Timing Is Everything!

Asad v. Comm’r, T.C. Memo. 201780, 2017 WL 2211215 (2017), aff’d, 751 F. App’x 339 (3d Cir. 2018)

(a) Facts: A husband and wife owned rental properties. Each spouse was responsible for some of the properties. They filed joint tax returns in which they claimed losses on the properties.

The IRS disallowed these losses and assessed a deficiency. The deficiency was asserted after the passage of the three-year statute of limitations in I.R.C. § 6501(a). Neither party contested the notice of deficiency within the 90-day period set forth in I.R.C. § 6213(a).

After the 90-day period, both parties petitioned for innocent spouse relief, and their respective requests were consolidated into one case. After the joint returns were filed, but before the Tax Court proceedings, the parties divorced. In their separation agreement, they agreed to divide all tax liabilities equally.

The IRS conceded that each spouse was entitled to relief from underpayment of tax on properties managed by the other. But the parties wanted to divide unpaid losses equally, as required by their separation agreement.

(b) Issues: (1) Could the parties raise a limitations defense to the notice of deficiency? (2) Should the tax liabilities be divided equally?

(d) Summary of Rationale (District Court): The statute of limitations was an affirmative defense, which could have been raised only within the 90-day statutory period for challenging a notice of deficiency. By failing to question the notice within 90 days, the parties waived their limitations defense.

“The divorce agreement establishes Asad’s and Akel’s rights against each other under state law. . . . However, it does not control their liabilities to the IRS.” 2017 WL 2211215, at *2.

(d) Summary of Rationale (Circuit Court): The appeal focused primarily upon the first issue. Because the parties missed the 90-day deadline, “the Tax Court properly determined that it lacked jurisdiction to consider the validity of the merits of any of Asad’s challenges to the underlying federal tax liability assessment, and that it was limited to determining whether Asad was eligible for innocent spouse relief.” 751 F. App’x at 341-42.

Lessons:

1. The IRS should pay more attention to the three-year statute of limitations on assessing deficiencies.

2. Taxpayers should pay more attention to the 90-day deadline for challenging a notice of deficiency.

Observations:

1. Asad only determined who pays the IRS. If the parties want to divide the tax liability equally, they are still free to ask the divorce court to enforce their agreement and order that result or even to reach that result through payments between themselves without involving any judge at all.

2. Asad creates a certain amount of judicial inefficiency, because there will have to be an extra action in state court to enforce the agreement. But federal judges do not handle domestic relations cases very often, they lack interest in family law, and sometimes they are not very good at applying it. Also, in many cases, the state law issues will be heard by the same state judge who approved the agreement or issued the divorce decree. There are powerful advantages to letting state judges decide state domestic relations law issues.