Proesel v. Comm'r of Internal Revenue

• Decision Date: 27 December 1979
• Docket Number: Docket No. 5995-76.
• Citation: 73 T.C. 600
• Parties: JAMES V. PROESEL and ROSEMARY K. PROESEL, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

73 T.C. 600

JAMES V. PROESEL and ROSEMARY K. PROESEL, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 5995-76.

United States Tax Court

Filed December 27, 1979.

As part of an intensive investigation to identify persons who may be evading taxes by use of foreign bank accounts, the IRS obtained the name of B, a partnership, through an admittedly illegal search and seizure. The IRS subsequently began a civil tax audit of B, and all information obtained during the audit was provided voluntarily by B's accountant. As a result of the audit, statutory notices of deficiency were issued to the partners of B, in which certain operating losses were disallowed. Ps filed a motion to suppress evidence and to quash the notices, or in the alternative, to shift to the Commissioner the burden of producing and going forward with the evidence. Held, the motion will be denied because the evidence on which the statutory notices were issued was not obtained as a result of an illegal search and seizure and because the connection between that evidence and the tainted evidence is so attenuated as to dissipate the taint. Silverthorne Lumber Co. v. United States, 251 U.S. 385 (1920); Nardone v. United States, 308 U.S. 338 (1939). Randall G. Dick, for the petitioners.

James F. Kidd, for the respondent.

OPINION

SIMPSON, Judge:

This matter is before us on the petitioners' motion in which they ask this Court to suppress evidence and to quash the statutory notice of deficiency on the ground that the information on which the notice was based was obtained as a result of an illegal search and seizure conducted by the Commissioner. In the alternative, the petitioners move that the burden of producing and going forward with proof be shifted to the Commissioner.

The issue in this case involves a deduction for partnership losses which the petitioner James V. Proesel claimed with respect to his alleged interest in Chico Enterprises (Chico) during 1971. Chico allegedly was a partner in Benwest Production Co. (Benwest), a partnership engaged in the movie production business. In their motion, the petitioners contend that the deficiency notices issued to them and to the other partners in Benwest were based upon evidence illegally obtained by the Commissioner through outrageous and illegal conduct. The conduct to which they refer is the extensive IRS investigation known as “Project Haven” or “Operation Trade Winds” and the infamous “briefcase incident” which transpired 6 years ago in the United States and the Bahamas. ¹ The Commissioner concedes that the basic facts of the Project Haven affair are public knowledge and may be accepted as the factual premise upon which the petitioners' motion is based. For the purpose of background information, we set forth the relevant facts dealing with Project Haven, as previously stipulated to by the Federal Government in other cases and as found by the District Court in United States v. Payner, 434 F. Supp. 113, 118-120 (N.D. Ohio 1977), affd. per curiam 590 F.2d 206 (6th Cir. 1979), cert. granted Oct. 1, 1979:²

In 1965 the Internal Revenue Service initiated Operation Trade Winds for the purpose of gathering information about the financial activities of American citizens in the Bahamas. Special Agent Richard Jaffe of the Jacksonville, Florida Office of the Internal Revenue Service (IRS) supervised the investigation. IRS agents gathered information pertinent to Operation Trade Winds by making numerous trips to the Bahamas and by the use of over 30 informants.

In June, 1972 the IRS suspected that the Castle Bank and Trust Company of the Bahamas functioned as an illegal tax haven for American taxpayers. The IRS' suspicion was based on information about an alleged California narcotics dealer, Allan Palmer, who deposited a check in his bank account originally drawn on the Castle Bank of the Bahamas. Further investigation revealed that the Castle Bank had an account with the Bank of Perrine in Florida, and that Palmer had $25,000 in a Castle Bank account which he opened through the assistance of the Bank of Perrine. In August, 1972 representatives of the IRS districts in San Francisco, Chicago, Miami, and Pittsburgh met in Jacksonville, Florida to discuss the involvement of the Castle Bank with respect to narcotic trafficking investigations pending in each district.

In late October, 1972, Special Agent Jaffe met with one of his informants, Norman Casper, and asked him to obtain the names and addresses of the individuals holding accounts with the Castle Bank. In the first week of November of 1972 Casper decided to secure the requested information and in late November of 1972, as part of the scheme to get the names of the Castle Bank depositors, Casper introduced Sybol Kennedy to Michael Wolstencroft. Wolstencroft was then an acquaintance of Casper's and Vice-President and Trust Officer of Castle Bank. Sybol Kennedy was a private detective employed by Casper. At the time Casper introduced Wolstencroft to Sybol Kennedy, Casper knew that Wolstencroft frequently traveled to the United States carrying a briefcase containing documents concerning the operation of the Castle Bank. In early January, 1973 Casper learned that Wolstencroft planned a business trip to the United States on January 15, 1973, and would have records of the Castle Bank in his possession during the trip.

In the week preceding January 15, 1973 Casper and Special Agent Jaffe discussed a covert plan to intercept copies of the documents that Wolstencroft planned to bring into the United States. On Tuesday, January 9, 1973 Casper told Jaffe that he could get the documents from Wolstencroft but that he needed Jaffe to supply photographic services, and on Thursday, January 11, 1973 Casper outlined to Jaffe his plan to get the documents from Wolstencroft. Casper specifically told Jaffe that he planned to enter an apartment from which he expected to remove Wolstencroft's briefcase. Jaffe told Casper that he would have to clear such an operation with his superior, Troy Register, Jr., Chief of the IRS Intelligence Division in Jacksonville. After obtaining authorization from Register, Jaffe told Casper to proceed with the operation. On Friday, January 12 Casper phoned Jaffe and asked if the IRS could refer him to a locksmith who could be “trusted,” which Jaffe did.

On January 15, 1973 Wolstencroft arrived in the United States and went to Sybol Kennedy's apartment. What occurred at her apartment, if anything, was not brought out at trial. However, at 7:30 p.m. Sybol Kennedy and Wolstencroft left Kennedy's apartment to go to a restaurant on Key Biscayne, whereupon Casper entered the apartment with a key given him by Kennedy, and removed Wolstencroft's briefcase without permission. Casper took the briefcase to a locksmith who had been recommended by the IRS, and who had previously refused to enter the apartment with him. Casper met the locksmith in a parking lot five blocks from Kennedy's apartment and instructed him to make a key for the briefcase. Casper then took the briefcase to an IRS agent's private residence, selected by Jaffe as the rendezvous point, and opened it in Jaffe's presence. Over 400 documents were taken out of the briefcase and photographed.

Jaffe, Casper, and an IRS photography expert used two cameras to photograph the documents, a “normal” camera and a microfilm camera. The microfilm camera was used because it was faster than a normal camera, and Agent Jaffe knew that the briefcase had to be returned to Sybol Kennedy's apartment before she and Wolstencroft got back from dinner. To get the briefcase back timely Casper had Kennedy and Wolstencroft watched during their dinner. When Kennedy and Wolstencroft completed their dinner, Casper's lookout phoned him at the residence which the IRS used to photograph the documents. After all documents were copied, Casper closed the briefcase, accidentally broke off the key in the lock, and returned the documents to Kennedy's apartment at approximately 9:00 p.m.

Within the next two weeks Jaffe again met with Casper and told him that additional information concerning Castle Bank's customers was needed. Casper obtained the requested additional information by sending Sybol Kennedy to the Bahamas to visit Wolstencroft. While there she stole a rolodex file from his office as Casper directed her to do. The stolen rolodex file was then turned over to Jaffe, who expressed no concern over the methods used to obtain it.

Casper was paid $8,000 in cash by the IRS for obtaining the information relating to Castle Bank. Sybol Kennedy was paid approximately $1,000 by Casper from funds he received from the IRS for her part in obtaining the briefcase and the rolodex.

(Fn. refs. omitted.)

The Commissioner has admitted that the name Benwest Production Co. was obtained as a result of the information gathered through the briefcase and rolodex incidents.³

In June or July 1973, Revenue Agent Larry L. Gregg was assigned to assist in the Project Haven investigation. He analyzed the Castle Bank & Trust Co. records and worked with Special Agents David L. Ellison and Richard Jaffe. Mr. Gregg was later assigned by Agent Ellison to audit Benwest, and he was under the direction of the Project Haven coordinators while conducting the audit. During the course of the audit, Mr. Gregg met with Jerry Weiss, the accountant for Benwest. All information regarding Benwest's operations used by Mr. Gregg was provided by Mr. Weiss. Mr. Gregg forwarded such information to the Project Haven staff; but, he never informed Mr. Weiss that he was reporting to the staff, nor that he was connected with Project Haven in any way. Statutory notices of deficiency were issued to the petitioners and to the other partners of Benwest as a result of Mr. Gregg's audit. The deficiencies were based on the disallowance of partnership losses on the grounds that partnership production costs and interest expenses were not properly deductible.

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