History and Hollywood are rife with heartwarming stories illustrating the power of true love. Love, these tales teach us, can conquer all, allowing two people to triumph over seemingly insurmountable adversity with nothing more than the bond forged by their hearts.
Churchill v. Commissioner, T.C. Memo 2011-182, is not one of those stories.
John Churchill married Sharon Schwarz in 2001 “as a matter of convenience.” Seems he needed access to Sharon’s health insurance. In addition to a laundry list of legitimate medical maladies, Churchill was also allergic to paying his taxes; neglecting to pay his IRS bill from 1992 through 2004.
In 2006, the IRS came calling, looking to collect on $250,000 of unpaid debts. Churchill responded by proposing an Offer in Compromise, whereby a taxpayer asks the Commissioner to settle old tax debts for less than its full value on one of three grounds: doubt as to liability, doubt as to collectibility, or promotion of effective tax administration.
Churchill, who earned only $1,612 in 2005, offered the IRS $2,500 — or 1% of the amount due — to settle his entire debt. The IRS countered with an offer of $122,808, which prompted Churchill to suffer his third heart attack, a feat worthy of a place at this table:
The disparity between the two offers was a result of each party’s differing approch towards computing Churchill’s “reasonable collection potential” (RCP). The RCP is computed by estimating the monthly future income of the taxpayer and extrapolating the result out over a period of months. If a taxpayer’s offer is less than the RCP, the IRS is instructed to reject the offer unless the taxpayer can prove he has special circumstances. Churchill used only his income to compute his RCP, while the IRS included Schwarz’ income.
In response,Churchill posed an interesting argument, pleading to the Tax Court that his spouse’s income should be ignored since their marriage was one only of convenience. And yes, I’m serious.
The Tax Court disagreed, noting that California — Churchill’s state of residence — is a community property state, and spouses are generally liable for each other’s debts, even if incurred before the marriage. Because Churchill was married at the time of the offer in compromise, the IRS was right to include Schwarz’ income.
Unfortunately Fortunately for Churchill, the offer in compromise process was too much for his soulmate to handle, and she uncerimoniously left him prior to the start of the trial. As a result, the Tax Court showed Churchill some sympathy, and sent him and the IRS back to compute a revised offer amount in light of his newfound single status.