5.5.d 2. Two Elements Must Be Proven

• Jurisdiction: United States

d. Innocent spouse, separate liability, and equitable defenses

See remarks ¶ 2.4(i)(13)

The debtor may raise the innocent spouse defense under IRC § 6013(e) as to liability in bankruptcy court. See, for example, In re Blanco 166 B.R. 759 (Bankr. M.D. Fla. 1994).

See In re Lesnick, 202 B.R. 82 (Bankr. N. D. Ohio 1996), where the debtor's spouse was held not liable for taxes on the basis of the innocent spouse defense because evidence showed that the wife's standard of living did not reflect failure to pay taxes: she had limited education, and there was understatement of income on joint tax return.

Note, also, that the IRS Restructuring & Reform Act of 1998 amended the IRC to add § 6015(b)(1)(B) and in other respects to substantially liberalize the spouse's ability to qualify for this defense. In addition, the Act creates a new defense called the "Election of separate liability." And, new IRC § 6015 adds a third possible remedy, the "equitable" defense that, in view of the totality of circumstances, it would be unfair to hold one spouse liable for the tax mistakes of the other.

The criteria and ramifications of these defenses are beyond the scope of this book. However, it is important to keep the opportunity to employ one of them when interviewing taxpayers, whether married or formerly married. They may provide a solution to the problem aside from, or in conjunction with a bankruptcy.

In connection with the liability of a spouse, do not forget to look at relevant statutes under state law that may provide an innocent spouse defense as to state income taxes. For example, California's tax statutes provide an innocent spouse defense permitting the divorce court to relieve the innocent spouse of liability for unpaid personal income taxes accrued during the marriage. And, eligibility for the California innocent spouse defense is more liberal than that of the IRS.²⁸⁴

There may be an issue regarding whether or not the bankruptcy court has jurisdiction to adjudicate the innocent spouse defense. Held, bankruptcy court is without jurisdic-tion to adjudicate innocent spouse relief under 26 U.S.C. § 6015(f) because under language of IRC § 6015(f), only the "Secretary" (of the Treasury) may determine whether taxpayer qualifies for innocent spouse relief. In re French, 255 B.R. 1 (Bankr. N.D. Ohio 2000). But see In re Shafman, 267 B.R. 709 (Bankr. N.D. W.Va. 2001), which adjudicated the issue of innocent spouse under 26 U.S.C. § 6015(c) (For Taxpayers No Longer Married)...