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Individual Tax

Appeals Court: Refund Claim Untimely, No Tolling for Financial Disability

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

The First Circuit Court of Appeals has affirmed a district court’s dismissal of an estate’s untimely refund claim (Stauffer, (CA 1 9/16/19) 124 AFTR 2d ¶2019-5250). The limitations period for filing the refund claim was not tolled due to the decedent’s financial disability because he gave his son a durable power of attorney.

In 2005, Carlton Stauffer executed a durable power of attorney (DPA) in favor of his son, Hoff, so that Hoff could help manage Carlton’s finances. However, by 2006 Hoff and Carlton were estranged, and Hoff told Carlton that he would no longer exercise any rights granted to him under the DPA. Then, Carlton drafted three notices revoking the DPA but never sent them to Hoff. Hoff told Carlton’s daughter, Carlton’s accountant, and Carlton’s attorneys that he was no longer acting as his father’s agent under the DPA, but he never told that to Carlton. By 2009, Carlton and Hoff had reconciled.

When his father died in 2012, Hoff was named the personal representative of Carlton’s estate (Estate). In that capacity, Hoff filed Carlton’s tax returns for 2006-2012 in late April 2013. The 2006 return reported a tax overpayment and requested a refund. The IRS denied the refund claim because it was untimely under Code Sec. 6511(a).

Code Sec. 6511(a) provides, in part, that a claim for credit or refund of an overpayment of any tax imposed must be filed within two years from the time the tax was paid if no return was filed by the taxpayer. This rule is commonly referred to as the 2-year look-back period. Generally, a taxpayer who fails to file a refund claim within the applicable limitations period may no longer obtain an overpayment refund or credit. (Code Sec. 6511(b)(1))

The Estate appealed the IRS’s refund denial to the district court. The Estate alleged that its 2013 refund claim for the 2006 overpayment was timely because Carlton had a financial disability that tolled the limitations period to file a refund claim until 2012.

The applicable limitations period will be tolled or “suspended” if a taxpayer is financially disabled. (Code Sec. 6511(h)(1)) A taxpayer is “financially disabled” when the individual is unable to manage their financial affairs because of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. (Code Sec. 6511(h)(2)(A)) However, an individual will not be considered “financially disabled” during any period for which another person is authorized to act on behalf of such individual in financial matters. (Code Sec. 6511(h)(2)(B))

The district court dismissed the estate’s refund suit because (1) Carlton had the capacity to execute the DPA; (2) as of 2005 Hoff was authorized under the DPA to act on Carlton’s behalf; (3) Hoff did not renounce the DPA; and (4) Carlton did not effectively revoke the DPA. Thus, the limitations period for filing Carlton’s 2006 tax refund claim was not tolled due to Carlton’s financial disability under Code Sec. 6511(h)(1) and the limitations period expired in 2010.

The Estate appealed the district court’s decision to the First Circuit Court of Appeals.

On appeal, the Estate argued that a person should be considered “authorized” to act on behalf of a financially disabled taxpayer in tax matters only if that person has (1) the 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 contended that Hoff did not meet these three requirements and, therefore, he was not “authorized” to act on Carlton’s behalf. Thus, the limitations period for filing Carlton’s tax refund claim remained suspended due to his financial disability through his death in October 2012.

The First Circuit Court of Appeals rejected the Estate’s arguments.

First, the Appeals Court held that the DPA Carlton gave to Hoff explicitly granted him the authority to file Carlton’s tax returns, as well as to handle any other tax-related matters before the IRS.

Next the Appeals Court rejected the Estate’s claim that the word “authorized” included an affirmative “duty” because the Estate’s definition went beyond the plain and unambiguous meaning of the word “authorized” and there was no support in Code Sec. 6511(h)(2)(B)’s plain language or its statutory context for the Estate’s interpretation of the word “authorized.” The Appeal Court found that a person may be considered “authorized” to act on behalf of a financially disabled taxpayer in tax matters for purposes of Code Sec. 6511(h)(2)(B) even if that person had no affirmative obligation to act on the taxpayer’s behalf.

The Appeals Court also rejected as unpersuasive the Estate’s argument that the word “authorized” included an “actual or constructive knowledge” requirement. Code Sec. 6511(h) does not include any term into which such a requirement could be read, and the Estate did not provide any context from which it could be inferred. Therefore, the Appeals Court found that, for purposes of Code Sec. 6511(h)(2)(B), a person is “authorized” to act on behalf of a financially disabled taxpayer in financial matters even when that person does not have actual or constructive knowledge of the need to file tax returns in a specific year.

Finally, the Appeals Court found no error in the district court’s finding that the Estate failed to show that Hoff renounced the DPA because Hoff never told Carlton he renounced it.

To continue your research on financial disability suspension of a limitations period, see FTC 2d/FIN ¶T-7506.


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