The limited reach of the financial disability tolling provisions added by Congress to §6501 was again highlighted in the case of McAllister v. United States, US Court of Federal Claims, No. 1:13-cv-01026.
IRC §6511(h) provides an exception to the general statute of limitations provisions under §6511 for filing a claim for refund in cases of financial disability. In April of 2015 the IRS, in Chief Counsel Memorandum 201515019 (which we discussed in an article posted back in April of 2015), concluded that the provision did not extend the general rule for when a taxpayer must file a claim for refund from years losses are carried to from a “financial disability” year.
Now we have a court opinion looking at another matter arising for a taxpayer claiming financial disability. In this case the “disability” year was 2009 and, as with the taxpayer in the Chief Counsel Advice, that year generated a net operating loss.
That year a special provision, found at IRC §172(b)(1)(H), allowed certain taxpayers to carry net operating losses back for up to five years. However under that provision an election to use an extended loss period had to be filed no later than the due date, including extensions, for the year generating the loss—and that due date was specifically provided for in the statute. Thus for the taxpayers, who had obtained an extension to file their 2009 return, the election needed to be filed by October 15, 2010.
The taxpayers did not timely file their 2009 tax return, and the Form 1040X they filed to claim a five year carryback, filed before their 2009 return actually ended up being filed, was filed in January of 2011. Eventually the taxpayers filed their 2009 return in October of 2011.
The IRS disallowed the carryback, noting the election found on the amended return was made months after the extended due date for filing the 2009 return, thus failing to meet the requirements of §172(b)(1)(H).
The taxpayers sought refuge in the financial disability provisions of IRC §6511(h). As the Court explained:
Plaintiffs contend that the tolling provided by section 6511(h) applies to the special provision under which plaintiffs attempt to carry back their loss, and that they were financially disabled because they were “unable to manage [their] financial affairs by reason of a medically determinable physical or mental impairment” during 2009 and 2010. § 6511(h). As support for their claim of financial disability, plaintiffs had initially detailed their alleged financial disability in an attachment to their 1040X amended return for the year 2005. Def.’s App. 3. The attachment explained that Mr. McAllister handles the operations of their businesses, while Mrs. McAllister handles the accounting, bookkeeping, and finances. Id. It further noted that during 2009 and 2010, taxpayers “were not able to attend to their respective functions” because Mr. McAllister suffered from recurring eye illness and other conditions throughout those years, and Mrs. McAllister suffered from debilitating symptoms which were eventually diagnosed as a tumor of the neck. Id.
The Court notes that the financial disability provisions of §6511(h) apply solely to the periods of limitations referenced in subsections (a), (b) and (c) of §6511, but in this case their problem arises from an entirely different IRC provision (that found at IRC §172(b)(1)(H)).
The Court concludes:
We decline to extend the tolling provisions beyond what Congress clearly specified. Therefore, contrary to plaintiffs' argument, it cannot be applied to section 172(b)(1)(H).
This narrow reading of §6511 is consistent with the reading provided in the Chief Counsel Advice referred to earlier. So while the financial disability provisions provide some relief for taxpayers who otherwise would be denied a refund, it is far from absolute protection in such cases.