Time Limit for Equitable Relief Struck Down, De Novo Standard Applied

In a trio of cases this spring, the Tax Court widened the availability of equitable relief under IRC § 6015(f) for taxpayers with innocent spouse claims.

In two cases, the court invalidated a Treasury regulation provision limiting to two years the period in which innocent spouses may request equitable relief under IRC § 6015(f). In one, the court sided with a taxpayer who said she had believed her husband was taking care of their tax liability before he died while in a prison halfway program.

Cathy Lantz was married to Richard Chentnik, a dentist. They filed a joint return for 1999. In 2000, Chentnik was arrested and subsequently convicted of Medicare fraud, and his assets were seized. The IRS determined an underpayment for 1999 and assessed $928,111 in additional taxes and penalties. The amount was not paid, and in 2003 the IRS issued notices of intent to levy to both Lantz and Chentnik. Lantz agreed to allow Chentnik, who was in prison, to handle the problem and correspond with the IRS. Chentnik died in 2004.

In 2005, Lantz filed a tax return, and her refund was applied to the taxes due for 1999. In 2006 she applied to the IRS for innocent spouse relief under IRC § 6015(f), which authorizes the IRS to grant equitable relief if a taxpayer is not eligible for relief under the general innocent spouse provisions of sections 6015(b) and (c) and if, taking into consideration all the facts and circumstances, it would be inequitable to hold the taxpayer liable.

The Service has issued regulations under section 6015(f). Treas. Reg. § 1.6015-5(b) requires taxpayers to file a petition for relief within two years from the date of the first collection activity against the requesting spouse. The requirement mirrors that of the procedure for general relief under IRC § 6015(b). Because Lantz filed her petition three years after she was notified of the intent to levy against her, the IRS denied equitable relief.

The principal question before the court was the validity of the regulation requiring that the taxpayer apply for equitable relief within two years of the first collection activity against the requesting spouse. The court first had to decide which standard of review to apply. Under the Golsen rule (Golsen v. Commissioner, 54 TC 742, aff’d, 10^th Cir., 1971), the Tax Court uses the standard used by the court of appeals to which the case would be appealed. For Lantz, it would be the Seventh Circuit, which applies the Chevron standard. Therefore, the Tax Court analyzed the regulations under the two-step Chevron rule.

The first step asks if Congress has addressed the issue. Section 6015(f) does not contain a limitation period, which would appear to indicate Congress had not addressed the question. However, the court ruled that since Congress had specifically placed a two-year rule in the date of the first collection activity against the requesting spouse. The requirement mirrors that of the procedure for general relief under IRC § 6015(b). Because Lantz filed her petition three years after she was notified of the intent to levy against her, the IRS denied equitable relief.

The principal question before the court was the validity of the regulation requiring that the taxpayer apply for equitable relief within two years of the first collection activity against the requesting spouse. The court first had to decide which standard of review to apply. Under the Golsen rule (Golsen v. Commissioner, 54 TC 742, aff’d, 10^th Cir., 1971), the Tax Court uses the standard used by the court of appeals to which the case would be appealed. For Lantz, it would be the Seventh Circuit, which applies the Chevron standard. Therefore, the Tax Court analyzed the regulations under the two-step Chevron rule.

The first step asks if Congress has addressed the issue. Section 6015(f) does not contain a limitation period, which would appear to indicate Congress had not addressed the question. However, the court ruled that since Congress had specifically placed a two-year rule in sections 6015(b) and (c), the absence of a similar rule in section 6015(f) meant none was intended there.

Normally, the discussion would end there. But the Tax Court chose to analyze this regulation under the second step: If the Code is silent or ambiguous, the regulation will be upheld if it permissibly interprets it. The court also found that the regulation fails this test. Because section 6015(f) is the last resort for taxpayers who do not qualify for relief under subsections (b) or (c), Congress intended for the relief available under it to be broader than under sections 6015(b) and (c), the court said. One thing that makes it broader is that Congress did not include a time limit in subsection (f) as it did in subsections (b) and (c).

To impose a two-year limit on subsection (f) would be to deny relief that Congress authorized, the court reasoned. Consequently, without ruling on the validity of her claim in other respects, the court ruled that Lantz could be considered for innocent spouse relief under section 6015(f).

The Tax Court soon afterward ruled similarly in Denise Mannella v. Commissioner. In that case, the court rejected the taxpayer’s argument that since her husband received the notice of intent to levy and forged her signature to the certified mail receipt for it, she was entitled to an extension. The court concluded that a taxpayer does not have to actually receive the notice. The mailing of the notice to the correct address is sufficient to start the two-year period. But following Lantz, the court went on to rule that the two-year limitation period was invalid in this case as well.

In the third case, a divided Tax Court took the next step after its determination last year in Suzanne L. Porter (130 TC 115) that it was not bound by the IRS administrative record but could conduct a trial de novo (that is, a new trial as if the IRS administrative determination had never occurred) in such cases. In this case, a nine-judge majority determined that the court should also use a de novo standard of review—determining the merits of the innocent spouse claim itself rather than merely determining whether the IRS abused its discretion in denying relief under section 6015(f).

Doing so, the majority found that Porter was entitled to equitable relief. In a separate opinion, two more judges concurred as to the de novo standard but dissented from finding Porter entitled to relief. Testimony indicated she signed the tax return at issue after her husband prepared it but without thoroughly examining it. Two opinions joined by six judges dissented from the use of the de novo standard of review.

The IRS has signaled that it does not agree with the Lantz ruling (from which five Tax Court judges also dissented) and will continue to argue the two-year limit at trial or “whenever appropriate” in litigation. However, Chief Counsel Notice CC-2009-012 also advises that where the Service’s denial of equitable relief under section 6015(f) is based on the time limit, IRS attorneys should refrain from filing motions for summary judgment and should request case reviews by an administrative center for innocent spouse claims.

■ Cathy Marie Lantz v. Commissioner, 132 TC no. 8

■ Denise Mannella v. Commissioner, 132 TC no. 10

■ Suzanne L. Porter v. Commissioner, 132 TC no. 11

By Edward J. Schnee, CPA, Ph.D., Hugh Culverhouse Professor of Accounting and director, MTA Program, Culverhouse School of Accounting, University of Alabama, Tuscaloosa.