In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 16‐1841
ALAA I. MUSA,
Petitioner‐Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent‐Appellee.
____________________
Appeal from the United States Tax Court.
No. 27996‐12 — Joseph W. Nega, Judge.
____________________
ARGUED JANUARY 12, 2017 — DECIDED APRIL 26, 2017
____________________
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 posi‐
tion 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.
2 No. 16‐1841
Appellant Alaa Musa owns and operates a restaurant in
Milwaukee, Wisconsin. The Commissioner of Internal Reve‐
nue determined that Musa made numerous misrepresenta‐
tions 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 discov‐
ered, 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 em‐
ployment 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
No. 16‐1841 3
restaurant. Since its early days, Musa’s family members regu‐
larly 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 pay‐
roll. The payroll company’s services included withholding re‐
quired 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’ infor‐
mation over the phone on a biweekly basis. He did not in‐
clude 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 restau‐
rant’s revenues on his individual tax returns and the restau‐
rant’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 in‐
accurate 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 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
II. Analysis
Duty of Consistency
1. Amendment to Answer
We review for abuse of discretion the Tax Court’s decision
to allow the Commissioner to amend his answer. See Estate of
Kanter v. Commissioner, 337 F.3d 833, 851 (7th Cir. 2003), rev’d
on other grounds, Ballard v. Commissioner, 544 U.S. 40 (2005).
The Tax Court enjoyed ample discretion to permit this amend‐
ment of the pleading. Rule 41(a) of the Rules of Practice and
Procedure of the Tax Court provides: “A party may amend a
pleading once as a matter of course at any time before a re‐
sponsive pleading is served. … Otherwise a party may amend
a pleading only by leave of Court or by written consent of the
adverse party, and leave shall be freely given when justice so
requires.” This Rule was derived from Rule 15(a) of the Fed‐
eral Rules of Civil Procedure, and the two rules should be in‐
terpreted in a similar manner. See Kramer v. Commissioner, 89
T.C. 1081, 1084–85 (1987); Curr‐Spec Partners, LP v. Commis‐
sioner, 94 T.C.M. (CCH) 314, at *4 (2007). Civil Rule 15(a) re‐
quires courts “to allow amendment unless there is a good rea‐
son—futility, undue delay, undue prejudice, or bad faith—for
denying leave to amend.” Life Plans, Inc. v. Security Life of Den‐
ver Ins., 800 F.3d 343, 358 (7th Cir. 2015), citing Foman v. Da‐
vis, 371 U.S. 178, 182 (1962); see also Ax v. Commissioner, 146
T.C. 153, at *168 (2016) (“The question of prejudice under Rule
41(a) is … whether the addition of those new issues by a later
amendment, rather than by inclusion in the initial pleading,
works an unfair disadvantage to the other party.”).
Musa claims that he was “unduly prejudiced” when the
court permitted the Commissioner to amend his pleading, but
8 No. 16‐1841
he offers no support for this claim. He claims that the Com‐
missioner amended his pleadings “just days before trial.”
That is simply not true. The Commissioner raised the issue
more than three months before trial during a conference call
on February 7, 2014 and sought leave to amend his answer
more than two months before trial. This was no last‐minute
surprise on the part of the Commissioner, at least. Moreover,
since Musa did not make clear in his original petition that he
would seek additional deductions based on his payments of
previously unreported wages, the Commissioner had no
grounds to raise the duty of consistency until he actually
raised it. Musa’s approach would unfairly penalize the Com‐
missioner (and thus other taxpayers) for Musa’s own delays
and false tax returns. The Tax Court did not abuse its discre‐
tion in allowing the amendment.
2. Partial Summary Judgment
Musa next claims that the Tax Court misapplied the duty
of consistency in granting the Commissioner’s motion for par‐
tial summary judgment. Since we review the Tax Court’s de‐
cisions “in the same manner and to the same extent as deci‐
sions of the district courts in civil actions tried without a jury,”
26 U.S.C. § 7482(a)(1), we review de novo the Tax Court’s
award of summary judgment. Kindred v. Commissioner, 454
F.3d 688, 693–94 (7th Cir. 2006).
Musa claims he should have been allowed additional de‐
ductions on his individual income tax returns based on the
amended employment tax returns that he filed after his fraud
was discovered. This is so, he claims, because the Commis‐
sioner failed to satisfy the requirements for applying the duty
of consistency. Here, again, Musa’s argument is disconnected
from any sense of basic fairness.
No. 16‐1841 9
The duty of consistency is an equitable tax doctrine analo‐
gous to judicial estoppel, which prevents a party from pre‐
vailing in a court proceeding by taking one position and then
taking a contradictory position in a later case. See In re Knight–
Celotex, LLC, 695 F.3d 714, 721–22 (7th Cir. 2012), citing New
Hampshire v. Maine, 532 U.S. 742 (2001). We outlined the re‐
quirements of the duty of consistency as follows:
The duty of consistency applies when there
have been: “(1) a representation or report by the
taxpayer; (2) on which the Commission[er] has
relied; and (3) an attempt by the taxpayer after
the statute of limitations has run to change the
previous representation or to recharacterize the
situation in such a way as to harm the Commis‐
sioner.”
Kielmar v. Commissioner, 884 F.2d 959, 965 (7th Cir. 1989), quot‐
ing Herrington v. Commissioner, 854 F.2d 755, 758 (5th Cir.
1988). The Tax Court correctly concluded that the undisputed
facts satisfied these three elements.
First, Musa made representations on the various tax forms
he filed, including the restaurant’s quarterly employment tax
returns for 2006 to 2009 and the W‐2 and W‐3 forms provided
to the restaurant’s employees and the IRS. In his initial filings,
Musa represented that the restaurant paid employees the fol‐
lowing sums in non‐tip wages from 2006 to 2009, respectively:
$28,248; $18,900; $30,993; and $70,890. Then in the fall of 2013,
Musa amended his filings to identify additional wages that he
had paid to employees but failed to report for those same
years: $42,000; $105,000; $92,000; and $153,000.
10 No. 16‐1841
Second, the Commissioner relied on the original represen‐
tations because the IRS assessed employment taxes based on
Musa’s original reports of employee wages in the restaurant’s
quarterly tax returns. See, e.g., Estate of Ashman v. Commis‐
sioner, 231 F.3d 541, 546 (9th Cir. 2000) (“The mere fact that
[the Commissioner] did not take steps against her, but ac‐
cepted the return and let the statute of limitations run,
demonstrates that he did rely.”); Herrington, 854 F.2d at 758
([T]he Commissioner relied on this representation [by peti‐
tioners] by accepting their 1976 return and allowing the stat‐
ute of limitations to run.”).
In one of his heavier doses of chutzpah, Musa argues that
the Commissioner did not rely on the employment returns be‐
cause the Commissioner should have known they were inac‐
curate. This is so, Musa claims, because the Commissioner
had “all facts available to him” or had the “opportunity to
gain such knowledge” prior to the expiration of the statute of
limitations, so the Commissioner did not “rely” on Musa’s
false representations. In other words, Musa argues, after the
IRS discovered his income tax fraud and he submitted
amended income tax returns, the IRS should have induced
from the amended income tax returns that the restaurant’s
quarterly employment tax returns had also been incorrect.
The Ninth Circuit observed that a similar argument that
the Commissioner “did not rely because he should have sus‐
pected … wrongdoing is a wallydraigle.” Estate of Ashman,
231 F.3d at 546. We agree. There is no merit to Musa’s claim
that the Commissioner loses his ability to rely on Musa’s em‐
ployment tax returns because Musa amended his income tax
returns. Ours is a “self‐reporting system of taxation,” and for
that system to function, the Commissioner must be able to
No. 16‐1841 11
rely on “truthful reporting.” United States v. Paepke, 550 F.2d
385, 391 (7th Cir. 1977).
Musa claims that the IRS should have known about his in‐
accurate wage reporting even before Musa himself suppos‐
edly knew about it. On the restaurant’s amended quarterly
employment tax returns for 2007 and 2010, Musa claimed that
he learned about the errors on May 2, 2012. He now argues
that the Commissioner should have learned about the errors
sooner, because by May 2, 2012 the assessment period for
2006, 2007, and 2008 had expired. We reject this remarkable
assertion. The Commissioner was permitted to take at face
value the representations in Musa’s original tax returns.
Third, failing to hold Musa to the duty of consistency
would harm the Commissioner. As just mentioned, the assess‐
ment period for the restaurant’s employment tax returns for
2006 to 2008 expired before the IRS could assess additional
taxes based on the amended employment tax returns. This is
because, in general, the IRS may assess an employment tax or
associated penalty only within three years after the return is
filed. 26 U.S.C. § 6501(a). Since the IRS could not collect addi‐
tional taxes based on Musa’s amended employment tax re‐
turns, it was harmed. Based on undisputed facts, the duty of
consistency applies. The Tax Court did not err when it ruled
that Musa is estopped from claiming the additional deduc‐
tions he seeks to offset the consequences of his own fraud.
B. Recalling Expert Witness
Finally, Musa claims that the Tax Court erred when it re‐
fused to recall accountant Charles Sturm for further testi‐
mony. Sturm had testified on several matters, including the
number of bank accounts that Musa used, but he admitted to
12 No. 16‐1841
being ill‐prepared on that subject, which was also addressed
in Musa’s interrogatory answer admitted without objection as
Exhibit 128. On appeal, Musa argues that Exhibit 128 was ad‐
mitted “without any context or testimony,” and that Sturm, if
recalled, would have “contradicted, impeached or defused
the Commissioner’s conjecture” about the fraudulent nature
of the numerous bank accounts.
Whether to recall a witness who has completed his testi‐
mony is the sort of trial management issue that appellate
courts leave to the sound discretion of trial judges, United
States v. Liefer, 778 F.2d 1236, 1249 n.11 (7th Cir. 1985), so we
review for abuse of discretion the Tax Court’s denial of Musa’s
request. United States v. Dent, 984 F.2d 1453, 1463 (7th Cir.
1993), abrogated on other grounds as recognized in United States v.
Gilbert, 391 F.3d 882 (7th Cir. 2004).
The Tax Court did not abuse its discretion. First, the ex‐
hibit did not contain new or surprising information; it was
Musa’s own testimony in the form of an interrogatory re‐
sponse regarding his numerous bank accounts. He did not ob‐
ject to its introduction during trial. Second, Sturm’s proposed
testimony would not have “contradicted” or “impeached” the
Commissioner. The exhibit was introduced to show that Musa
was not forthcoming with his earlier accountant, J&M, re‐
garding the existence of his numerous bank accounts. Sturm’s
proposed testimony about the purpose of those accounts
would not have contradicted Musa’s failure to disclose those
accounts (and we wonder what admissible evidence Sturm
might have been able to offer about Musa’s purposes before
Musa hired him). Third, Musa already had a chance to ques‐
tion Sturm about the bank accounts. Finally, even if the Tax
Court might have abused its discretion—and it did not—the
No. 16‐1841 13
denial was harmless. There is not a “significant chance” that
permitting Sturm to testify would have changed the outcome
of the case. See Old Republic Ins. Co. v. Employers Reinsurance
Corp., 144 F.3d 1077, 1082 (7th Cir. 1998). The court made nu‐
merous other findings to support its fraud determination.
The judgment of the Tax Court is AFFIRMED.