The case of Sari F. Deihl v Commissioner, T.C. Memo. 2012-176 (June 21, 2012) was factually and procedurally complex. This post deals only with one of the issues decided by the Tax Court: whether the income tax audit adjustments flowing from the taxpayer’s jointly owned S Corp for the years 1996 thru 1998 precluded the wife from obtaining innocent spouse relief because the erroneous items were not therefore solely attributable to the other spouse as required by Section 6015(b) (1) (B).
BACKDROP FOR THE DISPUTE
Section 6015(b) of the Internal Revenue Code permits a spouse who meets certain conditions to elect to escape joint and several liability that would otherwise apply to a spouse who files a joint tax return when it is inequitable to hold the spouse liable. The spouse must not know or have reason to know when signing the return that additional tax would be owed. The final condition for obtain relief is that the items giving rise to the additional tax must (erroneous items) be attributable solely to the other spouse.
The income tax regulations Sec. 1.6015-1(f) (1) allocate each erroneous item to the spouse whose activities gave rise to the item. Joint ownership does not alone dictate how an activity will be allocated. Similarly, the activities are allocated without regard to community property laws. But, a requesting spouse who voluntarily invests and participates in an activity cannot allocate the entire investment to the non-requesting spouse. On the other hand, a joint-owner spouse who did not voluntarily invest or actively participate in the activity will not be summarily precluded from relief from a tax liability attributable to that activity. See Buchine v. Commissioner, T.C. Memo. 1992-36, aff’d., 20 F. 3d 173 (5th Cir. 1994); Juell v. Commissioner, T.C. Memo. 2007-219; and, Olson v. Commissioner, T.C. Memo. 2009-294.
For example, In Juell, partnership erroneous items were not allocated to the requesting spouse who did not invest funds, attend partnership meetings or have access to partnership funds. But, in Bartak v. Commissioner, T.C. Memo. 2004-83, aff’d. 158 Fed. Appx. 43 (9th Cir. 2005), the Tax Court did allocate partnership erroneous items to a spouse who agreed to invest, signed partnership documents, and wrote checks to the partnership from a marital joint bank account. Similarly, in Abelein v. Commissioner, T.C. Memo. 2004-274, the Court allocated an understatement to a spouse who had agreed to jointly invest in the business, and participated actively.
FACTS IN DEIHL
The marital business in this case involved the marketing of a product called Vita Mist. The Tax Court in a related case (Deihl v. Commissioner, 134 T.C. 156 (2010)), had upheld the Commissioner’s determinations with regard to certain S Corp erroneous items. The determined tax deficiency and penalties exceeded $4 million. When IRS instituted collection action Sari Deihl, requested a Collection Due Process Hearing, seeking innocent spouse relief. She was denied on all grounds and timely filed a petition with the Tax Court.
The Tax court found that she had the following contacts with the marital business, which was conducted through an S Corp., namely:
- She jointly owned 100% of the stock with her former husband.
- She was an officer of the company.
- She signed corporate checks.
- She used corporate credit cards.
- She deposited money from the company into personal bank accounts.
- She actively participated in the businesses marketing efforts through planning of and attending events hosted at their marital home. These events, it was found, Mrs. Deihl believed were critical to the success of the company.
From the facts adduced at trial and stipulated, the court found that Sari was not entitled to relief under Section 6015 (b) from joint and several liability with regard to the joint returns filed with her former husband.
LESSONS FROM CASE
- Despite the fact that joint ownership is not solely determinative, a spouse not intending to be active in the business or wanting to become potentially responsible for tax liabilities flowing from the business, should not become a joint owner.
- If a spouse has not been involved in the business, attempt to have a clause inserted in the marital settlement agreement or seek a finding of the divorce court that the spouse did not invest, was not active and did not know about the business financial affairs.
- A spouse who is not the active owner of a business should think twice about filing joint returns.
© 2012 by Robert S. Steinberg, Esquire
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