one of law: whether an officer-shareholder of a Subchapter S
corporation may invoke his fifth amendment privilege when the
corporate books and records, along with his testimony thereon,
are subpoenaed by the Internal Revenue Service.
The uncontroverted facts include the following: Petitioner
Kenneth L. Reger, an Internal Revenue Special Agent, has been
participating in an investigation to determine respondent's
federal tax liability for the years 1967 through 1970.
Respondent, Alvin Silverman, is president and one of three
shareholders of Tiffany Decorating Company ("Tiffany"), a
corporation electing to be treated for tax purposes under the
provisions of Subchapter S of the Internal Revenue Code
(26 U.S.C. § 1372 and 1373). Two summonses were issued on October
8, 1971, directing Silverman to appear before Special Agent
Reger to testify and to produce certain corporate records and
documents in his possession which contained information
pertinent to the Special Agent's investigation. When respondent
appeared, he refused to testify or to produce Tiffany's
records, asserting that the fifth amendment privilege against
self-incrimination extended to him as an officer-shareholder of
a Subchapter S corporation.
In support of this refusal respondent contends (1) that a
Subchapter S corporation is not considered a corporation for
tax purposes; (2) that consequently a claim by the Internal
Revenue Service to examine the books and records of such a
corporation is subject to a shareholder's fifth amendment
privilege; and (3) that since the investigation includes a
determination of possible criminal violations of the Internal
Revenue it is subject to the fifth amendment privilege.
It is well settled that the privilege against
self-incrimination cannot be invoked in order to prevent the
disclosure of corporate records which might incriminate a
shareholder, even when the corporation constitutes a mere
alter ego of the owner. Hale v. Henkel, 201 U.S. 43, 26 S.Ct.
370, 50 L.Ed. 652 (1906); Wilson v. United States,
221 U.S. 361, 31 S.Ct. 538, 55 L.Ed. 771 (1911); Grant v. United
States, 227 U.S. 74, 33 S.Ct. 190, 57 L.Ed. 423 (1913).
Respondent has argued that Tiffany, as a Subchapter S
corporation, does not come within this rule since it is
treated as a partnership for tax purposes. However, an
examination of Subchapter S reveals that Congress did not
apply the partnership provisions of the Internal Revenue Code
("Code") to corporations electing under Subchapter S, but
rather provided for a "pass-through" of the corporate income
to the shareholders (26 U.S.C. § 1373). Moreover, the
corporation electing under Subchapter S files a return and is
subject to taxation on capital gains (26 U.S.C. § 1378).
Furthermore, since Treasury Regulation § 1.1372-1(c),
implementing the Code, declares that all other provisions
relating to corporations will apply to a Subchapter S
corporation, this Court must conclude that a Subchapter S
corporation is considered under the Code as a corporation, not
as a partnership. Indeed, the Seventh Circuit has ruled that
the Subchapter S method for channeling income from a
corporation to its shareholders "does not involve ignoring the
corporate entity." Byrne v. Commissioner of Internal Revenue,
361 F.2d 939, 942 (7th Cir. 1969). Thus, the holding in United
States v. Silverstein, 314 F.2d 789 (2d Cir. 1963) — that
owners of a partnership may invoke the fifth amendment
privilege when the partnership records are subpoenaed — is
inapplicable to the instant case.
Respondent's argument that a shareholder of a corporation
which is not a taxable entity under the Code may assert his
fifth amendment privilege is without merit. The case cited for
that proposition, Application of Daniels, 140 F. Supp. 322
(S.D.N.Y. 1956), although not controlling, involved the sole
owner of a foreign corporation which was not subject to
taxation under the Code. In fact, the court in
Daniels specifically stated that, while the books of a domestic
corporation are "always subject to inspection,"
140 F. Supp. at 325, "[w]e have here a unique corporate
situation to which [this] decision is limited." 140 F. Supp. at
327. In contrast, Tiffany is subject to taxation under the
Code, even though it receives special treatment in some
aspects of taxation.
Finally, with respect to respondent's contention that he has
a right to invoke his fifth amendment privilege in an
investigation of a criminal nature, the Court notes that the
proceedings at this stage do not involve criminal prosecution.
Since there is an intent here to pursue civil liabilities or
penalties, the summons is enforceable under 26 U.S.C. § 7602
even though the information sought may lead to criminal
penalties. Donaldson v. United States, 400 U.S. 517, 91 S.Ct.
534, 27 L.Ed.2d 580 (1971); United States v. Moriarty,
435 F.2d 347 (7th Cir. (1970).
For the foregoing reasons this Court finds that the
summonses should be enforced.
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