Monday, September 7, 2015

Trial Court Issues Contempt Order for Summons Noncompliance While Case is on Appeal (9/7/15)

In United States v. Soong, 2015 U.S. Dist. LEXIS 118585 (ND Cal. 2015), here, the district court held the taxpayers in contempt in a summons enforcement case for foreign account records.  Readers of this blog will recall that there have been many cases involving whether the IRS could use compulsory process (summons or subpoena) to compel the production of foreign account records that a U.S. person is required to maintain under the BSA.  Although there were some taxpayer victories in the district court, ultimately the Courts, including the Ninth Circuit, held uniformly that, under the required records doctrine, the the Government can compel production over an otherwise validly asserted Fifth Amendment claim, Apparently, recognizing that contesting the required records doctrine would not carry the day, the Soongs argued that the court could or should not enforce because of improper service of the summons.  The district court rejected that defense and ordered enforcement of the summons.  The taxpayers then filed notice of appeal but did not seek to stay the enforcement order in the district court.  Upon the taxpayers' failure to produce, the Government asked the trial court for contempt sanctions.

The district court rejected the taxpayers defense as follows:
First, they seem to suggest that this Court does not have jurisdiction to find them in contempt of this Court's Enforcement Order because the Soongs' appeal of that Order is currently pending before the Ninth Circuit. However, it is well established that a district court "retain[s] a limited equitable jurisdiction to enforce its orders" even after a notice of appeal has been filed. Kelley v. C.I.R., 45 F.3d 348, 351 n.5 (9th Cir. 1995); see also Hoffman v. Beer Drivers & Salesmen's Local Union No. 888, 536 F.2d 1268, 1276 (9th Cir. 1976) (holding that an appeal from a district court order does not divest the district court of jurisdiction to enforce its order). Or, as the Sixth Circuit has held, "[w]here, as here, the district court is attempting to supervise its judgment and enforce its order through civil contempt proceedings, pendency of appeal does not deprive it of jurisdiction for these purposes." Island Creek Coal Sales Co. v. City of Gainesville, 764 F.2d 437, 440 (6th Cir. 1985). Thus, the Court finds that it retains the authority to enforce compliance with its order irrespective of the fact that the Soongs' appeal of the Enforcement Order is currently pending. 
Alternatively, the Soongs again argue that this Court lacks personal jurisdiction over them because they are currently living abroad, and any attempted service on them at their Union City home was improper and legally ineffectual. See Opp. Br. at 4. Thus, the Soongs contend that "there is no personal jurisdiction for the district court until the Ninth Circuit says there is. Absent a final determination that this Court has jurisdiction over the Soongs, there is no jurisdiction to support the issuance of a Contempt Order." Id. (emphasis in original). The Soongs have the law backwards. As the Supreme Court has squarely held, "[i]t would be a disservice to the law if we were to depart from the long-standing rule that a contempt proceeding does not open to reconsideration the legal or factual basis of the order alleged to have been disobeyed and thus become a retrial of the original controversy." Rylander, 460 U.S. at 756 (quoting Maggio v. Zeitz, 333 U.S. 56, 69 (1948)). Or, as the Ninth Circuit has stated this basic principle of law: "Disagreement with the court is not an excuse for failing to comply with court orders." Adriana Int'l Corp. v. Thoeren, 913 F.2d 1406, 1412 (9th Cir. 1990); see also Hyde & Drath v. Baker, 24 F.3d 1162, 1168 (9th Cir. 1994) (same). This Court has already determined that it does have jurisdiction over the Soongs, and until the Soongs prove otherwise, they are obligated to comply with this Court's orders. See Adriana, 913 F.2d at 1412. If the Soongs did not want to comply with this Court's Enforcement Order pending their appeal, they should have sought a stay of this Court's order either in this Court or before the Ninth Circuit. Having failed to do so, however, the Soongs have no valid excuse for failing to comply with the unambiguous command of this Court. The Soongs must produce the documents the IRS has requested in its summonses. 
Because it is undisputed that the Soongs have not complied with this Court's Enforcement Order, and because it is beyond doubt that the Soongs have no valid excuse for this failure, the Court finds clear and convincing evidence that the Soongs are in contempt. Balla v. Idaho State Bd. of Corrections, 869 F.2d 461, 466 (9th Cir. 1989) ("As we have previously stated, civil contempt is appropriate when a party fails to comply with a specific and definite court order.") (citations omitted). In its motion, the Government asks this Court to impose a coercive fine on the Soongs in an effort to gain their compliance with this Court's Enforcement Order (i.e., to get the Soongs to produce the documents requested by the IRS in its summonses). Where the Court issues a fine in an effort to gain the contemnor's compliance with one of the Court's orders, the Supreme Court has held that the fine amount must take into account "the character and magnitude of the harm threatened by continued contumacy, and the probable effectiveness of any suggested sanction in bringing about the result desired." Unites States v. United Mine Workers of Am., 330 U.S. 258, 304 (1947); see also Whittaker Corp. v. Execuair Corp., 953 F.2d 510, 516 (9th Cir. 1992). "[I]n fixing the amount of a fine to be imposed as a . . . means of securing future compliance, [the Court should] consider the amount of defendant's financial resources and the consequent seriousness of the burden to that particular defendant." United Mine Workers, 330 U.S. at 304. 
Here, the Court believes that a coercive daily fine should be imposed on the Soongs for each day they remain out of compliance with this Court's Enforcement Order. See Bagwell, 512 U.S. at 829 (explaining that civil contempt fines may be imposed to ensure compliance with a Court order so long as the contemnor has a "subsequent opportunity to reduce or avoid the fine through compliance"). The Court finds that a fine of $500 a day per spouse (or $1,000 a day collectively as a couple) payable to the Court is the appropriate fine amount. The Soongs' appear to have tremendous financial resources -- the IRS has stated that the Soongs' privately held corporation earned revenues in excess of $200 million annually, and the Soongs apparently deposited at least $10 million in a foreign bank account -- and thus a lesser fine amount is unlikely to secure their compliance with this Court's order. Moreover, the Court believes this fine amount is appropriate in light of the lengthy period of non-compliance with the IRS's summonses, and the risk that further delay will prejudice the IRS's investigation if the evidence sought in its summonses is lost or destroyed. The Soongs have made no effort to comply with this Court's order for nearly a year-and-a-half, and have refused to comply with the IRS investigation for years before that. The Soongs' should not be permitted to put off compliance any longer. 
The Soongs admit that they have not complied with this Court's Order Enforcing the IRS's document summonses. Thus, the Soongs are in contempt. Beginning Friday, September 11, 2015, the Soongs shall pay a daily fine to the Clerk of Court in the amount of $500 per person ($1,000 total) until they come into substantial compliance with this Court's order.
The lesson here is that the taxpayer has a Hobson's choice when the Court has ordered enforcement of the summons if the taxpayer has not obtained a stay of enforcement either from the trial court or the Court of Appeals.  If the taxpayer complies, the Government will have the documents and information and the appeal will be moot.  If the taxpayer does not comply, the appeal will not be moot, but the taxpayer can be subject to serious sanctions that may not even be lifted if the taxpayer prevails on appeal.

Of course, if the taxpayer complies as ordered while the appeal is pending and the taxpayer ultimately prevails on appeal, the Government may not be able to use the documents and information produced or fruits thereof in a criminal proceeding.  But the Government would presumably be able to use them in a civil proceeding.  [Caveat to readers, the conclusions in this paragraph are off the cuff and unresearched, as I am vacation; I would appreciate responses to readers if in error or if needing nuance.]

Finally, it looks like the actual contempt sanctions -- $1,000 aggregate per day -- may be perhaps a nuisance to the taxpayers.  In the meantime, their noncompliance does keep the clock on the statute of limitations running for civil and criminal purposes.  (But, on the other hand,their indicated absence from the U.S. suspends the criminal statute of limitations for tax crimes, see § 6531 (flush language), here.)

Addendum 9/9/15 9:27am:  A reader sent me the following case:  "Where there is no stay of enforcement pending appeal, the district court has the power to enforce its order through contempt.  See Sekaquaptewa v. MacDonald, 544 F. 2d 396, 406 (CA 9, 1976) (affirming contempt issued while appeal pending because “To hold otherwise would deny the District Court the power to enforce its unstayed orders while they were on appeal.”)"

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