Court Opinion

ID: 2963994
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:18:42.528979+00
Date Added: 2024-06-11T11:42:49.178614
License: Public Domain

USCA1 Opinion

	

                            United States Court of Appeals
                            United States Court of Appeals
                                For the First Circuit
                                For the First Circuit
                                 ____________________

        No. 95-2073

                                   MICHAEL K. EAGAN
                                Plaintiff - Appellant,

                                          v.

                              UNITED STATES OF AMERICA,

                                Defendant - Appellee.

                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                     [Hon. Joseph L. Tauro, U.S. District Judge]
                                            ___________________

                                 ____________________

                                        Before

                                 Stahl, Circuit Judge,
                                        _____________
                            Aldrich, Senior Circuit Judge,
                                     ____________________
                              and Lynch, Circuit Judge.
                                         _____________

                                 ____________________

            Peter  L.  Banis  with  whom  Ley   &  Young,  P.C.,  Lawrence  P.
            ________________              _____________________   ____________
        Heffernan,  H. Bissell Carey,  III, and Robinson &  Cole were on brief
        _________   ______________________      ________________
        for appellant.
            Bridget  M. Rowan,  Attorney,  Tax Division,  U.S.  Department  of
            _________________
        Justice,  with whom  Loretta C.  Argrett, Assistant  Attorney General,
                             ___________________
        Donald K. Stern, United States Attorney, Gary R. Allen, and Kenneth L.
        _______________                          _____________      __________
        Greene,  Attorneys, Tax Division, U.S.  Department of Justice, were on
        ______
        brief for appellee.

                                 ____________________

                                    March 29, 1996
                                 ____________________

                      STAHL,  Circuit  Judge.   Michael K.  Eagan appeals
                      STAHL,  Circuit  Judge.
                              ______________

            from the grant of summary judgment in favor of the government

            in his  action seeking  a refund  of taxes  paid on  an early

            withdrawal from  his former company's retirement plan.   In a

            separate and previous tax refund suit, Eagan and the Internal

            Revenue Service ("IRS") stipulated that in 1987 Eagan, a life

            insurance salesman,  did not qualify as  a statutory employee

            of  the  company  sponsoring  the retirement  plan.    In the

            present suit, Eagan argues that his participation in the plan

            violated  the  requirement  that  the plan  operate  for  the

            exclusive benefit of  employees, thus disqualifying  the plan

            for  tax purposes  and  rendering contributions  to the  plan

            taxable.  

                      With  ingenuity,  Eagan  argues  that  because  the

            contributions were taxable  when made,  his withdrawals  from

            the plan cannot be taxed, and  therefore he is due a  refund.

            Conveniently for Eagan, the applicable statute of limitations

            now bars the assessment  of tax on most of  the contributions

            to the plan.  Thus, if Eagan's argument is accepted, he would

            have  the best of  both worlds: the  ability to  avoid tax on

            most  of the  original  contributions and  on the  subsequent

            withdrawals.

                      The  district  court,  unmoved  by   Eagan's  plea,

            rejected  that result.    It ruled  that the  Commissioner of

            Internal   Revenue   had  the   discretion   to  ignore   any

                                         -2-
                                          2

            disqualifying effect on the  plan of Eagan's participation as

            a  non-employee.    Accordingly,  the  court granted  summary

            judgment for the IRS on Eagan's refund claim, and this appeal

            ensued.   We  now affirm  the district  court, although  on a

            different  ground.  We hold that the duty of consistency bars

            Eagan  from taking a position  in one year  to his advantage,

            and  then later, after correction is barred by the statute of

            limitations,  taking  a  contrary  position  to  his  further

            advantage.

                                          I.
                                          I.
                                          __

                                      BACKGROUND
                                      BACKGROUND
                                      __________

                      During  the relevant  tax years,  Eagan was  a life

            insurance  agent,  earning  commissions   from  a  number  of

            insurers.   He had agreed, however, in a "Career Contract for

            Full-Time  Agents" with  Massachusetts Mutual  Life Insurance

            Company ("Mass  Mutual"),  that solicitation  of Mass  Mutual

            policies would be his "principal business activity."

                      The Internal  Revenue Code classifies  a "full-time

            life insurance salesman" as  an employee1 of the  insurer for

            whom  they   sell  full  time,  subject   to  employment  tax

            withholding and eligible to participate in the insurer's tax-

                                
            ____________________

            1.  Individuals deemed to be employees by statute, whether or
            not they fit the common law definition of employee, are often
            called   "statutory  employees,"   and  various   IRS  forms,
            instructions,  and regulations refer to them  that way.  See,
                                                                     ___
            e.g., IRS Form  W-2 Wage and Tax Statement;  IRS Instructions
            ____
            for Schedule C Profit or Loss From Business.  

                                         -3-
                                          3

            deferred  retirement  plans.   See  I.R.C.     3121(d)(3)(B),
                                           ___

            7701(a)(20).  Mass Mutual  maintains retirement plans for its

            employee-agents,  and  the  IRS  determined2  the  plans were

            qualified for tax-favored  treatment under section  401(a) of

            the Internal  Revenue Code  (26 U.S.C., hereafter  "I.R.C.").

            Based on  Eagan's representation in the  "Career Contract for

            Full-Time Agents,"  Mass Mutual treated Eagan  as a statutory

            employee and  contributed portions  of his compensation  to a

            qualified retirement plan, the Mass Mutual Agents 401(k) Plan

            ("the 401(k)  plan").   Under this arrangement,  taxation was

            deferred  on the  portion of  Eagan's compensation  that Mass

            Mutual  contributed to  the  401(k) plan  and  on any  income

            earned on those contributions,  see I.R.C.    401(k), 402(a),
                                            ___

            and  501(a),  but tax  would  eventually  be due  when  Eagan

            withdrew funds from the plan, see I.R.C.    402(a), 72(t).
                                          ___

                      Mass  Mutual  contributed  to  the  401(k) plan  on

            Eagan's behalf from 1981 until  1992, when his contract  with

            Mass  Mutual  was  terminated.   On  his  tax  returns, Eagan

            consistently  treated himself  as a  statutory  employee, and

            treated the  401(k) plan as qualified,  excluding from income

            the contributions made on his behalf in 1987, 1988, and 1989.

            In 1989, Eagan withdrew  $4,682 from the 401(k) plan,  and he

            reported and paid income  tax on that withdrawal on  his 1989

                                
            ____________________

            2.  In 1986,  the IRS issued  a determination letter  to Mass
            Mutual  finding  the retirement  plan  at  issue  here to  be
            qualified for tax benefits under I.R.C.   401(a).

                                         -4-
                                          4

            tax return, filed in August 1990.  Because Eagan  was not yet

            59  years  old when he withdrew the funds, he was also liable

            for,  and  paid, the  ten  percent  additional tax  on  early

            distributions  under I.R.C.    72(t).   In April  1992, Eagan

            filed  an amended tax return  for 1989, claiming  that he was

            not  subject to  any tax  on the  withdrawal from  the 401(k)

            plan.   The IRS  disallowed Eagan's  refund claim, and  Eagan

            responded by filing the instant tax refund suit in the United

            States District  Court  for the  District  of  Massachusetts,

            claiming  a refund  of $1,755.81  for the  taxes on  the 1989

            withdrawal from the 401(k) plan.

                                         II.
                                         II.
                                         ___

                                 EAGAN'S REFUND CLAIM
                                 EAGAN'S REFUND CLAIM
                                 ____________________

                      The rationale for Eagan's  refund claim is somewhat

            complicated and rather  brash.   We spell it  out in  detail.

            The linchpin of the  claim is Eagan's contention that  he was

            not a full-time insurance agent for Mass  Mutual during 1987,

            1988, and 1989.  In an earlier tax refund suit, Eagan  sought

            to  recover   FICA  tax3   withheld  from  his   Mass  Mutual

            compensation in 1987 and  later years, on the theory  that he

            was  not subject  to FICA  tax as a  non-employee.   Eagan v.
                                                                 _____

            United States,  No. 92-10786-T (D. Mass. filed  Apr. 3, 1992)
            _____________

                                
            ____________________

            3.  "FICA"   is  the  acronym   for  the   Federal  Insurance
            Contribution Act,  which requires the withholding  from wages
            of  an  employment  tax  to fund  Social  Security  benefits.
            I.R.C.   3101.

                                         -5-
                                          5

            ("Eagan I").   Eagan and  the IRS stipulated in  Eagan I that
              _______                                        _______

            Eagan was not a full-time  agent for Mass Mutual in  1987 and

            thus not a statutory  employee of Mass Mutual under  I.R.C.  

            3121(d)(3)(B).   As a non-employee, Eagan was  not subject to

            FICA  withholding   on  his  Mass  Mutual  compensation,  and

            accordingly  he received  a refund  of his  1987 FICA  tax in

            Eagan  I; the IRS also issued an administrative refund of his
            ________

            FICA taxes for 1988-1992.

                      Eagan's   position  in  this   suit  is   that  the

            stipulation in Eagan I that he was not a Mass Mutual employee
                           _______

            also  had  implications for  his  participation  in the  Mass

            Mutual  401(k) plan.    He argues  that  under the  statutory

            scheme, a  qualified tax-deferred retirement plan  must inure

            to  the  exclusive  benefit  of the  employees  of  the  plan

            sponsor.   See  I.R.C.   401(a)(2).   Because  he was  not an
                       ___

            employee in 1987,  he claims, his  participation in the  plan

            violated this  "exclusive benefit rule,"  rendering the  plan

            not qualified for  tax benefits.  See id.   Eagan then argues
                                              ___ ___

            that  because  the  plan  was  not qualified  in  1987,  Mass

            Mutual's contributions to the plan on his behalf were taxable

            to Eagan  as would  be other  compensation for  his services.

            See I.R.C.   402(b).  Moreover, income earned on  contributed
            ___

            funds would also be taxed when earned, not tax-deferred.  See
                                                                      ___

            I.R.C.    61(a)(15).  He concludes  that if the contributions

            and income thereon had been taxed when earned, there would be

                                         -6-
                                          6

            no  further tax  due when  "after-tax" funds  were eventually

            withdrawn.

                      Thus,  Eagan contends  he is  due a  refund on  the

            taxes he  paid in  connection  with his  early withdrawal  in

            1989.   Since the statute  of limitations4 bars  the IRS from

            assessing  tax on most of the  contributions Mass Mutual made

            to the plan on  Eagan's behalf, Eagan, if successful  in this

            claim, would avoid tax completely -- both on contributions to

            the plan and on withdrawals from the plan.5

                      The district court rejected Eagan's refund claim in

            a terse one-page  order.  The court pointed out  that the IRS

            had previously  issued a  determination letter that  the Mass

            Mutual   401(k)  plan   was  qualified,   and  although   the

            Commissioner   "has   authority   to   issue   a   corrective

            determination [that the plan  was no longer qualified because

            of Eagan's participation]  with retroactive application,  she

            has not done  so in  her discretion."   Finding  no abuse  of

            discretion,   the  court   deferred  to   the  Commissioner's

            decision, and consequently granted  summary judgment for  the

            government.

                                
            ____________________

            4.  A three-year  statute of  limitations, I.R.C.    6501(a),
            would   apply  to   Eagan's   non-payment  of   tax  on   the
            contributions to the 401(k)  plan, as we explain in  part III
            of this opinion.

            5.  Under his  theory, Eagan would,  however, owe tax  on any
            contributions and  income earned  on his plan  assets in  tax
            years within the three-year statute of limitations.

                                         -7-
                                          7

                                         III.
                                         III.
                                         ____

                                       ANALYSIS
                                       ANALYSIS
                                       ________

                      Our review  of summary judgments is  plenary.  Levy
                                                                     ____

            v. FDIC, 7 F.3d  1054, 1056 (1st Cir. 1993).  We  are free to
               ____

            affirm the district court's ruling on any ground supported in

            the record.  Id. 
                         ___

                      The district court granted summary judgment for the

            government, ruling that the Commissioner  of Internal Revenue

            had the discretion not to revoke her prior determination that

            the  Mass Mutual 401(k) plan  was a qualified  plan, and thus

            effectively to ignore the  disqualifying effect, if any, that

            Eagan's participation may have had  on the plan. The district

            court, however, did not cite any case, statute, or regulation

            as authority for  its ruling.  The  court apparently accepted

            the government's main  argument in its memorandum  supporting

            summary judgment, but the authorities cited by the government

            are not directly on point.   While the Commissioner  probably

            has the  authority to  consider a  401(k)  plan qualified  in

            spite of the erroneous  participation of one non-employee, we

            need not reach that  question in order to affirm  the summary

            judgment.   Nor  do  we reach  the  question whether  Eagan's

            participation   rendered  the  plan  disqualified  under  the

            statutory framework, but we note our  considerable skepticism

            of this argument.  We believe there is a more direct basis on

            which to affirm the decision below.

                                         -8-
                                          8

                      The  duty  of  consistency  estops Eagan  from  now

            seeking a refund  by asserting that his participation  in the

            401(k)  plan was  improper.   As  we  recently observed,  the

            "`duty of  consistency' prevents  a taxpayer who  has already

            had  the advantage of a  past misrepresentation --  in a year

            now closed to review  by the government -- from  changing his

            position and,  by  claiming  he should  have  paid  more  tax

            before, avoiding the present tax."  Lewis v. Commissioner, 18
                                                _____    ____________

            F.3d 20, 26 (1st Cir. 1994) (citing Beltzer v. United States,
                                                _______    _____________

            495  F.2d 211, 212-13 (8th Cir. 1974) and Jacob Mertens, Jr.,

            The Law of Federal Income Taxation   60.05 (1992)).  The duty
            __________________________________

            of consistency is a type of equitable estoppel, also known as

            "quasi-estoppel."   Id., 18  F.3d  at 26;  Mertens, supra,   
                                ___                             _____

            60.05.   The duty  of consistency  arises when  the following

            elements are present: "(1) a representation or report  by the

            taxpayer; (2) on which the Commission[er] has relied; and (3)

            an attempt by the taxpayer  after the statute of  limitations

            has  run   to  change  the  previous   representation  or  to

            recharacterize the situation  in such  a way as  to harm  the

            Commissioner."  Herrington v. Commissioner, 854 F.2d 755, 758
                            __________    ____________

            (5th  Cir. 1988), cert. denied,  490 U.S. 1065  (1989).  When
                              _____ ______

            these requirements  are met, "the Commissioner may  act as if

            the previous representation, on which he relied, continued to

            be true,  even if  it is  not.  The  taxpayer is  estopped to

            assert  the contrary."   Id.   The  elements of  the duty  of
                                     ___

                                         -9-
                                          9

            consistency are present in this case.  First,  there  was   a

            misrepresentation by the taxpayer.   Eagan represented on his

            1987,  1988, and (original) 1989 tax returns that, as a full-

            time insurance  agent for  Mass  Mutual, he  was a  statutory

            employee eligible  to participate  in the Mass  Mutual 401(k)

            plan.   Eagan  made that  representation to  the IRS  by: (1)

            submitting with his return  for each of those years  his Mass

            Mutual Form W-2 indicating that he was  a statutory employee;

            (2) excluding  each year  from gross income  the compensation

            contributed  to the  401(k)  plan; (3)  excluding from  gross

            income the earnings on  his account balance in the  plan; and

            (4)  treating  the  withdrawal  from the  401(k)  plan  as  a

            premature  withdrawal from  a qualified  plan and  paying the

            associated tax and  penalty.  Eagan also  represented to Mass

            Mutual in his "Career Contract for Full-Time Agents" that his

            "principal business activity" was solicitation of Mass Mutual

            business, and  Mass Mutual  relied on that  representation in

            issuing Eagan's W-2 forms  and by contributing to the  401(k)

            plan on his behalf.  We now know, based on the stipulation in

            Eagan I, that these representations were incorrect.
            _______

                      Eagan argues that his misrepresentations to the IRS

            were about a matter of law,  not fact, and that therefore the

            duty of consistency does not arise.  In Lewis,  we noted that
                                                    _____

            the  duty of  consistency  "seems to  apply when  the earlier
                                        _____

            taxpayer  position amounts to a  misstatement of fact, not of

                                         -10-
                                          10

            law."  18 F.3d at 26 (emphasis added).  But  in Lewis, we did
                                                            _____

            not  examine  the fact-or-law  issue  in  any  depth, and  we

            certainly made  no holding on  that point.   See id.   We now
                                                         ___ ___

            adopt the approach  of the Fifth  Circuit in Herrington  that
                                                         __________

            the  duty of consistency applies to "a mixed question of fact

            and law, concerning which the taxpayer[] had more information

            than the Commissioner at the time the initial representations

            were made."  854 F.2d at 758.

                      The question whether Eagan was a statutory employee

            of  Mass Mutual is primarily factual.  The inquiry depends on

            the facts of Eagan's particular situation, including the time

            and effort  Eagan devoted  to Mass  Mutual relative  to other

            insurers  and any  non-insurance business  pursuits.   See 26
                                                                   ___

            C.F.R.   31.3121(d)-1(d)(2) and  -1(d)(3)(ii).  In this case,

            as in Herrington,  the question  was not a  pure question  of
                  __________

            law, but rather "at best a  mixed question of fact and  law."

            Id.  Therefore, we  reject Eagan's argument that the  duty of
            ___

            consistency does not apply to his misrepresentation.

                      Second,     the     IRS    relied     on    Eagan's

            misrepresentation,   accepting  his  returns   as  filed  and

            allowing the statute of limitations to run. See id.  There is
                                                        ___ ___

            no  suggestion that  the  IRS was  unreasonable in  accepting

            Eagan's returns at  face value  or that the  IRS should  have

            known that Eagan was not a full-time life  insurance salesman

            for Mass Mutual.

                                         -11-
                                          11

                      Third, Eagan has recharacterized himself  as a non-

            employee  in 1987,  1988, and  1989, and  thus entitled  to a

            refund  for the taxes on his 1989 withdrawal, but the statute

            of  limitations  bars  the  IRS  from  taxing  most  of   the

            contributions  made  to  the  401(k) plan  and  the  earnings

            thereon.    Section  6501(a)  of the  Internal  Revenue  Code

            provides that taxes must be assessed within three years after

            the return  is filed.  Eagan states in his brief that for the

            government to  prevail on the duty of consistency defense, it

            must show  that, at  the time of  Eagan's recharacterization,

            the statute  barred reassessment  of his 1987  income taxes.6

            He concedes, and  we agree,  that it is  immaterial that  his

            1988 and 1989 taxes  were still open to reassessment  when he

            filed   an   amended  1989   return   on   April  14,   1992,

            recharacterizing himself as a  non-employee in order to claim

            a  refund.7   Because  Eagan filed  his  1987 tax  return  on

                                
            ____________________

            6.  In  a letter  attached  to Eagan's  amended 1989  return,
            Eagan asserted  that "during the years in  which amounts were
            deducted  from commissions  earned  by him  and  paid by  the
            Massachusetts Mutual Life Insurance  Company, he did not meet
            the definition of `full-time insurance salesman' as contained
            in  Section 7701(a)(20)."   The  record indicates  that Eagan
            began to  participate in  the 401(k) plan in 1981.   Thus, it
            appears that the  IRS is also  barred from reassessing  years
            before 1987  when Eagan  may have improperly  participated in
            the  401(k)  plan.    However, the  parties  apparently  have
            focused on 1987 because Eagan and the IRS stipulated in Eagan
                                                                    _____
            I  that he  failed  to  meet  the  definition  of  "full-time
            _
            insurance agent" in 1987.

            7.  Conceivably, the relevant  time of recharacterization was
            when Eagan filed his  claim for a FICA tax  refund, which was
            eventually litigated as  Eagan I.   Arguably, the FICA  claim
                                     _______

                                         -12-
                                          12

            September 26, 1988, the three-year statute  on 1987 taxes ran

            out  more than  six months  before Eagan  recharacterized his

            employment status in his  amended 1989 return.  As  a result,

            the  IRS is barred from taxing the contributions made in 1987

            and earlier  years, and  therefore the  third element  of the

            duty of consistency is satisfied.

                      Eagan   argues   that  the   six-year   statute  of

            limitations of  I.R.C.   6501(e) applies,  not the three-year

            limitation of section 6501(a).  We reject that argument.  The

            six-year  limitation contained  in  section  6501(e)  applies

            where the  taxpayer  omits an  item  from gross  income  that

            exceeds twenty-five percent of the gross income stated in the

            return.  Eagan asserts that his 1987 gross income was $4,432,

            and  since the  omission  in that  year exceeded  twenty-five

            percent of that amount, the six-year limitation should apply.

            But Eagan's  argument fails to recognize  that "gross income"

            of  a  trade or  business is  specially  defined in  I.R.C.  

            6501(e)(1)(A)(i)  as "the  total of  the amounts  received or

            accrued from the sale  of goods or services."  In 1987, Eagan

            was  taxed as a  trade or business.   He  reported $73,180 of

                                
            ____________________

            put  the IRS on  notice of  Eagan's recharacterization  at an
            earlier  point than did the  income tax refund  claim.  Eagan
            does not make this argument, however, and the record does not
            indicate the date when Eagan filed his FICA refund claim with
            the IRS.  The Eagan I refund suit was filed in district court
                          _______
            on  April 3,  1992, only  eleven days  before the  income tax
            refund  claim at issue  here, and that  eleven day difference
            does not alter the outcome.

                                         -13-
                                          13

            income, earned both as  a statutory employee8 of  Mass Mutual

            and   as  an  independent   contractor  for  other  insurance

            companies, on  Schedule C of  Form 1040, entitled  "Profit or

            Loss  from Business."   Schedule  C was  the proper  place to

            report that income,  and by reporting it  as business income,

            Eagan  was  able  to  deduct a  variety  of  business-related

            expenses such as office  rent, supplies, wages for employees,

            etc.,  that are generally not deductible by a taxpayer who is

            not  engaged  in a  trade or  business.   Eagan  clearly fell

            within the  I.R.C.   6501(e)(1)(A)(i)  special definition  of

            "gross  income" for a trade or business, and his gross income

            was therefore $73,180 for the limited purpose of applying the

            statute of limitations.

                      Although the  record is somewhat unclear  as to the

            total  amount omitted from his 1987 taxable income due to his

            improper  participation in the 401(k)  plan, it appears to be

            less than $5,000, and  in any event there is no  assertion by

            Eagan that  it is more  than twenty-five percent  of $73,180.

            Contrary  to  Eagan's  assertion, the  three-year  statute of

            limitation of section 6501(a) applies.

                                         IV.
                                         IV.
                                         ___

                                      CONCLUSION
                                      CONCLUSION
                                      __________

                                
            ____________________

            8.  The  instructions to  Schedule C  require a  taxpayer who
            received income as a statutory employee to report that income
                                 _________
            on  Schedule C, rather  than on line  7 of Form  1040 where a
            typical employee's salaries and wages are reported.

                                         -14-
                                          14

                      We conclude that all of the elements of the duty of

            consistency   are  met   in  this   case.     Having  earlier

            misrepresented himself  as a  statutory employee in  order to

            enjoy  tax-deferred retirement  plan contributions,  Eagan is

            estopped  from now claiming he was never an employee in order

            to enjoy tax-free withdrawals.9  As the Eighth  Circuit aptly

            put it:

                      It is no more right  to allow a party  to
                      blow hot and cold  as suits his  interest
                      in    tax    matters   than    in   other
                      relationships   whether   it  be   called
                      estoppel,  or a  duty of  consistency, or
                      the fixing  of a  fact by  agreement, the
                      fact fixed for  one year ought  to remain
                      fixed in all its consequences.

            Beltzer, 495 F.2d at 212-13.  Or, to paraphrase the hackneyed
            _______

            aphorism, Eagan  cannot retain  his cake  and  consume it  as

            well.  The decision of the district court is affirmed.
                                                         ________

                                
            ____________________

            9.  We recognize that Eagan's  1989 withdrawal was subject to
            the ten percent additional tax on early  distributions, a tax
            that  would  not apply  if Eagan  was  taxed on  the original
            contributions as if  made to  a non-qualified plan.   In  our
            view, however,  it is  not inequitable  that Eagan  should be
            subject to this tax.   Eagan enjoyed the economic  benefit of
            deferring  for many years the tax  on the plan contributions,
            earning income on  the portion of the contributed  funds that
            would otherwise have been paid to the IRS.

                                         -15-
                                          15