Taxes in Your Practice: Tax court allows innocent spouse relief
Vol. 79, No. 3 / May - June 2023
Scott E. Vincent
Scott E. Vincent is the founding member of Vincent Law, LLC in Kansas City.
The tax court recently addressed a spouse’s claim for innocent spouse relief in the context of an unreported income case with respect to her spouse’s financial activities.
In Di Giorgio v. Commissioner of Internal Revenue1 the tax court granted innocent spouse relief from joint and several liability for Zandra Di Giorgio due to equitable considerations and a lack of knowledge regarding the couple’s true financial situation.
Background and findings of fact
Robert Anthony Di Giorgio Sr. was involved in a variety of business activities, including mortgage lending, issuing mortgage-backed securities, and real estate sales. The court noted it was difficult to paint a precise picture of these activities. Robert Di Giorgio held multiple business and personal bank accounts, and he did business with more than 30 title companies and a variety of borrowers.
Robert Di Giorgio received and deposited payments relating to these activities in both his business and personal accounts. He also co-mingled funds among the accounts, used business accounts for personal expenses, and failed to provide adequate books and records. The court concluded Robert Di Giorgio had multiple sources of income including (1) real estate sales; (2) Radius Capital Corp., a California corporation (Radius CA); (3) Radius Capital Corp., a Florida corporation (Radius FL); (4) a Scottrade brokerage account; and (5) other miscellaneous sources.
Robert Di Giorgio’s first spouse had passed away, and he married Zandra Di Giorgio prior to the tax years in question. During those years, Robert Di Giorgio had several real estate transactions that involved properties he either owned individually or had owned with his first spouse at the time of her death. He nominally involved his second spouse in some corporate activities, for example designating her an officer of Radius CA and another new business. However, the court found that Zandra Di Giorgio was not involved in these corporations. It even noted that a warranty deed from Radius CA to Robert Di Giorgio personally used Zandra Di Giorgio’s name as a corporate officer, but that it was not her signature on the deed. Robert Di Giorgio also deposited the funds from this real estate sale in personal accounts that he did not share with Zandra Di Giorgio. The court outlined several examples involving Robert Di Giorgio receiving income or funds and making deposits to personal accounts during the years in question, including investment account transfers and life insurance proceeds from a policy on his first spouse.
Robert Di Giorgio failed to report substantial income from his activities. With his unreported income, Robert Di Giorgio led a lavish lifestyle with a waterside home, a beach house, multiple cars, boats, and extravagant vacations, including one to the Philippines where he met his second spouse, Zandra Di Giorgio. During their marriage, Robert Di Giorgio kept Zandra Di Giorgio in the dark about their true financial situation.
For the tax years in question, Robert Di Giorgio reported deductions in excess of income resulting in zero taxable income, and he filed his returns late. He also failed to file S corporation returns for some of his businesses. The parties agreed that Robert Di Giorgio properly filed an individual return for 2005 and that his correct status for 2006 was surviving spouse. The taxpayers filed a joint return for 2007.
The Internal Revenue Service examined the 2005, 2006, and 2007 tax returns. The IRS noted that Robert Di Giorgio was uncooperative and adversarial during the examination, and the court noted that Zandra Di Giorgio was not involved. The IRS found multiple bank accounts, real estate sales, and mortgages that Robert Di Giorgio had failed to disclose. The IRS also found questionable records that appeared to be falsified. Through a bank deposit analysis using summoned records for the tax years in question, the IRS determined several million dollars in income tax deficiencies, additions to tax, and civil fraud penalties.
The court also provided significant background on Zandra Di Giorgio’s history and involvement with Robert Di Giorgio. Zandra Di Giorgio was born and raised in the Philippines and was 26 years old with two minor children when the couple met online in late 2005. She was a high school graduate who had taken some nursing classes; her only work history was two weeks at a Dunkin Donuts. English was not Zandra Di Giorgio’s first language. In January 2006, Robert Di Giorgio traveled to the Philippines, and they met in person. After a few months, Zandra Di Giorgio and her children moved to Florida, and Zandra and Robert Di Giorgio married later in 2006.
The court outlined a disparaging and domineering relationship once Zandra Di Giorgio moved to Florida, with Zandra Di Giorgio in fear of jeopardizing their relationship and her status in the United States if she did not do what Robert Di Giorgio wanted. Robert Di Giorgio controlled all the family finances. Zandra Di Giorgio had no experience with accounting, finance, mortgages, securities, or United States taxes. She did not participate in the businesses or real estate transactions, and she was not a joint account holder on the bank accounts used by the IRS for the deposit analysis. Zandra Di Giorgio signed a joint tax return for 2007 that she had no role in preparing, and she was only provided with the signature page when she signed. Zandra Di Giorgio had never previously seen a United States tax return.
Zandra Di Giorgio was not aware of her husband’s financial problems when she signed the 2007 joint return. At that time, she viewed him as financially successful, with the means for travel and a good lifestyle. After the years in issue, Robert Di Giorgio’s financial problems became known as they lost a home in foreclosure, and he was eventually sued by the U.S. Securities and Exchange Commission. It was only then that Zandra Di Giorgio became aware that he had named her as an officer of Radius CA and another new entity to avoid government scrutiny. The court further noted that, by the time of trial in this case, the Di Giorgios were separated and involved in a protracted divorce proceeding.
Tax court decision
The tax court consolidated cases involving the spouses, with Robert Di Giorgio requesting a redetermination of deficiencies for 2005, and both spouses requesting a redetermination for 2006 and 2007. Zandra Di Giorgio also raised innocent spouse relief for 2006 and 2007, the years involving her. All parties had agreed by the time of trial that Zandra Di Giorgio had no liability for 2006.
The court first addressed the primary issues in the case, including failing to file returns, underreporting income, filing inadequate records, providing implausible or inconsistent explanations, failing to cooperate with tax authorities, concealing income, engaging in illegal activities, and filing false tax returns. In all these contexts, the tax court found that Robert Di Giorgio was not credible and held in favor of the IRS. The court further found that several of these issues established strong evidence of fraudulent intent, and the court held that the IRS had established by clear and convincing evidence that the § 6663 civil fraud penalty was applicable to Robert Di Giorgio’s underpayments of income tax.
The tax court then turned to Zandra Di Giorgio’s innocent spouse claim for 2007. The IRS conceded that Zandra Di Giorgio was entitled to relief under Internal Revenue Code § 6015(f) (equitable relief) because she lacked sophistication to have reason to know of the understated income. The IRS also acknowledged it would be an undue hardship to deny her relief, and denying her relief would be inequitable under the circumstances. However, Robert Di Giorgio opposed the innocent spouse relief, so it was addressed by the court.
The tax court first noted the general rule that taxpayers filing a joint federal income tax return are jointly and severally liable for the entire tax due for that year under IRC § 6013. However, a spouse who files a joint return may seek relief from joint and several liability under § 6015. Section 6015(f) equitable relief, conceded by the IRS here, is available on equitable grounds when relief is not available under IRC § 6015(b) or (c). The court focused on § 6015(b)(1) relief, which is available if all of the following requirements are satisfied:
(A) a joint return was filed for the taxable year;
(B) there was an understatement of tax attributable to an erroneous item of the nonrequesting spouse;
(C) at the time of signing the return, the requesting spouse did not know and did not have reason to know of the understatement;
(D) taking into account all the facts and circumstances, it is inequitable to hold the requesting spouse liable for the deficiency in tax attributable to the understatement; and
(E) the requesting spouse sought relief within two years of the first collection activity relating to the liability.
The court noted a joint return was clearly filed with an understatement attributable to erroneous items of Robert Di Giorgio, and the request was timely because the IRS had not yet commenced its collection activity. So, the decision focused on the knowledge and inequity requirements of § 6015(b)(1).
To meet the knowledge requirement, Zandra Di Giorgio had to lack actual or constructive knowledge of the understatements when she signed the joint return. For this requirement, actual knowledge of omitted income means knowledge of the amount was received, and actual knowledge of erroneous deductions means knowledge of the relevant facts, such as knowledge that an expenditure was not actually incurred. The tax court noted Zandra Di Giorgio did not have access to bank accounts used in the deposits analysis, and there was no evidence she knew about the unreported income. Based on these facts, the court summarily found that Zandra Di Giorgio did not have actual knowledge of the unreported income and erroneous deductions.
The court did a more in-depth analysis regarding whether Zandra Di Giorgio had constructive knowledge of the understatements based on a reasonably prudent taxpayer standard. The court considered the following factors in determining whether Zandra Di Giorgio was reasonably prudent:
(1) the requesting spouse’s level of education;
(2) the requesting spouse’s involvement in the family’s business and financial affairs;
(3) the presence of expenditures that appear lavish or unusual when compared to the family’s past standard of living; and
(4) the nonrequesting spouse’s evasiveness and deceit about the family’s finances.
The court found that all these factors weighed in favor of granting innocent spouse relief to Zandra Di Giorgio. She had limited education, English was not her first language, and she had no business or accounting background. Her involvement in the family business and financial affairs was limited, and she did not work in the businesses. The expenditures that Zandra Di Giorgio experienced in 2007 were not lavish or unusual compared with their prior spending. Robert Di Giorgio was clearly evasive and deceptive with his income and legal issues, and she was not aware of them. Based on these factors, the court concluded that Zandra Di Giorgio could not be expected to know that the tax liability stated on the return was erroneous or that further investigation was warranted.
Finally, the tax court addressed the inequity requirement in § 6015(b)(1)(D), relying on a balancing analysis of the nonexclusive factors from Revenue Procedure 2013-34:
(a) marital status;
(b) whether the requesting spouse will suffer economic hardship absent relief;
(c) whether the requesting spouse had actual or constructive knowledge of the understatement;
(d) whether either spouse had a legal obligation to pay the liability;
(e) whether the requesting spouse significantly benefited from the understatement;
(f) whether the requesting spouse has made a good faith effort to comply with income tax laws in years following the year of the understatement; and
(g) whether the requesting spouse was in poor physical or mental health when the joint return was filed.
The court found that the Di Giorgios’ separation and pending divorce favored relief. At the time of trial, Zandra Di Giorgio’s annualized monthly income was projected to fall well below the federal poverty level, and she had limited assets and significant liabilities. So, the tax court found that paying any part of the tax liability would cause Zandra Di Giorgio significant hardship, favoring relief. Based on its prior analysis, the court found that Zandra Di Giorgio did not have actual or constructive knowledge of the understatements, favoring relief. The court also found the other factors to be neutral. Based on this overall analysis, the court held that it would be inequitable to deny Zandra Di Giorgio innocent spouse relief.
After finding that Zandra Di Giorgio met both the knowledge and inequity requirements of § 6015(b), the court held that she was entitled to innocent spouse relief for 2007.
Di Giorgio v. Commissioner of Internal Revenue outlines key considerations for innocent spouse relief in the context of a significant underpayment and fraud penalty case. The opinion demonstrates the detailed technical and factual analysis needed to obtain innocent spouse relief. Notably, the IRS had conceded some innocent spouse relief prior to trial in this case, so the case is also a reminder that an innocent spouse challenge can come from the other spouse.
1 T.C. Memo. 2023-44 (2023).