Although the IRS's primary administrative unit for evaluating innocent-spouse requests concluded that a taxpayer was entitled to relief under Sec. 6015(c), the Service was not bound by that determination in litigation, the Tax Court held. Rather, when an innocent-spouse request is raised as an affirmative defense in a deficiency proceeding, the IRS Chief Counsel has the final authority to concede or settle the issue, the court held.
Facts: The underlying tax dispute in the case dated back to the late 1990s, when Michelle DelPonte was married to William Goddard. Goddard, a lawyer, sold aggressive tax-avoidance strategies and used some of those same strategies to shelter the considerable income he earned. Beginning in 2004, the IRS issued Goddard and DelPonte five notices of deficiency for tax years 1999, 2000, and 2001. However, the couple had separated in 2000, and DelPonte was unaware of the notices because they were sent to Goddard's law office. The nearly $5 million underlying tax liability was upheld in earlier proceedings (see Greenberg, T.C. Memo. 2018-74, aff'd, 10 F.4th 1136 (11th Cir. 2021), and Goddard, No. 20-73023 (9th Cir. 12/17/21)).
As part of his response to the notices of deficiency, Goddard filed innocent-spouse relief petitions in Tax Court on DelPonte's behalf without telling her. In 2010, upon learning about the tax deficiency asserted against her and the petitions filed on her behalf by Goddard, DelPonte ratified those petitions.
The Office of Chief Counsel (OCC) asked the IRS's Cincinnati Centralized Innocent Spouse Operation (CCISO) for a recommendation on whether DelPonte was eligible for Sec. 6015(c) relief, and CCISO found her eligible. The Chief Counsel, however, did not accept CCISO's determination and invited DelPonte to an informal discovery conference (a so-called Branerton conference, after Branerton Corp., 61 T.C. 691 (1974)) to request additional information. DelPonte refused to provide the information and filed a motion with the Tax Court for an entry of decision.
Issues: The question at issue was whether, in cases where innocent-spouse relief is raised as an affirmative defense for the first time in a deficiency proceeding, the IRS Chief Counsel has final authority to concede or settle the issue with the taxpayer.
Married couples have the option to file a joint return under Sec. 6013(a). However, each spouse is jointly and severally liable for any tax due. Sec. 6015 allows a spouse relief from joint-and-several liability in certain limited situations. Requesting spouses can seek three types of relief. Under one type, Sec. 6015(c) requires the requesting spouse to be legally separated or divorced from the nonrequesting spouse at the time of electing its provisions and to have no actual knowledge of any items giving rise to a deficiency not allocable to the requesting spouse at the time he or she signed the return. Alternatively, the requesting spouse may establish that he or she signed under duress.
Under Sec. 7803, the IRS commissioner has broad powers to "administer, manage, conduct, direct and supervise the execution and application of internal revenue laws or related statutes" as well as any other duties and powers Treasury may prescribe. The IRS commissioner has redelegated the responsibility for processing most requests for innocent-spouse relief to the CCISO. In addition, Sec. 7803 authorizes the IRS Chief Counsel to represent the IRS in cases before the Tax Court.
DelPonte argued that Treasury has delegated authority to make a final determination to the administrative side of the IRS, and, therefore, the CCISO's position should be final. The OCC argued that it is responsible for deciding what positions the IRS takes in litigation, and because this issue was raised in a deficiency proceeding, it is not bound by CCISO's determination.
In the alternative, DelPonte argued that in Chief Counsel Notice CC-2009-021 (June 30, 2009), the Chief Counsel had redelegated the power to make determinations about innocent-spouse relief to CCISO, and, therefore, it was bound by CCISO's determinations. The Tax Court quickly dismissed that argument, noting that the Chief Counsel has the authority to delegate functions only to an "officer or employee in the Office of the Chief Counsel" (Internal Revenue Manual (IRM) §126.96.36.199.3 (Sept. 1, 2005)), and CCISO is not within the OCC.
In addition, DelPonte argued that because the OCC instructs its attorneys generally to accept CCISO's determinations, the OCC was required to follow CCISO's determination in her case.
Holding: The Tax Court held that where a taxpayer raises an innocent-spouse relief claim as a defense for the first time in a deficiency proceeding, as DelPonte had, the Chief Counsel has the final authority over whether the IRS will litigate. As a result, the court denied her motion for an entry of decision granting her innocent-spouse relief under Sec. 6015(c).
The court found that to settle this dispute, it must answer the question of whether DelPonte's request for innocent-spouse relief — and CCISO's consideration of that request — was like any claim in a case "pending in Tax Court" or more like an administrative request for innocent-spouse relief made with CCISO. The court found it was more like the former, noting that its own jurisdiction was not dependent on an IRS administrative determination but depended only on a timely filed petition and a valid notice of deficiency.
Regarding DelPonte's argument that the OCC instructs its attorneys generally to accept CCISO's determinations, the Tax Court noted that this argument was based not on delegation but on what DelPonte identified as a possible protection of the Due Process Clause of the U.S. Constitution — "a requirement that the government follow the procedures that it establishes even if it didn't have to establish them in the first place" (slip op. at 13).
The Tax Court rejected this argument because it determined that OCC lawyers were following the established procedures. The Tax Court found that the Chief Counsel notices and the IRM tell CCISO to provide "assistance," not to make the final determination, and that OCC attorneys retain their discretion to adopt or reject CCISO's conclusion. The court noted that IRM Section 188.8.131.52.2(1) (Nov. 9, 2007) states that if innocent-spouse relief is raised for the first time in a case already docketed in court, "[j]urisdiction is retained by ... Counsel, and a request is sent to CCISO to consider the request for relief" and specifies that "Counsel ... has functional jurisdiction over the matter and handles the case and request for relief, and either settles or litigates the issues on its merits, as appropriate" (IRM §184.108.40.206.2(3)). Thus, in making their own determinations regarding innocent-spouse relief, OCC attorneys were following the procedures in the relevant guidance.
Lastly, DelPonte posited an argument based on fairness, arguing that principles of horizontal equity and "fundamental fairness" require that all taxpayers be entitled to a final determination of relief from CCISO, regardless of where the request for relief was submitted. The Tax Court dismissed the argument because it found that it did not have the power to adopt the remedy she requested.
- DelPonte, 158 T.C. No. 7 (2022)
— P. Jeffrey Christakos, CPA/PFS, MBA, is a tax partner at Christakos & Co. in Westfield, N.J., and Maria M. Pirrone, CPA, LL.M., is an associate professor of taxation, St. John's University, Queens, N.Y.