Financial Disability Argument Loses Because Taxpayer Husband Did not even Allege Disability

The Thorpes filed returns for several years in which they self-reported the penalty for an early withdrawal from an IRA. At some point long after the expiration of the period for timely filing a refund claim, the Thorpes discovered that they need not have paid the penalty for making an early withdrawal from their retirement account and they sought to recover the payments that they made. The IRS denied their claims as untimely and they brought a suit for refund in district court.

As we have mentioned before in discussing these cases the IRS has not written any regulations in the two plus decades since IRC 6511(h) was enacted but it issued Rev. Proc. 99-21 setting out what it thought taxpayer should show in order to meet the requirements of IRC 6511(h). The Rev. Proc. requires that the taxpayer provide:

(1) a written statement by a physician (as defined in § 1861(r)(1) of the Social Security Act, 42 U.S.C. § 1395x(r)), qualified to make the determination, that sets forth:

(a) the name and a description of the taxpayer’s physical or mental impairment;

(b) the physician’s medical opinion that the physical or mental impairment prevented the taxpayer from managing the taxpayer’s financial affairs;

(c) the physician’s medical opinion that the physical or mental impairment was or can be expected to result in death, or that it has lasted (or can be expected to last) for a continuous period of not less than 12 months;

(d) to the best of the physician’s knowledge, the specific time period during which the taxpayer was prevented by such physical or mental impairment from managing the taxpayer’s financial affairs; and

(e) the following certification, signed by the physician:

I hereby certify that, to the best of my knowledge and belief, the above representations are true, correct, and complete.

(2) A written statement by the person signing the claim for credit or refund that no person, including the taxpayer’s spouse, was authorized to act on behalf of the taxpayer in financial matters during the period described in paragraph (1)(d) of this section. Alternatively, if a person was authorized to act on behalf of the taxpayer in financial matters during any part of the period described in paragraph (1)(d), the beginning and ending dates of the period of time the person was so authorized.

The Thorpes basically complied with none of the requirements set out by the IRS in the Rev. Proc. They also did not attack the Rev. Proc. and argue that the requirements in the Rev. Proc. were not entitled to deference since the IRS did not go through notice and comment in adopting the requirements listed there. Based on their facts such an argument would have been unavailing since they only argued that Mrs. Thorpe had a medical condition and made no effort to show why Mr. Thorpe could not have addressed the claim for refund sooner. In the paragraph setting out its conclusions the court summed up the weak facts in the case very nicely:

The plaintiffs have never complied with these requirements. First, they claim disability only as to Ms. Thorpe; for all that appears here, there is no impairment that prevented Mr. Thorpe from managing the couple’s affairs, and no showing was made to the IRS that he could not. See 26 U.S.C. § 6511(h)(2)(B) (no tolling where “individual’s spouse or any other person is authorized to act” for the person in financial matters).⁷ Second, they supply three letters from a physician, Dr. Martin Mayer, regarding her condition (DE 1-2, 1-3) These relate certain ailments, but they do not state anywhere that Ms. Thorpe was or is unable to manage her financial affairs, and they do not include the certification required by Rev. Proc. 99-21. Third, there is no indication that the required showing was made in connection with the refund claims themselves, as opposed to here in court. See Chan v. Commissioner, 693 F. App’x 752, 756 (10^th Cir. 2017) (“The district court cannot make a determination of financial disability if [the taxpayer] did not first provide the requisite proof to the IRS.”). Fourth, I observe that this claim of medical disability is an anomalous one. The plaintiffs do not claim they were unable to deal with their financial affairs and file their returns; indeed, they did file their returns, using a paid preparer. Their claim, then, is not one of inability to cope with the demands of financial recordkeeping or filing, but merely that their returns contained a mistake.

This was a case that should never have been filed. Although the loss adds to the tally of taxpayer losses in IRC 6511(h) cases, the DOJ attorney would have expended little effort in preparing the responsive pleadings and motion to dispose of this case.

Problems exist with the Rev. Proc. which were exposed in the Stauffer, Kurko and Milton cases discussed here. Taxpayers with legitimate reasons for failing to meet a refund filing deadline should look to those cases in crafting arguments in support of IRC 6511(h) relief and should not be cowed by failures to follow all of the rules the IRS created 20 years ago without notice and comment and which do not internally make sense. The Thorpes’ problem was a basic problem with the statute because Mr. Thorpe provided no evidence of his disability and poor evidence of his wife’s. The case stands for little more than the statute means what it says. Future litigants who fail to provide evidence of the disability of all parties who could fix the mistake should expect similar results. Parties with real disability claims should continue to pursue their claims and litigate the intent of IRC 6511(h) if the IRS denies their claim administratively based on the narrow rules set out in Rev. Proc. 99-21.