Academic journal article Journal of Accountancy

Spouse Had "Reason to Know" of Disallowed Deductions

Academic journal article Journal of Accountancy

Spouse Had "Reason to Know" of Disallowed Deductions

Article excerpt

The Sixth Circuit joined the Second, Fifth, Seventh, Eighth, Ninth and Eleventh circuits in adopting the "knowledge of the transaction" test of Price v. Commissioner (887 F.2d 959 (9th Cir., 1989)) in innocent spouse cases, upholding a Tax Court finding of ineligibility for relief.

IRC [section] 6015(b)(1)(C) requires taxpayers seeking relief from joint and several liability for a deficiency to show that in signing the return they did not know, and had no reason to know, of an understatement of tax stemming from an erroneous item attributable to the other spouse on a jointly filed return. In Price, the Ninth Circuit set forth four factors to be considered in assessing "reason to know": (1) the spouse's education; (2) his or her involvement in the family's financial affairs; (3) unusual or lavish expenditures compared with past income and spending; and (4) the other spouse's evasiveness or deceitfulness concerning financial matters.

Taxpayer Winnie L. Greer's husband invested in a plastics recycling business, Madison Recycling Associates Inc., to shelter dividend income received in 1982. This pass-through investment yielded losses and investment credits that were carried back to years 1979-1981 and was itself subject to audit by the IRS and eventual adjudication in Greet I (TC Memo 2007-119, aff'd, 6th Cir., 2009) and Madison Recycling Associates (295 F.3d 280 (2nd Cir. 2002), aff'g, TC Memo 2001-85 and TC Memo 1992-605). The IRS argued, and the courts agreed, that Madison operated primarily as a tax shelter. Thus, the courts upheld an assessment against the Greers of a total joint deficiency of $87,627 in tax and $544,125 in interest, from which Greer sought innocent spouse relief.

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Greer, a homemaker employed variously as a music education teacher and photographer, had no actual knowledge of the tax deficiency, but the Tax Court denied relief on the "reason to know" basis, in keeping with its position in Richard D. …

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