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July 01, 2009

TAX COURT STRIKES TIME LIMITATION IN RAISING AN INNOCENT SPOUSE EQUITABLE CLAIM FOR RELIEF

 

Guest Author: M. Pilar Honer, Esq., Columbus, Ohio

 

In Cathy M. Lantz v. Commissioner, 132 T.C. No. 8, the Tax Court held that Treasury Regulation § 1.6015-5(b)(i), imposing a two-year time limitation for bringing forth an innocent spouse claim under Internal Revenue Code (the “Code”) § 6015(f), was as an invalid interpretation of the Code and therefore, invalid. 

In general, there are three sections under the Code in which a spouse may obtain relief for joint and several liabilities on a joint return. The first is Code § 6015(b), which provides relief from an understatement of tax on a joint return. The second is Code § 6015(c), which provides relief to a taxpayer that is no longer married, legally separated, or no longer living with the other spouse.  Finally, if the taxpayer does not qualify for relief under either Code §§ 6015(b) or (c), the taxpayer may obtain equitable relief under Code § 6015(f) based on an “all the facts and circumstances” test.  Further, under the Code §§ 6015(b) and (c), the taxpayer has a two-year time limitation for bringing forth a claim for relief, but there is no time limitation under § 6015(f).  In the regulations, however, the IRS did impose a two-year time limitation for bringing forth a Code § 6015(f) equitable relief claim. See Treasury Regulation § 1.6015-5(b)(i).  The Tax Bar has generally felt that the regulation imposing the two-year limitation on Code § 6051(f) claims is contrary to law.  This case presented the perfect facts to challenge the validity of Treasury Regulation § 1.6015-5(b)(i) imposing such time limitation on a Code § 6015(f) claim.  

Here, the taxpayer brought forth an innocent spouse claim for relief from her joint and several liabilities on a joint return.  The taxpayer did not qualify for relief under both Code §§ 6015(b) and (c).  The Taxpayer then pursued relief under Code § 6015 (f), but the Service denied her claim solely on the basis that she failed to meet the two-year time limitation imposed under Treasury Regulation § 1.6015-5(b)(i).  The Taxpayer then challenged the validity of Treasury Regulation § 1.6015-5(b)(i) as an impermissible interpretation of the Code, and the Tax Court agreed.  In its analysis, the Tax Court went through the Chevron Test to determine the validity of this regulation.  The Tax Court held that Congress had directly spoken on this issue by its silence.  That is, Congress imposed a two-year time limitation as to Code §§ 6015(b) and (c), but did not impose a two-year time limitation on Code § 6015(f).  Further, it was Congress’ intent to have Code § 6015(f) be a last resort to taxpayers in order to avoid the potential harsh consequences of being denied relief under both Code §§ 6015(b) and (c).  Hence, Congress intended taxpayers to have two kinds of relief: (i) traditional relief, under Code §§ 6015(b) and (c), with rigid procedures; and (ii) equitable relief, under Code § 6015(f), with looser procedures. The Tax Court then went on to state that Code § 6015(f) is there to provide equitable relief, and that a taxpayer’s failure to comply with the two-year time limitation does not necessarily indicate that it would be inequitable to provide the taxpayer such relief.  Therefore, the taxpayer’s failure to bring a timely claim under Code § 6015(f) does not disqualify the taxpayer for equitable relief, but rather, is one of various factors to be considered in applying the “all facts and circumstances” test of Code § 6015(f). 

After this decision was published, the IRS chief counsel’s office provided guidance to its attorneys.  In its guidance, the IRS states that its attorneys should still argue that relief is unavailable under Treasury Regulation § 1.6015-5(b)(i), but that they should note the IRS’ disagreement of the holding in Lantz.  Further, its attorneys are not to file motions for summary judgment based solely on the untimeliness of a Code § 6015(f) claim.  

 

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July 01, 2009

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