Another 6511(h) case Fails to Reach the Promised Land

One of the first posts I wrote addressed the issue of the extended period of time to file a refund claim allowed by IRC 6511(h). In that post I mentioned the long losing streak endured by taxpayers in published opinions. Last year it appeared that the case of Stauffer v. United States may have turned things around. I blogged about it here, here and here. In the Stauffer case the court refused to agree with the IRS regarding the need to obtain an opinion regarding the taxpayer’s capacity from a specific group of medical professionals mention in Rev. Proc. 99-21 which fails to include some of the most relevant medical professionals among those qualified to issue an opinion. The post earlier this year regarding the ABA’s comments regarding Rev. Proc. 99-21 provides some background on the procedures developed by the IRS.

Unfortunately for the estate of Stauffer, the IRS backed up after its loss regarding who may opine regarding financial disability and made a different argument. In the second version of the case to go forward to opinion, the IRS argues that Mr. Stauffer fails to qualify for the extended period available for taxpayers with financial disability because he gave a durable power of attorney to his son. The court finds that the son had the authority mentioned in the statute to assist Mr. Stauffer on financial matters and that authority causes the statute of limitations for filing a claim for refund to run prior to the actual filing in this case.

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As with the original opinion, this case went first to the magistrate judge. The magistrate judge determined that the statute of limitations ran because Mr. Stauffer’s son had the power to handle his financial affairs during much of the period between the due date of the return and the filing of the 2006 return claiming a refund of over $100,000. The district court upheld the decision of the magistrate judge but did so based on different reasons. At issue in this aspect of the case is the nature of the authorization provided by decedent to his son and what is required of someone with a durable power of attorney. See a prior post on the issue of authority.

In this case decedent gave to his son a durable power of attorney in 2005. The durable power of attorney stated that the POA could be withdrawn upon a written statement by decedent. It appears clear that the decedent did not provide to his son a written withdrawal of the POA although the decedent did write down that he intended to withdraw the POA. The decedent, however, did not deliver the written intention. The son did tell his sister that he was no longer acting as his father’s durable POA.

The court concludes that in 2005 the father had the capacity to execute the durable POA. It further concluded that the applicable law regarding the enforceability of the durable POA is the law of Pennsylvania and not federal common law. In holding that Pennsylvania law applies here, the court cited to Bova v. United States, 80 Fed. Cl. 449 (2008).

The court next looked at the issue of authority. It found that the durable POA gave the son the authorization to act on behalf of his father in financial matters for purposes of IRC 6511(h). The court acknowledged that the IRS does not define “authorized.” It looked at Black’s Law Dictionary which describes it as “[t]he official right or permission to act, esp. to act legally on another’s behalf….” The estate argued that authorized must be read in this context as requiring that the agent knew of the matter that requires action or it creates an absurd result. The court rejected this argument citing to Brockamp v. United States, 519 U.S. 347 (1997). It refers to the concerns of Congress that it not create a large equitable remedy that would engulf the tax refund system. Therefore, interpreting “authority” according to its plain meaning even when it produces an inequitable result follows the intention of the statute.

Here, the son had the authority to file the father’s return and that it all that the statute requires. It does not require that the son knew the returns needed to be filed.

Next the court looked at the facts to determine whether the father had revoked the POA. It finds that he did not applying Pennsylvania law. To be effective, revocation of a POA requires “actual notice” from the principal to the agent. The document itself required a written notification in order to revoke the POA. Since there was no actual notice as required by Pennsylvania law or written notification as required by the POA, the POA was not revoked and remained in effect from its creation. Because it remained in effect, the statutory language keeps the estate from asserting financial disability.

The result here shows how strictly the statute is interpreted. In the first opinion, the court looked at the Rev. Proc. and not the statute. The statute does not require a specific type of medical degree in order to opine regarding the taxpayer’s disability. This second opinion does not undercut the value of the first for those who seek to argue that strict compliance with the revenue procedure is not a prerequisite to relief. Nonetheless, in the issue of authority where the statute makes reference to the requirement, the court felt less ability to deviate from a strict interpretation of the statutory language.

Here, the facts showed a breech between the father and the son. They also showed that the financial actions taken by the son on behalf of the father during the father’s life were actions permitted by a narrow POA and not the durable POA. Nonetheless, the court declined to follow the estate to a legal place that would allow it to recover over $100,000 paid to the IRS by someone who lacked full capacity. IRC 6511(h) provides a statutory and not equitable remedy to parties seeking to hold open the refund statute of limitations. The Staffer case reminds us that refunds in financial disability case go to those with tight facts that meet the narrow requirement of the statute and necessarily not to those whose situation might cry out for relief.

 

ABA Tax Section Submits Comments on Rev. Proc. 99-21

We welcome guest blogger Caleb Smith who runs the tax clinic at University of Minnesota and who regularly blogs with us on designated orders. Recently, Caleb headed up a comment project for the ABA Tax Section on Rev. Proc. 99-21. In the almost 20 years after the passage of section 6511(h), the IRS has not issued regulations concerning that subparagraph and to my knowledge had not previously called for comments. The opportunity to comment on this provision is a very positive development and the group headed by the Caleb did an excellent job in their comments on this provision and how the IRS could change some of the rules it applies in administering the provision to follow more closely the purpose of the statute and to make it easier for taxpayers to comply without making it more difficult for the IRS to administer. The IRS is rightfully concerned that it does not want to open a floodgate of requests for relief that it would have to manage and concerned that it would not receive appropriate information to allow it to make the proper decision concerning relief to allow someone to claim a refund after, and sometimes long after, the statute of limitations had expired.  

Because I was aware that the ABA Tax Section was making these comments and because I wanted to highlight the specific issue of who can appropriately provide information to the IRS regarding someone’s disability, I also sent in comments on this issue on the narrow issue of who the IRS should listen to in making this decision. I am hopeful that a fresh look at this issue after 20 years of administration and litigation will allow the IRS the opportunity to improve upon the original procedures making it easier for it and taxpayers to appropriately determine and obtain relief. Keith

With all the focus on Graev, it can sometimes be easy to lose sight of the other, important issues that Procedurally Taxing has consistently blogged about. One such issue that, absent PT’s coverage, may not have been at the forefront of practitioner’s consciousness are the problems with Rev. Proc. 99-21 in determining “financial disability.” Much like supervisory approval in Graev, financial disability is a product of the 1998 IRS Restructuring and Reform Act that may not have been given quite its due in the decades after its enactment. Since the ABA Tax Section recently submitted comments to the IRS about concerns it has with the Rev. Proc. now seems a good time to get reacquainted with the issue.

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The Crux of Rev. Proc. 99-21: Showing “Financial Disability”

The phrase “Financial Disability” probably doesn’t mean a lot to most tax practitioners (or doctors, or anyone else, for that matter). But for tax purposes, the concept is somewhat simple: under IRC 6511(h), financial disability of a taxpayer tolls the statute of limitations for claiming a refund. Thus, financial disability allows for refunds that would otherwise be time-barred. There aren’t a lot of exceptions to the mechanical (and mind-boggling) statutory provisions governing refund claims, so this provision may come as both a surprise and relief to many. The problem is largely in proving that one is financially disabled. And this, in turn, is problematic at least in part because of the IRS procedures for showing financial disability in Rev. Proc. 99-21.

Along with Christina Thompson of Michigan State and Eliezer Mishory of the IRS, I presented on this topic at the most recent Low-Income Taxpayer Clinic conference in Washington, D.C. On giving the presentation, I encountered two general reactions: (1) many practitioners expressed that they previously had no idea what “financial disability” was (some expected our presentation to be about collection issues, probably “financial hardship”) and (2) practitioners that did know what financial disability was shared very similar frustrations with how to prove it. Those frustrations almost all dealt with Rev. Proc. 99-21.

Procedurally Taxing has covered this issue numerous times. Early posts note the near-futility of taxpayers challenging the IRS in court on financial disability grounds. The trend, however, has shifted in taxpayer’s favor (posts here and here). Courts progressed from questioning Rev. Proc. 99-21 in Kurko v. Commissioner to outright holding for the taxpayer when the IRS failed to provide rationale for rules within Rev. Proc. 99-21 in Stauffer v. IRS.

IRS Request for Comments and the ABA Tax Section Submission

My hope is that, in the aftermath of Kurko and Stauffer, the IRS will be more receptive to changes to Rev. Proc. 99-21 because there is little reason to stick with a sinking ship. The general criticisms in the ABA comments could be summarized as:

(1) Rev. Proc. 99-21 is not faithful to the intent of the enabling statute, stemming largely from the Congressional override of the Supreme Court in Brockamp;

(2) Changes are needed to ensure that vulnerable taxpayers are protected and any such change should, at the minimum, make it likely that the taxpayer in Brockamp would be found “financially disabled”; and

(3) Rev. Proc. 99-21’s disallowance of psychologists as a professional that can attest to a mental impairment is poorly reasoned, poorly drafted, and vulnerable to challenge in Court.

The suggestions provided to remedy these issues were sensitive to IRS worries that changes to Rev. Proc. 99-21 may open floodgates for late refund claims that cannot be quickly resolved, or that may allow the simply negligent to cash-in. The four recommendations are meant to balance legitimate IRS concerns while also protecting taxpayer rights and getting to the correct outcome. Some of the recommendations work towards administrative ease (publishing a list of prima facie section 6511(h) applicable medical conditions), while others focus on the realities that “financially disabled” (often low-income) taxpayers face (like poor medical records and greater involvement with psychologists and social workers than medical doctors).

I encourage readers to take a look at the submitted comments and to keep financial disability on their radar in the future. It can mean quite a lot to the more vulnerable individuals in society.

 

 

6511(h) Case Takes a New Turn

We have reported before, here and here, about the case of Hoff Stauffer, Administrator of the Estate of Carlton Stauffer v. IRS, in which the taxpayer, the estate of Carl Stauffer, seeks to obtain a refund for the amount of tax overpaid by a 90 year old individual who failed to timely request the refund in the declining years of his life. Mr. Stauffer was under the long term care of a psychologist who wrote an expert opinion on why Mr. Stauffer’s condition caused him to meet the criteria for financial disability, but the IRS refused to consider this opinion since psychologists are not listed as the type of medical professionals who can offer an opinion for purposes of the statute according to the Revenue Procedure.

The IRS moved to dismiss the case for lack of subject matter jurisdiction because the estate made its request for refund based on IRC 6511(h) but did not use the type of medical professional to support its request required by Rev. Proc. 99-21. In the opinion of both the magistrate judge and the district judge in Boston, the use of the precise medical professional required by the Revenue Procedure was not necessary and the court denied the IRS motion to dismiss.

Tom Crice, who represents the estate, has now filed a motion seeking to enjoin the IRS from arguing in any case that a taxpayer seeking a refund under 6511(h) must use the type of medical professional prescribed by the Revenue Procedure. This will be an interesting case to watch. I also note that separate from what is happening in this case, the government has published a request for comments on Rev. Proc. 99-21. If you have any experience with this provision and thoughts on how the IRS might improve the process, consider sending in a comment to assist the IRS in thinking about how to administer this provision. This is the first opportunity of which I am aware to formally comment on this procedure, which went into effect almost 20 years ago with no public comments.

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Just because it lost the motion to dismiss did not mean that the IRS needed to or would concede that the estate was entitled to the refund and the case has continued. In denying its motion to dismiss, the district court wrote that the basis in the Revenue Procedure for the use of only the type of medical professional designated by the IRS seemed arbitrary. Specifically, the court stated:

“Because the government has offered no evidence that the IRS had a reason that was not arbitrary for excluding psychologists from the category of professionals qualified to support a claimant’s financial disability, the court is denying the motion to dismiss.”

The court granted Defendant leave to present at summary judgment any evidence it might have “that the IRS considered reasonably obvious alternatives in excluding psychologists from the definition of “physicians” in the Revenue Procedure. On October 27, 2017, Defendant submitted to the Court its statement that “the United States reports that it does not presently have evidence on what alternatives that the IRS considered in excluding psychologist from the definition of “physicians” in Revenue Procedure 99-21 other than the rule itself.”

The IRS has stopped arguing that the opinion of the psychologists cannot be considered and will now argue that the opinion is not supported. The estate here is fortunate that Mr. Stauffer was seeing a professional for many years before his death and that this professional was in the position to write an expert opinion from personal knowledge and observation of his patient. So many individuals suffering from the type of cognitive decline that could form the basis for 6511(h) relief are not seeing professionals who can write an opinion based on personal observation. The lack of personal observation makes medical professionals, no matter what their professional designation, uncomfortable opining on the scope of a taxpayer’s cognitive decline in a manner that suits the criteria of the revenue ruling. Now that the IRS no longer contests the validity of the opinion of the psychologists, the ability of the taxpayer to succeed in this case has increased significantly. The IRS will have the same difficulty many taxpayers face in finding an expert. Its case will be primarily one of trying to punch holes in taxpayer’s expert rather than having a report of its own.

While I am rooting for Tom in his effort to enjoin the IRS from insisting on a specific type of medical professional as a basis for securing subject matter jurisdiction, I am most interested in seeing the IRS produce a rule that will work for it and for taxpayers in the situation of Mr. Stauffer, Mr. McGill (the decedent involved in Brockamp) and Ms. Parsons (the decedent involved in Webb).  The IRS fears a flood of long overdue refund claims and taxpayers fear an inability to provide expert proof of the basis for the late claim.

In my clinic, the students regularly marvel at our clients who fail to file their returns and often leave money on the table as a result. A tiny fraction of these clients may meet the concerns Congress sought to address in passing 6511(h) but most are just professional or semi-professional procrastinators. On the other hand, taxpayers like Mr. Stauffer and Mr. McGill who have a lifetime of timely filing should receive some recognition of that in the process similar to the reasoning behind first time abatement of penalties but with more stringent proof of the longstanding nature of compliance.

The combination of long-standing compliance coupled with cognitive decline because of age or because of other factors like disease or physical injury should produce the type of situation that allows for a refund of money that everyone agrees belongs to the taxpayer but for the delay in requesting it. I also do not mean to suggest that only people with perfect filing histories prior to the onset of financial disability should have the time for filing a refund claim tolled, but rather that a stellar filing history provides its own proof of the aberration of the late filed claim and likely reason therefore.

The rule should build upon the same principles as equitable tolling. It should not open the floodgates for late refunds, but it should not be so narrow that it causes the IRS to seek to knock out taxpayers who do not use the right kind of medical professional or submit the perfect proof package in the first instance. The people who suffer from financial disability will struggle to put together the perfect package for the IRS. Even with professional assistance, the ability to gather the right kind of information can be quite difficult and some patience on the part of the IRS and the court is necessary because of the difficulties of the person seeking the relief.

In her 2013 Annual Report, the National Taxpayer Advocate made a legislative recommendation concerning section 6511(h) and suggesting that Congress broaden the language.  The legislative recommendation contains an excellent and detailed discussion of the issue.  In particular, one of the concerns she addressed in the report is whether the language of the statute using the words “medically determinable physical or mental impairment” limits the relief to taxpayers who have obtained an opinion from a medical doctor as opposed to another type of medical professional. I know that the IRS is concerned about that as it looks at revising Rev. Proc. 99-21.  The Harvard clinic plans to put its thoughts together on this subject in the form of a comment to assist the IRS in reconsidering it guidance and litigation strategy. Please join us in commenting if you have thoughts on this subject.

 

The Crack Grows Wider – Continued Success in One Financial Disability Case

Last March, I reported on what I believe is the first successful financial disability case with a written opinion, Hoff Stauffer, Administrator of the Estate of Carlton Stauffer v. IRS. The decision on which I wrote was the report of a federal magistrate judge to whom the motion to dismiss filed by the IRS in the case had been referred. The magistrate judge found that the case should not be dismissed. That report then goes to the Federal District Court judge assigned to the case who can adopt, reject, or modify the report. On September 29, the district court rendered its opinion and it adopted in part and modified in part the report, and denied the motion to dismiss filed by the IRS.

This does not mean that the taxpayer wins the case but it goes a long way toward that outcome, particularly because of the reasoning for the decision. It is possible that the IRS will concede the case now that it has lost this motion. It could seek to settle based on the perceived hazards in the case. It could also continue to argue the case and pursue in the First Circuit the argument it made regarding the motion to dismiss if it should lose the case at the district court level. Of course, it could also decide to revisit Rev. Proc. 99-21. I do not know if it was because of the Stauffer decision, or the fact that this issue was sent to the IRS for discussion during the annual meeting between the IRS and the ABA Tax Section or just that the stars lined up but the IRS has just announced an opportunity giving the public the opportunity to finally comment on what rules might make sense in the circumstance of financial disability. I am pulling for the Estate to win, but I am also excited that the IRS is finally giving taxpayers a voice in how this process should work. The opinion of the district court, like that of the magistrate judge, suggests a revisit is needed.

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This case is factually very similar to Brockamp, which started the whole financial disability exception to the statute of limitations for filing refund claims. Hoff Stauffer is the son of Carlton Stauffer. Carlton Stauffer died at the age of 90, similar to the age at which Mr. Brockamp passed away. Mr. Stauffer’s capacity was slipping in his final years, similar to Mr. Brockamp. Mr. Stauffer had a refund for 2006 which he failed to claim because he did not file a return for that year, and his son (as opposed to Mr. Brockamp’s daughter) discovered the situation after his father’s death. Hoff Stauffer filed his father’s return about six years after the due date and let the IRS know that he wanted the return treated as timely because his father was financially disabled during the appropriate time period.

As the son of a now 91 year old father, I have begun in the past couple of years reviewing my father’s returns for the first time, at his request, though he continues to prepare them. This should be a situation in which the IRS and the court are sympathetic. While I am not arguing that every 90 year old should qualify for financial disability, age does bring some decline in functionality that does not take a medical doctor to recognize. It was the nature of the situation that caused Congress to act so swiftly after the situation in Mr. Brockamp’s case came to light.

As a reminder of the situation in these cases, the time for filing a refund claim usually runs three years after the due date of the return, although IRC 6511 has many more twists and turns than suggested by that broad statement as the recent decision in the Borenstein case attests. If you fail to file the return within that three year period, you lose the refund. In Brockamp, the Supreme Court held that equitable tolling was unavailable to keep open the time period for filing the claim even though his estate had very equitable facts.

Reacting to that decision, Congress passed IRC 6511(h) to allow taxpayers who missed the time for filing a claim for refund to file such a claim late and still receive the refund upon a showing that the taxpayer was financially disabled. It tossed the decision on what constitutes financial disability to the IRS. The IRS promulgated Rev. Proc. 99-21, in which it sets out the things a taxpayer must do to establish financial disability. Even though almost two decades have passed, the IRS still has not issued a regulation or previously given taxpayers the opportunity to comment on the procedures it established and it has doggedly adhered to the procedures in the face of cases showing that these procedures do not work that well. While the IRS has granted administrative relief under IRC 6511(h), it has had nothing but success in the cases it has chosen to litigate – until now.

Mr. Stauffer did not religiously follow the requirements of Rev. Proc. 99-21. Instead of using a physician to make a statement about the condition of the taxpayer, Mr. Stauffer submitted the statement of a psychologist. The IRS denied the claim for not following the applicable procedures. The Rev. Proc. requires a “written statement by a physician (as defined in section 1861(r)(1) of the Social Security Act, 42 U.S.C. 1395x(r)), qualified to make the determination” that the individual satisfied the definition of “financially disabled.” The Rev. Proc. does not define physician except to refer to the social security statute. The definition in the social security statute does not list psychologists.

The psychologist, whose statement Mr. Stauffer attached, had treated the taxpayer from 2001 until he passed away in 2012. The statement provided that the taxpayer suffered from “psychological problems” in addition to “a variety of chronic ailments, including congestive heart failure, chronic obstructive pulmonary disease, leukemia, and chronic pneumonia.” The psychologist opined that these conditions “severely and negatively impacted” the taxpayer’s “mental capacity, cognitive functioning, decision making, and emotional well-being,” preventing him from properly managing his financial affairs from at least 2006 until his death. The IRS denied the late refund claim because the attached statement came from a psychologist and therefore “cannot be used as a statement that can certify Mr. Stauffer’s condition.”

The estate argued that failing to consider this letter “unreasonably limits [the IRS’s] consideration of credible, relevant evidence of financial disability.” The district court found that it could set aside agency action if it was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. Because the IRS offered no evidence concerning why it was excluding psychologists from the list of professionals who could support a claim of financial ability, the court denied its motion to dismiss.

The district court stated that it reached the same conclusion as the magistrate judge through a different path. The magistrate judge applied a Skidmore standard, finding that if the agency interpretation does not warrant deference, the court can apply its own interpretation.

Here, the taxpayer did not argue that the Rev. Proc. misinterprets the statute, and did not argue that the Rev. Proc. was something other than a procedural rule. The district court said that it could not require the IRS to accept forms of evidence or manners of proof that the IRS foreclosed in a valid exercise of its authority; however, it pointed out that the applicable law does not exempt from judicial review the procedural requirements that the agency does choose to impose. This review includes reviewing rules of evidence imposed by the agency and determining if it is reasonable to categorically deny opinions from professionals not listed in the Rev. Proc.

The agency needs a reasoned explanation for rejecting the “reasonably obvious alternatives” available to it. In Abston v. Commissioner, 691 F.3d 992, 996 (8th Cir. 2012), the court upheld the Rev. Proc.; however, the taxpayer there failed to submit any doctor’s statement. So, the Abston court did not face the issue of what would be reasonable. Here, the court said that it was not obvious why the IRS would refuse to consider the statement of a psychologist who contemporaneously diagnosed and treated the individual. In Social Security cases, the opinion of a treating psychologist is entitled to great weight per Hill v. Astrue, 698 F.3d 1153, 1159-1160 (9th Cir. 2012).

Here, the IRS has not provided any evidence to support its rationale in adopting the definition in 42 U.S.C. 1395x(r). The court found this total absence of a basis for the rule to provide it with leeway to allow the evidence of the psychologist.

The IRS also argued that the taxpayer failed to follow the rule by failing to submit the psychologist’s report with its claim for refund. Here, the report was not supplied until the appeal of the initial denial of the refund request. Citing other cases that did not deny claims for technical foot faults, including the Abston court, the district court here followed the lead of the magistrate judge and allowed in the report even though it was not filed with the initial claim.

 

District Court Denies 6511(h) Financial Disability Claim

We have covered several cases in which the taxpayer sought to hold open the statute of limitations based on financial disability here, here, here, and here.  In Estate of Kirsch v. United States, the taxpayer’s estate loses, which is the norm for these cases, but does so with slightly different facts than the usual case.

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Ms. Kirsch passed away on September 16, 2016.  Her estate brought this action seeking to recover a refund of an overpayment for her 2008 return.  She did not file the 2008 return until June 5, 2015.  Her estate argued that the delay in filing was due to financial disability.  When she filed her 2008 return seeking a refund, she knew that she had missed the time for filing a refund absent the suspension caused by the financial disability provisions.  So, she submitted with the return two statements, one from her doctor and the other from her son.

The doctor’s statement provided:

Florence W. Kirsch is a patient known to me.

  1. [Ms.] Kirsch has been diagnosed with a cognitive mental impairment;
  2. It is my medical opinion that in addition to issues in remembering to take certain medications, her mental impairment has prevented [Ms.] Kirsch from managing certain aspects of her financial affairs;
  3. It is my medical opinion that the mental impairment has lasted for a continuous period of not less than twelve months and will continue to last indefinitely;
  4. While first diagnosed on January 3, 2012, [Ms.] Kirsch first began reporting issues with her memory in 2007. Given the progressive nature of cognitive mental impairments, [Ms.] Kirsch would have begun to experience adverse effects of her mental impairment first in 2007 and it became progressively worse.

 

The statement from her son, which it what makes this case somewhat unusual, involves a durable power of attorney granted to him.  In 2003, Ms. Kirsch created a durable power of attorney naming her husband as her agent and her son, Ken Kirsch, as the successor agent.  Mr. Kirsch, the husband, passed away on March 28, 2009, before the 2008 return was due.  Ken Kirsch did not exercise his authority under the power immediately.  He said in his statement that he lives on the West Coast, some distance from his mother in Massachusetts and did not realize that his assistance was required until about the time the refund claim was filed when her symptoms became more pronounced.

The statute requires that the taxpayer seeking to suspend the normal three year period for filing a refund claim show financial disability and defines that as someone who “is unable to manage [her] financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.”    You cannot be considered financially disabled unless “proof of the existence thereof is furnished in such form and manner as the secretary may require.”  The IRS has not gotten around to writing regulations on this issue yet but it issued Rev. Proc. 99-21 which sets out the requirements regarding a statement from a physician’s medical opinion.  The Rev. Proc. also sets out the requirement of a statement from the claimant that no person was authorized to act on the individual’s behalf during the period of impairment described in the doctor’s statement.  The second requirement exists because the statute also provides that a person is not financially disabled if “any other person is authorized to act on behalf of such individual in financial matters.”

The IRS argued that no suspension of the statute should occur in this case based on the inadequacy of the doctor’s statement and the existence of the durable power of attorney to the son.  The court agreed with both points.

The problem with the doctor’s statement her is the uncertainty of the starting point.  The statement says Mrs. Kirsch “would have begun” experiencing the effect of her mental impairment in 2007 but does not make a clear statement that in 2007 she could not manage her financial affairs.  The problem may stem in part from the doctor’s uncertainty about the progression of her illness.  The situation here mirrors other situations in which taxpayers have tried to claim financial disability.  The creation of the durable power of attorney several years before might suggest her family members saw a problem but, on the other hand, the delay in action by her son suggestions whatever impairment existed, he did not see it from afar.  The family tried to fix the problem by submitting another statement from the doctor.  The court acknowledged a willingness to receive a supplement statement citing Bowman v. Internal Revenue Serv., No. CIV-S-09-0167 MCE GGH PS, 2010 WL 178094 (E.D. Cal. Apr. 30, 2010); however, it found that the supplemental statement did not cure the defect because it still did not say exactly when she became financially disabled.  The physician continues to discuss her abilities based on an examination in 2012 where the issues existed and her statements that they began in 2007 but does not describe when the impairment crossed the line into financial disability.  Doing so would be a hard task for almost any physician.  The statement just talks about her cognitive abilities becoming worse over time.

Additionally, the Court finds that even if the doctor’s statement had contained satisfactory language, it still would not have found financial disability because of the power of attorney given to the son to assist her.  His letter states that he was authorized to assist her.  The son argued that the durable power of attorney did not become effective under Massachusetts law until “the designees became aware that they had such authorization.”  The Court holds that even if he is right about Massachusetts law he was authorized to act on his mom’s behalf during the time periods referenced in the doctor’s letter.  As such, the estate cannot meet the criteria in the statute.

I agree with the Court that the doctor’s letter leaves something to be desired in terms of clarity about exactly when Mrs. Kirsch became impaired.  The statute creates a very difficult task for a doctor how sees a patient only infrequently.  The doctor knows when the patient can no longer function with financial affairs (or can make a reasonably educated opinion based on observation) and knows that the inability did not turn on like a light switch but does not know exactly when the line was crossed.  It would seem that where the doctor makes a statement like the one here that other evidence should be allowed to more precisely pinpoint the timing when the line was crossed or a non-treating professional should be allowed to take the doctor’s opinion coupled with the other evidence and give a professional opinion.  Stating precisely when someone can no longer handle their financial affairs would not have been the goal of the doctor at the time of treatment and hindsight will not always allow for precision in this type of diagnosis.

The problem with the power of attorney exists whenever the person with the power is remote or not paying careful attention.  Not many children want to step in and declare their parent incompetent with financial affairs.  It is nice to create the power before the parent loses the capacity to grant it; however, deciding to exercise it requires a different calculus.  Where, as here, the son was remote it becomes even more difficult.  He was not seeing his mom on a regular basis apparently and would have had difficulty recognizing when her actions crossed over the line.  I see this with my own dad.  My sisters and I are in constant contact with him.  While at 91 his cognitive abilities are not what they once were, he is still quite financially able.  We see little things but we are watching closely.  Someone who is remote will have a very difficult time until a significant event occurs.

No one is arguing that the refund does not belong to the estate but for the statute of limitations on claiming it.  While the finality of a statute of limitation provides benefits, I question whether the benefits are great enough in these situations.  Do we have to make it so hard to recover monies lost because of cognitive decline?  I do not think we do.  I think we should be more compassionate.  This money is an overpayment of tax.  Someone who has spent a lifetime complying with the tax statutes should get a break when compliance becomes difficult because of cognitive decline.  We should err on the side of returning the money.

Your Psychologist Might Be a Physician, but Your Counselor is Not (Under Section 6511(h))

Last week, a Magistrate Judge for the District Court of the Western District of Washington in Milton v. United States (sorry, can’t find the order for free yet) granted the IRS’ motion for reconsideration on a refund claim based on financial disability.  The order may place some restrictions on the direction financial disability cases under Section 6511(h) have been headed.  We have covered this topic in great detail, including some small breakthroughs taxpayers have made in claiming financial disability under Section 6511(h).  Most recently, Keith wrote about the potential taxpayer victory in Stauffer v. IRS, where the Court declined to afford Rev. Proc. 99-21 deference regarding the definition of physician.  Keith’s wonderful write up can be found here. In Keith’s post he links to several of our prior posts on the subject, including a comprehensive two part post on the Tax Court case, Kurko, dealing with the same general concept written by Carlton Smith.  In addition, for those who want to learn more about Section 6511(h),  Chapter 11.05[2][b] of SaltzBook was recently rewritten to cover this topic in great detail.

As Keith notes in his write up in Stauffer, that case opened the door for potential relief under Section 6511(h) regarding the use of a psychologist to show disability, but this would have to be approved by the District Court (there is other Stauffer litigation, unfortunately alleging that Mr. Stauffer’s girlfriend at the end of his life may have inappropriately taken $700,000 from him).  The IRS filed objections to the ruling in late February, which were replied to in early March.  I have not found any other filings or orders in that case.

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I will borrow heavily from Keith’s post to frame the issue and the Court holding in Stauffer before touching on the holding in Milton:

The IRS filed a motion to dismiss for lack of jurisdiction because the claim for refund was untimely…  Examining the statute led to an examination of Rev. Proc. 99-21 which “sets forth in detail the form and manner in which proof of financial disability must be provided.”  The Rev. Proc. states that the claimant must submit “a written statement by a physician (as defined in section 1861(r)(1) of the Social Security Act, 42 U.S.C. 1395x(r), qualified to make such determination…”  The court noted that the Rev. Proc. does not define “physician” but borrows the definition from the Social Security statute.  The reference to section 1861(r)(1) creates confusion because that section does not have subsections.  Instead it has one large paragraph defining physician that includes five categories: (1) “a doctor of medicine or osteopathy,” (2) a doctor of dental surgery or of dental medicine,” (3) “a doctor of podiatric medicine,” (4) “a doctor of optometry,” and (5) “a chiropractor.”

*      *       *

The court notes that the Rev. Proc. does not receive Chevron deference because it expresses the view of one employee and not the view of the agency.  The Rev. Proc. receives deference “only to the extent that those interpretations have the power to persuade.”  The court then explains how the Rev. Proc. fails to persuade…

The court also cites to case law accepting the opinion of the treating psychologist while noting that the SSA and IRS definitions of disability are virtually identical.  So, the limitation argued by the IRS in its Rev. Proc. does not make sense and is inconsistent with the SSA rules it apparently sought to mimic…

Without a reasoned explanation and in light of the fact that the opinion of psychologist in these types cases is viewed as acceptable in other contexts, the Rev. Proc. does not provide persuasive authority.  The court states “I conclude that the defendant’s interpretation of the term ‘physician’ in Revenue Procedure 99-21 is not entitled to deference here.  I conclude further that to the extent the psychologist’s statement the plaintiff submitted supports a financial disability based on a mental impairment, the IRS was not required to reject it on the ground that it did not constitute a ‘physician’s statement.

In Stauffer, I believe the Court concluded that subsection (1) was the applicable definition the Rev. Proc. was seeking to use, although that is perhaps unclear, which Keith explains in his post.  Under (1), the definition is “a doctor of medicine or osteopathy.”  As quoted from Keith’s post above, the Court found that the Rev. Proc. was not persuasive on this matter, and that there was clear reason to believe a psychologist should be allowed to opine on financial disability, especially as regard mental impairment.

In Milton v. United States, the taxpayer sought to push this argument slightly further.  Procedurally, the IRS had previously sought to dismiss the case for lack of jurisdiction.  The Court denied that motion in May, which can be found here.  That order did not focus on financial disability.  Instead, the Court held as follows:

Plaintiff waited until January 2014 to file his tax return for his income tax liabilities from 2000… Plaintiff asserts that he filed a subsequent late return in May 2014 for the same tax liabilities from 2000… Defendant concedes that the late return filed in 2014 constitutes both a return and a refund claim… Accordingly, Defendant appears to concede that Plaintiff meets the requirements of § 6511(a) because Plaintiff “duly filed” his refund claim within three years of his tax return. Because Plaintiff meets § 6511(a)’s time limitation, this Court may exercise jurisdiction over the lawsuit…

Defendant offers no authority to prove that § 6511(b)(2)(A)—the “lookback” period—has any bearing on subject-matter jurisdiction. The remaining arguments in Defendant’s brief are more appropriately analyzed in a motion for summary judgment.

If the Section 6511(h) argument was initially briefed, the holding on jurisdiction above would have rendered it moot.  I did not pull the briefs.  We have discussed whether the Section 6511(b) look back is jurisdictional or not.  I blogged the case Boeri v. United States, where the Federal Circuit determined it was not.  Carl Smith has forwarded to me what I believe the Ninth Circuit’s last statement on this issue was, which can be found in Reynoso v. United States.  The Ninth Circuit held it was jurisdictional, but did so without reviewing more current SCOTUS holdings limiting use of that term.  Given the Ninth Circuit’s holding, the Service was understandably unhappy with this result, and filed a motion for reconsideration.  The Judge granted the motion, determining that Section 6511(b)(2)(A) was jurisdictional, and the refund claim was outside of the time frame.

The taxpayer, in response, made an argument that he was disabled under Section 6511(h).  It does not specify his disability, but he submitted a statement from “Tim Liddle, a ‘MA, LMHC, MAC.’”  Those designations, I believe, are a Masters of Arts (presumably in counseling), a Licensed Mental Health Counselor designation, and either a Master Addiction Counselor or a Master of Arts in Counseling.  He was clearly a trained counselor who was assisting the taxpayer for some mental health issues.

I found two points of the holding here interesting.  First, the Court states “physician” under Rev. Proc. 99-21 is “a doctor of medicine or osteopathy, a doctor of dental surgery or dental medicine, a doctor of podiatric medicine, a doctor of optometry, or a licensed chiropractor. 42 U.S.C. § 1395x(r).”  As Keith noted in his post, it is unclear if this entire paragraph is intended to apply, or only “a doctor of medicine or osteopathy.”  The Court did not provide its rationale.  This could be an interesting issue moving forward with other cases.  It would also be fairly interesting to have a podiatrist or chiropractor provide an opinion about a taxpayer’s mental health.

And, second, the Court found that none of the above designations qualify as a physician, as it is defined.  This was a “fatal error”, finding that Congress deliberately drafted the definition of “physician” narrowly, and the matter was dismissed for lack of subject matter jurisdiction.  While the District Court for Massachusetts was willing to look at the SSA procedures in determining disability, the Washington court did not provide the same review.  I believe counselor notes can be used as evidence to show disability in an SSA hearing (if the requesting party consents to disclosure), although I am not certain if they are sufficient without other evidence.

The strides made in Stauffer and Kurko make sense.  Someone suffering from mental illness will likely see a psychologist.  For that person, it may be the absolutely 100% correct treatment option, and the failure to have contemporaneous interaction with a physician should not preclude them from making the claim.  It is not surprising, however, that this court did not extend the rationale to counselors at this point.

Remaining Anonymous While Suing the IRS

In the recent case of John Doe v. United States, No. 1:16-cv-07256 (SDNY), the plaintiff requested that the court allow him to pursue the case without having his name made public.  The court said no.  It would not allow him to proceed anonymously for reasons discussed below.  At the last Tax Court regular trial session in Boston, I watched as someone, for reasons similar to Mr. Doe’s, asked that the court seal the record and the court said no.  We have blogged before on the rules for sealing the record in Tax Court.    John Doe’s case points out some of the policy considerations present in trying to hide your name or your personal medical information while pursuing a judicial remedy.  In general, courts seem to take a very different view of the protection of personal medical information than we do as a society after the passage of the HIPPA laws.  Where is the right balance in opening up personal medical information or keeping things discreet?

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John Doe filed a claim for refund which the IRS denied because he filed it after the applicable time period.  He sought to hold open the time period arguing that the delay resulted from his financial disability as described in IRC 6511(h).  We have blogged before, here, here, here and here, about 6511(h) and the difficulties most taxpayers have in meeting the criteria for relief the IRS has imposed in Rev. Proc. 99-21.

To meet the criteria for financial disability, the taxpayer must provide the IRS with detailed medical information.  This medical information supports taxpayer’s failure to follow through with routine responsibilities that could have a direct correlation to work activities.  Putting such information in the public domain could easily have the effect of limiting an individual’s future job prospects. While a taxpayer might feel uncomfortable turning over lots of sensitive personal medical information to the IRS in order to provide that the criteria for financial disability exists, at least taxpayers should feel comfortable knowing that providing their personal medical information to the IRS cloaks it with the protections of IRC 6103 and makes it as private as President Trump’s returns.

If a taxpayer seeking to use the financial disability provisions to hold open the statute fails to convince the IRS and must move forward to court to seek relief from the agency decision, the protections regarding that personal medical information can become subordinate to the public’s right to know.  In Sealed Plaintiff v. Sealed Defendant, 537 F.3d 185,188-189 (2nd Cir. 2008), the Court stated “[T]he interests of both the public and the opposing party should be considered when determining whether to grant an application to proceed under a pseudonym.”

In John Doe’s case, the Court notes that the 2nd Circuit has created a non-exhaustive list of factors to consider when deciding whether to allow a party to proceed anonymously.  This list includes:

  • “Whether the litigation involves matters that are highly sensitive and of a personal nature”;
  • “Whether identification poses a risk of retaliatory physical or mental harm to the party seeking to proceed anonymously or even more critically, to innocent non-parties”;
  • “Whether identification presents other harms and the likely severity of those harms”;
  • Whether the plaintiff is particularly vulnerable to the possible harms of disclosure, particularly in light of the plaintiff’s age”;
  • “Whether the suit is challenging the actions of the government or that of private parties”;
  • “Whether the defendant is prejudiced by allowing the plaintiff to press his claims anonymously, whether the nature of that prejudice differs at an particular stage of the litigation”;
  • “Whether the plaintiff’s identity has thus far been kept confidential”;
  • “Whether the public’s interest in the litigation is furthered by requiring the plaintiff to disclose his identity”;
  • “Whether, due to the purely legal nature of the issues presented or otherwise, there is an atypically weak public interest in knowing the litigants’ identities”; and
  • “Whether there are any alternative mechanisms for protecting the confidentiality of the plaintiff.”

Think about these factors in the context of a whistleblower case where the effective default is anonymity.  In John Doe’s case the court found that “alternative mechanisms for protecting the confidentiality of the plaintiff weighs against allowing anonymity.”

Plaintiff argued that disclosing his identity would impact his future career prospects because of the personal and sensitive medical information that he would have to show in order to prove his case.  The court noted that redacting and sealing submissions regarding sensitive medical information happens routinely.  In the Tax Court case I watched a couple of months ago, a pro se litigant’s request to seal medical records was summarily denied with little discussion.  The decision may have been the right decision but forcing someone to lay bare their medical history in order to succeed in a case puts the individual to hard choices about the importance of the current case versus the long term consequences of making the medical information public.

Tax Court Rule 27 protects the disclosure of the identity of minors and a host of other information.  Prior to filing a petition or submitting information to the Tax Court take a careful look at the list of information protected and the means of protecting the information.  The Tax Court protects the social security number of petitioners and has a special form to use to disclose the number to the court but not the public.  The Tax Court is concerned about inadvertent disclosure of the social security number and other sensitive information, and directs petitioners (and respondent) to redact such information before filing documents with the court.  The Tax Court practice concerning access to documents filed in its cases seeks to protect the information of litigants at the expense of full public access in its balancing of the competing interests regarding the information.  How does sensitive medical information fit into this scheme of protection about which the Court has given much thought?

The comments in the John Doe case by the district court in the Southern District of New York point to the different standards between requesting anonymity as a party and requesting redaction or sealing of records that come into a case.  In addressing each of the concerns raised by Mr. Doe, the court points to the ability to redact or seal information as an adequate remedy that will protect the sensitive information without creating the serious issues courts have with permitting a plaintiff to proceed anonymously.

Conclusion

The case, and the cases cited in the opinion, point to the very high bar that a plaintiff faces in seeking to proceed anonymously.  At the same time everyone has rights regarding their medical information.  Like corporations that seek to seal a court record regarding proprietary information, individuals have rights to protect medical information that could have an adverse commercial or personal impact.  By raising the concerns at the outset of the case, the individual plaintiff sets the stage for success on motions to seal or redact the medical information.  Even though John Doe loses his motion to protect his identity, he has certainly heightened the awareness of the court to the need to protect his medical information.

If you know that you have sensitive information you want to keep out of the public record, having a conversation with the court and the opposing party early in the proceeding will allow the court to reflect on how best to protect the information and not place the judge in the position of having to rule on such a motion during trial or as a trial begins.  Pro se litigants will struggle to understand the importance of this timing but representatives should not.

 

Tax Court Holds That Veteran’s Submission of Election to Exclude Foreign Earned Income is Too Late When Submitted After Service Issues a Substitute Return

This week’s Redfield v Commissioner illustrates the harsh and sometimes unfair results that sometimes attach when a taxpayer misses a deadline. The taxpayer in this case was a disabled 12-year Marine veteran who served in Afghanistan; he was suffering from PTSD and memory loss. After leaving the Marines he returned in 2010 to accept a civilian position at an airfield in Kandahar. Unfortunately his physical and mental condition worsened and he returned back to the States later in 2010. The case illustrates perhaps a gap in our tax system: the Service is required to enforce most deadlines without regard to whether the taxpayer’s disability contributed to the taxpayer’s delinquency.

Redfield’s tax troubles arose from his failing to file a tax return for the 2010 year, the year in which he had some foreign source income from the time he was working as a civilian in Kandahar. In 2014, IRS eventually prepared a substitute for return under Section 6020(b). Redfield did not respond to the stat notice that accompanied the SFR; instead he filed a delinquent 2010 return, which attempted to exclude the foreign source income from his shortened civilian gig in Kandahar.

Section 911 provides that citizens and residents living and working outside the US can exclude some of that earned income (the cap is adjusted for inflation and is about $100,000 these days). I will not spend much time on the nuances of the foreign earned income exclusion but Section 911 states that a taxpayer wishing to avail himself of the exclusion has to elect its application. The statute also directs the Treasury to issue regs to implement the regime. Treasury issued regs under Section 911 that fill in the details of that election: the when and the how are spelled out in detail.

The case considers whether Redfield satisfied the regulation’s timing requirement. The regs establish 4 methods of making the election 2 of them require the election to be made either with or in response to a timely filed return; a third requires that the election be made within one year of a timely filed return. That did not happen here.

The main issue revolved around the fourth method. It allows a taxpayer to file the election if it is made before the Service “discovers that the taxpayer failed to elect the exclusion.” In particular, the Tax Court considered whether the Service’s SFR amounted to its discovering that Redfield did not elect to exclude the wages he earned while working in Afghanistan.

Unfortunately for Redfield, in McDonald v. Commissioner, T.C. Memo. 2015-169 the Tax Court held that the Service discovers the failure to make the election no later than the issuance of the substitute for return. Redfield’s election was submitted years after the SFR, and the Tax Court held that he was out of luck.

The Tax Court acknowledged the harshness of the outcome, but felt that its hands were tied:

We acknowledge petitioner’s military service to this country and recognize that he emerged far from unscathed from his tours of duty in Afghanistan. We understand that the procedural requirements for making a timely [foreign earned income exclusion] election are not exactly intuitive and that the scars petitioner incurred during his military service may have contributed to the tax delinquency at issue.

While these facts may be relevant to the penalty and additions to tax that the IRS determined, they do not alter the requirement of a timely election. As to that requirement we must give effect to the regulations that the Secretary has issued under his delegated authority from Congress and to this Court’s prior construction of those regulations. That being so, we unfortunately have no alternative but to hold that petitioner did not make a timely and valid [foreign earned income exclusion] election for 2010. He is therefore not entitled to exclude from gross income any foreign earnings under section 911.

Some Parting Thoughts

Keith has written extensively on the impact of disability and time deadlines in the Code. An article he co-wrote a few years ago suggests that Congress should more directly apply the concepts of financial disability to other deadlines that taxpayers may not meet.

Deadlines by their nature may at times work and produce an unfair substantive result. The Service administers a complex tax system and processes many million tax returns. Yet it seems that for taxpayers who suffer from mental and physical disabilities, especially for veterans whose injuries arose in service for our country, there should be a safety valve for the Service or the court to provide relief when the failure to meet a deadline  is connected to the taxpayer’s disability.