Catherine L. LaRosa v. Commissioner of Internal Revenue, CA 4, Case No. 24-2034 (May 18, 2026) vacating and remanding 163 T.C. No. 2 (July 17, 2024)

The availability of equitable relief under Internal Revenue Code (I.R.C.) § 6015(f) is a critical safeguard for innocent spouses facing joint and several liability. However, whether an erroneous refund consisting solely of previously paid interest revives a "tax liability" eligible for such relief has been a matter of significant dispute. The recent Fourth Circuit Court of Appeals decision in LaRosa v. Commissioner completely reshapes the landscape on this issue, vacating a prior Tax Court ruling and determining that an erroneous refund of underpayment interest does indeed give rise to a liability for unpaid tax eligible for equitable relief.

This article details the intricate factual background of the LaRosa case, explores the initial legal reasoning of the United States Tax Court, and analyzes the Fourth Circuit’s textual approach in reversing that decision.

Factual Background

The timeline of the LaRosa case spans several decades, stemming from what the Tax Court described as a "long history of interactions with the Commissioner". Following a 1985 tax fraud conviction for the tax years 1981, 1982, and 1983, the Internal Revenue Service (IRS) issued a jeopardy assessment against the LaRosas.

In 1990, the parties reached a stipulated settlement. The agreement determined that the taxpayers had underpaid their taxes for the 1981 through 1983 tax years, while simultaneously overpaying for the 1984 and 1985 tax years. The LaRosas satisfied the net liability—paying the difference between their underpayments and overpayments, which included statutory underpayment interest under I.R.C. § 6601(a) and penalties.

Following full payment, the taxpayers requested a refund, asserting that the IRS had improperly calculated the interest owed. The IRS initially denied the claim, but subsequently issued a refund in 1994, which "consisted of section 6601 interest (interest on underpayments) and section 6611 interest (interest on overpayments) for the years in issue".

Shortly after, the IRS concluded that the 1994 refund was issued in error. The Department of Justice brought an erroneous refund suit in 1996 under I.R.C. § 7405. The government prevailed in district court, successfully reducing the erroneous refund to a judgment and placing a lien on the LaRosas' real property. Decades later, in 2019, the government initiated an action to foreclose on that judgment lien.

The Taxpayer's Request for Relief

Faced with foreclosure, Mrs. LaRosa filed Form 8857, requesting equitable relief from joint and several liability pursuant to I.R.C. § 6015(f). Section 6015(f)(1) provides that the Secretary may grant equitable relief if, "taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency".

The IRS refused to process her request, issuing a determination that "no amount is currently owed" and strictly asserting that "innocent spouse doesn’t consider relief for erroneous refunds". In response, Mrs. LaRosa filed a petition with the Tax Court to challenge the IRS's denial.

The Tax Court's Analysis and Conclusion

In the Tax Court, the core of the dispute centered on "whether the liability at issue, an erroneous refund of interest, constitutes an unpaid tax or deficiency as required by section 6015(f)". The Tax Court ultimately sided with the Commissioner, granting summary judgment and denying Mrs. LaRosa's eligibility for equitable relief.

The Tax Court judge rooted the legal analysis in the procedural distinction between "rebate" and "nonrebate" refunds. According to the Tax Court, rebate refunds involve a "substantive recalculation of a taxpayer’s tax liability," whereas nonrebate refunds occur due to clerical or computer errors and "bear no relation to a recalculation of tax liability".

Because the LaRosas had originally paid their underlying tax liabilities in full, and the refund solely addressed perceived calculation errors in statutory interest, the Tax Court ruled that the refund was a nonrebate refund. The Tax Court found that nonrebate refunds do not revive a tax liability and are only recoverable via a civil suit under I.R.C. § 7405, rather than deficiency procedures.

Addressing the taxpayer's argument that statutory interest is legally treated as tax under I.R.C. § 6601(e)(1), the Tax Court pointed to a specific statutory carve-out. Section 6601(e)(1) treats interest as tax, except for references in "subchapter B of chapter 63, relating to deficiency procedures". Because the definition of a rebate is found in Section 6211(b)(2)—which is located in subchapter B of chapter 63—the Tax Court concluded that "the statement in section 6601(e)(1) that interest is treated as tax, by its very own terms, does not apply when defining what is or is not a rebate".

Consequently, the Tax Court held that "an erroneous refund consisting solely of interest is not a rebate and does not give rise to an unpaid tax or deficiency," rendering Mrs. LaRosa ineligible for relief.

The Fourth Circuit's Disagreement and Application of the Law

Upon review, the Fourth Circuit Court of Appeals conducted a de novo review and dismantled the Tax Court's framework, focusing purely on statutory text rather than procedural classifications of refunds.

The appellate panel defined the sole question on appeal: "When the IRS mistakenly refunds interest payments a taxpayer made on previously underpaid taxes, does the taxpayer have a 'liability' for 'unpaid tax' that is eligible for discretionary relief under Section 6015(f)(1)?". (Note: Mrs. LaRosa explicitly disclaimed arguments regarding the overpayment interest portion of the refund on appeal, so the appellate review focused strictly on the underpayment interest).

The Fourth Circuit fundamentally disagreed with the Tax Court's application of the I.R.C. § 6601(e)(1) carve-out. The appellate panel noted that Section 6015(f)(1) authorizes relief for "any unpaid tax". Section 6601(e)(1) dictates that "[a]ny reference in this title (except subchapter B of chapter 63, relating to deficiency procedures) to any tax imposed by this title shall be deemed also to refer to interest imposed by this section on such tax".

The Fourth Circuit pointed out a critical geographic flaw in the Tax Court's reliance on the chapter 63 exception: "the provision we are interpreting here—Section 6015(f)(1)—is not part of chapter 63, much less of subchapter B. Instead, it is contained in subchapter A of chapter 61". Therefore, the exception does not apply to Section 6015(f)(1), and the term "tax" in the equitable relief statute inherently includes underpayment interest.

Furthermore, the Fourth Circuit aggressively rejected the government and Tax Court's reliance on the rebate versus nonrebate distinction. The panel stated clearly: "We are not persuaded that the rebate/nonrebate distinction matters here. For one thing, we see no basis for it in Section 6015(f)(1)’s text". The court observed that neither the Fourth Circuit nor its sister circuits had ever embraced this distinction in the context of Section 6015(f)(1).

The appellate panel also struck down the government's argument—drawn from the Eleventh Circuit's decision in Bilzerian v. United States—that the taxpayer's original payment had permanently "extinguished" the liability, meaning a later refund could not "revive" it. The Fourth Circuit clarified that Bilzerian addressed collection procedures, not the definition of "unpaid tax" under Section 6015. Instead, the court emphasized that tax liabilities are directly imposed by the Internal Revenue Code itself, and whether a taxpayer has a liability under Section 6015(f)(1) "turns only on whether her obligations under the tax code are currently satisfied rather than what the IRS may or may not have done in the past to collect on such obligations".

Conclusions Arrived at by the Court

By adhering strictly to the statutory text, the Fourth Circuit concluded that "erroneous refunds of underpayment interest give rise to a 'liability' for 'unpaid tax' that is eligible for equitable relief under Section 6015(f)(1)". Dismissing the IRS's policy arguments, the court firmly noted that "no amount of policy-talk can overcome plain statutory text".

Ultimately, the Fourth Circuit vacated the Tax Court’s grant of summary judgment and remanded the case. This requires the Tax Court to evaluate Mrs. LaRosa's petition for equitable relief on its substantive merits, rather than dismissing it on jurisdictional or threshold eligibility grounds. For tax professionals representing clients with erroneous refund liabilities, this decision confirms that an unrecovered erroneous refund of underpayment interest is statutorily classified as an unpaid tax, leaving the door open to utilize the equitable relief provisions of I.R.C. § 6015(f).

Given that the Tax Court’s initial ruling in LaRosa was a published decision, the court remains bound by the Fourth Circuit's reversal only within that specific circuit. Consequently, tax professionals should anticipate that the Tax Court will likely maintain its stance in other jurisdictions, continuing to assert that collection actions involving erroneous refunds of underpayment interest remain outside the purview of innocent spouse relief.

Prepared with assistance from NotebookLM.