Tax Court Denies Equitable Relief to Joint Filer

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As far as federal income taxes go, it’s usually “until death do us part” for joint filers, but a recent Tax Court case ruled otherwise.

There are times when the tax law provides a way out for one spouse or the other, as in Brooks, TC Memo 2019-5, 3/18/19, where a husband petitioned the Tax Court for equitable relief after his wife’s obligations were discharged due to bankruptcy.

Generally, married taxpayers who file a joint tax return are “jointly and severally” liable for any tax that is due. In other words, the IRS can pursue tax payments from either spouse or both. However, a joint filer may elect to seek relief from joint and several liability under several exceptions in the tax code.

One such provision provides relief if, taking all the relevant facts and circumstances into account, it is inequitable to hold a spouse liable and relief isn’t available to the spouse under code Section 6015(b) or Section 6015(c). The burden is on the spouse to prove his or her case.

To qualify for this relief, the following conditions must be met:

The requesting spouse filed a joint return

Relief is not available to the requesting spouse under Section 6015(b) or 6015(c) 

The claim is filed in timely manner

Assets were not transferred between the spouses as part of a fraudulent scheme

The non-requesting spouse did not transfer disqualified assets to the requesting spouse

The requesting spouse did not knowingly participate in the filing of a fraudulent joint return

The factors considered by the IRS in determining whether equitable relief should be granted include: 1.) marital status 2.) economic hardship 3.) knowledge or reason to know of the requesting spouse 4.) legal obligation arising from a divorce decree or other binding agreement 5.) significant benefit gained by the requesting spouse 6.) compliance with income tax laws and 7.) mental or physical health at the time of filing the request for relief.

In the new case, a couple residing in South Carolina filed joint tax returns for 2003 and 2006. The husband had two serious medical conditions. He was not disabled, but this limited his employment opportunities.

The couple did not pay the tax owed or the penalties assessed on their 2003 return. When they filed their 2006 return, they entered into an installment agreement to make up a shortfall, but stopped making payments under that agreement.

The wife later filed for bankruptcy and her federal income tax liabilities for 2003 and 2006 were discharged by the bankruptcy court. As a result, the IRS created separate accounts for the spouses.

After an offer in compromise made by the husband was rejected by the IRS, he sought equitable relief for 2003 and 2006. He asked the Tax Court to reduce his tax liability by half because of his wife’s bankruptcy discharge. However, the Tax Court determined that equitable relief isn’t available.

It found that the following factors to be neutral: marital status, economic hardship, legal obligation and subsequent tax compliance. As to the economic hardship factor, the Court acknowledged that the husband had diminished earning capacity. However, it concluded that his unsubstantiated, rounded estimates of assets, income and expense did not prove that he would suffer economic hardship.

Only two factors weighed in favor of granting relief to the husband. Those were his physical health and the lack of significant benefit. Accordingly, the husband remains fully liable for the tax underpayments and penalties.

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About Ken Berry

Ken Berry

Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.           

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