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STRAUSER v. U.S.

United States District Court, Northern District of Illinois, E.D


February 25, 1982

JOHN E. STRAUSER, PLAINTIFF,
v.
UNITED STATES OF AMERICA, DEFENDANT.

The opinion of the court was delivered by: Shadur, District Judge.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

John E. Strauser ("Strauser") sues the United States under 26 U.S.C. § 7429 ("Section 7429") for judicial review of a termination assessment of income taxes against Strauser by the Secretary of the Treasury (the "Secretary"). This Court has conducted a hearing on the expedited schedule required under Section 7429. After considering all the evidence and the submissions of the parties by their counsel, in accordance with Fed.R.Civ.P. ("Rule") 52(a) the Court finds the facts and states its conclusions of law as follows:

Section 7429

Since 1977 Section 7429 has provided for non-reviewable District Court proceedings dealing with jeopardy and termination assessments under the Internal Revenue Code (the "Code").*fn1 It requires the taxpayer first to request administrative review of the proposed assessment by filing a protest with the Secretary. Strauser did that. Section 7429 then authorizes judicial action to be brought, mandating a speedy decision.

Section 7429(b)(2) provides this Court with narrow criteria for review of the Secretary's action:

    (1) This Court must first determine whether the
  Secretary's action in making any assessment "is
  reasonable under the circumstances." On that score
  Section 7429(g)(1) places the burden of proof on the
  government.

    (2) If the first question is answered "yes," the
  Court must decide whether the amount assessed "is
  appropriate under the circumstances." On that issue
  Section 7429(g)(2) imposes the burden of proof on
  Strauser.

Each determination is made de novo, independent of that by the Secretary. S.Rep.No. 94-938, 94th Cong. 2d Sess. 364 (1976), U.S.Code Cong. & Admin.News 1976, p. 2897 (hereafter cited "Report").*fn2

Neither issue to be decided by this Court implicates a determination of the ultimate merits of Strauser's tax liability if any. Report at 365. If the Court rules in the government's favor Strauser has the right to file suit for refund — hence the congressional decision to make this Court the final voice in reviewing the Secretary's administrative decision.*fn3

Both because this action is not one for resolving Strauser's actual tax obligations and because of the extraordinarily expedited timetable,*fn4 it is not surprising that the statute and case law require considerably less than the usual judicial evidentiary criteria. At the Secretary's level he can rely upon "information" that need not comport with the strict rules of evidence. See Patrick v. United States, 524 F.2d 1109 (7th Cir. 1975). By the same token Section 7429(b)(2) requires this Court to review the "information" (Section 7429(a)(1)) upon which the Secretary relied in making the assessment. Expedited proceedings under the statute have permitted affidavit or other summary presentation. As examples of the numerous cases so holding, see, McAvoy v. United States, 475 F. Supp. 297, 299 (W.D. Mich. 1979); Loretto v. United States, 440 F. Supp. 1168, 1171 (E.D.Pa. 1977).

So much for general background of the statute under which this Court operates here. This opinion will turn to the facts, then return to the legal principles applicable to those facts.

Facts

On December 4, 1981 the Secretary terminated Strauser's taxable year prematurely as of October 31, 1981 and made a termination assessment of $154,156.26 for the ten-month taxable year ended that date. At that time he*fn5 had the following information about Strauser and his activities:*fn6

    (1) Strauser, a young man of about 25, had been
  engaged in lucrative illegal activities involving
  marijuana and other drugs. He was arrested October
  27, 1981, and felony charges were brought against him
  by the State of Illinois after he had been observed
  participating in an apparent sale of a quantity of
  marijuana. After his arrest the United States Drug
  Inforcement Agency ("DEA") was informed Strauser was
  also dealing cocaine.

    (2) Based on the ongoing surveillance if Strauser's
  activities, the sale of the illicit drugs was
  connected to several safe deposit boxes, including
  Burbank State tank No. 427 in the names of his mother
  Sandra H. Strauser) and 18-year old sister (Sandra A.
  Strauser), mi which Strauer was also an authorized
  signatory. Upon a showing of probable cause a search
  warrant was issued with respect to Burbank State Bank
  Box No. 427 and other safe deposit boxes.

    (3) On October 29, 1981, the day before the search,
  Box No. 427 and several other boxes were closed and a
  number of new boxes (two at the Burbank State Bank and
  two at the Bank of Hickory Hills) were
  contemporaneously opened in the names of Strauser's
  mother and sister. When the newly-opened boxes were
  searched, the two at the Burbank State Bank (Nos. 411
  and 416) disclosed over $196,000 in cash and over
  $42,000 in three certificates of deposit. When
  questioned about those boxes Strauser's mother and
  sister refused to answer until after they would
  communicated with their attorney. Their attorney later
  stated that neither would make any statements to law
  enforcement agents until after Strauser's trial.

    (4) Aceess records to Burbank State Bank Box No. 427
  disclosed that the only person to have visited the box
  from the beginning had been Strauser. It was never
  visited by Strauser's mother, and

  Strauser's sister visited only once — October
  29, 1981, the day the box was closed and the new boxes
  were opened.

    (5) Burbank State Bank vault custodian Judith
  DeWaters told both the DEA and the IRS that Strauser
  had visited that box about 60 times between its
  original opening in 1978 and its 1981 closing, and
  that about every other visit he would ask Ms. DeWaters
  for stacks of $1,000 and $2,000 money straps (used to
  package currency).

    (6) Strauser also refused to give the IRS any
  information regarding the safe deposit boxes or any
  other relevant matters.

Reasonableness of the Secretary's Action

When Congress added Section 7429 to the Code to provide a clear procedure for dealing with jeopardy and termination assessments, the Report at 365 n.6 referred to the government's burden of proof on reasonableness and specifically stated:

  The committee believes that the general standards set
  forth in the Internal Revenue Manual relating to the
  conditions which must exist before a jeopardy or
  termination assessment is made are reasonable.

Those standards (id. at 360 n.1) included one plainly applicable to this case (emphasis added):

  The taxpayer is or appears to be designing quickly to
  place his property beyond the reach of the Government
  either by removing it from the United States, or by
  concealing it, or by transferring it to other
  persons, or by dissipating it. . . .

There are a great many District Court cases (cited in the government's memorandum) that give the taxpayer short shrift indeed on a kind of "bad man" theory of the law. They sometimes uphold jeopardy or termination assessments essentially because the taxpayer is known to be, or suspected of being, in the business of selling or distributing illegal drugs. This Court need not go that far, for the nature of Strauser's alleged illegal activity simply makes the other factors present in this case even more compelling on grounds of reasonableness.

Strauser's memorandum of law treats the case as though it were a chain of custody criminal prosecution, with the government having the burden beyond a reasonable doubt to trace the funds to Strauser. But Strauser will have ample opportunity to try his ultimate liability in a full-dress hearing, with every protection the law affords? For the present reasonable inferences are enough, and neither the Secretary nor this Court is required to be an ostrich. Surely the reasonable inferences are sufficient to tie Strauser to the secreted funds, and this opinion proceeds on that predicate (discussed in greater detail in the following section).

Strauser's actions in (1) maintaining such a large hoard of currency, (2) keeping those funds in a safe-deposit box in the first place (a somewhat extraordinary measure in these days of high yields), (3) maintaining those funds in a safe-deposit box to which he had access, to which he availed himself of such access on a regular basis, and to which his sister and mother (the nominal owners) never availed themselves of such access, and (4) obviously shifting the funds to two newly-opened boxes in the names of his sister and mother — one step ahead of the government's search warrant of the first safe-deposit box — created much more than the necessary prima facie case for the government's decision to protect itself by a termination assessment. When two more elements are added to the equation — the imminence of pending criminal charges and the possibility of payment, or assignment of substantial assets, to take care of legal fees — the government's decision was further reinforced.

Strauser has not countered with anything other than his unduly restrictive view of the nature of this proceeding.*fn7 That cannot overcome the government's facially sufficient showing. There is no need to string citations in support of the Court's determination (though the government has done so in its memorandum). This Court concludes that the Secretary's action was in Section 7429 terms "reasonable under the circumstances."

Appropriateness of the Assessment

IRS records reflected that neither Strauser's sister nor his mother had filed income tax returns since at least 1970.*fn8 That information supported the Secretary's inference as to the ownership of the safe deposit box contents (bearing on the "reasonableness" issue) and also the taxability of those contents to Strauser (part of the "appropriateness" issue). Both conclusions were buttressed by the fact that after seizure of the newly-opened box Strauser's sister and mother refused to discuss the subject until they could communicate with their attorney. In turn, the attorney said that neither of them would make any statements to law enforcement agents until after Strauser's trial.

In summary those facts and the other facts already discussed supported as reasonable a determination by the Secretary that the secreted funds in fact belonged to Strauser rather than his sister or mother. When those facts were coupled with other critical evidence from IRS records — that Strauser himself filed no 1978 income tax return, while in each of 1979 and 1980 his returns reflected less than $2,000 in taxable income — they supported the appropriateness of the determination that the secreted currency, one certificate of deposit and the 1981 interest on all three certificates were not explained by Strauser's prior reported income or non-taxable sources and were us taxable in 1981.*fn9 In contrast, the Secrtary's determination was inappropriate only as to two of the certificates of deposit, which were shown during the hearing to have antedated 1981.

As for the appropriate rate of taxation, Strauser's counsel has cited Giles v. United States, 80-2 USTC ¶ 9546 (M.D.Fla. 1980) to argue that the 50% maximum tax rate on personal service income should apply to the 1981 income. With all respect the Court must disagree with Giles.*fn10 If Strauser is in fact a drug dealer (a reasonable inference from the "information" available to the Secretary), he is selling goods not services. There is no occasion for application of the 50% maximuni tax rate.*fn11

Strauser's attempted reliance on other case law is wholly misplaced. In each of those cases the income was generated from personal labor either entirely, Robida v. Commissioner, 460 F.2d 1172 (9th Cir. 1972) (taxpayer applied special skill to manipulate high payoffs from slot machines), or substantially: Holland v. Commissioner, 622 F.2d 95 (4th Cir. 1980) (maintenance contractor); Novikoff v. Commissioner, 40 T.C.M. 1039 (1980) (movie theatre business); Moore v. Commissioner, 71 T.C. 533 (1979) (retail grocery business); United States v. Korczynski, 78-2 USTO ¶ 9638 (S.D.Ohio 1978) (electrical contractor). There is nothing in the record here to compel the conclusion that any finite part of Strauser's 1981 income was attributable to his services. If it was in fact, he is free to assert that fact in the ultimate trial of his income tax liability.

Thus the only adjustment required in the Secretary's determination is to exclude the two certificates of deposit (including pre-1981 accrued interest from 1981 income). With that correction the "appropriate" assessment becomes $130,139.81. Again it is not for this Court to determine whether that amount of 1981 tax liability is ultimately provable against Strauser. Under the Code Strauser is fully protected against error in that respect. But the threshold issue of appropriateness must be decided in the government's favor.

Conclusion

Accordingly the order of this Court is that the Secretary's proposed assessment is abated to the extent of $24,016.45. In all other respects Strauser's Complaint is dismissed.


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