IRS ESTOPPED FROM ASSERTING OPEN-ENDED EXTENSION OF THE STATUTE OF LIMITATIONS

Mr. and Mrs. Barry Fredericks filed their 1977 tax return in a timely fashion in 1978. In 1981, the IRS sent the Fredericks a Form 872-A, which they signed and returned to the IRS. A Form 872-A is an open-ended extension of the statute of limitations, which is terminated only by the taxpayer's filing a Form 872-T or the IRS's issuing a notice of deficiency.

Also, in 1981, the IRS began auditing the Fredericks' return. As the three-year statute of limitations was about to run, the examining agent requested that the Fredericks execute a Form 872, which extends the statute of limitations for a one-year period. Mr. Fredericks responded that he had already granted an extension on a Form 872-A. The agent indicated none was in the file and that, unless the taxpayer had received an acknowledgement of the IRS' receipt of the Form 872, it must have been lost in the mail. Fredericks signed the form 872 in 1981 and two more in 1982 and 1983.

Mr. Fredericks had invested in a tax shelter, which itself had been under audit until 1988. The IRS waited until July 1992 to send out a notice of deficiency, that is, a 90-day letter, to the taxpayers. The taxpayers responded that the assessment was barred by the statute of limitations, which had run in 1984. The IRS responded that sometime after the 1983 extension was filed, it had located the Form 872-A, the indefinite extension. Therefore, the IRS argued, the assessment was not time-barred. The U.S. Tax Court agreed with the IRS and upheld the assessment of $28,361 in tax and nearly $158,000 in interest.

The Fredericks appealed and the Appellate Court for the Third Circuit overruled the Tax Court and found for the taxpayers. The appellate court held that the government was equitably estopped from asserting its rights under the Form 872-A.

To assert a claim of equitable estoppel, a party must show that he or she relied to his or her detriment on a misrepresentation by the other party. When asserted against the government, the courts also require the asserting party to show that there had been affirmative misconduct by the government. Other considerations that come into play when asserting equitable estoppel against the government are--

* the impact of the estoppel on the public fisc,

* whether the government agents who made the misrepresentation or error were authorized to act as they did,

* whether the governmental misconduct involved a question of law or fact,

* whether the government benefited from its misrepresentation, and

* the existence of irreversible detrimental reliance by the party claiming estoppel.

In the facts of the Fredericks case, the court found all these elements favored the taxpayers' assertion of estoppel. Regarding the impact on the public fisc, the court noted that the impact of granting the Fredericks relief was actually anticipated by Congress when it enacted the three-year statute of limitations. *

Source: Fredricks v. Commissioner, __ F.3d __ No. 96-7748 (3d Cir June 16, 1997).