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Tax Court Again Refuses to Apply One Part of Equitable Innocent Spouse Relief Rev. Proc. 2013-34

Posted on Aug. 19, 2015

Last week Bob Nadler wrote about a Tax Court decision that turned on spousal abuse.  Today, we welcome back frequent guest blogger Carl Smith to talk another innocent spouse case involving spousal abuse but one in which there may have been a War of the Roses where the abuse went both ways.  Still, the abuse was important to the outcome of the case.  Keith

In the summer of 2011, the IRS decided that it would make equitable innocent spouse relief under §6015(f) easier to obtain.  After some internal discussion, in Notice 2012-8, 2012-1 C.B. 309, the IRS put out for public comment a draft Revenue Procedure to replace the existing one at Rev. Proc. 2003-61, 2003-2 C.B. 296, which provided IRS rules for obtaining such relief.  Some clinicians and I gave comments to the IRS on the proposed Revenue Procedure – lauding its many improvements, but criticizing it at some places where it fell short.  One of the areas that clinicians disagreed with Notice 2012-8 was under one of the factors that go into consideration of equitable relief – significant benefit.

Since the original innocent spouse provision was first enacted in 1971, the courts have held that a lack of significant benefit of the understatement to the requesting spouse is a factor favoring relief. Significant benefit is benefit beyond normal support.  In a prior procedure under the new innocent spouse provisions at §6015(f), Rev. Proc. 2000-15, 2000-1 C.B. 447, the IRS had held that a spouse’s receiving a significant benefit was a factor disfavoring relief, but the Rev. Proc. implied that the lack of a significant benefit was a neutral factor toward relief.  In Ewing v. Commissioner, 122 T.C. 32, 45 (2004), the Tax Court overrode Rev. Proc. 2000-15 and held that, consistent with the Tax Court’s prior precedents, the lack of significant benefit was a factor favoring relief, not a neutral factor.  By the time Ewing was decided, however, the IRS had already replaced Rev. Proc. 2000-15 with Rev. Proc. 2003-61, in which the IRS took a position consistent with the Tax Court’s Ewing holding – i.e., that lack of significant benefit is a factor favoring relief under §6015(f).

In a post  I did on February 21, 2014, I pointed out how Notice 2012-8 contained a sentence partially backtracking on the significant benefit position that the IRS took in Rev. Proc. 2003-61, since the proposed Rev. Proc. added a sentence excepting “small” items from these rules:  “If the amount of unpaid tax or understatement was small such that neither spouse received a significant benefit, then this factor is neutral.” We clinicians had objected to this sentence as inconsistent with case law, which never made any distinctions between “big” and “small” underpayments or understatements. Further, we noted that “small” was undefined in amount, making the sentence unadministrable. The only response to our comments was that at section 4.03(2)(e) of the final Revenue Procedure, Rev. Proc. 2013-34, 2013-2 C.B. 397, the IRS added another sentence reading: “Whether the amount of unpaid tax or understatement is small such that neither spouse received a significant benefit will vary depending on the facts and circumstances of each case.” Big help.

The post I did in February 2014 was on one of the first Tax Court cases to apply Rev. Proc. 2013-34, Howerter v. Commissioner, T.C. Summary Op. 2014-15. In her opinion in that case, Judge Kerrigan cited Tax Court precedent to reject these sentences providing that small underpayments or understatements rendered this factor neutral. Of course, Summary Opinions do not bind the Tax Court as precedent.

However, I wanted to report that in Hollimon v. Commissioner, T.C. Memo. 2015-157 (Aug. 12, 2015), Judge Buch just issued a memorandum opinion that comes to the same conclusion as Judge Kerrigan did in Howerter.  So, you now have at least something the Tax Court will let you cite to ignore these two sentences in Rev. Proc. 2013-34 that make small underpayments or understatements neutral for purposes of the significant benefit factor.

For completeness, here is the entire discussion of the subject from the Hollimon opinion (at pp. *13-*14):

5. Significant Benefit

This factor weighs against relief if the requesting spouse “significantly benefited from the unpaid income tax liability or understatement.” Further, if the amount of the unpaid tax or understatement was small and did not provide a benefit to either spouse, the revenue procedure states that this factor will be neutral.  However, this Court has held that this factor weighs in favor of relief if the requesting spouse received little or no benefit.

Mr. Al Bakari asserted that Bay Area Staffing paid for items that benefited Ms. Hollimon, which Ms. Hollimon disputes. Regardless, there is no evidence that Ms. Hollimon received a benefit attributable to the unpaid liability or understatement. The amount of the unpaid tax, including additions to tax, is less than $4,000, and there is no evidence that this amount specifically benefited either spouse. Accordingly, this factor weighs in favor of relief under our precedent.

(citations omitted).

I will quote here from my prior post:  “Now, will someone tell all the employees at the Cincinnati Centralized Innocent Spouse Office to ignore the two sentences in Rev. Proc. 2013-34?”

Final Observations

Many taxpayers in innocent spouse cases are pro se or are represented by lawyers who are not experts in the innocent spouse area, and so won’t file any briefs pointing out the inconsistency of the Rev. Proc. on significant benefit with judicial precedent. Apparently, this may have already led one Tax Court judge to miss this problem with the Rev. Proc. In Hall v. Commissioner, T.C. Memo. 2014-171, where the spouses were pro se, Judge Ruwe wrote: “The fifth factor is whether the requesting spouse [Mr. Hall] significantly benefited from the understatement. Id. sec. 4.03(2)(e). We have not found that Mr. Hall significantly benefited from the understatements. In the context of this case, this factor is neutral. Id.” Although Judge Ruwe did not point to the smallness of any benefit to either party as his basis for making this factor neutral, under Tax Court precedent, the significant benefit factor should never be neutral.

So, the IRS really should issue a short, public modification to Rev. Proc. 2013-34 that explicitly deletes the two offending sentences. Doing so publicly would notify IRS employees, taxpayer lawyers (if any), and judges, so that this particular mistake is never made again.

Finally, the error in the Rev. Proc. on significant benefit likely is disproportionately more harmful to the working poor, who either may have claimed improper business deductions or education credits or owe reported taxes.  Poor people are more likely to have what CCISO employees will be inclined to think are small liabilities that fall within the exception for making the significant benefit factor neutral.  Compounding the problem for the working poor is that another factor — economic hardship if forced to pay the tax — is going to be hard to prove for small liabilities, so will also become a neutral factor, rather than a factor favoring relief.  After all, if a working poor taxpayer could afford to pay a mere $60 a month (say, over 72 months under a streamlined installment agreement), then a deficiency of, say, $4,000 — like that involved in Hollimon — would not impose an economic hardship to pay.  Hollimon herself was not working poor, but she reported that her monthly income exceeded her monthly expenses by about $1,000, so the judge found the hardship factor neutral.

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