United States v. Hebel

In 1952, the Internal Revenue Service (IRS) rescinded its former policy that it would not refer a taxpayer for criminal prosecution if the taxpayer voluntarily disclosed tax errors. Thereafter, the IRS made clear that it would consider a taxpayer’s voluntary disclosure, along with other relevant factors, in deciding whether to pursue criminal charges. As of 1973, the Treasury Department’s policy reflected this approach. Carlyle Merritt and Richard Hebel (defendants) consulted with their attorneys about disclosing to the IRS that their 1975 tax returns substantially understated their tax liabilities. The attorneys advised Merritt and Hebel that the IRS had abandoned its non-prosecution policy in 1952 but stated that, in their experience, a true voluntary disclosure would not result in prosecution. In reliance on their attorneys’ advice, Merritt and Hebel disclosed their 1975 tax deficiencies to the IRS, filed amended returns, and cooperated with the IRS. Merritt, Hebel, and their attorneys were unaware of any IRS investigation of Merritt or Hebel when they made their disclosures. However, the IRS advised Merritt and Hebel that their 1975 returns already had been selected for audit. Merritt and Hebel each were indicted on four counts relating to their 1975 taxes. Merritt and Hebel moved to dismiss the indictments and to suppress evidence, citing a claimed non-prosecution policy. The district court referred the motions to a magistrate judge, who recommended denial of the motions, reasoning that (1) Merritt and Hebel voluntarily made their disclosures to the IRS with full knowledge that the IRS had abandoned its non-prosecution policy in 1952 and (2) there was a serious question whether Merritt and Hebel’s disclosures truly were voluntary. Specifically, the magistrate judge cited the IRS’s clear post-1952 position and found that Merritt and Hebel failed to prove that the IRS nevertheless had an unwritten non-prosecution policy. The magistrate judge further found that while the IRS had sought criminal prosecutions in few voluntary-disclosure cases, the IRS consistently reserved its right to do so. Additionally, the magistrate judge recommended rejection of Merritt and Hebel’s selective-prosecution claim because they failed to show either that they were singled out for prosecution or that their prosecution was based on impermissible grounds. Finally, the magistrate judge opined that the motion to suppress should be denied because the United States did not obtain any evidence via misconduct. The district court accepted the magistrate judge’s recommendations. After a bench trial, Merritt and Hebel were convicted of one count of violating 26 U.S.C. § 7206(1) and 26 U.S.C. § 7201, respectively. Merritt and Hebel appealed.