Paul L. Caron

Monday, February 27, 2023

Lesson From The Tax Court: The New Evidence Rule In Spousal Relief Cases

Camp (2021)When a taxpayer requests spousal relief under §6015, the IRS must decide whether to grant it.  If the IRS denies relief, the taxpayer can petition the Tax Court. §6015(e).  In 2019 Congress created a modified administrative record rule for how the Tax Court is supposed to conduct that review.  Taxpayer First Act, 133 Stat. 981, 988.

It’s awkward.  Congress tells the Court to review the IRS decision de novo but, at the same time, tells the Court to do that using only a limited information set consisting of (a) “the administrative record established at the time of the determination” and (b) “any additional newly discovered or previously unavailable evidence.”  §6015(e)(7).

Sydney Ann Chaney Thomas v. Commissioner, 160 T.C. No. 4 (Feb. 13, 2023) (Judge Toro), is a reviewed opinion where a unanimous Tax Court interprets the phrase “newly discovered or previously unavailable evidence” broadly rather than narrowly, thus creating a new evidence rule (pun intended) that robustly protecting its ability to conduct the required de novo review.  Ironically, the decision worked against the taxpayer in this case because it was the IRS that here wanted to introduce new information (the taxpayer’s social media posts).  The taxpayer objected that those posts had been publicly available during the administrative proceeding; therefore they were not newly discovered or previously unavailable.  The Court rejected that argument and admitted the posts as evidence.

Today’s case is also an illustrative contrast to the T.C. opinion I discussed in last week’s post.  That was a case where the taxpayer was proceeding pro se.  And there the Court had no benefit of briefing from both sides.  I think the Court’s opinion showed it.  In today’s case, the taxpayer was (eventually) represented by one of the best tax attorneys I know, Megan Brackney.  Thus the Court had the benefit of a well-presented taxpayer argument.  The Court also had the benefit of a strong amicus brief submitted jointly by the Center for Taxpayer Rights, the Community Tax Law Project, the UC-SF LITC and the Villanova LITC.  That made the Tax Court’s opinion all the more robust, which is what it will need if and when its decision is reviewed in turn by a Court of Appeals.

Spoiler alert.  This post is a little longer than normal.  Sorry, Lew.

Law: Standard and Scope of Tax Court Review of IRS Spousal Relief Decisions
Knowing the standard and scope of Tax Court review can be critical for how a taxpayer’s representative frames and presents the taxpayer’s case at the administrative level.  Today’s lesson is not about the substantive law regarding spousal relief under §6105 generally, or even §6105(f) equitable relief specifically.  It’s about the standard and scope of review.  Let’s take a quick look at those terms. 

Standard of Review:  this is the idea of what degree of scrutiny the Tax Court gives the IRS decision.  Taxpayers tend to want the Tax Court to use a de novo standard to review an IRS decision denying spousal relief.  Under that standard the Tax Court substitutes its judgment for that of the IRS office that made the decision.  The IRS tends to want the Tax Court to use an abuse of discretion standard of review.  Under that standard the Tax Court just does a sanity check: it looks to see if the decision was within the bounds of reason and was not wacky.  Put another way, de novo review is to see whether the agency made the right decision; abuse of discretion review is to see whether the agency made a reasonable decision.

Scope of Review:  this is the idea of what information the Court uses to conduct its review.  Taxpayers tend to want a de novo scope of review which allows the Tax Court to hear any and all evidence regardless of what was given to the IRS during the administrative proceeding.  The IRS tends to want what is called the “administrative record rule” which limits the Tax Court’s information set to only that information that was before the IRS.

To understand today's new evidence rule, it's important to know that Tax Court review of an IRS spousal relief rejection might come up in one of three ways.  Each brings with it a different combination of standard and scope of review!  To add to the fun, the federal district courts can also get into the act if the taxpayer follows the refund route. See Hockin v. United States, 400 F. Supp. 3d 1085 (D. Or. 2019) (taxpayer used refund suit to challenge IRS rejection of her spousal relief claim).  But let's just focus on the three paths to Tax Court review.

First, taxpayers might ask for spousal relief as part of contesting an NOD in Tax Court.  When they do that, the Tax Court reviews the IRS decision under its §6213 deficiency jurisdiction, just like it reviews all other parts of a deficiency determination.  That means both the standard and scope of review are de novo.  It’s basically a “do over” for the taxpayer.  See e.g.  DelPonte v. Commissioner, 158 T.C. No. 7 (2022) at p. 7 (“Our jurisdiction to rule on those [spousal] claims is part of our authority under section 6213(a) to redetermine a taxpayer's deficiency when she's received a notice of deficiency.”)

This right to seek spousal relief during a deficiency proceeding causes a complication for trying to seek spousal relief later.  That is because, normally, the right to raise a claim in one preceding bars assertion of that same claim in a later proceeding.  That legal doctrine is called “claim preclusion.”  Applied normally, it would mean that taxpayers could never raise spousal relief claims when they had an earlier deficiency proceeding before the Tax Court.  However, Congress has modified the normal rules to allow a requesting spouse to make a later request (in a CDP or stand-alone proceeding), even if they were a named party to a deficiency case, so long as (1) spousal relief was not actually raised in the deficiency proceeding and (2) they did not meaningfully participate in the deficiency proceeding.  See §6015(g)(2).  The killer here is that if a spouse did particulate in a prior Tax Court case, the claim preclusion doctrine applies.  See  Kechijian v. Commissioner, T.C. Memo. 2022-127 (taxpayer’s participation in prior deficiency proceeding barred subsequent spousal relief request even though taxpayer did not actually request relief in the deficiency proceeding).

Second, taxpayers can request spousal relief as a collection alternative during the CDP process.  The Tax Court has jurisdiction to review those decisions under §6330.  See e.g. Francel v. Commissioner, T.C. Memo. 2019-35.  This is probably the worst path for taxpayers because if the spousal relief decision were considered part of the CDP determination, then, at best, the Tax Court reviews the decision for abuse of discretion, although it does so using a de novo record.  Robinette v. Commissioner, 123 T.C. 85 (2004).  But if the cases is appealable to the First, Eighth, and Ninth Circuits, then the Tax Court would use an abuse of discretion standard and confine its scope to the administrative record.  See Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009); Murphy v. Commissioner, 469 F.3d 27 (1st Cir. 2006); and Robinette v. Commissioner, 439 F.3d 455 (8th Cir. 2006).

Third, taxpayers can request spousal relief directly from the IRS, separately from any other proceeding.  The Tax Court has jurisdiction to review these “stand alone” decisions under §6015(e)(1).  Before 2009, the Tax Court reviewed IRS rejections of spousal relief requests using an abuse of discretion standard.  Jonson v. Commissioner, 118 T.C. 108 (2002). The basic rationale was that Congress had given the IRS the decision whether to grant equitable relief, therefore the Tax Court should review such decisions for abuse of the granted discretion.

In 2009 the Court changed its tune.  It started using instead a de novo standard, paired with a de novo record rule, which allowed the taxpayer to introduce new evidence to the Tax Court.  Porter v. Commissioner, 132 T.C. 203 (2009) (abrogating Jonson).  The basic rationale hinged on new statutory language Congress had added in 2006.  As modified, §6015(e) said the Tax Court’s job was "to determine the appropriate relief available to the individual under this section."  The Tax Court believed the phrase “to determine” meant de novo review, just like in deficiency cases where the Tax Court’s job was to “redetermine” a proposed deficiency.  This interpretation was blessed by the only Circuit Court to review it.  Wilson v. Commissioner, 705 F.3d 980 (9th Cir. 2013), and the IRS conceded the issue.  See Action on Decision (June 17, 2013), IRB 2013-25.

The Court’s pairing of de novo standard of review with de novo scope of review was both internally consistent and consistent with the Tax Court deficiency cases.  The idea was that the IRS decision received a presumption of correctness but the taxpayer still was allowed a do-over in Tax Court.  In fact, even when a taxpayer requested spousal relief as part of a CDP hearing, the Tax Court would sometimes treat the subsequent petition for Tax Court review as triggering its §6015(e) jurisdiction and thus the taxpayer received the de novo/de novo pairing rather than the awkward abuse-of-discretion standard paired with de novo scope.  See e.g. Fracel, supra, at p. 36, discussing cases.

Then in 2019 Congress created the current awkward pairing: a de novo scope of review with a modified administrative record rule.  Remember, the modification is that the Tax Court may consider “any additional newly discovered or previously unavailable evidence.”  The ABA Tax Section objected to this modification, suggesting that the language  “could lead to burdensome litigation over whether evidence that the taxpayer seeks to introduce qualifies as “newly discovered” or “previously unavailable.” Letter from ABA Tax Section, published in 72 Tax Law. 122 (2017).

Yup.  That’s what we have here today folks: a Lesson From The Tax Court on the meaning of the phrase ”any additional newly discovered or previously unavailable evidence.”  And it surely will not be the last case where the Court is required to engage with the weirdness of this Congressional directive.

Let’s take a look.

Ms. Thomas filed a stand-alone request for equitable spousal relief, the kind the IRS is authorized to grant under §6015(f).  The IRS denied her request in September 2020 and she timely petitioned the Tax Court to review that decision.  The Court held in-person trial in April 2022.  At that time Ms. Thomas was representing herself.

At the trial “both parties wanted the Court to consider testimony and other evidence that was not part of the administrative record.”  Op. at 3.  The Tax Court obliged.

First, it permitted Ms. Thomas to testify.  Judge Holmes has, in a couple of Orders, permitted taxpayer testimony, reasoning that such testimony in Court constitutes “previously unavailable evidence” because testimony in Court is given under oath and subject to cross-examination.  See Lesson From The Tax Court: The Impact Of De Novo Review In Spousal Relief Cases, TaxProf Blog (Nov. 7, 2022).  Since the IRS did not object to Ms. Thomas’s testimony, there was no occasion for Judge Toro here to rule on its admissibility.  So while we have no formal precedent, we can likely predict this practice will continue.

Second, the Court permitted the IRS to introduce “a series of posts from Ms. Thomas’s personal blog” running from 2016 to 2022.  Ms. Thomas was not comfortable with that and Judge Toro generously interpreted her expression of discomfort at trial as an objection to admitting the blog posts.  He then issued an order that he wanted post-trial briefing on whether the Court could even look at blog posts that had been written during the administrative proceeding, and he gently suggested that Ms. Thomas obtain counsel.  Megan Brackney agreed to do the representation pro bono.

Despite Ms. Brackney’s efforts, the Court unanimously decided that Ms. Thomas’s blog posts could be admitted into evidence because they were “newly discovered.”  Let’s see why.

Lesson: Information May Be “Newly Discovered” Even If It Previously Existed
In Tax Court Ms. Thomas argued for a “could have been discovered” interpretation of the statute.  Her concern was that the IRS should not now be allowed to use information against her now that it could have put into the administrative record then.  The blog posts existed at the time of the administrative hearing and the IRS could have easily discovered them during its consideration of her spousal relief request if it had bothered to look for them.  She points to an analogous provision in the Federal Rules of Civil Procedure that permits the use of newly discovered evidence only when “with reasonable diligence could not have been discovered” during the relevant proceeding.  FRCP Rule 60(b)(2).

Judge Toro disagrees, relying on statutory structure and administrative context.  He first notes the word “any” in the statute (any additional newly discovered or previously unavailable evidence.” ) precludes the Court from reading a due diligence limitation into the phrase.  He then notes that an expansive reading of what information the Tax Court can consider is more consistent with the Congressional directive for a de novo standard of review in the very same statute.  Finally, he agrees with the government: imposing a “could have” requirement would blow up the administrative hearing.  Instead of relying on information contained in existing files and information presented by taxpayers, the IRS employees would now need to make independent inquiries and investigations.  If you don’t like Office of Appeals delays now, just think what would happen if the IRS had a duty to discover all the relevant facts.

Thus, the Tax Court creates what I call an “actually discovered” rule. Information which might exist during the administrative phase but was not actually discovered by the party until afterwards constitutes newly discovered evidence within the meaning of the modified administrative record rule.  Importantly, Judge Toro notes that this “actually discovered” rule applies equally to taxpayers and the IRS.  Op. at 12, note 5.

Judge Toro supports this broad reading by consulting dictionaries to conclude that newly discovered evidence is simply evidence that is “recently...obtained for the first time.”  Op. at 11.  He then applies the rule this way:“[t]here is no evidence that the Commissioner obtained the blog posts any sooner [than the petition date]” and therefore he finds that the Tax Court may consider the blog posts along with the administrative as newly discovered evidence within the meaning of §6015(e)(7).

Bottom line: even though the blog posts actually existed during the taxpayer’s administrative hearing, since the IRS did not actually discover the blog posts until after the administrative record was closed, they could be presented to the Tax Court as newly discovered evidence to help the Tax Court properly review the IRS decision denying spousal relief.

Comment 1: Finding Balance
I think this decision does a good job in balancing the tension Congress created by its awkward pairing of a modified administrative record rule with a de novo standard of review.  And that awkward pairing, in turn, attempts to balance the inherent tension in the entire concept of §6015(f) equitable relief.

Start with the inherent tension in 6015(f).  Included in the idea of equitable relief is a dynamic understanding of life: a taxpayer’s circumstances may change during the 10 year collection period such that it becomes inequitable to collect an unpaid joint liability from them.  The tension comes in the fact that the requesting spouse gets only one shot at equitable relief.

I think of it as video v. snapshot.  That is, the idea that at some point during the 10-year collection period it may become unfair to collect is like a 10-year video during which a taxpayer’s circumstances can change.  You don’t have cancer one year but you do the next.  You don’t lose your house to a hurricane one year but you do the next.  Lots can happen over 10 years.  But Congress allows taxpayers only one shot to convince the IRS and/or Tax Court that collection is unfair.  That’s the snapshot.  So once a requesting spouse clicks the camera, that’s the snapshot the IRS will look at and that’s the snapshot the Tax Court will look at, even if life’s video changes afterwards.

The IRS recognizes this tension and has created reconsideration procedures to find balance.  Remember the statute gives taxpayers only one trip to the Tax Court and that is to contest a “Final Determination” denying the requested relief.  There is no further statutory opportunity to obtain relief after that final determination.  But the statute does not forbid the IRS from reconsidering a prior decision.  And the IRS jumped on that silence to create a reconsideration procedure in IRM permits taxpayers who were denied relief to submit “information not previously considered (new information or information that the IRS failed to previously consider).”  The reconsideration is purely administrative and thus “any reconsideration of the final determination, and any notice or letter issued to the RS as a result of the reconsideration, is not a Final Determination for purposes of IRC 6015(e) and is not subject to review by the Tax Court under IRC 6015(e).”  Id.

In Spencer (today’s case, remember?) the Tax Court finds a similar balance.  The traditional justification for a pure administrative record rule is an information-forcing.  It forces the party seeking relief from an administrative agency to put all their cards on the table at the administrative level.  It prevents them from sandbagging the agency.  At the same time it also forces the agency to explain the rational basis for its determination.  The agency cannot simply deny the requested relief and hope there is no judicial review or, if there is later judicial review, wait until then to scramble to justify the decision.

That’s all well and good when a court is simply reviewing whether the agency has made a reasonable decision.  But the directive for de novo review is a directive to help the taxpayer and the IRS get to the right decision based on the most current information set possible.  Thus, allowing either the IRS or taxpayers to show the Tax Court information that may have existed but was not reasonably available to them balances the need to protect the administration process and the need to get to the right decision.

In short, I submit that the Tax Court here strikes a good balance.  At the same time, it appears to create a question of what duty the party seeking introduction of the new evidence had to discover it during the administrative hearing.  This will likely need more litigation to find the right balance.

Comment 2: A One-Way Ratchet?
Judge Buch writes an insightful concurrence where he expresses a doubt about whether the actually discovered rule applies equally to both taxpayers and the IRS.  He worries that the rule could be “a one-way street benefiting the Commissioner.” Op. at 17.  He gives an example of a requesting spouse whose social media posts support a finding of abuse, but who fails to present those posts at the administrative level.  That taxpayer would probably not be able to show those posts to the Tax Court because they were available to that taxpayer.

He’s right.  But that’s a feature, not a bug.  It goes back to the information-forcing nature of any administrative record rule.  The requesting spouse has the burden to show why equities favor relieving them of liability.  An administrative record rule says they cannot sandbag the agency by withholding information at the administrative level only to show it to the court.  That’s part of the tension created by any administrative record rule.

Importantly, a large part of Judge Buch’s concern is rightly based on the common sense understanding that many spousal requests, like the one in today’s case, are done without representation.  So if a pro-se taxpayer messes up at the administrative level, they get punished by any administrative record rule.  They get punished less, however, by the Tax Court’s holding today than by a stricter reading of the statute.

Which takes me to ... 

Comment 3: The Importance of Representation
The Tax Court is currently filled with textualists.  For a textualist, the text of a statute is the alpha and omega of interpretation.  But what comes in between that alpha and omega can make all the difference.  “A text should not be construed strictly, and it should not be construed leniently; it should be construed reasonably, to contain all that it fairly means.” So sayeth the sainted Justice Scalia in “A Matter of Interpretation: Federal Courts and The Law” at p. 23 (sorry, no free link).  And what comes in between, especially in a complex statutory scheme like the Internal Revenue Code, can be opaque to non-specialists.

Thus, when the Court is faced with a question of law, when it is trying to decipher awkward or even non-sensical statutory text—hello §6751(b)(1)!—it just makes sense to me that the Court would want balanced input from both the government and from taxpayers.  That is not only because the Court wants to get it right, it is also because the Court’s opinion may well be scrutinized by one or more of the Circuit Courts of Appeal and perhaps even the U.S. Supreme Court.  So on these precedential T.C. opinions, the Court naturally wants to put it’s best analytical foot forward.  See Bryan Camp, The Tax Court As An Excellent Conversationalist, TaxProf Blog (Oct. 25, 2017).

The Court can always presume that the IRS will be well represented, although we all know that Chief Counsel attorneys are in fact sometimes slammed and are unable to give proper time and attention to some of the cases on their docket.  And sometimes a well-resourced taxpayer will overwhelm Chief Counsel.  But generally speaking, especially on cases presenting issues of statutory interpretation, Chief Counsel can be relied upon to give the Tax Court the government’s best arguments.

Pro-se taxpayers, however, are not reliable advocates, even if they are attorneys and even if they are tax attorneys.  That is why the Tax Court needs friends, the legal term for which is Amici.  Since I am way over my usual length I once again simply refer interested readers to Keith Fogg and Caitlin Hurd, Pro Se Precedent in the U.S. Tax Court: A Case for Amicus Briefs,  Houston Business and Tax Law Journal (forthcoming 2023).

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) to TaxProf Blog for another Lesson From The Tax Court.

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Prof. Camp, apology accepted. But the point remains. The majority stood that oxymoronic enactment, Section 615(e)(7), on its pointy little head. You cannot have de novo, whether standard or scope, if all the facts are limited to the admin record, and where none of those "facts" was established under oath nor subjected to cross-examination. Judge Buch got it right; the majority handed IRS a free kick to wild-card anything they like, even if same was available to the whole world pre-trial.

Posted by: Lewis c Taishoff | Feb 27, 2023 9:57:14 AM