Definition — Joint and Several

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Image source: Rev. Thomas Davidson 1856-1923 (ed.) [Public domain], via Wikimedia Commons

Image source: Rev. Thomas Davidson 1856-1923 (ed.) [Public domain], via Wikimedia Commons

Joint and several liability goes along with the election to file a joint federal income tax return, which has been an option in the tax code since 1918 (joint and several liability was formally codified in 1938). Generally, spouses filing a joint tax return are each fully responsible for the accuracy of their return and for the full tax liability (Section. 6013(d)(3)).

As stated in a 1998 report to congress: By signing and filing a joint return and obtaining the benefits of filing jointly, each of you voluntarily undertakes the responsibility for the correct joint liability. Put another way, you’re both liable and you’re each liable for the full amount due. In addition, filing jointly means you’re liable not only for the tax reported, but also for deficiencies, interest and possible civil penalties.

Generally, once you file a joint return, you can’t change your mind (Regulation 1.6013-1). You have to seek relief from joint and several liability under the innocent spouse rules or the injured spouse rules.

As always in tax law, “generally” is the operative word. Here are three situations involving the question of whether joint and several liability applies.

1.

A husband and wife filed a joint return and failed to make a required disclosure of a listed transaction. (Listed transactions are abusive tax avoidance schemes.)

In this case, the listed transaction involved a Roth IRA, where the husband attempted to get around the statutory limits on contributions to his Roth.

Under the section 6011 regulations, each taxpayer who has participated in a reportable transaction and is required to file a tax return has a duty to disclose that transaction. The penalty for failing to disclose listed transactions is $100,000 per unreported year.

However, individual retirement accounts are generally considered the sole property of the participating individual.

The question is whether the penalty imposed for failing to make the required disclosure is a joint and several liability of the husband and wife because they filed a joint return, or if the Roth is the sole property of the husband, making him solely liable for the penalty.

What do you think?
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over the link “The Chief Counsel’s Conclusion”

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Source: Office of Chief Counsel Memorandum 200938022

2.

The taxpayer’s husband gifted 48% of his stock in a closely held S corporation to his children. The taxpayer’s husband hired a return preparer to prepare the returns for himself and the taxpayer, and provided the return preparer false information as to the value of the stock. The returns were filed timely, and on each return the taxpayer and her husband identically valued the aggregate shares and split the value.

The taxpayer indicated her consent to the split gift on her return, and her husband indicated his consent to split the gift by signing the taxpayer’s Form 709. The returns were filed in the same envelope and neither the taxpayer nor her husband paid any gift tax on the split gift.

More than three years after the filing of the gift tax returns, the IRS sent a notice of deficiency stating that the fair market value of the stock substantially exceeded the amounts reported on the gift tax returns.

The IRS also assessed the fraud penalty against the taxpayer’s husband because he intentionally undervalued the stock on his gift tax return. The IRS did not assert the fraud penalty against the taxpayer because there was no evidence establishing fraudulent intent on her part.

The question is whether the deficiency can be assessed against the taxpayer under the joint and several liability rule. When taxpayers elect split gift treatment and one spouse commits fraud by undervaluing the gift, can the extended statute of limitations that applies to fraud be applied to both gift tax returns?

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over the link “The Chief Counsel’s Conclusion”

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Source: Chief Counsel Advice Memorandum Number 200205027

3.

The question: In a case where a husband and wife have filed a joint federal income tax return, do the spouses have joint and several liability for the employee FICA taxes of one spouse that are attributable to unreported tips?

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over the link “The Chief Counsel’s Conclusion”

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Source: Office of Chief Counsel Memorandum Number: 200016018

***

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The penalty for failing to make the required disclosure of a listed transaction should not be treated as a joint and several liability of the husband and wife who filed a joint return.

When a husband and wife file a joint return and the joint return “reflects the tax consequences or tax strategy described in the” listing notice, section 1.6011-4(c)(3)(A) would generally operate to determine that each spouse has participated in the listed transaction for purposes of having to file a disclosure, even though only one spouse actively engaged in the transaction, unless the applicable listing notice specifically provides otherwise.

Notice 2004-8 (Abusive Roth IRA) was issued before the penalty in section 6707A was enacted. The listing notice identified individuals known to be engaged in the abusive transaction and required them to disclose their involvement in the transaction under section 6011.

Notice 2004-8 did not include a spouse in the list of individuals with a disclosure obligation. This is logical because the spouse is not deemed to have a beneficial interest in the account, and thus, has no responsibilities with respect to the account. Likewise, section 408(g) provides that the IRA rules are applied without regard to community property laws. Therefore, even in community property states, these rules treat the IRA as the sole property of the participating individual.

Under these circumstances, since the inactive spouse was not included in the list of those required to disclose under Notice 2004-8, it generally would be inappropriate to impose a disclosure obligation on the inactive spouse now that a penalty may apply. Consequently, if only one spouse engaged in a Notice 2004-8 transaction it would be reasonable for the IRS to assess the section 6707A penalty only against the participating spouse.

We note, however, that to the extent that income is allocated to a taxpayer who engaged in a Roth IRA transaction, liability for tax on that income is joint and several even though the spouse of the taxpayer who participated in the listed transaction was arguably not a participant.

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No, the taxpayer’s return is not subject to the extended statute of limitations.

Because the present case involves joint and several tax liability, [the IRS] has drawn an analogy to court cases holding that the fraud of one spouse on a joint income tax return holds the period of limitations on assessment open as to both spouses.

In addition to joint and several liability, other factors may suggest an analogy between this case and the joint return situation. Each gift tax return in this case contains the signatures of both spouses. The consent of the taxpayer’s husband is signified on line 18 of taxpayer’s return, and the consent of the taxpayer is signified on line 18 of her husband’s return. Further, the form instructs the spouses to mail their Forms 709 in the same envelope.

We conclude, however, that this case cannot be analogized to court cases holding that the period of limitations on a joint income tax return remains open as to both spouses when only one has committed fraud. Those cases may be distinguished as follows.

In the income tax context, there are two taxpayers reporting a single tax liability on one return. This liability is computed based on the aggregate incomes, deductions, exemptions, and credits of the spouses. Under section 6013(d)(3), each spouse is jointly and severally liable for the liability. If one spouse commits fraud, the joint return is thereby rendered fraudulent and the period of limitations remains open as to both taxpayers under section 6501(c)(1). Because there is only one tax liability and one tax return, a different period of limitations cannot apply to each spouse.

In contrast, in the split gift tax context, there are two taxpayers, each of whom reports a separately computed gift tax liability on a separate return. Depending on each spouse’s available unified credit and annual exclusion amounts, their overall gift tax liabilities for the year may not be equal. The husband is not a taxpayer with respect to the wife’s return, and the wife is not a taxpayer with respect to the husband’s return.

We think it is of crucial importance that the taxpayer’s return is not a joint return notwithstanding the possible analogy to the present case and a situation involving a joint income tax return. See True v. United States, 354 F.2d 323, 326 (Ct. Cl. 1965) (“[j]oint returns are not part of the procedure for the collection of the gift tax”).

Thus, in this case, the taxpayer’s return is not rendered fraudulent simply because the return of her husband is fraudulent. Two separate liabilities and two separate returns are involved. Therefore, an analysis of whether section 6501(c)(1) applies to the taxpayer’s return must be separate from the analysis of whether section 6501(c)(1) applies to her husband’s return.

In the present situation, the IRS determined the actual fair market value of the stock to be substantially higher than the value reported on the taxpayer’s return. This results in a deficiency in the taxpayer’s gift tax liability.

This underpayment of tax was not the result of the taxpayer’s intent to defraud the government. Based on the factual development of this case to date, the IRS has no reason to believe the taxpayer or the return preparer had any knowledge of the taxpayer’s husband’s fraudulent undervaluation.

Moreover, the taxpayer had no reason to suspect that her husband had committed fraud in undervaluing the stock. Thus, the taxpayer’s return is not a “fraudulent return” because it does not reflect a fraudulent intent on the part of the taxpayer or her agent.

In Jackson v. Commissioner, T.C. Memo. 1964-330, aff’d, 380 F.2d 661 (6th Cir. 1967), cert. denied, 389 U.S. 1015 (1967), the Tax Court held that when a husband and wife file separate income tax returns, proof that a husband’s return is fraudulent is not clear and convincing evidence that a wife’s return for the same tax year is also fraudulent.

We believe a similar rule applies in a gift tax context where spouses file separate returns for split gifts. Absent information indicating that the taxpayer knew that her husband gave the return preparer fraudulent information about the value of the gifted stock, we do not believe that the Service could prove fraud by the taxpayer by clear and convincing evidence. See I.R.C. § 7454.

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Spouses are individually liable for employee FICA tax on tips.

Rev. Rul. 79-39, 1979-1 C.B. 435, states that the income tax imposed by section 1 and the FICA tax imposed by section 3101 are separate and distinct taxes. The requirements for filing a return apply separately to each class of tax, even though provision has been made for reporting both classes of tax on Form 1040.

Form 4137, on which unreported tip income must be reported for social security tax purposes, is an attachment to Form 1040. Form 4137 constitutes the FICA tax return for purposes of the statute of limitations.

While there are no cases or revenue rulings dealing directly with joint and several liability for employee FICA tax, it is an established principle that FICA tax liability applies to the wages of the employee who earned them. Rev. Rul. 71-116, 1971-1 C.B. 277 (holding that FICA tax applies to the wages of the spouse who earned them, regardless of the fact that the wages are community property under state law).

Similarly, even in community property states, SECA tax applies to the Rev. Rul. 82-39, 1982-1 C.B. 19.

Under section 6013(d)(3), a husband and wife who file a joint return are jointly liable only for the income taxes imposed by subtitle A. The employee FICA tax is an employment tax imposed by subtitle C. Thus it is not a tax with respect to which the Service may impose joint liability on a husband and wife.

Joint and several liability does not apply to unpaid employee FICA tax on unreported tips. Joint and several liability arises when a joint return is filed. Section 6013(d)(3). A joint return may be made with respect to income taxes under subtitle A of the Code. Section 6013(a). FICA tax is an employment tax imposed by subtitle C. Hence, joint and several liability does not apply to employee FICA tax.

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