U.S. Tax Court denies stay requested to perfect exercise of Fifth Amendment privilege against self-incrimination

19 Jun

In its recent decision in the Ironbridge Corporation case, the United States Tax Court had to decide the delicate issue of whether the petitioners’ motion to dismiss the case and to enter decision against them should be granted. The case arises from the debris of yet another appalling tax shelter, peddled by the masters of such “products”, a big six (5? 4?) accounting firm.

The Internal Revenue Service issued notices of deficiency to Ironbridge Corp. (formerly Pitt-Des Moines, Inc.) and its subsidiaries, which determined deficiencies and accuracy-related penalties for the 2001 – 2004 years. The deficiencies and penalties resulted from the Service’s determination that petitioners entered into foreign currency option transactions, with a foreign tax shelter (devised by KPMG) which lacked economic substance. These absurd transactions, devised or lifted by KPMG, became the basis for a Federal criminal investigation. The investigation resulted in indictments and prosecution of several people involved in the transactions.

Although he was not indicted or tried, the principal of petitioners believed that he was one of the persons involved in the criminal investigation, which is ongoing. In 2009, the U.S. Attorney wrote that the Department of Justice had no present intention of seeking criminal charges against the principal, or his companies.

In 2011, petitioners filed a motion for stay of proceedings, stating that
“allowing this case to proceed to trial would likely put the petitioners in the difficult position of being unable to put on their case, as [th eprincipal] and other personnel of his companies would likely invoke the Fifth Amendment with respect to interrogatories, depositions, and trial testimony.” The “other personnel” were not identified. The Internal Revenue Service objected to petitioners’ motion for stay of proceedings, and the motion was denied.

In 2012, petitioners filed a motion to dismiss the cases and enter decisions against them: “Testimony from * * * [these]
witnesses is critical to petitioners’ ability to meet their burden of proof in these cases”. The Service objected on the grounds that “the principles of judicial economy require a final determination of these issues in this proceeding, which only a decision on the merits or an agreed stipulated decision can produce.”

The Tax Court determined that a stay of proceedings was no longer appropriate. The Constitution does not ordinarily require a stay of civil proceedings pending the outcome of a related criminal case. A court nevertheless has discretion to stay civil proceedings “‘when the interests of justice seem to require such action.” Upon a showing of “special circumstances”, a court will stay the case so as to prevent substantial and irreparable prejudice. A stay of a civil case to permit conclusion of a related criminal prosecution has been characterized as “‘an extraordinary remedy’”.

The District Courts of the Second Circuit have often used the following six-factor balancing test to determine if a stay is appropriate: (1) the extent to which the issues in the criminal case overlap with those in the civil case; (2) the status of the case, including whether the defendant has been indicted; (3) the “private” [?] interests of the government in proceeding expeditiously, weighed against the prejudice to defendant caused by the delay; (4) the private interests of and burden on the defendant ; (5) the interests of the courts; and (6) the public interest.

The Tax Court found that the cumulative weight of the factors favored denying the stay. The civil cases and the related criminal investigation revolved around the purpose and operation of similar complicated financial transactions, and thus the cases overlapped considerably.

Stays also generally will not be granted before an indictment
is issued.
The Internal Revenue Service faced potential loss of evidence and testimony as time passes, and increasing difficulty in collecting from petitioners (or others as transferees). Even if the company principal invoked the Fifth Amendment, petitioners’ actions could be
proven through the testimony of employees and contemporaneous records.

The interest of the courts may favor a stay, where it is possible to use the criminal judgment as a basis for collateral estoppel in a related civil case. A stay may also ensure that civil discovery (when it resumes) will proceed unobstructed by concerns of self-incrimination. These interests are stronger when the cases share a large number of common issues.

In this case, petitioners were not at risk of criminal prosecution, and the company principal was not in criminal jeopardy. Granting the motion could result in the imposition of a lengthy and indeterminable stay for no reason. The public’s interest involves the resolution of disputes with minimal delay.

If the Tax Court dismisses a case for any reason other than lack of jurisdiction, it must enter an order finding the deficiency in tax to be the amount determined by the Service. The Court could conceive of no injustice in granting petitioners’ motion, and therefore did so.

James Cantillon Ross
Attorney at law
(LL.M. Taxation)
Bars of California, New York and Quebec
mail: 230 Cook Street # 23019 RPO, Victoria V8V 4Z8
(not admitted in British Columbia)
tel/fax 206 338 4456 cantilon@cruzers.com

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