Taxpayer First Act Update: Innocent Spouse Tangles Begin

Last week many of the PT bloggers spoke at the ABA Tax Section Fall Meeting. One of sessions discussed recent developments relating to innocent spouse relief. This post provides a brief update on how the IRS and the Tax Court are grappling with the Taxpayer First Act’s changes to the innocent spouse provisions.

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We have blogged before about the Taxpayer First Act’s changes to the innocent spouse provisions. After the TFA was enacted on July 1, 2019, Steve Milgrom and Carl Smith flagged many questions raised by the legislation. Carl Smith discussed his concerns about the proposed innocent spouse legislation in the Taxpayer First Act here and here back in April before it became law. 

The changes discussed at the ABA meeting affect how the Tax Court reviews IRS decisions on innocent spouse relief. Steve Milgrom explained:

On July 1, 2019 President Trump signed the Taxpayer First Act  (TFA) into law. One provision of the TFA, section 1203, makes procedural amendments to the innocent spouse rules …. The new provision defines the scope and standard of review that govern the Tax Court’s review of an IRS determination. Basically, “scope of review” deals with what the court will consider in making its decision, what evidence it will look at. A court’s “standard of review” defines how much deference to give to the decision (determination) made by, in tax cases, the Commissioner.

The Taxpayer First Act added a new paragraph to section 6015(e):

(7) STANDARD AND SCOPE OF REVIEW. — Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon —
(A) the administrative record established at the time of the determination, and
(B) any additional newly discovered or previously unavailable evidence.

This new standard applies “to petitions or requests filed or pending on or after the date of the enactment” of the Act, which was July 1, 2019. At the ABA meeting, IRS speaker Julie Payne reported that between 300 and 350 standalone innocent spouse cases are generally pending in U.S. Tax Court at any given moment. All of those cases are now subject to the new standard. The question of how the new language applies is an immediate one for the Court and the Service. The Tax Court must decide not only how it will conduct trials, but how to address cases that have already been tried but are pending the court’s decision.

I will not repeat the points made and questions identified by Carl and Steve but I encourage readers to review the PT post of July 9 and the comments on that post for an understanding of the many ways in which the new statutory language is problematic.

Several Tax Court judges have responded to the Taxpayer First Act by issuing orders to the parties, asking the parties to address the effect of the Act on their case. William Schmidt links to one of these orders by Judge Copeland in a recent Designated Order post. Similar orders were issued by Special Trial Judge Leyden and by Judge Thornton, and there are likely others by now.

Judge Leyden issued the first of these orders on July 24 in Grady v. Commissioner, Docket No. 016411-17S, and the first IRS response was filed in that case on September 23. (Ms. Grady is self-represented.) Additional filings were due in other cases on October 4 and October 10. I do not have copies of those submissions but would welcome them if any enterprising readers would like to order them from the Tax Court. Thanks to Sheri Dillon and Francesca Robbins of Morgan Lewis for obtaining the Grady filing at short notice last week, in time for discussion at the Tax Section Meeting. The other cases are:

  • Rubin v. Comm’r, Docket No. 26604-14 (J. Thornton) – response due 10/4.
  • Bargeron v. Comm’r, Docket No. 019828-17 (J. Thornton) – response due 10/4.
  • Robinson v. Comm’r, Docket No. 12498-16, (J. Copeland) – response due 10/4.
  • Morales v. Comm’r, Docket No. 25380-18S (J. Leyden) – response due 10/10.

The IRS speakers at the Tax Section meeting did not discuss the Taxpayer First Act submissions, as the matter is the subject of ongoing litigation, and the Service has not formalized its position. However, Respondent’s submission in Grady is instructive of the Service’s current litigating position. I recommend reading the full response, but are the highlights.

Respondent’s Position in Grady

On the standard of review, Respondent agrees that the Taxpayer First Act is clear: the standard of review is de novo in all cases brought under 6015(e). The Tax Court does not review the IRS’s determination for abuse of discretion but instead reaches its own determination of the appropriate relief. This applies to all avenues for relief under 6015, including traditional innocent spouse relief under 6015(b), separation of liability under 6015(c), and equitable relief under 6015(f).

The scope of review is the tricky part. Even though the Tax Court is to come to its own conclusions, the new statutory language appears to limit the evidence that the Tax Court can consider in making its determination. New 6015(e)(7) says the Tax Court’s de novo review “shall be based upon (A) the administrative record established at the time of the determination, and (B) any additional newly discovered or previously unavailable evidence.” Respondent’s filing takes each in turn.

The administrative record

Congress did not define what it means by the administrative record here. In Grady, Respondent submits that the term should have essentially the same meaning as it does in Collection Due Process cases. The Treasury regulations at section 301.6330-1(f)(2) Q&A-F4 define administrative record as

The case file, including the taxpayer’s request for hearing, any other written communications and information from the taxpayer or the taxpayer’s authorized representative submitted in connection with the CDP hearing, notes made by an Appeals officer or employee of any oral communications with the taxpayer or the taxpayer’s authorized representative, memoranda created by the Appeals officer or employee in connection with the CDP hearing, and any other documents or materials relied upon by the Appeals officer or employee in making the determination under section 6330(c)(3) …

In applying this definition to the innocent spouse context, Respondent notes

Obvious changes might include substituting “IRS or IRS employee” for “Appeals Officer or employee” and removing references to section 6330, as appropriate. Relevant documents could include: tax returns; notice of deficiency; documents where petitioner acknowledges deficiency (e.g., form 4549, statement of income tax changes); account transcripts; Form 8857 and any attachments; any documents submitted by petitioner; any documents submitted by [the] non-requesting spouse; CCISO’s or Appeal’s final determination; allocation/attribution worksheets; any statement of disagreement by petitioner and/or non-requesting spouse; CCISO’s or Appeal’s workpapers; Integrated Collection System (ICS) history, or financial information.

Newly discovered or previously unavailable evidence

Respondent turns to the dictionary to interpret the terms “additional” “newly discovered” and “previously unavailable.”

Combining these various dictionary definitions suggests the scope of review should encompass supplementary evidence of which a party was recently made aware, but could not get or use before. Applied specifically to innocent spouse claims, the plain meaning suggests that the scope of review is limited to evidence not already provided or existing in the administrative record, of which the party introducing the evidence became aware since the administrative determination, and which the party introducing the evidence could not have obtained and provided before the administrative determination.

In a footnote, Respondent further suggests

As to words of the statute that denote timing, i.e. “newly” and “previously,” (e)(7)(B), these are perhaps best understood with reference to the administrative determination. Accordingly, “newly” would cover the period of time after the administrative determination, whereas “previously” would encompass the time period before the determination.

Next steps

What does all this mean for Ms. Grady, in Respondent’s view?

As to the specific case in issue here, as a result of the amendment, it may be necessary for the parties to either agree what constitutes the administrative file and whether other evidence presented at trial was newly discovered or previously unavailable, or if the parties cannot agree, to hold a supplementary hearing to determine whether the Court is in full possession of the administrative record, and whether any evidence presented to the Court was not newly discovered or previously unavailable under section 6015(e)(7)(B).

This will not be welcome news to Ms. Grady.

Initial Thoughts

As others have commented, limiting the Court’s scope of review while setting a de novo standard of review makes very little sense, particularly in equitable relief cases and cases in which abuse is a factor. Unfortunately, taxpayers seeking relief will be caught up in delays and litigation over these provisions.

At the Tax Section meeting, attendees suggested that the parties simply waive any evidentiary objections under the Taxpayer First Act, at least as to cases that have already been tried. The Robinson trial took place over a year and a half ago, in February 2018. The Grady case was tried a year ago. In the interests of the efficient resolution of cases, and in fairness to the self-represented petitioners for whom further proceedings could pose a hardship, the parties could agree to have the Court decide the case based on the evidence submitted.

The administrative record was another topic of discussion. In many cases, the administrative record is simply poor, and it is not possible for the court to reach a de novo determination without fleshing out what happened in the administrative proceedings. Innocent spouse cases are fact-intensive and involve taxpayers telling nearly their entire life story to the examiner. Unfortunately, phone calls between the spouses and IRS and Appeals employees are not recorded and there is no reliable transcript of what was said. IRS employees’ case notes vary in quality, and taxpayers are not allowed to record these calls themselves.

Les recently noted that “last year’s Tax Court’s discussion of exceptions to the record rule in Kasper (the whistleblower case) will be even more important” in the context of the Taxpayer First Act. In a post on Kasper last year, he discusses the issue in the context of general administrative law principles. Les noted:

What makes Kasper one of the most significant tax procedure cases of the new year is that in reaching those conclusions it walks us through and synthesizes scope and standard of review and Chenery principles in other areas, such as spousal relief under Section 6015 and CDP cases under Section 6220 and 6330.

In what I believe is potentially even more significant is its discussion of exceptions within the record rule that allow parties to supplement the record at trial. To that end the opinion lists DC Circuit (which it notes in an early footnote would likely be the venue for an appeal even though the whistleblower lived in AZ ) summary of those exceptions:

• when agency action is not adequately explained in the record;
• when the agency failed to consider relevant factors;
• when the agency considered evidence which it failed to include in the record;
• when a case is so complex that a court needs more evidence to enable it to understand the issues clearly;
• where there is evidence that arose after the agency action showing whether the decision was correct or not; and
• where the agency’s failure to take action is under review

Established exceptions to the record rule in other contexts may provide some relief in cases where the administrative record falls short of what is reasonably necessary for a de novo determination. For example, where it is clear from the record that a specific contention was made during the administrative process, but the IRS case notes do not adequately describe the testimony given, the Tax Court may be able to take testimony on that specific point.

This post has barely scratched the surface of the Taxpayer First Act issues the Tax Court will grapple with in pending innocent spouse cases. We will continue to blog about developments in this area as they unfold.

Impact of Fraud Penalty on Only One Spouse

The case of Chico v. Commissioner, T.C. Memo. 2019-123 points out the benefits to the “good” spouse when the other spouse files a fraudulent tax return.  The case follows earlier Tax Court precedent established in the non-precedential case of Said v. Commissioner, T.C. Memo. 2003-148.  Because of the interplay of the fraud penalty and the accuracy related penalties, the “good” spouse gets a pass on penalties on the return.  While this outcome has nothing to do with the innocent spouse provisions, it has the effect of leaving the “good” spouse free of penalties when the fraud on the return relates only to the other spouse.  Thanks to our fellow blogger Jack Townsend for bringing this case to my attention.

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Mr. Chico ran several businesses including a return preparation business.  He filed returns that failed to report income from several sources and otherwise contained errors that caused the IRS to assert the fraud penalty.  When the IRS asserts the fraud penalty on a joint return, it must prove fraud of each spouse in order to have the fraud penalty apply to both spouses.  Here, Mr. Chico’s knowledge of the businesses and of return preparation made him the obvious target of the penalty while the IRS could not overcome the showing that Mrs. Chico had little knowledge of the matters on the return.  So, the court found the fraud penalty with respect to Mr. Chico but not his wife.

The finding of the fraud penalty against Mr. Chico did not end the pursuit of penalties by the IRS.  As it normally does, the IRS had asserted the lesser penalties in the accuracy penalty provisions of IRC 6662 against both husband and wife.  Here, the issue of penalty stacking comes into play.  The IRS cannot hit someone with the fraud penalty and the accuracy related penalty.  It can either obtain the fraud penalty or the accuracy related penalty but not both.  Because of the anti-stacking provision found in IRC 6662(b), the Tax Court found that it could not impose an accuracy related penalty against Ms. Chico since doing so would create a stacking of penalties.

IRC § 6662(b) states the following as it pertains to the imposition of accuracy-related penalties on underpayments.  The IRS may not stack penalties when any of the following apply:

  • When a penalty is imposed under IRC § 6663 (fraud penalties)
  • When a penalty is determined as being a “gross valuation misstatement” as defined under IRC § 6662(h)(2), the portion of the underpayment shall be penalized 40 percent in total (and not an additional 40 percent to the standard 20 percent penalty)
  • When a penalty is determined from a nondisclosed noneconomic substance transaction as defined under IRC § 6662(i), the portion of the underpayment shall be penalized 40 percent in total (and not an additional 40 percent to the standard 20 percent penalty)

Treas. Reg. 1.6662-2(c) is the anti-stacking provision in the CFR as it pertains to accuracy related penalties:

A. If a portion of the underpayment of tax shown on a return is attributable to both negligence and a substantial understatement, the accuracy-related penalty would apply only once at the 20 percent rate to this portion of the underpayment. The examiner should assert the penalty that is most strongly supported by the facts and circumstances and write up the other as an alternative penalty position.


B. The penalty is applied at the 40 percent rate on any portion of the underpayment attributable to a gross valuation misstatement. Any penalty at the 20 percent rate that could have applied to this portion is not asserted except as an alternative penalty position.


C. A penalty is applied at the 75 percent rate on any portion of the underpayment attributable to civil fraud. Any penalty that could have applied to this portion at the 20 or 40 percent rate is not asserted except as an alternative penalty position.

IRM 20.1.5.3.3.1 No Stacking Provision (12-13-2016) sets out the anti-stacking rules for IRS employees to follow. 

The application of the anti-stacking penalties allows Mrs. Chico to avoid having any penalty for filing an improper return assessed against her.  Although the IRS sought the accuracy related penalty against her it does not seem inclined to pursue the issue into the circuit courts to overturn the position stated by the Tax Court that imposing the lesser penalty on the spouse not liable for fraud creates impermissible stacking.  In the absence of a court challenge, the IRS must go to Congress and seek a change in the stacking rules to allow assessment against the spouse who did not commit fraud or forgo any lesser penalty against that spouse in these circumstances.

The spouse who did not commit fraud may still suffer because of the fraud.  Unless that spouse obtains innocent spouse relief, that spouse will owe all of the additional tax assessed as a result of the audit.  Unless the spouse who did not commit the fraud has no withholding and makes no estimated tax payments during the year, that spouse may have to repeatedly apply for injured spouse relief in subsequent years if the couple receives a refund of taxes since the IRS will likely take the whole refund to satisfy the penalty liability of the fraudulent spouse.

Here, the Chico’s filed a joint petition.  Two attorneys are listed in the opinion as representing the taxpayers.  It is not clear if one was representing Mr. Chico and the other Mrs. Chico or if they were both representing both parties.  This is a situation in which the attorneys must be careful because the interests of Mr. and Mrs. Chico do not align. 

This is also a situation in which Mrs. Chico was fortunate to have representation.  Without representation she has little chance of catching the mistake made by the IRS in seeking to impose a lesser included penalty on her.  Perhaps the Tax Court Judge would always or almost always catch this mistake and protect the unrepresented party but that puts a great deal of pressure on the judge which does not belong there.  Just because Tax Court judges do a good job of catching these issues and protecting unrepresented taxpayers does not mean that this is a perfect system.  An unrepresented taxpayer could end up owing a penalty which the IRS should not have imposed.  Even the accuracy related penalty would have been almost $40,000 for the three years at issue in this case.  That would have been a steep price for the unrepresented spouse to pay.

The court stated:

Respondent has not asserted fraud penalties against Ms. Chico but alleges that she is liable for the section 6662(a) accuracy-related penalty for each year at issue.

I interpret the court’s statement to mean that no penalty was asserted against Ms. Chico in the notice of deficiency but the attorney in Chief Counsel’s office decided to pursue the penalty after the filing of the petition.  If I have interpreted the situation correctly, it looks like the notice writers at the IRS read the IRM but the Chief Counsel attorney and supervisor did not or maybe Chief Counsel’s office does not agree with the decision in Said.  If I interpreted the situation correctly, maybe it’s time for a new Chief Counsel notice assuming that Chief Counsel’s office now agrees with this outcome.

Innocent Spouse, Abuse of Discretion, and Remand: Designated Orders 8/5/19 to 8/9/19

My August week of designated orders brought four orders in different areas. The topic range includes innocent spouse (with the question of application under the Taxpayer First Act), collection due process and remands. One of the remands has an abuse of discretion issue.

Taxpayer First Act and Innocent Spouse
Docket No. 12498-16, Beverly Robinson v. C.I.R., Order available here.
In her first designated order, Judge Copeland brings up how the Taxpayer First Act affects a pending innocent spouse case. Carlton Smith blogged about this issue in Procedurally Taxing previously here. Carlton’s article discusses the implications of the Taxpayer First Act section concerning innocent spouse cases, specifically IRC section 6015(f) cases.

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This order concerns a case that already went to trial on February 5, 2018. The parties filed a joint stipulation of facts and a joint first supplemental stipulation of facts. The petitioner moved to admit Exhibit 58-P and it was admitted into evidence. Each party called witnesses in support of their arguments. The entire administrative record was not presented or received into evidence. The trial was before Judge Chiechi, who has since retired. The case was reassigned to Judge Copeland. After trial, on July 1, 2019, the Taxpayer First Act was signed into law. The relevant portion to this case is below.

Section 1203(a)(1) of the Taxpayer First Act of 2019 (TFA) amended IRC section 6015(e) to add a new paragraph (7):

(7) STANDARD AND SCOPE OF REVIEW. — Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon —
(A) the administrative record established at the time of the determination, and
(B) any additional newly discovered or previously unavailable evidence.

TFA section 1203(b) states those sections apply to “petitions or requests filed or pending on or after the date of the enactment of this Act.”

Judge Copeland issued this order, stating that the parties shall file a response to the order addressing the effect of sections 1203(a) and (b) of the TFA on this case.

At first, I thought the judge wanted the parties to do research on the TFA and how its innocent spouse provision applied in general to their case so I would have directed them to Carlton’s article. However, I reread the order and realized just what she meant concerning the TFA’s application to their case.

The case was pending on the date the TFA was enacted. Now, normally the Tax Court would review the innocent spouse determination de novo based upon (A) and (B) listed above. However, the administrative record was not introduced or received into evidence, which is part of subsection (A) above. What to do in this case? Let the parties make their arguments about the matter. Thus, the judge ordered the parties to submit their responses on or before September 4, 2019.

As a follow-up – on August 30, the IRS filed an unopposed motion for an extension of time. That motion was granted to give the IRS an extension of time to October 4.

Takeaway: Applying the Taxpayer First Act will open up several questions for years to come. Since the Taxpayer First Act specifically discusses Tax Court review of innocent spouse cases, this may be a prominent issue moving forward in designated orders. They should still read Carlton’s article.

More Innocent Spouse
Docket No. 10341-18, Jeffrey C. Elliott v. C.I.R., Order available here.
Pamela Elliott filed a motion for leave to file a notice of intervention in this innocent spouse case. Normally, she could have intervened as a matter of right. However, she filed the motion after the 60-day window during which she could intervene and requests leave to do so at this late time. Her reasoning is that “she was not represented by counsel and did not understand her procedural rights,” adding that the “interests of justice favor allowing her request.”

The Court reviews factors regarding Ms. Elliott’s motion for leave to file a notice of intervention. The first factor is the length of time she knew or should have known of her interest. Ms. Elliott waited a year so that factor weighs against her. The second factor is the prejudice the parties may suffer by her failure to intervene earlier. Mr. Elliott did not provide proof of additional fees he would suffer, the docket in this case has been inactive, and the parties have sufficient time to prepare for an October 2019 trial so it is determined that the parties will not suffer prejudice from her failure to intervene earlier so that factor weighed in her favor. The third factor is the prejudice she will suffer from a denial of her motion. Because she will be affected by the decision on innocent spouse relief, she would suffer prejudice by not being able to participate in the trial and that factor weighs in favor of granting the motion. The fourth and final factor is any unusual factors weighing in favor of finding timeliness. There are no issues affecting timeliness, but the parties are involved in another Tax Court proceeding (2957-19) involving similar issues. On balance, the factors allow for Ms. Elliott to be granted the relief she sought.

The Court grants her motion for leave to file a notice of intervention, ordering to amend the caption and serve her with the proper notice and pretrial order so she may prepare for trial.

Takeaway: It is not recommended to file documents after a deadline has passed. However, factors may allow for the Court to grant an individual the relief sought.

Abuse of Discretion for Installment Agreement Notice
Docket No. 2018-17L, Don R. Means v. C.I.R., Order here.
The petitioner is a retired airline pilot who claimed deductions based on participation in tax shelter programs. Audits of those schemes resulted in the IRS disallowing the deductions and deficiencies for 7 tax years. The Tax Court entered final judgments in 2013 regarding the aggregated assessed tax and associated accrued interest to be, respectively, $102,765 and $76,498. Mr. Means entered into a $500 monthly installment agreement in February 2014. The IRS terminated the agreement in May 2016. In July 2016, the IRS issued a Notice of Intent to Levy. Mr. Means filed a Form 12153 to request a Collection Due Process hearing. In the form and also by request to the settlement officer, Mr. Means requested an explanation of the termination of the installment agreement.

Termination of an installment agreement must be preceded by a 30-day notice that provides an explanation to the taxpayer. There were inconsistencies in the administrative record so it was unclear that the notice requirement under IRC section 6159(b)(5) was met or that such notice was provided to Mr. Means (though there is an indication that Mr. Means, his ex-wife, or both, failed to provide the IRS updated financial information, which led to the termination).

The Court cannot agree with the settlement officer’s determination that legal and administrative procedures were met. Therefore, the conclusion is that the determination sustaining the proposed levy was an abuse of discretion. The Court remands the case to Appeals for a supplemental hearing. On remand, if Mr. Means did not have proper notice, he should either be allowed to continue the installment agreement or receive the proper notice due, with the right to appeal.

Takeaway: Consistent procedure is necessary for the IRS so that a taxpayer receives proper due process. If the administrative record is inconsistent about notices, it is more likely for the Court to decide there was abuse of discretion.

Collection Due Process, Remand, and Summary Judgment
Docket No. 25904-16SL, Chinyere Egbe & Sheila Daniels Egbe v. C.I.R., Order and Decision available here.
To begin, petitioners received an IRS notice of deficiency for tax years 2012 and 2013. They did not petition the Tax Court based on that notice.

Next, the IRS issued to the petitioners a Final Notice of Intent to Levy and Notice of Your Right to Hearing for the 2013 tax year. The petitioners submitted a form 12153 to request a collection due process (CDP) hearing.

The settlement officer assigned to the case worked with the petitioners and their representative. The officer granted them an extension of time and did not receive any requested financial documents. However, he told their representative that they qualified for a streamlined installment agreement of $275 per month. The representative agreed to get back with the settlement officer after discussing with the petitioners. The petitioners made two payments before realizing the agreement was not in effect and then terminated their relationship with the representative because of not communicating acceptance of the installment agreement to the IRS.

The IRS issued a notice of determination to the petitioners not to grant relief from the proposed levy action. The petitioners filed a timely petition to the Tax Court concerning the notice of determination, also checking the box for a notice of determination concerning innocent spouse relief (which did not apply) and indicating the notice was for tax years 2012 and 2013 (when it was only for 2013).

The IRS filed a motion for summary judgment, which the Court denied. The Tax Court remanded the case to IRS Appeals for a further administrative hearing so the IRS could provide petitioners a supplemental CDP hearing. The Court dismissed tax year 2012 and the innocent spouse claim from the case.

The same settlement officer held a further CDP hearing. He informed the petitioners they could not challenge the liability for tax year 2013 because they received a valid notice of deficiency and that they had accrued an additional liability. The settlement officer proposed an increased installment agreement and they accepted, signing form 433D.

The IRS issued to the petitioners a supplemental notice of determination related to tax year 2013, determining that the proposed levy is not sustained because they agreed to a $600 per month installment agreement.

Following the supplemental notice of determination, both parties were to file status reports but only the IRS filed one. The Court scheduled the case for trial on the September 23, 2019, docket for New York, New York. The IRS filed a motion for summary judgment, with the settlement officer’s statement in support. The petitioners filed their objection to the motion for summary judgment.

In the Court’s analysis, the petitioners did not show there was a genuine issue for trial. Since the petitioners were in an installment agreement, the IRS did not sustain the proposed levy. The Court granted the motion for summary judgment because there was no genuine issue of material fact and removed the case from the September calendar.

Takeaway: To some degree, I think the petitioners had bad representation, but I think the biggest problem was a lack of understanding of IRS and Tax Court procedure. What are some indicators? They did not petition the Tax Court regarding the liabilities for 2012 and 2013 from the notice of deficiency. They (or their representative) did not respond or communicate with the settlement officer for the CDP hearing. They did not fill out their Tax Court petition correctly based on the original notice of determination.

I find that clients do not understand the difference between the various notices that provide them access to the Tax Court. Generally, the notice of deficiency allows them to contest the liability while a notice of determination concerning collection action is about abuse of discretion in a CDP hearing. It is critical to know what lane you are in to argue correctly and find success in the Tax Court.

Innocent Spouse Survives Motion to Dismiss in Jurisdictional Fight with the IRS

We welcome Sarah Lora, Assistant Clinical Professor and Director of Lewis and Clark’s Low Income Taxpayer Clinic and Kevin Fann, 3L at Lewis and Clark Law School.  Their clinic just won an important victory in the innocent spouse arena overcoming an argument from the trial section of the Department of Justice Tax Division that completely disagrees with the arguments made by the appellate section of the Tax Division.  Keith

In his Opinion and Order issued last month in Hockin v. United States, Oregon District Court Judge Michael Simon rejected in part a magistrate judge’s findings and recommendations to dismiss and rejected the DOJ’s argument that the government had not waived sovereign immunity to be sued, holding that a taxpayer could bring an innocent spouse claim in federal district court as part of her larger tax refund claim against the IRS.

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The dispute concerned whether an alleged innocent spouse could follow the Flora rule of “pay first, litigate later” in her § 6015(f) claim.  In the past, the DOJ has presented contradictory arguments for and against the Flora rule in these innocent spouse refund cases, a contradiction highlighted by several advocates, including former NTA Nina Olson as well as Keith and Carl from Harvard’s Low-Income Taxpayer Clinic. In previous cases against clients at Harvard LITC , the DOJ insisted that taxpayers who miss the chance to file in U.S. Tax Court could still pay the assessment and litigate a refund claim in federal district court. In Hockin and several other cases, however, the DOJ turned a 180, arguing exactly the opposite, that the district court has no jurisdiction in innocent spouse refund suits.

Several years ago, Plaintiff Kimberly Hockin filed a claim with the IRS for innocent spouse relief of joint and several liability for tax years 2007 and 2008.  The claims for each year were based on the same facts: she did not sign the return and, in the alternative, she should be relieved of liability anyway based on § 6015(f).  The IRS granted her 2008 claim, but it denied the 2007 claim with no clear explanation for the different outcomes.

Ms. Hockin attempted to appeal the decision by filing a petition in U.S. Tax Court, but she had missed the filing deadline by 555 days. After the Tax Court’s dismissal, Ms. Hockin sought the assistance of the Lewis & Clark Law School LITC. By the time she contacted us, Ms. Hockin had paid the full balance due for 2007 through offset refunds over the years. After filing for a refund administratively, the LITC filed a complaint in U.S. District Court, led by volunteer attorney Scott Moede of the Office of the City Attorney in Portland, Oregon. The complaint sought a refund of her payments for 2007 made within the last two years, citing jurisdictional statutes 28 U.S.C. § 1346(a)(1) and IRC § 7422(a), for three reasons:

  1. Ms. Hockin never signed the return;
  2. the IRS is barred from collecting the tax liability for 2007 under the theory of quasi-estoppel (i.e. it granted relief for tax year 2008 but not 2007 under the same facts); and
  3. the United States erroneously collected taxes she should have been relieved of paying under the rules of innocent spouse relief.

The United States filed a motion to dismiss, arguing that the taxes had not been “illegally or erroneously collected” as required by § 1346(a)(1) for the district court to have subject matter jurisdiction. 

After extensive briefing, including an amicus curiae brief filed by Keith and Carl of the LITC at Harvard Law School, magistrate Judge Jolie Russo held oral arguments. The United States conceded the first claim should go forward. After all, there was a genuine dispute of fact about whether the return had been signed, and no copy of the return had been produced by Ms. Hockin, the IRS, or the ex-spouse. On the claims of quasi-estoppel and innocent spouse, Judge Russo said she leaned toward granting the government’s motion to dismiss and asked Attorney Moede and Lewis and Clark law student John MacMorris-Adix ’19 to convince her otherwise.  Within a few weeks, Judge Russo issued her Findings and Recommendations (F & Rs). She had granted the government’s motion to dismiss the quasi-estoppel and innocent spouse relief.

Undeterred, the clinic objected to Russo’s F & Rs.  The Article III review Judge Michael Simon requested additional briefing, citing part of the government’s original motion to dismiss, which admitted that, if plaintiff had filed her claims in both U.S. Tax Court and U.S. District Court, § 6015(e)(1)(A) cedes jurisdiction to the District Court. Simon asked the parties to answer several questions, including, “[W]hy isn’t Plaintiff’s failure to file a timely petition in U.S. Tax Court excusable neglect of an administrative technicality?” We tried not to get too excited, since it is rare for an Article III judge to disagree with a magistrate’s F & R.

The parties briefed Judge Simon’s questions within about two weeks. Two days after briefing, he issued his ruling, granting the Government’s motion as to the quasi-estoppel claim but denying the Government’s motion as to both the unsigned return and the innocent spouse claim! The opinion relied primarily on Flora v. United States, Wilson v. Comm’r, and Merriam-Webster’s plain-language definition of “wrongfully.”

The court held:

The IRS may grant innocent spouse relief even when the amount of tax assessed or collected was precisely the correct amount that the married couple owed given their financial circumstances. But 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422(a) do not waive sovereign immunity and provide a cause of action solely for claims that a tax was erroneously or illegally assessed. They also apply to claims that the tax was “in any manner wrongfully co[ll]ected.” A claim that “it is inequitable to hold the individual liable” falls within the scope of an allegation that a tax was “in any manner wrongfully collected,” giving “wrongfully” its plain meaning, which would include unfairly or unjustly. See Wrongful, MERRIAM-WEBSTER.COM, https://www.merriam-webster.com/dictionary/wrongful (last visited August 14, 2019) (definition: wrong, unjust).

In addition to the plain-meaning definition of “wrongful,” the court also resisted the Government’s strained logic when it pointed to clear and basic principles of justice and economy. On that point, the court held that tax refund cases could obviously contemplate innocent spouse relief at the same time, because if the two issues were tried separately under separate jurisdictions, contradictory results might occur. The court stated, “If Plaintiff wins on her refund claim, then she must lose on her innocent spouse claim. Were this dispute adjudicated in two different forums, the result could be contradictory rulings.” The Government had produced dozens of pages of logical loopty-loops about why that simple judicial principle should not apply. In the end, the court did not buy it.

The question still arises, however, as to whether this ruling extends to stand-alone innocent spouse claims. Although the court stated that “[n]othing in the innocent spouse statute, or elsewhere in the Tax Code, suggests that a claimant seeking innocent spouse relief cannot opt to ‘pay first [and] litigate later’ in district court,” the court also made a point to recognize that this was not a stand-alone case, because it also involves a “jurisdictionally valid refund claim” for lack of a signature on the return. 

The Hockin case will be set for trial in federal district court early in 2020.

Two tickets to Tax Court, by way of § 6015 and Collection Due Process

Today we again welcome guest blogger Carolyn Lee who practices tax controversy and litigation in the San Francisco offices of Morgan Lewis. Carolyn represents individual and business clients, including pro bono and unrepresented taxpayers while volunteering with the low income tax clinic of the Justice & Diversity Center of The Bar Association of San Francisco.

Carolyn asks that we add a reminder about the CDP Summit Initiative she is involved with, to reform and improve the effectiveness and efficiency of collection due process procedures, benefitting everyone who engages with them. Registration is open for the upcoming ABA Tax Section meeting in San Francisco on October 4 and 5, when there will be three CDP Summit programs. In addition, there will be a CDP Summit in Washington, D.C. on the morning of December 3. Contact Summit participants Carolyn (carolyn.lee@morganlewis.com), William Schmidt schmidtw@klsinc.org, or Erin Stearns (erin.stearns@du.edu) if you would like to be involved. Christine

The recent case of Francel v. Commissioner, T.C. Memo. 2019-35, provides a wealth of tax procedure lessons.  In Francel, a denial of § 6015 relief collided with a CDP determination, resulting in two tickets to Tax Court – one more valuable than the other.

Thomas Francel was (and is) a cosmetic surgeon with a solo practice that generated almost $1 million in income to the Francel household during each of the 2003-2006 tax years in issue. Patients paid their fees in three ways: currency, cashier’s checks (together, “cash”) or credit cards. Fees were accepted by the practice receptionist who turned them over to the office manager, Sharon Garlich. Ms. Garlich entered currency payments less than $100 and cashier’s checks in amounts of $10,000 or greater in the practice’s accounting system. Credit card payments also were entered in the practice’s accounting system. Ms. Garlich gave all other cash to Dr. Francel’s wife (nameless to the Court except as “Francel’s wife”) who also was employed at the medical office. These diverted fees ranged between $194,000 and $264,000 for each of the 2003-2006 tax years.

Ms. Garlich recorded by hand in a green ledger the cash payments she gave to Ms. Francel – or to Dr. Francel if Ms. Francel was not available. The medical practice’s CPA had direct access to the practice’s accounting system. No one gave the CPA the green ledger. No one told the CPA about the cash diverted to Ms. Francel (or Dr. Francel). The Francels filed joint income tax returns. The medical practice filed its tax return as an S corporation, with income passing through to the Francels.

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The Opinion does not indicate whether Dr. Francel personally directed the use of any of the diverted fees, though there are hints he was aware some cash was held separate from the practice’s accounts. For example, Ms. Garlich testified she gave diverted fees to Dr. Francel if Ms. Francel was not at the office. Also, when Ms. Garlich discussed the practice’s cash flow problems with Dr. Francel, she testified that his solution, after speaking with Ms. Francel, was “instead of keeping all of the cash for a while they would just go ahead and put half of it into the business.” Nonetheless, Dr. Francel could have known about the unconventional (in the Court’s view) fee handling method and still have believed the income tax reporting was correct.

The facts do tell us that Ms. Francel had a drug habit, which she kept hidden from Dr. Francel. We also learned that the strain of keeping two sets of books wore on Ms. Garlich, who retained legal counsel and reported the scheme to the US Attorney’s Office and the IRS Criminal Investigation Division.

Further into the engaging 48-page Opinion we learn that Ms. Francel (and not Dr. Francel) was indicted by the US Attorney’s Office and charged with a violation of § 7201, for attempting to evade or defeat federal income tax owed. Ms. Francel plead guilty to the federal tax charges, agreeing that the total tax underpayment for the 2003-2006 tax years was $344,121. Ms. Francel was sentenced to one year and one day imprisonment with supervised release. She was ordered to pay restitution to the government in the amount of $344,124 (the opinion acknowledges the $3.00 difference). Ms. Francel paid the restitution in full, using funds from a 401(k) account she owned. The restitution payments were credited to Dr. Francel’s account since a payment by either jointly liable spouse reduces the liability owed by both spouses. As an aside, Ms. Garlich has a whistleblower claim pending related to her role in securing the collected tax.

Many more pages later, recounting the successful civil litigation brought by Dr. Francel’s medical practice against Ms. Francel for embezzlement; a divorce suit and reconciliation between the Francels (still married and working together at Dr. Francel’s practice); and the recurring appearances of the same few lawyers representing the Francels individually and together and the medical practice, as plaintiff or defense, variously, throughout the years leading to the Tax Court trial (not so subtly noted by the Court), we arrive at the procedural history section of the Opinion. It is a delight for persons interested in the finer technical points of collection due process, § 6015 relief jurisdiction and Tax Court standard and scope and standard of review.

Dr. Francel Engages with the IRS and the Tax Court.

Due to interest and other computational quirks, after the restitution was paid the Francels still owed approximately $144,400 for the 2003-2006 years. Dr. Francel submitted a Form 8857 – Request for Innocent Spouse Relief on May 18, 2015 for all four tax years. The Opinion does not include any facts about an administrative review of the 6015 request by the IRS’s Innocent Spouse unit. We only know Dr. Francel’s claim was assigned to Appeals (“§ 6015 Appeals”).

On September 22, 2015, the IRS mailed Dr. Francel a notice of intent to levy to collect the 2003-2006 income tax liabilities, despite statutory prohibitions and Internal Revenue Manual (IRM) instructions to suspend collection when a processable request for § 6015 relief is received. The Opinion provides no indication of collection jeopardy. See § 6015(e)(B)(i); IRM 25.15.2.4.2; and IRM 8.21.5.5.7. Dr. Francel timely requested a collection due process (CDP) hearing with respect to the notice of intent to levy, asserting that he was entitled to § 6015 relief. The Appeals Officer assigned to the CDP hearing request (the “CDP Appeals Officer”) paused the CDP proceedings pending the decision regarding Dr. Francel’s § 6015 request.

Dr. Francel’s request for relief was denied. A report initiated by the § 6015 Appeals Officer, unsigned and undated, was sent to the CDP Appeals Officer who reviewed the report and adopted the decision without change. (We do not know the basis for the administrative denial.) The CDP Appeals Officer had a telephone conference with the attorney representing Dr. Francel for the CDP hearing, and confirmed the § 6015 request was denied.

On February 14, 2017, the IRS mailed Dr. Francel a notice of determination following the CDP hearing, sustaining the levy collection. This notice of determination with respect to the CDP hearing was a ticket to Tax Court for Dr. Francel, to seek review of the determination.

The notice stated that Dr. Francel would receive a separate “Final Appeals Notice” regarding his rejected relief request. Presumably this communication would have been issued as Notice of Determination by § 6015 Appeals. Such a notice would also have been a ticket to Tax Court for Dr. Francel. The notice was not sent, however. Because the IRS did not issue a response to Dr. Francel regarding the Form 8857, his application for relief itself became a ticket to Tax Court. See § 6015(e).

On March 14, 2017, Dr. Francel petitioned the Court to review the February 14, 2017 notice of determination, asserting error in denying him § 6015 relief. The petition was filed within thirty (30) days of the February notice. Ms. Francel intervened to support his request for relief. (The Francels were living together again.) Ms. Francel failed to appear for trial; she was dismissed as a party for failure to prosecute the case.

Dr. Francel had two tickets to Tax Court. The § 6015 rejection, with or without a formal determination denying relief initiated by § 6015 Appeals, entitled Dr. Francel to Tax Court review under § 6015(e). In addition, the CDP determination allowed Dr. Francel into Tax Court under § 6330(d)(1).

Does it matter which ticket Dr. Francel tendered to the Court?

Two Tickets to Tax Court

Consider the § 6015(e) ticket. First, when is a petition from a 6015 ticket timely? The Court explained a petition pursuant to § 6015(e) was timely regardless of whether there was a final determination issued by § 6015 Appeals (i.e., the promised Final Appeals Notice). The clock to petition for Court review of denial of § 6015 relief starts ticking on the date the IRS mails, by certified or registered mail to the taxpayer’s last known address, notice of the Service’s final determination. The taxpayer may petition for relief not later than the 90th day after such date. Here there was no notice from § 6015 Appeals. But taxpayers are not held hostage by slow determinations of § 6015 applications. Instead, they may petition the Court for review of their requests after six (6) months have passed since the request was made to the IRS. § 6015(e)(A)(i)(II). The Court determined Dr. Francel’s petition was timely pursuant to § 6015(e)(A) because it was filed March 14, 2017; that is, significantly longer than six (6) months after May 18, 2015 when the processable Form 8857 was submitted to the IRS.

Second, what standard and scope of review apply to the 6015 ticket? In cases arising under § 6015(e)(1), the Court employs a de novo standard of review and a de novo scope of review. Porter v. Commissioner, 132 T.C. 203, 210 (2009). (As a bonus for readers, the Porter opinion includes an extensive dissent asserting the proper standard of review for § 6015 cases should be abuse of discretion (with a de novo scope of review) – written by Judge Gustafson and joined by Judge Morrison who decided this Francel case.)

The de novo standard of review and scope of review affords taxpayers the benefit of the Court’s fresh consideration of all relevant evidence. IRS determinations are not granted deference. In some instances, particularly when an administrative record is under-developed when the matter reaches the Court, de novo review can make all the difference with respect to a full hearing of the facts and law, and a decision that is correct on the merits rather than based solely on the administrative record. Unfortunately, this summer Congress limited the Court’s scope of review in § 6015(e) cases so it is no longer fully de novo. It remains to be seen how litigants and the Tax Court will interpret the Taxpayer First Act’s changes to § 6015(e). Steve Milgrom and Carl Smith raised several concerns and questions in a recent PT post.

Now turn to the § 6330(d)(1) CDP ticket to Tax Court. The default application of § 6330(d)(1) provides that a petition must be made within thirty (30) days of a CDP determination – significantly shorter than the period to request review of a § 6015 relief rejection. Nonetheless, Dr. Francel met the 30-day deadline. The Court would have had jurisdiction to review the rejection of § 6015 relief by the CDP Appeals Officer based on Dr. Francel’s § 6330(d)(1) ticket.

The advantage of one ticket over the other in this case comes into sharp relief with respect to the standard and scope of review. In contrast to the Court’s full de novo review of § 6015 matters, collection due process review is constrained. The standard of review when the liability is not at issue – which it was not in Francel – is abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 609-610 (2000), quoting the legislative history of § 6330, because the statute itself does not prescribe the standard the Court should apply when reviewing the IRS’s administrative decisions.

Even more material in CDP matters, the standard of review is abuse of discretion. Sego v. Commissioner, supra; Goza v. Commissioner, 114 T.C. 176, 181-182 (2000); Robinette v. Commissioner, 439 F.3d 455, 459 (8th Cir. 2006, rev’g 123 T.C. 85 (2004). (Of course, review is de novo if the underlying liability is properly at issue.) Also, the Court often is bound by the record rule, in that it may only consider evidence contained in the administrative record if the case is appealable to the 1st, 8th, or 9th Circuits. In cases appealable to the other circuits, the Court does not limit the scope of its review to the administrative record, following Robinette. Judge Halperin recently reviewed the messy case law on scope and standard of review in CDP appeals in Hinerfeld v. Comm’r, T.C. Memo. 2019-47. In many cases, particularly those involving self-represented taxpayers, the record rule forecloses a full hearing of relevant facts. Here, however, Dr. Francel did not suffer from lack of representation.

So for a case involving a § 6015 issue and a CDP issue, one ticket is more valuable than the other. The § 6015(e)(1) ticket offers a longer period to petition for Court review and it offers a de novo standard and scope of review. The § 6030(d)(1) ticket requires a 30-day dash to petition and it is burdened by the abuse of discretion standard and scope of review. In the Francel matter, the § 6015(e)(1) ticket would be more valuable.

In fact, the Court took jurisdiction pursuant to § 6015(e)(1) without an explanation for the selection. Perhaps it did so because the rejected request for § 6015 relief preceded the unfavorable CDP determination which sustained the § 6015 denial. Thus, Dr. Francel had the benefit of the Court’s full de novo review. This may have been small comfort, however, because the Court sides with the IRS, deciding that Dr. Francel did not qualify for any relief.

By comparison to the lead in, a fairly uneventful conclusion

From this point, the Opinion accelerates to a close with the § 6015 analysis. Fundamentally, the unreported income was attributable to Dr. Francel. Relief may not be granted under § 6015(b) or (c) for tax arising from a liability attributable to the requesting spouse. Dr. Francel’s S corporation medical practice was required to report all fees as income. As sole shareholder of the practice, Dr. Francel was then required to include the fees in his income. The question of income attribution did not rest on who was responsible for the under-reporting, or embezzlement, or criminal tax evasion.

In addition, the Court decided it would not be inequitable to hold Dr. Francel liable for the deficiencies. (Section 6015(f) permits relief even when the liability is attributable to the requesting spouse, if an analysis of the facts and circumstances establishes equitable relief is justified.) According to the Court, Dr. Francel benefitted from the unreported cash fees because Ms. Francel spent some of the cash on home improvements for the residence Dr. Francel still occupied. He also owned the car restored using the unreported income. Dr. Francel’s accumulated wealth was attributable in part to the unreported cash and the unpaid tax from the 2003-2006 tax years. These facts weighed against a grant of relief. If Dr. Francel had actual knowledge, or reason to know, of the diverted cash and unreported income as the facts imply, this would have weighed against relief as well. Not mentioned but possibly also a factor: Dr. Francel may have failed the economic hardship test because he had the financial resources to pay the liability and still maintain a standard of living well above IRS national, regional and local standards (remember, Dr. Francel continued his cosmetic surgical medical practice).

In close, what a bountiful Opinion this is, presenting facts that would be NCI-episode-worthy if there had been a dead body; a generous tutorial regarding § 6015 relief, collection due process, as well as standard and scope of Court review; and – best of all – an elegant profiling of two tickets to the Tax Court. As a bonus, for readers who teach professional responsibility for tax practitioners, I recommend mining the Opinion for an exam fact pattern regarding an attorney’s duty of loyalty and conflicts of interest, extracting the many representation scenarios the Court helpfully flags. 

Seventh Circuit to Hear First Case about Applying Latest Innocent Spouse Equitable Rev. Proc.

Last summer, the Tax Court decided what seemed to be a fairly routine innocent spouse case involving three tax years, Jacobsen v. Commissioner, T.C. Memo. 2018-115. Mr. Jacobsen’s former wife had embezzled about $500,000 from her employer, and he was seeking to be relieved of taxes on the embezzlement income that had been omitted from their joint returns. The Tax Court dismissed the 2009 year from the case because the taxes had already been discharged in Mr. Jacobsen’s unfortunate ensuing bankruptcy. For the 2010 year, the court relieved him under section 6015(b) because he did not even have reason to know of the embezzlement (his ex-wife having hidden the money in small deposits in their joint business account and then gambled it all away), and four other equitable factors favored relief, while none disfavored relief. For the 2011 year, though, the court denied him relief under section 6015(b), (c), and (f), holding that, because he helped a return preparer prepare the 2011 return after his wife had already gone to jail, he had actual knowledge by then of the omitted income.

Of course, actual knowledge precludes relief under subsections (b) and (c), but it doesn’t preclude relief under subsection (f), equitable relief. Rev. Proc. 2013-34, 2013-2 C.B. 397, applicable to the case, provides factors to consider for equitable relief. Prior Rev. Proc. 2003-61, 2003-2 C.B. 296, had provided that actual knowledge was an especially strong factor weighing against relief, though it could be overcome. A major liberalization of relief in the 2013 Rev. Proc. is that actual knowledge is now weighed no more heavily against a taxpayer than reason to know. But then, Judge Paris, purporting to apply the 2013 Rev. Proc., but with no comparison of the factors for 2011, held that because Mr. Jacobsen had actual knowledge and helped prepare the 2011 return, he could not get equitable relief.

Mr. Jacobsen had been pro se. Keith and I were perplexed by the 2011 ruling. There were four positive factors for relief – marital status (divorced), no significant benefit, compliance with later tax filing requirements, and adverse health issues (Mr. Jacobsen is a vet with PTSD). How could they be outweighed by merely one negative factor, actual knowledge, which is no longer held extra-strong weight? (Helping prepare a return does not seem to be a separate factor, but simply part of the knowledge factor.) So, the Harvard Federal Tax Clinic volunteered to represent Mr. Jacobsen in an appeal of the 2011 part of the case to the Seventh Circuit. The DOJ did not cross-appeal the IRS loss on the 2010 year.

We think this is an important case to vindicate the liberalization of the actual knowledge factor in Rev. Proc. 2013-34. While there have been many court of appeals opinions under the prior Rev. Procs. under subsection (f), this will apparently be the first appellate case applying Rev. Proc. 2013-34. We know that the Tax Court has held that it isn’t bound to follow the Rev. Proc., but Judge Paris purported to follow the Rev. Proc. when discussing the equity factor for relief under subsection (b) for 2010. Even if the Rev. Proc. is only advisory, can a court purporting to apply it let one negative factor outweigh four positive factors? And isn’t the judge making actual knowledge, in effect, a per se disqualifier from relief under subsection (f), which contains no provision concerning knowledge?

A law student helped the IRS try the case in the Tax Court. Three law students at Harvard helped Keith and me draft our appellate brief. Here is the appellee’s brief. No reply brief was filed. A Harvard clinic student will do the oral argument for Mr. Jacobsen in the Seventh Circuit on September 13 – which we hope will be a lucky day, despite its being a Friday. This must be either the first case or one of the first cases where law students have helped both taxpayers and the IRS in litigating a case.

Innocent Spouse Relief and the Administrative Record

Steve Milgrom, an attorney who is the Litigation and Volunteer coordinator for San Diego Legal Aid, brings us today’s guest post. I wrote about Steve’s remarkable presentation at an ABA meeting last December where the audience begged him to finish telling the story of his CDP case about which we had blogged here and here. His CDP case involved an effort to convince the IRS to levy on the client’s retirement account. Today, we are fortunate to have Steve writing about the new additions to the innocent spouse provisions.

Carl Smith discussed his concerns about the proposed innocent spouse legislation in the Taxpayer First Act here and here back in April before it became law. He has some other concerns about it that dovetail with the concerns expressed below by Steve in this post. Carl’s concerns include:

First, what happens if the taxpayer brings suit after 6 months, but before the administrative record is completed and a NOD issued? The record may be minimal (the 8857 and a response by one or both spouses). As I read the statute, there will have been no determination to be reviewed; therefore, the Tax Court creates a de novo record. Thus, it would be best practice always to file a Tax Court petition after 6 months of filing the 8857 — if the IRS determination has not been made yet. This means that all 8857s should be sent certified mail, return receipt requested to establish the exact date of 8857 filing. Section 7502’s mailing rule doesn’t apply, since there is no time deadline to file an 8857.

Second, assuming that there was an NOD issued, how does a non-requesting spouse’s contradiction of a requesting spouse (typically on knowledge or significant benefit) get resolved without the judge being able to hear both spouses in court? Typically, the NRS’s statement is just made part of the administrative record.

Third, note that the prior litigation had only been over the scope of review of (f) cases under (e) proceedings. See, e.g., Porter I and Wilson. But, the new (e)(7) refers to determinations “under this section” (i.e., the complete 6015 — (b), (c), and (f)). This upends all case law under (b) and (c) going back to 2000, when the Tax Court did its first case under (e) and held that the scope of the evidence under (b) and (c) was de novo.

Fourth, this makes it virtually impossible for the NRS to usefully intervene first at the Tax Court stage. If the NRS has something to say, he or she better do it at the administrative level in writing.

After reading the concerns expressed by Steve and Carl, I feel that Congress has created another 6751 type situation in which the court will grapple with the language of the new provision and how it fits into the overall scheme of the innocent spouse provisions. I am also concerned that individuals seeking relief under the innocent spouse provisions will suffer unnecessarily because of these changes.

Keith

My daughter tells me I have a habit of burying the lede. To avoid repeating that mistake, here it is: Congress just stacked the deck against taxpayers trying to overturn a decision by the IRS to deny innocent spouse relief.

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On July 1, 2019 President Trump signed the Taxpayer First Act  (TFA) into law. One provision of the TFA, section 1203, makes procedural amendments to the innocent spouse rules, revisiting 10 year old decisions of the Tax Court in the two Porter cases, which Carl Smith discussed recently here. The new provision defines the scope and standard of review that govern the Tax Court’s review of an IRS determination. Basically, “scope of review” deals with what the court will consider in making its decision, what evidence it will look at. A court’s “standard of review” defines how much deference to give to the decision (determination) made by, in tax cases, the Commissioner.

In Porter I the Tax Court dealt with the scope of review. The government argued that the Court was limited to reviewing the administrative record. The Court rejected this limitation and held that they would hear the case de novo, meaning it would conduct a trial and decide for itself what the facts were. Then in Porter II the Court dealt with the proper standard of review in 6015(f) equitable relief cases. Prior to Porter II the Court had been using an abuse of discretion standard of review for 6015(f) cases and a de novo standard for 6015(b) and (c) cases. In Porter II Court decided that the 2006 amendments to 6015 warranted reconsideration of the standard of review and held that the standard should be de novo in all 6015 cases. Ms. Porter, proceeding pro se, had won very important protections for her fellow taxpayers.

Having lost in the Tax Court, the battlefront moved to Congress. While it took 10 years for Congress to enact legislation on the subject, in my opinion the new law is anything but Taxpayer First. Here is the new 6015(e)(7):

(7) STANDARD AND SCOPE OF REVIEW.—Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon—

(A) the administrative record established at the time of the determination, and

(B) any additional newly discovered or previously unavailable evidence.

The first part of the new law provides that the Tax Court is to give no deference (de novo standard of review) to the decision made by the Commissioner. That’s good news and codifies the current practice of the Court.

Before I get to the second part of the change, a little background. Innocent Spouse cases come before the Tax Court in two different postures, with or without a prior determination having been made by the Commissioner. They arrive with a prior determination when a taxpayer files a request for relief on Form 8857 and the Commissioner partially or fully denies the request. The Tax Court also has jurisdiction to hear innocent spouse cases without a prior determination when it is pled as an affirmative defense in a deficiency action or where a stand alone Petition for relief is filed in situations where Form 8857 was filed with the IRS but 6 months has passed without a final determination by the Commissioner.

I suspect the majority of cases arrive via the Form 8857, final determination path. It is in this universe of cases, where the Commissioner has rejected a request for relief, that Congress overturned the Court’s ruling in Porter I and has done great harm to taxpayer rights. In these cases Congress has tied the Court’s hands by limiting what facts it can consider when it engages in de novo review. The new wording requires Court’s decision to be made using the administrative record. Instead of the current Tax Court practice of having a full trial, with examination and cross-examination of witnesses, weighing the credibility of the witnesses testimony, and deciding based solely on the evidence presented to it during the trial, the Court is now to decide the case using the sterile record created during the administrative phase of a request for relief.

According to my research this is the only instance in the Code that the phrase “administrative record” is used. While this is certainly not a new concept in the law, courts are still entertaining arguments over what the administrative record consists of. See In re United States, et al., 138 S. Ct. 371 (2017). Questions that are regularly litigated regarding the administrative record (typically in non-tax cases) include: is the material proffered the full record; who decides what goes into the record; what materials in the agencies possession are relevant; did the agency decision maker consider matters not in the record; and does the record include evidence both supporting and contrary to the agencies decision. This presupposes you know who made the decision. Unlike the recent administrative decision case before the Supreme Court, where the issue was the decision of Commerce Secretary Wilbur Ross to add a citizenship question to the 2020 census, in tax cases I have found that the decision is sometimes made by an unknown manager, not the person that heard the evidence.

Then there is the biggest problem with the record rule as applied to IRS proceedings: little or no record exists of oral statements made by either the IRS or the taxpayer. While some cases can be document heavy, not everything in a person’s life is memorialized in writing. Spousal abuse cases are a serious part of innocent spouse jurisprudence. Sometimes there are police reports or medical records that corroborate allegations of physical abuse. However, the reality is that most abuse, physical and psychological, happens behind closed doors. Evidence of abuse is going to include a heavy component of potentially conflicting testimony. Will this make it into the administrative record in a compelling fashion?

It takes great strength and courage for an abused spouse to talk about the abuse they suffered. Written descriptions of the abuse never, never, convey the true nature of what happened. To get any real understanding of what actually took place you have to hear the parties’ descriptions and observe their body language as they are testifying. This happens at a trial. It is certainly not pretty and isn’t what I thought I would be dealing with when I decided to study tax law instead of family law, but alleviating the financial cost of separating from an abusive spouse is important work that has become a part of tax controversy practice.

How is the record made in these cases? All innocent spouse cases are referred to the IRS specialty unit in Kentucky. Since few taxpayers live in the Covington Kentucky area the opportunity for face-to-face meetings with the IRS is very limited. The record is going to be made by correspondence and phone interviews. The decision maker has no opportunity to observe body language. Advocates have no opportunity to cross examine witnesses. No one is sworn in front of someone wearing a black robe, which at least one Chief Counsel lawyer has explained tends to focus the mind. The IRS has almost complete control over the narrative in the record. You want to record the call so there is an accurate record? Forget it, the IRS prohibits the practice. Are people with a stake in the outcome (the abusive spouse who may end up with sole responsibility for the tax liability) more likely to shade the truth in an unrecorded private phone call with the IRS? In most spousal abuse cases the abusive spouse’s action led to the unpaid taxes in the first place.

The IRS creates a great deal of the administrative record in what are called case notes. Do case notes accurately reflect what happened? Is there the possibility that they present a skewed view? After all, unlike in a court where you have an independent reporter, the IRS personnel creating the record can be the same person making the decision that the Tax Court is then called upon to review. Or even worse, the person creating the record is doing so for the purpose of convincing their Manager that the decision they are recommending is correct. The record is not being made by a neutral party for the purpose of memorializing the evidence, it is made by someone who is advocating a particular outcome.

Then there is the question of what is included in the “administrative record” that the Court is to review. In the Declaratory Judgment Rules the Tax Court has its own definition of “administrative record” (see Rule 210 (b)(12)), which makes no provision for dealing with oral communications. In the CDP regulations, Treasury takes a broader approach:

Q- F4. What is the administrative record for purposes of Tax Court review?
A- F4 . The case file, including the taxpayer’s request for hearing, any other written communications and information from the taxpayer or the taxpayer’s authorized representative submitted in connection with the CDP hearing, notes made by an Appeals officer or employee of any oral communications with the taxpayer or the taxpayer’s authorized representative, memoranda created by the Appeals officer or employee in connection with the CDP hearing, and any other documents or materials relied upon by the Appeals officer or employee in making the determination under section 6330(c)(3), will constitute the record in the Tax Court review of the Notice of Determination issued by Appeals.

26 CFR § 301.6320-1

I’ve had occasion to review IRS case notes of meetings and telephone conversations in which I was a participant. Let’s just say that sometimes it appears that the person making the notes was part of a different conversation.

The adoption of the record rule is going to have a major impact on innocent spouse cases. After a few years of watching it play out in Tax Court it is unlikely anyone will conclude that the effect of the new law was to put taxpayers first. Nina, please come back!

Another District Court Holds It Lacks Jurisdiction to Consider Innocent Spouse Refund Suits – at Least for Section 6015(f) Underpayment Cases

Last year, in Chandler v. United States, 2018 U.S. Dist. LEXIS 174482 (N.D. Tex. Sept. 17, 2018) (magistrate opinion), adopted by judge at 2018 U.S. Dist. LEXIS 173880 (N.D. Tex. Oct. 9, 2018) (on which Keith blogged here), a district court – relying mostly on a majority of other district courts holding that section 6015 innocent spouse relief can’t be raised as a defense in collection suits – held that section 6015 relief can’t be raised in refund suits, either. The Chandler and other courts reasoned that, by creating section 6015(e) allowing for a stand-alone Tax Court proceeding to review denials of innocent spouse relief, Congress (with one minor exception) wanted the Tax Court to be the exclusive court to consider section 6015 relief. Chandler prompted Nina Olson in her 2018 Annual Report to Congress to add to her Congressional wish list that already included an overruling of the collection opinions an overruling of Chandler as to district court refund suits considering innocent spouse relief. See my post on her report here.

Well, Chandler has a companion now: In Hockin v. United States, on May 1, a magistrate in the district court of Oregon held that, at least for section 6015(f) underpayment cases, the district court lacks jurisdiction to award innocent spouse relief in refund suits because the Tax Court, under section 6015(e), is the sole location for reviewing denials of that relief.

This ruling is particularly disappointing, since both the Lewis and Clark School of Law and Harvard tax clinics extensively briefed this issue in Hockin – probably for the first time – including discussing case law under former section 6013(e) and quoting from the legislative history of the 1998 legislation adopting section 6015 and the 2000 legislation amending section 6015(e) to add the phrase “in addition to any other remedy provided by law”. This 2000 amendment and another were intended to (1) reject confusion over the issue of whether section 6015(e) was the exclusive avenue for judicial review of IRS innocent spouse rulings and (2) clarify that refund provisions apply both “administratively and in all courts”, not just in the Tax Court.

After allowing a period for the parties to object to the ruling, the district court in the Hockin case will now review the magistrate’s opinion.

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In Hockin, the husband of the taxpayer apparently filed joint 2007 and 2008 returns while the couple were in the process of divorcing. The returns showed balances due, all attributable to the husband’s businesses. But he did not pay the balances. She now says that she never signed the returns and did not authorize them. Their divorce decree says that the husband agrees to pay all liabilities for 2007 and 2008. In a Collection Due Process hearing only involving 2008, the IRS agreed to abandon collection from the taxpayer because it concluded that she did not file a joint return for that year. The IRS does not now have a copy of the 2007 return, so it cannot be looked at to determine whether Ms. Hockin is correct that she did not sign it.

For 2007, Ms. Hockin also filed a Form 8857 seeking innocent spouse relief from the underpayment. Relief was denied, but she did not petition the Tax Court for review under section 6015(e). Thereafter, the IRS fully collected the balance of the 2007 liability from her, mostly by taking later-year refunds. Then, she filed a refund claim on an amended return, arguing that she did not file a joint return, and, if she did, she was entitled to innocent spouse relief. The case involves about $10,000 of liability.

In Ms. Hockin’s district court suit, she seeks a refund on the grounds that (1) she did not file a joint return for 2007, (2) the IRS was required to give her relief for 2007 because it had given relief for 2008 (quasi-estoppel), and (3) if she had filed a joint return for 2007, she is entitled to innocent spouse relief from what had originally been an underpayment, under section 6015(f).

The DOJ moved to dismiss the case for lack of jurisdiction under FRCP 12(b)(1). During the course of the filings on the motion, the DOJ realized that Ms. Hockin had made a statement in her refund claim that she did not file a joint return. District courts have long heard refund suits where the taxpayer claimed that he or she had not filed a joint return. See, e.g., McCord v. Granger, 201 F.2d 103 (3d Cir. 1952); Anderson v. United States, 48 F.2d 201 (5th Cir. 1931). So, the DOJ agreed that this claim should go forward in district court and changed its motion to one only for partial summary judgment. The magistrate agreed that this “no return” refund suit claim may go forward.

In the opinion, the magistrate further held that the quasi-estoppel claim cannot be heard because it was not raised in the refund claim – i.e., that the argument fell afoul of the substantial variance rule prohibiting a court from considering issues not raised in refund claims.

But, the focus of the magistrate’s opinion was on the issue of whether the district court has jurisdiction to consider section 6015(f) relief in a refund suit (or whether it has jurisdiction to consider (f) relief for underpayment cases in a refund suit – the opinion not being too clear between the two statements of the issues).

I won’t repeat all of the reasoning of the court on the section 6015(f) issue, as that part of the opinion is 14 pages in length. But, here is a synopsis:

The court notes that, even if refund suits involving innocent spouse relief had been heard under the original innocent spouse provision, section 6013(e) (in existence from 1971 to 1998), those refund suits involved relief from deficiencies, not underpayments. Section 6015(f) first allowed relief from underpayments in 1998. Thus, there was no prior history of underpayment innocent spouse refund suits until section 6015 was enacted, along with the stand-alone Tax Court review provision at section 6015(e). Thus, section 6015(e) is arguably the only statutory way to review (f) underpayment rulings by the IRS. And, it was not until 2006 that Congress specifically added subsection (f) relief to the Tax Court’s jurisdiction in stand-alone cases. There is no discussion in the 2006 legislative history of the amendment to section 6015(e) of the possibility of going to the district courts for subsection (f) refund suits. (Note, however, there is a rare case where a district court refund suit is allowed to proceed about section 6015 relief: Under section 6015(e)(3), where a section 6015(e) suit is filed in the Tax Court while a district court refund suit was already pending, the section 6015 issues are transferred over to the district court for it to consider as part of the existing suit.)

The magistrate in Hockin acknowledged that there is some legislative history in 1998 and 2000 indicating that Congress thought that district courts could and should hear section 6015 refund suits generally, but the magistrate did not find any statutory language enacted to specifically so provide and would not let legislative history confer jurisdiction on a court.

The magistrate also discussed the language added to subsection (e) in 2000 providing that the stand-alone provision was intended to be “in addition to any other remedy provided by law”, writing:

Indeed, the Conference Committee Report states:

Non-exclusivity of judicial remedy. Some have suggested that the IRS Restructuring Act administrative and judicial process for innocent spouse relief was intended to be the exclusive avenue by which relief could be sought. The bill clarifies Congressional intent that the procedures of section 6015(e) were intended to be additional, non-exclusive avenues by which innocent spouse relief could be considered.

H.R. CONF. REP. 106-1033, l 023. However, this does not make explicit that an innocent spouse claim, after denial by the Secretary, may be made in a refund suit. The “any other remedy” language does not create jurisdiction where jurisdiction did not exist prior to the 2000 amendments. When Congress enacts a specific remedy when no remedy was previously recognized, or where it was “problematic” whether any judicial relief existed at all, the remedy provided is generally regarded as exclusive. Block v. N. Dakota ex rel. Bd. Of Univ. & Sch. Lands, 461 U.S. 273,285 (1983).

The court analogized this situation to that involved in Hinck v. United States, 550 U.S. 501 (2007). In Hinck, the issue was whether refund suits could be maintained in district court over whether the IRS had abused its discretion under section 6404(e) in failing to abate certain interest incurred as a result of unreasonable IRS delays. In Hinck, the Court pointed out that, prior to 1996, no court had found that the IRS’ interest abatement decisions were subject to judicial review because Congress had given the IRS full discretion on abatement, without setting out a judicial review standard. In 1996, Congress both added a review standard (“unreasonable”) and a special provision for Tax Court review at section 6404(h). Because the new Tax Court review provision was much narrower than the general refund suit jurisdictional grant at 28 U.S.C. section 1346(a)(1), the Supreme Court held that Congress intended that the only review of interest abatement decisions was through Tax Court section 6404(h) proceedings.

The magistrate in Hockin dismissed the taxpayer’s argument that Hinck was distinguishable because there had been a history of refund suits under former section 6013(e) (and even a few under section 6015). In the magistrate’s view, the amendment of section 6015(e) in 2000 to add “in addition to any other remedy provided by law” was ambiguous, and only the 2006 amendment of section 6015(e) to allow Tax Court consideration of (f) relief was important.

The magistrate also was not persuaded to give any weight to the positions taken both by (1) the IRS in a 2000 Chief Counsel notice that all courts (including the district courts) could consider section 6015(f) relief and (2) the DOJ Tax Division Appellate Section in recent appellate cases involving untimely section 6015(e) filings arguing that the taxpayers could always pay and sue for a refund arguing for innocent spouse relief in district court. The magistrate was also not impressed by Nina Olson’s having argued since 2007 that section 6015 should be clarified to make its relief something that can be raised as a defense in a collection suit in district court. Indeed, the magistrate thought Congress’ failure to act on her request for this long telling against her interpretation of current law, writing:

[A]lthough Congress acted almost immediately to amend the legislation to provide for review in the Tax Court when alerted by the Eighth and Ninth Circuits that the Tax Court lacked jurisdiction to hear such equitable claims, Congress’ decided inaction in the face of the National Taxpayer Advocate’s concerns via yearly reports since 2007, suggests Congress intended 26 U.S.C. § 6015(e) to limit review of a stand-alone subsection (f) claim to the Tax Court.

Observations

Keith and I are not exactly disinterested about the Hockin case. We caused the tax clinic at Harvard to file an amicus memorandum supporting the taxpayer. As a result, much of the opinion of the magistrate is a direct response to what we wrote in the memorandum.

Ms. Hockin was actually represented by the Lewis & Clark School of Law Low-Income Taxpayer Clinic. A student for the clinic, John MacMorris-Adix, argued the motion before the magistrate. Because most clinics do little in district courts, not surprisingly, the Lewis & Clark clinic sought help from lawyers on its pro bono panel. The assisting lawyer was Scott Moede, who works for the City of Portland. Mr. Moede was acting in his personal capacity, though, not on behalf of the City.

I am sure that this was the best-briefed motion on section 6015 relief that any district court has yet considered. In many cases, such as Chandler, taxpayers did not even file responses to DOJ motions to dismiss the section 6015 relief claims. So, it is not surprising that the district courts seemed to just copy and paste from DOJ filings saying that there was no jurisdiction.

Readers of the Hockin opinion may also want to consider a piece of legislative history which, though quoted in the Harvard memorandum, was not included in the magistrate’s opinion. While the magistrate quotes the part of the 2000 legislative history behind adding the words “in addition to any other remedy provided by law”, the magistrate does not quote the part of that same report that accompanied the moving of the refund rules out from under 6015(e) (involving only the Tax Court suit) to a new subsection (g). The omitted paragraph reads as follows:

Allowance of refunds.—The current placement in the statute of the provision for allowance of refunds may inappropriately suggest that the provision applies only to the United States Tax Court, whereas it was intended to apply administratively and in all courts. The bill clarifies this by moving the provision to its own subsection.

H. Rep. 106-1033 at 1023 (emphasis added). This seems another strong indication that Congress thought district courts in refund suits should be able to award 6015 relief. But, this will have to be a discussion saved for a court of appeals, if the Hockin case gets that far.

And the magistrate was simply legally wrong, for purposes of the Hinck analogy, in assuming there was no way to get judicial review of (f) underpayment cases until subsection (f) was added to subsection (e) in 2006. The magistrate neglected to appreciate that Collection Due Process allowed the Tax Court to consider (f) underpayment relief as early as 1998 through the CDP “spousal defenses” language. Amending section 6015(e) in 2006 merely added a second avenue for the Tax Court to give judicial review of (f) underpayment IRS rulings.

The parties are allowed to file objections to the magistrate’s opinion in Hockin, and a district court judge will be the ultimate one ruling on the motion for the district court.