Sometimes Participation Is Bad: To Participate Meaningfully and Barring the Right to Claim Spousal Relief

Keith, Stephen and I are in the thrice-annual process of sifting through hundreds of developments and choosing the cream of the crop for inclusion and analysis in the Saltz/Book treatise. A case that slipped through when it came out earlier this year is Rogers v Commissioner, which discusses the modified version of res judicata that applies to requests for spousal relief. We discuss the issue extensively in Chapter 7C, which is a standalone chapter addressing relief from joint and several liability.

Rogers provides another piece in the puzzle as to when a taxpayer will be prevented from claiming innocent spouse relief by virtue of failing to raise the claim in an earlier proceeding.

I will briefly discuss the issue and the case below.

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The doctrine of res judicata, or claim preclusion, provides that a previously litigated matter may not be pursued further by the same parties once there has been a final decision on the merits. Section 6015(g)(2) modifies the common law doctrine of res judicata with regard to claims for relief from joint and several liability. It provides that judicata does not bar a taxpayer from requesting relief under section 6015(b), (c), or (f) if: (1) relief from joint and several liability under section 6015 was not an issue in the prior proceeding; and (2) the taxpayer did not participate meaningfully in the prior proceeding.

The statute does not discuss what it means to participate meaningfully in the prior proceeding. Over the years, there have been a handful of cases that have set out what it means to meaningfully participate in a prior proceeding.

Back quickly to the facts of Rogers. Mrs. Rogers and her spouse were no stranger to taxes or tax problems. Mr. Rogers was a tax lawyer who gained some attention principally by putting together debt distressed investments in Brazilian consumer receivables that purportedly generated worthless debt deductions.

The opinion discusses how IRS examined the Rogers’ joint 2004 return, which eventually led to a notice of deficiency proposing an approximate $466,000 tax adjustment mostly stemming from unreported income and excess deductions from Mr. Rogers. The Rogers’ petitioned and tried the matter in Tax Court; Mr. Rogers was counsel for both himself and his wife (as he was for Mrs. Rogers in this matter).

In a 2014 Tax Court opinion, the Tax Court mostly agreed with the IRS and found that they failed to 1) include  income from the husband’s activity and 2) substantiate some business  deductions.  On appeal the 7th Circuit affirmed the Tax Court.

In the original Tax Court deficiency case, Mrs. Rogers did not claim relief under Section 6015. After the Tax Court decision became final, Mrs. Rogers filed a Form 8857, claiming spousal relief for a number of years, including 2004, the year that was the subject of the deficiency proceeding.

IRS denied the claim, and Mrs. Rogers filed a standalone petition to Tax Court seeking court review of the IRS’s denial. IRS moved to dismiss the case as per Section 6015(g)(2) on the grounds that she had her chance in the deficiency case to raise a claim for spousal relief and she was not now entitled to a second apple bite.

This teed up the issue: did Mrs. Rogers materially participate in the deficiency case? If she did, Section 6015(g)(2) would prevent her from having the opportunity to get relief from joint and several liability.

Prior cases discuss meaningful participation as essentially a facts and circumstances analysis, with the opinions identifying specific acts such as signing documents and participating in settlement discussions with IRS as indicative of someone meaningfully participating. The cases also look to the sophistication and experience of the person who later seeks relief.

With that context, the opinion describes the wife’s background: she was independently wealthy, had a long career as a teacher and school administrator, went to law school after her education career ended (and before the tax problems that generated the claim for relief from joint liability) and started a practice that focused on appealing local property tax assessments.

Despite her experience, Mrs. Rogers claimed that she relied fully on her husband in the Tax Court deficiency case and did not sign documents or otherwise engage in the specific acts leading up to the trial and in the trial itself that suggested involvement. As a result, she claimed that she was generally unaware of the defenses and arguments in the prior case.

The Tax Court disagreed, with her education, experience and resources all working against her:

Petitioner’s testimony about the extent of her ignorance is not credible. She was an educator and administrator and the holder of several advanced degrees, and her husband of 45 years was an extremely well-practiced tax attorney. Before the 2012 trial she had successfully completed at least four courses in tax and accounting. She maintained substantial real property, bank accounts, and other assets in her own name. During 2004 and in later years petitioner managed and participated in significant business dealings involving her own properties. Her tax returns show she was an active real estate agent.

The opinion concluded with a statement that Section 6015(g)(2) was not meant to “provide a second chance at relief for a litigant who had the wherewithal and the opportunity to raise a claim in a prior proceeding.”

Conclusion

This opinion shows the risks of not raising a request for relief from joint and several liability when the opportunity is there in a deficiency case. Sophisticated and well-resourced litigants who do not raise the claim will have a hard time, even if as in here the underlying deficiency case involved the other spouse’s business and the other spouse was an experienced tax lawyer who tried the case.

Litigating Your Innocent Spouse Claim in Bankruptcy

If you were interested in yesterday’s post concerning the mismanagement over a period of years of the account of Mr. Fagan, please read the comment posted yesterday by Bob Kamman.  Bob took the time to call Mr. Fagan and get the kind of background details not possible to find by just reading the opinion.  Based on the information from Mr. Fagan, his efforts to fix the problem in TAS, Appeals and Chief Counsel where he was working face to face with a real human were totally unsuccessful.  This is the type of case I expected Senator Roth to find in his hearings before the 1998 legislation.  These cases exist because sometimes accounts get badly mangled.  I did not expect to see Chief Counsel litigating such a case.  From the comments it appears that accounts management was not the only place badly managed on this case.

In March, the bankruptcy court for the Southern District of Texas ruled in In re Pendergraft that it had jurisdiction under Bankruptcy Code 505(a) to determine whether Jane Pendergraft qualified for relief from her joint and several liability under IRC 6015(f).  The IRS strenuously objected to the bankruptcy court’s decision that it had the power to decide she qualified for innocent spouse relief.  It views the Tax Court as the exclusive avenue for obtaining such relief.  The case, which maybe the first case to decide this issue – at least the first one to decide the case favorably to the taxpayer, deserves attention because it may open up opportunities for relief in a forum previously unused for this purpose and because the of policy tensions that support the bankruptcy court’s decision even if the language of the statute may not.

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Section 505(a) of the bankruptcy code offers taxpayers in bankruptcy the opportunity to contest their tax liabilities in that forum instead of the more traditional forums of Tax Court, district court, or Court of Claims.  The reason that Congress granted this power to the bankruptcy court is that sometimes the tax liability needs to be final in order to the bankruptcy case to move forward.  The time frame for deciding a tax case in the other forums does not necessarily match the time frame for the bankruptcy case.  By giving the bankruptcy court the ability to decide the tax matter, Congress allowed it to control the timing.

The reasoning behind the grant of jurisdiction to the bankruptcy court to hear the tax matter extends to the determination of innocent spouse status; however, the decision of whether someone is an innocent spouse does not turn on whether the tax is due, i.e., the merits of the liability, but rather whether this person claiming innocent spouse status should be relieved of the liability even though it is due.  The IRS argues that this distinction precludes the bankruptcy court from deciding the innocent spouse issue because its authority under section 505(a) covers determining the merits of the liability and does not extend to the issue of innocent spouse status even though such a determination would clearly have an important outcome on a taxpayer’s bankruptcy case and whether the debtor could confirm a plan.

The facts of the case are not unusual for an innocent spouse argument.  Mrs. Pendergraft, who was 66 at the time of the decision, married Mr. Pendergraft in 1988.  During the period of their marriage, they split household responsibilities with Mr. P taking on “exclusive responsibility for the financial activities of the homestead, including the preparation and paying of taxes.”  Mrs. P operated a private psychotherapy practice part time and took primary responsibility for child care and household maintenance.  For the years 2001-2006, the Pendergrafts failed to file tax returns or to pay the taxes.  Mrs. P alleged that she did not know of the failures and signed returns for each year expecting her husband to file them.

She learned of the problem when the IRS levied on her separate bank account in 2008.  Although Mr. P initially denied knowledge of the problem he eventually confessed to her he had forgotten to pay the taxes for one year.  He later informed her that he had retained attorneys and accountants to fix the IRS problem, that the agreement required they pay the IRS $10,000 a month for an extended period, and that he would make sure all future returns were timely filed.  She alleged that he may have misappropriated money she gave to him between 2008 and 2016 to deal with the IRS and that he caused the IRS to mail all correspondence to his office address preventing her from learning of ongoing problems.

In late June 2016, she attended a meeting with their attorney in which she alleges that she learned for the first time that their income and property taxes had not been paid for 15 years and that they faced criminal prosecution.  According to her, this attorney advised her that she must join her husband in filing for bankruptcy in order to prevent the IRS from seizing their house and from prosecuting them.  I note that if the attorney gave such advice, it incorrectly described the effect of bankruptcy on possible criminal tax prosecution.  Bankruptcy code section 362(b)(1), one of the exceptions to the automatic stay, provides that bankruptcy has no impact on criminal prosecution.  By October of 2016, she had obtained permission of the bankruptcy court to proceed with divorce and in November she asked the bankruptcy court to determine that she qualified as an innocent spouse.  The IRS filed a motion to dismiss the request for an innocent spouse determination arguing ‘that a bankruptcy court’s jurisdiction is limited by the fact that it is a judicial offer of the district court, that the structure of 26 U.S.C. 6015(f) vests the determination of innocent spouse relief strictly in the IRS and tax courts, and that the United States has not consented to being sued on the innocent spouse issue in bankruptcy court.”

The bankruptcy court looked at section 6015(e)(1)(A) which allows a court to grant innocent spouse relief if the IRS fails to make a determination within 6 months.  The bankruptcy court pointed to the language of the statute providing that the remedy available in Tax Court for innocent spouse determinations is “[i]n addition to any other remedy provided by law.”  Bankruptcy section 505(a) is another “remedy provided by law.”  The bankruptcy court looked at applicable 5th Circuit law on the application of section 505(a) which it found supported the court’s ability to make an innocent spouse determination.  The court acknowledged the case law cited by the IRS finding bankruptcy court an inappropriate forum for innocent spouse determinations.

The bankruptcy court rejected the authorities provided by the IRS for three reasons: 1) the case law did not address 5th Circuit precedent interpreting 505(a); 2) the plain language of the statute; and 3) a decision by the bankruptcy on this matter would not lead to inconsistent judgments or conflict with basic principles of judicial economy.

Having decided that it can decide the innocent spouse issue, the bankruptcy court then determines that it must wait for the IRS to make a decision.  It required Mrs. P to submit to the IRS Form 8857 and indicated that it will make a decision if the IRS fails to do so in six months (not adopting the four-month rule for claims for refund as the shortened time period in 505 cases) or after the IRS makes an adverse decision.  It is possible, of course, that the IRS will decide in her favor in the administrative process.  If it does not, watch this case as I expect the IRS will not give up this issue at the bankruptcy court level.  We looked quickly at the bankruptcy case  and did not see any developments yet on this issue.

 

 

Innocent Spouse Denied Attorney’s Fees

In Kazazian v. Commissioner, T.C. Memo 2017-135, the Court denied attorney’s fees to a petitioner who succeeded in gaining innocent spouse status.  The Court determined that she was not a prevailing party under the statutory definition of IRC 7430.  The Court also determined that even if she were a prevailing party she did not prove that she incurred meaningful costs with the respect to the case.

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Petitioner is a lawyer who had a solo practice run as a Schedule C.  She also owned real estate and the joint return reported losses attributable to the rental real estate activities.  The year at issue in the case is 2009.  She separated from her husband in 2010 and divorced in 2011.  The IRS audited the joint 2009 return and disallowed the rental losses, disallowed some of her claimed Schedule C expenses and disallowed each spouses’ claim for innocent spouse relief.  In Appeals, some losses and some expenses were allowed and the husband was granted partial innocent spouse relief.  Appeals did not grant Petitioner innocent spouse relief.  She agreed to the tax adjustments but did not agree to the determination regarding her status as an innocent spouse.  Both spouses alleged abuse by the other.

Petitioner filed her Tax Court petition on the issue of her status as an innocent spouse.  Shortly before the case was calendared, the IRS agreed that she was entitled to relief under 6015(f) and a stipulation of settled issues was filed.  She requested fees.  As a curious person, I would like to know why the IRS granted her innocent spouse relief since the liabilities seem to stem from adjustments related to her if I am reading the opinion correctly.  That, however, will remain a mystery.

The Court addresses her claim for fees and notes that she makes the request both with respect to both the administrative and litigation phases of the case.  Because petitioner did not file a qualified offer, the Court states that the position of the IRS is “substantially justified” if it is “justified to a degree that could satisfy a reasonable person” and has a “reasonable basis both in law and fact.”  Swanson v. Commissioner, 106 T.C. 76, 86 (1996).  The fact that the IRS ultimately loses or concedes a case does not make the position unreasonable but the Court notes that this can be considered in determining reasonableness.

Petitioner argued that the return preparer acting on behalf of her ex-husband made the decision to treat her as a real estate professional without consulting her.  The Court finds that no factual basis for this argument exists.  It finds she actively engaged with the preparer.  The Court goes through a brief analysis of the determination of the Appeals Officer that she did not qualify for innocent spouse relief.  The Court seems to have the same problem I do understanding why Chief Counsel’s office conceded this case.  It finds the determination of the Appeals Officer reasonable and states that “there is no evidence in the record as to the basis for this concession.”  Neither party is required to put such evidence into the record when making a concession but here it would have been very helpful if petitioner had done so.  If we could know why Chief Counsel decided to concede the case perhaps we could understand why they did so and why it was unreasonable for the Appeals Officer to fail to concede the case.

The Court finds that “notwithstanding this concession, we conclude that the AO’s determination that the petitioner was entitled to no relief under section 6015(f) had a ‘reasonable basis both in law and fact’ and was ‘justified to a degree that could satisfy a reasonable person.’”

Aside from the problem of not providing the Court with an understanding of how she came to win the case and how it was unreasonable for Appeals not to have conceded it, petitioner has the problem of not proving the basis for her claim for a specific amount of fees.  She failed to submit the affidavit required by Rule 232(d) and relied on the declaration included with her original motion.  Because she represented herself (and did a great job), she has trouble showing her costs other than her $60 filing fee.  Her time entries and those of her accountants do not break out the time to reflect time worked on the innocent spouse aspect of the case as opposed to the other issues present.  In response to a request by the IRS for more detailed records regarding the time spent on the innocent spouse issue, petitioner made what the Court deemed as a frivolous response stating that she devoted 1,000 hours over four years to resolve the matter and her billing rate is $350 per hour.  So, she argued she should really receive $350,000.

Petitioner’s path to victory on the innocent spouse issue remains a mystery and that mystery makes it hard for the Court to decide the IRS was unreasonable when it initially decided she did not qualify for such relief.  The case makes the point that when the IRS concedes and you want fees and the basis for the concession does not jump out from the available facts, you must take the time and effort to put into the record the basis for the concession.  I hope there is some reason that the Chief Counsel attorneys conceded what looks like from these facts to be a very strong case on their side of the argument.  Whatever reasons that exist for the concession need to be made known by petitioner in order to show the Court that she substantially prevailed.  Without a qualified offer, it is hard enough to show this.  On these facts it seems impossible.

Of course, showing why the IRS was so wrong is only one thing you must do if you want fees.  You also have to show how you calculated the fees you seek.  Petitioner’s somewhat frivolous response to the request for more data further doomed her chances for recovering fees.

 

Designated Orders: 7/24 – 7/28/2017

Professor Patrick Thomas of Notre Dame discusses last week’s designated orders. Les

Last week’s orders follow up on some previously covered developments in the Tax Court, including the Vigon opinion on the finality of a CDP case and the ongoing fight over the jurisdictional nature of section 6015(e)(1)(A). We also cover a very odd postal error and highlight remaining uncertainties in the Tax Court’s whistleblower jurisprudence. Other orders this week included a Judge Jacobs order and Judge Wherry’s order in a tax shelter case. The latter case showcases the continuing fallout from the Graev and Chai opinions.

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Deposits in a CDP Liability Challenge? – Dkt. # 14945-16L, ASG Services, LLC v. C.I.R. (Order Here)

The first order this week follows on the heels of the Vigon division opinion, about which Keith recently wrote. In a challenge to the underlying liability in a CDP case, ASG paid the liabilities at issue in full in August 2016, and the Service quickly followed with a motion to dismiss for mootness, given that no further collection activity would take place. Judge Gustafson (Vigon’s author) orders ASG to answer three hypotheses, which attempt to distinguish ASG from Vigon.

Judge Gustafson contrasts ASG’s situation with the taxpayer in Vigon, given that the Service has not indicated an inclination to assess the liabilities again in ASG. Indeed, this may be because the IRS cannot assess ASG’s liabilities a second time due to the assessment statute of limitations under section 6501. As a corollary, Judge Gustafson posits that ASG is asking for a refund of the tax, without any contest as to a collection matter. Thus, as in Greene-Thapedi, the court may lack jurisdiction to entertain the refund suit. Finally, the Court notes that even if the refund claim could proceed, ASG would need to show that it had filed a claim for a refund with the Service. Judge Gustafson requests a response from ASG (and the Service) on these suggestions.

Separately, ASG noted in its response to the motion to dismiss that “Petitioner paid the amounts to stop the running of interest.” Judge Gustafson therefore ordered ASG to document whether these remittances were “deposits”, rather than “payments,” along with the effect on mootness. Under section 6603, deposits are remittances to the Service that stop underpayment interest from running. However, deposits are ordinarily always remitted prior to assessment, during an examination. The Service must return the deposit to the taxpayer upon request, and, if at the end of the examination the resulting assessment is less than the deposit, the Service must refund the remainder.

It’s unclear whether a remittance made during a CDP proceeding challenging the underlying liability could be treated as a deposit, though Judge Gustafson seems to be opening the door to this possibility.

The Continuing Saga of Section 6015(e)(1)(A) – Dkt. # 21661-14S, Vu v. C.I.R. (Order Here)

Vu is one of four innocent spouse Tax Court cases in which Keith and Carl Smith have argued that the period under section 6015(e)(1)(A) to petition the Tax Court from the Service’s denial of an innocent spouse request is not jurisdictional. Les wrote previously about this case when Judge Ashford issued an opinion dismissing the case for lack of jurisdiction. Vu is unique among the four cases; in the three other Tax Court dockets (Rubel, Matuszak, and Nauflett), petitioners argue that the time period is not jurisdictional and is subject to equitable tolling in circumstances where the Service misled the taxpayers into filing late. In contrast, Ms. Vu filed too early, but by the time she realized this, it was too late to refile. As a result, Judge Ashford dismissed the case for lack of jurisdiction, because of an untimely petition.

Shortly after the opinion, Keith and Carl entered an appearance in Vu and filed motions to reconsider, vacate, and remove the small tax case designation, arguing that the Service forfeited the right to belatedly raise a nonjurisdictional statute of limitations defense.

Last week, Judge Ashford denied those motions. Substantively, Judge Ashford relied on the opinions of the Second and Third Circuits in Matuszak v. Commissioner and Rubel v. Commissioner, which hold that the time limitation in section 6015(e)(1)(A) is jurisdictional. (The Tax Court also recently ruled against the petitioner in Nauflett, but Keith and Carl plan to appeal this to the Fourth Circuit). Given that, therefore, Judge Ashford believed there to be no “substantial error of fact or law” or “unusual circumstances or substantial error” that would justify granting a motion to reconsider or motion to vacate, she denies those two motions.

To compound matters, Vu also filed her petition requesting a small case designation; decisions in small tax cases are not appealable. While Vu moved to remove the small case designation, Judge Ashford denied that motion as well. The standard for granting a motion to remove a small case designation is whether “the orderly conduct of the work of the Court or the administration of the tax laws would be better served by a regular trial of the case.” In particular, the court may grant such a motion where a regular decision will provide precedent to dispose of a substantial number of other cases. But because Judge Ashford views there to already be substantial precedent against Vu’s position, she denies this motion as well.

Keith and Carl plan to appeal Vu to the Tenth Circuit anyway, arguing that the ban on appeal of small tax cases does not apply where the Tax Court mistakenly ruled that it did not have jurisdiction to hear a case. This argument will be one of first impression.

A second argument will be that the denial of a motion to remove a small case designation is appealable. In Cole v. Commissioner, 958 F.2d 288 (9th Cir. 1992) the Ninth Circuit dismissed an appeal from an S case for lack of jurisdiction, noting that neither party had actually moved to remove the small case designation. In Risley v. Commissioner, 472 Fed. Appx. 557 (9th Cir. 2012), where there is no mention of the issue of a motion to remove the small tax case designation, the court raised, but did not have to decide, whether it could hear an appeal from an S case if there was a due process claim. A due process violation allegation might be another occasion for appealing an S case, but there will be no due process violation alleged in the appeal of Vu.

Keith and Carl also note that they will not be filing a cert petition in either Matuszak or Rubel. They will only do so if they can generate, through Nauflett or Vu, a circuit split on whether the time period under section 6015(e)(1)(A) is jurisdictional.

Postal Error? – Dkt. # 9469-16L Marineau v. C.I.R. (Order Here)

In Marineau, Judge Leyden tackles the Service’s motion for summary judgment in a CDP case. The facts start as is typical: the Service filed a motion for summary judgment, and the Petitioner responded that the Service hadn’t sent the Notice of Deficiency to their last known address in Florida. Dutifully, the Service responded with a copy of the Notice of Deficiency showing the taxpayer’s Florida address and a Form 3877 indicating the NOD was sent by certified mail to that address. Both the NOD and the Form 3877 have the same US Postal Service tracking number.

But then things take a turn. The Service also submitted a copy of the tracking record for that tracking number from the post office. It shows that the NOD was sent from Ogden, Utah, but that it was attempted to be delivered in Michigan, rather than Florida. The NOD was unclaimed and eventually returned to the Service.

Judge Leyden appears to be as perplexed as I am by this situation. So, she ordered the Service to explain what happened. I’ll be looking forward to finding out as well.

Remand and Standard of Review in a Whistleblower Action – Dkt. # 28731-15W Epstein v. C.I.R. (Order Here)

In this whistleblower action, the Service and the Petitioner apparently agreed that the Petitioner was entitled to an award (or perhaps, an increased award). The Service filed a motion to remand the case so that a new final determination letter could be issued. The Petitioner opposed this motion, as he believed that the Tax Court could decide the issue for itself, without need to remand.

Judge Lauber appears to be cautious towards remanding a case, for two reasons: first, it’s unclear whether the Court has the authority to remand a whistleblower case. While CDP cases are subject to remand, due to the abuse of discretion standard applicable in most cases, cases in which the Court may decide an issue de novo are, according to Judge Lauber, generally not subject to remand. (I’m not sure that’s entirely correct, as CDP cases challenging the underlying liability are indeed subject to remand.) Relatedly, the Court isn’t yet even sure what the standard of review for a whistleblower case is.

Judge Lauber manages to avoid these issues. Because the Court retains jurisdiction where the Service changes its mind about the original whistleblower claim post-petition (see Ringo v. Commissioner), Judge Lauber does not believe there’s any point in remanding the case for issuance of a new letter. The Service can simply issue the letter now, and the Court can enforce any resulting settlement through a judgment. Of course, it can’t hurt to not have to decide the tricky issues surrounding the Court’s standard of review and possibility of a remand

 

Second Circuit Agrees with Third That Time to File an Innocent Spouse Petition is Jurisdictional and Not Subject to Equitable Tolling

We welcome back frequent guest blogger Carl Smith who writes about a case he has assisted the Harvard Tax Clinic in litigating before the Second Circuit.  The court found the time for filing a Tax Court petition is jurisdictional meaning that our client’s reliance on the IRS statement regarding the last date to file her petition has landed her outside of the court without a judicial remedy for review of the innocent spouse determination unless she can come up with the money to fully pay the liability which she cannot.  Keith

This post updates a post on Rubel v. Commissioner, 856 F.3d 301 (3d Cir. May 9, 2017).  In Rubel, the IRS told the taxpayer the wrong date for the end of the 90-day period in section 6015(e)(1)(A) to file a Tax Court innocent spouse petition.  The taxpayer relied on that date – mailing the petition on the last date the IRS told her.  Then, the IRS moved to dismiss her case for lack of jurisdiction as untimely.  In response, the taxpayer argued that the IRS should be estopped from making an untimeliness argument, having caused the late filing.  But, the Tax Court and, later, the Third Circuit held that the filing period is jurisdictional.  Jurisdictional periods are never subject to equitable exceptions.

Keith and I litigated Rubel.  We also litigated a factually virtually-identical case in the Second Circuit named Matuszak v. Commissioner.  On July 5, the Second Circuit reached the identical conclusion as the Third Circuit.

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The reasoning of both opinions is almost the same:  Under recent Supreme Court case law, time periods to file are no longer jurisdictional.  But, there are two exceptions:

One is that if the Supreme Court has called a time period jurisdictional in multiple past opinions issued over decades, the time period is still jurisdictional under stare decisis.  This stare decisis exception can’t apply to the innocent spouse petition filing period because the Supreme Court has never called any time period to file in the Tax Court jurisdictional or not jurisdictional.

The other exception is the “rare” case where Congress makes a “clear statement” that it wants a time period to be jurisdictional, notwithstanding the ordinary rule.  Both Rubel and Matuszak rely on the language of section 6015(e)(1)(A) as providing such a clear statement through the words “and the Tax Court shall have jurisdiction . . . if” the petition is filed within 90 days of the notice of determination’s issuance.

Keith and I think this “clear statement” analysis is a bit too pat:  The words “and the Tax Court shall have jurisdiction” appear only in a parenthetical.  Further, the “if” clause does not immediately follow that parenthetical.  We think that, based on Supreme Court case law on this clear statement exception, one can fairly argue that the parenthetical only applies to the language immediately following it – i.e., “to determine the appropriate relief available to the individual under this section” – and which precedes the “if”.  In any case, if the language is not “clear”, then the time period should be held nonjurisdictional.

Both the Rubel and Matuszak opinion also pointed out the provision in section 6015(e)(1)(B)(ii) that gives the Tax Court jurisdiction to enjoin the IRS from collection of the disputed amount while the request for relief and all judicial appeals is pending.  There is a sentence in this provision that limits the Tax Court’s injunctive jurisdiction only to cases of the “timely” filing of a Tax Court petition under section 6015(e)(1)(A).  Keith and I don’t see the relevance of this injunctive provision to the clear statement exception, and we don’t see that “timely” means not considering any extensions provided under statutes (such as sections 7502 (tolling for timely mailing), 7508 (combat zone tolling), or 7508A (disaster zone tolling)) or judicial equitable exceptions.

And as to the context of the statute, remember both (1) that the statute explicitly invokes equity (in subsections (b) and (f)) and (2) that section 6015(e) was adopted joined in the same 1998 act to a legislative overruling of United States v. Brockamp, 519 U.S. 347 (1997).  In Brockamp, the Supreme Court held that, due to the high volume of administrative refund claims and the complexity of section 6511, the time periods therein were not subject to equitable tolling under the presumption in favor of equitable tolling against the government laid down in Irwin v. Department of Veterans Affairs, 498 U.S. 89 (1990).  Congress adopted section 6511(h) to provide what it called a legislative “equitable tolling” in cases of financial disability.  Does anyone think Congress’ desire to overrule the Supreme Court as to equitable tolling in section 6511 means that the same Congress did not want equitable tolling to apply in its new equitable innocent spouse provision?

In Rubel, the Third Circuit also cited Brockamp for the proposition that Congress in 1998 would have thought all time periods in the Internal Revenue Code jurisdictional.  Keith and I pointed out to both Circuits, however, that Brockamp doesn’t even contain the word “jurisdiction” or “jurisdictional”.  About the only significant difference between the opinions of the two Circuits is that the Second Circuit declines to include this questionable characterization of Brockamp.

No other Circuit has yet considered whether the time period in section 6015(e)(1)(A) is jurisdictional or not.  Keith and I are about to litigate the identical issue in the Fourth Circuit.  Clearly, the opinions in Rubel and Matuszak are not helping us.

Designated Orders: 6/12/2017 – 6/16/2017

From 7 designated orders last week, this post focuses on 3 orders of interest.  One may need to address a split of authority, one may need jurisdiction to revise a decision for an agreement between the parties, and a third deals with the death of a nonrequesting spouse in an Innocent Spouse case.

A Jackson Split?

Docket # 17152-13, Estate of Michael J. Jackson, Deceased, John G. Branca, Co-Executor and John McClain, Co-Executor v. C.I.R. (Order Here)

Slotted in the middle of a designated order that also deals with a joint stipulation of facts and whether specific information or exhibits needs to be sealed is an issue that could have greater implications.  In the case dealing with the tax liability of Michael Jackson’s estate, the Tax Court addressed implications of the recent Second Circuit opinion of Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017).

To summarize, there are disputes about the fallout from the Second Court opinion in Chai and whether that will triumph over the Tax Court opinion in Graev v. Commissioner, 147 T.C._ (Nov. 30, 2016).  The designated order in Estate of Michael R. Jackson cites the two cases concerning a difference of opinion regarding whether certain requirements are imposed on the IRS under IRC 6751.

The Graev conclusion was “that the statute [IRC 6751] imposes no particular deadline for the IRS to secure the required written approval before a penalty is assessed.”

In preparing for the trial in the Estate of Michael R. Jackson case, the Commissioner potentially provided a copy of the administrative approval of valuation penalties to the Petitioners.  However, no copy of the form made it into the record at trial.

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Following trial, the Second Circuit rejected the conclusion in Graev.  They replaced it in Chai with a holding that “compliance with IRC 6751(b) is part of the Commissioner’s burden of production and proof in a deficiency case in which a penalty is asserted.”

At this point in the Jackson case, the Commissioner certainly wants the approval form in the record and the P objects.  Unless the parties agree before the time the third stipulation is due (on or before 6/30/17), a motion would be necessary to reopen the record.  The Court will want the motion briefed and it would likely lead to an opinion.

The Court ordered that on or before 7/13/17 the Commissioner shall file any motion to reopen the record to include evidence relevant to their compliance with IRC 6751.  Petitioners shall file a response to that motion on or before 8/3/17.  Then, the Commissioner shall file a reply to that response on or before 8/17/17.

It thus looks like Michael Jackson’s estate may lead to something more than celebrity gossip.  The Tax Court case may be the next judicial step regarding a split of opinion regarding the burden of proof on the IRS under IRC 6751.

Jurisdiction Needed?  Just Add Rogers

Docket # 7390-10, John E. Rogers & Frances L. Rogers v. C.I.R. (Order Here)

While a decision in Rogers was finalized on April 3, 2017, that decision may not be so final.

The IRS brief to the Court of Appeals stated that computational errors resulted in a $134,000 overstatement of Rogers’s taxable income, deficiency and penalties.  While the IRS recommended remanding the case to correct that overstatement, the Court of Appeals affirmed instead of remanding.

The Tax Court ordered the parties submit a joint status report regarding further proceedings.  In their 2/15/17 joint status report, it states that the IRS is recomputing the deficiency and that the Rogers spouses will review the computations.  A joint status report filed on 6/13/17 stated that the IRS recomputed the deficiency and the petitioners agreed with the new computations.

However, no motion to vacate or revise the decision was filed under Rule 162 by 4/3/17.  Since the decision became final on 4/3/17, it is unclear to the Tax Court what their jurisdiction is for revising the decision.

Since the IRS will process the credits to the account for the petitioners for tax year 2004 in order to effectuate the corrections, that potentially makes the jurisdictional issue moot.

The Tax Court ordered that if either party wishes to file a Rule 162 motion to vacate or revise the decision, that the party should do so (with a motion for leave to file out of time) no later than July 14, 2017.  The motion for leave should explain how the Tax Court has jurisdiction to revise the decision.  If neither party files such a motion, the case will remain closed.

While the parties are in agreement, the Tax Court finds that their hands may be tied.  While they want the record to reflect the agreement of the parties, it is interesting that the Tax Court looks to the parties for jurisdictional help on how to revise their decision since time likely ran out.

Don’t Forget the Heirs and Beneficiaries

Docket # 19277-16, Alison Turen v. C.I.R. (Order Here)

Normally in an Innocent Spouse case, the IRS files a copy of the notice of the filing of the petition that they served on the other individual that the Petitioner filed joint returns with for the tax years before the Tax Court.  In other words, the Petitioner files a petition with Tax Court regarding an Innocent Spouse case and the IRS is to send a copy of the notice of the filing of the petition with the other spouse from the joint tax returns in order to give that spouse the right to intervene in the Tax Court case.  What happens then when the other spouse has died?

In the Turen case, the IRS did not file the notice since the petition states that the other spouse is deceased.  The Tax Court stated in their designated order that the death of that spouse does not relieve the IRS of their responsibility for providing notice.  Fain v. Commissioner, 129 T.C. 89 (2007) provides that the right of intervention belongs to the decedent’s heirs or beneficiaries, based on procedures outlined in Nordstrom v. Commissioner, 50 T.C. 30, 32 (1968) to ascertain the heirs at law of a deceased non-petitioning spouse.

The Tax Court order was that the parties are to identify on or before June 30, 2017 the heirs at law of the decedent nonrequesting spouse and on the same day to provide a joint status report to the Court of the heirs at law identified.  They are also ordered that on or before July 14, 2017, the IRS shall submit a Notice of Filing of Petition and Right to Intervene served on the heirs at law or file a response stating the reasons for not doing so.

Ninth Circuit Reverses Tax Court on Informal Claim Determination 

We wrote recently about the Tax Court’s decision in Palomares v. Commissioner, TCM 2014-243 in which the taxpayer incorrectly filed the injured spouse form instead of the innocent spouse form. We have also provided a link to the oral argument in the 9th Circuit by a student from the Gonzaga Law School Tax Clinic. By the time Ms. Palomares filed the corrected form, the time for claiming certain refunds had expired. The Tax Court declined to treat the filing of the injured spouse form as an informal claim for refund that would have provided her the opportunity to still receive the otherwise late refund claims.

Today, the 9th Circuit in an opinion found here reversed the Tax Court holding that the filing of the injured spouse form constituted an informal claim. Citing to a leading tax procedure treatise, the Court described the informal claim doctrine:

The informal claim doctrine permits a taxpayer to avoid the limitations of Section 6511(a) if the taxpayer filed a written refund request that was “sufficient to apprise the Service that a refund is being claimed,” and “specifies the tax and the year or years for which the refund is being sought sufficiently so that the Service can investigate the claim.” Michael I. Saltzman, IRS Prac. & Proc. ¶ 11.08(2); see United States v. Kales, 314 U.S. 186, 194 (1941).

After stating the principle of the informal claim doctrine, the Court went on to hold:

We conclude that Palomares’s Form 8379 fairly apprised the Commissioner that Palomares was seeking innocent spouse relief from her 1996 liability for two reasons. First, the Commissioner had been crediting Palomares’s tax overpayments—which were associated with returns she filed separately—to liability on the 1996 return that she filed jointly. The only form of relief that made any sense under these circumstances was innocent-spouse relief. Second, in responding to Palomares’s Form 8379, the Commissioner informed Palomares that to request innocent-spouse relief, she should file a Form 8857, not a Form 8379.

The Court pointed out that the equities were clearly in favor of granting her the refund. She was the subject of domestic abuse – something that impacted her ability to timely and correctly file her claim. English was not her first language and not a language with which she was comfortable. She was not liable for the 1996 liability. She received wrong advice from a volunteer attorney and the incorrect form she filed gave the IRS notice of her real problem. In fact, the mixing up of the injured spouse and innocent spouse forms occurs with enough frequency that the IRS addresses the problem in its instructions.

Here’s from the instructions on the current 8379:

Innocent Spouse Relief

Do not file Form 8379 if you are claiming innocent spouse relief. Instead, file Form 8857. Generally, both spouses are responsible for paying the full amount of tax, interest, and penalties due on your joint return. However, if you qualify for innocent spouse relief, you may be relieved of part or all of the joint liability. You may qualify for relief from the joint tax liability if any of the following apply.

There is an understatement of tax because your spouse omitted income or claimed false deductions or credits, and you did not know or have reason to know of the understatement.

There is an understatement of tax and you are divorced, separated, or no longer living with your spouse.

Given all the facts and circumstances, it would not be fair to hold you liable for the tax.

See Pub. 971 for more details.

The Ninth Circuit corrected an injustice. I do not believe that anyone at the IRS or the Tax Court wanted the outcome that Ms. Palomares received administratively or from the Tax Court. By applying the informal claim doctrine in these circumstances in a manner that allows Ms. Palomares to receive the refund she deserved the 9th Circuit has corrected a mistake the others did not feel empowered to correct. I wish the 9th Circuit had made this a precedential opinion. I do not understand its decision in that regard. It could have made a more sweeping statement about the confusion that impacts many people in Ms. Palomares circumstances regarding the distinction between injured spouse and innocent spouse. A broader statement about that confusion (which obviously occurred even with a member of the bar volunteering to assist) and the informal claim doctrine might have made it easier for the IRS to grant relief to others similarly situated who may now have to pursue the same hand to hand combat in litigation that Ms. Palomares faced.

Fortunately for her she found the Gonzaga clinic. Kudos to the clinic for its successful representation of her in this case.  That clinic is led by Jennifer Gellner.  The following students, spanning a period of five years, worked with her on this case:

2012  Amber Rush    Innocent Spouse Appeals hearing

2013   Derek Johnson   Tax Court Petition

2013  Natalie Lane & Kate Sender   Tax Court Trial

2014  Derek Johnson (again)  Tax Court brief

2015  Davis Mills   Ninth Circuit Brief and Mediation

2017 Meagan Nibarger   Ninth Circuit Oral Argument

Additional research and support:

2014  Tyler Smith

2015 Aaron Jones, James Schutt, Stevie Swift

2017  Dylan Broyles

Tax Court Case Highlights Limits of Court’s Power in Standalone Innocent Spouse Cases

 One of the challenges I used to face when directing a legal clinic was explaining to clients the limits of what the Tax Court could do in cases, especially in CDP and innocent spouse cases. When people would come to the clinic with a problem, and took the time (usually on their own) to petition the Tax Court they held out hope that if they could tell their story to the judge it would help make the IRS problem go away.

Despite some deep questions as to where the Tax Court sits constitutionally, its judges have extensive power in deficiency cases to resolve disputes, apply equitable principles and even order the issuance of a refund. A recent innocent case in Tax Court, Asad and Akel v Commissioner, illustrates some of the Tax Court’s limits and likely confusion that pro se taxpayers face in standalone innocent spouse cases that are not part of a deficiency proceeding.

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The simplified version of the facts is as follows. Asad and Akel were married, and then divorced. When married, both individually owned rental properties, and they filed joint returns. IRS audited a couple of those years’ returns, disallowing losses and expenses pertaining to the real estate activities and also imposing a 20% accuracy-related penalty. Asad and Akel did not respond to the stat notices. At trial in their divorce, Asad and Akel agreed that each would be responsible for ½ of the federal tax debt for the years IRS assessed liabilities.

Fast forward a few years. Each now ex spouse filed separate requests for relief from joint and several liability. IRS denied each request and both spouses filed petitions to Tax Court challenging the denial; husband for good measure intervened on wife’s Tax Court challenge. The Tax Court consolidated both cases.

In a pre-trial memo, IRS agreed to reduce each spouse’s share of the joint liability to essentially reflect the share that was attributable to the ex spouse, a result consistent with an outcome under Section 6015(c). The problem was that the parties wanted the IRS and Tax Court to respect their 50/50 tax liability allocation they agreed to in state court, an outcome that would have favoured Asad, who wound up with a higher shares of the liability under the IRS concession.

What did Asad and Akel want from the court? Asad and Akel did not claim at trial in Tax Court that they were entitled to relief under 6015, and essentially argued that that the Tax Court should provide a way to guarantee that the IRS respect the state law divorce terms. The Tax Court held that it could (and would) not do so. The state law agreement is not binding on the IRS, which was not a party (thankfully I am sure) to the state law divorce proceeding.

Although Asad and Akel petitioned the Court for relief from joint and several liability under section 6015, at trial neither contended that they satisfied the tests for relief under section 6015. It is apparent that they both would agree to a 50-50 settlement of these cases. But the IRS is also a party to these cases. Without the IRS’s consent to a settlement under which Asad and Akel’s liability is each reduced to 50%, there can be no enforceable settlement on those terms.

The substantive issue that both ex spouses agreed on at Tax Court was that they should not be subject to the 20% accuracy related penalty, and they argued at trial in the Tax Court that the positions on the old joint returns reflected the advice of a competent tax return preparer. Again, the opinion (and clear application of the law) left the ex spouses with no relief. In a standalone innocent spouse case the penalty issue was not properly before the court:

The Court is without jurisdiction in these cases to consider Asad’s and Akel’s return-preparer defense. Neither Asad nor Akel petitioned the Tax Court in response to the IRS’s notice of deficiency. See sec. 6213(a) (allowing taxpayer to petition the Tax Court to redetermine a deficiency within 90 days after the mailing of a notice of deficiency). Instead, they petitioned the Court to review the IRS’s denial of their respective claims for relief from joint and several liability under section 6015. See sec. 6015(e). In a stand-alone section-6015 case such as this, which is independent of a deficiency proceeding, the Court can consider only whether the relief provisions of section 6015 are available. See Block v. Commissioner, 120 T.C. 62, 68 (2003). The Court cannot consider issues other than section-6015 relief. Id. Thus, it cannot consider Asad’s and Akel’s tax-return-preparer defense to the accuracy-related penalties.

Conclusion

For seasoned tax practitioners it comes as no surprise that the IRS is not bound by state law divorce proceedings because this reflects settled law. It appears that Asad and Akel did not appreciate the subtleties of the limits of the Tax Court’s powers and the relationship between state and federal law.

The outcome of this case is a decision that reflects the IRS concession rather than the agreement that the ex spouses reached in state court. Of course, nothing in this opinion keeps Asad and Akel from following the state court agreement in terms of paying the IRS and that agreement may be enforceable in the divorce proceeding even if it is not enforceable with respect to the IRS. They may very well have federal tax liabilities and state court obligations that do not match but they can be held to both. Nothing prevents them from getting the result they bargained for in the divorce. This opinion also does not keep them from now requesting penalty relief even though they will not have a judicial remedy unless they pay the penalty and file for refund. This standalone case is not res judicata or collateral estoppel on that issue.