The Tax Court held that a taxpayer was not entitled to innocent spouse relief for an understatement of tax that was attributable to Social Security income of her husband that the couple did not report on their joint return.
Bessie Buchanan married Wayne Buchanan in 1975, but they also started living apart in 1975. However, they remained married and were not legally separated during the tax year at issue. Mr. Buchanan suffered a stroke and was moved into a nursing home sometime before the 2007 tax year. The stroke left him immobile and with limited speaking ability. Mrs. Buchanan visited Mr. Buchanan, sometimes purchased small gifts for him, and assisted with his care.
Mrs. Buchanan did not pay for any of Mr. Buchanan’s support. Mr. Buchanan received Social Security income, which was assigned directly to the nursing home for his care and maintenance. Mrs. Buchanan was unaware of the amount of Social Security income Mr. Buchanan was receiving, but she was aware that she did not support Mr. Buchanan and that his benefits paid the nursing home expenses.
Mrs. Buchanan elected head-of-household filing status on her federal income tax returns for several years before 2006. For 2006, she asked her tax return preparer whether she could claim Mr. Buchanan as a dependent. The preparer told her she could, but used married-filing-jointly status on her 2006 federal income tax return instead of having her claim Mr. Buchanan as a dependent. After the tax return preparer completed the return, Mrs. Buchanan took it to Mr. Buchanan at the nursing home and asked him to sign it. Mr. Buchanan signed the return, and Mrs. Buchanan filed it. The couple repeated the process in 2007. The joint returns for 2006 and 2007 did not include Mr. Buchanan’s Social Security income.
In 2009, the IRS sent Mrs. Buchanan a notice of deficiency for the 2007 tax year, which determined a deficiency in tax based on Mr. Buchanan’s Social Security income. Mrs. Buchanan responded to the notice by submitting a Form 8857, Request for Innocent Spouse Relief , on Dec. 28, 2009, seeking relief from joint and several liability under Sec. 6015. The IRS refused Mrs. Buchanan’s request, and she appealed. In 2010 the IRS issued a final determination denying her appeal under Secs. 6015(b), (c), and (f). Mrs. Buchanan petitioned the Tax Court to review the IRS’s determination.
The Tax Court’s Decision
The Tax Court held that Mrs. Buchanan was not entitled to any of the three forms of innocent spouse relief available under Sec. 6015. For various reasons, she did not meet the qualifications for the different forms of relief.
To qualify for relief under Sec. 6015(b), the taxpayer must have filed a joint return for the year in question. Mrs. Buchanan and the IRS had stipulated in the Tax Court proceedings that she had not intended to elect married-filing-jointly status in 2007; instead, she intended to use the married-filing-separately status and claim Mr. Buchanan as a dependent. Thus, the IRS argued that because she did not intend to file a joint return, she should not be treated as having filed a joint return for 2007, and she should not be treated as meeting the joint return requirement.
The Tax Court rejected this argument, finding that the question of intent arises only when a joint return is filed without the signatures of both parties and is used to distinguish between a spouse who did not sign a return but still wished to be bound by the return and a spouse who did not sign the return specifically because that person did not want to be bound by the document. Because both Mr. and Mrs. Buchanan signed the return, Mrs. Buchanan’s intent was irrelevant and did not change the status of the 2007 return.
However, the Tax Court found that Mrs. Buchanan failed to meet another requirement of Sec. 6015(b) relief, that she did not have a reason to know of the understatement of tax on the return. The Tax Court stated that she would be held to have a reason to know of the understatement if a reasonably prudent taxpayer in her position at the time she signed the return would be expected to know that the return contained an understatement. The court determined that because Mrs. Buchanan knew about Mr. Buchanan’s Social Security income and she knew that he did not file a return reporting the income, under the reasonably prudent taxpayer standard she should have known of the understatement. Therefore, she was not entitled to Sec. 6015(b) relief.
The Tax Court next analyzed whether Mrs. Buchanan was entitled to relief under Sec. 6015(c), which allows a spouse to elect to limit his or her liability for a deficiency on a joint return to the portion allocable to him or her. This election is available to a spouse who is divorced, legally separated, or is not a member of the same household as the individual with whom he or she filed a joint return at any time during the 12-month period ending on the date the election is filed. Although Mr. and Mrs. Buchanan were physically separated at the time Mrs. Buchanan elected to apply Sec. 6015(c), the court concluded that Mrs. Buchanan could not make the election because she and Mr. Buchanan were not divorced or legally separated and were considered part of the same household. The court determined that they were part of the same household because under Regs. Sec. 1.6015-3(b)(3)(ii), spouses living in separate dwellings are considered to be of the same household if they are not estranged. Based on Mrs. Buchanan’s “compassionate” treatment of Mr. Buchanan, the court found that they were not estranged.
Finally, the Tax Court considered whether Mrs. Buchanan was entitled to equitable innocent spouse relief under Sec. 6015(f). The Tax Court looked to Rev. Proc. 2003-61, which contains two ways to qualify for this relief (one under Section 4.02 and one under Section 4.03 of the revenue procedure). Section 4.02 of Rev. Proc. 2003-61 requires that the relief requested must be for the underpayment of a properly reported liability. The court found that Mrs. Buchanan did not properly report the liability for tax on her husband’s Social Security income because she did not include the income on her joint return, and consequently she did not qualify for relief under Section 4.02.
For relief under Section 4.03 of Rev. Proc. 2003-61, the fact-finder must weigh eight nonexclusive factors in determining whether it would be inequitable to hold the spouse liable for the underpayment. These factors are: (1) marital status; (2) economic hardship; (3) in the case of a deficiency, knowledge or reason to know of the item giving rise to the deficiency; (4) the nonrequesting spouse’s legal obligation; (5) significant benefit; (6) compliance with tax laws; (7) spousal abuse; and (8) mental and physical health of the nonrequesting spouse. The court found that two of the eight factors, Mrs. Buchanan’s marital status and her compliance with tax laws, supported granting relief, but it denied relief primarily because she had significantly benefited from filing a joint return.
Under Regs. Sec. 1.6015-2(d), when determining whether a requesting spouse significantly benefited, directly or indirectly, from the understatement, the fact that the requesting spouse received a benefit on the return from the understatement may be taken into account. The Tax Court found that filing a joint return benefited Mrs. Buchanan because it decreased her taxable income through the standard deduction for married taxpayers filing jointly and an additional personal exemption for Mr. Buchanan, and it reduced her tax rate to the lower rate for married taxpayers filing jointly. Thus, the Tax Court found that Mrs. Buchanan did not qualify for Sec. 6015(f) innocent spouse relief under Section 4.03 of Rev. Proc. 2003-61.
As the court stated in a footnote, in 2012 the IRS issued Notice 2012-8, which contains a proposed revenue procedure that revises the factors that are considered when determining whether a spouse is entitled to equitable innocent spouse relief. The notice lengthens the period during which a spouse can file a claim for equitable relief, expands how the IRS will take into account abuse and financial control by the nonrequesting spouse in determining whether equitable relief is warranted, and makes various other changes. This final revenue procedure would supersede Rev. Proc. 2003-61. Until the final revenue procedure is released, the IRS will apply the provisions in the proposed revenue procedure to applications for equitable innocent spouse relief unless the spouse advises the IRS that he or she would like the Service to use the provisions in Rev. Proc. 2003-61 when considering his or her application.
Buchanan, T.C. Memo. 2013-162