Government Opposes Production of IRS Documents in FBAR Penalty Case

United States of America
v.
David Moser, et al.

September 7, 2018

The Honorable Joseph A. Dickson
United States District Court
District of New Jersey
50 Walnut Street
Newark, NJ 07101

Re: United States of America v. David Moser, et al., No. 17-cv-2891-JLL-JAD (D.N.J.)

Dear Judge Dickson:

The United States responds to the Defendants' Motion to Compel as follows:

Decedent Walter Moser had secret Swiss bank accounts from 1974 to 2011. According to the Defendants, who are the co-executors of his estate, Moser established these accounts to hide funds from the United States government. Defendants allege in their motion to compel that Moser established secret accounts because his experience as a Jewish child in 1930s Germany made him “distrustful of government[s] . . . this fear caused him to open an account [in 1974] known only to close family members in order to have safe funds. . . .” (Mot. to Compel, p. 5.)

Moser was required to file a Report of Foreign Bank and Financial Account (“FBAR”). The parties agree that Moser was required to file the FBAR but failed to do so. Id., p. 2. The only question is whether Moser's failure was willful. To establish willfulness, the United States must show the failure to report the secret Swiss account was voluntary or reckless, and not just an accident or mistake. United States v. Markus, 2018 WL 3435068, *5 (D.N.J. July 17, 2018).

The Defendants moved after the close of discovery to seek internal IRS documents related to Moser's income tax audit as well as five documents the United States withheld as privileged. The Defendants asserts they need these documents to show that Moser had reasonable cause in establishing a secret Swiss account and failing to report it to the IRS. Alternatively, they try to lay the blame for Moser's willfulness at the IRS's feet. They assert that somehow the IRS' internal deliberations about how to handle Moser's income tax liability justifies Moser's denial to the Revenue Officer that the account ever existed.

The Defendants' requests, however, fall outside of the scope of discovery. The FBAR penalty statute expressly bars any reasonable-cause defense. 31 U.S.C. § 5321(a)(5)(C)(ii). Moser's willfulness is reviewed on a de novo standard, meaning the IRS' thoughts, impressions, or tactics are not taken into consideration in determining whether Moser acted willfully. The Defendants cannot prove any causal link between the IRS' deliberations and Moser's thoughts or actions. Accordingly, the requests for more IRS records falls outside the scope of discovery as it is not related to the claims or defenses of the parties.

The Defendants also seek production of communications subject to the attorney-client and deliberative-process privilege. As to the attorney-client privilege, United States asserted the privilege as to two documents that were also subject to the deliberative-process privilege. The Defendants only contested the deliberative-process privilege. Because the attorney-client privilege was never challenged, the documents should stand regardless of what happens to the deliberative-process privilege. As to the deliberative-process privilege, the Defendants assert the five withheld documents are either not predecisional or may contain purely factual information. The United States, however, has asserted the privilege narrowly, and the remaining documents are predecisional deliberations. As such, the privilege claims should stand.

FACTS

ARGUMENT

I. The Discovery Request Is Untimely And Waived.

A motion to compel can be waived if it is not timely pursued and instead is filed after the discovery closes. Cevdet Aksut Ogullari Koll, STI v. Cavusoglu, 2017 WL 3013257, *4-5 (D.N.J. July 14, 2017); Altana Pharma AG v. Teva Pharm. USA, Inc., 2010 WL 451168, *3, (D.N.J. Feb. 5, 2010). The United States produced the partially redacted Revenue Agent's Case History Notes and a privilege log nine months before discovery closed. This Court held multiple status conferences to give counsel a chance to raise any of these discovery issues and resolve them. Yet the Defendants only raised their discovery issues after discovery closed. Given their unjustified delay, this motion should be denied as untimely.

II. The Requested Documents Are Not Relevant.

The Defendants' analysis falters at the starting block. They invoke the wrong standard for obtaining discovery under Fed. R. Civ. P. 26. They allege discovery “encompasses 'any matter that bears on or reasonably could lead to other matters that could bear on any issue that is or may be in the case.'” (Mot. to Compel, p. 16, quoting Kopacz v. Delaware River & Bay Auth., 225 F.R.D. 494, 497 (D.N.J. 2004).) Before 2015, the scope of discovery included matters that were “reasonably calculated” to lead to the discovery of admissible evidence. Roadman v. Select Specialty Hosp., 2018 WL 3621017, at *3 (W.D. Pa. July 30, 2018). On December 1, 2015, Rule 26 was changed to remove the “reasonably calculated” language. Id. The scope of discovery now is limited to information that is “relevant to any party's claim or defense.” Fed. R. Civ. P. 26(b)(1). The Defendants cannot meet this standard for three reasons.

First, the Defendants' requests fall outside of the scope of discovery. The Defendants assert that the IRS documents will show Moser acted with reasonable cause in establishing his secret Swiss account, keeping that account secret for over 35 years, and ultimately lying to the Revenue Agent about the account's existence in 2011. (Mot. to Compel, p. 5; Ex. 2, Ltr. from R. Sapinski, p. 3.) Their theory appears to be any individual belonging to a persecuted minority has reasonable cause to hide assets from the United States government. (Mot. to Compel, p. 5.)

This Court recently held, “[t]here is no reasonable cause exception for a willful violation.” Markus, 2018 WL 3435068, *5, citing 31 U.S.C. § 5321(a)(5)(C)(ii).¹ Because reasonable cause is not a valid defense to willfulness, the Defendants' requests do not relate to valid claims or defenses that could be asserted in this action.

Second, the Defendants alternatively try to put the blame for Moser's decision to deceive the IRS on the IRS itself. (Mot. to Compel, p. 9.) They assert that the IRS tactics “may shed further light on whether” “fear of renewed government prosecution” akin to Nazi Germany was a “valid reason” for the various tall tales Moser told Revenue Agent Talavia in an effort to deceive her about who owned the Swiss accounts. Id. Putting aside the pettiness of this argument, it has nothing to do with whether Moser acted willfully. Moreover, it is not legally relevant and thus falls outside of the scope of discovery.

Every court that has examined the issue has held the standard of review for willfulness is de novo. Markus, 2018 WL 3435068, *4 (collecting cases). Based on this de novo standard, courts within this circuit have thus held that the “procedures, actions, analyses, or viewpoints of the Internal Revenue Service and its personnel at the administrative level regarding willfulness” are not relevant. Bedrosian v. United States, 2017 WL 4946433, *3 (E.D. Pa. Sept. 5, 2017) (granting motion in limine). The Defendants' motion to compel seeks nothing more or less than to explore the IRS' procedures, actions, and analysis to try to justify Moser's decision to keep his secret Swiss bank account hidden from the United States.

Third, even if the standard of review was not de novo, the discovery requests still seek irrelevant information. The Defendants have already admitted most of the relevant facts. They allege in their motion that Moser established a Swiss account to hide his assets. (Mot to Compel, p. 5.) Rather than step forward and disclose the account in 2009 when he heard that the IRS was investigating foreign bank account holders, they concede that Moser transferred the funds to his cousin a citizen of South Africa, who was not subject to the FBAR filing requirement. (Ex. 2, Letter from R. Sapinski, p. 2.) Moser also admitted before his death that he “lied in 2011 to Revenue Agent Talavia. . . . ” Id., p. 3. Moser kept his accountant in the dark about the Swiss account, never reported the foreign income or existence of the foreign account on his income tax return in 2007, and never filed an FBAR when due.

The actions taken by the IRS in this case do not make the foregoing facts any more or less probable. Fed. R. Evid. 401(a). The IRS documents the Defendants seek were created after the activities listed above, and there is no evidence that Moser was ever aware of these internal IRS documents. Thus, the requested records are not relevant and fall outside of the scope of discovery. See United States v. Garrity, 2018 WL 2465354, *2-3 (D. Conn. June 1, 2018) (attempts to show IRS guidance regarding the FBAR was ambiguous was held irrelevant in determining willfulness because there was no causal connection between any alleged ambiguity and the defendant's failure to file an FBAR). As such, the motion to compel should be denied.

III. The United States Properly Asserted Claims of Privilege.

Even if a document is otherwise relevant, it still does not need to be produced if it is subject to a privilege. Fed. R. Civ. P. 26(b)(1). The United States partially redacted its Case Officer History Notes and an Appeals Memorandum in part and withheld three additional documents in full. The United States asserted the attorney-client privilege and the deliberative-process privilege over these documents. (Ex. 1.) Because both privileges should stand, the Defendants' motion to compel should be denied.

A. Defendants Did Not Challenge the Assertions of Attorney-Client Privilege.

The attorney-client privilege bars discovery of: “(1) a communication (2) made between privileged persons (3) in confidence (4) for the purpose of obtaining or providing legal assistance for the client.” In re Teleglobe Commc'ns Corp., 493 F.3d 345, 359 (3d Cir. 2007), quoted in AbbVie Inc. v. Boehringer Ingelheim Int'l GmbH, 2018 WL 2995677, *2 (D. Del. June 14, 2018). The United States asserted the attorney-client privilege over the following documents:

(Ex. 1.)² These documents involve a confidential communication between an attorney and client's employees to obtain or give legal advice. The Defendants, however, did not challenge the assertion of the attorney-client privilege in their brief. Accordingly, the Defendants have waived any challenge to the attorney-client privilege, and the claims of privilege should stand. E.g., Klass v. Reliance Standard Life Ins. Co., 2017 WL 3741005, at *14 (D.N.J. Aug. 29, 2017); Laborers' Int'l Union of N. Am. v. Foster Wheeler Corp., 26 F.3d 375, 398 (3d Cir. 1994) (“An issue is waived unless a party raises it in [her] opening brief . . . a passing reference to an issue will not suffice to bring that issue before this court.”).

B. The United States Properly Asserted Its Deliberative-Process Privilege.

“Deliberative process covers documents reflecting advisory opinions, recommendations and deliberations comprising part of a process by which governmental decisions and policies are formulated.” Dep't of Interior v. Klamath Water Users Protective Ass'n, 532 U.S. 1, 8 (2001) (internal quotation marks and citations omitted). The rationale of the deliberative-process privilege is “that were agencies forced to operate in a fishbowl, the frank exchange of ideas and opinions would cease and the quality of administrative decisions would consequently suffer.” Redland Soccer Club, Inc. v. Dep't of Army, 55 F.3d 827, 854 (3d Cir. 1995) (quoting First Eastern Corp. v. Mainwaring, 21 F.3d 465, 468 (D.C. Cir. 1994)).

The deliberative process privilege requires that a document is both predecisional and deliberative. Abdelfattah v. Dep't of Homeland Sec., 488 F.3d 178, 183 (3d Cir. 2007). “A document is predecisional if it was drafted to aid a decision maker in reaching his or her decision, and it is deliberative if it reflects the give[ ]-and-take of the consultative process.” Qatanani v. Dep't of Justice, 2015 WL 1472227, *7 (D.N.J. March 13, 2015). The privilege covers “recommendations, draft documents, proposals, suggestions, and other subjective documents which reflect the personal opinions of the writer rather than” agency policy. Gaston v. F.B.I., 2017 WL 3783696, *10 (D.N.J. Aug. 31, 2017) (quoting Coastal States Gas Corp. v. Dep't of Energy, 617 F.2d 854, 866 (D.C. Cir. 1980)).

The United States originally asserted the deliberative-process privilege as to four documents in whole and to one document in part. It subsequently produced a partially redacted version of one of the four documents before the Defendants filed their motion to compel.

The Defendants claim the United States' assertion of the privilege was defective because the documents withheld in full “were not previously produced in discovery nor was there any reference to their existence.” (Mot. to Compel, p. 15.) This statement is false. The United States disclosed these documents on a privilege log almost a year ago. (Ex. 1.)

Moreover, the United States properly asserted the deliberative-process privilege as evidenced by the thorough Declaration of IRS Deputy Associate Chief Counsel Richard Goldman. (Dkt. 23-3.) The United States asserted a deliberative-process privilege over the following three documents in full:

The United States withheld two documents in part:

As to the Appeals Case Memorandum, the U.S. District Court for the District of New Mexico recently denied a motion to compel on nearly identical grounds when a person subject to the FBAR penalty sought to invade the non-factual portions of the Appeals Case Memorandum after the United States disclosed the factual portions of that memorandum. See United States v. Arora, No. 1:17-cv-584-SWS-MLC, dkt. 30 (D.N.M. July 16, 2018) (slip op.) A courtesy copy of this opinion is attached as Exhibit 4. Given that each of these documents was properly disclosed, and the assertion of the privilege was appropriate, this Court should allow the claims of privilege to stand and deny the Defendants' motion to compel.

CONCLUSION

For the foregoing reasons, the Defendants motion to compel should be denied.

Date: September 7, 2018,

Sincerely yours,

ARI D. KUNOFSKY
Trial Attorney
Civil Trial Section, Eastern Region

Enclosure

cc:
Richard J. Sapinski, Esq.
Sills, Cummis, Epstein & Gross, PC
(Via ECF)