CITY WIDE TRANSIT, INC. v. COMM., Cite as 111 AFTR 2d
2013-XXXX, 03/01/2013
CITY WIDE TRANSIT, INC., Petitioner-Appellee, v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
Case Information:
Code Sec(s):
Court Name: UNITED
STATES COURT OF APPEALS FOR THE SECOND CIRCUIT,
Docket No.: Docket
No. 12-1040-ag,
Date Argued:
02/01/2013
Date Decided:
03/01/2013.
Prior History:
Disposition:
HEADNOTE
.
Reference(s):
OPINION
IVAN C. DALE (Michael J. Haungs, on the brief), for Kathryn
Keneally, Assistant Attorney General, Washington, D.C.
GARY HOPPE (Herbert C. Kantor, on the brief), Kantor,
Davidoff, Wolfe, Mandelker, Twomey & Gallanty, P.C., New York, NY.
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT,
Before: WALKER, CABRANES, WESLEY, Circuit Judges.
Judge: WESLEY, Circuit Judge:
August Term, 2012
The Commissioner of Internal Revenue appeals from an order
of the United States Tax Court (Vasquez, J.) that prevented the Commissioner
from collecting City Wide Transit, Inc.'s outstanding employment taxes for
seven taxable quarters dating as far back as 1997 and as recently as 2000. The
tax court held that the Commissioner was time barred from collecting these
taxes under § 6501(a) of the Internal Revenue Code and that the tolling
provisions under §§ 6501(c)(1) and (2) of the I.R.C. did not apply. We disagree
and hold that an accountant who filed fraudulent tax returns on behalf of a
company in order to embezzle money otherwise owed to the Commissioner
intentionally evaded taxes, thereby triggering the tolling provision under §
6501(c)(1). Accordingly, the Commissioner was free to assess City Wide's taxes
for those seven quarters at any time. For the reasons stated below, the order
of the tax court is REVERSED.
Some have suggested that the Commissioner of Internal
Revenue (“Commissioner”) rarely loses in tax court, tax court decisions are
rarely appealed, and federal circuit courts rarely reverse tax court decisions.
See, e.g., James Edward Maule, Instant Replay, Weak Teams, and Disputed Calls:
An Empirical Study of Alleged Tax Court Judge Bias, 66 Tenn. L. Rev. 351, 353,
401 (1999) (reviewing empirical studies). Despite some of these expectations,
after losing in tax court, the Commissioner appealed, and we now reverse.
This case requires us to determine whether an accountant
that filed fraudulent tax returns on behalf of a company in order to embezzle
money that the company otherwise owed the Commissioner intentionally evaded
that company's taxes within the meaning of § 6501(c)(1) of the Internal Revenue
Code (“I.R.C.”). Similarly, we must also determine whether that accountant
triggered that tolling provision when he fraudulently amended tax returns that
the company had already filed.
I. BACKGROUND
A. The Fraudulently Filed Tax Returns
Ms. Ray Fouche (“Fouche”) owned several bus companies,
including Petitioner-Appellee City Wide Transit, Inc. (“City Wide”). City Wide
transported handicapped children throughout New York City. By the end of 1998,
Fouche's bus companies, including City Wide, collectively accrued about
$700,000.00 in outstanding payroll tax liabilities unrelated to this appeal.
To negotiate a reduction of these liabilities, Fouche hired
Manzoor Beg, who falsely held himself out as a certified public accountant, and
gave him a blank power of attorney. On behalf of City Wide, Fouche paid Beg $30,000.00
in April 1999 and promised him 25% of the amount he successfully saved City
Wide as result of his negotiations. Fouche also hired a third-party payroll
service, Brand's Paycheck, Inc. (“Brand's”), to prepare the Employer's
Quarterly Federal Tax Return on Forms 941 for the tax quarters relevant to this
appeal: June 1997; December 1998; March 31, June 30, and December 31, 1999; and
March 31 and June 30, 2000. For each of those last five quarters, Fouche
drafted checks payable to the IRS sufficient to cover City Wide's liabilities
and gave them, along with the corresponding returns that Brand's prepared, to
Beg, who in turn promised to deliver them to the revenue officer with whom he
was negotiating. 1
Instead of filing the correct returns, however, Beg
prepared, signed, and filed another set of returns on Forms 941 for those five
quarters (collectively, the “Beg returns”). In those returns, Beg fraudulently
added advance earned income credit (“EIC”) payments that significantly reduced
City Wide's tax liabilities. Beg then altered the checks that City Wide drafted
by changing the payee from the IRS to an account that he maintained at Habib
American Bank in the name of Himalayan Hanoi Craft, deposited or cashed those
checks for his own personal use, and drafted new checks to cover City Wide's
now fraudulently reduced tax liabilities.
Moreover, Beg also prepared, signed, and filed amended Forms
941 for the June 1997 and December 1998 quarters (the “Beg amendments”) in
order to add fraudulent EIC payments to the returns that City Wide previously
filed. Beg did not personally benefit from these amendments but presumably
filed them in an effort to conceal the fraudulent EIC payments he included in
the returns that he drafted. Through this scheme, Beg embezzled hundreds of
thousands of dollars from City Wide, and City Wide received certain tax
refunds. The following table represents the actual reduction in City Wide's
taxes resulting from the Beg amendments and returns.
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B. The United States Prosecutes Beg
On June 10, 2002, after discovering Beg's scheme, the United
States filed a complaint in United States District Court. That complaint
alleged, inter alia, that Beg (1) knowingly and willfully prepared false
Employer's Quarterly Federal Tax Returns for City Wide in violation of 26
U.S.C. § 7206(1); (2) knowingly and intentionally made and possessed forged
checks drawn on City Wide's account in violation of 18 U.S.C. § 513(a); and (3)
knowingly and intentionally deposited money derived from those forged checks
into his Himalayan bank account in violation of 18 U.S.C. § 1957(a) and (b)(1).
On October 8, 2002, Beg waived indictment and,inter alia , pled guilty to
preparing false tax returns for City Wide. Between 2003 and 2005, the district
court commenced certain sentencing proceedings, until April 7, 2006 when the
district court dismissed the case because Beg had died.
C. The Commissioner Examines City Wide's Returns
In May 2004, based on Beg's guilty plea, the Commissioner
began a civil examination of City Wide's returns to recover the taxes that had
been underassessed as a result of Beg's fraud.
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The Commissioner did not assess any fraud penalties against
Fouche or City Wide.
City Wide challenged these assessments as time barred
because they were outside of the three-year statute of limitations contemplated
by § 6501(a) of the I.R.C. The Commissioner then sent City Wide a Letter 1058,
titled Final Notice, Notice of Intent to Levy and Notice of Your Right to a
Hearing, on January 2, 2008. On January 15, 2008, City Wide requested a
collection due process (“CDP”) hearing again asserting that the assessments
were outside of the limitations period. The settlement officer assigned to the
CDP hearing conducted a face-to-face hearing with City Wide on May 27, 2008.
After exchanging several letters, City Wide requested a Notice of Determination
in order to pursue the case in tax court. On December 11, 2008, the
Commissioner issued a Notice of Determination that upheld the assessments.
D. The Tax Court Rules in Favor of City Wide
After the Notice of Determination was issued, City Wide
litigated the assessment in tax court maintaining that the three-year statute
of limitations barred the Commissioner from the relevant assessments and that
the I.R.C.'s tolling provisions were inapplicable. The tax court noted that the
Commissioner could trigger the tolling provisions under I.R.C. § 6501(c)(1),
(2), or both by showing with “clear and convincing evidence that Mr. Beg had
the specific intent to evade taxes known to be owing by conduct intended to
conceal, mislead, or otherwise prevent the collection of taxes.” City Wide
Transit, Inc. v. Comm'r, 102 T.C.M. (CCH) 542, 2011 WL 5884981, at 5 (2011).
The tax court concluded, however, that the Commissioner did not meet that standard.
Although the Commissioner “point[ed] to a number of
egregious acts Mr. Beg performed” that caused the Commissioner to fail to
collect the full amount of City Wide's taxes, the tax court thought those
actions did not prove that Beg filed fraudulent returns “intend[ing] to defeat
or evade [City Wide's] taxes” and that tax evasion was only the “incidental
consequence or secondary effect of [Beg's] embezzlement scheme.” Id. at 6. The
tax court noted City Wide's argument that Beg “intended only to cover up his
embezzlement scheme and not defeat or evade [City Wide]'s taxes” and that the
Commissioner could not “point to anything in the record that [caused it] to
believe [that] argument [was] meritless.” Id. Accordingly, the tax court
concluded that the Commissioner was time barred from assessing the additional
taxes and entered judgment for City Wide.
The Commissioner now appeals that decision.
II. DISCUSSION
We review the decisions of a tax court “in the same manner
and to the same extent as decisions of the district courts in civil actions
tried without a jury.” 26 U.S.C. § 7482(a)(1). Accordingly, we “review the
legal rulings of the [t]ax [c]ourt de novo and its factual determinations for
clear error.” Scheidelman v. Comm'r, 682 F.3d 189, 193 [109 AFTR 2d 2012-2536]
(2d Cir. 2012). In so doing, we “owe no deference to the [t]ax [c]ourt's
statutory interpretations, its relationship to us being that of a district
court to a court of appeals, not that of an administrative agency to a court of
appeals.” Madison Recycling Assocs. v. Comm'r, 295 F.3d 280, 285 [90 AFTR 2d
2002-5132]–86 (2d Cir. 2002) (internal quotation marks and citation omitted).
We treat taxpayer intent as a question of fact subject to clear error review.
See Redd v. N.Y. Div. of Parole, 678 F.3d 166, 178 (2d Cir. 2012) (“Issues of
causation, intent, and motivation are questions of fact.”). We will, therefore,
reverse a tax court's decision regarding taxpayer intent only if “on the entire
evidence[, we are] left with the definite and firm conviction that a mistake
has been committed.” United States v. Alcan Aluminum Corp., 315 F.3d 179, 186
(2d Cir. 2003).
A. The Statute of Limitations and Its Exceptions
The I.R.C. requires that the Commissioner assess any tax
imposed “within 3 years after the return was filed.” I.R.C. § 6501(a). The
I.R.C., however, contains certain exceptions that make the limitations period
limitless. In relevant portion the I.R.C. provides:
(1) False return. In the case of a false or fraudulent
return with the intent to evade tax, the tax may be assessed, ... at any time.
I.R.C. § 6501(c)(1). 2
“The burden of proving that a false or fraudulent return was
filed with intent to evade tax is on the Commissioner ... and such proof must
be made by clear and convincing evidence.”Schaffer v. Comm'r , 779 F.2d 849,
857 [57 AFTR 2d 86-440] (2d Cir. 1985)(citing I.R.C. § 7454(a)). However,
“[b]ecause tax evaders do not reveal their fraudulent evasion, the Commissioner
may establish fraud through circumstantial evidence.” Pittman v. Comm'r, 100
F.3d 1308, 1319 [78 AFTR 2d 96-7262] (7th Cir. 1996). To prove intentional
evasion of tax, “the Commissioner must establish that (1) an underpayment
exists; and (2) some portion of the underpayment was due to fraud.”
Loren-Maltese v. Comm'r, 104 T.C.M. (CCH) 115, 2012 WL 3079052, at 1 (2012).
In analyzing § 6501(c)(1), we remain mindful that
“limitations statutes barring the collection of taxes otherwise due and unpaid
are strictly construed in favor of the [Commissioner].” Bufferd v. Comm'r, 506
U.S. 523, 527 [71 AFTR 2d 93-573] n.6 (1993) (internal quotation marks and
citations omitted). “Accordingly, taking [that obligation] into account, we
conclude that the limitations period for assessing [the taxpayer's] taxes is
extended if the taxes were understated due to fraud of the preparer.”Browning
v. Comm'r , 102 T.C.M. (CCH) 460, 2011 WL 5289636, at 13 n.14 (2011) (quoting
Allen v. Comm'r, 128 T.C. 37, 40, 2007 WL 654357, at 40 (2007)). This makes
intuitive sense because “the special disadvantage to the Commissioner in
investigating fraudulent returns is present if the income tax return preparer
committed the fraud that caused the taxes on the return to be understated.”Allen
, 2007 WL 654357, at 40.
B. The Tax Court Clearly Erred
Here, the Commissioner concedes that City Wide's additional
taxes were assessed outside the three-year limitations period. Moreover, City
Wide concedes that Beg filed false or fraudulent tax returns and amendments on
its behalf and that City Wide's returns trigger the tolling provision if we
find that Beg filed them with the intent to evade City Wide's taxes. 3 We are
confronted, then, with a very narrow question: whether, considering all of the
evidence, the tax court made a mistake by concluding that the Commissioner
failed to establish by clear and convincing evidence that Beg intended to evade
City Wide's taxes through his embezzlement scheme. Beg's scheme clearly does,
and the tax court made a mistake.
Beg drafted and filed five fraudulent returns and two
fraudulent amendments to evade tax. By concluding that the Commissioner failed
to prove that Beg intended to evade City Wide's taxes and that, at best, tax
evasion was but an “incidental,” “secondary effect” to Beg's embezzlement
scheme, the tax court inappropriately substituted motive for intent. The
statute is agnostic as to the attendant motivations for submitting a fraudulent
return and only requires that the Commissioner prove a fraudulent return was
filed with an intent to evade, that is avoid, paying a tax otherwise due. Thus,
“if one of [a conspiracy's] objectives, even a minor one, be the evasion of
federal taxes, the offense is made out, though the primary objective may be
concealment of another crime.” Ingram v. United States, 360 U.S. 672, 679 [4
AFTR 2d 6128]–80 (1959). Moreover, “if a “tax evasion motive plays any part” in
certain conduct, an “affirmative willful attempt” to evade taxes may be
inferred from that conduct.”United States v. Klausner , 80 F.3d 55, 63 [77 AFTR
2d 96-1540] (2d Cir. 1996) (quoting Spies v. United States, 317 U.S. 492, 499
[30 AFTR 378] (1943)). The Commissioner only had to prove that Beg intended to
underpay the Commissioner taxes that City Wide owed when he filed a fraudulent
return on City Wide's behalf, not that he intended to avoid City Wide's taxes
for City Wide's benefit.
Moreover, tax evasion was not an incidental or secondary
effect to Beg's scheme. The tax court's analysis suggests that Beg's tax
evasion was an externality, as if shortchanging the Commissioner did not figure
into Beg's decision-making calculus. To the contrary, Beg's scheme was tax
evasion; tax evasion was not a subordinate element to a more grandiose scheme.
It is of no consequence that Beg evaded City Wide's taxes for his own benefit,
and the tax court should have allowed the Commissioner to assess the taxes that
City Wide owed because of Beg's returns and amendments.
In defense of the tax court's decision, City Wide maintains
that the Commissioner's position requires us to read the intent element out of
§ 6501(c)(1). In developing that argument, City Wide claims that reversing the
tax court would require us to assume ipse dixit that Beg must have intended to
avoid City Wide's taxes based on the fraudulent returns alone. City Wide's
argument is misplaced, and this case requires no assumption on our part. Beg
filed returns intending to avoid paying the Commissioner money that was
otherwise due; Beg's calculated scheme to embezzle that money proves that the
returns were fraudulent.
This would be another case if, for example, Beg falsely
recorded certain personal expenses as corporate expenses on City Wide's ledger
that in turn caused City Wide to file a tax return that fraudulently
understated its income. If that had been the case, Beg's fraud on the company
would have causedthe company to file a false return, and we would not assume
that the company intended to evade a tax by filing that false return. Here,
however, Beg's actions were not as secondary or remote to the fraudulent
returns as the tax court suggested; Beg was not a third party unrelated to the
preparation and filing of the returns. See I.R.S. Chief Counsel Advisory
201238026, 2012 WL 4261126 (June 2012). Accordingly, the Commissioner proved
“(1) that ... underpayment[s] exist[ed] and (2) that fraud exist[ed], i.e.,
that [Beg] intended to evade taxes known to be owing by conduct intended to
conceal, mislead, or otherwise prevent the collection of taxes.” Browning, 2011
WL 5289636 [TC Memo 2011-261], at 10.
We note briefly that Beg's motivation for fraudulently
amending the June 1997 and December 1998 returns that City Wide had previously
filed is unclear. He presumably did so in order to cover up the false EICs he
included on the five returns that he drafted and filed in the first instance.
But again, Beg's motivations are inconsequential, and it is clear that he filed
the two amended returns intending to evade tax for the foregoing reasons.
Accordingly, the Commissioner presented clear and convincing
evidence that Beg intended to evade City Wide's taxes for the seven taxable
quarters in question, thereby triggering the tolling provision under §
6501(c)(1). The tax court made a mistake, and we reverse.
III. CONCLUSION
The tax court's order of November 23, 2011 precluding the
Commissioner for assessing City Wide's taxes for the seven relevant quarters is
hereby REVERSED. The Commissioner is free to assess the taxes for the seven
relevant quarters at any time.
1
City Wide had
already filed Forms 941 that Brand's prepared for June 1997 and December 1998.
2
The Commissioner
also relies on I.R.C. § 6501(c)(2), which lifts the statute of limitations
“[i]n case of a willful attempt in any manner to defeat or evade tax imposed by
this title.” The tax court has previously stated that “it is difficult to
articulate a meaningful distinction between “false or fraudulent return with
the intent to evade tax” and “willful attempt in any manner to defeat or evade
tax.””Carl v. Comm'r , 41 T.C.M. (CCH) 1346, 1981 [¶81,202 PH Memo TC] WL
10527, at n.16 (1981). Although there may be a distinction between § 6501(c)(1)
and § 6501(c)(2) in some cases, we would, for the reasons set out in this
Opinion, reach the same conclusion under either provision here. We therefore
refer only to § 6501(c)(1).
3
In front of the tax
court, City Wide argued that it was not liable for the returns Beg prepared
where “(1) [City Wide] did not know of the preparer's defalcations; [and] (2)
[City Wide] did not sign or knowingly allow to be filed a false return ....”
Joint App'x 360; see also id. at 350–57 (developing the argument and citing
cases). The Commissioner anticipated these claims on appeal and rebutted them
in its opening brief. City Wide, however, conceded these issues in its response
brief. City Wide Br. at 16. Moreover, each member of this panel asked City Wide
whether it had intended this concession, and City Wide responded affirmatively
to each of us in turn. Accordingly, we accept this concession without deciding
whether certain factual situations might arise that sever the taxpayer's
liability from the tax-preparer's wrongdoing.
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