Disgruntled Ex-Spouses or Just Good Tax Procedure?

Divorce is not a very fun topic and divorce often causes people to act in ways that they would not otherwise act. I often encounter taxpayers who want to use the tax aspects of divorce to add insult to injury. Kovitch v. Commissioner, 128 T.C. 9 (2007), is a case that very well could be (but may not be) an example of disgruntled ex-spouses who are using the tax system to spite their ex-spouse.

The Kovitch’s were divorced. The IRS then issued a notice of deficiency to both spouses. Only Ms. Kovitch filed a petition in the U.S. Tax Court. Ms. Kovitch only sought innocent spouse relief, she did not challenge the underlying tax assessment. Mr. Kovitch did not file a petition with the tax court. Instead, Mr. Kovitch later opted to intervene in Ms. Kovitch’s tax court proceeding. Mr. Kovitch then filed for Chapter 13 bankruptcy after intervening in the tax court case.

Mr. Kovitch may have done this as a matter of course or Mr. Kovitch may have done this in an effort to preclude Ms. Kovitch from obtaining innocent spouse relief. The question before the U.S. Tax Court was whether the bankruptcy automatic stay would preclude the court from determining if wife Kovitch was entitled to innocent spouse relief.

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.

Mr. Kovitch may have thought that he was pulling a fast one, by filing bankruptcy to prevent his ex-wife from obtaining innocent spouse relief; however, it was Ms. Kovitch that pulled the fast one.

The tax court concludes that the bankruptcy automatic stay does not preclude the tax court from determining whether wife Kovitch was entitled to innocent spouse relief. The reasoning is that husband Kovitch will still owe the tax even if wife Kovitch was granted innocent spouse relief, as such the tax court was not determining husband Kovitch’s tax liability and the bankruptcy rules did not halt this type of activity.

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….