A few months ago I wrote about a case I argued in the United States Court of Appeals for the Third Circuit. The case concerned whether an IRS regulation requiring taxpayers requesting equitable innocent spouse relief to request the relief within two years was valid. The effect of the regulation is that any request made after two years would be rejected, regardless of how inequitable it would be to deny the request, which I argued was contrary to Congress' intent when the law was passed in 1998.
On January 17, 2011, the Third Circuit released its Opinion which leaves the issue ultimately still undecided. In the appeal, I argued that the IRS's regulation was invalid because Congress intended the section to not have a statute of limitations, but if the regulation was valid, it was subject to "equitable tolling," which means that the statute of limitations would not bar a taxpayer from requesting relief if the taxpayer was prevented from discovering the liability or requesting relief within two years. The court held that the regulation was valid, with Judge Ambro dissenting, and the court sent the case back to the Tax Court to determine if equitable tolling applied to the regulation, and if so, whether the taxpayer was entitled to tolling in the case. I believe the court saw equitable tolling as the preferable result for two reasons. First, it has a similar effect to finding the regulation invalid. It allows taxpayers that file for relief beyond two years to still receive innocent spouse relief if they can show a good reason for doing so. Second, it allowed the Third Circuit to reach this result without disagreeing with the Seventh Circuit, which found the regulation to be valid about six months before our appeal.
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