Top of the Order – Tax Court Designated Orders 5/8/2017 – 5/12/2017

Today we continue our reporting on designated orders.  Guest blogger Samantha Galvin reports on three cases.  Professor Galvin teaches and represents low income taxpayers in the tax clinic at the Sturm College of Law at the University of Denver – one of the oldest and best tax clinics for low income taxpayers.  Keith.

 

Designated Orders: 5/8/2017 – 5/12/2017

Two out of three of last week’s designated orders involved the IRS moving to dismiss the case, in part, for lack of jurisdiction because the taxpayers did not petition the Tax Court on a Notice of Deficiency but ended up in Tax Court after walking down a different procedural path. In these types of cases, the IRS wants to ensure that all parties understand which issue(s) is in front of the Court.

read more...

Choose Your Procedural Path Carefully

Docket # 4354-16L, Schwartz v. C.I.R. (Order and Decision Here)

The first case is a fairly common scenario, but it is a scenario in which new practitioners (and pro se petitioners) should be careful.  Petitioners’ original 2013 tax return showed a balance due of approximately $44,000, but they did not make any payments. They received a Final Notice of Intent to Levy and timely requested a collection due process (CDP) hearing asking for an installment agreement or an offer in compromise.

As part of the normal process, the IRS Appeals Office requested that the taxpayers submit a financial form and substantiation but taxpayers did not respond, nor did they participate in their CDP hearing phone conference. In October of 2015 (mistakenly referred to as 2016 in the Order and Decision), the taxpayers finally submitted a financial form, but again did not submit any substantiation.  In December of 2015, the taxpayers received a statutory Notice of Deficiency (NOD) for tax year 2013 proposing to assess an additional $7,058 in tax and penalties. Taxpayers’ failed to timely petition the Tax Court for a redetermination pursuant to the NOD.

On January 22, 2016 (less than a week after the deadline to petition the Tax Court on the NOD had passed), the IRS Appeals Office issued a notice of determination concluding the CDPhearing in which it sustained the proposed levy because the taxpayers did not submit any substantiation and because they had sufficient assets to pay the balance. This time the taxpayers petitioned the Tax Court claiming the IRS unfairly assessed penalties and seeking review of the NOD.

The IRS moved to dismiss the case for lack of jurisdiction to the extent the matter related to the NOD and the Tax Court granted the motion. Additionally because the taxpayer did not raise the issue of penalties during the administrative process, the Court held they were precluded from doing so in Tax Court.

The IRS’s motion to dismiss not only prevented the taxpayers from disputing the underlying liability, but also impacted the standard of review used by the Tax Court. On a deficiency case, the standard of review is “de novo” which generally means the Court will review the case without being bound by what the IRS or taxpayer has done to resolve the case prior to coming to Court. On a CDP hearing case, such as this when the underlying liability is not properly at issue, the Court reviews the case for an “abuse of discretion” which is whether the exercise of discretion by IRS Appeals was without sounds basis in fact or law.

The court reviewed the notice of determination for abuse of discretion and found that Appeals did not abuse its discretion in sustaining the proposed levy, since the taxpayers failed to participate in the CDP hearing and did not submit financial information or substantiation. As a result, the Court granted the IRS summary judgment.

Take-away points:

  • Be cognizant of the procedural path down which you are walking. It can get confusing especially if the taxpayer is in collections for a portion of liability, but another portion has not yet been assessed. If you want to dispute the underlying liability, then petition the Tax Court on an NOD rather than a notice of determination. It is rare that liability disputes can be raised in a collection due process hearing and it can really only be done if a taxpayer did not receive an NOD or did not otherwise have an opportunity to dispute the liability, an issue PT has covered extensively; see Keith’s post from this past March, for example. This is true even if a practitioner begins representing a client after the right to petition Tax Court pursuant to an NOD has expired.
  • Penalty abatement can be raised in a CDP hearing, but if it is not raised it may be precluded from being raised in Tax Court.
  • If a dispute to liability exists but the right to go to Tax Court on an NOD has expired, a practitioner or taxpayer should dispute the liability through audit reconsideration or a doubt as to liability offer in compromise instead.
  • Don’t petition Tax Court on a CDP hearing unless the IRS abused its discretion, which means it did not consider the facts or law in an appropriate way.

Innocent Spouse Relief is the Only Dispute

Docket # 15590-16, Starczewski v. C.I.R. (Order Here)

Similar to the Schwartz case (above) this is another case where the taxpayers did not petition the Tax Court on a Notice of Deficiency (NOD), but unlike the Schwartz case it seems like the taxpayers did not intend to dispute the underlying liability. In this case taxpayer wife and taxpayer husband ended up in Tax Court after the taxpayer wife’s request for innocent spouse relief was denied by the IRS (presumably this means the case involves taxpayer ex-wife and taxpayer ex-husband). Taxpayer husband intervened, which is permissible in an innocent spouse case and allows the non-requesting spouse the opportunity to testify about why the requesting spouse should not be granted relief. When an intervening spouse is successful, both spouses remain jointly and severally liable for the deficiency.

The IRS filed a motion to dismiss for lack of jurisdiction as to the NOD, stating that the Tax Court only had the jurisdiction to determine whether petitioner (taxpayer wife) should be relieved of liability.

The Tax Court gave the petitioner (taxpayer wife) and intervenor (taxpayer husband) an opportunity to respond and neither did, but later in a telephone conference taxpayer husband had no objections and taxpayer wife’s counsel affirmatively consented to the Court granting the IRS’s motion.

Once all parties were made aware that a dispute to the liability was not before the Tax Court, the Court allowed the innocent spouse relief question to proceed to trial.

Take-away points:

  • In this case it is unclear if a dispute to the liability was raised in the petition, or if IRS always requests a motion to dismiss for lack of jurisdiction in these case just so the taxpayers (and perhaps, the Court) are clear about what is really at issue.
  • The IRS is required to send separate original notices of deficiency to each spouse at their last known address (pursuant to I.R.M. 4.8.9.8.2.7), so even if taxpayers were divorced or separated at the time both taxpayers would have had the opportunity to petition the Tax Court on the NOD.

 

When Petitioners are Prisoners

Docket # 29472-12, Martinez v. C.I.R. (Order and Decision Here)

This case involves a taxpayer/petitioner who is currently an inmate in the Texas prison system, but the deficiency arose from tax years 2009 and 2010 (only 2009 was still at issue, because IRS had been granted summary judgment for 2010). In those years, the taxpayer was not yet in prison and he was a school teacher. The IRS sent him a Notice of Deficiency (NOD) after he began serving time and he timely petitioned the Tax Court asking for the deficiency to be redetermined. The deficiency arose from the taxpayer’s failure to substantiate gross receipts on his Schedule C and expenses on his Schedule C and Schedule A.

The Tax Court prefers to resolve cases expeditiously, even when a taxpayer is in prison. In this case, the taxpayer petitioned the Tax Court in 2012 and the decision was issued in 2017 so this case had been going on for a while. The Court worked with the taxpayer through the stipulation and summary judgment process (presumably for 2010) but then ordered the taxpayer to file written testimony stating his disagreement of the NOD for 2009 but the taxpayer failed to do so.

The Tax Court used its Rule 123(a) power which allowed the Court to default the taxpayer’s case, and pursuant to that rule, enter a decision against him.

Taxpayers without substantiation are a common phenomenon even when they are not in prison, so it was likely nearly impossible for the petitioner in this case to retrieve old records – but to view this as just another lack of substantiation case may be incorrect, because the Court took the time to describe the difficulties involved in resolving cases when a taxpayer/petitioner is in prison.

The Court referenced the BTK serial killer’s Tax Court case (in which the Court allowed the BTK killer to participate in trial via phone pursuant to Tax Court Rule 143). The Court also discussed that writs of habeaus corpus ad testificandum, which is an order from the court that a prisoner be brought to court to testify, are difficult to manage and security concerns make transportation difficult. Those concerns allow the Court to weigh the amount at issue with the need to find economical solutions for resolving the case.

Take-away points:

  • If a practitioner has a client in prison, the Tax Court may use Rule 143 in order to resolve the case without requiring the petitioner to be there in person.
  • These types of cases present potential substantiation-related issues and may require some creativity on the part of the practitioner.

 

There is another way to deal with prisoners, which is to try the case inside the prison.  In the Richmond office, we had more than our fair share of spy cases in which the spy neglected to report the income from spying on their tax return.  In the case of master spy, Aldrich Ames, he sought to contest the determination of additional income in Tax Court.  The Court decided to try the case inside the maximum security prison in Allenwood, PA.  John McDougal and Richard Stein tried the case for the office against Mr. Ames who represented himself.  The opinion is reported here.  Keith

Taft v. Comm’r: Innocent Spouse Relief Generates a Refund

We welcome back frequent guest blogger Carl Smith who writes about an innocent spouse case in which the Tax Court granted relief under a subsection permitting the innocent taxpayer to obtain a return of money previously taken from her to satisfy the liability caused by her ex-spouse.  Because the IRS frequently defaults to granting relief in a way that prevents the innocent spouse from obtaining refunds, this case shows a path to a more complete victory.  Keith

A number of people have congratulated Keith for contributing to a victory last month for a taxpayer seeking a $1,500 refund under the innocent spouse provisions at section 6015See Taft v. Commissioner, T.C. Memo. 2017-66.  Keith and I had filed an amicus brief in the case on behalf of the Harvard Federal Tax Clinic.  In it, we agreed with pro bono Florida attorney Joe DiRuzzo and his firm that a regulation on which the IRS relied to deny the refund under subsection (f) (equitable relief) was invalid – though invalid for different reasons than articulated by Joe and his firm.  But, as noted in footnote 4 near the end of the opinion, Tax Court Judge Vasquez never had to discuss the regulation’s validity, since he found the refund authorized under subsection (b) (traditional relief), even though the taxpayer had also been nominally granted relief under subsection (c) (separation of liability relief), which does not allow for refunds.  So, really, Keith and I did not win this case.  Rather, the taxpayer, aided by Joe and his firm, did.

In any event, the Taft opinion provides a useful reminder of some of the rules on getting a refund under the innocent spouse provisions.  And a post on it may alert others who find themselves in this position to the regulation invalidity argument.

read more...

The traditional way to bring a refund suit is to file an administrative claim, which, if not allowed, forms the basis of a suit for refund in district court or the Court of Federal Claims.  But, when Congress, in section 6015(e)(1)(A), also gave the Tax Court stand-alone jurisdiction to “determine the relief available to the individual under” section 6015, that included also determining whether a taxpayer was due a refund, even in the absence of predicate unpaid taxes.  Thus, Ms. Taft had her choice of bringing this refund action in any of three federal courts.

The pro se Ms. Taft first filed a Form 8857 seeking a refund under section 6015.  Note that she could not have used a Form 1040X to seek the refund, since the year involved, 2010, was one in which she had filed a joint return, and she did not want to file a joint amended return with the former husband that she had divorced in 2013.  The IRS treats a Form 8857 as a refund claim for purposes of the section 6511 statute of limitations.  Prop. Reg. § 1.6015-1(k)(4) (Nov. 19, 2015) (“Generally the filing of Form 8857, ‘Request for Innocent Spouse Relief,’ will be treated as the filing of a claim for credit or refund even if the requesting spouse does not specifically request a credit or refund.”).  Her refund request was timely because the IRS had taken about $1,500 of her reported overpayment on her 2012 return (filed in 2013) and applied it to fully pay the 2010 joint deficiency at issue.  She filed the Form 8857 less than two years after the overpayment was applied, so she qualified under the 2-years-from-payment refund statute of limitations in section 6511(a).

Since, by the time she filed the Form 8857, she was divorced, she was entitled to elect (c) (separation of liability) relief.  This led to the first complication, since relief under (b) and (f) can entitle a taxpayer to a refund, but relief under (c) cannot.  Section 6015(g)(3).  The reason why Congress made a refund under (c) unallowable is because it made relief under (c) so easy to obtain.

Relief under (c) applies to deficiencies when, at the time the Form 8857 is filed, the taxpayer is divorced, legally separated, or has been living apart from the taxpayer’s spouse for at least 12 months.  For relief under (c), a taxpayer merely elects to separate his or her liability from that of his or her spouse based on their respective contributions to causing the deficiency.  In this case, the deficiency was tax on about $4,500 of unreported dividends from stock Mr. Taft owned and that he had acquired as an employee of the supermarket chain, Publix.  Mr. Taft had worked for many years at Publix until he was fired in 2009.  Relief is available under (c) even where it would not be inequitable to hold the electing spouse liable (e.g., where he or she significantly benefited from the underpayment and would have no hardship in paying the amount).  The only way the IRS can deny relief under (c) is for it to prove (note the burden shift) that the taxpayer had actual knowledge of the item giving rise to the deficiency.  The IRS concluded that Ms. Taft did not see the statements addressed to Mr. Taft that would have shown the exact amount of dividends that were unreported, so, in the notice of determination, the IRS conceded that Ms. Taft was entitled to relief under (c) because she did not have actual knowledge.  But, that relief under (c) did absolutely nothing for Ms. Taft, since she had (involuntarily) already fully paid the deficiency and was only seeking a refund, which could not be granted under (c).

The IRS then went on to deny Ms. Taft the refund under (b).  Under (b), relief is only available in the case of deficiencies if, among other things, a taxpayer had no reason to know of the deficiency and it would be inequitable to hold the taxpayer liable for the deficiency.  The IRS argued that she should have known that there were unreported dividends from Publix because for many prior years she had signed joint returns that reported such dividends.  The IRS also argued that it would not be inequitable to hold Ms. Taft liable for the deficiency.

Relief under subsection (f) (including refunds) is available if only two conditions are met:  First, relief is “not available” under subsections (b) or (c).  Second, it would be inequitable to hold the taxpayer liable for the deficiency or underpayment.  Reg. § 1.6015-4(b) (which applies to relief under (f)), states:  “This section may not be used to circumvent the limitation of § 1.6015-3(c)(1) (i.e., no refunds under § 1.6015-3) [i.e., the regulations under subsection (c)]. Therefore, relief is not available under this section to obtain a refund of liabilities already paid, for which the requesting spouse would otherwise qualify for relief under § 1.6015-3.”  This regulation was controversial before it was enacted in 2002.  It seems to prohibit a refund under (f) – even if the taxpayer can show that it would be inequitable for the taxpayer to be held liable for the deficiency – because of qualification for nonexistent relief under (c) (which does not require proof of inequity).  The IRS argued that since relief had been “available” to Ms. Taft under (c), she was not entitled to a refund attributable to the Publix dividend underreporting deficiency.  The IRS also argued that it was not inequitable to hold Ms. Taft liable, in any event.

Judge Vasquez held that, even though Ms. Taft could not get a refund under (c), she could get a refund under (b).  Mr. Taft had started an affair, which Ms. Taft discovered in 2011.  During 2010, Mr. Taft, unbeknownst to Ms. Taft, liquidated all the family savings (including the Publix stock) and spent them on himself and his girlfriend.  Wanting to conceal his affairs (both emotional and financial) from Ms. Taft, when it came time to prepare the 2010 joint Form 1040, he did so with the long-time accountant without her present and had the return e-filed.  That return revealed all the income from liquidating the family assets, though mistakenly left off the Publix dividends.  Mr. Taft did not let Ms. Taft see a copy of the return, though he assured her that it had been properly prepared by the long-time accountant.  Given all this secretiveness, Judge Vasquez held that Ms. Taft had no reason to know of the deficiency for purposes of that requirement for (b) relief.

Given the fact that Mr. Taft had wasted the family assets in his affair and so Ms. Taft did not benefit in the slightest from the Publix dividends and Ms. Taft’s lack of knowledge of the underreporting, Judge Vasquez also held that it would have been inequitable to hold Ms. Taft liable – another condition for (b) relief.

Since the judge granted Ms. Taft a refund under (b), he no longer had to reach the issue of refunds under (f) and the possible invalidity of the regulation under (f).

The Regulation’s Possible Invalidity

Joe DiRuzzo took on the Taft case pro bono at a Tax Court calendar call.  It was his first innocent spouse case, so, knowing I was experienced in this area, he gave me a call about it later that day.  We both were worried that the judge might find that Ms. Taft should have known about the unreported Publix dividends based on the prior-year reporting of similar dividends.  In that event, Ms. Taft could not get relief under (b), and the issue of relief under (f) (and the validity of the regulation under (f) possibly prohibiting a refund) would be squarely presented.

Despite the small amount involved in the case, Joe asked the court for permission to do post-trial briefs.  And he then immediately did a FOIA request of the IRS for all comments submitted on the proposed regulations that were finalized in 2002.  Finding a few comments objecting to the proposed (f) refund regulation limitation and not feeling the IRS had adequately responded to those comments, in his brief in Taft, Joe challenged the validity of the regulation under the Administrative Procedure Act.  He made the same argument that had recently been successful in Altera Corp. v. Commissioner, 145 T.C. 91 (2015) (currently on appeal in the Ninth Circuit):  that the IRS had not sufficiently responded to the comments or provided a “reasoned explanation” for why it reached the result that it did under the standard set out in Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29 (1983).

Keith and I then got permission from the court to weigh in as amicus, arguing in our brief in Taft that the regulation was invalid under the tests of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).  We argued that the regulation added a limitation on getting a refund under (f) that was not in the statute – i.e., preventing circumvention of the no refund rule of subsection (c).  We pointed out that there could be no circumvention because a refund under (f) was not automatic, since, under (f), one had to prove inequity (something that was irrelevant under (c)).  We cited to the Tax Court’s opinions in Lantz v. Commissioner, 132 T.C. 131 (2009), revd. 607 F.3d 479 (7th Cir. 2010), and Hall v. Commissioner, 135 T.C. 374 (2010), which made similar points that the 2-year period for requesting (f) relief imposed by § 1.6015-5(b)(1) did not need to be imposed to prevent the circumvention of the 2-year periods provided by statute for (b) and (c) relief because (f) relief (by contrast) requires additional proof of a number of events that may occur years after the returns are filed.

In the end, the work that Joe DiRuzzo and his firm and that Keith and I did was irrelevant to the court’s decision to grant a refund in Taft under (b).  But, we know this situation occurs now and then.  Recently, at least one attorney with a section 6015 refund case contacted me with the same problem concerning refunds under the regulation under (f) where useless (c) relief was arguably “available”.  I have linked to the two briefs filed in the Taft case, just in case anyone might be helped in a future litigation by seeing the arguments we raised.  And readers should also know that Joe DiRuzzo has on a disk copies of all the comments made on the section 6015 regulations that were adopted in 2002, which is not only a resource for this issue under the (f) regulations, but for any other challenge to the 2002 regulations.

Finally, I would note that the IRS proposed new section 6015 regulations on November 19, 2015, that are still awaiting adoption.  The proposed regulations retain the current sentences quoted above, but add this:  “For purposes of determining whether the requesting spouse qualifies for relief under § 1.6015-3, the fact that a refund was barred by section 6015(g)(2) [res judicata] and paragraph (k)(2) of this section [no refunds under (c)] does not mean that the requesting spouse did not receive full relief.” Prop. Reg. § 1.6015-1(k)(3).  The IRS is trying to buttress its argument that even relief under (c) that is, as a practical matter, useless (because no refund is allowed under (c)), is relief that precludes a refund under (f).

 

Innocent Spouse Injured by Using the Wrong Form

The difference between innocent and injured spouse can create confusion.  That confusion gets illustrated in the case of Palomares v. Commissioner, T.C. Memo 2014-243 which will soon be argued before the 9th Circuit by a student at the tax clinic at Gonzaga Law School.  The case illustrates something that regularly happens in innocent spouse case – the innocent spouse’s refunds get offset by the IRS to satisfy the liability of the “liable” spouse – and getting them back can prove very difficult for the innocent spouse.

read more...

For anyone unfamiliar with the innocent spouse and injured spouse provisions, I will briefly discuss the distinction between the two types of relief.  Innocent spouse relief allows a spouse who has filed a joint return to obtain relief from the joint and several liability that results from filing a joint return if the spouse requesting relief meets certain criteria set out in IRC 6015(b), (c) or (f).  Injured spouse relief allows a spouse who files a joint return to recover the portion of the refund resulting from that return which relates to the liability of the requesting spouse when the refund would otherwise go to satisfy a tax, or other liability subject to offset, owed solely by the other spouse.  While both forms of relief result from filing a joint return, the goal of each type of relief differs and the difference can create confusion for someone who does not regularly handle these types of cases.

Ms. Palomares got confused.  She needed innocent spouse relief but filed Form 8379 designed for use by injured spouses.  The IRS recognized her confusion and provided her with the correct form, Form 8857.  Upon receipt of the correct form, Ms. Palomares eventually filed it but the delay creates the issue in the case.  The IRS determined she deserved some relief as an innocent spouse; however, the delay in filing the correct form limited that relief.  After incurring the joint liability for which she sought innocent spouse relief, Ms. Palomares found that the IRS took the refunds she claimed in subsequent years in order to satisfy the unpaid liability on the joint return.  In seeking innocent spouse relief, she also wanted a return of the refunds the IRS had offset against the joint liability.  The issue here turns on the timing of her request for refund, which turns on whether the filing of the incorrect form nominally seeking injured spouse relief can meet the requirements of the informal claim doctrine allowing her request for relief to relate to the date of filing the injured spouse relief rather than the date of filing the correct form for innocent spouse relief.

In addition to the general confusion that exists between innocent and injured spouse relief, Ms. Palomares had the additional handicap that English was not her first language, and she spoke very little English.  The years at issue for the refund are 2005 through 2008.  By these years, she had separated from her husband, and she filed returns using the filing status of head of household.  As mentioned above, the IRS took the refunds reflected on these returns as it should using the power of offset granted in IRC 6502.  When she did not receive her refunds for 2006 and 2007, she sought assistance from the Northwest Justice legal clinic which helped her fill out the wrong form on July 1, 2008.  This clinic is not a low income taxpayer clinic but a clinic providing general legal assistance.  On September 24, 2008, the IRS sent her a letter with the correct form.  The Court found that “She did not call or otherwise contact respondent with respect to the September 24 letter.”

Ms. Palomares’s life intervened and kept her from focusing on her taxes for almost two years.  Finally, in August, 2010, she filed the Form 8857 seeking innocent spouse relief with the correct form and seeking a return of the refunds taken from her for four years.  Initially, the IRS took the position that the request came too late because she sent it more than two years after collection activity had begun; however, on May 14, 2012 the IRS reversed its position regarding the two year rule and requests for relief under IRC 6015(f).  The IRS granted her relief as an innocent spouse; however, it limited her refund to amounts paid within two years of the filing of the Form 8857 in 2010.  She appealed arguing that the relief should date from the submission of Form 8379 and that is the issue before the court in this case.

The Tax Court found that the Form 8379 did not meet the requirements for an informal claim.  The requirements for an informal claim do not come from a statute since this is an equitable remedy constructed by the courts to prevent an injustice.  As the Court notes, the sufficiency of an informal claim largely turns on the facts; however, courts generally look for certain markers in deciding whether to treat something other than a formal claim for refund as an adequate informal one.  The underlying principle concerns exhaustion of administrative remedy and whether the IRS had a chance to consider the request.  The more the taxpayer can show that the inappropriate document filed essentially apprised the IRS of what it needed to know in order to grant a refund, the more likely the taxpayer will succeed.

The Court states that a qualifying informal claim must satisfy three requirements.  It quoted from a non-precedential memo opinion to set out the requirements:

It has long been recognized that a writing which does not qualify as a formal refund claim nevertheless may toll the period of limitations applicable to refunds if (1) the writing is delivered to the Service before the expiration of the applicable period of limitations, (2) the writing in conjunction with its surrounding circumstances adequately notifies the Service that the taxpayer is claiming a refund and the basis therefor, and (3) either the Service waives the defect by considering the refund claim on its merits or the taxpayer subsequently perfects the informal refund claim by filing a formal refund claim before the Service rejects the informal refund claim. Jackson v. Commissioner, T.C. Memo 2002-44, slip op. at 10.

The Court found that the Form 8379 meet the first test citing to Kaffenberger v. United States, 314 F.3d 944 (8th Cir. 2003).  The Court found that the Form 8379 did not convey sufficient information to notify the IRS that Ms. Palomares sought relief from the liability created by the joint return with her then husband and sought a refund of amounts applied to the liability created by the joint return.  The Court determined that sending her the form for innocent spouse relief amounted to guess by the IRS that she might have intended to request that relief rather than an awareness that she wanted such relief.  The Form 8379 did not reference 1996, the year for which she wanted innocent spouse relief.  Because it did not reference that year, the IRS lacked sufficient clues to know exactly what she wanted and to make a determination based on her Form 8379 other than that the form she sent did not work for the circumstances of her situation since she had not filed a joint return in the years to which the form related.  So, the Court denied her claim for refund based on the date of filing the Form 8379.

Ms. Palomares presents sympathetic facts.  She clearly did not know the difference between innocent spouse and injured spouse, and neither did the clinic that assisted her with her divorce and that helped her file the wrong form.  The IRS gave her the correct form relatively quickly but she delayed filing that form because of things happening in her personal life.  She appears to deserve the refunds she seeks.    The case deserves watching as it heads into argument in the 9th Circuit because of the effort to expand the informal claim doctrine into an area of some confustion.  If the IRS loses, it will probably do so because it was nice and sent her the innocent spouse form.  The outcome turns on whether the IRS knew what she wanted to a degree that would have allowed it to make an innocent spouse determination at the time it received the injured spouse form or instead made an educated guess based on the unavailability of the relief requested on the form she submitted and the confusion surrounding these two similar but different forms of relief available to spouses.

Mixing a Pro Se Taxpayer and Confusing Innocent Spouse Deadlines Leads to Bad Result

In Vu v Commissioner, a summary case from late last year, the Tax Court held that a pro se taxpayer did not establish the Tax Court’s jurisdiction to hear an appeal of an IRS’s denial of a request for innocent spouse relief. What makes the case unusual is that the taxpayer Amanda Vu did file a petition requesting relief but she did so before the IRS issued what it styled as a notice of determination and just prior to 6 months elapsing after her request to the IRS for relief was made. In other words, her petition jumped the gun on the two separate avenues needed to confer the Tax Court’s jurisdiction.

read more...

Before digging into the case I note that I came across the case and wrote a draft of this post without realizing that Carl and Keith are now representing the taxpayer Ms. Vu. As I discuss below, what intrigued me initially about the case was how the result was unfair. Carl and Keith and the Harvard Tax Clinic have filed a motion to set aside the dismissal and remove the case’s small case designation. I will discuss below why the Tax Court dismissed the case, and why I agree with the Tax Court judge that the outcome inequitable and hope that the legal argument Carl and Keith have advanced persuade the Tax Court to reconsider its approach.

I also note that we have discussed premature petitions before, albeit in the context of straight up deficiency cases. In Tax Court Order Finds Jurisdiction Even When Taxpayer Files a Petition Before the IRS Issues Notice of Deficiency a taxpayer filed a petition prior to the stat notice but in response to other correspondence IRS issued in its exam. I discussed how the Tax Court in Weiss v Commissioner went out of its way to confer jurisdiction, essentially allowing the taxpayer’s response to IRS motion to dismiss the case confer jurisdiction, so long as the taxpayer amended its petition and the IRS’s motion and the taxpayer’s response were issued prior to the actual 90-day period ran. I speculated that the problem of premature petitions filed in good faith was likely a common one, and that the Weisses were lucky in that the IRS motion, and their response, were within the 90-day period.

Vu was not nearly as fortunate as Weiss. I will simplify the facts to bring home the procedural conundrum Vu found herself in.

She, with a friend’s assistance, submitted a request for innocent spouse relief that she signed and dated February 28, 2014. IRS recorded it as received on March 24, 2014.

Vu testified that she received from IRS on June 12 an “Innocent Spouse Relief Lead Sheet” that was dated June 4, 2014. The document was designated Workpaper # 615 and reads in part:

Conclusion: (Reflects the final determination on the issue.)

Conclusion for 6015(b):

Note: A summary of your conclusion should go here. Ensure that reference is made as to what factors are met if allowing or granting partial relief, and what factors are not met

It was concluded that the Taxpayer does not meet innocent spouse relief under IRC 6015(b).

*******

Conclusion for 6015(c):

Note: A summary of your conclusion should go here. Ensure that reference is made as to what factors are met if allowing or denying partial relief, and what factors are not met if disallowing or granting partial relief.

It was concluded that the Taxpayer does not meet innocent spouse relief under IRC 6015(c).

*******

Conclusion for 6015(f):

Note: A summary of your conclusion should go here.

It was concluded that the Taxpayer does not meet innocent spouse relief under IRC 6015(f).

*******

Vu sent in a petition to Tax Court and it had a September 8, 2014 postmark, and Tax Court received it on September 12, 2014.

About one month after Vu filed her petition, on October 9, 2014 IRS mailed Vu a final determination denying her request for innocent spouse relief.

On November 3, 2014, IRS filed an answer. In the answer it denied issuing a notice of determination from New Mexico and indicated that it issued a notice of determination from Phoenix on October 9, 2014. IRS did not in the answer indicate that the petition Vu filed was premature; that was too bad because if it had flagged the issue, the taxpayer, like the early bird in Weiss, could have cured her defect and filed a petition that would have clearly been timely.

On January 27, 2015 Vu, more than 90 days after issuing what it called a final determination and over four months after Vu filed her petition, IRS filed a motion to dismiss Vu’s petition on the ground that she filed it prior to the time that the IRS issued its October 9 notice of determination.

Vu did not respond to the Tax Court’s order ordering a response to the motion. The motion was argued at a June 2015 calendar in New Mexico.

The Law

A petition to Tax Court is timely in innocent spouse cases if it is made (1) within 90 days of the mailing of a notice of final determination of relief, or (2) if the IRS has not yet mailed a notice of determination, at any point after six months has transpired since the taxpayer’s request for relief was made with the Commissioner.

Applying the above rules to Vu meant that the Tax Court would have had jurisdiction under two alternate theories:

  • if it considered the IRS’s Innocent Spouse Relief Lead Sheet IRS issued sometime in June a notice of determination and Vu filed a petition within 90 days of that determination, or
  • if at the time she filed her petition to Tax Court 6 months had elapsed following her request for relief and IRS had issued no determination in the case.

On both grounds the Tax Court held that Vu came up empty leaving the Tax Court to conclude that it had no jurisdiction in the case.

Both issues are interesting and walk us down some complicated procedural rules. First let’s look at issue 1. The opinion indicates that it likely would have been willing to conclude that the Workpaper #615 correspondence was a determination, noting cases such as Barnes v Commissioner that neither the statute or regs impose a specific form or spell out the content of what should be in a determination and the language of the workpaper led the taxpayer to conclude it was a final IRS determination. The problem for Vu was that there was no evidence in the record when IRS issued that correspondence, making it impossible to conclude that the petition she filed was within 90-days (and allowing the court to punt on concluding definitively that the Workpaper was a determination).

There were two possible dates: June 4, when the document was dated, or June 12, when Vu claimed to receive it. Determining which was correct was key, because if it were issued on June12th the petition she mailed on September 8 would have been filed within 90 days, using the mailbox rule that allows date of mailing to be the date of filing. If it were issued on June 4th the petition would have been filed outside the 90-days.

According to the Tax Court Vu did not offer any evidence as to why June12th was the correct date:

As for the June 12, 2014, date, petitioner however did not present any evidence whatsoever showing that any relevant action occurred on June 12, 2014, and has specifically failed to establish that respondent provided her the requisite final determination notice on that date.

What about issue 2, the 6-month rule? That issue turned on whether Vu’s request was considered made on February 28, when she signed, dated and testified that she mailed it, or March 24, when IRS records treated the request as received. If the operative date were February, then Vu’s petition would have conferred jurisdiction, as the petition she mailed on September 8 and which the Tax Court received on September 12 would have been filed after 6 months had elapsed from her administrative request for relief and prior to the IRS’s issuance of the October 9 final determination.

Vu came up empty here too. How it gets there requires a detour to Section 7502, the mailbox rule. The Vu opinion treats the statutory language “made” in the same manner as if it interpreted when the request were filed. The opinion treated the request for relief as having been filed or made in March (when IRS received it) and not when  mailed in late February. It does so because the mailbox rule under Section 7502 is actually an exception to the general rule that a document is filed when it is received by the IRS. Recall that the mailbox rule of Section 7502 only applies when documents are filed with and received after the expiration of a filing period. Here, the filing period limitation relates to the time period to bring an administrative request for innocent spouse relief, and that limitation was years in the future:

Because petitioner’s Form 8857…was filed before respondent initiated any collection action with respect to that year (indeed, before respondent even issued the joint notice of deficiency to petitioner and Mr. Nguyen with respect to that year), we find that respondent timely received the form on March 24, 2014; section 7502 therefore does not apply, and the relevant date for section 6015(e)(1)(A)(i)(II) is not six months after the alleged mailing date of the form but six months after the date of receipt of the form, or September 25, 2014.

The opinion made clear why Vu came up short:

Consequently, we can exercise jurisdiction over the petition herein only if it was filed “at any time after the earlier of” October 9, 2014 [the date of the formal notice of determination], or September 25, 2014 [six months after Vu’s request was made], see sec. 6015(e)(1)(A)(i), and “not later than” January 7, 2015, see sec. 6015(e)(1)(A)(ii). Because the petition was filed with the Court on September 12, 2014, it does not meet this requirement and we thus lack jurisdiction over it.

This opinion noted the unfairness of the outcome:

While we acknowledge that this is an inequitable result, as petitioner filed her petition believing in good faith that it was timely and her opportunity to file another petition has now expired, we are unfortunately constrained by the statute, and our role is to apply the tax laws as written.

Final Thoughts

This is a bad outcome. I do not understand why counsel for IRS did not alert Vu of the premature petition issue earlier in the process. It appears that counsel for the IRS did not appreciate the 90-day issue fully until it filed the motion; otherwise one would have hoped that counsel would have filed the motion in lieu of the answer. That would have given Vu time to file a petition within the 90-day window, as the taxpayer in Weiss did. I also note that the IRS only raised the 6-month issue at the hearing itself on the motion, which was many months after the IRS filed its motion to dismiss.

We have discussed before the difficulties associated with confusing IRS correspondence. When you add to the mix the reality that many taxpayers are pro se and not equipped to understand the nuances of differing IRS procedures you can get to a place where a taxpayer is denied her day in court despite efforts to have her case heard.

There is a possibility that the Tax Court will change its mind and the case will get heard. Keith and Carl in their motion to set aside the dismissal argue that the IRS forfeited the right to make an SOL argument by waiting too long in this case, as it should have been made in the answer. This is an argument similar to the way the Supreme Court in the 2004 case of Kontrick v. Ryan held that a bankruptcy debtor waited too long in his case to raise the untimeliness of a creditor’s filing because the time period was not jurisdictional, so had to be raised earlier in the case.  Kontrick is the Supreme Court opinion that first began the narrowing of the use of the word “jurisdictional”.

We have discussed the issue of jurisdictional deadlines repeatedly; the most recent was Carl’s discussion of Tilden earlier this week, an opinion that does not help the argument in Vu. Admittedly there is no direct precedent in support of Vu’s argument, and the Tax Court in Pollock v Commissioner has previously held that the deadline under Section 6015(e)(1)(A) was jurisdictional and not subject to equitable tolling. To be sure, there is no long line of Supreme Court precedent holding deadlines under Section 6015 jurisdictional, and the Tax Court’s opinion in Pollock was prior to the Supreme Court and other courts’ narrowing of the term jurisdictional. Moreover, the language in Section 6015(e) consists of a single sentence containing both jurisdictional grants and time periods to file a petition, a type of statute that the Supreme Court has previously held to be not jurisdictional.

Keith and Carl have a few cases other than Vu in the pipeline making this argument and I hope the courts at a minimum address the changing law and meaningfully apply those changes to these and other deadlines where IRS conduct has contributed to taxpayer confusion and the denial of a day in court.

Knowledge and an Ex-Spouse’s Request for Relief from a Tax Liability

Last night I taught my last income tax class of the semester in the Villanova Graduate Tax Program. Jim Fee, one of my longtime colleagues, suggested a few years ago that the course should end with a review of the tax consequences of divorce. Jim’s suggestion has worked well, as it allows us to discuss income and deduction issues associated with alimony, tease out a complex statutory recapture provision for excess alimony payments, consider and compare property transfers under Section 1041 with other transactions like part-gift/part-sales, and review the deductibility of legal fees associated with the divorce. It is a nice way to review concepts while at the same time introducing a topic that is essential for practitioners.

How does this relate to procedure? In class we only touch briefly on issues of filing status and mention though do not discuss in detail issues relating to relief from joint and several liability. That is left for our Tax Procedure class. And of course for Procedurally Taxing, which takes us to an early December Tax Court summary opinion, McDonald v Commissioner.

McDonald involves Section 6015(c), which for qualifying spouses results in an allocation of liability between the nonrequesting spouse and the spouse requesting relief. It provides a nice platform for discussing the difficult issues that arise when ex spouses do not agree on whether one is eligible for relief and the challenges associated with determining what constitutes disqualifying actual knowledge of an erroneous position on a return.

read more...

Section 6015(c) relief is more mechanical than the statutory basis for relief under either Section 6015(b) or the equitable relief rules in Section 6015(f). To get (c) relief the requesting spouse must be divorced, legally separated or widowed, or not part of the same household for 12 months prior to the request. In addition, there must be a valid joint return, the deficiency must be allocable (at least in part) to items pertaining to the nonrequesting spouse, and the request must be made within two years of the first collection activity.

While the test is somewhat mechanical, the statute provides that no relief is eligible if the IRS demonstrates that at the time that the individual signed the return the requesting spouse had “actual knowledge” that that “any item giving rise to a deficiency (or a portion thereof)” is erroneous. (Note that relief under Section 6015(b) is denied if the requesting spouse does not have actual knowledge but has “reason to know” of an understatement). Regulations expand a bit on the actual knowledge rule, providing that if “the requesting spouse had actual knowledge of an erroneous item that is allocable to the nonrequesting spouse, the election to allocate the deficiency attributable to that item is invalid, and the requesting spouse remains liable for the portion of the deficiency attributable to that item.” The regulations place the burden of proving knowledge on the IRS, which must establish by a “preponderance of the evidence” that the requesting spouse had actual knowledge of the erroneous item.

An interesting feature of spousal relief cases is that the statute allows a nonrequesting ex spouse to participate in a Tax Court proceeding; it is possible for the IRS to agree with the requesting spouse on the request for relief only to have the nonrequesting spouse intervene and become a party. Not surprisingly, ex-spouses do not always see eye to eye on eligibility for relief, and at times IRS may take a back seat and let the Tax Court judge decide issues like credibility and apply the law to the facts at hand.

That takes us to the McDonald case. I will simplify for purposes of highlighting the procedural issues. There were three years in issue. In the years in question the husband was a full-time employee of IBM working as an IT specialist. The wife operated a travel agency and was attending nursing school as a part time student. After graduating nursing school the wife worked part-time as a nurse. While the husband did use a management company for day-to-day management of the properties he did actively participate in its operations; the wife was a co-owner of some of the rental properties but otherwise according to the opinion only occasionally answered phone calls and took messages if the management company called the husband.

At trial the wife testified that she had no access to the business records because her ex kept all financial records relating to the real estate business in a locked storage room. In addition, she testified that she relied on her ex and a CPA to prepare the tax returns. The marital settlement agreement stated that the ex owned the real estate rental business and he received all the rental properties pursuant to that agreement.

The McDonalds filed the first of the returns for the years 2009-2011 in June of 2011. A CPA prepared the returns, and Mrs. McDonald testified that while she went to the CPA’s office to sign the returns the preparer did not review the return with her. She did testify, however, that a couple of years earlier that the CPA told her that “one or both of them qualified as real estate professionals by virtue of the substantial time and effort devoted to the rental real estate activity.”

The IRS examined the returns and made adjustments, including disallowing losses in excess of $25,000 on the real estate activity due to its conclusion that Mr. McDonald was not a real estate professional because he did not “materially participate” in a “real property trade or business.” (To put some context on this during the years in question the returns reflected about $119,000, $78,000 and $58,000 in real estate losses). In addition, one of the returns failed to include approximately $10,000 in wages attributable to Mrs. McDonald’s part-time work as a nurse.

The McDonalds conceded the adjustments in the notice of deficiency but Mrs. McDonald raised as an affirmative defense the issue of relief under Section 6015(c) with respect to the disallowed real estate losses. IRS agreed with Mrs. McDonald that she was entitled to relief; Mr. McDonald opposed her request for relief because he claimed that she had actual knowledge of the losses.

Before getting to what actual knowledge means in this context the Tax Court had to resolve the preliminary issue of burden of proof. The statute is silent on who has the burden when the ex spouse (and not the IRS) opposes the request for relief; the opinion notes that the Tax Court has held that the inquiry is “whether actual knowledge has been established by a preponderance of the evidence presented by all three parties.”

How did the Tax Court resolve this pickle of determining whether Mrs. McDonald had actual knowledge? There have been a number of cases teasing out the concept of actual knowledge both on the income and deduction side. Citing to the Cheshire case, the opinion notes that “[a]ctual knowledge” means “an actual and clear awareness (as opposed to reason to know) about the item giving rise to the deficiency.” In the context of deductions, the opinion discussed how the Tax Court considers whether “the requesting spouse has knowledge of the factual circumstances which made the item unallowable as a deduction.”

The term factual circumstances is not clear on its face, and the key in this case was whether the circumstances related to an awareness of the losses and expenses in the business itself or the actual tax treatment of the losses that were disallowed. Here the opinion considered circumstances in relation to the specific treatment of the losses:

The factual circumstance which made the balance of those losses unallowable as a deduction was that Mr. McDonald was not a real estate professional, i.e., that he did not “materially participate” in a “real property trade or business.”… We accordingly must decide whether Mrs. McDonald had “actual knowledge” that Mr. McDonald did not qualify as a real estate professional under the governing statutory standards.

The opinion goes on to discuss those standards and how given Mrs. McDonald’s lack of sophistication and the advice she received from the CPA she did not have “actual and clear awareness” of the disallowed losses:

She had no knowledge of Federal tax law and was advised by their C.P.A. in 2009 that she or Mr. McDonald (or both of them) did qualify as a real estate professional. She had no reason to question the C.P.A.’s advice: Although she did not know the exact scope of Mr. McDonald’s rental real estate activity, she was aware that his participation in the activity was significant. She knew that he devoted substantial time to the recordkeeping and financial aspects of the real estate business; that he kept volumes of financial records in a locked room to which she had no access; and that the management companies routinely called him when decisions about the rental properties needed to be made.

Conclusion

While McDonald is a non-precedential opinion, it is a helpful case for practitioners. It resolved the question of actual knowledge in a way that takes into account the sophistication of the taxpayer, the technical reasons for disallowance, and the taxpayer’s lack of awareness as to how the item should be treated for tax purposes. Knowledge of the mere existence of the expenses and even some engagement with the business that generated the deductions were insufficient to defeat relief.

Hiramanek Case Raises Issue of Collateral Estoppel When Spouse Intervenes as well as the Refusal of Tax Court to Accept Attempted Concession by IRS on Issue of Duress

Today, we welcome back guest blogger Patrick Thomas.  Patrick has just finished his Christine Brunswick Fellowship through which the ABA Tax Section sponsored his work for two years at the Low Income Taxpayer Clinic (LITC) located within the Neighborhood Christian Legal Clinic in Indianapolis, Indiana.  He will open the new LITC at Notre Dame Law School this fall as its first director.  He writes on an recent decision by Judge Halpern involving an interesting innocent spouse case with a couple of unusual procedural issues.  Keith

On May 10, Judge Halpern issued a memorandum opinion in Hiramanek v. Commissioner, T.C. Memo. 2016-92, denying innocent spouse relief in a standalone petition under section 6015(e). This case presents an interesting application of the collateral estoppel doctrine, along with a good example of circumstances under which a purported joint tax return is signed under duress. Mr. Hiramanek, the Petitioner (and a certified public accountant), was denied the opportunity to argue that a joint return was filed because of his prior intervention in his ex-wife’s case before the Tax Court, where the Court found that because the purported joint return was signed by Mr. Hiramanek’s wife under duress, she could not be held liable for the deficiency on that return. Because Mr. Hiramanek had effectively litigated this issue previously before the Court, he could not raise it again in his own proceeding under section 6015(e).

read more...

For tax year 2006, the IRS received what purported to be a joint tax return from the Hiramaneks. In March 2010 the IRS sent them a Notice of Deficiency, which determined a $27,222 deficiency, along with a $5,444 section 6662(a) penalty. Mrs. Hiramanek (“Ms. Kapadia” in the Court’s opinion) timely filed a petition, which both requested innocent spouse relief and disputed the deficiency in full. Mr. Hiramanek formally intervened in that case under Rule 325(b).

Prior to trial, Ms. Kapadia and the Service stipulated that she signed the purported joint return under duress and that therefore no deficiency existed with respect to her. The Court, however, did not accept the stipulation and proceeded to hold a trial on the duress issue. In his testimony at trial, Mr. Hiramanek disputed the allegations of duress, but otherwise did not introduce other relevant evidence.  Ms. Kapadia testified and introduced other evidence of a long history of abuse, along with the specific abuse that forced her signature on the tax return.

The Court found that Ms. Kapadia signed the return under duress and, accordingly, she was not liable for the deficiency. Specifically, the Court held Mr. Hiramanek’s contrary testimony not credible, while finding credible Ms. Kapadia’s testimony and evidence showing a history of abuse. (The Court also found that she qualified for relief under IRC § 66(c), which provides an exception from community property rules where spouses separately file). The Court’s ultimate findings as to the circumstances of duress are quite harrowing. According to the Court:

Throughout their marriage [Mr. Hiramanek] physical and verbally abused petitioner. During 2007 the abuse included threats against petitioner’s life, physical assaults, and verbal abuse. Petitioner documented several instances of abuse in a handwritten diary from December 13, 2005, to April 4, 2007.

In 2007 [Mr. Hiramanek] prepared a 2006 joint Federal income tax return . . . for himself and petitioner. On the evening of April 3, 2007, [Mr. Hiramanek] presented petitioner with a copy of the joint return for her signature. Petitioner refused to sign the return without first reviewing it. [Mr. Hiramanek] initially refused but, upon petitioner’s instance [sic], allowed her a quick glance at the return. Petitioner noticed that [Mr. Hiramanek] had claimed a casualty loss deduction of $35,000 for a break-in to their rental car while they were vacationing in Hawaii. [Mr. Hiramanek] had overstated the amount of the casualty loss deduction, and as a result, petitioner refused to sign the return.

Petitioner’s refusal to sign the return angered [Mr. Hiramanek]. He grabbed petitioner’s left arm and twisted it several times, resulting in bruising. He then struck petitioner on the back of the head with an open hand and pulled her hair with both hands. Finally, [Mr. Hiramanek] pushed petitioner on the jaw. Petitioner still refused to sign the return. Later that night, [Mr. Hiramanek] cornered petitioner in the bathroom and shoved her against the wall. He ordered her to the kitchen table and threatened her with physical harm and threatened that she would never see her children again if she did not sign the return. Petitioner, fearing for her safety, placed a scribble in the signature line of the return.

The next day . . . [Mr. Hiramanek] presented petitioner with a new version of the return in which he had removed the $35,000 casualty loss. Fearing for her safety, petitioner signed the return without review.

Hiramanek v. Commissioner, T.C. Memo. 2011-280, at 3-4 (Hiramanek I). Ms. Kapadia also filed a police report about this sequence of events, which she introduced at trial.

While the first Tax Court litigation was pending, Mr. Hiramanek filed his own request for innocent spouse relief with the Service, which was denied. He then petitioned the Tax Court for redetermination of his innocent spouse request, which eventually evolved into Hiramanek II. (Mr. Hiramanek appealed the first case all the way to the Supreme Court, which denied certiorari in late 2015. This resulted in a multi-year stay of the Hiramanek II proceedings. The Service filed a motion to lift the stay and for judgment on the pleadings on November 2, 2015.)

The Service argued that not only was no joint return filed, but Mr. Hiramanek was prohibited from arguing the existence of a joint return (a necessary predicate to innocent spouse relief) because of his involvement in the final determination in Hiramanek I. The Service specifically argued that the doctrines of res judicata and collateral estoppel gave Mr. Hiramanek only one bite at the apple on this issue—a bite he had already taken.

The Court largely agreed with the Service. It grounded its decision in the collateral estoppel doctrine, rather than res judicata; the Court recognized that IRC § 6015(g)(2) provides an exception to the res judicata doctrine, at least for innocent spouse petitions that are filed subsequent to the final determination of a tax deficiency.  As such, res judicata could not bar Mr. Hiramanek’s argument.

Mr. Hiramanek’s primary argument against the application of collateral estoppel was that the Court in Hiramanek I did not have jurisdiction to determine anything outside of the innocent spouse context once Ms. Kapadia formally withdrew her request for innocent spouse relief with the Service. However, because Ms. Kapadia filed her petition within the 90 day period after issuance of the Notice of Deficiency and included a “catch-all” request to invalidate the deficiency, the Court determined that they did have jurisdiction over any matter affecting the deficiency. Whether Ms. Kapadia signed the return under duress was centrally relevant to the existence of a deficiency; thus, the Court reasoned, they had jurisdiction to address that question.

Because Mr. Hiramanek actively participated in the resolution of the duress issue; that issue was identical to the dispositive issue in Hiramanek II; the Court had jurisdiction and rendered a final judgment; Mr. Hiramanek was a party to the prior litigation; and no operative facts had changed in the interim, Mr. Hiramanek was estopped from arguing that a joint return was filed. Therefore, because Mr. Hiramanek’s standalone petition necessitated a joint return and deficiency from which to seek relief—a requirement that could necessarily not be proven, given the collateral estoppel—the Court granted the Service’s motion for judgment on the pleadings.

This seems a fairly straightforward application of the collateral estoppel doctrine. However, there is a lesson to be learned for practitioners. Mr. Hiramanek was only prevented from relitigating the duress issue because he actively participated, as an intervenor, in the Hiramanek I litigation. Had he not formally intervened, collateral estoppel would provide no bar. Of course, the factual determinations would be highly probative evidence against his claim, so representatives of nonmoving spouses still would be well-advised to intervene in appropriate cases.

A more interesting situation could arise if the Court had accepted a settlement between Ms. Kapadia and the Service. In Dinger v. Commissioner, T.C. Memo. 2015-145, the Court concluded that a settlement, without a factual stipulation supporting the settlement, did not raise a collateral estoppel bar to subsequent litigation of the substantive facts actually underlying the settlement. Here, it appears the Service and Ms. Kapadia did have a factual stipulation that would have supported the settlement. But again, because Mr. Hiramanek would not have participated in that settlement, collateral estoppel would not apply. And, a stipulation alone would have less probative value than evidence introduced at trial, and would provide less finality to the petitioner seeking relief, as well as the Service.

Thus, in particularly compelling cases with substantial available evidence of abuse, like Ms. Kapadia’s, it may be prudent for an individual seeking innocent spouse relief, or the relief sought by Ms. Kapadia, to take this issue to trial and to accede to intervention by the nonmoving spouse. Even if the IRS Chief Counsel desires to grant innocent spouse relief, it may be in their interests to try the issue as well, given that it will save them from additional litigation down the line. Of course, this does not prevent tactics like Mr. Hiramanek’s that could extend the litigation, but given Hiramanek II, it appears that the Service could easily succeed with a motion for judgment on the pleadings in subsequent litigation brought by the nonmoving spouse.

 

 

 

 

Equitable Relief Case Gives Relief to Spouse on Late Filing Penalties and Interest Even Though Underlying Tax Attributable to Requesting Spouse

When spouses file a joint return reflecting an underpayment of taxes, the only avenue for relief from joint and several liability is equitable relief under Section 6015(f). When is it inequitable to hold a spouse liable?

Earlier this week’s Boyle v Commissioner is an interesting example of an equitable relief case involving a taxpayer who credibly testified that his wife had deceived him into thinking that she filed a tax return and paid the tax that was due. She had done neither, and after she died her husband found out and owed back taxes, late payment and filing penalties and interest. Despite the one off feel of many of the cases, Boyle raises unusual legal issues, including whether someone can get relief from penalties and interest but not the underlying tax.

read more...

The facts from the opinion itself set the stage for the tax issue:

During 2003 and many preceding years, petitioner [Mr. Boyle] was self-employed full time in the business of selling printer cartridges. He devoted substantial time during business hours to his sales work and also had a side business refurbishing cartridges that he pursued during evening hours. Petitioner relied on his spouse, Patricia J. Boyle (Mrs. Boyle), to handle the bookkeeping for his business, including the preparation of invoices and payment of bills. Mrs. Boyle also managed the household finances, including payment of household bills. The Boyles maintained a joint checking account during 2003. Although petitioner had access to the account and made deposits into it, Mrs. Boyle managed the account, including writing all checks to cover petitioner’s business expenses and the couple’s personal expenses.

As part of her management of business and personal finances, Mrs. Boyle also assumed responsibility for having the couple’s joint Federal income tax returns prepared and for filing them. She had done so for many years prior to 2003. Mrs. Boyle would gather information for their return preparer, and then present a prepared return to petitioner for his signature. She presented petitioner with a return prepared for 2003 for his signature and advised him that she would mail it. However, Mrs. Boyle did not in fact mail the return she had petitioner sign. Respondent’s account transcript for petitioner’s 2003 taxable year does not indicate that petitioner received any notice with respect to the Boyles’ failure to file a return or pay the tax for 2003 during 2004 or 2005. As more fully discussed hereinafter, petitioner belatedly filed a 2003 return in September 2006 when he discovered, after his wife’s death, that she had not done so. The first notice petitioner received from respondent concerning any problem for his 2003 taxable year was a notice of balance due issued one month after petitioner belatedly filed a 2003 return in September 2006.

After Mr. Boyle filed the 2003 joint return as a surviving spouse in September 2006 (showing $3451 in tax due), he sought equitable relief under Section 6015(f) from only the interest and late payment and filing penalties stemming from his spouse’s failure to file the return as she had promised in 2004.

Key Issues in the Opinion

There are some key issues worth highlighting in the opinion.

First, the IRS’s factors that it uses to determine eligibility for equitable relief that it has set out in a series of revenue procedures are not binding on the Tax Court. The most recent of those procedures and the one implicated in the case is revenue Procedure 2013-34. The Tax Court has stated many times (and again in Boyle) that it “considers” the Revenue Procedure factors but ultimately it decides on a de novo basis (both scope and standard of review) on what it thinks is fair.

Second, in Boyle, IRS took the position that a taxpayer is unable to request relief with respect to interest or penalties and that equitable relief can only be requested with respect to the underpayment and not additions to tax or interest. The Tax Court has rejected that position previously (a 2008 case called Kollar v Commissioner, at least with respect to penalties) and did so again in Boyle.

Next was the Tax Court discussion of the revenue procedure’s threshold conditions for relief, namely that the underpayment at issue was due to the requesting spouse’s income. IRS argued that because the tax on the 2003 return all stemmed from Mr. Boyle’s income, the underpayment was thus attributable to him with the effect then that it was not an appropriate case for granting relief. The Tax Court disagreed on two levels. First, it noted that it was not bound to follow the IRS’s threshold conditions. Second, it noted that IRS itself has discretion to waive the attribution requirement in cases of fraud and it analogized the wife’s deceit to fraud:

We believe what transpired here is sufficiently analogous to the fraud exception that it should give rise to an exception to the attribution condition. We are satisfied that Mrs. Boyle deceived petitioner concerning whether their 2003 return had been timely filed and the tax timely paid by having him sign a completed return and representing to him that she would take care of the rest.…

Our review of the account transcript persuades us that he filed a 2003 return before respondent issued any notice to him indicating that there were any problems for the 2003 taxable year. Thus, the items for which petitioner seeks section 6015(f) relief–the additions to tax for failure to timely file and pay, and the interest accruing during the period when petitioner was unaware that a 2003 return had not been filed–are attributable to Mrs. Boyle’s deceit. Given the totality of the facts and circumstances, we conclude that the attribution condition should not bar equitable relief. [footnotes omitted]

After dispensing then with the threshold bar to relief, the Tax Court went through the revenue procedure’s factors and ultimately found that all the factors were neutral with the exception of his lack of a significant benefit and knowledge or reason to know of the underpayment. With respect to significant benefit, the Tax Court again differed with the IRS’s view if the unpaid tax is small so that neither spouse received a significant benefit from its nonpayment, then this factor is neutral. Instead, the Tax Court views the lack of significant benefit as a factor favoring relief when the unpaid amounts in question were relatively small and would have produced little benefit for either spouse (as was the case here). For more on why the Tax Court is right here and the IRS’s view is wrong see Carl Smith’s post Tax Court Again Refuses to Apply One Part of Equitable Innocent Spouse Relief Rev. Proc. 2013-34.

Conclusion: Tax Court Gives Boyle Penalty and Interest Relief

On the factors, Boyle was a close case, and while I will not discuss them here, the opinion has an interesting discussion of the other factors (all of which besides significant benefit and reason to know were neutral), including Boyle’s somewhat less than clean compliance and payment history. But at the end of the day, the Tax Court felt that the lack of benefit and more importantly the deceit that contributed to his not knowing about the unfiled return were enough to tip the scales in favor of relief, in a limited way. It relieved him of the Sections 6651(a)(1) and (2) penalties for late payment and filing. More surprising to me was it also relieved him of interest from the period up until when he found out about the 2003 tax due when he filed the return, in September of 2006, stating that it was “appropriate to relieve petitioner of the interest that accrued during the period in which he reasonably believed the 2003 tax had been paid.” Given that taxpayers have very limited avenues to have the IRS abate interest, this aspect of Boyle represents a significant taxpayer victory although in this case itself the interest liability is low.

Matuszak v. Comm’r: A Tax Court Innocent Spouse Equitable Tolling Test Case

Frequent guest blogger Carl Smith writes today about a case in which he and I seek to argue that equitable tolling applies to the time frame for filing innocent spouse cases in Tax Court.  If you happen to have an innocent spouse or Collection Due Process case dismissed recently for lack of jurisdiction where the taxpayer had good reason for missing the time frame within which to file, please let us know.  Keith

I know that some of you think I only care about equitable tolling in the Tax Code.  I don’t.  But, it is one of the few areas of tax procedure where the courts created the problem and so are the ones who should fix it.  In United States v. Brockamp, the Supreme Court held that the section 6511 periods in which to file tax refund claims are not subject to the judicial doctrine of equitable tolling.  Through enactment of section 6511(h) (tolling the statute of limitations in cases of financial disability), Congress overruled Brockamp for the limited circumstances involved therein.

Since then, the government has consistently argued that Brockamp requires that there be no equitable tolling anywhere in the Tax Code.

As to time periods in which to file certain recent-jurisdiction Tax Court petitions (but not the original section 6213(a) deficiency jurisdiction time period), Keith and I would like to ask the Tax Court to reconsider and overrule its precedents on jurisdiction and equitable tolling.  This is to inform you that Keith and I have just done so — as new pro bono counsel of record — in a stand-alone innocent spouse case brought in Tax Court under section 6015(e), Matuszak v. Commissioner, Docket No. 471-15.  A copy of the December 29, 2015 order of dismissal entered by Judge Marvel in the case is here.  A link to our January 22, 2016 memorandum of law in support of a motion to vacate that order is found in two parts here and here.  Keith and I argue that the 90-day period at section 6015(e)(1)(A) in which to file a stand-alone innocent spouse petition is not jurisdictional and is subject to equitable tolling.  And we ask the Tax Court to reconsider and overrule its contrary precedent as to this particular time period in Pollock v. Commissioner because the reasoning of Pollock has been undermined by five subsequent Supreme Court opinions: Holland v. Florida; Henderson v. Shinseki; Gonzalez v. Thaler: Sebelius v. Auburn Regional Med. Cntr.; and United States v. Wong. (Another opinion issued on January 25, 2016, by the Supreme Court, Musacchio v. United States,also undermines Pollock.)

read more...

Last year, as an amicus, I helped obtain a ruling from the Ninth Circuit in the case of Volpicelli v. United States that, under current Supreme Court case law, the 9-month period in section 6532(c) in which to file a wrongful levy suit in district court is not jurisdictional and is subject to equitable tolling.  The government vigorously disagrees with that opinion, but decided not to ask the Supreme Court to review it (despite a split with older opinions from other Circuits). See posts on Volpicelli here and here.

In recent posts here and here, PT made you aware that in November, Keith and I, on behalf of the Harvard Federal Tax Clinic, filed an amicus memorandum of law in the Tax Court case of Guralnik v. Commissioner,  in which we make the argument that the 30-day period in section 6330(d)(1) in which to file a Collection Due Process (CDP) petition in the Tax Court is not jurisdictional and is subject to equitable tolling.  For those interested, as an update, here is a link to the IRS’ January 6, 2016 response to our memorandum.  Suffice it to say that the IRS argues that we grossly exaggerate the impact of the recent non-tax Supreme Court opinions on these topics.  But, that’s what the government unsuccessfully argued in Volpicelli, too.

I have been using the Tax Court’s order search function to read all recent orders of the Tax Court citing either section 6015 or 6330.  From doing that reading, and ordering copies of documents from the Tax Court in cases suggesting that the taxpayers might have had an equitable tolling argument for a late filing, I have located a small number of cases that might be used as test cases.  When the order issued in Matuszak on December 29, 2015, this seemed like a promising test case.

Matuszak Facts 

Craig Matuszak had a successful career going in the telecommunications business.  But, things went off the rails when his employer accused him and other employees of theft.  The theft was accomplished by making the employer pay third-party invoices for work never done and pocketing the money sent to pay those invoices.  The alleged conduct happened in 2007 and 2008, years in which Craig and his wife Linda filed joint returns that, of course, did not report any money that Craig stole as income.

On August 8, 2012, Craig was charged in federal district court both with wire fraud and filing a false 2007 income tax return in violation of section 7602(2).  The date the information was filed, Craig pled guilty, since he and his criminal lawyer had negotiated the exact amount of the tax deficiencies for 2007 and 2008 with the federal government in advance.  Under the plea deal, Craig and Linda forfeited the primary residence that they had been building in 2007 and 2008 (and completed in 2009) and two automobiles.  The primary residence was their only house and major asset.  Since January 2014, Craig has been incarcerated, and he is not expected to be released until 2017 at the earliest.  If you have access to PACER you can find out more about his case at United States v. Craig Matuszak, N.D.N.Y., Docket No. 1:12-cr-359.

On August 28, 2012, Craig brought a Form 4549 for 2007 and 2008 to Linda, and told her that she needed to sign the form for his plea deal to go through and that she would not be liable for the tax deficiencies shown thereon ($333,964 for 2007 and $105,055 for 2008) beyond the forfeited assets.  Late in 2009, Craig had told Linda that he was under criminal investigation for something he did at work, but he minimized the investigation and did not even let Linda go to his plea entry hearing.  So, in August 2012, she was rather shocked to hear that, essentially, the Matuszaks would lose all their assets because of the plea and owe additional unpaid taxes.  She was not aware at that date that Craig had ever received any unreported income.  Even today, she doesn’t know what happened with the money Craig now concedes that he took from his employer.  But, taking her husband’s assurances that she would not be liable for anything more, Linda signed the Form 4549, and the IRS assessed the taxes shown thereon and sent both spouses bills seeking payment.

After Craig was incarcerated and Linda was reduced to renting a place to live in, she filed a Form 8857 covering the 2007 and 2008 liabilities.  With no fuss, CCISO granted Linda complete section 6015 relief for 2008.  (Since 2001, Linda has been disabled, and her sole source of income has been Social Security disability.)  But, there was a problem with 2007.

Prior Deficiency Case

In 2010, the IRS had begun a routine audit of some unreimbursed employee business expense deductions claimed by Craig on the Schedule A of the 2007 joint return.  In September 2010, the IRS sent a notice of deficiency disallowing most of the deductions and asserting a deficiency of $9,260.  Linda had asked Craig if this IRS audit had anything to do with the criminal investigation that was going on.  Craig (probably correctly) said, “no”.

Acting pro se, Craig and Linda jointly prepared and filed a Tax Court petition contesting the notice.  At this point, Craig was still employed (by a different employer) and the Matuszaks were fairly well off, so Linda had no reason to think that, even if the deductions were wrong, the couple couldn’t afford to pay them.  As a result, the petition (given Docket No. 27407-10) did not include a request for section 6015 relief.

When the IRS attorney who was about to prepare the answer in the case searched a database, she discovered a criminal investigation regarding Craig that included the year 2007.  So, rather than file an answer, she successfully moved the Tax Court to stay all proceedings in the deficiency case pending resolution of the criminal proceedings.  Nothing happened in the deficiency case – other than periodic reports filed by the IRS attorney – until the IRS attorney prepared and sent to the Matuszaks a stipulated decision that showed the $333,964 deficiency for 2007 that appeared in the Form 4549 that both spouses had already signed.  Linda co-signed the stipulated decision, again on Craig’s assurances that she wouldn’t owe the tax shown thereon.

During the entire deficiency case, Linda never spoke to the IRS attorney – even failing to respond to voicemail messages from the attorney asking Linda’s position on IRS motions and the status reports prepared by the IRS attorney.  Linda was afraid of messing up Craig’s criminal case if she said something wrong to the IRS attorney in the deficiency case.

Current Innocent Spouse Case

CCISO denied Linda’s request for section 6015 relief for 2007 simply on the grounds of res judicata – that Linda could have, but did not, raise section 6015 relief in the deficiency case.  CCISO ruled that Linda was not entitled to the statutory exception to res judicata found at section 6015(g)(2) because, it said, Linda had “participated meaningfully” in the deficiency case.

Linda took her disallowance to Appeals, which upheld the CCISO ruling and issued a notice of determination denying relief on October 7, 2014.  Linda was concerned that she timely file a Tax Court petition, so she spoke twice to the Appeals Officer (AO) about the final date by which the petition needed to be mailed to the Tax Court.  Linda has contemporaneous notes in three places regarding the two phone conversations she had with the AO that seem to corroborate Linda’s story that the AO told Linda the final date to file was January 7, 2015.  In fact, the final date was January 5, 2015.  Linda thought she mailed her petition a day early when she mailed it out on January 6, 2015.  But, in fact, she mailed her petition a day late.

You may be wondering why Linda did not go to a tax clinic to get help with filing, since, of course, at that point, she could not afford to hire an attorney.  Well, Linda lives far upstate in New York, not near any New York City clinic.  And the closest clinic, in Albany, could not help her, since its intake procedures prohibited taking cases involving more than $50,000 of tax.  Linda went to her local library to research her case.  Linda’s research and frequent migraine headaches were among the reasons why she took so long to file the petition.

After Linda filed the section 6015(e) petition, the IRS attorney filed an answer and then went out on maternity leave.  A second IRS attorney who was assigned the case after it was noticed for trial before Judge Marvel (on February 1, 2016 in New York City) noticed the late filing issue.  Because jurisdictional issues can be raised at any time (unlike statute of limitation issues, which should be raised in the answer), the second IRS attorney then moved to dismiss the case for lack of jurisdiction.

On December 29, 2015, Judge Marvel dismissed the petition, pointing out that Tax Court precedent is that its filing dates in that court cannot be extended.  While sympathetic, Judge Marvel said there was nothing that she could do if Linda was misled by the AO into filing a day late.

Keith and I read the order and decided to contact Linda and offer our services, pro bono, to try to get the Tax Court to overturn its precedent that the section 6015(e)(1)(A) 90-day period in which to file a Tax Court innocent spouse petition is jurisdictional and not subject to equitable tolling.  We have asked the court to rule that the time period is not jurisdictional, but is merely a period of limitations subject to equitable tolling in the right circumstances.  We have also asked the court to take back jurisdiction in the case and then invite the IRS, if it chooses, to file a motion for leave to amend its answer to plead non-compliance with the period of limitations.  Under Rule 39, both the statute of limitations and estoppel are special issues that must be set forth in a party’s pleadings.  If the IRS does plead the statute of limitations, Linda, in turn, will plead estoppel as a result of the AO’s statements as to the filing date – estoppel being one of the usual grounds giving rise to equitable tolling.

Frankly, an example in the proposed section 6015 regulations seems to exactly cover Linda’s case on the res judicata issue, so that if the Tax Court takes back jurisdiction and the IRS does not raise (or raises, but loses) the statute of limitations issue, I would expect the IRS to concede the case on the merits.  Example 5 of Proposed Reg. 1.6015-1(e)(4) (proposed on November 20, 2015) states:

“In March 2014, the IRS issued a notice of deficiency to H and W determining a deficiency on H and W’s joint income tax return for tax year 2011. H and W timely filed a pro se petition in the United States Tax Court for redetermination of the deficiency. W signed the petition, but otherwise, H handled the entire litigation, from discussing the case with the IRS Chief Counsel attorney to agreeing to a settlement of the case. Relief under section 6015 was never raised. W signed the decision document that H had agreed to with the IRS Chief Counsel attorney. If W were to later file a claim requesting relief under section 6015, W’s claim would not be barred by res judicata. Considering these facts and circumstances, W’s involvement in the prior court proceeding regarding the deficiency did not rise to the level of meaningful participation.  [REG-134219-08, 2015-49 I.R.B. 842, 851]”

If this proposed regulation had been on the books when CCISO reviewed Linda’s Form 8857, I don’t believe that CCISO would have even asserted that Linda’s limited participation in the deficiency case caused res judicata to apply to her request for innocent spouse relief.

In a future post in March, Keith and I will report on another CDP case (i.e., beyond Guralnik) in which we will hopefully be arguing as amicus – this time in a pending pro se Ninth Circuit appeal – that the 30-day period in section 6330(d)(1) in which to file a CDP petition in the Tax Court is not jurisdictional and is subject to equitable tolling.  Stay tuned.