Opinion ID: 746869
Heading Depth: 1
Heading Rank: 6

Heading: detriment

Text: 73 To analyze the nature of a private party's detrimental change in position, we must identify the manner in which reliance on the Government's misconduct has caused the private citizen to change his position for the worse. Crawford County, 467 U.S. at 61, 104 S.Ct. at 2224. Fredericks argues that he suffered a substantial economic detriment by relying on the IRS' misrepresentations. He reasonably relied on the third Form 872 and reasonably believed that the statute of limitations expired on June 30, 1984. he relied on the IRS' misrepresentations that there was no Form 872-A indefinite extension of the statute of limitations and, to his detriment, did not terminate that form. Fredericks permanently lost his right to terminate the Form 872-A and he lost the benefit of the statute of limitations in the third Form 872. Moreover, he was penalized by the IRS' application of an enhanced rate of interest that continues to be compounded daily. This interest accrued while the IRS waited eight years after the June 30, 1984 statute of limitations expired to assess a deficiency. 74 To understand the nature of the detriment Fredericks suffered, we must consider the interest rate charged on his underpayment. Section 6601 of the Internal Revenue Code (26 U.S.C.) provides rules for the accrual of interest on tax underpayments. Section 6601(a) provides that interest on underpayments accrues at a rate established under § 6621, and continues to accrue until the taxpayer pays the overdue amount. Appendix A illustrates the underpayment rates that have been in effect under § 6621 since June 30, 1984. 75 On January 1, 1985, six months after Fredericks reasonably believed that the statute of limitations had expired, the government began to calculate interest on Fredericks' liability at an even higher rate. Section 6621(c) provided an increased rate for substantial underpayments attributable to tax motivated transactions. See Deficit Reduction Act of 1984, Pub.L. No. 98-369, § 144, 98 Stat. 682 (1984) (effective with respect to interest accruing after December 31, 1984), repealed by Omnibus Budget Reconciliation Act of 1989, Pub.L. No. 101-239, § 7721, 103 Stat. 2106 (1989) (effective for returns the due date for which is after December 31, 1989). 76 The Tax Court's order in this case stated that Fredericks' liability is a substantial underpayment attributable to tax-motivated transactions, for purposes of computing the interest payable with respect to such amount, pursuant to I.R.C. § 6621(c). Tax Court Order dated August 8, 1996. The increased rate under § 6621(c) is 120% of the ordinary underpayment rate. This interest is compounded daily pursuant to § 6621(a). Appendix B shows the penalty-enhanced interest rates applicable after December 31, 1984. 77 The detriment Fredericks suffered becomes readily apparent by comparing the penalty-enhanced rates to those he could have earned in savings accounts, certificates of deposit, treasury securities or top-rated corporate bonds. See Appendix C. Concededly, Fredericks retained and could have earned interest on $28,361 that he owed to the IRS, but even in a best-case scenario he could not have earned the amount of interest the government now seeks to collect. This fact is dramatically illustrated by comparing the penalty-enhanced interest charged by the government, as set forth in Appendix B, with the market interest rates shown in Appendix C. This penalty--this economic detriment--is more than a mere technicality because the amount of interest involved here greatly exceeds the underlying liability. 78 At oral argument, Fredericks stated: from direct numbers that the government has given me ... the interest is about $158,000. This figure is more than five times the underlying tax deficiency of $28,361. Counsel for the IRS responded to a question about the amount of interest the government charged Fredericks by stating: 79 I don't dispute Mr. Fredericks' estimate that it might be a hundred and fifty thousand dollars in this case. I don't know for certain, but I would not dispute that. 80 The government relies on the reasoning in Crawford County and argues that Fredericks obtained a benefit, rather than a detriment, by the IRS' delay. The government contends that he was allowed to retain money to which he was not entitled, money owed to the IRS in 1978. In our view, the case at bar stands in stark contrast with Crawford County. 81 In Crawford County, the Court found no detriment because the private party had suffered only the inability to retain money that it never should have [kept] in the first place. 467 U.S. at 61, 104 S.Ct. at 2225. Fredericks' detriment arises not from his inability to retain the $28,361, which he admittedly should have paid the government in 1978. His detriment results from the loss of his right to terminate the Form 872-A and the high rate of interest he is being charged, interest that accrued while Fredericks reasonably believed assessments were barred by the statute of limitations. Fredericks was not merely ... induced to do something which could be corrected later. Id. at 62, 104 S.Ct. at 2225. He was induced to forfeit his right to terminate the Form 872-A consent agreement. The IRS' subsequent action was not simply a correction of prior misrepresentations, it was a penalty compounded daily as the IRS continued its 12-year investigation well beyond the statute of limitations for any assessments. We conclude these are sufficient detriments to establish an estoppel defense. 82 As we have observed, courts must consider additional factors when estoppel is asserted against the government and one such factor is whether the government's action permanently deprived the party claiming estoppel of a benefit or right to which it was entitled. For example, in Payne v. Block, 714 F.2d 1510, 1517-1518 (11th Cir.1983), the court effectively estopped the government from closing a loan application period because government agents failed to advertise the loans. Estoppel was appropriate in part because the loan applicants would forever lose their opportunity to apply unless the government was estopped from closing the application period. Id. 714 F.2d at 1518; accord Vestal v. Commissioner, 152 F.2d 132, 135 (D.C.Cir.1945) (estopping IRS from changing its characterization of taxable entity in part because the statute of limitations had expired; restoration to the taxpayers of the taxes originally collected being impossible, estoppel was appropriate). 83 The court in Payne distinguished Schweiker v. Hansen, 450 U.S. 785, 101 S.Ct. 1468, 67 L.Ed.2d 685 (1981), a case in which the Court refused to estop the Secretary of Health and Human Services. In Schweiker, a government agent erroneously told a Social Security claimant she was ineligible for benefits. Relying on this false information, the claimant did not file an application until 10 or 11 months later, after discovering she was indeed eligible. The claimant asserted equitable estoppel against the government, arguing that she should receive retroactive benefits for the time during which she relied on the employee's misrepresentation. The Court rejected her argument and noted that the claimant suffered no permanent loss of a legal right because she could, and did, submit an application at a later date. Id. at 789, 101 S.Ct. at 1471. 84 Like the loan applicants in Payne, and unlike the claimant in Schweiker, Fredericks suffered a permanent loss of a legal right. He forever lost his right to terminate the Form 872-A, the only means through which the government could in 1992 assess his 1977 tax return. He was irreversibly deprived of the benefit of the three-year statute of limitations enacted by Congress, the benefit of the terms of the contracts he entered with the IRS to extend that period, and of any opportunity to terminate the revocable 872-A that the IRS misrepresented as lost. The loss of this right created a tangible economic detriment in the form of penalty-enhanced interest rates. Accordingly, we find that Fredericks has satisfied the detriment element of an equitable estoppel claim against the government.