Court Rules IRS Must Give Reason for Rejecting Psychologist's Letter on Taxpayer's Financial Disability

(Parker Tax Publishing October 2017)

A district court denied an IRS motion to dismiss a refund claim on statute of limitations grounds where the taxpayer's estate asserted that the limitations period was tolled because the taxpayer was financially disabled and the estate submitted a treating psychologist's letter to substantiate the disability. The district court found that the IRS had not provided a rational reason why Rev. Proc. 99-21 permits only a physician, as that term is defined under the Social Security Act, to substantiate a taxpayer's financial disability, and not a psychologist who contemporaneously diagnosed and treated the taxpayer. Estate of Stauffer v. IRS, 2017 PTC 451 (D. Mass. 2017).

In 2012, Carlton Stauffer died at the age of 90. His son, Hoff Stauffer, became the administrator of his estate. In administering the estate, Hoff Stauffer discovered that his father had not filed tax returns for 2006 through 2012. In 2013, Hoff Stauffer filed those returns with the IRS. Stauffer claimed that his father overpaid approximately $137,000 in taxes for 2006 and requested a refund for the estate in that amount.

The IRS denied the refund claim as untimely under Code Sec. 6511. Stauffer appealed, arguing that the statute of limitations was tolled under Code Sec. 6511(h) because his father was financially disabled during the relevant period. With his appeal, Stauffer submitted a statement from his father's psychologist, Dr. Stanley Schneider, who had treated him from 2001 until his death in 2012. Dr. Schneider's letter stated that Carlton Stauffer suffered from psychological problems in addition to a variety of chronic ailments including congestive heart failure, chronic obstructive pulmonary disease, leukemia, and chronic pneumonia. Dr. Schneider said that these conditions severely and negatively impacted Stauffer's mental capacity, cognitive functioning, decision making, and emotional wellbeing, and prevented him from managing his financial affairs from at least 2006 until his death. In denying the estate's claim as untimely, the IRS did not consider whether Stauffer was financially disabled. Instead, it stated that because Dr. Schneider was not a physician, as defined in Rev. Proc. 99-21, his letter could not be used to certify Stauffer's condition.

Under Code Sec. 6511(h), the three year limitations period for refund claims can be tolled during any period that a taxpayer is financially disabled. Individuals are considered financially disabled if they are unable to manage their financial affairs by reason of a medically determinable physical or mental impairment which can be expected to result in death or which lasts at least 12 months. The statute requires proof of the impairment in a manner determined by the IRS. Rev. Proc. 99-21 provides that a written statement from a physician must accompany a claim of financial disability. The definition of physician in Rev. Proc. 99-21 refers to the Social Security Act (SSA), which generally defines a physician as a medical doctor. The parties agreed that the definition does not include a psychologist.

The estate sued the IRS in a district court, arguing that the requirement of a physician's statement and the rejection Dr. Schneider's letter unreasonably limited the IRS's consideration of credible, relevant evidence of financial disability. The IRS moved to dismiss, contending that the claim of financial disability was not properly substantiated and that the court therefore lacked jurisdiction because the refund claim was filed outside of the limitations period. The IRS also argued that the estate's claim should be barred because the psychologist's letter was submitted with the estate's appeal, not with the estate's refund claim.

The district court denied the IRS's motion to dismiss because the IRS offered no evidence that it had a reason that was not arbitrary for excluding psychologists from the category of professionals qualified to support a claimant's financial disability. The district court framed the estate's argument as a claim that the IRS had acted in an arbitrary and capricious manner in refusing to accept the psychologist's letter. Noting that agencies have broad discretion in deciding procedural rules, and that courts are generally not empowered to impose a procedural requirement on an agency, the court determined that procedural rules that an agency chooses to impose are not exempt from judicial review. The court found that it had the power to review Rev. Proc. 99-21 under the arbitrary and capricious standard and that under that standard, the IRS was required to articulate a rational connection between the facts found and the choice made, as well as explain why it rejected any reasonably obvious alternatives to the challenged rule.

The district court reviewed the decision in Abston v. Comm'r, 2012 PTC 250 (8th Cir. 2012), where the Eighth Circuit held that the requirement of a doctor's statement in Rev. Proc. 99-21 was valid under any standard of review. The Eighth Circuit reasoned that Congress knew there could be a large number of financial disability claims. It therefore instructed the IRS in Code Sec. 6651(h) to prescribe a method for proving the impairment, and the IRS determined that a doctor's note should be required. In distinguishing Abston, the district court noted that the taxpayer in that case had provided no substantiation of financial disability at all, so the Abston court was not considering whether the IRS's decision to categorically refuse certain types of doctors' notes was arbitrary and capricious.

Applying the arbitrary and capricious standard, the district court said it was not obvious why, in establishing a standard for proving mental disability, the IRS would limit the types of doctors from whom it will accept certifying statements to those defined as physicians for the purposes of collecting Medicaid payments under the SSA and exclude a psychologist who contemporaneously diagnosed and treated the individual. The district court pointed out that the SSA does not restrict the types of professionals who may opine on whether a person has a disability for purposes of determining an entitlement to disability insurance benefits and that, in fact, the opinion of a treating psychologist is given great weight in that context.

According to the district court, the IRS had not submitted any evidence of its rationale, let alone a rational connection between the facts found and the choice made. The court speculated that the IRS may have viewed doctors without medical degrees as unqualified to make the required determination, and may have also been concerned with limiting the potentially large number of financial disability claims. However, the court determined that where the IRS's reasoning was not obvious, the court did not have the power to supply an explanation for the IRS's choice.

The district court also rejected the IRS's contention that the estate's claim was untimely because the psychologist's letter was filed with the estate's appeal and not with the refund claim. According to the court, if a refund claim is technically deficient because some piece of information is missing, courts generally accept the missing information at a later stage so that the taxpayer's claim may be considered.

For a discussion of the statute of limitations for refunds, see Parker Tax ¶261,180.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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