In Haag v. Shulman, (Case 11-1979, July 2, 2012), the First Circuit Court of Appeals upheld the Tax Court’s decision that Kathleen Haag (Haag) was not entitled to renew her innocent spouse claim for relief from joint and several liability for various years on res judicata grounds.  The Tax Court decision granting the government’s Summary Judgment Motion followed litigation in U.S. District Court in which Haag has asserted as an affirmative defense that she was entitled to innocent spouse relief in part under IRC Sec. 6015((f) (equitable relief).  The District Court entered judgment against Haag and her spouse finding that her innocent spouse claim had been filed with IRS later than two years after the commencement against her of the first IRS collection activity.  At the time Treas. Reg. 1.6015-5(b) (1) required claims under Sec. 6015(f) for equitable relief be brought within the two-year period following the first collection activity.  The Tax Court had rejected this view of Sec. 6015(b) (1) (E) in several cases but a number of Circuit Courts had upheld the IRS regulation.  Despite appellate court victories, and due at least in part to public pressure and Taxpayer Advocate criticism, the IRS later issued Notice 2011-70, 32 I.R.B. 135 (July 26, 2011) which changed its regulatory position and eliminated the two-year rule requiring instead that equitable relief claims generally be brought within the 10 year collection statute of limitations period.

Notwithstanding, the seeming unfairness to Haag, in not being allowed to litigate her affirmative defense on the merits of her innocent spouse claim, the First Circuit upheld the Tax Court’s decision denying her a second bite of the apple.  The Court stated in footnote 2:”Haag’s reliance on the IRS’s notice is ineffectual to the resolution of the present appeal due to the well settled principle that res judicata does not allow dispensation for intervening changes in the law.”

The court found res judicata applicable as there had been, “a final judgment on the merits in an action that precludes the parties from re-litigating claims that were or could have been raised in the prior action.” The doctrine generally applies in tax cases when there is:

(1)   A final judgment on the merits in an earlier action.

(2)   Relating to the same cause of action or claim (i.e., liability or non-liability for taxes asserted)

(3)   Involving the same taxpayers

(4)   Involving the same tax years.

The court also found the special res judicata rule of IRC Sec. 6015(g) (2) inapplicable as Haag had raised the affirmative defense, decided against her by the District Court, and meaningfully participated in that litigation.  The court did not address whether Haag was entitled to raise an innocent spouse claim as an affirmative defense in a suit by the government to reduce a tax assessment to judgment because it was not considering appeal from the District Court denial of the claim but the taxpayer’s appeal from the Tax Court’s granting of summary judgment to the Commissioner based solely on res judicata grounds.  Several district court’s have decided that innocent spouse claims may not be raised as an affirmative defense in a suit brought by the government to reduce its tax assessment to judgment.  Haag’s affirmative defense in District Court was denied because it was raised with IRS too late, and not because she could not raise innocent spouse as an affirmative defense having failed to file her innocent spouse claim with IRS as required by the regulations.

Thus, it appears, at least in the First Circuit that taxpayers who were denied innocent spouse relief based on the now rescinded IRS Regulation are out of luck.

 © 2012 by Robert S. Steinberg, Esquire
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