Searching based on a query string and returning JSON ActionResult

By splitting this method into multiple smaller methods you can reduce the complexity of this method.

if (query == "" && accountId == null)
{
    return Json(empty, JsonRequestBehavior.AllowGet);
}

if (query == "" && accountId != null)
{
    var search = Db.Entities.Find(accountId);
    var suggestions = Db.Entities.Where(
        x => x.Name.Contains(search.Name) && x.EntityId != accountId && !String.IsNullOrEmpty(x.Group.Label))
        .ToList()
        .Select(item => new { id = item.GroupId, text = item.Group.Label });

    return Json(suggestions, JsonRequestBehavior.AllowGet);

}  

here you have one common condition which is query == "" so let us extract this to a separate method.

private ActionResult *********1(int? accountId = null)
{ 
    if (accountId == null)
    {
        return Json(new object(), JsonRequestBehavior.AllowGet);
    }  

    var search = Db.Entities.Find(accountId);
    var suggestions = Db.Entities.Where(
        x => x.Name.Contains(search.Name) && x.EntityId != accountId && !String.IsNullOrEmpty(x.Group.Label))
        .ToList()
        .Select(item => new { id = item.GroupId, text = item.Group.Label });

    return Json(suggestions, JsonRequestBehavior.AllowGet);
}

leaving the original like

public ActionResult *********(string query = "", int? id = null, int? accountId = null)
{
    if (query == "")
    {     
         return *********1(accountId);
    }

    if (id != null)
    {
        var accountGroup = Db.Groups.Find(id);
        if (accountGroup != null)
            return Json(new { id = accountGroup.GroupId, text = accountGroup.Label },
                JsonRequestBehavior.AllowGet);
        return Json(null, JsonRequestBehavior.AllowGet);
    }
    var list = Db.Groups.Where(
        r => !String.IsNullOrEmpty(query) && query.Length > 2 && (r.StatusId == GroupStatus.Both || r.StatusId == GroupStatus.Customer) && r.Label.ToLower().Contains(query.ToLower())).OrderBy(r => r.Label).Select(item => new { id = item.GroupId, text = item.Label }).ToList();
    if (!list.Any())
    {
        return Json(new List<object>() { new { id = query, text = query } }, JsonRequestBehavior.AllowGet);
    }
    return Json(list, JsonRequestBehavior.AllowGet);
}  

Next I would extract the part where (id != null).

private ActionResult *********2(int? id = null)
{
    var accountGroup = Db.Groups.Find(id);
    if (accountGroup != null)
    {
        return Json(new { id = accountGroup.GroupId, text = accountGroup.Label },
            JsonRequestBehavior.AllowGet);
    }
    return Json(null, JsonRequestBehavior.AllowGet);
}  

which results in the original looking like

public ActionResult *********(string query = "", int? id = null, int? accountId = null)
{
    if (query == "")
    {     
         return *********1(accountId);
    }

    if (id != null)
    {
         return *********2(id);
    }

    var list = Db.Groups.Where(
        r => !String.IsNullOrEmpty(query) && query.Length > 2 && (r.StatusId == GroupStatus.Both || r.StatusId == GroupStatus.Customer) && r.Label.ToLower().Contains(query.ToLower())).OrderBy(r => r.Label).Select(item => new { id = item.GroupId, text = item.Label }).ToList();
    if (!list.Any())
    {
        return Json(new List<object>() { new { id = query, text = query } }, JsonRequestBehavior.AllowGet);
    }
    return Json(list, JsonRequestBehavior.AllowGet);
}  

Next I would refactor this monster linq query like

public ActionResult *********(string query = "", int? id = null, int? accountId = null)
{
    if (query == "")
    {     
         return *********1(accountId);
    }

    if (id != null)
    {
         return *********2(id);
    }

    if (query != null && query.Length > 2)
    {
        string lowerQuery = query.ToLower();

        var list = Db.Groups.Where(r => (r.StatusId == GroupStatus.Both || r.StatusId == GroupStatus.Customer) && r.Label.ToLower().Contains(lowerQuery))
                            .OrderBy(r => r.Label)
                            .Select(item => new { id = item.GroupId, text = item.Label });

// removed the call of ToList() because you only need to test if at least one item is in the list. 
// This results in 1 additional trip to the database if at least one item is found.  

        if (list.Any())
        {
            return Json(list.ToList(), JsonRequestBehavior.AllowGet);
        }  

    }

    return Json(new List<object>() { new { id = query, text = query } }, JsonRequestBehavior.AllowGet);

}

By changing the order of conditions you can speed up the queries too.

var suggestions = Db.Entities.Where(
            x => x.Name.Contains(search.Name) && x.EntityId != accountId && !String.IsNullOrEmpty(x.Group.Label))....  

the fastest check would be x.EntityId != accountId followed by !String.IsNullOrEmpty(x.Group.Label) and last x.Name.Contains(search.Name).

You should be consistent with the coding style you use. Some times you are using braces {} for single instrauction if or else and sometimes not. Although there is no explicit rule about using them, I would like to encourage you to always use them to make your code less error prone.

I have no idea about your domain model, but I would like to suggest to rename some of your variables to a better more meaningful name.

var search = Db.Entities.Find(accountId); // looks more like a searchResult  
var list = Db.Groups.Where()              // list is not the best name either

I'm a bit worried about how this one method seems to be dealing with distinct requests. The value of id for instance is only relevant for a small part that involves neither query nor accountId, so why then clutter this method by inserting that logic here?

Why not instead have:

• a separate public ActionResult SearchById(int? id = null)
• and a public ActionResult *********(string query = "", int? accountId = null)?

I also feel query is too generic a name, since it is only used here: r.Label.ToLower().Contains(query.ToLower())). Why not call it groupLabel?

I don't think !String.IsNullOrEmpty(query) && query.Length > 2 should be part of your Where clause, IMHO this is input validation that should happen before you compile the Where clause.