Paul L. Caron

Friday, July 19, 2019

Ex-Wife, Business Partner Denied Refund Beats IRS At Eleventh Circuit

Daily Business Review, Ex-Wife, Business Partner Denied Refund Beats IRS at Eleventh Circuit:

A woman denied a tax refund on $300,000 in income from a family business she paid back to her ex-husband, rather than paying back the federal government directly, has won a ruling from the U.S. Court of Appeals for the Eleventh Circuit in her case against the IRS [Mihelick v. United States, No. 17-14975 (11th Cir. June 29, 20190}.

“Inscribed above the main entrance of the Internal Revenue Service office in Washington, D.C., is a quotation from Supreme Court Justice Oliver Wendell Holmes Jr.: ‘Taxes are what we pay for a civilized society,’ ” Circuit Judge Robin Rosenbaum wrote. “An admirable outlook, yet even Justice Holmes would likely agree that it is uncivilized to impose taxes on citizens for income they did not ultimately receive. But that is precisely the result the government asks us to uphold today.” ...

Rosenbaum cut through layers of tax law and marital property nuances in the 24-page opinion, neatly simplifying a complex dispute.

“Since the two had equally benefited from and contributed to the income at issue, they agreed to split the liability evenly, consistent with Ohio law: Bluso would return $300,000 and Mihelick the other $300,000. So Bluso returned the full $600,000, and Mihelick reimbursed him for half that amount,” Rosembaum said, noting that the company was based in Ohio.

That’s where the tax trouble started.

“Then, under 26 U.S.C. § 1341—which allows a taxpayer who paid taxes on what he erroneously believed to be his income to recoup those unnecessary tax payments—Bluso recovered the taxes he had previously paid on the $300,000,” Rosenbaum said. “But when Mihelick tried to do the same thing for the taxes she had paid on the other since-returned $300,000, the government denied her request, simply because she had paid the money to Bluso instead of returning the money directly herself.”

Rosenbaum said the tax code provides the same relief to both ex-spouses. “Mihelick had just as much of a right to recover the taxes she previously paid on the $300,000 she received and then gave back as did Bluso to recover the taxes he paid on his $300,000 that he returned. So we reverse the district court’s entry of summary judgment for the government and remand for further proceedings consistent with this opinion,” Rosenbaum said. “To reach the contrary conclusion would punish Mihelick for not being her husband and in the process, would create a tax windfall for the government,” Rosenbaum said.

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