Equitable Relief from Joint and Several Liability - Who is Most Worthy??

On December 8, 1998 the Internal Revenue Service issued Notice 98-61 which provides interim guidance in relation to IRC §6015 (f) for taxpayers seeking equitable relief from an unpaid Federal tax liability arising from a joint return. In May of 1999 the deadline for public comment to Notice 98-61 was extended to June 30, 1999. As of the date of this article, no additional guidance has been issued. Thus, Notice 98-61 is currently the controlling statement of the Service’s position on requests for equitable relief.

IRC § 6015 (f) provides relief to a taxpayer who filed a joint return that fully reported the tax due but for which the taxpayer failed to make payment. In the past, relief from joint liability was only provided for if there was an understatement on the return later detected by an audit.

Seven Threshold Conditions

According to § 3.01 of Notice 98-61, there are seven threshold conditions which must be met for all requests for relief under §6015 (f). These conditions are as follows:

1. The individual seeking relief made a joint return for the taxable year for which relief is sought.
    
   
2. Relief is not available to the individual requesting relief under §6015 (b) or 6015 (c) ­ each which require an understatement.
    
   
3. The individual applies for relief no later than two years after the date of the Service’s first collection activity after July 22, 1998, with respect to the individual.
    
   
4. The liability remains unpaid at the time relief is requested.
    
   
5. No assets were transferred between the individuals filing the joint return as part of a fraudulent scheme by such individuals.
    
   
6. There are no disqualified assets transferred to the individual by the non-requesting spouse. The term “disqualified assets” has the meaning given such term by IRC §6015 (c)(4)(B) which defines the term disqualified asset as “any property or right to property transferred to an individual making the election under this section with respect to which a joint return by the other individual filing such joint return if the principle purpose of the transfer was the avoidance of tax or payment of tax”.
    
   
7. The individual seeking relief did not file the joint return with fraudulent intent.

Pursuant to Notice 98-61, “An individual satisfying all the above threshold conditions may be relieved of the liability under § 6015 (f) if, taking into account all the facts and circumstances, it is inequitable to hold the individual liable for all or part of the tax liability.
 

Equity

Currently, the new regulations for IRC §6015 have not been released by the IRS. Further, since the relief pursuant to IRC §6015(f) is discretionary, there are no cases that define the term “equity” for purposes of IRC §6015 (f) or this Notice. However, pursuant to the Regulations governing IRC § 6013(e), the precursor to IRC § 6015, "whether it is inequitable to hold a person liable for the deficiency in tax, within the meaning of paragraph (a)(4) of this section (IRC §6013 (e)), is to be determined on the basis of all the facts and circumstances. In making such a determination, a factor to be considered is whether the person seeking relief significantly benefited, directly or indirectly, from the items omitted from gross income. However, normal support is not a significant ‘benefit’ for purposes of this determination...other factors which may also be taken into account, if the situation warrants, include the fact that the person seeking relief has been deserted by his spouse or the fact that he has been divorced or separated from such spouse.” 26 CFR §1.6013-5(b). Further, as stated by the Tax Court in Kistner v. Commissioner, Tax Court Memo 1995-66 (discussing IRC §6013 (e)), in evaluating each of the elements to be proved prior to obtaining innocent spouse relief, “the innocent spouse relief provisions were enacted to remedy a perceived injustice that sometimes resulted from joint and several liability, and these provisions therefore should not be interpreted narrowly.” Id.

Until further guidance and/or regulations are issued by the Service, it is this author’s opinion that practitioner’s should consider the regulations and case law addressing the term “equity” for purposes of IRC §6013 (e) as guidance when discussing equity for purposes of new IRC §6015 (f) as required by Notice 98-61.

Circumstances when Relief will Ordinarily Be Granted

Internal Revenue Service 98-61 § 3.02 further includes circumstances under which equitable relief will ordinarily be granted. It is important to note that the Notice clearly states that relief will ordinarily be granted if certain circumstances apply, but does not require said circumstances to apply in order for a taxpayer to be granted relief. Unfortunately, it is this author’s experience that the examiners at the IRS who are reviewing requests for equitable relief feel constrained to grant relief only to those cases who meet the circumstances of Section 3.02 of Notice 98-61. Hopefully, when final regulations are released, the circumstances under which relief can be granted will be liberalized or agents will be better trained. Nevertheless, those circumstances are as follows:

1. The liabilities reported on the joint income tax returns for the years in issue were unpaid at the time the returns were filed.
    
   
2. Upon the filing of this request, the individual seeking relief is divorced, legally separated or has lived away from the non-requesting spouse for more than 12 months.
    
   
3. At the time the joint returns in issue were filed, the requesting individual did not know and did not have reason to know that the tax would not be paid. Again, without regulations or case law, the term “reason to know” is open to interpretation. However, as previously stated, the precursor to IRC § 6015 was IRC § 6013(e). Under IRC § 6013(e), both the Regulations and the Courts developed factors which were considered to determine if a spouse "had reason to know". Those four factors were (1) the level of education of the taxpayer seeking innocent spouse (2) the knowledge and experience in the family business and financial affairs attained by the spouse claiming to be innocent (3) whether the family’s current standard of living is lavish compared to past levels of income and expenditures and (4) the conduct of the culpable spouse in concealing the true state of the family’s finances from the innocent spouse.
    
   
4. That the requesting spouse will suffer an undue hardship if relief from the liability is not granted. For this purpose, the term “undue hardship” has the meaning given to such term under §1.6161-1 (b) of the Income Tax Regulations. The term “undue hardship” as defined in Regulations 1.6161-1 (b) means more than an inconvenience to the taxpayer. It must appear that substantial financial loss will result to the taxpayer.
    
   
5. The unpaid liability is completely attributable to the non-requesting spouse.

Factors for Determining Whether to Grant Equitable Relief

Finally, IRS Notice 98-61 § 3.03 contains factors for determining whether to grant equitable relief. §3.03 of IRS Notice 98-61 applies to married individuals filing separate returns in community property states who request relief under IRC §66 (c), and individuals who meet the threshold conditions of §3.01 of this Notice but who do not qualify for relief under §3.02 of Notice 98-61. Such individuals may qualify for relief from tax liability for a taxable year under §6015 (f) if, taking into account all the facts and circumstances, it is inequitable to hold the individual liable for the unpaid liability or deficiency. §3.03 of IRS Notice 98-6 contains a partial list of the positive and negative factors that will be taken into account in determining whether to grant equitable relief under IRC §6015 (f). The Notice specifically states that this list is not intended to be exhaustive.

Factors Weighing in Favor of Relief:

1. Marital Status. The individual requesting relief is separated (whether legally separated or living apart) or divorced from the requesting spouse.
    
   
2. Hardship. The individual requesting relief will suffer hardship if relief is not granted, even if such hardship does not constitute undue hardship within the meaning of §1.6161-1 (b).
    
   
3. Abuse. The individual requesting relief was abused by his or her spouse (but such abuse did not amount to duress).
    
   
4. Spouse’s Legal Obligation. The non-requesting spouse has a legal obligation pursuant to a divorce decree or agreement to pay the liability.

Factors Weighing Against Relief:
 

1. Attribution. If any unpaid liability or item giving rise to a deficiency is attributable to the individual requesting relief, that is a factor weighing against relief from such unpaid liability or deficiency.
    
   
2. Knowledge, or Reason to Know. An individual’s knowledge or reason to know of an unpaid liability or deficiency is an extremely strong factor weighing against relief. Nonetheless, when the factors in favor of equitable relief are unusually strong, it may be appropriate to grant relief under §6015 (f) in limited situations where an individual knew or had reason to know of an unpaid liability, and in very limited situations where an individual knew or had reason to know of a deficiency.
    
   
3. Significant Benefit. The individual requesting relief has significantly benefited (beyond normal support) from the unpaid liability or items giving rise to the deficiency.
    
   
4. Individual’s Legal Obligation. The individual requesting relief has a legal obligation pursuant to a divorce decree or agreement to pay the liability.

It is unfortunate that the Service has limited equitable relief to the circumstances detailed above since the statute contains no such limitations. It is even more unfortunate that, in this author’s experience, the Service Center employees who are reviewing these requests are insufficient in number and further have not been trained in line with even the Service’s recent guidance. Still, this opportunity for relief is better than no relief at all. Finally, for taxpayer’s who meet the circumstances of §3.02 of Notice 98-61, IRC

§6015 (f) could provide relief from a tax liability that under prior law could not have been granted.

Deborah J. Muhlbauer is a partner with the law firm of Bluestein & Muhlbauer, P.C. specializing in tax controversies and estate planning and is an adjunct professor of tax practice and procedure at the State University of New York at Buffalo, School of Law.

Bluestein & Muhlbauer, P.C.
333 International Drive
Williamsville, NY 14221
716.633.3200

Copyright © 2004 Bluestein & Muhlbauer, P.C.
Web Design By: Blue Building, Inc.