Posted by: Robert Horwitz | April 25, 2020

Fifth Circuit Affirms District Court Order Enforcing John Doe Summons Issued to Texas Estate and Tax Planning Firm by Robert S. Horwitz

Eleven months ago I blogged on a district court decision in Taylor Lohmeyer Law Firm P.L.L.C. v. United States, 385 F.Supp. 3d 548 (W.D. TX 2019), enforcing a John Doe summons seeking documents for clients who between 1995 and 2017 used the firm to acquire, establish maintain or control any foreign account, asset or foreign entity, or any domestic or foreign account in such an entity’s name. https://www.taxlitigator.com/a-district-court-enforces-a-john-doe-summons-issued-to-a-law-firm-prefaced-by-a-brief-primer-on-john-doe-summonses-by-robert-s-horwitz/.  As expected, the law firm appealed the decision to the Fifth Circuit.  Although the firm raised several issues before the district court, its appeal raised only one issue: whether the attorney-client privilege protected the documents sought from disclosure.  The John Doe summons was issued  as the apparent result of an Offshore Voluntary Disclosure Program case involving a client (C-1) for whom the firm had established foreign accounts and entities and executed transactions involving those accounts and entities.

The firm argued that the summons was over broad and represented “an unprecedented intrusion into the attorney-client relationship.”  The firm further asserted that while the identity of a firm’s client is not generally privileged, it is if revealing the client’s identity would disclose confidential communications.  The Fifth Circuit rejected the firm’s argument and affirmed the enforcement order.

The Fifth Circuit began by noting that the federal law governing attorney-client privilege applies.  That privilege is interpreted narrowly to ensure that it is used strictly to achieve its purpose: to keep confidential communications made to secure a legal opinion, legal services or assistance in a legal proceeding.  This is especially true in cases involving IRS summonses given Congress’ “policy choice in favor of disclosure of all information relevant to a legitimate IRS inquiry.”  In the case of documents, the privilege must “be specifically asserted” as to “particular documents.”  The identity of a client is not shielded by the privilege unless revealing it would reveal a confidential communication.  An example given by the Fifth Circuit was “where revelation of such information would disclose other privileged communications such as the confidential motive for retention.”

The firm relied on two cases to support its position:  Reyes-Requena, 926 F.2d 1423 (5th CIR. 1991), and United States v. Liebman, 742 F.2d 807 (3rd CIR. 1984).  The Fifth Circuit distinguished both cases.  In Reyes-Requena, involving a grand jury subpoena, the court was presented with documents under seal and the identity sought was that of the person who was paying the target’s fees, which was being done for joint representation in a criminal case. In Liebman, the IRS issued a John Doe summons for the identities of all clients who were advised by the firm that certain legal fees were deductible, so that by its terms the summons was designed to disclose the substance of privileged communications.

According to the Fifth Circuit, the summons issued to the firm did not seek the substance of any confidential communication and an affidavit submitted by one of the firm’s partners undermined its position since the partner stated C-1, unlike other clients, did not follow the firm’s advice.  The Fifth Circuit noted that the IRS did not indicate it knew the substance of the firm’s legal advice and that it sought documents concerning “any client” on whose behalf the firm formed or acquired “any” foreign entity or opened or maintained “any” foreign account.

Determining that the clients’ identities were not “inextricably” connected with a privileged communication, the Fifth Circuit held that the exception to the rule that a client’s identity is not privileged is inapplicable.  At this point, the firm will need to decide whether it will petition for rehearing en banc and, if it is unsuccessful, petition the Supreme Court for a writ of certiorari.  If it ultimately is required to comply with the summons, it can still assert the privilege as to specific documents in a privilege log.

Two points of the Fifth Circuit’s decision were troubling:  First, the Fifth Circuit at the beginning of its discussion stated that “where revelation of [the client’s identity] would disclose other privileged communications such as the confidential motive for retention” then the privilege would shield disclosure.  Here the summons didn’t ask for the identity of clients who were retained by the firm concerning foreign accounts or entities, but clients who “used the firm” to set up foreign accounts and foreign entities.  To my mind this is a situation where revealing the identity of the client would disclose the “confidential motive for retention.”  As such, the substance of the inquiry by the IRS, rather than the selection of words, would fall under the shield noted by the court at the outset of the opinion.

Second, the Fifth Circuit’s statement about the privilege being narrowly interpreted, especially given Congress’ policy choice in favor of disclosure to the IRS.  Is this an indication that where the IRS seeks information privilege claims will be more narrowly construed than in instances where some other entity or person seeks the same information?

Contact Robert S. Horwitz at horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions.


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