5.3.a Default Judgment

• Jurisdiction: United States

a. Equitable estoppel against IRS

The doctrine of equitable estoppel, in a nutshell, is "... conduct of one person inconsistent with a position later adopted by him which is prejudicial to the rights of another who detrimentally relied upon such prior conduct." In re McKenzie, 225 B.R. 377 (N.D. Ohio 1998); Heckler v. Community Health Services of Crawford County, 467 U.S. 51, 104 S.Ct. 2218 (1984).

The doctrine of equitable estoppel may be employed against the taxing entity in appropriate circumstances. "It is well settled that the doctrine of equitable estoppel, in proper circumstances, and with appropriate caution, may be invoked against the United States in cases involving internal revenue taxation." Simmons v. United States, 308 F.2d 938 (5th Cir. 1962); Fredericks v. Commissioner, 126 F.3d 433 (3d Cir. 1997).

In Heckler the court said:

Not every form of official misinformation will be considered sufficient to estop the government ... Yet some forms of erroneous advice are so closely connected to the basic fairness of the administrative decision making process that the government may be estopped from disavowing the misstatement.

Heckler, supra.

A number of courts have estopped the IRS in certain situations within a bankruptcy context. However, in order to establish estoppel against the government the courts have typically raised a fairly high bar over which the taxpayer is expected to leap.

The court in Hollenbeck v. IRS, 166 B.R. 291 (Bankr. S.D. Tex 1993) held the IRS equitably estopped from asserting that the 240 days had not expired as to an otherwise dischargeable tax, on the basis that the IRS had affirmatively misrepresented to the taxpayer the date when certain taxes would be assessed, and the taxpayer justifiably relied on such misrepresentation.

Held, without using the term equitable estoppel, debtor was not liable for interest on a tax claim due to ambiguous terms of an IRS writing.

The cover letter sent him [debtor] with the form 872-A states that he should sign it if he was interested in "saving the further accrued interest on any deficiencies which may be determined." It would be inequitable to hold the tax nondischargeable because the debtor signed the 872-A without holding the IRS to the entirely reasonable (although probably unintended) interpretation that signing the 872-A would stop further accrual of interest.

In re Crose, 1995 WL 373067 (Bankr.N.D.Cal.).

Held, in In re McKenzie the IRS was equitably estopped from requiring the debtor to produce copies of tax returns to prove he had filed the originals; three years after debtor's bankruptcy discharge the IRS asserted that certain prepetition taxes were not discharged because of the debtor's failure to file returns. The debtor alleged he could not produce copies of returns because the IRS seized the original tax returns, along with his tax records, several years before the bankruptcy in the course of a criminal investigation, and that the records had never been returned. In re McKenzie, 225 B.R. 377 (N.D. Ohio 1998). The key evidence introduced by the IRS was the tax transcripts showing no evidence of a taxpayer's return, but did show substitutes for return filed by the IRS. The court found that there was credible evidence sufficient to deny the IRS motion for summary judgment, and grant the debtor's motion for summary judgment, that the debtor had detrimentally relied on the bankruptcy discharge. In that case, the IRS did not notify the debtor of its position that the taxes had not been discharged until approximately three years after the bankruptcy.

Held, in In re Burford, the IRS was equitably estopped from trying to collect, after the completion of a Chapter 11 plan, interest ostensibly accrued on priority taxes during a Chapter 11 plan, on the basis that the plan provided for full payment of the "debt" owed to the IRS together with 10 percent on the...