Lesson From The Tax Court: IRS Can Issue Multiple 'Final' Spousal Relief Determinations

Yogi Berra would have been a great tax practitioner.  In Nilda E. Vera v. Commissioner, 157 T.C. No 6 (Aug. 23, 2021), Judge Buch does his best Yogi Berra imitation by teaching us that just because the IRS issued one “final determination” about an innocent spouse claim does not prevent it from issuing a second “final determination” to the same taxpayer when the taxpayer resubmits the same claim for the same year.  That means taxpayers potentially get a second opportunity to petition the Tax Court for review of an IRS rejection even when the taxpayer missed the first opportunity.  The Tax Court thus interprets the law to encourage taxpayers to keep resubmitting equitable relief claims because one never knows when the IRS might issue a second final determination, either deliberately or, as here, because of a goof-up.  As Yogi might have said: it ain't final until it's final!  So when at first your claim's denied, file, file again.  In the context of §6015(f) relief requests, that is not actually a bad result.  Details below the fold.

Law: Three Paths To Spousal Relief Means Three Different Tickets To Tax Court
Section 6013 says that married taxpayers who file joint returns are jointly liable for any resulting taxes.  Section 6015, however, allows divorced individuals the ability to be relieved of that obligation under certain circumstances.  These relief provisions are a mixture of legal concepts and equitable concepts. I blogged about this legal/equitable mix back in “Lesson From the Tax Court: The Role of Equity,” TaxProf Blog (May 7, 2018).  I blogged about the interesting history of §6015 in "100^th Lesson From The Tax Court: The Role of Innocence In §6015 Spousal Relief,” TaxProf Blog (Oct. 21, 2019).  Finally, I took a detailed dive into the history, policy, and purpose of §6015 in “The Unhappy Marriage of Law And Equity in Joint Return Liability," 108 Tax Notes 1307 (Sept. 12, 2005).   You can have fun with all that at your leisure.

Today’s lesson is not about the substance of §6015 but is instead about the procedures available for taxpayers to obtain §6015 relief.  More importantly, today’s lesson is about how taxpayers can get Tax Court review of their claim for §6015 relief.

Taxpayers have three procedural pathways to §6015 relief.   Each one is eligible for Tax Court review but requires a different “ticket” for entry.  The first two piggyback on other procedures and, hence, on the jurisdiction Congress gave the Tax Court under those procedures.  Those tickets are well known.  The third stands alone.  Its ticket is today’s lesson.

First, a taxpayer can ask for §6015 relief as part of the deficiency procedures, before assessment.  It might be during the audit process or even during a resulting Tax Court proceeding to contest a proposed deficiency.  The Tax Court’s deficiency jurisdiction has always permitted the Court to consider a taxpayer’s claim for §6015 relief as part of a deficiency proceeding.  See Butler v. Commissioner, 114 T.C. 276 (2000) (exercising jurisdiction to review § 6015(f) determination where taxpayer was seeking relief from a deficiency).  Hence, the “ticket” to the Tax Court here is the NOD.

Second, a taxpayer can ask for §6015 relief as part of the CDP procedures, after assessment. Section 6030(c)(2)(A)(i) provides that one of the issues a taxpayer may raise in a CDP hearing is “appropriate spousal defenses.”  Hence, the “ticket” to the Tax Court here is the relevant CDP Notice.

Third, a taxpayer can seek §6015 relief standing alone, independent of any other procedure.  Section 6015(e)(1)(A) gives the Tax Court jurisdiction “to determine the appropriate relief available to the individual under this section.”  Section 6015(e)(1)(A) says that this stand-alone procedure is “in addition to any other remedy provided by law.”  Of course, there are issue and claim preclusion problems if the taxpayer had prior access to court review.  But here we are just talking about jurisdiction.  And Tax Court jurisdiction depends on the taxpayer filing a timely petition.

If the IRS does not respond to the taxpayer’s claim for relief within 6 months, the taxpayer can petition the Tax Court at any time.  But when “the Secretary mails, by certified or registered mail to the taxpayer’s last known address, notice of the Secretary’s final determination of relief available to the individual” then the taxpayer must petition the Tax Court no later than the 90th day after the the final determination was mailed.  §6015(e)(1)(A). (emphasis supplied).

Hence, the “ticket” to Tax Court for this third path is a qualifying “final determination of relief.”  What does this ticket look like?  That is the lesson for today.

While the first two types of tickets—the NOD and the CDP Notices—are fairly well defined by both statute, regulation, and case law, this third ticket is not.  The statute does not define the term.  Nor do the regulations, although Treas. Reg. 1.6015-5(c)(1) does say that a taxpayer “is entitled to only one final administrative determination of relief...for a given assessment, unless the requesting spouse properly submits a second request for relief that is described in § 1.6015-1(h)(5).”  The referenced regulation allows a second request for relief (and thus, by inference, a second final determination), but only for the relief allowed in §6015(c) to allocate a deficiency and then only when the requesting taxpayer was not eligible for that relief at the time of the first request but later becomes eligible.  The exception does not contemplate allowing a second request for the equitable relief in §6015(f).

The concept of “final determination” and the lack of an explicit allowance for a second equitable relief request in the regulations is in considerable tension with §6015(f)’s direction to the IRS to do equity.  That is because a determination under §6015(f) depends heavily on facts and circumstances presented by the taxpayer.  And those can change over the long time in which taxpayers may request equitable relief, the entire time that the IRS’s collection period is open.

Given the fluidity of §6015(f) determinations, it is difficult to say what is “final.”  You can see this simply by reading the IRS guidance in Rev. Proc. 2013-34.  That document lists out the various factors affecting a taxpayer’s eligibility for equitable relief.  The document explicitly acknowledges that some factors will be evaluated at the time of the request.  That means if they change over time, the equities will change as well.   For example, one factor is the requesting spouse’s mental or physical health.  The Rev. Proc at §4.03(2)(g) says that “this factor will weigh in favor of relief if the requesting spouse was in poor mental or physical health...at the time the requesting spouse requested relief.” (emphasis supplied).  We all know how physical and mental health can change over time.  Similarly, §4.03(2)(b) says the IRS will consider whether denying relief would create an economic hardship.  That factor is also subject to considerable fluctuation over time.  The Rev. Proc. is clear that in making that determination, “the Service will take into consideration a requesting spouse’s current income and expenses.” (emphasis supplied).

Balanced against this functional need for fluidity is the administrative need for certainty and closure.  Thus it is not surprising that the Tax Court cases that have addressed the concept of “final determination” seem to have taken a formal view of the matter.

For example, in Barnes v. Commissioner, 130 T.C. 248 (U.S.T.C. 2008), Ms. Barnes had sought equitable relief in 2000 and the IRS denied it in 2001, sending the taxpayer Letter 3279 which was labeled (in all caps) “FINAL DETERMINATION.”  Okay.  Must be final if it says so.

Several years later, in 2007, Ms. Barnes thought events after her first request had changed the equities.  She re-requested equitable relief.  The IRS again refused to grant relief.  This time, however, it sent her the decision on Letter 3657C, which did not contain the magic words “final determination.”  Further, Letter 3657C said “Our records show you previously filed Form 8857 on December 01, 2000 for tax year 1997 and your claim was [considered] and denied. Since the facts have not changed, no further action can be taken on your request for relief.”  130 T.C. at 250.

Ms. Barnes disagreed with the statement that “the facts have not changed” and sought Tax Court review.  The Tax Court held it did not have jurisdiction because the Letter 3657C was not a proper ticket.  It was not a “final determination” within the meaning of §6015(e).  Why?  Because the IRS had said so.  Just look at the Form.  The Court did: “On the basis of our careful review of the Letter 3657C...we conclude that it does not purport to be a final notice of determination under section 6015, or an amendment to the original notice of final determination, and was not intended as such.”  130 T.C. at 254 (emphasis supplied).

The Barnes court also made an equally “careful review” of the record and came to its own conclusion that the facts had not changed.  So it viewed the second request as duplicative and said “we do not believe the 90-day limitations period of section 6015(e)(1)(A) should be defeated or protracted by the simple expedient of filing a succession of duplicative claims.” Id.   The Court did not say what it would have done had it concluded that Ms. Barnes' second claim was based on substantially changed facts.

Today’s lesson is consistent with Barnes even though the result is the opposite.  The Court here, as there, relies upon the form of the IRS decision document to decide whether the taxpayer has received a final determination ticket to the Tax Court.  Let’s take a look.

Facts
In 2015, Ms. Vera asked for equitable relief for tax year 2013.  The IRS denied her request with a letter that said “final determination” on it and explained how she had 90 days to petition the Tax Court for review.  She missed the deadline by one day.  The Tax Court dismissed that first petition for lack of jurisdiction.

In 2016, Ms. Vera filed another request for asked for equitable relief for tax year 2010.  As part of her submission she included a copy of her previous submission for tax year 2013.

In 2019, the IRS rejected Ms. Vera’s request, using Letter 3288 that also said it was a “Final Appeals Determination.”  The letter’s subject header referenced only the 2010 tax year.  But in the body of the letter, the Appeals Officer (AO) had written: “For tax year 2013, you didn’t comply with all income tax laws for the tax years that followed the years that are the subject of your claim.”

This time Ms. Vera timely filed her Tax Court petition.  The government moved to dismiss her petition as to the 2013 tax year.

Lesson: IRS Can Issue Multiple Final Determination Tickets
Judge Buch reviews the law—sparse as it is—on what constitutes a “final determination” for purposes of Tax Court jurisdiction.  He gives a really nice discussion of the Tax Court’s approach to evaluating various other tickets to the Tax Court in the deficiency, whistleblower, and CDP contexts.  In all of those, Judge Buch notes, the Tax Court relies heavily on the form or letter the IRS actually issues in those situations.  If what IRS sends out is labeled a ticket, then the Court takes jurisdiction, even if the IRS send the ticket mistakenly.

Judge Buch held that the Tax Court would take the same approach here: the IRS had sent Ms. Vera a ticket—a self-described “final determination”—and had punched that ticket for both 2010 and 2013 by giving substantive reasons for rejecting each request.

The IRS offered two arguments on why the letter in this case was not a final determination for 2013.  First, the letter was issued only in response to her request for 2010 relief and the header of the letter specified only the 2010 tax year.  Second, the AO had obviously included the language about the 2013 year by mistake since Ms. Vera’s submission had contained nothing that was not present in her first 2013 submission.  Her 2013 submission, even if considered as a second submission, was entirely duplicative.

Judge Buch rejected both arguments.  As to the first, he noted that content of the letter controlled the scope of the letter’s effect.  The letter was labeled "final determination" and the only question is whether its content reached the 2013 year.  It did.  The AO had given a substantive reason for denying relief for 2013.  The letter was a self-described “final determination.”  That made this a final determination for the year 2013.  That also made it different from Barnes, where the IRS did, actually, make a substantive decision (no new facts) to deny relief, but sent that decision using a letter that was not labeled as a final determination.

As to the second argument—that the 2013 language should be ignored because it had been included by mistake—Judge Buch pointed out that the IRS retained control over how it issued its decisions, so the concern in Barnes about taxpayers clogging up the system with multiple duplicative claims for relief was simply not present.  Wrote Judge Buch: “In this case, the policy concern regarding duplicative claims could have been avoided” if the AO had used the correct form to address what the AO apparently thought was a re-submitted 2013 claim. Op. at 9.

Bottom line: “the letter the Commissioner issued in this case is a second final determination as to 2013, which...grants the requesting spouse the right to petition this Court.”  Op. at 9.  Whether this will do Ms. Vera any good when the Tax Court moves to the substance of her petition is unclear.

Comment 1:  Not A Bad Result?  Granting equity is a facts-and-circumstances determination.  And circumstances change.  Over the 10-year collection period a taxpayer may have problems in year 7 they did not have in year 4 when they applied for equitable relief.   The IRM appears to explicitly contemplate later administrative relief for a subsequent request.  So while an IRS employee is unlikely to deliberately send a requesting spouse an additional ticket to the Tax Court if denying that later relief, this decision does not really change IRS practice.  The IRM just instructs the IRS employee to use a different form: the employee must “not issue Final Determination letters to either spouse; instead use the letters referred to in the sections below, which grant appeal rights, but not petition rights.”  IRM 25.15.17.5.

What the decision may change is Tax Court's willingness to review a subsequent denial where the taxpayer claims the IRS made its new decision on the merits, notwithstanding the letter used.  I read the cases as indicating that the Tax Court will not simply genuflect to the letter the IRS uses or the caption on the form.  Look at Barnes again.  Even though Tax Court there said it was dismissing for lack of jurisdiction, the Court was careful to first note that it had, in fact, substantively reviewed the administrative record and agreed that Ms. Barnes had not shown any changed circumstances that would justify treating the second request as a new request and not a duplicative request.  The fact that the Court did that implies that if the Court had believed Ms. Barnes had really alleged new facts (economic hardship, mental or physical health problems), the Court might be willing to treat the new denial as a new "final determination." Sure, this would run counter to the IRM, but we all know the IRM does not have the force or effect of law.  So if your client has facts significantly altered from a prior submission and the IRS still denies relief, remember today's Yogi Bera lesson.  We now know that the IRS can indeed issue multiple “final determinations,” so you lose nothing by trying for Tax Court review. 

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law and today celebrates his 61st year here on Earth.  He can think of few gifts better than the continued ability to write these posts; they are enormous fun.  He invites readers to return to TaxProf Blog each week for a new Lesson From the Tax Court.