The opinion of the court was delivered by: CANNELLA
Motions by the defendant, for dismissal of the indictment or various counts thereof, are denied. Fed.R.Crim.P. 12(b)(1), (2).
Motion by defendant, to suppress evidence on the ground that it was unlawfully seized from his possession, is denied. Fed.R.Crim.P. 12(b)(3).
The Court conducted an omnibus hearing on pre-trial motions in this case on July 13, 1979, and received the post-hearing submissions of the defendant on August 3, and of the Government on August 14. The following are the Court's findings of fact and conclusions of law. Fed.R.Crim.P. 12(e).
The defendant, Dr. Jacob Matis, and his wife Rosalie filed their joint return for 1972 federal income tax on June 13, 1973, and their joint return for 1973 on June 11, 1974, in each case having received a sixty-day extension for filing. To compute their taxable income, their accountant, Theodore Kass, had assembled their bank accounts, compared them with various other records, and then culled from them any transactions representing nontaxable transfers or sources of income. The transactions that could not be so identified he reported as taxable income.
The Internal Revenue Service ("IRS"), through a routine computer screening process known as "Discriminant Function Audit Selection," selected the Matises' 1972 return for auditing, and Revenue Agent James Quaglietta was assigned to the audit. According to testimony developed at the pretrial hearing, the IRS assigns "Revenue Agents" to investigations that are civil in nature; to investigations of possible criminal wrongdoing, it assigns "Special Agents." It is, of course, possible for a civil audit begun by a Revenue Agent to be transferred to a Special Agent for criminal investigation.
Eventually, the Matises' 1973 return was included in the audit as well. On June 27, 1974, Quaglietta canvassed local banks to determine whether their records indicated any accounts belonging to Jacob or Rosalie Matis. Presumably, several responded, but most notably, on July 15, 1974, the Chase Manhattan Bank reported that it listed a checking account under both those names (hereinafter, this account will be referred to as the "Chase checking account").
By June 1974, Kass learned that the IRS had begun an audit of the Matises' returns. He subsequently met with Quaglietta on three or four occasions, at which times he explained his method of computing the Matises' taxable income, and produced various documents, including bank records, the Matises' savings account passbooks, and Dr. Matis' "cash book," a purported record of all the receipts of Dr. Matis' practice.
Kass produced no documents pertaining to the Chase checking account, and at some point Quaglietta informed him of its existence. Precisely when this occurred is not at all clear, but the parties seem to agree that it happened between the beginning of November 1974 and the end of April 1975.
Upon learning of the account, Kass told Quaglietta that he had not known of it before. Thereafter, he informed Dr. Matis that he wished to cease representing him, and advised him to retain a lawyer to conduct any further discussions with the IRS regarding the audit.
On April 30, 1975, William Slivka, an attorney specializing in taxation and estate matters, began to represent Matis. When he first met with Quaglietta on May 22, 1975, Slivka inquired as to the nature of the investigation, whereupon Quaglietta told him that it was "a routine audit," which he had been assigned in the ordinary course of his duties as a Revenue Agent. Slivka asked why Quaglietta had canvassed local banks, to which Quaglietta responded that although it was not routine, he did so in this case for two reasons: First, because he had learned that the Matises' 1970 and 1971 returns had been audited, and that the audits had resulted in additions to income; and Second, because of Matis' profession as a physician. Slivka also asked what would happen if the deposits into the Chase account were irreconcilable with the Matises' reported income. Quaglietta responded that a lot of additional tax would be assessed.
Towards the end of the May 22 meeting, or at the beginning of their next meeting on July 14, Slivka showed Quaglietta his analysis of the deposits into the Chase checking account during 1972 and 1973. He identified certain deposits as attributable to nontaxable income or transfers, and indicated that he had no explanation for others. Slivka also discussed some of the Matises' other accounts, and produced additional documents. Quaglietta told Slivka that he would treat the unexplained items as taxable income, and that besides the requisite additional tax, he would have to impose a five percent negligence penalty. Quaglietta further stated that he did not want to see Dr. Matis go to jail.
Quaglietta then prepared a consent form for the Matises to sign indicating the additional tax due plus a five percent negligence penalty. The form he used was a standard IRS Form 4549, entitled "Income Tax Audit Changes," which, at the bottom, just above the space for the taxpayer's signature, bears the following legend: "It is understood that this report is subject to acceptance by the District Director." As completed by Quaglietta, the "4549" obligated the Matises to pay an additional $ 26,286 tax plus a $ 1,314 penalty for 1972, and an additional $ 41,205 tax plus a $ 2,060 penalty for 1973. Slivka testified that he understood the "4549" to be subject to the District Director's review and possible veto.
On July 15, Slivka brought the "4549" to the Matises, and, after they had signed it, delivered it back to Quaglietta. The District Director's approval, however, was not forthcoming. Quaglietta's manager, who would have had to approve it before transmitting it to the District Director, refused, and instead recommended that Quaglietta refer the audit to the IRS Intelligence Section for possible criminal investigation. This was done, and in early September ...