When it comes to so-called “apportioned” innocent spousery, the 6015(b) type, actual knowledge of the unreported or underreported ex’s income means just that – actual, not constructive.

Today Judge Buch absolves Catherine M. Blappert of the $108K unreported income from spouse Bradley M. Blappert (that’s Doc Blappert, M.D.) because she played no material role in Peak Medical Partners, LLC (the “operation”). You’ll find the whole story in Bradley M. Blappert & Catherine M. Blappert, Docket No. 10417-18, filed  2/7/21.

Doc Blappert’s operation employed an office manager and engaged a CPA to do the returns; return prep involved three-way meetings with Doc Blappert, manager, and CPA. Though Catherine got paid $36K in year at issue by the operation, she mostly did some sales rep work, and stayed home with their four (count ’em,, four) children. IRS let Catherine off the hook, but Doc Blappert wants her on.

I note that the operation, though styled “partners,” was a single member LLC (Transcript, at p. 5) reporting as sole proprietorship. As I am not admitted in LA where all this took place, I cannot comment upon LA’s view of those who use the term “partners” for a sole proprietorship.

Howbeit, Doc Blappert claims Catherine was a partner, took a “significant” part of the operation’s profits as wages. She did draw some money from the operation’s business accounts, but that was when Doc Blappert was shutting it down. Doc Blappert claims Catherine was in on the tax meetings, but there’s no evidence other than his testimony.

Their lifestyle wasn’t extravagant, the biggest expense being the kids’ parochial school expenses, and the $276K net profit the operation showed would have covered everything. Catherine admits she glanced at page one of their MFJ, and it looked OK. Besides, she knew nothing of the operation’s finances, Transcript, at p. 7. And $36K is less than 15% of $276.

Only actual knowledge is in dispute. Judge Buch sets out the checklist.

“Actual knowledge requires knowledge of the receipt of the income; knowledge of the source alone is not sufficient. Sec. 1.6015-3(c)(2)(i)(A) and  (iii), Income Tax Regs. It also requires knowledge of the amount received. See sec. 1.6015-3(c)(2)(ii) and (c)(4)(example 4), Income Tax Regs. Ms. Blappert believed that Dr. Blappert properly reported his income. She did not participate in bookkeeping for Peak Medical. Peak Medical’s office manager handled insurance payments and co-payments processed through Square. Moreover, Peak Medical maintained a separate business account that Ms.  Blappert did not access while Peak Medical was in operation. Ms. Blappert did not actually know about the source, receipt, or amount of the omitted income.  Ms. Blappert also did not have reason to know about the omitted income. She would have reason to know of the understatement if a reasonable person in similar circumstances would have known of the understatement. Sec. 1.6015-2(c), Income Tax Regs.; Cheshire v.  Commissioner, 115 T.C. 183, 192-93 (2000), aff’d, 282 F.3d 326, 332-34 (5th Cir. 2002).” Transcript, at p. 11.

Of course, we need facts and circumstances (I really miss Sir Eddie Elgar).

“We consider all the facts and circumstances, including: the nature of the erroneous item and its amount relative to other items; the requesting spouse’s education and business experience; the extent that the requesting spouse participated in the activity producing the erroneous item; whether the erroneous item departed from a pattern reflected in prior returns; and whether the requesting spouse failed to ask about erroneous or omitted items that a reasonable person would question. Sec. 1.6015-2(c), Income Tax Regs.” Transcript, at pp. 11-12.

Catherine was no partner.