Spouse’s actual signature not necessary on joint return and extension forms

A return was the joint return of a married couple, and forms to extend the period of limitation for assessment were valid, even though one spouse did not actually sign the return or the extension forms, the Second Circuit held, affirming a Tax Court decision.

Background

Om and Anjali Soni lived in New York with their son, Kunal. Om worked as a businessman, while Anjali was a homemaker and Kunal worked for Om.

During their over 40 years of marriage, Om had handled all of the couple’s finances; Anjali did not deal with financial matters and “fully expected and trusted” Om to handle all of their financial affairs, including the tax matters. Anjali was generally aware of the requirement for her and Om to file a tax return, but she had never signed a tax return or asked anyone to sign one for her. Instead, Om would often give documents, including tax returns, that required Anjali’s signature to Kunal, and Kunal would sign them for her. The Sonis filed joint tax returns from 1999 through 2003 and from 2005 through 2014.

On their 2004 return, which was filed 24 days late, the Sonis claimed a loss deduction in excess of $1.7 million in association with Beauville Corp., an S corporation in which Om held an ownership interest but for which he failed to keep records. This resulted in a $73,470 claim for refund for the Sonis. Om personally signed the return, but although Anjali’s signed name was on the return, she did not personally sign it.

The IRS examined the 2004 return and repeatedly sought the Sonis’ consent to extend the date by which it had to complete the examination and assess any tax due. A taxpayer can consent to such an extension using Form 872, Consent to Extend the Time to Assess Tax, or one of its variants. A representative of a taxpayer with a power of attorney for a tax year can also consent to extend the date on behalf of the taxpayer.

On March 20, 2008, the IRS received: (1) a Form 2848, Power of Attorney and Declaration of Representative, authorizing Alan Grossman, who was Beauville’s accountant, to act as the Sonis’ representative throughout the examination, and (2) a signed Form 872 that the IRS had previously sent to the Sonis seeking an extension of the examination period. The Form 2848, signed on April 10, 2006, contained signatures for Om, Anjali, and Grossman. Anjali, however, did not personally sign it, and the Sonis and the IRS disputed whether Om personally signed it. Although the first Form 872, signed by Grossman in his capacity as the Sonis’ representative, was dated March 20, 2006, the date was erroneous, and an IRS appeals officer noted during his review of the 2004 return that Grossman actually signed the form in 2008.

During the examination, the IRS received eight signed Forms 872 facially extending the limitation period for examining the 2004 return from Nov. 14, 2008, to Dec. 31, 2015. Grossman signed his, Om’s, and Anjali’s names on a second extension form. The remaining six extension forms bore only Om’s and Anjali’s signatures. However, Kunal had signed Anjali’s name on these forms.

The IRS found in the examination of the 2004 return that the Sonis failed to produce evidence supporting their claimed $1.78 million loss from Beauville and thus determined that they were not entitled to claim it. Accordingly, the Service issued a notice of deficiency informing the Sonis that they were jointly and severally liable for (1) an additional $642,629 in tax for 2004 due to the disallowance of the $1.78 million loss from Beauville, and (2) a $28,835 late-filing penalty.

The Sonis timely challenged the IRS’s determination in Tax Court. In an amended answer to their Tax Court petition, the IRS asserted that the couple owed an additional $128,526 accuracyrelated penalty under Sec. 6662.

The Tax Court agreed with the IRS: After a one-day trial, it held that (1) the 2004 return was jointly filed; (2) the IRS had timely issued the deficiency notice to the Sonis; (3) the Sonis were subject to a late-filing penalty of $28,836; and (4) they were subject to an accuracy-related penalty of $128,526 (Soni, T.C. Memo. 2021-137). The Sonis appealed the decision to the Second Circuit.

The Second Circuit’s decision

The Second Circuit upheld the Tax Court’s decision in total. In its opinion, the court discussed the ramifications of Anjali’s failure to sign both their joint return for 2004 and the Forms 872 during the examination.

Joint return: The Second Circuit, citing its decision in O’Connor, 412 F.2d 304 (2d Cir. 1969), stated that in the Second Circuit, determining whether an income tax return is a joint return depends on the intention of the parties and is a question of fact. One spouse’s failure to sign a return does not preclude a finding of a joint return, but it removes the presumption of correctness ordinarily attaching to the IRS’s determination of jointness, and if the return does not contain one spouse’s signature, the IRS bears the burden of producing additional evidence on the issue that proves the intention of the parties.

In O’Connor, the Second Circuit concluded that a married couple intended to file jointly — despite the absence of one spouse’s signature on several returns — where the IRS produced evidence that (1) the nonsigning spouse knew that a return had to be filed; (2) the nonsigning spouse knew of the signing spouse’s expert knowledge of the requirements for preparing and filing tax returns; (3) the spouses filed a joint petition in the Tax Court; (4) the spouses asserted only a delayed challenge to the IRS’s characterization of a return as joint; (5) the return in one spouse’s name alone actually included both spouses’ income and deductions; and (6) the nonsigning spouse had substantial gross income.

The Second Circuit found that in the Sonis’ case, at least the first four circumstances identified as evidence of the taxpayers’ intent in O’Connor were present. First, Anjali knew a return had to be filed. Second, Anjali knew of Om’s expert knowledge of return preparation and filing because he was an experienced businessman.Third, the Sonis filed a joint petition in the Tax Court. Fourth, Anjali, not having disavowed the 2004 return as joint until the Tax Court trial, only belatedly challenged the IRS’s characterization of it as joint. Besides this, in the court’s view, the fact that the Sonis had filed a joint tax return for every year from 1999 through 2003 and from 2005 through 2014 further supported a finding that they intended to file jointly. Thus, the court concluded that the Tax Court did not err, much less clearly err, in finding that the Sonis intended to file a joint return.

Extensions of the limitation period on assessment: The Second Circuit then considered whether the IRS issued a timely notice of deficiency to the Sonis. For the notice to be timely, it was necessary that all eight Forms 872 extending the limitation period for the Sonis’ 2004 tax year had been validly executed.

With regard to the first two Forms 872, Om contended that Grossman had forged his signature on the power of attorney authorizing Grossman to act on his behalf for 2004. However, because the Tax Court found that Om was not a credible witness and the signature on the power of attorney form was similar to signatures Om admitted were his, the Second Circuit found that the Tax Court did not err in determining the power of attorney was valid and did give Grossman the authority to act as Om’s representative and sign the first two Forms 872 on his behalf.

Anjali argued that because she did not sign the power of attorney form, the first two Forms 872 were invalid as to her because Grossman was not her representative. However, the Second Circuit agreed with the Tax Court that, under the principles of agency law, there was an agency relationship between Anjali and Om, with Om, the agent, having been given implied authority to act on behalf of Anjali, the principal, with respect to tax matters, including those for 2004. Because Om had this implied authority, the court found that he could have reasonably inferred that Anjali would consent to his appointing Grossman as their representative. Consequently, the first two Forms 872 signed by Grossman as the Sonis’ representative were valid as to Anjali.

With regard to the final six Forms 872, the Second Circuit found that since Om had signed those forms, they were all valid as to him. While Kunal had signed those forms for Anjali, the court found that the same agency analysis applied. Because Om had implied authority to handle all tax matters for Anjali, there was no reason why Om could not have tasked Kunal with ensuring Forms 872 were completed on Anjali’s behalf. Thus, the Forms 872 with Kunal signing for Anjali were valid.

Late-filing penalty: The Sonis argued on appeal that the Tax Court had committed reversible error in finding that they were liable for the penalty because the Tax Court had not purported to find that the couple had acted with willful neglect with respect to the 2004 return. However, the Second Circuit noted that it was the Sonis’ burden to prove a lack of willful neglect, and the Tax Court had no obligation to prove they had acted with willful neglect. Therefore, it affirmed the latefiling penalty.

Accuracy-related penalty: The Sonis also argued that they were not subject to the accuracy-related penalty because they had reasonable cause for the inaccuracy of their 2004 return and they had acted in good faith by relying on the advice of accountants. According to the Second Circuit, the Sonis did not have reasonable cause for claiming the loss from Beauville Corp. because the loss was a result of not keeping records for the corporation, which Om, an experienced, educated businessman, should have known to do. Furthermore, they could not rely on the advice of a tax professional because they did not give their accountants the necessary and accurate information about Beauville, and the record showed Om ignored the advice of accountants who warned him that he would need proof to substantiate the claimed loss from the company.

Reflections

As this case shows, using an improper signature on an IRS document as a shield is at best an iffy proposition for a taxpayer. Although many people might think that having someone else sign a document that requires a taxpayer’s signature would per se render that document invalid, under agency principles, if the facts show the taxpayer gave the person who actually signed the document the authority to do so, a court can and likely will hold that the signature by the agent is valid. This is true even if the authority to act was only implied by the taxpayer’s actions.

Soni, No. 22-829-ag (2d Cir. 7/27/23)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.