Assertion of the Fifth Amendment by a Taxpayer in a Tax Court Deficiency Redetermination Proceeding (12/21/15)

What does a party in a civil case do when, in discovery or at trial, the party asserts that party's Fifth Amendment privilege?  The purpose of the Fifth Amendment is to limit the ability of the opponent or the court to get to potentially relevant information.  After all, the civil litigation system counts on open discovery to serve the legitimate goal of making sure that all the truth relevant to determining and deciding the truth comes out.  But, the Fifth Amendment privilege serves a valuable purpose also of permitting a person from having to provide incriminating testimony that can be used in a criminal proceeding.  There are a host of issues raised by the circumstances.  If the party asserting the Fifth Amendment privilege in civil litigation is the proponent in the civil litigation (often call a plaintiff or petitioner), can the party continue to press the civil claims when he denies the opposing party the ability to discover or test the truth of the claims?  If so, should there be any consequence to the asserting party when denying the opposing party the benefit of discovery?  If the party asserting the privilege is a defendant and thus not the party instigating the litigation, are there different considerations that should apply?  There are many more questions both when a party asserts the privilege and when a nonparty witness asserts the privilege.

A recent case from the Tenth Circuit dealt with this issue where a party asserted the privilege in a Tax Court deficiency redetermination proceeding.  In Feinberg v. Commissioner, ___ F.3d ___, 2015 U.S. App. LEXIS 22161 (10th Cir. 2015), here, the taxpayers were in the marijuana sales business in Colorado where marijuana distribution is legal in the state but remains illegal under federal law.  See 21 USC § 841, here.  The IRS denied their related business deductions " on the ground that their conduct violates federal criminal drug laws. See 26 U.S.C. § 280E [here]."  In reality, as developed in the case, as a matter of prosecutorial discretion, DOJ does not prosecute persons such as the taxpayers for violating § 841.   As the Tenth Circuit said, this tension results in a phenomenon that "today prosecutors will almost always overlook federal marijuana distribution crimes in Colorado but the tax man never will."

In discovery in the Tax Court proceeding, the taxpayers claimed the Fifth Amendment privilege.  That's when the IRS engaged the issue of whether the taxpayers could properly claim the privilege where the Government would not prosecute the federal crime asserted as the basis for the privilege.  The court summarized as follows:

It's here where the parties' fight took an especially curious turn. The IRS responded to the petitioners' invocation of the Fifth Amendment by filing with the tax court a motion to compel production of the discovery it sought. Why the agency bothered isn't exactly clear. In tax court, after all, it's the petitioners who carry the burden of showing the IRS erred in denying their deductions — and by invoking the privilege and refusing to produce the materials that might support their deductions the petitioners no doubt made their task just that much harder. See Tax Ct. R. 142(a)(1). And harder still because in civil matters an invocation of the Fifth Amendment may sometimes lawfully result in an inference that what you refuse to produce isn't favorable to your cause. See, e.g., Baxter v. Palmigiano, 425 U.S. 308, 318 (1976). 

Still, the IRS chose to pursue a motion to compel. And in support of its motion the agency advanced this line of reasoning. Yes, of course, the IRS said, it thinks THC's deductions are impermissible precisely because they arise from activity proscribed by federal criminal statutes. Yes, the Fifth Amendment normally shields individuals from having to admit to criminal activity. But, the IRS argued, because DOJ's memoranda generally instruct federal prosecutors not to prosecute cases like this one the petitioners should be forced to divulge the requested information anyway. So it is the government simultaneously urged the court to take seriously its claim that the petitioners are violating federal criminal law and to discount the possibility that it would enforce federal criminal law.

When the Court ordered the taxpayers to produce despite their assertion of privilege.  Such a discovery order would not be the type of order that normally could be appealed until the proceedings at the trial level are concluded.  They had not been concluded in this case.  Hence, the taxpayers petitioned the Tenth Circuit for mandamus to order the Tax Court to withdraw its discovery order.  Mandamus is an unusual proceeding mid-stream at the trial level and requires a strong showing of right to relief.  The Court said that showing had not been made because the taxpayers could be given adequate relief in their appeal from the final decision (judgement) in the case.  The Court reasoned (footnotes omitted)

When it comes to establishing a clear and indisputable entitlement to relief, you might wonder if the petitioners are indeed able to bear the burden the law imposes on them. Of course it's true, as the IRS argues, that to invoke the Fifth Amendment you must "face some authentic danger of self-incrimination." United States v. Rivas-Macias, 537 F.3d 1271, 1277 (10th Cir. 2008) (internal quotation marks omitted). And it's true, as the IRS stresses, that two consecutive Deputy Attorneys General have issued memoranda encouraging federal prosecutors to decline prosecutions of state-regulated marijuana dispensaries in most circumstances. But in our constitutional order it's Congress that passes the laws, Congress that saw fit to enact 21 U.S.C. § 841, and Congress that in § 841 made the distribution of marijuana a federal crime. And, frankly, it's not clear whether informal agency memoranda guiding the exercise of prosecutorial discretion by field prosecutors may lawfully go quite so far in displacing Congress's policy directives as these memoranda seek to do. There's always the possibility, too, that the next (or even the current) Deputy Attorney General could displace these memoranda at anytime — by way of illustration look no further than DOJ's (still) evolving views on corporate waivers of the attorney-client privilege expressed in so many memoranda by so many Deputy Attorneys General over so many years.  

In light of questions and possibilities like these, you might be forgiven for wondering whether, memos or no memos, any admission by the petitioners about their involvement in the marijuana trade still involves an "authentic danger of self-incrimination." Maybe especially given the fact that the government's defense in this case is wholly premised on the claim that the petitioners are, in fact, violating federal criminal law. And given the fact that counsel for the government in this appeal candidly acknowledged that neither the existence nor the language of the DOJ memoranda can assure the petitioners that they are now, or will continue to be, safe from prosecution. And given the fact that this court has long explained that, once a witness establishes that "the answers requested would tend to incriminate [him]" under the law of the land, the Fifth Amendment may be properly invoked without regard to anyone's "speculat[ion] [about] whether the witness will in fact be prosecuted." United States v. Jones, 703 F.2d 473, 478 (10th Cir. 1983). 

But even if their Fifth Amendment objection bears merit, the petitioners still face a problem. As we've seen, a writ of mandamus isn't available when an appeal in the normal course would suffice to supply any necessary remedy. And in Mid-America's Process Service v. Ellison, 767 F.2d 684 (10th Cir. 1985), this court expressly held that any error in a district court's order compelling production of civil discovery that the petitioners believed protected by the Fifth Amendment could be satisfactorily redressed in an appeal after final judgment. Id. at 685-86. A holding that would seem to cover the very situation we now face.

The Court then addressed the taxpayers' claim that the appeal after the final order would be inadequate.

Besides, even if Mid-America's Process didn't control this case (it does) the petitioners still offer us no persuasive reason for thinking an appeal after final judgment would fail to remedy any wrong they might suffer. Suppose the petitioners are right and the tax court's order compelling production violates their Fifth Amendment rights. If they defy the tax court's order and that court issues an improper monetary or other sanction, this court would seem well able to undo the sanction after final judgment. By contrast, if the petitioners choose to comply with the discovery order under protest and the materials they produce are unlawfully used against them at trial, this court would still seem to enjoy ample authority to offer a remedy, maybe even in the form of a new trial without resort to the materials in question. 

Of course there are nuances here, but even they seem like they can be fairly addressed later. For example, if the petitioners stand on their privilege we would face the difficulty of separating out a permissible adverse inference (sometimes employable, as we've seen, in civil cases even when the Fifth Amendment is validly invoked) from an impermissible sanction. But no one suggests that task is beyond us after final judgment. Similarly, if the petitioners choose to produce the discovery under compulsion we might have to confront the question whether any error by the tax court in ordering production was harmless and so beyond our power to remedy after final judgment. But that sort of inquiry seems built into the mandamus standard too. See, e.g., Petersen v. Douglas Cty. Bank & Trust Co., 940 F.2d 1389, 1392 (10th Cir. 1991). Neither is it clear that an erroneous order compelling production in this civil case would yield an unremediable negative impact for the petitioners in a later criminal proceeding. For should they elect, under threat of sanction, to comply with the tax court's order — and should it turn out that order was entered in error — the petitioners might later move to suppress any of the evidence they produced on the ground that the production was made involuntarily — a point even the government in this appeal does not dispute. See, e.g., Minnesota v. Murphy, 465 U.S. 420, 425, 434 (1984); Lefkowitz v. Cunningham, 431 U.S. 801, 805 (1977). 

In the end, then, the petitioners fail to offer a convincing reason to think that without an immediate remedy they will face an irreparable injury. Maybe we're missing something. Maybe a future party will show us what it is we're missing. But the petitioners have not done that much here. And that by itself supplies an independent reason, beyond even our controlling precedent, to withhold the extraordinary remedy of mandamus in this case.

JAT Comment:  The key here is that, if the taxpayers in the case were forced to testify over their proper assertion of the Fifth amendment privilege, in any subsequent criminal proceeding, the courts could then provide an adequate remedy, including suppression of the testimony and the fruits of the evidence.  The taxpayers would then have a form of practical immunity from the continuation of the prosecution, because the Government probably could not prove that whatever it had after a suppression of that scope was sufficient for its criminal case.  See Kastigar v. United States, 406 U.S. 441 (1972).

For related blogs, see

• Negative Inference from NonParty Alleged Co-Conspirator's Invocation of Fifth Amendment in a Civil Case (Federal Tax Crimes Blog 4/13/13), here.
• Another Bullshit Shelter Bites the Dust Even with Variations (5/14/14), here.
• Parallel Civil Proceedings and Criminal Proceedings - The Balancing Act (Federal Tax Crimes Blog 10/12/12), here.

A dated but nevertheless seminal work on the general subject is Robert H. Heidt, The Conjurer's Circle--The Fifth Amendment Privilege in Civil Cases (1982), here.  More recent shorter summaries may be found at A. Brian Albritton,  Rights, Presumption of Guilt: Taking the Fifth in Civil Proceedings, 34 Litigation 20 (2007); and Jacob C. Lehman, Asserting the Privilege Against Self-Incrimination in a Civil Case; A Guide for the Pennsylvania Practitioner, 84 PA Bar Assn. Quarterly 70 (2013).