Every communication makes statements. The statements may be truthful or false. A statement that is misleading or exaggerated is somewhere between these two. There can be significant legal consequences depending on where a statement falls on this continuum.
This raises questions as to how precise do the statements have to be to be false? If they are vague, maybe they are merely misleading or exaggerated? Maybe the misleading or exaggerated statement is not sufficient to trigger a legal consequence.
This brings us to the concept of “puffery.” Puffery is something that is false, but not false enough to be a problem. The concept is often used by attorneys as a defense, i.e., my client’s statement was merely puffery and should not be considered or given any weight.
The concept is also used by the courts to dispose of evidence that is contrary to its holding in litigation. It is a tool that allows the court to reach a correct holding, while still building a record that prevents their court opinion from being overturned on appeal.
We don’t have all that many instances of puffery in tax cases. This is in part due to the deference the courts give to the IRS. False statements are discarded by the courts in tax cases using the simple statement that the testimony was not credible. There are thousands of examples of tax cases where the court finds the taxpayer’s testimony was not credible.
When we see a discussion of puffery in a tax case, it is worth stopping to see what exactly counts as puffery. The recent Robinson v. Commissioner, T.C. Memo. 2020-134 provides an opportunity to do just that. It involves a claim for innocent spouse relief.
Facts & Procedural History
The Robinson case involves the joint income tax liability for the 2010 tax year.
The taxpayer-husband owned and operated a law care business. The business was taxed as a sole proprietorship.
The taxpayer-wife worked for the husband’s business at least through 2009. The evidence presented to the court included a resume the taxpayer-wife uploaded to an online website. The resume indicated that she worked for the husband’s business through 2013.
The taxpayers separated in 2010. They entered into a separation agreement and divorced in 2014. The separation agreement said that the taxpayer-husband assumed the responsibility to pay the IRS debt.
About Innocent Spouse Relief
The innocent spouse relief rules allow one taxpayer to avoid liability for a jointly-owed tax. There are three types of innocent spouse relief:
- Traditional innocent spouse relief,
- Separation of liability relief, and
- Equitable relief
The first type, traditional innocent spouse relief, relieves the innocent spouse for the tax stemming from improperly reported items or omitted items on a joint tax return. Taxpayers do not have to be separated or divorced to qualify for this type of relief.
The second type, separation of liability relief, apportions the tax reported on a joint return between the spouses. If granted, the innocent spouse is only liable for their allocated portion. To qualify, the taxpayer generally has to be separated or divorced from their spouse.
The third type, equitable relief, is a catch-all that can be used if the other two types cannot be used. It also differs from the other two types of relief in that it can allow a taxpayer to avoid liability for an unpaid tax that was correct, but remains uncollected.
The taxpayer-wife was seeking equitable relief in this case. We’ll go through the rules briefly to help understand the context for the statement made in this case.
About Equitable Relief
The general rule for equitable relief is pretty basic. It says that equitable relief is appropriate if “taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either).”
Rev. Proc. 2013-34, 2013-43 I.R.B. 397 sets out guidelines to determine whether equitable relief is warranted.
The court describes the guidelines as follows:
the Commissioner conducts a multistep analysis when determining whether a requesting spouse is entitled to relief under section 6015(f). The requirements for relief under Rev. Proc. 2013-34, sec. 4, are characterized as threshold or mandatory requirements followed by either a streamlined determination or a weighing of equitable factors. A requesting spouse must satisfy each threshold requirement to be considered for relief. See Rev. Proc. 2013-34, sec. 4.01, 2013-43 I.R.B. at 399. If the requesting spouse meets the threshold requirements, the Commissioner will then grant equitable relief if he or she meets each streamline element. See id. sec. 4.02, 2013-43 I.R.B. at 400. If the requesting spouse is not entitled to streamlined relief but meets the threshold requirements, the Commissioner will determine whether equitable relief is appropriate by evaluating the equitable factors. See id. sec. 4.03(1), 2013-43 I.R.B. at 400.
So the requesting spouse has to meet the mandatory requirements and then either the streamlined determination or the weighted equitable factors.
The Mandatory Requirements
The mandatory requirements are that:
- the requesting spouse filed a joint return for the year for which relief is sought;
- relief is not available to the requesting spouse under Sec. 6015(b) or (c);
- the claim for relief is timely filed;
- no assets were transferred between the spouses as part of a fraudulent scheme;
- the nonrequesting spouse did not transfer disqualified assets to the requesting spouse;
- the requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and
- the income tax liability from which the requesting spouse seeks relief to be attributable, either in full or in part, to “an underpayment resulting from the nonrequesting spouse’s income.”
The IRS asserted that the last requirement was not met in this case. It noted that the evidence included a resume the taxpayer-wife posted on the internet saying that she worked for the business in 2010.
If taken as true, the resume establishes that the income earned by the business in 2010 was, at least in part, attributable to her efforts. This would seem to disqualify the taxpayer-wife from satisfying the mandatory requirements.
The court concludes that the false statement in the resume was “merely puffery.”
The term “puffery” means an exaggeration. Puffery is something that is misleading and/or incorrect, but it differs from an outright lie.
The courts have defined puffery as “an exaggeration or overstatement expressed in broad, vague, and commendatory language.”
The U.S. Tax Court has explained in a prior case that “[e]xaggerated or false representations to a prospective purchaser may indicate lack of trustworthiness, but they are not proof of facts.” Transupport, Inc. v. Comm’r, T.C. Memo. 2015-179. So puffery is closer to a statement of an opinion. It does not establish a fact.
If the statement is found to not be puffery, then it can establish a fact. The U.S. Tax Court’s holding in Jones v. Commissioner, 903 F.2d 1301 (10th Cir. 1990) provides an example of this. The taxpayer in Jones was arrested for buying cocaine from an undercover police officer. The IRS then made a termination assessment against Jones of $33,990,402 based on $68 million in unreported income from drug related activities which the IRS estimated Jones received in the first ten months of 1985 prior to his arrest. The assessment was based on testimony of a co-conspirator who told the undercover police officer that he and Jones were “doing approximately 50 kilos per month.” This statement was made to convince the police officer that they could handle the volume of drug sales the police was offering. The U.S. Tax Court concluded that this statement was not puffery. Thus, this statement was sufficient to establish the amount of income that was subject to tax.
In the present case, the fact to be established was whether the taxpayer-wife worked for the family business in 2010. The IRS established this fact by introducing the wife’s resume into evidence. The court concluded that the statement was puffery. Thus, the statement in the resume was not sufficient to prove the fact. This distinction decided the case.
In this case, for the resume, the court concludes that the taxpayer-wife overstated her time on the job to help obtain a new position. The court states that “[a]lthough we do not condone her inconsistency, we find it is merely puffery in an attempt to obtain new employment and of no significance here.”
The court did condone her inconsistency. The court granted the taxpayer-wife innocent spouse relief.
Puffery is an exaggeration. It is a statement made when the party has or could have had a reason to exaggerate. This case shows that puffery can be used in tax litigation to negate a prior inconsistent statement made by the taxpayer. The case can be cited for the proposition that the court should not accord any relevance or weight to the taxpayer’s harmful statement.