Procedure & Administration
The Third Circuit held that the two-year deadline in Regs. Sec. 1.6015-5(b)(1) for filing an equitable innocent spouse relief claim under Sec. 6015(f) is valid because it is a permissible interpretation of the statute. This is the second case in which a federal appeals court has overturned the Tax Court on the issue of whether the two-year statute of limitation period in the regulations is valid for claims filed under Sec. 6015(f).
Denise Mannella and her husband Anthony filed joint federal income tax returns for the years 1996–2000. They agreed to the assessment of a deficiency for the year 1996. For the years 1997, 1998, 1999, and 2000, the couple did not fully pay the taxes their returns showed as due. Consequently, the IRS initiated collection procedures to recover the back taxes by sending the Mannellas separate notices of its intent to levy on June 4, 2004. The notices indicated, however, that the Mannellas each had the right to a collection due process hearing before such levy.
The IRS sent the notices to the Mannellas’ correct address by certified mail, return receipt requested. IRS records indicate that it received signed return receipts dated June 17, 2004, for both notices at an IRS Service Center. Denise asserted, however, that her husband signed her name on the return receipt and did not inform her that the notice had arrived until more than two years after its arrival, an assertion the IRS did not challenge.
On November 1, 2006, after learning of the notice of intent to levy and speaking with an attorney, Denise filed two applications under Secs. 6015 (b), (c), and (f), for innocent spouse relief from joint and several liability on the couple’s joint returns filed for the years 1996–2000. The IRS, however, issued Denise a notice of determination dated May 3, 2007, denying her relief because she had not filed her claim within two years of June 4, 2004, the date that the IRS took its first collection action against her by mailing her notice of the intent to levy.
Tax Court Proceedings
In response to the IRS’s rejection of her applications, Denise filed a petition for relief with the Tax Court, arguing that she never received her notice from her husband and therefore the two-year period for seeking innocent spouse relief should not have begun to run against her. She did not argue, however, that the regulation setting a two-year deadline for requesting relief under Sec. 6015(f) was invalid. The IRS moved for summary judgment on the sole basis that Denise’s applications for relief under Sec. 6015 were untimely.
In 2009, the Tax Court granted the IRS’s motion for summary judgment in part and denied it in part. The court determined that the mailing of the notice to Denise’s last known address triggered the running of the two-year deadline periods under Secs. 6015(b) and (c) regardless of whether she actually received the June 4, 2004, notice. Accordingly, the Tax Court granted the IRS’s motion for summary judgment on Denise’s claims under those subsections. Nevertheless, the Tax Court, despite the fact that Denise had not made the argument, held that the two-year regulatory deadline under Sec. 6015(f) was invalid, a conclusion that it based on its prior decision in Lantz, 132 T.C. 131 (2009), rev’d, 607 F.3d 479 (7th Cir. 2010).
In Lantz, the Tax Court held that by explicitly creating a two-year limitation period in Secs. 6015 (b) and (c) but not in Sec. 6015(f), Congress had “spoken” by its silence. Because the regulation imposes a limitation that Congress explicitly incorporated into subsections (b) and (c) but omitted from subsection (f), the court held that the IRS’s interpretation of the law (i.e., the two-year deadline in the regulations) was invalid because Congress had already spoken directly to the question at issue in the statute. The Tax Court further reasoned that because Sec. 6015(f), by its own terms, is available only to taxpayers ineligible for relief under subsections (b) or (c), Congress, by omitting the two-year time limit in subsection (f), intended that the subsection be available to taxpayers who missed the filing deadline under subsections (b) or (c) as a result of some inequity. Consequently, the court concluded that Denise’s subsection (f) claim was timely, and it denied the IRS’s summary judgment on that claim.
After the Tax Court filed its opinion, Denise and the IRS agreed that if her Sec. 6015(f) request had been timely, Denise would have been entitled to relief. Subsequent to this agreement, the Tax Court entered a decision in Denise’s favor. The IRS appealed the decision to the Third Circuit.
The Third Circuit’s Decision
The Third Circuit, employing a Chevron analysis of the regulation, held that the two-year deadline for filing an equitable innocent spouse relief claim in Regs. Sec. 1.6015-5(b)(1) was valid. Therefore, it denied Denise’s claim for relief on that basis. However, it remanded the case to the Tax Court for further proceedings to determine whether Denise might be entitled to relief because the deadline had been tolled under equitable tolling.
In a Chevron analysis (which the Supreme Court set forth in Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984)), a court determines if the statute on which the regulation is based is silent or ambiguous with respect to Congress’s intention about the specific issue in question. If congressional intent is clear, a regulation is invalid if it is inconsistent with that intent. If the statute is silent or ambiguous with respect to the specific issue, the court must then determine whether the agency’s interpretation of the statute in the regulation is a permissible interpretation.
Under the first prong of the Chevron analysis, the Third Circuit found that Congress had not spoken directly to the question at issue in Sec. 6015(f), and thus the statute was ambiguous on the point. The court found that the lack of a deadline provision in Sec. 6015(f) similar to the ones in Secs. 6015(b) and (c) was not proof that Congress did not intend that there be no deadline for equitable innocent spouse claims. The court pointed to a number of plausible reasons why Congress may not have included a deadline in the statute and poked holes in the various theories that Denise presented in support of her position.
Having determined that the statute was ambiguous, the Third Circuit moved to the second prong of the Chevron analysis, whether the regulation permissibly implements the statute. To make its determination, the court looked at the legislative history of Sec. 6015(f). Having done so, the court came to the conclusion that nothing in the legislative history (including the history of Sec. 66(c), which was part of the same act that created Sec. 6015(f)), clearly demonstrated that Congress intended that requests for equitable innocent spouse relief not be subject to a two-year filing deadline. Therefore, the court held that the regulatory two-year deadline was valid.
However, Denise’s trip to the Third Circuit was not a total loss. In addition to arguing that the deadline was invalid, she argued in the alternative that the deadline was subject to equitable tolling and that the deadline should be tolled in her case. Because the Tax Court did not address the equitable tolling issue, the court found that there might be material facts not in the record relating to the issue and remanded the case to the Tax Court to determine whether the deadline was subject to equitable tolling and, if so, whether Denise met the standard for it.
Based on the Supreme Court’s affirmation in Mayo of the Chevron analysis as the only proper standard for analyzing the validity of tax regulations (see p. 205), the Third Circuit appears to have made the correct decision in this case. The IRS’s inclusion in the regulations of a two-year deadline for equitable innocent spouse claims is a harsh interpretation of the statute, but it is no more or less reasonable an interpretation than having no deadline would be. If a more liberal deadline (or no deadline at all) is appropriate for equitable innocent spouse claims, Congress should amend the statute.
Mannella, No. 10-1308 (3d Cir. 1/19/11)