Law Firm Seeks Stay of Enforcement of John Doe Summons

TAYLOR LOHMEYER LAW FIRM, PLLC,
Petitioner,
v.
UNITED STATES OF AMERICA,
Respondent.

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION

Honorable Xavier Rodríguez
U.S. District Judge

TAYLOR LOHMEYER LAW FIRM
PLLC'S MOTION FOR STAY PENDING APPEAL

TO THE HONORABLE JUDGE RODRIGUEZ:

Pursuant to Federal Rule of Civil Procedure 62, Taylor Lohmeyer Law Firm PLLC respectfully requests the Court to stay the order granting United States of America's counter-petition to enforce the summons (Docket No. 15) pending Taylor Lohmeyer's appeal of that order to the United States Court of Appeals for the Fifth Circuit. In the alternative, Taylor Lohmeyer requests the Court to stay the appealed order long enough for the Fifth Circuit to consider a motion to stay pursuant to Federal Rule of Appellate Procedure 8, which Taylor Lohmeyer will file if this Court does not grant this motion.

Relevant Background

In a separate proceeding, United States of America filed an ex parte petition for leave to serve a “John Doe” summons to Taylor Lohmeyer, a law firm specializing in estate and tax-planning law.¹ The Government supported its petition with a declaration signed by Revenue Agent Joy Russell-Hendrick in which she swore, under penalty of perjury, that the information she provided is true in all respects. Docket 8-4 at 39.

In her declaration, Russell-Hendrick described her involvement with an “Offshore Compliance Initiatives Program,” which she says “develops . . . techniques for identifying United States taxpayers who are involved in abusive offshore transactions . . . for tax-avoidance purposes.” Id. at 2. According to Russell-Hendrick, those taxpayers “relied on U.S. professionals to . . . provide legal advice” concerning tax-avoidance transactions. Id. at 5-6 (emphasis added). She goes on to describe her investigation of “Taxpayer-1,” who she says hired Taylor Lohmeyer for such legal advice. Id. at 6.

Specifically, according to Russell-Hendrick, “Taxpayer-1 came to Taylor² seeking advice on how he could save some tax on his investment activities because Taxpayer-1 had heard that Taylor was familiar with taxation matters involving foreign trusts.” Id. at 9. According to Russell-Hendrick, Taylor then advised Taxpayer-1 “that he could borrow money from the offshore structure without U.S. tax obligations” and that “no income was reportable from the offshore arrangement.” AZ at 16, 13.

Russell-Hendrick claims that Taxpayer-1 accepted Taylor's legal advice “with respect to Taxpayer-1's creation and use of the offshore structures” and “never told his return preparer about the offshore structure.” Id. at 7, 13. According to Russell-Hendrick, as a result of Taxpayer-1's reliance on Taylor's legal advice, he had had unpaid income tax liability of over $2 million and “agreed to pay almost $4 million to resolve his unpaid tax, interest, and penalties.” Id. at 24.

Russell-Hendrick became convinced that Taylor Lohmeyer gave the same advice to other clients. Because she does not know their identities, she developed a broad summons for Taylor Lohmeyer's documents that she believes will uncover “substantial evidence regarding the identity of the U.S. taxpayers with offshore structures used to avoid or evade taxes.” Id. at 31; see also Docket No. 4-3. Among other things, from January 1, 1995, through December 31, 2017, the summons describes:

• “Documents, including . . . client account records and client billing records reflecting any U.S. clients at whose request . . . you . . . acquired or formed any foreign entity, . . . foreign financial account, or assisted in the conduct of any foreign financial transaction.”

• “All . . . data . . . concerning the provision of services to U.S. clients relating to setting up offshore financial accounts . . . including . . . client forms . . . invoices and statements . . . all records of communications with clients . . . and billing statements and records of payments remitted by clients.”

• “All . . . data . . . concerning the provision of services to U.S. clients relating to the acquisition, establishment or maintenance of offshore entities or structures of entities, including . . . documents describing the service . . . all records of communications with clients . . . and billing statements and records of payments remitted by clients.”

• “The names of all persons or entities acting as advisors and the names of all person or entities acting as clients on the subject matter covered by the document.”

Docket No. 4-3 (emphasis added).

By virtue of the ex parte nature of the proceeding, Taylor Lohmeyer was not given the opportunity to review and object to the summons, and thus the Court granted the Government's request to serve it. See Docket No. 14 at 7.

Taylor Lohmeyer filed a petition to quash the summons and a supporting memorandum because the documents are protected by the attorney-client privilege. Docket Nos. 1 and 1-1. In response, the Government filed a counter-petition to enforce the summons. Docket No. 4.

The parties briefed the applicability of the attorney-client privilege as it relates to a law firm's clients' identities, and, more specifically, whether identities are privileged under cases like United States v. Liebman, 742 F.2d 807 (3rd Cir. 1984). See Docket Nos. 1, 5, 7, 8, 9, 11, and 12. In that case, the IRS accused a law firm of erroneously advising its clients that attorneys' fees they paid the firm for the acquisition of real estate partnerships were tax deductible.³ Because the IRS did not know the identities of clients who received this advice, it issued a summons to the law firm seeking all documents that revealed their identities. The law firm objected, claiming that the documents were protected by the attorney-client privilege. The Third Circuit agreed, holding that the “identity, when combined with the substance of the communication as to deductibility that is already known, would provide all there is to know about a confidential communication between the taxpayer-client and the attorney.”⁴ Id. at 810. That is precisely the situation here.

According to Russell-Hendrick's sworn declaration, Taylor Lohmeyer advised its clients that “no income was reportable from the offshore arrangement,” which is the primary basis for her belief that the firm's documents “will contain substantial evidence regarding the identity of the U.S. taxpayers with offshore structures used to avoid or evade taxes.” Additionally, Fred Lohmeyer, Robert Taylor's former law partner, attested that “[t]he Government is already aware of the general nature of the confidential communications with the Does based on the prior audit of Taxpayer-1” and the Government's requests in the summons are directly tied to the legal services the Taylor Lohmeyer provided to Taxpayer-1. Docket No. 8-1 at 5. In short, the rule from Liebman applies here.

The Government urged the Court to not follow Liebman, claiming the case is distinguishable because “the Third Circuit held that the summoned client identities were protected under the attorney-client privilege because the summons was framed in terms of the advice given — the summons sought the identities of those clients who had been advised that they could deduct, rather than amortize, certain fees paid to them.” Docket No 7 at 10 (citing Liebman, 742 F.2d at 809) (emphasis added). Thus, according to the Government, Liebman does not apply because the summons specifically targeted confidential attorney-client communications and not merely documents reflecting client identities. The Government, however, misconstrued the Third Circuit's opinion.

The summons was not framed in terms of the advice give. Rather, as in this case, the IRS agent's declaration recounted the fact that the IRS was already aware of the confidential communications. See Liebman, 742 F.2d at 809 (“[T]he affidavit . . . goes on to reveal . . . that 'taxpayers . . . were advised . . . that the fee was deductible for income tax purposes'”) (emphasis added). All that was lacking was the identities of the clients who received the advice. Because the IRS did not know the identities of the firm's clients, the summons broadly requested all “books, records, papers, billing ledgers and any other date which contains, reflects, or evidences the names, addresses and/or social security numbers of clients who paid fees in connection with the acquisition of real estate partnerships interest in 1978, 1979, and/or 1980.”

Id. at 808. Thus, the summons was framed in terms of identifying the clients who used the firm for the specified transactions, which is the same situation here. As Russell-Hendrick stated in her declaration, the summons is intended to “help the Service identify U.S. taxpayers who may have used Taylor Lohmeyer PLLC's services to establish offshore entities or accounts to avoid the payment of U.S. taxes.” Docket 8-4 at 31.

In granting the Government's counter-petition to enforce, the Court offered no substantive analysis of Liebman, other than to credit the Government's attempt to distinguish it. See Docket No. 15 at 9 (citing Docket No. 7 at 10) (“The Government distinguishes Liebman"). Taylor Lohmeyer submits that the Court erred by not applying Liebman and by requiring it to perform a document-by-document review of 32,000 pages to establish the privilege. Accordingly, Taylor Lohmeyer timely appealed the Court's decision. Docket No. 17.

With the appeal pending, the Government recently indicated that it may file a motion to compel. Accordingly, Taylor Lohmeyer requests the Court to grant this motion to stay pending appeal so the Fifth Circuit can rule on important attorney-client privilege issue.

Statement of the Issue

Should this Court stay the order granting United States of America's counter-petition to enforce the summons (Docket No. 15) pending Taylor Lohmeyer's appeal of that order to the United States Court of Appeals for the Fifth Circuit?

Standard of Review

“In determining whether to grant a stay pending appeal, this Court weighs: (1) whether the stay applicant has made a strong showing that it is likely to success on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of a stay will substantially injure the other parties interested in the proceeding; and (4) where the public

interest lies.” Wood v. Collier, 836 F.3d 534, 538 (5th Cir. 2016). “In evaluating these factors, this court has refused to apply them 'in a rigid . . . [or] mechanical fashion.'” Campaign for Southern Equality v. Bryant, 773 F.3d 55, 57 (5th Cir. 2014). With respect to the first element, a movant “need only present a substantial case on the merits when a serious legal question is involved.” Id.

Argument

I. Taylor Lohmeyer has a substantial case on the merits and is likely to succeed on appeal.

Taylor Lohmeyer respectfully maintains that the Court erred in granting the Government's counter-petition because Liebman, which the Fifth Circuit has cited favorably,⁵ is indistinguishable, and the primary authority on which the Court relied in its order does not apply.

As noted, in Liebman, the IRS claimed that the law firm erroneously advised its clients that the attorneys' fees that they paid the firm for the acquisition of real estate partnership interests were tax deductible. Liebman, 569 F.Supp. at 763. Because the IRS did not know the identities of the firm's clients, it issued a summons for the firm's “books, records, papers, billing ledgers and any other data which contains, reflects, or evidences the names, addresses and/or social security numbers of clients who paid fees in connection with the acquisition of real estate partnership interests in 1978, 1979, and/or 1980.” See Liebman, 742 F.2d at 808. The district court rejected the firm's attorney-client privilege claim, and the firm appealed.

In deciding whether responsive documents were privileged in this situation, the court reviewed the summons in the context of the IRS agent's declaration. Because the affidavit revealed that the IRS was aware of the firm's legal advice, the court reversed the district court, holding “this case falls within the situation where 'so much of the actual communication had already been established, that to disclose the client's name would disclose the essence of a confidential communication.”⁶ Id. at 809. Therefore, “[d]isclosure of the identity of the client would breach the attorney-client privilege to which that communication is entitled.” Id. at 810. Taylor Lohmeyer's clients are entitled to the same protections.

Here, as in in Liebman, the Government submitted an IRS agent's declaration to attempt to justify the summons, Docket 8-4; the declaration sets forth the IRS's belief that the firm gave tax advice to clients in connection with certain transactional work, id. at 5-6, 13, 16; the IRS is unaware of the identities of the firm's clients who may have received the advice; and the IRS issued a summons for all documents that reveal the clients' identities. Docket No. 4-3. Under Liebman, Jones, and Cherney, those documents are categorically privileged.

The Government's attempt to distinguish Liebman, which the Court appears to have credited, is easily refuted. According to the Government, the only reason the Third Circuit held that the documents were privileged was because the “summons was framed in terms of the advice given — the summons sought the identities of those client who had been advised that they could deduct, rather than amortize, certain fees paid to them.” Docket No. 7 at 10. As explained earlier, that simply is not the case. The summons, which said nothing about legal advice, broadly described “books, records, papers, billing ledgers and any other data which contains, reflects, or evidences the names, addresses and/or social security numbers of clients who paid fees in connection with the acquisition of real estate partnership interests in 1978, 1979, and/or 1980.”

See Liebman, 742 F.2d at 808. The summons in this case seeks the same kind of information, all of which is intended to reveal client identities so the Government can link the clients to the firm's advice.

Additionally, in the order granting the Government's counter-petition, the Court cited Hanse v. United States, No. 17-cv-4573, 2018 WL 1156201 (N.D. Ill. March 5, 2018), for the proposition that a “blanket” or categorical assertion of privilege is not proper and that privilege must be asserted on a document-by-document basis. Docket No. 15 at 11. Hanse, however, is distinguishable. In that case, a taxpayer, whose identity was already known, was being investigated by French tax authorities in connection with a transfer to a law firm's trust account. The IRS requested documents between that known taxpayer and the firm. The taxpayer objected, claiming that some of the documents were privileged. The court rejected the taxpayer's blanket privilege claim, noting that he did not even establish what he was a client of the firm.

Under Hanse, where the Government seeks a category of documents related to a known taxpayer that may include privileged advice, a claim of privilege must be asserted on a document-by-document basis. Here though, the Government maintains that it is already aware of the privileged advice; it just lacks awareness of the identities of the recipients of the advice. In this situation, the Government is not entitled to documents reflecting their identities because the “identity, when combined with the substance of the communication as to deductibility that is already known, would provide all there is to know about a confidential communication between the taxpayer-client and the attorney.” Liebman, 742 F.2d at 810.

Thus, the standard for establishing that the identity (as well as all other taxpayer information) is privileged has historically been established by a different (broader) standard than on a document-by-document basis. This makes sense given that the identity of the client is really all the government wants and it would be impractical to protect such identity on a document-by-document basis because of the difficulty in redacting documents to such a degree that the client's identity would be completely removed.

In sum, the Court should have relied on relevant privilege cases addressing instances where the Government sought the identities of unknown individuals (such as Liebman, Jones, Cherney, and DeGuerin) rather than an unpublished case from the Northern District of Illinois addressing a document request concerning a known taxpayer.

II. Taylor Lohmeyer will suffer irreparable harm absent a stay, and the public interest favors entry of a stay.

If the Court does not grant a stay, Taylor Lohmeyer, as well as its clients that are the target of the summons, will suffer irreparable harm. Cases like Liebman establish that, under the circumstances of this case, the law firm's clients' identities are protected by the attorney client privilege. As such, Taylor Lohmeyer, which does not own the privilege, is not at liberty to divulge the privileged information. Indeed, Taylor Lohmeyer has a duty to preserve the privilege and maintain client confidences. See Doe v. A Corp., 709 F.2d 1043, 1046 (5th Cir. 1983) (“The Code of Professional Responsibility seeks to safeguard both the attorney-client privilege and other confidential information”).

Further, from a practical standpoint, without a stay, Taylor Lohmeyer will be required to sift through 32,000 pages of documents and redact all information that would identify the clients' identities, including social security numbers, names, addresses, dates of birth, etc. and develop an extensive privilege log that will, inevitably, lead to additional hearings concerning the applicability of Liebman. Taylor Lohmeyer will also need to reach out to each individual client and allow them to hire representation, intervene in this matter, and determine the extent to which privilege should be asserted. Based on prior case law and in the interest of conserving resources, this is an exercise that should occur only if Taylor Lohmeyer is unsuccessful in the appellate process.

Granting a stay is also in the public interest. This is a serious case that has already garnered national attention⁷; and for good reason. “The attorney-client privilege,” after all, “is the oldest of the privileges for confidential communications known to the common law.” Upjohn v. U.S., 449 U.S. 383, 390 (1981) (citing 8 J. Wigmore, Evidence § 2290) (McNaughton rev. 1961)). “Its purpose is to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.” Id. “The privilege recognizes that sound legal advice or advocacy serves public ends and that such advice or advocacy depends upon the lawyer's being fully informed by the client.” Id. The Government's position in this case undermines the sanctity of the privilege, and the case should rightfully be stayed while the Fifth Circuit reviews the Government's position.

III. The Government will not suffer irreparable harm if the stay is granted.

The Government will suffer no harm if the Court grants the stay. As the Court recognized during the hearing, Taylor Lohmeyer has already complied and is preserving documents that are responsive to the summons. If Taylor Lohmeyer is not successful on appeal, the Government will be able to pursue non-privileged information in the manner set forth in the order just as it is attempting to do before the final resolution of the appeal.

Additionally, to the extent the Government is concerned about auditing before any periods of limitations run, a summons that is challenged tolls the period of limitations on assessment beginning six months after the summons is served (April 17, 2019 in this case) until the final resolution of the response. I.R.C. § 7609(e)(2); Treas. Reg. § 301.7609-5(d) (“If a third party's response to a summons for which the IRS was required to provide notice to persons identified in the summons, or to a John Doe summons described in section 7609(f), is not finally resolved within six months after the date of service of the summons, the periods of limitations are suspended . . . for the person with respect to whose liability the summons was issued and for any person whose identity is sought to be obtained by a John Doe summons”). Therefore, the period of limitations on assessment is already tolled and there is thus no risk to the Government if the stay is granted.

Conclusion

Taylor Lohmeyer Law Firm PLLC requests the Court to stay the order granting United States of America's counter-petition to enforce the summons (Docket No. 15) pending Taylor Lohmeyer's appeal of that order to the United States Court of Appeals for the Fifth Circuit. In the alternative, Taylor Lohmeyer requests the Court to stay the appealed order long enough for the Fifth Circuit to consider a motion to stay pursuant to Federal Rule of Appellate Procedure 8, which Taylor Lohmeyer will file if this Court does not grant the motion to stay pending appeal. Taylor Lohmeyer also requests any and all general relief to which it may be entitled.

Respectfully submitted,

Chamberlain, Hrdlicka, White
Williams & Aughtry

By: STEVEN J. KNIGHT
Texas Bar No. 24012975
steven.knight@chamberlainlaw.com
1200 Smith Street, Suite 1400
Houston, Texas 77002
Telephone: (713) 654-9603
Facsimile: (713) 658-2553

CHARLES J. MULLER III
State Bar No. 14649000
chad.muller@chamberlainlaw.com
LEO UNZEITIG
State Bar No. 24098534
leo.unzeitig@chamberlainlaw.com
112 East Pecan, Suite 1450
San Antonio, Texas 78205
Telephone: (210) 253-8383
Facsimile: (210) 253-8384