Liverett v. Torres Advanced Enter. Solutions LLC

• Decision Date: 28 June 2016
• Docket Number: Case No. 1:16-cv-339
• Citation: 192 F.Supp.3d 648
• Court: U.S. District Court — Eastern District of Virginia
• Parties: Grant LIVERETT, Plaintiff, v. TORRES ADVANCED ENTERPRISE SOLUTIONS LLC, Defendant.

192 F.Supp.3d 648

Grant LIVERETT, Plaintiff,

v.TORRES ADVANCED ENTERPRISE SOLUTIONS LLC, Defendant.

Case No. 1:16-cv-339

United States District Court, E.D. Virginia, Alexandria Division .

Signed June 28, 2016

Gregg Cohen Greenberg, Zipin, Amster & Greenberg, LLC, Silver Spring, MD, for Plaintiff.

Jeffrey Robin Hamlin, Ifrah PLLC, Washington, DC, for Defendant.

MEMORANDUM OPINION

T. S. Ellis, III, United States District Judge

In this employment dispute, plaintiff Grant Liverett alleges that his employer, defendant Torres Advanced Enterprise Solutions LLC, (i) violated the Fair Labor Standards Act ("FLSA")¹ by failing to pay required minimum and overtime wages to employees, (ii) committed tax fraud by willfully treating employees as independent contractors in order to avoid paying employer taxes, and (iii) breached the employment agreement between the parties.

Defendant filed a motion for summary judgment and a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), Fed. R. Civ. P. The motions were fully briefed and argued. At the conclusion of oral argument, a bench ruling issued denying the motions in substantial part, but deferring ruling on one count pending further briefing. Specifically, defendant's motion for summary judgment was denied pursuant to Rule 56(d)(1), Fed. R. Civ. P., and the motion to dismiss was denied with respect to Count I, alleging FLSA violations, and Count III, alleging breach of contract. See Liverett v. Torres Advanced Ent. Solutions LLC , No. 16–cv–339 (E.D.Va. June 17, 2016) (Order) (Doc. 23). The motion to dismiss Count II, alleging tax fraud, was taken under advisement, and the parties were directed to file supplemental briefs addressing a question of statutory interpretation pertinent to plaintiff's claim in Count II, an issue that neither party addressed in the initial briefing. The parties were directed to brief whether 26 U.S.C. § 7434(a) creates a private cause of action for tax fraud where, as here, the alleged misrepresentation giving rise to the action is unrelated to the amount of payments the defendant reported paying to the plaintiff. See id. For the reasons that follow, it does not.

I.

The relevant factual allegations may be succinctly summarized.² Plaintiff was employed by defendant,³ a government contractor, to provide bid procurement and contract management services at Camp Bondsteel in Kosovo, the headquarters for a North Atlantic Treaty Organization peacekeeping force led by the United States Army. The parties sharply dispute whether plaintiff is an employee or an independent contractor. Plaintiff alleges that defendant is engaged in a scheme to misclassify its employees as independent contractors in order to avoid paying the minimum and overtime wages to which these employees are due under the FLSA. Relatedly, plaintiff alleges that defendant, by intentionally misclassifying its employees as independent contractors on tax documents, is defrauding the federal government for the purpose of avoiding paying certain employer taxes.

Importantly, the fraudulent tax scheme that plaintiff alleges concerns the type of information return that defendant provides to its employees. Specifically, plaintiff alleges that instead of issuing the IRS Form W-2s to which defendant's employees are entitled, defendant instead willfully issued IRS Form 1099s, which represented that defendant's employees were independent contractors. See Am. Comp. ¶¶ 83, 91c, 92, 104, 124, 151, 159. There is no allegation that defendant willfully issued its employees or independent contractors information returns that reflected inaccurate amounts of wages paid or inaccurate payments in any other respect. As alleged by plaintiff, defendant is liable for tax fraud based only on the allegation that defendant willfully misrepresented the status of its employees by issuing them Form 1099s instead of Form W-2s.

II.

The Internal Revenue Code provides as follows:

If any person willfully files a fraudulent information return with respect to payments purported to be made to any other person, such other person may bring a civil action for damages against the person so filing such return.

26 U.S.C. § 7434(a). This statute, at first glance, appears quite simple and straightforward. But, a more careful reading reveals that it harbors a significant ambiguity, the resolution of which impacts this case.

The source of the ambiguity in § 7434(a) is the phrase "with respect to payments purported to be made to any other person." Simply put, there is ambiguity as to what the phrase "with respect to..." modifies. On the one hand, § 7434(a) may refer to an "information return with respect to payments purported to be made to any other person" that is "fraudulent." On this reading, "with respect to..." describes "information return," and such an information return that is false or misleading in any respect aimed at obtaining something of value is "fraudulent" and therefore actionable. On the other hand, "with respect to payments purported to be made to any other person" may be read as limiting "fraudulent." Under this interpretation, the filing of an information return is actionable only if the information return is false or misleading as to the amount of payments purportedly made.

Resolving this ambiguity is of consequence here, as the Amended Complaint states a claim for relief under the former interpretation, but not under the latter. To clarify, a Form 1099 that identifies plaintiff as an independent contractor when he is in fact an employee is an information return that is false with respect to plaintiff's employment status, but so long as the Form 1099 accurately reports the amount of wages defendant paid to plaintiff, the return is not fraudulent with respect to the amount of the payments made. Because the Amended Complaint contains no allegation that defendant willfully misrepresented the amount of wages paid to plaintiff, plaintiff's tax fraud claim rises or falls on whether willfully misrepresenting an employee as an independent contractor constitutes actionable fraud for purposes of § 7434(a). Thus, the question presented is whether § 7434(a) creates a private cause of action where, as here, the alleged misrepresentation is the filing of the wrong type of information return rather than a misrepresentation as to the amount of the payments made.

Interestingly, no court of appeals has addressed § 7434(a)'s ambiguity.⁴ Although some federal district courts have found allegations that an employer issued Form 1099s when Form W-2s were in fact appropriate—the same allegation advanced here—sufficient to state a claim,⁵ these cases did not carefully consider the statutory language or directly address the ambiguity on the face of § 7434(a). Instead, these courts—as courts routinely do—recited the elements of the cause of action under § 7434(a) as (i) the defendant issued an information return, (ii) the information return was fraudulent, and (iii) the issuance was willful,⁶ and therefore concluded that the filing of an information return that is fraudulent in any respect is actionable. This formulation of the elements, however, does not address the effect of the phrase "with respect to..." and overlooks the ambiguity. The failure to give this language its proper effect undermines Congress's intent in enacting § 7434 ; the "with respect to..." language serves an important purpose in limiting the scope of actionable frauds.

A.

When resolving the meaning of a statute, "the starting point...is the language of the statute itself." Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc. , 447 U.S. 102, 108, 100 S.Ct. 2051, 64 L.Ed.2d 766 (1980). Indeed, it is axiomatic that "[i]f the statutory language is plain," a court "must enforce it according to its terms."

King v. Burwell , –––U.S. ––––, 135 S.Ct. 2480, 2489, 192 L.Ed.2d 483 (2015). Of course, statutory language is not always plain. Where ambiguity is present, the interpretative project must take into account "the overall statutory scheme." See id. After all, statutory interpretation is the task of "constru[ing] statutes , not isolated provisions." Id. (emphasis added). Indeed, as the Supreme Court has recently explained, proper statutory interpretation proceeds "with reference to the statutory context, ‘structure, history, and purpose,’ " as well as "common sense." Abramski v. United States , ––– U.S. ––––, 134 S.Ct. 2259, 2267, 189 L.Ed.2d 262 (2014) (quoting Maracich v. Spears , ––– U.S. ––––, 133 S.Ct. 2191, 2209, 186 L.Ed.2d 275 (2013) ). Thus, "although the analysis properly focuses on the text, the analysis is not necessarily limited to the text." Angiotech Pharms. Inc. v. Lee , 191 F.Supp.3d 509, 521, 2016 WL 3248352, at *9 (E.D.Va. June 8, 2016). As already discussed, § 7434(a) is facially ambiguous. Accordingly, the task here is to identify the clues that point in favor of one interpretation over the other.

The language of § 7434(a) provides the first clue. The placement of "with respect to..." following "information return" fairly supports the broader reading of § 7434(a), insofar as one might expect the modifying phrase to follow the term it modifies. Yet, to give this clue significant weight is to assume (i) that Congress acted with care in drafting the language of § 7434, (ii) that Congress adhered to a particular rule of syntax, and (iii) that Congress accordingly placed the modifying phrase directly following the modified term. Although such assumptions are fair and reasonable, it is commonly accepted that interpretive presumptions based on congressional care in drafting and adherence to particular rules of syntax "can assuredly be overcome by other indicia of meaning." United States v. Hayes , 555 U.S. 415, 425, 129 S.Ct. 1079, 172 L.Ed.2d 816 (2009) (so stating as to the last antecedent rule).⁷ Thus, any inference from the placement of "with respect to..." is a weak one that must yield to weightier contextual clues, if such clues are present. Cf. Payless...