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Fifth Amendment Privilege Does Not Apply to Swiss Banking Records

M.H. v. U.S. (In re: Grand Jury Investigation M.H.), (9th Cir. 8/19/11): 

Facts: Taxpayer (T) is the target of a grand jury investigation seeking to determine whether he used secret Swiss bank accounts to evade paying federal taxes. previous hitRecordsnext hit were sought as part of the grand jury's investigation. Under its deferred prosecution agreement with the U.S. government, Bank 1 provided previous hitrecordsnext hit showing that T transferred securities from his Swiss Bank 1 account to a Swiss account with Bank 2 in 2002.

A district court granted a motion to compel T's compliance with the grand jury subpoena duces tecum demanding that he produce certain previous hitrecordsnext hit related to his foreign bank accounts under the Required previous hitRecordsnext hit Doctrine. The court declined to condition the order compelling production upon a grant of limited immunity under the recalcitrant witness statute and held T in contempt.

On appeal, T argued that if he provides the information sought, he risks incriminating himself in violation of his previous hitFifthnext hit previous hitAmendmentnext hit previous hitprivilegenext hit. T argued that the information he has been asked to produce might conflict with other information he has previously reported to the IRS, thereby incriminating himself by revealing amounts that he has not reported or that information he has previously reported was inaccurate. Additionally, T said that if he denies having the previous hitrecordsnext hit, he risks incriminating himself because failing to keep the information when required is a felony.

Holding: Under the Fifth Amendment to the U.S. Constitution, a taxpayer may refuse to answer specific questions or produce specific records if it would violate his or her privilege against self-incrimination. In a recent appellate case, the taxpayer was under a grand jury investigation as to whether he used undisclosed Swiss bank accounts to evade taxes. The taxpayer claimed that the Fifth Amendment protected him from having to provide his records relating to his foreign bank accounts. More specifically, a subpoena was issued for the taxpayer to produce “[a]ny and all records required to be maintained pursuant to

31 C.F.R. § 103.32 (subsequently relocated to 31 C.F.R. § 1010.420) relating to foreign financial accounts that you had/have a financial interest in, or signature authority over, including records reflecting the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such account is maintained, the type of such account, and the maximum value of each such account during each specified year.

The information identified in the subpoena mirrors the banking information that 31 C.F.R. § 1010.420 2 requires taxpayers using offshore bank accounts to keep and maintain for government inspection.
The information the subpoena seeks is also identical to information that anyone subject to § 1010.420 already reports to the IRS annually through Form TD F 90-22.1, known as a “Report of Foreign Bank and Financial Accounts,” or “FBAR.”

The taxpayer argued that the information he provided could be used to prosecute him criminally if it conflicts with other information he provided to the IRS. He also argued that if he had to deny he had such information, he could be guilty of a felony of not meeting legal requirements to maintain such records.

Notwithstanding the risk of criminal prosecution relating to responding to the record requests, the Ninth Circuit Court of Appeals held that the Fifth Amendment privilege did not apply under the “Required Records Doctrine.” This exception to the privilege applies under Grosso v. U.S., 21 AFTR 2d 554 (S Ct 1968) if:


    a. The purpose of the government’s inquiry is regulatory and not criminal prosecution. Here, the government’s purpose under the Bank Secrecy Act was essentially regulatory. It was important to the Court that the activity being regulated (participation in offshore banking) is not inherently unlawful, and thus information reporting in regard to it is not essentially related to criminal prosecution.


   b. And, the information requested is contained in documents of a kind the regulated party customarily keeps. In this situation, bank customers would generally keep basic account information both to comply with required reporting of offshore bank information and to be able to access their accounts.

   c. And, the records have public aspects which render them at least analogous to public documents. The records here had public aspects because individuals had to retain them for five years and provide them to the government upon request. Further, such records were required to be kept to aid in the enforcement of a valid regulatory scheme.

Thus, taxpayers under investigation in regard to offshore bank accounts will not be able to rely on the Fifth Amendment to deny access to their banking records.

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     On April 14, 2011 and April 29, 2011, the Florida legislature enacted several significant changes to the probate and trust code (hereinafter referred to as “legislation”). The bill was signed by the Governor on June 21, 2011. Some of the key sections of the legislation became effective on July 1, 2011 and others will become effective on October 1, 2011. In essence, the legislation creates or substantially modifies the following subject matters: I) Intestate succession; II) Reformation of a will; III) Challenges to revocation of a will and trust; IV) Attorney-client privilege relating to fiduciaries; and V) Timing for requesting attorney’s fees in a trust matter. The author urges probate and trust litigators to review the entire legislation because it contains nuances not fully addressed in this article.

Intestate Succession

     When a decedent dies without a will, the assets are distributed according to the laws of intestacy. Currently, the intestate share of a surviving spouse where all of the decedent’s descendants are also descendants of the surviving spouse is the first $60,000.00 and half of the remaining estate. Effective October 1, 2011, the legislation amends Florida Statute § 732.102(2) so that the intestate share of a surviving spouse of a decedent where all of the decedent’s descendants are also descendants of the surviving spouse (or if there are no descendants) is the entire estate. The legislation also creates Florida Statute § 732.102(4) to provide that if the surviving spouse has descendants that are also the decedent’s descendants and has descendants not related to the decedent, the surviving spouse’s intestate share is half of the estate.

Reformation of a Will

     Reformation of a testamentary document is an effective, yet often times overlooked, probate litigator’s technique to reform a document to conform to the settlor’s intent. Since 1998, Florida case law permitted reformation of a trust instrument to correct a mistake. See In re Estate of Robinson, 720 So. 2d 540 (Fla. 4th DCA 1998). In 2007, the Florida legislature codified and expanded common law to permit reformation to correct a trust to cure a mistake as well as reformation of a trust to achieve a settlor’s tax objectives. (See Fla.Stats. §§ 736.0415 and 736.0416).

     Effective July 1, 2011, the legislation created Florida Statutes §§ 732.615 and 732.616. These statutes mirror the above-referenced trust code statutes to permit reformation of a will to correct a mistake and to modify a will to achieve a testator’s tax objectives.

The mistake statute, Florida Statute § 732.615, allows an interested person to seek reformation of the terms of a will to conform to the testator’s intent, and provides a burden of proof of clear and convincing evidence. The statute even permits reformation that is completely inconsistent with the apparent terms of the will.

     The tax modification statute, Florida Statute § 732.616, permits an interested person to seek reformation of the terms of a will to achieve a testator’s tax objectives in a manner that is not contrary to the testator’s “probable intent.” These statutes are significant because reformation of an unambiguous will was previously never permitted by case law or statute. In addition, the legislation creates Florida Statute § 732.1061 which requires that in actions under reformation of a will to correct a mistake and modification of a will to achieve tax objectives, the court must award attorney’s fees and costs to the prevailing party. Nonetheless, the statute also gives the court discretion in awarding and allocating fees using the concept of equity.

Challenges to Revocation of a Will and Trust

     Florida law provides that a will or trust is void if procured by fraud, duress, mistake or undue influence. A testator or settlor may revoke a will or trust by writing or act. Until the legislation, there was no mechanism to challenge a revocation of a will or trust by physical act based upon fraud, duress, mistake or undue influence. The legislation amends Florida Statutes §§ 732.5165 and 736.0406 to provide that revocation of a will or trust is void if procured by undue influence, fraud, duress or mistake. A challenge to the revocation of a testamentary document cannot take place until the instrument becomes irrevocable or at the settlor’s demise.

Attorney-client Privilege relating to Fiduciaries

     Florida law provides that communication between an attorney and the client is confidential if it is not intended to be disclosed to third parties. The legislation clarifies and expands existing law so that communication between a fiduciary client and the attorney is confidential and privileged. (See Fla. Stat. § 90.5021). The legislation also amends Florida Statutes §§ 733.212(2)(b) and 736.0813 which create new reporting requirements for personal representatives and trustees. The reporting requirement compels personal representatives and trustees to provide notice to the beneficiaries that an attorney- client privilege exists between the fiduciary and the attorney employed by the fiduciary. (See Fla. Stats. §§ 733.212(2)(b) and 736.0813).

Timing for Requesting Attorney’s Fees in a Trust Matter

     The Florida Trust Code provides that trust proceedings are governed by the Florida Rules of Civil Procedure. In civil litigation, Florida Rule of Civil Procedure 1.525 is commonly used which requires a party to serve a motion seeking fees or costs within 30 days after the filing of a judgment. By amending Florida Statute § 736.0201(1), the legislation clarifies and confirms that Florida Rule of Civil Procedure 1.525 applies to all judicial proceedings concerning trusts.

     The legislation also creates Florida Statute § 736.0201(6) which states that Florida Rule of Civil Procedure 1.525 applies to all judicial proceedings concerning trusts, but provides the following two exceptions:
A trustee’s payment of compensation or reimbursement of costs to persons employed by the trustee from assets of the trust and
A determination by the court directing from what part of the trust fees or costs shall be paid, unless the determination is made under s. 736.1004 in an action for breach of fiduciary duty or challenging the exercise of, or failure to exercise, a trustee’s powers.

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U.S. readies papers v. Swiss banks on tax evasion

Sat Sep 10, 2011 12:50am BST
(Reuters) - The United States is drafting legal documents that seek to force nearly a dozen Swiss banks and international banks with Swiss branches to disclose the identities of American clients evading billions of dollars in taxes, sources briefed on the matter said. The drafting of the documents -- grand jury subpoenas and broad requests known as John Doe summonses -- is a fresh U.S. shot across the bow at Switzerland and its battered tradition of bank secrecy.

The Alpine country, a noted tax haven that is the global capital of offshore private banking, has been under attack from U.S. Justice Department and Internal Revenue Service officials conducting a broad criminal investigation into private banking services that U.S. authorities say enabled wealthy Americans to evade billions of dollars in taxes.

The documents could be served within a month or so on 10 banks, including some with headquarters outside Switzerland, these persons said.

The legal pressure signals a new front in Washington's fight against Swiss bank secrecy, a battle that in recent years has resulted in scores of Swiss bankers and advisers being charged, dozens of American clients indicted and several large banks investigated.

The Justice Department served a target letter in July on Credit Suisse AG (CSGN.VX), Switzerland's second-largest bank, notifying it that it was the focus of a criminal investigation. American authorities also are probing HSBC (HSBA.L) and smaller Swiss private banks and cantonal banks, including Basler Kantonalbank, Wegelin and Julius Baer (BAER.VX).

Talks between the Swiss and U.S. governments to resolve the broad investigation broke down in June. Switzerland wants its banks to pay a multi-billion dollar fine, but the U.S. side wants client names as well.

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