Mental Illness And The Statute Of Limitations

Many people and most tax practitioners (hopefully) know the statute of limitations on refunds from the IRS:

§ 6511 Limitations on credit or refund.

(a)  Period of limitation on filing claim.

Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. Claim for credit or refund of an overpayment of any tax imposed by this title which is required to be paid by means of a stamp shall be filed by the taxpayer within 3 years from the time the tax was paid.

We can shorthand this as the “3 and 2” rule.

Then there was the Brockamp case in 1997, which many felt was unfair and which led Congress to write this beauty:

§ 6511 Limitations on credit or refund.

(h)  Running of periods of limitation suspended while taxpayer is unable to manage financial affairs due to disability.

(1)  In general.

In the case of an individual, the running of the periods specified in subsections (a) , (b) , and (c) shall be suspended during any period of such individual's life that such individual is financially disabled.

(2)  Financially disabled.

(A)  In general. For purposes of paragraph (1) , an individual is financially disabled if such individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. An 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.

Like so much of the tax Code, the heavy lifting is in the details. Brockamp had been senile. Congress addressed the issue by introducing the phrase “medically determinable,” and then handed the baton to the IRS to define what that verbal salad meant.

COMMENT: And there you have a capsule summary of how the Code has gotten away from us over the years. Congress writes words and then leaves it to the IRS and courts to determine what they mean. Congress did the pooch again with the Tax Cuts and Jobs Act.  Google “qualified business income” and tell me that isn’t an elmore waiting to happen.

           

The IRS issued its interpretation of “medically determinable” in Rev Proc 99-21:

SECTION 4. PROCEDURE Unless otherwise provided in IRS forms and instructions, the following statements are to be submitted with a claim for credit or refund of tax to claim financial disability for purposes of § 6511(h).

(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 …

The IRS is pointing to the Social Security rules to define what a physician is. Methinks this is poor work. Why not reference Beat Bobby Flay to define meal expenses or Car Talk to define transportation expenses?

Let’s look at the Green case.

Richard Green and his wife (Hae Han) went to Tax Court in 2009. There were taxes due and tax refunds and quite the debate about offsetting one against the other.  The case eventually got to Sec 6511(h), and here is what the Court had to say about it:

An individual will not, however, be considered financially disabled unless proof of a medically determinable physical or mental impairment is provided in such form and manner as the Commissioner may require. More specifically, the Commissioner requires a written statement from a physician. Ms. Han, however, did not establish that she was financially disabled. In addition, she was treated by a clinical psychologist, not a physician, and thus could not and did not provide the requisite documentation.

Ms. Han’s letter was written by a psychologist. 

COMMENT: I am thinking: why is a psychologist not considered a “physician?” An optometrist is considered one for this purpose, although an optometrist has an O.D. and not an M.D.

There was no relief for Green and Han.

A number of practitioners considered this decision to be nonsense. The IRS had grafted a Medicare definition concerning payment for services onto Sec 6511(h), which was supposed to be a relief provision in the tax Code.

Enter the Estate of Stauffer, which is presently in Court.

Carlton Stauffer died in 2012 at the age of 90. His son is administering the estate. He discovered that his dad had not filed tax returns for 2006 through 2012. He filed those returns on behalf of his dad. One year alone – 2006 – had a refund of approximately $137,000.

The IRS denied the refund as outside the 3-year window.

The son appealed and pointed at Sec 6511(h).

His father had been seeing a psychologist, who treated him from 2001 until his death in 2012. The psychologist wrote a persuasive letter explaining how Carlton had suffered from psychological problems in addition to ailments including congestive heart failure, chronic obstructive pulmonary disease, leukemia, and chronic pneumonia. He explained how all these factors negatively impacted Carlton’s mental capacity, cognitive functioning, decision making and prevented him from successfully managing his affairs.

The IRS said: show us the “M.D.”

Why wouldn’t they? They had won with that play before.

The estate sued in District Court.

The IRS motioned to dismiss, order boneless chicken wings and watch the NBA over a pitcher of beer.

The District Court denied the IRS motion.

The Court pointed out that – for all the IRS’ power – that it could still review Rev Proc 99-21 under the “arbitrary and capricious” standard that government agencies are held to. The IRS had to articulate a rational connection for its standard, as well as explain why it rejected any reasonably obvious alternatives to the challenged rule.

The Court pointed out that Social Security does not restrict the types of professionals who may opine on whether someone has a disability qualifying for disability benefits. In fact, the opinion of a psychologist is given great weight in such a determination.

The Court did not see how the IRS dismissal of a psychologist’s letter passed the “arbitrary and capricious” standard.

Mind you, the Estate of Stauffer won a motion only; this does not mean that it will win the overall case.  

I for one hope it does.