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!

 

Does Rev. Proc. 99-21 Validly Restrict Proof of Financial Disability, for Purposes of Extending the Refund Claim SOL, to Letters From Doctors of Medicine and Osteopathy? Part 2

Yesterday, frequent guest blogger Carl Smith took us through the statute and Rev. Proc. 99-21 in setting the scene for Judge Gustafson’s March order in the Kurko case and its importance. Today, Carl picks up where he left off and shows how the current revenue procedure misses the mark. Because the IRS has never given the public the opportunity to comment on the procedure and because it does not explain how it decided upon the procedure, the procedure not only needs changing but also appears vulnerable to attack. That attack will have to come in some future case, though, as the IRS recently conceded the issue as presented in Kurko – without first getting a judicial ruling either way on the issue. Keith

Proof of “Disability” for SSDI Purposes

I am no expert in SSDI disability benefits litigation, so I went to one for information.  Prof. Toby Golick of Cardozo has for decades headed a Cardozo clinic that regularly wins SSDI benefits cases before the Social Security Administration.

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Toby told me the following:

The language of § 6511(h) derives from the SSDI provisions at 42 U.S.C. § 423(d)(1)(A), which generally defines “disability” as “inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment 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”. (The same definition is used for SSI benefits, but without the requirement of past FICA contributions for sufficient quarters.)  There are two separate questions, however — (1) whether the individual has a physical or mental impairment and (2) whether the individual’s impairment prevents her from working.  Regulations specify that to establish an impairment, evidence is needed from an “acceptable medical source”, limited to licensed physicians, osteopaths, licensed psychologists, optometrists, podiatrists, and speech pathologists. 20 C.F.R. § 404.1513(a). After the impairment is established, the agency will consider pretty much anything to establish the effect of the impairment on the ability to work.  20 C.F.R. § 404.1513(d) lists the following sources for the second inquiry:

(1)  Medical sources not listed in paragraph (a) of this section (for example, nurse-practitioners, physicians’ assistants, naturopaths, chiropractors, audiologists, and therapists);

(2)  Educational personnel (for example, school teachers, counselors, early intervention team members, developmental center workers, and daycare center workers);

(3)  Public and private social welfare agency personnel; and

(4)  Other non-medical sources (for example, spouses, parents and other caregivers, siblings, other relatives, friends, neighbors, and clergy).

20 C.F.R.  § 404.1527 explains how opinion evidence of disability is weighed, with more, or sometimes controlling, weight being accorded to treating physicians.  Toby says:  “The bottom line is that the Social Security disability determination is (wisely) based on all the relevant evidence, not merely a physician certification.”  Why didn’t the IRS adopt the SSDI procedures for proving disability?

Proof of Disability for Purposes of Early Withdrawal Penalty at § 72(t)

An exception to the 10% penalty for early withdrawals from qualified retirement plans has similar language to § 6511(h).  Section 72(t)’s penalty does not apply to distributions attributable to a taxpayer’s being disabled within the meaning of § 72(m)(7).  § 72(t)(2)(A)(iii).  Section 72(m)(7) describes “disability” largely the same was as § 6511(h) does and states:  “An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such manner as the Secretary may require.”  While the IRS has promulgated a regulation at § 1.72-17A(f) that elaborates on the definition of “disability” for this purpose, there is nothing in the regulation that states how disability must be proved, and no Rev. Proc. fills that gap either.  Case law suggests that the taxpayer’s own testimony in Tax Court, coupled with some testimony from a medical professional (of a type not specified) is helpful to the court’s making a de novo determination of qualification for this exception – as indeed was indicated just this week in Trainito v. Commissioner, T.C. Summary Op. 2015-37, where the court, while accepting into evidence medical records of a diabetic coma, bemoaned the absence of any additional medical records — or testimony from medical professionals — regarding the taxpayer’s diabetes or alleged depression. Why isn’t it good enough for proving disability for purposes of extending the refund claim statute of limitations to just introduce taxpayer testimony and (unspecified) medical personnel testimony at trial, as is done in section 72(t) cases?

Proof of Disability for Purposes of “Reasonable Cause” for Penalties

In setting the § 6511(h) financial disability procedures, the IRS should also have considered the much more lax rules that apply to a very similar situation — when a taxpayer seeks relief from a late-filing penalty (say, at § 6651(a)(1)) on the grounds of “reasonable cause and not willful neglect”.  In United States v. Boyle, 469 U.S. 241 (1985), the Supreme Court observed, in dicta, that “disability alone could well be an acceptable excuse for a late filing.”  Id., at 248 n.6.  For relief on the basis of “reasonable cause”, regulations only state that

a taxpayer who wishes to avoid the addition to the tax for failure to file a tax return or pay tax must make an affirmative showing of all facts alleged as a reasonable cause for his failure to file such return or pay such tax on time in the form of a written statement containing a declaration that it is made under penalties of perjury. Such statement should be filed with the district director or the director of the service center with whom the return is required to be filed . . . . [Treas. Reg. § 301.6651-1(c)(1)]

There is nothing in the regulations requiring that, for proof of reasonable cause on the ground of disability or other ill health, any medical-field worker provide a letter.  However, in practice, I have often had my Cardozo Tax Clinic clients obtain a letter from some third-party medical worker to attach to any submission under the regulation.  In my experience, such letters are fairly easily obtained (in the case of mental health issues) from a therapist who the taxpayer regularly sees, but are hard to get from doctors (such as psychiatrists), who have busy practices, see the patient infrequently, and who are uncomfortable in making any statement beyond the taxpayer’s medical diagnosis.  For examples of letters from physicians that were too waffly to qualify taxpayers for tolling under § 6511(h), see. e.g., Pleconis v. IRS, 2011 U.S. Dist. LEXIS 88471 (D.N.J. 2011); Henry v. United States, 2006 U.S. Dist. LEXIS 93038 (N.D. TX. 2006).

Even the requirement that the taxpayer’s reasonable cause statement for removing penalties must be made under penalties of perjury is permitted to be ignored by IRS employees.  The requirement that such a statement be sworn is not included in IRS Notice 746 (“Information About Your Notice, Penalty and Interest”) (rev. 2011), which states:

Reasonable Cause. The law lets us remove or reduce the penalties we explain in this notice if you have an acceptable reason. If you believe you have an acceptable reason, you may send us a signed statement explaining your reason. We will review it and let you know if we accept your explanation as reasonable cause to remove or reduce your penalty.

And the Internal Revenue Manual indicates that for some, unspecified small penalty amounts (the figure is redacted), IRS employees may find reasonable cause to exist either (1) even where a reasonable cause statement is unsigned or (2) based only on oral conversations with the taxpayer.  See IRM 20.1.1.3.1 (rev. 8/5/14).

Finally, there is no requirement that the reasonable cause statement be filed with the tax return, although it is recommended that the taxpayer do so in the instructions.  See, e.g., 2014 Form 1040 Instructions at p. 92.

When a reasonable cause statement is not accepted by the IRS (or not received), it is typical in court cases (deficiency or CDP) that the court decides the issue of reasonable cause because of physical or mental health reasons on a de novo record and under a de novo standard.   For examples of where the Tax Court has found reasonable cause for late filing because of health issues, see, e.g., Meyer v. Commissioner, T.C. Memo. 2003-12; Shaffer v. Commissioner, T.C. Memo. 1994-618; Carnahan v. Commissioner, T.C. Memo. 1994-163.

Proof of Physical and Mental Health Issues in Innocent Spouse Cases

When a person files for innocent spouse relief under § 6015, he or she does so on a Form 8857.  Under section 4.03(g) of Rev. Proc. 2013-34, 2013-2 C.B. 397, one of the factors considered by the IRS in the case of “equitable” relief under subsection (f) is the requesting spouse’s mental or physical health.  Of this factor, the IRS wrote in that section as follows:

Whether the requesting spouse was in poor physical or mental health. This factor will weigh in favor of relief if the requesting spouse was in poor mental or physical health at the time the return or returns for which the request for relief relates were filed (or at the time the requesting spouse reasonably believed the return or returns were filed), or at the time the requesting spouse requested relief. The Service will consider the nature, extent, and duration of the condition, including the ongoing economic impact of the illness. If the requesting spouse was in neither poor physical nor poor mental health, this factor is neutral.

Note that there is no requirement that any medical professional submit a letter (with the Form 8857 or at a later time) that discusses the taxpayer’s health issues.

When § 6015(f) cases are litigated in the Tax Court, the Tax Court decides the issue of equity both on a de novo standard and a de novo record. Porter v. Commissioner, 130 T.C. 115, 117 (2008) and 132 T.C. 203, 210 (2009), and “consults”, but is not bound by, the Rev. Proc.’s factors.  Pullins v. Commissioner, 136 T.C. 432, 439 (2011).  When health issues are raised, the Tax Court does not require any medical testimony (though, I am sure it might appreciate some in close cases).  Indeed, in the Pullins case — decided by Judge Gustafson — the judge wrote as follows about the physical or mental health factor:

There is no evidence that Ms. Pullins was ill when she signed the returns in issue or when she requested relief in April of 2008. See id. sec. 4.03(2)(b)(ii). This factor ordinarily would not weigh in favor of or against granting relief in the IRS’s analysis. See id. sec. 4.03(2)(b). However, having observed Ms. Pullins at trial in September 2009, we conclude that she is now disabled and unable to work and earn income and that she may be permanently so. We find that her obviously impaired health at the time of the trial de novo is relevant, and we conclude that this factor weighs in favor of granting relief. [Id. at 454]

So, just the judge eyeballing and listening to the taxpayer at trial is apparently enough evidence to prove health to be a positive factor for innocent spouse relief under subsection (f).

It is frankly baffling why the IRS should have imposed a stricter proof regime in Rev. Proc. 99-21 for § 6511(h) for obtaining financial disability relief from the refund claim statute of limitations than the equally-consequential-to-the-government determinations made concerning whether a taxpayer is entitled to SSDI, had reasonable cause for avoiding a late-filing penalty, or was entitled to innocent spouse relief.  In any redo of the required § 6511(h) procedures, I would urge the IRS to consider three things:  (1) whether it is really necessary to obtain a letter from a medical professional, (2) who that professional might be, and (3) when that letter must be provided to the IRS.  It is this last issue that leads to my final observations.

The Requirement to Attach Proof of Financial Disability to the Return 

One of the odd things about the Kurko case was that neither the IRS nor the judge seems to object to the late receipt of a “physician” letter and statement from the taxpayer.  Under the Rev. Proc. quoted in yesterday’s post, both are required to be attached to the refund claim (in this case, that would be Ms. Kurko’s late original 2008 income tax return, which was filed in mid-2013).  In the supplemental notice of determination, the Settlement Officer did not raise late receipt as a reason for turning down the benefits of § 6511(h) tolling.  Since she did not do so, the doctrine of SEC v. Chenery, Corp., 318 U.S. 80, 93-95 (1943), which prohibits a court from affirming on a ground not articulated by the agency, applies and would have stopped the judge and IRS attorneys from raising the lateness argument. See Salahuddin v. Commissioner, T.C. Memo. 2012-141 at *16 (citing Chenery and stating: “our role under section 6330(d) is to review actions that the IRS took, not the actions that it could have taken”) (Gustafson, J.).

In any redo of Rev. Proc. 99-21 (hopefully through the notice and comment regulation process), I would hope that the IRS reconsiders whether it is really too draconian a sanction to impose this timing requirement on taxpayers — one that is not imposed in the penalty “reasonable cause” or innocent spouse areas.  Remember that these § 6511(h) taxpayers, even if they have somehow managed to file a late return, are (because of their illnesses) likely not good about reading or complying with IRS instructions that would tell them about this proof timing requirement.  These are the last taxpayers on whom I would impose a requirement that everything be perfect on the return when it is filed.

And, remember that the Supreme Court has previously held that informal refund claims are sufficient to stop the refund claim statute of limitations, and that a perfected refund claim later on (after the statute has run) is normally sufficient.  United States v. Kales, 314 U.S. 186, 194 (1941).

Further, if IRS employees don’t want to enforce this timing requirement in some cases (like Kurko), why state the timing requirement as mandatory at all?  Leaving the submission of the physician’s statement as mandatory at the time of the filing of the return when the IRS has shown that it can overlook that mandatory requirement simply allows for IRS employees to impose the requirement at whim, which is a recipe for abuse of discretion.

Conclusion

Congress passed § 6511(h) to assist a very vulnerable population. Most of the persons impacted by the financial disability provisions face mental and not physical impairments preventing them from easily complying with the procedures for filing returns and refund claims. Rather than creating difficult barriers for this group to navigate, the IRS should adopt procedures that impose barriers to the extension of the statute of limitations only for those who cannot demonstrate financial disability, while allowing the former individuals the full opportunity to demonstrate the bases for their claims.