U.S. v. Michaelian

• Decision Date: 31 October 1986
• Docket Number: No. 86-1072,86-1072
• Citation: 803 F.2d 1042
• Parties: -6105, 86-2 USTC P 9798 UNITED STATES of America, Plaintiff-Appellee, v. Ara MICHAELIAN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1042

803 F.2d 1042

58 A.F.T.R.2d 86-6105, 86-2 USTC P 9798

UNITED STATES of America, Plaintiff-Appellee, v. Ara MICHAELIAN, Defendant-Appellant.

No. 86-1072.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Sept. 30, 1986.

Decided Oct. 31, 1986.

Sanford Svetcov, Charles B. Burch, Asst. U.S. Attys., San Francisco, Cal., for plaintiff-appellee.

Frank Z. Leidman, Frederik A. Jacobsen, Sideman & Bancroft, San Francisco, Cal., for defendant-appellant.

Appeal from the United States District Court for the Northern District of California.

Before ANDERSON, TANG and FARRIS, Circuit Judges.

TANG, Circuit Judge:

Defendant Ara Michaelian appeals from (1) denial of his motion to suppress evidence seized pursuant to two search warrants, and (2) denial of his motion to dismiss his indictment for tax evasion and subscribing to false tax returns. Michaelian contends that the warrants lacked probable cause; that the warrants violated the particularity requirement of the Fourth Amendment; and that the "good faith" exception to the exclusionary rule does not apply. Michaelian further asserts that federal agents violated the confidentiality requirement of 26 U.S.C. Sec. 6103, and that the proper remedies for such a violation are dismissal of the indictment or suppression of the evidence seized. The district court held that probable cause supported the warrants. The district court held further that the warrants violated the particularity requirement of the Fourth Amendment, but that the "good faith" exception to the exclusionary rule permitted admission of the evidence seized. Finally, the district court held that, even if IRS agents violated 26 U.S.C. Sec. 6103, dismissal of the indictment and suppression of the evidence seized were improper remedies. We have jurisdiction under 28 U.S.C. Sec. 1291 and Fed.R.Crim.P. 11(a)(2), and we affirm.

FACTS AND PROCEDURAL HISTORY

Ara Michaelian was president and majority shareholder of Ara Explorations, Inc., a San Francisco marine salvage company which sells scrap products and industrial valves. Michaelian's brother Arthur was president and sole shareholder of MAR-IND Supply Co., Inc., a San Francisco marine and industrial valve and fitting supplier. On January 22, 1982, and February 4, 1982, IRS Special Agent Gerald Cox (Agent Cox) met separately with Donna Johnson and James Doty. Johnson was Ara Michaelian's sister-in-law and bookkeeper; Doty had been a salesman for Michaelian since 1978. Johnson and Doty told Agent Cox that, since 1978, Ara Michaelian and Arthur Michaelian had engaged in a "cash-skimming" scheme by issuing checks to fictitious or unwitting payees and claiming the phony payments as deductible expenses on tax returns. One of the informants furnished a list, prepared from Ara Michaelian's business check register, of ninety-three checks allegedly issued to fictitious or unwitting payees from 1981 to 1982. Both informants had had close personal contact with the Michaelians from 1978 to 1982, had been inside their business premises frequently during that time, and had participated in the alleged cash-skimming scheme.

Arthur Michaelian's former bookkeeper Bertha Diaz, when interviewed by Cox, corroborated Doty and Johnson as to Arthur Michaelian's alleged cash-skimming scheme. Review of Ara Michaelian's tax returns for 1978 through 1980 led IRS Special Agent Billy Johnson, a CPA, to conclude that Ara Michaelian had fraudulently deducted business receipts on Schedule C of his tax return as cost of goods sold for his sole proprietorship. Review of Ara Michaelian's corporate tax return for the year ending 1981 led Agent Cox to a similar conclusion. Agent Cox submitted an eight-page affidavit and three search warrants for review and approval pursuant to IRS regulations to IRS District Counsel, IRS Chief Counsel, the Tax Division of the Department of Justice and the U.S. Attorney. The affidavit contained tax return information of Ara Michaelian. The warrants were executed on October 27, 1982. Numerous documents were seized.

On May 17, 1985, Ara Michaelian was indicted by a federal grand jury on five counts of tax evasion (26 U.S.C. Sec. 7201) for calendar years 1978-1982, and two counts of subscribing to false corporate tax returns (26 U.S.C. Sec. 7206(1)) of Ara Explorations, Inc., for tax years 1981 and 1982. Following an evidentiary hearing on September 13, 1985, the district court denied Michaelian's motion to suppress evidence seized under the search warrants for his business records and his motion to dismiss for alleged unlawful disclosure of his tax return information. On November 27, 1985, Michaelian entered conditional pleas of guilty to one count of tax evasion (for 1981) and one count of subscribing to a false corporate tax return (for 1981 also). Michaelian reserved his right to appeal from the denial of his pretrial motions. The district court dismissed the remaining counts and sentenced Michaelian to three concurrent three-year prison terms and a special assessment of $100. Michaelian is at liberty on bond pending disposition of this appeal.

DISCUSSION

I. Probable Cause

Determinations of probable cause must be upheld if the issuing magistrate had a "substantial basis" for concluding that a search would uncover evidence of wrongdoing. Illinois v. Gates, 462 U.S. 213, 236, 103 S.Ct. 2317, 2331, 76 L.Ed.2d 527 (1983). A federal search warrant must be based upon a showing of probable cause that a federal crime has been committed. See Fed.R.Crim.P. 41(b)(2). It is clear, however, that an affidavit containing a recitation of facts which show a nexus to a federal crime furnishes probable cause to support a warrant. United States v. Washington, 782 F.2d 807, 820 (9th Cir.1986). In Washington, an affidavit reciting facts which demonstrated the defendant's involvement in prostitution, not in itself a federal crime, recited facts sufficient to demonstrate a nexus to various federal crimes, including the Travel Act, RICO, and income tax violations. Id. at 820.

Michaelian argues that the affidavit, in its recitation of facts describing the cash-skimming scheme, fails to adequately demonstrate that a federal crime has been committed. Since writing business checks to fictitious payees is not a federal crime, Michaelian contends the affidavit fails to establish probable cause that federal tax crimes have been committed. We disagree.

In this case, the informants provided information describing a course of cash-skimming from 1978 to 1982 by which records used in the preparation of tax returns were created. Michaelian's bookkeeper told Agent Cox that the ledger containing phony entries was used to prepare tax returns. Based on this information and upon their experience, IRS agents concluded that large sums were fraudulently deducted in violation of the tax laws. Certainly, more direct evidence of tax crimes--e.g., an account of the actual fraudulent preparation of tax returns by Michaelian--would have augmented probable cause. But the information discussed supra described a course of conduct which extended beyond mere "cash-skimming," and which included the preparation of phony records used in preparing tax returns determined by experienced IRS agents to contain fraudulent deductions. Such evidence demonstrates at least a nexus between the cash-skimming scheme and violations of the tax laws. See Washington, 782 F.2d at 820.

Michaelian further contends that corroboration provided by (1) the informants Doty and Johnson of each other, (2) the bookkeeper Diaz, and (3) IRS examination of his tax returns, was insufficient to sustain a determination of probable cause. This contention lacks merit.

Michaelian correctly points out that evidence relating to the years 1978-1980 was provided only by one of the informants. It is likewise true that no list of alleged phony checks was provided for those years, and that no investigation was undertaken to determine if the payees were in fact fictitious or unwitting. A magistrate may infer, however, that the scope of the evidence presented represents the "tip of the iceberg" and conclude that probable cause is not limited to evidence described by informants. See United States v. 50 State Distributing Co., 708 F.2d 1371, 1374-1375 (9th Cir.1981), cert. denied, 465 U.S. 1021, 104 S.Ct. 1272, 79 L.Ed.2d 677 (1984). Insofar as the IRS agents' conclusions based on examination of Michaelian's tax return are concerned, it is clear that opinions and conclusions of an experienced agent regarding a set of facts are properly a factor in the probable cause equation under the Gates totality of the circumstances approach. United States v. Seybold, 726 F.2d 502, 504 (9th Cir.1984), United States v. Foster, 711 F.2d 871, 878 (9th Cir.1983).

Based on the totality of these circumstances, see Gates, 462 U.S. at 236, 103 S.Ct. at 2331, it cannot be said that the magistrate lacked a substantial basis on which to conclude that probable cause existed for the issuance of the search warrants in this case. Doty and Johnson had personal and business relationships with Michaelian. They independently corroborated each other as to the cash-skimming schemes and as to the location and description of documents related to the schemes. The bookkeeper Diaz confirmed the credibility of the informants. The conclusions of IRS agents based upon examination of Michaelian's returns provided further corroboration. Given the fact that these informants were citizen informants without criminal records, see United States v. McCrea, 583 F.2d 1083, 1085 (9th Cir.1978); Rutherford v. Cupp, 508 F.2d 122, 123 (9th Cir.1974), cert. denied, 421 U.S. 933, 95 S.Ct. 1663, 44 L.Ed.2d 92 (1975), further corroboration was unnecessary to a determination of probable cause.

II. Applicability of the "Good Faith" Exception to the Exclusionary Rule to the Warrants

Whether the "good faith" exception to the exclusionary rule applies in any given case is subject to de novo...