Judicial Oversight for Nonrequesting Spouses and Section 6015(f) Equitable Relief Claims

This paper proposes that Tax Court and Appellate Court judicial oversight be expanded to Section 6015(f) and Section 66(c)(4) equitable relief claims. This paper further proposes that appeals rights for the non-requesting spouses be expanded to the Circuit Court of Appeals.

Allowance of judicial review of equitable relief claims under Section 6015 (f) and Section 66(c)(4) is consistent with judicial oversight of Section 6015(b) and Section 6015 (c) claims. Expansion of judicial appeals rights to non-requesting spouses follows the intent of Congress in its passage of Section 6015(e)(4) and Section 6015(h) in the Internal Revenue Service Restructuring and Reform Act of 1998.

This background discussion provides a general overview of the enactment of Section 6015 (e) and (f) and Section 66(c)(4) in the Internal Revenue Service Restructuring and Reform Act of 1998 and its amendment in the Consolidated Appropriations Act -- Fiscal Year 2001. The discussion will review recent developments in the Circuit Court of Appeals limiting judicial review of Section 6015(f) claims. The discussion will conclude with a proposal for legislative action to expand Tax Court and Circuit Court oversight to Section 6015(f) and Section 66(c)(4) claims.

Section 6015(e) states in pertinent part:

Section 6015(e) procedures were intended to be additional, non-exclusive avenues in which innocent spouse relief would be considered. Congress intended in enacting section 6015 to provide a simple and efficient administrative procedure for the Internal Revenue Service to consider innocent spouse relief claims. If relief was denied and the spouse requesting such relief did not agree with such denial, the issue could by reviewed by the Tax Court.

The statutory language of Section 6015(e) provides for Tax Court review of IRS denial of innocent spouse relief under Section 6015 (b) and (c). However, Section 6015(e) does not expressly confer jurisdiction on the Tax Court or other federal courts to hear disputes over denials of equitable relief claims under Section 6015(f).

In Ewing v. Commissioner, the Ninth Circuit adopted the Tax Court's dissenting opinion of Judge Laro in Ewing I, 118 T.C. at 511. Judge Laro states in Ewing I that the plain meaning of Section 6015(e) limits Tax Court jurisdiction and review of innocent spouse claims to an individual. Second, prior to filing a claim, the Commissioner of Internal Revenue must assert a deficiency against the petitioner. Finally, the petitioning individual is required to file a claim under Section 6015(b) or (c). Thus, stand alone innocent spouse claims under Section 6015(f) are denied Tax Court review based upon statutory construction of Section 6015(e).

Other jurisdictions have similarly denied judicial review of Section 6015(f) claims, in particular, in Bankruptcy Court. Chief Counsel of the Internal Revenue Service has issued a memorandum in which they conclude if the Tax Court does not have jurisdiction over equitable relief claims, then the bankruptcy court should be similarly precluded from considering Section 6015(f) claims.⁵

Current Circuit Court decisions and Chief Counsel's own interpretation of Section 6015(f) are not following the spirit of congressional intent within Section 6015(e). Judicial review of innocent spouse claims by the Tax Court was intended to correct perceived deficiencies and inequities in the law. The legislation was designed to be curative and should be construed liberally in order to provide judicial oversight of all avenues for relief under Section 6015.

The Tax Court in Butler, 114 T.C. 276, and in Ewing I, 118 T.C. 494, examined congressional intent and the legislative history of Section 6015(e) and Section 6015(f) and concluded that there was nothing that specifically precluded Tax Court review of Section 6015(f) claims. In Ewing I, the Tax Court concluded that amendments to Section 6015(e) did not eliminate the Court's jurisdiction regarding Section 6015(f) claims. The Court concluded Section 6015 regulations allow the Tax Court to review the denial of relief available under Reg. 1.6015-1, which discusses joint and several liability in general.⁶

Section 66(c) provides a spouse may be relieved of liability from community income if:

Under the equitable method, a requesting spouse is eligible for relief if it would be inequitable to hold him or her liable for unpaid tax or deficiency.⁹

In Bernal v. Commissioner, 120 T.C. 102, the Tax Court ruled that Section 66 does not specifically and separately grant Tax Court jurisdiction over the Commissioner of Internal Revenue's denial of equitable relief. The Court ruled Section 66(c) does not provide for a stand alone proceeding whereby an individual can petition the Tax Court in response to an adverse IRS administrative decision.¹⁰

II. PROPOSED ACTION

The proposed legislative change would amend Section 6015(e) to allow judicial review of innocent spouse claims under Section 6015(f) and Section 66(c), similar to the current review of Section 6015(b) or (c) claims.

III. SUPPORT FOR PROPOSED ACTION

Failure to provide judicial review of claims under Section 6015(f) and Section 66(c) limits a taxpayer's right to question the government's determination through the eyes of an unbiased arbiter. The Tax Court has issued numerous rulings to date that determined congressional intent desired such review in the enactment of the Internal Revenue Service Restructuring and Reform Act of 1998.

The proposal was presented to officials of the Internal Revenue Service and the Department of Treasury on May 8, 2006. Representatives of Chief Counsel's office were sympathetic to our concerns regarding the lack of judicial oversight in Section 6015(f) in light of the Ninth Circuit's decision in Ewing. Officials of the Internal Revenue Service expressed a concern about the possibility of legislative error in the enactment of the 1998 IRS Restructuring and Reform Act when Congress specifically provided for Tax Court review of Section 6015 (b) and (c) innocent spouse relief, but not Section 6015 (f) relief.

Officials of the Treasury Department were most concerned about congressional intent in the passage of Section 6015(e). Treasury Department seemed interested in legislative changes when informed about the positive response from the Internal Revenue Service.

The proposal was presented to officials of the House Ways and Means Committee and the Senate Finance Committee on May 9, 2006. The proposal was also presented to members of the United States Tax Court on the same date. Some members of the Tax Court expressed a sense of urgency for legislative change due to the number of Section 6015(f) cases in their inventory and the Ninth Circuit's decision in Ewing.

Members of the House Ways and Means Committee and the Senate Finance Committee both expressed interest in future legislative changes to Section 6015(e). Neither committee expressed any reservations about our proposal to allow Tax Court review of Section 6015(f) innocent spouse claims.

IV. BACKGROUND OF DUE PROCESS FOR NON-REQUESTING SPOUSES

This background discussion provides a general overview of the enactment of Section 6015(e)(4) and Section 6015(h) in the Internal Revenue Service Restructuring Act of 1998. The discussion will review recent developments in the Ninth Circuit Court of Appeals limiting appellate court oversight of the interests of the non-requesting spouse. The discussion will conclude with a proposal for legislative action to expand Circuit Court oversight of non-requesting spouse's challenges to innocent spouse determinations.

Section 6015(h)(2) directs the Internal Revenue Service to prescribe regulations to give the non-requesting spouse notice and an opportunity to participate in the requesting spouse's Section 6015 administrative proceeding. The Internal Revenue Service must give the non-requesting spouse an opportunity to submit information relevant to its determination and must notify him or her of its final determination.¹¹

Rev. Proc. 2003-19 provides the non-requesting spouse the opportunity to file a written protest and receive an Appeals conference with respect to the Service's decision to grant partial or full relief to the requesting spouse.¹² Section 6015(e)(4) and Tax Court Rules 320 through 325 allow the non-requesting spouse the opportunity to become a party to the judicial proceeding as an intervenor.

The Court stated the taxpayer's obligation to pay the income tax deficiencies would not have changed based on the court's decision because he was jointly and severally liable. The Court ruled the taxpayer did not suffer a concrete injury.

The Court stated there are limits on who may appeal to a Federal Circuit Court. The Court ruled Circuit Court standing requires a litigant to present an actual case or controversy for the court to resolve. A party must satisfy three conditions to have constitutional standing to sue: It must allege some concrete injury in fact; that injury must be fairly traceable to the defendant's actions; and it must be likely, and not merely speculative, that a favorable decision will provide redress. These requirements must be met by a party appealing a judgment.¹³

The Ninth Circuit Court of Appeals ruled that Section 6015(e)(4) merely grants the non-requesting spouse the statutory right to intervene as parties in Section 6015(c) proceedings in the United States Tax Court, even if the intervenor does not have the kind of interest that confers standing to force the litigation to judgment or to appeal an adverse ruling. The Court concluded the mere grant of participation rights in Section 6015(c) proceedings in the United States Tax Court does not show that Congress intended to recognize standing to unsuccessful non-requesting spouses in such proceedings. The non-requesting spouse was unable to show he suffered an injury sufficient to confer article III standing on appeal.

In Estate of Ravetti, 37 F.3d 1393 (9th Cir. 1994), the Ninth Circuit Court of Appeals ruled a non-requesting spouse lacks standing to challenge the Tax Court's innocent spouse determination. The Court held that the federal district court generally lacks jurisdiction with regard to declaratory actions involving federal taxes, but noted that two exceptions to the general rule are recognized: (1) where the government under no circumstances could prevail; or (2) where the aggrieved party has no access to judicial review. The Court found neither exception applicable to the non-requesting spouse.

In Corson v. Commissioner, 114 T.C. 354 (2000), the Tax Court ruled a non-requesting spouse has the right to litigate an Internal Revenue Service decision to grant Section 6015(c) relief to the requesting spouse pursuant to the provisions of Section 6015(e)(4) and Section 6015(h)(2).

In Corson v. Commissioner, supra 114 T.C. at 365, the Tax Court discussed court review of a proceeding under section 6015. In Corson, supra, the Court was asked to review the Commissioner's determination regarding an administrative claim for relief in which the underlying deficiency was not in dispute. Such a proceeding under Section 6015(e)(1)(A) is referred to as a stand alone proceeding. The Court stated that Section 6015(e)(4) read together with Section 6015(g)(2) reveal a concern on the part of Congress with fairness to the non-requesting spouse.

Congress intended to provide the non-requesting spouse an opportunity to be heard on innocent spouse issues. The purpose of affording the non-requesting spouse an opportunity to be heard in administrative and then in judicial proceedings is to ensure that innocent spouse relief is granted on the merits after taking into account all relevant evidence.

In King v. Commissioner, 115 T.C. 118 (2000), the Tax Court further expanded the rights of non-requesting spouses in litigating innocent spouse claims. The Tax Court ruled a non-party to the deficiency suit has the right to contest a grant of Section 6015 relief sought by the petitioner. The court ruled a non-party to the deficiency suit had standing to contest Section 6015 relief sought by the petitioner. A non-requesting spouse who is not a petitioner may intervene and become a party in a deficiency case where the other spouse is claiming Section 6015 relief.

In Maier v. Commissioner, 119 T.C. 267 (2002), the Tax Court limited the non-requesting spouse's right to judicial oversight of an adverse administrative decision. The court ruled it had no jurisdiction to review a non-requesting spouse's petition when the requesting spouse had been granted Section 6015 relief in an administrative proceeding and had not filed a petition with the Tax Court.

V. PROPOSED ACTION

Congressional intent in its passage of Section 6015(e)(4) and Section 6015(h) allowed a non-requesting spouse his or her day in court to present the case against innocent spouse relief. Limiting judicial oversight to the Tax Court limits the non-requesting spouse's appeals rights and thwarts congressional intent. Furthermore, if section 6015 relief is granted administratively, the non-requesting spouse has no right to judicial review. The potential harm to the non-requesting spouse is the payment of additional federal taxes.

The proposed legislative change would amend Section 6015(e) and Section 6015(h) to allow Circuit Court review of Tax Court decisions of innocent spouse claims under Section 6015(b), (c), or (f). The legislative change would grant Tax Court standing to non-requesting spouses to challenge administrative determinations of Section 6015 innocent spouse relief. The legislative change would grant Circuit Court standing to non-requesting spouses to challenge Tax Court determinations of Section 6015 relief.

VI. SUPPORT FOR PROPOSED ACTION

The proposed changes will more fairly balance the judicial rights of the non-requesting spouse with those of the requesting spouse in determining exposure to the collection and payment of joint and several federal tax liabilities. The proposed changes closely match proposed court jurisdiction with congressional intent while providing a more level playing field for the non-requesting spouse.

The proposal helps taxpayers and will result in more judicial scrutiny of the taxing agencies actions. The proposal promotes judicial economy by providing a single forum for adverse parties to air their respective grievances.

VII. CONCLUSION

The proposed legislative changes to Section 6015(f), Section 6015(e)(4) and Section 6015(h) will provide proper judicial oversight to IRS administrative determinations. Such changes will provide proper judicial and legislative checks and balances to unbridled executive power.

Taxpayers who fail to meet all of the innocent spouse relief criteria of Section 6015(b) or Section 6015(c) are entitled to judicial review of adverse administrative decisions of Section 6015(f) equitable relief claims. Narrow statutory construction of such innocent spouse claims is inconsistent with legislative intent. Congress intended to have broad judicial oversight in the innocent spouse area when it enacted Section 6015. Similarly, taxpayers who file equitable relief claims under Section 66(c)(4) are entitled to judicial review of any arbitrary decisions of the Internal Revenue Service.

Circuit Court review of non-requesting spouse's rights in innocent spouse rulings also follows the intent of Congress in its passage of Section 6015(e)(4) and Section 6015(h). Full judicial review of the non-requesting spouse's case ensures that innocent spouse relief is granted on the merits after considering all relevant evidence.

² Although the participants on the project might have clients affected by the rules applicable to the subject matter of this paper and have advised such clients on applicable law, no such participant has been specifically engaged by a client to participate on this project.

³ Unless otherwise specified, Section references are to the Internal Revenue Code of 1986, as amended.

⁴ 439 F.3d 1009 (9th Cir. 2006)

⁵ CC:EL:GL:Br2:GL-607811-97 (October 8, 1999)

⁶ Regulation 1.6015-7(a).

⁷ Rev. Proc. 2003-61, 2003-32 I.R.B. 296, supersedes Rev. Proc. 2000-15, 2000-1 C.B. 447.

⁸ Section 66(c).

⁹ Regs. Section 1.66-4(b).

¹⁰Bernal v. Commissioner, 120 T.C. 102 (2003)

¹¹ Regulation 1.6015-6(a)(1) and (2).

¹² 2003-1 C.B. 371; 2003 I.R.B. Lexis 53; 2003-5 I.R.B. 371

¹³ Baranowicz v Commissioner of Internal Revenue, 432 F.3d 972 (9th Cir. 2005)