Sample v. Commissioner

A Dentist, An Office Manager, and a Split Decision on Tax Debt

The Tax Court, in a case presided over by Judge Holmes, recently grappled with the thorny issue of innocent spouse relief, ultimately issuing a split decision with significant implications for taxpayers. At the heart of the matter was Jodell Sample, the office manager and wife of a dentist, who sought to avoid nearly $600,000 in tax debt stemming from years of alleged underreporting. The court granted her request for equitable relief under Section 6015(f) of the Internal Revenue Code for the tax years 2011, 2012, and 2013, but denied it for 2014, 2017, and 2018, establishing a critical dividing line based on when she became aware of her husband's tax improprieties.

'Just Temporary' Troubles and a Shared Home

As the office manager for her husband's dental practice, Jodell Sample was responsible for tasks that included checking the mail. However, according to court documents, she did not take an active role in the couple's financial affairs, relying instead on her husband, Schara Sample. The couple's income reporting troubles began in 2011. While she worked alongside him, she did not show any interest in his business finances and never bothered to check his books. While she was aware that they had unpaid tax before the revenue agent’s 2015 visit, Schara had consistently assured her that the tax debts were “just temporary” and that he would pay them. By 2015, this “just temporary” problem had been going on for years. They had failed to pay the tax due at the time they filed their return for 2004, and it took them almost a decade to do so. They also had unreported income for tax years 2008 and 2010. The IRS knew about this and was launching correspondence at the couple, but as far as we can tell from the record, Sample wasn’t involved in the resulting back-and-forth with the IRS or their accountant. The couple legally separated in late March 2019 after Sample learned of the full extent of their financial problems. The terms of the separation were unusually favorable to her. Schara agreed to be solely responsible for their federal and state tax debts. Sample received one of their shared cars, their main residence in Minnesota, a second home in Montana, and Schara’s entire Section 401(k) account. It is important to note that Section 401(k) of the Internal Revenue Code allows employers to sponsor a retirement savings plan for its employees. Despite the legal separation, the Samples continued to reside together in their marital home, a situation that persisted at least into 2021, with no indication in the record that this arrangement had ceased.

A Malocclusion of Scopes and Standards

Sample sought relief under Section 6015, which offers three avenues for relief from joint and several tax liability: subsection (b) for relief from an understatement of tax, subsection (c) allowing for allocation of a deficiency between separated or divorced spouses, and subsection (f) offering equitable relief. She pursued these options through various channels: stand-alone petitions filed directly with the Tax Court and as a defense during a collection due process (CDP) hearing, which is offered to taxpayers facing enforced collection of a tax debt. This procedural complexity prompted the Tax Court to clarify the applicable standards of review. Regardless of the path taken, the Court affirmed that its review is de novo, meaning "as if new," citing Section 6015(e)(7), which states that the Court's review "shall be reviewed de novo by the Tax Court and shall be based upon— (A) the administrative record established at the time of the determination, and (B) any additional newly discovered or previously unavailable evidence." The Court emphasized it would apply this standard uniformly across all years in question, regardless of whether the case originated as a stand-alone petition or from a CDP hearing.

The 2014 Denial: The Office Manager Should Have Known

The Tax Court then turned to the request for innocent spouse relief under Section 6015(b) for the 2014 tax year. Section 6015(b) provides relief from joint and several liability for tax if several conditions are met, including that the requesting spouse did not know or have reason to know of the tax understatement on the joint return.

The court outlined the requirements to qualify for relief under Section 6015(b): (1) a joint return must have been filed for the year at issue; (2) there must be an understatement of tax attributable to an erroneous item of the non-requesting spouse; (3) the requesting spouse must not have known and had no reason to know of the understatement at the time of signing the return; (4) it would be inequitable to hold the requesting spouse liable for the deficiency given all the facts and circumstances; and (5) the claim for relief is timely. These conditions are conjunctive, meaning all must be satisfied. The Court reiterated that it was conducting its review de novo, meaning "as if new," citing Section 6015(e)(7).

The IRS argued that Sample, as the office manager, had knowledge or reason to know about the understatement on the 2014 return, thus failing the third requirement of Section 6015(b). The IRS cited the "knowledge-of-the-transaction" test established in Cheshire v. Commissioner, 282 F.3d 326 (5th Cir. 2002). This test dictates that a taxpayer has knowledge when she is "aware of the circumstances that gave rise to the understatement of income."

The Tax Court agreed with the IRS. While acknowledging Sample's lack of formal financial education, the court found that the errors on the return were blatant and should have prompted her to question them. Most notably, the return omitted her own W-2 wages and the income from her husband's dental practice, which was nearly $200,000 that year. The court noted that Treasury Regulation § 1.6015-2(c) states that a failure to question items that a reasonable person would question creates an inference of knowledge.

The court also rejected Sample's request for relief under Section 6015(c) for 2014. Section 6015(c) allows for the allocation of a deficiency between spouses who are no longer married or living together. A key requirement for relief under this subsection is that the requesting spouse did not have actual knowledge of the items giving rise to the deficiency at the time the joint return was signed. The IRS bears the burden of proving actual knowledge under Section 6015(c)(3)(C).

The court found that the IRS had met its burden of proving that Sample had actual knowledge that her husband’s dental practice was earning income that should have been reported. Given her role in the business and her knowledge that it was the family's primary source of income, the court concluded it was more likely than not that she actually knew the dental practice was earning income.

The Dividing Line: Before and After the Revenue Officer

The Tax Court's decision hinged on a clear dividing line: Sample's knowledge, or lack thereof, regarding her husband's tax payment behavior. The court evaluated Sample's request for equitable relief under Section 6015(f), which provides a "safety net" for spouses who do not qualify for relief under other subsections. Section 6015(f) allows the IRS to grant relief from joint and several liability if, considering all the facts and circumstances, it would be inequitable to hold the spouse liable. This can apply to both understatements (deficiencies) and underpayments (tax reported but not paid).

For the tax years 2011 through 2013, the court found that Sample had "little reason to suspect anything was wrong." She reasonably believed her husband's assurances that the tax debts were "just temporary" and that he was working with accountants to resolve the issues. However, the court drew a sharp contrast with the later years, 2017 and 2018.

The pivotal moment, according to the court, was the 2015 visit from an IRS revenue officer to the dental office. This event, coupled with the Department of Justice's subsequent lawsuit in 2019 against both Sample and her husband to collect unpaid federal tax liabilities, irrevocably altered the landscape of Sample's knowledge. The court noted that Sample's actions following these events, including a separation from her husband less than two weeks after the DOJ suit was filed and the submission of her first innocent spouse claim shortly thereafter, suggested she knew her husband would not pay the tax debt.

The court rejected Sample's argument that she continued to believe her husband's promises. Her "chain of defensive actions" indicated that by the time her 2018 tax return was filed in November 2019, she was aware her husband would not pay. Therefore, the court concluded that she had "reason to know at the time of filing that Schara could not correct the underpayments" for 2017 and 2018. This knowledge, according to the court, weighed against granting equitable relief for those years.

The court also rejected "streamlined relief" for all years at issue. To qualify for streamlined relief under Revenue Procedure 2013-34, Sample needed to demonstrate, among other things, that she would suffer economic hardship if relief was not granted. The court found that Sample's reported monthly income of $12,000, coupled with assets totaling $896,693 (including her home, car, and other properties), demonstrated that she could make payments toward the tax liability while still covering her reasonable living expenses. The court viewed her hardship as "hypothetical," which was insufficient to justify streamlined relief.

The Takeaway: When Ignorance Expires

The Sample case underscores the critical distinction in how the Tax Court assesses knowledge for different types of innocent spouse relief under Section 6015, which provides relief from joint and several liability on a tax return. Specifically, the court differentiates between "understatements" (deficiencies) and "underpayments" (taxes reported but not paid). Section 6015(b) offers relief from liability stemming from understatements, but only if the spouse proves they "did not know and had no reason to know" of the error. Section 6015(f), the "equitable relief" provision, functions as a broader safety net, potentially providing relief for both understatements and underpayments, contingent on fairness.

Here, Sample's "reason to know" was the crux of the matter. For the tax years 2011 through 2013, the court determined she lacked sufficient awareness of her husband's tax improprieties to deny her relief. However, the IRS visit in 2015 served as a pivotal moment. After that point, the court reasoned, Sample could no longer claim ignorance, especially concerning the "very substantial understatements" on the 2014, 2017, and 2018 returns. This demonstrates how a specific event, such as direct interaction with the IRS, can eliminate a taxpayer's ability to argue they had no "reason to know." It also highlights that filing a joint return carries the responsibility to inquire into items on the return.

Ultimately, the Tax Court issued a split decision. Sample received equitable relief under Section 6015(f) for the 2011 through 2013 tax years, absolving her of liability for that period. However, her request for relief was denied for the 2014, 2017, and 2018 tax years, leaving her responsible for those liabilities. As previously stated, the court directed the parties to agree on the specific wording of the decisions to reflect this outcome.