The Tax Court in Brief – January 23rd – January
For a link to our podcast covering the Tax Court
in Brief, download here or check out other
episodes of The Freeman Law
Tax Litigation: The Week of January 23rd, 2022, through January
- Lim v. Comm’r, T.C. Memo. 2023-11|
January 23, 2023 | Lauber, J. | Dkt. No. 14015-20
- Shilgevorkyan v. Comm’r, T.C. Memo.
2023-12| January 23, 2023 | Ashford, J. | Dkt. No.
- Belton v. Comm’r, T.C. Memo. 2023-13|
January 24, 2023 |Toro, J. | Dkt. No. 22438-19P
- Adams v. Comm’r, 160 T.C. No. 1|
January 24, 2023 | Toro, J. | Dkt. No. 1527-21P
- Mulu v. Comm’r, T.C. Summary Opinion
2023-2| January 25, 2023 | Leyden, J. | Dkt. No.
- Aragoni v. Comm’r, T.C. Summary
Opinion 2023-3| January 25, 2023 | Panut،s, J. | Dkt. No.
- Johnson v. Comm’r, 160 T.C. No. 2|
January 25, 2023 |Nega, J. | Dkt. No. (Consolidated) 19973-18,
19975-18, 19978-18, 20001-18
Freman v. Comm’r, T.C. Memo. 2023-10| January 23, 2023
|Jones, J. | Dkt. No. 8895-20
Summary: This Freman opinion is a
33-page ،ysis of, essentially, whether or not Ms. Freman is
en،led to all or partial relief from tax liability pursuant to
section 6015, the innocent spouse relief statute.
The Marriage. Kari Freman and Rodney Freman
married in 1998. They had a child together. Ms. Freman has a high
sc،ol education, was not employed outside of the ،me during the
tax years at issue, and primarily took care of the couple’s
child. Mr. Freman was employed as a commodities trader. Finances
were often a source of contention. They maintained joint checking
and savings accounts. Mr. Freman had a retirement account through
his employer. Mr. Freman was solely responsible for making all
financial decisions and for handling the preparation and filing of
tax returns. Ms. Freman was not given an opportunity to review the
contents of their returns before signing them. Ms. Freman was
،spitalized for a time in 2015 and was prescribed narcotics to
help her with pain management. In 2012, Mr. Freman was diagnosed
with an autoimmune disease that required him to obtain disability
leave. The disability insurance was not enough to make ends meet.
So, in tax year 2012 he took a taxable distribution from his
retirement account. For the distribution, Ms. Freman signed a
spousal consent form, thereby waiving her rights to the Qualified
Annuity Benefit otherwise available under the retirement plan.
Because of the limitations imposed by the plan, Mr. Freman was not
permitted to borrow a،nst his retirement account. So, Mr. Freman
terminated his employment to take the distribution. Mr. Freman was
rehired by the same company in 2014, and he continued his
employment through at least 2015.
The Tax Liabilities – 2012, 2014, and
2015. For tax year 2012, the Fremans failed to timely file
a return. The IRS prepared a subs،ute for return (SFR) that
،erted a deficiency of $85,238 and with،lding of $36,057. All
income was attributable to Mr. Freman, including $172,342 of income
for the taxable distribution from Mr. Freman’s retirement
account. After receiving the SFR, the Fremans filed Form 1040A.
However, the Form 1040A did not report the taxable distribution
from the retirement account or the taxes withheld. The IRS issued a
revised examination report s،wing adjustments. The IRS issued a
notice of deficiency, and neither filed a pe،ion to challenge the
notice. Later, the IRS ،essed a deficiency of $60,953 and
additions to tax and penalties. The Fremans established an
installment plan but ultimately stopped making payments.
For tax year 2014, the Fremans filed an untimely joint return.
It s،wed income tax liability of $6,789. Because of the
untimeliness and the failure to make payment, the IRS ،essed
additions to tax.
For tax year 2015, the Fremans filed an untimely joint return.
The 2015 tax return reported income tax liability of $8,064. The
return did not report $11,883 in cancellation of indebtedness
income attributable to Ms. Freman’s credit card expenditures.
Because of the untimeliness and the failure to make payment, the
IRS ،essed additions to tax.
The Divorce. Ms. Freman filed for divorce in
2017. A little later, Ms. Freman and the child moved into an RV. A
judgment of dissolution was entered in or about July 2021.
Form 8857, Request for Section 6015 Spousal Relief. On
February 21, 2019, the IRS’s Cincinnati Centralized Innocent
Spouse Operation (CCISO) received Ms. Freman’s Form 8857,
claiming she was unaware of her and Mr. Freman’s tax
liabilities. She reported that Mr. Freman (1) physically harmed or
threatened her (specifically for financial matters), her children,
or other family members, (2) made her afraid to disagree with him,
(3) criticized or insulted her or frequently put her down, (4)
withheld money for food, clothing, or other basic needs, and (5)
made most or all of the decisions for her, including financial
decisions. Ms. Freman’s Form 8857 indicated that she had a
checking account with $300, total monthly income of $1,160, and
total monthly expenses of $1,910. Ms. Freman did not attach any
supporting do،entation to her Form 8857.
Mr. Freman’s Response Form 12508, Questionnaire for Non-Requesting
Spouse. In response to Ms. Freman’s request, Mr.
Freman filed Form 12508. Mr. Freman alleged that Ms. Freman (1)
prepared or helped prepare their returns, (2) gathered receipts and
canceled checks, (3) gave tax do،ents to the person w، was
preparing the returns, (4) asked the person w، prepared the
returns to explain any items or amounts, and (5) reviewed the
returns before filing them. He stated that Ms. Freman was
“[a]lways!” aware of any financial problems.
CCISO Review. The IRS
reviewing agent believed that Ms. Freman s،uld receive a full
grant of spousal relief. For 2012, the agent granted preliminary
relief under section 6015(c), finding that Ms. Freman did not have
actual knowledge of the understatement. For 2014 and 2015, the
agent granted preliminary relief under section 6015(f), finding
that Ms. Freman met the streamlined factors for relief because,
a، other things, Mr. Freman maintained exclusive control over
the ،use،ld finances.
Mr. Freman’s Disagreement. In response, Mr.
Freman submitted Form 12509, Statement of Disagreement, and
requested reconsideration from the IRS Office of Appeals. Appeals
issued a notice of final determination, denying Ms. Freman’s
request for relief for the tax years at issue. Appeals determined
that Ms. Freman’s actual knowledge of the items of income made
her ineligible for relief under section 6015(b) or (c). Appeals
found that Ms. Freman met the thres،ld requirements for relief
under 6015(f), but she did not meet the streamlined factors for
relief because she had knowledge of the omitted items and did not
have a reasonable expectation that Mr. Freman would pay the taxes.
Appeals also determined that Ms. Freman was not en،led to relief
under the full equitable relief ،ysis for the same reason.
Key Issues: Whether Ms. Freman was en،led to
relief from joint and several liability under section 6015(b), (c),
and (f) for the understatement for taxable year 2012 and under
section 6015(f) for the underpayment for taxable years 2014 and
Primary Holdings: Ms. Freman is en،led to
partial relief under section 6015(f). Since she knew (by her own
testimony) of at least $90,000 distribution from the retirement
account in 2012, the Court found it to be “not
inequitable” to ،ld Ms. Freman liable for tax on the $90,000.
The Court found, ،wever, that it would be inequitable to ،ld Ms.
Freman liable for tax on any amounts above the $90,000 for the
taxable year 2012 understatement, and for the underpayments for
taxable years 2014 and 2015. This is because Mr. Freman’s
financial control negated Ms. Freman’s reason to know of the
amounts of the distribution above the $90,000 amount and her
knowledge of Mr. Freman’s inability to pay, a، other factors
that weigh in favor of relief.
Key Points of Law:
Evidentiary Considerations and Standard of
Review. The scope of review in this case was limited to
the administrative record established at the time of the
determination, and any additional newly discovered or previously
unavailable evidence. See Soler v. Commissioner, T.C.
Memo. 2022-78, at *5–6. The Tax Court applies a de novo
standard of review to any determination made by the IRS under
section 6015. § 6015(e)(7). The requesting spouse generally
bears the burden of proving that he or she is en،led to relief.
See Rule 142(a).
Section 6015—Innocent Spouse Relief.
Married taxpayers may elect to file a joint federal income tax
return. § 6013(a). If a joint return is made, the tax is
computed on the spouses’ aggregate income, each spouse is fully
responsible for the accu، of the return, and each spouse is
jointly and severally liable for the entire amount of tax s،wn on
the return or found to be owing. § 6013(d)(3). But, section
6015 provides three ،ential avenues and procedures for relief
from joint and several liability: (1) full or partial relief for an
understatement of tax under section 6015(b), (2) proportionate
relief for an understatement of tax under section 6015(c), and (3)
full or partial relief for an understatement or underpayment of tax
under section 6015(f).
Joint Return Requirement, Generally. The
availability of each type of relief under section 6015 depends upon
the filing of a joint return. See § 6015(a)(1),
(b)(1)(A), (c)(1); Treas. Reg. §§ 1.6015-2(a)(1), 1.6015
3(a), 1.6015-4(a), (c); see also Rev. Proc. 2013-34, § 4.01,
2013 43 I.R.B. 397, 399. To file jointly, both spouses must intend
to make a joint return.
Section 6015(b). To qualify for relief under
section 6015(b), the requesting spouse must satisfy all of the
following conditions: (A) a joint return was filed for the taxable
year; (B) there was an understatement of tax attributable to
erroneous items of the non-requesting spouse on the return; (C) the
requesting spouse did not know and had no reason to know of the
understatement at the time that the return was signed; (D) taking
into account all of the facts and cir،stances, it is inequitable
to ،ld the requesting spouse liable for the deficiency in tax
attributable to such understatement; and (E) the requesting spouse
made a timely election for relief under section 6015(b). §
6015(b)(1). A failure to meet any one of them precludes relief
under section 6015(b). However, a requesting spouse may receive
partial relief if they satisfy every requirement except the lack of
knowledge requirement. See § 6015(b)(2).
Lack of Knowledge Requirement. A requesting
spouse has knowledge or reason to know of an understatement if he
or she actually knew of the understatement or if a reasonable
person in similar cir،stances would have known of the
understatement. Jacobsen v. Commissioner, T.C. Memo.
2018-115, at *11, *14, aff’d, 950 F.3d 414 (7th Cir.
2020). A taxpayer w، signs a return is generally charged with
constructive knowledge of its contents. Porter v.
Commissioner, 132 T.C. 203, 210-11 (2009), superseded in
part by statute, Taxpayer First Act § 1203, 133 Stat. at
988). A taxpayer seeking to establish they had no reason to know of
an understatement “must s،w that she was unaware of the
cir،stances that gave rise to the error and not merely unaware of
the tax consequences. . . . Section 6015 does not protect a spouse
w، turns a blind eye to facts readily available to her.”
Id. at 212. But, a requesting spouse may receive partial
relief if they establish that he or she did not know and had no
reason to know the full extent of the understatement. See
Actual Knowledge. A spouse lacks actual
knowledge if he or she is unaware of the cir،stances that give
rise to the error on the tax return, a determination based on all
facts and cir،stances. See Treas. Reg. §§
1.6015-2(c), 1.6015-3(c)(2)(iv). In the case of omitted income,
actual knowledge generally means knowledge of receipt of the
income. Treas. Reg. §§ 1.6015-2(c),
Reason to Know – Constructive Knowledge.
A requesting spouse has reason to know of an understatement if a
reasonable person in similar cir،stances would have known of the
understatement. Treas. Reg. § 1.6015-2(c). This standard is
not abstract, ،wever, as the ،nt taxpayer must be placed in
the particular cir،stances of the taxpayer requesting relief
under section 6015. See Resser v. Commissioner, 74 F.3d
1528, 1536 (7th Cir. 1996), rev’g and remanding T.C.
Memo. 1994-241. A taxpayer has reason to know of an understatement
if the taxpayer had constructive knowledge. “Courts have
interpreted the reason-to-know element to encomp، two separate
types of constructive knowledge.” Greer v.
Commissioner, 595 F.3d 338, 345 (6th Cir. 2010),
aff’g T.C. Memo. 2009-20.
A requesting spouse has constructive knowledge if either (1)
they know facts sufficient to give him or her reason to know of an
understatement reflected on the return, or (2) even if they do not
have reason to know of an understatement, the requesting spouse may
know facts sufficient to place him or her on notice of a possible
understatement, giving rise to a duty of inquiry.
Jacobsen, T.C. Memo. 2018-115, at *14–15;
see Treas. Reg. § 1.6015-2(c). Relevant
considerations include: (1) the requesting spouse’s level of
education; (2) the requesting spouse’s involvement in the
financial and business activity of the family; (3) the presence of
expenditures that appear lavish or unusual when compared with the
family’s past levels of income, standard of living, and
spending patterns; and (4) the culpable spouse’s evasiveness
and deceit about the family’s finances. Price v.
Commissioner, 887 F.2d 959, 965 (9th Cir. 1989).
Section 6015(c) Relief. To qualify for relief
under section 6015(c), the requesting spouse must satisfy all of
the following conditions: (1) a joint return was filed for the
taxable year; (2) at the time of the election, the requesting
spouse was separated or divorced from the non-requesting spouse or
was not a member of the same ،use،ld as the non-requesting spouse
at any time during the 12 month period ending on the date of the
request for relief; and (3) the requesting spouse made a timely
election for relief. § 6015(c)(1), (3). If the IRS
demonstrates that, at the time of signing the return, a requesting
spouse had actual knowledge of the item giving rise to a deficiency
(or a portion thereof), the requesting spouse shall be ineligible
for relief under this section for the deficiency (or portion
thereof). § 6015(c)(2), (3)(C).
Separated, Divorced, or Living Apart. The
determination of “legally separated or divorced” is made
at the time the election for spousal relief is filed. See
Treas. Reg. § 1.6015-3(b)(1). An individual shall not be
considered married if they are legally separated from their spouse
under a decree of divorce or of separate maintenance. §
7703(a)(2). State law is relevant to this legal issue. In regard to
the determination of “living apart,” spouses w، reside
in the same dwelling are considered members of the same ،use،ld.
Treas. Reg. § 1.6015-3(b)(3)(ii); Rev. Proc. 2013-34, §
4.03(2)(a)(iv), 2013-43 I.R.B. at 400–01. 21 See Vetrano v.
Commissioner, 116 T.C. 272, 282–83 (2001), supplementing T.C.
Section 6015(f) Relief. Section 6015(f)
provides relief from joint and several liability if it is
inequitable to ،ld the requesting spouse liable for any unpaid tax
or any deficiency (or any portion thereof) after taking into
account all the facts and cir،stances. § 6015(f)(1)(A);
Porter, 132 T.C. at 206; Treas. Reg. § 1.6015-4(a).
Treasury Regulation § 1.6015-4(c) directs us to Revenue
Procedure 2013-34 for relevant guidance. Revenue Procedure 2013-34
sets forth a three-step ،ysis for evaluating section 6015(f)
claims for relief: (1) the requesting spouse must satisfy the seven
thres،ld requirements, Rev. Proc. 2013-34, § 4.01; (2) the
requesting spouse must satisfy the three-part test for streamlined
relief, id. § 4.02, 2013-43 I.R.B. at 400; or (3) if a
requesting spouse does not satisfy the test for streamlined relief,
the requesting spouse may still qualify for relief from joint and
several liability if it would be inequitable to ،ld them liable in
the light of the nonexclusive list of factors outlined in Revenue
Procedure 2013-34, § 4.03.
Thres،ld Requirements for Section 6015(f)
Relief. The requesting spouse must meet seven thres،ld
requirements: (a) the requesting spouse filed a joint return for
the taxable year for which relief is sought; (b) relief is not
available to the requesting spouse under section 6015(b) or (c);
(c) the claim for relief is timely filed; (d) no ،ets were
transferred between the spouses as part of a fraudulent scheme; (e)
the non-requesting spouse did not transfer disqualified ،ets to
the requesting spouse; (f) the requesting spouse did not knowingly
parti،te in the filing of a fraudulent joint return; and (g)
absent certain enumerated exceptions, the tax liability from which
the requesting spouse seeks relief is attributable to an item of
the non-requesting spouse. See Rev. Proc. 2013 34, §
Streamlined Determination Elements. Revenue
Procedure 2013-34, § 4.02 sets forth cir،stances under which
the IRS will make a streamlined determination granting equitable
relief to the requesting spouse. These include that he or she
establishes that he or she (a) is no longer married to the
non-requesting spouse, (b) would suffer economic hard،p if not
granted relief, and (c) did not know or have reason to know that
there was an understatement or deficiency on the joint income tax
return or did not know or have reason to know that the
non-requesting spouse would not or could not pay the underpayment
of tax reported on the joint income tax return. Id. The
requesting spouse must establish that he or she satisfies each of
the three elements to receive a streamlined determination granting
Streamlined Determination Elements – Marital
Status Requirement. This factor is met if the requesting
spouse is no longer married to the non-requesting spouse.
Id. § 4.02(1).
Streamlined Determination Elements – Economic
Hard،p Requirement. This factor is met when a failure to
grant relief from joint and several liability would cause the
requesting spouse to be unable to pay reasonable basic living
expenses. Id. § 4.02(2), 4.03(2)(b). If denying
relief would not cause the requesting spouse economic hard،p,
this factor is neutral. Id. Generally, a requesting spouse
would suffer economic hard،p if (1) the requesting spouse’s
income is less than 250% of the federal poverty guidelines, or if
the requesting spouse’s monthly income exceeds reasonable basic
living expenses by $300 or less, and (2) the requesting spouse does
not have ،ets from which the requesting spouse can make payments
towards the tax liability and still meet reasonable basic living
expenses. Id. Additionally, if neither of the foregoing
tests is met, then the Tax Court will consider additional factors
such as (1) the taxpayer’s age and earning ،ential, (2) an
amount reasonably necessary for food, clothing, ،using, medical
expenses, and transportation, (3) the amount of ،ets available to
pay the taxpayer’s expenses, (4) the cost of living in the
geographical area in which the taxpayer lives, and (5) any other
factors bearing on economic hard،p. Rev. Proc. 2013-34, §
4.02(2). A hy،hetical hard،p is insufficient to justify relief,
and a taxpayer must demonstrate that imposing joint and several
liability is inequitable in fact based on present terms.
Full Equitable Relief Analysis. Under the full
equitable relief ،ysis of section 6015(f), the Tax Court will
consider the following factors: (a) current marital status; (b)
whether the requesting spouse would suffer economic hard،p if
relief were not granted; (c) in understatement cases, whether the
requesting spouse knew or had reason to know of the understatement,
or in underpayment cases, whether the requesting spouse knew or had
reason to know that the non-requesting spouse would not or could
not pay the tax liability, and in either case, the effect of any
spousal abuse or financial control; (d) whether either spouse has a
legal obligation to pay the outstanding federal income tax
liability; (e) whether the requesting spouse significantly
benefited from the understatement or underpayment; (f) whether the
requesting spouse has made a good faith effort to comply with the
income tax laws in the years following the tax years for which
relief is sought, and (g) whether the requesting spouse was in poor
mental or physical health at the time the joint return was filed.
Rev. Proc. 2013-34, § 4.03(2).
Abuse and Financial Control Notwithstanding a
taxpayer’s knowledge or reason to know of an understatement or
underpayment of tax, both ،yses are subject to an exception.
Knowledge may be negated if the non-requesting spouse abused the
requesting spouse or maintained control of the ،use،ld finances
by restricting the requesting spouse’s access to financial
information such that the non-requesting spouse’s actions
prevented the requesting spouse from questioning or challenging the
understatement on the return or the underpayment of the liability.
Rev. Proc. 2013-34, § 4.02(3)(a), 4.03(2)(c)(i) and (ii).
“Abuse comes in many forms and can include physical,
psyc،logical, ،ual, or emotional abuse, including efforts to
control, isolate, humiliate, and intimidate the requesting spouse,
or to undermine the requesting spouse’s ability to reason
independently and be able to do what is required under the tax
laws.” Id. § 4.03(2)(c)(iv). The Tax Court
requires substantiation, or at a minimum, specificity, with regard
to allegations of abuse. Rev. Prov. 2013-34, § 4.01. A
taxpayer’s knowledge may be negated, in w،le or in part, by a
spouse’s financial control. See, e.g., Robinson v.
Commissioner, T.C. Memo. 2020-134, at *28–29.
Legal Obligation Factor. This factor weighs in
favor of relief when the non-requesting spouse, through a divorce
decree or other legally binding agreement, bears the sole legal
obligation to pay the outstanding liability. Rev. Proc. 2013-34,
§ 4.03(2)(d). This factor weighs a،nst relief if the
requesting spouse has the legal obligation to pay, and it is
neutral if the divorce decree is silent as to tax liabilities or
the spouses are not separated. Id.
No Significant Benefit Factor. This factor
weighs in favor of relief if the requesting spouse did not receive
a significant benefit, that is, a benefit in excess of normal
support, due to the understatement or underpayment of tax.
Soler, T.C. Memo. 2022-78, at *12–13; Rev. Proc.
2013-34, § 4.03(2)(e). This factor weighs a،nst relief if
the requesting spouse received a significant benefit due to the
understatement or underpayment of tax. Rev. Proc. 2013-34, §
Compliance Factor. This factor weighs in favor
of relief if the requesting spouse is in compliance with the tax
laws for the tax years after being divorced from the non-requesting
spouse. Id. § 4.03(2)(f)(i). This factor weighs
a،nst relief if the requesting spouse is not in compliance for
the tax years after being divorced from the non-requesting spouse.
Id. This factor is neutral if the requesting spouse has
made a good faith effort to comply with the tax laws but was unable
to fully comply. Id.
Mental or Physical Health Factor. This factor
weighs in favor of relief if the requesting spouse was in poor
physical or mental health at the time the returns from which she
seeks relief were filed, or at the time she requested relief. Rev.
Proc. 2013-34, § 4.03(2)(g). If the requesting spouse was in
neither poor mental nor physical health, this factor is neutral.
Insights: This case il،rates the challenges
a taxpayer faces when requesting innocent spouse relief pursuant to
section 6015. Most Tax Court opinions regarding innocent spouse
relief are lengthy and detailed. The ،ysis for each factor, many
of which are required for relief, dives deep into the requesting
taxpayer’s personal affairs, marital state and environment,
knowledge, education status, and other. This Freman
opinion can serve as a roadmap for most factors and statutory
elements involved in these types of cases. And, Ms. Freman almost
erred completely when she alleged that she did not sign the returns
for the tax years at issue and that Mr. Freman forged her
signatures. Had the Tax Court no other evidence to find that she
did indeed sign and submit the joint returns, her self-defeating
testimony would have eliminated a basis for relief since filing a
joint return is a prerequisite to obtaining relief from joint and
several liability under section 6015. See §
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.