Appeal from two orders of the United States District Court for the Southern District of New York, Sofaer, J., enforcing an Internal Revenue Service summons which required a sole proprietor, the target of a civil audit, to disclose his private proprietary and financial records to the IRS depsite his claim that such disclosure would violate his Fifth Amendment privilege against self-incrimination.
Oakes and Meskill, Circuit Judges, and Hill,*fn* District Judge.
The federal tax structure is based on a system of self-reporting which relies on "the good faith and integrity of each potential taxpayer to disclose honestly all information relevant to tax liability." United States v. Bisceglia, 420 U.S. 141, 145, 43 L. Ed. 2d 88, 95 S. Ct. 915 (1975). We have recognized repeatedly that the Internal Revenue Service is "indispensable" to the administration of the revenue laws, United States v. Harrington, 388 F.2d 520, 525 (2d Cir. 1968); see United States v. Arthur Young & Co., 677 F.2d 211, 218 (2d Cir. 1982), cert. granted, 459 U.S. 1199, 103 S. Ct. 1180, 75 L. Ed. 2d 429, 51 U.S.L.W. 3611 (1983), and that it can investigate a taxpayer's return "merely on suspicion that the law is being violated, or even just because it wants assurance that it is not." United States v. Powell, 379 U.S. 48, 57, 13 L. Ed. 2d 112, 85 S. Ct. 248 (1964) (quoting United States v. Morton Salt Co., 338 U.S. 632, 642-43, 94 L. Ed. 401, 70 S. Ct. 357 (1950)). However, we have also recognized that "even a routine tax investigation is a situation in which answers to questions by an IRS agent might tend to incriminate, and thus Fifth Amendment rights apply to such answers." United States v. O'Henry's Film Works, Inc., 598 F.2d 313, 317 (2d Cir. 1979). In this appeal we consider whether the Fifth Amendment's protection against self-incrimination allows a sole proprietor to shield his proprietary and financial records from compelled disclosure to a government agency. We hold that it does.
In January 1982 the Internal Revenue Service (IRS) commenced a civil audit to determine the joint tax liability of Dr. Martin Fox and his wife Tamar Fox for the tax year 1979.*fn1 On January 28, 1982 the IRS issued an administrative summons requiring Dr. Fox to appear, testify and produce the following documents:
1. All books and records, invoices, statement[s] and other documents pertaining to the operation of the sole proprietorship of Dr. Martin Fox for the period January 1, 1979 to December 31, 1979.
2. All savings account passbooks, brokerage account statements, 1099s, checking account statements, deposit slips, and cancelled checks for the taxpayer[s] Martin and Tamar Fox.
3. All evidence verifying contributions claimed as a deduction on Schedule A of the 1979 tax return of the taxpayer[s], Martin and Tamar Fox.
J. App. at 6. Dr. Fox refused to produce the summoned documents, invoking his Fifth Amendment privilege against self-incrimination. He also threatened to invoke the Fifth Amendment in response to any questions asked.
The IRS petitioned the United States District Court for the Southern District of New York for an order enforcing the summons.*fn2 On November 3, 1982 Judge Sofaer issued an opinion and order which set out his preliminary analysis of the issues. United States v. Fox, 549 F. Supp. 1362, 1368 (S.D.N.Y. 1982). First, he stated that the Fifth Amendment "directly" protects the contents of an individual's private records only if they are "purely personal" and "essentially nonbusiness" documents. Id. at 1365. He ordered Fox to submit in camera an affidavit detailing which documents were "personal." Id. at 1368. Second, Judge Sofaer held that the IRS summons might "indirectly" violate Fox's Fifth Amendment privilege in two ways: (a) by forcing him to produce and therefore acknowledge the existence of incriminating records heretofore unknown by the government, and (b) by forcing him to produce records "written by the taxpayer," and thereby implicitly authenticate them. Id. at 1366-67. He ordered the government to file a detailed summons establishing the extent of its knowledge of the existence of Fox's records and ordered Fox to submit in camera an affidavit identifying which documents he had "actually written." Id. at 1368. Third, Judge Sofaer sua sponte raised the issue of whether any or all of the summoned records were "required records" within the meaning of Shapiro v. United States, 335 U.S. 1, 92 L. Ed. 1787, 68 S. Ct. 1375 (1948), and therefore not entitled to Fifth Amendment protection. 549 F. Supp. at 1364. He ordered both parties to brief this issue.*fn3
After considering the parties' additional submissions, Judge Sofaer issued his second opinion and order on January 24, 1983 holding that (1) none of the summoned documents were personal and therefore they did not merit direct protection; (2) based on the government's affidavit, the revenue agent knew of the existence of at least some records in each of the three classes of summoned documents and therefore Fox was "entitled to no fifth amendment protection based on the notion that his act of production will amount to testimony of the existence or possession of the summoned documents;" and (3) Fox may assert the privilege against self-incrimination on the basis of authentication only as to documents bearing his own handwriting. United States v. Fox, 554 F. Supp. 422, 425 (S.D.N.Y. 1983). He concluded that "producing the summoned documents will not constitute compelled testimonial communication under the fifth amendment," id. at 424, and thus the government is entitled to production of all summoned documents except for those records actually bearing Fox's handwriting. Id. The court reserved decision with respect to the handwritten documents and requested that Fox submit an affidavit explaining how their production might incriminate him.
On February 4, 1983 Fox submitted the handwritten documents plus an explanatory affidavit and simultaneously moved for a stay and reconsideration of the court's January 24 order requiring production of all other summoned records. On February 11, 1983 the district court denied the motion for reconsideration and, after an in camera examination of the handwritten documents, ruled that they must also be produced. United States v. Fox, M-18-304 (S.D.N.Y. Feb. 11, 1983) (unpublished order), reproduced in J. App. at 93. The court granted Fox's application for a stay of the January 24 and February 11 orders pending appeal.
The constitutional privilege against self-incrimination is "essentially a personal one, applying only to natural individuals." United States v. White, 322 U.S. 694, 698, 88 L. Ed. 1542, 64 S. Ct. 1248 (1944). It cannot be invoked by a collective entity or its representatives. In Bellis v. United States, 417 U.S. 85, 40 L. Ed. 2d 678, 94 S. Ct. 2179 (1974), the Supreme Court drew "a bright line between organizations which have a 'recognizable juridical existence apart from [their] members, '" such as corporations or partnerships, and "those which do not," such as sole proprietorships. In re Grand Jury Empanelled (Colucci), 597 F.2d 851, 859 (3d Cir. 1979) (quoting In re Grand Jury Investigation, 483 F.2d 961, 962 (3d Cir. 1973), aff'd, Bellis v. United States, 417 U.S. 85, 40 L. Ed. 2d 678, 94 S. Ct. 2179 (1974)). Thus, an attorney who possesses partnership records in his capacity as a representative of the partnership cannot claim the personal protection of the Fifth Amendment privilege. Bellis v. United States, 417 U.S. at 88. Similarly, a corporate executive cannot invoke the Fifth Amendment to prevent compulsory disclosure of incriminatory corporate records. Wilson v. United States, 221 U.S. 361, 385, 55 L. Ed. 771, 31 S. Ct. 538 (1911); see also McPhaul v. United States, 364 U.S. 372, 380, 5 L. Ed. 2d 136, 81 S. Ct. 138 (1960) (member of Civil Rights Congress); Rogers v. United States, 340 U.S. 367, 371-72, 95 L. Ed. 344, 71 ...