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.

A Crack in the Glass Ceiling – Victory in a Financial Disability Case

We have reported before here, here, here and here about the IRS’ unbroken string of victories in cases involving a claim of financial disability.  The first two posts listed in this string, a two-part series by Carl Smith, has a particularly important connection to the opinion reported in this post. While taxpayers have obtained relief from the statutory period for filing a refund claim in administrative decisions by the IRS, no one had won a 6511(h) case in court – until now and this victory is one that opens the door of the court but does not grant relief.  In Hoff Stauffer, Administrator of the Estate of Carlton Stauffer v. IRS, a magistrate judge in the District of Massachusetts has recommended that the court has jurisdiction to hear a case involving 6511(h) in the face of a motion to dismiss for lack of jurisdiction.

Because this is the recommendation of a magistrate judge, the district court must accept it before it becomes final; however, the decision here coupled with the order entered by Judge Gustafson in another Boston case, Kurko v. Commissioner, suggests that perhaps a new day is dawning for those seeking relief for financial disability.  Because the IRS has only issued guidance in the form of an onerous revenue procedure and has never allowed public comment on the now 20-year old provision of the law and because most of the cases have been brought pro se, it has taken a long time to crack the ceiling and take steps toward meaningful administration of this provision.

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Carlton Stauffer passed away in 2012 at the age of 90.  His son, Hoff, discovered that the father had not filed a return since 2006 and proceeded to prepare the outstanding returns as was his fiduciary duty.  In 2013, Hoff Stauffer filed several back returns for his father’s estate and requested refund of an overpayment exceeding $100,000 for 2006.  The IRS disallowed the claim as untimely and declined to hold open the statute using 6511(h).  As a part of the process of appealing the denial of the claim, Hoff submitted a written explanation from a licensed psychologist who had treated his father from 2001 until his death.  The psychologist explained in his report that the father had a variety of mental and physical conditions which prevented him from properly managing his affairs from at least 2006 until his death.  The IRS rejected the explanation, citing to Rev. Proc. 99-21 which requires a statement from a physician and not a psychologist.

Tom Crice, a local Boston attorney whom I had met because of his pro bono work on behalf of low income taxpayers, brought suit for the estate after the denial of the claim.  Tom practiced as a criminal prosecutor and an actuary before settling into tax controversy work.  His background may have helped in the attack he took on Rev. Proc. 99-21.  The IRS filed a motion to dismiss for lack of jurisdiction because the claim for refund was untimely.  This caused the Court to examine 6511(h) which suspends the time frame if the claimant was financially disabled.  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 states that it assumes the IRS intends to refer to the first category but notes that the Rev. Proc. introduces further confusion by linking section 1861(r)(1) to 42 U.S.C. 1395x(r) because the latter provision “essentially tracks verbatim the wording and format of section 1861(r), but does not contain a corresponding reference to a subsection one.  Indeed, section 1395x(r), like section 1861(r), does not formally contain any subsections.”  This raises questions of whether the reference to 1861(r)(1) is a scrivener’s error or intended to narrow the scope of physician.

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:

section 6511(h) allows a disability to be based on a showing of a  ‘mental impairment’ and Revenue Procedure 99-21 directly undermines that goal where it demands a note from a physician but then defines that term to exclude a whole class of professionals generally considered competent to opine on the existence of a mental impairment.  On the record before the Court, there is no evidence that the IRS has considered the implications of its interpretation of the word ‘physician’ as used in the revenue procedure.  On the contrary, and as noted, Revenue Procedure 99-21 was drafted principally by a single IRS employee who without elaboration or explanation selected a definition of ‘physician’ as used by the SSA.  In the absence of additional information, there is just no basis to assess the soundness of the IRS’s interpretation of the work ‘physician’ in Revenue Procedure 99-21.

The court goes on to say that if the IRS sought to find someone competent to render an opinion on a physical or mental impairment it could have looked elsewhere in the rules governing Social Security cases.  Social Security regulation 20 CFR 404.1527(a)(2) provides “medical opinions are statements from physicians and psychologists or other acceptable medical sources that reflect judgments about the nature and severity of your impairment(s)….”  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.

The court states that the IRS may have reasons for limiting the opinions in financial disability cases to physicians but it does not explain those reasons in the Rev. Proc.  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.  Consequently, I find no basis on this record to deem the plaintiff’s claim for refund untimely under section 6511(h), and thus do not agree that the Court lacks jurisdiction to hear the plaintiff’s suit.”

The IRS made a couple more arguments that the court rejected.  First, it argued that the psychologist’s statement failed because the estate did not submit the statement at the same time as the claim for refund but only submitted it with the initial appeal.  The court noted other cases that had rejected this technical argument by the IRS stating that “the practice is to accept the missing information at a later stage so it and the taxpayer’s claim may be considered.”

Second, the IRS argued in a footnote that the psychologist was unqualified to opine on the disability because he appeared to base the opinion in part on the taxpayer’s physical ailments and this is outside of the psychologist expertise.  The court rejects this argument because the sufficiency of the statement was not before the court and because the mental impairments alone may have been sufficient to support the financial disability determination.

Under Federal Rule of Civil Procedure 72(b), the IRS was to file an objection to this recommendation within 14 days of the receipt of the report.    On February 27, 2017, the IRS filed its objection to the magistrate judge’s report.  It took issue with just about every aspect of the report but most strongly objected to the failure of the court to bow down to Rev. Proc. 99-21 as controlling:

The United States has numerous objections to the Report. First, the United States objects to Magistrate Judge Cabell’s interpretation of Congress’ delegation to the Secretary. The Report misapprehends the plain language of § 6511(h) and the Secretary’s authority under that statute. The Secretary did what Congress told it to do and, as discussed in greater detail below, there is no reason to expand § 6511(h) beyond what is prescribed in Rev. Rule. 99-21, which is something that the Report attempts to do. Neither the language of § 6511(h) nor Rev. Proc. 99- 21 support Magistrate Judge Cabell’s view that a psychologist is permitted to medically determine a mental impairment. The Report’s discussion regarding the proper level of deference afforded to Rev. Proc. 99-21 is simply irrelevant pursuant to § 6511(h). In short, a psychologist’s statement is invalid pursuant to § 6511(h). Accordingly, the plaintiff’s failure to comply with Proc. 99–21 is fatal to its refund claim because federal courts have no jurisdiction over a tax refund suit until a claim for refund or credit has been “duly filed” with the Secretary. Second, the United States objects to Magistrate Judge Cabell’s conclusion that the Eighth Circuits decision in Abston v. Commissioner, 691 F.3d 992 (8th Cir. 2012), is distinguishable from the case at bar. Contrary to the Report, the Eighth Circuit, as well as numerous other federal courts, have found that taxpayers cannot establish a medical disability under § 6511(h) without submitting a “doctor’s note” as required by Rev. Proc. 99-21. The plaintiff did not provide a doctor’s note as it was required to do. Third, the United States objects to Magistrate Judge Cabell’s rejection of the United States’ alternative argument. Even if the psychologist’s statement at issue could be considered a “doctor’s note,” it continues to be deficient pursuant to Rev. Rule 99-21.

Plaintiff’s response to the IRS motion is also attached.

While Judge Gustafson cracked the glass in the 6511(h) ceiling with his order in the Kurko case, Magistrate Judge Cabell punches his fist through the glass.  This may allow others to follow and finally break the choke hold in this area.  Perhaps the IRS will consider, after two decades, the idea of getting comments on what a reasonable rule would look like and talk to the representatives who assist individuals with financial disability.  Taxpayers claiming this exception, by definition, face difficulties.  Rev. Proc. 99-21 adds to those difficulties and does not provide a reasonable basis for working through this issue.  The facts here follow fairly closely the facts in the case Brockamp v. United States, 519 U.S. 347 (1997), in which another 90 year old gentleman failed to timely file a refund claim and the failure was discovered by his executor after the ordinary statute of limitations had expired.  The facts of that case so moved Congress that it created the statutory exception in 6511(h).  Let’s work together to find a reasonable way to allow those with valid claims for refund and legitimate reasons for filing late to get their money without imposing undue barriers.

 

 

Summary Opinions — Catch Up Part 1

Playing a little catch up here, and covering some items from the beginning of the year.  I got a little held up working on a new chapter for SaltzBook, and a supplement update for the same.  Both are now behind us, and below is a summary of a few key tax procedure items that we didn’t otherwise cover in January.  Another edition of SumOp will follow shortly with some other items from February and March.

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  • In CCA 201603031, Counsel suggests various procedures for the future IRS policy and calculations for the penalty for intentional failure to file electronically.  The advice acknowledges there is no current guidance…I wrote this will staring at my paper 1040 sitting right next to my computer.  Seems silly to do it in pencil, and then fill it into the computer so I can file electronically.
  • This item is actually from March.  Agostino and Associates published its March newsletter.  As our readers know, I am a huge fan of this monthly publication.  Great content on reducing discharge of indebtedness income and taxation.  Also an interesting looking item on representing real estate investors, which I haven’t had a chance to read yet, but I suspect is very good.
  • The IRS has issued a memo regarding its decision to apply the church audit restrictions found under Section 7611 (relating to exemption and UBI issues) to employment tax issues with churches also.
  • Panama Papers are all the rage, but I know most of you are much more interested in Iggy Azalea’s cheating problems (tax and beau).  Her Laker fiancé was recorded by his teammate bragging about stepping out and she had a sizable tax lien slapped against her for failure to pay.  She has threatened to separate said significant other from reproductive parts of his body, but it appears she has approached the tax debt with a slightly more level head, agreeing to an installment agreement.
  • I’m a rebel, clearly without a cause.  I often wear mismatched socks, rarely take vitamins, and always exceed the speed limit by about 6 MPH.  But, professionally, much of my life is about helping people follow the rules.  In Gemperle v. Comm’r, the taxpayers followed the difficult part of the conservation easement rules, and obtained a valid appraisal of the value, but failed to follow the simple rule of including it with his return.  Section 170(h)(4)(B)(iii) is fairly clear in stating the qualified appraisal of the qualified property interest must be included with the return for the year in question.  And, the taxpayers failed to bring the appraiser to the hearing as a witness, allowing the IRS to argue that the taxpayer could not put the appraisal into evidence because there was no ability to cross examine.  In the end, the deduction was disallowed, and the gross valuation misstatement penalty was imposed under Section 6662(h) of 40%.  The Section 6662(a) penalty also applied, but cannot be stacked on top of the 40% penalty pursuant to Reg. 1.6662-2(c).  The Court found that there was no reasonable cause because the taxpayer failed to include the appraisal on the return, so, although relying on an expert, the failure to include the same showed to the Court a lack of good faith.  Yikes! Know the rules and follow them. It is understandable that someone could get tripped up in this area, as other areas, such as gift tax returns, have different rules, where a summary is sufficient (but perhaps not recommended).
  • The Shockleys are fighting hard against the transferee liability from their corporation.  Last year we discussed their case relating to the two prong state and federal tests  required for transferee liability under Section 6901.  In January, the Shockleys had another loss, this time with the Tax Court concluding they were still liable even though the notice of transferee liability was incorrectly titled and had other flaws.  Overall, the Court found that it met and exceed the notice requirements and the taxpayer was not harmed.
  • The Tax Court, in Endeavor Partners Fund, LLC v. Commissioner, rejected a partnership’s motion for injunction to prevent the IRS from taking administrative action against its tax partner.  The partnership argued that allowing the IRS to investigate the tax matters partner for items related to the Tax Court case (where he was not a party) would “interfere with [the Tax] Court’s jurisdiction” because the Service could be making decisions on matters the Court was considering.  The Court was not troubled by this claim, and held it lacked jurisdiction over the matters raised against the tax matters partner, and, further, the partnership’s request did not fall within an exception to the Anti-Injunction Act.
  • Wow, a financial disability case where the taxpayer didn’t lose (yet).  Check out this 2013 post by Keith (one of our first), dealing with the IRS’s win streak with financial disability claims.  Under Section 6511(h), a taxpayer can possibly toll the statute of limitations on refunds with a showing of financial disability.  From the case, “the law defines “financially disabled” as when an “individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment … which has lasted or can be expected to last for a continuous period of not less than 12 months,” and provides that “[a]n individual shall not be considered to have such an impairment unless proof of the existence thereof is furnished in such form and manner as the Secretary may require.””  I’ve had some success with these cases in the past, but I also had my ducks in a row, and compelling facts.  So, not something the IRS would want to argue before a judge.  The Service gets to pick and choose what goes up, which is why it wins.  In LeJeune v. United States, the District Court for the District of Minnesota did not grant the government’s motion for summary judgement, and directed further briefing and hearing on whether the taxpayer’s met their administrative requirements.
  • Another initial taxpayer victory, which could result in an eventual loss, but this time dealing with TFRP under Section 6672.  In Hudak v. United States, the District Court for the District of Maryland dismissed the IRS’s motion for summary Judgement, finding that a jury could determine that a CFO (here Mr. Mules) was not a responsible person with the ability to pay.  The CFO admitted he knew the company wasn’t complying with its employment tax obligations, and knew other creditors were being paid.  He alleged, however, that he lacked the ability (as CFO) to make the required payments…seems like an uphill battle.  He could win though, as the contention is that the owner/CEO/President (Mr. Hudak) made those decisions, had that authority, and misled the CFO to believe the payments were made.  Neither side will likely be able to put much past the Court in this matter, as Judge Marvin Garbis is presiding (he who authored various books on tax, including Cases and Materials on Tax Procedure and Tax Fraud and Federal Tax Litigation).

 

Grab Bag: Increased Penalties for Failure to File and No Financial Disability For NOL Carryback Elections

 

Court of Federal Claims Declines to Apply Financial Disability Tolling Rule for NOL Carrybacks

Both Keith and Carl have written often on some of the procedural wrinkles with Section 6511(h), the provision that tolls the refund statute in periods of financial disability. This past week in McAlister v US, the Court of Federal Claims declined to allow taxpayers to use the financial disability exception of section 6511(h) to extend the due date by which the taxpayers could have elected to apply a net operating loss from 2009 and carry back their loss to an earlier year, 2005.

The Code has special rules for refunds based on carrybacks. As McAllister describes, a “claim for refund is ordinarily timely if it is filed within three years of the date of the filing of the tax return or within two years of the date of the payment of the tax. 6511(a). If the basis for a refund is an NOL carryback (as it was here), the time period for filing the refund claim is three years from the due date for the return for the taxable year in which the NOL arose. § 6511(d).”

I will discuss the case and the issues briefly below.

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In McAllister the taxpayers argued that they were financially disabled because they were “unable to manage [their] financial affairs by reason of a medically determinable physical or mental impairment” during 2009 and 2010. Specifically, they claimed that Mr. McAllister had a “recurring eye illness and other conditions throughout those years, and Mrs. McAllister suffered from debilitating symptoms which were eventually diagnosed as a tumor of the neck.” The McAllisters claimed that they had losses in 2009 which could be carried back to 2005, which resulted in after application a reduction in 2005 liability of over $175,000.

Special carryback rules enacted in 2009 extended the normal period to carryback losses from two years to five. The opinion discusses those rules and how they apply:

The American Recovery and Reinvestment Act of 2009 (“ARRA”), 26 U.S.C. § 172(b)(1)(H), permitted small business owners to carry back operating losses in 2009 for up to five years, three years more than otherwise would have been permissible. See 26 U.S.C. § 172(b)(1)(A) (2012) (providing the general rule that a net operating loss may be carried back two years prior to the year of the loss). In plaintiffs’ case, this would have allowed the McAllisters to carry back the 2009 NOLs to the 2005 tax year, resulting in a reduction in their 2009 liability of $175,013. The Act provided, however, that “[a]ny election under this subparagraph shall be made … by the due date (including extension of time) for filing the taxpayer’s return for the taxable year of the net operating loss [i.e., 2009, not 2005].”

The McAllisters were over a year late in filing their 2009 return and argued that the 6511(h) tolling provision for financial disability could act to have extend the date for filing the 2009 tax return that generated the NOL carryback. The court (without commenting on the adequacy of whether the taxpayers established that they were financially disabled) said no because the 6511(h) special rule on disability only acts to toll refund claims not carryback elections:

As defendant points out, there are two separate time periods at play: the period of limitations for filing a refund claim under section 6511, and the time within which the NOL carryback election must be made. Defendant contends that the period of limitations for filing a refund claim under 6511 is irrelevant to the dispute. Rather, the election for the NOL carryback provided in section 172(b)(1)(H) is clearly spelled out in the statute as being the time period for filing a timely return for the year in which the loss is incurred, i.e., 2009. Section 6511(h) does not operate to remedy this failure, as it only applies to subsections (a) through (c) of section 6511. We agree.

Higher Penalties for Failing to File Returns

This past week the President signed into law H.R. 644, the Trade Facilitation and Trade Enforcement Act of 2015. The law provides for stiffer penalties for failing to file many tax returns; this proposed increase has been kicking around for a while (in fact I wrote about in December a post in PT and had believed it had passed and was signed in to law then). and is now effective for returns required to filed after calendar year 2015. Here’s a little more on the penalty.

As background, Section 6651(a) provides that a taxpayer who fails to file a tax return on or before its due date is subject to a penalty equal to 5 percent of the net amount of tax due for each month that the return is not filed, up to a maximum of 25 that net amount.

Under prior law, the minimum penalty for failure to file certain types of tax returns (including income, estate, and gift tax returns) within 60 days of the due date (including extensions) equaled the lesser of $135 or 100% of the amount of tax required to be shown on the return. H.R. 644 raises the minimum penalty to $205 or 100% of the amount of tax required to be shown on the return, effective for returns required to be filed in calendar years after 2015.

This penalty has a broad reach. In addition to applying to income tax returns of an individual, fiduciary of an estate or trust, or corporation; self-employment tax returns, and estate and gift tax returns), the penalty also applies to returns required to be filed relating to excise taxes on relating to distilled spirits, wines, and beer, tobacco, cigars, cigarettes machine guns and certain other firearms.

 

 

 

 

Summary Opinions for 10/2/15 to 10/16/15

Lots of discussion of revenue procedures in this Sum Op, including what deference should be afforded.  Plus, an interesting TEFRA cert denial, terrible financial disability case, new IRS pilot program, and the IRS changing its policy on levying some Social Security payments.

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  • The IRS has released Notice 2015-72, which contains a proposed Revenue Procedure that would update the administrative appeals process for docketed Tax Court cases and update Rev. Proc. 87-24.  The Service indicates the update is appropriate given the various reorganizations of the Service since ’87 (right after the Mets last won the World Series), the increase in Tax Court litigation, and the new IRS procedures regarding workload. The changes do not drastically modify the general framework, but do have some modifications, including outlining more specifically how cases that are not immediately referred to Appeals should be handled, and providing additional guidance on keeping Appeals independent.  The IRS has requested comment on the changes by November 16, 2015.  For more specifics on the changes, Thomson Reuters has content here, as does Professor Timothy Todd at Forbes here.
  • Another day, another taxpayer loss under Section 6511(h) for financial disability.  Often, these fact patterns make the IRS look harsh.  In Reilly v. United States, the District Court for the District of Central California held that the taxpayer had failed to meet the requirements of Rev. Proc. 99-21.  In Reilly, a married couple attempted to obtain refunds for various past years where tax had been overpaid but returns were not filed.  The taxpayers claimed financial disability to toll the statute on refunds under Section 6011(h).  In the year where tax returns were first not filed, the husband was diagnosed with terminal pulmonary disease and various other related health issues, which were debilitating.  The wife, who for 39 years had not dealt with the family finances, fell into a deep depression, and failed to handle the financial affairs or attend to her ailing husband.  The husband’s doctor provided an opinion stating the lack of compliance was due to hubby’s health, and likely due to wife’s depression.  The Service, however, denied the request for tolling because the doctor was not wife’s physician, and that the letter did not include the certification as to its contents.  The claim also lacked the statement by husband that no one had the authority to act on his financial behalf.  The Court found the Service was correct, and that information was lacking (although it might have held substantial compliance if it had just been the doctor statement for husband missing the certification).  At trial additional information was provided to show the missing elements, but it was too late (and didn’t 100% comply).  Tough result for folks who probably could have used the assistance and likely could have complied had they fully understood the requirements.  It would be nice to see more cases arguing against any deference to Rev. Proc. 99-21, or for the Service to update its procedure.   Especially when a courts states, “[t]he Secretary has set forth regulations governing proof of financial disability at Rev. Proc. 99-21,” which was the case here.   Revenue Procedures are not regulations and generally should not receive the same deference.  Carlton Smith and Keith may have both discussed that point as regard this particular Rev. Proc. on PT in the past.  Probably just a loose use of the term “regulations”, but worth flagging.
  • Agostino and Associates has published their October Monthly Journal of Tax Controversy, which can be downloaded here. Quality work, as always.
  • IRS has announced a pilot program to test the authenticity of W-2s by working in conjunction with payroll companies.  This blog has recreated the Thompson Reuters Checkpoint news post on the topic.
  • About a year ago in SumOp, we discussed the JT USA, LP v. Comm’r, where the 9th Cir. reversed the Tax Court holding a partner had to completely elect out of TEFRA and treat all items as non-partnership items, and could not do it with only some items.  SCOTUS won’t review the matter.  Some additional background on the case can be found on Law360 here.
  • Periodically, Carlton Smith is kind enough to forward me articles from various news outlets regarding tax policy and administration.  This NYT article was one such post, which discusses academic and nonprofit computer scientists that are creating algorithms that assist in determining when tax evasion is occurring.  The code maps out the various entities and transactions found in specific shelters, and then assists in flagging those when found in taxpayer returns.  The stereotype of the unfeeling, robotic IRS agent might have just taken one step closer to an actual robot reality.  To all of our young readers out there, “I just want to say one word to you.  Just one word…Plastics.”  Just kidding. Two words, “computer science”.
  • Carlton also forwarded me this article regarding the passing of Jerry S. Parr, the Secret Service agent who was credited with saving President Regan during the 1981 assassination attempt.  This was just one example of a life of service that touched many people.  Our condolences go out to the Parr family, including his wife, retired Tax Court Judge Carolyn Parr.
  • In an internal memo for SB/SE, the Service has indicated a policy decision was made that under the Federal Payment Levy Program, SSA disability insurance payments will not be subject to the 15% levy.
  • A novel SOL suspension case was decided by the District Court for the Western District of North Carolina in United States v. Godley.   In Godley, an estate had obtained an extension to pay estate tax under Section 6166 on certain closely held business interests held by the decedent.  Under Section 6166, the estate can have up to five years of non-payment, followed by ten years of equal installment payments.  Under Section 6502(a), the Service usually has ten years to collect assessed tax, but under Section 6503(d) that period is suspended while Section 6166 payments are outstanding.  The question in Godley was when the suspension stops if installment payments are not made.  The Court held that failure to pay is not enough on its own, and that notice and demand by the Service of payment is needed.  The Court further stated the statute does not specify what constitutes notice and demand, and, after reviewing applicable law, found notice and demand occurred when the IRS notified the taxpayer about the unpaid tax, and stated the amount it demanded to be paid (makes sense).  There is a little more nuance in the case, regarding exactly what was in the IRS letters, but, generally, the Service sent notices stating the amount due that had to be paid, and said the taxpayer would be booted from the installment payment plan if not immediately brought current. The Service argued it was not the type of notice and demand required.  The Court disagreed, and found the notice and demand in the IRS letter terminated the suspension of the SOL.  Godliness (you got the bad pun, right) is next to cleanliness, and Les has been cleaning up the collections content in Saltz Book, including adding a much more insightful discussion of Godley.  The new chapter has actually been substantially reworked, and we are happy that it will be available on Checkpoint (and probably Westlaw) in December, and in print in January!
  • Last year around this time, Carlton Smith wrote “Hurray! A Tax Court Judge Decides an Innocent Spouse Case without Discussing Rev. Proc. 2013-34”, which, as the title indicated, was a discussion of Varela v. Comm’r, where the Tax Court held that a spouse was entitled to innocent spouse relief under Section 6015(b) because holding the spouse responsible would be inequitable under subsection (b)(1)(D).  In the post, Carlton advocates for Judges forgoing a review of the ever changing Revenue Procedure that indicates what the Service views as inequitable.  Carlton articulates well that “inequitable” doesn’t change, but the IRS view of “inequitable” does, which he believes is incorrect.  Hence, the Hurray! when the Tax Court made an inequitable determination without the Rev. Proc.  Well, it appears this is catchier than a T-Swift song, as Judge Goeke in Scott v. Commissioner  has held that it would be inequitable to impose tax (at least partially) on a spouse, and cites to only the applicable statute and prior judicial opinions.  Hurray!