ASIA ZAHEEN v. COMMISSIONER OF INTERNAL REVENUE

Abuse Negates 'Reason to Know' in $144,000 Spousal Relief Case

At stake was $144,000, representing Dr. Asia Zaheen's share of a tax deficiency and accuracy-related penalties stemming from her husband's alleged misuse of retirement funds. This case highlights the complexities of spousal tax liability, especially when domestic abuse is a factor. While the IRS initially conceded that Dr. Zaheen deserved relief from joint and several liability, her husband, Kamran Ehsan, intervened in the Tax Court to oppose it. Ultimately, the Tax Court granted Dr. Zaheen full equitable relief under Section 6015(f), ruling that the severe domestic abuse she suffered negated any "reason to know" she might have had regarding the tax understatement.

Background: A Physician Under Strict Financial Control

Dr. Zaheen and Kamran Ehsan married on February 1, 1998, remarkably, just a day after they first met. Nine days later, the couple relocated from Pakistan to the United States and subsequently had four children. Their life together in the family home continued until September 27, 2021, when Dr. Zaheen filed for divorce; as of the trial date, the divorce was still pending.

During the tax year in question, Dr. Zaheen was self-employed as a physician at Zaheen Medical Center, a practice initially jointly owned with Mr. Ehsan. Mr. Ehsan, an electrical engineer, performed contract engineering work. Ultimately, Dr. Zaheen became the sole owner of Zaheen Medical Center amidst the divorce proceedings. She estimated her annual income from the practice to be over $300,000. The medical center had been established in 2018, a year after Dr. Zaheen and Mr. Ehsan purchased the property for it. Title to the property was solely in Dr. Zaheen's name, as Mr. Ehsan was out of the country when the transaction closed, and Dr. Zaheen, anticipating divorce, insisted on it. To finance the purchase, as well as acquire medical equipment and supplies, they used a home equity line of credit (HELOC) with Citizens Bank. As of January 19, 2019, the balance on the HELOC was $291,939.

Despite Dr. Zaheen's professional success, Mr. Ehsan maintained tight control over the family's finances, discouraging her involvement or even inquiry. He managed the household mail and generally rebuffed Dr. Zaheen's attempts to participate in financial decisions. He scrutinized and criticized her and the children's spending habits if they used any credit card or account he could access. Dr. Zaheen only had direct access to the account where her medical practice salary was deposited, and she felt afraid to move funds from any joint account she held with Mr. Ehsan.

Mr. Ehsan's control extended to Dr. Zaheen’s medical practice. Despite having no medical education, he asserted himself as a partial owner and the chief executive officer of Zaheen Medical Center. This arrangement violated Massachusetts law, which prohibits non-licensed individuals from owning or controlling a medical practice. Mr. Ehsan had exclusive control over the practice's bank accounts, treating Dr. Zaheen as an employee by paying her a salary. Consequently, she did not enjoy typical ownership benefits in 2019. Except for employee bonuses and charitable donations, Mr. Ehsan reacted aggressively if Dr. Zaheen tried to use funds from the medical center's accounts. Dr. Zaheen testified that Mr. Ehsan often claimed she was his property, entitled to her earnings, and that all their property belonged to him. He also threatened financial ruin if she ever attempted to divorce him. In 2017, Dr. Zaheen explicitly requested that Mr. Ehsan not use funds from her retirement account for his business ventures. Since their marriage in 1998, Mr. Ehsan subjected Dr. Zaheen to various forms of abuse. Mr. Ehsan frequently threatened Dr. Zaheen and the children when he made financial demands, including demands that she sign documents.

Mr. Ehsan generally had a short temper, sometimes breaking plates and glasses in front of their children if they disobeyed him. Dr. Zaheen recounted an incident witnessed by their children where Mr. Ehsan berated and strangled her for eating chocolate. For years, she frequently slept separately from him out of fear of sexual abuse. On one occasion, he dragged her from her separate room to his, locked the door, and threatened to harm the children if she refused to have sexual intercourse with him. His violence also extended to their eldest son. In 2018, perceiving a lack of obedience, he pressed his knee against the son's neck while screaming at him. In or around 2020, he broke a piece of wood off a plant holder and threatened to stab the eldest son with it before Dr. Zaheen intervened.

The Transaction: Trust Funds and Hidden Liabilities

Continuing the narrative of abuse and control, Dr. Zaheen and Mr. Ehsan established the KME Investment Trust in 2017. This trust held the Asia Kamran, LLC Solo 401(k) retirement plan, which the court described as a self-directed 401(k) plan. Mr. Ehsan signed the trust documents on behalf of Asia Kamran, LLC, the settlor of the trust. Dr. Zaheen signed the documents, relying on Mr. Ehsan's representation that it would result in tax savings, but she claimed she was unaware of his intentions for the trust. Both Dr. Zaheen and Mr. Ehsan were trustees, each possessing independent authority to act on behalf of the trust.

The core of the tax deficiency stemmed from the use of funds Dr. Zaheen held in a 401(k) retirement account with Merrill Lynch (the Merrill Lynch account) to pay down the debt incurred on a home equity line of credit (HELOC). Mr. Ehsan allegedly promised to replace the funds withdrawn from the Merrill Lynch account within 30 days using proceeds from his other businesses and the sale of other property.

On January 14, 2019, $257,907 was withdrawn from Dr. Zaheen’s Merrill Lynch account by check and deposited into the KME Investment Trust. The initial transfer, characterized as a rollover, was not a taxable event. However, from January 25 to 31, 2019, nearly all of those funds—$257,000—were then withdrawn in three transactions from the KME Investment Trust and transferred to the HELOC. An additional $700 was withdrawn and transferred to a separate, unrelated account.

The court noted that all parties agreed that these subsequent withdrawals, totaling $257,700, constituted taxable transactions.

In February 2019, Dr. Zaheen requested the password to her Merrill Lynch account from Mr. Ehsan to confirm that the withdrawn funds had been replaced. Mr. Ehsan refused, telling her to trust him. Fearing his anger towards her and their children, Dr. Zaheen did not inquire further about the balance of her Merrill Lynch account.

The Dispute: Husband Intervenes After IRS Concession

The Tax Court had jurisdiction under Section 6015(e) to review Dr. Zaheen’s request for relief from joint and several liability for the 2019 tax year. Section 6015 provides relief for taxpayers who file a joint return but should not be held liable for underpayments or understatements of tax.

Initially, the IRS conceded that Dr. Zaheen was entitled to innocent spouse relief under Section 6015(f). Section 6015(f) allows the IRS to grant equitable relief from joint and several liability if, considering all the facts and circumstances, it would be unfair to hold one spouse liable for the tax. However, Mr. Ehsan, Dr. Zaheen's husband, pursuant to Section 6015(e)(4) and Tax Court Rule 325, filed a Notice of Intervention and became a party to the case, opposing the relief. Section 6015(e)(4) allows the non-requesting spouse to intervene in a Tax Court proceeding related to innocent spouse relief.

During the trial, Dr. Zaheen offered several documents as evidence. Mr. Ehsan objected to these exhibits (Petitioner’s Proposed Exhibits 9 through 12), arguing they were irrelevant, more prejudicial than probative, and contained inadmissible hearsay. The court reserved its ruling on their admissibility but directed both parties to argue the issue in their briefs. However, only the IRS addressed the admissibility of these exhibits on brief. The court found that Dr. Zaheen had forfeited her arguments regarding the admission of the exhibits due to her failure to argue their admissibility in her opening brief.

Court's Analysis: Abuse Outweighs Knowledge

As the previous section noted, Dr. Zaheen had forfeited her arguments regarding the admissibility of her husband’s Proposed Exhibits. The court then turned to the core question of equitable relief under Section 6015(f). Section 6015(f) of the Internal Revenue Code allows the IRS to grant relief from joint and several liability if, considering all the facts and circumstances, it is inequitable to hold one spouse liable for the tax. This determination hinges on a series of factors outlined in Revenue Procedure 2013-34.

The court first addressed the threshold requirements for Section 6015(f) relief, finding that Dr. Zaheen met them, specifically holding that the understatement of tax was attributable to her solely as a result of abuse committed by her husband.

Next, the court considered the factors outlined in Revenue Procedure 2013-34, Section 4.03, which guides the determination of whether it would be inequitable to hold Dr. Zaheen liable. These factors include marital status, economic hardship, knowledge or reason to know, legal obligation, significant benefit, compliance with tax laws, and mental or physical health.

One critical factor was whether Dr. Zaheen knew or had reason to know of the item giving rise to the understatement. Revenue Procedure 2013-34 states that this factor weighs against relief if the requesting spouse knew, or had reason to know, of the item giving rise to the understatement as of the date the joint return was filed. The court acknowledged that Dr. Zaheen, as a physician, possessed a high level of education and that she signed the joint 2019 tax return without reviewing it. Citing Hayman v. Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993), the court stated that a taxpayer who signs a return is generally charged with constructive knowledge of its contents. Therefore, the court found that Dr. Zaheen "had reason to know" of the understatement because she did not review the return before signing it and because a reasonable person would have been alerted to potential issues by her husband’s secrecy and defensiveness regarding her retirement account.

However, the court then considered the critical exception within Revenue Procedure 2013-34 for situations involving abuse or financial control. Specifically, Section 4.03(2)(c)(i) and (iv) state that knowledge may be negated if the non-requesting spouse abused the requesting spouse or maintained control of the household finances by restricting the requesting spouse’s access to financial information, preventing them from questioning the return.

The court emphasized that abuse comes in many forms, including physical, psychological, sexual, or emotional abuse, and requires substantiation or at least specificity. The court found Dr. Zaheen’s testimony regarding the abuse she endured from her husband to be credible and corroborated by her children and the family’s housekeeper. The court noted specific instances of aggression, including strangulation and forced sexual encounters. Further supporting the abuse claims were Mr. Ehsan’s admission in his criminal case and the findings of investigations conducted by local police and the Massachusetts Department of Children and Families (DCF).

Ultimately, the court concluded that Dr. Zaheen’s allegations of abuse were significant enough to negate its earlier finding that she had reason to know of the item giving rise to the understatement. Considering the totality of her circumstances, the court reasoned that Dr. Zaheen could not have questioned the accuracy of the joint return without risking her or her children’s safety. The court also found that Mr. Ehsan exerted significant financial control over Dr. Zaheen, restricting her access to financial information and misleading her about the transactions leading to the tax liability. The court held that even if Dr. Zaheen had actual knowledge of the transaction, that knowledge was negated by Mr. Ehsan’s abuse and financial control.

Impact: The High Bar for Intervention

The Tax Court concluded that Dr. Zaheen was eligible for full relief under Section 6015(f) with respect to the tax understatement on the 2019 joint return. Section 6015(f) allows the IRS to grant relief from joint and several liability if, considering all facts and circumstances, it would be inequitable to hold one spouse liable. The court's decision highlights the difficulty faced by non-requesting spouses who attempt to intervene in these cases. While Section 6015(e)(4) grants the non-requesting spouse the right to participate and present evidence, the Zaheen case underscores that specific, corroborated evidence of abuse, such as police reports or findings from the Department of Children and Families (DCF), can successfully override evidence of "actual knowledge" or "reason to know" on the part of the requesting spouse. This is true even when the requesting spouse is a high-income earner, like Dr. Zaheen. The ruling suggests a high bar for intervention, particularly when credible evidence of spousal abuse and financial control exists. Future taxpayers seeking innocent spouse relief can point to the Zaheen case as precedent for how abuse can negate knowledge.