Equitable Relief from a Spouse's Tax Liability

Under ' 6015, there are three possible ways to obtain relief: 1) as an 'innocent spouse' under ' 6015(b) (the pre-1998 relief provision); 2) if no longer married to the spouse with whom the return was signed, by electing to 'separate' the taxpayer's tax liability from that of his or her spouse under ' 6015(c); and 3) if relief is not available under (1) or (2), by persuading the IRS that he or she qualifies for equitable relief under ' 6015(f). An application for relief using Form 8857 (or a comparable statement applying for relief) would typically request relief under either (b) or (c), plus (f), or under all three provisions. The IRS has said that they will consider any application as including a request for equitable relief, even if not specifically requested. In this procedural posture, relief under (f) serves as an equitable catchall provision, applying in any case which does not meet the conditions for relief under (b) or (c). This article focuses on review in the Tax Court of IRS determinations to deny relief under (f), a problem that was brought to a head in 2006 by judicial decision and statutory amendment.

Relief from joint liability was initially provided as relief from the assertion of a deficiency by the IRS after the return had been filed. Claims for relief from liability were made after the assertion of a deficiency or, often at a later time, when the IRS began proceedings to collect the tax asserted in the deficiency ('understatement cases'). IRS determinations that relief would not be allowed could then be reviewed in a Tax Court proceeding involving the deficiency or collection of the deficiency. In 1998, the scope of relief from joint and several liability was broadened to include relief from collection of assessed but unpaid tax, when the tax involved is attributable to the taxpayer's spouse who failed to make payment ('underpayment cases'). '[I]f ' it is inequitable to hold the individual liable for any unpaid tax or any deficiency ' the [Commissioner of Internal Revenue] may relieve such individual of such liability.' (Emphasis supplied.) IRC ' 6015(f).

Section 6015(e)

Section 6015(e) originally provided for Tax Court review of determinations of relief from joint liability, but referred only to determinations under (b) and (c), unaccountably omitting any reference to (f). The IRS initially took the view that, reading (e) and (f) together, the statute committed the availability of equitable relief to its unreviewable discretion. The Tax Court disagreed, first in a deficiency case where the court clearly had jurisdiction, Butler, 114 T.C. 276 (2000), and then in a so-called 'stand-alone' case, Fernandez, 114 T.C. 324 (2000). Later, the 2000 amendments inserted the words 'against whom a deficiency has been asserted' in subsection (e), which, as the courts subsequently decided, seemed to make clear that claims for relief from liability for assessed but unpaid tax were not reviewable in the Tax Court. P.L.No. 106-554 ' 313(a)(3)(A); Billings v. Commissioner, 127 T.C. 6 (2006).

This problem surfaced in Ewing v. Commissioner, 122 T.C. 32 (2004), rev'd, 439 F.3d 1009 (9^th Cir. 2006). W, a laboratory scientist employed by the Red Cross, and H, self-employed in financial services, filed their 1995 joint return on which W paid the tax on the income she earned, but H paid less than the tax due on his income. He told W that he would pay that tax under an installment agreement that he submitted with the return, but never did. Medical disability intervened, and he became dependent on W who paid most of the household expenses. The court found that H did not discuss his tax liabilities (including liabilities for years prior to their marriage) with W, and concluded that this showed a 'pattern of concealment.' In 1999, W applied for relief from liability for the underpaid tax on the 1995 return. It is not clear what prompted this application, but some action must have been taken by the IRS to collect the tax, and since she was the party with the assets, it would have been taken against her. After the Commissioner denied relief on the ground that she knew, or had reason to know, that H would not pay the liability, W filed a stand-alone petition with the Tax Court for relief.

The Tax Court determined that it had jurisdiction, that, in applying (f) to decide whether the taxpayer should be relieved from joint liability, it could consider facts not in the administrative record, and that, 'under all the facts and circumstances,' W was entitled to relief, downplaying W's knowledge that H might not be able to pay the liability by referring to H's deception. Ewing differs from previous cases also because H and W remained married to each other and apparently maintained their lifestyle. The court of appeals reversed, persuaded by the amended statutory language of ' 6015(e), that the Tax Court did not have jurisdiction to hear a stand-alone claim for relief under (f) unless a deficiency had been asserted, which had not occurred in Ewing. A short time later, in Billings, supra, an almost evenly divided Tax Court agreed with this conclusion, and thereafter dismissed a number of these stand-alone petitions for lack of jurisdiction.

The decisions in Ewing, Billings, and Bartman v. Commissioner, 446 F.3d 785 (8^th Cir. 2006), provoked concern that relief from joint liability would not be available to taxpayers whose circumstances would support relief, despite failure to meet the technical requirements under (b) or (c). This led to unusually prompt action by Congress to amend ' 6015(e) to provide for Tax Court review in stand-alone cases under subsection (f). Tax Relief and Health Care Act of 2006, P.L. No. 109-432, Division C, ' 408(a). Filing a petition for relief under (f) now has the same effect as in petitions under (b) or (c), restricting the ability of the IRS to collect the liability and suspending the running of the statute of limitations. The amendments apply to cases which were pending at the date of enactment (Dec. 20, 2006) and in which the liability remained unpaid.

Opening a Door

The statutory change has now opened the door for review of an IRS determination not to grant relief in cases where a deficiency has not been asserted by the IRS. As explained in the next installment of this article, the Tax Court has a somewhat different view of the circumstances under which equitable relief is justified than that taken by the IRS. However, refunds are not permitted under the statute, so action by the IRS to collect may close off spousal relief if the taxpayer does not act to prevent payment of the liability. In Smith v. Commissioner, T.C. Memo. 2007-117, for example, this is exactly what happened. W's claim for relief was precluded when the taxpayer's liability was paid by levy against the escrowed proceeds from the sale of the former residence of W and her husband. W had applied for relief in 2006, but at that time a request for relief under (f) did not restrict the IRS' ability to pursue the levy, and, at that time, the Tax Court did not have jurisdiction to hear her appeal. To prevent collection, W, who had received notice of the levy, would have had to apply for a collection due process hearing under IRC ' 6330, which she did not do. Nor did the amended statute help her, as the liability had been paid, and the amendment applied to cases that remained unpaid at the date of enactment.

Payment can sometimes occur in circumstances beyond the taxpayer's control. This may happen when, in a later year, the taxpayer has had more tax withheld by an employer than he or she ultimately owes, and he or she files a return on which a refund is claimed. The IRS has authority to apply the refund to payment of the liability for the earlier year and will automatically do so, unless a restriction on collection applies. This step will prevent recovery of the refund, even when the taxpayer is later found to be entitled to relief. Taxpayers faced with liability for tax incurred by a spouse are often confronted with a complex set of rules that may preclude relief to which they might otherwise have obtained.

The second part of this article will consider, in relation to the position of the IRS, how the Tax Court evaluates the availability of relief for a taxpayer from liability for tax on a joint return that results from his or her spouse's errors or omissions.

Thomas R. White, 3^rd, a member of this newsletter's Board of Editors, is a John C. Stennis Professor of Law at the University of Virginia Law School.

When a taxpayer signs a joint return with his or her spouse, he or she will be jointly and severally liable to pay the tax shown on the return and any deficiency that may later be assessed on that return. I.R.C. ' 6013(d). Husband and wife typically sign joint returns as their aggregate income tax liability will, in most cases, be less on a joint return than it would be if each filed separately. Once a joint return has been signed by the taxpayer, however, he or she cannot avoid the liability for tax with respect to that return. This can lead to serious financial problems long after the year for which the return was signed. Errors with respect to the return will result in tax liability that may be directly asserted against the taxpayer who is not responsible for, and may not be aware of, those errors. A similar situation may occur when tax is shown to be due on the return (the tax is 'self-assessed') but is not paid. So-called 'innocent spouse' relief under ' 6015 may be available, but no one should assume that relief can be readily obtained. Recent developments make this very clear.

The current statute was enacted in 1998 to update and liberalize relief from joint several liability for a taxpayer whose spouse is responsible for omissions or erroneous deductions on the joint return. The effect of ' 6015 and its subsequent interpretation and amendment in 2000 (making clear that 'no refunds' are permitted) has previously been discussed in The Matrimonial Strategist. See Thomas R. White, 'Seeking Relief from the Improvidently Filed Joint Return: Recent Developments,' The Matrimonial Strategist, May 2001, and 'How Much Does a Spouse Have to Know to Be Liable for Her Husband's Tax?' The Matrimonial Strategist March 2002. Statutory relief from joint liability has been difficult to obtain, as much from the limited premise of the relief provisions as from the restrictive interpretation of these provisions by IRS regulations. Taxpayers who are sufficiently aware of potential tax problems arising from their spouses' activities have always been at a disadvantage in seeking relief from their inability to anticipate tax problems resulting from behavior of their spouses. This concern has been highlighted by recent judicial and legislative activity focused specifically on requests for equitable relief.

Relief Under ' 6015

Under ' 6015, there are three possible ways to obtain relief: 1) as an 'innocent spouse' under ' 6015(b) (the pre-1998 relief provision); 2) if no longer married to the spouse with whom the return was signed, by electing to 'separate' the taxpayer's tax liability from that of his or her spouse under ' 6015(c); and 3) if relief is not available under (1) or (2), by persuading the IRS that he or she qualifies for equitable relief under ' 6015(f). An application for relief using Form 8857 (or a comparable statement applying for relief) would typically request relief under either (b) or (c), plus (f), or under all three provisions. The IRS has said that they will consider any application as including a request for equitable relief, even if not specifically requested. In this procedural posture, relief under (f) serves as an equitable catchall provision, applying in any case which does not meet the conditions for relief under (b) or (c). This article focuses on review in the Tax Court of IRS determinations to deny relief under (f), a problem that was brought to a head in 2006 by judicial decision and statutory amendment.

Relief from joint liability was initially provided as relief from the assertion of a deficiency by the IRS after the return had been filed. Claims for relief from liability were made after the assertion of a deficiency or, often at a later time, when the IRS began proceedings to collect the tax asserted in the deficiency ('understatement cases'). IRS determinations that relief would not be allowed could then be reviewed in a Tax Court proceeding involving the deficiency or collection of the deficiency. In 1998, the scope of relief from joint and several liability was broadened to include relief from collection of assessed but unpaid tax, when the tax involved is attributable to the taxpayer's spouse who failed to make payment ('underpayment cases'). '[I]f ' it is inequitable to hold the individual liable for any unpaid tax or any deficiency ' the [Commissioner of Internal Revenue] may relieve such individual of such liability.' (Emphasis supplied.) IRC ' 6015(f).

Section 6015(e)

Section 6015(e) originally provided for Tax Court review of determinations of relief from joint liability, but referred only to determinations under (b) and (c), unaccountably omitting any reference to (f). The IRS initially took the view that, reading (e) and (f) together, the statute committed the availability of equitable relief to its unreviewable discretion. The Tax Court disagreed, first in a deficiency case where the court clearly had jurisdiction, Butler, 114 T.C. 276 (2000), and then in a so-called 'stand-alone' case, Fernandez, 114 T.C. 324 (2000). Later, the 2000 amendments inserted the words 'against whom a deficiency has been asserted' in subsection (e), which, as the courts subsequently decided, seemed to make clear that claims for relief from liability for assessed but unpaid tax were not reviewable in the Tax Court. P.L.No. 106-554 ' 313(a)(3)(A); Billings v. Commissioner , 127 T.C. 6 (2006).

This problem surfaced in Ewing v. Commissioner , 122 T.C. 32 (2004), rev'd , 439 F.3d 1009 (9 th Cir. 2006). W, a laboratory scientist employed by the Red Cross, and H, self-employed in financial services, filed their 1995 joint return on which W paid the tax on the income she earned, but H paid less than the tax due on his income. He told W that he would pay that tax under an installment agreement that he submitted with the return, but never did. Medical disability intervened, and he became dependent on W who paid most of the household expenses. The court found that H did not discuss his tax liabilities (including liabilities for years prior to their marriage) with W, and concluded that this showed a 'pattern of concealment.' In 1999, W applied for relief from liability for the underpaid tax on the 1995 return. It is not clear what prompted this application, but some action must have been taken by the IRS to collect the tax, and since she was the party with the assets, it would have been taken against her. After the Commissioner denied relief on the ground that she knew, or had reason to know, that H would not pay the liability, W filed a stand-alone petition with the Tax Court for relief.

The Tax Court determined that it had jurisdiction, that, in applying (f) to decide whether the taxpayer should be relieved from joint liability, it could consider facts not in the administrative record, and that, 'under all the facts and circumstances,' W was entitled to relief, downplaying W's knowledge that H might not be able to pay the liability by referring to H's deception. Ewing differs from previous cases also because H and W remained married to each other and apparently maintained their lifestyle. The court of appeals reversed, persuaded by the amended statutory language of ' 6015(e), that the Tax Court did not have jurisdiction to hear a stand-alone claim for relief under (f) unless a deficiency had been asserted, which had not occurred in Ewing. A short time later, in Billings, supra, an almost evenly divided Tax Court agreed with this conclusion, and thereafter dismissed a number of these stand-alone petitions for lack of jurisdiction.

The decisions in Ewing , Billings , and Bartman v. Commissioner , 446 F.3d 785 (8 th Cir. 2006), provoked concern that relief from joint liability would not be available to taxpayers whose circumstances would support relief, despite failure to meet the technical requirements under (b) or (c). This led to unusually prompt action by Congress to amend ' 6015(e) to provide for Tax Court review in stand-alone cases under subsection (f). Tax Relief and Health Care Act of 2006, P.L. No. 109-432, Division C, ' 408(a). Filing a petition for relief under (f) now has the same effect as in petitions under (b) or (c), restricting the ability of the IRS to collect the liability and suspending the running of the statute of limitations. The amendments apply to cases which were pending at the date of enactment (Dec. 20, 2006) and in which the liability remained unpaid.

Opening a Door

The statutory change has now opened the door for review of an IRS determination not to grant relief in cases where a deficiency has not been asserted by the IRS. As explained in the next installment of this article, the Tax Court has a somewhat different view of the circumstances under which equitable relief is justified than that taken by the IRS. However, refunds are not permitted under the statute, so action by the IRS to collect may close off spousal relief if the taxpayer does not act to prevent payment of the liability. In Smith v. Commissioner, T.C. Memo. 2007-117, for example, this is exactly what happened. W's claim for relief was precluded when the taxpayer's liability was paid by levy against the escrowed proceeds from the sale of the former residence of W and her husband. W had applied for relief in 2006, but at that time a request for relief under (f) did not restrict the IRS' ability to pursue the levy, and, at that time, the Tax Court did not have jurisdiction to hear her appeal. To prevent collection, W, who had received notice of the levy, would have had to apply for a collection due process hearing under IRC ' 6330, which she did not do. Nor did the amended statute help her, as the liability had been paid, and the amendment applied to cases that remained unpaid at the date of enactment.

Payment can sometimes occur in circumstances beyond the taxpayer's control. This may happen when, in a later year, the taxpayer has had more tax withheld by an employer than he or she ultimately owes, and he or she files a return on which a refund is claimed. The IRS has authority to apply the refund to payment of the liability for the earlier year and will automatically do so, unless a restriction on collection applies. This step will prevent recovery of the refund, even when the taxpayer is later found to be entitled to relief. Taxpayers faced with liability for tax incurred by a spouse are often confronted with a complex set of rules that may preclude relief to which they might otherwise have obtained.

The second part of this article will consider, in relation to the position of the IRS, how the Tax Court evaluates the availability of relief for a taxpayer from liability for tax on a joint return that results from his or her spouse's errors or omissions.

Thomas R. White, 3^rd, a member of this newsletter's Board of Editors, is a John C. Stennis Professor of Law at the University of Virginia Law School.