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
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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.
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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).
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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.
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("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
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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.
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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.
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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 ___
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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
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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.
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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 _______
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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.
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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.
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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.
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