In the case of Chavis v. Commissioner,[1] 158 T.C. No. 8, Angela Chavis argued, in part, that she should not be liable to pay a portion of a trust fund penalty under IRC §6672 because she should qualify for innocent spouse relief.  The Tax Court denied her requested relief, finding that the innocent spouse provisions only apply to amounts due on joint income tax returns.

Underlying Law

The amounts the IRS sought to collect from Angela in this case were unpaid payroll taxes for which the IRS had found her and her ex-husband to qualify as responsible parties under IRC §6672.  IRC §6672(a) provides generally:

(a) General rule. Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.

One argument Angela made in her case before the Tax Court was that if there was such a liability, she should qualify for relief as an innocent spouse under IRC §6015, with her former spouse being held entirely liable for the unpaid amount of the tax.  IRC §6015(a) reads:

(a) In general. Notwithstanding section 6013(d)(3)--

(1) an individual who has made a joint return may elect to seek relief under the procedures prescribed under subsection (b); and

(2) if such individual is eligible to elect the application of subsection (c), such individual may, in addition to any election under paragraph (1), elect to limit such individual's liability for any deficiency with respect to such joint return in the manner prescribed under subsection (c).

Any determination under this section shall be made without regard to community property laws.

IRC §6015(f) provide for an equitable relief option and reads:

(f) Equitable relief.

(1) In general. Under procedures prescribed by the Secretary, if--

(A) taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either), and

(B) relief is not available to such individual under subsection (b) or (c),

the Secretary may relieve such individual of such liability.

(2) Limitation. A request for equitable relief under this subsection may be made with respect to any portion of any liability that--

(A) has not been paid, provided that such request is made before the expiration of the applicable period of limitation under section 6502, or

(B) has been paid, provided that such request is made during the period in which the individual could submit a timely claim for refund or credit of such payment.

The Facts of the Case

The Tax Court provides the following description of how Angela ended up before the Court.

Petitioner received a B.A. in economics and an M.A. in business administration, having completed coursework in finance, accounting, marketing, management, and organizational behavior. At the relevant times she and her then husband were associated with Oasys Information Systems, Inc. (Oasys), a C corporation established in 2008. Her then husband was the president of Oasys, and she held the office of secretary. According to IRS records, Oasys listed petitioner’s home address as its business address.

Oasys withheld payroll taxes from its employees’ wages but did not pay those taxes over to the Government. Having no success in collecting these taxes from Oasys, the IRS determined penalties against petitioner and her then husband under section 6672. That section provides that “[a]ny person required to collect, truthfully account for, and pay over” payroll taxes, who willfully fails to do so, shall be liable for a penalty “equal to the total amount of the tax evaded . . . or not accounted for and paid over.” § 6672(a). Penalties determined under section 6672 are commonly called trust fund recovery penalties (TFRPs).

On July 13, 2015, the IRS issued petitioner Letter 1153, Notice of Trust Fund Recovery Penalty. The IRS sent this letter by certified mail to petitioner at her home address. Respondent has supplied a copy of U.S. Postal Service (USPS) Form 3811, Domestic Return Receipt, showing that petitioner received and accepted delivery of the Letter 1153 on July 16, 2015. Petitioner does not dispute that the signature on the Form 3811 is her signature.[2]

The letter and enclosed Form 2751 informed Angela of the IRS’s proposed assessment of the trust fund penalty against her:

Attached to the Letter 1153 was Form 2751, Proposed Assessment of Trust Fund Recovery Penalty. This form advised petitioner that Oasys had failed to pay over employment taxes totaling $146,682 for nine calendar quarters during 2011-2014. The IRS proposed to assess that sum against petitioner, determining that she, “[a]s Secretary, . . . had the responsibility of paying the employment taxes [but] paid other creditors over the US Gov't.” The IRS proposed to assess joint and several liability for the same amount against her then husband, determining that he, “[a]s President, . . . had the responsibility of paying the employment taxes [but] paid other creditors over the US Gov't.”

The Letter 1153 informed petitioner: “You may appeal your case to the local Appeals Office.” The letter included detailed instructions about the steps petitioner needed to take in order to appeal the proposed assessment and the issues that would be considered during the appeal. The letter warned: “If we do not hear from you within 60 days from the date of this letter . . ., we will assess the penalty and begin collection action.”

Petitioner did not appeal the notice of proposed assessment.[3]

Note that the IRS asserted that she, as the corporate secretary (an officer), had responsibility to insure the tax was paid.  The agency also asserted, separately, that her husband, as President, had a similar responsibility. Angela did not choose to appeal this matter to argue that she was not a responsible person in this fact pattern despite being a corporate officer.

The IRS therefore moved forward in this matter:

On November 16, 2015, the IRS accordingly assessed the TFRPs against her. Petitioner and her husband divorced in 2016, and the IRS was apparently successful in collecting a portion of the unpaid tax from him. In an effort to collect the balance of the liability, the IRS on May 16, 2019, issued petitioner a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing. This letter showed an aggregate unpaid balance of $126,919 on account of Oasys’s payroll tax liability.[4]

Only at this point did Angela decide to formally contest the matter via a Collections Due Process Hearing (CDP):

On May 29, 2019, petitioner timely requested a CDP hearing. In her hearing request she checked the boxes, “I cannot pay balance” and “Innocent Spouse Relief,” and she requested withdrawal of the NFTL. She urged that her ex-husband was responsible for Oasys’s payroll taxes, asserted that she “never received a notice for these taxes before,” and contended that she “d[id] not make enough income to put a dent in the amount presented.”

In July 2019 petitioner submitted Form 8857, Request for Innocent Spouse Relief. She sought relief from the TFRPs, alleging that she “had no dealings with Oasys.” She stated that she “agreed to sign our 1040 tax return jointly [but] never signed any returns from Oasys.” She did not request relief from any joint Federal income tax liability.[5]

Since an innocent spouse claim was being asserted, the matter was first referred to the IRS Cincinnati Centralized Innocent Spouse Operation (CCISO) office which handles the review of such claims:

The IRS Cincinnati Centralized Innocent Spouse Operation (CCISO) processed petitioner’s Form 8857 on July 26, 2019. On August 14, 2019, CCISO informed petitioner that she did not “meet the basic eligibility requirements” for relief under section 6015. CCISO explained that she did not qualify for relief because “[s]ection 6015 applies to jointly filed income tax returns,” not payroll tax liabilities.[6]

The CDP process then continued with a telephone conference:

Petitioner’s CDP case was then assigned to a settlement officer (SO) in the IRS Independent Office of Appeals (Appeals) in Houston, Texas. The SO reviewed CCISO’s file, verified that the TFRPs had been properly assessed, and confirmed that all other legal and administrative requirements had been met. The SO scheduled a telephone conference for November 19, 2019. Petitioner participated in the telephone conference as scheduled.

During the conference the SO explained that section 6015 relief was not available for TFRP liabilities. The SO also advised that petitioner could not now challenge her liability for the TFRPs because she had, but declined to take advantage of, a prior opportunity to challenge them upon receipt of the Letter 1153. Although petitioner said she did not recall receiving that letter, the SO drew her attention to her signature on the USPS Form 3811, which confirmed her receipt of the proposed assessment.[7]

Eventually the IRS determined that she was not eligible to have her account put on currently not collectible status nor did she qualify for lien withdrawal.  Angela filed an appeal with the Tax Court over all of these findings, including denial of innocent spouse relief.

Why No Innocent Spouse Relief?

Angela noted the following in response to an IRS Motion for Summary Judgment in this matter:

She concedes receiving the Letter 1153 in 2015 but urges that she was undergoing stress at that time in connection with her divorce proceedings. She alleges that she “had no involvement with the business operations of Oasys . . . and did not sign any tax filings associated with the company.”[8]

The Tax Court begins by noting that Angela had a chance to challenge her underlying liability previously but did not take advantage of the opportunity:

A taxpayer may challenge the existence or amount of her underlying tax liability in a CDP case only if she “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute” it. § 6330(c)(2)(B). TFRPs are “assessable penalties” and thus are not subject to deficiency procedures. See Chadwick v. Commissioner, 154 T.C. 84, 91 (2020). However, a taxpayer has the opportunity to dispute her liability for a TFRP by filing an appeal with the IRS when she receives a Letter 1153. See Mason v. Commissioner, 132 T.C. 301, 317-18 (2009); Lewis v. Commissioner, 128 T.C. 48, 61 (2007); Thompson v. Commissioner, T.C. Memo. 2012-87, 103 T.C.M. (CCH) 1470, 1472; Treas. Reg. § 301.6320-1(e)(3), Q&A-E2.

The IRS sent petitioner a Letter 1153 in July 2015. She acknowledges having received that letter, and the USPS Form 3811 bears her signature. The Letter 1153 informed petitioner of her right to appeal the proposed TFRP assessment and outlined the steps she needed to take. Because she had an opportunity to dispute her TFRP liability upon receipt of the Letter 1153 but declined to do so, she was not entitled to challenge her underlying tax liability at the CDP hearing and may not advance such a challenge in this Court. See Chadwick, 154 T.C. at 89.[9]

It is important to note that her argument that she did not sign any payroll tax forms and was not involved with the business operations of the company were potential defenses to her personal liability for the trust fund penalty, arguments that, had she timely contested the matter, she might (or might not) have been able to prevail on, leading to having the potential penalty assessment removed, with only her ex-husband being held liable.

So at this point she can’t contest the underlying liability.  Now the Tax Court considers whether she has an option to argue she was an innocent spouse that should not be required to pay this amount, even if the liability is not subject to challenge.

The Tax Court analyzes the IRC provision that provides for such innocent spouse relief.  The Court first concludes that she is not eligible for relief under either IRC §§6015(b) or (c):

Section 6015 is captioned “Relief from joint and several liability on joint return.” Section 6015(a)(1) provides that “an individual who has made a joint return may elect to seek relief under the procedures prescribed under subsection (b),” which sets forth procedures “applicable to all joint filers.” Section 6015(a)(2) provides that an individual may “elect to limit [her] liability for any deficiency with respect to such joint return in the manner prescribed under subsection (c),” which sets forth procedures applicable for spouses who are legally separated or no longer living together.

Subsections (b) and (c) both specify rules for obtaining relief from liabilities that are shown on (or should have been shown on) a joint Federal income tax return. See § 6015(b)(1)(A) and (B) (presupposing that “a joint return has been made” and that “on such return there is an understatement of tax”); § 6015(c)(1) (providing that a person “who has made a joint return” may be partially relieved of “liability for any deficiency which is assessed with respect to the return”).

Petitioner’s TFRP liabilities were not shown on, and did not arise from the filing of, a joint Federal income tax return. Rather, her TFRP liabilities arose from her failure to discharge her duty, as an officer of Oasys, to ensure that payroll taxes collected from the company’s workers were properly paid over to the Department of the Treasury. Petitioner was therefore not eligible for relief under section 6015(b) or (c).[10]

Her problem was simple—these provisions only apply to tax liabilities arising from a joint federal income tax return per the plain language found in the provisions.  The trust fund penalty did not relate to any joint federal income tax return.

However, IRC §6015(f) provides for equitable relief even if relief is not available under either IRC §§6015(b) or (c).  Initially this seems promising—assuming she could show that, in fact, she had nothing to do with the business, never signed a return and was unaware of the problem, it might seem inequitable to hold her liable.  Conceivably she might have been the corporate secretary in name only, her name provided only to satisfy a state law requirement for a corporation to have a corporate secretary.

The Court describes this provision:

Subsection (f) provides that “equitable relief” may be afforded to a taxpayer if “relief is not available to such individual under subsection (b) or (c).” § 6015(f)(1). “Under procedures prescribed by the Secretary,” such relief may be available if, “taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either).” Ibid.[11]

The Court refers to Rev. Proc. 2013-34 to note that the IRS has held that equitable relief is only available for income tax liabilities:

The Commissioner has specified, in Rev. Proc. 2013-34, 2013-43 I.R.B. 397, the procedures governing equitable relief. These procedures confirm that subsection (f), like subsections (b) and (c), applies only to joint income tax liabilities. See Rev. Proc. 2013-34, § 1.01, 2013-43 I.R.B. at 397 (“This revenue procedure provides guidance for a taxpayer seeking equitable relief from income tax liability. . . .”). Indeed, the IRS will not consider a taxpayer’s request for equitable relief unless she meets seven “threshold conditions,” one of which is that the “income tax liability from which the requesting spouse seeks relief” is attributable to the non-requesting spouse. Id. § 4.01(7), 2013-43 I.R.B. at 399. Another condition is that “[t]he requesting spouse [must have] filed a joint return for the taxable year” for which relief is sought. Id. § 4.01(1).[12]

The Tax Court goes on to agree with the IRS position that such equitable relief only applies to income tax liabilities, noting:

The IRS assessed TFRPs against petitioner and her ex-husband upon determining that they were both responsible for Oasys’s failure to remit payroll taxes to the Government. The IRS did not determine any income tax deficiencies against petitioner and has not attempted to collect any unpaid tax shown on any joint return that she signed. Although a TFRP liability is a form of “unpaid tax,” section 6015(f) applies only to unpaid taxes or deficiencies arising from joint income tax returns. See Treas. Reg. § 1.6015-1(a)(1)(iii) (stating that section 6015(f) applies only to “joint and several liability for Federal income tax”); H.R. Rep. No. 105-599, at 254 (1998) (Conf. Rep.), reprinted in 1998-3 C.B. 747, 1008 (stating that section 6015(f) applies only to “any unpaid tax or deficiency arising from a joint return”). The SO therefore did not err when she advised petitioner that innocent spouse relief was not available to her.[13]

Note that IRC §6015(f) itself never states that it only applies to income taxes arising from a joint return.  However, it also does not indicate that the provision is not so limited—rather it leaves that open to interpretation. The IRS interpretation that relief is limited to income taxes from a joint return is consistent with the title of the section (“Relief from joint and several liability on joint return”), the fact that the specific relief provisions referenced in the §6015(f) are specifically limited to income taxes arising from a joint return, and Congressional committee reports that showed Congress intended this relief to apply only to joint returns.

But those items are only useful if the language of the provision contains some level of ambiguity regarding which taxes the provision covers. In this reported opinion, the Tax Court has determined that sufficient ambiguity exists in the wording to allow the IRS to use that other information to provide for the interpretation that shall apply, an interpretation found in Reg. §1.6015-1(a)(1)(iii) cited in the opinion.

[1] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/lien-upheld-for-trust-fund-penalties%3b-spousal-relief-unavailable/7dkwq (retrieved June 16, 2022)

[2] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022

[3] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022

[4] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022

[5] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022

[6] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022

[7] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022

[8] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022

[9] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022

[10] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022

[11] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022

[12] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022

[13] Chavis v. Commissioner, 158 T.C. No. 8, June 15, 2022