Tax Court Side-Steps a "Beard" Return Issue to Get to Equitable Estoppel (11/16/13)

In Reifler v. Commissioner, T.C. Memo. 2013-258, here, the Tax Court was presented with an interesting issue of whether a returned original joint return without the spouse's signature was the return for purposes of the statute of limitations when the taxpayers later filed a delinquent return without any notice to the IRS about the original return.  The Tax Court ultimately held against the taxpayers on the basis of equitable estoppel, but in the interim discussed an issue of whether the "tacit consent" rule permitting the treatment of an unsigned return to be a return under Beard.

The Tax Court's summary of the opinion is:

On or about Oct. 15, 2001, the extended due date for Ps' 2000 Federal income tax return, Ps submitted to R's Andover, Massachusetts, Service Center a joint Federal income tax return for 2000, signed under penalties of perjury by P-H, but not by P-W. Upon receipt, the service center date-stamped the return, made handwritten markings indicating a missing signature, and mailed the return back to Ps with a form requesting that P-W sign it and that Ps return it to the service center within 20 days. Ps did not mail back the 2000 return with P-W's signature to the service center as requested. On July 29, 2002, respondent issued a "Taxpayer Delinquency Notice" to Ps. In response, Ps submitted a second joint Federal income tax return for 2000. The second 2000 return was identical to the first except that it was signed by both Ps opposite a date of Aug. 25, 2002, and bore neither the Oct. 15, 2001, date stamp nor the service center's markings on the original return. It was received by the service center on Sept. 2, 2002. Beginning on July 1, 2005, R obtained from Ps a series of consents extending the period of limitations on assessment and collection for 2000 until June 30, 2010, a date after the May 17, 2010, issuance of the notice of deficiency covering Ps' 2000 tax year. Ps allege that those consents are invalid because the I.R.C. sec. 6501(a) period of limitations on assessment and collection with respect to Ps' 2000 Federal income tax expired on Oct. 15, 2004, three years after they filed the initial 2000 return. 

Held: Ps are estopped from raising the affirmative defense of the period of limitations with regard to any 2000 deficiencies; 2000 remains open for assessment and collection of Federal income tax.

By way of background on the Beard return issue not addressed in the TC summary, I offer the following excerpts from my Federal Tax Procedure Book (footnotes omitted):

In considering the role of a return, we must first know what a return is.  A frequently cited test for a valid income tax return is the Beard test, named after the case in which it appeared:

First, there must be sufficient data to calculate [the] tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury. 

Generally, the income tax return should be filed on the proper form, contain information sufficient to calculate a tax liability, and identify the taxpayer (including the taxpayer's identification number).  A return must be signed and verified under penalties of perjury.  The IRS is authorized to allow returns without such signatures or verifications, but the common returns (income tax returns and transfer tax returns) upon which we focus in this course will require signature and verification. 

Focus on the bold-faced part of the above excerpts.  The original return did not meet the signature under penalties of perjury requirement.  So, the taxpayer fell back to what is called the "tacit consent" rule.  Here is the Tax Court's discussion (bold-face supplied by JAT):

The second argument, however, is supported by a line of cases that have created an exception to the general rule that, to have a valid return, it must be signed by the taxpayer (or both taxpayers, in the case of a joint return) under penalties of perjury. That exception holds that if an "income tax return is intended by both spouses as a joint return, the absence of the signature of one spouse does not prevent their intention from being realized." Estate of Campbell v. Commissioner, 56 T.C. 1, 12 (1971). The rule is generally applied when one spouse signs a joint return (usually signing for both spouses) and it is shown that the other spouse has tacitly consented to the joint return filing. It is, therefore, commonly referred to as the tacit consent rule. See, e.g., Hennen v. Commissioner, 35 T.C. 747, 748 (1961); Harris v. Commissioner, T.C. Memo. 1961-324, 1961 Tax Ct. Memo LEXIS 22, at *11. Because it is undisputed, for purposes of the motions, that Mrs. Reifler consented to petitioners' filing of a 2000 joint return, petitioners argue that, pursuant to the tacit consent rule, the 2000 return constituted a valid joint return. 

Respondent rejects that argument on the ground that courts have employed the tacit consent rule exclusively on the Commissioner's behalf to enable the Commissioner to hold the consenting, nonsigning spouse jointly liable for a deficiency otherwise exclusively attributable to the signing spouse (or have refused to so employ it on the ground of lack of spousal consent). See, e.g., Estate of Campbell v. Commissioner, 56 T.C. at 12; Hennen v. Commissioner, 35 T.C. at 748-749; Federbush v. Commissioner, 34 T.C. 740, 757-758 (1960), aff'd, 325 F.2d 1 (2d Cir. 1963); Simms v. Commissioner, T.C. Memo. 1968-298, 1968 Tax Ct. Memo LEXIS 1, at *28-*29, aff'd per curiam, 422 F.2d 340 (4th Cir. 1970); Harris v. Commissioner, 1961 Tax Ct. Memo LEXIS 22, at *10-*11. Thus, respondent argues that the tacit consent rule "has no bearing on the question of whether a Form 1040, signed by one spouse but not the other, is an income tax return for statute of limitations purposes", also citing caselaw to the effect that "[s]tatutes of limitation that bar the rights of the government are to be strictly construed in its favor." See, e.g., E.I. Du Pont De Nemours & Co. v. Davis, 264 U.S. 456, 462 (1924). Respondent further argues that the tacit consent rule cannot overcome the requirement that, in order to secure the benefit of a period of limitations barring Government collection of a tax liability, "a taxpayer * * * must demonstrate 'meticulous compliance * * * with all named conditions' and applicable requirements of the Code and the Treasury Regulations." Allnutt v. Commissioner, 523 F.3d 406, 412 (4th Cir. 2008) (quoting Pilliod Lumber Co., 281 U.S. at 249), aff'g T.C. Memo. 2002-311. 

In an effort to defuse respondent's attempt to so limit the tacit consent rule, petitioners cite Downing v. Commissioner, T.C. Memo. 2007-291, 2007 WL 2768754, at *9, in which we addressed the taxpayer's contention that he and his wife filed a joint return (of which respondent had no record) that triggered the commencement of the period of limitations. The taxpayer could produce no return containing his wife's signature, and we found "no credible evidence to establish that * * * [the wife] ever intended to file a * * * joint return with * * * [her husband] or that she even tacitly consented to the filing of a joint return". Downing v. Commissioner, 2007 WL 2768754, at *10. Moreover, we concluded that the taxpayer filed no return for the year in question, and, on that basis, we rejected his affirmative defense that the period of limitations had run. Id. at *9.8 

In essence, the parties raise the issue of whether the tacit consent rule is, effectively (1) a one-edged sword that only the Commissioner may wield in an effort to impose joint liability on a nonsigning spouse or (2) a two-edged sword that the taxpayer may also employ to invoke a defense based upon the expiration of the period of limitations. In Downing, since we rejected the taxpayer's affirmative defense on the ground that he had filed no return for the year in question, we did not reach that question. 

In this case, because we are persuaded to decide the motions in respondent's favor by his alternative argument, based upon the principle of equitable estoppel (see infra), we likewise find no need to resolve the parties' dispute over the applicability of the tacit consent rule. As we stated in McLaine v. Commissioner, 138 T.C. 228, 242 (2012) (quoting Whitehouse v. Ill. Cent. R.R., 349 U.S. 366, 372-373 (1955)): "[T]he better course is 'to observe the wise limitations on our function and to confine ourselves to deciding only what is necessary to the disposition of the immediate case.'"

The Court then held that the taxpayers were equitably estopped by their conduct in filing the delinquent return from claiming ex post facto that the original return was a return for purposes starting the statute of limitations.  The equitable estoppel discussion is a straight-forward application of the concept, although I am not sure the right bottom-line conclusion that the taxpayers are equitably estopped is right.

What concerns me is that, if the original 1040 was a return under the tacit consent rule, I don't understand how or why a court should be introducing inherently uncertain equitable principles to estop the taxpayer (or, for that matter, if the tables were reversed, the IRS).  I thus think that the Court should have decided the tacit consent issue that it said it did not need to address.  Of course, if it did decide the issue in favor of the taxpayers, there could be significant administrative problems created.