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

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

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

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

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

read more...

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

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

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

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

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

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

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

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

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

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

Indeed, the Conference Committee Report states:

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

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

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

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

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

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

Observations

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

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

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

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

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

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

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

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

Congress Set to Enact Only Now-Unneeded Innocent Spouse Fixes, Part 2

This is the second part of a two-part post on innocent spouse legislative changes proposed to be made in the Taxpayer First Act of 2019. 

This part of the post discusses the bill’s proposed change that would override an existing IRS regulation that provides for a 2-year limit for filing a request for innocent spouse relief under section 6015(f).  Of course, the IRS has long ago abandoned enforcing that regulation limit and has issued proposed regulations that follow the proposed statutory amendment.  So, this provision is essentially unnecessary, unless you don’t trust the IRS to stick with the position that it has now maintained since 2011. 

This part of the post also details three other proposed changes to the innocent spouse section that Nina Olson has previously sought, but that, sadly, are not included in the bill.

read more...

Background on 2-Year Rule

For a spouse to elect relief under subsection (b) or (c), the statute requires that an election be made no later than 2 years after the IRS commences collection activities. Subsection (f) equitable relief applies only if relief is not available under the other 2 subsections, but the subsection (f) contains no provision for a date by which relief under it must be requested.

In a 2002 regulation (Reg. sec. 1.6015-5(b)(1)), the IRS provided that a request for subsection (f) relief must be made no later than the same 2-year deadline applicable to elections for relief under subsections (b) or (c).

In Additional Legislative Recommendation #1 of her 2006 Annual Report to Congress, at Vol. I, pp. 540-541, Nina Olson first recommend that Congress amend subsection (f) to provide that a taxpayer may request relief thereunder at any time that the collection statute of limitations is open.

Then, in Lantz v. Commissioner, 132 T.C. 131 (2009) (en banc), the Tax Court held that Congress had deliberately spoken by its silence in not providing for a statute of limitations for requesting relief under subsection (f), and, therefore, the regulation was invalid.  

The IRS appealed Lantz and similar Tax Court rulings that followed it to various Circuits. Three Circuits promptly disagreed with the Tax Court and held that the regulation was valid.  Lantz v. Commissioner, 607 F.3d 479 (7th Cir. 2010); Mannella v. Commissioner, 631 F.3d 115 (3d Cir. 2011); Jones v. Commissioner, 642 F.3d 459 (4th Cir. 2011).

Information provided to Congress by Ms. Olson in early 2011 provoked letters from Congress to the Commissioner in April 2011 asking the IRS to withdraw its regulation under subsection (f) as not in accordance with Congressional intent.

A few weeks after those letters, I had a chat with Ms. Olson in the hallway at the May 2011 ABA Tax Section meeting.  She told me that the IRS was worried that if there was no 2-year limit, then taxpayers would forever request relief under subsection (f).  I told Ms. Olson that this was not a real concern, since taxpayers would only request relief from balances due while the collection statute of limitations under section 6502 was still open and would seek refunds only while the statute of limitations for refunds under section 6511 was still open.  I told her that the situation was analogous to that for people seeking relief from penalties under section 6404(f) on account of erroneous IRS written advice. I pointed out to her that there is a regulation under section 6404(f) (Reg. sec. 301.6404-3(e)) that provides: 

An abatement of any penalty or addition to tax pursuant to section 6404(f) and this section shall be allowed only if the request for abatement described in paragraph (d) of this section is submitted within the period allowed for collection of such penalty or addition to tax, or, if the penalty or addition to tax has been paid, the period allowed for claiming a credit or refund of such penalty or addition to tax.

I suggested that such section 6404(f) regulation could be modified for a replacement section 6015(f) regulation. To my embarrassment, minutes later, in a speech she gave to the whole Tax Section, she thanked me for “solving” the Service’s Lantz regulation repeal concern.

Christine and I represented a taxpayer in a Lantz-type case, Ms. Coulter, in the Second Circuit.  After oral argument there (held the day after the Fourth Circuit opinion was filed in Jones), it appeared that the Second Circuit intended to affirm the Tax Court and create a Circuit split.  However, the Second Circuit never ruled in the Coulter case because, in July 2011, the IRS issued Notice 2011-70, 2011-2 C.B. 135, stating that the IRS would no longer argue for any 2-year limit for requesting relief under subsection (f).  The Notice stated: 

Individuals may request equitable relief under section 6015(f) after the date of this notice without regard to when the first collection activity was taken.  Requests must be filed within the period of limitation on collection in section 6502 or, for any credit or refund of tax, within the period of limitation in section 6511.

In 2013, the IRS issued proposed regulations that would incorporate the filing deadlines set out in Notice 2011-70.  REG-132251-11, 2013-2 C.B. 191.  However, those proposed regulations have not yet been finalized.

Proposed Statutory Language on 2-Year Rule Repeal

Despite the legislation probably no longer being needed, section 1203(a)(2) of the Taxpayer First Act of 2019 would amend section 6015(f) to add a new paragraph (2) reading as follows:

(2) LIMITATION. — 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.

Other Needed Statutory Fixes Not Adopted

In prior posts here and here, I have noted that Ms. Olson has also requested that Congress amend section 6015 to:

  1. Make the subsection (e) filing deadline nonjurisdictional and subject to equitable exceptions. NTA 2017 Annual Report to Congress, Legislative Recommendation #3, at Vol. I, pp. 283-292.  This change would result in the overruling of three recent opinions where employees of the IRS accidentally misled taxpayers into filing late by telling the taxpayers the wrong date for the 90th day.  In the cases (where the Harvard clinic was counsel for the taxpayers), the taxpayers argued that the subsection (e) filing deadline is not jurisdictional and is subject to estoppel and equitable tolling.  The appeals courts all held that the filing deadline is jurisdictional, so cannot be subject to equitable exceptions.  Rubel v. Commissioner, 856 F.3d 301 (3d Cir. 2017); Matuszak v. Commissioner, 862 F.3d 192 (2d Cir. 2017); and Nauflett v. Commissioner, 892 F.3d 649 (4th Cir. 2018).
  2. Clarify that section 6015 relief can be raised in district court collection suits brought by the DOJ. NTA 2007 Annual Report to Congress, Additional Legislative Recommendation #3, at Vol. I, pp. 549-550.  This change would overrule a number of district court opinions that have held that they lack jurisdiction to give section 6015 relief in such suits.  See, e.g., United States v. Elman, 110 AFTR 2d 2012-6993 (N.D. Ill. 2012); United States v. LeBeau, 109 AFTR 2d 2012-1369 (S.D. Cal. 2012), and United States v. Stein, 116 AFTR 2d 2015-6504 (W.D. Ky. 2015) 
  3. Clarify that section 6015 relief can be raised in district court and Court of Federal Claims refund suits brought by taxpayers. NTA 2018 Annual Report to Congress, Legislative Recommendation #4, at Vol. I, pp. 387-391.  This change would overrule the district court magistrate’s opinion in Chandler v. United States, 2018 U.S. Dist. LEXIS 174482 (N.D. Tex. 2018), adopted by district court at 2018 U.S. Dist. LEXIS 173880 (N.D. Tex. 2018), which held that district courts lack jurisdiction to consider section 6015 relief in tax refund suits.

It is unfortunate that these more urgent fixes to the statute have been ignored.  I wonder, though, if the reason that these additional proposals have been ignored is that they are opposed by the IRS, but the changes proposed for the Taxpayer First Act of 2019 have not been so opposed (because, really, not changing current IRS practice)?  It would be unfortunate if the Congress is giving the IRS veto power over good ideas to amend section 6015.

Congress Set to Enact Only Now-Unneeded Innocent Spouse Fixes, Part 1

Sometimes, Congress drives me batty.  Its latest silliness is proposing to resolve legislatively two formerly-contested issues under the section 6015 innocent spouse provisions in the taxpayer-favorable ways that the courts and the IRS already had settled those issues many years ago.  

Section 1203 of the new Taxpayer First Act of 2019, as introduced in both houses, proposes to modify section 6015 in two ways: (1) It would codify judicial holdings that reviews of IRS determinations of equitable relief under subsection (f) are de novo as to scope and standard, and (2) It would amend subsection (f) to codify the IRS notice from 2011 that allows essentially unlimited time to request relief — effectively overruling the 2-year limit for requesting such relief contained in Reg. Sec. 1.6015-1(b)(5).  These are proposals that Nina Olson had long ago sought in prior annual reports to Congress (in 2011 and 2006, respectively). The House bill, H.R. 1957, was marked up in the Ways & Means Committee on April 2.  The Senate bill, S. 928, has been introduced by Senator Grassley, the Chair of the Finance Committee, but has not yet been marked up.

Sadly, however, the Taxpayer First Act of 2019 will not also amend section 6015, as Nina Olson has also asked in her annual reports, (1) to make the subsection (e) filing deadline nonjurisdictional and subject to equitable exceptions and (2) to clarify that section 6015 relief can be raised in district court collection suits brought by the DOJ and in district court and Court of Federal Claims refund suits brought by taxpayers. The latter changes would actually modify current case law.

In this first of a two-part post, I will only discuss the scope and standard of review modification.

read more...

Background on Trial Scope and Standard

I apologize to older PT readers who vividly recall the battles described below, but since many of the events happened a decade ago, younger PT readers may be unaware of the battles and the number of en banc Tax Court opinions that formed parts of those battles.  Below is my own description of the background, but you can also find the Joint Committee on Taxation’s description of the background at “Description of H.R. 1957, The ‘Taxpayer First Act of 2019’”, JCX-15-19 (Apr. 1, 2019).

Shortly after the section 6015 innocent spouse provision was enacted in 1998, the courts wrestled with the issue of what is the standard of judicial review under the equitable relief subsection, (f). While the courts and the IRS readily agreed that the standard of judicial review of determinations under subsections (b) and (c) is de novo, the courts decided that the standard of judicial review of determinations under subsection (f) is abuse of discretion. See, e.g., Cheshire v. Commissioner, 282 F.3d 326, 338 (5th Cir. 2002) (in which section 6015(b), (c), and (f) relief were raised as defenses in a Tax Court deficiency proceeding brought under section 6123(a)).  

There was also litigation over whether the Tax Court, in a stand-alone innocent spouse proceeding brought under section 6015(e), had jurisdiction to rule on subsection (f) relief and, if so, was the court limited to reviewing the administrative record, or did it do a trial de novo in which any relevant evidence could be introduced?

In Ewing v. Commissioner, 118 T.C. 494, 498-507 (2002) (en banc), the Tax Court held that it had jurisdiction to decide subsection (f) relief in a proceeding involving relief sought from an underpayment brought under subsection (e).  In a later opinion in the case, the Tax Court also held that the scope of such a proceeding under (f) was the same as that under subsections (b) and (c) — a trial de novo as to evidence — even though the standard of review under subsection (f) was abuse of discretion. 122 T.C. 32 (2004) (en banc).

Ewing was vacated by the Ninth Circuit because that court held that the Tax Court lacked jurisdiction to make subsection (f) determinations in subsection (e) stand-alone proceedings. 439 F.3d 1009 (9th Cir. 2006). Almost immediately thereafter, the Eighth Circuit agreed with the Ninth Circuit; Bartman v. Commissioner, 446 F.3d 785 (8th Cir. 2006); and the Tax Court reversed course on the jurisdictional question and decided to follow those appellate rulings. Billings v. Commissioner, 127 T.C. 7 (2006) (en banc).

In response, in December 2006, Congress amended subsection (e) to explicitly give the Tax Court jurisdiction to consider subsection (f) relief in stand-alone proceedings.

Thereafter, in Porter v. Commissioner (Porter I), 130 T.C. 115 (2008) (en banc), the Tax Court again held that relief under subsection (f) in a proceeding under subsection (e) was to be determined after a trial de novo as to evidence. And, the following year, in Porter v. Commissioner (Porter II), 132 T.C. 203 (2009) (en banc), the Tax Court held that, when Congress amended the statute in 2006, Congress also intended that henceforward the standard of judicial review under subsection (f) — whether in subsection (e) or deficiency proceedings — should be de novo.

The IRS challenged the rulings of both Porter I and II, not by appealing that case, but by appealing rulings in two other cases. However, in Commissioner v. Neal, 557 F.3d 1262 (11th Cir. 2009), relying on the reasoning of Porter I, the Eleventh Circuit held that a proceeding under subsection (e) concerning relief under subsection (f) should be de novo as to evidence admitted. (In Neal, which was argued before the Tax Court decided Porter II, the parties and the court continued to assume that the standard of review in such cases was for abuse of discretion.  See, id., at 1276.)  

And, in Wilson v. Commissioner, 705 F.3d 980 (9th Cir. 2013), the Ninth Circuit both (1) agreed with the Eleventh Circuit in Neal and the Tax Court in Porter I and held that the scope of review of determinations under subsection (f) was now de novo and (2) agreed with the Tax Court in Porter II that the standard of review was also de novo.

In 2011, Nina Olson asked Congress to amend section 6015 to codify the rulings in Porter I and IINTA 2011Annual Report to Congress, Legislative Recommendation #4, at Vol. I, pp. 533-536.

In 2013, the IRS announced that it would no longer contest the rulings in Porter I and II.  Notice CC-2013-011, Litigating Cases that Involve Claims for Relief from Joint and Several Liability Under Section 6015 (June 7, 2013).

However, just “to eliminate any ambiguity and preclude future changes in the IRS’s litigating position”, Nina Olson has continued to call for a legislative codification of the Porter I and II rulings — most recently in her Purple Book accompanying her 2018 Annual Report to Congress, pp. 91-92.

Proposed Statutory Language on Trial Scope and Standard

Section 1203(a)(1) of the Taxpayer First Act of 2019 would amend section 6015(e) to add at the end thereof a new paragraph (7) reading as follows:

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

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

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

Lesser Known Nuances of Innocent Spouse Relief, Designated Orders 2/11/2019 – 2/15/2019

During the week of February 11, 2019, Judge Buch designated a bench opinion in an innocent spouse case that highlights some lesser known nuances of the conditions and factors analyzed (Docket No. 24737-17L, Traci Newburn v. C.I.R (order here)).

These nuances are likely not new to more seasoned practitioners but may be helpful for those starting out or those who have not handled many innocent spouse cases.

read more...

The case itself involves a petitioner, the requesting spouse, who is a widow. Her late husband had a schedule C business that fixed and maintained the fire repression systems in commercial kitchen hoods and filters. Petitioner was not meaningfully involved in the operation of the business. The returns showed balances which were never paid, so petitioner requested equitable relief under section 6015(f).

Section 6015(f) requires the analysis of threshold conditions, and then a decision is made after analyzing the factors found in either the streamlined conditions or facts and circumstances test. The list of factors is found in Rev. Proc. 2013-34, but the Court routinely points out that it is not bound by the factors, only considers them to be guidelines and makes its decision based on the totality of the facts and circumstances. I won’t go on and reiterate all there is to know about innocent spouse relief, but instead focus on a few lesser known considerations addressed in the bench opinion.

The first lesser known nuances the Court identifies relate to one of the threshold conditions, specifically the seventh condition, which states, “absent certain enumerated exceptions, the tax liability from which the requesting spouse seeks relief is […] an underpayment resulting from the non-requesting spouse’s income.”

The nuances are found in the “enumerated exceptions.” While the record supports the fact that petitioner was not involved in the operation of the business, it is less clear whether petitioner had an ownership interest in the business because she was listed as a 50% owner on some of the tax returns. The Court points out that a requesting spouse may still meet the threshold condition if the ownership interest is solely due to the operation of community property law or was nominal. Petitioner and her late husband resided in a community property state, so the Court thinks that may be the reason for 50/50 ownership delineation listed on the returns. The Court also relies on petitioner’s testimony that she was not aware she owned an interest and was not involved in the business’s operations to decide that her ownership was nominal, and she satisfies this condition.

The next lesser known nuance is in the analysis of marital status, which is a factor found in the streamlined conditions and the facts and circumstances test. Generally, the factor favors relief if the requesting spouse and non-requesting spouse are considered not married due to divorce or legal separation. But where the non-requesting spouse has died, the requesting spouse is considered not married under Rev. Proc. 2013-34 if “the requesting spouse was not an heir to the non-requesting spouse’s estate that would have had sufficient assets to pay the liability.”

The Court here notes that the estate did not have sufficient assets to pay the liability, and therefore, petitioner is treated as not being married for purposes of the marital status factor.

The Court moves on to analyze the knowledge factor (which is also a factor found in the streamlined conditions and in the facts and circumstances test.) The knowledge factor is applied differently depending on whether the case involves an understatement or an underpayment. There can be cases where both an understatement and an underpayment are at issue, and in such cases both knowledge tests must be applied. In addition, the knowledge factor can be satisfied either with actual knowledge or a reason to know.

This case is an underpayment case, so the analysis is whether petitioner had knowledge or reason to know the balance would not be paid. The Court finds that petitioner did not have actual knowledge about whether the balance would be paid but did have reason to know it would not be paid. She had reason to know because she knew that she and her husband were experiencing financial difficulties around the time the returns were filed. They had recently sold their house in a short-sale and cut back on household expenditures.

The final nuance is found in compliance (which is only a factor in the facts and circumstances test). Compliance isn’t simply filing all required tax returns, but the compliance must also be in good faith. Filing several years’ worth of returns right before the trial, like petitioner did, is not complying in good faith.

After reviewing the above-mentioned factors, their lesser known nuances and examining the totality of the facts and circumstances, the Court denies petitioner relief in the designated bench opinion.

The Disappointed “Whistleblower” Tries Again

Docket No. 8179-17W, Robert J. Rufus v. C.I.R. (order here)

The last time we saw Mr. Rufus was in July of 2018 (see my previous post on this case here), when the Court granted summary judgment to the IRS. But the ever-persistent petitioner and his counsel are back with a motion to reconsider part of his case related to his supplemental claim.

The supplemental claim was about amended returns that the target filed, on which the target claimed bad debt deductions. With respect to this claim, the IRS’s position was that they “had not proceeded with an administrative or judicial action based on petitioner’s information.” This was determined by the administrative record and found not to be an abuse of discretion in the original opinion.

In support of his motion for reconsideration, petitioner argues several things, including that the Court made a substantial factual error, petitioner did not have enough opportunity to engage in discovery and that the information he provided was not tainted.

While petitioner argues he was still in the process of discovery when summary judgment was granted, he does not argue that he has newly discovered evidence – which would have potentially helped his motion for reconsideration. The Court takes issues with the fact that petitioner (who is, again, represented by counsel) did not raise this issue when responding to the IRS’s motion for summary judgment, so it finds he cannot raise it now.

The Court finds petitioner’s second referenced argument to be irrelevant. The revenue officer mistakenly thought the information petitioner provided was tainted so she documented the fact that she did not audit the return based on that information. The Court finds that this supports IRS’s argument, and does not support granting a motion for reconsideration – which puts an end to petitioner’s hope for a whistleblower award in this case.

The three remaining orders designated during the week of February 11 were all designated by Judge Carluzzo. In one order he denies the IRS’s motion to compel the production of documents because he surmises that petitioners’ failure to respond means they don’t have the substantiation required for their case, so compelling them to produce it will not change anything (here). In another order (here) he reinforces the Court’s arguably incorrect stance that a notice of determination is jurisdictional and not subject to equitable tolling  (see my previous post on this topic here). And in the final designated order, Judge Carluzzo grants the IRS’s motion to dismiss for lack of jurisdiction in a case where the petition was filed three years late with audit reconsideration documents attached (here).

IRS Still Ignores Allocation of Underpayment Mandated by 2011 Pullins Opinion in Computing Section 6015(f) Relief

I came back out of retirement to become the acting director of the Harvard Federal Tax Clinic for the first six months of this year, while Keith is on sabbatical.  One of the depressing things I just discovered is that the IRS is still ignoring the method for computing innocent spouse relief in underpayment cases under section 6015(f) that the Tax Court adopted (at least for some cases) in Pullins v. Commissioner, 136 T.C. 432 (2011).  In a nutshell, the IRS computers take the joint tax return liability as reported and allocate it between the spouses based on each’s relative proportion of total reported taxable income.  But, in Pullins, the court said that, at least in that case, relief should be to eliminate all tax except that which would be paid by the requesting spouse had she filed a married filing separately return.

I dealt with this issue when I was the director of a tax clinic at Cardozo School of Law some years ago, and every time I saw the allocation the IRS had done of the spouse’s taxes for purposes of underpayments cases, I had to ask the IRS to recompute the relief consistently with Pullins.  The IRS always did so at my request, increasing the amount of relief.  But, I shouldn’t have had to ask.  And I wondered about all the thousands of pro se requesting spouses out there who were seeking (f) relief in underpayment cases.  They would never have known to challenge the IRS computations of their relief the way I knew to make the challenge.

read more...

Last week, I consulted with a taxpayer who had reached a resolution of a Tax Court section 6015(f) underpayment case and who asked me to look at the IRS settlement computations.  Once again, the computations ignored Pullins.  The amount by which the taxpayer was being cheated was $300.  However, after I pointed this out to her, she decided not to make a fuss about this – not wanting to possibly jeopardize the settlement that she had already achieved on the major issue of getting relief at all.

But, I want to alert everyone to what is going on, and I hope the National Taxpayer Advocate will look into this matter.  After all, it is now almost 8 years since Pullins rejected the way the IRS computers are programmed to calculate section 6015(f) relief in underpayment cases.

The goal of the innocent spouse provisions (at least where there has been no abuse) is to relieve a requesting spouse only of the tax on the nonrequesting spouse’s income, not the tax on the requesting spouse’s income.  But, implementing this goal can be tricky.

If the tax as to which innocent spouse relief is sought is a “deficiency” – i.e., attributable to an audit adjustment increasing reported tax (a situation involving an “understatement”) – then relief may be available to the taxpayer under section 6015(b), (c), or (f).  Congress provided rules for calculating relief under section 6015(c) that provide, as a general rule, that “[t]he portion of any deficiency on a joint return allocated to an individual shall be the amount which bears the same ratio to such deficiency as the net amount of items taken into account in computing the deficiency and allocable to the individual under paragraph (3) bears to the net amount of all items taken into account in computing the deficiency.”  Section 6015(d)(1).  In a simple example, if the deficiency were $30,000, and the underlying adjustments to income were $80,000 of unreported income of the husband and $20,000 of unreported income of the wife, and the wife requested section 6015(c) relief, she could be relieved, at most, of 80% of the $30,000 deficiency – or $24,000.

The IRS uses this allocation system for subsection (c) relief also when computing relief from deficiencies under subsections (b) and (f).  And I take no issue with the IRS doing so.

However, there is no provision of section 6015 that tells the IRS how to compute relief under subsection (f) in an underpayment case – i.e., where the IRS has no issue with the tax reported on the return except that, when the return was filed, not all of the tax shown thereon was paid.  The IRS has filled this gap only in Manual section 25.15.3.9.2.1(7) (7/29/14), which states, in part:

If liability is attributable to both the RS [requesting spouse] and NRS [nonrequesting spouse], equitable relief will only be considered for the portion attributable to the NRS.

Note:

. . . .  Underpayments of tax are allocated based on each spouse’s pro rata share of the joint taxable income.

Note:

For purposes of determining how much of an underpayment is attributable to each spouse, the EITC and ACTC is allocated to each spouse in proportion to the spouse’s share of the adjusted gross income.

Imagine a case where the total tax shown on the joint return was $6,400 and the return only showed two items of income:  $80,000 of wages of the husband and $20,000 of wages of the wife.  After standard deductions for a married filing jointly return and two personal exemptions, assume that the taxable income is $58,000.  Imagine that the balance unpaid on that return is currently $4,000.  How much the requesting spouse should be relieved of under (f) is determined, in part, by how much of the total $6,400 of tax the requesting spouse already paid – either through income tax withholding, estimated tax payments, and payments made after the IRS commenced collection.  Under the Manual provision, though, the IRS would also say that the $6,400 of total tax should be allocated to the spouses 80% to the husband and 20% to the wife because that is their relative shares of the taxable income reported.  So, the wife would be allocated $1,280 of the reported joint tax liability of $6,400.

Pullins presented a similar fact pattern – i.e., the wife sought relief, and the wife’s income was relatively small compared to the total reported joint taxable income. Judge Gustafson, though, rejected the method the IRS used to determine section 6015(f) relief in that underpayment case.  Instead, he noticed that, had the wife filed a return as married filing separately, she would have had less tax.  That is because, by adding her income to her husband’s to file a joint return, both spouses got taxed at a high bracket.  But, her income alone would have been taxed at a low bracket if she had filed married filing separately.  In my example in the previous paragraph, the wife could have filed a married filing separately return showing only $20,000 of gross income.  Taking a combined standard deduction and personal exemption of, say, $11,000, the wife’s taxable income would have been only $9,000.  All of that $9,000 would be subjected only to the 10% tax bracket, so the tax she would have paid would have been about $900 – $380 less than her proportionate share of the joint liability.

In Pullins (at page 432), the judge wrote:

As we stated above, for purposes of determining the extent of her liability for or overpayment of tax on her own income, we use Ms. Pullins’s computation on the basis of married-filing-separately status, rather than the IRS’s computation that made a pro rata allocation of the reported liability (based on married-filing jointly status). To reckon the amount of tax liability that Ms. Pullins should have to pay because it is fairly attributable to her, we think that on the facts of this case it is reasonable to figure Ms. Pullins’s tax liability separately. The IRS’s method assumes a joint liability and then attributes to her a pro rata share of the joint liability, but the purpose of section 6015 is to grant relief from joint liability.  Under the IRS’s method, if we found Ms. Pullins to be otherwise entitled to section 6015 relief, we would nonetheless leave her liable for a portion of the joint liability.  Our aim here, however, is to figure Ms. Pullins’s own liability apart from joint liability and then ensure that we do not excuse her from paying her own liability.  To accomplish that aim, a determination of her separate liability, rather than an allocation of the joint liability, is most reasonable here. [footnotes omitted]

In footnote 8 on that page, the judge noted that the allocation that he was making was similar to one that would be made if it was determined that there was no joint return at all because the return had been signed under duress.  The footnote reads:

As an analogy, see 26 C.F.R. sec. 1.6013–4(d) (to allocate liability where a supposedly joint return was signed under duress, ‘‘The return is adjusted to reflect only the tax liability of the individual who voluntarily signed the return, and the liability is determined at the applicable rates in section 1(d) for married individuals filing separate returns’’ (emphasis added)). [emphasis in the Pullins original]

I think that Judge Gustafson declined to set down a general rule for all underpayment cases under section 6015(f) because he might want to adopt the IRS system of allocating the reported joint tax in proportion to relative taxable income when the requesting spouse was a person with much higher gross income than the nonrequesting spouse.  Also, there is the problem of the earned income tax credit.  If that credit applies for a married couple, it is only available if they file married filing jointly.  The nonrequesting spouse could not get any earned income tax credit with married filing separately status.  Section 32(d).

The case on which I was recently consulted was one like Pullins, where the requesting spouse had relatively small income compared to her husband’s and her income would have been taxed at a much lower rate had she filed a married filing separately return.  The return also involved no earned income tax credit.  Over the years, I have probably seen a half-dozen of this kind of case.  All presented this fact pattern.  My suspicion is that this is the typical innocent spouse case because, in my experience, the requesting spouse is usually the low earner in the family.

After almost 8 years since the issuance of Pullins, I think it high time that the IRS modify its Manual provision to reflect the Pullins system for calculating section 6015(f) relief in underpayment cases.  The IRS can adopt exceptions to deal with (1) the unusual situation of tax on a married filing separately return basis exceeding the allocation of the joint return tax in proportion to relative taxable income and (2) earned income tax credit returns.  I like the idea of allocating that credit between the spouses, though I would modify the allocation to be based on relative shares of the total earned income, not adjusted gross income.  After all, the tables for the earned income tax credit are computed with respect to combined earned income.

Update: Can District Courts Hear Innocent Spouse Refund Suits?

We welcome back frequent guest blogger Carl Smith. Carl discusses a case, Hockin, in which the Tax Clinic at the Legal Services Center of Harvard Law School has filed an amicus brief. If you read the brief filed by Ms. Hockin, to which we link below, you will learn the underlying facts of the case. Like the vast majority of innocent spouse cases these facts describe the sad circumstances that led her to request relief. Relief here for her, if she obtains it, will not make her whole monetarily because of the Flora rule. (Of course, relief would never make her whole in the true sense because the tax system can only assist her with the tax component of the difficult situation caused by the actions of her former husband.) 

This case should not only make us think about the jurisdictional issues raised by the innocent spouse provisions but also about how the application of the Flora rule prevents taxpayers without the wherewithal to fully pay in a short span of time to obtain the return of all of the money paid to the IRS for taxes that they do not owe. This situation describes most low income taxpayers. Keith

This is an update on two cases discussed by Keith in a recent post. The post primarily discussed the case of Chandler v. United States, 2018 U.S. Dist. LEXIS 174482 (N.D. Tex. Sept. 17, 2018) (magistrate opinion), adopted by judge at 2018 U.S. Dist. LEXIS 173880 (N.D. Tex. Oct. 9, 2018). Chandler was a district court suit in which an individual sought a refund for overpaying her equitable share of taxes on a joint return, taking into account innocent spouse relief under section 6015(f). In Chandler, the district court granted a DOJ motion to dismiss for lack of jurisdiction, holding that only the Tax Court could hear suits involving innocent spouse relief. Keith wondered whether there would be an appeal of this ruling of first impression with respect to innocent spouse refund suit jurisdiction.

In his post, Keith also mentioned the existence of a similar innocent spouse refund suit under section 6015(f) pending in the district court for the District of Oregon, Hockin v. United States, Docket No. 3:17-CV-1926. In that case, a similar DOJ motion to dismiss for lack of jurisdiction was pending, arguing that district courts cannot hear refund suits involving innocent spouse relief.

The update, in a nutshell, is that Chandler was not appealed, but Hockin has been set up as a test case, where nearly all the filings are in and linked to below.

read more...

Both under the original innocent spouse provision (section 6013(e), which existed from 1971 to 1998) and the current innocent spouse provision (section 6015, enacted in 1998), the district courts and the Court of Federal Claims had occasionally, and without objection from the DOJ, entertained suits for refund filed solely on the grounds that a taxpayer paid more than was required after the application of the innocent provisions.

Although the DOJ had apparently never done so before in any innocent spouse refund suit going back all the way to the 1970s and 1980s, in the summer of 2018, DOJ trial division lawyers in both Chandler and Hockin submitted motions to dismiss for lack of jurisdiction, arguing that, because Congress in 1998 enacted a stand-alone innocent spouse Tax Court action at section 6015(e) in which the Tax Court can find an overpayment under section 6015(b) or (f), the Tax Court is the sole court in which innocent spouse refund suits can now be filed (i.e., via section 6015(e)), and so neither the district courts nor the Court of Federal Claims has jurisdiction to entertain innocent spouse refund suits. The DOJ motions acknowledged only one rare exception to this position: Where there was a pending refund suit in a district court or the Court of Federal Claims (presumably on other issues) at a time when a taxpayer also filed a suit in the Tax Court under section 6015(e), the statute provides that the Tax Court innocent spouse suit should be transferred over to the court hearing the refund suit. Section 6015(e)(3).

In July, Keith and I were alerted to the existence of the motion in Hockin – but not the one in Chandler – by pro bono counsel for Ms. Hockin, J. Scott Moede, the Chief Deputy City Attorney of the Portland, Oregon Office of the City Attorney. Mr. Moede had taken on the Hockin case in his role as a regular voluteer with the Lewis & Clark Low-Income Taxpayer Clinic in Portland. That clinic suggested that Mr. Moede contact the Harvard Federal Tax Clinic because of the Harvard clinic’s interest in innocent spouse cases.

Working with summer students, in August, Keith and I put together a draft of a proposed amicus memorandum for Hockin arguing that the DOJ position was both ahistorical and contrary to the 1998 and 2000 legislative history of section 6015(e) that seemed to make clear that Congress enacted section 6015(e) to be added on top of all existing avenues for judicial review of innocent spouse issues, not to repeal or replace any prior avenues for judicial review.

Further, in the draft memorandum, we pointed out that the Trial Section’s motion in Hockin took a position directly contrary to the position that the DOJ Appellate Section had taken in three cases that the Harvard clinic had recently litigated. In those three cases, the DOJ Appellate Section urged the appellate courts not to worry about holding that a person who filed a late Tax Court suit under section 6015(e) must have her suit dismissed for lack of jurisdiction. The DOJ Appellate Section said that such a taxpayer could always still get judicial review of the IRS’ decision to deny innocent spouse relief by paying the tax in full, filing a refund claim, and suing for a refund in the district court or the Court of Federal Claims.

In both Hockin and Chandler, the taxpayers received a notice of determination denying innocent spouse relief, but did not try to petition the Tax Court within the 90 days provided under section 6015(e). Rather, after later making either partial (Chandler) or full (Hockin) payment, the taxpayers filed refund claims and brought refund suits in district court that were timely under the rules of sections 6511(a) and 6532(a) (though, for Hockin, the lookback rules of section 6511(b) limit the amount of the refund to only a portion of what Ms. Hockin paid). Thus, except for the full payment (Flora) rule problem in Chandler, the taxpayers had done exactly what the Appellate Section said they should do to get judicial review of innocent spouse relief rulings other than through section 6015(e).

In August, we sent a draft copy of the memorandum to the DOJ attorney in Hockin and asked whether the DOJ would object to a motion by the Harvard clinic to file it. This draft memorandum apparently triggered the DOJ’s desire to explore mediation in the case. So, the case was assigned to a magistrate for mediation, and further filings on the motion (including the amicus motion) were postponed.

Then, in September and October, the magistrate and district court judge, respectively, issued rulings in Chandler granting the DOJ’s motion to dismiss for lack of jurisdiction. That is how Keith, Mr. Moede, and I learned of the existence of the Chandler case presenting the identical jurisdictional issue. Although Ms. Chandler was represented by counsel, that counsel had filed no papers in response to the DOJ motion to dismiss in her case. Naturally, this led to the magistrate and judge in Chandler relying entirely on the DOJ’s arguments and citations in ruling for the DOJ.

In his recent post on Chandler, Keith raised the question whether the Chandler district judge ruling would be appealed to the Fifth Circuit. The first piece of news in this update is that Ms. Chandler decided not to appeal. Frankly, give the Flora full payment problem in the case, I think an appeal on the issue of whether the district court otherwise would have had jurisdiction would have been pointless.

But, the second piece of news is that, in November, mediation failed in the Hockin case. So, Hockin is now set up as a possible appellate test case, depending on the district court’s ruling.

The DOJ has now not objected to the Harvard clinic’s filing of an amicus memorandum in Hockin. That memorandum was filed on November 26.

On December, 21, Ms. Hockin (through Mr. Moede) filed her response to the DOJ motion. In her response, Ms. Hockin argued not only that the district court had jurisdiction over section 6015 innocent spouse relief refund suits, but also that she had raised in her refund claim two additional arguments: that she had never filed a joint return for the year and that the IRS should be bound to give her innocent spouse relief for the year because it had given her such relief for the immediately-following taxable year. As noted in the Harvard memorandum, the “no joint return” argument has been considered in district court refund lawsuits even predating the enactment of the first innocent spouse provision in 1971.

The DOJ will be allowed to file a reply by January 11.

On February 5, oral argument on the motion will be heard before a magistrate who was not involved in the mediation. Ms. Hockin has agreed to have this magistrate decide the jurisdictional motion without the involvement of a district court judge, but the DOJ has not yet similarly consented. If the DOJ does the same, and the magistrate dismisses the case, this would allow a direct appeal from the magistrate to the Ninth Circuit. If the DOJ does not consent, the magistrate’s ruling will have to be reviewed by a district court judge before a party could appeal any adverse ruling to the Ninth Circuit.

You can find here for Hockin, the DOJ’s motion, the Harvard clinic’s amicus memorandum, and Ms. Hockin’s response.

Finally, you may be aware of the recent amendment of 28 U.S.C. section 1631 that allows district courts and the Court of Federal Claims to transfer to the Tax Court suits improperly filed in the former courts. That amendment would not help Ms. Hockin, since her district courts suit was filed long after the 90-day period to file a Tax Court suit under section 6015(e) expired. So, her case, if transferred, would have to be dismissed by the Tax Court for lack of jurisdiction because the suit was untimely filed in the district court for purposes of the Tax Court’s stand-alone innocent spouse case jurisdictional grant. For Ms. Hockin, her only chance now for getting a refund attributable to the innocent spouse provisions is for the courts to agree that district courts have jurisdiction to consider innocent spouse refund suits.

 

The Intersection of Foreclosure and Innocent Spouse

In United States v. Charles LeBeau, No. 3:17-cv-01046 (S.D. Cal. Oct. 16, 2018) the district court stayed a foreclosure action brought by the IRS to allow the taxpayer’s wife to pursue her innocent spouse claim. Because the innocent spouse claim has a ways to go from a procedural perspective, it may be some time before the foreclosure case starts back up. The case provides an interesting look at the intersection of foreclosure and innocent spouse and deserves some discussion.

read more...

Victoria and Charles LeBeau were married at some point prior to 1980. They remain married though they are now legally separated. While the separation is legal, they continue to reside in the same house in La Jolla, California. For anyone not familiar with La Jolla, it generally has very nice houses near the ocean just north of San Diego. I will leave it to Bob Kamman to fill in the rest of the story on the value and location of the house. I am sure that Bob will find some interesting facts here that the opinion does not contain and that I am not tracking down. Keep a lookout in the comment section.

They bought the house in 1980 as joint tenants; however, they deeded the house to Victoria for no consideration in 1987. In 1988 Victoria transferred the property back to both of them for no consideration. Five days later they executed a deed of trust in favor of Security Allied Services to secure a loan of just over $300,000. In August of 1989, the couple transferred the property solely to Victoria again for no consideration. Charles created an entity known as Casa de Erin, LLC which the court describes as the alter ego/nominee of Charles and/or Victoria and in 2003 Victoria transferred the property to Casa de Erin for no consideration. In 2006 Casa de Erin rescinded the deed and transferred the property back to Victoria for no consideration and she remains the property’s nominal owner. The court notes that “upon information and belief, Charles LeBeau has continued to reside at the Property and has retained all the benefits and burdens of ownership.”

The IRS has already reduced its assessments to judgment and this case seeks to foreclose its lien on the property.

Given the recitation of facts in this case, I would not place a high value on Victoria’s chances of achieving innocent spouse status. If she was actively engaged in all of these transfers, innocence is not the word that comes to mind. In fact, the IRS denied her request for relief for many years though it did apparently grant her partial, but significant ($193,272) relief for 1995. She filed a petition with the Tax Court seeking review of the denial of relief on June 22, 2018. Charles has intervened in her Tax Court case presumably to argue that she should not be relieved of liability. (This is one of those cases where it might be really interesting to follow the pleadings if it did not require a trip to DC to the clerk’s office and 50 cents per page.) She asks that the district court stay the foreclosure of what I am presuming is a very nice place where they live and engage in deed swapping at a prodigious pace.

In the discussion section of the opinion the court first says that “the district court has no jurisdiction to decide an innocent spouse claim” citing to United States v. Boynton, 2007 WL 737725 (S.D. Cal. 2007) and Andrews v. United States, 69 F.Supp. 2d 972 (N.D. Ohio 1999). I do not necessarily agree with the court on this issue as discussed in the post in the Chandler case; however, the DOJ Trial Section attorney would have had difficulty arguing the opposite side of that issue.

The court next notes that it has broad discretion to stay proceedings noting that it must consider:

  • the possible damage which may result from the granting of a stay, (2) the hardship or inequity which a party may suffer in being required to go forward, and (3) the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay.

The defendants made the following arguments in support of a stay:

On the third factor, Defendants seek a stay pending resolution of the issues of “fraudulent transfers” and “nominee theory of ownership” now before the U.S. Tax Court arguing that Court lacks jurisdiction to consider these issues and a stay would avoid inconsistent rulings. On the second factor, they argue that a stay would cause hardship by being required to pursue litigation in two different courts. Lastly, on the first factor, Defendants content that a stay would not prejudice the government.

The court cites the Supreme Court’s decision in United States v. Rodgers, 461 U.S. 677 (1983) regarding its discretion to foreclose a federal tax lien on taxpayer’s property. We have discussed Rodgers before here in a case blogged by Les with some similarities to the LeBeau’s situation. After discussing the general Rodgers factors a court should weigh in deciding whether to permit foreclosure, the district court here cites to two prior cases in which someone claiming innocent spouse status sought to use that status as a basis for postponing foreclosure based on the Rodgers’ factors. In the first case, United States v. Battersby, 390 F. Supp. 2d 865 (N.D. Ohio 2005) the court did stay the action while in the second case, United States v. McGrew, 2014 WL 7877053 (C.D. Cal. 2014), aff’d, 669 Fed. App’x 831 (9th Cir. 2016) the court concluded Rodgers was inapplicable stating that “innocent spouse protection does not entitle [non-liable spouse] to prevent foreclosure on the Government’s tax liens.”

A third case exists out of South Carolina, which the LeBeau court does not mention, in which Carl Smith and Joe DiRizzo sought to assist the wife in her effort to stop foreclosure and seek innocent spouse relief, United States v. Dew. The IRS brought a foreclosure proceeding to sell some jointly owned property for liabilities of both Mr. and Mrs. Dew.  Late during the proceeding, Mrs. Dew filed a Form 8857, which had not yet been ruled on by the IRS.  The DOJ first asked the district court to ignore this belated filing.  And the court essentially did so in 2015 U.S. Dist. LEXIS 112979 (D. S.C. 2015), where it wrote in footnote 1:

The Court notes that Mrs. Dew filed objections asserting an “innocent spouse” defense pursuant to 26 U.S.C. § 6015(f). Even assuming such a claim can properly be raised for the first time in the objections, the innocent spouse defense cannot be considered by this Court because it lies within the exclusive jurisdiction of the tax court. See Jones v. C.I.R., 642 F.3d 459, 461 (4th Cir. 2011) (noting that § 6015(f) authorizes the “Secretary of the Treasury” to grant an innocent spouse relief; see also United States v. Elman, No. 10 CV 6369, 2012 U.S. Dist. LEXIS 173026, 2012 WL 6055782, at *4 (N.D. Ill. Dec. 6, 2012) (stating that “exclusive jurisdiction over [the defendant’s] innocent spouse defense under § 6015(f) lies with the Tax Court.”).

The Dews filed an appeal to the 4th Circuit arguing that the collection suit could not go forward.  Section 6015(e)(1)(B)(i) provides:

Except as otherwise provided in section 6851 or 6861 [26 USCS § 6851 or 6861], no levy or proceeding in court shall be made, begun, or prosecuted against the individual making an election under subsection (b) or (c) or requesting equitable relief under subsection (f) for collection of any assessment to which such election or request relates until the close of the 90-day period referred to in subparagraph (A)(ii), or, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final.

Mrs. Dew filed a response with the District Court arguing that 6015(e)(1)(B) was mandatory and asked, therefore, that foreclosure be stayed.  In response to this filing, the government finally agreed that it could not pursue collection against her for the taxes subject to the Form 8857, but still asked the court to foreclose and sell the property to satisfy Mr. Dew’s tax debts and Mrs. Dew’s tax debts that were not covered by the Form 8857.  See attached response. The court went ahead with the sale and instructed the distribution of proceeds in accordance with the government’s revised listing (excluding the Form 8857 liabilities). See the final revised order confirming the sale here.  The 4th Cir. then decided the appeal and held against the Dews.  670 Fed. Appx. 170 (4th Cir. 2016).  The entire text of the 4th Cir. opinion is as follows:

James and Veronica Dew (Appellants) appeal the district court’s order and judgment granting the United States’ motion for summary judgment in the United States’ action seeking to reduce to judgment Appellants’ federal income tax liabilities, and to foreclose the federal tax liens securing those liabilities on Appellants’ jointly owned real property. We have reviewed the record and have considered the parties’ arguments and discern no reversible error. Accordingly, we grant James Dew’s application to proceed in forma pauperis and affirm the district court’s amended judgment. United States v. Dew, No. 4:14-cv-00166-TLW (D.S.C. May 19, 2016). We dispense with oral argument because the facts [**2]  and legal contentions are adequately presented in the materials before this court and argument would not aid the decisional process.

In the Lebeau’s case the district court determined that the foreclosure case should be stayed against the LeBeaus until the end of the innocent spouse case. I do not find this result satisfying. Even if the Tax Court finds Victoria innocent, the IRS can still foreclose on the house and sell it subject to her interest. The decision would be much more satisfying if the court had explained why the Rodgers factors might weigh against allowing foreclosure to go forward. Was there something special about Victoria’s need for the house or even Charles’ need? I am assuming that they are not young at this point since they bought the house almost 40 years ago. Absent something special, I would allow the sale to go forward and hold her half in escrow. Since the innocent spouse determination does not prevent the sale, it does not seem that, by itself, it should hold up the sale.

It is possible that I am also someone jaundiced about her innocence given all of the transfers of the property recounted by the court but I recognize that there could be facts that would support a finding of innocent spouse status not brought out in this opinion. The significant delay that the court has provided here does prejudice the IRS unless one assumes that the property will continue to go up in value and that delay will ultimately benefit the IRS in that fashion.

 

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

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

read more...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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