Muskat v. United States

United States Court of Appeals
For the First Circuit

No. 08-1513

IRWIN MUSKAT AND MARGERY MUSKAT,

Plaintiffs, Appellants,

v.

UNITED STATES OF AMERICA,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW HAMPSHIRE

[Hon. Joseph A. DiClerico, Jr., U.S. District Judge]

Before

Lynch, Chief Judge,
Selya and Boudin, Circuit Judges.

James E. Higgins, with whom James E. Higgins, PLLC, John-Mark
Turner, and Sheehan, Phinney, Bass + Green, P.A. were on brief, for
appellants.
Teresa T. Milton, Attorney, Tax Division, with whom Nathan J.
Hochman, Assistant Attorney General, Thomas P. Colantuono, United
States Attorney, and Bruce R. Ellisen, Attorney, Tax Division, were
on brief, for appellee.

January 29, 2009
 SELYA, Circuit Judge. This case turns on the appropriate

tax treatment of a contractual payment initially reported as

ordinary income but later recharacterized as a capital gain. The

Internal Revenue Service (IRS) denied a requested refund and,

following a bench trial, the district court upheld that action.

This appeal touts four claims of error, the most

significant of which require us to elaborate upon the use and

meaning of, and then to apply, the "strong proof" rule. After

careful consideration of all four claims, we affirm the judgment

below.

I. BACKGROUND

Irwin Muskat worked for years in a family business, Jac

Pac Foods, Ltd., based in Manchester, New Hampshire.1 The firm's

signature line of business was the processing and distribution of

meat products to restaurant chains and other commercial entities.

In 1968, Muskat assumed operating control of Jac Pac. Under his

stewardship, Jac Pac's annual revenues soared to nearly

$130,000,000. Along the way, Muskat developed valuable

relationships with customers, suppliers, and distributors.

This litigation grew out of the acquisition of Jac Pac by

Manchester Acquisition Corporation, a subsidiary of Corporate Brand

1
Muskat and his wife, Margery, filed joint income tax returns
for the relevant years. They jointly appear as plaintiffs and
appellants in this case. For ease in exposition, we refer
throughout to Muskat as if he were the sole party in interest.
Nevertheless, our decision binds both taxpayers.

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Foods America, Inc. (collectively, CBFA). In 1997, George Gillett,

CBFA's chairman, contacted Muskat about a possible deal (at the

time, Muskat was Jac Pac's chief executive officer and the owner of

37% of its outstanding stock). Negotiations ensued. The

negotiations touched in part on whether Muskat would receive

remuneration over and beyond his share of the sale price for Jac

Pac's assets. Following lengthy deliberations, the parties agreed

that Muskat would continue to run the business after CBFA acquired

the assets, and that he would receive incremental payments under

both an employment agreement and a noncompetition agreement.

On March 31, 1998, representatives of CBFA and Jac Pac

executed an asset purchase agreement, which provided that CBFA

would buy all of Jac Pac's assets (save for certain real estate)

for $34,000,000 in cash and CBFA's assumption of enumerated

liabilities. The asset purchase agreement contained several

conditions precedent, three of which pertained to Muskat's

execution of specific contracts, namely, a subscription agreement,

an employment agreement, and a noncompetition agreement.

Muskat signed the required agreements on May 7, 1998.

The noncompetition agreement is of pivotal importance here. In it,

CBFA pledged to pay Muskat $3,955,599 in return for a covenant not

to compete over a thirteen-year period. The first installment —

$1,000,000 — was to be paid immediately, with other installments to

be paid in varying amounts and at varying intervals over the next

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thirteen years. These payment obligations were to survive Muskat's

death.

Muskat received the first installment in 1998. On his

1998 federal income tax return he listed the payment as ordinary

income and paid income and self-employment taxes accordingly. In

2002, however, Muskat reversed his field; he filed an amended

return for 1998, recharacterizing the payment as a capital gain and

seeking a tax refund in the amount of $203,434.2 The IRS denied

the requested refund. Muskat then sued in New Hampshire's federal

district court, alleging that the payment was compensation for the

transfer of his personal goodwill and, thus, was taxable as a

capital gain.

In a pretrial ruling, the district court declared that,

in order to prevail, Muskat would have to show by "strong proof"

that he and CBFA intended the payment to be compensation for

personal goodwill. Muskat v. United States (Muskat I), No. 06 Cv.

30, 2008 WL 138052, at *2 (D.N.H. Jan. 10, 2008). Following a

bench trial, the court determined that Muskat had failed to adduce

the requisite strong proof. Muskat v. United States (Muskat II),

No. 06 Cv. 30, 2008 WL 1733598, at *7-8 (D.N.H. Apr. 2, 2008). At

the same time, the court concluded that it lacked jurisdiction over

2
That amount comprised $176,652, which corresponded to the
lower tax rate on capital gains, and $26,782, which corresponded to
the elimination of self-employment tax. The parties now agree that
any overpayment of self-employment tax would be in the amount of
$21,479, rather than $26,782.

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Muskat's claimed entitlement to a return of self-employment tax.

Id. at *2-3. Consequently, the court entered judgment in favor of

the government. This timely appeal ensued.

II. ANALYSIS

This case plays out against two background principles of

tax law: The first principle holds that payments received in

exchange for a covenant not to compete are usually taxable as

ordinary income, whereas payments received for the sale of goodwill

are usually taxable as capital gains. Compare, e.g., Baker v.

Comm'r, 338 F.3d 789, 794 (7th Cir. 2003) (holding payments under

covenant not to compete taxable as ordinary income), with, e.g.,

Patterson v. Comm'r, 810 F.2d 562, 569 (6th Cir. 1987) (holding

amounts received for goodwill taxable at capital gain rates). The

second principle holds that the tax rates applicable to ordinary

income are normally higher than those applicable to capital gains.

See 26 U.S.C. § 1 (tax tables). We proceed against the backdrop of

these principles.

In this venue, Muskat advances four assignments of error.

These include: (i) the applicability of the "strong proof" rule;

(ii) the weight of the evidence as to whether the challenged

payment constituted compensation for personal goodwill (and, thus,

should have been taxed at capital gain rates); (iii) the exclusion

of expert testimony; and (iv) the lower court's refusal to consider

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the claim for a refund of self-employment tax. We discuss these

issues sequentially.

A. Strong Proof.

It is beyond hope of contradiction that, in a tax refund

suit, the complaining taxpayer bears the burden of proving the

incorrectness of the challenged tax treatment. See Webb v. IRS, 15

F.3d 203, 205 (1st Cir. 1994). Here, however, the parties disagree

as to the quantum of proof required to satisfy that burden.

Appellate courts review abstract legal questions de novo, and a

level-of-proof question comes within that purview. See United

States v. Goad, 44 F.3d 580, 585 (7th Cir. 1995); N. Am. Rayon

Corp. v. Comm'r, 12 F.3d 583, 586-87 (6th Cir. 1993); see also

Putnam Res. v. Pateman, 958 F.2d 448, 468-71 (1st Cir. 1992).

Accordingly, we review de novo the district court's determination

that Muskat had to adduce strong proof to prevail on his refund

claim.

The strong proof rule is peculiar to tax cases.3 It

applies when the parties to a transaction have executed a written

instrument allocating sums of money for particular items, and one

party thereafter seeks to alter the written allocation for tax

purposes on the basis that the sums were, in reality, intended as

3
In the area of taxation, the strong proof rule has been
thought to promote important values, such as administrative ease,
certainty, predictability in taxation, and general notions of
fairness. See Harvey Radio Labs., Inc. v. Comm'r, 470 F.2d 118,
120 (1st Cir. 1972).

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compensation for some other item. The rule provides that, in order

to effect such an alteration, the proponent must adduce "strong

proof" that, at the time of execution of the instrument, the

contracting parties actually intended the payments to compensate

for something different. See Harvey Radio Labs., Inc. v. Comm'r,

470 F.2d 118, 119-20 (1st Cir. 1972); Leslie S. Ray Ins. Agency,

Inc. v. United States, 463 F.2d 210, 212 (1st Cir. 1972). Phrased

another way, the party seeking to alter a written allocation must

demonstrate an actual meeting of the minds with respect to some

other allocation.4 The heightened standard strikes the appropriate

balance between predictability in taxation and the desirability of

respecting the contracting parties' real intentions. See Harvey

Radio, 470 F.2d at 120. In applying it, evidence that a written

allocation lacks independent economic reality, though likely

4
A few courts of appeals employ a more rigorous formulation
of the strong proof rule. See, e.g., Comm'r v. Danielson, 378 F.2d
771, 775 (3d Cir. 1967). That variation allows alteration of a
written allocation only through "proof which in an action between
the parties to the agreement would be admissible to alter that
construction or to show its unenforceability because of mistake,
undue influence, fraud, duress, etc." Id. The tax court generally
applies the strong proof rule as we have articulated it unless an
appeal would lie in a circuit that has adopted the alternative
formulation. See, e.g., Pinson v. Comm'r, T.C.M. (RIA) 2000-208,
2000 WL 949390, at *11 (2000).

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relevant, is not sufficient to satisfy the strong proof test.5 Id.

at 119-20.

Muskat vigorously contests the deployment of the strong

proof rule in the circumstances of this case. He starts with the

bald proposition that Harvey Radio is a relic of a bygone era and

should not be perpetuated. We reject this assault on the continued

vitality of Harvey Radio.

"We have held, time and again, that in a multi-panel

circuit, prior panel decisions are binding upon newly constituted

panels in the absence of supervening authority sufficient to

warrant disregard of established precedent." United States v.

Wogan, 938 F.2d 1446, 1449 (1st Cir. 1991). Such "supervening

authority" may take the form of a congressional enactment, a new

Supreme Court opinion, or an en banc decision of our own. See

United States v. Allen, 469 F.3d 11, 18 (1st Cir. 2006); Williams

v. Ashland Eng'g Co., 45 F.3d 588, 592 (1st Cir. 1995). The second

and third of these escape routes plainly do not apply here: Muskat

has not cited to any overriding judicial decision that would call

into question the durability of Harvey Radio.

5
The strong proof rule applies only when a contracting party,
or someone claiming by, through, or under a contracting party,
attempts to vary a written allocation. When the IRS seeks to
secure the reallocation of funds expressly earmarked for a given
purpose, it may do so by showing that the original allocation does
not comport with economic reality. See, e.g., Sullivan v. United
States, 618 F.2d 1001, 1007 (3d Cir. 1980); Harvey Radio, 470 F.2d
at 120.

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 This leaves only the escape route paved by statutory

enactments. In this vein, Muskat has argued that changes in the

tax code have rendered lifeless the rationales undergirding Harvey

Radio. But the strong proof rule is generic; it applies to the

entire universe of written allocations, not just to those where

changes in tax treatment have occurred. More importantly, the

modifications highlighted by Muskat make no mention of the strong

proof rule, nor do they necessarily imply that a different rule is

desirable. Accordingly, Harvey Radio remains good law in this

circuit.

Muskat's fallback position is that the strong proof rule,

even if velivolant, does not apply in the circumstances at hand

because Muskat was not a party to the written allocation. The

factual predicate on which this privity argument rests is faulty.

We need not tarry. The record shows with conspicuous

clarity that Muskat was a party to the allocation of funds to the

noncompetition agreement. For one thing, that agreement bears

Muskat's signature in his personal capacity. For another thing,

the testimony makes pellucid that, both individually and through

his representatives, he negotiated the overall CBFA/Jac Pac

transaction. That Muskat signed the asset purchase agreement on

Jac Pac's behalf was not a mere formality but, rather, an indicium

of his deep involvement in the structuring of the deal.

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 Finally, Muskat contends that the written allocation is

ambiguous and that this ambiguity renders the strong proof rule

inapposite. The premise behind this argument is sound: the strong

proof rule does not apply to ambiguous contractual allocations.

See, e.g., Kreider v. Comm'r, 762 F.2d 580, 586 (7th Cir. 1985);

Peterson Mach. Tool, Inc. v. Comm'r, 79 T.C. 72, 81-82 (1982). But

Muskat's attempt to rely upon this premise is an effort to force a

square peg into a round hole.

Whether a contract is ambiguous is a question of law.

Torres Vargas v. Santiago Cummings, 149 F.3d 29, 33 (1st Cir.

1998); Allen v. Adage, Inc., 967 F.2d 695, 698 (1st Cir. 1992).

"But a contract is not ambiguous merely because a party to it,

often with a rearward glance colored by self-interest, disputes an

interpretation that is logically compelled." Blackie v. Maine, 75

F.3d 716, 721 (1st Cir. 1996). Rather, a contract "is ambiguous

only if the language is susceptible to more than one meaning and

reasonable persons could differ as to which meaning was intended."

Uncle Henry's Inc. v. Plaut Consulting Co., 399 F.3d 33, 47 (1st

Cir. 2005).

In this instance, the noncompetition agreement hardly

could be clearer. It expressly states that the sums specified

therein will be paid to Muskat in order to protect Jac Pac's

goodwill and in consideration of his serial promises not to

participate in rival businesses, not to solicit employees to leave

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CBFA, and not to divert business opportunities from CBFA. The

specified payments are clearly allocated to this covenant not to

compete. In short, the noncompetition agreement unequivocally

reads — as its title suggests — like a garden-variety agreement not

to compete. See Black's Law Dictionary 392 (8th ed. 2008); see

also LDDS Commc'ns, Inc. v. Automated Commc'ns, Inc., 35 F.3d 198,

200-01 (5th Cir. 1994) (identifying agreement with similar

restrictions as a noncompetition agreement); Heritage Auto Ctr.,

Inc. v. Comm'r, 71 T.C.M. (CCH) 1839, 1996 WL 22405, at *5, *10

(1996) (treating agreement with similar provisions as covenant not

to compete for tax purposes).

In an endeavor to blunt the force of this reasoning,

Muskat notes that the preamble to the noncompetition agreement

recites that it was executed in consideration of the substantial

benefits accruing to Muskat under the asset purchase agreement — an

agreement that is itself ambiguous because it purports to allocate

a $59,000,000 purchase price even though Jac Pac received only

$45,000,000 from the sale. We fail to see how this arguable

discrepancy, most likely explicable in terms of assumption of

liabilities and other considerations, introduces an ambiguity into

the allocation set forth in the noncompetition agreement. Whatever

ambiguities might permeate the asset purchase agreement, there are

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none in the noncompetition agreement itself (to which the asset

purchase agreement unambiguously allocates $3,955,599).6

To sum up, none of Muskat's counter-arguments is

persuasive. Accordingly, we agree with the district court that

Muskat had to adduce strong proof that the contracting parties

intended, at the time of the transaction, that the challenged

payment would be compensation for Muskat's personal goodwill. It

is to that issue that we now proceed.

B. Weight of the Evidence.

The court below found that Muskat had failed to adduce

strong proof that the contracting parties intended the challenged

payment to be compensation for personal goodwill. Muskat II, 2008

WL 1733598, at *8. This is essentially a factual finding, and we

review it only for clear error. See Cumpiano v. Banco Santander

P.R., 902 F.2d 148, 152 (1st Cir. 1990) ("Findings concerning an

actor's intent fit neatly within the integument of the 'clearly

erroneous' rule."). Consequently, we will not disturb the district

court's determination "unless, on the whole of the record, we form

a strong, unyielding belief that a mistake has been made." Id.

6
Muskat claims that the survivability provision renders the
noncompetition agreement ambiguous. We do not agree. In all
events, the question is not whether that provision — with which we
deal infra — is a typical feature of a noncompetition agreement
but, rather, whether it lends an element of uncertainty to the
bargain struck by the contracting parties. In this case, it does
not.

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 The phrase "strong proof" is not self-elucidating. While

the utilization of an enhanced level of proof is consistent with

the spirit of our earlier cases, see, e.g., Leslie S. Ray, 463 F.2d

at 212, the precise import of the strong proof rule is arguably

best worked out on a case by case basis, see, e.g., United States

v. Tex. Educ. Agency, 467 F.2d 848, 864 (5th Cir. 1972). The tax

court cases leave the matter pretty much up in the air; that court

has construed the strong proof rule to require proof "beyond a mere

preponderance of the evidence." Major v. Comm'r, 76 T.C. 239, 247

(1981).

Despite the advantages of a loose articulation, we think

that a benchmark would be helpful. In our view, to constitute

"strong proof" a taxpayer's evidence must have persuasive power

closely resembling the "clear and convincing" evidence required to

reform a written contract on the ground of mutual mistake. See,

e.g., Ind. Ins. Co. v. Pana Cmty. Unit Sch. Dist. No. 8, 314 F.3d

895, 904 (7th Cir. 2002); Berezin v. Regency Sav. Bank, 234 F.3d

68, 72 (1st Cir. 2000); see also Nat'l Austl. Bank v. United

States, 452 F.3d 1321, 1329 (Fed. Cir. 2006) (collecting cases).

This analogy seems compelling because, under the strong proof rule,

a party seeking to vary a written allocation for tax purposes must

show a meeting of the minds different from that professed in the

written instrument — a showing that bears a family resemblance to

the showing required for the reformation of a contract. See, e.g.,

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Ind. Ins. Co., 314 F.3d at 904 (requiring party that seeks contract

reformation to show "a meeting of the minds resulting in an actual

agreement between the parties" different from that embodied in

their written contract).

The sources of "strong proof" are case-specific. For

that reason, an inquiring court, in determining whether there is

strong proof that the parties to a transaction intended the

allocation set forth in a written agreement to serve as a proxy for

some other (more genuine) allocation, should closely examine the

course of negotiations leading up to the agreement. See Critz v.

Comm'r, 54 T.C.M. (CCH) 947, 1987 WL 48834 (1987); Feller v.

Comm'r, 45 T.C.M. (CCH) 902, 1983 WL 14102 (1983).

In this case, the trial testimony revealed no discussion

of Muskat's personal goodwill during the negotiations. By the same

token, none of the transaction documents (including the early

drafts of those documents) mentioned Muskat's personal goodwill.

Muskat had ample opportunity to introduce the concept of personal

goodwill into the noncompetition agreement (which went through at

least five iterations), but he did not do so. And although there

is a reference to goodwill in the preamble to the noncompetition

agreement, that reference is to an avowed purpose to protect Jac

Pac's goodwill.

This is telling evidence. In our judgment, the absence

of any reference to Muskat's separate goodwill, combined with this

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express reference to Jac Pac's goodwill, makes it extremely

unlikely that the contracting parties intended the payments limned

in the noncompetition agreement to serve as de facto compensation

for Muskat's personal goodwill.

This intuition is reinforced by other pieces of evidence.

CBFA's president, Benjamin Warren, testified that he could not

imagine that any goodwill other than Jac Pac's was material to the

transaction. The asset purchase agreement allocated almost

$16,000,000 of the sale price to Jac Pac's goodwill, lending

credence to Warren's testimony and making a focus on Muskat's

separate goodwill implausible. Seen in this light and with due

deference to the district court's prerogative to judge the

credibility of the witnesses, the clear weight of the evidence

supports the conclusion that the challenged payment was, as stated,

compensation for the covenant not to compete, not compensation for

Muskat's personal goodwill.

Muskat musters two arguments designed to undermine this

conclusion. First, he asserts that the noncompetition agreement's

survivability provision is a dead giveaway that the payments called

for by the agreement are for something other than refraining from

competition (after all, Muskat hardly could compete subsequent to

his demise). Second, he asserts that the terms of his employment

and subscription agreements were so lucrative as to eliminate any

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realistic possibility that, at a relatively advanced age, he would

cross swords with CBFA.

The common thread that binds these arguments together is

that they are in service of Muskat's attempt to cast doubt upon the

economic reality of CBFA's need for a noncompetition agreement.

That game may not be worth the candle; proof that a written

allocation lacks economic reality does not, in and of itself,

constitute strong proof that the contracting parties intended some

other allocation. See Harvey Radio, 470 F.2d at 119-20. In any

event, as we explain below, the noncompetition agreement possessed

an adequate basis in economic reality.

Muskat, by his own admission, had a considerable

following in the trade (that is the core element of the "personal

goodwill" that he touts). While the presence of a survivability

provision is in some tension with the categorization of an

agreement as a covenant not to compete, see, e.g., In re Johnson,

178 B.R. 216, 220 (B.A.P. 9th Cir. 1995); Brinson Co.-Midwest v.

Comm'r, 71 T.C.M. (CCH) 1891, 1996 WL 27664, at *6 (1996); Ackerman

v. Comm'r, 27 T.C.M. (CCH) 1342, 1968 WL 1339 (1968), it is not

wholly antithetic to that taxonomy. After all, a person who has

the wherewithal (knowledge, contacts, and the like) to compete

effectively is in a strong position to drive a hard bargain in

exchange for his agreement to eschew competition. A survivability

provision may be part of that hard bargain. Thus, courts

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frequently have classified agreements that contain survivability

provisions as valid noncompetition agreements for tax purposes.

See, e.g., Thompson v. Comm'r, 73 T.C.M. (CCH) 3169, 1997 WL

344737, at *7-8 (1997); Buchner v. Comm'r, 60 T.C.M. (CCH) 429,

1990 WL 110212 (1990); Wager v. Comm'r, 52 T.C. 416, 419 (1969).

We think that classification is apt here, notwithstanding the

survivability provision contained in Muskat's noncompetition

agreement.

So too Muskat's argument that it was unlikely that he

would try to compete. It is true that competing would have had an

up-front cost. After the sale, Muskat continued to work for CBFA

in an executive capacity. He possessed a powerful financial

incentive to remain with CBFA: he had invested $2,000,000 in the

company through the subscription agreement, and his employment

agreement paid him a base salary of $273,000 per year, together

with a comprehensive benefits package and the prospect of sizable

bonuses.

On the other side of the balance, however, Muskat had

been enormously successful prior to the sale. There is no

indication that he was committed to retirement, infirm, or

otherwise situated so as to render his promise not to compete of

little value. Cf. Welch v. Comm'r, 73 T.C.M. (CCH) 2256, 1997 WL

102431, at *6-8 (1997) (finding that covenant not to compete lacked

economic reality when taxpayer was terminally ill at time of sale).

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Both Gillett and Warren testified that they valued Muskat's

relationships with customers, suppliers, and distributors, and

there is every reason to suppose that a man with Muskat's business

acumen could have earned as much or more money by turning his back

on CBFA and pursuing other (competitive) opportunities. Indeed,

Gillett testified that the noncompetition agreement was meant to

prevent that very possibility. The district court, as the arbiter

of witness credibility, see Fed. Refin. Co. v. Klock, 352 F.3d 16,

29 (1st Cir. 2003), was entitled to credit that testimony. The

noncompetition agreement was, therefore, sufficiently grounded in

economic reality.

The short of it is that the weight of the evidence is

completely consistent with the district court's conclusion that

CBFA sensibly protected its substantial investment in Jac Pac's

assets and goodwill by its contractual arrangement with Muskat. It

follows inexorably that the court did not clearly err in holding

that Muskat failed to adduce strong proof that the contracting

parties intended the payments delineated in the noncompetition

agreement to be compensation for Muskat's personal goodwill. The

payment received in 1998 was, therefore, taxable as ordinary

income. See Baker, 338 F.3d at 794 (holding that payment under

covenant not to compete is taxable as ordinary income).

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 C. Expert Testimony.

We review rulings admitting or excluding expert testimony

for abuse of discretion. United States v. Sebaggala, 256 F.3d 59,

66 (1st Cir. 2001). We will reverse such a ruling only if the

trial court "committed a meaningful error in judgment." Ruiz-

Troche v. Pepsi Cola of P.R. Bottling Co., 161 F.3d 77, 83 (1st

Cir. 1998) (citation and internal quotation marks omitted). Such

a bevue occurs when the court commits an "error of law, . . .

considers improper criteria, ignores criteria that deserve

significant weight, or gauges only the appropriate criteria but

makes a clear error of judgment in assaying them." Rosario-Urdaz

v. Rivera-Hernández, 350 F.3d 219, 221 (1st Cir. 2003).

At trial, Muskat sought to offer the opinion testimony of

George O'Brien, a certified public accountant, in order to

establish that most of the goodwill (73%) acquired by CBFA was

attributable to Muskat individually, not Jac Pac corporately. The

court excluded the proffered testimony on relevancy grounds.

Muskat appeals, maintaining that O'Brien's opinion tended to show

that he possessed a valuable asset (personal goodwill) that the

contracting parties probably would have taken into account.

The government's rejoinder begins with the suggestion

that Muskat neglected to preserve this objection. The record tells

a different tale: when the district court questioned the relevance

of the proffered testimony, Muskat's counsel summarized what

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O'Brien would say and explained how the testimony would support

Muskat's position. No more was exigible to preserve the point for

appeal. See Fed. R. Evid. 103(a)(2); see also Curreri v. Int'l

Bhd. of Teamsters, 722 F.2d 6, 13 (1st Cir. 1983).

The government's defense of the ruling on the merits is

sturdier. The principal issue at trial was whether the contracting

parties intended payments under the noncompetition agreement to

represent compensation for the transfer of personal goodwill. If

O'Brien planned to testify that Muskat possessed personal goodwill

separate from Jac Pac's goodwill, his testimony arguably may have

been relevant to that issue. But according to the proffer, O'Brien

would not have testified to that effect; rather, he would have

testified that a large slice of Jac Pac's goodwill was attributable

to Muskat. This is a significant distraction. All of Jac Pac's

goodwill, including any portion attributable to Muskat, was sold

under the asset purchase agreement. Thus, O'Brien's testimony

would have shed no light on the meaning of the noncompetition

agreement.

That ends this aspect of the matter. It is black-letter

law that "district courts enjoy wide latitude in determining the

relevancy vel non of evidence." Morales Feliciano v. Rullán, 378

F.3d 42, 58 (1st Cir. 2004). Given the nature of the proffered

testimony, the district court operated within the realm of its

discretion in excluding it.

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 D. Self-Employment Tax.

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

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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

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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). 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 *2-3.

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,

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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 (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.

7
The record reflects that, in a protest letter to the IRS
dated October 15, 2004, Muskat flagged the self-employment tax
issue with respect to tax years 1999 through 2002. The tax year at
issue in the instant case is 1998.

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 "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.

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III. CONCLUSION

We need go no further. For the reasons elucidated above,

we uphold the judgment of the district court.

Affirmed.

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