ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – PUTTING THE BRAKES ON THE REFUND CLAIM STATUTE – THE IMPACT OF BEING FINANCIALLY DISABLED
By Robert S. Schriebman
Every taxing agency whether it is the IRS, or agencies in California, are governed by strict statutes of limitations for certain actions. These statutes governing periods of assessment, periods of abatement, and periods involving refunds. There are statutes for the filing of refund suits and there are statutes for the filing of refund claims. On rare occasions these statutes can be extended but usually under very narrow and limited conditions. This article will discuss the FTB and the IRS suspension of the statutes for making refund claims. You have to make a claim for refund before you can file a refund suit in court. There are a few laws that stop the running of the statute of limitations for filing a refund claim. Here I will look at suspending the statute for making a timely refund claim due to being financially disabled. Both the IRS and the FTB have similar rules. I will also discuss the recent Office of Tax Appeals (OTA) Canann case that provided guidelines on how one goes about making a case for suspension due to financial disability.
Internal Revenue Code § 6511(h) suspends the running of a period of limitations for filing a timely refund claim if the taxpayer is unable to manage his/her financial affairs due to disability. What does financial disability mean? The taxpayer must be able to prove the inability to manage one’s 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 at least 12 months. It is not enough to simply make a bald assertion of financial disability. You have to follow the rules set down in IRS regulations, rulings, and other administrative instructions. A taxpayer shall not be treated as being financial disabled during any period that the taxpayer’s spouse or other person is authorized to act on behalf of the taxpayer in handling his/her financial affairs.
Pursuant to R&TC § 19316, the time period for filling a claim for refund may be suspended, and therefore extended, if a taxpayer is “financially disabled,” as defined by that provision. The running of the period for filing a claim for refund is suspended if (1) “an individual taxpayer 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;” and (2) there is no spouse or other legally authorized person who can act on the taxpayer’s behalf in financial matters. The FTB’s version mirrors that of the IRS.
FTB Form 1564 Is A Necessity
I went on the FTB website so I could attach a copy of Form 1564 for your review – there was no form, only instructions. In a nutshell, this form is a must if you are seeking more time to file refund claim. You must have a physician’s statement. The form is entitled: “Physician Affidavit of Physical or Mental Impairment.” When we lawyers think of an affidavit, we think of a sworn statement under penalty of perjury requiring a notary signature and stamp. I do not believe a notary is required. The physician must provide a medical opinion that the impairment prevented the taxpayer from managing his/her personal affairs and that the illness is expected to last for a continuous period of not less than 12 months.
The Canann Case
The case of A. Canann and M. Canann (Dec’d), OTA Case No. 18042560, April 3, 2020. Mr. and Mrs. Canann failed to file their 2012 FTB return timely. Several years went by and the FTB assessed a late penalty, a demand penalty, and interest. Mrs. Canann paid everything in 2014. The claim for refund was filed in 2017 and was late. Mrs. Canann went before the OTA arguing that the claim statute should be suspended due to financial disability caused by the stress and grief resulting from her husband’s terminal illness which was diagnosed in 2011. Mr. Canann died in 2013. Mrs. Canann contended that it took over three years to put her financial life back in order. In addition to the death of her husband, Mrs. Canann lost her mother in 2012 and her father in 2013. She also provided a declaration from her physician stating that due to such difficulties Mrs. Canann’s mental impairment was continuously ongoing for several years (2012-2017), and that she was unable to properly manage her financial affairs.
The FTB introduced evidence that Mrs. Canann was the owner, executive producer, and playwright of dinner-theater group. She took over her husband’s business but ran it at a loss.
The OTA ruled against Mrs. Canann. The judge felt that she was not financially disabled because she was running a business during the time she could have filed a timely claim for refund. The judge then attacked the physician’s statement because it stated that Mrs. Canann was unable to “properly” manage her financial affairs. However, the law requires her inability to manage “any” financial affairs, regardless of whether the affairs were properly managed or not. The fact that the business ran at a loss is not sufficient evidence to show an inability to manage Mrs. Canann’s financial affairs. Therefore, Mrs. Canann did not prove that she was financially disabled.
Financial disability, according to the OTA, must mean that you are comatose,
one step away from being thrown out of your house or apartment, and your utilities have been all shut off. In my opinion, the OTA decision is plain wrong. Wording in statutes should be given their ordinary and plain meaning. When you study law in law school, you learn the doctrine that hard cases and hard decisions make bad law. The more I review the decisions of the OTA, the clearer becomes the maxim, “there is not enough justice to go around.”
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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