Tax Lawyer's Blog

Last thursday, the United States Tax Court handed down a decision granting Innocent Spouse Relief to the widow of former San Francisco Mayor Joseph Alioto.

In Alioto v. Commissioner, T.C. Memo. 2008-185 (7/31/08), the Tax Court found that the Petitioner met the safe harbor provisions of Rev. Proc 2000-15 and, therefore, granted her claim for equitable relief under Section 6015(f).

When a person signs (or otherwise agrees to file) a joint income tax return he or she becomes jointly and severally liable for the tax (and penalties and interest, if applicable) that is due.  There are some instances where a spouse signs a joint return and is innocent of the knowledge that the filing of the return will give rise to a tax liability. 

In these cases, the tax code differentiates between situations where there was an erroneous item on the originally filed return and situations where the return was correct as filed but the liability was not paid.  Only “equitable relief” is available in the latter case and will be granted if,

[W]hen taking into account all the facts and circumstances, it is inequitable to hold [the taxpayer] liable for the deficiency in tax.

In Alioto, the petitoner admitted that she was only eligible for equitable relief since the return was correct as filed. 

After finding that the Court had jurisdiction to hear the case, the Court (Judge Vasquez presiding) applied the following equitable relief, safe harbor rules of Rev. Proc. 2000-15, Section 4.02, to the facts of the case:

             1.  At the time relief is requested, the requesting spouse is no longer married to, or is legally separated from, the nonrequesting spouse, or has not been a member of the same household as the nonrequesting spouse at any time during the 12 month period ending on the date relief was requested;

             2.  At the time the return was signed, the requesting spouse had no knowledge or reason to know that the tax would not be paid. The requesting spouse must establish that it was reasonable for the requesting spouse to believe that the nonrequesting spouse would pay the reported liability; and

             3. The requesting spouse will suffer economic hardship if relief is not granted.

The Court found that the three safe harbor conditions were met, and, therefore, granted Mrs. Alioto equitable relief from the tax debts of her deceased husband.

This case illustrates how difficult it can be to get the IRS to administratively grant innocent spouse or equitable relief. The facts of the case overwhelmingly supported Mrs. Alioto’s claim for equitable relief, yet the IRS forced her to go to court to get that relief.

Word to the Wise:  Because of the resistance the IRS has to innocent spouse claims, any taxpayer who is thinking about filing such a claim should consult a tax attorney before doing so. By hiring a tax attorney early in the process (at the claim filing stage), you put the government on notice that you are prepared to take the matter to court if necessary.

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