When Does an Innocent Spouse Request Stop a Levy

The case of Landers v. United States, 3:20-cv-00455-G (N.D. Tex. 2020) raises the issue of the timing of the injunction against collection vis a vis the completion of a bank levy.  This case appears to break ground not previously broken, as Ms. Landers seeks to undo the levy because she filed her innocent spouse request during the 21-day period the bank was holding the funds in the joint account after receipt of the levy.  The court decides that the language stopping collection resulting from the filing of an innocent spouse request does not stop the bank levy during the 21-day period.  The opinion goes through an analysis of the Anti-Injunction Act to get there.

For those interested in a deeper dive on the issue presented by the case and the arguments made by the parties you can find the following case documents: motion to dismiss; affidavit of Revenue Officer; plaintiff’s brief; IRS reply; and plaintiff’s sur reply.

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Ms. Landers and her ex-husband jointly filed a 2016 return at the end of 2017.  The IRS assessed a liability of $742,728 against them jointly and severally in January of 2018.  Although the opinion does not say this explicitly, I assume from the timing of the assessment that the IRS assessed a tax shown on the return.  The couple divorced on September 14, 2018.  On December 5, 2019, the IRS issued a levy to a bank where Ms. Landers had an account owned solely by her.  The bank received the levy notice on December 11 which started the 21 day holding period after a bank levy.  On December 20, 2019, Ms. Landers submitted a request for innocent spouse relief.  At the conclusion of the 21-day period, the bank turned over all of the money in her account as of December 11.

She filed this action on February 24, 2020 seeking relief, arguing entitlement to an injunction for return of the funds because the IRS should have ceased the levy upon the filing of the innocent spouse relief request until the conclusion of the innocent spouse case pursuant to IRC 6015(e)(1)(B)(i). This subsection provides:

no levy or proceeding in court shall be made, begun, or prosecuted against an individual making [an innocent spouse claim] . . . for collection of any assessment to which such election or request relates until the close of the 90th day referred to in subparagraph (A)(ii) . . . .

Additionally, she argued that she deserved declaratory or injunctive relief under 28 U.S.C. 2201 and 5 U.S.C. 702 for harm caused by the action and she deserved mandamus relief under 28 U.S.C. 1361 requiring the IRS to return the money acquired through the levy.

Injunctive Relief

The IRS filed a motion to dismiss for lack of subject matter jurisdiction citing the Anti-Injunction Act (AIA) creating a situation of dueling injunctive provisions.  The innocent spouse provisions contain one of the enumerated exceptions to the AIA in subsection 6015(e)(1)(B)(ii) which provides:

Notwithstanding the provisions of section 7421(a) [the AIA], the beginning of such levy or proceeding during the time the prohibition under clause (i) is in force may be enjoined by a proceeding in the proper court[.]

The court states that it must decide two questions: (1) what is the scope of the exception to the AIA provided in the innocent spouse provision and (2) do the facts of Ms. Lander’s case fall within the scope of the innocent spouse exception to the AIA.  It then states that the innocent spouse exception to the AIA does not provide an exception upon which she can rely in these circumstances.

The parties focused extensively on the phrase in (B)(i) “no levy or proceeding in court shall be made, begun, or prosecuted.”  The court, however, notes that the discussion of the language in (B)(i) must be tied into the language in (B)(ii) to determine if the court has jurisdiction to enjoin the IRS from this collection activity.  It finds that the phrase “the beginning of such levy” in (B)(ii) crucial to its determination of jurisdiction.

The court noted the absence of case law interpreting the phrase and resorted to rules of statutory construction.  It finds that (B)(ii) allows taxpayers to seek a preemptive injunction against the IRS starting the levy process but does not provide an indefinite right allowing an injunction after a levy has issued.  I find this peculiar.  What taxpayer wants to bring a suit to enjoin the IRS from issuing a levy before it does so?  Such a construction would suggest taxpayers should preemptively bring injuction suits after filing innocent spouse requests rather than rely on the statute to stop such actions.  Courts would not look kindly on such suits.

The logical conclusion of the court leaves taxpayers helpless if they do not preemptively sue to enjoin the IRS before it issues a levy.  Ms. Landers points this out to the court arguing that its interpretation makes the injunction in the innocent spouse provision toothless.  In answer the court says it seeks to read both the innocent spouse provisions and the AIA in such a way as to protect the purposes of both statutes.  It also notes that the AIA provides a broad restriction requiring strict enforcement.  It points out that Ms. Landers had more than a year after her divorce before she filed her innocent spouse request and she received notice of the intent to levy giving her a further, more specific opportunity to act before she did.  She had a broad window for seeking an injunction and missed it.  It concludes the first section of its opinion by providing:

Without deciding when exactly the levy began (and the court’s power under subsection (B)(ii) expired), the court concludes that Landers was long past that point when she sought injunctive relief, more than a month after the funds had already been turned over to the government by ICU. Therefore, the court is without subject matter jurisdiction over Landers’ claims for injunctive relief, and they must be dismissed.

Mandamus Relief

The court relies heavily on its decision regarding the injunction to reach its conclusion here.  It points out that the mandamus provisions cannot override the AIA by obtaining injunctive relief in the guise of a mandamus.  It basically dismisses this action because it attempts to end run the AIA, which the court believes serves to prevent injunctive relief here.

Declaratory Relief

The court points out that the exception in the Declaratory Judgment Act (DJA) for taxes intended to leave the Flora rule intact requiring full payment before seeking a return of money.  It looks to the case of Cohen v. United States, 650 F.3d 717,729-31 (D.C. Cir. 2011) to find an answer to the jurisdictional issue raised here.  In Cohen the court found that the relief sought was simply a declaration with no effect on the assessment and collection of taxes.  It finds that to the extent Ms. Landers seeks merely a declaration her case closely mirrors the Cohen case.

In other words, the DJA does allow courts to issue declarations regarding procedural issues so long as the declaration does not run afoul of the AIA by interfering with the assessment and collection of taxes. Taxpayers may seek a declaration of their procedural rights, but that declaration cannot be used to bootstrap a right to injunctive relief.

The court finds that it has jurisdiction over her DJA claim as long as she only seeks a declaration that the IRS followed proper levy procedures and does not seek an injunction or return of the levy proceeds.

Obtaining a statement that the IRS did not follow procedures but can still keep the money may not help Ms. Landers very much.  If she wins her innocent spouse case, will the IRS return the money at that point or will it require her to finish paying off the balance of the large assessment before she can sue for refund.  If she seeks a refund will the IRS argue that the district court has no jurisdiction over that case as it has done in the past despite the contrary arguments it has made to appeals courts.  Ms. Landers’s path to recovery of the levy proceeds remains unclear.  Simply obtaining a statement that the IRS did not properly follow procedures will not put food on the table.  This cases raises interesting questions.  We may not have seen the last of it.

The APA: The Other Taxpayer Bill of Rights

The Taxpayer First Act (TFA) provides that the Tax Court apply a de novo standard of review of a section 6015 determination of the IRS based on (1) “the administrative record established at the time of the determination” and (2) “any additional newly discovered or previously unavailable evidence”.  In today’s guest post practitioner Steve Milgrom advances a novel argument, that the TFA’s changes to Section 6015 open the door to the possibility that IRS innocent spouse hearings should be subject to the formal adjudication rules under the APA. Steve’s provocative post raises the soon to be very important problem of ensuring that parties requesting relief from joint and several liability are entitled to present relevant evidence that may be difficult or impossible to present administratively. While I am skeptical of the solution that Steve proposes, it is likely that at a minimum the Tax Court will be wrestling with the terms “newly discovered” or “previously unavailable” in fashioning broad exceptions that will allow the Tax Court to evaluate difficult cases that often implicate circumstances (like abuse) that may not be fully developed via centralized correspondence-based determinations that are the hallmarks of the current regime under Section 6015. Les

Unlike other Federal government agencies that routinely hold trial like hearings on the record, the IRS stopped doing so back in the 1920’s.  In the case of §6015 innocent spouse determinations, this may be about to change. 

The road to this change in IRS procedure begins with a bill of rights.  No, not that Bill of Rights, the first ten amendments to the US Constitution (although even this Bill of Rights may come to play a critical role).  I’m not even referring to the Taxpayer Bill of Rights, Code §7803(a)(3).  Here I refer to the bill of rights Congress passed in 1946 to protect us against the Federal government:

[A] bill of rights for the hundreds of thousands of Americans whose affairs are controlled or regulated in one way or another by agencies of the Federal Government.  S.Doc. No. 248, at 298.

The 1946 bill of rights is the Administrative Procedure Act (APA), which is found at 5 U.S.C §551-§706. While the Taxpayer Bill of Rights has not gotten much traction in the courts, the APA is a significant restraint on Federal administrative agencies.

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Before I delve into the mysteries of the APA keep in mind that, like all statutes, standing atop the APA is the U.S. Constitution and its Bill of Rights.  Whether or not the APA applies to agency action, compliance with the Due Process Clause of the 5th Amendment to the Constitution is also required.    PBGC v. LTV Corp., 496 U.S. 633, 655 (1990).  See also, Wong Yang Sung v. McGrath, 339 U.S. 33, at 49 (1950) (The constitutional requirement of procedural due process of law derives from the same source as Congress’ power to legislate and, where applicable, permeates every valid enactment of that body.)

Another preliminary matter is APA §559, dealing with the effect of subsequent statutes on the APA.  §559 states that a “[s]ubsequent statute may not be held to modify” the APA “except to the extent that it does so expressly.”  Faced with the prospect of having to comply with the APA’s formal procedural requirements the IRS might argue that the recent amendment to Code §6015 that I discuss below expressly modified the APA.  Arguments that tax law provisions are express modifications of the APA have gotten traction when made in connection with the judicial review of IRS proceedings.  See Kasper v. Commissioner, 150 TC 8 (2018).  However, these cases do not deal with how the agency itself must proceed and the change to §6015 doesn’t modify the APA in any way.  §6015 states that the procedures for the IRS to make a determination are to be prescribed by the Secretary of the Treasury.    Clearly the procedures prescribed by Treasury have to comply with the APA.  Mayo Foundation for Medical Education v. U.S., 131 S.Ct. 704 (2011).  

The APA covers a lot of ground.  It sets forth rules for agency rule making, agency adjudications, and for judicial review of agency proceedings.  To understand the APA one must first study the definitions.  “Rule making” is defined as an agency’s process for formulating, amending, or repealing a rule.  An “adjudication” is any agency process for the formulation of an order.  An “order” is a final disposition of an agency in a matter other than rule making.  APA §§551(5), (6), and (7).  Basically, adjudications are the things that agencies do other than rule making.  

Another important distinction made by the APA is between what are known as formal vs. informal agency proceedings, both in the context of rule making and adjudications.  The formal vs. informal dichotomy determines which set of procedural requirements apply to agency action.  Both rule making and adjudications are allowed to proceed informally unless the statute governing the agency activity requires it to hold a hearing on the record.  In the tax world, the statute governing agency activity is the Internal Revenue Code (Code).  If the statute calls for a hearing on the record, then the formal procedural requirements of the APA must be following by the agency.  Formal rule making is governed by §§556 and 557.  Formal adjudications are covered in §§554, 556, and 557.  Informal rule making and informal adjudications are covered by §553 and §555, respectively.

Agency adjudication can still avoid being subject to the formal procedural requirements of the APA based upon six specific exemptions, one of which is relevant to this discussion.  APA §554(a)(1) provides that any matter “subject to a subsequent trial of the law and the facts de novo in a court” is exempt from the formal procedural requirements of the APA.  Note that this is not an exemption from the APA itself, only from the formal rules. It is this exemption that has historically allowed the IRS to proceed, in APA parlance, informally.

The exception of matters subject to a subsequent trial of the law and facts de novo in any court exempts such matters as the tax functions of the Bureau of Internal Revenue (which are triable de novo in the Tax Court).  S. Comm. On the Judiciary, 79th Cong., 1st Sess., Administrative Procedure Act.  (emphasis in original).

Last year, in the Taxpayer First Act (TFA), Congress rewrote the rules applicable to the Tax Court’s determination of the availability of innocent spouse relief.  See Taxpayer First Act, Pub. L. No. 116-25, §1203, adding Code §6015(e)(7).  While §6015(e)(7) retains the rule that the Court’s review of an IRS determination is de novo, it is now to be based on the administrative record.  No more trial of the facts de novo.  The exemption provided by APA §554(a)(1) no longer applies.  Does this change mean that the IRS must now comply with the formal procedural requirements of the APA when making an innocent spouse determination? Only if the Code requires the adjudication “to be determined on the record after opportunity for an agency hearing …” See APA §554(a) prefatory language.

The Code says nothing about the IRS holding a hearing when it makes an innocent spouse determination. Might we find the hearing requirement elsewhere?  US v. Florida East Coast Railway Company, 410 U.S. 224, 245 (1973), deals with agency rule making.  However, the language of the APA for adjudications is the same.  In both rule making and adjudications the triggering language is identical, for the formal rules to apply the APA states that the operative statute must require agency action “on the record after opportunity for an agency hearing.”   In Florida East Coast Railway Company the Supreme Court had this to say about these key terms:

… the actual words ‘on the record’ and ‘after … hearing’ used in §553 were not words of art, and that other statutory language having the same meaning could trigger the provisions of §§556 and 557 in rulemaking proceedings. Id, at 238.  (emphasis added)

Other courts have confirmed that there are no magic words. 

[W]hether the formal adjudicatory hearing provisions of the APA apply to specific administrative processes does not rest on the presence or absence of the magical phrase “on the record.”  Marathon Oil Co. v. Environmental Protection Agency, 564 F.2d 1253, 1263 (9th Cir. 1977).

Courts often rely upon the Attorney General’s Manual on the Administrative Procedure Act (1947) in interpreting the APA.  See Vermont Yankee Nuclear Power Corp v. Natural Resources Defense Council, Inc., 435 U.S. 519, 546 (1978).  The AG Manual gives examples of statutes that require formal adjudications where the governing statute requires a hearing but says nothing about it being on the record:

[W]hile the … Act does not expressly require orders … to be made “on the record”, such a requirement is clearly implied in the provision for judicial review of these orders … Other statutes authorizing agency action which is clearly adjudicatory in nature … specifically require the agency to hold a hearing but contain no provision expressly requiring decision “on the record”.

The examples in the AG’s Manual deal with statutes that require a hearing but make no reference to its being “on the record.”  Is there any less of an implication when the missing language is reversed, when the statute calls for judicial review of an administrative record but makes no reference to the agency holding a hearing?  

Due process requires every agency adjudication to involve some type of hearing.  Even where there is no “adjudication required by statute,” the APA’s formal procedures have been imposed based upon the hearing requirement of the due process clause.  Wong Yang Sung v. McGrath, 339 US 33 (1950).  The APA provision stating that it is only applicable to hearings “required by statute” exempts agency hearings that are conducted by a lesser authority than a statute, such as by regulation or rule, not hearings that are held out of compulsion, either by statute or constitutional requirement.  Wong Yang Sung, at 50.  So when the Supreme Court referred to “other statutory language having the same meaning” in Florida East Coast Railway Company, to be consistent with Wong Yang Sung it would have been clearer to say “other statutory or constitutional language having the same meaning.”  

Now that §6015(e)(7) requires the Tax Court to perform its review of an IRS innocent spouse determination based upon the administrative record, the IRS must make its determination “on the record.”  While §6015 leaves it to the IRS to establish procedures for making its determinations, as the Attorney General said some 70 years ago, a requirement that an agency act on the record is “clearly implied in the provision for judicial review.”  §6015(e)(7) is just such a provision for judicial review and here you don’t have to search for an “implied” requirement.  The requirement for an administrative record is explicit.

Did Congress intend to force the IRS to hold formal hearings on the record when making a §6015 determination?  While the number of words used to impose the requirement are few, they are unique, this is the only place where the Code uses the phrase “administrative record.”  By adopting a new approach to Tax Court procedure, using a phrase that comes from the world of administrative law, it does seem that this change in judicial review should also change the agency level procedure applicable to innocent spouse determinations.  

Having decided to limit the Tax Court to reviewing the administrative record, maybe Congress was familiar with Wilson v Commissioner, 705 F.3d 980 (9th Cir. 2013).  In Wilson, the 9th Circuit rejected the IRS’s argument that the Tax Court should be restricted to a review of the administrative record in a §6015(f) case.  Wilson rejected what Congress has now made the law.  The rationale of the 9th Circuit explains why it is so important that the IRS be required to follow the formal procedural requirements of the APA in §6015 cases.  The Wilson decision is based in large part on the fact that the pre-TFA process used by the IRS for making a §6015(f) determination did not result in a sufficient record for the Tax Court to review:

There is no formal administrative procedure for a contested case at which the taxpayer may present her case before an administrative law judge.  At no time during the process is the taxpayer afforded the right to conduct discovery, present live testimony under oath, subpoena witnesses for trial, or conduct cross-examination. … [I]t is before the Tax Court that the taxpayer has the vehicle to conduct discovery … subpoena witnesses and documents … and submit evidence at trial.  Wilson, at 990.

The 9th Circuit continued its explanation of the importance of trial like proceedings:

The ability to supplement the administrative record is particularly important in equitable relief cases, which require a fact-intensive inquiry of sensitive issues that may not come to light during the administrate phase of review.  The threshold requirements for innocent spouse relief may present a complicated and contradictory dilemma for the taxpayer.  The innocent spouse must show that he or she is ignorant of the spouse’s tax misdeeds, yet must marshal documentary support to prove it.  The taxpayer often has limited or no access to critical records.  The innocent taxpayer who has been misled by a spouse often may not understand the full extent or scope of the erring spouse’s misdeeds.  Compounding these difficulties is an administrative system where the only opportunity to present a case is through telephonic interviews with an agent in a remote location.  Wilson, at 991.

Since the Tax Court is no longer permitted to decide the facts de novo, the administrative record which the Tax Court reviews must be created by the IRS using the formal procedural requirement of the APA, allowing for discovery, testimony under oath, cross-examination of witnesses, and the many other procedures that are designed to lead to a full and fair determination of the facts.

The last time Congress set up an agency of the Executive branch that conducted the sort of hearings that the APA requires for formal adjudications was 1924.  That agency was named the Board of Tax Appeals (BTA).  In 1969 Congress moved the functions of the BTA out of an administrative agency and placed them in the Judicial branch, in a court known as the United States Tax Court.   Harold Dubroff and Brant J. Hellwig, The United States Tax Court, an Historical Analysis, 49 (2nd ed. 2014).  When the activities of the BTA were moved to the Tax Court, the job of holding formal hearings to determine the facts of a case likewise moved to the judicial branch of our government.  While the 1924 Act that created the BTA did not provide for any direct appellate review of its decisions, the decisions could be collaterally attacked in a suit for a refund where the findings of the BTA were prima facie evidence.  In 1926 the law was amended to permit review of BTA decisions in the Court of Appeals, where review was limited to questions of law.  Why return to a system of agency level factual determinations followed by judicial review of the agency record? The IRS is constantly underfunded.  The Tax Court is fully capable of hearing the facts of §6015 cases de novo.  What can possibly be gained by forcing the IRS to build a whole new infrastructure just for 6015 cases? 

How might the IRS implement this new requirement?  Currently, requests for §6015 relief are handled by a special office in the IRS, known as CCISO.  There is no need for the operations of this office to change.  When Congress changed the §6015 judicial review provisions it also established a new office within the IRS, known as the Internal Revenue Service Independent Office of Appeals.  This office is required to be fair and impartial to both the government and the taxpayer.  While I don’t know what was in the mind of the drafters of the TFA but it seems like this new office was specifically created to, among other things, handle the task of complying with the APA formal procedural hearing requirements. 

The IRS has long argued that the Tax Court’s review of innocent spouse determinations should be restricted to the administrative record.  Since the argument was not based upon a statutory requirement, had the Tax Court agreed with this proposition it would not have triggered the APA’s formal procedural requirements at the agency level.  While the IRS lost in Tax Court, it prevailed in some Courts of Appeal, but not others.  Congress stepped in to resolve the circuit split by adopting the position advocated by the IRS.  There is now a statute that requires judicial review based upon the administrative record, the operative requirement for application of the formal procedural requirements of the APA.  I am reminded of Marty Ginsberg’s maxim of Moses’ rod:

Every stick crafted to beat on the head of a taxpayer will metamorphose sooner or later into a large green snake and bite the commissioner on the hind part.  Ginsburg, Making Tax Law Through the Judicial Process, 70 ABA J. 74, 76 (1984).

Only Tax Court Petitions Filed After July 1, 2019 Are Subject to TFA’s Restricted Scope of Review

In the en banc opinion Sutherland v. Commissioner, the Tax Court held that spousal relief cases petitioned before 7/1/19 are not subject to the Taxpayer First Act’s narrowed scope of review under new subparagraph 6015(e)(7). At this conclusion many practitioners with pending cases breathed a sigh of relief. However, the thorny issues raised by 6015(e)(7) remain to be litigated another day. We have written about these issues on PT several times, both as the Taxpayer First Act (TFA) was pending (here and here), and after it became law (here, here, here, and here).

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It’s worth noting the procedural posture of the Sutherland case, as it involves one of those thorny to-be-litigated issues. Last year Carl Smith wrote a post arguing that, in light of the new subparagraph (e)(7), the Tax Court should revisit its holding in Friday v. Commissioner that it lacks the power to remand standalone 6015(e) cases. In an email to the PT team, Carl explains that in his October 2019 post

I suggested that someone move for remand in a 6015 case.  Only weeks later, on Nov. 11 (three weeks  before a trial set for Boston), the taxpayer’s lawyers in Sutherland moved to remand the case, apparently arguing that Friday needed to be revisited — at least in a case like Sutherland, where the lawyers were counting on a de novo standard of review and standard for introducing evidence in the Tax Court.  The motion was argued at the calendar call, where Judge Lauber struck the case from the calendar and retained jurisdiction to rule on the motion.  Today’s unanimous opinion holds that the effective date of 6015(e)(7) is ambiguous, and the best construction is that it does not apply to this case. 

The Effective Date of TFA § 1203

For a review of the changes made by TFA section 1203 to IRC section 6015(e), see Steve Milgrom’s post from July 9, 2019. Relevant to the Sutherland case, the TFA appears to restrict the Tax Court’s scope of review in standalone spousal relief cases, so that it is now based primarily on the administrative record. In previous posts we have mused about what exactly that might mean.

Starting in July 2019, several judges began to issue orders asking the parties to address the impact of section 6015(e)(7) generally. Later in the fall, other judges issued orders specifically asking the parties to identify the administrative record, any disputes as to its contents, and state whether any newly discovered or previously unavailable evidence would be offered at trial.

In Sutherland, the court takes a step back and considers what the effective date provision really means, rendering many of those pretrial orders moot.

Donna Sutherland’s case is an example of previously sound strategy that no longer works under the Taxpayer First Act. Unlike most spouses requesting relief, Ms. Sutherland was represented in the administrative proceedings. Her counsel thought that the IRS Appeals Officer was misapplying the equitable relief factors and that further submissions would not be productive. So, counsel made a tactical decision to stop trying to persuade the AO and instead move the case to Tax Court. The petition was filed in February 2018.

When the statute changed over a year later, shifting the Tax Court from a de novo scope of review to the administrative record, Ms. Sutherland was left in an unhappy situation. At the time she filed her petition, she had no reason to suspect that her case would not receive a full trial de novo under the Court’s holding in Porter v. Comm’r, 132 T.C. 203 (2009).

Ms. Sutherland’s counsel filed a motion asking the court to remand the case to the IRS for fuller development of the administrative record. But rather than reconsider its ability to remand standalone innocent spouse cases, the court instead scrutinized the effective date provision in the Taxpayer First Act.

Taxpayer First Act section 1203(b) reads:

Effective Date. The amendments made by this section shall apply to petitions or requests filed or pending on or after the date of the enactment of this Act.

The structure of this sentence renders the provision ambiguous from the outset. The Court explains,

“[P]etitions or requests filed or pending” could mean “petitions filed or pending, or requests filed or pending.” Alternatively, it could mean “petitions filed or requests pending.” If the former reading is adopted, so that “pending” modifies both “petitions” and “requests,” subsection (e)(7) likely would apply here because this case was pending in this Court when the amendment was enacted. If the latter meaning is adopted, so that “pending” modifies only “requests” and “filed” modifies only “petitions,” subsection (e)(7) would not apply. Petitioner’s request for innocent spouse relief had been resolved by the IRS, and hence was not “pending,” on or after July 1, 2019. And her petition to this Court was filed before that date.

Judge Lauber gives two hypotheticals illustrating how such compound sentences can be interpreted:

For example, assume a municipal ordinance that is effective for “cars or boats parked or docked” at a city marina after a specified date. This provision would logically be interpreted to refer to “cars parked or boats docked.” That is because each adjective comfortably modifies only one noun.

On the other hand, assume a sales tax that is effective for “cars or trucks sold or leased” after a specified date. Unless the context suggested otherwise, this provision would likely be interpreted to refer to “cars sold or leased, or trucks sold or leased.” Both adjectives comfortably modify both nouns, and it would be odd to have different tax treatment for similar transactions involving similar vehicles.

Looking to the language of the Code, the Court concludes that TFA

sec. 1203(b) more closely resembles the first example above. We have discovered no instance in which Congress, either in the Code or in an uncodified effective date provision, has used the phrase “petition(s) pending” when referring to ongoing matters in our Court. And interpreting Act sec. 1203(b) to refer to “petitions filed [in this Court] or requests pending [with the IRS]” on or after the effective date makes logical sense in light of the statutory context.

The Court finds additional support for this conclusion in the structure of TFA section 1203 and the cannon against superfluity. Finally, the Court notes that this interpretation

also has the merit of preventing inequitable results that Congress presumably would have wished to avoid when prescribing the transition to the amended scope of review ordained by subsection (e)(7).

…[I]f subsection (e)(7) were to apply to cases such as this–where the conclusion of the administrative process and the filing of the petition both preceded July 1, 2019, but the case remained pending in this Court thereafter–a sort of “gotcha” could occur. The taxpayer would have gone through the administrative process believing that the scope of review in this Court was de novo. But she would then learn, once the time came for trial, that the scope of review was not de novo and that she could be prejudiced for not having made a more complete administrative record.

Because the Court finds that subsection 6015(e)(7) does not apply to this case, Ms. Sutherland will be free to introduce new evidence at trial.

The Remand Question Remains

In his email, Carl points out that the Sutherland opinion “goes out of its way to note the issue of Friday”:

Because we hold that section 6015(e)(7) does not apply, the scope and standard of review in this case will remain de novo, consistently with our case law predating the amendment. See Porter, 132 T.C. at 210. Petitioner will thus be free to introduce at trial any competent evidence that she desires. Because the premise for her motion to remand thus disappears, a remand (if we could order one) would serve no useful purpose. We will accordingly deny her motion for that reason. Cf. Burke v. Commissioner, 124 T.C. 189, 194 n.5 (2005) (declining to remand a collection due process case because a remand would not be productive); Whistleblower 23711-15W v. Commissioner, T.C. Memo. 2018-34, 115 T.C.M. (CCH) 1154, 1156 n.7 (declining to remand a whistleblower case because a remand would serve no useful purpose). That being so, we have no need to address her request that we reconsider our holding in Friday as applied to cases that are governed by the amended statute. 

It may not be long before another case squarely presents this issue and asks the Court to consider a remand. The opinion itself concedes, “[s]ome taxpayers might have received a determination letter shortly before July 1, 2019, with their petition to this Court due to be filed thereafter.” Under Sunderland’s interpretation of the TFA, such cases would be subject to the administrative record provision. (Note this is the result even if the requesting spouse had made the exact same strategic gambit as Ms. Sutherland. The Court’s analysis is grounded in textual interpretation, not equity.) In this situation the Court suggests that the requesting spouse could contact the AO and ask to re-open the administrative record. However, if the IRS declined to do so it is unclear what remedy a taxpayer would have, besides requesting a remand from the Court.

The broader concerns raised by Steve Milgrom and Carl Smith also apply to cases pending with the IRS as of July 1, 2019 (and for that matter new requests for relief), particularly when it comes to unrepresented individuals and victims of domestic violence. There will certainly be cases subject to the TFA in which a poor administrative record exists, even if the taxpayer technically had the opportunity to create a full record after July 1, 2019.

As pro se petitioners and practitioners in such cases consider their options, it’s helpful to remember the Tax Court’s May 29 press release which Keith described as a “significant and welcome change in the price structure of documents ordered from the Court.” As a result of that change, anyone interested in obtaining a copy of the motion to remand, response, and reply in Sutherland may obtain them by email for no more than $3 per document. The Court’s pricing change will make it feasible for those without deep pockets to closely follow this litigation and to make well-developed legal arguments in other TFA cases.

Generally Speaking, the IRS Fails to Understand the Law Governing Disclosure of Joint Accounts

In 1996 Congress added IRC 6103(e)(8) to the disclosure provisions allowing each spouse to access the collection account of a joint liability.  The addition of this section and the complimentary section 6103(e)(9) regarding disclosure of information to jointly liable responsible officers of the Trust Fund Recovery Penalty filled a gap necessary to allow taxpayers to have a true picture of what they owe.  Each of these two code subsections allows persons who share a liability to see the true picture of the account.  In both instances the IRS seeks to collect the liability only once, even though it has the ability to collect from more than one liable person.  If you are one of those persons, you want to know the true balance on the account in making decisions and not just the amount paid by you.  Congress should pass a law allowing this type of disclosure anytime more than one person owes for a joint liability and not just in these two specific instances.

The Treasury Inspector General for Tax Administration (TIGTA) recently released a report in which it displayed the result of tests it performed to see how well IRS employees understood IRC 6103(e)(8).  Basically, the IRS failed the test.  I will discuss details below, explain more about these types of accounts and suggest some additional legislation.  Before I provide that information, I want to make a quick observation regarding IRS employees and the disclosure laws. 

Many IRS employees live in fear of the disclosure laws.  Because they lack a clear understanding of the long and complex disclosure statute, because they must make snap decisions and because of the severe consequences of a wrong decision to disclose rather than to refuse, many IRS employees default to refusal to disclose even when they should provide the requested information.  What is the consequence of refusal to disclose?  The person asking must find someone else to ask or simply walk away empty handed.  The employee refusing to disclose faces no penalty for the refusal, no reprimand from their supervisor, no civil or criminal penalty for giving out information they should not have given out. 

We have a system in which IRS employees have learned the right answer is to follow Nancy Reagan’s advice – “Just say no.”  The TIGTA report does not address the bureaucratic and systemic reasons that IRS employees refuse to disclose information they should disclose.  It simply notes that they fail.  If we seek a system in which IRS employees will do a better job in disclosing information they should disclose, a balance of consequences must exist.  Until that happens all of the TIGTA reports telling us that IRS employees fail to follow the disclosure law provide little assistance.

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We are entering the season in which TIGTA issues the annual reports required by Congress in 1998.  Because TIGTA must issue reports on the same subject dictated in 1998 over and over again, it tries to be a little inventive and cover slightly different aspects of some of the subjects each year in order to avoid the groundhog day effect of reporting on the same thing over and over.  Maybe it’s time for Congress to think about having them report on some different things or require some of the reports every two, three, four or five years apart rather than every year.  I don’t think Congress has revisited the issue of these reports and I doubt if many people in Congress read the TIGTA reports.  Would it be so hard to rethink how it uses TIGTA resources?

The Results

TIGTA tested both revenue officers (ROs) and employees at Automated Call Sites (ACS).  You would expect that ROs would significantly outperform ACS employees because of the training and education requirements of ROs.  The ROs did better but did not cover themselves in glory.  TIGTA interviewed 12 ROs and 12 ACS employees asking about the ability to disclose information to the other spouse about a joint liability.  TIGTA asked two questions.  First, it asked if these IRS employees would disclose information to the spouse if the couple was married.  Second, it asked the same question except in the circumstance in which the couple was divorced.

All of the IRS employees got it right if the couple remained married.  All would have provided the information about the joint liability to either the H or the W.  Only 8 of 12 ROs would provide the information if the couple was divorced and only 6 of 12 ACS employees would provide the information in that situation.  The statute requires the disclosure of the information in both circumstances.  The refusal to provide the information violates the taxpayer’s rights and places the taxpayer in an awkward situation – exactly what Congress tried to avoid in passing the provision.

Mirrored Accounts

When a couple takes certain divergent paths such as an innocent spouse request or one spouse, but not the other, filing a Tax Court petition or a bankruptcy case, the IRS master file changes their account transcript from one containing all of the data for one spouse to two mirrored accounts – one for each spouse. The now-separate accounts generally “mirror” each other but diverge with regard to tax adjustments made on only one spouse’s account after the mirroring (see IRM 25.15.15.1 for further detail). Per IRM 21.6.8.3,  only certain information from a mirrored account (such as amount collected and current collection status) must be disclosed to a requesting spouse. The creation of the mirrored accounts tricks many practitioners and taxpayers who see the account transcript of the joint liability zeroed out and also leads the IRS employees down the wrong decision path in this situation when it comes to making a decision.

The problems with the IRS computer system need no explanation to regular readers of this blog or any description of the IRS.  Mirroring accounts, apparently a creature of the IRS computer system, not only trick others but create an impression that may provide one of the causes for IRS collection employees to do so poorly on the TIGTA test regarding IRC 6103(e)(8).  Would it be possible as the IRS continues to upgrade its computer systems to put a statement on joint accounts providing the reader with information that mirroring an account does not terminate the liability?  Would it be possible to put some indication in the account transcripts that IRS employees can read instructing them that information on a mirrored account can be provided to both H & W, thereby giving the IRS employee a little help in understanding this somewhat counterintuitive disclosure provision?

Disclosure and Domestic Violence

One of the things a taxpayer can learn about their joint account is who has accessed it and when.  Normally, providing this information seems appropriate; however, in a domestic violence situation it may create a bad situation.  Since the passage of IRC 6103(e)(8) in 1996, we have made many strides in improving the situation for victims of domestic violence.  DV victims can have a VODM (Victim of Domestic Violence) placed on their account by the innocent spouse unit which provides certain protections.  Congress should provide an additional protection.  It should not allow the other spouse to know when an inquiry regarding an account has occurred.  This could provide needed protection to a VODM.

No Refund to Individual Granted Innocent Spouse Relief under IRC 6015(c)

In Yiu v. Commissioner, T.C. Summ. Op. 2020-23, the Tax Court holds that the individual who succeeded in obtaining innocent spouse relief could not get back the money she paid on the liability before receiving relief from the liability.  This result occurs because she received relief under IRC 6015(c) rather than under one of the other two bases for innocent spouse relief.  This outcome does not provide a new or surprising result.  Here, she wins the battle of being deemed an innocent spouse but loses the war because she receives no relief in her request to have her payment of the liability created by her ex-husband returned to her. 

For anyone who has not previously litigated innocent spouse issues, this case might provide an alert to seek relief under the other provisions if the taxpayer wants a refund.  The innocent spouse unit in Covington, Kentucky seems to default to 6015(c) relief perhaps because of its more mechanical application; however, accepting a determination for relief under that subsection can bring less than full relief where the innocent spouse has made payments on the liability.  Contesting the grant of relief under 6015(c) also brings significant obsticales.

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Petitioner was married to James Neiswonger in 1998.  They remained married until after joint returns were filed for the years at issue.  As occurs in approximately 95% of innocent spouse cases, the wife seeks relief here.  The year at issue is 2011. 

The opinion says that the only liability for which she seeks a refund now is a $2,500 education credit attributable to her husband (who had no income in 2011).  She says she signed the return without looking at it which is always a bad fact, but the opinion makes no finding that she knew or had reason to know that the credit was erroneous (which would bar relief under (b), but not necessarily under (f)).  Because it is necessary to relief under 6015(c), the IRS conceded that she did not have actual knowledge and the opinion makes no finding that she had a reason to know the claim of the credit was wrong.  Section 6015(g)(3) provides:  “No credit or refund shall be allowed as a result of an election under subsection (c).”  For unexplained reasons, she conceded to the court that she was not entitled to relief with respect to this credit under (b) or (f).  We don’t have enough facts to be able to see that her concession made sense.  If she won under (b), she could get a refund. If she could win under (f) but for the fact that she could also win under (c), then the regulations provide that she can’t get a refund because she has gotten relief under (c) — even though she can’t get the only relief she sought under (c), a refund.  Reg. § 1.6015-4(b) (which applies to relief under (f)), states:

This section may not be used to circumvent the limitation of § 1.6015-3(c)(1) (i.e., no refunds under § 1.6015-3) [i.e., the regulations under subsection (c)]. Therefore, relief is not available under this section to obtain a refund of liabilities already paid, for which the requesting spouse would otherwise qualify for relief under § 1.6015-3.

This regulation was controversial when enacted in 2002.  In Taft v. Commissioner, T.C. Memo. 2017-66, the IRS conceded that a taxpayer was not liable under (c), but argued that because the taxpayer was getting relief under (c), she could not get a refund under (f).  Carl posted on Taft here.  In Taft, the taxpayer argued that she should get relief of a refund under (b) or (f), and the court agreed with her that she could get a refund under (b), so it did not have to decide the (f) issue.  In order to enhance her chances in case the she might not qualify for relief under (b), the taxpayer argued that the regulation prohibiting a refund under (f) if the taxpayer qualified for relief under (c) is invalid.  Carl’s prior post has a link to the brief filed by her pro bono attorney, Joe DiRuzzo. The Harvard clinic also filed an amicus brief arguing that the reg. under (f) is invalid.  A copy of the clinic’s brief is attached here

Because of the decision to allow relief under 6015(b) the Tax Court did not reach the issue of the validity of the regulation.  The validity of the regulation has never been decided by a court. 

Ms. Yiu essentially ended her chances to succeed when she conceded that she was not entitled to relief under (b) or (f).  Someone in her situation should not make such a concession unless it is obvious that the taxpayer can’t possibly win under those subsections.  If making that concession, no need to bring a Tax Court case exists.  Of course, a person in this position must consider arguing that the regulation under (f) is invalid if it appears that the taxpayer would otherwise qualify for equitable relief under (f) (which can occur even if the taxpayer had reason to know so could not qualify under (b)).

The default to relief under 6015(c) drives knowledgeable taxpayers to avoid paying a tax assessment if they contemplate divorce and a claim of innocent spouse relief.  Probably less than 1% of taxpayers have knowledge of this consequence.  They need assistance from knowledgeable tax practitioners but they also need to seek assistance early.  This situation reminds me of the rules created by the IRS with respect to the Trust Fund Recovery Penalty, viz., if more than one responsible officer exists the one who pays first loses.  See a discussion of those rules here.  So, clients in this situation must try not to pay the taxes directly or by offset if they intend to seek innocent spouse relief.  Trying to do that is hard.  Adjustments to withholding to try to avoid having a refund can result in owing tax if not properly calculated.  As a result, many people in Ms. Yiu’s circumstance end up paying some or all of the tax from the joint return because of the offset of refunds from later year returns.

This circumstance also argues for seeking innocent spouse relief as soon as possible.  If the person seeking innocent spouse relief seeks such relief when the notice of deficiency is sent before there is even an assessment of the additional taxes, they do not have to worry about seeking a refund.  Unfortunately, many individuals who might have a valid innocent spouse defense do not raise it at the notice of deficiency stage and only become concerned about it when the IRS moves into the collection phase.  Some individuals with this defense may still be in a positive relationship with their spouse at the notice of deficiency phase and not think about their individual responsibility should the marriage dissolve.

Once the assessment occurs a slightly different dynamic can occur.  Seeking relief will keep the IRS from beginning to take administrative collection action while the innocent spouse request is pending.  Section 6015(c) relief only becomes available if the spouses divorce, separate for 12 months or one dies.  It may take some time before the spouse becomes eligible for this relief.  In the period before this occurs the spouse would look to relief under 6015(b) or (f).  After 6015(c) relief becomes available, the person seeking relief who has made a payment and wants a refund must argue for 6015(b) relief or face a somewhat difficult argument for 6015(f) relief if 6015(c) relief is available.

If the individual can wait for two years after the IRS initiates collection, then 6015(c) relief is no longer available and the individual can seek relief under 6015(f).  This two-year rule creates the easiest basis for going directly to 6015(f) relief.  Of course, the individual would also attempt to keep from paying during that two-year period if possible in order to avoid having to seek a refund in the innocent spouse case.

In addition to the problem of only receiving a refund under the right subsection of 6015, the individual has to thread the needle of Flora which will prevent the receipt of a refund in situations in which the individual seeks the refund more than three years after filing the return or two years after making payment.  Additional hurdles imposed by Flora involve the need for full payment if the taxpayer seeks relief in district court and the position of the trial section of the Department of Justice regarding the use of innocent spouse cases as a vehicle for obtaining a refund discussed here, here and here.

Individuals who desire to use the innocent spouse provisions to relieve themselves of a liability and to obtain the return of money paid on a debt they argue should not be placed on them face numerous challenges.  Obtaining a refund in the innocent spouse context is not impossible but is difficult because of default to 6015(c) relief, the regulation barring a taxpayer from seeking a refund through 6015(f) if they qualify for 6015(c), the Flora rule and the unclear jurisdictional situation of seeking a refund in district court.  The best outcome for someone seeking innocent spouse relief involves not having paid anything towards the debt but few taxpayers know that money once paid toward the debt will prove difficult to recover.  Ms. Yiu joins a long list of taxpayers who while deemed innocent of the liability still end up paying all or part of it and not recovering that payment.  Maybe Congress should rethink how the relief works for people caught in this situation.

A Webber Update, Possible Pandemic Changes, and Conservation Easements: Designated Orders 5/11/20 to 5/15/20 and 6/8/20 to 6/12/20

There were 7 designated orders during the week I monitored in May and 1 designated order for the week I monitored in June (Mark Alan Staples order), covering a variety of topics.  We start with an order updating the Webber case and its Collection Due Process issues.  Next, is there a change in the Tax Court treatment of motions to dismiss during the COVID-19 pandemic?  Following that, there are conservation easement, innocent spouse and other cases to review.

A Webber Update

Docket No. 14307-18 L, Scott Allan Webber v. C.I.R., Order available here.

Previously in Procedurally Taxing, the Webber case prompted discussion and change regarding Collection Due Process (CDP) and jurisdiction in Tax Court.  I wrote here regarding the case and Judge Gustafson’s taking issue with a prior IRS motion to dismiss.  The motion to dismiss was based on an IRS notice concerning CDP rights that had 2 addresses listed, one to request a CDP hearing and the other to make payment to the IRS on the listed amount due.  Mr. Webber had attempted to submit his CDP hearing request, but wound up mailing it to the payment address by mistake.  Based on the request’s movement through the IRS bureaucracy, it arrived at the correct location but late enough to only allow Mr. Webber an equivalent hearing (limiting his access to Tax Court review).  After Judge Gustafson took the IRS to task on the motion to dismiss as being a harsh result for such a simple taxpayer mistake, the IRS withdrew their motion to dismiss.  Things were not done regarding CDP, though, as there was a CDP Summit Initiative Workshop where these types of issues with CDP notices were discussed (also here).  Keith wrote here that a result of this discussion led to a program manager technical assistant (PMTA) memo setting new IRS policy to determine timeliness of a CDP hearing request.  The new policy is based on the type of situation above – receipt of a CDP hearing request at an incorrect office when it was mailed to the incorrect office because of being an office listed on the notice. 

I would like to also announce that the IRS is making a revision to the Internal Revenue Manual at IRM 8.22.5.3 to reflect that PMTA memo.  The revision will be effective beginning July 6 and will be incorporated into the IRM within 2 years of the date of this memorandum, reflected here (this links to a Tax Notes article available only to subscribers). 

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Got that?  Because the current designated order has a change of topic.  This designated order’s topic is shift from jurisdiction to the topic of credit elects.

In fact, Mr. Webber is dealing with a credit elect dating back to 2003 (when it was $71,012).  Over the years, that credit elect was applied to each tax year until we are dealing with the tax year at issue and the question of whether a credit elect of $77,782 from 2012 applies to his 2013 tax return.  If so, it reduces his 2013 total tax of $5,690 so that there is a credit elect of $72,092 that would carry to the 2014 tax return.

The problem is that Mr. Webber has received conflicting messages from the IRS regarding allowance of the credit elect over the years.  Certainly, removing an earlier link in the chain of credit elects would affect the 2013 tax year.  Part of the problem is that the review by Appeals during his CDP hearing was not honoring a prior IRS letter allowing the credit elect for tax years 2004 and 2005.

This order deals with both an IRS motion for summary judgment and Mr. Webber’s response, which contains a motion to dismiss and a motion to remand.

Mr. Webber presents the issue raised, the availability of the credit elect for tax year 2013, as a challenge to the existence of an underlying liability.  He contends that no valid CDP hearing was conducted asking to dismiss for lack of jurisdiction, but also asking for a remand back to Appeals for them to take appropriate action.  The judge finds dismissal for lack of jurisdiction to be unwarranted.  Regarding remand, Judge Gustafson says it may or may not be necessary based on the IRS argument concerning the credit elect issue in the CDP hearing so no remand at this time.  Both motions are denied (the motion to remand denied without prejudice).

While the Court is not adjudicating Mr. Webber’s entitlement to the overpayment underlying the credit elect in 2013, the Court does have the responsibility to determine if the IRS allowed the overpayment but failed to credit it.  The Court states that is a genuine dispute of material fact since Appeals gave a statement in 2012 that they are allowing the full amount of the claimed credit elect for 2004 and 2005.  Appeals stated in the more recent CDP hearing that the question needed to be resolved outside Appeals so the Court reviews possible reasoning (statute of limitations, non-determination years, or refunds received).  None of that is conclusive so there is a genuine dispute of fact, leading to denial of the motion for summary judgment.  The parties are currently filing joint status reports to the Court.

Bob Kamman wanted to let us know about some coincidences – there is a citation in this order to a published Tax Court opinion from 2012 that also involves a credit-elect dispute in a CDP context.  The taxpayer is named Hershal Weber and the opinion was written by Judge Gustafson.  The more things change, the more they stay the same?

Stance on Motions to Dismiss During Pandemic?

Docket No. 10386-19S, Salvador Vazquez, v. C.I.R., Order available here.

This order is rather short, but notable.  The order begins by stating this case was scheduled for the Los Angeles trial session beginning June 1 before COVID-19 disrupted the Tax Court calendars.  The IRS filed a motion to dismiss for failure to properly prosecute on May 6, stating that the petitioner failed to respond to numerous attempts by the IRS to make contact.

Judge Carluzzo states:  “Under the circumstances and at this stage of the proceedings, we are reluctant to impose the harsh sanction that respondent requests. Our reluctance, however, to impose the sanction at this time in this case should not in any way be taken as a suggestion that a party’s behavior, as petitioner’s behavior is described in respondent’s motion, could not support such a sanction under appropriate circumstances.”

It is too soon to tell if this is any type of new position for the Tax Court regarding motions to dismiss during these pandemic times.  Since then, the judge ordered the parties to, separately or together, submit reports by August 24.

Conservation Easements

In recent years, the IRS has been taking a harder stance against several organizations that have claimed deductions for the donations of conservation easements.  For those looking to learn more about the issues, I recommend listening to two of the June 2020 podcast episodes from Tax Notes Talk.  A problem I have noticed is that both the bad apples and the good ones have been swept up in the IRS enforcement efforts.  For example, a request I have seen from the good apples is that they would like to get sample language from the IRS on how to draft documents relating to the conservation easement donation that will be satisfactory to the IRS.

One current development regarding conservation easement cases is that the IRS announced in IR-2020-130 that certain taxpayers with syndicated conservation easement issues will receive letters regarding time-limited settlement offers in docketed Tax Court cases.  Perhaps that will help reduce the conservation easement cases on Tax Court dockets.

  • Docket No. 5444-13, Oakbrook Land Holdings, LLC, William Duane Horton, Tax Matters Partner v. C.I.R., Order available here.

Oakbrook Land Holdings would like to reopen the record to add four deeds from the Nature Conservancy that have language to support the argument that Oakbrook’s deed doesn’t violate the regulation regarding their conservation easement donation.  The Court ruled the evidence is merely cumulative.  Also, the Conservancy’s comments, not practices, are what is discussed so the proffered deeds won’t change the outcome of the case.  The motion to supplement the record is denied.

  • Docket No. 10896-17, Highpoint Holdings, LLC, High Point Land Manager, LLC, Tax Matters Partner, v. C.I.R., Order available here.

This case required a look to state law in Tennessee regarding interpretation of the deed at issue and that does not help Highpoint Holdings.  The IRS motion for partial summary judgment is granted and the parties are to submit their status reports on how to proceed in the case.

Innocent Spouse

Docket No. 4899-18, Doris Ann Whitaker v. C.I.R., Order available here.

This is an innocent spouse case that came to Tax Court as Ms. Whitaker is seeking relief from joint liability for 2005 income tax, pursuant to IRC 6015(f).  Ms. Whitaker has not completed high school and is employed as a nurse’s aide.  When filing the 2005 tax return, income attributable to her then-disabled and drug-addicted husband was not reported on the return.  Ms. Whitaker did not report his income as she incorrectly understood “married filing jointly” to mean “married filing separately”.  Basically, she thought filing the joint return took care of her obligations and her husband was required to file his own separate return.

The IRS filed their motion for summary judgment, arguing “there remains no genuine issue of material fact for trial”.  The Court, when reviewing the facts and circumstances, takes Ms. Whitaker’s education and resources into account and finds this factor is sufficient to prompt a holding that there is a genuine issue of material fact to prompt denial of the motion without prejudice.

However, what to make of the recent amendment to IRC 6015(e)(7)?  The amendment requires the Tax Court to review applicable innocent spouse cases based on (A) the administrative record established at the time of the determination, and (B) any additional newly discovered or previously unavailable evidence.  What should be done with motions for summary judgment in conjunction with these evidentiary requirements?  In this case, only the IRS motion is on hand.  The Court has the discretion to construe an opposition to a summary judgment motion as a cross-motion for summary judgment but only where the parties have adequate notice and adequate opportunity to respond.  There was no such notice to treat Ms. Whitaker’s opposition as a cross-motion.  The Court orders the parties to communicate toward settlement.  The next order is for the IRS to file a certified administrative record and motion for summary judgment based on that record.  Ms. Whitaker is ordered to file any objections she would have about the administrative record, a response to the motion and a cross-motion for summary judgment.  The Clerk of the Court is also ordered to serve on Ms. Whitaker a copy of the information letter regarding the local Low Income Taxpayer Clinics potentially providing assistance to her (this case is being worked by Winston-Salem IRS Counsel so presumably this would be the 2 North Carolina clinics).

There have been subsequent orders filed in this case.  The first order relays that in a telephone conference between the parties that the IRS is conceding the IRC 6015 issue in the case so the parties are ordered to file a proposed stipulated decision or joint status report no later than July 17.  The second order relays that the IRS filed a motion for entry of decision on June 24, proposing a zero deficiency and no penalty due for the 2005 tax year, after applying IRC section 6015(b), and there is no overpayment in income tax due to petitioner for the 2005 tax year.  However, the motion states that the petitioner objects so Ms. Whitaker is to file no later than July 24 a response to the motion explaining why it should not be granted and a decision should be entered in this case.

Unless there is a procedural issue in her case I am overlooking, I find this to be a win for Ms. Whitaker and think she should not file a response to the motion.

Short Takes on Issues

  • Docket No. 6946-19SL, Soccer Garage, Inc., v. C.I.R., Order available here.

This case concerns Collection Due Process regarding a levy and penalties for failure to file.  The IRS argues there was an intentional disregard of the filing requirement.  There are not enough facts provided regarding the petitioner’s intent so the Court denied the IRS motion for summary judgment.

  • Docket No. 10662-19W, Wade H. Horsey v. C.I.R., Order available here.

Mr. Hosey requested the reconsideration of the determination of a whistleblower claim and his motion was denied.

  • Docket No. 6560-18, Mark Alan Staples v. C.I.R., Order and Decision available here.

Mr. Staples filed a motion for new trial that the Court had to recharacterize as a motion for reconsideration of findings or opinion.  Mr. Staples made arguments about the characterization of his retirement benefits, Constitutional arguments, and generally argued about his computation regarding tax year 2015.  The Court denied the motion as the IRS computations were in line with the Court’s memorandum findings of fact and opinion.  On this case, I am generally confused by the petitioner’s actions – was he a tax protestor or just ignorant of tax procedure?  Either way, his motion was filed in vain.

 

Public Comment and LITCs: Bringing Client Voices To the Administrative Process

We welcome guest blogger Madeleine DeMeules who was a student of my clinic during the past semester.  She spent time this semester working on the Clinic’s brief to the 11th Circuit in an innocent spouse case, giving her a basis for reflecting on the process and offering some ideas to the IRS about its form.  The Clinic tries to comment on matters that impact low income taxpayers when the IRS offers the opportunity.  I was fortunate that Madeleine had the experience from her case work to provide several comments to the IRS we hope might improve the process.  Keith

The Harvard Federal Tax Clinic is a Low Income Tax Clinic (“LITC”), one of many such organizations nationwide that are sponsored by the IRS and work to serve low- and moderate-income taxpayers through individual representation as well as systemic policy work.

As a rising third-year law student with the Harvard Tax Clinic, I recently had the opportunity to work with our Clinic on an important piece of written advocacy on behalf of our clients. At the beginning of June, the Clinic submitted feedback to the IRS in response to its request for public comment on upcoming changes to IRS Form 8857. This is the form that taxpayers use to submit a request for innocent spouse relief under § 6015 of the Internal Revenue Code. In short, the innocent spouse provision of the tax code allows married taxpayers who have filed joint returns to seek relief from liability arising from the deceptive, improper, or otherwise inequitable behavior of a spouse. While there are many interesting facets to this particular type of IRS proceeding, a few in particular are worth mentioning:

  • First, the Internal Revenue Code phrases the innocent spouse provision in gender neutral language (i.e., referencing “individuals” and “spouses”). However, at least 90% of § 6015 litigants are women. See Stephanie McMahon, What Innocent Spouse Relief Says About Wives and the Rest of Us, 37 Harv. J.L. & Gender 141, 149 (2014).
  • Second, individuals who request innocent spouse relief may have experienced some form of abuse in their marriage, sometimes connected to the tax liability at issue.
  • Third, the Taxpayer Advocate Service—an independent organization that works from within the IRS to be a voice for taxpayers—has described innocent spouse relief as one of the most frequently litigated issues within the IRS as recently as 2017.

As any one of these points demonstrates, the stakes can be high in an innocent spouse case. Coupled with the difficulties of litigating complex tax issues pro se, these high stakes make innocent spouse cases an ideal issue for LITC clinics to assist clients with. Many clinics, including ours, make innocent spouse work an important part of their docket.  

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Significantly, LITC clinics may meet their clients at a variety of time points throughout a case. Sometimes clinics and clients encounter each other before a proceeding begins, and the clinic can help the client prepare their case from the initial filing of Form 8857. In other cases, a clinic might not meet their client until after administrative proceedings have begun, but before an appeal or Tax Court petition has been filed. From this spectrum of experience, then, clinics have the opportunity to observe and learn from their clients about what it is like to fill out IRS forms like 8857 without the aid of counsel. At seven pages long, Form 8857 is detailed; it goes without saying that completing it on one’s own is difficult. As a result, clinics are aware that the presence or absence of counsel at the outset of a case can influence a client’s eventual chances of success.  This is particularly important because of the changes to the Code last year which place additional emphasis on the administrative record.

In our recent comments to the IRS, the Clinic sought to summarize what we have learned from our clients in order to give the IRS specific suggestions about how it can improve Form 8857 for the range of taxpayers that encounter this form, and in particular for those clients that must proceed pro se because clinics are unable to reach them or do not have enough capacity. We suggested five changes, two of which are summarized below to illustrate the types of concerns that our clients have, and that we believe the IRS should account for as it updates Form 8857.

1. Form 8857 should include a voicemail contact permission.

The IRS sometimes calls taxpayers with questions after they submit Form 8857, but only during restricted business hours. Currently the IRS cannot leave voicemails, so taxpayers with irregular work schedules may be missing out on contacts with the IRS that could involve clarifying questions about their submission and potentially help their case. Low- and moderate-income individuals may juggle work schedules with changing shifts, or even multiple jobs. Adding a voicemail permission to Form 8857 is a simple change that should greatly increase the ability of all taxpayers to make contact with the IRS and participate fully in their case. 

2. Form 8857 should give taxpayers the option to identify as ESL and list their first or preferred language.

Currently, the IRS only offers Form 8857 in one translated format—Spanish—even though the agency has language resources, including phone interpretation, in over three hundred language and dialects. By collecting this information from taxpayers who wish to share it, the IRS will be better equipped to connect ESL taxpayers submitting Form 8857 with existing language resources. Additionally, the Clinic could find no published data about the language needs of the over 50,000 taxpayers annually who submit Form 8857. This addition to the form will allow the IRS to collect that data in a meaningful manner; at the Clinic, we hope that this data can be used in the future to make the case for translating Form 8857 into additional languages. 

While we at the Clinic of course hope that our comments will encourage the IRS to adopt the specific improvements we suggested, we also hope that the IRS appreciates the people and the perspectives that we sought to represent in this comment. In 2018, LITCs around the country served over 19,000 low-income taxpayers. By participating in public comments proceedings like these, our Clinic seeks to amplify the voices of the clients that we serve. We hope that the presence of their voices in the administrative process reminds that IRS that it serves these clients too.

Over the last two weeks, George Floyd’s death has reminded our country that society does not work the way it works by happenstance. Our society is the way it is because it is built on systems—systems of race, power, and privilege that are shaped by choices and constructed to produce specific results. The tax system is no exception: it directly influences how our society thinks about and interacts with pressing topics like healthcare, marriage, immigration, and income inequality. I am heartened that Harvard’s Clinic appreciates the importance of bringing as many voices as possible to the administrative process, so that as administrative agencies like the IRS continue to shape these systems, they do so with as much knowledge as possible about the needs of the people they serve.

Seventh Circuit Affirms Tax Court’s Discretion to Weigh Actual Knowledge More Heavily than Four Positive Factors for Innocent Spouse Relief

Last summer, I alerted PT readers here to an innocent spouse case, Jacobsen v. Commissioner, T.C. Memo. 2018-115, that Keith and I were litigating in the Seventh Circuit on behalf of the Harvard tax clinic.  We took on the appeal of one year (2011) where the taxpayer did not get equitable innocent spouse relief from the Tax Court under section 6015(f) from the unreported taxes on the taxpayer’s former wife’s embezzlement income.  For that year, the Tax Court held that because the former wife was already jailed when the return was filed and because the taxpayer helped a CPA prepare the return, the taxpayer had actual knowledge of the deficiency.  Of course, while actual knowledge is fatal to relief under subsections (b) and (c), it is not supposed to be fatal under subsection (f) equitable relief.  Knowledge (whether actual or reason to know) is only supposed to be one factor of seven factors to consider under subsection (f), as elaborated on by Rev. Proc. 2013-34, 2013-2 C.B. 397.  Under the liberalizing 2013 Rev. Proc., unlike under the earlier Rev. Proc. 2003-61, 2003-2 C.B. 296, actual knowledge was now to be weighed no more heavily than reason to know in the factor analysis.  And, in the case, the Tax Court held that of the remaining factors, four were positive for relief – marital status, lack of significant benefit, compliance with future tax filing and payment obligations, and serious health issues.  So, it struck Keith and me as wrong – and as not consistent with what most Tax Court judges were doing – for the court to have still denied relief in this case.  It seemed to us that the Tax Court had not, in substance, applied the Rev. Proc. (which, concededly is not binding on the court, but which the court generally follows and purported to follow in the case).

Keith and I hoped a reversal of the Tax Court in the Jacobsen case would have a salutary effect on Tax Court judges not to overweigh the actual knowledge factor.  And, this would be the first appeals court to ever have to apply Rev. Proc. 2013-34 (surprisingly).  Then, during briefing of the appeal, Congress enacted the Taxpayer First Act, which amended section 6015(e) to add paragraph (7) providing that the Tax Court should decide innocent spouse cases on a de novo standard and a supplemented administrative record.  Because the amendment applied to pending cases, the Jacobsen Seventh Circuit opinion would also be the first to consider the impact of subsection (e)(7) on appellate review.

Well, we lost. In Jacobsen v. Commissioner, 2020 U.S. App. LEXIS 4544 (7th Cir. Feb. 13, 2020), in a published opinion, the Seventh Circuit upheld the Tax Court’s ruling, though noted that this was a close case and that, had it been the trier of fact (and not employing deferential appellate review), it might have ruled for the taxpayer.

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Given Jacobsen, I am not sure that any court of appeals will ever reverse the Tax Court on a section 6015 ruling against a taxpayer.  My research before the clinic’s taking on the appeal revealed that, while taxpayers occasionally obtained a reversal of the Tax Court under the former innocent spouse provision at section 6013(e) (in effect from 1971 to 1998); see, e.g., Resser v. Commissioner, 74 F.3d 1528 (7th Cir. 1996); no taxpayer since 1998, in 14 tries, had obtained a reversal of the Tax Court under section 6015.  See Asad v. Commissioner, 751 Fed. Appx. 339 (3d Cir. 2018); Nunez v. Commissioner, 599 Fed. Appx. 629 (9th Cir. 2015); Deihl v. Commissioner, 603 Fed. Appx. 527 (9th Cir. 2015); Karam v. Commissioner, 504 Fed. Appx. 416 (6th Cir. 2012); Maluda v. Commissioner, 431 Fed. Appx. 130 (3d Cir. 2011); Greer v. Commissioner, 595 F.3d 338 (6th Cir. 2010); Golden v. Commissioner, 548 F.3d 487 (6th Cir. 2008); Aranda v. Commissioner, 432 F.3d 1140 (10th Cir. 2005); Feldman v. Commissioner, 152 Fed. Appx. 622 (9th Cir. 2005); Alt v. Commissioner, 101 Fed. Appx. 34 (6th Cir. 2004); Doyle v. Commissioner, 94 Fed. Appx. 949 (3d Cir. 2004); Mitchell v. Commissioner, 292 F.3d 800 (D.C. Cir. 2002); Cheshire v. Commissioner, 282 F.3d 326 (5th Cir. 2002); Wiksell v. Commissioner, 2000 U.S. App. LEXIS 5857 (9th Cir. 2000).  The taxpayer losing string continues.

An interesting issue in the Seventh Circuit in Jacobsen was its discussion of the appellate standard of review in light of section 6015(e)(7).  As to what would be “inequitable” under section 6015(f), the IRS argued for abuse of discretion review, and the taxpayer argued for clear error review.  There isn’t much of a difference between the two standards, but (e)(7) was designed to prevent the Tax Court from giving deference to IRS rulings under (f), which had been held though, until Porter v. Commissioner, 132 T.C. 203 (2009), to be reviewed by the Tax Court on an abuse of IRS discretion standard.  In Porter, the Tax Court held it would henceforth decide (f) issues on a de novo standard – the position adopted by statute in (e)(7).  And at least some Tax Court judges had said that the Tax Court does not exercise equitable discretion under (f), but merely makes a factual finding of what would be “unfair”.  Cf. Hall v. Commissioner, 135 T.C. 374, 391-392 (2010) (Thornton and Holmes, JJ., dissenting) (arguing that by using the word “inequitable” in § 6015(f), Congress did not imply the rules of equity practice, but rather only meant that it would be “unfair” to hold the taxpayer liable;  “A request for relief under section 6015(f) is called a request for ‘equitable relief’ not because it is a request for reformation, rescission, specific performance, or accounting, but because to a reasonable decisionmaker at the IRS it would be unfair to hold one spouse jointly liable with another for a particular tax debt.”).  Factual findings are usually reviewed by appellate courts for clear error.  

In Jacobsen, the Seventh Circuit dodged the appellate review standard issue in the following discussion:

Although the parties agree generally that we review the Tax Court’s decisions “in the same manner and to the same extent as we review district court decisions from the bench in civil actions,” 26 U.S.C. § 7482(a)(1); Gyorgy v. C.I.R., 779 F.3d 466, 472–73 (7th Cir. 2015); Resser, 74 F.3d at 1535, they disagree as to whether that means we review the denial of relief under § 6015(f) for clear error or an abuse of discretion.

The parties’ differing views on the standard of review hinge in part on the Taxpayer First Act, legislation that was passed shortly after the parties filed their briefs. See Pub. L. No. 116-25, 133 Stat. 981 (July 1, 2019). As relevant here, § 1203 of the Taxpayer First Act added a new paragraph at the end of § 6015(e) codifying the existing practice of de novo review by the Tax Court of appeals from the denial of innocent spouse relief. Because this addition to § 6015 simply “clarified,” see Pub. L. No. 116-25, § 1203 (“Clarification of equitable relief from joint liability.”), the existing standard and scope of Tax Court review, the Commissioner maintains it has no effect on our standard of review. Thus, argues the Commissioner, denial of relief under § 6015(f) should be reviewed in the same manner as any determination of equitable relief in the district court—for abuse of discretion. See, e.g., Bowes v. Ind. Sec. of State, 837 F.3d 813, 817 (7th Cir. 2016) (explaining general applicability of abuse of discretion standard to equitable determinations).

Jacobsen, however, insists that the Taxpayer First Act confirms his position that we review decisions under § 6015(f) for clear error. Jacobsen explains his reasoning as follows: (1) the Taxpayer First Act makes equitable relief under § 6015(f) mandatory as opposed to discretionary; (2) mandatory relief under subsection (f) “is now the same as mandatory relief under subsection (b),” which also contains an inequity condition; and so (3) Tax Court rulings under subsection (f) should be reviewed under the same standard as subsection (b). Jacobsen finds further support for his position with the fact that subsection (b) is a continuation and expansion of former § 6013(e), which we held in Resser was subject to clear error review, 74 F.3d at 1535.

We are unconvinced, however, that the Taxpayer First Act (which settled only the Tax Court’s standard of review of IRS determinations) sheds any particular light on our standard of review as to relief under § 6015(f), which multiple courts have recognized as for abuse of discretion. See Greer v. C.I.R., 595 F.3d 398, 344 (6th Cir. 2010) (innocent spouse relief under § 6015(b) reviewed for clear error but equitable relief under § 6015(f) reviewed for abuse of discretion); Cheshire v. C.I.R., 282 F.3d 326, 338 (5th Cir. 2002) (same). Fortunately, we need not resolve the issue today, as we would affirm the Tax Court’s decision under either deferential standard.

Slip op. at 9-11 (emphasis in original; some citations omitted).

As to the underlying issue of whether the Tax Court could let actual knowledge outweigh four positive factors for relief, the Seventh Circuit wrote:

Because each of the factors for consideration was either neutral or favored relief, Jacobsen claims the Tax Court must have weighed knowledge more heavily than the other factors, in contravention of Rev. Proc. 2013-34 § 4.03(2)(c)(i)(A). Nothing in the Tax Court’s opinion, however, suggests that it believed knowledge of the embezzled funds necessarily precluded Jacobsen from equitable relief or automatically outweighed the other factors for consideration. Although the 2013 regulations make clear that knowledge is no longer necessarily a strong factor weighing against relief, as Jacobsen himself acknowledges in his brief, they do not prohibit the Tax Court from assigning more weight to petitioner’s knowledge if such a conclusion is supported by the totality of the circumstances. As explained in the Revenue Procedures, “no one factor or a majority of factors necessarily determines the outcome.” Rev. Proc. 2013-34 § 4.03. And although knowledge no longer weighs heavily against relief, nothing in the statute or revenue procedures forecloses the decisionmaker from concluding that in light of “all the facts and circumstances,” § 6015(f), knowledge of the understatement weighs heavily against granting equitable relief. There is thus no reason to believe the Tax Court’s decision was necessarily erroneous because only one of the nonexhaustive factors for consideration weighed against relief.

Jacobsen also suggests it was inappropriate for the Tax Court to factor his “participation in preparing the 2011 return” into its assessment, characterizing it as “another way for the court to extra-count” Jacobsen’s knowledge of the embezzlement. In assessing the role of Jacobsen’s knowledge in his entitlement to equitable relief, the court noted that in addition to Jacobsen’s actual knowledge on account of Lemmens’ criminal conviction and sentence, in 2011 Jacobsen himself provided the tax information to the paid preparer, whereas in previous years Lemmens had always prepared and submitted the tax information. Far from demonstrating that the Tax Court erred, the court’s consideration of his role in preparing the 2011 return demonstrates its commitment to heed the Revenue Procedure’s directive that the seven listed factors merely provide “guides” as opposed to an “exclusive list” and that “[o]ther factors relevant to a specific claim for relief may also be taken into account.” Rev. Proc. 2013-34 § 4.03(2).

It is clear from its opinion that the Tax Court considered the factors relevant to Jacobsen’s specific claim for relief. The court considered Jacobsen’s individual circumstances as it analyzed each of the listed factors. Jacobsen does not argue, nor could he, that the Tax Court misapprehended the facts or otherwise overlooked information relevant to Jacobsen’s claim.

We are sympathetic to Jacobsen’s situation, and recognize that the Tax Court could have easily decided on this record that Jacobsen was entitled to equitable relief under § 6015(f). Indeed, were we deciding the case in the first instance as opposed to on deferential review, we may have decided the case differently. But notwithstanding the existence of many factors favoring relief and only Jacobsen’s knowledge counseling against it, nothing in the record indicates the Tax Court misapprehended the weight to be accorded Jacobsen’s knowledge or treated it as a decisive factor barring relief. Indeed, its discussion of each of the factors as well as the relevance of Jacobsen’s involvement in preparing the 2011 taxes demonstrate that the Tax Court did not engage in a mechanical balancing of the factors where the number of factors favoring relief necessarily counterbalanced the ultimate question of whether it was inequitable to hold Jacobsen liable for the 2011 deficiencies. We thus cannot say the Tax Court either abused its discretion or clearly erred in its denial of relief for 2011.

Slip op. at 16-18 (emphasis in original; some citations omitted).

Based on our research (much of which we incorporated in the briefing in Jacobsen), the Jacobsen case is unusual in letting so many positive factors be outweighed by only one negative factor.  But, if other Circuits are going to be so deferential in reviewing the Tax Court’s weighing of factors, it is hard to imagine any taxpayer ever being able to mount a successful attack on a Tax Court judge’s weighing of the factors.  About the only chance for reversing the Tax Court may be if the Tax Court made a factual error as to whether a particular factor was positive, negative, or neutral for relief.

That brings me to Sleeth v. Commissioner, T.C. Memo. 2019-138.  Like Jacobsen, Sleeth is one of those outlier cases where the Tax Court unusually treated knowledge as outweighing multiple other factors for relief.  Sleeth is an underpayment case, where the taxpayer signed returns showing balances due (two of which were being filed late), but where the taxpayer’s husband, a doctor making $418,000 a year, failed to later fully pay the balances due that initially aggregated, in tax alone, about $354,000.  The Tax Court held that the taxpayer had reason to know that the taxes would never be fully paid because the taxpayer knew that in a prior year, the husband had once used an installment agreement.  As in Jacobsen, the Tax Court in Sleeth held that the taxpayer had not proved she would suffer economic hardship if forced to pay the liabilities, so this factor was neutral.  As in Jacobsen, the court in Sleeth found three other factors favored relief:  marital status, lack of significant benefit, and compliance with later tax return filing and payment obligations.  The main difference between the two cases is that, while Jacobsen had a serious health issue that favored relief, Sleeth did not.

Sleeth had paid counsel in the Tax Court, but she could not afford to pay counsel for an appeal.  The Harvard tax clinic, pro bono, is now representing her in an appeal to the Eleventh Circuit (Docket No. 20-10221).  If the Eleventh Circuit is as deferential as to the weighing of factors as the Seventh Circuit was in Jacobsen, Sleeth will have a hard time in obtaining victory.  However, there are arguments that the Tax Court erred in its holdings with respect to the knowledge and financial hardship factors.  So, it is still possible that Sleeth will break the unbroken string of taxpayer losses in appeals of innocent spouse cases from the Tax Court.  The appellate briefing in Sleeth has only just begun.