Pickel v. U.S.
| Decision Date | 05 October 1984 |
| Docket Number | 83-5684,Nos. 83-5672,s. 83-5672 |
| Citation | 746 F.2d 176 |
| Parties | 84-2 USTC P 9934, 17 Fed. R. Evid. Serv. 372 Bruce PICKEL and Lauren Pickel, Appellees, v. UNITED STATES of America, Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
William C. McClure (argued), Charles B. Watkins, Stanley P. DeGory, McClure & Watkins, P.C., Richard Joseph, Pittsburgh, Pa., for appellees.
Glenn L. Archer, Jr., Asst. Atty. Gen., Washington, D.C., J. Alan Johnson, U.S. Atty., Pittsburgh, Pa., Michael L. Paup, Charles E. Brookhart, William A. Whitledge (argued), Tax Div., Dept. of Justice, Washington, D.C., for appellant.
Before WEIS and BECKER, Circuit Judges, and ACKERMAN, District Judge. *
The government appeals from an order of the United States District Court for the Western District of Pennsylvania quashing two summonses issued, pursuant to 26 U.S.C. Sec. 7602 (1983), by the Internal Revenue Service. The district court refused to enforce the summonses because of the violation of a sequestration order by a government agent, the refusal of the government to identify an FBI informant, and the court's conclusion that the IRS was acting in "bad faith" by using its civil arm to develop a criminal case. We reverse and remand for further proceedings.
Bruce Pickel is the major shareholder and officer of two corporations, Gardner Steel Corporation and H. Wolfe Iron and Metal Company. In September 1981, IRS Revenue Agent William Manolis conducted an audit of the income tax returns of Pickel, his wife, and the two corporations. During the investigation, Pickel informed Manolis that he had sold a number of securities from a pension fund of one of the corporations to pay off a gambling debt. Pickel also told Manolis that he had since repaid the fund. Thereafter, Manolis independently uncovered other information which, in his mind, indicated the existence of fraud in one or more of the returns under examination. Following established procedures, Manolis referred the case to the IRS's Criminal Investigation Division (CID) for an investigation into possible tax fraud. In October 1982, Special Agent Samuel Ruggiero of the CID was assigned to investigate whether criminal violations of the Internal Revenue Code had occurred.
In July 1982, the Pittsburgh office of the FBI was told by an informant that Pickel was embezzling money from one of the corporate pension funds. The FBI initiated an investigation into the allegations, headed by Agent Peter McCann. 1 In November 1982, the IRS and the FBI each discovered that the other was investigating Pickel. FBI Agent McCann then deferred his investigation until the IRS investigation was terminated, because both inquiries would require access to the same pension records. Shortly thereafter, IRS Special Agent Ruggiero issued the summonses that are the subject of this case. The summonses, issued to Pickel's accountant and bank, sought copies of the Pickels' tax returns for the period 1978 to 1981, the tax returns of the two corporations for the same period, assorted computer printouts of financial records, credit card charge statements, cancelled checks, loan history records, and other financial records pertaining to the Pickels in the possession of the accountant and bank. 2
The Pickels filed a petition to quash each summons in the district court, pursuant to 26 U.S.C. Sec. 7609(b). In their petitions the Pickels asserted, inter alia, that the purpose of the summonses was to gather information for the conduct of an FBI investigation rather than for a valid IRS investigation, and therefore that they were not issued in good faith, and further that the IRS was already in possession of the information it sought. The government responded by denying the allegations in the petition and by moving for summary enforcement of the summonses.
A hearing on the allegations of the petition to quash and on the motion for summary enforcement was held on July 21, 1983. At the beginning of the hearing, the Pickels informed the district court that they intended to call IRS Revenue Agent Manolis, FBI Agent McCann, and IRS Special Agent Ruggiero to testify. At the Pickels' request, the district court ordered that each witness be sequestered during the testimony of the others. Agent Manolis testified first, describing his investigation into the tax returns, and his referral of the case to the CID. He was followed on the stand by Agent McCann, who described the initiation of the investigation into the embezzlement charges, and the discovery of the concurrent IRS investigation of the Pickels' tax returns.
During a recess in McCann's testimony, the Pickels' counsel observed Agent McCann, the FBI attorney and the government attorney, Ms. Scott-Clayton, talking together in the hallway outside the courtroom within earshot of Special Agent Ruggiero, who had not yet testified. After the recess, the Pickels' attorney called the incident to the attention of the court. Agent McCann admitted that he was discussing an exhibit used during the hearing and that he intended that Special Agent Ruggiero hear this discussion so that Ruggiero would not say something contradictory when he got on the stand. The court ruled that its sequestration order had been violated, but deferred imposing sanctions.
McCann resumed his testimony. Shortly thereafter, the Government objected to the Pickels' request that McCann disclose the name of the informant whose information had led to the FBI investigation into the embezzlement charges. The following exchange then took place.
MR. JOSEPH [The Pickels' Attorney]: I want to know who the source is, Your Honor. I think the government is being anything but honest.
THE COURT: I think you are entitled to know.
Q. Tell him what the source was.
The district court thereupon justified its action on the grounds that:
[I]t is clear that the government has not acted in good faith in this matter. It is clear to this Court that the government has acted in a manner wherein they have actually used the IRS's civil arm in order to develop a criminal case against this man ....
It is clear that the government refuses to give the source of their information in the situation where it is possible there is no such source, or if the source is a source, that the credibility of the government ought to be tested ....
and the Court feels it has the duty to do it as a sanction for the court's finding that the government has flagrantly and clearly violated this court's sequestration order ....
in fact the government has acted in bad faith generally ...
The court concluded:
when I see a flagrant violation of a sequestration order in this court, when I see communications indicate to me that the Internal Revenue Service was using its civil offices to prosecute criminals or to get information for use to indict, to prosecute an alleged criminal, well, I think it is wrong...."
The Court then adjourned. Orders granting the petitions to quash were filed the next day. 3 The government appeals.
The precise basis of the court's decision to grant the petitions to quash the summonses is unclear. It appears to be based in relatively equal measure on three factors: (1) the court's displeasure over the violation of its sequestration order; (2) the court's conclusion that the government acted in bad faith by using civil processes to aid a criminal investigation; and (3) the government's failure to disclose the identity of the FBI's source. We must determine whether any of the factors relied on by the district court would justify quashing the summonses in this case.
In Roviaro v. United States, 353 U.S. 53, 77 S.Ct. 623, 1 L.Ed.2d 639 (1957), it was recognized that the government has a qualified privilege to refuse to disclose the identity of a confidential informant who has provided information about alleged criminal activity. In determining whether the privilege should be sustained, a court must "balanc[e] the public interest in protecting the flow of...
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