City Wide Transit, Inc. v. Comm'r
| Decision Date | 01 March 2013 |
| Docket Number | Docket No. 12–1040–ag. |
| Citation | 709 F.3d 102 |
| Parties | CITY WIDE TRANSIT, INC., Petitioner–Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellant. |
| Court | U.S. Court of Appeals — Second Circuit |
OPINION TEXT STARTS HERE
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.
Before: WALKER, CABRANES, WESLEY, Circuit Judges.
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.
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.
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.
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. Subsequently, the Commissioner assessed the following:
+-----------------------------------------------------------------+
¦Taxable Period ¦Assessment Date ¦Additional Tax Owed ¦
+---------------------+---------------------+---------------------¦
¦June 1997 ¦February 26, 2007 ¦$42,211.00 ¦
+---------------------+---------------------+---------------------¦
¦December 1998 ¦March 12, 2007 ¦$48,812.00 ¦
+---------------------+---------------------+---------------------¦
¦March 1999 ¦February 26, 2007 ¦$40,539.00 ¦
+---------------------+---------------------+---------------------¦
¦June 1999 ¦February 26, 2007 ¦$45,388.41 ¦
+---------------------+---------------------+---------------------¦
¦December 1999 ¦February 26, 2007 ¦$85,927.41 ¦
+---------------------+---------------------+---------------------¦
¦March 2000 ¦February 26, 2007 ¦$53,081.77 ¦
+---------------------+---------------------+---------------------¦
¦June 2000 ¦February 26, 2007 ¦$55,665.84 ¦
+-----------------------------------------------------------------+
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.
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 fraudulentreturns “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.
We review the decisions of a tax court “in the same manner and to the same extent as ...
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