No Toll for the Taxpayer: Financial Disability, Statute of Limitations Refund Tolling, and Courts’ Strict Application of “Authority”

Today’s post comes from one of my students at the University of Minnesota Law School Tax Clinic, Casey Epstein, on a topic very near and dear to my heart: financial disability. Casey is currently working one such case in our clinic and has put in a lot of research on the topic. This post, however, takes us a different direction than the common lamentations on Rev. Proc. 99-21 pitfalls, instead focusing on the exception to financial disability where the taxpayer has a guardian. Note that a version of this post was originally published in the Minnesota Law Review De Novo online blog.

-Caleb

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INTRODUCTION

Imagine you are poor, mentally-ill, and struggle to manage your finances. You granted your adult son durable power of attorney (“DPA”) but are no longer on speaking terms with him. You work a low-wage, menial job and your paychecks are subject to typical tax withholdings. Because of your modest income your effective tax rate is zero, and most of your withholdings are returnable to you in a small, but meaningful, refund. However, as a result of your condition you forget to file your tax returns until four years later. The IRS denies your refund as being past the statute of limitations (”SOL”). You challenge, claiming to meet the requirements for “financial disability,” tolling your SOL. Despite the judge agreeing that you were financially disabled, the judge denies your claim anyway because she finds that your estranged adult son had the authority to file your tax returns for you.  

As unjust as this sounds, the First Circuit rejected an analogous claim in Stauffer v. Internal Revenue Service, No. 18-2105 in September 2019 (covered in Procedurally Taxing here, here, here, and here). The First Circuit’s strict financial disability analysis is not unique—nearly every financial disability litigation ends in failure for the taxpayer. Moreover, taxpayers potentially eligible for financial disability are, by definition, mentally and/or physically disabled—and therefore among the most vulnerable Americans. This Post focuses on financial disability’s little-discussed “authority” provision and argues that courts should adopt a more lenient standard for assessing “authority” and awarding “financial disability” tolling.

  1. FINANCIAL DISABILITY

Most taxpayers have a three-year SOL to receive refunds from the IRS on their tax returns—typically starting on April 15, when the taxpayer’s withholding or other credits are deemed paid, after the tax year in question. See IRC § 6511(a); IRC § 6513(b), (c)(2). Once the statute of limitations clock expires, taxpayers have little recourse—and a confusing set of procedural rules—to recover their refunds. Courts are exceedingly reluctant to grant equitable tolling, regardless of the taxpayer’s situation, as shown by Keith Fogg and Rachel Zuraw in their 2013 article Financial Disability for All.

Responding to the Supreme Court’s 1997 United States v. Brockamp decision, which refused to grant equitable tolling to a ninety-three year old with dementia who forgot to file his tax return, Congress sought to provide a limited tolling option for taxpayers whose inability to manage their finances was truly beyond their control. The Congressional Record (at H3411–12) documents Representative Dunn, a sponsor of the financial disability bill, stating that the Brockamp result was “an outrageous injustice that my commonsense [bill] is intended to end.” One year later, Congress enacted a tolling provision for taxpayers “unable to manage financial affairs due to disability.” Codified in Section 6511(h), a taxpayer is “financially disabled” if they are “unable to manage [their] financial affairs by reason of a medically determinable physical or mental impairment.”

Congress additionally specified that a taxpayer is not financially disabled if “any . . . person is authorized to act on [their] behalf.” Neither the legislature nor the Treasury’s Revenue Procedure 99-21 provided guidance as to what qualifies a person as one “authorized to act on behalf.” As professor Roger McEowen further shows, Courts have consistently held against taxpayers who granted someone DPA, but afterword claimed that the DPA holder was not “actually” authorized or able to manage the taxpayer’s finances.

Beyond “authority” issues, courts reject almost every “financial disability” tolling claim anyway, fearing stale claims and extra administrative burdens for the IRS. Taxpayers’ success rates for financial disability are so low that Procedurally Taxing has already celebrated victory in Stauffer twice—here and here—only to have the Blog’s hopes dashed on appeal.

  • STAUFFER

In Stauffer, the Court refused to grant financial disability tolling to an elderly, mentally-ill man whose son had DPA, discovered millions of dollars in lost assets, and quickly became estranged from his father. Neither father nor son filed tax returns for the year in question, which would have allowed recovery of almost $140,000 in overpayment to the IRS.

The Court’s specific rationale for rejecting financial disability tolling was that Stauffer did have someone authorized to act on his behalf—his estranged son who still technically had DPA, despite both parties orally revoking the agreement. The Stauffer Court invoked the plain meaning statutory canon to interpret the undefined term “authorized,” concluding that dictionary definitions “unambiguous[ly]” define “authority” as the mere “right or permission to act,” not “imply[ing] the existence of a ‘duty.’” Because the father executed a DPA with his son and never revoked it in writing—oral revocation and estrangement notwithstanding—the son had legal authority to act on his father’s behalf and plaintiff was thus not entitled to SOL tolling under § 6511(h)(2)(B).

  • COURTS SHOULD APPLY A MORE FORGIVING STANDARD

The Stauffer Court’s analysis and use of the plain meaning canon is unduly strict. There was no reason that the Court to solely rely on dictionary definitions in interpreting “authority.” The Court could have easily interpreted “authority” to mean actual as opposed to theoretical authority under a common usage theory. Moreover, such a strict application of § 6511(h) undermines its raison d’etre—statutory rejection of the harsh Brockamp result. Whether or not the Stauffer’s son had legal authority to file his tax returns, he clearly lacked permission. From a broad fairness perspective, it is unjust that Stauffer was denied his refund merely because his son had tenuous power of attorney.

Other courts interpreting “authority” also rejected plaintiffs’ pleas, although without Stauffer’s statutory interpretation hoopla. In Bova v. United States, (and other similar cases, like Plati v. United States, discussed in McEowen’s article) the Federal Claims Court held a DPA sufficient to deny plaintiffs’ financial disability claims, finding that “[b]ecause the express terms of the power of attorney instrument here authorized Mr. Bova . . . the court may not consider the plaintiffs’ allegation that a separate oral agreement made the power of attorney contingent on the taxpayer becoming disabled.” Few critics and scholars have addressed the problematic interpretation of “authorized;” most commentators, like the Taxpayer Advocate and ABA Section on Taxation instead advocate for expanding the definition of “physician,” specifying qualifying medical conditions, and courts broadening their analyses of taxpayers’ ability to manage their financial affairs. These myriad criticisms showcase many, many issues still affecting § 6511(h).

Critics proposed solutions for § 6511(h) primarily involve Congress and the Treasury promulgating new rules to correct the judiciary. The courts, however, are fully capable of addressing § 6511(h)’s flaws on their own. Moreover, the judiciary arguably should change course and apply a more lenient standard because their strict approach undermines the original purpose of § 6511(h)—ensuring that future plaintiff’s in Mrs. Brockamp’s shoes would have redress. And yet it seems highly unlikely that Mrs. Brockamp would win her financial disability claim if argued today.

While the Treasury and Congress should revisit financial disability rules, the courts can salve disabled Americans’ tax woes by simply applying more leniency. Instead of strictly interpreting “authority” with a legalistic dictionary definition as the Stauffer Court did, courts should apply a reasoned facts-and-circumstances test to determine whether the taxpayer actually had someone authorized to act on their behalf—not merely a tenuous or orally rescinded DPA agreement. No legislative fix is necessary for these judicial errors—courts must simply provide the flexibility that Congress demanded in enacting 6511(h). A judicial mentality of leniency towards the small number taxpayers medically incapable of filing their tax returns would fulfill Congress’ aims without overburdening the IRS.

CONCLUSION

Despite Congress’ good intentions, Section 6511(h) has not relieved disabled taxpayers incapable of filing their tax returns. Fortunately, the judiciary can address and ameliorate the most pressing issues of financial disability jurisprudence on its own. To do so, however, courts must reverse course and apply a far more lenient analysis. This solution requires evaluating taxpayers’ “authorized” agents on a facts-and-circumstances basis instead of through a strict and reductive plain meaning statutory interpretation lens. Late filing or not, it is unjust for disabled plaintiffs to be regularly denied their overpayment refunds; it is far past time for the courts to heed Congress’ 1998 clarion call.

Notes from the Fall 2019 ABA Tax Section Meeting

From October 3 to 5 Les, Christine and I attended the tax section meeting in San Francisco.  We were each on different panels and we each enjoyed a delightful dinner cruise on the bay Friday night courtesy of tax procedure guru, Frank Agostino.  During the cruise the three of us had an in depth discussion with Frank about his latest ground-breaking tax procedure initiatives which we hope to highlight in coming posts.

For this post I intend to provide some of the information passed out during the update sessions in the Administrative Practice and Court Procedure Committees.  For anyone interested in more depth or more precision, it is possible to purchase audio tapes of the committee meetings from the tax section.

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Administrative Practice Committee

The discussion initially focused on Appeals and the Taxpayer First legislation seeking to create a more independent Appeals.  Apart from the legislation, Appeals issued a new conferencing initiative on September 19, 2019.  A request for comments on the new process went out. 

The presenter discussed the change to IRC 7803(e)(5)(A) and the right to a hearing in Appeals.  This change resulted from the Facebook case discussed here.  For those who do not remember the Facebook litigation, Chief Counsel denied Facebook the opportunity for a conference with Appeals after Facebook filed its Tax Court petition — even though Facebook had not met with Appeals prior to filing the petition.  The new provision will make it more difficult to deny a taxpayer the opportunity to meet with Appeals in this circumstance.

Another provision of the Taxpayer First Act, IRC 7803(e)(7)(A), grants taxpayers the right to their file 10 days in advance of a meeting with Appeals.  This provision has some income limitations but will generally benefit the vast majority of individual taxpayers.  It seems like a good step forward, though I would like the file much earlier than 10 days before the meeting, and I have had trouble getting it from Appeals in the past.  Some Appeals Officers (AOs) have denied my request for information in the administrative file, even though taxpayers have always had the right to this information.  If the case is in Tax Court, a Branerton letter to the Chief Counsel attorney will almost always result in that attorney calling the AO to tell the AO to send the material.  If you go to Appeals prior to Tax Court and have no Chief Counsel attorney to make this call, I wonder if the legislation will cause Appeals to take the position that a taxpayer cannot receive the material until 10 days prior to the meeting.  This would be a shame, because meetings are much more productive when parties can properly prepare.

The Taxpayer First Act also made changes to the ex parte provisions, set out in 7803(e)(6)(B), first enacted in 1998 as a means of insulating Appeals from the corrupting influence of other parts of the IRS.  The ex parte provisions were previously off-code but picked up by the IRS in a pair of Revenue Procedures describing how they would work.  The new provision allows Appeals to communicate with Chief Counsel’s office in order to obtain a legal opinion as it considers a matter, as long as the Chief Counsel attorney providing the advice was not previously involved in the case.  I don’t think this changes much.  Rev. Proc. 201218 already allowed attorneys in Chief Counsel to provide legal advice to Appeals.  Maybe this makes it clear that Appeals is not so independent that it cannot receive legal advice when it needs it, but it seemed that Chief Counsel and Appeals had already figured that out — even if some taxpayers criticized Appeals for obtaining legal advice.  Of course, when obtaining advice Appeals needs to seek out someone other than the attorney who was providing advice to Examination, in order to avoid having the attorney be the Trojan horse improperly influencing Appeals.

The panel mentioned Amazon v. Commissioner, 2019 U.S. App. Lexis 24453 (9th Cir. 2019). This is an important transfer pricing case clarifying what constitutes an “intangible” that must be valued and included in a buy-in payment to a cost-sharing arrangement between a parent company and its foreign subsidiary entity. The 9th Circuit panel affirmed the Tax Court, declining to apply Auer deference and holding that certain of Amazon’s abstract assets, like its goodwill, innovative culture, and valuable workforce, are not intangibles.

The committee also discussed Chief Counsel Notice CC-2019-006 “Policy Statement on Tax Regulatory Process” (9-17-2019).  A copy of the complete policy statement can be found here.   Each of the four points is important in its own way.  I find number three to be especially important.  We discussed the notice previously in a post here.

A few recent cases were mentioned as especially important to administrative practice:

Mayo Clinic v. United States, 124 AFTR2d 2019-5448 (D. Minn. 2019) provides the most recent interpretation of Mayo and what it means, in the context of whether Mayo Clinic was entitled to an exemption as an “educational organization” under Treas. Reg. § 1.170A-9(c).

Baldwin v. Commissioner, 921 F.3d 836 (9th Cir. 2019) is a mailbox rule case in which the taxpayer seeks to overrule National Cable & Telecommunications Association v. Brand X Internet Services, 545 U.S. 967 (2005).

Bullock v. IRS, 2019 U.S. Dist. LEXIS 126921 (D. Mont. 2019) is a pre-enforcement challenge to Rev. Proc. 2018-38 which relieves 501(c) organizations of the obligation to disclose the names and addresses of their donors.

Court Practice and Procedure Committee

Robin Greenhouse, who now heads Chief Counsel’s LB&I office, gave the report for Chief Counsel’s office.  She read from her notes and provided no PowerPoint presentation or handout material, so this time I cannot FOIA the PowerPoint presentation to provide the data.

She discussed two financial disability decisions which seems like an interesting place to begin.  First she mentioned Carter, as representative for Roper, v. United States, 2019 U.S. Dist. LEXIS 134035 at( N.D. Ala. 2019) in which the court determined that an estate cannot use 6511(h) to assert financial disability because an estate is not an individual.  I wrote a post on this case earlier in the fall.   Next she mentioned the case of Stauffer v. Internal Revenue Service, which I recently wrote about here.  I failed to make notes on the other cases she discussed and I cannot remember why.

Judge Marvel talked about the new Tax Court announcement on limited scope representation and the Chief Counsel Notice, CC-2020-001 on that issue.  During the first month of the fall Tax Court calendar four persons entered a limited appearance, including our own Christine Speidel.  The limited appearance ends when the calendar ends, making it not entirely clear what to do with a decision document.  Some suggested getting the decision document signed by the petitioner was the way to go.

So far the Tax Court has 18 pending passport cases.  Judge Marvel indicated that we might see the first opinion in a passport case soon.

Effective on September 30, 2019 the Tax Court has begun accepting electronic filing of stipulated decisions.  The practical effect of this is that because the IRS always signs the decision document last, it will be the party to submit the document.  I doubt this change will have a profound impact on Tax Court practice but, in general, more electronic filing is better.

Development of the Tax Court’s new case management system is moving quickly.  The court expects it to go online by Spring of 2020.  When implemented, this system will allow parties to file petitions electronically.  Judge Marvel expects that practitioners will like the new system.  The new system may allow changes to the public’s access to documents; however, whether and how that might happen is unclear.

Gil Rothenberg, the head of the Department of Justice Tax Division’s Appellate Section gave an update on things happening at DOJ.  He said there have been 75 FBAR cases filed since 2018 with over $85 million at issue.  Several FBAR cases are now on appeal – Norman (No. 18-02408) (oral argument held on October 4th) and Kimble (No. 19-1590) (oral argument to be scheduled) both in the Federal Circuit; Horowitz (No. 19-1280) (reply brief filed on July 18th) in the 4th Circuit and Boyd (No. 19-55585) (opening brief not yet filed) in the 9th Circuit.

Over 40 bankers and financial advisors have been charged with criminal activity in recent years and the government has collected over $10 billion in the past decade.  I credit a lot of the government’s success in this area to John McDougal discussed here but the Tax Division certainly deserves credit for this success as well.

DOJ has obtained numerous injunctions for unpaid employment taxes in the past decade.  It has brought over 60 injunction cases against tax preparers and obtained over 40 injunctions.  These cases take a fair amount of time and resource on the part of both the IRS and DOJ.  They provide an important bulwark against taxpayers who run businesses and repeatedly fail to pay their employment taxes.  Usually the IRS revenue officers turn to an injunction when the businesses have no assets from which to administratively collect.  We have discussed these cases here.  I applaud DOJ’s efforts to shut down the pyramiding of taxes.  Congress should look to provide a more efficient remedy, however, for addressing taxpayers who engage in this behavior.

He said that while tax shelter litigation was generally down, the Midco cases continued.  He mentioned Marshall v. Commissioner in the 9th Circuit (petition for rehearing en banc was denied on October 2nd) and Hawk v. Commissioner in the 6th Circuit (petition for certiorari was denied by the Supreme Court on October 7th).  We have discussed Midco cases in several posts written by Marilyn Ames.  These cases arise as transferee liability cases.  See our discussion of some past decisions here and here.  My hope is that the government will continue to prevail on these cases as the scheme generally serves as a way to avoid paying taxes in situations with large gains.  I wonder how many of these cases the IRS misses.

In Fiscal 2019 there were 200 appeals.  The government won 94% of the cases appealed by taxpayers and 56% of the cases appealed by the government.  I was naturally disappointed that he only talked about cases in which the government prevailed and did not discuss some of the larger losses such as the one in Myers v. Commissioner discussed here.

He briefly discussed the Supreme Court’s decision in Taggart v. Lorenzen, a bankruptcy case, in which the court held that the proper standard for holding the government in contempt for violating the discharge injunction required mens rea.  This followed the position of the amicus brief submitted by the Solicitor General. The Court declined to adopt the petitioner’s position, which would permit a finding of civil contempt against creditors who are aware of a discharge and intentionally take actions that violate the discharge order. The Court found this proposal to be administratively problematic for bankruptcy courts, distinguishing between the purpose and statutory language of bankruptcy discharge orders (which require mens rea) and automatic stays (which do not).

He ended by announcing that he will retire on November 1, 2019.

First Circuit Sustains Denial of Financial Disability Claim

On September 16, 2019, the First Circuit affirmed the decision of the district court denying a claim for refund a son filed for his father’s estate after the normal statute of limitations for claiming a refund had expired.  The decision, Stauffer v. Internal Revenue Service, No. 18-2105, finds that Mr. Stauffer’s son held a durable power of attorney and that, because of that POA, the estate cannot avail itself of the benefit of the statute suspension provided in IRC 6511(h).  We have previously written about this case here and in three prior posts linked therein.  Despite the unfavorable outcome at the Circuit level, this case did move the needle on financial disability cases by resulting in a favorable ruling early in the litigation regarding the need to obtain an expert opinion from certain types of professionals, as required by Rev. Proc. 99-21.

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The facts as determined by the court are relatively straightforward.  Father gives son a durable power of attorney (POA)(Sometimes referred to herein as a DPA).  Son and father have a falling out.  Son tells father he will no longer serve as the POA.  Son drafts revocation of POA but fails to send out the revocation.  Father and son later reconcile shortly before father’s death.  Son becomes executor and discovers that his father has not filed returns for several years prior to death.  As is common in unfiled return cases, some of the years involved refunds and at least one involved a reasonably substantial liability that would have been paid by the refunds on the now overly delinquent returns.

The estate did well in the early stages of the case when the IRS tried to rely on its Revenue Procedure in arguing that the estate did not obtain an opinion from the right type of professional.  The magistrate judge ruled against the IRS and allowed the opinion of a professional who had worked with the decedent for several years prior to his death, even though it was not the type of professional described by the Revenue Procedure. However, the IRS then changed tactics to begin arguing that the son did not properly revoke the POA.  The statute does not allow a suspension when a competent POA exists, under the theory that the competent POA could/should file the return on time even if the taxpayer had disabilities preventing that from happening.  The district court bought the IRS argument regarding the POA, and the First Circuit does as well.

In the First Circuit the estate made two arguments.  First, it attacked the factual finding that Hoff never renounced the POA.  Second, it disputed the court’s legal conclusion that the POA qualified Hoff as a person authorized to act on behalf of Carlton in financial matters for the purposes of I.R.C. § 6511(h)(2)(B).  With respect to the legal argument, the court stated:

The Estate urges us to adopt a reading of § 6511(h)(2)(B) under which a person will be considered “authorized to act on behalf of [a financially disabled taxpayer] in financial matters” only if he or she has: (1) authority to file the financially disabled taxpayer’s tax returns; (2) a duty to file the financially disabled taxpayer’s tax returns; and (3) actual or constructive knowledge that the tax returns for a particular year have to be filed on behalf of the disabled taxpayer. The Estate claims that, because Hoff did not meet these three purported requirements, the statute of limitations for the filing of Carlton’s tax refund should have remained suspended through his death in October 2012 due to his financial disability.

The First Circuit found that:

The DPA explicitly granted him the authority to file Carlton’s tax returns, as well as any other tax-related claim before the IRS. Thus, ever mindful of the principles that guide our interpretation of a statute, we turn to the Estate’s purported “duty” and “actual or constructive knowledge” requirements for a person to qualify as “authorized to act on behalf of [a financially disabled taxpayer] in financial matters” under § 6511(h)(2)(B)….
 
Here, the key word for our analysis of § 6511(h)(2)(B)is “authorized.” By urging us to adopt the “duty” and “constructive knowledge” requirements, the Estate asks us to interpret the term “authorized” in § 6511(h)(2)(B) beyond its plain and unambiguous meaning. And this we cannot do. The Estate’s proposed definition of “authorized” finds no support in § 6511(h)(2)(B)’s plain language or its statutory context.  

The court then looked at the word ‘authority’ to find the correct definition.  In doing so it found:

None of the above definitions imply that the existence of a “duty” is a requisite for a person’s authority. To the contrary, the provided definitions illustrate that one who acts with “authority” has been bestowed with the power to perform an action on another’s behalf. By contrast, a duty imposes an obligation to perform a certain act.10 While there are duties that flow from grants of authority (e.g., those of loyalty and care in agency law), the relevant question here is whether in this context, definitionally speaking, one who is “authorized” to take a certain course of action should be understood narrowly to mean only one who has an affirmative obligation to take such action….
 
Therefore, we hold that a person may be considered “authorized to act on behalf of [a financially disabled taxpayer] in financial matters” for purposes of § 6511(h)(2)(B) even if he has no affirmative obligation to act on the taxpayer’s behalf.

Next it turned to constructive knowledge to address the estate’s argument that the POA needed to know of the duty to file a tax return.  Here it said:

The Estate’s argument in support of an “actual or constructive knowledge” requirement is even less persuasive. The statute’s plain language does not include any term into which such a requirement can plausibly be read, nor does the Estate point to any contextual basis (e.g., provisions of the whole law) from which it can be inferred. Thus, we also hold that, for purposes of § 6511(h)(2)(B), a person “authorized to act on behalf of [a financially disabled taxpayer] in financial matters” is not required to have actual or constructive knowledge of the need to file tax returns in a specific year.

After knocking out the legal argument concerning the POA, the court then determined that the estate failed to prove that the son revoked the POA.  In doing so it relied on both the standard of proof imposed upon the estate to upset the factual decision of the district court and Pennsylvania law, which was the state law governing the POA.

The Stauffer decision provides a disappointment for those of us buoyed by the initial success of the estate in pushing back on the harshness of the Revenue Procedure.  Nothing in the First Circuit’s decision undercuts the good points made by the magistrate concerning the Revenue Procedure.  The First Circuit does add clarity to the issue of the type of POA that can cause a taxpayer to lose the protection of the financial disability provisions.  It also provides clarity on what an individual appointed as a POA must do to revoke the POA at a point when the individual no longer wishes to serve.  Many of the financial disability cases involve pro se individuals who do not do a good job of advocating for their position.  The estate here was well represented at each stage.  Unfortunately, that did not save the estate, even if it did produce a favorable opinion concerning the restrictions in the Revenue Procedure regarding an appropriate expert.

An Estate Cannot Use the Financial Disability Provisions to Toll the Statute of Limitations for Filing a Refund Claim

The case of Carter v. United States, No. 5:18-cv-01380 (N.D. Ala. 8-9-2019) shows a limitation of the financial disability provision set out in IRC 6511(h). Ms. Carter is a personal representative of an estate. She failed to timely file an administrative claim for the estate and sought to use the financial disability provisions to hold open the time frame. The court finds that the language of the statute only applies to individuals. The court also spends a fair amount of time in its lengthy opinion talking about the issue of jurisdiction, a favorite topic at this blog. Both financial disability and jurisdiction will be discussed below. Carl Smith helped significantly in the writing of the jurisdictional portion of this post.

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Financial Disability

The decedent owned a lot of valuable stock in a bank but had the misfortune to pass away in the midst of the financial crisis of 2007-2008. The stock went down precipitously because of the great recession but fell to worthless status when a fraudulent scheme perpetrated on the bank was discovered. The dramatic drop in the value of the stock apparently caused Ms. Carter, the executor of the estate to develop issues that she alleges caused her to be late in submitting an amended return claiming a refund because the value of the stock at the valuation date for the estate tax return was actually lower than the amount reported on the return.

The IRS moved to dismiss because by the time she filed the amended return it was well past the ordinary time for filing a claim for refund. Ms. Carter withdrew her initial claim and filed another one to which she attached a doctor’s note explaining that she, the executor, was suffering from a medical impairment that prevented her from managing the affairs of the estate for five years. She also filed an affidavit with the second claim stating that no one other than her had the authority to act on behalf of the estate during the relevant time period. The IRS did not act on her new amended claim. After waiting six months she filed her complaint and the IRS moved to dismiss for lack of jurisdiction since the claim was filed out of time. The estate claimed a refund of over 3 million dollars stating that the stock was really worthless at the time of valuation based on non-public information that later became available.

We can all sympathize with someone who thought they were inheriting stock worth over $17 million and who found out it was worthless. Compounding this problem, according to footnote 2 of the opinion, was the fact that the bank executives urged Ms. Carter and a co-beneficiary not to sell their stock but to borrow from the bank to pay the estate tax. The two borrowed the money giving personal guarantees and they remain liable on those guarantees. So they not only lost all of the value that they thought the stock had but they owe money (lots of it) to boot. [I doubt they found much solace in the successful prosecution of the person who caused the devaluation.]

Such a turn of events could put someone in a tailspin that might cause some delays. The IRS did not argue that Ms. Carter was wrong in her assertion that she suffered from some unspecified medical impairment that kept her from acting. It essentially argued that this did not matter because the taxpayer was the estate and not an individual. It also did not matter that the stock may have been worthless at the time the estate reported it without knowing of the actions that devalued the stock. What mattered was that the refund claim came too late.

Footnote 6 of the opinion collects the case law on this issue which uniformly holds that the financial disability must belong to the taxpayer and not to some third person. Prior cases on this point include Murdock v. United States, 103 Fed. C. 389 (2012); Alternative Entm’t Enters., Inc. v. United States, 458 F. Supp. 2d 424 (E.D. Mich. 2006), aff’d 277 F. App’x 590 (6th Cir. 2008); Brosi v. Commissioner, 120 T.C. 5, 10 (2003) as well as others I will not detail here. I wrote a law review article several years ago detailing holes in the financial disability statute. This is another hole. I cannot say that Ms. Carter would win her case but if financial disability did keep her from filing her claim on time, and if she can prove the claim was valid, this seems like a worthy exception for Congress to make to allow a taxpayer to obtain the return of money that should not have come to the IRS in the first place. Until the statute changes to include a broader class of taxpayers with financial disability cases like this will continue to occur occasionally. Financial disability cases do not present large numbers and courts can sort through the disability claims. I would let them do it.

Jurisdiction

The court also spent time parsing its jurisdiction. This issue matters because nonjurisdictional filing deadlines are subject to waiver, forfeiture, estoppel, and, usually, equitable tolling. The Supreme Court in Brockamp v. United States, 519 U.S. 347 (1997) (remember it was Brockamp that caused Congress to pass IRC 6511(h) creating financial disability in the first place) merely held that equitable tolling doesn’t apply in 6511 cases, but the Court did not hold the other three defenses don’t apply. Brockamp says nothing about whether the filing deadline is jurisdictional. Indeed, the opinion doesn’t even contain the words “jurisdiction” or “jurisdictional”. Dalm v. United States, 498 U.S. 596 (1990) does contain language calling 6511 rules jurisdictional, but it goes on to reason that it is so because: 

Under settled principles of sovereign immunity, the United States, as sovereign, is immune from suit, save as it consents to be sued . . . and the terms of its consent to be sued in any court define that court’s jurisdiction to entertain the suit. A statute of limitations requiring that a suit against the Government be brought within a certain time period is one of those terms.

494 U.S. at 608 (cleaned up)

That statement is the reverse of good law today. SOLs now are almost never jurisdictional. 

The Supreme Court has not given much thought to the 1990 Dalm opinion in recent years, for if the Court did, the 1997 Brockamp opinion (which doesn’t even mention Dalm) could have been one sentence long: “Since jurisdictional filing deadlines are never subject to equitable tolling, and since, in Dalm, we called the 6511 filing deadlines jurisdictional, those deadlines cannot be equitably tolled.” 

Since the district court opinion did not involve the DOJ waiving or forfeiting the right to raise the untimeliness issue, nor did it involve facts that might cause estoppel, it really did not matter in Ms. Carter’s case whether the filing deadline is jurisdictional.

The district court has serious doubts that 6511 noncompliance arguments go to its jurisdiction. The court in the text relies on statements in Dalm making 6511 jurisdictional, but is sufficiently concerned that 6511 is not, that it goes on to decide the underlying merits against the taxpayer (not sure why it has to do this). Then, the court writes a long footnote about why 6511 might not be jurisdictional:

Supreme Court jurisprudence no longer accords similar limitations periods jurisdictional status. In United States v. Kwai Fun Wong, 135 S. Ct. 1625 (2015), the Supreme Court held the limitations period for filing a Federal Tort Claims Act case is not jurisdictional. The Court determined “the Government must clear a high bar to establish that a statute of limitations is jurisdictional.” Id. at 1632. “In recent years, [the Court has] repeatedly held that procedural rules, including time bars, cabin a court’s power only if Congress has ‘clearly state[d]’ as much.” Id. (citation omitted). “Time and again, [the Court has] described filing deadlines as ‘quintessential claim-processing rules,’ which ‘seek to promote the orderly progress of litigation,’ but do not deprive a court of authority to hear a case.” Id. (citing Henderson v. Shinseki, 562 U.S. 428, 435 (2011)). 

Therefore, to “ward off profligate use of the term ‘jurisdiction,’ [the Court has] adopted a ‘readily administrable bright line’ for determining whether to classify a statutory limitation as jurisdictional. . . . [Courts should] inquire whether Congress has ‘clearly state[d]’ that the rule is jurisdictional; absent such a clear statement, . . . ‘courts should treat the restriction as nonjurisdictional in character.’” Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145, 153 (2013). As a result, the Court has “repeatedly held that filing deadlines ordinarily are not jurisdictional. . . .” Id. at 154. 

Even more recently, the Supreme Court reconfirmed that a statute’s limitations period primarily pertains to claim-processing, not subject matter jurisdiction. See Fort Bend Cty., Texas v. Davis, 139 S. Ct. 1843, 1849 (2019) (“The Court has therefore stressed the distinction between jurisdictional prescriptions and nonjurisdictional claim-processing rules, which ‘seek to promote the orderly progress of litigation by requiring that the parties take certain procedural steps at certain specified times.’” (quoting Henderson v. Shinseki, 562 U.S. 428, 435 (2011))); Nutraceutical Corp. v. Lambert, 139 S. Ct. 710 (2019) (contrasting nonjurisdictional claim-processing rules subject to waiver by an opposing party with court procedural rules which clearly foreclose a flexible equitable tolling approach). “If a time prescription governing the transfer of adjudicatory authority from one Article III court to another appears in a statute, the limitation [will rank as] jurisdictional; otherwise, the time specification fits within the claim-processing category.” Hamer v. Neighborhood Hous. Servs. of Chicago, 583 U.S. at ___, 138 S. Ct. 13, 20 (2017).

Section 6511(a)’s filing deadlines appear to fall within the ambit of a claim-processing rule rather than a jurisdictional prerequisite. As similarly countenanced in Kwai Fun Wong, § 6511(a)’s “text speaks only to a claim’s timeliness, not to a court’s power.” 135 S. Ct. at 1632; see § 6511 (describing the filing deadlines for administrative claims for tax credits and refunds). Section 6511 “‘does not speak in jurisdictional terms or refer in any way to the jurisdiction of the district courts.’” Kwai Fun Wong, 135 S. Ct. at 1633 (citations omitted). Furthermore, § 6511’s limitations periods fall in a different section of the Internal Revenue Code from the jurisdiction granting provisions. See28 U.S.C. § 1346(a)(1); 26 U.S.C. § 7422.

The court cognizes the Supreme Court referred to § 6511’s time limits in jurisdictional terms in Dalm, In Dalm, the Court held the district court did not have jurisdiction over a suit seeking a refund of gift tax, interest, and penalties when the plaintiff did not file suit within the limitations period. Id. at 601. The Eleventh Circuit followed Dalm’s reasoning in dismissing a refund suit for lack of subject matter jurisdiction. Wachovia Bank, N.A. v. United States, 455 F.3d 1261, 1268-69 (11th Cir. 2006). However, the Supreme Court’s recent jurisprudence portrays that courts “once used [the term “jurisdiction”] in a ‘less than meticulous’ manner.” Nutraceutical, 139 S. Ct. at 714 n. 3 (citing Hamer, 583 U.S. at ___, 138 S. Ct. at 21; Kontrick v. Ryan, 540 U.S. 443, 454 (2004)). “Those earlier statements did not necessarily signify that the rules at issue were formally ‘jurisdictional’ as [the Court uses] that term today.” Id.

Nevertheless, the structural interpretation of § 6511(a) as a claims-processing rule may not overcome its prior construal as a jurisdictional provision. See Fort Bend, 139 S. Ct. at 1849 (The “Court has stated it would treat a requirement as ‘jurisdictional’ when ‘a long line of Supreme Court decisions left undisturbed by Congress’ attached a jurisdictional label to the prescription.”) Furthermore, notwithstanding the shadow cast on § 6511(a) as a jurisdictional provision, its limitations period applies to this action as it prescribes mandatory filing deadlines subject to a narrow tolling provision. See Nutraceutical, 139 S. Ct. at __ (“The mere fact that a time limit lacks jurisdictional force, however, does not render it malleable in every respect. Though subject to waiver and forfeiture, some claim-processing rules are “mandatory” — that is, they are “‘unalterable’” if properly raised by an opposing party.” (citing Manrique v. United States, 137 S. Ct. 1266, 1272 (2017); see also Kontrick, 540 U.S. at 456; Eberhart v. United States, 546 U.S. 12, 19 (2005) (per curiam) (A claim-processing rule manifests as “mandatory” when a court must enforce the rule if a party “properly raise[s]” it.). Therefore, Defendant properly raised the limitations period prescribed by 26 U.S.C. § 6511(a), and it applies whether it is designated as a jurisdictional or claim processing rule.

Conclusion

The Carter case provides much thought and analysis on the jurisdictional issue as it applies to refund claims. As you can see from this discussion, it does not simply stop at Brockamp. While the discussion does not help the taxpayer here, it may help to guide future taxpayers seeking to understand the possibilities for pursuing an otherwise late claim.

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

IRS Request for Comments and the ABA Tax Section Submission

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

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

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

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

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

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

 

 

6511(h) Case Takes a New Turn

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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