Government Argues Law Firm Can’t Make Blanket Privilege Claim

 

TAYLOR LOHMEYER LAW FIRM P.L.L.C.,
Plaintiff-Appellant
v.
UNITED STATES OF AMERICA,
Defendant-Appellee

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

ON APPEAL FROM THE ORDER OF THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS

BRIEF FOR THE APPELLEE

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

GILBERT S. ROTHENBERG (202) 514-3361
MICHAEL J. HAUNGS (202) 514-4343
DOUGLAS C. RENNIE (202) 305-7546
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

STATEMENT REGARDING ORAL ARGUMENT

Counsel for the Commissioner are of the view that oral argument would be helpful in this case in light of the unusual privilege claim at issue.

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TABLE OF CONTENTS

Statement regarding oral argument

Table of contents

Table of authorities

Glossary

Statement of jurisdiction

Statement of the issue

Statement of the case

Summary of argument

Argument

Conclusion

Certificate of service

Certificate of compliance

TABLE OF AUTHORITIES

Cases:

Agricultural Asset Mgmt. Co. v. United States, 688 F.2d 144 (2d Cir. 1982)

Baird v. Koerner, 279 F.2d 623 (9th Cir. 1960)

Battle v. Barton, 970 F.2d 779 (11th Cir.)

Canaday v. United States, 354 F.2d 849 (8th Cir. 1966)

Cavallaro v. United States, 284 F.3d 236 (1st Cir. 2002)

DeGuerin v. United States, 214 F. Supp. 2d 726 (S.D. Tex. 2002)

Doe v. United States (“In re Shargel”), 742 F.2d 61 (2d Cir. 1984)

Duffie v. United States, 600 F.3d 362 (5th Cir. 2010)

Estate of Duncan v. Commissioner, 890 F.3d 192 (5th Cir. 2018)

EEOC v. BDO USA, L.L.P., 876 F.3d 690 (5th Cir. 2017)

Eulich v. United States, 74 F. App'x 373 (5th Cir. 2003)

Eulich v. United States, No. CIV.A.3:99CV1842-L, 2004 WL 1844821 (N.D. Tex. Aug. 18, 2004)

Matter of Feldberg, 862 F.2d 622 (7th Cir. 1988)

Fisher v. United States, 425 U.S. 391 (1976)

Frank v. Tomlinson, 351 F.2d 384 (5th Cir. 1965)

Gannet v. First Nat. State Bank of New Jersey, 546 F.2d 1072 (3d Cir. 1976)

In re Grand Jury Investigation (“Harvey”), 769 F.2d 1485 (11th Cir. 1985)

In re Grand Jury Proceedings, 616 F.3d 1172 (10th Cir. 2010)

In re Grand Jury Proceedings (85 Misc. 140), 791 F.2d 663 (8th Cir. 1986)

In re Grand Jury Proceedings (“Browning Arms Co.”), 528 F.2d 1301 (8th Cir. 1976)

In re Grand Jury Proceedings (“Pavlick”), 680 F.2d 1026 (5th Cir. 1982) (en banc)

In re Grand Jury Subpoena (“Lipnack”), 831 F.2d 225 (11th Cir. 1987)

In re Grand Jury Subpoena (“Mr. S.”), 662 F.3d 65 (1st Cir. 2011)

In re Grand Jury Subpoena (“Reyes-Requena I”), 913 F.2d 1118 (5th Cir. 1990)

In re Grand Jury Subpoena (“Reyes-Requena II”), 926 F.2d 1423 (5th Cir. 1991)

In re Grand Jury Subpoenas, 561 F.3d 408 (5th Cir. 2009)

Hanse v. United States, No. 17-cv-4573, 2018 WL 1156201 (N.D. Ill. Mar. 5, 2018)

Hoffman v. United States, 341 U.S. 479 (1951)

Holifield v. United States, 909 F.2d 201 (7th Cir. 1990)

John Does v. United States, 866 F.2d 1015 (8th Cir. 1989)

Liew v. Breen, 640 F.2d 1046 (9th Cir. 1981)

In re Lindsey, 148 F.3d 1100 (D.C. Cir. 1998)

Maxton v. United States, 103 F.3d 126 (5th Cir. 1996)

Mazurek v. United States, 271 F.3d 226 (5th Cir. 2001)

McLaughlin v. Mississippi Power Co., 376 F.3d 344 (5th Cir. 2004)

Montgomery v. Leftwich, Moore & Douglas, 161 F.R.D. 224 (D.D.C. 1995)

Nguyen v. Excel Corp., 197 F.3d 200 (5th Cir. 1999)

Pollock v. United States, 202 F.2d 281 (5th Cir. 1953)

Reisman v. Caplin, 375 U.S. 440 (1964)

In re Santa Fe Int'l Corp., 272 F.3d 705 (5th Cir. 2001)

Steinert v. United States, 571 F.2d 1105 (9th Cir. 1978)

Sugarloaf Funding, LLC v. U.S. Dep't of Treas., 584 F.3d 340 (1st Cir. 2009)

In re Tax Liabilities of John Does, No. 5:18-mc-1046-XR (W.D. Tex.)

Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310 (1985)

United States v. Allee, 888 F.2d 208 (1st Cir. 1989)

United States v. Aronson, 610 F. Supp. 217 (S.D. Fla. 1985), aff'd, 781 F.2d 1580 (11th Cir. 1986)

United States v. Aronson, 781 F.2d 1580 (11th Cir. 1986)

United States v. Arthur Young & Co., 465 U.S. 805 (1984)

United States v. BDO Seidman, 337 F.3d 802 (7th Cir. 2003)

United States v. Bisceglia, 420 U.S. 141 (1975)

United States v. Blackman, 72 F.3d 1418 (9th Cir. 1995)

United States v. Brickey, 426 F.2d 680 (8th Cir. 1970)

United States v. Brigham Young Univ., 679 F.2d 1345 (10th Cir. 1982), vacated, 459 U.S. 1095 (1983)

United States v. Chagra, 754 F.2d 1181 (5th Cir. 1985)

United States v. Christensen, 828 F.3d 763 (9th Cir. 2015)

United States v. Clarke, 573 U.S. 248 (2014)

United States v. Davis, 636 F.2d 1028 (5th Cir. 1981)

United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982)

United States v. Evans, 113 F.3d 1457 (7th Cir. 1997)

United States v. First Bank, 691 F.2d 332 (7th Cir. 1982)

United States v. Goldberger & Dubin, P.C., 935 F.2d 501 (2d Cir. 1991)

United States v. Goldfarb, 328 F.2d 280 (6th Cir. 1964)

United States v. Gottlieb, 712 F.2d 1363 (11th Cir. 1983)

United States v. Hirsch, 803 F.2d 493 (9th Cir. 1986)

United States v. Huberts, 637 F.2d 630 (9th Cir. 1980)

United States v. John G. Mutschler & Assocs., Inc., 734 F.2d 363 (8th Cir. 1984)

United States v. Jones, 517 F.2d 666 (5th Cir. 1975)

United States v. Jones, 696 F.2d 1069 (4th Cir. 1982)

United States v. Lawless, 709 F.2d 485 (7th Cir. 1983)

United States v. Leventhal, 961 F.2d 936 (11th Cir. 1992)

United States v. Liebman, 742 F.2d 807 (3d Cir. 1984)

United States v. McKay, 372 F.2d 174 (5th Cir. 1967)

United States v. Medlin, 986 F.2d 463 (11th Cir. 1993)

United States v. Mississippi Power & Light Co., 638 F.2d 899 (5th Cir. 1981)

United States v. Palmer, 536 F.2d 1278 (9th Cir. 1976)

United States v. Ponder, 475 F.2d 37 (5th Cir. 1973)

United States v. Powell, 379 U.S. 48 (1964)

United States v. Richey, 632 F.3d 559 (9th Cir. 2011)

United States v. Riewe, 676 F.2d 418 (10th Cir. 1982)

United States v. Ritchie, 15 F.3d 592 (6th Cir. 1994)

United States v. Robinson, 121 F.3d 971 (5th Cir. 1997)

United States v. Rockwell Int'l, 897 F.2d 1255 (3d Cir. 1990)

United States v. Roundtree, 420 F.2d 845 (5th Cir. 1969)

United States v. Samuels, Kramer & Co., 712 F.2d 1342 (9th Cir. 1983)

United States v. Under Seal, 204 F.3d 516 (4th Cir. 2000)

United States v. White, 970 F.2d 328 (7th Cir. 1992)

Upjohn Co. v. United States, 449 U.S. 383 (1981)

Vingelli v. DEA, 992 F.2d 449 (2d Cir. 1993)

Statutes:

Internal Revenue Code (26 U.S.C.):

28 U.S.C.:

Miscellaneous:

Federal Rules of Appellate Procedure Rule 4(a)(1)(B)

Tax Haven Abuses: The Enablers, the Tools and Secrecy, Minority & Majority Staff Report, Permanent Subcomm. on Investigations, S. Hrg. 109-797, 109th Cong., 2d Sess. 9 (Aug. 1, 2006)

3 Jack B. Weinstein et al., Weinstein's Federal Evidence

GLOSSARY

Acronym	Definition
Br.	The Firm's opening brief on appeal
Doc.	Documents contained in the original record on appeal, as numbered by the Clerk of the District Court
Does	U.S. clients of the Firm who participated in transactions described in the summons whose identities are not known by the IRS
EP	Documents contained in the record in the ex parte proceeding In re Tax Liabilities of John Does, No. 5:18-mc-1046-XR (W.D. Tex.), as numbered by the Clerk of the District Court
Firm	Taylor Lohmeyer Law Firm P.L.L.C.
I.R.C.	Internal Revenue Code
IRS	Internal Revenue Service
ROA	Documents contained in the record on appeal, as numbered by the Clerk of the Court of Appeals

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STATEMENT OF JURISDICTION

The Internal Revenue Service (“IRS”) issued a “John Doe” summons to the Taylor Lohmeyer Law Firm P.L.L.C. (the “Firm”) seeking documents concerning an investigation to determine the identity and correct federal tax liability of U.S. taxpayers for whom the Firm performed certain services. (See ROA.83-100.)¹ The Firm

petitioned the District Court to quash the summons, and the Government counter-petitioned to enforce it. (ROA.5-7, 68-82.) The District Court had jurisdiction over the counter-petition pursuant to §§ 7402(b), 7604(a), and 7609 of the Internal Revenue Code (“I.R.C.” or “Code”) (26 U.S.C.) and 28 U.S.C. §§ 1340 and 1345.

On May 15, 2019, the District Court entered an order granting the Government's counter-petition to enforce the summons. (ROA.255-66.) On June 3, 2019, the Firm filed a notice of appeal. (ROA.269-70.) That notice was timely pursuant to Rule 4(a)(1)(B) of the Federal Rules of Appellate Procedure.

In its enforcement order, the District Court rejected the Firm's assertion of a blanket privilege claim, stating that it would “retain jurisdiction in this case pending any challenges by the Government of the Firm's privilege log, should the Firm produce one.” (ROA.265-66.) Even though the District Court retained jurisdiction to consider potential document-by-document privilege claims, the order appears to be “a final judgment on the merits.” United States v. Allee, 888 F.2d 208, 212 (1st Cir. 1989); but see Steinert v. United States, 571 F.2d 1105, 1107 (9th Cir. 1978) (suggesting that an enforcement order is not final until the district court “has determined what questions must be answered and what documents must be produced”).² Thus, this Court appears to have jurisdiction pursuant to 28 U.S.C. § 1291.

STATEMENT OF THE ISSUE

Whether a law firm may assert a blanket claim that all documents responsive to an IRS summons are protected by the attorney-client privilege without making a document-by-document showing that the materials reflect confidential communications made for the purpose of obtaining or conveying legal advice.

STATEMENT OF THE CASE

A. The nature of the case and course of proceedings below

Taylor Lohmeyer Law Firm P.L.L.C., the appellant, is a law firm that provides what it characterizes as estate and tax planning services. One of its clients used those services to create structures of offshore entities that helped him underreport his income by $5 million. The IRS's investigation of that individual led it to believe that other Firm clients may have engaged in similar conduct. Consequently, after receiving court approval in an ex parte proceeding, the IRS issued a “John Doe” summons under I.R.C. § 7609(f) to the Firm concerning the services the Firm provided to those unknown clients (the “Does”).

In the resulting action to enforce the summons, the Firm claimed that the Government had abused the judicial process by misleading the District Court in the ex parte proceeding. It also asserted a blanket claim that all documents responsive to the summons were protected by the attorney-client privilege. The District Court rejected the Firm's arguments and enforced the summons. Nonetheless, it indicated that the Firm could attempt to establish its privilege claims on a document-by-docment basis through a privilege log. The Firm appeals.

B. The IRS's efforts to combat offshore tax evasion and the IRS's investigation of Taxpayer-1

The IRS has long sought to investigate and deter U.S. taxpayers who evade their U.S. tax obligations by concealing unreported income in offshore tax havens. (ROA.85.) In pursuit of these efforts, it has conducted thousands of examinations which have shown that offshore tax evasion almost always involves a foreign financial account and often involves an offshore entity (e.g., corporation, trust, foundation) or structure of entities. (ROA.85.) These offshore entities are typically controlled through nominee directors or trustees, thereby concealing the true beneficial owner. (ROA.85.) Taxpayers using offshore entities in this manner often use professional service providers (many of whom are based in the U.S.) to open accounts, create and manage entities, move assets offshore, conduct transactions, make investments, and make use of their concealed assets in the U.S. (ROA.85-86.)

This problem has drawn Congressional scrutiny on several occasions. (ROA.163, 165.) Notably, in a bipartisan report, Congress concluded that “U.S. persons, with the assistance of lawyers, brokers, bankers, offshore service providers, and others, are using offshore trusts and shell corporations in offshore tax havens to circumvent U.S. tax, securities, and anti-money laundering requirements.” Tax Haven Abuses: The Enablers, the Tools and Secrecy, Minority & Majority Staff Report, Permanent Subcomm. on Investigations, S. Hrg. 109-797, 109th Cong., 2d Sess. 9 (Aug. 1, 2006)³ (hereinafter, “Tax Haven Abuses”). Professionals, including domestic tax attorneys, “advise and assist U.S. citizens on opening offshore accounts, establishing sham trusts and shell corporations, hiding assets offshore, and making secret use of their offshore assets here at home.” Id. at 1. Consequently, estimates indicated that, as of 2006, “Americans now have more than $1 trillion in assets offshore and illegally evade between $40 and $70 billion in U.S. taxes each year through the use of offshore tax schemes.” Id.

The individual referred to throughout the proceedings in this case as “Taxpayer-1” was one of these Americans who, with professional assistance, utilized offshore accounts and entities in an attempt to evade U.S. taxes. (See ROA.167.) Taxpayer-1 was a hedge fund manager who received “incentive” fees for managing foreign hedge funds. (ROA.169-70.) Prior to 1995, these fees were paid to a domestic S corporation and reported on Taxpayer-1's tax returns. (ROA.169-70.)

In 1995, an acquaintance, John Eulich,⁴ referred Taxpayer-1 to Robert Taylor, a lawyer and principal at the Firm. (ROA.27, 170; EP 1-3 at 211.) Thereafter, Taylor set up offshore entities for Taxpayer-1 in the Isle of Man and the British Virgin Islands. (ROA.167.) These entities included an Isle of Man corporation that would receive the incentive fees, which in turn, was owned by an Isle of Man trust. (ROA.170-71.) An internal memorandum described the purpose of the trust as “US tax avoidance.” (EP 1-3 at 50.) The trust was allegedly initially funded by its grantor, an investor in one of the offshore hedge funds, who contributed $15,000. (ROA.171.) However, the remainder of its assets (exceeding $5 million) came from the incentive fees paid to the corporation. (ROA.171.) The management agreements between Taxpayer-1 and the offshore hedge funds were amended so that the fees were paid to the Isle of Man corporation. (ROA.172.) That corporation did not employ anyone who could provide management advice; instead, Taxpayer-1 continued to directly advise the funds. (ROA.172-74.) Based on Taylor's advice, Taxpayer-1 did not inform his return preparer about the offshore entities or the incentive fees, which were not reported on his tax returns. (ROA.174.) Taylor subsequently set up additional foreign entities structured in a similar manner for Taxpayer-1's benefit. (See ROA.179-82.)

Taxpayer-1 retained the beneficial use of the assets of these entities, which was demonstrated by the facts that he: (a) directed how funds should be invested; (b) used trust assets to purchase an apartment in New York for his family's use (rent-free); (c) had Taylor purchase art with trust funds for his personal residence; and (d) had offshore funds loaned to his domestic businesses. (ROA.175-79.) The art and apartment, though selected by Taxpayer-1, were purchased (and the apartment was later sold) at Taylor's suggestion. (EP 1-3 at 214-15.)

Although these entities were purportedly funded by foreign persons, those individuals merely served as straw men who provided a de minimis amount of funding at creation and allowed their names to be used on documents and due diligence materials. (ROA.179-80.) And, although the trustees purportedly had discretion to make decisions on behalf of the trusts, they received directions from the Firm and other professionals acting on behalf of Taxpayer-1. (ROA.183-84.) At one point, Taylor directed a trustee to “white out” Taxpayer-1's name on an agreement between the hedge funds and the offshore corporation. (ROA.184-85; EP 1-3 at 103.) Taylor suggested that one of the trustee's names could be substituted, thereby removing any reference to Taxpayer-1 in the agreement. (See ROA.184-85; EP 1-3 at 103.) Taylor also informed the trustees that he had told “all U.S. clients that it is inadvisable” to contact the trustees directly and that the clients should make “suggestions through our firm.” (ROA.187; EP 1-3 at 105.) The record further demonstrates that Fred Lohmeyer, the Firm's other (and only surviving) principal (ROA.62), was also involved in the creation and management of such entities (ROA.189-91).

The IRS subsequently audited the joint returns that Taxpayer-1 had filed with his wife. (See ROA.136-37.) In March 2014, IRS Revenue Agent Joy Russell-Hendrick initially concluded that Taxpayer-1 had failed to properly report one of the foreign trusts despite receiving “competent legal advice” from the Firm. (ROA.116, 136.) As Agent Russell-Hendrick later explained, however, that initial determination was reached before she “was aware of the full extent of Taxpayer-1's offshore activities and [the Firm's] involvement with Taxpayer-1's offshore activities.” (ROA.136.) The IRS's subsequent investigation included interviews of both Taxpayer-1 and Taylor. (ROA.168; EP 1-3 at 210-27.)

In June 2017, Taxpayer-1 and his wife executed a closing agreement with the IRS admitting that he had underreported interest and investment income and was liable for a civil fraud penalty. (ROA.136-38, 185.) Taxpayer-1's unreported income between 1996 and 2000 exceeded $5 million, resulting in an unpaid income tax liability exceeding $2 million. (ROA.185.) The parties to the agreement resolved the income tax deficiencies, civil fraud penalties, and offshore penalties for $3.75 million. (ROA.137.) For the purposes of settlement, this resulted in an assessment of offshore penalties in lieu of the applicable income tax deficiencies, fraud penalties, and other international information return penalties. (ROA.137.)

C. The ex parte proceeding and the John Doe summons

During the course of its investigation, the IRS learned that some of the Firm's other clients may have also improperly utilized offshore entities and accounts to evade U.S. taxes. (See ROA.191.) Taylor told Agent Russell-Hendrick that he had created offshore entity structures for 20 to 30 clients. (EP 1-3 at 221.) Correspondence gathered during the audit also referenced other U.S. taxpayers involved with similar structures. (See ROA.187-89.)

The IRS accordingly sought to investigate taxpayers who utilized the Firm's services in a manner similar to the way Taxpayer-1 used them. (ROA.191-92.) To facilitate that investigation, the IRS sought permission to serve a “John Doe” summons on the Firm. (ROA.192.) Before issuing such a summons, the Code requires the Government to obtain court approval in an ex parte proceeding. I.R.C. § 7609(f), (h)(2).

In October 2018, the Government filed an ex parte petition seeking leave to serve its John Doe summons. (EP 1.) The petition was supported by a 39-page declaration from Agent Russell-Hendrick detailing the investigation into Taxpayer-1 and the Firm's involvement (ROA.162-200; EP 1-2), over 200 pages of exhibits (EP 1-3), and a memorandum of law (EP 2). In her declaration, Agent Russell-Hendrick relied on her interviews of Taxpayer-1 and Taylor, as well as the underlying documents submitted with her declaration.⁵ (See ROA.162-200; EP 1-3.) Agent Russell-Hendrick explained that the services the Firm provided to Taxpayer-1 and described by Taylor during an interview with the IRS were “hallmarks of offshore tax evasion.” (ROA.198.) This included the use of nominees to control foreign entities, “straw men” to act as foreign grantors contributing nominal funds to foreign trusts, and the concealment of the beneficial ownership of foreign accounts and assets. (ROA.198.) The IRS's investigation suggested that “still-unknown U.S. taxpayers” working with the Firm avoided reporting the existence of hidden entities and accounts, “expecting that the IRS would not discover the accounts, omitted income, and/or the existence of the entities.” (ROA.198.)

In its memorandum, the Government explained that issuance was warranted because the summons related to an ascertainable group or class of persons consisting of clients who used the Firm's services to acquire, establish, operate, or control foreign financial accounts, assets, or entities. (EP 2 at 5.) It also established that there was a reasonable basis for believing that these individuals failed to comply with the tax laws: Taxpayer-1 had used the Firm's services to conceal his ownership of foreign accounts and entities, and consequently, underpaid his taxes for multiple years, while Taylor admitted that he performed similar services for other taxpayers. (EP 2 at 6-11.) The materials summoned also could not be obtained without unreasonable burden because the Firm was the only known repository of the information sought. (EP 2 at 11-12.) The Government observed that “one of the apparent goals of this offshore structure was to create multiple layers of 'protection' for each client so as to make it difficult for the IRS to trace the assets and U.S. parties involved.” (EP 2 at 12.) It further noted that the proposed summons did not seek communications related to legal advice and that the Firm would still have the opportunity to raise privilege concerns during enforcement proceedings. (EP 2 at 12-13.) The District Court subsequently issued an order authorizing the IRS to serve the proposed summons on the Firm. (EP 3.)

The IRS served the summons on the Firm that same month. (ROA.84.) The summons sought information regarding U.S. persons who used the Firm's services to create and maintain foreign accounts and entities that may not have been properly disclosed on tax returns. (ROA.94-100.) For example, it sought: “All books, papers, records, or other data in your possession, custody, or control concerning the provision of services to U.S. clients relating to the acquisition, establishment or maintenance of offshore entities or structures of entities. . . .” (ROA.96.) It also sought similar information regarding several other subjects, including: (1) documents concerning “any U.S. clients” for whom the Firm created or maintained foreign entities or accounts; (2) “[a]ll books, papers, records, or other data” concerning services provided to U.S. clients to set up offshore financial accounts; (3) “[a]ll records of communications with offshore service providers utilized by [the Firm] to implement the services and/or structures purchased by [its] clients”; (4) specific records concerning foreign corporations established for U.S. clients, including articles of incorporation and bylaws; and (5) specific records concerning foreign trusts established for U.S. clients, including governing instruments and minutes of board meetings. (ROA.94-100.) The summons was restricted to U.S. clients from 1995 to 2017. (ROA.96.) And the summons provided specific instructions for withholding documents on privilege grounds, requesting the type of information typically found on a privilege log. (See ROA.91, 98-99.)

D. The present action concerning enforcement of the summons

In November 2018, the Firm commenced this action by filing a petition to quash the summons. (ROA.5-7.) In the supporting memorandum, the Firm argued that Agent Russell-Hendrick's declaration was “replete with misrepresentations and inaccuracies demonstrating a serious abuse of the summons process.” (ROA.11.) It suggested that the court should reconsider its findings from the ex parte proceeding. (ROA.229-30.) It nonetheless also conceded that it was not alleging “that the government is acting with sinister motive.” (ROA.18 n.4.) It further contended that it had given Taxpayer-1 “correct legal advice” and that it was Taxpayer-1 who “failed to carry out the instructions properly.” (ROA.14.) It also argued that the summons sought client identities protected by the attorney-client privilege because the summons sought those identities “based on the advice and services they sought from” the Firm. (ROA.21 (discussing United States v. Liebman, 742 F.2d 807 (3d Cir. 1984).)

The Firm relied on declarations from Lohmeyer in which he claimed that the Firm “generally provided legal services such as estate and tax planning that often included the establishment and administration of foreign trusts.” (ROA.149.) He also stated that the Firm's other clients who “engaged in foreign estate and tax planning” had “facts that are distinguishable” from Taxpayer-1 because “to the best of” his knowledge, the Firm “never advised any other client with respect to the treatment of earned income earned by a foreign corporation.” (ROA.26.) Nevertheless, citing Agent Russell-Hendrick's declaration (including references to Taylor's interview), he contended that the Government already knew the “general nature” of the Firm's communications with the Does. (ROA.152-53 & n.2.) He therefore asserted that the “substance of the ongoing legal advice to the clients” would be disclosed if the Firm were forced to reveal the Does' identities. (ROA.153.) In its memoranda, despite Lohmeyer's declaration that its other foreign estate and tax planning clients had “distinguishable” situations, the Firm argued that the services received by the Does “were similar to the legal services received by Taxpayer-1.” (ROA.145.) The Firm also conceded that it provided “business transaction services” to some of its clients “such as assisting with the purchase of assets and execution of loans.” (ROA.145.)

The Government then moved to dismiss the petition and counter-petitioned to enforce the summons. (ROA.68-82.) The Government argued that there was no jurisdiction over the petition to quash because the Code only allows a person “who is entitled to notice” to seek to quash a third-party summons, which does not apply in the context of a John Doe summons. (See ROA.69 (citing I.R.C. §§ 7609(a), (b)(2), (c)(3), (h)(1)).) It further contended that it was entitled to enforcement because the Powell factors were satisfied. (ROA.72-79 (citing United States v. Powell, 379 U.S. 48, 57-58 (1964)).) It also noted that it had previously made the showing required for issuance of the summons in the ex parte proceeding, and the District Court's findings in that proceeding could not be collaterally attacked in the enforcement action. (ROA.72-73 (citing United States v. Samuels, Kramer & Co., 712 F.2d 1342, 1346 (9th Cir. 1983)).) The Government further argued that the Firm was improperly asserting a “blanket” privilege over all responsive materials and that the District Court should enforce the summons and require the Firm to raise specific privilege objections on a document-by-document basis through a privilege log. (ROA.79-81.) The counter-petition was supported by an additional declaration from Agent Russell-Hendrick. (ROA.83-92.)

The District Court allowed the parties to submit additional memoranda, declarations, and exhibits in support of their positions. (ROA.103-22, 124-254.) In its submissions, the Firm indicated that it had reviewed its files and gathered materials responsive to the summons, consisting of 32,240 pages of documents. (See ROA.150, 159-60.) Of those thousands of pages of responsive documents, it submitted 22 pages of redacted samples of client billing records. (See ROA.154, 202-23.) Those limited records indicated that the Firm's services included reviewing loan information and financial statements (ROA.205), selling a home (ROA.206-07), handling fund transfers (ROA.207), discussing potential asset sales (ROA.211), reviewing trust arrangements (ROA.217, 219), and arranging debt payments (ROA.216).

E. The District Court's decision

Prior to issuing its order, the District Court heard argument. (ROA.274-317.) At that hearing, the court proposed, and the parties agreed, to proceed on the Government's counter-petition to enforce the summons “rather than go through the procedural stickiness of having to deal with the motion to quash.” (ROA.275.)

In May 2019, the District Court issued an order granting the Government's counter-petition to enforce the summons. (ROA.255-66.) The court initially noted that the court's findings in the ex parte proceeding were “not subject to challenge in [the] enforcement proceeding.” (ROA.257 (citing Samuels, Kramer & Co., 712 F.2d at 1346), 259.) Regardless, it concluded that even if the Firm could challenge those findings, Agent Russell-Hendrick's declaration established the necessary findings. (ROA.259-60.) The court then determined that the Government had “easily” made out a prima facie case for enforcement of the summons under Powell. (ROA.258-59.) It rejected the Firm's allegations of “false or misleading misrepresentations,” holding that the Firm failed to rebut the Government's showing. (ROA.261.)

The court then turned to the privilege issue. It initially noted that the Firm relied on Liebman and that the Government argued that Liebman was distinguishable. (ROA.263-64.) The court then found that the Firm's privilege arguments did not rebut the Powell showing (ROA.265), having noted that a “party seeking to assert the privilege must allege its applicability with specificity as to each document” (ROA.262 (citing United States v. El Paso Co., 682 F.2d 530, 539 (5th Cir. 1982); see also ROA.265 (citing Hanse v. United States, No. 17-cv-4573, 2018 WL 1156201, at *6 (N.D. Ill. Mar. 5, 2018)). It observed that the Firm's “sample billing records only show, at most, that some services were legal in nature and protected by privilege, but this does not show that the 32,000 [pages of] responsive documents the Firm claims to have are all privileged.” (ROA.265.) It held that the Firm had not carried its burden, “because blanket assertions of privilege are disfavored” and because the general discussion in Lohmeyer's declarations failed to establish the applicability of the “narrowly defined exception to the general rule that identities are not privileged.” (ROA.265.) Thus, it concluded that whether individual documents fell within the exception advanced by the Firm under Liebman would be “better decided individually or by discrete category” after production of a privilege log. (ROA.265.) The Firm now appeals.⁶ (ROA.269-70.)

SUMMARY OF ARGUMENT

The law requires the IRS to make inquiries and determine whether the taxes imposed by law are being correctly reported and paid. In support of that authority, Congress gave the IRS broad power to issue summonses so it may investigate possible violations of the law. One issue that Congress has been particularly concerned about in recent years is the use of offshore tax schemes to illegally evade taxes, which estimates indicate cost the Treasury billions of dollars in tax revenue every year. Tax Haven Abuses, supra, at 1.

The IRS issued the summons in this case to the Taylor Lohmeyer Law Firm P.L.L.C. after determining that one of that Firm's clients (Taxpayer-1) had used offshore structures set up with the Firm's assistance to hide $5 million in unreported income. The summons sought information concerning other Firm clients (the Does) who used similar Firm services. Because the IRS did not know the identity of the Does, the Government first obtained permission to issue the summons as a “John Doe” summons from the District Court in an ex parte proceeding, as required by I.R.C. § 7609(f).

In the subsequent action to enforce the summons, the Firm argued that the Government had abused the judicial process, and it asserted a blanket claim that all documents responsive to the summons (which it stated exceeded 32,000 pages) were protected by the attorney-client privilege. The Firm did not attempt to make a document-by-document or even category-by-category showing that the privilege applied. The District Court rejected the Firm's arguments, holding that the Government had satisfied the requirements for enforcement of the summons. And, although it rejected the Firm's blanket privilege defense, it held that the Firm could nonetheless submit a privilege log and attempt to show that the privilege applied on a document-by-document basis, as this Court's precedent requires. The Firm never submitted a privilege log.

The Firm now appeals, insisting that the District Court erred and that its blanket claim is valid as a matter of law. It argues that the Does' identities are privileged under a narrow and rarely-applied doctrine that, it claims, relieves it of any obligation to show that the allegedly privileged information involved communications seeking or relaying legal advice.

The Firm's interpretation of the law is wrong for multiple reasons. First, the proponent of the privilege bears the burden of showing that it applies, including by demonstrating that the allegedly privileged matter involved a communication seeking or conveying legal advice. Second, the privilege must be asserted and established on a document-by-document basis, not as a blanket claim. Third, client identities are generally not privileged.

The narrow circumstances where client identities are privileged only occur where disclosure of the client's identity would also necessarily disclose a confidential communication of legal advice. Here, the responsive documents would merely disclose that the Does participated in transactions involving foreign entities and accounts, which is not inherently improper. Nor would that information necessarily disclose their motives for participating in those transactions or any legal advice they sought or received from the Firm. And, although the Government knows some of the advice the Firm gave to Taxpayer-1, it does not follow that the Government must already know the advice the Firm provided to the Firm's various other clients over a 20-year period.

The IRS's summons authority reflects Congress's policy choice in favor of disclosure of all information relevant to a legitimate IRS inquiry. The attorney-client privilege should not be applied in a manner that interferes with the administration of justice and incentivizes the use of lawyers to carry out illegal schemes. The District Court's decision in this case was narrow and reasonable, and should be affirmed.

ARGUMENT

The District Court correctly enforced the IRS summons and determined that the Firm's privilege claims should be evaluated on a document-by-document basis

Standard of review

“In reviewing the district court's grant of a motion to enforce a summons, [this Court] accept[s] all facts found by the district court unless they are clearly erroneous.” Mazurek v. United States, 271 F.3d 226, 229 (5th Cir. 2001); see also United States v. Medlin, 986 F.2d 463, 466 (11th Cir. 1993) (“An order enforcing an IRS summons will not be reversed unless clearly erroneous.”). The Court reviews “legal issues de novo.” Duffie v. United States, 600 F.3d 362, 364 (5th Cir. 2010).

A. The District Court correctly enforced the summons

1. The IRS has authority to issue, and the courts have authority to enforce, summonses

The United States has a system of taxation that relies on voluntary compliance and the good faith and integrity of each taxpayer. United States v. El Paso Co., 682 F.2d 530, 545 (5th Cir. 1982). Nonetheless, “it would be naive to ignore the reality that some persons attempt to outwit the system.” United States v. Bisceglia, 420 U.S. 141, 145 (1975). Accordingly, “Congress has 'authorized and required' the IRS 'to make inquiries, determinations, and assessments of all taxes' the Internal Revenue Code imposes.” United States v. Clarke, 573 U.S. 248, 249-50 (2014) (quoting I.R.C. § 6201(a)). “[I]n support of that authority, Congress has granted the Service broad latitude to issue summonses 'for the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax . . . or collecting any such liability.'” Id. at 250 (quoting I.R.C. § 7602(a)) (alteration marks omitted); see also I.R.C. § 7602(b) (clarifying that the purposes for which a summons may be issued “include the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws”). The summons authority “is not for the purpose of accusing but of inquiring.” United States v. Goldberger & Dubin, P.C., 935 F.2d 501, 503-05, 507 (2d Cir. 1991) (citing United States v. Arthur Young & Co., 465 U.S. 805, 816 (1984)).

Summonses that are directed to third parties in the matter of the tax liability of another are subject to special procedures prescribed by I.R.C. § 7609. Congress required the IRS to give notice of any third-party summons seeking the production of documents with respect to “any person . . . who is identified in the summons.” I.R.C. § 7609(a). Where, however, “the IRS does not know the identity of the taxpayer under investigation, advance notice to the taxpayer is, of course, not possible.” Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 316-17 (1985). In such a case, the IRS must obtain judicial approval pursuant to I.R.C. § 7609(f) prior to issuing a summons. Id. at 317. A summons issued pursuant to I.R.C. § 7609(f) is known as a “John Doe summons.” Id. at 313 & n.4; United States v. Gottlieb, 712 F.2d 1363, 1364 (11th Cir. 1983).

In the context of John Doe summonses, § 7609(f) imposes three pre-issuance requirements. See United States v. Ritchie, 15 F.3d 592, 600 & n.10 (6th Cir. 1994). The Government must establish that: (1) “the summons relates to the investigation of a particular person or ascertainable group or class of persons”; (2) “there is a reasonable basis for believing that such person or group . . . may fail or may have failed to comply” with the internal revenue laws; and (3) “the information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.” I.R.C. § 7609(f). That determination is to be made in an ex parte proceeding, and solely based on the Government's petition and supporting affidavits. Ritchie, 15 F.3d at 600 n.8 (citing I.R.C. § 7609(h)(2)).

Once a summons is issued, it is not self-enforcing. If the person to whom a summons is issued fails to comply, the Government must seek judicial enforcement under I.R.C. §§ 7402(b) and 7604(a). To obtain enforcement of a summons, the Government must meet the standards set forth in United States v. Powell, 379 U.S. 48, 57-58 (1964), by demonstrating that the investigation is being conducted for a legitimate purpose, that the information sought may be relevant to that investigation, that the information sought is not already in the Government's possession, and that the administrative steps required by the Code have been followed. “The burden on the government to produce a prima facie case is 'slight' or 'minimal.'” Mazurek v. United States, 271 F.3d 226, 230 (5th Cir. 2001). It “can be fulfilled by a 'simple affidavit' by the IRS agent issuing the summons.” Id.; accord Clarke, 573 U.S. at 254.

“Once the IRS has made this showing, the burden shifts to the [summonee] to disprove one or more of the Powell requirements, or to show that enforcement would be an 'abuse of process.'” Sugarloaf Funding, LLC v. U.S. Dep't of Treas., 584 F.3d 340, 346 (1st Cir. 2009) (citation omitted); accord Mazurek, 271 F.3d at 230. “An abuse of the judicial process occurs when a summons is sought for an improper purpose, such as harassing the taxpayer, putting pressure on him to settle a collateral dispute or obtaining information solely for a criminal prosecution under the guise of a civil liability investigation.” Mazurek, 271 F.3d at 231 (citing, inter alia, Powell, 379 U.S. at 58) (alteration marks and internal quotation marks omitted). The burden of rebutting the Government's showing is a “'heavy'” one. Id. at 230.

The person summoned may also “challenge the summons on any appropriate ground,” Reisman v. Caplin, 375 U.S. 440, 449 (1964), including legal privileges, see Upjohn Co. v. United States, 449 U.S. 383, 398 (1981); United States v. Riewe, 676 F.2d 418, 420 & n.1 (10th Cir. 1982). Nonetheless, the Supreme Court has emphasized “that 'restrictions upon the IRS's summons power should be avoided absent unambiguous directions from Congress.'” Tiffany Fine Arts, 469 U.S. at 318 (quoting Arthur Young, 465 U.S. at 816); see also United States v. McKay, 372 F.2d 174, 176 (5th Cir. 1967) (explaining that the power is “greater than that of a party in civil litigation” and “analogous to that of the grand jury and one which should be liberally construed”). This is because the statute reflects a “congressional policy choice in favor of disclosure of all information relevant to a legitimate IRS inquiry.” Arthur Young, 465 U.S. at 816.

In the case of a John Doe summons, the summonee does not have the right to collaterally challenge the § 7609(f) determinations in an enforcement proceeding. See John Does v. United States, 866 F.2d 1015, 1018 (8th Cir. 1989); United States v. John G. Mutschler & Assocs., Inc., 734 F.2d 363, 366 (8th Cir. 1984); United States v. Samuels, Kramer & Co., 712 F.2d 1342, 1346 (9th Cir. 1983); Agricultural Asset Mgmt. Co. v. United States, 688 F.2d 144, 147-49 (2d Cir. 1982); but see United States v. Brigham Young Univ., 679 F.2d 1345, 1348 (10th Cir. 1982) (holding that a third party may question whether there was a reasonable basis for issuance of a John Doe summons as part of an attempt to show an abuse of process in an enforcement proceeding), vacated, 459 U.S. 1095 (1983).

2. The Government demonstrated that the Powell factors were satisfied, and the Firm failed to show any abuse of process

The District Court correctly determined that the Government “easily” satisfied the Powell factors through Agent Russell-Hendrick's declaration. (ROA.258-59.) First, the summons was issued for the proper purpose of investigating offshore tax evasion after its investigation of Taxpayer-1 indicated that he employed the Firm to hide unreported income. (See ROA.85-87.) Second, the material sought may be relevant to that proper purpose because it would reveal the identities and international activities of certain Firm clients who may not have properly reported their income during the relevant timeframe. (ROA.87-88.) Third, the information is not in the Government's possession. (ROA.91.) And fourth, Agent Russell-Hendrick indicated that the administrative steps required by the Code were followed. (ROA.92); cf. Maxton v. United States, 103 F.3d 126, 126 (5th Cir. 1996).

The District Court also correctly rejected the Firm's attempt to demonstrate an abuse of process. (ROA.259-62.) The Firm was not entitled to collaterally attack the ex parte determination. E.g., Samuels, Kramer & Co., 712 F.2d at 1346. And, even if it could, the Government had satisfied the I.R.C. § 7609(f) requirements by showing that the summons related to an ascertainable group of persons, there was a reasonable basis for believing that these persons may have failed to comply with the tax laws, and the information sought was not readily available from other sources. The Government established that the services described by Taylor and Taxpayer-1 in their interviews were the “hallmarks of offshore tax evasion,” that Taylor had admitted performing similar services for 20 to 30 clients, and that offshore structures can be used to hide the income, entities, and accounts from the IRS. (ROA.259-60.)

Moreover, the Firm's arguments that the Government “misled” the court were unavailing. (ROA.8 n.2.) The Firm's arguments were based on a variety of tenuous claims, including its contentions that the Government should have disclosed (a) Agent Russell-Hendrick's preliminary indication (years before the assessments were proposed) that the Firm provided “competent” advice to Taxpayer-1, (b) that no “tax assessment”⁷ was made against Taxpayer-1, and (c) that no “tax assessment” was ever made against John Eulich. (ROA.231-32.) The Firm also suggested that the court should accept Lohmeyer's assertion that the Firm provided legitimate advice to the Does and that Taxpayer-1 must have misapplied or failed to follow the Firm's advice. (ROA.53-54.)

The District Court properly rejected these contentions. (ROA.261.) The Firm pointed to nothing in the IRS's actions that could qualify as an improper purpose, such as harassment or an attempt to pressure it into settling a collateral dispute. See Mazurek, 271 F.3d at 231. Consequently, the District Court properly found that the Powell factors were satisfied and the Firm failed to demonstrate an abuse of process. In any event, the Firm has waived any challenges to those determinations by failing to raise them in its opening brief on appeal. E.g., Estate of Duncan v. Commissioner, 890 F.3d 192, 202 (5th Cir. 2018).

B. The court correctly rejected the Firm's blanket privilege defense

1. The attorney-client privilege

The attorney-client privilege protects “[c]onfidential disclosures by a client to an attorney made in order to obtain legal assistance.” Fisher v. United States, 425 U.S. 391, 403 (1976). “The purpose of the privilege is to encourage clients to make full disclosure to their attorneys.” Id. Nonetheless, because “the privilege has the effect of withholding relevant information from the fact-finder, it applies only where necessary to achieve its purpose.” Id. “Accordingly it protects only those disclosures necessary to obtain informed legal advice which might not have been made absent the privilege.” Id. Thus, the privilege “is interpreted narrowly.” EEOC v. BDO USA, L.L.P., 876 F.3d 690, 695 (5th Cir. 2017) (citing Fisher, 425 U.S. at 403; United States v. Robinson, 121 F.3d 971, 974 (5th Cir. 1997)).

The party invoking the privilege bears the burden of establishing it as a defense to enforcement of an IRS summons. El Paso, 682 F.2d at 538. That party “'must prove: (1) that he made a confidential communication; (2) to a lawyer or his subordinate; (3) for the primary purpose of securing either a legal opinion or legal services, or assistance in some legal proceeding.'” EEOC, 876 F.3d at 695 (quoting Robinson, 121 F.3d at 974). The proponent bears the burden of establishing these “'highly fact-specific'” elements. Id. at 695 (citation omitted). “[S]imply describing a lawyer's advice as 'legal,' without more, is conclusory and insufficient to carry out the proponent's burden of establishing attorney-client privilege.” Id. at 696.

“'[W]hat is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer.'” El Paso Co., 682 F.2d 538 (citation omitted). “'A communication is not privileged simply because it is made by or to a person who happens to be a lawyer.'” United States v. Evans, 113 F.3d 1457, 1463 (7th Cir. 1997); see also EEOC, 876 F.3d at 696. “'A client may not 'buy' a privilege by retaining an attorney to do something that a non-lawyer could do just as well.'” United States v. Under Seal, 204 F.3d 516, 523 (4th Cir. 2000). Put simply, “[t]here is no magic in a law license that would prevent a lawyer from being required to testify to acts of this kind.” Pollock v. United States, 202 F.2d 281, 286 (5th Cir. 1953).

Thus, documents that “relate to matters other than the giving of legal advice” necessarily fall “outside the attorney-client privilege.” United States v. Davis, 636 F.2d 1028, 1044 (5th Cir. 1981). It follows that the privilege does not apply to transactions where an attorney is acting as a “client's business advisor,” id., “banker,” or “real estate broker,” Pollock, 202 F.2d at 286. That includes documents reflecting a “simple transfer of title to real estate,” id., receipts, deposit slips or other records substantiating deposits, id. at 285, appraisal reports, McKay, 372 F.2d at 176-77, documents reflecting accounting services, Davis, 636 F.2d at 1043, records of the “receipt or disbursement of money or property to or from third parties,” id. at 1044, “[d]ocuments establishing trust funds,” id. at 1044 n.19, and tax returns “and other reports filed with the government,” id. at 1044.⁸ Therefore, “unless the communication is designed to meet problems that fairly can be characterized as predominantly legal, the privilege does not apply.” 3 Jack B. Weinstein et al., Weinstein's Federal Evidence § 503.13[3][c] (2d ed. 2019) (citing, inter alia, Davis, 636 F.2d at 1044).

“Ambiguities as to whether the elements of a privilege claim have been met are construed against the proponent.” EEOC, 876 F.3d at 695. In particular, given “the broad investigatory and subpoena authority given to agencies, courts have indicated that the privilege should be granted cautiously where administrative investigations are involved.” Id. These principles have “particular force in the context of IRS investigations given the 'congressional policy choice in favor of disclosure of all information relevant to a legitimate IRS inquiry.'” Id. at 696 (quoting Cavallaro v. United States, 284 F.3d 236, 245-46 (1st Cir. 2002), and Arthur Young, 465 U.S. at 816).

Moreover, even where the attorney-client privilege would otherwise apply, there are limits to its application. “'Under the crime-fraud exception to the attorney-client privilege, the privilege can be overcome where communication . . . is intended to further continuing or future criminal or fraudulent activity.'” In re Grand Jury Subpoenas, 561 F.3d 408, 412 (5th Cir. 2009) (citation omitted). Notably, this Court has acknowledged that illegal use of foreign trusts to evade taxes is a basis for invoking the crime-fraud exception. See id. at 409-10, 412; see also United States v. Chagra, 754 F.2d 1181, 1183 (5th Cir. 1985) (communications intended to complete criminal conspiracy of evading income tax payments were not privileged).

2. “Blanket” privilege claims are impermissible

This Court has repeatedly indicated that the “privilege must be specifically asserted with respect to particular documents” and “may not be tossed as a blanket over an undifferentiated group of documents.” El Paso, 682 F.2d at 539 (citing Davis, 636 F.2d at 1044 n.20, and United States v. Roundtree, 420 F.2d 845, 852 (5th Cir. 1969)). Blanket assertions of privilege “disable the court and the adversary party from testing the merits of the claim of privilege.” Id. at 541. As such, blanket claims are “simply inadequate.” Id.; accord In re Santa Fe Int'l Corp., 272 F.3d 705, 713 (5th Cir. 2001); Nguyen v. Excel Corp., 197 F.3d 200, 207 n.16 (5th Cir. 1999). Other circuits agree.⁹

This Court's decision in Davis illustrates this principle. There, the IRS had issued summonses to two attorneys concerning a shared client. 636 F.2d at 1031-32. The attorneys “made a blanket assertion of privilege and refused to comply with any part of the summons.” Id. at 1034. This Court explained that it “is generally agreed that the recipient of a summons properly should appear before the issuing agent and claim privileges on a question-by-question and document-by-document basis.” Id. at 1038.

In relevant part, this Court held that the summonses should have been enforced over the attorney-client privilege objections in most respects because the attorneys were performing non-legal services. 636 F.2d at 1043-44. The Court nonetheless concluded that some of the responsive information might be privileged. Id. at 1044. It held that on remand, one attorney would be allowed to attempt to demonstrate that the requirements were satisfied with respect to those materials on a document-by-document basis, despite the fact that his blanket claim arguably should have waived the privilege. Id. at 1044 & n.20. It warned that: “Future litigants who make only blanket assertions of privilege at enforcement proceedings should not expect such grace.” Id. at 1044 n.20.

Subsequently, in El Paso, 682 F.2d at 542, this Court held that a summonee making a blanket privilege claim “failed to meet its burden to assert the privilege specifically.” It noted that the summonee “had fair notice of the obligation to make its privilege claim precise” given the Court's guidance in Davis, and that it could not “excuse [the summonee's] failure to do so.” Id. at 541. Consequently, it held that the privilege did not preclude enforcement of the IRS summons. Id. at 541-42.

3. Client identities are not privileged absent “limited and narrow” circumstances

“As a general rule, client identity and fee arrangements are not protected as privileged.” In re Grand Jury Subpoena (“Reyes-Requena II”), 926 F.2d 1423, 1431 (5th Cir. 1991) (citing Jones, 517 F.2d at 670-71); accord United States v. Ponder, 475 F.2d 37, 39 (5th Cir. 1973) (citing Frank v. Tomlinson, 351 F.2d 384, 384 (5th Cir. 1965)). This is because a client's identity is not generally “the kind[ ] of disclosure[ ] that would not have been made absent the privilege and [its] disclosure does not incapacitate the attorney from rendering legal advice.” Vingelli v. DEA, 992 F.2d 449, 452 (2d Cir. 1993). Nonetheless, this Court has recognized a narrow exception to this generally-recognized rule.

This exception evolved out of the Ninth Circuit's decision in Baird v. Koerner, 279 F.2d 623, 630-35 (9th Cir. 1960), in which that court held that the privilege protected the identity of a client who hired an attorney to anonymously pay delinquent taxes. This Court applied the exception in Jones, 517 F.2d at 671-75. It explained that “[t]he cases applying the exception have carved out only a limited and rarely available sanctuary, which by virtue of its very nature must be considered on a case-to-case basis.” Id. at 671 (discussing, inter alia, Baird). The Court concluded that the exception applied on the “peculiar facts” of that case, which concerned subpoenas directed to attorneys seeking information about the benefactors who paid the attorneys' fees for various criminal drug defendants. Id. at 668, 675. As the Court later explained it, “the six attorneys drawn before the grand jury in Jones represented a generous portion of the criminal law bar of the lower Rio Grande Valley area, and the project was a rather broad attempt to canvass that portion for information detrimental to certain of its clients.” In re Grand Jury Proceedings (“Pavlick”), 680 F.2d 1026, 1027 (5th Cir. 1982) (en banc); see also Jones, 517 F.2d at 672-73. The Court also cautioned that its “decision should not be taken as any indication of how we would decide a similar question if the inculpatory value of sought-after testimony were less obvious or largely attenuated.” Jones, 517 F.2d at 675.

Subsequently, in Pavlick, 680 F.2d at 1027, the Court, sitting en banc, explained that this “limited and narrow exception to the general rule” was “one that obtains when the disclosure of the client's identity by his attorney would have supplied the last link in an existing chain of incriminating evidence likely to lead to the client's indictment.” But where the identification of a client merely “might lead” to an indictment, the privilege would not apply. See id. at 1027-28 n.2. The Court also observed that it did not apply to the circumstances of that case because the privilege “is not to be used as a cloak for illegal or fraudulent behavior.” Id. at 1028.

Baird and its progeny were subsequently criticized as applying the privilege “to gain a positive advantage for wrongdoers.” Weinstein, supra, § 503.14[5][b]. The courts took notice, cautioning against the exception “becom[ing] an immunity for corrupt or criminal acts.” Doe v. United States (“In re Shargel”), 742 F.2d 61, 64 (2d Cir. 1984). “Such a shield would create unnecessary but considerable temptations to use lawyers as conduits of information or of commodities necessary to criminal schemes or as launderers of money.” Id.

This Court subsequently clarified that its decisions on the subject “did not fashion a 'last link' or 'affirmative link' attorney-client privilege independent of the privileged communications between an attorney and his client.” In re Grand Jury Subpoena (“Reyes-Requena I”), 913 F.2d 1118, 1124 (5th Cir. 1990) (emphasis added). Rather, they held that “the attorney-client privilege shields the identity of a client or fee information only where revelation of such information would disclose other privileged communications such as the confidential motive for retention.” Id. at 1125 (emphasis added). This can occur where a client's identity is “connected inextricably with a privileged communication — the confidential purpose for which he sought legal advice.” Reyes-Requena II, 926 F.2d at 1431.

Reyes-Requena II, 926 F.2d at 1425-26, involved a grand jury subpoena directed to an attorney who represented a criminal drug defendant and a second, undisclosed client who paid the fees. The “narrow exception” applied because sealed filings established that the undisclosed client had sought legal advice from the attorney regarding the same drug bust for which the criminal defendant had been charged. Id. at 1432-33; cf. United States v. Hirsch, 803 F.2d 493, 499 (9th Cir. 1986) (privilege did not protect the identity of benefactor paying attorney fees where there was no evidence that the benefactor sought “legal advice in relation to personal involvement” in the alleged criminal activity), corrected on other grounds, 817 F.2d 64 (9th Cir. 1987). The present case plainly does not involve the Government's efforts to learn the identities of undisclosed benefactors paying the fees of drug conspiracy defendants akin to those discussed in Jones and Reyes-Requena, nor has the Firm suggested that the Does were involved in the same transactions as Taxpayer-1.

Other courts have evaluated the applicability of the Baird/Jones exception in circumstances similar to the present case and concluded that it did not apply. In United States v. BDO Seidman, 337 F.3d 802, 810-13 (7th Cir. 2003), the IRS had issued a summons to an accounting firm regarding clients who participated in tax shelters. Id. at 806. Several unnamed clients sought to intervene to assert that documents revealing their identities were protected by the statutory privilege protecting confidential communications between a taxpayer and tax practitioner. Id. at 805-07 (citing I.R.C. § 7525). That statutory privilege is modeled on the attorney-client privilege. Id. at 810.

The Seventh Circuit held that the privilege did not apply under this “narrow” doctrine because the clients had not established that a confidential communication would be disclosed if their identities were revealed. 337 F.3d at 811-12. Although disclosure of the client identities would “disclose to the IRS that the Does participated in one of the 20 types of tax shelters described in the summons,” it was “less than clear . . . as to what motive, or other confidential communication of tax advice, can be inferred from that information alone.” Id. at 812.

Similarly, in Ritchie, 15 F.3d at 595, the Sixth Circuit determined that an IRS summons issued to an attorney seeking the identities of his clients should be enforced. In that case, the summons sought information concerning clients who had made cash payments exceeding $10,000, including their identities, addresses, taxpayer identification numbers, and the nature of the services rendered. Id. at 595. In finding the summons enforceable, the court observed that “there is no reason to grant law firms a potential monopoly on money laundering simply because their services are personal and confidential.” Id. at 601. It also rejected the attorney's argument that the identities of the clients were privileged. Id. at 602. It noted that although it did not recognize the Jones exception, “even circuits that do approve of the last link doctrine have held on facts similar to those in the case at bar that the doctrine did not prevent enforcement of the IRS's summons.” Id. at 602 n.13 (citing United States v. Leventhal, 961 F.2d 936, 940-41 (11th Cir. 1992)).¹⁰

This case is akin to those authorities. As in BDO Seidman, 337 F.3d at 812, disclosure of the Does' identities would disclose to the IRS that the Does participated in certain transactions involving foreign accounts and entities described in the summons, but it is far from clear “what motive, or other confidential communication of [legal] advice, can be inferred from that information alone.”

In contrast, these authorities do not support the (incorrect) statement of the law forming the lynchpin of the Firm's privilege claim — namely, that “the documents do not have to reflect the legal advice to fall under the rule” set out by Jones. (Br. 8.) In fact, this Court rejected that very proposition in Reyes Requena I, 913 F.2d at 1124. “Nonprivileged information is not suddenly transformed into confidential communications . . . whenever it becomes relevant to” an investigation. In re Grand Jury Proceedings (85 Misc. 140), 791 F.2d 663, 665 (8th Cir. 1986). Thus, the narrow Jones exception does not apply on the facts of this case.

4. The “unusual” result in Liebman does not apply here

In support of its blanket-privilege claim, the Firm relies heavily on a self-described “unusual” decision — United States v. Liebman, 742 F.2d 807, 809 (3d Cir. 1984). But that decision does not support the Firm's attempt to apply the privilege in the absence of a communication seeking or providing legal advice. Nor does it apply on the present facts, where the IRS does not know what advice the Firm gave the Does. And the Firm cannot force the facts of this case to “fit” into the Liebman scenario by disclosing the general nature of the advice it gave the Does.

In Liebman, 742 F.2d at 808, the Third Circuit held that client identities were protected by the attorney-client privilege. There, the summonee was a law firm that charged fees to its clients who invested in certain real estate partnerships. Id. It advised the clients that the fees were deductible as legal expenses. Id. The IRS contended that the fees were non-deductible brokerage fees. Id. It issued a summons seeking various records containing identifying information for the clients who had paid the fees. Id. In the enforcement proceeding, the IRS agent averred that the clients had all been “advised by [the summonee] that the fee was deductible for income tax purposes.” Id. at 809. The district court ordered the law firm to disclose a list of client identities.¹¹ Id. at 808.

The Third Circuit reversed. 742 F.2d at 808. It initially acknowledged that client identity was not privileged “'absent unusual circumstances.'” Id. at 809 (citation omitted). It noted that “[i]f the summons merely requested the names of clients who paid fees, the information would not be protected by the attorney client privilege.” Id. Nonetheless, in the unusual circumstances of that particular case, the additional revelation of the client's name would have revealed the essence of the confidential communication, as the IRS “not only identifie[d] the subject-matter of the attorney-client communication,” but also “reveal[ed] the content of the communication” — i.e., the advice that the fees were deductible. Id. Thus, the court concluded that client identities were protected in that case because “the IRS request was limited to the group of persons who paid for specific investment advice” and “the IRS would automatically identify those who were told they could make the questionable deductions.”¹² Id.

For several reasons, Liebman does not support the Firm's arguments here. First, like Jones, Liebman does not stand for the proposition (Br. 8) that “documents do not have to reflect the legal advice” to be privileged under the narrow exception. Rather, in reaching its decision, the Third Circuit held that the advice at issue concerned “a legal matter” that would “ordinarily” be protected by the attorney-client privilege. 742 F.2d at 810. In doing so, it distinguished this Circuit's then-existing case law to the extent that it could be construed as supporting the proposition (later rejected in Reyes-Requena I) that the privilege could apply in the absence of a “protected communication.” Id. at 810 n.2 (discussing Pavlick, 680 F.2d at 1027). Regardless, to the extent that Liebman can be read as supporting the Firm's proposition, it is inconsistent with the law of this Circuit. This Court's decisions hold that for the privilege to apply at all, the communication at issue must seek or provide legal advice. EEOC, 876 F.3d at 696; El Paso, 682 F.2d 538; Davis, 636 F.2d at 1044.

Second, the unusual result in Liebman does not apply where the IRS is not seeking information based on the legal advice an unknown client received. See United States v. Aronson, 610 F. Supp. 217, 222 n.4 (S.D. Fla. 1985) (Liebman did not apply where “IRS summons at bar does not specify the type of legal advice provided [to the unnamed client], but rather seeks information about the corporate entities in which [the client] possesse[d] an interest”), aff'd, 781 F.2d 1580 (11th Cir. 1986).

In the present case, the IRS's summons broadly sought information concerning “any U.S. clients” who used the Firm's services to create or maintain foreign entities and accounts. (ROA.94-100 (emphasis added).) Although they may trigger reporting requirements, there is nothing inherently improper about these activities — indeed, they may be necessary depending on the client's circumstances. Similarly, consulting an attorney for tax planning does not raise an inference of tax evasion any more than consulting a criminal defense attorney raises an inference of past criminal conduct. Cf. In re Shargel, 742 F.2d at 64 n.4 (rejecting “out of hand the argument that a confidential communication about criminal activity may be inferred from consultation with a criminal law specialist”). The IRS knows that Taxpayer-1 used foreign accounts and entities to improperly evade taxes based, in part, on the advice both he and Taylor acknowledged that he received from the Firm. The IRS also has a basis to suspect the Firm may have performed similar services for the Does, providing a valid reason for inquiring further — which is the very purpose of the summons authority. See Arthur Young, 465 U.S. at 815-16.

Unlike in Liebman, however, here the IRS does not know that the Does engaged in the same fraudulent conduct as Taxpayer-1, nor does it know what advice the Firm gave the Does. Cf. DeGuerin v. United States, 214 F. Supp. 2d 726, 737 (S.D. Tex. 2002) (fact that the disclosure of benefactor's identity “might” cause the Government to initiate an investigation did “not transform the benefactor's name into a privileged communication”). Indeed, Fred Lohmeyer testified by declaration that the Firm's other clients had different factual situations from that of Taxpayer-1. (ROA.26.) Liebman, in contrast, involved a discrete group of clients paying for specific advice. The agent's declaration in Liebman indicated that the IRS knew that the unnamed clients had been advised that the fees paid regarding specific transactions were deductible. 742 F.2d at 809. Here, the Firm was involved in a wide variety of transactions over a 20-year period involving offshore entities and accounts for a variety of clients, presumably with a variety of motivations. Although Agent Russell-Hendrick knew based on her interviews what advice the Firm gave to Taxpayer-1, Agent Russell-Hendrick's declarations do not indicate that the IRS knows what specific advice the Firm gave the Does.¹³

Although Lohmeyer summarily declares that the Government knows the “general nature” of the advice the Firm provided to the Does because it knows what the Firm told Taxpayer-1 (ROA.153), those conclusory allegations did not actually establish what specific advice was given or that it was privileged. See Battle v. Barton, 970 F.2d 779, 781 (11th Cir. 1992) (privilege claimant's “say so” was not sufficient to establish the Fifth Amendment privilege (quoting Hoffman v. United States, 341 U.S. 479, 486 (1951)). Moreover, the “general nature of services” provided by a lawyer is not privileged. Nguyen, 197 F.3d at 206. Thus, unlike in Liebman, revealing the Does' identities will not automatically disclose that any of them have received specific legal advice from the Firm. And, in any event, Lohmeyer contradicted himself by claiming that the Does had “distinguishable” circumstances and did not receive advice concerning the treatment of income earned by foreign corporations. (ROA.155.)

Third, to the extent that Lohmeyer's declaration can be construed as affirmatively asserting that the Firm provided the same advice to the Does that it provided to Taxpayer-1 (ROA.151-53), the Firm cannot “bootstrap a privilege to protect” the Does' identities by disclosing the substance of the purported legal advice. Under Seal, 204 F.3d at 521. On the contrary, this type of disclosure would waive the privilege. See id. The Firm cannot have it both ways by simultaneously disclosing the substance of communications and claiming that those communications are also protected from disclosure by the privilege. In either case, by its own terms, the “unusual” result in Liebman does not apply here.

5. Policy considerations favor enforcement of the summons

Applying the Firm's proposed rule could have drastic consequences — both expanding the universe of materials covered by the privilege and contracting the IRS's summons power. A rule providing blanket protection is also particularly inappropriate here given the large number of non-privileged business services that the Firm admittedly provided to its clients.

Adopting the Firm's expansive interpretation of the law to support a blanket privilege claim on the present facts would “grant law firms a potential monopoly on” offshore tax evasion “simply because their services are personal and confidential.” Ritchie, 15 F.3d at 601. The privilege — “which rests on the assumption that free consultation enhances the administration of justice” — should not be applied “when non-disclosure interferes so strongly with the administration of justice.” Weinstein, supra, § 503.14[5][b]. The “goal of enabling lawyers to render informed legal advice and advocacy” “will suffer little if all involved are aware” that there is no “broad privilege against the disclosure of the identity of clients” that “might easily become an immunity for corrupt or criminal acts.” In re Shargel, 742 F.2d at 64. Nor can such an expansion of the privilege to conceal potential tax evasion be squared with this Court's precedent. See Pavlick, 680 F.2d at 1028-29.

The Firm's rule would also effectively curtail the IRS's ability to use its summons power in the John Doe context. The Government must establish a reasonable basis for issuing a John Doe summons prior to issuance, which it has done here. I.R.C. § 7609(f)(2). If it does so by showing one client obtained services from a law firm, then under the Firm's construction of the law, the Government would be precluded from ever obtaining enforcement of the John Doe summons against a law firm because it is already aware of services the law firm provided to that one client. Or, alternatively, the law firm could defeat enforcement by simply asserting (as Lohmeyer has) that the IRS must “already know[ ]” the advice it gave its other clients. (Cf. ROA.151); Under Seal, 204 F.3d at 521. The Firm tacitly acknowledges that this is its position. (See Br. 20 n.9.) But the law does not support such a restrictive reading of the IRS's summons authority, which is founded upon Congress's policy choice in favor of disclosure of all information relevant to a legitimate inquiry. See Tiffany Fine Arts, 469 U.S. at 318; ArthurYoung, 465 U.S. at 816; EEOC, 876 F.3d at 696. This is particularly true here, where it appears that the Firm intentionally set up these structures so that it was the only repository of information linking the Does to the offshore structures.

Rather, privilege claims should be evaluated on a “document-by-document” basis, as this Court's precedent indicates. See Davis, 636 F.2d 1038. It is notable that the Fi rm performed a wide variety of non-legal, business services for its clients. It performed numerous non-legal services for Taxpayer-1, including buying and selling real estate (ROA.175-76), buying artwork (ROA.177), structuring loans (ROA.177), identifying strawmen to serve as the nominal owners of trusts (ROA.181-82), arranging fund and asset transfers (ROA.183-84), and passing on investment “suggestions” to trustees (ROA.187). Similarly, corporate documents filed with foreign jurisdictions pursuant to local law would not be privileged. See Davis, 636 F.2d at 1044.

Even the limited number of invoices submitted by the Firm concerning the Does — cherry-picked to prop-up its arguments — actually indicate that its services encompassed a variety of business matters, including real estate, financial, and debt transactions, as well as asset purchases and sales. (ROA.205-07, 211, 216-17, 219.) The Firm itself previously conceded that it provided “business transaction services such as assisting with the purchase of assets and execution of loans.” (ROA.145.) These are services that could have been undertaken by non-lawyers and are not protected by the privilege. See, e.g., Davis, 636 F.2d at 1043-44 & n.19; Pollock, 202 F.2d at 285-86; Montgomery, 161 F.R.D. at 227. Although the Firm's appellate brief gratuitously labels all its services as “legal” in nature (see Br. 2-5, 8, 11), such self-serving proclamations carry no weight, EEOC, 876 F.3d at 696.

The District Court properly rejected the Firm's attempt to use the privilege to block disclosure of all such materials. That decision was both narrow and reasonable. The District Court did not hold, and the Government has not argued, that no responsive documents are privileged. Rather, under the District Court's order, the Firm and the Does had the opportunity to raise any privilege claims (including any claims regarding client identity) and attempt to establish a basis for all elements of the privilege (such as through a privilege log or in camera submissions). Such a procedure would have provided the District Court with the opportunity to evaluate those claims based on a full record and also address whether any exceptions (such as the crime-fraud exception) might apply. Cf. Grand Jury Subpoenas, 561 F.3d at 412. The District Court thus properly followed this Court's precedent requiring a document-by-document showing to establish the applicability of the privilege. Accordingly, its order should be affirmed.

CONCLUSION

The order of the District Court should be affirmed.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

Douglas C. Rennie

GILBERT S. ROTHENBERG (202) 514-3361
MICHAEL J. HAUNGS (202) 514-4343
DOUGLAS C. RENNIE (202) 305-7546
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

OCTOBER 2019