Tuesday, August 30, 2005
Neal v. Commissioner of Internal Revenue, T.C. Memo 2005-201, 2005 Tax Ct. Memo LEXIS 201 (August 24, 2005)
We tell students that a divorce judgment does not necessarily affect the obligations a spouse might have to creditors. Here's a lovely tax court opinion to make the point clear.
Two doctors are married and have three children. They maintain separate finances throughout their marriage. Doctor Mom pays nearly all the household expenses, takes care of the kids, and earns professional awards. Doctor Dad cheats on his taxes and his wife, spends lavishly (and secretly) on himself and his lover, and drives himself into bankruptcy twice. When Doctor Mom finally gets the picture, she's given a divorce judgment that orders Doctor Dad to pay "all outstanding joint Federal income taxes as well as any other future tax liability having been incurred during the course of the parties' marriage."
But Doctor Mom still has to deal with the IRS on the unpaid tax liabilities from their joint tax returns. In this proceeding, she requests equitable relief from liability for taxes incurred during her marriage. The opinion makes it clear that, even under the egregious facts of this case, equitable relief is not lightly granted. The court notes that two of the prerequisites for equitable relief (whether petitioner had knowledge of or reason to know of Alimam's nonpayment of the taxes due and whether petitioner would suffer economic hardship if not granted relief from joint and several liability) are "difficult questions." In balancing all the facts, however, the court decides that Doctor Mom has paid enough.
Opinion on the web at: http://www.ustaxcourt.gov/InOpHistoric/NealRuthE.TCM.WPD.pdf