                                                                                            January 12 2016


                                           DA 15-0353
                                                                                        Case Number: DA 15-0353

              IN THE SUPREME COURT OF THE STATE OF MONTANA
                                           2016 MT 7



IN RE THE MARRIAGE OF:

SHERRI ELAINE ROSE,

               Petitioner and Appellant,

         v.

MICHAEL THOMAS ROSE,

               Respondent and Appellee.


APPEAL FROM:           District Court of the Thirteenth Judicial District,
                       In and For the County of Yellowstone, Cause No. DR 13-0342
                       Honorable Russell C. Fagg, Presiding Judge


COUNSEL OF RECORD:

                For Appellant:

                       Kevin T. Sweeney, Attorney at Law, Billings, Montana

                For Appellee:

                       J. Reuss, Guthals, Hunnes, & Reuss, P.C., Billings, Montana



                                                    Submitted on Briefs: December 9, 2015
                                                               Decided: January 12, 2016


Filed:

                       __________________________________________
                                         Clerk
Justice Beth Baker delivered the Opinion of the Court.

¶1     Sherri Elaine Rose appeals the findings of fact, conclusions of law, and decree of

dissolution of the Thirteenth Judicial District Court, Yellowstone County, dissolving her

marriage to Michael Thomas Rose. We restate the issue on appeal as follows:

      Whether the District Court erred in allocating delinquent tax liability equally
between the parties after taxing authorities had determined that Sherri was an “innocent
spouse” for purposes of joint tax liability.

¶2     We affirm.

                  PROCEDURAL AND FACTUAL BACKGROUND

¶3     Sherri and Michael married in 1994 and have three children.           They resided

together in Billings, Montana, for the majority of their marriage before separating in late

2012. Sherri filed a petition for dissolution in March 2013 and, on April 24, 2014, the

District Court held a bench trial.

¶4     During their marriage, Michael worked in medical equipment sales and Sherri was

primarily a homemaker. Following their separation, Michael moved to Florida to take a

job as a surgical supplies sales representative trainer. Sherri returned to work as a

cosmetologist, a profession she had held prior to the marriage.

¶5     In 2005, Sherri and Michael bought a house at 2407 Teton Avenue, Billings.

Sherri and Michael bought the Teton property as an investment; they planned to improve

the house and “flip” it. Over the course of several years, they invested approximately one

hundred thousand dollars into improving the Teton property. They were unable to sell it

due to the downturn in the housing market following the 2008 financial crisis. Sherri and

Michael also owned a recreational cabin in Red Lodge.
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¶6      In 2006, Sherri and Michael began to accrue both federal and state income tax

liability. By 2012, they had accumulated over $70,000 in delinquent tax liability to the

Internal Revenue Service (IRS) and $20,000 in delinquent tax liability to the Montana

Department of Revenue (Department).           As a consequence, state and federal taxing

authorities placed tax liens on both of the Roses’ real properties.

¶7      At the dissolution proceeding, Michael testified that their tax liability accrued

because he and Sherri decided to apply the income intended to pay their taxes to

improving the Teton property. Their plan, he testified, was to pay the tax liability once

the Teton property was sold. He further testified that income that should have been put

toward the tax liability also was spent on “vacations and what have you.” Michael

proposed during the dissolution proceeding that the tax liability be considered marital

debt and that both the Teton property and the Red Lodge property be sold to pay off the

tax liability.

¶8      Sherri testified that she was aware that the tax liability was incurred during the

marriage and acknowledged that she and the family benefitted from the income that

created the tax liability. Prior to the dissolution proceeding, however, she sought and

obtained a determination from both the IRS and the Department that she was an

“innocent spouse.” The IRS and the Department therefore concluded that Sherri was not

liable to the agencies for any of the delinquent tax liability. As a result of the innocent

spouse relief, Sherri testified that she received refunds from the IRS and the Department

totaling nearly $11,000. Sherri proposed during the dissolution proceeding that the tax


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liability not be considered marital debt due to her status as an “innocent spouse” and that

she be awarded the Teton property.

¶9     At the conclusion of the proceeding, the District Court orally pronounced that it

intended to order that both the Teton property and the Red Lodge property be sold, in

part, to pay the tax liability:

       It’s my conclusion that the only reason the tax liability occurred is because
       [Sherri and Michael] put the money into either living expenses or into the
       Teton Avenue home and it’s—even though it’s—the IRS decided that they
       weren’t going to go after Ms. Rose, I think it is a marital debt and should be
       paid for out of the proceeds.

In its written findings of fact, conclusions of law, and decree of dissolution, the court

ordered that the Teton and Red Lodge properties be sold and that the proceeds be put

towards paying off the tax liability. The court found, “Although the IRS has decided that

were [sic] weren’t going to pursue the tax liability against Sherri, the Court finds that the

tax liabilities are joint marital obligations because the parties put the money into living

expenses or the Teton Avenue home.” Sherri appeals the court’s finding and conclusion

regarding the tax liability.

                                  STANDARD OF REVIEW

¶10    We review a district court’s findings of fact pertaining to marital property division

to determine if they are clearly erroneous. In re Marriage of Crowley, 2014 MT 42, ¶ 24,

374 Mont. 48, 318 P.3d 1031. A finding is clearly erroneous if it is not supported by

substantial evidence, if the court misapprehended the effect of the evidence, or if our

review of the record convinces us that a mistake has been made. Crowley, ¶ 24. We

review a district court’s conclusions of law to determine if they are correct. In re
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Marriage of Bartsch, 2007 MT 136, ¶ 9, 337 Mont. 386, 162 P.3d 72 (hereafter Bartsch

II). Absent clearly erroneous findings, we will affirm a district court’s property division

unless we identify an abuse of discretion. Bartsch II, ¶ 9.

                                      DISCUSSION

¶11 Whether the District Court erred in allocating delinquent tax liability equally
between the parties after taxing authorities had determined that Sherri was an “innocent
spouse” for purposes of joint tax liability.

¶12    On appeal, Sherri contends that because the District Court did not adequately

consider the IRS’s and the Department’s innocent spouse determinations, it erred in

apportioning the delinquent tax liability equally between the parties. She asserts that the

District Court “wholly misunderstood or misapplied” the administrative rulings that she

was an “innocent spouse” and not responsible for the tax liability. She argues that in

order to obtain innocent spouse status, she had to prove that she did not know and had no

reason to know of the non-payment and that it would be inequitable to hold her liable for

the debt. Sherri maintains that, because she could not have been found to be an “innocent

spouse” unless she did not receive a material benefit from the understatement of tax, the

District Court improperly disregarded the taxing authorities’ rulings in reaching a

contrary finding.

¶13    In response, Michael argues that the administrative rulings have no preclusive

effect in the dissolution proceeding and that the District Court did not err in concluding

that the tax liability should be treated as marital debt based on substantial evidence that

the parties put the money into joint living expenses or into the Teton property.


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¶14    Sherri’s reply, on one hand, appears to acknowledge that the administrative

determinations do not have preclusive effect. On the other hand, she maintains that she

could not have been granted innocent spouse status unless she did not materially benefit

from the untaxed income. Michael, she points out, did not appeal from the administrative

determinations. For the District Court to reach a contrary conclusion, it would have to

point to specific evidence in the record and explain why equity required a result different

from that reached by the taxing authorities. In this regard, Sherri argues that the District

Court’s findings of fact are inadequate “in determining what evidence the court used to

order relief ignoring both taxing authorities.”

¶15    Innocent spouse relief from joint tax liability is an administrative remedy provided

for by both Montana and federal statute. Under Montana statute, “A taxpayer who has

obtained relief from joint and several liability under section 6015 of the Internal Revenue

Code, 26 U.S.C. 6015, may apply to the department for relief from joint and several

liability of the tax imposed by this chapter.” Section 15-30-2646(1), MCA. Under

federal statute, “an individual who has made a joint return may elect to seek relief” from

joint tax liability if she meets certain requirements. 26 U.S.C. § 6015(a)(1). The relevant

requirements for such relief include:

       (A) a joint return has been made for a taxable year;

       (B) on such return there is an understatement of tax attributable to
       erroneous items of one individual filing the joint return;

       (C) the other individual filing the joint return establishes that in signing
       the return he or she did not know, and had no reason to know, that there
       was such an understatement;

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       (D) taking into account all the facts and circumstances, it is inequitable to
       hold the other individual liable for the deficiency in tax for such taxable
       year attributable to such understatement . . .

26 U.S.C. § 6015(b)(1).      In determining whether it is inequitable to hold a spouse

requesting innocent spouse relief liable for an understatement of tax, “[o]ne relevant

factor . . . is whether the requesting spouse significantly benefited, directly or indirectly,

from the understatement.      A significant benefit is any benefit in excess of normal

support.”   26 C.F.R. § 1.6015-2(d).      The record before the District Court does not

substantiate any factual determinations made either by the IRS or by the Department in

awarding Sherri innocent spouse relief.

¶16    To address Sherri’s arguments fully, we first clarify that the doctrines of claim and

issue preclusion do not apply here to foreclose the District Court’s determination that the

tax liability is a marital debt. First, we have held that claim and issue preclusion may

apply to an administrative decision that has been “upheld on judicial review.” Rooney v.

City of Cut Bank, 2012 MT 149, ¶ 17, 365 Mont. 375, 286 P.3d 241 (citing Parini v.

Missoula Cnty. High Sch. Dist., 284 Mont. 14, 23, 944 P.2d 199, 204 (1997)). See also

Dobson v. Dobson, 159 S.W.3d 335, 337 (Ky. Ct. App. 2004) (concluding that the “IRS’s

determination for innocent spouse relief is not entitled to preemption or res judicata

because it involves only an administrative process rather than an adjudication”). The

IRS’s and the Department’s administrative decisions that Sherri is an “innocent spouse”

were not subjected to judicial review.

¶17    In addition, the administrative proceedings do not satisfy all elements that must be

met in order to bar re-litigation of an issue. Among those elements is that the issues
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decided in the prior adjudication must be identical to the issues raised in the current

litigation. Rooney, ¶ 17; Planned Parenthood v. State, 2015 MT 31, ¶ 13, 378 Mont. 151,

342 P.3d 684 (concluding that “[t]he identity of issues is the most important element of

issue preclusion”). An innocent spouse determination involves considerations different

from a district court’s division of a marital estate.          Under an innocent spouse

determination, “[t]he IRS’s only concern is the identity of the spouse to whom it will look

for payment of the delinquent taxes . . . .” In re Marriage of Hargrave, 36 Cal. App. 4th

1313, 1320 (Cal. App. 2d Dist. 1995) (citations omitted). In other words, the IRS is

concerned only with which party will be responsible for payment to the government of

the delinquent taxes.

¶18    In contrast, a district court’s concern in a dissolution proceeding is the equitable

apportionment of the marital estate. Section 40-4-202(1), MCA (stating in pertinent part

that the court must “equitably apportion between the parties the property and assets . . .”).

In equitably apportioning the marital estate, the court generally must determine the

marital estate’s net worth. In re Marriage of Lewton, 2012 MT 114, ¶ 15, 365 Mont. 152,

281 P.3d 181. This determination necessarily requires the court to consider marital debt.

Crowley, ¶ 31 (citing In re Marriage of Rudolf, 2007 MT 178, ¶ 23, 338 Mont. 226, 164

P.3d 907 (concluding that by not considering the parties’ debt, “the true net worth of the

marital estate was not accurately determined” and therefore the issue of equitable

apportionment could not be resolved)). We have defined “marital debt” as “all debt

incurred by either party during the marriage.” In re Marriage of Scoffield, 258 Mont.


                                          8
337, 342, 852 P.2d 664, 667 (1993). We have not examined previously how an innocent

spouse determination may affect the equitable apportionment of marital debt.

¶19    Section 40-4-202(1), MCA, requires the court to “equitably apportion between the

parties the property and assets belonging to either or both, however and whenever

acquired and whether the title to the property and assets is in the name of the husband or

wife or both.” The statute therefore requires the court to apportion marital property

equitably “regardless of how or when it was acquired.” In re Marriage of Funk, 2012

MT 14, ¶ 13, 363 Mont. 352, 270 P.3d 39. Because the court must consider marital debt

in dividing the marital estate under § 40-4-202(1), MCA, it follows that the court also

apportions marital debt equitably, and may do so regardless of which party is responsible

for it. Crowley, ¶¶ 28, 34; Scoffield, 258 Mont. at 342, 852 P.2d at 667 (concluding that

“the medical debts incurred by [Wife] on behalf of her children during the course of the

parties’ marriage are marital debts”).

¶20    Accordingly, we conclude that so long as the delinquent tax debt was incurred

during the marriage, an innocent spouse determination by the IRS or the Department does

not preclude a district court from equitably apportioning the delinquent tax debt to an

“innocent spouse” under § 40-4-202(1), MCA.          Other jurisdictions agree with this

conclusion. Dobson, 159 S.W.3d at 337 (concluding that the trial court did not abuse its

discretion in apportioning delinquent tax liability to an “innocent spouse” in part because

the “[innocent spouse] did not present evidence that the money the family had as a result

of the underpayment of taxes was not spent on family expenses”); In re Marriage of

Hargrave, 36 Cal. App. 4th at 1320-21 (upholding the trial court’s apportionment of
                                         9
delinquent tax liability and concluding that an innocent spouse determination does not

preempt state law efforts to impose liability for federal income taxes in a dissolution

proceeding).

¶21    Contrary to Sherri’s assertions, the District Court did not find that Sherri

“substantially benefitted” from the understatement; that is, the court did not find that

Sherri received “any benefit in excess of normal support.” 26 C.F.R. § 1.6015-2(d). The

court simply found that “the tax liabilities are joint marital obligations because the parties

put the money into living expenses or the Teton Avenue home.” The court “recognize[d],

and attempt[ed] to compensate for,” the fact that, as Sherri testified, the income that

created the tax liability contributed to the marriage. Bartsch II, ¶ 20. As such, this

finding is in line with the court’s “broad discretion to apportion the marital estate in a

manner equitable to each party under the circumstances.” Bartsch II, ¶ 9 (citations

omitted). The District Court therefore did not abuse its discretion in apportioning the

delinquent tax liability equally between the parties.

¶22    We are not persuaded by Sherri’s contention that the District Court’s departure

from the taxing authorities’ findings was not explained sufficiently to withstand review

for clear error. Because “[f]indings of fact inform the court of appeals of the basis of the

judgment,” they must be “sufficiently comprehensive and pertinent to the issues to

provide a basis for decision, and the evidence presented must support them.” Bartsch II,

¶ 33 (citation omitted). Therefore, in order for a district court’s findings to be adequate,

they “must be complete at least to the point that this Court need not succumb to


                                          10
speculation when assessing the conscientiousness or reasonableness of the district court’s

judgment.” Bartsch II, ¶ 33 (citation omitted).

¶23    Here, the District Court was presented with very little evidence regarding Sherri’s

status as an “innocent spouse.” Sherri presented no documentation from the IRS or the

Department pertaining to the innocent spouse determination.1 Sherri did not cite the trial

court to the statutes and regulations that she has identified in her briefing to this Court.

Furthermore, Sherri’s own proposed findings of fact and conclusions of law do not

address the innocent spouse determination. Although Sherri did testify at the dissolution

proceeding that both the IRS and the Department had determined her to be an “innocent

spouse,” there was very little testimony regarding what that determination entails.

During his cross-examination of Michael, Sherri’s counsel stated that there “are legal

definitions” regarding an innocent spouse determination. Counsel then stated:

       In order for the taxman to call someone an innocent spouse and use that
       special and very limited exception. There’s very specific rules. I know you
       may not know them. The Court may well know them, and they’re certainly
       in the law, and I recognize you may not know the tax law, but I didn’t know
       whether or not you knew that, but I take it from your answer that you did
       not, correct?

The extent of counsel’s discussion of these “very specific rules” during the proceeding

was to state that “at least by my understanding of these rules, is that she didn’t know of

any of [the tax liability] and that she didn’t benefit from any of [the income that created

1
  In her reply brief on appeal, Sherri requests that we take judicial notice of documentation from
the IRS and the Department regarding her innocent spouse relief, which she has appended to her
reply brief. “We generally do not take judicial notice of evidence not presented to the district
court.” Cruson v. Missoula Elec. Coop., Inc., 2015 MT 309, ¶ 30, 381 Mont. 304, 359 P.3d 98.
This rule is particularly apropos here, where we are reviewing whether the District Court’s
findings of fact are adequate in light of the record before it.
                                               11
the tax liability].” On cross-examination, however, Sherri testified that she was aware

that the couple incurred income tax debt during the marriage and that “I did benefit [from

the income that created that debt], but I won [innocent spouse relief].”

¶24    Based on this limited evidence, the District Court found that even though the IRS

was not going to pursue the tax liability against Sherri, “the tax liabilities are joint marital

obligations because the parties put the money into living expenses or the Teton Avenue

home.” The court’s finding is “sufficiently comprehensive and pertinent to the issues to

provide a basis for decision” in light of the limited evidence presented by Sherri

regarding her innocent spouse relief. Bartsch II, ¶ 33. Moreover, Sherri’s own testimony

supports the court’s finding that the delinquent tax liability was a joint marital obligation.

Although the court’s finding is brief, it does not require us to engage in speculation in

“assessing the conscientiousness or reasonableness of the district court’s judgment”

because it provides a “basis upon which to review whether” the District Court equitably

apportioned the marital estate, as required by § 40-4-202(1), MCA. Bartsch II, ¶¶ 33-34.

¶25    There is substantial evidence in the record to support the District Court’s finding

that Michael’s income that created the tax liability was used for marital purposes. The

court considered Sherri’s status as an “innocent spouse” and was within its discretion to

conclude that this determination did not affect equitable apportionment of the delinquent

tax liability. We decline to reverse the District Court’s findings as inadequate.

                                      CONCLUSION

¶26    The District Court was not bound by the taxing authorities’ determinations that

they would not collect delinquent taxes from Sherri. The court did not err in considering
                                           12
the tax liability as marital debt or by including that debt in apportioning the marital estate.

Its judgment is affirmed.



                                                   /S/ BETH BAKER

We concur:

/S/ MIKE McGRATH
/S/ PATRICIA COTTER
/S/ LAURIE McKINNON
/S/ MICHAEL E WHEAT
/S/ JAMES JEREMIAH SHEA
/S/ JIM RICE




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