Hopkins v. Comm'r

*452 RUWE, Judge: The issue for decision is whether a closing agreement entered into under section 7121¹

precludes the assertion of a claim for relief from joint and several liability under section 6015 where petitioner signed the closing agreement before the effective date of section 6015. We hold that it does not.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time of filing the petition, petitioner resided in Kentfield, California.

Petitioner was formerly married to Donald K. Hopkins. ² Petitioner filed joint income tax returns with Mr. Hopkins from 1978 to 1997. Petitioner and Mr. Hopkins claimed deductions on their joint returns for 1982 and 1983, which related to a certain Far West Drilling partnership. They claimed a loss deduction*22 of $ 83,402 on their joint return for 1982. They claimed a loss deduction of $ 91,086 and a depletion deduction of $ 2,126 on their joint return for 1983. Those deductions were erroneous.

Respondent audited the Far West Drilling partnership. In the course of respondent's examination, petitioner and Mr. Hopkins agreed to settle their tax liabilities relating to Far West Drilling. They signed a Form 906, Closing Agreement on Final Determination Covering Specific Matters, dated September 28, 1988. The closing agreement provides:

*453 Under section 7121 of the Internal Revenue Code Donald K and Marianne Hopkins 111 Diablo DR., Kentfield, CA 94904 * * * and the Commissioner of Internal Revenue make the following closing agreement:

WHEREAS, the Taxpayers were investors in Far West Drilling Associates (the "Partnership"),*23 beginning with the taxable year 1981.

WHEREAS, the Taxpayers have made cash contributions to the Partnership in the total amount of $ 67,500.00[.]

WHEREAS, the Taxpayers have claimed losses with respect to their interest in the Partnership on their Federal income tax return beginning in the year 1981, the allowance of which are contested by the Commissioner of Internal Revenue.

WHEREAS, the parties wish to resolve with finality the Federal income tax consequences of their investment in the Partnership.

NOW THEREFORE, it is hereby determined and agreed for Federal income tax purposes that:

1. The Taxpayers are entitled to an ordinary deduction in the amount of $ 50,625.00 for the taxable year ending December 31, 1981, with respect to their investment in the Partnership. Said amount represents 75% of their cash investment in the Partnership.

2. The Taxpayers shall be entitled to an ordinary deduction in any taxable year ending subsequent to 1981 equal to the *24   amount of cash payments made by them during such taxable year, against their assumed portion of the Partnership debt to Mitchell Petroleum Technology Corporation, upon substantiation of such cash payments.

3. The Taxpayers' basis in the Partnership shall be $ 0 as of December 31, 1981. The Taxpayers will, however, be allowed an increase in their basis in the Partnership, equal in amount to any subsequent cash payment by Taxpayers made pursuant to their assumption of a portion of any debt of the Partnership to Mitchell Petroleum Technology Corporation.

4. The Taxpayers are not entitled to the investment tax credit with respect to their interest in the Partnership for any taxable year.

5. The Taxpayers are not entitled to any deductions in the taxable year ending December 31, 1981, or in any subsequent year, other than the deductions which are set forth in paragraphs "1" and "2" above.

6. Any release, discharge or forgiveness of any obligation with respect to the Taxpayers' investment in the*25 Partnership in any year subsequent to the taxable year ending December 31, 1981 will not result in gross income to the Taxpayers in any taxable year.

7. No penalty shall be assessed against the Taxpayers for the taxable year ended December 31, 1981 or any subsequent taxable year by reason of the disallowance of any losses claimed as a result of their interest in the Partnership. The increased interest rate pursuant to I.R.C. section 6621(c) shall apply. This agreement is final and conclusive except:

(1) the matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of material fact;

*454 (2) it is subject to the Internal Revenue Code sections that expressly provide that effect be given to their provisions notwithstanding any other law or rule of law except Code section 7122; and

(3) if it relates to a tax period ending after the date of this agreement, it is subject to any law, enacted after the *26     agreement date, that applies to that tax period.

By signing, the above parties certify that they have read and agreed to the terms of this document.

Respondent accepted the closing agreement on October 13, 1988.

Respondent made adjustments to petitioner and Mr. Hopkins's 1982 and 1983 returns pursuant to the closing agreement. Those adjustments resulted in deficiencies for 1982 and 1983, which respondent assessed. ³ Respondent filed notices of Federal tax lien with the county recorder of Marin County, California, relating to those assessments. The tax liabilities for 1982 and 1983 remain unpaid.

On February 8, 1995, petitioner filed a chapter 7 bankruptcy. She also filed an adversary complaint in the U.S. Bankruptcy Court for the Northern*27 District of California, Santa Rosa Division, in which she sought to be relieved of her joint and several tax liabilities, and the related tax liens, for 1982 and 1983 under former section 6013(e). The Government filed a motion for summary judgment, arguing, inter alia, that petitioner was barred from seeking relief because she had executed a closing agreement under section 7121 with respect to the Far West Drilling adjustments. The bankruptcy court granted the Government's motion, concluding that petitioner was precluded by the closing agreement from asserting a claim for relief under section 6013(e). Petitioner appealed from that judgment to a Federal District Court. The District Court affirmed the bankruptcy court's decision. Hopkins v. United States (In re Hopkins), 79 AFTR 2d 97-2625, 97-1 USTC par. 50,446 (N.D. Cal. 1997). Petitioner then appealed to the Court of Appeals for the Ninth Circuit, which also affirmed. Hopkins v. United States (In re Hopkins), 146 F.3d 729 (9th Cir. 1998).

On May 24, 1999, petitioner filed a Form 8857, Request for Innocent Spouse Relief, with respondent for her 1982 and *455 1983 joint and several tax liabilities in which she*28 requested relief under the recently enacted provisions of section 6015. On January 8, 2001, petitioner filed a petition for relief from joint and several liability with this Court. At the time of petitioner's filing the petition, respondent had not made a determination with respect to her request.

OPINION

We decide in this Opinion whether petitioner is precluded by her closing agreement from asserting a claim for relief from joint and several liability under section 6015. The closing agreement was signed before the effective date of section 6015, and the tax liabilities assessed pursuant to that closing agreement were unpaid as of that effective date. This case presents an issue of first impression.

With certain exceptions, a husband and wife may elect to file a joint return. Sec. 6013(a). If a joint return is made, the tax is computed on the aggregate income, and the liability with respect to the tax is joint and several. Sec. 6013(d)(3). However, in specified circumstances, relief from joint and several liability was previously available under former section 6013(e) and is currently available under section 6015.

Section 6013(e), *29 as amended, ⁴ provided generally that a spouse could be relieved of a joint and several liability if: (1) A joint income tax return was filed; (2) the return contained a substantial understatement of tax attributable to grossly erroneous items of the other spouse; (3) in signing the return, the spouse seeking relief did not know, and had no reason to know, of the substantial understatement; and (4) under the circumstances it would be inequitable to hold the spouse seeking relief liable for the substantial understatement. Cheshire v. Commissioner, 115 T.C. 183, 189 (2000), affd. 282 F.3d 326 (5th Cir. 2002). However, relief under section 6013(e) was difficult to obtain. Id.

Congress enacted section 6015 on July 22, 1998, as part of the IInternal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998),Pub. L. 105-206, sec. 3201(a), 112 Stat. 734*30 . Congress repealed former section 6013(e) as part of this enactment, and section 6015 was given retroactive effect with *456 respect to any liability for tax remaining unpaid as of July 22, 1998. See RRA 1998 sec. 3201(g)(1), 112 Stat. 740. ⁵

Section 6015 is more accessible than former section 6013(e). See Cheshire v. Commissioner, supra at 189; H. Conf. *31 Rept. 105-599, at 249 (1998), 1998-3 C.B. 747, 1003. Section 6015 provides three avenues of relief from joint and several liability. First, section 6015(b)(1) (which is similar to former section 6013(e)) allows a spouse to escape joint and several liability. Section 6015(b)(2) also allows a spouse to be relieved from a portion of the understatement. Second, section 6015(c) generally provides for an allocation of liability for a deficiency as if the spouses had filed separate returns. Third, section 6015(f) confers upon the Secretary discretion to grant equitable relief in situations where relief is unavailable under section 6015(b) or (c). See Cheshire v. Commissioner, supra; Mora v. Commissioner, 117 T.C. 279, 285 (2001).

In the instant case, petitioner requests relief under section 6015(b), (c), and (f) with respect to the tax liabilities arising from the closing agreement. Respondent argues, however, that the closing agreement precludes petitioner from asserting a claim for relief under section 6015.

Generally, petitioner's closing agreement would preclude her from asserting any defense to a tax liability covered by the agreement. See, e. *32 g., sec. 7121(b); ⁶sec. 301.7121-1(c), Proced. & Admin. Regs. A closing agreement entered into under section 7121 settles or "closes" the liability of an individual for any tax covered by the agreement, and it is *457 final and conclusive as to both the taxpayer and the Commissioner. See, e.g., S& O Liquidating Pship. v. Commissioner, 291 F.3d 454, 458 (7th Cir. 2002); Hopkins v. United States (In re Hopkins), 146 F.3d at 733; In re Miller, 174 Bankr. 791, 796 (9th Cir. BAP 1994), affd. without published opinion 81 F.3d 169 (9th Cir. 1996); Zaentz v. Commissioner, 90 T.C. 753, 760-761 (1988). Closing agreements may not be annulled, modified, set aside, or disregarded in any suit or proceeding unless there is a showing of fraud, malfeasance, or misrepresentation of a material fact. Wolverine Petroleum Corp. v. Commissioner, 75 F.2d 593, 595 (8th Cir. 1935), affg. 29 B.T.A. 1236 (1934); H Graphics/Access, Ltd. Pship. v. Commissioner, T.C. Memo. 1992-345.

*33 In a prior opinion involving petitioner and the same closing agreement at issue in this case, Hopkins v. United States (In re Hopkins) 146 F.3d 729 (9th Cir. 1998), the Court of Appeals for the Ninth Circuit held that these same principles applied to preclude petitioner's assertion of a claim for relief from joint and several liability under section 6013(e). The Court of Appeals held:

     We now hold that a taxpayer may not avoid tax liabilities



   arising out of a valid closing agreement by asserting an



   innocent spouse defense where that defense has not been



   preserved in the text of the closing agreement. Closing



   agreements are meant to insure the finality of liability for



   both the taxpayer and the IRS. This is why courts have strictly



   enforced closing agreements, finding them binding and conclusive



   on the parties even if the tax at issue is later declared to be



   unconstitutional or in conflict with other internal revenue

   sections. * * * In signing the closing agreement, Ms. Hopkins

   explicitly agreed to have her tax liability determined by the    closing agreement. If Ms. *34 Hopkins wished to try later to avoid

   the tax consequences flowing from that agreement, she had a duty



   to preserve any possible defenses to personal liability in that



   agreement. Having failed to do so, Ms. Hopkins should not now be



   permitted to reopen the question of her liability in the current



   adversary proceedings on the grounds that she was an



   "innocent spouse." Permitting her to do so would



   undermine the very purpose of entering into a closing agreement

   in the first place. [Id. at 733.]

The Court of Appeals decided that case in the context of a claim for relief under former section 6013(e). Relief under section 6015 was not available at the time that case was decided on June 17, 1998. Following the decision of the Court of Appeals for the Ninth Circuit in Hopkins v. United States (In re Hopkins), 146 F.3d 729, section 6015 was enacted and provided retroactive relief for tax liabilities*458 remaining unpaid as of its effective date. Petitioner argues that, despite her signing the closing agreement, she is entitled to claim relief under section 6015.

In interpreting section 6015, our purpose*35 is to give effect to Congress's intent. Ewing v. Commissioner, 118 T.C. 494, 503 (2002); Fernandez v. Commissioner, 114 T.C. 324, 329 (2000). We begin as always with the statutory language, and we interpret that language with reference to the legislative history primarily to learn the purpose of the statute and to resolve any ambiguity in the words contained in the language. Ewing v. Commissioner, supra at 503.

Section 6015 does not address the issue of unpaid taxes arising from a section 7121 closing agreement. Section 6015 makes no explicit reference to closing agreements except for a parenthetical reference in section 6015(g)(1). ⁷ However, that provision by its terms applies only in the case of credits and refunds. It does not express Congress's intent with respect to cases, such as the instant case, which do not involve credits and refunds. ⁸ We do not interpret Congress's failure to otherwise address closing agreements in section 6015 as evidence of its intent to restrict the availability of relief in the case of an unpaid tax liability arising from a closing agreement.

*36 As we indicated above, section 6015 was enacted to provide spouses with broader access to relief from joint and several tax liabilities. See H. Conf. Rept. 105-599, supra at 249, 1998-3 C.B. at 1003. Indeed, Congress provided retroactive relief in the case of any liability for tax arising on or before July 22, 1998, but remaining unpaid as of such date. RRA 1998 sec. 3201(g)(1), 112 Stat. 740. ⁹ It is clear that Congress intended section 6015 to be applied broadly and expansively *459 to provide relief for joint and several tax liabilities remaining unpaid as of the effective date of section 6015. Considering Congress's purposes in enacting section 6015, we cannot construe Congress's failure to address the overall effect of closing agreements, which were entered into before the effective date of section 6015, to indicate an intent to restrict section 6015 relief that would otherwise be available in the absence of a closing agreement.

*37 Although Congress did not address the effect of closing agreements in the situation presented here, it did address the effect of a final decision in a prior court proceeding; i.e., the effect of the doctrine of res judicata on the availability of section 6015 relief. Section 6015(g)(2) provides:

In the case of any election under subsection (b) or (c), 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.

On July 18, 2002, the Secretary issued published regulations which are applicable to all elections or requests for relief filed on or after such date. ¹⁰ See sec. 1.6015-9, Income Tax Regs. Those regulations provide with respect to section 6015(g)(2) that "A requesting spouse has not meaningfully participated in a prior proceeding if, due to the*38 effective date of section 6015, relief under section 6015 was not available in that proceeding." Sec. 1.6015-1(e), Income Tax Regs. The legislative history also indicates that a spouse may elect section 6015 relief without regard to whether he or she has previously been denied relief under former section 6013(e). See H. Conf. Rept. 105-599, supra at 251, 1998-3 C. B. at 1005.

Although section 6015(g)(2) and the regulations refer only to res judicata, we believe the same logic applies in the case of a closing agreement entered into before the effective date of section 6015. We recognize the similarities that exist with respect to closing agreements and the doctrine of*39 res judicata. ¹¹*460 They have a similar preclusive effect, and the policy reasons for giving final and conclusive effect to a closing agreement and a prior judgment of a court are also similar. ¹² Indeed, the Court of Appeals for the Ninth Circuit in Hopkins v. United States (In re Hopkins), 146 F.3d at 733 n.2, analogized the effect of a closing agreement to res judicata. See also Katz v. United States, 43 AFTR 2d 79-1124, 79-1 USTC par. 9332 (D. Mass. 1979).

*40 Given the similarities in the purpose of a closing agreement and the doctrine of res judicata, we cannot conclude any logical reason to afford section 6015 relief in the case of a prior judgment involving section 6013(e) and deny relief in the case of a closing agreement entered into before the effective date of section 6015. In both situations, the taxpayer-spouse did not have an opportunity to raise a claim for relief under section 6015. We do not perceive Congress's failure to include specifically an exception with respect to closing agreements to indicate Congress's intent to restrict relief in the case of a closing agreement entered into before the effective date of section 6015.

The final regulations provide an opportunity to claim section 6015 relief in the case of a section 6224(c) settlement agreement which was entered into while the spouse was a party to a pending partnership level (TEFRA) proceeding. ¹³Sec. 1.6015- 1(c)(2), Income Tax Regs.¹⁴ In doing so, the final regulations provide an exception to the final and preclusive *461 effect which we have given section 6224(c) settlement agreements. ¹⁵ The final regulations contain an example illustrating, as well as providing*41 a justification for including, this exception. Section 1.6015-1(c)(3), Example (2), Income Tax Regs., provides:

*42      H and W file a joint return for taxable year 2002, on which they claim $ 25,000 in losses attributable to H's general partnership interest in Partnership B. In November 2003, the Service proposes a deficiency in tax relating to H's and W's 2002 joint return arising from omitted taxable interest income in the amount of $ 2,000 that is attributable to H. In July 2005, the Internal Revenue Service commences a TEFRA partnership proceeding regarding Partnership B's 2002 and 2003 taxable years, and sends H and W a notice under section 6223(a)(1). In March 2006, H and W enter into a closing agreement with the Service. The closing agreement provides for the disallowance of the claimed losses from Partnership B in excess of H's and W's out-of-pocket expenditures relating to Partnership B for taxable year 2002 and any subsequent year(s) in which H and W claimed losses from Partnership B. In addition, H and W agree to the imposition of the accuracy-related penalty under section 6662 with respect to the disallowed losses attributable to partnership*43 B. In the closing agreement, H and W also agree to the deficiency resulting from the omitted interest income for taxable year 2002. W may not later claim relief from joint and several liability under section 6015 as to the deficiency in tax attributable to the omitted income of $ 2,000 for taxable year 2002, because this portion of the closing agreement pertains to nonpartnership items. In contrast W may claim relief from joint and several liability as to the disallowed losses and accuracy-related penalty attributable to Partnership B for taxable year 2002 or any subsequent year(s). This is because this portion of the closing agreement pertains to partnership and affected items and was entered into at a time when W was a party to the pending partnership-level proceeding regarding Partnership B. Consequently, W never had the opportunity to raise the innocent spouse defense in the course of that TEFRA partnership proceeding. (See section 1.6015-5(b)(5) relating to premature claims). [Emphasis added.]

*462 We fail to see why the same rationale does not apply to*44 a closing agreement entered into before the effective date of section 6015. A spouse who enters into such an agreement likewise never had the opportunity to raise a claim under section 6015 before, or at the time of, her signing the closing agreement. Although we recognize that the final regulations were not effective for purposes of petitioner's request for relief, we believe the reason underlying the exceptions in section 1.6015-1(c)(2) and (e), Income Tax Regs., supports a conclusion that a closing agreement entered into before the effective date of*463 section 6015 does not preclude petitioner from asserting relief under that section. ¹⁶

*45 We recognize that courts have strictly enforced closing agreements executed pursuant to section 7121 (and section 6224(c) for that matter), and they are binding and conclusive on the parties even if the tax at issue is later declared to be unconstitutional or in conflict with other Code sections. See Hopkins v. United States (In re Hopkins), 146 F.3d at 733. However, in this case, we are dealing with legislation which has retroactive effect in the case of unpaid tax liabilities and which we have broadly and expansively construed consistent with congressional intent. Indeed, we have previously stated that the rules of section 6015 were designed to correct perceived deficiencies and inequities apparent in former section 6013(e) and that this curative legislation should be construed liberally to effectuate its remedial purpose. Washington v. Commissioner, 120 T.C. 137, 155-156 (2003); Ewing v. Commissioner, 118 T.C. at 503; see also Flores v. United States, 51 Fed. Cl. 49, 53 (2001). Construing section 6015 liberally, we conclude that Congress did not intend to restrict the availability of section 6015 relief in the case of a closing*46 agreement entered into before its effective date. We hold that a closing agreement entered into before the effective date of section 6015 does not preclude the assertion of a claim for relief under that section, provided the tax liability or liabilities arising from the closing agreement remain unpaid as of July 22, 1998.

In the instant case, a portion of petitioner's 1982 and 1983 tax liabilities was assessed pursuant to the closing agreement that she signed. The closing agreement was signed at a time when section 6015 relief was unavailable, and her tax liabilities remained unpaid as of July 22, 1998. In those circumstances, we hold that the closing agreement does not preclude petitioner from asserting a claim for relief under section 6015.

Respondent also contends on brief that the doctrines of res judicata and collateral estoppel preclude petitioner from asserting relief under section 6015. He relies upon the decision of the Court of Appeals for the Ninth Circuit in Hopkins v. United States (In re Hopkins), 146 F.3d 729 (9th Cir. 1998). However, as we stated above, the Court of Appeals in that case addressed petitioner's claim for relief under former section 6013(e), *47 which, except for some similarities in section 6015(b), was far more restrictive than relief under section 6015. That case involved a different claim from the claim which we have before us. In addition, a critical factor in the decision of the Court of Appeals was petitioner's failure to preserve her claim for relief under section 6013(e) as a defense in the closing agreement: "We now hold that a taxpayer may not avoid tax liabilities arising out of a valid closing agreement by asserting an innocent spouse defense where that defense has not been preserved in the text of the closing agreement." Id. at 733. Given the curative and retroactive effect of section 6015 and petitioner's inability to claim section 6015 relief at the time she entered the closing agreement or in the subsequent bankruptcy proceedings, we hold that she is not precluded by res judicata or collateral estoppel from raising her claims to section 6015 relief. See Trent v. Commissioner, T.C. Memo. 2002-285. ¹⁷

*48 We hold that petitioner is not precluded by the closing agreement or the doctrines of res judicata and collateral estoppel *464 from claiming relief under section 6015 with respect to liabilities attributable to the Far West Drilling partnership. For purposes of convenience and clarity, we address whether petitioner is entitled to relief under section 6015 in a separate opinion.