In Uncategorized on 01/11/2012 at 21:35

Judge Gustafson gets an oddball, in Ann Marie Minihan, Petitioner, and John J. Minihan, Jr., Intervenor, 138 T.C. 1, filed 1/12/12.

Mrs. Minihan claims she’s a Section 6015 innocent spouse, but IRS already levied on a joint account she held with John J., her former spouse, for the full amount of tax, interest, and penalties (note the Harvard comma, because this is a Massachusetts case where Massachusetts law plays a big part).

So IRS says “Even if Mrs Minihan is an injured innocent (which we don’t agree), no tax is due, so no collection action will follow. But in case Mrs. Minihan is seeking a refund, we’ll move for Rule 121 partial summary judgment that she isn’t entitled to a refund even if she can prove innocent spousehood, because we levied on a joint account, and by Mass law either joint account holder can withdraw 100% of the money, irrespective of who put it there or what deals they had between themselves.”

Judge Gustafson puts it this way: “The question whether a section 6015(f) petitioner is eligible for any relief is logically prior to the question whether she is entitled to a particular form of relief (i.e., a refund); and in a sense the Court’s holding a partial trial on the latter question first puts the cart before the horse. However, because here the entire joint liability has been satisfied, petitioner’s request for relief is moot (since the IRS will engage in no more collection activity) unless a refund is possible. The IRS sensibly moved for partial summary judgment on this issue, since if the motion succeeded, the parties and the Court could avoid a trial on the fact-intensive and sometimes vexing question of entitlement to equitable relief under section 6015(f).” 138 T.C. 1, at p. 2, footnote 2.

Note that the new proposed innocent spouse Rev. Proc. in IRS Notice 2012-8, 2012-4 I.R.B. 1 (see my blogpost “Innocence is Bliss,” 1/6/12) is mentioned in the decision, but plays no part in the outcome. 138 T.C. 1, at p. 12, footnote 7.

The only question is whose money is it,  anyway.  After trial,  Mrs. Minihan’s pro bono counsel moved to reopen the record to submit documentation showing the bank account IRS levied upon was one from which neither Mrs. Minihan nor John J. could unilaterally withdraw money. Judge Gustafson allows this over IRS and John J. objections, because it won’t change the result. While the bank’s paperwork isn’t of the best, Mrs. Minihan prevails.

Before IRS levied, Mrs. Minihan filed her Section 6015 petition, which stopped IRS from pursuing collection against her. So IRS went after the joint account. IRS set up what are called “mirror” accounts, his-and-hers, to go after John J.’s money, wheresoever it might be. IRS says “because joint money belongs to whoever grabs it first, we can seize the joint account.”

No, says Judge Gustafson. You can levy, all right, but that doesn’t decide whose money it is. As between depositors and the bank, either party can take out all the money, and the bank is off the hook. See Section 7426; if someone who doesn’t owe tax has their property levied upon to pay the tax of someone who does, they can sue to get it back.  See also US v. Rodgers, 461 US 677 (1983).

But Mrs. Minihan missed the statute of limitations to go under Section 7426. No problem, says Judge Gustafson; there’s wonderful “notwithstanding any other provision of law” language in Section 6015(g)(1) that saves the day, allowing the injured spouse to challenge the levy when all other recourse is gone. So Section 6015 is the innocent spouse’s cure-all.

Presuming without deciding that Mrs. Minihan is entitled to innocent spouse relief under Section 6015(f) equitable principles,  and a refund if she overpaid notwithstanding any other provision of law (except some specifically enumerated ones), Judge Gustafson looks at Massachusetts’ take on joint accounts and what went into the account.

Mass law, says Judge Gustafson, citing several cases, is that as between the depositors, it’s a question of intent, and a question of fact, as to whose money it is, anyway.

“The money in the joint account came from the sale of the couple’s long- time marital house, in which they had made a home together during almost two decades of marriage. Although the money to pay the mortgage had come from the earnings of Mr. Minihan, his earning potential depended on Ms. Minihan’s making her contribution to the household by keeping house, raising the children, and fulfilling the other responsibilities of the stay-at-home spouse.

“Most telling, however, is Mr. Minihan’s testimony at trial: When asked why, on one occasion when he unilaterally withdrew from the account $5,000 for himself, he also withdrew $5,000 for Ms. Minihan, Mr. Minihan testified: “I did so because it was equitable. That was–if one was going to take out $10,000, the other one would take out $10,000”. Mr. Minihan had every incentive in this case to minimize Ms. Minihan’s claim on the funds in the joint account, but even his testimony suggests that the parties intended that Mr. and Ms. Minihan each had a 50-percent interest in the account, notwithstanding that the initial source of the funds might be traced to Mr. Minihan’s paycheck.” 138 T.C. 1, at pp. 26-27.

The money, incidentally, was supposed to pay for their three children’s education and living expenses, according to the evidence Mrs. Minihan brought in, and John J. and IRS couldn’t rebut.

In short: “The propriety of the creditor’s levy is one thing; the right of a third party to assert a claim against the creditor for the property it seized is another thing.” 138 T. C. 1, at p. 28.

So Mrs. Minihan can get back her 50%, assuming she can prove she’s an innocent spouse.

Takeaway- The either-depositor-can-take-all rule is there to protect the bank, not the depositors, so the bank hasn’t to decide a jump-ball between joint account holders. But if IRS levies on a joint account, it’s not “game over.” Ask the question: “Whose money is it anyway?”

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