Taxable Talk

I remember the Michael Myers movie, So I Married an Axe Murderer. Today the Tax Court looked at a related issue: What happens if you marry a tax cheat but don't know about it?

The basic facts weren't in dispute. The petitioner's ex-wife was a parking lot cashier at the Philadelphia Airport in the early 1990s. She participated in a scheme to steal money from the airport. She earned about $90,000 in illegal (stolen) income. As you might expect, when the theft was discovered her employment was terminated.

There's no dispute that illegal income is taxable. There's also no argument that when a joint return is filed, both spouses are responsible for paying the tax on the income. In this case, both the IRS and the petitioner agree that about $36,000 in tax is owed.

However, there is a protection for the true innocent spouse. Section 6015(c) of the Tax Code:

"...That section limits an individual’s liability for a deficiency to the portion of the deficiency properly allocable to that individual under section 6015(d). In general, an item that gives rise to a deficiency on a joint Federal income tax return will be allocated to the individuals who file the return in the same manner as that item would have been allocated had those individuals filed separate returns."

Given that when the returns were signed the petitioner knew nothing about the ex-wife's illegal income, all of the income would be attributable to the wife.

However, the IRS disputed whether the petitioner had actual knowledge of the illegal income. If that were the case, he would not be eligible for relief by filing a Section 6015(c) election.

Luckily for the petitioner, for this section of the Tax Code the burden of proof is with the IRS (per Section 6015(c)(2)). While petitioner's ex-spouse testified that the petitioner knew about the illegal income, that was apparently the only evidence that the IRS had. The petitioner also testified that he had no knowledge of the illegal income, and "...we find petitioner’s version of the events to be the more credible. Other evidence supports our finding in this regard. "

So if you marry a tax cheat, don't despair. The Tax Code does actually offer you some protection. On the other hand, if you marry an axe murderer....

Case: Eller v. Commissioner, T.C. Summary 2007-215

A partnership changes its address. What should it do to notify the IRS? Well, that's fairly simple: Like any taxpayer it should send in Form 8822. Today, the Tax Court looked at a case where the partnership didn't follow the normal procedure.

Partnerships are required to designate a "Tax Matters Partner" (TMP). When the IRS has questions/issues/needs to send a notice, it sends the same to the TMP. In this case, the IRS sent 14 final partnership administrative adjustment (FPAA) notices to three different addresses. As the Tax Court said, "By mailing FPAAs to multiple addressees at multiple addresses, respondent made a good faith effort to notify all affected parties of the partnership adjustments, thus satisfying the notice requirement of sec. 6223(a)." And one of the addresses was the last address of the Form 1065, thus making it a correct address to mail the FPAAs.

The partnership wanted to challenge the FPAAs. (Among other issues, the IRS believes the partnership is a sham.) From this case and two related cases the Tax Court ruled on, it's unclear whether or not the partnership received the FPAAs timely. It's quite clear that they didn't respond timely (the Tax Court case was brought two years after mailing of the FPAAs). Because the IRS mailed the FPAAs to a correct address, the Tax Court dismissed the partnership's petition.

Consider what would have happened to the case had the partnership correctly filed a change of address—there's a good chance their case would be heard at the Tax Court. (Whether or not they would prevail is unknown, as the issues involved were never argued.) Certified mail costs under $5.00. I guarantee that the IRS asked the partnership for more than $5.00.

Case: Stone Canyon Partners v. Commissioner, T.C. Memo 2007-377

That's the score in the epic battle between Larry Harvey and Randall Preheim. Mr. Harvey has represented 61 taxpayers who resided in Antarctica and wanted to take the Foreign Earned Income Exclusion. Mr. Preheim represented the IRS.

Antarctica is still not a continent, and it's 61 losses and counting for Mr. Harvey. Joe Kristan likens this to the battle between the Roadrunner and Wile Coyote. I liken it to the Washington Generals, who achieved an enviable record of 6 wins to 13,000 losses.

I hear the Generals are due for a win soon....

Cases: Role v. Commissioner, McDonald v. Commissioner, and Owens v. Commissioner