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

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

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

I will briefly discuss the issue and the case below.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Just as a reminder to everyone, two years ago this month, the IRS published proposed regulations under 6015 that, inter alia, gave more definition and included some examples of meaningful participation for purposes of the res judicata exception. See http://procedurallytaxing.com/new-additional-proposed-innocent-spouse-regulations-issued-part-2/. Those regulations have not yet been finalized. Particularly of interest are examples that represent, says the IRS, participation that was not meaningful. No doubt, one could cite those examples to any IRS employee who was planning on ruling the other way on similar facts.

  2. A juicy tidbit from the Rogers case is that Mr. Rogers represented his own wife in the innocent spouse proceedings.

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