Tuesday, March 13, 2012

Ninth Circuit Speaks on FOIA, but Ducks Fugitive Disentitlement (3/13/12)

A common parry in a tax criminal investigation or prosecution is to file a FOIA request with the IRS.  The IRS / DOJ thrust is to resist.  I provide at the end of this blog a general discussion of FOIA and the theories of resistance.

In Shannahan v. United States, ___ F.3d ___, 2012 U.S. App. LEXIS 5168 (9th Cir. 2012), here, the Ninth Circuit held that the attorney for two fugitives avoiding U.S. prosecution by their absence from the country could not obtain documents under FOIA that the IRS claimed were exempt from disclosure.  The background facts are:
On January 28, 2003, Steven Cheung and Linda Su Cheung, husband and wife, were indicted on one count of conspiracy to defraud the United States. The Cheungs are United States citizens. The indictment charged that the Cheungs concealed their ownership of, and millions of dollars of income derived from, businesses owning commercial parking lots in Hong Kong. Steven Cheung was charged in the same indictment with six counts of filing false or fraudulent income tax returns, five counts of filing false foreign bank account reports, and one count of failing to file a foreign bank account report. The indictment alleges that the Cheungs engaged in financial transactions in the United States, Hong Kong, the Marshall Islands, and the British Virgin Islands and “utilized a web of corporations and other entities” in those countries. When they lived in the United States, their principal residence was in Seattle, Washington.
The Ninth Circuit affirmed the lower court's holding that Exemptions 3 and 7(A) applied.  5 USC 552(b)(3) and (7)(A), here.  The Ninth Circuit's opinion on the application of these FOIA exceptions appear to plough no new ground, but is a good illustration of these exceptions.

DOJ did claim an overriding basis for denying the request -- the common law fugitive disentitlement doctrine.  This doctrine of uncertain scope has a specific instance codified in 28 U.S.C. § 2466, here, applying to civil foreclosure proceedings related to the criminal case.  But it's scope outside that context is not certain.  In any event, the Ninth Circuit, as did the district court, ducked the issue, finding that the FOIA Exceptions were more than adequate to authorize the IRS to withhold the documents in question.  In this regard, I find it interesting what the Court said in summing up:
The Cheungs’ problem is partly of their own making. They were indicted for tax-related crimes — conspiracy to commit tax fraud (both Cheungs), filing fraudulent income tax returns (Steven Cheung), filing false foreign bank account reports (Steven Cheung), and failing to file a foreign bank account report (Steven Cheung). Instead of defending against the criminal charges, the Cheungs fled the United States. It appears that they are now in China, which has no extradition treaty with the United States. 
If the Cheungs had stayed in the United States and defended against the charges, the IRS would likely have  gone forward with the criminal case before instituting any civil tax proceedings, in accordance with its usual procedure. Once the Cheungs’ criminal proceedings were complete, the Cheungs would have had access to some of the documents they now seek, either because they would have received the documents during the criminal proceedings or because the harm of disclosing the documents would have been vitiated by the conclusion of those proceedings. But here the criminal proceedings have not taken place because the Cheungs have fled, and they must live with the consequences.
Although the Ninth Circuit did not reach the fugitive disentitlement doctrine, the foregoing paragraph certainly echoes the equitable concerns that the fugitive disentitlement doctrine is based on.  It presents them in another context to explain how and when, if the Cheungs were not fugitives, they could get access to the documents.  Basically, the notion is that, if they were not fugitives, they could get many, perhaps most of the documents, because (i) they would be disclosed in some appropriate context (either criminal discovery (including Brady and related concepts) or civil discovery in some civil proceeding) and (ii), in any event in a FOIA context, the IRS’s claims of exemptions would likely be less compelling after the criminal proceeding was concluded.

Note that, among the charges, were FBAR charges -- false FBAR and failure to file.  The events and the charges long preceded the Government's latest FBAR forays commencing with the UBS brouhaha and OVDP 2009.  I will include the indictment in my spreadsheet when next I turn to it.

Finally, I offer here an excerpt from the current draft of my Federal Tax Crimes book dealing with FOIA (footnotes omitted):
D.  Freedom of Information Act. 
The Freedom of Information Act (“FOIA”) (5 U.S.C. § 552) and the companion Privacy Act (“PA”) offer another avenue to discover at least portions of the Government’s case.  The basic concept of FOIA is that citizens should have the right to know how their Government operates.  The basic concept of the Privacy Act is that a citizen should know what the Government records say about him.  These two acts are different in focus but share the underpinning that knowledge of Government in a free society is a good thing.  Knowledge is power.  In a democracy, citizens’ knowledge is their power against an abusive government. 
In a criminal case, the target and his lawyer would want ideally to see everything in the Government’s files.  Just as in any other type of adversary proceeding (including civil trials), knowing everything the other side knows is critical.  Yet, historically, criminal investigations and trials offer the target limited ability to discover the other Government’s files (and, correspondingly, the Government has limited ability to discover the target’s files).  Although FOIA is not a litigation discovery alternative, FOIA does reflect the same policies regarding precluding access to criminal investigation files.  
In pertinent part, FOIA provides a general rule of citizen right to access of agency files and document.  Section 5 U.S.C. § 552(a).  But, FOIA provides exceptions, referred to as Exemptions, including Exemption 7 as follows (5 U.S.C. § 552(b)(7)(A)): 
(7) records or information compiled for law enforcement purposes, but to the extent that the production of such law enforcement records or information (A) could reasonably be expected to interfere with enforcement proceedings, (B) would deprive a person of a right to a fair trial or an impartial adjudication, (C) * * * (D) could reasonably be expected to disclose the identity of a confidential source, including a State, local, or foreign agency or authority or any private institution which furnished information on a confidential basis, and, in the case of a record or information compiled by a criminal law enforcement authority in the course of a criminal investigation, or by an agency conducting a lawful national security intelligence investigation, information furnished by a confidential source, (E) would disclose techniques and procedures for law enforcement investigations or prosecutions, or would disclose guidelines for law enforcement investigations or prosecutions if such disclosure could reasonably be expected to risk circumvention of the law, or (F) could reasonably be expected to endanger the life or physical safety of any individual;  
Notice that, at least theoretically, virtually all of a criminal investigatory file (the files compiled by CI and by DOJ’s CES) are likely compiled for law enforcement purposes (see Exemption 7(A)).  This will be the exemption most frequently invoked when a FOIA request is made with a criminal investigation or prosecution in the background.  
Protecting informant’s confidentiality, however, is a high priority for criminal investigators.  In United States Department of Justice v. Landano, 508 U.S. 165 (1993), the Court held, consistent with FOIA generally, that the informant exception, often referred to as the Exception 7(D), was to be narrowly construed.  Specifically, in order to invoke Exemption 7(D), the investigating agency must show that the informant had supplied information under an express assurance of confidentiality or circumstances where such an assurance was necessarily implied if not express.  The Court noted in this regard that an assurance of confidentiality did not mean an absolute assurance, for confidential informants often are required ultimately to testify at trial even if given some assurance of confidentiality.  Should the matter be prosecuted, of course, the target (who is then a defendant) will have an opportunity for the limited discovery offered under the Federal Rules of Criminal Procedures and such doctrines as Brady. 
Usually invoked with Exemption 7(A) in the context of a criminal investigation or prosecution is Exemption 3 which exempts documents “specifically exempted . . .by statute.” § 552(b)(3).  Section 6103(a) of the Internal Revenue Code characterizes “returns and return information” as “confidential,” subject to certain exceptions.  One of the exceptions to compelled confidentiality requires disclosure to the taxpayer, but only “if the Secretary determines that such disclosure would not seriously impair Federal tax administration.” § 6103(e)(7).  Exemption 3 is thus likely to be invoked in addition to Exemption 7(A) to preclude access to the the criminal investigation or prosecution files. 
Although these Exemptions would seem to create an insuperable roadblock to using FOIA to blasting out documents for use in a defending in a criminal investigation or prosecution, it does not hurt to ask.  Given FOIA’s purpose to narrowly construe the exemptions, most of the raw data in those files may be obtained in a FOIA request.  For example, if a civil audit preceded the criminal audit, much of the documents compiled in the civil audit would arguably not have been compiled for law enforcement purposes.  As a practical matter, while a criminal tax investigation is being pursued by the IRS or by DOJ’s CES, a FOIA request will likely draw out much of the underlying documents (other than the documents generated by CI or DOJ in the criminal investigation itself). 
In framing the FOIA request, the taxpayer will want to identify the records requested.  The practitioner should consider requesting  
All memoranda and interview notes of taxpayer interviews, practitioner contacts and third party interviews.
All documents gathered in the investigation (or a limited subset if the facts so warrant).
the Agent’s daily activity report and examination history record if there has been a civil audit involved.

No comments:

Post a Comment

Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.