Acock, Schlegel Architects, Inc. v. Commissioner., United States Tax Court - Memorandum Decision, T.C. Memo. 1991-633, Docket Nos. 15907-89, 5466-90., Filed December 19, 1991
Acock, Schlegel Architects, Inc. v. Commissioner.
United States Tax Court - Memorandum Decision
T.C. Memo. 1991-633
Docket Nos. 15907-89, 5466-90.
Filed December 19, 1991.
Harvey Dunn, 41 S. High St., Columbus, Ohio, for the petitioner. Terry W. Vincent, for the respondent.
HAMBLEN, Judge: This matter is before the Court on the following motions, each of which was filed in each of these unconsolidated cases: (1) Respondent's motions, pursuant to Rule 50(a), 1 for a stay of proceedings; (2) respondent's motions, pursuant to Rule 103(a), for a protective order suspending further discovery; and (3) petitioner's motions, pursuant to Rules 72(b) and 104(b), to compel respondent's production of certain documents and things.
1 Unless otherwise indicated, Rule references are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code of 1954 as amended and in effect for the years in issue.
Petitioner is an Ohio architectural corporation, Acock, Schlegel Architects, Inc., whose principal office was in Columbus, Ohio, at the time the petitions were filed in each of these cases.
Specifically, the issues that the parties seek to have adjudicated are: (1) Whether we should grant respondent's motion for a stay of proceeding in petitioner's two tax deficiency cases until the disposition of the criminal investigation and possible indictment of two people related to petitioner corporation ≈ its secretary-treasurer, Wayne L. Schlegel, and its former accountant, David L. Thomas ≈ have concluded; (2) whether we should grant respondent's motion for a protective order suspending further discovery because of the effect it could have on the criminal proceedings involving Mr. Schlegel and Mr. Thomas; and (3) whether we should grant petitioner's motion to compel respondent's production of certain documents and things.
We assume the following facts based on the parties' pleadings, motions, and the memoranda and documents submitted in support of these motions.
Petitioner filed corporate tax returns for 1984, 1985, and 1986. By separate statutory notices of deficiency, dated April 3, 1989, and December 27, 1989, respondent determined deficiencies in, and additions to, petitioner's 1984, 1985, and 1986 tax returns as follows:
* 50% of the interest due on $57,891
** 50% of the interest due on $20,285
*** 50% of the interest due on $54,262
Petitioner timely filed petitions seeking a redetermination of the above tax deficiencies and additions to tax. In his answer, filed August 24, 1989, respondent conceded the additions to tax for fraud under section 6653(b)(1) and (2) for the taxable year 1985 and alleged that petitioner is liable for additions to tax pursuant to section 6653(a)(1) and (2) for negligence or intentional disregard of the rules and regulations.
George W. Acock is president of petitioner corporation and owns 56 percent of its shares. Wayne L. Schlegel is secretary-treasurer of petitioner corporation and owns 44 percent of its shares. Mr. Thomas is principal of a small accounting firm, David L. Thomas, C.P.A., Inc., based in Delaware, Ohio. Mr. Thomas' accounting firm was instrumental in preparing petitioner's 1984, 1985, and 1986 Federal corporate tax returns. In addition, his firm prepared petitioner's State and local tax returns, compiled petitioner's monthly and annual financial statements, and gave petitioner tax advice.
In February 1987, respondent began an examination of petitioner's 1984, 1985, and 1986 corporate tax returns. Mr. Thomas' accounting firm provided documents and other information to the internal revenue agents. During the field examination, the examining agent referred petitioner's cases to the Criminal Investigation Division (hereinafter CID), a specialized branch of the Internal Revenue Service, whose function is to investigate possible criminal violations of the Internal Revenue Code. Shortly thereafter, Mr. Thomas sent petitioner a letter, dated April 3, 1987, terminating his accounting firm's representation of petitioner.
In September 1989, Mr. Thomas voluntarily gave a special agent of the CID an affidavit concerning petitioner's corporate records and tax returns. Mr. Thomas executed the affidavit upon the advice of his attorney. Shortly after Mr. Thomas executed the affidavit, the CID informed him that he was a target of their criminal investigation. Although petitioner corporation was never made a target of the CID investigation, petitioner corporation's president, Mr. Acock, and its secretary-treasurer, Mr. Schlegel, were named as targets. Mr. Acock, however, has been dropped as a target.
On July 2, 1990, pursuant to Rule 74(a), petitioner and respondent filed a joint stipulation to take a deposition of Mr. Thomas as a nonparty witness on July 24, 1990, in Columbus, Ohio. The parties agreed in the stipulation that Mr. Thomas was to bring the following documents with him to assist in giving his testimony at the deposition:
All correspondence, memoranda, research, documents, records, notes, books of original entry or copies thereof, workpapers, and written statements given to the Internal Revenue Service relating to the preparation and filing of the 1984, 1985 and 1986 federal income tax returns of Acock, Schlegel Architects, Inc. and any investigation conducted by the Internal Revenue Service which involves such returns.
During the first week of July 1990, petitioner served two subpoenae duces tecum 2 on Mr. Thomas at his business office in Delaware, Ohio, demanding his personal appearance at the deposition and his production of the documents and memoranda named in the stipulation.
2 Each one of the subpoenae relates to one of petitioner's two cases which have respective docket Nos. 15907-89 and 5466-90.
Mr. Thomas filed a motion to quash petitioner's subpoenae on July 24, 1990, in docket No. 5466-90 and on July 27, 1990, in docket No. 15907-89. In a letter, dated July 25, 1990, Mr. Thomas' counsel indicated to petitioner's counsel that, notwithstanding Mr. Thomas' motion to quash the subpoenae, he would voluntarily provide certain records and testimony at a deposition but preserve his Fifth Amendment right not to incriminate himself. However, when Mr. Thomas failed to further cooperate or to comply with the subpoenae, petitioner filed a motion to compel compliance with the subpoenae served on Mr. Thomas.
On January 4, 1991, petitioner's counsel asked respondent's counsel to disclose the affidavit that Mr. Thomas had executed for the CID in September 1989. On January 8, 1991, petitioner received a letter from respondent's counsel indicating that respondent would not disclose to petitioner the affidavit without a protective order restricting petitioner's use of it. On January 9, 1991, Mr. Thomas gave petitioner the records and documents covered by petitioner's subpoenae except for the affidavit which he had given to the CID.
On January 25, 1991, Mr. Thomas was deposed by petitioner's counsel in the presence of respondent's counsel. During the deposition, Mr. Thomas was questioned about the general scope of the accounting services he had provided to petitioner, his specific role in preparing petitioner's tax returns, and the nature of the affidavit that he had given to the CID. Mr. Thomas refused to answer numerous questions alleging that he had a right not to incriminate himself under the Fifth Amendment to the Constitution. 3
3 The transcript of Mr. Thomas' deposition consists of 148 pages of questions and testimony. Although respondent's counsel was present at the deposition, we note that his questioning of Mr. Thomas comprised only six or seven of the 148 pages. The rest of the questioning was done by petitioner's counsel.
On January 30, 1991, a hearing was held in Washington, D.C., on petitioner's motion to compel compliance with the subpoenae and Mr. Thomas' motion to quash. Mr. Thomas advanced three arguments at the hearing: (1) Mr. Thomas' right not to incriminate himself under the Fifth Amendment protects him from having to give petitioner the affidavit because if the information in the affidavit was disclosed to Mr. Schlegel, who is also a CID target, Mr. Schlegel's resulting criminal defense could further incriminate Mr. Thomas; (2) the Court should properly grant Mr. Thomas, a nonparty witness, a stay in petitioner's cases until any criminal proceedings against Mr. Thomas and Mr. Schlegel are concluded; and (3) the Court should grant a protective order stating that the affidavit should be permitted to be viewed by petitioner's counsel, but not by Mr. Schlegel or Mr. Schlegel's criminal defense attorney.
On July 8, 1991, respondent sent the U.S. Department of Justice its recommendation that Mr. Thomas and Mr. Schlegel be prosecuted for alleged criminal violations of the internal revenue laws. Neither Mr. Thomas nor Mr. Schlegel has been indicted for any action relative to these cases to date.
On July 25, 1991, petitioner served respondent its "First Request for Production of Documents" in which it asked respondent to allow it to "inspect, copy, translate or transcribe" items that "relate to, discuss, mention or in any manner contain any information" about certain adjustments set forth in the deficiency notices and that were "obtained or received by any employee of the Internal Revenue Service." Specifically, petitioner requested "all notes (whether handwritten, typed or otherwise) prepared by any [I.R.S.] employee, * * * affidavits of any person, statements of any person, tape recordings and their transcription thereof, testimony, and any other writing prepared by or delivered to any [I.R.S.] employee." The relevant adjustments, referred to by petitioner, were stated at the end of the request as follows:
ADJUSTMENTS * * * TO WHICH REQUEST FOR PRODUCTION RELATES
Adjustment "i.≈ Other Deductions"
The negligence penalties under Section 6653, Internal Revenue Code of 1954, as amended.
Adjustment "e.≈Interest Expense"
Adjustment "h.≈Advertising Expense"
The negligence penalties under Section 6653, Internal Revenue Code of 1954, as amended.
On August 9, 1991, respondent filed a motion in each of petitioner's tax deficiency cases to stay all proceedings "until the conclusion of criminal proceedings" involving Mr. Thomas and Mr. Schlegel. Respondent also filed motions for a protective order suspending petitioner's further discovery of information relative to the "criminal proceedings." On August 21, 1991, petitioner filed a motion in each of these cases to compel the production of documents that were described in its "First Request For Production of Documents."
In our opinion in these cases, issued on September 18, 1991, we held that (1) Mr. Thomas had waived any claim to the Fifth Amendment privilege that he may have possessed when he voluntarily executed the affidavit for the IRS, (2) there was no further danger of incriminating Mr. Thomas by allowing petitioner to disclose the affidavit's contents, and (3) Mr. Thomas, as a nonparty, had no standing to request a stay of proceeding in petitioner's cases. Accordingly, we denied Mr. Thomas' motion to quash petitioner's subpoenae and granted petitioner's motion to compel compliance with the subpoenae. However, in our opinion we stated that we would withhold directives with respect to that compliance until we had disposed of pending motions filed by the parties in these cases. 97 T.C. 352 (1991).
In the motion presently before us requesting a stay of proceedings, respondent alleges that the criminal investigation of Mr. Schlegel and Mr. Thomas focused primarily on a "deliberately concocted scheme" between them to conceal from the Internal Revenue Service a series of payments made by petitioner corporation for the construction of a room addition to the residence of Mr. Schlegel. Mr. Schlegel is an officer, director, and shareholder of petitioner. According to respondent, Mr. Thomas, as petitioner's accountant, knowingly deducted the alleged personal expenses on petitioner's 1985 and 1986 corporate income tax returns as ordinary and necessary advertising expenses of the business under section 162(a), rather than properly characterizing them as constructive corporate dividends. Petitioner's claimed deduction of these expenses is also the reason respondent determined the additions to tax for negligence or intentional disregard of the rules or regulations under section 6653(a) in petitioner's cases.
Respondent bases his motion for a stay of proceedings on the ground that Mr. Thomas' testimony in these cases will be inhibited by his Fifth Amendment right not to incriminate himself and on the risk that the Tax Court's more liberal discovery procedures will impair the possible prosecution of Mr. Schlegel and Mr. Thomas by giving them an opportunity to concoct defenses to the threatened criminal charges. Respondent contends that Mr. Thomas' candid and forthright testimony, in particular, is necessary in order to provide the Court with a complete factual basis for making a determination of petitioner's liability for the additions to tax for negligence.
Respondent further argues that a protective order suspending petitioner's discovery of items related to the criminal "proceedings" is necessary to prevent petitioner from unfairly using the Tax Court's liberal discovery process to learn the details of the proposed criminal prosecution of Mr. Schlegel and Mr. Thomas. Respondent also contends that his requested protective order is warranted because he has already "provided petitioner with virtually every document in the administrative file involving the issues in the notice of deficiency", and, consequently, petitioner has all the information it needs to adequately prepare its cases for trial or settlement.
Petitioner, on the other hand, objects to respondent's motions for a stay of proceedings and for a protective order and contends that respondent filed those motions as a means to avoid giving petitioner the documents and other items named on its formal request for the production of documents. Petitioner argues that respondent's motions are merely an attempt to further obstruct and delay the preparation and trial of these civil cases so that the Government can gain a tactical advantage in the potential prosecution of two individuals who have not, despite the lengthy investigation of them, been indicted for anything so far. In light of these circumstances, petitioner asks us to deny both of respondent's motions and to grant its motion to compel respondent's production of documents.
We must first decide whether to grant respondent's motions to stay the proceedings in petitioner's tax deficiency cases until the criminal investigation and possible criminal prosecutions of Mr. Schlegel and Mr. Thomas have concluded.
We agree with respondent's premise that the broad scope of discovery available in the Tax Court runs counter to the more limited discovery rules applicable in criminal cases. 4 Compare Rules 70(b)(1) and 70(c), Tax Court Rules of Practice and Procedure, with Rule 26.2 of the Federal Rules of Criminal Procedure. Nevertheless, we are not persuaded that this difference should compel us to stay petitioner's tax deficiency cases. Nor do we believe that the risk that Mr. Thomas' possible testimony will be inhibited warrants a stay of proceedings in these cases.
4 By way of example, Rule 26.2 of the Federal Rules of Criminal Procedure, requires that statements of witnesses be turned over to the defendants only after the witness has testified in court. Compare Rule 70(c), Tax Court Rules of Practice and Procedure, which provides that "Upon request to the other party and without any showing except the assertion in writing that the requestor lacks and has no convenient means of obtaining a copy of a statement made by the requestor, a party shall be entitled to obtain a copy of any such statement which has a bearing on the subject matter of the case and is in the possession or control of another party to the case."
As a preliminary matter, until such time as Mr. Thomas or Mr. Schlegel would be required to appear at trial and refuse to testify on the basis of their Constitutional privilege against self-incrimination, respondent's position is premature and amounts to speculation as to what either of them will or will not do. In addition, if either party calls Mr. Thomas as a witness in these cases and he is unable or unwilling to testify, the party desiring to use Mr. Thomas' testimony may consider the introduction of his deposition under Rule 81.
More importantly, in cases analogous to petitioner's, we have long subscribed to the general principle that the "Tax Court must confine itself to its own problems." Commissioner v. Licavoli [58-1 USTC ╤ 9281], 252 F.2d 268, 273 (6th Cir. 1958), affg. a Memorandum Opinion of this Court [Dec. 21,887(M)]. 5 We applied this principle in Singleton v. Commissioner [Dec. 33,720], 65 T.C. 1123 (1976), affd. [79-2 USTC ╤ 9619] 606 F.2d 50 (3d Cir. 1979) where we were faced with the question of whether the discovery proceedings in the Tax Court should be suspended pending final disposition of an indictment for income tax evasion brought against the taxpayer. The taxpayer in Singleton had been physically searched at an airport just before he was to depart on a flight leaving the United States. During the search, customs officials discovered that the taxpayer was carrying $20,000 cash in his pockets. The search prompted an investigation of the taxpayer's income tax returns which ultimately led to the taxpayer's tax deficiency case in the Tax Court.
5 We observe that venue on an appeal of these cases will lie with the U.S. Court of Appeals for the Sixth Circuit. Therefore, to the extent that it is applicable to the issues before us, we are bound by the law of the Sixth Circuit. Golsen v. Commissioner [Dec. 30,049], 54 T.C. 742, 756-757 (1970), affd. [71-2 USTC ╤ 9497] 445 F.2d 985 (10th Cir. 1971).
After the taxpayer's tax deficiency case had been set for trial and an evidentiary hearing had been scheduled as to whether the airport search had violated his Constitutional rights under the Fourth and Fifth Amendments, the taxpayer was indicted for income tax evasion for 1 of the 4 years at issue in the Tax Court. A jeopardy assessment was made against the taxpayer and payments arising from levies and seizures of his property were made to the Government.
After all of these events, the Commissioner then moved for a protective order under Rule 103(a) to suspend all further proceedings pending the final disposition of the criminal indictment. We denied the Commissioner's motion and held that further proceedings in the civil Tax Court case would not be suspended. In our opinion, there was no evidence of the extent to which the Commissioner, in issuing the deficiency notice, had actually relied on the primary evidence of the criminal case which was thought to be illegally obtained. Furthermore, it had not been formally established whether any evidence was illegally obtained. "To hold petitioner's case in abeyance pending the outcome of a case which is of uncertain application while petitioner's assets are in the Government's control under a jeopardy assessment appears inappropriate after [the Commissioner had] actively [pursued] discovery." Singleton v. Commissioner [Dec. 33,720], 65 T.C. at 1135.
Our denial in Singleton of the Commissioner's motion for a protective order suspending all Tax Court proceedings was based not only on the uncertain relevance of the pending criminal proceeding, but also on the length of time that the Government had allowed to pass before returning a criminal indictment against the taxpayer. As we stated in our opinion, if a criminal prosecution is to be instituted, "it should be done promptly to proceed ahead of the civil case. The Commissioner has been well aware of these procedural problems since 1958." Singleton v. Commissioner [Dec. 33,720], 65 T.C. at 1137 (citing Commissioner v. Licavoli, supra ).
In Singleton, the taxpayer was not indicted until 16 months after the Commissioner made the jeopardy assessment against him. Since, by that time, the parties were "well down the road" in the Tax Court proceeding, we denied the Commissioner's motion for a protective order which would have suspended further discovery proceedings pending a final disposition of the criminal indictment.
We find a more compelling factual basis in the instant cases than in Singleton for denying respondent's motions for a stay of proceedings and for a protective order. First, unlike the situation in both Singleton and Licavoli, there is no "criminal proceeding" currently pending; to date, neither Mr. Thomas nor Mr. Schlegel has been indicted for the willful evasion of income taxes or any other crimes relative to these cases.
There is a second and more striking difference between petitioner's cases and other cases, like Singleton and Licavoli, in which the court has entertained motions for a protective order or for a stay of proceeding. The "taxpayer" in the instant cases ≈ petitioner corporation herein ≈ is not the same entity or person against whom criminal charges are pending. Petitioner corporation was never named as a target of the criminal investigation in these cases. Respondent has clearly indicated that petitioner will not be one of the defendants if, at some future date, there are indictments. Rather, one of petitioner's officers, Mr. Schlegel, and petitioner's former accountant, Mr. Thomas, are likely to be the only defendants if a criminal action involving petitioner's tax returns ever occurs.
Finally, in Singleton we found it significant that the taxpayer was not indicted until 16 months after the Commissioner had made his jeopardy assessment which began the Tax Court proceeding. We note that in the instant cases, approximately 30 months has passed since respondent issued the deficiency notice in docket No. 15907-89. Approximately 20 months has passed since respondent issued the deficiency notice in docket No. 5466-90. According to respondent's motion, these cases were first referred to the CID on June 24, 1988. Despite the time that has passed, no indictments have been returned. In light of these circumstances, we find that the parties have progressed too far "down the road" in these civil proceedings to turn back now. Accordingly, we deny respondent's motions for a stay of proceedings and for a protective order. We have considered respondent's other arguments and find them unpersuasive.
We must next decide whether to grant petitioner's motion to compel the documents listed in its "First Request For Production of Documents," which was served on respondent on July 25, 1991. Respondent objects to petitioner's motion, arguing that it is overly broad and that he has already provided petitioner with copies of everything in the "administrative file." Given the broad scope of this Court's discovery rules, we do not agree that petitioner's motion is overly broad. Rather, the last paragraph of petitioner's motion entitled "Adjustments * * * To Which Request For Production Relates" adequately narrows petitioner's request so as to comply with Rule 72(b). See also Rule 70(b). We grant petitioner's motion to compel respondent's production of the documents and other items that were listed in petitioner's first formal request to the extent those items relate to the issues raised by respondent in the notices of deficiency. If petitioner and respondent dispute the relevance of certain items to the issues in these cases, the Court will entertain further motions seeking our review of these items in camera so as to determine whether they should be subject to petitioner's discovery.
To reflect the foregoing,
An appropriate order will be issued.