9th Circuit Holds that Law Firm Asserting a Fisher Privilege for Client Documents it Possesses that Are Potentially Subject to Fifth Amendment Privilege in Client's Hands Need Not Produce a Privilege Log (2/1/25; 3/31/25)

In In re Grand Jury Investigation, dated July 21, 2023, 127 F.4th 139 (9th Cir. 1/28/25), CA9 here and GS here, the grand jury subpoenaed a target of a grand jury investigation who invoked his Fifth Amendment privilege. The grand jury then subpoenaed a Law Firm for the target (“Client”) to produce records Client had delivered to the Law Firm in the context of receiving legal advice. Law Firm declined to produce asserting privilege. The Government moved to require Law Firm to provide a privilege log (sometimes called a Vaughn index) to help the government determine if the privilege was properly invoked. The district court required that the Law Firm give the privilege log. The client then immediately appealed under the Perlman doctrine permitting an immediate appeal rather than awaiting a contempt holding. See Perlman v. United States, 247 U.S. 7 (1918).The Ninth Circuit panel held (per the summary (similar to a Supreme Court Syllabus), Slip Op. 2-3)

In Fisher [Fisher v. United States, 425 U.S. 391 (1976)], the Supreme Court held that when the Fifth Amendment protects an individual from the compelled production of documents and the individual shares those documents with his attorney to obtain legal advice, the attorney-client privilege shields the attorney from compelled production of those documents to the government. But if the government can already independently determine the existence, authenticity, and client’s custody of those documents such that the act of producing them would reveal no additional incriminating information, the Fifth Amendment does not protect the individual against the documents’ production, and the Fisher privilege accordingly does not apply.

The panel held that an attorney cannot be ordered to provide the government with a privilege log of documents to which the Fisher privilege applies, and that to determine whether the requirements for Fisher protection are in fact satisfied, a district court will generally need to conduct an in camera review. Because the district court here ordered a privilege log to be provided to the Government without any such prior process, the panel reversed and remanded.

District Court Holds Failure to Properly Report Foreign Accounts on a Fifth Amendment FBAR Is Subject to FBAR Willful Penalty (9/18/20)

In United States v. Bernstein, 2020 U.S. Dist. LEXIS 167278 (E.D. N.Y. 2020), CL here and GS here, the Court granted the Government’s motion for summary judgment determining that the defendants, husband and wife (“Bernsteins”), were each subject to the willful FBAR penalty.  Those interested in the motions (and commotions) can find it in the Court Listener docket entries, here, where the motions are available free.

The key facts are;  For many years prior to 2010, the year for which the willful FBAR penalties were assessed, the Bernsteins had foreign accounts.  For the per-2010 years, they did not file FBARs, answered “no” to the Form 1040 Schedule B question about the foreign accounts, and did not report the income from the foreign accounts.  Over the years, they did not tell their accountant about the foreign accounts because they wanted to keep the accounts secret. That conduct, the Court found on summary judgment, was to cheat on their U.S. taxes.

They had the misfortune of having selected UBS as their foreign bank (although they moved the accounts into a single account at Bank Sal Oppenheim after they realized that UBS was caving to Government pressure as readers of this blog already know).  The following series of events then occurred:

Daniel Bernstein later consulted with a U.S. tax attorney, who told him that it was "nothing serious" because the account held "only a million dollars" and therefore the Government would not likely pursue it. Furthermore, Nemirovski, who consulted with a Swiss attorney, conveyed to Mr. Bernstein that the attorney had assured him that their account information had not been turned over to the IRS. Thus, the Bernsteins decided not to take any action in response to the letter and, specifically, not to participate in the Government's voluntary disclosure program.

In April 2011, the Government advised the Bernsteins that it was auditing their 2007 tax return. By that time, the Bernsteins were aware of publicity about the Government's prosecution of UBS account holders. They returned to the U.S. tax attorney who had told them not to worry two years earlier, but this time he told them, "I can't help you; you need a white-collar criminal attorney." He referred them to Lawrence S. Feld, Esq., who is known for his white-collar practice with a specialty in tax prosecutions, and the Bernsteins retained him.

Attorney Feld effectively disagreed with the prior decision not to participate in the voluntary disclosure program. He found the facts as presented to him "deeply disturbing" and believed that there was a "substantial risk" of criminal prosecution. He advised the Bernsteins to file an FBAR for the 2010 tax year in which they would invoke their privilege against self-incrimination under the Fifth Amendment of the U.S. Constitution. He prepared an addendum to the FBAR describing the basis for the privilege in which the Bernsteins offered to make more detailed disclosures if they received use immunity from criminal prosecution. In addition, the Bernstein's 2010 tax return and Schedule B invoked the Fifth Amendment with regard to any questions about foreign accounts.

Attorney Feld believed that this would protect the Bernsteins from criminal prosecution, although they still might be required "to pay [a] fine." The Bernsteins followed his advice and filed an FBAR for the year 2010 in which they did not provide information about the accounts, instead, in the spaces calling for account information, inserting "Fifth Amendment" in answer to each question. At their depositions, the Bernsteins testified as to their belief, based on the advice from Attorney Feld, that by submitting the FBAR in this manner, they had complied with the disclosure requirements for 2010.

The advice given by Attorney Feld appears to have been sound as there is no suggestion in the record that the Bernsteins are subjects or targets of a criminal investigation. However, in May 2017, the IRS assessed a penalty in the amount of $262,288.50 each for the 2010 tax year. 

The Government brought this collection suit  for the FBAR willful penalties.

Mr. Feld, the attorney advising the Bernsteins to file Fifth Amendment FBARs, is a prominent tax lawyer practicing in the criminal tax arena and is  a co-author of Ian Comisky,  Lawrence Feld,  Steven Harris, Tax Fraud and Evasion (Thomson Reuters), here.

Second Circuit Applies the Foregone Conclusion Doctrine to Overcome the Fifth Amendment's Act of Production Doctrine (9/15/20)

In United States v. Fridman, 974 F.3d 163 (2d Cir. 2020), CA2 here and GS here, the Court held that the Government had overcome Fridman’s claim of Fifth Amendment privilege (via Act of Production doctrine) under the foregone conclusion doctrine which requires “the Government must establish with reasonable particularity its knowledge as to (1) existence of the documents, (2) the taxpayer's possession or control of the documents and (3) the authenticity of the documents.” Fridman, Slip Op. 13.  The Court also held that a “traditional trust” is a collective entity that could not assert a Fifth Amendment privilege.

I focus here on the Act of Production Doctrine under which production can be testimonial and the exception known as the foregone conclusion doctrine.  The Court discusses and applies these concepts at Slip Op. 13-29.  Readers can study the opinion for the particular application of the law to the facts.  I thought that it would be most helpful to most readers to excerpt the general discussion of the applicable law.  I do caution that the Court calls it the Act of Production Privilege; the privilege involved is the Fifth Amendment privilege; Act of Production is is not a separate privilege but a doctrine as to a particular application of the Fifth Amendment privilege.   In this excerpt, I have substantially cleaned up for easier readability (footnotes omitted):

The Fifth Amendment provides that no person shall be compelled in a criminal case to be a witness against himself. U.S. Const. amend. V. In Fisher v. United States, 425 U.S. 391, 409-11 (1976), the Supreme Court defined the contours of the Fifth Amendment as it applies to document requests. The Court held that documents voluntarily prepared prior to the issuance of a summons were not compelled testimony, so there was no Fifth Amendment protection for the contents of these records. At the same time, however, the Court recognized a narrow privilege against the act of production. Because producing documents tacitly concedes the existence of the papers demanded and their possession or control by the taxpayer as well as the taxpayer's belief that the papers are those described in the subpoena, the Court concluded that the act of production could, in some cases, communicate incriminatory statements and thus may fall under the Fifth Amendment's protection against self-incrimination; but the Court hinted that such a determination would be conditioned on the facts and circumstances of particular cases. Similarly, when a defendant must make extensive use of the contents of his own mind in identifying the hundreds of documents responsive to the requests in the subpoena, he or she contributes to a "link in the chain" of their prosecution in violation of the Fifth Amendment privilege. United States v. Hubbell, 530 U.S. 27, 42-43 (2000).

The act-of-production privilege is not an absolute one. Fridman challenges the district court's ruling that two exceptions to the act-of-production privilege permitted enforcement of the requests at issue in this case.

I. The Foregone Conclusion Doctrine

Taxpayers Fail to Prove Expenses of Medical Marijuana Business Deductible; Burden of Proof Does Not Violate Fifth Amendment Privilege (3/2/19)

In Feinberg v. Commissioner, 2019 U.S. App. LEXIS 5618 (10th Cir. 2019), here, the taxpayers were shareholders in an LLC selling medical marijuana.  Their sales were legal under state law, but illegal under federal law.  The issue was whether they bore the burden of proving that they were entitled to deductions related to the business.  Section 280E provides:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

The Court held that the taxpayers bore the burden of establish their entitlement to the deductions over the taxpayers objection that the assignment of the burden violated their Fifth Amendment privilege.  (There were some other procedures discussed such as substantiation burden shifted to the IRS because new matter, but this is the point I want to address.)

Here is the key part of the opinion (cleaned up and footnotes omitted)

The Taxpayers fail to explain how requiring them to bear the burden of proving the IRS erred in applying § 280E to calculate their civil tax liability is a form of compulsion equivalent to a statute that imposes criminal liability for failing to provide information subjecting the party to liability under another criminal statute. Here, the Taxpayers must choose between providing evidence that they are not engaged in the trafficking of a controlled substance or forgoing the tax deductions available by the grace of Congress. In the cases cited by the Taxpayers, the petitioners were faced with a choice of whether to be prosecuted criminally because they did not provide the information, or to be prosecuted criminally because they did. The circumstances are easily distinguishable. 

Nor can we adopt the Taxpayers' position without running afoul of Supreme Court precedent squarely rejecting the notion that a possible failure of proof on an issue where the defendant had the burden of proof is a form of compulsion which requires that the burden be shifted from the defendant's shoulders to that of the government. Such a concept would convert the Fifth Amendment privilege from the shield against compulsory self-incrimination which it was intended to be into a sword whereby a claimant asserting the privilege would be freed from adducing proof in support of a burden which would otherwise have been his. The Fifth Amendment privilege has never been thought to be in itself a substitute for evidence that would assist in meeting a burden of production.

To be sure, "by invoking the privilege and refusing to produce the materials that might support their deductions the Taxpayers no doubt made their task of proving the IRS erred in denying their deductions that much harder. But "a party who asserts the privilege against self-incrimination must bear the consequences of the lack of evidence. Rylander [United States v. Rylander, 460 U.S. 752 (1983)] teaches that the Taxpayers' possible failure of proof on an issue on which they bear the burden is not compulsion for purposes of the Fifth Amendment. Therefore, we reject the Taxpayers' contention that bearing the burden of proving the IRS erred in rejecting THC's business deduction under § 280E violated the Taxpayers' Fifth Amendment privilege.

The Court held that, since the taxpayers bore the burden of proof without the cover of the Fifth Amendment, the failure of proof required that they lose.

Ninth Circuit Rejects Spousal Testimonial Privilege for Foreign Bank Records (1/4/19)

In In re Grand Jury Subpoena, Dated March 21, 2018 (9th Cir. 12/28/18) (unpublished), here, the Court affirmed a district court order of contempt for compelling the wife of a grand jury target to produce records of her foreign bank activity for the years 2011 through 2016.  She asserted that the spousal testimonial privilege protects her from compelled production of the documents.  The district court rejected her claim of spousal testimonial privilege and held her in contempt for her continuing refusal to produce.  The Ninth Circuit held that the spousal testimonial privilege was not applicable.

The Ninth Circuit's analysis is contained in one paragraph with one footnote, so I just cut and paste them.

Doe asserts that the spousal testimonial privilege protects her from producing documents responsive to the subpoena because the grand jury is currently investigating possible federal tax crimes committed by her husband. n1  For the spousal testimonial privilege to apply, “the anticipated testimony ‘[must] in fact be adverse’ to the nonwitness spouse.” United States v. Van Cauwenberghe, 827 F.2d 424, 431 (9th Cir. 1987) (citation omitted); see also United States v. Fomichev, 899 F.3d 766, 771 (9th Cir. 2018) (“[T]he witness-spouse alone has a privilege to refuse to testify adversely.”) (emphasis added) (citation omitted). Here, “the testimonial aspect of [Doe’s] response to a subpoena duces tecum does nothing more than establish the existence, authenticity, and custody” of any responsive foreign bank account records. United States v. Hubbell, 530 U.S. 27, 40–41 (2000). Because this bare testimonial aspect of Doe’s act of production does not itself adversely affect her husband’s case, Doe is not relieved of her obligation to produce foreign bank account records over which she has care, custody, or control.
   n1 Although Doe also raised claims of privilege under the Fifth Amendment, and the marital communications privilege, before the district court, these arguments were not raised on appeal and are therefore waived. Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999) (“[O]n appeal, arguments not raised by a party in its opening brief are deemed waived.”). 

JAT Comments:

District Court Opinion Over Parties' Sparring About Summons Enforcement for Foreign Account Records (8/18/18; 12/20/19)

Caution as of 12/20/19:  I learned today that the district court had issued a subsequent opinion of which I was previously unaware.  I learned of the subsequent opinion, here, in this blog:  Leslie Book, I Do Not Have What You Want: The Affirmative Defense of Non-possession In Summons Enforcement Proceedings (Procedurally Taxing Blog 12/20/19), here.   In the subsequent opinion, the Court held in Conclusion:

Having determined that Santoso has demonstrated not only that she does not possess the summoned documents but also that she has taken reasonable steps to obtain them if they are within  her control, I find that Santoso has established the affirmative defense of non-possession and her Motion to Dismiss the Petition and Quash the Summons is granted with the exception of the Sampoerna documents. Santoso must produce any records she obtains related to her Sampoerna shares by September 27, 2019, or file a status report that explains why she is unable to produce any further documents regarding the shares, and the steps taken in an attempt to produce further documents.

Please review to Les Book's discussion in the Procedurally Taxing Blog.

In United States v. Santoso, 2018 U.S. Dist. LEXIS 136889 (D. Md. 2018), here, the IRS issued one or more summonses to a taxpayer who, it seems, received large sums of money from overseas, "allegedly as 'gifts,' from members of her famously wealthy family in Indonesia."  Presumably, pursuant to summonses, "she has given sworn testimony to the IRS on three occasions for more than twenty hours and provided over a thousand documents."  But, the court reviewed the transcripts and concluded "that much of it is of little value because it is made up of speaking objections made by Santoso's lawyers, sparring between them and counsel for the IRS and the revenue agent, and assertions of the fifth amendment by Santoso."  So, over Santoso's objection that she did not have or control documents within the description in the summons, the IRS moved to enforce the summons.

In order to enforce the summons, the Government's initial burden is to meet the Powell requirements, well known to readers of this blog.  Those requirements are (i) a legitimate purpose, (ii) relevance to the IRS inquiry, (iii) information not already possessed by the IRS and (iv) compliance with the administrative steps.  The Government met that burden.

But, a witness cannot produce documents she does not possess or control.  So, after the Government meets the Powell requirements, the witness then must credibly show lack of ability to comply because of lack of possession or control.  The Court held that a hearing must be held as to whether Santos "made more than "a pro forma" effort to obtain records that she does not actually possess, or made more than a cursory search for them."

The Court then notes the dearth of authority on precisely what Santos must do to meet her burden.  The Government asserted (fn. 5) that her diligent efforts "should include (without limitation):

(1) Contacting the foreign financial institutions from which she received millions of dollars in wire transfers to determine whether she possessed a relevant legal interest in the originating or other bank accounts. See Resp.' Mot. Quash, ECF No. 19 at *5 (admitting that "the wire transfers originated from entities located in Singapore, Indonesia, or Hong Kong");
(2) Ascertaining whether she received and retained an interest in any assets of her mother's estate and, as a consequence, retains possession and control of related records. See Mot. to Quash, ECF No. 19-1 at *6 (December 6, 2017 letter from Respondent's counsel stating that Respondent's sister "was left with the responsibility of administering and managing [Respondent's mother's] estate after her death.");
(3) Taking additional steps to determine whether she owns stock in a foreign company, such as Sampoerna Tobacco, after Respondent's family conspicuously avoided answering Respondent's initial inquiry regarding such ownership. Compare Resp.' Mot. Quash, Ex. 1B, ECF No. 19-1 at *8 (December 6, 2017 letter from Respondent's counsel to counsel for Respondent's family, asking six numbered questions, including whether family was "aware of the existence of any records that show that Sharon Santoso owns foreign stock (e.g. Wismilak or Samporena)?" with id. at *10 (January 2, 2018 response from Blank Rome attorneys answering only five of Respondent's numbered questions, and failing to address or acknowledge the question concerning stock ownership); and
(4) Taking all other reasonable steps to (A) identify potential sources of summonsed records; (B) obtain information from those sources (including, if necessary, pursuing rights under local law); and (C) use newly discovered information, if any, to identify additional sources of summonsed records.
Pet.'s Resp. to Resp't's Request to Stay 2. The IRS also requested that Ms. Santoso provide an update on the steps she has taken to obtain the documents in question. Because it is uncertain what is required, I have ordered the parties to brief whether or not Ms. Santoso must update the IRS on the steps she has taken before the upcoming hearing.

The Court said, however, "it is far from clear to me that there is authority that she must do that much."

District Court Opinion Rejecting Fifth Amendment Act of Production Claim by Password Holder for Encrypted Devices (5/4/18)

In United States v. Spencer, 2018 U.S. Dist. LEXIS 70649 (N.D. Cal. 2018), here, the Court (District Judge Charles Breyer) rejected a Fifth Amendment claim to being compelled to decrypt three devices--phone, laptop, and an external hard drive--after the Government seized them pursuant to search warrant. The issue involves the act of production doctrine and the foregone conclusion exception to the act of production doctrine.

In the excerpts below, I use the "cleaned up" technique here to eliminate unnecessary noise in quotations and citations.

Judge Breyer explains the standards as follows:

The Fifth Amendment to the United States Constitution provides that "No person . . . shall be Compelled in any criminal case to be a Witness against himself." It applies only when the accused is compelled to make a Testimonial Communication that is incriminating.  Accordingly, the Fifth Amendment is not violated whenever the government compels a person to turn over incriminating evidence. Instead, it is only implicated when the act of production itself is both "testimonial" and "incriminating." 

The act of production is neither testimonial nor incriminating when the concession implied by the act adds little or nothing to the sum total of the Government's information by conceding that he in fact has the evidence—that is, where the information conveyed by the act of production is a "foregone conclusion." It is important to stress the limited scope of the "foregone conclusion" rule. It only applies where the testimony at issue is an implied statement inhering in the act of production itself. Otherwise, the government cannot compel a self-incriminating statement, regardless of whether the contents of the statement are a "foregone conclusion."  

For instance, the government could not compel Spencer to state the password itself, whether orally or in writing. But the government is not seeking the actual passcode. Rather, it seeks the decrypted devices. Spencer argues that production of the devices would not fall within the act-of-production doctrine because producing the devices would require him to enter the decryption password. In other words, Spencer argues that because the government cannot compel him to state the passwords to the devices, it cannot compel him to decrypt the devices using the passwords, either. This argument has some superficial appeal, and finds support in a dissent by Justice John Paul Stevens, who once contended that a defendant could not be compelled to reveal the combination to his wall safe either by word or deed. While the analogy is not perfect, we may assume that storing evidence in encrypted devices is equivalent to securing items in a safe protected by a combination, and that Justice Stevens' reasoning applies equally to the situation at hand.

Pretrial Order Excluding Government Evidence in Criminal Tax Case for Offshore Accounts (4/22/18)

In United States v. Doyle, 2018 U.S. Dist. LEXIS 66980 (S.D. N.Y. 2018), here, the defendant had been charged in a superseding indictment for tax obstruction (§ 7212(a)), tax perjury (§ 7206(1)), and conspiracy (18 USC § 371).  The superseding indictment is here; the docket entries as of yesterday are here.  "These charges allege that Defendant and others unlawfully hid Defendant's foreign bank accounts from the IRS from approximately 2003 to 2017."

The Court describes the primary allegations as:

In 2003, Defendant's father died and left her an inheritance of over $4 million. Id. ¶¶ 23-25, 29, 34. The Defendant, who was also executor of her father's estate, made court filings falsely stating under penalty of perjury that the total value of her father's estate was under $1 million when, in fact, it was more than four times that amount. Id. In 2006, the Defendant sought the help of Beda Singenberger, a Swiss citizen who ran a financial advisory firm, to open a Swiss bank account into which the inheritance was deposited. Id. ¶ 34. To conceal the existence of the account, the Defendant and Singenberger established a trust in Lichtenstein named Gestino Stiftung ("Gestino" or "Gestino Foundation") to hold the Swiss bank account in its name. Id. As of December 31, 2008, the account held currency and financial instruments valued at approximately $3,548,380. Id. ¶ 41. In 2010, Gestino re-domiciled from Lichtenstein to Panama. Id. ¶¶ 45, 47. As of December 31, 2016, Gestino maintained assets in various Swiss bank accounts in the amount of at least approximately $3,028,562. Id. ¶ 53. 

The Defendant is alleged to have used this arrangement to unlawfully and fraudulently avoid paying over $1.5 million dollars in United States taxes resulting from the inheritance. For each of the tax years from 2004 through 2009, the Defendant failed to report any income from foreign accounts in her tax filings, and also stated in those filings that she did not have an interest in or signatory or other authority over a financial account in a foreign country (the "Foreign Accounts Question"). Id. ¶ 63.

The motions resolved by the court related to

(i) Tax Return Issue.  The Defendant claimed the Fifth Amendment on her federal income tax returns after she became a target of investigations of her interest in foreign accounts; the issue is whether the tax returns can be admitted in evidence by the Government in support of the tax obstruction and conspiracy charges; and
(ii) Subpoena Litigation Issues.  Represented by Counsel, the Defendant continued to resist the subpoenas, raising, through her then counsel, variations of the Fifth Amendment argument and lack of possession or control of the subpoenaed documents.  The Government asserted the resistance was evidence of unlawful conduct and thus admissible in support of the charge of tax obstruction.  

The Tax Return Issue:

The Court describes the facts succinctly as follows:

from 2004 to 2009, Defendant answered "no" to the Foreign Accounts Question. However, after Defendant received a grand jury subpoena, she did not check either a "yes" or "no" in response to the Foreign Accounts Question on her 2010 through 2015 returns. Rather, she wrote "See Attached Statement" and attached a "Disclosure Statement" stating: "In the context of an on-going federal criminal grand jury investigation being undertaken in the Southern District of New York, under the auspices of the United States Attorney's Office for that District, Lacy D. Doyle hereby asserts her rights and privileges under the Fifth Amendment not to incriminate herself by responding to [the Foreign Accounts Question]." 

The defendant moved "to preclude the Government's use of her answer to the Foreign Accounts Question on her 2010-2015 tax returns in its direct case."

The Government wanted to show that "the defendant never disclosed her foreign accounts to the IRS during that time period." The Government proposed to redact any reference to her assertion of privilege on the return and simply show the foreign account question on Schedule B was blank.

The Court's resolution of the issue:

Agostino & Associates Monthly Journal of Tax Controversy Articles of Interest to Tax Crimes Enthusiasts (12/27/17)

Tax Crimes enthusiasts should regularly read Agostino & Associates Monthly Journal of Tax Controversy.  The December 2010 edition, here, has the following articles of interest:

• Frank Agostino and Edward Mazlish, Protecting the Taxpayer Facing Passport Revocation (Agostino & Associates Monthly Journal of Tax Controversy December 2010)
• Frank Agostino and Valerie Vlasenko, Fifth Amendment Privilege in Tax:  How to Keep the Case Moving While Protecting the Taxpayer (Agostino & Associates Monthly Journal of Tax Controversy December 2010)

Taxpayer Successfully Shows NonPossession and Control to Avoid Summons and Successfully in Most Part Asserted Fifth Amendment (8/5/17; 8/20/17)

In United States v. Lui, 2017 U.S. Dist. LEXIS 119953 (N.D. Cal. 2017), here, the court granted in part and denied in part the IRS petition to enforce the summons to the taxpayer.  The time line of events pieced together from the opinion and the parties' key submissions (Liu's amended memo here, the Gov't's response here,and Lui's Sur-reply here) is:

• 9/??/13 IRS starts audit for 2010 year
• 1/29/14 IRS issues IDR 001 requesting "copies of all delinquent FBARs"
• 2/11/4 "Lui submitted FBAR filings for years 2008, 2009, 2010, 2011 and 2012." [There is some commotion as to whether the 2012 FBAR had been timely filed]
• 7/8/14 first summons issue for testimony
• 8/4/14 Lui responds to summons and invokes Fifth Amendment in Q&A.
• 8/??/14 IRS expands audit to include 2005-2009 and 2011-2012
• 7/29/15 IRS issues second summons for documents related to offshore activity, related to foreign entities.
• 8/10/15 IRS issued IDR 13 and an Foreign Document Request ("FDR" pursuant to 26 U.S.C. § 982. The FDR, with IDR 13, sought records from foreign companies. Id.  [JAT Note, the opinion mentions the FDR but says almost nothing about why that is an issue, since it was not part of the summons enforcement proceeding except as background.]
• 10/14/16 Lui produces some documents but not others.  In his submission, the allegation is made that "Lui fully and timely responded to the IDRs, the FDR, and the both summonses, except that Lui could not provide all documents related to Netfinity and WG. " As to the FDR, "Lui provided certain documents pursuant to the FDR that were not in his possession or control, specifically the limited documents his family in Hong Kong chose to provide him in response to his requests."
• 2/26/16 IRS petitions to enforce summons (I think it may be both summonses)
• 3/16/16 Court approves summons on prima facie basis and issues Lui show cause order
• At some point apparently in 2016, Lui served on Government request for admissions and for documents.
• 12/15/16 Hearing on show cause order
• 7/31/17 Order Issued

Decisions as to Document Production

Lui's defense to the petition to enforce was that he had produced the documents he could but that he did not have possession or control or ability to obtain the documents.  The Court hold that the summonsed party asserting this defense must make a credible showing of lack of possession and control as of the date the summons was issued.  As to what the summonsed party must show, the Court adopted the sliding scale test of United States v. Malhas, 2015 U.S. Dist. LEXIS 151990, 2015 WL 6955496, at *4, which it describes as "the more the Government's evidence suggests the defendant possesses the documents at issue, the heavier the defendant's burden to successfully demonstrate that he does not."  Based on that Court's application of the Malhas test, the Court holds that (one footnote omitted):

The Court adopts the sliding scale test from Malhas, but reaches a different result, because the facts here are markedly different than in Malhas. For one thing, Lui presents far more than his own affidavit to support his argument of non-possession. ECF No. 82 at 21-24. Lui argues he does not have possession of the requested documents  because the non-produced records were either beyond his control or no longer existed as of July 29, 2015, the date of the IRS document summons. ECF No. 82 at 14-17, 21-24. On July 26, 2014, Lui resigned as a director of Netfinity and any related records were transferred out of his possession, custody, care and control to the custody of his siblings. ECF No. 82 at 15, citing ECF No. 24-2 at 154; ECF No. 24-6 at 63-71. Lui argues that "[c]oncurrently," the 2002 Trust assets were distributed among Lui's siblings, and "all shares in Netfinity and WG were transferred to Lui's" siblings." Id. Lui contends that "[u]pon distribution of the assets, the 2002 Trust dissolved because it no longer held any assets." ECF No. 82 at 15 (citing ECF No. 23 at 7). Lui presents numerous exhibits that show Lui had limited power over the trust that held Netfinity shares, ECF No. 24-2 at 17-18, 12, 73, 77, 75, 79; ECF No. 22-2 at 3-7; that the interests in Netfinity and WG were transferred to Lui's siblings at their request, ECF No. 24-2 at 38-41, 19, 35, 105,107-112; that the documents sought are now in the possession of Lui's siblings, ECF No. 24-2 at 63-71, 154; ECF No. 22-2 at 3-7; and that Lui was never a beneficial owner, [*11]  ECF No. 24-2 at 14-16. Moreover, Lui has attached advisory letters from law firms within the foreign jurisdictions, explaining that non-beneficial owners have no legal right to compel production of the documents. ECF No. 21-5 at 3-7. Therefore, Lui argues, he has no enforceable legal right to obtain the records. ECF No. 82 at 15. Lastly, Lui presents evidence that he did not receive a dividend from Galaxy during the audit period, ECF No. 24-2 at 81-82, and asserts he is not the beneficial owner of the Netfinity shares, ECF No. 88 at 4. 

The Government offers little direct evidence to the contrary. It primarily relies on a 2005 SEC filing that lists Lui as the owner of Netfinity. ECF No. 33-1. In addition, the Government also asks the Court to consider the suspicious timing of events by which the shares of Netfinity were distributed out of Lui's control and to his siblings, ECF No. 84 at 10, as well as Lui's lack of documentation surrounding the transfer of the Netfinity stock to his siblings. Id. at 8. 

These circumstances, though suspicious, are insufficient to demonstrate that Lui possesses or has the capacity to obtain the challenged documents. Although Lui may have been on notice of the IRS' investigation into his foreign assets because of the FDR or the testimonial summons in 2014, Lui's duty to retain these documents was not fixed until July 29, 2015, the date of the document summons. n4 The Court finds that the suspicious timing alone is not enough to overcome the plethora of evidence that Lui has offered to show that he did not possess, control, or have custody of the documents at issue which the IRS sought in its July 29, 2015 document summons as of that date. The Court cannot compel Lui to produce documents that he does not have in his possession or control.
   n4 The Government argues the relevant summons date was July 8, 2014 because it placed Lui "on notice that the IRS was examining his foreign interests." ECF No. 84 at 8. The obligation to retain documents does not begin until the actual document summons is issued. See Asay, 614 F.2d at 660. 

Nonetheless, although Lui has succeeded in demonstrating that he does not possess documents directly related to the Netfinity or WG assets, he has not met his burden of showing that he has no documents related to the transfer of those assets. As the Government argues, "[i]t is difficult to believe that such a significant purchase and transfer of stock would be unaccompanied by correspondence or at least emails maintained by the transferor." ECF No. 84 at 8. In the IRS' initial summons, it included "letters of wishes, letters of intent, orders of instructions and other similar documents expressing the founder's or beneficiary's wishes or instructions regarding the entity." ECF No. 1-3 at 7. Lui has not included any emails or other correspondence with regard to the transfer of the Netfinity stock. He has, however, been able to provide declarations from his siblings corroborating the fact that he no longer has access to Netfinity documents. ECF No. 83-1, 83-2, 83-3, 83-4, 83-5, 83-6, 83-7, 83-8, 83-9, 83-10, 83-11. Therefore, Lui is ordered to turn over any additional correspondence or other records in his possession regarding the transfers, or to submit a declaration under penalty of perjury that no such documents exist and that none existed as of July 29, 2015. Such declaration must be filed by August 11, 2017.

Decisions as to Testimonial Summons

Second Circuit Decision Applying Fifth Amendment to Foreign Compelled Testimony (7/19/17)

The Second Circuit issued an important decision today dealing with the use -- directly or indirectly -- of testimony compelled by a foreign government in a U.S. criminal case.  United States v. Allen, ___ F.3d ___ (2017), here. This is not a tax prosecution, but the holding could apply in all U.S. prosecutions, tax or otherwise, where foreign compelled testimony is used.

The opinion is very long and very good.  The Court's summary of the opinion is:

 This case—the first criminal appeal related to the London Interbank Offered Rate (“LIBOR”) to reach this (or any) Court of Appeals—presents the question, among others, whether testimony given by an individual involuntarily under the legal compulsion of a foreign power may be used against that individual in a criminal case in an American court. As employees in the London office of Coöperatieve Centrale Raiffeisen‐Boerenleenbank B.A. in the 2000s, defendants‐appellants Anthony Allen and Anthony Conti (“Defendants”) played roles in that bank’s LIBOR submission process  during the now‐well‐documented heyday of the rate’s manipulation. Defendants, each a resident and citizen of the United Kingdom, and both of whom had earlier given compelled testimony in that country, were tried and convicted in the United States before the United States District Court for the Southern District of New York (Jed S. Rakoff, Judge) for wire fraud and conspiracy to commit wire fraud and bank fraud.
While this appeal raises a number of substantial issues, we address only the Fifth Amendment issue, and conclude as follows.   

First, the Fifth Amendment’s prohibition on the use of compelled testimony in American criminal proceedings applies even when a foreign sovereign has compelled the testimony.    

Second, when the government makes use of a witness who had substantial exposure to a defendant’s compelled testimony, it is required under Kastigar v. United States, 406 U.S. 441 (1972), to prove, at a minimum, that the witness’s review of the compelled testimony did not shape, alter, or affect the evidence used by the government.   

Third, a bare, generalized denial of taint from a witness who has materially altered his or her testimony after being substantially exposed to a defendant’s compelled testimony is insufficient as a matter of law to sustain the prosecution’s burden of proof. 

Fourth, in this prosecution, Defendants’ compelled testimony was “used” against them, and this impermissible use before the petit and grand juries was not harmless beyond a resonable doubt. 

Accordingly, we REVERSE the judgments of conviction and hereby DISMISS the indictment

Important CA2 Opinion on Foregone Conclusion Required To Overcome Fifth Amendment Act of Production Assertion to Summons Production of Foreign Documents, Including Bank Records (8/1/16)

In United States v. Greenfield, 831 F.3d 106 (2d Cir. 8/1/16), here, the Court rejected the IRS's summons enforcement.  I offer first the Court's opening summary and will then offer more (including some quotes and discussion).

Defendant-Appellant Steven Greenfield was implicated in tax evasion after a leak of documents from a Liechtenstein financial institution revealed connections to previously undisclosed, offshore bank accounts. Years after the leak, the Internal Revenue Service issued a summons for an expansive set of Greenfield’s financial and non-financial records, including those pertaining to the offshore accounts referenced in the leak. Greenfield refused to comply with the summons, and the Government sought enforcement in the Southern District of New York (Hellerstein, J.). Greenfield opposed enforcement and moved to quash the summons, inter alia, on the basis that the compelled production of the documents would violate his Fifth Amendment right against self-incrimination. The District Court granted enforcement for a subset of the requested documents under the foregone-conclusion doctrine set out in Fisher v. United States, 425 U.S. 391 (1976). We conclude that the Government has failed to establish that it is a foregone conclusion that the requisite exercise, control, and authenticity of the documents existed as of time of the issuance of the summons. Accordingly, we VACATE the District Court’s order enforcing the summons and denying Greenfield’s motion to quash and REMAND for further proceedings consistent with this opinion.

The panel in an opinion by Judge Calabresi opens with a sweeping introduction to the problem of offshore wealth and offshore evasion:

A remarkable amount of American wealth is held offshore, often in an effort to evade taxation. One recent study estimated that $1.2 trillion—some four percent of this nation’s wealth—is held offshore and that this results in an annual loss in tax revenue of $35 billion. Gabriel Zucman, The Hidden Wealth of Nations: The Scourge of Tax Havens 53 (Teresa Lavender Fagan trans., 2015). Such lost income diminishes the Treasury and exacerbates problems of inequality since, generally, only the wealthiest of individuals can take advantage of foreign tax havens. Id. Recognizing this, recent measures, such as the Foreign Account Tax Compliance Act, 26 U.S.C. §§ 1471-1474, have sought to strengthen the IRS’s efforts to combat tax evasion through the use of foreign shelters. But enforcement presents significant challenges given the sophistication of tax planning and the information asymmetry between taxpayers and tax authorities.

So there is strong need for tax enforcement and collection in the offshore area.  But,

The need to curtail tax evasion, however pressing, nevertheless cannot warrant the erosion of protections that the Constitution gives to all individuals, including those suspected of hiding assets offshore. In the present case, Steven Greenfield was implicated in tax evasion as a result of a document leak from a Liechtenstein financial institution. Years later, the Government issued a summons for a broad swath of Greenfield’s records, including documents relating to all of Greenfield’s financial accounts and documents pertaining to the ownership and management of offshore entities controlled by Greenfield. 

Greenfield opposed production and moved to quash the summons based on his Fifth Amendment right against self-incrimination. But the District Court for the Southern District of New York (Hellerstein, J.) granted enforcement as to subset of the records demanded by the summons. It concluded that the existence, control and authenticity of that subset of documents were a foregone conclusion and, as a result, under Fisher v. United States, 425 U.S. 391 (1976), any Fifth Amendment challenge must fail. 

We disagree with the District Court for two reasons. First, we find that, for all but a small subset of the documents covered by the District Court’s order, the Government has not demonstrated that it is a foregone conclusion that the documents existed, were in Greenfield’s control, and were authentic even in 2001. Second, we find that the Government has failed to present any evidence that it was a foregone conclusion that any of the documents subject to the summons remained in Greenfield’s control through 2013, when the summons was issued.  Accordingly, because the Government has not made the showing that is necessary to render Greenfield’s production of the documents non-testimonial and, hence, exempt from Fifth Amendment challenge, we vacate the District Court’s order and remand.

I urge readers with particular interest in the issue to study the opinion carefully.  I offer the following which steps through the key analysis as I understand it.

Further on the Foregone Conclusion Exception to the Fifth Amendment Act of Production Doctrine (6/7/16; 6/8/16)

Professor Oren Kerr has this excellent posting today:  The Fifth Amendment limits on forced decryption and applying the ‘foregone conclusion’ doctrine (The Volokh Conspiracy 6/7/16), here.  He discusses a case on that issue that is teed up in the Third Circuit and perhaps in an off the record amicus brief fashion, points the Third Circuit in the direction that it should hold.

So, what is the issue?.  The issue is whether, after the Government obtains a search warrant for the contents of an encrypted hard disk drive that it is unable to decrypt without a password, the Government can require the person with the password, under penalty of contempt, to provide the password over his Fifth Amendment assertion.  (I suppose the same issue might be presented for any computer related storage that the Government is unable to supply the password for access.)  In Fifth Amendment analysis merely producing documents under some compulsory process (usually a subpoena) requires a testimonial act merely in the act of production.  This has given rise to the Act of Production doctrine whereby a party under compulsory process can claim the Fifth Amendment privilege not as to the documents under compulsion (there is no Fifth Amendment privilege for documents) but as to the testimony inherent in the act of production.  But, perhaps inconsistently with the Fifth Amendment privilege, the Supreme Court has recognized a concept that, if Government can establish that the testimony inherent in the compulsion is a "foregone conclusion" then the testimony in the act of production is irrelevant and the Act of Production doctrine does not apply,  (I think that the way I phrased the "foregone conclusion" concept tilts in favor of the argument Professor Kerr makes, but bear with me here.)  The issue is important for a number of criminal cases.  In the case at issue, it is pornography, but it easily presents itself in tax cases where the documents evidencing the crime may be in encrypted storage.

Professor Kerr sets it up by pointing out the error, a prior Eleventh Circuit opinion, in his opinion, is incorrect.  That opinion is:  In re: Grand Jury Subpoena Duces Tecum Dated March 25, 2011, 670 F.3d 1335 (11th Cir. 2012), here,  (I blogged that case Fifth Amendment Act of Production Privilege and Encrypted Data Files (2/25/12), here; but do not recommend that readers go there because Professor Kerr has a good discussion.)  Professor Kerr picks on the Eleventh Circuit for misapplying the "foregone conclusion" exception to the application of the Fifth Amendment in an Act of Production setting.  Basically (and I urge everyone to read his discussion of the Eleventh Circuit case), he says that the Eleventh Circuit focused its foregone conclusion analysis on the existence of the documents rather than on the testimony being compelled.  Professor Kerr excepts this quote:

[U]nder the “foregone conclusion” doctrine, an act of production is not testimonial — even if the act conveys a fact regarding the existence or location, possession, or authenticity of the subpoenaed materials — if the Government can show with “reasonable particularity” that, at the time it sought to compel the act of production, it already knew of the materials, thereby making any testimonial aspect a “foregone conclusion.”

Professor Kerr's argument, directed not just at criticizing the Eleventh Circuit, but to the Third Circuit in the pending case is that the Eleventh Circuit's analysis misses the point.  It is not the underlying documents that is the focus of the foregone conclusion analysis but the actual testimony being compelled.  When that compulsion is as to a password to a hard drive rather than as to the contents of the hard drive, the only compulsion in issue is the password so that all the foregone conclusion analysis need show is that the compelled party knows the password.  That is all he is compelled to tell.  The compelled person, so the reasoning goes, is giving no testimony beyond the password and the requirement that the Government show that he knows the password with reasonable particularity should satisfy the Fifth Amendment concerns under traditional foregone conclusion analysis.

I think it helpful to quote Professor Kerr's key reasoning:

Yet Another Appeals Court Enforcement of Summons for FBAR Required Foreign Bank Account Records (3/4/16)

In United States v. Chen, 2016 U.S. App. LEXIS ____ (1st Cir. 2016), here, the First Circuit enforced an FBAR required records summons, following the unbroken line of cases in the other circuits.  The opinion is well researched and well-written.  Because this holding is now routine in the circuits, I offer only certain items from the opinion that caught my interest.

1. One of the judges on the panel was former Supreme Court Justice David Souter.  He did not write the opinion.

2. In the statement of facts, the Court notes that, in its petition to enforce, the agent's supporting affidavit advised that:

"[t]here is no 'Justice Department referral[ ]' . . . in effect with respect to Chu H. Ng and Zhong H. Chen for the year under examination." n1
   n1 This statement meant that the taxpayers were not then referred for criminal prosecution by the Department of Justice. "A Justice Department referral is in effect with respect to any person if -- (i) the Secretary has recommended to the Attorney General a grand jury investigation of, or the criminal prosecution of, such person for any offense connected with the administration or enforcement of the internal revenue laws, or (ii) any request is made under section 6103(h)(3)(B) for the disclosure of any return or return information (within the meaning of section 6103(b)) relating to such person." 26 U.S.C. § 7602(d)(2)(A).

The Court returns to this key fact later in the opinion:

Additionally, the IRS may not issue a summons "with respect to any person if a Justice Department referral is in effect with respect to such person." 26 U.S.C. § 7602(d)(1). The government here submitted an affidavit executed by the IRS revenue agent stating that the summons was issued for the purpose of determining the 2008 tax liability of Chen and Ng, and that the IRS had not referred Chen or Ng to the Department of Justice for criminal prosecution. The agent acknowledged that the government had some documents pointing to the existence of Chen's foreign bank accounts, but not enough documents to know whether there was underpayment of taxes. this key fact later in the opinion:

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.

Tax Court Rejects the Frivolous Return Penalty for Fifth Amendment Assertion on Schedule B FBAR Question (11/71/5)

In Youssefzadeh v. Commissioner, Order (11/6/15), here, on Schedule B for 2011, the taxpayer "refused to answer some questions and fill in some values."  Instead, he "invoked his Fifth Amendment privilege against self-incrimination, and wrote that if (sic) his answers to these questions might lead to (or actually be) incriminating evidence against him.."  Later in the order, the Court says that the taxpayer "did black out the source and amount of some interest on Schedule B, but importantly, he included the total amount of interest on line 4."

The IRS asserted a frivolous return penalty under § 6702(a), here.

The taxpayer contested the penalty in a CDP proceeding.  The Tax Court held that he had properly invoked his Fifth Amendment privilege and therefore rejected the IRS's assertion of the frivolous return penalty.

Although this is a nonprecedential order, the discussion of this issue often faced by tax practitioners is very good.  The issue is how does the taxpayer properly invoke his or her Fifth Amendment privilege when some information on the tax return may be potentially incriminating.  In broad strokes, the taxpayer cannot assert the Fifth Amendment privilege by filing no return.  Nor can he assert the privilege by filing a return with no information other than identifying information and the assertion of the Fifth Amendment claim.  Rather, as I stated in the last version of my Federal Tax Crime book (footnotes omitted:

From the above, we derive the conclusion that generally, the proper way to assert the Fifth Amendment on current returns is to selectively assert it on the return in response to the line item requesting information that may be incriminating.  Certainly line items on the return that require disclosure of a source of income or a type of business (as in Schedule C) might permit the assertion of the Fifth Amendment to avoid answering the question.  What about the amount of the income?  Any lawyer worth his or her pay can provide reasons, often tenuous, as to why putting the amount of income would be incriminating even if the Fifth Amendment is asserted as to the source.  But the amount of income is usually not thought of as the quality of information that is incriminating for Fifth Amendment purposes. fn
   fn. E.g., United States v. Goetz, 746 F.2d 705, 710 (11th Cir. 1984); United States v. Brown, 600 F.2d 248, 252 (10th Cir. 1979), cert. denied, 444 U.S. 917 (1979); United States v. Johnson, 577 F.2d 1304, 1311 (5th Cir. 1978).

I am not sure that I picked up all nuances in this concluding statement and Youssafzaeh may be offer some nuance.  So, I include here significant portions of Judge Holmes' Order because it is short, touches all the right bases, and well-stated:

D.C. Circuit Affirms Preparer Convictions Over Ineffective Assistance Claims (7/30/15)

In United States v. Udo, 795 F.3d 24 (DC Cir. 2015), here, the defendant, a CPA, was a return preparer.  He prepared many false returns falling into a pattern.  The IRS was suspicious and conducted a sting operation.  He prepared a false return for the undercover agent.  He was convicted at trial.  He raised several issues on appeal.  I address only a couple here.

Ineffective Assistance From Promise that Defendant Would Testify and Then Not Testifying

Here are the relevant facts from the opinion:

We recount only the events at Udo's trial relevant to this appeal. During his opening statement at trial, Udo's counsel told the jury that the case "comes down to . . . he said, she said." Trial Tr. 168 (Aug. 1, 2012). Counsel went on to promise that the jury would "hear from Mr. Udo," who would explain that he acted in good faith based on what his clients had told him about their expenses. Id. at 173. But Udo never testified. 

Instead, when the government's case came to a close, Udo's counsel asked the court for a ruling limiting any cross-examination of Udo to those issues about which he would testify: his background, his education, and his knowledge of the law and his professional duties. Relying on Brown v. United States, defense counsel argued that a defendant who testifies in his own defense does not waive the Fifth Amendment's protection from self-incrimination to matters unrelated to his testimony. Cf. Brown v. United States, 356 U.S. 148, 154-55 (1958). In response, the government argued that, at the very least, Federal Rule of Evidence 608(b) permitted questioning Udo about his character for truthfulness. n1 Skeptical of Udo's request, the court stated that it would be "very, very, very surprised" if counsel was correct. Trial Tr. 67 (Aug. 3, 2012). After a short break to consider the question, the court announced that it would not limit cross-examination before Udo testified, and that his credibility was fair game for the government to examine. n2 Udo's counsel decided not to call him to testify.
   n1 Rule 608(b) allows a party to inquire on cross-examination into specific instances of a witness's conduct if those instances are probative of the witness's character for truthfulness. See FED. R. EVID. 608(b).
   n2 Udo does not appeal the court's determination that the government would likely be able to cross-examine him about his character for truthfulness. Cf. Brown, 356 U.S. at 154-55 ("If [a defendant] takes the stand and testifies in his own defense his credibility may be impeached and his testimony assailed like that of any other witness, and the breadth of his waiver is determined by the scope of relevant cross-examination.").

The Court started by saying the, normally, ineffective assistance of counsel is not raised on direct appeal because a hearing may be required.  Nevertheless, the Court determined that on the record it could adequately address the claim.  In doing so, the Court said that "the government's case against him was, in a word, overwhelming."  There was cumulative evidence, and "Udo -- a licensed CPA -- never introduced a shred of evidence suggesting that he thought that making up these expenses out of whole cloth was somehow permissible."  That created a high bar for Udo to show prejudice.

Then turning to the claim and resolution.

Third Circuit Applies Required Records Doctrine to Require Taxpayers to Respond to Compulsory Process About Foreign Bank Account (7/18/15)

The Third Circuit yesterday issued an opinion affirming that the Government has the right under the required records doctrine to compel via summons or grand jury subpoena production of foreign bank account records.  United States v. Chabot, 793 F.3d 338 (3d Cir 2015)., here.  The opinion is almost garden-variety by now, so I will just make a few points:

1.  The opinion follows the consistent holdings of all other courts of appeals.  See In re Grand Jury Subpoena Dated Feb. 2, 2012, 741 F.3d 339 (2d Cir. 2013); United States v. Under Seal, 737 F.3d 330 (4th Cir. 2013); In re Grand Jury Proceedings, 707 F.3d 1262 (11th Cir. 2013); In re Grand Jury Subpoena, 696 F.3d 428 (5th Cir. 2012); In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d 903 (7th Cir. 2012); In re Grand Jury Investigation M.H., 648 F.3d 1067 (9th Cir. 2011).

2.  Chabot involved an IRS summons whereas the early cases involved grand jury subpoenas.  The analysis is the same.

3.  The court, somewhat cryptically, rejected the argument that the shift in Fifth Amendment analysis by such cases as Fisher v. United States, 425 U.S. 391 (1976) and its progeny, all decided after the key required records cases, had affected the analysis.  However, I think that issue is more significant than this court or other courts acknowledge.  Under the Fisher analysis, there is no question that U.S. persons such as the Chabots have a Fifth Amendment privilege via the act of production doctrine.  The question is whether the required records doctrine can overcome the privilege that a fair reading of the Constitution would mean cannot be overcome.  Here, as in other areas (such as doctrine permitting compulsory process if the existence and possession of the documents is a foregone conclusion), the courts seem to be making ad hoc exceptions to the Fifth Amendment, perhaps under the notion that small encroachments of the Fifth Amendment are acceptable.  (In this regard, in a heading, the Third Circuit opinion says:  "The Government's Ability to Use the Required Records Exception to Abrogate the Fifth Amendment Privilege;"  I am not sure how the Fifth Amendment can be abrogated when it is stated that starkly, but that is the practical effect; readers might want to review Justice Thomas' concurring opinion in United States v. Hubbell, 530 U.S. 27 (2000), here, taking a literal approach to the Fifth Amendment.)  Here is the Third Circuit's short analysis:

Fisher, which found no Fifth Amendment privilege because the involved taxpayers were not the persons compelled to produce, appeared to shift the focus away from the private/public distinction in determining whether compelled production of records violates the Fifth Amendment privilege. n3 See 425 U.S. at 397, 400-01. Despite this somewhat altered view of how the Fifth Amendment relates to the production of documents, courts have continued to rely on the required records exception. See, e.g., Balt. City Dep't of Soc. Servs. v. Bouknight, 493 U.S. 549, 555-56 (1990) (recognizing the principle behind the required records exception abrogated respondent's act-of-production privilege even though her compliance with a court order to produce her child would have aided in her prosecution); Doe, 741 F.3d at 342-43, 346 (applying the required records exception to the respondent's act-of-production privilege where his compliance with a grand jury's subpoena for account records would have aided in criminal proceedings against him).
   n3 The degree to which Fisher represents a complete repudiation of the private/public distinction remains unsettled. It has been stated that the general consensus is that Fisher was an attempt to find Fifth Amendment protections applicable to compelled production of documents without relying on the private/public distinction. Doe, 741 F.3d at 343 n.2.

US Attorney Declines House Republicans Invitation to Present Lerner Contempt Over Fifth Amendment Claim to Grand Jury (4/2/15)

The US Attorney sent a letter, here, to the House stating that he has determined that Ms. Lerner validly invoked here Fifth Amendment right to remain silent and therefore declining to present the matter to a federal grand jury.

Although other issues are discussed, the core conclusion is that Ms. Lerner did not waive her Fifth Amendment privilege.  The key undisputed facts from the letter are:

Ms. Lerner appeared at the hearing on May 22, 2013, and gave an opening statement that included the following: 

I have not done anything wrong. I have not broken any laws. I have not violated any IRS rules or regulations, and I have not provided false information to this or any other congressional committee. 

And while I would very much like to answer the Committee's questions today, I've been advised by my counsel to assert my constitutional right not to testify or answer questions related to the subject matter of this hearing. After very careful consideration, I have decided to follow my counsel's advice and not testify or answer any of the questions today.

The question is whether Ms. Lerner's general assertions of innocence waived the privilege that she clearly had.  Here is the US Attorney's legal analysis:

B. Ms. Lerner Did Not Waive Her Fifth Amendment Privilege. 

The Supreme Court has made clear that witnesses who testify before Congress are protected by the Fifth Amendment to the Constitution. See Quinn, 349 U.S. at 161. Thus, it is undisputed that Ms. Lerner had the right not to testify at the Committee hearing, given the possibility that her answers could be used against her in a subsequent criminal proceeding. See, e.g., Hoffman v. United States, 341 U.S. 479, 486 (1951); Minnesota v. Murphy, 465 U.S. 420, 426 (1984); United States v. Balsys, 524 U.S. 666, 672 (1998). The only question is whether she waived that right by giving her opening statement on May 22, 2013. 

In finding that Ms. Lerner waived her Fifth Amendment privilege, the Committee focused on her assertions that she had done nothing wrong, had broken no laws, had violated no IRS rules, and had provided no false information to Congress. Citing the Supreme Court's decisions in Brown v. United States, 356 U.S. 148, 154-55 (1958), and Mitchell v. United States, 526 U.S. 314, 321 (1999), the Committee found that these "four specific denials" amounted to voluntary testimony about the subject matter of the hearing, which Ms. Lerner could not then refuse to be questioned about. See Committee Report, at 11, 36-37. 

We respectfully disagree with this conclusion, however, because case law establishes that Ms. Lerner's general denials of wrongdoing did not amount to "testimony" about the actual facts under the Committee's review. In Brown, the defendant in a civil immigration proceeding voluntarily took the stand and gave substantive testimony on direct examination, but refused to answer pertinent questions about that testimony on cross-examination. 356 U.S. at 150-52. The Court upheld the defendant's contempt conviction for that refusal, noting that a party may not put a "'one-sided account of the matters in dispute" before the trier of fact, which could not be tested by adversarial cross-examination. Id at 155. See also Mitchell, 526 U.S. at 321 (noting that "a witness, in a single proceeding, may not testify voluntarily about a subject and then invoke the privilege against self-incrimination when questioned about the details"). 

Where witnesses do not offer substantive testimony, however, and instead merely make general denials or summary assertions, federal courts have been unwilling to infer a waiver of the Fifth Amendment privilege. See, e.g., Isaacs v. United States, 256 F.2d 654. 656-57, 660-61 (8th Cir. 1958) (witness before grand jury who repeatedly stated that he had committed no crime did not waive his Fifth Amendment privilege); Ballantyne v. United States, 237 F.2d 657, 665 (5th Cir. 1956) (concluding that "the United States Attorney could not, by thus skillfully securing from appellant a general claim of innocence, preclude him from thereafter relying upon his constitutional privilege when confronted with specific withdrawals"); United States v. Hoag, 142 F. Supp. 667, 669 (D.D.C. 1956) (witness who generally denied being a spy or saboteur before Congressional committee did not waive Fifth Amendment privilege). 

In her opening statement before the Committee, Ms. Lerner offered no account or explanation of what occurred and revealed no facts about the matters under the Committee's review. Instead, she made general assertions lacking substantive content. She did not purport to explain why she believed she was innocent or why any information she had previously provided was not false. This matter therefore appears materially indistinguishable from cases like Isaacs, Ballantyne, and Hoag, in which defendants were held not to have waived Fifth Amendment protection simply by asserting general innocence or even denying guilt of specific offenses. 

There is likely an additional barrier to finding that Ms. Lerner waived her Fifth Amendment privilege through her general denials of wrongdoing. Unlike the civil defendant in Brown and defendants in criminal cases (who similarly subject themselves to wide-ranging cross-examination if they voluntarily take the stand), Ms. Lerner was an ordinary witness who had been compelled to testify by subpoena. The Supreme Court has held that "where the previous disclosure by an ordinary witness is not an actual admission of guilt or incriminating facts, he is not deprived of the privilege of stopping short in his testimony whenever it may fairly tend to incriminate him." McCarthy v. Arndstein, 262 U.S. 355, 359 (1923); see also, e.g., United States v. Powell, 226 F.2d 269, 276 (D.C. Cir. 1955); accord Rogers v. United States, 340 U.S. 367, 368, 373 (1951). Ms. Lerner did not testify to any incriminatory facts during her opening statement but, to the contrary, asserted her innocence. Thus, like the defendant in Arndstein, she had the right to "stop[ ] short" after making her self-exculpatory statement. 

The Committee found that Ms. Lerner's opening statement was the equivalent of the "voluntary" testimony at issue in Brown, presumably because she did not have to make the statement at all. Although in theory this could render the Arndstein line of cases inapplicable, that conclusion is doubtful. Ms. Lerner was compelled by subpoena to appear before the Committee on May 22, 2013 after she declined an invitation to appear voluntarily and informed the Committee that she would invoke her Fifth Amendment privilege. Courts have not found waiver under such circumstances. See, e.g., Hoag, 142 F. Supp, at 669-71.

Convicted Politician Did Not Lay a Proper Foundation For Proferred Indirect Testimony of Lack of Intent (7/4/14).

In United States v. Beavers, ___ F.3d ___, 2014 U.S. App. LEXIS 12469 (7th Cir. 2014), here, the defendant was convicted of multiple counts of tax fraud.  The facts are within a range of what might be expected given his profession -- money flowed to him and he did not report or pay tax on it.

The interesting part of the case relates to the key element for tax fraud that the defendant act willfully -- with intent to violate a known legal duty.  How does a defendant unwilling to testify as to his intent -- thus invoking his Fifth Amendment privilege -- introduce indirect evidence of his lack of intent to blunt the Government's indirect proof of his intent?  (Similar issues going to the willfulness element are, for example, reliance on tax practitioner (how can the defendant put his reliance in play without testifying).  Can the defendant effectively mount the "defense" without taking the stand? This issue often comes up in the context of a defense request for a jury instruction on good faith -- an instruction meant to emphasize something inherent in the willfulness element, that if the defendant acted in good faith he did not act willfully.  I offer the following from my Federal Tax Crimes Book (footnotes omitted):

The so-called good faith defense – sometimes the Cheek good faith defense – is technically not a defense.  The Government must prove willfulness.  Willfulness does not exist if the defendant acted in good faith with a belief that the law did not impose the legal obligation he is alleged to have violated.  Does that mean that the Government, in order to prove willfulness, must disprove good faith as to the legal requirement?  Logically, it would and, certainly most of the time, the Government’s proof of willfulness will in fact be sufficient to permit the jury to infer beyond a reasonable doubt that the defendant lacked good faith. 

Defendants who want to emphasize their good faith with the hope that the evidence bearing on good faith will at least dissuade the jury from finding willfulness beyond a reasonable doubt.  Thus, they will want the judge, by separate instruction, to instruct that good faith negates willfulness.  That good faith nuance, while implicit in the general willfulness instruction, is not as explicit as defendants desire.  Generally, courts will give the specific good faith instruction only if the evidence somehow affirmatively puts good faith in play – makes it a real issue for the jury.  How does the defendant do that?  The most direct way is for the defendant to testify as to his or her good faith.  But, in order to do that, the defendant will be subject to cross-examination; frequently, the defense team will conclude that the potential benefits of the defendant testifying (including the good faith opportunity) are less than the risks of the defendant testifying.  So the defendant will not testify.  Notwithstanding some noises that the defendant is required to testify to put good faith in play, the courts soundly reject that notion.  Other circumstantial evidence, including perhaps lay opinion evidence as to the defendant’s mental state, may be sufficient to put that issue in play and, if it does, the trial judge should give the instruction.

So, basically, the Government must prove intent beyond a reasonable doubt via circumstantial evidence in the absence of the defendant's testimony.  In appropriate cases, the defendant should be able to do so also, provided that he gets to the jury by laying the proper foundation.

With that, let's turn to Beavers.