     12-1040-ag
     City Wide Transit, Inc. v. Comm’r
 1
 2                      UNITED STATES COURT OF APPEALS
 3
 4                           FOR THE SECOND CIRCUIT
 5
 6
 7
 8                              August Term, 2012
 9
10
11    (Argued: February 1, 2013                 Decided: March 1, 2013)
12
13                            Docket No. 12-1040-ag
14
15
16                          CITY WIDE TRANSIT, INC.,
17
18                                                   Petitioner-Appellee,
19
20                                       –v.–
21
22                    COMMISSIONER OF INTERNAL REVENUE,
23
24                                                  Respondent-Appellant.
25
26
27
28   Before:
29               WALKER, CABRANES, WESLEY, Circuit Judges.
30
31        The Commissioner of Internal Revenue appeals from an
32   order of the United States Tax Court (Vasquez, J.) that
33   prevented the Commissioner from collecting City Wide
34   Transit, Inc.’s outstanding employment taxes for seven
35   taxable quarters dating as far back as 1997 and as recently
36   as 2000. The tax court held that the Commissioner was time
37   barred from collecting these taxes under § 6501(a) of the
38   Internal Revenue Code and that the tolling provisions under
39   §§ 6501(c)(1) and (2) of the I.R.C. did not apply. We
40   disagree and hold that an accountant who filed fraudulent
41   tax returns on behalf of a company in order to embezzle
42   money otherwise owed to the Commissioner intentionally
43   evaded taxes, thereby triggering the tolling provision under
44   § 6501(c)(1). Accordingly, the Commissioner was free to
45   assess City Wide’s taxes for those seven quarters at any
 1   time. For the reasons stated below, the order of the tax
 2   court is REVERSED.
 3
 4
 5
 6               IVAN C. DALE (Michael J. Haungs, on the brief), for
 7                    Kathryn Keneally, Assistant Attorney General,
 8                    Washington, D.C.
 9
10               GARY HOPPE (Herbert C. Kantor, on the brief),
11                    Kantor, Davidoff, Wolfe, Mandelker, Twomey &
12                    Gallanty, P.C., New York, NY.
13
14
15
16   WESLEY, Circuit Judge:

17       Some have suggested that the Commissioner of Internal

18   Revenue (“Commissioner”) rarely loses in tax court, tax

19   court decisions are rarely appealed, and federal circuit

20   courts rarely reverse tax court decisions.     See, e.g., James

21   Edward Maule, Instant Replay, Weak Teams, and Disputed

22   Calls: An Empirical Study of Alleged Tax Court Judge Bias,

23   66 Tenn. L. Rev. 351, 353, 401 (1999) (reviewing empirical

24   studies).    Despite some of these expectations, after losing

25   in tax court, the Commissioner appealed, and we now reverse.

26       This case requires us to determine whether an

27   accountant that filed fraudulent tax returns on behalf of a

28   company in order to embezzle money that the company

29   otherwise owed the Commissioner intentionally evaded that

30   company’s taxes within the meaning of § 6501(c)(1) of the

                                     2
 1   Internal Revenue Code (“I.R.C.”).     Similarly, we must also

 2   determine whether that accountant triggered that tolling

 3   provision when he fraudulently amended tax returns that the

 4   company had already filed.

 5                             I. BACKGROUND

 6   A.   The Fraudulently Filed Tax Returns

 7        Ms. Ray Fouche (“Fouche”) owned several bus companies,

 8   including Petitioner-Appellee City Wide Transit, Inc. (“City

 9   Wide”).     City Wide transported handicapped children

10   throughout New York City.     By the end of 1998, Fouche’s bus

11   companies, including City Wide, collectively accrued about

12   $700,000.00 in outstanding payroll tax liabilities unrelated

13   to this appeal.

14        To negotiate a reduction of these liabilities, Fouche

15   hired Manzoor Beg, who falsely held himself out as a

16   certified public accountant, and gave him a blank power of

17   attorney.     On behalf of City Wide, Fouche paid Beg

18   $30,000.00 in April 1999 and promised him 25% of the amount

19   he successfully saved City Wide as result of his

20   negotiations.     Fouche also hired a third-party payroll

21   service, Brand’s Paycheck, Inc. (“Brand’s”), to prepare the

22   Employer’s Quarterly Federal Tax Return on Forms 941 for the


                                     3
 1   tax quarters relevant to this appeal: June 1997; December

 2   1998; March 31, June 30, and December 31, 1999; and March 31

 3   and June 30, 2000.   For each of those last five quarters,

 4   Fouche drafted checks payable to the IRS sufficient to cover

 5   City Wide’s liabilities and gave them, along with the

 6   corresponding returns that Brand’s prepared, to Beg, who in

 7   turn promised to deliver them to the revenue officer with

 8   whom he was negotiating.1

 9        Instead of filing the correct returns, however, Beg

10   prepared, signed, and filed another set of returns on Forms

11   941 for those five quarters (collectively, the “Beg

12   returns”). In those returns, Beg fraudulently added advance

13   earned income credit (“EIC”) payments that significantly

14   reduced City Wide’s tax liabilities.     Beg then altered the

15   checks that City Wide drafted by changing the payee from the

16   IRS to an account that he maintained at Habib American Bank

17   in the name of Himalayan Hanoi Craft, deposited or cashed

18   those checks for his own personal use, and drafted new

19   checks to cover City Wide’s now fraudulently reduced tax

20   liabilities.

21

          1
           City Wide had already filed Forms 941 that Brand’s prepared
     for June 1997 and December 1998.

                                     4
 1       Moreover, Beg also prepared, signed, and filed amended

 2   Forms 941 for the June 1997 and December 1998 quarters (the

 3   “Beg amendments”) in order to add fraudulent EIC payments to

 4   the returns that City Wide previously filed.    Beg did not

 5   personally benefit from these amendments but presumably

 6   filed them in an effort to conceal the fraudulent EIC

 7   payments he included in the returns that he drafted.

 8   Through this scheme, Beg embezzled hundreds of thousands of

 9   dollars from City Wide, and City Wide received certain tax

10   refunds.    The following table represents the actual

11   reduction in City Wide’s taxes resulting from the Beg

12   amendments and returns.

13          Tax Quarter Ending          Fraudulent EIC Reductions
14             [Month/Year]
15   June 1997                                  $42,211.00
16   December 1998                              $48,812.00
17   March 1999                                 $40,539.00
18   June 1999                                  $45,388.41
19   December 1999                              $85,927.41
20   March 2000                                 $53,081.77
21   June 2000                                  $55,655.84
22                  Total                      $371,615.43



23


                                    5
 1   B.   The United States Prosecutes Beg

 2        On June 10, 2002, after discovering Beg’s scheme, the

 3   United States filed a complaint in United States District

 4   Court.   That complaint alleged, inter alia, that Beg (1)

 5   knowingly and willfully prepared false Employer’s Quarterly

 6   Federal Tax Returns for City Wide in violation of 26 U.S.C.

 7   § 7206(1); (2) knowingly and intentionally made and

 8   possessed forged checks drawn on City Wide’s account in

 9   violation of 18 U.S.C. § 513(a); and (3) knowingly and

10   intentionally deposited money derived from those forged

11   checks into his Himalayan bank account in violation of 18

12   U.S.C. § 1957(a) and (b)(1).     On October 8, 2002, Beg waived

13   indictment and, inter alia, pled guilty to preparing false

14   tax returns for City Wide.     Between 2003 and 2005, the

15   district court commenced certain sentencing proceedings,

16   until April 7, 2006 when the district court dismissed the

17   case because Beg had died.

18   C.   The Commissioner Examines City Wide’s Returns

19        In May 2004, based on Beg’s guilty plea, the

20   Commissioner began a civil examination of City Wide’s

21   returns to recover the taxes that had been underassessed as

22   a result of Beg’s fraud. Subsequently, the Commissioner

23   assessed the following:


                                     6
 1   Taxable Period         Assessment Date     Additional Tax

                                                Owed
 2   June 1997              February 26, 2007   $42,211.00
 3   December 1998          March 12, 2007      $48,812.00
 4   March 1999             February 26, 2007   $40,539.00
 5   June 1999              February 26, 2007   $45,388.41
 6   December 1999          February 26, 2007   $85,927.41
 7   March 2000             February 26, 2007   $53,081.77
 8   June 2000              February 26, 2007   $55,665.84

 9   The Commissioner did not assess any fraud penalties against

10   Fouche or City Wide.

11       City Wide challenged these assessments as time barred

12   because they were outside of the three-year statute of

13   limitations contemplated by § 6501(a) of the I.R.C.     The

14   Commissioner then sent City Wide a Letter 1058, titled Final

15   Notice, Notice of Intent to Levy and Notice of Your Right to

16   a Hearing, on January 2, 2008.     On January 15, 2008, City

17   Wide requested a collection due process (“CDP”) hearing

18   again asserting that the assessments were outside of the

19   limitations period.    The settlement officer assigned to the

20   CDP hearing conducted a face-to-face hearing with City Wide

21   on May 27, 2008.   After exchanging several letters, City

22   Wide requested a Notice of Determination in order to pursue


                                    7
 1   the case in tax court.    On December 11, 2008, the

 2   Commissioner issued a Notice of Determination that upheld

 3   the assessments.

 4   D.   The Tax Court Rules in Favor of City Wide

 5        After the Notice of Determination was issued, City Wide

 6   litigated the assessment in tax court maintaining that the

 7   three-year statute of limitations barred the Commissioner

 8   from the relevant assessments and that the I.R.C.’s tolling

 9   provisions were inapplicable.       The tax court noted that the

10   Commissioner could trigger the tolling provisions under

11   I.R.C. § 6501(c)(1), (2), or both by showing with “clear and

12   convincing evidence that Mr. Beg had the specific intent to

13   evade taxes known to be owing by conduct intended to

14   conceal, mislead, or otherwise prevent the collection of

15   taxes.”     City Wide Transit, Inc. v. Comm’r, 102 T.C.M. (CCH)

16   542, 2011 WL 5884981, at *5 (2011).       The tax court

17   concluded, however, that the Commissioner did not meet that

18   standard.

19        Although the Commissioner “point[ed] to a number of

20   egregious acts Mr. Beg performed” that caused the

21   Commissioner to fail to collect the full amount of City

22   Wide’s taxes, the tax court thought those actions did not

23   prove that Beg filed fraudulent returns “intend[ing] to

                                     8
 1   defeat or evade [City Wide’s] taxes” and that tax evasion

 2   was only the “incidental consequence or secondary effect of

 3   [Beg’s] embezzlement scheme.”        Id. at *6.   The tax court

 4   noted City Wide’s argument that Beg “intended only to cover

 5   up his embezzlement scheme and not defeat or evade [City

 6   Wide]’s taxes” and that the Commissioner could not “point to

 7   anything in the record that [caused it] to believe [that]

 8   argument [was] meritless.”     Id.     Accordingly, the tax court

 9   concluded that the Commissioner was time barred from

10   assessing the additional taxes and entered judgment for City

11   Wide.

12       The Commissioner now appeals that decision.

13                             II. DISCUSSION

14       We review the decisions of a tax court “in the same

15   manner and to the same extent as decisions of the district

16   courts in civil actions tried without a jury.”        26 U.S.C. §

17   7482(a)(1).     Accordingly, we “review the legal rulings of

18   the [t]ax [c]ourt de novo and its factual determinations for

19   clear error.”     Scheidelman v. Comm’r, 682 F.3d 189, 193 (2d

20   Cir. 2012).     In so doing, we “owe no deference to the [t]ax

21   [c]ourt’s statutory interpretations, its relationship to us

22   being that of a district court to a court of appeals, not


                                     9
 1   that of an administrative agency to a court of appeals.”

 2   Madison Recycling Assocs. v. Comm’r, 295 F.3d 280, 285-86

 3   (2d Cir. 2002) (internal quotation marks and citation

 4   omitted).    We treat taxpayer intent as a question of fact

 5   subject to clear error review.      See Redd v. N.Y. Div. of

 6   Parole, 678 F.3d 166, 178 (2d Cir. 2012) (“Issues of

 7   causation, intent, and motivation are questions of fact.”).

 8   We will, therefore, reverse a tax court’s decision regarding

 9   taxpayer intent only if “on the entire evidence[, we are]

10   left with the definite and firm conviction that a mistake

11   has been committed.”    United States v. Alcan Aluminum Corp.,

12   315 F.3d 179, 186 (2d Cir. 2003).

13   A.   The Statute of Limitations and Its Exceptions

14        The I.R.C. requires that the Commissioner assess any

15   tax imposed “within 3 years after the return was filed.”

16   I.R.C. § 6501(a).    The I.R.C., however, contains certain

17   exceptions that make the limitations period limitless.         In

18   relevant portion the I.R.C. provides:

19               (1) False return. In the case of a false or
20               fraudulent return with the intent to evade tax,
21               the tax may be assessed, . . . at any time.

22   I.R.C. § 6501(c)(1).2

          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

                                    10
 1        “The burden of proving that a false or fraudulent

 2   return was filed with intent to evade tax is on the

 3   Commissioner . . . and such proof must be made by clear and

 4   convincing evidence.”    Schaffer v. Comm’r, 779 F.2d 849, 857

 5   (2d Cir. 1985)(citing I.R.C. § 7454(a)). However, “[b]ecause

 6   tax evaders do not reveal their fraudulent evasion, the

 7   Commissioner may establish fraud through circumstantial

 8   evidence.”   Pittman v. Comm’r, 100 F.3d 1308, 1319 (7th Cir.

 9   1996).   To prove intentional evasion of tax, “the

10   Commissioner must establish that (1) an underpayment exists;

11   and (2) some portion of the underpayment was due to fraud.”

12   Loren-Maltese v. Comm’r, 104 T.C.M. (CCH) 115, 2012 WL

13   3079052, at *1 (2012).

14        In analyzing § 6501(c)(1), we remain mindful that

15   “limitations statutes barring the collection of taxes

16   otherwise due and unpaid are strictly construed in favor of

17   the [Commissioner].” Bufferd v. Comm’r, 506 U.S. 523, 527

18   n.6 (1993) (internal quotation marks and citations omitted).


     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).

                                    11
 1   “Accordingly, taking [that obligation] into account, we

 2   conclude that the limitations period for assessing [the

 3   taxpayer’s] taxes is extended if the taxes were understated

 4   due to fraud of the preparer.”      Browning v. Comm’r, 102

 5   T.C.M. (CCH) 460, 2011 WL 5289636, at *13 n.14 (2011)

 6   (quoting Allen v. Comm’r, 128 T.C. 37, 40, 2007 WL 654357,

 7   at *40 (2007)).   This makes intuitive sense because “the

 8   special disadvantage to the Commissioner in investigating

 9   fraudulent returns is present if the income tax return

10   preparer committed the fraud that caused the taxes on the

11   return to be understated.”    Allen, 2007 WL 654357, at *40.

12   B.   The Tax Court Clearly Erred

13        Here, the Commissioner concedes that City Wide’s

14   additional taxes were assessed outside the three-year

15   limitations period.   Moreover, City Wide concedes that Beg

16   filed false or fraudulent tax returns and amendments on its

17   behalf and that City Wide’s returns trigger the tolling

18   provision if we find that Beg filed them with the intent to

19   evade City Wide’s taxes.3    We are confronted, then, with a


          3
           In 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

                                    12
 1   very narrow question: whether, considering all of the

 2   evidence, the tax court made a mistake by concluding that

 3   the Commissioner failed to establish by clear and convincing

 4   evidence that Beg intended to evade City Wide’s taxes

 5   through his embezzlement scheme.    Beg’s scheme clearly does,

 6   and the tax court made a mistake.

 7       Beg drafted and filed five fraudulent returns and two

 8   fraudulent amendments to evade tax.    By concluding that the

 9   Commissioner failed to prove that Beg intended to evade City

10   Wide’s taxes and that, at best, tax evasion was but an

11   “incidental,” “secondary effect” to Beg’s embezzlement

12   scheme, the tax court inappropriately substituted motive for

13   intent.   The statute is agnostic as to the attendant

14   motivations for submitting a fraudulent return and only

15   requires that the Commissioner prove a fraudulent return was

16   filed with an intent to evade, that is avoid, paying a tax

17   otherwise due.   Thus, “if one of [a conspiracy’s]

18   objectives, even a minor one, be the evasion of federal

19   taxes, the offense is made out, though the primary objective


     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.

                                   13
 1   may be concealment of another crime.”      Ingram v. United

 2   States, 360 U.S. 672, 679-80 (1959).     Moreover, “if a ‘tax

 3   evasion motive plays any part’ in certain conduct, an

 4   ‘affirmative willful attempt’ to evade taxes may be inferred

 5   from that conduct.”     United States v. Klausner, 80 F.3d 55,

 6   63 (2d Cir. 1996) (quoting Spies v. United States, 317 U.S.

 7   492, 499 (1943)).     The Commissioner only had to prove that

 8   Beg intended to underpay the Commissioner taxes that City

 9   Wide owed when he filed a fraudulent return on City Wide’s

10   behalf, not that he intended to avoid City Wide’s taxes for

11   City Wide’s benefit.

12       Moreover, tax evasion was not an incidental or

13   secondary effect to Beg’s scheme.     The tax court’s analysis

14   suggests that Beg’s tax evasion was an externality, as if

15   shortchanging the Commissioner did not figure into Beg’s

16   decision-making calculus.      To the contrary, Beg’s scheme

17   was tax evasion; tax evasion was not a subordinate element

18   to a more grandiose scheme.     It is of no consequence that

19   Beg evaded City Wide’s taxes for his own benefit, and the

20   tax court should have allowed the Commissioner to assess the

21   taxes that City Wide owed because of Beg’s returns and

22   amendments.

23

                                     14
 1       In defense of the tax court’s decision, City Wide

 2   maintains that the Commissioner’s position requires us to

 3   read the intent element out of § 6501(c)(1).     In developing

 4   that argument, City Wide claims that reversing the tax court

 5   would require us to assume ipse dixit that Beg must have

 6   intended to avoid City Wide’s taxes based on the fraudulent

 7   returns alone.   City Wide’s argument is misplaced, and this

 8   case requires no assumption on our part.     Beg filed returns

 9   intending to avoid paying the Commissioner money that was

10   otherwise due; Beg’s calculated scheme to embezzle that

11   money proves that the returns were fraudulent.

12       This would be another case if, for example, Beg falsely

13   recorded certain personal expenses as corporate expenses on

14   City Wide’s ledger that in turn caused City Wide to file a

15   tax return that fraudulently understated its income.     If

16   that had been the case, Beg’s fraud on the company would

17   have caused the company to file a false return, and we would

18   not assume that the company intended to evade a tax by

19   filing that false return.   Here, however, Beg’s actions were

20   not as secondary or remote to the fraudulent returns as the

21   tax court suggested; Beg was not a third party unrelated to

22   the preparation and filing of the returns.     See I.R.S. Chief

23   Counsel Advisory 201238026, 2012 WL 4261126 (June 2012).

                                   15
 1   Accordingly, the Commissioner proved “(1) that . . .

 2   underpayment[s] exist[ed] and (2) that fraud exist[ed],

 3   i.e., that [Beg] intended to evade taxes known to be owing

 4   by conduct intended to conceal, mislead, or otherwise

 5   prevent the collection of taxes.” Browning, 2011 WL 5289636,

 6   at *10.

 7       We note briefly that Beg’s motivation for fraudulently

 8   amending the June 1997 and December 1998 returns that City

 9   Wide had previously filed is unclear.   He presumably did so

10   in order to cover up the false EICs he included on the five

11   returns that he drafted and filed in the first instance.

12   But again, Beg’s motivations are inconsequential, and it is

13   clear that he filed the two amended returns intending to

14   evade tax for the foregoing reasons.

15       Accordingly, the Commissioner presented clear and

16   convincing evidence that Beg intended to evade City Wide’s

17   taxes for the seven taxable quarters in question, thereby

18   triggering the tolling provision under § 6501(c)(1).    The

19   tax court made a mistake, and we reverse.

20

21

22



                                  16
1                         III. CONCLUSION

2       The tax court’s order of November 23, 2011 precluding

3   the Commissioner for assessing City Wide’s taxes for the

4   seven relevant quarters is hereby REVERSED.   The

5   Commissioner is free to assess the taxes for the seven

6   relevant quarters at any time.




                                 17
