DocketNumber: Docket Nos. 18009-81, 16224-82, 18017-82, 18448-82, 26377-82, 5803-88
Citation Numbers: 99 T.C. 342, 1992 U.S. Tax Ct. LEXIS 73, 99 T.C. No. 19
Judges: Gerber
Filed Date: 9/28/1992
Status: Precedential
Modified Date: 1/13/2023
*73
P's contend that information gathered by the U.S. attorney (USA) in anticipation of grand jury presentment becomes "grand jury matter" protected by grand jury secrecy requirements. More specifically, P's argue that their identities were discovered through the grand jury process and that R's determinations are tainted with improperly obtained grand jury matter. P's became involved in a tax scheme promoted by lawyer B. R conducted an administrative criminal investigation and recommended prosecution of B for preparing false or fraudulent 1972 and 1973 returns for taxpayers. The Department of Justice (DJ) authorized USA to use the grand jury to determine whether prosecution was warranted. USA sent out R's agents to determine whether B was continuing to prepare false returns for others. After R's agents reported that B's activity continued, USA sought authorization from DJ to expand the investigation of B to subsequent years. R would not agree to the expansion, and prosecution of B for 1972 and 1973 was declined by USA. During this period no grand jury subpoenas were issued, and nothing was presented to a grand jury concerning B. Subsequently, *74 information about B's activity in later years was presented to a grand jury. During the criminal investigation, R's civil examiners, in the normal course, were auditing returns of B's clients. Civil examiners were able to identify B's clients through existing internal records of R. R's civil and criminal divisions worked separately and apart, but matters were coordinated between them. R did not identify B's clients for civil purposes by means of any matter which had been presented to the grand jury. Some of the information accumulated during USA's consideration of whether to prosecute for 1972 and 1973 may have been used by R in the conduct of the civil examinations. L's 1977 return was filed by B, who held a valid power of attorney from L. B signed L's name to the return and B's address was shown for L. R sent L's refund check to B. L knew that B was filing returns, but did not know what B had reported to R. L now contends that the 1977 return is not his return.
*343 OPINION
Gerber,
Petitioners were part of a large litigation project for which test cases were tried and the issues addressed in a Memorandum Opinion of this Court,
*344 In this opinion we consider whether respondent's agents violated the secrecy requirements of
A second issue in this case involves the question of whether petitioner Salvador A. Lombardo (petitioner Lombardo or Mr. Lombardo) filed a 1977 return. All other issues have been resolved by the parties or by order(s) of this Court. Each of the petitioners herein resided in California at the time of the filing of their petitions.
These consolidated cases involve several sets of petitioners, each of whom was involved in a tax scheme promoted by a law firm known as Berg & Allen. The taxable years before the Court in these cases are 1975 through 1980. Some*77 of the tax consequences of the scheme were decided as part of several test cases as set forth by an April 1990 Memorandum Opinion which addressed a substantive and two procedural issues.
During the years 1977 through 1981, petitioners engaged Berg & Allen to prepare their income tax returns * * * [and a presentation was made to petitioners] outlining an investment plan * * * [to] enable petitioners to recover large amounts of taxes previously paid with respect to prior years' returns. * * * petitioners invested in various master recording limited partnerships. Some petitioners wrote personal checks payable for their cash investment. Petitioners also executed nonrecourse promissory notes. * * * the personal checks were not cashed * * * [and] It was understood by petitioners [that] the partnership investment would be funded by the tax refunds generated by the credits and deductions claimed from the investment. * * *
* * * the individual returns and claims for refund were based upon improper deductions and credits.
All the individual*78 returns and claims for refund reflected petitioners' names c/o Berg & Allen with the address of the Firm. * * * When the refund checks were received by Berg and Allen, petitioners were contacted and advised of the receipt of the refund. In some instances petitioners endorsed the refund checks. In other instances the Firm signed petitioners' names or stamped the back of the check with the Firm's name. * * * The Firm then applied the funds to pay petitioners' investment and tax *345 preparation fees. A Firm check for the balance was issued to each petitioner. * * *
The taxpayers in
*79 Following the withdrawal of petitioner Lombardo's attorney, due to a "conflict of interest", 3 one of the petitioners in these consolidated cases was given additional time to show cause. No adequate showing was made, and the orders to show cause were made absolute in that the substantive issue decided in
*80 These cases were set for trial at the session scheduled for Los Angeles, California (at Pasadena), commencing September 23, 1991. Petitioners, at that juncture, moved to vacate the show cause orders which had been made absolute. After oral argument on behalf of petitioners with respect to the possibility of
Petitioners argue that a list of clients' names (from which petitioners allege that respondent identified them and began civil examinations) was grand jury matter 5 which was wrongfully disclosed and used for civil purposes. If we agree with petitioners, then we must consider whether a sanction should be employed and, if so, which sanction would be appropriate under the circumstances.
Petitioners structure their argument beginning with the threshold legal question of whether the list of names (which included the identities of petitioners herein) was, by definition, grand jury matter. Respondent attempts to preempt that question by arguing that the record reflects that the list referred to by petitioners was not used by respondent's*82 civil auditors to identify petitioners for purposes of examination.
If the list was used by respondent's civil auditors to identify petitioners, we must determine whether the list was grand jury matter. Literally,
On December 11, 1974, respondent's Criminal Investigation Division (CID) referred a recommendation that Charles Maxwell Berg (Attorney Berg) be prosecuted for violations of section 7206(2) 6 for 1972 and 1973 for review by the Office of Chief Counsel for the Internal Revenue Service (Counsel). The investigation had been conducted principally by Special Agent Michael Berry (Agent Berry) and focused upon Attorney Berg's alleged preparation of other taxpayers' returns and whether Attorney Berg claimed false and fraudulent deductions regarding same. The report contained the conclusion that Attorney Berg had fabricated deductions for taxpayers in exchange for about 10 percent of the refund that resulted from the deductions. Agent Berry's investigation was administrative and did not involve the grand jury process. Agent Berry's report contained the recommendation, however, that various individuals be brought before the grand jury regarding the false*84 preparation of their returns by Attorney Berg.
Counsel, on October 30, 1975, referred CID's recommendation to the Tax Division of the Department of Justice (DJ) for prosecution. Although there was disagreement amongst reviewers at DJ as to the prospects for a successful prosecution, Attorney Berg's case was forwarded, by a letter dated *348 April 13, 1976, to the U.S. attorney for the Central District of California (USA) with the following recommendation:
Because of problems in this case a decision has not yet been made as to whether or not Mr. Berg should be indicted. The case is being transmitted to you with the request that the witnesses be tested before the grand jury. Final decision as to whether or not Mr. Berg should be prosecuted is left to your discretion.
Assistant U.S. Attorney Jonathan David Rapore*85 (AUSA Rapore) was first assigned to handle Attorney Berg's case. As of August 9, 1976, no final decision had been made by AUSA Rapore as to whether to recommend that Attorney Berg be indicted. During September 1977, AUSA Rapore stated in a memorandum to the file that Attorney Berg should be prosecuted and he also proposed use of the grand jury to develop the case against Attorney Berg. During September 1977, Attorney Berg's case was reassigned from AUSA Rapore to Assistant U.S. Attorney Steven Kramer (AUSA Kramer).
Subsequent to his assignment of the case, AUSA Kramer requested the assistance of an agent of respondent in the handling of Attorney Berg's case. Agent Berry was not available and Special Agent John Reimer (Agent Reimer) was assigned to assist AUSA Kramer. During April 1978, Agent Reimer met with AUSA Kramer to discuss DJ's recommendation regarding the prosecution of Attorney Berg for the 1972 and 1973 years. AUSA Kramer asked Agent Reimer to determine if Attorney Berg continued to prepare "fraudulent" Federal income tax returns for clients. Based upon that inquiry, Agent Reimer went to Internal Revenue Service records and determined that Attorney Berg continued*86 to be a return preparer. After locating records indicating that Attorney Berg had prepared returns for clients' taxable years subsequent to 1973, Agent Reimer obtained (from internal sources) about 50 returns which reflected (in Agent Reimer's opinion) that Attorney Berg continued to prepare returns with inflated deductions for clients' 1974 through 1977 tax years, but mostly for 1976 or 1977.
Based upon the above analysis, Agent Reimer selected about 10 or 15 of Attorney Berg's clients and interviewed them at their homes. Agent Reimer did not serve subpoenas or threaten to serve subpoenas on any of these individuals. 7*349 Many of the interviewees would not discuss the matter with Agent Reimer and told him to contact Attorney Berg. Agent Reimer put together a summary of his findings and then visited AUSA Kramer to discuss Attorney Berg's case. AUSA Kramer felt that there was potential for a successful prosecution of the more current years and he decided to attempt to obtain authorization to expand the investigation to the 1974 through 1977 years. AUSA Kramer, on February 28, 1979, wrote to DJ for authorization to expand the 1972-73 investigation to include 1974 through*87 1977. In a June 26, 1979, letter to DJ, AUSA Kramer inquired about the status of the request in his February 28, 1979, letter. In an August 30, 1979, letter AUSA Kramer advised DJ that the USA's office had decided not to prosecute Attorney Berg for the 1972 and 1973 taxable years and that Counsel's office was opposed to extending Attorney Berg's case to the 1974 through 1977 years. At this point, it appears that DJ declined to expand Attorney Berg's investigation to the 1974 through 1977 years. In that same August 30, 1979, letter AUSA Kramer urged the Internal Revenue Service to pursue its investigation of Attorney Berg for the years 1974 through 1978. Thereafter, AUSA Kramer returned the 1972-73 investigation files to respondent.
AUSA Kramer did not issue or cause the issuance of grand jury subpoenas with respect to the investigation of Attorney Berg's 1972 or 1973 tax-related activities. Agent Reimer did not serve grand jury subpoenas*88 or appear before a grand jury regarding Attorney Berg's 1972-73 criminal investigation. Through the end of 1979, no testimony or documents were presented to a grand jury concerning the investigation of Attorney Berg for the 1972-73 taxable years.
Some of the correspondence and memoranda of Agent Reimer used the expression "dismissed before indictment" in referring to the results of the 1972-73 criminal investigation of Attorney Berg. Agent Reimer intended to express that criminal prosecution of Attorney Berg for the 1972 and 1973 tax years had been declined by DJ or AUSA Kramer. AUSA Kramer and Agent Reimer, in the correspondence related to the seeking of authorization from DJ to expand the 1972-73 case to the 1974-77 years, used the expression or terms "extension [or expansion] of the Grand Jury." AUSA Kramer *350 and Agent Reimer used that language in connection with the request to extend the 1972-73 investigation to later years.
After AUSA Kramer declined the 1972-73 case, Agent Reimer, during November 1979, wrote a report recommending that subsequent years be investigated for criminal prosecution. Agent Reimer's involvement with respondent's criminal investigation of*89 Attorney Berg concluded after November 1979, with the exception that he participated in the execution of a search warrant on the premises of Berg & Allen on September 3, 1981. On December 5, 1979, CID sent a memorandum to the Examination Division requesting that examination of returns prepared by Attorney Berg be discontinued and held in "suspense".
Donald K. Halper (Attorney Halper) was an attorney who was manager of Berg & Allen's tax department from February 1979 through August 1979. Prior to that time, Attorney Halper had been employed as an attorney for the Veterans' Administration and the Internal Revenue Service. Attorney Halper invested in a tax shelter being promoted by Berg & Allen.
During his employment with Berg & Allen, Attorney Halper became concerned about the terms of powers of attorney executed by clients and the practice of Berg & Allen clerical employees endorsing clients' Federal tax refund checks and depositing them in Berg & Allen's bank account. Thereafter, during August 1979, Attorney Halper's employment with Berg & Allen concluded. Attorney Halper went to an Internal Revenue Service office and requested that his tax return be amended to remove the tax*90 shelter promoted by Berg & Allen. Attorney Halper also offered to become an informant to respondent in connection with the activities of Attorney Berg.
Attorney Halper's contact with respondent was voluntary, and he had not received a subpoena or summons during 1979. Attorney Halper's contact with respondent was not brought to AUSA Kramer's attention during his consideration of whether to prosecute Attorney Berg for the 1972 and 1973 tax years. Attorney Halper submitted an Application for Reward for Original Information on or about October 23, 1979, in connection with his assistance to respondent regarding Attorney Berg. Attorney Halper testified before the grand *351 jury (
Based upon the information developed by Agent Reimer, the investigation of Attorney Berg was assigned to Special Agent Eric Critchfield (Agent Critchfield) on November 30, 1979. Late in 1979, CID requested that all of Berg & Allen's clients' returns under civil audit be forwarded to CID. Special Agent Robert Hessler (Agent Hessler), during February 1980, was also assigned to assist Agent Critchfield with interviews of these clients, *91 and eventually Agent Hessler took over the Attorney Berg investigation. Agent Hessler continued to request tax returns of taxpayers whose returns had been prepared by Attorney Berg and he interviewed Attorney Halper. During June 1980, Agent Hessler requested that he be permitted to recommend that a grand jury be used to investigate Attorney Berg because the clients were unwilling to provide information to Agent Hessler. Agent Hessler's supervisor refused the first request to recommend use of a grand jury investigation regarding Attorney Berg.
By a letter dated May 27, 1981, the office of the USA informed respondent that an investigation of Attorney Berg had uncovered possible violations of 18 U.S.C. (title 18), and requested respondent's joint participation in an investigation (of title 18 and 26 U.S.C. (title 26) violations) of Attorney Berg and his law firm by means of a grand jury. Respondent refused and, instead, requested use of a search warrant to seize Berg & Allen's books and records. The search warrant was approved and issued, and on September 3, 1981, Berg & Allen's books and records were seized. In connection with that seizure, CID obtained the identities of Berg*92 & Allen clients. The names of those clients were, at some point, made into a list. Agent Hessler, during September 1981, became involved in assisting the USA in the grand jury investigation (
On September 30, 1981, the USA began a grand jury investigation of Attorney Berg. On October 28, 1981, the USA again requested the participation of respondent in a joint title 18 and title 26 investigation of Attorney Berg by means of the grand jury. On December 14, 1981, Counsel recommended to DJ that the criminal tax aspects concerning *352 Attorney Berg be approved. DJ approved that request during February 1982.
During part of the time that respondent's criminal investigators were considering and recommending criminal prosecution of Attorney Berg, respondent's auditors were examining returns of Attorney Berg's clients on a routine and normal basis. Those audits had not been referred by CID or through a special program of respondent. No special projects that focused on Attorney Berg were begun prior to October 1980.
Revenue Agent John Cossentine (Auditor*93 Cossentine) and Revenue Agent Ted Meyer (Auditor Meyer) were separately auditing returns of Attorney Berg's clients during the early part of 1979. Those returns had been assigned to Auditors Cossentine and Meyer through normal procedures or regular channels and not in connection with any criminal investigation of Attorney Berg. Eventually, by January 1980, Auditor Cossentine had about five of Attorney Berg's clients' returns for examination. During the year 1979, Auditor Meyer had been assigned about 10 of these returns. At some point during 1979, Attorney Halper called the office of the Internal Revenue Service and spoke to Auditor Cossentine concerning the audit of Attorney Berg's clients' returns and the activities of Attorney Berg. Attorney Halper was considered an informant concerning Attorney Berg and sought an informant's reward from respondent. Up to this time, neither Auditor Cossentine nor Auditor Meyer was in contact with CID concerning Attorney Berg, and they did not contact CID in advance of conversations with Attorney Halper about Attorney Berg. Subsequent to receiving informant type information from Attorney Halper, during October and December 1979, Auditors*94 Cossentine and Meyer met with and advised a special agent of the information received from Attorney Halper. Those meetings were requested by the auditors. On December 17, 1979, Attorney Halper was interviewed by two special agents concerning Halper's relationship to Attorney Berg and his law firm.
By October 1980, a fully coordinated examination effort to audit returns of clients who had their Federal income tax returns prepared by Berg & Allen was being conducted within respondent's Examination Division. Plans for the project were begun sometime after a January 11, 1980, *353 memorandum from the Chief of the Examination Division notifying the Examination Division that audits of returns prepared by Attorney Berg could be resumed. By July 1980, the Examination Division had about 150 returns under examination. Under the coordinated procedures, a group of tax auditors was assigned solely for the purpose of auditing returns of Berg & Allen clients. Additionally, refunds claimed for Berg & Allen's clients' 1980 tax year were frozen on a national level. The returns of partnerships which were part of the Berg & Allen refund program were also coordinated with this program.
The*95 returns for this coordinated audit program were obtained by the following methods: (1) The most common method was to secure the return for audit by means of a "preparer inventory listing". These listings permitted respondent's auditors access to search for all returns filed by clients of a particular return preparer. (2) Some returns were secured through the "Questionable Preparer Program", which was a service center screening program to identify preparers whose clients generally had overinflated deductions or some other problem. (3) Some of the returns were secured through the "DIF system", under which returns are scored for audit depending on the return's score variation from established statistical norms. (4) Notification to service centers, other than in California, of the Berg & Allen coordinated project also provided some returns for audit. (5) Work on returns had been suspended late in 1979 and the Examination Division sent Attorney Berg's clients' returns to CID. After January 1980, the Examination Division was permitted to resume examining Attorney Berg's clients' returns and CID sent back those returns submitted by the Examination Division and additional returns of*96 Attorney Berg's clients which had been secured by CID. The returns received from CID could have been identified by the Examination Division on the preparer inventory listing and were received by the Examination Division prior to the September 1981 seizure of Attorney Berg's records which gave rise to the so-called client list.
The coordinated program did not have possession or use of a list of clients of Berg & Allen which had been secured by CID in connection with the seizure of Berg & Allen's records during September 1981. Auditors involved with the coordinated program occasionally would be required to request a *354 return from CID. In those instances, the return was sought from CID after auditors discovered a specific Attorney Berg client in the preparer inventory listing. The supervisor of the coordinated audit program worked with Agent Hessler in connection with the project. In that relationship, Agent Hessler was provided with information obtained during the conduct of the civil audits of Attorney Berg's clients for use in the criminal case. In that relationship, however, the supervisor did not receive information, other than returns which were usually requested*97 by the auditors and the multiple filer list, from Agent Hessler or CID. It was respondent's policy that information developed by CID was not provided to the Examination Division.
The multiple filer list was prepared for CID from respondent's computer, and it reflected situations where more than one refund check went to the same address or addressee. On occasion auditors would use the multiple filer list from CID because it identified the location of the return and preparer. Additionally, the multiple filer list was generated by the local service center and could be more quickly generated and obtained than the preparer inventory list, which was a national compilation and took longer to generate and obtain.
Based upon the codes on the returns of petitioners in these cases, they were selected for examination for the following reasons: (1) Regular classification by service center employees; (2) received a high DIF score; (3) relationship to a tax shelter examination; (4) related to a high DIF scored return; (5) related to a preparer project. None of the returns of petitioners in these cases were initially selected by CID.
Petitioner Salvador*98 A. Lombardo first met Attorney Berg during 1978 while Mr. Lombardo was installing two telephones for Attorney Berg. Attorney Berg inquired about Mr. Lombardo's income and suggested that Mr. Lombardo "should get involved in a tax shelter". Mr. Lombardo agreed and engaged Attorney Berg to prepare his 1977 income tax return, and Mr. Lombardo knew that Attorney Berg was filing Mr. Lombardo's income tax returns. On February 24, 1978, Mr. Lombardo signed a power of attorney (Form 2848) authorizing Attorney Berg to represent him before the *355 Internal Revenue Service for Mr. Lombardo's 1975, 1976, 1977, and 1978 tax years. 8 The power of attorney is the standard form authorizing representation of a taxpayer and also lists specific authority to receive refund checks, waive restrictions on assessment and collection, consent to extend the period for assessment, execute a closing agreement under section 7121, and delegate the authority to another representative. In addition to the specific authority printed on the form, Attorney Berg was specifically authorized, by a handwritten statement, to endorse and collect refund checks for Mr. Lombardo.
*99 Mr. Lombardo's 1977 Federal income tax return was filed with the Internal Revenue Service on or before April 15, 1978. Attorney Berg signed or executed the return on behalf of Mr. Lombardo, as reflected by initials next to what purports to be Mr. Lombardo's signature. Mr. Lombardo did not sign the return. The power of attorney signed by Mr. Lombardo was attached to the 1977 return. Mr. Lombardo's 1977 return reflected the address of "C/O Berg, P O Box 2000, BEVERLY HILLSCALIF 90213", which is Attorney Berg's office address. Mr. Lombardo did not file any original 1977 Federal income tax return other than the one filed on his behalf by Attorney Berg. In addition to the 1977 return, Attorney Berg filed amended returns for Mr. Lombardo's 1975 and 1976 taxable years.
Petitioner Lombardo argues that he did not file a 1977 Federal income tax return. Mr. Lombardo does not, however, advise us of the effect that his nonfiling would have on his case. We presume that his failure to file a 1977 return would in some way 9 reduce or obviate the income tax deficiency and additions to tax determined by respondent. *100 More specifically, petitioner Lombardo argues that Attorney Berg was not authorized to sign his name on the 1977 income tax return. Respondent argues that petitioner Lombardo authorized Attorney Berg to represent him and to file various returns in order to generate an income tax refund from several taxable years, including 1977. Further, respondent argues that petitioner, at the time of the filing of the 1977 return, intended to file a return and that after having received the benefit of refunds and the passage of 14 years he should not now be permitted to disavow the filing of his 1977 return. We agree with respondent.
Section 6061 provides that "any return * * * required to be made under any provision of the internal revenue laws or regulations shall be signed in accordance with forms or regulations prescribed by the Secretary." *101 Section 6064 provides that the "fact that an individual's name is signed to a return * * * shall be prima facie evidence for all purposes that the return * * * was actually signed by him."
*357 Petitioner Lombardo agreed to involvement in Attorney Berg's tax refund idea and engaged Attorney Berg to prepare his 1977 and other income tax returns. Mr. Lombardo knew that Attorney Berg was filing Mr. Lombardo's income tax returns. Mr. Lombardo signed a power of attorney (Form 2848) authorizing Attorney*102 Berg, as his attorney in fact, to represent Mr. Lombardo before the Internal Revenue Service for the 1975, 1976, 1977, and 1978 tax years. The power of attorney attached to the return is the standard form for representation listing specific authority to receive refund checks, waive restrictions on assessment and collection, consent to extend the period for assessment, execute a closing agreement under section 7121, and delegate the authority to another representative. In addition to the specific authority printed on the form, Attorney Berg was specifically authorized by a handwritten statement to endorse and collect refund checks for Mr. Lombardo.
Petitioner Lombardo's 1977 return complied with the statutory and regulatory requirements for an agent filing an income tax return on behalf of a taxpayer. Although Mr. Lombardo might not have known what his agent reported to respondent, he received the benefit of that agency (refunds) 10 and should not now be permitted to withdraw the authorization which he had freely given because it has now become disadvantageous. The passage of time (more than 10 years) makes this attempt at withdrawal even more tenuous.
*103 The situation here is analogous to that in
Petitioner Lombardo equates the situation here with those involving unsigned returns. See, e.g.,
We find the case of
Where, as here, a return complete in form, signed in the taxpayer's name by one purporting to have authority and who actually had such authority, was filed, we find no basis for holding that this was no such return as would commence the running of the statute of limitations. * * *
In
We accordingly hold that petitioner Lombardo*105 timely filed a 1977 return.
At the heart of petitioners' argument is the premise that their identities were obtained from grand jury matter without a proper order under
We address the question of whether the pre-grand jury investigative materials concerning Attorney Berg had become grand jury matter within the meaning of
A grand juror, an interpreter, a stenographer, an operator of a recording device, a typist who transcribes recorded testimony, an attorney for the *360 government, or any person to whom disclosure is made under paragraph (3)(A)(ii) of this subdivision shall not disclose matters occurring before the grand jury, except as otherwise provided for in these rules. No obligation of secrecy may be imposed on any person except in accordance with this rule. A knowing violation of
Although this Court does not have subject matter jurisdiction *108 over the disclosure of grand jury matter under
It is a well-established principle that grand jury matter should generally not be disclosed and that the grand jury system requires secrecy.
*110 *361 The question posed in this case focuses upon the meaning of the phrase "matters occurring before the grand jury" within the context of
There is no question that testimony before a grand jury is a "[matter] occurring before the grand jury."
As a matter of law, petitioners ask us to categorize as grand jury matter any documents or information gathered by or on behalf of a U.S. attorney who is authorized and intends to use the grand jury to prosecute. In support of their position, petitioners rely heavily on
Petitioners' approach*113 or proposed definition of grand jury matter does not comport with traditional concepts and is too pervasive to comport with established definitions of grand jury matter. It is axiomatic that if something was intended for use before a grand jury, it could, at some point, become grand jury matter. Even if it were to become grand jury matter, i.e., a matter presented to the grand jury, it may still be disclosed upon a showing that it did not reveal the content of the grand jury proceeding. That is the standard for
The case law, however, leaves us with a somewhat confusing paradigm.
There is an absence of a bright line standard for when investigative materials become grand jury matter. Accordingly, consideration of several cases bearing on these questions is instructive. In one such case, the Circuit Court,
It was held in
The facts in
Additionally, concerning the draft indictment prepared by the U.S. attorney, the Circuit Court, in a footnote in
In another case,
*365 In another case considered by the Court of Appeals for the Third Circuit, it was held that certain invoices and auditor's*119 analyses were grand jury matter because they revealed the contents of the grand jury proceeding no less than the transcript of witnesses' testimony before the grand jury.
In
The circumstances in
Petitioners rely heavily on two cases which involved*123 the release of the identities of potential grand jury witnesses:
The refusing witness' defense rested on the assumption that if the public discovers the identity of a grand jury witness, then the secrecy of the grand jury process has been compromised. In rejecting that position, the Circuit Court noted that although the Government is not entitled to publish the identities of prospective or former grand jury witnesses (citing
Even with the benefit of hindsight, more than 10 years after the grand jury considered whether to indict Attorney Berg, we are unable to conclude that petitioners' identities would have revealed the content*126 of the 1981 grand jury proceeding. Petitioners did not show that any of them testified before the grand jury. Even if they had testified, we fail to see how the disclosure of their identities for purposes of civil tax examination, substantially prior in time to any grand jury proceeding, would reveal anything about or have any effect on the grand jury process. The identities of Attorney Berg's clients were available to respondent's agents in the normal course of business and existed independently of the grand jury process.
Petitioners' argument, from both a factual and legal perspective is, at best, a tenuous 15 one. Factually, the only information that could be in this category would have been developed by the criminal investigators and/or USA during their pre-September 1981 involvement in Attorney Berg's case. The record here supports a finding that some returns secured by CID before September 1981 were sent to the civil *369 auditors. Some of those returns may have been for people considered by Agent Reimer in response to questions from AUSA Kramer regarding the proposed prosecution for the 1972 and 1973 years. The chance that one of those returns was the sole source*127 of the identity of a taxpayer is remote and has not been shown in this record.
*128 Petitioners also placed great emphasis on the terminology used in correspondence and memoranda by employees of respondent and attorneys of the DJ's and USA's offices. The terminology included: "dismissed before indictment" and "extension" or "expansion" of the grand jury. Petitioners contend that the above-quoted terminology proves the existence of the pre-1981 presentment of Attorney Berg's case to a grand jury. Although certain terminology was unartfully used and may be subject to misinterpretation, 16 the record does not support petitioners' contention that Attorney Berg's case had been presented to a grand jury prior to 1981. Individuals who had used the referenced terminology testified and were subjected to cross-examination. Their testimony was credible and fully supports the finding that Attorney Berg's case had not been presented to a grand jury prior to 1981.
*129 In view of the foregoing, we hold that petitioners have not shown, either factually or as a matter of law, that respondent's determination was based upon a matter before the grand jury and subject to the secrecy requirements of
*370 To reflect the foregoing,
1. Cases of the following petitioners are consolidated herewith: Salvador A. Lombardo, docket No. 16224-82; E. Harrison Van O'Linda and Jean C. Van O'Linda, docket No. 18017-82; Albert R. Carter and Ella B. Carter, docket No. 18448-82; Roy M. Axford, docket No. 26377-82; and Cyril E. Davies and Michele N. Davies, docket No. 5803-88.↩
2. The Court also decided that the Commissioner had not improperly utilized grand jury information and that the taxpayers had failed to establish that the Commissioner did not comply with discovery orders or withhold documents in response to discovery.↩
3. The purported conflict of interest was explained in Attorney Wegge's motion for withdrawal as a failure of petitioner Lombardo to pay his share of the "Berg & Allen litigation expense" which conflicted with the rights of petitioners who had paid. Apparently, petitioner Lombardo thereafter agreed to pay and Attorney Wegge entered his appearance. All petitioners herein are represented by Attorney Wegge.↩
4. Although
Accordingly, petitioners were permitted to come forward with respect to the
5. The parties and case commentary interchangeably use the terms "information", "material", and "matter" to describe that which may be protected under the secrecy provisions of
6. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the periods under consideration, and Rule references are to the Tax Court Rules of Practice and Procedure.↩
7. Either grand jury subpoenas or administrative summonses under sec. 7602.↩
8. Petitioners objected to the receipt of Exhibit 123 for identification (along with other similar exhibits) into evidence. This exhibit is the 1977 Federal income tax return filed for petitioner Lombardo. The related exhibits are also income tax returns for the other petitioners in this consolidated proceeding. The objection was tactical in that petitioners argued that they never saw the return before the trial because the returns were filed by Attorney Berg as their purported agent.
After some discussion on the record, the parties stipulated that, as part of the series of exhibits, Exhibit 123 could be received for the limited purpose of specific witnesses' testimony interpreting charge-out sheets which had been attached to various of petitioners' returns by respondent's employees after the returns had been filed. Both parties, on brief, have relied upon Exhibit 123 for proposed findings of fact concerning the issue involving petitioner Lombardo's filing of a 1977 return. We treat the parties' approach on brief as an implicit agreement that Exhibit 123 is to be considered part of the record without limitation upon its use. We note that petitioner Lombardo would have preemptively failed to meet his burden of proof on the issue concerning the filing of the 1977 return, without the return's being in evidence for all purposes. We also note that petitioner Lombardo's argument regarding the 1977 return would have been more difficult to comprehend without the ability to reference Exhibit 123. Finally, we note that the outcome of this issue would be the same whether Exhibit 123 was received for all purposes or not. In either event, petitioner Lombardo failed to show that the return filed was not his or that it was unauthorized.↩
9. Without the deductions claimed on his behalf by Attorney Berg, petitioner Lombardo might have had sufficient prepayment credits which would result in a smaller deficiency or no deficiency.↩
10. It has already been decided in the test case that Berg & Allen clients should be considered to have received refund checks in care of Berg & Allen and negotiated by Berg & Allen.
11. Only one witness indicated that pre-1981 information gathered in connection with the criminal investigative efforts was forwarded to the civil examiners. That witness revealed that some returns secured by CID may have been sent to the Examination Division after CID advised that civil audits could be resumed. There is no direct evidence that those returns provided the identity of a taxpayer who was subseuently audited.↩
12. We make this assumption here because of our understanding that numerous cases involving taxpayers who were involved in Berg & Allen transactions are currently pending in this Court. These consolidated cases are being treated as test cases. To the extent that any of the taxpayers not in these consolidated cases may have been identified for purposes of civil audit from the seized records or client list, the result would be the same.↩
13. Maintaining the confidentiality of grand jury proceedings protects several important interests of the government and of private citizens. First, if preindictment proceedings were conducted publicly, individuals who learned of their possible indictment might flee the jurisdiction or attempt to tamper with the grand jurors or witnesses appearing before them. Persons with information about crimes would be less willing to appear voluntarily and to speak fully and frankly, knowing that the individuals about whom they testify would be aware of that testimony. The rule of secrecy avoids injury to the reputation of those persons accused of crimes whom the grand jury does not indict. Finally, it encourages the grand jurors to investigate suspected crimes without inhibition and to engage in unrestricted deliberations. [
14. The memorialized interview of a witness preliminary to testimony before a grand jury has been held to constitute grand jury material. See, e.g.,
15. We note that at a preliminary hearing petitioners, through their counsel, John Harrison Wegge, argued that there was grand jury involvement concerning Attorney Berg prior to 1981. Based upon those arguments, petitioners claimed that respondent's determinations were tainted. In making these allegations petitioners' counsel stated that he was prepared to offer evidence in support of his arguments. Relying upon these statements, petitioners were permitted to make a showing as to why the orders to show cause which had been made absolute should be vacated.
At trial, petitioners did not advance any probative evidence in support of their position other than the documents with words which could, to a limited degree, be interpreted to indicate that there may have been pre-1981 grand jury activity. Petitioners' counsel used these documents as a "smokescreen" to deflect attention from the testimony of credible witnesses who unconditionally testified that the matter had not been presented to a grand jury. Petitioners' counsel was quick to assert that witnesses and even Government counsel were not truthful, but did not come forward with proof to support his assertions.
We also note that although Attorney Wegge has represented numerous of the taxpayers involved in the Berg & Allen tax matter, he did not bring forward one witness to testify that he or she had appeared before a grand jury concerning Attorney Berg prior to 1981. This would have been a simple and conclusive way to support his assertions, rather than by making unsupported accusations that Government counsel and witnesses were lying.↩
16. On brief, petitioners point out that the Court of Appeals for the Ninth Circuit in its unpublished opinion referenced possible grand jury involvement as follows:
While the tax court's opinion does not specifically address the existence of the 1978/79 grand jury investigation, it does strongly imply the existence of such an investigation. See
Although the referenced language may denote or connote the existence of a grand jury proceeding, the evidence in this record shows that no grand jury proceeding with respect to Attorney Berg occurred prior to September 1981. Petitioners, in their brief, inappropriately argue as though the existence of a grand jury during 1979 had been found by the three-judge Circuit Court panel.↩
Acierno v. Commissioner , 74 T.C.M. 738 ( 1997 )
Karlsson v. Commissioner , 74 T.C.M. 694 ( 1997 )
Herbert C. Elliott v. Commissioner , 113 T.C. No. 7 ( 1999 )
Ford v. Comm'r , 86 T.C.M. 259 ( 2003 )
Ballantyne v. Comm'r , 99 T.C.M. 1523 ( 2010 )
Hartman v. Comm'r , 95 T.C.M. 1448 ( 2008 )
Scenic Trust, Dennis Simpson, Special Trustee, Petitioner(s) ( 2023 )