UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK
August 11, 1966
United States of America,
Walter O. Carlson, Defendant
Dooling, District Judge.
The opinion of the court was delivered by: DOOLING
Memorandum and Order
DOOLING, District Judge
Defendant has moved to suppress evidence obtained by the Special Agents of the Intelligence Division of the Internal Revenue Service through interviews conducted by them with defendant at which defendant was not advised that he was entitled to be represented by counsel and that the investigation was addressed to fixing upon him criminal responsibility for his understatements of income tax in the years 1957, 1958, 1959, 1960 and 1961. Defendant moved also, on the ground that it is necessarily founded upon evidence illegally obtained, to dismiss the indictment and all the counts of it.
The indictment, under Internal Revenue Code § 7206(1) charges that defendant willfully made tax returns for 1958, 1959 and 1960 which he did not believe to be true and correct in material matters; the specification is understatement of income tax liability due to the omission of dividends, capital gains, and interest.
Admittedly - now at least - defendant's income tax liability in each year was substantially understated. Defendant reported some dividends every year and in one year reported a capital gain; he did not report all his dividends, nor any of his savings bank interest, nor all his capital gains. The data available for prosecution include defendant's own statements of his dividend income derived from securities kept in his own custody, the records of Goldman Sachs & Co., Bache & Co. and Merrill, Lynch, Pierce, Fenner & Smith (and Form 1087s filed by Merrill, Lynch) copies of the savings bank pass books, and Form 1099s filed by various dividend-paying corporations. Suppression is significant only as to such evidence as the taxpayer produced against himself about his knowledge that he had the income and had not reported it and the reason for not reporting it, and as to the data, if any, which came to the Government's hands only after the Intelligence Division began its criminal inquiry and by reason of leads obtained from defendant in the challenged interviews.
The Government, here, is transactionally interested as tax-collecting sovereign in the tax owed to it and not paid. Apart from being prosecuting sovereign the Government is interested to get the data to compute its tax for collection. As a prosecuting sovereign it is additionally interested in matter relevant only to criminal punishment or to the related but milder punishment of the fraud and negligence penalties that are collectible as additions to tax.
In this latter aspect the Government is interested in making such inquiries - irrelevant to the tax computation - as these: Were you conscious that you had omitted material items and that the tax you showed was less than the tax due? Did you intend by the conscious omission from the returns of items that you knew were taxable to evade and defeat the payment of the tax? Did you observe on the brokerage statement that you received the printed legend advising you to preserve the broker's statement for use in preparing your income tax return? Did you know that capital gains on securities are taxable even though within 18 months the proceeds are re-invested in property of substantially the same sort? The answers to such questions bear upon criminal responsibility and on liability to "civil" penalties for negligence or fraud.
The United States as tax-imposing sovereign was entitled under Internal Revenue Code §§ 6011(a), 6012 and 6013 to have a return of tax from the defendant or from the defendant and his wife which sets forth the information required by the tax form and the regulations. It is idle to suggest that the duty to file that return or to supply the information called for by the tax form and regulations was discharged by filing an incorrect return. The duty to respond correctly to the inquiries made by the form of tax return is a continuing duty. It is not distinctively a duty of self-accusation for, considered by itself, the supplementing of a return by additional information relevant to tax computation is wholly compatible with innocence and with the absence of negligence, fraud, willfulness and criminality.
Internal Revenue Code §§ 7601-7606 empower the Internal Revenue Service to examine records relative to an inquiry directed to ascertain the correctness of any tax return and to summon the persons liable to the tax, and anyone having custody of books of account relating to the tax liability, and such summonses are enforceable in the District Courts. There can be no question that appropriate inquiries under Sections 7602 through 7605 are necessary governmental implementations of the duty to file the returns and to pay the taxes. The mere filing of an inadequate tax return can not discharge the responsibility to make the disclosure that will complete the return merely because to do so will supply indispensably necessary data preconditioning any governmental case for criminal responsibility. So, the present case may involve delineating the boundary between the area of responsibility for civil disclosure and the area in which, if ever, interrogation and the eliciting of evidence and evidentiary leads were material only, or only significantly, to the pursuit of criminal objectives.
A whole second range of consideration is presented in this case, because of the nature of the defendant's professional experience. If a defendant is entitled to be told - or reminded - that he has the right to the assistance of counsel, must that be done for men equally competent with the interrogating officer to remind him that the right exists? And if no broad generalization can be made based on the calling and competency of the particular taxpayer and potential defendant - for he may not be sensitive to the moment when inquiry has become oriented toward eliciting evidence for use in a criminal proceeding - does that become a factor in the context of a particular interrogation and the possibility that the taxpayer and potential defendant is calculatedly investing a mixture of self-condemning statements, exculpatory arguments and proffers of belated cooperation with the Internal Revenue Service even as the Internal Revenue Service may be skirmishing for inculpatory statements as well as pursuing objective factual data?
The final range of consideration brought to bear upon this case arises out of defendant Carlson's health.
The taxpayer-defendant's tax history, his professional advancement and his health problems require a chronological statement.
Defendant was born in 1908 in Connecticut, was graduated from high school, took special courses at Columbia University and the College of the City of New York - apparently in the late 20s or early 30s - which may have amounted to no more than the equivalent of a year and a half or so of college. Carlson's first employment was with Lawyers Trust Company and thereafter with County Trust Company and Bankers Trust Company, successors by merger to Lawyers Trust Company.
On November 2, 1942, defendant joined Lybrand, Ross Bros. & Montgomery, a well known public accounting firm, at a salary of $2,400 a year. By October 1, 1955, defendant was on a base salary of $8,500 a year and was receiving an annual bonus of $2,500 a year. His later salary and bonus history was as follows:
October 1, 1956 $ 9,000 $2,500
October 1, 1957 $10,000 $2,500
October 1, 1958 $11,000 $2,500
October 1, 1959 $11,000 $2,300
About March of 1960 defendant left Lybrand. He was then an audit supervisor and was in charge of the conduct of field audits of clients' accounts. He would have under him from 1 to 10 or 20 men at any one time. The grades junior to defendant's grade in the staff organization of Lybrand were seniors, staff A and staff B accountants. Senior to defendant in the Lybrand plan of staffing would be "managers," to whom a person in the position of defendant would report, and senior to the managers would be the partners of the firm. In the 18 years with Lybrand defendant had fairly routine business experience that was not markedly successful although it was adequate and satisfactory.
On April 1, 1960, defendant joined Philip Morris, Inc. as a general accounting manager at $16,000 a year. His work was to supervise the preparation and consolidation of accounting statements; he was in charge of a staff of 12 or 15 persons; he reported to the comptroller of the corporation. While with Philip Morris and in January of 1963, defendant was made Comptroller of Philip Morris International Division. His responsibilities in that job were to prepare the statements and supervise the keeping of the records of the division. A staff of 12 or 15 worked under him. Defendant's rates of pay at Philip Morris were as follows:
Annual Rate of
Year Commencing Salary
Defendant had accruals in the company's profit sharing plan equal to $3,600 at December 31, 1965.
Some time in or before 1952 defendant Carlson had qualified as a certified Public Accountant in the District of Columbia. Defendant never practiced accountancy in the District but he sat for the examination there because his pre-accountancy education was inadequate to qualify him for the New York examination.
In May 1952 defendant applied for and was granted admission to practice before the United States Treasury Department. He stated his position at the time as being that of Senior Accountant with Lybrand. The basic qualification that defendant presented was that he was a certified public accountant. In January 1957 defendant applied to renew his Treasury Department enrollment card, and a card was issued to him which he still carried in 1963 but which had expired in 1962.
Although defendant was admitted to practice before the Treasury Department as a Certified Public Accountant he did not for Lybrand or his own account represent any taxpayers before the Treasury Department or the Internal Revenue Service.
During all of the years directly in question, that is 1957 through 1961, defendant maintained an account with Merrill Lynch, Pierce, Fenner & Smith, Inc. and in 1961 he had an account with Bache & Co. Much earlier he had an account with Goldman Sachs & Co., or had bought securities through Goldman Sachs & Co. In all the years in question the defendant and his wife maintained savings accounts at the Excelsior Savings Bank, Emigrant Industrial Savings Bank, The Seamen's Bank for Savings, Long Island City Savings Bank and Essex Savings Bank (located at Essex, Connecticut). Defendant and his wife lived in an apartment but owned a beach bungalow at Bayville, Long Island, which they had bought for about $11,000 in 1950. Defendant, or he and his wife, owned two lots in Venice, Florida, one lot in Boca Raton, Florida, and at the end of 1962 also owned a house at Pompano Beach, Florida, and a cooperative apartment in the same town. The Venice lots were bought in 1958 or 1959 and cost $13,000. The Boca Raton lot was bought in 1960 and cost $7,000. The Pompano Beach house was bought in 1962 for $22,500; the cooperative apartment and furnishings were bought in 1962 at a cost of about $9,000. The money for the real estate transactions was derived from savings accounts, from brokerage accounts or from the proceeds of collateral loans made against securities. One such collateral loan, if not the only one, of $10,000, was obtained from Chemical Bank New York Trust Company.
Defendant and his wife had one child, a daughter born about 1936, who was married and had two children.
During the income tax years in question defendant's wife was employed by Marine Works, Inc. She received gross wage or salary income in the years in question as follows:
Year or Salary
Mrs. Carlson was still employed at Marine Works, Inc. in the latter part of 1963.
Commencing some time before December 1, 1955, defendant became subject to a rhythmic, uncontrollable bobbing or twitching of his head, mainly toward the left. Difficult to describe exactly, it has been called loosely a tic or twitch but is not a facial twitch or tic but a rhythmic relatively continuous shaking of the head as if in a negative. Defendant consulted Dr. Chapman about the tic on December 1, 1955, and has consulted the same doctor about it periodically since that time. The tic was not defendant's first illness; he had had an ulcer in 1938, and in 1954 a duodenal ulcer, which apparently yielded to medical treatment to some extent. Dr. Chapman at an early point suspected, and thought that he could not eliminate the possibility, that a Parkinson's disease was developing. In March of 1956 Dr. Chapman sent the defendant to a neurosurgeon who diagnosed a probable early torticollis and thought a Parkinson's affliction possible but not likely.
From the beginning, Dr. Chapman observed that the defendant tried to control the constant head-nodding by supporting the left side of his face, mainly with thumb under chin and extended fingers.
Dr. Chapman's observation constantly referred or related the twitch of the head to nervous tension; the range of medications that he prescribed included specifics for a Parkinson's disease involvement. Certain of the Parkinson's medications seemed to the patient, Dr. Chapman reports, to have worsened his nervous tensions and induced irritability and nervousness. In the spring of 1962 Dr. Chapman referred defendant to a neurologist or neurosurgeon who diagnosed the ailment as a spasmodic torticollis which had no organic background and for which there was no useful treatment. The neurosurgeon was prepared on the basis of his consideration to rule out Parkinson's disease.
At about this period Dr. Chapman authorized the defendant to commence the use of a tranquilizer and defendant began to use Miltown, the dosage rising to 4 Miltowns a day. The defendant reported that it gave some assistance in controlling the twitching of his head.
In June 1964 Dr. Chapman ordered an electroencephalogram, and the impression produced by the encephalogram was of a normal cranium.
Dr. Chapman's long range conclusion is approximately that while a Parkinson's involvement of some sort is not to be ruled out as impossible, it is unlikely, and that the cervical tic or spasmodic torticollis has no discernible foundation in any organic affectation. Spasmodic torticollis or cervical tic is far from uncommon but in general its cause is not a matter of common agreement and the overall impression is that no particular explanation for the occurrence of such a cervical tic or spasmodic torticollis is available. Dr. Chapman points out that defendant's condition presents to him and to defendant a completely unresolved clinical problem for which there is no medical help. As cause and consequence both, in Dr. Chapman's view, the spasmodic torticollis is at once the focus and transferee of the complex of defendant's emotional involvements and of his psychological reactions to problems arising not only out of the torticollis as an unresolved and unresolvable medical problem but as an observable physical peculiarity that presents a special and unrelenting problem in adjusting to his social and business environment. In Dr. Chapman's view defendant sought to deal with the problem through use of a range of expedients such as supporting his head in various ways with his hand, inventing movements that would conceal the tremor of the head, and exerting, through use of Miltown and his own psychological resources, efforts to control the condition. There is a further possibility, which Dr. Chapman inclined to regard as not serious, that the defendant's knowledge of the diagnosis of a possible Parkinson's involvement could have had a traumatic effect. Dr. Chapman discounted that risk, pointing out that the first concern had been for something immensely grave, like a brain tumor, which had been early ruled out, and that Parkinson's disease, while formidable, is not always sudden and frequently does not become intense. Dr. Chapman observed no great fear about Parkinson's disease, differing from the two psychiatrists, who examined defendant in and after 1964 but did not have any detailed report from or discussion with Dr. Chapman.
Thus, in the period in question, 1957 through February 6, 1964, defendant was making steady if unspectacular progress at his work and was achieving a fairly responsible place in his new employment. The range of his speculations was on the increase through 1962. Defendant was unquestionably plagued by the tic which created practical and psychological problems for him, and perhaps he had some concern about Parkinson's disease.
The joint United States income tax returns filed by the defendant and his wife for the years 1957, 1958, 1959, and 1960 did not include any interest received on savings accounts, did not report all of defendant's dividends and did not report all of the capital gains received.
In 1960 a routine check of the filed information returns, Form 1099, against selected taxpayer returns had indicated that defendant had failed to report all the income shown on the Forms 1099 as paid to defendant. Defendant's returns had been filed in the Brooklyn office and it accordingly requested him to come in for an office audit. Defendant then asked that the case be transferred to the Manhattan office for his convenience, since he worked there. The file was accordingly transferred to Manhattan.
When the file was transferred to Manhattan it contained defendant's 1960 return and a sheaf of Forms 1099 and 1087, the latter being forms filed by Merrill-Lynch to report report dividends received on stocks standing in the firm's name, but owned by defendant. The case was assigned to Constance E. Haley, a tax examiner in the office audit division. Miss Haley says that when she first saw the defendant early in 1962 there were over two dozen 1099s and 1087s in the file and that no additional forms were received while she had the file. Miss Haley received brokerage statements from defendant, very likely in photostatic form, which she placed in the file. Defendant also submitted to Miss Haley, and she included in the file, schedules of his capital gains for the years 1958, 1959, and 1960. It appears that Miss Haley also inquired about defendant's receipt of bond interest. Miss Haley did not, however, learn of the existence of the savings accounts.
About November 21, 1962, Hiss Haley prepared a Form 2797 "Referral Report" on defendant's case as a potential case of fraudulent understatement of taxable income. The Referral Report related to 1958, 1959 and 1960; it stated as the "method used in determination" of the tentative additional income "Form 1099 and Broker's Statement." Data were given in two columns showing dividends per return and as corrected indicating a deficiency in reporting dividends in 1958 of about $1,100, in 1959 of about $1,200 and in 1960 of about $2,000. An additional item showed omitted capital gains in the amount of about $3,200 in 1958, $3,900 in 1959 and $1,800 in 1960. A note said, "These figures were compiled from taxpayer's records and not brokers. Taxpayer as an accountant cannot plead ignorance of the law."
Miss Haley's report was endorsed by the Group Supervisor on November 27, 1962, and by the Chief of the Audit Division on January 25, 1963, and the Referral Report was apparently received in the Intelligence Division on January 30, 1963.
The case was assigned to Special Agent John J. Alleva of the Intelligence Division and he wrote defendant on February 13, 1963, to appear and to bring "all your savings account bank books, and other items including check books, stock brokerage statements for the years 1957 through 1961 and retained copies of tax returns for the same years." Mr. Alleva interrogated defendant under oath on February 21, 1963, and on September 25, 1963. A stenographic record of each interrogation was taken and transcribed. Mrs. Carlson was similarly interrogated on November 5, 1963. Interviews of which memoranda were made took place on January 9, 1964, and on February 6, 1945; defendant talked to Agent Alleva on the telephone June 11, 1964.
At no point after the referral to the Intelligence Division was defendant told that the government meant to seek an indictment against him for a criminal violation. The Internal Revenue Service employees did not at any time state to defendant that he was entitled to be represented by counsel and defendant did not expressly and formally waive the right to counsel before the interviews or interrogations proceeded. Only when the Chief of the Intelligence Division, Manhattan District, A. E. Walters, Jr., sent to defendant the formidable letter of January 27, 1964, which flatly stated that "... consideration is being given to recommending criminal proceedings against you for attempted evasion of your income taxes," and offered defendant an interview, was defendant formally advised that "... at [such] time you may appear with counsel or with any other person having knowledge of the situation so that any facts or evidence you wish to present will be considered." Defendant appeared on February 6, but he appeared without counsel.
So far as advising defendant of his rights was concerned, on February 21st Special Agent Alleva opened the first interrogation by saying that defendant was present in regard to "an official investigation of your 1958 through 1961 income tax returns" and he said that he wanted to inform defendant "that under the Fifth Amendment of the Constitution you are not required to make any statements that you feel may incriminate you under federal law." At the outset of the September 25, 1963, interrogation Special Agent Alleva said that defendant was present with regard to an official investigation of his tax returns and then said "and at this time I would again like to inform you that under the Fifth Amendment you are not required to make any statements which you feel may incriminate you under federal law, and that anything you may say and any evidence you produce can be used in any future action the government may deem to initiate." In the interrogation of Mrs. Carlson in defendant's presence Special Agent Alleva commenced by saying "Mrs. Carlson, you are here today in regard to the official investigation of your 1958 through 1961 income tax returns and at this time, I would like to inform you that under the Fifth Amendment of the Constitution you are not required to make any statements which you feel may incriminate you under federal law and that anything you may say and evidence you produce can be used in any future action the government may deem to initiate." Special Agent Alleva's memorandum of the January 9th conference says that he advised defendant of his Constitutional rights and informed him that any thing he might say or any evidence he might produce could be used in any future action the government deemed to initiate. The February 6th conference was conducted by John J. McLaughlin, Group Supervisor, with Special Agent Alleva present, and, although the memorandum of conference does not disclose it, both men are confident that the warning was given but that it did not extend to the repetition of the idea that the defendant had the right to counsel.
The data about the savings accounts were obtained through the interviews with defendant. It is not apparent that these data could or would have been obtained, or could readily have been obtained in any other way. It does not, however, appear that any other data were obtained by reason of the interviews. The 1958, 1959 and 1960 brokerage sheets, and the schedule or schedules of capital gains and dividends were given to Miss Haley before the case was referred as a possible fraud case. These data plus the Forms 1099 and 1087 (the latter repetitious of the data appearing on the Merrill-Lynch sheets) appear to embrace all of the data in the case except the savings account amounts. The preponderance of the evidence is that all of the Forms 1087 and 1099 now associated with the file were in the file when Miss Haley received it and sent it on to the Intelligence Division.
The question and answer sessions of February 21, 1963, and September 25, 1963, definitely include material which would serve no useful purpose in determining tax liability but would be useful only in trying to supply the element of guilty knowledge or corrupt intention requisite to a criminal conviction. Defendant was asked whether he realized that the omissions were taking place and for his explanation of the omissions. His testimony indicates no explanation other than to say that he did not have the data at hand because of careless home bookkeeping and record keeping methods, and that the time of year when he had to file his returns coincided with the time of year when he was under the heaviest pressure in his work as an accountant. He did advance a legal theory to justify not returning the capital gains but it is only too likely that the explanation offered, standing in contrast with defendant's having reported certain of his capital gains as taxable that were returned, might be offered against defendant as a consciously fallacious excuse indicating guilty knowledge. Much of the interviews and interrogations simply repeated or confirmed what was already known, or obtained directly from the defendant that which either had already been received from or was readily available from other sources and was sought from the defendant only as a matter of convenience and simplicity of authentication.
Were suppression in order here it would extend to the admissions of guilty knowledge and to the admissions of the correctness of the figures and thus might require the government to resort to other proofs. However, it would not appear that there could here be any fruits of an improper interrogation or search except the savings account interest. Further evidence would be required to determine whether the savings account interest could be considered fruits of the interrogations in any significant sense, if it were concluded that suppression is called for.
Two grounds of suppression are suggested: the first of these is that Miranda v. Arizona, 1966, 34 U.S.L.W. 4521 requires suppression because defendant was not advised of his right to counsel. The second reason is that there was a transgression of defendant's rights because the admissions were the product of his mental disturbance at the time.
To deal with the last question first: The evidence of the two psychiatrists, who dealt with the defendant's situation with sympathy and insight, does not nearly suggest that the defendant was by reason of his health unable either when they saw him, or at the period considerably earlier when he was going through his interviews with the government, to take care of himself in the tax interviews. Dr. Wadsworth found what he construed to be definite evidence of a deteriorative brain damage very likely arteriorsclerotic in its general nature. He found this manifested in the defendant's diminished visual motor coordination, his problems of gait, his inability to continue well-formed handwriting through the whole of passages of modest length, and the cumulative impression of a deteriorating personality indicated in impairment of ethical judgment and diminution in mental efficiency. Dr. Wadsworth could not back-date his observations of November 1, 1964, to any definite earlier period. His conclusion was not final and was not an opinion that defendant's was a weak spirit or will or mind. On review in 1966 he could not say that the aggregate data available to him enabled him to either confirm or rule out an impression of diffuse brain damage and cerebral arteriosclerosis. While he took very much into account a systematic and properly administered psychological test which indicated some impairment of thinking, Dr. Wadsworth pointed out that the test showed superior intelligence in some areas of test, and he noted the preservation - not unexpectedly - of superior mathematical acuity.
Dr. Wadsworth pointed out that a man having such symptoms as the defendant exhibited was capable of holding down a good job, a job that involved responsibility - on the assumption, and the Doctor was firm in finding no evidence of malingering, that all of the symptoms reported to him were genuine.
Dr. Lehrman, too, did not depict defendant as a person unequal to the occasions of his life. He insisted that the complex of health problems that defendant had faced over the years could well be consistent with the production of such a depression as could impair judgment. He noted that being told that one was subject to a catastrophic illness could cause impairment of judgment in other life activities conducted in the same period, and that emotional disorders traceable to a protracted episode of that kind could both accelerate organic deteriorations and, perhaps, precipitate latent ones into an active form, and so bring about impaired judgment. But, the doctor's ultimate conclusion that there was nothing inconsistent between the defendant's record of business achievement and his mental condition again underlines that neither doctor was saying the defendant was inadequate to trying situations. They were saying he was not mentally a wholly well man, although he was competent to conduct the business of life.
Both doctors said that defendant could have masked his twitch and the nodding of his head so that it was not observed by the Internal Revenue Service personnel. All of the Service witnesses testified that they had not observed any spasmodic twitching or tic. Both doctors indicated that such a tic, although in general continuous, is not incessant, and is not incapable of being masked, or, for some periods of time, controlled.
Neither doctor had read the text of the meetings between the defendant and the Intelligence Division but neither thought the text would throw light on whether the defendant was on those occasions evincing a morbid mental condition. Dr. Lehrman pointed out that without the total atmosphere of the occasion the words themselves would not communicate a great deal nor would they indicate what the interplay of pressures in the meeting was.
The testimony about defendant's illness and mental condition contributes no evidence that his mind was over-mastered, or that his disclosures were to any extent the product of anything except his own healthy volition.
Whether or not the Miranda case and similar cases are treated as limited to the case of a person in a custody that is inescapable as a practical matter, and granting that in the typical Miranda -type case there can be no silent or unexpressed waiver of the right to counsel, the case still has no application here. The present case presents the perhaps equally difficult question of when it is that evidence has been so unfairly taken that its use against the defendant will be suppressed. Bolich v. Rubel, 2d Cir. 1933, 67 F.2d 894, 895, may over-simplify in suggesting that, while a taxpayer may file no return at all and then stand on his privilege against self-incrimination in refusing to produce any evidence against himself, he nevertheless subjects himself to limitless scrutiny if he does file a return, and that no constituitional difficulty arises until an abuse appears. And while the Miranda case deals with the extreme position of the man in custody, from which an implicit inference of a want of true volition is so powerful that the interrogating government is required to show clearly that the interrogation proceeded only after certain sternly formal procedures were complied with, every other case of interrogation by a government presents, if in diluted form, an underlying inequality of confrontation that may be supposed to require the government to show the answers that it has in its possession were derived from a genuinely free volition. Whether a person is in custody or not, he is entitled to the assistance of counsel if he is facing an explicit or imminent criminal charge. It is logically difficult to determine whether anything more is necessary to ripen the rights to the assistance of counsel and to a warning to that effect than the mere fact that the government is the interrogator and is conducting the interrogation in the perspective of criminal law enforcement whether or not it has already resolved to go forward. The tax cases do not indicate that the standard is the standard applicable to protect persons in custody. United States v. Silverstein, 2d Cir. 1963, 314 F.2d 789, 790, treats an appearance before a special agent of the Intelligence division as in the nature of an appearance in a criminal investigation, and it says that a claim of privilege against a summons directing production of individual papers would be sustained in that context. Russo v. United States, 2d Cir. 1957, 241 F.2d 285, 287, may assume, though without comment, the inadmissibility of disclosures obtained by Treasury Agents by means of deceiving a taxpayer into thinking an examination was for the purpose of a routine civil audit rather than for the purpose of a criminal charge. In United States v. Sclafani, 2d Cir. 1959, 265 F.2d 408, 414-415, defendant sought to exclude data from evidence on the ground that it was turned over after the case had been transferred to the Intelligence Division without the taxpayer's having been advised that the case had ceased to be a routine audit and had become a criminal investigation. The Court rejected the contention essentially on the ground that the defendant was entitled to no more in the context than freedom from deceit and that the change in the coloration of the investigation, if it had occurred, did not vitiate the defendant's consent to the production of the data.
In re Turner, 2d Cir. 1962, 309 F.2d 69, was an appeal from an order denying a motion to quash a summons issued under Section 7602(2) of the 1954 Code. The taxpayer had been commanded to produce all of his records covering designated tax years. The taxpayer argued that the Special Agent was embarked upon an investigation directed to instituting a criminal proceeding and that in consequence the taxpayer was protected against appearing and producing his papers by his Constitutional right not to incriminate himself. The District Court denied relief on the ground that the taxpayer could assert his Constitutional rights when he appeared before the Special Agent. The Court of Appeals affirmed, said that any tax investigation involved a theoretical possibility of disclosures that might lead to a criminal indictment, and that no special class of investigations, such as those initiated by Special Agents of the Intelligence Division, could be treated as exclusively directed to the initiation of criminal cases. The taxpayer, like any other witness, must obey the summons and claim his Constitutional privileges as particular questions are asked which accrue the right to assert the objection. As to the production of self-incriminating records, the Court said that not only was it unclear that defendant and his counsel might not decide to produce the records, but also it was not yet evident that production of every item in the defendant's records must be dangerous because it might result in injurious disclosure.
The cases assume that interrogation is relatively free as between government and taxpayer until some ill-defined zone is reached in which fairness requires the government to alert the defendant that the theoretical risk of a criminal prosecution implicit in any investigation of an imperfect return has become a matter of pointed interest on the part of the government, whether or not the government has resolved to procede. At some point the Government's further questions may become an attempt to take testimony in aid of prosecution rather than as part of an investigation.
In Kohatsu v. United States, 9th Cir. 1965, 351 F.2d 898 (cert. den. June 20, 1966, 34 U.S.L.W. 3429, Mr. Justice Douglas voting to grant and to affirm) no warning with respect to Constitutional rights had been given. The Court considered that the rule of Escobedo v. Illinois, 1964, 378 U.S. 478, 12 L. Ed. 2d 977, 84 S. Ct. 1758, did not reach a case in which the defendant had neither been arrested nor indicted. The Court rejected the suggestion that the Escobedo case should be extended to a case in which all the statements were made and the documents delivered voluntarily and not under the inducement of stealth, trickery or misrepresentation. The Court relied on United States v. Sclafani, supra. In the Kohatsu case (351 F.2d at 900) the defendant conceded that an Internal Revenue Agent had the right to determine a taxpayer's correct civil liability and in so doing to interrogate the taxpayer and examine his books and records. The defendant argued only that such a "routine civil tax investigation" changes when a revenue agent discovers facts indicating substantial unreported income and the facts are such that the revenue agent suspects fraud.
In the present case defendant's disclosures were not the product of any sort of fraud, misconduct or misleading on the part of the revenue agents. Defendant had plainly moved into the zone of criminal investigation, and he knew it. His first answer to the first formal interrogation expressed his understanding that the nature of the proceeding had changed. Special Agent Alleva's warning at the beginning did not separate out clearly the two ideas that statements did not have to be made and that if made they could be used against the taxpayer, but the reference to the Fifth Amendment and the compacted statement that the defendant did not have to make any statements that he felt might incriminate him under federal law expressed the full menace of the choice defendant was making in submitting to interrogation.
It may well be the fact that of fifty investigations in which Special Agent Alleva has been involved in the five years since he has done this work only seven proceeded beyond the preliminary stage, that only four resulted in indictments or informations and that of the remaining three one resulted in the recommendation that there be no prosecution and two are still open; and it may well be that the attitude of mind of Special Agents in the Intelligence Division is rather that they seek to determine whether there should be prosecution rather than to unearth evidence to support a desired prosecution. But transfer of a case to the Intelligence Division is formal administrative action genuinely signifying official orientation of the investigation toward data relevant to criminality rather than to tax liability as such. Hence the question is simply whether in such a preliminary but definitively criminal investigation as the present one something more than the warnings given were necessary. It is concluded that no more was needed in the circumstances of an investigation conducted by the Intelligence Division in the maner and circumstances of the present investigation.
In the present investigation the defendant had ample time to consider, before he appeared voluntarily at the Intelligence Division office, whether to consult with counsel and to be accompanied by counsel. The interrogation was not reassuring to the defendant. It was straightforward and its thrust most evident. In the first interrogation the special agent proceeded systematically to elicit the depth of the defendant's education, the nature of his work, his bank accounts, his brokerage accounts, his savings accounts (which were then for the first time itemized), the source of the funds in the savings accounts, the extent of defendant's ownership of stocks (both directly and through brokerage accounts), the collateral position of certain of the securities, the places of deposit of dividends and interest, the status of a collateral loan, the capital gains transactions, the real estate transactions and holdings, and the source of the funds used for the real estate transactions. Then the Special Agent examined about the preparation of each of the three returns, and about defendant's consciousness of the omissions from the returns and his explanation of and excuses for the omissions. There is no doubt that many of the statements made are highly incriminating. It was very evident to the defendant that the questions called for incriminating answers, and they were freely given, the defendant distinguishing between the instances, such as the omission of capital gains, where he considered that he had a satisfactory explanation, and those in which he presented only an excuse for having filed returns which did not include income items which he said he knew were taxable.
Similarly in the case of the September 25 interrogation: defendant was first warned of his Fifth Amendment rights, and the questions related to defendant's posessing a Treasury Department card until 1962, to the explanation of the omission of dividend and interest income, to the details of the excuse of the unavailability of records needed to make a complete return, to the kind of accounting work that defendant had done and his participation in preparing corporate income tax returns, and to the cost basis of certain stock.
The government's inquiries could not induce in defendant a belief that criminal proceedings were not contemplated as possible. Defendant's motivations in participating as he did in the inquiry are not brought out by the evidence, since defendant did not testify. The most profound of lawyers might well have advised defendant that just such was the wisest course for him to pursue in view of the completeness of the data already at the Government's command. There is, in any event, no evidence of any over-reaching on the Government's part.
Accordingly on defendant's motion to suppress and to dismiss the indictment, it is
ORDERED that the motion is in all respects denied.
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