Tax Court in Brief | Kechijian v. Comm’r | Innocent Spouse Relief, Res Judicata, and “Meaningful Participation” Exception of Section 6015

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The Tax Court in Brief – December 26th – December 30th, 2022

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Tax Litigation:  The Week of December 26th, 2022, through December 30th, 2022

Kechijian v. Comm’r, T.C. Memo. 2022-127| December 28, 2022 | Gustafson, J. | Dkt. No. 3430-20

Short Summary: Petitioner Susan Kechijian sought the Tax Court’s review, under section 6015(e), of the denial by the IRS of her request for innocent spouse relief from joint and several liability for a federal income tax liability for 2004, a year for which she filed a joint return with her late husband. For that return, the IRS determined that Mr. Kechijian and his business partner failed to report income they had received related to S corporation stock that they owned. In that deficiency case (2010), the Kechijians and the business partner petitioned the Tax Court for redetermination. All taxpayer parties, including Ms. Kechijian, were represented by the same attorney. During the proceeding, Mr. Kechijian died. At Ms. Kechijian’s request, the Court substituted for Mr. Kechijian, the personal representatives of the estate, one of whom was Ms. Kechijian. Discovery ensured, and a trial took place. Ms. Kechijian did not participate in the IRS Appeals process; she did not participate in any pretrial meetings; she did not participate in settlement negotiations; she did not sign any court documents; and she did not otherwise participate at trial except sitting in the courtroom during trial. The other co-executor assumed sole responsibility for communicating with their shared counsel about the litigation. The Tax Court issued its opinion, determining deficiencies for 2004. Ms. Kechijian, individually, and the representatives of the Estate appealed the decision to the U.S. Court of Appeals for the Fourth Circuit. The same attorney as before represented all appealing taxpayers. In June 2020 the Fourth Circuit upheld the Tax Court’s judgment. See Est. of Kechijian v. Commissioner, 962 F.3d 800, 802 (4th Cir. 2020).

Innocent spouse relief for Ms. Kechijian under section 6015 was not an issue raised in the deficiency case—neither in the Tax Court nor in the appeal. In June 2019 Ms. Kechijian filed with the IRS Form 8857, “Request for Innocent Spouse Relief”, requesting relief from joint and several liability pursuant to section 6015(b), (c), and (f). The same attorney who represented the taxpayer parties in the deficiency litigation signed the Form 8857 as “Preparer”.

The IRS denied her request in November 2019, claiming that she did not meet the basic eligibility requirements. Ms. Kechijian sought review by the Tax Court in February 2020. On December 8, 2021, Ms. Kechijian (through the same attorney) moved for summary judgment, claiming (1) that she is entitled to relief under section 6015(b), (2) that she is entitled to elect relief under section 6015(c), and (3) that under section 6015(g)(2), she is not barred by res judicata from raising the innocent spouse relief in the current case because she did not meaningfully participate in the prior deficiency case. The IRS opposed the motion and cross-moved, arguing that Ms. Kechijian meaningfully participated in the previous deficiency case both in her own capacity and as a co-executor of the estate and that the I.R.C. § 6015(g)(2) exception to res judicata therefore did not apply.

Key Issues: Whether Ms. Kechijian meaningfully participated in the previous deficiency case through counsel such that res judicata precludes Ms. Kechijian from raising a I.R.C. § 6015 claim for the year that was the subject of that case?

Primary Holdings: All four conditions to the doctrine of res judicata were proven, as a matter of law, and the exception of I.R.C. § 6015(g)(2) does not apply because Ms. Kechijian participated, albeit through counsel, meaningfully in the prior deficiency proceedings. The fact that Ms. Kechijian was represented by counsel and communicated with counsel at the prior proceeding is an indication of meaningful participation, and thus she is not entitled to avoid judgment on res judicata principles via the exception I.R.C. § 6015(g)(2). Section 6015(g)(2) contemplates that participation through counsel in a prior proceeding can constitute meaningful participation that triggers res judicata and bars a subsequent innocent spouse case.

Key Points of Law:

Summary Judgment, briefly. The purpose of summary judgment is to expedite litigation and avoid unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). It is used to make rulings of law when there is no genuine dispute of material fact. Rule 121(b); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002). Opposition to a motion for summary judgment must “set forth specific facts” (in contrast to “mere allegations or denials”) to raise a genuine issue of fact.

Innocent Spouse Relief. Section 6013(d)(3) provides that when married taxpayers file a joint federal income tax return, the tax is computed on their aggregated income, and their liability to pay the tax shown on the return or found to be owing is joint and several. See also Treas. Reg. § 1.6013-4(b). Under section 6015, a taxpayer may seek relief from joint and several liability; and if the IRS determines not to grant such relief to a taxpayer, then section 6015(e) gives the taxpayer the right to petition the Tax Court for review.

Res Judicata. Res judicata (Latin for “a thing adjudicated”), and sometimes referred to as “claim preclusion”, is an affirmative defense developed by the courts to bar repetitious suits on the same cause of action. Res judicata is applicable to tax litigation. When a court has entered a final judgment on the merits of a cause of action, the parties to the suit are thereafter bound as to every matter which was offered and received to sustain or defeat the claim or demand as well as to any other admissible matter which might have been offered for that purpose. Commissioner v. Sunnen, 333 U.S. 591, 597–98 (1948). In tax controversies, each tax year is a separate cause of action, and res judicata makes truly final a final judgment for a particular tax year. Id. Where the cause of action of a taxpayer’s liability in a given tax year has already been litigated, the parties may be barred from relitigating that liability— unless an exception to the doctrine of res judicata applies.

Conditions for Res Judicata. Four conditions must be met to preclude the re-litigation of a claim: (1) the parties in each action must be identical (or at least be in privity); (2) a court of competent jurisdiction must have rendered the first judgment; (3) the prior action must have resulted in a final judgment on the merits; and (4) the same cause of action or claim must be involved in both suits. See Breland v. Commissioner, 152 T.C. 156, 161 (2019); Koprowski v. Commissioner, 138 T.C. 54, 62 (2012); see also Covert v. LVNV Funding, LLC, 779 F.3d 242, 246 (4th Cir. 2015). Once these four conditions are met, the res judicata claim preclusion applies to any claim or defense that was or could have been raised as part of the litigation over the cause of action in the prior case. Koprowski, 138 T.C. at 62

Exception to Res Judicata—No “Meaningful Participation in Prior Proceeding.” Section 6015(g)(2) creates an exception to res judicata in the case of an “innocent spouse” claiming relief from joint liability in a subsequent suit, where that spouse did not “participate[] meaningfully in such prior proceeding.” Section 6015(g)(2) provides: “(2) Res judicata.—In the case of any election under subsection (b) or (c) or of any request for equitable relief under subsection (f), if a decision of a court in any prior proceeding for the same taxable year has become final, such decision shall be conclusive except with respect to the qualification of the individual for relief which was not an issue in such proceeding. The exception contained in the preceding sentence shall not apply if the court determines that the individual participated meaningfully in such prior proceeding.”

A taxpayer seeking to leverage the exception must show: (1) that the innocent spouse claim “was not an issue” in the prior deficiency case and (2) that the innocent spouse did not “participate[] meaningfully” in the prior deficiency case.

“Meaningful Participation.” The requesting spouse bears the burden of proving that he or she did not participate meaningfully in the prior proceeding. See Deihl v. Commissioner, 134 T.C. 156, 162 (2010). The phrase “participated meaningfully” is not defined in section 6015(g)(2). The Tax Court looks to the totality of the facts and circumstances to determine whether a taxpayer participated meaningfully in a prior proceeding. See Harbin v. Commissioner, 137 T.C. 93, 98 (2011); Rogers v. Commissioner, T.C. Memo. 2017-130, at *13, aff’d, 908 F.3d 1094 (7th Cir. 2018). The Tax Court views the following factors as probative of meaningful participation: (1) exercising exclusive control over the handling of the prior proceeding; (2) having a high level of participation in the prior proceeding (e.g., signing court documents and participating in settlement negotiations); and (3) having the opportunity to raise a claim for relief from joint and several liability in the prior proceeding. Harbin, 137 T.C. at 98; Rogers v. Commissioner, T.C. Memo. 2018-53, at *97–98, supplemented by T.C. Memo. 2019-61, aff’d, 9 F.4th 576 (7th Cir. 2021). “The fact that the taxpayer was represented by counsel and communicated with counsel at the prior proceeding is an indication of meaningful participation”. Rogers, T.C. Memo. 2018-53, at *97–98. A lawyer who enters an appearance on behalf of a taxpayer petitioner thereafter acts for and on behalf of the taxpayer petitioner. When a taxpayer is represented by counsel, the acts of counsel fulfill the obligations of the taxpayer as litigant.

Joint Representation of Spouses Whose Interests are Adverse. Where an innocent spouse relief claim is directly in conflict with the interest of another taxpayer represented by the same attorney (and without proper disclosure of the potential conflict or written consent waiving the conflict of interest), the Tax Court may find that a purported innocent spouse did not participate meaningfully where the attorney for the two spouses “obscured and obstructed” one of the spouse’s opportunity to raise a claim for relief under section 6015. See Harbin, 137 T.C. at 98. This is but another part of the facts and circumstances review.

Insights: Kechijian is an important and instructive opinion to the tax practitioner and taxpayer alike. For the practitioner, close attention should be given to the joint representation of spouses (former or current) who may be jointly and severally liable for a tax liability. One of the spouses may have a claim for innocent spouse relief that is adverse to the other spouse’s interest in the matter. Up front evaluation, disclosure, and waiver of conflicts of interest should be secured in writing in the engagement. Both spouses should be encouraged to seek out and engage individual representation. For the taxpayer, engaging independent counsel (i.e., not joint representation), on a limited or even full-time basis in a tax matter, may be advisable and could help protect the taxpayer’s rights and interests that are or may later prove to be adverse to the rights and interests of the taxpayer’s spouse.