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

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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.

Comments

  1. Kenneth H. Ryesky says

    20+ years ago, I had a probate case (actually, 2 probate cases) involving 2 brothers who, military service aside, lived their entire lives under the same roof as their mother and, following her passing, remained together in the same apartment until the elder one died. The surviving brother engaged an attorney whose offices were in the same old former mansion building where the brothers’ financial planner was located. The two brothers’ lives — and finances — were intertwined and commingled to the extent that functionally, they were in many respects, one person.

    This attorney had apprised the surviving brother that a Form 706 Estate Tax Return was necessary to be filed before its due date (plus extension). He also wrote in a letter that “in order for you to legally be able to file that return, you need to be appointed Administrator.” Younger Brother was duly appointed Administrator, and the Estate Tax Return was timely filed. Within 2 months after Older Brother’s Form 706 was filed, Younger Brother died. I was then retained by the primary beneficiary of Younger Brother’s will, which had been drafted by the aforementioned attorney in the process.

    [I shall skip over the numerous complications in handling the Estates, including the necessity of me having to take flak, and personal condemnation in open court from the Surrogate’s Court judge in my zealous advocacy of my client (never mind that the same judge was later found to be in a closer-than-arms-length relationship with the Public Administrator’s attorney who was my adversary).]

    In one of the discordant discourses I had with Younger Brother’s attorney, I took issue with the “in order for you to legally be able to file that return, you need to be appointed Administrator” language he had written to his now deceased client. I pointed out the following statutory and regulatory provisions:

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    IRC § 2203: Definition of executor:

    The term “executor” wherever it is used in this title in connection with the estate tax imposed by this chapter means the executor or administrator of the decedent, or, if there is no executor or administrator appointed, qualified, and acting within the United States, then any person in actual or constructive possession of any property of the decedent.

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    Treas. Reg. § 20.2203-1 Definition of executor:

    The term executor means the executor or administrator of the decedent’s estate. However, if there is no executor or administrator appointed, qualified and acting within the United States, the term means any person in actual or constructive possession of any property of the decedent. The term “person in actual or constructive possession of any property of the decedent” includes, among others, the decedent’s agents and representatives; safe-deposit companies, warehouse companies, and other custodians of property in this country; brokers holding, as collateral, securities belonging to the decedent; and debtors of the decedent in this country.

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    Inasmuch as there is explicit statutory and regulatory authority for all types of people to file a Form 706 Estate Tax return, can there then be any equitable tolling in Estate and Gift cases under the Stauffer standard?

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