The Limits of Community Property Relief When Spouses Split a Joint Business

We have not covered IRC 66(c) relief from community property taxation in detail on PT before.  Keith wrote about the 2018 case of U.S. v. Kraus, where the grant of personal relief under IRC 66 failed to lift the federal tax lien or prevent foreclosure of the lien. (Similar hurdles exist with IRC 6015.) We have also noted, in another post by Keith, that contesting the validity of a joint return is much more fraught in community property states, as it does not relieve the spouses of liability for each other’s income as it does in common law states. A December 2021 summary opinion by Judge Pugh, Wheeler v. Comm’r, provides an opportunity to further explore the limits of relief from community property taxation under IRC 66(c).

The Wheeler case caught my eye as I (with guest blogger Audrey Patten) finalized the updates to Robert Nadler’s classic book, A Practitioner’s Guide to Innocent Spouse Relief. In addition to updating the book generally, for the third edition we added new material including a chapter on community property states, with an overview of relief from community property taxation. For those wanting more detail, the Saltzman & Book treatise IRS Practice and Procedure has an excellent and thorough explanation at ¶ 7C.07.


Marriage and Divorce and a Jointly Owned Business

Ms. Wheeler and Mr. Turner resided in Texas during their marriage, during which they formed an S Corporation naming each spouse as a 50% shareholder. The opinion does not include many details about Ms. Wheeler’s involvement in the operation of the business, but she apparently performed work for the business including in 2015, the year at issue. The court finds that “Income reported on Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc., from Turner Investments was included on petitioner’s joint return with Mr. Turner for the three years (2012-14) before the year in issue. She was also issued Forms W-2, Wage and Tax Statement, reporting income from Turner Investments in years before 2015 and during that year, and she signed several checks for Turner Investments in 2013.”

When the couple divorced in 2015, Mr. Turner was awarded the business, and by the end of September 2015, Ms. Wheeler was no longer a shareholder.

The divorce decree provided that each spouse would file an individual income tax return for 2015, and “that for calendar year 2015, each party shall indemnify and hold the other party and his or her property harmless from any tax liability associated with the reporting party’s individual tax return for that year unless the parties have agreed to allocate their tax liability in a manner different from that reflected on their returns.”

Tax Troubles

Ms. Wheeler reported her W-2 income from Turner Investments on her 2015 tax return, but she did not report any pass-through income from Schedule K-1, which listed her as a 37.44856% shareholder for that year. The IRS subsequently issued a Notice of Deficiency and Ms. Wheeler timely petitioned the Tax Court, where she raised spousal relief as an affirmative defense.

Ms. Wheeler apparently viewed the 2015 net income from Turner Investments as equitably belonging to Mr. Turner, and therefore she sought relief under section 66(c) from the operation of community property taxation. (Because no joint return was filed for 2015, section 6015 was not applicable.)

The Court notes that

Texas is a community property State, and under section 66, married couples who do not file joint tax returns “generally must report half of the total community income earned by the spouses during the taxable year” unless an exception applies. Sec. 1.66-1(a), Income Tax Regs.

This general rule can lead to harsh results, as it does not depend on how income is actually received and spent. For example, in Hiramanek v. Comm’r, T.C. Memo. 2011-280, a preschool teacher who suffered years of abuse at the hands of her spouse would have been responsible for taxes on half of his much higher income as a corporate finance director, absent relief from community property laws. The Wheeler Court explains that

Section 66 provides that under certain circumstances a taxpayer may be relieved of Federal income tax liability on community property income earned by a spouse. Section 66(c) offers two types of relief to a requesting spouse — “traditional” and “equitable”. Sec. 1.66-4, Income Tax Regs.

Traditional Relief under IRC 66(c)

Traditional relief from community property taxation under IRC 66(c) is similar in many ways to “traditional” innocent spouse relief under IRC 6015(b), but in some ways it is more limited. The Court in Wheeler summarizes the four requirements:

(i) The requesting spouse did not file a joint Federal income tax return for the taxable year for which he or she seeks relief;

(ii) The requesting spouse did not include in gross income for the taxable year an item of community income properly includible therein, which, under the rules contained in section 879(a), would be treated as the income of the nonrequesting spouse;

(iii) The requesting spouse establishes that he or she did not know of, and had no reason to know of, the item of community income; and

(iv) Taking into account all of the facts and circumstances, it is inequitable to include the item of community income in the requesting spouse’s individual gross income.

As with 6015(b), many traditional relief cases under section 66(c) hinge on knowledge. For example, in the Hiramanek case linked above, the requesting spouse was not entitled to traditional relief under section 66(c) because she knew that her husband had been employed during the tax year.

The Wheeler case is different, and it highlights one big distinction between section 6015(b) and traditional 66(c) relief. Here, the Court stops at the second condition, finding that the business income included in the SNOD would not be treated as income of Mr. Turner under the rules of IRC 879(a) (which in turn reference section 1402):

Under section 1402(a)(5)(A), gross income and deductions attributable to a jointly operated trade or business are treated as the gross income and deductions of each spouse on the basis of their respective distributive shares of the gross income and deductions. Therefore, the rules contained in section 879(a) treat income from Turner Investments, a jointly operated trade or business, as the income of petitioner and Mr. Turner on the basis of their respective distributive shares. The income from petitioner’s 37.44856% ownership of Turner Investments and reported on her 2015 Schedule K-1 would not be treated as income of a nonrequesting spouse, and she therefore does not satisfy section 1.66-4(a)(1)(ii), Income Tax Regs. We therefore hold that petitioner is not entitled to traditional relief under section 66(c).

Although that finding is enough to prevent traditional relief, the Court also addresses Ms. Wheeler’s arguments that she did not know about the income. As with 6015 cases, the knowledge factor does not require knowledge of the tax law, only knowledge of the activity that produced the income. Given the history of joint returns reporting Schedule K-1 income, the Court finds that Ms. Wheeler had ample reason to know of the income. Nails in the coffin are (a) a provision in the divorce decree giving each spouse the duty to furnish to the other any information requested to prepare the 2015 tax return, and (2) the fact that Ms. Wheeler hired a tax preparer.

Equitable Relief Also Fails

In addition to the traditional relief outlined above, Section 66(c) contains flush language providing for equitable relief:

Under procedures prescribed by the Secretary, if, taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either) attributable to any item for which relief is not available under the preceding sentence, the Secretary may relieve such individual of such liability.

The procedures governing equitable relief under section 66(c) are the same familiar procedures and factors that govern equitable relief under section 6015(f), set out in Rev. Proc. 2013-34. (Hooray for tax simplification!)

The Court starts and ends its equitable relief analysis with the threshold requirement that the liability be attributable to the nonrequesting spouse. The attribution rule is not absolute, however. The Court notes that the Rev. Proc. provides for five exceptions, “(a) attribution solely due to operation of community property law, (b) nominal ownership, (c) misappropriation of funds, (d) abuse, and (e) fraud committed by the nonrequesting spouse.” Also, as the revenue procedure is not binding on the Court, in some cases judges have found that relief is warranted under slightly different fact patterns not captured by the five enumerated exceptions. This occurred for example in the Boyle case, which Les discussed here.

The Court finds that Ms. Wheeler does not meet any of the exceptions, and as she seeks relief from her own income items, she does not qualify for equitable relief. The Court also addressed other facts that Ms. Wheeler raised.

Petitioner does not meet any of these exceptions because: (a) the Schedule K-1 income from Turner Investments is attributable to her under section 1366, not solely by the operation of community property law; (b) the Schedule K-1 is in her name, and she did not rebut the consequent presumption that the income is attributable to her; (c) her failure to claim estimated tax payments (and the IRS’ subsequent refund of those excess payments to Mr. Turner pursuant to section 6402 and section 1.6654-2(e)(5)(ii), Income Tax Regs.) does not constitute misappropriation of funds; (d) she filed an individual return and did not establish how any prior abuse by Mr. Turner would result in her inability to challenge the treatment of items on a return that she filed individually after her divorce was finalized and with the help of her own return preparer; and (e) she did not argue or establish that fraud is the reason for an erroneous item. Nor are we persuaded that her failure to claim the estimated tax payments and the subsequent refund to Mr. Turner provided sufficient ground for equitable relief independent of these factors. While the facts here are unfortunate, they were not unavoidable. We therefore hold that petitioner is not entitled to equitable relief under section 66(c).


The Wheeler case is not really about community property taxation, despite the petitioner’s attempt at framing it that way. It appears that the SNOD did not rely on the law of community property taxation to charge Ms. Wheeler with income that was received by her ex-husband during their marriage. Rather, the SNOD relied on the Schedule K-1 issued separately to Ms. Wheeler, and the deficiency would have been the same if the parties had lived in a common law state.

If Mr. Turner had been the sole shareholder of Turner Investments for all of 2015, and the IRS had attempted to charge Ms. Wheeler with half of his net business income under community property principles, the analysis (and potentially the result) would have been very different.

It seems likely that Ms. Wheeler misunderstood the tax implications of her divorce agreement. As the business had been awarded to Mr. Turner and transferred to him by the end of September, it seems quite realistic to me that an unsophisticated taxpayer would believe the net business income for 2015 should fall entirely to Mr. Turner. In his blog about the case, CPA Ed Zollars observes that such misunderstandings are common in his experience, and he notes the difficulties that tax preparers often have in convincing their clients of the need to report community income.

As is unfortunately the usual case, the parties failed to coordinate when filing their 2015 returns. This is understandable given the opinion’s mention of abuse, but it left Ms. Wheeler at a disadvantage. Mr. Turner initially only claimed half of the estimated payments made by the business for the first three quarters of 2015. If the parties had coordinated, Ms. Wheeler could have claimed the rest of the estimated payments. As Ms. Wheeler did not claim any of them, the IRS later refunded them to Mr. Turner prior to this case. Now she is stuck with the liability but gets no benefit from the estimated payments. Mr. Turner seems to have acted in accordance with the tax laws and the divorce decree; the problem was likely Ms. Wheeler’s (or her preparer’s) misunderstanding of the full impact of the divorce decree on her 2015 taxes. It is unfortunate that responsibility for taxes on the net business income was not explicitly addressed in the decree.

January 2022 Digest

A lot has happened in the tax world since the year began, then filing season began last week, and the ABA Tax Section 2022 Virtual Midyear Meeting began yesterday. There are no signs that things will slow down soon, except for (maybe) IRS notices.

Procedurally Taxing will continually provide comprehensive updates and information, but if you fall behind with your reading or struggle to keep up- I’ll be digesting each month’s posts from here on out.

January’s posts highlighted the NTA’s Report, the ongoing impact of the pandemic, and recent Circuit splits.

National Taxpayer Advocate’s Report

NTA Report Released: Essential Reading: The Report is available and contains new features, including an enhanced summary of the Ten Most Serious Problems and a change in the methodology used to determine the Most Litigated Issues.

What are the Most Litigated Issues and What’s Happening in Collection?: A closer look at the Most Litigated Issues. EITC issues are often petitioned but rarely result in an opinion, suggesting that most are settled before trial. In Collection, lien cases referred to the DOJ have declined substantially over the years corresponding with the decline in Revenue Officers and resources.

Who Settles Cases – Appeals or Counsel (and Why?): An analysis of data on the number of Tax Court cases settled by Appeals or Counsel. An increasing percentage of settlements are handled by Counsel, but why? Possible reasons and possible solutions are considered.

read more…

Where Have Tax Court Deficiency Cases Come from in the Past Decade?: Most deficiency cases have come from correspondence exams of low- and middle-income pro se taxpayers. The focus of IRS examinations over the past decade has influenced the cases that end up in Tax Court. A shift in focus may be coming as IRS seeks to hire attorneys to specifically combat syndicated conservation easements, abusive micro-captive insurance arrangements and other tax schemes.

The Melt – Cases That Drop Away in Tax Court: Around 20% of Tax Court cases get dismissed each year- likely due, in part, to untimely filed petitions. Also due to a failure to prosecute, that is the petitioner abandoned the process somewhere along the way. Ways to address this issue are worth exploring, such as increasing access to representation and implementing a model utilized by the Veterans Court of Appeals.

Supreme Court Updates and Information

Who Qualifies as Press and the Boechler Supreme Court Argument Today: Being consider a member of the press comes with benefits, including the option to attend Supreme Court arguments with a press day pass when Covid-restrictions end. In lieu of being there in person, real-time broadcast links of Oral Arguments are made available on the Supreme Court website.

Transcript of Boechler Oral Argument: A link to the transcript of the Boechler Oral Argument is provided and Keith shares his in-person experiences observing the Supreme Court and the options available to others who are interested in doing so when Covid-restrictions end.

Pandemic-Related Considerations

Refund Claims and Section 7508A: A well-informed analysis of the disaster area suspensions under section 7508A and the refund lookback limits. Does the language in section 7508A allow for an extended lookback period? The IRS Office of Chief Counsel doesn’t think so, but TAS has recommended that Congress amend section 6511(b)(2)(A) for that purpose, and there is an argument that a regulatory solution is already available.

 Making Additional Work for Yourself and Others: The IRS has been cashing taxpayer payments without acknowledging receipt of the associated return. This improper recordkeeping resulted in the IRS sending CP80 notices to taxpayers requesting duplicate returns. This created more work for the IRS, practitioners, and clients. The IRS, however, recently announced it would stop doing this, as summarized directly below.

IRS Announces Stoppage of Notice to Paper Filers Who Remitted Payment and Tax Court Announces Continued Zooming: The IRS will stop requesting duplicate returns from paper filers who remitted payments with their original returns. Members of Congress also made specific requests to the IRS with the goal of providing relief to taxpayers until the IRS backlog is resolved, including temporarily halting automated collections, among other things. The Tax Court announced all February trial sessions will be by Zoom.

Practice and Procedure Considerations

“But I’ve Always Done It That Way!” Practitioner Considerations on Subsequent Year Exams: A TIGTA recommended change to IRS procedure may increase the audit risk for taxpayers who do not respond to audit notices. There is no blanket prohibition on telling clients about audit rates and general likelihoods of audit, so practitioners should be able to advise their clients of this potentially emerging risk and ways to avoid it.

New Rules in Effect for Refund Claims For Section 41 Research Credits Raise A Number of Procedural Issues: New rules for research credit refund claims require extensive documentation which increases costs and the risk of a deficient claim determination. Procedures for determinations were issued at the beginning of the month and have generated concern among practitioners because a determination cannot be challenged with a traditional refund suit and because the IRS modified regulatory requirements without utilizing formal notice and comment procedures.

Tax Court News

Tax Court Going Remote for the Remainder of January[and February]: January calendars (and now February, as mentioned above) scheduled in-person sessions have switched to remote sessions due to ongoing Covid-concerns.

Tax Court Orders and Decisions

The Tacit Consent Doctrine May Extend Far Beyond Signing a Joint Return: The Court in Soni v. Commissioner, allowed the tacit consent doctrine (where facts and circumstances led to finding of consent on the part of a non-signing spouse) to apply to returns, power of attorney authorizations and forms 872. The doctrine could be expanded in future cases, so it should be kept in mind when representing innocent spouses.

Timely TFRP Appeal?: The administrative 60-day deadline to respond to TFRP notices is discussed in an order requesting that the IRS supplement its motion for summary judgment. The origin of a deadline is important. Jurisdictional deadlines are different from administrative deadlines, and cases involving administrative deadlines can be reviewed for abuse of discretion.

Circuit Court Decisions

Eleventh Circuit finds Regulation Invalid under APA: The Eleventh Circuit, in Hewitt, calls into question who has the burden to show that a comment made during a notice and comment period: 1) was significant, and 2) consideration of it was adequate. The Tax Courts says it’s the taxpayer, the Eleventh Circuit says it’s the IRS, but what does this mean for everyone else?

The Fifth Circuit Parts Ways with the Ninth Circuit Regarding the Non-Willful FBAR Penalty: A difference in statutory interpretation results in a recent split between the Ninth and Fifth Circuits over whether the non-willful penalty under section 5321(a)(5)(A) should be assessed on a per-form or per-account basis. The Ninth Circuit held that legislative history, purpose, and fairness support a per-form penalty, but the Fifth Circuit held that Congress’ intent and the objective of the penalty support a finding that it’s per-account.

Goldring is Back with a Circuit Split: The Fifth Circuit addresses how underpayment interest should be computed on a later assessed deficiency when a taxpayer elects to credit forward an overpayment from an earlier filed return. It held “a taxpayer is liable for interest only when the Government does not have the use of money it is lawfully due.” This contrasts with other Circuits which have decided that the law allows the IRS to begin computing interest when an amount is “due and unpaid.”

Polselli v US: Circuit Split on Notice Rules for Summonses to Aid Collection: A recent Sixth Circuit decision continues a circuit split on a fundamental issue in IRS summons practice: does the IRS have to give notice when it issues a summons on accounts owned by third parties in the aid of collecting an assessed tax? The Sixth, Seventh and Tenth Circuits read section 7609 notice requirements and its exclusion without limitations, which contrasts with the Ninth Circuit’s more narrow interpretation.

D.C. Circuit Narrows Tax Court Whistleblower Award Jurisdiction: The D.C. Circuit overturns Tax Court precedent by holding that the Tax Court lacks jurisdiction over appeals of threshold rejections of whistleblower requests. Since all appeals of whistleblower cases go to the D.C. Circuit, the Tax Court is bound by the decision unless the Supreme Court takes up the issue. 

Liens and Judgments

Local Taxes and the Federal Tax Lien: The effect of the Tax Lien Act of 1966 was reiterated in United States v. Tilley.  Section 6323(a) sets up the first in time rule of law, but 6323(b) provides ten exceptions, including one for local property taxes, which allows a local lien to defeat a federal tax lien even when the local lien comes later in time.

Tax Judgments and Quiet Titles: Tax judgments can benefit the IRS beyond the 10-year federal collection statute of limitations. Boykin v. United States, like Tilley, involves real property held by nominal owners. The taxpayer brought suit to quiet title, the IRS counterclaimed that the money used to purchase the property was fraudulently transferred, and the taxpayer argued that a state statute of limitations prevented the IRS’s argument. The Boykin Court disagreed with the taxpayer relying upon Supreme Court precedent that state statutes do not override controlling federal statutes.

Bankruptcy and Taxes

Diving Beneath the Surface of In re Webb: An in-depth analysis of a technical bankruptcy issue that can impact taxes involving an election under section 1305, which allows postpetition tax claims to be deemed prepetition claims. The classification of the claims impacts whether a subsequent IRS refund offset violates a debtor’s rights.

2021 Year in Review – Administrative Matters Part 1

The job of my dreams from 15 years ago has just come open.  The University of Florida, home to one of the best LLM programs in tax in the country, has decided to make it even better by starting a low income taxpayer clinic.  When I was preparing for retirement from Chief Counsel back in 2007, I looked around for a teaching position and especially wanted one in Florida or somewhere in the South if I could not find one in Virginia.  I applied for a couple of positions in Florida but the schools had no interest in me, which was fortunate because I ended up at Villanova where I could not have been happier except that the weather in PA could have been warmer.  Then I moved even further North, reversing the path of most elderly folks, but again was very fortunate to land at the Legal Services Center of Harvard Law School.  Some lucky person will now have the opportunity to teach and to help taxpayers from a nice warm location.  The announcement:

The University of Florida Levin College of Law seeks a non-tenure-track Legal Skills Professor to serve as the instructor and director for our newly funded Low Income Taxpayer Clinic (“LITC”). This is a wonderful opportunity for a licensed attorney with substantial experience representing clients in disputes with the IRS and a passion for clinical legal education. We welcome applications from licensed attorneys already working in legal academia as well as practicing lawyers seeking to transition to legal academia.

Here’s the link to the position:

Lots of administrative matters this year as the IRS pushed out a third Economic Impact Payment (EIP) and pushed out the Advance Child Tax Credit payments.  Congress put a lot of burden on the IRS asking it to shoulder these tasks while the IRS sought to dig itself out from two difficult filing seasons with lots of backlogs.


ID Verification

Among other things that made the last two filing seasons difficult was the high number of ID verification requests the IRS made to taxpayers.  These requests came at an unprecedented scale.  I had the opportunity to ask Wage & Investment Commissioner Ken Corbin about the volume of these requests in a panel I moderated at the annual conference for Low Income Taxpayer Clinics.  He explained why the volume increased so dramatically and why it would probably go down significantly in the future.  Perhaps the IRS has explained this in other settings, but I had not seen an explanation previously.  His explanation made perfect sense.  The EIPs caused a high number of individuals to file a return who had not previously filed a return or who had not filed a return in a long time.  The returns of taxpayers not in the system generate a much higher level of potential fraud, particularly when filed for the purpose of obtaining a refund in one of these payment programs.  Consequently, the IRS sought to verify the ID of many more taxpayers than normal.  Unfortunately, it was unprepared for the call volume.  Fortunately, it has now developed a system rolled out in late November 2021 that should make the process go much smoother.

Misdated Notices

The IRS regularly sends out mail on a date other than the date on the correspondence.  I don’t condone the practice, but it’s been going on for quite some time.  In 2020, however, the IRS sent out millions of letters with the wrong dates and the wrong instructions, creating more confusion than necessary.  You can find our posts on these notices here and here.  During the pandemic, the IRS held off on sending out some of the notices that would have gone out on a regular cycle.  It did so both because it wanted to give taxpayers a break during the pandemic and because it could not staff the phone lines for the calls that would have inevitably resulted from the notices.  The problem continued in 2021.  As she did in 2020, the NTA blogged on the problem, providing a window into IRS action not otherwise available.  The 2021 correspondence problem does not implicate statutory time frames the way the 2020 misdated notices did.  Instead, the new problem involved the IRS sending 109,000 taxpayers a notice with incorrect information.  The notice not only wrongly told taxpayers of action the IRS did not take but contains a typographical error that compounded confusion.  See our posts here and here.

Cases for the Taxpayer Advocate

The Taxpayer Advocate issued guidance regarding the cases it would accept.  It needed to limit the cases it would take both because of case inventories and because it could do nothing about one of the biggest issues facing taxpayers – finding out what had happened to their return.  Because of significant and continuing delays in processing returns due to the pandemic, an unprecedented number of returns sat at IRS Service Centers waiting for someone to process them.  The delays especially impacted taxpayers who filed paper returns, amended returns and late returns.  These taxpayers turned to TAS when calls to the IRS proved unavailing or went unanswered; however, TAS cannot locate unprocessed returns sitting on a trailer outside of a Service Center.  The inability to turn to TAS for assistance provided further frustration for taxpayers, but the decision not to accept these types of cases seemed only logical given the inability to do much with these cases. 

In TAS-13-0521-0005: Interim Guidance on Accepting Cases Under TAS Case Criteria 9, Public Policy (05/06/2021), the National Taxpayer Advocate (NTA) put out guidance on the public policy cases that the Taxpayer Advocate Service (TAS) will accept.  The guidance regarding case acceptance expires on May 5, 2023. Under Code Sec. 7803(c)(2)(C)(ii), Congress listed several types of cases in which TAS will assist taxpayers and gave the NTA the authority to determine additional matters in which TAS will assist taxpayers. We discussed the issue here.

Updates from Independent Office of Appeals

Good news – Appeals has a customer service number: 559-233-1267.

Bad news – Appeals does not call you back if the case is unassigned, which would be my main reason for calling the number.

The update occurred as part of an event put on by the IRS for its stakeholders.  The executives from Appeals had a brief slide presentation which showed staffing and case levels in Appeals as of January 2021.

ITIN Acquisition

There have been changes made to processes at the ITIN unit related to issuing ITINs to dependents in Canada and Mexico.  Since the TCJA passed, the ITIN unit has begun to require proof of U.S. residency for dependents outside the U.S. prior to issuing an ITIN. These policies are not required by the statute or regulations and have perhaps some unintended consequences for vulnerable communities, particularly as they relate to the calculation of family size for the numerous federal and state agencies that use the tax return for this purpose. These policies also contradict the Form 1040 instructions which instruct taxpayers to include dependents from Mexico and Canada on the return.

Unfortunately for ITIN applicants, there is no easy way to appeal a rejection of an ITIN application, making these changes especially burdensome. Requesting an abatement of the math error notice that is issued after an ITIN rejection may provide the only way to appeal a rejected ITIN application. However, sometimes the IRS denies ITINs in situations where the inclusion of the ITIN applicant on the return does not change the amount of tax due, and no math error notice will issue. Creative litigators will have to figure out what remedies are available for a wrongfully denied ITIN application under these circumstances.

Exercise of Discretion Not to Offset Recovery Rebate Credits

The offset statute gives the IRS discretion to decide when to offset.  For the first two stimulus payments, Congress directed that the only offset would be for past due child support; however, it did not limit the IRS’ ability to offset when it passed the final stimulus payment.

A post by the NTA sets out some of the history on what the IRS did as it moved into the 2020 filing season. 

Congress prohibited offset of the first two stimulus payments (EIP), except against past due child support, which were made in 2020.  In passing the third stimulus payment (RRC), Congress did not create the same offset restriction.  Nonetheless, the IRS decided to exercise its discretion under 6402(a) with respect to the offset of federal tax refunds to federal tax liabilities.  The IRS allowed refunds based on RRC to pass through to taxpayers without being offset to satisfy prior federal tax debts.  Great news for persons with only federal tax debts in their portfolio of debts subject to offset under the Treasury Offset Program (TOP), but less good news for taxpayers with other outstanding obligations.  For a detailed discussion of offset and an explanation of TOP, you can read an article by me forthcoming in the Florida Tax Review found here.

The NTA points out two problems with the otherwise good news regarding the IRS decision to forego offset of refunds based on RRC.  First, the decision happened in the middle of the filing season after many taxpayers had already filed and already had their refunds offset.  A similar offset decision occurred in 2020 when the Department of Education decided during the middle of the filing season not to exercise its right to offset federal tax refunds (and other federal payments) against outstanding student loan debts.  Individuals who filed early (i.e., those most likely to have substantial refunds) get treated differently than those who wait. 

A similar issue occurred during the 2021 filing season with unemployment benefits that Congress decided mid-filing season to exclude from income (although the IRS created a way to fix this for early filing taxpayers without the need for them to file a superseding or amended return).  So many problems are created for tax administrators when Congress makes changes during the filing season.  The IRS deserves much credit the past two years for adjustments it has had to make during the filing season while operating under pandemic restrictions.  These type of adjustments can contribute to the processing delays for which the IRS gets a black eye.

Innocent Spouse and the Administrative Record

We received correspondence from PT reader James Everett of DeFranceschi & Klemm, PC in Boston.  Mr. Everett represents the taxpayer in Sutherland v. Commissioner, which Christine blogged here and I blogged here in the 2020 year in review post because of the importance of this case.  For those who do not remember Sutherland, it involves the issue of IRC 6015(e)(7) which limits Tax Court review in innocent spouse cases to the administrative record, including cases pending at the time of enactment that had already gone through the administrative process prior to the legislation creating the limitation.  The case was rescheduled for trial in 2021.

The national office interjected itself into the case and the IRS objected to all documents the taxpayer wanted to include with the stipulation that weren’t part of the “administrative” record (i.e., documents not provided during the administrative stage).  Judge Lauber made it clear he was going to require the IRS to call the appeals officer as a witness at the trial to discuss the record.  A few days before the trial, the IRS dropped its administrative record objections.  Judge Lauber asked the respondent’s counsel if this reflected Service-wide policy (i.e., the IRS agreed that §6015(e)(7) didn’t apply to pending cases); respondent’s counsel candidly replied that this was above his paygrade to comment on – he could only speak to the case at hand.

The withdrawal of objection to the administrative record was great, but based on the record it is not possible to tell if this was specific to the case, a rethink of IRS position, or just a lack of desire to have the AO testify.  The administrative record rule presents significant problems for individuals who go through the administrative process pro se, since they often fail to develop the full record needed if litigation occurs.  We really appreciate the insights provided by Mr. Everett and encourage other readers to provide similar insights if their cases have a significant procedural development.

2021 Year in Review – Cases

Despite the ability to access most courts only remotely for much if not all of the year, 2021 still produced a number of important tax procedure decisions.  Perhaps judges could produce more opinions because they did not need to travel or to hold lengthy in-person trials.  This post shows that not all cases are Graev cases.


Supreme Court matters

The Supreme Court handed down a unanimous opinion in CIC Services.  The Court holds that the Anti-Injunction Act does not bar a suit challenging an IRS notice that requires a non-taxpayer to provide information even though the failure to provide the information could result in a penalty.  Posts can be found  here, here, here and here.

The Supreme Court rejected the request for certiorari in Organic Cannabis v. Commissioner seeking a determination that the time period for filing a petition in Tax Court in a deficiency case is a claims processing period rather than a jurisdictional one but granted certiorari in Boechler v. Commissioner regarding the same issue but in the collection due process context.  The Boechler case will be argued before the Supreme Court on January 12, 2022.

Circuit Court matters

Coffey v. Commissioner, –F.3d – (8th Cir. 2021)  – in a case that fractured the Tax Court about as badly as it can be fractured, the Eighth Circuit, after initially projecting harmony and uniformity in its decision, fractured as well, reversing its initial decision which overturned the Tax Court’s fully reviewed opinion.  This action briefly reopened the door on the question of adequate filing of a return for purposes of triggering the statute of limitations, before reinstating the original holding through a new opinion by the panel. That new panel opinion can be found here. 

Taxpayers claimed that they were residents of the US Virgin Islands in 2003 and 2004 and filed returns with the Virgin Islands tax authority.  That taxing authority has a symbiotic relationship with the IRS and sent to the IRS some of the documents it received.  The IRS took the documents it received and concluded that M/M Coffey should have filed a US tax return.  Based on that conclusion, it sent the Coffeys a notice of deficiency.  The Coffeys argued that the notice of deficiency was sent beyond the statute of limitations on assessment since their filing with the US Virgin Islands tax authority also served as a filing with the IRS, starting the normal assessment statute.  The government argued that because the Coffeys did not file a return with the US, no statute of limitations on assessment existed.  After only eight years, the Tax Court sided with the Coffeys.  A mere three years later, the Eighth Circuit reversed in a unanimous three judge panel. 

On February 10, 2021, the Eighth Circuit granted a panel rehearing but denied a rehearing en banc.  Disagreements with the outcome of a circuit court usually result in a request for a rehearing en banc rather than a rehearing with the very panel that entered the decision.  So, this is a bit of an unusual twist in a case with many twists. After the vacating of the original opinion, the same panel issued a new opinion with some minor differences.

The result of the Eighth Circuit’s decision allows the IRS to come in many years later to challenge residence of individuals claiming Virgin Islands residence.  If the Coffeys had succeeded in this case, the procedural issue would have turned into a substantive victory, since the IRS would not have been able to make an assessment against them for the years at issue.

Gregory v. Commissioner, — F.3d – (3rd Cir. 2020) – This case was decided at the very end of 2020 so it is included here as it came out during last year’s end of year review and also because it is a case argued on appeal by the Tax Clinic at Harvard so including it provides another opportunity to showcase the work of the students.  The issue before the Third Circuit was whether the taxpayers’ use of Forms 2848 Power of Attorney and 4868 Request for Extension of Time constituted “clear and concise notice” of a change of address to the IRS pursuant to Treasury Regulation §301.6212-2.  Although filed as a non-precedential opinion, the outcome is a clear example of how the IRS cannot simply ignore the actual knowledge it has of a taxpayer’s address when issuing a Statutory Notice of Deficiency pursuant to I.R.C. §6212(b)(1), even if that taxpayer failed to follow the IRS’ prescribed procedures for changing their address. 

An odd ending to this case occurred when the Third Circuit returned it to the Tax Court.  Rather than simply entering an opinion for the taxpayers, the Court issued an order restoring the case to the general docket.  That order made no sense because the Gregorys unquestionably filed their Tax Court petition late.  This required the filing of a motion to have the court make a determination that the notice of deficiency was invalid, which it eventually did with no opposition from an equally confused government counsel.

In Patrick’s Payroll Services, Inc., v. Commissioner, No. 20-1772 (6th Cir. 2021), the Sixth Circuit upheld the decision of the Tax Court denying the taxpayer the opportunity to litigate the merits of the underlying tax because of a prior opportunity to discuss settlement with Appeals.  Guest blogger Chaim Gordon wrote about this case after the Tax Court’s decision and while the case was pending before the Sixth Circuit.  Chaim pointed out some of the novel arguments the taxpayer was making.  Unfortunately for the taxpayer, the Sixth Circuit was not buying what they were selling.

The 11th Circuit upheld the decision of the Tax Court in Sleeth v. Commissioner, — F.3d — 2021 WL 1049815 (11th Cir. 2021), holding that Ms. Sleeth was not an innocent spouse.  The Sleeth case continues the run of unsuccessful taxpayer appeals of innocent spouse cases following the major structural changes to the law in 1998. The Tax Court found three positive factors and only one negative factor applying the tests of Rev. Proc. 2013-34.  Yet, despite the multitude of factors favoring relief in each case, the Tax Court found that the negative knowledge factor required denial of relief.  This case follows the decision in the Jacobsen case from 2020 in which the Tax Court denied relief to someone with four positive factors for relief and only knowledge as a negative factor.  The pattern developing in these cases suggests that the Tax Court views the knowledge factor as a super factor, despite changes in IRS guidance no longer describing it as such.  Only economic hardship seems capable of overcoming a negative determination on knowledge.  In this post, Carl Smith discussed the Seventh Circuit’s decision in the Jacobsen case.  Both cases were argued on appeal by the Tax Clinic at Harvard.  The clinic also filed an amicus brief in the case of Jones v. Commissioner, TC Memo 2019-139, set to be argued soon before the 9th Circuit.

Lindsay v. U.S. is the latest case to apply the principle that United States v. Boyle essentially stands for the position that taxpayers have a nondelegable duty to be aware of tax deadlines. An agent’s incompetence or willful misconduct will not excuse the taxpayer from delinquency penalties.  Lindsay was incarcerated and executed a POA to Bertelson, an attorney, to manage his affairs, including filing his tax returns.  The attorney assured Lindsay he was doing so for the years 2012-15; instead he failed to file the returns and for good measure embezzled hundreds of thousands of dollars. The actions resulted in Lindsay receiving $705,414.61 in actual damages and $1 million in punitive damages.  Lindsay eventually filed his tax returns and paid over $425,000 in delinquency penalties. He filed a claim for refund; IRS rejected and he filed a suit in district court. The district court, contrary to the magistrate’s recommendation, granted the government’s motion to dismiss, citing Boyle as precluding a claim for relief. Following a timely appeal, the Fifth Circuit affirmed. In so doing, it applied Boyle to Lindsay’s somewhat sympathetic circumstances.

Tax Court

In Ramey v Commissioner, 156 T.C. No. 1 (2021), the Tax Court determined in a precedential opinion that when the IRS issues a notice of decision rather than a notice of determination and the taxpayer has filed the collection due process (CDP) request late, the Court lacks jurisdiction to hear the case.  The taxpayer, a lawyer, represented himself and pegged his arguments to last known address rather than jurisdiction.  Nonetheless, the decision expands the Court’s narrow view of jurisdiction to another setting without addressing the Supreme Court precedent on jurisdiction and its impact on the timing of the filing of documents.

Galloway v Commissioner, TC Memo 2021-24: This case holds that a taxpayer cannot use the CDP process to rehash a previously rejected offer in compromise (OIC).  Mr. Galloway actually submitted two OICs that the IRS rejected.  As an aside, from the description of the OICs in the Court’s opinion, the rejections seemed appropriate strictly from an asset perspective, since he did not want to include the value of a car he owned but allowed his daughter to use. 

The case of Mason v. Commissioner, T.C.M. 2021-64 shows at least one benefit of submitting an offer in compromise (OIC) through a request for a collection due process (CDP) hearing.  As part of his lessons from the Tax Court series, Bryan Camp has written an excellent post both on the case and the history of offers. 

Friendship Creative Printers v. Commissioner, TC Memo 2021-19: This case holds that the taxpayer could raise the merits of delinquency penalties by the backhanded method of challenging the application of payments.  Taxpayer failed to pay employment taxes over an extended period of time and failed to file the necessary returns but at some point made payments on the earliest periods.  In the CDP hearing, taxpayer argued satisfaction of the earliest periods and eventually provided an analysis showing payments equal to the tax paid.

The Court treated this as a challenge to the merits of the delinquency penalties imposed.  Unfortunately, the taxpayer did not designate its payments, which meant that the payments it made were not applied in the manner it expected and argued in the CDP hearing.  Taxpayer also looked at the transcripts without appreciating the impact of accruals not reflected in the assessed portion of the transcript but accruing nonetheless.

Reynolds v. Commissioner, TC Memo 2021-10: This case holds that the IRS can collect on restitution based assessments even when the taxpayer has an agreement with the Department of Justice to make payments on the restitution award.  Taxpayer’s prosecution resulted in a significant restitution order. He agreed to pay DOJ $100 a month or 10% of his income.  At the time of the CDP case he was not working and did not appear to have many prospects for future employment. Citing Carpenter v. Commissioner, 152 T.C. 202 (2019), the Tax Court said that the IRS did have the right to pursue collection from him.  Obviously that right, at least with respect to levy, is tempered by the requirement in IRC 6343 not to levy when it would place someone in financial hardship, but no blanket prohibition existed to stop the IRS from collecting and therefore to stop it from making a CDP determination in support of lien or levy. The case is a good one to read for anyone dealing with a restitution based assessment to show the interplay between DOJ and IRS in the collection of this type of assessment, as well as to show the limitations of restitution based assessments compared to “regular” assessments.

BM Construction v. Commissioner, TC Memo 2021-13: This case involves, inter alia, a business owned by a single individual and the mailing of the CDP notice to the business owner rather than the business.  The Tax Court finds that sending the CDP notice to the individual rather than the business does not create a problem here, since the sole owner of the business would receive the notice were it addressed to the business rather than to him personally.

Shitrit v. Commissioner, T.C. Memo 2021-63, points out the limitations on raising issues other than the revocation of the passport when coming into the Tax Court under the jurisdiction of the passport provision.  Petitioner here tries to persuade the Tax Court to order the issuance of a refund but gets rebuffed due to the Court’s view of the scope of its jurisdiction in this type of case.

The case of Garcia v. Commissioner, 157 T.C. No. 1 (2021) provides clarity and guidance on the Tax Court’s jurisdiction in passport cases as the Court issues a precedential opinion to make clear some of the things that can and cannot happen in a contest regarding the certification of passport revocation.  I did not find the decision surprising.  The Court’s passport jurisdiction is quite limited.  Petitioners will generally be disappointed in the scope of relief available through this new type of Tax Court jurisdiction. 

Other Courts

In Mendu v. United States, No. 1:17-cv-00738 (Ct. Fd. Claims April 7, 2021) the Court of Federal Claims held that FBAR penalties are not taxes for purposes of applying the Flora rule.  In arguing for the imposition of the Flora rule, the taxpayer, in a twist of sides, sought to have the court require that the individual against whom the penalties were imposed fully pay the penalties before being allowed to challenge the penalties in court.  The FBAR penalties are not imposed under title 26 of the United States Code, which most of us shorthand into the Internal Revenue Code, but rather are imposed under Title 31 as part of the Bank Secrecy Act.

The case of In re Bowman, No. 20-11512 (E.D. La. 2021) denies debtor’s motion for summary judgment that Ms. Bowman deserves innocent spouse relief.  On its own, the court reviews the issue of its jurisdiction to hear an innocent spouse issue as part of her chapter 13 bankruptcy case and decides that it has jurisdiction to make such a decision.  The parties did not raise the jurisdiction issue, which is not surprising from the perspective of the plaintiff, but may signal a shift in the government’s position since it had previously opposed the jurisdiction of courts other than the Tax Court to hear innocent spouse cases.

Tax Court Lacks Jurisdiction in Innocent Spouse Case Pending Before District Court

In Coggin v. Commissioner, 157 T.C. No. 12 (2021) the Tax Court issued a precedential opinion interpreting IRC 6015(e)(3) regarding its jurisdiction to hear an innocent spouse case when a district court simultaneously has the same issues pending before it.  In her pleadings in district court Ms. Coggin sought a determination that she did not sign the joint returns with her husband.  This issue, while a prelude to a claim for innocent spouse status if unsuccessful, does raise a different legal argument than innocent spouse.  Because of the relationship between the two arguments, the IRS handles both at its Covington Service Center where it houses the innocent spouse unit.  The same employees who decide innocent spouse status also decides whether a joint return exists. 

This fact pattern will not occur with frequency, perhaps explaining why a precedential opinion first comes out almost a quarter century after passage of the legislation, but despite the unusual nature of the procedural posture the case highlights some issues that innocent spouse and joint return cases present.

Caught up in this case and addressed, though not decided, by the Tax Court is the issue of the jurisdiction of district courts to decide innocent spouse relief.  This is an issue that seems to split the Department of Justice Tax Division where the trial section argues the district courts lack jurisdiction while the appellate section argues the district court have jurisdiction.  We have discussed this quandary previously here chastising the Tax Division for arguing out of both sides of its mouth.  Perhaps the Coggin case will provide more clarity regarding the Tax Division’s view of the law but that will come at a later stage of this proceeding.


Ms. Coggin received the revelation that no spouse wants to receive, i.e., that her name was on several joint returns for which substantial tax liabilities existed.  She learned this just a few weeks prior to her husband’s death.  She took the position that she did not sign the joint returns and that joint liability should not attach.  In support of her position she filed married filing separate returns for the years at issue. We don’t get the full picture of the IRS response to her argument that she did not participate in the joint return; however, the IRS did not accept that position or this case would not exist.  Arguing against the treatment of the returns as joint implicates the issue of tacit consent on which we have a blog post coming in the near future.  Individuals like Ms. Coggin who have a tax filing responsibility and who do not file a separate return at the filing date face a particularly difficult time arguing that they did not intend to participate in the joint return; a difficulty that becomes more pronounced if they have filed jointly in the past.  This case does not get into the tacit consent issue, but it lurks in the background.

Because the IRS declined to accept her argument that she did not file a joint return, it did not accept the subsequently filed married filing separate returns on which she claimed refunds.  Instead, it sent to her notices of claim disallowance for 2007 (in February 2014) and for 2003 and 2004 ((in March 2017.)  In February 2016 she filed a refund suit which was amended a couple times and ultimately included 2001-2007.  In this suit she does not argue innocent spouse status but focuses on the joint return issue.

The IRS counterclaimed to reduce her liabilities to judgment opening the possibility of a very long time for the IRS to collect as discussed here.  Such a counterclaim would be standard practice since the facts needed to support the counterclaim usually mirror the facts necessary to defend against the refund claim.  For the same amount of work, the IRS obtains the benefit of a judgment.  This is a downside of bringing certain refund suits and something to consider in choice of forum.  A Tax Court opinion does not result in a judgment making it perhaps a more favorable forum if available and if the downside of a judgment exists.  In this case the counterclaim resulted in more work for the IRS since the court granted summary judgment finding that Mr. and Ms. Coggin filed joint returns but setting the counterclaim for trial on the issue of whether the innocent spouse provisions could relieve her from liability.

She then submitted Form 8857 on October 19, 2018, to the IRS requesting innocent spouse relief and requested that the district court stay the proceeding until the IRS had time to consider her request.  The district court granted her request stating:

[T]he Court finds first that a stay is warranted under 26 USC § 6015(e)(1)(B), which provides that no proceeding in court shall be prosecuted against an individual requesting relief under § 6015(b), (c), or (f). Defendant’s counterclaims are now being prosecuted in this Court, and the United States has not presented any case or analysis to show that § 6015(e)(1)(B) would not apply here. Moreover, even if that provision did not specifically apply here, the Court finds that * * * its equitable authority should be exercised to stay this proceeding while the Innocent Spouse defense is litigated. * * *

* * * [T]his case will be stayed pending resolution of Ms. Coggin’s Innocent Spouse defense through the administrative process. The stay will remain in place in this proceeding until it is lifted by further order of the Court. Because this case is being stayed to allow that matter to proceed administratively, any litigation freeze with the IRS should be lifted, and the administrative proceeding should be reopened to allow that Innocent Spouse defense to be processed. * * *

On December 6, 2019, Ms. Coggin filed a Tax Court petition seeking review of the administrative denial of her innocent spouse relief.  At the time of filing this petition, Ms. Coggin’s refund claims and the IRS counterclaim for 2002-2009 remained pending before the district court.  The IRS filed a motion to dismiss the Tax Court case for lack of jurisdiction based on section 6015(e)(3) which provides:

(3) Limitation on Tax Court jurisdiction. — If a suit for refund is begun by either individual filing the joint return pursuant to section 6532

(A) the Tax Court shall lose jurisdiction of the individual’s action under this section to whatever extent jurisdiction is acquired by the district court or the United States Court of Federal Claims over the taxable years that are the subject of the suit for refund, and

(B) the court acquiring jurisdiction shall have jurisdiction over the petition filed under this subsection.

In addressing the issue of its jurisdiction in this case, the Tax Court has some nice language for parties seeking to raise innocent spouse relief in a district court proceeding.  It states:

Two additional provisions in section 6015 indicate that innocent spouse claims may be brought in a legal forum other than the Tax Court. First, the text “any other remedy provided by law” found in section 6015(e)(1)(A) indicates that there are other instances in which innocent spouse relief may be sought. Second, section 6015(g)(2) provides an exception to the general rule of res judicata and in so doing indicates that an innocent spouse claim may be “an issue in” a prior proceeding:

The court notes that district courts have split on whether they have jurisdiction to hear innocent spouse cases citing the prior decisions on this point which we have discussed previously.  The Tax Court finds that it loses jurisdiction where the district court has jurisdiction over the same years.  Even though she could normally come to the Tax Court after denial of her innocent spouse request (or the passage of six months without action), she cannot do so in a situation in which the same tax years are pending before a district court.

In two of the years for which she sought innocent spouse relief in the Tax Court, the district court did not have jurisdiction.  For those two years the Tax Court denied the IRS motion to dismiss.  This leaves her with innocent spouse/joint return consent issues pending in both courts for different years.  It seems likely that the district court might decide the years before it first but that is not a certainty.

The decision here is in line with the statute.  She has not lost her ability to argue in court about her innocent spouse status but only lost the ability to move the entire case over to the Tax Court once it began in the district court and remained there unresolved.  This is not a common fact pattern but does serve as a reminder of one of the limitations on forum shopping – seeking to have the same issue move forward in two different courts at the same time.  On December 14, 2021, the Tax Court issued an order requiring the parties to file a status report and notify the Court of the issues for trial and a proposed schedule.

Knowledge Leaves Another Innocent Spouse Petitioner Standing at the Altar

Goode v. Commissioner, T.C. Summ. Op. 2021-34 finds another spouse seeking relief from liability under IRC 6015 failing because of the knowledge element and the lack of economic hardship.  As we discussed in the recent post entitled “Is Economic Hardship the Antidote for Knowledge in an Innocent Spouse Case?” the Tax Court has created an unmistakable pattern of finding against spouses who have knowledge of the item giving rise to the liability and do not prove economic hardship.  The Goode case is another case where the petitioner had three positive factors and only one negative factor, knowledge.  Despite the numerical advantage of the positive factors, the knowledge factor continues to enjoy the status of a superfactor unless the taxpayer seeking relief can successfully raise the antidote of economic hardship.


Revenue Procedure 2013-34 purports to drop the superfactor status of knowledge and the Tax Court generally purports to follow the Revenue Procedure but on this issue, the outcome appears quite predictable to the PT writers but we note that our non-computer based analysis may be at odds with the computer Blue J Legal, Inc which finds economic hardship a relatively unimportant factor and abuse the key to success. 

The folks at Blue J follow several issues and model the decisional law in order to predict outcomes in future cases.  They have presented at the ABA Tax Section meeting and a couple years ago provided Les and me a private demonstration.  If you are working with one of the issues they model, their work could be helpful in assisting you with how to set up your case or whether to settle.  On September 27, 2021 an article concerning their product appeared in Tax Notes.  I realize it is behind a paywall and may not be available to all readers but if you are interested, I am sure the company would be glad to talk to you.

On IRC 6015(f) the article talks about the recent 7th Circuit decision in Rogers and provides:

We consider abuse and economic hardship to determine their relative importance in the court’s equitable relief analysis. We begin with our baseline prediction with greater than 95 percent confidence that equitable relief is unavailable, adopting the facts as found by the Tax Court and affirmed by the Seventh Circuit.

We next test the importance of the abuse factor. Contrary to what the Tax Court found, we alter the scenario by accepting Frances’s argument that her husband abused and controlled her to prevent her from knowing about or addressing the tax liability and that she feared retaliatory abuse. If that abuse were present, Blue J’s prediction reverses. Blue J’s machine learning technology predicts with 94 percent confidence that Frances would be granted equitable relief.

Once again beginning with our baseline prediction, we then test out the likely effect of accepting Frances’s argument that she would be unable to meet reasonable basic living expenses if she were forced to pay the tax liability. Blue J predicts that equitable relief would be unavailable, and the confidence in that prediction remains greater than 95 percent.

Therefore, the abuse factor is determinative, whereas the economic hardship factor is somewhat insignificant in this particular set of facts and circumstances. If Frances were able to convince the court of abuse, equity would be on Frances’s side.

The IRS guidance on IRC 6015 has evolved since the law passed in 1998, making it hard to lump together all 6015 cases.  It seems clear, however, that the Tax Court has not evolved with the IRS with respect to actual knowledge and failure to prove financial hardship.  In many ways, I can hardly say with a straight face that the IRS has evolved, since getting a successful determination from the innocent spouse reviewers in Covington seems impossible.  I can only imagine how dispiriting it must be to review hard luck stories day after day but I find the reviewers a bit jaded.  They have made amazingly inappropriate statements to our clinic regarding abused clients.  I wonder if a rotation out of a steady diet of innocent spouse cases might be healthy for those working in this unit.

Back to Ms. Goode and her problems with their 2010 return; let’s look at her facts.  As is typical in small tax caseS, she handled her case pro se, probably never looking at the data produced by Blue J or the blogs produced here.  She and her husband, who intervened, both worked for the Department of Defense.  He became ill in 2010 which caused both of them to resign from their positions and move to Florida to be nearer to his family.  She and her husband borrowed money from their retirement plans to tide them over while they looked for jobs in Florida.  They did not find work that paid as much as their DOD jobs and defaulted on the loans from the retirement accounts.  The defaulted loans triggered Forms 1099.  They filed a joint return for 2010, properly reporting the liability but not fully paying the $64,000 federal tax bill triggered by the loan defaults.

As often happens in cases of financial strife, petitioner and her husband separated and eventually divorced.  She moved to Texas with the children, went through several years of low wages, but eventually obtained another job with DOD which greatly improved her finances.  Had she filed for relief during the low income years, her outcome might have been different, but she may have been in currently not collectible during that period and not as focused on paying the liability. 

In her petition, she alleged spousal abuse and attached a copy of a protective order to her innocent spouse submission.  She did not qualify for streamlined relief under the Revenue Procedure because she did not qualify based on her income at the time of her request.  The court cites Rev. Proc. 2013-34 extensively and works its way through the factors listed in it.  She received positive factors for being divorced, for significant benefit (that is to say, she did not receive a significant benefit from the underpayment of the tax) and for compliance with tax laws.  The economic benefit factor was neutral as was health.  She knew at the time she filed the return that the tax triggered by the money both she and her husband pulled from their retirement accounts was not being paid so she failed the knowledge test.

The court made the following finding:

After evaluating the factors, we find that three of the seven factors weigh in favor of relief, one factor weighs against relief, and the remaining factors are neutral. In section 6015(f) cases, however, we do not simply count factors. We evaluate all of the relevant facts and circumstances to reach a conclusion. See Pullins v. Commissioner, 136 T.C. at 448; Rev. Proc. 2013-34, secs. 3.05, 4.03(2), 2013-43 I.R.B. at 398, 400.

In evaluating the relevant factors we conclude that the knowledge factor weighs too heavily against relief for petitioner. The 2010 tax liability attributable to intervenor partially arose from defaulted TSP loans to which petitioner had consented. She knew the liability would not be paid when she signed the return. Given these facts, we find that it would not be inequitable to hold her responsible for the underpayment for 2010.

Knowledge continues to rule the day.  If you don’t have the antidote, be prepared for a sad outcome.  As we have mentioned before, and as the tax clinic at Harvard knows from personal experience discussed here and here, no petitioner has successfully appealed a Tax Court denial of innocent spouse relief since the change in the law in 1998.  Of course, Ms. Goode, having filed a small Tax Court case, will not be changing that result.  There will be an oral argument before the 9th Circuit, probably in January 2022, in the case of Jones v. Commissioner, 9th Cir. Case No. 20-70013, Tax Court Docket No. 7493-18, where another attempt will occur.

A Second Bite at the Innocent Spouse Apple

We regularly have clients who come into the Tax Clinic at the Legal Services Center of Harvard Law School who received a determination in the past that they did not qualify for innocent spouse relief.  These individuals may have what looks to us like a good case, but we struggle to get them a favorable result because they missed the 90-day period for filing a petition in Tax Court following the receipt of the determination letter denying relief.  The manual has a provision for seeking reconsideration of innocent spouse relief similar to that for seeking audit reconsideration.  While I applaud the IRS for giving taxpayers this second chance, it is a second chance for an administration procedure and getting the innocent spouse unit to rule favorably is hard.

So, I read with interest the case of Vera v. Commissioner, 157 T.C. No. 5 (2021) in which the Tax Court in a precedential opinion allows the taxpayer to come into the Tax Court after dismissing her first attempt to come to the Tax Court as untimely.  Why it did so and how she came to receive a second ticket to Tax Court make this an interesting case. So interesting, in fact, is this case that Bryan Camp has also recently written about it in a post which you can find linked here.


I note that Ms. Vera represented herself in this case.  In reading the opinion I came away with the impression that Judge Buch or his law clerks did a lot of research that might have otherwise been supplied by a represented petitioner.

Ms. Vera submitted joint returns for 2010 and 2013 with her then-spouse.  The IRS adjusted the 2010 return increasing the liability.  The IRS did not adjust the 2013 return; however, the liability reported on the return was not paid in full.

In 2015, Ms. Vera requested innocent spouse relief with respect to 2013.  The IRS denied relief.  She filed a Tax Court petition on the 91st day after the notice of determination and the Tax Court dismissed the case for lack of jurisdiction.

In November of 2016, Ms. Vera requested innocent spouse relief with respect to 2010.  In doing so, she mailed to the IRS several other documents including her request for innocent spouse relief for 2013.

On March 14, 2019, the IRS denied her innocent spouse relief based on the November 2016 submission.  The header of the denial letter specifies 2010; however, the body of the determination letter addresses both 2010 and 2013, stating:

For tax year 2010, the information we have shows that you didn’t meet the requirements for relief.

For tax year 2010, you didn’t have a reasonable expectation that the person you filed the joint return with would or could pay the tax.

For tax year 2013, you didn’t comply with all income tax laws for the tax years that followed the years that are the subject of your claim.

In response to this determination letter, she timely filed a Tax Court petition listing both 2010 and 2013.  She addressed both years in her statement of facts.  In response, the IRS filed a motion to dismiss as to 2013, taking the position that the determination letter is not a second determination for 2013 and that a second request for innocent spouse relief “is available only when seeking to allocate a deficiency.”  Since the 2013 year is an underpayment year, the IRS argued that she could not come to Tax Court on that year after having once received a determination letter that she did not timely petition.

The court begins its discussion of the situation by setting out what is normal in an innocent spouse case and what is unclear from the statute:

Final determinations in innocent spouse cases are typically singular, conclusive decisions. We previously made this observation in dicta in Comparini v. Commissioner, 143 T.C. 274 (2014). Our Opinion in Comparini, a case involving our whistleblower jurisdiction, noted a distinction between the provisions that give us jurisdiction in whistleblower cases and those that pertain to innocent spouse cases. Id. at 281. We observed that the whistleblower provision gives us jurisdiction over any determination, whereas a predicate to our innocent spouse jurisdiction under section 6015(e) is the mailing of a final determination. Id.

Although section 6015(e)(1)(A)(i)(I) refers to a final determination, nothing in that provision prohibits the Commissioner from issuing more than one final determination as to a given tax year. To the extent this provision might be interpreted as allowing for only one final determination, it does not specify whether it is one final determination per request for innocent spouse relief or one final determination per tax year.

The court then looks at the applicable regulation, 1.6015-1(a)(2), and finds that the IRS “believes that more than one final determination can be issued with respect to a single tax year.”  The regulation contemplates that ordinarily the IRS will only make one final determination of innocent spouse status but that it could make a second determination upon a change in marital status among other reasons.  The court points out that IRM states that if the IRS decides to issue a second determination, the second determination does come with the right to petition the Tax Court.

The court discusses the ability of the IRS to reconsider an innocent spouse case and not issue a second determination letter.  It did so in Barnes v. Commissioner, 130 T.C. 248 (2008) and the letter it issued was determined by the Tax Court not to confer upon it jurisdiction.

The court then looks at its whistleblower jurisprudence where it has held that a successive letter purporting to be a final determination confers jurisdiction upon the court as in Comparini v. Commissioner, 143 T.C. 274 (2013).

Although the IRS argues that including mention of 2013 in the second final determination letter sent to Ms. Vega was done in error, the court finds that the notice provides an unambiguous denial of both 2010 and 2013.  The letter does not mention that she sought an improper second request for 2013.  Looking again to whistleblower law, the court notes that it has previously determined in Ringo v. Commissioner, 143 T.C. 297 (2014) that it has jurisdiction to hear a case even when the IRS issues a determination letter by mistake.  It has similar jurisprudence regarding deficiency notices as discussed in Hannan v. Commissioner, 52, T.C. 787 (1969) and in collection due process cases as discussed in Kim v. Commissioner, T.C. Memo. 2005-96.

Because of its consistent case law looking to the notice and not behind it, the court finds that the same principle applies to Ms. Vega’s petition for innocent spouse relief.  The decision does not mean that she has won her request for innocent spouse relief, but only that she will now have the opportunity to prove her case in Tax Court.  If she wants assistance on the merits of her case, I invite her to reach out to the Tax Clinic at the Legal Services Center of Harvard Law School or to her local LITC.  It would be a shame not to obtain a complete victory after her success on the jurisdictional issue.

Because of the case law in other areas of the Tax Court’s jurisdiction, I doubt that the IRS will appeal this decision.  I do not think that too many taxpayers have the good fortune to receive a second notice of determination for the same period by mistake.  My guess is that this situation occurs infrequently and fighting about it further will provide few benefits.  Notices of deficiency and notices of determination do matter.  The IRS can confer on the Tax Court jurisdiction inadvertently.  Congratulations to a pro se taxpayer who has created favorable precedent for others who may find themselves similarly situated.

Is Economic Hardship the Antidote for Knowledge in an Innocent Spouse Case?

A pair of innocent spouse cases just came out, one granting relief, Grady v. Commissioner, T.C. Summ. Op. 2021-29, and one denying relief, Rogers v. Commissioner, No. 20-2789 (7th Cir. 2021).  Neither case reaches a surprising result but the cases do continue trends.  In this post I hope to not only provide some background on these two cases but to also explore the trends that have emerged in innocent spouse cases.


In the Grady case, a case tried under the small tax case procedures, the Tax Court details a litany of issues that the non-requesting spouse (the ex-husband) caused during the marriage.  In the end, the Tax Court finds that the petitioner knew that the tax liability was not being paid so the knowledge factor is negative but essentially all other factors were positive, including economic hardship.  The Court states that:

While her knowledge when she signed the 2007, 2009, 2010, and 2011 joint Federal income tax returns that the tax due would not be paid weighs against her entitlement to section 6015(f) relief, generally knowledge is only one of the factors and knowledge alone is not determinative of the Court’s decision. See Minton v. Commissioner, T.C. Memo. 2018-15 (granting relief despite the taxpayer’s admitting to knowledge of a balance owed); Demeter v. Commissioner, T.C. Memo. 2014-238 (granting relief despite finding that the taxpayer knew or had reason to know that her ex-husband would have difficulty paying the tax liabilities). Therefore, in considering Ms. Gans’ entitlement to relief under section 6015(f), her knowledge is only one factor among many to be taken into account. As the Court has noted, no one factor, in and of itself, is determinative. See Stolkin v. Commissioner, T.C. Memo. 2008-211; Beatty v. Commissioner, T.C. Memo. 2007-167; Banderas v. Commissioner, T.C. Memo. 2007-129.

As regular readers of this blog know, we believe, and have discussed here and here, that the Tax Court treats knowledge as a super factor in many cases.  Knowledge alone did cause Mr. Jacobsen and Ms. Sleeth to lose their innocent spouse cases despite four (Jacobsen) and three (Sleeth) positive factors. The fact that, even in this case where knowledge is the only negative factor, the Court spends a paragraph explaining that knowledge alone is not determinative, provides insight into the power of the knowledge factor.

The Rogers case continues the unbroken string of losses for taxpayers appealing IRC 6015 cases.  Since the change in the law in 1998 placing the innocent spouse provisions in IRC 6015, no taxpayer has won an appeal from an adverse Tax Court decision.

In Rogers, the 7th Circuit affirms the Tax Court’s holding that the wife of a shelter promoter isn’t entitled to innocent spouse relief.  The court noted that this was not the first visit to the 7th Circuit by one or both members of the marital unit:

Married since 1967, John and Frances Rogers filed joint federal income tax returns for many years. They underreported their tax obligations many times over, and the misreporting was the product of a fraudulent tax scheme designed by John, a Harvard‐trained tax attorney. The fraud did not elude the Internal Revenue Service, though, and the many subsequent collection and enforcement proceedings in the U.S. Tax Court have not gone well for the Rogerses. Our court has affirmed the Tax Court’s rulings every time.

Before us now is another appeal by Frances challenging two Tax Court decisions denying her requests for what the Tax Code calls innocent spouse relief. Our review of the record shows that the Tax Court took considerable care assessing Frances’s pleas for relief, in the end denying them largely on the basis that she was aware of too many facts and too many warning signs during the relevant tax years to escape financial responsibility for the clear fraud perpetrated on the U.S. Treasury. While the tragedy of what Frances has endured over the years is in no way lost on us, we are left to affirm, for the Tax Court got it right.

In one respect, the 7th Cir. disagrees with the Tax Court as to a factor — the substantial benefit factor does not weigh against relief in this case.  But, interestingly, the 7th Cir. never cites or discusses the Rev. Proc. factors.  It limits its discussion to how the Rogers facts compare to a prior 7th Cir. opinion from 1996, Reser, which, of course, involved 6013(e).  The most the 7th Cir. will do is cite a reg. under 6015 concerning significant benefit for purposes of (b), 1.6015-2, that actually derives from language in the Committee reports from 1971 for enacting 6013(e).  The committee reports can be found at H.R. Rep. No. 91-1734, at 2 (1970), and S. Rep. No. 91-1537, at 2 (1970), 1971-1 C.B. 608. The 7th Cir. focuses entirely on the knowledge issue (both for purposes of (b) and (f) relief) as grounds for denying relief.  If there were no other factors negative for relief, though some positive or neutral factors, this would make Rogers a case similar to the Jacobsen case decided by the 7th Cir. two years ago.

Interestingly, the Grady case presented only one negative factor, knowledge, and multiple positive factors, but the Tax Court granted relief.  That’s the exact same situation as in Jacobsen, but the case leads to a different result.  Carl Smith has done a fair amount of research and thinking on this issue.  He concludes that the reason why Grady won while Jacobsen didn’t is that, although Jacobsen had four positive factors for relief, he did not put in the evidence to establish financial hardship, which Grady did.  Research of innocent spouse cases shows that proving financial hardship serves as the only way to guarantee that the taxpayer wins an innocent spouse case where knowledge is a negative factor.  Lack of significant benefit, marital status, and compliance with return filing obligations are not enough to outweigh knowledge in some Tax Court opinions.  Note that, in Sleeth (from the 11th Cir. this year), Ms. Sleeth was also said not to have proved financial hardship, and her case also involved only one negative factor (knowledge), and three positive factors (the ones in the prior sentence). Jacobsen’s positive factors included those from Sleeth, as well as an additional fourth positive factor — for his bad health.

As mentioned above, the Rogers 7th Cir. opinion did not cite or discuss the Rev. Proc. that was applicable.  That seems significant, since the Tax Court almost always discusses each of the Rev. Proc. factors.  In 2011, Carl Smith wrote a Special Report for Tax Notes entitled “Innocent Spouse:  Let’s Bury that Inequitable Revenue Procedure“.  In the article, he called for the courts to return to deciding the equitable factor under common law — using opinions involving 6013(e) and 6015, not the Rev. Proc. factors.  While using the factors of the Rev. Proc. seems appropriate for the IRS in administratively evaluating cases, it seems less appropriate for courts which need not be bound by the IRS’ views of appropriate equitable factors.

In some ways the courts, particularly the Tax Court, seem to apply their own thinking, yet cloak the decisions in the factors of the Rev. Proc.  While the Rev. Proc. may say that knowledge is no longer a super factor and while the Tax Court may say it is applying the Rev. Proc., the outcomes suggest that the court has its own equitable barometer which still places significant weight on knowledge.  If the Tax Court weighs knowledge more heavily, then taxpayers must look for something to countervail knowledge or potentially lose even where they have many positive factors. In cases where knowledge is the only negative factor and there are three or more positive factors (one of which is lack of significant benefit), the taxpayer usually wins, but the taxpayer always wins if one of the positive factors is also financial hardship.  You can find the list of cases where knowledge was the only negative factor in the Jacobsen brief filed by the Harvard Tax Clinic in the appeal to the 7th Circuit.