NO TOLL FOR THE TAXPAYER: FINANCIAL DISABILITY, STATUTE OF LIMITATIONS REFUND TOLLING, AND COURTS’ STRICT APPLICATION OF “AUTHORITY”
By: Casey Epstein, Volume 104 Staff Member
Imagine you are poor, mentally-ill, and struggle to manage your finances. You granted your adult son durable power of attorney (“DPA”), but are no longer on speaking terms with him. You work a low-wage, menial job and your paychecks are subject to typical tax withholdings. Because of your modest income your effective tax rate is zero, and most of your withholdings are returnable to you in a small, but meaningful, refund. However, as a result of your condition you forget to file your tax returns until four years later. The IRS denies your refund as being past the statute of limitations (“SOL”). You challenge, claiming to meet the requirements for “financial disability,” tolling your SOL. Despite agreeing that you were financially disabled, the judge denies your claim anyway because she finds that your estranged adult son technically had the authority to file your tax returns for you.
As unjust as this sounds, the First Circuit rejected an analogous claim in Stauffer in September 2019. The First Circuit’s strict financial disability analysis is not unique—nearly every financial disability litigation ends in failure for the taxpayer. Moreover, taxpayers potentially eligible for financial disability are, by definition, mentally or physically disabled—and therefore among the most vulnerable Americans. This Post focuses on financial disability’s little-discussed “authority” provision and argues that courts should adopt a more lenient standard for assessing “authority” and awarding “financial disability” tolling.
I. FINANCIAL DISABILITY
Taxpayers generally have a three-year SOL to claim a refund from the IRS. The clock starts ticking when the taxpayer’s tax returns are due—typically April 15. Once the SOL clock expires, taxpayers have little recourse—governed by a confusing set of procedural rules—to recover their refunds. Courts are exceedingly reluctant to grant equitable tolling, regardless of the direness of the taxpayer’s situation.
Responding to the Supreme Court’s 1997 Brockamp decision, which refused to grant equitable tolling to a ninety-three year old with dementia who forgot to file his tax return, Congress sought to provide a limited tolling option for taxpayers whose inability to manage their finances was truly beyond their control. One year later, Congress enacted a tolling provision for taxpayers “unable to manage financial affairs due to disability.” Codified in Section 6511(h), a taxpayer is “financially disabled” if they are “unable to manage [their] financial affairs by reason of a medically determinable physical or mental impairment.”
Congress additionally specified that a taxpayer is not financially disabled if “any . . . person is authorized to act on [their] behalf.” Neither the legislature nor the Treasury provided guidance “as to what qualifies a person as one ‘authorized to act on [their] behalf.’” Courts have consistently held against taxpayers who granted someone DPA, but claimed that person was not “actually” authorized or able to manage the taxpayer’s finances.
Beyond “authority” issues, courts reject almost every financial disability plaintiff, fearing stale claims and extra administrative burdens for the IRS. Taxpayers’ success rates for financial disability are so low that commentators proclaim victory even when a magistrate judge preliminarily finds Section 6511(h) met—only to lose on appeal.
In Stauffer, the Court refused to grant financial disability tolling to an elderly, mentally-ill man whose son had DPA, discovered millions of dollars in lost assets, and quickly became estranged from his father. Neither father nor son filed tax returns for the year in question, which would have allowed recovery of almost $140,000 in overpayment to the IRS.
The Court’s specific rationale for rejecting financial disability tolling was that Stauffer did have someone authorized to act on his behalf—his estranged son who still technically had DPA, despite both parties orally revoking the agreement. The Stauffer Court invoked the plain meaning canon to interpret the undefined term “authorized,” concluding that dictionary definitions “unambiguous[ly]” define “authority” as the mere “right or permission to act,” not “imply[ing] the existence of a ‘duty.’” Because the father executed a DPA with his son and never revoked it in writing—oral revocation and estrangement notwithstanding—the son had legal authority to act on his father’s behalf and the plaintiff was thus not entitled to SOL tolling under § 6511(h)(2)(B).
III. COURTS SHOULD APPLY A MORE FORGIVING STANDARD
The Stauffer Court’s analysis and use of the plain meaning canon is unduly strict. There was no reason that the Court needed to solely rely on dictionary definitions in interpreting “authority.” Stauffer could have easily interpreted “authority” to mean actual as opposed to theoretical authority under a common usage theory. Moreover, such a strict application of § 6511(h) undermines its raison d’etre—statutory rejection of the harsh Brockamp result. Whether or not Stauffer’s son had legalauthority to file his tax returns, he clearly lacked permission. From a fairness perspective, it is unjust that Stauffer was denied his refund merely because his son had tenuous power of attorney.
Other courts interpreting “authority” also reject plaintiffs’ pleas, although without Stauffer’s statutory interpretation hoopla. In both Plati and Bova, the Federal Claims Court held a DPA sufficient to deny plaintiffs’ financial disability claims, finding that “[b]ecause an individual was authorized to act on [plaintiff’s] behalf . . . § 6511(h)(2)(B) mandates that [she] not be treated as financially disabled.” Few critics have addressed the problematic interpretation of “authorized;” most commentators instead advocate for expanding the definition of “physician,” specifying qualifying medical conditions, and courts broadening their analyses of taxpayers’ ability to manage their financial affairs. These myriad criticisms showcase the extent of § 6511(h)’s flaws.
Critics’ proposed solutions for § 6511(h) primarily involve Congress and the Treasury promulgating new rules to correct the judiciary. The courts, however, are fully capable of addressing § 6511(h)’s flaws on their own. Moreover, the judiciary arguably should change course and apply a more lenient standard because their strict approach undermines the original purpose of § 6511(h)—ensuring that future plaintiffs in Mr. Brockamp’s shoes would have redress. With the courts’ current analysis, it seems highly unlikely that Mr. Brockamp would win his financial disability claim if argued today.
While the Treasury and Congress should revisit financial disability rules, the courts can salve disabled Americans’ tax woes by simply applying more leniency. Instead of strictly interpreting “authority” with a legalistic dictionary definition as the Stauffer Court did, courts should apply a reasoned facts-and-circumstances test to determine whether the taxpayer actually had someone authorized to act on their behalf—not merely a tenuous or orally rescinded DPA agreement. Importantly, the judiciary can act immediately to grant financially disabled taxpayers’ claims without waiting for Congress or the Treasury to act. A judicial mentality of leniency towards the small number of taxpayers medically incapable of filing their returns would fulfill Congress’ aims without overburdening the IRS.
Despite Congress’ good intentions, Section 6511(h) has not relieved disabled taxpayers incapable of filing their tax returns. Fortunately, the judiciary can address and ameliorate the most pressing issues of financial disability jurisprudence on its own. To do so, however, courts must reverse course and apply a more lenient analysis. This solution requires evaluating taxpayers’ “authorized” agents on a facts-and-circumstances basis instead of through a strict and reductive plain meaning statutory interpretation lens. Late filing or not, it is unjust for disabled plaintiffs to be regularly denied their overpayment refunds; it is far past time for the courts to heed Congress’ 1998 clarion call.
A DPA is “an instrument by which a principal empowers an agent to act on the principal’s behalf.” Carolyn L. Dessin, Acting as Agent Under a Financial Durable Power of Attorney: An Unscripted Role, 75 Neb L. Rev. 574, 575 (1996).
See infra notes 5–6and accompanying text.
Stauffer v. Internal Revenue Service, No. 18-2105, 2019 WL 4409349 (1st Cir. Sept. 16, 2019), rev’g No. 15-10271-MLW, 2018 WL 5092885 (D. Mass. Sept. 29, 2019).
See infra note 8and accompanying text. It is, of course, impossible to know how many financial disability cases settle with the IRS without litigation.
I.R.C. § 6511(a) (2012).
I.R.C. § 6072(a) (2012).
See Johnson et al., Civil Tax Procedure 271–78 (3d ed. 2016).
See United States v. Brockamp, 519 U.S. 347, 352–54 (1997), rev’g 67 F.3d 260 (9th Cir. 1995); Keith Fogg & Rachel E. Zuraw, Financial Disability for All, 62 Cath. U. L. Rev. 965, 980–81 (2013).
Brockamp, 519 U.S. at 354; Fogg & Zuraw, supra note 8, at 974.
142 Cong. Rec. H7639 (daily ed. Apr. 16, 1996) (statement of Rep. Dunn) (“My interest in this area was precipitated by a highly publicized court case in which . . . . [administratrix] Mrs. Brockamp asked the IRS for a refund . . . . This is just one example of an outrageous injustice that my commonsense [bill] is intended to end.”); Michael S. Moriarty, Government Asks Supreme Court to Overturn Equitable Tolling Cases, Tax Notes (Feb. 12, 1996), https://www.taxnotes.com/taxpractice/practice-and-procedure/government-asks-supreme-court-overturn-equitable-tolling-cases/1996/02/12/1t74w (“[T]he Clinton administration has also publicly encouraged Treasury to work on a possible legislative fix [to Brockamp].”).
Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 685.
I.R.C. § 6511(h)(1), (2)(A) (2012); see, e.g., Pull v. Internal Revenue Serv., No. 1:14-cv-02020-LJO-SAB, 2015 WL 4634761, at *1 (E.D. Cal. June 5, 2015) (refusing SOL tolling because plaintiff submitted a clinical psychologist’s letter, not a “physician’s note”).
I.R.C. § 6511(h)(2)(B); see generally Bruce A. McGovern, The New Provision for Tolling the Limitations Period for Seeking Tax Refunds: Its History, Operation and Policy, and Suggestions for Reform, 65 Mo. L. Rev. 797, 859–63 (2000).
Stauffer v. Internal Revenue Service, No. 18-2105, 2019 WL 4409349, at *3 (1st Cir. Sept. 16, 2019); See Rev. Proc. 99-21, 1999-1 C.B. 960, § 4(2) (requiring taxpayers seeking financial disability status to file “[a] written statement” claiming that “no person . . . was authorized to act on behalf of the taxpayer,” yet omitting “authorized” definition).
See Plati v. United States, 99 Fed. Cl. 624, 640–41 (2011); Bova v. United States, 80 Fed. Cl. 449, 450–51, 460 (2008);Stauffer, 2019 WL 4409349, at *5–6.
See Fogg & Zuraw, supra note 8, at 980–81 (“The decisions interpreting and applying § 6511(h) almost unanimously hold in favor of the IRS.”); see also United States v. Brockamp, 519 U.S. 347, 352–53 (1997); but see Walter v. United States, No. 09-420, 2009 WL 5062391, at *7 (W.D. Pa. Dec. 16, 2009) (“Plaintiffs . . . are entitled to the tolling provision of § 6511(h).”).
See Keith Fogg, A Crack in the Glass Ceiling — Victory in a Financial Disability Case,Procedurally Taxing(Mar. 22, 2017), https://procedurallytaxing.com/a-crack-in-the-glass-ceiling-victory-in-a-financial-disability-case/; Keith Fogg, The Crack Grows Wider — Continued Success in One Financial Disability Case, Procedurally Taxing(Oct. 24, 2017), https://procedurallytaxing.com/the-crack-grows-wider-continued-success-in-one-financial-disability-case/(describing Stauffer).
Stauffer, 2019 WL 4409349, at *1–2.
Id. at *2.
Id. at *6.
See, supra note 14and accompanying text.
Stauffer, 2019 WL 4409349, at *5.
Id. at *6–7.
See, e.g., Nix v. Heddon, 149 U.S. 304 (1893).
See the incredulously titled Stephanie Cumings, Son’s Tenuous Power of Attorney Precludes Estate’s Tax Refund, Tax Notes(Sept. 23, 2019), https://www.taxnotes.com/tax-notes-federal/statutes-limitations/sons-tenuous-power-attorney-precludes-estates-tax-refund/2019/09/23/29yp0.
Plati v. United States, 99 Fed. Cl. 624, 640–41 (2011); Bova v. United States, 80 Fed. Cl. 449, 450–51, 460 (2008).
The only commentary that even advocates for improving the definition of “authorized” is Bruce McGovern who argues that the IRS, not the judiciary, should better define the term. See McGovern,supra note 13, at 874–75.
See Taxpayer Advocate, IRS, Broaden Relief from Timeframes for Filing a Claim for Refund for Taxpayers with Physical or Mental Impairments, in 2013 Ann. Rep. to Cong., https://taxpayeradvocate.irs.gov/2013-Annual-Report/downloads/Broaden-Relief-from-Timeframes-for-Filing-a-Claim-for-Refund-for-Taxpayers-with-Physical-or-Mental-Impairments.pdf;Am. Bar Ass’n, Section of Taxation, Comments on Information Collection Under Revenue Procedure 99-2120 (2018), https://www.americanbar.org/content/dam/aba/administrative/taxation/policy/020118comments.authcheckdam.pdf.
See, supra note 28and accompanying text.
See Am. Bar Ass’n, supra note 28(“[I]t is not clear even today that Brockampwould have prevailed given the strict application and requirements of Rev. Proc. 99-21.”).