Dobson v. Dobson, 159 SW3d 335 (Ky.App., 2004)

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Dobson v. Dobson, 159 SW3d 335 (Ky.App., 2004)
Spouse granted innocent spouse relief by the IRS is
not entitled to res judicata and trial court assignment
of tax deficiency 40% to innocent spouse was upheld.
Tax audit has uncovered a tax deficiency, but trial court
reasoned that the parties benefited from the lower tax burden
and innocent spouse was later required to pay the share of
taxes for which she would have been responsible had the
deductions not been disallowed.

Jerry was a shareholder in Cardinal Chemical Co. with his brother. The corporate tax returns were audited by the IRS from 1991 through 1999, and numerous claimed deductions were disallowed. The IRS granted Roberta innocent spouse relief under 26 U.S.C. 6015. The divorce court ordered Roberta to pay 40% of the tax deficiency attributable to the business, amounting to $190,748.82. Roberta was unaware of the audits, and it is undisputed that her name was forged on the P.O.A. allowing Jerry's accountant to handle the audits. Roberta testified she had no knowledge of the disallowed deductions on the corporate return, nor any knowledge of the audit, and no involvement in the running of the corporation or the filing of the tax returns.

The trial court originally assigned the tax deficiency 50/50, but ultimately amended this to 60/40 (40% to Roberta).

Roberta appealed to the Court of Appeals, which affirmed, holding the IRS determination of innocent spouse is not entitled to res judicata because in involves only an administrative process rather than an adjudication and the only repercussion flowing there from is which party the IRS pursues for payment, citing Ravetti v. U.S., 37 F3d 1393. The Court reasons that the lower tax burden as a result of the deductions benefited both she and Jerry by allowing them to "keep more money in their own pocket." Roberta is simply required to pay taxes that she would have been responsible for had Jerry not taken the deductions which were later disallowed.