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February 18, 1982

Lester BARRY, Jr.

The opinion of the court was delivered by: LUONGO


On or before November 20, 1981, Reuben H. Saideman, Acting District Director of Internal Revenue for Philadelphia, made a termination assessment of federal income tax liability against plaintiff, Lester Barry, Jr., pursuant to 26 U.S.C. § 6851(a)(1). *fn1" Plaintiff has exhausted his administrative remedies and now brings this civil action pursuant to 26 U.S.C. § 7429 seeking judicial review and abatement of the termination assessment.

 As gleaned from the pleadings, affidavits, exhibits and testimony submitted by the parties, the relevant facts are as follows. Barry lives with his wife and children at 7701 Queen Street, Wyndmoor, Pennsylvania. (See Government Exhibit 9.) On November 13, 1981, Trooper Walter C. Gibbon of the Pennsylvania State Police, having information that Barry was engaged in illegal gambling operations, secured a search warrant for the Barry home and two vehicles which allegedly belong to Barry. (Government Exhibit 1.) The search was executed the following day by officers of the Pennsylvania State Police. The police inventory form, (Government Exhibit 3), discloses that the police found and seized, inter alia, significant amounts of gambling paraphernalia, $ 1,171 in cash, and a quantity of precious metals valued at $ 76,000 by the State Police. (See Schmidt affidavit P 7.) As a result of this search plaintiff was charged with operating an illegal lottery in violation of Pa.Cons.Stat.Ann. tit. 18 § 5512 and engaging in pool selling and bookmaking in violation of Pa.Cons.Stat.Ann. tit. 18 § 5514.

 Sometime after the search occurred the Pennsylvania State Police notified Internal Revenue Service Special Agent John P. Cooper of the fruits of the search and furnished to him copies of the gambling records which the State Police had seized. (Cooper Affidavit P 4.) Cooper, who has been employed by IRS as a special agent for twelve and one-half years, and who has conducted gambling investigations for IRS in the past, concluded, after analysis of the records, that Barry was a banker in an illegal gambling operation from a period beginning in 1979. As explained in Cooper's affidavit, which was not contradicted in any manner, a banker "is the person who controls the illegal wagering operation. He makes all pay-outs, pays commissions owed to numbers writers, and is literally the owner-operator of the business." (Cooper Affidavit P 5.)

 Revenue Agent Harry J. Schmidt was assigned the task of conducting an examination to determine whether the circumstances surrounding Barry's tax liability for 1981 warranted a termination assessment. Schmidt was given all of the information regarding the search of Barry's home, including the inventory of property seized. (See Schmidt Affidavit PP 3-9.) He had discussions with officers of the Pennsylvania State Police regarding the records and the circumstances of the search. Schmidt, with Cooper's aid, analyzed the gambling records (Government Exhibits 4-6) seized from Barry's home and concluded that Barry's net income from gambling for 1979 was $ 21,909. He also calculated that Barry's net profit from gambling in 1980 was $ 172,809, and $ 167,004 in 1981. (Schmidt Affidavit P 15; Government Exhibit 7.) *fn2" Schmidt reviewed computer summaries of Barry's 1980 tax return which showed an adjusted gross income of $ 22,640, none of which was attributed to gambling activities. (Government Exhibit 9.) Schmidt further determined that, although Barry had earned $ 167,004 from gambling in 1981, Barry had not filed an estimated tax return. From his analysis of the records, Schmidt concluded that Barry's tax liability for January 1, 1981 to November 14, 1981 was $ 101,082.34. In addition to determining Barry's income attributable to gambling and Barry's prior tax status, Schmidt had an agent check the records located at Montgomery County courthouse to determine whether there was any property in Barry's name. This check failed to disclose any assets owned by Barry and further disclosed that the Barry residence is held by Barry's wife in an irrevocable trust for their children. Schmidt also checked motor vehicle registration records at the Pennsylvania Department of Transportation. Initially, this search failed to disclose that any vehicles were registered in Barry's name but, at some point thereafter, Schmidt learned that Barry owned a Cadillac.

 After reviewing all of the aforementioned material, Schmidt concluded that "the circumstances were such that they tended to prejudice or render wholly or partially ineffectual normal proceedings to collect the outstanding income tax due and thereby warranted a termination assessment." (Schmidt Affidavit P 23.)

 On November 20, 1981, Acting District Director Reuben H. Saideman, pursuant to 26 U.S.C. § 6851, notified Barry by mail:


(Y)ou appear by the nature of your wagering activities, to be designing quickly to place your property beyond the reach of the Government, either by transferring or dissipating it, thereby tending to prejudice or render ineffectual collection of income tax for the current taxable year. Accordingly, the income tax, as set forth below, is due and payable immediately.

  Taxable Year Tax January 1, 1981 to November 14, 1981 $ 101,082.34


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