Knowing but Innocent

The Tax Court held that the IRS abused its discretion in denying a stay-at-home mom's request for innocent spouse relief because it did not consider all of the relevant factors. Chrystina Nihiser filed for relief after her husband stopped paying their taxes due to financial problems with his business. Although she had known the couple would most likely fail to pay the taxes shown on the returns she signed, the Tax Court found other factors weighed in her favor, resulting in relief from a tax liability for tax years 1996-2001 of close to $250,000. Nihiser married Kevin Connelly in 1980 and stopped working as a schoolteacher when she gave birth to their daughter in 1988. They lived in California. Connolly supported the family with his law practice and controlled all of the finances, keeping his income and expenses hidden from Nihiser. In 1993, Connolly began filing their joint returns, which he had Nihiser sign on the due date, without paying the taxes due. In 1999, Connelly presented Nihiser with divorce papers but never filed them. Although the couple began living in separate rooms of the same apartment, they continued to file joint returns for the next two years. Ultimately, Connelly was imprisoned for stealing from his clients, and Nihiser returned to fulltime teaching. Although the IRS did not begin any actions against the couple, Nihiser initiated innocent spouse proceedings. Because the tax liability was neither an understatement nor a deficiency, Nihiser was limited to filing under section 6015(t), which calls for relief if, taking into account all the facts and circumstances, it would be inequitable to hold her liable. The court looked to the balancing test of Revenue Procedure 2000-15 (since superseded by Rev. Proc. 2003-61) to examine whether the IRS abused its discretion by denying Nihiser relief and, if so, to determine the appropriate relief. Four of the eight factors were in contest, each raising new questions for the court: (1) The requesting spouse is divorced, legally separated or living apart from the nonrequesting spouse. The court held that the couple's living apart, albeit within the same household, weighed in favor of relief. (2) The requesting spouse would suffer economic hardship if forced to pay the tax liability. It was unclear whether this determination should be based on when relief was requested (when Nihiser was working only part time), during appeals (when she was working full time) or at trial (when her wages were being garnisheed to pay a state tax debt). …