Procedure & Administration
Despite being overruled by the Seventh Circuit in an earlier case, the Tax Court has again held that the regulatory two-year limitation period for filing a claim for equitable innocent spouse relief under Sec. 6015(f) is invalid.
Background
Audrey and Etheridge Hall were married on October 9, 1965. The couple filed joint federal income tax returns for the tax years 1998 and 2001, the years at issue. For the year 1998, they included a payment with their return but did not pay the full amount due. For the year 2001, they filed a return but did not pay any of the amount due. However, after filing their 2001 return, the Halls made several payments for the tax year 2001, and the IRS applied several credits to their account.
On April 17, 2003, the Halls divorced. Pursuant to their divorce decree, Mr. Hall had a legal obligation to pay his and Mrs. Hall’s joint income tax liabilities. However, Mrs. Hall did not know at the time she filed her joint returns for the years at issue whether Mr. Hall would pay the tax due for those years. On July 6, 2004, the IRS initiated collection activity against the Halls’ outstanding tax liabilities for the years 1998 and 2001 by issuing an intent to levy notice.
On August 1, 2008, Mrs. Hall submitted claims for innocent spouse relief for her 1998 and 2001 tax years. On August 14, 2008, the IRS issued a preliminary determination denying the petitioner equitable relief under Sec. 6015(f) for the years at issue because her claim was not filed within the two-year limitation period. Mrs. Hall filed an administrative appeal of the IRS’s decision. In November 2008, the Appeals officer held a conference with Mrs. Hall and informed her that the IRS could not grant her relief because she had not timely filed her request. Later that month, the IRS issued a final Appeals determination denying Mrs. Hall relief from joint and several liability under Sec. 6015(f) for the years at issue. Mrs. Hall then challenged the IRS’s determination in Tax Court. In Tax Court, the IRS stipulated that if Mrs. Hall had submitted her claim for relief timely, she would have been entitled to equitable innocent spouse relief under Sec. 6015(f).
Lantz
In making its decision in Hall, the Tax Court took into account the Seventh Circuit’s decision in Lantz. In that case, the Tax Court held that the two-year limitation period in Regs. Sec. 1.6015-5(b)(1) was invalid because it was Congress’s intent that there be no limitation period for equitable innocent spouse claims. According to the court, because the relief provided by Sec. 6015(f) is equitable relief, the limitation period for the relief should not mirror the statutory two-year limitation period for claims for relief under Secs. 6015(b) and (c).
However, the Seventh Circuit reversed the Tax Court’s decision. The Seventh Circuit found no evidence that Congress intended that there should be no limitation period for claiming equitable innocent spouse relief. It also found that if there was no deadline in Sec. 6015(f), or even a longer deadline (or a flexible deadline applied through the equitable doctrine of laches), the deadlines in Secs. 6015(b) and (c) would be “largely set at naught” because the substantive criteria for qualifying under all three subsections are virtually the same. It further found that Congress had made an express delegation of rule-making authority to the IRS and that therefore the rules it made were entitled to judicial deference.
Tax Court’s Decision in Hall
Because Mrs. Hall’s case was appealable to the Sixth Circuit, the Tax Court was not constrained by the Seventh Circuit’s decision in Lantz. The Tax Court again held that the two-year limitation period for innocent spouse relief claims in Regs. Sec. 1.6015-5(b)(1) was invalid and that Mrs. Hall was entitled to relief. In its opinion, the Tax Court reiterated the points supporting its position that it had made in Lantz and discussed why it believed the Seventh Circuit’s decision was erroneous.
In response to the Seventh Circuit’s argument that there was no support for finding that Congress intended no period of limitation for Sec. 6015(f), the Tax Court explained that the intent was shown through the language of the statute, in particular the statute’s requirement that all facts and circumstances be considered. The court argued that if the time limit is enforced, in cases like Lantz’s and Hall’s this made the innocent spouse relief determination depend on only one factor—the date on which the claim was filed. According to the court, this was in clear conflict with the intent expressed in the actual language of Sec. 6015(f) that all facts and circumstances be considered in making the determination.
With regard to the interaction among Secs. 6015(b), (c), and (f), the Tax Court found that the Seventh Circuit’s argument failed because it did not take into account a key difference in Sec. 6015(f). Under that subsection, the taxpayer’s current circumstances are taken into account in making a determination, whereas under Secs. 6015(b) and (c) only the facts from the tax year at issue are primarily relevant. Thus, the subsections were not equivalent, as the Seventh Circuit claimed.
In response to the Seventh Circuit’s deference argument, the Tax Court agreed that having a mechanism for determining the timeliness of claims is important. However, in this case, setting a time limit had the effect of refusing to allow the consideration of a taxpayer’s exceptional circumstances and was squarely contrary to the statutory mandate of Sec. 6015(f). The court stated: “The Secretary has wide latitude to implement section 6015(f) but does not have carte blanche to ignore the purpose and defeat the application of the section for a substantial number of otherwise deserving taxpayers.”
Reflections
As the dissenting opinion in the case points out, the majority seems to be advocating the application of principles of equity (as opposed to legal) jurisprudence in making its decision. Under the principles of equity, strict statutes of limitation are highly disfavored. However, the only support for the proposition that equitable principles be applied is Congress’s use of the word “inequitable” in the statute. The dissent ably points out that this alone does not show Congress intended that the principles of equity be applied to Sec. 6015(f) claims. Instead, it would seem that Congress’s instruction to provide relief “under procedures prescribed by the Secretary” would allow the IRS to include a statute of limitation in the regulations. If Congress had intended otherwise, knowing full well that the IRS would be likely to limit the period for making claims, seemingly it would have expressly stated in the statute that there was no limit on the period for making a claim.
Hall, 135 T.C. No. 9 (2010)
