Recent Bankruptcy Court Ruling Addresses the Jurisdiction of Bankruptcy Courts to Hear Innocent Spouse Relief Cases

The recent case of In re Bowman, Case No. 20-11512, Section A (Bankr. E.D. La., July 12, 2021) addresses an interesting intersection of tax and bankruptcy law.  Specifically, it looks at the issue of whether bankruptcy courts have jurisdiction to grant a debtor relief as an “innocent spouse” under § 6015 of the Internal Revenue Code, and ultimately determines that it does.

Although it is true that Section 6015(f) does not allow a bankruptcy court to exercise initial subject matter jurisdiction over an innocent spouse defense because only the Secretary of the IRS receives the equitable power to grant innocent spouse relief under that Section, in this case, it was undisputed that the Debtor sought such relief from the Secretary in July 2019 and the Secretary denied the request.  The bankruptcy court determined that § 6015(e)(1)(A) confers subject-matter jurisdiction to determine whether innocent spouse relief should be granted when it is denied by the Secretary. Citing to Pendergraft v. I.R.S. (In re Pendergraft), Adv. No. 16-3246, 2017 WL 1091935, at *3-4 (Bankr. S.D. Tex. Mar. 22, 2017), the Court explained:

Section 6015(e)(1) states that, in a case where an individual requests equitable relief under Section 6015(f), [i]n addition to any other remedy by law, the individual may petition the Tax Court to determine the appropriate relief available to the individual under this section . . . . 26 U.S.C. § 6015(e)(1)(A). It is unambiguous that a Tax Court—and not just the Secretary—may grant relief to an individual. Moreover, the remedy available in the Tax Court is [i]n addition to any other remedy provided by law. 26 U.S.C. § 6015(e)(1)(A).

11 U.S.C. § 505 is another remedy provided by law. Section 505(a)(1) specifically provides bankruptcy courts with remedial power over tax liabilities and penalties . . . . This statutory language provides a bankruptcy court with the power to determine the legality of taxes and tax penalties

Here, the Court found that the determination of the Debtor’s tax liability directly affects the administration of her bankruptcy estate.  Indeed, the IRS had filed a proof of claim against the estate and had not raised an objection to this Court’s jurisdiction to rule on the Debtor’s status as an innocent spouse.

Although the Court in Bowman went on to deny the Debtor’s motion for summary judgment with respect to her innocent spouse claim, the more important conclusion of the court is that it had jurisdiction to make that determination.

Application

Bankruptcy courts may present an alternative forum to address innocent spouse claims.  The ruling from the court in Bowman clearly reflects its belief that its jurisdiction only arose after the IRS initially denied such relief.  Therefore, a bankruptcy attorney who anticipates wanting to make an innocent spouse claim may want to seek a ruling on the issue from the IRS prior to any bankruptcy filing in order to assure that the bankruptcy court will have jurisdiction to hear the matter.

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