YOUNG, District Judge.
The United States of America (the "United States") brings this petition on behalf of the Internal Revenue Service (the "IRS") to enforce an administrative summons served by the IRS on Zhong H. Chen ("Chen") pursuant to 26 U.S.C. section 7604(a). Pet. Enforce IRS Summons ("IRS Pet.") ¶ 1, ECF No. 1. In support of its summons, the IRS alleges that its request for documents is necessary in order that it may "examine the summonsed records to properly determine the federal tax liabilities of Chu H. Ng and Zhong H. Chen for the taxable period ending December 31, 2008." Id. ¶ 10. Chen, however, resists the United States's enforcement petition on several grounds: Chen argues, first, that the IRS has failed to satisfy the relevant requirements for obtaining judicial enforcement of its summons, Resp't's Answer & Defenses Pet. Enforce IRS Summons ("Resp't's Answer") ¶ 21, ECF No. 7, and, moreover, that the IRS has waived the putative right to enforcement that it claims, id. ¶ 23; second, that the IRS is employing its administrative power for an ulterior — and improper — purpose, Resp't's Reply Gov't's Mem. Law Supp. United States' Pet. ("Reply") 13, ECF No. 13; and, third, that he is protected from having to furnish the documents the IRS seeks in virtue of his Fifth Amendment privilege against self-incrimination, Resp't's Answer ¶ 22.
The IRS has been attempting to assess the tax liabilities of Chu H. Ng and Zhong H. Chen for the taxable period ending December 31, 2008. IRS Pet. ¶ 10. In furtherance of this objective, the IRS served a summons on Chen dated September 12, 2011, which demanded that he appear
Although Chen appeared at the September 27, 2011, meeting, he failed to produce the documents that the IRS had requested. See IRS Pet. ¶ 8. Instead of producing the relevant documents or answering McClung's questions, Chen read the following statement, seeking to invoke his Fifth Amendment privilege against self-incrimination: "On advice of counsel, I refuse to answer on the grounds that a full and complete answer may waive certain protections afforded me under the 5th Amendment to the U.S. Constitution." Resp't's Answer ¶ 19. The United States therefore petitions this Court on the IRS's behalf for an order to enforce the administrative demand it has served on Chen. IRS Pet.
On May 31, 2012, the United States filed a petition to enforce the IRS's summons, id., which Chen answered on July 9, 2011, Resp't's Answer. On July 20, 2012, the United States filed a memorandum in support of its petition to enforce, Mem. Supp., to which Chen responded on July 24, 2012, Reply. The United States filed its own rejoinder on July 31, 2012, United States' Sur-Reply, ECF No. 14, to which Chen responded on August 15, 2012, Resp't's Resp. United States' Sur-Reply, ECF No. 17. On August 20, 2012, the United States filed a sur-sur-reply to Chen's response. United States' Sur-Sur-Reply, ECF No. 20.
This Court has original jurisdiction pursuant to 26 U.S.C. Sections 7402(b) and 7604(a) and 28 U.S.C. sections 1340 and 1345.
The Secretary of the Treasury (the "Secretary") is empowered to issue summonses pursuant to 26 U.S.C. section 7602(a) ("Section 7602"); he has, in turn, delegated his authority, through the IRS, to McClung pursuant to 26 C.F.R. section 301.7602-1 and IRS Delegation Order No. 4 (as revised). See IRS Pet. 1. Section 7602 authorizes the Secretary to act as follows:
26 U.S.C. § 7602(a)(2). The IRS therefore has broad powers under the Internal Revenue Code with respect to the gathering of information for the purposes of determining tax liability. United States v. Arthur Young & Co., 465 U.S. 805, 816, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984). Section 7602(d), however, adds a caveat to the IRS's broad power to issue administrative summonses which serves to circumscribe the IRS's power in situations where a Justice Department referral is in effect. 26 U.S.C. § 7602(d); 26 C.F.R. § 301.7602-1(c). Where a referral has been made to the Justice Department, the IRS is proscribed from obtaining information by means of the administrative summons process. 26 U.S.C. § 7602(d).
In order to obtain enforcement of its summons before a federal district court, the IRS must satisfy four criteria that the Supreme Court enumerated in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964):
Id. at 57-58, 85 S.Ct. 248. Although the IRS bears the prima facie burden of showing that the four Powell criteria are met, this burden is, to borrow the First Circuit's language, "not taxing, so to speak." United States v. Gertner, 65 F.3d 963, 966 (1st Cir.1995). The First Circuit has held, in particular, that the IRS may satisfy the burden by asserting in the "affidavit of the investigating agent that the requirements are satisfied." United States v. Lawn Builders of New Eng., Inc., 856 F.2d 388, 392 (1st Cir.1988) (per curiam) (quoting Liberty Fin. Servs. v. United States, 778 F.2d 1390, 1392 (9th Cir.1985) (per curiam)). Once the IRS has satisfied its prima facie burden through the affidavit of one of its officers, the burden of proof shifts to the summonsed taxpayer to "rebut the good-faith presumption that arises in consequence of the government's prima facie case." Gertner, 65 F.3d at 967.
The taxpayer may rebut the prima facie case by disproving any one of the four Powell factors or by showing — more generally — that enforcement of the IRS summons would constitute an abuse of the court's process. Sugarloaf Funding, LLC v. U.S. Dep't of the Treasury, 584 F.3d 340, 346 (1st Cir.2009). An abuse of process would occur "if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation." Powell, 379 U.S. at 58, 85 S.Ct. 248.
In attempting to rebut the good faith of the IRS, "[t]he taxpayer's burden is heavy." Sugarloaf Funding, 584 F.3d at 346. In particular, the taxpayer "must allege specific facts and evidence to support
United States v. Millman, 765 F.2d 27, 29 (2d Cir.1985) (quoting United States v. Kis, 658 F.2d 526, 540 (7th Cir.1981)).
The IRS has satisfied its prima facie burden in relation to its administrative power to summons documents pursuant to Section 7602. The affidavit of its revenue officer, and the IRS's petition to enforce its summons, each allege compliance with all of the Powell factors. See IRS Pet., Ex. 1, Decl. David McClung ("McClung Decl.") ¶ 11, ECF No. 1-1; IRS Pet. ¶¶ 9-14. In addition, the IRS alleges in its petition that "there is no `Justice Department referral,' as that term is described in Section 7602(d)(2) of the Internal Revenue Code, in effect with respect to Chu H. Ng and Zhong H. Chen for the tax year under examination." IRS Pet. ¶ 13. McClung makes the same allegation in his supporting declaration. McClung Decl. ¶ 10.
Chen, in his answer to the IRS's petition, denies the IRS's claim that it has satisfied the Powell factors. Resp't's Answer ¶¶ 9-11. With the exception of Chen's claim that the IRS has failed to satisfy the third Powell criterion, id. ¶ 21, Chen fails to offer any facts in support of his allegations, id. Chen neither alleges facts with the required degree of specificity nor furnishes this Court with sufficient evidence to rebut this heavy burden. See Sugarloaf Funding, 584 F.3d at 346 ("The taxpayer's burden is heavy....").
Chen alleges that the IRS has failed to satisfy the third Powell criterion on account of the fact that the "IRS is in possession of at least some of the documents sought in the summons." Resp't's Answer ¶ 21. The First Circuit, however, has already rejected a similar argument, see Sugarloaf Funding, 584 F.3d at 350, and at least two district courts have rejected identical arguments, see Sterling Trading, 553 F.Supp.2d at 1160; PAA Mgmt., Ltd. v. United States, Nos. 91 C 168, 91 C 169 and 91 C 170, 1992 WL 346314, at *5 (N.D.Ill. Nov. 19, 1992) ("The IRS ... should be afforded the opportunity to review records of the same PAA transactions maintained by PAA third-party recordkeepers, in order to ascertain whether the information in each set of documents is consistent."). Just as the First Circuit has held that "the IRS is entitled to obtain relevant records from third parties to compare for accuracy any records obtained from the taxpayer," Sugarloaf Funding, 584 F.3d at 350, it ought be allowed to summons documents from the taxpayer to verify any records it may already have in its possession from third parties.
The First Circuit cites to the Central District of California's opinion in Sterling Trading, LLC v. United States, 553 F.Supp.2d 1152, where the district court held that even where the IRS "had already
Chen claims that "Revenue Agent McClung never asked the Respondent to produce the documents at the September 27, 2011 meeting. Thus the IRS has waived its right to now enforce the summons with respect to the production of documents." Resp't's Answer ¶ 23. This conclusion does not follow from the premise. In support of his assertion, Chen cites to a Fifth Circuit case, United States v. Malnik, 489 F.2d 682 (5th Cir.1974). Resp't's Answer ¶ 23. Even in his parenthetical explanation of the case, however, Chen points to the relevant distinction between Malnik and the facts before this Court. To use Chen's words, Malnik concerned an "agreement with taxpayer to waive appearance ... [that] waived IRS's rights." Id. (emphasis added). There is no suggestion here, either in the responsive pleadings or in Chen's factual allegations, that the IRS had come to any agreement with the taxpayer which might constitute a waiver of the IRS's enforcement rights.
Because McClung attested to the satisfaction of each of the Powell factors in his affidavit, see McClung Decl. ¶ 11, the IRS has established a prima facie case for enforcement of its summons. McClung's declaration supports the conclusion that the IRS is seeking to exercise its power for a proper purpose, a conclusion which Chen has been unable to rebut.
The Fifth Amendment provides that "[n]o person ... shall be compelled in any criminal case to be a witness against himself." U.S. Const. amend. V. This privilege against self-incrimination applies only to testimonial communications. See Warden, Md. Penitentiary v. Hayden, 387 U.S. 294, 302, 87 S.Ct. 1642, 18 L.Ed.2d 782 (1967) ("The items of clothing involved in this case are not `testimonial' or `communicative' in nature...."). In order for the relevant person's communication to be deemed testimonial, the communication "must itself, explicitly or implicitly, relate a factual assertion or disclose information." Doe v. United States, 487 U.S. 201, 210, 108 S.Ct. 2341, 101 L.Ed.2d 184 (1988). The privilege can be asserted in "any proceeding, civil or criminal, administrative or judicial, investigatory or adjudicatory; and it protects against any disclosures which the witness reasonably believes could be used in a criminal prosecution or could lead to other evidence that might be so used." Kastigar v. United States, 406 U.S. 441, 444-45, 92 S.Ct. 1653, 32 L.Ed.2d 212 (1972) (footnotes omitted).
The burden of proving the existence of a valid Fifth Amendment privilege is on the person claiming that privilege.
The Supreme Court has recently affirmed that, in the context of requests for documents, the Fifth Amendment privilege does not apply to incriminating facts that were generated prior to the demand that these facts be produced. See United States v. Hubbell, 530 U.S. 27, 35-37, 120 S.Ct. 2037, 147 L.Ed.2d 24 (2000) ("[A] person may be required to produce specific documents even though they contain incriminating assertions of fact or belief because the creation of those documents was not `compelled' within the meaning of the privilege." Id. at 35-36, 120 S.Ct. 2037). Deriving its character from the same lack-of-compulsion analysis, the required records doctrine forms an exception to the Fifth Amendment privilege against self-incrimination.
The Supreme Court has noted that "the physical custody of incriminating documents does not of itself protect the custodian against their compulsory production." Shapiro v. United States, 335 U.S. 1, 17, 68 S.Ct. 1375, 92 L.Ed. 1787 (1948) (quoting Wilson v. United States, 221 U.S. 361, 380, 31 S.Ct. 538, 55 L.Ed. 771 (1911)) (internal quotation mark omitted). There are certain documents as to which "the custodian has voluntarily assumed a duty which overrides his claim of privilege." Id. Such documents include "records required by law to be kept in order that there may be suitable information of transactions which are the appropriate subjects of governmental regulation." Id.
Shapiro v. United States, 335 U.S. 1, 68 S.Ct. 1375, concerned the subpoena of a fruit wholesaler's business records, which the Emergency Price Control Act required that he preserve. See id. In response to the subpoena, the wholesaler (William Shapiro) sought to rely on his Fifth Amendment privilege against self-incrimination. Id. at 4-5, 68 S.Ct. 1375. The Supreme Court rejected Shapiro's claim of constitutional privilege, reasoning that he had voluntarily assumed a duty to maintain records (equivalent to a waiver of his Fifth Amendment privilege) when he chose to engage in the regulated activity. Id. at 17, 68 S.Ct. 1375.
Twenty years after it decided Shapiro, the Supreme Court identified three premises which it saw as underpinning the required records doctrine:
Grosso v. United States, 390 U.S. 62, 67-68, 88 S.Ct. 709, 19 L.Ed.2d 906 (1968) (emphases added). It is important to note that the Supreme Court in Grosso v. United States, 390 U.S. 62, 88 S.Ct. 709, used the language of "premises" in relation to these elements. Id. at 67, 88 S.Ct. 709 (emphasis added). In using the language of premises (or, assumptions about the applicability) of the required records doctrine, rather than referring to necessary elements of the doctrine, the Supreme
The recordkeeping provisions of the Bank Secrecy Act, 31 U.S.C. § 5311, fall within the required records exception to the Fifth Amendment. United States v. Miller, 425 U.S. 435, 439, 96 S.Ct. 1619, 48 L.Ed.2d 71 (1976); accord In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d 903, 909 (7th Cir. 2012) ("We need not repeat the Ninth Circuit's thorough analysis [in In re M.H., 648 F.3d 1067 (9th Cir.2011), cert. denied sub norm. M.H. v. United States, ___ U.S. ___, 133 S.Ct. 26, 183 L.Ed.2d 676 (2012)], determining that records under the Bank Secrecy Act fall within the exception."); In re M.H., 648 F.3d 1067 (noting that a witness may not invoke the Fifth Amendment in support of her refusal to hand over subpoenaed documents where those documents fall within the required records exception). In United States v. Miller, 425 U.S. 435, 96 S.Ct. 1619, the Supreme Court affirmed that "the recordkeeping requirements of the Bank Secrecy Act had been held to be constitutional on their face in [California Bankers Ass'n v. Shultz, 416 U.S. 21, 94 S.Ct. 1494, 39 L.Ed.2d 812 (1974)]." Miller, 425 U.S. at 439, 96 S.Ct. 1619.
It is well established that the United States has the power to regulate offshore banking as part of its power to "regulate Commerce with foreign Nations." U.S. Const. art. I, § 8, cl. 3. The recordkeeping requirements of the Bank Secrecy Act, moreover, fall within the required records doctrine, satisfying the three Grosso premises.
First, the purpose of the United States's inquiry is "essentially regulatory." See Grosso, 390 U.S. at 68, 88 S.Ct. 709. In order to establish the first premise, it is necessary to show that the relevant legislation is generally applicable and does not specifically target criminal activity. It must therefore be directed toward "an essentially noncriminal and regulatory area of inquiry," Albertson v. Subversive Activities Control Bd., 382 U.S. 70, 79, 86 S.Ct. 194, 15 L.Ed.2d 165 (1965), and not targeted "at a highly selective group inherently suspect of criminal activities," id. Unlike the requirement in Albertson v. Subversive Activities Control Bd., 382 U.S. 70, 86 S.Ct. 194, that those to whom the statute applied register their involvement in subversive activities, it is not inherently illegal for a person to engage in the practice of offshore banking. Even though the recordkeeping provisions of the Bank Secrecy Act are "focused in large part on the acquisition of information to assist in the enforcement of the criminal laws," Shultz, 416 U.S. at 76, 94 S.Ct. 1494, "the fact that a legislative enactment manifests a concern for the enforcement of the criminal law does not cast any generalized pall of constitutional suspicion over it," id. at 77, 94 S.Ct. 1494. Because there is no suggestion that the recordkeeping requirements of the Bank Secrecy Act are merely a guise for the enforced disclosure of criminal misconduct, they may be deemed "essentially regulatory" within the meaning of Grosso.
The recordkeeping requirements of the Bank Secrecy Act also satisfy the second Grosso premise in that records relating to foreign banking transactions are "customarily kept." 31 C.F.R. section 1010.420 ("Section 1010.420") requires that (1) "[r]ecords of accounts required by § 1010.350 to be reported to the Commissioner
The recordkeeping provisions of the Bank Secrecy Act, similarly, satisfy the third Grosso premise, which commands that the records required to be kept have "assumed `public aspects.'" Grosso, 390 U.S. at 68, 88 S.Ct. 709. Just as the Supreme Court held in Shapiro that "it cannot be doubted that the sales record which petitioner was required to keep as a licensee under the Price Control Act has `public aspects,'" 335 U.S. at 34, 68 S.Ct. 1375, so too here the records which Chen is required to keep, as a condition of engaging in an activity which Congress may legitimately regulate (namely, offshore banking), have attained "public aspects" within the meaning of Grosso.
The IRS asks this Court to "overrule Respondent's Fifth Amendment objection with respect to the production of records that fall within the record keeping requirements of the Bank Secrecy Act," Mem. Supp. 5, because Chen has, by maintaining offshore bank accounts, voluntarily chosen to engage in a regulated activity. As the Seventh Circuit has noted, the "voluntary choice to engage in an activity that imposes record-keeping requirements under a valid civil regulatory scheme carries consequences, perhaps the most significant of which, is the possibility that those records might have to be turned over upon demand, notwithstanding any Fifth Amendment privilege." In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d at 909.
Although Chen asserts that "if the Respondent were to produce documents in response to the IRS's broad based document request set forth in the summons, he would be confronted by substantial and real hazards of self-incrimination," Resp't's Answer 5, at least some of the documents subject to the IRS's summons relate to Chen's offshore banking activities. Insofar as the summons relates to documents concerning Chen's offshore banking activities (which fall within the scope of the recordkeeping requirements of the Bank Secrecy Act), the summons falls within the required records exception to the Fifth Amendment privilege against self-incrimination.
Chen, however, also argues that even if the required records doctrine applies to the content of the documents he allegedly possesses, it does not apply to preclude his invocation of his Fifth Amendment privilege as regards the self-incrimination that would arise from his act of producing the requested documents.
The act of producing summonsed documents "may have a compelled testimonial aspect." Hubbell, 530 U.S. at 36, 120 S.Ct. 2037. The taxpayer's act of producing the documents in response to a
Id. at 908-09 (citation omitted).
Thus, this Court holds that (1) the required records doctrine is an exception to the Fifth Amendment privilege against self-incrimination; (2) the recordkeeping provisions of the Bank Secrecy Act fall within the scope of this exception; and, therefore, (3) Chen may not rely on the Fifth Amendment to resist production of the documents falling within the scope of the recordkeeping provisions of the Bank Secrecy Act, neither on account of their allegedly incriminating content nor on account of the act of production doctrine.
The ruling which affirms that the recordkeeping provisions of the Bank Secrecy Act fall within an exception to the Fifth Amendment privilege against self-incrimination settles the question as to the recordkeeping requirement's facial constitutionality. Chen next attempts to raise an as-applied challenge to the IRS's reliance on the Bank Secrecy Act. See Resp't's Resp. United States' Sur-Reply 2. Chen argues that the IRS's reliance on the recordkeeping provisions of the Bank Secrecy Act is unconstitutional as applied to him. Id.
Chen's argument, however, fails to resonate. In raising any kind of constitutional challenge to a statute (whether facial or as applied), the initial question is whether the relevant constitutional right is engaged. In other words, before this Court can decide whether the Fifth Amendment privilege against self-incrimination trumps the IRS's administrative power, it must first ask whether Chen's privilege is implicated by the IRS summons. There are a number of reasons why the factual predicate necessary to invoke the Fifth Amendment privilege may not here be satisfied. One reason might be that the evidence in question is not testimonial in character. See Doe, 487 U.S. at 210, 108 S.Ct. 2341. Or the privilege may be deemed to have been waived by the person seeking to rely on it. See Bouknight, 493 U.S. at 555-56, 110 S.Ct. 900.
Because Chen is deemed to have waived his Fifth Amendment privilege against self-incrimination by choosing to engage in the regulated activity, there is no Fifth Amendment right applicable in this context as to which he could make an as-applied claim. Given that the required records doctrine is applicable, and the records sought by the IRS relating to Chen's offshore banking activities fall within the doctrine, Chen must comply with the summons insofar as it relates to those documents implicated by the recordkeeping requirements of the Bank Secrecy Act.
Having argued that this Court could enforce the summons with respect to the documents that are implicated by the recordkeeping requirements of the Bank Secrecy Act, the IRS asks this Court to "rule upon the Respondent's Fifth Amendment objection with respect to all other summonsed documents after an in camera privilege review of those documents." Mem. Supp. 5.
Although the Supreme Court has held that the filing of tax returns is one of the "many burdens [an organized society imposes] on its constituents," California v. Byers, 402 U.S. 424, 427, 91 S.Ct. 1535, 29 L.Ed.2d 9 (1971), it notes that "there is some possibility of prosecution — often a very real one — for criminal offenses disclosed by or deriving from the information that the law compels a person to supply," id. at 428, 91 S.Ct. 1535. As already noted, such information might incriminate Chen merely by virtue of Chen's act of production. See Smith v. Richert, 35 F.3d 300, 302 (7th Cir.1994) ("If a subpoena demanded all the documents possessed by the subpoenaed person concerning some subject, by producing them the person would be acknowledging that he possessed them and that they concerned the subject in question, and if this acknowledgment was self-incriminating he could not be forced to produce them."). This is true notwithstanding the fact that, save for the act of production privilege, "the government could compel the production of nonrequired records, because their creation, and the setting forth of potentially self-incriminating facts entailed by that creation, were the author's voluntary choice." Id. In these circumstances, where "the Court is confronted with the question of a compelled disclosure that has an incriminating potential, the judicial scrutiny is invariably a close one." Byers, 402 U.S. at 427, 91 S.Ct. 1535.
Within the context of IRS document requests, however, the First Circuit has held that a "blanket objection to the issuance of an IRS summons based on the Fifth Amendment privilege against self-incrimination is not a viable defense." United States v. Allee, 888 F.2d 208, 212 (1st Cir.1989) (per curiam). Although Chen did "appear before the IRS agent and claim[ed] the privilege on a question-by-question
Having held that Chen's Fifth Amendment privilege is engaged, this Court orders in camera review of the summonsed documents which do not fall within the scope of the recordkeeping requirements of the Bank Secrecy Act in order to determine, on a document-by-document basis, whether Chen's assertion of his Fifth Amendment privilege is made out.
For the foregoing reasons, this Court hereby GRANTS the petition to enforce the IRS's administrative summons to the extent that Chen's documents fall within the scope of the recordkeeping provisions of the Bank Secrecy Act, 31 U.S.C. § 5311.
With respect to the summonsed documents which fall outside the scope of the recordkeeping provisions of the Bank Secrecy Act, this Court ORDERS Chen, within thirty days of the date of this order, to submit under seal to this Court a document-by-document explanation of his Fifth Amendment assertions and the documents which substantiate such assertions. Such submissions shall not constitute a waiver of Chen's Fifth Amendment privilege as to any document so submitted. The failure timely to submit such documents for in camera review shall operate as a waiver of Chen's Fifth Amendment privilege as to any such document within the scope of the administrative summons.
