U.S. v. Baskes, 77-2178

• Decision Date: 18 September 1980
• Docket Number: No. 77-2178,77-2178
• Citation: 649 F.2d 471
• Parties: 80-2 USTC P 9679, 7 Fed. R. Evid. Serv. 975 UNITED STATES of America, Plaintiff-Appellee, v. Roger S. BASKES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 471

649 F.2d 471

80-2 USTC P 9679, 7 Fed. R. Evid. Serv. 975

UNITED STATES of America, Plaintiff-Appellee, v. Roger S. BASKES, Defendant-Appellant.

No. 77-2178.

United States Court of Appeals, Seventh Circuit.

Argued April 28, 1978.

Decided Sept. 18, 1980.

Harvey M. Silets; Theodore A. Sinars, Harris, Burman, Sinars & Sigant:, Chicago, Ill., for defendant-appellant.

Sam L. Strother, Tax Division, Dept. of Justice, Washington, D. C., for plaintiff-appellee.

Before FAIRCHILD, Chief Judge, MARKEY, Chief Judge, ^* and BAUER, Circuit Judge.

FAIRCHILD, Chief Judge.

Defendant-appellant Roger S. Baskes was charged in a one-count indictment with conspiring with others to defraud the United States by impeding and obstructing the assessment and collection of income and gift taxes by the Internal Revenue Service. After a jury trial, defendant was found guilty. Kanter, who was tried with Baskes, was acquitted. The cases of other defendants were severed. Following a post-trial denial of the defendant's motion to dismiss the indictment or suppress allegedly illegally acquired evidence, defendant was sentenced to the custody of the Attorney General for a period of two years. This appeal followed. For the reasons hereinafter stated, we affirm.

I. Background

During late 1968 and 1969, Samuel Zell, a real estate investor, entered into negotiations for the purchase of the Arlington Towers, a twenty-two story office-apartment complex, and the adjacent Arlington Plaza, an eleven-story hotel built on top of a six-story garage. The Towers and the Plaza are located in Reno, Nevada. The Towers was owned by a partnership whose partners were John and Margery Cavanaugh (90%), their son John E. Cavanaugh, Jr. (5%), and Barbara and William Thornton, their daughter and son-in-law (5%). The garage and the Plaza were owned entirely by John and Margery Cavanaugh. While these negotiations were taking place, Zell was in repeated contact with his brother-in-law, Roger Baskes, a Chicago attorney specializing in federal income taxation and real estate planning. Zell advised the Cavanaughs that the tax ramifications of any sale could be handled by defendant Baskes' law firm. The parties then devised a highly complicated transaction which they claim would legitimately minimize the tax consequences of any sale as well as provide the Cavanaughs with a certain amount of cash after taxes.

Under the terms of the transaction structured by the defendant Baskes, $700,000 which was allegedly part of the purchase price for the Towers and the Plaza was treated as the ultimate purchase price of a third asset owned by the Cavanaughs, the Hornet No. 2, a gold mining claim in the Manhattan, Nevada mining district. The parties, in August 1969, orally agreed to a plan whereby the Towers, the Plaza and the mining claim would be sold. A letter memorializing the prior oral agreement between Zell and Cavanaugh was prepared in November, 1969.

Pursuant to the plan, John Cavanaugh transferred the mining claim to Jeffrey Investment Company (Jeffrey) in exchange for all its preferred stock. Jeffrey was a shelf Nevada corporation already formed by Baskes' law firm. The common stock of Jeffrey was issued to Castle Trust Company, Ltd., Nassau, Bahamas, as Trustee of T-5088, the foreign trust held for the benefit of Cavanaughs' children. On liquidation of Jeffrey, in January 1970, Cavanaugh, Sr. would receive $10,000 in exchange for its preferred stock with ownership of the mining claim going to the foreign trust as common stockholder. In February, Zell, the buyer, deposited the $700,000 in T-5088 and the mining claim was then transferred to Zeno, N.V., a foreign affiliate of Castle Trust Co. ¹ The claim was then transferred to Hornet Mining, Inc., a newly formed corporation, in exchange for its stock. The Hornet Mining stock was then sold to a partnership called Tonopah Vein in which Fantasy-Galaxy, Inc. had a 99% stock interest and Buckeye Oil Co. had a 1% stock interest. Defendant Baskes' law firm was tax counsel to Fantasy-Galaxy and Baskes himself was a trustee and partner in Buckeye Oil. As a result of this transaction, Fantasy-Galaxy claimed a partnership loss on account of prepaid interest of $153,000. Finally, Fantasy-Galaxy was dissolved and all of its assets, including the mining claim, were transferred to Argosy Venture, a Bahamian partnership associated with Castle Trust.

The government presented the case on the theory that the defendant Baskes, Burton W. Kanter, Alan H. Hammerman, and Samuel Zell conspired together to structure the sale of the Towers and the Plaza in such a manner as to disguise and falsify the true tax consequences of the sale to the seller, John E. Cavanaugh, Sr. and family, by falsely treating $700,000 which was really part of the purchase price of the real estate and a part of the Cavanaugh gain, as if it were paid for the mining claim. The claim allegedly was worthless. The government argued that this scheme was carried out by a series of manipulations through the use of corporate entities, corporate stock, foreign trusts, partnerships, backdated documents and ostensible transfers of ownership in order to conceal the true nature of the sale of the Towers and Plaza.

It is conceded by all parties that the transaction would not have defrauded the government had the mining claim actually been worth $10,000 originally and then appreciated to $700,000. ² The mining claim was introduced into the transaction, according to the government, because unfavorable tax consequences due to depreciation recapture would have resulted in the Cavanaughs being unable to recover their cash investment had the Towers and the Plaza been sold alone. Moreover, the government argued that a gift of the senior Cavanaughs' portion of the $700,000 was accomplished, without payment of gift taxes.

Defendant Baskes does not challenge the sufficiency of the evidence in this appeal. Rather, defendant contends: (1) the trial court erred in failing to dismiss the indictment or suppress evidence derived from certain illegal government conduct; (2) the government failed to disclose an understanding with two key prosecution witnesses; (3) the trial court erred in refusing to require the government to disclose the scope of its intended cross-examination of defendant's proposed character witnesses; (4) the trial court unduly restricted cross-examination of a key witness; (5) the trial court erred in failing to instruct the jury on the essential elements of the conspiracy charge; and (6) he was denied his right to a fair trial by the admission of substantial evidence outside the charged conspiracy. We affirm.

II. Illegally Seized Evidence

We first note that this court delayed the decision in this case pending a Supreme Court decision in United States v. Payner. The Supreme Court recently issued its opinion. 447 U.S. 727, 100 S.Ct. 2439, 65 L.Ed.2d 468 (1980). At issue in Payner was the effect of the government's illegal conduct in seizing certain documents from a briefcase belonging to Michael Wolstencroft, which were introduced at defendant Payner's trial to help convict him. The Court held that Payner lacked standing to suppress the documents under the fourth amendment and "the supervisory power does not authorize a federal court to suppress otherwise admissible evidence on the ground that it was seized unlawfully from a third party not before the court." Id. at 735, 100 S.Ct. at 2446.

Here, documents seized at the same time as the documents in Payner from the same briefcase allegedly led the government to prosecute defendant Baskes. The Supreme Court's decision in United States v. Payner is dispositive of defendant's contention in this case that because of the illegal seizure of evidence the indictment should be dismissed or other action taken to avoid the taint.

III. Alleged Failure to Disclose Promise of Leniency

Defendant contends that the government's failure to disclose a promise of leniency made to two key prosecution witnesses in exchange for testimony requires a new trial.

The government's case against defendant Baskes depended extensively on the testimony of John E. Cavanaugh, Jr. and William Thornton. During the direct testimony of both witnesses the government asked whether they had received any promises in exchange for their testimony. Both witnesses replied they had not. In addition, Thornton was asked whether he asked for or received any immunity, to which he again responded that he had not.

Following the jury verdict, at a post-trial hearing held on defendant's motion to suppress certain evidence, the prosecution called Bernard Schoenberg, an attorney representing Cavanaugh, Jr. and Thornton, to testify. On cross-examination Schoenberg testified that he would do everything in his power to prevent a criminal case from being directed at his clients. Schoenberg testified that, although the government told him his clients were not then the target of any investigation and he believed his clients had a complete defense to any fraud charge, he stated to the government that his clients would not furnish any statements or documents to the government until "this matter was resolved civilly in a way which would . . . my clients were willing to pay whatever tax they owed, that I wanted to resolve the matter civilly without penalties and we wanted to be left out and everything else."

Other evidence indicated that the government was not particularly interested in charging Cavanaugh, Jr. or Thornton. One agent thought that there was sufficient evidence to institute a civil fraud case against John Cavanaugh, Sr. and that the institution of civil fraud proceedings against the Cavanaughs was explored. Further evidence was introduced of a phone conversation between an Internal Revenue agent and a Department of Justice attorney in which the attorney stated that he "may" have to give the Cavanaugh group informal immunity. No charges were instituted against...