Innocent spousery is multiform. Today we deal with apportionment, or rather Judge Lauber, recovered from unscrambling defective lodgings and filings, takes up that task in Dwight McDonald and Donna McDonald, 2016 T. C. Sum. Op. 79, filed 12/1/16.
Apportionment falls under Section 6015(c). So let’s go down the checklist. Dwight and Donna filed jointly for years at issue. Check. Dwight and Donna are now divorced and living apart. Check. Donna seeks to bail not later than two (2) years after IRS starts to collect. Check.
So Donna’s cleared the bar.
Now what does she get?
Well, the State tax refunds (unreported) get split 50-50, as the returns that generated same were joint.
And Donna’s unreported wages are all hers.
The biggest items are current losses and carryforwards arising from Dwight’s real estate operation. Though Dwight had a full-time job in RI, both Dwight and Donna owned ten (count ‘em, ten) rental real estate parcels in FL and AL. And Donna did answer the phone when the managing agent called for Dwight’s decisions. She knew Dwight spent a lot of time on the real estate, but he kept all the records in a locked room, to which Donna did not have the key. Donna knows nothing of tax law and relied on Dwight and their CPA.
The CPA figured Dwight was a real estate pro, and told Donna so, but didn’t go over the tax returns with her.
IRS says Dwight “actually participated,” so he gets the $25K of losses, but did not “materially participate,” so loses the rest. Hence Dwight’s tears.
IRS says Donna is innocent, but Dwight disagrees.
Judge Lauber: “The statute does not address burden of proof in the situation we face here, where the IRS supports relief from joint and several liability and the nonrequesting spouse opposes it. In such cases we ‘inquire whether actual knowledge has been established by a preponderance of the evidence’ presented by all three parties.
“’Actual knowledge’ means ‘an actual and clear awareness (as opposed to reason to know)’ about the item giving rise to the deficiency. A taxpayer lacks actual knowledge if she ‘is unaware of the circumstances that give rise to error on the tax return.’ In the context of a disallowed deduction, the relevant question is whether the requesting spouse ‘had actual knowledge of the factual circumstances which made the item unallowable as a deduction.’” 2016 T. C. Sum. Op., 79, at pp. 9-10. (Citations omitted, but look them up for your next memo of law).
Dwight argues Donna knew about the real estate business, answered the phonecalls of the managing agent, and was told by the CPA that either she or Dwight or both were real estate pros. Therefore Donna knew about the dicey deductions.
No, says Judge Lauber. Yes, she knew about the real estate business. But that’s not enough.
Since the distinction between actually participating and materially participating means counting hours, knowing who did what and whether all activities were treated as a single activity (and appropriate election filed), and since Dwight called all the shots and kept the records locked away, no way could Donna know that Dwight was a short-timer. Especially when the CPA said he was.
The accuracy chops will follow the erroneous items.