Clients’ Identities and the IRS Summons Power

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The recent Fifth Circuit case of Taylor Lohmeyer v U.S. explores the limits of the attorney-client privilege in the context of the IRS using its John Doe summons powers seeking the identity of a law firm’s clients the firm represented with respect to offshore transactions. The case provides a useful opportunity to explore the general rule that the attorney client privilege does not extend to client identity and fee arrangements, as well as a limited exception that would allow the privilege to exist when disclosure of the client identity would effectively disclose the nature of the client communication. 

In this post, I will summarize the circuit court opinion, as well as highlight briefs addressing the law firm’s request for a rehearing en banc.

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Taylor Lohmeyer involves the IRS’s serving a John Doe summons on the law firm seeking the identity of “John Does”, who were U.S. taxpayers

who, at any time during the years ended December 31, 1995[,] through December 31, 2017, used the services of [the Firm] … to acquire, establish, maintain, operate, or control (1) any foreign financial account or other asset; (2) any foreign corporation, company, trust, foundation or other legal entity; or (3) any foreign or domestic financial account or other asset in the name of such foreign entity.

According to a declaration by an IRS revenue agent, the IRS sought the information because it was familiar with a taxpayer who used the firm’s services in an effort to avoid US income tax:

[The prior IRS] investigation “revealed that Taxpayer-1 hired [the Firm] for tax planning, which [the Firm] accomplished by (1) establishing foreign accounts and entities, and (2) executing subsequent transactions relating to said foreign accounts and entities”. Additionally, “[f]rom 1995 to 2009, Taxpayer-1 engaged [the Firm] to form 8 offshore entities in the Isle of Man and in the British Virgin Islands” and “established at least 5 offshore accounts so [Taxpayer-1] could assign income to them and, thus, avoid U.S. income tax on the earnings”. “In June 2017, [however,] Taxpayer-1 and his wife executed a closing agreement with the IRS in which they admitted that Taxpayer-1 … earned unreported income of over $5 million for the 1996 through 2000 tax years, resulting in an unpaid income tax liability of over $2 [m]illion.”

In seeking to quash the summons, the law firm argued that the identity of its clients was protected by the attorney client privilege because the identifying information itself was tantamount to disclosing confidential client communication.

In finding that the exception did not apply and rejecting the law firm’s petition to quash, the Fifth Circuit relied on general precedent that explored the exception in cases that did not involve the IRS, as well as the few cases exploring the exception in the context of IRS investigations. The Fifth Circuit framed the discussion by noting that the few cases that have allowed shielding clients’ identity do so by not expanding the reach of the attorney-client privilege; the cases emphasize that the exception is a subset of the privilege itself. As such a client’s identity is shielded “only where revelation of such information would disclose other privileged communications such as the confidential motive for retention”. Citing In re Grand Jury Subpoena for Attorney Representing Criminal Defendant Reyes-Requena, 913 F.2d 1118, 1124 (5th Cir. 1990), the opinion emphasized that:

the privilege “protect[s] the client’s identity and fee arrangements in such circumstances not because they might be incriminating but because they are connected inextricably with a privileged communication—the confidential purpose for which [the client] sought legal advice”. Reyes-Requena II, 926 F.2d at 1431 (emphasis added).

The firm argued that the IRS’s request for client identities was “connected inextricably” with the purpose for which its clients sought advice. In rejecting that argument, the opinion explored the Third Circuit case of United States v. Liebman, 742 F.2d 807  (3d Cir. 1984). In Liebman, the Third Circuit sought the identity of a law firm’s clients.  The IRS had issued a John Doe summons to the firm seeking the identity all clients who paid fees over a three-year period in connection with the acquisition of certain tax shelters.

The Third Circuit held that the identity of the clients was protected by the attorney client privilege:

If appellants were required to identify their clients as requested, that identity, when combined with the substance of the communication as to deductibility that is already known, would provide all there is to know about a confidential communication between the taxpayer-client and the attorney. Disclosure of the identity of the client would breach the attorney-client privilege to which that communication is entitled

Liebman and Taylor Lohmeyer are facially similar. One key difference though was that the affidavit of the revenue agent in Liebman tipped the IRS’s hand and revealed that the IRS itself linked the identity of the clients with the specific legal advice that the firm itself gave to the clients:

The affidavit of the IRS agent supporting the request for the summons not only identifies the subject matter of the attorney-client communication, but also describes its substance. That is, the affidavit does more than identify the communications as relating to the deductibility of legal fees paid to Liebman & Flaster in connection with the acquisition of a real estate partnership interest, App. at 116a-121a. It goes on to reveal the content of the communication, namely that “taxpayers … were advised by Liebman & Flaster that the fee was deductible for income tax purposes.” App. at 117a. Thus, this case falls within the situation where “so much of the actual communication had already been established, that to disclose the client’s name would disclose the essence of a confidential communication ….” See United States v. Jeffers, 532 F.2d 1101, 1115 (7th Cir. 1976) (and cases cited therein).

The Fifth Circuit in Taylor Lohmeyer highlighted this distinction. Unlike in Liebman, 

the “agent’s declaration did not state the Government knows the substance of the legal advice the Firm provided the Does. …Rather, it outlined evidence providing a “reasonable basis”, as required by 26 U.S.C. §7609(f), “for concluding that the clients of [the Firm] are of interest to the [IRS] because of the [Firm’s] services directed at concealing its clients’ beneficial ownership of offshore assets”. The 2018 declaration also made clear that “the IRS is pursuing an investigation to develop information about other unknown clients of [the Firm] who may have failed to comply with the internal revenue laws by availing themselves of similar services to those that [the Firm] provided to Taxpayer-1”. (Emphasis added.)

Following the adverse circuit court opinion, the Taylor Lohmeyer firm has filed a petition for an en banc rehearing. The American College of Tax Counsel Board of Regents submitted an amicus brief in support of the petition (disclosure: Keith and I are members of the ACTC but did not participate in the amicus filing). 

In submitting its petition, the Taylor Lohmeyer firm emphasized that the panel failed to explore fully circuit precedent, especially United States v. Jones, 517 F.2d 666 (5th Cir. 1975), which it believed supported the privilege applying even in the absence of a declaration that did not definitively tie the request to the firm’s substantive legal advice. The ACTC brief’s main substantive point emphasizes that the summons request should be thought of as covered by the exception flagged in Liebman because the summons is “premised upon the IRS’s purportedly knowing the motive of clients in engaging Taylor Lohmeyer.” (page 11). The ACTC brief states that “[b]ecause the summons at issue requires the Firm to provide documents that connect specific clients with specific advice provided by the Firm, compliance with the summons effectively requires testimony by the Firm regarding that advice.”

In essence both briefs minimize the importance of explicit substantive tax issue that the agent identified in his declaration in support of the summons in Liebman and ask the court to consider the context of the request in Taylor Lohmeyer, which in their view inexorably links the request to the substance of the advice. 

Some Concluding Thoughts

There is more to the briefs, including a detailed discussion of circuit precedent in the petition and the ACTC’s distinguishing of the Seventh Circuit’s United States v. BDO Seidmananother case the Fifth Circuit relied on, and a policy argument alleging that an undisturbed Taylor Lohmeyer opinion will “impose a discernible chill over the attorney-client relationship between taxpayers and tax counsel.” But the key part of the briefs is the point that courts should consider the overall context of the IRS request and not limit the privilege to circumstances when an agent says aloud in a declaration what was driving the request for the client identities.

My colleague Jack Townsend blogged this case when the Fifth Circuit issued its opinion this past spring, and we are discussing it in the next update to the Saltzman and Book treatise (Jack is a contributing author). As he noted in his blog, in Taylor Lohmeyer the IRS request for information “was not connected to ‘identified specific, substantive legal advice the IRS considered improper;’ rather, the request asked for documents of clients for whom the Firm established, maintained, operated or controlled certain foreign accounts, assets or entities, without limitation to any specific advice the Firm rendered, so that it was ‘less than clear . . . as to what motive, or other communication of [legal] advice, can be inferred from that information alone.’

The ACTC suggests that even without the agent’s declaration explicitly referring to the legal advice the law firm purportedly provided the request itself implicates the legal advice in such a way that the identity itself should be protected. This approach, if accepted, would extend the exception in tax cases in a way that other courts have not embraced, at least not in cases that solely focus on the tax consequences of the unknown clients. 

About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Robert Kantowitz says

    No rational person can deny that in this case, as in Liebman, (i) the IRS is clearly looking for the identities of taxpayers who engaged in a small set of defined transactions (for absent that there could be no cause to ask for the list of clients) and (ii) the names of the clients are relevant to communications related to those transactions. Requiring disclosure of the client names is a gross breach of privilege. The panel should be reversed.

    • William Clayton says

      I think the case turned on the phrase “may have failed”. US citizens could lawfully engage in any or all of the activities listed as 1, 2, and 3 on the summons as long as they are properly accounted for on a US tax return as required.

      I encourage anyone who doesn’t understand the logic in her decision to read the decision document. It is conveniently linked above. The judge is the most senior judge in the 5th circuit, not that this fact makes her correct as a matter of law, but her experience commands some respect. The language used to request the documents required is critical to the decision and prior case decisions support her opinion very well in my view. An IRS agent looking at every document provided has no idea if any laws were broken, nor why the firm was hired, until they match those records with tax returns. One of the principals of the law firm took the stand and testified that it was his belief the firm had not had any other clients like Taxpayer 1. The judge weighed this testimony in her decision. This is most definitely an interesting topic, but I have run out of time.

      The firm could have assisted in a perfectly legal transaction, therefore the specific advice given is not actually exposed. The records requested only provides the opportunity for the IRS to investigate whether any laws were violated and does not disclose the purpose of the engagement of the law firm. IRS still needs to compare the records with tax filings to determine if any tax laws were potentially violated and provide the taxpayers involved the opportunity to provide proof that no tax laws were violated and the was no nefarious

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