Crop Associates-1986, Frederick H. Behrens, Tax Matters Partner v. Commissioner , 2000 T.C. Memo. 216 ( 2000 )

T.C. Memo. 2000-216UNITED STATES TAX COURT
CROP ASSOCIATES-1986, FREDERICK H. BEHRENS,
TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12532-90. Filed July 17, 2000.
P has moved for dismissal or alternative relief
based on respondent’s misconduct. Petitioner’s
principal complaints are:
1. A civil investigation was carried out in the
guise of a criminal investigation.
2. Conversations subject to the attorney-client
privilege were unlawfully monitored.
3. Documents were unlawfully seized pursuant to a
defective search warrant.
Petitioner requests that the case be dismissed, or
alternatively, that the Court shift the burden of going
forward with the evidence, and/or suppress evidence
illegally and improperly obtained by R.
Held: Petitioner has failed to prove his claims
of misconduct. The motion will be denied.
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Steven Mather and Kenneth Barish, for petitioner.
William H. Quealy, Jr., Henry T. Schafer, Alan Summers,
Alcie M. Harbutte, Guy H. Glaser, Zachary King, and Ronald L.
Buch, Jr., for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN, Judge: This case is presently before the Court on
petitioner’s motion for dismissal or alternative relief based on
respondent’s misconduct (the motion), filed July 2, 1999.1
Respondent objects. For the reasons stated, we shall deny the
motion.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
The Partnership
This case originates with a petition for the readjustment of
certain partnership items of Crop Associates-1986, a limited
partnership with its principal place of business in Coachella,
California, at the time the petition was filed (the partnership).
1
A prior report in this case appears at Crop Associates-
1986 v. Commissioner, 113 T.C. 198 (1999). Since that report, we
have substituted Frederick H. Behrens, Tax Matters Partner, for
W. Keith Oehlschlager, A Partner Other Than the Tax Matters
Partner, as petitioner.
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Partnership’s Return; FPAA; Petition; Participating Partners
The partnership timely made a return of income for its 1986
taxable (calendar) year (the 1986 partnership return). By notice
of final partnership administrative adjustment, dated March 14,
1990 (the FPAA), respondent made adjustments to the 1986
partnership return. The petition was filed on June 13, 1990, by
George P. and Ann T. Ballas, two partners other than the tax
matters partner (the petitioning partners). The petitioning
partners are no longer parties to this case, having entered into
settlement agreements with respondent on April 28, 1997, with
respect to the partnership items in question. Following the
elimination of the petitioning partners from the case, the case
was carried on by respondent and certain other partners who had
elected to participate in the case. On June 28, 1999, petitioner
intervened. Petitioner is a general partner of the partnership,
and he has been the tax matters partner (TMP) since at least
June 13, 1990. Petitioner is, now, the only participating
partner.
FPAA Adjustments and Issues Raised in the Petition
By the FPAA, respondent notified the TMP that he was
disallowing Schedule F, Profit or Loss From Farming, deductions
of the partnership (the Schedule F deductions) in the amount of
$10,104,861. Respondent explained his disallowance of the
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Schedule F deductions as follows: (1) The partnership activities
constituted a series of sham transactions lacking economic
substance; (2) the partnership did not actively engage in the
trade or business of farming; and (3) the partnership did not pay
or incur any bona fide trade or business expenses during the
taxable period, or, if the partnership did pay or incur expenses,
the partnership did not establish that these were ordinary and
necessary trade or business expenses currently deductible under
section 162.
In the FPAA, respondent set forth alternative positions
based on his determination that the partners were not entitled to
deduct their proportionate shares of the partnership’s losses
because they were not “at risk”, within the meaning of section
465, or did not have sufficient adjusted basis in their
partnership interests. See sec. 704(d). Respondent also reduced
the partnership’s tax preference items by disallowing qualified
investment expenses of $9,973,739.
In the petition, the petitioning partners assigned error to
all of respondent’s adjustments and, with respect to the
disallowance of the Schedule F deductions, averred the following:
(1) The partnership incurred and paid ordinary and necessary
expenses in the conduct of its trade or business of farming, in
an amount not less than the amount claimed by the partnership,
(2) the partnership engaged in a bona fide farming activity,
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which had economic substance and constituted a trade or business
for all purposes of the Internal Revenue laws, and (3) the
partnership engaged in the trade or business of farming primarily
for the purpose of earning profits.
Additional History of the Case
On July 30, 1990, respondent moved to extend the time within
which to move or answer the petition from July 30, 1990, to
August 27, 1990. We granted that motion on August 2, 1990.
On August 13, 1990, respondent moved to stay the proceedings
prior to answer for a period of 1 year (the motion to stay). In
support of the motion to stay, respondent claimed that petitioner
and certain others were under criminal investigation for their
activities in connection with the partnership and other
partnerships sponsored by Amcor Capital, Inc., formerly American
Agri-Corp. (without distinction, AMCOR). Although petitioner was
not, then, a participating partner, see Rule 247(b), and
respondent claimed that none of the participating partners were
under criminal investigation for their activities in connection
with any AMCOR-related partnership, respondent believed that a
stay was required to avoid conflicts and difficulties arising
from the ongoing criminal investigation of petitioner and certain
others. The petitioning partners objected to the motion to stay,
arguing, among other things, that not only were none of the
participating partners under any related criminal investigation
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but neither were any of the 1500 other limited partners affected
by any AMCOR-related cases then before the Court. Following a
hearing on the motion to stay, we granted the motion to stay and
the proceedings were stayed until April 3, 1991 (the stay).
Upon a motion by respondent on April 1, 1991, the stay was
extended to October 3, 1991 (the extension). The stay was
lifted, however, upon the motion of the petitioning partners,
filed April 9, 1991, requesting that we reconsider the extension.
The petitioning partners argued on behalf of themselves and the
other limited partners of the partnership (together, the limited
partners). They argued that, although petitioner was technically
a party to this case, see section 6226(c)(1) and Rule 247(a), he
was not a participating partner, and the real parties in interest
were the limited partners, who held 99 percent of the partnership
interests. The petitioning partners argued:
[T]he limited partners * * * had no involvement in the
activities and events which give rise to Respondent’s
criminal investigation. The * * * [limited partners]
are neither the actors in nor the targets of alleged
criminality – they are passive investors who seek only
the prompt adjudication of civil tax claims asserted
and initiated by the Respondent * * *
The stay was lifted on June 19, 1991, and respondent filed
the answer on August 19, 1991.
On May 1, 1992, we set this case for trial at the trial
session scheduled to commence in Washington, D.C., on October 5,
1992.
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On August 11, 1992, respondent and the petitioning partners
jointly moved for a continuance, which was granted on August 13,
1992.
On January 12, 1994, we again set this case for trial at the
trial session scheduled to commence in Washington, D.C., on
October 31, 1994.
On July 22, 1994, the petitioning partners moved for
sanctions on account of alleged discovery abuses and violations
by respondent (the motion for sanctions). Respondent objected to
the motion for sanctions. The petitioning partners replied to
that objection, alleging additional incidents of misconduct. The
petitioning partners alleged the following incidents of
misconduct by respondent:
(1) Destruction of documents potentially
discoverable by petitioners.
(2) Failure to comply with certain discovery
orders of the Court.
(3) General failure to provide timely, accurate,
and complete discovery.
(4) Breaches of grand jury secrecy.
(5) Bad-faith withholding of pre-grand jury
documents.
We considered each of the petitioning partners’ claims, and we
denied the motion for sanctions in its entirety.
On October 12, 1994, the petitioning partners again moved
for dismissal or alternative relief based upon alleged violations
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of grand jury secrecy (the grand jury secrecy motion). By order
dated October 19, 1994, we denied the grand jury secrecy motion,
finding such motion premature in that issues concerning grand
jury secrecy had been raised by the petitioning partners and
certain others in an action brought in U.S. District Court for
the Central District of California.2
On October 19, 1994, we continued the trial of this case
until September 11, 1995.
On March 24, 1995, the petitioning partners moved for
dismissal or alternative relief based on respondent's misconduct
(the 1995 misconduct motion). Respondent objected.
2
See Ballas v. United States (In re Grand Jury
Proceedings), 62 F.3d 1175 (9th Cir. 1995). In Ballas, the
petitioning partners appealed the U.S. District Court for the
Central District of California’s order denying their petition for
disclosure of certain grand jury investigative materials prepared
by the Department of Justice and the Internal Revenue Service
during their investigation of the promoters of certain AMCOR-
sponsored partnerships (which, we assume, included the
partnership). See id. at 1177 (referring to “the promoters of an
abusive tax shelter called AMCOR”). In Ballas, the petitioning
partners requested that the Department of Justice investigate
certain breaches of grand jury secrecy and that the petitioning
partners be given a copy of any resulting report and certain
related grand jury materials. The District Court found that only
isolated and technical instances of improper disclosure had
occurred and denied the petitioning partners’ requests for
relief. The Court of Appeals for the Ninth Circuit affirmed the
District Court’s action on the basis, in part, that the
petitioning partners “were not targets of, witnesses before, or
otherwise involved in the grand jury proceeding.” Id. at
1177–1180.
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On August 3, 1995, based on the information that a basis of
settlement had been reached, we again continued the trial of this
case.
Settlement discussions and related procedures continued
until the expiration, on February 11, 1999, of the period
provided for in section 6224(c)(2) for partners to demand
consistent settlement agreements from respondent. Respondent
entered into consistent settlement agreements with some, but not
all, of the limited partners. Petitioner did not enter into a
settlement agreement.
On February 2, 1998, respondent and the participating
partners who remained active in the case (the remaining
participating partners) jointly moved to withdraw certain motions
and documents previously filed in this case (the motion to
withdraw), including the 1995 misconduct motion. The motion to
withdraw was granted on September 2, 1998.
On October 29, 1998, we allowed counsel for the remaining
participating partners to withdraw from the case.
On June 4, 1999, we set this case for trial at a special
session scheduled to commence on October 4, 1999 (the October 4
special trial session).
On July 2, 1999, petitioner made the misconduct motion (the
motion). We set the motion for an evidentiary hearing (the
hearing) at the October 4, 1999, special trial session. The
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hearing commenced on October 4, 1999, and ended on November 5,
1999.
AMCOR
AMCOR was organized in 1981 by petitioner, George Schreiber,
and Robert Wright.
As of December 1988, AMCOR was headquartered in Irvine,
California.
For a period beginning some time after AMCOR’s organization
in 1981 and ending in 1986, AMCOR was in the business of
promoting tax shelter partnerships, including the partnership.
General Partners
During 1986 and all subsequent years relevant to this case,
petitioner, George Schreiber, and Robert Wright were the only
general partners of the partnership. Mr. Schreiber died in
August 1991.
Respondent’s Examinations
Introduction
During the mid- and late-1980's, AMCOR’s business activities
drew the attention of various of respondent’s officers and
employees, particularly civil examination and criminal
investigative personnel in respondent’s Dallas, Texas, and Laguna
Niguel and San Jose, California, districts. Those personnel
examined and investigated both AMCOR and various entities and
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individuals with a connection to AMCOR. The following are
pertinent aspects of those examinations and investigations.
Investigation of Paul Hays
In May 1988, George Martin was a special agent working in
respondent’s Criminal Investigation Division (CID) and assigned
to respondent’s Dallas, Texas, district, with post of duty in
Amarillo, Texas. In May 1988, Mr. Martin was assigned the case
of Paul Hays, a farmer, who, acting through his attorney, Wendell
Davies, had approached the Internal Revenue Service with
information to disclose concerning a tax shelter scheme in which
Mr. Hays and several other farmers had participated. Mr. Martin
investigated Mr. Hays’ information, and that information led him
to AMCOR and certain employees and agents of AMCOR. On June 6
and June 14, 1988, with the consent of Mr. Hays and Steve
Sterquell, an accountant employed by Mr. Hays, Mr. Martin
monitored and recorded conversations concerning AMCOR among Ted
Frame, an attorney representing AMCOR, and Messrs. Hays,
Sterquell, and Schreiber. Mr. Martin came to suspect that AMCOR
was operating an “illegal tax shelter” and that others, including
Mr. Frame, had committed crimes in connection therewith. On
June 6, 1988, Mr. Martin learned that a civil examination of
AMCOR had been undertaken by personnel assigned to respondent’s
Examination Division in Laguna Niguel, California (the Laguna
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Niguel Examination Division). On June 16, 1988, Mr. Martin
ceased his investigation of AMCOR.
Examinations of AMCOR-Sponsored Partnerships
Beginning in 1987 and continuing through July 1988, Bobbie
Tadlock, then a revenue agent assigned to the Laguna Niguel
Examination Division, conducted a civil tax examination of the
income tax returns of certain AMCOR-sponsored partnerships (the
AMCOR partnerships examination). By a letter dated July 14,
1988, Mr. Tadlock informed AMCOR that respondent was considering
both penalties against AMCOR under section 6700 for promoting
abusive tax shelters and an injunction under section 7408 to
enjoin further promotion of such shelters.
Intermittently, from August 1988 to January 1990, the AMCOR
partnerships examination was continued by Debbie Gaither, then a
revenue agent also assigned to the Laguna Niguel Examination
Division. As part of her examination, Ms. Gaither requested
various documents relating to the AMCOR partnerships from AMCOR.
Commencing on or about October 17, 1988, and for a period of
about 2 weeks, Ms. Gaither visited the offices of AMCOR and made
copies of many documents.
On October 26, 1988, at the initiation of Mr. Tadlock, the
chief of the Laguna Niguel Examination Division referred AMCOR to
respondent’s CID for a criminal tax fraud investigation (the
fraud referral). AMCOR is described in the fraud referral as a
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promoter of abusive tax shelters. Its transactions are described
as “shams”, generating “about $400,000,000 in first year tax
deductions from 1981 through 1986, claimed on one hundred plus
partnerships [returns].” The fraud referral accuses AMCOR of
entering into purported farming transactions in which, among
other things, crops were not grown and AMCOR and farmers drew and
exchanged checks with neither party having sufficient funds to
cover the checks drawn. Petitioner, Mr. Schreiber, and Mr.
Wright are referred to as “players”, along with a group of about
25 farmers, who are described as “culpable”.
Examination of AMCOR
From July 1988 until October 1988, Vince Capobianco, a
revenue agent assigned to the Laguna Niguel Examination Division,
conducted a civil tax examination of the corporate tax returns of
AMCOR for its taxable years ending November 30, 1985 and 1986
(the AMCOR corporate examination). Mr. Capobianco assisted
Mr. Tadlock in the preparation of the fraud referral. Sometime
after October 1988, he assisted in the examination of the income
tax returns of certain AMCOR-sponsored partnerships. From March
1989 to November 1989, Mr. Capobianco assisted in a criminal
investigation of AMCOR.
Joint Civil-Criminal Investigation
The fraud referral was received by respondent’s CID, and, on
January 4, 1989, it was assigned to Douglas Watson, then a
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special agent working in Laguna Niguel, California. Mr. Watson
accepted the fraud referral, but not with respect to AMCOR, since
he felt it more appropriate to investigate individuals rather
than a corporation for fraud. Mr. Watson accepted the fraud
referral as to Mr. Schreiber, an individual, and made him the
target of his investigation. Subsequently, the Laguna Niguel
Examination Division and Mr. Watson commenced a joint civil and
criminal investigation into AMCOR, its principals, and the AMCOR-
sponsored partnerships’ tax shelter activities. The Internal
Revenue Manual does not prohibit such joint investigations. On
August 22, 1989, petitioner and Mr. Wright also became subjects
of Mr. Watson’s investigation.
Investigation of Dodson and McCoy
In 1987, Wilbur J. Goolkasian was a special agent in
respondent’s CID, assigned to the San Jose, California, district
(the San Jose district), with post of duty in Fresno, California.
In 1987, Mr. Goolkasian received information from the San
Francisco office of the Securities and Exchange Commission
concerning “a large tax shelter fraud scheme” targeted at
investors in the Fresno, California, area. That information led
him to investigate two individuals, Ronald Dodson and Ray McCoy
(Dodson and McCoy). During his investigation of Dodson and
McCoy, Mr. Goolkasian learned that Dodson and McCoy were
principals of a Mexican corporation, C.H.M. de Mexico (C.H.M.),
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purportedly engaged in farming in Mexico. C.H.M. had entered
into 10 farming contracts (the 10 contracts) with AMCOR. On
February 14, 1988, Mr. Goolkasian was contacted by Mr. Frame, who
identified himself as general counsel of AMCOR and asked about
his investigation of the 10 contracts. Because of certain
discrepancies in what Mr. Frame told him, Mr. Goolkasian became
suspicious of Mr. Frame. Mr. Frame also represented Dodson and
McCoy. On April 13, 1988, Mr. Goolkasian met with Mr. Frame in
pursuit of his investigation of Dodson and McCoy, and, on
June 20, 1988, he met Messrs. Frame, Dodson, and McCoy in pursuit
of that investigation. Mr. Goolkasian believed that, at one or
both of those meetings, Mr. Frame attempted to mislead him. As a
result, Mr. Goolkasian grew suspicious. Mr. Goolkasian came to
believe that there were one or more tax fraud conspiracies
involving, variously, as conspirators, Dodson and McCoy,
Mr. Frame, Barry Jones (an accountant for AMCOR), petitioner,
Mr. Wright, Mr. Schreiber, and AMCOR. Mr. Goolkasian’s authority
to investigate AMCOR was limited because its principal place of
business was outside the district to which he was assigned, the
San Jose district. By at least April 1988, Mr. Goolkasian had
communicated his suspicions about AMCOR to personnel in the
Laguna Niguel Examination Division. Mr. Goolkasian was
instrumental in persuading personnel in the Laguna Niguel
Examination Division to make the fraud referral.
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On October 19, 1988, Mr. Goolkasian traveled to Texas in
furtherance of his investigations of the various tax fraud
conspiracies that he believed he had found during his
investigation of Dodson and McCoy. He interviewed Messrs. Hays
and Davies, who agreed to become confidential informants for
Mr. Goolkasian. On November 14, December 8, and December 9,
1988, with the consent of Messrs. Davies and Sterquell, Mr.
Goolkasian monitored and recorded certain conversations in Mr.
Davies’ office. On November 14, 1988, the participants in the
conversation were Messrs. Frame and Davies, and, for a portion of
the conversation, Mr. Sterquell. On December 8 and 9, 1988, the
participants were the same with the addition of Mr. Schreiber
(Mr. Sterquell also arrived late for the December 8
conversation).
On October 26, 1988, Mr. Goolkasian submitted a request to
the chief of the CID, San Jose, California, to make Mr. Frame
officially the subject of a criminal investigation. Mr.
Goolkasian’s request was approved on November 4, 1988.
On March 21, 1989, Mr. Goolkasian executed a search warrant
(the warrant) at 2301 Dupont Drive, Suite 510, Irvine,
California. Application for the warrant (the application) was
made by Mr. Goolkasian to the Hon. George H. King, U.S.
Magistrate, Los Angeles, California, on March 14, 1989.
Attachment A to the application describes AMCOR’s offices as the
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premises to be searched (the premises). Attachment B to the
application states Mr. Goolkasian’s belief that, on the premises,
there are concealed various business records of AMCOR, “for the
years 1982 through 1988, inclusive, and relating to the following
partnerships and corporations: [a list of 192 entities, not
including the partnership]”. The application states that the
items to be seized are “the fruits, instrumentalities, and
evidence of conspiracy to commit tax evasion, in violation of
18 U.S.C. § 371 and 26 U.S.C. § 7201, and aiding or assisting in
the preparation of false or fraudulent tax returns, in violation
of 26 U.S.C. § 7206(2).” Mr. Goolkasian’s affidavit is attached
to, and made part of, the application. Attached to it are lists
of entities that had farming agreements with AMCOR. The
partnership’s name appears on one of those lists. Items were
seized pursuant to the warrant, and an employee of respondent’s
prepared a detailed inventory of those items.
On March 27, 1989, Mr. Davies recorded a telephone call
among himself, Mr. Frame, and Bruce Hochman, a criminal defense
attorney retained by Mr. Frame. He did so without authorization
or permission from Mr. Goolkasian. Mr. Goolkasian reviewed the
record of that conversation. On March 28, 1989, Mr. Davies was
instructed not to record any more conversations with Mr. Hochman.
Mr. Goolkasian informed Mr. Hochman that the conversation of
March 27, 1989, had been recorded.
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The investigation of Dodson and McCoy was closed sometime
prior to March 1992, after Dodson and McCoy had pled guilty to
filing false income tax returns.
Grand Jury Investigation
In March 1990, the District Director, Laguna Niguel,
California, requested William Shipley, Regional Counsel, Western
Region, to recommend to the Department of Justice (the
Department) that the Department institute a grand jury
investigation into the activities of petitioner, Messrs.
Schreiber and Wright, and two others (but not AMCOR) in
connection with the operation of a fraudulent tax shelter.
Mr. Shipley made that recommendation, and the Department accepted
it; a grand jury investigation was commenced in June 1990 (the
grand jury investigation).
The joint investigation ended when the grand jury referral
was accepted. During the course of the grand jury investigation,
the Laguna Niguel Examination Division continued the AMCOR
partnerships examination.
On March 1, 1993, the Department notified Mr. Shipley that
the Department was declining prosecution of the subjects of the
grand jury investigation. The letter so notifying Mr. Shipley
stated: “Although evidence uncovered to date indicates that the
principals of * * * [AMCOR] were involved in the operation of a
fraudulent tax shelter, this office has concluded that two
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problems are present in this case which will prevent a successful
prosecution of the * * * matter.” The first problem was the
death of Mr. Schreiber, whose presence the Department thought
vital to a successful prosecution of the other subjects of the
grand jury investigation. The second problem was the risk of
adverse court rulings on evidentiary questions arising in
connection with evidence resulting from the monitoring of
Mr. Frame.
OPINION
I. The Motion and the Hearing
The motion is made pursuant to Rules 53, 123, 142(a) and
requests that this case:
be dismissed, or alternatively, that the Court shift
the burden of going forward with the evidence, and/or
suppress evidence illegally and improperly obtained by
Respondent through pervasive and egregious misconduct,
which has severely and irreparably prejudiced the Tax
Matters Partner’s ability to present his case.
Commencing on October 4, 1999, and ending on November 5,
1999, we held a hearing at which petitioner presented evidence in
support of the relief requested in the motion (the hearing).
At the close of the hearing, petitioner agreed that his
principal complaints were as follows:
1. A civil investigation was carried out in the guise of a
criminal investigation.
2. Conversations subject to the attorney-client privilege
were unlawfully monitored.
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3. Documents were unlawfully seized pursuant to a defective
search warrant.
Petitioner further agreed that the harms of which he complains
are (1) prejudice to petitioner in presenting his case and
(2) the additional interest on any deficiency that would result
to petitioner on account of respondent’s causing a delay in
resolving the case.
II. Petitioner’s Memoranda
Petitioner filed a post-hearing memorandum in support of the
motion (petitioner’s memorandum) and incorporated into the motion
the memorandum filed March 24, 1995, by the petitioning partners
in support of the 1995 misconduct motion (petitioning partners’
memorandum). In the introduction to petitioner’s memorandum,
petitioner states: “The pervasive nature of Respondent’s
misconduct has caused infringements of the TMP’s, AMCOR’s and the
AMCOR’s partnerships’ [including Crop Associates-1986]
constitutional rights”. Both petitioner’s memorandum and the
petitioning partners’ memorandum complain of “a complex weave of
especially prejudicial illegal and improper acts”. In each
memorandum, the complaint is followed by a list of actions taken
by respondent and complained of by the author of the memorandum.
The lists are different, and we assume that petitioner no longer
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relies on the list of actions in the petitioning partners’
memorandum.3 The list in petitioner’s memorandum is as follows:
1. Use of fraud, deceit and trickery in order to
procure evidence for a criminal investigation.
2. Misuse of a civil tax examination as a guise to
secure evidence for use in a criminal tax
investigation.
3
The list in the petitioning partners’ memorandum is as
follows:
1. Misuse of a civil tax examination as a guise to
secure evidence for use in a criminal tax
investigation.
2. Invasion of privileged attorney-client
communications through unlawful monitoring of meetings
and telephone conversations.
3. Deprivation of access to vital business books and
records by their seizure and extended retention
pursuant to a search warrant that was improperly sought
and wrongfully issued on the basis of material
misrepresentations of fact made under oath.
4. Gross negligence in the care and maintenance of the
seized records while in the Government’s custody so
that key documents were lost and important computerized
information rendered useless.
5. Misrepresentation of the status and duration of a
related grand jury investigation in a manner that
seriously impeded the civil tax litigation.
6. Intimidation of targets of the criminal tax
investigation with the result that their assistance and
testimony was unavailable to Petitioners.
7. Coercion and improper inducement by Government
agents of witnesses to procure favorable -- and bury
unfavorable -- testimony.
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3. Invasion of privileged attorney-client
communications through unlawful monitoring of
meetings and telephone conversations.
4. Deprivation of access to vital business books and
records by their seizure and extended retention
pursuant to a search warrant that was improperly
sought and wrongfully issued on the basis of
material misrepresentations of fact made under
oath.
5. Misrepresentation of the status and duration of a
related grand Jury investigation in a manner that
seriously impeded the civil tax litigation.
6. Improper dissemination of grand jury materials.
7. Recalcitrance during discovery, resulting in
abnormal prejudicial delay.
8. Obstreperousness and stonewalling during the
hearing on this matter, causing additional
unwarranted delay.
After discussing certain preliminary matters, we shall
address the items in petitioner’s list, keeping in mind
petitioner’s principal complaints and the claimed harms (as
stated at the end of the hearing) as an aid to understanding
petitioner’s list.
III. Jurisdiction
A. Introduction
Respondent filed a brief in answer to petitioner’s
memorandum (respondent’s brief). In that brief, respondent asks:
As a matter of law, does the TMP have standing to
raise (or rely upon) alleged violations of the
constitutional rights of third parties (specifically
AMCOR, its principals, and AMCOR-sponsored partnerships
(other than Crop Associates-1986)) as the basis for his
request for sanctions against Respondent?
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Respondent answers that petitioner has standing only to ask
redress of violations of rights that he holds in his capacity as
TMP and a partner of the partnership. Essentially, we agree with
respondent. On the question of standing, see Dixon v.
Commissioner, 90 T.C. 237, 243-244 (1988). Respondent’s
question, however, suggests a more fundamental issue, viz, the
limits of our subject matter jurisdiction in this case.
B. Limited Jurisdiction To Redetermine Partnership Items
This is a case brought pursuant to section 6226 for the
redetermination of certain partnership items. Section 6226 is a
part of subchapter C, chapter 63, subtitle F of the Code
(subchapter C). Subchapter C comprises sections 6221 through
6233. Subchapter C was added to the Code by the Tax Equity &
Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248,
sec. 402(a), 96 Stat. 324, 648. Congress added subchapter C to
the Code for the purpose of changing prior law, under which the
Federal income tax consequences of partnership operations were
determined at the partner level, generally in a separate
proceeding with respect to each partner. See H. Conf. Rept. 97-
760, at 599 (1982), 1982-2 C.B. 600, 662 (conference report
accompanying H.R. 4961, 97th Cong., 2d Sess. (1982), which, when
enacted, became TEFRA). In general, subchapter C provides that
the tax treatment of partnership items will be determined at the
partnership level in a unified partnership proceeding rather than
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in separate proceedings with each partner. See, e.g., sec. 6221;
H. Conf. Rept. 97-760 (1982), supra at 599, 1982-2 C.B. 662.4
Our role in a subchapter C proceeding is limited by section
6226(f) to the determination and allocation of partnership items.
Section 6226(f) provides:
A court with which a petition is filed in
accordance with this section shall have jurisdiction to
determine all partnership items of the partnership for
the partnership taxable year to which the notice of
final partnership administrative adjustment relates and
the proper allocation of such items among the partners.
We have no authority under section 6226(f) to determine any
affected item or the tax liability of any partner.5 See, e.g.,
Crop Associates-1986 v. Commissioner, 113 T.C. 198 (1999). In
Dynamic Energy, Inc. v. Commissioner, 98 T.C. 48 (1992), an
entity level proceeding involving an S corporation, we held that
we lacked jurisdiction in such a proceeding to consider a defense
arising at the shareholder level and personal to the wife of a
shareholder. We have held similarly in subchapter C proceedings.
4
A “partnership item” is any item required to be taken
into account for the partnership’s taxable year to the extent
that the regulations provide that such item is more appropriately
determined at the partnership level rather than at the partner
level. Sec. 6231(a)(3). A “nonpartnership item” is any item
which is not, or is not treated as, a partnership item. See sec.
6231(a)(4). An “affected item” means any item to the extent that
such item is affected by a partnership item. See sec.
6231(a)(5).
5
See sec. 6230(a)(2), describing situations in which the
deficiency procedures provided for in subchapter B, chapter 63,
subtitle F of the Code will apply to deficiencies attributable to
affected items.
- 25 -
See, e.g., Life Care Communities of America, Ltd. v.
Commissioner, T.C. Memo. 1997-95 (“It is now well settled that
the Tax Court lacks jurisdiction to consider whether a
taxpayer/partner is entitled to innocent spouse relief under
section 6013(e) in the context of partnership level
proceedings.”). Our jurisdiction under section 6226(f) is to
determine certain partnership items (and related allocation
questions), and, in exercising that jurisdiction, we must be
careful not to consider extraneous claims unrelated to that
limited jurisdiction.
C. Conclusion
Consistent with our limited jurisdiction under section
6226(f), we can consider petitioner’s claims of misconduct that
relate to respondent’s determination (or allocation) of
partnership items of the partnership. We shall examine how
respondent conducted himself with respect to the partnership, and
not how he conducted himself with respect to any other person,
except to the extent such person was acting for the partnership.
We shall address standing with more particularity as we proceed.
IV. Court’s Power and Authority
Having determined that the claims that we can consider are
limited by our subject matter jurisdiction, we must determine
whether we have the power and authority to provide the relief
requested by petitioner.
- 26 -
Petitioner asks the Court to use its inherent power and
authority to regulate and supervise proceedings before it so as
to insure the integrity of its processes. See Freytag v.
Commissioner, 501 U.S. 868, 891 (1991); Chambers v. NASC0, Inc.,
501 U.S. 32, 43-46 (1991). The Court’s inherent power extends to
regulate both conduct before it and conduct beyond its confines.
See Chambers v. NASCO, Inc., supra at 44. The Court has
recognized its authority to maintain the integrity of its
proceedings and its ability to provide relief for a party’s
misconduct. See, e.g., Dixon v. Commissioner, T.C. Memo. 2000-
116 (imposing additional sanctions, some on the basis of inherent
power); Dixon v. Commissioner, T.C. Memo. 1999-101; CMEM, Inc. v.
Commissioner, T.C. Memo. 1991-467.
V. Burden of Proof
Petitioner has the burden of establishing the allegations of
illegal and improper acts by respondent that are the basis of the
motion. See Rakas v. Illinois, 439 U.S. 128, 130 n.1 (1978)
(citing Simmons v. United States, 390 U.S. 377, 389-390 (1968)
(“The proponent of a motion to suppress has the burden of
establishing that his own Fourth Amendment rights were violated
by the challenged search or seizure.”)).
- 27 -
VI. “Invasion of privileged attorney-client communications
through unlawful monitoring of meetings and telephone
conversations.”
We dispose of this complaint first because, for the most
part, it deals with a matter already disposed of by the Court.
In the motion, petitioner states: “Respondent engaged in
illegal monitoring of attorney-client communications, which
conversations were protected by the joint defense privilege.” In
petitioner’s memorandum, petitioner states:
On several occasions in this case, the Respondent
utilized Wendell Davies -- an attorney representing
certain farmers who had contracted with AMCOR
partnerships -- as a confidential informant (ultimately
paid) to engage in monitored telephone conversations or
meetings with Ted Frame, an attorney representing
AMCOR, its principals and employees, and AMCOR
partnerships.
Although petitioner is not specific about the “several occasions”
he has in mind, the focus of petitioner’s complaint with respect
to conversations participated in by Mr. Frame appears to be the
conversations monitored and recorded by Mr. Goolkasian on
November 14, December 8, and December 9, 1988 (the three
conversations). With respect to the three conversations,
petitioner has failed to establish any attorney-client privilege
including joint defense privileges, or the application of the so-
called “work product” doctrine. See Hickman v. Taylor, 329 U.S.
495 (1947).
Indeed, petitioner has failed to prove that Mr. Frame was
the recipient of any privileged communications with respect to
- 28 -
the partnership. Mr. Frame testified that he had no written
agreement with the partnership to perform legal services but only
an oral agreement to “perform whatever legal services might be
required” (which oral agreement he had with all of the AMCOR-
sponsored partnerships). He misidentified “AMCOR or an AMCOR
affiliate” as the general partner of the partnership with whom he
made that oral agreement. He could not recall any services that
he had performed for the partnership or whether he billed it for
any services. Besides failing to prove the privileged or
otherwise protected nature of the three conversations, petitioner
has failed to prove the communication of any privileged
information from the partnership to Mr. Frame or that, with
respect to the partnership, Mr. Frame ever produced any material
subject to the work product doctrine.
Petitioner also complains with respect to one or more
conversations on or about March 27, 1989, involving Mr. Hochman
(a criminal defense attorney retained by Mr. Frame), Mr. Frame
and Mr. Davies that were monitored or recorded by Mr. Davies.
Those conversations were monitored and recorded without the
permission or authorization of Mr. Goolkasian. Petitioner has
failed to prove that the partnership enjoyed any privilege or
other protected status with respect to those conversations. In
any event, Mr. Goolkasian informed Mr. Hochman of Mr. Davies’
- 29 -
actions, and petitioner has failed to demonstrate any harm to the
partnership on account of such recording.
Petitioner’s complaint with respect to respondent’s
monitoring or recording of conversations fails to establish any
ground on which to base any sanction of respondent in this case.
VII. "Use of fraud, deceit and trickery in order to procure
evidence for a criminal investigation.”
A. Introduction
In the motion, petitioner claims:
The Respondent’s civil examination of the AMCOR
partnerships began in May 1988. Although a concurrent
criminal investigation of the partnerships was ongoing,
the Respondent’s agents failed to notify AMCOR or its
general partners. Moreover, during the time the two
investigations were proceeding concurrently, civil
agents, acting as undercover criminal investigators,
collected thousands of pages of documents from the
AMCOR partnerships. These are the very documents
Respondent wishes to introduce as evidence during the
trial of this matter.
Petitioner demands:
Documents voluntarily disclosed to Respondent’s
civil examination agents during the time such agents
were acting as undercover criminal agents, should be
suppressed. United States v. Tweel, 550 F.2d 297, 299
(5th Cir. 1977). Information voluntarily produced by a
taxpayer cooperating with what he believes to be a
civil investigation must be suppressed if he was misled
and the investigation really was criminal. Id.In petitioner’s memorandum, he states:
This case involves a clandestine criminal investigation
supported by civil agents, with the specific purpose of
obtaining evidence of criminal and civil fraud. The
result, however, was that Respondent illegally acquired
substantial volumes of documents, interviews and other
- 30 -
evidentiary materials he would not have otherwise
obtained.
The gravamen of petitioner’s complaint appears to be that,
had petitioner (or any other partner) been aware that a criminal
investigation was underway, no one representing the partnership
would have cooperated in a civil examination of the partnership.
Petitioner equates respondent’s silence with fraud, deceit, and
trickery. Petitioner reasons that respondent obtained evidence
by such means from the partnership, and such evidence must be
suppressed in this proceeding.
B. Grounds for Suppression of Evidence
Respondent may not develop a criminal investigation under
the auspices of a civil examination. See, e.g., United States v.
Grunewald, 987 F.2d 531, 534 (8th Cir. 1993). Nevertheless, he
may pursue civil and criminal investigations either
simultaneously or successively. See United States v. Kordel, 397
U.S. 1, 11 (1970); Standard Sanitary Manufacturing Co. v. United
States, 226 U.S. 20, 52 (1912). Respondent must be careful,
however, not to represent to a taxpayer that an investigation of
the taxpayer is routine when, in fact, it is a criminal
investigation. In a criminal case, which this is not,
misrepresentations of that sort may give a court cause to
suppress evidence resulting from the investigation because it was
obtained in violation of the taxpayer’s rights under the Fourth
or Fifth Amendments to the Constitution. See, e.g., United
- 31 -
States v. McKee, 192 F.3d 535, 542 (6th Cir. 1999); United States
v. Peters, 153 F.3d 445, 451 (7th Cir. 1998) (“A consensual
search is unreasonable under the Fourth Amendment or violative of
due process under the Fifth Amendment if the consent was induced
by fraud, deceit, trickery or misrepresentation by the revenue
agent.” (Fn. ref. omitted.)); United States v. Grunewald, supra
at 534; United States v. Tweel, 550 F.2d 297, 299 (5th Cir.
1977).
We have not stated a rule precluding the suppression of
evidence in a civil case on account of violations of a person’s
Fourth Amendment rights. See Jones v. Commissioner, 97 T.C. 7,
27 n.8 (1991). In Jones, the taxpayers claimed that the
Commissioner’s agents violated their constitutional rights by
gathering evidence during a criminal investigation that was
conducted under the guise of a civil examination. See id. at 26.
The taxpayers argued that, but for the conduct of such agents,
they would not have provided certain evidence that was
subsequently used in a criminal prosecution of them and in
determining deficiencies in tax. See id. We agreed with the
taxpayers that they had shown inappropriate or reprehensible
activities by the Commissioner’s agents. See id. at 29. We
found, however, that the alleged violations occurred before any
deficiency had been determined and that any statements and
documents given to the Commissioner were given with the knowledge
- 32 -
and consent that they might be used against the taxpayers in a
civil tax controversy. See id. at 27. We considered the cost to
the Court’s truth-finding function of suppressing the documents
and evidence in question and concluded: “This cost is not
warranted here due to factors of remoteness and unsuitability of
the sanction as it relates to the violation of the rights and the
use of the fruits of such violation.” Id.C. Discussion
For a taxpayer to prevail in his claim that the Commissioner
violated his Fourth Amendment rights by obtaining evidence by
fraud, trickery, or deceit, the taxpayer must show an affirmative
act of misrepresentation by the Commissioner. See United States
v. McKee, supra; United States v. Peters, supra; Jones v.
Commissioner, supra at 28.6 He must also show some resulting
prejudice to his rights, see United States v. Grunewald, supra at
534, and that evidence actually was obtained as a result of the
alleged deception; see United States v. McKee, supra at 542.
Petitioner bears the burden of proof, see supra sec. V., and, as
we said in Jones v. Commissioner, supra at 28: “To prevail,
petitioners must show by clear and convincing evidence the fraud
6
Petitioner asks us to suppress documents voluntarily
disclosed to respondent. He does not appear to be making a Fifth
Amendment claim with respect to those documents. In any event,
petitioner has no Fifth Amendment privilege to protect against
the compelled production of incriminating documents that have
been disclosed voluntarily to respondent and are in respondent’s
possession. See Fisher v. United States, 425 U.S. 391 (1976).
- 33 -
or deceit on the part of the IRS." (Emphasis added.) Petitioner
has failed to make the requisite showings.
It is true that, by the FPAA, respondent made adjustments to
the 1986 partnership return. Undoubtedly, some examination of
the 1986 partnership return preceded the FPAA. Nevertheless,
petitioner has failed to prove that, in connection with that
examination, respondent misrepresented anything to him or to
anyone else. Revenue Agent Tadlock commenced an examination of
certain AMCOR-sponsored partnerships in 1987 (the AMCOR
partnerships examination). He continued that examination through
July 1988, when his participation ended, and the examination was
continued by Revenue Agent Gaither, sporadically, until January
1990. Petitioner has failed to prove that the 1986 partnership
return was the subject of either agent’s examination. He has
failed to prove that Ms. Gaither obtained any documents relating
to the 1986 partnership return on her visit to AMCOR commencing
on October 17, 1988. He has failed to prove that the 1986
partnership return was the subject of the AMCOR corporate
examination carried on by Revenue Agent Capobianco. Indeed,
petitioner has failed to prove even the date on which the
examination of the 1986 partnership return commenced or who
conducted that examination.
Even assuming some misrepresentation, petitioner has failed
to show any prejudice to the partnership or that any evidence
- 34 -
actually was obtained pursuant to that misrepresentation.
Petitioner claims that, as a result of respondent’s concealment
of his criminal investigation, respondent was able to obtain
“putative extensions” of the statute of limitations. We have
found that the 1986 partnership return (a calendar-year return)
was timely made and that the FPAA was dated (and, we assume,
mailed) on March 14, 1990. On the face of it, respondent had no
need of any extension of the period of limitations, see section
6229(a), (d), and, in any event, petitioner has failed to prove
that any agreement to extend the section 6229(a) period was
entered into by any partner or any other person with authority to
bind the partnership. See sec. 6229(b).7
7
Petitioner may have in mind agreements to extend the sec.
6229(a) period of limitations entered into by partners of other
partnerships sponsored by AMCOR. Throughout the course of
petitioner’s memoranda, petitioner fails clearly to relate his
complaints to the partnership or distinguish between harms
alleged to have been suffered by the partnership and harms
suffered by AMCOR, its principals, or the remaining AMCOR
sponsored partnerships. Respondent and the tax matters partners
in certain related cases have stipulated that they will be bound
in those cases by our order on the motion. During the course of
the hearing, we cautioned petitioner that the hearing concerned
only the motion, which pertained only to the partnership.
Respondent opposed the motion, and participated in the hearing,
on the basis that the motion concerned only the partnership. As
we said supra sec. III., we shall examine how respondent
conducted himself with respect to the partnership and not how he
conducted himself with respect to any other person, except to the
extent such person was acting for the partnership.
- 35 -
D. Conclusion
Petitioner’s complaint with respect to respondent’s use of
fraud, deceit, and trickery in order to procure evidence for a
criminal investigation fails to establish any ground on which to
base any sanction of respondent in this case.
VIII. "Misuse of a civil tax examination as a guise to secure
evidence for use in a criminal tax investigation."
A. Introduction
In petitioner’s memorandum, he states:
Even if Respondent’s misconduct is placed in its
most favorable light, the conclusion must be reached
that the civil examination was used as a guise to
obtain evidence for the use in the ongoing criminal
investigation. The Respondent, however, may not
develop a criminal investigation under the auspices of
a civil audit. United States v. Grunewald, 987 F.2d
531, 534 (8th Cir. 1992). [Fn. ref. omitted.]
Moreover, the policy is stated clearly in the
Internal Revenue Manual (“IRM”);
[T]he Service should not attempt to use a
civil examination to develop a criminal tax
investigation. If a criminal investigation
is being developed with regard to a taxpayer,
the Service must respect the taxpayer’s
rights and follow Manual instructions
pertaining thereto. Therefore, under no
circumstances will these procedures be used
to develop a criminal tax case under the
guise of a civil examination.
IRM § 9311.83(1) (Apr. 8, 1985).
As this Court observed in Jones:
Any attempt to conduct a criminal
investigation under the guise of a civil
examination would have a chilling effect upon
- 36 -
the normal demeanor of the parties in civil
examinations.
97 T.C. at 29 (emphasis added).
Here, the evidence demonstrating the use of a
civil tax examination as a means to gather information
for criminal investigative purposes is abundant.
That complaint is distinguishable from the immediately
preceding complaint in that petitioner is complaining of
respondent’s methods for gathering evidence for use in a criminal
investigation rather than for use in a civil examination.
B. Background
What we said above, in the first paragraph of section
VII.B., is equally applicable here. Also, 2 Audit, Internal
Revenue Manual (CCH) section 4565.21, at 14,382, provides that,
if an employee of respondent’s conducting a civil examination of
a taxpayer comes across a firm indication of fraud on the part of
the taxpayer, she must suspend her examination so that an
evaluation can be made as to whether the case is appropriate for
criminal investigation.8 Several courts have relied on the “firm
indications of fraud” rule of 2, Audit, Internal Revenue Manual
(CCH) sec. 4565.21(2) as an appropriate benchmark for determining
8
The Court of Appeals for the Sixth Circuit has stated:
“compliance with § 4565.21 is mandated by the Constitution.”
United States v. McKee, 192 F.3d 535, 542 (6th Cir. 1999);
accord Grunewald v. Commissioner, 897 F.2d 531, 534 (8th Cir.
1993). But see Groder v. United States, 816 F.2d 139, 142 (8th
Cir. 1987) (classifying Internal Revenue Manual sec. 4565.21 as
essentially a procedural rule conferring “no substantive rights
or privileges upon taxpayers”).
- 37 -
whether respondent has attempted to conduct a criminal
investigation under the guise of a civil examination. See United
States v. Peters, 153 F.3d at 452 (and cases cited therein). A
firm indication of fraud is different from an initial indication
that fraud exists, and it is more than a mere suspicion of fraud.
See, e.g., United States v. Peters, supra at 455-456. The
determination of a firm indication of fraud is a factual
determination that can only be determined on a case-by-case
basis. See id. at 456. Moreover, only the victim of conduct
improper under the Fourth Amendment has standing to challenge
such conduct by seeking suppression of the evidence obtained
under the exclusionary rule. See United States v. Payner, 447
U.S. 727, 731 (1980). Nor does a Federal court’s inherent
supervisory power authorize the court to suppress otherwise
admissible evidence on the ground that it was seized unlawfully
from a third party not before the court. Id. at 735.
C. Discussion
Petitioner has failed to prove the particulars of
respondent’s examination with respect to the 1986 partnership
return. See supra sec. VII. During his investigation of Dodson
and McCoy, Special Agent Goolkasian came to believe that there
were one or more tax fraud conspiracies involving, variously, as
conspirators, Dodson and McCoy, Mr. Frame, Mr. Jones, petitioner,
Mr. Wright, Mr. Schreiber, and AMCOR. On October 26, 1988, the
- 38 -
fraud referral was made, referring AMCOR to respondent’s CID for
a criminal fraud investigation. In early 1989, Special Agent
Watson accepted the fraud referral with respect to Mr. Schreiber,
who became the target of a criminal investigation by Special
Agent Watson. Subsequently, Special Agent Watson and personnel
from the Laguna Niguel Examination Division commenced a joint
investigation into AMCOR, its principals, and the AMCOR-sponsored
partnerships’ tax shelter activities. On August 29, 1989,
petitioner and Mr. Wright became subjects of Special Agent
Watson’s investigation.
Petitioner has failed to prove that, in the course of
respondent’s examination of the 1986 partnership return,
respondent intended to obtain or, indeed, obtained any
information for the purposes of any criminal investigation. See
supra sec. VII.C. (petitioner has failed to prove any details of
the examination of the 1986 partnership return).
D. Conclusion
Petitioner’s complaint with respect to respondent’s alleged
misuse of a civil tax examination as a guise to secure evidence
for use in a criminal tax investigation fails to establish any
ground on which to base any sanction of respondent in this case.
- 39 -
IX. "Deprivation of access to vital business books and records
by their seizure and extended retention pursuant to a
search warrant that was improperly sought and wrongfully
issued on the basis of material misrepresentations of fact
made under oath.”
In the motion, petitioner avers: “Special Agent Goolkasian
committed perjury in his affidavit in support of the March 21,
1989, search warrant for the books and records of the AMCOR
partnerships.” Petitioner claims that, in the application (for
the warrant), Mr. Goolkasian misrepresented that books and
records of AMCOR were concealed. In petitioner’s memorandum, he
broadens his complaint: “The seeking of a search warrant in this
situation was not to fulfill any legitimate purpose but, rather,
to serve Mr. Goolkasian’s objective of conducting an improper
general search and coercing the targets of the criminal
investigation.” Petitioner particularizes the harm he claims to
have suffered: “By improperly seizing these business records,
Respondent denied AMCOR and the TMP effective access, severely
prejudicing the TMP in his ability to timely and fully prepare
his cases.”
Petitioner argues his standing to make a Fourth Amendment
claim with respect to the execution and consequences of the
warrant: “The Respondent’s blatant violations of the TMP’s,
AMCOR’s and the AMCOR partnerships, including Crop Associates-86,
Fourth Amendment rights, moreover, gives TMP standing on behalf
of Crop Associates-86.” In support of that proposition,
- 40 -
petitioner cites Rakas v. Illinois, 439 U.S. at 142 (person need
not have a recognized property interest in a premises in order to
claim the protection of the Fourth Amendment with respect to use
of the premises).
Petitioner does not have standing to raise Fourth Amendment
claims for a third party. See United States v. Payner, supra at
731 (“a court may not exclude evidence under the Fourth Amendment
unless it finds that an unlawful search or seizure violated the
defendant’s own constitutional rights.” (Emphasis added.)); Rakas
v. Illinois, supra at 133-134 (“Fourth Amendment rights are
personal rights which * * * may not be vicariously asserted.”
(quoting Alderman v. United States, 394 U.S. 165, 174 (1969)).
The legality of a search or seizure may be challenged only by one
who has a legitimate expectation of privacy in the items seized
or the area searched. See United States v. Padilla, 508 U.S. 77,
82 (1993) (per curiam); United States v. Sarkisian, 197 F.3d 966(1986) (9th Cir. 1999). On brief, petitioner states:
“[R]espondent’s violations were committed against the targets in
their capacities as representatives of Crop Associates - 1986 and
are, therefore, claims of the petitioner/parties.” Petitioner is
making a claim on behalf of the partnership.9 We assume that a
partnership has standing to raise a Fourth Amendment claim with
9
We do not consider any Fourth Amendment claim that
petitioner may have separate and apart from the partnership’s
claim.
- 41 -
regard to partnership property. See, e.g., In re Subpoena Duces
Tecum, 81 F. Supp. 418 (N.D. Cal. 1948) (partnership was able to
claim Fourth Amendment rights); cf. Fleming v. Montgomery Ward &
Co., 114 F.2d 384, 387 (7th Cir. 1940) (“corporation is entitled
* * * to the protection of the Fourth Amendment against
unreasonable searches and seizures of its papers.”). The
expectation of privacy in a commercial setting is less than in a
residential setting. See Minnesota v. Carter, 525 U.S. 83, 89
(1998); New York v. Burger, 482 U.S. 691, 700 (1987) (the
“expectation of privacy in commercial premises * * * is different
from, and indeed less than, a similar expectation in an
individual’s home.”). Petitioner has not established that the
partnership had any expectation of privacy with respect to
AMCOR’s premises, let alone a legitimate expectation. See United
States v. Padilla, supra. As a result, petitioner has not
established that he, on behalf of the partnership, has Fourth
Amendment standing to challenge the search of AMCOR’s premises.
In any event, petitioner has failed to prove that any
partnership books and records were seized pursuant to the
warrant. Rule 41 of the Federal Rules of Criminal Procedure
addresses search and seizure. Fed. R. Crim. P. 41(d) provides:
(d) Execution and Return With Inventory. The officer
taking property under the warrant shall give to the
person from whom or from whose premises the property
was taken a copy of the warrant and a receipt for the
property taken or shall leave the copy and receipt at
the place from which the property was taken. The
- 42 -
return shall be made promptly and shall be accompanied
by a written inventory of any property taken. The
inventory shall be made in the presence of the
applicant for the warrant and the person from whose
possession or premises the property was taken, if they
are present, or in the presence of at least one
credible person other than the applicant for the
warrant or the person from whose possession or premises
the property was taken, and shall be verified by the
officer. The federal magistrate judge shall upon
request deliver a copy of the inventory to the person
from whom or from whose premises the property was taken
and to the applicant for the warrant.
An employee of respondent’s made a detailed inventory of the
items seized pursuant to the warrant (the inventory). Fed. R.
Crim. P. 41(d) requires that, upon request, the Federal
magistrate shall deliver a copy of such inventory to the person
from whom or from whose premises the property was taken. We
assume that person to be AMCOR, with whom petitioner was closely
related (petitioner describes himself as an “AMCOR principal”).
On brief, petitioner states that the inventory was filed under
seal. Even if that were so, petitioner has failed to show any
effort to unseal the inventory and produce it in support of
petitioner’s claim that partnership books and records were seized
pursuant to the warrant. Petitioner does not argue that the
inventory would fail to show whether or not partnership books and
records were seized pursuant to the warrant. Petitioner’s
failure to produce the inventory or any other evidence that
partnership books and records were seized pursuant to the warrant
leads to the inference that either such evidence does not exist
- 43 -
or would be negative to petitioner. Wichita Terminal Elevator
Co. v. Commissioner, 6 T.C. 1158, 1165 (1946)(“the failure of a
party to introduce evidence within his possession and which, if
true, would be favorable to him, gives rise to the presumption
that if produced it would be unfavorable”), affd. 162 F.2d 513(10th Cir. 1947). We find that no partnership books and records
were seized pursuant to the warrant. Petitioner has failed to
show how, on account of the execution of the warrant and the
retention of any items seized pursuant to the warrant, he has
been disadvantaged in prosecuting the petition in this case.
Petitioner’s complaint with respect to respondent’s alleged
seizure and extended retention of vital business books and
records pursuant to an illegal search warrant fails to establish
any ground on which to base any sanction of respondent in this
case.
X. “Misrepresentation of the status and duration of a related
grand jury investigation in a manner that seriously impeded
the civil tax litigation.”
In June 1990, acting on a recommendation of respondent, the
Department of Justice (the Department) commenced a grand jury
investigation of petitioner, Messrs. Schreiber and Wright, and
two others in connection with the operation of a fraudulent tax
shelter (the grand jury investigation). On March 1, 1993, the
Department declined prosecution of the subjects of the grand jury
investigation for the reasons set forth in our findings of fact.
- 44 -
In petitioner’s memorandum, petitioner avers that, because of
inactivity, “for all intent and purpose”, the grand jury
investigation terminated on September 1, 1991. Petitioner
complains:
Thus, by withholding the fact of the termination of the
grand jury’s investigation, the government delayed the
progress of these civil proceedings for over two years;
AMCOR’s seized documents remained under lock and key;
and TMP was denied access to information possessed by
AMCOR’s principals who, unwittingly, believed they were
still under criminal investigation and feared,
appropriately, waiving their rights against self-
incrimination.
* * * * * * *
Most importantly, but for the delay, two central
witnesses for TMP who are now dead would have been
available. George Schreiber, the general partners
[sic] who had overall responsibility for the
partnerships’ farming operations, and who was a target
of the grand jury investigation, died in August, 1991.
* * * Carl Hansen, an employee of AMCOR who was
directly and significantly involved in the farming
operations, died in February, 1993. * * *
As a remedy, petitioner asks that the case be dismissed.
Petitioner bases his averment that the grand jury
investigation terminated on September 1, 1991, on two proposed
findings of fact:10
10
Those are petitioner’s proposed findings 85 and 86.
Petitioner refers to proposed findings 86 and 87; 87 is as
follows: “By June 1, 1991, Exam’s administrative files were
transferred to the Office of District Counsel, Laguna Niguel, and
the AMCOR Civil Tax Force headed by Group Manager Silverman was
terminated." (Ref. to record omitted.) We assume that the
reference to proposed finding 87 was supposed to be to proposed
finding 85.
- 45 -
September 1, 1991, was the last time evidence was
presented to the grand jury investigating the
principals of AMCOR. [Ref. to record omitted.]
Between September, 1991, and March 1, 1993, there was
no communication between the respondent and the
Department of Justice on the issue of whether the
criminal cases would be prosecuted; this was an
abnormally long passage of time. [Ref. to record
omitted.]
Petitioner offers the testimony of William Shipley, Regional
Counsel, Western Region, in support of the two proposed findings.
Mr. Shipley did not testify as to the date of the last meeting of
the grand jury, and he simply said that he was unaware of any
grand jury activity after September 1991. Petitioner has failed
to show that Mr. Shipley would have been privy to the
Department’s progress with the grand jury. Further, petitioner’s
references in support of his second proposed finding do not
support such a finding as to a lack of communication.
Mr. Shipley did testify that more than 1 year passed from
respondent’s submission of material to the Department and the
Department’s response. He could not, however, explain the
reasons for that delay. Petitioner has failed to prove that the
grand jury investigation terminated on September 1, 1991. He has
failed to prove that there was undue delay in terminating the
grand jury. Moreover, petitioner has failed to prove that the
grand jury investigation was unfounded. The testimony of
respondent’s agents, in particular, George Martin, and Steve
Sterquell, leads us to believe that respondent’s suspicions of
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fraud and the Department’s presentation to a grand jury were well
founded, no matter what the outcome.
Moreover, we fail to see any prejudice in connection with
Mr. Schreiber’s death in August 1991, 1 month before petitioner
claims the grand jury investigation ended. Also, although
petitioner proposes as a fact that Mr. Hansen is dead, he
provided no reference to any evidence in support of that proposed
finding, nor did he propose a finding that Mr. Hansen was even a
subject of the grand jury investigation. Finally, petitioner
alleges that the grand jury investigation deprived petitioner of
access to items seized pursuant to the warrant. Petitioner has
failed to prove that any of those items seized were the
partnership’s books and records.
Petitioner’s complaint with respect to respondent’s alleged
misrepresentation of the status and duration of a related grand
jury investigation fails to establish any ground on which to base
any sanction of respondent in this case.
XI. "Improper dissemination of grand jury materials."
In petitioner’s memorandum, he states: “Because of
Respondent’s attorney’s laxity, grand jury documents were
disseminated to unauthorized persons, including attorney-members
of the AMCOR Litigation Team and Special Agent Goolkasian.”
Petitioner proposes the following finding of fact:
The documents which were improperly disclosed to the
Respondent in violation of Rule 6(e) of the Federal
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Rules of Criminal Procedure included, Department of
Justice attorney's review notes and letters, agreements
executed by the AMCOR partnerships, letters, promissory
notes, leases, a two-page letter to William K. Shipley,
Deputy Regional Counsel, Internal Revenue Service, from
Stanley F. Krysa, Director of the Tax Division's
Criminal Enforcement Section, dated March 1, 1993 (EX
17-P) and fourteen pages of an internal Department of
Justice Tax Division Memorandum ("DOJ Memo") prepared
by Ronald A. Cimino, Stanley F. Krysa and James A.
Bruton. (EX 90-P)
Rule 6(e) of the Federal Rules of Criminal Procedure (Fed.
R. Crim. P. 6(e)) sets forth the general requirement of secrecy
for grand jury proceedings. Where respondent has obtained and
used grand jury materials in violation of Fed. R. Crim. P. 6(e),
the Court in one instance has sanctioned respondent. Cohen v.
Commissioner,42 T.C.M. (CCH) 312, 1981 T.C.M. (P-H) par. 81,901
(exclusion of certain evidence and shifting burden of going
forward with evidence). We did so where such sanctions were
appropriate as a deterrent to future unlawful conduct. Compare
Cohen v. Commissioner, id., with Kluger v. Commissioner, 83 T.C.
309 (1984) (suppression of materials inappropriate when obtained
in good faith regardless of whether Fed. R. Crim. P. 6(e) order
was proper).
In our findings of fact, we have described the motion for
sanctions, made by the petitioning partners on July 22, 1994.
The petitioning partners moved for sanctions based, in part, on a
claim of breaches of grand jury secrecy. We denied the motion
for sanctions. In doing so, we stated that, except with respect
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to the two items identified in petitioner’s proposed finding of
fact as Exhibit 17-P and the Department of Justice memorandum, we
were not convinced that any violations of Fed. R. Crim. P. 6(e)
had occurred and, even if they did, the petitioning partners had
failed to link such violations to the matters placed in issue in
these cases. We concluded: “On the facts before us, we do not
think that exclusion of evidence or dismissal of the cases would
serve the interests of justice.” Exhibit 17-P and the Department
of Justice memorandum (and certain other items) were the subject
of Ballas v. United States (In re Grand Jury Proceedings), 62
F.3d 1175 (9th Cir. 1995), described supra note 2. In Ballas,
the Court of Appeals for the Ninth Circuit did not disturb the
holding of the District Court “that only isolated and technical
instances of improper disclosure had occurred.”
We are unsure whether petitioner is bringing to our
attention any items that were not previously considered by us in
addressing the motion for sanctions or by the Court of Appeals
for the Ninth Circuit in Ballas. In any event, petitioner has
failed to show any link between any Fed. R. Crim. P. 6(e)
violations and the partnership items at issue in this case. In
particular, he has failed to show that any grand jury materials
were improperly relied on by respondent in preparation for the
trial in this case.
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Petitioner’s complaint with respect to respondent’s alleged
improper dissemination of grand jury materials fails to establish
any ground on which to base any sanction of respondent in this
case.
XII. ”Recalcitrance during discovery, resulting in abnormal
prejudicial delay” and “Obstreperousness and stonewalling
during the hearing of this matter, causing additional
unwarranted delay, court time and costs.”
In petitioner’s memorandum, he states:
Respondent’s counsel throughout the discovery
stage of these proceedings had repeatedly attempted to
prevent the TMP from discovering the full extent of
Respondent’s misconduct. Later, Respondent attempted
to thwart the TMP, in presenting the misconduct to the
Court.
From June 1990, when the first Tax Court petitions
were filed, to the middle of 1994, Respondent failed to
comply with discovery requests for answers to
interrogatories and requests for documents, eventually
resulting in sanctions being imposed. (Finding 147.)
Respondent’s deliberate attempts to obstruct TMP
from learning the truth of his agent’s misconduct
carried over to an attempt to hamper TMP’s presentation
of the misconduct in the hearing of this motion.
Respondent refused to stipulate to facts presented to
him, which were proven during the hearing, causing
further needless trial time and further expense to the
TMP.
Then, in the hearing, Respondent allowed false and
misleading testimony to be introduced and used as the
court’s basis for rulings. (Finding 148.)
Petitioner’s argument in support of his final two complaints
contains a hodgepodge of claims, some of which we have previously
disposed of and the remainder of which are meritless.
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Petitioner first complains of respondent’s attempts to
prevent or thwart petitioner’s discovery. Petitioner has failed
to support that complaint with any proposed findings of fact.
Petitioner next complains of respondent’s failure to comply with
requests for discovery from June 1990 through the middle of 1994.
By the motion for sanctions, on July 22, 1994, the petitioning
partners moved for sanctions on account of alleged discovery
abuses and violations by respondent. We denied the motion for
sanctions in its entirety. Petitioner’s proposed finding of fact
in support of this claim does not bring to our attention anything
new. Petitioner’s complaints that respondent hampered
petitioner’s presentation in the hearing and failed to stipulate
facts in anticipation of the hearing are also unsupported by the
record.
Petitioner’s final claim, that, during the hearing,
respondent introduced false and misleading testimony, is
supported by the following proposed finding of fact: “Respondent
allowed false and misleading testimony from Sterquell to be
introduced.” In support of that proposed finding of fact,
petitioner’s only reference to the record is a reference to
petitioner’s motion, made during the hearing, to strike testimony
(of Mr. Sterquell) and reconsider ruling that privilege was
waived (motion to strike). We denied the motion to strike.
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We did so, in part, on the basis that, if Mr. Sterquell’s
testimony were false, then it was petitioner’s task to impeach
Mr. Sterquell. We found that petitioner had an adequate
opportunity to impeach Mr. Sterquell, by cross-examination or
otherwise. We concluded our order denying the motion to strike
by rejecting petitioner’s broad claim of misconduct by
respondent. Petitioner has failed to show any misconduct by
respondent in connection with the testimony of Mr. Sterquell.
Petitioner’s complaints with respect to respondent’s alleged
discovery abuses or conduct during the hearing fail to establish
any ground on which to base any sanction of respondent in this
case. Indeed, it is appropriate to repeat here the remark we
made in the course of the trial on the merits in this case, which
followed the hearing. In our order dated January 7, 2000, we
stated:
Petitioners also make various claims concerning
“stonewalling” by respondent. Petitioners have made
similar claims throughout this litigation, since the
appearance of petitioners’ present counsel. In our
order of December 9, 1999, we rejected petitioners’
characterization of respondent’s behavior in this case
as “stonewalling”. Indeed, we stated: “It is
petitioners who have repeatedly asked, both formally
and informally, for continuances.” Again, we reject
petitioners’ characterization of respondent’s behavior
as stonewalling. Indeed, petitioners’ claim of
respondent’s tardy response, discussed above, seems to
us to have such little merit that we caution
petitioners’ counsel to be aware of section 6673(a)(2)
(“Counsel’s liability for excessive costs.”).
XIII. Conclusion
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We have rejected every ground set forth by petitioner in
support of the motion. We do not find that respondent’s actions
during the course of his examination of the 1986 partnership
return or during the course of this case prejudiced petitioner in
presenting his case. With respect to respondent’s examination of
the 1986 partnership return, respondent issued the FPAA within
the statutory period. We have set forth in detail the major
procedural steps of this case from the petition to the motion.
The initial delay was on respondent’s motion, but the petitioning
partners were also the authors of motions to continue or motions
that otherwise delayed the proceedings. There have been numerous
participating partners during the intervening 10 years, and
petitioner waited until May 1999 to ask for leave to intervene.11
Blame (if any) for the time it took to proceed to the present
posture cannot be laid only at the feet of respondent.
Petitioner also claims that the delay will cost him
additional interest, which we should abate. In Dixon v.
Commissioner, T.C. Memo. 1999-101, the Court denied time-
sensitive additions to tax for negligence under sections
6653(a)(2) and 6653(a)(1)(B) and increased interest under section
11
Petitioner says that he could not participate in this
proceeding during the time he was under criminal investigation.
The grand jury investigating petitioner concluded by Mar. 1,
1993. In his motion to intervene, petitioner claims that,
thereafter, he believed that the interests of the partners was
being adequately represented by counsel for the petitioning and
participating partners.
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6621(c) as a sanction against the IRS for its district counsel’s
misconduct in the trial of the test cases. The Court’s sanction
was based on its finding that the IRS’ misconduct in the trial of
the test cases had caused a substantial delay in resolution of
the cases. Id. In the current case, there are no time-sensitive
additions to tax or increased interest at issue. A change in the
tax liability of a partner to reflect properly the treatment of a
partnership item under subchapter C is made through a
computational adjustment. See sec. 6231(a)(6). A computational
adjustment includes any interest due with respect to any
underpayment attributable to adjustments to reflect properly the
treatment of partnership items. See sec. 301.6231(a)(6)-1T(b),
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790, 6791
(March 5, 1987). Such interest, however, is not a partnership
item. See sec. 301.6231(a)(3)-1, Proced. & Admin. Regs. We have
no jurisdiction in a partnership proceeding to abate interest.
See sec. 6226(f). In certain cases, Congress has provided for
the abatement of interest. See sec. 6404(i) (establishing
jurisdiction in Tax Court to review denials of requests to abate
interest in certain cases). The prerequisites of section 6404(i)
have not here been met.
Therefore, we shall deny the motion in its entirety.
An appropriate order
will be issued.