Eagan v. U.S.

• Decision Date: 07 February 1996
• Docket Number: No. 95-2073,95-2073
• Parties: -1514, 96-1 USTC P 50,184, 19 Employee Benefits Cas. 2921, Pens. Plan Guide (CCH) P 23918S Michael K. EAGAN, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 13

80 F.3d 13

77 A.F.T.R.2d 96-1514, 96-1 USTC P 50,184,

19 Employee Benefits Cas. 2921,

Pens. Plan Guide (CCH) P 23918S

Michael K. EAGAN, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 95-2073.

United States Court of Appeals, First Circuit.

Heard Feb. 7, 1996.

Decided March 29, 1996.

Appeal from the United States District Court for the District of Massachusetts; Hon. Joseph L. Tauro, U.S. District Judge.

Peter L. Banis with whom Ley & Young, P.C., Lawrence P. Heffernan, H. Bissell Carey, III, and Robinson & Cole, Boston, MA, were on brief, for plaintiff-appellant.

Bridget M. Rowan, Attorney, Tax Division, U.S. Department of Justice, with whom Loretta C. Argrett, Assistant Attorney General, Washington, DC, Donald K. Stern, United States Attorney, Boston, MA, Gary R. Allen, and Kenneth L. Greene, Attorneys, Tax Division, U.S. Department of Justice, Washington, DC, were on brief, for defendant-appellee.

Before STAHL, Circuit Judge, ALDRICH, Senior Circuit Judge, and LYNCH, Circuit Judge.

STAHL, Circuit Judge.

Michael K. Eagan appeals 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 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. 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 employee ¹ of the insurer for whom they sell full time, subject to employment tax withholding and eligible to participate in the insurer's tax-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 determined ² 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 tax return, filed in August 1990. Because Eagan was not yet 59 1/2 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. 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 tax ³ 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) ("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 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 no further tax due when "after-tax" funds were eventually withdrawn.

administrative refund of his FICA taxes for 1988-1992.

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 limitations ⁴ 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.

III. 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.

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...