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U.S. v. MARRA

October 5, 2005.

UNITED STATES OF AMERICA, Petitioner,
v.
DENNIS MARRA, Respondent.



The opinion of the court was delivered by: JOHN LIFLAND, Senior District Judge

MEMORANDUM AND ORDER

Before the Court is the Motion of Respondent Dennis Marra ("Marra") to stay the enforcement of the summons issued by the Internal Revenue Service ("IRS") as ordered on September 16, 2005. Marra seeks a stay pending appeal to the Third Circuit of the substantive finding that he has no Fifth Amendment privilege to resist the summons. For the reasons expressed below, Respondent's Motion is denied.

I. BACKGROUND

  On September 12, 2005, Marra and the Government appeared before this Court on an Order to Show Cause ("OTSC") why Marra should not be compelled to obey an IRS summons served on him in the investigation of Kenneth Reiher ("Reiher"). Reiher is being investigated to determine whether he "committed any offense under the internal revenue laws by filing false or fraudulent returns or attempted to evade or defeat his Federal income taxes for the years 2000, 2001, and 2002." (Chang Dec. ¶ 2)

  In the summons issued to Marra on June 18, 2004, the government seeks Marra's appearance to "give testimony . . . and to produce for examination" books, records, papers and other data relating to Reiher personally and two corporate entities owned by Reiher, KVR Consultants, Inc. and Healthcare Management, Inc., and for Statewide Delivery Services, Inc, a corporation owned by Reiher's father-in-law, Joseph Pezzutti. Specifically, the summons calls for the production of:
All books, records, bank statements, cancelled checks, deposit tickets, work-papers, financial statements, correspondence and other pertinent documents furnished by or on behalf of the above named client(s) for the preparation of state and federal income tax returns and for any other entity in which either or both of them have a financial interest, including but not limited to:
All records used in or resulting from the preparation of federal and state income tax returns consisting of but not limited to work-papers, notes, papers, memoranda and correspondence used or prepared by you relative to the preparation of the aforementioned returns.
Copies of federal and state income and payroll tax returns, state sales tax returns and amended tax returns.
All records, books of account and other documents or papers relative to financial transactions of the principals.
All client billing records relative to this client to include records disclosing the dates and types of services rendered; client account cards; billing invoices; records reflecting the dates, amounts, purpose, and method of all payments (cash or check); and all correspondence with this client.
  The Government contends that Marra is "the accountant, tax preparer and third-party record-keeper" for Reiher and the above named entities. (Petr.'s Mem. 4-5) As such, he is the custodian of corporate records. Thus, the Government argues that Marra has no privilege to withhold the documents it seeks. Marra confirms that he is Reiher's "tax return preparer" but is not a certified public accountant. (Marra Dec. ¶ 1)*fn1 In subsequent papers, Marra's counsel described him as "more than just a third-party record-keeper." (Resp.'s Br. Supp. Mot. Stay 6) Marra has declined to produce the books and records, arguing that any such production or attendant testimony could incriminate him, and asserting his Fifth Amendment privilege against self-incrimination as his basis for refusing to obey.

  At the OTSC hearing, the Court upheld the summons, ruling that Marra had ten days to produce responsive materials. The Court issued an Order requiring Marra to "produce the books, papers, records and/or other data as demanded by the summons within ten (10) days of September 16, 2005." Order of September 16, 2005. The Order further required Marra to appear and give testimony "with respect to the documents produced." Id. The Order found that "Dennis Marra does not have a Fifth Amendment privilege to resist the production of documents described in the summons." Id.

  On September 20, 2005, counsel for Marra moved to stay the enforcement of the summons pending an appeal of the Court's September 16, 2005 Order to the Third Circuit.

  II. LEGAL ANALYSIS

  To prevail on a motion for a stay pending appeal, the movant must establish: (1) a likelihood of success on the merits; (2) a risk of irreparable injury if the stay is not granted; (3) an absence of substantial harm to other interested parties; and (4) no harm to the public interest. ECRI v. McGraw-Hill, Inc., 809 F.2d 223, 226 (3d Cir. 1987). The elements are discussed below.

  Success on the Merits

  The issue here is whether Marra is a third-party record-keeper or similarly, a custodian of corporate records, to whom a Fifth Amendment privilege is unavailable, or whether he can personally assert a Fifth Amendment privilege in refusing to turn over the books and records of a taxpayer and several corporate entities under investigation by the IRS.

  The Fifth Amendment provides that "[n]o person . . . shall be compelled in any criminal case to be a witness against himself." U.S. Const. amend. V. The Internal Revenue Code makes it a crime to "willfully" assist in the preparation of a false or fraudulent return. 26 U.S.C. § 7206. Willfulness is present if the tax preparer deliberately falsifies a material statement in the tax return with full understanding of its materiality and with the intent that it should be accepted as true. A Justice Department referral signals that the IRS recommends criminal prosecution or a grand jury investigation. 26 U.S.C. § 7602(d). If a referral is in effect, the Government is precluded from issuing or attempting to enforce a summons to examine books and records. Id. Here, the Government's papers state clearly that there is no Justice Department referral in effect. (Chang Dec. ¶ 21; Pet. to Enforce IRS Summons ¶ 9) Furthermore, the Government states that
the [IRS] has not made a recommendation to the Department of Justice for a grand jury investigation or criminal prosecution of Kenneth Reiher for the tax years under investigation. The [IRS] is not delaying a recommendation to the Department of Justice in order to collect additional information. Moreover, the Department of Justice has not made any request under 26 U.S.C. § 6103(h)(3)(B) for the disclosure of any return or return information . . . relating to Kenneth Reiher.
(Chang Dec. ¶ 21) Thus, it appears that there is no "criminal case" open against Reiher or Marra or even contemplated against either person. Nonetheless, the Fifth Amendment has been held to apply to both civil and criminal tax investigations. United States v. Egenberg, 316 F. Supp. 86, 89 (D.N.J. 1969).

  In United States v. Egenberg, the court considered a claim of privilege against self-incrimination where the IRS issued summonses to respondent Egenberg, an accountant, who was himself under indictment for alleged illegal conduct arising out of his work in the tax field. Id. at 90. The IRS sought Egenberg's clients' tax and financial records to determine his personal income tax liabilities. The IRS testified that "respondent deposited in his bank account, refund checks issued to respondent's clients; that respondent allowed some of the clients to use his credit card; that respondent would loan money to his clients; and that respondent would recommend a particular broker to take care of his clients' insurance needs." Id. at 89. These transactions may have led to unreported income taxable to respondent. Id. The respondent refused to turn over his clients' records, basing his refusal on the Fifth Amendment privilege against self-incrimination.

  It is "well settled that the Fifth Amendment privilege against self-incrimination can be invoked in civil and criminal proceedings, including investigations." Id. The court specifically recognized that "constitutional claims may be asserted in proceedings under section 7602 of the Internal Revenue Code." Id. (citing Reisman v. Caplin, 375 U.S. 440, 449 (1964) ("[T]he witness may challenge the summons on any appropriate ground."). Ultimately, the court found that because respondent was under indictment for conduct arising out of his work as an accountant, compelling the production of the ...


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