The Tax Court determined that a widow was not prohibited from raising the issue of relief from joint and several liability for three tax years that had been previously litigated. The court concluded that the exception to res judicata applied, but it did not address whether the taxpayer qualified to receive the requested relief.
Sari F. Deihl and her husband litigated three consolidated tax cases in the Tax Court in 2004 related to the substantiation of business expenses claimed during the 1996, 1997 and 1998 tax years. Mr. Deihl hired an attorney to represent the couple in the consolidated cases. The 1996 petition raised the issue of relief from joint and several liability for Mrs. Deihl, but the issue was not raised in the 1997 or 1998 petition. Mr. Deihl died in 2006 after the Tax Court filed its opinion but before the final decisions were entered. In 2007, Mrs. Deihl filed a request for innocent spouse relief for the 1996, 1997 and 1998 tax years, which the IRS denied.
Under the judicial doctrine of res judicata, once a court that has jurisdiction in a case enters a final judgment on the merits of a cause, the parties to the suit are bound with regard to all matters that were or could have been litigated in that suit. This doctrine prevents repetitious lawsuits. For federal income taxes, res judicata is used to prohibit subsequent proceedings that involve the same tax year. The principles of res judicata prohibit a taxpayer who was a party to an earlier proceeding from later seeking relief from joint and several liability, whether or not the issue was raised in the earlier proceeding. However, IRC § 6015(g)(2) creates an exception to res judicata when relief was not an issue in the earlier proceeding and the taxpayer did not meaningfully participate in the proceeding. The taxpayer bears the burden of proving those elements.
Neither the IRC nor prior court decisions clearly define meaningful participation. In previous cases, the Tax Court has weighed the requesting spouse’s degree of involvement in and knowledge about documents, meetings and court sessions connected with the litigation. Merely complying with the other spouse’s instructions to sign court documents did not conclusively indicate meaningful participation (Thurner v. Commissioner, 121 TC 43). In this case, Mrs. Deihl did not sign any court documents in the consolidated cases, and she did not review or agree to the stipulations of facts. Further, Mrs. Deihl, who had less than a high school education, did not meet with any IRS personnel or participate in any of the settlement negotiations with the IRS. Mrs. Deihl did testify briefly as a witness in the earlier litigation. The Tax Court determined that Mr. Deihl controlled the litigation in the consolidated cases until the time of his death and that the evidence indicated that Mrs. Deihl was not fully informed about or engaged in the litigation. Thus, the court concluded that Mrs. Deihl did not participate meaningfully in the consolidated cases.
Only the 1996 petition raised the issue of relief from joint and several liability, and it did not specify whether the basis for the relief was section 6015(b) (joint filers generally), 6015(c) (election by divorced or legally separated spouses to allocate a deficiency between them), or 6015(f) (equitable relief). Because Mrs. Deihl was not divorced or separated from Mr. Deihl when the 1996 petition was filed, she was ineligible to have made an election under section 6015(c) then, but the other two subsections could have applied. Therefore, the Tax Court concluded, she was barred from pursuing relief under subsections 6015(a) and 6015(f) now, but section 6015(c) remained available for 1996 and all three subsections for the other two tax years.
Sari F. Deihl v. Commissioner , 134 TC no. 7
By Beth Howard, Ph.D., assistant professor of accounting, Tennessee Technological University.
More from the JofA: