## Facts

- Frank and Bertha Kretchmar filed joint federal income tax returns for 1976–1978.
- The IRS audited the returns and determined the Kretchmars underreported business income for each year.
- During the audit, the Kretchmars agreed to extend the limitations period for the IRS to assess additional deficiencies.
- The parties negotiated a settlement reducing the proposed deficiencies and penalties.
- The Kretchmars executed IRS Form 870-AD, which included a promise that no claim for refund or credit would be filed for the covered years.
- In reliance on the settlement, the IRS closed the matter and allowed the extended assessment period to expire without further assessments.
- The Kretchmars later filed refund claims for 1976–1978 after the assessment period had expired.
- The IRS denied the refund claims, and the Kretchmars filed a refund suit in the United States Claims Court.

## Issues

1. Whether taxpayers who execute Form 870-AD agreeing not to file refund claims may later maintain a judicial refund action for the covered years.
2. Whether the United States may invoke equitable estoppel to bar taxpayers from repudiating Form 870-AD where the IRS reasonably relied on the agreement and the assessment limitations period expired.

## Decision

- The court granted the government’s motion for summary judgment and dismissed the refund suit.
- The court held the Kretchmars were equitably estopped from pursuing refunds because they promised in Form 870-AD not to seek refunds and the IRS relied on that promise by allowing the assessment period to lapse.
- The court treated the later refund claims as inconsistent with the taxpayers’ settlement representation and concluded the government would be prejudiced if the claims proceeded.

## Legal Principles

- Equitable estoppel may bar a taxpayer from asserting a position inconsistent with a prior material representation when the government reasonably relied on the representation to its detriment.
- Elements supporting estoppel include: (1) a material misrepresentation or conduct amounting to it, (2) reasonable and detrimental reliance by the party asserting estoppel, and (3) prejudice if the other party is allowed to contradict the earlier representation.
- Although Form 870-AD is not a statutory closing agreement, its terms may be enforced through equitable estoppel when the IRS changes its position in reliance on the settlement, including by permitting the assessment limitations period to expire.

## Conclusion

The Claims Court held that taxpayers who agreed in Form 870-AD not to seek refunds were equitably estopped from later bringing a refund suit after the IRS reasonably relied on the settlement and lost the ability to assess additional tax due to expiration of the limitations period.


Kretchmar v. United States, 9 Cl. Ct. 191 (Cl. Ct. 1985)