Where a taxpayer raises innocent-spouse relief for the first time in a petition to the Tax Court for redetermination of a deficiency, the IRS Chief Counsel has the final authority to determine whether to concede or settle the issue, even if the IRS has administratively determined that the taxpayer is entitled to relief.
Background
Michelle DelPonte was married to William Goddard in the years 1999 through 2001 and filed joint returns with him for those years. Goddard was a lawyer who made large sums of money selling tax shelter strategies. He used some of the same strategies he sold to shelter his income from selling the shelter strategies in 1999-2001. The IRS eventually noticed Goddard's activity, audited his and DelPonte's joint returns for those years, and issued notices of deficiency for several million dollars in tax. Although DelPonte was unaware of Goddard's tax problems, because the couple filed a joint return, she was jointly and severally liable for the tax the IRS found was due in the audit.
When the first notice of deficiency from the audit was sent out, DelPonte and Goddard had been living apart for several years. The notice was sent to Goddard's law office, and Goddard neglected to inform DelPonte about it. However, apparently thinking it was unfair that DelPonte would have to pay taxes as a result of his tax troubles, Goddard filed a petition for Sec. 6015 innocent-spouse relief for DelPonte. The IRS sent four more notices of deficiency related to the audit of 1999-2001 to Goddard's office (one in 2005 and three in 2009), and in response to each of these notices, Goddard filed a petition for innocent-spouse relief on DelPonte's behalf without telling her.
In 2010, after DelPonte became aware of the deficiencies from 1999-2001 and the petitions Goddard had filed on her behalf, she ratified those petitions.
In April 2011, the Chief Counsel referred DelPonte's claim for innocent-spouse relief to the IRS's Cincinnati Centralized Innocent Spouse Operation (CCISO) to determine whether DelPonte was entitled to relief. CCISO is the IRS unit that receives and processes most requests for innocent-spouse relief, and its determinations are generally binding on the IRS and the spouse asking for relief. However, the referral letter that the Office of Chief Counsel (OCC) lawyer sent with DelPonte's request asked CCISO to not issue a determination letter but instead "provide the results of [its] consideration directly to [the OCC]."
CCISO reached out to DelPonte directly and instructed her to fill out and return a Form 8857, Request for Innocent Spouse Relief, which DelPonte did. After reviewing the form and the supporting documents DelPonte provided, CCISO concluded she was entitled to innocent-spouse relief.
Following the Chief Counsel's request in the referral letter, CCISO did not send a determination letter to DelPonte, and instead it sent a letter to the OCC explaining its conclusion. The OCC, rather than accepting CCISO's conclusion and settling DelPonte's cases, decided more information was needed to determine whether DelPonte was entitled to Sec. 6015 innocent-spouse relief. It also told DelPonte that CCISO had found in her favor but that the OCC was not abiding by that decision.
DelPonte was not happy with the OCC's request for more information and refused to send any. In her view, additional information would be superfluous because CCISO had already decided she was entitled to relief and its decision was binding on the OCC.
Things did not progress further until 2021, when the IRS's litigation with Goddard over the deficiency for 1999-2001 was completed. DelPonte and the OCC resumed their correspondence on the innocent-spouse issue shortly after the Tax Court released its opinion in Goddard's deficiency cases. DelPonte responded to the Chief Counsel's discovery requests but still insisted that discovery was unnecessary because CCISO had already granted her relief. The OCC continued to argue that CCISO did not speak for the IRS in cases it litigated. DelPonte then moved in Tax Court for entry of decisions in her favor.
The Tax Court, finding that DelPonte's motion was "really more like one for partial summary judgment on the issue of whether DelPonte is entitled to relief under section 6015(c) because the CCISO determined that she is," treated the motion as such.
The Tax Court's decision
The Tax Court denied DelPonte's motion for entry of decision, finding that where a taxpayer raises innocent-spouse relief as an affirmative defense for the first time in a petition that invokes the court's deficiency jurisdiction under Sec. 6213(a), the IRS's counsel has final authority to concede or settle the issue with the taxpayer.
DelPonte argued that the Treasury secretary has delegated authority to make a final determination of innocent-spouse relief to the administrative, not the litigating, side of the IRS, based on the regulations, numerous Internal Revenue Manual (IRM) provisions, the OCC's own written guidance, and the instructions to Form 8857. She further argued that her position was supported by the principles of horizontal equity and fundamental fairness, contending that under these principles a requesting spouse raising innocent-spouse relief for the first time in litigation should have CCISO make the determination, just as if he or she had raised it for the first time in a stand-alone request. According to DelPonte, CCISO makes the innocent-spouse relief determination, and the OCC's job is only to defend CCISO's determination.
The IRS, on the other hand, argued that the OCC is responsible for deciding what positions the IRS takes in litigation, and the decision about whether to concede innocent-spouse relief is a litigating position. The OCC, in representing the IRS, may ask CCISO for its advice but gets the final say in determining the IRS's position on innocent-spouse relief.
The Tax Court agreed with the IRS that the lawyers of the OCC are responsible for the IRS's litigation decisions. The question the court was required to answer, then, was whether DelPonte's request for innocent-spouse relief and CCISO's consideration of that request was like any claim in a case "pending in Tax Court," or more like an administrative request for innocent-spouse relief begun by filing a Form 8857 with CCISO.
The Tax Court found that her request for innocent-spouse relief was the former. The court noted that taxpayers were raising innocent-spouse claims as affirmative defenses in deficiency proceedings years before the creation of today's administrative processes for seeking relief. Furthermore, its power under Sec. 6213(a) to decide issues in deficiency proceedings was not limited to the issues listed in the notice of deficiency. Moreover, jurisdiction to decide an issue in a deficiency case is not dependent on an IRS administrative decision; all the court requires to have jurisdiction to render a decision is a timely filed petition and a valid notice of deficiency.
Once it has jurisdiction over a case where innocent-spouse relief is at issue, the IRS must concede or settle it with a taxpayer if it does not want to litigate it. Sec. 7803(b)(2) and related delegation orders have long delegated those decisions to the Chief Counsel.
DelPonte argued that under Chief Counsel Notice CC-2009-021, the Chief Counsel had redelegated its authority to CCISO to make the innocent-spouse relief determination. The Tax Court found that under IRM Section 30.2.2-6, the Chief Counsel only had authority to delegate functions to an officer or employee in the OCC, and CCISO was not within the OCC, so this argument was not valid.
The Tax Court, reformulating this claim, considered whether, because the Chief Counsel had instructed OCC lawyers to adhere to CCISO determinations in a deficiency case, the OCC lawyers were required to follow those instructions. According to DelPonte, this argument would not be based on powers of delegation but on "a possible protection of the Due Process Clause — a requirement that the government follow the procedures that it establishes even if it didn't have to establish them in the first place."
The Tax Court rejected this argument because it concluded that OCC attorneys handling deficiency procedure cases had been following established procedures. Reviewing CC-2009-21 and other related Chief Counsel notices, as well as the relevant sections of the IRM, the court found OCC lawyers were instructed that they generally should follow a CCISO determination but were not required to do so. The Tax Court held that "the Chief Counsel notices and the IRM all tell CCISO to provide 'assistance,' not to make a final determination, and that Chief Counsel attorneys retain their discretion to adopt or reject CCISO's conclusions."
The Tax Court last addressed DelPonte's argument that principles of horizontal equity and "fundamental fairness" require that all taxpayers be entitled to a final determination of relief from CCISO, regardless of whether they first request relief in a petition for redetermination of a deficiency, in a stand-alone petition, or in a CDP hearing. In DelPonte's eyes, it was unfair that while taxpayers who seek innocent-spouse relief have the opportunity for a determination by CCISO and review by IRS Appeals and the Tax Court, taxpayers who, like her, requested relief in a deficiency proceeding get a review by the Tax Court only.
The Tax Court found two problems with this argument. The first was that her premise was faulty. According to the court, requiring CCISO to have the opportunity to issue a final determination in cases where the requesting spouse raises an innocent-spouse claim for the first time in a petition for redetermination of a deficiency would not guarantee that all spouses be treated equally, regardless of when they request relief. Instead, it would merely make taxpayers who requested innocent-spouse relief in CDP hearings the ones treated differently, rather than taxpayers who requested relief in a petition for redetermination of a deficiency.
The second and more important problem the court found with this argument was that it did not have the power to do what DelPonte contended it should. It observed that while the court under Sec. 6213(a) has exclusive jurisdiction to redetermine a taxpayer's deficiency for a tax year when the taxpayer receives a valid deficiency notice and timely files a petition for redetermination, under Sec. 7803(b)(2)(D), the Chief Counsel has the authority to litigate cases for the IRS before the Tax Court. The court held it could not undo this statutoWry scheme in the name of fairness.
Reflections
While DelPonte did not get the immediate relief she was looking for through her motion, it is entirely likely she will still be found to be an innocent spouse. Although the court denied her motion for entry of decision, it did not decide the underlying issues. It seems probable that, unless the OCC has a very convincing argument as to why DelPonte should be held liable for the taxes caused by Goddard's misdeeds, the Tax Court, in light of CCISO's determination, will hold that she is entitled to innocent-spouse relief.
DelPonte, 158 T.C. No. 7 (2022)
Contributor James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information on this article, contact thetaxadviser@aicpa.org.
