In divorce settlement negotiations, the use of a tax indemnification agreement should be considered to protect the tax liability of a spouse who desires protection from liability for any deficiency relating to a jointly filed return. Noonan v. Commissioner, 73 TCM 1740 (1997), upheld the joint filing status of a return even though the ex-spouse refused to sign the return since a tax indemnification agreement had been executed to protect the ex-spouse from any liability for a deficiency for the tax year at question.

In 1987, the Noonans separated and Mrs. Noonan commenced judicial proceedings for divorce. After a bitter proceeding, the divorce became final in 1991. Noonan filed for an extension to file the 1988 federal income tax return. On the extension form, Noonan indicated that he would claim joint filing status. After substantial negotiations in 1990, Noonan signed an indemnification and hold harmless agreement with his spouse as part of the divorce settlement. The agreement recited that the Noonans had not filed tax returns for the years 1986, 1987, and 1989, and that they agreed to file joint tax returns for 1986 and 1987 reflecting refunds due. Under the indemnification agreement, Noonan agreed to accept sole financial responsibility for all taxes, interest, and penalties connected with the 1988 federal return in exchange for Mrs. Noonan's agreement to sign a 1988 federal tax return claiming joint filing status. The Noonans also agreed that Mrs. Noonan would sign the completed 1988 joint federal return which would be retained by her law firm until Mr. Noonan notified the law firm that he was able to pay the entire tax liability. Under the indemnification agreement,when the law firm received the funds to pay the tax liability, it would then file the return.

When petitioner and Mrs. Noonan signed the indemnification agreement, he provided the law firm with a completed 1988 federal return. A member of the firm reviewed the completed 1988 federal return and supporting documentation with Mrs. Noonan. Petitioner and Mrs. Noonan signed the completed 1988 federal return, and it was retained by the law firm. Later, a joint 1988 California return was filed. The California return was signed by petitioner and Mrs. Noonan. A copy of the signed joint federal return was filed with the California return.

Petitioner anticipated receiving a distribution of funds from the divorce proceeding with which he would pay the indicated tax liability for 1988, but the distribution was never mailed to him and he was unable to make the full payment.

In the Tax Court proceeding, Noonan testified that often he telephoned Mrs. Noonan and unsuccessfully requested the completed and executed 1988 federal return so he could file it even though he never provided the law firm or Mrs. Noonan with the funds to cover the 1988 tax liability. According to petitioner, he filed a 1988 federal return in March, 1992 without payment of the tax liability. He had no proof of mailing to show that he filed the 1988 federal return at that time and the Service had no record of receipt of that return from petitioner. In 1992, a revenue agent began a taxpayer delinquency investigation to secure a 1988 federal income tax return from the Noonans. The agent attempted to secure the return from petitioner, rather than Mrs. Noonan, because his address was contained in her records. The agent received the 1988 federal return from petitioner containing petitioner's original signature and a copy of Mrs. Noonan's signature because the original return remained with Mrs. Noonan's law firm.

Mrs. Noonan was contacted concerning her copied signature and told the agent that she did not want to sign the 1988 return submitted by Noonan because she did not know if the information in the return was correct and because she did not want to incur any liability related to that return. The agent mailed a letter to petitioner advising him that she was unable to obtain Mrs. Noonan`s signature and that he should file a 1988 federal return as head of household or married filing separate. The agent then mailed to Mrs. Noonan a Form 1040 for taxable year 1988. Prior to mailing the Form 1040, the agent filled in the following information: Mrs. Noonan's name and address, her Social Security number, and zero gross income. Mrs. Noonan completed the Form 1040 and returned it to the IRS. Later, petitioner received a letter from the IRS indicating that a 1988 federal return had not been filed by him. He then filed another copy of the 1988 federal return reflecting his original signature and a copy of the signature of Mrs. Noonan. In 1993, Noonan received notification from the IRS that the January return had been received but the joint return status was not correct.

The Tax Court summarized the issues before it as follows:

"A husband and wife may file a joint return. Sec. 6013. A joint return generally must be signed by both spouses. Sec. 1.6013-1(a)(2), Income Tax Regs. However, we have held that a return may be a joint return even though the signature of one spouse is missing, if both spouses intended to file a joint return. (Cases omitted.) Therefore, the resolution of this issue depends upon whether Mrs. Noonan intended that the 1988 return filed by petitioner constitute their joint return." Id at 1742.

Noonan stated that Mrs. Noonan was uncooperative in locating the completed and executed 1988 return due to their bitter divorce. Mrs. Noonan apparently refused to sign the return she had received from the agent filed by the taxpayer because of her belief that the return might contain inaccuracies. Mrs. Noonan stated she did not want to be held liable for any deficiencies relating to the return but according to the court, the tax indemnification agreement protected her.

According to the Tax Court, Noonan did everything possible he could do short of placing the money for the tax liability in Mrs. Noonan's hands, which, in view of their animosity toward each other, would not have been a reasonable thing to do. "Under these circumstances, petitioner complied with the terms of the indemnification agreement. His tender (offer to pay the tax) was unreasonably rejected, and, therefore, the condition precedent has been satisfied." Id. at 1743.