Estates Cannot Make Use of the Financial Disability Relief Rule to Extend the Statute for Filing a Refund Claim

The tolling of the statute of limitations for filing a claim for refund due to financial disability under IRC §6511(h) does not apply to estates, per a ruling from the US District Court for the Northern District of Alabama in the case of Carter v. United States, US DC ND Alabama, Case No. 5:18-cv-01380.[1]

IRC §6511(h) was enacted by Congress to provide relief for a case where a taxpayer fails to file a claim for refund within the time period provided otherwise by that section due to a financial disability. The provision provides “an individual is financially disabled if such individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment of the individual 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.”[2]

The law provides the following extension of the statutes found in IRC §6511(a), (b) and (c):

In the case of an individual, the running of the periods specified in subsections (a), (b), and (c) shall be suspended during any period of such individual’s life that such individual is financially disabled.[3]

In this case the taxpayer seeking relief was an estate, arguing that the personal representative of the estate was financially disabled for a period of time, thus the fact that the estate’s claim for refund was filed after the time period specified in IRC §6511(a) should not bar the estate from proceeding with its claim for refund.  The estate argued that it should be treated as an individual, and thus be able to obtain relief under this provision.

The estate was looking to claim a refund of estate taxes paid related to the value of stock in Colonial BancGroup held by the decedent on the date she died in late 2007.  That stock made up over 45% of the gross estate.  What was not known at the time was that a customer of the bank had been involved in a fraud against the bank that eventually led the state of Alabama to shut down the bank, rendering the stock nearly worthless.[4]

The fraud against the bank and subsequent loss of virtually all value of that stock, which represented a large portion of what had passed to the heirs, including the personal representative, took its toll on the personal representative:

Carter asserts that from Fall 2008 to the end of 2013, she suffered from moderate to severe mental and emotional maladies which rendered her incapable of managing the Estate’s financial affairs. She provides the declaration of her treating physician, Dr. William Hahn, to support this contention. Both Carter and Dr. Hahn attest the trauma from the Colonial stock’s complete devaluation caused Carter’s ailments. For these reasons, Carter maintains her disabilities incited § 6511(h)’s equitable tolling provision so as to excuse the untimely filing of the refund claim.[5]

Unfortunately for the estate, the court held that the term individual found in §6511(h)(1) did not include estates.  While the IRC often uses “person” as a stand-in for all taxpayers, in this case the law has definitions that clearly indicate a “person” and an “individual” are two separate classes of taxpayers under the law, with “persons” covering a broader class than individual.  Specifically, IRC §7701(a)(1) defines a person as “an individual, a trust, estate, partnership, association, company or corporation.”  The court found this makes it clear that Congress sees individuals and estates as distinct types of taxpayers, and the use of the term individual in IRC §6511(h) limits the relief to natural persons.[6]

While the taxpayer argues that the IRC treats estates and individuals the same, pointing out a number of specific examples of such treatment, the court points out that a number of other provisions, including the imposition of an estate tax and use of different tax rates for estates, make it clear that estates and individuals are not always treated the same under the IRC.  Thus, the estate does not qualify for this relief—this is just another situation where the IRC treats estates and individuals differently.[7]

Just for good measure, the Court goes on to hold that even if the claim was not time barred, it would fail on its merits, since the value for estate tax purposes is based on the value at the date of death or alternate valuation date.  The fact that facts came to light later that would have impacted the market value of the shares had it been known at that date doesn’t change the fact that it wasn’t known, and the stock was being actively traded at the higher price on the date that counts for calculating its value for estate tax purposes.[8]

[1], August 2, 2019, retrieved from PACER August 13, 2019 (registration required)

[2] IRC §6511(h)(2)(A)

[3] IRC §6511(h)(1)

[4] Carter v. United States,, August 2, 2019, retrieved from PACER August 13, 2019 (registration required), p. 7 (including footnote)

[5] Ibid, p.13

[6] Ibid,

[7] Ibid, pp. 13-14

[8] Ibid, pp. 19-21