Petition for Writ of Certiorari — Warshay v. Commissioner

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Supreme Court. U.S.

PiLED

No 941839 may _5 1995

OFFICE OF THE CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1994

HAROLD WARSHAY and DORIS WARSHAY.

Petitioners,

VS.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

STUART A. JACKSON

Counsel of Record

THOMAS RE & PARTNERS

Attorneys for Petitioners

445 Park Avenue

New York, New York 10022

(212) 752-7555

a en “~

QUESTIONS PRESENTED

I. Did petitioners meet their burden

of proof on the issue of whether high

ranking officials of the Internal Revenue

Service orally promised them immunity

from civil prosecution for certain tax

liabilities, thereby precluding entry of

judgment against petitioners?

II. Does an oral promise by high rank-

ing officials of the Internal Revenue

Service not to prosecute petitioners for

certain tax liabilities equitably estop

the Internal Revenue Service from so

prosecuting?

TABLE OF CONTENTS

Page

Questions Presented ..... . i

Tempte@ G2 COmCONnSTB <«. s+ +s « * il

Table of Authorities ...... iil

Gpanmiome Below « . « © «= = © «= s 2

Jurisdictional Statement... . 2

Statutes Involved 3

Statement of the Case .... . 3

AQGUMONT . «. «© 2 © © © © we wt 16

) THE TAX COURT WRONGLY

CONCLUDED THAT HAROLD WARSHAY

FAILED TO MEET THE BURDEN OF

PROOF THAT HE WAS PROMISED

IMMUNITY FROM CIVIL TAX LIA-

Ee a ee 18

II. THE COMMISSIONER IS EQ-

UITABLY ESTOPPED FROM PROSE-

CUTING THE WARSHAYS FOR THE

TAX LIABILITIES HERE AT

ISSUE ee ae ae wk ek se Ue 27

RE ee a 34

i (i « « « «¢ + « ¢ © & @ 2 Al

no «¢ © « *# «© «+ # «© © @ « A4

iii

TABLE OF AUTHORITIES

Cases

Botany Worsted Mills v. United

States, 278 U.S. 282 (1929)

Brandt v. Hickel, 427 F.2d 53

(9th Cir. 1970)

Galucci v. Commissioner,

T.C. Memo. 1992-435

Lignos v. United States,

439 F.2d 1369 (2d Cir. 1970)

Office of Personnel

Management v. Richmond,

496 U.S. 414 (1990)

Rudisill v. Commissioner,

T.C. Memo. 1992-388

Schuster v. Commissioner,

312 F.2d 311 (9th Cir. 1962)

Schweiker v. Hansen,

450 U.S. 785 (1981)

Simmons v. United States,

308 F.2d 938 (5th Cir. 1962)

Tonkonogy v. United States,

417 F. Supp. 78 (S.D.N.Y. 1976)

Waqner v. Commissioner,

T.C. Memo. 1990-443

Statutes

26 U.8.C. § 712i

Page

4G, a7

16, 28

ai,

29,3

26 U.S.C. § 7459(b)

Oe Oe, 6 £56613 «st we ew 2

Other Authorities

Lynn & Gerson, Quasi-Estoppel

and Abuse of Discretion as Ap-

plied Against the United States

in Federal Tax Controversies,

19 Tax L. Rev. 487 (1964) ... . 29

No.

In the

SUPREME COURT OF THE UNITED STATES

October Term, 1994

HAROLD WARSHAY and DORIS WARSHAY,

Petitioners,

- against -

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

Petitioners Harold and Doris Warshay

respectfully pray that a writ of certio-

rari issue to review the judgment of the

United States Court of Appeals for the

Second Circuit entered in this action on

February 7, 1995.

Opinions Below

The oral findings of fact and opinion

and the subsequent Orders and Decision of

the United States Tax Court finding that

petitioners are liable to respondent for

$116,094 in tax deficiencies are unre-

ported and is set forth in Appendix B

hereto. The Order of the Court of Ap-

peals affirming the Tax Court's Decision

is set forth in Appendix A hereto.

Jurisdictional Statement

The Order of the Court of Appeals was

entered on February 7, 1995. This Peti-

tion for Writ of Certiorari was filed

within ninety days of that date. This

Court has jurisdiction pursuant to 28

U.S.C. § 1254(1).

Statutes Involved

This Petition does not directly involve

any constitutional provisions, treaties,

statutes, ordinances or regulations.

Statement of the Case

On or about September 30, 1991, the

Commissioner of Internal Revenue sent

petitioners Harold and Doris Warshay a

notice of deficiency stating that they

owed a total of $116,094.00 in deficien-

cies plus additions to tax for the years

1979 through 1982. The Warshays disa-

greed with this determination, and so on

December 26, 1991 they filed with the

United States Tax Court their petition

for a redetermination of the deficiencies

set forth in the notice. The petition

' The basis for jurisdiction in the

Tax Court was 26 U.S.C. § 7442 and Rule

13 of the Tax Court Rules of Practice and

Procedure.

Gid not contest the technical merits of

the Commissioner's adjustments. It did,

however, assert as a complete defense to

those adjustments that, in exchange for

Harold Warshay's cooperation with an

ongoing criminal investigation of John

Muir & Co., high ranking officials of the

Internal Revenue Service ("IRS") had

Orally promised him that he and his wife

would not be prosecuted for the deficien-

cies set forth in the notice. The Com-

missioner's answer denied that any such

promise was ever made to Mr. Warshay, but

admitted that he had rendered his assis-

tance in connection with the investiga-

tion of John Muir & Co, where Mr. Warshay

was then employed. On September 28,

1993, the parties filed a joint stipula-

tion of facts which provided, inter alia,

that:

12. The only issues in dispute are:

a. Whether oral promises were

made by or on behalf of respondent to

the effect that petitioners would be

entitled to retain the tax benefits

of their investment in AIP,®* and;

b. If such promises were made,

whether respondent should be preclud-

ed from disallowing said tax benefits

in a statutory notice of deficiency.

The Tax Court, the Honorable David Laro

presiding, then conducted a bench trial

of these two issues on that same day.

Mr. Warshay and his witness testified

that high ranking officials of the IRS

had promised him immunity from civil

prosecution, while the Commissioner's

witnesses testified that no such promise

was ever made, or that they could not

remember whether it had been made or not.

* Harold Warshay had claimed deduc-

tions on the basis of his investment in

the AIP (Arbitrage Investment Partner-

ship), a tax shelter sponsored by John

Muir & Co. The Commissioner disallowed

these deductions in his notice of defi-

ciency.

0 eeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeOOeeeEOEEEEEOEOEeEeEeEeEeEeEee

LE Le eee ee a ee ee

On October 6, 1993, Judge Laro rendered

his oral findings of fact and opinion

pursuant to Section 7459(b) of the Inter-

nal Revenue Code and Rule 152 of the Tax

Ccurt Rules of Practice and Procedure.

In his findings of fact, Judge Laro found

that Mr. Warshay assisted the IRS for

approximately four years in its investi-

gation of John Muir & Co. In his opin-

ion, however, Judge Laro stated that Mr.

Warshay had failed to establish the exis-

tence of an oral agreement between him-

self and high officials of the IRS that

would protect the Warshays from civil tax

liability. Judge Laro accordingly sus-

tained the Commissioner's determination

in full.

Because he found that Mr. Warshay had

not proven the existence of an agreement,

Judge Laro did not determine whether such

a promise, if it had been made, would be

binding upon the Commissioner. It is

Significant, however, that Judge Laro

found that Mr. Warshay had established

that he cooperated with the IRS's inves-

tigation and that he suffered detriment,

one of the elements of the equitable

estoppel defense petitioners raised. In

light of this finding of detriment, it is

inexplicable that Judge Laro did not also

find that Mr. Warshay had relied upon the

IRS's promise. No other reason could be

inferred for Mr. Warshay's cooperation --

to the detriment of both his person and

his career -- with the Government's in-

vestigation.

Pursuant to his opinion of October 6,

1993, Judge Laro ordered that the War-

shays were liable for the deficiencies

set forth in the Commissioner's notice of

deficiency. This last order was entered

on December 8, 1993. The Warshays ap-

pealed this order to the United States

Court of Appeals for the Second Circuit.

On February 7, 1995, the Court of Appeals

entered its Order affirming Judge Laro's

decision.

The gravamen of the Warshays' petition

for a writ of certiorari is that Judge

Laro was clearly wrong to credit the

testimony of the Commissioners' witness-

es, who were unable to remember virtually

anything about Mr. Warshay's extensive

cooperation with the IRS investigation of

John Muir & Co., that there was no prom-

ise to immunize the Warshays from civil

tax liability. These witnesses' inexpli-

cable failure to recall the material

facts relating to a major investigation

by the IRS, the Securities and Exchange

Commission ("SEC") and the United States

Attorney for the Southern District of New

York should have led Judge Laro to dis-

count their testimony. Mr. Warshay and

his witness, in contrast, clearly re-

called their participation in the John

Muir & Co. investigation, and should have

been believed when they testified that

the Warshays were promised civil tax

immunity. In affirming the Tax Court's

erroneous decision, the Court of Appeals

also committed reversible error.

That there was an investigation of John

Muir & Co., despite the Commissioner's

witnesses' inability to recall it, is not

subject to doubt. Peter Quigley, then an

investigator for the SEC on special as-

Signment to the United States Attorney's

office, testified that he was assigned to

the investigation in 1981, and that Mr.

Warshay, together with Hans Reinisch,

also an employee of John Muir & Co., had

instigated the investigation. Mr. Quig-

ley met with Messrs. Warshay and Reinisch

on at least ten different occasions.

Linda Cassano, then special counsel to

the SEC, confirmed that Messrs. Warshay

and Reinisch provided the government with

information relevant to its investigation

of John Muir & Co. Mark Sirkin, a spe-

Cial agent with the IRS Criminal Investi-

gation Division, testified that the IRS

was involved in the investigation.

On the basis of this and other testi-

mony, Judge Laro expressly stated in his

findings of fact that:

Reinisch contacted the Internal Reve-

nue Service (IRS). Reinisch and War-

shay assisted the SEC and IRS for

approximately four years during which

time the Office of the United States

Attorney also participated in the

investigation.

and that:

At various times [{Warshay]} and Rei-

nisch met with Linda Cassano, Special

Counsel to the SEC; Donald Malawsky,

Deputy Regional Administrator of the

SEC; Peter Quigley, an SEC investiga-

tor; Pamela Chepiga of the United

States Attorney's Office; Mark Sir-

kin, a special agent with the IRS

Criminal Investigation Division;

Daniel Kornblatt, an IRS agent, and

others.

Mr. Warshay stated under oath that, in

addition to the persons cited by Judge

Laro, he also met with Charles H. Bren-

nan, then the IRS District Director of

the Manhattan District, and Raymond Turn-

er, Assistant Regional Commissioner of

Criminal Investigation of the IRS for the

North Atlantic Region. It was at their

first meeting, which Mr. Reinisch also

attended, that Messrs Brennan and Turner

promised Mr. Warshay that no harm whatso-

ever would come to Mr. Warshay if he

assisted them in their investigation of

John Muir & Co., and that he would not be

exposed or lose any of the tax benefits

of his investment in the AIP. Mr. Rein-

isch confirmed that the meeting took

place, and that Mr. Warshay received from

Messrs. Brennan and Turner the assurances

he requested.

There waS a second meeting between

Messrs. Warshay, Reinisch, Brennan and

Turner, and again Messrs. Brennan and

Turner assured Mr. Warshay that "a deal

is a deal" and no harm would come to him

epee

as a result of his cooperation with the

IRS's investigation of John Muir & Co.

They gave him no reason to believe that

they were unauthorized to make the prom-

ises they had made. Mr. Warshay would

not have cooperated with the investiga-

tion if he had thought they were unautho-

rized to offer him immunity from civil

tax liability. Mr. Reinisch also con-

firms that this meeting took place and

that Messrs. Brennan and Turner were

present.

In view of the magnitude of the John

Muir & Co. investigation, and the fact

that Messrs. Reinisch and Warshay insti-

gated and assisted it for four years, it

would be incredible for anyone involved

in that investigation to claim that he

could not recall the crucial role they

played, even ten years after the fact.

Nevertheless, Mr. Brennan testified that

he had never even met Messrs. Reinisch or

Warshay until the day of the hearing on

September 28, 1993. Mr. Turner testified

to the same effect.

Even more incredible, however, is the

fact that none of the Commissioner's wit-

nesses could locate any mention of

Messrs. Warshay's or Reinisch's names in

the IRS files relating to the John Muir &

Co. investigation. Mr. Sirkin, for exam-

ple, testified that he reviewed all of

the IRS files relating to the investiga-

tion, but could find no reference to

Harold Warshay. In fact, his search of

the IRS's computerized files revealed

that there was no record of any documents

whatsoever relating to the John Muir &

Co. investigation. This revelation

proved so embarrassing to the Commission-

er that it stipulated in open court that

"[Tajn examination of the IRS files will

reveal documents relating to the investi-

gation of John Muir & Company." Mr.

Brennan testified that he did not even

bother to inquire whether or not there

was an IRS file relating to the John Muir

& Co. investigation. Mr. Turner conduct-

ed only a perfunctory check by telephone,

and was told that "nobody knew anything

about that case." It boggles the mind

that the IRS, an organization that rou-

tinely tracks every investigation by

computer,* could have permitted all trac-

es of the John Muir & Co. case to vanish

into a black hole.

Yet that case was prosecuted by the

IRS, and it ultimately resulted in the

criminal indictment of Daniel Lanahan, a

principal of John Muir & Co. Mr. War-

shay, however, reaped no reward for his

role in the IRS's success. On the con-

trary, he was subjected to physical dan-

3° mr. Sirkin, for example, testi-

fied that "[a]ny time a particular divi-

sion of the IRS is working on any partic-

ular entity, the computer keeps track of

it and a code is put on there."

ger for which Linda Cassano offered body-

guard protection. After his cooperation

with the investigation became generally

known in the securities industry, he

faced extreme difficulty in finding en-

ployment, and in fact did not find a

Salaried position until 1992. Judge Laro

expressly noted Mr. Warshay's travails

when he noted in his October 6, 1992

opinion that Mr. Warshay had established

detriment.

Under these circumstances, it would be

unconscionable for the IRS now to repudi-

ate the promise its high ranking offi-

Cials made to Mr. Warshay when they need-

ed his assistance. Allowing the IRS to

evade its obligations would have a chill-

ing effect on the willingness of confi-

dential informants to come forward in

connection with any future investigation

by the federal government. It would also

be egregiously unfair to Mr. Warshay.

Argument

This Petition should be granted because

it affords the Court an opportunity to

Clarify previous decisions that have

resulted in conflicting decisions in the

United States Courts of Appeals.

The questions presented for review

herein boil down to the issue of when the

United States government should be equi-

tably estopped from enforcing otherwise

valic statutes or regulations. This

Court has previously recognized that

[t]he language in our decisions has

spawned numerous claims for equitable

estoppel in the lower courts. As

Justice Marshall stated in dissent in

[Schweiker v. Hansen, 450 U.S. 785,

792 (1981)], "{t]he question of when

the Government may be equitably es-

topped has divided the distinguished

panel of the Court of Appeals in this

case, has received inconsistent

treatment from other Courts of Ap-

peals, and has been the subject of

considerable ferment."

Office of Personnel Management v. Rich-

mond, 496 U.S. 414, 422 (1990). The

Richmond Court further noted that "feder-

al courts have continued to accept estop-

pel claims under a variety of rationales

and analyses," and that there is "a good

indication that our approach to these

cases has provided inadequate guidance or

the federal courts and served only to

invite and prolong needless litigation."

Id. at 422-423. The Richmond Court nev-

ertheless decided to "leave for another

day whether an estoppel claim could ever

succeed against the Government." Id. at

423.

In this case, petitioner Harold Warshay

gave valuable assistance to the IRS in

connection with a major criminal investi-

gation. He did so at considerable risk

to his livelihood and indeed his person,

for high-ranking officers of the IRS had

assured him that, in view of his coopera-

tion, he would not suffer any adverse tax

consequences. Now, however, the IRS has

reneged on its representatives' promises

and threatens to hold petitioners liable

for taxes they were assured they would

not owe. Petitioners respectfully submit

that today is the day for this Court to

assert that, under the circumstances of

this case, the Government can be equita-

bly estopped.

I. THE TAX COURT WRONGLY CONCLUDED

THAT HAROLD WARSHAY FAILED TO MEET THE

BURDEN OF PROOF THAT HE WAS PROMISED

IMMUNITY FROM CIVIL TAX LIABILITY.

In his testimony before the Tax Court,

Harold Warshay stated under oath that in

1980 Charles H. Brennan, then District

Director of the Manhattan District, and

Raymond Turner, Assistant Regional Com-

missioner of Criminal Investigation of

the Internal Revenue Service for the

North Atlantic Region, promised him that

he would suffer no adverse civil tax

consequences if he would assist the IRS

in its investigation of John Muir & Co.

Mr. Reinisch confirms that the meeting

took place, and that Mr. Warshay received

from Messrs. Brennan and Turner the as-

Surances he requested.

There was a second meeting between

Messrs. Warshay, Reinisch, Brennan and

Turner, and again Messrs. Brennan and

Turner assured Mr. Warshay that "a deal

is a deal" and no harm would come to him

as a result of his cooperation with the

IRS's investigation of John Muir & Co.

They gave him no reason to believe that

they were unauthorized to make the prom-

ises they had made. Mr Reinisch also

confirms that this meeting took place and

that Messrs. Brennan and Turner were

present.

Notwithstanding this unambiguous and

corroborated testimony, Judge Laro found

in his October 6, 1993 bench opinion that

Mr. Warshay had "failed to establish the

existence of an oral agreement between

(Mr. Warshay] and either, Brennan, {sic}

Turner or both, that would protect [the

Warshays] from civil tax liability."

Judge Laro also found, however, that Mr.

Warshay had established that he cooperat-

ed with the IRS's investigation and that

he suffered detriment, one of the ele-

ments of the equitable estoppel defense

petitioners raised. In light of this

finding, it is inexplicable that Judge

Laro did not also find that Mr. Warshay's

cooperation with the IRS's investigation

and the resulting detriment suffered by

Mr. Warshay necessarily followed from Mr.

Warshay's reliance upon the IRS's pro-

mise. No other reason could be inferred

for Mr. Warshay's cooperation -- to the

detriment of both his person and his

career -- with the Government's investi-

gation. Furthermore, the testimony of

the Commissioner's witnesses that Mr.

Warshay had not been involved in the

IRS's investigation, especially in light

of Judge Laro's findings to the contrary,

was so incredible as to boggle the mind.

Judge Laro was therefore clearly in er-

ror, and under the applicable standard of

review should have been reversed.

The John Muir & Co. investigation was a

major one, involving the IRS, the SEC and

the United States Attorney's office. As

Judge Laro found, Messrs. Reinisch and

Warshay assisted that investigation for a

period of four years. It would therefore

be incredible if anyone involved in that

investigation claimed that he could not

recall the crucial role they played, even

ten years after the fact. Nevertheless,

Mr. Brennan testified that he had never

even met Messrs. Reinisch or Warshay

until the day of the hearing on September

28, 1993. Mr. Turner testified to the

same effect.

Even more incredible, however, is the

fact that none of the Commissioner's wit-

nesses could locate any mention of

Messrs. Warshay's or Reinisch's names in

the IRS files relating to the John Muir &

Co. investigation. Mr. Sirkin, for exam-

ple, testified that he reviewed all of

the IRS files relating to the investiga-

tion, but could find no reference to

Harold Warshay. In fact, his search of

the IRS's computerized files revealed

that there was no record of any documents

whatsoever relating to the John Muir &

Co. investigation. This revelation

proved so embarrassing to the Commission-

er that it stipulated in open court that

"CajJn examination of the IRS files will

reveal documents relating to the investi-

gation of John Muir & Company." Mr.

Brennan testified that he did not even

bother to inquire whether or not there

was an IRS file relating to the John Muir

& Co. investigation. Mr. Turner conduct-

ed only a perfunctory check by telephone,

and was told that "nobody knew anything

about that case." It stretches credulity

to the breaking point that the IRS, an

organization that routinely tracks every

investigation by computer,” could have

permitted all traces of the John Muir &

Co. case to vanish into a black hole.

Yet there was an investigation of John

Muir & Co., despite the Commissioner's

witnesses' inability to recall it. Peter

Quigley, then an investigator for the SEC

on special assignment to the United

States Attorney's office, testified that

he was assigned to the investigation in

1981, and that Mr. Warshay, together with

Hans Reinisch, also an employee of John

4 Mr. Sirkin, e.g., testified that

"C[ajny time a particular division of the

IRS is working on any particular entity,

the computer keeps track of it and a code

is put on there."

Muir & Co., had instigated the investiga-

tion. Mr. Quigley met with Messrs. War-

shay and Reinisch on at least ten differ-

ent occasions. Linda Cassano, then spe-

cial counsel to the SEC, confirmed that

Messrs. Warshay and Reinisch provided the

government with information relevant to

its investigation of John Muir & Co.

Mark Sirkin, a special agent with the IRS

Criminal Investigation Division, testi-

fied that the IRS was involved in the

investigation. On the basis of this and

other testimony, Judge Laro found that:

At various times [Warshay] and Rei-

nisch met with Linda Cassano, Special

Counsel to the SEC; Donald Malawsky,

Deputy Regional Administrator of the

SEC; Peter Quigley, an SEC investiga-

tor; Pamela Chepiga of the United

States Attorney's Office; Mark Sir-

kin, a special agent with the IRS

Criminal Investigation Division;

Daniel Kornblatt, an IRS agent, and

others.

There can be no even remotely plausible

explanation for the discrepancy between

the testimony of employees of the IRS,

who to a man could not remember anything

about the John Muir & Co. investigation,

ana the testimony of representatives from

the SEC and the United States Attorney's

office, who did recall the investigation.

The testimony of Harold Warshay and Hans

Reinisch, a disinterested third party, 1s

clear and unambiguous. In 1980 they met

with Messrs. Brennan and Turner.?

Messrs. Brennan and Turner promised Mr.

Warshay he would not be held liable for

any tax liabilities stemming from his

investment in the AIP. This is the tes-

timony Judge Laro should have credited,

and not the wholly incredible testimony

of witnesses who could not recall whether

the IRS investigation of John Muir & Co.

was even conducted.

How either Mr. Warshay or Mr.

Reinisch could have known of Messrs.

Brennan and Turner's names, let alone

their positions in the IRS hierarchy, is

inexplicable unless they did meet at some

time.

Judge Laro apparently did credit Mr.

Warshay's and other witnesses' testimony

that Mr. Warshay cooperated with the

IRS's investigation, for he expressly

found this to be the case. He also found

that Mr. Warshay had suffered detriment.

It necessarily follows that Mr. Warshay's

testimony as to the existence of his

agreement with the IRS was more probably

true than not, for nothing but such an

agreement would explain why Mr. Warshay

undertook to assist the IRS despite the

detriment Judge Laro found he suffered.

Judge Laro thus ignored the logical im-

plications of his own findings of fact

and committed reversible error when he

decided that Mr. Warshay had not met his

burden of proof as to the agreement's

existence.

rs THE COMMISSIONER IS EQUITABLY

ESTOPPED FROM PROSECUTING THE WARSHAYS

FOR THE TAX LIABILITIES HERE AT ISSUE.

Charles H. Brennan and Raymond Turner

were officials in the IRS's highest eche-

lons. Their promise to Harold Warshay

not to prosecute him for tax liabilities

stemming from his investment in the AIP,

coupled with Harold Warshay's. actual

cooperation with the IRS's investigation

of John Muir & Co., precludes the Commis-

sioner from collecting those liabilities.

The Tax Court made no binding determina-

tion of this issue.

The doctrine of equitable estoppel

precludes the Commissioner from repudi-

ating a promise such as the one Messrs.

Brennan and Turner made. Indeed, courts

have specifically held that "{w]ith re-

spect to the IRS, equitable estoppel is

appropriate under certain limited circunm-

stances." Tonkonogy v. United States,

417 F. Supp. 78, 79 (S.D.N.Y. 1976); see

also, Schuster v. Commissioner, 312 F.2d

311, 317 (9th Cir. 1962); Simmons Vv.

United States, 308 F.2d 938, 945 (5th

Cir. 1962) ("It is well settled that the

doctrine of equitable estoppel ... may be

invoked against the United States in

cases involving internal revenue taxa-

tion"). This Court has never held other-

wise; thus, in Botany Worsted Mills v.

United States, 278 U.S. 282, 289 (1929),

the Court held an informal agreement by

the Bureau of Internal Revenue to be non-

binding "without determining whether such

an agreement, though not binding in it-

self, may when executed become, under

some circumstances, binding on the par-

ties by estoppel." See also Hansen, 450

U.S. at 789 (with reference to welfare

benefits, "{t]his Court has never decided

what type of conduct by a Government

employee will estop the Government from

insisting upon compliance with valid

regulations governing the distribution

of" such benefits).

The "limited circumstances" under which

equitable estoppel applies to the IRS are

set forth in Tonkonogy, 417 F. Supp. at

79:

(1) a misrepresentation by an agent

of the United States acting within

the apparent scope of his duties; (2)

the absence of contrary knowledge by

the taxpayer in circumstances where

he may reasonably act in reliance;

(3) actual reliance; (4) detriment;

and (5) a factual context in which

the absence of equitable relief would

be unconscionable.

Citing Lynn & Gerson, Quasi-Estoppel and

Abuse of Discretion as Applied Against

the United States in Federal Tax Contro-

versies, 19 Tax L. Rev. 487, 488-489

(1964); Lignos v. United States, 439 F.2d

1369 (2d Cir. 1970) (unresolved issue of

whether there was false representation or

wrongful misleading silence by taxpayer

precluded summary judgment in his favor).

These circumstances are clearly present

in the case at bar. First, District

Director (now Regional Commissioner)

Brennan and Assistant Regional Commis-

sioner Turner misrepresented to Harold

Warshay that he would not be liable for

certain adverse tax consequences if he

assisted them in their investigations,

even though they provided him with no

written statement to that effect. Sec-

ond, Mr. Warshay (who was not represented

by counsel in his dealings with the IRS)

had no knowledge that said officers could

not compromise his civil tax liability

orally, nor did Messrs. Brennan and Turn-

er ever indicate that they lacked such

authority. Third, Mr. Warshay relied

upon said officers' misrepresentations

when he agreed to assist them in the

IRS's investigation of John Muir & Co.

He would not have cooperated with the

investigation if he had not thought they

were affording him immunity from civil

tax liability. Fourth, as Judge Laro

found, this reliance was detrimental, for

in cooperating with the IRS's investiga-

tion, Harold Warshay exposed himself to

personai physical harm and damage to his

business reputation.

Fifth, and most important, the factual

context of this case is such that it

would be unconscionable to deny petition-

ers equitable relief. In view of the

personal risk that Harold Warshay under-

took when he assisted the Internal Reve-

nue Service in a major criminal investi-

gation, and the loss of business reputa-

tion suffered by him, it would be pro-

foundly unfair to permit respcndent to

repudiate its senior officers' promises.

As the Tonkonogy court observed,

as to a taxpayer who relies upon [an

IRS agent's] statements to his detri-

ment at a time of great personal

trauma and concern, that agent will

be found to be acting within the

apparent scope of his authority.

Anything to the contrary would, in my

opinion, be '... hardly worthy of our

great government. '

Citing Brandt _v. Hickel, 427 F.2d 53, 97

(9th Cir. 1970).

Finally, public policy considerations

also support granting the Warshays the

relief of equitable estoppel. The factu-

al circumstances of this case are excep~

tional, and will not often apply to de-

prive the United States of tax revenue to

which it otherwise would be entitled.

The IRS and other federal agencies, how-

ever, would be hard pressed to find any-

one willing to cooperate with their in-

vestigations if they could repudiate

their senior officers' promises as sum-

marily as the IRS seeks to repudiate them

here.

Cases where the courts declined to

apply principles of equitable estoppel

are inapposite to the case under review.

They can be easily distinguished on their

facts. In Rudisill v. Commissioner, T.C.

Memo. 1992-388, for example, it was mere-

ly a desk clerk who allegedly advised the

petitioner to "go home and forget about"

refiling his taxes. Similarly, in Ga-

lucci_v. Commissioner, T.C. Memo. 1992-

435, and Wagner _v. Commissioner, T.C.

Memo. 1990-443, it was agents of the

United States Attorney's office who,

notwithstanding their alleged oral agree-

ments with the respective petitioners,

had specifically advised the petitioners'

attorneys that they had no authority to

compromise civil tax liabilities. In the

case at bar, however, it was the District

Director, not a low-ranking subordinate

or representative of another agency, who

promised petitioner the IRS would not

Gisallow certain benefits. It is undis-

puted that Mr. Brennan had sufficient

authority to enter into closing and com-

promise agreements under Sections 7121

and 7122, respectively, of the Internal

Revenue Code.

Conclusion

For all of the reasons set forth above,

the writ of certiorari should be granted.

Dated: New York, New York

May 1, 1995

Respectfully submitted,

CEE

Stuart A. Jackson,

Attorney of Record

THOMAS RE & PARTNERS

Attorneys for Petitioners

445 Park Avenue

New York, New York 10022

(212) 752-7555

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