On Remand, Court Rejects President Trump's Challenge to Subpoena for His Tax Returns

(Parker Tax Publishing August 2020)

On remand from the Supreme Court, a district court rejected a complaint by President Trump that a subpoena of his tax returns to his accounting firm was overbroad and was issued in bad faith. The court, therefore, granted a motion by the District Attorney for the Southern District of New York to dismiss the complaint. Trump v. Vance, Jr., 2020 PTC 256 (S.D. N.Y. 2020).

Background

In 2019, the New York County District Attorney's Office, acting on behalf of a grand jury, served a subpoena on Mazars USA, LLP (Mazars Subpoena), the personal accounting firm of President Donald J. Trump, for financial records relating to the President and his businesses. The President, acting in his personal capacity, sued the district attorney and Mazars in the New York Southern District Court to enjoin enforcement of the subpoena, arguing that a sitting President enjoys absolute immunity from state criminal process under Article II and the Supremacy Clause. The district court dismissed the case (Trump v. Vance, 2019 PTC 391 (S.D. N.Y. 2019)) under the abstention doctrine of Younger v. Harris, 401 U.S. 37 (1971), and, in the alternative, held that the President was not entitled to injunctive relief. The Second Circuit, in Trump v. Vance, 2019 PTC 429 (2d Cir. 2019), rejected the district court's dismissal under Younger but agreed with the court's denial of injunctive relief, concluding that presidential immunity did not bar enforcement of the subpoena and rejecting the argument of the United States as amicus curiae that a state grand jury subpoena seeking the President's documents must satisfy a heightened showing of need.

The Supreme Court affirmed the decision of the Second Circuit and held that the President is not entitled to absolute immunity from the issuance of a subpoena, but remanded the case to the district court for further proceedings where, it said, the President can raise constitutional and legal objections to the state grand jury subpoena as appropriate. The Court concluded that Article II and the Supremacy Clause do not categorically preclude, or require a heightened standard for, the issuance of a state criminal subpoena to a sitting President.

On July 27, 2020, the President filed a Second Amended Complaint (SAC) in the Southern District of New York. In the SAC, the President claimed that the Mazars Subpoena was overly broad and issued in bad faith. The New York Southern District Attorney filed a motion to dismiss the SAC for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) (Rule 12(b)(6)).

Among the arguments cited by the President for not producing the requested tax returns were the following:

(1) the timing argument - the Mazars Subpoena was issued at some point after the President claimed that an earlier subpoena to the Trump Organization could not legitimately be read to request tax returns, and was issued during a time when news reports suggested Democrats desired access to the President's tax returns;

(2) the copying argument - the Mazars Subpoena (1) was copied almost entirely from the House Oversight Committee's subpoena to the Trump Organization and added only a request for tax returns - a request that the House Ways and Means Committee made in its subpoena to the Treasury Department and the IRS, and (2) the District Attorney did not issue the subpoena in good faith based on the District Attorney's representations that the decision to mirror the Congressional subpoena was about efficiency, meaning it was intended to facilitate the easy production by Mazars of a set of documents already collected, and to minimize any claim that the District Attorney's request imposed new and different burdens;

(3) the timeframe involved - the Mazars Subpoena was overbroad because it ordered the production of certain categories of documents from January 1, 2011, and requested production of other categories of documents regardless of time period.

Analysis

The district court granted the motion by the Attorney General of the Southern District of New York to dismiss the President's SAC. The district court began its analysis by discussing Rule 12(b)(6). It cited two Supreme Court cases, Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), which provide the criteria that must be met for a claim to survive a motion to dismiss under Rule 12(b)(6). To survive a motion to dismiss under Rule 12(b)(6), a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. This standard is met, the court said, when a plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged (i.e., in this case, issuing an overbroad subpoena in bad faith). Under Rule 12(b)(6), a complaint should be dismissed if the plaintiff has not offered factual allegations sufficient to render the claims facially plausible. However, a court should not dismiss a complaint for failure to state a claim if the factual allegations sufficiently raise a right to relief above the speculative level. The requirement that a court accept the factual allegations in the complaint as true, the court said, does not extend to legal conclusions or threadbare recitals of the elements of a cause of action, supported by mere conclusory statements.

With respect to the SAC's allegations regarding the timing argument, the court found that, while the President conclusorily describes the issuance of the Mazars Subpoena as retaliation for the President's refusal to produce tax returns under the Trump Organization Subpoena, the alleged fact pattern described did not render such an inference reasonable. The SAC lacked detailed factual allegations, the court noted - it neither included quotations from nor attached correspondence in which the District Attorney's communications indicated anything but good faith. Without additional factual allegations supporting the claim that the District Attorney prepared and issued the Mazars Subpoena "in a fit of pique" prompted by the refusal to produce tax returns, this sequence of events could obviously be explained in ways that do not impugn the presumptive validity of the Mazars Subpoena. First, the court stated, the District Attorney's decision not to argue that the Trump Organization Subpoena called for tax returns obviously need not reflect bad faith; normally, acquiescence in the face of another party's opposition is a sign of good faith negotiations. Similarly, the court observed, the District Attorney's choice to issue a new subpoena that explicitly called for tax returns could just as readily reflect either a good faith agreement that the President's interpretation of the Trump Organization Subpoena was valid or a conclusion that issuing a clearer subpoena would simply be preferable to prolonged arguments.

With respect to the issue of copying of the Mazars Subpoena, the court found that this allegation did not plausibly suggest that the subpoena was overly broad or issued in bad faith. The court noted that the President did not cite any authority for the proposition that a grand jury subpoena is invalid because it is copied from another source. On the contrary, the court said that its review of relevant case law suggested that the mere copying of other sources does not inherently render a grand jury subpoena overbroad or issued in bad faith.

With respect to the timeframe of the request for documents that might be so old as to be beyond the potentially applicable statute of limitations, the court found that this argument alone did not render a subpoena unreasonable. According to the court, no magic figure limits the vintage of documents subject to a grand jury subpoena; the law requires only that the time bear some relation to the subject matter of the investigation and be reasonable. It was clear to the court that, in accordance with the grand jury's broad investigatory powers, a grand jury subpoena may seek documents dating from years outside of the specific time period during which a crime is thought to have been committed.

The district court concluded that, in general, the President's allegations failed to adequately rebut the presumption of legitimacy that accords to grand jury subpoenas.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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