The Ninth Circuit affirmed the Tax Court and held that Sec. 6015 does not preempt state community property law with respect to an innocent spouse’s right to a refund.
Background
Lois Ordlock and her husband, Bayard Ordlock, live in California, a community property state. In 1982, 1983, and 1984, the Ordlocks filed joint income tax returns. The IRS made several assessments of additional amounts of tax, penalties, and interest against the Ordlocks for those three years. Over the next two decades, the Ordlocks made several payments on the tax debt, all except one of which they made from their community property. The Ordlocks were married at the time they made all the payments and are still married today. Under California law, community property is liable for the joint debts of a married couple and also for the separate liabilities of one spouse (Cal. Fam. Code §910(a)).In March 1999, Mrs. Ordlock filed a request under Sec. 6015(b) for innocent spouse relief from joint and several liability on the tax debt for the years 1982, 1983, and 1984. In July 2002, the Service issued a notice of determination granting her relief "in full" under Sec. 6015(b) for the taxes owed for all three years. However, the notice did not discuss the payments that the Ordlocks had previously made on the outstanding tax debt.
Mrs. Ordlock challenged the determination in the Tax Court. The IRS and Mrs. Ordlock agreed that she was entitled to relief from liability from the tax debt and a refund of the payment she made on the debt from her separate property. However, Mrs. Ordlock contended that she was also entitled to a refund of half of the payments made on the tax debt that were made out of community property because Sec. 6015 preempted state community property law with respect to the calculation of refunds.
In support of her argument, she pointed to the last sentence of Sec. 6015(a), which states, "Any determination under this section shall be made without regard to community property laws," and Sec. 6015(g)(1), which in part states, "[N]otwithstanding any other law or rule of law . . . credit or refund shall be allowed or made to the extent attributable to the application of this section."
The Service argued that Congress did not intend either of these statutory passages to preempt state community property law for refund purposes. The Tax Court, in a reviewed decision, held that Mrs. Ordlock was not entitled to a refund of the payments made out of community property because her husband was still liable for the tax and, under California community property law, the IRS could look to the community property to pay the separate liability of one spouse.
Ninth Circuit’s Decision
On appeal, the Ninth Circuit affirmed the Tax Court and held that Mrs. Ordlock was not entitled to the refund because, in enacting Sec. 6015, Congress did not intend to preempt state community property law with respect to an innocent spouse’s right to a refund.Regarding Sec. 6015(a), the court held that, based on statutory construction and legislative history, Congress intended the final sentence of Sec. 6015(a) to apply only to "determinations" made under Sec. 6015(a), not to all subsections of Sec. 6015. The IRS argued, and the court agreed, that the only determination under Sec. 6015 is the determination of whether or not a spouse qualifies as an innocent spouse. Whether an innocent spouse is then entitled to a refund is not a determination under Sec. 6015 but a separate question governed by state law.
Sec. 6015(g), governing refunds for innocent spouses, does not use the word "determine." It merely says that any "credit or refund shall be allowed or made" (not determined). The legislative history indicates that Congress intended for the language of Sec. 6015 only to preempt community property law so that items could be allocated between spouses for purposes of determining eligibility for innocent spouse relief. Therefore, the court held that Sec. 6015(a) did not preempt community property law for purposes of refunds to innocent spouses.
Looking at Sec. 6015(g)(1), the court found that Congress’s intent in including the phrase "notwithstanding any other rule of law" in the subsection pointed to by Mrs. Ordlock was to limit the application of the doctrine of res judicata, not to limit the application of community property laws. The court gave two primary reasons for this holding. First, it noted that Sec. 6015(g)(2), which restricts the application of Sec. 6015(g)(1), is titled "Res judicata," indicating that Congress was contemplating res judicata when it was drafting the refund provision. Second, the court pointed to "a long history of tax statutes granting some transitional relief from res judicata in connection with the enactment and amendment of the ‘innocent spouse’ statutes" as further evidence that Congress intended in Sec. 6015(g)(1) to restrict the application of res judicata, not the application of state community property laws.
Finally, the court stated that Congress had shown in various parts of Sec. 6015 that it was aware of the implications of community property law for innocent spouse relief. According to the court, the fact that Congress did not include provisions in the statute explicitly addressing the issue of refunds to community property taxpayers was additional proof that Congress did not intend to preempt community property law for refund purposes.
Reflections
Although the Ninth Circuit’s opinion leads one to believe that there is little question about Congress’s intent on this point, the Ordlocks’ arguments were not totally without merit. The dissenting opinion in the Tax Court case argued strongly that Congress intended the phrase "under this section" in Sec. 6015(a) to include all subsections of Sec. 6015.The dissent contended that the majority had invented a too-narrow definition of "determination" and insisted that the determination under Sec. 6015 is not just whether the taxpayer is entitled to innocent spouse relief; the Service also determines the amount of the innocent spouse’s tax liability and the amount of any refund. Thus, the language of Sec. 6015(a) requires that community property laws be disregarded in determining the amount of the taxpayer’s refund.
The Tax Court majority and the Ninth Circuit
drew one set of conclusions about congressional intent from
the legislative history, and the Tax Court dissent drew
contradictory conclusions from the same history. Since
questions about the interplay of Sec. 6015 and community
property laws are regularly litigated, it would be helpful if
the statute were amended to clarify Congress’s intent on this
issue.
—Ordlock, No. 06-74539 (9th Cir. 2008)
The reports of cases, rulings, etc., herein, except for the Reflections, are edited versions of the relevant court opinion, published ruling, etc.
