Despite its recent reversal on the issue by the Seventh Circuit, the Tax Court again ruled invalid IRS regulations requiring innocent spouses to request equitable relief under IRC § 6015(f) within two years of the beginning of collection activity. For more, see “Innocent Spouse Relief: Alternatives After the Lantz Case,” on page 46 in this issue.
Audrey Hall and her husband filed joint federal tax returns in 1998 and 2001 (the years at issue in the case). The couple paid only part of the amount due for 1998 and did not pay any of the amount due for 2001. After the 2001 filing, the couple made additional payments, which were applied to the 2001 tax year. In 2003, the couple divorced. Their divorce decree obligated Mr. Hall to pay the joint tax obligations. In 2004, the IRS initiated collection activity against both Audrey Hall and her ex-husband. In 2008, Audrey Hall submitted Form 8857, Request for Innocent Spouse Relief, for her 1998 and 2001 tax years.
The IRS denied the request on the grounds that it was filed after the two-year limitation period required by Treas. Reg. § 1.6015-5(b)(1). Hall pursued an administrative appeal of the denial, stating that she was not aware of the collection activity and had been confused by the IRS correspondence. The IRS denied all appeals but stipulated she “would be entitled to equitable relief on the merits” if her request had been timely. Hall then petitioned the Tax Court for relief.
The Tax Court held that the regulation violated congressional intent and granted her innocent spouse relief.
In a prior case in which it reversed the Tax Court, Lantz v. Commissioner, the Seventh Circuit Court of Appeals (docket no. 09-3345) held that the two-year time limit for filing a claim in Treas. Reg. § 1.6015-5(b)(1) was valid. In its analysis in Hall’s case of the Seventh Circuit’s decision, the Tax Court found that the application of the two-year limitation period made section 6015(f) ineffective in situations where an innocent spouse is unaware of the need or unable to contact the IRS for some of the very reasons envisioned by Congress when it enacted section 6015. Because the regulation prevented any consideration of the facts once the time limit has passed, the Tax Court regarded it as contrary to the statutory requirement that all the facts and circumstances be taken into account.
The Seventh Circuit had also stated in its opinion that allowing claims for equitable relief under section 6015(f) without a time limit would negate the two-year statutory limit on such claims in “traditional” relief and “separation-of-liability” innocent spouse claims under sections 6015(b) and (c), respectively. The Tax Court stated that this argument failed to take into account the differing purposes of sections 6015(b) and (c) and section 6015(f). The Tax Court noted that as applied by the IRS in Revenue Procedure 2003-61, 2003-2 C.B. 296, subsection (f) requires a decision about whether collecting a joint liability yields an inequitable result. It reasoned that while subsections (b) and (c) are viewed in light of the tax year at issue, the application of subsection (f) also depends upon circumstances after the year of joint liability. Thus, it was not appropriate to carry over the time limit from sections 6015 (b) and (c) to section 6015(f).
The Seventh Circuit had also argued that because the statute authorized the IRS to grant discretionary relief under procedures the Service devised, the two-year limit in the regulations was entitled to judicial deference. The Tax Court recognized that the IRS, in the interest of budget constraints and efficiency, must encourage timely claims. However, the court held, “a refusal to consider ... exceptional circumstances runs squarely contrary to the statutory mandate to prevent inequity. The Secretary ... does not have carte blanche to ignore the purpose and defeat the application of the section for a substantial number of otherwise deserving taxpayers.”
By Dayna E. Roane, CPA, M.Tax., Perry & Roane PC, Boulder, Colo.
More from the JofA: