Two-Year Limit on Equitable Relief Petitions Upheld
The Seventh Circuit Court of Appeals reversed the Tax Court and upheld IRS regulations restricting to two years the period in which taxpayers can petition under IRC § 6015(f) for equitable innocent spouse relief from joint and several liability.
Cathy Lantz was married to a dentist convicted of Medicare fraud. Based on the fraud, the IRS assessed more than $900,000 of additional tax, penalties and interest against the couple for the 1999 tax year. Materials the IRS sent the couple in 2003 with its notice of a proposed levy to collect the assessment included information on how Lantz could file for innocent spouse relief. She asked her husband about the assessment and relief rules, and he said he would take care of it. However, he did not file the forms necessary for her to be relieved of her joint and several liability before he died in 2004. In 2006, the IRS applied $3,239 of a refund due to Lantz for her 2005 return against the assessment for 1999 (which by then had grown to more than $1.3 million). She requested innocent spouse relief under section 6015(f).
The IRS denied the request on the grounds that it was filed after the two-year limitation period in Treas. Reg. § 1.6015-5. The Tax Court ruled the regulation invalid (132 TC no. 8; see also “Tax Matters: Time Limit for Equitable Relief Struck Down, De Novo Standard Applied,” JofA, July 2009, page 76). The IRS appealed.
The Seventh Circuit Court of Appeals first considered how much deference the courts should give to the regulation. Section 6015(f) contains the phrase “under procedures prescribed by the [Treasury Department].” The court concluded that because of this express delegation of authority, the regulation, including its time limit, is entitled to full deference. In other words, the regulation must be enforced unless it is “unreasonable,” which is defined as contrary to the IRC or the intent of Congress.
The Tax Court had held that the regulations violated congressional intent. It reasoned that since Congress had dictated a two-year period in sections 6015(b) and (c) (providing relief generally and in cases of subsequently separated or divorced spouses, respectively), the absence of any period in subsection (f) indicated that Congress had “‘spoken’ by its audible silence” and intended no limitation period. The Seventh Circuit disagreed, saying such silence could not be viewed as a statement of intent. The appeals court concluded the regulation was not contrary to congressional intent.
The court also examined the reasonableness of a two-year limit on filing for relief under subsection (f) (when relief is not available under subsections (b) or (c) but, considering all the facts and circumstances, the IRS determines it would be inequitable to hold the spouse liable). The court noted that the requirements for all three subsections were similar. In this case, as in most cases, the taxpayer would have been eligible to request relief under either subsection (b) or (c), plus (f). To have similar substantive criteria for relief under all three subsections, but no time limit under (f), would nullify the limits in (b) and (c). Therefore, having the same limitation period for all three was reasonable, the court said.
Finally, the Seventh Circuit pointed out that section 6015(f) does not require the IRS to grant relief even to a taxpayer who petitions for it within two years. Since relief is discretionary, the court found it reasonable for the IRS to use that discretion to deny relief to a class of applicants—those who waited more than two years to petition. The court also pointed out that in most cases, section 6015(f) is not the only available administrative equitable remedy. Lantz, for example, could seek a release of levy for economic hardship under section 6343(a)(1)(D), the court noted.
The Tax Court has held similarly to its holding in Lantz in another case the IRS also has appealed, in the Third Circuit: Mannella v. Commissioner, 132 TC no. 10.
Within days after the Seventh Circuit’s decision in Lantz, the IRS in a chief counsel notice (CC-2010-011) told its attorneys not to concede or settle the two-year issue on any Tax Court-docketed cases and said it is considering still more appeals. However, about half the docketed cases are taxpayer-elected “small” cases that may not be appealed, the IRS noted. Because of the issue’s significance, the IRS said it believes it should have the opportunity to appeal any cases involving the issue. Thus, it has instructed its attorneys to not classify cases with the issue as small cases and to remove the “S” designation from cases per Tax Court Rule 171(c) and to oppose any request to designate cases with the issue as small cases. In any case arising within the Seventh Circuit, the Tax Court must follow that court’s holding in Lantz.
By Edward J. Schnee, CPA, Ph.D., Hugh Culverhouse Professor of Accounting and director, MTA Program, Culverhouse School of Accounting, University of Alabama, Tuscaloosa.
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