Hurray! A Tax Court Judge Decides an Innocent Spouse Case Without Discussing Rev. Proc. 2013-34

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Today we welcome back Carl Smith who writes about a recent innocent spouse case that raises interesting issues that connect back to general administrative law principles, including whether in equitable relief cases the Tax Court should continue to cite and discuss relief factors that the IRS has only promulgated through a revenue procedure rather than through more traditional APA notice and comment procedures.

Last week, Judge Halpern issued an opinion in an innocent spouse case, Varela v. Commissioner, T.C. Memo. 2014-222. Neither the facts of the case nor its ultimate holding are novel.  But, the opinion may be important for how the court got to its ultimate holding.  Unusually, the judge decided that the taxpayer-wife was an innocent spouse under section 6015(b) — and that holding her liable would be “inequitable” under subsection (b)(1)(D) — both without citing or discussing Rev. Proc. 2013-34, 2013 C.B. 2013-2 C.B. 397.  As I have written before (see below), I hope this becomes a trend.  For, in deciding a taxpayer’s entitlement to section 6015(b) or (f) relief, there is no need or wisdom in the courts’ relying on continually-changing IRS non-regulation guidance on what is “inequitable”.  The courts can rely on their own case law on what is “inequitable” that was generated in the 27 years during which the courts decided this identical issue under the predecessor innocent spouse statute at former section 6013(e) — a time in which there was no similar Rev. Proc.  Although IRS non-regulation guidance keeps changing, what is “inequitable” does not.

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Much of the background (and citations) for this blog post is condensed from an article that I wrote for Tax Notes in 2011, and I suggest that readers interested in detail and citations go to that article. See Carlton M. Smith, “Innocent Spouse: Let’s Bury That ‘Inequitable’ Revenue Procedure”, 2011 TNT 114-6 (June 14, 2011)[free link not available].  I don’t want to turn a blog post into a law review article.

Rev. Proc. 2013-34 is the fifth and most recent IRS non-regulation guidance addressing the issue of what is “inequitable” under section 6015(b) or (f).  It has many predecessors going back to 1998:  Notice 98-61, 1998-2 C.B. 756 (issued only months after section 6015 was enacted as part of the IRS Restructuring and Reform Act of 1998); Rev. Proc. 2000-15, 2000-1 C.B. 447; Rev. Proc. 2003-61, 2003-2 C.B. 296; and Notice 2012-8, 2012-1 C.B. 309.

Prior to the enactment of section 6015 in 1998, there had been an innocent spouse provision at former section 6013(e) that also contained, as one of a few requirements for relief, that it be “inequitable” to hold the taxpayer liable.  Section 6013(e) was adopted in 1971, and its legislative history contained a few sentences on what Congress thought were among the things the courts should consider in the equity determination.  In regulations promulgated under section 6013(e), the IRS basically just quoted those sentences from the legislative history, without further elaboration.  For the next 27 years, courts issued opinions deciding what factors went into the equity determination and the weight of the factors (such as that lack of significant benefit was the most important factor).

When section 6015 was enacted in 1998 to replace section 6013(e), the new statute contained a modified version of section 6013(e) relief at new section 6015(b) — one which also required the court to decide, among other issues, whether holding the spouse liable would be “inequitable”.  Section 6015 also contained a new provision at section 6015(f) that allowed for relief, if relief was not available under subsections (b) or (c), merely on a showing that holding the spouse liable would be “inequitable”.  There were initially procedural reasons why a taxpayer would prefer seeking relief under (b) (e.g., filing an election under (b) would prohibit IRS collection during the IRS’ consideration, while filing a request under (f) would not), but Congress later eliminated these procedural distinctions, thereby making (b), as a practical matter, unnecessary anymore, since any taxpayer who qualified for relief under (b) had proved more than she needed to prove to qualify under (f).

In 2002, the IRS promulgated regulations under the new subsection (b) that lifted the sentences from the 6013(e) regulations on what was to be considered in deciding the equity issue (sentences that were derived from the 1971 legislative history of section 6013(e)).  The regulation adopted provides (at section 1.6015-2(d)):

All of the facts and circumstances are considered in determining whether it is inequitable to hold a requesting spouse jointly and severally liable for an understatement. One relevant factor for this purpose is whether the requesting spouse significantly benefitted, directly or indirectly, from the understatement. A significant benefit is any benefit in excess of normal support. Evidence of direct or indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several years after the year of the understatement. Thus, for example, if a requesting spouse receives property (including life insurance proceeds) from the nonrequesting spouse that is beyond normal support and traceable to items omitted from gross income that are attributable to the nonrequesting spouse, the requesting spouse will be considered to have received significant benefit from those items. Other factors that may also be taken into account, if the situation warrants, include the fact that the requesting spouse has been deserted by the nonrequesting spouse, the fact that the spouses have been divorced or separated, or that the requesting spouse received benefit on the return from the understatement.

But this regulation also went on to add:  “For guidance concerning the criteria to be used in determining whether it is inequitable to hold a requesting spouse jointly and severally liable under this section, see Rev. Proc. 2000-15 (2000-1 C.B. 447), or other guidance published by the Treasury and IRS (see § 601.601(d)(2) of this chapter).”  Thus, the regulation attempted to bootstrap anything the IRS said in a Revenue Procedure about what is “inequitable” as additionally required for getting relief.

The regulation under new section 6015(f) does not even contain the above-quoted sentences about inequity lifted from the section 6013(e) regulations, but merely contains a similar cross-reference to Rev. Proc. 2000-15 or other published guidance for a determination of what is “inequitable” for purposes of subsection (f) relief.  See Reg. 1.6015-4(c).

Beginning with Notice 98-61 and most recently appearing in Rev. Proc. 2013-34, the IRS has issued a series of non-regulation guidance explaining to how it will evaluate what is “inequitable” under subsection(f) (including a safe harbor).  The IRS lists a series of factors — which have changed over the years, both in their detail and whether the factors are positive, negative, or neutral in effect.  I think it is natural for the IRS to have given guidance to its own employees making innocent spouse determinations.  I would expect that guidance to be based on case law or the regulations and to appear in the IRS Manual.  I have never understood, though, why or how the IRS can expect to have issued guidance — without following the Administrative Procedure Act for regulations — that it expected to bind or govern how the courts should rule on this equity issue.

In the first section 6015 cases that came before the courts (starting in 2000), the courts quickly observed that, in light of the identical word “inequitable” in the two statutes, judicial precedent on what was inequitable under section 6013(e) governed what was “inequitable” under section 6015(b) or (f).  The early opinions from the courts on section 6015 usually don’t even cite any Rev. Proc., but simply cite to earlier judicial opinions decided under section 6013(e).  However, over time, the courts started citing and discussing the various Rev. Procs. when deciding what  was “inequitable”.  Eventually, the courts began almost slavishly just citing the Rev. Procs. — only differing from the Rev. Procs. when it deviated from long-standing section 6013(e) judicial precedent (as it did on a few occasions).

In virtually every Tax Court opinion in recent years, the judges have cited the relevant Rev. Proc. to decide the issue of what is “inequitable”.  But, starting around 2011, with the Tax Court opinion in Pullins, 136 T.C. 432, 438-439, the Tax Court has noted it isn’t bound by the Rev. Proc.  However, as in Pullins, the court has continued to cite and discuss the Rev. Proc. in nearly every subsequent opinion.

A few other significant events happened in 2011:  First, in Mayo Foundation v. U.S., 562 U.S. 44, the Supreme Court held that it was not going to create a system of administrative review good for tax law only.  Realizing that guidance like Rev. Procs. do not go through APA-appropriate pre-issuance notice and comment, in early May (only two days after Pullins was issued), the Department of Justice announced at an ABA Tax Section meeting that it was no longer going to argue for Chevron deference to I.R.B. guidance like Rev. Ruls. and Rev. Procs.  See Marie Sapirie, “DOJ Won’t Argue for Chevron Deference for Revenue Rulings and Procedures, Official Says”, 2011 TNT 90-7 (May 10, 2011).  In my view, this further undermined the need for the courts to discuss the Rev. Proc. in deciding a 6015 case.  The IRS was no longer arguing that the Rev. Proc. had any legally-binding weight.  Finally, and least relevant, in June 2011, I published my article criticizing courts giving any weight to the innocent spouse “inequitable” Rev. Proc.

Judge Halpern, the author of last week’s Varela opinion, is one of the Tax Court judges who is known to care a lot about administrative law.  Perhaps for that reason, when he wrote the Varela opinion, he, unusually, did not cite the current Rev. Proc. (i.e., 2013-34) or any of the many factors as listed therein, but merely decided the inequity issue in the following paragraph:

Finally, section 6015(b)(1)(D) provides that innocent spouse relief is appropriate when, in the light of all the facts and circumstances, it is inequitable to hold the requesting spouse jointly and severally liable. Factors we consider include (i) whether there has been a significant benefit to the spouse claiming relief and (ii) whether the failure to report the correct tax liability on the joint return results from concealment, overreaching, or any other wrongdoing on the part of the other spouse. See Alt v. Commissioner, 119 T.C. 306, 314-315 (2002), aff’d, 101 Fed. Appx. 34 (6th Cir. 2004). Intervenor concealed the fact that the withdrawn funds were inappropriately taken from JL Unique, and petitioner did not learn of intervenor’s withdrawal of the funds until 2010, during the couple’s divorce proceedings. Moreover, while the funds were used to pay household expenses for the family, we are convinced that petitioner did not receive a benefit that is traceable to the funds beyond ordinary support.

The Alt case cited by Judge Halpern was an early innocent spouse case under 6015 that also, under 6015(b), determined what was “inequitable” without citing either Notice 98-61 or Rev. Proc. 2000-15.

It is my hope that this Varela opinion starts a trend for other judges of the Tax Court to follow — abandoning discussing the Rev. Proc. and instead just citing case law to determine what is “inequitable” under both (b) and (f).

 

Comments

  1. I’m confused about Carl Smith’s attack on the validity of IRS Revenue Procedures related to one’s seeking I.R.C. section 6015(f) equitable spousal relief.

    First, 6015(f) premises equitable spousal relief on”PROCEDURES prescribed by the Secretary….” Do Revenue Procedures not qualify as the statutorily required “procedures?”

    Second, 6015(b), which also contains an equity provision, premises innocent spousal relief under the same “procedures prescribed by the Secretary.” Is Carl claiming both 6015(b) and 6015(f) should be construed to read, “Under regulations prescribed by the Secretary….”?

    Third, the Revenue Procedure that draws Carl’s contempt, Rev. Proc. 2013-34, contains the following section:

    “SECTION 3. SIGNIFICANT CHANGES
    On January 5, 2012, the Department of Treasury and the Service released Notice 2012-8, 2012-4 I.R.B. 309, which set forth a proposed revenue procedure to update and revise Rev. Proc. 2003-61, 2003-2 C.B. 296. Notice 2012-8 also modified and clarified the criteria for equitable relief, and it eliminated the two-year rule for filing a claim for relief as set forth in Notice 2011-70, 2011-2 C.B.135. Notice 2012-8 invited public comment regarding the proposed revenue procedure. A total of 54 comments were received, 45 of which were general comments either in support of the revisions, asking for assistance in specific cases, or totally unrelated to innocent spouse relief. The nine substantive comments ranged from discussing one or two discrete issues to commenting on all aspects of the proposed revenue procedure and innocent spouse relief in general. Treasury and the Service considered all comments received, and the proposed revenue procedure has been modified to take into account many of the concerns raised.
    This revenue procedure supersedes Rev. Proc. 2003-61…..”

    Reading that section, I understand the IRS DID seek and receive public notice and comment on Revenue Procedure 2013-34. If my understanding is correct….

    Can Carl please restate the basis for his “a-Revenue-Procedure-is entitled-to-no weight-because it- has-not-been-subjected-to-public-notice-and-comment” argument?

    On this one, I may be APA deficient.

  2. Carl Smith says:

    Jason,

    Under the APA, proper notice and comment not only requires an explanation of why the IRS was proposing particular important provisions in the first place (“a reasoned explanation” under the Supreme Court’s State Farm opinion), but also, after comments are received, the agency must explain why (or why not it) adopted each of the significant comments. Notice 2012-8 was deficient in explaining why it was proposing certain changes to Rev. Proc. 2003-61 and what alternatives it considered, but rejected. Then, the final Rev. Proc. 2013-34 was deficient for not commenting on the vast majority of the significant comments the IRS did receive. An agency saying merely that it took into account many comments received is not sufficient under the APA.

    I joined with several other people in submitting comments on the Rev. Proc. (despite my not liking it), and one or two of the changes that we proposed were incorporated, but the vast majority of the comments were not, and the IRS never gave an explanation of why — even though some of these comments were quite significant.

    For example, under the current Rev. Proc. (as under the proposed Rev. Proc.), the IRS, without explanation, changed the rules on significant benefit. In the case law under 6013(e), lack of significant benefit was a positive factor for relief. In Notice 2000-15, the IRS made lack of significant benefit a neutral factor. The Tax Court later held — in a footnote the en banc Ewing opinion — that it would ignore that part of the Rev. Proc., since it was contrary to the case law. In Rev Proc. 2003-61, the IRS turned lack of significant benefit back to being a positive factor for relief. But in Notice 2012-8, the lack of significant benefit was made usually a positive factor, but neutral if the benefit to either party was small because the amount involved was small. I pointed out to the IRS that it was again violating case law by ever making significant benefit neutral and the proposed Rev. Proc. did not even define what “small” is — $5,000, $20,000? Without mentioning my comments in the introductory section of Rev. Proc. 2013-34, the IRS added a sentence saying that what is small depended on the facts and circumstances of each case (pretty unhelpful), but otherwise did not mention that it had received a comment on this issue or that it had rejected the comment warning it to follow the case law.

    There have been two Tax Court opinions this year that cited the significant benefit language in Rev. Proc. 2013-34. In one, an S case, the judge noted the Rev. Proc. language on small benefit being neutral and disregarded that language as violating existing Tax Court precedent indicating that lack of significant benefit is a positive factor. But another judge, in a memorandum opinion, just followed the Rev. Proc. and held that, since the amount in dispute was small, there was no significant benefit, so this was a neutral factor. That second judge apparently did not realize that the Tax Court case law was otherwise on this point. If you want to see a case where the Tax Court held lack of significant benefit to be a positive factor for relief (despite there only being about $1,000 at stake in the case (which has to be considered minor in anybody’s world)), see the 2009 en banc opinion in Porter. I pointed out this case law to the IRS in the comment. Why was there no acknowledgement that this comment was made and why the IRS rejected it?

    I could go on to list more than half a dozen other quite serious comments that were never addressed in adopting the final Rev. Proc. 2013-34. But that would make this post way to long.

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