When the IRS or a grand jury has reason to believe that a taxpayer has a foreign account, it may issue compulsory process for the account documents. The compulsory process will be an IRS summons or a grand jury subpoena. As I have discussed earlier in this blog, many taxpayers have unsuccessfully asserted the Fifth Amendment privilege (via act of production). The Courts have held that the required records doctrine overcomes the assertion of the Fifth Amendment privilege.
In
United States v. Malhas, 2015 U.S. Dist. LEXIS 151990 (N.D. Ill. Nov. 10, 2015),
here, the taxpayer attempted another tack -- the lack of possession defense. In summary, the defense is that the a party subject to compulsory process cannot produce documents that he does not possess or, if he doesn't possess, have sufficient control over that he could possess the documents. In
Malhas, a summons enforcement proceeding, the Court ruled that, once the IRS has proved it likely that the taxpayer does have the possession or control, the summons can be enforced.
Some interesting features of the opinion are:
1. "Malhas argued that his control over the bank account at issue [apparently then at UBS] was cancelled on August 3, 2004 when a third party he has never met, Ms. Moosleeithner-Batliner, became an authorized signator and cancelled 'the authorized signatory of Dr. Malhas.'" The opinion does not explain why someone Malhas had never met took over the signatory authority. Apparently, the Court did not credit this cryptic claim.
2. "Further, Malhas alleged that the bank transferred all assets from the account at issue [with UBS] to 'Banque Baring Brothers Sturdaza' on September 24, 2008, rendering any attempt to contact 'UBS for account documents . . . useless.'" The opinion does not indicate how Malhas knew about that transfer if he had nothing to do with the account after 2004. Apparently, the summons sought records.
3. Also, the transferee bank -- Banque Baring Brothers Sturdaza -- is one I have not seen surface in the Swiss bank brouhaha. The US TAX PROGRAM list of Swiss banks participating the U.S. DOJ Swiss Bank Program,
here, does list the bank, but assigns no program category to it. Yet, the timing of the transfer from UBS to Banque Baring Brothers suggests that the bank should perhaps be in the Category 2 program. In this regard, all category 2 banks have not yet been identified. The bank's website is
here, indicating that the spelling of the last word is "Sturdza." Googling turns up some interesting stuff, such as the indication in a BloombergBusiness article that it is "Swiss private bank overseeing the wealth of tennis players, soccer stars and other athletes." See Giles Broom,
Baring Swiss Bank for Rich Athletes Buys Asset Manager Coges (BloombergBusiness 2/4/13),
here.
4. Malhas dithered but finally indicated to the Court that, if it would just wait, he "'intend[ed] to issue written requests to both the Union Bank of Switzerland (UBS) and Banque Baring Brothers Sturdaza to forward to him, with a copy to the IRS, all records, statements and documents regarding any and all non-U.S. accounts, pertaining to Dr. Malhas . . . for the calendar years 2006, 2007, and 2008.'" Yet, he admitted that "despite being approached by the IRS as early as early 2012 and learning of the November 5 evidentiary hearing on October 8, he had yet to make such contact with the banks at issue." The Court was not pleased and denied any further time before ruling on the summons enforcement petition, noting "its surprise that Malhas had not previously sought these documents from the banks at issue."
5. The IRS presented "numerous documents [showing] that Malhas was connected to the banks at issue during the relevant time period." The court later referred in the quote below to this as a "plethora of documents and records illustrating Malhas's connections with the international banks and the accounts at issue."
6. In enforcing the summons, the Court has a good discussion of the law relating to the lack of possession defense and the burden on the summonsed party to prove the defense of lack of possession. Here are the critical paragraphs from the discussion:
A number of Circuit Courts of Appeals have detailed what the taxpayer must show at this hearing to successfully illustrate that he "lacks possession" of the relevant documents. Some have held that it is within the district court's discretion to simply determine whether the facts show that the taxpayer does, or does not, possess the relevant documents. See Barth, 745 F.2d at 187-88 (directing the lower court to "rule explicitly on [the defendant's] defense of nonpossession based on the present record and on any additional evidence the parties may wish to present" and concluding that if the lower court "finds that [the defendant] possesses the [documents], then enforcement may be granted; if [the court] determines that [the defendant] does not possess them, then enforcement should be denied"); see also Gippetti, 153 F. App'x. at 868, citing Barth, 745 F.2d at 187. Others have established the standard in more detail. Specifically, they have stated that, "the party resisting enforcement bears the burden of producing credible evidence that he does not possess or control the documents sought." United States v. Billie, 611 Fed. App'x. 608, 610 (11th Cir. 2015), quoting United States v. Huckaby, 776 F.2d 564, 567 (5th Cir. 1985). Importantly, this "credible evidence" standard operates on a sliding scale: 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. Id. at 610-11 ("[T]he burden would be heavy in the present circumstances -- [the defendant's] prior production of materials and his title as Custodian of Records strongly suggest he maintains control and possession.").
Here, Malhas has failed to satisfy his burden regardless of what standard the Court applies. Specifically, Malhas did not present any evidence at the November 5 evidentiary hearing, let alone "credible evidence" that he did not possess the documents at issue. Huckaby, 775 F.2d at 567. As the government noted, the Court has already found that the IRS's petition was valid under Powell, rendering Malhas's eleventh hour argument otherwise, moot. Further, the IRS's plethora of documents and records illustrating Malhas's connections with the international banks and the accounts at issue overshadowed Malhas's cursory references to the signatory and asset-transfer documents. Specifically, the IRS undercut the importance by pointing out Malhas's "password" that enabled him to access the accounts at issue without a signature. Thus, Malhas's utter lack of evidence left him unable to convince the Court that he does not have possession or custody of the documents. Indeed, even Malhas implied just the opposite. In his November 3 emergency motion, Malhas suggested the banks at issue may possess the summonsed documents, admitting that "[i]f the banks produce documents sought by Petitioner in response to Dr. Malhas' request, compliance would presumably no longer be an issue, and enforcement will be moot." (R. 29 at 2.) Similarly, when asked by the Court at the November 4 emergency motion hearing what he expected to receive from the banks, Malhas admitted that he expected the institutions could produce relevant documents that may go toward compliance with the IRS's summons. These admissions cut against any argument that Malhas does not possess the documents, and it certainly does not satisfy his heavy burden at this stage. See Kis, 658 F.2d at 544. Accordingly, the Court concludes that Malhas has failed to meet his heavy burden, and the IRS has presented compelling evidence that he possesses or has custody of the documents and records the IRS seeks. The Court, therefore, orders him to comply with the IRS's summons by January 12, 2016.
5. The summons enforcement order gives Malhas until January 12, 2016, to comply. If he pulled out all stops immediately after the order was issued, he may be able to retrieve the summonsed documents.
