Opinion ID: 4163636
Heading Depth: 2
Heading Rank: 2

Heading: Investigation and Tax Court Proceedings

Text: The IRS began to audit Musa in 2009. The examination started with Musa’s 2007 income tax return, but soon ex‐ panded to include his returns from 2006 and 2008. A review of the bank statements for Musa and the restaurant revealed 4 No. 16‐1841 that the amount of credit card deposits in the restaurant’s ac‐ count exceeded the amount Musa reported on his income tax returns. The IRS considered pursuing criminal charges against Musa for his tax fraud but ultimately opted for only civil remedies. While under audit, Musa hired accountant Charles Sturm to replace J&M. Sturm prepared returns for 2009 and 2010 and amended returns for 2006 to 2008. Musa signed the amended returns for 2006 and 2007 in October 2011. On August 21, 2012, the IRS sent Musa a Notice of Defi‐ ciency for tax years 2006 to 2010. Musa then petitioned the Tax Court for a redetermination of his tax deficiency. He chal‐ lenged many aspects of the deficiency notice, including the Commissioner’s determination that his underpayment was due to fraud. On September 23, 2013, Musa responded to the Commissioner’s discovery request and provided a spread‐ sheet listing employees who he claimed had been paid addi‐ tional wages but who were not previously included in the res‐ taurant’s wage statements. Over the next few months, the res‐ taurant submitted amended wage and tax statements, as well as amended quarterly employment tax returns for 2006 to 2010. Based on these amended returns, Musa sought addi‐ tional deductions from his income tax liabilities. On the amended forms for 2007 and 2010, Musa claimed that he first learned about these errors on May 2, 2012. Musa provided copies of these amended statements to the Commissioner on January 10, 2014. Contrary to Musa’s arguments on appeal, the Commis‐ sioner responded promptly to Musa’s tactic. Just a month later in a conference call with the Tax Court and Musa, the Com‐ No. 16‐1841 5 missioner raised the affirmative defense of the duty of con‐ sistency. He argued that the doctrine prevents Musa from claiming new expense deductions on his income tax returns for wages paid between 2006 and 2009 because the IRS had relied on those representations and because the period for as‐ sessing employment taxes on those wages had expired. The Commissioner also made this argument in his pretrial mem‐ orandum on February 24, 2014. Because the duty of consistency is an affirmative defense, the Commissioner sought and was granted leave to amend his answer in March 2014. The Commissioner also sought partial summary judgment on this defense, and the Tax Court ruled in his favor on March 27, 2014. The Tax Court denied Musa’s motion to reconsider its decisions on the amendment and par‐ tial summary judgment. The Tax Court held a trial on the remaining issues in May 2014. One issue was Musa’s liability for the fraud penalty for his underpayments from 2006 to 2010. The fraud penalty was supported by an accountant from J&M who testified that Musa had not been forthcoming with certain financial infor‐ mation, such as the existence of numerous bank accounts. Musa tried to rebut that testimony with testimony by his new accountant, Sturm. After Sturm testified and the court gave Musa a chance to question him again on re‐direct examina‐ tion, the court dismissed the witness. The Commissioner then introduced Exhibit 128, which was an interrogatory response by Musa identifying eleven of his bank accounts. Musa did not object to Exhibit 128. During the trial, the court permitted the testimony of three witnesses (Musa’s family members) to be delayed so they 6 No. 16‐1841 could discuss with counsel the potential criminal ramifica‐ tions of their testimony. After the trial had otherwise con‐ cluded, during a conference call to arrange for the testimony of these remaining witnesses, Musa’s counsel asked to recall accountant Sturm for further questioning regarding Exhibit 128. The Tax Court denied the motion because Musa had not objected to Exhibit 128, Sturm already had a chance to discuss the subject matter of the exhibit, and further delay would pre‐ judice the Commissioner. On March 25, 2015, the Tax Court issued a memorandum opinion ruling in favor of the Commissioner and holding Musa liable for his deficiency and the fraud penalty. To sup‐ port this conclusion, the court pointed out that Musa had: (1) understated his income; (2) failed to keep adequate records; (3) offered implausible explanations for his behavior; (4) con‐ cealed income; (5) failed to cooperate with tax officials; (6) failed to file Forms W‐2 and 1099‐MISC for all employees; (7) filed false documents; (8) failed to make estimated tax pay‐ ments; and (9) relied extensively on cash payments. The court determined that Musa owed over $500,000 in income tax for years 2006 to 2010 and over $380,000 in fraud penalties. On appeal, Musa does not deny that he filed fraudulent income and employment tax returns. Instead, he argues that the Tax Court erred in two ways: first in its rulings on the duty of consistency and second in denying his request to recall ac‐ countant Sturm. No. 16‐1841 7