U.S. v. Greve

• Decision Date: 04 June 2007
• Docket Number: No. 06-3127.,06-3127.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. James F. GREVE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

490 F.3d 566

UNITED STATES of America, Plaintiff-Appellee, v. James F. GREVE, Defendant-Appellant.

No. 06-3127.

United States Court of Appeals, Seventh Circuit.

Argued: April 13, 2007.

Decided: June 4, 2007.

John G. McKenzie (argued), Office of the United States Attorney, Rockford, IL, for Plaintiff-Appellee.

Shelly B. Kulwin (argued), Kulwin & Associates, Chicago, IL, for Defendant-Appellant.

Before FLAUM, MANION, and WOOD, Circuit Judges.

FLAUM, Circuit Judge.

A grand jury indicted James Greve on four counts of income tax offenses all in violation of 26 U.S.C. § 7206(1). Greve filed a motion to dismiss the indictment and/or suppress evidence, alleging that the Internal Revenue Service ("IRS") violated his Fourth and Fifth Amendment rights by conducting a covert criminal investigation under the guise of a civil audit. The district court denied Greve's motion, stating that the facts reflected a "typical IRS civil investigation that ultimately led to a criminal referral." Greve appeals. For the following reasons, we affirm the district court's judgment.

I. BACKGROUND

James Greve took over Greve Construction, the family business, in 1990 and converted it into a commercial snow plowing company for shopping centers, school districts, and other municipal entities. Until early 2000, Greve operated his business without an accountant and kept track of business income and expenses through billing invoices and expense receipts. Through 1999, Greve prepared his own federal and state income tax returns, employing a hybrid cash and accrual method of reporting income.

On June 28, 1999, the IRS began a civil audit of Greve's 1997 federal income tax return. Greve contacted revenue agent Ramona Luke and scheduled a meeting for August 5, 1999; however, Greve missed the scheduled appointment. On August 5, 1999, Luke issued Greve an examination report and proposed to add $143,023 in additional income to his 1997 taxable income and assessed an additional $68,383 in taxes, interest and penalties. On September 2, 1999, Greve and Luke met, and Greve admitted that he had omitted $107,888 of income in 1997. Luke determined that Greve kept inadequate books and records and employed unacceptable accounting procedures. Additionally, Greve told Luke that he and his wife had recently hired an accountant to prepare their future income tax returns.

Immediately following the September 2, 1999 interview, Luke mailed Greve an IRS Information Document Request ("IDR") seeking bank records that would reflect unreported gross receipts. On September 24, 1999, Greve turned over the requested bank deposit records.

On January 13, 2000, Luke began reviewing her file on Greve. On January 31, 2000, Luke reviewed the documents that Greve gave her and noted that some of the documents appeared to have been altered and that she did not have all of Greve's account information. On February 1, 2000, Luke noted that she needed to discuss the case with her group manager, Margaret Songer, and that Greve's case potentially involved fraud as opposed to merely an understatement of income.

On March 9, 2000, Luke met with Songer, who agreed that the case "may have fraud potential." Songer set up a meeting between Luke and the IRS District Fraud Coordinator, Michael Welu. The Fraud Coordinator helps develop potential fraud cases and instructs revenue agents and tax auditors how to investigate cases that may involve civil fraud or result in a criminal referral to the IRS Criminal Investigation Division ("CID").

On March 28, 2000, Welu and Luke met for seven hours about the Greve audit. During that meeting, Welu suggested that Luke expand the audit to include the 1998 tax year, obtain the 1996 tax year returns, and confirm whether Greve altered the documents he gave Luke. Welu directed Luke to issue administrative summonses to Greve's banks because they could assist in determining whether Greve had any hidden accounts.

On March 29, 2000, Luke contacted Greve and requested additional documents and another interview. She also advised Greve that she would be issuing him an IDR for tax years 1997 and 1998. During that conversation, Greve told Luke that he only reported income from customers who did not issue him an IRS Form 1099 and claimed that he did this because the IRS already knew about the income reported on the 1099 forms. After the conversation ended, Luke wrote a note reminding herself to determine whether Greve had altered the documents he previously provided.

On March 30, 2000, Welu informed Luke that Greve had been involved in several large cash transactions, possessed a previously undisclosed bank account, and had transferred his home into a trust shortly after the IRS audit began. Luke faxed Welu her proposed IDR for the 1997-1998 tax years for his review and approval. On April 4, 2000, Luke spent six hours reviewing Greve's file. She prepared an Examination Request for tax year 1998, seeking permission to expand the audit to include that year. The stated reasons for the request were "recurring issue" and "develope [sic] for fraud." Luke also prepared a request for tax year 1996 for "info only."

On April 6, 2000, Luke gave Greve the IDR she prepared with Welu for the 1997-1998 tax years and faxed Songer the previously prepared examination request. Luke also told Songer that she still had "to develop the fraud case" against Greve. On April 19, 2000, Luke prepared administrative summonses and retrieved IRS information on Greve's 1996 and 1998 tax returns.

On May 5, 2000, Greve requested additional time to produce his records. He told Luke that he was overwhelmed by the number of documents she requested and did not know how to organize them. Luke told Greve how to organize the records and gave him more time to gather them. On May 8, 2000, Greve called Luke to tell her that he had retained an attorney, Christopher Saternus. Saternus requested more time to gather Greve's documents. On June 15, 2000, Luke noted that she could not proceed with the audit until she received the requested documents from Greve, so she called Saternus and told him that she needed the documents to proceed with her examination.

On July 10, 2000, Greve called Luke to discuss the document request. He informed her that he had requested his customers' cancelled checks from his bank but did not have all of them. Luke told Greve that the records were due by July 20, 2000.

On July 20, 2000, Luke met with Saternus and Greve. Saternus asked whether Luke would be able to wrap up the audit for the years in question after she received the requested documents. Luke responded that there would be additional taxes, interest, and penalties and that the audit would be "wrapped up pretty quickly" after their meeting upon final review and determination. Greve and Saternus gave Luke all of the requested documents and acknowledged that Greve had understated his income in 1997 and 1998 by approximately $245,000.

Between July 20, 2000 and October 17, 2000, Luke continued her review of Greve's records. On October 2, 2000, Luke advised Songer that she had completed the majority of the work involved in determining the gross receipts but that she had learned of a new bank account in Greve's wife's name. The following day, Greve called Luke and inquired about the audit's status. Luke told Greve that she needed the documents on the newly-discovered bank account and that she might ask Greve for an extension of the civil statute of limitations.

On January 23, 2001, after discussing the audit with Welu, Luke downloaded the IRS fraud handbook. Luke's notes from the following day indicate that she needed to conclude the audit and either "write up referral or close agreed." On January 25, 2000, Luke noted that she needed to set an appointment with Welu to complete the referral of the criminal fraud case. The next day, Luke scheduled a meeting with Welu to "write fraud referral." On February 15, 2001, Luke and Welu met to discuss the status of the audit. Welu told Luke that she could not refer the matter to CID because she needed to be able to show that Greve made an "overt action." Welu instructed Luke to contact Greve's customers to determine why they did not issue him 1099 forms for work he performed for them. Welu and Luke also discussed the applicable statute of limitations for civil assessment. Welu noted that because Greve omitted over 25% of income, the statute could be extended. Luke contacted several of Greve's customers and requested information regarding their payments to him.

On March 23, 2001, Luke met with Welu for another six hours. Following that meeting, Luke wrote up her CID referral report, which noted that Greve filed a "W-9 with several customers claiming that he was incorporated when he was in fact not. These customers issued no 1099's [sic]." On March 26, 2001, Songer e-mailed Welu asking about the referral's status. Welu e-mailed Songer that the referral had been made. Songer then e-mailed Luke with the news, stating, "O ye of little faith." On April 2, 2001, Special Agent Mark Johnson met with Luke, Welu, and Songer to discuss the case.

On March 29, 2005, a federal grand jury indicted Greve on four income tax offenses, alleging violations of 26 U.S.C. § 7206(1). Count One charged Greve with failing to report $158,539 in gross receipts in his personal tax return for tax year 1998. Count Two charged Greve with failing to report $201,736 in gross receipts in his personal tax return for tax year 1999. Count Three charged him with failing to report $388,365 in gross receipts in a tax return for Greve Construction, Inc. for tax year 2000. Count Four charged Greve with claiming a false S corporation loss and a false refund in his personal income tax return for tax year 2000.

Greve filed a motion to dismiss the indictment and/or suppress evidence, alleging that the IRS had unconstitutionally obtained statements and documents for him by conducting a civil audit of Greve after it had ...