Before: Stapleton, Lewis and Aldisert, Circuit Judges.
The opinion of the court was delivered by: Aldisert, Circuit Judge.
We must decide whether this is an appropriate case to apply the doctrine of estoppel against the Internal Revenue Service (IRS). Barry I. Fredericks appeals a decision of the United States Tax Court that approved a deficiency assessed by the Commissioner of Internal Revenue in July 1992 for Fredericks' 1977 income tax return. The IRS action requires the taxpayer to pay an additional tax of $28,361 and approximately $158,000 in interest on the basis of a disallowed tax-shelter deduction. The taxpayer filed a timely 1977 tax return, but the IRS took 14 years to decide if the tax-shelter deduction taken by the taxpayer was appropriate.
The IRS' assessment was filed long after the three-year statute of limitations had expired. However, at the request of the IRS Fredericks signed various consent agreements extending the time for the government to assess his 1977 tax return. The taxpayer's estoppel contention is based on alleged misrepresentations and misconduct by the IRS regarding its possession, solicitation and use of these consent forms. The appeal requires us to determine whether the IRS was estopped from making the assessment in 1992 because of its conduct regarding these consent agreements.
The taxpayer alleges the IRS committed the following misconduct in connection with the forms he and the IRS executed to extend the statute of limitations. First, the IRS misrepresented in 1981 that it never received a Form 872-A (Special Consent to Extend the Time to Assess Taxes), which Fredericks had signed to authorize an indefinite extension of the statute of limitations. Second, the IRS confirmed this misrepresentation in 1981, 1982 and 1983, by soliciting and executing three separate Forms 872, which extend the statute of limitations for one year. Third, the IRS discovered that it possessed the Form 872-A sometime before June 30, 1984, the date the last one-year extension expired, decided to rely on that form in continuing its investigation of Fredericks' tax return and failed to notify the taxpayer of its changed course of action. Fourth, the IRS used the Form 872-A to assess a deficiency in 1992, 11 years after informing the taxpayer that the Form 872-A did not exist, and eight years after the final one-year extension expired. Finally, the IRS imposed interest penalties totaling over five times the amount of the tax and covering the entire duration of its protracted investigation of the tax shelter.
The IRS rejected the taxpayer's statute-of-limitations defense, which was based on the third Form 872 executed by Fredericks and the government. The Commissioner argued that the Form 872-A remained in effect, even though the IRS had represented for the previous 11 years that no such form existed. The taxpayer contended that he relied on the IRS' affirmative misrepresentations over the years to his detriment and, thus, the Commissioner is estopped from using that Form 872-A.
We conclude that this taxpayer has met his burden of proving the traditional elements of equitable estoppel, and has mounted the high hurdle of establishing other special factors applicable to estoppel claims against the government. Accordingly, we will reverse the Tax Court's decision approving the assessment.
The Tax Court had jurisdiction pursuant to 26 U.S.C. §§ 6213(a), 6214 and 7442. We have jurisdiction under 26 U.S.C. § 7482(a)(1). The appeal was timely filed in accordance with Rule 13(a), Federal Rules of Appellate Procedure.
Tax Court decisions are reviewed in the same manner as district court decisions in non-jury civil cases. 26 U.S.C. § 7482(a); Bachner v. Commissioner, 81 F.3d 1274, 1277 (3d Cir.1996). Determinations that a party failed to establish its burden of proof are reviewed under the clearly erroneous standard. In Re Brown, 82 F.3d 801, 804 (8th Cir.1996); Knop v. McMahan, 872 F.2d 1132, 1140 (3d Cir.1989). We also review findings of fact for clear error, and we apply plenary review to the Tax Court's conclusions of law. United States v. Asmar, 827 F.2d 907, 913 n. 8 (3d Cir.1987).
In 1978, Fredericks and his former wife filed a timely joint federal income tax return for 1977. In October 1980, the IRS sent Fredericks a Form 872-A, Special Consent to Extend the Time to Assess Taxes, requesting him to extend for the 1977 tax year the three-year statute of limitations within which the government must assess deficiencies. J.A. 22a. See 26 U.S.C. § 6501(a). On October 17, 1980, Fredericks signed and returned the Form 872-A, authorizing the government to assess deficiencies within 90 days of:
(a) the IRS' receipt of a Form 872-T, Notice of Termination of Special Consent to Extend the Time to Assess Tax, from the taxpayer; or
(b) the IRS' mailing of a Form 872-T to the taxpayer; or
(c) the IRS' mailing of a notice of deficiency for the relevant year.
None of these events occurred. According to the government's "received" date stamp on the Form 872-A, it was received by the Audit Division of the Manhattan District Director's Office on November 3, 1980, and signed and dated by the IRS on November 4, 1980.
In January 1981, an IRS agent telephoned Fredericks and requested him to sign a Form 872, Consent to Extend the Time to Assess Tax, for the 1977 tax year. According to Fredericks' trial testimony:
[The] IRS agent ... indicated that he was reviewing my tax return involved in the audit of my 1977 tax return, and ... the statute of limitations was about to run and that the Government needed an extension of that statute.... I told the ... agent that I had already executed and returned ... an extension.... He told me he was in charge; he had my file and there was no extension in the file. He asked me did I receive ... a copy of the extension back from the IRS signed. I said I did not. He indicated ... that therefore the Government did not have it, it was probably lost in the mail, and that he needed me to execute another extension, otherwise the Government was going to assess the tax. But they didn't want to do that. They wanted time to review, and would I send them an 87 -- a new form. We did not mention numbers.
J.A. 81a-82a. The IRS did not contradict this testimony.
Consistent with Fredericks' testimony, the government sent a Form 872, which he signed and returned to the IRS. The Form 872 expressly extends the statute of limitations for only one year, whereas the Form 872-A authorizes an indefinite, although revocable, extension of the statute of limitations. The first Form 872 executed by the IRS and Fredericks extended the statute of limitations until December 31, 1982.
The agents telephoned Fredericks on two additional occasions and requested him to sign and return two additional Forms 872. On June 13, 1982, Fredericks signed and returned a consent to extend the statute of limitations to December 31, 1983; and on February 3, 1983, Fredericks signed and returned a Form 872 agreeing to extend the statute of limitations until June 30, 1984. Each of these Forms 872 was received and signed by an agent of the IRS Newark District Director's Office, and copies of these signed forms were subsequently forwarded to, and received by, Fredericks.
Throughout oral argument, counsel for the IRS made abundantly clear why the government requested these extensions of the statute of limitations:
IRS COUNSEL: What really took so long in this case was the fact that it took a very long time for the IRS and the tax shelter which the IRS was investigating in which Mr. Fredericks had invested, to reach an agreement .... [A] number of years went by, .... I believe that a couple of organizations were involved. It was a complicated settlement.
IRS COUNSEL: [I]t's very common when you have complicated tax shelters like this to ask for very long ... extensions.
THE COURT: But you didn't ask for any additional extensions after the ... expiration in 1984 did you?
IRS COUNSEL: No, we did not ....
Counsel for the IRS also made clear that the consent agreements extending the statute of limitations were repeatedly obtained for both the IRS' and the taxpayers' benefit:
IRS COUNSEL: Mr. Fredericks didn't want that tax assessed any more than the IRS agent did. And why was that? Because they were still in negotiation on the underlying tax shelter which was not resolved until 1988. That's why he didn't want the tax assessed and that's why the IRS agent didn't want the tax assessed ....
After February 1983, the IRS made no attempt to extend the statute of limitations, which pursuant to the third Form 872 expired on June 30, 1984. In light of the IRS' representations that it neither signed nor possessed a Form 872-A indefinite extension of the statute of limitations, the taxpayer concluded that the government lacked authority to assess a deficiency on his 1977 income tax return after that date.
On July 9, 1992 -- eight years and nine days after the June 30, 1984 expiration date -- the IRS mailed a notice of deficiency to Fredericks and his former wife alleging they were liable for $28,361 in income tax, plus interest for the 1977 tax year. Fredericks filed a petition in the Tax Court challenging the deficiency assessment on grounds that it was barred by the June 30, 1984 statute of limitations agreed to in the third Form 872. Thus, Fredericks claimed the Commissioner was estopped from relying on the Form 872-A to avoid the statute-of-limitations defense, which completely bars the assessment of any deficiency. *fn1
The Tax Court held a trial at which Fredericks testified and the Commissioner presented no witnesses. Significantly, the IRS presented no evidence as to the date it "discovered" its possession of the Form 872-A which it invoked to assess Fredericks' 1977 return in 1992. This is the same form the IRS affirmatively represented to the taxpayer as non-existent. Moreover, the IRS does not dispute that it waited until 1992 to notify the taxpayer that it had the Form 872-A and intended to rely on that form instead of the third Form 872 signed by the parties. At oral argument, counsel for the IRS stated that she did not know when the IRS discovered the Form 872-A or when it decided to rely on that form.
The Tax Court concluded that the government's action did not constitute an affirmative misrepresentation about any fact concerning the Form 872-A, and that Fredericks failed to prove the elements of estoppel. The court found that Fredericks did not establish that he relied to his detriment on the government's acts regarding the Forms 872 (one-year extensions) because he could have at any time filed a Form 872-T to terminate the previously executed Form 872-A (unlimited extension). The court decided that a deficiency of $28,361 was due. Fredericks now appeals that decision.
The question is whether Fredericks sufficiently established the elements of an estoppel claim against the government such that it should be prevented from relying on the Form 872-A indefinite extension of the statute of limitations to pursue an otherwise time-barred assessment on Fredericks' 1977 tax return. Fredericks contends the government's July 9, 1992 assessment on his 1977 tax return was barred as of June 30, 1984, the date on which his and the IRS' agreement to extend the statute of limitations expired pursuant to the third Form 872 sought by the government. The Commissioner contends the Tax Court correctly concluded that estoppel is inappropriate here because Fredericks failed to demonstrate that the government's conduct constituted affirmative misconduct.
"Estoppel is an equitable doctrine invoked to avoid injustice in particular cases." Heckler v. Community Health Serv. of Crawford County, Inc., 467 U.S. 51, 59, 104 S.Ct. 2218, 2223, 81 L.Ed.2d 42 (1984). Parties attempting to estop another private party must establish that they relied to their detriment on their adversary's misrepresentation and that such reliance was reasonable because they neither knew nor should have known the adversary's conduct was misleading. Id.; U.S. v. Asmar, 827 F.2d 907, 912 (3d Cir.1987). The Tax Court has set forth the essential elements of estoppel:
1) a false representation or wrongful misleading silence; 2) an error in a statement of fact and not in an opinion or statement of law; 3) person claiming the benefits of estoppel must be ignorant of the true facts; and 4) person claiming estoppel must be adversely affected by the acts or statements of the person against whom estoppel is claimed.
Estate of Emerson v. Commissioner, 67 T.C. 612, 617-618, 1977 WL 3636 (1977).
This court is among the majority of circuits recognizing estoppel as an equitable defense against government claims, but in such a context we impose an additional burden on claimants to establish some "affirmative misconduct on the part of the government officials." Asmar, 827 F.2d at 911 n. 4, 912; see also Kurz v. Philadelphia Elec. Co., 96 F.3d 1544 (3d Cir.1996). The additional element reflects the need to balance both the public interest in ensuring government can enforce the law without fearing estoppel and citizens' interests "in some minimum standard of decency, honor, and reliability in their relations with their Government." Asmar, 827 F.2d at 912 (citing Community Health Serv. of Crawford County v. Califano, 698 F.2d 615 (3d Cir.1983), rev'd on other grounds sub nom. Heckler v. Community Health Serv. of Crawford County, 467 U.S. 51, 104 S.Ct. 2218, 81 L.Ed.2d 42 (1984)). See also United States v. St. John's Gen. Hosp., 875 F.2d 1064, 1069 (3d Cir.1989).
In Heckler v. Community Health Serv. of Crawford County, 467 U.S. 51, 104 S.Ct. 2218, 81 L.Ed.2d 42 (1984), *fn2 the Supreme Court reversed this court's holdings on the reliance and detriment elements, but left undisturbed our analysis and conclusions regarding the existence ...