The case of Bishop v. Commissioner, T.C. Summ. Op. 2018-1 although not precedential, provides comfort for spouses seeking relief under the provision available for those who are divorced, widowed, or separated. This case has a couple of unusual aspects worth noting before discussing the main issue – actual knowledge. First, the person claiming innocent spouse status is the former husband. Only a small percentage of innocent spouse cases present the situation in which the husband claims innocence and seeks relief. Second, this case involves an intervenor, the former wife, who is represented by a low income taxpayer clinic. It is unusual to see a clinic on the side of the intervenor though certainly not unprecedented. (I corresponded with the Lewis & Clark clinic director, Jan Pierce, about the case. Jan indicated that the clinic picked up the case at calendar call. This is something the opinion does not indicate. Because I also pick up cases at calendar call and litigate and lose them, I think it would be nice if the Court somehow made mention of the fact that a clinic or pro bono counsel came into the case at calendar call. It provides a little background about the limited ability of the representative in the case.)
Here, the parties admit that the wife inherited a retirement account from her father in 2009. They admit that after she inherited this account she received distributions from the account each year and they admit that the distribution made in 2014 in the amount of $15,068 was left off of their return. They also admitted that $6,000 of the distribution went into a joint checking account that both had access to and that the balance was used to benefit the wife’s daughter. The husband claims that he was generally aware of the retirement account but did not know that a distribution occurred in 2014 and, therefore, had no actual knowledge of the amount left off the return. Because he did not have actual knowledge, he asserts that he qualifies for relief from the additional tax liability based on the language of IRC 6015(c).
The court starts out stating that a “question exists as to where the burden of proof lies in cases when, as here, the IRS favors granting relief and the nonrequesting spouse intervenes to oppose it. The Court has resolved such cases by determining whether actual knowledge has been established by a preponderance of the evidence as presented by all parties.” To determine if a spouse had actual knowledge the IRS considers “all of the facts and circumstances” as required by Treas. Reg. 1.6015-3(c)(2)(iv). The test imposed by the Tax Court examines the surrounding facts and circumstances for “an actual and clear awareness (as opposed to reason to know)” of the omitted income causing the deficiency.
In a situation like this where both spouses know of the retirement account, both spouses know that money has been distributed from the retirement account in each of the five years preceding the year at issue, and both spouses have access to the bank account into which $6,000 of the retirement account distribution in 2014 was made, the person claiming innocent spouse status would seem to bear a heavy burden to demonstrate that he did not know about the distribution. In the background portion of the opinion, the Court noted that the parties separated twice during 2014 before permanently separating in 2015. These facts suggest that the parties did not enjoy harmonious relations in 2014 and that undoubtedly was a factor in the Court’s decision.
The Court states that “he argues that intervenor deliberately deceived him, but he relies on her silence and does not identify any specific misrepresentations by her.” It also states that “he acknowledges that he was at fault for not checking the records on the joint bank account maintained by him and intervenor.”
The wife attacked his credibility and argued that he had actual knowledge of the distribution because it was deposited in their joint bank account seven months before the filing of the return. During that time he wrote checks on the account and used debit cards to access the account. She did not testify that she specifically told him about the distribution and she testified that they both forgot about it when they provided their accountant with the information necessary to prepare the return.
The Court finds that the “history of withdrawals from the retirement account used by the parties over a period of years and the transactions by petitioner with reference to the joint bank account support a conclusion that petitioner should have known about the distribution. The amount was very large in relation to the average balances and other transactions in the account.” Having made that finding which seems very damaging to the petitioner, the Court went on to conclude however that “there is no evidence … that petitioner saw the bank records before the joint return for 2014 was filed. His denials are not incredible, implausible or contradicted by direct evidence.” So, the Court concludes that “regardless of the strong indications of constructive knowledge, the evidence falls short of establishing actual knowledge of any specific amount of the distribution in 2014.”
The case should provide great comfort to anyone seeking to use section 6015(c) if knowledge is the crucial point of contention. The evidence here of constructive knowledge could hardly have been greater and yet the Court declines to rely on the strong evidence of constructive knowledge instead insisting on proof of actual knowledge. Since he denied actual knowledge and she did not testify that she specifically told him about the distribution, there was no evidence that he had specific knowledge. The opinion is consistent with the language of the statute and upholds the actual knowledge requirement in a very literal way.
If you were advising a client you might tell them to make sure that their spouse knows about all of the income coming from their side of the family equation so that your client could testify that the former spouse had actual knowledge but who engages in this type of planning discussion – not many people.
This case demonstrates how difficult proving actual knowledge will be for the IRS or the intervenor. This difficulty is good news for divorced, separated, or widowed spouses who want to avoid a liability caused by income of their former spouse. Remember that to obtain (c) relief you must make the request within two years of collection action. The timing of the request for innocent spouse relief in this situation could be critical because taxpayers like Mr. Bishop may not qualify for relief under IRC 6015(f) and (c) relief may be the only door available in order to walk away from the liability.