Robert B. McGhee v. Commissioner, TC Memo 2010-259
If you travel the tax blogosphere a bit you will find that many tax bloggers give themselves license to freely comment on many issues. We know for example that Robert Flach, The Wandering Tax Pro, abhors reality TV, possibly as much as the unreliable software that keeps him preparing returns by hand. James Edward Maul loves chocolate chip cookies and includes commentary on them as part of Mauled Again's mission statement. If you look back a bit you will find a couple of non-tax posts in this blog. Beginning in June, though, I have stuck exclusively to tax. Most posts are keyed to a specific recent development. I also generally don't discuss tax policy - (Why is it the way it is ? How could it be better ?). It is what it is. Deal with it.
I do, however, find in the tax developments themselves much to ponder beyond the tax problems. Some opinions have the material for several good novels. Tax Court Summary opinions, the reality TV of the system, often have the makings of sit com episodes. Also, they can inspire me to bring in my other passions and interests. One of these is gender equity. William Farrel's book is a pretty good read and he makes some good points, although he can lay it on a little thick. He started out as a feminist giving speeches to men about what bad sexists they were and then had this series of revelations that included things like noticing that although women were clamoring to get into the executive suit as executives rather than secretaries, they did not seem to be rushing into mining and garbage collection, where the relatively high pay is attributable to unpleasant and dangerous working conditions. I have this image of him showing up in this break room festooned with pin-ups seeking forgiveness and looking to embrace his brother, the garbage collector. My own particular peculiar view on this matter is summed up in my reaction to the slogan "Another Man Against Violence Against Women". The implication to this is that it is somehow better for a big strong man to beat up small weak men than it is for him to beat up small weak women. I think this thought sends a bad message to the people who are most likely to be the victims of violent crime :
Violence against male,blacks, and persons age 24 or younger occurred at higher or somewhat higher rates than the rates of violence against females, whites, and persons 25 or older in 2009.
That's from the Bureau of Justice Statistics. The message is that even though you are more likely to be a victim, nobody cares.
I think that just as their is a notion, now much less popular, that an empowered woman is not really a woman, there is an almost symmetrical concept, perhaps more firmly rooted, that a disempowered man is not really a man. This logic is taken to its extreme in prisons.
At any rate, my passion for gender equity, has left me on the alert for an "innocent spouse" case where it is the guy claiming innocent spouse status. This is the first one I noticed. I hate to let facts spoil my preconceived notions, but based an unscientific scanning it's not actually that uncommon. Mr. McGhee's case is fairly interesting and I probably would have picked up on it regardless of the gender bending.
Robert McGhee was a commercial airline pilot, who was also active in the Air Force Reserve. This kept him away from home about 20 days a month. His wife, Cynthia, worked as a bookkeeper and office manager for a law firm. At some point she decided to take up a little sideline to bring in some extra money. She found something that fit in well with her job at the law office. She started embezzling from them. Somehow she got caught. She pleaded no contest and was sentenced to 20 years in prison and 30 years probation. The sentence was suspended and she was ordered to pay $213,144 of restitution to her former employer, with $60,000 due February 1, 2005, and $2,000 due each month thereafter.
And of course there's the tax issue :
On February 18, 2004, Burch and George mailed Mrs. McGhee Forms 1099-MISC, Miscellaneous Income, reporting nonemployee compensation of $126,772 for 2001 and $117,587 for 2002. These amounts represented the funds that she had embezzled from Burch and George. On November 20, 2004, after the IRS had commenced an audit of petitioner and Mrs. McGhee's 2002 joint return, petitioner and Mrs. McGhee filed amended joint Federal income tax returns for 2001 and 2002, reporting as income the embezzlement proceeds reported on the Forms 1099-MISC. The 2001 amended return reflects additional tax of $40,366 and a balance due of $40,366. The 2002 amended return reflects additional tax of $33,920 and a balance due of $35,399. Respondent accepted the amended joint returns, processed them, and on February 7, 2005, assessed the tax stated on them. Neither petitioner nor Mrs. McGhee paid the balances due on the amended returns.
I can't figure out what the point of the 1099's was. Under general principles, the embezzled funds were gross income to Mrs. McGhee. I just don't see what her employer was up to in sending the forms. I don't know under what theory they are required or what they thought they were accomplishing.
Regardless it was the fellow who spent his spare time serving his country rather than stealing from his employer who thought the IRS might find him an innocent spouse. No such luck. So he tried the Tax Court. The Court went through the same eight factors we discussed in the case of Eileen Pugsley :
(1) is separated or divorced from the nonrequesting spouse,
(2) had knowledge or reason to know that the nonrequesting spouse would not pay the income tax liability,
(3) would suffer economic hardship if relief were denied,
(4) complied with income tax laws in years after the year at issue,
(5) received significant economic benefit from the unpaid income tax liability,
(6) was abused by the nonrequesting spouse,
(7) was in poor health when signing the return or requesting relief,
(8) whether the nonrequesting spouse had a legal obligation to pay the outstanding tax
For some reason the judge in this case ordered them differently. Regardless, the couple had remained married, Mrs. McGhee was not abusive and Mr. McGhee had always had good health making four of the eight factors (1,6,7, and 8 in this list) neutral.
Mr. McGhee had complied with the income tax laws at all times after this mess started giving him one factor in his favor. The IRS concedes that having to pay the deficiency would cause severe economic hardship for Mr.McGhee. Remember they have to pay the money back or Mrs.McGhee goes to prison. The pay back should be deductible and there is a special "claim of right" computation, but that probably isn't going to help that much.
Here's where things get a little crazy. Mr.McGhee had no idea as to what happened to the embezzled money. Mrs.McGhee, the embezzler, said it went for general family support. In the court Mr.McGhee had the burden of proving that he didn't benefit from the embezzled funds, a burden he did not carry. There did not seem to be any evidence that Mr.McGhee knew his wife was embezzling. He was away as much as 20 days a month. I don't know. Doesn't seem right.
The knowledge one is where it gets really crazy. The IRS argues that his knowledge should be evaluated at the point in time when he signed the amended return. The tax court has twice ruled against the IRS on this issue, but they are not giving up. They decided, however, that they don't need to argue about it with the IRS. When the original 2002 return was filed, Mrs. McGhee had already been caught. They figured that all the extra money floating around should have tipped Mr. McGhee off to something being up when he signed the 2001 return.
Final score was as follows:
As indicated by the foregoing analysis, four factors are neutral. Two of the factors—compliance with Federal tax laws and economic hardship—favor relief. Two of the factors— significant benefit and knowledge—weigh against relief. Thus, as respondent acknowledges, a “strictly mathematical balancing of the factors shows them to be in equipoise”. If we were to conclude on this score that there is an evidentiary tie.. .......... But rather than decide this case on that basis, we conclude on a preponderance of all the evidence that petitioner is not entitled to equitable relief. In reaching this conclusion, we take into account petitioner's lack of credibility on several key points as well as his seeming lack of good faith in waiting until after the IRS had opened an audit on his 2002 tax year to file amended joint returns reflecting the embezzlement proceeds that he had, at that point, long known about but had not previously reported.
In a previous post I quoted Dr. Johnson's remark that "Every man thinks meanly of himself for not having been a soldier, or not having been at sea" which motivates me to throw my stubborn ounces on the scale that is in equipoise. Mr. McGhee used his spare time to serve his country. The evidence that he benefited from embezzled funds was the testimony of the embezzler. If he had divorced her he would have had another point in his favor, but he didn't do that. I can't say his gender counted against him. Women also lose innocent spouse cases, which is why I have so many blog posts on the unrecognized hazards of joint returns. Regardless, I think he got a raw deal.
It could be worse. Consider the plight of Robert Thomas, an Australian resident of Saudi Arabia. His wife was convicted of embezzling and he got 16 months in prison and 300 lashes (in convenient installments of 50 each). Under Sharia law there is no such thing as a male innocent spouse.