What Defines Abuse for Innocent Spouse Relief?

HeydonGrauss v. Comm’r, T.C. Memo. 2018209, 2018 WL 6720943 (2018)

(a) Facts: Husband and wife filed joint tax returns for tax years 2005 to 2009. They separated on 2010 and were divorced in 2015.

The parties did not enclose full payment with their 2005-2009 tax returns until 2010. The wife was not aware of this fact until 2010. But she was aware that the parties were spending beyond their incomes and living beyond their means. The wife paid nothing on the parties’ tax liabilities, and the divorce decree ordered her to reimburse the husband for half of the payments he had made.

The wife filed a petition for discretionary innocent spouse relief. The IRS granted limited relief for certain amounts in some of the years. The wife sought review in the Tax Court.

(b) Issue: Was the wife entitled to more discretionary innocent spouse relief than the IRS gave her?

(c) Answer to Issue: No.

(d) Summary of Rationale: The seventh and final threshold condition for innocent spouse relief provides that the tax must be attributable to the income of the nonrequesting spouse. In other words, discretionary innocent spouse relief is generally not available for tax due on the requesting spouse’s own income. But there is an exception if the requesting spouse was subject to abuse.

The wife argued that abuse was present and therefore she should be relieved of liability for tax on her own income. “To satisfy the abuse exception . . . , the requesting spouse must establish that as a result of abuse she was unable to question the payment of the tax due on a return for fear of retaliation from the nonrequesting spouse.” 2018 WL 6720943, at *14.

The court described the wife’s claim of abuse as follows:

[P]etitioner did not provide specific testimony supporting a pattern of abuse. Specifically, she testified that there was “abuse in the household. There was alcohol. There were drugs. There were gambling. There were sexual affairs. There was mismanagement of money. Risky investments. Gambling.” She also testified that “[t]here was a lot of anger and yelling in the household.” She testified that documents from the domestic relations court indicated that intervenor abused the children. Specifically, she testified that intervenor “had supervised visits” of the children and the court documents “reference the alcohol and drug testing”.
Id.

Thus, the wife alleged abuse of alcohol and drugs. But the abuse required by the regulations is abuse of the other spouse. “Anger and yelling” likewise fall short of abuse. The husband denied physical abuse of either the wife or the parties’ children, and the court found his denial credible.

Because abuse was not proven, and because the tax at issue arose from the wife’s own income, the seventh threshold condition was not met, and the wife was not entitled to additional innocent spouse relief.

Observations:

1. It is good that the IRS has promised to be more sensitive to a situation in which abuse prevents one spouse from discovering or responding to tax-related misconduct of the other spouse. There are cases, e.g., Hiramanek; Contreras, in which real abuse is present, and the new rules greatly improve the fairness of tax law.

2. But as this outline has noted in prior years, a power that can be used for good can also be misused for more questionable purposes. It is highly foreseeable that some spouses who were not genuinely abused will attempt to use the new rules to obtain innocent spouse relief from taxes that they can and should help to pay. The federal courts are going to have to find a workable definition of genuine abuse.

4. HeydonGrauss is a good example of a spouse attempting to misuse the new rules. The new rules focus upon physical or emotional abuse of the other spouse. The mere fact that both parties misused alcohol or even drugs is not what the new rules mean by abuse. Further, as divorce courts have realized for years, anger and harsh words do not constitute abuse. Abuse generally requires some form of intimidation, and there was no evidence of any intimidation in Heydon-Grauss. The facts before the court did not show the type of abuse at which the new rules are aimed.