Josephberg #2 - Fifth Amendment on Ongoing Returns During Criminal Investigation

This is the second blog on the Josephberg case. Please refer to my first blog here which has a statement of the facts. I repeat here only a summary of the facts relevant to the discussion in this blog.

From the late 1970s though 2003, Josephberg did multiple acts to avoid reporting and paying his taxes. For the years 1999-2002, he failed to file income tax returns and failed to pay taxes. During those years, there was an ongoing investigation of his claiming of net operating loss deduction carryforwards for his bogus shelters. He claimed that "the very filing of returns for those years would tend to incriminate him, for if he continued to claim the loss he would subject himself to prosecution for those years as well, whereas if he did not claim the loss it would be tantamount to an admission that his prior NOL claims were impermissible." That argument was directed at the charge of failure to file but presumably related to the failure to pay (i.e., if he had paid the tax without claiming the NOL carryforward, he would be admitting that the NOL carryfoward was no good).

The Second Circuit handily rejected to claim, citing both Supreme Court authority (California v. Byers, 402 U.S. 424, 434 (1971) and United States v. Sullivan, 274 U.S. 259, 263-64 (1927)) and its own Circuit authority (United States v. Barnes, 604 F.2d 121, 148 (2d Cir. 1979) cert. denied, 446 U.S. 907 (1980). The Second Circuit distinguished its holding in United States v. Romano, 938 F.2d 1569 (2d Cir. 1991)) which was a tax evasion case rather than a failure to file case. In Romano, the Government argued in part that the failure to file the tax return was an act of evasion. The Court rejected that idea because of the Fifth Amendment implications inherent in the failure to file, but did note in so holding that the taxpayer was required to file a return and report the income with a note that it was "Sullivan case income." The Romano court reasoned:

[W]hatever Romano's specific reasons may have been for not filing the 1983 return, an attempt to evade taxes was not one of them, for there was nothing for Romano to gain, nothing to conceal from the IRS, except possibly some incriminating information as to the source of the income--information that is protected by the fifth amendment.

Bottom-line, the Josephberg court held:

The pendency of a government investigation does not give a taxpayer a Fifth Amendment option to fail to file his tax return. His privilege against self-incrimination is protected by his right to refuse, with a Sullivan citation, to answer the questions that implicate that privilege. The district court correctly denied Josephberg's motion to dismiss Counts 7-15.

The take-away from Josephberg for practitioners on this issue is that there is no Fifth Amendment basis for failing to file a return with impunity from the charge of failure to file. Some lawyers have spent considerable angst over this issue over the years, upon the thought that there still may be some play in the joints on the issue. The play is either nonexistent or severely circumscribed.