Donna M. Sutherland v. Comm’r, No. 3634-18, T.C. Memo 2021-110 | September 16, 2021 | Lauber | Dkt. No. 3634-18

Short Summary:  This is an innocent spouse case in which the taxpayer, Ms. Sutherland, sought relief from joint and several liability under the equitable relief provision of 26 U.S.C. 6015(f).  The Court ultimately found that the taxpayer was not entitled to the relief requested.

Key Issues:

  • Did the taxpayer qualify for relief from joint and several liability for the unpaid employment taxes that accrued from taxpayer’s husband’s business?

Facts and Primary Holdings:

  • The taxpayer was married to her husband Scott in 1990. She has a high school education and completed a few college courses.  She gave birth to the couple’s only child in 1991, and after her child was born, she worked primarily at home or in Scott’s business.

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Recent Bankruptcy Court Ruling Addresses The Jurisdiction of Bankruptcy Courts To Hear Innocent Spouse Relief Cases

The recent case of In re Bowman, Case No. 20-11512, Section A (Bankr. E.D. La., July 12, 2021) addresses an interesting intersection of tax and bankruptcy law.  Specifically, it looks at the issue of whether bankruptcy courts have jurisdiction to grant a debtor relief as an “innocent spouse” under § 6015 of the Internal Revenue Code, and ultimately determines that it does.

Although it is true that Section 6015(f) does not allow a bankruptcy court to exercise initial subject matter jurisdiction over an innocent spouse defense because only the Secretary of the IRS receives the equitable power to grant innocent spouse relief under that Section, in this case, it was undisputed that the Debtor sought such relief from the Secretary in July 2019 and the Secretary denied the request.  The bankruptcy court determined that § 6015(e)(1)(A) confers subject-matter jurisdiction to determine whether innocent spouse relief should be granted when it is denied by the Secretary. Citing to Pendergraft v. I.R.S. (In re Pendergraft), Adv. No. 16-3246, 2017 WL 1091935, at *3-4 (Bankr. S.D. Tex. Mar. 22, 2017), the Court explained:

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Innocent spouse relief, which has been available under IRC § 6015 since 1998 (and was available prior to that, in a more limited way, under IRC § 6015(e)), provides three avenues of relief. Section 6015(b) provides “traditional” relief for deficiencies.

Section 6015(c) also provides relief for deficiencies for certain spouses who are divorced, separated, widowed, or not living together, by allocating the liability between the spouses. Section 6015(f) provides “equitable” relief from both deficiencies and underpayments, but only applies if a taxpayer is not eligible for relief under IRC § 6015(b) or (c).

As I reported in my 2001 Annual Report to Congress, the IRS received 46,619 claims for innocent spouse relief in fiscal year (FY) 1999 (i.e., from October 1, 1998, to September 30, 1999). The IRS received 54,402 claims for relief in FY 2000.

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The terms “innocent spouse” and “injured spouse” are frequently misunderstood. These are two different situations under our current tax code.  A previous blog discussed the concept of an innocent spouse under IRS rules (See Innocent Spouse Relief by John Stancil). An innocent spouse is one who stands has filed a joint return and is exposed to liability for additional taxes due to fraudulent activity on the part of the other spouse.  An injured spouse is someone whose refund is captured by the IRS to satisfy a debt owed by the other spouse.  An injured spouse claim, if accepted by the IRS, can prevent this from happening.  A claim is made by filing Form 8379 with the IRS.

First, some background.  When spouses file joint returns, each spouse is liable for anything that is included on the return.  In addition, there is joint liability for any Read More

Injured Spouse

An Injured Spouse is a spouse who has had part or all of their refund seized due to the debt owed by the non-injured spouse. In order to qualify as an Injured Spouse a taxpayer must meet the following qualifications:

1. File a joint tax return with the non-injured spouse.
2. Have had, or suspect you will have, part or all of your portion of the refund seized due to the other spouses back debts.
3. Not be obligated to pay the other spouses back debts.
4. Have received income reported on the joint return. Read More

There are two other situations that fall into the realm of Innocent Spouse, the Separate Spouse election and Equitable Relief.

Under the Separate Spouse election (§ Cod. Sec. 6015(c)) a requesting spouse may elect to be treated as if the joint return had been filed separately. The requesting spouse bears the burden of proof and eligibility requirements are very stringent as follows:

1. At the time of the election the requesting individual is no longer married to or is legally separated from the individual with whom the joint return was filed; or
2. The requesting individual was not a member of the same household as the individual with whom the joint return was filed at anytime in the 12 month period ending on the date Read More

Spouses being held liable for their partner’s tax liabilities have given rise to two separate and unique types of relief by legislation and the IRS. These are often confused and misunderstood. We will define both Innocent and Injured Spouses, determine how to qualify for the different types of relief, discuss timing options, and review recent legislation and court cases.

When a couple files a joint tax return they are agreeing that everything on that tax return is true and they are responsible for everything on the return. This is known as joint and several liability, (§ Cod. Sec. 6013(d)(3)) which means that both parties are totally responsible for all of the tax liability on the return both together and separately. Read More

TaxConnections Picture - His Hers“I” is for Innocent and Injured Spouse.  The Innocent Spouse program and the Injured Spouse program are similar but different ways for spouses to keep their tax situation separate from each other.  Trust me when I say you don’t want to be involved in these.  It can be a messy, complicated, time consuming process to reach a fair conclusion. It is much better if you don’t need to avail yourself of the Innocent or Injured Spouse provisions. The next post is “J for Joint Liability”; I suggest you read that one as well.

Innocent Spouse relief is when one spouse thinks they should be absolved of the joint tax liability.  These are extreme situations and many times involve an ugly divorce.  One example the Internal Revenue Service gives is a couple files a return owing $5,000 then get divorced.  The tax bill wasn’t paid and part of the divorce declares the spouses will split the tax.  If one spouse gives the other $2,500 but the other spouse never remits anything to the IRS, this would be a situation where the spouse who did provide their $2,500 should be allowed to be released from the tax debt.  Most situations are much trickier and difficult on both parties.  It can take months or years to get it resolved, but it does provide at least the chance to make things right.

Injured Spouse Relief is a much easier concept to understand and to implement.  If one spouse has prior tax debts or child support liabilities, there are two ways to keep the current year taxes separate.  The couple can file two separate returns but that is normally a tax disadvantage and more work, so enter the Injured Spouse Relief.  If you include Form 8379 with a joint return, the IRS calculates the current year refund for each spouse.  Instead of a joint refund of $8,000 all being taken by the IRS and applied to prior liabilities for one spouse, Form 8379 allows the IRS to calculate the refund attributable to each spouse.  If the spouse with no outstanding liabilities would have a refund based on their own income and their own payments, that spouse will receive a check for their portion of the refund while the remainder is applied against the one spouse’s prior liabilities. Read More