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

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

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

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

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

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

Innocent Spouse Relief and the Administrative Record

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

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

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

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

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

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

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

Keith

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

26 CFR § 301.6320-1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Indeed, the Conference Committee Report states:

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

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

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

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

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

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

Observations

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

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

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

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

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

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

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

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

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.

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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.

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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.

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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.

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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.

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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.