Lead Opinion
This mаtter is before the Court on petitioners’ motion for summary judgment, or alternatively, for an order suppressing evidence, and respondent’s cross-motion for partial summary judgment, each filed pursuant to Rule 121, Tax Court Rules of Practice and Procedure.
By notice of deficiency dated April 9, 1984, respondent determined the following deficiencies and additions to tax in petitioners’ Federal income taxes:
Additions to tax
sec. 6653(b)2 Deficiency Year
$91,517 $181,880 1976
152,177 304,353 1977
86,116 172,231 1978
The issues for our consideration are (1) whether findings of fact and conclusions of law made by the U.S. District Court for the Central District of California pursuant to a summons enforcement proceeding constitute res judicata or collateral estoppel as to the issues raised here; and (2) if not, whether the Commissioner’s violation of provisions of his own internal procedures is unconstitutional, thus requiring that the exclusionary rule be applied. For the purpose of our ruling, the parties have submitted copies of petitioners’ tax returns, affidavits, extensive memoranda оf legal points and authorities, the trial transcripts and pleadings from the District Court proceeding involving summons enforcement,
One preliminary matter must be disposed of before turning our attention to the issues at hand. On December 29, 1986, respondent filed a motion in opposition to petitioners’ request that the Court take judicial notice of the District Court’s trial transcripts in United States of America v. Bank of America, Case No. CV82-3549-Lew, which was filed concurrently with the submission of such transcripts on December 10, 1986. Respondent contends that the transcripts are inadmissible hearsay under rules 801 and 804 of the Federal Rules of Evidence.
Under Rule 121(d), in ruling on a motion for summary judgment, the Court shall consider such evidence as affidavits, and supplemental materials such as answers to interrogatories, depositions, or other acceptable materials. One reason for adoption of the hearsay rule is the unavailability of the declarant. In this case, however, the parties herein were, in effect, participants in the District Court proceeding and respondent had the opportunity to cross-examine petitioners and their witnesses in that proceeding. In our opinion, these transcripts which contain the testimony of petitioners as well as Internal Revenue Sevice personnel taken under oath and with opportunity for cross-examination, are no less rehable or probative than the usual type of evidence submitted by parties seeking summary judgment. Accordingly, we conclude that for the purpose of disposing of the summary judgment motions before us, the transcripts are not inadmissible evidence. Respondent’s motion therefore will be denied.
Background
On July 9, 1980, Internal Revenue Agent Joyce Morrison (formerly known as Joyce Morrison-Hillhouse) was assigned to audit petitioners’ 1978 Federal income tax return and in January 1981, Agent Morrison commenced her audit. During the course of examining petitioners’ 1978 return, Agent Morrison noticed an expense item with respect to horses
On March 9, 1981, Agent Morrison met with petitioners and petitioners’ accountant at the accountant’s office to secure an extension of time with respect to the statute of limitations for the principal purpose of adjusting the expense item on petitioners’ 1977 income tax return which previously was not under audit. At that time, petitioners were given the option of having their accountant prepare and file an amended return, or having Agent Morrison correct the expense on audit. Agent Morrison indicated to petitioners that she thought her audit of the 1977 return would be fairly limited in that she would likely look only at the payroll deductions and miscellaneous supplies expenses, items also being examined on the 1978 return, and that she did not see anything “unusual” on petitioners’ 1977 return. Petitioners signed the first consent to extend the statute of limitations (Form 872 “Consent Fixing Period of Limitation Upon Assessment of Income Tax”) on March 10, 1981, which extended the statute of limitations for their 1977 return until October 31, 1981.
On May 29, 1981, Agent Morrison contacted Kaufman & Broad for the first time. Pursuant to her letter of that date, Agent Morrison requested information concerning payments made to petitionеrs during 1977 and 1978. Further correspondence was necessary to clarify that the checks she sought were made payable to Foothill Plastering Co., and on June 16, 1981, Agent Morrison received copies of the
On July 20, 1981, Agent Morrison received copies of the reverse sides of checks issued to Foothill Plastering Co. by Kaufman & Broad from Kaufman & Broad’s accounting department.
On September 20, 1982, the District Court entered an order pursuant to stipulation permitting the taxpayers to intervene in the summons enforcement proceeding as real parties in interest. An evidentiary hearing was commenced on November 22, 1982, and was completed on March 11, 1983.
At this hearing, petitioners testified that when they signed the consent to extend the statute of limitations for 1977 they were under the impression that only one item for 1977 needed to be corrected and that Agent Morrison was only going to look into the same items that she had examined on the 1978 return. They also stated that at that time Agent Morrison informed them that she “was ready to wrap up” her audit of their 1978 return, but admitted that they had never been notified officially that the audit for 1978 had been completed. Petitioners further testified that on the two occasions in which Agent Morrison requested an extension she did not inform them that they had the option of refusing to sign the consent, nor did she provide information concerning restricted consents. Petitioners acknowledged that while Agent Morrison had given them the option of having their accountant correct the expense on their 1977 return, petitioners stated that they elected to have Agent Morrison do it because she had assured them it would be a “simрle matter.” Petitioners verified that they were aware of the February 18, 1981, document request which sought checks issued by Kaufman & Broad, but that this issue was not discussed at the March 9 meeting. Mr. and Mrs. Vallone admitted that prior to signing the second
On August 3, 1983, the District Court entered judgment in favor of the intervenors (petitioners herein) and denied the IRS’s petition for the enforcement of summonses. In its opinion, the District Court determined that the primary purpose of the provisions of the Internal Revenue Manual (I.R.M. or Manual), specifically sections 4541.1(15)
An appeal of the Distriсt Court’s judgment was filed with the Court of Appeals for the Ninth Circuit, but was later dismissed pursuant to a stipulation by the parties.
The Summary Judgment Issues
Under Rule 121, the party moving for summary judgment has the burden of demonstrating that no genuine issue as to any material fact exists, and that he is entitled to judgment as a matter of law. Adickes v. Kress & Co.,
Petitioners seek to have this Court summarily adjudicate certain issues as settled and established based on the related doctrines of res judicata and of collateral estoppel or, in the alternative, issue an order suppressing certain evidence. Petitioners contend that respondent’s notice of deficiency is based upon certain checks obtained by the Commissioner from Kaufman & Broad and that these checks were the subject of a prior adjudication between the same parties in the U.S. District Court for the Central District of California. Specifically, petitiоners claim that the District Court determined that respondent had wrongfully obtained such checks and therefore argue that respondent may not use the Kaufman & Broad checks as evidence in this proceeding. Accordingly, petitioners assert that this Court should grant summary judgment with respect to paragraph 4(a)
Res judicata is a judicial doctrine that applies only to the same cause of action arising between the same parties. Simply stated, under this doctrine “a judgment on the merits in a prior suit bars a second suit involving the parties or their privies based on the same cause of action.”
Collateral estoppel, on the other hand, precludes litigation of any issue of fact or law that is actually litigated and necessarily determined by a valid and final judgment. Montana v. United States, supra at 153; see 1 Restatement, Judgments 2d, sec. 27 (1982). Like res judicata, the purpose of collateral estoppel is to avoid repetitious litigation of issues between the same parties or their privies. See Jaggard v. Commissioner,
In the instant case, petitioners’ rebanee on the doctrine of res judicata is misplaced. The District Court proceeding was a summons enforcement action wherein the Commissioner sought to have that court enforce comphance with certain IRS summonses. Thus, the Distriсt Court was called upon to review the enforceabibty of those summonses. The instant proceeding, however, is an action for the redetermination of petitioners’ tax babibty. These two proceedings are based on different causes of action, raise different issues, and the moving parties seek different forms of rebef in each proceeding.
Similarly, petitioners’ arguments with respect to collateral estoppel must also be dismissed. In support of their argument, petitioners assert that the District Court, as a part of its findings, actually and necessarily determined that respondent had engaged in illegal conduct, thus
We conclude that petitioners’ arguments miss the heart of the matter presently before us. First, the issue of whether evidence is admissible in this civil tax proceeding is not identical to that raised in the prior proceeding. As we noted earlier, the District Court proceeding was a summons enforcement action wherein the Commissioner sought to obtain records concerning the petitioners from various banks, financial institutions, the petitioners’ accountant, and petitioners’ attorney of record. The issue in that proceeding was whether the various summonses were enforceable. .
Certain requirements must be met before an IRS summons can be enforced. United States v. Powell,
Secondly, the issue presently before this Court was not actually raised and litigated in the prior proceeding. The requirement under the law of collateral еstoppel that an issue be actually litigated is generally satisfied if the parties to the original action disputed the issue and the finder of fact resolved it. See 1 Restatement, Judgments 2d, sec. 27, comment d (1980). Inasmuch as a summons enforcement proceeding is a limited one at the purely investigative stage of governmental activity, the question with respect to the admissibility of the checks obtained by the respondent from Kaufman & Broad was never placed in issue. Nor did the District Court make any ruling on the admissibility of these checks. However, even if the District Court had ruled on the use of the checks, such findings would have been outside the scope of the proceeding and nonessential to the judgment.
We now must decide (1) whether the violation of provisions contained in the Internal Revenue Manual amount to unconstitutional conduct, and (2) whether suppression of evidence is warranted under the circumstances involved here. It is in this context that respondent has countered with a motion for partial summary judgment asking that the checks obtained by respondent from Kaufman & Broad be held admissible to prove that petitioners had unreported income and further to establish fraud.
It has long been recognized that this Court has authority to inquire into the question of аdmissibility of evidence. Kluger v. Commissioner,
determinations regarding the admissibility of evidence in proceedings before this Court are an inherent power incident to the Court’s duty to redetermine proposed income tax deficiencies. The fact that a determination of admissibility of evidence involves an inquiry into the propriety of actions of other courts, or other branches of Government, has never been thought to deprive this or any other Federal court of the authority to exercise that power, * * * [Kluger v. Commissioner, supra at 316.]
We would point out, however, that we are not called upon to review the correctness of the District Court’s determination with respect to the denial of the petition to enforce the summonses.
As a general rule, this Court will not look behind a deficiency notice to examine the evidence used, the propriety of the Commissioner’s motive, or the administrative policy or procedure in making his determinations.
We were faced with a similar argument in Riland v. Commissioner,
In Caceres, the Supreme Court declined to apply the exclusionary rule, noting that the IRS rules were neither required by the Constitution nor any statute and that the defendant could not reasonably contend that he relied on the regulation or that its breach had any detrimental effect on his conduct. More importantly, in emphasizing that a “rigid application of an exclusionary rule to every regulatory violation could have a serious deterrent impact on the formulation of additional standards to govern prosecutorial and police procedures,” the Court stated:
In the long run, it is far better to have rules like those contained in the IRS Manual, and to tolerate occasional erroneous administration of the kind displayed by this record, than either to have no rules except those mandated by statute or to have them framed in a mere precatory form. [440 U.S. at 755-756 .]
The I.R.M. sections in question in the present case were neither required by the Constitution nor by statute. Because “Their purpose is to govern the internal affairs of the [IRS],” the procedures of the IRS do not have the forcе or effect of law. Foxman v. Renison,
Moreover, we cannot conclude that the Commissioner’s failure to follow his own regulations materially affected petitioners’ conduct to their substantial detriment. First, with respect to the failure of the IRS to provide Publication 1035 when seeking to extend the statute of limitations, we note that discussions surrounding the first extension took place at petitioners’ accountant’s office and in his presence. In our opinion, petitioners could have reasonably looked to their accountant for information concerning any consequences stemming from signing an extension, as well for advice as to the probable scope of the examination.
While Agent Morrison did not inform petitioners that she intended to request information from Kaufman & Broad for 1977, we do not find this “omission” to be a misrepresentation of a material fact. It is well established that agents are expected to pursue their examination to a point where they can conclude, with reasonable certainty, that all items necessary for a substantially proper determination of thе tax liability have been considered. Further, in March 1981,
With respect to Agent Morrison’s failure to give Miranda-type warnings on July 9, 1981, we emphasize that petitioners were not being “investigated” for criminal tax fraud at that time. Moreover, the Supreme Court, as well as various courts of appeals, have stated that Miranda warnings need not be given in every instance to targets of criminal tax investigations. United States v. Beckwith,
We now turn our attention to petitioners’ arguments that information obtained through IRS deception violates the Fourth and Fifth Amendments and therefore must be suppressed.
First and foremost, a person who claims a violation of Fourth Amendment rights must have standing to assert the unlawfulness of the search and seizure; that is, the movant must have a privacy interest in the object of the illegal search and seizure. Alderman v. United States,
Even assuming that petitioners have standing under the Fourth Amendment, however, we do not find on these facts that Agent Morrison obtained the consents by fraud or deceit or that she made material misrepresentations. First, courts have consistently held that the failure of an IRS agent to warn a taxpayer that an audit may have potential criminal ramifications does not render a search unreasonable. United States v. Robson,
A “routine” tax investigation openly commenced as such is devoid of stealth or deceit because the ordinary taxpayer surely knows that there is inherent in it a warning that the Government’s agents will pursue evidence of misreporting without regard to the shadowy line between avoidance and evasion, mistake and willful omission. [265 F.2d at 414-415 .]
See also United States v. Squeri,
Secondly, our review of the cases cited by petitioner, as well as those uncovered by our own research, suggests that suppression is an appropriate remedy only for fairly serious affirmative misrepresentations. No case holds that an IRS agent breaches a constitutional duty when he or she obtains information merely by failing to state speсifically that he is conducting a criminal investigation. In fact, in several cases courts have refused to suppress evidence when IRS agents made no affirmative misrepresentations but simply failed to disclose information. United States v. Irvine,
Although we can find no cases identical to the case at bar, it appears that the reason for requiring an agent to cease contact with the taxpayer after finding firm indications of fraud is to protect against evidence being gathered for use at a subsequent criminal trial under the guise of a civil audit. This premise is bolstered by I.R.M. sections 9322.1(1) and 9322.5 which generally provide that once there are indications of fraud, no delay should occur in preparing a fraud referral report. If such delay occurs, and the agent continues investigating, suppression of evidence at the criminal trial may be appropriate. See United States v. Touissant,
Where a taxpayer has no privacy interest in the object of the alleged illegal search and seizure, this Court hаs recognized that evidence may be excluded on due process grounds under the Fifth Amendment where it has been seized from an individual in a manner so outrageous that it shocks the Court’s conscience. Similarly, a court may invoke its supervisory powers to exclude evidence seized “in a manner inconsistent with American standards of justice.” Proesel v. Commissioner,
In situations where the exclusionary rule is plainly applicable, we have declined to adopt a “per se or but for rule” that would make inadmissible any evidence, whether tangible or live-witness testimony, which somehow came to light through a chain of causаtion that began with * * * [the illegal activity]. * * *
See also United States v. Brandon,
cannot be answered on the basis of “causation in the logical sense alone” [United States v. Ceccolini,435 U.S. at 274 ], but necessarily involves a weighing of the social costs of applying the exclusionary rule against the benefits to be gained therefrom, for the “penalties visited upon the Government, and in turn upon the public, because its officers have violated the law must bear some relation to the purposes which the law is to serve. [435 U.S. at 279 .]”
Even if respondent had violated the law in obtaining petitioners’ consent to extend the statute of limitations, he did not violate the law in obtaining the checks from Kaufman & Broad. As we have previously emphasized, those checks were provided to respondent voluntarily, pursuant to respondent’s informal request by letter correspondence.
Secondly, we point out that the consents applied to taxable year 1977 only. In the course of auditing petitioners’ 1978 return, Agent Morrison clearly was free to seek information from Kaufman & Broad to verify receipts as shown on Schedule C of the 1978 return. In February 1981, she sent petitioners’ accountant a document requesting information concerning Kaufman & Broad. Petitioners testified at the summons enforcement proceeding that they were aware that Agent Morrison sought this information. Agent Morrison also testified that she would have gone to Kaufman & Broad for 1978 “in any event.” Thus, if petitioners had refused to extend the statute of limitations
We conclude that there are no grounds fоr applying the exclusionary rule in the present case. In sum, petitioners have not shown that any of their rights under the Fourth Amendment have been violated. Further, petitioners’ due process rights under the Fifth Amendment were not violated since the deficiency notice was based on legally obtained evidence; nor is there any ground for the Court to exercise its supervisory powers to suppress any evidence on which such notice was based. Therefore, as a matter of law, that part of petitioners’ motion that moves for an order suppressing evidence will be denied.
That part of respondent’s cross-motion for partial summary judgment that moves for a summary determination that the checks obtained from Kaufman & Broad be held admissible will be granted. However, we decline to determine at this time that these checks establish that petitioners’ alleged understatements of income were due to fraud with intent to evade taxes. Where the inferences which the party sеeks to have drawn deal with questions of motive and intent, summary judgment is particularly inappropriate. Such inferences of fact are to be drawn only at trial.
An appropriate order will be issued.
Notes
On Sept. 10, 1986, this Court issued an order for respondent to show cause in writing, on or before Nov. 24, 1986, as to why petitioners’ motion of Aug. 27, 1986, should not be granted. Thereafter, respondent timely filed a memorandum in opposition and a cross-motion for partial summary judgment. On Nov. 24, 1986, this Court granted petitioners leave to file a reply to respondent’s motion and on Dec. 10, 1986, petitioners submitted a reply memorandum and supporting documents. This case was continued from a trial session of the Court which commenced Feb. 23, 1987, at Los Angeles, California.
All statutory referеnces are to the Internal Revenue Code of 1954 as amended and in effect during the taxable years in issue. All Rule references, unless otherwise indicated, are to the Tax Court Rules of Practice and Procedure.
The rules of evidence applicable to Tax Court proceedings are the rules applicable in trials without jury in the U.S. District Court for the District of Columbia. These include the Federal Rules of Evidence. Rule 143(a), Tax Court Rules of Practice and Procedure.
At the time she met with petitioners Agent Morrison did not know whether the referral had been accepted or declined. In late July 1981, Special Agent Hall contacted Agent Morrison to set up an appointment to review the file and Agent Morrison was advised unofficially in August 1981, that the referral had been accepted. The joint investigation began on or about Sept. 3, 1981. No recommendation for criminal prosecution was ever made.
I.R.M. sec. 4541.1(15) as in effect during 1981 provided that:
“Publication 1035, Extending the Tax Assessmеnt Period, will be furnished to taxpayers concurrently with any written or oral requests for consents. In addition, examiners should give taxpayers a brief explanation of their rights and options when soliciting consents orally.”
I.R.M. sec. 4565.2 is merely a title reference. The material that the District Court refers to is in fact found at sec. 4565.21. That section as in effect during 1981 read as follows:
“(1) If, during an examination, an examiner discovers any indications of fraud he/she shall suspend his/her activities at the earliest opportunity without disclosing to the taxpayer, his/her representative or employees, the reason for such suspension. * * * He/she will then prepare a report of his/her findings on Form 2797 (Referral Report for Potential Fraud Cases) for transmission through channels to the Chief, Intelligence Division.
“(2) There may be instances where at the time the examiner first discovers indications of fraud the information is insufficient to complete Form 2797 in all respects. Even so, the examiner will not delay preparing the report, but will complete it to the extent possible.”
At the evidentiary hearing in District Court, Agent Morrison testified that at the time she secured the consents from petitioners she was unaware of the IRS Manual provision stating that taxpayers should be given Publication 1035 at the time there is an oral or written request for consents. However, Agent Morrison contended that even if petitioners had requested a restricted consent it would not have been available to them and she would not have agreed to a restricted consent. Michael J. Maynard, a group manager at the IRS, and Agent Morrison’s supervisor, testified that in 1981 the general procedure when obtaining consents from taxpayers was to provide them information orally and then if the taxpayer requested further information, a publication, such as Publication 556 “Examination of Returns, Appeal Rights, and Claims for Refund,” would be provided. He indicated that during 1981, he was not aware of Publication 1035. Mr. Maynard also indicated that the IRS’s customary practice, once a fraud referral report had been submitted, was to suspend examination and cease contact with a taxpayer. He pointed out, however, that the exception to this rule applied where it was necessary for an agent to secure an extension of time in order to protect the civil liability. Stressing that he had given Agent Morrison permission to seek extensions on both occasions, Mr. Maynard stated that it was his belief that the prohibition against contacting taxpayers applied to requests for information but not to consents to extend the statute of limitations.
Par. 4(a) of the petition in this proceeding denies the Commissioner’s allegation that petitioners failed to report income from Kaufman & Broad for taxable years 1976 through 1978:
“The Commissioner erred in his determination that the Petitioners received income from Kaufman and Broad which was not reported on Petitioners’ returns, in the amounts of $280,030.00 for the taxable year ended December 31, 1976, in the amount of $448,216.00 for the taxable year ended December 31, 1977 and in the amount of $233,178.00 for the taxable year ended December 31, 1978, on the basis that the Petitioners have failed to establish that these amounts are excludable from gross income under provisions of the Internal Revenue Code.”
Questions of suppression are not to be considered until the time when proceedings arise in which the Government seeks to use the evidence in question. G.M. Leasing Corp. v. United States,
Petitioners, who rely on Graham v. Commissioner,
Substantial evidence of unconstitutional conduct by respondent in determining the deficiency does constitute an exception to this rule. However, even in instances where we have discovered evidence of unconstitutional conduct underlying a deficiency notice, we have refused to declare the deficiency notice itself null and void as a sanction for respondent’s behavior. Graham v. Commissioner,
See Bridges v. Commissioner,
I.R.M. sec. 4541.1(19), formerly sec. 4541.1(15), currently provides that Publication 1035 need not be provided where the taxpayer has an accountant or tax attorney, with whom the examiner is conducting the examination, as such persons are expected to be thoroughly familiar with IRS administrative provisions and options available to a taxpayer.
We note that the IRS requires that its special agents give so-called “News Release” warnings to prospective targets of criminal investigations. In the instant proceeding, when Special Agent Gloria Hall met with petitioners in their home, she identified herself and gave them the required warnings.
In general, the Fifth Amendment may not be claimed in civil tax cases, even when a civil fraud penalty is involved, so long as there is no reasonable apprehension of criminal prosecution. Harper v. Commissioner,
United States v. Robson,
The Ninth Circuit, the court to which an appeal herein lies, applies this doctrine by determining whether “anything seized illegally, or any leads gained from the illegal activity, tend significantly to direсt the investigation toward the specific evidence sought to be suppressed.” United States v. Taheri,
An inference that fraud extended into years allegedly barred by the statute of limitations is sufficient to authorize examinations. United States v. Ryan,
The filing of false or fraudulent returns with intent to evade tax constitutes an exception to the general 3-year statute of limitations. Sec. 6501(c)(1). However, respondent bears the burden of proof and such proof must be made by clear and convincing evidence. Sec. 7454(a); Rule 142(b); Schaffer v. Commissioner,
Similarly, where respondent alternatively alleges, as he does here, that the 6-year statute of limitations provided for in sec. 6501(e)(1)(A) applies, he has the burden of proving such omission. See Bardwell v. Commissioner,