Innocent spouse relief denied for attorney with actual knowledge.

The Fourth Circuit has ruled that a tax attorney who had actual knowledge of understatements on a joint return was not entitled to relief as an innocent spouse under the provisions of new Sec. 6015 (Grossman, 6/28/99). Robert D. Grossman, Jr., had asked the court to separate the liability for the deficiency on his joint return and wanted the IRS to seek payment of the additional tax and penalty from his former spouse under Sec. 6015(c). The court rejected his claim, noting that he knew of constructive dividend income received by his wife and intended for it to be omitted from their joint return.

The Internal Revenue Service Restructuring and Reform Act of 1998 repealed the existing innocent spouse provisions of Sec. 6013(e) and replaced them with the somewhat more liberal and expanded provisions of Sec. 6015. Under the old rules, relief was available only when a substantial understatement was due to the grossly erroneous items of one spouse. Sec. 6015 eliminated these requirements and may apply to any deficiency on a joint return.

In addition, Sec. 6015(c) provides special relief for taxpayers who are no longer married, are legally separated or are no longer living together. This new provision provides separation of liability for electing individuals who have not lived with their spouse or former spouse within the past 12 months and did not have actual knowledge of the items giving rise to the deficiency at the time they signed a joint return. In the event that the individual seeking relief had actual knowledge of some erroneous items, the individual may still be granted relief for items giving rise to a deficiency of which he was unaware.

A special rule also grants relief to individuals with actual knowledge of understatements, but who signed a joint return under duress. Relief may be denied if transfers of assets are made between spouses to protect those assets from the Service. An election for separation of liability under Sec. 6015(c) may be made at any time up to two years after the date on which collection activity against the individual making the election begins.

Grossman argued that, although Sec. 6015 generally requires a taxpayer to demonstrate that he did know and had no reason to know of the understatement to be granted relief, Sec. 6015(c) requires only that the taxpayer have no actual knowledge of the understatement at the time he signed the return. In denying the taxpayer's request, the Court of Appeals did not disagree with this interpretation of the statute, but noted that the Tax Court had not denied his original claim because he "had reason to know" of the understatement. Rather, the Tax Court had found that Grossman knew of the unreported income and intended that the income be omitted from the joint return.

While the new, more liberal innocent spouse provisions may benefit many taxpayers (particularly those who are divorced or separated), taxpayers must still be innocent to receive relief.

FROM JOHN J. LARUE, CPA, BLOOM, GETTIS, HABIB, SILVER & TERRONE, PA, MIAMI, FL

Philip E. Moore, CPA, MBA Brown, Dakes & Wannall, P.C. DFK International Fairfax, VA