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
________________
Heffernan,
_________

with

whom

Ley
& Young, P.C.,
_____________________

Lawrence
_________

H. Bissell Carey, III, and Robinson & Cole were on br

______________________
________________

for appellant.
Bridget M. Rowan,
_________________
Justice,

with whom

Attorney,

Tax Division,

U.S.

Loretta C. Argrett, Assistant

___________________

Department

Attorney Gener

Donald K. Stern, United States Attorney, Gary R. Allen, and Kenneth

_______________
_____________
_______
Greene,
______

Attorneys, Tax Division, U.S.

Department of Justice, were

brief for appellee.

____________________

March 29, 1996

____________________

STAHL,
STAHL,

Circuit Judge.
Circuit Judge.
______________

Michael K.

Eagan appeals

from the grant of summary judgment in favor of the government

in his

action seeking

withdrawal from

a refund

of taxes

paid on

an early

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,

of

the

company

did not qualify as

sponsoring

a statutory employee

the retirement

plan.

In the

present suit, Eagan argues that his participation in the plan

violated

the

requirement

exclusive benefit of

for

tax purposes

taxable.

and

that

the plan

operate

employees, thus disqualifying

rendering contributions

for

the

the plan

to the

plan

With

ingenuity,

contributions were taxable

Eagan

argues

when made,

the plan cannot be taxed, and

that

because

his withdrawals

therefore he is due a

the

from

refund.

Conveniently for Eagan, the applicable statute of limitations

now bars the assessment

to the plan.

of tax on most of

the contributions

Thus, if Eagan's argument is accepted, he would

have

the best of

most

of the

both worlds: the

original

ability to

contributions and

avoid tax on

on the

subsequent

withdrawals.

The

rejected

Internal

district

that result.

Revenue

had

court,

unmoved

It ruled

the

by

that the

discretion

Eagan's

plea,

Commissioner of

to

ignore

any

-22

disqualifying effect on the

non-employee.

plan of Eagan's participation as

Accordingly,

the

court granted

summary

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

ensued.

We

different

Eagan

now affirm

ground.

the district

court, although

on a

We hold that the duty of consistency bars

from taking a position

in one year

to his advantage,

and

then later, after correction is barred by the statute of

limitations,

taking

contrary

position

to

his

further

advantage.

I.
I.
__

BACKGROUND
BACKGROUND
__________

During

insurance

insurers.

Full-Time

the relevant

agent,

earning

tax years,

commissions

Eagan was

from

a life

number

of

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

Agents" with

Company ("Mass

Massachusetts Mutual

Mutual"),

that solicitation

Life Insurance

of Mass

Mutual

policies would be his "principal business activity."

The Internal

Revenue Code classifies

life insurance salesman" as

an employee1 of the

a "full-time

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

instructions,

and regulations refer to them

e.g., IRS Form

____

W-2 Wage and Tax Statement;

for Schedule C Profit or Loss From Business.

-33

IRS

that way.

forms,
See,
___

IRS Instructions

deferred

retirement

7701(a)(20).

plans.

Mass Mutual

employee-agents,

and

the Internal

Based on

I.R.C.

IRS

determined2

plans were

401(a) of

(26 U.S.C., hereafter

"I.R.C.").

Eagan's representation in the

employee and

the

treatment under section

Revenue Code

Full-Time Agents,"

3121(d)(3)(B),

maintains retirement plans for its

the

qualified for tax-favored

See
___

"Career Contract for

Mass Mutual treated Eagan

contributed portions

as a statutory

of his compensation

to a

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

("the 401(k)

deferred

plan").

on the

Under this arrangement,

portion of

taxation was

Eagan's compensation

that Mass

Mutual

contributed to

the

401(k) plan

earned on those contributions,

and

501(a),

but tax

would

and

see I.R.C.
___

eventually

Mutual

contributed

Eagan's behalf from 1981 until

Mass

Mutual

consistently

treated the

was

terminated.

treated himself

to

income

401(k), 402(a),

be due

withdrew funds from the plan, see I.R.C.

___

Mass

on any

when

402(a), 72(t).

the

401(k) plan

1992, when his contract

On

as a

his

tax

statutory

401(k) plan as qualified,

Eagan

on

with

returns, Eagan

employee, and

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,

reported and paid income

tax on that withdrawal on

____________________

and he

his 1989

2.

In 1986,

Mutual

the IRS issued

finding

a determination letter

the retirement

plan

qualified for tax benefits under I.R.C.

at

issue

to Mass

here to

be

401(a).

-44

tax return, filed in August 1990.

59

for,

years

and

Because Eagan

was not yet

old when he withdrew the funds, he was also liable

paid, the

ten

percent

additional tax

on

early

distributions

filed

not

under I.R.C.

72(t).

an amended tax return

subject to

plan.

The IRS

any tax

In April

1992, Eagan

for 1989, claiming

that he was

on the

withdrawal from

disallowed Eagan's

the 401(k)

refund claim, and

Eagan

responded by filing the instant tax refund suit in the United

States District

claiming

Court

a refund

for the

of $1,755.81

District

for the

of

Massachusetts,

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

complicated and rather

The linchpin of the

brash.

refund claim is somewhat

We spell it

out in

claim is Eagan's contention that

detail.

he was

not a full-time insurance agent for Mass

1988, and 1989.

to

recover

In an earlier tax refund suit, Eagan

FICA

tax3

compensation in 1987 and

was

not subject

United States,
_____________

Mutual during 1987,

to FICA

withheld

from

his

Mass

later years, on the theory

tax as a

non-employee.

No. 92-10786-T (D. Mass. filed

sought

Mutual

that he

Eagan v.
_____

Apr. 3, 1992)

____________________

3.

"FICA"

is

the

Contribution Act,
of

an

I.R.C.

employment

acronym

for

the

Federal

which requires the withholding

tax

to fund

3101.

-55

Social

Security

Insurance
from wages
benefits.

("Eagan I").
_______

Eagan and

the IRS stipulated in

Eagan was not a full-time

thus not a statutory

3121(d)(3)(B).

FICA

withholding

accordingly

Eagan I that
_______

agent for Mass Mutual in

employee of Mass Mutual under

As a non-employee, Eagan was

on

his

he received

Mass

a refund

Mutual

of his

1987 and

I.R.C.

not subject to

compensation,

1987 FICA

and

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

Mutual

401(k) plan.

scheme, a

to

implications for

the

sponsor.

participation

He argues

that

in the

under the

qualified tax-deferred retirement plan

exclusive

See
___

violated this

of the

401(a)(2).

he claims, his

employees

Because

the

tax benefits.

plan

was

of

must inure

the

he was

rendering the

See id.
___ ___

Mass

statutory

participation in the

"exclusive benefit rule,"

not qualified for

because

benefit

I.R.C.

employee in 1987,

that

his

plan

not an

plan

plan

Eagan then argues

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.

I.R.C.

61(a)(15).

He concludes

See
___

that if the contributions

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

-66

no

further tax

due when

"after-tax" funds

were eventually

withdrawn.

Thus,

taxes he

1989.

paid in

Eagan contends

he is

connection

with his

Since the statute

assessing

refund on

early withdrawal

of limitations4 bars

tax on most of the

to the plan on

due a

the

in

the IRS from

contributions Mass Mutual made

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

had previously

Mutual

401(k)

order.

issued a

plan

The court pointed out

that the IRS

determination letter that

was

qualified,

and

the Mass

although

the

Commissioner

"has

authority

determination [that the plan

of Eagan's participation]

has not done

so in

discretion,

the

to

issue

corrective

was no longer qualified because

with retroactive application,

her discretion."

court

deferred

decision, and consequently granted

Finding

to

the

no abuse

she

of

Commissioner's

summary judgment for

the

government.

____________________

4.

A three-year

would

apply

to

statute of
Eagan's

contributions to the 401(k)

limitations, I.R.C.

6501(a),

non-payment

on

of

tax

plan, as we explain in

the

part III

of this opinion.

5.

Under his

theory, Eagan would,

contributions and

income earned

however, owe tax

on his plan

assets in

years within the three-year statute of limitations.

-7-

on any
tax

III.
III.
____

ANALYSIS
ANALYSIS
________

Our review

v. FDIC, 7 F.3d
____

of summary judgments is

1054, 1056 (1st Cir. 1993).

plenary.

We

Levy
____

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

effectively to ignore the

was a qualified

plan, and thus

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 government's main

The

court apparently accepted

argument in its memorandum

supporting

summary judgment, but the authorities cited by the government

are not directly on point.

has the

authority to

While the Commissioner

consider a

401(k)

probably

plan qualified

in

spite of the erroneous

participation of one non-employee, we

need not reach that

question in order to affirm

judgment.

we reach

Nor

participation

do

rendered

the

the

plan

statutory framework, but we note our

of this argument.

the summary

question whether

disqualified

Eagan's

under

the

considerable skepticism

We believe there is a more direct basis on

which to affirm the decision below.

-88

The

duty

of

consistency

estops Eagan

from

seeking a refund

by asserting that his participation

401(k)

improper.

plan was

"`duty of

had

As

consistency' prevents

the advantage of a

now closed to review

position and,

by

we

by the government -- from

he should

before, avoiding the present tax."

have

the

has already

past misrepresentation --

claiming

in the

recently observed,

a taxpayer who

now

in a year

changing his

paid

more

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."

60.05.

The duty

Id., 18
___

F.3d

of consistency

at 26;

Mertens, supra,
_____

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

has

previous

run

to

change

the

recharacterize the situation

Commissioner."

(5th

in such

limitations

representation

a way as

or

to harm

to

the

Herrington v. Commissioner, 854 F.2d 755, 758

__________
____________

Cir. 1988), cert. denied,

_____ ______

these requirements

490 U.S. 1065

(1989).

are met, "the Commissioner may

When

act as if

the previous representation, on which he relied, continued to

be true,

assert

even if

it is

the contrary."

not.

Id.
___

The

The

taxpayer is

elements of

estopped to

the duty

of

-99

consistency are present in this case.

misrepresentation by the taxpayer.

1987,

First,

there

was

Eagan represented on his

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

time insurance

agent for

employee eligible

plan.

Eagan

Mass

Mutual, he

to participate

made that

in the Mass

representation to

submitting with his return

contributed

each year

to the

(4)

treating

premature

the

the IRS

plan; (3)

withdrawal

penalty.

from the

a qualified

Eagan also

by: (1)

his Mass

the compensation

excluding from

his account balance in the

withdrawal from

associated tax and

Mutual 401(k)

a statutory employee;

from gross income

401(k)

income the earnings on

statutory

for each of those years

Mutual Form W-2 indicating that he was

(2) excluding

was a

401(k)

plan and

gross

plan; and

plan

as

paying the

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

issuing Eagan's W-2 forms

plan on his behalf.

relied on that

representation in

and by contributing to the

401(k)

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.

the

duty of

taxpayer

consistency

"seems to
_____

position amounts to a

-1010

In Lewis,
_____

apply when

we noted that

the earlier

misstatement of fact, not of

law."

not

18 F.3d at 26 (emphasis added).

examine

the fact-or-law

certainly made

no holding on

adopt the approach

the

issue

But

in

that point.

of the Fifth

any

in Lewis, we did
_____

depth, and

See id.
___ ___

Circuit in Herrington
__________

we

We now

that

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

insurers

C.F.R.

Eagan devoted

and any

to other

pursuits.

-1(d)(3)(ii).

the question

law, but rather "at best a

Therefore, we

Mutual relative

non-insurance business

31.3121(d)-1(d)(2) and

as in Herrington,
__________

Id.
___

to Mass

was not a

See 26
___

In this case,

pure question

mixed question of fact and

reject Eagan's argument that the

of

law."

duty of

consistency does not apply to his misrepresentation.

Second,

misrepresentation,

the

accepting

IRS

his

relied

returns

on

as

allowing the statute of limitations to run. See id.

___ ___

Eagan's

filed

and

There is

no

suggestion that

Eagan's returns at

the

IRS was

face value

unreasonable in

or that the

known that Eagan was not a full-time life

for Mass Mutual.

-1111

accepting

IRS should

have

insurance salesman

Third, Eagan has recharacterized himself

employee

refund

of

in 1987,

1988, and

1989, and

as a non-

thus entitled

to a

for the taxes on his 1989 withdrawal, but the statute

limitations

contributions

thereon.

bars

made

Section

the

to

the

6501(a)

IRS

from

taxing

401(k) plan

of the

most

and

the

Internal

of

the

earnings

Revenue

Code

provides that taxes must be assessed within three years after

the return

is filed.

government to

must show

the statute

prevail on the duty of consistency defense, it

that, at

we agree,

1988 and 1989 taxes

an

the time of

barred reassessment

He concedes, and

filed

Eagan states in his brief that for the

amended

Eagan's recharacterization,

of his 1987

that it is

income taxes.6

immaterial that

were still open to reassessment

1989

return

on

April

14,

his

when he

1992,

recharacterizing himself as a

refund.7

Because

non-employee in order to claim

Eagan filed

his

1987 tax

return

on

____________________

6.

In

a letter

Eagan asserted
deducted

attached

to Eagan's

amended 1989

that "during the years in

from commissions

earned

Massachusetts Mutual Life Insurance

return,

which amounts were

by him

and

paid by

the

Company, he did not meet

the definition of `full-time insurance salesman' as contained

in

Section 7701(a)(20)."

began to

participate in

appears that the

when Eagan

the

plan.

record indicates

the 401(k) plan in 1981.

IRS is also

before 1987
401(k)

The

that Eagan
Thus, it

barred from reassessing

may have improperly

However, the

years

participated in

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

when Eagan filed his

time of recharacterization was

claim for a FICA tax

eventually litigated as

Eagan I.
_______

refund, which was

Arguably, the FICA

claim

-1212

September 26, 1988, the three-year statute

out

more than

six months

employment status in his

the

before Eagan

on 1987 taxes ran

recharacterized his

amended 1989 return.

As

a result,

IRS is barred from taxing the contributions made in 1987

and earlier

years, and

therefore the

duty of consistency is satisfied.

third element

of the

Eagan

limitations of

argues

I.R.C.

that

the

six-year

6501(e) applies,

statute

not the three-year

limitation of section 6501(a).

We reject that argument.

six-year

in

limitation contained

where the

taxpayer

omits an

item

of

section

6501(e)

from gross

The

applies

income

that

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

return.

and

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

since the

omission

in that

year exceeded

twenty-five

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

But Eagan's

of

argument fails to recognize

trade or

6501(e)(1)(A)(i)

business is

as "the

accrued from the sale

was

taxed as a

specially

total of

that "gross income"

defined in

the amounts

of goods or services."

trade or business.

He

I.R.C.

received or

In 1987, Eagan

reported $73,180 of

____________________

put

the IRS on

earlier

notice of

Eagan's recharacterization

point than did the

income tax refund

claim.

at an
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.
on

The Eagan I refund suit was filed in district court

_______

April 3,

refund

1992, only

claim at issue

eleven days
here, and that

does not alter the outcome.

-1313

before the

income tax

eleven day difference

income, earned both as

and

as

an

independent

companies, on

Loss

a statutory employee8 of

Schedule C of

from Business."

report that income,

Eagan

was

able

to

not

for

C was

variety

insurance

"Profit or

the proper

and by reporting it

deduct a

other

Form 1040, entitled

Schedule

expenses such as office

etc.,

contractor

Mass Mutual

place to

as business income,

of

business-related

rent, supplies, wages for employees,

that are generally not deductible by a taxpayer who is

engaged

within the

"gross

in a

I.R.C.

trade or

business.

6501(e)(1)(A)(i)

Eagan

clearly fell

special definition

of

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

total

record is somewhat unclear

as to the

amount omitted from his 1987 taxable income due to his

improper

participation in the 401(k)

less than $5,000, and

Eagan that

Contrary

in any event there is no

it is more

to

Eagan's

plan, it appears to be

than twenty-five percent

assertion, the

three-year

assertion by

of $73,180.

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.

-1414

We conclude that all of the elements of the duty of

consistency

are

met

misrepresented himself

enjoy

in

this

as a

tax-deferred retirement

case.

Having

earlier

statutory employee in

order to

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
blow hot and cold
in

tax

the fixing

as suits his

matters

relationships
estoppel,

to allow a party

or a

whether
duty of

of a

fact fixed for

than

fact by

interest
in

it

to

be

other
called

consistency, or
agreement, the

one year ought

to remain

fixed in all its consequences.

Beltzer, 495 F.2d at 212-13.

_______

aphorism, Eagan

well.

cannot retain

Or, to paraphrase the hackneyed

his cake

and

consume it

The decision of the district court is affirmed.

________

as

____________________

9.

We recognize that Eagan's

1989 withdrawal was subject to

the ten percent additional tax on early

that

would

not apply

contributions as if
view, however,

made to

it is

subject to this tax.

deferring

if Eagan

taxed on

the original

a non-qualified plan.

not inequitable

that Eagan

Eagan enjoyed the economic

for many years the tax

earning income on

was

distributions, a tax

our

should be
benefit of

on the plan contributions,

the portion of the contributed

would otherwise have been paid to the IRS.

-1515

In

funds that