Keith recently blogged on proposed regulations dealing with the timing of making requests for equitable relief from joint and several liability under Section 6015(f). This post considers issues relating to the scope of review and standard of review for Tax Court equitable relief cases arising outside deficiency procedures.
Cases involving equitable relief from joint liability are challenging to litigate. They often involve compelling circumstances and require a different approach than cases implicating purely technical legal issues. To win, you have to show why it is inequitable for the IRS to collect an agreed upon liability. Factors like abuse and knowledge and financial hardship are not easy to prove, and relate often to painful and difficult matters in peoples’ lives.
This past June, the lot of practitioners and taxpayers became easier. Earlier this year, the 9th Circuit, in Wilson v Commissioner, affirmed a Tax Court decision that concluded that the appropriate scope and standard of review in equitable relief cases should be on a de novo basis. Following the defeat, IRS in a June Action on Decision announced that it will no longer argue that the Tax Court should review section 6015(f) equitable innocent spouse relief cases for an abuse of discretion or that the court should limit its review to the administrative record. It also issued instructions to its counsel attorneys to that effect.read more...
Some tax procedure context is important (for those wanting more, take a look at Saltzman, Chapter 7 C or Effectively Representing, Chapter 19) Since Congress overhauled the rules for relief from joint and several liability in 1998, there has been a significant amount of litigation over the parameters for requests for equitable relief under Section 6015(f). As background, under section 6015(e)(1)(A) as amended in 2006, the Tax Court has jurisdiction to “determine the appropriate relief available” to an individual who requests equitable relief under section 6015(f) and files a timely petition. This legislative change expressly granting Tax Court jurisdiction for these cases came in to law in Tax Relief and Health Care Act of 2006, because there was uncertainty as to whether the courts had jurisdiction to consider equitable relief cases that arose in nondeficiency cases. See Ewing v. Commissioner, 439 F.3d 1009 (9th Cir. 2006)(no court review for nondeficiency equitable relief cases).
While Congress resolved that issue in 2006, one of the open issues since then has been the appropriate standard and scope of review in these cases. A de novo scope of review allows taxpayers to introduce evidence outside the administrative record, and a de novo standard of review allows the court to determine whether the taxpayer was entitled to relief without regard to the Service’s determination. A scope and standard based on abuse of discretion generally limits the court’s review of evidence to what was before the IRS in the administrative determination, with the IRS decision on the merits upheld unless the court found it to be arbitrary or capricious.
In Wilson, the Ninth Circuit, affirming the Tax Court, held that “determine,” as used in Section 6015(e)(1)(A), provides both a de novo standard and a de novo scope of review in section 6015(f) cases. The circuit court interpreted section 6015(e)(1) in conjunction with the requirement of Section 6015(f) “to consider the totality of the circumstances before making an equitable relief determination.” The Ninth Circuit emphasized that requirement would be impossible if the Tax Court’s review was tethered to the administrative record (the so called “record rule”).
The IRS’s acquiescence is good news for taxpayers. The restrictive administrative record rule that the IRS sought to apply prior to Wilson presented formidable obstacles for taxpayers wishing to get a full consideration of the merits. Taxpayers who for whatever reason could not or did not present sufficient evidence at the level of Service review may not have been awarded relief in court even if the facts (if properly presented) justified relief. The Ninth Circuit’s description of the problem with the IRS’s prior view is right on:
Many of the taxpayers who seek innocent spouse relief share Wilson’s limited educational background, lack of access to essential documents, and inability to hire counsel. Taxpayers in Wilson’s position may have understandable trouble comprehending, and thus fully complying with, the IRS’s process in considering requests for equitable spouse relief or establishing a complete record with the agency. Allowing the Tax Court to review a supplemented and up-to- date record under these circumstances is entirely consistent with the statutory structure of § 6015 and Congress’s direction that the Tax Court determine the appropriate relief
Hats off to the IRS for throwing in the towel on this fight. Note though that the IRS still is arguing (with the support of 4 circuits, though not the Tax Court) that the record rule generally applies in collection due process cases considering issues other than the amount or existence of the underlying liability. Future posts will address that issue, and what I believe to be a more justifiable reason to applying the record rule in those cases.