                                                                                                                           Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-16-2007

Pediatric Affiliates v. USA
Precedential or Non-Precedential: Non-Precedential

Docket No. 06-1979




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                                                                       NOT PRECEDENTIAL

                          UNITED STATES COURT OF APPEALS
                               FOR THE THIRD CIRCUIT

                                         No. 06-1979

                                PEDIATRIC AFFILIATES,

                                                           Appellant

                                               v.

      UNITED STATES OF AMERICA; DEPARTMENT OF THE TREASURY;
                    INTERNAL REVENUE SERVICE


                       Appeal from the United States District Court
                                for the District of New Jersey
                                        (05-cv-03108)
                       District Court Judge: Hon. Mary Little Cooper

                     Submitted Pursuant to Third Circuit LAR 34.1(a)
                                    January 8, 2007

                          Before: McKEE, AMBRO, and FISHER
                                     Circuit Judges.

                               (Opinion filed April 16, 2007)


                                          OPINION


McKEE, Circuit Judge.

       Pediatric Affiliates appeals the District Court’s dismissal of the complaint

Pediatric Affiliates filed seeking a redetermination of its tax liability. For the reasons that

follow, we will affirm.
                                             I.

       Because we write primarily for the parties, we need not recite the factual or

procedural background in detail. Rather, we will only briefly summarize the relevant

facts that are helpful to our discussion.

       In 2002, the Internal Revenue Service (“IRS”) first notified appellant that it had

underpaid its payroll taxes for 1999 and part of 2000. After some investigation, appellant

discovered that PAL Data Processing, Inc.; and PAL’s founder, Menachem Hirsch, had

misappropriated tax funds collected from appellant. Appellant had hired Hirsch and his

company to service its payroll accounting. However, Hirsch instituted a scheme in which

he underpaid the payroll taxes he forwarded to the IRS on behalf of appellant, and then

pocketed the remaining funds. Hirsch was eventually prosecuted for this illegal scheme.

He pled guilty to criminal fraud and tax evasion and was sentenced to 37 months’

imprisonment and ordered to pay $841,959 in restitution to appellant.

       When the IRS informed appellant that it intended to proceed against it for the

payroll taxes that remained outstanding because of Hirsch’s embezzlement, appellant

sought administrative review. The IRS Office of Appeals issued a Notice of

Determination that upheld the liability and appellant then filed this suit seeking review of

the IRS Determination. The District Court dismissed the complaint, and this appeal

followed.

                                            II.



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       Appellant argues that it should not be held liable for unpaid employment taxes and

interest because: (1) it was not responsible for PAL’s theft, and (2) if Hirsch was charged

with a crime involving a tax loss, Pediatric should be credited with the amount of that

loss attributable to the crime committed against it.

       Appellant’s arguments require little discussion given the well-established principle

that a taxpayer’s reliance on a third party to fulfill its tax obligations does not relieve the

taxpayer of responsibility for those obligations. See United States v. Boyle, 469 U.S. 241,

252 (1985) (the timely filing of returns and the payment of taxes are solely the duties of

the taxpayer and are not delegable). Appellant concedes that it was required to collect

and pay over employment taxes to the government under the Internal Revenue Code. An

employer is liable for payment of taxes that must be deducted and withheld from its

employees’ income. 26 U.S.C.A. § 3403. Misappropriation of funds by a third party

does not relieve an employer of that obligation. See Morin v. Frontier Business

Technologies, Inc., 288 B.R. 663, 674 (noting that, when payroll services provider

misappropriated funds it had received from its clients for payment of their payroll taxes,

the clients owed the unpaid taxes to the IRS); see also United States v. Galletti, 541 U.S.

114, 121 (2004) (“[W]hen an employer fails to withhold and submit the requisite amount

of employment taxes, § 3403 makes clear that the liable taxpayer is the employer.”).

Although the IRS may, in certain circumstances, abate a penalty for failure to make

timely payment, the abatement does not extend to the unpaid tax principal. See I.R.C. §



                                               3
6404(e)(1) (codified at 26 U.S.C.A. § 6404).

       Pediatric argues that it should not be liable for interest on the unpaid tax liability

because the IRS held the case in abeyance pending the resolution of the criminal

prosecution. The IRS may abate interest on a tax deficiency if the interest is attributable

to unreasonable error or delay by an officer or employee of the Service in performing a

ministerial or managerial act. I.R.C. § 6404(e)(1). However, delay or error is not a

ground for abatement if it is attributable to the taxpayer. Id. We can not say that it was

unreasonable for the IRS to refrain from collecting appellant’s outstanding tax

delinquency until the prosecution of PAL and Hirsch was resolved. Moreover, nothing

prevented appellant from paying the delinquency in the interim, and thereby mitigating

the penalties that continued to accrue.

       Appellant also relies on principles of judicial estoppel. That is an equitable

principle intended to prevent one party from asserting an “inconsistent or mutually

contradictory position with respect to the same matter in the same or a successive series

of suits.” Scarano v. Central R.R., 203 F.2d 510, 513 (3d Cir. 1953). “It is not intended

to eliminate all inconsistencies, however slight or inadvertent; rather, it is designed to

prevent litigants from ‘playing fast and loose with the courts.’” Ryan Operations G.P. v.

Santiam-Midwest Lumber Co., 81 F.3d 355, 358 (3d Cir. 1996) (quoting Scarano, 203

F.2d at 513). The doctrine is not implicated here.

       The government’s position in the criminal prosecution was not irreconcilably



                                               4
inconsistent with the position it took during proceedings related to appellant’s tax

delinquency. As noted above, appellant is liable for employment taxes regardless of

whether an intermediary misappropriated funds collected to pay that obligation.

Moreover, the government is entitled both to criminally prosecute Hirsch for attempting

to defeat a tax obligation—his own or someone else’s – and also collect the delinquent

taxes that appellant owed because of Hirsch’s embezzlement. See I.R.C. § 7201.

       Similarly, no estoppel arises from oral statements the Appeals Officer made during

the administrative hearing. To prevail on a traditional estoppel defense, the record must

establish reasonable reliance on a misrepresentation to a party’s detriment. See Heckler

v. Community Health Services of Crawford County Inc., 467 U.S. 51, 59 (1984).

However, more is required to find an estoppel against the government. When the

government is involved, the party claiming estoppel must establish “affirmative

misconduct or rare or extreme circumstances.” See United States v. Pepperman, 976

F.2d 123, 131 (3d Cir. 1992). Here, appellant rests its estoppel claim on the Appeals

Officer’s oral statement that appellant should not be held responsible for money, interest

or penalties that were stolen by Hirsch. That oral expression of opinion simply does not

rise to the level of an estoppel. See Heckler, 467 U.S. at 65 (1984) (estoppel cannot be

erected on the basis of oral advice); United States v. St. John’s Gen. Hosp., 875 F.2d

1064, 1070 (3d Cir. 1989) (no estoppel where alleged misrepresentation was based on

inadmissible hearsay, not written correspondence). Moreover, appellant was represented



                                             5
by counsel and therefore, its “failure to decipher the Tax Code cannot be excused by its

reliance on a government employee’s error.” Estate of Kunze v. Commissioner of

Internal Revenue, 233 F.3d 948, 952 (7th Cir. 2000).

                                           III.

      For the foregoing reasons, we will affirm the district court’s order dismissing

appellant’s complaint.




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