decided as amended september 11 1979: August 20, 1979.
APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Crim. Nos. 78-71-1-2-3)
Before Aldisert, Gibbons and Van Dusen, Circuit Judges.
The defendants, Peter J. Serubo, Donald H. Brown and W. Thomas Plachter, Jr., appeal from judgments of sentence following their pleas of guilty to criminal violations of the internal revenue laws. Those guilty pleas were, as authorized by United States v. Zudick, 523 F.2d 848, 851-52 (3d Cir. 1975), and United States v. Moskow, 588 F.2d 882, 886 (3d Cir. 1978), conditioned upon their retention of the right to appeal from the trial court's denial of several pre-trial motions, and the government does not contest appellate jurisdiction under 28 U.S.C. § 1291. The pretrial rulings challenged on appeal dealt with motions addressed to alleged abuses of the Internal Revenue Service's (IRS) civil subpoena power, claimed prosecutorial misconduct before the grand jury, a change of venue because of prejudicial pretrial publicity, and severance of personal and corporate income tax charges. We conclude that a remand for further proceedings is required.
I. FACTS AND PROCEEDINGS BELOW
Summarized, the indictment, which was returned on March 13, 1978, deals with the tax liability, for the years 1971 through 1973, of the Plachter-Serubo Cadillac Company, an incorporated automobile dealership (the Corporation) and the individual tax liability, for the same years, of two of its controlling stockholders. It charges that Plachter and Serubo, the Corporation's officers and controlling stockholders, and Brown, employed by the Corporation as Comptroller, conspired to cause personal expenditures to be made on behalf of Plachter and Serubo, while deducting those expenditures, falsely labeled business expenditures, on the corporate tax returns. Serubo and Plachter are also charged with failing to report the expenditures as income to them on their personal income tax returns.
B. Pre-Sentence Proceedings
Following the return of the indictment the defendants, with the aid of materials obtained in discovery permitted by the trial court, moved to dismiss the indictments, or suppress evidence, charging (1) that the IRS had used its civil summons power in bad faith to conduct a criminal investigation; and (2) that the prosecutor had abused the grand jury procedure. They also moved for a severance on the ground that the indictment joined unrelated offenses in violation of Fed.R.Crim.P. 8(b). Plachter and Serubo moved for a change of venue because of prejudicial pretrial publicity. Finally, Plachter moved for additional discovery bearing upon the IRS summons issue. The trial court denied these motions in three pretrial opinions. United States v. Serubo, 460 F. Supp. 689 (E.D.Pa.1978).
On September 5, 1978, the day the trial was to commence, the defendants, by this time in possession of transcripts of grand jury proceedings furnished pursuant to a Brady request, moved for reconsideration of the motion to dismiss the indictment because of prosecutorial misconduct. Although the court found prosecutorial conduct which was "generally improper, reprehensible and unacceptable," the motion for reconsideration was denied. Plachter and Brown then entered a Zudick plea. Serubo went to trial, but before the case went to the jury he also entered a Zudick plea. Thereafter the defendants made post-trial motions for reconsideration of the pretrial denial of the motion for additional discovery on the IRS summons issue and a new motion for further discovery on the abuse of the grand jury procedure. Both the motion for reconsideration and the new motion were denied, and judgments of sentence entered. This appeal followed.
A. The Pre-indictment Investigation
Although the defendants contend that they need additional discovery in order fully to present their case respecting the alleged abuse of the IRS civil subpoena power, many of the facts respecting the pre-indictment investigation were developed in an evidentiary hearing and found by the trial court. That investigation can, for purposes of this appeal, be divided into two phases: (1) April 1974 to April 23, 1975; and (2) April 23, 1975 to January 22, 1976, the date when the last IRS summons was issued.
In April of 1974 Special Agent Richard T. Gilbert, assigned to the narcotics group of the Intelligence Division of the IRS in Philadelphia, received from the Federal Drug Enforcement Administration (DEA) and the Organized Crime Unit of the Philadelphia Police Department information suggesting that Serubo was involved in loansharking and in financing of narcotics transactions, and was linked with organized crime. About the same time Gilbert received from an unnamed confidential informant of the Federal Bureau of Investigation (FBI) similar allegations about Serubo. After evaluating the information, and without communicating with the United States Attorney, Gilbert sought authorization from the IRS National Office to conduct a joint civil and criminal investigation of Serubo, to determine if the allegations of loansharking and narcotics trafficking were true, and if so, whether the proceeds of these activities had been reported to the government for tax purposes. An IRS internal committee in Washington, D.C., concerned with expediting the investigation of income tax liability of narcotics traffickers, considered Gilbert's request, and on June 6, 1974, authorized a joint civil-criminal investigation of Serubo.
Revenue Agent Louis Berkowitz and Special Agent Gilbert were assigned to the case on June 19, 1974. Berkowitz was replaced, in September 1974, by Revenue Agent Edward Marsh. At least in Phase I, the investigation was conducted by Gilbert and the two revenue agents as a joint civil-criminal investigation, with equal participation by the revenue agents and the special agent. Between June 19, 1974 and April 23, 1975, Gilbert, pursuant to 26 U.S.C. § 7602, issued twenty-two administrative subpoenas to various third parties seeking information bearing upon Serubo's tax liability. During that period Gilbert had not formed a commitment to recommend prosecution under the internal revenue laws, and did not transmit any of the evidence obtained by use of the subpoenas to the DEA, the FBI, the United States Attorney, or the Philadelphia Police Department. No evidence was introduced with respect to Phase I suggesting an abandonment of a civil purpose, or an unexplained delay, after a decision to recommend prosecution, used as a subterfuge for a continued investigation. Later, evidence obtained by use of IRS subpoenas issued during the first phase of the investigation was presented to the grand jury, and was intended to be used by the government at defendants' trial.
In November of 1974 Joel M. Friedman, an attorney in charge of the Philadelphia Office of the Organized Crime and Racketeering Section of the Justice Department (Philadelphia Strike Force) learned, during a review of Strike Force files, of a 1973 FBI report suggesting that the Plachter-Serubo Cadillac dealership had been infiltrated by organized crime. The Strike Force was then unaware of the IRS investigation. Friedman requested further investigation by the FBI and also asked the Department of Justice to seek disclosure from the IRS of any information it might have pertinent to the infiltration allegations. On April 3, 1975 the Philadelphia Office of the IRS was authorized to disclose to the Strike Force information concerning its Serubo income tax investigation. Disclosure of information to the Strike Force began on April 23, 1975 at a conference between Friedman, representatives of the FBI, and representatives of the IRS. Thereafter the investigations of Serubo by the Department of Justice and the Treasury Department were coordinated under the leadership of a Strike Force attorney. FBI agents and IRS agents conducted joint interviews of Brown. IRS Special Agent Gilbert, in June of 1975, suggested the issuance of a grand jury subpoena to Brown for the contents of his briefcase, which was issued on June 9, 1975 and served by Gilbert. Shortly thereafter the district court granted the government's motion, pursuant to Fed.R.Crim.P. 6(e), for disclosure of grand jury matters to IRS personnel, who were assisting in the grand jury investigation. Between June 10, 1975, and January 22, 1976, Special Agent Gilbert and Special Agent Donald Watkins, who succeeded Gilbert in the Serubo investigation in July, 1975, issued thirteen administrative subpoenas to third parties. In October, 1975 Plachter became a target of the government's investigation, and in September, 1976, so did Brown. Although from April 23, 1975, the IRS Agents were participating in a Strike Force investigation, and from June 9, 1975, in a grand jury investigation, Agent Watkins did not recommend criminal prosecution until January 27, 1977, and the Regional Counsel of the IRS did not submit a formal recommendation of prosecution to the Department of Justice until November 9, 1977. Agent Watkins testified that none of the evidence obtained through the use of the thirteen administrative subpoenas used during the second phase was presented to the grand jury or would be used directly or indirectly to obtain evidence intended for use at trial.
B. The District Court's Decision
Reviewing this record in light of the standards announced in United States v. LaSalle National Bank, 437 U.S. 298, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978), the district court concluded that the defendants had failed to make even a colorable showing that the twenty-two subpoenas issued during Phase I of the investigation were issued in "bad faith." He therefore denied both the defendants' motions for further discovery regarding the first phase of the investigation, and their motion to suppress the evidence gathered in that phase. United States v. Serubo, 460 F. Supp. at 698-99. Regarding the thirteen subpoenas issued during Phase II, the court stated that it would be "inclined to hold that the summonses dated after April 25, 1975, were issued in bad faith and therefore to suppress the evidence derived from them." Id. at 699. It found it unnecessary to do so, however, because it credited Agent Watkins' testimony that none of the evidence obtained as a result of the Phase II subpoenas was presented to the grand jury or was scheduled for presentation at trial. The court also denied the defendants' request to dismiss the indictment on the basis of abuse of the summons procedure.
1. Standards Governing Use of Internal Revenue Service Subpoenas.
In United States v. Genser, 582 F.2d 292 (3d Cir. 1978) (Genser I ), relying upon statements to that effect in Donaldson v. United States, 400 U.S. 517, 531, 91 S. Ct. 534, 27 L. Ed. 2d 580 (1971), and United States v. Friedman, 532 F.2d 928, 931 (3d Cir. 1976), we held that a defendant in a criminal case could assert that evidence obtained pursuant to 26 U.S.C. § 7602 solely for a criminal rather than a civil investigative purpose was illegally obtained and should be suppressed. In this case we apply the standards for determining IRS compliance with section 7602 announced by the Supreme Court in United States v. LaSalle National Bank, 437 U.S. 298, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978), as elaborated in the context of a suppression motion by an indicted defendant in United States v. Genser, 595 F.2d 146 (3d Cir. 1979) (Genser II ).
LaSalle National Bank, establishes two important limitations upon the validity of an IRS civil summons. First, the summons must be issued before the IRS recommends to the Justice Department that a criminal prosecution be undertaken. Second, prior to that date, the IRS "at all times must use the summons authority in good-faith pursuit of the congressionally authorized purposes of § 7602." 437 U.S. at 318, 98 S. Ct. at 2368. "(B)ad faith" abuse of the powers granted by section 7602 occurs when "the Service . . . abandon(s) in an institutional sense . . . the pursuit of civil tax determination or collection." Id. Because the goals of determining liability for civil fraud penalties and determining the existence of a basis for criminal prosecution are "normally inseparable," Id. at 314, 98 S. Ct. 2357, the party opposing the summons bears the "heavy" burden of disproving the "existence of a valid civil tax determination or collection purpose" on the part of the IRS. Id. at 316, 98 S. Ct. at 2367. The IRS "rarely will be found to have acted in bad faith" for pursuing solely criminal matters. Id.
The LaSalle Court specified two instances where bad faith might be shown. The Court refused to "countenance delay in submitting a recommendation to the Justice Department when there is an institutional commitment to make the referral and the Service merely would like to gather additional evidence for the prosecution," since "such a delay would be tantamount to the use of the summons authority after the recommendation . . . ." Id. at 316-17, 98 S. Ct. at 2368. Bad faith is also shown when the IRS becomes "an information-gathering agency for other departments, including the Department of Justice." Id. at 317, 98 S. Ct. at 2367, 2368.
Genser II places a further gloss on the LaSalle standards. There we held that the test of the validity of an IRS summons was not the existence of "a general civil purpose" for the investigation, but rather the purpose of the individual summons at issue. "If any one . . . (summons) . . . were issued solely for a criminal purpose, the fruits of that summons would have to be suppressed, even in the face of an overwhelmingly civil purpose of the investigation as a whole." 595 F.2d at 150. This standard, however, does not require "a district court to examine every summons issued in every investigation." Id. at 151. Since LaSalle requires institutional abandonment of a civil collection purpose, and since, under LaSalle, the intent of a single agent cannot be imputed to the institution as a whole, we reasoned that summonses issued by an investigating agent before that agent recommended prosecution would be presumptively valid. But that presumption could be overcome by a showing that the agent had "issued summonses at the request of the United States Attorney or delayed his recommendation at the request of his superiors solely to further a criminal investigation." Id.
In Genser II, we placed the burden upon the defendant to overcome the presumption of validity attaching to prerecommendation subpoenas. At the same time, we recognized that the evidence needed to meet that burden was in the hands of the government. To give meaning to the ...