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In re Quezada

United States District Court, W.D. Texas, Austin Division

September 30, 2019

IN RE JAMES QUEZADA AND SIMONA QUEZADA, DEBTORS.
v.
UNITED STATES OF AMERICA, APPELLEE. JAMES QUEZADA AND SIMONA QUEZADA, APPELLANTS

          MEMORANDUM OPINION AND ORDER

          LEE YEAKEL UNITED STATES DISTRICT JUDGE.

         This cause arises from an appeal of the Memorandum Opinion and Final Judgment rendered on August 31, 2018, by the United States Bankruptcy Court for the Western District of Texas, Austin Division. Before the court are the Brief for Appellants James Quezada and Simona Quezada filed March 12, 2019 (Doc. #14); Brief for Appellee United States of America filed April 29, 2019 (Doc. #17); and the Reply Brief of Appellants James Quezada and Simona Quezada filed May 13, 2019 (Doc. #18). On May 31, 2019, the court entertained oral argument, at which all parties appeared through counsel. Following argument, Appellants James Quezada and Simona Quezada filed a Motion for Leave to Clarify and Correct the Record on July 24, 2019 (Doc. #21). Appellee United States of America's Objection to Appellants' Motion for Leave to Clarify ad Correct the Record and Response to Appellants' Post-Submission Brief was filed on August 16, 2019 (Doc. #22). Having carefully considered the briefs, argument of counsel, and applicable law, the court concludes that Appellants' Motion for Leave to Clarify and Correct the Record should be denied and the bankruptcy court's order should be affirmed for the reasons to follow.

         I. Factual Background

         Appellant James Quezada, a bricklayer and owner of Quezada Masonry, builds masonry projects for general contractors. Quezada typically supplies the materials and hires contract laborers and subcontractors to perform the labor.

         From 2005-2008, Quezada filed tax returns, which included Forms 1099-Misc, in which he reported payments made to subcontractors. Quezada claimed deductions for these payments on his Form 1040 "Individual Income Tax Return" for each of these years. The Form 1099s filed by Quezada for years 2005-2008 showed no withholdings on payments made to his subcontractors, and Quezada did not file Annual Returns of Withheld Federal Income Tax, Forms 945, for tax years 2005 through 2008. In addition, Quezada did not obtain a Social Security number ("SSN") or Taxpayer Identification number ("TIN") from all of his subcontractors.

         In September 2006, the Internal Revenue Service ("IRS") sent a notice to Quezada that his 2005 Form 1099 had missing or incorrect TINs (which includes SSNs). The notice also informed Quezada that if he had missing or incorrect TINs, he had to start backup withholding. The IRS sent the same notice out in 2007 and twice in 2009 about Quezada's later-filed Forms 1099. Quezada did not provide the missing or incorrect TINs for the tax years 2005 through 2008.

         In February 2014, the IRS assessed Quezada's backup-withholding-tax liability for 2005-2008 totaling $ 1, 269, 561.89, including penalties and interest, pursuant to Section 3406 of the Internal Revenue Code. See 26 U.S.C. § 3406 (2011). Quezada was sent a Notice of Determination in March 2015, notifying him of the total backup-withholding-tax liability assessed.

         On April 21, 2016, Appellants James Quezada and Simona Quezada[1] filed for bankruptcy under Chapter 11 of the Bankruptcy Code. On November 22, 2016, Quezada filed an Adversary Complaint challenging the assessment of the backup withholding tax. The parties consented to the bankruptcy court's rendering of a final judgment with respect to the issues raised in Quezada's Adversary Complaint. The adversary case was tried May 3, 2018, and the bankruptcy court rendered a Memorandum Opinion and a Final Judgment in favor of the United States on August 31, 2018, concluding that the taxes assessed by the IRS are valid, allowed, and non-dischargeable. On September 17, 2018, Quezada timely filed a Notice of Appeal.

         II. Standard of Review

         On appeal, this court reviews the bankruptcy court's findings of fact under a clearly erroneous standard and reviews conclusions of law de novo. See In re Heartland Fed. Sav. & Loan Assn. v. Briscoe Enters., Ltd. II (In re Briscoe Enters., Ltd. II), 994 F.2d 1160, 1163 (5th Cir. 1993). Mixed questions of fact and law are subject to de novo review. See In re CPDC, Inc., 337 F.3d 436, 441 (5th Cir. 2003).

         III. Analysis

         The sole issue on appeal is whether the filing of Forms 1099 and 1040 by Quezada commenced the three-year statute of limitations under Section 6501 of the Internal Revenue Code, see 26 U.S.C. § 6501 (2011 & Supp. 2019), which prohibits tax assessments made after the statute of limitations has closed. Quezada argues that Quezada's filings of Forms 1099 and 1040 were "returns" sufficient to trigger the three-year statute of limitations, and that Quezada's failure to file Forms 945, which Quezada asserts were not required, had no bearing on the start of the statute-of-limitations period.

         The United States asserts that Quezada was required and failed to conduct backup withholding from his contract laborers, and therefore was also required and failed to report this backup withholding on Forms 945 for tax years 2005 through 2008. Appellees further contend that because no Forms 945 were filed, the three-year assessment limitation period imposed by Section 6501 was never triggered, see Id. at § 6501(c)(3), and the bankruptcy court properly determined that the backup withholding liability assessed against Quezada in 2014 was not barred by Section 65 01.

         In reply, Quezada argues that the question is not whether Quezada should have begun backup withholding or whether Forms 1099 and 1040 are substitute returns for Forms 945, but what form or forms were necessary to start the running of the statute of limitations under Section 6501. Quezada contends that the case law and the IRS's own advice clarify that the exception under Section 6501(c)(3) that "[i]n the case of failure to file a return, the tax may be assessed ... at any time" does not mean that the failure to file any IRS form nullifies the statute of limitations. The United States contends that Form ...


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