Opinion ID: 203649
Heading Depth: 2
Heading Rank: 4

Heading: Self-Employment Tax.

Text: Muskat's final plaint concerns his separate claim for a refund of self-employment tax. He maintains, in the alternative, that the lower court erred in concluding that it lacked subject matter jurisdiction over this claim; that the court abused its discretion in denying his motion for leave to amend his complaint; and that, in all events, he should have prevailed on a theory of judicial estoppel. We review the district court's determination that it lacked subject matter jurisdiction de novo. Dominion Energy Brayton Point, LLC v. Johnson, 443 F.3d 12, 16 (1st Cir.2006). The Internal Revenue Code recognizes the value of an orderly refund process, requiring the exhaustion of remedies available through administrative channels prior to opening the courthouse doors. Under that scheme, a district court has jurisdiction to adjudicate only those refund claims that have first been duly filed with the Secretary of the Treasury. 26 U.S.C. § 7422(a). Relevant regulations provide that a filed claim must set forth in detail each ground upon which a ... refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. 26 C.F.R. § 301.6402-2(b)(1). Taken together, these provisions bar a taxpayer from presenting claims in a tax refund suit that `substantially vary' the legal theories and factual bases set forth in the tax refund claim presented to the IRS. Lockheed Martin Corp. v. United States, 210 F.3d 1366, 1371 (Fed.Cir.2000); accord Charter Co. v. United States, 971 F.2d 1576, 1579 (11th Cir.1992). It follows that a claim or theory not explicitly or implicitly set forth in the taxpayer's administrative refund application cannot be broached for the first time in a court in which a subsequent refund suit is brought. See Lockheed Martin, 210 F.3d at 1371. Here, the administrative refund claim filed on Muskat's behalf stated in full: Taxpayers are amending their tax return to properly record the allocation between the sale of goodwill and a covenant not to compete. This change results in the reclassification of income erroneously reported as fully ordinary income to the correct allocation between ordinary income and capital gain. Fairly read, this statement indicates that the sole purpose of the refund claim is to change the allocation of the 1998 payment between goodwill and noncompetition, emphasizing the former and deemphasizing the latter, to the end of taxing at the (lower) capital gain rate monies previously taxed at the (higher) ordinary income rate. The IRS addressed that claim head-on, and Muskat's ensuing judicial complaint neither mentioned an alternative claim for self-employment tax nor raised any other new issues. At trial, Muskat shifted gears. He sought to argue, in part, that he was entitled to a refund of the self-employment tax remitted with respect to the reported payment whether or not the payment constituted ordinary income. In support, he pointed to a line of cases holding that sums paid in consideration of covenants not to compete are not deemed to have been earned in the conduct of a trade or business and, thus, are not subject to self-employment tax. See, e.g., Milligan v. Comm'r, 38 F.3d 1094, 1098 n. 6 (9th Cir. 1994); Barrett v. Comm'r, 58 T.C. 284, 289, 1972 WL 2450 (1972). This was an entirely new theory, neither mentioned in nor adumbrated by the administrative claim. The district court did not reach the question of whether payments made under a noncompetition agreement are subject to self-employment tax. Instead, the court noted that the administrative refund claim did not raise the self-employment tax issue and, therefore, the court lacked jurisdiction over it. See Muskat II, 2008 WL 1733598, at -3. We concur with the district court that this theory, voiced for the first time in the district court, worked a substantial variance from the administrative refund claim. Regardless of whether the IRS might have deduced from the general parameters of the refund claim that Muskat was eligible for a refund of self-employment tax even if the reported payment was attributed to the noncompetition agreement, the district court lacked jurisdiction. A taxpayer is the master of his refund claim, and it is not the IRS's responsibility to make a case for the taxpayer that the taxpayer himself has opted not to make. See, e.g., IA 80 Group, Inc. v. United States, 347 F.3d 1067, 1075 n. 9 (8th Cir. 2003); Charter Co., 971 F.2d at 1579. Because Muskat failed to put the IRS on notice during the administrative phase of the basic nature of his present theory, the district court lacked subject matter jurisdiction over that claim. See Lockheed Martin, 210 F.3d at 1371; Charter Co., 971 F.2d at 1580. That determination is dispositive of Muskat's further contention that the trial court abused its discretion in refusing to allow the filing of an amended complaint. The law is settled that futility is a sufficient basis for denying leave to file an amended complaint. See Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962); Universal Commc'n Sys., Inc. v. Lycos, Inc., 478 F.3d 413, 418 (1st Cir. 2007). Since the district court lacked jurisdiction over Muskat's claim for a refund of self-employment tax, Muskat's proposed amendment would have been utterly futile. In a last-ditch effort, Muskat suggests that the IRS has conceded that no self-employment tax was owed on payments made under the noncompetition agreement in 2001 and 2002. [7] On that basis, he implores us that the government should be judicially estopped from contesting the impropriety of the 1998 tax in this proceeding. We reject his importunings. As a general matter, the doctrine of judicial estoppel prevents a litigant from pressing a claim that is inconsistent with a position taken by that litigant either in a prior legal proceeding or in an earlier phase of the same legal proceeding. InterGen N.V. v. Grina, 344 F.3d 134, 144 (1st Cir.2003). There are at least two preconditions to a successful claim of judicial estoppel. First, the estopping position and the estopped position must be directly inconsistent, that is, mutually exclusive. Second, the responsible party must have succeeded in persuading a court to accept its prior position. Alternative Sys. Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23, 34 (1st Cir.2004) (internal citations omitted). Even if we assume, for argument's sake, that (i) this judicial estoppel theory somehow eludes the jurisdictional bar and (ii) the IRS has conceded that payments under the noncompetition agreement are not subject to self-employment tax, Muskat's judicial estoppel claim falters at the first step. The 2001-2002 position that Muskat attributes to the government (no self-employment tax on payments received pursuant to noncompetition agreements) is not inconsistent with the basic position that the government urges in this litigation: that a taxpayer who has failed to exhaust his administrative remedies may not litigate a self-employment tax issue in a refund suit. Given this circumstance, the doctrine of judicial estoppel is not implicated.