St. German of Alaska Eastern Orthodox Catholic Church v. U.S.

• Decision Date: 24 February 1988
• Docket Number: No. 1375,D,1375
• Citation: 840 F.2d 1087
• Parties: -670, 88-1 USTC P 9201 ST. GERMAN OF ALASKA EASTERN ORTHODOX CATHOLIC CHURCH, St. John of Rila Eastern Orthodox Monastery, Vatna Realty Corporation, Titchfield Realty Corporation, Glastonbury Estates, Inc., Kotel Realty Corporation, Knutsford Realty Corporation, Batin Realty Corporation, Vidin Realty Corporation and Graystoke Realty Corporation, Petitioners-Appellants, v. UNITED STATES of America, Respondent-Appellee. ocket 87-6053.
• Court: U.S. Court of Appeals — Second Circuit

Page 1087

840 F.2d 1087

61 A.F.T.R.2d 88-670, 88-1 USTC P 9201

ST. GERMAN OF ALASKA EASTERN ORTHODOX CATHOLIC CHURCH, St John of Rila Eastern Orthodox Monastery, Vatna Realty Corporation, Titchfield Realty Corporation, Glastonbury Estates, Inc., Kotel Realty Corporation, Knutsford Realty Corporation, Batin Realty Corporation, Vidin Realty Corporation and Graystoke Realty Corporation, Petitioners-Appellants, v. UNITED STATES of America, Respondent-Appellee.

No. 1375, Docket 87-6053.

United States Court of Appeals Second Circuit.

Argued June 9, 1987.

Decided Feb. 24, 1988.

Ralph A. Jacobs, Philadelphia, Pa., (Marc S. Raspanti, Hoyle, Morris & Kerr, Philadelphia, Pa., of counsel), for petitioners-appellants.

Peter J. Kurshan, New York City (Herzfeld & Rubin, P.C., New York City, of counsel), for petitioners-appellants.

Mary Anne Wirth, Asst. U.S. Atty. S.D.N.Y., New York City (Rudolph W. Giuliani, U.S. Atty. S.D.N.Y., Nancy Kilson, Asst. U.S. Atty., New York City, of counsel), for respondent-appellee.

Before VAN GRAAFEILAND, KEARSE and MAHONEY, Circuit Judges.

MAHONEY, Circuit Judge:

This is a consolidated appeal from an order of the United States District Court for the Southern District of New York, 653 F.Supp. 1342, Edward Weinfeld, Judge, entered on February 13, 1987 that denied petitioners' motions to quash five Internal Revenue Service ("IRS") third-party recordkeeper summonses served on various attorneys, for limited discovery, and to strike certain government exhibits as scandalous, immaterial and impertinent. ¹

We affirm.

Background

Petitioners are St. German of Alaska Eastern Orthodox Catholic Church ("St. German"), St. John of Rila Eastern Orthodox Monastery ("St. John"), and subsidiary real estate holding corporations: Vatna Realty Corp., Titchfield Realty Corp., Glastonbury Estates, Inc., Kotel Realty Corp., Knutsford Realty Corp., Batin Realty Corp., Vidin Realty Corp., and Graystoke Realty Corp.

This case concerns five summonses, issued in connection with an IRS investigation into the affairs of Paul W.V. Ischie, Right Reverend Archimandrite of St. German and Abbot of St. John. The purpose of the investigation was to ascertain Ischie's income tax liabilities for the period from 1980 to 1984, during which years he allegedly filed no federal personal income tax returns, and to determine whether he had committed any offenses under the Internal Revenue Code. The government has maintained throughout the course of these proceedings that petitioners are not the targets of any investigation, civil or criminal, and has reasserted that contention on appeal.

An investigation conducted by IRS Special Agent John Kees led him to believe that Ischie might have orchestrated a number of transactions in which he solicited the donation of depressed realty to St. German and St. John at grossly inflated values--corresponding charitable deductions then being taken by the donor--which properties were thereafter sold at substantially lower prices. ² Advertisements displaying St. German's telephone number which were placed in Fortune, and apparently also in the Wall Street Journal and New York Times, stated: "HARD TO SELL, DISTRESSED AND OTHER REAL ESTATE ACCEPTED BY RELIGIOUS CORPORATION. WILL STRUCTURE CONTRIBUTION OF REAL ESTATE TO MEET NEED OF DONOR."

The government sets forth five examples of such transactions in its brief: (1) property appraised upon contribution at $2.3 million sold by St. John for $250,000; (2) St. German sold property originally appraised at $622,500 for $50,000; (3) property initially appraised at $42,500 sold by St. German for $12,500; (4) St. German disposed of property originally appraised at $580,000 for $50,000; and (5) St. German sold property initially appraised at $34,100 for $8,000. There was evidence of numerous other donations and sales of real estate in which St. German and St. John played a similar role.

In at least three situations, one William Blackmore acted as appraiser for both donor and donee, appraising realty for the donor at the time of the donation and for St. German when it disposed of the property. On one occasion, Blackmore appraised property as of December 8, 1980 for its donor at $42,500; he appraised the same property as of July 26, 1982 for St. German at $12,240. In September, 1982, St. German sold the property for $12,500. On another occasion, Blackmore appraised property as of December 21, 1980 for its donor at $905,250, and for Ischie as of June 23, 1981 at $98,500; St. German sold it for $104,964.80 on July 6, 1981. On a third occasion, property was transferred to St. German in consideration of ten dollars. Blackmore appraised the realty for the transferor as of April 10, 1980 at $580,000. He appraised the same property for Ischie as of July 5, 1980 at $47,775. Since 1979, Blackmore has conducted approximately thirty appraisals for Ischie and his churches, and Ischie has often recommended Blackmore's services to potential donors.

While engaged in an investigation of Michael I. and Paul N. Gordon, Kees interviewed Ischie on March 8, 1985. At that time, Kees was investigating the Gordons, not Ischie or any of the petitioners. Prior to that interview, Kees also was aware that the Gordons had donated to St. German the capital stock of Herkimer Holding Corporation, the sole asset of which was a vacant building in Herkimer, New York. Kees also was aware that Blackmore had appraised the property for the donors at $622,500, and that St. German had subsequently sold it for $50,000. The property had been independently appraised for the IRS, as Kees knew, at approximately $50,000.

During the interview, Kees was informed that Michael Gordon had telephoned Ischie in 1980 in response to one of Ischie's advertisements. Gordon indicated his interest in donating his Herkimer, New York property. Ischie traveled to Herkimer to examine it. Gordon asked Ischie for the name of a real estate appraiser, and Ischie referred Gordon to Blackmore, who was located in Hempstead, New York. Ischie did not find it unusual that Gordon, an upstate New York real estate developer, requested that Ischie, a resident of Setauket, New York, suggest an appraiser. Ischie did not recall seeing the appraisal which Blackmore did for the Gordons, and Ischie further stated that he was never aware of the donated property's value. Ischie ultimately sold the Herkimer property to KSI Corp. for $50,000.

Kees also asked Ischie for general background information concerning Ischie and his church. Kees recalls that he "probably" asked Ischie about the church's procedure in accepting donations. Kees inquired whether Ischie required potential donors to complete any paperwork, and whether Ischie found it unusual that people not of his faith would be donating property to his church.

Since Ischie indicated he had no knowledge of the value of the Herkimer property stated in Blackmore's appraisal, Kees asked about the accounting procedure followed to record assets owned by Ischie's church. Ischie replied that he kept a list of owned properties which noted their locations but not their values. Kees questioned Ischie about the sale of the Herkimer property to KSI Corp., "probably" asking why the property was sold, whether it was listed with any brokers, and the names of any such brokers. Kees asked Ischie whether he was present at the closing with KSI Corp. In an effort to ascertain who derived monetary benefit from the Gordons' donation, Kees asked for the names of the authorized signatories on the St. German bank account, in which the proceeds of the Herkimer sale were deposited. In another attempt to determine the value of the Herkimer property, Kees asked whether Ischie had obtained insurance thereon following its donation. Kees "probably" inquired whether Ischie was a licensed real estate broker.

Kees noted that throughout the interview, Ischie "had been vague and appeared to be withholding information.... This along with his demeanor lead [sic] me to suspect his credibility. Therefore, I asked the taxpayer whether he used any aliases or had an arrest record."

Allan Greenstein, St. German's counsel, was present at Kees' interview of Ischie. Greenstein's recollection of what transpired at the interview does not depart in any material respect from that of Kees, but Greenstein characterizes the tone of the meeting differently. According to Greenstein, in June or July, 1984, he learned that the IRS had served a summons on St. German in connection with the agency's investigation of the Gordons. It was decided that the church should cooperate with the IRS based on the latter's "representations" that its investigation was limited to the affairs of one donor and was not a full-scale inquiry into St. German and its activities. Accordingly, various documents relevant to the Gordon transaction were furnished in response to an IRS request therefor. Later, Greenstein permitted Ischie to participate in the interview with Kees, based on the latter's assurance that he was not investigating the church or Ischie, but only the Gordons. Although Greenstein's recollection of what was asked at the interview largely corresponds with that of Kees, Greenstein suggests impropriety in that the scope of Kees' questions ventured far afield of the Gordons and their Herkimer property.

On July 18, 1985, Kees interviewed Elaine F. Kaldor, St. German's accountant. In response to Kees' inquiry, Kaldor generally described the services she performed for St. German. According to Kaldor, Kees asked a series of questions about St German's religious activities, and did not clarify whether the church itself was under suspicion. When she asked what Kees was looking for, he allegedly replied: "Everything including the kitchen sink." Kaldor states that Kees asked whether St. German actually conducted religious services, what kind of services were held, and how often they were conducted. Kees asked whether the church had any members,...