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Individual Denied Innocent Spouse Relief From Joint Tax Liability

APR. 30, 2021

Momoudou Lamin Fatty et al. v. Commissioner

DATED APR. 30, 2021
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Momoudou Lamin Fatty et al. v. Commissioner

MOMOUDOU LAMIN FATTY,
Petitioner,
and
HANSOUTIE FATTY,
Intervenor,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT
WASHINGTON, DC 20217

ORDER

Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is

ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the of the trial of the above case before Judge Mark V. Holmes at Saint Paul, Minnesota on March 16, 2021, containing his oral findings of fact and opinion rendered after the conclusion of trial.

In accordance with the oral findings of fact and opinion, an appropriate decision will be entered.

(Signed) Mark V. Holmes
Judge


Bench Opinion by Judge Mark V. Holmes

March 16, 2021

THE COURT: Good morning. The Court has decided to render oral findings of fact and opinion in the case of Momodou Lamin Fatty, Petitioner, and Hansoutie Fatty, Intervener v. Commissioner, docket number 3787-20S.

This bench opinion is made pursuant to the authority granted by Section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court's rules of practice and procedure. 

Both Mr. and Mrs. Fatty lived in Minnesota when they filed their petition. The case is very easy to understand and paraphrase. Mr. and Mrs. Fatty bought a house in 2015. Part of the down payment and closing costs came from a withdrawal of Mrs. Fatty's retirement account. This triggered income, and Mr. Fatty, after the couple divorced a few years later, gave up rights to that house and wanted to be relieved of the income tax liability caused by the withdrawal from Mrs. Fatty's retirement account.

The question is what does the tax code say about this. Let me introduce the couple with some background. Momodou Fatty married Hansoutie Fatty in 1997. In 2015, they bought a house together. Hansoutie Fatty, who is Mrs. Fatty, took a distribution from her retirement account and did not pay any tax on it. 

Both Mr. and Mrs. Fatty used this retirement distribution in 2015 to pay for expenses related to the purchase of their home. Mr. Fatty knew about this withdrawal and that the money would go to pay for expenses related to the purchase of this house in Andover, Minnesota.

In 2016, when it came time to prepare their income tax return for 2015, both Mr. and Mrs. Fatty went to a meeting with their tax preparer, who went over the tax return with them and told them that they owned close to $7,700 in income tax for 2015.

Both Mr. and Mrs. Fatty entered into an installment agreement that same month to pay this underpayment of their 2015 tax liability. Both Mr. and Mrs. Fatty agreed that they signed this installment agreement, and that it remains in effect to this day.

A couple years later, the couple had differences and separated, a couple years after that in 2019. Mrs. Fatty sued Mr. Fatty for divorce. The subject of liability to the IRS for this 2015 tax liability came up in their divorce. And according to the divorce decree, which they agreed to in Minnesota State Court, Paragraph 10 deals with this debt.

It says "the Petitioner" — in this case, that's Mrs. Fatty — "shall be responsible for the outstanding debt owed to the IRS and shall hold the Respondent — in this case, that means Mr. Fatty — "harmless for that debt."

So as a matter of their divorce, and under Minnesota state law, Mrs. Fatty remains liable for this debt to the IRS. And as I said, the evidence showed that she has continued to pay it. Nevertheless, Mr. Fatty wants to be relieved from it because he gave up the house during the divorce and he no longer owns that house.

How is this analyzed under the tax code? The question is one of what's called innocent spouse relief. The innocent spouse rules start with a presumption that the spouses who file a joint federal tax return are jointly and severally liable for the income tax liability. That's Internal Revenue Code Section 6013(d)(3).

However, Section 6015(f) grants innocent spouse relief, which is relief from this joint liability, to qualifying spouses. A spouse may be relieved from joint and several liability under Section 6015(f) if, taking into account all the facts and circumstances, it would be inequitable to hold them liable for any unpaid tax. 

Now, when a subject case comes to Tax Court, Tax Court has to apply both a standard and scope of review. The standard of review is what I look, at — or it is how I look at the evidence. And in this case, it is undisputed the standard of review is de novo. I don't care as a judge what the IRS decided. I have to look at the evidence with fresh eyes.

The scope of review is what I look for. Until recently, the scope of review in a Tax Court case involving a request for innocent spouse relief is also de novo. People would come, they'd introduce evidence, and I as a judge would look at it with fresh eyes. 

Congress has more recently changed that scope of review. Now I am supposed to look at what is called the administrative record. The administrative record consists of all the documents and the evidence that the IRS looked at when Mr. Fatty first applied for relief.

I am supposed to look only at the administrative record, with two exceptions. And those two exceptions are evidence that is newly discovered or evidence that was previously unavailable. This is a change in the law, and the Fattys are one of the first cases to come after this change in the law.

However, in this particular case, I just assumed that testimony given under oath and subject to cross-examination, like the testimony given by both Mr. and Mrs. Fatty, is this newly available evidence, because when Mr. Fatty applied for innocent spouse relief, he wasn't able to give sworn testimony and neither he nor his wife were subject to cross-examination.

As I said, I'm not deciding this for all cases in the future. This is an S case. But I am assuming that I can look at the evidence that they give me in the form of their testimony. So I will look both at the administrative record in this case and at the testimony of both Mr. and Mrs. Fatty.

I found both of their testimonies to be entirely credible. They were honest people in this case, and I'll consider their testimony. But it really only buttresses what has already been looked at by the IRS and what has been assembled in the administrative record.

So with that as background, let me return again to how we consider innocent spouse cases in Tax Court. We look to revenue procedures 2013-34, which lists factors to consider in deciding whether to grant relief under Section 6015(f). This inquiry is divided into three parts: a threshold part, all the conditions of which must be met to go forward at all; a streamlined part, if any of those conditions are missing, streamlined relief is not available; and then a multifactor balancing test.

I'll look first at the threshold conditions. These are listed in Section 4.01 of Revenue Procedure 2013-34. I have to ask a series of questions. Was there a joint return for the year in issue, 2015? This was not disputed; there was.

Second question is is relief available under section 6015(b) or (c). This is easy. Both section 6015(b) and 6015(c) deal with cases of understatement where a tax return doesn't report the entire liability that a couple owes. Those sections don't apply here because this case under 6015(f) is for underpayment. Everybody knows what the Fattys owed; they just didn't pay it all at once. So relief under 6015(b) and (c) is not available.

The third question is whether the claim for relief was timely filed. The Commissioner concedes that Mr. Fatty did timely file his request for relief. The fourth question is whether assets were transferred between the spouses as part of a fraudulent scheme. There's no evidence of this. The Commissioner doesn't argue it.

The fifth question is whether the non-requesting spouse, which would be Mrs. Fatty in this case, transferred disqualified assets to the requesting spouse. The Commissioner concedes that he did not — I'm sorry, the requesting spouse here is Mr. Fatty. The nonrequesting spouse is Mrs. Fatty. But in any event, there were no such shenanigans going on between Mr. and Mrs. Fatty to avoid paying their tax liability.

The sixth question is whether the requesting spouse did not knowingly participate in the filing of a fraudulent joint return. There was no fraudulent joint return here. The Fattys honestly reported their tax liability for 2015.

And finally, the seventh question that I have to ask right at the beginning is whether the liability from which Mr. Fatty seeks relief is attributable either in full or in part to an item of Mrs. Fatty. Here, the parties stipulated that although Mrs. Fatty contributed the lion's share of the down payment, part of that down payment and part of the closing costs came from Mr. Fatty's income.

They stipulated that $6,608 was attributable to Mrs. Fatty's income, while $1,017 was attributable to Mr. Fatty's income. Thus, at least part in this case, most of the disputed liability comes from Mrs. Fatty.

So at the threshold, Mr. Fatty at least has a case. As for streamlined relief, the Revenue Procedure 2013-34 at section 4.02(3) requires that Mr. Fatty not have known there would be an underpayment. This can't possibly be true in this case because the couple was still married in 2015. Both acknowledged that they  didn't have money to pay all of their tax bill for 2015 when they filled out their returns. And both signed the installment agreement.

Moreover, both Mr. Fatty and Mrs. Fatty not only signed this agreement, but continued to pay it together until the couple separated and then got divorced. 

So it's clear to me that Mr. Fatty knew that there was an underpayment when he signed the return back in 2016 for their 2015 tax year. So there's no streamlined relief available.

That brings us to the multifactor balancing test for equitable relief. Those factors are also listed in Revenue Procedure 2013-34 in section 4.03. Again, I'll address them one by one.

The first is what is the couple's marital status. There's no dispute that Mr. Fatty and Mrs. Fatty are no longer married. They got divorced in 2019. This factor weighs in favor of relief under that Revenue Procedure.

The second question is whether not granting relief would cause Mr. Fatty economic hardship. It is undisputed that Mr. Fatty is not currently paying any money towards the satisfaction of the unpaid tax for the year 2015. Instead, Mrs. Fatty is the one who's making the monthly installment payments. These are not extremely large monthly payments. They're $135 a month.

According to the divorce decree and the questionnaire attached to it, under Minnesota law, Mr. Fatty spends roughly $1,000 less each month than he earns. So this would not cause him economic hardship should he end up having to pay under the installment agreement.

The third factor is whether Mr. Fatty had knowledge of the underpayment. I've already discussed this in the section of this opinion that deals with the availability of streamlined relief. It's clear that Mr. Fatty knew that they were not going to be able to pay their 2015 tax bill when they filed their return. That's why they both signed the installment agreement. 

So I have to find that Mr. Fatty did know the tax was going to be underpaid at the time he signed the return. That counts against him at least a little bit.

The fourth factor, according to the Revenue Procedure, that I need to look at is a very important one. It says that I need to look at whether the non-requesting spouse — that means Mrs. Fatty here — was under a legal obligation to pay the unpaid tax. "According to Revenue Procedure 2013-34 section 4.03(2)(d), this factor will weigh in favor of relief. The non-requesting spouse has the sole legal obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement."

It's clear to me that in this case, Mrs. Fatty assumed the obligation to pay this unpaid tax bill. So this does count in Mr. Fatty's favor.

The fifth factor is significant benefit. Married couples who share expenses in a single household typically have expenses that are everyday. Think groceries or their rent. They also have some extra expenses beyond that, such as buying a new house, luxurious travel, secret expense accounts that some couples have.

There was a little bit of that last year in that, in addition to paying for their everyday expenses out of joint assets, Mr. and Mrs. Fatty did get a little bit of extra benefit. They bought a house. And they spent some of the income that they didn't pay tax on for 2015 to buy that house. They then sold it for a little bit of a profit.

So there's a significant benefit, as the Revenue Procedure defines it here, not much of one. This counts a little bit against Mr. Fatty because he did receive part of the proceeds from the sale of that home, but not an enormous amount.

The sixth factor I have to consider is whether Mr. Fatty has been in compliance with the tax laws after 2015. Here there was a little bit of a glitch. In 2017, he chose single filing status instead of married filing single status.

I find that given that English isn't his first language and he hadn't had much experience with the tax system, that Mr. Fatty did this in good faith. He thought that when he separated from his wife, he was single again. The law defines him as not being single until he actually got the divorce in 2019. So this counts a tiny bit against him, but again, it's in good faith. I don't count it against him very much.

The final factor that I have to look at is whether there was any mental or physical health problems that Mr. Fatty had. On his request for innocent spouse relief, he stated that he did not suffer from any such issues, either now or during the years at issue. So this factor is neutral.

So we have the fact that they are divorced and that the divorce decree says that Mrs. Fatty is responsible for the tax bill. But everything else is either neutral or weighs a little bit against Mr. Fatty.

As in any multifactor balancing test, I have to have something in mind as the appropriate fulcrum where there are factors laying down on both sides of the lever. What I look at, and what I think is the appropriate fulcrum, is the extent to which the economic immunity of a household that files a joint return has been broken down by the actions of the non-requesting spouse in a way that didn't allow the requesting spouse's reasonable exit from having joint returns and a joint liability.

Here, Mr. and Mrs. Fatty did have a joint household. They shared expenses and they shared their income. They knew what each other were doing, and the money was spent on themselves together, not on either person hiding money from each other, as sometimes happens. 

So in this case, I find that financially, if perhaps not emotionally, for 2015, Mr. Fatty and his wife enjoyed the benefits of a joint economic household together. I therefore find that no relief is available for Mr. Fatty to relieve him of his obligation, should he become obliged to pay under the installment agreement.

Again, I stress that Mrs. Fatty assumed this under Minnesota law. Should Mr. Fatty ever have to pay the still-unpaid tax obligation, he would have the right under Minnesota law to get relief from Mrs. Fatty. But because they agreed in their divorce cases that Mrs. Fatty would be responsible doesn't relieve both of them from their obligation to the IRS.

This situation is kind of like roommates, who might agree that although the electric utility bill comes in both their names, one of them will pay it each month. Well, if the one who doesn't pay it, doesn't pay it — the one who's responsible doesn't pay it, that doesn't mean the electric company can't go after both roommates. It only means that one roommate can take the other one to small claims court.

And that's essentially the situation here. The couple has agreed that Mrs. Fatty has to pay the tax bill. But should it become necessary for Mr. Fatty to pay the tax bill because, for whatever reason, Mrs. Fatty doesn't, they cannot — because of their private agreement with each other — relieve themselves of the obligation to pay the IRS together.

Decision will be entered for Mrs. Fatty — I'm sorry, will be entered against Mr. Fatty. This concludes the Court's oral findings of fact and opinions in this case. Thank you very much.

(Whereupon, at 10:21 a.m., the above-entitled matter was concluded.)

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