555 F.3d 190 (6th Cir. 2009), 07-2312, United States v. Rutherford

Docket Nº:07-2312, 07-2313.
Citation:555 F.3d 190
Party Name:UNITED STATES of America, Plaintiff-Appellant, v. Jon RUTHERFORD (07-2312), Judith Bugaiski (07-2313), Defendants-Appellees.
Case Date:February 04, 2009
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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555 F.3d 190 (6th Cir. 2009)

UNITED STATES of America, Plaintiff-Appellant,

v.

Jon RUTHERFORD (07-2312), Judith Bugaiski (07-2313), Defendants-Appellees.

Nos. 07-2312, 07-2313.

United States Court of Appeals, Sixth Circuit.

February 4, 2009

Argued: Oct. 21, 2008.

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ARGUED:

Robert Cares, Assistant United States Attorney, Detroit, Michigan, for Appellant.

Steven F. Fishman, Robert M. Morgan, Law Office, Detroit, Michigan, for Appellees.

ON BRIEF:

Robert Cares, Assistant United States Attorney, Detroit, Michigan, for Appellant.

Steven F. Fishman, Robert M. Morgan, Law Office, Detroit, Michigan, for Appellees.

Before BOGGS, Chief Judge; and COLE and COOK, Circuit Judges.

BOGGS, C. J., delivered the opinion of the court, in which COOK, J., joined. COLE, J. (pp. __ - __), delivered a separate concurring opinion.

OPINION

BOGGS, Chief Judge.

Defendants Jon Rutherford and Judith Bugaiski were charged with numerous tax violations and conspiracy to defraud investigators from the Internal Revenue Service (IRS). The United States appeals the district court's suppression of certain statements and documents obtained pursuant to an allegedly improper civil investigation. The IRS civil examiners who interviewed Rutherford and Bugaiski were required under an IRS manual to suspend their investigation when a " firm indication of fraud on the part of the taxpayer[s]" surfaced and refer the case to the criminal division. Internal Revenue Manual § 4565.21(1). Despite the fact such indications had emerged, civil examiners continued their investigation, conducting further

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interviews with the defendants and requesting additional documents.

In the criminal proceedings that followed, the IRS sought admission of their incriminating statements. The district court held the statements had to be suppressed, initially citing United States v. McKee, 192 F.3d 535 (6th Cir.1999), for the proposition that any continuation of discussions under a civil audit after firm indications of fraud have emerged would violate the Due Process Clause of the Fifth Amendment.; JA 81. At a later hearing, the court narrowed its explanation orally, remarking that not every " violation of the [IRS] manual [creates] a per se constitutional violation," but that this case did establish a violation. The United States now appeals, contending that the district court misread the Sixth Circuit's

Because the defendants' constitutional rights were not violated by the IRS's negligent violation of its manual, we reverse the district court. Despite the district court's reliance on McKee, in that case the Sixth Circuit explicitly reserved the issue now before us. Whether the government violates a person's due process rights in the course of taking his statement is assessed under a voluntariness standard, and the Constitution does not demand a bright-line rule whereby every breach of federal administrative policy also violates the Due Process Clause. The Fifth Amendment is implicated only when a federal agent's conduct actually compels a person to speak against his will. With respect to Rutherford and Bugaiski, there is no credible basis for concluding that their statements were coerced. Although the civil examiners may have been negligent in failing to refer the case to the IRS's Criminal Division, the district court found no evidence that they deliberately disregarded the manual in order to mislead the defendants. Nor is there evidence in the record that suggests Rutherford and Bugaiski were familiar with the manual, or that they were lulled into a false sense of security about the nature of the charges they might face. In short, their statements were given voluntarily and may be properly admitted into evidence without infringing upon their constitutional rights.

I

Rutherford and Bugaiski were both officers of Metro Emergency Services (MES), a non-profit tax exempt organization operating a homeless shelter for women in Highland Park, Michigan. Rutherford served as the organization's president, and Bugaiski served as its controller. The IRS first became interested in MES when a newspaper article reported on political contributions made by the group. As a non-profit organization, such disbursements could affect the group's tax status. In the course of reviewing the IRS filings, agent Wesley Tagami of the Tax Exempt and Government Entities Division discovered that MES had not filed several forms related to tax withholding from employee salaries. At this point, no direct evidence of fraud had surfaced, as there was no indication that Rutherford or any other employee had not reported all income. But Tagami's findings suggested there was the potential for fraud and, noting the irregularity, he referred the case to a fraud specialist. Soon thereafter, several other agents were assigned to work on this case, including Suzanne Carene, a revenue agent, who was tasked with examining the organization's tax returns, and another agent who was charged with collecting any unpaid taxes from MES.

Some indications of fraud began to emerge. Agents discovered that Rutherford's personal tax return showed that taxes had been withheld from his pay, even though MES never remitted the

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money to the IRS. Still, agents believed no firm indications of fraud were yet apparent, because certain elements of criminal fraud remained unsupported by the records. As the government notes, " there could be innocent explanations for the problem with the returns, such as Rutherford's lack of knowledge about the non-filings of 941s or the fact that the funds had not been remitted to the IRS." Since a taxpayer's intent is crucial to the distinction between criminal and civil fraud, agents could not determine whether there was an innocent explanation for the discrepancy or if the omission was intentional and therefore potentially criminal until they interviewed Rutherford and Bugaiski.

Agent Carene met with the defendants and their CPA for the first time on December 16, 2003. Rutherford and Bugaiski stated that their failure to remit taxes was unintentional, and that funds owed to them had come in late. Rutherford thereafter abruptly ended the interview. Agent Carene attempted to continue the interview, but the defendants refused to answer any more questions. She then made several requests to meet with the defendants again for further questioning, and when they declined, she caused a summons to be served on the defendants.1 Pursuant to the summons, Carene met with defendants on June 17, 2004. At that time, Bugaiski turned over various documents, but no interviews were conducted. On June 21 and June 25, 2004, Carene interviewed Rutherford for a second and third time. In the course of these interviews, he answered some questions and declined to answer others. On June 23, 2004, she interviewed Bugaiski.

IRS agents involved in the case held a conference call on July 20, 2004, and finally determined that a criminal referral should be made. Explaining the decision later, one investigator said, " I believe we had enough, or we had affirmative acts that showed intent and willfulness by the taxpayer to fail to collect and turn over the employment taxes, not report substantial amounts of income, not file tax returns...." On April 21, 2006, defendants were charged in a 22-count indictment alleging various violations of the tax code, including tax evasion, failure to pay taxes that were withheld from employees, making false returns, and conspiracy to defraud IRS investigators. In a pretrial motion to suppress evidence and dismiss the indictment, the defendants claimed that the IRS agents improperly continued the civil examination after...

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