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.

 

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.

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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.

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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.

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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.

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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).

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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).

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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).

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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.