Innocent Spouse Relief Not Available in District Court Proceeding

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The recent decision in United States v. Stein highlights a limitation in the jurisdiction of district courts when a taxpayer seeks innocent spouse relief.  The IRS brought suit against Mr. and Mrs. Stein seeking to reduce their assessments to judgment.  In response to that suit, Mr. Stein agreed to the judgment but Mrs. Stein sought relief from the liability under section 6015(f).  The court denied her relief but her failure to obtain relief here does not foreclose her from retaining innocent spouse relief administratively or in a Tax Court proceeding at some point in the future.

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Mr. Stein is a lawyer who had a successful solo practice. The couple was married for 30 years during which she stayed at home and he not only earned the money for the family but took charge of the family finances including filing the tax returns.  He underreported the income on their joint tax returns for most years between 2001 and 2010 leaving them with about a $663,000 tax liability at the time the IRS brought suit to reduce the liability to judgment.  I would imagine that the circumstances surrounding the assessment of the liability may have played a part in the dissolution of the marriage but the opinion does not discuss that issue.

The IRS does not recommend suits to collect very often because of the time and effort required both by the revenue officer handling the case and the Department of Justice attorney who brings the suit. I generally brings a suit to reduce an assessment to judgment when the taxpayer owes a substantial amount of tax and there is some reason to believe that gaining more time to collect the tax will result in the successful collection of the liability even though the IRS has failed to collect the liability during the 10 year period of the statute of limitations leading up to the filing of the suit.  Normally, the suit to reduce the liability to judgment accompanies another suit such as a suit to foreclose the federal tax lien on property.  I did not read the pleadings but from the description of the case in the opinion this case appears to only involve the suit to reduce the liability to judgment.  As an outsider, it is not possible to know why the IRS thinks the extended period to collect will allow it to recover the tax but I know that it would not bring this suit without some basis to believe it could collect the debt in the future.

Given the facts made available in the opinion, Mrs. Stein looks like a good, or at least a potential, candidate for innocent spouse status. She filed a motion for summary judgment seeking innocent spouse status and must have had a fair amount of confidence in her qualifications to seek this relief through summary judgment.  Because the court does not look at the merits of her position, insufficient facts exist in the opinion on which to draw any conclusions.  In response to her motion for summary judgment, the IRS filed its own motion seeking summary judgment because no genuine dispute existed concerning “the fact or amount of [her] indebtedness…”

She sought relief under 6015(f) rather than (c). I imagine she did this because more than two years had passed since collection activity began against her.  Because of the fact intensive nature of an (f) determination, it does not seem well suited to summary judgment but that does not matter in this case.  The Court finds that innocent spouse determinations require an application to the IRS followed by judicial review in the Tax Court.  It states that the Tax Court will decide innocent spouse status “in all but the rarest circumstances.  Certainly no part of 6015 confers jurisdiction to the federal district courts ‘to determine innocent spouse claims in the first instance.’”  In reaching this conclusion the Court mentions there is a “dearth of published authority” on the issue but the courts that have spoken on the issue have been near unanimous citing United States v. Wallace and Andrews v. Taylor and about ten cases in footnote two of the opinion.  Ten cases does not seem like a dearth of precedent but the opinion does a nice job of collecting the decisional law in this area.  Based on its determination that it did not have jurisdiction over the innocent spouse claim and that the IRS request for summary judgment was supported by the assessment record, it denied summary judgment to her and granted it to the IRS.

The decision should not end the matter for Mrs. Stein. Even though she apparently has not sought innocent spouse status during the approximately ten year period since the initial years were assessed, she can still do so as long as the IRS has the right to collect from her.  She is the beneficiary of the IRS concession on the statute of limitations for bringing 6015(f) relief.  She needs to go through the normal process of submitting the request for relief to the IRS and then proceed to Tax Court if she fails to obtain relief at the administrative level.  While it would make sense for the district court to have jurisdiction to decide whether this defense to collection exists, it makes more sense to require a party asserting this defense to exhaust administrative remedies before heading to litigation.  Perhaps she will achieve a happy ending.  If not, she will have a substantial debt essentially for the rest of her life unless she can obtain relief through bankruptcy or some form of offer in compromise.  Because of the judgment, any offer will go through the Department of Justice rather than the normal administrative channels for an offer.

Comments

  1. I have never understood why those district courts (no court of appeals yet) have held that the procedures of 605(e)(1) are exclusive for obtaining (b), (c), or (f) relief. Without yet going to read all ten opinions, I simply know that Congress thought it had made sufficient amendments to the statute in 2000 to kill this argument. Here are two paragraphs from the 2000 Conference Report concerning amendments to section 6015:

    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.

    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. Rep. 106-1033 at 1023.

    Despite this, Nina Olson has had to ask for a further amendment to clarify that the Tax Court is not the sole judicial forum for litigating 6015 relief entitlement.

    The court in Stein ruled that 6015 may be raised in the district court, but only in a suit for refund, not any other kind of suit. But, the court doesn’t cite this legislative history. And 6013(e) relief was occasionally raised in suits that were not for refund. There is zero evidence that, in enacting 6015, Congress was trying to limit other avenues for getting innocent spouse relief.

    Former §6013(e)(1) could also be raised as a defense in a district court
    collection suit brought by the United States under §7402 or §7403 after a
    deficiency had been assessed. United States v. Hoffinann, 1993 U.S. Dist.
    LEXIS 15872, 73 A.F.T.R.2d 447, 93-2 U.S.T.C. ¶50639 (D. Utah 1993);
    United States v. Diehi, 460 F. Supp. 1282 (S.D. Tex. 1976), aff’d per curiam,
    586 F.2d 1080 (5th Cir. 1978). Such a suit could be brought at any time during
    which the 10-year period for collecting assessed taxes was still open under
    §6502.

    Former §6013(e)(1) relief could also be raised in a bankruptcy proceeding as
    a defense against assessed, but uncollected, tax, where the statute of limitations on
    collection under §6502 had not yet expired. In re Hopkins, 146 F.3d 729 (9th Cir.
    1998); In re Lilly, 76 F.3d 568 (4th Cir. 1996).

    One of the district court opinions cited in the long first footnote in Stein is
    United States v. Dew, No. 4:14-CV-00166-TLK, 2015 WL 5037850, at *1 n.1 (D.S.C. Aug. 26, 2015) (“[T]he innocent spouse defense cannot be considered by this Court because it lies within the exclusive jurisdiction of the tax court.”), appeal docketed, No. 15-2062 (4th Cir. Sept. 11, 2015). Dew in the Fourth Circuit is actually two dockets, the latter at No. 15-2063. I hope the issue of the exclusivity of the Tax Court is considered and rejected in the forthcoming Fourth Circuit appeal. However, since the appellants are pro se, we may end up with none of this history being shown to the Fourth Circuit, just the IRS’ selective history. Really, an amicus brief is needed for this case. Anyone out there have a non-refund district court or bankruptcy court case in which he or she is raising innocent spouse relief? If so, could we borrow your taxpayer as a person on behalf of whom we could do an amicus brief in the Fourth Circuit pro bono? I would be happy to work on the brief, even though I am not admitted to the Fourth Circuit. I am sure I could get admitted, or I know at least one Fourth-Circuit-admitted attorney who would probably help. The appellant’s opening brief is due Nov. 3, which would make the amicus brief due Nov. 10.

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