Kathy A. King v. Commissioner

115 T.C. No. 8

Opinion

115 T.C. No. 8

UNITED STATES TAX COURT

KATHY A. KING, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5989-97. Filed August 10, 2000.

P and H filed a joint income tax return for 1993. P and H later divorced. R issued separate notices of deficiency to P and H determining identical deficiencies in tax for 1993 related entirely to the disallowance of a claimed business loss. P filed a petition. P’s only claim was for relief as an innocent spouse under former sec. 6013(e), I.R.C. H did not file a petition. R assessed a deficiency against H who has not paid any portion of the assessment and has not challenged the assessment in any other court. Subsequent to the petition and trial in this case, sec. 6013(e), I.R.C., was repealed and replaced by sec. 6015, I.R.C. R filed a report with the Court, taking the position that P was entitled to relief under new sec. 6015(b), I.R.C., and that P’s former spouse H should be provided with adequate notice and an opportunity to become a party to this proceeding pursuant to sec. 6015(e)(4), I.R.C. This Court then ordered R to serve upon H a copy of the petition and a copy of Interim Rule 325. H then filed a Motion For - 2 -

Leave to File Notice of Intervention. R filed a notice of no objection to H's motion. P did not respond.

Held: In any case where an individual petitioner seeks relief from joint liability pursuant to sec. 6015, I.R.C., the other individual who filed the joint return is entitled to notice and, if not already a party in the case, an opportunity to intervene for purposes of challenging the propriety of relieving the petitioner of liability.

Held, further, H is entitled to intervene in order to challenge P’s entitlement to relief under sec. 6015, I.R.C. The record will be reopened, and the case will be calendared for further trial solely with respect to the issue of relief from joint liability. H's motion will be granted.

Held, further, additional procedural requirements in proceedings before this Court are set forth as guidance to taxpayers and counsel.

Kathy A. King, pro se.

James R. Rich, for respondent.

OPINION

RUWE, Judge: The matter before the Court is a Motion For

Leave to File Notice of Intervention (Embodying Notice of

Intervention) by Curtis T. Freeman (Mr. Freeman) with respect to

petitioner’s claim for relief from joint liability under section

6015.1

1 Unless otherwise indicated, section references are to the Internal Revenue Code, and Rule references are to the Tax Court (continued...) - 3 -

Background

Mr. Freeman was previously married to petitioner, and he and

petitioner filed a joint return for 1993, which is the year in

issue. Although Mr. Freeman is not a petitioner in this case, he

objects to petitioner’s claim for relief from joint liability.

At the time the petition was filed, petitioner was a

resident of Hartsville, South Carolina. At the time Mr. Freeman

filed his motion, he was also a resident of Hartsville, South

Carolina.

During 1993, petitioner and Mr. Freeman were married to each

other. They separated sometime during 1993 and, in May 1995,

they were divorced. Their joint Federal income tax return for

1993 included a Schedule C, Profit or Loss From Business, for a

farming activity. The reported gross income from this activity

was $802, the claimed expenses totaled $28,199, and the reported

net loss was $27,397. Respondent disallowed the $27,397 loss on

the ground that the farming activity was not engaged in for

profit. There were other adjustments to the return that flowed

from the disallowed loss. On December 23, 1996, respondent

issued separate notices of deficiency to petitioner and Mr.

Freeman. The deficiency shown in each notice was $7,781.

Petitioner filed a timely petition, but Mr. Freeman did not.

1 (...continued) Rules of Practice and Procedure. - 4 -

Respondent assessed the deficiency against Mr. Freeman. No

portion of the assessment has been paid by Mr. Freeman, nor has

he challenged the assessment in any other court.

Petitioner has not challenged the disallowed farming

activity loss. The only claim being made by petitioner is that

she is entitled to relief from joint liability. The case was

tried before Special Trial Judge Couvillion on January 12, 1998.

Mr. Freeman was not called to testify and made no appearance

until the instant motion. At the time of the trial, section 6013

contained the provisions governing relief from joint liability or

what has come to be known as “innocent spouse” relief.

Approximately 6 months after the trial, section 6013(e) was

repealed and replaced with section 6015. See Internal Revenue

Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L.

105-206, sec. 3201, 112 Stat. 685, 734. The RRA 1998 generally

revised and expanded the relief available to joint filers.

Moreover, the RRA 1998 gave section 6015 retroactive effect in

that it was made applicable to any liability for tax arising

after July 22, 1998, and to any liability for tax arising on or

before such date that remained unpaid as of July 22, 1998. See

RRA 1998, sec. 3201(g)(1), 112 Stat. 740; Corson v. Commissioner,

114 T.C. 354, 359 (2000). - 5 -

Following the change in the applicable law, respondent was

ordered to file a written report on respondent's position with

respect to petitioner's claim for relief under the new law. In

respondent’s report, he stated: "In light of the aforementioned

change in the law, it appears to respondent that petitioner

qualifies for innocent spouse relief under the provisions of

section 6015(b)." Respondent further stated that petitioner's

former spouse, Mr. Freeman, objected to such relief and that Mr.

Freeman "should be provided with adequate notice and an

opportunity to become a party to this proceeding" and cited

section 6015(e)(4). The Court then directed respondent to serve

Mr. Freeman with a copy of the petition and a copy of Interim

Rule 325.2 Thereafter, within the time prescribed in Interim

Rule 325, Mr. Freeman submitted to the Court a document that was

filed as a Motion For Leave to File Notice of Intervention

2 Interim Rule 325 provides:

(a) Notice: The Commissioner shall serve notice of the filing of the petition on the other individual filing the joint return.

(b) Intervention: If the other individual filing the joint return desires to intervene, then such individual shall file a notice of intervention with the Court not later than 60 days after service of the notice by the Commissioner of the filing of the petition, unless the Court directs otherwise, and attach to the notice of intervention a copy of such notice of filing. All new matters of claim or defense in a notice of intervention shall be deemed denied. - 6 -

(Embodying Notice of Intervention) (the motion). The motion was

served on the parties. Respondent filed a notice of no

objection, and petitioner has not responded.

Discussion

We have recently issued several opinions involving claims

for relief from joint liability in which we noted significant

differences between section 6015 and the repealed section

6013(e). See Corson v. Commissioner, supra; Charlton v.

Commissioner, 114 T.C. 333 (2000); Fernandez v. Commissioner, 114

T.C. 324 (2000); Butler v. Commissioner, 114 T.C. 276 (2000).

For example, in Corson v. Commissioner, supra, we observed:

Whereas section 6013(e) had offered only a single avenue of relief, based on a spouse's lack of knowledge or reason to know of a substantial understatement, section 6015 authorizes three types of relief. Subsection (b) provides a form of relief available to all joint filers and similar to, but less restrictive than, that previously afforded by section 6013(e). Subsection (c) permits a taxpayer who has divorced or separated to elect to have his or her tax liability calculated as if separate returns had been filed. Subsection (f) confers discretion upon the Commissioner to grant equitable relief, based on all facts and circumstances, in cases where relief is unavailable under subsection (b) or (c).

Subsections (a), (e), and (g) of section 6015 address general and procedural aspects relating to the operation of the section and the role therein to be played by this Court and by the Commissioner. * * * [Id. at 359-360.] - 7 -

When this case was tried, section 6013(e) was still in

effect. Section 6013(e) was subsequently repealed and replaced

by section 6015. Section 6013(e) is no longer applicable in this

case. Under these circumstances, the Court will treat

petitioner's claim for relief from joint liability as a claim

under section 6015.3 See Corson v. Commissioner, supra at 364;

Charlton v. Commissioner, supra at 339; Butler v. Commissioner,

supra at 281-282.

There are several jurisdictional bases upon which this Court

may review a claim for relief from joint liability under section

6015. One basis, which survives section 6013(e), is the

traditional petition based on a notice of deficiency where the

petition includes a claim by one or both spouses for relief from

joint liability. Relief claimed in this context has

traditionally been characterized as an affirmative defense, and

the enactment of section 6015 has not negated this Court's

authority to consider a claim for such relief in a "deficiency

proceeding". See Corson v. Commissioner, supra at 363; Charlton

v. Commissioner, supra at 338-339. The instant case is a

deficiency proceeding.

Another situation in which this Court has jurisdiction to

review a claim for relief from joint liability involves the

3 Neither petitioner nor respondent requested a new trial for the presentation of the case under sec. 6015. - 8 -

collection due-process procedures of sections 6320 and 6330.

Among the issues that can be considered under sections 6320 and

6330 are “the underlying tax liability” and “appropriate spousal

defenses”. Sec. 6330(c)(2).

Section 6015(e)(1)(A) also provides this Court with

jurisdiction to consider a claim for relief from joint liability

by specifically allowing a spouse who elects relief under section

6015 to petition this Court for review of the Commissioner’s

determination regarding an administrative claim for relief.

Unlike a deficiency proceeding or a collection due-process

proceeding, a proceeding under section 6015(e)(1)(A) is

restricted to the issue of relief from joint liability for the

individual electing such relief. A proceeding under section

6015(e)(1)(A) has been referred to as a "stand alone” proceeding.

Corson v. Commissioner, supra at 363; Fernandez v. Commissioner,

supra at 329. In a stand-alone proceeding, the nonelecting

spouse is statutorily entitled to “adequate notice” and "an

opportunity to become a party" to the proceeding. Sec. - 9 -

6015(e)(4);4 Interim Rules 324 and 325; Corson v. Commissioner,

supra.

The issue we must decide for the first time is whether a

spouse (or former spouse), who is not a petitioner, may intervene

and become a party in a deficiency case where the other spouse

(or former spouse) is a petitioner who is claiming relief from

joint liability pursuant to section 6015. While we have not

previously addressed this specific issue, we have previously

allowed one spouse to challenge the other spouse’s claim for

relief under section 6015 where both spouses were before the

Court as petitioners in the same deficiency case. See Corson v.

Commissioner, supra.

Corson v. Commissioner, supra, was a deficiency proceeding

in which both spouses filed a joint petition with this Court

pursuant to a notice of deficiency. In Corson, the taxpayers

separated and divorced after their joint return was filed. The

former wife filed an amended petition claiming relief from joint

4 Sec. 6015(e)(4) provides:

(e) Petition for Review by Tax Court.--

* * * * * * *

(4) Notice to other spouse.--The Tax Court shall establish rules which provide the individual filing a joint return but not making the election under subsection (b) or (c) with adequate notice and an opportunity to become a party to a proceeding under either such subsection. - 10 -

liability. Respondent separately negotiated settlements with the

parties that included, for the former wife, relief from joint

liability. The granting of this relief was not previously

disclosed to her former husband. When the former husband became

aware of this concession, he refused to agree to the negotiated

settlement, whereupon respondent filed a motion for entry of

decision. In Corson, we noted that, in the context of a stand-

alone proceeding under section 6015(e)(1)(A), the other spouse is

entitled to notice and the opportunity to participate in the

consideration of the claim for relief by the electing spouse at

both the administrative level and in any subsequent judicial

proceeding before this Court. See section 6015(e)(4), (g)(2).

Even though Corson did not arise as a stand-alone proceeding, we

held that, pursuant to section 6015, the husband was entitled to

be heard on the question of his former wife’s claim for relief

from joint liability.

In the instant case, the claim for relief from joint

liability arises, as in Corson, in the context of a deficiency

proceeding. However, unlike Corson, in this case Mr. Freeman is

not a petitioner in this deficiency proceeding. Mr. Freeman did

not file a petition and, as a result, the deficiency was assessed

against him. In our view, this difference is not a material

distinction for purposes of deciding whether to allow Mr. Freeman - 11 -

to intervene. As we explained in Corson v. Commissioner, supra

at 365:

Section 6015(e)(1) is structured so that administrative consideration (or failure to rule) will precede any court action when innocent spouse status is raised in a stand alone petition. Section 6015(g)(2), in turn, contemplates an opportunity for the nonelecting spouse to participate at the administrative level. Section 6015(e)(4) then speaks of a similar chance for participation should the matter move from an administrative to a judicial forum. Hence, as a general premise, we believe that these sections, when read together, reveal a concern on the part of the lawmakers with fairness to the nonelecting spouse and with providing him or her an opportunity to be heard on innocent spouse issues. Presumably, the purpose of affording to the nonelecting spouse an opportunity to be heard first in administrative proceedings and then in judicial proceedings is to ensure that innocent spouse relief is granted on the merits after taking into account all relevant evidence. After all, easing the standards for obtaining relief is not equivalent to giving relief where unwarranted.

The same rationale applies in this case. Petitioner is

seeking the same type of relief under section 6015 that would be

the issue in any stand-alone case under section 6015(e)(1)(A).

Congress believed that when a spouse (or former spouse) sought

such relief, the other spouse (or former spouse) who signed the

joint return should receive notice and an opportunity to

intervene in order to challenge the propriety of granting such

relief. In order to implement this objective, Congress directed

this Court to establish rules.5 Congress also directed the

5 See supra note 4. - 12 -

Secretary to prescribe regulations.6 Therefore, we believe that

it is necessary to provide a spouse (or former spouse) with both

notice of, and an opportunity to be heard in, any case where the

other spouse (or former spouse) is claiming relief from joint

liability under section 6015. As we stated in Corson v.

Commissioner, supra at 364:

Principally, we believe that the interests of justice would be ill served if the rights of the nonelecting spouse were to differ according to the procedural posture in which the issue of relief under section 6015 is brought before the Court. Identical issues before a single tribunal should receive similar treatment. * * *

Accordingly, we shall grant Mr. Freeman’s motion and allow him to

intervene in order to have an opportunity to challenge

petitioner’s claim for relief. The record in this case will be

reopened, and the case will be calendared for further trial

solely with respect to petitioner's claim for relief from joint

liability.

6 Sec. 6015(g) provides:

(g) Regulations.--The Secretary shall prescribe such regulations as are necessary to carry out the provisions of this section, including--

(2) regulations providing the opportunity for an individual to have notice of, and an opportunity to participate in, any administrative proceeding with respect to an election made under subsection (b) or (c) by the other individual filing the joint return. - 13 -

The Court has issued interim rules contained in Title XXXI

of our Rules of Practice and Procedure that set forth procedures

to be followed in stand-alone cases brought under section

6015(e)(1)(A). In deciding that Mr. Freeman may intervene in

order to object to petitioner’s claim for relief from joint

liability, we are interpreting statutory provisions that require

procedures which have not yet been completely provided for in our

Rules. We believe that it is now necessary for us to articulate

and announce the necessary procedural requirements.7

We hold that whenever, in the course of any proceeding

before the Court, a taxpayer raises a claim for relief from joint

liability under section 6015, and the other spouse (or former

spouse) is not a party to the case, the Commissioner must serve

notice of the claim on the other individual who filed the joint

return for the year(s) in issue. The notice shall advise such

other individual of his or her opportunity to file a notice of

intervention for the sole purpose of challenging the petitioning

individual’s entitlement to relief from joint liability pursuant

to section 6015. Such notice shall include a copy of Interim

Rule 325. The Commissioner shall at the same time file with the

Court a certification of such notice or, in a stand-alone case

brought under section 6015(e)(1)(A), state in the answer that

7 Specific rules regarding these matters will be promulgated in the future. - 14 -

such notice has been provided. See Interim Rule 324(a)(2). Any

intervention shall be made in accordance with the provisions of

Interim Rule 325(b).

These procedures are effective immediately and are

applicable to all cases, including small tax cases.

An appropriate order

will be issued.