The United States Tax Court recently entered decision for an innocent spouse who had no knowledge of tax understatements by her former spouse, relieving her from joint and several liability otherwise she would have to assume for joint tax return.

Petitioner, Elizabeth Varela, (petitioner) sought judgment against respondent, Commissioner of Internal Revenue, (respondent), over the objection of her former husband, Jose M. Lozano, (intervenor) regarding determination of deficiencies and penalties on income tax return in 2007 and 2008. Petitioner and intervenor were married during the disputed years. Meanwhile, Intervenor was operating a corporation engaged in business of building homes on a daily basis, from which he withdrew constructive dividend during the years at issue and resulted in erroneous deductions.

The court concluded that although petitioner was listed as a director, her mere contribution of setting up organizational system for newly hired employee did not put her in actual participation in the corporation business. Evidences on file indicated that the petitioner had no access to corporate information, did not share economic benefit. She had no actual knowledge or had no reason to know of the tax understatements in years 2007 and 2008. Pursuant to Section 6015, the petitioner was qualified for innocent spouse relief as to the full amount in question.

See Elizabeth Varela et al. v. Commissioner, T.C.M. 2014-222 (2014).

Posted by Jiaqi Wang, Associate Editor, Wealth Strategies Journal