12-1040-ag City Wide Transit, Inc v. Comm’r 1 UNITED STATES COURT OF APPEALS 2 3 FOR THE SECOND CIRCUIT 4 5 6 7 August…

12-1040-ag
City Wide Transit, Inc. v. Comm’r
1
UNITED STATES COURT OF APPEALS 2
3
FOR THE SECOND CIRCUIT 4
5
6
7
August Term, 2012 8
9
10
(Argued: February 1, 2013 Decided: March 1, 2013) 11
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Docket No. 12-1040-ag 13
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CITY WIDE TRANSIT, INC., 16
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Petitioner-Appellee, 18
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–v.– 20
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COMMISSIONER OF INTERNAL REVENUE, 22
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Respondent-Appellant. 24
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26
27
Before: 28
WALKER, CABRANES, WESLEY, Circuit Judges. 29
30
The Commissioner of Internal Revenue appeals from an 31
order of the United States Tax Court (Vasquez, J.) that 32
prevented the Commissioner from collecting City Wide 33
Transit, Inc.’s outstanding employment taxes for seven 34
taxable quarters dating as far back as 1997 and as recently 35
as 2000. The tax court held that the Commissioner was time 36
barred from collecting these taxes under § 6501(a) of the 37
Internal Revenue Code and that the tolling provisions under 38
§§ 6501(c)(1) and (2) of the I.R.C. did not apply. We 39
disagree and hold that an accountant who filed fraudulent 40
tax returns on behalf of a company in order to embezzle 41
money otherwise owed to the Commissioner intentionally 42
evaded taxes, thereby triggering the tolling provision under 43
§ 6501(c)(1). Accordingly, the Commissioner was free to 44
assess City Wide’s taxes for those seven quarters at any 45

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