City Wide Transit, Inc. v. Comm'r of Internal Revenue, No. 12-1040 (2d Cir. 2013)
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The Commissioner appealed from the tax court's order that prevented the Commissioner from collecting City Wide's outstanding employment taxes for seven taxable quarters. The tax court held that the Commissioner was time barred from collecting these taxes under section 6501(a) of the Internal Revenue Code and that the tolling provisions under section 6501(c)(1) and (2) of the I.R.C. did not apply. The court held 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 section 6501(c)(1). Accordingly, the court held that the Commissioner could assess City Wide's taxes for those seven quarters at any time.
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12-1040-ag City Wide Transit, Inc. v. Comm r 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term, 2012 (Argued: February 1, 2013 Decided: March 1, 2013) Docket No. 12-1040-ag CITY WIDE TRANSIT, INC., Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. Before: WALKER, CABRANES, WESLEY, Circuit Judges. 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 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 time. For the reasons stated below, the order of the tax court is REVERSED. 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. WESLEY, Circuit Judge: Some have suggested that the Commissioner of Internal 18 Revenue ( Commissioner ) rarely loses in tax court, tax 19 court decisions are rarely appealed, and federal circuit 20 courts rarely reverse tax court decisions. 21 Edward Maule, Instant Replay, Weak Teams, and Disputed 22 Calls: An Empirical Study of Alleged Tax Court Judge Bias, 23 66 Tenn. L. Rev. 351, 353, 401 (1999) (reviewing empirical 24 studies). 25 in tax court, the Commissioner appealed, and we now reverse. 26 See, e.g., James Despite some of these expectations, after losing This case requires us to determine whether an 27 accountant that filed fraudulent tax returns on behalf of a 28 company in order to embezzle money that the company 29 otherwise owed the Commissioner intentionally evaded that 30 company s taxes within the meaning of § 6501(c)(1) of the 2 1 Internal Revenue Code ( I.R.C. ). 2 determine whether that accountant triggered that tolling 3 provision when he fraudulently amended tax returns that the 4 company had already filed. 5 6 7 Similarly, we must also I. BACKGROUND A. The Fraudulently Filed Tax Returns Ms. Ray Fouche ( Fouche ) owned several bus companies, 8 including Petitioner-Appellee City Wide Transit, Inc. ( City 9 Wide ). City Wide transported handicapped children 10 throughout New York City. 11 companies, including City Wide, collectively accrued about 12 $700,000.00 in outstanding payroll tax liabilities unrelated 13 to this appeal. 14 By the end of 1998, Fouche s bus To negotiate a reduction of these liabilities, Fouche 15 hired Manzoor Beg, who falsely held himself out as a 16 certified public accountant, and gave him a blank power of 17 attorney. 18 $30,000.00 in April 1999 and promised him 25% of the amount 19 he successfully saved City Wide as result of his 20 negotiations. 21 service, Brand s Paycheck, Inc. ( Brand s ), to prepare the 22 Employer s Quarterly Federal Tax Return on Forms 941 for the On behalf of City Wide, Fouche paid Beg Fouche also hired a third-party payroll 3 1 tax quarters relevant to this appeal: June 1997; December 2 1998; March 31, June 30, and December 31, 1999; and March 31 3 and June 30, 2000. 4 Fouche drafted checks payable to the IRS sufficient to cover 5 City Wide s liabilities and gave them, along with the 6 corresponding returns that Brand s prepared, to Beg, who in 7 turn promised to deliver them to the revenue officer with 8 whom he was negotiating.1 9 For each of those last five quarters, Instead of filing the correct returns, however, Beg 10 prepared, signed, and filed another set of returns on Forms 11 941 for those five quarters (collectively, the Beg 12 returns ). In those returns, Beg fraudulently added advance 13 earned income credit ( EIC ) payments that significantly 14 reduced City Wide s tax liabilities. 15 checks that City Wide drafted by changing the payee from the 16 IRS to an account that he maintained at Habib American Bank 17 in the name of Himalayan Hanoi Craft, deposited or cashed 18 those checks for his own personal use, and drafted new 19 checks to cover City Wide s now fraudulently reduced tax 20 liabilities. Beg then altered the 21 1 City Wide had already filed Forms 941 that Brand s prepared for June 1997 and December 1998. 4 1 Moreover, Beg also prepared, signed, and filed amended 2 Forms 941 for the June 1997 and December 1998 quarters (the 3 Beg amendments ) in order to add fraudulent EIC payments to 4 the returns that City Wide previously filed. 5 personally benefit from these amendments but presumably 6 filed them in an effort to conceal the fraudulent EIC 7 payments he included in the returns that he drafted. 8 Through this scheme, Beg embezzled hundreds of thousands of 9 dollars from City Wide, and City Wide received certain tax Beg did not 10 refunds. 11 reduction in City Wide s taxes resulting from the Beg 12 amendments and returns. 13 14 The following table represents the actual Fraudulent EIC Reductions Tax Quarter Ending [Month/Year] 15 June 1997 $42,211.00 16 December 1998 $48,812.00 17 March 1999 $40,539.00 18 June 1999 $45,388.41 19 December 1999 $85,927.41 20 March 2000 $53,081.77 21 June 2000 $55,655.84 22 Total $371,615.43 23 5 1 B. 2 The United States Prosecutes Beg On June 10, 2002, after discovering Beg s scheme, the 3 United States filed a complaint in United States District 4 Court. 5 knowingly and willfully prepared false Employer s Quarterly 6 Federal Tax Returns for City Wide in violation of 26 U.S.C. 7 § 7206(1); (2) knowingly and intentionally made and 8 possessed forged checks drawn on City Wide s account in 9 violation of 18 U.S.C. § 513(a); and (3) knowingly and 10 intentionally deposited money derived from those forged 11 checks into his Himalayan bank account in violation of 18 12 U.S.C. § 1957(a) and (b)(1). 13 indictment and, inter alia, pled guilty to preparing false 14 tax returns for City Wide. 15 district court commenced certain sentencing proceedings, 16 until April 7, 2006 when the district court dismissed the 17 case because Beg had died. 18 C. That complaint alleged, inter alia, that Beg (1) On October 8, 2002, Beg waived Between 2003 and 2005, the The Commissioner Examines City Wide s Returns 19 In May 2004, based on Beg s guilty plea, the 20 Commissioner began a civil examination of City Wide s 21 returns to recover the taxes that had been underassessed as 22 a result of Beg s fraud. Subsequently, the Commissioner 23 assessed the following: 6 1 Taxable Period Assessment Date Additional Tax Owed 2 June 1997 February 26, 2007 $42,211.00 3 December 1998 March 12, 2007 $48,812.00 4 March 1999 February 26, 2007 $40,539.00 5 June 1999 February 26, 2007 $45,388.41 6 December 1999 February 26, 2007 $85,927.41 7 March 2000 February 26, 2007 $53,081.77 8 June 2000 February 26, 2007 $55,665.84 9 10 11 The Commissioner did not assess any fraud penalties against Fouche or City Wide. City Wide challenged these assessments as time barred 12 because they were outside of the three-year statute of 13 limitations contemplated by § 6501(a) of the I.R.C. 14 Commissioner then sent City Wide a Letter 1058, titled Final 15 Notice, Notice of Intent to Levy and Notice of Your Right to 16 a Hearing, on January 2, 2008. 17 Wide requested a collection due process ( CDP ) hearing 18 again asserting that the assessments were outside of the 19 limitations period. 20 CDP hearing conducted a face-to-face hearing with City Wide 21 on May 27, 2008. 22 Wide requested a Notice of Determination in order to pursue The On January 15, 2008, City The settlement officer assigned to the After exchanging several letters, City 7 1 the case in tax court. 2 Commissioner issued a Notice of Determination that upheld 3 the assessments. 4 D. 5 On December 11, 2008, the The Tax Court Rules in Favor of City Wide After the Notice of Determination was issued, City Wide 6 litigated the assessment in tax court maintaining that the 7 three-year statute of limitations barred the Commissioner 8 from the relevant assessments and that the I.R.C. s tolling 9 provisions were inapplicable. The tax court noted that the 10 Commissioner could trigger the tolling provisions under 11 I.R.C. § 6501(c)(1), (2), or both by showing with clear and 12 convincing evidence that Mr. Beg had the specific intent to 13 evade taxes known to be owing by conduct intended to 14 conceal, mislead, or otherwise prevent the collection of 15 taxes. 16 542, 2011 WL 5884981, at *5 (2011). 17 concluded, however, that the Commissioner did not meet that 18 standard. 19 City Wide Transit, Inc. v. Comm r, 102 T.C.M. (CCH) The tax court Although the Commissioner point[ed] to a number of 20 egregious acts Mr. Beg performed that caused the 21 Commissioner to fail to collect the full amount of City 22 Wide s taxes, the tax court thought those actions did not 23 prove that Beg filed fraudulent returns intend[ing] to 8 1 defeat or evade [City Wide s] taxes and that tax evasion 2 was only the incidental consequence or secondary effect of 3 [Beg s] embezzlement scheme. 4 noted City Wide s argument that Beg intended only to cover 5 up his embezzlement scheme and not defeat or evade [City 6 Wide] s taxes and that the Commissioner could not point to 7 anything in the record that [caused it] to believe [that] 8 argument [was] meritless. 9 concluded that the Commissioner was time barred from Id. at *6. Id. The tax court Accordingly, the tax court 10 assessing the additional taxes and entered judgment for City 11 Wide. 12 The Commissioner now appeals that decision. 13 II. DISCUSSION 14 We review the decisions of a tax court in the same 15 manner and to the same extent as decisions of the district 16 courts in civil actions tried without a jury. 17 7482(a)(1). 18 the [t]ax [c]ourt de novo and its factual determinations for 19 clear error. 20 Cir. 2012). 21 [c]ourt s statutory interpretations, its relationship to us 22 being that of a district court to a court of appeals, not 26 U.S.C. § Accordingly, we review the legal rulings of Scheidelman v. Comm r, 682 F.3d 189, 193 (2d In so doing, we owe no deference to the [t]ax 9 1 that of an administrative agency to a court of appeals. 2 Madison Recycling Assocs. v. Comm r, 295 F.3d 280, 285-86 3 (2d Cir. 2002) (internal quotation marks and citation 4 omitted). 5 subject to clear error review. 6 Parole, 678 F.3d 166, 178 (2d Cir. 2012) ( Issues of 7 causation, intent, and motivation are questions of fact. ). 8 We will, therefore, reverse a tax court s decision regarding 9 taxpayer intent only if on the entire evidence[, we are] 10 left with the definite and firm conviction that a mistake 11 has been committed. 12 315 F.3d 179, 186 (2d Cir. 2003). 13 A. 14 We treat taxpayer intent as a question of fact See Redd v. N.Y. Div. of United States v. Alcan Aluminum Corp., The Statute of Limitations and Its Exceptions The I.R.C. requires that the Commissioner assess any 15 tax imposed within 3 years after the return was filed. 16 I.R.C. § 6501(a). 17 exceptions that make the limitations period limitless. 18 relevant portion the I.R.C. provides: 19 20 21 22 The I.R.C., however, contains certain In (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 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 10 1 The burden of proving that a false or fraudulent 2 return was filed with intent to evade tax is on the 3 Commissioner . . . and such proof must be made by clear and 4 convincing evidence. 5 (2d Cir. 1985)(citing I.R.C. § 7454(a)). However, [b]ecause 6 tax evaders do not reveal their fraudulent evasion, the 7 Commissioner may establish fraud through circumstantial 8 evidence. 9 1996). Schaffer v. Comm r, 779 F.2d 849, 857 Pittman v. Comm r, 100 F.3d 1308, 1319 (7th Cir. To prove intentional evasion of tax, the 10 Commissioner must establish that (1) an underpayment exists; 11 and (2) some portion of the underpayment was due to fraud. 12 Loren-Maltese v. Comm r, 104 T.C.M. (CCH) 115, 2012 WL 13 3079052, at *1 (2012). 14 In analyzing § 6501(c)(1), we remain mindful that 15 limitations statutes barring the collection of taxes 16 otherwise due and unpaid are strictly construed in favor of 17 the [Commissioner]. Bufferd v. Comm r, 506 U.S. 523, 527 18 n.6 (1993) (internal quotation marks and citations omitted). 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 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). 11 1 Accordingly, taking [that obligation] into account, we 2 conclude that the limitations period for assessing [the 3 taxpayer s] taxes is extended if the taxes were understated 4 due to fraud of the preparer. 5 T.C.M. (CCH) 460, 2011 WL 5289636, at *13 n.14 (2011) 6 (quoting Allen v. Comm r, 128 T.C. 37, 40, 2007 WL 654357, 7 at *40 (2007)). 8 special disadvantage to the Commissioner in investigating 9 fraudulent returns is present if the income tax return Browning v. Comm r, 102 This makes intuitive sense because the 10 preparer committed the fraud that caused the taxes on the 11 return to be understated. 12 B. Allen, 2007 WL 654357, at *40. The Tax Court Clearly Erred 13 Here, the Commissioner concedes that City Wide s 14 additional taxes were assessed outside the three-year 15 limitations period. 16 filed false or fraudulent tax returns and amendments on its 17 behalf and that City Wide s returns trigger the tolling 18 provision if we find that Beg filed them with the intent to 19 evade City Wide s taxes.3 Moreover, City Wide concedes that Beg We are confronted, then, with a 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 12 1 very narrow question: whether, considering all of the 2 evidence, the tax court made a mistake by concluding that 3 the Commissioner failed to establish by clear and convincing 4 evidence that Beg intended to evade City Wide s taxes 5 through his embezzlement scheme. 6 and the tax court made a mistake. 7 Beg s scheme clearly does, Beg drafted and filed five fraudulent returns and two 8 fraudulent amendments to evade tax. By concluding that the 9 Commissioner failed to prove that Beg intended to evade City 10 Wide s taxes and that, at best, tax evasion was but an 11 incidental, secondary effect to Beg s embezzlement 12 scheme, the tax court inappropriately substituted motive for 13 intent. 14 motivations for submitting a fraudulent return and only 15 requires that the Commissioner prove a fraudulent return was 16 filed with an intent to evade, that is avoid, paying a tax 17 otherwise due. 18 objectives, even a minor one, be the evasion of federal 19 taxes, the offense is made out, though the primary objective The statute is agnostic as to the attendant Thus, if one of [a conspiracy s] 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. 13 1 may be concealment of another crime. Ingram v. United 2 States, 360 U.S. 672, 679-80 (1959). Moreover, if a tax 3 evasion motive plays any part in certain conduct, an 4 affirmative willful attempt to evade taxes may be inferred 5 from that conduct. 6 63 (2d Cir. 1996) (quoting Spies v. United States, 317 U.S. 7 492, 499 (1943)). 8 Beg intended to underpay the Commissioner taxes that City 9 Wide owed when he filed a fraudulent return on City Wide s 10 behalf, not that he intended to avoid City Wide s taxes for 11 City Wide s benefit. 12 United States v. Klausner, 80 F.3d 55, The Commissioner only had to prove that Moreover, tax evasion was not an incidental or 13 secondary effect to Beg s scheme. The tax court s analysis 14 suggests that Beg s tax evasion was an externality, as if 15 shortchanging the Commissioner did not figure into Beg s 16 decision-making calculus. 17 was tax evasion; tax evasion was not a subordinate element 18 to a more grandiose scheme. 19 Beg evaded City Wide s taxes for his own benefit, and the 20 tax court should have allowed the Commissioner to assess the 21 taxes that City Wide owed because of Beg s returns and 22 amendments. To the contrary, Beg s scheme It is of no consequence that 23 14 1 In defense of the tax court s decision, City Wide 2 maintains that the Commissioner s position requires us to 3 read the intent element out of § 6501(c)(1). 4 that argument, City Wide claims that reversing the tax court 5 would require us to assume ipse dixit that Beg must have 6 intended to avoid City Wide s taxes based on the fraudulent 7 returns alone. 8 case requires no assumption on our part. 9 intending to avoid paying the Commissioner money that was In developing City Wide s argument is misplaced, and this Beg filed returns 10 otherwise due; Beg s calculated scheme to embezzle that 11 money proves that the returns were fraudulent. 12 This would be another case if, for example, Beg falsely 13 recorded certain personal expenses as corporate expenses on 14 City Wide s ledger that in turn caused City Wide to file a 15 tax return that fraudulently understated its income. 16 that had been the case, Beg s fraud on the company would 17 have caused the company to file a false return, and we would 18 not assume that the company intended to evade a tax by 19 filing that false return. 20 not as secondary or remote to the fraudulent returns as the 21 tax court suggested; Beg was not a third party unrelated to 22 the preparation and filing of the returns. 23 Counsel Advisory 201238026, 2012 WL 4261126 (June 2012). If Here, however, Beg s actions were 15 See I.R.S. Chief 1 Accordingly, the Commissioner proved (1) that . . . 2 underpayment[s] exist[ed] and (2) that fraud exist[ed], 3 i.e., that [Beg] intended to evade taxes known to be owing 4 by conduct intended to conceal, mislead, or otherwise 5 prevent the collection of taxes. Browning, 2011 WL 5289636, 6 at *10. 7 We note briefly that Beg s motivation for fraudulently 8 amending the June 1997 and December 1998 returns that City 9 Wide had previously filed is unclear. He presumably did so 10 in order to cover up the false EICs he included on the five 11 returns that he drafted and filed in the first instance. 12 But again, Beg s motivations are inconsequential, and it is 13 clear that he filed the two amended returns intending to 14 evade tax for the foregoing reasons. 15 Accordingly, the Commissioner presented clear and 16 convincing evidence that Beg intended to evade City Wide s 17 taxes for the seven taxable quarters in question, thereby 18 triggering the tolling provision under § 6501(c)(1). 19 tax court made a mistake, and we reverse. 20 21 22 16 The 1 2 III. CONCLUSION The tax court s order of November 23, 2011 precluding 3 the Commissioner for assessing City Wide s taxes for the 4 seven relevant quarters is hereby REVERSED. 5 Commissioner is free to assess the taxes for the seven 6 relevant quarters at any time. 17 The
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