Small Business Taxes & ManagementTM--Copyright 2015, A/N Group, Inc.
When they say the tax code is complicated, they're not kidding. Some of the simpliest concepts can be convoluted. This is an excellent example. Even the Tax Court may not have gotten it right here. Adding complexity to the law, some Courts of Appeals may take a different view of the same issue and the Tax Court is bound by the decisions to which a case is appealable.
In a Tax Court case (Issak Abdi Ibrahim, T.C. Memo. 2014-8) the taxpayer could not speak, read, or write English. His return was prepared by a tax service who filed his return as head of household and claimed two of his four children as dependents. Trouble was his wife filed her return as single. If you're legally married you can only file one of two ways--married or married, filing separately. The IRS determined that the taxpayer's correct filing status for 2011 was married filing separately rather than head of household.
The law (Sec. 6013(b)(1) allows you to change your filing status from married, filing separate to married on an amended return. But Sec. 6013(b)(2) contains four limitations on filing an amended return. The Section specifically bars taxpayers from electing to file a joint return after filing a separate return "after 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 Sec. 6213". And that's exactly what the taxpayer did.
He argued that he was allowed to change his filing status because he has not filed a "separate return" as that term is defined in Sec. 6013(b). The taxpayer cited decisions in the Courts of Appeals for the Fifth and Eleventh Circuits. The Court of Appeals for the Fifth Circuit held that "separate return" as used in Sec. 6013(b) refers only to married filing separately status and not to any other filing status, including, as in this case, head of household. The taxpayer supported his argument citing decisions in the Courts of Appeals for the Fifth and Eleventh Circuits. In Glaze the Fifth Circuit held that "separate return" as used in Section 6013(b) refers only to married, filing separately status.
The Tax Court noted that it is bound by the precedent of the Court of Appeals to which an appeal from the case would lie. Consequently, the Tax Court would have to follow the decisions of the Court of Appeals for the Eighth Circuit which are squarely on point in deciding this case. The Tax Court also noted it believed the holding in Glaze (that separate means only married filing separate) was too narrow and noted that the Office of Chief Counsel and the IRS have announced they will not fillow Glaze. The Tax Court held here that the taxpayer could not change his filing status.
The taxpayer appealed to the U.S Court of Appeals, Eighth Circuit. The Court noted that Sec. 6013(b)(1) does not define "separate return" although it uses the term four times. "Separate return" appears numerous times throughout the Code. The Code first uses "separate return" in the subheading of Sec. 1(d), the first section of the Code, "separate returns" means "married filing separately." The Court also noted that throughout the Code, a "separate return" is an option only for "married individuals," "spouses," or "husband and wife." The Court went on to note that Sec. 6013(b)(2) (the Section originally cited by the Court) applies only if the taxpayer first files as married filing separately and then amends his or her initial election married filing jointly. But here the taxpayer never made an election to file as married filing separately.
The IRS believed that "separate return" cannot mean only "married filing dseparately" because when Sec. 6013 was enacted in 1951, "married filing separately" status did not exist. The Court found the IRS to be wrong. It dug up tax forms from 1951 which lists "married person filing separately" in its tax table. The 1952 tax-form instructions (interpreting the 1951 Act) repeatedly use "separate returns" and allow only married taxpayers to file a "separate return," with different directions for head-of-household taxpayers.
The Appeals Court reversed and remanded the Tax Court decision and found that the taxpayer did not file a separate return within the meaning of Sec. 6013 and was not prohibited from amending his status to married filing jointly.
It should be noted that there were three judges siting on this case and one expressed a dissenting opinion. And the decision is one of the Eighth Circuit (Arkansas, Iowa, Minnesota, Mississippi, Nebraska and North and South Dakota). Other circuits might hold differently.
While there's a good chance even a professional tax advisor will never encounter such a situation, it's interesting that the issue has never been decided definitely, the IRS didn't bother to check the early tax forms and instructions, the Tax Court missed several of the points, etc.
Copyright 2015 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 06/22/15