U.S. v. Rutherford

• Decision Date: 04 February 2009
• Docket Number: No. 07-2312.,No. 07-2313.,07-2312.,07-2313.
• Citation: 555 F.3d 190
• Parties: UNITED STATES of America, Plaintiff-Appellant, v. Jon RUTHERFORD (07-2312), Judith Bugaiski (07-2313), Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

555 F.3d 190

UNITED STATES of America, Plaintiff-Appellant, v. Jon RUTHERFORD (07-2312), Judith Bugaiski (07-2313), Defendants-Appellees.

No. 07-2312.

No. 07-2313.

United States Court of Appeals, Sixth Circuit.

Argued: October 21, 2008.

Decided and Filed: February 4, 2009.

ARGUED: Robert Cares, Assistant United States Attorney, Detroit, Michigan, for Appellant. Steven F. Fishman, Robert M. Morgan, Law Office, Detroit, Michigan, for Appellees. ON BRIEF: Robert Cares, Assistant United States Attorney, Detroit, Michigan, for Appellant. Steven F. Fishman, Robert M. Morgan, Law Office, Detroit, Michigan, for Appellees.

Before BOGGS, Chief Judge; and COLE and COOK, Circuit Judges.

BOGGS, C. J., delivered the opinion of the court, in which COOK, J., joined. COLE, J. (pp. ___-___), delivered a separate concurring opinion.

OPINION

BOGGS, Chief Judge.

Defendants Jon Rutherford and Judith Bugaiski were charged with numerous tax violations and conspiracy to defraud investigators from the Internal Revenue Service (IRS). The United States appeals the district court's suppression of certain statements and documents obtained pursuant to an allegedly improper civil investigation. The IRS civil examiners who interviewed Rutherford and Bugaiski were required under an IRS manual to suspend their investigation when a "firm indication of fraud on the part of the taxpayer[s]" surfaced and refer the case to the criminal division. Internal Revenue Manual § 4565.21(1). Despite the fact such indications had emerged, civil examiners continued their investigation, conducting further interviews with the defendants and requesting additional documents.

In the criminal proceedings that followed, the IRS sought admission of their incriminating statements. The district court held the statements had to be suppressed, initially citing United States v. McKee, 192 F.3d 535 (6th Cir.1999), for the proposition that any continuation of discussions under a civil audit after firm indications of fraud have emerged would violate the Due Process Clause of the Fifth Amendment.; JA 81. At a later hearing, the court narrowed its explanation orally, remarking that not every "violation of the [IRS] manual [creates] a per se constitutional violation," but that this case did establish a violation. The United States now appeals, contending that the district court misread the Sixth Circuit's

Because the defendants' constitutional rights were not violated by the IRS's negligent violation of its manual, we reverse the district court. Despite the district court's reliance on McKee, in that case the Sixth Circuit explicitly reserved the issue now before us. Whether the government violates a person's due process rights in the course of taking his statement is assessed under a voluntariness standard, and the Constitution does not demand a bright-line rule whereby every breach of federal administrative policy also violates the Due Process Clause. The Fifth Amendment is implicated only when a federal agent's conduct actually compels a person to speak against his will. With respect to Rutherford and Bugaiski, there is no credible basis for concluding that their statements were coerced. Although the civil examiners may have been negligent in failing to refer the case to the IRS's Criminal Division, the district court found no evidence that they deliberately disregarded the manual in order to mislead the defendants. Nor is there evidence in the record that suggests Rutherford and Bugaiski were familiar with the manual, or that they were lulled into a false sense of security about the nature of the charges they might face. In short, their statements were given voluntarily and may be properly admitted into evidence without infringing upon their constitutional rights.

I

Rutherford and Bugaiski were both officers of Metro Emergency Services (MES), a non-profit tax exempt organization operating a homeless shelter for women in Highland Park, Michigan. Rutherford served as the organization's president, and Bugaiski served as its controller. The IRS first became interested in MES when a newspaper article reported on political contributions made by the group. As a non-profit organization, such disbursements could affect the group's tax status. In the course of reviewing the IRS filings, agent Wesley Tagami of the Tax Exempt and Government Entities Division discovered that MES had not filed several forms related to tax withholding from employee salaries. At this point, no direct evidence of fraud had surfaced, as there was no indication that Rutherford or any other employee had not reported all income. But Tagami's findings suggested there was the potential for fraud and, noting the irregularity, he referred the case to a fraud specialist. Soon thereafter, several other agents were assigned to work on this case, including Suzanne Carene, a revenue agent, who was tasked with examining the organization's tax returns, and another agent who was charged with collecting any unpaid taxes from MES.

Some indications of fraud began to emerge. Agents discovered that Rutherford's personal tax return showed that taxes had been withheld from his pay, even though MES never remitted the money to the IRS. Still, agents believed no firm indications of fraud were yet apparent, because certain elements of criminal fraud remained unsupported by the records. As the government notes, "there could be innocent explanations for the problem with the returns, such as Rutherford's lack of knowledge about the non-filings of 941s or the fact that the funds had not been remitted to the IRS." Since a taxpayer's intent is crucial to the distinction between criminal and civil fraud, agents could not determine whether there was an innocent explanation for the discrepancy or if the omission was intentional and therefore potentially criminal until they interviewed Rutherford and Bugaiski.

Agent Carene met with the defendants and their CPA for the first time on December 16, 2003. Rutherford and Bugaiski stated that their failure to remit taxes was unintentional, and that funds owed to them had come in late. Rutherford thereafter abruptly ended the interview. Agent Carene attempted to continue the interview, but the defendants refused to answer any more questions. She then made several requests to meet with the defendants again for further questioning, and when they declined, she caused a summons to be served on the defendants.¹ Pursuant to the summons, Carene met with defendants on June 17, 2004. At that time, Bugaiski turned over various documents, but no interviews were conducted. On June 21 and June 25, 2004, Carene interviewed Rutherford for a second and third time. In the course of these interviews, he answered some questions and declined to answer others. On June 23, 2004, she interviewed Bugaiski.

IRS agents involved in the case held a conference call on July 20, 2004, and finally determined that a criminal referral should be made. Explaining the decision later, one investigator said, "I believe we had enough, or we had affirmative acts that showed intent and willfulness by the taxpayer to fail to collect and turn over the employment taxes, not report substantial amounts of income, not file tax returns. ..." On April 21, 2006, defendants were charged in a 22-count indictment alleging various violations of the tax code, including tax evasion, failure to pay taxes that were withheld from employees, making false returns, and conspiracy to defraud IRS investigators. In a pretrial motion to suppress evidence and dismiss the indictment, the defendants claimed that the IRS agents improperly continued the civil examination after firm indications of fraud had emerged. By doing so, the defendants argued, their rights under the Due Process Clause had been violated. The district court agreed that statements made in the later stage of the investigation had to be suppressed as violating the Constitution.

II

The district court found that firm indications had emerged by the time the IRS conducted its second round of interviews in June 2004. Although the United States did not concede this point on appeal, the government paid little attention to this issue in its brief and at oral argument— perhaps in recognition of the standard of review. Whether firm indications of fraud had emerged is a question of fact, and this court reviews such findings for clear error. McKee, 192 F.3d at 543. Nothing in the record suggests the district court's finding was clearly erroneous, and therefore we proceed on the assumption that the IRS civil investigation was improperly continued.

The Sixth Circuit has once before considered the issue now before this court, and this case has proven a source of some confusion. In United States v. McKee, the defendant asked this court to suppress statements made to the IRS because the statements had purportedly been made pursuant to an improper investigation. 192 F.3d 535. In an opinion for the court, Judge Jones first set forth the traditional rule for determining whether a statement should be suppressed:

[I]t is incumbent upon [the defendant] to show by clear and convincing evidence that (1) [the revenue agent] made affirmative misrepresentations in the course of her investigation, and (2) because of those misrepresentations, [the defendant] disclosed incriminating evidence to the prejudice of her constitutional rights.

Id. at 542. In this respect, the opinion is wholly conventional. Although defendant's motions to exclude statements she made to the IRS were based on an allegation that the revenue agent had failed to refer the case to the Criminal Division after firm indications of fraud surfaced, the district court found that the manual had not been violated and therefore denied her motions. Id. at 540-41. The Sixth Circuit affirmed this decision, again relying on the fact that the manual had not been violated. Id. at 543 ("Far from disregarding the Manual's provisions, [the IRS] acted in...