In a recent Tax Court case, Strom v. Comm’r, T.C. Memo. 2024-58, the issue of innocent spouse relief was highlighted. The case involved Dr. Strom and his wife, who faced a substantial tax liability due to a decision made on a joint tax return. Mrs. Strom had received significant compensation from exercising stock options in 2000, resulting in a tax problem for the couple. Despite seeking advice and deciding to defer the compensation to the following year, the IRS disagreed, leading to a Notice of Deficiency claiming roughly $40 million in taxes from the stock option exercise. Dr. Strom sought innocent spouse relief under section 6015(b) and (f).
The Tax Court considered various factors in determining eligibility for innocent spouse relief, including whether the requesting spouse was aware of the understatement of tax attributable to the other spouse. In the case of Dr. Strom, the court found evidence that he was aware of the stock option exercise and the omission of income, which would disqualify him from relief under section 6015(b). Additionally, the court considered factors such as whether Dr. Strom received a significant benefit from the improper reporting position and whether the deficiency was caused by actions of Mrs. Strom. The court ultimately denied Dr. Strom’s request for innocent spouse relief based on these factors.
The decision in Strom serves as a lesson for married taxpayers, highlighting the risks and consequences of filing joint tax returns. It is important for spouses to consider the potential liability associated with joint and several liability when filing taxes together. In cases where one spouse has questionable transactions or significant income, it may be advisable to file separately to avoid joint liability. Additionally, married couples going through a divorce or separation should carefully weigh the benefits and risks of filing jointly, as innocent spouse relief may not always be guaranteed and may require a fight to obtain.
The court’s analysis of the equitable relief factors under section 6015(b) and section 6015(f) in the Strom case demonstrates the complexities involved in innocent spouse relief. Factors such as benefit received from the improper reporting position and the cause of the deficiency play a significant role in determining eligibility for relief. In cases where the innocent spouse has benefited from the improper reporting or where the deficiency is caused by the mistaken belief in tax laws, relief may be denied.
Overall, married taxpayers should be aware of the potential risks and consequences of filing joint tax returns, especially when one spouse has significant income or questionable transactions. Seeking advice from tax professionals and weighing the benefits and risks of filing jointly is essential to avoid potential tax liabilities. The decision in Strom underscores the importance of considering all factors before filing taxes jointly or separately to protect against joint and several liabilities and potential tax disputes.
