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Tuesday, January 21, 2003


Patricia Barranco sought relief from joint and several liability for nine years in which her husband, an orthopedic surgeon, was engaged in a tax evasion scheme for which he eventually served 18 months in prison. Tax Court accepted, for purposes of the opinion, that Ms. Barranco did not know of the evasion scheme and did not review the tax returns before signing them. Tax Court held that she was not eligible for relief because: (1) She had constructive knowledge of the evasion scheme. Family expenditures she was aware of greatly exceeded the adjusted gross income on the returns, and no spousal abuse or coercion was alleged. She therefore had a duty to look over the tax returns before signing them, and if she had, the circumstances should have lead her make an inquiry as to why the AGI was so low. (2) She benefitted from the evasion scheme by living a lifestyle and owning property that was financed by the undisclosed income, and therefore holding her liable was not inequitable.

Tax Court is right about the equity requirement for spousal relief. But I am unconvinced by their constructive knowledge argument. Many highly paid professionals report AGIs that are otherwise suspiciously low because they hire smart accountants who get them to invest in perfectly legal tax shelters or tax avoidance schemes. It is not clear to me that Tax Court should hold her to constructive knowledge that her husband was evading taxes rather than avoiding them.

I am tempted to comment on what this case teaches tax evaders to tell their spouses, but I will refrain from giving such illegal advice.

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