In two recent United States Tax Court decisions, the Tax Court has provided hope for taxpayers seeking relief from joint and several liability from federal income tax under Internal Revenue Code §6015(f) more than two years after collection activity commenced. The Seventh Circuit had previously dashed taxpayer hopes by ruling that a taxpayer is barred if relief is requested more than two years after the commencement of collection activity. But the Tax Court has continued to permit taxpayers to obtain innocent spouse "equitable" relief undeterred by the reversal by the Seventh Circuit ruling that no limitation exists at all.
Most U.S. income tax returns that are filed are joint income tax returns. The filing of a joint return creates joint and several liability for both taxpayers. §6013(d)(3). In 1998, Congress expanded the ability to claim relief as an innocent spouse by enacting §6015, as joint and several liability was seen as unfair in certain circumstances. The form for filing for this relief is I.R.S. Form 8857.
There are three statutory bases for innocent spouse relief: §6015(b) (applicable to all taxpayers and provides for apportionment relief); §6015(c) (limits liability for taxpayers no longer married or are legally separated or no longer living together and limits liability); and §6015(f) (equitable relief for all taxpayers where under the facts and circumstances it is inequitable to hold the individual liable for any unpaid tax and where relief is not available under §6015 (b) or (c)). §6015(b) and (c), which have their own requirements and nuances and are often combined with relief under I.R.C. §6015(f), are beyond the scope of this article. What is relevant for this discussion is that the relief under each of those sections is statutorily barred if not requested within two years after the IRS first begins collection activity. This article will focus on the time within which a request for equitable relief under §6015(f) must be made.
§6015(f) does not contain any limitation period for requesting relief. The Secretary of the Treasury has attempted to apply a two-year requirement through a Regulation (Reg. §1.6015-5(b)(1)) and a Revenue Procedure (Rev. Proc. 2003-61).
There have been recent challenges to the validity of the Secretary's regulation adopting the two-year bar to taxpayers seeking equitable relief under §6015(f). The Tax Court has held the Regulation invalid in cases that are appealable to the Third, Sixth and Seventh Circuits. Even after a recent reversal of the Tax Court by the Seventh Circuit on June 8, 2010 in Lantz v. Commissioner, 607 F.3d 479 (7th Cir. 2010), the Tax Court stood its ground and held in Hall v. Commissioner, 135 T.C. #19 (September 22, 2010) that it will continue to take the position that Reg. §1.6015-5(b)(1) is an invalid interpretation of §6015(f) in a case in which appeal would be to the Sixth Circuit.
The full Tax Court, in Cathy Lantz v. Commissioner, 132 T.C. 131 (2009) had held the Regulation which contained the two-year bar invalid. In Lantz, the only issue before the Tax Court was whether taxpayer's request for relief which was filed more than two years after the commencement of the collection process was barred by the regulation. The Tax Court held that the appropriate legal standard for determining the validity of a regulation was set forth in Chevron, U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). Chevron requires a two-step analysis. First, whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter. Second, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.
The Tax Court in Lantz reasoned that the silence of §6015(f), as contrasted to (b) and (c) which contains two-year limitations, was Congress speaking directly to the precise question in issue which was whether a two-year period was acceptable. The Tax Court concluded that Congress's intent was that timeliness of the claim was a factor to be considered under §6015(f) and the strict imposition of a two-year limitation would be contrary to Congress's intent that the Service was to consider many factors in evaluating a claim for equitable relief from a taxpayer. Finding that the first prong of Chevron was violated by the regulation, the Tax Court found the regulation invalid. In declaring the two-year limitation contained in the regulations invalid, the Tax Court forcefully observed that it was unreasonable for the IRS to impose the same deadline that applied to traditional §6015(b) and (c) relief on what was supposed to be a broader equitable remedy of §6015(f). The court reasoned that to do otherwise would allow the IRS to shirk its duty to consider all of the facts and circumstances in a §6015(f) case.
On appeal, the Seventh Circuit in Lantz refused to accept "audible silence" as a reliable guide to congressional intent. The Seventh Circuit disagreed with the Tax Court by disagreeing with its rationale that since some provisions of a statute prescribe deadlines, whenever a provision fails to prescribe a deadline, there is none. The court responded that is not how statutes that omit a statute of limitation are usually interpreted. Courts "borrow" a statute of limitation from some other statute in order to avoid the absurdity of allowing suits to be filed centuries after the claim on which the suit was based arose. Whether the treasury borrowed a two-year limitations period from §6015(b) and (c) or simply decided that two years was the right deadline is thus of no consequence; either way, it was doing nothing unusual.
The Seventh Circuit raised the equitable issue of laches as an alternative, noting that "equitable" is in the body of §6015(f). According to the Seventh Circuit, there is a compelling reason why it would be equitable to set a two-year laches period. Had the treasury decided to impose no deadline on the filing of claims under §6015(f) or a longer period, it would undermine §6015(b). According to the Seventh Circuit, §6015(b) would serve no purpose because anyone eligible under §6015(b) would be eligible under §6015(f).
The Seventh Circuit also noted that §6015(f) requires the IRS to devise the appropriate substantive standards and the relevant procedures for the grant of equitable relief. The court concluded that one would expect Congress to leave it up to the treasury to establish appropriate deadlines.
Concurrently with the Tax Court deciding Lantz, the Tax Court also decided Denise Mannella v. Commissioner, 132 T.C. 196 (2009) to which appeal is pending in the Third Circuit. In Mannella, the taxpayer requested equitable relief from the commissioner's notice of intent to levy. More than two years after the notice was sent, the taxpayer filed a Request for Innocent Spouse Relief. The commissioner denied the relief, citing the fact that more than two years had passed since the commissioner began collection activities. The Tax Court held that although §6015(b) and (c) barred the taxpayer's request for relief under §6015(b) and (c), the relief was not barred under §6015(f). The court determined that the Third Circuit would apply the Chevron standard of review in determining the validity of the Regulation as did the Lantz case and adopted the Lantz rationale.
The Tax Court held that the commissioner cannot bar the request for relief solely on the basis that the request was filed more than two years after the commencement of collection activities. The Mannella case has been appealed to the Third Circuit and all briefs have been filed including an amicus brief, but no decision has been made. Additionally, this same issue is in front of the Second Circuit in Coulter v. Commissioner, No. 10-680 (2d Cir.) appealing a stipulated decision of the Tax Court.
These authors have a case pending that is awaiting the decision of the Third Circuit in Mannella before the case will move forward. In the meantime, our advice to practitioners with clients who may be innocent spouses but have not requested relief is to go ahead and request the relief. If it is more than two years after the first collection activity, the taxpayer should still file under §6015(f).
After the IRS denies the request asserting lateness, you should persist and attempt to extend the statute of limitations by agreement. Failing that, file a Tax Court Petition or Complaint to the United States District Court or United States Claims Court, as appropriate, to preserve your client's rights. After filing, do like we are doing: pray the Third Circuit affirms the Tax Court. Even if the Third Circuit reverses the Tax Court, there is still hope with the United States Supreme Court, as the arguments in the taxpayers' favor are cogent. Stay tuned to this ever-evolving area if the relief is sought more than two years after collection activity commenced.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
