Kingsley v. Commissioner

Decision Date20 February 1990
Docket NumberDocket No. 11439-87.
Citation1990 TC Memo 79,58 TCM (CCH) 1428
PartiesMichael J. Kingsley v. Commissioner.
CourtU.S. Tax Court

Elliot D. Lobel, 222 Lewis Wharf, Boston, Mass., for the petitioner. Charles Maurer, for the respondent.

Memorandum Findings of Fact and Opinion

Ruwe, Judge:

On December 12, 1986, a jeopardy assessment was made against petitioner for taxable years 1980, 1981, 1982, 1983, and 1984 pursuant to section 6861(a).1 In a notice of deficiency dated February 3, 1987, respondent determined deficiencies in petitioner's Federal income taxes and additions to tax as follows:

                Additions to Tax
                Year Deficiency Sec. 6653(b) Sec. 6654
                          1980 .............. $ 9,418.57          $ 4,709.29          $  599.88
                          1981 ..............  48,927.53           24,463.77           3,744.85
                                                                                          Additions to Tax
                Year Deficiency Sec. 6653(b)(1) Sec. 6653(b)(2) Sec. 6661
                       1982 .......... $ 9,290.08        $ 4,645.04      50 percent of       $ 2,322.52
                                                                         the interest due
                                                                         on $ 9,290.08
                       1983 ..........  14,938.35          7,469.18      50 percent of         3,734.59
                                                                         the interest due
                                                                         on $14,938.35
                       1984 ..........  58,949.35         29,474.68      50 percent of        14,737.34
                                                                         the interest due
                                                                         on $58,949.35
                

Respondent, in determining the deficiencies, relied upon information obtained from the public files of the United States District Court for the District of Massachusetts. Following a concession,2 we must decide: (1) Whether any portion of the deficiencies or additions to tax determined for taxable years 1980 through 1984 should be invalidated because of petitioner's allegations that the evidence used to prepare the notice of deficiency was obtained both as a result of an illegal search and seizure and as a result of an illegal disclosure of grand jury information; and (2) whether petitioner is estopped from contesting the additions to tax for fraud.

Findings of Fact

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

Petitioner resided in Belchertown, Massachusetts when he filed his petition in this case.

Petitioner did not file Federal income tax returns for taxable years 1980 and 1981. He did, however, file Federal income tax returns for taxable years 1982, 1983, and 1984.

During the years 1980 through 1984, petitioner was engaged in the sale of narcotics. During that period of time, petitioner derived taxable income from the sale of narcotics.

The Civil Forfeiture Litigation

On May 3, 1985, Edward K. O'Brien, a Supervisory Special Agent of the United States Drug Enforcement Administration (DEA), presented five seizure warrants and a supporting affidavit to United States Magistrate Michael A. Ponsor. Mr. O'Brien requested that the warrants be issued to facilitate a civil forfeiture seizure pursuant to 21 U.S.C. sec. 881(a)(6).3 Magistrate Ponsor found that the affidavit established probable cause that all of petitioner's possessions were purchased with proceeds earned from the sale of illegal drugs.4 Accordingly, warrants authorizing the seizure of petitioner's house, its contents, his safety deposit box, two bank accounts, and his girlfriend's automobile were issued that same day. On May 6, 1985, three additional warrants were issued authorizing the seizure of four investment accounts held in petitioner's name and a diamond ring. On May 31, 1985, a search warrant was issued authorizing the DEA to search petitioner's home and briefcase. The DEA eventually seized all of the property except for the diamond ring, which it was unable to locate.

Following the various searches and subsequent seizures of petitioner's property, petitioner filed a motion on June 4, 1985, with the United States District Court for the District of Massachusetts seeking the return of his property under rule 41(e) of the Federal Rules of Criminal Procedure. On June 12, 1985, petitioner moved for a preliminary injunction that would allow him to return to his home and make use of its contents pending resolution of his rule 41(e) motion. In support of his motion, petitioner argued that the seizure warrants violated his Fourth and Fifth Amendment rights, that the civil forfeiture statute was unconstitutional, and that he was being subjected to cruel and unusual punishment in violation of the Eighth Amendment.

On June 20, 1985, the United States Attorney filed eight civil in rem forfeiture complaints with respect to the seizure warrants of May 3 and 6, 1985. The Government sought through the complaints to cause petitioner to forfeit his home, specified contents of his home, and a specified amount of currency and financial instruments that had been seized from accounts held in petitioner's name at a number of financial institutions.

On July 12, 1985, District Court Judge Frank H. Freedman issued a memorandum and order with respect to petitioner's motions requesting the return of the seized property under rule 41(e) and a preliminary injunction. The memorandum and order is styled In re Application of Kingsley, 614 F. Supp. 219 (D. Mass. 1985). The District Court denied petitioner's rule 41(e) motion, finding that Federal Rule of Criminal Procedure 41(e) does not apply in cases involving a civil forfeiture. In re Application of Kingsley, 614 F. Supp. at 221 n.1. The court then found that the Government acted properly in having the magistrate review the warrants procured for the seizure of petitioner's property in order to make a determination of probable cause. The court, however, criticized the Government for failing to file a civil forfeiture complaint at the same time that the seizure warrants were requested. Relying on United States v. Pappas, 613 F.2d 324 (1st Cir. 1979), the District Court concluded that the seizure of petitioner's property did not comply with the civil forfeiture procedure set forth in 21 U.S.C. sec. 881(b)(1982) and was therefore warrantless under the statute. In re Application of Kingsley, 614 F. Supp. at 222-223. Having determined that the seizure of petitioner's property was not effected incident to the execution of a valid warrant, the District Court nevertheless refused to invalidate the entire seizure. In re Application of Kingsley, 614 F. Supp. at 223. Instead, the District Court concluded that petitioner was entitled to relief in the form of a preliminary injunction, finding that it was likely that petitioner would prevail at the civil forfeiture proceeding because the Government would be unable to establish probable cause under the statute to forfeit the seized property.5 In re Application of Kingsley, 614 F. Supp. at 224. The District Court denied petitioner's request for a preliminary injunction, but allowed petitioner to make use of the contents of his house under a residency agreement.

Petitioner subsequently appealed the order issued by the District Court. The decision of the Court of Appeals was rendered on September 30, 1986, and is styled In re Application of Kingsley, 802 F.2d 571 (1st Cir. 1986). In commenting on the scope of the appeal, the First Circuit noted:

What Kingsley is not appealing is significant. He has chosen not to appeal directly the denial of his Rule 41(e) motion, or even to request a remand to the district court for reconsideration of the merits of that motion. He seeks a preliminary injunction, on the grounds that he will likely succeed on the merits of the Rule 41(e) motion or in the government's civil forfeiture action. We, therefore, treat this appeal as Kingsley has presented it to us, an appeal from a denial and a partial granting of a motion for a preliminary injunction. Accordingly, the merits of Kingsley's numerous statutory and constitutional arguments raised below are not before us, except as to his likelihood of success on them. In re Application of Kingsley, 802 F.2d at 577-578. Fn. ref. omitted.

The court went on to state:

If this case continues to a trial on the civil forfeiture proceedings, as the district court evidently contemplates, the issue of the legality of the seizures, potentially involving the constitutionality of the civil forfeiture statute, must be resolved. This appeal, however, does not ask us to resolve those issues. It seeks preliminary relief only. * * * In re Application of Kingsley, 802 F.2d at 578.

The court went on to hold that the District Court's order requiring petitioner to post a bond as part of the residency agreement under which he was permitted to make use of his home and its contents did not constitute an abuse of discretion. In re Application of Kingsley, 802 F.2d at 579.

On December 4, 1986, the Government filed a motion to dismiss the civil forfeiture action. The Government's motion to dismiss was prompted, at least in part, by a report and recommendation issued by Magistrate Ponsor on November 26, 1986. That report stated in part:

The chronology of the Government's errors in prosecuting this case is as follows. First, in the investigative stage, the Government made improper use of materials obtained through the Grand Jury to assist its civil forfeiture effort. Bank documents and other records were subpoenaed by the Grand Jury and turned over wholesale to law enforcement officers to be incorporated by them later as part of the application for civil seizure and forfeiture. While the question of whether a single Assistant United States Attorney prosecuting both civil and criminal sides of an investigation (as here) can use Grand Jury information in his civil
...

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