I. An evidentiary hearing was held (Pickel Hearing II).
The evidence at Pickel Hearing II established that Gardner Steel was initially selected on a random basis for an audit under the IRS's Taxpayer Compliance Measurement Program (TCMP). A TCMP audit is a line-by-line examination of a taxpayer's return. When it became necessary during the course of the examination to make adjustments to Gardner Steel's tax returns, the IRS expanded its TCMP audit to three related taxpayers whose returns would be impacted, H. Wolf Iron & Metal, Bruce Pickel and Laren Pickel.
The TCMP audit revealed that pension plan payments due Gardner Steel had not been timely made, that Gardner Steel had claimed improper deductions and that Bruce Pickel had used pension plan funds for his personal benefit. These irregularities were reported to the IRS Employee Plans Division and the Criminal Investigation Division for further investigation.
IRS Special Agent Samuel Ruggerio was assigned to investigate suspected criminal activity associated with the Pickels' federal tax liability. During the course of his investigation, IRS Agent Ruggiero contacted FBI Agent Peter McCann to obtain the location of a potential source with information concerning Bruce Pickel's gambling activities. Thereafter, the evidence shows, IRS Agent Ruggerio and FBI Agent McCann, made several contacts between November 10, 1982 and May 20, 1983. During their discourse, IRS Agent Ruggerio made minor disclosures of information regarding his investigation of the Pickels to FBI Agent McCann. On November 29, 1983, the FBI discontinued its investigation of the Pickels, since the IRS was doing so.
II. COLLATERAL ESTOPPEL.
The taxpayers have moved for summary judgment on the ground that the doctrine of collateral estoppel bars enforcement of the summonses against Gardner Steel and H. Wolf Iron & Metal. Like res judicata, the doctrine of collateral estoppel precludes litigants from relitigating matters that they have had a full and fair opportunity to previously litigate. A "right, question or fact distinctly put in issue and directly determined by a Court of competent jurisdiction . . . cannot be disputed in a subsequent suit between the same parties or their privies. . . ." Southern Pacific Railroad Co. v. United States, 168 U.S. 1, 48-49, 42 L. Ed. 355, 18 S. Ct. 18 (1897).
The doctrine of collateral estoppel bars a party to a subsequent litigation from raising an issue that was actually and necessarily determined by a court of competent jurisdiction in a prior suit based on a different cause of action involving that party. Montana v. United States, 440 US. 147, 153, 99 S. Ct. 970, 59 L. Ed. 2d 210 (1979). Before a party can be collaterally estopped from raising an issue, four elements must be present: "(1) the issue sought to be precluded must be the same as that involved in the prior action; (2) that issue must have been actually litigated; (3) it must have been determined by a valid and final judgment; and (4) the determination must have been essential to the prior judgment." See Haize v. Hanover Insurance Co., 536 F.2d 576, 579 (3d Cir. 1976) (footnote omitted).
The doctrine of collateral estoppel cannot be applied in this case because the ultimate issue of the government's good faith, which the taxpayers' seek to preclude by their motion for summary judgment, was not fully and fairly litigated and actually determined in the prior proceeding.
The concept of a "full and fair opportunity to litigate" is central to the application of the issue preclusion doctrine. Resolution of an issue in a prior judicial forum is given conclusive effect in a subsequent proceeding only if the precluded party was given a "full and fair opportunity to litigate" that issue in the prior proceeding. Montana, 440 U.S. at 153. The requirement that there must have been a full and fair opportunity to litigate an issue and that an issue have been actually litigated does not require that the issue must have been thoroughly litigated. The doctrine applies despite an imbalance in the quantity of evidence introduced. See e.g., Continental Can Co., U.S.A. v. Marshall, 603 F.2d 590, 596 (7th Cir. 1979); James Talcott, Inc. v. Allahabad Bank, Ltd., 444 F.2d 451, 459-60 (5th Cir.), cert. denied, 404 U.S. 940, 92 S. Ct. 280, 30 L. Ed. 2d 253 (1971). It has been long established, however, that collateral estoppel does not apply to issues that might have been litigated and determined, but were not. See Cromwell v. County of Sac, 94 U.S. 351, 353, 24 L. Ed. 195 (1876); Stebbins v. Keystone Insurance Co., 156 U.S. App. D.C. 326, 481 F.2d 501, 506 (D.C. Cir. 1973).
In Pickel Hearing I, this Court granted the taxpayers' petition to quash the IRS's third party summonses, partly as a sanction for the government's violation of a sequestration order, and partly on a finding of bad faith. Notably, the petition was granted and the hearing was terminated during the taxpayers' case-in-chief. The taxpayers' called several witnesses to testify and introduced several exhibits which were admitted into evidence. The government, however, called no witnesses and introduced no exhibits.
Under these circumstances, the government did not have a full and fair opportunity to litigate the good faith issue in Pickel Hearing I. Unlike the Continental Can Company case, this is not a case involving an imbalance of evidence. 603 F.2d at 596. Nor is this a case where the issue was raised and a party failed in his proof and the issue was decided against him. In those circumstances, a party would be just as bound by collateral estoppel as though he had introduced a ton of testimony. See United States v. Silliman, 167 F.2d 607 (3d Cir. 1948). Here, however, the government did not fail in its proof. Nor was the ultimate issue decided on the merits against the government, because the trial was terminated prior to the government's production of any witnesses or any evidence.
On this record, the denial of the government's opportunity to fully and fairly litigate the issue of bad faith in Pickel Hearing I makes the imposition of collateral estoppel in Pickel Hearing II inappropriate and unjust under the circumstances. For these reasons, the taxpayers' motion for summary judgment is denied.
III. ENFORCEMENT OF IRS SUMMONSES.
An examination of the record in this case reveals that the summonses served upon Gardner Steel and H. Wolf Iron & Metal should be enforced.
The evidence at Pickel Hearing II established that general disclosures of the nature, scope and direction of the IRS investigation of the Pickels were made to an FBI agent. Disclosures of this nature are authorized under the Internal Revenue Code, 26 U.S.C. § 6103(K)(6). Moreover, interdepartmental disclosures by government agencies does not ipso facto invalidate an otherwise legitimate IRS investigation. Taxpayers resisting the enforcement of an IRS summons must disprove the existence of a valid tax investigation, not merely prove that the IRS exchanged information with another government agency. See United States v. Lasalle, 437 U.S. 298, 316, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978); United States v. Chemical Bank, 593 F.2d 451, 456 (2nd Cir. 1979).
On this record, there is no evidence of bad faith. The record does not establish that the IRS investigation was a mere subterfuge or that the FBI used the IRS investigation to ferret out information it could not have otherwise obtained. Nor is there evidence that the IRS was improperly using the FBI as an information gathering agency. Furthermore, the testimony did not establish that the IRS agents made disclosures of return information that are prohibited by law.
Finally, this Court is not persuaded by the taxpayers' argument that the IRS agents lacked the authority to issue summonses to Gardner Steel and H. Wolf Iron & Metal or that the summonses were otherwise defective. In sum, there is no evidence of irregularity in this case that would warrant invalidation of the summonses. An appropriate order follows.
AND NOW, to wit, this 13th day of June, 1984, after consideration of the pleadings, arguments and briefs in the above captioned case and for the reasons set forth in the accompanying Opinion, it is ORDERED, ADJUDGED and DECREED that the defendants' and intervenors' Motions for Summary Judgment be and the same are hereby DENIED;
AND it is further ORDERED, ADJUDGED and DECREED that the H. Wolfe Iron & Metal Company shall appear and obey the Internal Revenue Summons served upon it November 8, 1982, in the federal income tax investigation of Bruce Pickel and Laren Pickel;
AND it is further ORDERED, ADJUDGED and DECREED that the Gardner Steel Corporation shall appear and obey the Internal Revenue Summons served upon it November 8, 1982, in the federal income tax investigation of Bruce Pickel and Laren Pickel.
AND it is further ORDERED, ADJUDGED and DECREED that the above captioned cases be and the same are hereby closed immediately.
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