Jones v. Comm., (CA 4 6/13/2011) 107 AFTR 2d ¶ 2011-930
The Court of Appeals for the Fourth Circuit has reversed a Tax Court decision that invalidated Reg. §1.6015-5(b)(1), which provides that a spouse must request equitable relief under Code Sec. 6015(f) no later than two years from the first collection activity against the spouse. While the Tax Court has repeatedly invalidated the reg, the Fourth Circuit joins the Third and Seventh Circuits in holding the reg valid.
Observation: In a letter to legislators, dated Apr. 29, 2011, IRS Commissioner Doug Shulman said that he has directed IRS to review the two-year period for innocent spouses to request equitable relief under Code Sec. 6015(f), noting that the courts are at odds over the two-year rule. The National Taxpayer Advocate, as well as a number of members of Congress, have also asked that the rule be modified or eliminated.
Background. Each spouse is jointly and severally liable for the tax, interest, and penalties (other than the civil fraud penalty) arising from a joint return. Code Sec. 6015(f) allows relief to a requesting spouse if, among other conditions, taking into account all the facts and circumstances, it is inequitable to hold the individual liable.
To be eligible for relief under Code Sec. 6015(b) (innocent spouse relief) or Code Sec. 6015(c) (separate liability relief), the Code explicitly provides that the requesting spouse must elect relief not later than the date that is two years after the date that IRS has begun collection activities with respect to the individual making the election. (Code Sec. 6015(b)(1)(E), Code Sec. 6015(c)(3)(B)) However, no such limitation is imposed in Code Sec. 6015(f). The regs, however, do impose a parallel limitation. Reg. §1.6015-5(b)(1) provides that a spouse requesting relief under Code Sec. 6015(f) must do so by filing Form 8857 or a similar statement with IRS no later than two years from the date of the first collection activity against the requesting spouse for the joint tax liability.
In Lantz, (2009) 132 TC 131, the Tax Court concluded that Reg. §1.6015-5(b)(1) was an invalid interpretation of Code Sec. 6015(f). But, the Seventh Circuit reversed the Tax Court and held the reg was valid (Lantz, (CA 7 06/08/2010) 105 AFTR 2d 2010-2780). In Mannella, (CA 1/19/2011) 107 AFTR 2d 2011-519, the Third Circuit also held that the reg was valid. Thus, after the new Fourth Circuit decision, there are now three Circuits rejecting the Tax Court's view. However, the Tax Court is apparently sticking to its guns on the issue. In one case appealable to the Eighth Circuit and another to the Sixth Circuit, the Tax Court has continued to invalidate the reg.
Facts. Octavia Jones separated from her husband, Robert Jones, in September of 2000. Under their separation agreement, the couple filed a joint tax return for 2000. Robert prepared the return, which claimed a loss from his business and a $6,464 refund. On audit, IRS determined that there were errors on the return and, on July 25, 2002, assessed a deficiency of $7,630, including interest. Robert entered into an installment agreement with IRS to pay the deficiency, but defaulted when he filed for bankruptcy in April of 2005. IRS began efforts to collect the deficiency from both Robert and Octavia Jones.
More than two years after IRS first began its collection activities, Octavia Jones requested innocent spouse relief from her tax liability under Code Sec. 6015(f). While IRS agreed that Octavia would otherwise qualify for such relief, it denied such relief because she made her request more than two years after IRS began collection activities.
Octavia Jones petitioned the Tax Court, which ruled that Reg. §1.6015-5(b)(1) was invalid. The Court granted her relief from all tax liability in excess of $450. IRS appealed.
Parties' positions. Octavia Jones argued that Congress unequivocally addressed the limitation issue by not including a deadline as it had in the other innocent spouse relief provisions in Code Sec. 6015(b) and Code Sec. 6015(c). Under Code Sec. 6015(f), she maintained that Congress required IRS to balance all the facts and circumstances and grant relief, where appropriate. She contended that Reg. §1.6015-5(b)(1) wasn't a permissible interpretation of Code Sec. 6015(f) because it unnecessarily and inappropriately narrowed the relief that Congress intended for equitable innocent spouse relief.
On the other hand, IRS argued that Code Sec. 6015 was ambiguous because silence was inherently ambiguous and that when Congress gave IRS discretion under Code Sec. 6015(f) to grant relief as a matter of equity, it also directed IRS to adopt through regs the procedural requirements, including time limitations, governing Code Sec. 6015(f) claims. Since Congress specified no limitation period for making a claim, IRS was free to provide one. IRS argued that providing a limitations period for Code Sec. 6015(f) in the regs was a permissible way to resolve the ambiguity in Code Sec. 6015, which otherwise could cause confusion and inconsistency.
Fourth Circuit upholds reg. The primary issue before the Fourth Circuit was whether IRS validly exercised its rulemaking authority in adopting the reg setting a two-year deadline for requesting relief under Code Sec. 6015(f). The Court said that it had to apply the analysis in Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc. (S Ct 1984) 467 U.S. 837, to resolve the issue. In Chevron, the Supreme Court set out a two-step analysis for a court to apply in reviewing an agency's construction of a statute that it administers:
(1) if the intent of Congress is clear, IRS and the courts must give effect to the unambiguously expressed intent of Congress;
(2) if the statute is silent or ambiguous as to a specific issue, the question for a court is whether the agency's answer is based on a permissible construction of the statute. An agency's regs are given controlling weight unless they are “arbitrary, capricious, and manifestly contrary to the statute.”
The Fourth Circuit found that Code Sec. 6015 was ambiguous as to when a request for relief may be brought under Code Sec. 6015(f). Although the absence of a limitations period in Code Sec. 6015(f) and the presence of one in Code Sec. 6015(b) and Code Sec. 6015(c) could suggest that Congress intended no limitations period for Code Sec. 6015(f), it could also suggest that Congress intended to leave a gap so that IRS could adopt a limitations period as a procedure under which it would administer its discretionary authority under Code Sec. 6015(f).
Looking to the second part of the Chevron analysis, the Court said that the question was only whether IRS's adoption of the limitations period was a reasonable way to resolve the statute's ambiguity, and not whether it was the best way. If IRS's interpretation was reasonable, the Court said it had to defer to IRS.
The Fourth Circuit found that it was not unreasonable for IRS to conclude that leaving Code Sec. 6015(f) with no limitations period could create more uncertainty and uneven results than including one. It reasoned that limitations periods inherently involve some arbitrary line-drawing. Line-drawing provides some administrative benefit, and it was reasonable for IRS to have drawn that line at two years, making the equitable spousal relief parallel with the narrower relief obtainable under Code Sec. 6015(b) and Code Sec. 6015(c).
The Court concluded that IRS's adoption of a two-year time period for requesting relief under Code Sec. 6015(f) was a reasonable approach to filling the gap left in Code Sec. 6015. Because Reg. §1.6015-5(b)(1) wasn't “arbitrary, capricious, or manifestly contrary to the statute,” it was a valid reg.
The Fourth Circuit remanded the case to the Tax Court to determine (under procedures stipulated by the parties) whether Octavia Jones was entitled to an extension under Reg. §301.9100-3.
References: For equitable innocent spouse relief, see FTC 2d/FIN ¶V-8553; United States Tax Reporter ¶60,154.04; TaxDesk ¶570,928; TG ¶1929.