Tax Court Extends Camara and Allows Switch in Filing Status

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This week in Knez v Commissioner, the Tax Court held that when a taxpayer files a return erroneously claiming head of household status that return did not constitute a “separate return” under section 6013(b). A few weeks ago guest poster Tom Thomas discussed Camara v Commissioner, where the Tax Court reversed itself and held that an erroneous election as single was not a separate return within the meaning of Section 6013(b)(2).

Knez thus extends Camara to an analogous situation and closes the circle on the 8th Circuit Ibrahim case from a few years ago.

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As a refresher, Section 6013(b)(2) bars a joint return for a married taxpayer who initially filed a separate return if either spouse received a notice of deficiency and files a petition with the Tax Court. The issue often has great significance for lower income taxpayers, as many benefits (such as EITC) are not available to a married taxpayer who fails to file a joint return. If the married taxpayer discovers the mistake after filing a petition, the IRS view of Section 6013(b)(2) bars the claiming of a credit that the taxpayer would have been entitled to had they filed correctly in the first instance.

While Camara involved an initial erroneous single return and Knez a HOH return, the Tax Court concluded “that this distinction makes no legal difference: Because the filing status initially selected by each married taxpayer was legally impermissible, the logic of our Opinion in Camara has equal force here.”

In so doing, it reviewed the rationale of Camara, which itself is aligned with Ibrahim (which involved a switch from HOH to single). Noting that an election suggests a choice, “[w]e reasoned in Camara that “there is no valid ‘choice’ embodied in a return on which the taxpayer has erroneously indicated a filing status that is not legally available to him or her.” Thus, Congress’ “use of the word ‘election’ strongly supports the conclusion that an erroneous single return is not a ‘separate return.’”

It also walked through the legislative history of 6013(b)(2):

[The legislative history] shows that Congress intended this provision to alleviate problems arising from married taxpayers’ inability to change a permissible election they had made concerning their filing status, an election the courts had deemed binding and irrevocable. As we concluded in Camara, this legislative history strongly suggests that the term “separate return” as used in section 6013(b) means a return filed as “married filing separately,” because that is the only filing status (other than joint filing) that is permitted for married taxpayers.”

Wrapping it up, the court concluded:

Our reasoning in Camara applies with equal force here. Petitioner did not make an “election” to file as a head of household, because that filing status was not legally available to her. See sec. 2(b)(1) (“[A]n individual shall be considered a head of household if, and only if, such individual is not married at the close of his taxable year.”). And because that filing status was legally impermissible, the statute’s legislative history indicates that petitioner’s erroneously filed original return did not constitute a “separate return.”

Conclusion

Knez makes no mention of the initial decision by the taxpayer’s filing status error to be the result of a good faith mistake as opposed to intentionally misstating filing status. (It also does not discuss why HOH was not available for Knez under the “abandoned spouse” rules of Section 7703(b), which might have meant that the status was correct in the first instance;) [Ed. UPDATE: footnote 6 does in fact mention this and notes that neither party argued that the provision applied]. As our hardworking blogging colleague Lew Taishoff notes here in his discussion of Knez, there is no reason to suspect from the opinion that the taxpayer was playing games. He warns, however, that Knez presents an opportunity for gamesmanship (for example, if a married couple’s earned income allows for a greater EITC when filing separately a compared to filing a joint return).

Mr. Taishoff suggests that perhaps Congress should fix the problem. To be sure, while taxpayers no doubt can improperly claim to be unmarried to goose a benefit, IRS has plenty of other tools in its arsenal to attack that, including imposing two and ten year bans on taxpayers who recklessly or fraudulently claim an EITC.

As Tom noted in his guest post discussing Camara, it still remains to be seen whether the Service will recommend an appeal on this issue.

Stay tuned.

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Bob Kamman says:

    Sometimes IRS lawyers can’t win for losing. Take this case, for example.

    A footnote in Judge Lauber’s opinion mentions that “Even where spouses who live apart are not ‘legally separated * * * under a decree of divorce or of separate maintenance,’ sec. 7703(a)(2), they will be considered as unmarried if certain conditions are satisfied, see sec. 7703(b). Petitioner concedes that she was married . . .during 2014. Neither party contends that section 7703(b) operated to render her ‘not married’ for Federal income tax purposes at the close of her 2014 taxable year.”

    And why would either party contend that? The petitioner has already decided that the best way out of this tax year, for both her and her husband, is to switch to a joint return. The IRS, filing its motion for summary judgment on March 17, 2017, does not have the foresight to argue that the Camara case, decided September 28, 2017, might be involved here. (The Ibrahim case would not apply because New York is not in the 8th Circuit.)

    But what if the Tax Court had instead allowed the parties to submit supplemental briefs based on the Camara decision? Or sua sponte decided that something looked awry and let the case proceed to trial as scheduled on December 4, 2017?

    There are two ways to view the original “Head of Household” return.

    Either it was not filed in error because the taxpayer did indeed qualify to file that way under the rules of Section 7703(b). Or, it was filed in error because she did not qualify.

    It’s intriguing to note that her husband filed as “Single” but also claimed EIC – we are not told whether it was for the same child or another one. (Nor are we told whether a practitioner was involved here, although similar situations seem to arise frequently with tax preparers trying to maximize refunds.)

    If it was filed in error, knowingly or not, the taxpayer wins under the rule announced for her.

    But what if it was filed because the taxpayer indeed qualified for Head of Household status? Her case is not precedent for one with those facts, because the holding relies on taxpayer error with the first return.

    But what does IRS do when that case comes along? Do they argue that the original filing status was correct? But then they lose the case, because the taxpayer qualifies for EIC. Perhaps we should say, they can’t win for winning. Or d***ed if they do and d***ed if they don’t.

    It’s interesting that the husband escaped audit. My guess is that he was “first to file” and the IRS programs to prevent EIC fraud are set up to pursue subsequent filers.

    Finally, isn’t there a loose end here to tie up? The opinion tells us, “The IRS also proposed that petitioner ‘be restricted from receiving the earned income credit for the following two years,’ stating that this two-year ban was being asserted “for the reckless or intentional disregard of the rules and regulations governing the earned income credit.” See sec. 32(k)(1)(B)(ii).”

    Does the Tax Court have jurisdiction over that action? Has it been decided? Does it apply to the 2014 joint return? Maybe we will find out in the court’s forthcoming order. Or maybe the case will have to go to trial on that issue alone.

    • Franke Paulett says:

      I would like to add a different twist to the above issue where a newly married couple ask their CPA to prepare separate returns even though joint return would produce a lower tax and therefore separate returns were prepared and the clients signed the separate e-file authorization forms (8879). The CPA also prepared a joint return to show the couple the tax would be lower than the combined separate liabilities. However, a clerk in the CPA’s office erroneously transmitted the joint return instead of the two separate returns and the IRS accepted the joint return and acknowledged on Form 9325. The CPA did not find out about this mistake until after the April 18th deadline. I advised that the CPA file the separate paper returns with the explanation that the joint return that the IRS accepted did not constitute a “tax return” since it had not been signed (Treas. Reg. 1.6013-1(a)(2)) and suggested attaching the two separate signed Forms 8879 that matched the paper returns being filed currently. I believe the above recommendation is legally and procedurally correct given what happened but it will be interesting what the IRS Service Center will do with this mess.

  2. Norman Diamond says:

    ‘See sec. 2(b)(1) (“[A]n individual shall be considered a head of household if, and only if, such individual is not married at the close of his taxable year.”). ‘

    OK I saw it, 26 USC 2(b)(1).

    Did the IRS see it? Maybe the answer doesn’t matter, since IRS publications aren’t law and a taxpayer who relies on IRS publications can be penalized for doing so. Nonetheless, here’s what the IRS says:

    “If you are a U.S. citizen married to a nonresident alien you may qualify to use the head of household tax rates. You are considered unmarried for head of household purposes if your spouse was a nonresident alien at any time during the year and you do not choose to treat your nonresident spouse as a resident alien. However, your spouse is not a qualifying person for head of household purposes. You must have another qualifying person and meet the other tests to be eligible to file as a head of household.”

    https://www.irs.gov/individuals/international-taxpayers/us-citizens-and-resident-aliens-abroad-head-of-household

    (This particular situation doesn’t involve me, and neither does section 7703; this is just an observation.)

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