Government Opposes Stay of Enforcement of John Doe Summons

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

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

UNITED STATES' RESPONSE TO TAYLOR LOHMEYER'S MOTION TO STAY ENFORCEMENT OF THE SUMMONS [D.E. 19]

The United States responds in opposition to Petitioner's, Taylor Lohmeyer's, Motion to Stay Enforcement of the Summons [D.E. 19], as follows:

I. Relevant Factual Background

On May 15, 2019, the Court ordered enforcement of an IRS summons [D.E. 15] that was served on Taylor Lohmeyer, PLLC (“Taylor Lohmeyer” or the “Firm”), as the United States had complied with its obligations under Powell.¹ The Court rejected Taylor Lohmeyer's arguments that the United States made misrepresentations in its briefing, both in the ex parte proceeding, and the enforcement proceeding. Id at pgs. 6-8. The Court rejected Taylor Lohmeyer's argument that its blanket assertion of attorney-client privilege was sufficient to rebut the United States' Powell showing. However, the Court did not rule on whether the identities of the clients of Taylor Lohmeyer were subject to attorney-client privilege (or whether any individual documents were privileged). Id at pg. 11. Rather, the Court ordered Taylor Lohmeyer to prepare a privilege log, and carried all privilege issues pending challenges by the government to any privilege log (or similar device) produced. Id at 11-12.

II. Standard for Motion to Stay

In determining whether a stay pending appeal is appropriate, the Court weighs: (1) “whether the stay applicant has made a strong showing that it is likely to succeed 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.” Niken v. Holder, 556 U.S. 418, 427 (2009). A stay is an intrusion into the ordinary processes of administration and judicial review. Id (citations omitted). As such, a stay is not a matter of right, even if irreparable injury might otherwise result to the appellant. Id. The party requesting a stay bears the burden of showing that the circumstances justify an exercise of discretion in its favor. Id at 433-34.

III. The United States is likely to prevail on appeal

Taylor Lohmeyer appears to argue that this is a “serious legal question” and that it must only show a “substantial case on the merits” rather than a “likelihood of success on the merits.” [D.E.19, pg. 7]. However, as argued below, Taylor Lohmeyer is arguing against established Fifth Circuit case law with regard to its privilege claims. Nevertheless, whichever standard is used, Taylor Lohmeyer fails to meet it.

Contravening Fifth Circuit authority, Taylor Lohmeyer argues that it should not be ordered to produce a privilege log, because the Court should have followed the Third Circuit decision in Liebman [D.E. 19, pg. 7]. This is wrong because 1) there is clear law in the Fifth Circuit that it disfavors blanket assertions or attorney-client privilege; and 2) Taylor Lohmeyer's reliance on Liebman is premature and misplaced.

a. The Fifth Circuit disfavors blanket assertions of attorney-client privilege

Taylor Lohmeyer's blanket assertion of attorney client privilege was properly rejected by this Court. The Fifth Circuit has made it abundantly clear that blanket assertions of attorney-client privilege are unacceptable in IRS summons enforcement proceedings, even when the IRS issues a summons to a law firm for information on its clients. United States v. Davis, 636 F.2d 1028, 1044, n.20 (5th Cir. 1981)² (“Blanket assertions of privilege before a district court are usually unacceptable . . . Although Orr made no attempt to demonstrate in any specific way that any particular documents fell within the ambit of the privilege . . . there was enough confusion over the appropriate time to assert privilege that we will permit Orr to make the required showing on remand. Future litigants who make only blanket assertions of privilege at enforcement proceedings should not expect such grace.”); United States v. Finley,³ 434 F.2d 596, 597 (5th Cir. 1970) (“. . . appellant has sought to invoke the attorney-client privilege by means of a blanket refusal to testify. That utilization of such a vehicle for assertion of privileged matter is unacceptable and improper is clear beyond question and a claim to the contrary borders on the caviler.”). Thus, this Court was correct when it ruled that “the Firm's attorney-client privilege arguments do not meet its burden to rebut a Powell showing, in large part because the Firm makes a blanket assertion and does not produce a privilege log or similar device.” [D.E. 15, pg. 11]. See United States v. El Paso Company, 682 F.2d 530, 539 (5th Cir. 1982) (Court stating in IRS summons enforcement action against corporate taxpayer, “Finally, we have made clear that the attorney-client privilege may not be tossed as a blanket over an undifferentiated group of documents.”); United States v. Roundtree, 420 F.2d 845, 852 (5th Cir. 1969) (Court rejecting blanket refusal of taxpayer to appear pursuant to IRS summons and testify or produce documents on basis of Fifth Amendment privilege).

Even outside of the IRS summons context, the Fifth Circuit has clearly voiced its displeasure with blanket assertions of privilege. See; Nguyen v. Excel Corp., 197 F.3d 200, 206 n.16 (5th Cir. 1999) (“Blanket claims of privilege are disfavored”); In re Santa Fe Intern. Corp., 272 F.3d 705, 713 (5th Cir. 2001) (“The extraordinary writ of mandamus will not issue to grant Santa Fe's blanket request for protection of documents and communications not expressly claimed and shown to be privileged.”). Indeed, the submission of a privilege log, or similar device, is a basic requirement to withhold documents on the basis of a privilege in civil litigation. See FED. R. CIV. P. 26(b)(5); 45(e)(2)(A)(ii). Even where the identity of clients is claimed to be privileged, the assertion must be accompanied by sufficient facts (i.e. a privilege log or similar device) to allow the opposing party the opportunity to test the privilege. See e.g., DeGuerin v. United States, 214 F. Supp.2d 726, 737 (S.D. Tex. 2002) (finding that the “Factual Basis for Claim of Privilege” submitted by Plaintiffs was insufficient for the court to conclude that the names were privileged).⁴

b. Taylor Lohmeyer's reliance on Liebman is misguided

Taylor Lohmeyer contends it is likely to prevail on appeal on its blanket assertion of privilege because the Court allegedly erred by not following the Third Circuit case, United States v. Liebman, 742 F.2d 807 (3rd Cir. 1984) [D.E. 19, pg. 7]. Taylor Lohmeyer is incorrect for several reasons.

First, Liebman is does not apply here because the IRS is seeking transactional documents.⁵ It is not seeking the substance of communications made in confidence by a client to his attorney, or from the attorney to the client, for the purpose of seeking or rendering legal advice [D.E. 7, pgs. 6-7; D.E. 11, pgs. 2-5].

Second, the argument that the Fifth Circuit should reverse this Court based on Liebman should fail as a matter of law simply based on the issues the Court ruled on. The Court did not rule that Liebman was applicable, or inapplicable, in this matter. Rather, the Court specifically refrained from ruling on that issue until the production of a privilege log or similar device [D.E. 15, pg. 11].⁶ Moreover, Liebman did not even address whether the submission of a privilege log, or a similar device, was appropriate (or not). Thus, Liebman does not answer any of the questions on appeal, and reliance on it to show error is premature and misplaced.

Third, while the Liebman case provides a result that Taylor Lohmeyer surely wants, it is not controlling in this matter (as it has not been issued or adopted by the Fifth Circuit⁷). Nor should it be viewed as persuasive authority, as it is only one of many cases on this issue. As cited in the United States' supplemental memorandum [D.E. 11], many Courts have declined to find that attorney-client privilege bars production of a response to an IRS summons, when the IRS seeks transactional documents of unknown clients and only has a general knowledge of the advice given to, and the motivations of, the various unknown clients. [D.E. 11, pgs. 6-7].

But even if this Court were to view Liebman as controlling or persuasive law (which it is not), and even if Liebman stood for the proposition that Taylor Lohmeyer should not be required to produce a privilege log (which it does not), the facts of Liebman are still inapposite to the facts of this case, despite Taylor Lohmeyer's insistence that it is “indistinguishable” [D.E. 19, pg. 7].

In Liebman, the law firm at issue investigated and evaluated real estate partnerships for clients who wanted to invest for tax purposes. 742 F.2d 807, 808 (3rd Cir. 1984). The law firm conceded that each of its clients was advised that the fee was deductible as a legal expense, and only charged fees to those who invested. Id. The IRS contended, however, that the fees were not deductible as legal expenses, but rather, were brokerage charges and not deductible. Id. Accordingly, the IRS only asked for documents referencing the name of the clients, since it had already determined what the tax outcome would be.⁸ Id. The Court concluded, that since the deductibility of the fees was a legal matter, the summons simply sought to identify clients based on the advice they were given. Id at 810.

There are two glaring differences with this case: 1) the United States does not know privileged communications that occurred between Taylor Lohmeyer and its clients (other than the general nature of the services provided); and 2) even after learning the names of the clients, the IRS would still need further analysis and factual development to determine whether any tax consequences are appropriate.

Taylor Lohmeyer wishes the Court to believe that the government already knows the confidential and privileged communications that occurred between Taylor Lohmeyer and the rest of its clients with offshore holdings. This is incorrect. While the United States does indeed have a general knowledge of the services provided by Taylor Lohmeyer, this is not privileged or confidential. See United States' briefing [D.E. 11, pgs. 5-6]. The United States is also aware of some of the advice that was allegedly given from Taylor Lohmeyer to Taxpayer-1, as it was voluntarily disclosed by Taxpayer-1 to the IRS. See e.g., In re Tax Liabilities of John Does, 5:18-mc-1046 [D.E. 1-2, ¶28 (“On the advice of Taylor, that no income was reportable from the offshore arrangement . . .”). The United States does not know the advice provided to other clients of Taylor Lohmeyer. Even Fred Lohmeyer himself declared that the advice given to Taxpayer-1 was different what was provided to other clients [D.E. 8-2, ¶10]. Nevertheless, whatever advice was given, the United States does have a reasonable basis to conclude that the transactions performed by Taylor Lohmeyer on behalf of some of its U.S. taxpayers were used by them to escape or evade U.S. taxes. See United States briefing [D.E. 12, pgs. 3-5]. Knowing the transactions and the U.S. taxpayers associated with them will not disclose the individualized advice they received from Taylor Lohmeyer.

Moreover, even once the IRS learns the names of the U.S. taxpayers who used the services of Taylor Lohmeyer to conduct these foreign transactions (and the foreign structure itself), the United States will still have to undergo an analysis to determine if there are any tax consequences. For example, with Taxpayer-1, it was not sufficient that the IRS knew his name, or even the foreign structure in place. Even once the IRS learned that Taxpayer-1 performed services for a foreign hedge fund, which paid the money due to Taxpayer-1 to foreign corporation (owned by a foreign trust), it still needed to ascertain that this foreign corporation (“Corporation-1”) employed no one who could provide management services to the hedge fund, and that Taxpayer-1 was the only person who he did provide these services. In re Tax Liabilities of John Does, 5:18-mc-1046 [D.E. 1-2], ¶22. Additionally, it was uncovered that Corporation-1 had no real business activity, other than to receive the fees from the hedge fund. Id at ¶ 25. The IRS needed to uncover similar facts with respect to the trusts used. See e.g., Id at ¶ 30 (investment decisions were controlled by Taxpayer-1 rather than trustee); Id at ¶ 20 (only $15,000 of trust assets came from alleged trust “grantor”, while $5 million came from fees earned by Taxpayer-1). These brief examples show the kinds of additional facts that the IRS will need to discover to determine whether the structure of other US taxpayers will result in proposed adjustments. The IRS will be looking at (in some case) over twenty years of various kinds of transactions. See D.E. 8-3 (columns: Client File Total Date Range). This is in stark contrast to Liebman, where the IRS already knew the totality of the advice given of the transaction, the legal ramifications of the transaction (i.e. the deductions at issue should be denied), and simply lacked the name of the taxpayer.

Accordingly, the Court in no way erred in withholding its decision on Liebman until after the submission of a privilege log. Taylor Lohmeyer has failed to show that it is likely to prevail on appeal, or even that it has a “substantial case on the merits.”

IV. Taylor Lohmeyer will not suffer irreparable injury

Taylor Lohmeyer argues that it (as well as its clients) will be irreparably harmed if it is forced to “divulge the privileged information” [D.E. 19, pg. 10]. Putting aside this conclusory argument, as stated above, this Court has not yet ordered the Firm to divulge anything it claims to be privileged. In fact, the Court's Order was narrowly tailored to maintain the status quo on the issue of privilege — which is the entire purpose of (and obviates the need for) a stay. Niken v. Holder, 556 U.S. 418, 429 (2009) (“A stay simply suspends judicial alteration of the status quo”) (citations omitted).

Certainly, the act of disclosing the non-privileged documents themselves does not constitute an irreparable injury, as the IRS can simply give them back if Taylor Lohmeyer prevails on appeal. Church of Scientology of California v. United States, 506 U.S. 9, 12-13 (1992) (An appeal is not moot if the IRS already has possession of the documents, because the Court can Order the IRS to give them back or destroy them). Here, the question is whether Taylor Lohmeyer will be irreparably injured if it produces non-privileged and redacted documents. Taylor Lohmeyer complains about having to “sift through 32,000 pages of documents” to redact client information, and inform its clients of these proceedings [D.E. 19, pg. 10-11]. But, the Firm does not quantify this “injury,” and does not explain how it is “irreparable.”⁹ Nor could it, because complying with a court order to produce documents does not injure Taylor Lohmeyer let alone cause irreparable injury. As such, this factor weighs heavily against Taylor Lohmeyer.

V. Substantial Injury to Opposing Party and the Public Interest

If the moving party satisfies the first two factors, the Court assesses the harm to the opposing party and weighing the public interest. These factors merge when the government is the opposing party. Niken v. Holder, 556 U.S. 418, 435 (2009).

While Taylor Lohmeyer argues that the United States will not suffer substantial injury, it is incorrect. By way of example, Taylor Lohmeyer asserts that it “has already complied and is preserving documents that are responsive to the summons” [D.E. 19, pg. 11]. The United States notes that Fred Lohmeyer has declared that he only has access to the firm's “active” files, which are only eight clients [D.E. 8-1, ¶¶ 10-11; D.E. 8-3]. However, Robert Taylor had previously told the IRS that the number of responsive clients would be between 20 to 30. In re Tax Liabilities of John Does, 5:18-mc-1046, pg. 26, ¶ 47. Justifiably, the United States is concerned that Taylor Lohmeyer has possession, custody or control over a larger universe of documents than its “active files,” but is not taking steps to preserve them. If these additional materials are not preserved, this would amount to substantial injury.

Moreover, while Taylor Lohmeyer correctly notes that under 26 U.S.C. § 7609(e)(2), the assessment statute of limitations under 26 U.S.C. § 6501 is tolled after six months if a John Doe summons is not complied with, there are offshore-related liabilities that do not arise under Title 26 U.S.C. (and, consequently, are not subject to the assessment statute of limitations of § 6501, or the tolling provision of § 7609(e)(2)). For example, when a US taxpayer fails to disclose his or her interest in a foreign bank account with a balance in excess of $10,000, that taxpayer is liable for a civil penalty under 31 U.S.C. § 5321(a)(5). This civil penalty has a six-year assessment statute of limitations under 31 U.S.C. § 5321(b)(1), and the tolling statute in Title 26 does not apply. Consequently, the government's ability to assess these types of liabilities, if applicable, is being lost as the government is not able to further its investigation.

Last, the public interest weighs against a stay. There is broad public interest in maintaining a sound tax system. United States v. Lee, 455 U.S. 252, 260 (1982). If the clients of Taylor Lohmeyer have, in fact, used the services of the law firm to evade taxes for which they are liable, it is certainly in the public interest for this investigation to proceed as quickly as possible. However, even if the investigation results in no assessments of liability or collection, it is still in the public interest for the IRS to promptly investigate when it has a reasonable basis to conclude that federal tax laws are not being followed.

VI. Conclusion

Taylor Lohmeyer has failed to establish that it is entitled to a discretionary stay from the Court's May 15 Order.

WHEREFORE, the United States respectfully prays that this Court deny Taylor Lohmeyer's motion for a stay pending appeal.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Acting Assistant Attorney General
U.S. Department of Justice, Tax Division

CURTIS C. SMITH
Trial Attorney, Tax Division
U.S. Department of Justice
717 N. Harwood Street, Suite 400
Dallas, Texas 75201
Telephone: (214) 880-9734
Facsimile: (214) 880-9741
E-mail: curtis.c.smith@usdoj.gov