More Innocent Spouses Qualify For Relief Under IRS Guidelines

 

The IRS released new guidelines this month designed to provide relief to more innocent spouses seeking relief from tax liability.

A Notice proposing a new revenue procedure, posted today on IRS.gov, revises the threshold requirements for requesting equitable relief and revises the factors used by the IRS in evaluating these requests. The factors have been revised to ensure that requests for innocent spouse relief are granted under section 6015(f) when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process. The new guidelines are available immediately and will remain available until the finalized revenue procedure is published. The IRS will immediately begin using these new guidelines when evaluating equitable relief requests.

"The IRS is significantly changing the way we determine innocent spouse relief," said IRS Commissioner Doug Shulman. "These improvements should dramatically enhance our process to make it fairer for victimized taxpayers facing difficult situations.”

This is the second major change made to the innocent spouse program. In July, the IRS extended help to more innocent spouses by eliminating the two-year time limit that previously applied to requests seeking equitable relief.

To watch a video made by the IRS on this topic click here: Innocent Spouse Relief.

 

Debt in Divorce

   An excerpt from my book, Basics of Texas Divorce Law on debt division in divorce:

     To determine liability for a debt as between spouses, there are two inquiries - which person may be liable and which assets may be liable.

     A debt incurred by a spouse during the marriage is presumed to be a community property debt.  A debt incurred before the marriage is presumed to be separate property debt.  If a debt is incurred during the marriage, but the creditor agreed to look solely to the separate property of the spouse for satisfaction of the debt, then the debt may be a separate property debt.  Characterization of the debt as in the nature of community property does not determine the question of liability.  The designation of a debt as community property has no effect on which spouse may actually be liable for the repayment of the debt.  The fact that spouses are married, does not, by itself, create liability by one spouse for the debts of the other spouse.  The mere fact of marriage does not create joint liability on all debts.  If one spouse incurs a debt as the agent for the other spouse, or if the debt is for basic living necessities, then both spouses may be help jointly liable, together with the jointly help community assets.

     To determine which spouse's properties may be liable, the marital property needs to be classified as to which spouse has the right to manage it - each spouse may have separate and community sole management property and there may be joint management property of both spouses.  A spouse's separate property is not generally subject to the other spouse's debt liability.  Further, each spouse has sole management and control over his or her community property that each would have owned except for being married, such as personal earnings.  This sole management community property may only be used to satisfy the debts of the spouse that manages the property or the joint debts.  Jointly managed property, such as a jointly titled asset, may be used to satisfy either spouses' community or separate liabilities.

     When looking at borrowed funds, the examination goes further into the intent of the spouses in incurring the debt.  If the money is borrowed to benefit a spouse's separate property, and the intent is to repay the funds using separate property, then the borrowed funds will likely be separate in nature.

     Most credit cards are opened with an account agreement.  From a contract law perspective, only the parties to the contract are bound to the terms of the agreement.  Therefore, it is simple to determine who is contractually liable if one has a copy of the account agreement - which hardly ever happens in practice.  If that is the case, the practitioner can utilize the credit report to determine if the spouse is contractually responsible, or just an authorized user.  Arguably, if a spouse is designated as an authorized user then that may create agency as defined above.  Alternately, if the purchases were for necessities, liability could be present regardless of whether one was an authorized user or not.

     Nevertheless, an authorized user should probably not seek to assume this unsecured liability in the decree.  If this is done, the authorized user will have a difficult time in restricting the future access of the other spouse to that account.  While an in junction may assist in protecting the authorized user, it would still be advisable to not seek responsibility for the payment of this debt.  Alternatively, the spouse who is the primary card holder should (as soon as legally possible) revoke the authorized user status of the ex-spouse to avoid problems.

     In determining the division of the overall estate, and debt in particular, it is important to determine which spouse and/ or assets may be liable for the debt and divide the debt according to liability.  Otherwise, if a debt is allocated in a divorce to a spouse who is not legally liable, then the spouse has little motivation to pay and there are few legal remedies available in the court system to force payment against a non-willing spouse.  Further, the credit of the spouse incurring the debt can be damaged by relying on the nonliable spouse to make payment.

     The division of debts between the spouses has no effect on the creditor's ability to collect the debt.  Even if one spouse is allocated the debt in the divorce, if the debt is one for which the other spouse is liable, the creditor can seek payment from the other spouse regardless of the wording of the divorce decree.  The only recourse that a spouse has in such a situation is to sue the spouse that was supposed to pay and seek reimbursement.

     One way to conclusively address debt and liability in a divorce is to allocate other assets to pay the community debts of each spouse, leaving fewer assets but no debts to divide.  When possible, the system allows both spouses to leave the marriage with a "clean slate."

Credit Rating and Divorce

Divorce can be a trying time on your credit as well as your finances and emotions.  A vindictive or spendthrift ex-spouse can incur debt on your joint accounts and destroy your credit rating during hte divorce process.  I fyou are not able to pay a joint account in full, inquire as to whether you can maintain a balance on the account after it is closed to prevent the situation from gettng worse. 

Tips for dealing with your credit during a divorce:

  • Get a copy of your credit report and familiarize yourself with everything in it.
  • Close all accounts that you do not need or use.
  • If you don't already have one, apply for a credit card in your name while you can.
  • Close all joint accounts and credit cards as soon as possible.

Keep in mind that many of the courts in Texas have orders that prohibit accounts from being closed or limited while the divorce is pending.  So, either take these actions before the divorce is filed or you may need to seek court approval to do so. For example, see the Collin County Standing Order that applies to all pending divorces and my prior post on this topic: Collin County Texas Divorce Standing Order

Your credit report shoudl help you discover any outstanding debts that need to be addressed as part of the divorce process.  Consider using marital assets or funds to pay off joint debts so each spouse can start over with a clean slate.

Once the divorce is finalized, use credit cards sparingly.  To establish or maintain a good credit score, pay off balances on time every month. 

If you need to use credit for short-term liquidity, then you may be better off refinancing your home and avoiding balances on credit cards.  Benfits of home financing include deductibility of the mortgage interest and a lower interest rate.

 

'Til death do us part, or until I sue you.

On July 8, 2009, the Tyler Court of Appeals affirmed a judgment for monetary damages in favor of one spouse against the other.  In Colvin v. Colvin, the husband sued his wife for personal injury damages caused by his wife in an automobile collision.  Wife was the driver of a car and the husband was the passenger.  Wife and a third party were in a collision, third party sued wife, and then husband intervened in the lawsuit and sued third party and wife (husband and wife were married at the time and are still so). 

The trial court awarded damages to husband against wife, and wife appealed.  On appeal, the Tyler Court Appeals affirmed the trial court's ruling.  Interestingly, the Colvin opinion does not mention whether or not husband and wife are still married. 

The Colvin opinion presents an interesting situation.  Under Texas law, community property is divided into two types: (1) joint management; and (2) sole management.  The community property characterization is important because if one spouse is held liable for a tort (i.e. negligence) during marriage, then the court may satisfy the judgment by looking to the community property jointly managed by the spouses as well as the sole management community property of the non-culpable spouse.  In result in Colvin is that in a sense the trial court could look to the community property jointly managed by the husband and wife, and the husband's sole management community property, to satisfy the judgment.  

As a Dallas divorce lawyer, our clients frequenltly are unaware of the concepts of joint and sole management community property.  In a nutshell, if either spouse is held liable for tortious conduct during marriage, then all property other than the non-culpable spouse's separate property may be used to satisfy the judgment. 

No Debtors Prison for Failing to Make Car Payment

A new case out of the Tyler Court of Appeals hold that a contempt order ordering imprisonment for failure to make car payments required by a divorce decree is void as imprisonment for debt. Also, the court holds that  a contempt order may not be used to make substantive changes to divorce decree. In re White, ___ S.W.3d ___, 2009 WL 1153396 (Tex. App.—Tyler 2009, orig. proceeding) (4/30/09)

Facts: Father and mother divorced on 12/29/05. Trial court appointed both JMC but gave father exclusive right to choose child’s primary residence. Trial court required both parties to give 60 days’ notice of intended residence change and father to make payments on wife’s car. Trial court ordered that the father make child available at his residence for mother to pick up. In 2006, mother filed a motion for enforcement. Trial court found that father had fraudulently notified mother that he was moving, had not surrendered child to mother at court-scheduled times and had failed to make car payments. Trial court held father in contempt and ordered him confined for 30 days. It suspended based on father paying attorney’s fees and mother’s loss resulting from repossession of car. It also required that the delivery of the child be limited to Anderson County. Father paid funds into trial court’s registry and petitioned for mandamus for district court to vacate contempt finding.

Held: Mandamus granted as to the car payments and methods of access to child and denied for the other findings of contempt.

Tyler Court of Appeals Opinion: A court cannot order confinement on the basis of a debt. The car payments are part of a division of property; they are not assets held in trust. Therefore, the obligation to make payments is a debt even though a divorce decree created it. Since it is not enforceable by confinement, the trial court abused its discretion in the contempt order. The only way to make substantive changes to a divorce decree is under TFC §156.001. As limiting delivery to Anderson County was a substantive change, trial court abused its discretion in its probation order. The contempt finding for husband fraudulently claiming a change of address was justified.

Any Dallas family law attorney knows that our country was formed based on the concept that a party could not be imprisoned for failure to pay a debt. We do not have debtor's prison in America! Just because a debt obligation is listed in a divorce decree makes it no less a debt. Family law attorneys should counsel their clients about the seeming lack of enforceability of the division of debts and structure the settlement of the estate in such a way that protects the enforceability of the court’s orders. For example, if the decree had left the car payment as wife’s obligation and ordered husband to pay maintenance in the amount of the car payment to wife, the wife would have had better enforceability options. Or, the car payment could have been awarded as additional child support. But, simply putting a debt pay-ment in the division of assets is insufficient to protect the client on whose behalf the payment is to be made.

This commentary originally appeared in the June 2009 Section Report of the State Bar of Texas Family Law section, where I serve as guest editor.