McGraw v. C.I.R., 03-2883.
| Decision Date | 24 September 2004 |
| Docket Number | No. 03-2883.,03-2883. |
| Citation | 384 F.3d 965 |
| Parties | Joseph P. McGRAW, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Appeal from the United States Tax Court, Maurice B. Foley, J.
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Steven Zane Kaplan, argued, Minneapolis, MN (Cynthia Jokela Moyer, on the brief), for appellant.
Francesca Ugolini, argued, Washington, D.C. (Kenneth L. Greene, on the brief), for appellee.
Before MURPHY, SMITH, and COLLOTON, Circuit Judges.
Joseph McGraw appeals the decision of the United States Tax Court1 finding him liable for the tax deficiencies, including fraud penalties, of Metro Refuse, Inc. ("Metro") for tax years ending on June 30, 1988, 1989, and 1990. We affirm.
Metro was a Minnesota corporation that provided waste disposal services to commercial customers in the Minneapolis-St. Paul area. William Butler was the founder of the company and its Chief Executive Officer and majority shareholder during the relevant time. Butler's job duties included business development, acquisitions, expansion planning, and assisting with the financial management of the business. Joseph McGraw started working as general manager for Metro in 1983. In 1988, McGraw became the president of Metro. Butler was the sole shareholder until McGraw bought 49 percent of Butler's Metro shares in June 1988. In both his general manager and president capacities, McGraw handled the day-to-day operations of Metro and served as its "chief financial person." Specifically, he supervised the accounting department and was personally responsible for maintaining the general ledger and preparing the balance sheets, income statements, and tax returns.
During the three taxable years in question (1988, 1989, and 1990), Metro engaged in two schemes that resulted in the omission of gross receipts from Metro's income tax returns and the taking of fictitious deductions. The first scheme ("Scheme I") involved Metro's provision of front-end loading services to Poor Richards, Inc., another waste-hauling service operated by Richard Wybierala. When Metro sent Poor Richards invoices for these services, Poor Richards issued checks payable to Metro or a defunct waste hauler called Village Sanitation, Inc. Wybierala, however, endorsed the checks using Butler's name and gave the cash directly to Butler. Over the three-year period, the checks issued as part of Scheme I totaled $609,895.52. Metro did not report the cash from Poor Richards as taxable income on its tax returns.
McGraw was aware that Metro's tax returns for the three-year period did not include any gross receipts for the subcontracting work it performed for Poor Richards. According to McGraw and Butler, however, the receipts were properly deductible from income by Metro as salary paid to Butler or business expenses of Metro. They say that Poor Richards paid Butler in cash, so that Butler could receive additional compensation in order to avoid paying personal income taxes, and so he could pay for certain Metro wage, spare part, repair, and kickback expenses in cash. Despite their contention that the cash was used for Butler's salary and Metro business expenses, however, Metro did not report this compensation or these business expenses as deductions on its income tax filings.
The second scheme ("Scheme II"), which began in 1987, entailed Metro issuing checks to Poor Richards for non-existent subcontract work, and Wybierala of Poor Richards cashing the checks and giving the money to Butler. The amount of each transaction was always less than $10,000, which avoided federal reporting requirements. Again, Butler allegedly used the money to augment his personal income, to make kickback payments to a landfill employee, and to purchase items for Metro.
In 1988 and 1989, Scheme II resulted in Butler receiving $331,332. To carry out this scheme, McGraw created false vouchers, and the Metro accounts payable staff recorded the transactions as accounts payable. As a result, Metro reported these payments as deductible subcontract business expenses rather than as compensation to Butler. At the time of filing, McGraw was aware that Metro's tax returns for the 1988 and 1989 tax years overstated the amount of deductions for subcontracting expenses. For tax year 1990, the proceeds from Scheme II totaled $401,234. Instead of continuing to report this amount as a subcontracting service deduction, Metro claims that it consulted with legal counsel and reclassified $400,873 of these payments as a deduction for Butler's compensation.
In August 1990, Metro entered into an agreement with Browning Ferris Industries, Inc. ("BFI") in which all of Metro's assets were sold to BFI's Minnesota subsidiary ("BFIM"). In return, BFI assumed Metro's debt and transferred 212,233 shares of BFI stock to Metro. Metro and its stockholders (i.e., Butler and McGraw) agreed not to compete with BFI in the Twin Cities for a period of five years. On December 4, 1990, as part of its plan of liquidation, Metro distributed and re-issued the BFI stock to Butler and McGraw, who at that time owned 67 percent and 33 percent of Metro's shares, respectively. Accordingly, Butler received 141,488 shares and McGraw received 70,744. Metro filed its articles of dissolution on December 9, 1991.
According to McGraw, since Metro's dissolution, Butler and McGraw have paid other tax deficiencies and penalties owed by Metro. McGraw testified that in 1991 and 1992, Butler and McGraw paid the IRS and the Minnesota Department of Revenue for additional taxes, penalties, and interest that Metro owed for tax years 1988 through 1990. He averred that the total amount Butler and McGraw had to expend, including legal fees, was $538,883. Also, in 1995, Butler pled guilty to filing a false individual income tax return and aiding and abetting the filing of a false corporate tax return on behalf of Metro. As part of this plea agreement, Butler admitted filing false individual tax returns, and aiding and abetting the filing of false corporate tax returns for Metro, in 1988, 1989, and 1990.
On November 30, 1999, the Commissioner of Internal Revenue ("Commissioner") issued separate notices of tax liability to McGraw and Butler. The total liability alleged for tax deficiencies, fraud penalties, and interest was $1,946,292. McGraw and Butler filed petitions with the United States Tax Court challenging the Commissioner's notices of liability. In his amended answer, the Commissioner alleged an additional deficiency of $30,600 for the 1988 tax year, and asserted that the reclassified officer's compensation deduction taken in 1990 was also subject to the fraud penalty. McGraw and Butler contested the notices of liability in Tax Court.
After a two-day trial, the Tax Court issued a decision upholding the majority of the Commissioner's notices of liability, and finding that McGraw and Butler were jointly and severally liable for the following amounts:
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Tax
Year Deficiency Fraud Penalty Interest
-------------------------------------------------------
1988 $112,324 $ 83,393.24 and plus interest on
50% of the deficiency
interest due and fraud
on $111,191 amounts
-------------------------------------------------------
1989 $186,457 $136,207.50 plus interest on
deficiency
and fraud
amounts
-------------------------------------------------------
1990 $160,854 $117,204 plus interest on
deficiency
and fraud
amounts
-------------------------------------------------------
McGraw raises numerous issues on appeal relating to the calculation of the tax deficiencies, the imposition of fraud penalties, the finding of transferee liability, and the total amount of transferee liability. We review the Tax Court's legal conclusions de novo and its factual findings for clear error. Howard E. Clendenen, Inc. v. Comm'r, 207 F.3d 1071, 1073 (8th Cir.2000).
First, we consider whether the Tax Court erred in finding that Metro submitted fraudulent income tax returns for the tax years ending June 30, 1988, 1989, and 1990, and was thereby subject to fraud penalties pursuant to 26 U.S.C. § 6653(b)(1) (1988), 26 U.S.C. § 6653(b) (1989), and 26 U.S.C. § 6663 (1990). The finding of fraud is also pertinent to whether the Commissioner timely filed its notices of liability in 1999. See 26 U.S.C. § 6501(a), (c)(1) (). It is the Commissioner's burden to establish the taxpayer's fraud by clear and convincing evidence. Id. § 7454(a); Scallen v. Comm'r, 877 F.2d 1364, 1369 (8th Cir.1989). The Tax Court's finding of fraud is an issue of fact, "which will be overturned only if it is not supported by substantial evidence on the record as a whole, or if it is clearly erroneous or induced by an erroneous view of the law." Scallen, 877 F.2d at 1369. We hold that the Tax Court's finding of fraud was not clearly erroneous.
Tax fraud is established when a taxpayer engages in intentional wrongdoing and has the "specific purpose to evade taxes the taxpayer knows or believes to be owing." Day v. Comm'r, 975 F.2d 534, 538 (8th Cir.1992). McGraw claims that there was no evidence that Metro possessed the requisite specific intent to evade any income tax liability. Although Metro knew the tax returns were false because they omitted the Scheme I income and claimed the...
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