WHEN IS BAD HEALTH AN EXCLUSE FOR A LATE RETURN?

Late filing of a tax return and payment of taxes is subject to penalty absent reasonable cause, if not due to willful neglect. Code §6651(a)(1). In a recent Claims Court case, the key focus by the court in weighing bad health as an excuse for a late gift tax return filing was was whether the taxpayer’s incapacity from illness was “continuous.”

This is not the first case dealing with serious illness as a reasonable cause excuse. The Supreme Court indicated in Boyle, 55 AFTR 2d ¶ 85-1535 (1985) that serious illness of a taxpayer or a member of his immediate family could constitute reasonable cause, but it did not decide how ill that person must be. In Sanford, 71 AFTR 2d ¶ 93-405 (CA 11 1992), the 11th Circuit Court of Appeals recognized the excuse if the taxpayer was unable to exercise reasonable business care. In Williams, 16 TC 893 (1951), an intermittent period of disability was not enough for penalty relief.

In the current case, the taxpayer made substantial gifts in 2007 and owed approximately $1.8 million in gift taxes. She filed her gift tax returns late, and incurred penalties.  The taxpayer suffered numerous health care problems after the gift, including knee replacement surgery, cataract surgery, thyroid problems, heart palpitations, pneumonia, and other respiratory problems. Despite these problems, the Claims Court found that the taxpayer was not continuously incapacitated at the time when she could have informed her tax advisors of the transactions for reporting purposes.

Probably most troublesome for the court was that the taxpayer completed numerous other financial transactions in 2007 through April 15,2008. These including calling tax attorneys, reviewing deeds for the conveyance of real property, visiting notaries, mailing documents to her tax returns, reviewing her 2007 federal and state income tax returns and estimated tax returns, making out checks, and mailing checks to the tax authorities. By able to do these things, the court felt there was no way she was continuously incapacitated.

Stine, 110 AFTR 2d ¶ 2012-5383 (Claims Ct 2012)