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Pickel v. United States

October 5, 1984

BRUCE PICKEL AND LAUREN PICKEL, APPELLEES
v.
UNITED STATES OF AMERICA, APPELLANT



On Appeal from the United States District Court for the Western District of Pennsylvania

Author: Becker

Before: WEIS, BECKER, Circuit Judges and ACKERMAN, District Judge*fn*

Opinion OF THE COURT

BECKER, Circuit Judge.

The government appeals from an order of the United States District Court for the Western District of Pennsylvania quashing two summonses issued, pursuant to 26 U.S.C. § 7602 (1983), by the Internal Revenue Sesrvice. The district court refused to enforce the summonses because of the violation of a sequestration order by a government agent, the refusal of the government to identify an FBI informant, and the court's conclusion that the IRS was acting in "bad faith" by using its civil arm to develop a criminal case. We reverse and remand for further proceedings.

I. FACTS AND PROCEDURAL HISTORY

Bruce Pickel is the major shareholder and officer of two corporations, Gardner Steel Corporation and H. Wolfe Iron and Metal Company. In September 1981, IRS Revenue Agent William Manolis conducted an audit of the income tax returns of Pickel, his wife, and the two corporations. During the investigation, Pickel informed Manolis that he had sold a number of securities from a pension fund of one of the corporations to pay off a gambling debt. Pickel also told Manolis that he had since repaid the fund. Thereafter, Manolis independently uncovered other information which, in his mind, indicated the existence of fraud in one or more of the returns under examination. Following established procedures, Manolis referred the case to the IRS's Criminal Investigation Division (CID) for an investigation into possible tax fraud. In October 1982, Special Agent Samuel Ruggiero of the CID was assigned to investigate whether criminal violations of the Internal Revenue Code had occurred.

In July 1982, the Pittsburgh office of the FBI was told by an informant that Pickel was embezzling money from one of the corporate pension funds. The FBI initiated an investigation into the allegations, headed by Agent Peter McCann.*fn1 In November 1982, the IRS and the FBI each discovered that the other was investigating Pickel. FBI Agent McCann then deferred his investigation until the IRS investigation was terminated, because both inquiries would require access to the same pension records. Shortly thereafter, IRS Special Agent Ruggiero issued the summonses that are the subject of this case. The summonses, issued to Pickel's accountant and bank, sought copies of the Pickels' tax returns for the period 1978 to 1981, the tax returns of the two corporations for the same period, assorted computer printouts of financial records, credit card charge statements, cancelled checks, loan history records, and other financial records pertaining to the Pickels in the possession of the accountant and bank.*fn2

The Pickels filed a petition to quash each summons in the district court, pursuant to 26 U.S.C. § 7609(b). In their petitions the Pickels asserted, inter alia, that the purpose of the summonses was to gather information for the conduct of an FBI investigation rather than for a valid IRS investigation, and therefore that they were not issued in good faith, and further that the IRS was already in possession of the information it sought. The government responded by denying the allegations in the petition and by moving for summary enforcement of the summonses.

A hearing on the allegations of the petition to quash and on the motion for summary enforcement was held on July 21, 1983. At the beginning of the hearing, the Pickels informed the district court that they intended to call IRS Revenue Agent Manolis, FBI Agent McCann, and IRS Special Agent Ruggiero to testify. At the Pickels' request, the district court ordered that each witness be sequestered during the testimony of the others. Agent Manolis testified first, describing his investigation into the tax returns, and his referral of the case to the CID. He was followed on the stand by Agent McCann, who described the initiation of the investigation into the embezzlement charges, and the discovery of the concurrent IRS investigation of the Pickels' tax returns.

During a recess in McCann's testimony, the Pickels' counsel observed Agent McCann, the FBI attorney and the government attorney, Ms. Scott-Clayton, talking together in the hallway outside the courtroom within earshot of Special Agent Ruggiero, who had not yet testified. After the recess, the Pickels' attorney called the incident to the attention of the court. Agent McCann admitted that he was discussing an exhibit used during the hearing and that he intended that Special Agent Ruggiero hear this discussion so that Ruggiero would not say something contradictory when he got on the stand. The court ruled that its sequestration order had been violated but deferred imposing sanctions.

McCann resumed his testimony. Shortly thereafter, the Government objected to the Pickels' request that McCann disclose the name of the informant whose information had led to the FBI investigation into the embezzlement charges. The following exchange then took place.

MR. JOSEPH (The Pickels' Attorney): I want to know who the source is, Your Honor. I think the government is being anything but honest.

THE COURT: I think you are entitled to know.

BY THE COURT:

Q. Tell him what the source was.

MS. SCOTT-CLAYTON (THE GOVERNMENT ATTORNEY): Your Honor, I must object to this. This is clearly --

THE COURT: I think your objection is overruled. The government has been acting very, very unfairly here in the last hour ...


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