In Uncategorized on 02/06/2014 at 00:58

No opinions or designated orders again today, 2/5/14, so again the diligent blogger trudges through volumes of “pay the $60 already” and “Simon Says answer the motion”.

The alternative is to romp through the muddy field of Rev. Proc. 2014-16, effective 1/24/14, among whose purposes are to provide: “…the procedures by which a taxpayer may obtain the automatic consent of the Commissioner of Internal Revenue to change to the methods of accounting provided in §§ 1.162-3, 1.162-4, 1.263(a)-1, 1.263(a)-2, and 1.263(a)-3 of the Income Tax Regulations and §§ 1.162-3T, 1.162-4T, 1.263(a)-1T, 1.263(a)-2T, and 1.263(a)-3T of the temporary regulations. This revenue procedure also modifies Rev. Proc. 2011-14 and provides the procedures by which a taxpayer may obtain the automatic consent of the Commissioner of Internal Revenue to change to a reasonable method described in § 1.263A-1(f)(4) for self-constructed assets and to change to a permissible method of accounting under section 263A(b)(2) of the Internal Revenue Code and § 1.263A-3(a)(1) for certain costs related to real property acquired through foreclosure, by deed in lieu of foreclosure, or in another similar transaction. Finally, this revenue procedure also modifies section 3.0 of the APPENDIX of Rev. Proc. 2011-14 regarding a change to the method of accounting described in Rev. Proc. 2011-43, 2011-37 I.R.B. 326, for taxpayers in the business of transporting, delivering, or selling electricity.” Rev. Proc. 2014-16, at pp. 1-2.

Sorry, readers, this is not my primary area of interest. I leave that sort of thing to the trade press, where battalions of CPAs at Big Whatever-The-Number-Is firms grind out newsletters, blogs and webinars.

No, today I would respectfully draw the reader’s attention to an off-the-bencher from The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter, Judge Mark V. Holmes, decided 1/10/14, but filed 2/5/14, Lori A. Harris, Petitioner and Kenneth Donnelly, Intervenor, Docket No. 14290-12.

As is obvious, this is a Section 6015 innocent-spouser. All the facts are stipulated.

Lori and Ken split during the year at issue, but Ken prepared the joint 1040, and had Lori come over at 9 p.m. on April 15 of the next year, put the form in front of her and told her to sign. They’d never had tax troubles before, Lori says she was tired, had no time to get to a tax pro to scope out Ken’s arithmetic, so she signed.

Ken disclosed all their income and took no unwarranted deductions. But he didn’t include the 10% Section 72(t) chop for premature withdrawals from his IRA.

So IRS hits them both with a $6300 deficiency and a $1300 penalty. Lori claims innocence, IRS says no, and Lori petitions. While her petition is pending, IRS’ trial counsel agrees Lori is innocent, but Ken intervenes (as is his right, says Judge Holmes; when Judge Holmes makes remarks like that about a party, that party is in for a rough trip).

IRS’ guidelines are now found in Rev. Proc. 2013-34. See my blogpost “Innocence Is Bliss”, 1/6/12, which I optimistically subtitled “Less Work for Us Tax Court Bloggers?”. There was plenty of work until Rev. Proc. 2013-34 became final, but here it is, retroactively applied by its terms to Lori.

And though Tax Court must consider the guidelines in Rev. Proc. 2013-34, Tax Court isn’t bound by them.

Lori and Ken weren’t making fraudulent transfers (transfers pursuant to a divorce decree don’t count), knowingly trying to defraud the government, or hiding assets, and Lori’s sole basis for innocence is Section 6015(f) equitable relief. Now the issue of whose tax incident gave rise to the deficiency is a little tricky, as Lori and Ken were Californians, and the Bear Republic is community property country, so Lori has a one-half share in Ken’s IRA distributions under local law. But there’s a savings clause in Rev. Proc., 2013-34 that lets innocent spouses off the hook if they’re only on the hook because of community property laws.

So Lori crosses the Rev. Proc. 2013-34 threshold; now to see if she can pass the balancing-of-factors test. Judge Holmes: “The general rule is that I have to look at all the factors and all the facts and circumstances, and that I’m not limited to any particular group of factors. Nevertheless, as Tax Court has generally done, we look at the Revenue Procedure in effect at the time. This is particularly noteworthy in this case, because the current Revenue Procedure in Section 3.01 states that this Revenue Procedure ‘gives greater deference to the presence of abuse than [previous Revenue Procedures]. The Service  recognizes that the issue of abuse can be relevant with respect to the analysis of other factors, and can negate the presence of certain factors. This change is entitled to give greater weight to the presence of abuse when its presence impacts the analysis of other factors.’” Order, at pp. 9-10.

Now abuse is not defined in any of the Rev. Procs., old or new, except that it’s less than duress. Duress means “…any constraint of will so strong that it makes a person reasonably unable to resist demands to sign a return.” Order, at pp. 10-11.

But that negates innocent spousery, because a return signed under duress is not a joint return at all.

“But it’s abuse as a factor by itself, and not just as a relevant bit of evidence about one spouse’s state of knowledge, that I’m looking for in this case. It’s an important point because it liberates me from focusing on the moment the return is signed. The relevant abuse here precedes that moment. And there’s no suggestion in any of the Revenue Procedures, including the current one, or any other source of relevant law that limits my consideration to whether a spouse was abused only to abuse that causes a particular instance of non-compliance with the tax law.” Order, at p. 11.

So it’s not only “sign or I’ll slug you”, but rather a pervasive pattern.

Now, as Judge Holmes said in Brett Van Alen and Kimberlee Van Alen, 2013 T. C. Memo. 235,  pay attention: “This leads to the heart of my inquiry on this particularly important factor. What is abuse for purposes of innocent spouse relief? If there was verifiable physical harm, that would likely be sufficient. And here, in fact, there was verifiable physical harm to the two daughters, albeit not Ms. Harris, caused by Mr. Donnelly.” Order, at p. 12.

But there’s what lawyers call a caveat: “One has to be aware of the danger that requesting spouses, in trying to escape financial liability, may easily exaggerate the level of non-physical abuse. Innocent spouse cases often spring from the dissolution of troubled marriages, and there’s an obvious incentive to vilify the non-requesting spouse.” Order, at p. 12.

Ken never abused Lori, only their two daughters, causing permanent injury to one child’s shoulder, and constantly belittling them, to the point that neither wanted anything to do with Ken. You can read for yourself what Judge Holmes found in the divorce proceedings; it isn’t pretty.

But it’s enough to cause Judge Holmes to find Ken abused Lori.

“In the applicable Revenue Procedure, the Commissioner has instructed his employees– and I think it’s a good thing, and the Court will do it as well in this case– that abuse of the requesting spouse’s child or other family members living in the household may constitute abuse of the requesting spouse, depending on the facts and circumstances….” Order, at pp. 16-17.

Going through the factors, Judge Holmes tosses Ken and holds Lori innocent.

It’s unfortunate this off-the-bencher can’t be cited. But it sure can be argued.




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