Two recently reported cases continue the Service’s unbroken string of victories in situations in which taxpayers seek to extend the statute of limitations for making refund claims by arguing financial disability under Section 6511(h). Williams v. United States, No. 4: 12-cv-03401 (S.D. Tex August 13, 2013); and Martinez v. United States, No. 1:13-cv-00107 (Ct. Fed. Claims July 25, 2013) (213 TNT 145-16, July 29, 2013). The Service’s win streak on this issue, at least in reported cases, stands at 17 years – even the 1962 Mets occasionally won a game. The Service deserved to win both of the recent cases brought by pro se complainants yet the string of reported losses for taxpayers on this issue raises questions about the procedure for claiming financial disability and the transparency of the process. For a broader discussion on financial disability see Keith Fogg and Rachel E. Zuraw, Financial Disability for All, forthcoming in Catholic University Law Review http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2182772.
In both cases the taxpayers made it easy for the Service and for the Court by not following the instructions laid out in Rev. Proc. 99-21, 1999-1 C.B. 960. Like most of the prior cases on this issue, Mr. Williams and Ms. Martinez failed to file their tax returns within three years of due date of those returns. At some later point each of them filed refund returns and the Service declined to issue the requested refunds asserting that the statute of limitations barred the issuance of the refund at the time of the claim.
Section 6511(h), added to the code in 1996 after a couple of egregious situations prevented taxpayers from obtaining refunds and just as the Supreme Court decided equitable tolling does not apply to section 6511, allows a taxpayer who otherwise misses the time frame for filing a refund claim to file the claim late if the taxpayer’s financial disability caused the late claim. The statute provides that “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.” Congress left it up to the Service to define financial disability providing “[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.” The Service promulgated Rev. Proc. 99-21 to set out its requirements for adequate proof.
The Court of Claims does a nice job in Ms. Martinez’s case of explaining the Service’s requirements for a valid and timely refund claim. “In general, the two ‘statement’ required by Revenue Procedure 99-21 should be provided with the refund claim itself, although it is not unusual for the statements to be supplied later upon request from the IRS…. The first statement required of the taxpayer is a detailed statement from a physician, which must include four specific representations of fact as to the taxpayer’s financial disability, as well as the physician’s certification that the representations are ‘true, correct and complete.’ Rev. Proc. 99-21 section 4(1)(a)-(e). The statement from the physician must: (1) name and describe the disabling condition(s); (2) provide the physician’s opinion that the condition (or conditions) rendered the taxpayer unable to manage her financial affairs; (3) provide the physician’s opinion that the impairment lasted at least twelve months; and, (4) to the best of the physician’s knowledge, identify the period of time that the financial disability lasted.” The second statement required by the revenue procedure “is a certification by the signatory of the refund claim that the taxpayer had no one authorized to act on her behalf in financial matters at the relevant time period of disability, or, if someone was authorized to act on her behalf for some portion of the relevant period of disability, a statement as to the start and end dates said person was authorized to act on the taxpayer’s behalf in financial matters.”
Ms. Martinez failed to submit the required statements and the court had little difficulty finding that the suspension of the statute of limitations for financial disability could not apply in her circumstances. The William’s court does not take as much time explaining the statutory provisions but certainly does an adequate job of providing the legal basis for its decision which followed a very similar path to that of the Martinez case. Perhaps the fact that Mr. Williams was a federal employee during part, or all, of the time of his alleged financial disability would have played a role in the decision had the court gotten that far. Since he did not submit the required medical statements with his claim and he failed to respond to the motion for summary judgment, the court did not spend too much energy on his case.
Section 6511(h) may afford thousands of taxpayer’s relief. No data exists on the cases in which taxpayer’s succeed or fail during the administrative process. What is clear, however, is that taxpayers do not win this issue in court. Rev. Proc. 99-21 may set the bar too high. The Service has chosen not to allow the public to comment on the appropriate standard for relief. Without knowledge of the number of cases requesting relief and the disposition of the cases that do not make it to court any analysis of relief granted under section 6511(h) is necessarily incomplete. The absence of information on successful cases, assuming successful cases exist, makes it difficult for practitioners, and those representing themselves, to evaluate the issue and to make an informed decision on when and how to go forward.
Other provisions in the code allowing relief after missing the time frame provide more transparency. [See the law review article cited above for a more complete discussion of all code provisions providing similar after the fact relief.] Relief exists, for example, for those who fail to roll over their IRA within 60 days. The process for relief in those circumstances involves a private letter ruling. Since private letter rulings are no longer totally private, it is possible to read about the facts and the analysis in those cases where the Service decides to allow a taxpayer, for the stated reasons, to make an effective rollover after the 60 day period has passed. That kind of transparency should exist with financial disability. In addition, enough time has passed since the creation of the financial disability statute that the public should receive the opportunity to comment on the appropriate standards for disability and to comment on the appropriate standard of review of submissions seeking disability.
For a further discussion of the importance of giving the public the opportunity to comment on published guidance, you should also look at the 2012 Florida Tax Review article written by Les where he implores the Service to seek guidance from interested parties when publishing guidance on issues that relate to taxpayers whose voice is often not heard when Service makes rules: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1947457
You might also look at one of the many articles on published guidance written by Kristin Hickman, who specifically wrote on the impact of Treasury guidance issued without notice and comment, in Unpacking the Force of Law, 2013 Vanderbilt law review which you can find at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2242134