Financial disability provision does not suspend statute of limitation on taxpayers’ refund claims

A district court dismissed a married couple’s claim for refunds due to a lack of subject-matter jurisdiction because they did not timely file the claims with the IRS. It ruled that the statute of limitation was not suspended because the couple did not satisfy the requirements of a provision that tolls the statute of limitation when an individual is financially disabled.

Facts: Rhandall and Barbara Thorpe filed tax returns for eight years between 2002—2013 in which they calculated and paid individual retirement account (IRA) early-withdrawal penalties. The returns were prepared with the aid of professionals and duly sworn and subscribed. All but one of the returns were filed with married filing jointly status. Realizing they had overpaid the penalties, the Thorpes filed refund claims with the IRS in 2015 through 2017, which were denied as untimely. The couple then filed a claim for refunds in the District Court for the District of New Jersey, contending that they were timely filed, as the statute of limitation for refund claims was suspended by the tolling provision of Sec. 6511(h) because Barbara Thorpe was financially disabled.

Issue: The court decided whether it had subject-matter jurisdiction, pursuant to Sec. 7422(a), to determine whether the refund claims were timely filed because the statute of limitation was suspended.

Sec. 7422(a) provides that a suit for refund of a tax may not be maintained in any court unless a claim for refund has been timely filed with the IRS prior to filing suit. Generally, Sec. 6511(a) provides that a taxpayer must file a claim for refund within three years from the time a tax return was filed, or within two years from the time the tax was paid, whichever period expires later.

Sec. 6511(h)(1) suspends the statute of limitation period provided in Sec. 6511(a) for any period in which an individual is financially disabled. Sec. 6511(h)(2)(A) provides an individual is financially disabled when he or she “is unable to manage his [or her] financial affairs by reason of a medically determinable physical or mental impairment … 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.” It also provides that taxpayers must provide proof of their impairment in the form and manner required by the IRS.

Sec. 6511(h)(2)(B) provides that an individual is not financially disabled “during any period that such individual’s spouse or any other person is authorized to act on behalf of such individual in financial matters.”

In Rev. Proc. 99-21, the IRS requires that a written statement of a physician “qualified to make the determination” must be submitted with a refund claim to claim financial disability, setting forth:

• The name and a description of the taxpayer’s physical or mental impairment;
• The physician’s medical opinion that the physical or mental impairment prevented the taxpayer from managing the taxpayer’s financial affairs;
• The physician’s medical opinion that the physical or mental impairment resulted in or can be expected to result in death or that it has lasted (or can be expected to last) for a continuous period of not less than 12 months;
• To the best of the physician’s knowledge, the specific period during which the taxpayer was prevented by such physical or mental impairment from managing his or her financial affairs; and
• A certification signed by the physician.

Additionally, a written statement must be submitted by the person signing the refund claim, in effect stating that Sec. 6511(h)(2)(B) is satisfied.

Holding: The court held that it lacked subject-matter jurisdiction and dismissed the claims for refund, as they were untimely filed with the IRS because the Sec. 6511(h) tolling provision was not satisfied. It noted the Thorpes claimed only that Barbara Thorpe suffered from an impairment, and no evidence had been presented showing Rhandall Thorpe had an impairment that prevented him from managing the couple’s financial affairs, so Barbara Thorpe could not be treated as financially disabled under Sec. 6511(h)(2)(B). In addition, the requirements for suspending the statute of limitation in Rev. Proc. 99-21 were not satisfied, as the three letters from a physician that the taxpayers supplied to the court did not state that Barbara Thorpe was unable to manage her financial affairs or include the required certification, and the documents were not filed with the refund claims made to the IRS. Finally, the court reasoned that the taxpayers’ claim was not of an inability to deal with financial matters and file their tax returns, but that their returns contained a mistake.

• Thorpe, No. 18-4956 (D.N.J. 3/12/19)

— By Mark Aquilio, CPA, J.D., LL.M., professor of accounting and taxation, St. John’s University, Queens, N.Y.