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UNITED STATES v. MILLMAN

September 16, 1986

UNITED STATES OF AMERICA and PETER P. CALARCO, Special Agent, Internal Revenue Service, Petitioners,
v.
DANIEL MILLMAN, Respondent



The opinion of the court was delivered by: CHREIN

FACTS

In or about 1968, David Millman, a tax attorney, invested along with his clients in certain oil and gas leases identified as Bowers #1 well located in Clearfield County, Pennsylvania and Well #37 located in Keating Township Pennsylvania. See JA 24. *fn1" Mr. Millman retained Boyd Brown, a certified petroleum geologist and engineer to survey these properties and determine their fair market value in order to enable Mr. Millman and his clients to take their pro rata share of charitable deductions on their individual income tax returns. JA 24-25. Thereafter some of Mr. Millman's clients took a charitable deduction in conformity with Mr. Brown's estimates which was followed by an Internal Revenue Service (Service) audit of their returns. See id. at 25-26. Mr. Millman's clients appealed the Service's decision. At the appeals hearing in 1977, these clients were represented by Mr. Millman. Representing the Service was Meyer Baer, from the Internal Revenue Service's Appeals Office and Frank Caponegro, an Internal Revenue Service Engineering Agent. Mr. Caponegro's method of appraisal with respect to the wells involved herein differed significantly from Mr. Brown's appraisals. Id. at 26. At the hearing there was some acrimony between Mr. Millman and Mr. Caponegro. See Transcript of Oct. 25, 1985 at 12. [Oct. 25 Tr]. *fn2"

 Subsequently, these cases ("Millman/Brown" cases) were settled at 41% of Mr. Brown's appraised value. JA 41. Mr. Caponegro testified that he was unaware that his appraisals were revised upward in appellate settlement proceedings until one month before the present proceedings. *fn3" At some point during these earlier proceedings, communications between Mr. Millman and Mr. Caponegro broke down. Oct. 25 Tr 214.

 During the course of the Millman/Brown cases and in response to Service directives encouraging agents to report cases suspected of fraud, Mr. Caponegro prepared memoranda setting forth his suspicions of overvaluation with respect to the wells involved herein. Oct. 25 Tr 45. Over a period of years, Mr. Caponegro prepared three memoranda setting forth his suspicions of overvaluation which were then given to his manager. See Oct. 25 Tr. 66 and 170. The first two memoranda were written while the Millman/Brown cases were still pending. Id. at 45.

 In 1981, the Service initiated an audit of Mr. Millman's 1979 individual tax return. The selection of his return for audit was accomplished by computer selection. Transcript of Oct. 4, 1985 Tr. 61-62 (Oct. 4 Tr.). Sometime thereafter, Mr. Caponegro's group manager assigned him the Millman return for review. Oct. 25 Tr. 15-16. While reviewing both the Millman/Brown cases and Mr. Millman's individual return, Mr. Caponegro formed the opinion that Mr. Millman was a person who "peddles tax evasion." Oct. 25 Tr. 20. Mr. Caponegro believed Mr. Millman had the background and experience to enable him to ascertain an accurate value for the leases, and that he failed to do so. In addition, Mr. Caponegro believed that Mr. Millman espoused a pattern or practice of overvaluation as oppossed to his being involved in an isolated incident of overvaluation. See Oct. 25 Tr 172. Finally, Mr Caponegro faulted Mr. Millman because Mr. Millman failed to discount the "stream of revenue" with respect to these wells Oct. 25 Tr. 330-332.

 In keeping with these beliefs, Mr. Caponegro issued a third memorandum alerting his superiors to his suspicions of fraud with respect to Mr. Millman's return. See Oct. 25 Tr. 45.

 In conjunction with this audit, Mr. Caponegro requested that Revenue Agent Stanley Tepper *fn4" obtain certain information from Mr. Millman; this procedure was necessary due to the earlier breakdown in communications between Mr. Millman and Mr. Caponegro. Id. at 214. Mr. Millman complied with Mr. Tepper's request and submitted certain documents relating to the ownership and operation of Bowers #1 well JA 224. Ms. Susan Patch, also an engineering agent with the Service, testified that there is nothing unusual about engineering agents assisting revenue agents on a case. See Oct. 4 Tr. 235-36. This is especially true for the Brooklyn Internal Revenue District which does not have an engineering group attached to it and as such when an engineering issue is involved they must call on the Manhattan Internal Revenue District which does have an engineering group. Id. at 236.

 Thereafter, Mr. Tepper again requested documents, this time relating to the production and income of Bowers #1 well. Mr. Millman refused to comply with the request claiming that the Service already had these documents in their possession from the audit of his client's tax returns. JA 224. Although Mr. Caponegro kept a file which contained relevant documents concerning wells under IRS investigation, this file was merely an an industry file as opposed to an official file dealing exclusively with the wells herein. Oct. 25 Tr. 147-148.

 In August of 1982, Revenue Agent Tepper issued a fraud referral report *fn5" with respect to Mr. Millman. Attached to this report was at least one of the previously discussed memoranda prepared by Mr. Caponegro. Transcript of Oct. 28, 1985 Tr. 437-38 (Oct. 28 Tr.) Although Mr. Caponegro had conversations with Agent Tepper concerning the fraud referral report, Mr. Caponegro did not know that the fraud referral report was filed until Special Agent Calarco informed him of this fact some time later, Oct. 25 Tr. 232, in fact, Mr. Caponegro testified that he has never seen the report. Id. 232-33.

 In September of 1982, Special Agent Peter Calarco was assigned to investigate Mr. Millman's tax liabilities, if any. Oct. 28 Tr. 399.

 The procedures employed when the fraud referral was transferred from the examination division to the criminal investigation division (CID) were testified to by Special Agent Calarco. George Tierney, a group manager at the CID, gave Special Agent Calarco the fraud referral report and asked him to evaluate it. See Oct. 28 Tr. 406-408, 411. Subsequently, Special Agent Calarco indicated that the referral had potential for investigation. Special Agent Calarco testified that his evaluation was based primarily upon the facts contained in the referral and gave little weight to the conclusions of Mr. Caponegro contained in the attached memoranda. Transcript of Oct. 29, 1985 656, 657 (Oct 24 Tr.). On September 16, 1982, the case was accepted by the CID, id. at 423 and endorsed by Joel Weiner, Revenue Agent Tepper's group manager; Thomas LoCicero, a branch chief at that time; and Wayne Thomas, Chief of the Examination Division. Oct. 4 Tr 164. Mr. Caponegro testified that he never made a recommendation to the CID concerning the Millman return. Oct. 25 Tr. 21.

 Sometime thereafter, Special Agent Calarco served a summons upon Michael Berg, a Certified Public Accountant involved in disbursing the distribution proceeds from the wells to Mr. Millman's clients. See Oct. 29, Tr. 670, JA at 60. The Berg summons sought substantially the same records that were subsequently requested by the Millman summons. Oct 29 Tr. 670. Mr. Berg informed Special Agent Calarco that he did not possess the records sought by the summons but rather Mr. Millman did. See Oct. 29 Tr. 671, 588. This information was one factor which prompted Special Agent Calarco to serve a summons on Mr. Millman. id. at 671. Although the record is not clear as to the chronology of the Berg and Brown summonses, it is clear that before Special Agent Calarco issued the Millman summons he served a summons upon Boyd Brown with which Mr. Brown complied. See Id. at 673.

 During the week of July 25, 1983, Revenue Agent Farley was assigned to replace Revenue Agent Tepper and examine the Millman return. See Oct 4 Tr. 57, 69. Agent Farley testified that his only contact with Agent Tepper was a single brief conversation in which Agent Tepper informed him that the Millman case involved a valuation issue which was referred to the CID. Oct. 4 Tr. 70, 97, 101-103. Agent Farley's only contact with Mr. Caponegro was on September 18, 1985 after the date that the Millman summons had been issued. Id. at 99.

 Agent Farley testified that two factors, among others, were predominant in Revenue Agent's Tepper's decision to issue the fraud referral. One was Mr. Caponegro's evaluation with respect to the wells at issue and two, Mr. Millman's intent in valuing his interest in the wells when taking his charitable deduction. Id. at 105.

 On July 25, 1983, Special Agent Calarco issued and served the summons herein to Mr. Millman with the approval of his superiors. Oct. 28 Tr. 571. Before issuing the Millman summons, Special Agent Calarco discussed the issuance of the summons with his group manager, George Tierney; District Counsel; and Revenue Agent Tepper. Id. at 569, 570. The summons seeks financial, ownership, production, operation and distribution information concerning the two wells at issue. *fn6" Special Agent Calarco testified that he had spoken with Mr. Caponegro approximately three to four time before Mr. Calarco issued the summons Id. at 401. However, Mr. Calarco also testified that Mr. Caponegro had "virtually nothing to do with the case other than the report [memoranda] that he supplied to Mr. Tepper" Id. at 401-402. *fn7"

 Special Agent Calarco testified that Mr. Caponegro did not request that he issue the summons or obtain the documents sought for Mr. Caponegro's use, but rather Special Agent Calarco testified that the documents sought were for his own use in determining Mr. Millman's correct income tax liabilities and whether he committed an act in violation of the Internal Revenue laws. Id. at 402-403. The contact between Special Agent Calarco and Mr. Caponegro consisted of two meetings at which time they discussed the types of records utilized by the oil industry. See Oct. 28 Tr. 556-558. Special Agent Calarco did not solicit Mr. Caponegro's advice as to whether he should issue the summons. See id. at 561.

 At the time Special Agent Calarco issued the summons, the Service had in its possession files obtained from Boyd Brown, Agent Tepper and Mr. Caponegro's file. Oct. Tr. 584-585. Although the service possessed some but not all of the records sought by the Millman summons, none of these records were obtained from Mr. Millman himself. Id. at 638-642. In light of the fact that none of the records received were obtained from Mr. Millman, Special Agent Calarco pursued Mr. Millman's files for various reasons. First, Special Agent Calarco believed that records obtained from sources other than the taxpayer are not sufficiently probative as to precisely what the taxpayer [Mr. Millman] relied upon in claiming a deduction. See id. at 643, 682.

 Second, due to statements made by Mr. Berg, Special Agent Calarco had reason to believe that certain records with respect to these wells might have been prepared by someone other than Mr. Brown.

 Third, in the Service's eyes, Mr. Millman's repetitive and prolonged involvement characterized Mr. Millman as a central figure in these investments necessitating the need for Mr. Millman's records. Id. at 689.

 Fourth, since one of the purposes of the investigation of Mr. Millman is to determine if the charitable deduction is a permissible or fraudulent deduction, Mr. Millman's intent is a key factor which can only be gleaned from documents he relied on. See id. at 682.

 Finally, since another aim of the summons is to determine the amount of compensation received by Mr. Millman from his clients, the Service needs Mr. Millman's papers. Oct. 28 Tr. 500-506.

 Special Agent Calarco testified that at the time he served the summons he did not have any of Mr. Millman's records and still does ...


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