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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

Comments

  1. Harold A. "Hank" Chamberlain says:

    The issue is not jurisdiction in a refund suit in District Court which always had exclusive jurisdiction to refund taxes paid, after a proper claim for refund filed and rejected or after six
    months lapse. Jurisdiction in the past was always based on the claim for refund not the issue presented by the claim.

  2. Norman Diamond says:

    ‘it is interesting when one part of the Tax Division files motions to dismiss cases for lack of jurisdiction for seeking a refund based on innocent spouse relief while another part argues to appellate courts that a party seeking a refund based on innocent spouse relief could do so in district court.’

    Maybe this is the first time that innocent spouse cases get caught up in the general rule, but the general rule is nothing new. A lawyer can make two opposing arguments in two separate cases without even needing to involve a second lawyer or a second court. A judge can make two opposing rulings on two aspects of a case in a single order without even needing a second case. A DOJ lawyer can argue that a DOJ publication is wrong, an IRS lawyer can argue that an IRS publication is wrong, a DOJ lawyer can argue that an IRS publication is wrong, and I wouldn’t hold my breath waiting to find out about vice-versa. Also see intra-circuit splits. Also see Tax Court rule 31(c).

    ‘In June of 2013 she received a CDP notice and timely made a CDP request.’

    But she blew off her opportunities to dispute the underlying liability. I wonder what would have happened if she had petitioned timely after the IRS’s second final denial of relief but untimely for the first final denial, or were the denials not final?

    Some information is missing. Was there a Notice of Deficiency? Was a petition submitted for that?

    ‘It collected $22,890 through levy before writing off the balance based on the statute of limitations. In July 2015 she filed a claim for refund seeking return of the levied money. The IRS denied the claim and she brought suit in the Northern District of Texas to recover her refund.’

    Doesn’t Flora prevent a refund suit regardless of whether the unpaid portion has been written off?

    ‘The only jurisdictional basis of a “suit for refund . . . begun by either individual filing the joint return pursuant to section 6532” (i.e., the suit to which the Tax Court proceeding would be transferred) is 28 U.S.C. § 1346(a)(1).’

    If that were true, wouldn’t Congress have written “suit for refund . . . begun by either individual filing the return pursuant to 28 U.S.C. § 1346(a)(1)’? Must we assume Congress intended to mislead or to be vacuous in referencing section 6532?

    • Tom Greenaway says:

      Great post, Keith.

      Diamond’s analogy to private attorneys is misplaced. The DOJ and all its attorneys should take consistent views in tax litigation. Here’s the opening clause of the mission statement of the Tax Division: “The Tax Division’’s mission is to enforce the nation’’s tax laws fully, fairly, and consistently….”

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