author: ROBERT D. POTTER, Chief Judge.

text:
    UNITED STATES of America, Plaintiff, v. MUSIC MASTERS, LTD, Masters Financial, Inc., Alfred R. Masters, John W. Olive, Robert F. Duncan, Ronald T. Dean, d/b/a Mass-Comm Enterprises, and David W. Mathes, d/b/a The Mathes Co., Defendants.
    No. C-C-84-0228-P.
    United States District Court, W.D. North Carolina, Charlotte Division.
    Nov. 12, 1985.

      Charles R. Brewer, U.S. Atty., Charlotte, N.C., Alice Davis, U.S.. Dept. of Justice, Washington, D.C., for plaintiff.

      Larry Kars, New York City, Isham B. Bradley, Nashville, Tenn., for defendants.
   MEMORANDUM OF DECISION

ROBERT D. POTTER, Chief Judge.

THIS MATTER is before the Court on a Complaint filed by the Plaintiff against the Defendants alleging an abusive tax shelter scheme and seeking injunctive relief. The issues before the Court are: (1) whether Defendants violated 26 U.S.C. § 6700 proscribing abusive tax shelter schemes; and if so, (2) whether injunctive relief is appropriate under 26 U.S.C. §§ 7402 and 7408.

The trial was heard before the undersigned on September 25, 1985 in Charlotte, North Carolina. The Defendants were represented by Attorney Larry Kars. The Plaintiff was represented by United States Department of Justice Attorney Alice J. Davis. After a full trial of the matter, the Court, having carefully considered the testimony and exhibits, enters the following findings of fact and conclusions of law:

FINDINGS OF FACT

(1) Defendant Alfred R. Masters (hereinafter “Masters”) is the President and 50% shareholder of the two defendant corporations, Music Masters, Ltd. (hereinafter “Music Masters”) and Masters Financial, Inc. (hereinafter “Masters Financial”), both North Carolina corporations, with their principal place of business located in Charlotte, North Carolina.

(2) In 1982 and 1983, Music Masters was engaged in the business of buying master sound recordings and leasing them to investors, in investment plans entitled “Music Masters Ltd., Master Sound Recording Lease Programs,” (hereinafter the “investment programs”). Masters Financial marketed the master sound recordings on behalf of Music Masters, and promoted the leasing programs to potential investors.

(3) A master sound recording (hereinafter “master”) is a permanent tape made of a musical performance that can be reproduced onto other devices (records, tapes, etc.) for distribution and sale.

(4) Music Masters offered investors an opportunity to lease interests in these masters under various programs. In 1982 these were the “Regular,” “TV Promotion” and “Single” programs; and in 1983 they were the “Headliners,” “Regular,” “Rising Stars,” and “Music Video” programs.

(5) Under each of these programs, investors purchased one or more leasehold units in the master. Defendants represented to investors that each investor was to be in the business of manufacturing records and/or tapes from their leasehold interest in the masters, for the purpose of selling the records and/or tapes to the public for profit.

(6) In each of the master sound recording lease programs offered by the Defendants, Music Masters elected to transfer investment tax credits to the lessees, pursuant to Internal Revenue Code Sections 38 and 46-48.

(7) Defendants represented that each investor would be eligible to claim an investment tax credit based on the percentage of their investment in the master and the amount Music Masters purportedly paid for the master, including cash and notes. Defendants also represented that each investor would be eligible to claim business deductions for the amount paid for leasing and start up distribution expenses.

(8) Over 1,000 persons invested in the Tax Shelter in 1982 and 1983. The Internal Revenue Service claims that over $17 million in improper tax deductions and credits may be taken if each investor uses the deductions and credits that Defendants represented were made available to them by investing in the program.

(9) During 1982 and 1983, Music Masters purchased approximately 135 masters, paying for each partially in cash, and issuing a promissory note for the balance. Music Masters purchased the masters it leased from the following sources: Hice Music Corporation, Gold Shield Productions, Inc., Hal Kat Kountry Music, and Golden West Studios.

(10) During 1982 and 1983, Music Masters made down payments of approximately $1,242,200 in cash for masters it purchased and leased in its programs.

(11) During 1982 and 1983, Music Masters issued notes claimed to be recourse totalling approximately $112,963,900 for the masters it purchased and leased in its programs.

(a) Each of the notes issued by Music Masters was for a period of 12 years, with interest accruing at 9%, non-compounding, each year. Each note was secured only by the master for which it was issued, although each was alleged to be recourse against any and all assets of Music Masters.
(b) Payments on the notes before the 12-year due date were to be made solely out of profits generated from the sale of records, purportedly through the business efforts of the investors.

(12) Music Masters was to pay 45% of its profits on the notes. No other payments were required to be made by Music Masters during the 12-year life of the notes.

(13) Music Masters purchased the majority of its masters from Hice Music Company in Charlotte, and Gold Shield Productions, Inc., in Nashville, Tennessee (hereinafter, “Gold Shield”).

(14) Hice Music Company (hereinafter “Hice”) sold about 40 masters to Music Masters in 1982 and 1983, taking back notes from Music Masters in excess of $30 million.

(15) Nick Hice (hereinafter “Hice”), the owner of Hice Music Company, testified that he was interested in the notes as a form of insurance that he would receive the royalty payments due him from the record sales, and that he did not expect to be paid over $30 million if no records were sold.

(16) It is extremely doubtful that the notes Music Masters issued to Hice will be paid from the sales of the masters. If Music Masters was to pay Hice the agreed upon price of $1.55 per album, a typical master in the 1982 Regular program with a note of $990,000 would have to sell over 600.000 records just to pay the principal due. A sale of 500,000 records is a gold album in the music industry. At the end of 12 years, with interest of 9% each year, a typical master would have to sell over 1.250.000 records to pay off the principal and interest due on the note. A sale of over 1,000,000 records is a platinum album. Only a very small percentage of masters ever reach this amount in sales.

(17) None of the notes Music Masters issued in these programs are likely to be paid out of the sales from the masters. Gold Shield, which also took back several million dollars in notes from Music Masters, was apparently working very closely with Music Masters and in collusion with the Defendants.

(18) Long term notes issued in conjunction with the purchase of masters are not normal in the music industry. The life of a master is short, and the great majority of the masters do not sell for longer than six months before they are taken off the market. Regional wholesalers refuse to take records which have previously been on the market and did not sell.

(19) One of the largest selling records in the Music Masters program has produced no more than approximately $6,000 to Music Masters.

(20) The Defendants made material gross valuation overstatements with respect to the masters they offered to investors.

(21) Defendants represented that the value of each master was supported by two appraisals. The unrefuted testimony of one of the appraisers, David Mathes, is that the amount of the “purchase price” of each master to be appraised was provided to him by Music Masters, and this price formed the basis for his determination of “fair market value.”

(22) David Mathes also obtained two other appraisers (Ronald Dean and Robert Holmes) to do appraisals for Music Masters at their request, and they too provided appraisals based on the purchase price of the masters that was provided to them by Music Masters. The only other appraiser for Music Masters was Lawrence Broderick, who also provided appraisals for Mid-South Music Corporation in Nashville, Tennessee.

(28) Mr. Mathes, who also testified as an expert witness for the Defendants, defined fair market value in terms of the sales price between a willing buyer and willing seller, but he made no attempt to determine whether the price was reached through arm’s-length negotiations, the price of other similar masters on the market, whether there was a recent previous sale of the same master. He stated that he would be unable to determine the fair market value of a master if he did not know, beforehand, a selling price, because it was purely negotiable.

(24) The method of appraisal used by all of Music Masters appraisers was the same method used in a similar abusive tax shelter, sold by Mid-South Music Corporation in Nashville, Tennessee. United, States v. Mid-South Music Corp., et al., Civil No. 3:84-0968 (M.D.Tenn., 1985). Mr. Mathes’ testimony in that case was similar to that given in the instant action.

(25) Mathes thoroughly researched each master recording and the artist using all his books, periodicals, and other information contained in his library in confirming his appraisal.

(26) Mathes clearly stated his “Determinants of Value” in this appraisal report.

(27) Mathes believed that his appraisals were good when he made them and that they were good on the date of trial.

(28) Mathes did not agree with the appraisal reports and the criteria used by the Government’s expert, Thomas Bonetti.

(29) Mathes believed his job was to research and confirm the fair market value of a master based upon what a willing buyer was to pay for it.

(30) Mathes testified that the fair market value for a $10,000 automobile could be $30,000 if that was the amount that a willing buyer and willing seller would exchange.

THE COURT: Let me ask this witness a couple of questions myself. On this fair market value, you were influenced, I take it, by the price which was given to you my Mr. Masters. Is that right — or somebody?
A. Mr. Olive (vice-president and secretary-treasurer of Music Masters and Masters Financial).
THE COURT: And all you did was say— if they say it’s worth two million, you verify in your own mind it’s worth two million. Is that right?
A. That is correct.
THE COURT: Now, suppose I had an automobile being sold for $10,000 by dealers and I came out to you and I said, “I’ll let you have this automobile for $30,000,” and you said, “Okay, I’ll buy it for $30,000.” Now, does that establish a price of fair market value?
A. If I’m the willing buyer, yes, sir. THE COURT: Is that — that’s what I thought you said. Okay. Let’s recess for lunch.

(Trial Transcript at 116-117).

(31) The valuations furnished by Masters and confirmed by their appraisers as the fair market values provided an apparent basis for the gross overvaluations of the masters and were stated for the purpose of misrepresenting to investors and prospective investors the correct valuations of the masters.

(32) There existed overvaluations which were in an amount exceeding 200% of the correct valuation of the masters involved.

(33) The Government’s expert witness, Tom Bonetti, has considerable experience in buying and selling masters, and in appraising the value of masters.

(34) Mr. Bonetti examined several of the masters offered in the Music Masters programs, and concluded that the correct value of these masters was but a small fraction of the stated purchase price, ranging from $1,000 to $45,000.

(35) Mr. Bonetti’s opinion of the fair market value of the masters is based on potential profit to be derived from record sales. Some of the factors that were used by him to project record sales include: the popularity and previous success of the artist, whether similar or identical songs on the master are already on the market, the quality of the performances, whether the masters were what they purported to be, and the quality of the production.

(36) Substantial defects in the masters were pointed out by Mr. Bonetti in his review of the sample masters he was provided, including songs on the albums that were not made by the performers, selections that were merely “song demos” and were not recorded to be marketed, and albums that did not appear to be recorded by the claimed artist.

(37) Several of the masters that were obtained were claimed by Music Masters to have been purchased in 1982, but were not in fact purchased until 1983.

(38) Defendants represented to the investors who leased interests in these masters that the investment tax credits and business deductions would be available to them for the 1982 tax year.

(39) A close examination of the dates of the purchases of the masters, the dates on the leases and the dates of the appraisals shows that Music Masters often leased masters before they were appraised. Further, several of the masters were leased to investors before they were produced, and yet, Defendants represented to investors the claimed values of the masters.

(40) The values Defendants represented to investors on masters that were not yet produced were each eventually supported by appraisals in the same amount. The Defendants’ appraisers did not appraise masters without listening to the masters first; yet, they did agree to either backdate or supply a date on the appraisal that was “as of” the purchase date.

(41) Many of the investors in the Music Masters program were audited by the Internal Revenue Service. Music Masters and Alfred Masters provided advice and assistance to these investors, by acting as Power of Attorney and otherwise representing to them that the tax deductions and credits they claimed on their tax returns were valid.

(42) As of April 1985, Music Masters continued to collect payments on leases from investors. As of September 1984, Music Masters continued to threaten investors by letters which stated that if their late payments were not made, the Internal Revenue Service would be informed.

(43) Alfred Masters has a bachelors degree and worked for 18 years as a stockbroker in California.

(44) Alfred Masters was involved in setting up the Music Masters leasing program, including preparation of the materials that would be used in the program and obtaining appraisers that would render values of the masters at around $1 million. It was Alfred Masters’ idea to set up Masters Financial, whose purpose was to market the tax shelter program.

(45) Masters had primary responsibility for obtaining sales representatives for the Music Masters investment programs.

(46) Defendant Masters distributed to sales representatives the offering materials for the lease programs, listings of masters to be leased, the lease agreements, the manufacturing/distribution agreements and the investment tax credit pass through. He also explained to them how the lease program worked, and gave them further instructions for getting lessees into the program.

(47) Even though Alfred Masters was away from the office the majority of the time, he was in daily contact with the office and was fully informed of its activities.

(48) In the summer of 1985, Alfred Masters sent out a letter to investors promoting a new program through another corporation that he formed, Masters International, offering to purchase and sell records made from the masters for the purpose of proving to the Internal Revenue Service that the investors are “still in the trade or business.”

(49) In 1981, Alfred Masters and Masters Financial both marketed the Mid-South Music master recording tax shelter that was enjoined by the District Court in Nashville, Tennessee.

(50) The investment programs offered by Defendants in 1982 and 1983 are investment plans within the meaning of Section 6700 of the Internal Revenue Code.

(51) The values of the masters which Defendants stated to lessees in the investment programs are material within the meaning of Section 6700 of the Internal Revenue Code.

(52) Defendants were instrumental in determining the values of the masters, by providing the claimed value of the notes to the sellers of the masters and by providing the same amounts to the appraisers.

(53) The notes entered into by Music Masters for the purchase of the masters leased in its investment programs were not bona fide. Similarly, Defendants’ appraisals were not independent, but were based on prearranged “values”.

(54) The value of each master leased in Music Masters investment programs can be no more than the cash that was paid for each master, and therefore, each valuation represents an overvaluation of more than 200%.

CONCLUSIONS OF LAW

(1) This Court has jurisdiction over this action and the parties, pursuant to Sections 1340 and 1345 of Title 28 of the United States Code and Sections 7402(a) and 7408(a) of the Internal Revenue Code of 1954, as amended (26 U.S.C.) (hereinafter the “Code”).

(2) Section 7408 of the Code grants this Court the authority to enter an injunction upon finding that the Defendants have engaged in conduct subject to penalty under Section 6700 of the Code, and upon further finding that injunctive relief is appropriate to prevent a recurrence of such conduct.

(3) Section 6700 of the Code was enacted in the Tax Equity of Fiscal Responsibility Act of 1982 for the purpose of penalizing persons who organize and sell abusive tax shelter plans, in an attempt to curb the sale of such shelters. S.Rep. No. 07-494, 97th Cong., 2d Sess., 266 (1982), U.S.Code Cong. & Admin.News 1982, p. 781, 1014. Section 6700 provides, in pertinent part:

(A) Imposition of Penalty — Any person who — (l)(a) organizes (or assists in the organization of) ...
(ii) any investment plan or arrangement, or ...
(b) participates in the sale of any interest in an entity or plan or arrangement referred to in subparagraph (A), and (2) makes or furnishes (in connection with such organization or sale)—
(A) a statement with respect to the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement which the person knows or has reason to know is false or fraudulent as to any material matter, or
(B) a gross valuation overstatement as to any material matter, shall pay a penalty ...

(4) Section 6703 of the Code places on the United States the burden of proving that the Defendants have engaged in conduct subject to penalty under Section 6700.

(5) The Government bears the burden of proving by a preponderance all factual predicates for the imposition of penalty for the filing of a frivolous return under 26 U.S.C. §§ 6702, 6703. Franklet v. United States, 578 F.Supp. 1552, 1559 (N.D.Calif.1984).

(6) Section 7408 injunction cases are similar in nature to injunction cases brought by the Securities Exchange Commission to enjoin fraudulent securities practices. See, e.g., United States v. Buttorff, 761 F.2d 1056, 1062 (5th Cir.1985); S.Rep. No. 97-494, 97th Cong., 2d Sess. at 266, reprinted in 1982 U.S.Code Cong. & Admin.News at 1014.

(7) The standard of the burden of proof used in the SEC injunction cases is the “preponderance of the evidence” standard, and this is the proper standard to be used in Section 7408 injunction cases. See Steadman v. SEC, 450 U.S. 91, 95, 101 S.Ct. 999, 1004, 67 L.Ed.2d 69 (1985) and SEC v. C.M. Joiner Corp., 320 U.S. 344, 355, 64 S.Ct. 120, 125, 88 L.Ed. 88 (1943).

(8) The Music Masters Master, Ltd., Sound Recording Lease Program is an abusive tax shelter within the meaning of Section 6700 of the Code.

(9) Music Masters, Masters Financial and Alfred Masters each were involved in the organization of the tax shelter within the meaning of Section 6700, and each participated in the sale of interests in the tax shelter.

(10) Music Masters, Masters Financial and Alfred Masters each furnished statements as to the value of the master recordings that were leased to investors in the tax shelter, within the meaning of Section 6700, by preparing and furnishing the offering materials and otherwise providing advice to the investors.

(11) Each of the statements of value of the masters that were furnished by the Defendants are gross valuation overstatements within the meaning of Section 6700.

(a) Valuation is necessarily an approximation. It is not necessary that the value arrived at by the trial court be a figure as to which there is a specific testimony, if it is within the range of figures that may properly be deduced from the evidence. See, e.g., Buffalo Tool & Die Mfg. Co., Inc. v. Commissioner, 74 T.C. 441 (1971). Arm’s-length sales are, other things being equal, the best evidence of the value of the assets of a business. Gravois Planning Mill Co. v. Commissioner, 299 F.2d 199 (8th Cir.1962); Grill v. United States, 303 F.2d 922, 157 Ct.Cl. 804 (1962). However, when peculiar circumstances tend to inflate the price at which property is sold, that price is not a proper measure of fair market value. Flowers v. Commissioner, 80 T.C. 914 (1983).

(b) The notes issued by Music Masters to purchase the masters were not bona fide. Although the notes are alleged to be recourse, requiring Music Masters to pay over $112 million plus 9% interest at the end of 12 years, the circumstances surrounding the issuance of these notes indicate that they were not entered into in bona fide arm’s-length transactions, and there is little likelihood that they will be paid when they supposedly become due. Testimony of Nick Hice shows that only cash amounts to be received by him were negotiated, and that he expected to make his profits from the sale of records, not from the notes. He did not expect to be paid if records did not sell. The conclusion of invalidity of the notes is also supported by other factors. The notes were only recourse as to Music Masters, Ltd., not to the individuals. At the end of the 12 years, Music Masters could be defunct, with no assets. The high possibility of this is shown in the facts alleged in a Complaint filed by John Olive against Alfred Masters in state court proceedings alleging that he is wasting corporate assets and selling the assets of the corporation. Olive, et al. v. Masters, et al, No. 85CVS-5272 (Superior Court, Mecklenburg County, filed April 29, 1985.) It is highly unlikely that there will be corporate assets for payment of these notes in 12 years, nor were there corporate assets when the notes were taken by Hice or Gold Shield.

(c) The testimony of Defendants’ expert, who was also one of Defendants’ appraisers for the masters, indicates that neither he nor the other appriasers obtained by Defendants rendered independent appraisals of the masters’ value. The definition most often used in tax cases to determine “fair market value” is “the price at which property would exchange hands in a transaction between a willing buyer and a willing seller, neither being under compulsion to buy nor sell and both being reasonably informed as to all relevant facts.” (Emphasis added). See Goldstein v. Commissioner, 298 F.2d 562 (9th Cir.1962) and O’Malley v. Ames, 197 F.2d 256 (8th Cir. 1952). See also 10 Merten’s Law of Federal Income taxation (1984 revised ed.), 1159.01, et seq. While Defendants’ appraisals were allegedly based on the definition, they were essentially based on the “prices” given to them by Music Masters, which were not based on arm’s-length transactions, but were created by Music Masters for the tax shelter plan. Further, Mathes’ testimony that he could not value a master if he was not first given a selling price casts a cloud over his credibility as an appraiser, since it is not necessary to have an actual sale in order to establish a market value. See Gersten v. Commissioner, 267 F.2d 195 (9th Cir.1959). Defendants’ expert provided the same testimony concerning his method of appraisals in United States v. Mid-South Music Corp., et al., Civil No. 3:84-0968 (M.D.Tenn., Sept. 20, 1985), a case very similar to the present one. In the Mid-South case, that Court determined that each of the masters was overvalued by more than 200%, and that the promissory notes were not bona fide.

(d) The testimony of the Government’s witness provides convincing evidence that the masters are worth no more than the cash that was paid for them, as his appraisals also closely approximate the cash that was paid for the masters. His testimony concerning industry practices and the life of master recordings leads this Court to conclude that the tax shelter plan of the Defendants was organized and promoted solely for the purpose of generating tax benefits for the investors without any real expectation of profit to be derived by the investors. This conclusion is further supported by the incredible number of records each master would have to sell in order for Music Masters to just “break even;” the fact that Defendants could have purchased masters directly from Paul Wyatt (who sold masters to Gold Shield) for a small fraction of the price they ultimately paid; and that Music Masters was able to “price” masters for the lessees before the masters were even produced.

(12) Section 6700 does not require that the Defendants know or have reason to know that the gross valuation overstatements were made under subsection (a)(2)(B). See U.S. v. Turner, 601 F.Supp. 757, 767 (E.D.Wisc.1985). Thus, the furnishing of the gross valuation overstatements by each of the Defendants is conduct subject to penalty within the meaning of Section 6700.

(13) Nevertheless, each of the Defendants also furnished false statements concerning the masters that they claimed to have purchased from Gold Shield in 1982, but were not in fact purchased by Gold Shield from Paul Wyatt, a sales broker of masters, until 1983. Under Section 46(c) of the Code, property must be placed in service in the year for which an investment tax credit is claimed. Solon v. Commissioner, 1980-77 T.C.Memo., aff'd by unpublished order (5th Cir.1981). Music Masters represented to investors that these masters were purchased in 1982 and that the investors could deduct the investment tax credits for that year. These were material false statements, since the availability of credits for the 1982 year would have a substantial impact on a reasonably prudent investor in the investment program. See United States v. Buttorff, 761 F.2d 1056 (5th Cir.1985).

(14) Each of the Defendants knew or had reason to know that the statements relating to the year these matters were purchased were false, since the masters were not in the possession of Music Masters and could not possibly have been sent to the distributors. The facts show that Alfred Masters was integrally involved and kept close contact with the office and John Olive, even though he was out of the office a great deal of the time. His close involvement with office operations is clear evidence that he had reason to know of the false statements concerning the purchase dates of these masters.

(15) Each of the Defendants also made false statements to the investors within the meaning of Section 6700 concerning the availability of the deductions and credits to them by investing in this program, based on the following:

(a) In order for a taxpayer to claim an investment tax credit or a business expense on his or her income tax returns, such taxpayer must enter into the transaction with the intent of making a profit from the business. If no profit motive exists, the deductions will be disallowed. Where there is a lack of economic substance to the whole transaction, the transaction will be considered a sham for tax purposes and no deductions or credits will be allowed. See e.g., Rice’s Toyota World, Inc. v. Commissioner, 752 F.2d 89 (4th Cir.1985); Flowers v. Commissioner, supra.

(b) The investors were each told they were to be in the business of manufacturing and distributing records based on the partial interest(s) they leased in the masters, and that they would not have to pay more than the start-up distribution expenses, which could be as little as $200. They were routinely not told who were the other investors in that master.

(c) The testimony of several witnesses provides clear evidence that it would be impossible for an investor with a partial interest to attempt to distribute an album, and that distribution in the 1982 Regular could not be obtained for the minimum payment of $200, or for $800 for a TV promotion.

(d) The Defendants each knew or had reason to know that the statements they furnished regarding the deductibility of the credits and business expenses were not allowable under the Code, as they organized and planned the transactions, and continued to represent to investors that their deductions and credits were allowable, after the Internal Revenue Service began auditing them.

(e) The availability of the deductions and credits to the investors is material within the meaning of Section 6700, in that this would impact on the decision-making process of a reasonably prudent investor. See United States v. Buttorff, supra.

(16) Defendants also represented that they were not to be a party to the agreements between the lessees and the distributors, and that the lessees themselves were to engage in the business of distributing the masters. But the Defendants were actively involved in obtaining distributors for the masters, were involved in trying to get the records on the market, and routinely changed either masters or distributors of the lessees without first notifying the lessees. The evidence is clear that Defendants carried on the business of manufacturing and distributing the masters. The Defendants’ representations to the contrary are false and/or fraudulent. These representations are material matters within the meaning of Section 6700, because Music Masters’ involvement in the business activities that were alleged to be the business of the investors might cause the lease arrangements to be reclassified by the Internal Revenue Service, thereby threatening the investors’ ability to claim the investment tax credits that were passed through to them by Music Masters. See, e.g., Comidsco, Inc. v. United States, 53 A.F.T.R.2d 84-333 (D.Ill.1983); See also Jackson v. Commissioner, T.C.Memo 1982 —556.

(17) Injunctive relief is appropriate to prevent each of the Defendants from engaging in further conduct subject to penalty under Section 6700 of the Code. The United States seeks to prevent the Defendants from continuing to represent to investors that the tax deductions and credits they claimed are valid, among other things. Alfred Masters’ background in the securities business and the fact that he was one of the originators of this Music Masters’ tax shelter plan; his history of promoting the Mid-South Music plan; his continued representations to investors concerning the validity of their tax deductions after audit and after the institution of this law suit, and his marketing of a new plan in 1985 to buy and sell the records of the lessees for the purpose of proving to the Internal Revenue Service that they are “still in a trade or business,” all indicate that he has no intention to cease the activities complained of in this case. Where there is no indication that an individual will attempt to comply with the law, injunctive relief has been determined to be appropriate. See, e.g. United States v. Buttorff, 761 F.2d 1056 (5th Cir.1985); United States v. White, 769 F.2d 511 (8th Cir.1985); and United States v. Mid-South Music Corp., et al., supra. Since he acts through the two Defendant corporations, injunctive relief is appropriate as to each of them also.

(18) Injunctive relief is also appropriate because of the public interest in preventing the Defendants from making further representations concerning the validity of the deductions and credits taken by the investors in the Music Masters program on their income tax return. See, e.g. United States v. Buttorff, supra. Over 1,000 persons invested in this program in 1982 and 1983. The Internal Revenue Service estimates that if each person claimed the deductions and credits alleged by the Defendants to be available to them, improper tax claims of over $17 million will be claimed. This loss to the public fiscal will be increased by the cost of auditing and litigating these cases, in the event that the investors contest the audits. Music Masters continued representations to the investors that they should not settle their cases with the Internal Revenue Service, and that the master values as stated by them are correct, should be enjoined. The history of Defendants’ continued sales activities, the continued allegations that the tax deductions are or somehow can be made legitimate, the harm to the public and the harm to the Government are all reasons that show why injunctive relief is appropriate to prevent Defendants from further sales activities of abusive tax shelters such as the present one, and from making representations to investors that the tax shelter is legitimate.

(19) Defendants’ conduct is also enjoinable under Section 7402(a) of the Internal Revenue Code.

(a) Section 7402(a) of the Internal Revenue Code gives the district courts of the United States the jurisdiction “to make and issue in civil actions, writs and orders of injunction ... and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws.”
(b) This Court has jurisdiction to grant an injunction under Section 7402(a). See, United States v. Savoie, 594 F.Supp. 678 (W.D.La.1984); United States v. May, 555 F.Supp. 1008 (E.D. Mich.1983) and United States v. Landsberger, 692 F.2d 501 (8th Cir.1982).
(c) Defendants have interfered with the proper enforcement of the Internal Revenue laws by continuing to represent to investors that the deductions and credits attributable to the Music Masters’ tax shelter plan are allowable under the Internal Revenue Code, and by continuing to urge investors to not settle their cases with the Internal Revenue Service. Defendant Masters has also created a new plan through his corporation, Masters International, and has represented to investors that this new plan may somehow legitimize the deductions they took that are clearly disallowable. Thus, injunctive relief to prevent further activities such as these is appropriate and necessary under Section 7402(a) of the Internal Revenue Code.

(20) Once all of the facts have been proven showing a violation of Section 6700 of the Code and showing that injunctive relief is appropriate, this Court is authorized, as a matter of law, to issue an appropriate injunction order. Traditional equity grounds need not be proven in order for an injunction that is authorized by statute to be issued. United States v. White, supra; United States v. Buttorff, 761 F.2d at 1059; Donovan v. Brown Equipment & Service Tools, Inc., 666 F.2d 148 (5th Cir. 1982); Cf. United States v. Landsberger, 692 F.2d 501 (8th Cir.1982).

(21) However, under the terms of Section 7408 of the Code and the facts of this case, the traditional equity grounds for obtaining an injunction have, indeed, been met. It is clear from the facts of this ease that the United States will suffer irreparable injury if an injunction is not granted, and, that it has no adequate remedy at law. The threatened injury is further depletion of Government resources in locating and auditing taxpayers who may claim improper deductions and credits based on their investment in the Music Masters plan. Those who follow the advise of the Defendants may proceed to litigate their claims that the deductions are legitimate. As stated in another, similar injunction case under Section 7408 of the Code, "... actions against those following [the Defendants’] plans would entangle the Government in a maze of lawsuits.” United States v. Savoie, 594 F.Supp. 678 (W.D.La.1984). Injunctive relief is therefore both appropriate and necessary under Section 7402(a) of the Code.

(22) Any finding of fact which is determined also to be a conclusion of law is so deemed and any conclusion of law which is determined also to be a finding of fact is so deemed.

Based on the foregoing Findings of Fact and Conclusions of Law, the Court will enter Final Judgment of Permanent Injunction as to Alfred R. Masters, Music Masters, Ltd., and Masters Financial, Inc. simultaneously with this Memorandum of Decision.

FINAL JUDGMENT OF PERMANENT INJUNCTION AS TO ALFRED R. MASTERS, MUSIC MASTERS, LTD., AND MASTERS FINANCIAL, INC.

Based upon consideration of all of the evidence presented at trial, upon the pleadings and the Findings of Fact and Conclusions of Law found by this Court, having found that Defendants have engaged in conduct subject to penalty under Internal Revenue Code Section 6700 and that injunctive relief is appropriate to prevent a recurrence of such conduct, IT IS, HEREBY, ORDERED, ADJUDGED, AND DECREED:

(1) That Defendants Alfred Masters, Masters Financial, Inc., and Music Masters, Ltd., their officers, agents, attorneys, servants, employees and all those in active concert or participation with them, and each of them, are hereby permanently enjoined and restrained from directly or indirectly, by the use of any means or instrumentalities:

A. Taking any action in furtherance of the organization, promotion/ advertising, marketing, or selling of the Music Masters, Ltd. Master Sound Recording Lease Program (hereinafter “Tax Shelter”);
B. Representing that an investor in the Tax Shelter is entitled to Federal income tax deductions or credits, with respect to the Tax Shelter property (including investment tax credits and/or deductions for lease payments and distribution expenses), and from furnishing or distributing any oral or written information that so indicates;
C. Organizing or assisting in the organization of, or selling or leasing or participating in the sale or lease of interests in any “tax shelter” as defined in paragraph 3, infra, unless a complete appraisal using comparable sales and/or other methods of valuation commonly recognized in the trade has been obtained from an appraiser who is certified by the American Society of Appraisers, or who has similar professional credentials;
D. Organizing or assisting in the organization of, or participating in the sale of any interests in a partnership or other entity, an investment plan or arrangement or any other plan or arrangement, in which the Defendants make or furnish, in connection with such organization or sale:
(a) a statement with respect to the allowability of any deductions or credits, the excludability of any income, or the securing of any other tax benefits by reason of holding an interest in the entity or participating in the plan or arrangement, which the Defendants know or have reason to know is false or fraudulent as to any material matter, or
(b) a gross valuation overstatement as to any material matter. A “gross valuation overstatement” means any statement as to the value of any property or services if the value so stated exceeds 200 percent of the amount determined to be the correct valuation, and if the value directly relates to the amount of a deduction or credit for Federal income tax purposes.

(2) That for a period of five (5) years from date of entry of this Judgment, if Defendants acting individually or through any agent, servant, employee, corporation or other entity now in existence or hereafter formed, or indirectly in any other manner, intend to organize, assist in the organization of, or participate in the sale or lease of any tax shelter as defined in paragraph 3 below, they each shall:

A. Notify the Internal Revenue Service (through the District Director of the Internal Revenue District wherein he resides) of the intent to participate in the organization or sale of such tax shelter;
B. Provide the District Director with complete and true copies of all offering documents, appraisals, tax opinions, and other promotional material with respect to such tax shelter;
C. Wait a period of thirty (30) days from the date such material is delivered to the District Director before beginning the promotion and sale of such tax shelter; and
D. Refrain from making any claim or ■ statement that such notification implies approval of the shelter by the Internal Revenue Service, or that any action or nonaction by the Internal Revenue Service as the result of such notification implies approval of the shelter by the Internal Revenue Service.
E. Prominently disclose the existence and nature of this Judgment in any and all materials or media used to offer for sale such tax shelter.

(3) A “tax shelter” as the term is used in paragraphs 1 and 2 of this Final Judgment is an investment which has as a significant feature for federal income or excise tax purposes either of the following attributes: (1) deductions in excess of income from the investment being available in any year to reduce income from other sources in that year, or (2) credits in excess of the tax attributable to the income from the investment being available in any year to offset taxes on income from other sources in that year.

(4) That Defendant Music Masters shall send a copy of this Judgment to each lessee in its 1982 and 1983 Master Sound Recording Lease Programs. Defendant Alfred R. Masters shall file an affidavit with this Court, within thirty (30) days from the date this Judgment is entered, affirming that a copy of this Judgment has been sent to each such lessee.

(5) That Defendant Music Masters shall send a letter to each lessee in its 1982 and 1983 Master Sound Recording Lease Programs offering to rescind the lease agreements Music Masters entered into with each such lessee within 30 days from the date this Judgment is entered. Music Masters shall file a copy of this letter with this Court thirty (30) days from the date this Judgment is entered.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that this Court shall retain jurisdiction of this action to implement and enforce this Final Judgment and all additional decrees and orders necessary and appropriate to the public interests. The provisions of paragraph 2 shall be in effect for a term of five (5) years from the date entered, unless the United States files a notice no earlier than 180 days nor less than 60 days before expiration, stating reasons why the best interest of the United States requires an extension of these provisions. In such case, the Court may extend these provisions in accordance with the public interest.

The Clerk is directed to file this Final Judgment simultaneously with this Court’s Memorandum of Decision.

      . Masters, Music Masters and Masters Financial are the sole Defendants in this case. The other named Defendants have either settled with the Government or have been dismissed. Defendants John W. Olive and Ronald T. Dean each have consented to be enjoined, without admitting or denying any of the facts alleged in the Complaint, and Final Judgments of Permanent Injunction have been entered against them by this Court. Defendant David W. Mathes was enjoined pursuant to a Court order issued by the United States District Court for the Middle District of Tennessee, and was therefore dismissed from this case. Defendant Robert F. Duncan was not served with process, and pursuant to Rule 4(j) of the Federal Rules of Civil Procedure, will be dismissed from this case.


source: Caselaw Access Project

author: SIMMONS, District Judge.

license: Public Domain

text:
    UNITED STATES of America v. Howard Emmett HORSLEY, Charlotte D. Johnson.
    Crim. No. 85-79.
    United States District Court, W.D. Pennsylvania, Criminal Division.
    Nov. 12, 1985.

      A. Elliot McLean, Asst. U.S. Atty., Pittsburgh, Pa., for plaintiff.
    Kim William Reister, Pittsburgh, Pa., for defendant Horsley.
    Stephen F. Capone, Pittsburgh, Pa., for defendant Johnson.
   OPINION

SIMMONS, District Judge.

The Defendants, Howard Emmett Horsley and Charlotte Johnson, have been charged in a seven count indictment with conspiracy to distribute and possess with the intent to distribute heroin, in violation of 21 U.S.C. § 846; and with distributing and possessing with intent to distribute heroin in violation of 21 U.S.C. § 841(a)(1). Only the Defendant Howard Horsley is charged in Counts 2, 3, and 4 of the indictment (distribution and possession with intent to distribute); both of the Defendants are charged in Count 1 of the indictment (conspiracy to distribute and possess with intent to distribute) as well as in Counts 5, 6, and 7 (distribution and possession with intent to distribute) of the indictment.

Both Defendants have filed numerous pre trial motions which have previously been heard and argued, and are now ready for decision by this Court. The Defendant Howard Horsley has filed the following motions: Motion for a Speedy Trial, Motion to Dismiss, Motion to Disclose Favorable Evidence, Motion to Disclose the Identity of an Informant, Motion for Pre Trial Hearing to Determine the Admissibility of Hearsay Statements of Co-Conspirator, Motion for Bill of Particulars, Motion for Disclosure of Jencks Material, and a Motion to Suppress. Defendant Horsley filed a second motion to dismiss the indictment, however, that motion was withdrawn by Horsley on October 22, 1985. The Defendant Charlotte Johnson has filed a Motion for Severance, Motion for Pre Trial Hearing to Determine Admissibility of Hearsay Statements of Co-Conspirator, and a Motion to Adopt Defendant Horsley’s Motions to Dismiss and Suppress. Defendant Horsley has also filed a Motion to Adopt Defendant Johnson’s Motion, for Severance.

MOTION FOR A SPEEDY TRIAL

The Defendant Howard Horsley was indicted in the Western District of Pennsylvania by a federal grand jury on April 11, 1985. Defendant Horsley had previously been arrested December 12, 1984 on a warrant for state charges by City of Pittsburgh police officers, and on April 24, 1985, these state charges were nolle prossed. In this motion, the Defendant contends that the time for the commencement of the federal Speedy Trial Act, 18 U.S.C. § 3161 et seq., should be based on the date of his arrest on December 12, 1984, and not on the date of the federal indictment, April 11, 1985. The Defendant claims that the Speedy Trial Act has been violated, and he is entitled to the dismissal of the charges, if the December 12, 1984 arrest date is used as the relevant date in computing the time provisions of the Speedy Trial Act. The Defendant also argues that because the United States instituted the federal proceedings when there were only 47 days remaining on the state speedy trial period, it is improper for the United States to circumvent the state speedy trial periods by instituting these new federal proceedings. It is the Defendant’s position that the state arrest on December 12, 1984 is the relevant date that must be used in computing the federal speedy trial requirements under section 3161 of the Speedy Trial Act.

The Speedy Trial Act requires that a Defendant be charged by indictment or information within 30 days of his arrest or the service of summons [18 U.S.C. § 3161(b) ], and that trial commence within 70 days of either the filing of the indictment or the Defendant’s appearance before a judicial officer, whichever event occurs last. [18 U.S.C. § 3161(c)(1) ]. However, it is a federal arrest and not a state arrest which triggers the commencement of these time provisions. United States v. Adams, 694 F.2d 200 (9th Cir.1982); United States v. Iaquinta, 674 F.2d 260, 267 (4th Cir.1982); United States v. Leonard, 639 F.2d 101 (2d Cir.1981). In order for the time limitations contained in section 3161 of the Speedy Trial Act to apply, the Defendant must be held on federal charges, and, thus, if a person is held by state authorities on a state charge, and then is turned over to federal authorities for federal prosecution, the date of that delivery into federal custody, and not the date of the state arrest, is the applicable date for purposes of the Speedy Trial Act. United States v. Shahryar, 719 F.2d 1522 (11th Cir.1983); United States v. Tanu, 589 F.2d 82 (2d Cir.1978).

Here the Defendant was arrested by state officials on December 12, 1984, on state charges. The record indicates that there was no federal action or involvement in the state arrest, and the arresting police officers could not have been acting as “agents” of the federal government at the time they arrested Horsley on December 12, 1984. It is also clear that there has been no violation of the Pennsylvania Speedy Trial requirements, since the state charges were timely withdrawn prior to the Defendant’s final state trial date. There has been no expiration of the time period permitted by the federal Speedy Trial Act, since it is the date of the federal indictment and not the date of the state arrest which triggers the time provisions contained in 18 U.S.C. § 3161. The Motion is without merit, and the Motion to Dismiss for Speedy Trial Violations will therefore be denied.

MOTION FOR PRE TRIAL HEARING TO DETERMINE EXISTENCE OF CONSPIRACY

Both of the Defendants have filed motions seeking a separate pre trial hearing to determine the existence of a conspiracy, in which this Court would determine the admissibility of co-conspirator statements. Before the statements of a co-conspirator may be presented to the jury, the Court must determine that the government has established the existence of the alleged conspiracy and the connection of each Defendant with it by a clear preponderance of the evidence, independent of the hearsay declarations. United States v. Continen tal Group, Inc., 603 F.2d 444, 457 (3d Cir.1979), cert. denied, 444 U.S. 1032, 100 S.Ct. 703, 62 L.Ed.2d 668 (1980). In United States v. Ammar, 714 F.2d 238 (3d Cir. 1983), the Third Circuit has considered whether an in limine hearing should be preliminarily held so that the court can determine the existence of the alleged conspiracy. The Third Circuit in Ammar, supra, noted that the Fifth Circuit prefers a preliminary hearing in limine, while the Ninth Circuit declines to express a preference for the pre trial determination of the admissibility of co-conspirator statements. In Ammar, the Third Circuit declined to impose the requirement of the preliminary hearing, emphasized that the control of the order of proof at trial is within the discretion of the trial judge, and concluded that in the circumstances, it was not error or an abuse of discretion for the trial judge to have refused to hold a pre trial hearing. 714 F.2d at 247.

There is no justification in this case for holding a pre trial hearing on the question of the admissibility of co-conspirator statements. A pre trial hearing would be cumbersome, inefficient, and duplicative. This is not an unduly complex case which involves many defendants or lengthy and varied counts. This Court at trial will easily and efficiently be able to determine whether the prosecution has established the existence of the conspiracy which would then permit the use of the declarations of the co-conspirators. The motions of both Defendants will be denied.

MOTION TO DISMISS INDICTMENT

The Defendant Howard Horsley has moved to dismiss the instant indictment, contending that it was sought by law enforcement officers of the Commonwealth of Pennsylvania in order to circumvent his Pennsylvania procedural and substantive constitutional rights. Horsley contends that the above-captioned indictment is one of a series of indictments where the City of Pittsburgh police have sought to utilize the United States District Court for the Western District of Pennsylvania for the prosecution of crimes which are de minimus and/or in cases where there is a violation of a defendant’s rights under the Commonwealth of Pennsylvania. Defendant claims that the selection of the federal forum for these reasons constitutes prosecutorial misconduct which requires the dismissal of the indictment. The Defendant Charlotte Johnson has also adopted this Motion to Dismiss.

Defendant Horsley claims that the criminal information brought in state court and the indictment brought in the above-captioned case are duplicitous, and that the principle reason for this federal prosecution is to circumvent Horsley’s rights under the Pennsylvania constitution and to avoid the suppression of the evidence and the dismissal of the state criminal action. At the hearing and argument held before this Court on July 3, 1985, the Defendant’s attorney conceded that he had to show more than the mere fact that Horsley’s case was being prosecuted in federal court, and that there were problems with the state court proceeding. (Tr. July 3, 1985 at 6). The Defendant, however, has not been able to show such a course of conduct on the part of the United States Attorney in adopting cases of this type.

The Assistant United States Attorney indicated at the July 3, 1985 hearing that the federal government assumed the prosecution of the above-captioned case because there was an on-going federal investigation concerning the Defendant’s involvement in illegal drug trafficking, that Howard Horsley had long' been identified as a major heroin trafficker, that the Defendant Horsley had a prior federal conviction for narcotics, and that it was felt that Defendant Horsley was a career type of criminal. The Assistant United States Attorney indicated that the United States asked to adopt the state case, and received the approval of the District Attorney, before any of the evidence was presented to the federal grand jury. (Tr. July 3, 1985 at 14-16). At the time that the state charges were withdrawn, there had been no allegations made that the Pennsylvania speedy trial requirements had not been met.

The Defendants claim that the indictment in the above-captioned case is a form of prosecutorial misconduct since the indictment was brought for the purposes of circumventing state substantive and procedural rights. While it is true that there is prosecutorial misconduct and vindictiveness where the motive of the prosecution is to discourage or preclude a Defendant from exercising legal rights [Jackson v. Walker, 585 F.2d 139 (5th Cir.1978)], in the instant case the conduct of the government in obtaining the indictment has not prevented or discouraged the Defendants from exercising any of their legal rights under federal or state law. The claim that substantive and procedural rights were violated at the state level is without merit since there has never been any state court ruling or hearing on those issues; although charges were originally filed in state court, the Defendants were never brought to trial on those charges in the state court system, no pre trial motions concerning the state charges were ever filed, and there has never been any prosecution or adjudication on the merits of the state case. The above-captioned indictment was not brought because the local law enforcement officers failed to prevail in state court, and there has been no showing of a policy or practice on the part of the United States Attorney to federally prosecute crimes in order to circumvent state substantive and procedural rights. The United States Attorney has articulated legitimate reasons for initiating this federal prosecution, and the Defendant has offered nothing to either refute these legitimate reasons or to indicate that the United States Attorney acted vindictively and/or in bad faith.

Additionally, this Court notes that prosecution of drug conspiracy charges in federal court after a state court conviction on the same charges is not an abuse of discretion and does not show prosecutorial vindictiveness. United States v. Sellers, 603 F.2d 53 (8th Cir.1979). Where as in this case there have been no pre trial motions filed in the state system and no trial on the underlying charges in the state system, it is not an abuse of prosecutorial discretion for the United States to obtain the above-captioned indictment. The Motion to Dismiss will therefore be denied.

MOTION FOR DISCOVERY AND/OR PRODUCTION OF FAVORABLE EVIDENCE

Defendant Horsley seeks the pre trial disclosure of all written or recorded statements or reports which are favorable to Defendant; disclosure of all grants of immunity, plea bargains, promises and preferential treatment of witnesses, all “rap” sheets of witnesses who will testify; names and addresses of all witnesses who testified before the grand jury; the identity of all witnesses who failed to identify Defendant Horsley as a member of the alleged conspiracy; statements of the co-conspirator; and all personnel files of the undercover officer.

The government, by way of response to this Motion, has stated that it has no statements or reports discoverable under Brady v. Maryland, 373 U.S. 83, 83 S.Ct. 1194, 10 L.Ed.2d 215 (1963); that there have been no grants of immunity, plea bargains, promises or preferential treatment of witnesses. The government also claims that there is no witness who was unable to identify Defendant Horsley as an alleged conspirator, and has stated that all statements by the Defendants and all statements which are discoverable under Local Rule 24 have been or will be provided. The United States has also assured that all documentation pertaining to funds used to purchase the controlled substances and/or to funds provided to the informant will be given to the Defendant. It therefore appears that the only two requests presently at issue in the Defendant’s Motion for Discovery are the request for the names and addresses of the grand jury witnesses who will not be called at trial, and the request for the disclosure of the personnel files of the undercover officer.

With respect to the matter of the federal grand jury proceedings, it is clear that a particularized need for the disclosure must be shown for material other than that which can be obtained under the Jencks Act, 18 U.S.C. § 3500. Dennis v. United States, 384 U.S. 855, 870, 86 S.Ct. 1840, 1849, 16 L.Ed.2d 973 (1966). Here the Defendant is essentially claiming that the grand jury information would reveal exculpatory evidence, and this is not sufficient to satisfy the requirement of particularized need. United States v. Short, 671 F.2d 178 (6th Cir.1982). The request will be denied.

With respect to the request for the disclosure of the personnel file of the undercover officer, the Defendant contends that it is a discoverable document in the possession of the United States Government. The Defendant believes that the personnel file may contain material which will be helpful in preparing for the cross examination of the undercover officer, and the Defendant contends that the defense at trial will be that the indictment was rushed through by vindictive and hostile law enforcement personnel.

The Defendant claims that United States v. Deutsch, 475 F.2d 55 (5th Cir. 1973), authorizes the disclosure of the personnel file in this instance. In Deutsch, the Defendant moved for the personnel file of a postal employee, and in response, the United States Attorney stated that it did not have the personnel file. The trial court ruled that the prosecution could not be compelled to disclose something it did not have, and further, that the Post Office was not an arm of the prosecution contemplated by Brady. On appeal, the Fifth Circuit held that Brady did not refer to an arm of the prosecution and the government could not compartmentalize the Department of Justice and deny having access to the requested files. The Deutsch court stated: “We do not suggest ... that the government was obliged to obtain evidence from third parties, but there is no suggestion in Brady that different ‘arms’ of the government, particularly when so closely connected as this one for the purpose of the case, are severable entities.” 475 F.2d at 57.

Here, the Government is not in possession of the personnel files of the City of Pittsburgh, and the situation is distinguishable from Deutsch where the agency involved was the Post Office Department. The request for production of the personnel file will be denied.

MOTION FOR DISCLOSURE OF IDENTITY AND/OR PRODUCTION OF INFORMANT

Defendant Horsley seeks the identity of the confidential informant, and while he does not specifically request in the “wherefore” clause of his motion that the informant be produced, he does allude to the production of the confidential informant elsewhere in that motion.

The Government has responded to this Motion by revealing that the informant’s name is Jack Williams, a/k/a Smokey Williams, whose present address and whereabouts are unknown to the Government, and who has not been seen since the ending months of 1984. At the hearing on the motions held July 3, 1985, the Defendant took the position that because the Government could not physically produce the confidential informant, the indictment should be dismissed, or alternatively, those counts pertaining to the controlled buys during which the confidential informant was present should be dismissed. However, the Assistant United Attorney represented to this Court that it has other witnesses who are able to testify on the subject of the controlled buys, (Tr. 28), and it later reiterated that assurance to this Court. (Tr. 49). The government also assured this Court that it would continue to make affirmative efforts to locate the present whereabouts of Mr. Williams, the confidential informer. (Tr. 46).

This Court does not believe that dismissal of the indictment is the proper remedy for the inability of the Government to produce the informant. In United States v. Valenzuela-Bernal, 458 U.S. 858, 102 S.Ct. 3440, 73 L.Ed.2d 1193 (1982), where the Defendant was charged with violating the immigration laws, two other illegal aliens who were apprehended with the Defendant were deported after an Assistant United States Attorney determined that the two illegal aliens possessed no evidence material to the Defendant’s prosecution. The United States Supreme Court held that the prompt deportation of the alien witnesses was justified by practical considerations, the government had good reasons for so doing, and that there was no hiding or concealing of witnesses by the Government. 458 U.S. at 865-66, 102 S.Ct. at 3445-46, 73 L.Ed.2d at 1201-02. The Court also held that the Defendant could not establish a violation of his constitutional right to compulsory process merely by showing that the deportation of the passengers deprived the Defendant of their testimony, some plausible showing of how their testimony would have been material and favorable was additionally required. 458 U.S. at 867, 102 S.Ct. at 3446, 73 L.Ed.2d at 1202.

The Supreme Court in Valenzuela-Bernal recognized that “while a defendant who has not had an opportunity to interview a witness may face a difficult task in making a showing of materiality, the task is not an impossible one. In such circumstances it is of course not possible to make any avowal of how a witness may testify. But the events to which a witness might testify, and the relevance of those events to the crime charged, may well demonstrate either the presence or absence of the required materiality.” 458 U.S. at 871, 102 S.Ct. at 3448, 73 L.Ed.2d at 1205.

Where the Government has contributed to the unavailiability of the witnesses, the showing of favorable testimony is relaxed. Singleton v. Lefkowitz, 583 F.2d 618, 623 (1978). Here, however, the unavailability of the witness is due to no fault of the federal government which attempted and continues to attempt, to locate the present whereabouts of the confidential informant.

Further, there has been no showing by the Defendant that the confidential informant would provide relevant and favorable evidence. At the July 3, 1985 hearing, the Defendant claimed that the transcript of the detention hearing before the United States Magistrate and the transcript of the preliminary hearing before the state court magistrate reveal a discrepancy in the amount of heroin involved in the purchases the informant made from Howard Horsley and Billy Johnson. (Tr. 41-46). However, these alleged discrepancies are not favorable to the defense, and it cannot be exculpatory or material in nature because the quantity of the heroin involved is irrelevant to the charges; the relevant issue is whether or not the Defendant Howard Horsley distributed or possessed with the intent to distribute heroin, a Schedule I narcotic drug controlled substance. Accordingly, the Motion will be denied.

MOTION FOR BILL OF PARTICULARS

MOTION FOR EARLY DISCLOSURE OF JENCKS MATERIAL

It is unclear from representations made at the July 3, 1985 hearing whether the requested information pertaining to these motions has been provided, or whether the Defendant actively continues to pursue these motions. (See Tr. at 50). In any event, the Motions will be denied. The indictment in the above-captioned case is not so vague, indefinite or general that it fails to apprise the Defendant of the nature of the charges pending against him, since the substantive counts allege the date and nature of the alleged criminal activity of the Defendant, and the conspiracy count sufficiently alleges the existence of the conspiracy to distribute heroin, the time period during which the conspiracy was allegedly operative, and the statute which was being violated. It is not necessary for the Government to either allege or prove an overt act in furtherance of a conspiracy to distribute controlled substances in violation of 21 U.S.C. § 841.

The Motion for Bill of Particulars will be denied.

With respect to the early disclosure of Jencks material, the Jencks Act, 18 U.S.C. § 3500, does not require the Government to produce the material prior to the time a witness testifies. The Court declines to order the pre trial disclosure of such material. The Motion will be denied.

MOTION FOR SEVERANCE

The Defendant Charlotte Johnson has moved to sever her trial from that of the co-defendant Howard Horsley, contending that the Government will introduce post-arrest statements of the co-defendants as admissions; that she will be prejudiced by the extensive criminal record of the co-defendant; and that her involvement in the alleged criminal acts is minimal as compared to the involvement of the co-defendant Howard Horsley. The Defendant Howard Horsley also joins in the Motion for Severance.

Rule 14 of the Federal Rules of Criminal Procedure permits a severance of defendants, if joinder of the defendants is prejudicial either to a defendant or to the Government. Rule 8(b) of the Federal Rules of Criminal Procedure permits two or more defendants to be charged in the same indictment if they are alleged to have participated in the same act or transaction or in the same series of acts or transactions constituting the offense.

A motion for severance is addressed to the sound discretion of the trial court, and upon appellate review, a Defendant will gain relief only if he satisfies the heavy burden of proving that the trial court’s decision was an abuse of discretion which denied him the right to a fair trial. United States v. Boscia, 573 F.2d 827, 832 (3d Cir.1978); United States v. Rosa, 560 F.2d 149 (3d Cir.1977); United States v. Sommers, 496 F.2d 723 (3d Cir.1974); United States v. Armocida, 515 F.2d 29 (3d Cir.1975).

Persons jointly indicted will be tried together unless there is a clear and substantial showing that a Defendant will be so severely prejudiced that the right to a fair trial would be denied.' Where the Government charges multiple defendants with a single conspiracy, the interests of judicial economy usually favor a single trial. A severance is also not required where it is possible that evidence will be admissible against some but not all of the Defendants. United States v. Dickens, 695 F.2d 765 (3d Cir.1982); United States v. Jackson, 649 F.2d 967 (3d Cir.1981); United States v. Kenny, 462 F.2d 1205 (3d Cir.), cert. denied, 409 U.S. 914, 93 S.Ct. 233, 34 L.Ed.2d 176 (1972).

In the instant case, count one of the indictment charges both Defendants with conspiracy to distribute heroin, and counts five, six and seven charge both of the Defendants with distribution of heroin and the possession of it with the intent to distribute it. Proof of direct involvement in the actual transfer of heroin is not necessary for a conviction on the conspiracy count, and with reference to Counts 5, 6, and 7, where both of the Defendants are charged, it is also possible for the Defendant Johnson to be found guilty as an aider and abettor without proof that she actually did every act constituting the offense charged. Defendant Johnson’s claim that a severance should be granted because her degree of participation is minimal as compared to Defendant Horsley’s participation is of no merit.

The Defendant Johnson has not shown that she will be severely prejudiced by a joint trial. Under proper instructions by this Court, the jury will be able to separate the evidence and render a fair verdict as to each Defendant. The fact that evidence against one Defendant may be stronger than the evidence against another Defendant is not a sufficient reason to compel a severance, nor is the fact that a co-defendant has a criminal record a sufficient reason for a severance. United States v. Witschner, 624 F.2d 840, 845 (8th Cir.1980); United States v. Dalzotto, 603 F.2d 642, 646 (7th Cir.), cert. denied, 444 U.S. 994, 100 S.Ct. 530, 62 L.Ed.2d 425 (1979); United States v. Dansker, 537 F.2d 40 (3d Cir. 1976), cert. denied, 429 U.S. 1038, 97 S.Ct. 732, 50 L.Ed.2d 748 (1977); United States v. Bazinet, 462 F.2d 982, 992 (8th Cir.), cert. denied, 409 U.S. 1010, 93 S.Ct. 453, 34 L.Ed.2d 303 (1972). However, if prejudice to either of the Defendants does develop during the course of the trial, the Court may properly grant a severance at that time. The Motion for Severance will be denied.

MOTION TO SUPPRESS

The Defendant Horsley has moved to suppress evidence seized on or about December 12, 1984 upon the execution of search and arrest warrants issued by a magistrate of the City of Pittsburgh. The Defendant contends that the arrest warrants were obtained in violation of the Pennsylvania Rules of Criminal Procedure which require that an affidavit be attached; that the search warrant contains material misrepresentations of fact; that probable cause for the issuance of the search warrant was lacking, and that the probable cause section of the search warrant affidavit was impermissibly based on hearsay and on an unreliable informant.

With respect to the Defendant’s claim that the arrest warrant is defective since there was no affidavit of probable cause, this Court noted that Rule 119(a) of the Pennsylvania Rules of Criminal Procedure does require that an arrest warrant must be supported by one or more affidavits sworn to before the issuing authority. However, the Comment to that rule specifically states: “Where a properly sworn to complaint contains a statement of facts and circumstances sufficient to establish probable cause for the issuance of the arrest warrant, it may serve as the affidavit.” Here Benny Sledge did swear to the criminal complaint, which clearly sets forth instances of deliveries by Horsley of controlled substances to the undercover officer Sledge. There were sufficient facts and circumstances to establish probable cause for the issuance of the arrest warrant

A. Probable Cause for the Issuance of the Search Warrant

The Fourth Amendment requirement of probable cause for the issuance of a warrant must be applied in the light of the totality of the circumstances made known to the magistrate. A reviewing court may not undertake a de novo determination of probable cause, and should determine only whether there is substantial evidence to support the magistrate’s decision to issue the warrant. In so doing, the Court must pay great deference to the magistrate’s determination of probable cause, and must interpret the supporting affidavits in a commonsense manner. Illinois v. Gates, 462 U.S. 213, 236 103 S.Ct. 2317, 2331, 76 L.Ed.2d 527, 547 (1983). The Supreme Court reiterated in Massachusetts v. Upton, 466 U.S. 727, 104 S.Ct. 2085, 80 L.Ed.2d 721 (1984) that the totality of the circumstances test is the proper standard for determining the existence of probable cause under the Fourth Amendment.

Probable cause may be founded upon hearsay and upon information received from informants, as well as information that is within the affiant’s own knowledge. Franks v. Delaware, 438 U.S. 154, 165, 2681, 98 S.Ct. 2674, 57 L.Ed.2d 667, 678 (1978). In the application for the search warrant in this case, Beverly Stewart, the affiant, based her probable cause belief on the following:

During the week of 12/10/84, this affiant received information from a confidential and reliable source who stated that Howard Horsley is the main dealer of heroin in the City of Pittsburgh.: Howard sells heroin on the streest [sic] mostly, but he keeps his stashes of heroin all over the city at different locations. At 7947 Thon Dr. this C.I. stated Howard has dope (heroin) here. On rare occassions [sic], Howard will sell the heroin from the above location. On 5/17/84-5/21/84-7/18/84-7/25/84, U.Co. B. Sledge went to the above location and did obtain heroin in exchange for items listed on this report. The C.I. has had conversation with Horsley with-in the last 48 hrs. The C.I. reported to police, now that one of his girlfriends has been arrested, he is keeping his heroin at this location. Charlotte Johnson also resides here with her daughter. Ms. Johnson aides [sic] Howard in keeping all monies from the sales of the narcotics. This C.I. was at the above location, with-in the last 48 hrs. of this report. Also, Howard is into cocaine and sells it as well as the heroin. The C.I. stated that cocaine might be in the residence. All items were exchanged for heroin and given to U.Co. B. Sledge. This C.I. further stated, Horsley drives a blue Jaguar, which is parked at this location with license plate no # GHU-378; Horsley has several vehicles as reported to the police. This confidential and reliable informant is reliable because in the past this C.I. has given information which led to the arrests and convictions of approx, five persons, for VCSDD&CA Heroin. Also, in the future there will be approx, six arrests made from the information given to police by this C.I. Chuckie Dial 4/27/83-10/12/83, Darryl Ward (5/24/84-) 7/7/84 arrests VCSDD&CA heroin on both cases. Wards case is still pending. All future arrests will be for VCSDD&CA heroin, and cocaine. This C.I. reports, Horsley packages his heroin in balloons and sells them for $20.00 a bag (Balloon). The C.I. has seen how heroin and cocaine are packaged and sold in the past and in a bundle, there are 15 balloons.

Court Exhibit A.

The commonsense interpretation of the information contained in the application for search warrant and affidavit compels the conclusion that in the totality of the circumstances there was probable cause for the issuing magistrate to believe that a crime had been or was being committed by the Defendant and that controlled substances were at the place to be searched. The magistrate could properly conclude from the affidavit that Horsley had sold heroin in the past, that in preceeding months Horsley sold heroin from the premises to be searched to an undercover officer, and that within 48 hours of the application for the search warrant the confidential informant was at the premises to be searched and as a result had reason to believe that controlled substances were on the premises. There was probable cause for the issuance of the search warrant.

B. Material Misrepresentations in the Affidavit for Probable Cause.

The defendant alleges that the affidavit for probable cause contains material misrepresentations and alleges that the following statement contained in the affidavit in support of probable cause is false: “On 5/17/84-5/21/84-7/18/84-7/25/84, U.Co. B. Sledge went to the above location and did obtain heroin in exchange for items listed on this report.”

Detective Benny Sledge testified at the July 3, 1985 pre trial hearing that on May 17, 1984, he drove Mr. Horsley to Horsley’s residence at 7947 Thon Drive in Penn Hills, and while enroute to the residence Defendant Horsley gave him seven balloons of heroin in exchange for a VHS recorder which Horsley removed from the car and took into his residence on Thon Drive. (Tr. 68-69). Sledge also testified that on May 21, 1984, Sledge went to Horsley’s residence at 7947 Thon Drive with a television set, and while Sledge was in Horsley’s dining room, Horsley gave him five balloons of heroin in exchange for the television set. (Tr. 69). Sledge further testified that on July 18, 1984, Sledge exchanged clothing for heroin at the Thon Drive residence, and finally, that on July 25, 1984, Sledge went to Horsley’s house and Horsley took Sledge to the residence of Gloria Ritley in East Hills, where Horsley went in, brought heroin out, and gave it to Sledge, after which Sledge drove Horsley back to the residence on Thon Drive. (Tr. 70-71).

The Defendant argues that the affidavit contained material misrepresentations of fact since not all of the transactions took place in the Thon Drive, Penn Hills residence.

Franks v. Delaware, 438 U.S. 154, 171-72, 98 S.Ct. 2674, 2684-85, 57 L.Ed.2d 667, 682 (1978), holds that a Defendant must establish that an affiant knowingly and intentionally or with reckless disregard for the truth, made a false statement. The search would then be voided only if the affidavit, without the false material, is insufficient to establish probable cause. Here, on all of the dates specified, Sledge did go to Horsley’s residence on Thon Drive in Penn Hills, and on two of these occasions Sledge did obtain heroin which actually was at and inside the Thon Drive, Penn Hills residence. There was no material misrepresentations of facts stated in the affidavit which would void the search warrant under the principles enunciated by the Supreme Court in Franks v. Delaware, supra.

C. Credibility of the Informant

The Defendant claims that the affidavit is insufficient to establish the reliability of the confidential informant because the affidavit does not set forth the names and dates of the persons arrested and/or convicted as a result of information given by the confidential informant. Defendant contends that arrests which had not occurred as of the date of the issuance of the warrant are insufficient to establish the reliability of the informant. The Defendant also takes issue with statements in the warrant which the Defendant claims are conclusory, unreliable, unsubstantiated and insufficient.

The Supreme Court in Illinois v. Gates, 462 U.S. 213, 230, 103 S.Ct. 2317, 2327-28, 76 L.Ed.2d 527, 543 (1983), pointed out that an informant’s “veracity”, “reliability”, and “basis of knowledge” are highly relevant in assessing an informant’s reliability, but stated that these elements should not be understood to be entirely separate and independent requirements which must be rigidly exacted in each case. The Supreme Court noted that probable cause is a fluid concept, not readily reducible to a set of legal rules, and it therefore adopted the totality of the circumstances approach as the standard for assessing the reliability of the informant, and clearly rejected the application of the two-pronged test that had been derived from Aguilar v. Texas, 378 U.S. 198, 84 S.Ct. 1509, 12 L.Ed.2d 723 (1964), and Spinelli v. United States, 393 U.S. 410, 89 S.Ct. 584, 21 L.Ed.2d 637 (1969). With respect to the reliability of an informant, the Supreme Court stated in Illinois v. Gates, supra:

If, for example, a particular informant is known for the unusual reliability of his predictions of certain types of criminal activities in a locality, his failure, in a particular case, to thoroughly set forth the basis of his knowledge surely should not serve as an absolute bar to a finding of probable cause based on his tip. [Citation omitted]. Likewise, if an unquestionably honest citizen comes forward with a report of criminal activity — which if fabricated would subject him to criminal liability — we have found rigorous scrutiny of the basis of his knowledge unnecessary. [Citation omitted]. Conversely, even if we entertain some doubt as to an informant’s motives, his explicit and detailed description of alleged wrongdoing, along with a statement that the event was observed firsthand, entitles his tip to greater weight than might otherwise be the case. Unlike a totality-of-the-circumstances analysis, which permits a balanced assessment of the relative weight of all of the various indicia of reliability (and unreliability) attending an informant’s tip, the “two-pronged test” has encouraged an excessively technical dissection of informants’ tips, with undue attention being focused on isolated issues that cannot sensibly be divorced from the other facts presented to the magistrate.

462 U.S. at 233-34, 103 S.Ct. at 2328-29, 76 L.Ed.2d at 545 (Footnote omitted).

Here the affidavit of probable cause states that in the past the confidential informer gave information leading to the arrest and convictions of five persons for heroin trafficking, and specifically names two person involved in heroin trafficking. The affidavit also establishes that the informant had conversations with Horsley in the last 48 hours, the informant was in the residence to be searched within that time period, and the informant believed that heroin and cocaine might be in the residence. The affidavit contains more than a conclusory statement that the information was received from a reliable informant, and in addition to the information received from the informant (who had previously given information leading to arrest and conviction of heroin traffickers), the undercover officer B. Sledge on at least two occasions had obtained heroin from Horsley at the Thon Drive residence. From all of the circumstances set forth in the affidavit, including the past reliability of the informant and the fact that the informant had recently been in contact with Horsley at the Thon Drive residence, there was a substantial basis for the magistrate to conclude that there was probable cause to believe that controlled substances would be found at the Thon Drive residence. The Motion to Suppress will be denied.

The Motions filed by the Defendants will all be denied, and an appropriate Order will be entered.


author: WILLIAM C. LEE, District Judge.

text:
    Lorin G. SLOAN and Carol L. Sloan, Petitioners, v. UNITED STATES of America, Respondent.
    Civ. No. F 85-140.
    United States District Court, N.D. Indiana, Fort Wayne Division.
    Nov. 14, 1985.
    Lorin G. Sloan, pro se.
    Gerald C. Miller, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., Christina McKee, Asst. U.S. Atty., Fort Wayne, Ind., for respondent.
   ORDER

WILLIAM C. LEE, District Judge.

This matter is before the court on respondent’s motion to dismiss and petitioners’ (“Sloan”) motion to compel discovery. The motion to dismiss has been briefed by both sides. A hearing on the discovery motion was held October 3, 1985, wherein the respondent indicated that its position on the motion to dismiss applied to the discovery motion as well. For the following reasons, the motion to dismiss will be granted and the motion to compel discovery will be denied.

According to the petition to quash and the various documents filed in this cause, the facts appear to be as follows. Special Agent Kenneth J. Matthews of the Internal Revenue Service, on March 11, 1985, issued to Ted Leas, Vice President of City Savings and Loan Association of Hartford City, Indiana and Gary Teegarden, Accounts Manager at Marion Independent Federal Credit Union in Marion, Indiana, an IRS summons requesting “[a]ll account records in the names of or under the control of Lorin G____and/or Carol ... Sloan for the period December 1, 1980 to January 31, 1985 ____” Because both the savings and loan and the credit union are third-party record-keepers for purposes of IRS summons, notice was provided to the Sloans and on March 27, 1985 they filed their petition to quash.

In the petition, the petitioners contend that the summons should be quashed because (1) they are “not persons liable for a tax or required to perform an act under Title 26 Section 7602(a)(2)”; (2) that they are not employees as defined in 26 U.S.C. § 3401(c); and (3) that they are not taxpayers as defined by 26 U.S.C. §§ 7701(a)(14) and 1313(b). With the petition, the Sloans also filed an affidavit stating that their allegations are true and made in good faith.

On August 8, 1985, the Sloans filed a motion to compel discovery, seeking to require the respondent to produce the documents which support its denial of petitioners’ claims that they are not taxpayers.

The respondent’s motion to dismiss the petition to quash is premised on the argument that the reasons offered by the Sloans are simply insufficient to justify the quashing of the summons. The opposition to the discovery motion is premised on the insufficiency of the petition as well. The court therefore begins with the motion to dismiss.

The power of the IRS to issue summons is set out in Chapter 78 of the Code, 26 U.S.C. §§ 7601-7611. Section 7601 directs the Secretary to “cause officers or employees of the Treasury Department to proceed ... through each internal revenue district and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax____” In order to carry out this mandate, § 7602 provides:

For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax ... or collecting any such liability, the Secretary is authorized—
(2) To summon ... any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax ..., or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data ... as may be relevant or material to such inquiry.

The Sloans read § 7602 as granting the IRS power to issue summons only to obtain information about taxpayers, so that their declaration that they are not taxpayers is sufficient to place them outside the scope of § 7602 summons power. That argument is incorrect, and thus the Sloans’ position in the petition to quash is meritless, for several reasons. First, the language of § 7601 quoted above indicates a much broader scope. It requires the IRS to investigate all persons who “may” be liable to pay taxes, which no doubt includes persons who are not liable for taxes. The rationale behind § 7601 is to ensure that the IRS finds all who are liable for taxes; such thoroughness can be accomplished only through the investigation of all potential taxpayers.

The language of § 7602 promotes the goal of § 7601. The summons power extends to “making a return where none is made” and to “determining the liability of any person for any internal revenue tax.” This latter phrase clearly empowers the Secretary to issue summons to obtain information about any potential taxpayer, even if the Secretary ultimately determines that the person investigated does not owe any tax. That is why courts have held that the IRS is not required to establish tax liability prior to the issuance of a summons under § 7602. See United States v. McAnlis, 721 F.2d 334, 336 (11th Cir.1983), cert. denied, — U.S. -, 104 S.Ct. 2681, 81 L.Ed.2d 877 (1984); Uhrig v. United States, 592 F.Supp. 349, 353 (D.Md.1984). Thus, whether or not the Sloans are “taxpayers,” “employees,” or “persons liable for a tax” is simply irrelevant to the summons power granted in § 7602.

Second, courts have rejected arguments that summonses should be quashed because the Internal Revenue Code does not apply to the persons being investigated. See McAnlis, 721 F.2d at 336; Johnson v. United States, 607 F.Supp. 347, 349 (E.D. Pa.1985); Uhrig, 592 F.Supp. at 353. That reasoning applies here with full force.

Third, there is evidence to suggest that the Sloans are in fact subject to the Internal Revenue laws. At the October 3, 1985 hearing, Mr. Sloan indicated that he works for a division of General Motors. It is a safe assumption to make that he receives a wage for his work, and the law of this court, as well as the Seventh Circuit, is that “WAGES ARE INCOME” for purposes of taxation under the Code. Granzow v. Commissioner, 739 F.2d 265, 267 (7th Cir. 1984); United States v. Kaliboski, 732 F.2d 1328, 1328 n. 1 (7th Cir.1984); Snyder v. I.R.S., 596 F.Supp. 240, 249 (N.D.Ind. 1984); Cameron v. I.R.S., 593 F.Supp. 1540, 1552 (N.D.Ind.1984), aff'd, 733 F.2d 126 (7th Cir.1985). Sloan’s liability for taxes would exist whether or not he met the definition of “employee” under 26 U.S.C. § 3401(c).

It is therefore clear that the summonses issued in this case were issued properly, and the petitioners have offered no meritorious grounds to quash those summonses. Therefore, the motion to dismiss will be granted.

With the dismissal of the petition to quash, the discovery motion must also be denied because it is no longer a part of any proceeding before this court. However, the motion itself deserves comment. It is clear that “a taxpayer’s discovery rights in a summons enforcement proceeding are very limited.” United States v. Price, 655 F.2d 56, 59 (5th Cir.1981). The ultimate burden is to show a lack of good faith. United States v. Kis, 658 F.2d 526, 539 (7th Cir.1981), cert. denied, 455 U.S. 1018, 102 S.Ct. 1712, 72 L.Ed.2d 135 (1982); United States v. Moll, 602 F.2d 134, 138 (7th Cir. 1982). Here, the only allegation of possible bad faith is the claim that because the Sloans submitted an affidavit averring that they are not taxpayers, the respondent’s continued pursuit of this matter constitutes bad faith, apparently justifying discovery of the documents which support the denial of the affidavit. However, no bad faith is present here. Mr. Sloan’s admission concerning his employment at the General Motors division in Marion, Indiana suggests strongly (if not proves) that he may be liable for Internal Revenue taxes, and thus a summons to investigate that liability is completely proper. The mere filing of an affidavit alleging the legal conclusion that a person is not a taxpayer is insufficient to force the IRS to stop a tax investigation for fear of acting in bad faith; any other conclusion would grind the tax collection machinery of this country to a halt, and would be directly contrary to the congressional purpose implicit in the broad language of §§ 7601 and 7602. The respondent should not be forced to produce documents under the facts alleged here. Therefore, the motion to compel discovery will be denied.

Although not raised by the respondent, the issue of sanctions for the filing of this meritless petition to quash must be addressed. Rule 11 of the Federal Rules of Civil Procedure requires that each pleading or motion be signed by an attorney or the party (if the party is proceeding pro se). The rule then provides:

The signature of an attorney or party constitutes a certificate by him that he has read the pleading, motion, or other paper; that to the best of his knowledge, information and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

If a pleading violates this rule the court “shall impose” an “appropriate sanction,” which may include the amount of reasonable expenses and attorney’s fees incurred by the other party because of the filing of the pleading or motion. The rule applies to pro se litigants, although the concerns of Haines v. Kemer, 404 U.S. 519, 92 S.Ct. 594, 30 L.Ed.2d 652 (1972), must be taken into account.

The core of Rule 11 is that the signature on the pleading certifies that “after reasonable inquiry [the pleading, motion or paper] is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law ____” Thus, Rule 11 sanctions cannot be avoided by a mere subjective belief that the law or facts are a certain way; the “reasonable inquiry” language makes the test an objective one. Indianapolis Colts v. Mayor and City of Baltimore, 775 F.2d 177, 181 (7th Cir.1985); Glick v. Koenig, 766 F.2d 265, 270 (7th Cir.1985).

The lack of merit in the Sloans’ position is obvious to any person who reads the statutes cited by the Sloans in their petition to quash. Section 7601 clearly states that the IRS may inquire after persons who “may” be liable for taxes, and § 7602 specifically allows for summons to be used to determine the liability of any person for any tax. As noted before, the Sloans have misread § 3401’s language concerning employees. The language of §§ 7701(a)(14) and 1313(b), which define taxpayer as a person subject to any tax is both immaterial to the issuance of a summons given § 7602, and is (in light of Mr. Sloan’s admissions concerning his employment) applicable to the Sloans. If the Sloans read the Internal Revenue Code as closely as they claimed they did, they would not have made the patent misinterpretations which underlie this petition.

Courts have recognized the propriety of assessing sanctions against litigants who claim to be exempt from the Internal Revenue laws. Granzow v. Commissioner, 739 F.2d at 269-70; Snyder, 596 F.Supp. at 252; Cameron, 593 F.Supp. at 1558. In Johnson v. United States, 607 F.Supp. 347 (E.D.Pa.1985), the court awarded attorney fees to the government for the filing of a frivolous petition to quash. Id. at 349-50. Frivolous suits such as this waste precious judicial resources, and incur needless costs for the respondent. Such irresponsible use of the courts to harass the government and delay the orderly administration of the Internal Revenue laws will not be tolerated. The court will therefore assess a sanction in the amount of Two Hundred Fifty Dollars ($250.00) for attorney fees incurred by the respondent for having to defend against this frivolous action, and, pursuant to the notice given by this court in Cameron, 593 F.Supp. at 1558 n. 4, a fine in the amount of Two Hundred Fifty Dollars ($250.00).

The fact that the Sloans may have relied on the opinions of others, such as Robert Minarik, who sat at counsel table with the Sloans during the October 3, 1985 hearing and who has a similar action pending in the South Bend Division of this court, does not alter the court’s conclusion as to the propriety of a Rule 11 sanction, and in fact strengthens the rationale in favor of it. At the hearing, counsel for the respondent indicated that the pleadings in Minarik’s South Bend petition to quash were very similar to the pleadings here, and the court’s own examination of the South Bend file confirms that fact. Minarik admitted that Judge Sharp had denied the petition, so that both Minarik and the Sloans were aware that these arguments had been rejected by another court in this district. Further, litigants who have advanced frivolous ideas such as the inapplicability of the Internal Revenue laws, that wages are not income, and that the Internal Revenue Code is unconstitutional or not “positive law,” have been sanctioned in this court for their baseless claims. See Snyder; Cameron. This court put all litigants on notice, see Cameron, 593 F.Supp. at 1558 n. 4, that frivolous suits about the tax laws would result in Rule 11 sanctions. Litigation in light of such notice cannot be excused on the grounds of reliance on others who espouse such meritless contentions.

The presence of Mr. Minarik at counsel table with the Sloans, as well as the remarkable similarity of the pleadings in this and Minarik’s South Bend petition, lend credence to this court’s belief that there is a network of misguided citizens who believe they can exempt themselves from the Internal Revenue laws despite the clear judicial precedent to the contrary. Some of those citizens may have been misled by people like Minarik — false prophets whose messages only result in the sanctions imposed today. Without so deciding, the court believes that the Sloans may have a cause of action against Minarik or any other person who counseled the Sloans to file this petition. However, until such lawsuits are filed by the unfortunate taxpayers who must pay the penalty for such prophecies, this court will continue to penalize taxpayers who file such meritless litigation as this petition to quash in the hopes that such penalties discourage and eliminate these wasteful proceedings.

For the reasons stated above, the motion to dismiss the petition to quash is hereby GRANTED, and the petition is hereby DISMISSED. The motion to compel discovery is hereby DENIED. Petitioners are hereby ORDERED to pay the respondent Two Hundred Fifty Dollars ($250.00) in attorney’s fees, and to pay the Clerk of this court Two Hundred Fifty Dollars ($250.00) as a Rule 11 sanction for filing this petition.

      . The court notes in passing that the Sloans misread § 3401. That section defines wages as "all remuneration ... for service performed by an employee for his employer” in order to determine what amount of the wages should be withheld by the employer for purposes of collecting income tax under § 3402. Section 3401(c) does not define "employee"; rather, it is designed to make clear that "employee” is intended to include state and federal officers and elected officials. Mr. Sloan is clearly an employee for purposes of the Internal Revenue laws.