NewsNotes

Lesli S. Laffie, J.D., LL.M.

Innocent Spouse Relief * Deducting Medical Conference Attendance * Nonqualified Preferred Stock

Court Decisions

Innocent Spouse Relief

In three recent decisions, the Tax Court explained its ability to review requests for innocent spouse relief under Sec. 6015, as enacted by Section 3201 of the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98) and amended by Section 4002(c) of the Tax and Trade Relief Extension Act of 1998. (For a discussion, see Foran and Foran, "Innocent Spouse Rules Provide Relief," TTA, Jan. 2000, p. 26.)

Law: Prior to the IRSRRA '98, the Tax Court generally had jurisdiction only in cases in which there was a tax deficiency, not a refund. After the IRSRRA '98, however, the Tax Court is empowered to review IRS denials of (or failures to rule on) innocent spouse relief in both deficiency and refund cases, generally effective for any liability for tax arising after (or unpaid on) July 22, 1998, if the petition is timely filed in accordance with Sec. 6015(e).

Generally, an eligible taxpayer can make one of two elections under Sec. 6015:

1. An "innocent spouse" election if the taxpayer filed jointly and is still married to the other spouse, under Sec. 6015(b).

2. A "separate liability" election if the taxpayer filed jointly and, at the time of the election, is no longer married to, is legally separated from or lived apart from the other spouse for the past 12 months, under Sec. 6015(c).

If the taxpayer does not qualify for either of the above, the IRS may nevertheless grant "equitable relief" under Sec. 6015(f) if undue hardship would otherwise result (and other requirements are met). The remedy in each instance is apportioned relief for the portion of the understatement for which there was no knowledge or reason to know.

Sec. 6015(e)(1)(A) provides that, if the taxpayer timely files a petition, the Tax Court can review the IRS's denial of relief in Sec. 6015(b) and (c) election cases.

Butler: In Michael B. Butler, 114 TC No. 19, the taxpayer sought Sec. 6015(b) relief. The IRS denied the election and Sec. 6015(f) relief. The issue was whether the Tax Court had jurisdiction to review the IRS's denial of Sec. 6015(f) relief.

The Tax Court held that its jurisdiction is not limited to review of denials of Sec. 6015(b) and (c) relief; there is a strong presumption that administrative agency actions are subject to judicial review unless specifically precluded by statute or the action is committed to agency discretion by law. According to the court, nothing in the statute or legislative history bars Tax Court jurisdiction to review the denial of Sec. 6015(f) relief. (See also Fredie Lynn Charlton, 114 TC No. 22.) The court went on to uphold the IRS's denial of innocent spouse relief, however, holding that the taxpayer had reason to know of the understatement and there was no showing of economic hardship.

Fernandez: In Diane Fernandez, 114 TC No. 21, acq., the taxpayer elected Sec. 6015(b), (c) and (f) relief, which the IRS denied. The Tax Court held it had jurisdiction to review the denial of Sec. 6015(f) relief, when an election is made under Sec. 6015(b) or (c) and a petition timely filed under Sec. 6015(e). According to the court, the legislative history supports the interpretation that the court has jurisdiction to review relief requests under all of Sec. 6015. Further, the IRS's authority to grant relief is not solely committed to agency discretion and, thus, is susceptible to judicial review. The court thus denied the IRS's motion to dismiss the taxpayer's suit for lack of jurisdiction.

Corson: In Thomas Corson, 114 TC No. 24, the taxpayer's spouse elected and was granted Sec. 6015(c) relief from a joint tax deficiency; the taxpayer argued that he had the right under Sec. 6015(e)(4) to litigate the IRS's decision to grant such relief. Sec. 6015(e)(4) provides that, in an innocent spouse proceeding, the nonelecting spouse will be given adequate notice and an opportunity to become part of the Sec. 6015(b) or (c) proceeding.

The IRS contended that only the electing spouse has the Sec. 6015(e) right to bring a Tax Court proceeding, and only after innocent spouse relief is denied; the nonelecting spouse cannot bring such a proceeding when the IRS has granted the electing spouse the desired relief.

The Tax Court held that, read together, Sec. 6015(e)(1), (4) and (g)(2) show a concern for (1) fairness to the nonelecting spouse and (2) providing him an opportunity to be heard on innocent spouse issues. Thus, the court ruled that the taxpayer could intervene, in the interests of ensuring that innocent spouse relief is granted on the merits.

Butler, Fernandez and Corson demonstrate that the Tax Court has expanded the statutory grant of jurisdiction provided in Sec. 6015(e).

IRS guidance: In addition, the IRS released Pub. 971 (revised 4/00), Innocent Spouse Relief (And Separation of Liability and Equitable Relief), to explain the three types of relief available. It describes who may qualify for innocent spouse relief, separation of liability or equitable relief and how to apply.

The publication is free and can be obtained by calling (800) 829-3676 or downloading from the Internet at www.IRS.gov/prod .

From the IRS

Deducting Medical Conference Attendance

For the first time, the IRS has ruled that certain costs of attending a medical conference, when recommended by a physician, can be a deductible medical expense.

In Rev. Rul. 2000-24, a taxpayer lived in City A; his child was chronically ill. The child's physician recommended that the taxpayer attend a conference in City B sponsored by an association that supports research and education about the child's disease. The conference was attended by medical practitioners and individuals with the disease and their families.

The taxpayer spent the majority of his time in City B at the conference. His expenses included transportation to and from City B, local transportation to and from the conference site, conference registration fee and meals and lodging while attending the conference.

Sec. 213(a) and (d)(1) allow a deduction for unreimbursed expenses incurred for "medical care"—the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any body structure or function—if the 7.5% adjusted gross income threshold is met. Under Regs. Sec. 1.213-1(e)(1)(ii), the deduction is confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness. Whether an expense is "primarily" for medical care is a question of fact.

Under Sec. 213(d)(1)(B), medical care includes transportation "primarily for and essential to" medical care. Sec. 213(d)(2) provides that the cost of lodging up to $50 per night while away from home that is primarily for and essential to medical care is paid for medical care if the care is provided by a physician in a licensed hospital or equivalent facility and there is no significant element of personal pleasure, recreation or travel in the away-from-home travel.

On the other hand, Regs. Sec. 1.213-1(e)(1)(iv) and (v) provide that meals are not deductible medical expenses unless provided at a hospital or other facility at which the taxpayer, his spouse or dependent is receiving medical care.

The IRS ruled that the conference registration fee and costs of travel to and from the conference were deductible medical expenses. The meals and lodging were nondeductible.

Rev. Rul. 2000-24 distinguished Rev. Rul. 76-79, 1976-1 CB 70, in which the costs of a physician-recommended cruise were deductible only to the extent attributable to the physician cruise staff reviewing the taxpayer's medical records, performing medical tests and reporting the results to the taxpayer's physician.

It is unclear how broadly the IRS will apply the holding of Rev. Rul. 2000-24 to other taxpayers who attend what purport to be medical conferences. The burden is on the taxpayer to prove legitimate expenses and actual conference attendance. The taxpayer should strive to obtain in writing his, his spouse's or dependent's physician's recommendation to attend the conference.

Rev. Rul. 2000-24 may be a bright spot for clients who are chronically ill or have chronically ill spouses or dependents. Even if the 7.5% Federal threshold cannot be met, the expenses may nevertheless be deductible on a state return.

Regulations

Nonqualified Preferred Stock

Sec. 356(e) final regulations (TD 8882) provide guidance on when nonqualified preferred stock (NPS) will not be treated as stock or securities for purposes of Secs. 354, 355 and 356. The regulations, which affect shareholders who receive NPS (or rights to NPS) in certain corporate reorganizations and divisions, reflect changes made by the Taxpayer Relief Act of 1997 and were effective May 16, 2000.

According to the regulations, neither (1) a right to acquire NPS received in exchange for stock or a right to acquire stock other than NPS nor (2) NPS received in exchange for stock or for a right to acquire stock other than NPS will be treated as stock or a security.