The Eleventh Circuit Court of Appeals, in the case of Bea v. Commissioner, Case No. 18-10511, held that a married couple could not obtain relief from making an irrevocable election with their tax returns merely because they were not aware of the election. Rather, the Court found that the taxpayer had signed and submitted a return that had the election on it, and the fact they failed to review the return before filing did not allow them to obtain relief.
The taxpayers had engaged an EA to prepare their tax returns for 2011-2014 and made significant errors those returns. The returns as prepared showed a substantial net operating loss for 2013, which the taxpayers carried back and obtained refunds on their 2011 and 2012 income tax returns.
The 2014 return prepared by this preparer also showed a large net operating. The preparer believed that no tax liabilities remained in the years to which the loss would be carried under the default rules. In that case, the loss would naturally have been carried forward to 2015 and later years.
However, for whatever reason, the preparer decided to attach an election to the tax return under IRC §172(b)(3) to irrevocably elect to have the loss carried forward and waive the right to any carryback.
The IRS commenced an examination of the taxpayer’s returns and asserted deficiencies for 2011 and 2012. The taxpayers looked to apply their 2014 net operating loss against the proposed deficiency for 2012, but the IRS denied that request. The IRS pointed out that the taxpayer had attached the election to waive the carryback period and only carry the 2015 loss forward.
The Tax Court agreed with the IRS’s position. The opinion noted the election had been made on their 2014 income tax return that the taxpayers had reviewed and signed. The panel agreed with that decision:
The Beas paid a professional to prepare their tax returns in 2014. That professional return preparer took all the steps required by Treas. Reg. § 301.9100-12T(d) to make a valid election under § 172(b)(3) on the Beas' joint tax return, a point that the Beas do not deny. The Beas affirmed with their signatures that they had examined their tax return, and subsequently filed the return containing this unambiguous election — which is expressly described as “irrevocable” by statute. The Beas contend that they neither knew nor understood the implications of the §172(b)(3) election on their 2014 tax return, but they did not ask their tax return preparer about the § 172(b)(3) election on the return that they signed.
Unfortunately for the taxpayers, ignorance is not bliss in this situation—nor does it serve as a valid reason for the taxpayers to be able to escape the consequences of that election.
As the opinion continues:
Though it was the error of the Beas' return preparer that put the Beas in this undesirable tax position, the Beas may not now disavow the unambiguous language of the irrevocable election they made on their signed 2014 tax return. The Tax Court correctly interpreted § 172(b)(3) and found that nothing in the statute requires the IRS or courts to consider a taxpayer's subjective intent in making the election. The Tax Court also found that the Beas did not make an ambiguous election under that section, and therefore the court correctly determined that the Beas could not revoke or disavow their election.
The taxpayers argued that the Tax Court should have considered their ignorance of the nature or consequences of the election and granted relief. However, the Eleventh Circuit panel disagreed, finding that ignorance of the consequences was not relevant in this case:
The Beas stated in their motion that the primary issue before the Tax Court was whether their ignorance regarding the § 172(b)(3) election in their 2014 tax return permitted them to disavow or revoke the election, and their “Additional Material Facts” were relevant to this issue. The Tax Court disagreed, however, and reasoned that the Beas' knowledge was irrelevant to whether the Beas could revoke their § 172(b)(3) election because the Beas' signed 2014 tax return contained the explicit, irrevocable election, and there was nothing in the statute or regulations to suggest that taxpayer knowledge might affect the revocability of that election. The Tax Court therefore did not view further evidence of the Beas' lack of knowledge to be relevant to its inquiry. The Tax Court did not clearly err in this finding.
The panel specifically referenced in a footnote the fact that the taxpayers had signed the jurat that contains a reference to reviewing the return.
The Beas' signed statement on Form 1040 stated: “Under penalties of perjury, I declare that I have examined this return and the accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”
As well, the Court found that requiring the IRS to divine whether taxpayers understood such elections would put an undue burden on the IRS:
If the IRS was required to determine the individual knowledge of each taxpayer making an unambiguous election under § 172(b)(3), the IRS would bear the risk of taxpayers' selection of — and reliance on — return preparers, as well as the administrative burden of determining subjective intent for all § 172(b)(3) elections. Nothing in relevant provisions of the Tax Code indicates that Congress intended to place this burden on the IRS.