TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

Second Circuit Holds Justice Department’s Feet to the Fire to Prove the Fifth Amendment Doesn’t Apply in Two Cases

There is no Fifth Amendment protection for the content of most records, but the act of producing records is protected by the Fifth Amendment if the government could use the fact of a taxpayer having produced documents against her.  For example, if a sole proprietor kept two sets of books – one showing “real” revenue and another showing less revenue that he used to prepare tax returns – the books themselves would not be protected by the sole proprietor’s Fifth Amendment rights.  However, if the government subpoenaed all books and records from the sole proprietor, he could assert his Fifth Amendment rights against producing the books and records because the act of producing the books would incriminate him.  How?  By confirming that he knew there were two sets of books, and that the books being turned over were for his business as opposed to someone else’s business.  An experienced lawyer representing the sole proprietor would likely be successful at asserting a Fifth Amendment defense to producing records to the IRS and Department of Justice (“DOJ”).

The IRS and DOJ may counter with one of three common exceptions to this act-of-production privilege: (1) “collective entities” such as corporations don’t have Fifth Amendment rights, so the IRS could try to subpoena a corporation, trust, or LLC to designate a custodian and produce documents without regard to possible incrimination of the entity or its members; (2) if the subpoenaed records, such as certain foreign banking records, are required by law to be kept (aka the “required records exception”), then the government may successfully force a taxpayer to turn over records even if the act of producing incriminates the taxpayer; and (3) if the government already knows that the taxpayer has the records, then her production of documents isn’t incriminating because her possession thereof is a “foregone conclusion.”

In August 2016, the Second Circuit Court of Appeals shot down the DOJ and IRS’s attempt to use the foregone conclusion exception to the act-of-production privilege. In United States v. Greenfield, 831 F3d 406 (2d Cir. 2016), the Court noted that an employee of a Liechtenstein bank had leaked bank documents in 2008 showing that clients, including Mr. Greenfield, appeared to have had foreign bank accounts in 2001.  In 2013, acting on the leaked documents, the IRS subpoenaed the taxpayers to produce foreign bank records, and the taxpayer’s lawyers responded by claiming the act-of-production privilege.  After the district court ruled against the taxpayers, the Second Circuit reversed the district court’s decision and held that the fact that the taxpayers may have had documents ten years before the subpoena, is insufficient for the government to meet its burden to show (a) the documents still exist, (b) they are authentic without having to rely on the taxpayer to authenticate them, and (c) they have remained in the taxpayer’s possession.  The Second Circuit noted that generally the government has met its burden in cases involving much shorter periods – weeks or months – and events such as the death of the family patriarch here made it likely that the documents would have been destroyed.  The appellate court went out of its way to explain how continued possession of documents could be incriminatory, and that two years was too long to assume that a taxpayer would keep important documents such as expired passports.  Although the Second Circuit asserted that it was thoroughly analyzing the case so as to give the government a roadmap to strengthen its evidence and then serve another summons, in reality it will be very difficult for the government to overcome the hurdles that the Second Circuit erected without finding an eyewitness who recently saw the documents.

Proving Greenfield was no fluke, last week the Second Circuit reversed a district court’s order compelling a taxpayer to turn over records and testify about them.  In United States v. Fridman, 2016 TNT 240-13, the district court had found all three exceptions applied to the IRS subpoena issued to the taxpayer’s trust, for records of foreign bank accounts. The Second Circuit wasn’t satisfied with the district court’s unsupported conclusions, noting the district court hadn’t explained why any of those exceptions applied to particular documents.  The appellate court sent the case back to the district court to explain in detail – if it could – which exception applied and to which documents.

The cases reinforce why lawyers should press the government to show how it has met its heavy burden to prove an exception to the Fifth Amendment’s act-of-production protection.

EVAN DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3200. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the Criminal Division.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, federal and state white collar criminal investigations. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).