Fourth Circuit Upholds Two-Year Innocent Spouse Limitation Period

The Fourth Circuit overturned a Tax Court decision and upheld a Treasury regulation that sets a two-year statute of limitation on claims for innocent spouse relief (Jones, No. 10-1985 (4th Cir. 6/13/11)). This marks the third time the Tax Court has been overruled on this issue by a higher court.

The taxpayer, Octavia Jones, was separated from her husband. After he defaulted on an installment agreement with the IRS to pay the couple’s joint tax liability for the year 2000, the IRS began collection activities against the taxpayer. More than two years later, she requested innocent spouse relief under Sec. 6015(f). Although it agreed that she would otherwise have been eligible for innocent spouse relief under the facts of the case, the IRS denied her claim because it was barred by the two-year statute of limitation contained in Regs. Sec. 6015-5(b)(1).

The Tax Court granted the taxpayer’s petition for summary judgment based on its earlier decision that the regulation at issue is invalid (Lantz, 132 T.C. 131 (2009)). In Lantz, the Tax Court held that because Congress specifically omitted any limitation period from Sec. 6015(f), coupled with the fact that that subsection provides relief that cannot be obtained under Sec. 6015(b) or 6015(c), Congress intended that the two-year limitation would not apply in connection with Sec. 6015(f). Accordingly, the Tax Court held that Regs. Sec. 6015-5(b)(1) was invalid.

Lantz was subsequently overturned by the Seventh Circuit (Lantz, 607 F.3d 479 (7th Cir. 2010)), which held that Congress had granted to the IRS the authority to devise appropriate substantive and relevant procedures to be followed, including deadlines, and that the two-year limitation period was a reasonable exercise of that authority.

A similar decision by the Tax Court has also been overturned by the Third Circuit (Mannella, 631 F.3d 115 (3d Cir. 2011)), which found Sec. 6015(f) to be ambiguous, found nothing in the legislative history that clearly demonstrated Congress’ intent, and upheld the regulation.

The Fourth Circuit in Jones analyzed the regulation under the Chevron standard (Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)), and concluded that Sec. 6015 is ambiguous regarding the limitation period applicable to Sec. 6015(f) and that the two-year limit in the regulation is a permissible interpretation of the statute.

The court rejected the argument that the lack of a specific limitation period in Sec. 6015(f) means that Congress intended there to be no limitation period. Instead, the court found the Code section to be ambiguous, and that under Chevron, it merely needed to determine whether the regulation’s statute of limitation was “a reasonable approach to resolving the statute’s ambiguity,” not whether the “chosen approach is the best one” (Jones, slip op. at 10).

The court held that the regulation was reasonable and therefore valid.

The taxpayer had also requested Sec. 9100 relief, and the court remanded the case to Tax Court to decide if she is entitled to such relief. It did not address the taxpayer’s request for relief under the doctrine of equitable tolling because she did not raise the issue in Tax Court, and issues raised for the first time on appeal are generally considered waived.

In April, Senate Finance Committee Chairman Max Baucus, D-Mont., and members Tom Harkin, D-Iowa, and Sherrod Brown, D-Ohio, wrote to IRS Commissioner Doug Shulman asking the IRS to review the two-year statute of limitation, which they said, “serves to deny equitable relief to the very taxpayers the law was designed to reach, such as innocent spouses unaware of IRS collection activities because of intimidation or deception on the part of the joint filer.” Shulman wrote back that he has asked for a review of the IRS rules governing innocent spouse determinations.