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Liverett v. Torres Advanced Enterprise Solutions LLC.

United States District Court, E.D. Virginia, Alexandria Division

June 28, 2016

GRANT LIVERETT, Plaintiff,
v.
TORRES ADVANCED ENTERPRISE SOLUTIONS LLC, Defendant.

          MEMORANDUM OPINION

          T.S. ELLIS, III UNITED STATES DISTRICT JUDGE.

         In this employment dispute, plaintiff Grant Liverett alleges that his employer, defendant Torres Advanced Enterprise Solutions LLC, (i) violated the Fair Labor Standards Act ("FLSA")[1]by failing to pay required minimum and overtime wages to employees, (ii) committed tax fraud by willfully treating employees as independent contractors in order to avoid paying employer taxes, and (iii) breached the employment agreement between the parties.

         Defendant filed a motion for summary judgment and a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), Fed.R.Civ.P. The motions were fully briefed and argued. At the conclusion of oral argument, a bench ruling issued denying the motions in substantial part, but deferring ruling on one count pending further briefing. Specifically, defendant's motion for summary judgment was denied pursuant to Rule 56(d)(1), Fed. R. Civ. P., and the motion to dismiss was denied with respect to Count I, alleging FLSA violations, and Count III, alleging breach of contract. See Liverett v. Torres Advanced Ent. Solutions LLC, No. 16-cv-339 (E.D. Va. June 17, 2016) (Order) (Doc. 23). The motion to dismiss Count II, alleging tax fraud, was taken under advisement, and the parties were directed to file supplemental briefs addressing a question of statutory interpretation pertinent to plaintiffs claim in Count II, an issue that neither party addressed in the initial briefing. The parties were directed to brief whether 26 U.S.C. § 7434(a) creates a private cause of action for tax fraud where, as here, the alleged misrepresentation giving rise to the action is unrelated to the amount of payments the defendant reported paying to the plaintiff. See Id. For the reasons that follow, it does not.

         I.

         The relevant factual allegations may be succinctly summarized.[2] Plaintiff was employed by defendant, [3] a government contractor, to provide bid procurement and contract management services at Camp Bondsteel in Kosovo, the headquarters for a North Atlantic Treaty Organization peacekeeping force led by the United States Army. The parties sharply dispute whether plaintiff is an employee or an independent contractor. Plaintiff alleges that defendant is engaged in a scheme to misclassify its employees as independent contractors in order to avoid paying the minimum and overtime wages to which these employees are due under the FLSA. Relatedly, plaintiff alleges that defendant, by intentionally misclassifying its employees as independent contractors on tax documents, is defrauding the federal government for the purpose of avoiding paying certain employer taxes.

         Importantly, the fraudulent tax scheme that plaintiff alleges concerns the type of information return that defendant provides to its employees. Specifically, plaintiff alleges that instead of issuing the IRS Form W-2s to which defendant's employees are entitled, defendant instead willfully issued IRS Form 1099s, which represented that defendant's employees were independent contractors. See Am. Comp. ¶¶ 83, 91c, 92, 104, 124, 151, 159. There is no allegation that defendant willfully issued its employees or independent contractors information returns that reflected inaccurate amounts of wages paid or inaccurate payments in any other respect. As alleged by plaintiff, defendant is liable for tax fraud based only on the allegation that defendant willfully misrepresented the status of its employees by issuing them Form 1099s instead of Form W-2s.

         II.

         The Internal Revenue Code provides as follows:

If any person willfully files a fraudulent information return with respect to payments purported to be made to any other person, such other person may bring a civil action for damages against the person so filing such return.

26 U.S.C. § 7434(a). This statute, at first glance, appears quite simple and straightforward. But, a more careful reading reveals that it harbors a significant ambiguity, the resolution of which impacts this case.

         The source of the ambiguity in § 7434(a) is the phrase "with respect to payments purported to be made to any other person." Simply put, there is ambiguity as to what the phrase "with respect to..." modifies. On the one hand, § 7434(a) may refer to an "information return with respect to payments purported to be made to any other person" that is "fraudulent." On this reading, "with respect to..." describes "information return, " and such an information return that is false or misleading in any respect aimed at obtaining something of value is "fraudulent" and therefore actionable. On the other hand, "with respect to payments purported to be made to any other person" may be read as limiting "fraudulent." Under this interpretation, the filing of an information return is actionable only if the information return is false or misleading as to the amount of payments purportedly made.

         Resolving this ambiguity is of consequence here, as the Amended Complaint states a claim for relief under the former interpretation, but not under the latter. To clarify, a Form 1099 that identifies plaintiff as an independent contractor when he is in fact an employee is an information return that is false with respect to plaintiffs employment status, but so long as the Form 1099 accurately reports the amount of wages defendant paid to plaintiff, the return is not fraudulent with respect to the amount of the payments made. Because the Amended Complaint contains no allegation that defendant willfully misrepresented the amount of wages paid to plaintiff, plaintiffs tax fraud claim rises or falls on whether willfully misrepresenting an employee as an independent contractor constitutes actionable fraud for purposes of § 7434(a). Thus, the question presented is whether § 7434(a) creates a private cause of action where, as here, the alleged misrepresentation is the filing of the wrong type of information return rather than a misrepresentation as to the amount of the payments made.

         Interestingly, no court of appeals has addressed § 7434(a)'s ambiguity.[4] Although some federal district courts have found allegations that an employer issued Form 1099s when Form W- 2s were in fact appropriate-the same allegation advanced here-sufficient to state a claim, [5] these cases did not carefully consider the statutory language or directly address the ambiguity on the face of § 7434(a). Instead, these courts-as courts routinely do-recited the elements of the cause of action under § 7434(a) as (i) the defendant issued an information return, (ii) the information return was fraudulent, and (iii) the issuance was willful, [6] and therefore concluded that the filing of an information return that is fraudulent in any respect is actionable. This formulation of the elements, however, does not address the effect of the phrase "with respect to..." and overlooks the ...


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