
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
