IRS FIGHTS TO KEEP OVERPAYMENT\Family says man was senile when he wrote $7,000 check.

Byline: Steven J. Gorman Daily News Staff Writer

Before his death in 1988, Stanley McGill of Granada Hills wrote the IRS a $7,000 check for taxes he didn't owe - and now his family wants it back, claiming McGill was senile and didn't know what he was doing.

The Internal Revenue Service acknowledges that McGill, a retired civil engineer, never owed the government. But the agency refuses to give back the money on grounds that his family missed a two-year deadline for filing a refund claim.

In a suit against the government, McGill's estate argues that while a two-year statute of limitations for refund claims had technically expired, the deadline should be extended for disabled taxpayers.

"I'm trying to get justice for people who have been incapacitated in some way and have been unable to handle their affairs," McGill's daughter, Marian Brockamp, said Thursday.

Brockamp won an important victory when a federal appeals court in October ordered the IRS to hand over the money, but now the Department of Justice has petitioned the Supreme Court to overturn the ruling.

Bridget Rowan, an attorney for the Justice Department's tax division, acknowledged such cases "can present very sad circumstances." But waiving the deadline would play havoc with the administration of income taxes, she said.

"The implications reach far beyond those individuals who might be very sympathetic," she said. "When you think about making all those millions of claims really open-ended, that presents a real problem."

McGill, a civil engineer who moved to California from Kansas City after retiring in the 1940s, suffered from senile dementia so severe that he "didn't recognize people he had known all his life," his daughter said.

He died at age 98.

Brockamp, 70, who now lives in Prescott, Ariz., said her father had agreed to let family members handle his financial affairs after overpaying doctors on two or three occasions.

But without the family's knowledge, McGill wrote a $7,000 check to the IRS on April 16, 1984, Brockamp said. It turned out he owed about $400 for the 1983 tax year, said Robert Klueger, the attorney for the McGill estate.

Brockamp said she discovered the canceled $7,000 check while going through his papers after he died in 1988 and asked the IRS to return the money.

A federal judge who heard the case in Los Angeles sided with the government, which argued there were no legal grounds for extending the deadline and that such a policy would be open to abuse.

But the 9th U.S. Circuit Court of Appeals in San Francisco overturned the lower-court ruling in October 1995, calling the IRS refusal to return the money "unconscionable."

The Justice Department petitioned the Supreme Court on Jan. 31 to hear the case and overturn the 9th Circuit.

According to a White House statement issued the same day, President Clinton reviewed the McGill case and directed the Treasury Department to recommend how the law might be changed "to avoid such unfair results in the future," the Bloomberg News Service reported.