Can one spouse prevent the other spouse from obtaining innocent spouse relief by filing bankruptcy? The court addressed this question in Kovitch v. Commissioner, 128 T.C. 9 (2007).
The Facts & Procedural History
The Kovitch’s were divorced. The IRS then issued a notice of deficiency to both spouses for their joint tax liability.
Only the wife filed a petition in the U.S. Tax Court. The wife only sought innocent spouse relief, she did not challenge the underlying tax assessment.
The husband did not file a petition with the tax court. Instead, the husband later opted to intervene in the wife’s tax court proceeding. The husband then filed for Chapter 13 bankruptcy after intervening in the tax court case to challenge whether the wife was entitled to innocent spouse relief.
The question before the U.S. Tax Court was whether the bankruptcy automatic stay would preclude the court from determining if the wife was entitled to innocent spouse relief.
Innocent Spouse Relief & Bankruptcy
Innocent spouse relief generally can relieve the current or former spouse of liability for a tax, penalties and interest if (1) there was a jointly filed tax return, (2) there is an understatement of tax by the non-innocent spouse, and (3) the innocent spouse can show that he or she did not know or have reason to know of the understatement.
Generally the bankruptcy automatic stay halts all IRS and tax court activities with regard to the taxpayer who files bankruptcy, pending the resolution of the bankruptcy proceeding.
Innocent Spouse Not Halted by Bankruptcy Stay
Does the bankruptcy automatic stay preclude the U.S. Tax Court from determining whether the wife is entitled to relief as an innocent spouse? The U.S. Tax Court concluded that it does not. The court reasoned that the husband will still owe the tax even if the wife is granted innocent spouse relief. As such, the court was not determining husband’s tax liability and the bankruptcy rules did not halt this type of decision.
The result may have been difficult if Mr. Kovitch filed his own petition contesting the deficiency and the trials were consolidated or had Ms. Kovitch opted to contest the deficiency in her tax court petition. I can’t help but wonder if Ms. Kovitch did her homework and knew that she should not contest the tax in addition to requesting innocent spouse relief or if it was just a lucky coincidence.