Ex-Congressman Argues Lack of Intent Existed to Evade Income Tax

Biaggi received stock in the manufacturing company, Wedtech, in 1983 and sold some of the stock in 1985, but never reported income from the transactions. At his criminal trial in 1988 it was established that Biaggi received the stock as a bribe, that his accountant advised Biaggi that he was required to report the stock as income, and that Biaggi used his son as a nominee to avoid the income restrictions on congressional members. Biaggi was found guilty of two counts of filing false income tax returns. At his trial, the Tax Court held Biaggi liable for fraud penalties under section 6653(b), finding that he failed to report income from the receipt and sale of stock and that the underpayments were due to fraud. The court had no trouble finding fraudulent intent, pointing out that Biaggi's prior conviction created a powerful inference that he possessed the requisite willfulness under section 6653(b). (For a summary of that opinion, see Tax Notes, Feb. 21, 2000, p. 1104; for the full text, see Doc 2000-4458 (17 original pages) or 2000 TNT 30-57 .)

Biaggi asserts that at the Tax Court trial he requested that the IRS produce documents that he alleged were important to his defense. The court ordered the production of the documents and the IRS responded by producing a review agent's reports and by stating that the requested special agents' reports were grand jury materials and not in the IRS's possession. Biaggi filed a subpoena duces tecum for production of the special agents' reports. The IRS responded with a motion to quash the subpoena that was granted by the Tax Court. Biaggi insists that the actions of the IRS in not producing the requested documents prevented the Tax Court from determining whether the IRS complied with the court's order and prevented Biaggi from proving his lack of intent to evade income tax. Biaggi also argues that the Tax Court erred in accepting the IRS's valuation of the stock.

ISSUE

[2] Whether the I.R.S.'s non-compliance with an order of the tax court which required the production of documents including special agent reports in the possession, custody and control of the I.R.S. prevented the court from exercising its discretion in determining whether the grand jury secrecy applies and prevented Mario Biaggi from proving lack of intent to evade income tax.

[3] Whether the I.R.S. has failed to prove the valuation of the stock by a fair preponderance of the evidence.

STATEMENT OF THE CASE

[4] After a trial held in the United States Tax Court on June 22, 23 and 26th of 1998 before the Honorable Judge James S. Halpern, Mario Biaggi was found to have understated his tax for 1983 and 1985 as a result of fraud under Section 6501(c)(1) of the tax code. All of the evidence against petitioner at the tax trial stemmed from the criminal trial of United States v Mario Biaggi wherein Mario Biaggi was collaterally estopped to deny the facts of the criminal trial and wherein the Commissioner of Internal Revenue Service (hereinafter "I.R.S.") introduced as evidence the criminal trial transcripts other evidence and witnesses who testified at the criminal trial.

[5] At the criminal trial, Mario Biaggi was found guilty, among other charges, of two counts of filing a false income tax return in violation of 26 USC Section 7206, however, Mario Biaggi was not indicted for filing fraudulent tax returns with the intent to evade in violation of 26 USC Section 7201.

[6] It was Mario Biaggi's position at the tax trial that reports of the Internal Revenue agents and the special agents containing the testimony of many witnesses taken by them would set forth the basis for the failure to proceed with criminal tax evasion charges. The examination of these reports are important to the presentation of Mario Biaggi's defense in the tax trial.

[7] Mario Biaggi respectfully submits that the adverse impact of the I.R.S. in its failure to produce the documents pursuant to the trial judge's order was crucial and prevented him from discovering evidence on the issue of fraudulent intent to evade tax.

TAX COURT TRIAL

[8] On March 25, 1998, Mario Biaggi requested, pursuant to tax court rule 72, the production of documents (A-10) including all internal revenue agent reports, special agent reports and all reports and memorandums in the files prepared by Appeals Officer P. Russo. The I.R.S. served objections on April 29, 1998 on the grounds of relevance.

[9] On May 4, 1998 Mario Biaggi moved to compel the I.R.S. to produce the documents for inspection (A-4). In a decision of the tax court dated on May 8, 1998 (A-13) the court ordered the I.R.S. to produce each and every document in Mario Biaggi's request for production of documents dated March 25, 1998.

[10] On May 20, 1998 the I.R.S.'s response to Mario Biaggi's request for the productions of documents, produced a review agent's reports which were basically a calculation of the tax for two years and which Mario Biaggi already had and attached to his petition filed in the tax court (A-14). The I.R.S. did not produce the special agent reports set forth in Mario Biaggi's discovery request nor the reports and memorandums in the files prepared by Appeals Officer P. Russo. The I.R.S.'s further response on May 20, 1998 was that since the special agent's reports WERE NOT IN THE I.R.S's POSSESSION, CUSTODY OR CONTROL they cannot be produced, and that the I.R.S. was unable to obtain copies of the special agent's reports because they are grand jury matters (A-14).

[11] With the trial scheduled to proceed on June 15, 1998 and having not received the documents requested, despite a court order to do so, on June 8, 1998 Mario Biaggi served a subpoena duces tecum on Carol Griffiths, a Revenue Officer Advisory Reviewer, issued to the Commissioner of Internal Revenue calling for his appearance, to produce certain documents and for the appearance of unnamed special agents at the trial scheduled to commence June 15, 1998.

[12] On the day set for trial June 15, 1998 the I.R.S. served on Mario Biaggi a motion to quash the subpoena, on the grounds that Mario Biaggi failed to tender the appropriate witness fee and that the Internal Revenue Service is prevented under Federal Rules of Criminal Procedure 6(e) from providing the petitioner with any documents contained within the files maintained by both the Criminal Investigation Division and the Deputy Regional Counsel (Criminal Tax) in connection with the criminal investigation of petitioner Mario Biaggi and that generally the subpoena was unreasonable and oppressive. The court granted the I.R.S.'s motion.

[13] The I.R.S. in its motion to quash stated to the tax court that in response to the discovery request made by Mario Biaagi that (1) copies of the special agent's reports WERE NOT WITHIN THE CUSTODY OR CONTROL OF THE "ATTORNEYS" ASSIGNED TO THE CASE and (2) release of the Special Agent's Reports would violate the Federal Rule of Criminal Procedure 6, (e). (A-19).

[14] The I.R.S. further acknowledged that it has possession, custody and control of the requested documents in the affidavit of Ronald F. Rothman who is the special litigation assistant for the Chief Counsel's office, criminal tax function, Northeast Region located in New York City. He is the custodian of and authorized to examine the criminal tax file maintained by the Deputy Regional Counsel (Criminal Tax), Northeast Region relating to Mario Biaggi (A- 28,29).

[15] After a review of the files Mr. Rothman acknowledged that THE DOCUMENTS CONTAINED IN THE I.R.S. FILE RELATING TO MARIO BIAGGI "INCLUDED" THE SPECIAL AGENT'S REPORT. Mr. Rothman determined that they contain information pursuant to a grand jury investigation. (A- 28,29). That based on his inspection he concluded that this material may not be disclosed except, where such disclosure has been ordered by a court. The I.R.S. further argued that Mario Biaggi did not meet the requisite showing that he has a particularized need for this material.

POINT I

[17] After Mario Biaggi issued a subpoena, for the same documents that the court, on May 8, 1998 ordered the I.R.S. to produce, the I.R.S. changed its position. The I.R.S. in its motion to quash, totally contradicted its previous assertion that it did not have the special agent's reports in its possession custody or control. It alleged for the first time, on the eve of trial, that compliance with the court's order of possession, custody and control of the special agent's documents meant whether the documents requested were in the ATTORNEY'S possession, custody and control, not the I.R.S., and that the documents contained in that file were in fact THE SPECIAL AGENT'S REPORT. This is in flagrant disregard of the trial court's order and created an unfair situation at trial.

[18] Curiously, in their motion to quash, the I.R.S did not attach its May 20, 1998 response to Mario Biaggi's discovery request which would have highlighted its change of position.

[19] In addition to the motion to compel, petitioner raised this issue prior to trial in petitioner's opposition to respondent's motion for partial summary judgment in the affidavit of Leonard Bailin dated May 29, 1998 (A-30,34). Petitioner yet another time raised this issue in its post trial reply brief filed October 15, 1998.(Docket No.30).

FEDERAL RULES OF CIVIL PROCEDURE RULE 26(b)(1)

[20] The documents requested by Mario Biaggi related to his defense that the government's decision in the criminal proceeding not to indict for tax evasion and the information contained in the IRS files is relevant to his defense of no fraudulent intent which IRS a prime element of a tax evasion charge.

[21] In Abel Investment Company v United States of America 53 FRD 485 the Internal Revenue was required to turn over reports, memorandum, schedules and exhibits of revenue agents to a taxpayer in a tax deficiency proceeding.

Documents are relevant if they contain material evidence or

Under Rules of Criminal Procedure Rule 6(e)(3),

(C) Disclosure otherwise prohibited by this rule of matters

Rule 6(e) shields solely "matters occurring before the grand

THERE ARE NO FACTORS THAT EXIST THAT JUSTIFIED THE I.R.S. PROTECTION UNDER RULE 6(e).

The reasons for grand jury secrecy is (1) To prevent the escape

THE TRIAL JUDGE ABUSED ITS DISCRETION BY NOT APPLYING THE PARTICULARIZED NEED ANALYSES

[24] The standard for determining when the traditional secrecy of the grand jury may be broken is set forth United States v Proctor & Gamble supra; Cullen v Margiotta 811 F2d 698, 715 (2nd Cir 1987); Douglas Oil Company of California v Petrol Stops Morthwest et al, supra . . .

A private party requesting disclosure of grand jury material

[26] At the tax trial, Mario Biaggi particularized his need in his motion to Compel, that although he was convicted of filing a false income tax return he was never indicted for the filing a fraudulent tax return (A-4). Further, that reports of the I.R.S. agents and the special agents contain the testimony of many witnesses taken by them, which apparently set forth the basis for the government's decision not to proceed with tax evasion charges in the criminal case (A-5). The examination of these reports are important to the presentation of Mario Biaggi's case.

[27] Further, Mario Biaggi specifically argued, in his motion to compel, that the issue of intent is a key factor; that over the course of several meetings, over a three year period of time Appeals Officer P. Russo, indicated to Leonard Bailin, Esq. the tax trial attorney for Mario Biaggi, that he had serious doubts as to whether the I.R.S. could prove a case of tax evasion (A-5). It is his reports, we submit, which would contain an analysis of the facts relevant to any determination in the tax trial.

[28] The injustice, as a requirement set forth in Proctor & Gamble, is that the information possessed by the government, in its criminal investigation, which formed a basis not to indict Mario Biaggi for income tax evasion bears directly on the issue that the I.R.S. seeks to prove in the tax trial i.e. intent to defraud.

[29] The material requested was limited solely to the tax issues and not the aspects of the criminal investigation concerning all the other charges that Mario Biaggi was indicted for and convicted in the criminal matter.

If the reasons for maintaining secrecy do not apply at all in a

Grand Jury [sic] secrecy is of course not an end in itself.

THE DOCUMENTS REQUESTED ARE IN THE CUSTODY, POSSESSION AND CONTROL OF THE I.R.S.

[32] The I.R.S. has by its own admissions conceded that it has in its possession and control the documents requested. See affidavit of Ronald Rothman attached to respondent's motion to quash wherein he concedes the information requested is indeed in the tax file (A-28, 29). The documents maintained in the file are maintained by the Deputy Regional Counsel (Criminal Tax) for the I.R.S., Northeast Region (A-28, 29). However, Mr. Rothman makes his own investigation, without court supervision, and concludes that the matters contained therein are information obtained pursuant to a grand jury investigation and claims protection under Rule 6(e)(A-28, 29). In the very least the trial judge should have reviewed materials in camera to enable it to make an informed decision applying the analyses required under the applicable standard set forth above.

POINT II

[33] THE TAX COURT ERRED IN FINDING THAT THE RESPONDENT MET ITS BURDEN OF PROOF BY A PREPONDERANCE OF THE EVIDENCE CONCERNING VALUATION OF THE STOCK.

THE VALUATION OF THE STOCK IN JANUARY 1983 AT 32 CENTS A SHARE WAS A PROPER VALUATION IN LIGHT OF THE EVIDENCE IN THE CASE.

[34] The decision of the court of Appeals in United States v Biaggi 909 F.2d 662 (Ex. 6J) is evidence in the tax court trial. The evidence shows that at a meeting in 1982 the company agreed to issue 5% of Wedtech stock to the firm of Biaggi and Ehrlich, US v Biaggi id at 680.

[35] The evidence further shows that the accountants valued the stock at $34,000 using a book value supplied by Wedtech. Yet there was never any evidence that anyone was willing to pay anything near the public offering price, $16 per share for such restricted stock.

"Though the public offering price was $16 per share, the shares

[36] No experts testified for either party at the trial of the within action. The valuation date, the date when petitioner received the shares, is in dispute, and was not proven by respondent by a fair preponderance of the evidence. The trial court's finding that petitioner received the shares sometime between the date of the underwriter's commitment letter with respect to the IPO (May 9, 1983) and the date of the IPO, was erroneous, and therefore useless in making a determination in this matter.

[37] The tax court opinion states that the respondent valued the shares at $11.20 by taking into account the initial public offering price, a 2 year restriction on transferability that applied to the Wedtech shares, and other contemporaneous transactions. /1/, ²

[38] In Messing v Commissioner 48 T.C. 502, 509 (1967) the court stated advice of the accountants (Tr.225).

"we are not unaware that sales prices at or about the critical

THE STOCK WAS RECEIVED BY RICHARD BIAGGI IN 1982

[40] The proof at trial offered by the I.R.S.'s own witnesses proves otherwise. Lawrence Shorten, Executive Vice President and Chief Financial officer, who became an employee of the company in 1982, several years after the Biaggi firm began representing Wedtech, testified. that at some point in 1982 he was promised Wedtech stock and ultimately received that stock ³ (Tr.218). He first learned about the stock that was received by Richard Biaggi and Bernard G. Ehrlich from Mario Moreno in the latter part of 1982 (Tr.219). The stock he and others were promised, was transferred on the books and records of Wedtech to others in June 1983, and physically received in August, 1983 (Tr.223). The stock certificates were dated January 1, 1983 (Tr.224). The stock was backdated to reflect the book value of the stock in January 1, 1983 at 32 cents a share (Tr.224). The amount was not based on an appraisal but on advice of the accountants (Tr.225).

When asked,

THE BENEFICIAL OWNERSHIP OF STOCK WAS RECEIVED BY RICHARD BIAGGI IN JANUARY 1983

[42] The I.R.S called Jeffrey Rubin an attorney of the firm of Squadron and Ellenoff, as a witness. He had worked on the Wedtech account and specialized in corporate and securities law (Tr.122). Mr. Rubin worked on the IPO having been assigned by a partner Arthur Siskind (Tr.124) His firm was responsible for the preparation of the registration statement and propectus in connection with the company and underwriter's counsel (Tr.124). He performed due diligence and reviewed the books and records of the company to determine that the information contained in the registration statement and prospectus was correct (Tr.125).

Q: And can you tell us what date Welbilt agreed to issue shares

THE STOCK SHOULD BE VALUED AT THE TIME THE PAST LEGAL SERVICES WERE RENDERED

[43] The I.R.S. also called Richard M. Biaggi, who testified that he received a 1099 from Wedtech valuing the stock at $34,000 (Tr.381). This valuation was used in the preparation of his tax return and further, that from the middle of 1982 until the public offering in August 1983 the law firm of Biaggi and Ehrlich was owed approximately $85,000 in legal fees (Tr.379). Biaggi and Ehrlich was to receive the stock as a promise by the company to reward the firm for its loyalty to Wedtech in the early days when the firm billed modestly for legal services, from 1982 and prior, declined to insist on prompt payment, and did not bill at all or some services U.S. v Biaggi, id at 681.

BOOK VALUE WAS A PROPER AND ACCEPTED VALUE

[44] The I.R.S. additionally called as a witness, Irwin Wolf, an accountant at the firm of Cogan and Bell who were the accountant's to the law firm of Biaggi and Ehrlich (Tr.22, 25). He testified he was requested to determine a valuation on the Wedtech stock while he was in the process of preparing the 1983 tax returns for Richard Biaggi (Tr.57). He was supplied with a copy of the prospectus before the returns were filed and could not determine a value based on such prospectus, which incidentally included prior private transactions to another individual (Tr.57-58). He did not get an appraisal, but was given a value (Tr.59). The book value as stated in the propectus was 93 cents a share (Tr.62). The stock was picked up on Richard Biaggi's return as miscellaneous income in the amount of $34,931 (Tr.61).

Q: So sir, assuming that the amount reported was 30 cents a

[45] Not only did this witness testify that book value is a proper and accepted measure but gave conflicting testimony as to the [missing copy] (Tr.74-5)

[46] Not only did this witness testify that book value is a proper and accepted measure but gave conflicting testimony as to the valuation, because the book value in August of 1983 as stated the prospectus was 93 cents a share. The valuation date for the stock should not be between May of 1983, the date of the underwriter's commitment and August 1983, the date of thee public offering. The valuation date should be at the time that services were rendered in prior years to earn those shares, up to and including 1982 when it was agreed to give the law firm the shares, but certainly no later that January 1983, at the time the shares were beneficially given.

CONCLUSION

[47] For the foregoing reasons, it is respectfully requested that the decision of the tax court be reversed in its entirety and that this court find that the valuation of the stock has not been determined by a fair preponderance of the evidence.

Dated: New York, New York

[49] That on the 18th day of October 2000, deponent served the within Appellants Brief of Mario Biaggi and Joint Appendix upon:

Kenneth W. Rosenberg, Attorney

LOUISE ADAMS

² The Court of Appeals in US v Biaggi found that even if the value was fact somewhat higher, there was no evidence that the value was so high in relation to the value of past services.

³ "Tr." refers to trial transcript