On the subject of divorcing couples filing joint returns, I have felt like a voice crying out in the wilderness. In practice, the default assumption seems to be that a couple will file jointly for the final year of the marriage. Given the hazard of joint and several liability and the fact that filing jointly is an irrevocable election, I really think the default assumption should be separate filing. I was rather shocked when a friend of mine, whose spouse probably had unreported income, was ordered by a probate judge to sign a joint return. I didn’t think that such an order would stand up on appeal, but what did I know ? Apparently state courts have been ordering divorcing spouses to file jointly with their soon to be exes. Well thanks to the Nebraska Supreme Court decision in Bock v Dalbey, they won’t be doing it anymore, at least in Nebraska.
The Nebraska Supreme Court overturned an appellate court decision that an order to file a joint return was valid. Jennifer Lynn Dalbey, who was balking at signing a joint return, did not present any reason for not doing it other than that she preferred not to. I kind of admire that.
The Nebraska Supreme Court gave four reasons why a state court cannot not order someone to join in filing a joint return:
First, the U.S. Tax Court is not bound by orders compelling the parties to sign a joint return. It will look to the husband and wife’s intent, and if one of them signed only because a state court ordered him or her to do so, the return may or may not be treated as a joint return.
The second reason is on the “lawyerly” side, but the gist of it is that a “mandatory injunction” should be used sparingly and not when another remedy is available. The court has the authority to adjust the distribution of marital assets in a manner that is fair and equitable. Essentially if Ms. Dalbey’s refusal to file a joint return is unreasonable and costly, the Court can make her bear the burden of the extra tax.
Third, a resisting spouse’s exposure to liability under the federal tax code is too difficult to predict if compelled to file a joint return.
This is what I constantly harp on. It comes from staying up late reading Tax Court decisions. Joint and several liability is the problem. If the balance due is not paid or there is a deficiency, the IRS can collect the entire balance from either party. The Court noted the existence of innocent spouse relief, but also noted that:
Obtaining relief under the innocent spouse statute, however, is far from certain. The regulations are complicated and predicting liability would frequently require considerable tax expertise.
Summed up, for a divorcing spouse with little or no taxable income for the tax year, signing a joint tax return may pose considerable liability risk with no appreciable benefit.
Fourth, the rules related to filing deadlines under the federal tax code create practical hurdles to allowing a trial court to compel the parties to file joint returns. Under § 6013(b) of the tax code, a husband and wife can only elect to file a joint return for up to 3 years after they filed separate returns. But the opposite is not true. If the husband and wife filed a joint return, they cannot revoke that decision after the filing time limits for the taxable year have expired.
Planning Note
In the appellate court decision, it had been noted that Mr. Bock had made estimated tax payments. Although, it may or may not have been a factor in this case, estimated tax payments are a complicating factor in the decision to file jointly or separately. If one spouse is a partner in a partnership or a Schedule C proprietor and the other has is a W-2 employee, the estimated payments will presumably relate to the non-employee spouse, but it is not a given that the non-employee spouse “owns” those payments if they are joint.
The W-2 employee does, however, own his or her withholdings. This is why I recommend that family offices, closely held businesses and trustees that make estimated tax payments for beneficiaries and the like always make them out as individual estimated tax payments. It does no harm if a joint return is filed, but will avoid trouble if separate returns are chosen.
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Originally published on Forbes.com on June 22nd, 2012