On September 19, 2022, Judge Holmes entered a bench opinion in Bacigalupi v. Commissioner, Dk. No. 20480-21 making it public in an order dated October 27, 2022. The opinion was not extraordinary though I will discuss its take on the administrative record rule and the hardship factor for equitable relief. Bench opinions generally are also not extraordinary though I will discuss them as well. I will discuss them in part 2 of this post. What struck me the most about this bench opinion was the handwritten edits by Judge Holmes in the bench opinion. I do not read all bench opinions but I thought I had read enough to make me feel that the handwritten edits to the opinion were somewhat unusual but maybe they are not.
The edits did not bother me. I applaud Judge Holmes for writing a bench opinion. The trial of the case apparently took place on September 16 three days before he issued the bench opinion. This is the second time we have blogged about an innocent spouse bench opinion of his. As I will discuss in more detail below, the rules of the Tax Court require that judges issue the bench opinion before the gavel came down to close the end of the trial session. This trial session was in San Francisco. I don’t know how many trials he had during the session that week which is certainly a factor in a Tax Court judge’s ability to render a bench opinion.
The Case
Ms. Bacigalupi proceeded pro se. The 19-page bench opinion, which is really a 19-page transcript of the judge’s oral reading of the opinion into the record, recites some of the factual background of the case before coming to the first important legal question – the scope of review. Judge Holmes acknowledges the standard for scope of review now in place which calls for the Court to look at the administrative record. We have discussed this in several posts, and you can read a couple of our discussions of the issue here and here (where Les discusses the non-precedential Fatty rule created by an earlier Judge Holmes bench opinion in an innocent spouse case.) The scope of review provides for two exceptions to the administrative record review where there is newly discovered or previously unavailable evidence.
Judge Holmes, following the Fatty rule, decides that the petitioner’s testimony under oath is newly discovered evidence since she could not have given sworn testimony or be cross-examined when she applied for innocent spouse relief. I like that approach though it’s clear that Judge Holmes still has some concerns about it as he noted again that he is not deciding such testimony meets the exception for all cases in the future. Since bench opinions are not precedential, this aspect of the case does not make new law even if it provides some sanity to the situation facing pro se taxpayers who will almost never have developed a robust administrative record.
He then looks to see if Ms. Bacigalupi qualifies for streamlined relief under the applicable Revenue Procedure whose factors do not necessarily control the Court’s decision but generally seem to guide it. He decides she does not qualify for streamlined relief because the joint returns were not filed until after receipt of a notice of intent to levy. This makes clear she had knowledge of the underpayment and that knocks her out of streamlined relief. The fact that this is an underpayment case knocks her out of IRC 6015(b) and (c) relief moving the case on to potential equitable relief under 6015(f).
Because she fails the knowledge factor, you might remember from our earlier posts on this subject, here and here, that the Tax Court almost always (maybe always) denies relief where the person seeking relief has knowledge unless that person has financial hardship. This case falls into that pattern. Judge Holmes finds Ms. Bacigalupi meets the economic hardship test even though she has assets worth approximately $150,000. She owes over $300,000 so he concludes paying the liability would create hardship given her meager (he calculates less than $200) monthly income available to pay the debt. The facts are not straight forward because of her divorce arrangement but the conclusion makes sense. He cites to Leith v. Commissioner, TC Memo 2020-149, discussed here, in support of his conclusion to compare the value of her assets to the total amount of the debt. Ms. Leith had assets of approximately $5,000, mostly in a retirement account, and liabilities over $30,000.
As I mentioned in a post about Pocock v. Commissioner, T.C. Memo 2022-55, the conclusion there, and here (as well as in Leith), seems directly at odds with the approach of the Tax Court taken in Sleeth v. Commissioner, TC Memo 2019-138, aff’d, — (11th Cir. 2021) where the requesting spouse had almost no income, assets of about $150,000 and debts of over $500,000. I discuss the Sleeth case here. The Tax Clinic at the Legal Services Center of Harvard Law School took on an appeal of that case seeking, inter alia, to convince the 11th Circuit that she met the hardship criteria but the Circuit court found the arguments did not overcome the decision of the Tax Court. The hardship issue is critical to success in the Tax Court in an innocent spouse case where the requesting spouse fails the knowledge test. Judge Holmes’ approach to the hardship question here, as well as the approach taken by the Tax Court in Leith and Pocock, makes sense but does not seem to have uniform acceptance at the Court.
Judge Holmes found three of the Revenue Procedure’s factors in petitioner’s favor and only the knowledge factor against. He leaned heavily on the additional fact that the non-requesting spouse hid his income from petitioner over a period of many years in deciding for her in what he describes as “a very close call.”