16 Oct Tough Standards for Getting Equitable Relief from Joint Tax Liability
Getting equitable relief from joint tax liability isn’t easy. Just ask the husband in Cojocar v. Comm’r., T.C. Memo 2017-189, issued on September 26, 2017. In that case, the husband filed an IRS Form 8857 shortly after his divorce was final, seeking relief from paying taxes on his ex-wife’s income (which he agreed to pay in a marital settlement agreement). The IRS determined that he was not eligible for innocent spouse relief or allocation of liabilities, but considered his request for equitable relief under Tax Code § 6015(f). His request was denied, so husband took an appeal to the U.S. Tax Court.
First, the Tax Court reviewed the seven threshold requirements for equitable relief: (1) the requesting spouse filed a joint tax return for the taxable year for which he or she seeks relief; (2) relief is not available to the requesting spouse under section 6015(b) or (c); (3) the requesting spouse’s claim for relief is timely filed; (4) no assets were transferred between the spouses as part of a fraudulent scheme; (5) the nonrequesting spouse did not transfer disqualified assets to the requesting spouse; (6) the requesting spouse did not knowingly participate in the filing of a fraudulent joint tax return; and (7) absent certain exceptions, the tax liability from which the requesting spouse seeks relief is attributable to an item of the nonrequesting spouse.
Next, having met the 7 threshold requirements, the Court considered the three criteria for a streamlined determination granting equitable relief: (1) the requesting spouse is not married to the nonrequesting spouse; (2) the requesting spouse will suffer economic hardship if relief is not granted; and (3) in an underpayment case, as of the date the return was filed or the date the requesting spouse reasonably believed the return was filed, the requesting spouse did not now or have reason to know that the nonrequesting spouse would not or could not pay the tax liability at that time of or within a reasonable period of time after the filing of the return. Rev. Proc. 2013-34, sec. 4.02.
The Tax Court found that husband failed to prove that he would suffer economic hardship, and that he did not have reason to know that his wife would not or could not pay the tax liability. Even so, a taxpayer having failed to qualify for a streamlined determination may obtain equitable relief if the facts and circumstances are compelling. To make this determination, the Tax Court considered many factors: (1) marital status; (2) economic hardship; (3) in the case of an underpayment, knowledge or reason to know that the tax liability would or could not be paid; (4) legal obligation to pay the outstanding tax liability; (5) receipt of a significant benefit from the unpaid tax liability; (6) compliance with tax laws; and (7) mental or physical health at the time of filing.
The Tax Court observed that, in order to prove (2) economic hardship, a taxpayer must prove that he would be unable to meet his reasonable basic living expenses if he paid the tax. The Court may look at the taxpayer’s age, employment, income, budget, cost of living, and assets in making this determination. Here, the taxpayer claimed income of $13,166 per month (more than double the federal poverty guideline) and budgetary expenses of $11,564. He did not testify that he would suffer a hardship, but that his ex-wife would not suffer a hardship if she were made to pay. That testimony did not satisfy the Court.
The Court also consider the husband’s level of knowledge that his wife could not or would not pay the liability. Here, husband knew when he filed a joint return with his ex-wife that they were not sending a payment with the return, and they owed taxes for prior years. In light of these facts, husband knew or should have known that his wife would not pay the liability.
Finally, the Tax Court considered the marital settlement agreement, in which husband agreed to pay the tax. Interestingly, this factor is not the only criteria that was considered, but it did tip the scales against Husband in this case.
Equitable relief is the third level offered under the Tax Code, when joint taxpayers do not qualify for innocent spouse relief or allocation of liabilities. The criteria are very detailed and precise, as this case demonstrates. For more information about getting equitable relief from joint tax liability, read my book Frumkes & Vertz on Divorce Taxation. For legal help with divorce tax matters in Western Pennsylvania, call Brian C. Vertz at 412-471-9000.