U.S. v. Tenzer, 1824

• Decision Date: 19 September 1997
• Docket Number: D,No. 1824,1824
• Citation: 127 F.3d 222
• Parties: -6676, 97-2 USTC P 50,689 UNITED STATES of America, Appellant, v. James TENZER, Defendant-Appellee. ocket 96-1653.
• Court: U.S. Court of Appeals — Second Circuit

Page 222

127 F.3d 222

80 A.F.T.R.2d 97-6676, 97-2 USTC P 50,689

UNITED STATES of America, Appellant, v. James TENZER, Defendant-Appellee.

No. 1824, Docket 96-1653.

United States Court of Appeals Second Circuit.

Sept. 19, 1997.

Ira M. Feinberg, Asst. U.S. Atty. for the Southern District of New York, New York City (Mary Jo White, U.S. Atty. for the Southern District of New York, Cynthia Keeffe Dunne, Peter G. Neiman, Asst. U.S. Atty.s, of counsel), for Appellant.

William B. Wachtel, Gold & Wachtel, LLP, New York City (Elliot Silverman, Gold & Wachtel, LLP, New York City Mortimer M. Caplin, Caplin & Drysdale, Chartered, Washington, DC, of counsel), for Defendant-Appellee.

(Michael R. Young, Stacey E. Paradise, Willkie Farr & Gallagher, New York City, Richard I. Miller, General Counsel, American Institute of Certified Public Accountants, New York City, of counsel), for Amicus Curiae American Institute of Certified Public Accountants.

(Robert S. Fink, Kostelanetz & Fink LLP, New York City, of counsel), for Amici Curiae New York County Lawyers' Association and New York State Society of Certified Public Accountants.

Before: MINER and McLAUGHLIN, Circuit Judges, and NICKERSON, District Judge. ^*

MINER, Circuit Judge:

Appeal from an order of the United States District Court for the Southern District of New York (Brieant, J.) dismissing a four-count Information charging defendant with willful failure to file income tax returns, in violation of 26 U.S.C. § 7203. The court found that the IRS had violated its own policy by recommending criminal prosecution of one who voluntarily disclosed his failure to file and who thereafter filed the delinquent returns and made an offer in compromise of his tax liability. The district court found that this policy violation constituted a denial of due process.

For the reasons that follow, we reverse and remand to the district court.

BACKGROUND

Defendant-appellee James Tenzer is an experienced tax attorney and accountant. At all relevant times, he was a principal of the Long Island, New York, accounting firm of Margolin Winer & Evens ("MWE") and head of its tax department. It is undisputed that Tenzer failed to timely file income tax returns for the years 1987 through 1990, or pay any taxes for those years.

During 1988, 1989 and 1990, the IRS sent Tenzer computer-generated notices regarding his failure to make the required tax filings. Tenzer repeatedly ignored these notices. In March of 1991, Tenzer retained a tax attorney, Steven Solomon, to assist him in filing his returns but did not immediately contact the IRS or file any returns. Tenzer continued to receive computer-generated notices of his failure to file from the IRS. By letter dated October 7, 1991, the IRS notified Tenzer and his wife that, due to their failure to respond, their accounts had been referred for "enforcement action," meaning civil or administrative enforcement. Tenzer was warned that enforcement action could be avoided by calling the IRS immediately or filing all delinquent returns within ten days.

Following receipt of the October 7 letter, Solomon's partner, Myron Weinberg, twice called the IRS to request an extension of time to file Tenzer's returns for 1986 through 1989. He first requested an extension until November 18, 1991, and, November 15, 1991, he requested an additional extension until December 14, 1991. However, Tenzer's returns were not filed by December 14, 1991. The IRS subsequently designated Tenzer's case for investigation and enforcement.

On February 10, 1992, Tenzer filed his returns for 1986 through 1989. However, no payment accompanied these returns, nor did Tenzer at that time file his then-delinquent 1990 return.

I. Civil Collection Efforts

In September of 1992, collection of Tenzer's tax deficiency was assigned to Revenue Officer Elizabeth Kishlansky, a civil collection officer. On October 15, 1992, she met with Weinberg at Solomon's office and demanded full payment of the taxes. Weinberg stated that Tenzer was unable to pay in full and wanted to enter into an installment agreement.

On October 22, 1992, Kishlansky reviewed an IRS transcript of Tenzer's account and learned that Tenzer had not filed returns for 1990 and 1991. Kishlansky telephoned Weinberg's office and left a message demanding that Tenzer file his 1990 and 1991 returns if he wanted the IRS to consider an installment agreement. Kishlansky and Weinberg spoke the next day. Kishlansky explained the IRS's policy of not agreeing to an installment plan with a taxpayer for any given year's tax liability when that taxpayer is delinquent in filing for other tax years. Kishlansky said that Tenzer must file his 1990 and 1991 returns by November 30, 1992 if he wanted to be considered for an installment agreement.

Tenzer filed his delinquent 1990 and 1991 returns on November 13, 1992. On January 8, 1993, after all the relevant returns had been filed, Kishlansky met with Weinberg, Solomon, and a new lawyer for Tenzer, Ernest Honecker, who formerly had been a high-ranking attorney with the IRS. According to the district court, Honecker asked Kishlansky at this meeting for assurances that Tenzer's voluntary disclosure was being handled as a civil matter, and was assured by Kishlansky that it was a civil matter and that she was there only for collection. At this meeting, Tenzer's attorneys first informed Kishlansky that Tenzer intended to make an "offer in compromise," that is, an offer of partial payment in settlement of Tenzer's outstanding tax liabilities instead of full payment over time through an installment agreement. Kishlansky advised the attorneys that the IRS would not consider such a compromise settlement unless Tenzer started to become current on accruing taxes and make all required estimated tax payments. She also advised that any offer would have to be substantial. Tenzer's attorneys indicated that the offer would be approximately $250,000. Kishlansky responded by estimating that, given Tenzer's assets and potential earnings, a reasonable offer would be in excess of $600,000. Following the meeting, and after reviewing a financial statement provided by Tenzer at the meeting, Kishlansky called Weinberg and demanded that Tenzer divest himself of several assets and begin making monthly payments of $7,000 toward his tax liability. Tenzer never made any monthly payments.

By letter dated February 5, 1993, Honecker submitted on behalf of Tenzer a formal offer in compromise in the amount of $250,000. At that time, Tenzer's total tax liability was approximately $1.3 million. Enclosed with the offer was a $5,000 check payable to the IRS, which represented the first payment under the offer terms, with $245,000 to follow within 30 days of acceptance of the offer. The financial statement that accompanied the offer showed that Tenzer's equity in assets was $345,300. The IRS subsequently returned the check and rejected the offer as being "unprocessable" because it was below the minimum amount. The letter of rejection explained that "for offers based on inability to pay, you must generally offer an amount equal to or in excess of the amount shown as 'equity in assets' on your financial statement(s)."

On April 14, 1993, Honecker responded with a letter to the IRS arguing that the IRS should accept the offer. Honecker explained that, in arriving at the offer amount of $250,000, consideration had been given to the forced sale value of non-liquid items such as real estate and Tenzer's partnership interests. Quoting the IRS Manual, he urged that it was appropriate to use the forced sale value of assets in determining Tenzer's collection potential. Honecker also noted that he intended to resubmit the offer with an explanation attached to the financial statement During these negotiations with the IRS, Tenzer failed to become current on his accruing tax liabilities. He paid no estimated taxes during 1992, and, although he timely filed his 1992 return, he failed to pay any of the $135,665 tax due for that year.

of how he arrived at the forced sale value of certain assets. Additionally, because Tenzer had made estimated payments on his 1993 federal and state income taxes, Honecker wrote that some of Tenzer's liquid assets had declined in value and therefore a new financial statement would be prepared.

Kishlansky and her supervisor concluded that Tenzer was not attempting in good faith to pay his taxes, but rather was engaged in stalling tactics. In late April of 1993, Tenzer's file was transferred to the IRS's office in Brooklyn, the office for the region in which most of Tenzer's assets were located, for further collection. According to Honecker, Kishlansky informed him of the transfer and instructed him to forego resubmission of his offer until he had been contacted by a revenue officer from the Brooklyn office.

Honecker testified that although he had prepared the offer for resubmission, the Brooklyn office never contacted him. Instead, he was informed by a special agent, in late June or early July of 1993, that Tenzer was under criminal investigation by the IRS. Honecker allegedly asked the agent if the Brooklyn office had not contacted him because a freeze had been placed on the collection action in light of the criminal investigation, and the special agent answered in the affirmative. Apparently, the special agent had notified a civil collections officer earlier that month not to take any further action on Tenzer's case due to the pending freeze.

II. Criminal Investigation and Prosecution

In July of 1991, MWE was notified by one of Tenzer's clients, JRD Management Corp. ("JRD"), a real estate management firm, that JRD had been served with a grand jury subpoena seeking its records in a criminal tax investigation. On November 22, 1991, in connection with that investigation, MWE also was served with a grand jury subpoena requiring production of documents relating to JRD.

The government, believing that Tenzer might have been...