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By Professor Karen B. Brown
George Washington University, Washington, D.C.
When Congress enacted the IRS Restructuring and Reform Act of 1998, it fulfilled its goal to expand the grounds for relief from joint and several liability for innocent spouses filing joint returns. One of the most important innovations was the provision of equitable relief for taxpayers unable to qualify for traditional relief. This included the possibility of relief for victims of domestic violence and others who knew or had reason to know of the erroneous deduction or omitted income of their spouses, but were powerless to correct the defects. It also expanded relief to include situations in which a taxpayer signed a joint return reflecting tax liabilities attributable to her spouse which she knew or had reason to know would not be paid by the "guilty spouse."
When the Treasury issued regulations, it adopted a limitations period – two years after the IRS initiated collection action against the innocent spouse – for the filing of claims for equitable relief. Although Congress expressly provided a two-year limitations period in the statute regarding claims for traditional relief (where the taxpayer has no knowledge or reason to know of her spouse's understatement of tax or is eligible to elect separate return treatment), it was silent with respect to claims for equitable relief.
In Lantz v. Comr., 132 T.C. 131 (2009), the Tax Court found Congress' silence to be an endorsement of a more flexible limitations period for equitable claims which takes into account a number of factors, only one of which is prompt filing of a claim for relief, given the difficult marital circumstances in which these types of claims arise. It invalidated Regs. §1.6015-5(b)'s two-year statute of limitations for equitable claims finding that it failed the first step of the Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S. 837 (1984), test because it was contrary to Congressional intent in enacting equitable relief. Examining legislative history relating to parallel provisions according equitable relief to spouses residing in community property states, the Tax Court concluded that the limitations period was a categorical exclusion from relief that impermissibly failed to take into account all of the facts and circumstances.
The Seventh Circuit Court of Appeals reversed the Tax Court in Lantz v. Comr., 607 F.3d 479 (7th Cir. 2010), finding the regulation a reasonable interpretation of the statute. The Seventh Circuit found that the absence of a two-year limitations period would eviscerate the same time limit for claims for traditional relief, because any taxpayer failing to meet that time limit could nonetheless qualify for equitable relief. The Third Circuit reached the same conclusion (relying on different analysis) in Mannella v. Comr., 631 F.3d 115 (3d Cir. 2011), rev'g 132 T.C. 196 (2009), holding that the administrative two-year time limitation was a valid exercise of regulatory power.
After the Seventh Circuit's decision in Lantz, but before the Third Circuit's decision in Mannella, in Hall v. Comr., 135 T.C. No. 19 (2010), the Tax Court reaffirmed its analysis in Lantzinvalidating the two-year limitations period for all matters pending in circuits other than the Seventh. In light of the decision in Mannella, the Tax Court is also bound to hold the regulation valid in the Third Circuit as well.
While the Tax Court has taken an expansive view of its jurisdiction in the case of the limitations period concerning claims for equitable relief, it does not appear to take this approach in every case. In its decision in Mannella, the Tax Court found that where the IRS properly mailed a notice of intent to levy to the taxpayer's last known address, the two-year limitations period on her claims for traditional relief began to run even though her husband signed for the notice but never delivered it to her. Although the lack of actual notice of collection activity to the innocent spouse might have furnished a basis for tolling the running of the statute of limitations on the assertion of her equitable claim, the Tax Court did not reach such a conclusion. Perhaps because it held that the two-year limitations period was an invalid regulatory exercise (subsequently reversed by the Third Circuit), it did not adopt the lack of actual notice as an alternative ground for relief.
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.
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