Cohen v. Commissioner
| Decision Date | 02 July 1981 |
| Docket Number | 6244-75.,3927-71,7823-74,6145-72,3614-70,Docket No. 4290-69 |
| Parties | Sam Cohen and Ethel Cohen. Samuel (a/k/a Sam) Cohen and Ethel Cohen v. Commissioner. |
| Court | U.S. Tax Court |
Memorandum Sur Order
By separate notices of deficiency, respondent determined the following amounts due from petitioners for Federal income taxes and imposed the following penalties:
Taxable Sec. 6653(b)1
Year Deficiency Penalty
1963 .............. $ 647,772.94 $ 323,886.47
1964 .............. 822,325.41 411,162.71
1965 .............. 5,740,535.63 2,870,267.82
1966 .............. 11,009,821.42 5,504,910.71
1967 .............. 17,876,207.39 8,938,103.70
1968 .............. 27,847.49
1971 .............. 315,786.28
On October 19, 1977, respondent filed an amended answer in which he altered his computations of income taxes due from petitioners as follows:
Taxable Sec. 6653(b)
Year Deficiency Penalty
1963 ............... $ 647,772.94 $ 323,886.47
1964 ............... 822,325.41 411,162.71
1965 ............... 2,278,404.85 1,139,202.43
1966 ............... 3,372,061.64 1,686,030.82
1967 ............... 1,137,963.97 568,981.99
1968 ............... 13,285.36
1971 ............... 82,037.73
The petitioners filed the following motions in advance of trial:
A hearing was held on these motions in Las Vegas, Nevada, and subsequently briefs and reply briefs were filed by the parties. The issues raised by the motions are: (1) whether in formulating a substantial part of the deficiencies proposed against petitioners, respondent's agents disclosed and utilized grand jury material in violation of Rule 6(e) of the Federal Rules of Criminal Procedure, and (2) assuming Rule 6(e) of the Federal Rules of Criminal Procedure was violated, the appropriate remedy to apply.
Sometime prior to 1966, Revenue Agent Richard Ehrensing of the Internal Revenue Service ("the IRS") started a civil audit of the Flamingo Company ("the Flamingo") for the fiscal years 1961 and 1962. In 1966, the civil examination was expanded to include the fiscal years 1963, 1964, and 1965.
In September of 1966 Revenue Agent Ehrensing was told that IRS surveillance disclosed the possibility of suppressed income at one crap table at the Flamingo, one day, one shift, of approximately $4,881. Ehrensing then referred his civil audit to the Intelligence Division, the branch of the IRS responsible for criminal investigations, and it was decided that the Flamingo should be the subject of a full scale organized crime investigation for the fiscal years 1963 through 1968. The fiscal years 1961 and 1962 were closed civilly after the Flamingo agreed to the IRS adjustments. Subsequently, the IRS decided to proceed with the joint civil and criminal investigation only for the years 1966, 1967, and 1968. A statutory notice of deficiency for the years 1963, 1964, and 1965 was sent to the Flamingo Company, but because of the limited nature of the surveillance, no issue relating to the "skimming" of unreported casino income was included in the deficiency notice. The special agents from the Intelligence Division of the IRS assigned to the joint investigation for the years 1966 through 1968 were Andrew Baruffi and Glenn Tellgren. The revenue agent from the Audit Division of the IRS assigned to the joint investigation was Richard Ehrensing.
On February 12, 1970, the Chief Counsel of the Internal Revenue Service sent a letter to the Assistant Attorney General, Criminal Division, Department of Justice, suggesting that a grand jury be convened to investigate the Flamingo Company and its shareholders. Memorandum reports prepared by IRS Special Agents Andrew Baruffi and Glenn Tellgren outlining what was proposed to be accomplished through use of a grand jury were attached to the letter. The letter also suggested that the U.S. Attorney's office file a motion with the court for an order under Rule 6(e) of the Federal Rules of Criminal Procedure ("6(e) order") that would make available to the Internal Revenue Service any information gathered by the grand jury. The letter stated that it was clear that unless a 6(e) order was granted, the IRS could not use in connection with any civil tax determination any of the knowledge gained by its particular employees who assist the U.S. attorneys in evaluating grand jury evidence for indictment purposes.
A grand jury was convened in Miami, Florida in 1970 to investigate the Flamingo Company and its shareholders. On February 12, 1971 Special Agent Baruffi issued his IRS special agent's report. The report makes clear that the attorneys from the Justice Department who acted as prosecutors before the grand jury ("attorneys for the government") discussed grand jury testimony with the special agents of the IRS. At the conclusion of the special agent's report, it was suggested that a 6(e) order be obtained so as to permit the Internal Revenue Service to use the evidence obtained by the grand jury for determining the civil tax liability of the Flamingo Company and its shareholders.
On March 18, 1971. the attorneys for the government issued their prosecution memorandum to the Chief of the Organized Crime and Racketeering Section of the Department of Justice. The prosecution memorandum contained a substantial number of references to testimony before the Miami grand jury, and was furnished to the Intelligence Division of the IRS.
By letter dated March 19, 1971, the Chief Counsel of the Internal Revenue Service through Joseph W. Salus, Technical Assistant, Enforcement Division, advised the Assistant Attorney General, Tax Division, Department of Justice, of recommendations regarding the potential for criminal prosecution of the Flamingo Company and its shareholders. In the letter, Mr. Salus requested that a 6(e) order be obtained so that the IRS could have the benefit of the grand jury transcripts.
On March 25, 1971, the Miami grand jury returned an indictment against petitioner Samuel Cohen, the Flamingo Company, and four other individuals charging one count of conspiracy. This indictment was later dismissed. A grand jury was again convened in October of 1971 in Las Vegas, Nevada, which returned a five count indictment against petitioner Samuel Cohen and six other individuals.
By a memorandum dated November 30, 1971, Revenue Agent Ehrensing requested approval from his superiors in the IRS to reopen the civil case concerning the Flamingo Company and its shareholders for the taxable years 1961 through 1965. In the memorandum Revenue Agent Ehrensing referred extensively to testimony presented to the grand jury, and he relied on this information in computing the proposed civil tax adjustments. The report stated that steps had been taken to secure the grand jury testimony for civil proceedings. However in fact, no application had been made for a 6(e) order.
At no time were any IRS agents sworn in or appointed as agents of either the Miami grand jury or the Las Vegas grand jury. However, Special Agents Baruffi and Tellgren actively assisted the attorneys for the government by preparing questions and evaluating grand jury testimony and documents. Thus, information obtained by the grand jury was freely given to these special agents, who in turn, conveyed grand jury information to Revenue Agent Ehrensing. Special Agent Baruffi continually provided oral summaries to Revenue Agent Ehrensing of the testimony of witnesses before the grand jury. Revenue Agent Ehrensing then utilized the grand jury information to recompute the civil tax liability of petitioners and others connected with the Flamingo. He also helped the special agents with some of the computations of the casino.
In January of 1973, petitioner Samuel Cohen entered a plea of guilty to counts one and two, both conspiracy charges, of the indictment returned by the Las Vegas grand jury. Counts three, four, and five were dismissed.
On April 30, 1973, Special Agent Baruffi and Revenue Agent Ehrensing met with two lawyers from the Department of Justice to discuss the possibility of asking the District Court for a 6(e) order disclosing grand jury information to the Internal Revenue Service for use in the civil investigation. At the meeting, attorney Marvin Loewy from the Criminal Division of the Department of Justice stated that he would not solicit a 6(e) disclosure order for the grand jury material, and recommended that Ehrensing obtain the information by interviewing the individuals involved in lieu of using the official grand jury transcripts. Attorney James Walker from the Tax Division of the Department of Justice indicated that his superiors believed that a 6(e) order should be obtained. Attorney Walker also stated that it was the opinion of Joseph Salus in the Chief Counsel's office of the IRS that a 6(e) order must be obtained for the IRS to secure the evidence. Attorney Loewy stated that as far as he was concerned the 6(e) order was unnecessary and that since IRS agents had read the testimony legally, he did not want to set such a precedent. A 6(e) order was not applied for at that time.
Subsequent to the April 30th meeting, IRS Special Agent Baruffi, who had custody of the grand jury transcripts in the office of the Intelligence Division of the IRS, turned over all of the official grand jury transcripts to Revenue Agent Ehrensing to read and use in the civil investigation of the Flamingo and its shareholders.
In June of 1973, the Miami branch office of the Regional Counsel of the Internal Revenue...
To continue reading
Request your trial