The Eleventh Circuit held that the Tax Court properly considered evidence outside the administrative record in a trial to determine whether a taxpayer was entitled to innocent spouse relief.
Ruth Neal and her ex-husband Alimam Neal married in 1976, lived together until 1996, and divorced in 1998. During the marriage, the couple kept largely separate finances, maintained separate checking accounts, and rarely discussed their financial arrangements. Alimam took responsibility for preparing and filing the couple’s tax returns. However, unknown to Neal, for a long period during their marriage, Alimam mailed the couple’s completed tax returns to the IRS but did not include any payment with the returns for the taxes on his income. The IRS eventually assessed the couple for Alimam’s unpaid taxes. Although a divorce court ordered Alimam to pay all the couple’s past and future tax liabilities in their subsequent divorce proceedings, he made only minimal payments on the outstanding debt.
In 2000, Neal petitioned the IRS for equitable relief for the portion of the couple’s unpaid tax debt that was attributable to Alimam’s income. Neal responded to a written questionnaire sent by the IRS in which she represented that she was not involved with the preparation of tax returns, did not discuss the tax returns with Alimam, and did not review the tax returns.
Neal then met with an IRS examining agent and related some of these facts. Neither a court reporter nor an attorney was present at the interview, and no recording was made of it. The agent denied Neal relief because the agent found that Neal knew that an underpayment existed when she signed the returns, that she would not suffer an economic hardship if the IRS required her to pay the taxes owed, and that a portion of the taxes was attributable to her income. Neal protested the determination to the IRS Office of Appeals, but it also denied Neal’s request for relief.
Neal then appealed the IRS’s decision in the Tax Court. In the proceedings, the IRS took the position that the Administrative Procedures Act (APA) limited the Tax Court’s review to the administrative record. The Tax Court, however, ruled that its review and determination were de novo, based on its decision in Ewing, 122 T.C. 32 (2004), and it agreed to hear testimony and consider other evidence that the parties wished to offer. In the trial, the Tax Court heard the testimony of Neal and an IRS revenue officer. Based on the administrative record, the testimony, and other evidence presented at the trial, the Tax Court reversed the IRS’s decision and granted Neal’s request for innocent spouse relief. The IRS appealed the decision to the Eleventh Circuit, arguing that the Tax Court had improperly considered evidence outside the record from Neal’s administrative hearings.
The Eleventh Circuit’s Decision
The Eleventh Circuit held that when the Tax Court is making a determination of whether a taxpayer is entitled to equitable relief under Sec. 6015(f), the APA’s record rule does not apply and the Tax Court’s review is not limited to matter contained in the IRS’s administrative record. The Eleventh Circuit, following the Tax Court’s Ewing decision, gave several reasons for this holding.
First, it found that in order to give proper effect to both Sec. 6015(e) (which gives the Tax Court jurisdiction to “determine the appropriate relief available to the individual”) and Sec. 6015(f), the innocent spouse provision, a trial de novo was necessary to correctly determine the appropriate relief. The court also noted that allowing a trial de novo was consistent with the Tax Court’s long history of conducting trials de novo where Congress has authorized the Tax Court to make a “determination.” In addition, the court found that if the Tax Court were confined to the administrative record in reviewing standalone Sec. 6015(e) petitions (such as Neal’s petition), inconsistent procedures would be adopted in equitable spouse relief cases.
Finally, the court noted that the APA itself specifies that it does “not limit or repeal additional requirements imposed by statute or otherwise recognized by law.” Because the Tax Court de novo procedures were well established at the time the APA was enacted and had not been subsequently changed, the court concluded that the APA had not limited or repealed the use of these procedures, even under provisions of the Code that were passed after the enactment of the APA. The court also argued that the APA, as a statute of general application, did not supersede statutes granting specific provisions for judicial review.
In allowing the Tax Court to conduct a trial de novo in innocent spouse cases, the Eleventh Circuit has essentially changed the function of the Tax Court in these cases from a court of appeal to a trial court. While this may have been Congress’s intent, as the dissent in this case points out, allowing the Tax Court authority to take over the IRS’s function as the fact finder makes the whole process of IRS review in these cases essentially a waste of both the taxpayer’s and the IRS’s time and money.
Neal, No. 06-14357 (11th Cir. 2/10/09) TTA
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