Estate of Fisher v. C.I.R., s. 792

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Citation905 F.2d 645
Docket NumberD,Nos. 792,1088,s. 792
Parties-5099, 90-2 USTC P 50,334, 30 Fed. R. Evid. Serv. 624 ESTATE OF Lee B. FISHER, Deceased, John J. Carney, Executor, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ockets 89-4124, 89-4126.
Decision Date06 June 1990

John P. Pieri, Buffalo, N.Y. (John W. Condon, Condon & Pieri, Buffalo, N.Y., of counsel), for petitioner.

Calvin C. Curtis, Washington, D.C. (Shirley D. Peterson, Asst. Atty. Gen., Gary R. Allen, David I. Pincus, Tax Div., Dept. of Justice, Washington, D.C., of counsel), for respondent.

Before CARDAMONE and WINTER, Circuit Judges and KEENAN, District Judge *.

CARDAMONE, Circuit Judge:

A taxpayer petitioning to set aside income tax deficiencies and penalties for fraud responded to the Commissioner of Internal Revenue's request for discovery by asserting, in part, a Fifth Amendment privilege against self-incrimination. The question before us is whether the taxpayer's request for in camera review of his claimed privilege before responding to discovery was properly denied by the tax court, which then proceeded to sanction petitioner for his failure to comply with the court's discovery order by dismissing his petition.

The Estate of Lee B. Fisher appeals from a judgment and order of the United States Tax Court (Shields, J.), entered August 11, 1989, dismissing its petition for a redetermination of a claimed deficiency in income taxes and ordering it to pay the deficiency as well as an addition to the taxes due for fraud. For the reasons that follow we reverse and remand.

FACTUAL BACKGROUND

The appeal concerns two cases consolidated in the United States Tax Court that involved Fisher's tax liability for the taxable years 1975, 1976 and 1977. The first case arose in March 1984 when the Commissioner of Internal Revenue (Commissioner) assessed a tax deficiency and a fraud penalty against taxpayer for the taxable year 1977 in the amounts of $33,192.04 and $16,596.02, respectively.

Fisher petitioned the United States Tax Court for a re-determination of this assessment and later amended his petition arguing that the three year statute of limitations set forth in Sec. 6501(a) of the Internal Revenue Code (I.R.C.) had expired. The Commissioner filed an answer contending that the three-year statute of limitations did not apply in the case of a fraudulent return, I.R.C. Sec. 6501(a), or alternatively that a six-year limitation period applied because Fisher had failed to report an excess of 25 percent of his gross income, I.R.C. Sec. 6501(e)(1)(A). In his reply, Fisher admitted some of the allegations but declined to respond to others on Fifth Amendment grounds. Similarly, when the Commissioner sought discovery Fisher responded to some of the discovery demands, but invoked his Fifth Amendment privilege against self-incrimination with respect to the remainder.

Thereafter, counsel for the Commissioner sent a letter to Fisher's counsel requesting documents and additional information, and stating that the Assistant Chief of the Internal Revenue Service's (IRS) Criminal Investigation Division had advised him that no investigation of Fisher was being conducted by the Criminal Investigation Division at that time. The informal and formal discovery requests were only partially answered by Fisher, who refused to provide documents and to respond to most of the interrogatories on Fifth Amendment grounds.

The second tax case is similar to the one just recited. In April 1985 the Commissioner issued a notice of deficiency for the taxable years 1975 and 1976, determining that Fisher owed $191,069.65 in taxes for 1975 and $62,595.13 for 1976. Additionally, the Commissioner, as in the first case, believed that Fisher intentionally underreported his income, and therefore assessed fraud penalties of $95,534.83 for 1975 and $31,297.57 for 1976. Fisher had at this time already been tried and acquitted in the United States District Court for the Western District of New York on criminal tax evasion for the tax years 1975 and 1976.

The taxpayer filed a petition in the tax court for a re-determination of the deficiencies and fraud penalties. In response to the answer interposed by the Commissioner, taxpayer admitted many of the facts set forth on previously filed income tax returns, but to all the other allegations he In June 1986 the tax court consolidated petitioner's two cases. Shortly thereafter, the Commissioner filed a motion to compel Fisher to respond to the discovery requests. Attached to the motion was an affidavit from the Chief of the Buffalo Internal Revenue Service's Criminal Investigation Division confirming that Fisher was not currently under criminal investigation by the IRS. On August 21, 1986 after reviewing Fisher's claims of a Fifth Amendment privilege, the tax court ordered him to respond to the discovery requests. Fisher thereupon served supplemental responses to the requests but persisted in his Fifth Amendment claim with respect to several requests.

claimed a Fifth Amendment privilege. After unsuccessfully seeking informal discovery the Commissioner served Fisher with interrogatories, a request for admissions, and a request for the production of documents. Of the 263 requests for admissions, taxpayer admitted 180, denied six, indicated that he did not have sufficient information to respond to nine, and declined on Fifth Amendment grounds to respond to 68.

On September 15, 1986 the taxpayer filed a motion for a protective order permitting him to continue to rely upon his Fifth Amendment privilege, noting that he had admitted most of the allegations in the Commissioner's requests for admissions and had cooperated in stipulating which documents could be used by the Commissioner at trial. In the motion, Fisher requested an in camera conference in order to substantiate his claim of privilege by setting forth what he believed were self-incrimination problems that concerned non-tax crimes.

On the same day, the Commissioner filed a supplemental motion asking the tax court to impose sanctions for Fisher's failure to respond to discovery requests, including a request that the case be dismissed pursuant to Tax Court Rule 104(c)(3). In March 1988 taxpayer died. Two months later counsel's motion to substitute Fisher's estate for the decedent was granted. On July 18, 1989 the tax court entered a default judgment against the taxpayer's estate dismissing taxpayer's petitions because of its failure to comply with the August 21, 1986 discovery order. In its dismissal order, the court held that "Fisher did not have ... reasonable cause to apprehend danger of a criminal prosecution and therefore he did not have a valid Fifth Amendment claim." It relied on two factors to support its conclusion: (1) double jeopardy would prevent a retrial of Fisher for tax evasion; and (2) the IRS had repeatedly informed Fisher during his lifetime that he was not being criminally investigated.

DISCUSSION
A.

The Fifth Amendment to the United States Constitution provides in relevant part that "[n]o person ... shall be compelled in any criminal case to be a witness against himself...." U.S. Const. amend. V. The privilege against self-incrimination "reflects a complex of our fundamental values and aspirations, and marks an important advance in the development of our liberty." Kastigar v. United States, 406 U.S. 441, 444, 92 S.Ct. 1653, 1656, 32 L.Ed.2d 212 (1972). The guarantee must be broadly construed to serve the right it was designed to protect, Arndstein v. McCarthy, 254 U.S. 71, 72-73, 41 S.Ct. 26, 26-27, 65 L.Ed. 138 (1920); Counselman v. Hitchcock, 142 U.S. 547, 562, 12 S.Ct. 195, 197, 35 L.Ed. 1110 (1892), and is entitled to be asserted in any civil, criminal or administrative proceeding, Kastigar, 406 U.S. at 441, 92 S.Ct. at 1653. It may properly be invoked whenever a witness reasonably believes that his testimony could "furnish a link in the chain of evidence needed to prosecute" him for a crime. Hoffman v. United States, 341 U.S. 479, 486, 71 S.Ct. 814, 818, 95 L.Ed. 1118 (1951). Ultimately, a "witness is not exonerated from answering merely because he declares that in so doing he would incriminate himself." Id. at 486, 71 S.Ct. at 818. It is the court that decides whether a witness' refusal to answer is privileged. "To sustain the privilege, it need only be evident from the implications The danger of self-incrimination must be real, not remote or speculative. Zicarelli v. New Jersey State Comm'n of Investigation, 406 U.S. 472, 478, 92 S.Ct. 1670, 1675, 32 L.Ed.2d 234 (1972). When the danger is not readily apparent from the implications of the question asked or the circumstances surrounding the inquiry, the burden of establishing its existence rests on the person claiming the privilege. See United States v. Fox, 721 F.2d 32, 40 (2d Cir.1983); In re Morganroth, 718 F.2d 161, 167 (6th Cir.1983); United States v. Field, 532 F.2d 404 (5th Cir.), cert. denied, 429 U.S. 940, 97 S.Ct. 354, 50 L.Ed.2d 309 (1976).

                of the question, in the setting in which it is asked, that a responsive answer to the question or an explanation of why it cannot be answered might be dangerous because injurious disclosure could result."    Id. at 486-87, 71 S.Ct. at 818
                
B.

Although Fisher refused on Fifth Amendment grounds to respond to the majority of the discovery questions posed, he did not make an impermissible blanket claim of Constitutional privilege. United States v. Malnik, 489 F.2d 682, 686 (5th Cir.), cert. denied, 419 U.S. 826, 95 S.Ct. 44, 42 L.Ed.2d 50 (1974) (judges cannot speculate "that any response to all possible questions would or would not tend to incriminate the witness."). Here the taxpayer invoked the privilege in response to specific questions. Consequently, "[a]s to each question to which a claim of privilege is directed, the court must determine whether the answer to that particular question...

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