Treasury Regulation Imposing Two Year Limitations Period for Request of Equitable Relief as Innocent Spouse Upheld

The Fourth Circuit has joined the Third and Seventh Circuits in finding that Treasury Regulation Section 1.6015(b), which imposes a two-year limitations period upon taxpayers to request equitable relief under the innocent spouse provisions of the Internal Revenue Code, is a valid regulation.  Internal Revenue Code Section 6015(f) is ambiguous as to the applicable statute of limitations, and therefore the Treasury Regulation is a reasonable interpretation of the statute.

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Jones v. Commissioner, —F.3d—, 107 A.F.T.R.2d 2011-2475 (4th Cir. 2011).

Facts.  Robert and Octavia Jones separated in September 2000.  Pursuant to the couple’s separation agreement, Robert and Octavia filed a joint income tax return for tax year 2000.  Robert prepared the couple’s return and claimed a loss from his business, resulting in a refund.  The IRS subsequently performed an audit of the return and assessed additional tax and interest of $7,630.  Robert entered into an installment agreement to pay the additional amounts due, but defaulted on the agreement when he filed for bankruptcy in April 2005.  The IRS notified both Robert and Octavia of the default in August 2005, and commenced a collection action.   The notice of default issued to Robert and Octavia also notified them of the IRS’ intent to levy on property.  When Octavia received notification from her bank in January 2008 of an IRS levy on her bank account, she promptly filed IRS Form 8857 and requested innocent spouse relief under the equitable relief provisions of Internal Revenue Code Section 6015(f).  The IRS denied her request, however, because Octavia submitted the request for relief after expiration of the two-year limitations period found in Treasury Regulation Section 1.6015(b)(1).  Octavia filed a petition with the U.S. Tax Court in July 2008 and challenged the denial of her request, arguing that the Treasury Regulation imposing the two year limitations period was invalid.

U.S. Tax Court Ruling.  The IRS Commissioner and Octavia stipulated that Octavia would be entitled to relief under Internal Revenue Code Section 6015(f), but for her submission of the request more than two years after the IRS began collection efforts.  The Commissioner and Octavia submitted cross-motions for summary judgment on the issue.  The Tax Court granted Octavia’s motion and determined the regulation to be invalid for the reasons outlined in Lantz v. Commissioner, 132 T.C. 131 (2009), despite the Seventh Circuit’s reversal of the Tax Court’s decision in Lantz v. Commissioner, 607 F.3d 479 (7th Cir. 2010).  The Tax Court specifically concluded that Congress’ failure to provide a limitations period in IRC § 6015(f) was intentional, considering the limitations period expressly imposed in IRC §§ 6015(b) and (c), and therefore the regulation imposing such a limitations period was invalid.  The Commissioner appealed the Tax Court’s decision to the Fourth Circuit.

Fourth Circuit Ruling.  On appeal, the Fourth Circuit reversed the decision of the Tax Court and concluded that the regulation was, in fact, valid.  In reaching this decision, the Court applied the two-prong standard established by Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) and found Internal Revenue Code § 6015(f) to be ambiguous as to any relevant limitations period.  Because the statute was ambiguous, the Court was required to determine whether the Treasury Regulation “was a reasonable approach to resolving the statute’s ambiguity.”  The Fourth Circuit concluded that it was, and upheld the regulation establishing a two-year limitations period for requesting equitable relief as a permissible interpretation of IRC § 6015(f).  Its decision is consistent with the holdings of the Seventh Circuit in Lantz, as well as the Third Circuit in Mannella v. Commissioner, 631 F.3d 115 (2011).

Given the harsh impact the limitations period has on victims of domestic violence seeking equitable relief, the regulation is currently under review by the IRS, and the National Taxpayer Advocate has recommended revising it to eliminate the two-year statute of limitations for requesting equitable relief.