Time Limitation on Innocent Spouse Relief

Posted on September 23, 2010. Filed under: Uncategorized |


In a reviewed opinion appealable to the Sixth Circuit, the Tax Court has once again 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.

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 2 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, there is no such limitation in Code Sec. 6015(f).

Reg. § 1.6015-5(b)(1) provides that a spouse requesting relief under Code Sec. 6015(f) must do so by filing Form 8857 (Request for Innocent Spouse Relief) 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 No. 8, the Tax Court concluded that Reg. § 1.6015-5(b)(1) is an invalid interpretation of Code Sec. 6015(f) (see Federal Taxes Weekly Alert 04/09/2009).

The Tax Court held that 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 2 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, it said no such limitation is imposed in Code Sec. 6015(f). The Court found that the reg, by imposing a limitation that Congress explicitly incorporated into Code Sec. 6015(b) or Code Sec. 6015(c) but omitted from Code Sec. 6015(f), failed to give effect to the unambiguously expressed intent of Congress. The Court concluded that the equitable remedy which is available under Code Sec. 6015(f) only if relief is not available to an individual under Code Sec. 6015(b) or Code Sec. 6015(c) was meant to be broader than those provisions.

Earlier this year, the Seventh Circuit reversed the Tax Court and held the reg was valid (Lantz, CA 7 06/08/2010, 105 AFTR 2d ¶ 2010-935, see Federal Taxes Weekly Alert 06/17/2010). The Seventh Circuit said that the fact that Congress designated a deadline in two provisions of the same statute and not in a third was not a compelling argument that it meant to preclude IRS from imposing a deadline applicable to cases governed by that third provision. Whether IRS borrowed the two-year limitations period from the other two provisions or simply decided that two years was the right deadline was of no consequence because IRS was doing nothing unusual in imposing a deadline. The Seventh Circuit also observed that if there was no deadline for equitable relief, the two-year deadlines for regular and separate relief “will be set largely at naught” because the substantive criteria of Code Sec. 6015(b) and Code Sec. 6015(c) are virtually the same as those of Code Sec. 6015(f).

Tax Court sticks to its guns. In a new case dealing with Code Sec. 6015(f) and the Reg. § 1.6015-5(b)(1) two-year deadline, the Tax Court in a reviewed opinion has once again invalidated the reg using essentially the same reasoning it employed in Lantz, and indicated it wouldn’t follow the Seventh Circuit’s holding outside of the latter’s jurisdiction.

In holding that the taxpayer in the new case was entitled to equitable relief under Code Sec. 6015(f), even though she submitted her request more than 2 years after collection activities had commenced, the Tax Court once again ruled that Reg. § 1.6015-5(b)(1) wasn’t entitled to Chevron deference (IRS regs are given controlling weight unless they are “arbitrary, capricious and manifestly contrary to the statute”).

Seven Tax Court judges agreed with the majority, and five agreed with a concurring opinion that advanced an additional reason why the reg should be held invalid. This dispute is far from over. A recent Chief Counsel Notice revealed that the issue of whether Reg. § 1.6015-5(b)(1) is valid is pending in the Second and Third Circuits, that IRS is holding firm on the issue and that IRS is considering appeals in additional Circuits (see article in Federal Taxes Weekly Alert 07/10/2010). IRS may well add to its list the Sixth Circuit, to which Hall is appealable.

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