Tax Court Extends Camara and Allows Switch in Filing Status

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.


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.”


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.

Tax Court Reverses Course and Allows Taxpayers to Change Filing Status

Today we are privileged to have Tom Thomas as our guest blogger. Tom and I worked together for many years at Chief Counsel’s Office though we were never working together in the same office at the same time. When I retired, he was my boss’s, boss’s boss. Put another way, he was the head lawyer for all of the Chief Counsel attorneys in the SBSE stovepipe. These are the lawyers who primarily populate the field offices of Chief Counsel, who try the bulk of the Tax Court cases and who provide the collection advice to the IRS. Tom held that position for about a decade before he retired a couple of years ago. In retirement he found the pull to work in a low income tax clinic and he is now the Assistant Director of the Kansas City Tax Clinic. That clinic and the low income taxpayers of Kansas City are extremely lucky to have Tom providing assistance.

The case Tom discusses marks an important shift at the Tax Court in its approach to taxpayers who use the wrong filing status on their original return and want to shift to a correct and usually more favorable filing status in response to a notice of deficiency. As Tom discusses, the Court reaches its decision in a fully reviewed, precedential opinion. Although the issue has existed for decades and come before the Tax Court on several occasions, it had previously only addressed the issue in non-precedential memorandum opinions. The life of this issue in Tax Court opinions provides an interesting glimpse in how and when a case becomes precedential. Unfortunately, I cannot say that the glimpse makes the process any clearer to me.

The case also provides an important glimpse at what makes the Tax Court so wonderful. Judge Thornton provides a beautifully written law review like explanation of the history of the statute involving joint returns. He does this without the benefit of a much help from the petitioners who were pro se. I recently presented a paper to the Harvard faculty on access to judicial review in tax cases. I concluded in the paper that the best answer to the problem I perceived was to insure access to the Tax Court, and I drew a question from a professor on why I preferred to insure access to an Article I court rather than an Article III court. The Camara case is my answer. The Tax Court puts a lot of effort into finding the right answer for a pro se taxpayer on an issue that typically plagues low income taxpayers. While I do not always agree with the Tax Court, I am always impressed with the efforts it takes to insure equal justice for all taxpayers appearing before it. The opinion here is worth reading for the education it provides on filing status issues but also for the care it takes to find the answer with little help from the pro se taxpayers who appeared before it. Keith

In a fully reviewed opinion, a unanimous Tax Court held that petitioner Fansu Camara’s originally filed return, erroneously claiming “single” status, did not constitute a “separate return” under section 6013(b) and, thus, petitioner is not barred from filing a subsequent joint return. Camara v. Commissioner, 149 T.C. No. 13 (September 28, 2017). 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. Because Mr. Camara did not file a separate return within the meaning of section 6013(b)(2), he and his wife were entitled to file a joint return and enjoy joint tax rates and filing status.


In holding for Mr. Camara, the Tax Court rejected its own precedent in several memorandum opinions, the most recent being Ibrahim v. Commissioner, T.C. Memo. 2014-8, rev’d and remanded, 788 F.3d 835 (8th Cir. 2015). In rejecting those memorandum opinions, Judge Thornton noted that the Tax Court has never addressed the issue in a reported or reviewed opinion. Further, Ibrahim was reversed by the Court of Appeals for the Eighth Circuit in 2015. Also, in Glaze v. United States, 641 F.2d 339 (5th Cir. Unit B Apr. 1981), aff’g 45 A.F.T.R2d (RIA) 80-740 (N.D. Ga. 1979), the Court of Appeals for the Fifth Circuit in 1981 held that a single return is not a “separate” return under section 6013(b). In light of these circuit court opinions, Judge Thornton concluded “that the importance of reaching the right result in this case outweighs the importance of following our precedent.”

This issue has been of interest to our clinics. Ibrahim was tried by a student attorney under the supervision of Professor Kathryn Sedo of the University of Minnesota Law School; the student also successful argued the case in the Eighth Circuit. Mr. Ibrahim had erroneously filed as head of household before filing a joint return with his spouse. If his HOH return was a separate return, as the IRS and the Tax Court found, he would have been precluded from claiming his earned income credit.

The Code and the regulations do not define “separate return” within the context of section 6013. The Tax Court found that the term means a return on which a married taxpayer has elected to file a married filing separate return, rather than a return on which a married taxpayer files a return with an incorrect filing status, that is, a single or head of household status. Judge Thornton reasoned that because section 6013(b)(1) refers to an “election,” an erroneous filing status impermissible under the Code cannot be an election. Further, the Tax Court’s exhaustive review of the legislative history reveals that the ability under the Code to switch from one allowable filing status to another was never intended to preclude one from correcting a return with an erroneous filing status.

Mr. Camara pursued his Tax Court case pro se. The case was submitted under Rule 122, that is, by stipulation without trial. The Tax Court ordered briefs, but Mr. Camara did not file one. It appears that the Tax Court was on the lookout for a vehicle to reconsider the issue.

Where do we go from here? Judge Thornton’s opinion in Camara is as well reasoned as it is taxpayer friendly. The next step is for IRS Chief Counsel’s office to decide whether to recommend that the Department of Justice appeal the opinion to the Sixth Circuit Court of Appeals or acquiesce in the Tax Court opinion. If the IRS acquiesces, it will issue an action on decision (AOD) and abandon its current postion. If it recommends an appeal, it will be up to the Department of Justice to decide whether to continue pursuing the issue. In either case, the Camara opinion is a big step forward for taxpayers.


Counsel for Ibrahim Explain Last Week’s Important Circuit Court Opinion on Filing Status

Today’s post is written by Professor Kathryn Sedo of the University of Minnesota Law School and Frank DiPietro. Frank is a Teaching Fellow Center for New Americans / University of Minnesota Tax Clinic and recipient of the ABA Tax Section Christine A. Brunswick Public Service Fellowship for 2015-17. In Tax Court, as a student attorney, Frank tried Ibrahim v Commissioner under Professor Sedo’s supervision, and he argued the case on appeal before the 8th Circuit. Frank and Kathryn wrote about the Tax Court case here, and Carl Smith weighed in on the oral argument here. Last week, the 8th Circuit Court of Appeals issued its decision. The post explains the decision and discusses how the issue is not yet resolved, with the ball now in the IRS and DOJ’s court. Frank and Kathryn’s efforts demonstrate the importance of legal representation and show how clinics can ensure that taxpayers without resources to afford legal representation can get a fair day in court. Kudos to Kathryn and Frank for an exceptional job. Les

The question before the 8th Circuit in Isaak Ibrahim v. Commissioner was whether the term “separate return” as used in section 6013(b) is defined as return with the filing status “married, filing separately” or a tax return with any other filing status other than “married, filing jointly.” The Tax Court, following its precedent, ruled that “separate return” is defined as any filing status other than “married, filing jointly.” Ibrahim v. Comm’r, 107 T.C.M. (2014). However, the 8th Circuit held that the term “separate return” in section 6013(b) meant “married, filing separately”. This ruling is in accord with the decision in Glaze v. United States, 641 F.2d 339, 344 (5th Cir. 1981). The 8th Circuit reversed and remanded the case back to Tax Court in a 2-1 decision.

The reason why this mattered was that section 6013(b)(2)(B) prevents a taxpayer from changing the election to file a “separate return” to a joint return once the taxpayer has received notice of deficiency and filed a petition in Tax Court. Mr. Ibrahim, who was unrepresented at the time, filed as head of household (an erroneous filing status), was audited, received a notice of deficiency and filed in Tax Court. Mr. Ibrahim found himself in Appeals as a docketed case and it was then he came to the University of Minnesota Tax Clinic for assistance. If Mr. Ibrahim filed as “married, filing separately” as the IRS and (ultimately) the Tax Court insisted, he would lose the ability to claim the earned income credit for his children. Thus, after losing in Tax Court, the U of MN clinic appealed the case to the 8th Circuit.


The Ibrahim opinion states that because the term “separate return” when viewed alone is ambiguous, the Court must consider the Code as a whole and the legislative history of section 6013 to determine its meaning. In reviewing where “separate return” appears throughout the code, the Court focused on section 7703 and how it interplays with other sections of the Code including sections 1, 2, 36 and 6654. This was not surprising as during oral argument, Judge Benton (who wrote the opinion for the court) asked numerous questions to both parties concerning section 7703’s use of the term and how it related to section 6013.   Section 7703 provides for a determination of a person’s marital status and the Court stated that section 7703(b) “creates a special rule: an abandoned spouse ‘who is married,’ ‘files a separate return,’ and supports a child is considered not married.” Following this logic, the Court reasoned that “separate return” in section 7703(b) “refers to a married-filing separately return made by a taxpayer who is considered married. Conversely, head-of-household taxpayers, considered “not married,” may not make joint or separate returns.” Furthermore, the court reviewed and found in the Internal Revenue Manual as well as 28 other Code sections that the term “separate return” is defined as a taxpayer who has filed a tax return with the filing status of “married, filing separately” return.

The Court also looked at the legislative history of section 6013 as found in the Congressional Reports concerning its enactment in 1951, the Glaze court’s view of why the statute was created, and the usage of the term “separate return” by the IRS in its publications prior to its enactment as well as immediately after. The Tax Clinic strongly argued in its briefs this line of review and felt it comprised some of its strongest arguments. The 8th Circuit determined that section 6013 was created to help taxpayers avoid adverse financial consequences due to the complexity of the Code by preserving the “election” of a married taxpayer to choose the filing “married, filing jointly” after the filing of their original return with the status of “married, filing separate”. Prior to the enactment of section 6013, a taxpayer could not change their election. Consequently, the Court found that the legislative history supported the claim that “separate return” could only apply to those taxpayers who had originally filed “married, filing separately.” Furthermore, the Court referenced IRS instructions on preparing individual tax returns “in 1952 showing that ’separate return’ did not apply to those filing as “head of household.”

In one of the best parts of the opinion, the Court found that the Commissioner was incorrect when he claimed that the “head of household” status did not exist when section 6013(b)(2)(B) was enacted. In fact, the “head of household” status was first enacted at the same time that section 6013(b) was enacted.

Based on its review of the legislative history and the term’s usage in the Code as a whole, the Court held that the “separate return” as used in section 6013(b) only applies to taxpayers who have filed a tax return with the filing status of “married, filing separately.” Because Mr. Ibrahim filed his 2012 income tax return with the filing status of Head of Household, the limitations of section 6013(b)(2)(B) do not apply and he may amend his return with his correct filing status and receive the Earned Income Tax Credit.

Surprisingly, there was a strong dissenting opinion by Judge Bye in this case. Judge Bye argued that Congress created with sections 6013 and 6511 a two-step process to request a refund; “-step one is to amend to a joint return under § 6013(b)(1) and step two is then to use that joint return as the operative return to seek a credit or refund under section 6511.” Based on this logic, if section 6013(b)(1) does not apply to Head of Household taxpayers, then Ibrahim does not have the right to amend his return in compliance with section 6511. The dissenting opinion goes further in arguing that if “separate return” only applies to those with the filing status of “married, filing separately,” then the purpose of section 6013 as explained by the Glaze court is frustrated because it prevents taxpayers with the filings status “single” and “head of household” amending their returns to the filing status of “married, filing jointly.” The majority references this logic in its opinion and discounts it.

Granted, section 6013 expressly provides the married taxpayer a right to go from “married, filing separately” to “married, filing jointly.” However, the majority states that section 6013 is not required for a taxpayer to amend his returns because “section 6511(and IRS regulations) satisfy this ‘first step’ by allowing taxpayers to correct their filing status through Form 1040X.” The tax clinic agrees, but also contends that while the dissenting opinion states the reasoning for the creation of section 6013, it does not illustrate its purpose. Section 6013 was created because prior to 1951 a taxpayer with the filing status of “married, filing separately” could not amend his/her return to the filing status of “married, filing jointly.” The enactment of section 6013 allowed them to do so. As a taxpayer with the “single” or “head of household” filing status is considered non-married by the IRS, they were never prevented from amending their tax returns. Thus, there is no problem for Section 6013 to solve and it benefits and/or limitations should not apply.

The Department of Justice and the Internal Revenue Service currently have five options after this opinion. First, the IRS Office of Chief Counsel could concede the issue in the 8th circuit as it is has done in 5th and 11th circuits while maintaining its position elsewhere. Second, the IRS could concede the issue nationally so that the application of section 6013 is consistent throughout the country. Third, the Department of Justice could request an en banc review before the entire 8th Circuit which we feel is unlikely to be granted due to the persuasiveness of Judge Benton’s opinion. Fourth, the Department of Justice could request certiorari before the US Supreme Court. However, this request will most likely also not be granted as the only Federal Circuit Courts of Appeals that have ruled on this issue are in agreement despite the contrary opinions of the Tax Court. Lastly, the IRS could follow the recommendations of National Taxpayer Advocate, Nina Olson, who in her most recent annual report to Congress recommended that section 6013(b)(2)(B) be amended, and propose legislation to that effect.

We think it is unlikely that this issue has been put to rest and urge clinics in other circuits to raise the issue in appropriate cases. The Office of Chief Counsel stated in 2006 (25 years after Glaze was decided) that “We continue to disagree with the rationale and holding of Glaze, which holding is inconsistent with Tax Court cases” and “Chief Counsel attorneys with cases appealable to other circuits should look for appropriate cases to litigate that challenge Glaze.see I.R.S. Chief Counsel Notice CC-2006-010. Regardless, we are extremely happy with the result in this case and look forward to an impoverished immigrant receiving thousands of dollars in income tax refunds.


Summary Opinions for the week ending 3/27/15

How could I not start with John Oliver and Michael Bolton singing about the IRS.  This link is not really great for work, and to say it is sophomoric may overstate the sophistication and maturity.  Sexy singing is at the end of a fairly long clip, which is all pretty funny (on the IRS, “it combines two things we hate, people taking our money and math”).  This is probably the funniest Michael Bolton clip from the month, which is really impressive since it is about the IRS and he recently recreated the Office Space scenes with the character sharing his name – if you liked that movie, you should find the clip.  Equally as entertaining and enlightening were our guest posters during the week ending March 27, 2015.  Peter Hardy and Carolyn Kendall of Post & Schell did a two part post (found here and here) regarding the definition of willfulness in civil offshore enforcement cases.  First time guest poster, Bob Nadler, posted on the recent Sanchez case dealing with an interesting innocent spouse issue that hinged on whether a joint return was actually filed.  Thank you again for the great content.

I also need to thank our guest posters from the last week and a half.  Carlton Smith provided two of the three posts on the Godfrey case, the last of which can be found here and links to the first two.  Godfrey is an interesting case raising a couple issues regarding appropriate notice with collection actions.  We were also pleased to have Prof. Bryan Camp with a three part post on Eight Tax Myths, the last of which can be found here and links the first two.  Both sets of posts were very well received, and both generated a fair amount of discussion.  I would encourage everyone who has not read both sets to do so, and, for those who have, you might consider going back and reading the comments and responses.

To the other procedure: 

  • In a FOIA dump, the Service has released PMTA 2014-015, which discusses the erroneous refund penalty under Section 6676.  The following points are discussed in the memo:

1. Does the Section 6676 penalty apply to refund claims made on Form 1040 and Form 1040X and does it matter whether the Service has paid the claim?

2. Does the nature of the item to which the excessive amount is attributable have any bearing on the penalty?

3. Is the Section 6676 penalty subject to deficiency procedures?

4. Are there any specific taxpayer notifications required for the penalty to apply?

5. Does the ‘reasonable basis’ exception to the Section 6676 penalty have the same general meaning as the reasonable basis exception to negligence found in Reg. 1.6662-3(b)(3)?

 I’m not sure there are any earth-shattering realizations to be found in the IRS response, but some points seem worth noting.  As to the first point, the Service stated the penalty can be imposed even when the IRS does not actually refund the amount requested.  For the second point, the Service discussed the various situations where other penalties would apply (reportable transactions, EIC, etc.).  As to the third question, the Service stated the general rule that the penalty is not subject to the deficiency procedures, but stated that for some refundable credit cases the penalty will have to be assessed pursuant to the procedures.  No court has apparently addressed either point.  The last thing that jumped out at me was that the Service stated the reasonable basis exception under Section 6676 has the same meaning as under the accuracy related penalty provisions found in Section 6662, which is not news, but good reinforcement of the prior position.

  • Harper Int’l Corp v. US is a case we (I) missed in January (see page 13 of this PDF for a more robust recitation of facts and holding).  In the case, the IRS denied a refund request.  On May 2, 2012 the IRS issued a Notice of Disallowance, which stated the taxpayer had two years to challenge the determination.  About a month later, another notice was received by the taxpayer, stating the claim was rejected and another formal Notice of Disallowance would be issued – but it never was.  Taxpayer petitioned the Court of Federal Claims in June of 2014, more than two years after the first letter, but less than two years after the second letter.  The Court of Federal Claims held that although equitable provisions might apply, it was not reasonable for the taxpayer to rely on the second notice (and they failed to comply even if using the date of the second notice because timely mailing was not timely filing for CFC).
  • Another sham(wow) partnership case in CNT Invest., LLC v. Comm’r, where the Tax Court has held that gain recognized in a collapsed step of a multi-step transaction was gross income for determining the extended statute of limitations under Section 6501(3)(1)(A).  Case also confirmed limitations period was the longer of the period found under Section 6229 or Section 6501.
  • Businessweek thinks the IRS sucks.  The reasons are largely outlined by the John Oliver video above.  I’m sure this has generated a lot of scoffs, but I honestly do try to keep this in mind as I sit on hold for 90 minutes.  Maybe it helps me from being a complete jerk to the person who eventually picks up.  Solid chance that person’s day is worse than mine. How much longer before this all implodes? Is that the goal?  Might work.
  • Kardash v. Commissioner was decided by the Tax Court on the 18th, and has a good discussion of transferee liability but a difficult result for taxpayer minority shareholders in a company where the Service found transferee liability for tax due that was the result of theft by the majority shareholders.  This is going to get a little longwinded, sorry.  In Kardash, a concrete company was largely owned by two shareholders, who controlled all aspects of the business.  Two other minor shareholders oversaw sales and operations; neither had any control over the overall management or finances of the company.  During the early 2000s, the company was very successful and the minority shareholders received huge additional compensation.  Unfortunately, during this time, the majority shareholders were plundering the coffers and not paying any taxes ( one of whom is in the clink and the other is no longer with us).  Here is some more background on that sad story.  The finances of this company were apparently open for the taking, as two other employees were jailed for stealing over $5.5MM from it before the IRS got involved.  On audit, for 2003 to 2007, the Service assessed over $120MM in tax, penalties and interest.  The company was insolvent at that point, payment was not possible, and the company and the Service entered into an installment agreement to pay $70,000 a year until the end of time.  The Service reached agreements with the two majority shareholders, but substantial amounts of tax were still outstanding.  The Service then attempted to recoup a portion of the remaining amount from the minority shareholders pursuant to Section 6901(a).  For Kardash, the amount was around $4MM.  There were a host of questions before the Court regarding the IRS’s collection actions against the company and majority shareholders cutting off liability, but what I found interesting was the issue about whether, under state law, the minority shareholders were responsible for the tax due to fraudulent transfers to them by the majority shareholders.

For the fraud, the Court looked to Florida law to determine the extent of the potential transferee liability.  As an initial point, the Court did not aggregate the transfers with those of the majority shareholders (contrary to the Service argument), and instead looked at each payment to the minority shareholders to determine constructive or actual fraud of each payment.  The FL statute provides that if the company did not receive “reasonably equivalent value” for the payments, they may be fraud if: “(1) the debtor was engaged…in a business…for which the remaining assets of the debtor were unreasonably small…;(2) the debtor intended to incur…debts beyond his ability to pay as they became due; and (3) the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer.”  Kardash argued his work for the company was reasonably equivalent value, and the Court agreed for certain “loans” in 2003 and 2004, which were really advanced on compensation.  For 2005 through 2007, the funds were provided to Kardash in the form of a dividend from the Company.  The Court noted the conflict in cases regarding the treatment of dividends as “reasonably equivalent value” as compensation for work done.  The Court seems to indicate the general position is that dividends are not compensation for services rendered and therefore not an exchange for value.  In the limited cases holding the opposite, the dividend has been directly tied to work provided.  See In re Northlake Foods, Inc., 715 F3d 1251 (11th Cir.) (holding dividend made as tax distribution to pay tax due on s-corp shares); In re TC Liquidations, LLC 463 BR 257 (ED NY 2011) (dividend made to shareholder to repay loans taken out to expand business).  Although I have not read these cases, this seems like a point that could be open to other interpretation in this case.  The dividends here effectively replaced a prior bonus program.  The program was stopped and the company made the loan/advances to the minority shareholders because the company knew the minority shareholders needed that level of compensation.  This was a temporary solution until the dividends were to start.  Since at least a portion was compensation provided in a different form, a finding that it was received in exchange for equivalent value would not seem unreasonable in this case.  The Court did address this by stating the company did not benefit from the dividends as clearly as in the above two cases, but I am not sure I agree.  Had the dividends not be issued to take the place of the prior bonus program and advances, the minority shareholders may have left.  During the period in question, the company was very successful, arguably because of the minority shareholders.  The second reason is that the company and shareholders treated it as dividend income and not compensation.  Although a factor worth consider, I am not sure it has to be dispositive.

The issue of insolvency was reviewed next, with a few pages devoted to the debts and income stream.  The Court relied on the IRS’s expert’s opinion that since there were no tax returns, no buyer would ever pay more than the gross value for the land and tangibles, and the company had no intangibles.  Based on that, the company was insolvent most of, if not the entire time.  Interestingly, the opinion includes the gross revenue, but I don’t think it includes the asset values.  Ignoring the various other ways to value a company, I think this is also open to other interpretation.  I am not sure the conclusion that no one would be willing to buy the company is correct—obviously that would be a substantial risk, but business people often take risk if the reward appears sufficient.  I am also not sure the value of the intangibles was $0, since the revenue for the years in question was north of $100MM, which was substantially more than the hard assets.  Clearly, the company, as a going concern, had some value that exceeded hard assets.  The company may have still been insolvent, I just wasn’t sold on those particular points.  An interesting case, and what seems to be a tough result for some transferees who were screwed by their employer.

  • The Service has issued internal guidance indicating that it will no longer allow taxpayers to enter into installment agreements for post-petition liabilities when the taxpayer has filed for Chapter 13 bankruptcy.  The guidance indicates that this was previously allowed in some jurisdictions, but that the Service believes this potentially violates the BR stay.
  • 2014 data book has been issued by the Service in electronic form, and can be found here.  Lots of interesting stuff.  Looks like 40% of penalties were abated in terms of amount.  Less business returns, but more individual in 2014 than 2013.
  • Barry and Michelle paid an effective tax rate of 18.8% (maybe slightly higher –I’m finding some conflicting reports and too lazy to do the math) for federal income tax purposes.  I think that is a little higher than mine…although we made slightly different amounts.

The Eight Circuit Gives Both Sides a Hard Time on What is a “Separate Return” for Section 6013(b) Purposes

We welcome back Carl Smith who listened to the 8th Circuit argument in an important case concerning the ability to change filing status.  First, the post highlights the ability to listen to many oral arguments in Federal Circuit Court cases.  If you have an interest in a particular case, this feature adopted by the Circuit courts over the past several years allows the person with an interest in the case to hear the argument as it progresses giving much greater insight about the argument than available from merely reading a transcript and portability to the time and place for listening.  Second, this issue received attention in the NTA annual report and continues to create problems for taxpayers who may not receive the best advice at the time of filing their returns but who realize the best path to take on their return at a later point in the process after the IRS has raised questions about the original return.  As always, we appreciate the insights that Carl brings to the issue.  Keith

Section 6013(b)(1) allows a married person who has filed a “separate return” to change his or her mind and later file a married filing jointly (MFJ) return with his or her spouse for the same taxable year.  Section 6013(b)(2) provides certain time limits for doing this.  Section 6013(b)(2)(A) says that the switch to an MFJ return can be made any time before 3 years after the return’s original due date — without regard to extensions.  Another limit is at subparagraph (B), which prohibits a change after both a notice of deficiency has been issued on the taxable year and a spouse has filed a Tax Court petition.  Kathryn Sedo, the Director of the U. Minnesota Tax Clinic, and one of her student attorneys, Frank DiPietro, did a post a year ago on the interesting case of Ibrahim v. Commissioner, T.C. Memo. 2014-8, where the clinic is representing the taxpayers.  The case presents the issue of whether the limit under (B) applies where a taxpayer erroneously filed as head of household (HOH), but later realized that he should have filed as a married person, and so, after filing in the Tax Court in response to a notice of deficiency, wanted to then file an MFJ return (on which he would get an earned income tax credit), rather than have his tax computed as married filing separately (MFS) (under which no such credit may be claimed).  Does the limit on changing from a “separate return” to an MFJ return after filing a Tax Court petition only apply where a taxpayer initially filed an MFS return (as the taxpayer argues), or does it also apply where a taxpayer initially filed a “single” or HOH return (as the government argues)?  In Ibrahim, the Tax Court held that the limit of (B) prohibiting a change to MFJ applied where a taxpayer erroneously filed an HOH return, though he was really married during the taxable year (and was not treated as unmarried under the rules of section 7703(b)).  By contrast, the Fifth Circuit in Glaze v. U.S., 641 F.2d 339 (5th Cir. 1981), held (in the context of a person who first erroneously filed a “single” return, though he was in a common law marriage) that “separate return” in section 6013(b) applies only to MFS returns.

Relying, in part, on Glaze (the only Circuit court opinion touching on this issue), the taxpayers in Ibrahim filed an appeal in the Eighth Circuit. Oral argument was held in the case on February 11 and can be found on the Eighth Circuit’s website.  Having listened to the oral argument done by Mr. DiPietro for the taxpayers and by the DOJ specialist in marital cases, Teresa McLaughlin, I am totally mystified how the Eight Circuit will rule.  The Eight Circuit could end up affirming the Tax Court and disagreeing with Glaze, in which case Ibrahim may appeal to the Supreme Court to resolve the Circuit split.


Why am I so mystified by the panel?  Well, it gave both sides a very hard time.

One judge noted that the words “separate return” appear 44 times in the Code (according to his law clerks), though it is nowhere defined in the Code.  He was worried about making interpretations of “separate return” in this section of the Code that might bollix up some of the 43 other sections that reference “separate return”. In particular, he pressed Mr. DiPietro on what everyone conceded was the most relevant other provision to consider in connection with section 6013(b) — section 7703(b).  The latter section states that a married taxpayer “shall not be considered as married” if the taxpayer (1) files a “separate return”, (2) has a dependent child in the household, and (3) provides over half of the cost of maintaining the household, and where for the last 6 months of the year, the spouse is not a member of the household.  Thus, section 7703(b), which is also referenced in section 2 on filing status, effectively provides (combined with the rules of section 2) that such a person should file HOH if filing a “separate return”.  The judge asked if “separate return” in section 7703(b) allows HOH filing, doesn’t that mean “separate return” in section 6013(b) could also include an HOH return, not just an MFS return?  Mr. DiPietro, in my opinion, did not have a good answer to this question, though he did point out that the HOH return in Ibrahim was not a proper HOH return because the taxpayer did not qualify to be treated as “not married” under sections 2 and 7703(b).  Later, in her argument, Ms. McLaughlin pointed out that section 7703(b) is optional, and that, instead of the taxpayer filing HOH, the couple that has not been living together for the last 6 months of the year could properly elect to file as MFJ, since, in that case, the taxpayer would not qualify for section 7703(b) treatment because of not meeting one requirement — that of filing a “separate return”.  So, she argued, section 6013(b)(1) should allow a change from such a valid HOH return to a later MFJ return.  Implicit in her argument was that any HOH return (valid or not) could be encompassed in the term “separate return” in section 6013(b)(1).

But, then one judge noted to Mr. DiPietro that section 7703(b) was enacted long after the predecessor of section 6013(b) (which was adopted in 1951 in the same act that created HOH filing status).  Should a later Congress’ view of what a “separate return” is for purposes of section 7703(b) govern an earlier Congress’ view of what a “separate return” is in section 6013(b)?  What should be the effect, one judge wondered, of the reenactment of section 6013(b) when the 1954 Codes and 1986 Codes were adopted?  Does that change past intention?

But the panel also turned the tables on Ms. McLaughlin, with one judge asking her whether she isn’t asking the panel to read the word “separate” out of “separate return” in section 6013(b).  In effect, the judge noted, she is arguing that any return filed by a person is governed by the time limits in section 6013(b) on changing to an MFJ return, since the only choices for returns other than MFJ are “single”, HOH, and MFS.  Didn’t her argument make the word “separate” superfluous?  Well, she said, it might be a little superfluous, but it was clarifying language inserted by Congress.

This will be a fun opinion to read, I’m sure.


Summary Opinions 03/21/2014

To start off SumOp this week, we have a PSA from Portlandia about tax attorneys and the dangers of playing bass guitar (hat tip to Les’ daughter, Sophie).   My favorite part may be the talented Annie Clark from the band St. Vincent’s explaining the danger of playing bass, and how that likely caused Lauryn Hill to be jailed.  My wife has been trying to remove my musical instruments from the house for years.  Before jumping into other new content, I have to add a special thanks to Susan Morse for her very well received guest post on the need for the Service to add storytelling and narrative to its tool kit. Very much worth a read if you have not yet checked it out.

The procedure this week includes some interesting cases, including third party liability for taxes, lots of info on Bitcoins, and appraisers behaving badly (drugs, guns, prostitutes…you all know what appraisers are like).  To the roundup:

  • Being an executor is a pain in the a$$ in general, but it gets worse when you personally have to pay the dead guy’s taxes.  In United States v. Shriner, the federal District Court for Maryland held that the Shriners (Robert and Scott, not the Ancient Arabic Order of the Nobles of the Mystic Shrine) who were named administrators of the Estate of Carol Shriner were responsible for the income tax debts of the estate because they paid other unsecured debts before satisfying the tax debts.  Section 6901(a)(1)(B) and 31 USC § 3713(b) both provide that a fiduciary paying any part of a debt of an estate before paying a claim of the government is responsible for the unpaid claim.  Chapter 16.09 of Saltzman and Book covers this in great detail.  One of the conditions is that the fiduciary must have known or had reason to know of the government’s tax.  The Shriners claimed they may not have known about the taxes, but the Court imputed the knowledge of their attorney who had received multiple IRS notices regarding the taxes.  The Shriners also claimed they had erroneous advice as to the extent of the liability, and therefore could not be found responsible, but the Court was not persuaded since they knew some tax amount was outstanding and still transferred funds.
  • The Jack Townsend had various great posts over the last week, but I found his commentary on his Federal Tax Crimes Blog for the Humboldt Shelby Holding Corp. v. Commissioner case really informative.  The case involved a BS tax shelter, where the defendant was also a witness in another criminal prosecution (and perhaps being investigated himself).  The taxpayer requested his tax case be stayed until after the conclusion of the criminal matter, and the Tax Court found that did not serve the interest of justice.  Mr. Townsend’s thoughts are found towards the bottom of this post.
  • Appraisers behaving badly.  In an announcement on March 19th, OPR has disclosed its settlement agreements that bared some appraisers for overly aggressive façade easements.
  • F. Lee Bailey is making tax news.  Gone are the days defending The Fugitive, Patty Hearst, the Boston Strangler, and the Juice.  The First Circuit held that Mr. Baily was collaterally estopped from claiming funds he received from a trust were a loan that he intended to repay because multiple prior federal holdings had found that he inappropriately used the trust assets (sorry, I couldn’t find the case for free on line yet).
  • Make your 2010 refund claims if you haven’t already.  The Service is claiming that it has a ton of taxpayer cash it wants to give back.
  • Chief Counsel has issued guidance, indicating the Service’s position that taxpayers cannot file amended returns after the filing due date if the amended return switches the filing status from joint to head of household. See CCA 201411017.  The taxpayer attempted to do this within the three year statute, but the Service stated the election is irrevocable once made, relying on Reg. 1.6013-1(a)(1) and Ladden v. Comm’r, 38 TC 530.  This is somewhat similar to the Ibrahim case, which Professor Sedo and Frank DiPietro blogged for us earlier this year.  In Ibrahim, the taxpayer was trying to switch from head of household to married filing jointly after a petition was before the Tax Court.
  • Nina Olson presented at Temple University on March 20, where she discussed her 2013 report, including the hope for a new taxpayer bill of rights to increase trust and strengthen its ability.  TaxProfBlog has additional coverage, and we posted a link to an upcoming conference this Thursday where NTA Olson and others will discuss the prospects of a new taxpayer bill of rights.
  • Lots of coverage about the IRS phone scam.  See Politico and TIGTA’s notice.  I had a client who was contacted by one of these spammers late last year, which I blogged about here.
  • So apparently, the internet has an old couch somewhere in cyberspace, where people lose Legos, candy, and hundreds of thousands of dollars in Bitcoins in an “old wallet”.  I am not really following this story beyond the headlines, but it would be interesting to see how the company treats the loss of the remaining missing virtual currency.  Simply misplacing something does not result in a deduction.  More importantly, the Service has indicated Bitcoins and other virtual currency will not be treated as currency, and instead will be treated as property for tax purposes.
  • Sort of similar to that point, at the Villanova Law  2014 Jeffrey S. Moorad Sports Law Journal Annual Symposium, ex-Villanova running back, Brian Westbrook mentioned the Eagles giving him his signing/roster bonus twice.  The Eagles figured this out the following year, and requested repayment.  Probably added slightly to Mr. Westbrook’s accounting and legal fees that year, and is somewhat connected to Les’ post last week on former Qwest CEO having to give back millions in stock gains and how one gets a deduction when one gets something that has to be returned.
  • IRS tips on how to choose a tax preparer. I did a chamber of commerce panel discussion a few weeks ago, and this was a big portion of the topic.  I was surprised at how many people were nervous about signing returns because of a lack of faith in their accountant and a feeling of not fully understanding the returns they were signing.

Ibrahim v Comm’r: A Procedural Trap for Unrepresented Taxpayers

[Today’s post is written by Professor Kathryn Sedo of the University of Minnesota Law School and Frank DiPietro, a third-year student attorney at the University Of Minnesota Tax Clinic. Frank litigated the case of Ibrahim v Commissioner under Professor Sedo’s supervision. The case highlights the pitfalls of unrepresented taxpayers facing IRS compliance action and in particular raises another aspect of the complexities facing taxpayers claiming the EITC. The procedural issue in the case is whether a taxpayer can change filing status to MFJ from HOH after filing a petition to Tax Court. That alone caught our attention.  The way the IRS and Tax Court are interpreting Section 6013(b)(2)(B) puts lots of pressure on taxpayers to know the procedural traps of filing a petition before fixing marital status on tax returns.  The case also raises issues about when IRS should or can refer people to tax clinics. Keith will have more to say on that in tomorrow’s post.]

On January 13, the Tax Court decided the case of Ibrahim v. Comm’r, T.C. Memo 2014-8.  The primary issue in this case was whether a taxpayer may amend his personal income tax return to change his filing status from “Head of Household” to “Married Filing Jointly” after he has received a notice of deficiency from the IRS and filed a petition in Tax Court.  The issue is complicated because the language of the applicable statute is ambiguous and there is a split between the only appellate court (the 5th circuit) that has ruled on directly on this issue and Tax Court decisions.  The result of the Tax Court’s decision in this case is to deny Mr. Ibrahim married filing jointly filing status and bar him from claiming the Earned Income Tax Credit (EITC).  He was required to file as married filing separate and allowed the claimed dependents and child tax credits.  However, instead of receiving a large refund, this decision creates a tax liability for Mr. Ibrahim.


The petitioner in this matter was Isaak Abdi Ibrahim, an immigrant from Somalia with almost no proficiency of the English language.  Mr. Ibrahim retained a tax preparer to prepare and file his 2011 tax return.  The tax preparer (who not surprisingly cannot now be found) filed returns with incorrect filing status for both Mr. Ibrahim and his wife, despite being advised by them of their marital status and living situation.   Mr. Ibrahim and his wife completely relied on the expertise and knowledge of their tax preparer when preparing their income tax returns as they cannot read English.

Mr. Ibrahim’s filing status, claimed exemptions and credits were contested by the IRS, and his Earned Income Credit frozen.  Ultimately a Notice of Deficiency was issued on October 1st, 2012 challenging his filing status, disallowing his two dependents and the child tax and earned income credits for those dependents.  Mr. Ibrahim filed a tax court petition pro se on November 16th, 2012.  Subsequently, Mr. Ibrahim was contacted by the St. Paul Appeals office of the IRS and was notified, based on the evidence provided by Mr. Ibrahim, that his filing status was incorrect but he could claim his two dependents.  The St. Paul Appeals office also referred Mr. Ibrahim to the University of Minnesota Tax Clinic for representation.

Upon review of the circumstances and consultation with our client, we determined the primary issue in that matter was whether section 6013(b)(2)(B) applies and would it prevent our client from amending his personal income tax return.  Section 6013(b)(2)(B) prevents a taxpayer from electing to file a joint return after filing a separate return once  “there has been mailed to either spouse, with respect to such taxable year, a notice of deficiency under section 6212, if the spouse, as to such notice, files a petition with the Tax Court within the time prescribed in section 6213.”  The question becomes whether filing a return with the status of “Head of Household” is considered filing a “separate return” under section 6013(b)(2)(B).

The IRS and Tax Court properly conceded that if this case was in the 5th or 11th circuits, the decision would be in our clients favor allowing him to amend his return.  The 5th Circuit ruled in Glaze v. United States, 641 F.2d 339 (5th Cir. 1981) that a “separate return” refers to only the filing status of “Married, filing separately” and not to any other election such as “Head of Household”.  Therefore, following the logic in Glaze, our client should be allowed to amend his return as he did not file a “separate return” under section 6013(b)(2)(B).  The 11th Circuit adopted all prior decisions of the Court of Appeals for the 5th Circuit in Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981).

However, only the 5th Circuit has ruled directly on this issue.  The Tax Court in numerous T.C. Memo decisions has ruled against petitioners with similar filing status situations.  (See e.g., Currie v. Comm’r, T.C. Memo. 1986-71; Blumenthal v. Comm’r, T.C. Memo. 1983-737; Saniewski v. Comm’r, T.C. Memo. 1979-337; Phillips v. Comm’r, 86 T.C. 433, 439 (1986))  In addition, the IRS stated in its Action on Decision in relation to Glaze that it would decline to follow it circuits beyond the 5th (AOD 1981-140 (IRS AOD), 1981 WL 176193).

The Tax Court found for the respondent in this matter holding prior Tax Court precedent that “section 6013(b)(2)(B) bars a taxpayer who has filed a return with single or head of household filing status for a tax year and in response to a notice of deficiency for that year filed a petition with this Court from changing his filing status to married filing jointly.”  (Ibrahim at 7) In addition, the court supported its position with the rationale that “Congress enacted the predecessor statute to section 6013(b) in 1951 but did not establish a separate rate structure for married taxpayers filing separately until 1969.” The Tax Reform Act of 1969 created the separate rate structure between “single” and “married, filing separately”.  However, this separate rate structure was created to help avoid the marriage penalty.  We do not feel the addition of the “married, filing separately” tax rate relates in any way to section 6013(b).

We find this decision troubling for numerous reasons.  The IRS concedes a proper filing status if section 6013(b)(2)(B) did not apply for our client is “Married Filing Jointly”.   This filing status would allow him to claim the Earned Income Tax Credit.  Taxpayers who filed with the status of Married filing Separate cannot claim the Earned Income Credit.  However, because our client did not amend his tax return, even after a notice of deficiency was issued but prior to him filing in tax court, he is barred from this credit.  Thus unrepresented and limited English proficient taxpayers who are not aware of section 6013(b)(2)(B) fall into the trap of filing a Tax Court petition instead of amending their returns.  The Tax Court and IRS reading of section 6013(b)(2)(B) works a substantial hardship on this group of taxpayers.

We believe there has been a significant increase in the appearance of this issue after discussion with several of our colleagues.  Low-income taxpayers, especially those that cannot understand English, cannot hope to understand a complex statutory scheme such as the one at issue in this case.  These taxpayers rely on paid preparers who may not understand or choose to properly file their clients’ tax returns.  In this particular case, an unrepresented taxpayer relied on his tax preparer and upon receipt of the notice of deficiency filed a tax petition believing he was following proper procedure.  In trying to follow proper IRS and Tax Court procedures, he prevented himself from obtaining those very refunds he was trying to protect.

We will be speaking with our client in the near future to determine our next course of action.  This may include an appeal to the 8th circuit.  As the 8th circuit has not directly ruled on this issue, we hope to obtain a more favorable result if we appeal.