A certified public accountant who was the managing director of
three foreign corporations with signature authority over the corporations’
foreign bank accounts, was properly convicted of: (1) filing false tax return
because he failed to check the "yes" box
on his Forms 1040 and (2) failing to file Form TDF 90-22.1, Report of Foreign
Bank and Financial Accounts (FBAR). The individual was required to file an FBAR
for each year he had signature authority over a foreign account with a balance
of $10,000 or more by June 30 of the subsequent year. He conceded that he
failed to timely file the FBARs but claimed that, since he filed the required
forms by the extended due dates provided in Notice 2009-62,
I.R.B. 2009-35, 260, and Notice 2010-23,
I.R.B. 2010-11, 441, he could not be convicted of failing to file them.
However, the
individual did not properly report all of his taxable income or pay all of his
taxes and, therefore, he was not entitled to the relief from criminal or civil
penalties provided in the notices. Moreover, he could not have seen the notices
until several years after he had already violated the law requiring him to file
FBARs for the years at issue. Thus, he could not have mistakenly relied on the
advice given in the notices. Further, by the time the IRS had extended the FBAR
filing deadline for otherwise compliant taxpayers, he was already under
investigation by the IRS and was not even eligible for the Voluntary Disclosure
Program that minimized, but did not eliminate, the risk of criminal
prosecution.
Affirming an
unpublished DC Ind. decision. Related decision at 2010-2 ustc ¶50,680.
J.A. Simon,
CA-7, 2013-2 ustc ¶50,480
USTC
Cases, United States of America v. James A. Simon., U.S. District Court, N.D.
Indiana, 2010-2 U.S.T.C. ¶50,680, (Oct. 8, 2010)
United States of America v. James A. Simon.
Tax crimes: Indictment: Suppression
of evidence: Search and seizure: Search warrant: Probable cause: Sufficient
particularity: Reports of Foreign Bank and Financial Accounts (FBARs).–
An IRS special agent’s affidavit supported a finding of probable
cause to search an individual’s residence; therefore, the individual’s motion
to suppress was denied. The special agent’s affidavit did not contain false and
misleading statements or omit facts that were material to the probable cause
finding. Rather, it contained sufficient facts to lead a reasonable person to
believe that a search of the individual’s residence would produce evidence that
the individual and his wife committed tax crimes. Further, the individual was
not entitled to a Franks hearing because the affidavit
sufficiently established that evidence of the specified criminal activities
would be found at the individual’s residence. The search warrant was not
overbroad or lacking in specificity because it listed the individual’s business
affiliations, and limited the search to documents related to those businesses
and a particular time frame. Therefore, seizure of financial aid documents
concerning the individual’s children neither exceeded the warrant’s scope nor
demonstrated an impermissible lack of particularity. The financial aid
applications contained information about the couple’s taxable income, expenses,
and loans, and included copies of tax returns. The individual’s contention that
investigators should used the least intrusive means to obtain information
before moving to the next stage of their investigation was rejected. Even if
the IRS’s internal procedures supported his contention, they confer no rights
on the person being investigated. That the couple’s residence was the place to
be searched did not trigger a heightened standard of probable cause or
reasonableness. Therefore, the search was not unreasonable simply because of a
failure to comply with the Internal Revenue Manual. The individual was not
entitled to a bill of particulars because indictment sufficiently alleged the
elements of the offenses charged and provided significant detail regarding the
sources of the individual’s unreported income. The indictment provided more than
enough information to inform the individual of the charges and to allow him to
prepare and defend those charges. Moreover, the government correctly contended
that its open-file discovery obviated the need for a bill of particulars. The
individual’s contention that the indictment rested on false testimony was
rejected. He failed to show that the grand jury heard false testimony, or that
it was prejudiced by inappropriate testimony. The transcripts did not show the
prosecutor or IRS agent making false statements, or that the prosecutor failed
to answer or refused to allow the grand jurors’ questions. Further, if excusing
a grand juror from the proceedings amounted to misconduct by anyone, that
misconduct did not affect the individual’s substantial rights. Therefore,
dismissal of the indictment was unwarranted. Finally, the individual’s claim
that he filed all required FBARs before his indictment and was in full
compliance a the time, and that any earlier failure to file or disclose could
not be the basis of any criminal violation of Code Sec.
7203 was rejected. He did not qualify for relief under Notice 2009-62, I.R.B. 2009-35, 260, because he had a
financial interest, not just signature authority, in the foreign accounts. If
the individual committed a crime by failing to file an FBAR when IRS
regulations required him to do so, a latter regulatory amendment could not
absolve him of criminal liability without retroactive modification of the
underlying statute. Back
|
Miller, Jr., Judge: James Simon is under indictment on four counts of
filing false income tax returns, 26 U.S.C. §7206(1),
four counts of failure to file reports of foreign bank and financial
accounts, 31 U.S.C. §§5314 & 5322, eleven counts of mail fraud involving
private financial aid, 18 U.S.C. §1341, and four counts of fraud involving
federal financial aid, 20 U.S.C. §1097. The charges revolve around the
government's allegation that Mr. Simon and his wife received what were
purported to be loans from organizations with which he was affiliated, and
treated that money as personal income that he did not report on his personal
income tax returns for the calendar years 2003 to 2006, and concerning which
he filed no reports of foreign bank and financial accounts for the calendar
years 2004-2007, and that he didn't include in applications for need-based
financial aid from two private schools for his children. Mr. Simon has
pleaded not guilty to each of the charges.
On September 28, the court heard argument on five motions
by Mr. Simon: a motion for disclosure of grand jury transcripts, which is now
moot; a motion to suppress and for a Franks evidentiary
hearing; a motion for a bill of particulars; a motion to dismiss the counts
relating to reports of foreign bank accounts; and a motion to dismiss the
indictment based on tainted grand jury proceedings. Some of the motions are
based on multiple grounds. For the reasons set forth in this opinion, the
court denies each of the motions, except for the motion to suppress based on
the manner of the search warrant's execution and the delay in returning
seized material. The court also grants the government's motion to exclude
expert testimony concerning the reasonableness of the application for the
warrant based on Internal Revenue Service policies.
I
The court begins with the motion to suppress. On November
2, 2007, Internal Revenue Service Special Agent Paul Muschell submitted a
search warrant affidavit to District Judge Theresa Springmann, who authorized
the search of the Simon residence. On either November 4 or November 6 (the
parties' submission disagree about the date the warrant was executed, but the
date isn't pertinent to the issues now before the court), thirteen agents
conducted a search of the Simon residence from around 7:30 a.m. to around
5:00 p.m. Denise Simon, Mr. Simon's wife, was present when the agents
arrived. She called her husband and asked that her attorney be allowed to
attend the search. Her attorney, Robert Nicholson, arrived about an hour
later. The agents seized computers, computerrelated devices, and financial
documents; some computer-related items were imaged at the Simon home and left
there.
A few days after the warrant was executed, Mrs. Simon died
at her own hand.
Mr. Simon argues that all evidence obtained as a result of
the search of his home and seizure of financial records, computers and other
documents, and all derivative evidence should be suppressed because it was
obtained in violation of his Fourth Amendment rights. Mr. Simon's motion to
suppress is one of the motions based on a variety of arguments. Mr. Simon
says:
The government agrees that an evidentiary hearing is
needed with respect to the reasonableness of the warrant's execution. Mr.
Simon seeks an evidentiary hearing concerning the statements and omissions in
the affidavit and also seeks to present evidence concerning the IRS manual
for search and seizure.
A
A court evaluating probable cause asks if there was a fair
probability, given the totality of the circumstances, that evidence of a
crime would be found in the place to be searched. United States v.
Orozco, 576 F.3d 745, 748 (7th Cir. 2009); see also United States
v. Walker, 237 F.3d 845, 850 (7th Cir. 2001) (“a practical, common-sense
decision”). The supporting affidavit must set forth enough facts to lead a
reasonably prudent person to believe that the requested search will find
evidence of a crime. United States v. Romo, 914 F.2d 889, 898
(7th Cir. 1990). The affidavit is reviewed in a common sense manner, not
hypertechnically. United States v. Walker, 237 F.3d at 850.
“The Fourth Amendment requires an evidentiary hearing on
the veracity of a warrant affidavit, and ultimately on the constitutionality
of the search, when a defendant requests such a hearing and ‘makes a
substantial preliminary showing that a false statement knowingly and
intentionally, or with reckless disregard for the truth, was included by the
affiant in the warrant affidavit, and [ ] the allegedly false statement is
necessary to the finding of probable cause.’” United States v. Harris,
464 F.3d 733, 738 (7th Cir. 2006) ( quoting Franks v. Delaware,
438 U.S. 154, 155-56 (1978)). “A defendant may also challenge an affidavit by
showing that the affiant intentionally or recklessly omitted material
information.” Id.; see also Shell v. United States,
448 F.3d 951, 958 (7th Cir. 2006); United States v. Williams, 737
F.2d 594, 604 (7th Cir. 1984). “[T]o make a substantial preliminary showing,
the defendant must identify specific portions of the warrant affidavit as
intentional or reckless misrepresentations, and the defendant should submit
sworn statements of witnesses to substantiate the claim of falsity.” Id.; see
also Franks v. Delaware, 438 U.S. at 171. A court then considers the
affidavit, eliminating any false statements and incorporating omitted
material facts, and determines whether probable cause existed. United
States v. Harris, 464 F.3d at 738.
1
Discussion of Mr. Simon's attacks on the affidavits
requires the court to recite an unfortunate degree of detail. Some of what
Special Agent Muschell related in the affidavit related to what he has
learned about tax offenders and their ways during his years as an IRS agent
and as an accountant before that. He explained that tax offenders often use
offshore entities, offshore trusts, foreign shell corporations, and foreign
bank accounts, that sham loan transactions (those in which the borrower isn't
really obligated to repay the loan) often are used to hide income, that tax
offenders often use “tax haven” countries that are deemed “tax havens”
because of their bank secrecy laws, like Cyprus, Gibraltar, and the Cook
Islands, and that tax offenders often add layers to the scheme to try to make
it harder to trace funds. Agent Muschell then explained computer terminology
and how tax offenders are known to have used computers, and added that it can
take weeks to find financial information in computers.
The affidavit then turned to James and Denise Simon, who
were affiliated with several domestic entities, foreign trusts, foreign shell
entities, and offshore bank accounts, some of which were established in
countries earlier identified as “tax havens”. The affidavit reported that the
Simons sent funds to offshore countries, then transferred the funds back into
domestic bank accounts, with funds eventually winding up in Denise Simon's
checking account. The affidavit also reported that the Simons received mail
at an address in Huntertown, Indiana, and transferred mail to their
residential address.
The affidavit says Mr. Simon transferred personal assets
to the Simon Family Trust, located in the Cook Islands for the benefit of his
family. The trustees were an attorney named Doug Miller and a Cook Islands
firm. The family trust contained a 99 percent interest in JAS Partners, and
contained about $4 million in 2000. Although required to file tax returns,
the family trust hadn't done so from 2004 through 2006, during which years
the Simons prepared their own personal and business tax returns. Special
Agent Muschell's affidavit said Mr. Simon was president of William R. Simon
Farms, Inc., which he and his family inherited when his mother died. That
corporation owned two properties in Huntertown, Indiana; the Simons received
mail at one of the properties and Mrs. Simon was seen obtaining an envelope
from that property. Mr. Simon signed the corporation's tax returns of the
Farm in 2000, 2001, and 2004, but the corporation didn't file a return for
2002, 2003, 2005, and 2006. According to the affidavit, Mr. and Mrs. Simon
received farm subsidy income from the corporation in those years.
The affidavit reported that Mr. Simon is the managing
director and Denise Simon is an authorized representative of JS Elekta
Leasing, an international telecommunications corporation based in Cyprus. Mr.
and Mrs. Simon opened, and were the only authorized signers on, a bank
account for J.S. Elekta Leasing Limited. Agent Muschell said Mr. Simon had
received funds from investors on behalf of JS Elekta Leasing's behalf since
2002, and that JS Elekta Leasing had never filed a tax return.
The affidavit said the Simons had formed JAS Partners in
1981 in Colorado through attorney David Lockwood, who specializes in
“achieving estate tax minimization and probate avoidance.” Mr. Simon was
quoted as saying JAS Partners was a “vehicle that engages in financial
transactions: loans, money, et cetera, for the purpose of economic gain.” JAS
Partners reported little revenue, but significant business expenses and net
losses from 2000 to 2005. The partnership's losses flowed through to the
Simons' tax returns, so they reported adjusted gross incomes of -$37,364 in
2003, $5,130 in 2004, -$269,922 in 2005, and -$47,119 in 2006. Because of
(and only because of) the partnerships' losses, the affidavit reported, Mr.
and Mrs. Simon received earned income tax credits in 2003-04 and 2006, to
which they would not have been entitled had they correctly reported their income.
Special Agent Muschell's affidavit says Mrs. Simon's checking account
received more than $500,000 in 2006 that came from companies affiliated with
Mr. Simon. Some of these wire transactions referenced payment for “services,”
but those payments weren't reported as income.
The affidavit reported that Mr. Simon is the president and
self-described managing director for Elekta Limited, which is based in
Gibraltar and hasn't filed any tax return with the IRS. Mr. and Mrs. Simon
opened, and were (along with Mr. Simon's sister) authorized signers on, an
Elekta Limited bank account in 1997. In 2006, Mr. Simon transferred $2,700
from the Elekta Limited account to a Gibraltar company that specializes, inter
alia, in “international tax and asset protection planning.”
Mr. Simon, the affidavit continued, also was chief
executive officer of Intellecom, the parent company of which is Ichua
Limited, located in Cyprus. The affidavit reports that Mr. Simon, acting on
Ichua Limited's behalf, had wired $417,000 in 2006 and 2007 to accounts the
Simons controlled, and that most of that money went into Mrs. Simon's
checking account. The Simons didn't disclose on their 2003 to 2005 tax
returns that they had any interest in a foreign financial account, and from
2003 to 2006, didn't file Reports of Foreign Bank and Financial Accounts
(“FBARs”) disclosing their interest in foreign financial accounts.
Ichua Limited wired more than $270,000 to JS Elekta
Leasing Limited in 2006 (referencing “services”) and more than $370,000 to
Elekta Limited which, in turn, wired more than $370,000 to JAS Partners,
which transferred more than $350,000 to the personal bank account of Mrs.
Simon, who also got more than $190,000 from Elekta Limited. Mrs. Simon, the
affidavit says, spent between $34,000 and $120,000 per month in 2006, but the
Simons reported total income of -$40,499.
Based on this affidavit, Judge Springmann found probable
cause to issue a search warrant to look for financial records and other
evidence of tax offenses in the Simon residence.
2
The court agrees with the government and Judge Springmann
that Special Agent Muschell's affidavit established probable cause for the
requested search. The affidavit set forth enough facts to lead a reasonable
person to believe that the search of the residence would produce evidence
that Mr. and Mrs. Simon had filed tax returns that were false because they
omitted taxable income, and that Mr. and Mrs. Simon were required to file
“FBARs” that they hadn't filed.
Most of Mr. Simon's arguments to the contrary intertwine
with his separate argument for a Franks hearing, making it
difficult to isolate his arguments about the insufficiency of the affidavit
as written. Essentially, Mr. Simon contends that the affidavit's factual
allegations don't establish each element of tax evasion. This was not an
affidavit for an arrest warrant, though. It sought a warrant to search the
Simon residence for evidence of tax evasion and failure to comply with
reporting requirements concerning foreign bank accounts. Setting aside for
the moment the facts that Mr. Simon contends were missing or were false,
Special Agent Muschell's affidavit contains more than enough facts to support
a finding of probable cause for the requested search.
3
Mr. Simon contends that Special Agent Muschell's affidavit
contained false and misleading statements of fact and omitted material facts.
He seeks an evidentiary hearing pursuant to Franks v. Delaware,
438 U.S. 154 (1978), to pursue that inquiry. As already noted, Mr. Simon must
make a substantial preliminary showing that Special Agent Muschell made one
or more false statements knowingly, intentionally, or with reckless disregard
for the truth, and that the false statement was necessary to the finding of
probable cause. United States v. Harris, 464 F.3d at 738.
Mr. Simon says two of the statements in the affidavit were
false: Cyprus has a tax treaty with the United States and doesn't have bank
secrecy laws, so it isn't a “tax haven” as Special Agent Muschell defined the
term; and the Simon Family Trust, described as being located in the Cook
Islands, actually is a domestic trust.
Mr. Simon says the affidavit omitted the following facts:
that Mr. Simon lived overseas and has business operations in foreign
countries; that neither Mr. nor Mrs. Simon had any criminal history; that Mr.
and Mrs. Simon had been audited in the past, and had cooperated with the IRS
and resolved the audits successfully; that the Simon Family Trust's assets
were held in domestic financial institutions, not in the Cook Islands; that a
person could have legitimate reasons for using offshore bank accounts; that
the Simon Family Trust's trustee's address was in the United States, and the
Trust was involved in litigation in the United States, so it had submitted to
the jurisdiction of an American court; that the Family Trust's trustee,
rather than Mr. and Mrs. Simon, was required to file tax returns for the
trust; that the Simons' personal tax returns included income generated by the
Family Trust; that the farm subsidies to William R. Simon Farms, Inc., in
2000, 2001, and 2004, were less than $5,000, and that the farm historically
had shown losses on its tax returns; that J.S. Elekta Leasing, Ltd. and
Elekta Limited might not be required to file tax returns; that taxable income
is different than revenues and JAS Partners might have received nontaxable
sources of income, such as loans; and that while Elkta, Ltd. received
payments from services from Ichua, Ltd., Mrs. Simon and JAS Partners didn't
receive payments for “services.”
4
The omissions of which Mr. Simon complains relate to
matters that might, if included, make the inculpatory facts look less
suspicious. For example, the Simons' use of offshore accounts seems less
sinister if the reader also learns that there can be innocent reasons for
using offshore accounts. But the Fourth Amendment doesn't require that an
applicant for a search warrant include all facts that could support an
innocent explanation for the apparently less innocent facts recited in the
affidavit. United States v. Rambis, 686 F.2d 620, 623 (7th Cir
1982) (affidavit “need only allege specific facts establishing a reasonable
probability that the items sought are likely to be at the location
designated; [it] need not also negate every argument that can be asserted
against that probability.”); see also United States v. Carmel, 548
F.3d 571, 577 (7th Cir. 2008) (affidavit described illegal use for object but
omitted reference to a legal use for the same object; Franks hearing
properly denied); United States v. Fama, 758 F.2d 834, 838 (2d
Cir. 1985) (“The fact that an innocent explanation may be consistent with the
facts alleged…does not negate probable cause.”).
Nothing in Mr. Simon's submission suggests that the
omitted facts go so far past the “innocent explanations” that needn't be
included that Special Agent Muschell could be said to have omitted the
specified facts “knowingly or intentionally, or with reckless disregard for
the truth ….” Franks v. Delaware, 438 U.S. at 155-156.
That leaves the two statements that Mr. Simon says were
false: that Cyprus is a “tax haven,” and that the Simon Family Trust is
located in the Cook Islands. First, the record contains precious little to
support a finding that either statement is wrong. See United States
v. Souffront, 338 F.3d 809, 823 (7th Cir. 2003) (“The presumption of
validity [of the affidavit] cannot be overcome by defendant's self-interested
inferences and conclusory statements.”); see also Shell v. United
States, 448 F.3d 951, 958 (7th Cir. 2006) (denying Frankshearing
where defendant offered no support for the contention that the agent
intentionally omitted information). The more important point is that even if
those statements are disregarded, the affidavit contains more than enough
factual information to lead a reasonable person to believe evidence of the
specified criminal activities would be found at the Simon residence. The
alleged omissions aren't material to the probable cause finding. See
United States v. Klump, 536 F.3d 113, 120 (2d Cir. 2008) (omission not
material where innocent explanation doesn't negate probable cause); United
States v. Harris, 464 F.3d at 738 (innocent explanation didn't materially
detract from the totality of probable cause found in the affidavit); United
States v. Maro, 272 F.3d 817,821 (7th Cir. 2001) (unimportant allegation,
even if viewed as intentionally misleading, doesn't trigger need for a Franks hearing).
5
Special Agent Muschell's affidavit supported a finding of
probable cause to search the Simon residence, and Mr. Simon hasn't made a
showing sufficient to support his request for a Franks hearing.
To the extent the motion to suppress is based on those arguments, it must be
denied.
B
Mr. Simon contends that the search warrant was overly
broad and had insufficient specificity. The warrant had two attachments. The
first attachment described and depicted the Simon residence. The second
(Attachment B) set forth the items to be seized: (1) business records and
correspondence related to Intellcom, Ichua Limited, Elekta Limited, JS Elekta
Leasing, JAS Partners, Ltd., Fort Wayne Telstat, and Klondike Data Services
from 2000 through 2006; (2) state and federal tax returns, and related forms
and schedules, from 2000 through 2007; (3) documents related to domestic and
foreign travel; (4) financial records showing the obtaining and concealing of
assets and the expenditure of money; (5) photographs of real or personal
property; and (6) indicia of occupancy. Attachment B authorized the agents to
seize computers and electronically stored information, making every effort to
image the information on site, but allowing seizure for enough time for
off-site access and copying.
Mr. Simon contends that Attachment B's descriptions of
items to be seized didn't satisfy the Fourth Amendment's particularity
requirement. The description “all business records” didn't limit the seizure
authority to evidence of violations of the statutes in the application,
giving the agents unfettered discretion rather than providing specific guidance. See,
e.g., United States v. Cardwell [ 82-2ustc ¶9470],
680 F.2d 75 (9th Cir. 1982), citing Marron v. United States, 275
U.S. 192, 196 (1927); Alioto v. United States [ 63-2 ustc¶9552],
216 F.Supp. 48 (E.D. Wis. 1963) (warrant was overbroad when only limitation
on seizure of business records was that they be instrumentalities or evidence
of violation of general conspiracy and tax evasion statutes). With respect to
tax returns and financial documents, the warrant wasn't limited to any person
or entity. The same was true with respect to records of foreign or domestic
travel and photos, which weren't even limited to a particular time period. As
a result, Mr. Simon argues, agents seized documents beyond those authorized
by the warrant, such as records of financial aid from the schools his
children attended.
A warrant satisfies the particularity requirement if the
warrant tells a reasonable executing officer what items are to be seized. United
States v. Hall, 142 F.3d 988, 996 (7th Cir. 1998). The particularity
needed in one case might be impossible in another, so the courts recognize
that the requisite specificity varies from case to case, depending on the
complexity of the suspected criminal activity. See Russell v. Harms,
397 F.3d 458, 464 (7th Cir. 2005); United States v. Vitek Supply Co.,
144 F.3d 476, 481 (7th Cir. 1998); Wag-Aero, Inc. v. United States,
837 F.Supp. 1479, 1496 (E.D. Wis. 1993). The description in the warrant must
be as particular as the circumstances reasonably permit, United
States v. Bentley, 825 F.2d 1104, 1110 (7th Cir. 1987), allow so that an
executing officer can identify the things to be seized with reasonable
certainty. United States v. Jones, 54 F.3d 1285, 1290 (7th Cir.
1995). Generic language is allowed if detailed particularity is impossible
and the language used particularizes what is to be seized. United
States v. Hall, 142 F.3d at 996.
This warrant listed the Simons' business affiliations and
limited the records search concerning those businesses to a particular time
frame. It specified tax documents within a particular time frame. The other
categories of items are limited by subject matter rather than by time frame.
Greater specificity would be needed for a search of an accountant's office,
but this warrant related to a residence.
Seizure of the financial aid documents neither exceeded
the warrant's scope nor demonstrated an impermissible lack of particularity.
The financial aid applications contained information from the Simons about
taxable income, expenses, and loans, and included copies of tax returns. The
warrant specified evidence of the obtaining and concealment of assets by Mr.
and Mrs. Simon, and the financial aid documents appear to fall within that
category of items.
C
Mr. Simon argues that the execution of the search warrant
was unreasonable, among other reasons because the agents departed from the
IRS' administrative guidelines on search warrants. Mr. Simon's argument,
though, addresses the decision to obtain a warrant and the adequacy of
Special Agent Muschell's affidavit, rather than the execution of the search
itself. Mr. Simon notes, for example, that section 9.4.9.2 of the Internal
Revenue Manual says “CID will employ the least intrusive means necessary to
acquire evidence in tax and tax-related Title 18 investigations,” and that
search warrants are to be used when crucial evidence “cannot be obtained by
any other means.” Special Agent Muschell used the search warrant rather than
using IRS summonses and/or grand jury subpoenas, or simple requests. Sections
9.4.9.2 and 9.4.9.3.1.2 of the IRS manual say that an affidavit for a warrant
must show “objective evidence of the subject's attempt to obstruct the
investigation”, or “objective evidence indicating the subject may destroy the
evidence”, or “facts that establish that other attempts to acquire the
records were ineffective.” Special Agent Muschell's affidavit made no such
references.
A search warrant obtained in contravention of the IRS
manual, Mr. Simon argues, is unreasonable. This is especially so since the
warrant was directed at the Simon residence, in which he and his family had
the highest degree of privacy. There would have been no search had the manual
been followed, because the government would have employed less intrusive
means of investigation first.
The court doesn't understand the law the same way Mr.
Simon does. Mr. Simon cites no authority for the proposition that
investigators must proceed incrementally by using the least intrusive
investigative means before moving to the next stage of their investigation.
The IRS might have internal procedures to that effect, but those procedures
confer no rights on the person being investigated. United States v.
Peters [ 98-2 ustc ¶50,650], 153
F.3d 445, 452 n.9 (7th Cir. 1998). The search warrant was based on probable
cause and described the place to be searched and the items to be seized with
sufficient particularity. Recognizing that the court defers ruling on the
reasonableness of the warrant's execution until after hearing evidence, the
Fourth Amendment requires no more.
That the Simon residence was the place to be searched doesn't
change the analysis. No heightened standard of probable cause or
reasonableness governs residential searches pursuant to search warrants. See,
e.g., United States v. Jones, 54 F.3d 1285, 1289-1290 (7th
Cir. 1995); United States v. Stone, 471 F.2d 170, 175 (7th Cir.
1972).
During argument on Mr. Simon's motion, the government
moved to exclude the presentation, at the hearing concerning the method of
execution of the warrant, of any expert testimony that the search and/or
warrant did or didn't comport with the manual. Because the manual doesn't
provide the yardstick by which reasonableness is judged for Fourth Amendment
purposes, the court grants the government's motion.
D
Special Agent Muschell's affidavit supported a finding of
probable cause to search the Simon residence, and Mr. Simon hasn't made a
showing sufficient to support his request for a Franks hearing.
The warrant described with sufficient particularity the things to be seized,
and the search was not made unreasonable by any failure to comply with the
IRS manual. The court has deferred ruling on the aspect of Mr. Simon's motion
that argues for suppression based on the execution of the warrant and
retention of items seized; in all other respects, the motion to suppress is
denied.
II
The court heard argument on the pending motions on
September 28, Mr. Simon asked to submit supplemental authority on a couple of
points, and the court afforded both sides until October 1 to file
supplementary material. On October 5, as the court was drafting this opinion
and after the court already had completed the section concerning the motion
for a Franks hearing (this opinion would have been released
a day earlier but for a gas leak that caused evacuation of an area of South
Bend that includes the federal courthouse), Mr. Simon filed a motion for
leave to file the affidavit of retired IRS agent George Scott in support of
his motion to suppress. Mr. Simon explained that he didn't believe such an
affidavit was required for his suppression motion, but the arguments at the
hearing suggested the government disagreed. The government objected to Mr.
Simon's motion to file the Scott affidavit.
The court has resolved the suppression motion (save issues
concerning the warrant's execution) without relying on (though not without
commenting on) the lack of an affidavit. Mr. Scott's affidavit wouldn't
affect that ruling if the affidavit (as the court assumes) is limited to the
issues previously raised. If the affidavit raises any new issues, it comes
too late. In either event, there is no need to expand the record with Mr.
Scott's affidavit, so the court denies Mr. Simon's motion to file the
affidavit.
III
Mr. Simon asks the court to order the government to file a
bill of particulars pursuant to FED. R. CRIM. P. 7(f) as to the amount of
unreported income allegedly received from each of the entities referenced in
¶ 3 of the indictment for each tax year in question, and requiring an
itemized statement of all of the expenditures alleged in ¶ 7 of the
indictment (including dates, amounts and payee of each expenditure). The
government responds that the indictment sufficiently alleges the elements of
the offenses charged and provides significant detail regarding the source of
the implicated funds and the manner in which they were spent, and that it's
“open-file” discovery obviates the need for a bill of particulars in this
case.
The motion deals with paragraphs 3 and 7 of the tax counts
(counts 1-4), The indictment is unusually rich in detail with respect to the
tax counts. After alleging ¶ 2 that Mr. Simon was involved with Elekta
Limited, JS Elekta Leasing Limited, Ichua Limited, JAS Partners, and William
R. Simon Farms, Inc., the indictment alleges in ¶ 3 specific annual amounts
of money Mr. Simon and his family are said to have received from the entities
listed in ¶ 2:
3. From
2003 through 2006, Simon and/or his family received approximately
$1,799,502.60 from Elekta Limited, JS Elekta Leasing Limited, Ichua Limited,
JAS Partners, and William R. Simon Farms, Inc., as follows: $245,800 in 2003;
$341,143.71 in 2004; $472,637.96 in 2005; and $739,920.93 in 2006.
Paragraph 4 alleges that Mr. Simon didn't report the
$1,799,502.60 as income on his tax returns. Paragraphs 5 and 6 allege that
Mr. Simon's personal accounting records referred to most of the money as
“loans” or “advances,” but set forth about eleven reasons why the money
wasn't loaned or advanced.
Paragraph 7 then alleges, with striking specificity, how
Mr. Simon and his family spent most of the money from those entities from
2003 to 2006, breaking the expenditures down into 31 categories, with 14
sub-categories. 1 The
expenditures are alleged down to the penny; for example, the indictment
alleges that Mr. Simon and his family spent $5,054.18 on make-up from 2003 to
2006.
This indictment, in other words, is a far cry from the
usual allegation that a defendant, together with others known and unknown,
conspired to distribute cocaine base in excess of 50 grams in 2007 and 2008
within the Northern District of Indiana and elsewhere.
Mr. Simon seeks still greater detail. He notes that ¶ 3
doesn't specify how much allegedly unreported income was received from each
entity, either in total or for each tax year in question. Without that
information, he says, he won't be able to prepare a defense to these
allegations. With respect to the expenditures collected in ¶ 7, Mr. Simon
says the Government should itemize each transaction, the dates thereof, and
the payees, so he can investigate. Mr. Simon says the Government had produced
more than 40,000 pages of documents by the time he filed his motion (more
pages were produced at the hearing), but hasn't provided any kind of index,
categorization, or organizational aid. Mr. Simon believes it would be grossly
unfair and prejudicial to leave it to him to go through so much discovery
without the detailed schedule of all of the expenditures that the government
already must have prepared.
A bill of particulars is not designed to help a defendant
organize discovery materials; a bill of particulars helps clarify a minimally
sufficient indictment so that a defendant might understand the nature of the
charge against him. See United States v. Fassnacht, 332 F.3d 440,
446-447 (7th Cir. 2003); United States v. Kendall, 665 F.2d 126,
134 (7th Cir. 1981) (“The test for whether a bill of particulars is necessary
is ‘whether the indictment sets forth the elements of the offense charged and
sufficiently apprises the defendant of the charges to enable him to prepare
for trial.’”). This indictment provides more than enough information to
inform Mr. Simon of the charges and to allow him to prepare to defend those
charges. Moreover, the government is correct that a bill of particulars is
even less necessary when, as here, the government provides open file
discovery. United States v. Canino, 949 F.2d 928,949 (7th Cir.
1991);United States v. Giese, 597 F.2d 1170, 1180 (7th Cir. 1979).
The court denies Mr. Simon's motion for a bill of
particulars.
IV
Mr. Simon moves to dismiss the indictment in its entirety
on two grounds related to the grand jury. He contends the grand jury
proceedings in this case were tainted because Special Agent Muschell gave
misleading and false information to the grand jury and because the prosecutor
gave misleading, confusing and inaccurate information to the grand jury, and
didn't clarify and/or answer questions posed by the grand jury. He also seeks
dismissal because the prosecutor excused a grand juror without court
approval.
A
Mr. Simon contends that Special Agent Muschell led the
grand jury to believe that $1.7 million had come into Mr. Simon's personal
checking account, that Mr. Simon received transfers from the affiliated
entities on a regular basis from 2003 to 2006, that Mr. Simon “did not report
virtually any income” during those years, that the money was spent primarily
on tennis lessons, that Mr. Simon had personally prepared affidavits for
witnesses to sign, that money that actually went to affiliated entities went
directly into Mr. Simon's checking account, that money “bounced around” before
settling in Mr. Simon's bank account, that Mr. Simon pocketed “half” of the
money investors were putting into the affiliated entities, and that no loan
documents (or payments on the loans) were ever made. Mr. Simon believes the
prosecutor misled the grand jury with respect to whether loans from certain
people would be the basis of charges the grand jury was considering, whether
loan documentation existed, whether promissory notes would be evidence of
loans, and about a lawsuit Mr. Simon had filed against Special Agent Muschell
and the IRS (relating to the search of his home and his wife's death).
To the extent Mr. Simon contends the indictment rested on
false testimony, he must show (1) that the grand jury heard false testimony
and (2) prejudice amounting to either “proof that the grand jury's decision
to indict was substantially influenced, or that there is grave doubt that the
decision to indict was substantially influenced, by testimony which was
inappropriately before it.” United States v. Useni, 516 F.3d
634,656 (7th Cir. 2008); United States v. Anderson, 61 F.3d 1290,
1296 (7th Cir. 1995). Mr. Simon hasn't met that burden. There might be a
factual dispute between the parties with respect to documents that purport to
be loan documents, but that's a matter for trial, not pretrial motion
practice. None of the transcripts to which Mr. Simon points demonstrate that
either the prosecutor or Special Agent Muschell made any false statements, or
that the prosecutor failed to answer (or refused to allow) the grand jurors'
questions.
Mr. Simon's complaints seem to rest instead on what he
sees as skewed or slanted testimony and responses to grand jurors' questions.
In presenting such an argument, Mr. Simon shoulders a heavy burden. A grand
jury is an accusatory body rather than an adjudicatory body, United
States v. Mahalick, 498 F.3d 475, 479-480 (7th Cir. 2007), so its
proceedings can't be judged by the same yardstick that applies to trials. The
government isn't required to disclose even the existence of exculpatory
evidence to the grand jury, United States v. Williams, 504 U.S.
36, 53 (1992), or to provide instructions about material facts or legal
terms. United States v. Lopez-Lopez, 282 F.3d 1, 8-9 (1st Cir.
2002). The federal courts “have been reluctant to invoke the judicial
supervisory power as a basis for prescribing modes of grand jury procedure.
Over the years, we have received many requests to exercise supervision over
the grand jury's evidence-taking process, but we have refused them all ….” United
States v. Williams, 504 U.S. at 50.
In United States v. Hogan, 712 F.2d 757, 760
(1st Cir. 1983), the prosecutor called the target a “hoodlum” who should be
indicted as a matter of equity, presented hearsay testimony about unrelated
murders of which the target was suspected, recounted news accounts and rumors
suggesting that the target had taken bribes while a police officer, presented
speculative testimony about why the target hadn't engaged in a drug deal with
an informant, and presented concededly false testimony about someone
overhearing the target discussing a heroin deal in a phone call. Mr. Simon's
complaints about the conduct before the grand jury that indicted him fall
well short of that conduct. The parties have cited no other instance in which
a federal court upheld an indictment's dismissal for prosecutorial misconduct
falling short of actual false testimony, and the court's research has found
none. Cf. United States v. Feurtado, 191 F.3d 420 (4th Cir. 1999)
(upholding district court's dismissal of indictment without prejudice,
rejecting appellants' contention that indictment should have been dismissed
without prejudice).
At the hearing on his motion, Mr. Simon indicated that he
wanted to be able to question Special Agent Muschell at a hearing to learn
why answers were framed as they were. The court invited Mr. Simon to file
supplemental citation of authority to support the proposition that a
defendant is entitled to an evidentiary pretrial hearing to question a grand
jury witness about why answers were phrased in certain way, or why certain
information wasn't given. No authority was submitted, and the court knows of
none. The court won't allow such questioning.
B
One of the grand jurors reported that he or she had
attended Mrs. Simon's funeral. The Assistant United States Attorney told the
grand juror:
In
situations like this, what we typically do assuming we have enough grand
jurors, which we do is ask someone who would be that familiar with that
situation to excuse themselves from the deliberations. So I guess what you
can do is you can step out and so you won't need to be involved in the
deliberations on this particular case hearing more testimony or deliberating
because of your sort of personal knowledge and relationship with the family
or in-laws or that sort of thing.
Grand jurors inquired whether that grand juror, who had
been an active questioner to that point (this was an active grand jury with
respect to questions), could remain to ask questions of witnesses and then
leave only for the deliberations; the foreperson of the grand jury asked the
grand juror to step out before the witnesses were called. Another grand juror
reported an acquaintance with the Simon family: the grand juror taught tennis
to the Simon children, and the Simons were neighbors of the grand juror. The
prosecutor made no suggestion that this second grand juror should recuse.
Based on these exchanges, Mr. Simon contends that the
prosecutor improperly suggested that the grand juror excuse himself, although
that grand juror was (in Mr. Simon's estimation) asking the best questions
about Mr. Simon's financial matters and seemed to have the most insight into
Mr. Simon' position with respect to loans and taxable income. Mr. Simon moves
the court, pursuant to its inherent supervisory power over the grand jury, to
dismiss the indictment with prejudice.
Conceding the absence of any authority squarely on point,
the government argues that a district court is not to inquire into grand
jurors' bias after the grand jury has been selected, see United
States v. Adamo, 742 F.2d 927,936 n.5 (6th Cir. 1984), and that district
judges are to have very little involvement with grand jury matters after
calling the grand jurors together and administering their oaths. United
States v. Williams, 504 U.S. at 48-50. The government views Mr. Simon's
argument — that the prosecutor should have brought the arguably tainted grand
jurors before the court rather than advise the grand jury himself — as
inconsistent with those principles.
The government's argument on this point is staggered, if
not knocked out altogether, by Federal Rule of Criminal Procedure 6(h), which
authorizes judges to excuse seated grand jurors, either permanently or
temporarily. Whatever limits law or custom may place on judges' involvement
with the grand jury's day-to-day operations, the Rule contemplates that
judges will, at least occasionally, be called upon to decide whether to
excuse a juror, even on a temporary basis. Given the terms of Rule 6(h), it
doesn't appear that it would have been improper for the government to refer
the grand juror's potential recusal to a judge.
But Rule 6(h) doesn't answer any more of the questions
posed by Mr. Simon's motion, because it doesn't limit the authority to excuse
a grand juror to the court. It simply vests the court with such authority
without revealing whether anyone else shares the authority. It doesn't
declare that the prosecutor can never excuse a grand juror with respect to a
single matter, or that the foreperson or deputy foreperson can't do so, or that
a grand juror can't recuse herself with respect to a particular inquiry. By
the same token, it doesn't deny the authority to permanently excuse a grand
juror to any of those people, but it seems improbable that the law
contemplates either the prosecutor permanently barring a seated grand juror
from the room, or a seated grand juror's authority to excuse himself from any
further duty.
If the inquiry proceeded further, it would be difficult to
identify precisely who had final responsibility for the grand juror's recusal
on the grand jury's final day with this case. The prosecutor never told the
grand juror that recusal was required, but since grand juries look to
prosecutors for guidance on the law, the prosecutor's statement about what is
“typically” done in similar situations might have been indistinguishable from
a command. On the other hand, the grand juror seems to have had no
disagreement with the course the prosecutor recommended, and the action might
be seen as self-recusal. Modest precedent for a voluntary, but
prosecutor-driven, recusal is found in United States v. Lopez,
854 F.Sup. 50, 54-55 (D. P.R. 1994) (AUSA said, “Mr. Foreperson, this is the
case of Franklin Delano López. As in the past, we would request that you
recuse yourself, and I would request that the deputy foreperson assume his
duties”; issue in case arose when deputy foreperson wasn't there). And as
already noted, it was the foreperson who finally directed the grand juror to
step outside.
The court needn't resolve either the factual issue or the
threshold legal question about who can excuse a grand juror temporarily,
because there is no authority for the premise of Mr. Simon's motion: that the
court can dismiss an indictment if a grand juror was improperly excused from
the proceedings and deliberations. A court can't dismiss an indictment for
prosecutorial misconduct in grand jury proceedings if the misconduct didn't
affect the defendant's substantial rights. Bank of Nova Scotia v.
United States [ 88-2 ustc¶9547], 487 U.S. 250,
254-255 (1988).
Unlike a petit jury that requires a unanimous verdict, the
government wasn't required to persuade any particular combination of grand
jurors to obtain this indictment. The government had to persuade twelve or
more grand jurors to indict, out of at least sixteen grand jurors in
attendance. That the indictment was returned demonstrates that twelve or more
voted to indict; the vote of the excused grand juror wouldn't have affected
the outcome. Mr. Simon had no right to a particular composition of the grand
jury; as has already been discussed, grand jurors may be excused temporarily,
so that the grand jury's composition might differ from session to session.
Indeed, one member of the grand jury that indicted Mr. Simon had missed an
earlier session, and the prosecutor properly produced a transcript of
evidence from that session (which included exculpatory witnesses) for that
grand juror to review. See United States v. Lang, 644 F.2d 1232
(7th Cir. 1981).
If the excusing of the grand juror from the proceedings
amounted to misconduct by anyone, that misconduct didn't affect Mr. Simon's
substantial rights. Dismissal is not appropriate. Bank of Nova Scotia
v. United States [ 88-2 ustc ¶9547], 487 U.S.
at 254-255.
C
Mr. Simon also had moved for disclosure of grand jury
transcripts to allow him to seek any further issues with what was presented
to the grand jury or what occurred during the proceedings. Since then, the
government provided quite a few transcripts. At the hearing, the court asked
Mr. Simon if those transcripts made his motion moot; he responded that if he
has all the transcripts the government has, his motion is moot. The
government then informed the court that Mr. Simon has all the transcripts it
has. The court deems the motion moot and denies it as such.
V
Counts 1 through 4 of the indictment allege that Mr. Simon
violated 26 U.S.C. §7206(1) by
filing tax returns for the years 2003 through 2006 because they didn't report
certain income for each of those years and because they didn't disclose
certain foreign bank accounts. Counts 5 through 8 of the indictment allege
that Mr. Simon failed to file Reports of Foreign Bank Accounts — what the
parties call “FBARs” for the years 2004 through 2007, and so violated 31
U.S.C. §§5314 and 5322. Mr. Simon moves to dismiss these counts because the
IRS has extended any requirement for the filing of FBARs or any disclosure of
them on tax returns and expressly made the extension retroactive, see Administrative Notice 2010-23, March 13, 2010; and Notice 2009-62, (August 31, 2009), and because Mr.
Simon filed all FBARs that could have been required before the indictment.
31 C.F.R. §24 (reports of foreign financial accounts)
provides that:
Each
person subject to the jurisdiction of the United States having a financial
interest in, or signature or other authority over, a bank, securities or
other financial account in a foreign country shall report such relationship
to the Commissioner of the Internal Revenue for each year in which such
relationship exists, and shall provide such information as shall be specified
in a reporting form prescribed by the Secretary to be filed by such persons
[Form TD F 90-22.1] …
Under 31 C.F.R. §27(c):
Reports
required to be filed by 103.24 shall be filed with the Commissioner of
Internal Revenue on or before June 30 of each calendar year with respect to
foreign financial accounts exceeding $10,000 maintained during the previous
calendar year.
Mr. Simon argues that the IRS retroactively extended the
filing deadline in §27(c) (and the duty to disclose those accounts on tax
returns) for (i) persons with no financial interest in a foreign financial
account but with signature or other authority over that account, and (ii)
persons with a financial interest in, or authority over, a foreign financial
account in which the assets are held in a commingled fund, by Administrative Notice 2010-23 (March 13, 2010) and
Administrative Notice 2009-62 (August
31,2009). Such people now have until June 30, 2011 to file FBARs for all
calendar years before 2010. Mr. Simon says he filed all of the FBARs that
could have been required before his indictment on April 15, 2010 and was in
full compliance at the time, and that any earlier failure to file or disclose
can't be the basis of any criminal violation of 26 U.S.C. §7203.
As the government sees it, Mr. Simon doesn't qualify for
relief under the IRS notices because he had a financial interest, not just
signature authority, in the foreign accounts. Even if he did qualify, the
government argues, administrative relief can't change any criminal liability
incurred before amendment of the regulation. The government further contends
that the notices haven't become final regulations under the Administrative
Procedures Act, and that Congress didn't expressly grant retroactive
rule-making authority to the Treasury Department under Title 31. Mr. Simon's
January 2010 filing of FBARs for 2005-2007, the government says, doesn't
absolve him of criminal liability because under the regulations existing at
the time the FBARs had to be filed by June 30 of the following year (June 30
of 2006, 2007, and 2008). The government also notes that Mr. Simon never
filed an FBAR for 2003 or 2004.
In reply, Mr. Simon argues that he doesn't have a
financial interest in Ichua, JS Elekta or Elekta, that 31 C.F.R. §103.55
gives the Treasury Secretary authority to make exceptions to the reporting
requirements, that the exceptions made by the administrative notices were
expressly retroactive, and that he wasn't required to file a FBAR for 2004
because the account balance was less than $10,000. No documentation supports
his factual assertions.
Whether Mr. Simon had a financial interest in a foreign
account is a matter for resolution at trial, not on pretrial motions. The
court agrees with the government, though, that if Mr. Simon committed a crime
by failing to file an FBAR when the regulations required him to do so, a
later regulatory amendment can't absolve him of criminal liability without
retroactive modification of the underlying statute. See United States
v. Hark, 320 U.S. 531 (1944); United States v. Uni Oil, Inc.,
710 F.2d 1078, 1086 (5th Cir. 1983); City & County of Denver v.
Bergland, 695 F.2d 465, 480 (10th Cir. 1982); United States v.
Resnick, 455 F.2d 1127, 1134 (5th Cir. 1972); United States v.
Masciandaro, 648 F.Supp.2d 779, 784 (E.D. Va. 2009). The statute hasn't
been changed.
Mr. Simon argues that the government is mistaken because
none of these cases (or the several others the government cites) involved
expressly retroactive regulations. Mr. Simon's description of the cited cases
is accurate, but the court disagrees with Mr. Simon as to where that distinction
leads. To agree with Mr. Simon that a regulation's self-declaration of
retroactivity requires a different outcome would be to hold that an agency
acquires the power to forgive crimes already committed by simply declaring
its intent to exercise that power. The cited cases teach that even if an
agency's regulations becomes intertwined in a crime's definition, it is
Congress and not the agency that creates the crime, and only Congress can
forgive the crime. See also United States v. U.S. Coin and Currency [ 71-1 ustc¶15,979],
401 U.S. 715, 737-38 (1971); Allen v. Grand Central Aircraft Co.,
347 U.S. 535, 553-555 (1954); United States v. Curtiss-Wright Export
Corp., 299 U.S. 304, 332 (1936).
The court denies Mr. Simon's motion to dismiss counts 5
through 8 of the indictment.
VI
For all of these reasons, the court:
SO ORDERED.
|
|
|||
|
www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
No comments:
Post a Comment