Bernstein v. U.S.
| Citation | 990 F.Supp. 428 |
| Decision Date | 10 November 1997 |
| Docket Number | No. 2:97-746-18.,No. 2:97-745-18.,2:97-745-18.,2:97-746-18. |
| Court | U.S. District Court — District of South Carolina |
| Parties | Lynn F. BERNSTEIN, Harvey A. Nathan, Plaintiffs, v. UNITED STATES of America, acting by and through its agency, the Internal Revenue Service, Kevin Cox, Robert Freeland, and James Ruark, Defendants. |
Charles S. Bernstein, Charleston, SC, for Plaintiffs.
Steven Webster, Washington, DC, for Defendants.
Plaintiffs Harvey Nathan and Lynn Bernstein filed separate actions against the United States and special agents for the Internal Revenue Service based on the conduct of the agents during the search of a business and residence. The defendants moved to dismiss the actions under Rule 12(b)(1) for lack of subject matter jurisdiction and Rule 12(b)(6) for failure to state a claim under the Federal Rules of Civil Procedure due to the Court's absence of jurisdiction over this action. The defendant federal officer alternatively moved for summary judgment based on qualified immunity. Based on the following discussion, the United States is dismissed based on sovereign immunity. Further, the actions are dismissed against the federal officer defendants based on the failure to state a claim, or alternatively, summary judgment is granted based on qualified immunity.
Background of Investigation. The Internal Revenue Service began a criminal investigation of Harvey Nathan following a report by a local accounting practitioner that Nathan may have violated federal tax laws in connection with his personal income taxes and that of his business, Nathan's Deli, Inc. for the years 1991 and 1992. (Brantley Decl., para. 2.)
The accounting practitioner stated that she had performed accounting services for Nathan's Deli, Inc. and Harvey Nathan since May or June 1993 and that Nathan sought her assistance in assembling financial information for an insurance company relating to an insurance claim for damages incurred to a deli location in May 1993. (Brantley Decl., para. 3.)
According to the informant, Nathan specifically requested that she prepare a corrected 1991 and 1992 corporate income tax return for Nathan's Deli, Inc. and compile sales figures for the business for the period May 1991 through May 1993. Nathan advised the informant that the 1991 corporate tax return that he had previously filed with the IRS was incorrect because it did not include wholesale income. Nathan told the informant that, in addition to the retail deli, food products and catering services were sold through a wholesale side business and that the income had not been reported on tax returns. (Brantley Decl., para. 4.)
Nathan provided the informant with records of his wholesale/catering income by month for 1991 and 1992 along with the food cost associated with this income. He also gave her the daily income sheets for this period which reflected retail income. According to these records, the 1991 corporate tax return failed to report $164,200 in additional gross receipts and $126,434 in additional net income. Also, the 1992 corporate tax return had not yet been filed, but the records Nathan provided to the informant showed that $183,922 in additional gross receipts and $138,362 in additional net income 1992 were not shown on the corporate financial statements. (Brantley Decl., para. 5.)
Nathan told the informant that he wanted her to prepare tax returns that reflected all income (retail and wholesale), which were to be provided to the insurance company for the business interruption claim. (Brantley Decl., para. 6.) The informant also stated that she later prepared Nathan's individual tax returns for 1991 and 1992, which had been delinquent. The earnings that she reported on his returns were based on the flow-through profits from the SubChapter S corporate returns for Nathan's Deli, Inc. that she had previously prepared for the insurance company. The informant stated that Nathan had also provided copies of these returns to a local bank to refinance his residence. (Brantley Decl., para. 7.)
The informant stated that during September and November 1993, Nathan received notices from the IRS and South Carolina Tax Commission regarding his 1991 personal tax return and 1992 corporate tax return. In November 1993, Nathan and his girlfriend/business partner, Lynn Bernstein, asked the informant to meet with them to discuss his tax problems. At this meeting, Nathan told her that he needed her to prepare new 1991 and 1992 individual and corporate income tax returns for him to file with the tax authorities. Nathan explained that he did not want these new returns to reflect the wholesale/catering income that was shown on the tax returns he submitted for insurance and refinancing purposes. Nathan told the informant that the tax liabilities shown on returns submitted to the insurance company were much higher than he was willing to pay. At this point, the informant contacted the IRS and reported Nathan's conduct. (Brantley Decl., para. 8.)
The Internal Revenue Service Special Agent assigned to the case, Brantley, took the following actions to corroborate the statements. A check of IRS records reflected that Nathan's 1991 and 1992 individual tax returns, along with the 1992 corporate tax return for Nathan's Deli, Inc., had not been filed. A copy of the 1991 corporate return for Nathan's Deli, Inc. in the informant's possession agreed with the return originally filed with the IRS. Copies of income summary sheets and other documentation provided to the informant by Nathan were reviewed. The income sheets supported the informant's statement regarding the additional wholesale business income that Nathan claimed the business made in 1991 and 1992. In addition, copies of the tax delinquency notices provided to the informant from Nathan were reviewed and were consistent with her testimony. Also, copies of the tax returns that she prepared for submission by Nathan to the insurance and mortgage companies were reviewed and agreed in amount to income summary sheets provided by Nathan. (Brantley Decl., para. 9.)
The informant agreed to tape conversations with Nathan and Bernstein to confirm that Nathan wanted her to assist him in preparing erroneous federal income tax returns. During December 1993 and February 1994, the informant made a series of monitored telephone calls to Nathan and Bernstein. In these recorded conversations, Nathan reiterated his instructions to her regarding the preparation of his corporate and individual income tax returns. (Brantley Decl., para. 10.)
From a December 2, 1993 telephone conversation, the informant asked Nathan if he wanted the corporate tax returns to include the wholesale income or expenses which were shown on the returns prepared for the insurance company, to which Nathan replied, "No, we don't want to show any of the wholesale (figures) in there; We don't want to pay any taxes." Bernstein then told the informant, "We get money back, make sure to do that." (Brantley Decl., para. 11.)
In the same conversation, she told Nathan and Bernstein that both she and they knew that the tax returns were not correct and asked if they had any objections to her not signing the returns (as the preparer). Nathan responded, "No." Bernstein reassured the informant that she should not worry about asking them anything and further explained that she and Nathan felt comfortable with her or else would not be filing false returns. (Brantley Decl., para. 12.) Also in the same conversation, Nathan told the informant, "Just show as much income as you can without having a wild tax liability; that way we can substantiate our existence." (Brantley Decl., para. 13.)
On February 6, 1994, the informant had a recorded conversation with Nathan and Bernstein at Nathan's Deli. At this meeting, she gave Nathan the tax returns that he requested she prepare for the IRS. She also showed Nathan and Bernstein copies of the 1991 and 1992 corporate tax returns she had earlier prepared, at his request, for insurance purposes. The informant explained that the only difference between the returns was that the returns used for insurance purposes included both retail and wholesale income and the returns to be used for tax reporting purposes included only retail income. Nathan reviewed the returns and told her that he wanted the returns with the lower tax liability to be filed with the IRS and state authorities. (Brantley Decl., para. 14.)
On February 8, 1994, Nathan filed the tax returns that reflected the lower tax liabilities with the Internal Revenue Service. (Brantley Decl., para. 15.) Based on the results of the investigation through March 1994, the Internal Revenue Service determined that there was probable cause that Nathan had filed false individual and corporate income tax returns with the IRS. (Brantley Decl., para. 16.) Special Agent Brantley prepared affidavits in support of search warrants for records believed to exist at Nathan's Deli, Inc. and at the residence and Harvey Nathan and Lynn Bernstein. (Id.)
On March 22, 1994, search warrants and affidavits were presented to and signed by U.S. Magistrate Judge Robert S. Carr for searches of Nathan's Deli, Inc. located at 1836 Ashley River Road, Charleston, South Carolina and the residence and garage of Harvey Nathan and Lynn Bernstein located at 14 Trail Hollow Drive, Charleston, South Carolina. (Brantley Decl., para. 17; copies attached as Exs. 1 and 2 to Brantley declaration.)
Execution of Search Warrants. The search warrants were executed on the morning of March 24, 1994 at both the business site of Nathan's Deli and the residence. Agents arrived at both locations at approximately 7:00 a.m. Special Agent Brantley was the team leader for the search at the business site. Upon entering the business, the four IRS agents performed a sweep for weapons and to identify persons present. All customers...
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