709 F.3d 102 (2nd Cir. 2013), 12-1040-ag, City Wide Transit, Inc. v. Commissioner of Internal Revenue

Docket Nº:12-1040-ag.
Citation:709 F.3d 102
Opinion Judge:WESLEY, Circuit Judge:
Party Name:CITY WIDE TRANSIT, INC., Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
Attorney: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.
Judge Panel:Before: WALKER, CABRANES, WESLEY, Circuit Judges.
Case Date:March 01, 2013
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 102

709 F.3d 102 (2nd Cir. 2013)

CITY WIDE TRANSIT, INC., Petitioner-Appellee,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 12-1040-ag.

United States Court of Appeals, Second Circuit.

March 1, 2013

Argued: Feb. 1, 2013.

Page 103

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.

WESLEY, Circuit Judge:

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,

Page 104

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.

Tax Quarter Ending Fraudulent EIC
[Month/Year] Reductions
June 1997 $42,211.00
December 1998 $48,812.00
March 1999 $40,539.00
June 1999 $45,388.41
December 1999 $85,927.41
March 2000 $53,081.77
June 2000 $55,655.84
Total $371,615.43
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 Page 105 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. 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,
...

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