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Every year, both in April and in October, divorce lawyers face a dilemma. While April is the official tax deadline, just about everyone knows that “complex” returns are almost never complete when spring rolls around and many filers defer to October. But, when couples split they often ask for the first time whether they should be filing jointly with their spouse. This often presents difficult questions for the lawyers because we are not accountants and we are latecomers to the financial history of the marriage. The easy answer is to say “Never!” in response to the inquiry, but that usually means the marital estate will have additional tax burdens. It also is often a financial shot across the bow of the primary breadwinner, causing aggravation that can set a decidedly negative tone to the negotiation process.
Inevitably, once the discussion about joint versus separate returns gets underway, one of the parties introduces another term, “innocent spouse.” For many years, if one spouse was seriously hedging in reporting income or by deducting improper expenses, the spouse who did not produce the income or determine the expenses could claim that they should not be held liable for the taxes, interest and penalties. This was because he or she did not know and could not reasonably have known about the tax evasion. It is an area where laypeople seem to think they are expert when they most certainly are not.
On Saturday, the Wall Street Journal reported on the story of Rick Jacobsen. Rick filed jointly with his wife. In 2012, the IRS found that Mrs. Jacobsen had embezzled about $500,000.00 from a non-profit where she did accounting. Most people don’t realize this, but if you steal money, the government classifies it as income and you owe taxes on it. So the IRS sent the joint filing Jacobsen’s an “assessment” for $100,000.00 in income tax due but unpaid. Jacobsen contested the assessment contending that he did not know about the “income” and should not be assessed for something his wife did without his knowledge. Last month the U.S. Tax Court agreed.
How come the IRS did not just get the money from Mrs. J? You know. She was in prison and the money had disappeared. So, Mr. Jacobsen filed his own Form 8857 and claimed he knew nothing about the income or the tax associated with it. He was underway when a new wrinkle emerged. His now “ex” told the Service he did know about the money taken. Innocent spouses are not innocent if they either knew about or “profited” from the wrongdoing spouse’s conduct. Thus, if you are reporting $4,000.00 a month in income and you are making mortgage and car payments of $5,000.00 a month, the term “innocent” may not fit comfortably around your financial neck. The IRS denied Herr Jacobsen relief and he appealed to the Tax Court, which heard his case in 2017. By the time the case was heard the tax due had swollen to $150,000.00 with penalties and interest. His happy news is that the Court decided for him on almost all of the unreported income.
How did he prevail against the government? First, he showed that he was financially unsophisticated. His wife was an accountant. He had an associate’s degree and worked in a cheese factory. Second, and most important, he could show that the money embezzled did not inure to his benefit nor was it apparent from his wife’s lifestyle. The couple did gamble a lot, reporting $160,000.00+ in gaming income and corresponding losses in one year. The couple filed electronically and husband said his only involvement in tax preparation was providing his W-2 wage statement to his wife. Not only did their lifestyle not improve, at one point their utilities were suspended for non-payment. The Tax Court accepted his testimony that his gaming activity was quite modest and involved only slots. One can picture the IRS attorney wincing during that testimony. The Court also did not credit wife’s testimony that her husband knew because it was not supported by any evidence.
Other intangibles are credited with his win as well. He is a disabled veteran who is no longer married to the offending taxpayer and aside from the issues associated with his joint filing, all other returns he filed showed income properly reported and taxes properly paid.
The Opinion reported as T.C. 2018-115, is worthy of review as the presiding judge marches through the statutory facts and case law to reach her conclusion. She found that husband was “out” for most of the tax liability arising from 2010, but had to pay tax on a small piece of unreported income in 2011 because he filed a joint return, even after his wife was charged with embezzlement. Note also that the case is decided under precedent from the Seventh Circuit Court of Appeals. Other Circuits may employ other standards or analysis.
Also important to know is the statistical trend. In 2013 there were roughly 35,000 innocent spouse cases presented for disposition. Relief was denied in just over 10,000 of those cases and granted in some form or the other in 25,000. In 2017 the number of requests had fallen to 25,000 and in that year the denial rate soared so that the chance of denial was equal to that of getting relief. As Sgt. Esterhaus said best, “Let’s be careful out there.” And, beware that the tale of an ill-advised joint return may come with a tail of never ending tax obligations.
2017 was a remarkable year in many ways. In late Spring we watched one of America’s favorite entertainers tried for sexual assault. In October, prominent producer Harvey Weinstein was accused of sexual assault by more than a dozen women. The list of prominent men who have fallen from grace since the Weinstein story broke on October 5 would occupy a blog site of its own. As this is written, a story has broken that a California legislator and leader of the #MeToo movement has found herself charged with sexual harassment by two people; a former staffer and a lobbyist.
While is it always tempting to write about those who are prominent, most of us who live in relative obscurity view them as “different.” We like to think that perhaps the victims were complicit or at least indifferent to what occurred. A common refrain I hear, even from women, is that the victim knew what she was getting into. Others rally to the side of the victims, plainly asserting that the mere assertion of assault is prima facie evidence that it occurred. I try to stay away from these stories because where wealth and power enter the equation, reality can become distorted.
That is what made my view of Anderson Cooper’s interview of Jennifer Willoughby so compelling. Willoughby was not a public figure when she summoned the police to intervene in her domestic life in June, 2010. She was just the bride of a 32 year old Senate staffer. On paper, Rob Porter was everything a person would want in a spouse. Harvard. Mormon missionary work in London. Harvard Law. Rhodes Scholar at Oxford just like his father, the professor at Harvard. But, in 2010 Ms. Willoughby reports that despite his polished and highly effective work in the United States Senate, their domestic life was overtaken by fear for her physical safety.
I would commend every parent with teenage children to make them watch the CNN interview with Willoughby. The interview can be found at Daily Beast with reference to Jennifer Willoughby. https://www.thedailybeast.com/rob-porters-ex-wife-warns-hope-hicks-hell-abuse-you-next As I began to watch it I did so with some lawyerly skepticism, mainly because the story was old as was the divorce of the couple. Many divorced couples love to dish on each other while millions watch. Jerry Springer has made that model work for almost three decades.
But Willoughby was different. She came straight out and explicitly said she had no agenda and wished her former spouse no harm. I was still skeptical. Until, in a very unscripted way, she began to ponder how what occurred arose from her choice of Rob Porter as her spouse. Unlike many victims, she was not transferring blame to herself. Not at all. She was exploring how a relationship that once felt so right had traveled to such a bad place. In 35 years of practicing law on behalf of victims and perpetrators, if I had a wish for all of them, it would be the self-conferred gift of introspection. Whether knowingly or not, we have the ability to push the emotional buttons of those whom we profess to love. On July 28 Redbook published 50 phrases that we use everyday that push those anger buttons. On November 21, 2017 Best Life published 20 Things No Husband Wants to Hear. Most of these phrases would not be welcomed by any partner. Any jurist who hears domestic violence cases will tell you that it is common to hear “Your honor, he punched me for no reason.” Only psychotic people punch other humans “for no reason.”
If there was one area in the Willoughby interview where I think she strayed too far, it was her speculation about the woman her former husband is today dating. Every relationship is different. Ms. Willoughby may have incited violence without her even knowing how she did it. She may have incited violence through conduct that even outsiders would not notice. This is no justification for any violent conduct on the part of her then husband, but, rather than identify patterns of behavior that cause that domestic violence we rush to label people as “bad” or “good”. What I found most instructive about the Jennifer Willoughby interview was that she made clear Rob Porter was not a “bad” man; he was a man who had issues with controlling his anger. Thirty years ago, addiction was equated with moral failure. We know better today and this writer submits that our views of anger and the violence it causes merit the same evolution in thinking that we have witnessed with substance abuse. People afflicted with anger management problems do not benefit from ostracism; they require help.
Again, I commend every reader to give Jennifer Willoughby 26 minutes of time by listening to her tell her story. Of course, there are two sides to every story. But, no matter what the truth, Ms. Willoughby’s story is one every person can learn from.