803 F.2d 1042 (9th Cir. 1986), 86-1072, United States v. Michaelian

Docket Nº:86-1072.
Citation:803 F.2d 1042
Party Name:UNITED STATES of America, Plaintiff-Appellee, v. Ara MICHAELIAN, Defendant-Appellant.
Case Date:October 31, 1986
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 1042

803 F.2d 1042 (9th Cir. 1986)

UNITED STATES of America, Plaintiff-Appellee,

v.

Ara MICHAELIAN, Defendant-Appellant.

No. 86-1072.

United States Court of Appeals, Ninth Circuit

October 31, 1986

Argued and Submitted Sept. 30, 1986.

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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

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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

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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...

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