Shafmaster v. United States

• Decision Date: 11 February 2013
• Docket Number: No. 12–1726.,12–1726.
• Citation: 707 F.3d 130
• Parties: Jonathan SHAFMASTER and Carol Shafmaster, Plaintiffs, Appellants, v. UNITED STATES, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

707 F.3d 130

Jonathan SHAFMASTER and Carol Shafmaster, Plaintiffs, Appellants,

v.UNITED STATES, Defendant, Appellee.

No. 12–1726.

United States Court of Appeals,First Circuit.

Feb. 11, 2013.

James E. Higgins for appellants.

Joan I. Oppenheimer, Tax Division, Department of Justice, with whom Kathryn Keneally, Assistant Attorney General, Ivan C. Dale, Tax Division, Department of Justice, and John P. Kacavas, United States Attorney, were on brief, for appellee.

Before LYNCH, Chief Judge, SELYA and HOWARD, Circuit Judges.

LYNCH, Chief Judge.

Plaintiffs Jonathan and Carol Shafmaster, once a married couple and now divorced, appeal from the United States District Court for the District of New Hampshire's grant of summary judgment to the United States on the plaintiffs' claim for refund of a failure-to-pay penalty imposed on them by the Internal Revenue Service (IRS).

The Shafmasters argue that there was at least a dispute of material fact as to whether the IRS was equitably estopped from assessing this fee, whether they had reasonable cause not to pay the relevant taxes within the time provided by statute, and whether the IRS had ever provided them with proper notice and demand for payment. We affirm, and reject the attempt to get us to recognize the doctrine of equitable estoppel against the IRS by tax-owing taxpayers who do not come close to satisfying equitable principles.

I.

A. Factual Background

This dispute about the payment of penalties arises out of the Shafmasters' underlying joint personal income tax liability for the tax year 1994. The IRS audited the Shafmasters for 1994, as well as for tax years 1993 and 1995–1998, eventually calculating deficiencies and penalties totaling $14,367,234. ¹ In 1998 and 1999, the Shafmasters brought petitions in Tax Court challenging the adjustments for 1993, 1994, and 1995. The IRS referred those years to its office in Portsmouth, New Hampshire, where the case was assigned to an agent named Robert Hamilton.

On March 19, 2001, the Shafmasters and the IRS entered into three limited stipulations of settlement for the years 1993–1995, which were entered by the Tax Court on April 25, 2001. The Tax Court order for 1994 stated that the Shafmasters owed a penalty for failing to timely file a return, but it was silent on the separate penalty provision that would have addressed whether the Shafmasters would owe a penalty if they did not pay the required amounts within the prescribed statutory period of time after notice and demand for payment (a “failure-to-pay” penalty, see26 U.S.C. § 6651(a)(3)).

Meanwhile, the Shafmasters had also filed an administrative appeal relating to the adjustments for tax years 1996, 1997, and 1998. Those years were also referred to Hamilton and had not yet been resolved at the time of the 2001 stipulations. The Shafmasters took the position that net operating loss carrybacks from 1996–1998 would offset much, if not all, of their 1993 and 1994 tax liabilities.

In the summer and fall of 2001, the Shafmasters' attorney had discussions with Hamilton and another IRS agent about obtaining a stay of collection. This stay would suppress the accrual of a failure-to-pay penalty for six months. In the district court and in this appeal, the Shafmasters have represented that these discussions also included an offer by Hamilton to waive the failure-to-pay penalty permanently; the government denies that the evidence supports the claim that Hamilton said any such thing or that he had any authority to do so. On September 6, 2001, the parties agreed to a six-month stay of collection.

On September 10, 2001, the IRS created a Form 3552 for the Shafmasters' account, which included a “Statutory Notice of Balance Due” reflecting the 1994 tax liability. The parties dispute whether this form ever reached the taxpayers or whether it was re-routed to the Boston IRS appeals office. The Shafmasters argue that, in any event, the agreed-upon six-month stay of collection should have prevented the issuance of any Notice of Balance Due.

The Shafmasters and Hamilton continued to negotiate the assessments for 1996–1998 during the rest of 2001 and 2002. On October 7, 2002, the IRS sent the Shafmasters a Notice of Tax Lien based on the 1993 and 1994 taxes. The lien notice stated, in relevant part: “[W]e are giving a notice that taxes (including interest and penalties) have been assessed against the following-named taxpayer. We have made a demand for payment of this liability, but it remains unpaid.” It also stated that the “IRS will continue to charge penalty and interest until you satisfy the amount you owe.” The Shafmasters did not make any payments in response to this notice. They say they did not because they believed that the amounts owed for 1993 and 1994 would be reduced due to the carryback issue and thus that the amount reflected in the lien notice was overstated.

The Shafmasters' amended returns for 1993 and 1994 were processed in December 2003, at which point the IRS determined that the 1994 liability should be reduced by $177,769 due to the carryback losses. The scope of that determination was reduced to writing, and in December 2003 and January 2004, the Shafmasters and Kathleen Brown, a supervising agent in the Portsmouth IRS office, executed a Form 870–AD that reflected the downward carryback loss adjustments to tax years 1992, 1993, and 1994. The Form 870–AD is, however, notably silent as to the imposition or waiver of any failure-to-pay penalty.

In August 2004, Jonathan Shafmaster signed an installment payment plan agreement pursuant to the Form 870–AD for the 1993 and 1994 tax liabilities, which at that point totaled over $2.6 million. Significantly, the installment plan document, Form 433–D, provided that the taxpayers “agree to pay the federal taxes shown above, plus penalties and interest provided by law” (emphasis omitted).

In March 2005, after the Shafmasters objected to certain penalties that appeared on their IRS account transcript, Brown sent Jonathan Shafmaster a letter in which she agreed to abate a failure-to-pay penalty that had been assessed on the 1993 taxes, concluding that it had been a “calculation error.” Brown's letter went on to state explicitly: “However, the failure to pay tax penalty will continue to accrue on any unpaid tax balance until either the penalty reaches 25% or the account is full [sic] paid” (emphasis omitted). ²

On April 17, 2006, the IRS assessed the failure-to-pay penalty at issue in this case, in the amount of $261,189.50. According to the IRS's calculations, the maximum statutory penalty for 1994 had accrued by that date. That same day, the IRS sent the Shafmasters an updated Statutory Notice of Balance Due.

The Shafmasters completed payment of their agreed 1994 tax liability under the payment plan on November 16, 2007. On September 18, 2008, they filed an administrative claim for, inter alia, refund of the 1994 failure-to-pay penalty and the interest they had paid on that penalty. The IRS denied the claim on November 28, 2008.

B. District Court Proceedings

The Shafmasters filed suit in the district court on July 15, 2009. They argued that Hamilton had orally agreed that the IRS would permanently waive any failure-to-pay penalties, and that this agreement was implicitly incorporated into the Tax Court stipulations, the Form 870–AD, and the installment plan. They contended that this agreement equitably estopped the IRS from assessing the penalty. They further argued that, under the penalty statute, they had “reasonable cause” to not make timely payment, see26 U.S.C. § 6651(a)(3), because they had relied on the alleged agreement.³

The government moved for summary judgment, arguing that in the absence of a written agreement to waive the penalty, made using the statutory closing mechanisms of 26 U.S.C. §§ 7121–7122, the IRS could not be held to any alleged promise. In response to this motion, the Shafmasters introduced an argument not made in their complaint: that they had never received proper notice and demand to trigger accrual of the penalty.

On September 30, 2011, the district court granted the government summary judgment on the equitable estoppel and reasonable cause claims. It held that because none of the statements cited by the Shafmasters conformed to the statutory closing procedures, the Shafmasters could not have reasonably relied on those statements, thus negating an essential element of an estoppel claim. It also rejected the “reasonable cause” argument as merely an “attempt to repackage” the equitable estoppel argument. However, the district court concluded that there was a genuine issue of material fact with regard to the notice and demand question, because the Shafmasters had produced a document from the Boston IRS appeals office indicating that notice may not have been delivered to the Shafmasters' last known address, as required by statute.

The government again moved for summary judgment on November 23, 2011, producing another part of the Form 3552 that it argued could show proper notice and demand. The district court denied this motion, finding that the document did not explicitly demand payment and did not show that it was sent to the Shafmasters. But the court noted in its memorandum denying the motion that the Notice of Tax Lien dated October 7, 2002, which was undisputedly sent to the Shafmasters, “may well satisfy the notice and demand requirement,” if the government could make a developed argument on that point.

Accordingly, the government filed a third summary judgment motion on February 16, 2012, arguing that the Notice of Tax Lien provided satisfactory notice and demand. On May 7, 2012, the district court allowed this motion, resulting in judgment for the government on all claims. The Shafmasters timely appealed.

II.

Our review of the district court's grant of summary judgment is de novo, “drawing all reasonable inferences in favor of the non-moving party while ignoring ‘conclusory...