Nonelecting Decedent's Trust May Challenge Innocent-spouse Relief to Ex-wife

T and W filed joint Federal returns for 1979 and 1980. They separated in 1978 and were divorced in 1981. In 1988, the IRS sent T and W a deficiency notice for 1979 and 1980. T and W then petitioned the Tax Court for redetermination of these deficiencies. T died in 1994 and the court substituted H, the trustee for T's trust and T's successor-in-interest.

In 1998, W moved to assert her entitlement to innocent-spouse relief under former Sec. 6013(e), which the Tax Court allowed.

In July 1998, the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98) was exacted. The IRSRRA '98 included Sec. 6015, which expanded innocent-spouse relief.

In 2000, the Service and W reached a settlement, under which, based on Sec. 6015(c), W was not responsible for any deficiency for 1979. H would not agree to this settlement, arguing that Sec. 6015 gives H the right to contest the IRS's determination of Sec. 6015 relief to W. In a memorandum decision, the Tax Court holds for H; as T's successor-in-interest, she is entitled to participate in the judicial review of the decision granting relief to W.

In the interests of justice, it is highly desirable that identical issues before a single tribunal receive identical treatment. The interests of justice would be ill served if the rights of the nonelecting spouse were to differ according to the jurisdictional predicate for the claim for Sec. 6015 relief.

In a stand-alone proceeding brought under Sec. 6015(e), the nonelecting spouse is allowed to participate at the administrative level; see Sec. 6015(g)(2). After a determination is made (or the IRS fails to make a determination), the nonelecting spouse is given an opportunity to participate in the judicial review of the determination; see Sec. 6015(e)(4). When read together, these provisions reveal Congress' concern with providing procedural fairness to the nonelecting spouse by allowing the opportunity to be heard on whether relief from joint liability should be granted. Presumably, the purpose of affording the nonelecting spouse an opportunity to be heard first in administrative proceedings and then in judicial proceedings is to ensure that relief from joint liability is granted on the merits after taking into account all relevant evidence.

While this case arises under deficiency jurisdiction, nonelecting spouses should have the same rights to participate in the judicial review as their stand-alone counterparts under Sec. 6015(e) enjoy. The jurisdictional predicate giving rise to the issue of Sec. 6015 relief should not determine the rights of the nonelecting spouse to participate in judicial review of the Service's determinations.

Here, H, as T's successor-in-interest, is entitled to participate in the judicial review of the decision granting relief to W under Sec. 6015(c). To grant the IRS's motion would effectively preclude the nonelecting spouse's right to participate in the judicial review of the Service's determination.

Hale Exemption Trust, TC Memo 2001-89