Lassoff v. Gray

• Decision Date: 05 July 1962
• Docket Number: 3635,3636.,Civ. A. No. 3626
• Citation: 207 F. Supp. 843
• Parties: Benjamin LASSOFF and Irene Lassoff, Plaintiffs, v. William M. GRAY, etc., Defendant. Myron DECKELBAUM and Dorothy Deckelbaum, Plaintiffs, v. William M. GRAY, etc., Defendant. Robert LASSOFF, Plaintiff, v. William M. GRAY, etc., Defendant.
• Court: U.S. District Court — Western District of Kentucky

207 F. Supp. 843

Benjamin LASSOFF and Irene Lassoff, Plaintiffs, v. William M. GRAY, etc., Defendant.

Myron DECKELBAUM and Dorothy Deckelbaum, Plaintiffs, v. William M. GRAY, etc., Defendant.

Robert LASSOFF, Plaintiff, v. William M. GRAY, etc., Defendant.

Civ. A. Nos. 3626, 3635, 3636.

United States District Court W. D. Kentucky, at Louisville.

July 5, 1962.

Daniel W. Daviess, Newport, Ky., for plaintiffs.

William E. Scent, U. S. Atty., Louisville, Ky., for defendant.

SHELBOURNE, District Judge.

The plaintiffs in the above styled actions seek to invoke the equity jurisdiction of this Court to restrain the District Director of Internal Revenue at Louisville, Kentucky, in the collection of wagering taxes which have been levied and assessed against them and for relief against liens imposed upon their property. The defendant filed motions to dismiss on the grounds that the Court lacked jurisdiction to grant the relief sought. Defendant's motions were sustained and the complaints were dismissed. Lassoff v. Gray, D.C., 168 F.Supp. 363.

On plaintiffs' appeal, the Court of Appeals for the Sixth Circuit reversed the judgment of this Court and remanded the actions with directions that a hearing be held on the legality of the assessments and the existence of special and extraordinary circumstances warranting equitable relief notwithstanding the prohibition contained in Section 7421 of Title 26, United States Code, which provides that no suit for the purpose of restraining assessment or collection of any tax shall be maintained in any court. Lassoff v. Gray, 6 Cir., 266 F.2d 745.

In accordance with the mandate of the Court of Appeals, a trial of these consolidated actions was had before the Court, without the intervention of a jury, on June 5 and 6, continued to June 20 and concluded June 21, 1961.

Upon the testimony heard and the exhibits filed, the Court makes the following:

FINDINGS OF FACT

1. April 19, 1956, Special Agents of the Internal Revenue Service, armed with a search warrant, forced entry into a three-story building located at 1045 Monmouth Street, Newport, Kentucky, owned by plaintiffs Benjamin Lassoff and Robert Lassoff, and conducted a raid. Certain papers, notes, and memoranda that evidenced the operation of a business of accepting wagers were seized.

2. Plaintiffs Benjamin Lassoff, Robert Lassoff, and Myron Deckelbaum and Simon Klayman, who were found in a room on the second floor of the building during the raid, were subsequently indicted by the grand jury of the United States District Court for the Eastern District of Kentucky at Covington on a charge of conspiring to willfully attempt to evade a federal tax and for doing acts making them liable for such taxes without having paid them. The criminal charges were dismissed following Judge Swinford's determination that the warrant for search of premises was invalid and the search conducted April 19, 1956, unlawful, so as to require suppression of the evidence so obtained. United States v. Lassoff, D. C., 147 F.Supp. 944.

3. September 12, 1956, a joint and several jeopardy assessment of excise wagering taxes was made against Benjamin Lassoff, Robert Lassoff, Myron Deckelbaum, and Simon Klayman as follows:

                                                                         Total
                       Period        Tax        Penalty      Interest    Assessment
                       ------        ---        -------      ---------   -----------
                     March. 1956   $94,027.50   $94,027.50    $2,204.94  $190,259.94
                     April, 1956    54,499.50    54,499.50     1,005.52   110,004.52
                                                                          -----------
                                                                          $300,264.46
                

4. As shown by the assessment levied, the Internal Revenue Service determined that the three plaintiffs and Simon Klayman accepted wagers in the amount of $940,275.00 during March, 1956, and $544,995.00 during the period April 1 to April 19, 1956, for a total of $1,485,270.00. The defendant admits that the amount of taxes allegedly due was calculated from records seized in the raid on April 19, 1956, and that without those records the tax liability could not have been calculated.

5. September 13, 1956, a Form 17, notice and demand for payment of the assessment set out above, was issued to each of the plaintiffs. September 14, 1956, notices of federal tax liens in the amount of $300,264.46 were duly recorded in Hamilton County, Ohio and Campbell County, Kentucky with respect to property of each plaintiff.

6. Each of the plaintiffs have substantial property but it is inadequate to enable them to make bond or to pay the tax in full and file suit to recover a refund.

7. There is no admissible evidence to establish that plaintiffs were engaged in the business of accepting wagers and thus liable for the tax imposed by Section 4401 of Title 26, United States Code.

8. The plaintiffs' contention that they were each engaged in the business of handicapping sporting events, principally horse racing and baseball, and not in the business of accepting wagers is refuted by the testimony of the Special Agents of the Internal Revenue Service.

CONCLUSIONS OF LAW

In reversing the judgment of dismissal in these actions and remanding for further proceedings, Lassoff v. Gray, 6 Cir., 266 F.2d 745, 747, the Court said:

"Here we have three cases in which the parties will be denied a remedy unless and except they be afforded a hearing upon their complaints for injunction. It is true that if upon such hearing the alleged illegality and special and extraordinary circumstances do not in fact both exist then the restraint imposed by Section 7421(a) Internal Revenue Code of 1954 would apply, and the complaints would be dismissed, but we do not think that they should be dismissed without a hearing."

In order to come within the equity jurisdiction of this Court, plaintiffs must show both that the tax sought to be enjoined was illegally levied and the existence of special and extraordinary circumstances which would require equity to intervene. Hill v. Wallace, 259 U.S. 44, 62, 42 S.Ct. 453, 66 L.Ed. 822; Miller v. Standard Nut Margarine Co., 284 U.S. 498, 509, 52 S.Ct. 23, 76 L.Ed. 517; Midwest Haulers v. Brady, 6 Cir., 128 F.2d 496; John M. Hirst & Co. v. Gentsch, 6 Cir., 133 F.2d 247; Shelton v. Gill, 4 Cir., 202 F.2d 503.

Plaintiffs have each denied being engaged in the business of accepting wagers and, therefore, contend they are not liable for the tax imposed by Section 4401. Defendant's contention that plaintiffs were engaged in the business of accepting wagers is based upon the testimony of Special Agents of the Internal Revenue Service who conducted the raid at 1045 Monmouth Street on April 19, 1956. At the trial plaintiffs objected to the admissibility of evidence obtained during the raid because of Judge Swinford's ruling in United States v. Lassoff, supra. The Court reserved ruling on plaintiffs' objections and permitted the agents to testify.

The assessments were admittedly based upon information obtained during the search which Judge Swinford determined was unlawful. For this reason, plaintiffs allege that the assessments were illegal. However, defendant contends that, since these actions are civil in nature, the prohibition against the use of evidence obtained through an illegal search and seizure does not apply.

Although the Supreme Court has not specifically held that illegally obtained evidence is inadmissible in a civil case, statements in certain of its opinions are adaptable to the conclusion that such evidence may be considered inadmissible in civil cases.

In Weeks v. United States, 232 U.S. 383, 391, 34 S.Ct. 341, 58 L.Ed. 652, holding that illegally obtained evidence was not admissible in a criminal action, the Supreme Court said:

"The effect of the Fourth Amendment is to put the courts of the United States and Federal officials, in the exercise of their power and authority, under limitations and restraints as to the exercise of such power and authority, and to forever secure the people, their persons, houses, papers and effects against all unreasonable searches and seizures under the guise of law. This protection reaches all alike, whether accused of crime or not, and the duty of giving it force and effect is obligatory upon all entrusted under our Federal system with the enforcement of the laws." (Emphasis added.)

The case of Silverthorne Lumber Co. v. United States, 251 U.S. 385, 40 S.Ct. 182, 64 L.Ed. 319, arose out of an illegal search and the seizure of records of a corporation while two of its officers who had been indicted were being detained following their arrest. Photographs and copies of material papers were made and a new indictment was framed based upon the knowledge thus obtained. Application was made for the return of the records unlawfully taken and the District Court ordered the originals returned but impounded the photographs and copies. Subpoenas to produce the originals then were served and the District Court ordered the defendants to comply, although it had previously found that all of the papers had been seized in violation of the parties' constitutional rights. At pages 391 and 392, 40 S.Ct. at pages 182, 183 of its opinion reversing the order of the District Court, the Supreme Court said:

"The Government now, while in form repudiating and condemning the illegal seizure, seeks to maintain its right to avail itself of the knowledge obtained by that means which otherwise it would not have had.

* * * * * *

"The essence of a provision forbidding the acquisition of evidence in a certain way is that not merely evidence so acquired shall not be used before the Court but that it shall not be used at all. Of course this does not mean that the facts thus obtained become sacred and inaccessible. If knowledge of them is gained from an independent source they may be proved like any others, but the knowledge gained by the Government's own wrong cannot be

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