Regs. Limiting Period for Filing Innocent Spouse Claim Held Valid

Procedure & Administration

Reversing the Tax Court, the Seventh Circuit held that the two-year limitation period for filing an equitable innocent spouse claim under Sec. 6015(f) in Regs. Sec. 1.6015-5(b)(1) was valid.

Background

Cathy Lantz filed a joint return for 1999 with her husband, Dr. Richard M. Chentnik. The IRS assessed a large deficiency against the couple based on Medicare fraud committed by Chentnik, of which Lantz was totally unaware. Although the couple had separated after Chentnik was jailed for the fraud, Lantz relied on him to resolve the issue with the IRS and took no independent action to address it. However, Chentnik did not resolve the issue before his death in 2004, and the IRS applied Lantz’s 2005 income tax refund against the outstanding liability for 1999.

In response, Lantz filed for equitable innocent spouse relief in 2006 under Sec. 6015(f), which allows for relief when it would be inequitable to hold the spouse liable and relief is not available under Secs. 6015(b) or (c). The IRS denied her request because she had filed her claim more than two years after the first collection action the IRS took against her, as required by Regs. Sec. 1.6015-5(b)(1). Lantz subsequently filed a petition in Tax Court challenging the IRS’s determination, arguing that Regs. Sec. 1.6015-5(b)(1) was invalid.

The Tax Court’s Opinion

The Tax Court held that Regs. Sec. 1.6015-5(b)(1) was invalid because the two-year limitation period violated Congress’s intent for Sec. 6015(f), and the IRS had therefore abused its discretion in denying Lantz innocent spouse relief (Lantz, 132 T.C. No. 8 (2009)). Although Sec. 6015(f) does not address a limitation period for claims for equitable relief, the Tax Court found that Congress’s intent was that there be no limitation period. According to the Tax Court, “by explicitly creating a 2-year limitation in subsections (b) and (c) but not subsection (f), Congress has ‘spoken’ by its audible silence.” The Tax Court explained that this was consistent with a grant of equitable relief, which by its nature would be broader than the specific relief granted in Secs. 6015(b) and (c).

The Seventh Circuit’s Opinion

The Seventh Circuit reversed the Tax Court and held that Regs. Sec. 1.6015-5(b)(1) was valid and that the IRS had not abused its discretion in Lantz’s case. The court found that the Tax Court had improperly interpreted what the omission of a limitation period from a statute meant and that under the delegation of rule-making authority in Secs. 6015(f) and (h), the IRS could establish a limitation period for claims under Sec. 6015(f).

The Seventh Circuit found that the Tax Court had erred in treating Congress’s “audible silence” on the limitation period as an indicator of its intent. The court wrote, “even if our review of statutory interpretations by the Tax Court were deferential, we would not accept ‘audible silence’ as a reliable guide to congressional meaning.” The court noted that the usual way a court determines a limitation period when it is omitted from a statute is to borrow a limitation period from another statute and that Congress was well aware of this judicial practice. The court further stated that Congress was aware that regulatory agencies normally would not hesitate to create a limitation period where they had the authority to do so. Thus, the court found that the fact that Congress included a limitation period in Secs. 6015(b) and (c) and not in Sec. 6015(f) was not compelling evidence that Congress meant that the IRS could not establish a limitation period for Sec. 6015(f).

The court also found support for the Regs. Sec. 1.6015-5(b)(1) limitation period in the delegation language in Sec. 6015. The introductory phrase to Sec. 6015(f) states that the subsection is to be applied “[u]nder procedures prescribed by the Secretary,” and Sec. 6015(h) directs the IRS to “prescribe such regulations as are necessary to carry out the provisions of” Sec. 6015. The court explained:

Congress’s authorizing an agency to grant discretionary relief under procedures that the agency is to devise itself, as distinct from telling the agency when it must grant relief, writes the agency a blank check; and one of the blanks on the check is the deadline for applying for such relief.

The court also pointed out that, as numerous courts have held, where Congress makes an express delegation to the IRS of rule-making authority, as it did in this case, the regulations the IRS issues under the delegation of authority are entitled to judicial deference.

Finally, the court stated that although its ruling might seem harsh, given her dire financial situation, Lantz was not without remedy. Under Regs. Sec. 301.6343-1(b)(4), the IRS is obligated to release a levy on a taxpayer if the levy is causing a financial hardship that makes the taxpayer unable to pay his or her basic living expenses. Because the IRS had declared her husband’s tax liability to be currently uncollectible, the court reasoned that if Lantz filed for relief under Sec. 6343, which has no filing deadline, the IRS would have to also find her tax liability uncollectible and release the levy against her.

Reflections

Because of the delegation language in Secs. 6015(f) and (h), while the Tax Court’s position was not entirely implausible, it seems highly unlikely that Congress intended that the IRS could not establish a limitation period for filing an equitable innocent spouse claim. Although it did so for what would appear to be noble reasons, the Tax Court overstepped its bounds by not giving deference to the IRS’s determination of what the limitation period should be.

Lantz, No. 09-3345 (7th Cir. 6/8/10)