Tax Court Hard on Widowed Nurse

Originally Published on forbes.com on December 11th,2011

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I would never make it as a Tax Court judge.  There are some cases where I just would not care what the law said, I would just go with my gut sense of what’s fair.  Also, in memory of my mother, any widow coming into my court would start out three steps ahead.  So I’m writing about the case of Mary Haggerty for two reasons.  One is that I am upset with the decision, whether it is right or not.  The other is that there is a really important planning point, that many practitioners ignore.  I’ve only made this point a couple of million times, but maybe it will get through one of these days.  The point is :Think before filing joint returns.  Filing a joint return is an election. It is not required.  Most importantly, it is not just a matter of what produces the lowest tax.  It is also about who is responsible for paying the tax.

Mrs. Haggerty was married to Timothy Haggerty from 1968 till his death in 2006.  There were issues in their marriage:

Petitioner and Mr. Haggerty used a joint checking account in which her paycheck was directly deposited by her employer. Petitioner paid all household bills out of this account. Twice a month Mr. Haggerty deposited between $500 and $550 into the joint checking account. Petitioner did not know what Mr. Haggerty did with the rest of his paycheck. When she inquired, Mr. Haggerty became angry and told her that it was his money which he used to pay his bills. Petitioner explained that Mr. Haggerty “was very secretive about his money and about you don’t question him. That’s what he used to tell me. Don’t question me.” Mr. Haggerty liked to gamble.

Shortly before his death Mr. Haggerty had cashed in some retirement accounts and paid off a second mortgage.  After his death Ms. Haggerty learned more:

Petitioner received Forms 1099-R, Distributions From Pensions, Annuities,Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., after Mr. Haggerty’s death. She did not know what to do with them, found them threatening, and hid them in a cabinet.

Finally she sought help:

In early 2007 petitioner gathered all of the documents she could find and hired an accountant, Michael L. Schmidt of Schmidt, Nugent, Gano &; Co., P.C., to prepare her tax return. Mr. Schmidt prepared a joint return without asking petitioner how she wished to file. Petitioner assumed that was correct because she had always filed joint returns. Petitioner became distraught when Mr. Schmidt informed her how much she owed; she did not know that she would be liable for $25,343 in tax. Petitioner signed and timely filed a joint Form 1040, U.S. Individual Income Tax Return, for the 2006 tax year

She was only able to send about $5,000 in with the return, so she applied for innocent spouse relief:

“My deceased husband received 1099s after his death reflecting his pension and annuity income for the year 2006. I was shocked when I saw the 1099s because I had no idea he had received that much money and there wasn’t enough money to pay the tax.” On her request petitioner reported monthly income of $8,682 and monthly expenses of $7,147. Of this income $5,350.96 per month comes from Mr. Haggerty’s retirement plan distributions.

 The IRS denied innocent spouse relief and the Tax Court upheld their determination.  The big things that weighed against her was that she had benefited from the mortgage pay-off and knew about the income when she signed the return.  The abuse factor was neutral:

Haggerty was an imposing man who was secretive about his money. 

He occasionally verbally abused petitioner and would get angry if she ever asked about his money. Although of concern, there is not enough evidence to find that this factor weighs in favor of petitioner. It is neutral.

That one has me angry at the Tax Court.

The big question to me is what would have happened if Mrs. Haggerty had not filed a joint return.  Apparently Mr. Haggerty’s intestate estate was insolvent.  Mrs. Haggerty is getting a substantial retirement benefit and has a free and clear house, so maybe there would have been some sort of transferee liability if she had let the estate be liable for his final income tax return.  It does not appear, though, that this option was considered.  It seems like legal advice was called for before a joint return with an unpaid balance due was submitted.  Anytime innocent spouse relief is being sought immediately after signing the joint return, you have to question the thought process that went into the decision to file jointly.