In a favorable development for taxpayers seeking innocent spouse equitable relief, the IRS announced that it will acquiesce to a Ninth Circuit holding (Wilson, 705 F.3d 980 (9th Cir. 2013), aff’g T.C. Memo. 2010-134) that allowed the Tax Court to consider newly developed information during trial. The IRS had argued previously that innocent spouse equitable relief cases should be tried based solely on information developed during the IRS’s administrative process.
Sec. 6015 affords relief from joint and several liability on a joint return to certain spouses and lays out the conditions under which this relief may be granted. Sec. 6015(e) allows the Tax Court to determine appropriate relief for an individual once a deficiency has been asserted under the general provisions of Sec. 6015(a) or in cases of an understatement of tax under Sec. 6015(b). In addition, taxpayers seeking equitable relief under Sec. 6015(f) may, under certain conditions, seek review by the Tax Court.
In this case, Karen Wilson, a high-school-educated clerk, petitioned the court to be relieved of self-reported liabilities resulting from her ex-husband’s Ponzi scheme. The IRS had denied Wilson’s request for equitable relief because, it contended, the fact that there was an outstanding balance owed on the couple’s 1998 return when they filed their 1999 return showed she did not reasonably believe the tax would be paid (a factor weighing against relief under Rev. Proc. 2000-15). At the time of her appeal hearing she was still living with her husband (although she had begun divorce proceedings) and did not respond to an Appeals officer’s requests for additional information. At the Tax Court trial, Wilson was allowed to provide additional testimony that convinced the court that relief from the joint liability was appropriate.
The IRS appealed, arguing that the court should apply an abuse-of-discretion standard of review and should not look outside the administrative record. The Ninth Circuit, however, noted that Sec. 6015(f) requires the Tax Court to take into account all facts and circumstances, and that previous cases (e.g., Porter, 130 T.C. 115 (2008) and 132 T.C. 203 (2009)) established that the court could weigh facts not considered during the original administrative process. The Eleventh Circuit reached the same conclusion in 2009, taking the broad view that a taxpayer is not appealing the IRS’s Sec. 6015(f) decision to the Tax Court but that the taxpayer is seeking Sec. 6015(e) relief from the Tax Court (Neal, 557 F.3d 1262 (11th Cir. 2009)). Thus, the court is not reviewing the IRS’s determination but making an independent determination that begins anew in the courtroom.
The IRS Office of Chief Counsel issued memorandum CC-2013-011 advising IRS attorneys to no longer argue that the Tax Court should apply an abuse-of-discretion standard of review or limit its review in innocent spouse cases to evidence in the administrative record. Attorneys should, however, “work with petitioners to stipulate to evidence in the administrative record that is relevant to the court’s determination. …”
This Action on Decision allows welcome flexibility to a taxpayer pursuing innocent spouse relief, especially in cases where spousal abuse and ongoing marital litigation is a factor.
IRS Action on Decision 2012-07
By Dayna E. Roane, CPA/ABV, M.Tax., Perry & Roane PC, Niwot, Colo.