Cojocar v. Comm’r, T.C. Memo. 2017‑189, 2017 WL 4321149 (2017)
(a) Facts: A husband and wife filed joint tax returns from 2009 to 2012. The 2011 return reported $170,870 in income for the husband, $30,870 in income for the wife, and $289 in interest income. The parties did not pay the tax reported on the return.
The parties were subsequently divorced in Texas state court. Both the divorce decree and a settlement agreement between the parties provided that the husband would hold the wife harmless from tax liability on the returns at issue.
The husband filed a petition for discretionary innocent spouse relief from tax due on the wife’s income. The IRS denied the petition, and the husband sought relief in the Tax Court.
(b) Issue: Was the husband entitled to discretionary innocent spouse relief?
(c) Answer to Issue: No.
(d) Summary of Rationale: The threshold requirements for relief were met on the facts.
The safe harbor requirements were not met because the husband had not proven that he would suffer economic hardship from paying the limited tax attributable to the wife’s income nor proven that he did not know that the wife could not pay the taxes herself.
The result, therefore, turned upon the discretionary relief factors. Factors favoring relief were 1) the fact that the parties were divorced and 2) the fact that the husband had complied with tax law in future years.
Factors opposing relief were the husband’s knowledge that the wife could not pay the taxes (taxes were not paid when the 2011 return was filed and had not been paid in prior years; the husband earned the great majority of the parties’ income); and the provision in the state court divorce decree that assigned the 2011 tax liability to the husband.
The economic hardship factor was neutral, as the husband would not suffer economic hardship from paying tax on the wife’s income. His income was more than five times her income in 2011, and his income had increased since then.
The significant benefit factor had not been addressed by the evidence and was therefore also neutral. The petitioner’s health was also a neutral factor.
Overall, the court held that the balance of the factors opposed relief. The husband would not suffer much hardship from paying the tax.
Observations:
- Innocent spouse relief is most often granted when spouses face large tax bills that they have difficulty paying. The husband in Cojocar had reported income of over $170,000 per year. The court did not state the amount of tax at issue, but the wife’s income was less than one-fifth of his income. Even if one uses only the income reported on the husband’s petition for innocent spouse relief, he admitted to a gross income of $12,258 per month, over $147,096 per year. The tax obligation at issue was not large enough that the husband would have undue difficulty in paying it.
- The husband expressly agreed in the divorce settlement agreement and was ordered in the divorce decree, to hold the wife harmless for the taxes at issue. Divorce settlements and decrees are not binding on innocent spouse questions, but federal courts are reluctant to grant innocent spouse relief from taxes that a spouse has voluntarily agreed to pay.
- Even if the husband had been granted relief against liability to the IRS, he still had an obligation under state law to hold the wife harmless from liability. It is, therefore, difficult to see what benefit the husband would have ultimately obtained from a ruling in his favor. Even if the IRS had collected the full amount due from the wife, the wife would just have sought reimbursement in state court. A federal decision granting innocent spouse relief would not have been a defense to liability in state court under the agreement or the decree.