Limitation Period for Equitable Innocent Spouse Relief Held Invalid

In a decision of the full court, the Tax Court held that Regs. Sec. 1.6015-5(b) (1), which imposes a two-year limitation period for requesting equitable innocent spouse relief, is an invalid interpretation of Sec. 6015(f).

Background

During 1999, Cathy Lantz was married to Dr. Richard M. Chentnik, a dentist. Lantz and Chentnik timely filed a joint return for the tax year 1999. Chentnik was charged in June 2000 with Medicare fraud and was convicted and sentenced to federal prison. He remained incarcerated through 2003 and was released from prison to a halfway house in August 2004.

As a result of Chentnik’s Medicare fraud, the IRS determined that the couple’s joint income tax liability for 1999 was understated, and it issued a notice of deficiency. In May 2003, the IRS sent separate letters to Lantz and Chentnik at Lantz’s home address, advising them that the IRS was proposing a levy action to collect their joint income tax liability for 1999. Although Chentnik was in prison, he advised Lantz that he would communicate with the IRS about these notices. As a result of Chentnik’s communications with the IRS, in February 2004 the IRS issued two notices of determination solely to Chentnik. In these notices, the IRS determined that it should move the joint account of Lantz and Chentnik into currently noncollectible status because serving a levy on them at that time would cause undue hardship due to their financial condition. In his correspondence with the IRS, Chentnik advised that the IRS should communicate with him directly and requested a form to seek relief for Lantz. In this correspondence, he characterized Lantz as “the innocent spouse.” Chentnik died in a halfway house in October 2004.

Lantz relied on Chentnik to resolve the 1999 income tax issue and took no independent action regarding collection letters from the IRS until it applied her income tax overpayment for 2005 against the 1999 tax liability. After communicating with the IRS, Lantz filed a request for innocent spouse relief in June 2006. In July 2006, the IRS issued a preliminary determination denying her relief for 1999 because she had filed her claim more than two years after the first collection action the IRS took against her, in violation of Regs. Sec. 1.6015-5(b)(1). Lantz protested this determination with the IRS. An IRS Appeals officer determined that Lantz was not entitled to relief because of the limitation period. Lantz subsequently filed a petition in Tax Court challenging the IRS’s determination, arguing that Regs. Sec. 1.6015-5(b)(1), which imposes the two-year limitation period for requesting relief under Sec. 6015(f), was invalid.

Innocent Spouse Relief and Sec. 6015

In certain circumstances, a spouse may obtain relief from joint and several tax liability by satisfying the requirements of Sec. 6015. Sec. 6015(a)(1) provides that a spouse who made a joint return may elect to seek relief under Sec. 6015(b) (dealing with relief from liability for an understatement of tax with respect to a joint return). Sec. 6015(a)(2) provides that a spouse who is eligible to do so may elect to limit that spouse’s liability for any deficiency with respect to a joint return under Sec. 6015(c). To qualify for relief under Sec. 6015(b) or (c), the requesting spouse must make an election not later than two years after the IRS has begun a collection action (Secs. 6015(b)(1)(E) and (c)(3)(B)).

If relief is not available under either Sec. 6015(b) or (c), an individual may seek equitable relief under Sec. 6015(f). Sec. 6015(f) itself does not impose a twoyear limitation period for equitable relief. However, a two-year limitation period for requesting relief under Sec. 6015(f) was included in Notice 98-61, §3.01(3), and subsequently in Rev. Proc. 2000-15, Rev. Proc. 2003-61, and Regs. Sec. 1.6015-5.

Tax Court’s Decision

The Tax Court held that Regs. Sec. 1.6015-5(b)(1) is an invalid interpretation of Sec. 6015 and that the IRS had abused its discretion in denying Lantz’s request based on the two-year limitation period.

The IRS argued that Regs. Sec. 1.6015- 5(b)(1) was valid because Congress had not spoken to the time limitation issue in Sec. 6015(f) and it was not contrary to Congress’s intent. In response to the first argument, the Tax Court found that although the statute did not specify a limitation period for equitable relief under Sec. 6015(f), this did not mean that the statute was silent on the matter. According to the Tax Court, because Congress had specifically included a two-year limitation period in Sec. 6015(b) and (c) but not in Sec. 6015(f), it had addressed the issue by not including a limitation period for Sec. 6015(f). The Tax Court noted that this was consistent with granting equitable relief, which by its nature would be broader than the specific relief provided in Sec. 6015(b) and (c).

The Tax Court also found that the regulation was contrary to Congress’s intent, stating that

[w]hile a taxpayer’s delay in applying for relief under section 6015(f) is a factor to be considered in applying “all the facts and circumstances” test of section 6015(f), the Secretary must be reasonable when creating restrictions that categorically exclude taxpayers from relief. For example, in Revenue Procedure 2003-61, supra, the Secretary imposes a requirement that the requesting spouse must not have transferred property to the nonrequesting spouse as part of [a] fraudulent scheme by the spouses in order to be eligible for relief under section 6015(f). However, unlike restrictions that exclude taxpayers who request relief after engaging in fraudulent activities, whether a taxpayer requests relief within 2 years of the IRS’s first collection activity does not necessarily indicate whether it would be equitable to grant the taxpayer relief. While we need not decide today whether any temporal limitation would be appropriate, it is clear from the omission of a 2-year limitations period in section 6015(f) that such a 2-year limitations period is impermissible.

The Tax Court also noted that when the IRS promulgated regulations under Sec. 66, which governs the treatment of community property income and, like Sec. 6015, provides for traditional and equitable relief from its general rules, it included a different (and much longer) limitation period for equitable relief than it did for traditional relief.

Finally, the Tax Court addressed the IRS’s argument that Congress had tacitly approved the limitation period because it had amended Sec. 6015(f) twice since Regs. Sec. 1.6015-5(b)(1) had been finalized. The Tax Court stated that while it agreed that in general congressional inaction indicated tacit approval, this rule applies only where it is clear that Congress was aware of the disputed regulation and did not act. In this case, the Tax Court found that it did not apply because it was not clear that anyone had brought the disputed two-year limitation period in Regs. Sec. 1.6015-5(b)(1) to Congress’s attention or that Congress had considered its validity.

Reflections

The Tax Court reached the same conclusion and again held Regs. Sec. 1.6015- 5(b)(1) invalid in another innocent spouse case decided shortly after Lantz (Mannella, 132 T.C. No. 10 (2009)). Until further notice, the Office of Chief Counsel has instructed its attorneys not to file motions for summary judgment arguing that a taxpayer’s claim for relief under Sec. 6015(f) was untimely under Regs. Sec. 1.6015- 5(b)(1). If the taxpayer also requested relief under Sec. 6015(b) or (c), IRS attorneys are directed to file a motion for partial summary judgment based on Sec. 6015(b)(1)(E) or (c)(3)(B), respectively. However, the attorneys are also instructed to continue to argue the issue, raising it when appropriate in the case (e.g., in a pretrial memo, at trial, or on brief) and indicating the IRS’s disagreement with the Lantz opinion. For docketed cases where relief was denied based on the two-year rule, attorneys have been told to request that Cincinnati Centralized Innocent Spouse Operations consider the merits of the Sec. 6015(f) claims.

Lantz, 132 T.C. No. 8 (2009)