Jennifer A. Soler, T. C. Memo. 2022-78, filed 7/18/22, is a fashionista and the family breadwinner, while spouse Carlos ran some money-losing real estate. Carlos’ real estate losses triggered a couple audits (hi, Judge Holmes), unpetitioned deficiencies followed, and Jennifer found her pay being garnished by Collections. So she seeks innocent spousery.

Jennifer was still married to, and lived with, Carlos, so Section 6015(c) proportionate relief is off the table. Appeals says Jennifer has knowledge or reason to know that Carlos has income, even though she claims he was unemployed throughout and got money as gifts from his mother; except she has no proof. No statement that either Carlos or Mom testified on the trial.

Here’s ex-Ch J L Paige (“Iron Fist”) Marvel.

“Mrs. Soler contends that she did not have reason to know of the understatements on the dates she signed the returns. In her view she was an unsophisticated taxpayer who entrusted the family finances to Mr. Soler and did not participate in the Schedule C businesses. She further argues that Mr. Soler hid the existence of the bank accounts that he used for his Schedule C ventures and she, therefore, was not aware of enough facts to be put on notice that the understatements might exist.  Accordingly, she contends that a reasonable person in her position would not have inquired any further into the returns than she did.

“Mrs. Soler has not carried her burden of proving that she lacked reason to know of the understatements. Mrs. Soler is college educated, was the primary income earner for her household during the years at issue, and had some regular involvement in the household finances. On the dates she signed the returns for [the first three years], Mrs. Soler believed that Mr. Soler did not work and had no income. As a result, the mere attachment of Schedules C to the [first three years] returns would raise questions about the validity of the returns in the mind of a reasonably prudent person in Mrs. Soler’s position. This is particularly true in view of the fact that Mrs. Soler knew that her income alone was not sufficient to pay all of her family’s routine expenses. Additionally,  the Schedules C that Mr. Soler completed showed net losses for tax years [Two and Three]. The Solers were experiencing financial stress during the years at issue and were in the middle of a chapter 13 bankruptcy proceeding. Under those circumstances, a reasonably prudent person would certainly inquire about the loss-generating activity. Indeed, Mrs. Soler testified that, had she looked at the returns and noticed the  reported losses, she would have asked her husband about them. However, even if Mrs. Soler did not actually review the returns, she is nonetheless charged with constructive knowledge of their contents because she signed them. Because Mrs. Soler did not fulfill her duty of inquiry, we conclude that she had reason to know of the understatements on the [first three years’] tax returns.” T. C. Memo. 2022-78, at pp. 89. (Footnote omitted, but it’s the bit about Mom’s gifts).

Lack of knowledge protects the innocent, not the “intentionally ignorant.”

But wait, there’s more, as the midnight telehucksters say.

Jennifer and Carlos each took IRA draws in Year Four, never reported, never petitioned, assessed and chopped.

“Mrs. Soler claims that she did not review the [Year Four] return before signing it and was not aware that it contained an understatement. However, at the time Mrs. Soler signed the [Year Four] tax return, the IRS was examining the returns for [Years One, Two, and Three] and had issued proposed adjustments for those years. Although Mrs. Soler chose not to participate in the audit, she admittedly knew that it was happening and even briefly spoke to the examining RA in May [Year Four]. It is difficult to conceive of a more conspicuous notice that an understatement may exist or that some inquiry into the validity of a tax return is warranted than an audit of and proposed adjustment to the immediately preceding three years of tax returns. Because Mrs. Soler unreasonably and inexplicably failed to review the [Year Four] return, we conclude that she had reason to know of the understatement contained therein.” T. C. Memo. 2022-78, at p. 9.

Ex-Ch J Iron Fist trudges through the factors for equitable relief, but “reason to know” is enough to bar Jennifer.