Court adopts "reason to know" test for innocent spouse cases.

• Author: Beavers, James A.

The Sixth Circuit adopted the "reason to know" test for determining whether a taxpayer was eligible for innocent spouse relief from tax liability for an understatement arising out of an erroneous deduction on a tax return.

Background

Winnie Greer married Daniel Greer in 1967 while in college and remains married to Mr. Greer. Mrs. Greer continued her education after marriage and eventually earned a master's degree in music education; however, she had no financial or accounting training. During their entire marriage, Mr. Greer managed the couple's financial affairs. He did not conceal any financial activities from the petitioner or mislead her about those activities, but he was the primary decision maker, and she relied upon him to direct their investments and make decisions regarding their finances and taxes.

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Mr. Greer and his father-in-law started a cable television business in 1979. In an effort to offset anticipated taxable income from this business, he invested in Madison Recycling Associates, Inc. (Madison) in 1982. Mr. Greer claimed significant investment tax credits related to Madison on the couple's joint return for 1982 and carried back some of the credits on amended returns for 1979-1981. The IRS disallowed all the tax benefits arising from the Madison investment in a final partnership administrative adjustment issued in 1987.

After prolonged litigation, the Tax Court and the Sixth Circuit upheld the IRS's position, and the IRS issued the Greers a notice of deficiency in 2003 for the tax ($87,627) and interest ($544,125) due related to the disallowed credits. The Greers challenged the amount, but the courts again rebuffed them. In 2006, Mrs. Greer requested innocent spouse relief from the IRS under Secs. 6015 (b) and (f) for the deficiency. The IRS denied her request, finding that she knew of the Madison investment, that the money for the investment was drawn from the Greers' joint bank account, that she signed Form 1045, Application for Tentative Refund, requesting refunds, and that she received the benefit of those refunds. Undaunted, Mrs. Greer filed an administrative appeal, but the appeals officer denied her request based on her failure to inquire into the claimed deductions. The appeals officer also rejected her claims that she qualified for equitable relief because she would face economic hardship if she were forced to pay the deficiency.

Mrs. Greer next petitioned the Tax Court to review the IRS's...