Prior closing agreement subject to innocent spouse provisions.

• Author: Beck, Allen M.

In a case of first impression, the Tax Court ruled, in Marianne Hopkins, 120 TC No. 17 (2003), that a closing agreement executed before July 22, 1998, did not bar a later claim for Sec. 6015 innocent spouse relief when the tax liability resulting from the closing agreement remained unpaid on that date. The taxpayers signed the closing agreement 15 years ago; presumably, after Hopkins, many closing agreements could qualify for the same treatment. The Tax Court's rationale indicates that it will probably interpret other provisions of Sec. 6015 broadly. Sec. 6015 is a pro-taxpayer statute and includes retroactive provisions.

Background

Sec. 6013(d)(3) provides for joint and several liability for spouses filing jointly (i.e., each spouse is liable for all of the tax). Enacted in 1971, Sec. 6013(e) provided relief from such liability if there was a substantial understatement of tax due to grossly erroneous items of one spouse, the innocent spouse proved he or she did not know (nor have reason to know) of the substantial understatement when signing the return, and it would be inequitable to hold the innocent spouse liable for the resulting tax. Congress thought Sec. 6013(e) relief was inadequate because it was limited to only the most egregious cases.

Law and Regulations

The Internal Revenue Service Restructuring and Reform Act of 1998 repealed Sec. 6013(e) and enacted Sec. 6015, effective for any tax liability arising after July 22, 1998, and any prior tax liability remaining unpaid on that date. It applies to all understatements; partial relief is also available, under Sec. 6(115(b)(2), if the innocent spouse knew (or had reason to know) of the understatement, but not its extent. Under Sec. 6015(c) and Regs. Sec. 1.6015 3(a), if spouses are widowed, divorced, legally separated or living apart, the innocent spouse can elect separate liability, unless the Service proves that spouse had actual knowledge of the item when signing the return. The innocent spouse also must prove the item is properly allocable to the other spouse. Sec. 6015(f) allows spouses not qualifying under the above rules to request equitable relief. According to Sec. 6015(a), community property laws are ignored. Finally, Sec. 6015 relief is available even if previously denied under Sec. 6013(e).

Under Regs. Sec. 1.6015-5, innocent spouses elect or request relief on Form 8857, Request for Innocent Spouse Relief no earlier than after receiving notice of an auditor possible...