United States v. Lockyer, No. 71-1083.

• Decision Date: 16 September 1971
• Docket Number: No. 71-1083.
• Parties: UNITED STATES of America, Plaintiff-Appellant, v. Ralph LOCKYER, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

448 F.2d 417 (1971)

UNITED STATES of America, Plaintiff-Appellant, v. Ralph LOCKYER, Defendant-Appellee.

No. 71-1083.

United States Court of Appeals, Tenth Circuit.

September 16, 1971.

Johnnie M. Walters, Asst. Atty. Gen. (Meyer Rothwacks, John P. Burke and John M. Brant, Attys., Tax Division, Dept. of Justice, and C. Nelson Day, U. S. Atty., of counsel, on the brief), for appellant.

E. L. Schoenhals, Salt Lake City, Utah, for appellee.

Before SETH and DOYLE, Circuit Judges, and KERR, District Judge.

WILLIAM E. DOYLE, Circuit Judge.

This is an income tax fraud prosecution in which the government seeks a reversal of a judgment of the district court which suppressed all of the evidence and dismissed a four-count complaint. The essential basis was that the Internal Revenue agent had conducted a criminal rather than a civil investigation prior to his referring the case to the special agent, Intelligence Division, and had done so without warning the defendant-appellee as to his rights and had thus violated the internal administrative regulation of the Revenue Service contained in one of its manuals; and had also violated the rights of the accused under the Fourth and Fifth Amendments of the Constitution of the United States.

On March 28, 1968, a four-count complaint was filed in the district court charging that the defendant had willfully attempted to evade and defeat a large part of the federal income tax owed by him for the calendar years 1961, 1962, 1963 and 1964, by means of filing false and fraudulent income tax returns contrary to § 7201 of the Internal Revenue Code of 1954. A combined motion was filed on behalf of the defendant seeking suppression of the evidence obtained from him and dismissal of the charges. The motion charged the Internal Revenue Service with dissemination of massive prejudicial publicity making a fair trial impossible, and further stated that the Internal Revenue Service had violated the defendant's Fourth and Fifth Amendment rights by obtaining his papers without informing him that he was under investigation for income tax fraud. The motion sought dismissal of the complaint and the suppression of all of the evidence obtained by the Internal Revenue Service. Hearings were held on the motions on June 10, 1968, and July 23, 1968. Subsequently, on December 19, 1969, there was a waiver of indictment followed by the filing of a four-count information which was substantially identical to the complaint which was on file. It was not until May 18, 1970 that arguments were heard on the motion to dismiss and the motion to suppress and, finally, on December 7, 1970, the trial court granted the defendant's motions. It is the judgment suppressing the evidence and dismissing the complaint which is before us for review.

The defendant-appellee taxpayer had been a used furniture dealer for 32 years until the date that he sold his business in June 1964. He was shown to have had a high school education and, to put it mildly, was not a bookkeeper and had not kept any formal records. The investigation started on December 6, 1965, when he was contacted by Internal Revenue Agent Vatsis concerning his 1964 income tax return. Vatsis called again the next day at which time he obtained the taxpayer's bank statements for the year 1964. On December 17 Vatsis made a third call and obtained further information and documents for the year 1963. The next contact was in February 1966, at which time still further material was obtained, including cancelled checks and bank statements for the year 1962. It was not until April 8, 1966 that the matter was referred to the Intelligence Division. Vatsis met with defendant on April 22, 1966, and was present while Special Agent Rich questioned him at length. Rich first gave him what purported to be a Miranda warning advising him that he was not required to make a statement; that he was entitled to have a lawyer present if he wished. However, there was no mention as to the function of Rich as a Special Agent for the Intelligence Division, and there was little or no inkling communicated that there had been a shift of emphasis from civil to criminal investigation. Special Agent Rich interviewed the defendant at great length and this interview was taped and transcribed. Rich also demanded further records from the accused for 1961, a tax year which had not been investigated by Agent Vatsis. After these records had been picked up by Vatsis, on Rich's instruction the defendant obtained a lawyer and further communications were through him.

In ordering all of the evidence to be suppressed, the trial court applied a provision of the Internal Revenue Audit Technique Handbook which outlines the "procedure after discovering indications of fraud." The court held that this provision was fully applicable and could be invoked by the defendant. The indications of fraud were present, according to the court, at the very outset when an understatement of approximately $1,700.00 was apparent and it became evident that some of the records had been destroyed. The evidence obtained on December 8, 1965 and subsequent interviews were all tainted, and the revenue agent "built cases for the years 1964, 1963 and 1962 against defendant under the guise of conducting an audit for civil tax purposes." The court relied on the decision of the Supreme Court in United States ex rel. Accardi v. Shaughnessy, 347 U.S. 260, 74 S.Ct. 499, 98 L.Ed. 681 (1954), which held that a regulation vesting the Board of Immigration Appeals with discretion equal to that of the Attorney General in hearing and disposing of a case was intended to give to the Board full authority to hear and determine — an authority which could not be short circuited by the Attorney General,¹ and also on United States v. Heffner, 420 F.2d 809 (4th Cir. 1969) and United States v. Leahey, 434 F.2d 7 (1st Cir. 1970).

Some understatement of income was undoubtedly evident soon after the first interview. However, the condition was by no means clear at this stage. Revenue Agent Vatsis was then examining a capital transaction resulting from the sale of the business and was required to see other years. Moreover, the records were, as previously noted, inadequate thus requiring Vatsis to obtain the checks and bank statements, to segregate them and to obtain explanations from the defendant. Later sales records in the form of daybook entries were produced by defendant and these also had to be examined. The revenue agent was thus called upon to reconstruct the records for the three years in order to ascertain the true condition and this task was not completed until after the February 28, 1966 visit with the defendant after which the checks and statements for the year 1962 were obtained. The computations which resulted from this reconstruction showed a pattern of substantial understatements for the three-year period 1962-1964 inclusive. Following the completion of the mentioned computations, the agent determined that the total amount which the defendant had failed to report in the three years amounted to $55,000.00. The four-count complaint (which the court dismissed) described lesser amounts. These reductions were made by Intelligence Agent Rich following his investigation.

On this appeal the government argues:

First: The provision of the Audit Technique Manual was not designed to set a standard for the protection of the taxpayer; that it was intended to guide employees of the Internal Revenue Service so as to improve efficiency in gaining the facts and at the same time not imperiling the case by conducting themselves so as to give the taxpayer legal arguments.

Second: That the evidence at the suppression hearing did not in any event establish a violation of the provisions of the manual and that the court's holding that there was a violation, together with the drastic action which the trial judge took, constituted plain error.

I

The provision (§ 10.09) of the Internal Revenue Service Audit Technique Handbook which was relied on by the trial court² states that the Internal Revenue Manual requires that a revenue agent suspend his investigation when he discovers what he believes to be an indication of fraud. The purpose is so that the Chief, Intelligence Division, can evaluate it. The agent is cautioned not to stop too soon lest he might not have information necessary for the Intelligence Division to make a decision. He is also told that he must have sufficient facts and explanations to demonstrate an understatement (of income), and that he is not to stop before having sufficient evidence to demonstrate intent. He is further cautioned against

1. Taking the investigation too far, whereby there may be duplication of effort by the special agent, or

2. Jeopardizing the criminal case by giving the taxpayer a basis for claiming that the criminal case was prepared by the revenue agent under the guise of conducting a civil audit.

The controlling guideline is discovery of a substantial understatement coupled with "an indication that the understatement was deliberate."

From start to finish the regulation seeks to guide the revenue agent in the execution of his investigation. Its manifest purpose is to delineate and delimit the duties of the revenue agent prior to referral to the Intelligence Division. Does an unpublished regulation having this character and tenor apply to and define the rights of the taxpayer? We conclude that it does not.

The case of Accardi v. Shaughnessy, supra, does not call for any such construction, for there the regulation which was held to have the force of law was a vital procedural provision which governed the procedure to be followed in deportation cases. The procedural due process deprivation was there clear.

Not even the decision of the Fourth Circuit in Heffner, supra, which is expansive and sweeping in its language, is authority for applying a regulation like the present one. There the instruction was a public one which was...