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U.S. v. ZUCKERMAN

February 21, 2000

UNITED STATES OF AMERICA, PLAINTIFF
V.
HOWARD ZUCKERMAN, DEFENDANT.



The opinion of the court was delivered by: Spatt, District Judge.

MEMORANDUM OF DECISION AND ORDER

This is a criminal case charging the Defendant Howard Zuckerman with income tax evasion and tax fraud. He is charged with failing to file personal income tax returns for the years 1992-1995, and having made false statements omitting certain income and overstating certain deductions on those same returns when he eventually filed them. Presently pending before the Court are Zuckerman's objections to the Report and Recommendation of United States Magistrate Judge E. Thomas Boyle dated February 3, 2000 and Zuckerman's motion to dismiss the indictment, or in the alternative, an order suppressing evidence obtained from meetings Zuckerman had with IRS agents.

BACKGROUND

Zuckerman was Senior Vice President of Finance for Tollman-Hundley Hotels, Inc. In late 1996 and early 1997, the IRS began an investigation of one of the principals of Tollman-Hundley, and requested an interview with Zuckerman to obtain certain information about his employer. The parties dispute' the events surrounding this initial contact. The Government contends that it looked up information about Zuckerman prior to contacting him, discovered that he had not filed income tax returns for the preceding 4 years, visited his home and left a card with Zuckerman's wife asking that he call them. The Government further contends that, thereafter, Zuckerman contacted his accountant, and the accountant contacted the IRS to discuss the interview. During this phone call, the accountant informed the IRS agent that Zuckerman had not filed returns from 1992-1996, and indicated that he was in the process of preparing such returns.

According to Zuckerman, the agent expressed surprise at this statement by Zuckerman's accountant. Zuckerman agreed to meet with the IRS after being assured that he was not currently under investigation himself, but that he might become a subject in the future. Several more meetings were arranged between the IRS and Zuckerman over the next several months, all with the same general understanding between the parties regarding Zuckerman's status. On August 11, 1997, Zuckerman filed returns for the years 1992-1996, showing tax obligations of $130,000. The IRS contends that by this point, it had opened up a formal investigation of Zuckerman for failure to file. About a month later, the Government met with Zuckerman's attorney regarding the pending criminal investigation. Zuckerman argued that he was eligible for immunity under the IRS' Voluntary Disclosure policy, and would shortly be presenting an offer-in-compromise regarding his outstanding tax liability. Nevertheless, the IRS continued with the investigation, and on September 8, 1999, indicted Zuckerman on 8 counts of tax evasion and tax fraud.

Zuckerman moved to dismiss the indictment, arguing that he is eligible for consideration under the IRS' "Voluntary Disclosure Policy." While the parties disagree as to the exact wording of this policy, they agree that in general terms, the IRS has a practice of not recommending criminal prosecution where an individual makes a timely, voluntary disclosure of his failure to file a return. Based on the factual disputes concerning the events at issue, this Court referred the case to Magistrate Judge Boyle for a hearing on the facts underlying Zuckerman's claim under the Voluntary Disclosure Policy and the facts underlying Zuckerman's motion to suppress his statements based on claims of "trickery" by the Government.

Following a hearing on December 22, 1999, Judge Boyle made the following findings: (i) the IRS became aware of Zuckerman's failure to file tax returns in December 1996, when it began preparing to interview Zuckerman regarding his employer's tax returns; (ii) IRS agents left a card in Zuckerman's mailbox on January 23, 1997; (iii) Zuckerman was not a subject of the investigation at that time, but because the IRS was already aware of his failure to file, the IRS agent intended to inform Zuckerman of his rights to refuse to answer questions and have an attorney present for the interview; (iv) Zuckerman's accountant contacted the IRS on January 24, 1997 and admitted that Zuckerman had not filed his returns but intended to do so; (v) Zuckerman's accountant stated that Zuckerman wished to cooperate with the investigation even after being informed that Zuckerman himself could become a subject at some point in the future; (vi) IRS agents met with Zuckerman's attorney on February 5, 1997, at which time the IRS disclosed that they were aware of Zuckerman's failure to file and that Zuckerman could become the subject of an investigation in the future; (vii) Zuckerman voluntarily appeared for an interview on March 4, 1997; (viii) at this interview, with his attorney present, Zuckerman was informed that he was being interviewed as a witness, but could become the subject of an investigation himself due to his failure to file; (ix) the IRS did not inform Zuckerman that they became aware of his failure to file before ever contacting him; (x) Zuckerman was informed of his rights at the interview and informed that any statements he made could be used against him in any subsequent criminal proceeding; (xi) Zuckerman stated that he understood his rights and proceeded to be interviewed; (xii) Zuckerman eventually explained at the interview that he had not filed his own returns because he was awaiting information, then acknowledged that he intended to file when he obtained this information; (xiii) the IRS froze Zuckerman's account on March 14, 1997, ten days after the interview, in order to preclude the Civil Division of the IRS from compromising any future criminal prosecution of Zuckerman; and (xiv) Zuckerman became a formal subject of a criminal investigation on August 1, 1997, and Zuckerman claimed to be within the Voluntary Disclosure Policy for the first time on August 4, 1997.

Zuckerman filed objections to Judge Boyle's Report and Recommendation on three major grounds: (a) that Judge Boyle erred in not finding that the IRS agents made false representations and materially omitted relevant information when speaking to Zuckerman and his tax attorney; (b) that the Judge failed to address whether the IRS met its obligations under the Voluntary Disclosure Policy in good faith; and (c) whether the Judge erred in failing to require the IRS to produce a document claimed to be privileged.

DISCUSSION

Pursuant to 28 U.S.C. § 636(b)(1), any party may file written objections to the Report and Recommendation of a Magistrate Judge within ten days after being served with a copy. See also Fed.R.Civ.P. 72(a). Once objections are filed the district court is required to make a de novo determination as to those portions of the Report and Recommendation to which objections were made. see 28 U.S.C. § 636(b)(1); Grassia v. Scully, 892 F.2d 16, 19 (2d Cir. 1989). The phrase "de novo determination" in section 636(b)(1) — as opposed to "de novo hearing" — was selected by Congress "to permit whatever reliance a district judge, in the exercise of sound judicial discretion, chose to place on a magistrate's proposed findings and recommendations." U.S. v. Raddatz, 447 U.S. 667, 676, 100 S.Ct. 2406, 65 L.Ed.2d 424 (1980). Section 636 does not require the district court "to rehear the contested testimony in order to carry out the required `determination.'" Id. at 674, 100 S.Ct. 2406. Rather, in making such a determination, the district court may, in its discretion, review the record and hear oral argument on the matter. See Pan Am. World Airways, Inc. v. International Brotherhood of Teamsters., 894 F.2d 36, 40 n. 3 (2d Cir. 1990). Furthermore, the District Judge may also, in his sound discretion, afford a degree of deference to the Magistrate Judge's Report and Recommendations. See U.S. v. Raddatz, 447 U.S. 667, 676, 100 S.Ct. 2406, 2412, 65 L.Ed.2d 424 (1980).

In light of these standards, this Court will make a de novo determination with regard to the three objections raised by the Defendant.

A. As to the alleged false representations and material omissions made by the IRS

Zuckerman first objects to Judge Boyle's finding that the IRS agents made no misrepresentations to him and his attorney. Zuckerman cites two specific misrepresentations: (i) the affirmative statements by the IRS that he was not a subject of an investigation when he clearly was, and (ii) the failure of the IRS to expressly inform Zuckerman that they had learned of his failure to file before speaking to his accountant.

IRS Agent George Nass testified at the hearing that "a subject investigation is basically a full-fledged investigation of a . . . taxpayer . . . to see if there's any merit to the allegations [that the taxpayer has violated the law]." Similarly, the Internal Revenue Manual-Administration defines a subject investigation as a situation where "an individual or entity [is] alleged to be in noncompliance with the laws enforced by the Internal Revenue Service and having prosecution potential." While Zuckerman attempted to demonstrate that Nass considered the case against Zuckerman to have such prosecution potential as early as December 1996, Nass' testimony clearly establishes that his initial findings regarding Zuckerman's ...


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