Lesson From The Tax Court: No §6015 Equitable Relief For §6672 Penalties

The Internal Revenue Code is full of taxes and penalties.  Oh my, so many taxes and penalties!  You must always stay aware of which kinds of taxes or penalties are at issue in order to know what rules of law apply.  This week and next week will give us two lessons on the importance in keeping straight the different kinds of taxes and penalties.

In Angela M. Chavis, 158 T.C. No. 8 (June 15, 2022) (Judge Lauber), the taxpayer was seeking spousal relief under §6015(f) from Trust Fund Recovery Penalties assessed per §6672 against her and her then-husband.  The liability for §6672 penalties is joint and several.  And, if you squint, the text of §6015(f) appears to allow relief from any joint and several liability.  Today we learn not to squint. Section 6015(f) provides relief only from joint liability for income taxes.  Trust Fund Recovery Penalties are not income taxes.  So no spousal relief for §6672 penalties.  You will find a bit more (but not much) below the fold.  It’s a short lesson for a hot summer day.

Law: §6672 Is A Penalty But Is Also a Tax
“Trust Fund Taxes” are those taxes that are paid by the taxpayer to an intermediary who, after collecting the tax, is then supposed to forward it to the government.  These are known as "trust fund" taxes because  §7501(a) says that the money so collected is held in trust for the United States until it is paid over.

Two of the most important trust fund taxes are collected by employers from their employees. First, §3402(a) makes every employer responsible for withholding their employees' income taxes. Second, §3102(a) imposes a withholding requirement for the employees’ share of social security taxes.  Employers are supposed to remit these withheld taxes on an ongoing basis and to account for the payments and withholding once each quarter on Form 941.

But it does not always go down like that.  If the employer fails to properly pay over these withheld amounts to the government, then the Treasury bears the loss, because §31(a) gives employees a credit for taxes withheld regardless of whether the money actually reaches the government's coffers.  I call this the “duh” credit because even though the government may not have received the money, you can just hear the employee saying, “well, duh, my employer withheld it.  It’s not my fault my employer failed to actually pay it!”

Section 6672 is a penalty designed and administered to help ensure payment of trust fund taxes. It provides that if any “person required to collect, truthfully account for, and pay over any tax imposed by this title...willfully fails to collect such tax, or truthfully account for and pay over such tax" then that person is “liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”  The term “person” in the statute can include a corporate employer as well as individuals within the company who have sufficient control such that they should be held responsible for ensuring proper payment.  The short-hand term for such individuals is “responsible persons.”

Though called a "penalty," it is treated as a tax, both formally and functionally.

First, §6672 is located in Subchapter B (“Assessable Penalties”) of Chapter 68 of the Tax Code.  And the very first statute in the Subchapter, §6671, tells us that “The penalties and liabilities provided by this subchapter shall be...assessed and collected in the same manner as taxes. Except as otherwise provided, any reference in this title to “tax” imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter.”  So, formally, §6672 is included within the Code’s definition of “tax.”

Second, the IRS has a long established policy of using §6672 only as an additional tool to collect unpaid trust fund taxes.  In Policy Statement 5-14 (formerly P-5-60) the IRS says: “The withheld income and employment taxes or collected excise taxes will be collected only once, whether from the business, or from one or more of its responsible persons.”  This policy reads the statute’s purpose as recovering trust fund taxes that ought to have been paid, and not as imposing additional penalties on the responsible persons.  It exists to counter the great temptation businesses encounter when their cash flow is but a trickle.

You can see the IRS policy at work when it determines that multiple responsible persons should be hit with the TFRP.  Yes, multiple individuals might be responsible persons. See IRM 5.17.7 (listing different kinds of responsible persons).  Quattrone Accountants, Inc. v. I.R.S, 895 F.2d 921, 926 (3d Cir. 1990)(“There can be more than one responsible person for a given employer. *** Section 6672 imposes joint and several liability on each responsible person, and each responsible person can be held for the total amount of withholding not paid.”)(quotes and citations omitted).  When that happens, however, the IRS will still collect the unpaid trust fund taxes only once.  It will cross-apply monies collected from one responsible person to the accounts of all the others who were assessed for the same unpaid trust fund taxes. IRM 5.7.7 gives the various payment application rules.

The fact that the TFRP is treated as a “tax,” both formally and functionally, plays a role in today’s case because of the specific language in §6015(f).

Law: Spousal Relief Under §6015
Section 6013 provides that spouses are jointly and severally liable for the taxes owed on a jointly filed return.  But sometimes there are unpaid tax liabilities after a divorce and one spouse might not want to be jointly liable for those liabilities.

Section 6015 allows divorced individuals the ability to be relieved of the obligation created by §6013.  Titled “Relief from joint and several liability on joint return ,” its predecessor was actually codified as part of §6013 before Congress expanded the scope of relief in 1998 and re-codified that relief into §6015.  For the gory details, feel free to download my article “The Unhappy Marriage of Law And Equity in Joint Return Liability," 108 Tax Notes 1307 (Sept. 12, 2005).

But titles in a Code section carry little legal weight.  It’s the text that matters.  While a title might be helpful in interpreting ambiguous text, it cannot limit the plain meaning of the text.  See Brotherhood of R. R. Trainmen v. Baltimore & O. R. Co., 331 U.S. 519 (1947).  So let’s look at the text.

As currently written, the plain text of §6015 gives three ways to obtain relief from joint tax liabilities.

First, §6015(b) applies only when the unpaid tax liability is due to an understatement of income tax attributable to a joint return.  Subsection (b) lists several conditions for relief.  The joint return is one condition, spelled out right there in the text, in §6015(b)(1)(A).  Another conditions is that “taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement.” §6015(b)(1)(D).

Second, §6015(c) also applies only to understatements attributable to jointly filed returns.  Again, that’s right in the text.  §6015(c)(1).

The third path has different text.  Section 6015(f) provides simply that “if...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 such individual under subsection (b) or (c), the Secretary may relieve such individual of such liability.”  That’s it.  That’s pretty much the text.

Do you see that there is no explicit textual requirement for (f) relief that the referenced “unpaid tax” be an income tax attributable to a joint return?  And when you go to the regulations, you likewise see a gap.  Treas. Reg. § 1.6015-1(a)(1) simply says there are three ways to obtain relief from “joint and several liability for Federal income tax.”  It lists equitable relief as one of those ways.  But it is otherwise silent on the scope of equitable relief.  That is, the regulation does not explicitly say that equitable relief applies only to income taxes. 

That’s why I think today’s lesson comes to us in the form of a precedential Tax Court opinion: the Court, properly in my view, reads subsection (f) relief as limited to the same class of taxes as (b) and (c) relief: income taxes related to a joint return. 

Facts and Lesson: No §6015(f) relief for TFRP Assessments
Ms. Chavis and her ex-husband ran a business called Oasys Information Systems, Inc..  They apparently ran it into the ground.  At least I find no trace of it.  In the process, they ran up a trust fund liability of almost $150,000.

Before the IRS can assess a TFRP against a responsible person, the statute requires it to first give the taxpayer an opportunity to protest to Appeals.  The IRS generally does that by sending out Letter 1153 and giving 60 days to protest to Appeals.

In 2015 the IRS sent both Ms. Chavis and her ex-husband separate Letters 1153.  Each Letter proposed to assess each of them almost $150,000 to collect trust fund taxes.  Remember, this would be joint and several liability on each of them.  And, remember, they were married at the time.  Ms. Chavis did not respond to the Letter.

By 2019 the IRS was still seeking to collect about $130,000 of the assessed liability.  It sent Ms. Chavis a lien CDP notice and she timely requested a hearing.  At the hearing she not only asked for collection alternatives, she also asked for spousal relief.  Squinting hard, she claimed the seemingly broad language of §6015(f) entitled her to relief because the nonpayment had been all her ex-husband’s fault.  She made standard allegations for many §6015(f) claims: he controlled the finances, she never signed the corporation’s checks or the relevant returns.

Judge Lauber ignores the details of her claim because he finds that §6015(f) simply does not apply to her situation.  He relies on internal IRS guidance, primarily Rev. Proc. 2013-34, on the Treasury Regulation, and on the legislative history of §6015, citing to the 1998 Conference Committee Report.  He notes that all of those sources combine to convince him that equitable relief is only available for joint and several income tax liability.  The TFRP is not an income tax liability.  So no relief is available.  Stop Squinting.

Comment: The No Squinting Rule of Statutory Imterpretation.  I think an additional reason supporting Judge Lauber’s interpretation of §6015(f)’s text is the canon of statutory interpretation made famous by Justice Scalia in Whitman v. American Trucking Associations,  531 U.S. 457 (2001).  There, a federal agency was claiming to have authority to issue regulations based on a squinty reading of its authorizing statute.  In rejecting the agency’s reading of the statute, Scalia wrote: “Congress, we have held, does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions-it does not, one might say, hide elephants in mouseholes.”  Id. at 468.

Commonly called the elephants-in-mouseholes canon, I teach it as the Don’t Squint canon (yeah, I teach a class in Statutory Interpretation as well as tax).  As applied here, one would see that §6015’s legal history is deeply embedded in a regulatory scheme that imposes joint and several liability on married couples in §6013 and then gives relief from that liability under certain circumstances.  Those circumstances used to be spelled out in 6013 itself but in 1998 Congress both expanded the relief and re-codified the expanded relief as §6015.  But it’s still tethered to §6013.  To read the wording used in §6015(f) as expanding that relief to any type of joint and several liability is to find an elephant in a mousehole.  Anyone who knows the statute’s history knows that.  For those who do not know the history, I again invite you to see “The Unhappy Marriage of Law And Equity in Joint Return Liability," 108 Tax Notes 1307 (Sept. 12, 2005). 

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites readers to return each Monday (or Tuesday, if Monday is a federal holiday) for another Lesson From The Tax Court here at TaxProf Blog.