What do a weekend trip to Mexico, a sneaky spouse, and a tax protest letter have in common?
They are all components of a taxpayer’s losing plea for tax relief in front of the California State Board of Equalization.*
Charles and Vickie Sine filed a joint California resident tax return (Form 540) for tax year 2005. It subsequently came to the attention of the Franchise Tax Board that they had neglected to report $30,560 of income earned by Mrs. Sine that same year. A notice of Proposed Assessment for $2900 was then issued.
THE SECRET DIVORCE
Mrs. Sine protested the assessment on the grounds that she had recently discovered that Mr. Sine had secretly divorced her when he made a brief solo visit to Mexico in 2001.
Mrs. Sine attached a copy of the Mexican Divorce Certificate dated November 12, 2001 to her protest letter to the Franchise Tax Board. She stated that since Mr. Sine had divorced her in Mexico without her knowledge in 2001, and subsequently tricked her into filing jointly with him in 2005, that she “should not and cannot be held liable for any tax liabilities [innocently incurred while jointly] filing with him.” Her protest letter also contained the following sentence: “I am therefore asking to be released from this and any such liabilities that may arise.” The Franchise Tax Board denied her protest and Mrs. Sine subsequently appealed the matter to the State Board of Equalization.
In deciding this case the Board of Equalization first considered the issue of the clandestine Mexican divorce. Mrs. Sine argued that she should not be held liable for any taxes arising from the 2005 tax return filed with Mr. Shine because he obtained (without her knowledge) a Mexican divorce in 2001.
The Board pointed out that in Gaiton vs. Commissioner, (T.C. Memo 2012-13 citing Tersch vs. Commissioner  47 T.C. 415, 419.), that “the marital status of individuals is determined under the law of the state where they reside.” Accordingly, the Board considered the couples marital status to be under California law, because records showed that they both lived in California during the relevant time. The Board noted that California Family Law Code Section 2091 provides: “A divorce obtained in another jurisdiction shall be of no force or effect in this State if both parties to the marriage were domiciled in this State at the time the proceedings for the divorce [were] commenced.”
The Board also cited California Family Code Section 2092 which provides in relevant part, that it shall be prima facie evidence that an individual was domiciled in California at the time he or she obtained a divorce in another jurisdiction, if such individual maintained a place of residence within California at all times after his or her departure from California, and until his or her return to California. The Board noted that Mr. and Mrs. Sine filed a California joint return for 2001 that listed their residence in Irvine, California, not Mexico. Also, during 2001, Mr. Sine earned California wages. The Board therefore concluded that under family code section 2091, the Mexican divorce decree is void because both Mr. and Mrs. Sine were domiciled in California at the time the Mexican divorce was commenced. Thus the Board reasoned that the Sines were married under California law as of December 31, 2005, and that they filed a valid California joint return for that year.
THE NOT SO INNOCENT SPOUSE
California’s tax code contains provisions for Innocent Spouse relief, provided the requesting taxpayer meets certain criteria. Even though Mrs. Sine did not formally request Innocent Spouse Relief, the Board considered it. The innocent Spouse rules provide exceptions without regard to Community Property Laws to the general rule that spouses are jointly and severally liable for tax on the combined income on a joint return.
However, Innocent Spouse relief will only be granted under certain conditions. One such condition is that the spouse requesting the relief must not have been the same person that earned or had exclusive management of the income that generated the tax liability at issue. In other words, if you earned the income you own the tax liability. Mrs. Sine she ran afoul of this rule. The Board found that she presented no evidence that the $30,560 in unreported wage income in 2005 was earned by Mr. Sine instead of herself. She only argued that she should not be held accountable for the tax on this unreported income because Mr. Sine had surreptitiously obtained a Mexican divorce from her in 2001. Since the Board ruled otherwise on this issue, and since she could not prove that she did not earn the $30,560 in unreported wages in question, the Board ruled that Mrs. Sine was not entitled to innocent spouse relief.
What if anything could Mrs. Sine have done to extract herself from the 2005 tax assessment? The short answer is probably nothing – at least as far as the assessment of the tax itself. There are simply times in the tax resolution business when taxpayers and practitioners should accept the inevitability of an assessment as early in the game as possible so as to mitigate additional interest and penalties. Mrs. Sine’s case would seem to have been one of those times. Had Mrs. Sine been so informed by a competent advisor, she would have been well served. Furthermore, a good practitioner may have been able to arrange an Installment Agreement for her. Also, if she otherwise qualified it may have been possible to obtain a Hardship Abatement – or perhaps even a reduction in the tax via an Offer in Compromise. Instead, the case dragged on for years while interest and penalties accumulated.
In any event, the case of The Secret Divorce And The Not So Innocent Spouse is settled at long last – with the Franchise Tax Board having the last word.
Connect with David Ellis on TaxConnections to discuss further.
*Appeal of Vickie Sine Case No. 533583, September 13, 2012.
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