The Tax Court had to determine what Congress meant with unclear wording of an effective date provided for in the Taxpayer First Act in the case of Sutherland v. Commissioner, 155 TC No. 6.[1] While most readers are not going to be trying cases before the Tax Court that were filed before July 1, 2019, the case reminds those who represent taxpayers in innocent spouse cases in Appeals that Congress has attempted to incentivize taxpayers to cooperate in the Appeals process rather than decide to attempt to go straight to Tax Court in innocent spouse cases.

The case in question involves an application for innocent spouse relief by Ms. Sutherland. The basic facts of Ms. Sutherland’s situation are described by the Court as follows:

In 2010 petitioner’s husband was indicted for tax crimes. He pleaded guilty, and as part of his plea agreement he was required to submit delinquent tax returns for 2005 and 2006 (among other years). Petitioner avers that she did not have an independent filing obligation for 2005 or 2006 but believed she was required to file joint returns with her husband. She signed the returns, as he requested, in the courthouse cafeteria less than an hour before his sentencing on June 29, 2011.

On September 1, 2016, petitioner filed a Form 8857, Request for Innocent Spouse Relief, for 2005 and 2006. On that form she stated that she had signed the returns during a “confusing and emotional” period, that the returns had been prepared by her husband’s accountant with no input from her, and that she simply signed the returns as instructed. She did not mark the box on the Form 8857 indicating that she had any mental or physical health problems at that time, believing that a “yes” answer would have required that she secure a medical diagnosis.[2]

After the IRS denied her initial request for relief, Ms. Sutherland filed for an Appeals conference. Her representative decided that the Appeals Officer (AO) was not applying the standard the representative believed was appropriate to evaluate the claim for relief and that a decision against the taxpayer was a forgone conclusion at this level regardless of what was provided to the AO.[3]

The representative also knew that, at the time of the conference, at the Tax Court the taxpayer would be provided with a de novo scope of review[4]—that is, the Court would analyze the case anew, and the taxpayer would be able to present additional evidence in that proceeding. The representative concluded there was no need to continue to provide information to the AO. Doing so would only serve to delay the inevitable need to file a petition in the U.S. Tax Court to seek the result the taxpayer desired.[5]

However, after the petition was filed and before the case came before the Court, the U.S. Congress intervened. In the Taxpayer First Act, Congress provided in new IRC §6015(e)(7) the following rule that applied to Tax Court cases brought for innocent spouse relief:

(7) Standard and scope of review Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon—

(A) the administrative record established at the time of the determination, and

(B) any additional newly discovered or previously unavailable evidence.

Act Section 1203(b) provided the amendment “shall apply to petitions or requests filed or pending on or after the date of the enactment of this Act.” That date of enactment was July 1, 2019.

The key issue was how to interpret the effective date—if, in fact, it applied to petitions that had been filed but not yet decided, the taxpayer would be unable to produce additional evidence to the Tax Court. The question was whether the phrasing should be read to apply both “filed” and “pending” to petitions and requests, or whether only the “filed” term modified petitions, with “pending” modifying requests.

The opinion notes:

On its face the effective date provision is ambiguous. “[P]etitions or requests filed or pending” could mean “petitions filed or pending, or requests filed or pending.” Alternatively, it could mean “petitions filed or requests pending.” If the former reading is adopted, so that “pending” modifies both “petitions” and “requests,” subsection (e)(7) likely would apply here because this case was pending in this Court when the amendment was enacted. If the latter meaning is adopted, so that “pending” modifies only “requests” and “filed” modifies only “petitions,” subsection (e)(7) would not apply. Petitioner’s request for innocent spouse relief had been resolved by the IRS, and hence was not “pending,” on or after July 1, 2019. And her petition to this Court was filed before that date.[6]

The Court illustrates how the phrase could be read in two ways in the following examples:

For example, assume a municipal ordinance that is effective for “cars or boats parked or docked” at a city marina after a specified date. This provision would logically be interpreted to refer to “cars parked or boats docked.” That is because each adjective comfortably modifies only one noun.

On the other hand, assume a sales tax that is effective for “cars or trucks sold or leased” after a specified date. Unless the context suggested otherwise, this provision would likely be interpreted to refer to “cars sold or leased, or trucks sold or leased.” Both adjectives comfortably modify both nouns, and it would be odd to have different tax treatment for similar transactions involving similar vehicles.[7]

The Court concludes that, looking at how the word “pending” has previously been applied (or not applied) in relation to petitions in the IRC, that the second interpretation is the appropriate one:

We have discovered no instance in which Congress, either in the Code or in an uncodified effective date provision, has used the phrase “petition(s) pending” when referring to ongoing matters in our Court. And interpreting Act sec. 1203(b) to refer to “petitions filed [in this Court] or requests pending [with the IRS]” on or after the effective date makes logical sense in light of the statutory context.[8]

As well, the Court found that applying both “filed” and “pending” to both petitions and requests would render the word filed superfluous, a result that courts avoid accepting absent no other reasonable way to resolve the issue:

The universe of “petitions or requests pending” on or after July 1, 2019, is the same as the universe of “petitions filed or pending” and “requests filed or pending” on or after that date. Put simply, this alternative reading leaves no work for the word “filed” in the effective date provision, in direct conflict with our established practice of giving effect “to every clause and word of a statute.” See, e.g., Klein v. Commissioner, 149 T.C. 341, 355 (2017) (citing Lamie v. U.S. Tr., 540 U.S. 526, 534 (2004), and Negonsott v. Samuels, 507 U.S. 99, 106 (1993)).[9]

The Court concludes that Ms. Sutherland will be allowed to introduce her evidence in the Tax Court proceeding, since her petition was filed before July 1, 2019.

But it is important to note that the law has changed, and in the future taxpayers will not be able to decide it is best to delay producing information to the Appeals Officer, rather bringing it forward to the Tax Court. As the opinion notes:

By amending the statute to provide that this Court’s review would be limited to the administrative record (apart from previously unavailable or newly discovered evidence), Congress incentivized taxpayers to cooperate with the IRS by building a complete record during the administrative process.[10]

[1] Sutherland v. Commissioner, 155 TC No. 6, https://www.ustaxcourt.gov/UstcInOp2/OpinionViewer.aspx?ID=12314 (retrieved September 8, 2020)

[2] Sutherland v. Commissioner, 155 TC No. 6, p. 5

[3] Sutherland v. Commissioner, 155 TC No. 6, p. 5

[4] Porter v. Commissioner, 132 TC 203, 206-210 (2009)

[5] Sutherland v. Commissioner, 155 TC No. 6, pp. 5-6

[6] Sutherland v. Commissioner, 155 TC No. 6, p. 10

[7] Sutherland v. Commissioner, 155 TC No. 6, p. 11

[8] Sutherland v. Commissioner, 155 TC No. 6, p. 11

[9] Sutherland v. Commissioner, 155 TC No. 6, p. 15

[10] Sutherland v. Commissioner, 155 TC No. 6, p. 17