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UNITED STATES v. PORTER

December 3, 1982

UNITED STATES OF AMERICA AND GERALD T. PADAR, PETITIONERS,
v.
HELEN V. PORTER AND NICKOLAUS BELIGRATIS, RESPONDENTS.



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

FINDINGS OF FACT AND CONCLUSIONS OF LAW

In this action the United States and Internal Revenue Service ("IRS") Special Agent Gerald T. Padar ("Padar") (collectively "Petitioners") seek enforcement of three IRS summonses, one issued to Nickolaus Beligratis ("Beligratis") and the other two to Beligratis' attorney, Helen Viney Porter ("Porter") (Beligratis and Porter are collectively "Respondents"). This Court has conducted an evidentiary hearing (the "Hearing") and, in accordance with Fed.R.Civ.P. ("Rule") 52(a), makes the following findings of fact and conclusions of law.

Findings of Fact ("Findings")

1. During 1976-78 Beligratis was the sole proprietor of two beauty salons known as Grecian Goddess and Lady of Castille (Tr. 54). During that period Beligratis engaged accounting firm Byrne & Co. ("Byrne") to perform various accounting and bookkeeping services, including preparation of the federal tax returns now under IRS investigation and, with the aid of a data processing center (Tymshare, Inc.), Beligratis' books of account (Tr. 60-75, 104). Documents so prepared by or under the direction of Byrne comprised (Tr. 62, 92) income statements, balance sheets and general ledgers (collectively "financial statements"), payroll records, bank reconciliation sheets (Tr. 83-88), federal payroll tax returns (Forms 941), personal income tax returns (Forms 1040), Forms W-2, federal unemployment tax returns (Forms 940) and State of Illinois unemployment compensation tax forms.

2. To enable Byrne to prepare the documents referred to in Finding 1, Beligratis furnished Byrne with three types of business records written by Beligratis:

(a) carbon copies of checks;

(b) cash disbursement records; and

(c) monthly sales sheets.

Beligratis also provided Byrne with bank account statements accompanied by cancelled checks (Tr. 65, 67, 80). Finally Beligratis provided Byrne with the remaining information required for preparation of Beligratis' Form 1040 personal income tax return through a personal interview after the close of each calendar year (Tr. 89-91, 106-10).

3. Byrne's regular practice was to transmit one copy of each financial statement to Beligratis and retain one copy in Byrne's own files for a 3-5 year period (Tr. 96-100, 115), and to do the same with respect to Beligratis' Form 1040 (retained at least 3 years, Tr. 71) and the other forms and returns referred to in Finding 1 (retained 3-5 years, Tr. 73, 88, 99). Payroll records (prepared by Byrne from Beligratis' duplicate checks) and bank reconciliation sheets (prepared by Byrne from the bank's cancelled checks) were retained by Byrne for 3-5 years (Tr. 73, 88). Byrne considered its retained copies of the financial statements belonged to Beligratis and were retained by it for his convenience (Tr. 105-07).

4. In the summer of 1979 IRS began a civil examination of Beligratis' returns. In the course of the audit IRS Examination Division Agent Joseph Marmoll reviewed the various documents in Byrne's possession relating to Beligratis' two proprietorships and his personal finances (Tr. 53-58). Those documents comprised:

    Profit and loss statements (including income
  statements and balance sheets)

General ledgers

    Bank reconciliation sheets on accounts included in
  the general ledger

Byrne input sheets

Payroll tax returns (Forms 941)

Forms W-2

    All checking account statements pertaining to the
  two proprietorships

90% of all cancelled checks and deposit tickets

    Three months of cash receipts records written by
  the taxpayer

5. Beginning in the fall of 1979 IRS' Criminal Investigation Division and Examination Division conducted a joint investigation to determine whether Beligratis had violated any Internal Revenue laws as well as to determine Beligratis' correct income tax liability for the years 1976-78. Special Agent Padar was assigned to lead the joint investigation (Tr. 15-16). There has been no recommendation by IRS to the Department of Justice for criminal prosecution of Beligratis, and the investigation is not being conducted solely for a criminal prosecution purpose.

6. During the regular course of the investigation in early April 1980, Padar interviewed Beligratis and requested a wide range of records pertaining to his personal finances and business affairs (Tr. 16-17). Beligratis said they were in Byrne's possession and that he would make them available (Tr. 17-18).

7. Shortly thereafter Beligratis retained Porter as his lawyer to represent him during the IRS investigation (Tr. 19, 122-23). In accordance with Porter's advice, in April 1980 Beligratis obtained most of the relevant documents from Byrne and delivered them to Porter. Byrne turned over all remaining records to Porter in June 1980 (Tr. 18-20, 123-24, Resp.Ex. A ¶¶ 3-4). Porter is now in possession of all business and personal financial records relating to Beligratis and referred to in earlier Findings, except for the records turned over to the IRS (see Finding 11) (Tr. 127-28).

8. On August 21, 1980 Padar served an IRS summons (Govt.Ex. 3) on Porter (Tr. 21), requiring Porter on September 8, 1980 to produce four categories of documents:

    (a) records relating to Beligratis' personal
  checking and savings accounts and his business
  checking accounts, including bank statements,
  cancelled checks, deposit slips, statements of
  interest earned (Forms 1099) and statements of
  interest paid on personal and business loans;
    (b) cash receipts journals, cash disbursements
  journals and appointment books or records of services
  provided, of Beligratis' beauty salons;
    (c) retained copies of "employee withholding tax
  returns," including Schedules A and Forms W-2 or
  1099s issued to employees; and
    (d) any other information or papers relevant to
  determination of Beligratis' tax liability for 1976,
  1977 or 1978;

and to testify as to Beligratis' tax liability (or its collection) for the 1976-78 years.

9. On the September 8, 1980 return date, Porter appeared before Padar and refused to comply with the summons. Porter claimed the government already possessed the documents included in category (c). As for the documents in categories (a), (b) and (d) Porter invoked the attorney-client privilege on the ground that the Fifth Amendment privilege against self-incrimination would justify withholding production if the documents were in Beligratis' possession (Tr. 125). Porter has not denied having possession of the documents demanded by the summons (Tr. 22) and is in fact in possession thereof (Resp.Ex. A ¶¶ 3-4, Govt.Ex. 5, 6).

10. On September 23, 1980 Padar served a second IRS summons (Govt.Ex. 1) on Porter (Tr. 22-23), requiring Porter on October 14, 1980 to produce all documents of Byrne relating to Beligratis' beauty salons from December 1, 1975 through January 31, 1979 including:

1. balance sheets;

2. profit and loss statements;

  3. cash disbursements journal, cash receipts journal
    and ...

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