On December 1, 2021, the Tax Court issued a Memorandum Opinion in the case of Soni v. Commissioner (T.C. Memo. 2021-137). The primary issues presented in Soni were (1) whether the petitioners filed a valid joint return; (2) whether the period of limitations for assessment of tax under IRC § 6501(a) and (c)(4) expired before the issuance of the notice of deficiency; (3) whether the petitioners are liable for an addition to tax under IRC § 6651(a)(1); and (4) whether the petitioners are liable for the 20% accuracy-related penalty under IRC § 6662(a).
Background to Soni v. Commissioner
The petitioners had an arranged marriage, which the court describes as “typical” and “traditional to their culture.” Petitioner-husband—whose name was Om—was a very successful businessman, and petitioner-wife was a homemaker (or “housekeeper” as the court refers to her). Petitioner-husband earned the lion’s share of the income, and petitioner-wife did not know what her husband earned, their bills, or any financial affairs of the marriage.
Side note: With a name like “Om” how could you not be overly relaxed about your tax filing obligations? When Om’s wife (Anjali) became upset, one wonders if he just told her to say his name in a soft voice. This is a whole new spin to telling someone, “Say my name!”
Petitioner-husband had engineering degrees and an MBA. He worked in Fortune 500 companies before establishing several businesses of his own, all of which included very large accounting and finance departments. expected the staff of those businesses to take care of both business and personal matters, such as paying bills, preparation of income tax returns, and sending gifts. He did not handle his own bank accounts or pay any of his personal bills for 25 years. He trusted his administrative staff to take care of such personal matters.
Between 2004 and 2005 petitioner-husband’s businesses acquired large debt loads, and as a result of the market collapse and other factors by 2012 all of his businesses had failed. Tax year 2012 was a “trying year” as petitioner-husband was also indicted for embezzling from his businesses’ IRC § 401(k) plans. He was eventually exonerated, but the litigation was time consuming and stressful for him.
Petitioner-wife did not sign documents because she was concerned that they might be documents affecting her legal rights, for example, divorce papers. However, she was generally aware of U.S. tax filing requirements. Since the time of their marriage, petitioner-wife never signed a tax return or asked anyone to sign a tax return for her (although her son signed for her, on at least six occasions); instead, she relied on petitioner-husband to do so.
On the petitioners 2004 tax return, they reported a $1.8m loss. Petitioner-husband assured his CPA that he had documentation to back up this loss, but of course, he did not. “An examination of the 2004 return ensued.”
In 2008, during that examination, the IRS received a Form 2848 authorizing Alan Grossman to act as the petitioners’ representative. Through the year at issue and beyond, Mr. Grossman assisted with income tax and employment tax matters for petitioner-husband and his businesses. The petitioners’ and Mr. Grossman’s signatures on that Form 2848 were dated April 10, 2006. While a signature for petitioner-wife was on Form 2848, she did not technically personally sign the Form 2848. Mr. Grossman signed multiple (eight) Forms 872, Consent to Extend Time for Assessment. Petitioner-husband personally signed six.
The IRS issued a statutory notice of deficiency to the petitioners in 2015, disallowing the $1.8m loss on the 2004 return for lack of substantiation of basis in the entity. The IRS also determined an addition to tax for late filing under IRC § 6651(a)(1) of $30,000. The IRS then asserted an IRC § 6662(a) penalty for the 2004 tax year in an amendment to the answer lodged with the Court in 2017.
Burden of Proof
The IRS’s determination of a taxpayer’s liability is presumed correct, and the taxpayer bears the burden of proving that the determination is incorrect. The burden of shifts to the IRS where the “taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer.” “Credible evidence” is evidence that would constitute a sufficient basis for deciding the issue in favor of the taxpayer if no contrary evidence were submitted. The taxpayer bears the burden of proving that the requirements of IRC § 7491(a) have been met.
Petitioner-wife did not sign the 2004 tax return, and a spouse’s failure to sign the return removes the presumption of correctness ordinarily attaching to the IRS’s determination of jointness. Thus, where a spouse does not sign a purported joint return, the IRS bears the initial burden of production that a joint return was intended.
Because petitioner-wife did not personally sign the return, the Tax Court had to determine whether it was nonetheless filed jointly.
IRC § 6013(a) permits a husband and wife to file a joint return. Spouses who elect to file a joint return for a tax year are required to compute their tax on the aggregate income of both spouses, and both spouses are jointly and severally liable for all tax due. Whether an income tax return is a joint or separate return is a question of fact that depends on the intent of the parties. Consequently, married filing jointly status does not apply to a return unless both spouses intended to make a joint return. 
The failure of one spouse to actually sign does not necessarily negate the intent to file a joint return by the nonsigning spouse. Intent may be demonstrated through “tacit consent.” The intent to file jointly may be inferred from the acquiescence or tacit approval from the nonsigning spouse, which may be established by showing that the nonsigning spouse filed a separate return, that the nonsigning spouse objected to filing jointly, or the prior filing history indicates the intent to file jointly.
Additionally, as here, a pattern of relying on one’s spouse to handle the family’s financial matters, including preparation of tax returns, suggests that the spouse consented to the other spouse’s filing of the return. Joint returns have been upheld even where no part of the spouse’s signature on the return was in the spouse’s handwriting.
While petitioner-wife did not personally sign the 2004 return, this was standard practice of their tax return preparation. Consequently, petitioner-wife chose to trust her husband’s handling of their family’s finances, which included preparation and filing of their tax returns, including the 2004 tax return.
The Tax Court also considered whether the petitioner-wife objected to filing jointly or made any attempts to file separately. The Tax Court found that the petitioner-wife took no affirmative actions, filed no separate returns, and made no attempts to disavow the joint status of the 2004 return before the date of trial. She had access to and frequently brought in the family mail and would have seen bills, financial accounts, and IRS notices in the mail, many of which were addressed to the petitioner-wife or to her and her husband jointly.
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. Further, she did not make any attempts at filing separately from petitioner-husband, trusting him to do the right thing.
As such, the Tax Court concluded that “on balance,” the evidence led to a conclusion that the petitioner-wife approved or at least acquiesced in the joint filing of the 2004 return. The petitioner-wife’s testimony didn’t do her any favors, either. She testified that she would let documents like tax returns sit “for days and days and days,” because she didn’t “feel like reading papers like this, and [so] I wouldn’t look at it.”
Overall, the petitioner-wife repeatedly reiterated that she fully trusted her husband and son to handle the financial issues for her, and, indeed, she chose to let others handle all of her affairs for her. It was part of her “arrangement” with her husband that he handle all of their tax-related matters. Therefore, she tacitly consented to filing the 2004 return jointly.
Period of Limitations on Assessment
The petitioners argued that the statute of limitations had expired before the IRS mailed the statutory notice of deficiency (“SNOD”). Ordinarily, under IRC § 6501(a), the IRS must assess a tax deficiency within three years of the date the return was filed, and under IRC § 6213(a), it must mail the SNOD before it may assess a deficiency. Under IRC § 6503(a)(1), when the IRS mails a SNOD, the period of limitations for assessment is suspended. Therefore, for the SNOD to be timely (but for a written agreement extending the statute of limitations under IRC § 6501(c)(4)(A)) it must have been mailed to the petitioners within three years from the date that the 2004 return was filed.
Regarding waivers, a waiver to extend the period to assess a deficiency is valid only as to the spouse who signs the waiver. Even though the Code treats married taxpayers who file jointly as one taxable unit, it does not convert two spouses into one single taxpayer. Thus, spouses filing a joint return are separate taxpayers, and each spouse has an absolute right to extend or not extend the time within which to assess.
Burden of Proving Timeliness (or Lack Thereof)
The expiration of the period of limitations for assessment is an affirmative defense, and the party raising it must specifically plead it and carry the burden of proving its applicability. To establish this defense, taxpayers must make a prima facie case showing the date they filed their return, the expiration date of the period of limitations based on that filing date, and receipt or mailing of the SNOD after the running of that period. The petitioners filed their 2004 return in 2005, and the SNOD was not mailed until March 2015, which is well past the period of limitations for assessment.
Because the SNOD was issued beyond the three-year period, the burden of going forward was on the IRS to show that the petitioners executed one or more written agreements extending the period of limitations on assessment and that the SNOD was mailed before the end of the extended period. If the IRS can show a facially valid extension existed under IRC § 6501(c)(4), then the burden going forward shifts back to the petitioners to show that the alleged exception to the expiration of the period is invalid or otherwise inapplicable. In the present case, the petitioners (or their power of attorney) signed EIGHT Forms 872, thereby extending the statute of limitations until December 2015.
Implied Authority and Ratification
The petitioners argued that their attorney did not have authority to execute the initial power of attorney. The Tax Court was not persuaded. Whether a representative has authority to act on behalf of a taxpayer is a factual question to be decided according to the common law principles of agency. Actual authority is given by express statements, and implied authority is derived by implication from the principal’s words or deeds. A taxpayer has a “duty to repudiate the consent as soon as he learn[s] of it if he had not authorized it.” In the present case, the petitioners’ attorney could not have mailed in the first extension of the period of limitations for assessment of tax without the petitioners’ knowledge because he did not receive a copy; rather, it was mailed directly to the petitioners’ home address.
The Tax Court was, likewise, not taken with the “our attorney forged our signatures even though we were cool with it until trial” argument. Further, even if he had forged their signatures, an extension request which is itself defective may also be ratified by subsequent actions of a taxpayer.
Also, “No Harm, No Foul” is not “Reasonable” Cause
Reasonable cause for delay is established where a taxpayer is unable to file despite the exercise of ordinary business care and prudence. “Willful neglect” has been defined as a “conscious, intentional failure or reckless indifference.” Whether a failure to file timely is due to reasonable cause and not willful neglect is a question of fact.
The Tax Court found that the petitioners did not have a reasonable explanation for filing late. According to the Tax Court, the petitioners thought “no harm, no foul” because they would have zero tax due, but this is—no shocker here—not a reasonable cause for the delay. As such, the petitioners were liable for the failure to file penalty under IRC § 6651(a)(1).
The Accuracy-Related Penalty
The IRS bears the burden of production with respect to an individual taxpayer’s liability for any penalty and the burden of proof with respect to any new penalty pleaded in its answer. The record reflected (and the petitioners conceded that the IRS secured timely supervisory approval for the penalty pursuant to IRC § 6751(b)(1).
IRC § 6662(a) imposes an accuracy-related penalty equal to 20% of the portion of an underpayment of tax required to be shown on a return that is attributable to either negligence or disregard of the rules or regulations under IRC § 6662(b)(1) or a substantial understatement of income tax under IRC § 6662(b)(2). “Negligence” includes a failure to make a reasonable attempt to comply with tax laws, and Treas. Reg. § 1.6662-3(b)(1) includes any failure to keep adequate books and records or to substantiate items properly. An understatement of income tax is substantial if it exceeds the greater of 10% of the tax required to be shown on the return or $5,000 under IRC § 6662(d)(1)(A). Here, the petitioners failed to keep adequate records and conceded the underlying tax; their tax understatement was substantial.
However, the IRC § 6662(a) accuracy-related penalty does not apply if the taxpayers show they acted with reasonable cause and in good faith in filing their return pursuant to IRC § 6664(c)(1). This reasonableness analysis takes into account the taxpayers’ experience, knowledge, and education.
Reasonable reliance upon the advice of a tax professional may also establish reasonable cause and good faith. To show reliance on an adviser, a taxpayer must prove that: (1) the adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer gave the adviser the necessary and accurate information, and (3) the taxpayer actually relied in good faith on the adviser’s judgment. In the present case, the petitioners failed to show reliance on an adviser because they failed to provide their return preparers all necessary and accurate information. Further, the petitioner-husband was a highly-educated, sophisticated businessman. Thus, the Tax Court was disinclined to find reasonable cause.
- Tax Court Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). ↑
- IRC § 7491(a)(1). ↑
- Higbee v. Commissioner, 116 T.C. 438, 442 (2001). ↑
- Rolfs v. Commissioner, 135 T.C. 471, 483 (2010), aff’d, 668 F.3d 888 (7th Cir. 2012). ↑
- O’Connor v. Commissioner, 412 F.2d 304, 309 (2d Cir. 1969), aff’g in part, rev’g in part and remanding T.C. Memo. 1967-174. ↑
- Id. ↑
- IRC § 6013(d)(3); Harrington v. Commissioner, T.C. Memo. 2012-285, at *4. ↑
- Heim v. Commissioner, 27 T.C. 270, 273-74 (1956), aff’d, 251 F.2d 44 (8th Cir. 1958). ↑
- See Lane v. Commissioner, 26 T.C. 405, 408-09 (1956); Weber v. Commissioner, T.C. Memo. 1995-125, *3. ↑
- Estate of Campbell v. Commissioner, 56 T.C. 1, 12 (1971); Hennen v. Commissioner, 35 T.C. 747, 748 (1961). ↑
- Hennen, 35 T.C. at 748; Okorogu v. Commissioner, T.C. Memo. 2017-53, *19. ↑
- Okorogu, T.C. Memo. 2017-53 at *19-*21; see also Heim, 27 T.C. at 274; Howell v. Commissioner, 10 T.C. 859, 866 (1948), aff’d per curiam, 175 F.2d 240 (6th Cir. 1949); Carroro v. Commissioner, 29 B.T.A. 646, 650 (1933). ↑
- Estate of Campbell, 56 T.C. at 12-13; Okorogu, T.C. Memo. 2017-53 at *20. ↑
- Id. at 13. ↑
- See, e.g., Heim, 27 T.C. at 274; Howell, 10 T.C. at 866; Carroro, 29 B.T.A. at 650. ↑
- Tallal v. Commissioner, 77 T.C. 1291, 1295 (1981). ↑
- Dolan v. Commissioner, 44 T.C. 420, 427-428 (1965). ↑
- Tax Court Rules 39, 142(a); Mecom v. Commissioner, 101 T.C. 374, 382 (1993), aff’d without published opinion, 40 F.3d 385 (5th Cir. 1994); Heckman v. Commissioner, T.C. Memo. 2014-131, at *10-*11, aff’d, 788 F.3d 845 (8th Cir. 2015). ↑
- Coleman v. Commissioner, 94 T.C. 82, 89 (1990); Adler v. Commissioner, 85 T.C. 535, 540 (1985); Robinson v. Commissioner, 57 T.C. 735, 737 (1972). ↑
- See Hernandez v. Commissioner, T.C. Memo. 1998-46, 1998 WL 44090, at *4, supplemented by T.C. Memo. 1998-329. ↑
- Adler, 85 T.C. at 540. ↑
- Trans World Travel v. Commissioner, T.C. Memo. 2001-6, *7; Estate of Quirk v. Commissioner, T.C. Memo. 1995-234, *5; see also Kraasch v. Commissioner, 70 T.C. 623, 627-29 (1978). ↑
- Dahl v. Commissioner, T.C. Memo. 1995-179, *3, aff’d, 85 F.3d 643 (11th Cir. 1996); DiSanza v. Commissioner, T.C. Memo. 1993-142, *9, aff’d, 9 F.3d 1538 (2d Cir. 1993). ↑
- Lyon v. Commissioner, T.C. Memo. 1994-351, *4 (citing Mishawaka Props. Co. v. Commissioner, 100 T.C. 353, 366 (1993), and 1 Restatement, Agency 2d, § 43 (1957)). ↑
- Ryan v. Commissioner, T.C. Memo. 1991-49, *12. ↑
- Bassett v. Commissioner, 67 F.3d 29, 31 (2d Cir. 1995), aff’g 100 T.C. 650 (1993); Treas. Reg. § 301.6651-1(c)(1). ↑
- United States v. Boyle, 469 U.S. 241, 245 (1985). ↑
- Id. at 249 n.8; Crocker v. Commissioner, 92 T.C. 899, 913 (1989). ↑
- See IRC § 7491(c); Tax Court Rule 142(a)(1). ↑
- Treas. Reg. § 1.6664-4(b)(1). ↑
- Treas. Reg. § 1.6664-4(c). ↑
- Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002). ↑
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