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Musa v. Commissioner of Internal Revenue

United States Court of Appeals, Seventh Circuit

April 26, 2017

Alaa I. Musa, Petitioner-Appellant,
v.
Commissioner of Internal Revenue, Respondent-Appellee.

          Argued January 12, 2017

          Appeal from the United States Tax Court. No. 27996-12 - Joseph W. Nega, Judge.

          Before Bauer, Sykes, and Hamilton, Circuit Judges.

          Hamilton, Circuit Judge.

          The central issue in this appeal from the Tax Court is how to apply the "duty of consistency, " an equitable tax doctrine analogous to judicial estoppel, which prevents a party from prevailing in a court proceeding by taking one position and then taking a contradictory position in a later case. See Kielmar v. Commissioner, 884 F.2d 959, 965 (7th Cir. 1989). The Tax Court correctly applied the duty of consistency in this case to prevent a taxpayer's unfair tactic to minimize the consequences of his fraud.

          Appellant Alaa Musa owns and operates a restaurant in Milwaukee, Wisconsin. The Commissioner of Internal Revenue determined that Musa made numerous misrepresentations on his tax returns, including underreporting his federal income taxes by more than $500, 000 for the years 2006 to 2010. Musa challenged this determination in the Tax Court. The Tax Court upheld the Commissioner's determination, including a civil fraud penalty. On appeal, Musa does not challenge the fraud finding. Instead, he makes arguments that are heavy on chutzpah but light on reasoning or any sense of basic fairness.

         Musa's central argument is that after his fraud was discovered, the Commissioner should have allowed him additional deductions on his individual tax returns based on amended employment tax returns in which Musa had corrected earlier false underreporting of wages. He made these corrections, however, only after the statute of limitations had run on the Commissioner's ability to collect the correct amounts of employment taxes that Musa's amended returns admitted were due. Musa argues that the Tax Court mishandled this issue by permitting the Commissioner to amend his answer to add the affirmative defense of the duty of consistency under tax law, and then erred by granting partial summary judgment to the Commissioner on that defense. Musa also argues that the Tax Court erred by denying his request to recall a witness. Musa's claims are without merit. We affirm the decision of the Tax Court.

         I. Factual and Procedural Background

         A. Musa's Fraudulent Tax Filings

         Musa opened his restaurant in 2005. He is the sole member of the limited liability company that owns and operates the restaurant. Since its early days, Musa's family members regularly worked as employees at the restaurant, and he paid them based on informal agreements. Musa did not report their wages to the company the restaurant hired to assist with payroll. The payroll company's services included withholding required taxes from employees' paychecks, issuing annual wage and tax statements to employees and the IRS, and filing Musa's quarterly employment tax returns.

         Musa gave the payroll company his employees' information over the phone on a biweekly basis. He did not include any of his family members in the information that he provided between 2006 and 2008. He included only two of his family members during 2009 and 2010. Instead, Musa paid family employees in cash under the table and maintained no record of these payments. He also underreported the amount his staff received in tips.

         At the same time, Musa was underreporting the restaurant's revenues on his individual tax returns and the restaurant's Wisconsin monthly sales tax returns for 2006 to 2008. He did this by lying to his then-accountant, J&M Accounting and Tax Services. Musa reported the restaurant's monthly sales over the phone to J&M. He gave the accounting firm inaccurate information and failed to disclose relevant banking information.

         B. Investigation and Tax Court Proceedings

         The IRS began to audit Musa in 2009. The examination started with Musa's 2007 income tax return, but soon expanded to include his returns from 2006 and 2008. A review of the bank statements for Musa and the restaurant revealed that the amount of credit card deposits in the restaurant's account exceeded the amount Musa reported on his income tax returns. The IRS ...


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