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IN RE GRUBERG

July 10, 1978

IN RE APRIL 25, 1978 GRAND JURY SUBPOENA DUCES TECUM SERVED UPON JACOB GRUBERG AS SECRETARY-TREASURER OF ULSTER ELECTRIC SUPPLY COMPANY, INC.


The opinion of the court was delivered by: HAIGHT

MEMORANDUM OPINION AND ORDER

HAIGHT, District Judge:

 Ulster Electric Supply Company, Inc. ("Ulster") moves to quash a subpoena served upon Jacob Gruberg, its Secretary-Treasurer, by the May 1978 additional grand jury, currently sitting in this District, and to terminate as invalid the grand jury investigation underlying that subpoena. This relief was sought pursuant to Rules 17 and 47, F.R.Cr.P. The motion was made returnable on May 23, 1978 before Judge Griesa, then sitting in Part I of this Court. On May 31, 1978 Judge Griesa stayed the enforcement of subpoena, pending further order of the Court. Owing to the press of other emergency matters, Judge Griesa was not able to decide the motion before his schedule required him to be absent from Court. In these circumstances, Judge Griesa has referred the pending motion to the undersigned, his successor in Part I. I have carefully reviewed all affidavits, documents and authorities submitted to Judge Griesa. *fn1" For the reasons stated below, the motion is denied in its entirety, and the order staying enforcement of the grand jury subpoena is vacated.

 I.

 In February of 1975, the Intelligence Division of the Internal Revenue Service ("IRS") commenced an investigation for possible fraud against Ulster, Gerald Gruberg, its President, and his brother Jacob Gruberg, the corporation's Secretary-Treasurer. Ulster is a wholesale and retail electrical supply outlet, with business locations in both Kingston and Poughkeepsi, New York. The interest of the IRS agents was first attracted by Ulster's corporate income tax return for the year 1973. In particular, evidence of possible criminal violations has centered upon Ulster's purchase journal for 1973, which reflects a series of purchases by the company in December of 1973, totalling $350,000, and which were claimed on the 1973 tax return as a deduction for the cost of goods sold. The Government contends, in opposing the present motion, that the records of the suppliers from whom these purchases were allegedly made "reveal that the purchases were never made, and are in fact fictional." *fn2" Subsequently the IRS inquiry extended into Ulster's tax returns for the years 1971, 1972 and 1974.

 The firm of Rogers & Wells was retained by Ulster in connection with the IRS audit of the company and subsequent inquiries. Messrs. Charles A. Simmons and Victor F. Ganzi, associated with that firm, filed the requisite powers of attorney on February 4, 1975. Thereafter a number of meetings were held between the IRS agents in charge of the case and counsel, as the result of which numerous documents were produced by Ulster for examination and copying by the IRS. There were six such meetings for the delivery of documents, the first occurring on April 21, 1975 and the last on November 6, 1975. *fn3"

 The IRS agents also made efforts, unsuccessful in these instances, to interview individuals at Ulster who could shed further light upon what the documents revealed. Special agent Anthony A. Cesare, the special agent in charge of the inquiry, attempted on September 20, 1975 to interview Grace Claire Ede, Ulster's book-keeper, at her home in Kingston. Mrs. Ede advised that she would not answer any questions without having first consulted with her attorney. The IRS thereupon served an administrative summons upon Mrs. Ede. There ensued an exchange of telephone communications between agent Cesare and Mr. Simmons (who now represented Mrs. Ede as well as Ulster), in which the communicants debated whether a United States District Court stenographer would transcribe the interview (as Mrs. Ede requested) or whether the transcript was made by a stenographer who was an employee of the IRS (as the agent insisted). *fn4" While on this motion Ulster devotes considerable effort to criticizing the IRS in this debate over stenographers, the issue appears to generate more heat than light, in view of the fact that on October 8 Simmons advised Cesare that, in any circumstances, Mrs. Ede intended to assert her Fifth Amendment and other constitutional privileges, a refusal to testify in which she presumably would have persevered had the stenographer been the Angel Gabriel himself.

 In meetings held between the IRS agent and counsel in April, June and July of 1975, the agent also inquired as to whether Gerald Gruberg would voluntarily appear for questioning and voluntarily produce his own records. Counsel responded, on each of these occasions, that the request would be considered only upon completion of examination of Ulster's books and records, which as noted supra had been made available by counsel for Ulster to the IRS. *fn5"

 The agents also expressed interest in interviewing Josephine Bloom, another bookkeeper employed by Ulster. Mr. Simmons then identified himself as counsel for Ms. Bloom as well. While the affidavits do not reflect what precise position was taken by counsel in response to the request, it does not appear that Ms. Bloom consented to be interviewed. *fn6"

 The IRS agents and their superior officers concluded, at this juncture, to request that the case be referred to the United States Department of Justice for further proceedings before a federal grand jury. That request takes the form of a letter dated February 9, 1976, addressed by the Regional Counsel of IRS in New York to the Hon. Scott P. Crampton, the Assistant Attorney General in charge of the Tax Division of the Department of Justice in Washington. That letter has been examined by the Court in camera. The IRS, in its February 9, 1976 letter, refers to the Department of Justice income tax cases involving Ulster and the two Grubergs, in respect of the alleged "overstatement of purchases by Ulster... on its corporate income tax return for the year 1973..." IRS coupled its reference with the recommendation:

 "... that a grand jury investigation be conducted to provide evidence of criminal violations of Int. Rev. Code of 1954, § 7201 (hereinafter cited as Code) with a view toward the return of indictments against Gerald Gruberg and Jacob Gruberg for attempting to evade and defeat the corporate income tax liabilities of Ulster for the year 1973. It is also recommended that this grand jury inquiry be focused toward the development of evidence of Code § 7206(1) violations against Gerald Gruberg and Code § 7206(2) violations against Gerald and Jacob Gruberg for subscribing to and aiding and abetting in, respectively, the preparation of a false return for Ulster for the year 1973."

 The IRS called the particular attention of the Department of Justice to the statute of limitations applicable to the "institution of criminal proceedings" as to Ulster, and the establishment of possible "criminal violations" concerning the individual income tax liabilities of the Grubergs. After a review of certain evidence uncovered during the IRS inquiry, the IRS stated to the Department of Justice:

 "We note that jurisdiction of the tax aspects of the proposed grand jury investigation remains with the Internal Revenue Service and the Tax Division, Department of Justice, and that prospective recommendations under Title 26, stemming from the investigation, will be processed in the regular manner. If the grand jury proceedings are instituted, we request that at the conclusion thereof, and subsequent to the securing of a rule 6(e) order, Fed. R. Crim. Proc., the data generated by the grand jury be submitted to the Internal Revenue Service for inclusion with other information and processing through the normal service channels."

 The Assistant Attorney General responded to the IRS request in a letter dated October 14, 1976, addressed to the United States Attorney for this District. The Assistant Attorney General refers to the recommendation of the IRS that "a grand jury investigation be conducted to provide evidence of criminal violations"; he recommends to the United States Attorney that the grand jury inquiry be focused "toward the development of evidence" of violations of the criminal provisions of the Internal Revenue Code; the United States Attorney is requested to commence such a grand jury investigation for the year 1973; and the United States Attorney is directed to return the transcripts of testimony taken before the grand jury to Washington, "so that we may determine whether prosecution in this case is warranted. Under no circumstances should an indictment be sought without authorization from this office."

 To this task, the May 1978 additional grand jury in due course addressed itself. The subpoena forming the subject matter of the present motion was served on May 1, 1978 by IRS agents, under the direction of Assistant United States Attorney Patterson, upon Jacob Gruberg, the Secretary-Treasurer of Ulster. The subpoena required Gruberg to appear before the grand jury on May 15, 1978, and produce Ulster's purchase journals, general ledgers, general journals, and accounts payable subsidiary ledgers for the years 1971, 1972, 1973 and 1974. Following adjournment of the return ...


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