United States v. Greve, James F.

In the

United States Court of Appeals

For the Seventh Circuit

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No. 06-3127

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v.

JAMES F. GREVE,

Defendant-Appellant.

_____________

Appeal from the United States District Court

for the Northern District of Illinois, Western Division.

No. 05 CR 50031—Philip G. Reinhard, Judge.

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ARGUED APRIL 13, 2007—DECIDED JUNE 4, 2007

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Before FLAUM, MANION, and WOOD, Circuit Judges.

FLAUM, Circuit Judge. A grand jury indicted James

Greve on four counts of income tax offenses all in violation

of 26 U.S.C. § 7206(1). Greve filed a motion to dismiss the

indictment and/or suppress evidence, alleging that the

Internal Revenue Service (“IRS”) violated his Fourth and

Fifth Amendment rights by conducting a covert criminal

investigation under the guise of a civil audit. The district

court denied Greve’s motion, stating that the facts re-

flected a “typical IRS civil investigation that ultimately led

to a criminal referral.” Greve appeals. For the following

reasons, we affirm the district court’s judgment.

2 No. 06-3127

I. BACKGROUND

James Greve took over Greve Construction, the family

business, in 1990 and converted it into a commercial snow

plowing company for shopping centers, school districts,

and other municipal entities. Until early 2000, Greve

operated his business without an accountant and kept

track of business income and expenses through billing

invoices and expense receipts. Through 1999, Greve

prepared his own federal and state income tax returns,

employing a hybrid cash and accrual method of reporting

income.

On June 28, 1999, the IRS began a civil audit of Greve’s

1997 federal income tax return. Greve contacted revenue

agent Ramona Luke and scheduled a meeting for August

5, 1999; however, Greve missed the scheduled appoint-

ment. On August 5, 1999, Luke issued Greve an examina-

tion report and proposed to add $143,023 in additional

income to his 1997 taxable income and assessed an

additional $68,383 in taxes, interest and penalties. On

September 2, 1999, Greve and Luke met, and Greve

admitted that he had omitted $107,888 of income in 1997.

Luke determined that Greve kept inadequate books and

records and employed unacceptable accounting procedures.

Additionally, Greve told Luke that he and his wife had

recently hired an accountant to prepare their future

income tax returns.

Immediately following the September 2, 1999 interview,

Luke mailed Greve an IRS Information Document Request

(“IDR”) seeking bank records that would reflect unreported

gross receipts. On September 24, 1999, Greve turned over

the requested bank deposit records.

On January 13, 2000, Luke began reviewing her file on

Greve. On January 31, 2000, Luke reviewed the documents

that Greve gave her and noted that some of the documents

appeared to have been altered and that she did not have

No. 06-3127 3

all of Greve’s account information. On February 1, 2000,

Luke noted that she needed to discuss the case with her

group manager, Margaret Songer, and that Greve’s case

potentially involved fraud as opposed to merely an under-

statement of income.

On March 9, 2000, Luke met with Songer, who agreed

that the case “may have fraud potential.” Songer set up a

meeting between Luke and the IRS District Fraud Coordi-

nator, Michael Welu. The Fraud Coordinator helps develop

potential fraud cases and instructs revenue agents and tax

auditors how to investigate cases that may involve civil

fraud or result in a criminal referral to the IRS Criminal

Investigation Division (“CID”).

On March 28, 2000, Welu and Luke met for seven hours

about the Greve audit. During that meeting, Welu sug-

gested that Luke expand the audit to include the 1998 tax

year, obtain the 1996 tax year returns, and confirm

whether Greve altered the documents he gave Luke. Welu

directed Luke to issue administrative summonses to

Greve’s banks because they could assist in determining

whether Greve had any hidden accounts.

On March 29, 2000, Luke contacted Greve and requested

additional documents and another interview. She also

advised Greve that she would be issuing him an IDR for

tax years 1997 and 1998. During that conversation, Greve

told Luke that he only reported income from customers

who did not issue him an IRS Form 1099 and claimed that

he did this because the IRS already knew about the income

reported on the 1099 forms. After the conversation ended,

Luke wrote a note reminding herself to determine whether

Greve had altered the documents he previously provided.

On March 30, 2000, Welu informed Luke that Greve had

been involved in several large cash transactions, possessed

a previously undisclosed bank account, and had trans-

ferred his home into a trust shortly after the IRS audit

4 No. 06-3127

began. Luke faxed Welu her proposed IDR for the 1997-

1998 tax years for his review and approval. On April 4,

2000, Luke spent six hours reviewing Greve’s file. She

prepared an Examination Request for tax year 1998,

seeking permission to expand the audit to include that

year. The stated reasons for the request were “recurring

issue” and “develope [sic] for fraud.” Luke also prepared a

request for tax year 1996 for “info only.”

On April 6, 2000, Luke gave Greve the IDR she prepared

with Welu for the 1997-1998 tax years and faxed Songer

the previously prepared examination request. Luke also

told Songer that she still had “to develop the fraud case”

against Greve. On April 19, 2000, Luke prepared ad-

ministrative summonses and retrieved IRS information

on Greve’s 1996 and 1998 tax returns.

On May 5, 2000, Greve requested additional time to

produce his records. He told Luke that he was over-

whelmed by the number of documents she requested and

did not know how to organize them. Luke told Greve how

to organize the records and gave him more time to gather

them. On May 8, 2000, Greve called Luke to tell her that

he had retained an attorney, Christopher Saternus.

Saternus requested more time to gather Greve’s docu-

ments. On June 15, 2000, Luke noted that she could not

proceed with the audit until she received the requested

documents from Greve, so she called Saternus and told

him that she needed the documents to proceed with her

examination.

On July 10, 2000, Greve called Luke to discuss the

document request. He informed her that he had requested

his customers’ cancelled checks from his bank but did not

have all of them. Luke told Greve that the records were

due by July 20, 2000.

On July 20, 2000, Luke met with Saternus and Greve.

Saternus asked whether Luke would be able to wrap up

No. 06-3127 5

the audit for the years in question after she received the

requested documents. Luke responded that there would be

additional taxes, interest, and penalties and that the audit

would be “wrapped up pretty quickly” after their meeting

upon final review and determination. Greve and Saternus

gave Luke all of the requested documents and acknowl-

edged that Greve had understated his income in 1997 and

1998 by approximately $245,000.

Between July 20, 2000 and October 17, 2000, Luke

continued her review of Greve’s records. On October 2,

2000, Luke advised Songer that she had completed the

majority of the work involved in determining the gross

receipts but that she had learned of a new bank account in

Greve’s wife’s name. The following day, Greve called Luke

and inquired about the audit’s status. Luke told Greve

that she needed the documents on the newly-discovered

bank account and that she might ask Greve for an exten-

sion of the civil statute of limitations.

On January 23, 2001, after discussing the audit with

Welu, Luke downloaded the IRS fraud handbook. Luke’s

notes from the following day indicate that she needed to

conclude the audit and either “write up referral or close

agreed.” On January 25, 2000, Luke noted that she needed

to set an appointment with Welu to complete the referral

of the criminal fraud case. The next day, Luke scheduled

a meeting with Welu to “write fraud referral.” On Febru-

ary 15, 2001, Luke and Welu met to discuss the status of

the audit. Welu told Luke that she could not refer the

matter to CID because she needed to be able to show that

Greve made an “overt action.” Welu instructed Luke to

contact Greve’s customers to determine why they did not

issue him 1099 forms for work he performed for them.

Welu and Luke also discussed the applicable statute of

limitations for civil assessment. Welu noted that because

Greve omitted over 25% of income, the statute could be

6 No. 06-3127

extended. Luke contacted several of Greve’s customers and

requested information regarding their payments to him.

On March 23, 2001, Luke met with Welu for another six

hours. Following that meeting, Luke wrote up her CID

referral report, which noted that Greve filed a “W-9 with

several customers claiming that he was incorporated when

he was in fact not. These customers issued no 1099’s [sic].”

On March 26, 2001, Songer e-mailed Welu asking about

the referral’s status. Welu e-mailed Songer that the

referral had been made. Songer then e-mailed Luke with

the news, stating, “O ye of little faith.” On April 2, 2001,

Special Agent Mark Johnson met with Luke, Welu, and

Songer to discuss the case.

On March 29, 2005, a federal grand jury indicted Greve

on four income tax offenses, alleging violations of 26 U.S.C.

§ 7206(1). Count One charged Greve with failing to report

$158,539 in gross receipts in his personal tax return for

tax year 1998. Count Two charged Greve with failing to

report $201,736 in gross receipts in his personal tax return

for tax year 1999. Count Three charged him with failing to

report $388,365 in gross receipts in a tax return for Greve

Construction, Inc. for tax year 2000. Count Four charged

Greve with claiming a false S corporation loss and a false

refund in his personal income tax return for tax year 2000.

Greve filed a motion to dismiss the indictment and/or

suppress evidence, alleging that the IRS had unconstitu-

tionally obtained statements and documents for him by

conducting a civil audit of Greve after it had “firm indica-

tions of fraud.” Greve also filed a motion for leave to

conduct discovery and requested an evidentiary hearing on

his initial motion. On December 12, 2005, the district

court, accepting as true all of the facts alleged by Greve,

denied the motions, finding that the facts reflected a

“typical IRS civil investigation that ultimately led to a

criminal referral.” Greve appeals.

No. 06-3127 7

II. DISCUSSION

A. Motion to Dismiss the Indictment

Greve contends that the district court erred by denying

his motion to dismiss the indictment because the IRS

presented illegally obtained evidence to the grand jury.

This Court reviews questions of law in a district court’s

ruling on a motion to dismiss an indictment de novo.

United States v. Peters, 153 F.3d 445, 451 (7th Cir. 1998).

It reviews factual findings for clear error. Id. The Supreme

Court has held that “[a]n indictment returned by a legally

constituted and unbiased grand jury . . . , if valid on its

face, is enough to call for a trial on the merits.” Costello v.

United States, 350 U.S. 359, 363 (1956). The Court’s

reluctance to examine the quality or sufficiency of the

evidence presented to a grand jury extends even to uncon-

stitutionally obtained evidence. See United States v.

Calandra, 414 U.S. 338, 344-45 (1974) (stating that “an

indictment valid on its face is not subject to challenge on

the ground that . . . the basis of information obtained in

violation of a defendant’s Fifth Amendment privilege

against self-incrimination”). Accordingly, even if the grand

jury examined illegally obtained evidence, the district

court did not err by denying Greve’s motion to dismiss the

indictment.

B. Motion to Suppress

Greve next argues that the district court erred by

denying his motion to suppress because the IRS obtained

evidence against him in violation of his Fourth and Fifth

Amendment rights by conducting a covert criminal investi-

gation under the guise of a routine civil audit. We review

questions of law in a district court’s ruling on a motion to

suppress de novo. Peters, 153 F.3d at 451. We review

factual findings for clear error. Id.

8 No. 06-3127

Greve contends that Luke affirmatively misled him by

continuing to conduct a civil audit after she had firm

indications of fraud. See United States v. Serlin, 707 F.2d

953, 956 (7th Cir. 1983) (stating that a defendant seeking

suppression must produce clear and convincing evidence

that the agents affirmatively misled him as to the true

nature of their investigation). Although the IRS regula-

tions require a civil investigator to cease her investigation

when she has developed firm indications of fraud, see

Internal Revenue Manual §§ 4565.21(1), 9311.83(1), we

have held that “[a] failure to terminate a civil investigation

when the revenue agent has obtained firm indications of

fraud does not, without more, establish the inadmissibility

of evidence obtained by [the agent] in continuing to pursue

the investigation.” United States v. Kontny, 238 F.3d 815,

820 (7th Cir. 2001). Indeed, “[p]roof of deceit must be

linked up to the constitutional standard of threat or

promise.” Id. at 819. In other words, Greve must prove

that Luke induced his compliance through false promises.

Greve maintains that Luke made false promises to him

by repeatedly advising him that his cooperation would

result solely in a civil tax assessment. Greve first identi-

fies a July 10, 2000 phone conversation, in which Greve

called Luke to tell her that he was having difficulty

obtaining all of the cancelled checks, and Luke told him

not to worry because the records were due on July 20,

2000. Greve contends that “clearly, Luke [wa]s promising

Greve that the case would be concluded if he provided his

deposit records and further cooperated on July 20, 2000.”

We disagree. We have stated that an inappropriate

promise might occur if an agent “pretend[s] to be an

Assistant U.S. Attorney and assure[s] [the taxpayer that

he] w[ill] not be prosecuted if [he] cooperate[s].” Kontny,

238 F.3d at 819. However, no such affirmative promise

occurred during this conversation. Rather, it dealt solely

with the timing of Greve’s compliance with an IDR.

No. 06-3127 9

Next Greve points to the meeting on July 20, 2000

between Luke, Saternus, and Greve at the IRS’s office.

Saternus asked whether Luke would be able to wrap up

the audit for the years in question once she received the

requested documents. In response, Luke stated that upon

review and final determination, there would be additional

tax due, plus interest and penalties, but that it should be

wrapped up following the meeting. Greve maintains that

Luke’s response was a promise not to refer the case to CID

and to proceed in a civil manner only. Again, there was

simply no such promise. In fact, Luke qualified her

statement by saying that any decisions were dependant

upon review and final determination. Although Luke did

not inform either Saternus or Greve that she might refer

the case to CID for a criminal investigation, she was not

required to do so. See Serlin, 707 F.2d at 956 (stating that

“[s]imple failure to inform the defendant that he was the

subject of the investigation, or that the investigation was

criminal in nature, does not amount to affirmative deceit”).

Consequently, the district court did not err by denying

Greve’s motion to suppress.

C. Evidentiary Hearing

Greve argues that the district court erred by denying his

motion for an evidentiary hearing. This Court reviews a

district court’s denial of an evidentiary hearing for an

abuse of discretion. United States v. Juarez, 454 F.3d 717,

719 (7th Cir. 2006). To obtain an evidentiary hearing on

his motion to suppress, Greve was required to “provide

sufficient information to enable the court to conclude that

a substantial claim [wa]s presented and that there [we]re

disputed issues of material fact which w[ould] affect the

outcome of the motion.” Id. at 720. In ruling on Greve’s

motion to suppress, the district court accepted Greve’s

factual assertions as true. Because the government did not

10 No. 06-3127

dispute the facts of the IRS investigation as relayed by

Greve, the district court had no need to make a credibility

determination. Consequently, the district court did not

abuse its discretion by denying Greve’s motion for a

hearing.1

III. CONCLUSION

For the above reasons, we AFFIRM the district court’s

judgment.

A true Copy:

Teste:

________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit

1

Greve also claims that the district court erred by denying his

motion for further discovery. However, because the district court

properly denied Greve’s motion to dismiss and motion to sup-

press, we need not address his challenge to the district court’s

denial of his motion for additional discovery. See Larkin v.

Galloway, 266 F.3d 718, 724 (7th Cir. 2001).

USCA-02-C-0072—6-4-07