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First Circuit Sustains Denial of Financial Disability Claim

Posted on Oct. 21, 2019

On September 16, 2019, the First Circuit affirmed the decision of the district court denying a claim for refund a son filed for his father’s estate after the normal statute of limitations for claiming a refund had expired. The decision, Stauffer v. Internal Revenue Service, No. 18-2105, finds that Mr. Stauffer’s son held a durable power of attorney and that, because of that POA, the estate cannot avail itself of the benefit of the statute suspension provided in IRC 6511(h). We have previously written about this case here and in three prior posts linked therein. Despite the unfavorable outcome at the Circuit level, this case did move the needle on financial disability cases by resulting in a favorable ruling early in the litigation regarding the need to obtain an expert opinion from certain types of professionals, as required by Rev. Proc. 99-21.

The facts as determined by the court are relatively straightforward. Father gives son a durable power of attorney (POA)(Sometimes referred to herein as a DPA). Son and father have a falling out. Son tells father he will no longer serve as the POA. Son drafts revocation of POA but fails to send out the revocation. Father and son later reconcile shortly before father’s death. Son becomes executor and discovers that his father has not filed returns for several years prior to death. As is common in unfiled return cases, some of the years involved refunds and at least one involved a reasonably substantial liability that would have been paid by the refunds on the now overly delinquent returns.

The estate did well in the early stages of the case when the IRS tried to rely on its Revenue Procedure in arguing that the estate did not obtain an opinion from the right type of professional. The magistrate judge ruled against the IRS and allowed the opinion of a professional who had worked with the decedent for several years prior to his death, even though it was not the type of professional described by the Revenue Procedure. However, the IRS then changed tactics to begin arguing that the son did not properly revoke the POA. The statute does not allow a suspension when a competent POA exists, under the theory that the competent POA could/should file the return on time even if the taxpayer had disabilities preventing that from happening. The district court bought the IRS argument regarding the POA, and the First Circuit does as well.

In the First Circuit the estate made two arguments.  First, it attacked the factual finding that Hoff never renounced the POA.  Second, it disputed the court’s legal conclusion that the POA qualified Hoff as a person authorized to act on behalf of Carlton in financial matters for the purposes of I.R.C. § 6511(h)(2)(B).  With respect to the legal argument, the court stated:

The Estate urges us to adopt a reading of § 6511(h)(2)(B) under which a person will be considered “authorized to act on behalf of [a financially disabled taxpayer] in financial matters” only if he or she has: (1) authority to file the financially disabled taxpayer’s tax returns; (2) a duty to file the financially disabled taxpayer’s tax returns; and (3) actual or constructive knowledge that the tax returns for a particular year have to be filed on behalf of the disabled taxpayer. The Estate claims that, because Hoff did not meet these three purported requirements, the statute of limitations for the filing of Carlton’s tax refund should have remained suspended through his death in October 2012 due to his financial disability.

The First Circuit found that:

The DPA explicitly granted him the authority to file Carlton’s tax returns, as well as any other tax-related claim before the IRS. Thus, ever mindful of the principles that guide our interpretation of a statute, we turn to the Estate’s purported “duty” and “actual or constructive knowledge” requirements for a person to qualify as “authorized to act on behalf of [a financially disabled taxpayer] in financial matters” under § 6511(h)(2)(B)….
Here, the key word for our analysis of § 6511(h)(2)(B)is “authorized.” By urging us to adopt the “duty” and “constructive knowledge” requirements, the Estate asks us to interpret the term “authorized” in § 6511(h)(2)(B) beyond its plain and unambiguous meaning. And this we cannot do. The Estate’s proposed definition of “authorized” finds no support in § 6511(h)(2)(B)’s plain language or its statutory context.  

The court then looked at the word ‘authority’ to find the correct definition.  In doing so it found:

None of the above definitions imply that the existence of a “duty” is a requisite for a person’s authority. To the contrary, the provided definitions illustrate that one who acts with “authority” has been bestowed with the power to perform an action on another’s behalf. By contrast, a duty imposes an obligation to perform a certain act.10 While there are duties that flow from grants of authority (e.g., those of loyalty and care in agency law), the relevant question here is whether in this context, definitionally speaking, one who is “authorized” to take a certain course of action should be understood narrowly to mean only one who has an affirmative obligation to take such action….
Therefore, we hold that a person may be considered “authorized to act on behalf of [a financially disabled taxpayer] in financial matters” for purposes of § 6511(h)(2)(B) even if he has no affirmative obligation to act on the taxpayer’s behalf.

Next it turned to constructive knowledge to address the estate’s argument that the POA needed to know of the duty to file a tax return.  Here it said:

The Estate’s argument in support of an “actual or constructive knowledge” requirement is even less persuasive. The statute’s plain language does not include any term into which such a requirement can plausibly be read, nor does the Estate point to any contextual basis (e.g., provisions of the whole law) from which it can be inferred. Thus, we also hold that, for purposes of § 6511(h)(2)(B), a person “authorized to act on behalf of [a financially disabled taxpayer] in financial matters” is not required to have actual or constructive knowledge of the need to file tax returns in a specific year.

After knocking out the legal argument concerning the POA, the court then determined that the estate failed to prove that the son revoked the POA. In doing so it relied on both the standard of proof imposed upon the estate to upset the factual decision of the district court and Pennsylvania law, which was the state law governing the POA.

The Stauffer decision provides a disappointment for those of us buoyed by the initial success of the estate in pushing back on the harshness of the Revenue Procedure. Nothing in the First Circuit’s decision undercuts the good points made by the magistrate concerning the Revenue Procedure. The First Circuit does add clarity to the issue of the type of POA that can cause a taxpayer to lose the protection of the financial disability provisions. It also provides clarity on what an individual appointed as a POA must do to revoke the POA at a point when the individual no longer wishes to serve. Many of the financial disability cases involve pro se individuals who do not do a good job of advocating for their position. The estate here was well represented at each stage. Unfortunately, that did not save the estate, even if it did produce a favorable opinion concerning the restrictions in the Revenue Procedure regarding an appropriate expert.

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