Before DUFFY, Chief Judge, and MAJOR and HASTINGS, Circuit Judges.
Arnold J. Werner (hereinafter referred to as the taxpayer) and his wife Lucille Werner, commenced this action to recover an alleged overpayment of income tax for the calendar year 1948. After hearing, the district court, on July 1, 1958, entered judgment against plaintiffs and directed dismissal of their complaint. From this order plaintiffs appeal.
The sole issue is whether plaintiffs are entitled to have their tax liability for the year in question determined on the basis of rates applicable to married persons filing a joint return, as they contend, or on the basis of a married person (taxpayer) filing a separate return, as determined by the Commissioner and approved by the district court.
In the view which we take of the case only a brief statement of the facts is required. Prior to 1948, taxpayer each year had filed a separate return and his wife had filed no return. Taxpayer, for the year 1948 and for some time prior thereto, was executive vice president of a corporation. The corporate returns as well as those of its officers for a number of years had been prepared by the corporation's bookkeeper, Arthur Champion. For the year 1948, an independent tax practitioner, who was a lawyer and certified public accountant, was employed to prepare the corporate returns and also those of its officials. This practitioner because of commitments to previous clients was not able to prepare either the corporate or individual returns by March 15, 1949, the due date for filing. An extension of time was requested of the local collector by both the corporation and the taxpayer. The corporation prior to due date received notice of an extension. However, the taxpayer received no notice of an extension prior to due date but subsequently received such notice in the form of a letter dated March 15, 1949.
Taxpayer, having failed to receive a notice of extension, considered it necessary that a return be made, and on March 15, 1949, had a return prepared by Champion and filed. This return was signed only by the taxpayer. He contends that this was a tentative return but that he intended, along with the corporation, to file a final return when the services of the person who had been employed for that purpose were available. Taxpayer testified that he was not familiar with the distinction between a joint return and a separate return or the income-splitting benefits of the Revenue Act of 1948, and that he received no information from Champion in regard to these matters. Taxpayer also testified that he did not request his wife to sign the original return because she had never done so in the past and he did not regard it as necessary. Taxpayer and Lucille Werner, his wife, on September 30, 1949, filed another return designated "Amended Return," which was filed jointly in the names of taxpayer and his wife for the calendar year 1948.
The income disclosed by taxpayer in his original return was increased in the amended return filed by him and his wife and was further increased by the Commissioner's determination. We see no purpose in setting forth the detailed and complicated calculation of the Commissioner by which he arrived at the amount of the deficiency assessed against taxpayer. This is because there is no dispute on the record as to the amount of the deficiency determined on the basis employed by the Commissioner. Neither is there any dispute as to the amount the defi.iency would have been, determined on the basis urged by the taxpayer. The amount sought to be recovered is the difference between the deficiency assessed by the Commissioner and paid by the taxpayer on the basis of rates applicable to a married person filing a separate return, and the deficiency which should have been determined on rates applicable to a joint return.
The district court found that taxpayer "intentionally filed a separate income tax return for the year 1948"; in fact, the court characterized this finding as representing "the only issue in the case." Based upon this finding, the court reasoned that recovery was precluded by reason of Amended Reg. 111, Sec. 29.51, promulgated by the Commissioner of Internal Revenue (subsequently quoted). We disagree with the reasoning. We accept for the purpose of our discussion the finding that the taxpayer on March 15, 1949, intentionally filed a separate return.
Sec. 51(b)(1) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 51(b)(1) provides as follows:
"In General. A husband and wife may make a single return jointly. Such a return may be made even though one of the spouses has neither gross income nor deductions. If a joint return is made the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several." Reg. 111, Sec. 29.51, upon which the district court solely relied in denying recovery, provides:
"A joint return may not be made by a husband and wife for a taxable year if a separate return has been filed by one of the spouses and the time for filing the return of such spouse has expired. Similarly, if a joint return is filed, separate returns may not be made by the spouses after the time for filing the return of either has expired."
Plaintiffs contend that this regulation, precluding the filing of a joint return where a separate return has been filed by one spouse, is unreasonable and inconsistent with the terms of the statute. We think this contention is sound. Of course, as the government points out, the Commissioner had authority to prescribe regulations necessary to carry out the congressional enactment and, as stated in its brief, "It is settled that regulations, when thus reasonably prescribed and not in conflict with the statute, * * * have the force and effect of law."
A comparison of the regulation with the statute is sufficient to demonstrate that the former is inconsistent with the latter. The statute bestows the unqualified right of a husband and wife to file a joint return and to have their tax liability determined on that basis. This unqualified right provided by Congress is withdrawn by the regulation to the extent that the benefit of the statutory provision is not available if either husband or wife has previously filed a separate return.
In our view, the regulation is not only inconsistent with the statute but is unreasonable and arbitrary, particularly as applied to the situation before us. In Manhattan General Equipment Co. v. Commissioner, 297 U.S. 129, ...