USCA1 Opinion

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT
____________________
No. 93-1365
ALAN E. LEWIS AND HARRIET R. LEWIS,
Petitioners, Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent, Appellee.
____________________
ON APPEAL FROM A DECISION
OF THE UNITED STATES TAX COURT
____________________
Before
Breyer, Chief Judge,
___________
Rosenn,* Senior Circuit Judge,
____________________
and Cyr, Circuit Judge.
_____________
____________________
David R. Andelman with whom Edward F. Fay, Colleen A. Brady
__________________
_____________ _________________
Lourie & Cutler, P.C. were on brief for appellants.
_____________________
Kenneth L. Greene, Attorney, Tax Division, U.S. Department

__________________
Justice, with whom Michael L. Paup, Acting Assistant Attorney Gener
_______________
Gary R. Allen and Curtis C. Pett, Attorneys, Tax Division, U
______________
_______________
Department of Justice, were on brief for appellee.
____________________
March 17, 1994
____________________
_____________________
*Of the Third Circuit, sitting by designation.

BREYER, Chief Judge.

____________
appeal

from

$1,062,500,
"ILT"

Tax

which

Alan

Court decision
a

distributed to

Lewises in

Harriet

assessing

Lewis-controlled
the

and

taxes

corporation
1984.

Lewis

In

upon
called

the

Tax

Court's view, that money represented an ILT "dividend," paid

to
(3)

the Lewises at that time.

(1986).

"dividend"

The
must

See I.R.C.
___

Lewises disagree.
come from

They

301(a), (c)(1)point out that a

corporation's "earnings

and

profits."

See id.
___ __

316(a).

And, they argue,

ILT had no

"earnings and profits," either in or before 1984, from which

it might

have paid a "dividend"

in 1984.

contrary conclusion, they believe,

The Tax Court's

rests upon a simple, and

clear, factual error.

_______
The

Lewises

further

argue

that,

if

ILT's

distribution of the $1,062,500 is not a dividend, neither is

it any

other kind of 1984

taxable "income."

See
___

id.
__

61

(defining "gross income" as "all income from whatever source

derived").

Rather,

in their

view, the

represents income that they constructively

accumulated from, earlier years,
through 1980.

The

1984 distribution
received in, and

namely from the years 1974

Lewises concede

that they

should have
___________

paid (but never have paid) income tax on this money sometime
____
_______________
between 1974 and

1981.

But, as all
___
-22

parties concede,

the

statute

of

assessing

limitations
taxes

now

for those

bars
earlier

Lewises's view, the Commissioner

and

the spirit, of that

the

government

conclude that

the

Commissioner

years.

have

And, in

the

cannot subvert the letter,

statute by taxing

should

from

now income that

___

taxed then.
____

The

we should, therefore, simply

Lewises

reverse the Tax

Court's determination.
In our view, the Lewises are correct about the Tax
Court's factual error.

The record makes clear that the 1984

distribution did not come from ILT's "earnings and profits."

It is, as the
that

the

Lewises say, some form of

Lewises "constructively

now-closed, tax years.

pay

accumulated income

received" in

prior, and

But, whether or not the Lewises must

taxes on that distribution

is a different

matter.

adjudicating tax cases, the courts have developed a

estoppel

known

as

"quasi

estoppel"

or

the

consistency," whereby a taxpayer may not take

one year to

his advantage,

after correction for that

and then at

facts

or

transaction.

Federal Income Taxation

_________________________
doctrine

requires

the

type of
"duty

of

a position in

some later

year is barred by the

limitations, adopt a contrary

In

point,

statute of

position touching on the same

Jacob

Mertens,

Jr., The Law of

____________

60.05 (1992).
Lewises

to

treat

Whether
the

1984

that
ILT

-33

distribution as taxable income is a

matter so far addressed

only superficially by the parties and upon which we wish the

Tax

Court's

invitation

views.
to hold

them in 1984, and we

We

therefore

decline the

that the $1,062,500

is not

remand this case to the Tax

Lewises's
taxable to
Court for

further proceedings.
I
Background Facts
________________
To understand the Tax

Court's factual error,

one

must have in mind a rather complex (and here undisputed) set

of events,

some

of which

took

after, December 1980, when ILT's

place before,

and

others

bank account showed a zero

balance.
A
Before December 1980

____________________
This
and Steven
federal
Europe

an effort by Alan Lewis,

Belkin, his business associate,

income
by

("TNT").
1980.

case arises out of

taxes

their

on revenue

travel

to avoid paying

generated

business, Trans

primarily

National

in

Travel

Two key sets of events took place before December

First, between 1974

TNT employees
local (e.g.,

send TNT

and 1980, Lewis

revenue

and Belkin had

generated by

European city) tours

the sale

in Europe to

of

the Cayman

-44

Island bank account of ILT, a

owned and
received

controlled.
from

TNT to

foreign corporation that they

ILT transferred some

____
two

Cayman

of the

Island trusts.

trusts, it later turned out, were "grantor" trusts of

money
Those
Lewis

and Belkin (meaning, basically, that Lewis and Belkin should

have paid income tax on the money those trusts received when

the trusts received it.)

Second,
between 1977 and
received

and more important

1980 ILT

from TNT

to two

controlled by Lewis and

"loaned" the rest

____

Belkin.

such

travelled

In effect, this

personal investments.

"loans,"
a circuitous

money

formed and
was money

to themselves, for the purpose

these "loans" was approximately

three

of the

limited partnerships

"loaned" by Lewis and Belkin

of making some

for present purposes,

each

$2.075 million.

of which

path,

The total amount

involved

reaching

Lewis

of

There were
money
and

that
Belkin

through paper intermediaries:

a)

In 1977, ILT loaned $800,000 to Gran Compania

De Comercio, which reloaned the money to
Windikip
Financieringsmaatschappij
B.V.,
which
in turn
reloaned
the money
to
Charlesgate West Associates. We assume that
Gran Compania and Windikip were Lewis/Belkincontrolled entities that existed only on
paper (though their use may have avoided the
need to withhold U.S. taxes on interest
payments).
Charlesgate was a Lewis/Belkin
real estate partnership, which used the money
for the benefit of Lewis and Belkin.
-55

b)

In
1978,
ILT
loaned Charlesgate
West
Associates an additional $600,000, using the
same intermediaries.

c)

In
1980,
ILT
loaned
$675,000
to
a
Lewis/Belkin-controlled
real
estate
partnership
named
Taunton
Boulevard
Associates, which used the money for their
benefit.
This
time the
intermediaries
consisted of two different foreign entities
called "Mido Capital Venture,
N.V." and
"Bristol Realty Trust."

In each
borrowing

entities created

documentation.
owed

instance, the lending entity

Thus, on paper, it

Windikip (which

regular payments of
Similarly, it
(which

owed

all the

necessary loan-related
seemed as if Charlesgate

owed Gran

Compania, which

owed ILT)

interest plus

repayment of

principal.

seemed, on paper, as if

regular

payments

interest plus repayment of principal.

The Tax

Court found,

that

which

Taunton owed Bristol

owed ILT)

however,

Mido,

and all the

neither Lewis

nor

Belkin,

the persons

of

in

control of Charlesgate and Taunton Associates, ever intended

to

pay back the

$2.075 million in "loans"

to ILT.

Hence,

for tax purposes, they were not loans at all.

By
all

the

TNT

the end of
money

Lewis/Belkin "grantor"
real

estate

1980, ILT apparently

it

had

received

trusts, or

partnerships

by
-66

2)

way of

either
to the
the

had paid out

1)

to

the

Lewis/Belkin

$2.075

million

Charlesgate and Taunton

Court

found

that, as

balance was zero.

loans.
of

As we have

December

31,

said, the

1980, ILT's

Tax
bank

-77

B
After 1980
__________
Three
First,

in

significant

1983,

association.

Belkin

As part of

property jointly owned or

the three

"loans" from

and Lewis

(in the other

occurred
ended

after

their

1980.

business

their consequent efforts to divide

controlled, they decided to repay
ILT.

"money flow," having (in the

by Windikip,

events

They therefore reversed

one case) Gran Compania

the
(paid

paid by Charlesgate) pay ILT $1.4 million, and

case) Mido Capital

(paid by Bristol

Realty,

paid by Taunton) pay ILT $708,658.

Second,

ILT,

having

received this

money

(plus

related interest) from Gran Compania and Mido, divided it in

half,
and

distributing $1,079,329
$1,079,329 to

amount

to Belkin's

Lewis's "grantor"

($1,062,500)

of

this

trust.

to a

The adjusted

distribution

"grantor" trust in 1984 (which, as noted

tax purposes

"grantor" trust

distribution to

to

Lewis's

above, amounts for

Lewis

himself) is

the

money at issue here.

II
The Tax Court's Error
_____________________
The
that

factual record,

the underlying,

as just

and possibly

described, suggests

difficult,

question in

-88

this case is

not one of finding the facts,

but rather, one

of characterizing facts that are essentially beyond dispute.

______________
Is ILT's 1984 distribution of roughly $2.159 million taxable
"income"

to its recipients in

light of the

fact that that

distribution originated in the repayment of sham loans (made

__________
in years now closed to review), the funds for which "loans,"
in

turn, originally

taxable

(but

(again, in

took the

untaxed)

years now

form of

income

to

closed to

what may

those

review)?

avoided this question, however, by finding

had other
_____

"earnings

same

and profits"

distribution could have been made.

out

have been
recipients

The

Tax Court

as fact that ILT

of which

its

1984

The Tax Court found that

between 1981
and 1984, unidentified
amounts
were deposited
into and/or
credited to ILT's Cayman Islands bank
account in the approximate amount of
$4.5 million.
Since the

law presumes that a

from "earnings

and profits,"

corporate distribution comes

leaving the taxpayer

to show

the contrary, see Hagaman v. Commissioner, 958 F.2d 684, 695

___ _______
____________
n.16

(6th Cir. 1992) (citing cases), were it true that $4.5

million
1984)

in "unidentified
"deposited

into

amounts"
and/or

were (between

credited

to

ILT's

1981 and
Cayman

Islands bank account," the law would simply presume that the
-99

$2.159 million payment in

so

because

$4.5

1984 was a "dividend."

million

repayment would still

minus the

$2.159

have left ILT with

(This is

million

loan

$2.341 million in

"earnings and profits" -- enough to support a $2.159 million

dividend.)

And, the Lewises

would have to

pay taxes upon

that dividend income.

Unfortunately
makes

clear that

significant

for

it is

source

of

the

Commissioner, the

not true that

___
income.

The

ILT had
1981-1984

account deposits are fully explained; and,

$4.5

million

otherwise.

in
The

"earnings and
Tax

"clearly erroneous."
(Tax

to

See, e.g., Hagaman,

___ ____ _______

Court's findings

accepted

some other
_____
ILT

bank

ILT did not have

profits,"

Court's finding

record

accumulated

or

the contrary

is

958 F.2d at

690

on appeal

unless "clearly

erroneous").
We
testified,
income.

reach

this conclusion

without contradiction,
_______ _____________
He said

that ILT

because
that

was formed to

ILT

Lewis himself
had no

serve as

other
a tax-

saving entity for TNT's "local tour"

money (in other words,

that ILT was a sham corporation), that the transfers of that

"local tour" money constituted ILT's sole significant source
____
of "income,"
after

and that TNT did not transfer any money to ILT

___

1980.

Lewis's

testimony is

supported

by the

Tax

-1010

Court's own explanation of

tax

the workings of the Lewis/Belkin

avoidance plan, which fully accounts for the money that

ILT received.

Nothing in that explanation suggests that ILT

had some other source of income.

_____
Finally,

and

into

evidence

introduced

most

important,

(over the

ILT's 1981-1984 bank account records.

that

ILT's

interest

income

paid on

during

that

the Charlesgate

the

Lewises's

Commissioner
objection)

Those records confirm

period

consisted

and Taunton

of

1)

"loans," 2)

interest earned on the account balance, and 3) the return of

the

Charlesgate and Taunton "loan" principals in 1984.

attach

that exhibit as an

Appendix here.)

(We

The Lewises in

their brief go through each entry, showing how it falls into

one of
bank

these three
errors

--

categories (with

deposit

(4/26/84), reversed the

$37,625 (5/25/84),
explanation
statement
amounts

deposits refer
that
other

by

deposits,

the facts

deposits in

Tax

Court

to "Mido"

should have

of

$1.415

reversed about one month

shows large
the

notation

of two
million

same day, and a deposit notation of

is supported

that

the exception

that

the very

mentions,

2)

or "Gran Compania,"

paid ILT
totalling

interest on
roughly

later).

Their

1) the

"loan return"
many

smaller

the entities

the loans,
$2.7

bank

million,

3) the
bear

-1111

references of "from fixed [or 'call'] deposit," which is how

banks

sometimes

instruments,
returns for
as

label

and

4)

redeposits
the

from

Lewises, in

1983 and 1984, described

"interest" and paid

interest-bearing

their

amended

tax

the interest payments

taxes on them.

Not a

word in the

record, or in the Commissioner's brief, casts doubt upon the

Lewises's

explanation

of

the

record

of

ILT's

account

activity.
To
transfers

labelled "fixed" or

following

in an

over"

bank,

the

a depositor
and invest

instrument (contained,

separate interest-bearing account),

the

investment

from

interest-bearing instrument expires.

that

Suppose

take money from his account

interest-bearing

contained, in a
"roll

explanation of

"call" "deposit," consider

hypothetical example.

instructs a bank to
it

Lewises's

to, and redeposits from, certain interest-bearing

instruments
the

understand the

time

to

Suppose,

time

or

not

and to
as

the

for example,

on January 1, John Smith deposits $10,000 in the local

along

with an

Treasury Bills that

instruction

the

money in

expire every three months and

that pay

an annual interest of 5%.

to invest

Smith's bank statement might look

something like this:

Date
____

Deposit
_______

Withdrawal
__________
-1212

Balance
_______

Jan 1
Jan 1

10,000

March 31

10,125 (from
T'bills)

April 1
June 30
July 1

10,000
10,000 (to
T'bills)

0
10,125

10,000 (to
T'bills)
10,125 (from
T'bills)

125
10,250

10,000 (to
T'bills)

250

-1313

Sept 30

10,125 (from
T'bills)

Oct 1
Dec 31
The Commissioner

10,375
10,000 (to
T'bills)

10,125 (from
T'bills)
might use this

375
10,500

kind of bank

statement as

evidence

that Smith had interest income of $500, or even as

evidence

that Smith had income of $10,500 (if the source of

the initial
But, we
case, the

$10,000 deposit

do not see how

Tax Court --

is

not otherwise

the Commissioner -- or,

could add up

all the

explained).
as in this
deposits and

then use this statement as evidence that Smith had income of

$50,500.

The statement shows the contrary.

In our view, ILT's bank account, in respect to its

"fixed/call

deposit"

hypothetical.
and-forth
"fixed

[or

portions
sense

activity

'call']

to

and

of the

given

is

that

of

our

The Lewises say in their brief that the back-

transfers of

transfers

references,

from

we

(i.e., "fixed
____

between

deposit"
the

single

what

interest-bearing

money

ILT's

represent

"checking"

account.
understand
deposit"

account

intra-account
_____________

and

"investment"

This explanation
about

and

standard

may denote

makes
banking

a fixed-term,

certificate of deposit, and "call deposit"

may denote an interest-bearing instrument, say an investment

-1414

in a money

market fund, which can be recalled

the depositor).

Moreover,

on demand of

nowhere does the government deny

_______

that these transfers of money were short-term investments of

the

kind

just

described.

In

essence,

the

government

concedes the point.

The
lose, even
because

government

if their

explanation,

advance that

proceeding.

however,

in

immediately after they

One

can

meet a

advance,

that the

Lewises

bank deposit explanation

they did not

Court's initial

argues

explanation at

motion

for

of

reconsideration,

proof without

all logical alternative

the Tax

advance that

saw what the Tax Court

burden

reasonable for them

is believed,

The Lewises did

___
a

should

had written.

disproving,

possibilities.

in

It seems

not to have made an issue of the matter

earlier, and to have assumed that the government and the Tax
Court would read a bank deposit statement in accordance with
ordinary commercial banking practices.
Of
certain
bank

course, one

might

wonder how

we

can be

so

that the Lewises are right about the meaning of the

deposit statement.

cannot

be completely
__________

banking

practices.

plausible;

it

is

The

truthful

certain, for
But,

the

consistent
-1515

answer is

that we

we are

not experts

in

Lewises's

explanation

is

with what

we

know

of

the

commercial
provided
banking

world;

and, the

government

a counter-explanation,
principles, were

could easily

grounded in

the Lewises's

have

accounting or

explanation wrong.

The government failed even to advance a contrary argument.

If

we put

the

matter in

terms

of "burdens

of

proof," the Lewises satisfied that burden, initially through

testimony that would have proved sufficient had
the Tax

the IRS and

Court read the bank deposit statement as reflecting

ordinary banking

activity; and,

then, through

motion with

a full, and uncontroverted,

statement.

If

we put

the matter

a rehearing

explanation of the

in practical

terms, we

recall Abraham Lincoln's famous question and reply.

Lincoln

asked his cabinet members, "How many legs would a sheep have
if you call a tail a leg?"

"Five," they answered.

"Wrong,"

said Lincoln, "the answer is four; calling a tail a leg does

not make it one."
In sum, the record here shows that Lewis explained
the sources and amounts
in

the record

"improbable,

of ILT's income at trial.

suggests that
unreasonable,

his unrebutted
or

Nothing

testimony was

[even] questionable,"

that the Tax Court could choose to disregard it.

such

See Estate
___ ______

of DeNiro v. Commissioner, 746 F.2d 327, 331 (6th Cir. 1984)

_________
____________
-1616

(citing Commissioner v.
____________
1960)).
ILT

And, ILT's

did not
___

have

had

"unexplained

deposits

$4.5 million."

factual error, the

million

96 (5th

"dividend"

in

Insofar as it

Tax Court's finding

"earnings and profits" in 1984

$2.159

F.2d 91,

Cir.

bank statement supports that testimony.

approximate amount of
upon this

Smith, 285
_____

the
rests

that ILT

sufficient to support a

distribution

is

"clearly

erroneous."

III
Proceedings on Remand
_____________________
Our

conclusion

about

the

facts

of

this

case

returns it
for

to where we believe it

tax purposes,

should one

should have begun.

characterize the

How,

funds that

flowed to, and then through, ILT in 1984?

Some

of those funds represent "interest" payments

to ILT.

The Lewises agree that they must pay income tax on

the 1984

distribution to the

such interest.
part

But, those

of the distribution.

of ILT's receipt
(through their

extent that ILT

sums account for

received any
only a

small

The more important part consists

and subsequent return to

"grantor" trusts)

Lewis and Belkin

of the $2.159

million in

sham loan proceeds.

-1717

The Tax Court seemed

transfer of

funds to

to find that this undisputed

ILT reflected possible

ILT "earnings

and profits," for it said that

Petitioners have failed to show . . .
how a transfer between separate taxable
entities,
i.e.,
a
transfer
from

petitioner and Belkin to ILT, would not

be includable in ILT's taxable income or
in ILT's earnings and profits.
But, the question at issue here is not factual; it is legal.
_____
The

Lewises

did

show,

and

indeed,

the

Tax

Court

acknowledged, what the transfer consisted of, as a matter of

fact.
____

It consisted of an effort by Lewis and Belkin to send

themselves some money in

the manner described in Part

this opinion, namely, by

repaying "loans" obtained from ILT

several years before, and

flowing the repayment through ILT

to

themselves (in the form of their "grantor" trusts).

Lewises
were

I of

themselves

shams.

now concede

They now dispute,

that the

Commissioner's legal right to tax

original "loans"

not the facts,

characterize them as a legal matter.

The

but how to

That is, they deny the

in 1984 money that should

have been taxed earlier, in now-closed years.

The
government
greater

to

burden

law

either does,

tax this
of

or

money now.

"proving"

the

Commissioner, or, for that matter, the

-1818

does

not, permit

The taxpayer
law

than

courts.

the

has no

does

the

Our problem

is that neither the

thoroughly

Tax Court, nor the

Commissioner, seems

to have considered a portion of the law that may

answer the legal question.

conclude that

Our

own research has led us

a type of estoppel known

or the "duty of

to

as "quasi estoppel"

consistency" might operate

_____

in a way as

to

prevent the Lewises from denying the taxability, in 1984, of

the

$1,062,500 distribution.

prevents a taxpayer who

past
the

This "duty

of consistency"

has already had the advantage

of a

misrepresentation -- in a year now closed to review by

government

--

claiming he should
present

tax.

from

changing

his

position

have paid more tax before,

See Beltzer
___ _______

and,

by

avoiding the

v. United States,
_____________

495 F.2d 211,

212-13 (8th Cir. 1974).

The "duty of consistency"

seems to apply when the

earlier taxpayer position amounts to a misstatement of fact,

not of law.
755,

758

See, e.g., Herrington v. Commissioner, 854 F.2d

___ ____ __________
____________
(5th

Cir.

(1989); Beltzer,
_______
Commissioner,
____________

1988), cert. denied,

_____________

490

U.S. 1065

495 F.2d at 213; Mayfair Minerals, Inc. v.

______________________

456 F.2d

Corp. v. United States,

_____
_____________

622, 623

(5th Cir.

1972); Crosley
_______

229 F.2d 376, 380 (6th

Cir. 1956);

Ross v. Commissioner,
_____________________

169 F.2d

(simple failure

to report

that such income

has in

483, 496

income "is not

fact not been

(1st Cir.

1948)

a representation

received" and

does

-1919

not, without more,

supra,
_____

60.05

furnish grounds for

("Where there is

estoppel); Mertens,
_______

a mistake

of law

and no

factual misrepresentations, the doctrine of consistency does

not

apply.").

Moreover, the misstatement

must be

one on

which the government reasonably relied, in the sense that it

neither
the

knew, nor ought to

transaction

have known, the

mischaracterized

Herrington, 854 F.2d at 758;

__________
623; Ross, 169 F.2d at 495-96.
____

by

the

true nature of
taxpayer.

Mayfair Minerals, 456 F.2d

________________

See
___
at

In this

case, it

seems possible that

representations of key facts

activities
intent
If

of ILT

regarding the genuine business

throughout

on his and Belkin's

such representations

the 1970's

and the

part to repay

of

Lewis made

fact were

genuine

the ILT "loans."

made, then

holding

Lewis to them now might generate a 1984 tax liability.

We stress,
this

matter.

factual

Since it has not

history

Commissioner

opinion.

is

judgment insofar
And,

we remand

both

a full

Tax Court.

the

Lewises

opportunity to

We therefore

as it

about

-2020

to

and the
argue the

vacate the

is inconsistent

the case

further proceedings.

So ordered.
__________

we are uncertain

been argued here, and since

at issue,

should have

issue before the

Court's

however, that

the Tax

Tax

with this
Court for

NOTE:

See Slip Opinion for Appendix.

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