Cencast Services, L.P. v. United States , 729 F.3d 1352 ( 2013 )

United States Court of Appeals
for the Federal Circuit
______________________
CENCAST SERVICES, L.P., CENEX SERVICES,
L.P., DISC ACQUISITION CORP., DISC
MANAGEMENT SERVICES GROUP, INC., DISC
TALENT GROUP, INC., EP MANAGEMENT
SERVICES, L.P., EP PRODUCTION SERVICES,
L.P., EP TALENT SERVICES, L.P., PIXPAY
SERVICES, L.P., AND SCREENPAY, INC.,
Plaintiffs-Appellants,
v.
UNITED STATES,
Defendant-Appellee.
______________________
2012-5142, -5143, -5144, -5145, -5146, -5147, -5148, -5149,
-5150, -5151
______________________
Appeals from the United State Court of Federal
Claims in consolidated Nos. 02-CV-1916, 02-CV-1917, 02-
CV-1918, 02-CV-1919, 02-CV-1920, 02-CV-1921, 02-CV-
1922, 02-CV-1923, 02-CV-1924, and 02-CV-1925, Judge
George W. Miller.
______________________
Decided: September 10, 2013
______________________
2 CENCAST SERVICES, L.P. v. US
KENT A. YALOWITZ, Arnold & Porter, LLP, of New
York, New York, argued for plaintiffs-appellants. With
him on the brief was MAXWELL C. PRESTON.
PATRICK J. URDA, Attorney, Tax Division, United
States Department of Justice, of Washington, DC, argued
for defendant-appellee. With him on the brief were
KATHRYN KENEALLY, Assistant Attorney General, TAMARA
W. ASHFORD, Deputy Assistant Attorney General, and
GILBERT S. ROTHENBERG, Attorney.
ELIZABETH ROSENFELD, Wohlner Kaplon Phillips
Young & Cutler of Encino, California, for amicus curiae
Studio Transportation Drivers, Union No. 399 of the
International Brotherhood of Teamsters.
DALE W. SHORT, Short & Shepherd of Westlake, Ohio,
for amicus curiae International Alliance of Theatrical
Stage Employees, et al.
REX S. HEINKE, Akin Gump Strauss Hauer & Feld
LLP, of Los Angeles, California, for amicus curiae Alli-
ance of Motion Picture and Television Producers. With
him on the brief was JESSICA M. WEISEL.
______________________
Before NEWMAN, DYK, and PROST, Circuit Judges.
DYK, Circuit Judge.
In these consolidated tax refund cases, Cencast Ser-
vices, L.P. et al. are entities that, inter alia, remit payroll
and employment taxes on behalf of motion picture and
television production companies. For convenience we refer
to these entities in the singular as “Cencast.” Cencast
appeals from a final judgment of the United States Court
of Federal Claims (“Claims Court”) rejecting its claims for
tax refunds. We hold that the scope of Cencast’s liability
for employment taxes under the Federal Unemployment
Tax Act (“FUTA”) and the Federal Insurance Contribution
CENCAST SERVICES, L.P. v. US 3
Act (“FICA”) is determined by reference to the employees’
“employment” relationships with the common law em-
ployers for which Cencast remits taxes (i.e., the produc-
tion companies), and that the common law employers
cannot decrease their liability by retaining entities such
as Cencast to actually make the wage payments to the
employees. We also hold that Cencast is barred from
raising its theory that it overpaid the FUTA and FICA
taxes because some of the individuals classified as em-
ployees were independent contractors. We affirm.
BACKGROUND
The evolution of the motion picture and television in-
dustries over the past century has resulted in this tax
case concerning FUTA and FICA tax liability. In the early
part of the twentieth century, motion picture productions
were primarily controlled by large, major motion picture
and television studios, and production workers enjoyed
long-term, continuous employment relationships with
those studios. These studios paid wages to these employ-
ees, and, as the common law employers of these workers,
were liable for employment taxes on those wages, and
remitted those taxes directly to the Internal Revenue
Service (“IRS”).
Since the late 1970s, however, many smaller produc-
tion companies have emerged and have created movies
and television programs independently from the large
studios. As a result of this trend, many production work-
ers are now employed by several different production
companies during the course of a year, rather than by a
single large production studio. Thus, in any given year, a
given production worker might earn wages from several
production companies, all of whom (being common law
employers) would be individually liable for employment
taxes on those wages. The complex web of production
companies and production workers that evolved made
administration of payroll, benefits, collective bargaining
agreements, and taxes increasingly difficult.
4 CENCAST SERVICES, L.P. v. US
Entities like Cencast, which are also known as payroll
service companies (“Service Companies”), emerged to
address these problems. Over the last twenty-five years,
virtually all independent production companies have
contracted with Service Companies for payroll and related
services. Cencast and other Service Companies compute
and pay compensation to production workers, report and
pay compensation to multi-employer pension and benefit
funds, provide post-production financial reporting, and
pay employment taxes to the IRS.
Although they contract with the Service Companies,
production companies both hire and supervise the indi-
vidual production workers—as they had done in the pre-
Service Company era. In general, Cencast and other
Service Companies have no role in selecting or supervis-
ing production workers. The only change is that entities
like Cencast—and not the production companies—now
pay the production workers and administer the produc-
tion companies’ payroll and employment tax obligations.
It is undisputed in this case that Cencast is not the com-
mon law employer of production workers.
Around the time that Service Companies such as Cen-
cast began to emerge, the Supreme Court decided Otte v.
United States, 419 U.S. 43 (1974), which involved the
question of whether entities who are not the common law
employers (but nonetheless pay wages to the employees)
are required, inter alia, to withhold the employees’ por-
tion of the FICA tax. See id. at 49-51. That question arose
in the context of the payment of wages by a bankruptcy
trustee on behalf of a bankrupt common law employer.
See id. at 45-46. The Court held that persons who formal-
ly pay the wages of employees (called “statutory employ-
ers”) are liable for the withholding of FICA taxes under
I.R.C. § 3102(a), even where those persons were never in a
common law employment relationship with those employ-
ees. See id. at 50-51. While Otte dealt only with the em-
ployee’s portion of FICA, it is accepted that Otte applies
equally to the employer’s FUTA and FICA tax obligations.
CENCAST SERVICES, L.P. v. US 5
See Winstead v. United States, 109 F.3d 989, 991 (4th Cir.
1997) (applying Otte to FUTA); In re Armadillo Corp., 561
F.2d 1382, 1386 (10th Cir. 1977) (applying Otte to FUTA
and to the employer’s portion of FICA).
Under Otte, because Cencast and the other Service
Companies pay the production workers, they are required
to remit taxes imposed on employers and employees
under FUTA and FICA. Only the employer’s FUTA and
FICA tax obligations are at issue here.
Between 1991 and 1996, Cencast paid over $7 billion
in wages, on behalf of production companies, to hundreds
of thousands of workers who worked on numerous differ-
ent productions. Cencast also filed tax returns and remit-
ted FUTA and FICA taxes to the federal government with
respect to these employees. For the six tax years in ques-
tion, Cencast remitted approximately $465 million in
FUTA and FICA taxes as the employer contribution for
the production worker employees.
When Cencast filed its FUTA and FICA employment
tax returns, it treated each employee as being in an
“employment” relationship with Cencast rather than with
the production companies. This reduced the overall tax
payments because of statutory caps on both FUTA and
FICA taxes. Though both FUTA and FICA tax “all remu-
neration for employment,” see I.R.C. § 3306(b) (FUTA);
I.R.C. § 3121(a) (FICA), they both place caps on the wages
subject to the tax. Under FUTA, each employer is only
liable to pay taxes on the first $7,000 of wages paid “with
respect to employment,” see I.R.C. § 3306(b)(1), and under
FICA, each employer is only liable to pay taxes on wages
paid “with respect to employment” up to a specified FICA
wage base, see I.R.C. § 3121(a)(1) (excluding from FICA’s
definition of wages remuneration above “the [FICA]
contribution and benefit base (as determined under
section 230 of the Social Security Act)”). The FICA wage
base varies by year. The relevant FICA wage base for
1996, for example, was $62,700. Thus, if employee A
earned $50,000 from production company 1 and $50,000
6 CENCAST SERVICES, L.P. v. US
from production company 2, Cencast paid FUTA tax on
only $7,000 of wages instead of $14,000, and paid FICA
tax on only $62,700 in wages instead of $100,000 (for the
1996 tax year). Thus, applying a single wage cap in calcu-
lating its taxable wages for both FUTA and FICA purpos-
es, Cencast excluded a portion of the production workers’
wages from employment taxes. The amount of tax that
was avoided is exactly equal to the additional amounts of
FUTA and FICA tax that individual production compa-
nies would have been liable for had those companies
conducted their own payroll services and filed their own
tax returns.
In 1994, the IRS began investigating Cencast’s FUTA
and FICA tax calculation practices. Eventually, the IRS
issued Technical Advice Memorandum (“TAM”) 119980-
97. See IRS Tech. Adv. Mem. 119980-97, available at
http://www.irs.gov/pub/irs-wd/9918056.pdf. In the TAM,
the IRS explained that FUTA and FICA taxes should be
calculated as though each employee were in an employ-
ment relationship with each individual production com-
pany, rather than with Cencast. Thus, the TAM concluded
that Cencast could not treat itself as being in an “em-
ployment” relationship with production workers (i.e.,
apply a single wage cap) in calculating its tax liability for
FUTA and FICA purposes. Instead, Cencast was required
to apply a separate wage cap with respect to each produc-
tion company that had an employment relationship with
the production worker during that year. In 2001, the IRS
assessed Cencast FUTA and FICA tax deficiencies for the
1991-1996 tax years totaling approximately $43.7 million
for FUTA taxes and $15.6 million for FICA taxes.
In November 2001, Cencast paid divisible portions of
the IRS assessments totaling $637,000, representing
additional tax owed with respect to some (but not all)
Cencast employees for each of the 1991-1996 tax years.
These payments entitled Cencast to file a claim for re-
fund. See Flora v. United States, 362 U.S. 145, 175 n.38
(1960). Cencast then filed refund claims with the IRS in
CENCAST SERVICES, L.P. v. US 7
April 2002 alleging, inter alia, that Cencast should be
treated as the “employer” for FUTA and FICA tax purpos-
es, and that taxes should be calculated accordingly. After
Cencast requested and received a notice of claim disal-
lowance from the IRS in May 2002, Cencast filed suit in
the Claims Court, where it raised claims that largely
paralleled those raised in the administrative refund
claim. Because Cencast had only made a partial payment
of tax, the government raised counterclaims for the re-
maining, unpaid balances of the IRS’s assessments with
respect to the employees not covered by Cencast’s original
refund claim. Cencast, in its answers to these counter-
claims, defended on the same grounds asserted in the
initial refund claim.
In December 2003, the parties first filed motions for
partial summary judgment on the issue of how to compute
the statutory caps for FUTA and FICA. In September
2004, the Claims Court granted the government’s sum-
mary judgment motion on this issue. See Cencast Servs.,
L.P. v. United States (“Cencast I”), 62 Fed. Cl. 159 (2004).
It agreed with the government that “the Production
Companies are to be considered the [production workers’]
employers for purposes of calculating FICA and FUTA
taxable wage bases.” Id. at 165, 184.
After this ruling, the parties discussed settlement and
discovery. Then, in an August 2008 status conference,
Cencast argued for the first time that it was entitled to
reduce its tax obligations because, in its view, it had
erroneously overpaid FUTA and FICA taxes. This was so
because some individuals for whom it paid tax were not
employees but independent contractors. Cencast Servs.,
L.P. v. United States (“Cencast II”), 94 Fed. Cl. 425, 437
(2010). (Neither FUTA nor FICA taxes are imposed with
respect to independent contractors. See, e.g., Hathcock v.
Acme Truck Lines, Inc., 262 F.3d 522, 525 (5th Cir. 2001).)
According to the Claims Court, “[t]his was the first men-
tion of [Cencast’s] independent contractor theory in this
litigation, which, at that time, had been pending for
8 CENCAST SERVICES, L.P. v. US
approximately six years.” Cencast II, 94 Fed. Cl. at 437.
Indeed, neither Cencast’s original complaint nor its
administrative claim for refund attached to that com-
plaint reference the independent contractor theory.
Meanwhile, in December 2008, the IRS issued a notice
of levy and seized an additional $4.3 million from a Cen-
cast affiliate (beyond the $637,000 Cencast had already
paid to the IRS). Cencast filed administrative claims for
refund of this $4.3 million. Cencast then moved to amend
its complaint in the Claims Court in April 2010 to include
allegations regarding both Cencast’s purported independ-
ent contractor overpayments, as well as allegations perti-
nent to its claim for refund with respect to the
additionally seized funds. See Cencast II, 94 Fed. Cl. at
437-38. In January 2010, the government filed a motion
in limine to exclude the independent contractor theory
from the case.
In September 2010, the Claims Court ruled on both
the government’s motion in limine and Cencast’s motion
for leave to amend. See Cencast II, 94 Fed. Cl. 425. As to
the government’s motion in limine on Cencast’s independ-
ent contractor theory, the Claims Court considered the
variance doctrine, which bars taxpayers from raising new
issues relating to its tax claims unless “the [new] issue
raised in court ‘is derived from or is integral to the ground
timely raised in the [initial] refund claim.’” Id. at 440
(quoting Ottawa Silica Co. v. United States, 699 F.2d
1124, 1139 n.6 (Fed. Cir. 1983)). The Claims Court held
that “[t]he independent contractor theory [could not] be
said to be ‘fairly contained within the refund claim’ [origi-
nally filed in 2001] and [wa]s [therefore] barred by the
variance doctrine.” Cencast II, 94 Fed. Cl. at 441 (citing
Blakley v. United States, 593 F.3d 1337, 1342 (Fed. Cir.
2010)). The Claims Court considered and rejected Cen-
cast’s arguments that various exceptions to the variance
doctrine applied, see id. at 441-47, and also held that,
even if the variance doctrine had not barred the inde-
pendent contractor theory, “the [c]ourt would nonetheless
CENCAST SERVICES, L.P. v. US 9
[have] preclude[d] [Cencast] from injecting [the theory]
into the litigation at th[at] point because it simply c[ame]
too late,” id. at 448-49. The Claims Court denied Cen-
cast’s motion to amend its complaint “to the extent that it
s[ought] to add a claim for refund . . . based on the inde-
pendent contractor theory,” but allowed the motion in
other respects. Id. at 450-53. The Claims Court entered
an agreed-upon final judgment on September 4, 2012.
Cencast timely appealed. We have jurisdiction under
28 U.S.C. § 1295(a)(3). The relevant facts are undisputed.
“We review the Claims Court’s legal determinations de
novo.” Haddon Housing Assocs., Ltd. P’ship v. United
States, 711 F.3d 1330, 1337 (Fed. Cir. 2013).
DISCUSSION
I
We first consider whether the Claims Court errone-
ously held that, for purposes of calculating the FUTA and
FICA wage base caps, the caps should be calculated as
though employees were in an “employment” relationship
with each of the individual production companies (the
common law employers), rather than with Cencast (the
statutory employer). We agree with the government that
the wage caps should be calculated by treating the em-
ployees as being in employment relationships with the
common law employers. It would be contrary to the statu-
tory scheme to allow common law employers to reduce
their liability by transferring the functions of wage ad-
ministration to entities like Cencast.
We begin with FUTA. Section 3301 of the Internal
Revenue Code imposes a tax “on every employer (as
defined in section 3306(a)) . . . equal to [a percentage] of
the total wages (as defined in section 3306(b)) paid by him
during the calendar year (or portion of the calendar year)
with respect to employment (as defined in section
3306(c)).” I.R.C. § 3301. It is established that both the
common law employer and the statutory employer (Ser-
vice Company) are employers within the meaning of
10 CENCAST SERVICES, L.P. v. US
Section 3301. See I.R.C. § 3306(a). 1 Though the parties
appear to agree that the term “employer” as used under
§ 3301 refers to both common law employers and statuto-
ry employers, Cencast argues that liability is imposed
only on the entities that control the payment of wages—
i.e., those who have “paid” wages. Thus, if the common
law employee retains an entity such as Cencast to formal-
ly make the payments, only Cencast is liable for the tax
and therefore must be the relevant “employer” for purpos-
es of both § 3301—imposing liability—and § 3306(b)(1)—
defining the wage cap calculation. We assume—without
deciding—that when a single entity controls the payment
of wages (i.e., it formally makes the tax payments), that
entity is the “employer” who has “paid” the “wages” or
“remuneration” under FUTA. 2 But it does not follow that
the caps are to be computed as though the “employment”
of the employees was by Cencast and not by the multiple
common law employers here (the production companies).
The definition of taxable “wages” for FUTA purposes
in § 3306(b)(1), referring to the wage cap, excludes:
that part of the remuneration [for employment]
which, after remuneration . . . equal to $7,000
with respect to employment has been paid to an
1 Section 3306(a) contains a statutory definition of
employer, as well as a common law definition of employer.
See I.R.C. § 3306(a)(1)(A) (employer can include any
person who “during any calendar quarter in the calendar
year or the preceding calendar year paid wages of $1,500
or more”); id. § 3306(a)(1)(B) (employer can include any
person who “on each of some 20 days during the calendar
year or during the preceding calendar year, each day
being in a different calendar week, employed at least one
individual in employment”).
2 We make the identical assumption when discuss-
ing FICA below.
CENCAST SERVICES, L.P. v. US 11
individual by an employer during any calendar
year, is paid to such individual by such employer
during such calendar year.
Id. § 3306(b)(1) (emphasis added). In other words, the
wage cap is “equal to $7,000 [paid] with respect to em-
ployment.” Id. It is therefore “employment,” not “employ-
er,” that is the relevant term for the wage cap amount.
There can also be no doubt that “employment” under
§ 3306(b)(1) must refer to the common law employment
relationship. The statute defines “employment” to include
“any service, of whatever nature, performed after 1954 by
an employee for the person employing him . . . within the
United States.” Id. § 3306(c)(A) (emphasis added). FUTA
incorporates the FICA definition of “employee,” see id.
§ 3306(i), which defines an “employee” in employment as
“any individual who, under the usual common law rules
applicable in determining the employer-employee rela-
tionship, has the status of an employee.” I.R.C.
§ 3121(d)(2) (emphasis added). These references in the
FUTA statute, therefore, consistently refer to employment
in the common law sense, and the wage cap provision
must therefore be calculated with respect to the employ-
ee’s various common law employments during the calen-
dar year. The “person employing” the “employee” under
§ 3306(c) is not the statutory employer, and the “employ-
ment” referenced in § 3306(b)(1) is not the relationship
between the “employee” and the statutory employer but
the relationship between the “employee” and his or her
common law employers. The language of the statute is
quite consistent with the view that the common law
employers provide the “employment” (the remuneration
for which is the measure of the statutory cap) even though
the statutory employer is “an employer” that “paid” the
remuneration.
Moreover, as the Ninth Circuit noted in Blue Lake
Rancheria v. United States, 653 F.3d 1112, 1118 (9th Cir.
2011), “it is the common-law employment relationship
that triggers the FUTA tax.” Blue Lake reiterated that
12 CENCAST SERVICES, L.P. v. US
Otte and its progeny “merely hold that a statutory em-
ployer has responsibility for reporting and remitting
[FUTA and FICA] taxes; these cases do not change the
fact that FUTA liability arises out of the common-law
employment relationship.” Id. 3 This case, like Blue Lake,
involves provisions—the wage cap provisions—that are
designed to exempt certain wages from tax, and we agree
with Blue Lake that only common law employment is
relevant to such exemptions. Here, given the undisputed
common law employment relationship between the pro-
duction companies and the production workers, it is the
common law “employment” that governs in the wage cap
computation, not the relationship of the employees to
Cencast. 4 And there is no question here that remunera-
3 In Blue Lake, the Ninth Circuit declined to extend
a statutory provision exempting from FUTA taxes wages
that were earned for “services performed . . . in the employ
of an Indian tribe,” see I.R.C. § 3306(c)(7) (emphasis
added), to wages earned through employment by other
common law employers but remitted by a tribe acting as a
statutory employer, holding that this specific exemption
from taxable wages under FUTA only applied to common
law Indian tribe employers. See 653 F.3d at 1114.
4 The term “employment” is perhaps ambiguous as
to whether it refers to each employee’s overall employer
during the year or to employment with each individual
“employing the employee.” The Treasury Regulations—
which are entitled to Chevron deference, see Mayo Found.
for Med. Educ. & Research v. United States, __ U.S. __, __,
131 S. Ct. 704, 711-14 (2011)—make clear that the latter
is the correct interpretation. See, e.g., Treas. Reg. §
31.3306(b)(1)-1(a)(3) (noting that under FUTA, the wage
cap applies “not to the aggregate remuneration paid by all
employers with respect to employment performed [during
a calendar year] after 1938, but instead to the remunera-
tion paid during such calendar year by each employer
with respect to employment”); see also Treas. Reg.
CENCAST SERVICES, L.P. v. US 13
tion was “paid” by Cencast, making it liable for the FUTA
taxes since Cencast paid all wages to the employees.
Under Cencast’s theory, moreover, the statutory em-
ployer’s tax liability is less than the aggregate liability of
the production companies if they had paid the employees
directly. Nothing in § 3306(b)(1) suggests that Congress
intended that common law employers be given the option
to choose a different wage cap (and effectively reduce the
amount of their tax liability) depending on whether they
chose to administer payroll themselves or to delegate that
responsibility to another entity. Rather, Congress intend-
ed the wage cap calculation amount to be the same
whether the Service Company or the production company
paid the wages to the employees. Neither Otte nor the
Court of Appeals cases following Otte in any way suggest
that common law employers could reduce their tax liabil-
ity by contracting with Service Companies to pay wages
and remit taxes. Accordingly, the FUTA wage cap provi-
sion, when referring to the relevant “employments” for
purposes of calculating the wage cap, must refer to com-
mon law employment relationships.
A similar issue arises with respect to FICA. FICA im-
poses taxes “on every employer . . . with respect to having
individuals in his employ[] equal to [a] percentage[] of the
wages (as defined in section 3121(a)) paid by him with
respect to employment (as defined in section 3121(b)).”
I.R.C. § 3111(a). Moreover, the wage cap provision of
FICA, defining the “wages” to be taxed under FICA, has
§ 31.3121(a)(1)-1(a)(3) (noting that under FICA, “[i]f
during a calendar year the employee receives remunera-
tion from more than one employer, the annual wage
limitation does not apply to the aggregate remuneration
received from all such employers, but instead applies to
the remuneration received during such calendar year
from each employer with respect to employment”).
14 CENCAST SERVICES, L.P. v. US
an identical structure to the corresponding FUTA provi-
sion. It excludes from the wages taxed under FICA
that part of the remuneration [for employment]
which, after remuneration . . . equal to the contri-
bution and benefit base (as determined under sec-
tion 230 of the Social Security Act) with respect to
employment has been paid to an individual by an
employer during the calendar year with respect to
which such contribution and benefit base is effec-
tive, is paid to such individual by such employer
during such calendar year.
I.R.C. § 3121(a)(1) (emphasis added). As with FUTA,
Cencast argues that the “employer” used in calculating
the FICA wage base should be the employer that pays the
wages (here, the statutory employer), and the government
argues that the common law employer should be treated
as the employer. But again, even assuming that Cencast
is the “employer” that has paid the “wages” or “remunera-
tion,” the computation of the wage cap is made with
respect to common law “employment.”
Again, the relevant term is “employment.” The em-
phasis in FICA, as in FUTA, is on capping taxable wages
paid “with respect to employment.” Id. (emphasis added).
Employment, as in FUTA, is defined in FICA as “any
service, of whatever nature, performed . . . by an employee
for the person employing him,” id. § 3121(b) (emphasis
added), again suggesting a common law relationship. As
in FUTA, FICA defines “employee” as “any individual
who, under the usual common law rules applicable in
determining the employer-employee relationship, has the
status of an employee.” Id. § 3121(d)(2) (emphasis added).
Therefore, it is clear that the FICA statute refers to
common law employment when it refers to the “employ-
ment” with respect to which FICA wages are capped. As
with FUTA, it would not make sense to have a wage cap
definition that varies depending on the entity that paid
the wages to the employees, and the Treasury Regulations
again make clear that employment is not defined by
CENCAST SERVICES, L.P. v. US 15
reference to a single employer but rather by each individ-
ual employer employing the worker during the year. See
Treas. Reg. § 31.3121(a)(1)-1(a)(3). Therefore, we hold
that the wage base under FICA must be calculated by
reference to common law employments.
Cencast argues that we cannot interpret the FUTA
and FICA provisions such that “employer” has different
meanings under the liability (§§ 3301 and 3111) and wage
cap (§§ 3306(b)(1) and 3121(a)(1)) provisions. However,
because calculation of the wage cap amount rests on the
definition of “employment,” rather than on the definition
of “employer,” we do not adopt inconsistent interpreta-
tions of the term “employer.” For purposes of this case, we
assume that both the liability and wage cap provisions
refer to the “employer” who is responsible for withholding,
calculating, and reporting taxes. But the cap is not calcu-
lated by treating the “employee” as having “employment”
with the statutory employer but instead as having em-
ployment with the various entities that have entered into
common law employment relationships with them.
Finally, Cencast appears to argue that the FUTA and
FICA provisions should be given the same construction as
the income tax withholding provisions of § 3401 of the
Internal Revenue Code at issue in Otte, and that those
provisions apply only to the statutory employer. Section
3401(d)(1) defines “employer” as the entity “having control
of the payment of . . . wages” (here Cencast). I.R.C.
§ 3401(d)(1). But this definition does not apply “for pur-
poses of subsection [3401](a),” which defines the “wages”
subject to withholding. See id. Section 3401(d) makes
clear that the wage computation of § 3401(a)—the equiva-
lent of the wage caps here—does not refer to the wages
paid by the entity that “control[s] . . . the payment of . . .
wages,” see § 3401(d), but rather to wages earned “for
services performed by an employee for his employer,” (i.e.,
common law employment). Id. § 3401(a). If § 3401(a) is
viewed as similar to the wage cap provisions in FUTA and
FICA, it supports our interpretation of those provisions.
16 CENCAST SERVICES, L.P. v. US
Ultimately, as discussed above, the wage cap provi-
sions under FUTA and FICA would make no sense if the
wage caps were applied to the statutorily defined em-
ployment relationships, and not the common law em-
ployment relationships, because that would allow common
law employers to reduce their tax liabilities by retaining
entities like Cencast. This is a result Congress could not
have intended. 5 Contrary to the views expressed by
various amici, this result will not impair production
companies’ use of Service Companies like Cencast. If the
Service Companies provide indispensable administrative
services, as both amici and Cencast argue, we are con-
vinced that production companies will continue to con-
tract with Cencast, even if Cencast is liable for the same
amount of tax as the common law employers would be in
the event that they chose to make the wage payments
directly. But whether or not this is the case, the argument
that this liability should be reduced to encourage the use
5 Cencast’s proposed disposition would also be con-
trary to the IRS’s current guidance in the Internal Reve-
nue Manual, which states:
Although a section 3401(d)(1) employer is liable
for the payment of employment taxes, the deter-
mination of whether an employee has wages as
defined by the FICA, FUTA, or [income tax with-
holding] provisions of the Internal Revenue Code
is made by reference to the common law employer.
Thus, if an employee has multiple common law
employers during a calendar year, the section
3401(d)(1) employer must apply a separate FICA
and FUTA wage base for each common law em-
ployer.
See Field Collecting Procedures, Third-Party Payer Ar-
rangements for Employment Taxes, IRM 5.1.24.3.2.2 (Aug.
15, 2012), available at
http://www.irs.gov/irm/part5/irm_05-001-024r.html.
CENCAST SERVICES, L.P. v. US 17
of Service Companies is a matter for Congress, not this
court.
II
The second issue on appeal is the independent con-
tractor issue, namely, whether Cencast can include in its
refund suit a claim for taxes erroneously paid with respect
to independent contractors. This claim was neither sub-
mitted to the IRS with Cencast’s original refund claim nor
originally asserted in the refund suit in 2003 nor asserted
in Cencast’s response to the government’s counterclaims.
Cencast argues that it erroneously designated some
production workers as “employees,” (rather than as inde-
pendent contractors) and that this resulted in an over-
payment of tax. Cencast seeks to amend its pleadings to
claim a tax refund on this theory. The government argues
that Cencast’s attempt to amend its pleadings to include
the independent contractor theory in 2010 is barred. We
agree with the Claims Court that Cencast’s independent
contractor theory is barred. See Cencast II, 94 Fed. Cl. at
438-49. We address Cencast’s several arguments in turn.
A
Cencast argues that, under Court of Federal Claims
Rule 15(a), 6 it should have been permitted to amend its
answer to the government’s counterclaim to assert the
independent contractor theory as an affirmative defense.
There is no dispute that, when Cencast filed answers to
the counterclaim in both 2003 and 2007, it failed to in-
clude the independent contractor theory.
6 Though Cencast references Rule 15(b) as authori-
ty to amend its pleadings, we agree with the government
that Rule 15(a) is the pertinent rule, since Rule 15(a) is
the rule that applies to amendments sought pre-trial.
Rule 15(b) applies to amendments made during and after
trial. See Ct. Fed. Cl. R. 15(a),(b),
18 CENCAST SERVICES, L.P. v. US
Though Rule 15(a), like the corresponding Federal
Rule of Civil Procedure, is construed liberally to allow
amended pleadings, and leave is to be “freely give[n] . . .
when justice so requires,” such amendments are not
allowed where they result in undue delay or prejudice. See
Ct. Fed. Cl. R. 15(a); Zenith Radio Corp. v. Hazeltine
Research, Inc., 401 U.S. 321, 330-31 (1971) (“[I]n deciding
whether to permit . . . an amendment, the trial court [i]s
required to take into account any prejudice that [the non-
movant] would have suffered as a result . . . .”); Foman v.
Davis, 371 U.S. 178, 182 (1962) (citing “undue delay” and
“undue prejudice to the opposing party” as reasons to
deny leave to amend). Here, the Claims Court found that
both undue delay and prejudice would result from Cen-
cast’s proposed amendments relating to the independent
contractor theory.
Not only did Cencast’s original complaint not refer-
ence the independent contractor issue, the government
and Cencast had entered into a stipulation meant to
define and narrow the relevant issues in the case as late
as 2008. This stipulation did not mention the independent
contractor theory. We agree that the amended pleading,
coming two years later, would have been prejudicial to the
government. As the Claims Court concluded, “[a]llowing
[the] plaintiffs to introduce the independent contractor
theory [in 2010] would [have] prejudice[d] [the govern-
ment], which ha[d] already devoted significant resources
to litigating the issues long recognized as raised by th[e]
case.” Cencast II, 94 Fed. Cl. at 448. Here, the Claims
Court emphasized that injecting the theory into the
litigation at a late stage would require new discovery,
noting “the addition of the independent contractor theory
would cause ‘further factual disputes [and] substantial
factual inquiry by [the parties].’” Id. at 449 (quoting In re
Bank of Am., 217 Ct. Cl. 731, 732 (1978)) (second altera-
tion in the original). As the record shows, discovery on the
independent contractor issue would have indeed been
complex and time consuming, including requiring statisti-
cal sampling. Additional discovery would thus have been
CENCAST SERVICES, L.P. v. US 19
burdensome and, contrary to Cencast’s arguments, the
government never acquiesced to such discovery. 7 It is
clear that, “if the amendment [to a pleading] substantially
changes the theory on which the case has been proceeding
and is proposed late enough so that the opponent would
be required to engage in significant new preparation, the
court may deem it prejudicial.” 6 Wright & Miller, Federal
Practice and Procedure § 1487 (Apr. 2013); see also Troxel
Mfg. Co. v. Schwinn Bicycle Co., 489 F.2d 968, 971 (6th
Cir. 1973) (“[T]o put [the non-moving party] through the
time and expense of continued litigation on a new theory,
with the possibility of new discovery, would be manifestly
unfair and unduly prejudicial.”).
Cencast’s unreasonable delay after it became aware of
the independent contractor issue—also emphasized by the
Claims Court—only underscores the evident prejudice
here. See Cencast II, 94 Fed. Cl. at 449 (noting that Cen-
cast’s attempt to amend to include the independent con-
tractor theory “simply c[ame] too late”). Cencast was
7 After Cencast first raised the independent con-
tractor theory before the Claims Court, discovery regard-
ing the independent contractor issue was discussed at
status conferences and other hearings, and some discov-
ery began on the issue. The government objected to the
discovery, noting that there would be “legal barriers” to
Cencast’s independent contractor theory, and sought to
stay discovery pending resolution of its defenses to Cen-
cast’s independent contractor theory. See J.A. 2591. Any
discovery undertaken by the government during the
period between the government’s objection to discovery
and the Claims Court’s ultimate decision to exclude the
independent contractor theory was not voluntary. Rather,
this discovery occurred because the Claims Court denied
the government’s motion to stay discovery pending its
forthcoming decision on the motion to exclude the inde-
pendent contractor theory from the case.
20 CENCAST SERVICES, L.P. v. US
aware of its independent contractor theory as early as
1994. Nonetheless Cencast, without explanation, failed to
raise the issue in a refund claim or pleading for over
fifteen years. Here, Cencast could have sought leave to
file its amended pleading at any point before February 23,
2007, the deadline the parties agreed to—and the court
imposed—for adding new legal theories and affirmative
defenses to the pleadings. This opportunity existed for
nearly five years after the government brought its initial
counterclaim on the entire tax assessment in 2003.
Cencast’s “failure to seek such leave, much less do so in a
timely fashion, renders its purported [supplemental
pleading] improper.” Rates Tech. Inc. v. Nortel Networks
Corp, 399 F.3d 1302, 1309-10 (Fed. Cir. 2005). And
“[d]elay alone, even without a demonstration of prejudice,
has thus been sufficient grounds to deny amendment of
pleadings.” Te-Moak Bands of W. Shoshone Indians of
Nev. v. United States, 948 F.2d 1258, 1262 (Fed. Cir.
1991); see also 6A Charles Alan Wright et al., Federal
Practice and Procedure § 1510, at 208-09 (2d ed. 1990)
(noting that “supplemental pleading will not be permit-
ted” where “the moving party is guilty of inexcusable
delay”).
We conclude that the Claims Court did not abuse its
discretion in denying Cencast’s motion to amend its
complaint as to the independent contractor theory. See
Tamerlane, Ltd. v. United States, 550 F.3d 1135, 1147
(Fed. Cir. 2008) (“‘The decision to grant or deny a motion
for leave to amend . . . lies within the sound discretion of
the trial court.’” (quoting Insituform Techs., Inc. v. CAT
Contracting, Inc., 385 F.3d 1360, 1372 (Fed. Cir. 2004))).
Cencast next argues that its 2009 administrative re-
fund claim (relating to the $4.3 million levy in 2008 which
resulted in the seized funds) permitted supplementation
of Cencast’s pleading to include the independent contrac-
tor issue. There is no dispute that Cencast raised the
independent contractor theory in the 2009 administrative
claim that preceded its proposed amended complaint.
CENCAST SERVICES, L.P. v. US 21
Cencast’s argument seems to be that, because the IRS
seized the additional $4.3 million in funds in 2008, lead-
ing to a new refund claim, Cencast was entitled to file a
supplemental pleading raising the independent contractor
theory. Cencast relies in part on Court of Federal Claims
Rule 15(d), which gives the Claims Court discretion to,
“on just terms, permit a party to serve a supplemental
pleading setting out any transaction, occurrence, or event
that happened after the date of the pleading to be sup-
plemented.” See Ct. Fed. Cl. R. 15(d). Rule 15(d) further
allows the court to “permit supplementation even though
the original pleading is defective in stating a claim or
defense.” Id. As with Rule 15(a), the Court of Appeals
“review[s] the denial of leave to supplement a complaint
under [Rule 15(d)] for abuse of discretion.” See Schwarz v.
City of Treasure Island, 544 F.3d 1201, 1211 (11th Cir.
2008) (addressing Rule 15(d) of the Federal Rules of Civil
Procedure).
Here, following Rule 15(d), the Claims Court allowed
Cencast to supplement its complaint to (1) plead factual
allegations surrounding the 2008 levy of funds; (2) plead
an illegal exaction claim “assert[ing] a right to . . . return”
of the seized funds; and (3) include the $4.3 million seized
by the IRS in the relief it sought in its original refund
claim (based on the legal theories originally raised). See
Cencast II, 94 Fed Cl. at 451-52. These legal claims and
facts resulted from the 2008 levy, and the Claims Court
allowed these amendments because “[s]upplementation of
pleadings should be allowed where post-commencement
events are material to the action.” Id. at 449 (emphasis
added) (internal quotation marks omitted). However, the
Claims Court did not allow Cencast to supplement its
complaint to include new allegations relating to the
independent contractor theory. Id. at 449-50. This ruling
was entirely appropriate. In 2008, no new facts material
to Cencast’s independent contractor theory arose. The
pertinent facts relate to the production workers’ employ-
ment relationships with the production companies be-
22 CENCAST SERVICES, L.P. v. US
tween 1991-1996, which remained unchanged as a result
of the 2008 levy.
Moreover, Cencast’s liability for the $4.3 million
seized as a result of the levy had already been placed at
issue in this case as a result of the government’s counter-
claims and as a result of Cencast’s election to pay a di-
visible portion of the tax to determine its overall tax
liability and commence a refund suit under I.R.C.
§ 7422(a). Even though the divisibility rule “‘legally
entitle[s a taxpayer] to make [a partial] payment . . ., to
make [a] claim for refund, and to institute [a] suit for
recovery,’” the rule is designed as a means of “‘settling the
question of the right of the government to have made [the
entire tax] assessment against [the taxpayer].’” See
Boynton v. United States, 566 F.2d 50, 52 (9th Cir. 1977)
(emphasis added) (quoting Steele v. United States, 280
F.2d 89, 91 (8th Cir. 1960)). When a taxpayer sues for a
refund based on a divisible refund claim, it is meant to
“test the validity of the entire assessment.” See Lucia v.
United States, 474 F.2d 565, 576 (5th Cir. 1973) (empha-
sis added)); see also Univ. of Chi. v. United States, 547
F.3d 773, 785 (7th Cir. 2008) (noting that, where a tax is
divisible, “the taxpayer may pay the full amount on one
transaction, sue for a refund for that transaction, and
have the outcome of this suit determine his liability for all
the other, similar transactions” (emphasis added) (quota-
tion marks omitted)).
Moreover, Congress has recognized the representative
nature of a divisible refund suit, foreclosing IRS levies
“with respect to any unpaid divisible tax during the
pendency of any [previously-filed refund] proceeding
brought . . . in a proper Federal trial court” where “the
decision in [a] [previously-filed] proceeding would be res
judicata with respect to such unpaid tax” for the amounts
not formally part of the refund suit. See id.CENCAST SERVICES, L.P. v. US 23
§ 6331(i)(1)(A). 8 We view this to be such a case. Thus, we
are persuaded that the Claims Court did not abuse its
discretion in declining to allow Cencast’s independent
contractor theory on the basis of the IRS’s levy of $4.3
million. The “new facts” arising from the IRS levy did not
compel the Claims Court to allow Cencast to plead “new
issues” relating to the independent contractor theory. 9
B
Cencast finally argues that its original 2002 refund
claim was sufficient to preserve the independent contrac-
tor theory. The Claims Court rejected this argument,
concluding that it lacked jurisdiction over the independ-
ent contractor theory based on the so-called “substantial
variance” rule. See Cencast II, 94 Fed. Cl. at 441-42. We
described this rule in Computervision Corp. v. United
States, 445 F.3d 1355 (Fed. Cir. 2006). As we explained in
8 The propriety of the levy in this case is not impli-
cated by this provision because it only applies to “unpaid
tax attributable to taxable periods beginning after De-
cember 31, 1998.” Pub. L. 105-206, § 3433(b), 112 Stat.
685, 760 (1999).
9 Allstate Ins. Co. v. United States, 550 F.2d 629(Ct. Cl. 1977), is not to the contrary. Although the Court
of Claims allowed a taxpayer to assert an additional legal
theory in a second refund claim in that case, both the first
and second refund claims at issue were made within the
initial statute of limitations period defined in § 6511(a).
See id. at 635-36. Unlike Allstate, this case does not
involve an amendment to the taxpayer’s legal theories
within the limitations period applicable to a taxpayer’s
initial refund claim. Rather, it involves allegedly “new
facts” arising several years after the initial deficiency
assessment and tax payment that, in Cencast’s view,
justify a separate refund claim, made outside the initial
limitations period, raising new legal theories.
24 CENCAST SERVICES, L.P. v. US
Computervision, “[t]he Secretary by regulation requires
that claims for refund ‘set forth in detail each ground
upon which a credit or refund is claimed and facts suffi-
cient to apprise the Commissioner of the exact basis [of
the refund claim].’” Id. at 1363 (quoting Treas. Reg. §
301.6402-2(b)(1)). This requirement “‘is designed both to
prevent surprise and to give adequate notice to the [IRS]
of the nature of the claim and the specific facts upon
which it is predicated, thereby permitting an administra-
tive investigation and determination.’” Computervision,
445 F.3d at 1363 (quoting Alexander Proudfoot Co. v.
United States, 454 F.2d 1379, 1383 (Ct. Cl. 1972)). Accord-
ingly, new claims or theories raised subsequent to the
initial refund claim are not permitted where they sub-
stantially vary from the theories initially raised in the
original claim for refund. See Computervision, 445 F.3d at1364 & n.8; Lockheed Martin Corp. v. United States, 210
F.3d 1366, 1371 (Fed. Cir 2000) (“[The] ‘substantial
variance’ rule . . . bars a taxpayer from presenting claims
in a tax refund suit that ‘substantially vary’ the legal
theories and factual bases set forth in the tax refund
claim presented to the IRS.”).
The question here, as in other cases, is “whether there
[wa]s a substantial variance from a timely filed claim.”
See Computervision, 445 F.3d at 1364 n.8 (citing Lock-
heed, 210 F.3d at 1371). There is no dispute that the
independent contractor theory was not raised in Cencast’s
2002 administrative refund claim. There is also no doubt
that the independent contractor theory substantially
varies from Cencast’s original theory of the case (which
was based on the wage cap issue discussed in Part I).
However, Cencast argues that exceptions to the variance
rule apply here.
1
Cencast first argues that the equitable recoupment
doctrine is an exception to the variance rule that permits
it to use its independent contractor theory to offset any
recovery the government may receive on its counter-
CENCAST SERVICES, L.P. v. US 25
claims. However, where the government files a counter-
claim that places the entire balance of assessed tax in
issue, we agree with the Claims Court that Cencast’s
right to assert a setoff with respect to the government’s
counterclaim recovery “exists only when the Government
raises a new issue that the plaintiff could not have antici-
pated and, therefore, could not have . . . asserted as
grounds for its [original] refund [claim].” Cencast II, 94
Fed. Cl. at 441. The principle underlying equitable re-
coupment, as articulated by the Ninth Circuit in a related
context, is that “[i]t would be unfair to allow the Govern-
ment to assert a new defense to a taxpayer’s claim at
pretrial and simultaneously to prevent the taxpayer from
making appropriate responses to it, because the taxpayer
had not previously anticipated the defense.” Brown v.
United States, 427 F.2d 57, 62 (9th Cir. 1970). However,
where “the government does not raise a[] [new] offset
issue . . . , a taxpayer could not raise any setoff.” Union
Pac. R.R. Co. v. United States, 389 F.2d 437, 447 (Ct. Cl.
1968).
This principle—that equitable recoupment only ap-
plies when the government raises a new taxation theory
in its counterclaims—is compelled by Supreme Court
cases emphasizing that the doctrine applies where the
government raises new and inconsistent theories of taxa-
tion. See United States v. Dalm, 494 U.S. 596, 605 n.5
(1990) (“[W]e have emphasized that a claim of equitable
recoupment will lie only where the Government has taxed
a single transaction, item, or taxable event under two
inconsistent theories.” (emphases added)); Rothensies v.
Electric Storage Battery Co., 329 U.S. 296, 300 (1946)
(“Whatever may have been said [in past cases] indicating
a broader scope to the doctrine of recoupment, these facts
are the only ones in which it has been applied by this
Court in tax cases.”); Bull v. United States, 295 U.S. 247(1935) (permitting use of equitable recoupment defense
where an executor initially paid an estate tax on certain
funds, but the IRS subsequently treated the funds as
taxable income of the estate). No new and inconsistent
26 CENCAST SERVICES, L.P. v. US
theories were raised by the government in its counter-
claims. Accordingly, the equitable recoupment exception
is inapplicable.
2
Cencast next argues that the waiver doctrine saves its
independent contractor theory. Under this doctrine,
where “the taxpayer files a timely formal claim but fails
to include the specific claim for relief [i.e., the independ-
ent contractor theory], th[at] claim may nonetheless be
considered timely if the IRS considers that specific claim
within the limitations period.” Computervision, 445 F.3d
at 1365. Under some circumstances, the IRS’s considera-
tion is viewed as resulting in a waiver. See id.; see also
Goulding v. United States, 929 F.2d 329, 332 (7th Cir.
1991) (noting that waiver may occur “if the IRS has
sufficient knowledge of the claim and makes a determina-
tion on the merits”). “The central purpose of the waiver
doctrine is to prevent IRS agents from lulling taxpayers
into missing the [limitations] deadline . . . .” Computervi-
sion, 445 F.3d at 1366 (alterations in the original) (quota-
tion marks omitted). However, “the IRS cannot waive the
requirements of its regulations by conduct outside of the
limitations period.” Id. at 1367.
Here, with respect to Cencast’s 2002 administrative
claim, the relevant limitations period expired in 2004. See
I.R.C. § 6511(a) (noting that the statute of limitations for
a refund claim expires at the later of two years from the
date the tax is paid or three years from the date the
return is filed). Thus, the IRS’s consideration must have
occurred no later than 2004 for this exception to apply.
Cencast argues that the IRS considered the independent
contractor issue during the investigative proceedings that
preceded its 2001 assessment, but this argument is with-
out merit. While Cencast, during the administrative
investigation, alerted the IRS that there were questions
as to the independent contractor status and possibility of
refund claims with respect to those employees, Cencast
did not suggest that the independent contractor theory
CENCAST SERVICES, L.P. v. US 27
was a current issue, but merely that it was an issue that
could be raised in the future. Cencast’s submissions to the
IRS during its investigation specifically stated that “the
issue in the case at hand is not whether the workers are
employees or independent contractors. [The taxpayer] has
always treated the [production workers] as employees.”
J.A. 5488 (emphasis added). At the conclusion of the
investigation, the IRS merely “accepted the determination
that was made by the production companies and [Cen-
cast]” that the production workers were common law
employees. J.A. 10,775.
Here, it is clear that, before the expiration of the limi-
tations period, the IRS neither “consider[ed]” nor made a
“determination of the merits” as to the scope or nature of
any independent contractor overpayment. See Com-
putervision, 445 F.3d at 1365; Goulding, 929 F.2d at 332.
It is also clear that the IRS’s actions here did not pre-
vent Cencast from raising a timely administrative claim
or lull it into missing a limitations deadline. See Com-
putervision, 445 F.3d at 1365-67; see also United States v.
Memphis Cotton Oil Co., 288 U.S. 62, 64-66, 71 (1933)
(finding waiver where the IRS, after initially concluding
that a refund was due on a claim, reversed its position
and determined that the initial claim was improperly
filed, after the limitations period expired for filing a
corrected claim); Goulding, 929 F.2d at 333 (finding
waiver where the IRS had considered the merits of the
taxpayer’s claim based on an “in-depth investigation” it
had performed on a related claim, and declined to chal-
lenge the sufficiency of the taxpayer’s claim until two
years after the original claim was filed). No aspect of the
IRS’s alleged “consideration” prevented Cencast from
raising the independent contractor theory before 2004.
We agree with the Claims Court that, “[b]ecause
[Cencast] did not assert the independent contractor status
of [the] workers as a basis of [its] claim for refund and the
28 CENCAST SERVICES, L.P. v. US
answer to that question was not implicitly included in the
agency’s audit investigation,” 10 the independent contrac-
tor status of employees was “beyond the scope” of what
the IRS considered. Cencast II, 94 Fed. Cl. at 441. Thus,
the waiver doctrine does not warrant further considera-
tion of Cencast’s independent contractor theory.
There is no exception to the substantial variance doc-
trine here that would permit Cencast to raise its inde-
pendent contractor theory at this late date.
CONCLUSION
Because we conclude that Cencast has not shown its
entitlement to a tax refund, we affirm the judgment of the
Claims Court.
AFFIRMED
COSTS
Costs to the United States.
10 Cencast argued in its 2002 administrative claim
that the IRS had misidentified the workers’ common law
employers. Now, on appeal, Cencast argues that assess-
ment of this issue necessarily required the IRS to ascer-
tain whether production workers were independent
contractors or employees. However, as discussed above,
the refund claims treated as settled fact that the produc-
tion workers were employees. The issue was therefore not
“implicitly included” in Cencast’s claim, see Cencast II, 94
Fed. Cl. at 441.