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.