More Payne for the IRS

Prolonged agency abuses bring a Houston attorney $1.5 million

Score it Jerry Payne 2, the Internal Revenue Service 0.
Last Friday, United States District Judge Vanessa D. Gilmore ordered the IRS to pay Payne more than $1.5 million in damages. She agreed with the Houston attorney that IRS agents damaged his law practice by illegally releasing information about his federal income tax returns and the agency's criminal investigation of him.

In 1995 a federal jury cleared Payne of charges of income tax evasion, so Gilmore's ruling marks the second time in less than four years that the attorney has prevailed in court against the IRS during an 11-year battle with the agency.

Payne noted that the April 15 federal income tax filing deadline is less than a month away. "It's a good time of the year for the judge to issue her ruling, because the public needs to know about the illegal actions of these federal agents. To that degree, I'm very proud."

Payne maintains that his trouble with the IRS stems from his association -- first as legal counsel, later as the de facto owner -- with Caligula XXI, a southwest Houston topless bar. Like almost every other sexually oriented business in the city, it was suspected, rightly or wrongly, by law enforcement authorities of being involved in anything from over-the-line table dances to prostitution and drug dealing.

In June 1988 Payne successfully defended his club against an attempt by the Texas Alcoholic Beverage Commission to revoke Caligula's liquor license, a move that would have put the bar out of business. Infighting between the club's two principal owners also threatened its future. Since the bar owed Payne almost $600,000 in legal fees, Payne squared the debt by assuming control of the club. He placed its ownership in the name of his daughter, who is mentally handicapped and whose affairs he oversees.

During Payne's 1995 federal court trial on income tax evasion charges, testimony revealed that the IRS launched a probe of Payne shortly after he blocked the beverage commission's effort to jerk Caligula's liquor license. Payne argued at his trial that the state commission began investigating his finances as a retaliatory action at the behest of the TABC, a charge denied by the IRS.

For whatever reasons, IRS agents became fixtures at Payne's law office between 1988 and 1993. Although they never told him what they were looking for or why he was being investigated, Payne says the agents had no qualms about telling others. They informed his clients, relatives and business associates about the criminal investigation of his financial affairs, and they asked them if they had ever known Payne to use or sell drugs.

So, in June 1993, Payne sued the IRS and agents Simon Rodriguez, David Batista and Kenneth Frelow, accusing them of trying to damage his legal career by implying that he was engaged in criminal activity.

Twenty months later -- and almost seven years after the IRS first began investigating him -- Payne was indicted on five counts of federal tax code violations. None of the counts alleged that Payne owed money to the government. Instead, two of them dealt with Payne's refusal to file tax returns for 1989 and 1990, when he was cooperating in the IRS investigation of him. Three other counts accused him of signing tax forms that he knew contained incorrect information. Rather than accusing Payne of underpaying his taxes, the government basically charged him with perjury.

"If I'm guilty of perjury, I can't be a lawyer," Payne said at the time. "What they wanted to do was to knock me out as a lawyer."

If they couldn't take away his law license, he says, they wanted to make sure he didn't have any clients. In her decision last week, Judge Gilmore seemed to agree.

Gilmore's 29-page ruling highlighted testimony from Payne's civil trial against the IRS. Several witnesses said that IRS agents -- specifically agent Batista -- made a point of informing them that Payne was the focus of criminal tax fraud investigation and that he was suspected of using and/or selling drugs, or committing other crimes. On the witness stand, Batista testified he was told that Payne was involved with drugs, but he could not remember by whom.

"The Court finds that there was no rational basis for Batista to ask these questions, particularly in light of IRS regulations that require special agents to avoid 'unnecessarily injur[ing] the reputation of the person being investigated,'" wrote Gilmore. The judge also notes that the agent eventually admitted that he had violated internal IRS policy regarding confidentiality.

"In this case," the judge continued, "there is more than mere speculation to support the conclusion that [Payne's] decline in clients and client referrals was caused by the unauthorized disclosures made by Batista."

To remedy the situation, Gilmore found the government liable to Payne for $1.5 million in actual damages, as well as $1,000 in punitive damages.

At the Press deadline, it was uncertain if the government will appeal Gilmore's decision. However, even though he won, Payne plans to file an appeal of his own. He concedes that $1.5 million is a tidy sum, but Payne expected -- and wants -- more than $1,000 in punitive reparations.

"There seems to be a decimal point in the wrong place," says Payne. "I'm not sure $1,000 will really deter the IRS from doing this sort of thing again."

Payne hopes, but doubts, that the United States Attorney's Office will see fit to file charges against agent Batista for violating federal law by releasing confidential information. The attorney also comes away from his 11-year ordeal with a belief that Congress should go further with its purported effort to reform the federal tax agency. And he has a new appreciation of what ordinary folks -- people without law degrees or knowledge of the ways and means of revenue agents -- face when they find themselves accused of tax violations and up against the deep pockets of the IRS.

"People who don't do this for a living and who are subjected to illegal acts by the federal government -- those people are pretty well doomed," Payne says.

E-mail Steve McVicker at steve_mcvicker@ houstonpress.com.

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