One of the challenges I used to face when directing a legal clinic was explaining to clients the limits of what the Tax Court could do in cases, especially in CDP and innocent spouse cases. When people would come to the clinic with a problem, and took the time (usually on their own) to petition the Tax Court they held out hope that if they could tell their story to the judge it would help make the IRS problem go away.
Despite some deep questions as to where the Tax Court sits constitutionally, its judges have extensive power in deficiency cases to resolve disputes, apply equitable principles and even order the issuance of a refund. A recent innocent case in Tax Court, Asad and Akel v Commissioner, illustrates some of the Tax Court’s limits and likely confusion that pro se taxpayers face in standalone innocent spouse cases that are not part of a deficiency proceeding.
The simplified version of the facts is as follows. Asad and Akel were married, and then divorced. When married, both individually owned rental properties, and they filed joint returns. IRS audited a couple of those years’ returns, disallowing losses and expenses pertaining to the real estate activities and also imposing a 20% accuracy-related penalty. Asad and Akel did not respond to the stat notices. At trial in their divorce, Asad and Akel agreed that each would be responsible for ½ of the federal tax debt for the years IRS assessed liabilities.
Fast forward a few years. Each now ex spouse filed separate requests for relief from joint and several liability. IRS denied each request and both spouses filed petitions to Tax Court challenging the denial; husband for good measure intervened on wife’s Tax Court challenge. The Tax Court consolidated both cases.
In a pre-trial memo, IRS agreed to reduce each spouse’s share of the joint liability to essentially reflect the share that was attributable to the ex spouse, a result consistent with an outcome under Section 6015(c). The problem was that the parties wanted the IRS and Tax Court to respect their 50/50 tax liability allocation they agreed to in state court, an outcome that would have favoured Asad, who wound up with a higher shares of the liability under the IRS concession.
What did Asad and Akel want from the court? Asad and Akel did not claim at trial in Tax Court that they were entitled to relief under 6015, and essentially argued that that the Tax Court should provide a way to guarantee that the IRS respect the state law divorce terms. The Tax Court held that it could (and would) not do so. The state law agreement is not binding on the IRS, which was not a party (thankfully I am sure) to the state law divorce proceeding.
Although Asad and Akel petitioned the Court for relief from joint and several liability under section 6015, at trial neither contended that they satisfied the tests for relief under section 6015. It is apparent that they both would agree to a 50-50 settlement of these cases. But the IRS is also a party to these cases. Without the IRS’s consent to a settlement under which Asad and Akel’s liability is each reduced to 50%, there can be no enforceable settlement on those terms.
The substantive issue that both ex spouses agreed on at Tax Court was that they should not be subject to the 20% accuracy related penalty, and they argued at trial in the Tax Court that the positions on the old joint returns reflected the advice of a competent tax return preparer. Again, the opinion (and clear application of the law) left the ex spouses with no relief. In a standalone innocent spouse case the penalty issue was not properly before the court:
The Court is without jurisdiction in these cases to consider Asad’s and Akel’s return-preparer defense. Neither Asad nor Akel petitioned the Tax Court in response to the IRS’s notice of deficiency. See sec. 6213(a) (allowing taxpayer to petition the Tax Court to redetermine a deficiency within 90 days after the mailing of a notice of deficiency). Instead, they petitioned the Court to review the IRS’s denial of their respective claims for relief from joint and several liability under section 6015. See sec. 6015(e). In a stand-alone section-6015 case such as this, which is independent of a deficiency proceeding, the Court can consider only whether the relief provisions of section 6015 are available. See Block v. Commissioner, 120 T.C. 62, 68 (2003). The Court cannot consider issues other than section-6015 relief. Id. Thus, it cannot consider Asad’s and Akel’s tax-return-preparer defense to the accuracy-related penalties.
For seasoned tax practitioners it comes as no surprise that the IRS is not bound by state law divorce proceedings because this reflects settled law. It appears that Asad and Akel did not appreciate the subtleties of the limits of the Tax Court’s powers and the relationship between state and federal law.
The outcome of this case is a decision that reflects the IRS concession rather than the agreement that the ex spouses reached in state court. Of course, nothing in this opinion keeps Asad and Akel from following the state court agreement in terms of paying the IRS and that agreement may be enforceable in the divorce proceeding even if it is not enforceable with respect to the IRS. They may very well have federal tax liabilities and state court obligations that do not match but they can be held to both. Nothing prevents them from getting the result they bargained for in the divorce. This opinion also does not keep them from now requesting penalty relief even though they will not have a judicial remedy unless they pay the penalty and file for refund. This standalone case is not res judicata or collateral estoppel on that issue.