In June, the Tax Court issued a division opinion in Chavis v. Commissioner, 158 T.C. No. 8, a Collection Due Process case. The taxpayer, proceeding pro se, raised three arguments. I’m going to put them in a different order than the Court did, saving the best for last. First, she sought to challenge the underlying liability. The IRS argued and the court agreed that she had a prior opportunity to dispute it, even if she hadn’t taken advantage of it. Under the current status of the law, that result was anticipated, although many of us wish that either the IRS or Congress would change that.
Second, she requested “currently not collectible” status and withdrawal of the notice of federal tax lien. Given that the Settlement Officer disagreed and that the abuse of discretion standard applied, you already can guess how that was decided.
Finally, she raised a different – and creative! – argument concerning why she shouldn’t have to pay. My guess is that this argument is why the Court issued a division opinion instead of a memorandum opinion; it’s also why I chose to write this post. I’m not sure that argument would have ever occurred to me or that I would have raised it if it had occurred to me. I’m also not surprised that the argument lost; it was certainly a long shot.
Background
Ms. Chavis and her former husband worked, as the Secretary and President respectively, at Oasys Information Systems, Inc., a C corporation. The business address for Oasys was Ms. Chavis’s home address. Oasys withheld payroll taxes from employees’ wages but never paid the taxes over to the government. The amount was substantial enough that the IRS pursued trust fund recovery penalties under section 6672 against both Ms. Chavis and her former husband. The IRS issued Letter 1153 Notice of Trust Fund Recovery Penalty to both Ms. Chavis and her then-husband on July 13, 2015, proposing to assess $146,682 against each of them.
The Letter 1153 informs responsible parties that they can appeal to the local Appeals Office within 60 days and provides detailed instructions on how to do that. Ms. Chavis did not appeal. On November 16, 2015, the IRS assessed. She and her husband divorced in 2016 and the IRS apparently collected some of that amount from the husband. The IRS filed a notice of federal tax lien on May 29, 2019 and issued Ms. Chavis a collection notice stating her right to a CDP hearing. She timely requested a hearing and, when Appeals ruled against her, filed a Tax Court petition.
The first two (my order) arguments
These were the easiest for the Court to dispose of. The decision that Ms. Chavis could not challenge the underlying liability was expected. For assessable penalties, an opportunity to dispute the liability at Appeals is treated as sufficient. Judicial review in a pre-payment forum – Tax Court – is not required. The IRS and the Court consider that a settled issue, unfortunately, for assessable penalties, including the TFRP. If you’d like a refresher on why that’s a bad result, start with a couple of posts (here and here) by Keith. Ms. Chavis had that opportunity to go to Appeals; she acknowledged receiving the Letter 1153 and signed the return receipt. So the court didn’t consider this argument.
Similarly, the collection alternatives that Ms. Chavis suggested – CNC status and withdrawal of the NFTL – were rejected by the Settlement Officer and the Court easily concluded that the rejection was not an abuse of discretion. The SO found that she could pay $1,685 per month toward the liability. Ms. Chavis argued that the calculation of $1,685 per month available income was “unreasonable and not economically feasible.” As the Court noted:
In determining this figure, the SO calculated allowable monthly expenses by reference to local standards prevailing in the Missouri county where petitioner resided. . . . The SO was authorized to rely on those standards in assessing petitioner’s ability to pay, and it was her burden to justify a departure from the local standards. . . . Petitioner has not satisfied that burden.
However, it appears that the real issue may have been assets rather than income. The SO had disallowed home mortgage expenses of $1,611 because Ms. Chavis had not proved that she had no equity in the home. See IRM 5.16.1.2.9(1): “An account should not be reported as CNC if the taxpayer has income or equity in assets, and enforced collection of the income or assets would not cause hardship.” Ms. Chavis argued that she did not have “access” to any equity, but she hadn’t submitted evidence during the CDP hearing. She lived in Missouri, so the court’s review was limited to the administrative record per Robinette v. Commissioner, 439 F.3d 455 (8th Cir. 2006).
The request to withdraw the NFTL also failed. The Court reviewed the conditions under which a withdrawal is authorized, in section 6323(j), and concluded that all but one either clearly did not apply or had not been asserted by Ms. Chavis. For that final condition – that withdrawal would facilitate the collection of the tax liability – Ms. Chavis had not presented any evidence in the CDP hearing.
Creativity!
Those arguments didn’t prevail but Ms. Chavis had one more up her sleeve. You’ve probably guessed even if you didn’t read the opinion. She was married at the time the TFRP was assessed. Both she and her then-husband were liable for the entire amount. What does that suggest? Relief from joint and several liability under section 6015!
Ms. Chavis checked the box for innocent spouse relief, among others, on her request for a CDP hearing on May 29, 2019. In July 2019, she submitted Form 8857 to the Cincinnati Centralized Innocent Spouse Operation. CCISO told her within a few weeks that she did not qualify for section 6015 relief, but Ms. Chavis still argued for it (unsuccessfully) during the CDP hearing. It’s not clear whether she also argued for it in her response to the government’s motion for summary judgment.
As noted above, the Court rejected the challenge to the underlying liability because Ms. Chavis had a prior opportunity to dispute it. An innocent spouse claim is a defense against, rather than challenge to, the underlying liability and therefore is not precluded under section 6330(c)(2)(B) from review as part of the CDP hearing.
As the court pointed out, subsections (b) and (c) of section 6015 both reference the taxpayer filing a joint return (i.e., income tax) and provide for relief for an understatement or deficiency with respect to that return. Because the deficiency in this case arose from TFRP for the corporation’s payroll taxes, subsections (b) and (c) would not apply. However, subsection (f) does not include such a reference to a joint return.
This may remind you of the situation several years ago with respect to the statute of limitations for innocent spouse claims under subsection (f). The Code provided a two-year statute of limitations for subsection (b) and (c) claims but did not specify a statute of limitations for (f) claims. So, the IRS and Treasury issued a regulation to establish a two-year statute of limitations for (f) cases as well. The Tax Court ruled that regulation was invalid, interpreting the “audible silence” by Congress as an indication there should be no statute of limitations for (f) cases. Despite success in appeals to Circuit Courts, the IRS backed down and decided to limit (f) claims only by the ten-year statute of limitations for collection in section 6502. The Taxpayer First Act later established, at section 6015(f)(2), a statute of limitations: if unpaid, before the section 6502 collection statute of limitations expires, or if paid, before the section 6511 refund claim statute of limitations expires. It still doesn’t say anything about income tax or joint return in subsection (f).
Would the Tax Court refuse to import the “income tax only” provisions in (b) and (c) to (f)? Unfortunately for Ms. Chavis, the answer was no. The Court concluded easily that 6015(f) applies only to income tax. The caption for section 6015 is “Relief from joint and several liability on joint return.” Captions don’t always carry a lot of weight, but there was much, much more:
The Commissioner has specified, in Rev. Proc. 2013-34, 2013-43 I.R.B. 397, the procedures governing equitable relief. These procedures confirm that subsection (f), like subsections (b) and (c), applies only to joint income tax liabilities. See Rev. Proc. 2013-34, § 1.01, 2013-43 I.R.B. at 397 (“This revenue procedure provides guidance for a taxpayer seeking equitable relief from income tax liability. . . .”). Indeed, the IRS will not consider a taxpayer’s request for equitable relief unless she meets seven “threshold conditions,” one of which is that the “income tax liability from which the requesting spouse seeks relief” is attributable to the non-requesting spouse. Id. § 4.01(7), 2013-43 I.R.B. at 399. Another condition is that “[t]he requesting spouse [must have] filed a joint return for the taxable year” for which relief is sought. Id. § 4.01(1).
There is more than just a Revenue Procedure:
Although a TFRP liability is a form of “unpaid tax,” section 6015(f) applies only to unpaid taxes or deficiencies arising from joint income tax returns. See Treas. Reg. § 1.6015-1(a)(1)(iii) (stating that section 6015(f) applies only to “joint and several liability for Federal income tax”); H.R. Rep. No. 105-599, at 254 (1998) (Conf. Rep.), reprinted in 1998-3 C.B. 747, 1008 (stating that section 6015(f) applies only to “any unpaid tax or deficiency arising from a joint return”).
That seems very persuasive support for the conclusion that section 6015 relief is not available for the TFRP. Since section 6672 is an assessable penalty not subject to deficiency procedures, there is no judicial review of the validity of the penalty in Tax Court at all. Although this seems very clear, apparently it had never been decided by the court, which might explain why this was a division opinion instead of a memorandum opinion. Ms. Chavis seems to be the first one to ever argue in Tax Court for innocent spouse relief from the TFRP.
TFRP is also a divisible tax, so at least the Flora rule is not as much of a hurdle to judicial review, and there’s a right of contribution in section 6672(d). However, it’s still a nasty penalty and difficult to challenge once you don’t head it off at the interview stage.
Standard/scope of review – CDP versus innocent spouse
The opinion states the standard of review for CDP cases as follows:
Where the validity of the taxpayer’s underlying liability is properly at issue, we review the IRS’s determination de novo. Goza v. Commissioner, 114 T.C. 176, 181-82 (2000). Where the taxpayer’s underlying liability is not properly at issue, we review the IRS’s decision for abuse of discretion only. Id. at 182.
That comes pretty much straight from the legislative history of the IRS Restructuring and Reform Act of 1998, which enacted the CDP hearing process of section 6330.
The court previously considered stand-alone innocent spouse cases under section 6015(e) de novo for both the standard of review and the scope of review. Porter v. Commissioner, 132 T.C. 203 (2009). The Taxpayer First Act of 2019 specified both the standard of review (de novo) and the scope of review (limited to the administrative record plus “any additional newly discovered or previously unavailable evidence”) in new section 6015(e)(7). The Chavis petition was filed on September 23, 2020, after the effective date of section 6015(e)(7). For more on the complexities of TFA and innocent spouse relief, start with Christine’s posts here and here.
So, we have two different standards/scopes of review – for CDP and for stand-alone innocent spouse cases. Which applies when dealing with an innocent spouse claim in a CDP hearing? standard and scope of It doesn’t matter for this case; although the court included the discussion under a section labeled “Abuse of Discretion,” it also noted in footnote 2:
We need not decide whether the SO’s resolution of petitioner’s spousal defense challenge should be reviewed de novo rather than for abuse of discretion. We would decide this issue the same way under either standard because (as explained in the text) it presents a purely legal question.
It does matter, though, when taxpayers have an innocent spouse claim with respect to income taxes in a CDP case.
A quick check of Effectively Representing Your Client Before the IRS turned up Francel v. Commissioner, T.C. Memo 2019-35, which had already addressed this same scenario. The taxpayer in that case filed a request for innocent spouse relief before receiving the final notice of intent to levy. The request for a CDP hearing asked for innocent spouse relief. The court concluded that it had jurisdiction with respect to the innocent spouse issue under both section 6330(d)(1) and section 6015(e). The IRS argued that the standard of review should be abuse of discretion and the scope of review should be limited to the administrative record. (Dr. Francel lived in Missouri, as did Ms. Chavis, so the Eighth Circuit’s decision in Robinette applied.). The court concluded that both the standard of review and the scope of review would be de novo because the petition was (in part) a petition under section 6015(e)(1).
Francel was decided (a) before the Taxpayer First Act, which restricted the scope of review in innocent spouse cases, and (b) in one of the three circuits that restrict the scope of review to the administrative record in a CDP case. After the Taxpayer First Act, and in one of the other circuits, it’s possible to have a situation in which:
- The standard of review is more favorable to the taxpayer under section 6015(e) – de novo – rather than under section 6330(d)(1) – abuse of discretion.
- The scope of review is more favorable to the taxpayer under section 6330(d)(1) – de novo – than under section 6015(e) – limited evidence beyond the administrative record.
In a situation like that, how should the court evaluate the standard and scope of review? All or nothing, whether section 6330(d)(1) or section 6015(e)? Or mix-and-match, with the most favorable to the taxpayer for both standard of review (section 6015(e)) and scope of review (section 6330(d)(1))?
Footnote 2 in the Chavis case, quoted above, avoids deciding which standard and scope of review would apply in these situations. It didn’t matter for Ms. Chavis’s situation. Now that we have the Taxpayer First Act, will the court want to re-visit this question in a future case where the decision on the merits is not a purely legal question?