Paul L. Caron
Dean




Tuesday, January 18, 2022

Lesson From The Tax Court: The Tacit Consent Rule

Camp (2021)Every marriage requires trust.  In my own marriage my DW trusts me to handle our finances.  I’m sort of the CFO of our marriage.  As part of my duties I prepare our taxes.  I try to explain them to my DW before I file, but more often than not she just waves me away with a smile, saying “I trust you.”  Back in the day when we filed paper returns I at least was able to ensure she signed the returns.  But now that we file electronically, I just make a few clicks and, boom!, it’s filed.

I have sometimes questioned whether we are really filing a joint return when it’s only me doing all the clicking for the electronic submission.  When one files electronically there is nothing analogous to an actual signature to show that both spouses have even seen, much less approved, of what is submitted.  You just need to create two 5-digit numbers, one for each spouse. Tax return preparers at least get to secure a wet signature on Form 8879 to show both spouses consented to the return preparer submitting the electronic return.  I got nothing like that.  Just a smile and a “I trust you.”

Today’s lesson answers my question.  In Om P. Soni and Anjali Soni v. Commissioner, T.C. Memo. 2021-137 (Dec. 1, 2021) (Judge Copeland), we learn that a spouse can tacitly consent to a joint return even when the spouse does not actually sign the return and even when someone else forges the spouse’s signature!  Whether there is tacit consent depends on the facts and circumstances of the filing.  And perhaps the most important factor is a history of one spouse’s trust in the other.  Details below the fold.

Law:  Of Joint Liability, Joint Returns, and Economic Units
Section 6013(a) provides that “a husband and wife may make a single return jointly of income tax...”  Section 6013(d)(3) provides that “the liability with respect to the tax shall be joint and several.”  That fact that both these provisions are currently in §6013 has led many folks to the erroneous conclusion that the two provisions have a common origin and that joint liability is “price” married couples pay for some favorable tax breaks.  So let’s at least learn why that is a myth.

The two provisions are not related.  They have different origins in time and purpose.  This is some theoretical stuff.  Skip if you want.  I think it’s fascinating but I can understand if you don’t.

The provision allowing for joint returns is from §223 of the Revenue Act of 1918, 40 Stat. 1057, 1074.  But the provision making the liability joint and several traces back to §51(b) of the Revenue Act of 1938.  52 Stat. 447 (sorry, I cannot find a free link for this).  During that 20-year period taxpayers and the IRS fought over whether joint filers were jointly liable.  Taxpayers mostly won in court. See e.g. Cole v. Commissioner, 81 F.2d 485 (9th Cir. 1935)(no joint liability on joint return).  But the Treasury won in Congress.  For a wide-ranging article on this issue (and more), see Richard C. E. Beck, The Innocent Spouse Problem:  Joint and Several Liability for Income Taxes Should be Repealed, 43 Vand. L. Rev. 317 (1990).

It is also erroneous to claim that joint and several liability is the “price” couples pay for a more favorable rate structure than individuals.  Such a view is wrong for three reasons.

First, between 1913 and 1918 couples were not even permitted to file jointly and were subject to the single rate structure, which exempted the first $3,000 of income from tax.  Yet even during those five years, however, married couples were permitted an additional $1,000 exemption for their aggregate income when they lived together.  So couples received the effect of a more beneficial rate structure long before being allowed to file jointly.

Second, while Congress made couples jointly liable in 1938, it then waited 10 more years to enact the supposed benefit of a separate rate structure for couples.  That special rate structure did not come until the Revenue Act of 1948.  62 Stat 110, §301(d) (sorry, I cannot find a free link).  Further, the purpose of that statute was not to offset the pain of joint and several liability.  It was all about putting couples in common law states on an equal footing with couples in community property states.

The Supreme Court had created a division between tax treatment of couples in community law and common law states in 1930 in a pair of cases: Poe v. Seaborn, 282 U.S. 101 (1930) and Lucas v. Earl, 281 U.S. 111 (1930).  The effect of those cases was that couples in community law states could split income but couples in common law states (where property was held in a Tenancy by the Entirety) could not accomplish the same result “by anticipatory arrangements and contracts however skillfully devised.”  281 U.S. at 115.   In reaction to those cases, some states tried to get cute.  Oklahoma, for example, tried to give its citizens the best of both worlds.  It passed legislation that permitted married couples to “opt in” to a special state community law regime.  The Supreme Court nixed that idea in 1941.  Commissioner v. Harmon, 323 U.S. 44 (1941).

The resulting discrimination between community law and common law states had been exacerbated by an increase in the marginal rates.  And then came WWII and the broadening of the tax base from about 7 million tax returns in 1940 to over 42 million by 1945.  So it was to ameliorate the increasing effect of the Supreme Court’s interpretations in Seaborn and Earl, that Congress created the rate structure allowing all couples to split their aggregate taxable income for purposes of rate determination. See Sen. Rep. No. 1013, 80th Cong., 2nd Sess. (1948), 1948-1 C.B. 301-303, 326.

Finally, the third reason that joint liability is not the “price” couples pay for more favorable tax treatment is simply that not all couples actually receive more favorable tax treatment!  Even the current elimination of the “marriage penalty” for equal-earner spouses (and the concomitant expansion of the “marriage bonus” for unequal earner spouses) makes those previously penalized marriages merely tax-neutral and not tax favorable.  So not all couples benefit.

The better way to understand joint liability is the well-recognized tension in the Tax Code between treating individuals as individuals and treating them as part of a greater economic unit: the family.  One sees the tension in the very first Revenue Act of 1913.  Recall that Act did not permit couples to file jointly, yet allowed them to exempt $1,000 more than unmarried individuals.  This additional exemption amount was made in recognition that marriage created an economic unit of more than one individual.  That is, the additional exemption for married couples was based on the theory that “an American family of from three to five children living in decent comfort, and desirous of giving the children a college education would, it was maintained, need all of $4,000, or in the case of a widow, certainly all of $3,000, for meeting the necessary family expenses.”  Seligman, supra, at 686   From the get-go, then, the Internal Revenue Code has not been only about taxing individuals, but also about taxing family units.

Further support for this idea about the origin of joint liability comes from early rulings by the IRS.  Professor Beck’s article gives this example:  In 1921 the IRS decided that a joint return should be viewed as a return of a single economic unit: “If a single joint return is filed it is treated as the return of a taxable unit....  In cases, therefore, in which the husband or wife has allocable deductions in excess of his or her gross income, such excess may, if joint return is filed, be deducted from the net income of the other for the purpose of computing [tax].” Beck, 43 Vand. L. Rev. at 336, quoting from Op. Solicitor 90, 4 C.B. 236, 238 (1921). Similarly, in 1923 the IRS based a ruling for joint liability explicitly on the notion that “a single joint return is one return of a taxable unit and not two returns of two units on one sheet of paper.”  Id.

The Supreme Court also adopted this view of the matter in 1940, when it rejected the IRS’s attempt to limit a charitable deduction taken on a joint return to 15% of the donating spouse’s separate income instead of 15% of the combined income.  The IRS had written regulations abandoning the economic unity rationale for joint filing, but the Court struck down the regulations, holding:

“The principle that the joint return is to be treated as the return of a taxable unit and as though it were made by a single individual would be violated if in making a joint return each spouse were compelled to calculate his or her charitable contributions as if he or she were making a separate return.”

Taft v. Helvering, 311 U.S. 195, 198 (1940).  The Court reinforced its view in a companion case, Helvering v. Janney, 311 U.S. 189 (1940) (interpreting statute on capital losses as allowing capital losses of one spouse to be deducted from capital gains of the other, despite contrary Treasury Regulation).

So that is why I think of a joint return as the return of an economic unit, or entity, rather than the return of two individual taxpayers.  A couple can choose to file separately but if they choose to file jointly, then they are filing as a unit.   For even more gruesome details, you can see my article "The Unhappy Marriage of Law and Equity in Joint Return Liability," 108 Tax Notes 1307 (Sept. 12, 2005).

Law: The Tacit Consent Rule
So how does a couple show they are choosing to file jointly?  Well, as a functional matter, there’s a box for that!  If you look at the very top of the Form 1040 for 2021, you will see that the taxpayer is supposed to check a box to tell the IRS the claimed filing status.  If the “Married Filing Jointly” box is checked and the rest of the return is filled in consistently with that choice, the IRS will process the return using that status.  One aspect of the return that must be consistent is that both spouses must have signed the return. Treas. Reg. 1.6013-1(a)(2).  And a signature made under duress does not count.  Treas. Reg. 1.6013-4(d).

So...what is a signature?  Well, the function of a signature is to show both identity and intent.  Traditionally, taxpayer did that with a wet signature on paper documents.  But there is no legal requirement for signatures to be that way.  In fact, the statute requiring signatures totally punts the question of electronic signatures to Treasury in §6061(b).  And Treasury kicks that can down the food chain to sub-regulatory guidance in Treas. Reg. 301.6061-1(b) (“The Secretary may prescribe in forms, instructions, or other appropriate guidance the method of signing any return, statement, or other document required to be made under any provision of the internal revenue laws or regulations.”)

So how do we know what constitutes an adequate electronic signature?  We have to dig around in the IRM to find that regulatory “other appropriate guidance.”  One finds it over in IRM 10.10.1 ("IRS Electronic Signature (e-Signature) Program").  The general rule there is that “An electronic signature may be used to sign an IRS document and will satisfy the requirements of IRC § 6061(b) and CFR § 301.6061-1 if the signature is made using the permitted electronic signing process for that specific IRS document.”  IRM 10.10.1.3.  The IRM then goes on to give some very comprehensive rules for all the variety of ways (including biometrics and sounds!) taxpayers can electronically sign documents.  See IRM 10.10.1.3.1 through 10.10.1.3.4.  For a summary, see IRM Exhibit 10.10.1-1, Current Approved Methods

But none of those rules permits one spouse to sign for another spouse when the other spouse is in the living room involved in other matters and just yells “sure, honey, I trust you.”   That’s where the tacit consent rule comes into play.

There is a long line of cases that say a return filed as a joint return will be treated as a joint return, even if not signed by one of the spouses, if the facts and circumstances convince a court  the non-signing spouse “intended to file and be bound by the particular return in question.” Shea v. Commissioner, 780 F.2d 561, 567 (6th Cir. 1986).  The test is an indeterminate facts-and-circumstances test where a court will look at all the circumstances surrounding the filing.  Let’s look at what I would say are the top three factors:

(1) Filing History
One important factor is the history of the marriage relationship and of joint filing.  In Campbell v. Commissioner, 56 T.C. 1 (1971) the tax year at issue was 1964.  The return filed that year did not contain the signature of Mrs. Campbell.  However, the Tax Court found that the 1964 return should be treated as a joint return in large part because returns both before and after 1964 had been jointly signed.

“On the basis of the record before us, we conclude that the Campbells intended the 1964 return to be a joint return. We note in particular that the Campbells customarily filed a joint return for each year other than 1964 from at least 1960 through 1966. Mrs. Campbell did not examine such returns, she simply accepted her husband's preparation of the returns and signed them. Like the others, the 1964 return was filed as a joint return. The only significant difference was the absence of Mrs. Campbell's signature on the 1964 return.

"Viewed in this context, the absence of her signature is hardly of overriding importance. Her signature on prior and subsequent returns appears to have been little more than a formal ritual as far as she was concerned. She left the responsibility for preparation and filing of the returns to her husband. She intended the returns to be filed as he chose. We conclude that Mrs. Campbell intended the 1964 return to be filed in the same manner as was each of the others: as a joint return.”

(2) Opportunity to Review
A history of joint filing and insouciance by the non-signing spouse, however, is not always then end of the analysis, as one would expect for an indeterminate multi-factor test.  Courts have found that the inability of a non-signing spouse to review the return in question can outweigh a long history of acquiescence and reliance on the other spouse to prepare returns.  In Shea, supra, for example, the spouses had a long history of joint filing.  The Tax Court thought that factor, plus the factor that the non-signing spouse had not attempted to file a separate return for the year in question, was dispositive.  The Circuit Court disagreed, noting that “the focus should not be on petitioner's intent to file any joint return, but whether she intended to file and be bound by the particular return in question.”  780 F.2d at 568.

Focusing on the year in question the Circuit Court noted that neither spouse had signed the return.  Instead, the husband had taken the information to their return preparer and told the return preparer to just sign both their names.  In addition, the non-signing spouse did not have enough income of her own to require filing a return.  Finally, the Circuit Court was troubled by the fact that the non-signing spouse had been not physically present when the return was prepared, nor had she even had the opportunity to review the return.

Similarly, in Helfrich v. Commissioner, 25 T.C. 404, 407 (1955) the Court decided that the dispositive facts were that the non-signing spouse had no idea any return had been-filed for the year in question and “the first time she saw it was in the collector’s office.”

(3) Status of Marriage during Year In Question
If a marriage is on the rocks during the years in question and there are objective facts in the record on why the non-signing spouse would not trust the other spouse in the year of filing, those facts will weigh against a finding of tacit consent.  A good example is Burke v. Commissioner, T.C. Memo. 1995-608 (1995).  In that case there were three tax years at issue: 1986, 1987, and 1988.  But all three returns were filed on the same day in 1991.  And there was much evidence of cracks in the marriage during all those times. Writes the Court:

“Numerous reasons existed for Mrs. Burke not to consent to the filing of joint returns. Mrs. Burke was not personally required to file any returns for the years at issue. The years at issue were turbulent ones for petitioners. Mr. Burke was a heavy gambler, and he was abusing cocaine. Mrs. Burke knew that Mr. Burke had been indicted for embezzlement during 1987, that he had pleaded guilty to Grand Larceny 4, a felony in New York, and that U.S. Life had obtained a default judgment against him for the premiums he diverted. The returns in question were filed long after their due dates, at which time the Burkes were experiencing severe marital problems.”

Let’s see how these factors play out in today’s case.

Facts and Lesson
The tax year at issue was 2004.  The Soni’s married in 1978, and for each year both before and after the year at issue they filed joint returns.  Mr. Soni was a successful businessman.  Ms. Soni was a homemaker.

Each year Mr. Soni took their financial records to his office and had an outside accounting firm prepare the returns.  The returns were then reviewed by personnel in Mr. Soni’s office and then given to him for filing.  Mr. Soni reviewed and signed all the returns.

He generally asked his son or a staff member to get Ms. Soni’s signature.  They were not always successful and it was not clear who would sign for Ms. Soni.  Ms. Soni testified that that she would let documents like tax returns sit “for days and days and days.  Because I don’t feel like reading papers like this, and I wouldn’t look at it.”  Op. at 19, note 13.  She also testified that she was extremely reluctant to sign any documents for fear they could hurt her legal rights, such as divorce papers: “so I don’t sign any papers.”  Op. at 17, note 12.

Thus, the record is unclear as to who signed the 2004 tax return for Ms. Soni.  However, the evidence showed that her son Kunal signed her name to the married-filing-jointly returns for 2009-2013.

The taxpayers’ return for 2004 was no different.  Mr. Soni took the family’s financial information to his office where he had an outside firm prepare a married-filing-jointly return. It appears Mr. Soni signed the return but that Ms. Soni’s signature was put on the return by someone else.  The IRS audited the return and proposed a deficiency of just north of $800,000 ($649k understatement, $29k §6651 penalty, $128k §6662 penalty) penalties, but not interest)

In Tax Court, the Soni’s argued that only Mr. Soni should be liable for any deficiency because the return was not a valid joint return.  They argued that she herself had not signed the return, that she had not authorized anyone to sign for her, and that she had no opportunity to review the return before it was filed, since her husband had taken all the information to his office and had an outside firm prepare the return.

Judge Copeland held that the facts and circumstances showed that Ms. Soni had given her tacit consent for joint filing.  Let’s look at the big three:

(1) Filing History
This factor weighed heavily in favor of finding tacit consent.  Judge Copeland repeatedly returned to the evidence that Ms. Soni totally and completely trusted her husband every year to handle all of their financial matters, including tax returns.  On the stand, Ms. Soni testified that she trusted her husband to handle all of the tax issues: “We’ve been taught your husband always takes care of you. He does the right thing, and you’ve got to trust him. My mother did that. My grandmother did that. We all do that.” Op. at 17.  And, again: “I trust him with everything. Yes, I do. I don’t know what this pertains, but whatever, right, wrong, I trust him.” Op. at 17, note 12.  While that may have been gratifying for her husband to hear, her tax counsel was probably silently groaning.

This factor is very similar to the Campbell case: one spouse shows a decades-long history of trusting and accepting the filing decision of the other spouse, both before and after the year in question.  Judge Copeland thus found, as a matter of fact that Ms. Soni “believed and continues to believe it is her role to trust her husband with the financial matters for the couple.”  Op. at 17.

(2) Opportunity to Review
On first blush, this factor seems to weigh against a finding of tacit consent.  However, as Judge Copeland so succintly puts it: “we find this case analogous to the phrase ignorance is bliss, except when it is not.”  Op. at 1.  That is, unlike the Shea and Helfrich cases, supra, Ms. Soni did have the ability to review the return during the year.  Her failure to review is not the same as failure of opportunity to review.  Judge Copeland explains: “She was aware that they had a tax filing obligation in the United States; however, she testified that she did not 'really pay attention' to tax issues and felt she was “just out of the whole system.” She chose to let other family members handle those issues.”  Op. at 18-19.

(3) Status of the Marriage
Unlike the Burke case, supra, the Soni’s marriage appears to have been very stable both before, during, and after the year in question, although they went through some turbulent times in 2012.  But they had remained married since 1978 and had even lived in the same home in New York from 1999 up at least through time of trial. Op. at 3.  There was nothing to show cracks in the marriage from which one could infer a lack of intent to file jointly.

Judge Copeland does not explicitly discuss the state of the marriage, but she does explain that Ms. Soni did not take the kind of actions one would expect if the marriage had problems, actions that would be inconsistent with an intent to file a joint return.  Thus, Judge Copeland writes: “[Ms. Soni] had not taken any affirmative actions, filed any separate returns, or made attempts to disavow the joint status of the 2004 return before the date of trial.”  Op. at 18.

Coda: So as it turns out, even though I am the one clicking all the buttons to file electronically when I file our joint tax returns, my DW is tacitly consenting to filing the return jointly when she shouts out from the other room "I trust you."  We’re good.  Put another way, I can trust her oral statements that she trusts me.   Marriage requires trust.

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites readers to return each week to Tax Prof for a new Lesson From The Tax Court.

https://taxprof.typepad.com/taxprof_blog/2022/01/lesson-from-the-tax-court-the-tacit-consent-rule.html

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Comments

According to instruction number nineteen married couples could get around the exemption being limited to $4000 between the two of them by living separately; although in that case they could not file jointly, they could escape the “marriage penalty” if either both had income, or only one did in community property states, but would be worse of if only one had income in common law states: https://www.irs.gov/pub/irs-prior/f1040--1913.pdf

Incidentally, what's truly amazing about this document is that from only four pages (including instructions) the 1040 universe, in little over a century, has expanded at a rate that puts the cosmic one to shame.

Posted by: David Yos | Jan 22, 2022 5:32:59 PM

Welcome back from your bluebook perusals.

The significance of the Supreme Court’s holding in Poe v. Seaborn now hits home in the proverbial pocketbook. Despite the desirability of a uniform individual income tax for all of the then forty-eight states and pertinent territories, the Court held community income earned by one spouse is taxable one half to each spouse. Referring to state law property notions first to resolve the second issue of the incidence of the federal income tax liability, the constitutional concept of federalism raised its familiar head. Clearly such an interpretation favored community property states over common law jurisdictions in a progressive tax environment.

To prevent the wholesale conversion to a distinctly different state property regime Congress came to the rescue with appropriate federal tax legislation. The Revenue Act of 1948 said that in the context of federalism and uniform federal tax law, the former must give way to the latter with respect to the following four issues: [a] Married couples will be permitted to elect to file a joint income tax return. [b] & [c] Married donors and decedents will be allowed a marital deduction equal to one half the value of the transfer or one half the adjusted gross estate, respectively. [d] Gifts by either spouse to a third party are eligible for the election to split gifts.

I would not simply focus on jointly filed income tax returns. Truth be told it is far from unusual for both spouses not to review (other than the proverbial bottom line) a professionally prepared federal individual income tax return.

Not only marriage, but the work product of the alleged tax expert also requires the trust of the taxpayers. I usually review my end product with my spouse. Trust is a wonderful human quality, but understanding is equally if not more important particularly in the year of the spouse preparer’s crossing of the river. The preparer spouse must prepare the uninvolved spouse with all tax and financial matters so that the non-preparer spouse will be better able to cope with the death of the tax and financial guru.

Undiscussed issue of using business employees to perform the personal, non-business related, obligations of the employer, which is certainly unacceptable in the political world.

Since all of our S corporations include basis calculations as part of the shareholder’s K-1 Schedule, I find it unacceptable that the tax preparer accepted the existence of adequate basis for loss deductibility purposes given by husband and the accountant for the S corporation.

I can understand that the fact of an intention to file a joint income tax return can overcome the absence of a properly executed signature, and that a family history of one spouse handling financial matters is quite often an operative fact demonstrating tacit consent.

The facts contained within Judge Copeland’s decision are such that her finding of tacit consent would definitely not be overturned by an appellate court as clearly erroneous.

Posted by: Jonathan S. Ingber | Jan 19, 2022 7:24:15 AM