Jones v. Berry

• Citation: 524 F. Supp. 645
• Decision Date: 20 October 1981
• Docket Number: Civ. No. 81-581 PHX VAC.
• Parties: William E. JONES and Gladys A. Jones and Acme Meat Company, Inc., Petitioners, v. Prescott A. BERRY, et al., Respondents.
• Court: U.S. District Court — District of Arizona

524 F. Supp. 645

William E. JONES and Gladys A. Jones and Acme Meat Company, Inc., Petitioners, v. Prescott A. BERRY, et al., Respondents.

Civ. No. 81-581 PHX VAC.

United States District Court, D. Arizona.

October 20, 1981.

COPYRIGHT MATERIAL OMITTED

Stephen E. Silver, Burch & Cracchiolo, P. A., Phoenix, Ariz., for petitioners.

Ralph A. Romano, Trial Atty., Tax Div., Dept. of Justice, Washington, D. C., Michael A. Johns, Asst. U. S. Atty., Phoenix, Ariz., for respondents.

OPINION AND ORDER

CORDOVA, District Judge.

INTRODUCTION

Petitioners were targets of an undercover operation conducted by the Internal Revenue Service (IRS). Prior to the institution of any criminal proceeding, petitioners filed a petition seeking the return and future suppression of certain evidence seized by the IRS agents. For the reasons hereinafter stated, the Court will grant the relief requested in the petition.

FACTS

In May of 1977 respondent John M. Manning, a Special Agent with the IRS, submitted a request for approval of the Business Opportunities Project (BOP). The objective of the BOP is to discover tax fraud by the use of IRS Special Agents acting in an undercover capacity as prospective purchasers of businesses for sale. The Agents would attempt to gain the confidence of the seller in order to elicit evidence of "skimming", the understatement of income, by the seller.

The BOP was approved by the District Director and went into effect as a local District project on June 2, 1977. Respondent David C. Arnell, Phoenix District Chief of the Criminal Investigation Division, then submitted a request for national approval of the program, which was initially denied on January 21, 1978 by the National Director of the Intelligence Division (now the Criminal Investigation Division). After the project was reclassified as a "quasi, non-penetration undercover approach" rather than as a deep penetration undercover technique which requires national approval, the National Director authorized the BOP on January 23, 1981. (Exhibit 18).

On January 10, 1981 Special Agent Manning visited Business World Investments, Inc. and represented to sales representative Frank Bornstein that he and a partner were interested in purchasing a business in the Phoenix area. Manning stated that he was originally from Springfield, Massachusetts and presented the business card of "J. Manning and Assoc." (Exhibit 1). Although the term "skimming" may not have been used at this initial meeting, Manning indicated by veiled suggestions and hand gestures that he was interested in businesses with a substantial cash flow susceptible to skimming. Without mentioning the name of the company, and without discussing whether skimming was actually occurring, Bornstein responded that he had previously listed a meat company which might suit Manning's purposes.

After lining up a single party listing for petitioner Acme Meat Company in favor of Manning, Bornstein met again with Manning on February 7, 1981 and disclosed that the meat business was named Acme Meat Company. Manning signed a confidentiality agreement promising not to divulge information about Acme Meat to others, except to secure their advice and counsel. (Exhibit 2). Manning then scanned the corporate tax returns for Acme Meat for the fiscal years 1976, 1977 and 1978 which were given to him by Bornstein.

Bornstein and Manning then went to the premises of Acme Meat where Manning toured the business and met petitioner William E. Jones. Manning raised the subject of skimming to Jones while they were temporarily outside the presence of Bornstein. Though the conversation was conducted in somewhat vague terms, Manning testified that it was his impression, as a result of an "informal meeting of the minds," that Jones was skimming.

On February 18, 1981 Bornstein contacted Manning by telephone and asked: "Are you sure you are not from the IRS?" Manning testified that he just laughed, said nothing, and proceeded to arrange for another meeting with Jones.

On the morning of April 4, 1981 Manning met with Bornstein, William Jones and his wife, Gladys, who is also a petitioner in this case, at the Joneses' Pinchot residence. Manning reviewed various corporate books and records, including sales invoices and the cash receipts and disbursements ledger for the fiscal year 1981, certain fiscal year 1980 business records, as well as the general corporate ledger.

Manning arranged to have his supposed business partner, Special Agent James E. Mason, a respondent herein, meet the Joneses to further consider the purchase of the business. Manning and Mason decided that Manning would feign interest in buying the business, while Mason would be reluctant and take a "show me" attitude. Manning and Mason toured the premises of Acme Meat with Mr. Jones on April 25, 1981. At the insistence of Manning, Bornstein did not attend this meeting. With the admitted intent of viewing petitioners' records the agents again stated that they were only interested in purchasing a business that could generate substantial skimming and Mr. Jones then agreed to show them the records of the skim which were located at his home.

Upon arriving at the Joneses' Pinchot residence the agents noted a sign that the home was for sale. The agents asked for and were granted a tour of the house by Mr. and Mrs. Jones on the pretext that Mason knew someone who might be interested in purchasing it. Manning testified that in fact a purpose of the tour was to allow them to prepare a diagram of the house in order to obtain a search warrant.

The agents and the Joneses then went into the kitchen where certain books and records were on display. In response to Mason's request for proof of skimming, Mrs. Jones removed a five by six inch paper from a file cabinet in the kitchen. Mason expressed doubt as to the validity of the monthly and yearly totals on the paper and asked for documentation to substantiate the figures, selecting at random the month of February, 1977 for a sample audit. The Joneses lead the agents to their bedroom where Mrs. Jones removed the February, 1977 skimmed invoices from the top left drawer of their dresser. After returning to the kitchen, Mrs. Jones reconciled precisely the figure entered on the summary sheet by adding the invoice totals on a calculator. Mason then assisted Mrs. Jones in returning one of the corporate ledgers to another bedroom where Mason noted the location of other books and records.

Within a few days after this April 25, 1981 meeting Manning drew a diagram of the Pinchot residence and prepared a search warrant affidavit. A raid plan for the search was prepared by Special Agent David McCluskey. On the morning of May 1, 1981 a search warrant was issued by a United States Magistrate. (Exhibit 6). The agents assigned to execute the search met at the IRS offices where a copy of the search warrant was briefly circulated among the agents. The search warrant listed five specific items to be seized, and Manning instructed the agents as to the location of each item by means of the diagram included in the raid plan.

The search began at approximately 11:40 a. m. on May 1, 1981 when Special Agents McCluskey and Laura Brown announced to Mrs. Jones that they were real estate agents interested in viewing the premises. They followed Mrs. Jones into the kitchen where the agents displayed their badges and announced that they were there to execute a search warrant, which may have been shown to Mrs. Jones at this time. Mrs. Jones was read her constitutional rights and declined the opportunity to telephone her husband or an attorney. Mrs. Jones was asked for consent to search the storage buildings behind the house and she responded that the records had been moved from the storage buildings to the Joneses' new residence on Rowland Lane. Mrs. Jones then read and signed consent forms to allow the search of the storage buildings and the Rowland Lane residence. Agent Brown remained with Mrs. Jones in the living room watching television during the search.

The search of the Pinchot residence was executed by approximately nine agents by means of a "search and finder" system. Agents were assigned to search a specific area and raid leader McCluskey was to review items brought to him by the other agents to determine whether they were subject to seizure. McCluskey testified that his review of the items presented during the hour and ten minutes search was cursory and he admitted that many items were improperly seized. It appears that with one exception¹ every item presented to McCluskey was tagged and seized. Approximately eight boxes of records were seized at the Pinchot residence. Mrs. Jones was presented with a copy of the search warrant which included an inventory summary of the items taken. Agents McCluskey and Brown then proceeded to the Rowland Lane residence where an additional eight boxes of records were seized.

At approximately 4:30 p. m. on May 1, Mr. Jones telephoned respondent Bernice Yost, Group Manager of the Criminal Investigation Division, and demanded the return of all of the records and stated they were needed for the operation of the business. Ms. Yost replied that certain items would be returned and on May 4 an adding machine and a blank checkbook were returned to the Joneses.

On May 6 the Joneses' attorney presented to Ms. Yost a written request for the return of all records. Ms. Yost did not fully comply with this request, however, and on May 7 merely returned blank business forms, an address book, a file cabinet, and various fiscal year 1981 records. (Exhibits 11, 12). The IRS has retained possession of the bulk of the seized records (Exhibits 15a, 15b, 15c) and has microfilmed many of the documents.

Petitioners filed a petition and an amended petition on May 27, 1981 seeking the return and suppression of the seized records, and requesting a temporary restraining order preventing respondents from proceeding with their investigation of petit...