Bell v. Comm'r of Internal Revenue

• Decision Date: 09 May 1988
• Docket Number: Docket No. 22733-84,37219-84,25769-84,37220-84
• Parties: PERCY L. AND LOIS V. BELL,, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

90 T.C. 878

90 T.C. No. 59

PERCY L. AND LOIS V. BELL,, ET AL.,1 Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22733-84

25769-84

37219-84

37220-84

United States Tax Court

Filed May 9, 1988

R obtained a copy of a criminal indictment, after it had been filed in open court, and used the information contained therein as a basis for the notices of deficiency issued to Ps. Ps' contend that R's obtention and use of the indictment was a violation of Rule 6(e), Federal Rules of Criminal Procedure (‘Rule 6(e)‘), which shields from public disclosure matters occurring before the grand jury. R's position is that the filed indictment is a public record and the procurement of a copy thereof and the subsequent use of the information contained therein is reasonable and proper.

Neither Ps nor R ever filed a petition for disclosure pursuant to Rule 6(e) with the United States District Court seeking matters occurring before the grand jury.

HELD, the indictment filed in the United States District Court on September 30, 1982 is a public record. HELD FURTHER, R's obtention of a copy of the indictment and his use thereof in formulating the notices of deficiency was reasonable and proper and, hence, did not violate the secrecy provisions of Rule 6(e). HELD FURTHER, Ps' Motion to Shift the Burden of Going Forward With Untainted Evidence and Motion to Suppress Evidence Improperly Attained is denied. James L. Norris, for the petitioners.

Benjamin A. de Luna, for the respondent.

OPINION

WHITAKER, JUDGE:

Petitioners' Motions to Shift the Burden of Going Forward With Untainted Evidence and Motion to Suppress Evidence Improperly Attained filed herein were assigned to Special Trial Judge Francis J. Cantrel.² After a review of the record, we agree with and adopt his opinion which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

CANTREL, SPECIAL TRIAL JUDGE:

These cases are presently before the Court on petitioners' Motion to Shift the Burden of Going Forward With Untainted Evidence and Motion to Suppress Evidence Improperly Attained filed in each case.³ A hearing was held on petitioners' motion at Denver, Colorado at which time a Stipulation of Facts was filed, some 49 exhibits were received and oral testimony was heard. The parties have filed original simultaneous briefs and reply briefs.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, the exhibits attached thereto and other exhibits received are incorporated herein by this reference.

During 1979 and 1980, William A. Kilpatrick (hereinafter sometimes referred to as ‘Kilpatrick‘) owned all the outstanding stock of United Financial Operations, Inc. (‘UFO‘). During these years UFO was in the business of promoting and administering tax shelters.

In 1979 UFO, Kilpatrick, Declan O'Donnell (‘O'Donnell‘) and Shiela Lerner (‘Lerner‘) promoted Alpha V Real Estate (‘Alpha V‘), Information Realty, Ltd. (‘Information Realty‘, North Sea Realty, Ltd. (‘North Sea‘) and Xanadu Realty, Ltd. (‘Xanadu‘), four of approximately 21 methanol limited partnerships, which were to involve the development of methanol production processes and plants. ⁴ Petitioners were limited partners in these four partnerships. /5/ It Petitioners were limited partners in these four partnerships.⁵ It appears that investments in the methanol partnerships were structured to facilitate a deduction on the Federal income tax return for each partner/investor equal to four (4) times the amount of said investor's cash investment through the use of nonrecourse financing.⁶

Petitioners Percy L. and Lois V. Bell (hereinafter sometimes called ‘petitioners-Bell‘) filed joint Federal income tax returns with the Internal Revenue Service (‘IRS‘), for the taxable years 1979 and 1980. Thereon they claimed losses attributable to North Sea in the respective amounts of $49,511 and $37,241. On the date their timely petition was filed they resided in Greenville, Mississippi. ⁷

Petitioners Glen A. Jamtgaard and Barbara Jamtgaard (hereinafter sometimes called ‘petitioners-Jamtgaard‘) filed a joint Federal income tax return with the IRS for the taxable year 1979. Thereon they claimed a loss of $99,022 attributable to Information Realty. On the date their timely petition was filed they resided in Sioux Falls, South Dakota. ⁸

Petitioners James L. and Patricia Ramsey (hereinafter sometimes called ‘petitioners-Ramsey‘) filed joint Federal income tax returns with the IRS for the taxable years 1979 and 1980. Thereon they claimed losses attributable to Alpha V in the respective amounts of $49,500 and $36,921. On the date their timely petition was filed they resided in Littleton, Colorado. ⁹

Petitioners Donald V. Osborne and Nancy E. Osborne (hereinafter sometimes called ‘petitioners-Osborne‘) filed joint Federal income tax returns with the IRS for the taxable years 1979 and 1980. Thereon they claimed losses attributable to Xanadu in the respective amounts of $49,511 and $37,094. On the date their timely petition was filed they resided in Overland Park, Kansas. ¹⁰

Kilpatrick and O'Donnell began forming limited partnerships to invest in mineral leases in 1977 and 1978.¹¹ Special Agent paul E. Raybin (‘Raybin ‘) and Revenue Agent Ralph Tanner (‘Tanner‘) began a joint investigation of these mineral partnerships in November 1979.¹² Raybin first learned about activities of Kilpatrick and O'Donnell when CID received a telephone call from an informer on August 15, 1979. Subsequently, he met with the informer on several occasions, sometimes alone and sometimes with another agent. He also spoke with the informer a number of times by telephone. His last contact with the informer was sometime in 1981. Agents other than Raybin met with the informer from time to time. As a result of the joint investigation, the informer provided Raybin and Tanner with a list of the methanol partnerships that were formed in 1979, which included Alpha V, Information Realty, North Sea and Xanadu. Additionally, the informer provided a list of investors for some of the methanol partnerships, which list included investors in Alpha V and Information Realty. Two of the investors included in that list are James L. Ramsey, a limited partner in Alpha V, and Glen A. Jamtgaard, a limited partner in Information Realty.¹³

Prior to May 1980, the list of methanol partnerships was turned over to Revenue Agent Carol Daugherty (‘Daugherty‘). She was to coordinate the audit of the methanol partnerships and control the statute of limitations for the partners of the methanol partnerships. Her first work on the partnerships was May 19, 1980, for Alpha V; August 6, 1980, for Information Realty; November 14, 1980, for Xanadu; and January 29, 1981, for North Sea. Other than processing the tax return requests for the methanol partnerships and the related partners, getting transcripts of the partners' returns and coordinating the statute of limitations periods with IRS District Director's Offices outside of the Denver, Colorado District (hereinafter called ‘Denver District Office‘), no other action was taken by her. The identities of the partners in the methanol partnerships were obtained from the list of investors provided by the informer and from information on the Form K-1 attached to each of the methanol partnership returns.¹⁴

On May 12, 1980, the Chief, CID, of the Denver District Office requested, by Memorandum addressed to the Regional Commissioner, Southwest Region, a grand jury investigation of Kilpatrick, O'Donnell and Lerner in accordance with section 9267.2 of the Internal Revenue Manual (hereinafter referred to as ‘IRM ‘).¹⁵ The requested investigation would include, among other subjects, activities involving promotions of the methanol partnerships by UFO, Kilpatrick, O'Donnell and Lerner.

On July 30, 1980, the Office of Chief Counsel for the IRS pursuant to section 6103(h)(3)(A) forwarded a letter to the Assistant Attorney General, Tax Division, Department of Justice (hereinafter called ‘Department of Justice ‘) recommending that a grand jury investigation be conducted of Kilpatrick and others to gather additional evidence pertaining to the promotion of the methanol partnerships.¹⁶ IRS made its recommendation because of its belief that it would have difficulty developing a case through its normal criminal administrative process. It was further concerned that Kilpatrick, his related entities and others would be uncooperative and would frustrate any attempt by the IRS to gain access to records by criminal administrative means. It further believed that it would be faced with time consuming challenges to any administrative summonses it issued. This belief was supported by the problems encountered by the Securities and Exchange Commission (‘SEC‘), in an unrelated matter regarding some of the entities involved with the methanol partnerships, when it issued administrative subpoenas to Kilpatrick, O'Donnell and related corporations in August and September 1978. All parties refused to comply with the subpoenas. Numerous hearings were held and in January 1979 a Federal District Court ordered the parties to comply with the subpoenas. This decision was appealed to the Court of Appeals and as of May 12, 1980 SEC had received no records.

In making its recommendation, the IRS noted that its investigation to date had disclosed the names and addresses of some 360 methanol shelter investors. The IRS also advised, in transmitting some 55 exhibits to the Department of Justice, that its file contained a good deal of information developed outside of any grand jury.

The Department of Justice approved the IRS' recommendation on December 18, 1980, on which date it requested the United States Attorney's Office at Denver, Colorado to institute a grand jury investigation.

Soon after December 18, 1980, the Department of Justice assigned attorney Steven L. Snyder (‘Snyder‘) to conduct the grand jury investigation of Kilpatrick and others. In...