This opinion (and post) is quite long, but it's worth reading if you really want to understand spousal relief.
Questions for the Tax Court
Is Ms. Sykes [petitioner] entitled to relief under section 6015(b), (c), or (f). (10).
Spousal Relief From Joint and Several Tax Liability
Under section 6013(d)(3), a husband and wife filing a joint return are jointly and severally liable for all tax for the taxable year, including interest and penalties. (14).
Section 6015 relieves a spouse of joint and several liability in three situations: (1) if the spouse did not know or have reason to know of the deficiency when the return was signed, and satisfies other conditions; (2) if a divorced or separated spouse seeks to limit individual liability to the portion of the deficiency attributable to him or her; and (3) in the case of a deficiency or of a tax shown on a return but not paid, if it is inequitable to hold the spouse liable for the tax. See sec. 6015(b), (c), and (f), respectively. The last provision, found in section 6015(f), only applies if relief is not available to the taxpayer under the other two provisions. (14-15).
Tax Court's Section 6015(b) Analysis
Under section 6015(b), the first situation above, A spouse has reason to know of the understatement if a "reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the . . . understatement." Price v. Commissioner, 887 F.2d 959, 965 (9th Cir. 1989). (16).
Factors to consider in analyzing whether a spouse had reason to know of the understatement include: (1) the spouse's level of education; (2) the spouse's involvement in the family's business and financial affairs; (3) the presence of expenditures that appear lavish or unusual when compared to the family's past levels of income, standard of living, and spending patterns; and (4) the culpable spouse's evasiveness and deceit concerning the couple's finances. Price v. Commissioner, 965. (17).
[Here], Ms. Sykes held two bachelor degrees, kept all the records for her husband's law practice in 2003, was the sole party responsible for reviewing the documents to be presented to the tax return preparer for the tax year 2003. (17). Her husband was not deceptive about financial matters, and in fact frequently discussed with her . . . business and family financial matters. (17). She either knew or should have known, as the manager of the law practice that business expenses were being twice deducted and that excessive deductions for advance client costs were being claimed. (18). Thus, because she knew or should have known of the understatement of tax, she does not qualify for relief under section 6015(b).
Tax Court's Section 6015(c) Analysis
[U]nder section 6015(c)(3)(C), apportionment of liability does not apply if the Commissioner "demonstrates that an individual making an election under this subsection had actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof) which is not allocable to such individual . . . ". This Court has defined actual knowledge as "an actual and clear awareness (as oppose to a reason to know) of the existence of an item which gives rise to the deficiency (or portion thereof)". Cheshire v. Commissioner, 115 T.C. 183, 195 (2000). (20).
And, consistent with Cheshire, such actual knowledge does not include knowledge of the tax laws or knowledge of the legal consequences of the operative facts. (21).
It is clear to the Court that Ms. Sykes had actual knowledge of all items giving rise to the deficiency in joint tax. She was solely responsible for keeping the finances of the law practice; had actual knowledge of the year the Cadillac Escalade was purchased and placed in service; helped prepare the 2003 income tax return by reviewing items with the preparer and reviewing and gathering all financial documents . . . . (22).
Tax Court's Section 6015(f) Analysis
Section 6015(f) relief is available if, taking into account all of the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or deficiency, and if relief is not available under section 6015(b) or (c). (22).
Rev. Proc. 2003-61 states the requesting spouse must satisfy all of the following threshold conditions to be eligible for relief under section 6015(f) . . . Ms. Sykes satisfies these threshold requirement for equitable relief. (24.) However, the I.R.S. argues that as described under the revenue procedure, she is not entitled to relief under section 6015(f) because petitioner had knowledge of the items giving rise to the deficiency; had knowledge or reason to know that intervenor would not or could not pay the tax liability shown on the return; and if held liable for the payment of the tax she would not suffer an economic hardship. (24).
[T]he Court determines that petitioner is not entitled to relief under section 6015(f). (26). [Ms. Sykes] knew at the time she signed the 2003 tax return that [her husband] owed a separate in come tax liability for tax year 2001 in excess of $50,000. (25). This liability was not satisfied until after the 2003 return was filed, and the money used to [pay] the debt was provided by [her husband's] family. This information supports the conclusion that Ms. Sykes knew that . . . [her husband] could not pay the tax liabilities shown on the return. (25).
Three strikes and your out. Ms. Sykes failed the test for relief under (b), (c), and (f). It goes to show that spousal relief is not a "get out of tax owed" free card. It is truly for those occasions where it would be inequitable to hold the truly 'unknowing' spouse 'jointly and severally' liable for the tax of his or her deadbeat spouse.