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UNITED STATES v. GARDNER STEEL CORP.

June 13, 1984

UNITED STATES OF AMERICA, and SAMUEL J. RUGGIERO, Special Agent of the Internal Revenue Service, Plaintiffs,
v.
GARDNER STEEL CORPORATION, Defendant, BRUCE PICKEL and LAREN PICKEL, Intervenors; UNITED STATES OF AMERICA, and SAMUEL J. RUGGIERO, Special Agent of the Internal Revenue Service, Plaintiffs, v. H. WOLFE IRON & METAL, CO., Defendant, BRUCE PICKEL and LAREN PICKEL, Intervenors



The opinion of the court was delivered by: SIMMONS

 In these cases, the IRS seeks to compel taxpayers' compliance with summonses served upon two closely held companies. In two related cases, this Court previously quashed third party summonses during an evidentiary hearing on the validity of the IRS investigation of the taxpayers. In the case sub judice, the taxpayers again assail the validity of IRS summonses, arguing that the summonses were issued in bad faith and are therefore unenforceable. The taxpayers now seek to preclude the government from relitigating the good faith issue in this proceeding.

 I. FACTS.

 Sometime prior to 1983, the Criminal Investigation Division of the Internal Revenue Service (IRS) began an investigation into the federal tax liability of Bruce and Laren Pickel, a married couple, to determine whether the Pickels had committed any offenses connected with the administration and enforcement of Internal Revenue laws for the tax years 1978 through 1981.

 During the tax years under investigation, Bruce Pickel was a major stockholder, director and an officer of both H. Wolf Iron & Metal Company, Inc. (H. Wolf Iron & Metal) and Gardner Steel Corporation (Gardner Steel). The shares of both closely held companies were held by the Pickels and their relatives.

 On January 11, 1983, the IRS served upon Philip Weiner and Company, CPA's (Philip Weiner) a summons directing it to produce certain records relative to the Pickels and their two companies, Gardner Steel and H. Wolf Iron & Metal. Three months later, the IRS served a similar summons upon Peoples Bank of Western Pennsylvania (Peoples Bank). The Pickels had transacted business with the summoned parties during the tax periods under investigation. Both Philip Weiner and Peoples Bank were directed to appear and produce records relating to the taxpayers' financial transactions.

 Before Philip Weiner and Peoples Bank could comply with the summonses, the Pickels petitioned this Court to quash the IRS's third party summonses (Civil Actions 83-200 and 83-938). The Pickels averred that the summonses had been issued in bad faith and were therefore unenforceable. Specifically, the Pickels maintained that the third party summonses were unenforceable because they were tainted by improper contacts between the IRS and the Federal Bureau of Investigation (FBI). In response, the IRS moved for summary denial of the petitions to quash and for summary enforcement of the summonses. The IRS averred that it was conducting a proper investigation into the Pickels' federal income tax liability and that the information it sought was relevant to the investigation and not already in the IRS's possession. Hence, argued the IRS, summary enforcement of the summonses were appropriate.

 a. Pickel Hearing I.

 An evidentiary hearing (Pickel Hearing I) was held to determine whether the third party summonses served upon Peoples Bank and Philip Weiner should be enforced. Prior to the hearing, a sequestration order was entered directing all witnesses to remain outside the courtroom until each was called to testify, and thereafter, refrain from discussing their testimony with other witnesses.

 The in camera documents tending to support the taxpayers' theory that the IRS was conducting an improper investigation were turned over to the taxpayers to permit counsel to inquire into the nature and extent of IRS and FBI contacts regarding the Pickels investigations. Thereafter, the proceedings were briefly recessed to permit the taxpayers to review the newly disclosed documents.

 When the proceedings resumed, FBI Agent McCann candidly admitted under oath that the government had violated the Court's sequestration order during the recess. Agent McCann testified that during the recess he had discussed various aspects of his testimony with the government's counsel in the corridor immediately outside the courtroom. During this discussion, the principal IRS investigator and witness, Special Agent Samuel Ruggiero, sat within earshot of the discussion and overheard the conversation.

 As a sanction against the government for violation of the sequestration order, the taxpayers urged the Court to summarily grant the petition to quash the third party summonses. The government stringently argued that the violation was inadvertent and that sanctions were not warranted. At that point, the Court imposed no sanctions and the proceedings continued.

 On further direct examination of FBI Agent McCann, the taxpayers inquired into various telephone entries on the recently disclosed FBI documents. When queried about certain telephone entries, McCann attributed the information on the documents to a "confidential FBI source". Upon motion of the taxpayers, the Court directed the government to disclose the identity of the FBI's ...


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