We welcome Sarah Lora, Assistant Clinical Professor and Director of Lewis and Clark’s Low Income Taxpayer Clinic and Kevin Fann, 3L at Lewis and Clark Law School. Their clinic just won an important victory in the innocent spouse arena overcoming an argument from the trial section of the Department of Justice Tax Division that completely disagrees with the arguments made by the appellate section of the Tax Division. Keith
In his Opinion and Order issued last month in Hockin v. United States, Oregon District Court Judge Michael Simon rejected in part a magistrate judge’s findings and recommendations to dismiss and rejected the DOJ’s argument that the government had not waived sovereign immunity to be sued, holding that a taxpayer could bring an innocent spouse claim in federal district court as part of her larger tax refund claim against the IRS.
read more...The dispute concerned whether an alleged innocent spouse could follow the Flora rule of “pay first, litigate later” in her § 6015(f) claim. In the past, the DOJ has presented contradictory arguments for and against the Flora rule in these innocent spouse refund cases, a contradiction highlighted by several advocates, including former NTA Nina Olson as well as Keith and Carl from Harvard’s Low-Income Taxpayer Clinic. In previous cases against clients at Harvard LITC , the DOJ insisted that taxpayers who miss the chance to file in U.S. Tax Court could still pay the assessment and litigate a refund claim in federal district court. In Hockin and several other cases, however, the DOJ turned a 180, arguing exactly the opposite, that the district court has no jurisdiction in innocent spouse refund suits.
Several years ago, Plaintiff Kimberly Hockin filed a claim with the IRS for innocent spouse relief of joint and several liability for tax years 2007 and 2008. The claims for each year were based on the same facts: she did not sign the return and, in the alternative, she should be relieved of liability anyway based on § 6015(f). The IRS granted her 2008 claim, but it denied the 2007 claim with no clear explanation for the different outcomes.
Ms. Hockin attempted to appeal the decision by filing a petition in U.S. Tax Court, but she had missed the filing deadline by 555 days. After the Tax Court’s dismissal, Ms. Hockin sought the assistance of the Lewis & Clark Law School LITC. By the time she contacted us, Ms. Hockin had paid the full balance due for 2007 through offset refunds over the years. After filing for a refund administratively, the LITC filed a complaint in U.S. District Court, led by volunteer attorney Scott Moede of the Office of the City Attorney in Portland, Oregon. The complaint sought a refund of her payments for 2007 made within the last two years, citing jurisdictional statutes 28 U.S.C. § 1346(a)(1) and IRC § 7422(a), for three reasons:
- Ms. Hockin never signed the return;
- the IRS is barred from collecting the tax liability for 2007 under the theory of quasi-estoppel (i.e. it granted relief for tax year 2008 but not 2007 under the same facts); and
- the United States erroneously collected taxes she should have been relieved of paying under the rules of innocent spouse relief.
The United States filed a motion to dismiss, arguing that the taxes had not been “illegally or erroneously collected” as required by § 1346(a)(1) for the district court to have subject matter jurisdiction.
After extensive briefing, including an amicus curiae brief filed by Keith and Carl of the LITC at Harvard Law School, magistrate Judge Jolie Russo held oral arguments. The United States conceded the first claim should go forward. After all, there was a genuine dispute of fact about whether the return had been signed, and no copy of the return had been produced by Ms. Hockin, the IRS, or the ex-spouse. On the claims of quasi-estoppel and innocent spouse, Judge Russo said she leaned toward granting the government’s motion to dismiss and asked Attorney Moede and Lewis and Clark law student John MacMorris-Adix ’19 to convince her otherwise. Within a few weeks, Judge Russo issued her Findings and Recommendations (F & Rs). She had granted the government’s motion to dismiss the quasi-estoppel and innocent spouse relief.
Undeterred, the clinic objected to Russo’s F & Rs. The Article III review Judge Michael Simon requested additional briefing, citing part of the government’s original motion to dismiss, which admitted that, if plaintiff had filed her claims in both U.S. Tax Court and U.S. District Court, § 6015(e)(1)(A) cedes jurisdiction to the District Court. Simon asked the parties to answer several questions, including, “[W]hy isn’t Plaintiff’s failure to file a timely petition in U.S. Tax Court excusable neglect of an administrative technicality?” We tried not to get too excited, since it is rare for an Article III judge to disagree with a magistrate’s F & R.
The parties briefed Judge Simon’s questions within about two weeks. Two days after briefing, he issued his ruling, granting the Government’s motion as to the quasi-estoppel claim but denying the Government’s motion as to both the unsigned return and the innocent spouse claim! The opinion relied primarily on Flora v. United States, Wilson v. Comm’r, and Merriam-Webster’s plain-language definition of “wrongfully.”
The court held:
The IRS may grant innocent spouse relief even when the amount of tax assessed or collected was precisely the correct amount that the married couple owed given their financial circumstances. But 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422(a) do not waive sovereign immunity and provide a cause of action solely for claims that a tax was erroneously or illegally assessed. They also apply to claims that the tax was “in any manner wrongfully co[ll]ected.” A claim that “it is inequitable to hold the individual liable” falls within the scope of an allegation that a tax was “in any manner wrongfully collected,” giving “wrongfully” its plain meaning, which would include unfairly or unjustly. See Wrongful, MERRIAM-WEBSTER.COM, https://www.merriam-webster.com/dictionary/wrongful (last visited August 14, 2019) (definition: wrong, unjust).
In addition to the plain-meaning definition of “wrongful,” the court also resisted the Government’s strained logic when it pointed to clear and basic principles of justice and economy. On that point, the court held that tax refund cases could obviously contemplate innocent spouse relief at the same time, because if the two issues were tried separately under separate jurisdictions, contradictory results might occur. The court stated, “If Plaintiff wins on her refund claim, then she must lose on her innocent spouse claim. Were this dispute adjudicated in two different forums, the result could be contradictory rulings.” The Government had produced dozens of pages of logical loopty-loops about why that simple judicial principle should not apply. In the end, the court did not buy it.
The question still arises, however, as to whether this ruling extends to stand-alone innocent spouse claims. Although the court stated that “[n]othing in the innocent spouse statute, or elsewhere in the Tax Code, suggests that a claimant seeking innocent spouse relief cannot opt to ‘pay first [and] litigate later’ in district court,” the court also made a point to recognize that this was not a stand-alone case, because it also involves a “jurisdictionally valid refund claim” for lack of a signature on the return.
The Hockin case will be set for trial in federal district court early in 2020.
Congrats on the win! It is an important win, regardless of how your client fares at trial. I hope the issue of whether the district court is limited to the administrative record does not come up. There are so many of the innocent spouse factors that are moving targets that limiting a claim to only those facts in existence at a certain point in time is hard to square with the purpose of the statute when one gets to a Tax Court review of an IRS determination. But it is very, very difficult for courts (especially district courts who do not have the Tax Court’s experience with the concept of “re-determination”) to see past the standard administrative record rule. Additionally, the question in a refund suit has traditionally been whether the taxpayer overpaid his or her taxes. This court appears to now re-frame that traditional understanding into whether the IRS “wrongfully…collected” the taxes. When you put the question that way, it would be very, very, difficult to argue that events subsequent to the IRS determination that has caused the wrongful collection should be considered by the court. But it does not sound like that issue will arise because, it seems, your main claim is that the IRS should have done for one year what it did for the other because the relevant factors were materially the same at that time.
Congrats to you and the Lewis & Clark Clinic! Opening the door a little wider for deserving taxpayers to have their day in court is always a welcome development…