Summons Enforcement For Undisclosed Offshore Accounts: The I Don’t Have Em Defense Is Not an Easy One to Win

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Last year’s Supreme Court Clarke decision reshuffled the deck when it comes to summons enforcement litigation. Cases are now applying Clarke in different scenarios, and it seems that district courts are allowing more evidentiary hearings to consider bad faith or improper purpose defenses to summons enforcement. Even if a party can convince the district court judge to grant a hearing, those wishing to contest enforcement of the summons face an uphill climb. For example, in the Microsoft challenge to the Service’s use of Quinn Emanuel in its examination of Microsoft the November 23rd district court order granting the enforcement of the summons reflected the notion that a party challenging enforcement “bears a heavy burden” and that even if the government has an improper purpose in issuing the summons so long as there is some proper purpose the court will order enforcement (Keith wrote in the Tax Controversy Posts blog on the Microsoft issues prior to the court decision; I suspect we will return to the Microsoft litigation though note that BNA [free link not available] is reporting today that Microsoft is complying with the November court order).

Last month in US v Malhas the district court in Illinois considered the issue in the context of IRS seeking to enforce a summons when the taxpayer raised a “lack of possession” defense, a defense that defendants have traditionally had a hard time invoking, which is described in SaltzBook Chapter 13.04[5].

Malhas arose in the context of an IRS investigation of a taxpayer’s supposedly undisclosed offshore accounts. In this post I will describe the case and look at the way that the district court resolved the case in favor of the government.

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Background

IRS was investigating Wade Malhas’ 2006-08 tax years, with the investigation looking at liabilities allegedly stemming from undisclosed offshore accounts with UBS. IRS issued a summons; Malhas appeared but failed to produce documents. US eventually filed a petition to enforce the summons; Malhas responded and raised as an affirmative defense that he did not have the documents, known in summons enforcement litigation as the “lack of possession defense.” In support of his defense, Malhas filed an affidavit alleging that he had taken all reasonable steps to ensure that the documents were not in his custody. The government responded, stating that Malhas’ “blanket assertion” was not true, and that he failed to categorically show that he was not able to comply.

In support of its position, the government referred to the heavy burden that defendants typically have faced when raising the lack of possession defense. Generally, the cases have provided that the “burden falls squarely on the shoulders” of the defendant when raising this defense.

Malhas in response to the government’s position, added more to the blanket assertion, stating that the assets had been transferred to another international bank (Banque Baring Brothers Sturdaza) and that in any event he had given up all control of the bank account at issue back in 2004, when he transferred signature authority to a third party he had never met and cancelled his signature authority over the bank.

Court Says A Hearing is Justified

That was enough for the district court to order an evidentiary hearing. Recall that under Clarke the Supreme Court and in cases arising pre-Clarke where taxpayers have raised the lack of possession defense, if the defendant makes more than a threshold showing in support of an affirmative defense, courts may allow an evidentiary hearing. In Malhas, the affidavit claiming that the account was closed and that he transferred control prior to the years in question was enough to trigger the hearing.

Malhas makes clear that getting the hearing is far from tantamount to success; at the hearing the burden still is on the defendant. Some courts go into more detail than others in terms of discussing the discretion that the district courts should exercise. Other courts are much less specific.

In any event, the government at the evidentiary hearing came with evidence rebutting Malhas’ claim that he did not have possession, including “a plethora of documents and records illustrating Malhas’ connections with the international banks” and “pointing out that Malhas’ password. . . enabled him to access the accounts at issue without a signature.” Malhas failed to bring forth more evidence, and in fact two days before the hearing filed an emergency motion asking for a delay but in so doing suggested that the delay might allow the government to get more information from the bank in question.

Conclusion

Jack Townsend described the Malhas case last week in a post in his Federal Tax Crimes blog. As readers know, Jack is all over issues pertaining to offshore accounts, and his post has some good information, including that according to Bloomberg the transferee bank is known as being one that caters to wealthy athletes.

At the end of the day, the court felt that Malhas failed to meet his heavy burden and ordered him to comply with the summons by January. The case shows that defendants have a steep hill to climb. Perhaps though the court’s willingness to grant the evidentiary hearing in this case stems in part from a trend that will allow more such hearings post-Clarke. As Malhas shows, however, that may do little other than give a defendant some additional time and place some additional pre-enforcement burdens on the government.

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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