By: Yvonne Juris
A Wisconsin military veteran should not get relief from tax liability on income his ex-wife embezzled, since he must have known of the ill-gotten funds after she was arrested, convicted and jailed, the government told the Seventh Circuit.
Rick E. Jacobsen is seeking so-called innocent spouse relief for taxes, interest and penalties owed on the embezzled income for 2011. His claim that he lacked actual knowledge of crimes committed by his ex-wife, Tina Lemmens, does not hold water since Jacobsen had access to bank statements showing the embezzled money, the U.S. said. The actual knowledge legal standard is used to determine whether a person must have been aware of a specific act.
Lemmens, an accountant, already had been convicted in November 2011 and incarcerated for embezzling close to $500,000 from her employer before the pair, who were still married at the time, filed their joint income tax return for 2011.
Jacobsen’s contention that it would have been “fruitless” to look at the bank statements because the ill-gotten funds had been disguised as legitimate should be rejected, the U.S. said, since Jacobsen had access to all related tax forms and bank statements and could have tracked down which funds were embezzled.
His additional argument that he did not know the “precise amount” of embezzled income was likewise meritless, since he could have also determined that with relevant bank and tax statements, the U.S. said.
“A man who knows that his wife has been convicted of embezzling large amounts, and who has access to bank statements showing the deposits of the embezzled income, cannot avoid the conclusion that he ‘knew or had reason to know’ about the embezzled income,” the U.S. said.
Jacobsen, a factory worker who also ran a joint home inspection business with Lemmens, had argued on appeal from the U.S. Tax Court that he had no background in accounting or finance and that he wouldn’t have been able to tell which funds were embezzled and which were legitimate. Since he lacked the financial savvy to use joint bank statements to determine what funds were ill-gotten, he did not posses actual knowledge of the embezzled money, which entitled him to spousal relief for 2011 under Internal Revenue Code Section 6015(f) , Jacobsen argued.
Jacobsen, who has post-traumatic stress disorder and experienced a mental breakdown following Lemmens’ arrest and their divorce, claimed he was unaware of her scheme until her arrest in June 2011, according to court documents. While his business income went into their joint account, his wages as a machine operator went into a separate personal checking account. He never reviewed bank statements and left it up to his wife to manage their finances, he said.
Jacobsen requested spousal relief for tax years 2009 through 2011 but the IRS denied the request in 2015, according to court documents. He sued in Tax Court later that year. The court found he was exempt from taxes for 2009 because the debt owed for that year had been discharged in bankruptcy, according to court documents. The court also found he was eligible for innocent spouse relief for 2010, but ruled that he did not meet the threshold for spousal relief for 2011 since he had actual knowledge of the stolen funds by that time.
In arriving at a decision for the 2011 year, the Tax Court found that out of the seven factors that determine eligibility for relief, four were in his favor, including compliance with income tax laws in later years, a divorce from the spouse who embezzled and poor mental and physical health. The other two — economic hardship and legal obligation — were deemed neutral. However, the Tax Court found that his knowledge of embezzled income that should have been reported on the 2011 return outweighed the other factors.
Carlton M. Smith of the Federal Tax Clinic at Harvard Law School, who represents Jacobsen, told Law360 that the lower court put too much weight on the actual knowledge factor in light of the fact that Jacobsen qualified for four of the seven factors and that the original purpose of spousal relief was to offer protection against a spouse who fails to report embezzled funds.
“The taxpayer concedes that the court is not bound to consider all factors as having the same weight, and that even as many as two or three positive factors can be outweighed by one negative factor,” Smith said. “However, the taxpayer argues that four positive factors can’t be outweighed by one negative factor when there are only seven factors.”
The U.S. Department of Justice declined to comment.
Jacobsen is represented by T. Keith Fogg and Carlton M. Smith of the Federal Tax Clinic at the Legal Services Center of Harvard Law School.
The IRS is represented by Bethany B. Hauser of the U.S. Department of Justice, Tax Division.
The case is Rick E. Jacobsen v. Commissioner of Internal Revenue, case number 18-3371, in the U.S. Court of Appeals for the Seventh Circuit.
–Additional reporting by Vidya Kauri. Editing by Robert Rudinger.
Read more at: https://www.law360.com/articles/1174833/…