The Federal Tax Lien and the Homestead Exemption

The case of In re Selander, No. 16-43505 (Bankr. W.D. Wash. Oct. 19, 2018) pits the bankruptcy trustee against the IRS. The trustee attempts to use a provision in Chapter 7 to take from property secured by the federal tax lien in order to pay his fees and other administrative costs. The IRS argues that when its lien attaches to property claimed by the debtor as a homestead, the provision allowing the trustee to use an asset secured by the federal tax lien does not apply. The case allows for an explanation of B.C. 724(b), in which Congress allows the use of money that would otherwise come to the government because of its secured position to pay unsecured priority creditors, and the interplay between the federal tax lien and the homestead exemption. The bankruptcy court here gets the law right and does a good job of explaining it.

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Mr. Selander filed a Chapter 7 petition on August 22, 2016. The Umpqua Bank filed a claim for over $5 million and the IRS filed one for over $700,000. The bank had liens against the debtor that predated the IRS’s federal tax lien. The debtor owned a ½ interest as a tenant in common of a home in the Seattle area. Other assets may have existed, but the house occupied the attention of the court.

The trustee of the bankruptcy estate found a buyer for the house for a gross sales price of $825,000. After paying off the mortgage, closing costs and the other owner, about $200,000 came to the bankruptcy estate. Washington is one of the states that allows debtors to choose between the federal bankruptcy exemptions in B.C. 522, or its own state-level exemptions, including a pretty generous homestead exemption of $125,000. The debtor elected to receive that amount as his homestead exemption.

The homestead exemption seeks to allow debtors something to get going after bankruptcy as part of their fresh start. While some states provide generous homestead exemptions and other states provide very little, the exemption in all states comes to the debtor subject to the federal tax lien. So, debtors owing federal taxes do not get the benefit of the homestead exemption that the state might intend since the state homestead law lacks the ability to pass property to the debtor in a way that overrides federal law. The operation of the federal tax lien vis-à-vis the homestead exemption has frustrated many debtors and provides one of many reasons to pay down federal tax debt prior to bankruptcy rather than to pay ordinary creditors.

The trustee ordinarily cannot use the homestead amount to pay his fees or to pay the claims of creditors of the estate. B.C. 522 carves the homestead amount out of the estate and gives it to the debtor as property exempt from the estate.

B.C. 724(b) allows the trustee to take an amount that would ordinarily go to the IRS because of the federal tax lien and use that amount to pay unsecured creditors of the bankruptcy estate entitled to priority status. The trustee is one of the creditors entitled to priority status. In the B.C. 724 analysis of Mr. Selander’s bankruptcy estate, nothing would go to the IRS because of the higher priority lien of Umpqua. That higher priority lien and the value of the assets in the estate prevents the IRS from having a secured claim against the estate. Without a secured claim held by the IRS, the trustee could not use B.C. 724(b) to carve out money to pay priority claimants.

Even though the IRS could not take from the estate, it stood to receive the homestead amount. The trustee argued that the payment of the homestead amount should allow the B.C. 724(b) carve out to occur even though the basis for the payment occurred from money not a part of the bankruptcy estate.

The court rejects the trustee’s argument, citing to relevant case law and finding:

There is no conflict between § 724(b) and § 522(k) because those two sections speak to different kinds of property. Section 724(b) involves property of the estate where the IRS holds a valid lien. In this scenario, Congress has made the decision that the bankruptcy trustee may subordinate the secured tax claim to pay administrative expenses. What § 724(b) does not address is the property a debtor removes from the estate by exemption, but still subject to a continuing lien of the IRS. This property is not covered by the plain language of § 724(b), which provides that it only applies to property ‘in which the estate has an interest….’ Exemptions remove property, or a certain value of that property, from the estate. Alsberg v. Robertson (In re Alsberg), 68 F.3d 312, 315 (9th Cir. 1995). Debtor’s Homestead Exemption removed the value of $125,000 from the estate but such exemption was powerless to eliminate the interest of the IRS in those funds claimed with the exemption.

The court noted that in the absence of the federal tax lien, the trustee’s attempt here would be a naked effort to take exempt funds to pay his fees, and that B.C. 522(k) prohibits that action. The bankruptcy court found that by claiming the homestead exemption, the debtor removed the property from both the estate and the application of B.C. 724(b).   It further found that the IRS need not bring a separate action to seize the money in the debtor’s bank account, but that the trustee should remit the $125,000 to the IRS. This victory by the IRS may benefit the debtor if the taxes were excepted from discharge. If the taxes would have been discharged by the bankruptcy, the debtor loses as well as the trustee since the debtor’s homestead exemption turns out to provide him with no benefit. Prior to filing bankruptcy, debtors should check the impact of a federal tax lien if they hope that bankruptcy will allow them to take certain assets with them. Mr. Selander’s case leaves him with a bankruptcy discharge but no major asset to take with him as he leaves bankruptcy.

 

Should the Tax Court Sua Sponte Continue a Case When Taxpayer Would Benefit from Representation

I saw the headnote of Ford v. Commissioner, 122 AFTR 2d xxxx, No. 18-1524 (6th Cir. 2018) and decided it was a case about hobby loss. It is; however, fellow blogger Peter Reilly pointed out to me that in the Sixth Circuit, Ms. Ford also raised as a ground for overturning the opinion the failure of the Tax Court to sua sponte continue her case when it was called at the Nashville calendar call of the Tax Court. You can find Peter’s post on the case here.

The idea that the failure to grant a continuance that the taxpayer never requested could form the basis for a successful appeal seemed a bit far-fetched to me. I guess it did to the Sixth Circuit as well since it found against Ms. Ford on that issue. Despite the difficult stretch to get to where Ms. Ford wanted the Sixth Circuit to go, the facts of the case regarding the need for some help from the court are worth discussing as a lesson for future litigants.

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Ms. Ford ran a restaurant and venue for emerging music artists in Nashville. From reading the opinion, I came away with the impression that the business had helped to launch the careers of some artists who had performed there. I also came away with the impression that the business had not produced a profit for many years and only continued to exist because of Ms. Ford’s generosity. The IRS audited her return and disallowed losses generated by the business, arguing that Ms. Ford did not engage in the business for profit but rather was motivated by something other than profit. The IRS sent Ms. Ford a notice of deficiency and she petitioned the Tax Court.

At calendar call, she appeared with her return preparer who is an enrolled agent. Enrolled agents can study and take the Tax Court test to practice before the court. I have written about the test before. Many have passed the test but the vast majority have not taken the test because Tax Court representation is not something they want to do. Most of the enrolled agents I have encountered are very knowledgeable about taxes and very diligent in representing their clients. I regularly recommend that individuals seeking the services of our clinic who do not qualify for our services seek advice from an enrolled agent in their neighborhood because I think the test to become an enrolled agent and the ongoing training they pursue generally makes them a reasonably priced, well-trained option for the types of individuals who my clinic must turn away.

Because representing someone in Tax Court falls pretty far outside the scope of what most enrolled agents do for their clients, going to the Tax Court with the client as happened in Ms. Ford’s case puts the EA, the client and the court in an awkward position. The EA cannot speak to the court on behalf of the client unless the EA has passed the Tax Court’s admission test. The client is left having to speak to the court and often the EA is not in a position to provide much, if any, guidance on the procedural aspects of the case even though they may know the substantive aspects of the case very well. The court can speak to the EA and provide direction. Judge Foley did that in this case but ultimately the taxpayer must be the one to talk to the court and the one to decide what to do.

Ms. Ford did not know how to best present her case and the EA she brought with her either did not know how to do it through her or did not know how to do it either. As a result she did a poor job of presenting her case. It’s hard to say whether she might have won with a good lawyer guiding the introduction of evidence. It would be expensive for her to hire a good lawyer to represent her but maybe not as expensive as losing the case. The EA may have advised her to obtain a lawyer and may have suggested lawyers she could use. The case does not get into those facts.

The case does bring out another facet of the dynamic at calendar call, which is that at almost every Tax Court calendar call, there are tax lawyers there as volunteers willing to meet with unrepresented taxpayers and provide advice. If you want to read more about the calendar call program, here is an article about a successful representation of someone encountered at calendar call. In Ms. Ford’s case, she was fortunate to meet with an excellent tax lawyer, Mary Gillum, who runs the tax clinic at Legal Aid Society of Middle Tennessee & the Cumberlands. Mary has been running the tax clinic there for almost two decades and is a fierce litigator, but Mary is hamstrung in helping someone like Ms. Ford. First, she is hamstrung because she has only a short time to size up the situation. Second, she is hamstrung because Ms. Ford is over the income guidelines of IRC 7526, which makes it difficult for Mary to take on full representation of the case. Lastly, Mary may have been hamstrung by the existence of the EA. Although the court suggested that Ms. Ford speak with Mary who was there to volunteer and assist unrepresented taxpayers, a taxpayer who brings a representative, even one not qualified to represent someone in the Tax Court, can create a barrier to effective counseling. The dynamic here is not one that the court discusses because it would have no way of knowing what happened. The program of volunteers at Tax Court calendars has helped many people but does not appear to have helped Ms. Ford in this situation.

Ms. Ford hired an attorney to handle her appeal but by then it was too late. The attorney handling the appeal is stuck with the record below. He wrote a brief arguing that the Tax Court erred in not deciding on its own that Ms. Ford’s case should have been continued and arguing that she had proved the business purpose of the venture. With respect to the first argument, it is difficult to believe that the attorney had a realistic expectation of success at the appellate level. With respect to the second argument, he did not have enough to work with based on the record at trial. He copied into his brief portions of the trial transcript regarding the back and forth between the court and Ms. Ford at calendar call as part of his effort to show a continuance should have been granted. I copy those below so you can see the difficult spot Ms. Ford had placed herself in by not coming to court with someone authorized to represent her. This also puts the court in an awkward spot but if the Tax Court granted a continuance every time someone appeared before it who did not have their act together, it would be granting multiple continuances at every calendar.

THE COURT: An option from the Court is to push this later on in the week to give you a little more time to gather that information. We could proceed Wednesday. What’s your position about proceeding to trial on this matter? Or would you still like some time to see if you could settle this?

  1. FORD: I really am confused about all of this.

THE COURT: Okay. Okay.

  1. FORD: I’ve never been to court like this.

THE COURT Okay.

  1. FORD: So I’m trying to learn.

THE COURT: I don’t know if – you may not meet the guidelines for Ms. Gillam. I don’t know. But if you do, then – well, you’ve been working with your CPAso in consultation with him, I think we should decide what the most prudent way to proceed is, whether you should proceed to trial or whether you should try and work something out or if you think you have a good case and you’re ready to go to trial then we’ll have a trial in this matter on Wednesday, but that would give you a couple more days to gather more information and also any other documentation that you think would support your position. It’s the Government’s position that this case is – that Ms. Ford didn’t have the requisite intent to make a profit?

  1. HARRIS: That is correct, Your Honor.

THE COURT: And –

  1. HARRIS: Your Honor will remember, we issued discovery on this and attempted to gather documents to show that this is like manner – it was conducted, and the Court does have an order, a standing pretrial order. I’m happy to look at what they have but this has drug on for quite a while.

THE COURT: This case hasn’t been –

  1. HARRIS: No, it hasn’t. I’m sorry. No, it hasn’t but we have been seeking information since last fall.

THE COURT: And is there any reason why that information hasn’t been provided?

  1. FORD: Well, I was sick with pneumonia for a couple of months with pneumonia and bronchitis, and there was a storm that hit the Bell Cove, my place of business. …

THE COURT: Well, Ms. Ford, if we proceed to trial, one thing you have to be aware of is there are specific rules that you’re going to have to meet in order to make your case, and of course you can consult with your CPA. I’m sure your CPA is aware of what the rules under 183 are and what the standards are and exactly what Ms. Ford is going to have to establish in order to meet those rules. And it’s going to be your contention that she meets those standards; is that correct?

  1. KING: Yes.

THE COURT: Well, what I can do is schedule this trial for Wednesday at ten o’clock and that doesn’t mean that the parties can’t sit down and talk prior to Wednesday. I would anticipate that it might make some sense for you guys to talk and to see if something can be worked out. I don’t know what the merits are in this case. I don’t know what evidence you plan to present. Can you give me an idea about what kind of evidence you plan to present?

  1. KING: Well, I think she will be prepared to go through the rules to establish that she was in the business of making money.

THE COURT: Okay. All right. So any witnesses, Ms. Ford, that you plan to call?

  1. FORD: I don’t know. Right now I’m not sure what 183 is even.

THE COURT: Okay. Well consult with your CPA. He’ll know what the rules are and what’s going to be important for you is I’m going to give you the opportunity to testify and when you testify, you just make sur[e] that you hit all the important points. It also helps to have documentation, you know, business licenses and more things that support your contention that you were in this endeavor to make a profit.

  1. FORD: Well I wouldn’t have gone into it if I wasn’t.

THE COURT: Okay.

  1. FORD: That would be silly.

THE COURT: Okay.

  1. FORD: I mean, I’ve generated millions of dollars through the music industry from helping everybody there. There are so many, George Jones, *13John Anderson – I can’t tell you how much people I’ve helped through there. And I didn’t go in there to fail, you know. I would not want to fail.

THE COURT: All right. Well, this is what we’ll do. We will schedule the trial for ten o’clock Wednesday. And do we have a stipulation of facts?

  1. HARRIS: Well, Your Honor, I have one prepared. It is not signed and if I could get some clarification on exactly, is Mr. King a witness? Is he – what role he’s going to play. Ms. Ford didn’t file a ––– I’m somewhat at a loss here.

THE COURT: Okay. Mr. King?

  1. KING: I can only be a witness.

THE COURT: Okay.

  1. KING: I cannot practice.1

THE COURT: So you’ll be a witness. Of course, you can — I’m going to anticipate that you’ll be working with Ms. Ford so that she has a better understanding of what the rules are, and I would also suggest that you meet with Ms. Gillam. Ms. Gillam is right behind you in the first row and talk to her, and then I think she’ll be able to give you a better — you, the two of you, go in one of the counsel’s rooms, talk with Ms. Gillam, so that you can get a better assessment of the strength of your case and just how prudent it is for you to proceed.

[Calendar Transcript, pgs. 6-12 (emphasis added)]

Conclusion

For most people going to Tax Court, proving their case without a qualified representative will be very difficult. In deciding whether to hire someone, the taxpayer has to take into account the amount at issue and the ongoing nature of the matter in dispute. Assuming that Ms. Ford wanted to continue to run the business, she might have found the calculus for hiring a qualified representative in her situation would have led her to hire someone. Because of the complexity of proving a hobby loss case and the potential for the issue to continue on in future years, someone in Ms. Ford’s situation should think hard before proceeding in the Tax Court without qualified representation. Similarly, someone in the position of this EA must also try to steer their client to a qualified representative even if they have a good grasp of the substance of the case.

 

 

Filing a Tax Court Petition Late for Purposes of Determining if the Notice of Deficiency Was Mailed to the Last Known Address

In Sadek v. Commissioner, T.C. Memo 2018-174 the Court decided the issue of a taxpayer’s last known address at the time of the mailing of the notice of deficiency. These cases occur regularly. We have not written about one recently and this one is interesting because no one seemed to know the taxpayer’s last known or current address including his lawyer. The taxpayer did not file the Tax Court petition until more than four years had passed from the issuance of the notice of deficiency. The only reason that the taxpayer filed the petition in Tax Court was to obtain from the court a ruling regarding last known address. From the outset of the case the Tax Court lacked jurisdiction to hear the merits of the underlying liability but could in dismissing the case determine whether the assessment based on the default in filing a timely Tax Court petition could stand. For another take on this case with greater detail see the post by Bryan Camp in his lessons from the Tax Court series.

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The amounts at issue are eye popping. The IRS assessed Mr. Sadek over $30 million in income tax and penalties for 2005 and 2006. Prior to making the assessments, the IRS sent a notice of deficiency to him at an address in California and one in Nevada. The IRS mailed the notice of deficiency on August 25, 2011. At the time it mailed the notice, the last correspondence it had from Mr. Sadek appeared on his 2005 individual income tax return which he filed on May 21, 2009. It showed a California address and the IRS sent one copy of the notice to that address. In October of 2009 Mr. Sadek filed bankruptcy in Nevada. The IRS sent a second copy of the notice to the address in Nevada that Mr. Sadek used in filing the bankruptcy petition. At the time the IRS mailed the notice Mr. Sadek actually resided in Beirut, Lebanon; however, the IRS did not send a notice to him in Beirut.

Prior to the issuance of the notice, Mr. Sadek had appealed the proposed audit adjustments. The Appeals Officer asked Mr. Sadek’s representative where Mr. Sadek resided. The court found that :

During the pendency of petitioner’s appeal, AO Zhou and Mr. McGinnis communicated about petitioner’s location. Mr. McGinnis informed AO Zhou that petitioner was out of the country, but AO Zhou was unable to get a new address from Mr. McGinnis despite repeated attempts. AO Zhou never spoke directly with petitioner, and Mr. McGinnis represented to AO Zhou that petitioner had cut off contact with him as well.

Anyone who has represented a client before the IRS and had the client go missing knows the uncomfortable feeling that Mr. McGinnis must have felt over not knowing the location of his client. Representing low income taxpayers, I do regularly lose touch with clients. Although the clinic does not have fee issues creating concerns about lost clients, we have plenty of other issues and try hard to reestablish contact if possible. Of course, the Appeals Officer would also have been uncomfortable. She knew the importance of sending the notice of deficiency to the correct address. She seems to have diligently pursued the address and defaulted to the best information in the IRS system when the taxpayer’s current address was not forthcoming. I hope that the IRS also sent a copy of the notice of deficiency to Mr. McGinnis. Maybe that did not help here since Mr. McGinnis had lost touch with his client but the copy of the notice sent to the representative will often keep the client from defaulting on a notice sent to the “last known address” which is not the actual address.

Mr. Sadek resided in Beriut from September 2010 through May 2014. While the IRS did not know where he resided, the FBI investigator assigned to his case did have conversations with him and knew that Mr. Sadek was out of the country even though he did not have a specific address for Mr. Sadek.

Mr. Sadek argues in this case that the IRS had ample notification that he did not reside in California or Nevada at the time it sent the notice. First, he argued that the file in the bankruptcy case showed that the bankruptcy court lifted the automatic stay to allow creditors to foreclose upon his California and Nevada homes. The IRS argued that the bankruptcy files did not show that the foreclosure actually took place and also did not show where he actually lived. The controlling regulation also makes clear that information a taxpayer provides to a third party “is not clear and concise notification of a different address.”

Next, Mr. Sadek argued that “[v]irtually the entire federal government knew where” he was. The Court rejected this argument as well because the evidence showed the FBI knew he had left the US and spent some of his time in Lebanon but did not have a specific address. Further, even if the FBI had known precisely where he lived, it could not have shared that information with the civil arm of the IRS. Similarly, Mr. Sadek’s argument regarding the State Department failed. He argued that he provided his specific address in Lebanon to the State Department in connection with a request for a renewed passport. He did not, however, put evidence into the record of the hearing on this matter of the address provided to the State Department. Had he put on evidence that he provided a specific address to the State Department, providing the updated address to the State Department would not cause his address to change with the IRS. The regulation provides that “change of address information that a taxpayer provides to … another government agency, is not clear and concise notification of a different address.”

Last, Mr. Sadek argues that the IRS knew the two addresses to which it sent the notices were wrong and so the notice could not be valid. The Tax Court holds that the burden falls on the taxpayer to keep the IRS informed of his address and not on the IRS to find exactly where someone lives. The IRS tried to find his correct address and even Mr. Sadek’s own representative could not tell the IRS where to send the notice. The case shows that the IRS must make an effort when it knows that the address it has is wrong but that effort need only be reasonable. The taxpayer bears the burden to keep the IRS informed. When your own representative does not know how to find you, you will have an uphill battle convincing a court that the IRS should have known your address. Most cases do not have the personal involvement of an Appeals Officer prior to the issuance of the notice of deficiency and an Appeals Officer who directly questions the representative regarding the proper address. In the face of that type of questioning, taxpayer’s failure to provide the IRS with the proper address causes the outcome here.

Mr. Sadek owes a lot of money. That kind of money makes it worthwhile trying to set aside the assessment for an improperly filed notice. Since his case was dismissed for lack of jurisdiction because of an untimely petition and not because of a wrongly addressed notice of deficiency, the IRS assessment stands. If he wants to contest the underlying liability now, he must find the money to pay for at least one of the two years in order to meet the requirements of Flora.

 

Another 6511(h) case Fails to Reach the Promised Land

One of the first posts I wrote addressed the issue of the extended period of time to file a refund claim allowed by IRC 6511(h). In that post I mentioned the long losing streak endured by taxpayers in published opinions. Last year it appeared that the case of Stauffer v. United States may have turned things around. I blogged about it here, here and here. In the Stauffer case the court refused to agree with the IRS regarding the need to obtain an opinion regarding the taxpayer’s capacity from a specific group of medical professionals mention in Rev. Proc. 99-21 which fails to include some of the most relevant medical professionals among those qualified to issue an opinion. The post earlier this year regarding the ABA’s comments regarding Rev. Proc. 99-21 provides some background on the procedures developed by the IRS.

Unfortunately for the estate of Stauffer, the IRS backed up after its loss regarding who may opine regarding financial disability and made a different argument. In the second version of the case to go forward to opinion, the IRS argues that Mr. Stauffer fails to qualify for the extended period available for taxpayers with financial disability because he gave a durable power of attorney to his son. The court finds that the son had the authority mentioned in the statute to assist Mr. Stauffer on financial matters and that authority causes the statute of limitations for filing a claim for refund to run prior to the actual filing in this case.

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As with the original opinion, this case went first to the magistrate judge. The magistrate judge determined that the statute of limitations ran because Mr. Stauffer’s son had the power to handle his financial affairs during much of the period between the due date of the return and the filing of the 2006 return claiming a refund of over $100,000. The district court upheld the decision of the magistrate judge but did so based on different reasons. At issue in this aspect of the case is the nature of the authorization provided by decedent to his son and what is required of someone with a durable power of attorney. See a prior post on the issue of authority.

In this case decedent gave to his son a durable power of attorney in 2005. The durable power of attorney stated that the POA could be withdrawn upon a written statement by decedent. It appears clear that the decedent did not provide to his son a written withdrawal of the POA although the decedent did write down that he intended to withdraw the POA. The decedent, however, did not deliver the written intention. The son did tell his sister that he was no longer acting as his father’s durable POA.

The court concludes that in 2005 the father had the capacity to execute the durable POA. It further concluded that the applicable law regarding the enforceability of the durable POA is the law of Pennsylvania and not federal common law. In holding that Pennsylvania law applies here, the court cited to Bova v. United States, 80 Fed. Cl. 449 (2008).

The court next looked at the issue of authority. It found that the durable POA gave the son the authorization to act on behalf of his father in financial matters for purposes of IRC 6511(h). The court acknowledged that the IRS does not define “authorized.” It looked at Black’s Law Dictionary which describes it as “[t]he official right or permission to act, esp. to act legally on another’s behalf….” The estate argued that authorized must be read in this context as requiring that the agent knew of the matter that requires action or it creates an absurd result. The court rejected this argument citing to Brockamp v. United States, 519 U.S. 347 (1997). It refers to the concerns of Congress that it not create a large equitable remedy that would engulf the tax refund system. Therefore, interpreting “authority” according to its plain meaning even when it produces an inequitable result follows the intention of the statute.

Here, the son had the authority to file the father’s return and that it all that the statute requires. It does not require that the son knew the returns needed to be filed.

Next the court looked at the facts to determine whether the father had revoked the POA. It finds that he did not applying Pennsylvania law. To be effective, revocation of a POA requires “actual notice” from the principal to the agent. The document itself required a written notification in order to revoke the POA. Since there was no actual notice as required by Pennsylvania law or written notification as required by the POA, the POA was not revoked and remained in effect from its creation. Because it remained in effect, the statutory language keeps the estate from asserting financial disability.

The result here shows how strictly the statute is interpreted. In the first opinion, the court looked at the Rev. Proc. and not the statute. The statute does not require a specific type of medical degree in order to opine regarding the taxpayer’s disability. This second opinion does not undercut the value of the first for those who seek to argue that strict compliance with the revenue procedure is not a prerequisite to relief. Nonetheless, in the issue of authority where the statute makes reference to the requirement, the court felt less ability to deviate from a strict interpretation of the statutory language.

Here, the facts showed a breech between the father and the son. They also showed that the financial actions taken by the son on behalf of the father during the father’s life were actions permitted by a narrow POA and not the durable POA. Nonetheless, the court declined to follow the estate to a legal place that would allow it to recover over $100,000 paid to the IRS by someone who lacked full capacity. IRC 6511(h) provides a statutory and not equitable remedy to parties seeking to hold open the refund statute of limitations. The Staffer case reminds us that refunds in financial disability case go to those with tight facts that meet the narrow requirement of the statute and necessarily not to those whose situation might cry out for relief.

 

Exonerees and TAPS

On giving Tuesday we write to offer you two ways to give back to the community in the tax area. The first opportunity is by taking a pro bono case to assist individuals who were wrongfully incarcerated. After release from wrongful incarceration, many of these individuals lived in states that paid the exoneree for the damage caused by the wrongful incarceration. At the time of payment, the money received was taxable income. Congress changed the law and retroactively excluded these funds from taxation in 139F. It has also opened up the refund statute to allow these individuals to get back the money paid before the law change; however, the open refund statute is about to close. We wrote about this two years ago seeking volunteers and readers of PT generously donated their time to assist the individuals who had been identified. More individuals have now been identified and another push is needed to assist them. Please read Kelley Miller’s letter below and respond to her if you are able to assist. 

In addition to the opportunity to assist by working on a case, we also write to ask that you assist by donating money to TAPS. This fund, created by the ABA Tax Section, provides money for fellowships to new lawyers to work in low income taxpayer clinics and other similar settings to assist low income taxpayers. In particular, it seeks to create projects that would serve as models to assist these individuals. At PT we have a regular portal through which you can give to TAPS (look on the side of the blog.) Today, we bring you a letter from one of our loyal readers who caused his firm to give to TAPS. We ask that you consider using the portal to have your firm do the same or to give individually. Keith

Helping Exonerees

Hello, Friends:

Two years ago at this time, we were working round the clock with Jon Eldan of After Innocence in San Francisco to file refund claims under Section 139F by December 18, 2016.  I am really proud of the results achieved to date for our extraordinary, pro bono exoneree clients, and am so grateful for all of the assistance that Keith and his students at Harvard have provided to this effort as well over the past two years.  This work has resulted in our doing additional tax-related, pro bono work for exonerees beyond the Section 139F claims.  We have worked closely with Jon Eldan and the Innocence Project Network over the past two years as the only group of tax practitioners working to assist Exonerees.  It has been incredibly important and significant work for us.

As you all know, the extender bill (which we provided much education on in terms of the normative refund statute) that was passed back in February gave us an additional two years from the original claim filing date.  Since that time, Jon and myself and a team of summer associates and volunteer attorneys from Reed Smith have worked to locate almost 300 remaining possible Section 139F refund claimants, including, many military exonerees (these individuals are those left from our search two years ago, where we worked to locate hundreds of other possible Section 139F refund claimants).  As a result of working to locate these individuals, preliminary review of each’s facts and circumstances, Jon informed me today of 12 potential pro bono refund cases to review and assist with by the deadline of December 17, 2018.

I am writing to ask for your help in either you or your firm assisting us in taking on one or more of these cases.

Many thanks to you all. Happy to answer any questions and I welcome your thoughts about this work.

Best,

Kelley C. Miller
Direct 215.851.8855 – Mobile 215.704.3046 – Fax 215.851.1420
kmiller@reedsmith.com

 

Helping Low Income Taxpayers Through TAPS

I have been a tax controversy lawyer since 1977.  I spent about 10 years with the Office of Chief Counsel, IRS, and have been in private practice since 1986.  Procedurally Taxing has become a staple of my daily reading.  If Procedurally Taxing charged a fee for access, we would pay thousands of dollars per year for access just as we pay for other tax publications.  I inquired about how to make a contribution towards Procedurally Taxing, and was advised to make a donation to the ABA Tax Assistance Public Service Fund (“TAPS”), which provides long-term funding for tax-related public service programs for underserved taxpayers.  I was able to convince my firm to make annual donations to TAPS.  An added perk is the TAPS donor sticker attached to your name tag at ABA Tax Section meetings.

As a result of reading Procedurally Taxing every day, I have come to appreciate that low income taxpayer clinics frequently litigate important tax controversy issues that otherwise would not be litigated because the dollar amounts at issue are very small or the chances of success at the appellate level are low or, frequently, both.  This is another important reason every tax lawyer should support TAPS.

If you too read Procedurally Taxing every day, I encourage you to step-up and convince your firm to make annual donations to TAPS.  If you are a tax controversy attorney and you do not read Procedurally Taxing every day, you should, unless you are a government attorney, in which case it is fine if you want to remain in the dark about cutting edge tax controversy issues.

Bob

Robert. R Rubin ●  Attorney ●  BOUTIN  JONES INC. ●  555 Capitol Mall, Suite 1500  ●  Sacramento, CA 95814

The Intersection of Foreclosure and Innocent Spouse

In United States v. Charles LeBeau, No. 3:17-cv-01046 (S.D. Cal. Oct. 16, 2018) the district court stayed a foreclosure action brought by the IRS to allow the taxpayer’s wife to pursue her innocent spouse claim. Because the innocent spouse claim has a ways to go from a procedural perspective, it may be some time before the foreclosure case starts back up. The case provides an interesting look at the intersection of foreclosure and innocent spouse and deserves some discussion.

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Victoria and Charles LeBeau were married at some point prior to 1980. They remain married though they are now legally separated. While the separation is legal, they continue to reside in the same house in La Jolla, California. For anyone not familiar with La Jolla, it generally has very nice houses near the ocean just north of San Diego. I will leave it to Bob Kamman to fill in the rest of the story on the value and location of the house. I am sure that Bob will find some interesting facts here that the opinion does not contain and that I am not tracking down. Keep a lookout in the comment section.

They bought the house in 1980 as joint tenants; however, they deeded the house to Victoria for no consideration in 1987. In 1988 Victoria transferred the property back to both of them for no consideration. Five days later they executed a deed of trust in favor of Security Allied Services to secure a loan of just over $300,000. In August of 1989, the couple transferred the property solely to Victoria again for no consideration. Charles created an entity known as Casa de Erin, LLC which the court describes as the alter ego/nominee of Charles and/or Victoria and in 2003 Victoria transferred the property to Casa de Erin for no consideration. In 2006 Casa de Erin rescinded the deed and transferred the property back to Victoria for no consideration and she remains the property’s nominal owner. The court notes that “upon information and belief, Charles LeBeau has continued to reside at the Property and has retained all the benefits and burdens of ownership.”

The IRS has already reduced its assessments to judgment and this case seeks to foreclose its lien on the property.

Given the recitation of facts in this case, I would not place a high value on Victoria’s chances of achieving innocent spouse status. If she was actively engaged in all of these transfers, innocence is not the word that comes to mind. In fact, the IRS denied her request for relief for many years though it did apparently grant her partial, but significant ($193,272) relief for 1995. She filed a petition with the Tax Court seeking review of the denial of relief on June 22, 2018. Charles has intervened in her Tax Court case presumably to argue that she should not be relieved of liability. (This is one of those cases where it might be really interesting to follow the pleadings if it did not require a trip to DC to the clerk’s office and 50 cents per page.) She asks that the district court stay the foreclosure of what I am presuming is a very nice place where they live and engage in deed swapping at a prodigious pace.

In the discussion section of the opinion the court first says that “the district court has no jurisdiction to decide an innocent spouse claim” citing to United States v. Boynton, 2007 WL 737725 (S.D. Cal. 2007) and Andrews v. United States, 69 F.Supp. 2d 972 (N.D. Ohio 1999). I do not necessarily agree with the court on this issue as discussed in the post in the Chandler case; however, the DOJ Trial Section attorney would have had difficulty arguing the opposite side of that issue.

The court next notes that it has broad discretion to stay proceedings noting that it must consider:

  • the possible damage which may result from the granting of a stay, (2) the hardship or inequity which a party may suffer in being required to go forward, and (3) the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay.

The defendants made the following arguments in support of a stay:

On the third factor, Defendants seek a stay pending resolution of the issues of “fraudulent transfers” and “nominee theory of ownership” now before the U.S. Tax Court arguing that Court lacks jurisdiction to consider these issues and a stay would avoid inconsistent rulings. On the second factor, they argue that a stay would cause hardship by being required to pursue litigation in two different courts. Lastly, on the first factor, Defendants content that a stay would not prejudice the government.

The court cites the Supreme Court’s decision in United States v. Rodgers, 461 U.S. 677 (1983) regarding its discretion to foreclose a federal tax lien on taxpayer’s property. We have discussed Rodgers before here in a case blogged by Les with some similarities to the LeBeau’s situation. After discussing the general Rodgers factors a court should weigh in deciding whether to permit foreclosure, the district court here cites to two prior cases in which someone claiming innocent spouse status sought to use that status as a basis for postponing foreclosure based on the Rodgers’ factors. In the first case, United States v. Battersby, 390 F. Supp. 2d 865 (N.D. Ohio 2005) the court did stay the action while in the second case, United States v. McGrew, 2014 WL 7877053 (C.D. Cal. 2014), aff’d, 669 Fed. App’x 831 (9th Cir. 2016) the court concluded Rodgers was inapplicable stating that “innocent spouse protection does not entitle [non-liable spouse] to prevent foreclosure on the Government’s tax liens.”

A third case exists out of South Carolina, which the LeBeau court does not mention, in which Carl Smith and Joe DiRizzo sought to assist the wife in her effort to stop foreclosure and seek innocent spouse relief, United States v. Dew. The IRS brought a foreclosure proceeding to sell some jointly owned property for liabilities of both Mr. and Mrs. Dew.  Late during the proceeding, Mrs. Dew filed a Form 8857, which had not yet been ruled on by the IRS.  The DOJ first asked the district court to ignore this belated filing.  And the court essentially did so in 2015 U.S. Dist. LEXIS 112979 (D. S.C. 2015), where it wrote in footnote 1:

The Court notes that Mrs. Dew filed objections asserting an “innocent spouse” defense pursuant to 26 U.S.C. § 6015(f). Even assuming such a claim can properly be raised for the first time in the objections, the innocent spouse defense cannot be considered by this Court because it lies within the exclusive jurisdiction of the tax court. See Jones v. C.I.R., 642 F.3d 459, 461 (4th Cir. 2011) (noting that § 6015(f) authorizes the “Secretary of the Treasury” to grant an innocent spouse relief; see also United States v. Elman, No. 10 CV 6369, 2012 U.S. Dist. LEXIS 173026, 2012 WL 6055782, at *4 (N.D. Ill. Dec. 6, 2012) (stating that “exclusive jurisdiction over [the defendant’s] innocent spouse defense under § 6015(f) lies with the Tax Court.”).

The Dews filed an appeal to the 4th Circuit arguing that the collection suit could not go forward.  Section 6015(e)(1)(B)(i) provides:

Except as otherwise provided in section 6851 or 6861 [26 USCS § 6851 or 6861], no levy or proceeding in court shall be made, begun, or prosecuted against the individual making an election under subsection (b) or (c) or requesting equitable relief under subsection (f) for collection of any assessment to which such election or request relates until the close of the 90-day period referred to in subparagraph (A)(ii), or, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final.

Mrs. Dew filed a response with the District Court arguing that 6015(e)(1)(B) was mandatory and asked, therefore, that foreclosure be stayed.  In response to this filing, the government finally agreed that it could not pursue collection against her for the taxes subject to the Form 8857, but still asked the court to foreclose and sell the property to satisfy Mr. Dew’s tax debts and Mrs. Dew’s tax debts that were not covered by the Form 8857.  See attached response. The court went ahead with the sale and instructed the distribution of proceeds in accordance with the government’s revised listing (excluding the Form 8857 liabilities). See the final revised order confirming the sale here.  The 4th Cir. then decided the appeal and held against the Dews.  670 Fed. Appx. 170 (4th Cir. 2016).  The entire text of the 4th Cir. opinion is as follows:

James and Veronica Dew (Appellants) appeal the district court’s order and judgment granting the United States’ motion for summary judgment in the United States’ action seeking to reduce to judgment Appellants’ federal income tax liabilities, and to foreclose the federal tax liens securing those liabilities on Appellants’ jointly owned real property. We have reviewed the record and have considered the parties’ arguments and discern no reversible error. Accordingly, we grant James Dew’s application to proceed in forma pauperis and affirm the district court’s amended judgment. United States v. Dew, No. 4:14-cv-00166-TLW (D.S.C. May 19, 2016). We dispense with oral argument because the facts [**2]  and legal contentions are adequately presented in the materials before this court and argument would not aid the decisional process.

In the Lebeau’s case the district court determined that the foreclosure case should be stayed against the LeBeaus until the end of the innocent spouse case. I do not find this result satisfying. Even if the Tax Court finds Victoria innocent, the IRS can still foreclose on the house and sell it subject to her interest. The decision would be much more satisfying if the court had explained why the Rodgers factors might weigh against allowing foreclosure to go forward. Was there something special about Victoria’s need for the house or even Charles’ need? I am assuming that they are not young at this point since they bought the house almost 40 years ago. Absent something special, I would allow the sale to go forward and hold her half in escrow. Since the innocent spouse determination does not prevent the sale, it does not seem that, by itself, it should hold up the sale.

It is possible that I am also someone jaundiced about her innocence given all of the transfers of the property recounted by the court but I recognize that there could be facts that would support a finding of innocent spouse status not brought out in this opinion. The significant delay that the court has provided here does prejudice the IRS unless one assumes that the property will continue to go up in value and that delay will ultimately benefit the IRS in that fashion.

 

Bankruptcy Court Declines to Exclude Retirement Plan from Estate

Congratulations to Keith Fogg on his new grandchild, Samuel! And now, back to tax procedure. Christine  

The case of In re Xiao, No. 13-51186 (Bankr. D. Conn 2018) presents the unusual situation of a bankruptcy court analyzing whether the pension plan of debtor’s corporation met the qualifications required by the Internal Revenue Code for such a plan. Here, it was not the IRS attacking the validity of the pension plan, though it might have if it had noticed. Rather, the bankruptcy trustee brought the action seeking a determination that the plan did not qualify in order to bring the money in the pension plan into the bankruptcy estate. Because the plan held over $400,000 in assets, it provided a rich target for creditors of the estate. Of course, the trustee also has a financial incentive to bring assets into the estate since the more assets the estate contains the larger the fee received by the trustee. Regardless of the financial incentive, bringing the asset into the estate for use to pay the unsecured creditors also fulfills the trustee’s obligation to the estate.

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As a general rule B.C. 541(c)(2) excludes a debtor’s pension plan from the bankruptcy estate. The Supreme Court confirmed this reading of the statute a quarter of a century ago in Patterson v. Shumate, 504 U.S. 753 (1992). The exclusion from the bankruptcy estate does not cover everything labeled as a pension plan. Excluded plans must meet certain criteria. Even if not excluded by BC 541(c)(2), funds could be exempted from the estate under B.C. 522. Few cases exist in which trustees have successfully attacked a plan to bring its assets into the bankruptcy estate. The trustee’s success in this case demonstrates the possibilities of such an action and also the perils to someone who fails to follow all of the necessary formalities for maintaining a proper plan. Even if you believe that the IRS has so few people looking at these plans that the chances of an IRS audit remain slim, the Xiao case shows another way in which failure to properly maintain a pension plan can create problems.

The court here spends several pages recounting the inappropriate manner in which the pension plan of debtor’s corporation was established and administered. The details of the administration of this plan suggested many lapses in following the necessary formalities to properly maintain a plan. The trustee hired an expert to examine plan activity and to testify concerning plan failures. In effect, the expert hired by the trustee acted like a revenue agent performing an audit of the plan. He explained in great detail the plan’s failures. The trustee charges the estate for the cost of the expert and the cost of the litigation attacking the plan. In essence, the plan assets will pay for the cost of the attack. The debtor’s creditors do not mind because even though these costs reduce the funds available from the plan, the trustee still brings into the estate money not otherwise available. The loser here is the debtor who sees his entire pension plan used to fund the attack on the plan and to pay creditors who would not otherwise have had the opportunity to get paid from this asset.

Debtor also hired an expert who testified about the plan in order to prove it was appropriately administered. Debtor himself testified on this point as well. The court did not find the debtor credible and did not find his expert persuasive.

After a detailed examination of the plan, the court found that it did not operate in a manner that allowed the debtor to exclude or exempt this asset. The concluding paragraph of the opinion provides the best overview of the court’s reasoning:

…the Plan failures at issue in this case do not merely constitute technical defaults, but instead are operational failures that ‘are substantial violations of the core qualification requirements for a retirement’ plan as set forth in the IRC Section 401(a)(2). … it appears that LXEng [debtor’s corporation] operated the Plan in order to solely benefit Mr. Xiao and his then spouse, Ms. Chen. According to the Treasury Regulations, a plan cannot act as a subterfuge for the distribution of profits to the owners of the employer. 26 C.F.R 1.401-1(b)(3). It appears to have been so here.

The opinion does not explain how the trustee came to the conclusion that the debtor’s plan did not meet muster. Because I have seen few of these cases over the years, I do not think that many trustees key in on this issue and perhaps the taxpayer’s failure to follow plan formalities represents a rare aberration. I suspect that there may be a number of plans of small businesses with problems that could be attacked by a trustee if the business owner seeks bankruptcy relief and tries to shelter assets in a pension plan. The former employees of the business that this plan did not properly cover could have had claims against the bankruptcy estate. Such employees may have provided the trustee a roadmap to unlocking the assets in the plan. While I am just speculating that one of the employees the plan sought to stiff provided critical information about the inadequacies of the plan, this serves as yet another reminder why employers should keep employees happy and not overtly antagonize them.

The court stresses that it tests qualification of the plan as of the date of the filing of the bankruptcy petition. For any small business where the owner is headed for bankruptcy, the Xiao case should serve as a significant wake-up call regarding the proper administration of a pension plan. The debtor here loses an asset that the creditors could not have reached had the plan been properly administered. Conversely, the case also serves as a reminder to attorneys for creditors that they should pay attention to pension plans in the case of small businesses to look for improper administration of the plan as a way to pull the asset into the bankruptcy estate that might otherwise have few assets for the unsecured creditors. Hiring an expert to do the analysis of the plan and pursuing the litigation to get information about the plan serve as barriers where the plan assets are not significant and information about plan administration does not suggest problems worth pursuing.

 

Litigating Innocent Spouse Cases in District Court – Does the Department of Justice Tax Division Trial Section Talk to Its Appellate Section?

Jurisdiction is not something that the Department of Justice can confer upon the courts, but it is interesting when one part of the Tax Division files motions to dismiss cases for lack of jurisdiction for seeking a refund based on innocent spouse relief while another part argues to appellate courts that a party seeking a refund based on innocent spouse relief could do so in district court. The recent decision in Chandler v. United States, 122 AFTR 2d 2018-XXXX, (N.D. Tex. Sept. 17, 2018) highlights the division between sections at the Department of Justice. The decision in the Chandler case was written by the magistrate to whom the case was referred.  The District Court judge has since issue an order adopting the decision and a judgment.  Since the Chandler case could now move from one section to the other if an appeal occurs, the Appellate Section might get the chance to let the court know it disagrees with the Trial Section. [The case of Hockin v. United States (PACER login required), Civil No. 3:17-CV-1926-PK, pending in the District of Oregon raises the same issue and the Federal Tax Clinic at the Legal Services Center of Harvard Law School may file an amicus brief in that case.] read more...

Ms. Chandler filed a joint return with her then husband for the tax years 1997 through 2002. The IRS made adjustments to the returns and ultimately additional assessments. In 2011 Ms. Chandler, now divorced from her husband with whom she filed the joint returns, requested innocent spouse relief claiming, inter alia, that she did not know exactly what was on the returns and had simply signed them in the appropriate box when the returns were placed in front of her after preparation by an accounting firm.

The IRS denied her relief and she failed to file a Tax Court petition within 90 days thereafter. She then filed another request for innocent spouse relief and the IRS considered her new request before denying it as well. Her attorney tried three more times with the IRS denying each attempt for lack of new information.

In June of 2013 she received a CDP notice and timely made a CDP request. The IRS denied her relief in the CDP process and thereafter began collecting from her. It collected $22,890 through levy before writing off the balance based on the statute of limitations. In July 2015 she filed a claim for refund seeking return of the levied money. The IRS denied the claim and she brought suit in the Northern District of Texas to recover her refund.

The government filed a motion to dismiss for lack of jurisdiction. The magistrate judge determined that the court did not have jurisdiction, citing United States v. Elman, 110 AFTR 2d 2012-6993 (N.D. Ill. 2012) which stated “although the statute itself does not address whether the Tax Court’s jurisdiction is exclusive, courts interpreting the statute have concluded that it is.” This quote, in part, refers to the language in IRC § 6015(e) providing for Andrews v. United States Tax Court jurisdiction which makes no mention of district court jurisdiction. The magistrate judge went on to cite the cases of United States v. LeBeau, 109 AFTR 2d 2012-1369 (S.D. Cal. 2012) and Andrews v. United States, 69 F. Supp. 2d 972, 978 (N.D. Ohio 1999) which held that district courts did not have jurisdiction to decide an innocent spouse issue unless the taxpayer files a refund suit while an innocent spouse case is pending in the Tax Court. Here, the taxpayer missed her chance to bring a Tax Court case. The court also cited United States v. Stein, 116 AFTR 2d 2015-6504 (W.D. Ky. 2015) holding “no part of § 6015 confers jurisdiction to the federal district courts to determine innocent spouse claims in the first instance.”

This seems like a lot of precedent in favor of dismissing the case; however, none of the district court opinions on which the court in Chandler relied involve refund lawsuits, nor does the court cite the three opinions, discussed below, where refund suits proceeded under § 6015 without objection by the DOJ as to jurisdiction.  The cited cases all involve § 6015 raised as a defense in a suit brought by the government for collection. Further, no Circuit court has yet weighed in on this jurisdictional issue either in the context of refund suits or of collection suits.

For decades, the courts have allowed district court and Court of Federal Claims refund suits considering relief under § 6015 and its predecessor innocent spouse provision without discussion or government objection. In enacting and amending § 6015, Congress expressed its understanding that district court refund suits raising innocent spouse relief were permitted under former § 6013(e). Congress did not repeal this prior law by implication when, in 1998, it added new, additional ways to raise innocent spouse relief in the Tax Court under §§ 6015(e)(1)(A), 6320, and 6330.

Several cases held that former § 6013(e)(1) relief, the code section for innocent spouse relief from 1971 to 1998, could be raised by a taxpayer who paid an assessed deficiency in full and brought a refund suit in district court or the Court of Federal Claims. These cases existed in several circuits: Yuen v. United States, 825 F.2d 244 (9th Cir. 1987); Busse v. United States, 542 F.2d 421, 425-427 (7th Cir. 1976); Sanders v. United States, 509 F.2d 162 (5th Cir. 1975); Dakil v. United States, 496 F.2d 431 (10th Cir. 1974); Mlay v. IRS, 168 F. Supp. 2d 781 (S.D. Ohio 2001). In research for an amicus brief on this issue, the tax clinic at Harvard could not find that any party ever argued that such a suit was barred because the taxes were not “erroneously or illegally assessed or collected”, within the meanings of § 7422(a) and 28 U.S.C. § 1346(a)(1).

Several cases have also held that taxpayers claiming innocent spouse status under former § 6013(e)(1) could raise that status as a defense to reduce tax assessments to judgment under § 7402 in district court suits brought by the United States; United States v. Grable, 946 F.2d 896 (6th Cir. 1991); United States v. Diehl, 460 F. Supp. 1282 (S.D. Tex. 1976), aff’d per curiam, 586 F.2d 1080 (unpublished opinion) (5th Cir. 1978); or to foreclose on tax liens under § 7403. United States v. Shanbaum, 10 F.3d 305 (5th Cir. 1994); United States v. Hoffmann, 1993 U.S. Dist. LEXIS 15872 (D. Utah 1993). They also held that former § 6013(e)(1) relief could be raised in a bankruptcy proceeding. In re Hopkins, 146 F.3d 729 (9th Cir. 1998); In re Lilly, 76 F.3d 568 (4th Cir. 1996).

In the 1998 legislation in which the new IRC § 6015 was enacted, the Ways and Means Committee explained:

The proper forum [under present law] for contesting a denial by the Secretary of innocent spouse relief is determined by whether an underpayment is asserted or the taxpayer is seeking a refund of overpaid taxes. Accordingly, the Tax Court may not have jurisdiction to review all determinations of innocent spouse relief . . . . The Committee is concerned that the innocent spouse provisions of present law are inadequate. . . . The bill generally makes innocent spouse status easier to obtain. The bill eliminates all of the understatement thresholds and requires only that the understatement of tax be attributable to an erroneous (and not just a grossly erroneous) item of the other spouse. . . . The bill specifically provides that the Tax Court has jurisdiction to review any denial (or failure to rule) by the Secretary regarding an application for innocent spouse relief. The Tax Court may order refunds as appropriate where it determines the spouse qualifies for relief . . . .

Rep. 105-364 (Part 1), at 61 (emphasis added).

In the first two quoted sentences above, Congress implicitly acknowledged that it understood that § 6013(e) issues could be raised in refund suits in district courts or the Court of Federal Claims brought under 28 U.S.C. § 1346(a)(1) and nowhere did it state in its Committee reports that it intended to remove the jurisdiction of those courts to hear innocent spouse refund suits.

The transfer provision now at § 6015(e)(3) also provides support for the conclusion that district courts have refund jurisdiction over innocent spouse cases. The only jurisdictional basis of a “suit for refund . . . begun by either individual filing the joint return pursuant to section 6532” (i.e., the suit to which the Tax Court proceeding would be transferred) is 28 U.S.C. § 1346(a)(1). Even if language in § 7422(a) and 28 U.S.C. § 1346(a)(1) might arguably not cover innocent spouse relief under the government’s reading, Congress clearly legislated in 1998 on the assumption that refund suits raising innocent spouse relief had been proceeding under the 1971 legislation and should continue to proceed under the 1998 legislation. The language of § 7422(a) and 28 U.S.C. § 1346(a)(1) should be given a practical construction regarding innocent spouse relief in accordance with Congress’s clear intentions.

At least three cases since the enactment of § 6015 have moved forward in district court with no finding of a jurisdictional bar. In Jones v. United States, 322 F. Supp. 2d 1025 (D.N.D. 2004) – a refund suit predicated originally on former § 6013(e) relief – during the course of the case, Congress enacted § 6015, and thereafter, the taxpayer filed a Form 8857 requesting § 6015 relief and sought a refund under the new provision for some taxable years. There is no evidence in the opinion that the government made the claim that it makes here that the district court lacked jurisdiction to conduct a refund suit under § 6015 in the absence of a petition to the Tax Court under § 6015(e). Probably for that reason, the court does not even discuss this potential jurisdictional issue.

In Favret v. United States, 2003 U.S. Dist. LEXIS 21969 (E.D. La. 2003), the court denied a government motion to dismiss an innocent spouse refund suit for failure to state a claim (i.e., a motion on the merits). The case later settled. There is again no evidence in the opinion that the government made any claim that the court lacked jurisdiction of § 6015 refund suits in the absence of a prior petition to the Tax Court under § 6015(e).

In Flores v. United States, 51 Fed. Cl. 49 (2001), the Court of Federal Claims heard a refund suit where the taxpayer sought relief under § 6015(f). The court found the taxpayer entitled to relief. In a footnote, the court indicated that it had considered whether it had jurisdiction to so hold and explained (rather summarily) that both the government thought so and the court did, as well. The court wrote:

The court initially was concerned with whether it had jurisdiction to review a determination made by the Secretary of the Treasury not to render innocent spouse relief under section 6015(f) of the Code (discussed, infra). In their supplemental memoranda, both parties argue that this court has such jurisdiction, directing this court to the legislative history of section 6015, the cases construing that legislative history, and the amendments made to section 6015 by section 1(a)(7) of the Consolidated Appropriations Act of 2001, Pub. L. No. 106-554, 114 Stat. 2763. Based on its review of these materials, the court now agrees that it has jurisdiction to review whether the Commissioner has abused his discretion under section 6015(f), as well as to determine whether that subsection is applicable to plaintiff under the effective date provisions of the Act. See, e.g., Butler v. Commissioner, 114 T.C. 276, 290 (2000) (concluding that Congress did not intend to commit the determination under section 6015(f) to unreviewable agency discretion).

So, in a few instances, refund suits involving § 6015 have been allowed to proceed in the absence of a petition to the Tax Court under § 6015(e).

IRS National Taxpayer Advocate (“NTA”) Nina Olson agrees with the position that district courts can hear refund claims based on innocent spouse status. Since 2007, Ms. Olson has been alerting Congress to the incorrect district court rulings under § 7402 and § 7403. NTA 2007 Annual Report to Congress, Vol. I, p. 631; NTA 2008 Annual Report to Congress, Vol. I, p. 525; NTA 2009 Annual Report to Congress, Vol. I , pp. 494-495; NTA 2010 Annual Report to Congress, Vol. I, pp. 504-505; NTA 2012 Annual Report to Congress, Vol. I., pp. 648, 652; NTA 2015 Annual Report to Congress, Vol. I, pp. 532-536. In her 2013 report, Ms. Olson wrote:

As the National Taxpayer Advocate has pointed out, these district court decisions are inconsistent with the statutory language of IRC § 6015, which does not give the Tax Court exclusive jurisdiction to determine innocent spouse claims, but rather confers Tax Court jurisdiction “in addition to any other remedy provided by law.” Nothing in IRC § 6015 prevents a district court from determining, in a collection suit, whether innocent spouse relief is available. . . . Moreover, the refusal to allow a taxpayer to raise IRC § 6015 as a defense in a collection suit may create hardship because a taxpayer may be left without a forum in which to raise IRC § 6015 as a defense before losing her home to foreclosure by the IRS.

NTA 2013 Annual Report to Congress, Vol. I, pp. 416-417. Ms. Olson has asked that, if the courts do not correct their rulings, Congress adopt legislation that would make it even more clear that § 6015 relief is available as a defense in a district court collection suit. NTA 2007 Annual Report to Congress, Vol. I, pp. 549-550; NTA 2009 Annual Report to Congress, Vol. I, pp. 378-380; NTA 2010 Annual Report to Congress, Vol. I, p. 378-382; NTA 2017 Annual Report to Congress, Purple Book, p. 53.

In a series of recent court of appeals cases brought by the tax clinic at Harvard, the Clinic has represented taxpayers who had filed late pro se stand-alone petitions in the Tax Court under § 6015(e)(1)(A) seeking relief under § 6015(b), (c), and/or (f). In each case, the IRS misled the taxpayer with respect to the last date to file such petition. The Tax Court dismissed the petitions for lack of jurisdiction as untimely. In each case, the Department of Justice (“DOJ”) Tax Division Appellate Section attorneys assured the courts, both in their briefs and at oral argument, that the courts should not worry that the taxpayers were left without a remedy because each taxpayer could pay the liability in full and sue for a refund in district court or the Court of Federal Claims, where each could still seek relief under § 6015. For example, at page 48 of its appellee’s brief in the Nauflett case, the Appellate Section attorneys wrote:

We note, however, that this does not mean that taxpayers who miss the deadline in § 6015(e)(1)(A) may never seek judicial review of the IRS’s determination that they are not entitled to innocent-spouse relief. As the Tax Court recognized (A. 29-30), a taxpayer like Nauflett who misses the 90-day filing window may nevertheless pay any assessment made by the IRS, file a timely administrative claim for refund, and then file a refund suit in either a federal district court or the Court of Federal Claims six months later (or earlier, if the refund claim is denied before the expiration of that six-month period). See I.R.C. §§ 6511(a), 6532(a)(1), 7422(a); see also id. § 6015(e)(3) (stating that jurisdiction over any pending petition for relief under § 6015 is transferred from the Tax Court to any district court that acquires jurisdiction over the relevant years as part of a refund suit filed by either spouse pursuant to I.R.C. § 6532).

At oral argument in the Matuszak and Nauflett cases, the tax clinic at Harvard pointed out that the taxpayers could not afford to fully pay all asserted liabilities for all years before filing district court refund suits, so the alternative remedy of a suggested refund suit was of little practical use to them. Doubtless for this impracticality reason, at footnote 5 of Matuszak, the court wrote:

Although the Tax Court lacks jurisdiction to review an untimely petition for innocent spouse relief, taxpayers who miss the ninety‐day deadline in § 6015(e)(1)(A) may have other means, outside the Tax Court, to seek review of the IRS’s determination. See Appellee’s Br. 47 (suggesting that a taxpayer may pay the assessed deficiency and then seek review of the IRS’s denial of innocent spouse relief in a refund suit in federal district court or the Federal Court of Claims). We express no opinion on the availability of those alternative remedies in this case. [Emphasis added.]

The argument by the Trial Section attorney in Chandler directly contradicts what the DOJ Tax Division Appellate Section has recently argued in the cases of the clients of the tax clinic at Harvard. The government should get its story straight. The Appellate Section is right and the Trial Section is wrong. The court in Chandler gets it wrong because of the argument made by the Trial Section. The Tax Division should come to the court and get its position straight.