avoiding joint income tax liability – another issue

Published On: 23rd May 2011

On a largely esoteric note, it should be pointed out that I.R.C. §6015 ‘innocent spouse’ status may not be the only avenue for avoiding joint income tax liability.  The threshold issue with joint liability is the existence of a valid joint return.  An area of the case law that has been somewhat dormant since the enactment of I.R.C. §6015 involves arguments that the prima facie valid signature on the joint return is not valid (contract) affirmation under either 1) principles of fraud in the inducement, or 2) duress.  The ‘fraud in the inducement’ theory seems to have less traction – that Tax Court rejected it roundly in Wissing v. Commissioner, 54 T.C. 1428 (1971) in a typical situation of embezzlement income of one spouse of which the other spouse was generally unaware.  Claims of duress may have more traction – an occasional case notes that duress defenses survived the enactment of the ‘innocent spouse’ statute.  See, United States v. Kramer, 52 A.F.T.R.2d 83-5630 (D.Md. 1983).

A further interesting issue along these lines.  What happens with similar theories for joint (‘gift-splitting’) gift tax returns under I.R.C. §2513?  There is much less litigation in this area, presumably because there are vastly fewer joint gift tax returns (and perhaps wealthy spouses have somewhat less compelling claims to innocence).  But it is interesting that I.R.C. §6015 statutory ‘innocent spouse’ rules are entirely moot with respect to gift tax returns: I.R.C. §6015 applies only to joint income tax returns under I.R.C. §6013 (or seems to).  Is the ‘innocent spouse’ with respect to a joint gift tax return largely without remedy?  Would a court apply the case law on joint income tax returns that is outside I.R.C. §6015 in the same manner to joint gift tax returns?  Or would the gift tax returns be deemed somehow less intrinsically ‘joint’ than income tax returns?  See, CCA 200205027 (although fraud statute-of-limitations exception applies to joint return liability of both fraudulent and non-fraudulent spouse, for gift tax returns the rule is the opposite: the fraud statute-of-limitations exception applies only to the fraudulent spouse).