What’s James “Buster” Douglas v. Mike Tyson got to do with You v. The IRS?

Many people (and unfortunately, some attorneys) will concede or settle a dispute with the IRS because they fear the courtroom. Other than the costs or stresses associated with litigation, I have heard, on more than one occasion, that an attorney or a taxpayer “gave in” because “the IRS never loses a case, and thus, the fact that the IRS is willing to go to trial is a harbinger of almost certain defeat.” While it may certainly seem like this is the truth, it’s not. Without first independently evaluating the facts and law at issue, it’s merely an excuse.

To appreciate how absurd this excuse is, imagine a similar excuse being made in an athletic context. Take James “Buster” Douglas. In 1990, Buster had a shot at the Heavyweight Championship Belt. His only obstacle? Mike Tyson, the undefeated champion who many considered to be the best boxer in the world. Now imagine if Buster had bowed out of the fight because Mike Tyson had never lost before! Fortunately, he didn’t. He knew that with his training and experience, he stood a chance. Las Vegas, however, did not agree. Only one betting house in the city held odds for the Douglas-Tyson fight. Fortunately, despite the world believing all odds were against Buster, he proved that the odds were, still, merely odds. During the title fight, Buster scored a win for the underdogs. In the 11^th round, he knocked Tyson out.

Just as Buster Douglas proved that even Mike Tyson could lose, the recent deluge of news coverage of IRS “scandals” is an indication that the IRS—yes, even the IRS!—makes errors, mistakes, or bad decisions.

A Notice issued on June 7, 2013 by the IRS Office of Chief Counsel is also a good reminder. The Notice (CC-2013-011), which provides guidance to Chief Counsel attorneys, informed the attorneys that the IRS was officially changing its litigating position in “section 6015(f)” cases. Why this is notable (and long overdue) takes a bit of explanation...

Before 1971, unless a spouse could prove that he or she signed a joint return under duress, both spouses filing a joint tax return were jointly and severally liable for the tax owed—regardless of which spouse earned or benefited from the income, and regardless of a spouse’s innocent ignorance of the other’s financial dealings. To remedy the harsh and often unjust impact on some spouses, in 1971 Congress passed a law setting forth limited circumstances in which a spouse would be entitled to relief from the joint liability. Today, this relief (as modified through the years) is codified in Internal Revenue Code § 6015.

Generally, to request relief under IRC § 6015, a taxpayer files a Form 8857 Request for Innocent Spouse Relief with the IRS. The IRS reviews it and decides whether the taxpayer is entitled to relief. The taxpayer has an opportunity to appeal a denial to the IRS’s Office of Appeals. If the Office of Appeals denies the taxpayer’s request, he may file a petition in the United States Tax Court.

Before the June 7, 2013 Notice was issued, it was the IRS’s position that in § 6015(f) cases the Tax Court could only review the IRS’s determination for “abuse of discretion” and could not consider new evidence. In other words, the IRS would argue that if evidence was not included in the administrative record that was developed during its review of the taxpayer’s request under IRC § 6015(f), the Tax Court could not consider it, and the Tax Court could not come to its own conclusion as to whether the taxpayer was entitled to relief. Thus, according to the IRS, the Tax Court could only decide whether the IRS, in light of the evidence in the administrative record, came to a conclusion that exceeded the bounds of reason.

The Tax Court did not agree. In cases decided on May 15, 2008[1] and April 2, 2009[2] (the “Porter Cases”), the Tax Court held that the scope and standard of its review of the IRS’s determinations under IRC § 6015(f) was “de novo.” The Court of Appeals for the Eleventh Circuit came to the same conclusion on February 10, 2009[3]. In other words, the Tax Court and the Eleventh Circuit held that they would accept new evidence (including evidence of events that transpired after the IRS’s determination) and, considering all of this evidence, would make their own determination as to whether the taxpayer was entitled to relief under IRC § 6015(f).

Following these decisions, the IRS Office of Chief Counsel issued a Notice (CC-2009-021) on June 30, 2009 stating that the proper standard of review in § 6015(f) cases was NOT “de novo” and that the Tax Court should only consider the administrative record.

Between the dates of the Porter Cases and the date the IRS changed its litigating position (thus aligning itself with the Porter Cases), at least 50 cases were decided by the Tax Court in which the Tax Court, against the IRS’ position, applied a “de novo” standard and scope of review. In these cases, the IRS proceeded to trial, at least in part because, under an “abuse of discretion” review and limiting the evidence to the administrative record, it believed it could prevail[4].

In each of these cases, the IRS attorneys likely would have told the taxpayer or his representative that he or she would object to the taxpayer presenting any new evidence or to the taxpayer or his witnesses testifying at trial.

How many taxpayers did not proceed to trial on because of the IRS’s litigating position or anticipated objections? How many taxpayers were not aware that the Tax Court did not agree with the IRS’s position? Hopefully, not many. Hopefully, most taxpayers knew that they had the case law and support to know they stood a chance.

So what’s the lesson? When the law is on your side, it doesn’t matter how many cases the IRS has won. Know the law. Know the difference between the law and a position of the IRS.

And remember: even Mike Tyson gets knocked out.

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