Is the IRS Bound to What it Says? A Case Where the IRS Cannot “Eat Its Cake and Have it Too.”

In re Anderson, 650 B.R. 510 (Bkrtcy. W.D. Tenn. 2023), is an interesting case because the court concluded that the debtor’s taxes were dischargeable in bankruptcy, and then several years later, the IRS came back and said that the taxes were not dischargeable. The debtors argued estoppel, an equitable doctrine, to say that the IRS cannot come back years later and that the taxes are non-dischargeable when the IRS had previously taken the opposite position. The court ruled in the debtor’s favor.

While it is difficult to estop the government (argue that the IRS is bound by its oral or written statements), this case presents a unique fact pattern where estoppel actually worked. That being said, if the IRS issues a notice with a deadline to respond, taxpayers generally can rely upon that deadline, even if the IRS calculates it incorrectly.

Issue:

Whether the IRS is equitably estopped from asserting that the taxes are nondischargeable by virtue of its agreement to subordinate its claim to the Chapter 7 trustee and its acceptance of the settlement proceeds from litigation.

Facts:

In 2001, Mr. Anderson’s accountants approached him with a proposal for a tax shelter to reduce his tax liability.

Mr. Anderson met with representatives of BDO Seidman, LLP, who solicited Mr. Anderson to invest in a tax strategy based on distressed foreign debt instruments.

The Andersons entered into two transactions — one in 2001 and the other in 2002. In 2005, the IRS initiated an audit of the Andersons’ tax returns and eventually disallowed the transactions as illegitimate. The Tax Court, in 2013, eventually entered an agreed decision which sustained the IRS’s adjustments for tax year 2001.

On October 9, 2013, the Andersons sued BDO Seidman, LLP, among others, alleging that the Andersons were defrauded into investing in the distressed debt tax shelter.

On December 22, 2014, the IRS filed a tax lien against the Andersons.

Soon thereafter and while the BDO litigation was pending, the Andersons commenced their bankruptcy case under Chapter 7 of the Bankruptcy Code on February 23, 2015.

Upon commencement of the bankruptcy case, the BDO litigation became property of the bankruptcy estate and the Chapter 7 trustee stepped into the Andersons’ shoes in that litigation.

On July 2, 2015, the IRS filed its proof of claim in the amount of $18,067,986.87, and the IRS agreed to subordinate its secured claim to the Chapter 7 administrative expense creditors on November 13, 2015.

The IRS Bankruptcy Specialist, Ms. White, noted in her log that “Tax periods 2001, 2002, 2003 and 2004 are all considered dischargeable.” Two months after entry of the discharge order, on August 11, 2015, Ms. White sent a letter acknowledging the discharge.

The Andersons heard nothing from the IRS for the next five and a half years. The Chapter 7 trustee entered into a series of settlements with all defendants in the BDO litigation.

The IRS was the sole prepetition creditor who benefitted from the BDO litigation, and the IRS did not object to any of the settlements.

After paying the administrative expenses of the BDO litigation, the IRS was paid $3,678,641.20.

After the bankruptcy estate received the final settlement payment, at some point “before February of 2021,” counsel for the IRS contacted the Andersons’ bankruptcy counsel in “an attempt to resolve matters without the need for litigation.

The Andersons initiated this adversary proceeding seeking a declaratory judgment that the remainder of the tax debt was discharged in their Chapter 7 bankruptcy case by the order of discharge entered on June 7, 2015, and that the IRS is equitably estopped from asserting that the taxes are nondischargeable by virtue of its agreement to subordinate its claim to the Chapter 7 trustee and its acceptance of the settlement proceeds from the BDO litigation.

Holding:

The Andersons are entitled to summary judgment as to quasi-estoppel.

Quasi-estoppel describes a situation in which an individual is not permitted to ‘blow both hot and cold,’ taking a position inconsistent with prior conduct, if this would injure another, regardless of whether that person actually relied thereon.