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Bankruptcy Court has Authority Under 11 U.S.C. 505(a)(1) to Grant Innocent Spouse Relief to a Taxpayer/Debtor

By: Noreen Gilroy

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Courts have consistently recognized that section 6015(e)(1)(a) of the Tax Code grants subject matter jurisdiction to a tax court to determine the appropriate relief available to a debtor seeking innocent spouse relief under section 6015(f). In In re Pendergraft, the United States Bankruptcy Court for the Southern District of Texas found that bankruptcy courts have the authority under 11 U.S.C. §505(a)(1) to grant innocent spouse relief to a debtor if certain procedures under the Tax Code are met.[1]

Jane Pendergraft filed for bankruptcy because her legal counsel allegedly advised that Pendergraft join her husband, Mr. Pendergraft, in filing for bankruptcy to prevent the IRS from seizing the couple’s home, and arresting and prosecuting them for tax violations.[2] In the bankruptcy case the IRS filed a proof of claim in the amount of $2,506,354.07, of which $653,669.80 was secured by tax liens, and $272,726.99 was entitled to priority under 11 U.S.C. §508(a)(8).[3] Mrs. Pendergraft filed an adversary complaint against the IRS to: (1) determine the validity of her tax liability under section 505(a)(1); (2) object to the IRS’s proof of claim; and (3) determine the validity, priority and extent of the IRS’s lien against her homestead. [4] In response, the IRS filed a motion to dismiss Pendergraft’s complaint on the grounds that the bankruptcy court lacked subject matter jurisdiction to determine whether Pendergraft is entitled to innocent spouse relief. [5] The IRS argued that a bankruptcy court does not have subject matter jurisdiction over an innocent spouse determination because 26 U.S.C. §6015(f) vests such a determination strictly in the IRS and tax courts. [6] The court agreed that section §6015(f) of the Tax Code does not grant a bankruptcy court subject matter jurisdiction over an innocent spouse determination.[7] Nevertheless, the court held that a bankruptcy court may grant innocent spouse relief under 505(a) of the Bankruptcy Code if such relief is denied by the Secretary of the United States Department of the Treasury (the “Secretary”) or if a determination is not made within six months of filing under section 6015(e)(1)(A) of the Tax Code.[8]

The innocent spouse exception allows an individual to request equitable relief from the Secretary from joint and several liability for any unpaid tax or deficiency caused by the illegal actions of their spouse.[9] Under section 6015(e)(1)(a) of the Tax Code, an individual requesting innocent spouse relief may “in addition to any other remedy provided by law . . . petition the Tax Court to determine the appropriate relief available to the individual.”[10] Section 505(a)(1) of the Bankruptcy Code is an example of such “other remedy provided by law.”[11] The Fifth Circuit and other courts have relied on legislative history[12] to support the authority of bankruptcy courts to determine and remedy a debtor’s tax liability under 505(a)(1).[13] The Pendergraft court found that cases outside the Fifth Circuit presented by the IRS were unpersuasive and contradict the plain language of 26 U.S.C. §6015(e)(1)(a) and the legislative history of section 505.[14] However, the bankruptcy court recognized that section 6015(e)(1)(A) places a statutory delay on petitions to the tax court.[15] Although there is no language in the Tax Code expressly requiring a bankruptcy court determining innocent spouse relief to comply with the statutory delay, the court concluded that a bankruptcy court is required to wait a similar period of time.[16] Therefore, because Pendergraft failed to first file with the Secretary, the bankruptcy court concluded that Pendergraft must follow the procedures of section 6015(f) of the Tax Code before petitioning the bankruptcy court for a remedy under section 505(a)(1) of the Bankruptcy Code.[17]

            This decision recognizes that the Tax Code, in conjunction with the Bankruptcy Code, permits an individual to seek innocent spouse relief on taxes, relating to a bankruptcy estate, in a bankruptcy court after certain procedures are met. The individual seeking innocent spouse relief must file for relief under the Tax Code with the IRS.  If the Secretary denies the relief or fails to render a decision within six months of the filing, then the individual may elect to pursue other remedies provided under the Bankruptcy Code.  It is only after the procedures of sections 6015(f) and 6015(e) of the Tax Code are followed that the bankruptcy court obtains subject matter jurisdiction over the innocent spouse relief claim. 

 

           



[1] In re Pendergraft, 2017 WL 1091935 (Bankr. S.D. Tex. March 22, 2017).

[2] Id. at *2.

[3] Id.

[4] Id. at *1.

[5] Id.

[6] Id. at *3.

[7] Id.

[8] Id.

[9] 26 U.S.C. §6015(f) (2015).

[10] Id. 26 at §6015(e)(1)(a).

[11] In re Pendergraft, 2017 WL 1091935 at *4. Under section 505(a)(1), a bankruptcy court has the remedial power to “determine the amount or legality of any tax, any fine or penalty relating to a tax.” See 11 U.S.C. §505(a)(1) (2010).

[12] See In re Millsaps, 133 B.R. 547, 554 (Bankr. M.D. Fla. 1991) (relying on congressional intent to provide a forum for the swift determination of claims that would otherwise delay the administration of a bankruptcy estate); 124 CONG. REC. H11095, H11110-H11111 (1978) (providing evidence that Congress intended bankruptcy courts to be a forum for taxes affecting the administration of a bankruptcy estate); Hinsley v. Hinsley (In re Hinsley), 99 Fed.Appx. 658 (5th Cir. 2003) (relying on legislative history to interpret section 505 as a broad grant to bankruptcy courts to determine the liability of both the specific debtor, and the estate).

[13]See IRS v. Luongo (In re Luongo), 259 F.3d. 323, 328 (5th Cir. 2001) (finding that Section 505’s broad grant of power to the bankruptcy courts to determine the legality of any tax liability of a debtor is limited only by Secretary’s express limitations and the court’s discretion to abstain); United States v. Wilson, 974 F.2d. 514, 517 (4th Cir. 1992) (“[B]ankruptcy Code requires bankruptcy courts to deter to tax courts only where claim was contested and adjudicated by the tax court before commencement of the bankruptcy case.”); Hinsley, 99 Fed.Appx. at 658 (determining that section 505 is an avenue for a taxpayer/debtor to object to IRS’s proof of claim).  

[14] In re Pendergraft, 2017 WL 1091935 at *6 (relying on legislative history, persuasive case law, and controlling Fifth Circuit decisions). The IRS relied on cases that limit the review of the Secretary’s determination of equitable relief to tax courts. See Simmons Perrine Moyer Bergman, PLC v. Coleman, 2013 WL 1080666, at *7–8 (N.D. Iowa March 14, 2013) (stressing an innocent spouse claim must be pursued before the Commissioner and appealed to the Tax Court); United States v. LeBeau, 2012 WL 835160, at *3 (S.D. Cal. March 12, 2012) (ruling a district court lacks the authority to adjudicate an innocent spouse claim or defense).

[15] 26 U.S.C. §§ 6015(e)(1)(A)(i)(I)–(II) (2015) (requiring the request for relief to be filed after the Secretary makes a final determination of relief available to the individual or six (6) months after the date the request was filed).

[16] In re Pendergraft, 2017 WL 1091935 at *6 (reasoning that a proper reading of the statute as a whole required a bankruptcy court to wait a similar period).

[17] Id. at *7.