Jones v. U.S., 4:92CV3029.

• Decision Date: 19 June 1998
• Docket Number: No. 4:92CV3029.,4:92CV3029.
• Citation: 9 F.Supp.2d 1119
• Parties: Terry L. JONES, et al., Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Nebraska

9 F.Supp.2d 1119

Terry L. JONES, et al., Plaintiffs, v. UNITED STATES of America, Defendant.

No. 4:92CV3029.

United States District Court, D. Nebraska.

June 19, 1998.

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Robert B. Creager, Anderson, Creager & Wittstruck, P.C., Lincoln, NE, Sandra L. Dougherty, Lieben, Dahlk, Whitted, Houghton, Slowiaczek & Jahn, P.C., Omaha, NE, for plaintiffs.

Thomas J. Monaghan, United States Attorney, Sally R. Johnson, Assistant United States Attorney, Lincoln, NE, Michael J. Salem, Gerald A. Role, Trial Attorneys, Tax Division, U.S. Department of Justice, Washington, D.C., for defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

KOPF, District Judge.

Terry and Pat Jones, and the companies they own, seek damages pursuant to 26 U.S.C. § 7431(c) in their suit against the United States based on an Internal Revenue Agent's disclosure of tax return information to a confidential informant which allegedly resulted in damage to the Joneses and their companies. Following a bench trial and subsequent briefing by the parties on the issue of damages, I now issue my findings of fact and conclusions of law¹ in accordance with Federal Rule of Civil Procedure 52(a). For the reasons set forth below, I find and conclude that judgment should be entered against the United States and in favor of Terry and Pat Jones for much, but not all, of the damages they seek.

I. BACKGROUND

During the liability phase of this litigation, I concluded that (1) IRS Special Agent Angelo Stennis violated the provisions of 26 U.S.C. § 6103(a) when he disclosed to a confidential informant on January 31, 1990, that "a search warrant [is] going to be executed. Be cautious over the next several days, and if there [are] any problems that occur[] or anything that [you] perceive[] as a threat from anyone at Jones Oil, ... let [me] know"; (2) the disclosure was not exempted by the provisions of 26 U.S.C. § 6103(k)(6); and (3) because the taxpayers failed to prove Agent Stennis' disclosure was based on a bad-faith misinterpretation of section 6103(k)(6), the United States had no liability to the plaintiffs pursuant to 26 U.S.C. § 7431(b). Jones v. United States, 898 F.Supp. 1360, 1387-88 (D.Neb.1995) (Jones I).

The Eighth Circuit Court of Appeals agreed with my conclusions regarding section 6103, but reversed on the "bad-faith" issue, holding that the United States bears the burden of proving good faith under 26 U.S.C. § 7431(b), as opposed to the plaintiff bearing the burden to prove bad faith. Jones v. United States, 97 F.3d 1121, 1124-25 (8th Cir.1996) (Jones II). Thus, the case was remanded for a determination of whether the United States had met the burden of demonstrating that Agent Stennis' actions met the objective standard of "good faith." Id. at 1125.

On remand, I found that the United States failed to prove that Agent Stennis' actions met the objective standard of "good faith," revoked the previous judgment in favor of the United States, found in favor of the plaintiffs and against the United States on the issue of liability, and referred this matter to Magistrate Judge Piester for expedited progression regarding trial on damages. Jones v. United States, 954 F.Supp. 191, 195 (D.Neb.1997) (Jones III).

After a three-day bench trial on damages and subsequent briefing by the parties, this matter is now ripe for decision.

II. FINDINGS OF FACT

Because the facts of this case on the issue of liability are set out in detail in my prior opinions, I shall not repeat them here. Jones I, 898 F.Supp. at 1365-72 (part I.B., findings 1-82); Jones III, 954 F.Supp. at 192 (amending previous factual findings to conform to stipulation that Agent Stennis never had any direct contact or run-ins with Terry Jones). I simply incorporate those findings herein as if I had set them forth verbatim. I will focus on the evidence presented to me during the damages trial.

However, a brief summary of my previous decision is helpful to put the damage issues in context. I previously found that the government is liable to the plaintiffs because an IRS criminal investigator unlawfully told a confidential informant that the government intended to execute a search warrant at the plaintiffs' place of business. Jones III, 954 F.Supp. at 193-95. Specifically, the agent told the informant the day before the warrant was executed that: "a search warrant [is] going to be executed. Be cautious over the next several days, and if there [are] any problems that occur[] or anything that [you] perceive[] as a threat from anyone at Jones Oil, ... let [me] know." Jones I, 898 F.Supp. at 1379. In context, this "disclosure amounted to notification that the tax returns of Terry Jones and Jones Oil were `subject to other investigation or processing,' as defined by 26 U.S.C. § 6103(b)(2)." Id. at 1379-80.

Jones Oil Company

1. Terry Jones graduated from the business college at the University of Nebraska at Lincoln in 1958, after which he became employed as credit manager with the Television Service Company, a manufacturer and distributor of television antennas, radios, and citizen band radios. He remained with that company — which ultimately became HyGain Electronics — for 15 years, during which he was promoted to controller and operations vice-president. Terry Jones also operated residential and commercial real estate businesses in Lincoln, Nebraska; owned thousands of acres of farmland in Nebraska, Kansas, and Texas; and published television repair and amateur radio operator manuals. Terry and Patricia (Pat) Jones have purchased, built, and operated apartments since 1965; operated NCB, a service to recover insufficient-fund checks; and owned a publishing company. (Tr. 20:12-26:11; 63:1-20; 87:21-22.)

2. In the time frame relevant to this lawsuit, Terry and Pat Jones owned a partnership called Jones Petroleum, with Terry owning 49 percent of the interest and Pat owning 51 percent. Jones Petroleum owned a holding company called J.O. Holding, Inc., which in turn owned several other entities, including Jones Oil Company, Inc., a Nebraska corporation, and Jones Publishing. (Tr. 31:5-20; 47:5-14; 109:11-110:4; Ex. 72.) Terry and Pat Jones controlled all of the Jones' entities through their holding company. (Tr. 153:6-7.) During the relevant time frame, J.O. Holding, Inc., filed a consolidated tax return which included Jones Oil Company as a subsidiary. (Tr. 444:6-23; Ex. 61.)

3. Pat Jones was a board member, officer, and owner of Jones Oil Company and served as Terry Jones' "administrative assistant" with that company. In fact, she owned a controlling interest in Jones Oil by virtue of her 51-percent interest in the holding company. (Tr. 172:5-20; Ex. 61 at Statement 18 (disclosing in Consolidated Corporate Income Tax Return that Pat Jones owned 51 percent of the holding company for tax year ending October 31, 1990).) However, her focus was overseeing the Jones' apartments and a check recovery company. (Tr. 63:10-20; 172:25-173:5; 410:3-22.) Pat Jones was also a joint taxpayer with her husband, Terry. (Tr. 190:15-22; Ex. 68.)

4. In 1975, Terry Jones purchased an oil jobber or distributorship which owned five or six gasoline stations and had four to six customers that used gasoline in large quantities. At that time, Jones also purchased property at the corner of 33rd and Cornhusker Streets in Lincoln, Nebraska, to be used as the office for Jones Oil Company. (Tr. 27:2-29:5.)

5. Jones continued to purchase gasoline stations — eventually acquiring 20 at one point — and gained additional customers for Jones Oil's petroleum products through a telemarketing sales staff. These petroleum products included gasoline, diesel fuel, aviation fuel, and heating oil. From 1975 to February 1990, Jones Oil Company increased its annual sales from 1.5 million to approximately 15 million dollars. (Tr. 27:2-30:18; 32:10-14.)

6. Jones Oil operated by having credit arrangements with various Gulf Coast refineries that allowed common carriers working for Jones Oil to obtain petroleum products on preapproved credit from the "common carrier pipeline" — a pipeline into which all refineries place the same product and which is accessible by terminals placed approximately every 50 miles throughout the United States. Each refinery places the same product into this pipeline, but puts additives in the product upon its withdrawal from the terminal so as to create its own product or brand. Jones Oil typically would determine the lowest-priced product each day via daily faxes from the 20 to 30 refineries with which it did business and would then dispatch common carrier trucks to withdraw fuel from approximately 200 terminals throughout the United States for delivery to the customers who were paying the highest prices in the geographic region. (Tr. 32:15-36:12.)

7. Jones Oil had credit arrangements with "all the refineries" which were obtained through the refineries' area representatives after the refineries reviewed Jones Oil's financial statements and "morals ... character ... [and] integrity." Terry Jones testified that the latter three factors were important because the terminals described above were not attended during nights and weekends, and common carriers were authorized to enter the terminals with a key and were trusted to withdraw the proper amount of fuel on Jones Oil's behalf. These credit arrangements were memorialized with letters of credit containing a certain credit limit and discount factor of "[o]ne percent, 10 days" — that is, Jones Oil got a one-percent discount if it paid for the product within 10 days. (Tr. 36:16-40:20, 55:14-56:19; Exs. 21, 25, 26, 28-30.)

8. Jones Oil required the customers to whom it delivered petroleum products to pay for the products within 30 days. In order to bridge the gap between the time Jones Oil was required to pay the refineries and the time Jones Oil's customers paid it, Jones Oil had a line of credit of 1.5 million dollars with FirsTier...