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.
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.