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United States v. Chen

United States Court of Appeals, First Circuit

February 29, 2016

UNITED STATES OF AMERICA, Petitioner, Appellee,
v.
ZHONG H. CHEN, Respondent, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. William G. Young, U.S. District Judge]

William J. Lovett, with whom Melissa S. Baldwin and Collora LLP were on brief, for appellant.

Alexander P. Robbins, Attorney, Tax Division, Department of Justice, with whom Robert J. Branman, Attorney, Tax Division, Department of Justice, Caroline D. Ciraolo, Acting Assistant Attorney General, Diana L. Erbsen, Deputy Assistant Attorney General, Gilbert S. Rothenberg, Robert W. Metzler, Attorneys, Tax Division, Department of Justice, and Carmen M. Ortiz, United States Attorney, were on brief, for appellee.

Before Lynch, Circuit Judge, Souter, [*] Associate Justice, and Stahl, Circuit Judge.

LYNCH, Circuit Judge.

Tensions between taxpayers and the Internal Revenue Service ("IRS") over forced disclosure of foreign bank account information implicate both statutory and constitutional rights. Taxpayers have Fifth Amendment rights not to be forced to incriminate themselves by the compelled act of production. But where the documents are required to be kept under the regulatory scheme of the Bank Secrecy Act ("BSA" or "the Act"), see Currency and Foreign Transactions Reporting Act, Pub. L. No. 91-508, tit. II, 84 Stat. 1118 (1970) (codified as amended at 31 U.S.C. § 5311 et seq.), the question arises whether the Required Records Doctrine under the Fifth Amendment trumps those Fifth Amendment rights. The Supreme Court has not directly answered this question.

We now join the unanimous view of the circuit courts that have faced the question, all of which hold that the taxpayer must comply with an IRS summons for documents he or she is required to keep under the Act, where the IRS is investigating civilly the failure to pay taxes and the matter has not been referred for criminal prosecution. And so we affirm the district court's enforcement of the summons as to documents required to be kept under the BSA. See United States v. Chen, 952 F.Supp.2d 321, 333 (D. Mass. 2013). As to enforcement of the summons for documents not subject to the BSA, we vacate and remand to the district court for further explanation.

I.

As part of an investigation into the 2008 tax liability of Zhong H. Chen and his wife, Chu H. Ng, the IRS served a summons on Chen on September 12, 2011, requiring him to appear for an interview with an IRS revenue agent and to produce various financial and banking records. Chen appeared for the interview, but he refused to answer any questions -- invoking the Fifth Amendment -- and did not provide the requested documents. On May 31, 2012, the government filed in the Massachusetts federal district court a petition to enforce the portion of the summons seeking the production of documents. In support of its petition, the government submitted an affidavit executed by an IRS revenue agent stating that "[i]t is necessary to obtain the records sought by the Summons in order to determine the federal tax liabilities of Chu H. Ng and Zhong H. Chen for the taxable period ending December 31, 2008." Importantly, it also stated that "[t]here is no 'Justice Department referral[]' . . . in effect with respect to Chu H. Ng and Zhong H. Chen for the year under examination."[1] In response, Chen asserted a Fifth Amendment claim of privilege, not over the documents themselves, but over his compelled act of producing the documents. See Fisher v. United States, 425 U.S. 391, 410 (1976) (describing compelled act of production privilege); see also In re Grand Jury Subpoena (Mr. S.), 662 F.3d 65, 72–73 (1st Cir. 2011).

The district court granted, in part, the government's petition to enforce the summons on July 3, 2013. See Chen, 952 F.Supp.2d at 334. It granted the petition "insofar as it relates to those documents implicated by the recordkeeping requirements of the Bank Secrecy Act" because it concluded that those documents fall within the scope of the Required Records Doctrine. Id. at 333. On September 11, 2014, after reviewing in camera the documents not covered by the BSA's recordkeeping provision, as well as an in camera argumentative submission in support of Chen's privilege claim, the district court issued a brief order directing Chen, without explanation, also to produce the documents not covered by the BSA. This appeal followed.[2]

II.

Our holding requires an understanding of the Bank Secrecy Act and its purposes.

The BSA was first enacted in 1970. Its preamble states its four purposes as follows: "to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism."[3] 31 U.S.C. § 5311. Enforcement of criminal laws is a direct purpose, but not the sole purpose.

The Act requires individuals engaged in foreign banking to maintain certain records:

[T]he Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or ...

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