Dixon v. Comm'r of Internal Revenue
| Decision Date | 11 February 1988 |
| Docket Number | 17640-83 4201-84,22783-85,30010-85,29643-86.,Docket Nos. 9382-83,30979-85,40159-84,15907-84 |
| Citation | 90 T.C. 237,90 T.C. No. 17 |
| Parties | JERRY R. AND PATRICIA A. DIXON, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
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. Darrell D. Hallett, Robert J. Chicoine, and Robert M. McCallum for the petitioners. 2
Kenneth W. McWade and Henry O'Neal for the respondent.
The Commissioner determined the following deficiencies in petitioners' Federal income taxes:
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¦ ¦ ¦ ¦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 ¦--- ¦--- ¦
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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
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 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...
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