IRS Veteran On Innocent Spouse Cases

Originally published on forbes.com.

My most recent divorce post has been bringing my guest posters out in force. Robert Baty spent his career with the IRS finishing up as an appeals officer. Thanks to him I learned about the travesty of "basketball ministers". He has significant experience with "innocent spouse" cases, some of which he shares here.

Equity: In The Eye of The Beholder!
by Robert Baty

A number of years ago, the Congress and the President, in their collective wisdom, increased the subjective nature of tax administration by coming up with Internal Revenue Code Section 6015(f), dealing with requests for innocent spouse relief. It states, in relevant part, when all else fails:

> "if, taking into account all the facts and circumstances,
> it is inequitable to hold the individual liable for any
> unpaid tax or any deficiency (or any portion of either);
> the Secretary may relieve such individual of such liability."

And so, in the case of Tomi Baumann , the Secretary, in an exercise of discretion, relieved Tomi of a portion of the liability resulting from a joint return she filed with Stanley for 1998. The legal standard for reviewing such determinations is "whether the Secretary abused his discretion".

Tomi didn't think there was an abuse of discretion and accepted the Secretary's determination.

Stanley may not have personally disputed the Secretary's determination, but he appears to have had a tax lawyer that didn't mind pressing the case to trial; for reasons not disclosed. And so it went to trial and, quite predictably, the Secretary's deal with Tomi was upheld and Frederick J. O'Laughlin, Stanley's tax lawyer, chocked up another loss for his resume.

Stanley had his vices and personal problems and did not live long after the trial, dying in his sleep at age 47 when his heart gave out in 2007. His obituary noted, in part:

> "Stanley loved to play the ponies
> at Remington Park."

That's really where the innocent spouse story begins.

Prior to 1998, the tax year before the Tax Court, Stanley had hit it big betting on the ponies. He and Tomi enjoyed the windfall and paid the taxes on the winnings.

Somewhere along the line, Stanley came up with the idea that the provision that limits gambling losses to gambling winnings was not to be applied on a year to to year basis and was not limited to applying gambling losses against gambling gains. So, in years subsequent to the big win, the joint returns of Stanley and Tomi used Stanley's "love for the ponies" to offset Stanley's other business income.

A deficiency notice was issued as to the 1998 tax year, Frederick J. O'Laughlin was called in, and the jurisidiction of the Tax Court was invoked in seeking a redetermination.

The original trial was set for February of 2002 but was continued. That continuation, it would be later determined, resulted from a certain domestic disturbance involving Stanley and Tomi, after which Stanley was involuntarily committed to Griffin Memorial Hospital for observation. Other reported incidents involved Stanley's alleged physical assaults on Tomi and threats against her and the children, including one arson charge to which Stanley pleaded guilty.

A divorce followed and Frederick J. O'Laughlin was removed as counsel as to Tomi due to the conflict of interest.

The Government filed a motion for summary judgment and was granted summary judgment as to the deficiency. It's not clear how the Court ultimately disposed of the accuracy related penalty.

Tomi filed for innocent spouse relief. She did NOT mention the abuse issues in her application for innocent spouse relief.

The District Director considered Tomi's request and, taking into account the information available, denied relief because Tomi was aware of the issue giving rise to the deficiency (e.g., the gambling) and ignorance of the tax ramifications of such was not considered a basis upon which to grant relief. Other factors that might have otherwise supported relief were insufficient to overcome the knowledge issue. Based on the information available to the District Director at that time, the decision to deny relief cannot be said to have been in error.

Trial before the Tax Court was rescheduled to January of 2004.

As is the custom, since the Appeals Office had not previously considered the case, the District Counsel office handling the litigation referred the case to the Appeals Office. An Appeals Officer met with Tomi in December of 2003. During that meeting, the abuse issues were discovered and later independently verified. When added to the mix of other issues, the Appeals Officer determined that a compromise settlement would be appropriate in order to reflect the merits of the innocent spouse claim and the hazards of litigation.

In effect, Tomi's liability would be limited to the amount of her separate 2002 tax year refund of $2,020.00 which the Secretary was holding pending the outcome of the innocent spouse dispute.

Tomi agreed.

Frederick J. O'Laughlin, Stanley's tax lawyer, would not concede the issue and the case proceeded to trial. Stanley did not testify in order to dispute of the settlement of the innocent spouse issue that Tomi had reached with the Secretary. Had Stanley testified and been cross-examined, the Secretary or the Tax Court just might have modified the settlement with Tomi to allow full relief instead of partial relief.

Frederick J. O'Laughlin was unimpressive in his attempts to argue the Secretary abused his discretion, particularly when one considers that he had no witness to testify. Mr. O'Laughlin could not convince the Tax Court with his legal shenanigans that the Secretary had abused his discretion in the settlement reached with Tomi.

As with any substantive changes in the law, it sometimes takes years for the details to work out as to the administration of the law. That was the case with the revisions to innocent spouse law made in the 1990s. As indicated in a Forbes' column earlier this year on the subject, by Stephen J. Dunn, that process is continuing (e.g., the IRS is softening up on what it proposes to be the rules).

Mr. Dunn concludes with:

> I have clients who have litigated in U.S. Tax
> Court under the old rules and lost who will
> apply for innocent spouse relief under the
> new rules.

Tomi Baumann didn't have to wait.

She managed, in time and circumstance, to work with an IRS Appeals Officer who was, perhaps, a visionary regarding tax administration and was able to craft an appropriate settlement without the quibbling and legal hair-splitting reflected in the continuing evolution of the issue.

Congress and the President mandated equitable treatment within the ambiguous discretionary limits implied by the statute.

Tomi Baumann was a beneficiary of that mandate!

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