My friends joke that my time as an attorney in the IRS Office of Chief Counsel was spent in the belly of the Beast. I’m not a fan of that analogy because it implies the IRS is a single entity. As regular readers of this blog (if any exist) know, I regularly argue against that view. The best way to think of the IRS---both in theory and practice---is that it is a collection of different offices (or functions) each of which has certain defined authorities. Folks, it’s a bureaucracy, not a beast.
Today’s case, Colleen Michelle Leith, Petitioner, and Oraine J. Leith, Intervenor v. Commissioner, T.C. Memo. 2020-149 (Nov. 4, 2020) (Judge Vasquez), teaches a great lesson on how getting to a different bureaucratic decision-maker can turn defeat into victory. There, the taxpayer sought spousal relief and lost in the IRS. Although the Tax Court decision is in her favor, she really won the case in the Office of Chief Counsel. Details below the fold.
Law: Spousal Relief
The election to file a joint return under §6013 has a huge upside: more favorable rate structure and benefits from certain exclusions, deductions and credits, including higher thresholds before applicable phaseouts kick in. But it also has a downside: both spouses are jointly and severally liable for any unpaid tax. Section 6015, however, permits spouses to obtain relief from that joint liability under certain circumstances. I explained the history of this provision in my 100th Lesson From The Tax Court, The Role of Innocence In Spousal Relief, TaxProf Blog (Oct 13, 2019).
Basically, §6015 gives taxpayers three pathways to obtain relief from unpaid tax liabilities associated with a joint return. The path relevant to this case is the §6015(f) pathway for equitable relief.
The basis for §6015(f) relief is very broadly worded: the statute allows a taxpayer to be relieved of responsibility for an unpaid joint liability when “taking into account all the facts and circumstances, it is inequitable to hold” the requesting spouse liable. The relief applies to both understatements of tax (i.e. deficiency assessments) and underpayments (i.e. assessment based on filed returns that simply did not remit sufficient payment). A taxpayer can seek equitable relief during the entire time that the IRS can collect from the taxpayer. §6015(f)(2).
The IRS has implemented §6015(f) relief through Rev. Proc. 2013-34. While the Tax Court repeatedly says it is not bound by the Rev. Proc., as a practical matter it always follows the Rev. Proc.’s approach when evaluating the suitability of relief.
I teach Rev. Proc. 2013-34 as creating three equity screens, each of which asks slightly different questions, all variants of “is it unfair to make the requesting spouse pay the tax?”
Section 4.01 sets up a threshold screen that consists of a checklist of mostly procedural hoops. If a taxpayer does not meet the threshold conditions, the IRS rejects the request without further analysis.
Section 4.02 is the second screen. It kicks in when a taxpayer satisfies the threshold requirements in §4.01. This second screen is called the “streamlined determination” because it takes three of the multiple factors used in the third screen and will grant relief if all three favor the requesting spouse: (1) the divorce is final; (2) the taxpayer would suffer economic hardship without relief; (3) the taxpayer did not know or have reason to know of the existence or nonpayment of the tax liability for which relief is sought. In essence, these are the three most important factors and if all three favor the requesting spouse, the IRS will not even consider remaining factors. That’s why this is called the “streamlined determination.”
Section 4.03 is the third screen. It applies when a taxpayer passes the threshold requirements but fails one of the streamlined determination factors. Section 4.03 lays out seven non-exclusive factors that the IRS will consider in deciding whether to grant the requested relief. In addition to the three factors that the IRS uses in the streamlined determination, it adds the following 4 factors: (1) who had the legal obligation under any relevant state court order or binding agreement to pay the outstanding tax liability; (2) how much the requesting spouse benefitted form the unpaid tax liability; (3) whether the requesting spouses has otherwise complied with income tax laws; and (4) the physical or mental health of the requesting spouse.
Special Role of abuse. Under the former Revenue Procedure the IRS made abuse a separate factor to consider as part of the third screen. However, Rev. Proc. 2013-34 elevates the importance of abuse by allowing a showing of physical or emotional abuse to affect all three s.01(7)(D), §4.02(3)(a), §4.03(2). If the requesting spouse convinces the IRS that the nonrequesting spouse abused the requesting spouse such that the requesting spouse could not, as a practical matter, object or affect the treatment of any item that gave rise to a deficiency, or could not, as a practical matter, question or affect the actual payment of reported taxes, then such abuse or financial control will result in the IRS putting a huge thumb on the scale of fairness in favor of the requesting spouse. Specifically, the IRS will disregard whether requesting spouse knew or had reason to know of the items giving rise to the understatement or deficiency or knew or had reason to know that the nonrequesting spouse would not pay the tax liability.
Law: The Role of Intervenors
Congress recognized that there are often two sides to any story. In §6015(h)(2) Congress told the tax administrators to write rules to ensure that nonrequesting spouses received adequate notice and opportunity to be heard during the administrative proceedings. Those rules are found in Treas. Reg. 1.6015-6. Similarly, Congress told the Tax Court to write rules permitting permit nonrequesting spouses to intervene in Tax Court Procedings. §6015(e)(4). Those rules are found in Tax Court Rule 325.
Mr. and Ms. Leith married in 2008 and divorced in 2015. Ms. Leith sought relief relating to three tax years in which the couple had filed joint returns: 2010, 2011, and 2013. The first two years involve deficiencies the IRS had assessed after audits and after the taxpayers failed to respond to the NODs for each year. For 2013, the unpaid tax was a self-reported tax liability that the Leiths simply had not paid on their return.
Crucial to the case was Judge Vasquez’s finding that Mr. Leith controlled the preparation of the tax returns at issue. Each year Ms. Leith gave him her tax documents, such as her W-2’s, but it was Mr. Leith who “selected and dealt exclusively with the return preparers.” When the returns were completed Mr. Leith would give her only the signature page to sign. Writes Judge Vasquez: “He did not give petitioner an opportunity to review the returns before she signed them.” Op. at 5.
The deficiencies on the 2010 and 2011 returns resulted from the IRS disallowing large deductions Mr. Leith put on the returns. First, he deducted unreimbursed employee expenses for both himself and for Ms. Leith. Second, he filed Schedule C’s each year relating to a company he and two others had started, called Accelerated Waste Solutions of North American. In both years the IRS disallowed all deductions he claimed to associate with the business. Additionally, In 2012, Ms. Leith received $6,000 in settlement of a claim she had against an oil company. Mr. Leith reported the $6,000 on a separate Schedule C as if it were from a separate business and then threw in a bunch of deductions, all of which the IRS disallowed. There were other problems with the returns, but the point is that all the shenanigans related to Mr. Leith’s preparation of the returns.
In early 2016, Ms. Leith requested §6015 relief for the 2010 and 2011 tax years. She did not allege spousal abuse in the first request. About 2 months later, Ms. Leith filed a second request for §6015 relief and expanded the request in two directions. First, she asked for relief for tax years 2009 through 2013. Second, she alleged abuse, recounting two specific incidents: an incident where a drunk Mr. Leith shouted at her and kicked household objects; and a time when he locked her out of the house and she called the police. She also explained that Mr. Leith’s practice of “stashing” kitchen knives under their bed made her fearful.
Mr. Leith intervened in the administrative proceedings, alleging that Ms. Leith knew all about the problems that caused the deficiencies. The opinion is silent on whether his submission admitted, denied, or ignored Ms. Leith’s allegations about his behavior.
Ms. Leith’s requests and Mr. Leith’s responses were reviewed by the IRS’s Cincinnati Centralized Innocent Spouse Operation (CCISO). In March 2017 that office issued its final determination denying relief. The IRS reviewer found that she knew about the facts giving rise to the understatements in 2010 and 2011 and that the disallowed unreimbursed employee expense deductions were attributable, in part, to her. Like all taxpayers, she was under a duty to review the returns and she should have asked to see them. For 2013 the office concluded that it was not reasonable for Ms. Leith to think that Mr. Leith had agreed to take sole responsibility for paying the understatement shown on the return.
Ms. Leith petitioned the Tax Court. Mr. Leith intervened. Neither was represented by counsel. Both failed to follow various Tax Court’s rules. But that hurt Mr. Leith much more, which is part of the lesson.
Lesson: The Enemy of Your Enemy Is Your Friend
Our system of tax administration has built-in redundancies so that taxpayers who receive an adverse determination from one IRS office can get their case before different decision-makers and, hopefully, get a different decision.
The trick in helping people with tax problems is to find the function or office that can give a decision in your client’s favor. If one office does not do that, you must try to find another office than can.
Most practitioners know how to use this trick to get a taxpayer’s matter before the Office of Appeals, or before the Taxpayer Advocate Service. However, many folks overlook the fact that filing a petition in Tax Court brings in a new bureaucratic office, the IRS Office of Chief Counsel. Most folks think of Chief Counsel attorneys as “the enemy.” The better view is that they are just another office in the tax administration bureaucracy. They can hurt you. Sometimes they can help you. One often overlooked benefit of Tax Court review is that the case file is reviewed by Chief Counsel trial attorneys, who make their own judgment about the merits of the case. Sometimes that new bureaucratic player can make a difference in the outcome.
That is what happened in today’s case. When Ms. Leith filed her petition, the Chief Counsel attorneys assigned to the case reviewed the information she had provided and came to a different conclusion than the CCISCO employees who reviewed that same information.
The upshot was that the Chief Counsel attorneys agreed she was entitled to spousal relief as to items attributable to Mr. Leith. Normally, agreement by Chief Counsel would result in a stipulated decision of the Trial Court. See IRM 220.127.116.11 (08-15-2019). See also the Tax Court’s website FAQ (“If you settle your case with the IRS, a settlement document (stipulated decision) will be prepared by the IRS.”).
Here, however, Mr. Leith had intervened and that required trial. Still, having the Office of Chief Counsel agree that she was entitled to relief helped Ms. Leith. First, it helped in the fact-finding process, which can be crucial in the result. Specifically, it helped in the stipulation process. For example, the 2011 return claimed deductions for unreimbursed employee expenses attributed to Ms. Leith. But the parties stipulated that Mr. Leith was the one who made that claim on the 2011 return. Judge Vasquez interpreted that stipulation to mean that those items were attributable to Mr. Leith and not Ms. Leith. Op. at 7, note 7. Chief Counsel’s cooperation also helped at trial. Judge Vasquez repeatedly notes in his opinion that the Chief Counsel’s office agreed at trial with Ms. Leith’s factual assertions, particularly the assertion of abuse.
A second way that Chief Counsel helped Ms. Leith was simply in knowing how to follow Tax Court rules. At trial Mr. Leith, proceeding pro se, tried to introduce evidence that he had not shared with the other parties before trial. Chief Counsel knew enough to object and the Tax Court sustained the objection. Op. at 14, note 11. Mr. Leith continued to try and introduce more information as part of his post-trial brief. Judge Vasquez treated that attempt as a motion to re-open the record and rejected the attempt. Op. at 15, note 12.
Thus, the actions of Chief Counsel---in supplying evidence from the administrative record, in stipulating to facts favorable to Ms. Leith, in objecting to Mr. Leith’s proposed evidence, and in conceding factual issues at trial---helped shape the factual record favorably for Ms. Leith. That factual record enabled the Court to determine that Ms. Leith met all the factors for the Rev. Proc. 2013-34 §4.02 streamlined determination. The Court found Ms. Leith would suffer economic hardship based on the financial information she had submitted in her 2016 requests which were part of the administrative record before the court. Chief Counsel conceded the issue and Mr. Leith was unable to produce contrary evidence in an admissible form at trial. The Court also found she did not have reason to know of the understatements because Mr. Leith controlled the process and because it found “she was the victim of spousal abuse.” Again, Chief Counsel conceded the issue and, again, Mr. Leith did not produce admissible evidence at trial.
The short of it is that while Mr. Leith got the CCISO folks on his side for the win, Ms. Leith got a different office, the Office of Chief Counsel, on her side. In effect, Chief Counsel over-ruled the CCISO folks who found against her. That’s a great way to beat the bureaucracy.
Bryan Camp is the bureaucratic George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return each Monday for a new Lesson From The Tax Court.