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 May 10, 04

District Court Awards Taxpayer Innocent Spouse Relief

Code Section 6015

A taxpayer was entitled to innocent spouse relief because she did not know about the tax understatements at issue, did not participate in or benefit from the underlying transactions, and was not sophisticated in financial matters. Jones v. United States, No. A3-98-142 (D. N.D. 3/31/04).

Sunny Crahan, previously known as Marvis Jones, was married to Frank Jones. In 1980, Frank invested in a computer equipment leasing tax shelter. On their joint income tax returns for 1981-1984, Frank claimed substantial losses and tax deductions as part of this shelter. The IRS disallowed these losses and deductions, and issued assessments for unpaid taxes, interest, and penalties.

Frank died in 1989, and Sunny remarried. She made several payments toward the 1981-1984 assessments between 1997 and 2002, but account balances remained for all the years in issue. She then filed amended returns seeking innocent spouse relief. The IRS denied relief, and Sunny sued in district court.

The court held that Sunny was entitled to innocent spouse relief. Under Code Section 6015(b), the court noted, a taxpayer is entitled to innocent spouse relief if: (1) a joint return was filed for the taxable year; (2) there is an understatement of tax on the return attributable to erroneous items of the spouse responsible for filing the return; (3) the other spouse did not know or have reason to know of the deficiency; (4) it would be inequitable to hold the other spouse liable for the deficiency; and (5) the other spouse timely sought innocent spouse relief.

The court noted that the first two criteria were undisputed. In addition, according to the court, Sunny did not know and had no reason to know about the tax deficiencies. The court pointed out that she had little knowledge of the tax shelter transactions and did not participate in them, had no reason to believe the losses were not allowable as deductions, and did not know that the deductions would give rise to substantial understatements of tax.

In addition, the court noted, Sunny was not sophisticated in financial matters because she had only a high school education, and Frank exclusively handled all of their financial affairs. Sunny also did not benefit financially from the tax shelter or the erroneous deductions, the court stated.

The court also found that Sunny would experience significant hardship if she were denied relief because she would lose about one-third of her assets, none of which were attributable to the tax shelter or the erroneous deductions. In addition, the court stated, her request for innocent spouse relief was timely filed. As a result, the court held that Sunny was not liable for the 1981-1984 taxes arising from the tax shelter, and that she was entitled to a refund for amounts she paid toward the 1981 and 1982 assessments.

 

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