90 T.C. 237 (1988), 9382-83, Jerry R. v. C.I.R.

Docket Nº:9382-83, 17640-83 4201-84, 15907-84, 40159-84, 22783-85, 30010-85, 30979-85, 29643-86.
Citation:90 T.C. 237
Opinion Judge:GOFFE, JUDGE:
Party Name:JERRY R. AND PATRICIA A. DIXON, ET AL.,[1] Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Darrell D. Hallett, Robert J. Chicoine, and Robert M. McCallum for the petitioners. Kenneth W. McWade and Henry O'Neal for the respondent.
Case Date:February 11, 1988
Court:United States Tax Court
 
FREE EXCERPT

Page 237

90 T.C. 237 (1988)

JERRY R. AND PATRICIA A. DIXON, ET AL.,[1] Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 9382-83, 17640-83 4201-84, 15907-84, 40159-84, 22783-85, 30010-85, 30979-85, 29643-86.

United States Tax Court

February 11, 1988

Pursuant to an undercover investigation, the Internal Revenue Service concluded that Henry Kersting was involved in a scheme in which fictitious debt was created in order to generate interest deductions. The IRS obtained and executed a search warrant on Kersting's office. Among the documents seized were notes, copies of stock certificates, stock subscription agreements and checks pertaining to petitioners. The statutory notices of deficiency mailed to petitioners disallowed the interest deductions claimed with respect to transactions arranged through Kersting. Petitioners contend that when the IRS obtained the search warrant, it knew that the information obtained pursuant to the execution of the search warrant was to be used primarily for civil litigation purposes. Petitioners contend that the IRS does not have the authority to utilize a search warrant for such purposes and petitioners amended their petitions to allege that we should suppress such evidence and shift the burden of proof and the burden of going forward to respondent. Petitioners do not contend that their Fourth Amendment rights were violated by the search and seizure. HELD, in order for petitioners to contest the propriety of the search and seizure, they must establish that the search and seizure violated their Fourth Amendment rights. Rakas v. Illinois, 439 U.S. 128 (1978), followed. HELD FURTHER, our supervisory power as a Court does not authorize us to suppress otherwise admissible evidence on the ground that it was seized unlawfully from a third party not before the Court. United States v. Payner, 447 U.S. 727 (1980), followed. Accordingly, we need not decide whether any evidence was unlawfully obtained and the evidence obtained pursuant to the search and seizure will not be suppressed at a trial on the merits to redetermine the civil tax liabilities of petitioners.

Page 238

Darrell D. Hallett, Robert J. Chicoine, and Robert M. McCallum for the petitioners. [2]

Kenneth W. McWade and Henry O'Neal for the respondent.

GOFFE, JUDGE:

The Commissioner determined the following deficiencies in petitioners' Federal income taxes:

Additions to tax
Taxable Sec. Sec. Sec.
Petitioners year Deficiency 6653(a)(1)3 6653(a)(2) 6661(a)
Jerry R. and 1977 $9,885.00 $494.00 __ __
Patricia A. Dixon 1978 17,375.00 868.75 __ __
1979 18,087.00 904.35 __ __
1980 29,448.00 1,649.70 __ __
1981 28,061.00 1,759.90 __ __
Ralph J. Rina 1979 16,236.38 811.81 __ __
1980 39,015.00 1,950.75 __ __
Robert L. and 1980 25,877.00 1,293.85 __ __
Carolyn S. DuFresne 1981 21,790.00 1,089.50 (1) __
1982 16,684.70 834.24 (1) $1,668.47
1983 15,851.64 729.58 (1) 1,585.16
Terry D. and 1975 4,341.00 217.00 __ __
Carolyn K. Owens 1976 2,786.00 139.00 __ __
1977 1,195.00 60.00 __ __
1978 1,069.00 53.00 __ __
Hoyt W. and 1979 15,658.00 783.00 __ __
Barbara D. Young 1980 23,582.00 1,179.00 __ __
1981 23,819.00 1,191.00 (1) __
1982 13,773.59 688.68 (1) 1,377.36
1983 2,163.42 108.17 (1) __
Richard and 1978 9,303.00 465.00 __ __
Fidella Hongsermeier 1979 11,866.00 593.00 __ __
1980 18,717.00 936.00 __ __
Page 239 The issues for our decision are: (1) whether petitioners can challenge the search and seizure of a third party not before the Court; (2) if petitioners can challenge the search and seizure, whether the Internal Revenue Service utilized a search warrant to compel the production of information which was to be used primarily for civil purposes; (3) if the IRS did utilize the search warrant for such purpose, whether it has such authority; and (4) if the IRS does not have such authority, whether the exclusionary rule should be applied. [4] FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and the accompanying exhibits are incorporated by this reference. Petitioners, Jerry R. and Patricia A. Dixon, husband and wife, resided in El Paso, Texas, at the time they filed their petition. Petitioner, Ralph J. Rina, resided in Sunset Beach, California, at the time he filed his petition. Petitioners, Robert L. and Carolyn S. DuFresne, husband and wife, resided in Memphis, Tennessee, at the time they filed their petitions. Petitioners, Terry D. and Carolyn K. Owens, husband and wife, resided in Kailau, Hawaii, at the time they filed their petition. Petitioners, Hoyt W. and Barbara D. Young, resided in Cordova, Tennessee, at the time they filed their petitions. Petitioners, Richard and Fidella Hongsermeier, resided in Spring, Texas, at the time they filed their petition. With the exception of petitioner Ralph J. Rina who filed an individual Federal income tax return, all of the petitioners filed joint Federal income tax returns with their respective spouses for the taxable years in issue. In April 1980, Special Agent James Duncan of the IRS was in charge of the investigation of alleged violations of Page 240 the criminal tax laws by Henry Kersting. In March and April 1980, Special Agent Duncan obtained information and documents from two confidential sources indicating that Kersting was using sham corporations and sham loan transactions to generate fictitious interest deductions. On January 9, 10, and 12, 1981, an undercover special agent of the IRS posed as an airline pilot and businessman and met with Kersting for the purpose of gathering information concerning transactions arranged by Kersting for clients. During the course of these meetings, the undercover agent indicated to Kersting that he had some income tax liability for 1980. Kersting explained that he had devised a plan, which he had used for approximately 2,500 pilots, to generate fictitious interest deductions of approximately twelve times the cash outlay. Kersting explained that the plan involved the creation of debt and the creation of loans to pay interest on the debt. Kersting stated that, under one variation of the plan, he would arrange for a loan to be made to the undercover agent at an annual rate of 18 percent. The purported loan would be used to purchase stock in various corporations controlled by Kersting. Kersting then stated that he would arrange for a second loan to be made to the undercover agent which would be for the stated purpose of paying the interest on the first loan. The second loan would have an annual interest rate of 9 percent. The interest on the second loan would be paid to Kersting as a fee for his services. Kersting further explained that the promissory notes were nonnegotiable and nonassignable and that there was absolutely no cash outlay required other than the payment of his fee. Kersting stated that the loans were not expected to be repaid except by redemption of the stock certificates. Kersting stated that all documents used in the program were prepared in his office and that copies were retained there. On January 12, 1981, Kersting provided the undercover agent with the necessary documentation bearing dates in 1980. During one of the meetings, Kersting received a telephone call and during the conversation referred to a list of names and telephone numbers. The undercover agent concluded that this was Kersting's client list. Page 241 On January 21, 1981, based upon affidavits submitted by Special Agent Duncan, a search warrant was issued to the IRS by the United States District Court for the District of Hawaii to search the office of Kersting and seize the following: promissory notes; note and security agreements; copies of stock certificates; cancelled checks and deposit slips relating to bank accounts maintained at the Liberty Bank, Kahala Mall, Hawaii; a computer listing of names and telephone numbers; copies of completed pre-numbered receipts; all of the above relating to loan transactions and interest deductions prepared by or for Mr. Henry Kersting's clients, together with any other evidence and/or instrumentalities of violations of 26 U.S.C. Sections 7201 and 7206(2), and 18 U.S.C. Section 371 for the years 1976 up to and including the present. On January 22, 1981, the search warrant was executed. Seventy- seven boxes and two filing cabinets of records were seized from Kersting's offices. Among the documents seized were notes, copies of stock certificates, stock subscription agreements and checks pertaining to petitioners Dixon, Rina, DuFresne, Owens, Young, and Hongsermeier. Also seized were a list of approximately 1,800 names and addresses of individuals who were clients of Kersting and approximately 104 pages of 12 column worksheets showing, for each of the taxable years 1977, 1978, and 1979, the names of clients and the amounts of interest they purportedly paid to each of several companies. The worksheets revealed the names and amounts purportedly paid by petitioners Dixon, Rina, and Hongsermeier. Subsequent to the execution of the search warrant, Kersting filed a suit in the U.S. District Court for the District of Hawaii seeking among other things: 1. Money damages for alleged failure to issue Miranda warnings prior to the search; 2. A declaratory judgment that provisions of the IRS Manual were unconstitutional; 3. Numerous injunctions based upon alleged misuse of the grand jury system; 4. Money damages under 42 U.S.C. section 1985(3) for alleged violations of First Amendment rights; and 5. A declaratory judgment that the search was an illegal, warrantless search. Page 242 The District Court dismissed claims 1 through 4 and granted the government's motion for summary judgment with respect to claim 5. The District Court also held that in light of the disposition...

To continue reading

FREE SIGN UP