Chief Counsel's Office Has Authority to Override CCISO Innocent Spouse Determinations

(Parker Tax Publishing May 2022)

The Tax Court held that where innocent spouse relief under Code Sec. 6015 is raised as an affirmative defense for the first time in a Tax Court petition, the IRS Office of Chief Counsel has final authority to concede or settle the issue, even where the IRS Cincinnati Centralized Innocent Spouse Operation (CCISO) concludes that the taxpayer is entitled to relief. The court found that CCISO's role is to provide assistance, not to make a final determination, and that the Chief Counsel's Office retains discretion to adopt or reject CCISO's conclusions. DelPonte v. Comm'r, 158 T.C. No. 7 (2022).

Background

Michelle DelPonte separated from her then husband, William Goddard, in 2000. Goddard was a was a lawyer who sold exceptionally aggressive tax-avoidance strategies and became very wealthy in the process. The IRS soon caught on and issued notices of deficiency for tax years 1999, 2000, and 2001. Goddard filed joint returns with DelPonte for each of those three years. Delponte was thus jointly and severally liable with Goddard for the several millions of dollars in tax that were owed to the IRS.

In response to the notices of deficiency, Goddard filed a petition in which he asserted innocent-spouse relief on DelPonte's behalf without telling her. It wasn't until November 2010 that DelPonte first became aware of the deficiencies asserted against her and the ongoing litigation before the Tax Court. She promptly hired her own lawyer and ratified the petitions Goddard had filed.

In 2011, the Office of Chief Counsel referred DelPonte's claim for innocent spouse relief to the IRS's Cincinnati Centralized Innocent Spouse Operation (CCISO) "to make a determination regarding [DelPonte's] entitlement to such relief." CCISO is the IRS unit that receives and processes most requests for innocent spouse relief. Under Section 25.15.18.1.1(2) of the Internal Revenue Manual, CCISO's determination letters are generally binding on the IRS and the spouse asking for relief. However, the referral letter that accompanied DelPonte's request asked CCISO to not issue a determination letter but instead "provide the results of [its] consideration directly to [the Office of Chief Counsel]." Having received the referral, CCISO reached out to DelPonte directly and instructed her to fill out and return a Form 8857, Request for Innocent Spouse Relief. DelPonte did just that, and after reviewing her paperwork, CCISO concluded that she should be granted relief for each of the years at issue.

CCISO did what the Chief Counsel lawyer had asked. It did not send a determination letter to DelPonte, but instead sent a letter explaining its conclusion directly to the Chief Counsel's Office. Rather than accepting CCISO's conclusion and settling DelPonte's cases, the Chief Counsel's Office decided that more information was needed in order to evaluate her claim for relief. It also informed her that CCISO had already "rendered its decision in [her favor], but that [the Office of Chief Counsel] had overridden that decision."

After years of litigation, the Tax Court eventually upheld the IRS's determinations of deficiencies and ordered the parties to compute the correct amounts of tax owed. DelPonte and the Chief Counsel's Office continued their correspondence regarding the innocent spouse issue. The IRS sent discovery requests to DelPonte but she insisted that discovery was unnecessary because CCISO had already granted her relief. The Chief Counsel's Office stood firm in its position that CCISO didn't speak for the IRS in her cases.

DelPonte then moved for entry of decisions in her favor. The Tax Court treated her motion as a motion for partial summary judgment on the issue of whether DelPonte was entitled to relief under Code Sec. 6015(c) because CCISO determined that she was. DelPonte argued that the authority to make a final determination regarding innocent spouse relief belonged to the administrative, not the litigating side of the IRS. She reasoned that principles of horizontal equity and "fundamental fairness" required that all taxpayers be entitled to a final determination of relief from CCISO, regardless of whether they first request relief in a petition for redetermination of a deficiency, in a standalone petition, or in a CDP hearing. She pointed out that taxpayers don't always get to choose when to request innocent spouse relief and that the position of the Chief Counsel's Office would put taxpayers like her, who first request relief in a petition for redetermination of a deficiency, in a worse position than taxpayers in collections due process (CDP) proceedings, who can appeal a denial of relief by CCISO to the IRS Independent Office of Appeals (Appeals) before taking their case to the Tax Court as a last resort.

Analysis

The Tax Court denied DelPonte's motion after finding that the Chief Counsel's Office has final authority to concede or settle a case when innocent spouse relief is raised as an affirmative defense for the first time in a Tax Court petition.

The Tax Court agreed with the Chief Counsel's Office that its lawyers are responsible for the IRS's litigation decisions. The court noted that under Code Sec. 7803(b)(2), the Chief Counsel's Office is authorized to represent the IRS in cases before the Tax Court, and General Counsel Order No. 4 delegates to the Chief Counsel's Office the authority in such cases to decide whether and in what manner to defend, settle, or abandon a claim or defense therein.

The court also noted that Chief Counsel Notice CC-2013-011 (which was published after CCISO had already rendered a decision on DelPonte's request, but which the court believed was still helpful in understanding the Office of Chief Counsel's guidance that was in effect) requires Chief Counsel attorneys to request a determination from CCISO where a taxpayer requests relief under any provision of Code Sec. 6015. The court noted that CC-2013-011 also clarifies that "the trial attorney should, except in rare circumstances, follow the determination made by CCISO." In the court's view, the word "should" instead of "must" meant that in this context CCISO's decisions are advisory and that Chief Counsel attorneys get to make the final decision about the IRS's position on any particular request for innocent spouse relief when a taxpayer seeks such relief in a deficiency case.

The court was unpersuaded by DelPonte's argument that principles of fairness required all taxpayers to be entitled to a final determination of relief from CCISO. First, the court said that even in a CDP case, where an Appeals officer receives a request for innocent spouse relief and forwards it to CCISO, the Appeals officer makes the ultimate decision for the IRS about whether to grant relief. In the court's view, the Appeals officer's role is therefore similar to that of the Chief Counsel attorney in a deficiency case. Second, the court found that it had no power to undo the statutory grant of authority in Code Sec. 7803 to the Chief Counsel's Office to litigate cases before the Tax Court, including the power not to adopt CCISO's determinations.

For a discussion of innocent spouse relief, see Parker Tax ¶260,560.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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