New, Additional Proposed Innocent Spouse Regulations Issued (Part 2)

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My introduction to the first post by Carl yesterday, created some confusion about the regulations just issued. While the IRS has not finalized the 2013 proposed regulations (and so has not responded to the comments that were submitted in response to those regulations), it has just issued additional proposed innocent spouse regulations that, for the most part, deal with different issues than the 2013 proposed regulations.  As Carl discusses, they do some good things and offer the opportunity to comment further. Today’s post will analyze the new proposed regulations.  Keith

This is the second part of a two-part post on proposed regulations under sections 66 and 6015 issued by the Treasury on November 20, 2015. In the first part of this post, I gave the long, tortuous background that has led up to these new proposed regulations. In this second part of the post, I will discuss the actual proposed changes and note some requested changes not made.

To repeat my summary from the first part of this post, the new proposed regulations largely do four things:  (1) make changes necessary to conform the existing regulations to the 2006 statutory amendments to subsection (e) concerning subsection (f) equitable relief, (2) adopt positions previously taken by the IRS in Rev. Proc. 2013-34, 2013-2 C.B. 397, that expanded the instances in which a requesting spouse could get a refund from post-return payments applied to the liability, (3) provide detailed new rules and examples concerning when a spouse, under section 6015(g)(2), “participated meaningfully” in a prior litigation such that the spouse is precluded by res judicata from later relitigating the right to section 6015 relief, and (4) provide detailed rules and examples concerning allocation of deficiencies among spouses in situations where one spouse’s unreported income or improper deductions changed adjusted gross income (AGI) such that a portion of the deficiency is attributable to a phase-out of tax benefits on the return.


New Proposed Regulations

The new proposed regulations do not replace the 2013 proposed regulations, so they do not state that they address comments made on the 2013 proposed regulations.  However, there is some overlap in the new proposed regulations in that, in two instances, they take positions that commenters on the 2013 proposed regulations opposed.  The notice of proposed rulemaking for the new regulations is 57 pages in length on a double-spaced release. I won’t discuss every proposed change, but I will identify the most significant changes made and the most significant changes requested that were not made.

One Request for All Relief

One thing the new proposed regulations do is conform the 2002 regulations to the statutory changes wrought by the 2006 amendment to section 6015(e) to make that subsection also apply to requests for equitable relief under subsection (f). This is accomplished in several ways:

First, since 2007, the IRS has informally treated the filing of any Form 8857 as an election of relief under subsections (b) and (c) and a request for relief under subsection (f). The new proposed regulations enshrine this practice at Prop. Reg. sec. 1.6015-1(a)(2). Although the statute refers to elections for relief under subsections (b) and (c) and requests for relief under subsection (f), the regulations abandon the cumbersome terminology difference, which has no practical effect anymore, and henceforward use the simpler terminology of “request” to apply to seeking relief under any of the three subsections. I applaud this change, which has the side benefit of making the regulations easier to read because of shorter sentences.

A conforming change is made at subsection (b) of Prop. Reg. sec. 1.6015-7 on Tax Court review, which will provide that the Tax Court can consider review of any denial of a request for relief (effectively including consideration of subsection (f) relief in section 6015(e) stand-alone Tax Court cases).

Prop. Reg. sec. 1.6015-7(c) provides rules for the suspension of collection activities and the tolling of the collection statute of limitations under the amended subsection (e) that now accompany a request for relief under any of the three subsections. Prior to 2006, the suspension and tolling provisions only kicked in for elections under subsections (b) and (c).

The new proposed regulations do not change the prior rule – by the way, nowhere stated in the statute — that (with one minor exception relating to electing subsection (c) relief for which one belatedly qualified) only one Form 8857 may be filed. See Prop. Reg. sec. 1.6015-1(h)(5).

One of the comments made to the 2013 proposed regulations by LITC people (who included Keith and me) was that we wished the IRS to change the rule that a taxpayer could only file one Form 8857. While we acknowledged the improvement in the 2013 proposed regulations of creating an audit reconsideration process, we proposed that a taxpayer who had already filed a Form 8857, but who had never petitioned the Tax Court in response to a notice of determination denying relief, be allowed to file a second Form 8857 if, as one example, the factors considered for (f) relief in Rev. Proc. 2013-34 substantially changed (e.g., divorce, financial hardship, health, and/or abuse).  If the taxpayer had never petitioned the Tax Court with respect to a prior notice of determination, we thought the taxpayer should be allowed to petition the Tax Court with respect to the notice of determination rejecting the later Form 8857.

The need for a right to a second or subsequent Form 8857 is much greater now that the period in which one can file a Form 8857 encompasses the entire collections statute of limitations. That period will be at least 10 years, and it may be longer if certain events (such as a request for an installment agreement or an offer in compromise) caused a tolling of the period.  Sadly, there is no discussion in the preamble to the new proposed regulations of the comments that the LITC people made about the benefit of having additional chances to file Forms 8857 as equity factors change over the lengthy collection period.

Election Timing and Refund Issues

The new proposed regulations make amendments to allow requests for relief under subsection (f) to be made in the time frames set out in Notice 2011-70 – i.e., during the entire collection statute of limitations at section 6502 or the entire refund claim statute of limitations at section 6511, as is relevant.

By statute, refunds attributable to section 6015 relief are only available under subsections (b) and (f), not (c). In section 4.04 of Rev. Proc. 2003-61, 2003-2 C.B. 296, the IRS had set rather severe limits on refunds under subsection (f) relief. First, no refunds could be made of payments made with the joint return or from joint payments later made, say, as a result of the IRS’ taking a joint overpayment from a later tax year and offsetting it against the tax liability addressed by section 6015(f). In the case of deficiencies, refunds were limited basically to amounts paid by the requesting spouse under an installment agreement after the Form 8857 was filed.

In section 4.04 of Rev. Proc. 2013-34, the IRS substantially liberalized the refund rules for subsection (f) refunds (both for underpayment and deficiency cases), making refunds available for amounts taken and applied by offset from a later-year joint return overpayment to the extent the taxpayer can establish (basically, under the injured spouse tracing rules) the extent to which the later-year overpayment was attributable to the requesting spouse.

The new proposed regulations adopt the salutary changes made by Rev. Proc. 2013-34 to refunds under subsection (f) and, quite logically, extend such rules to refunds under subsection (b) by creating a new subsection (k) at Prop. Reg. sec. 1.6015-1. And for the first time, subsection (k)(4) adopts the existing IRS practice of treating the filing of a Form 8857 requesting relief as the administrative refund claim for purposes of section 6511 and 7422 refund litigation, even though the Form 8857 (1) states nothing in it about seeking a refund or (2) doesn’t state an amount sought to be refunded. Kudos for new subsection (k)(4)!

Another comment that the LITC people made in response to the 2013 proposed regulations was to ask that the period in which to claim refunds be allowed to be extended by the IRS where the other spouse’s abuse or control of the requesting spouse prevented the requesting spouse from filing within the normal 2- and 3-year periods in section 6511(a).  Our request was analogous to asking for a regulatory form of section 6511(h) financial disability tolling of the 6511(a) periods in abusive situations.  Sadly, the new proposed regulations do not address or discuss the LITC comment about putting in a tolling provision.

Res Judicata Issues 

In 1998, Congress was concerned that taxpayers might be precluded from receiving section 6015 relief if they had been a party to a prior court proceeding that involved, or could have involved, section 6015 relief. Accordingly, Congress enacted what is now at section 6015(g)(2), providing:

In the case of any election under subsection (b) or (c) or of any request for equitable relief under subsection (f), if a decision of a court in any prior proceeding for the same taxable year has become final, such decision shall be conclusive except with respect to the qualification of the individual for relief which was not an issue in such proceeding. The exception contained in the preceding sentence shall not apply if the court determines that the individual participated meaningfully in such prior proceeding.

In a section 6015(e) stand-alone innocent spouse proceeding in the Tax Court, the question sometimes comes up whether the requesting spouse “participated meaningfully” in a prior suit – say a deficiency suit in the Tax Court or a collection suit brought against the spouse by the United States under sections 7402 or 7403. Current Reg. sec. 1.6015-1(e) largely repeats the statutory res judicata rules, but gives no examples.

Since 1998, the Tax Court has generated a number of opinions in which it has decided whether a spouse’s actions in a prior suit constituted meaningful participation. See, e.g., Harbin v. Commissioner, 137 T.C. 93 (2011); Deihl v. Commissioner, 134 T.C. 156 (2010). The new proposed regulations greatly expand this regulatory provision and, with one minor exception that I won’t get into, the IRS adopts the various activities that the Tax Court looked to as evidence in deciding the question of meaningful participation and the Tax Court’s holdings in this area. The proposed regulations also give examples.

In addition, the IRS, in the proposed regulations, adds a new exception to res judicata if the requesting spouse, in the prior suit, performed any of the activities indicating meaningful participation only because the non-requesting spouse abused or maintained control over the requesting spouse, and the requesting spouse did not challenge the non-requesting spouse for fear of the non-requesting spouse’s retaliation.  Once again, I applaud this IRS innovation.

Less laudable is the IRS’ failure to deal with the government’s conflicting litigation positions regarding res judicata that puts taxpayers in an untenable situation.  As Keith noted in a recent post on United States v. Stein, a suit to reduce a tax assessment to judgment, the Department of Justice has, in about a dozen district court cases since 1998, convinced those courts that they lack jurisdiction to consider section 6015 relief as a defense in a tax collection suit under section 7402 or 7403, and that only the Tax Court or district court judges entertaining a refund lawsuit under 28 U.S.C. sec. 1346(a)(1) have jurisdiction to provide section 6015 relief.

For years, Nina Olson, in a series of her reports to Congress, has deplored the lack of legal reasoning in these district court opinions.  For her most recent report complaints, with which I agree, see 2013 NTA Annual Report to Congress at Vol. 1, pp. 416-417. At least three times she has called for a legislative fix, if the courts, at the urging of the Department of Justice, continue to get this wrong.  Her proposed fix would confirm that section 6015 relief can be raised as a defense in a district court collection suit.

But, it is the position of the Tax Court – egged on to this holding by the IRS – that section 6015 relief can be raised as a defense in a district court collection suit, and that a taxpayer who meaningfully participated in such a suit, but who did not ask for section 6015 relief, is precluded by res judicata from raising section 6015 relief in a later suit in the Tax Court under section 6015(e).  Thurner v. Commissioner, 121 T.C. 43 (2003), aff’d on other issues 255 Fed. Appx. 90 (7th Cir. 2007). The proposed regulations provide no resolution or even discussion as to this Kafkaesque res judicata situation faced by taxpayers.

Allocation of Taxes Between Spouses 

Current regulations have no general rule about how to allocate either unpaid taxes or deficiencies between spouses when erroneous items from the spouses create additional AGI, thereby triggering statutory phase-outs (such as of deductions or the earned income tax credit). New Prop. Reg. sec. 1.6015-1(n) provides rules and examples that allocate the amounts of taxes or disallowed credits triggered by the increases in AGI. The amounts are allocated among the spouses in proportion to their erroneous income or deductions reported on the return. For a concrete example that may be of interest to the LITC community, Prop. Reg. sec. 1.6015-1(n)(2) (Example 1), states:

H and W file a joint Federal income tax return. After applying withholding credits there is a tax liability of $500. Based on the earned income reported on the return and the number of qualifying children, H and W are entitled to an Earned Income Tax Credit (EITC) in the amount of $1,500. The EITC satisfies the $500 in tax due and H and W receive a refund in the amount of $1,000. Later the IRS concludes that H had additional unreported income, which increased the tax liability on the return to $1,000 and resulted in H and W’s EITC being reduced to zero due to their adjusted gross income exceeding the maximum amount. The IRS determines a deficiency in the amount of $2,000 – $1,500 of which relates to the EITC and $500 of which relates to H’s erroneous item – the omitted income. If W requests relief under section 6015, the entire $2,000 deficiency is attributable to H because the EITC was disallowed solely due to the increase of adjusted gross income as a result of H’s omitted income.

Final Observations

The 2013 proposed regulations also addressed an issue that is not covered by the new proposed regulations in any way:  when collection activities start for purposes of making an election under (b) or (c).  That election must be made within 2 years of the IRS commencing collection activities. Current regulations provide that, among other things, the issuance of a notice of intention to levy (NOIL) is a collection activity for this purpose. Reg. sec. 1.6015-5(b)(2)(ii).

The 2013 proposed regulations sought to adopt the holding in Mannella v. Commissioner, 132 T.C. 196 (2009), rev’d on other issues 631 F.3d 115 (3d Cir. 2011), that the mailing of an NOIL commences the two years running, even if the NOIL is never received or (as alleged in Mannella) was hidden from the requesting spouse by the nonrequesting spouse.  The LITC comments explain why an NOIL should not be considered a collection activity; rather, an actual levy should be considered such an activity. That was the position that the IRS took in the original regulations it proposed in 2001, then rejected in the final 2002 regulations.  See section 1.6015-5(b)(2) and (4) of the proposed 2001 regulations atREG-106446-98, 2001-1 C.B. 945, 958-959.

In the alternative, the LITC commenters argued that, if an NOIL was to trigger the start of the 2-year period, the period should run from actual receipt of the NOIL because the Mannella holding was incorrect in light of legislative history never considered in the opinion.

Sadly, the new proposed regulations do not involve the portions of the regulations at Reg. sec. 1.6015-5(b)(3) that provide the definition of “collection activities”. Hopefully, the IRS will still keep this issue open for reconsideration when final regulations are adopted under section 6015.

Finally, earlier this year, the IRS lost Altera Corp. v. Commissioner, 145 T.C. No. 3 (July 27, 2015), in which all 15 judges of the Tax Court who voted in the case held that a regulation under section 482 had to be treated as legislative, and thus covered by the rules of 5 U.S.C. section 553(b) of the Administrative Procedure Act, because the regulation had the force and effect of law.  The regulation was held not to be exempt as an interpretative rule.  It is interesting to see the Treasury go blithely on as if nothing had happened in Altera.  In the preamble to the proposed section 66(c) and 6015 regulations issued on November 20, 2015, the following now-insupportable sentence appears:  “It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations.”  I don’t know whether to laugh or cry.

Carlton Smith About Carlton Smith

Carlton M. Smith worked (as an associate and partner) at Roberts & Holland LLP in Manhattan from 1983-1999. From 2003 to 2013, he was the Director of the Cardozo School of Law tax clinic. In his retirement, he volunteers with the tax clinic at Harvard, where he was Acting Director from January to June 2019.


  1. Further to the final paragraph, I don’t know why Treasury and the Tax Court (and numerous other courts) frequently refer to “section 553(b) of the Administrative Procedure Act”. No such provision has ever existed. The statute presently codified at 5 USC § 553 was originally enacted as § 4 of the Administrative Procedure Act, PL 79-404 (“APA”), 60 Stat 237, 238-239 (June 11, 1946). The entire APA only had 12 sections (the last of which was printed at 60 Stat 244); there was never such a thing as “section 553(b) of the Administrative Procedure Act”.

    On September 6, 1966, Congress enacted PL 89-554, 80 Stat 378 (the “Title 5 Act”; it has no official short title). Among other things, the Title 5 Act repealed the entire APA (Title 5 Act § 8(a), 80 Stat at 632-63) and re-enacted its provisions as sections of 5 USC, including re-enacting the former APA § 4 as 5 USC § 553 (80 Stat at 383-84). As a result of the Title 5 Act, the APA no longer exists, but § 7(b) of the Title 5 Act (80 Stat at 631) provides that “[a] reference to a law replaced by … this Act … is deemed to refer to the corresponding provision enacted by this Act”. Hence, the term “APA § 4” is still a valid way to refer to 5 USC § 553, but “APA § 553” does not make sense and has never existed.

    Although a large number of judicial opinions appear to use incorrect references to this statute (including the opinion of the Tax Court in Altera), there are also at least a few judges that get it right. See, e.g., Tafas v. Doll, 559 F 3d 1345, 1366 (Fed CA 2009) (Bryson, J, concurring) (referring to “section 4 of the Administrative Procedure Act, 5 U.S.C. § 553”); Cathedral Candle v. United Stated Internation Trade Commission, No 04-1803 (Fed CA March 9, 2005) (Bryson, J) (same); Herman v. Suwannee Swifty Stores, 19 F Supp 2d 1365, 1371 (1998) (Sands, J) (same).

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