Many people and most tax practitioners (hopefully) know
the statute of limitations on refunds from the IRS:
§
6511 Limitations on credit or refund.
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.
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.
(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.
