Goode v. Commissioner, T.C. Summ. Op. 2021-34 finds another spouse seeking relief from liability under IRC 6015 failing because of the knowledge element and the lack of economic hardship. As we discussed in the recent post entitled “Is Economic Hardship the Antidote for Knowledge in an Innocent Spouse Case?” the Tax Court has created an unmistakable pattern of finding against spouses who have knowledge of the item giving rise to the liability and do not prove economic hardship. The Goode case is another case where the petitioner had three positive factors and only one negative factor, knowledge. Despite the numerical advantage of the positive factors, the knowledge factor continues to enjoy the status of a superfactor unless the taxpayer seeking relief can successfully raise the antidote of economic hardship.
Revenue Procedure 2013-34 purports to drop the superfactor status of knowledge and the Tax Court generally purports to follow the Revenue Procedure but on this issue, the outcome appears quite predictable to the PT writers but we note that our non-computer based analysis may be at odds with the computer Blue J Legal, Inc which finds economic hardship a relatively unimportant factor and abuse the key to success.
The folks at Blue J follow several issues and model the decisional law in order to predict outcomes in future cases. They have presented at the ABA Tax Section meeting and a couple years ago provided Les and me a private demonstration. If you are working with one of the issues they model, their work could be helpful in assisting you with how to set up your case or whether to settle. On September 27, 2021 an article concerning their product appeared in Tax Notes. I realize it is behind a paywall and may not be available to all readers but if you are interested, I am sure the company would be glad to talk to you.
On IRC 6015(f) the article talks about the recent 7th Circuit decision in Rogers and provides:
We consider abuse and economic hardship to determine their relative importance in the court’s equitable relief analysis. We begin with our baseline prediction with greater than 95 percent confidence that equitable relief is unavailable, adopting the facts as found by the Tax Court and affirmed by the Seventh Circuit.
We next test the importance of the abuse factor. Contrary to what the Tax Court found, we alter the scenario by accepting Frances’s argument that her husband abused and controlled her to prevent her from knowing about or addressing the tax liability and that she feared retaliatory abuse. If that abuse were present, Blue J’s prediction reverses. Blue J’s machine learning technology predicts with 94 percent confidence that Frances would be granted equitable relief.
Once again beginning with our baseline prediction, we then test out the likely effect of accepting Frances’s argument that she would be unable to meet reasonable basic living expenses if she were forced to pay the tax liability. Blue J predicts that equitable relief would be unavailable, and the confidence in that prediction remains greater than 95 percent.
Therefore, the abuse factor is determinative, whereas the economic hardship factor is somewhat insignificant in this particular set of facts and circumstances. If Frances were able to convince the court of abuse, equity would be on Frances’s side.
The IRS guidance on IRC 6015 has evolved since the law passed in 1998, making it hard to lump together all 6015 cases. It seems clear, however, that the Tax Court has not evolved with the IRS with respect to actual knowledge and failure to prove financial hardship. In many ways, I can hardly say with a straight face that the IRS has evolved, since getting a successful determination from the innocent spouse reviewers in Covington seems impossible. I can only imagine how dispiriting it must be to review hard luck stories day after day but I find the reviewers a bit jaded. They have made amazingly inappropriate statements to our clinic regarding abused clients. I wonder if a rotation out of a steady diet of innocent spouse cases might be healthy for those working in this unit.
Back to Ms. Goode and her problems with their 2010 return; let’s look at her facts. As is typical in small tax caseS, she handled her case pro se, probably never looking at the data produced by Blue J or the blogs produced here. She and her husband, who intervened, both worked for the Department of Defense. He became ill in 2010 which caused both of them to resign from their positions and move to Florida to be nearer to his family. She and her husband borrowed money from their retirement plans to tide them over while they looked for jobs in Florida. They did not find work that paid as much as their DOD jobs and defaulted on the loans from the retirement accounts. The defaulted loans triggered Forms 1099. They filed a joint return for 2010, properly reporting the liability but not fully paying the $64,000 federal tax bill triggered by the loan defaults.
As often happens in cases of financial strife, petitioner and her husband separated and eventually divorced. She moved to Texas with the children, went through several years of low wages, but eventually obtained another job with DOD which greatly improved her finances. Had she filed for relief during the low income years, her outcome might have been different, but she may have been in currently not collectible during that period and not as focused on paying the liability.
In her petition, she alleged spousal abuse and attached a copy of a protective order to her innocent spouse submission. She did not qualify for streamlined relief under the Revenue Procedure because she did not qualify based on her income at the time of her request. The court cites Rev. Proc. 2013-34 extensively and works its way through the factors listed in it. She received positive factors for being divorced, for significant benefit (that is to say, she did not receive a significant benefit from the underpayment of the tax) and for compliance with tax laws. The economic benefit factor was neutral as was health. She knew at the time she filed the return that the tax triggered by the money both she and her husband pulled from their retirement accounts was not being paid so she failed the knowledge test.
The court made the following finding:
After evaluating the factors, we find that three of the seven factors weigh in favor of relief, one factor weighs against relief, and the remaining factors are neutral. In section 6015(f) cases, however, we do not simply count factors. We evaluate all of the relevant facts and circumstances to reach a conclusion. See Pullins v. Commissioner, 136 T.C. at 448; Rev. Proc. 2013-34, secs. 3.05, 4.03(2), 2013-43 I.R.B. at 398, 400.
In evaluating the relevant factors we conclude that the knowledge factor weighs too heavily against relief for petitioner. The 2010 tax liability attributable to intervenor partially arose from defaulted TSP loans to which petitioner had consented. She knew the liability would not be paid when she signed the return. Given these facts, we find that it would not be inequitable to hold her responsible for the underpayment for 2010.
Knowledge continues to rule the day. If you don’t have the antidote, be prepared for a sad outcome. As we have mentioned before, and as the tax clinic at Harvard knows from personal experience discussed here and here, no petitioner has successfully appealed a Tax Court denial of innocent spouse relief since the change in the law in 1998. Of course, Ms. Goode, having filed a small Tax Court case, will not be changing that result. There will be an oral argument before the 9th Circuit, probably in January 2022, in the case of Jones v. Commissioner, 9th Cir. Case No. 20-70013, Tax Court Docket No. 7493-18, where another attempt will occur.