Drug addiction is a medical condition. It can be a very serious and life-altering medical condition. This begs the question as to whether drug addiction or migraines be an excuse for filing a tax return late or for abating late filing penalties. The court addresses this in Jordan v. Commissioner, T.C. Memo. 2005-266, for a life insurance salesman who became addicted to OxyContin prescribed for his severe headaches.
Facts & Procedural History
The taxpayer in this case is a life insurance salesman. He had a medical condition that resulted in headaches. He had seen numerous doctors and has tried a variety of different medications and treatments for his headaches, such as Darvocet, Percocet, Ativan, and even injections of Botox in his neck.
His doctor prescribed OxyContin in 1996 and increased the dosage over the years. The taxpayer became dependent on OxyContin and sought additional prescriptions from other doctors and early refills of the medication.
The taxpayer tried to stop taking the drug and was hospitalized and treated in rehab in 1999. His finances were in disarray, he was disorganized, and he was experiencing some memory problems and his house was sold in foreclosure.
The Unfiled Tax Returns & Penalties
He did not file Federal income tax returns for tax years 1997 through 2002. The taxpayer began to organize his receipts and information to give to his accountant in late 1999. His goal was to file all late returns at one time. It took several years.
In October 2003, the IRS contacted the taxpayer about his unfiled tax returns. The taxpayer did not provide the information the IRS requested and the IRS issued a notice of deficiency.
In July of 2004, the taxpayer filed his 1997-2002 income tax returns. The IRS responded by imposing late filing penalties. The taxpayer asked the court to review the penalties that were imposed. Specifically, Mr. Jordan asked the court to decide whether his failure to file timely was due to reasonable cause.
Reasonable Cause to Avoid Penalties
Reasonable cause and good faith can be a defense for late filing penalties. To qualify, a taxpayer must show that he or she exercised ordinary business care and prudence but was nevertheless unable to file the return within the prescribed time. This comes from the leading case, United States v. Boyle, 469 U.S. 241 (1985).
The taxpayer in the current case argued that his drug addiction and the time he spent in drug rehabilitation, as well as his other medical problems and related memory loss constitute reasonable cause for his failure to timely file a return for the years at issue.
The court evaluated the prior court cases that address reasonable cause. It focused on the cases that hold that a taxpayer does not have reasonable cause for his or her failure to timely file a return where the taxpayer’s illness does not prevent the taxpayer from filing his or her return.
The court noted that:
Although petitioner testified he experienced some memory problems, petitioner was able to continue his life insurance business during the years at issue. In fact, petitioner’s gross receipts for 1999 and 2000 were the two highest totals for all years from 1997 through 2002. Selective incapacity only with respect to income tax returns is not sufficient to prove reasonable cause. Wright v. Commissioner, supra. We find petitioner’s illnesses did not incapacitate him so severely that he was unable to conduct his business affairs during the years at issue. We find, therefore, that petitioner’s illnesses also did not render him unable to timely file his returns for the years at issue.
Additionally, the petitioner’s failure to file continued for years beyond the duration of his illnesses, leading the court to conclude that the petitioner’s illnesses did not constitute reasonable cause for his failure to file a tax return.
Thus, the court held that the taxpayer was liable for the late filing penalties.
This case stands for the proposition that migraines and addiction to drugs to remedy them are not reasonable cause for the late filing of tax returns in most cases. These facts don’t establish reasonable cause for abating late filing penalties. This may be different if there was evidence that the medical condition prevented him from conducting his business affairs or filing his returns.