Robb Evans & Associates, LLC v. US

Filing

OPINION issued by Sandra L. Lynch, Appellate Judge; David H. Souter,* Associate Supreme Court Justice and Bruce M. Selya, Appellate Judge. Published. *Hon. David H. Souter, Associate Justice (Ret.) of the Supreme Court of the United States, sitting by designation. [15-2540, 15-2552]

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Entry ID: 6073837

United States Court of Appeals
For the First Circuit
No. 15-2540
ROBB EVANS & ASSOCIATES, LLC, AS RECEIVER, ETC.,
Plaintiff, Appellee,
v.
UNITED STATES OF AMERICA,
Defendant, Appellant.
____________________
No. 15-2552
ROBB EVANS & ASSOCIATES, LLC, AS RECEIVER, ETC.,
Plaintiff, Appellant,
v.
UNITED STATES OF AMERICA,
Defendant, Appellee.

APPEALS FROM THE UNIED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Michael A. Ponsor, U.S. District Judge]
[Hon. Kenneth P. Neiman, U.S. Magistrate Judge]

Before
Lynch, Circuit Judge,
Souter, Associate Justice,
and Selya, Circuit Judge.


Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.

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Paul A. Allulis, Attorney, Tax Division, United States
Department of Justice, with whom Caroline D. Ciraolo, Principal
Deputy Assistant Attorney General, Tax Division, United States
Department of Justice, Teresa E. McLaughlin and Gilbert S.
Rothenberg, Attorneys, Tax Division, and Carmen M. Ortiz, United
States Attorney, were on brief, for the United States.
David J. Vendler, with whom Morris Polich & Purdy LLP, Gregory
S. Duncan, Stephen G. Hennessy, Joseph S. Tusa, and Tusa P.C. were
on brief, for Robb Evans & Associates, LLC.

March 3, 2017

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SELYA, Circuit Judge.

Date Filed: 03/03/2017

Entry ID: 6073837

These appeals require us to

construe and apply 26 U.S.C. § 1341(a), reproduced in the Appendix,
a statutory provision that addresses the situation of a taxpayer
who pays taxes on income that she must later restore because it is
established

in

a

subsequent

year

unrestricted right to the income.

that

she

did

not

have

an

The statute permits such a

taxpayer to reduce her tax liability for the year of repayment by
the amount that her taxes in the year of inclusion would have
decreased had the restored funds been excluded from her income in
that year.

But there is a catch: by its terms, section 1341(a)

requires that the taxpayer must have had what appeared to be an
unrestricted right to the income when she first reported it.
Here, the controversy over the meaning and application
of section 1341(a) arises in the course of a tax-refund suit
brought by a court-appointed receiver.

The court below, noting

that Congress had enacted section 1341 in a spirit of fairness,
fashioned

a

"unrestricted

judicially
right"

created

requirement.

exception

to

Applying

the
that

statute's
judicially

created exception, the court proceeded to deny the government's
motion to dismiss and granted a modicum of relief.1

1

Both sides

The district court initially referred the government's
motion to dismiss to a magistrate judge.
See Fed. R. Civ. P.
72(b). The district court, exercising de novo review, see id.,
later adopted the recommendation, adding its own gloss. For ease
in exposition, we take an institutional view and refer to the
determinations below as those of the district court.
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After careful consideration of these appeals, we conclude

that the district court erred: that Congress, in the spirit of
fairness, tailored a statute to iron out a wrinkle in the Internal
Revenue Code does not give a court license to make the application
of the statute wrinkle-free.

This conclusion leads us to apply

the luminously clear language of the statute as written, sustain
the government's appeal, reject the cross-appeal, reverse the
judgment below, and remand for entry of judgment dismissing the
tax-refund suit.
I.

BACKGROUND
This tax-refund suit has its genesis in the efforts of

Robb Evans & Associates, LLC, a court-appointed receiver (the
Receiver), acting on behalf of a class of defrauded persons (the
underlying plaintiffs), to collect judgments previously rendered
against

a

network

of

interlocking

proprietors, John and Richard Puccio.

corporations

and

their

The twists and turns of the

Puccios' fraudulent scheme are by now well-documented.

See, e.g.,

Zimmerman v. Epstein Becker & Green, P.C. (Zimmerman V), 657 F.3d
80 (1st Cir. 2011); Zimmerman v. Puccio (Zimmerman IV), 613 F.3d
60 (1st Cir. 2010); Zimmerman v. Cambridge Credit Counseling Corp.
(Zimmerman II), 409 F.3d 473 (1st Cir. 2005).

We assume the

reader's familiarity with these opinions and with the district
court's exegetic accounts of the facts undergirding the class
action litigation.

See Zimmerman v. Cambridge Credit Counseling

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Corp. (Zimmerman III) 529 F. Supp. 2d 254, 256-64 (D. Mass. 2008);
Zimmerman v. Cambridge Credit Counseling Corp. (Zimmerman I), 322
F. Supp. 2d 95, 96-98 (D. Mass. 2004).2

Consequently, we rehearse

here only those skeletal facts needed to put these appeals into
workable perspective.
In 1996, the Puccio brothers formed Cambridge Credit
Counseling Corporation (CCCC), a non-profit corporation organized
under Massachusetts law.

At around the same time, they formed

parallel non-profit corporations in Florida and New York.

These

other corporations operated in much the same way as CCCC and, for
simplicity's

sake,

we

refer

to

the

three

non-profits,

collectively, as CCCC.
CCCC held itself out as skilled in improving credit
ratings and trumpeted its ability to help financially strapped
individuals by creating "debt management plans" for a fee.

Under

such a plan, an individual in straitened circumstances would make
a single monthly payment to CCCC, and CCCC would (at least in
theory) sprinkle payments around to the individual's creditors.
As part of its service, CCCC aspired to "re-age" clients' debt,
that is, to persuade creditors to mark clients' accounts as current

2

For the sake of completeness, we note that the decision in
Zimmerman III was affirmed by this court in Zimmerman IV, and the
decision in Zimmerman I was reversed by this court in Zimmerman
II. Neither of these appellate decisions calls into question the
district court's factual accounts.
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in exchange for promises that CCCC would make regular payments.
Business

boomed:

from

1996

to

2004,

CCCC

harvested

over

$250,000,000 from hopeful clients.
The Puccio brothers likewise owned and controlled an
array of for-profit businesses, some of which provided back-office
support to the non-profit entities.

The assets and operations of

these businesses were inextricably intertwined with those of the
non-profit entities: all of them shared management, staff, office
space, clients, and funds.

For example, CCCC freely transferred

clients' accounts to its for-profit brethren without bothering to
notify the affected clients.
The

balloon

went

up

in

2003,

when

the

underlying

plaintiffs brought a class action against the Puccios and several
of their corporations (both for-profit and non-profit).

Roughly

five years later, the district court granted summary judgment in
favor of the underlying plaintiffs on their state-law consumer
protection claims, Mass. Gen. Laws ch. 93A, and their claims under
the federal Credit Repair Organizations Act (CROA), 15 U.S.C.
§ 1679 et seq.

Judgment was entered against the corporations in

the amount of $259,085,983 and against the Puccios in the amount
of

$256,527,000.

The

Puccios

unsuccessfully

appealed.

See

Zimmerman IV, 613 F.3d at 69, 76.
Securing a judgment and realizing the fruits of that
judgment are two different things.

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Thus, the district court

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appointed the Receiver and tasked it with collecting the judgments
on behalf of the underlying plaintiffs. For the most part, though,
the money had vanished into thin air: the Receiver was able to
recoup less than $2,500,000.3

Endeavoring to boost this total,

the Receiver filed a tax-refund claim for $9,387,235.

The essence

of the Receiver's claim follows.


The Receiver can assert a refund claim on behalf of

certain taxpayers, namely, the Puccios and their for-profit
corporations, which were judgment debtors.


In earlier years, those taxpayers reported as income,

and

paid

taxes

on,

monies

that

they

euchred

from

the

underlying plaintiffs.


By virtue of the class-action judgment, the taxpayers

are now obligated to restore those monies to the underlying
plaintiffs (through the Receiver).


The taxpayers may deduct those repayments, see 26 U.S.C.

§ 162, and may reduce their tax liability for the year of

3

Pursuant to the district court's order of appointment, these
proceeds were deposited into what the court denominated as a
Qualified Settlement Fund. See Rob Evans & Assocs., LLC v. United
States, 9 F. Supp. 3d 165, 167 (D. Mass. 2014) (explaining that
the Fund will "hold the monetary assets of the receivership as
. . . acquired"); see also 26 C.F.R. § 1.468B-1 (defining
"qualified settlement fund"). Relatedly, we note that the district
court, in the rescript that embodied this order, misspelled the
Receiver's name (dropping a "b" from "Robb"). That bevue does not
affect the substance of the court's order.
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repayment by the amount that they overpaid in the years that
they originally reported the income, see id. § 1341(a).


Because the amounts of these deductions will exceed the

taxpayers' tax liability for the year of repayment, refunds
will be in order — and those refunds should be paid to the
Receiver.
In June of 2011, the Internal Revenue Service (IRS)
denied the tax-refund claim.
this suit.

The Receiver responded by bringing

See 28 U.S.C. § 1346(a)(1).

The government moved to

dismiss, arguing among other things that the Receiver (who stands
in the taxpayers' shoes) was not entitled to the benefit of section
1341(a) because it never appeared to the taxpayers that they had
an unrestricted right to the funds fraudulently obtained from the
underlying plaintiffs.
motion to dismiss.

The district court denied the government's

Although it agreed that the taxpayers never

appeared to have an unrestricted right to the funds reported as
income, it nonetheless concluded that, as a matter of equity, "the
fraudulent conduct of the Puccios should not be imputed to [the
Receiver]."

Rob Evans & Assocs., LLC v. United States, 9 F. Supp.

3d. 165, 169 (D. Mass. 2014).

Accordingly, the court denied the

government's motion to dismiss, holding that the government was
obligated to honor the refund request.

See id. at 171.

The Receiver, though, did not achieve a total victory.
The court limited the amount of the refund by holding that it must

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be based on the amount the receiver had actually collected and
deposited into the Qualified Settlement Fund, not on the full
amount of taxes paid by the taxpayers during the relevant years.
See id. at 170-71; see also note 3, supra.
After deciding the motion to dismiss, the district court
stayed the case so that the Receiver could file administrative
refund claims for additional tax years.

The IRS denied those

claims, and the Receiver, in its own words, filed its first amended
complaint in order to "include [claims for] additional tax years."
At that point, however, the Receiver gratuitously added two other
sets of allegations in the first amended complaint: a constructive
trust argument and a claim that section 1341(a) did not require
actual restoration of the funds to the Qualified Settlement Fund
as a condition precedent to deductibility.

The government filed

an answer and, since the district court's earlier adjudication of
the motion to dismiss had effectively resolved the essence of the
dispute, the parties jointly moved for the entry of final judgment,
reserving their rights to appeal.

The court granted the joint

motion without substantive comment, relying on the reasoning laid
out in its prior decision on the motion to dismiss.

These timely

appeals followed.
II.

ANALYSIS
In this venue, the government's principal argument is

that the district court erred in allowing the Receiver access to

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the balm of section 1341(a) because the taxpayers never appeared
to

have

an

opposition,

unrestricted
the

jurisdiction.

Receiver

right
starts

to
by

the

reported

questioning

income.
our

In

appellate

Past that point, the Receiver asserts that the

taxpayers did have an apparent unrestricted right to the reported
income and, in all events, that the district court did not err in
fashioning an equitable exception to the statutory "unrestricted
right" requirement.

Finally, the Receiver submits that it is

entitled to recoup all taxes paid to the government under a
constructive trust theory.
matters,

we

briefly

Before proceeding to more substantive

address

the

Receiver's

jurisdictional

challenge.
A.

Appellate Jurisdiction.

The Receiver's jurisdictional challenge is premised on
the contention that we lack jurisdiction because the government,
despite reserving its right to appeal in the consent judgment, did
not adequately manifest an intent to appeal.

This challenge lacks

force.
It is common ground that a party may preserve its right
to

appeal

a

unequivocally."

consent

judgment

by

"reserv[ing]

that

right

BIW Deceived v. Local S6, Indus. Union of Marine

& Shipbldg. Workers of Am., 132 F.3d 824, 828 (1st Cir. 1997)
(quoting Coughlin v. Regan, 768 F.2d 468, 470 (1st Cir. 1985)).
Here, the joint motion for entry of final judgment unequivocally

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reserved the parties' rights to appeal.

Entry ID: 6073837

To begin, the parties —

according to the motion itself — "move[d] the Court . . . to enter
a final, appealable judgment."

Moreover, the motion made pellucid

that the parties "reserve[d] their rights to appeal any of the
Court's rulings, findings or orders."

Erasing any vestige of

doubt, the motion later reiterated that the parties "reserve[d]
their rights to challenge on appeal the Court's legal and factual
findings."
Although

this

language

seems

clear

as

a

bell,

Receiver suggests that something more was exigible.
Receiver's

view,

a

specific

statement

intention to appeal was essential.

of

the

the

In the

government's

To support this view, the

Receiver notes that some of the case law refers to an intent to
appeal.

See, e.g., Scanlon v. M.V. Super Servant 3, 429 F.3d 6,

10 (1st Cir. 2005).

That language, though, does not set up a

separate requirement: it merely confirms that statements of an
intent to appeal can in some circumstances supply evidence of a
reservation of a right to appeal.
828.

All

that

is

needed

to

See BIW Deceived, 132 F.3d at
pave

the

way

for

appellate

jurisdiction, however, is the clear reservation of a right to
appeal, followed by the timely filing of a notice of appeal.
Fed. R. App. P. 4(a)(1); BIW Deceived, 132 F.3d at 828.

See

Because

that sequence of events occurred in this case, we have jurisdiction
to hear and determine the government's appeal.

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B.

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The Government's Appeal.

The government's appeal challenges head-on the viability
of

the

Receiver's

tax-refund

claim.

Before

addressing

this

challenge, some stage-setting is useful.
A taxpayer must include all of her gross income in her
taxable income each year.
U.S. 417, 424 (1932).
obtained unlawfully.

See N. Am. Oil Consol. v. Burnet, 286

This obligation extends even to income
See James v. United States, 366 U.S. 213,

219 (1961) (plurality opinion).

At a later date, though, it may

become evident that the taxpayer did not have a right to items
previously included in her gross income.

If the taxpayer restores

such an item of income to its lawful owner, she may be able to
deduct that repayment in the current year.

See, e.g., 26 U.S.C.

§§ 162, 165. But because the taxpayer's situation may have changed
(say, her annual income may have decreased or her tax bracket may
have been lowered), it may disadvantage her to take the deduction
in the year of repayment.

See United States v. Skelly Oil Co.,

394 U.S. 678, 681 (1969).
To guard against any such inequity, Congress enacted 26
U.S.C. § 1341.

This statute does not itself provide for a

deduction but, rather, applies only if a deduction is available
under some other provision of the Internal Revenue Code.

See Fla.

Progress Corp. & Subsids. v. Comm'r, 348 F.3d 954, 958 (11th Cir.
2003) (per curiam).

In that event, section 1341(a) allows a

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taxpayer to choose between two different ways of calculating her
otherwise available deduction for the restored funds.

Under the

first option, the taxpayer may simply deduct the amount of the
restored

funds

§ 1341(a)(4).

in

the

year

of

repayment.

See

26

U.S.C.

Under the second option, the taxpayer may calculate

her taxes for the year of repayment without deducting the amount
of the restored funds and then reduce that tax liability "by the
amount [her] taxes were increased in the year or years of receipt
because the disputed items were included in gross income."
Oil, 394 U.S. at 682; see 26 U.S.C. § 1341(a)(5).

Skelly

It is this

latter method, which more or less puts the taxpayer in the position
that she would have occupied had she never reported the income,
that the Receiver wishes to employ.
For section 1341(a)(5) to apply, a taxpayer must satisfy
three prerequisites.

She must show that:

(1) an item was included in gross income for a prior
taxable year (or years) because it appeared that the
taxpayer had an unrestricted right to such item;
(2) a deduction is allowable for the taxable year because
it was established after the close of such prior taxable
year (or years) that the taxpayer did not have an
unrestricted right to such item or to a portion of such
item; and
(3) the amount of such deduction exceeds $3,000.
26 U.S.C. § 1341(a)(1)-(3).

Here, the government does not gainsay

that the taxpayers included the funds at issue in income for prior
years; that, if the funds are restored, a deduction will be

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available; and that the deduction, whatever its precise amount,
exceeds

$3,000.

taxpayers' rights.

The

Receiver's

claim

is

derivative

of

the

For present purposes, then, the dispositive

issue reduces to whether, at the time the income was reported, it
appeared to the taxpayers that they had an unrestricted right to
the funds.

As we explain below, if the funds were derived from

fraudulent activity, it could not have appeared to the taxpayers
that they had an unrestricted right to them.
The district court (despite its eventual ruling in favor
of the Receiver) thought not.

It held that the Receiver was

collaterally estopped from advancing such an argument because the
funds were derived from fraudulent activity: the taxpayers "were
found . . . to have committed fraud" and, therefore, could not
have had (or appeared to have had) an unrestricted right to the
funds.

Rob Evans, 9 F. Supp. 3d at 169 & n.5.

Our review of the

Receiver's challenge to the district court's application of the
collateral estoppel doctrine is de novo.

See Faigin v. Kelly, 184

F.3d 67, 78 (1st Cir. 1999).
Collateral estoppel, sometimes called issue preclusion,
bars parties from re-litigating issues of either fact or law that
were adjudicated in an earlier proceeding.

See Manganella v.

Evanston Ins. Co., 700 F.3d 585, 591 (1st Cir. 2012); Kale v.
Combined Ins. Co., 924 F.2d 1161, 1168 (1st Cir. 1991).

Here, the

district court regarded certain determinations made in the federal

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class action suit as preclusive.

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In the absence of any objection,

we follow the usual rule that "[t]he preclusive effect of a
federal-court

judgment

is

determined

by

federal

common

law."

Taylor v. Sturgell, 553 U.S. 880, 891 (2008).
Under federal common law, there are four prerequisites
to the application of collateral estoppel.

The party seeking

preclusion must show that "(1) both proceedings involve[] the same
issue of law or fact, (2) the parties actually litigated that issue
[in the prior proceeding], (3) the prior court decided that issue
in a final judgment, and (4) resolution of that issue was essential
to judgment on the merits."

Global NAPs, Inc. v. Verizon New Eng.

Inc., 603 F.3d 71, 95 (1st Cir. 2010).

We employ this framework

to determine whether the Receiver is collaterally estopped from
asserting that the taxpayers could have believed that they had an
unrestricted right to the funds at issue.
In this case, our inquiry is considerably shortened: the
Receiver does not contest that the prior proceeding (the federal
class

action)

satisfies

the

second,

prerequisites for collateral estoppel.

third,

and

fourth

The critical factor is

whether both proceedings involve the same issue. This factor turns
on

whether

the

district

court's

earlier

finding

of

fraud

effectively resolved the question of whether the taxpayers had an
apparent unrestricted right to the income reported on their tax
returns.

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The "unrestricted right" question cannot be answered in
a vacuum but, rather, must be answered in light of section 1341(a).
According to Treasury Department regulations, section 1341(a)
covers "an item included in gross income because it appeared from
all the facts available in the year of inclusion that the taxpayer
had an unrestricted right to such item."
1(a)(2).4

26 C.F.R. § 1.1341-

The law is clear, though, that it cannot be said to

appear to an embezzler or fraudster that he has an unrestricted
right to his ill-gotten gains (notwithstanding the fact that he is
obligated to report those gains in his annual gross income).

See

Culley v. United States, 222 F.3d 1331, 1335-36 (Fed. Cir. 2000);
Kraft v. United States, 991 F.2d 292, 299 (6th Cir. 1993); McKinney
v. United States, 574 F.2d 1240, 1243 (5th Cir. 1978).
section

1341(a)'s

"unrestricted

right"

language

In short,

excludes

all

income reaped by taxpayers who know at the time of receipt that
they have no right to the income.

"When a taxpayer knowingly

obtains funds as the result of fraudulent action, it simply cannot
appear from the facts known to him at the time that he has a
legitimate, unrestricted claim to the money."
1335.

Culley, 222 F.3d at

It follows inexorably that if the taxpayers acquired the

4

This requirement should not be confused with the "claim of
right" doctrine, which is broader and includes virtually
everything that a taxpayer must report in her annual gross income.
See Culley v. United States, 222 F.3d 1331, 1336 (Fed. Cir. 2000)
(distinguishing claim of right doctrine from section 1341(a)'s
"unrestricted right" requirement).
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funds at issue by fraud, they could not have thought that they had
an unrestricted right to those funds.
That ends this aspect of the matter.

The district court

squarely decided, in the earlier class action, that the taxpayers
were swindlers who had obtained the underlying plaintiffs' funds
by fraud.

In this regard, the district court held that the

taxpayers' "representation[s] that CCCC was a nonprofit entity"
were "material," and that the taxpayers "betrayed Plaintiffs'
trust when, as was [their] policy for all CCCC clients, [they]
transferred

Plaintiffs'

businesses]."

accounts

to

[their

for-profit

Zimmerman III, 529 F. Supp. 2d at 279.

The court

considered this more than adequate to show that the taxpayers were
engaged in fraud.

See id. at 280.

In a separate order, the court

added frosting to the cake: it found that the Puccio brothers'
noncompliance with CROA "involved false pretenses, the use of false
representations[,] and amounted to actual fraud."

Zimmerman v.

Cambridge Credit Corp., No. 03-30261, slip op. at 1-2 (D. Mass.
Mar.

18,

2009).

The

brothers,

through

their

network

of

corporations, had "engaged in a pervasively deceptive course of
business involving fraudulent misrepresentations to consumers."
Id. at 5-6.
This finding of pervasive fraud was affirmed on appeal,
see Zimmerman IV, 613 F.3d at 62, and the class action judgments
against the taxpayers have become final.

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Thus, the Receiver is

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collaterally estopped from challenging the finding.

Entry ID: 6073837

And because

it has been conclusively determined that the taxpayers procured
the funds at issue through fraud, the taxpayers could not have
thought that they had an unrestricted right to the funds.
Culley, 222 F.3d at 1335.

See

Consequently, the Receiver, standing in

their place and stead, is collaterally estopped from asserting
that the taxpayers satisfied the requirements of section 1341(a).5
The Receiver offers virtually nothing in the way of
developed argumentation against the application of collateral
estoppel.

The Receiver does, however, make two points.

First, it

laments that the government "was in large part responsible for
providing the [taxpayers] with the[] legal cover" that enabled
them to execute their fraudulent scheme.

This boils down to a

suggestion that the government should be equitably estopped from
disputing whether the taxpayers had an apparent unrestricted right
to the funds.

But estoppel against the government is hen's-teeth

rare, especially when, as in this case, the proposed estoppel
involves public funds.

See OPM v. Richmond, 496 U.S. 414, 426-27

(1990); see also Heckler v. Cmty. Health Servs. of Crawford Cty.,
Inc., 467 U.S. 51, 60 (1984) ("[I]t is well settled that the

5

The Receiver argues that a 2004 district court ruling in
the taxpayers' favor provides an indication that the taxpayers
could reasonably have believed that they had an unrestricted right
to the income at the time of receipt. But that ruling was reversed
on appeal, see Zimmerman II, 409 F.3d at 479, and it has no bearing
on the outcome of the collateral estoppel inquiry.
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Government may not be estopped on the same terms as any other
litigant.").
In all events, the estoppel argument is suggested in an
off-handed manner, unaccompanied by any fully formed argument.
Accordingly, we deem it waived.

See United States v. Zannino, 895

F.2d 1, 17 (1st Cir. 1990).
The Receiver's remaining argument is no more convincing.
In it, the Receiver asserts that subsequent legislation, namely,
a provision of the Pension Protection Act of 2006, 26 U.S.C.
§ 501(q), demonstrates that the taxpayers reasonably could have
believed that they had an unrestricted right to the fraudulently
derived income.

This assertion, though, arrives too late: the

finding of fraud was an essential element of a final judgment in
an earlier proceeding, and the Receiver is bound by that result.
See Manganella, 700 F.3d at 591, 594-95.
The Receiver has a fallback position, arguing that it
can obtain a refund even though the taxpayers themselves could
not.

This

Stressing

argument

that

tracks

section

the

1341(a)

district
was

court's

enacted

to

reasoning.
alleviate

inequities, not to perpetuate them, the court concluded that
Congress could not have intended to impute the taxpayers' fraud to
the Receiver and thus deny relief to fraud victims. See Rob Evans,
9 F. Supp. 3d at 169-70. As a result, the district court determined
that the Receiver can not only "step into [the taxpayers'] boots,

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but it can also, as it were, knock the mud off them before putting
them on."

Id. at 170.
This determination, which has the effect of giving the

Receiver the benefits of the taxpayers' status without compelling
the Receiver to shoulder any of the burdens of that status, weaves
an equitable exception into the fabric of section 1341(a).
one-sided

formulations

are

generally

disfavored.

Cf.

Such
United

States v. Tierney, 760 F.2d 382, 388 (1st Cir. 1985) ("Having one's
cake and eating it, too, is not in fashion in this circuit.").
The text of the statute at issue does not support such a generous
construction.
We review matters of statutory interpretation de novo.
See Medchem (P.R.), Inc. v. Comm'r, 295 F.3d 118, 122 (1st Cir.
2002).

Here, we start with the background principle that "income

tax deductions and credits are matters of legislative grace."
at 123.

Id.

"[D]eductions are strictly construed and allowed only 'as

there is a clear provision therefor.'"

INDOPCO, Inc. v. Comm'r,

503 U.S. 79, 84 (1992) (quoting New Colonial Ice Co. v. Helvering,
292 U.S. 435, 440 (1934)).

Section 1341(a)(5) is simply a method

for calculating a deduction, so this principle controls.

See id.

Of course, the most reliable guide to the meaning of a
statute is the statutory text.

See Conn. Nat'l Bank v. Germain,

503 U.S. 249, 253-54 (1992) ("We have stated time and again that
courts must presume that a legislature says in a statute what it

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means and means in a statute what it says there.").

Entry ID: 6073837

If the plain

language of a statute elucidates its meaning, that meaning governs.
The fact that the equities (real or perceived) may favor the
taxpayer does not allow an inquiring court to distort the statute's
plain meaning by importing its own notions of fairness.

See

Batchelor-Robjohns v. United States, 788 F.3d 1280, 1297 (11th
Cir. 2015).
In this instance, Congress did not sound an uncertain
trumpet, and we believe that the district court erred in refusing
to follow section 1341(a)'s unambiguous textual mandate.

Nothing

in the discernable legislative intent justifies carving out a
special exemption from the "unrestricted right" requirement for
parties in either the Receiver's or the underlying plaintiffs'
position.

Indeed, the legislative history of section 1341 does

not contain even a glimmer of a reason to think that the provision
was intended to give the victims of a taxpayer's fraud a free pass
around the "unrestricted right" requirement.

The statute was

plainly designed to alleviate an entirely separate problem: the
plight of taxpayers who are inadequately compensated for taxes
paid on income later restored.

See H.R. Rep. No. 83-1337 (1954),

reprinted in 1954 U.S.C.C.A.N. 4017, 4113; S. Rep. No. 83-1622
(1954), reprinted in 1954 U.S.C.C.A.N. 4621, 4751; see also Skelly
Oil, 394 U.S. at 681.

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We

add

that

Page: 22

although

Date Filed: 03/03/2017

section

1341

was

Entry ID: 6073837

enacted

to

alleviate a perceived inequity, the inequity that the Receiver
deplores differs materially from the inequity that the statute was
intended to correct.

When a statute is aimed at addressing a

particular inequity in the tax code, it does not follow that the
statute may be interpreted to address every inequity attributable
to the tax code.

The opposite is true: when a statute's plain

language permits only one interpretation, a court may not make an
end run around that language by the simple expedient of pointing
to the statute's equitable purpose.

See Lopez-Soto v. Hawayek,

175 F.3d 170, 176 (1st Cir. 1999).
Relatedly, the Receiver — again echoing the district
court — asseverates that we should refuse to impute the taxpayers'
fraud to the Receiver because doing so "would not further the
purpose of the fraud exception to recovery under [section] 1341."
Rob Evans, 9 F. Supp. 3d at 169-70 (citing Cooper v. United States,
362 F. Supp. 2d 649, 656 (W.D.N.C. 2005)).

This asseveration

relies almost exclusively on the decision in Cooper, a case
similarly configured but arising in the bankruptcy context, in
which the court predicated its holding on the ipse dixit that
public policy would not be "served by mechanically applying the
statute."

Cooper, 362 F. Supp. 2d at 655.

In our view, Cooper is

wrongly decided: the issue is not one of public policy but, rather,
one of statutory construction.

That issue, in turn, depends on

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whether the taxpayer appeared to have an unrestricted right to the
funds.

See Culley, 222 F.3d at 1335-36.

Such an unrestricted

right is what the plain language of section 1341 requires.

See

id. at 1336; McKinney, 574 F.2d at 1243; see also Seggerman Farms,
Inc. v. Comm'r, 308 F.3d 803, 808 (7th Cir. 2002) (declining "to
disregard the plain language of the tax code" even if the code
subjects taxpayers to "harsh tax consequences").
In a variation on the same theme, the Receiver says that
its special status qua receiver justifies special treatment.

See

Rob Evans, 9 F. Supp. 3d at 170 (noting that "[c]ourts have
exhibited a . . . disinclination to impute fraud to a receiver in
the corporate context").

In support, the Receiver cites McGinness

v. United States, 90 F.3d 143 (6th Cir. 1996).

That decision is

inapposite, though, because the court there specifically found
that — unlike here — the receiver did "not stand in the place of
the taxpayer."

Id. at 146.6
C.

The Receiver's Appeal.

In its cross-appeal, the Receiver advances an entirely
separate theory through which it endeavors to reach the same goal:
to recover, for the benefit of the underlying plaintiffs, monies

6

The Receiver's reliance on Scholes v. Lehmann, 56 F.3d 750
(7th Cir. 1995), is similarly misplaced. That case, which turns
on Illinois law, see id. at 753-54, has no conceivable bearing on
the proper interpretation of section 1341(a).

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that the taxpayers paid to the IRS.

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The Receiver submits that the

class action imposed a constructive trust on all monies that the
taxpayers procured by fraud from the underlying plaintiffs.
the

Receiver's

view,

this

constructive

trust

was

In

effectively

retroactive, stripping the taxpayers of any entitlement to the
fraudulently obtained funds from the moment those funds were paid
over to them. Because the funds at all times remained the property
of the underlying plaintiffs qua beneficiaries of the constructive
trust, the Receiver's thesis runs, the government took that money
from the taxpayers subject to the constructive trust and must
return it now.
The district court deemed this argument waived, noting
that the Receiver had neglected to make it before the magistrate
judge.

See Rob Evans, 9 F. Supp. 3d at 168.

That ruling rested

on a firm foundation: the law is settled that a litigant must put
its best foot forward before a magistrate judge, and cannot
introduce new arguments for the first time on the district court's
review of the magistrate judge's ruling or recommendation.

See

Perez v. Lorraine Enters., Inc., 769 F.3d 23, 32 (1st Cir. 2014);
Paterson-Leitch Co. v. Mass. Mun. Wholesale Elec. Co., 840 F.2d
985, 990 (1st Cir. 1988).
The Receiver acknowledges this rule, but labors to shift
the trajectory of the debate.

It says that it is absolved from a

finding of waiver because it raised the constructive trust argument

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both in its first amended complaint (filed after the district
court's denial of the motion to dismiss) and in the joint motion
for entry of final judgment.

As the Receiver sees it, these

references are sufficient to resuscitate the constructive trust
argument and defeat the apparent waiver because the parties are
appealing not from the decision on the motion to dismiss but from
the final judgment.
This argument does not take the Receiver very far.

The

first amended complaint was filed as a preliminary step to tee up
the case for appeal, that is, to ensure that the decision in the
case covered all the tax years in dispute.
of

final

judgment

expressly

The motion for entry

acknowledged

that

no

further

deliberations were necessary because the district court already
had decided "all disputed issues of law."
reference

to

decisions

that

had

been

adjudication of the motion to dismiss.

This was unarguably a
made

in

the

court's

That fact is made crystal

clear by the nature of the final judgment, which provides no new
analysis but simply refers back to the denial of the motion to
dismiss.
To sum up, the parties clearly intended to set the stage
for appeals of the district court's ruling on the motion to
dismiss.

Their filings achieved this end and, for all practical

purposes, the parties are now appealing the decision on the motion
to dismiss.

Although new claims may sometimes be raised for the

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first time in an amended complaint, see Fed. R. Civ. P. 15(a), it
was not appropriate for the Receiver, in the unique circumstances
of this case, to raise new claims in the first amended complaint.
After all, substance ordinarily ought to prevail over form, and it
was too late at that time for the Receiver to inject into the case
issues that had not been raised at the motion-to-dismiss stage.
See B & T Masonry Constr. Co. v. Pub. Serv. Mut. Ins. Co., 382
F.3d 36, 40 (1st Cir. 2004); Rocafort v. IBM Corp., 334 F.3d 115,
121-22 (1st Cir. 2003).
The pivotal question, then, is whether the Receiver
advanced the constructive trust theory at the appropriate time.
The record makes manifest that the Receiver did not — and that
omission constituted a waiver.
990-91.

See Paterson-Leitch, 840 F.2d at

In the last analysis, "[c]ourts are entitled to expect

represented parties to incorporate all relevant arguments in the
papers that directly address a pending motion."

McCoy v. Mass.

Inst. of Tech., 950 F.2d 13, 22 n.7 (1st Cir. 1991). Consequently,
theories not timely raised in the trial court cannot be raised on
appeal.

See Teamsters, Chauffeurs, Warehousemen & Helpers Union,

Local No. 59 v. Superline Transp. Co., 953 F.2d 17, 21 (1st Cir.
1992); McCoy, 950 F.2d at 22.

So it is here.

To be sure, appellate courts may, in their discretion,
"relax the raise-or-waive rule in order to prevent miscarriages of
justice . . . in exceptional cases — cases in which 'the previously

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omitted ground is "so compelling as virtually to insure appellant's
success."'"

Iverson v. City of Bos., 452 F.3d 94, 103 (1st Cir.

2006) (quoting United States v. Slade, 980 F.2d 27, 31 (1st Cir.
1992)).

The Receiver's constructive trust argument, which posits

a right to claw back monies paid to the federal fisc for lawfully
levied taxes, does not come close to clearing that high bar.

This

is especially so where, as here, we already have rejected an
attempt to apply essentially the same argument to private parties.
Earlier, the Receiver attempted to use the constructive trust as
a mechanism to claw back funds paid as fees for professional
services "in the ordinary course of business and in exchange for
fair value."

Zimmerman V, 657 F.3d at 83.

We rejected its claim,

observing that "very little suggests that the order [creating the
constructive trust] was intended to reach payments, made before
the constructive trust was even imposed, to lawyers, accountants
or the butcher, baker or candlestick maker."

Id. at 84.

If anything, the constructive trust argument is even
weaker in the circumstances of this case.

Whether or not the

taxpayers could be held liable to the underlying plaintiffs (the
victims of their fraud) on a constructive trust theory seems to
have nothing to do with the statutory procedure for obtaining tax
refunds.

By the same token, it strains credulity to suggest that

the IRS was somehow under a constructive trust.

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Stripped

of

Page: 28

the

Date Filed: 03/03/2017

constructive

trust

Entry ID: 6073837

argument,

the

Receiver's cross-appeal is impuissant,7 and we reject it without
further comment.
III.

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

we

sustain

the

government's

appeal,

reject

the

cross-appeal,

reverse the judgment below, and remand for entry of judgment
dismissing the tax-refund suit.

No costs.

So ordered.

7

The Receiver's plaint about the size of the deduction
allowed by the district court is of no concern. See Rob Evans, 9
F. Supp. 3d at 170. Because we have held that the Receiver is not
entitled to any deduction at all, see text supra, we need not
address this plaint.
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APPENDIX
26 U.S.C. § 1341.

Computation of tax where taxpayer restores

substantial amount held under claim of right
(a) General rule.

If—

(1) an item was included in gross income for a
prior

taxable

year

(or

years)

because

it

appeared that the taxpayer had an unrestricted
right to such item;
(2) a deduction is allowable for the taxable
year because it was established after the close
of such prior taxable year (or years) that the
taxpayer did not have an unrestricted right to
such item or to a portion of such item; and
(3)

the

amount

of

such

deduction

exceeds

$3,000,
then the tax imposed by this chapter for the taxable
year shall be the lesser of the following:
(4) the tax for the taxable year computed with
such deduction; or
(5) an amount equal to—
(A)

the

tax

for

the

taxable

year

computed without such deduction, minus
(B)

the

chapter

decrease
(or

in
the

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tax

under

this

corresponding

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provisions of prior revenue laws) for
the prior taxable year (or years) which
would result solely from the exclusion
of such item (or portion thereof) from
gross income for such prior taxable
year (or years).
For purposes of paragraph (5)(B), the corresponding provisions of
the Internal Revenue Code of 1939 shall be chapter 1 of such code
(other than subchapter E, relating to self-employment income) and
subchapter E of chapter 2 of such code.

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