Married taxpayers can file their taxes together or separately. Because it is often more tax-advantageous and convenient to file together, most married individuals elect to file as married filing jointly. But there are risks with this approach. When spouses file a joint return, they become jointly and severally liable for the taxes owed for that tax year.
Joint and several liability can be harsh and unfair. For example, a spouse who files a joint tax return may become liable for taxes due solely to the other spouse’s willful omission of income or claims of fraudulent deductions. Accordingly, section 6015 of the Internal Revenue Code relieves spouses from joint and several liability in certain instances.
In Strom v. Comm’r, T.C. Memo. 2024-58, Dr. Strom discovered just how difficult it can be to obtain innocent spouse relief. In that case, InfoSpace had hired his wife, Mrs. Strom, to serve as its president and chief operating officer. As a company executive, Mrs. Strom received stock options, which she exercised in 2000. Her total compensation from the exercise was more than $100 million. Regrettably, Mrs. Strom held onto the shares—shares which dropped in price by more than 90% by the end of the tax year.
In January 2001, Mrs. Strom received Forms W-2 from InfoSpace which collectively reported more than $100 million of taxable compensation. Mrs. Strom had a major tax problem: her exercise of the stock options had resulted in significant ordinary income that could not be offset by her unrecognized capital losses attributable to the InfoSpace stock. The Stroms sought tax guidance and were told that they could take a position that the compensation should be deferred to 2001 (when InfoSpace’s stock price was lower, resulting in lower recognized income). However, the tax professionals cautioned that there would be substantial risks in taking this position. Ultimately, the Stroms filed a joint return for 2000, claiming that the more than $100 million of compensation should be deferred to the subsequent tax year.
The IRS disagreed with the Stroms’ reporting and issued a Notice of Deficiency. The notice asserted that the Stroms—jointly and severally—owed roughly $40 million of taxes from the InfoSpace stock option exercise. The Stroms filed separate petitions with the Tax Court. In Dr. Strom’s petition, he claimed innocent spouse relief under sections 6015(b) and (f).
The Tax Court considers a litany of factors in determining whether a spouse qualifies for relief under section 6015(b). Among these, the requesting spouse must show that the spouse did not know, or have reason to know, of the understatement of tax attributable to the other spouse. The Tax Court in Strom concluded that Dr. Strom failed this requirement. More specifically, there was sufficient evidence to show that Dr. Strom was aware of the stock option exercise and the omission of income, including: (i) his execution of spousal consent forms associated with Mrs. Strom’s stock option agreements; and (ii) his participation in various discussions with tax professionals regarding the proper tax treatment and reporting of the stock options.
This finding alone would have been sufficient to disqualify Dr. Strom from section 6015(b) relief. Nevertheless, the court analyzed other relevant factors under section 6015(b)—such as whether it would be inequitable to hold Dr. Strom liable for the deficiency. In analyzing this factor, the court concluded that two of the more important considerations for purposes of section 6015(b) were whether: (i) Dr. Strom received a significant benefit from the improper reporting position; and (ii) the deficiency was caused by improper conduct of Mrs. Strom (e.g., concealment, overreaching, or other wrongdoing).
The Tax Court held that equitable favors counseled against granting Dr. Strom innocent spouse relief. In prior decisions, the Tax Court had held that an improper refund of a substantial amount can serve as a significant benefit. The court noted that the Stroms had used the improper refund here to satisfy a $10 million loan for which Dr. Strom was personally liable. In addition, the court found that the deficiency was not caused by any actions of Mrs. Strom but rather by the Stroms’ mistaken belief in the tax laws (i.e., that they could defer the compensation to 2001).
Leaving no stone unturned, the court also analyzed other equitable relief factors under both section 6015(b) and section 6015(f). After its analysis, the court concluded that five factors were neutral, and four weighed against relief. On this basis, the court denied Dr. Strom’s request innocent spouse relief.
Married taxpayers can pick up a few lessons from the decision in Strom. First, if a spouse has a questionable transaction in any tax year, it may be advisable for each spouse to file separately to avoid joint and several liability. Second, married taxpayers going through a divorce or separation should carefully consider whether filing a joint return is in their best interests. Although innocent spouse relief may be available if the other spouse omits income or claims improper deductions, Strom shows that the innocent spouse may have to fight for it and that it is not always a given.
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