Tax Court in Brief | Pocock v. Commissioner | Equitable Innocent Spouse Relief Under 6015(f)

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Tax Litigation: The Week of June 6th, 2022, through June 10th, 2022

Pocock v. Commissioner, T.C. Memo. 2022-55 | June 6, 2022 | Vasquez, J.| Dkt. No. 12558-17 Consolidated with Dkt. No. 23569-17L

Opinion

Summary: Jan Pocock (Jan), a 1972 college graduate, married Douglas Pocock (Douglas), a Vietnam war veteran, in 1973. They had 2 children. Douglas had a history of aggressive behavior towards Jan and the children, especially about financial matters. In 1990, Jan and Douglas separated but they reconnected in 1992. In 1999, Jan, her ailing and elderly mother, and Douglas financed the purchase and closing costs for a home they could all live in. Title to the home was in all three of their names. Douglas maintained control over his and Jan’s mail, such so that he installed an electric contraption at the house that rang whenever someone opened the mailbox, and he always retrieved the mail immediately upon delivery. Douglas alone prepared his and Jan’s joint income tax returns. Jan did not review or sign the returns, and, considering her upbringing, she was accustomed to relying on Douglas to prepare the returns.

In 1995-2005, Douglas fraudulently claimed and through those years received near $1,000,000 in refunds by overstating his income and tax withholdings. Believing refund checks were from Douglas’s money brokering activities, Jan endorsed some of the refund checks, and Douglas signed Jan’s name to some of them. The refunds were the primary source of income for Douglas and Jan, and Jan knew Douglas paid for all of their expenses through the accounts in which the refund amounts were deposited. In 2005, Douglas’s mother died, and he, as executor, misappropriated funds from her estate. Upon Jan and her mother’s discovery of Douglas’s actions, he was removed from the deed to the home that they jointly purchased, and he wrote Jan a check for $140,000. She deposited the check into a bank account from which she removed Douglas as joint owner.

For the tax years in issue, 2006-2008, Douglas continued his fraudulent scheme. But, the IRS did not issue a refund check for 2008. When that check did not materialize, Douglas contacted the IRS for help and an examination of the joint returns for all three years ensued, which resulted in credit reversals and about $500,000 of liabilities owed to the IRS. In October 2010, Jan learned of the situation. She asked Douglas about it and he responded by slamming her against a wall. In 2011, Douglas was diagnosed with post-traumatic stress disorder, and later that year, Douglas and Jan divorced, although he was permitted to reside with her, albeit with payment of rent and in a separate part of the house. Also in 2011, an IRS criminal investigation ensued in 2011, which paused Jan and Douglas’s pending collection due process proceeding.

In 2013, Jan filed Form 8857, Request for Innocent Spouse Relief, for tax years 2006-2008. In 2015, the U.S. attorney’s office ultimately declined criminal prosecution, and also in that year, Jan’s mother died. In 2016, the IRS denied her request for innocent spouse relief, concluding she had reason to know of Douglas’s fraudulent tax scheme. In 2017, the IRS issued a Notice of Determination Concerning Collection Actions Under Section 6630 and Your Request for Relief from Joint and Several Liability under Section 6015. Jan petitioned the Tax Court to review those determinations. Before trial, she completed and submitted Form 433-A, Collection information Statement for Wage Earners and Self-Employed Individuals.

Key Issues:

  • Whether Jan qualifies for relief from her 2006, 2007, and 2008 federal income tax liabilities under the equitable relief process afforded by 26 U.S.C. § 6015(f).

Primary Holdings:

  • Yes. Jan proved—through her testimony, other witnesses, and records—that she met all threshold or mandatory requirements for equitable spousal relief under section 6015(f), and the streamlined elements and equitable factors weighed in favor of Jan’s request. Jan was entitled to streamlined relief from joint and several liability pursuant to section 6015(f) for the years in issue.

Key Points of Law:

  • Joint Returns. Generally, married taxpayers may file a joint federal income tax return. 6013(a). If a joint return is made, the tax is computed on the spouses’ aggregate income, and each spouse is fully responsible for the accuracy of the return and is jointly and severally liable for the entire amount of tax shown on the return or found to be owing. § 6013(d)(3); Butler v. Commissioner, 114 T.C. 276, 282 (2000).
  • Innocent Spouse Relief. A spouse who has made a joint return may seek relief from joint and several liability pursuant to 26 U.S.C. § 6015. Section 6015 provides a spouse with three alternatives: (1) full or partial relief under subsection (b); (2) proportionate relief under subsection (c); and (3) if relief is not available under subsection (b) or (c), equitable relief under subsection (f).
  • Jurisdiction and Burden of Proof. There are 3 jurisdictional bases for the U.S. Tax Court to review a taxpayer’s entitlement to section 6015 relief: (1) a spouse can file a petition pursuant to section 6015(e)(1); (2) the court can review the claim in the context of a collection due process case under 26 U.S.C. § 6330(d)(1); and (3) the claim can be asserted by a spouse as an affirmative defense in a proceeding to redetermine a deficiency pursuant to 26 U.S.C. § 6213(a). For option (1), a taxpayer may file a petition to determine the appropriate relief available to the taxpayer under section 6015. The petition must be filed within 90 days after the IRS’s mailing of a notice of final determination of relief to the taxpayer or if the IRS has not yet mailed such a notice, at any time after six months have passed since the taxpayer’s election for relief. The taxpayer generally bears the burden of proving that he or she is entitled to equitable relief under section 6015(f).
  • Equitable Innocent Spouse Relief. The IRS has procedures to determine whether a requesting spouse is entitled to equitable relief from joint and several liability. Those procedures are in Proc. 2013-34, § 4, 2013-43 I.R.B. 397, 399–403, but the Tax Court is not bound by them. The Court’s determination is based on an evaluation of all the facts and circumstances. The IRS conducts a multistep analysis when determining whether a requesting spouse is entitled to equitable relief under section 6015(f). See Rev. Proc. 2013-34, § 4. The requirements for relief under the revenue procedure are categorized as threshold or mandatory requirements, streamlined elements, and equitable factors. A requesting spouse must satisfy each threshold requirement to be considered for relief. If the requesting spouse meets the threshold requirements, the IRS will grant equitable relief if the requesting spouse meets each streamlined element. Otherwise, the IRS will determine whether equitable relief is appropriate by evaluating the equitable factors. See id. §§ 4.01, 4.02, 4.03, 2013-43 I.R.B. at 399-403.
  • Threshold Requirements for Equitable Innocent Spouse Relief. The requesting spouse must meet seven threshold requirements to be considered for relief under section 6015(f): (1) the requesting spouse filed a joint return for the taxable year for which relief is sought; (2) relief is not available to the requesting spouse under section 6015(b) or (c); (3) the claim for relief is timely filed; (4) no assets were transferred between the spouses as part of a fraudulent scheme; (5) the non-requesting spouse did not transfer disqualified assets to the requesting spouse; (6) the requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and (7) absent certain enumerated exceptions, the tax liability from which the requesting spouse seeks relief is attributable to an item of the non-requesting spouse. Proc. 2013-34, § 4.01. The only requirements in issue in Pocock were (4), (6), and (7).
  • Threshold requirement (4): no assets transferred between spouses as part of a fraudulent scheme Treasury Regulation § 1.6015-1(d) states that a “fraudulent scheme includes a scheme to defraud the [IRS] or another third party.” The basic badges of fraud demonstrate an intent to misrepresent, conceal, or hide information. See Spies v. United States, 317 U.S. 492, 499 (1943); Recklitis v. Commissioner, 91 T.C. 874, 910 (1988). Spouses can jointly intent to engage in fraudulent schemes, which, if found, will preclude relief under section 6015(f)).
  • Threshold requirement (6): did not knowingly participate in the filing of a fraudulent return. Such participation may exist where the requesting spouse signed fraudulent joint returns with knowledge of the inaccuracies reported thereon. See Durland v. Commissioner, T.C. Memo. 2016-133, at *98. The court must determine whether the relief-requesting spouse was aware of the overstated withholdings when the returns in issue were filed. This determination is based on the evidence presented to the court, including the credibility of the witnesses, the facts surrounding the signing of the returns, the likelihood that the signing spouse would have been alerted to some fraud on the face of the returns, and other factors.
  • Threshold requirement (7): tax liability attributable to an item of the non-requesting spouse. The IRS may consider granting relief regardless of whether the underpayment or understatement is attributable to the requesting spouse if any of the following exceptions applies: (1) attribution is solely due to operation of community property law; (2) nominal ownership; (3) misappropriation of funds; (4) abuse; or (5) fraud committed by the non-requesting spouse. See Proc. 2013-34, § 4.01(7). In deciding the issue of to whom inaccurate, false, or “phony” tax items are attributable, the Tax Court has generally attributed such items to the spouse who wrongfully reported or claimed them. See Leith v. Commissioner, T.C. Memo. 2020-149, at *7 n.6; Lawson v. Commissioner, T.C. Memo. 1994-286; Davis v. Commissioner, T.C. Memo. 1992-240, aff’d without published opinion, 26 F.3d 130 (9th Cir. 1994)..
  • Streamlined Determination Elements. Once a taxpayer satisfies the threshold requirements, the court then considers whether the taxpayer is entitled to a streamlined determination. See Proc. 2013-34, § 4.02. The requesting spouse is eligible for a streamlined determination by the IRS only in cases in which the requesting spouse establishes that he or she (1) is no longer married to the non-requesting spouse (marital status requirement), (2) would suffer economic hardship if not granted relief (economic hardship requirement), and (3) did not know or have reason to know that the non-requesting spouse would not or could not pay the underpayment of tax reported on the joint income tax return, or did not know or have reason to know that there was an understatement or deficiency on the joint income tax return (lack of knowledge requirement). Id.
  • Streamlined Determination Element – Marital Status Requirement. A requesting spouse is no longer married to the non-requesting spouse if the requesting spouse is divorced from the non-requesting spouse as of the date of the IRS’s determination. See id. 4.03(2)(a)(i), 2013-43 I.R.B. at 400. Even if there is a divorce, the IRS may deny innocent spouse relief if the requesting spouse continues to live with the non-requesting spouse and the divorce is seen as a scam for favorable tax results. See Ohrman v. Commissioner, T.C. Memo. 2003-301, 2003 Tax Ct. Memo LEXIS 303, at *12–13, *25-26, 36, aff’d, 157 F. App’x 997 (9th Cir. 2005) (finding that the divorce was intended “to shield as many assets and as much of the family’s income as possible” from tax collection).
  • Streamlined Determination Element – Economic Hardship Requirement. Economic hardship exists if satisfaction of the tax liability, in whole or in part, would result in the requesting spouse’s being unable to meet his or her reasonable basic living expenses. Rev. Proc. 2013-34, § 4.03(2)(b), 2013-43 I.R.B. at 401. The requesting spouse suffers economic hardship if two requirements are met: (1) either (a) the requesting spouse’s income is below 250% of the federal poverty level or (b) the requesting spouse’s monthly income exceeds his or her reasonable basic monthly living expenses by $300 or less, and (2) the requesting spouse does not have assets from which he or she can make payments toward the tax liability and still meet reasonable basic living expenses. If the requesting spouse fails to satisfy either requirement, the IRS “will consider all facts and circumstances (including the size of the requesting spouse’s household) in determining whether the requesting spouse would suffer economic hardship if relief is not granted.” Id.
  • Streamlined Determination Element – Lack of Knowledge Requirement. If the requesting spouse knew or had reason to know of the item giving rise to the understatement as of the date the joint return was filed, this factor will weigh against relief. Rev. Proc. 2013-34, § 4.03(2)(c)(i)(A), 2013-43 I.R.B. at 401. A requesting spouse has knowledge or reason to know of an understatement if he or she actually knew of the understatement or if a reasonable person in similar circumstances would have known of the understatement. Reg. § 1.6015-2(c). This is determined by review of matters that a requesting spouse was actually aware of and matters that may be deemed to have been known through constructive knowledge. Taxpayers are generally presumed to have constructive knowledge of information reported on returns that they signed. Hayman v. Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993), aff’g T.C. Memo. 1992-228. Taxpayers have a duty to inquire into the amounts of their tax liabilities. See Price v. Commissioner, 887 F.2d 959, 965 (9th Cir. 1989). Failure to fulfill the duty to inquire may constitute reason to know that the tax would not be paid. Sleeth v. Commissioner, T.C. Memo. 2019-138, at *12, aff’d, 991 F.3d 1201 (11th Cir. 2021). Innocent spouse relief is not available to those who choose to ignore information in their possession. Charlton v. Commissioner, 114 T.C. 333, 340 (2000). But, these factors are not viewed in a vacuum, and the court may also consider mitigating factors such as spousal abuse.
  • Streamlined Determination Element – Abuse. Knowledge of a fraudulent tax scheme may be negated if the non-requesting spouse abused the requesting spouse or maintained control of the household finances by restricting the requesting spouse’s access to financial information such that the non-requesting spouse’s actions prevented the requesting spouse from questioning or challenging payment of the liability. Rev. Proc. 2013-34, § 4.02(3)(a), 4.03(2)(c)(i) and (ii). Abuse may be in the form of physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate the requesting spouse, or to undermine the requesting spouse’s ability to reason independently and be able to do what is required under the tax laws. § 4.03(2)(c)(iv), 2013-43 I.R.B. at 402. The court considers all facts and circumstances in determining the presence of abuse, but the determination requires substantiation, or at a minimum, specificity, with regard to allegations of abuse. See Nihiser v. Commissioner, T.C. Memo. 2008-135. A generalized claim of abuse is insufficient. See Thomassen v. Commissioner, T.C. Memo. 2011-88, aff’d, 564 F. App’x 885 (9th Cir. 2014).

Insights:  Pocock is an example of how a taxpayer’s entire life story may be relevant to a determination of innocent spouse relief under section 6015(f) of the Code. The fact-pattern in issue spanned from 1972 through 2017. In laying the factual foundation for the tax analysis, the Court noted Jan’s education in the 1970s, Douglas’s military service in the Vietnam War, the birth of children to their marriage, the cohabitation and death of Jan’s mother, Douglas’s mental challenges, and other personal attributes, picadilloes, and tendencies of Jan and Douglas with respect to finances, tax matters, control, and demeanor over the course of decades, all of which were relevant to the Tax Court’s evaluation of the many requirements for a taxpayer to receive innocent spouse relief under 26 U.S.C. § 6015.

For additional Tax Court in Brief Innocent Spouse Relief information, please search “Innocent Spouse” in our Insights blog to find the following case summaries and many other resources on this topic:

Podlucky v. Commissioner – $34M Jewelry in a Secret Room, Constructive Receipt, Innocent Spouse, and Putative Monks

DelPonte v. Commissioner – Innocent Spouse Relief and Authority of the IRS Chief Counsel

Actions (and Inactions) Matter with Innocent Spouse Relief – Jones v. Commissioner

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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