The Tax Court in Brief – July 18th – July 22nd, 2022

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Tax Litigation: The Week of July 18th, 2022, through July 22nd, 2022

Soler v. Comm'r, T.C. Memo. 2022-78 | July 18, 2022 | Marvel, J. | Dkt. No. 18639-19


Short Summary: In this case, Jennifer Soler petitioned for innocent spouse relief from joint and several liability under 26 U.S.C. § 6015(b) or (f) with respect to tax years 2012, 2013, 2014, and 2015. Mrs. Soler and her husband, Carlos Soler, were married for over 25 years. They have two children together and have never been legally separated. Mrs. Soler is the primary income earner. Mr. Soler has a bachelor's degree in accounting and was primarily a stay-at-home father during the tax years in issue. Mr. Soler also operated a consulting business and a real estate business. The returns in issue were prepared by Mr. Soler and were signed by both Mr. and Mrs. Soler. Mr. Soler reported the income and expenses of his consulting and real estate businesses on separate Schedules C, Profit or Loss From Business. The IRS informed the Solers that their income tax returns were being examined. Later, the IRS mailed separate letters and Forms 4549–A, Income Tax Examination Changes for the 2012, 2013, and 2014 tax years. The IRS later issued a notice of deficiency that determined a deficiency in tax and a section 6662 accuracy-related penalty for each year. The IRS later performed an income-matching examination of the Solers' 2015 tax return and determined that the 2015 return failed to include in income distributions from Mr. and Mrs. Soler's qualified retirement accounts. So, the IRS issued a notice of deficiency for the 2015 tax year determining a deficiency in tax and a section 6662 accuracy-related penalty. About three years later, the IRS received a timely Form 8857, Request for Innocent Spouse Relief, from Mrs. Soler, requesting relief from joint and several liability for tax years 2012, 2013, 2014, and 2015 pursuant to section 6015(b), (c), and (f). She claimed that she was unaware of any income tax liabilities until the IRS began levying against her wages and that she believed Mr. Soler was unemployed during the years at issue. The IRS preliminarily denied her request. Mrs. Soler submitted Form 12509, Innocent Spouse Statement of Disagreement, appealing the IRS's preliminary determination, and her case was assigned to the IRS Office of Appeals (Appeals). Mrs. Soler argued that she relied on Mr. Soler to handle all of the family finances and tax returns. Appeals issued a final notice of determination, denying her request for relief. Mrs. Soler timely petitioned the Tax Court, and the case was tried.

Key Issues:

  • Whether Jennifer Soler was entitled to innocent spouse relief from joint and several liability under 26 U.S.C. § 6015(b) or (f) with respect to tax years in issue?

Primary Holdings:

  • Jennifer Soler did not meet her burden of proof to receive relief under section 6015(b) or (f). She had knowledge or reason to know of the understatements at the time she signed the returns for the years at issue, and the factors relevant to equitable relief weighed in favor of the IRS's determination to hold her liable for the deficiency.

Key Points of Law:

  • Joint Liability. Generally, married taxpayers who elect to file a joint federal income tax return are jointly and severally liable for the entire tax liability due on that return. 26 U.S.C. § 6013(d)(3); Butler v. Commissioner, 114 T.C. 276, 282 (2000).
  • Relief from Joint Liability. Section 6015 provides three avenues to relief from joint and several liability: (1) full or partial relief under subsection (b) (general relief provision applicable to all joint filers); (2) proportionate relief under subsection (c) (dealing with spouses who are no longer married, legally separated, or no longer living together); and (3) if relief is not available to the taxpayer under either subsection (b) or (c), equitable relief under subsection (f) (equitable relief).
  • Review Scope. The Tax Court's scope of review is limited to the administrative record established at the time of the IRS's determination and any newly discovered or previously unavailable evidence. 26 U.S.C. § 6015(e)(7).
  • The taxpayer requesting relief under section 6015 generally bears the burden of proving that he or she is entitled to relief. See Rule 142(a).
  • Relief Under Section 6015(b). A taxpayer requesting this relief must satisfy each of the following requirements: (1) a joint return was filed for the years at issue; (2) the returns contain an understatement of tax attributable to an erroneous item of the non-requesting spouse; (3) at the time of signing the return, the requesting spouse did not know and had no reason to know of the understatement; (4) taking into account all the facts and circumstances, it is inequitable to hold the requesting spouse liable for the deficiency in tax attributable to the understatement; and (5) the requesting spouse's claim for relief is timely. 26 U.S.C. § 6015(b)(1); Alt v. Commissioner, 119 T.C. 306, 313 (2002), aff'd, 101 F. App'x 34 (6th Cir. 2004). A taxpayer 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. Treas. Reg. § 1.6015-2(c).
  • Lack of Knowledge. A spouse lacks actual knowledge if she is unaware of the circumstances that gave rise to the error on the tax return. See Bokum v. Commissioner, 94 T.C. 126, 145–46 (1990), aff'd, 992 F.2d 1132 (11th Cir. 1993). In the case of omitted income, actual knowledge generally means knowledge of receipt of the income. Treas. Reg. §§ 1.6015-2(c), 1.6015-3(c)(2)(i)(A). In the case of erroneous deductions, actual knowledge means knowledge of the facts that made the item not allowable as a deduction. Treas. Reg. §§ 1.6015-2(c), 1.6015-3(c)(2)(i)(B); see also Price v. Commissioner, 887 F.2d 959, 963 n.9 (9th Cir. 1989).
  • Reason to Know. In determining whether a requesting spouse had reason to know of an understatement, the Tax Court considers all of the facts and circumstances. Price v. Commissioner, 887 F.2d at 965; see also Reg. § 1.6015-2(c). The relief provisions of section 6015 are "designed to protect the innocent, not the intentionally ignorant[.]" Dickey v. Commissioner, T.C. Memo. 1985-478, 50 T.C.M. (CCH) 1041, 1046. Thus, the reason to know test establishes a duty of inquiry on the part of the requesting spouse. Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989), aff'g T.C. Memo. 1988-63; Butler, 114 T.C. at 283–84. A spouse who does not fulfill this duty may be charged with constructive knowledge of the understatement. Price, 887 F.2d at 965.
  • Relief Under Section 6015(f)—Threshold Determination. Section 6015(f) allows for relief from joint and several liability in cases where no relief is available under subparagraph (b) or (c) if, taking into account all facts and circumstances, it would be inequitable to hold the requesting spouse jointly and severally liable. 26 U.S.C. § 6015(f)(1); see Proc. 2013-34, 2013-43 I.R.B. 397, modifying and superseding Rev. Proc. 2003-61, 2003-2 C.B. 296 (framework for equitable relief review). Factors to consider: (1) a joint return was filed for the years at issue; (2) the tax liability from which the requesting spouse seeks relief is attributable in full or in part to an item of the non-requesting spouse; (3) relief is not available to the requesting spouse under section 6015(b) or (c); (4) no assets were transferred between the spouses as part of a fraudulent scheme; (5) the non-requesting spouse did not transfer disqualified assets (as defined by section 6015(c)(4)(B)) to the requesting spouse; (6) the requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and (7) the claim for relief is timely filed.
  • Streamlined Relief. Once a taxpayer has satisfied the threshold conditions, the Tax Court will consider whether the requesting spouse is eligible for streamlined relief or, if not, whether he or she qualifies under the full facts and circumstances test. Rev. Proc. 2013-34, §§ 4.02 and 4.03, 2013-43 I.R.B. at 400–03. Streamlined determinations granting equitable relief under section 6015(f) are available if the requesting spouse can establish that he or she (1) is no longer married to the non-requesting spouse; (2) would suffer economic hardship if relief were not granted; and (3) lacked knowledge or reason to know of the understatement at the time the return at issue was signed. Rev. Proc. 2013-34, § 4.02.
  • Facts and Circumstances. If a requesting spouse is not eligible for streamlined relief, the Tax Court will next and finally consider the request for relief, taking into account all the facts and circumstances. Id. §§ 4.02 and 4.03. The factors considered include but are not limited to (1) marital status; (2) economic hardship; (3) knowledge; (4) legal obligation to pay the tax; (5) the amount of benefit derived from the understatement or underpayment; (6) compliance with income tax laws; and (7) mental or physical health. Id. § 4.03; see also Pullins, 136 T.C. at 448–55. Each factor has its own specific emphasis based on the circumstances, and the Tax Court generally will apply a reasoning to each relevant factor, treating each factor as favorable, unfavorable, or neutral for the relief requested. See Proc. 2013-34, § 4.03(2)(d), 2013-43 I.R.B. at 402.

Insights: Mrs. Soler was not innocent, and the evidence established that she was, more likely than not, intentionally ignorant of her and Mr. Soler's tax situation with respect to the returns in issue. To obtain equitable relief under section 6015(f), the taxpayer bears the burden of presenting evidence to support an array of factors. Each factor is important to the determination, and the Tax Court will, in performing its administrative court function, carefully weigh the factors based on the evidence presented. It is not an easy row to hoe. Mrs. Soler, being educated and the primary income-earner in the household, endured quite the uphill battle only to find that her request for relief would be denied.

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