ASK THE EDD ATTORNEY – WHEN WILL EMOTIONAL DEPRESSION CONSTITUTE REASONABLE CAUSE FOR THE ABATEMENT OF PENALTIES? THE TRIMMER CASE – PART 3
By Robert S. Schriebman
This is Part 3 of a 3-part article discussing when emotional depression constitutes reasonable cause for the abatement of penalties.
It does not happen very often in the world of tax controversies, but when it does, it is a major event! I am talking about a tax case that is of major consequences. The case of John C. Trimmer, decided by the US Tax Court in April 2017 was such a case. In the Trimmer case, the US Tax Court ruled that emotional depression may constitute reasonable cause for the abatement of IRS penalties. John C. Trimmer and Susan Trimmer v. Commissioner 148 TC – No. 14 April 20, 2017.
Depression. It is something that we have all experienced, especially in today’s world where it seems that you cannot pick up a newspaper without reading about something very depressing. I am reminded of President Abraham Lincoln, who constantly suffered from bouts of depression, then medically diagnosed as melancholy. Between the poor beginnings of the Civil War for the North, the death of his sons, and his emotionally challenged spouse, Mr. Lincoln had good reason for being depressed.
Mr. Trimmer, as we will see in this series of articles, had his challenges. The IRS was not sympathetic, and IRS lawyers threw up many road blocks in his attempts to remove penalties assessed against him for failing to timely set up an IRA. However, a wise and understanding US Tax Court judge eventually ruled that Mr. Trimmer’s depression constituted reasonable cause for the abatement of penalties relating to his IRA contributions.
The facts in the Trimmer matter are extensive and will not be repeated here. I recommend that you review Parts 1 and 2 before reviewing this Part 3.
The Trimmers Get a Professional Evaluation Relating to John’s Depression
The Trimmers went into the US Tax Court prepared with a professional opinion and report regarding the nature and the extent of John’s depression. They hired a law professor at the Fordham University School of Law who had outstanding credentials. Ms. Ho was a licensed master social worker (LMSW), and a licensed clinical social worker licensed in California. The Court found Ms. Ho’s expertise to be acceptable. She prepared a written report detailing John’s depression history and concluded that his depression prevented him from timely rolling over his pension distribution into an IRA. IRS attorneys offered many challenges to Ms. Ho’s qualifications and opinion. They pointed out that her opinion was something akin to a Monday-morning-quarterback, because she did not examine John while he was depressed. This argument did not bother the Court. Both Ms. Ho’s testimony and her report were admitted into evidence.
Was the IRS’ Refusal To Waive Penalties Against Equity or Good Conscience?
The IRS Code section that allows for a waiver of penalty is set forth in IRC § 402(c). It states the following: “The Secretary may waive the 60-day requirement …where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.”
The IRS code does not define the phrase against “equity and good conscience.” There are very few code sections containing this language. The Court concluded that “equity and good conscience” should reflect a broad and flexible concept of fairness by providing a non-exhaustive list of situations that might satisfy the general standard.
The Court also reviewed section 3.02 of Rev. Proc. 2003-16 (2003-1 C.B. at 359). This internal revenue procedure allows the IRS to issue a ruling waiving the 60-day rollover requirement, “in cases where the failure to waive such requirement would be against equity or good conscience including … events beyond the reasonable control of the taxpayer.” It goes on to provide the following objective factors to be used in determining whether to grant a hardship waiver:
“In determining whether to grant a waiver, the Service will consider all relevant facts and circumstances, including: … (2) in ability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error…”
The Court properly determined that John Trimmer was under a disability due to depression. The Court further held that it would be against equity and good conscience to deny the Trimmers a waiver of the 60-day rollover requirement. The Court reversed the IRS’ finding that the Trimmers owed penalties and additional federal income taxes.
It has been historically difficult to convince the IRS that depression should be a reasonable cause for removing assessed penalties. Reasonable cause, under the IRS Manual (IRM), is the standard for removing assessed penalties. But what is reasonable cause? Chapter 20 of the IRM deals with the abatement of penalties. There are many categories for the abatement of penalties due to reasonable cause. The first category is death, serious illness, or unavoidable absence. What constitutes serious illness? In the past I have argued unsuccessfully that alcoholism is a disease and severe alcoholism is debilitating. It can also cause serious depression or vice versa. With the Trimmer case I now feel empowered to forcefully argue that depression now constitutes a serious debilitating illness and constitutes reasonable cause for the abatement of penalties.
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.
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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