Disagreement on Bankruptcy Court’s Jurisdiction to Give ‘Innocent Spouse’ Relief

Disagreeing with Bankruptcy Judge Marvin Isgur of Houston and siding with the Internal Revenue Service, Chief Bankruptcy Judge Gregory L. Taddonio of Pittsburgh ruled that the bankruptcy court has no subject matter jurisdiction to grant “innocent spouse relief” under Section 6015(f) of the IRS Code.

Basically, Judge Taddonio held in his April 19 opinion that Section 505(a) does not confer equitable jurisdiction on the bankruptcy court to grant “innocent spouse” relief from tax debts.

The debtor filed an adversary proceeding against the IRS under Section 505 of the Bankruptcy Code, alleging that she had no liability for three years of taxes because she was an “innocent spouse.” She pegged jurisdiction in the bankruptcy court on Section 505(a).

With limitations not pertinent to the case, Section 505(a) provides that “the court may determine the amount or legality of any tax . . . whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.”

The IRS filed a motion to dismiss, contending that the bankruptcy court lacked subject matter jurisdiction.

“At first blush,” Judge Taddonio said, the adversary proceeding seemed to be “core” under 28 U.S.C.§ 157(b)(2)(B) as a dispute over the allowance of a claim. But it is “far more complex,” he said.

The Bankruptcy Code and the IRS Code

Because she filed a joint tax return, the debtor had joint and several liability for unpaid taxes. For substantive relief, the debtor was invoking Section 6015(f) of the IRS Code. It provides that the Secretary of the Treasury “may relieve such individual of such liability” after “taking into account all the facts and circumstances” and concluding that “it is inequitable to hold the individual liable for any unpaid tax or any deficiency . . . .”

Observing that the statute was “unambiguous in this regard,” Judge Taddonio said that the section “granted only the Secretary of the Treasury the equitable power to grant innocent spouse relief under subsection (f).”

If the taxpayer disagrees with the determination by the IRS, Section 6015(e)(1)(A) provides a judicial remedy. It says:

In addition to any other remedy provided by law, the individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section . . . .

Except when a refund suit has been filed in a federal district court, Judge Taddonio said, “[M]ost courts agree that this provision grants the Tax Court exclusive jurisdiction to hear appeals under subsection (f).”

Counter to the notion of exclusive jurisdiction in the tax court, Judge Taddonio cited Judge Isgur’s opinion in Pendergraft v. I.R.S. (In re Pendergraft), No. 16-33506, 2017 WL 1091935 (Bankr. S.D. Tex. Mar. 22, 2017), “and its progeny.”

According to Judge Taddonio, Judge Isgur focused “on the prefatory phrase and [found that] section 505(a) of the Code is another ‘remedy provided by law.’” If Section 505 of the Bankruptcy Code indeed were “any other remedy provided by law,” then Section 6015(e)(1)(A) of the IRS Code would open the door to jurisdiction in the bankruptcy court.

Judge Taddonio described Judge Isgur as concluding “that ‘innocent spouse’ relief under I.R.C. § 6015(f) fits neatly within the bankruptcy court’s jurisdiction ‘to determine the legality of a tax.’” Pendergraft, supra, 2017 WL 1091935, at *5. Judge Taddonio said he was “unconvinced” by Pendergraft.

Judge Taddonio characterized the debtor not as contending that the taxes were illegal, but that “they should be waived for equitable reasons.” Thus, he said, the debtor “is not asking the Court to determine the amount of the tax. The Service already did that, which is her problem.”

Judge Taddonio admitted he was “unsure” what Congress meant when it wrote “other remedy provided by law,” but he did not see the statute as pointing to Section 505. He would have expected Congress to refer to Section 505 “more directly.”

The “ambiguity,” Judge Taddonio said, “reveals that section 505 is not really ‘[an]other remedy’ but a means to exercise the Tax Court’s jurisdiction under I.R.C. § 6015(e)(1)(A).”

“Ultimately,” Judge Taddonio said, “equitable relief from a legal determination of the amount of a tax is outside section 505 jurisdiction.” [Emphasis in original.] He granted the IRS’s motion to dismiss, saying that “the Tax Court remains a viable forum to pursue ‘innocent spouse’ relief.”

Questions

Perhaps Section 505(a) isn’t jurisdictional. After all, Section 505(a) does not contain language conferring jurisdiction. Perhaps it only confers power once jurisdiction is found elsewhere.

Jurisdiction in the district and bankruptcy courts is contained in 28 U.S.C. §§ 1334 and 157. As Judge Taddonio said, Sections 1334 and 157 seem to grant subject matter jurisdiction.

To this writer’s way of thinking, the bankruptcy court has jurisdiction under those sections, but the question remains whether Section 505(a) confers power to grant innocent spouse relief even when there is jurisdiction.