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Effective Tax Administration and Equitable Estoppel as Defenses to Assessment of Trust Fund Recovery Penalty

Posted on Oct. 4, 2021

I am confused by the court’s introduction of the case which indicates that the IRS brought suit to hold Stanley Craft liable as a responsible officer.  Usually, the IRS assesses the Trust Fund Recovery Penalty (TFRP) and the responsible person brings a refund suit against the United States seeking to recover any amount paid and to obtain a determination they do not have the requisite responsibility.  Based on the timing of the assessment, I think that the IRS brought this suit to reduce its assessment to judgment, which it does when the normal statute of limitations is running short but it thinks that collection potential still exists.  I have written about this process before here.  After filing suit, the IRS moved for summary judgment – a move that also suggests this suit sought to reduce the assessment to judgment.

Despite my lack of understanding regarding how the suit began because I have not gone to the source documents, the case of United States v. Craft, No. 5:19-cv-00287 (E.D.N.C. 2021) clearly results in a finding that Mr. Craft is a responsible officer.  He makes some unusual arguments in his effort to avoid the imposition of the TFRP and those arguments deserve some discussion.

Mr. Craft, a software engineer, and his wife started a company to develop automated test equipment for circuit board manufacturers. The company never grew very large in its corporate structure, it had no board of directors, and Mr. Craft served as the president. At peak, it had about 17 employees and $1.3 million in annual revenue. Mr. Craft did most everything at the business including “sales, some programming, leases, insurance, accounts payable, and accounts receivable.” He had final authority over contracts and maintained the bank accounts. In short, he had just about every decision making authority he would need to qualify as the responsible person for the business.

He primarily prepared the employment tax returns in house and he signed them. During the years 2002-2005 he knew that the company did not pay these taxes. The company formally dissolved in 2011 with the taxes still outstanding. Eventually, the IRS assessed the TFRP against him and began the collection process. At the time of this suit, he owed over $1.1 million.

The court goes through the elements necessary to establish a person as a responsible officer and has no difficulty finding that he fits all bases for imposing this liability. Mr. Craft himself does not seem to put up much fight, if any, regarding his position as a responsible officer; however, his defenses to granting the summary judgment requested by the Service do deserve some attention.

First, he argues that granting summary judgment would create an economic hardship for him.  A $1.1 million liability would create an economic hardship for almost anyone.  What surprises me about this argument is not that the granting of the summary judgment would create a hardship but that he raises it in the context of litigation rather than in the context of an offer in compromise.  In 1998 Congress created Effective Tax Administration offers in compromise in IRC 7122.  We have discussed them previously here to highlight a rare litigation of such an offer.

It’s possible to seek to compromise with the IRS or DOJ Tax Division during litigation by proposing an offer in compromise as discussed here.  DOJ does have a more liberal view of compromising than Chief Counsel as discussed here.  Mr. Craft, however, seeks not to obtain a compromise through the traditional pathway or through settlement but rather to have the district court determine that it should not grant a judgment to the IRS because doing so would promote effective tax administration.

The court explains that this is not its role. Mr. Craft should seek to work that out in a settlement with the government and not seek a court order on this point:

The IRS has authority to compromise civil tax liabilities to promote effective tax administration. See [D.E. 30] 4; 26 U.S.C. § 7122(a); 26 C.F.R. § 301.7122-1(b)(3). Such compromises, however, are appropriate “only prior to  — not after — their transfer to the” Department of Justice (“DOJ”). Johnson v. United States, 610 F. Supp. 2d 491, 498 (D. Md. 2009); see 26 U.S.C. § 7122(a) (authorizing compromises 7122(a)(authorizing compromises “prior to reference to the [DOJ] for prosecution or defense”); Brooks v. United States, 833 F.2d 1136, 1145-46 (4th Cir. 1987). Once the IRS refers a case to the DOJ, the Attorney General has authority to compromise tax liability. See 26 U.S.C. § 7122(a). The DOJ has not compromised this case, apparently believing that a compromise would not promote effective tax administration. See [D.E. 31] 1-2. Even assuming that grounds exist warranting a compromise in light of the financial burden summary judgment may impose on Craft, this court could not order the DOJ to compromise this case because “[s]ection 7122 is the exclusive method by which tax cases may be compromised.” Brooks, 833 F.2d at 1145.

The argument misconstrues the role of the court which is not to compromise but to decide.  Even if the government obtains the order it seeks here, it still has the ability to compromise.  All is not lost for Mr. Craft, but he is wasting time trying to get the court to do something that must come from his opposing party.

Next, he argues equitable estoppel.  Essentially, he argues that the IRS Revenue Officer (RO) who visited him many years prior had the authority to make a payment arrangement and he detrimentally relied on the RO to make such a payment arrangement which, had it occurred, could have taken care of the case.  (He fails to note that the creation of a payment agreement must be accompanied by actual payments.)  The court notes that this is a very difficult argument for someone suing or defending against the government to make:

“Equitable estoppel against the government is strongly disfavored.” Volvo Trucks of N. Am., Inc. v. United States, 367 F.3d 204, 211-12 (4th Cir. 2004); see Greenbelt Ventures, LLC v. Wash. Metro. Area Transit Auth., 481 F. App’x. 833, 838 (4th Cir. 2012) (per curiam) (unpublished); Miller v. United States, No. 2:11-cv-03026-DCN, 2012 WL 6674492, at *4 (D.S.C. Dec. 21, 2012) (unpublished); Nagy v. United States, No. 2:08-cv-2555-DCN, 2009 WL 5194996, at *4 n.6 (D.S.C. Dec. 22, 2009) (unpublished), aff’d, 519 F. App’x 137 (4th Cir. 2013) (per curiam) (unpublished). “If equitable estoppel ever applies to prevent the government from enforcing its duly enacted laws, it would only apply in extremely rare circumstances.” Volvo, 367 F.3d at 211-12; see Taylor v. United States, 89 F. Supp. 3d 766, 777 n.5 (E.D.N.C. 2014). Those rare circumstances may exist, “if ever,” because of “affirmative misconduct by government agents.” Dawkins v. Witt, 318 F.3d 606, 611 (4th Cir. 2003).

For equitable estoppel to apply, Craft must demonstrate that: “(1) the party to be estopped knew the true facts; (2) the party to be estopped intended for his conduct to be acted upon or acted in such a way that the party asserting estoppel had a right to believe that it was intended; (3) the party claiming estoppel was ignorant of the true facts; and (4) the misconduct was relied upon to the detriment of the parties seeking estoppel.” Id. at 611 n.6 (quotation omitted); see Miller, 2012 WL 6674492, at *4.

The Craft case does not cover new ground for either the TFRP liability, ETA offers or equitable estoppel; however, it does show that the defense to a suit to reduce a liability to judgment must be rooted in arguments that go to the correctness of the liability rather than to wished-for compromises or payment agreements.  By making arguments that could not win, he makes it easy for the court to grant summary judgment against him.  He will now owe the TFRP for a very long time.  Of course, the true measure of the government’s victory here lies in whether it can collect anything.  It appears not to have had too much success in the first 10 years of the liability’s existence.  Nothing in the case provided a clue whether more time will bring future success.

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