The Tax Times: Required Record Doctrine Does Not Trump 5th Amendment Privilege in the Second Circuit

We previously posted Trouble for Offshore Bank Account Owners at Liechtensteinische Landesbank AG (LLB) where we discussed that Tax problems for offshore bank account holders in Lichtenstein date back to 2008 when information stolen from LGT Group was used by German authorities to prosecute tax fraud.

The fallout extended to U.S. depositors at LGT who were investigated by the IRS. One of the US depositors that got caught in this expanded IRS investigation was the defendant Steven Greenfield.

The 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).

The U.S. appeals court overturned the District Court's decision and thereby made it harder for the Internal Revenue Service to get some tax records of Americans with offshore accounts, denying the agency's request for records of a U.S. client at LGT Group in Liechtenstein United States v. Greenfield.

One exception to the Fifth Amendment privilege against self-incrimination is the foregone conclusion doctrine, which holds that the government can compel the production of certain documents if the production of the documents does not amount to testimony.

The foregone-conclusion doctrine applies if the government knows the documents exist, knows that the taxpayer possesses or controls the documents, and knows that the documents are authentic.

Therefore, compliance with the summons would be a question not of testimony but of surrendering the documents.

With respect to the foregone-conclusion doctrine, the appeals court determined that the time when the prerequisites for the exception (existence, control, and authenticity) would have to be met was when the IRS issued its summons in 2013.

The appeals court found that, although some of the documents might have satisfied these tests years ago, in 2013 none of the prerequisites for the exception were met for any of the documents the IRS sought.

The court recognizedthat tax evasion is bad:

"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."

But it also recognized this is America and we have a Fifth Amendment:

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.

For example, the IRS sought Greenfield’s expired passports, and the court found that they existed, were in his control, and were authentic as of 2001. However, it found that the elements were not met in 2013, when the IRS first requested the passports, because he was unlikely to have kept expired passports for so long, and therefore it was not a foregone conclusion that the passports still existed or that the taxpayer still possessed them. Consequently, the court vacated and remanded the case to the district court, which must then grant Greenfield’s motion to squash the summonses.

The district court held that the summonses were enforceable because the foregone-conclusion exception applied. It cited an earlier case involving the same document leak, in which the court had enforced the summons because the government had “specific knowledge of the accounts and the individual who controlled the accounts” (Greenfield, slip op. at 9, citing Gendreau, No. 12-Misc-303 (S.D.N.Y. 1/22/14)). In vacating and remanding the district court’s decision, the appeals court first looked at the Fifth Amendment privilege against self-incrimination, explaining that constitutional rights are broadly construed.

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