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Does Rev. Proc. 99-21 Validly Restrict Proof of Financial Disability, for Purposes of Extending the Refund Claim SOL, to Letters From Doctors of Medicine or Osteopathy? Part 1

Posted on June 24, 2015

Procedurally Taxing has been following a CDP case that raised important issues about the proper application of the financial disability provisions added to the Code in 1998. Both Carl Smith and I have written on this issue and I have blogged on it. As currently written the concept of financial disability applies in the refund context though the discussion here also relates to the equitable tolling discussions we have frequently had on this site and most recently in a post by Carl.

Carl has produced a two part post on a CDP case that was pending before Judge Gustafson in which the judge entered another interesting order in March. Today’s post will set up the case and describe that recent order. Tomorrow’s post will demonstrate the too limited scope of the current procedures governing the determination of financial disability and offer some unsolicited advice to the IRS on how it might make improvements. Keith

In two prior posts — one in Summ. Ops. by Stephen and one by me — PT has reported on a very interesting Collection Due Process (CDP) case that was recently pending in the Tax Court, Kurko v. Commissioner, Docket No. 24040-13L.  The case had continued to present novel issues — most recently in an order issued by Judge Gustafson on March 20, 2015 – namely, whether an amended return’s overpayment may be credited against a CDP-year liability, even though the overpayment return was filed beyond the 3-year period of § 6511(a). In a recent remanded CDP hearing completed prior to the March 20 order, the taxpayer presented the Settlement Officer with a letter from a licensed psychologist stating that the taxpayer had a mental health disability that made her financially disabled for purposes of § 6511(h)’s provision tolling the credit or refund claim period under (a).  In a supplemental notice of determination, the SO denied tolling on the ground that, under Rev. Proc. 99-21,1999-1 C.B. 960, the letter had to come from a “doctor of medicine or osteopathy legally authorized to practice medicine and surgery” – which is a subset of individuals defined as “physicians” at 42 U.S.C. § 1395x(r) (listing various medical professionals, but not clinical psychologists).  In his order of March 20, Judge Gustafson instructed the parties to brief the issue of the validity of the Rev. Proc.’s limitation requiring the letter to come from a doctor of medicine or osteopathy as defined in § 1395x(r)(1).  Although it initially supported the position taken in the supplemental notice of determination, after reading Judge Gustafson’s questions in his March 20 order, the IRS decided to sign a stipulated decision providing that the overpayment was timely claimed, notwithstanding that the letter was not from a “physician” – thereby settling the case and rendering the issue moot for purposes of the Kurko case. However, as this issue may recur, and the issue is an important one, I think it is worth a couple of posts.

Below, I explore Judge Gustafson’s concerns in detail and conclude that the Rev. Proc. is invalid and the IRS should revise it and replace it, after notice and comment, with a suitable regulation.

First, some good news about Ms. Kurko’s case:  Ms. Kurko was proceeding in the case pro se. An issue in the prior posts on this case was the judge’s request that Ms. Kurko get an attorney or next friend to assist her in prosecuting the case. She did eventually get a pro bono attorney, Bruce McElvenney, located in Norwell, MA. I commend Mr. McElvenny in his representation, which began with the CDP remand hearing earlier this year.

Kurko‘s Facts

Ms. Kurko failed to timely file 2008 and 2009 income tax returns, but she filed a late 2011 return showing a small balance due that she did not pay.  The IRS prepared Substitutes for Return for her for 2008 and 2009 showing substantial balances due (over $10,000 due for 2009) and sent her notices of deficiency.  She received the 2009 notice of deficiency, but did not contest it in Tax Court, so was not in a position to challenge the 2009 underlying liability in a CDP hearing.  §6330(c)(2)(B). She did not receive the 2008 notice of deficiency, so she still could raise a challenge to the 2008 underlying liability in a CDP hearing.  The IRS assessed both the 2008 and 2009 deficiencies.  In February 2013, the IRS sent Ms. Kurko a notice of filing of a tax lien for 2008, 2009, and 2011.  She timely requested a CDP hearing.  In her Form 12153, she challenged the amount of the 2008 liability and wrote: “I am in the process of seeking legal assistance and psychiatric assistance.  I told agents unemployed (sic) and am applying for SSDI [Social Security Disability Insurance benefits].

During the course of the ensuing CDP hearing, in June 2013, Ms. Kurko filed an original 2008 income tax return showing an overpayment of $8,560, which she elected to apply to her 2009 taxes.  The IRS processed the 2008 return (eliminating any balance due for 2008), but did not apply the overpayment shown thereon as a credit to the 2009 liability, since the SO determined that the 3-year credit or refund claim statute of limitations at § 6511(a) for the 2008 year had run out on April 15, 2012 — 14 months before the 2008 return was filed.  As of the time the SO issued the notice of determination (September 2013), Ms. Kurko had not been awarded SSDI benefits.  However, based on evidence provided to an ALJ in the Social Security Administration (1) by a licensed psychologist with a PhD degree in clinical psychology and (2) by Ms. Kurko (apparently through her own testimony), at some point after she filed her Tax Court case, she was granted SSDI benefits.

In December 2014, Judge Gustafson issued a bench opinion finding that Ms. Kurko had discussed her mental health issues with the SO, who should have then invited Ms. Kurko to submit evidence that she had been financially disabled within the meaning of § 6511(h).  Since the SO had not done so, the judge ordered the case remanded for a supplemental CDP hearing.

Section 6511(h) and Rev. Proc. 99-21

Section 6511(h), adopted in 1998, provides that “the running of the periods specified in subsections (a), (b), and (c) [of § 6511] shall be suspended during any period of such individual’s life that such individual is financially disabled”.  The statute partially overruled the Supreme Court’s decision in the Brockcamp case, which held that the 3-year period of limitations in subsection (a) was not subject to the judicial doctrine of equitable tolling on any ground (including the ground of disability involved therein). The new statute defined “financially disabled” as “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.” Congress placed two limitations on this provision:  First, “[a]n 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.”  Second, “[a]n individual shall not be treated as financially disabled during any period that such individual’s spouse or any other person is authorized to act on behalf of such individual in financial matters.”

The Treasury has never adopted any regulations under § 6511(h).  However, in 1999, without any prior public notice or comment or explanation of why it made certain choices, it adopted Rev. Proc. 99-21.  Section 4 thereof states:

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)(1)), 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.

Remand Hearing and Subsequent Order

At the remand hearing in February of this year, Ms. Kurko, assisted by her counsel, submitted a letter from the same licensed psychologist whose evidence was accepted for SSDI purposes.  The letter was in the required format of the Rev. Proc. 99-21 letter.  Ms. Kurko also submitted the written statement required by the Rev. Proc. that no one was authorized to act on her behalf on financial matters during the relevant period.

In a supplemental notice of determination, the SO turned down the psychologist’s letter on the ground that the psychologist was not a “physician”, as defined in the Rev. Proc.  Ms. Kurko then filed a report with the court showing the psychologist’s letter and the supplemental notice of determination.  This triggered a fairly annoyed order from the judge on March 20.  In the order, the judge, after noting that the case was set for a second trial at Boston on June 8, stated

that, if the case does not settle, then in the next memoranda or briefs to be filed, the parties shall explain their positions on two issues:

(a)            What level of deference should be accorded to the “physician” requirement of section 4(1) of Rev. Proc. 99-21, 1991-1 C.B. 960? Section 6511(h) provides that the taxpayer must furnish “proof … in such form and manner as the Secretary may require”. Did the Revenue Procedure go beyond mere form and manner to set up a substantive standard? Does that matter? Does it matter whether the Revenue Procedure was promulgated without notice-and-comment pursuant to Section 4 of the Administrative Procedures Act, 5 U.S.C. § 553?

(b)            For purposes of assessing the validity of the “physician” requirement, what was the agency’s rationale for (a) requiring that the statement be by a “physician” as opposed to another sort of medical professional, and (b) importing the definition of “physician” from a Medicare provision (42 U.S.C. § 1395x(r) (“a doctor of medicine … legally authorized to practice medicine and surgery”))? In regards to Medicare (its native context), the definition has the apparent purpose of restricting Medicare payments to certain persons. It is not immediately obvious why, in setting standards for proving a mental disability, an agency would require a statement by someone who is qualified to receive Medicare payments and is “authorized to practice medicine and surgery”.

Deference to Rev. Procs.

Of course, it is well-settled in the Tax Court that a Revenue Procedure that states no reasoning for a requirement gets no deference — not even Skidmore v. Swift & Co., 323 U.S. 134 (1944), deference.  See Exxon Mobil Corp. v. Commissioner, 136 T.C. 99, 117 (2011) (“Because the pronouncement in Rev. Proc. 99-43, supra, that [for interest netting to apply] both periods of limitation must be open is unaccompanied by any supporting rationale, it is not entitled to [even Skidmore] deference and does not provide a basis for resolving the issues before us.”).

“Physician” in 42 U.S.C. § 1395x(r) includes more individuals than the “doctor of medicine or osteopathy” under its paragraph (1) — who are the only kinds of medical professionals eligible to submit the Rev. Proc. written statement.  The term “physician” at subsection (r) also includes (at later paragraphs thereunder) doctors of dental surgery or dental medicine, doctors of podiatric medicine, doctors of optometry, and licensed chiropractors. None of these other health professionals, although “physicians” for Medicare purposes, may submit the Rev. Proc. written statement. However, even if the Rev. Proc. were expanded to allow written statements from all the other people listed under subsection (r), that subsection’s definition of “physician” currently does not include “clinical psychologists”. Medicare does contain definitions of “clinical social worker” and “clinical psychologist” at 42 U.S.C. § 1395x(hh) and (ii), but those professionals are not treated as “physicians” under Medicare.

Regardless of whether the IRS actually could find a reason for cross-referencing a subset of the definition of “physician” in Medicare, that Rev. Proc. limitation should be rejected, since the IRS has apparently failed to consider why it should reject the less strict procedures to prove disability applied in the SSDI context and other contexts.  The SSDI requirements and requirements in other contexts will be discussed in tomorrow’s post, together with suggestions for improving and replacing the current Rev. Proc. governing financial disability. But, the judge’s March 20 order has at least already resulted in the IRS conceding Ms. Kurko’s right to benefit from § 6511(h), notwithstanding her non-compliance with the Rev. Proc. A stipulated decision in the Kurko case was entered on June 18, 2015. Although the Tax Court lacks jurisdiction in CDP cases to find an overpayment, in a stipulation below the judge’s signature in the decision, the IRS and Ms. Kurko agreed that there was an overpayment for 2008 in the amount sought by Ms. Kurko ($8,560) and that the overpayment was not barred by § 6511.

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