A Duty Of Consistency

 

I did not expect to see the issue in an innocent spouse context.

Stacey is the ex-husband.

Stanley is the ex-wife.

In 2004 Stacey and Stanley, while married, bought property in Texas.

In 2007 Stacey filed for divorce in Florida. The court bifurcated the proceedings, granting the divorce in 2011 but reserving jurisdiction over the property settlement.

Stacey caught the attention of the IRS. In 2014 the IRS sued to reduce his 1995 to 1997 tax liabilities to judgement. The next year (2015) the IRS issued Notices of Deficiency (NODs or SNODs) to Stanley for her 2000 to 2003 years.

In 2016 Stanley requested innocent spouse relief for the 2000 to 2003 liabilities.

Not surprisingly, there is a form for innocent spouse relief, and that form includes questions about financial information.

Stanley did not include any information on line 20 about the Texas property – or any other assets either.

In 2017 the IRS granted her innocent spouse relief for most of the liabilities from 2000 to 2003.

Meanwhile, the Florida court entered final judgement, giving Stanley one-half interest in the Texas property.

COMMENT: Perhaps this is why Stanley did not include the Texas property on her 8857 filing: she did not consider it hers until a Court said that it was.

Meanwhile, her ex (Stacey) racked up IRS debt over $3.2 million.

The IRS wanted money. In 2025 the Texas property was sold for $750 grand. His half went to the IRS; her half went to escrow until a court could figure out what to do.

Stanley knew what to do: she wanted half of the proceeds. Stacey’s tax problems were his own.

The Court disagreed with her.

Why?

It had to do with her excluding the Texas property from her innocent spouse filing.

The legal concept is called “duty of consistency.” The seminal case was Herrington in 1988. The Herringtons repeatedly entered straddle transactions on the London Metal Exchange. A straddle has two sides, and theirs had an ordinary loss in the first year followed by a capital gain in the second year. The Tax Court determined that these straddles were sham transactions, nixing one of the years when the Herringtons had an ordinary loss. The Herringtons brought suit over the second year, saying that it was unfair to have them pay tax on a capital gain when the other side (the loss year) got wiped out.

The Court was not particularly sympathetic, as one would expect with a tax shelter/sham case. The Court laid out its duty of consistency doctrine:

·       Taxpayer makes an assertion or representation.

·       The government relies on it, and

·       After the statute of limitations expires, the taxpayer wants to redo or recharacterize the earlier representation in such a way to aid the taxpayer and harm the government.

·       If the doctrine applies, the government may continue to act as if the previous representation continues to be true, even if it is not.

Now Stanley was not a shelter or sham case by any stretch, but the Court did see a duty of consistency.

·       Stanley made a representation on Form 8857 by leaving the “tell us about your assets” line blank.

·       The IRS relied on the representation when it evaluated whether Stanley was likely to experience economic hardship if innocent spouse relief was not granted.

·       Stanley was now changing her representation in a way that harmed the government.

Stanley was estopped under duty of consistency. The Court ordered her half of the sales proceeds be used to pay off Stacey’s back taxes.

Our case this time was United States v Stanley, No. 25-10687, U.S. Court of Appeals, 5^th Circuit.