Source: https://procedurallytaxing.com/category/innocent-spouse/
Timestamp: 2019-04-18 22:38:53+00:00

Document:
In United States v. Charles LeBeau, No. 3:17-cv-01046 (S.D. Cal. Oct. 16, 2018) the district court stayed a foreclosure action brought by the IRS to allow the taxpayer’s wife to pursue her innocent spouse claim. Because the innocent spouse claim has a ways to go from a procedural perspective, it may be some time before the foreclosure case starts back up. The case provides an interesting look at the intersection of foreclosure and innocent spouse and deserves some discussion.
Victoria and Charles LeBeau were married at some point prior to 1980. They remain married though they are now legally separated. While the separation is legal, they continue to reside in the same house in La Jolla, California. For anyone not familiar with La Jolla, it generally has very nice houses near the ocean just north of San Diego. I will leave it to Bob Kamman to fill in the rest of the story on the value and location of the house. I am sure that Bob will find some interesting facts here that the opinion does not contain and that I am not tracking down. Keep a lookout in the comment section.
The IRS has already reduced its assessments to judgment and this case seeks to foreclose its lien on the property.
Given the recitation of facts in this case, I would not place a high value on Victoria’s chances of achieving innocent spouse status. If she was actively engaged in all of these transfers, innocence is not the word that comes to mind. In fact, the IRS denied her request for relief for many years though it did apparently grant her partial, but significant ($193,272) relief for 1995. She filed a petition with the Tax Court seeking review of the denial of relief on June 22, 2018. Charles has intervened in her Tax Court case presumably to argue that she should not be relieved of liability. (This is one of those cases where it might be really interesting to follow the pleadings if it did not require a trip to DC to the clerk’s office and 50 cents per page.) She asks that the district court stay the foreclosure of what I am presuming is a very nice place where they live and engage in deed swapping at a prodigious pace.
In the discussion section of the opinion the court first says that “the district court has no jurisdiction to decide an innocent spouse claim” citing to United States v. Boynton, 2007 WL 737725 (S.D. Cal. 2007) and Andrews v. United States, 69 F.Supp. 2d 972 (N.D. Ohio 1999). I do not necessarily agree with the court on this issue as discussed in the post in the Chandler case; however, the DOJ Trial Section attorney would have had difficulty arguing the opposite side of that issue.
the possible damage which may result from the granting of a stay, (2) the hardship or inequity which a party may suffer in being required to go forward, and (3) the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay.
On the third factor, Defendants seek a stay pending resolution of the issues of “fraudulent transfers” and “nominee theory of ownership” now before the U.S. Tax Court arguing that Court lacks jurisdiction to consider these issues and a stay would avoid inconsistent rulings. On the second factor, they argue that a stay would cause hardship by being required to pursue litigation in two different courts. Lastly, on the first factor, Defendants content that a stay would not prejudice the government.
The Court notes that Mrs. Dew filed objections asserting an “innocent spouse” defense pursuant to 26 U.S.C. § 6015(f). Even assuming such a claim can properly be raised for the first time in the objections, the innocent spouse defense cannot be considered by this Court because it lies within the exclusive jurisdiction of the tax court. See Jones v. C.I.R., 642 F.3d 459, 461 (4th Cir. 2011) (noting that § 6015(f) authorizes the “Secretary of the Treasury” to grant an innocent spouse relief; see also United States v. Elman, No. 10 CV 6369, 2012 U.S. Dist. LEXIS 173026, 2012 WL 6055782, at *4 (N.D. Ill. Dec. 6, 2012) (stating that “exclusive jurisdiction over [the defendant’s] innocent spouse defense under § 6015(f) lies with the Tax Court.”).
Except as otherwise provided in section 6851 or 6861 [26 USCS § 6851 or 6861], no levy or proceeding in court shall be made, begun, or prosecuted against the individual making an election under subsection (b) or (c) or requesting equitable relief under subsection (f) for collection of any assessment to which such election or request relates until the close of the 90-day period referred to in subparagraph (A)(ii), or, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final.
James and Veronica Dew (Appellants) appeal the district court’s order and judgment granting the United States’ motion for summary judgment in the United States’ action seeking to reduce to judgment Appellants’ federal income tax liabilities, and to foreclose the federal tax liens securing those liabilities on Appellants’ jointly owned real property. We have reviewed the record and have considered the parties’ arguments and discern no reversible error. Accordingly, we grant James Dew’s application to proceed in forma pauperis and affirm the district court’s amended judgment. United States v. Dew, No. 4:14-cv-00166-TLW (D.S.C. May 19, 2016). We dispense with oral argument because the facts [**2] and legal contentions are adequately presented in the materials before this court and argument would not aid the decisional process.
In the Lebeau’s case the district court determined that the foreclosure case should be stayed against the LeBeaus until the end of the innocent spouse case. I do not find this result satisfying. Even if the Tax Court finds Victoria innocent, the IRS can still foreclose on the house and sell it subject to her interest. The decision would be much more satisfying if the court had explained why the Rodgers factors might weigh against allowing foreclosure to go forward. Was there something special about Victoria’s need for the house or even Charles’ need? I am assuming that they are not young at this point since they bought the house almost 40 years ago. Absent something special, I would allow the sale to go forward and hold her half in escrow. Since the innocent spouse determination does not prevent the sale, it does not seem that, by itself, it should hold up the sale.
It is possible that I am also someone jaundiced about her innocence given all of the transfers of the property recounted by the court but I recognize that there could be facts that would support a finding of innocent spouse status not brought out in this opinion. The significant delay that the court has provided here does prejudice the IRS unless one assumes that the property will continue to go up in value and that delay will ultimately benefit the IRS in that fashion.
Litigating Innocent Spouse Cases in District Court – Does the Department of Justice Tax Division Trial Section Talk to Its Appellate Section?
Ms. Chandler filed a joint return with her then husband for the tax years 1997 through 2002. The IRS made adjustments to the returns and ultimately additional assessments. In 2011 Ms. Chandler, now divorced from her husband with whom she filed the joint returns, requested innocent spouse relief claiming, inter alia, that she did not know exactly what was on the returns and had simply signed them in the appropriate box when the returns were placed in front of her after preparation by an accounting firm.
The IRS denied her relief and she failed to file a Tax Court petition within 90 days thereafter. She then filed another request for innocent spouse relief and the IRS considered her new request before denying it as well. Her attorney tried three more times with the IRS denying each attempt for lack of new information.
In June of 2013 she received a CDP notice and timely made a CDP request. The IRS denied her relief in the CDP process and thereafter began collecting from her. It collected $22,890 through levy before writing off the balance based on the statute of limitations. In July 2015 she filed a claim for refund seeking return of the levied money. The IRS denied the claim and she brought suit in the Northern District of Texas to recover her refund.
This seems like a lot of precedent in favor of dismissing the case; however, none of the district court opinions on which the court in Chandler relied involve refund lawsuits, nor does the court cite the three opinions, discussed below, where refund suits proceeded under § 6015 without objection by the DOJ as to jurisdiction. The cited cases all involve § 6015 raised as a defense in a suit brought by the government for collection. Further, no Circuit court has yet weighed in on this jurisdictional issue either in the context of refund suits or of collection suits.
For decades, the courts have allowed district court and Court of Federal Claims refund suits considering relief under § 6015 and its predecessor innocent spouse provision without discussion or government objection. In enacting and amending § 6015, Congress expressed its understanding that district court refund suits raising innocent spouse relief were permitted under former § 6013(e). Congress did not repeal this prior law by implication when, in 1998, it added new, additional ways to raise innocent spouse relief in the Tax Court under §§ 6015(e)(1)(A), 6320, and 6330.
Several cases held that former § 6013(e)(1) relief, the code section for innocent spouse relief from 1971 to 1998, could be raised by a taxpayer who paid an assessed deficiency in full and brought a refund suit in district court or the Court of Federal Claims. These cases existed in several circuits: Yuen v. United States, 825 F.2d 244 (9th Cir. 1987); Busse v. United States, 542 F.2d 421, 425-427 (7th Cir. 1976); Sanders v. United States, 509 F.2d 162 (5th Cir. 1975); Dakil v. United States, 496 F.2d 431 (10th Cir. 1974); Mlay v. IRS, 168 F. Supp. 2d 781 (S.D. Ohio 2001). In research for an amicus brief on this issue, the tax clinic at Harvard could not find that any party ever argued that such a suit was barred because the taxes were not “erroneously or illegally assessed or collected”, within the meanings of § 7422(a) and 28 U.S.C. § 1346(a)(1).
Several cases have also held that taxpayers claiming innocent spouse status under former § 6013(e)(1) could raise that status as a defense to reduce tax assessments to judgment under § 7402 in district court suits brought by the United States; United States v. Grable, 946 F.2d 896 (6th Cir. 1991); United States v. Diehl, 460 F. Supp. 1282 (S.D. Tex. 1976), aff’d per curiam, 586 F.2d 1080 (unpublished opinion) (5th Cir. 1978); or to foreclose on tax liens under § 7403. United States v. Shanbaum, 10 F.3d 305 (5th Cir. 1994); United States v. Hoffmann, 1993 U.S. Dist. LEXIS 15872 (D. Utah 1993). They also held that former § 6013(e)(1) relief could be raised in a bankruptcy proceeding. In re Hopkins, 146 F.3d 729 (9th Cir. 1998); In re Lilly, 76 F.3d 568 (4th Cir. 1996).
The proper forum [under present law] for contesting a denial by the Secretary of innocent spouse relief is determined by whether an underpayment is asserted or the taxpayer is seeking a refund of overpaid taxes. Accordingly, the Tax Court may not have jurisdiction to review all determinations of innocent spouse relief . . . . The Committee is concerned that the innocent spouse provisions of present law are inadequate. . . . The bill generally makes innocent spouse status easier to obtain. The bill eliminates all of the understatement thresholds and requires only that the understatement of tax be attributable to an erroneous (and not just a grossly erroneous) item of the other spouse. . . . The bill specifically provides that the Tax Court has jurisdiction to review any denial (or failure to rule) by the Secretary regarding an application for innocent spouse relief. The Tax Court may order refunds as appropriate where it determines the spouse qualifies for relief . . . .
Rep. 105-364 (Part 1), at 61 (emphasis added).
In the first two quoted sentences above, Congress implicitly acknowledged that it understood that § 6013(e) issues could be raised in refund suits in district courts or the Court of Federal Claims brought under 28 U.S.C. § 1346(a)(1) and nowhere did it state in its Committee reports that it intended to remove the jurisdiction of those courts to hear innocent spouse refund suits.
The transfer provision now at § 6015(e)(3) also provides support for the conclusion that district courts have refund jurisdiction over innocent spouse cases. The only jurisdictional basis of a “suit for refund . . . begun by either individual filing the joint return pursuant to section 6532” (i.e., the suit to which the Tax Court proceeding would be transferred) is 28 U.S.C. § 1346(a)(1). Even if language in § 7422(a) and 28 U.S.C. § 1346(a)(1) might arguably not cover innocent spouse relief under the government’s reading, Congress clearly legislated in 1998 on the assumption that refund suits raising innocent spouse relief had been proceeding under the 1971 legislation and should continue to proceed under the 1998 legislation. The language of § 7422(a) and 28 U.S.C. § 1346(a)(1) should be given a practical construction regarding innocent spouse relief in accordance with Congress’s clear intentions.
At least three cases since the enactment of § 6015 have moved forward in district court with no finding of a jurisdictional bar. In Jones v. United States, 322 F. Supp. 2d 1025 (D.N.D. 2004) – a refund suit predicated originally on former § 6013(e) relief – during the course of the case, Congress enacted § 6015, and thereafter, the taxpayer filed a Form 8857 requesting § 6015 relief and sought a refund under the new provision for some taxable years. There is no evidence in the opinion that the government made the claim that it makes here that the district court lacked jurisdiction to conduct a refund suit under § 6015 in the absence of a petition to the Tax Court under § 6015(e). Probably for that reason, the court does not even discuss this potential jurisdictional issue.
In Favret v. United States, 2003 U.S. Dist. LEXIS 21969 (E.D. La. 2003), the court denied a government motion to dismiss an innocent spouse refund suit for failure to state a claim (i.e., a motion on the merits). The case later settled. There is again no evidence in the opinion that the government made any claim that the court lacked jurisdiction of § 6015 refund suits in the absence of a prior petition to the Tax Court under § 6015(e).
The court initially was concerned with whether it had jurisdiction to review a determination made by the Secretary of the Treasury not to render innocent spouse relief under section 6015(f) of the Code (discussed, infra). In their supplemental memoranda, both parties argue that this court has such jurisdiction, directing this court to the legislative history of section 6015, the cases construing that legislative history, and the amendments made to section 6015 by section 1(a)(7) of the Consolidated Appropriations Act of 2001, Pub. L. No. 106-554, 114 Stat. 2763. Based on its review of these materials, the court now agrees that it has jurisdiction to review whether the Commissioner has abused his discretion under section 6015(f), as well as to determine whether that subsection is applicable to plaintiff under the effective date provisions of the Act. See, e.g., Butler v. Commissioner, 114 T.C. 276, 290 (2000) (concluding that Congress did not intend to commit the determination under section 6015(f) to unreviewable agency discretion).
So, in a few instances, refund suits involving § 6015 have been allowed to proceed in the absence of a petition to the Tax Court under § 6015(e).
NTA 2013 Annual Report to Congress, Vol. I, pp. 416-417. Ms. Olson has asked that, if the courts do not correct their rulings, Congress adopt legislation that would make it even more clear that § 6015 relief is available as a defense in a district court collection suit. NTA 2007 Annual Report to Congress, Vol. I, pp. 549-550; NTA 2009 Annual Report to Congress, Vol. I, pp. 378-380; NTA 2010 Annual Report to Congress, Vol. I, p. 378-382; NTA 2017 Annual Report to Congress, Purple Book, p. 53.
We note, however, that this does not mean that taxpayers who miss the deadline in § 6015(e)(1)(A) may never seek judicial review of the IRS’s determination that they are not entitled to innocent-spouse relief. As the Tax Court recognized (A. 29-30), a taxpayer like Nauflett who misses the 90-day filing window may nevertheless pay any assessment made by the IRS, file a timely administrative claim for refund, and then file a refund suit in either a federal district court or the Court of Federal Claims six months later (or earlier, if the refund claim is denied before the expiration of that six-month period). See I.R.C. §§ 6511(a), 6532(a)(1), 7422(a); see also id. § 6015(e)(3) (stating that jurisdiction over any pending petition for relief under § 6015 is transferred from the Tax Court to any district court that acquires jurisdiction over the relevant years as part of a refund suit filed by either spouse pursuant to I.R.C. § 6532).
The argument by the Trial Section attorney in Chandler directly contradicts what the DOJ Tax Division Appellate Section has recently argued in the cases of the clients of the tax clinic at Harvard. The government should get its story straight. The Appellate Section is right and the Trial Section is wrong. The court in Chandler gets it wrong because of the argument made by the Trial Section. The Tax Division should come to the court and get its position straight.

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