UNITED STATES OF AMERICA
v.
Raymond, et al

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF WISCONSIN

UNITED STATES OF AMERICA,     )
                              )
          Plaintiff,          )
                              )
     v.                       )          Civil Action No. 97-CV-207
                              )
Robert R. Raymond, et al.,    )
                              )
          Defendants.         )

On January 11, 1999, defendants Raymond R. Raymond and Robert G. Bernhoft moved this court for an order reopening discovery and for permission to serve 15 additional interrogatories. (See Doc. 246.) The purpose of that motion, as set forth therein, was to take the depositions of Assistant United States Attorney for the Eastern District of Wisconsin Francis D. Schmitz, and IRS Internal Security Inspectors Sharon D. Jarosz and Joel Jurkowski, based on new information contained in a response from the Internal Revenue Service National Office to a Freedom of Information Act Request submitted by defendants. (See Exhibit A.) Based on process service stipulations between AUSA Schmitz and defendant Bernhoft, and between the parties with respect to Jarosz and Jurkowski, defendants served subpoenas on the deponents identified above. (See Third Decl. of Robert D. Metcalfe, Doc. 288.)

Plaintiff United States of America subsequently moved for a protective order, and both supported its motion for protective order and opposed defendants' motion to reopen discovery in its accompanying brief. (See Br. in Opp'n to Defs.' Mot. to Reopen Disc. and in Supp. of Pl.'s Mot. for Prot. Order, Doc. 287.) Defendants file the instant brief in opposition to plaintiff's motion for protective order and in reply to plaintiff's brief in opposition to defendants' motion to reopen discovery. For the reasons set forth in defendants' motion to reopen discovery and as additionally set forth below, defendants have established good cause that discovery should be reopened so that they may take the depositions of Jarosz and Jurkowski, and conversely, that plaintiff has not established good cause for a protective order to issue preventing defendants from taking those depositions.

Unknown Internal Revenue Service agents/officers/employees identified defendants Bernhoft and Raymond as "De-Taxing America Protester Group Members" on August 7 and 10, 1995, respectively. (See Letter from Attorney Trissell, 2-1-99, Exhibit B.) Defendant Bernhoft responded to a request by the Internal Revenue Service to examine his books and records by meeting with IRS Revenue Agent Robert Hopkins and Group Manager Lynn Wilkinson at 330 East Wisconsin Avenue, Milwaukee, Wisconsin, on September 20, 1995. (See Bernhoft's First Decl., ¶ 4, Ex. C.) At this meeting, Bernhoft asked Hopkins and Wilkinson by what authority the IRS purported to compel Bernhoft to provide any books and records to them for examination. (See id.; Raymond's First Decl., ¶ 5, Ex. D. ) Group Manager Wilkinson became animated over this request, and after admonishing everyone present not to leave the room until she returned, she left the examination room. (See id.; Raymond's First Decl., ¶ 6, Ex. D.)

After approximately 10 minutes, she returned with a man who identified himself as Jeffrey Palmer. (See Bernhoft's First Decl., ¶ 5, Ex. C; Raymond's First Decl., ¶ 6, Ex. D.) Fictitious Agent Palmer asked Mr. Bernhoft what the problem was, and Bernhoft again queried the IRS agents present by what authority the IRS purported to compel Bernhoft to provide his books and records for examination. (See id.; Raymond's First Decl., ¶ 7, Ex. D.) Palmer became very angry, and told Bernhoft he didn't need show him anything. (See id.) Bernhoft asserted his belief that under the Administrative Procedures Act, the IRS had the burden of proving its authority to do any act, including compelling Bernhoft to provide his books and records for examination. (See id.) Palmer became livid at this suggestion, and told Bernhoft that it was alright that he would not provide books and records, because Palmer was going to ruin his life by auditing him for the previous seven years, filing "substitute for returns" for any years Bernhoft had not filed, assessing thousands of dollars of taxes, and would then see him and tax court. (See Bernhoft's First Decl., ¶ 6, Ex. C; Raymond's First Decl, ¶7, Ex. D.) Palmer further asserted angrily that Bernhoft could be sure that he would be audited every year in the future, and would be labeled a tax protestor. (See Bernhoft's First Decl., ¶ 6, Ex. C.) Palmer directed violent anger towards Bernhoft at this meeting. (See id.)

Palmer did, in fact, label Bernhoft a tax protestor on October 26, 1995, by placing code "085" in the project code section of the "Examination Request Master File" he personally prepared on October 26, 1995. (See October 17, 1997 Palmer Depo., Exhibit 14, attached hereto as Ex. E.) IRS Internal Security Inspector Sharon Jarosz initiated a criminal investigation of Morningstar Consultants for wire and mail fraud in violation of 18 U.S.C. §§ 1341 and 1343, when she, along with IRS Internal Security Inspector Joel Jurkowski, met with Jeffrey Palmer on December 19, 1995. (See Jurkowski Decl., p. 2, ¶ 6; Exhibit A, p. 3.) At this meeting, Palmer told Jarosz that contacting "Morningstar Consultants" by telephone, fax number, AOL, and world-wide web (internet) site resulted in the contacting party being asked to provide a credit card number prior "De-Taxing America Program" materials being provided. (See Ex. A, p. 6.) Jarosz and Palmer had reason to believe that defendants Raymond and Bernhoft were the principals of Morningstar Consultants, because of a letter in their possession on Morningstar Consultants stationary listing Raymond's and Bernhoft's names and telephone numbers. (See Ex. A, p. 7.)

Palmer and other IRS agents/officers/employees subsequently met with Wisconsin Department of Revenue employees to discuss the "De-Tax America Protest Group" on January 9, 1996, at which time another meeting for April 17, 1996 was scheduled. (See December 4, 1998 Malcolmson Depo., Exhibit 13, attached hereto as Ex. F.) At this January 9, 1996 meeting, Palmer stated that "IRS Inspection in Wisconsin was working on the individuals selling the packages and hopes to get a cease and desist order issued to stop the sales. Inspection may also pursue other legal avenues against those individuals." (See id.). Jarosz met again with Palmer to discuss the progress of the criminal investigation of Raymond, Bernoft, and Morningstar Consultants, on February 15, 1996. (See Ex. A, p. 9.) On April 25, 1996, Jarosz met with AUSA Schmitz do discuss the filing of criminal charges against Raymond, Bernhoft, and Morningstar Consultants for mail and wire fraud relating to Raymond's and Bernhoft's alleged sale of the "De-Taxing America Program." (See id. at 11.) AUSA Schmitz declined to pursue criminal charges at this meeting because there was no substantial damage to the government and because the known activity constituted protected speech. (See id.; Schmitz Decl. p. 2, ¶ 6, Doc. 289.)

Sometime in the Spring of 1996, Palmer stated that he learned a decision had been made by Ruth Maze, a Manager in the IRS Criminal Investigation Division, not to bring criminal charges against Raymond and Bernhoft for allegedly selling the "De-Taxing America Program" through the entity Morningstar Consultants. (See October 17, 1997 Palmer Depo., pp. 98-105, Ex. G.) On June 27, 1996, the IRS held the first in a series of "Morning Star Injunction/6700 Meeting[s]." (See Pl.'s Answers to Mandatory Interrogs., IRS Document No. 666, pp. 4542 4543, Ex. H.) On July 15, 1996, defendant Raymond sent materials to the United States Attorney for the Eastern District of Wisconsin regarding what Raymond believed were violations of the U.S. Criminal Code by IRS Group Manager Larry Locke. (See Raymond's Second Decl., ¶ 4, Ex. I.) On July 19, 1996, Fictitious Agent Palmer sent a letter to Bernhoft and Raymond requesting a meeting with them to discuss their alleged sale of the "De-Taxing America Program" through the entity know as Morningstar Consultants. (See Exs. I, J.) On July 31, 1996, AUSA Matthew L. Jacobs sent a letter to Raymond informing him that his complaint against IRS Group Manager Larry Locke has been forwarded to IRS Internal Security. (See Ex. K.)

On August 1, 1996, Palmer issued a summons to Ozaukee Bank for records relating to "Bounty Trust." (See Palmer Decl., p. 4, ¶ 13, Doc. 21.) On September 4, 1996, IRS Special Agent Versal Klinge executes six search warrants on Barry Konicov, the alleged founder of the "De-Taxing America Program," in Alto, Kentwood, Wyoming, and Comstock Park Michigan, for violations of 26 U.S.C. §§ 7201, 7203, 7206, 7212, and 18 U.S.C. § 371. (See Klinge Decl., p. 4, ¶ 5, Doc. 253.) On September 17, 1996, defendant Raymond forwards materials relating to possible violations of the U.S. Criminal Code by IRS Revenue Officer Edwin Lopez to the United States Attorney for the Eastern District of Wisconsin. (See Raymond's Second Decl., ¶ 5, Ex. L.) On November 13, 1996, IRS Assistant District Counsel Edward G. Langer informed Jarosz that in lieu of a criminal action being brought, civil penalties and an injunction were being pursued through the Department of Justice. (See Ex. A, p. 12.) On November 15, 1996, Jarosz informed Langer and Fictitious Agent Palmer that her criminal investigation of Morningstar Consultants was closed. (See Jarosz Decl., p. 3, ¶ 8.) Palmer wrote defendants on November 15, 1996, advising them that his preliminary investigation of the "De-Taxing America Program" was complete, the same day that Jarosz advises him that her criminal investigation of Morningstar Consultants is closed. (See Palmer's Third Decl., p. 35, ¶ 42, Doc. 259.) On November 21, 1996, AUSA Schmitz sends a letter to defendant Raymond informing him that his complaint against IRS Officer Lopez has been referred to IRS Internal Security. (See Ex. M.)

Palmer issues "penalty assessments" against Raymond and Bernhoft on February 25, 1997. (See Palmer's Third Decl., p. 6, ¶ 20, Doc. 259.) On October 17, 1997, Palmer testifies that he caused defendant Bernhoft to be labeled a tax protester because he refused to provide books and records at the meeting on September 20, 1995. (See Palmer Depo., pp. 73-74, Ex. G.) On May 12, 1997, Palmer declares that he began his investigation of Raymond and Bernhoft for allegedly selling the "De-Taxing America Program" through an entity called "Morningstar Consultants" on June 24, 1996, over six months after Palmer's first meeting regarding a criminal investigation of Morning Consultants with Jarosz, and over four months after his second meeting with Jarosz regarding the same criminal investigation. (See Palmer Decl., p. 2, ¶ 6, Doc. 21.) Palmer testified on October 17, 1997, that he never personally discussed a criminal investigation or the bringing of criminal charges against Morningstar Consultants, Raymond, or Bernhoft with any IRS employee. (See October 17, 1997 Palmer Depo., pp. 79-86, Ex. G.) This civil action was then commenced by plaintiff, United States of America, on March 3, 1997. Plaintiff seeks an injunction permanently restraining the defendants, Robert R. Raymond and Robert G. Bernhoft, from organizing or selling the "De-Taxing America Program", an allegedly abusive tax shelter within the meaning of 26 U.S.C. §§ 6700 and 6701, and from engaging in any conduct that substantially interferes with the enforcement of the internal revenue laws. (See Complaint, Doc. 1.)

Defendants received the response to their Freedom of Information Act Request which precipitated their need to depose Jarosz and Jurkowski on or about December 14, 1998. (See Ex. A.) Contrary to plaintiff's unjustified ad hominem assertion that defendants likely purpose in seeking to depose Jarosz and Jurkowski is to harass opposing counsel and to divert attention from the merits of the case, defendants first contacted AUSA Schmitz and IRS Inspector Jarosz to attempt to get the information they needed for their trial defense and opposition to plaintiff's motion for summary judgment, without deposing said individuals. Neither Schmitz nor Jarosz were willing to discuss the subject matter of the FOIA response, however, and it became clear to defendants that compulsory process was unavoidable. In fact, Jarosz superior, Jack Mason, Regional Inspector General for IRS Internal Security located in Minneapolis, Minnesota, stated to Bernhoft that Internal Security never permitted its Inspectors to be deposed, and would most likely not even obey a judicial order to give testimony.

It took several days to make the necessary contacts to determine whether or not compulsory process would be required, and Bernhoft and Raymond made that decision to serve subpoenas on or about December 18, 1998. At this point, out of respect for U.S. Department of Justice Tax Division attorneys' specific request that no depositions be conducted over the December holiday period, defendants determined to wait until after the December holidays to serve subpoenas and notice the depositions. Therefore, plaintiff's charge that defendants were not duly diligent in taking the depositions prior to the close of discovery on January 1, 1999, is wholly without merit and, quite frankly, insulting, considering the fact that defendants were accommodating plaintiff's counsel's express wishes.

Furthermore, and notwithstanding plaintiff's fatuous assertion to the contrary, the United States of America was required to provide information regarding the Jarosz/Palmer/Langer/Jurkowski interviews and the criminal investigation of Morningstar Consultants, Raymond, and Bernhoft that preceded the filing of this civil action against them, in its responses to mandatory interrogatories. Plaintiff, however, attempts to cast these interviews as "irrelevant," in spite of the fact that Palmer was continuously investigating defendants starting sometime before December 19, 1995, the date of his first meeting with Jarosz. Palmer asserts in a sworn declaration, however, that he did not begin investigating defendants until June 24, 1996. (See Palmer Decl., p. 2, ¶ 6, Doc. 21.) This sworn statement is demonstrably false. Taking Jarosz deposition is essential to clarify who initiated that first meeting between herself on Palmer on December 19, 1995, and what her relationship with Palmer was over the next year, and what Palmer's level of knowledge was regarding her criminal investigation. Moreover, given Palmer's unusually strong bias against defendant Bernhoft, interrogating Jarosz about conversations relating to Bernhoft will likely lead to the discovery of further impeachment evidence against Palmer.

Moreover, deposing Jarosz and Jurkowski is reasonably calculated to develop additional important impeachment evidence against Fictitious IRS Revenue Agent Palmer. Palmer lied to Jarosz during his meeting with her on December 19, 1995, when he told her that contacting "Morningstar Consultants" by telephone, fax number, AOL, and world-wide web (internet) site resulted in the contacting party being asked to provide a credit card number prior "De-Taxing America Program" materials being provided. (See Ex. A, p. 6.) Neither defendant Raymond nor Bernhoft, however, has ever had the capability to process credit card purchases of anything, much less the alleged purchase of "De-Taxing America Program" materials. (See Bernhoft's Second Decl., Ex. N; Raymond's Third Decl., Ex. O.) It can be reasonably inferred that Palmer told this lie to Jarosz in order to "spice up" his presentation to Jarosz in an effort to induce her to commence a criminal investigation of Raymond and Bernhoft. In fact, as Palmer was aware, Jarosz began her criminal investigation on that date. (See Ex. A, p. 3.)

At a minimum, Palmer's lie to Jarosz regarding credit card numbers is a prior instance of untruthfulness regarding essential facts related to the investigation and filing of this case and, as such, will provide important impeachment evidence at trial. Moreover, Jarosz was recalcitrant and evasive when Bernhoft contacted her by telephone after receiving copies of her investigative summaries from the Internal Revenue Service National Office. Defendants need to depose Jarosz to discover more detail as to the circumstances and nature of her first meeting with Palmer, and to further explore Palmer's statement to her regarding credit card numbers.

Second, Palmer perjured himself in his deposition when he testified that he never personally discussed a criminal investigation or the bringing of criminal charges against Morningstar Consultants, Raymond, or Bernhoft with any IRS employee. (See October 17, 1997 Palmer Depo., pp. 79-86, Ex. G.) In fact, Palmer was intimately involved with Jarosz' criminal investigation of Morningstar Consultants, Raymond, and Bernhoft, and was providing her information he was acquiring in his parallel investigation. (See Ex. A, pp. 5-7, 9.) Furthermore, while Palmer was assisting Jarosz in her criminal investigation of Morningstar Consultants, Raymond, and Bernhoft, he was corresponding with defendants and asking them to voluntarily provide information that would bear on his decision to recommend that the instant civil action be brought against them, without ever notifying them that he was providing information to Jarosz in a concurrent criminal investigation regarding the identical subject matter. (See Exs. I, J.)

Finally, Jarosz' deposition testimony regarding Palmer is essential to defendants' trial defense and, most importantly, their opposition to plaintiff's motion for summary judgment; plaintiff relies heavily on Palmer's declarations and statements of fact as a basis for that motion which is currently before this court. Moreover, Palmer's investigation and injunction referral report form the core of plaintiff's complaint for injunctive relief, and undoubtedly, Palmer will be plaintiff's main witness at trial. But a proven liar and perjurer will not have credibility before any court at trial, nor will his affidavits stand up to a motion to strike on that basis. Self evidently, then, Jarosz and Jurkowski's testimony regarding Palmer's involvement with their criminal investigation is reasonably calculated to lead to the discovery of admissible evidence, and plaintiff's motion for protective order should be denied. Conversely, on the same grounds, defendants motion to reopen discovery is justly granted to permit them to depose Jarosz and Jurkowski.

As to the other factors relevant to the instant issue, an impending trial will not be delayed by reopening discovery, because there is no trial date scheduled as of this writing. Furthermore, plaintiff's unavailing whine that it will be prejudiced by a reopening of discovery is more than outweighed by the fact that any delay is a self-inflicted wound, because it is plaintiff's sanctionable conduct in not giving defendants the information they ultimately received in the FOIA response that has created the need to reopen discovery, not any lack of diligence on defendants' part. All plaintiff's name-calling and shameless ad hominem attack cannot change that.

Lastly, plaintiff argues that somehow the "law enforcement investigatory privilege" justifies protecting Jarosz and Jurkowski from being deposed by defendants. Any such privilege, however, was expressly waived when the IRS National Office provided defendants with copies of Jarosz memoranda of interviews. Furthermore, Jarosz criminal investigation of Morningstar Consultants, Raymond, and Bernhoft is closed; it strains credulity that plaintiff expects this court to take seriously a privilege that is exclusively invoked because of on-going criminal investigations, and only then when there are particular, well-established concerns for the safety of possible witnesses and the preservation of evidence. Moreover, any concern over particular questions regarding the identity of informants and the like can be handled at the deposition with a simple objection and instruction to the witness not to answer a particular question or questions.

In conclusion, defendants have established good cause for discovery to be reopened in this case. Further, plaintiff has not met its heavy burden of establishing good cause for a protective order to issue preventing defendants from taking the depositions of Jarosz and Jurkowski. Consequently, defendants respectfully pray for an order reopening discovery for a reasonable period of time such that the aforementioned depositions can be taken, and further, that the court deny plaintiff's motion for protective order.

Respectfully submitted on this the 25th day of February, in the Year of Our Lord & Saviour Jesus Christ 1999.

____________________________
Robert R. Raymond, Defendant
c/o 1456 Lakeshore Road
Grafton, Wi 53024
(414) 375-2737

____________________________
Robert G. Bernhoft
c/o 3170 Farview Drive
Richfield, Wisconsin 53076
(414) 677-4450

IT IS HEREBY CERTIFIED that a true and correct copy of the foregoing "Defendants' Brief in Opposition to 'Plaintiff's Motion for Protective Order' and Reply to Plaintiff's 'Brief in Opposition to Defendants' Motion to Reopen Discovery,'" was placed in the U.S. Mail, postage prepaid, on February 25, A.D. 1999, addressed to:

Robert D. Metcalfe III
Senior Trial Attorney, Interstate Tax Division
U.S. Department of Justice
P.O. Box 7238
Ben Franklin Station
Washington D. C. 20044

Thomas P. Schneider
U. S. Attorney
517 East Wisconsin Ave.
Room 530
Milwaukee, Wisconsin 53202

___________________________
Robert R. Raymond
1456 Lakeshore Road
Grafton, Wisconsin
53024
(414) 375-2737

brad.barnhill@mindspring.com HomeSite v2.5 Last Updated: Thursday, March 04, 1999 10:25:39 PM