CCA 200024035: Criminal Tax finds probable cause supporting proposed search warrants

Plain-English summary

District Counsel sought review of search warrant applications in an investigation of a business owner and an S corporation for possible tax offenses. The affidavit alleged that the owner diverted cash and barter receipts for personal use without reporting the income. Chief Counsel's Criminal Tax office concluded that the affidavit and corroborated informant accounts supported probable cause for the alleged offenses and for finding relevant records at the places to be searched. It found no significant policy concern preventing District Counsel from forwarding the warrant package to the Justice Department's Tax Division. Final approval remained for that division, and the memo did not determine guilt.

Ruling snapshot

• Question: Should the proposed search warrant package be forwarded for final Tax Division approval?
• Outcome: Advice given: no significant policy barrier, and the affidavit supported probable cause.
• Key authorities: 26 U.S.C. §§ 7201 and 7206(1); 18 U.S.C. § 371; CCDM (31)720(2).

Full text (IRS public release)

INTERNAL REVENUE SERVICE

Number: 200024035
Release Date: 6/19/2000
CC:EL:CT-105672-00
March 17, 2000

UILN: 7201.00-00
7206.10-00
9999.92-00

MEMORANDUM FOR
DISTRICT COUNSEL

FROM: Barry J. Finkelstein
Assistant Chief Counsel (Criminal Tax)

SUBJECT: Search Warrant Request For

This responds to the above referenced search warrant request submitted to our office on by District Counsel. Because the target of the investigation is to a certain degree “a representative of the
” the Office of the Assistant Chief Counsel (Criminal Tax) is required to review the search warrant application and recommend whether it should be referred to the Tax Division, Department of Justice for final approval. See, CCDM (31)720(2). Upon reviewing the application, we conclude there are no significant policy considerations which would prevent your office from forwarding the matter to the Tax Division. Accordingly, we are returning the search warrant package to your office subject to your decision to seek final approval from the Tax Division.

FACTS

The search warrant is sought in connection with an ongoing criminal investigation of and the subchapter S corporation he controls, , for possible violations of 26 U.S.C. §§ 7201 and
7206(1), and 18 U.S.C. § 371, for the years through .1 The premises to be searched are s corporate offices located at
, the offices of , a business operated by , located
at
, and a condominium unit
, located at
The items to be seized include all property that constitutes instrumentalities, fruits, or evidence of the commission of tax offenses. The affidavit alleges has made extensive net worth acquisitions and/or personal expenditures during the years at issue which are inconsistent with his reported income. Moreover, the affidavit

1
Although the affidavit for the search warrant states is under criminal investigation for the years through , technically, individual return, as well as

2
CC:EL:CT-105672-00

alleges has conspired with various employees of the businesses he controls through to divert corporate cash receipts, as well as bartered income and assets, to his own personal use.

   is an                          which                            several

in the
area. Its largest
, is and appears in . The
majority of income is generated through the sale of
to individuals and by selling
to business
clients. is a subchapter S corporation owned primarily by , with a minority interest owned by . In , and reported gross receipts of $ ,$ , and $ , respectively. For the same years, reported earnings of $ ,$
, and $
, respectively, with corresponding tax liabilities of $
,$ , and $ .

The search warrant affidavit is based primarily on information obtained from two confidential informants, each of whom were . The first informant, identified as , was the from approximately through Because of his high
ranking position, he was able to gain of corporate
structure and
business activities and practices. Morever, he became
familiar with the
, as well as its
for the years through . The second informant, , was
in the for years, leaving the in
to start his own business.
has corroborated many of the
allegations made by
as to the questionable business practices of
and, most significantly, the location of the corporate sales, gross receipts, and accounting records necessary to establish diversion of corporate cash receipts and under reporting of corporate income.

The informants describe in detail a system whereby would directly receive weekly cash payments from various businesses and individuals in the area in
return for
and other
controlled and . would personally drive to the businesses and pick up the cash payments. He would then cause sales records to either reflect no charge for the or a specific dollar amount to be charged for the . However, the accounting records would not reflect the income received by ,
nor would his individual tax returns.
asserts that at a minimum,
receives $ of unreported income per week and has been operating in this fashion for the past years. Moreover, the informants describe instances where they were specifically directed by to from business
for had been paid directly, either in the form of cash, free meals, or through the provision of other products and services, such as automobiles, home

3
CC:EL:CT-105672-00

furnishings, and office supplies. None of these items were reported as income to .

DISCUSSION

After reviewing the search warrant application, we do not believe the traditional policy considerations concerning protecting the privacy interests of “representatives of the
” are present in this case. Although and are
in the business of various , the
records sought are not those of
which might contain
information. The records sought are business records which reflect its gross sales and receipts, the manner in which conducts its accounting, as well as its reporting of income for tax purposes. Essentially, this case concerns a business owner skimming from gross receipts and failing to report that income.

From a substantive standpoint, we believe the affidavit in support of the search warrant clearly establishes probable cause to believe the alleged violations of Title 18 and Title 26 have occurred. Moreover, the detailed and corroborated information provided by the two confidential informants sets forth a sufficient factual predicate to establish probable cause to believe the records, books, and computer equipment sought are located on the premises to be searched and are likely to contain evidence of the crimes alleged to have been committed. Initially, we were concerned that a staleness issue might arise due to the fact that the two informants had not been
since
, causing their information to be over
old. However, the recently
monitored consensual telephonic conversation between and
, which occurred on , bolsters the fact that is actively
evading his income tax reporting requirements. Additionally, no other evidence has been developed to date which would undermine the credibility of the informants or question the detail of the information they have provided. Therefore, we are returning the search warrant package to your office subject to your decision to seek final approval from the Tax Division.

Should further assistance be required, please feel free to contact Chris Monica of the Criminal Tax Division on (202) 622-4470.

Attachment