Judge Holmes Examines the Fifth

I’ll leave out the honorifics for Judge Mark V. Holmes, as today he has issued a blockbuster designated hitter.

Can asserting Fifth Amendment self-incrimination protection get you a Section 6702(a)(1) frivolity chop? Don’t say “of course” too fast, practitioner.

Check out Youssef Youssefzadeh, Docket No. 14868-14L, filed 11/6/15. I know you can’t cite orders, but check out Judge Holmes’ reasoning and the cases cited.

Yous’ return had all the financial info, except that the Schedule B interest and dividends had a payor redacted and apparently the item 7 magic foreign account or trust boxes unchecked. The totals were there, though. Yous wrote that spelling out the omitted info might subject him to criminal penalties.

IRS said “come clean or we’ll hit you with a frivolity chop.” Yous said no. IRS hit Yous with a NITL, and Yous petitioned. Since the Section 6702 chops aren’t assessable, Yous gets de novo as he never had a chance to contest, but however you slice it, Judge Holmes is finding for Yous.

And Yous makes a safe three-point landing to avoid the chop.

One, the return purports to be a return. Even IRS agrees it does.

Two, although it’s close, the return does contain enough information for IRS to see that Yous’ self-assessment is “substantially correct.” Note the magic adjective “substantially.” The return doesn’t have to be perfect. Yous didn’t file a blank return or put in all zeros, like the usual rounder-protester.

Judge Holmes: “He did black out the source and amount of some interest on Schedule B, but importantly, he included the total amount of interest on line 4. There don’t appear to be any other irregularities.

“The Commissioner argues that he needs the missing information to determine if Youssefzadeh’s return is accurate, but he fails to give any reasons why. And it’s important that the standard isn’t ‘Is the return completely correct?’ but ‘Is the return substantially correct?’ We hold that this return on these undisputed facts is — considering that the face of the return appears to include the total amount of interest while only redacting the source of one payer.” Order, at p. 3. I think you mean the name of the payer or the source of the payment, Judge.

Three, IRS plays the Notice 2010-33, 2010-17 I.R.B. 609 gambit. Citing the Fifth Amendment is frivolous on its face.

Here’s the Wet-Blanket Defense to the Notice 2010-33 gambit. “But Notice 2010-33 doesn’t say omitting some information because of fear of self-incrimination is frivolous; it says that omitting “all financial information” is frivolous. Id. (emphasis added). This distinction is important and appears elsewhere. The Internal Revenue Manual says it’s frivolous when an ‘individual makes an improper blanket assertion of the Fifth Amendment right against self-incrimination as a basis for not providing any financial information.’ I.R.M. 4.10.12.1.l (10) (emphasis added). The Manual goes on to say that ‘judicial precedents clearly establish that failure to comply with the filing and reporting requirements of the federal income tax laws will not be excused based upon blanket assertions of’ the Fifth Amendment. I.R.M. 4.10.12.1.2(6) (emphasis added). A review of Youssefzadeh’s return reveals that it contains plenty of financial information and isn’t covered by any blanket assertions.” Order, at p. 4.

Of course the IRM isn’t binding upon IRS nor does it confer any rights on taxpayers, but it’s surely a good argument.

But what about those judicial precedents the IRM talks about?

Judge Holmes will tell you. “The Supreme Court held a long time ago that the Fifth Amendment doesn’t excuse a complete failure to file a tax return. United States v. Sullivan, 274 U.S. 259, 263 (1927). But the Court went on to say in the same opinion that if the form ‘called for answers that the defendant was privileged from making he could have raised the objection in the return.’ Id. It later specifically held the privilege does apply to tax returns, provided the taxpayer affirmatively claims the privilege on the return and does so before he files it. Garner v. United States, 424 U.S. 648, 656 (1976). The Commissioner’s assertion without further analysis that a claim of the Fifth Amendment privilege on a return must in all cases be frivolous is simply wrong.” Order, at p. 4.

But just claiming the Fifth at random for one item doesn’t work. Yous has to show he has reasonable cause to fear a real and substantial hazard of incriminating himself. And the Courts look at the nature of the item on the return to which Yous has demurred. If the Court can’t think Yous has a real and substantial hazard looking at the item, Yous has to prove he does, without spilling so many clichés that he sends himself to the slammer.

Yous pulls it off. Yous has got FBAR troubles, offshore account(s) he maybe hasn’t OVDI’d out of.

“Youssefzadeh correctly tells us here that 31 U.S.C. § 5314 and 31 U.S.C. § 5322 make it a crime to willfully fail to file an FBAR. The questions asked on Section B of the Form 1040 elicit information that can easily be used to determine if the taxpayer has filed an FBAR. And, as the Sixth Circuit pointed out, ‘this section of the return refers taxpayers to a booklet that further outlines their responsibilities for reporting foreign bank transactions. This booklet discusses the duty to file [the FBAR].’ United States v. Sturman, 951 F.2d 1466, 1477 (6th Cir. 1991). Because the lines that Youssefzadeh redacted ask for information that triggers the duty to file an FBAR, and because willful failure to file an FBAR is a crime, we hold that Youssefzadeh has shown us a real and appreciable danger of self-incrimination by being compelled to answer the questions on Section B. In other words, Youssefzadeh’s return wasn’t frivolous by reason of invoking the Fifth Amendment privilege. Because the Commissioner raised no other grounds for imposing the penalty, we hold that Youssefzadeh’s return wasn’t frivolous or made with an intent to impede the administration of the code.” Order, at p. 5. (Footnotes omitted).

Note that IRS blew yet another gambit, by failing to raise intent to impede administration. That would make an interesting coda.

A Taishoff “good job, first class” to Yous’ trusty attorney, Edward M. Robbins Jr., Esq., of Beverly Hills, CA.