Vallone v. Comm'r of Internal Revenue

• Decision Date: 06 April 1987
• Docket Number: Docket No. 24111-84
• Citation: 88 T.C. No. 44,88 T.C. 794
• Parties: GERALD W. AND ELIZABETH R. VALLONE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

88 T.C. 794

88 T.C. No. 44

GERALD W. AND ELIZABETH R. VALLONE, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 24111-84

United States Tax Court

Filed April 6, 1987.

Ps filed a motion for summary judgment on the ground that the doctrines of res judicata and collateral estoppel bar R from using certain checks in this proceeding based on a District Court determination that R had violated provisions of the Internal Revenue Manual in securing Ps' consent in extending the statute of limitations prior to obtaining such checks and alternatively that the checks should be suppressed on constitutional grounds. R filed a cross-motion for partial summary judgment alleging that the checks are admissible and that those checks establish that Ps underpaid their taxes and that such underpayment was due to fraud.

HELD, the doctrines of res judicata and collateral estoppel do not bar R from using the checks for purposes of this proceeding inasmuch as the District Court did not rule on their admissibility. Ps' motion for summary judgment denied. HELD FURTHER, the violation of provisions contained in the Internal Revenue Manual by R's agent does not give rise to unconstitutional conduct requiring suppression of evidence. Ps' alternative motion for an order suppressing evidence denied. HELD FURTHER, Ps do not have standing under the Fourth Amendment because they have no privacy interest in records issued and maintained by a third party who provided those records voluntarily to R's agent. HELD FURTHER, that part of R's cross- motion for partial summary judgment which moves that the checks be held admissible granted. HELD FURTHER, that part of R's motion which alleges that the checks establish fraud denied. Alan Jay Weil and Steven S. Davis, for the petitioners.

Thomas D. Coker, for the respondent.

ORDER

WRIGHT, JUDGE:

This matter is before the Court on petitioners' motion for summary judgment, or alternatively, for an order suppressing evidence, and respondent's cross-motion for partial summary judgment, each filed pursuant to Rule 121, Tax Court Rules of Practice and Procedure. ¹

By notice of deficiency dated April 9, 1984, respondent determined the following deficiencies and additions to tax in petitioners' Federal income taxes:

+--------------------------------+
                ¦    ¦          ¦Additions to tax¦
                +----+----------+----------------¦
                ¦Year¦Deficiency¦Sec. 6653(b)2   ¦
                +----+----------+----------------¦
                ¦1976¦$181,880  ¦$91,517         ¦
                +----+----------+----------------¦
                ¦1977¦304,353   ¦152,177         ¦
                +----+----------+----------------¦
                ¦1978¦172,231   ¦86,116          ¦
                +--------------------------------+
                

The issues for our consideration are (1) whether findings of fact and conclusions of law made by the United States District Court for the Central District of California pursuant to a summons enforcement proceeding constitute res judicata or collateral estoppel as to the issues raised here; and (2) if not, whether the Commissioner's violation of provisions of his own internal procedures is unconstitutional, thus requiring that the exclusionary rule be applied. For the purpose of our ruling, the parties have submitted copies of petitioners' tax returns, affidavits, extensive memoranda of legal points and authorities, the trial transcripts and pleadings from the District Court proceeding involving summons enforcement, the District Court's decision, and copies of checks which are the principal items of contention between the parties.

One preliminary matter must be disposed of before turning our attention to the issues at hand. On December 29, 1986, respondent filed a motion in opposition to petitioners' request that the Court take judicial notice of the District Court's trial transcripts in United States of America v. Bank of America, Case No. CV82-3549-Lew, which was filed concurrently with the submission of such transcripts on December 10, 1986. Respondent contends that the transcripts are inadmissible hearsay under Rule 801 and 804 of the Federal Rules of Evidence. ³

Under Rule 121(d), in ruling on a motion for summary judgment, the Court shall consider such evidence as affidavits, and supplemental materials such as answers to interrogatories, depositions, or other acceptable materials. One reason for adoption of the hearsay rule is the unavailability of the declarant. In this case, however, the parties herein were, in effect, participants in the District Court proceeding and respondent had the opportunity to cross-examine petitioners and their witnesses in that proceeding. In our opinion, these transcripts which contain the testimony of petitioners as well as Internal Revenue Service personnel taken under oath and with opportunity for cross-examination, are no less reliable or probative than the usual type of evidence submitted by parties seeking summary judgment. Accordingly, we conclude that for the purpose of disposing of the summary judgment motions before us, the transcripts are not inadmissible evidence. Respondent's motion therefore will be denied.

BACKGROUND

On July 9, 1980, Internal Revenue Agent Joyce Morrison (formerly known as Joyce Morrison-Hillhouse) was assigned to audit petitioners' 1978 Federal income tax return and in January 1981, Agent Morrison commenced her audit. During the course of examining petitioners' 1978 return, Agent Morrison noticed an expense item with respect to horses that were sold at a loss and determined that such expense should have been deducted in 1977, the year the loss occurred. On February 18, 1981, she sent a ‘document request‘ to petitioners' accountant, Mr. Waters (now deceased), requesting information from Kaufman and Broad Homes, Inc. (Kaufman and Broad) (a company for which petitioner Gerald Vallone, doing business as Foothill Plastering Company, had done work as a subcontractor), as to the total monies paid to petitioners in 1978. Agent Morrison believed verification of gross receipts was necessary in order to have a ‘quality audit.‘ Because Mr. Vallone had indicated that Kaufman and Broad would not give that information to him, Agent Morrison concluded that she would have to seek that information directly from Kaufman and Broad.

On March 9, 1981, Agent Morrison met with petitioners and petitioners' accountant at the accountant's office to secure an extension of time with respect to the statute of limitations for the principal purpose of adjusting the expense item on petitioners' 1977 income tax return which previously was not under audit. At that time, petitioners were given the option of having their accountant prepare and file an amended return, or having Agent Morrison correct the expense on audit. Agent Morrison indicated to petitioners that she thought her audit of the 1977 return would be fairly limited in that she would likely look only at the payroll deductions and miscellaneous supplies expenses, items also being examined on the 1978 return, and that she did not see anything ‘unusual‘ on petitioners' 1977 return. Petitioners signed the first consent to extend the statute of limitations (Form 872 ‘Consent Fixing Period of Limitation Upon Assessment of Income Tax‘) on March 10, 1981, which extended the statute of limitations for their 1977 return until October 31, 1981.

On May 29, 1981, Agent Morrison contacted Kaufman and Broad for the first time. Pursuant to her letter of that date, Agent Morrison requested information concerning payments made to petitioners during 1977 and 1978. Further correspondence was necessary to clarify that the checks she sought were made payable to Foothill Plastering Company, and on June 16, 1981, Agent Morrison received copies of the front sides of these checks from Kaufman and Broad. After reviewing these check copies and finding discrepancies between the amounts of the checks and the income reported on petitioners' returns, Agent Morrison began preparing a fraud referral report directed to the Criminal Investigation Division of the Internal Revenue Service (the IRS) with the recommendation for a criminal fraud investigation of petitioners. Agent Morrison called Mr. Vallone in late June and informed him that she had received copies of the checks. On July 1, 1981, she spoke with Mr. Vallone and asked if he knew any reason for the discrepancies. He was unable to provide any explanation. Pursuant to her telephone conversation, Agent Morrison also requested that petitioners set up an appointment to sign a second consent to extend the statute of limitations for the taxable year 1977. On July 2, 1981, Agent Morrison wrote Kaufman and Broad asking for copies of the reverse sides of checks issued to Foothill Plastering Company and sent petitioners a copy of that letter, to which she attached a schedule of all checks she had received previously from Kaufman and Broad. On that same day Agent Morrison submitted her criminal fraud referral report to her supervisor. Subsequently, on July 9, 1981, Agent Morrison met with petitioners at her office and petitioners executed a second consent (Form 872) extending the statute of limitations for their 1977 return until October 31, 1982. At neither time when Agent Morrison secured the extensions did she provide petitioners with a copy of IRS Publication 1035 ‘Extending the Tax Assessment Period‘ or inform petitioners of the rights and options of taxpayers as set forth in that publication. Moreover, at the July 9, 1981 meeting Agent Morrison did not give petitioners Miranda-type warnings, nor did she inform them that she had submitted a criminal fraud referral report. ⁴

On July 20, 1981, Agent Morrison received copies of the reverse sides of checks issued to Foothill Plastering Company by Kaufman and Broad from Kaufman and Broad's accounting department.

On July 19, 1982, the United States of America and Gloria Hall, Special Agent, Internal Revenue Service, filed in the United States District Court, Central District of California (District Court), a Petition to Enforce...