Mannella v. Comr: Third Circuit Upholds Treasury Regulation Imposing Two-Year Deadline for Innocent Spouse Relief

By David I. Kempler, Esq. and Elizabeth Carrott Minnigh, Esq.  

Buchanan Ingersoll & Rooney PC, Washington, D.C. 

As in the recent Supreme Court decision in Mayo Foundation for Medical Ed. & Research v. U.S,1  in Mannella v. Comr., No. 10-1308 (3d Cir. 1/19/11), the Third Circuit recently found that deference was owed to a Treasury Department regulation. In Mannella, the Third Circuit upheld Regs. §1.6015-5(b)(1), which sets a deadline of two years from the IRS's first action to collect the tax to file a claim for equitable "innocent spouse" relief under §6015(f) from liability resulting from a jointly filed federal income tax return.

In Mannella, Husband and Wife filed joint federal income tax returns for the years 1996 through 2000.  For the years 1997 through 2000, Taxpayers failed to fully pay the taxes shown as due on their returns. Under §6013(d)(3), married taxpayers filing a joint return are jointly and severally liable for the entire tax liability shown or that should have been shown on their return. In June 2004, the IRS initiated collection procedures to recover the back taxes owed by sending Taxpayers separate Notices of Intent to Levy. Included with the notices were materials with instructions of how to obtain innocent spouse relief under §6015.  Section 6015(f) sets forth "innocent spouse" rules, which provide that if after "taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency" and relief is not available to the individual under §6015(b) or §6015(c), then the IRS may relieve the individual of any liability. Wife asserted that Husband signed her name on the return receipt for the notice and did not inform her that it had arrived until more than two years later. On November 1, 2006, after learning of the Notice of Intent to Levy and speaking with an attorney, Wife filed two Form 8857 applications under §6015 (b), (c) and (f) for innocent spouse relief from joint and several liability on Taxpayers' joint returns filed for the years 1997–2000.  The IRS issued Wife a notice of determination dated May 3, 2007, denying her relief under §6015 because she had not filed her claim within two years of June 4, 2004, the date that the IRS took its first collection action against her by mailing her notice of the intent to levy.

In response to the rejection by the IRS of her applications, Wife filed a petition for relief with the Tax Court.  The IRS moved for summary judgment on the sole basis that Wife's applications for relief under §6015 were untimely. Wife opposed the motion on the ground that she never received her notice from Husband and, therefore, the two-year period for seeking innocent spouse relief should not have begun to run against her. Wife did not argue, however, that Regs. §1.6015-5(b)(1), which sets the two-year deadline for requesting relief under §6015(f), was invalid.

Tax Court Decision  

The Tax Court granted the IRS's motion for summary judgment in part and denied it in part. The Tax Court determined that the mailing of the notice to Wife's last known address triggered the running of the two-year deadline periods under §§6015(b) and (c) regardless of whether she actually received the June 4, 2004 notice. Accordingly, the Tax Court granted the IRS's motion for summary judgment on Wife's claims under §§6015(b) and (c). Nevertheless, based on its prior decision in Lantz v. Comr.,2  the Tax Court sua sponte held that the two-year regulatory deadline under §6015(f) was invalid.  Consequently, the Tax Court concluded that Wife's §6015(f) claim was timely and it denied the IRS summary judgment on that claim.  After the parties executed a stipulation that if Wife's §6015(f) request had been timely, which it was if the regulation was invalid, Wife was entitled to innocent spouse relief, the Tax Court entered a decision on November 5, 2009, in Wife's favor, but reserved the IRS's right to appeal. The IRS then appealed.

Under Chevron,3  a court must first determine whether the statute is silent or ambiguous with respect to the issue.  If congressional intent is clear, the inquiry ends; however, where the statute is silent or ambiguous, the court must inquire into whether the regulation was on a permissible construction of the statute.4

In invalidating Regs. §1.6015-5(b)(1), the Tax Court, following its opinion in Lantz in which it had applied Chevron, held that the regulation conflicted with the clear language of §6015(f) and that, even if the language of the statute was ambiguous, the regulation impermissibly implements that subsection. In Lantz, the Tax Court found that by creating an explicit two-year limitation in §6015(b) and §6015(c) but not §6015(f), "Congress has `spoken' by its audible silence" and that because Regs. §1.6015-5(b)(1) imposed a limitation that Congress explicitly incorporated into subsections §6015(b) and §6015(c) but omitted from §6015(f), it failed the first prong of the Chevron test. The Tax Court further reasoned that because §6015(f), in terms, is only available to taxpayers ineligible for relief under §6015(b) or §6015(c), Congress, by omitting the two-year time limit in §6015(f), intended that the subsection be available to taxpayers who missed the filing deadline under §6015(b) or §6015(c) as a result of some inequity.

After the IRS filed its opening brief on this appeal, the Seventh Circuit reversed the decision of the Tax Court in Lantz and upheld the two-year regulatory deadline for claims filed under §6015(f). In its Lantz opinion, the Seventh Circuit rejected the Tax Court's theory of "audible silence." The Seventh Circuit further noted that the introductory phrase of §6015(f) expressly grants the Treasury Department rulemaking authority.

Application of Chevron Step One  

Under Chevron step one, the Third Circuit agreed with the Seventh Circuit, noting that while " `[i]t is generally presumed that Congress acts intentionally and purposely when it includes particular language in one section of a statute but omits it in another,' the absence of a statutory filing deadline in §6015(f) of the Code similar to those in subsections (b) and (c) does not require us to conclude that the Secretary cannot impose a two-year deadline by regulation."5  Additionally, the Third Circuit noted that if a claim was allowed under §6015(f) where claims were time barred under §6015(b) and §6015(c), §6015(f) would effectively allow a taxpayer to circumvent Congress's clearly expressed time limitation. The Third Circuit further noted that the provision of §6015(f) that limits its availability to taxpayers ineligible for relief under §6015(b) and §6015(c) has real meaning, even if it does not save claims that had been, but no longer are, within the scope of §6015(b) and §6015(c) because, if asserted, they would be untimely, since §6015(f) relief is available for both understatements and underpayments of taxes whereas §6015(b) and §6015(c) are limited to understatements.  Accordingly, the Third Circuit concluded that §6015 was ambiguous on the question of when a request for relief may be brought under §6015(f).

Application of Chevron Step Two  

Under Chevron step two, the Third Circuit looked at the legislative history and the purposes of §6015 to determine whether Regs. §1.6015-5(b)(1) was contrary to Congressional intent. The Third Circuit concluded that, while the legislative history lent some support to Wife's position, it failed to overcome the deference owed to Regs. §1.6015-5(b)(1) under Chevronand it did not clearly demonstrate that Congress intended that requests for relief under §6015(f) not be subject to a two-year filing deadline. Accordingly, the Third Circuit concluded that the regulation was valid. However, the Third Circuit remanded the case to the Tax Court to decide whether Regs. §1.6015-5(b)(1) is subject to equitable tolling and, if so, whether Wife meets the equitable tolling standard.

While agreeing with his colleagues regarding the ambiguity of §6015(f), in a dissenting opinion, Judge Ambro stated that Regs. §1.6015-5(b)(1) should be invalidated under Chevron step two on the ground that the Treasury Department failed in promulgating the regulation to articulate a reason why a two-year limitations period was necessary.

In light of this decision and the recent decision in Mayo Foundation, it appears clear that all Treasury regulations will be given substantial deference under Chevron.  Accordingly, a challenge to a regulation is unlikely to be successful unless that regulation: (i) conflicts with statutory language, (ii) is not a reasonable interpretation of the statute, or (iii) the Treasury Department acted in an arbitrary, capricious or otherwise impermissible manner in adopting or applying the regulation.

For more information, in BNA's Tax Management Portfolios, see Brown, 645 T.M., Innocent Spouse Relief, and in Tax Practice Series, see ¶3825, Innocent Spouse Relief.

1 No. 09–837 (S. Ct. 1/11/11). 

2 132 T.C. 131 (2009). 

3 467 U.S. 837, 104 S. Ct. 2778 (1984). 

4 Lin-Zheng v. Attorney Gen., 557 F.3d 147, 155 (3d Cir. 2009). 

5 Quoting City of Chicago v. Envtl. Def. Fund, 511 U.S. 328, 338 (1994).