• Key point: An application for exemption from self-employment taxes (Form 4361) that is filed after the deadline is ineffective even if the IRS erroneously recognizes the exemption.
• The Tax Court ruled that a minister who filed an application for exemption from self-employment taxes after the deadline had expired could not rely on an IRS letter that erroneously informed him that he was exempt. A minister was ordained in 1971, and received at least $400 or net self-employment income from performing ministerial services in 1971 and 1972. In 1976, the minister filed an application for exemption from self-employment taxes (Form 4361) with the IRS. The IRS denied this application because it had not been timely filed. Although he had net earnings from self-employment from ministerial services during the 1975 tax year, the minister did not report any self-employment tax attributable to those earnings on his 1975 income tax return. The IRS audited the minister’s 1975 tax return in 1977 and determined that he was liable for self-employment taxes attributable to his work as a minister. However, the IRS later sent the minister a letter that stated “we have accepted the application for the year 1975 and subsequent years, however it is not valid for years prior to 1975.” Based on this letter, the minister paid no self-employment tax on his ministerial income from 1976 through 1990. Instead, he wrote “Exempt Form 4361” on the line of each return relating to self-employment tax. The IRS again audited the minister, this time for tax years 1988, 1989, and 1990. The sole issue in this audit was the minister’s failure to report self-employment tax with respect to his earnings as a minister. The IRS asserted that the minister was not exempt from self-employment taxes, and assessed back taxes with penalties and interest for the years under examination. The minister appealed to the Tax Court, which agreed with the IRS position. The Court began its opinion by observing:
A minister seeking the exemption must file an application stating that he is opposed, because of religious principles or conscientious beliefs, to the acceptance of certain types of public insurance, such as that provided by the Social Security Act, attributable to his services as a minister. This application must be filed within the specific time limits set forth in section 1402(e)(3). Once properly obtained, the exemption from self-employment tax is irrevocable and remains effective for all succeeding taxable years. Section 1402(e)(3) provides that the application for exemption must be filed on or before the later of the following dates: (1) The due date of the return (including any extension thereof) for the second taxable year for which the taxpayer has net earnings from self-employment of $400 or more, any part of which was derived from the performance of services as a minister, or (2) the due date of the return (including any extension thereof) for his second taxable year ending after 1967. This Court has consistently held that the time limitations imposed by section 1402(e)(3) are mandatory and taxpayers must strictly comply with them.
The Court concluded that the minister’s application for exemption was not filed within these time limits. It noted: “Because [the minister] had net earnings from self-employment as a minister of $400 or more during each of 1971 and 1972, his application for exemption was required to be filed no later than April 16, 1973, the due date for his 1972 tax return. However, [he] did not file his application for exemption until April 20, 1976, more than 3 years after the required deadline. Accordingly, we hold that [he] is not entitled to an exemption from self-employment tax for services performed as a minister.”
The minister vigorously argued that he was entitled to exemption for the years in question because of his reliance on the 1976 letter from the IRS that assured him that “we have accepted the application for the year 1975 and subsequent years”. The minister claimed that the IRS was “estopped” by this letter from denying his exemption. The Court disagreed. It observed:
Equitable estoppel is a judicial doctrine that precludes a party from denying his own acts or representations which induced another to act to his detriment. This Court has recognized that estoppel is applied against the [IRS] with utmost caution and restraint. Moreover, the U.S. Supreme Court has stated that “the Government may not be estopped on the same terms as any other litigant.” Although refusing to adopt a “flat rule” prohibiting estoppel claims against the government in all circumstances, the U.S. Supreme Court has noted that it has “reversed every finding of estoppel [against the government]” that has come before it. The U.S. Supreme Court has made it clear that “however heavy the burden might be when an estoppel is asserted against the Government, the private party surely cannot prevail without at least demonstrating that the traditional elements of an estoppel are present.” The traditional elements necessary to invoke equitable estoppel are: (1) The existence of a false representation or wrongful misleading silence by the party against whom estoppel is invoked; (2) the error must originate in a statement of fact, not in an opinion or statement of law; (3) the party claiming the benefits of estoppel must be ignorant of the true facts; (4) the party claiming the benefits of estoppel must reasonably rely on the other party’s misrepresentation or wrongful misleading silence; and (5) the party claiming the benefits of estoppel must be adversely affected by the other party’s misrepresentation or wrongful misleading silence. If any one of these elements is not present, equitable estoppel is not appropriate.
In the present case, [the minister] has established the first element of traditional equitable estoppel. [The IRS] does not dispute that the September 22, 1977, letter sent by [the IRS] to [the minister] mistakenly represented that [the minister’s] Form 4361 exemption application would be accepted for the 1975 taxable year and all subsequent years. However, [the minister] has failed to establish several other elements necessary for equitable estoppel and is therefore not entitled to the benefits of equitable estoppel. First, the misrepresentation upon which [the minister] relies—[the IRS] statement in its September 22, 1977, letter that the Form 4361 exemption application was valid for the 1975 taxable year and all subsequent years—was a misstatement of law, not of fact. Section 1402(e)(3) provides a specific deadline by which an application for exemption under section 1402(e) must be filed. This time limitation is mandatory and taxpayers must strictly comply with it.
In the present case, [the minister] did not file his Form 4361 exemption application until more than 3 years after the statutory deadline. [The] purported acceptance [by the IRS] of the Form 4361 exemption application for the 1975 taxable year and subsequent years was based on a misinterpretation of the clear statutory filing requirement, and was not a misrepresentation of fact that would support equitable estoppel. In view of [the minister’s] failure to meet the statutory requirements of section 1402(e)(3), “erroneous acquiescence by agents of [the IRS] in accepting his claim of exemption in earlier years does not prevent correction of the error [as to later years].”
In addition, the Court noted that the minister had failed to demonstrate that he reasonably relied on the IRS misrepresentation. It observed:
In order to demonstrate reliance, [the minister] must show that he changed his position as a result of the misrepresentation. In the present case, [the minister] would have to demonstrate that his failure to comply with the statutory time limits of section 1402(e) was caused by [the IRS] misrepresentation. [The minister] clearly cannot establish such reliance because [the IRS] misrepresentation occurred more than 4 years after the expiration of the statutory deadline for filing [the] Form 4361. Moreover, even if [the minister] had relied on [the IRS] misstatement of law, such reliance would not have been reasonable. As the U.S. Supreme Court has stated, “those who deal with the Government are expected to know the law and may not rely on the conduct of Government agents contrary to law.” In the present case, the time within which [the minister] was required to file his Form 4361 exemption application is clearly stated in the governing statute as well as in the regulations thereunder. In light of this specific statutory requirement, [the minister] cannot be deemed to have reasonably relied on any misstatements [the IRS] made.
Finally, the Court noted that the minister had not established that he suffered any significant detriment as a result of the IRS letter. The minister claimed that the payment of back taxes would constitute a severe financial hardship. The Court disagreed: “[A]ll that is being required … is that he pay taxes that he would have owed whether or not [the IRS] made the misstatement.” The Court also noted that as a result of the misinterpretation of the law by the IRS in its 1976 letter the minister “received a windfall by avoiding for more than a decade the payment of self-employment taxes that he was legally required to pay.” Keaton v. Commissioner, T.C. Memo. 1993-365.
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