United States v. Bonnell, Civ. No. 4-78-190

• Court: United States District Courts. 8th Circuit. United States District Court of Minnesota
• Writing for the Court: MacLAUGHLIN
• Citation: 483 F. Supp. 1070
• Parties: UNITED STATES of America and Ralph G. Neumann, Special Agent of the Internal Revenue Service, Petitioners, v. Harold BONNELL, as Partner of Peat, Marwick, Mitchell & Co., and Peat, Marwick, Mitchell & Co., Respondents. UNITED STATES of America and Ralph G. Neumann, Special Agent of the Internal Revenue Service, Petitioners, v. Charles RICE, as Assistant Vice President of Cargill, Inc., and Cargill, Inc., Respondents.
• Docket Number: Civ. No. 4-78-190,4-78-191.
• Decision Date: 27 December 1979

483 F. Supp. 1070

UNITED STATES of America and Ralph G. Neumann, Special Agent of the Internal Revenue Service, Petitioners,
v.
Harold BONNELL, as Partner of Peat, Marwick, Mitchell & Co., and Peat, Marwick, Mitchell & Co., Respondents.
UNITED STATES of America and Ralph G. Neumann, Special Agent of the Internal Revenue Service, Petitioners,
v.
Charles RICE, as Assistant Vice President of Cargill, Inc., and Cargill, Inc., Respondents.

Civ. Nos. 4-78-190, 4-78-191.

United States District Court, D. Minnesota, Fourth Division.

December 27, 1979.

483 F. Supp. 1071

COPYRIGHT MATERIAL OMITTED

483 F. Supp. 1072

Sheryl Ramstad Hvass, Asst. U. S. Atty., Minneapolis, Minn., for petitioners; Stephen G. Fuerth and James P. Sites, Tax. Div., Dept. of Justice, Washington, D.C., of counsel

Boris Kostelanetz, Lawrence S. Feld, and Stuart Abrams, Kostelanetz & Ritholz, New York City, for respondents Charles Rice and Cargill, Inc.; Dorsey, Windhorst, Hannaford,

483 F. Supp. 1073

Whitney & Halladay, Minneapolis, Minn., of counsel

Jeffrey R. Brooke, Gray, Plant, Mooty, Mooty & Bennett, Minneapolis, Minn., for respondents Harold Bonnell and Peat, Marwick, Mitchell & Co.; Howard Krongard, Associate Gen. Counsel, Peat, Marwick, Mitchell & Co., New York City, of counsel.

MEMORANDUM AND ORDER

MacLAUGHLIN, District Judge.

These cases present novel and difficult issues regarding the enforceability of certain tax summonses¹ issued by the Internal Revenue Service (hereinafter "the IRS"). The summonses require the production of documents and the giving of testimony by and from Cargill, Inc., Charles Rice, Assistant Vice President of Cargill, Inc., Cargill's certified public accountants, Peat, Marwick, Mitchell & Co. (hereinafter "PMM") and Harold Bonnell, a partner in PMM.

Cargill resists the enforcement of the summonses on the ground that they are predicated upon a document authored by John Levine,² an attorney for a Minneapolis law firm, which was obtained in a manner not authorized by Levine. Cargill argues that the document is privileged or was illegally seized and may not be used directly or indirectly by the government. Other contentions concerning due process, IRS regulations, right to counsel, and discovery are also advanced. Cargill further asserts a counterclaim in which it asks this Court to enjoin use of the questioned document in the investigation of Cargill's tax liability and to enjoin enforcement of the summonses. It also asks that the government identify the informant³ and return all copies of the questioned document. PMM supports Cargill's position.⁴

The petitions are before this Court on objections to two reports from Magistrate J. Earl Cudd. The first report recommended that the summonses be enforced, and that the relief sought by Cargill's counterclaim be denied without prejudice. The second report specifically found that the United States government was not involved in the procurement of the questioned document.

1. Facts

On February 14 and 15, 1977, John Levine, head of the trial department of the Minneapolis law firm of Dorsey, Windhorst, Hannaford, Whitney & Halladay (hereinafter the "Dorsey firm") met with several persons at the request of John McGrory, general counsel for Cargill. The participants at the February meetings included two auditors from PMM and a tax attorney from Cargill's legal department. The meetings arose out of Cargill's responses to the Eleven Questions, inquiries made by the IRS in 1975 to major corporations relating to "unusual payments," whether bribes, kickbacks, political contributions, or the like. Discussed at the meetings were activities of two of Cargill's subsidiary companies: Compania Industria Y De Abastecimientos S.A. (hereinafter "Cindasa") and Piensos Hens, S.A. (hereinafter "PH").

Following the meetings, McGrory requested that Levine summarize his notes taken at the meetings in typewritten form. McGrory indicated that Levine's summary would be useful to Cargill and to Palmer Baker, New York tax counsel for Cargill. Once the typed summaries were prepared, Levine retained the original and sent a copy to the Cargill corporate offices in Minneapolis by a messenger provided by a delivery company hired by the Dorsey firm. Without

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authority, the messenger who was to deliver the questioned document, one Carl Harstad (the informant), opened the taped envelope and examined the document in a men's room. The informant, who holds a journalism degree and is a sometime reporter, photocopied the document and proceeded to deliver the resealed envelope containing the original document to Cargill

The informant then delivered a photocopy to a local newspaper, the Minneapolis Star. On March 11, 1977, Levine received a phone call from McGrory, who indicated that the Star had informed Cargill that the newspaper had a copy of the questioned document.⁵

Upon learning of the Star's journalistic coup, Charles Rice, assistant vice president of Cargill, hand-delivered a letter to Revenue Agent Robert T. Johnson of the IRS,⁶ on March 15, 1977. The letter informed the IRS that a document had been stolen, and that if the IRS received it, it should be aware that the document was privileged. Johnson was told by Rice that "they had a problem with this Spanish company" and Rice "stated . . . generally what the problem was."⁷

On March 16, 1977, the informant arranged a meeting with Special Agent Leon Steinberg of the IRS Intelligence Division and handed Steinberg a copy of the questioned document, a magazine article about Cargill and a listing of Cargill executives and their duties. As a condition to the delivery of the questioned document, the informant required the IRS not to disclose information which might lead to a discovery of the informant's identity, and not to reveal to others that the IRS possessed the document. Shortly after the March 16 meeting the informant telephoned the IRS and a method was devised whereby Steinberg could reach the informant.

On May 19, 1977, Revenue Agent Johnson personally delivered a copy of one of the summonses here in question to Charles Rice at Cargill's office. At that time Rice gave Agent Johnson a letter which stated that Cargill probably owed additional tax for 1972 and 1973 totalling one million dollars. The PMM/Bonnell summons was served on May 26, 1977.

After the summons was served, Cargill representatives surmised that the IRS probably possessed a copy of the questioned document, because the language of the summons tracked the language of the document. From March 15, 1977, the date that the IRS was informed that the document was purportedly both stolen and privileged, until September 7, 1977, when Cargill was informed that the IRS had the document in its possession, the IRS engaged in misleading conduct. On several occasions, IRS agents denied that the IRS possessed a copy of the questioned document. Not until September 2, after the IRS received the informant's consent, did it reveal that it had a copy of the document. On May 8, 1978, the IRS commenced these actions to enforce the summonses.

2. Issues

Respondents argue that the questioned document is a tainted source and that the "fruits" therefrom may not be used, on four grounds: 1) that the IRS failed to follow its own regulations; 2) that the government unreasonably seized the document without a warrant in violation of the Fourth Amendment; 3) that the document is protected by the attorney-client privilege; and 4) that the document is protected by the work-product doctrine. Respondents also allege that the document's use violates Cargill's right to effective assistance of counsel, that the government's conduct was so illegal and unethical as to violate the Fifth Amendment, and that the Magistrate erroneously

483 F. Supp. 1075

restricted discovery and the scope of evidentiary hearings held to delve into the IRS' conduct. Finally, respondents urge that their counterclaim for an injunction against use of the document and enforcement of the summons, identification of the informant, and return of the document be granted

After a close analysis of the extensive briefs submitted by all parties and the transcripts of the proceedings before the Magistrate, after an in camera examination of the questioned document, and after hearing oral argument, this Court has determined that the questioned document neither was illegally seized nor is a privileged attorney-client communication. This opinion concludes that the document is an attorney's work product, but that the IRS should not be barred from using work product to obtain other, unprivileged materials. The rest of Cargill's and PMM's defenses are denied, with the caveat that respondents may, consistent with this memorandum and order, raise claims that the materials described in the summonses are themselves privileged. The rationale underlying these conclusions follows.

3. Right to raise defenses in a summons proceeding

Respondents' primary contention is that the summonses are based on a tainted source — the questioned document — and are therefore themselves tainted. Essentially, respondents claim that the summonses demand production of fruit of a poisonous tree, see Wong Sun v. United States, 371 U.S. 471, 488, 83 S.Ct. 407, 9 L.Ed.2d 441 (1963), and that an exclusionary rule⁸ should be created for summons enforcement proceedings.

Reisman v. Caplin, 375 U.S. 440, 84 S.Ct. 508, 11 L.Ed.2d 459 (1964), is the controlling authority as to which defenses may be raised in summons enforcement proceedings:

The witness may challenge the summons on any appropriate ground. This would include . . . the defenses that the material is sought for the improper purpose of obtaining evidence for use in a criminal prosecution . . . as well as that it is protected by the attorney-client privilege . . ..

375 U.S. at 449, 84 S.Ct. at 513 (emphasis added). The Reisman criterion is thus whether the defense is an "appropriate ground."

A. IRS...