Opinion
No. 1:02-CR-46
June 29, 2002
OPINION DENYING DEFENDANTS' MOTION FOR DISCOVERY, FOR SUPPRESSION, AND FOR A GENSER HEARING
Now before the Court are defendants' motion for specific discovery, for Jencks Act discovery and for exculpatory material discovery ("Discovery motion") and defendants' motion to suppress all evidence gathered improperly by the use of a civil administrative summons as a de facto grand jury subpoena ("Suppression motion"). See dkt. #72. Defendants ask the Court to conduct a Genser hearing for the purpose of suppressing all evidence gathered by the use of the contested Form 2039 summonses. See Dkt. #72 at 1-2, ¶ 5 at 4, Exhs. A-E. The government has filed a response (dkt. #75), to which defendants have filed a reply brief (dkt. #79). The Court held a final pretrial conference on June 24, 2002, from 9:00 a.m. to 12:00 p.m., at which time it heard oral argument on defendants' motions. The Court denied defendants' discovery motion, suppression motion, and request for a Genser hearing from the bench, stating that a written opinion would follow.
The Court rejected defendants' reply brief for failure to comply with W.D. L. Crim. R. 47.1(c). See dkt. #85.
A. LEGAL ANALYSIS — SUPPRESSION MOTION
Defendants' suppression motion is premised on their claim that the government improperly used Form 2039 as a de facto grand jury subpoena, improperly collecting information against defendants that may be used in this criminal prosecution. See Brief in Support at 1. Defendants advance five arguments in support of their motion to suppress, none of which has merit.
1. Defective Indictment
Defendants contend that they face a defective indictment. See Suppression motion ¶ 1 at 2. In their first and second motions to dismiss (dkt. ##70, 71), defendants raise the identical argument about the indictment being defective as that advanced in their suppression motion. The Court rejected defendants' defective indictment argument in its opinion, dated June 26, 2002, denying defendants' first and second motions to dismiss. See dkt. #89. For the reasons stated in that opinion, the Court once again rejects defendants' contention that the indictment against them is defective. Therefore, the Court rejects defendants' claim that defects in their indictment necessitate suppression of all evidence gathered by the use of the Form 2039 summonses. See dkt. #89; see also Suppression motion ¶ 1 at 2.
2. Notice of Deficiency
Defendants claim that the failure of the government to issue an assessment and a notice of deficiency prior to instituting criminal proceedings against the defendants is a badge of institutional bad faith. See Suppression motion ¶ 2 at 2-3. The Court rejected defendants' contention that an assessment and notice of deficiency are required prior to instituting criminal proceedings under § 7201 in its opinion denying defendants' first and second motions to dismiss. See dkt. #89. For the reasons set forth in that opinion, the Court, once again, rejects defendants' argument. As a result, the Court denies defendants' request for suppression premised on the failure to first issue an assessment and notice of deficiency to defendants.
In Part A.5 of this opinion, the Court discusses defendants' claim that the absence of an assessment and notice of deficiency shows that the government feigned a civil investigation while intending to pursue a criminal prosecution against defendants.
3. 26 U.S.C. § 7602 (d)(2)(A)(ii)
At the time the contested summonses were issued, this provision was contained at 26 U.S.C. § 7602 (c)(2)(A)(ii).
Defendants contend that at the time that the contested Form 2039 summonses described in paragraph 5 of the suppression motion were issued, a Justice Department referral already had been made and, therefore, the summonses are invalid. See Suppression motion ¶¶ 3-6 at 3-5. As a result, they claim that any evidence gathered by the use of these Form 2039 summonses should be suppressed. See id. Defendants are simply incorrect in this assertion, having misread the applicable case and statutory law.
The Internal Revenue Code provides that "[n]o summons may be issued under [title 26], and the Secretary may not begin any action under section 7604 to enforce any summons, with respect to any person if a Justice Department referral is in effect with respect to such person." 26 U.S.C. § 7602 (d)(1)(2002). Section 7602 defines when a Justice Department referral is in effect. That section provides, in pertinent part, as follows:
the time the contested summonses were issued, this provision was contained at 26 U.S.C. § 7602 (c)(1).
(A) A Justice Department referral is in effect with respect to any person if —
(ii) any request is made under section 6103(h)(3)(B) for the disclosure of any return or return information (within the meaning of section 6103(b)) relating to such person.26 U.S.C. § 7602 (d)(2)(A)(ii) (2002). Defendants apparently contend that the gathering of return information by the IRS pursuant to Form 2039 means that a Justice Department referral for criminal prosecution has occurred and, therefore, the Form 2039 summons cannot be enforced. See Suppression motion ¶ 3 at 3. This is a clear misreading of the relevant statutory sections.
Section 6103(h)(3)(B), to which defendants refer in their suppression motion, provides, in relevant part, as follows:
In any case in which the Secretary is authorized to disclose a return or return information to the Department of Justice pursuant to the provisions of this subsection
(B) if the Secretary receives a written request from the Attorney General, the Deputy Attorney General, or an Assistant Attorney General for a return of, or return information relating to, a person named in such request and setting forth the need for the disclosure, the Secretary shall disclose return or return the information so requested.26 U.S.C. § 6103 (h)(3)(B) (2002) (emphasis added). In other words, there is a Justice Department referral under § 7602(d)(2)(A)(ii) when the Attorney General makes a written request for return or return information, not when the IRS requests return information from a taxpayer, as contended by defendants. Defendants are asking the Court to rewrite the statute to say that a Justice Department referral occurs when the Secretary or a taxpayer receives a written request for return information from the Attorney General or the IRS. The Court rejects this argument, advanced by defendants, as it applies to any Form 2039 summons issued.
Moreover, despite extensive discovery, defendants offer the Court absolutely no evidence that the contested Form 2039 summonses described in paragraph 5 of the suppression motion were issued after the Attorney General had made a written request for return information from the Secretary. Accordingly, the Court rejects defendants' contention that evidence obtained pursuant to the contested Form 2039 summonses should be suppressed.
4. Form 2797 argument
Defendants contend that referral of their case, pursuant to Form 2797, to the Criminal Investigation Division (CID) of the Internal Revenue Service for potential fraud marks the date on which any further Form 2039 summonses may not issue. See Suppression motion 117-9 at 5-8. The Form 2039 summonses contested by defendants were issued in late April and early May of 1997, after defendants' case was referred to the CID. See Brief in Support, Exhs. A-E.
Form 2797, however, "is the administrative form used to refer an investigation to the CID." United States v. McKee, 192 F.3d 535, 544 (6th Cir. 1999). The IRS may not issue an administrative summons after it has referred the case to the Justice Department for criminal prosecution. See United States v. LaSalle Nat'l Bank, 437 U.S. 298, 318 (1978); 26 U.S.C. § 7602 (d)(1) (2002). Referral to the CID, however, is not referral to the Justice Department. Moreover, in LaSalle, the Supreme Court expressly "decline[d] to impose the prophylactic restraint on the summons authority any earlier than at the recommendation to the Department of Justice." LaSalle, 437 U.S. at 313 n. 15. At the final pretrial conference, counsel for the government informed the Court that the referral to the Department of Justice occurred on December 2, 1999, 19 months after the contested Form 2039 summonses were issued. See Brief in Support, Exhs. A (summons issued 4/28/97), B (summons issued 4/29/97), C (summons issued 5/1/97), D (summons issued 5/1/97), and E (issued 5/1/97). Therefore, defendants' argument based on Form 2797 is without merit.
Defendants attach to their brief as Exhibit G1 a page identified as Internal Revenue Service Manual 10/21/95. See Brief in Support, Exh. G1. Defendants claim that the manual prohibits the use of a Form 2039 summons in a criminal investigation. See Suppression motion ¶ 7 at 5-6. The prohibition, however, is limited to the use of Form 2039 summonses when revenue agents (civil tax audits) and special agents (criminal investigation) are assisting the attorney for the government. See Brief in Support, Exh. G1 at ¶ (1); see also McKee, 192 F.3d at 537-38 (describing difference between IRS revenue and special agents). IRS agents, however, would be assisting the government attorney only after the case had been referred from the IRS to the Justice Department for possible criminal prosecution. In addition, the prohibition on use of Form 2039 in Exhibit G1 is followed, in the same subsection, by the statement that the IRS may issue Form 2725 when securing documents for grand jury subpoena. See Brief in Support, Exh. G1 at ¶ 2. Therefore, the language cited by defendants in Exhibit G1 prohibits the use of Form 2039 after referral to the Justice Department, which is consistent with the case law.
5. Institutional Bad Faith
Defendants argue that the government made an institutional bad faith decision to use the Form 2039 summons during a criminal investigation. See Suppression motion ¶¶ 2, 8, 9 at 3, 6-8. The Sixth Circuit has held, in an unpublished decision, that "under LaSalle, the Service cannot obtain information pursuant to the administrative summons process after the IRS recommends prosecution to the Department of Justice, or after the IRS has abandoned, in an institutional sense, the pursuit of civil tax determination or collection." United States v. Ahee, 2001 WL 180969, at *7 (6th Cir. Feb. 15, 2001) (quoting United States v. Genser, 582 F.2d 292, 309 (3d Cir. 1978)). Defendants claim that
(a) the absence of an assessment and notice of deficiency, and (b) statements by CID officers Rogowski and Harris, when serving Form 2039 summonses, that a criminal investigation was being conducted, demonstrate that the IRS was feigning a civil investigation and was pursuing a solely criminal purpose at the time that they issued the contested Form 2039 summonses. See Brief in Support ¶¶ 2-4, 9 at 2-3, 7-8.
a. Absence of Assessment and Notice of Deficiency
The mere fact that there was no assessment or notice of deficiency in this case does not automatically mean that at the time the contested summonses were issued the IRS institutionally had abandoned the pursuit of civil tax determination. The contested summonses were issued in April and May of 1997. At that time, only one year had elapsed since defendants' 1995 tax return was due. Defendants do not argue that, as of April or May of 1997, any statute of limitations had run on the IRS's ability to collect taxes from them.
Moreover, at the final pretrial conference, in response to questions from the Court, counsel for the government explained that the revenue agent assigned to defendants' case concluded that defendants were being evasive and that their case could not be pursued in a civil audit setting. As result, the revenue agent made the referral to the CID.
In conclusion, as the Court explained in its opinion denying defendants' first and second motions to dismiss, defendants have provided no case law from the Sixth Circuit or any other court holding that an assessment and notice of deficiency are required prior to instituting a criminal proceeding for income tax evasion. Defendants also offer the Court no case authority for the proposition that the absence of an assessment and notice of deficiency is the equivalent of institutional bad faith on the part of the IRS. Accordingly, defendants' motion to suppress based on the absence of an assessment and notice of deficiency is denied.
b. Statements by CID Officers
This argument is also without merit because summonses issued pursuant to § 7602 are not limited to civil tax investigations. Section 7602(b) of the Internal Revenue Code expressly provides that "[t]he purposes for which the Secretary may [issue a summons] include the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws." 26 U.S.C. § 7602 (b) (2002). The mere fact that a Form 2797 referral has occurred, triggering the entry of CID into the case and the start of a criminal investigation, does not mean that a referral to the Justice Department for criminal prosecution has occurred. In other words, defendants are confusing a Form 2797 referral, which is an internal referral within the IRS, with a Justice Department referral.
Moreover, defendants have the argument backward. If CID Special Agents Rogowski and Harris had not informed defendants that a criminal investigation was underway, then suppression would be an appropriate remedy. The Sixth Circuit has held that "generally an affirmative misrepresentation by an IRS agent that the investigation is routine when in fact it is a criminal investigation requires suppression of evidence." McKee, 192 F.3d at 542 (quoting United States v. Nuth, 605 F.2d 229, 234 (6th Cir. 1979)). Therefore, identification of the investigation as a criminal one protects the IRS from subsequent claims that a taxpayer produced evidence to the IRS as a result of trickery or deception by the Service.
6. Suppression Motion — Conclusion
The case law and statutory authority cited by defendants do not stand for the proposition that the contested Form 2039 summonses were issued improperly.
The Court also concludes that a Genser hearing is unnecessary in this case. "The decision of whether to hold a Genser hearing lies within the sound discretion of the trial court." Ahee, 2001 WL 180969, at *6. Defendants contend that they are entitled to a Genser hearing because they have "set forth indications and proofs of Government misconduct/institutional bad faith because the IRS/Government clearly deviated from statutory obligations and from regulations." Brief in Support at 3. To the contrary, they have only demonstrated a clear misunderstanding of applicable law.
Accordingly, the Court denies defendants' request for a Genser hearing and their motion to suppress all evidence obtained by use of the contested Form 2039 summonses.
B. LEGAL ANALYSIS — MOTION FOR DISCOVERY
In their discovery motion, defendants ask the Court for an order compelling the government to provide the following: (1) the Individual Master File ("IMF") record history for defendants for 1995, (2) Form 9131, (3) Form 2797, (4) Form 4930/4930(a), (5) proof of compliance with Internal Revenue Manual ("IRM") § 9322.2(1), and (6) Forms 23-C and 4340. Discovery motion ¶¶ 1-6 at 10-12. At the end of their suppression motion, defendants also ask the Court to provide copies of all summonses issued in the investigation of defendants that are not attached as Exhibits A through E to Defendant's Brief in Support. See Suppression motion at 9. The Court denies defendants' discovery motion because some of the materials requested already have been provided by the government or the government has agreed to provide them, and the remaining materials requested do not exist in this case.
1. Documents provided (or agreed to be provided) by Government
The government has provided defendants with Form 2797. Government's Response, Including Brief to Defendants' First Motion for a Genser Hearing and to Dismiss or Suppress Evidence ("Government's Response Brief") 3. At the final pretrial conference, the government indicated that it has not yet located Form 4930/4930(a), but will disclose that form to defendants if it is found.
Defendants indicated in their discovery motion that Form 2797 would show whether the government had complied with IRM § 9322.2(1). Discovery motion ¶ 5 at 12. The government has provided defendants with Form 2797, and, during the final pretrial conference, defendants did not inform the Court that they needed other documents from the government to show compliance with IRM § 9322.2(1).
The government agreed during the final pretrial conference to provide the IMF record history for defendants for 1995, accompanied by a key to the numeric or letter codes used. The government also agreed to provide defendants with copies of any other summonses or subpoenas issued in this case that have not been previously disclosed to defendants.
2. Documents not in existence
In their response brief, the government points out that Form 9131 does not exist in this case, because it is used when the IRS refers a case to the Department of Justice Tax Division to request authorization to conduct a grand jury investigation. Government's Response Brief at 2. Because the IRS asked the Justice Department's Tax Division to refer the case to the U.S. Attorney's Office for indictment, it was unnecessary to use Form 9131 in this case. See id. At the final pretrial conference, the government reiterated that Form 9131 does not exist.
In its brief and at the final pretrial conference, the government stated that neither Form 23-C nor Form 4340 exists in this case. See Government's Response Brief at 4. Defendants' request for Forms 23-C and 4340 is premised on their argument that the government must provide a notice of deficiency prior to instituting criminal proceedings against the defendants. The Court, however, has rejected this contention in both this opinion and its opinion denying defendants' first and second motions to dismiss. See dkt. #89.
3. Discovery Motion — Conclusion
The government has provided defendants with Form 2797, which defendants state would show compliance with IRM 9322.2(1). The government has agreed to provide defendants with their 1995 IMF record history, Form 4930/4930(a), if located, and any additional summonses or subpoenas not already disclosed. Accordingly, defendants' request for these documents is denied as moot.
Forms 9131, 23-C, and 4340 do not exist in this case. Therefore, the Court denies defendants' motion for discovery as to these documents.
C. CONCLUSION
The Court denies defendants' motion to suppress evidence gathered pursuant to the contested Form 2039 summonses. The Court also denies defendants' request for a Genser hearing. Finally, the Court denies defendants' discovery motion because (1) the government has provided or agreed to provide the documents requested in defendants' motion, or (2) the documents requested do not exist in this case. The Court will issue an order consistent with this opinion.
ORDER DENYING DEFENDANTS' DISCOVERY AND SUPPRESSION MOTIONS
In accordance with this Court's opinion of even date,
IT IS ORDERED that defendants' motion for specific discovery, for Jencks Act discovery and for exculpatory material discovery (dkt. #72) is DENIED.
IT IS FURTHER ORDERED that defendants' motion to suppress all evidence gathered improperly by the use of a civil administrative summons as a de facto grand jury subpoena (dkt. #72) is DENIED.
IT IS FURTHER ORDERED that defendants' request for a Genser hearing (dkt. #72) is DENIED.
IT IS FURTHER ORDERED, pursuant to the government's agreement at the final pretrial conference, held on June 24, 2002, to provide defendants with their Individual Master File record history for 1995, along with a key to the numeric and letter codes used therein, and all summonses or subpoenas not already disclosed to defendants, that the government shall provide these documents to defendants no later than June 28, 2002.
IT IS SO ORDERED.