Refund Claim Relief Due To Financial Disability

Overview

The Internal Revenue Code (Code) suspends the statutory timeframe for claiming a tax refund for the period of time that an individual is suffering a financial disability. I.R.C. §6511(h).  It’s an important statutory provision that can provide relief in the event of unforeseen circumstances.  But definitions matter and there is a key exception to the statutory time suspension.

The suspension of the timeframe for claiming a tax refund – it’s the topic of today’s post.

The Statute

Under I.R.C. §6511 for all taxes for which a return must be filed, a claim or refund must be filed within: (1) three years of the time the return was filed, except, if the return was filed before it was due, then the claim must be filed within three years of the return's due date; (ii) two years from the time the tax was paid, if that period ends later; or, (iii) two years from the time the tax was paid, if no return's filed by a taxpayer required to file a return.  I.R.C. §6511(b)(2). 

However, those timeframes are suspended for the time period that an individual is “financially disabled.”  An individual is “financially disabled” if the individual cannot manage his financial affairs by reason of his medically determinable physical or mental impairment, and the impairment can be expected to result in death, or has lasted, or can be expected to last, for a continuous period of not less than 12 months.  I.R.C. §6511(h)(2)(A).   Upon the individual’s death, the suspension period ends, and if a joint return is filed, each spouse’s financial disability must be separately determined.  C.C.A. 200210015 (Nov. 26, 2001). 

The statute has no application to corporations because it, by its terms, applies to an “individual.”    That’s the case even for a solely owned corporation where the owner is financially disabled.  See, e.g., Alternative Entertainment Enterprises, Inc. v. United States, 277 Fed. Appx. 590 (6th Cir. 2008).   The statute also only applies to the limitation periods that are listed in the provision.  That means, for example, that it won’t extend the limitations periods for other provisions of the Code such as for net operating losses or loss carrybacks (now only for farmers), etc.  See, e.g., McAllister v. United States, 125 Fed. Cl. 167 (2016). 

The statute also doesn’t apply to an estate.  This point was made clear in a recent case.  In Carter v. United States, No. 5:18-cv-01380-HNJ, 2019 U.S. Dist. LEXIS 134035 (N.D. Ala. Aug. 9, 2019) a decedent’s estate sought relief on the basis that the estate’s personal representative was financially disabled for a period of time entitling the estate to file a claim for refund after the time period set forth in I.R.C. §6511(a). The estate claimed that it should be treated as in individual for relief purposes. The estate sought a refund of federal estate tax tied to the value of bank stock that the decedent held at the time of death which made up 45 percent of the gross estate value. Unknown at the time of death was that a fraud had been committed against the bank which ultimately led to the bank being shut down and the stock rendered worthless. The personal representative was traumatized by the events, suffering emotional distress which rendered her unable to manage the estate which was substantiated by a physician who maintained that the representative’s disabilities triggered I.R.C. § 6511(h)’s equitable tolling provision so as to excuse the untimely filing of the refund claim.

The court disagreed with the estate’s position, holding that the term “individual” in I.R.C. §6511(h)(1) did not apply to an estate. The court pointed out that I.R.C. §7701(a)(1) defines a person as “an individual, a trust, estate, partnership, association, company or corporation.” The court reasoned that this made it clear that the Congress saw individuals and estates as distinct types of taxpayers, and the use of the term individual in I.R.C. §6511(h) limited the relief to natural persons. The court also noted that even if the estate’s claim weren’t time-barred, it would fail on its own merits because estate tax value is based on the value as of the date of death or the alternate valuation date of six months after death. Simply because the fact of the bank fraud arose post-death didn’t change the fact that it wasn’t known at the time of death and the stock was being actively traded at death, the measuring date for federal estate tax purposes. 

In all situations, as you probably could guess, a taxpayer is not considered to be financially disabled unless the taxpayer can prove that the statutory requirements are met to the satisfaction of the government.  I.R.C. §6511(h)(2)(A).

More Cases

The courts have fleshed-out the edges on the statute.  For example, in Brosi v. Comr., 120 T.C. 5 (2003), the petitioner claimed that the reason he didn’t file was because he was too busy providing care to his mother working for an airline.  The Tax Court held he wasn’t entitled to relief because he didn’t personally suffer any physical or mental impairment.  The same result occurred in Pleconis v. Internal Revenue Service, No. 09-5970 (SDW) (ES), 2011 U.S. Dist. LEXIS 88471 (D. N.J. 2011).  In that case, the taxpayer failed to show that he was financially disabled from 2001-2007 because the evidence showed that even during the periods when he underwent surgeries, he was able to manage his finances, and his conditions had improved by January of 2006.  In another case, a taxpayer that missed 60 days of work due to high blood sugar didn’t qualify as “financially disabled. Bhattacharyya v. Comr., 180 Fed. Appx. 763 (9th Cir. 2006). 

Authorized “agent”?  The statute clearly states that an individual cannot satisfy the statute to be treated as “financially disabled” when there is a spouse or an authorized agent that can handle the individual’s financial affairs for the individual, whether they choose to do so or not.  I.R.C. §6511(h)(2)(B).  See also, Pull v. Internal Revenue Service, No. 1:14-cv-02020-LJO-SAB, 2015 U.S. Dist. LEXIS 39562 (E.D. Cal. 2015); Plati v. United States, 99 Fed. Cl. 634 (2011).  This is the case even when the power to act on the individual’s behalf exists under a durable power of attorney, but the agent has not acted and has agreed not to act on the individual’s behalf until the individual wants the agent to act or otherwise becomes “disabled.”  See, e.g., Bova v. United States, 80 Fed. Cl. 449 (2008). 

The issue of the presence of an authorized agent came up again in a recent case.  In Stauffer v. Internal Revenue Service, No. 18-2105, 2019 U.S. App. LEXIS 27827 (1st Cir. Sept. 16, 2019), an individual who filed suit on behalf of his father’s estate claimed that the IRS had improperly denied his 2013 claim for his father’s 2006 tax refund as untimely.  He claimed that the tax refund claim time limitation was suspended because of his father’s financial disability.  The trial court dismissed the claim because the son held a durable power of attorney that authorized him to act on his father’s behalf with respect to his father’s financial matters.  It made no difference whether he ever actually had acted on his father’s behalf.  The mere fact that the durable power of attorney had been executed and was in effect was enough to bar the application of the statute.  On appeal, the appellate court agreed. 

Conclusion

Financial hardship brings its own set of complications to other areas of life.  The Code provides some relief from the filing deadlines.  But, the relief only applies to an “individual” and only if that individual is suffering from a financial disability.  If someone else is authorized to act on the financial affairs of the individual, the individual cannot be financially disabled.  These points should be kept in mind.