Wednesday, May 11, 2011

What Is So Great About Sliced Bread ?

CCA 201106013

The controversy around the constitutionality of Section 3 of the Defense of Marriage Act is much larger than the income tax issues it raises.  According to a  GAO report, as of December 31, 2003, there were 1,138 provisions in the United States Code in which marital status enters into determining eligibility for "benefits, rights and privileges".  By my count 22 of them fell under Title 26, better known as the Internal Revenue Code.  I would quibble with the list in that it includes Section 6015 - Relief from joint liability.  Joint liability is a pickle you can only get yourself in if your are considered to be married so I don't know that the ability to wiggle out of it should count towards the 1,138 - still its a quibble.  Oddly enough, I don't see Section 6013, which allows you to file a joint return on the list.  Of course the list does not include Section 267 which denies losses on transactions between related parties.  Being able to take a loss when you sell something to somebody is benefit of not being married to them.  One of my earliest posts was on the tax benefits that an unmarried couple has, particularly if they do some clever planning.

With all that said denying joint return status to same sex married couples seems to be the most talked about aspect of Section 3 of DOMA even provoking a principled civil disobedience campaign called Refuse to Lie.  A very large number of people need to file tax returns, many more than need concern themselves with the United States-Chile Free Trade Implementation Act (which is also on the GAO list), so I guess it makes sense.  So it always bothers me when I have to bring up the question - If being able to file a joint return is the greatest thing since sliced bread - what is so great about sliced bread ?  The worst thing about joint returns which I have pointed out frequently in posts like this one is joint and several liability, which is not all that easy to wiggle out of despite Section 6015.  Joint returns also produce messes like the one this CCA is addressing:

From: —————————————- Sent: Monday, January 10, 2011 2:23:03 PM To: ———————- Cc: ——————————————————————— ———————————————————- Subject: Allocation of Joint Credits- Elect and Estimated, ———————————

You have asked for advice regarding allocation of an overpayment from a married couple's joint return in year 1, which was credited to estimated tax in year 2. The taxpayers were divorcing when their ———- returns were due. They filed separately, but did have their returns completed by the same preparer. The TPW claimed 100% of the joint credit-elect from ———- and 100% of the estimated tax payments. The TPH's ———-separate liability was $————-; the TPW's ———- separate liability was $——————-. The TPH claimed NO pre-payment credits and in fact paid in the $——- due per his separate return.

The two credits, which were posted under the TPH's SSN because they'd filed joint the previous year, were transferred from the TPH's SSN to the TPW's.

The TPH subsequently filed an amended return (presumably timely) where he claimed 50% of the credit-elect from ———-. He did not similarly claim any part of the estimated tax payments. TPH appears to have acted unilaterally, as TPW did not file a complimentary amended return.

You raised three questions: Question 1 : Are the taxpayers' original ———- returns valid evidence of an agreement between the spouses as to the allocation of the credit-elect from ———- and the ————-estimated tax payments

Question 2: Are the credit-elect from ———- and the ———- estimated tax payments correctly attributable 100% to the TPW
Question 3: Was the allowance of the TPH's amended return (see below) erroneous and must it be reversed/disallowed
Issue 1: An overpayment in year 1 on a joint return ceases to be an overpayment and becomes an estimated tax payment once the couple elects to credit the amount to the next year's estimated taxes. See sections 6402(b) and 301.6402-3(a)(5). The allocation of estimated tax payments is not addressed in the Code, however, Reg. 1.6654-2(e)(5)(ii) explains how joint payments of estimated taxes should be allocated to separate returns. Regulation 1.6654-2(e)(5)(ii) provides for allocation of estimated tax payments to either husband, wife, or divided between each's tax liability by agreement of the parties.

Rev. Rul. 76-140, 1976-1 C.B. 376, addresses a similar factual situation, under prior Code section 6015(b). The treatment under the previous Code section is identical to the current treatment. The section has simply been renumbered with the conversion of section 6015 to addressing innocent spouse claims. Therefore, the reasoning of the Revenue Ruling remains sound.

In Rev. Rul. 76-140, we indicated the policy that where taxpayers filed consistent returns in year 2 allocating estimated tax payments, those returns would be considered evidence of an agreement between the parties as to allocation of the estimated tax payments. A subsequent refund claim, without further evidence of a different agreement between the parties, should be disallowed. As such, the taxpayers' original -———- returns are valid evidence of an agreement between the spouses as to the allocation of the ———- estimated tax payments, which include the credit-elect from ———-———-.

Issue 2: Because the original returns for ———- evidence an agreement between the parties to allocate 100% of the estimated tax payments to TPW, such an allocation is acceptable under Treas. Reg. 1.6654-2(e)(5)(ii).

Issue 3: If the Service issued a refund to TPH for the estimated tax payments requested on his 1040X, then an erroneous refund has been made. If TPH's account was credited but no refund was made, the credit may be reversible.

If you have any further questions or comments, please do not hesitate to contact me at the address above or —————————-. Thank you-————————————————————— —————— ———————

Like divorce doesn't produce enough aggravation, you need one more thing.

OK.  I actually do know that it can be quite advantageous to file jointly in many situations and not just because of the bracket creep.  That's why I was writing posts like this one about not missing the deadline for amending 2007 returns.  And believe it or not I found out what is so great about sliced bread.  A friend of mine who spent time in a back to the land type of lifestyle told me its real hard to make sandwiches when you bake your own bread.

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