Existence of Power of Attorney Not Current Being Used Found to Bar Finding of Financial Disability
A “zombie” power of attorney proved costly for the estate of a taxpayer in the case of Stauffer v. IRS, United States Court of Appeals, First Circuit, Case No. 18-2105.[1] By “zombie” we’re referring to a power of attorney that was not being actively used by the power holder, who announced he wasn’t going to act under it, and which the grantor drafted letters to revoke but never actually got around to sending to the power holder. This power that never died would enter into the question of whether the statute of limitations was still open for the estate to claim a refund of taxes due to the decedent.
The law involved is IRC §6511(h) which suspends the statute for claiming a refund for the period an individual is financially disabled. But there is an exception to this suspension of the statute, found at IRC §6511(h)(2)(B), that provides a person is not financially disabled during any period where another person “is authorized to act on behalf of such individual in financial matters.”
Carlton Stauffer had executed a durable power of attorney (DPA), naming his son, Hoff, to hold the power. Mr. Stauffer granted the power as he was both elderly and mentally ill.[2] However, less than six months after the power was granted, the father and son had a falling out. The friction resulted in the father and son taking the following actions:
Hoff claims to have told Carlton at the March 15 meeting that he would no longer be exercising any rights granted to him under the DPA. Then, Carlton drafted three notices revoking the DPA. However, he never sent these notices, and Hoff never received them. Carlton and Hoff also stopped talking. Carlton would not pick up Hoff’s calls or return his calls or messages. The fallout led Hoff to tell his sister (Carlton’s daughter), Carlton’s accountant, and Carlton’s attorneys that he was no longer acting as his father’s agent under the DPA.[3]
Beginning with the year that Hoff announced he would no longer exercise rights under the DPA, Carlton stopped filing income tax returns. While Hoff and Carlton did reconcile a few years later, Hoff did not handle any matters under the DPA.
When Carlton died, Hoff was appointed as personal representative, and he discovered the fact that income tax returns had not been filed from 2006-2012 (the last being the year that Carlton died). Carlton filed all of these returns in April 2013.
The 2006 return had an overpayment of $137,403, from which the estate requested a refund of $97,364 and requested the remaining balance be applied to Carlton’s 2007 liability. The IRS found that the claim for refund was late, being after the time period prescribed for filing for such a refund under IRC §6511(a) and then later denied the taxpayer’s claim following an internal appeal.[4]
The IRS argued that even if Carlton was financially disabled as defined at IRC §6511(h), his son held a valid durable power of attorney that granted him the right to act on his father’s behalf, including the right to file income tax returns. [5]
The opinion notes that the statute does not contain a definition regarding what is meant by someone being authorized to act on behalf of the taxpayer. The estate argues that the provision should be read to require that a person meet all three of the following criteria to be considered authorized to act on behalf of the taxpayer.
The person must have the authority to file the tax returns on behalf of the financially disabled person;
The person must have a duty to file the financially disabled person’s tax returns; and
The person must have actual or constructive knowledge of the fact that returns for a particular tax year have not been filed.[6]
The appellate panel rejected these criteria as going far beyond the statute in imposing conditions for a person to be authorized to act on behalf of the individual.
The panel skips over the first claim, noting that neither party had suggested that Hoff was not authorized to file the returns on Carlton’s behalf—the power of attorney explicitly granted Hoff this authority.[7]
The Court then looks to find a definition of authorized since none is found in the statute itself. The Court turns to dictionary definitions to find the expected meaning of the word, noting:
The root word for “authorized” is “authority,” which is defined as: (1) “[t]he official right or permission to act, esp. to act legally on another’s behalf; esp., the power of one person to affect another’s legal relations by acts done in accordance with the other’s manifestations of assent,” Authority, Black’s Law Dictionary (11th ed. 2019); (2) “the power delegated by a principal to an agent,” id.; (3) “power to influence or command thought, opinion, or behavior, “Authority, Merriam-Webster Online Dictionary, https://www.merriam-webster.com/dictionary/authority (last visited Aug. 15, 2019); and (4) “freedom granted by one in authority,” id. These dictionary definitions reveal no ambiguity.[8]
The panel points out that nowhere in that definition is there a reference to a requirement there be a duty—rather being authorized gives a person a power to act, not necessarily a requirement the person do so.[9]
The panel similarly found no support for the view that the use of the word authority imposes a requirement the person holding the power be aware of the failure to file a return, noting that “[t]he statute’s plain language does not include any term into which such a requirement can plausibly be read, nor does the Estate point to any contextual basis (e.g., provisions of the whole law) from which it can be inferred.”[10]
The panel also found the District Court had not erred in finding the DPA had not been properly terminated, and thus remained in force during the time period that it was claimed the decedent was financially disabled. The opinion notes:
Carlton and Hoff’s execution of the DPA gave rise to a principal-agent relationship. See generally 20 Pa. Cons. Stat. § 5601 (2015).14 Under Pennsylvania law, an agent’s renunciation of the duties and obligations of such relationship must be positive, unequivocal, and made known to the principal for it to be effective. Bergner v. Bergner, 67 A. 999, 1001 (Pa. 1907). Furthermore, “the burden of proving renunciation of one’s obligations rests on the party asserting it.” Shafer v. A. I. T. S., Inc., 428 A.2d 152, 155 (Pa. Super. Ct. 1981).
The district court found that the Estate did not meet its burden of proving that Hoff renounced the DPA. Our review of the record leads us to conclude the same. Thus, we find no error in the district court’s finding, much less a clear error.
We agree with the district court’s assessment of the deposition testimony upon which it primarily relied to reach its finding that Hoff did not renounce the DPA. See Stauffer, 2018 WL 5092885, at *10. During the deposition, which was taken for a separate Pennsylvania state court proceeding, Hoff was asked, “Do you recall ever discussing the possible termination of the power of attorney directly with your father?”; to which he responded, “I don’t, but I could have said . . . I’m not doing anything with it now, it’s really a non-issue, but it would hurt my feelings if it were terminated.” Below and now before us, the Estate attempts to save itself from Hoff’s deposition testimony by contradictorily asserting that Hoff actually told Carlton during the March 15 meeting that “he would no longer be exercising any rights granted to him under the [DPA].” But, as the district court noted, “if true, this [purported statement] would not constitute a renunciation” because it “only expresses an intent not to use the [DPA], not a ‘positive and unequivocal’ renunciation of it.” Id. (quoting Bergner, 67 A. at 1001); see 20 Pa. Cons. Stat. § 5604(b) (2017) (“Unless the power of attorney states a time of termination, it is valid notwithstanding the lapse of time since its execution.”). As such, Hoff’s purported March 15 meeting statement is — as a matter of law — inconsequential to the question of whether he renounced the DPA.[11]