Sample v. Commissioner

A $300,000 Dental Bill and a Split Decision

A dental office manager's plea for innocent spouse relief from over $300,000 in tax liabilities, accrued jointly with her dentist husband, resulted in a mixed outcome in Tax Court. Judge Holmes granted Jodell Sample equitable relief under Section 6015(f) of the Internal Revenue Code for the tax years 2011 through 2013. However, the court denied relief for the later years of 2014, 2017, and 2018. The critical turning point: 2015, the year Sample became aware of the IRS’s involvement. In Sample v. Commissioner, T.C. Memo. 2025-118, the Tax Court emphasized the importance of a requesting spouse’s knowledge of tax noncompliance when evaluating equitable relief claims arising from Collection Due Process (CDP) hearings under Section 6330. This case underscores the court's authority to determine when a taxpayer's awareness of tax issues precludes later claims of innocent spouse relief.

The Dentist, The Manager, and The Revenue Officer

Schara and Sample married in 1995. Schara owned a dental practice, and Sample served as his office manager; the practice was their primary source of income. Sample, whose formal education ended with high school, stated she relied heavily on Schara for financial matters, signing joint returns without review. While she worked alongside him, she showed little interest in the business's finances, trusting Schara's assurances that everything was "taken care of." The couple failed to pay the tax due with their 2004 return, a debt that took nearly a decade to resolve. They also had unreported income for the 2008 and 2010 tax years.

The IRS corresponded with the couple regarding these issues. A critical juncture occurred in 2015 when an IRS revenue officer visited. While Sample claimed ignorance regarding their tax liabilities, the record indicated her involvement in the business and the returns filed. Those returns reported $0 of business income, which strained the plausibility of her lack of awareness, given the dental practice was the couple’s main source of income. The couple legally separated in March 2019, after Sample learned the full extent of their financial problems. The separation terms were unusually favorable to Sample. Schara agreed to be solely responsible for their federal and state tax debts. Sample received a car, their main residence in Minnesota, a second home in Montana, and Schara’s entire Section 401(k) account. Section 401(k) governs qualified retirement plans sponsored by employers. Despite the legal separation, they continued to live together in their marital home, at least through 2021, according to the record.

Straightening Out a 'Malocclusion' of Procedures

Sample continued to live with Schara, at least through 2021, despite the terms of their financial problems. The separation terms were unusually favorable to Sample. Schara agreed to be solely responsible for their federal and state tax debts. Sample received a car, their main residence in Minnesota, a second home in Montana, and Schara’s entire Section 401(k) account. Section 401(k) governs qualified retirement plans sponsored by employers. Despite the legal separation, they continued to live together in their marital home, at least through 2021, according to the record.

The court then turned to what it called a "malocclusion of scopes and standards" of review. At issue was whether Sample's request for innocent spouse relief during a Collection Due Process (CDP) hearing entitled her to de novo review by the Tax Court. A CDP hearing, authorized under Section 6330, allows a taxpayer to challenge a proposed tax levy.

The Tax Court, in a decision penned by Judge Holmes, held that it did. Citing Section 6015(e)(7), the court explained that any review of a determination made under Section 6015 "shall be reviewed de novo by the Tax Court." This meant the court could consider evidence beyond the administrative record. Judge Holmes noted that while Sample could have offered testimony at trial regarding any newly discovered or previously unavailable information, she agreed to submit the case fully stipulated.

The court emphasized the significance of this ruling, noting that more than twenty years ago the Tax Court held that a taxpayer who raises an innocent-spouse defense in a CDP hearing is seeking not just a determination under section 6330, but a determination under section 6015 as well. The Second and Third Circuits have agreed. In Wright v. Commissioner, 571 F.3d 215, 220 (2d Cir. 2009), the Second Circuit held that a taxpayer who asked for interest abatement during his CDP hearing was effectively asking for relief under Section 6404, even if he didn’t mention that section. Section 6404 addresses the IRS's authority to abate interest. This meant that, at least for the issue of interest abatement, the Tax Court should have followed the jurisdictional rules for review of interest-abatement determinations.

Why 2014 Was Different: The Blatant Error

The court then analyzed the denial of relief for 2014 under subsections (b) and (c) of Section 6015. Section 6015 addresses relief from joint and several liability on a tax return. Under Section 6015(b), a taxpayer can be relieved of liability if, inter alia, they did not know, or have reason to know, of the understatement of tax. Similarly, Section 6015(c) allows for the allocation of a deficiency between spouses who are no longer together, provided the requesting spouse did not have actual knowledge of the items giving rise to the deficiency.

The Tax Court found that Sample, the office manager, failed both tests for the 2014 tax year. The 2014 return reported zero business income, despite the dental practice generating approximately $200,000. The court emphasized the "knowledge-of-the-transaction" test, derived from cases like Cheshire v. Commissioner, 282 F.3d 326 (5th Cir. 2002). This test stipulates that a taxpayer has knowledge if they were "aware of the circumstances that gave rise to the understatement of income." In other words, it is not about understanding the tax implications, but knowing the underlying transaction occurred.

The court acknowledged that Sample may not have had a sophisticated understanding of finance. However, it stated that it "doesn’t take a degree in accounting to recognize that this return looked different." As the office manager who was paid from the business's income, Sample was aware of the dental practice's income. The court also noted that their joint returns from 2011-2013 showed almost $300,000 or more in business income.

Treasury Regulation § 1.6015-2(c) states that failing to question items that a reasonable person would question at or before signing the return creates an inference of knowledge. The court stated that the error-ridden return, including the failure to report Sample's own W-2 income, should have prompted further inquiry. Because of Sample's involvement in the business and the obvious errors on the return, the court found it more likely than not that she had reason to know of the understatement, thus precluding relief under Section 6015(b).

Turning to Section 6015(c), the court found that the IRS met its burden of proving Sample had actual knowledge that her husband's dental practice was earning income that should have been reported. The court recognized that Sample was not financially sophisticated, but she worked at the business and knew it was the family’s main source of income. Therefore, the court denied relief under Section 6015(c) for the 2014 tax year.

Equitable Relief: The 2015 Knowledge Threshold

Having denied relief under Sections 6015(b) and (c), the court then turned to Section 6015(f), which provides equitable relief from joint and several liability. This section serves as a "safety net," offering relief when the other provisions of Section 6015 don't apply. Relief under 6015(f) is only possible from an unpaid tax liability, and not merely an understated one. The IRS provides guidance on this provision through revenue procedures; the relevant procedure here was Revenue Procedure 2013-34, which structures the analysis into three steps: threshold factors, streamlined relief, and a multifactor balancing test.

The court noted that the IRS conceded Sample met the threshold conditions of Revenue Procedure 2013-34, Section 4.01. These conditions include filing a joint return, ineligibility for relief under Sections 6015(b) or (c), a timely request for relief, and the absence of fraudulent asset transfers between the spouses.

The next step was to determine if Sample qualified for streamlined relief under Section 4.02 of Revenue Procedure 2013-34. Streamlined relief requires meeting three conditions: the requesting spouse must no longer be married to the non-requesting spouse, they must suffer economic hardship if relief is not granted, and they must not have known or had reason to know of the understatement or underpayment. The court focused on the economic hardship factor. While Sample argued that not receiving relief would cause hardship, the court disagreed, noting her reported monthly income of $12,000 and significant assets exceeding $896,000. The court determined she could make payments toward the tax liability while maintaining a reasonable standard of living, leading to a finding of only "hypothetical hardship." Therefore, streamlined relief was denied for all tax years at issue.

Since streamlined relief was unavailable, the court proceeded to the multifactor balancing test outlined in Section 4.03 of Revenue Procedure 2013-34. This test considers factors such as marital status, economic hardship, knowledge or reason to know of nonpayment, legal obligation to pay, benefit from the underpayments, compliance with tax laws in subsequent years, and mental or physical health. The court noted that Sample was eligible only for partial equitable relief because her wages were fully attributable to her and already excluded from the other items.

The court then split its analysis based on when Sample had knowledge of her tax situation. Sample argued that she reasonably relied on her husband's assurances regarding their tax obligations. The court agreed for tax years 2011 through 2013, effectively granting her equitable relief for those years. However, a critical turning point occurred in 2015.

The court found that the IRS's visit to her husband's dental practice in 2015 served as a "knowledge threshold." It was at this point that Sample became aware, or should have become aware, of the extent of the tax problems. The court reasoned that after this point, her continued reliance on her husband's promises was no longer reasonable. Therefore, the court denied equitable relief under Section 6015(f) for the 2017 and 2018 tax years.

The Cost of Staying Involved

The Cost of Staying Involved

The Tax Court drew a firm line at 2015. For the tax years 2011 through 2013, the court accepted that Sample was reasonably ignorant of her husband's underpayments. However, the court concluded that she knew, or should have known, of the substantial understatements starting with the 2014 return. Consequently, the court granted equitable relief under Section 6015(f) for the 2011 through 2013 tax years but denied it for 2014, 2017, and 2018.

Section 6015(f) of the Internal Revenue Code offers "equitable relief" from joint and several liability for spouses who filed a joint return, providing a safety net when traditional innocent spouse relief under subsections (b) or (c) is unavailable.

The lesson for taxpayers is clear: willful blindness is not a viable defense. Taxpayers cannot bury their heads in the sand regarding their spouses' financial dealings, especially when red flags appear. The court acknowledged Sample's attempt to legally separate assets. However, it also observed that she remained physically and financially intertwined with her husband, highlighting the difficulties of disentangling oneself from the economic union of marriage, especially when filing jointly. An order will be issued directing the parties to agree on the wording of the decisions.