The bankruptcy court has the power, albeit limited, to decide whether a claim by the Internal Revenue Service should be disallowed under the so-called “innocent spouse” doctrine, according to a March 22 decision by Bankruptcy Judge Marvin Isgur of Houston.
Unbeknownst to a wife, her husband failed to file tax returns or to pay federal taxes for several years. After the IRS seized her bank account and put a lien on her home, she filed a chapter 11 petition.
Relying on the innocent spouse doctrine, the wife objected to the IRS’ proof of claim and sought to have the bankruptcy court determine the extent and validity of the lien on her home. The IRS responded with a motion to dismiss, contending that the bankruptcy court lacked subject matter jurisdiction to decide whether the debtor was entitled to invoke the innocent spouse doctrine contained in 26 U.S.C. § 6015.
Judge Isgur denied the IRS’ motion and found that he had subject matter jurisdiction, although he said he could not exercise jurisdiction immediately.
Under Section 6015(f) of the Tax Code, the Secretary of the Treasury “may relieve” someone of tax liability if holding the individual liable would be “inequitable” after “taking into account all the facts and circumstances.”
That subsection means, according to Judge Isgur, that the bankruptcy court cannot “exercise initial subject matter jurisdiction over an innocent spouse defense because only the Secretary receives the equitable power to grant innocent spouse relief.”
Nonetheless, Section 6015(e)(1)(A) of the Tax Code allows the tax court to grant innocent spouse relief if it is denied by the Secretary or six months passes without a decision by the Secretary, Judge Isgur said.
Next, Judge Isgur interpreted Section 505 of the Bankruptcy Code as giving the “bankruptcy court subject matter jurisdiction to review the Secretary’s grant or denial of equitable relief.”
Judge Isgur said that the debtor must first submit the appropriate forms to the IRS for invocation of the innocent spouse doctrine. Cobbling together the Bankruptcy and Tax Codes, Judge Isgur concluded that he could exercise jurisdiction on the earlier of the Secretary’s decision or six months after submission of the forms to the IRS.
Judge Isgur explained why several cases to the contrary cited by the IRS were “unpersuasive.” His opinion appears to mean that the bankruptcy court, not just the tax court, can review the Secretary’s exercise of discretion.