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

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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.

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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.

 

Carlton Smith About Carlton Smith

Carlton M. Smith worked (as an associate and partner) at Roberts & Holland LLP in Manhattan from 1983-1999. From 2003 to 2013, he was the Director of the Cardozo School of Law tax clinic. In his retirement, he volunteers with the tax clinic at Harvard, where he will be Acting Director from January to June 2019.

Comments

  1. The 8th Circuit will rule against the Ibrahim appellants–but for reasons different than the reasons the Tax Court and the DOJ articulated.

    Attorney DiPietro essentially argues that, for § 6013 purposes, Mr. Ibrahim filed no return at all. He argues that only an MFS return is a “separate return” and, thus, he concludes that Mr. Ibrahim’s filed HOH return is not a “separate return.” This argument actually wins the battle…but it loses the war.

    If Mr. Ibrahim did not file a “separate return,” then he filed no return recognized by § 6013. So far, so good. Because Mr. Ibrahim did not file a separate return, he and his wife are free to file a joint return. But now the tide turns.

    Under § 6013(b)(2)(B), no one may elect an MFJ status if the Commissioner issues a valid NOD to either spouse and if the noticed spouse timely petitions the Tax Court. Importantly, the Commissioner may issue an NOD even when a taxpayer files no return. In Ibrahim, the Commissioner issued a valid NOD and Mr. Ibrahim filed a timely Tax Court petition. And those acts signify Mr. Ibrahim’s legal demise.

    It is immaterial whether Mr. Ibrahim’s HOH return is, or is not, a “separate return” under § 6013. He cannot prevail because he, whether as a “separate return” filer or as a “separate return” non-filer, falls victim to § 6013(b)(2)(B). I predict the 8th Circuit will so hold.

    • Jason,

      The issue you raise has already been litigated, and the IRS no longer is willing to make that argument.

      The Tax Court in Phillips v. Commissioner, 86 T.C. 443 (1986), affd. in part and revd. in part 851 F.2d 1492 (D.C. Cir. 1988), held that where a taxpayer did not file a return, and the IRS did not do a substitute for return, either, a taxpayer who petitions the Tax Court in response to a notice of deficiency is not limited by the rule of section 6013(b)(2)(B) and so can elect to file a joint return for the first time in Tax Court. Some years late, the Tax Court held that in similar circumstances, but where the IRS prepared a substitute MFS return, that the substitute return was a return for purposes of section 6013(b)(1)(B), thereby precluding the taxpayer from electing MFJ status while in Tax Court — and the 10th Circuit affirmed the Tax Court’s holding and reasoning. Smallridge v. Commissioner, T.C. Memo., affd. 804 F.2d 125 (10th Cir. 1986)

      But, then, the in Milsap v. Commissioner, 91 T.C. 926 (1988), an en banc Tax Court overruled Smallridge, holding that a taxpayer in Tax Court could elect to file MFJ, despite the IRS’ having prepared an MFS substitute for return. The issue has not been litigated further because the IRS acquiesced in Milsap’s holding in 1991 AOD LEXIS 32.

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