On July 9, 2020, the U.S. Supreme Court released a pair of opinions regarding the ongoing controversy of President Trump’s tax returns.
In Trump et al v. Mazars USA LLP et al, __ U.S. __ (2020)(No. 19-715), the U.S. House of Representatives issued subpoenas to Deutsche Bank seeking financial and tax information on Mr. Trump in their possession (the president was not subpoenaed directly) for purposes not involving a criminal investigation. The President sought to quash the subpoenas in U.S. District Court on the basis that they lacked a legitimate legislative purpose and violated the separation of powers.
In a 7-2 opinion, the U.S. Supreme Court found that the legislative branch’s purpose for the congressional subpoenas does not overcome “special concerns regarding the separation of powers” and should be quashed. This is distinct from the circumstances during the Watergate scandal in United States v. Nixon, 418 U.S. 683 (1974) where the Court held that a federal prosecutor in a criminal investigation could obtain information from a president despite executive privilege.
Four criteria were laid out for future courts to consider for congressional requests for presidential information. First, courts should carefully assess whether the legislative purpose warrant the significant step of involving the president’s personal papers (the president’s information cannot be relied on if other sources can reasonably provide Congress the information it needs in light of its objective). Second, courts should insist on a subpoena no broader than reasonably necessary to carry out the legislative objective. Third, courts must be attentive to the nature of the evidence offered by Congress to establish the subpoena advances a valid legislative purpose. Finally, courts should be careful to assess the burdens imposed on the president by a subpoena. Since the subpoenas stem from a rival political branch that has an ongoing relationship with the president, the incentives to use subpoenas for institutional advantage must be scrutinized. Congress could not overcome this scrutiny, so the subpoenas were denied.
However, the president could not claim total victory on the tax return issue. In Trump v. Vance, __ U.S. __ (2020)(No. 19-635), the New York County District Attorney’s Office served a grand jury subpoena on Trump’s personal accounting firm for financial and tax records. The president sued the district attorney in U.S. District Court requesting an injunction against enforcing the subpoena on the grounds that a sitting president enjoys absolute immunity from state criminal process under the U.S. Constitution.
In a 5-4 decision, the U.S. Supreme Court held that Article II and the Supremacy Clause of the U.S. Constitution do not categorically preclude, or require a heightened standard for, the issuance of a state criminal subpoena to a sitting president. Trump cites arguments that such litigation distracts him from his duties as president, affects his leadership role and sets a precedent for future harassment, but the majority determined that there are already safeguards built into the grand jury system to prevent fishing expeditions or initiating investigations out of malice or intent to harass. In addition, there should be no heightened scrutiny when the subpoenas apply to the President’s personal papers as opposed to documents of an official nature that executive privilege can be asserted over. The U.S. Constitution does not entitle the president to absolute immunity or a heightened standard when subject to the same challenges as private citizens (especially when all of the same defenses apply in court). Therefore, the U.S. Supreme Court remanded the case back to the District Court where Mr. Trump is free to assert any other challenges to the subpoena other than absolute immunity.
The U.S. Supreme Court evaluated two different subpoenas from two different entities for the same information. The congressional subpoena fails because the Court wanted to protect the integrity of the separation of powers and Congress failed to present a valid reason for the president’s records that didn’t amount to politics. However, the grand jury subpoena was issued for the valid purpose of a criminal investigation and President Trump was entitled to all the defenses available to everyone else under law to protest whether this request was relevant to the investigation. However, the grand jury proceedings are secret, and this secrecy prevents these records from being released publicly. As it stands, the only current method that the tax returns can be released are if Mr. Trump elects to do so on his own accord.
What is the big deal about these tax returns? Before his candidacy for president, Donald Trump repeatedly promised to publicly release his tax returns as every other major party presidential nominee since 1976 has done before him. During the campaign and the presidential debates, he asserted that he would release his returns after routine IRS audits were completed but not before on advice of his lawyers. After being elected, Mr. Trump has refused requests to release his returns and cites that voters are not interested, that there is nothing that can be learned from them, and that his tax rate is “none of your business”. The privacy around his tax returns has only increased the mystique around them and the desire of his opponents to get their hands on them.
Does a tax return being audited prevent its release to the public?
Mr. Trump’s assertion that he has been under audit is very plausible since he is a billionaire. In 2017, the IRS audited only 0.70% of individual tax returns. However, taxpayers who had incomes over $10 million were audited at a rate of 14.52% in 2017. The chances he is under audit most years is high. In addition, IRS policy states that “[t]he individual tax returns for the President and the Vice President are subject to mandatory review” and are audited every year. IRM 220.127.116.11.5. However, there is no federal law that prevents a taxpayer from releasing a tax return under audit to the public. This is solely the decision of Mr. Trump.
Can the IRS be subpoenaed directly for a tax return?
According to the Internal Revenue Code, “returns and return information shall be confidential” and that no officer or employee of the United States or any individual state “shall disclose any return or return information obtained by him in any manner”. 26 U.S.C. §6103(a). A person cannot just send a subpoena to the IRS for a tax return for no good reason.
The exceptions to the general rule permit disclosure of return and return information includes, but it is not limited to, such persons the taxpayer designates in writing (26 U.S.C. §6103(c)), to the taxpayer himself or herself (26 U.S.C. §6103(e)(1)(A)(i)), to any party to a joint return (26 U.S.C. §6103(e)(1)(B)), to a partner for a partnership return (26 U.S.C. §6103(e)(1)(C)), to certain corporate officers or qualifying shareholders for a corporate return (26 U.S.C. §6103(e)(1)(D)), to a trustee, executor or beneficiary for a trust or estate return (26 U.S.C. §6103(e)(1)(E & F)), and, upon court order, to federal officers and employees undertaking nontax federal criminal investigations.
If it is not an excepted reason, the subpoena will be denied. If the subpoena is from a state court, the IRS routinely removes the matter to federal court to seek an order that a state court has no authority to subpoena a federal agency. It should be noted that the Internal Revenue Code provides that, “[u]pon written request from the chairman of the Committee on Ways and Means of the House of Representatives, the chairman of the Committee on Finance of the Senate, or the chairman of the Joint Committee on Taxation, the Secretary shall furnish such committee with any return or return information specified in such request, except that any return or return information which can be associated with, or otherwise identify, directly or indirectly, a particular taxpayer shall be furnished to such committee only when sitting in closed executive session unless such taxpayer otherwise consents in writing to such disclosure.” 26 U.S.C. §6103(f). This gives the Congress broad power to examine tax returns, but were limited in scope by the U.S. Supreme Court to the extent that this authority violates the principles of separation of power.
Can Trump’s tax returns be subpoenaed directly from the President?
While the Internal Revenue Code prevents unauthorized disclosure of tax returns from the federal government, this does not confer a privilege upon returns and return information in possession of the taxpayer. However, most federal courts have recognized a “qualified” tax return privilege with respect to demands for tax returns in the course of civil discovery. In Terwilliger v. York International Group, 176 F.R.D. 214 (W.D. Va. 1997), the court stated the following:
- “Courts have made it increasingly clear that tax returns in the hands of a taxpayer are not privileged from civil discovery. Nevertheless, judicial consensus exists that, as a matter of policy, great caution should be exercised in ordering the disclosure of tax returns. Unnecessary disclosure of tax returns is to be avoided.”
- “Examination of case law reveals the emergence of a judicially developed qualified privilege that disfavors the disclosure of income tax returns as a matter of general federal policy. A two-prong test has been utilized to assess whether the qualified privilege should be overcome and a party’s income tax returns should be disclosed. The court must determine whether (1) the tax return is relevant to the subject matter in dispute; and (2) a compelling need exists for the return, because the information sought is not obtainable from other sources. While the party seeking discovery of the tax returns bears the burden of establishing its relevance, the resisting party has the task to identify an alternative source for the information.”
- “In contrast, a minority of courts have held that the sole inquiry governing discovery of tax returns is whether the information contained in the return is relevant. This court, however, favors the two prong approach. . . . We believe that test artfully balances the privacy interest inherent in tax returns with the policy favoring broad civil discovery. Proper consideration is also afforded to the relevancy and materiality of the information.”
Of course, a person cannot just file any random lawsuit against Mr. Trump to hope and gain access to the tax return. Material is only discoverable in civil litigation if it is reasonably calculated to lead to the discovery of admissible evidence. However, the court does not have to compel discovery of relevant material if the request is “unreasonably cumulative or duplicative… [or] the burden or expense of the proposed discovery outweighs its likely benefit.” Fed. R. Civ. P. 26(b)(2)(i),(iii). Likewise, Mr. Trump can defeat a subpoena for his tax returns in a civil suit if he demonstrates the request is irrelevant, unduly burdensome or otherwise not discoverable due to privilege. In addition, the qualified tax return privilege may allow Mr. Trump to provide the “relevant” information from another source other than his tax returns. It is unlikely that any random private citizen could ever sustain a subpoena request to the president for tax returns because it simply would not be relevant to any viable cause of action allowed in federal court.
It should be noted that the qualified tax return privilege applies to all taxpayers, not just the President of the United States.
The public dispute for President Trump’s tax returns will likely continue for years and this won’t be the last time that federal courts weigh in on this issue. If you have any questions about federal taxation or need legal representation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.