In Uncategorized on 11/23/2011 at 17:53

Or, Why He Stole May Save the Victim

Such is the lesson of City-Wide Transit, Inc., 2011 T.C. Mem. 279, filed 11/23/11, the drought-breaker of a long line of arid, uninteresting cases.

Ray Fouche ran a bus company transporting disabled children to school under contract to the New York City school system. She had a payroll company do the payroll and prepare the 941s, and no one finds any fault with any of that.

But Ray needed to sort out a reduction in certain employment tax liabilities unrelated to the years at issue. So she hires one Manzoor Beg, who claims to be an accomplished CPA. He isn’t an accomplished CPA, but he is an accomplished thief.

He gets official bank checks from Ray to pay the supposed taxes, gets her to sign a blank Form 2848 power of attorney, and has her hand over the returns prepared by the payroll company. He deep-sixes the real returns, and makes up phony returns, claiming false EICs. He then fraudulently alters the bank checks and deposits them in his Himalayan Hanoi account, whence the proceeds go to Hanoi or the Himalayas, but not to IRS. Instead, Manzoor gives the IRS his own Hanoi checks in an amount sufficient to pay the phony taxes, which is of course much less than Ray really owes.

Ultimately, Manzoor makes off with almost $350K, some of it being the money Ray properly owes IRS, plus some other monies he stole from other bus companies. Before he can skip to the fastnesses of Shangri-La or the Hanoi Hilton, the long arm of the law catches Manzoor, and he pleads guilty to money laundering, signing false returns and filing false returns. Before he can be sent to jail, Manzoor dies.

IRS comes after Ray for the back taxes. Ray says she did nothing wrong, her payroll company did nothing wrong, and IRS agrees, but says “too bad, so sad, but you owe the money and you trusted Manzoor.” Ray says “but those are all closed years.” IRS says, “not if there was fraud. Frauds, like diamonds, are forever.”

Ray’s attorneys, Herbert Kantor and Gary Hoppe (and I name them here because they did a real fine job), argue that Manzoor didn’t file false returns to evade the payment of tax, as Section 6501 proscribes, but rather to cover up his theft of Ray’s monies. In other words, Manzoor was trying to steal from Ray, not the IRS.

Now the general rule is that whether the taxpayer or the taxpayer’s preparer was filing the fraudulent return doesn’t matter. The taxpayer and the preparer are in the same boat. But that’s Section 6501(c)(1) learning, from Allen v. Commissioner, 2007 T.C. 37. And that involved filing a fraudulent return to evade or defeat payment of tax. That isn’t the issue here; the issue here is an attempt by any means to evade or defeat tax, per Section 6501(c)(2).

IRS claims that if anyone attempts by any means to evade payment of tax, even if the taxpayer is completely innocent and got no benefit from the skullduggery in question, it’s a fraud and IRS can assess tax at any time.

No, says Judge Vasquez. IRS failed to show by clear and convincing evidence (the standard of proof for fraud) that Manzoor intended to evade payment of tax. “Respondent [IRS] argues that the record clearly and convincingly shows that Mr. Beg intended to evade tax and/or willfully attempted to defeat or evade employment taxes for all of the periods at issue. Specifically, respondent points out that Mr. Beg filed fraudulent Forms 941 and amended Forms 941, pleaded guilty to violating section 7206(1), and had the knowledge and experience to know that his actions would result in the evasion of petitioner’s employment taxes.

“Petitioner counters that the stipulated facts and incorporated exhibits show that Mr. Beg intended to embezzle from petitioner and that he filed the Forms 941 and amended Forms 941 solely to cover up his embezzlement, not to defeat or evade petitioner’s employment taxes. Therefore, according to petitioner, the record does not show by clear and convincing evidence that Mr. Beg had the specific intent to evade tax or willfully attempted to defeat or evade tax, and respondent has failed to carry his burden of proof.” 2011 T.C. Mem. 277, at pp. 16-17.

IRS claims that Manzoor’s acts speak for themselves, and his guilty plea speaks even louder. No, says Judge Vasquez, the guilty plea is a factor but not conclusive. And specific intent to evade or defeat is not a factor in a Section 7206(1) violation, to which Manzoor pleaded guilty.

So the years are closed, and Ray drives off into the sunset. Good job by the defense.


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