The fight in Bankruptcy Court goes on.  Although many individuals throughout the country have bankrupted millions of dollars in income taxes, the fight continues.  The IRS, acting like a wounded lion, is fighting back hard.  Since taxes related to civil fraud cannot be discharged in a Chapter 7 in Bankruptcy Court, the IRS is attempting to stop the discharge of taxes by alleging fraud.  If you have been convicted of a criminal tax offense or you have an exempt W-4 in your record, it is likely that the IRS will try to allege civil fraud.  The following case is an appeal from the Bankruptcy Court to a panel of judges in the United States District Court for the Southern District of Florida. The Case No. is 96-6431-CIV-ARONOVITZ.   Emil Schandl, the debtor argued that the application of a civil fraud penalty to an individual who has been convicted of tax fraud is double jeopardy. (Double jeopardy is prohibited by the Bill of Rights and it means that an individual cannot be punished twice for the same crime).  The court's opinion follows:

            The appeal arises from the adversary proceeding filed by Schandl to determine the dischargeability of income tax liabilities for the years 1981-1985, 1990 and 1991.  The issues concern double jeopardy and the dischargeability of tax fraud penalties, with respect to the bankruptcy court's ruling that the debtor's 1981-1985 income tax liabilities are nondischargeable under 11 U.S.C. Section 523 (a) (1) (C).

            ...The debtor contends that the bankruptcy court erred on grounds of double jeopardy in finding his obligation to the government to be nondischargeable with respect to the civil tax penalties for fraud for the same years, 1981-1085, and the same conduct for which criminal fraud penalties have been imposed.  Appellant's argument concerning multiple punishments for the Same offense refers to both the criminal fraud and the civil fraud penalties as "punishment."

            This Court finds the government's argument persuasive that the civil tax fraud penalty in this case is not punishment, based on Helvering v. Mitchell, 30 U.S. 391 (1938)(sanction for fraud is a remedial measure), and distinguishing United States v. Halper, 490 U.S. 435, 442-45 (1989) (sanction is punishment when overwhelmingly disproportionate).

            Appellant  also argues that the penalty for tax fraud is nonpecuniary, and thus dischargeable, because it is imposed for the purpose of punishment, not to compensate for any loss.  From this reasoning, Schandl reasserts the double jeopardy argument.

            The government argues that the language in the Legislative History to 11 U.S.C. Section 523(a)(7), clarifying the treatment of punitive tax penalties, which Appellant relies upon,  does not provide a basis to discharge the tax penalty on double jeopardy grounds.  The Court agrees with the government's  position on this issue. 

            As the final issue, Schandl argues that the fraud penalties for 1981-1985 relate to taxes that are over three years old, and therefore, the fraud penalty is dischargeable even if the underlying tax is not dischargeable.  This argument, based on the relevant three-year period prior to the filing of the bankruptcy petition, requires the application of Section 523(a)(7) to the facts.  See In re Burns, 887 F.2d 1541 (11th Cir. 1989).

            The relevant provision, 11 U.S.C. Section 523(a)(7)(B), provides, in part that:

            A discharge under Section 727...does not discharge an individual debtor from any debt--to the extent such debt is for a fine, penalty or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty--imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition. (Emphasis added).

            The government does not address the merits of this issue, but, rather, asserts the procedural issue that Appellant's argument is raised for the first time on appeal.  The government has not presented its position on either the three-year time period for Schandl's fraud, which appears to be a self-evident fact, or the application of Section 523(a)(7)(B).  It asserts as the basis for the Court to deny consideration that the issue under Section 523(a)(7)(B) was not briefed by the debtor in his motion for summary judgment, nor argued at trial.  See United States v. Southern Fabricating Co., Inc., 764 F2d 780, 781-82 (11th Cir. 1985).  The government argues that this issue has been abandoned by Appellant.  See Fehlhaber v. Fehlhaber, 681 F.2d 1015, 1030-31 (5th Cir. Unit B 1982).  The government has neither addressed nor disputed the legal issue concerning Section 523(a)(7)(B) on the merits, nor does it address the "plain error" exception as it pertains to consideration of the issue.  The record shows that in Schandl's pro se complaint and the Pretrial Order of the bankruptcy court, the issue concerning the debtor's tax liabilities for the years 1981-1985 was framed pursuant to Section 523(a)(1).  Reference was also made to the dischargeability of the taxes in relation to the period of three years before the date of the filing of the petition.

            The Court notes that it may exercise its discretion to consider the issue for the first time on appeal, if the issue is a purely legal one, and the asserted error is so obvious that the failure to consider it would result in a miscarriage of justice.  See also In re Bergstrom, 949 F.2d 341 (10th Cir. 1991.)  A factor in this consideration is that the harsh result of applying the principle of abandonment to Appellant, who appears pro se before this Court and the bankruptcy court, would be inconsistent with the doctrine of leniency regarding pleadings of pro se litigants.  See Didie v. Howes, 988 F.2d 1097, 1105 (11th Cir. 1993) (citing Haines v. Kerner, 404 U.S. 519, 520-21 (1972). 

            For the foregoing reasons, to avoid the miscarriage of justice of depriving the pro se debtor of the full benefit of asserting his rights under Section 523(a)(7)(B), the issue of whether Schandl's tax fraud penalties for the years 1981-1985 are dischargeable should be first considered by the bankruptcy court on Remand. 

            Accordingly it is ordered and adjudged that this matter concerning the dischargeability of the civil tax fraud penalties imposed upon the debtor for the years 1981-1985, is hereby REMANDED for further consideration by the bankruptcy court, pursuant to 11 U.S.C. Section 523(a)((7)(B).  The Order to Determine Dischargeability of Income Taxes, entered on April 9, 1996 pertaining to the debtor's taxes for the years 1990 and 1991 shall stand as a final order of the bankruptcy court.

------------end of opinion.

            This opinion is instructive in several ways.  First of all, if you are contemplating a bankruptcy, it is possible that you will have to file an adversary proceeding and if you lose the adversary proceeding, you will have to appeal to a panel of district court judges.  Emil Schandl did not appeal to the Circuit Court of Appeals after the above-ruling, so there is still room for the argument involving double jeopardy to change.  The fraud penalty is so severe that the denial of a right to a Chapter 7 (A Chapter 7 is a bankruptcy that can discharge all debts according to specific rules) discharge seems that it could be double jeopardy and some court of appeals may rule in favor of the issue. 

            It is good for us that the court took the position that they could not hold a pro se to the standards of an attorney.  Take note of the cases the judges cited for your own future reference.  The most interesting issue however, is the fact that the court understands the issue that although the tax related to civil fraud is not dischargeable in a Chapter 7 Bankruptcy, the civil fraud penalty is dischargeable.  Although this may not seem like an important issue, it is very, very important.  Individuals cannot discharge fraud in a Chapter 7 but they can discharge fraud in a Chapter 13 (A Chapter 13 is a payment plan bankruptcy), but only if the amount owed is less than around a quarter of a million dollars of unsecured debt.  Some individuals would not be able to discharge the fraud at all if it were not for the implications in the case of In re Burns, supra which was quoted in the opinion. 

            If an individual has an amount of tax that is too great to discharge in a Chapter 13, he might be able to lower the owed amount in a Chapter 7 by discharging the fraud penalty first and then filing a Chapter 13.  Unfortunately fraud cannot be discharged in a Chapter 11 which is a business type of bankruptcy.  So if an individual owes too much in tax and penalties to effectively use a Chapter 13, and he cannot do a Chapter 7 because of fraud, he may be up against the wall with no bankruptcy protection from the IRS.  If you want to get into the freedom fight, please do not file an exempt W-4 because you may find yourself in this position at some point in time.

There has been a lot of discussion on the web about Ed and Elaine Brown who were convicted on tax evasion charges.   The IRS gets a few criminal show trials each year to scare the public into voluntarily filing returns.  The Brown family happens to be one of the victims for this year.  Since the IRS proceeds criminally before it proceeds civilly, the government goes to trial without a legal tax liability.  In other words, since there is no statute in the Internal Revenue Code that makes anyone liable to pay income tax, the government must create a liability by filing a return for individuals who do not voluntarily self assess.  In a criminal case, the IRS does not file a return and make an assessment until after the conviction.  However, neither the courts nor the juries understand this complex issue.  The IRS refrains from an assessment because it does not want to make the juries sympathetic to the defendant.  If the jury members were to hear stories about liens and levies and about how poor the IRS is with giving valid tax help, the juries might not convict.

So the Browns went to trial and lost and now the IRS will start assessing and taking their assets.  The Browns have currently chosen to serve their prison sentence at home.  If the judge would just grant them that right, as the courts do in many cases, they would get prison credit for their home stay.

But alas, sooner or later they must come out, and when they do, the government will arrest them and incarcerate them to terrify the populace into submission.  Ed and Elaine are very brave and they are calling attention to this incredibly absurd tax system that we currently live with.  Let's hope that their sacrifice will help make change.

In the meantime, the IRS will continue with IRS liens and IRS levies and from time to time, someone who stands up to the IRS will be prosecuted so that the rest of the population understands how dangerous it is to take on the mighty IRS.  Don't expect the IRS to give you good tax help.  The agency is here to create fear and submission in the middle class.

              Maybe if we make enough people aware of the situation, we will get the momentum going to cause positive change in the Income Tax System and other pertinent areas of the economic and social system.  Well, here are the very upsetting facts. Let's get out the word.

FACTS

1.  Children born in 1994 will endure tax rates of more than 80 percent. (Clinton Administration 1994 budget.)

2.  Real wages peaked in 1973 and have been declining ever since; however we now work an average of one month more per year than we did two decades ago. (The Great U-Turn).

3.  During the last 30 years, the number of children living in poverty has increased by nearly 30 percent. (Vanishing Dreams).

4.  A monthly investment of $50.00 for 20 years will only provide for one year of tuition at a public college or university. (USA Today.)

5. Since the mid-1970's, poverty among young adults (18 to 34) has gone up by 50 percent-while the median income of under-30 parents fell by a third. (Vanishing Dreams).

6. In 1970, the Japanese had none of the world market share in dynamic random access memories, a semiconductor device; by 1988, that share had risen to 80 percent. (Selling Our Security).

7.  Almost half of all Americans between the ages of 21 and 25 lack basic literacy skills, and are unable to balance a checkbook or read a map. (Children's Defense fund-State of America's Children 1992).

8.  One in five Philadelphia teenagers misses school every day. (Monitor Radio).

9.  American teenagers ranked number one in the world in saying they were good at math-and last in a simultaneously administered international math proficiency test. (Educational Testing Service.)

10.  Nearly half of all the new full-time jobs created in the 1980s paid less than $250 a week, or $13,000 a year, below the poverty line for a family of four. (Fortune magazine.)

11.  According to "moderate projections," between 1995 and 2005, there will be almost half a million more new college graduates a year entering the job market than there will be new jobs. (Bureau of Labor Statistics).

12.  In the last ten years, the number of functionally illiterate 17-year-olds has more than doubled.  Today, 7 million teenagers are functionally illiterate. (Children's Defense Fund.)

13.  In 1974 the U.S. government declared a health care crisis because we spent 7.5 percent of our gross national product on medical costs.  Today we spend twice that much. (State of the Union, 1994).

14.  U.S. health care spending has risen from 121 billion in 1961 to a projected $1.3 trillion by 2000. (Congressional Budget Office.)

15.  In 1991, the U.S. trailed most industrialized countries in spending on social programs and led in defense spending.  (The World Bank).

16.  In an early 1990s report, the government's own accountants found that if current trends continue, federal expenditures will grow from 23 percent of the GNP to 42 percent by 2020, pushing up taxes. (U.S. General Accounting Office.)

17.  The elderly (age 65 and up) population will grow 153 percent between now and 2040 (Social Security Administration.)

18.  The collapse of America's savings and loans will cost taxpayers at least $180 billion. (Congressional Budget Office).

19.  Federal Judges have ordered jails closed and new ones built because the conditions violated the rights of the prisoner.  Some of our schools wouldn't pass such scrutiny.:"  (Rep. Dale Kildee, member of the House Education Committee.)

20.  America has the largest number of functional illiterates in the industrial world. (Richard Lamm, Uncompetitive Society.)

21.  The average murderer serves less than seven years because of prison crowding. (U.S. Bureau of Justice Statistics.)  Note here that some tax protesters have received sentences of more than seven years.

22.  The Fortune 500 industrial companies employed 3.7 million fewer workers in 1991 than in 1981-a loss of about one job in four.  That trend will continue into the 21^st Century. (Fortune.)

23.  Today's average, married senior citizen paid $83,852 in Social Security and Medicare taxes.  The average senior gets back $308,328. (The Ways and Means Committee.)

24.  Only 2.8 percent of German children live in poverty.  Over 20 percent of all American kids do. (Pete Peterson, Facing Up.)

25.  In the last twenty years, income for parents under the age of 30 dropped 28.6 percent, while it rose 28.4 percent for seniors. (1992 census survey.)

26.  In the next 35 years, health care spending is expected to eat up twice as much of our economy as it does today. (U.S. Health Care Financing Administration).

27.  The U.S. infant mortality rate is higher than that of 18 other major industrialized countries.  (State of the World's Children, UNICEF.)

28.  "Vital parts of the military equipment that helped win the Gulf War were made in Germany, Japan and other foreign countries," write Martin and Susan Tolchin.  "The need to beg foreign embassies for essential parts was chilling."  (Selling our Security.)

29.  The current average skill level of 21- to 25- year olds is 40 percent lower than the skill level that will be required of new workers in the year 2000-only six years from today.  (The Hudson Institute.)

30.  The median home price, adjusted for inflation, has jumped 78 percent since the early 19690s making ownership out of the reach of many young families. (Forbes.)

31. Nearly one in three college graduates between 1997 and 2010 is expected to take a job that doesn't require a college degree-up from 1 in 10 in the 1960s.

32.  It is hard to see why someone age 68 should automatically pay lower taxes than someone age 28 with the same income.  Yet, that happens." (Robert Samuelson, Newsweek.)

33.  A 30-year old man in the early 1970s earned 15 percent more than his father did at that age.  Today's 30 year old can expect to bring in 25 percent less than his dada did. (Forbes.)

34.  By 2002, Uncle Sam will have stolen over $1 trillion from the Social Security trust fund. (OASDHI 1993).

35.  Poverty affected 11.1 percent of Americans in 1973 and 14 percent by the early 1990s. (1992 Census.)

36.  "The Great American Job Machine...is shifting gears-downward.  Solid middle-class jobs ... have been disappearing in record numbers and are being replaced more often than not by lower wage jobs."  (Fortune).

37.  Since the early 1970s, the poverty rate among under-30 households has doubled.  (The Economic Policy Institute.)

38.  From 1929 to 1933 (the years of the Great Depression), real income fell by 25 percent.  For couples with kids in the current generation, it's dropped to 30 percent. (Thirteenth Generation).

39.  In 1948, a family of four earning the median income would have paid no income tax, and a mere 1 percent to Social Security.  By 1955,  income tax and Social Security would require 9 percent, and by 1990, the combined tax burden was 25 to 28 percent.  (Boiling Point).

40.  Baby boomers are saving only about one-third as much as they need.  This means their kids will have to finance their retirements. (Merrill Lynch.)

41.  From 1981 to 1989, the number of American home-owners between the ages of 25 and 29 declined by 11 percent, while the number of renters in that same age group rose by 16 percent. (‘Housing in America,"  U. S. Department of Commerce, 1992).

42.  Today's 63-years old will get back roughly $200 for every $100 he or she pays into Social Security.  Today's 25 year old will lose over $100 for every $450 paid into Social Security.  (The Wyatt Company).

43.  As a share of worker's payroll, the total cost of Social Security and Medicare could climb from 17 percent today to over 50 percent by 2040.  (OASDHI, 1992.)

44.  Twenty-five percent of full-time workers do not earn enough to rise out of poverty. (U.S. Census Bureau.)

45.  From 1971 to 1988,  only 50 percent of all eligible voters turned out on election day-the worst record of any major democracy. (World Values Survey, January 1987).

46.  When the national debt hits $6.5 trillion, interest on the debt will gobble up 85 percent of all personal taxes. (Bankruptcy 1995).

47.  The average cost in 1990 dollars of attending a private four-year college more than doubled form 1965 to 1990.  (U.S. Department of Education.)

48.  From the mid-1970s to the late 1980s, the average tuition at a private college as part of an average family income rose in ratio almost 50 percent. (USA Today.)

49.  The U.S. spends nearly $1 trillion annually on health care, yet nearly 75 million Americans are either underinsured or completely uninsured.  Both Canada and Germany spend 30 to 40 percent less on health care per capita, and both provide universal health care. (The Washington Monthly.)

50.  Since 1969, in inflation-adjusted dollars, the average Social Security benefit for a retired worker has rise by 80 percent.  Meanwhile, the inflation-adjusted average AFDC  benefit for a child in poverty has declined by over 10 percent. (Social Security Administration).

51.  In his book Powernomics  Economics and Strategy After the Col;d War, former U.S. trade negotiator Clyde Prestowitz stated, "On a national basis, about 25 percent of our students drop out of high school, consigned to a social and economic scrap heap before then even begin their adult lives.  The U.S is the only major nation of the world that tolerates such human waste."

52.  In 1992, the U.S. spent $24.92 billion to jail 1.3 million prisoners-a per prisoner cost of $20,072-while we spent $4,000 per public school student. (Washington Monthly).

53.  From 1973 to 1990, real median income of U.S. families aged 65 and over went up 39 percent, while it dropped 16 percent for families headed by someone aged 30 or under (U.S. Bureau of the Census.)

54.  In 1979, 74 percent of working Americas under age 25 were earning an hourly wage which-if received full-time and year-round-exceeded the cash poverty level for a family of three.  By 1991,  that share had fallen to 47 percent.  (The Children's Defense Fund).

55.  In the early 1970s, for a typical married couple under age 30, the after-tax cost of owning a first home consumed just 12 percent of income.  By the 1990s, the after-tax cost of owning the same house had risen to 29 percent of income. (Joint center for Housing Studies of Harvard University.)

56.  In 1990, a couple in their twenties with one worker, a baby, and $30,000 in income had to pay five times as much tax to the government ($5,055) as the typical retired couple in their late sixties with the same incomes from public and private pensions ($1,073.)  (Congressional Ways and Means Committee.)

57.  The average 30-year-old home-owner in the 1950s could make the monthly mortgage payment using 14 percent of his income.  Today it would take 40 percent. (Frank Levy).

58.  In 1980, the U.S. government consumed less than 9 percent of the gross national product (the nation's total economic output).  By 1990, the government was costing almost 40 percent of the gross national product.  On a per-capita basis the growth in the cost of government was even greater, going from $1,651 per person in 1900 to over $23,000 in 1990.  These statistics are based on real 1990 dollars. (Institute for Policy Innovation.)

            Although the above facts seem very depressing, the good news that history shows, when conditions in a country get bad, the people wake up, arise, and make positive change. 

            The  Ninth Circuit Court of Appeals affirmed what you and I have known all along about the Fifth Amendment.  It does apply to tax returns. Can you believe that I was sanctioned $6,000 for arguing in the Tenth Circuit that the 5^th Amendment applies to tax returns?  It is absolutely amazing that the Department of Justice actually put the Circuit Court of Appeals in the position of having to answer a question like this one. Well, the Ninth Circuit did us a great favor and the decision, although it does not create any new law, makes it very, very clear that individuals do have a right to be concerned about waiving their Fifth Amendment Rights when answering questions that pertain to their tax liability.  The court's opinion has been quoted in full because this case is so important.  Do you think that the IRS might classify the judges of the Ninth Circuit Court of Appeals as illegal tax protesters for their argument of law that the Fifth Amendment does apply to the Federal Income Tax?  Read the following case and enjoy it.  If you are classified as an illegal tax protestor, then the Fifth Amendment surely applies to you! 

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA,

                                                      No. 95-55609

Petitioner-Appellee,

                                                      D.C. No.

v.

                                                      CV 93-5736 SVW

LOREN C. TROESCHER,

                                                      OPINION

Respondent-Appellant.

Appeal from the United States District Court for the Central District of California Stephen V. Wilson, District Judge, Presiding

Argued and Submitted

August 7, 1996--Pasadena, California

Filed November 7, 1996

Before: Stephen Reinhardt, Cynthia Holcomb Hall, and

Edward Leavy, Circuit Judges.

Opinion by Judge Reinhardt

_________________________________________________________________

SUMMARY

_________________________________________________________________

                                14677

_________________________________________________________________

COUNSEL

Joe Alfred Izen, Jr., Bellaire, Texas, for the respondent-

appellant.

John A. Dudeck, Jr., Tax Division, United States Department

of Justice, Washington, D.C., for the petitioner-appellee.

_________________________________________________________________

                                14678

OPINION

REINHARDT, Circuit Judge:

Loren C. Troescher appeals an order of the district court compelling him to appear before the Internal Revenue Service to answer questions and produce documents.1 The IRS issued the summons after Troescher apparently failed to file income tax returns for several years. Troescher argues that the district court erred in rejecting his assertion of the Fifth Amendment's privilege against self-incrimination. We agree, and therefore vacate the order and remand to the district court for reconsideration in light of this opinion. Accordingly, because we conclude -in light of the law of this circuit, and in light of the government's confession of error on appeal -that there is no "Tax-Crime Exception" to the Fifth Amendment, we vacate the order of the district court and remand for further proceedings so that it may dispose of the matter before it in accordance with the law that governs the invocation of the Fifth Amendment.

VACATED and REMANDED

_________________________________________________________________

1 The parties disagree as to whether we have jurisdiction to hear this appeal. Indeed, the complex problem of jurisdiction presents the sole substantial disagreement between Troescher and the government.

Accordingly, we conclude that this case is appropriate for application of the doctrine of hypothetical jurisdiction. See Wong v. Ilchert, 998 F.2d 661, 662 (9th Cir. 1993) (assuming without deciding the existence of subject matter jurisdiction where the "difficulty of resolving [the jurisdictional question] is far greater than the difficulty of resolving [the merits of the appeal].")

Several opinions in this circuit have set out requirements for the proper application of the doctrine. See, e.g., In re Grand Jury Subpoena Issued to Bailin, 51 F.3d 203, 206 (9th Cir. 1995) (holding that the doctrine requires that "(1) the jurisdictional question must be difficult; (2) the merits of the appeal must be insubstantial; (3) the appeal must be resolved against the party asserting jurisdiction; and (4) undertaking a resolution on the merits as opposed to dismissing for lack of jurisdiction must not affect the outcome"), cert. denied, 116 S. Ct. 472 (1995). The issue here is different from that in our other cases, because here the parties do not disagree about the merits. Indeed, the reason the case is before us now is that the government argued a meritless position before the district court which it now confesses was in error. Thus, the resolution of the merits is in accordance with the position of both parties, and the third of the usual requirements is therefore inapplicable.

As to the fourth requirement, whether we dismiss for lack of jurisdiction or reverse on the merits, the outcome of this case will not change, given the government's confession of error. In either event the parties will return to the district court and proceed in accordance with traditional Fifth Amendment doctrine. The other customary requirements are readily met. We should note, incidentally, that the requirements we frequently apply when invoking the doctrine are not mandated by historical practice. See Philbrook v. Glodgett, 421 U.S. 707, 722 (1975) (resolving the merits in favor of the party asserting jurisdiction); Secretary of the Navy v. Avrech, 418 U.S. 676, 677-78 (1974) (reversing the decision of the court of appeals on the merits without deciding the "difficult jurisdictional issue" presented by the case, concluding that "even the most diligent and zealous advocate could find his ardor somewhat dampened in arguing a jurisdictional issue where the decision on the merits is foreordained"). Thus, our requirements may in some instances be flexible.

The summons was issued after Troescher apparently failed to file income tax returns for several years. Troescher argues that the district court erred in rejecting his assertion of the Fifth Amendment's privilege against self-incrimination. We agree, and therefore vacate the order and remand to the district court for reconsideration in light of this opinion.2

I.

The general standard for a valid assertion of the Fifth Amendment privilege against self incrimination is well established. In order properly to assert the privilege, "respondents must show that their testimony would `support a conviction under a federal criminal statute' or `furnish a link in the chain of evidence needed to prosecute the claimant for a federal crime.' " United States v. Rendahl, 746 F.2d 553, 555 (9th Cir. 1984) (quoting Hoffman v. United States, 341 U.S. 479, 486 (1951). Indeed, it is enough if the responses would "merely `provide a lead or clue' to evidence having a tendency to incriminate." United States v. Neff, 615 F.2d 1235, 1239 (9th Cir.)(quoting Hashagen v.United States, 283 F.2d 345, 348 (9th Cir. 1960)), cert. denied, 447 U.S. 925 (1980). The privilege is validly invoked "only where there are `substantial hazards of self-incrimination' that are `real and appreciable,' not merely `imaginary and unsubstantial.' " Rendahl, 746 F.2d at 555 (quoting Neff, 615 F.2d at 1239). Finally, "the existence of such a hazard is generally determined from `examination of the questions, their setting, and the peculiarities of the case.' " Id. (quoting Neff, 615 F.2d at 1240).

_________________________________________________________________

2 The government also argues that Troescher was precluded by waiver and res judicata from raising his Fifth Amendment claim with respect to the production of documents for the first time in the contempt proceeding. Because the facts in United States v. Rendahl, 746 F.2d 553 (9th Cir. 1984), are indistinguishable from those in the case before us, we reject the government's argument, concluding as we did in Rendahl, Troescher's "first opportunity to litigate properly [his] Fifth Amendment claims was  at the contempt hearing." Id. at 555.

The district court in this case initially analyzed Troescher's privilege claims properly, under the standard set forth above. The court ordered Troescher to file a statement under seal to determine whether he was justified in refusing to answer each question posed by the IRS and in refusing to  document requested under the subject summons. The court then held a hearing and conducted an in camera review of Troescher's statement and the IRS information requests, concluding in the end that "respondent is faced with substantial hazards of self-incrimination that are real and appreciable not merely imaginary and unsubstantial."

Despite that finding, however, the court "reluctantly" issued its order compelling Troescher to answer the questions and produce the documents demanded in the IRS summons. In the face of appellant's otherwise valid claims of privilege, the court was persuaded by the government's argument that binding Ninth Circuit precedent created a "Tax-Crime Exception" to the Fifth Amendment. It found that under Fuller v. United States, 786 F.2d 1437 (9th Cir. 1986), and Brooks v. Hilton Casinos, Inc., 959 F.2d 757 (9th Cir.), cert. denied, 506 U.S. 906 (1992), "the Fifth Amendment just does not apply when the taxpayer fears prosecution for a tax crime." Because Troescher demonstrated a real and appreciable fear of prosecution for tax crimes only, and could make no showing regarding non-tax crime prosecution, the court rejected his Fifth Amendment claims. The court felt bound by decisions it concluded were unjustifiable and "simply wrong," and asked that we correct what he rightly viewed to be in error.

[1] On appeal, the government appears to have discovered that the district judge's instincts were correct. It now confesses error and argues that "[t]he self-incrimination clause of the Fifth Amendment applies in all instances where a taxpayer has reasonable cause to apprehend criminal prosecution, whether tax related or not." We agree. There is no general "Tax-Crime Exception" to the Fifth Amendment, and Troescher's Fifth Amendment claims were not defeated here simply because he feared prosecution for tax crimes. It is easy to understand why the district judge was misled by some of our cases. Our opinions in Fuller and Brooks do contain language that suggests a distinction between tax crimes and non-tax crimes under Fifth Amendment analysis. In Fuller we stated, "The fifth amendment's self incrimination clause provides no right to taxpayers to refuse to provide the IRS with financial information unless they make some showing that there is an appreciable possibility of prosecution for a non-tax crime." 786 F.2d at 1439. The actual holding in Fuller, however, and in every case it cites for support of that holding, is merely that the privilege is not validly invoked by asserting only vague, blanket, or generalized claims of self-incrimination. In Fuller and the cases it cites, we rejected Fifth Amendment claims where the taxpayer did not make any showing of an "appreciable possibility of prosecution," as required by traditional self-incrimination analysis. Id. Specifically in Fuller, we upheld a penalty assessed against three taxpayers for filing frivolous returns within the meaning of 26 U.S.C. S 6702, where each raised only "spurious" Fifth Amendment objections on their return forms. Any language suggesting a broad exemption from the Fifth Amendment in tax cases or that there is a constitutional distinction between tax and non-tax crimes is merely dictum.

The unfortunate dictum in Fuller was repeated in Brooks, where on the basis of Fuller we volunteered that "the fifth amendment's self-incrimination clause does not give taxpayers a right to withhold financial information from the IRS unless they can show an appreciable possibility of prosecution

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3 We need not consider how or in what manner the Fifth Amendment may be invoked as a defense to a prosecution for failure to file tax returns. See, e.g., United States v. Sullivan, 274 U.S. 259, 263-64 (1927); Rendahl, 746 F.2d at 556.

for a non-tax crime." 959 F.2d at 767 (emphasis in the original). Once again, however, the sweeping language suggesting a constitutional distinction between tax and non-tax crimes is simply dictum. In Brooks, discovery sanctions were imposed against a plaintiff who sued his employer and then attempted to avoid discovery by relying on the Fifth Amendment. We upheld the sanctions stating that "Plaintiffs who voluntarily come into court and seek economic damages must be prepared to prove their economic loss: `The scales of justice would hardly remain equal . . . if a party can assert a claim against another and then be able to block all discovery attempts against him by asserting a Fifth Amendment privilege to any interrogation whatsoever upon his claim.' 959 F.2d at 768 (quoting Lyons v. Johnson, 415 F.2d 540, 542 (9th Cir. 1969), cert. denied, 397 U.S. 1027 (1970)). Thus, the unnecessarily broad language of Brooks regarding a taxpayer's right to withhold financial information from the IRS is clearly dictum and, like in Fuller, involves a question not before the court. [2] To read the Fuller and Brooks dicta as creating a general "Tax-Crime Exception" to the Fifth Amendment would render the cases inconsistent with the opinions of this court that have actually considered the issue before us. The case law in this circuit is clear that the Fifth Amendment may be validly invoked when the taxpayer fears prosecution for tax crimes. See, e.g., United States v. Bodwell, 66 F.3d 1000, 1001 (9^th Cir. 1995) (holding that "[a] reasonable belief that information concerning income or assets, such as that sought in the summons here, might be used to establish criminal failure to file a tax return can support a claim of Fifth Amendment privilege."); Rendahl, 746 F.2d at 555-56 (failure to file tax return); see also United States v. Turk, 722 F.2d 1439, 1440 (9th Cir. 1983) (failure to file tax return), cert. denied, 469 U.S. 818 (1984); United States v. Tsui, 646 F.2d 365, 367 (9th Cir. 1981) (income tax evasion), cert. denied, 455 U.S. 991 (1982); United States v. Helina, 549 F.2d 713, 716 (9th Cir. 1977) (income tax evasion and willful filing of a false return); Federal Deposit Ins. Co. v. Sovereign State Capital, Inc., 557 F.2d 683, 686 (9th Cir. 1977) (tax fraud). Further, such a sweeping exception would be inconsistent with the law in other circuits. See, e.g., United States v. Argomaniz, 925 F.2d 1349, 1353 (11th Cir. 1991); Estate of Fisher v. C.I.R., 905 F.2d 645, 648-49 (2nd Cir. 1990); United States v. Clark, 847 F.2d 1467, 1474 (10th Cir. 1988).

II.

Accordingly, because we conclude -in light of the law of this circuit, and in light of the government's confession of error on appeal -that there is no "Tax-Crime Exception" to the Fifth Amendment, we vacate the order of the district court and remand for further proceedings so that it may dispose of the matter before it in accordance with the law that governs the invocation of the Fifth Amendment.

VACATED and REMANDED

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            As you can see, the Ninth Circuit has made it very clear that individuals who have not filed tax returns do have a legitimate fear of prosecution from the IRS; so they definitely have a reason to assert the Fifth Amendment.

            Now the Troescher case can be added to the arsenal of weapons in backing up the use of the Fifth Amendment in response to any IRS summons issued to a non-filer or an individual who is classified as an illegal tax- protestor.  Now ask yourselves. If individuals have a reason to be concerned about waiving their Fifth Amendment rights in response to an IRS summons, do they also have a reason to be concerned about waiving their rights on a tax return?  How much longer will the IRS be able to deceive the American Public about the nature of the Fifth Amendment as it relates to the alleged filing requirement?

Dear Willie:

I have been classified as an illegal tax protestor (ITP)?  Do I have a right to be concerned about waiving my Fifth Amendment Rights?

Sincerely, ITP

--Dear ITP:

Since the Illegal Tax Protestor (ITP) code sets your case aside for scrutiny by the Criminal Investigation Division, you certainly should pay attention to the Troecher case.  The Ninth Circuit wouldn't want you to give the government information that they could use in a criminal case.  Congratulations on the ITP designation, it is now clear that you can assert the Fifth if the IRS asks you any questions. --Willie