United States v. Greve, James F. ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-3127
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
JAMES F. GREVE,
Defendant-Appellant.
_____________
Appeal from the United States District Court
for the Northern District of Illinois, Western Division.
No. 05 CR 50031—Philip G. Reinhard, Judge.
____________
ARGUED APRIL 13, 2007—DECIDED JUNE 4, 2007
____________
Before FLAUM, MANION, and WOOD, Circuit Judges.
FLAUM, Circuit Judge. A grand jury indicted James
Greve on four counts of income tax offenses all in violation
of 26 U.S.C. § 7206(1). Greve filed a motion to dismiss the
indictment and/or suppress evidence, alleging that the
Internal Revenue Service (“IRS”) violated his Fourth and
Fifth Amendment rights by conducting a covert criminal
investigation under the guise of a civil audit. The district
court denied Greve’s motion, stating that the facts re-
flected a “typical IRS civil investigation that ultimately led
to a criminal referral.” Greve appeals. For the following
reasons, we affirm the district court’s judgment.
2 No. 06-3127
I. BACKGROUND
James Greve took over Greve Construction, the family
business, in 1990 and converted it into a commercial snow
plowing company for shopping centers, school districts,
and other municipal entities. Until early 2000, Greve
operated his business without an accountant and kept
track of business income and expenses through billing
invoices and expense receipts. Through 1999, Greve
prepared his own federal and state income tax returns,
employing a hybrid cash and accrual method of reporting
income.
On June 28, 1999, the IRS began a civil audit of Greve’s
1997 federal income tax return. Greve contacted revenue
agent Ramona Luke and scheduled a meeting for August
5, 1999; however, Greve missed the scheduled appoint-
ment. On August 5, 1999, Luke issued Greve an examina-
tion report and proposed to add $143,023 in additional
income to his 1997 taxable income and assessed an
additional $68,383 in taxes, interest and penalties. On
September 2, 1999, Greve and Luke met, and Greve
admitted that he had omitted $107,888 of income in 1997.
Luke determined that Greve kept inadequate books and
records and employed unacceptable accounting procedures.
Additionally, Greve told Luke that he and his wife had
recently hired an accountant to prepare their future
income tax returns.
Immediately following the September 2, 1999 interview,
Luke mailed Greve an IRS Information Document Request
(“IDR”) seeking bank records that would reflect unreported
gross receipts. On September 24, 1999, Greve turned over
the requested bank deposit records.
On January 13, 2000, Luke began reviewing her file on
Greve. On January 31, 2000, Luke reviewed the documents
that Greve gave her and noted that some of the documents
appeared to have been altered and that she did not have
No. 06-3127 3
all of Greve’s account information. On February 1, 2000,
Luke noted that she needed to discuss the case with her
group manager, Margaret Songer, and that Greve’s case
potentially involved fraud as opposed to merely an under-
statement of income.
On March 9, 2000, Luke met with Songer, who agreed
that the case “may have fraud potential.” Songer set up a
meeting between Luke and the IRS District Fraud Coordi-
nator, Michael Welu. The Fraud Coordinator helps develop
potential fraud cases and instructs revenue agents and tax
auditors how to investigate cases that may involve civil
fraud or result in a criminal referral to the IRS Criminal
Investigation Division (“CID”).
On March 28, 2000, Welu and Luke met for seven hours
about the Greve audit. During that meeting, Welu sug-
gested that Luke expand the audit to include the 1998 tax
year, obtain the 1996 tax year returns, and confirm
whether Greve altered the documents he gave Luke. Welu
directed Luke to issue administrative summonses to
Greve’s banks because they could assist in determining
whether Greve had any hidden accounts.
On March 29, 2000, Luke contacted Greve and requested
additional documents and another interview. She also
advised Greve that she would be issuing him an IDR for
tax years 1997 and 1998. During that conversation, Greve
told Luke that he only reported income from customers
who did not issue him an IRS Form 1099 and claimed that
he did this because the IRS already knew about the income
reported on the 1099 forms. After the conversation ended,
Luke wrote a note reminding herself to determine whether
Greve had altered the documents he previously provided.
On March 30, 2000, Welu informed Luke that Greve had
been involved in several large cash transactions, possessed
a previously undisclosed bank account, and had trans-
ferred his home into a trust shortly after the IRS audit
4 No. 06-3127
began. Luke faxed Welu her proposed IDR for the 1997-
1998 tax years for his review and approval. On April 4,
2000, Luke spent six hours reviewing Greve’s file. She
prepared an Examination Request for tax year 1998,
seeking permission to expand the audit to include that
year. The stated reasons for the request were “recurring
issue” and “develope [sic] for fraud.” Luke also prepared a
request for tax year 1996 for “info only.”
On April 6, 2000, Luke gave Greve the IDR she prepared
with Welu for the 1997-1998 tax years and faxed Songer
the previously prepared examination request. Luke also
told Songer that she still had “to develop the fraud case”
against Greve. On April 19, 2000, Luke prepared ad-
ministrative summonses and retrieved IRS information
on Greve’s 1996 and 1998 tax returns.
On May 5, 2000, Greve requested additional time to
produce his records. He told Luke that he was over-
whelmed by the number of documents she requested and
did not know how to organize them. Luke told Greve how
to organize the records and gave him more time to gather
them. On May 8, 2000, Greve called Luke to tell her that
he had retained an attorney, Christopher Saternus.
Saternus requested more time to gather Greve’s docu-
ments. On June 15, 2000, Luke noted that she could not
proceed with the audit until she received the requested
documents from Greve, so she called Saternus and told
him that she needed the documents to proceed with her
examination.
On July 10, 2000, Greve called Luke to discuss the
document request. He informed her that he had requested
his customers’ cancelled checks from his bank but did not
have all of them. Luke told Greve that the records were
due by July 20, 2000.
On July 20, 2000, Luke met with Saternus and Greve.
Saternus asked whether Luke would be able to wrap up
No. 06-3127 5
the audit for the years in question after she received the
requested documents. Luke responded that there would be
additional taxes, interest, and penalties and that the audit
would be “wrapped up pretty quickly” after their meeting
upon final review and determination. Greve and Saternus
gave Luke all of the requested documents and acknowl-
edged that Greve had understated his income in 1997 and
1998 by approximately $245,000.
Between July 20, 2000 and October 17, 2000, Luke
continued her review of Greve’s records. On October 2,
2000, Luke advised Songer that she had completed the
majority of the work involved in determining the gross
receipts but that she had learned of a new bank account in
Greve’s wife’s name. The following day, Greve called Luke
and inquired about the audit’s status. Luke told Greve
that she needed the documents on the newly-discovered
bank account and that she might ask Greve for an exten-
sion of the civil statute of limitations.
On January 23, 2001, after discussing the audit with
Welu, Luke downloaded the IRS fraud handbook. Luke’s
notes from the following day indicate that she needed to
conclude the audit and either “write up referral or close
agreed.” On January 25, 2000, Luke noted that she needed
to set an appointment with Welu to complete the referral
of the criminal fraud case. The next day, Luke scheduled
a meeting with Welu to “write fraud referral.” On Febru-
ary 15, 2001, Luke and Welu met to discuss the status of
the audit. Welu told Luke that she could not refer the
matter to CID because she needed to be able to show that
Greve made an “overt action.” Welu instructed Luke to
contact Greve’s customers to determine why they did not
issue him 1099 forms for work he performed for them.
Welu and Luke also discussed the applicable statute of
limitations for civil assessment. Welu noted that because
Greve omitted over 25% of income, the statute could be
6 No. 06-3127
extended. Luke contacted several of Greve’s customers and
requested information regarding their payments to him.
On March 23, 2001, Luke met with Welu for another six
hours. Following that meeting, Luke wrote up her CID
referral report, which noted that Greve filed a “W-9 with
several customers claiming that he was incorporated when
he was in fact not. These customers issued no 1099’s [sic].”
On March 26, 2001, Songer e-mailed Welu asking about
the referral’s status. Welu e-mailed Songer that the
referral had been made. Songer then e-mailed Luke with
the news, stating, “O ye of little faith.” On April 2, 2001,
Special Agent Mark Johnson met with Luke, Welu, and
Songer to discuss the case.
On March 29, 2005, a federal grand jury indicted Greve
on four income tax offenses, alleging violations of 26 U.S.C.
§ 7206(1). Count One charged Greve with failing to report
$158,539 in gross receipts in his personal tax return for
tax year 1998. Count Two charged Greve with failing to
report $201,736 in gross receipts in his personal tax return
for tax year 1999. Count Three charged him with failing to
report $388,365 in gross receipts in a tax return for Greve
Construction, Inc. for tax year 2000. Count Four charged
Greve with claiming a false S corporation loss and a false
refund in his personal income tax return for tax year 2000.
Greve filed a motion to dismiss the indictment and/or
suppress evidence, alleging that the IRS had unconstitu-
tionally obtained statements and documents for him by
conducting a civil audit of Greve after it had “firm indica-
tions of fraud.” Greve also filed a motion for leave to
conduct discovery and requested an evidentiary hearing on
his initial motion. On December 12, 2005, the district
court, accepting as true all of the facts alleged by Greve,
denied the motions, finding that the facts reflected a
“typical IRS civil investigation that ultimately led to a
criminal referral.” Greve appeals.
No. 06-3127 7
II. DISCUSSION
A. Motion to Dismiss the Indictment
Greve contends that the district court erred by denying
his motion to dismiss the indictment because the IRS
presented illegally obtained evidence to the grand jury.
This Court reviews questions of law in a district court’s
ruling on a motion to dismiss an indictment de novo.
United States v. Peters, 153 F.3d 445, 451 (7th Cir. 1998).
It reviews factual findings for clear error. Id. The Supreme
Court has held that “[a]n indictment returned by a legally
constituted and unbiased grand jury . . . , if valid on its
face, is enough to call for a trial on the merits.” Costello v.
United States, 350 U.S. 359, 363 (1956). The Court’s
reluctance to examine the quality or sufficiency of the
evidence presented to a grand jury extends even to uncon-
stitutionally obtained evidence. See United States v.
Calandra, 414 U.S. 338, 344-45 (1974) (stating that “an
indictment valid on its face is not subject to challenge on
the ground that . . . the basis of information obtained in
violation of a defendant’s Fifth Amendment privilege
against self-incrimination”). Accordingly, even if the grand
jury examined illegally obtained evidence, the district
court did not err by denying Greve’s motion to dismiss the
indictment.
B. Motion to Suppress
Greve next argues that the district court erred by
denying his motion to suppress because the IRS obtained
evidence against him in violation of his Fourth and Fifth
Amendment rights by conducting a covert criminal investi-
gation under the guise of a routine civil audit. We review
questions of law in a district court’s ruling on a motion to
suppress de novo. Peters, 153 F.3d at 451. We review
factual findings for clear error. Id.8 No. 06-3127
Greve contends that Luke affirmatively misled him by
continuing to conduct a civil audit after she had firm
indications of fraud. See United States v. Serlin, 707 F.2d
953, 956 (7th Cir. 1983) (stating that a defendant seeking
suppression must produce clear and convincing evidence
that the agents affirmatively misled him as to the true
nature of their investigation). Although the IRS regula-
tions require a civil investigator to cease her investigation
when she has developed firm indications of fraud, see
Internal Revenue Manual §§ 4565.21(1), 9311.83(1), we
have held that “[a] failure to terminate a civil investigation
when the revenue agent has obtained firm indications of
fraud does not, without more, establish the inadmissibility
of evidence obtained by [the agent] in continuing to pursue
the investigation.” United States v. Kontny, 238 F.3d 815,
820 (7th Cir. 2001). Indeed, “[p]roof of deceit must be
linked up to the constitutional standard of threat or
promise.” Id. at 819. In other words, Greve must prove
that Luke induced his compliance through false promises.
Greve maintains that Luke made false promises to him
by repeatedly advising him that his cooperation would
result solely in a civil tax assessment. Greve first identi-
fies a July 10, 2000 phone conversation, in which Greve
called Luke to tell her that he was having difficulty
obtaining all of the cancelled checks, and Luke told him
not to worry because the records were due on July 20,
2000. Greve contends that “clearly, Luke [wa]s promising
Greve that the case would be concluded if he provided his
deposit records and further cooperated on July 20, 2000.”
We disagree. We have stated that an inappropriate
promise might occur if an agent “pretend[s] to be an
Assistant U.S. Attorney and assure[s] [the taxpayer that
he] w[ill] not be prosecuted if [he] cooperate[s].” Kontny,
238 F.3d at 819. However, no such affirmative promise
occurred during this conversation. Rather, it dealt solely
with the timing of Greve’s compliance with an IDR.
No. 06-3127 9
Next Greve points to the meeting on July 20, 2000
between Luke, Saternus, and Greve at the IRS’s office.
Saternus asked whether Luke would be able to wrap up
the audit for the years in question once she received the
requested documents. In response, Luke stated that upon
review and final determination, there would be additional
tax due, plus interest and penalties, but that it should be
wrapped up following the meeting. Greve maintains that
Luke’s response was a promise not to refer the case to CID
and to proceed in a civil manner only. Again, there was
simply no such promise. In fact, Luke qualified her
statement by saying that any decisions were dependant
upon review and final determination. Although Luke did
not inform either Saternus or Greve that she might refer
the case to CID for a criminal investigation, she was not
required to do so. See Serlin, 707 F.2d at 956 (stating that
“[s]imple failure to inform the defendant that he was the
subject of the investigation, or that the investigation was
criminal in nature, does not amount to affirmative deceit”).
Consequently, the district court did not err by denying
Greve’s motion to suppress.
C. Evidentiary Hearing
Greve argues that the district court erred by denying his
motion for an evidentiary hearing. This Court reviews a
district court’s denial of an evidentiary hearing for an
abuse of discretion. United States v. Juarez, 454 F.3d 717,
719 (7th Cir. 2006). To obtain an evidentiary hearing on
his motion to suppress, Greve was required to “provide
sufficient information to enable the court to conclude that
a substantial claim [wa]s presented and that there [we]re
disputed issues of material fact which w[ould] affect the
outcome of the motion.” Id. at 720. In ruling on Greve’s
motion to suppress, the district court accepted Greve’s
factual assertions as true. Because the government did not
10 No. 06-3127
dispute the facts of the IRS investigation as relayed by
Greve, the district court had no need to make a credibility
determination. Consequently, the district court did not
abuse its discretion by denying Greve’s motion for a
hearing.1
III. CONCLUSION
For the above reasons, we AFFIRM the district court’s
judgment.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
1
Greve also claims that the district court erred by denying his
motion for further discovery. However, because the district court
properly denied Greve’s motion to dismiss and motion to sup-
press, we need not address his challenge to the district court’s
denial of his motion for additional discovery. See Larkin v.
Galloway, 266 F.3d 718, 724 (7th Cir. 2001).
USCA-02-C-0072—6-4-07