When It Comes To Innocence, Both Spouses Now Have A Say When It Comes To Taxes
(RIVERWOODS, ILL, May 26, 2000) In one of the first cases to
interpret new "innocent spouse" rules established by the IRS Restructuring and
Reform Act of 1998, the Tax Court has said that both spouses not just the one
seeking to be let off the hook for a tax deficiency have a right to participate in
the related administrative hearings and court proceedings, according to CCH INCORPORATED
(CCH), a leading provider of tax law information and software.
"The same law that makes it easier for one spouse to claim innocent spouse status
also makes it easier for the other spouse to oppose it," commented Mark Luscombe,
principal federal tax analyst for CCH.
The case involved Thomas and Judith Corson (Thomas Corson and Judith Corson v.
Commissioner of Internal Revenue, Dec. 53,882) who filed a joint income tax return for
1981. On the return, they claimed significant deductions relating to tax shelter limited
partnerships. The Corsons separated in 1983 and divorced in 1984. In 1985, the IRS sent
them a notice of deficiency for $21,711 for the 1981 tax year. Because of their joint
return, each of the Corsons was responsible for the entire amount, and the IRS was free to
pursue either or both of them until it was paid.
The Corsons contested the deficiency by filing a petition with the Tax Court, but each
of them decided to try to settle with the IRS after a test case involving other taxpayers
whod invested in tax shelter partnerships was decided in the governments favor
Rules for Innocent Spouses Change
While she admitted that a deficiency existed on the joint return, Mrs. Corson also
claimed that she was an "innocent spouse," and as such should not be held
responsible for it. Under the law, as it stood before the enactment of the IRS
Restructuring and Reform Act in July of 1998, she had to prove that she did not know about
the items that led to the deficiency. In addition, she had proved she had no reason to
know about them and that it would be "inequitable" to hold her responsible.
The 1998 Act gave innocent spouses wider grounds for claiming relief. For example, it
became possible for one spouse to have his or her liability determined separately from the
other spouse, and to be held responsible only where they had "actual knowledge"
of an item that gave rise to a deficiency a much more favorable test for the
taxpayer than the "knew or should have known" test.
The new law made a dramatic difference in Judith Corsons dealing with the IRS. On
July 8, 1998, the Service turned down her request to be treated as an innocent spouse
under the older rule. Two weeks later, President Clinton signed the Restructuring Act into
law. Mrs. Corsons attorney then asked the IRS to consider her as a candidate for
separate liability. The IRS at first turned down this request, but then agreed to grant
her separate liability and free her from responsibility for the entire deficiency
as a trial date was finally set for May of 1999.
Other Spouse Objects
The IRS also had been negotiating with Thomas Corson. He, too, had admitted the
deficiency, but opposed the granting of separate liability to Mrs. Corson, which would
leave him solely responsible for the entire amount. When he refused to
"stipulate" to a settlement in which his former wife escaped liability, the IRS
filed a motion with the Tax Court to enter (endorse) the agreement with Judith Corson. Mr.
Corson objected, and in the first case of its kind, the court ruled that Thomas had a
right to be heard on the question of Judiths liability, both in negotiations with
the IRS and in any court proceedings where it was at issue.
Judge Arthur Nims noted that before the Restructuring Act, the general rule was that
one taxpayer had no say in how the IRS settled with another taxpayer even if the
two taxpayers had signed a joint return: "Under prior law it is clear that Thomas's
objection here would not furnish grounds for denying [the IRSs] motion."
With the passage of the Act, much of the attention was on the enhanced protections
available to the spouse who elected to seek "innocent spouse" status. Less was
given to the new rights of the non-electing spouse. Judith Corson and the IRS argued that
allowing Thomas to intervene diminished the enhanced protections that were the main thrust
of the legislation.
Judge Nims disagreed, however. Reading several provisions of the Act together
"reveal a concern on the part of the lawmakers with fairness to the nonelecting
spouse and with providing him or her an opportunity to be heard on innocent spouse
issues." While he declined to set out the "precise contours" of the rights
of nonelecting spouses, Nims ruled that Thomas was entitled to "his day in
Keeping Spouse Involved Keeps Him Around
CCHs Luscombe says that the new innocent spouse rules were intended to provide
greater scope for both marital parties.
"It seems logical that the non-electing
spouse could have information relevant to the grant of the election, and the IRS or the
court would have to weigh whether the non-electing spouse is being truthful or not."
Luscombe also noted that recognizing the interests of both spouses may avoid one of the
worst tax scenarios -- being stuck with a large tax bill by an absconding husband or wife.
"It gets the non-electing spouse involved in the proceeding and subject to the
administrative and legal processes. That means it would not tend to help a spouse that has
fled or gone underground."
About CCH INCORPORATED
CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has
served four generations of business professionals and their clients. The company produces
more than 700 electronic and print products for the tax, legal, securities, insurance,
human resources, health care and small business markets. CCH is a wholly owned subsidiary
of Wolters Kluwer U.S. The CCH web site can be accessed at www.cch.com. The CCH federal and state tax web site can be accessed at http://tax.cchgroup.com.
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