Alan Michael Berkun ( 2023 )

United States Tax Court
T.C. Memo. 2023-127ALAN MICHAEL BERKUN,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 22550-17. Filed October 23, 2023.
—————
Joseph A. DiRuzzo III and Daniel M. Lader, for petitioner.
Kimberly A. Daigle, Michael K. Foster II, Alexander N. Martini, John T.
Arthur, and Lauren B. Epstein, for respondent.
MEMORANDUM OPINION
URDA, Judge: Petitioner, Alan Michael Berkun, challenges a
notice of deficiency issued by the Internal Revenue Service (IRS) that
determined deficiencies as well as civil fraud penalties under section
6663(a) 1 for his 2001 through 2005 tax years. Before the Court is Mr.
Berkun’s motion to compel production of documents filed on
September 1, 2021, as supplemented on June 14, 2022.
Mr. Berkun seeks to compel the Commissioner of Internal
Revenue (Commissioner) to turn over the complete file from a grand jury
investigation into Mr. Berkun, which the Commissioner obtained in
2019 pursuant to Rule 6(e) of the Federal Rules of Criminal Procedure
(Fed. R. Crim. P. 6(e)). The Commissioner argues that section 6103(a)
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C. (Code or I.R.C.), in effect at all relevant times, and Rule
references are to the Tax Court Rules of Practice and Procedure. We round all
monetary amounts to the nearest dollar.
Served 10/23/23
2
[*2] limits disclosure of these materials and contends that he provided
to Mr. Berkun all materials that fit within one of the exceptions set forth
in section 6103(h)(4). We will deny the motion to compel.
Background
The following facts are derived from the parties’ motion papers,
pleadings, and stipulation of facts, along with the various supporting
declarations and exhibits. They are stated solely for the purpose of
deciding the pending motion to compel and not as findings of fact in this
case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992),
aff’d, 17 F.3d 965 (7th Cir. 1994). Mr. Berkun lived in Florida when he
timely filed his petition, and an appeal in this case would ordinarily lie
to the U.S. Court of Appeals for the Eleventh Circuit. See I.R.C.
§ 7482(b)(1)(A).
I. Mr. Berkun’s Criminal Tax Case
Mr. Berkun is a former attorney and financier with a history of
criminal activity including securities fraud and money laundering. In
2012 he pleaded guilty to filing a false tax return for his 2004 tax year,
receiving a sentence of 12 months’ imprisonment and restitution to the
IRS of $390,590.
Mr. Berkun’s tax fraud conviction stemmed from an investigation
by the IRS Criminal Investigation Division (CID). Mr. Berkun initially
caught the IRS’s attention during its scrutiny of two other parties, with
the IRS eventually expanding its investigation to examine Mr. Berkun’s
2001 through 2005 returns.
The IRS referred the matter to the U.S. Attorney’s Office for the
Southern District of Florida, which led to a grand jury investigation. In
2011 the United States filed an information against Mr. Berkun in the
U.S. District Court for the Southern District of Florida (District Court),
charging Mr. Berkun with filing a false tax return for 2004 in violation
of section 7206(1).
The case was transferred to the U.S. District Court for the
Eastern District of New York, where it was consolidated with assorted
other criminal cases pending against Mr. Berkun. He thereafter agreed
to plead guilty to a violation of section 7206(1) for tax year 2004 and to
pay restitution in exchange for the United States’ agreement not to bring
“further criminal charges . . . against [Mr. Berkun] for knowingly and
willfully filing false . . . tax returns for the tax years 2001 through 2005.”
3
[*3] The parties specified that the agreement did not “limit the IRS in
its lawful examination, determination, assessment, or collection of any
taxes, penalties or interest due . . . for any time period covered by this
agreement.”
II. Notice of Deficiency and Tax Court Proceedings
After the conclusion of the criminal proceedings, the IRS began a
civil examination into Mr. Berkun’s 2001 through 2005 tax liabilities.
On August 4, 2017, the IRS issued a notice of deficiency for the years at
issue that determined tax deficiencies totaling $1,918,706 and fraud
penalties under section 6663(a) totaling $1,439,030. Mr. Berkun filed a
timely petition in this Court, challenging both the deficiency and penalty
determinations.
During discovery, the Commissioner sought grand jury materials
from the District Court pursuant to Fed. R. Crim. P. 6(e). On August 27,
2019, the District Court ordered the release of these materials, which
included “those documents and records obtained by grand jury subpoena
and documents prepared by agents and analysts of IRS’s CID, the
Special Agent Report and the evidence exhibited with the Special Agent
Report.” The District Court explicitly recognized that the Commissioner
had demonstrated a “particularized need” for the disclosure and that the
materials “will be restricted by the [nondisclosure] provisions of [section
6103].” The District Court denied Mr. Berkun’s motion for
reconsideration, and the Eleventh Circuit thereafter affirmed the
District Court’s order authorizing disclosure of the grand jury materials.
Mr. Berkun thereafter made both informal and formal discovery
requests for the grand jury materials. Although the Commissioner
provided certain documents, he refused to provide the complete set on
the ground that certain materials constituted third-party returns and
that return information is shielded by section 6103. The Commissioner
also pointed out that the “third-party records include not only the
records of the third-party targets but also records of additional third
parties obtained as part of the third-party targets’ investigation.”
Over nearly two years of motion practice, the parties have refined
their positions. The Commissioner asserts that he has produced all
grand jury materials that “fall within the nondisclosure exceptions in
section 6103(h)(4)(B) and (C), as well as section 6103(e)(1)(C) and (D)
and (e)(7),” including Mr. Berkun’s own returns and return information.
He has also filed with the Court a privilege log describing in general
4
[*4] terms the documents he is withholding. Mr. Berkun responds that
he is entitled to the disclosure of the grand jury materials in their
entirety.
Discussion
I. Discovery Standards
Rule 70(b)(1) permits discovery concerning “any matter not
privileged that is relevant to the subject matter involved in the pending
case.” The party objecting to discovery has the burden of establishing
that the information sought is not relevant or otherwise not
discoverable. See Rosenfeld v. Commissioner, 82 T.C. 105, 112 (1984);
Rutter v. Commissioner, 81 T.C. 937, 948 (1983); Branerton Corp. v.
Commissioner, 64 T.C. 191, 193 (1975). The burden thus belongs to the
Commissioner to demonstrate that section 6103(a) shields the grand
jury materials in dispute.
II. Section 6103
A. General Principles
Section 6103(a) provides that “[r]eturns and return information
shall be confidential” and that “no officer or employee of the United
States” may disclose such information “except as authorized by this
title.” See also Church of Scientology of Cal. v. IRS, 484 U.S. 9, 16
(1987); Mescalero Apache Tribe v. Commissioner, 148 T.C. 291, 294
(2017). Return information is broadly defined to include
a taxpayer’s identity, the nature, source, or amount of his
income, payments, receipts, deductions, exemptions,
credits, assets, liabilities, net worth, tax liability, tax
withheld, deficiencies, overassessments, or tax payments,
whether the taxpayer’s return was, is being, or will be
examined or subject to other investigation or processing, or
any other data, received by, recorded by, prepared by,
furnished to, or collected by the [IRS] with respect to a
return or with respect to the determination of the
existence, or possible existence, of liability (or the amount
thereof) of any person under this title for any tax, penalty,
interest, fine, forfeiture, or other imposition, or offense . . . .
I.R.C. § 6103(b)(2)(A). As the Eleventh Circuit has put it, this definition
encompasses “information that has passed through the IRS.” Ryan v.
5
[*5] United States, 74 F.3d 1161, 1163 (11th Cir. 1996); see also Mallas
v. United States, 993 F.2d 1111, 1118 (4th Cir. 1993) (“Taxpayer
information obtained or prepared by the IRS, therefore, is ‘return
information’ regardless of the person with respect to whom it was
obtained or prepared.”).
B. Section 6103(h)(4)
This case focuses on the authorization for disclosure embodied in
section 6103(h)(4), which provides, in relevant part:
A return or return information may be disclosed in a
Federal or State judicial or administrative proceeding
pertaining to tax administration, but only—
(A) if the taxpayer is a party to the
proceeding, or the proceeding arose out of, or in
connection with, determining the taxpayer’s civil or
criminal liability, or the collection of such civil
liability, in respect of any tax imposed under this
title;
(B) if the treatment of an item reflected on
such return is directly related to the resolution of an
issue in the proceeding; [or]
(C) if such return or return information
directly relates to a transactional relationship
between a person who is a party to the proceeding
and the taxpayer which directly affects the
resolution of an issue in the proceeding . . . .
The Commissioner has argued that he has supplied all grand jury
materials that fit within section 6103(h)(4)(B) and (C), and Mr. Berkun
has cast no doubt on the Commissioner’s representations. 2 We will
accordingly accept the Commissioner’s word.
2 Mr. Berkun contended at one point that “substantially (if not literally) all of
the grand jury materials that would otherwise be subject to default protection under
Section 6103 must be disclosed pursuant to the exception under 26 U.S.C.
§ 6103(h)(4)(B).” The courts of appeals have reached different conclusions on whether
section 6103(h)(4)(B) permits the disclosure of returns only or returns and return
information. Compare United States v. NorCal Tea Party Patriots (In re United States),
6
[*6] Our analysis thus concentrates on section 6103(h)(4)(A);
specifically, whether Mr. Berkun’s case in this Court “arose out of, or in
connection with” determining the civil or criminal tax liabilities of the
third parties in the grand jury proceedings. As we have recently
observed, the phrase “arose . . . in connection with determining the
taxpayer’s civil or criminal liability” is broader than the phrase “arose
out of,” and thus we will look to the former phrase for the outer limit of
the disclosure authorization. Whistleblower 972-17W v. Commissioner,
159 T.C. 1, 13 (2022).
We begin with the word “arose,” which Congress did not define
when it enacted section 6103(h)(4)(A) in 1978. See Revenue Act of 1978,
Pub. L. No. 95-600, § 503, 92 Stat. 2763, 2880. We consider the “term’s
‘ordinary, contemporary, common meaning’ . . . when Congress enacted”
the relevant provision. Food Mktg. Inst. v. Argus Leader Media, 139 S.
Ct. 2356, 2362 (2019) (quoting Perrin v. United States, 444 U.S. 37, 42
(1979)). According to the contemporary edition of Webster’s Third New
International Dictionary at the time, the relevant primary meanings of
“arise” are “to originate from a specified source,” “to come into being,” or
“to become operative.” Arise, Webster’s Third New International
Dictionary (1976).
For its part, “the phrase ‘in connection with’ establishes a
standard that is ‘quite broad,’” Whistleblower 972-17W, 159 T.C. at 15(quoting Azima v. RAK Inv. Auth., 926 F.3d 870, 878 (D.C. Cir. 2019)),
and we have previously interpreted it as meaning “related to,” Adams
Challenge (UK) Ltd. v. Commissioner, 154 T.C. 37, 63 (2020). We have
recognized, however, that “[t]he phrase ‘in connection with’” can also be
read as “essentially ‘indeterminat[e]’ because connections, like relations,
‘“stop nowhere.”’” Maracich v. Spears, 570 U.S. 48, 59–60 (2013)
(quoting N.Y. State Conf. of Blue Cross & Blue Shield Plans v. Travelers
Ins. Co., 514 U.S. 645, 655 (1995)); see also Whistleblower 972-17W, 159
T.C. at 15.
To avoid interpreting the phrase to have “impermissible, ‘near-
infinite breadth,’” Whistleblower 972-17W, 159 T.C. at 18 (quoting FERC
v. Elec. Power Supply Ass’n, 577 U.S. 260, 278 (2016, revised Jan. 28,
2016)), we have looked for a “logical or causal connection” between the
817 F.3d 953, 962 (6th Cir. 2016) (concluding that section 6103(h)(4)(B) permits the
disclosure of returns only), and In re United States, 669 F.3d 1333, 1339–40 (Fed. Cir.
2012) (per curiam) (suggesting the same), with Tavery v. United States, 32 F.3d 1423,
1430 (10th Cir. 1994) (allowing the disclosure of return information under section
6103(h)(4)(B)). The Eleventh Circuit has not spoken to this issue.
7
[*7] earlier proceeding and the IRS’s determination of a taxpayer’s
liability, 3 id. at 17 (quoting John Wyeth & Brother Ltd. v. Cigna Int’l
Corp., 119 F.3d 1070, 1074 (3d Cir. 1997) (Alito, J.)). In so doing, we
keep in mind “the structure of the statute and its other provisions,”
Maracich, 570 U.S. at 60, and “exclude from the scope of section
6103(h)(4)(A) those proceedings that have only a ‘remote relation to’ the
determination of a taxpayer’s liability,” Whistleblower 972-17W, 159
T.C. at 16; see also Maracich, 570 U.S. at 89 (Ginsburg, J., dissenting)
(“[W]hen the Court has sought a limiting principle for similar statutory
language, it has done so to prevent the application of a statute to matters
with ‘only a tenuous, remote, or peripheral connection’ to the statute’s
core purpose.” (quoting N.Y. State Conf. of Blue Cross & Blue Shield
Plans, 514 U.S. at 661)).
III. Analysis
The Commissioner contends that section 6103(a) shields the
remaining grand jury materials because they comprise returns and
return information from (1) the two targets (besides Mr. Berkun) of the
grand jury investigation and (2) other third parties whose information
was obtained as part of the grand jury proceedings. Mr. Berkun argues
that section 6103 does not protect materials acquired by the grand jury,
even those originally obtained as part of the IRS investigation. He
further asserts that section 6103(h)(4)(A) authorizes disclosure of all
grand jury materials because this case arose “in connection with”
determining the criminal tax liability of Mr. Berkun and the two third
parties under investigation. The Commissioner has the better of the
argument, and we will thus deny the motion to compel.
A. Section 6103 Applies to the Grand Jury Material.
As an initial matter, the grand jury materials obtained in 2019
qualify for section 6103 protections and thus can only be disclosed
pursuant to the exceptions enumerated in that statutory regime. The
Code’s broad definition of return information encompasses “any . . . data,
received by, recorded by, prepared by, furnished to, or collected by the
[IRS] with respect to a return or with respect to the determination of the
existence, or possible existence, of liability (or the amount thereof).”
I.R.C. § 6103(b)(2)(A). In other words, return information includes
3 To be clear, the “taxpayer” in this context refers to the person or entity whose
returns and return information are being sought.
8
[*8] “information that has passed through the IRS.” Ryan, 74 F.3d
at 1163; see Mallas, 993 F.2d at 1118.
In this case the District Court authorized the disclosure of grand
jury materials to the IRS under Fed. R. Crim. P. 6(e), specifically
anticipating that the protections of section 6103 would apply to such
materials going forward. Upon transmission of the materials to the IRS,
the protections of section 6103 attached.
Mr. Berkun’s contentions to the contrary miss the mark. He first
asserts that section 6103 does not apply because its terms do not include
disclosure by the grand jury. Mr. Berkun is not seeking disclosure of
materials from the grand jury, however, but from the Commissioner,
who is most certainly covered by the strictures of section 6103.
Mr. Berkun next contends that the protections of section 6103
that originally attached to materials collected as part of the CID
investigation were waived when those materials were given to the grand
jury. This argument focuses on the wrong link in the chain: The critical
inquiry is whether the grand jury materials obtained by the
Commissioner here constitute return information, not whether
protections had attached earlier. 4
B. Section 6103(h)(4)(A) Does Not Authorize Disclosure.
Mr. Berkun argues that, even if the grand jury materials qualify
for the protections of section 6103 as a general matter,
section 6103(h)(4)(A) authorizes disclosure in this proceeding. He
4 We note that there is a split among four of the courts of appeals as to whether
return information loses the protections of section 6103 when it is disclosed as part of
a public judicial proceeding. Compare Mallas, 993 F.3d at 1120 (finding that no
exception exists that would permit the disclosure of return information “simply
because it is otherwise available to the public”), and Rodgers v. Hyatt, 697 F.2d 899,
906 (10th Cir. 1983), with Rowley v. United States, 76 F.3d 796, 801 (6th Cir. 1996)
(“We therefore follow the Ninth Circuit in holding that, once a taxpayer’s return
information becomes part of the public domain . . . , it loses its confidentiality . . . .”),
and Lampert v. United States, 854 F.2d 335, 338 (9th Cir. 1988). We believe that
disclosure of return information as part of a grand jury investigation presents a
markedly different situation given “that the proper functioning of our grand jury
system depends upon the secrecy of grand jury proceedings,” Rehberg v. Paulk, 566
U.S. 356, 374 (2012) (quoting United States v. Sells Eng’g, Inc., 463 U.S. 418, 424
(1983)), and Congress expressly authorized such disclosures in this context, see I.R.C.
§ 6103(h)(2)(A). Although Mr. Berkun suggests that the material also might have been
provided to financial institutions, he fails to develop this argument, and we accordingly
decline to consider it.
9
[*9] premises his argument on the plain text of the disclosure
authorization, asserting that this Tax Court proceeding arose out of the
criminal investigation into Mr. Berkun and in connection with the
concurrent criminal investigation into two third-party targets.
According to Mr. Berkun, this connection is sufficient to require
disclosure of the entire grand jury record.
We begin by revisiting the pertinent text in section 6103(h)(4)(A),
which authorizes disclosure of a taxpayer’s returns or return
information in a judicial proceeding where “the proceeding arose out of,
or in connection with, determining the taxpayer’s civil or criminal
liability.” We first observe that this section limits disclosure to returns
and return information of a taxpayer whose civil or criminal tax liability
is being determined. To put it in layman’s terms, the IRS (or the United
States) must have looked into a taxpayer’s civil or criminal tax liability
before that person’s returns or return information might be subject to
disclosure under this provision.
In this case we have two distinct classes of third parties whose
returns and return information are at issue: (1) the third-party targets
of the IRS’s criminal investigation (and later grand jury investigation)
and (2) the third parties whose returns and return information were
swept up in the course of these investigations. The civil or criminal
liability of the former category was plainly being determined in the
investigations. Third parties in the latter category, on the other hand,
were essentially bystanders whose information was gathered in the
course of determining others’ liabilities. As the records of these third
parties were not obtained in the course of determining their civil or
criminal tax liabilities, section 6103(h)(4)(A) would not operate to
authorize disclosure.
The question remains whether section 6103(h)(4)(A) authorizes
the disclosure of the returns and return information of the third-party
targets. As Mr. Berkun sees it, the “grand jury proceedings ‘arose out
of’ the accomplices’ proceedings in order to investigate [Mr. Berkun’s]
conduct ‘in connection with’ the conduct of the accomplices with respect
to ‘determining [those taxpayers’] civil or criminal liabilit[ies].’”
Mr. Berkun stretches the text of section 6103(h)(4)(A) past its
breaking point. We begin by emphasizing that interpretation of this
provision must account for the structure of the statute and its other
provisions. See, e.g., Maracich, 570 U.S. at 60; Whistleblower 972-17W,
159 T.C. at 16–17. Congress explicitly authorized disclosure where an
10
[*10] item on the return “is directly related to the resolution of an issue
in the proceeding,” I.R.C. § 6103(h)(4)(B), and the disclosure of both
returns and return information where they “directly relate[] to a
transactional relationship between a person who is a party to the
proceeding and the taxpayer which directly affects the resolution of an
issue in the proceeding,” I.R.C. § 6103(h)(4)(C). If we were to credit Mr.
Berkun’s extremely expansive view of section 6103(h)(4)(A), both of
these provisions would seem wholly superfluous. “An interpretation
that renders a statutory provision superfluous should be avoided, since
it would offend ‘the well-settled rule of statutory construction that all
parts of a statute, if at all possible, are to be given effect.’” Rhone-
Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533,
547 (2000) (quoting Weinberger v. Hynson, Westcott & Dunning, Inc., 412
U.S. 609, 633 (1973)).
The connection between the case before us and the investigations
into the third parties’ criminal tax liabilities is tenuous at best. This
case had its origins in a civil examination of Mr. Berkun. Although the
civil examination followed Mr. Berkun’s criminal prosecution per
standard IRS policy, see Mathia v. Commissioner, T.C. Memo. 2009-120,
2009 WL 1471716, at *13 n.29 (“The delay of a civil matter until the
resolution of a related criminal matter is a longstanding policy of the
IRS.”), aff’d, 669 F.3d 1080 (10th Cir. 2012), the examining agent did
not have access to any of the grand jury materials. We struggle to see a
sufficient legal or causal connection when the grand jury materials
played no role in this proceeding.
The absence of connecting ligaments is brought into relief by our
decision in Whistleblower 972-17W. In that case we concluded that the
challenge to a whistleblower award arose “in connection with”
determining the civil or criminal liabilities of three taxpayers and was
therefore within the scope of section 6103(h)(4)(A). Whistleblower 972-
17W, 159 T.C. at 18. We explained that “what the IRS determined with
respect to the target taxpayers and what it collected from those
taxpayers are key inquiries in analyzing the merits of this proceeding.”
Id. at 19. In our case, on the other hand, the IRS’s determination
regarding the civil or criminal liabilities of the third-party targets had
no bearing on the resolution of Mr. Berkun’s 2001 through 2005 tax
liabilities or whether he is liable for the civil fraud penalty.
In an attempt to strengthen the attenuated connection between
this case and the determining of the liabilities of the third-party targets
by relying on the previous investigations into his criminal liabilities, Mr.
11
[*11] Berkun points to an IRS policy in effect at the time the IRS began
its civil examination of his 2001 through 2005 tax returns; namely, that
a civil fraud penalty may not be removed absent IRS area counsel
approval when a taxpayer has been referred for criminal prosecution
regarding the same tax periods. See Internal Revenue Manual
25.1.6.2(8) (Nov. 5, 2014); see also Hull v. Commissioner, T.C. Memo.
2014-36, at *4. Mr. Berkun argues that this policy demonstrates that
this case originated in connection with the previous investigations.
Assuming arguendo that this case arose in connection with the
determining of his criminal tax liabilities, it does not follow that this
case has anything but a remote connection with the determining of the
third parties’ liabilities.
We are likewise unpersuaded by Mr. Berkun’s argument that the
District Court’s order authorizing disclosure of the grand jury materials
demonstrates the necessary connection. According to Mr. Berkun, the
District Court’s conclusion that the Commissioner showed a compelling
and particularized need for the specific grand jury materials (as
required for disclosure under Fed. R. Crim. P. 6(e)), see United States v.
Aisenberg, 358 F.3d 1327, 1348–49 (11th Cir. 2004); United States v.
Gomez, 323 F.3d 1305, 1308 n.4 (11th Cir. 2003), necessarily establishes
that this case arose in relation to the action of determining the third
parties’ liabilities.
Mr. Berkun reads too much into the District Court’s action. The
District Court plainly viewed the grounds for granting disclosure under
Fed. R. Crim. P. 6(e) as distinct from the section 6103(h)(4) inquiry, as
illustrated by its acknowledgment that the section 6103 protection
would continue to apply to the grand jury material disclosed to the
Commissioner.
IV. Conclusion
The Commissioner has established that the grand jury materials
at issue are subject to the protection of section 6103(a). Mr. Berkun has
failed to establish that these materials qualify for any exception to the
general rule of nondisclosure, and we will accordingly deny his motion
to compel, filed on September 1, 2021, and as supplemented on June 14,
2022.
To reflect the foregoing,
An appropriate order will be issued.