Will the “Blogger Rule” Join the “Fatty Rule” as Litigation over IRC 6015(e)(7) Continues? (Part Two)

In Part One I introduced the pending case Thomas v. Commissioner, in which a taxpayer seeks to exclude some of her blog posts from evidence in her innocent spouse trial. She argues the blog posts must be excluded under 6015(e)(7) as they were public at the time of the administrative determination and so should not be considered “newly discovered” or “previously unavailable” to respondent.

Does “Newly Discovered” Imply Any Diligence Requirement?

As you’ll recall from Part One, Judge Toro set out nine questions for the parties to consider in their memoranda of law. Perhaps the most crucial question is this:

  1. Should Federal Rule of Civil Procedure 60(b)(2) inform our interpretation of the term “newly discovered evidence” in I.R.C. § 6015(e)(7)? That rule provides that “[o]n motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b). Fed. R. Civ. P. 60(b)(2) (emphasis added).
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In her motion to strike, Ms. Thomas argues that applying the FRCP 60(b)(2) standard makes sense under Tax Court Rule 1(b) and Tax Court precedents applying the standard to Tax Court Rules 161 and 162. She notes:

Applying the ordinary meaning would set a very low bar in determining whether evidence is “newly discovered,” as it would allow Respondent to freely reopen the record and submit any evidence at trial just on a showing that it did not previously know about it without any consideration of Respondent’s attempt to obtain the evidence sooner. It is unlikely that this is what Congress intended when enacting the TFA.

Fed. R. Civ. P. 60(b)(2), in contrast, provides an administrable standard for admitting newly discovered evidence, by requiring a showing that the party seeking admission has exercised reasonable diligence.

In petitioner’s view, 6015(e)(7) would be meaningless if “materials which were publicly and freely available on the internet, and which Respondent could have easily located with a simple internet search, are ‘newly discovered evidence.’” She points out that the IRM permits CCISO to engage in internet research.

Respondent’s Objection to Motion to Strike, in contrast, argues that the plain language of the statute should control without any requirement of IRS diligence during the administrative proceeding. Respondent points out that a requesting spouse bears the burden to establish that they are entitled to relief, and that CCISO is not directed to thoroughly investigate each case before it: “It would be a waste of IRS resources to gather additional evidence to refute an inadequate claim…”

Petitioner states that respondent would have been able to find the blog by doing a simple internet search for petitioner’s name. Respondent should not have to do that because petitioner generally has the burden of proof at all stages of the request for relief and, to the extent important information is on a blog or elsewhere, petitioner ought forthrightly to provide the information as required by the Form 8857 she signed under penalties of perjury. The ease with which one may be able to find evidence does not matter when a party omits it…

…Exhibit 13-R, in its entirety, should be admitted into evidence as respondent did not become aware of petitioner’s blog until after the final administrative determination.

Concern for Moral Hazards versus Concern for Unsophisticated Taxpayers

The Objection also raises the danger that petitioners could potentially withhold information or documents from CCISO. If the government does not discover those items on its own, a petitioner could be rewarded for their malfeasance. In her reply, petitioner points out that there is no evidence the blog posts were deliberately withheld from CCISO.

as Petitioner explained during the trial, she did not view her blog, which was an attempt at self-branding and marketing, as relevant to her actual real world financial circumstances.

I cannot think of any client (or even any attorney) who would submit all potentially relevant documents to CCISO in the first instance. Innocent spouse cases (especially equitable relief cases) are fact-dense, and the universe of potentially relevant documents is enormous. Without the ability for some development of the case by exchanges of information and arguments on both sides, it is difficult to see how one could reach the right result on the merits of most equitable relief cases.

The clinics’ amicus brief urges the Court consider the realities of the administrative process and how self-represented taxpayers experience that process. Ms. Thomas likewise argues that

the Tax Court should take special care in determining what constitutes reasonable diligence in the innocent spouse context, particularly where the taxpayer is pro se and/or has suffered domestic abuse. …[T]he determination of whether the party seeking admission of the evidence exercised reasonable diligence should take into account the resources and wherewithal of that party. (Petitioner’s reply)

Respondent agrees that “the court should consider factors like who has knowledge of and control over the evidence and which party has the burden of proof.” But, Respondent also asks the Court to “consider the administrative burden of extensive research to try to capture evidence uniquely within petitioner’s control or that which petitioner willfully hides.” (Objection ¶42) And in response to petitioner’s reply, Respondent contends the requesting spouse actually has the upper hand before CCISO:

If anything, because the requesting spouse is the expert on their factual circumstances, respondent’s burden should be lighter unless the requesting spouse affirmatively discloses information during the administrative stage.

CCISO Engages in Limited Factfinding: On which side should that weigh?

Respondent’s filings and the amicus brief both point out the limitations of the current administrative process, but they draw very different conclusions. The amicus brief spends some paragraphs detailing the administrative process in the CCISO IRM, pointing out that it is not designed to generate a full factual record upon which the Tax Court can reach a de novo conclusion on the merits of the case. (A forthcoming Tax Lawyer article by Scott Schumacher argues that the administrative process is so flawed that CCISO does not reach the correct result except by accident.)

Respondent presents a similarly limited view of CCISO’s role, but for reasons of administrative efficiency and capacity as well as the burden of proof, the government would place all the onus on the requesting spouse to establish the administrative record. Respondent ties this to the “general requirement in administrative law to exhaust administrative remedies.” (Objection ¶ 11.) I find this an odd fit with 6015(e). Not only is there no requirement to request an administrative appeal before a court appeal (reflected in Respondent’s practice of sending docketed cases to Appeals for settlement consideration), a requesting spouse can file a petition before the IRS makes any determination at all. IRC 6015(e)(1)(A)(i)(II).

I found it interesting that in Respondent’s view, requiring a fuller investigation by CCISO would make the administrative process more adversarial. (Response to Reply ¶14, 15) Given that many requesting taxpayers are unrepresented and often face considerable barriers, it would be a terrible outcome for taxpayers if future CCISO technicians only investigated to uncover unfavorable or impeachment evidence. If the Court ultimately views 6015(e)(7) as incorporating a reasonable diligence requirement on the part of the agency, the IRS should consider other models of non-adversarial investigative processes, such as those employed for veterans benefit or Social Security disability claims. The Center for Taxpayer Rights’ Reimagining Tax Administration workshops, especially sessions 5, 6, and 7, provide much food for thought here.

A Note about The Role of Amicus Briefs

Responding to the amicus brief, Respondent commented that (in their view) the clinics’ amicus brief is counter to petitioner’s position. I disagree, but it is true that the amicus brief does not exactly track petitioner’s analysis.

One of the benefits of an amicus brief is that it can bring “to the attention of the Court relevant matter not already brought to its attention by the parties.” In the clinics’ view, this includes taking a broader perspective on the issues which may include analysis that is not identical to that of the petitioner, despite the amicus brief ultimately supporting petitioner.

Conclusion

Thomas raises thorny issues as everyone grapples with an unclear and ill-advised statute. The difficulties posed in applying 6015(e)(7) to the blogging taxpayer perhaps show why this is a highly unusual standard and scope of review in the administrative state. Innocent Spouse litigation may be very messy for many years to come.

If the “Fatty rule” holds, it will mitigate the harmful impact of the TFA on self-represented petitioners who are unlikely to build an adequate administrative record for judicial review. Here’s hoping that a future “blogger rule” does not have the opposite result. No matter how the case comes out, it will set important precedent on a novel question of law.

Will the “Blogger Rule” Join the “Fatty Rule” as Litigation over IRC 6015(e)(7) Continues? (Part One)

In Thomas v. Commissioner, Dkt. 12982-20, the interpretation of “newly discovered or previously unavailable evidence” in IRC 6015(e)(7) seems to be squarely before the Tax Court.

We have covered the Taxpayer First Act changes to the Tax Court’s innocent spouse jurisdiction in prior posts, such as my early post here. Most recently, Keith blogged the bench opinion in Bacigalupi v. Commissioner in which Judge Holmes followed the analysis he first adopted in Fatty v. Commissioner (blogged by Les here): since the IRS administrative process to adjudicate innocent spouse claims does not allow for sworn testimony or cross examination, witness testimony is “previously unavailable” and thus admissible evidence in a Tax Court trial. Judge Holmes was careful to note that in these nonprecedential orders he was not establishing a general rule for all future cases and that he might take a different view in the future. Nevertheless, the opinions show one potential approach to “previously unavailable” evidence.

The Thomas case presents an opportunity for the Tax Court to flesh out the other caveat in 6015(e)(7): “newly discovered” evidence. In Thomas, Respondent offered as trial exhibits several blog posts written by the petitioner Ms. Thomas, including some that were published before the final innocent spouse determination issued but which were not part of the administrative record. The Center for Taxpayer Rights, the Community Tax Law Project, and the Tax Clinics at Hastings and Villanova with my colleague Les Book together filed an amicus brief in the case flagging some broader concerns, including the inadequacy of the current administrative process in building a record for de novo review, particularly as to claimants navigating the impacts of domestic violence and other barriers.

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Thomas v. Commissioner and Initial Evidentiary Issues Presented

Ms. Thomas and her husband were going through financial and marital difficulties when he passed away unexpectedly. Ms. Thomas then requested relief from joint underpayments, offering (among other reasons) that her husband was abusive and that she could not afford to pay the debts. Before her husband’s death, Ms. Thomas had started a new business targeting a well-heeled clientele and she wrote a blog to promote that business. Ms. Thomas continued to post on her blog while her innocent spouse claim was pending. In Respondent’s view, the blog posts show a very different lifestyle than the picture Ms. Thomas painted for CCISO.

The IRS, though CCISO, denied Ms. Thomas’s claim on September 8, 2020. (The record does not reveal why Ms. Thomas did not appeal the preliminary determination.) Ms. Thomas appealed CCISO’s denial to the Tax Court, and she represented herself at trial on April 4, 2022. At trial both parties sought to introduce new documents that weren’t part of the administrative record, and respondent also raised hearsay and relevance objections to some documents in the record.

Judge Toro took the objections under advisement, and on April 26 issued an order discussing IRC 6015(e)(7) and the eight challenged trial exhibits. Here is a modified version of the table that appears in the order:

Exhibit NumberDescriptionObjection (P or R)Included in the Administrative Record?
Exhibit 6-J, p. 10-14 Exhibit 29-PLetters of supportHearsay (R)Yes
Exhibit 6-J, p. 15-18Real estate recordsRelevance (R)Yes
Exhibit 6-J, p. 29Employment ContractRelevance (R)Yes
Exhibit 13-RBlog postsI.R.C. § 6015(e)(7) (P)No
Exhibit 31-PBankruptcy Court filingsI.R.C. § 6015(e)(7) (R)No
Exhibit 32-PNews articleHearsay; Relevance (R)No
Exhibit 33-PLand Rover invoiceRelevance (R)No

After setting out some preliminary considerations, Judge Toro determined that “it would advance the orderly resolution of this case to treat each of the exhibits listed above as admitted in full.” However, the Court invited either party to file a motion to strike, and further noted that if such a motion was filed, the Court would entertain a motion for leave to file an amicus brief “in support or opposition.”

Respondent declined this invitation, but petitioner filed a motion to strike part of Exhibit 13-R: the blog posts that were published before the September 2020 determination. As noted above, an amicus brief (to which Les and I contributed) was filed in support of petitioner. Respondent filed an objection to the motion, to which petitioner replied, as well as a response to the amicus brief and a response to petitioner’s reply.

While only Ms. Thomas’s pre-determination blog posts remain at issue, practitioners may want to take note of the items that Respondent initially challenged and prepare to litigate these issues if necessary in other cases. To the government’s credit, here it did not maintain its initial relevance or hearsay objections to documents found in the administrative record.

Kudos to the Court for soliciting amicus briefs on this novel issue, and for encouraging the petitioner to seek counsel. Ms. Thomas is now represented pro bono by Megan Brackney of Kostelanetz & Fink.

The Blogger Problem

Judge Toro’s order identifies many questions raised by the blog posts:

  1. Are the blog posts newly discovered or previously unavailable evidence?
  2. In making that determination, what is the importance (if any) of the fact that some of the blog posts were publicly available via Internet search during the IRS innocent spouse administrative proceeding?
  3. If the Commissioner did not “discover” the blog posts until after the administrative proceeding was complete, is that sufficient to allow the blog posts into evidence at trial?
  4. Should the phrase given its ordinary meaning (e.g., evidence that was not “found out” before a relevant time) or should it be viewed as a term of art? […]
  5. If the phrase is viewed as a term of art, is its meaning different from the ordinary meaning of the phrase?
  6. Should Federal Rule of Civil Procedure 60(b)(2) inform our interpretation of the term “newly discovered evidence” in I.R.C. § 6015(e)(7)? That rule provides that “[o]n motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b). Fed. R. Civ. P. 60(b)(2) (emphasis added).
  7. If Federal Rule of Civil Procedure 60(b)(2) should inform our interpretation of the term “newly discovered evidence” in I.R.C. § 6015(e)(7), what is the import of the qualifying language used in that rule and italicized above?
  8. Relatedly, should this Court’s interpretation of the term “newly discovered evidence” in other contexts inform our interpretation of the same term in I.R.C. § 6015(e)(7)? See, e.g. Estate of Quick v. Commissioner, 110 T.C. 440, 441 (1998) (applying the term “newly discovered evidence” in the context of a motion to reconsider pursuant to Rule 161, Tax Court Rules of Practice and Procedure); Fairmont Aluminum Co. v. Commissioner, 22 T.C. 1377, 1383 84 (1954) (same, regarding a motion for new trial pursuant to Rule 162, Tax Court Rules of Practice and Procedure); Rule 1(b), Tax Court Rules of Practice and procedure, the Court . . . may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand.”).
  9. Does the “newly discovered evidence” standard mean that the same evidence could be admissible if offered by one party but inadmissible if offered by the other? For example, might the older blog posts be admissible if the Commissioner offers them (because they existed at the time of the administrative proceeding but were then unknown to (or had not been “found out” by) the Commissioner), but not if the petitioner offers them (because she knew of them at the time of the administrative proceeding)? And if the one party is allowed to offer “newly discovered evidence,” how can the other party rebut that evidence in a manner consistent with I.R.C. § 6015(e)(7)?

The parties’ answers to these questions reflect very different visions for the future of innocent spouse cases under the TFA. In Part Two, we’ll examine the arguments raised.

Innocent Spouse Bench Opinion – Part 2

In Part 1 of this post, I noted that Judge Holmes issued a bench opinion in the case of Bacigalupi v. Commissioner, Dk. No. 20480-21.  I also noted that the bench opinion itself caught my eye because of the handwritten edits on the opinion.  Between the time the judge read the opinion into the record prior to the close of the trial calendar in San Francisco on September 19, 2022, and the entering of the order making the bench opinion public in written form, the judge made the type of editorial corrections one expects occurs in the writing of any opinion but which we do not have the opportunity to view.  The opinion made me start thinking about bench opinions again.  Since we have not posted about them for some time I wanted to separately address that aspect of this case.

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We have written about the process of bench opinions here and their non-precedential effect here.  Building on the blog post about this process, I wrote a longer article on bench opinions published in the Journal of Tax Practice and Procedure in 2015 available here. I have not done the work to count the number of bench opinions issued by the Court since 2015 to see if the practice has changed at all in the past several years.

The rules generally make it tough for the judges to issue bench opinions because they must do so within a very short time frame.  These opinions get their name from the fact that the judge issuing such an opinion literally sits on the bench and reads the opinion into the record.  In many instances the judge does so to a courtroom populated only by the trial clerk and the court reporter.  Some judges reach out to the parties before reading the opinion causing one or both of the parties to attend the reading.

This process has been around for 40 years.  Code Sec. 7459 provides in part:

(a) Requirement. —A report upon any proceeding instituted before the Tax Court and a decision thereon shall be made as quickly as practicable. The decision shall be made by a judge, in accordance with the report of the Tax Court, and such decision so made shall, when entered, be the decision of the Tax Court.
(b) Inclusion of findings of fact or opinions in report.—It shall be the duty of the Tax Court and of each division to include in its report upon any proceeding its findings of fact or opinion or memorandum opinion. The Tax Court shall report in writing all its findings of fact, opinions, and memorandum opinions. Subject to such conditions as the Tax Court may, by rule provide, the requirements of this subsection and of section 7460 are met if findings of fact or opinion are stated orally and recorded in the transcript of the proceedings.

The last sentence of subsection (b) provides the foundation for bench opinions and limits the ability of the court to make oral findings both on rules the Tax Court might adopt and on Code Sec. 7460. The language in the last sentence of subsection (b) concerning oral findings was enacted in 1982.

Tax Court Rule 152, entitled Oral Findings of Fact or Opinion, provides the “rule” governing bench opinions. It states:

(a) General. Except in actions for declaratory judgment or for disclosure (see Titles XXI and XXII), the Judge, or the Special Trial Judge in any case in which the Special Trial Judge is authorized to make the decision of the Court pursuant to Code section 7436(c) or 7443A(b)(2) , (3), (4), or (5), and (c), may, in the exercise of discretion, orally state the findings of fact or opinion if the Judge or Special Trial Judge is satisfied as to the factual conclusions to be reached in the case and that the law to be applied thereto is clear.

(b) Transcript. Oral findings of fact or opinion shall be recorded in the transcript of the hearing or trial. The pages of the transcript that contain such findings of fact or opinion (or a written summary thereof) shall be served by the Clerk upon all parties.

(c) Nonprecedential Effect. Opinions stated orally in accordance with paragraph (a) of this Rule shall not be relied upon as precedent, except as may be relevant for purposes of establishing the law of the case, res judicata, collateral estoppel, or other similar doctrine.

The requirement that the judge issue the bench opinion before the end of the trial session giving rise to the bench opinion appears to stem from the implicit requirement in Rule 152(b) relating to the recording of the bench opinion in the transcript of the hearing or trial.  The Court views the hearing or trial concluded when the trial session ends although it is possible to hold a case open past the trial session under certain circumstances.  Holding the trial session open does not appear to apply to issuing bench opinions under the current interpretation of the Rule.

One of the reasons for the creation of the Tax Court was the desire to create a uniform body of federal tax decisional law.  Bench opinions do not go through the same review process in the Chief Judge’s office prior to issuance that other Tax Court opinions do.  The review process seeks to make the decisions uniform as well as to decide which opinions should be issued as precedential.  The goal of uniformity must be considered alongside the goal of rendering the opinions as quickly as possible. 

As discussed in our recent editorial on the speed of Tax Court opinions, I think that Tax Court decision process should speed up.  I am not convinced that uniformity would necessarily suffer from greater speed but acknowledge it as a concern.  The economic hardship aspect of the Bacigalupi shows what appears to be a lack of uniformity in the Tax Court on this issue whether the opinion is reviewed or not.

Recommendation 

In order to speed up outcomes in Tax Court cases one way would be to increase the number of bench opinions.  One way to increase that number would be to make it easier for the judges to render such opinions by allowing them to hold open the record of the case for a brief period of time after the trial calendar.  As the Court looks for ways to perhaps move cases more quickly, it might look at the bench opinion process as one opportunity for accomplishing that goal.

Innocent Spouse Bench Opinion – Part 1

On September 19, 2022, Judge Holmes entered a bench opinion in Bacigalupi v. Commissioner, Dk. No. 20480-21 making it public in an order dated October 27, 2022.  The opinion was not extraordinary though I will discuss its take on the administrative record rule and the hardship factor for equitable relief.  Bench opinions generally are also not extraordinary though I will discuss them as well.  I will discuss them in part 2 of this post. What struck me the most about this bench opinion was the handwritten edits by Judge Holmes in the bench opinion.  I do not read all bench opinions but I thought I had read enough to make me feel that the handwritten edits to the opinion were somewhat unusual but maybe they are not. 

The edits did not bother me.  I applaud Judge Holmes for writing a bench opinion.  The trial of the case apparently took place on September 16 three days before he issued the bench opinion.  This is the second time we have blogged about an innocent spouse bench opinion of his.  As I will discuss in more detail below, the rules of the Tax Court require that judges issue the bench opinion before the gavel came down to close the end of the trial session.  This trial session was in San Francisco.  I don’t know how many trials he had during the session that week which is certainly a factor in a Tax Court judge’s ability to render a bench opinion.

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The Case

Ms. Bacigalupi proceeded pro se.  The 19-page bench opinion, which is really a 19-page transcript of the judge’s oral reading of the opinion into the record, recites some of the factual background of the case before coming to the first important legal question – the scope of review.  Judge Holmes acknowledges the standard for scope of review now in place which calls for the Court to look at the administrative record.  We have discussed this in several posts, and you can read a couple of our discussions of the issue here and here (where Les discusses the non-precedential Fatty rule created by an earlier Judge Holmes bench opinion in an innocent spouse case.)  The scope of review provides for two exceptions to the administrative record review where there is newly discovered or previously unavailable evidence. 

Judge Holmes, following the Fatty rule, decides that the petitioner’s testimony under oath is newly discovered evidence since she could not have given sworn testimony or be cross-examined when she applied for innocent spouse relief.  I like that approach though it’s clear that Judge Holmes still has some concerns about it as he noted again that he is not deciding such testimony meets the exception for all cases in the future.  Since bench opinions are not precedential, this aspect of the case does not make new law even if it provides some sanity to the situation facing pro se taxpayers who will almost never have developed a robust administrative record.

He then looks to see if Ms. Bacigalupi qualifies for streamlined relief under the applicable Revenue Procedure whose factors do not necessarily control the Court’s decision but generally seem to guide it.  He decides she does not qualify for streamlined relief because the joint returns were not filed until after receipt of a notice of intent to levy.  This makes clear she had knowledge of the underpayment and that knocks her out of streamlined relief.  The fact that this is an underpayment case knocks her out of IRC 6015(b) and (c) relief moving the case on to potential equitable relief under 6015(f). 

Because she fails the knowledge factor, you might remember from our earlier posts on this subject, here and here, that the Tax Court almost always (maybe always) denies relief where the person seeking relief has knowledge unless that person has financial hardship.  This case falls into that pattern.  Judge Holmes finds Ms. Bacigalupi meets the economic hardship test even though she has assets worth approximately $150,000.  She owes over $300,000 so he concludes paying the liability would create hardship given her meager (he calculates less than $200) monthly income available to pay the debt.  The facts are not straight forward because of her divorce arrangement but the conclusion makes sense.  He cites to Leith v. Commissioner, TC Memo 2020-149, discussed here, in support of his conclusion to compare the value of her assets to the total amount of the debt. Ms. Leith had assets of approximately $5,000, mostly in a retirement account, and liabilities over $30,000.

As I mentioned in a post about Pocock v. Commissioner, T.C. Memo 2022-55, the conclusion there, and here (as well as in Leith), seems directly at odds with the approach of the Tax Court taken in Sleeth v. Commissioner, TC Memo 2019-138, aff’d, — (11th Cir. 2021) where the requesting spouse had almost no income, assets of about $150,000 and debts of over $500,000.  I discuss the Sleeth case here.  The Tax Clinic at the Legal Services Center of Harvard Law School took on an appeal of that case seeking, inter alia, to convince the 11th Circuit that she met the hardship criteria but the Circuit court found the arguments did not overcome the decision of the Tax Court.  The hardship issue is critical to success in the Tax Court in an innocent spouse case where the requesting spouse fails the knowledge test.  Judge Holmes’ approach to the hardship question here, as well as the approach taken by the Tax Court in Leith and Pocock, makes sense but does not seem to have uniform acceptance at the Court.

Judge Holmes found three of the Revenue Procedure’s factors in petitioner’s  favor and only the knowledge factor against.  He leaned heavily on the additional fact that the non-requesting spouse hid his income from petitioner over a period of many years in deciding for her in what he describes as “a very close call.”

DOJ Apologizes for Misinforming District Court on IRC 6015(f) Deadline

I did a post on August 15 in which I expressed shock that the DOJ lawyers in a district court collection suit told the court that the taxpayer could no longer seek IRC 6015(f) relief, since a two-year period to ask for such relief had passed.  The DOJ had cited a regulation that is no longer effective after a 2019 statutory amendment allowing a taxpayer to seek (f) relief at any time while the collection statute of limitations is still open, as it is in the case before the court.  This is a short post, just to let everyone know that on August 17, the United States filed a document in the district court entitled “United States’ Notice of Errata to United States’ Memorandum in Support of Motion for Partial Summary Judgment.”

The operative language from the notice is as follows:

[T]he United States . . .  argued that to qualify for relief under § 6015, a taxpayer must first present an administrative claim to the IRS within two years of the date on which the IRS first began collection activity against the taxpayer claiming innocent spouse relief. While innocent spouse relief under 26 U.S.C. § 6015(b) and (c) is limited by a two-year statute of limitations, the United States erroneously asserted that the same statute of limitations also applies to innocent spouse relief sought under 26 U.S.C. § 6015(f). Although Mrs. Weathers remains time barred from seeking innocent spouse relief under 26 U.S.C. § 6015(b) and (c), she could seek relief under 26 U.S.C. § 6015(f) before the IRS. This does not impact the Court’s lack of subject matter jurisdiction, as Mrs. Weathers would still have to avail herself of the administrative processes before the IRS to seek this relief and, if necessary, follow procedures for review established in 26 U.S.C. § 6015(e).

We just understood our error and respectfully alert the Court and parties through this errata filing. As stated, however, our inadvertent error does not impact the Court’s memorandum opinion and Order, which properly dismissed the asserted affirmative defense for lack of subject matter jurisdiction.

Undersigned counsel apologizes to the Court for the mistake.

The case was headed for a jury trial beginning August 22.  However, there is an entry on the docket sheet that the case settled on August 18.  There is no entry (yet?) correcting the district court’s order, though.

DOJ Misinfoms District Court on IRC 6015(f) Relief Filing Deadline

Sometimes, I am amazed at what DOJ attorneys don’t know about tax procedure.  Once, I wrote a post on how a court misapplied the amount lookback period of IRC 6511(b)(2)(A) when a refund claim was mailed before the end of the filing deadline but was received by the IRS afterward.  The DOJ in that case had misled the court by not citing the relevant case law and regulations.  I brought the error to the attention of the taxpayer’s attorney, who got the court to immediately reverse its holding and scold the DOJ for not citing the relevant authority.

Well, the DOJ has done it again:  In a collection suit brought against a husband and wife, where the wife has raised IRC 6015 innocent spouse relief as a defense, United States v. Weathers, Docket No. 5:21-cv-5012 (W.D. Arkansas, 8/10/22), not only did the DOJ get the court to follow likely-incorrect district court holdings saying that IRC 6015 relief cannot be raised in a collection suit, but the IRS persuaded the court that it would be too late for the taxpayer to now file a Form 8857 seeking such relief, citing still-current Reg. 1.6015-5(b) and the opinion in Lantz v. Commissioner, 607 F.3d 479 (7th Cir. 2010) (holding that regulation valid to the extent that it imposes a 2-year limit after collection activity has begun to seek relief under IRC 6015(f)).  While it is true that the statutes impose the 2-year rule for requesting relief under subsections (b) and (c), the regulation, as applied to relief under subsection (f) was abrogated by an amendment to section 6015(f) in 2019 that provides that a taxpayer who hasn’t paid an assessment can file a request for subsection (f) relief at any time while the statute of limitations on collection is still open.  If a collection suit is in process, then the statute of limitations on collection must still be open.

I contacted the taxpayers’ attorney to alert her to the revised statute, but she says that she already brought this information to the attention of the court.  I also suggested to her that the wife immediately file a Form 8857 because, if the wife does so, the district court suit can’t continue against the wife.  IRC 6015(e)(1)(B)(i) prohibits the IRS from levying or commencing or prosecuting a suit for collection of the liability involved in the Form 8857 while the Form 8857 is being considered, including during any subsequent Tax Court suit.  I expect that Form 8857 to be filed very shortly.

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I am not surprised that the district court held that it lacked jurisdiction to consider IRC 6015 relief in a collection suit, since as far as I am aware, all district courts to have considered the issue have held that only the Tax Court can consider IRC 6015 relief.  No appellate court has considered the issue, however, and at least one appellate court noted that the DOJ Appellate Section lawyers conceded that a refund suit could be filed in district court where a taxpayer late-filed a Tax Court IRC 6015(e)(1)(A) stand-alone suit that was dismissed for lack of jurisdiction.  The counter-argument to the district court opinions, to which Nina Olson and various tax procedure professors and former professors agree, is that under former IRC 6013(e) (the innocent spouse statute up to 1998), the courts had considered innocent spouse relief in (1) collection cases in district court, (2) refund cases in district court, (3) deficiency cases in Tax Court, and (4) cases in bankruptcy courts.  In 2000, Congress amended IRC 6015 to make clear that the provision of IRC 6015(e)(1)(A) authorizing a Tax Court stand-alone suit is “[i]n addition to any other remedy provided by law”. 

We did a post in September 2019 on the Hockin district court opinion that held that it had jurisdiction to consider IRC 6015(f) relief in a refund suit.  But, we had also done a post in May 2019 on a contrary district court opinion in Chandler.  The IRS settled Hockin, so the jurisdictional issue never went up to the Ninth Circuit, as we had hoped it would.

And, last year, we noted in a post on the Bowman case that the only two bankruptcy courts to have addressed the issue have ruled that the bankruptcy courts have jurisdiction to consider IRC 6015 relief.

I am not surprised that the DOJ cited the uniform district court rulings holding the district courts to lack jurisdiction to decide IRC 6015 relief in collection cases.  But, what really shocked me about the Weathers case is the following passage from the DOJ’s motion for summary judgment:

Furthermore, as explained above, to qualify for relief under § 6015, a taxpayer must first present an administrative claim to the IRS within two years of the date on which the IRS first began collection activity against the taxpayer claiming innocent spouse relief. 26 U.S.C. § 6015(b)(1)(E), (c)(3)(B) and 26 C.F.R. § 1.6015-5(b) (setting a two-year statute of limitations for 26 U.S.C. § 6015(f)); Lantz v. Comm’r, 607 F.3d 479 (7th Cir. 2010) (upholding the two-year statute of limitations for relief under § 6015(f)); Jones v. Comm’r, 642 F.3d 459, 465 (4th Cir. 2011) (same). The regulations define collection activity as including a Section 6330 notice, which is a statutory notice of intent to levy. 26 C.F.R. § 1.6015-5 (b)(2)(ii). Melissa Weathers received notification of a levy as early as August 12, 2019, more than two years ago. (Statement of Facts “S.O.F.” ¶ 13; Exhibit 107, Final Notice of Intent Levy attached to Beatriz Saiz Declaration (“Saiz Dec.”); see also Exhibits 101-106, certified Forms 4340 attached to Castor Dec. 1). Therefore, not only does this Court lack subject matter jurisdiction of her purported innocent spouse defense, but she is precluded from seeking innocent spouse relief before the IRS.

PT readers of a certain age will remember the huge uproar that the Lantz and Jones opinions generated in Congress and the IRS’ July 2011 capitulation in Notice 2011-70 that it would no longer enforce the 2-year filing deadline contained in the regulation as applied to IRC 6015(f) relief.  In July 2019, Congress also amended IRC 6015(f) to provide a new paragraph (2) conforming to the Notice and reading:

A request for equitable relief under this subsection may be made with respect to any portion of any liability that—

(A) has not been paid, provided that such request is made before the expiration of the applicable period of limitation under section 6502, or

(B) has been paid, provided that such request is made during the period in which the individual could submit a timely claim for refund or credit of such payment.

How could the DOJ attorneys not know that the Lantz and Jones cases and the regulation were all legislatively overruled?  The attorney for the wife in Weathers says she pointed this out in her papers (though I haven’t looked through her papers).  Yet the court, borrowing from the DOJ motion, wrote:

Finally, as to Melissa’s request that these proceedings be stayed to permit her time to file an administrative claim with the IRS, such a stay would be exceedingly inefficient. Moreover, Melissa has yet to pursue the defense before the IRS, and it appears that the time to raise the defense has passed. See C.F.R. § 1.6015-5(b) (noting that to request innocent spouse relief under the provisions of § 6015(b), (c), and (f), “a requesting spouse must first file Form 8857 or other similar statement with the Internal Revenue Service no later than two years from the date of the first collection activity against the requesting spouse . . ., with respect to the joint tax liability”) (emphasis added); Lantz v. C.I.R., 607 F.3d 479, 482-83 (7th Cir. 2010) (rejecting argument that equitable relief under § 6015(f) carries with it a ten-year limitations period, as opposed to a two-year period).

To avoid this misreading, it would certainly have helped if the IRS had finalized its August 12, 2013 proposed regulations under IRC 6015 (REG-132251-11, 78 FR 49242) that mimicked Notice 2011-70 and the later Congressional amendment.  Keith blogged on those proposed regulations here.  The IRS proposed more regulations under IRC 6015 on November 20, 2015 (REG-134219-08, 80 FR 72649), which I blogged about here and here.  I recall that Keith and I submitted comments to at least one set of those proposed regulations (perhaps both).  Considering the tens of thousands of taxpayers who seek IRC 6015 relief each year, I think it a scandal that the Treasury hasn’t yet finalized either of those proposed regulations.  I think it no excuse that the proposed regulations would need to be modified to reflect statutory changes from 2019.  It’s been more than 3 years since those statutory changes, and I don’t think the IRS has proposed any regulations to reflect the 2019 statute.

We will follow developments in the Weathers case.  I have pointed out to the wife’s attorney that in a prior district court case, Dew, where a magistrate originally held that the court lacked IRC 6015 jurisdiction and the taxpayer responded by filing a Form 8857 before the district court considered the magistrate’s holding, the DOJ had to concede that, under the collection suspension filing provision at IRC 6015(e)(1)(B)(i), the case against the taxpayer now could not go forward.  I attach the DOJ filing in Dew, making that concession.

Tax Court Inconsistent on Economic Hardship

Before I embark on a discussion of this innocent spouse case, I want to pause for a brief commercial interlude.  My fellow blogger, Christine Speidel, and my colleague at Harvard, Audrey Patten, have just published, through the ABA Tax Section, the third edition of “A Practitioner’s Guide to Innocent Spouse Relief.”  I read the book and it is excellent.  Here is a link to the ABA announcement about the book which contains a link you could use to purchase it if desired.  Keith

The case of Pocock v. Commissioner, T.C. Memo 2022-55 holds that payment of the tax liability at issue would create an economic hardship for Ms. Pocock.  I agree with the decision in the Pocock case but find it at odds with an earlier TC Memo decision, Sleeth v. Commissioner, my clinic appealed to the 11th Circuit where the Tax Court found in similar circumstances that equity in property precluded a determination of economic hardship. For a discussion of the Sleeth case look here

The situation in Pocock and Sleeth arises when a spouse with limited income owns property in which equity exists.  This fact pattern arises with some regularity and a consistent position from the Court would assist in resolving these cases at the administrative stage.  In the typical case, the requesting spouse could sell the property with equity, their home, and satisfy a portion of the outstanding liability; however, selling the house would generally create hardship for the requesting spouse who would then need to move, probably to a rental unit of lesser quality with little or no future prospect of purchasing a home.  The requesting spouse in these cases generally has no ability to extract the equity through borrowing because of low income stream to support loan repayment.  Is it economic hardship to require sale of the home to partially satisfy the outstanding joint liability or should the requesting spouse eliminate their equity in assets before basing their economic hardship request on available income?

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Fascinating Facts

The facts in Pocock interest me and should greatly concern the IRS and the public in general.  Mr. Pocock tried his hand at several income producing activities without success until he settled on an annual scheme of obtaining a six figure income by grossly inflating his withholding credits.  The Court describes in some detail his efforts to produce income the honest way before embarking on a “money brokering business.”  For reasons described in the opinion, the requesting spouse could not get her husband to discuss his business ventures without fear of physical and verbal reprisal.  She learned to avoid the topic.  He also controlled the mailbox cutting off another avenue of information that might have been available to her.

Here’s the Court’s description of his money brokering scheme:

For taxable years 1995 through 2005, Mr. Pocock fraudulently claimed large refunds on his and petitioner’s joint returns by overstating his income and federal income tax withholdings. Because the IRS did not examine or otherwise correct those returns, respondent’s account transcripts for those years show balances of zero.


On the joint returns for 1995 through 2005, Mr. Pocock reported federal income tax and withholding as follows:

Tax year        Filing date    Total tax       Withholding  Overpayment
1995              9/4/1997      $26,593        $80,674        $54,081
1996              9/8/1997      58,768           98,523           39,755
1997              2/3/1999     61,475           172,406         110,931
1998              12/10/1999 56,158           169,968         113,810
1999              5/4/2001      58,745           174,898         116,153
2000              8/29/2002    51,244           194,170         142,926
2001              12/30/2002 55,060           208,836         153,776
2002              1/11/2005    52,803           219,628         166,825
2003              1/14/2005    47,488           184,828         137,340
2004              10/21/2005 35,253           193,627         158,104
2005              1/17/2008    53,435           149,012         95,577


After receiving the above-described joint returns, the IRS issued Mr. Pocock and petitioner the following refund checks comprising the reported overpayments and, for some years, interest:


Tax year        Issue date     Amount
1997              4/30/1999    $112,621
1998              2/13/2000    115,137
2000              9/27/2002    142,926
2001              3/21/2003    153,776
2002              4/8/2005      168,594
2003              4/1/2005      138,243
2004              7/14/2006    166,077
2005              2/15/2008    95,577


Petitioner, who believed that Mr. Pocock was earning periodic commissions from his “money brokering” business, endorsed the refund checks for 1997 and 2004. Occasionally she asked about the status of their tax filings, but he never gave her a clear answer. When he showed petitioner the 2004 refund check, Mr. Pocock explained that it was part of his compensation for the closing of a deal.

I would like to believe that the fraud filters at the IRS work better than Mr. Pocock’s case suggests.  His scheme succeeded for a long time.  Eventually, the IRS caught on but not for three more years.  He essentially got the same amounts of refunds based on overclaiming withholding for 2006 and 2007 before his 2008 return finally caused the IRS computer or someone at the IRS to wake up.

Mr. Pocock then had the chutzpah to file a CDP request regarding the liability triggered as the IRS refused to give him credit for his bogus overpayment claim.  Only 16 years after his scheme started, criminal investigators appeared on his doorstep.  They eventually recommended prosecution of Mr. Pocock but not of petitioner.  The U.S. Attorney’s office declined to prosecute.  A footnote in the opinion suggests the declination resulted from concerns about the statute of limitations.  I wonder if extreme embarrassment over the IRS’s inability to detect the scheme also played a part in the decision.

I apologize for taking you on a long journey through facts that really have nothing to do with the issue causing me to write this post, but I was so fascinated that Mr. Pocock could use a scheme of overclaiming withholding credits for over a decade that I could not help myself from writing about it.  If you have my same voyeuristic tendencies, I recommend reading the 27 page opinion.

Innocent Spouse Claim

Not that it especially matters but it is worth noting that petitioner filed her innocent spouse request almost a decade ago in January of 2013.  By that point the IRS had established liabilities against the couple of almost $500,000 and it could have been higher.  She petitioned the Tax Court in November of 2016 so it only had her case for five and one half years before rendering an opinion.

At the time of the trial, petitioner was 68 years old.  She had total assets of slightly over $190K almost all of which came from equity in her home.  Her monthly income totaled, $1,855 resulting from social security, wages and rental income from Mr. Pocock, her ex-husband, whom she rented space to in the house.  His presence in the house did continue to cause difficulty as discussed below.

She sought relief under IRC 6015(f) and the Court cited the requirements set out in Rev. Proc. 2013-34.  The Court looked to see if she met the threshold requirements for streamlined relief.  The IRS raised concerns about three elements of the bases for relief.  First, it expressed concern about the transfer of assets from Mr. Pocock to petitioner.  After he stole from the estate of his mother, he transferred his interest in their Florida home to petitioner and her mother (a joint owner of the home.)  The Court finds that the transfer did not occur as part of a fraudulent transfer but rather as compensation for damages resulting from his mishandling of the estate case.

Next the IRS raised an objection concerning her knowledge of the scheme.  The Court found her testimony credible that she did not know what he did each year.  The returns looked proper on their face and he had told her the money resulted from his money brokering business.  The Court was also impressed with the testimony regarding why petitioner would not question him about finances.  As a result, the Court finds she had no knowledge of the overstated withholding and no reason to know the returns were incorrect.

Lastly, the Court found the liabilities resulted from Mr. Pocock’s actions and not hers meaning that the liabilities all met the test of resulting from items attributable to the non-requesting spouse.

The Court then turned its attention to the elements of a streamlined determination.

The requesting spouse is eligible for a streamlined determination by the Commissioner only in cases in which the requesting spouse establishes that she (1) is no longer married to the nonrequesting spouse (marital status requirement), (2) would suffer economic hardship if not granted relief (economic hardship requirement), and (3) did not know or have reason to know that the nonrequesting spouse would not or could not pay the underpayment of tax reported on the joint income tax return, or did not know or have reason to know that there was an understatement or deficiency on the joint income tax return (lack of knowledge requirement). The requesting spouse must establish that she satisfies each of the three elements to receive a streamlined determination granting relief. 

The IRS challenged the marital status element because they still lived in the same house; however, the Court determined that they had become roommates.  The Court did not find that the divorce served as a ruse.

The IRS challenged the economic hardship element because she had substantial equity in the house.  The Court finds:

we doubt petitioner could access the equity in the property without selling it. The record includes a statement of credit denial from a credit union, and petitioner credibly testified that her work prospects were diminishing on account of physical ailments. Given these circumstances, we do not believe petitioner could liquidate her assets to make even a partial payment of the liabilities and still meet her reasonable basic living expenses. She therefore satisfies the second prong of the economic hardship test.

Almost identical facts to Sleeth and the opposite result.  Ms. Sleeth had even less income and no real work history.  She was also in her 60s.  Maybe the Court in Pocock was influenced by a concession by the IRS and maybe the inconsistency is in the approach of the IRS and not the Court.  In footnote 20 the Court states:

Respondent does not contend that petitioner could sell the home and still meet her reasonable basic living expenses. To the contrary, respondent states on brief: “Respondent is not arguing that petitioner should have to sell the home in order to pay the tax liability.”

She did put on evidence that should could not borrow on the equity in the house because she did not have the income to support repayment of any loan.

Finally, the Court looks again at knowledge and determines that she did not have knowledge of the scheme.  It states that Mr. Pocock had proved to petitioner that he was untrustworthy putting her on constructive notice warranting an inquiry by her.  Because he became violent when questioned about finances, her failure to question him in this situation is excused based on the totality of the circumstances.

Conclusion

As a result, the Court determines she qualifies for streamlined relief.  As I mentioned at the outset, I agree with the opinion but find the result here with respect to economic hardship difficult to square with at least one prior opinion from the Court.  Because of the importance of that issue in innocent spouse cases, it deserves more attention at the IRS and the Court.

Things are Different at the Government

Everyone graduating from law school these days must take a course in legal ethics aka professional responsibility.  State bars also require persons seeking admittance to take a standardized test designed to ensure that those entering the profession have the requisite knowledge of the ethical rules that govern legal practice. 

In 2007 when I was retiring from the Office of Chief Counsel, IRS and beginning to teach at Villanova, the law school wanted me to become a member of the Pennsylvania bar.  Thankfully, Pennsylvania allowed members of the Virginia bar with the requisite number of years of practice to waive into the bar; however, they stopped my application because I had not passed the ethics exam.  I pointed out to them that when I joined the bar in 1977 there was no ethics exam.  I politely inquired if, given my age and length of service, I might be grandfathered in without need to take this standardized test.  The bar examiners politely let me know I needed to take the test.  So, shortly before retiring from federal service, I sat in a room filled with people 30 years younger than me who no doubt wondered what ethical lapses had caused this very old person to take the test.  Thankfully, I passed.

One of the ethical rules, Rule 1.4(2) of the ABA model rules, concerns settlement and the requirement that an attorney must bring a settlement offer to the client.  The ethical rules prevent the attorney from simply rejecting the settlement because the attorney does not like it.  In Delponte v. Commissioner, 158 T.C. No. 7 (2022), the Tax Court explains how that rule does not apply to the attorneys in the Office of Chief Counsel handling an innocent spouse case.  Taking it from the innocent spouse issue to the broader issue of cases handled by Chief Counsel, the rule does not apply to any of the cases in Tax Court nor does it apply to the Department of Justice Tax Division attorneys.  Once a case moves into the office of Chief Counsel or DOJ Tax Division, the attorneys are in the driver’s seat in deciding when to settle.   While they may consult with their client at the IRS, the relationship of the government attorney to its client differs dramatically from the relationship of the attorney in private practice to the client.  This proves unfortunate for Ms. Delponte.

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The case goes back to years from two decades ago.  The Tax Court docket numbers, of which there are five, go back to 2005.  Way back when, Ms. Delponte was married to Mr. Goddard who the Court described as “a lawyer who sold exceptionally aggressive tax-avoidance strategies with his business
partner David Greenberg and became very wealthy in the process.”  Mr. Goddard not only sold aggressive tax shelters, he also invested in them.  The IRS examined his returns, which were joint returns with Ms. Delponte, and proposed huge liabilities.

Ms. Delponte’s involvement in the Tax Court cases provides an interesting procedural sidelight.  The notices of deficiency were sent to Mr. Goddard’s law office years after the parties had split.  Mr. Goddard filed several Tax Court petitions as joint petitions without consulting or notifying Ms. Delponte.  Even though he filed the petitions in years 2005 through 2009, she did not become aware of the petitions until November of 2010.  At that  point she ratified the petitions.  Allowing her to ratify the petitions and be treated as if she timely filed them is an interesting feature of Tax Court jurisdiction.

The Tax Court, and the IRS, would not have known that she did not agree to the filing of the joint petition.  The IRS would have held off making an assessment against her, thinking that doing so would violate IRC 6213.  By putting her name on the petition even without her permission, Mr. Goddard not only suspended the statute of limitations on assessment for her liability but also preserved for her the opportunity to accept or reject the Tax Court case over five years after its filing.  You can see the awkward position this puts everyone in.  Yet, in many ways this works to the unknowing spouse’s advantage since it preserves the right to litigate in a prepayment forum.  The suspension of the statute of limitations on assessment is the downside of this action on the unwitting spouse.

Mr. Goddard not only filed joint petitions but he also listed her as an innocent spouse.  I do not know why in the five years between 2005 and 2010 the case had not progressed to a point that someone at Chief Counsel had pressed on the innocent spouse issue in a Branerton conference or otherwise, but at the point when she came fully into the case nothing seemed to have occurred regarding the innocent spouse defense. 

When you raise an innocent spouse defense in a deficiency case, the Chief Counsel attorneys ask that you complete a Form 8857, the innocent spouse relief form, and they send the form off for review by the innocent spouse unit of the IRS located in Covington, Kentucky.  This finally happened in Ms. Delponte’s case in April of 2011 only six years after the filing of the first petition in the case.

The Court points out that when Chief Counsel refers the case to the innocent spouse unit it requests that the unit not issue a determination letter as it would do if the request had arrived outside of a Tax Court deficiency proceeding but rather that the innocent spouse unit simply provide the results of its review to the attorney handling the deficiency case.  Here the innocent spouse unit reviewed the submission and determined that Ms. Delponte met the criteria for relief.

At the Harvard Tax Clinic we handle quite a few innocent spouse cases.  We submit what we believe are good applications but receive a favorable determination from the innocent spouse unit on a distinct minority of cases.  We usually gain relief from Appeals or from Chief Counsel. So, the fact that this unit granted Ms. Delponte relief in no way reflects that her success at this stage was routine.  Nonetheless, the Chief Counsel attorney did not accept the advice of its client and pressed forward with the innocent spouse case.

So, unlike an attorney in private practice who would be bound by the decision of its client, the government attorney is not so bound.  Ms. Delponte disagreed with the refusal of Chief Counsel to accept the decision made by its client that she met the criteria for relief.  She refused to meet with the Chief Counsel attorney to discuss the case, arguing that the additional information it sought “would be superfluous because CCISO (the innocent spouse unit) had already decided she was entitled to relief and its decision was binding on Chief Counsel.”

Because she would not meet, her innocent spouse status remained unresolved while the deficiency case moved forward, ultimately resulting in a large deficiency determination that was upheld on appeal.  Once the underlying tax issue was complete, the Court turned back to her innocent spouse request. The next post on this case will discuss how the Tax Court came to the conclusion that Chief Counsel’s office could ignore the decision of its client and what happened on the merits of the innocent spouse relief request.