Fourth Circuit Joins Others Upholding Two-Year Innocent Spouse Limit; Tax Court Again Rejects It
The Fourth Circuit Court of Appeals joined the Third and Seventh circuits in validating Treasury regulations limiting to two years the period in which taxpayers may apply for innocent spouse equitable relief under IRC § 6015(f). The decision overruled the Tax Court, which has consistently reached an opposite conclusion, including in another recent case.
In the Fourth Circuit case, Octavia Jones was separated from her husband, who in 2005 defaulted on an installment agreement with the IRS to pay the couple’s joint tax liability for 2000. In 2005, the IRS notified the former couple of its intent to levy on their property. In 2008, Octavia Jones requested innocent spouse relief under section 6015(f). Although the IRS agreed that she would otherwise have been eligible for relief under the facts of the case, the Service denied her claim, saying it was barred by the two-year statute of limitation in Treas. Reg. § 1.6015-5(b)(1).
The Tax Court granted summary judgment for the taxpayer on the basis of its decision in Lantz v. Commissioner (132 TC 131 (2009)). In Lantz, the court held the regulation invalid under the first step of the Chevron analysis (Chevron USA Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984))—that is, it violates the clear legislative intent of the statute evident in Congress’ having omitted any time limit for equitable relief under 6015(f) while specifying a two-year limit for general relief under section 6015(b) and separate liability relief under section 6015(c).
On appeal by the IRS, the Fourth Circuit found the statute’s silence on the point inconclusive and thus ambiguous and the regulation valid under the second Chevron step—that it is a permissibly reasonable interpretation of the statute, not “arbitrary, capricious or manifestly contrary to the statute.” The court noted that section 6015(f) begins with the phrase “under procedures prescribed by the Secretary” and thus appears to grant sufficiently broad discretion to support the regulation. And it reasoned that the lack of any time limit for equitable relief would subvert the time limits under the other two subsections.
The Seventh Circuit and Third Circuit had previously reached similar conclusions, overruling the Tax Court in Lantz (see “Innocent Spouse Relief: Alternatives After the Lantz Case,” JofA, Dec. 2010, page 46) and Mannella v. Commissioner (132 TC 196), respectively.
The Fourth Circuit remanded Jones’ case for consideration of her alternate claim, that she should be allowed to request an extension of time to request innocent spouse relief under the regulatory election regulations of Treas. Reg. § 301.9100-3.
A few weeks earlier, the Tax Court granted another taxpayer, Suzanne Pullins, equitable relief under IRC § 6015(f) and yet again held the two-year limit invalid. The court then found that the factors favoring relief outweighed factors not favoring relief. That case is appealable to the Eighth Circuit.
On April 18, 2011, members of Congress sent a letter to IRS Commissioner Doug Shulman, urging the Service to withdraw the two-year requirement of Treas. Reg. § 1.6015-5(b)(1), stating that Congress never intended a statute of limitation for section 6015(f). Shulman responded that he had requested that an internal review of the rules be added to the “fresh start” initiatives to help struggling taxpayers he had announced in February but did not give a timetable for its completion.
By Charles J. Reichert, CPA, professor of accounting, University of Wisconsin–Superior.
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