Taxpayer Right to Be Present at Interview of Federally Authorized Practitioner (4/10/15)

In United States v. McEligot, 2015 U.S. Dist. LEXIS 45519 (N.D. Cal. Apr. 6, 2015), here, the third-party witness, the taxpayer's accountant and return preparer, had asserted the Federally Authorized Practitioner Privilege under Section 7525, here, and refused to be interviewed without taxpayer's counsel.  The IRS moved to enforce the summons.  The Court held (1) "a taxpayer does not have an absolute right to be present at a third party IRS summons proceeding concerning the taxpayer's liabilities" and (2) the summons should be enforced.

Taxpayer's Right to Have His Counsel at the Interview

The Court starts off by saying that any implication in Reisman v. Caplin, 375 U.S. 440 (1964) that the taxpayer might be present at the interview was not the "last word on the subject."  In Donaldson v. United States, 400 U.S. 517 (1971), the Court rejected guaranteed right for the taxpayer's counsel to be present and said such presence was permissible only where the taxpayer could show the potential for a significantly protectable interest.  For example, if the taxpayer's attorney were summonsed where the taxpayer might have attorney-client privilege and work-product protection.

The Court noted that subsequent changes to Section 7609, here, which require notice to the taxpayer and a right to move to quash the summons or intervene in a summons enforcement proceeding do not affect the issue of presence at the summons interview.  The Court then reasons and concludes:

The Government additionally notes that "[t]he Fourth Circuit, Tenth Circuit, Fifth Circuit, and a District Court within the Ninth Circuit have held that a taxpayer has no right to be present at the interview of the party being summoned." ECF No. 21 at 4. In United States v. Newman, 441 F.2d 165 (5th Cir. 1971) the Fifth Circuit held that a taxpayer could not intervene or be present at the IRS hearing, noting that United States v. Powell, 379 U.S. 48, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964) had compared such proceedings to grand jury proceedings. The Newman court noted that the investigatory, non-adversarial nature of the proceedings "would be frustrated by requiring those persons not parties who might be later affected to be allowed to take an active part through private counsel in such proceedings." n1 Newman, 441 F.2d at 174. In United States v. Traynor, 611 F.2d 809, 811 (10th Cir. 1979), the Tenth Circuit rejected a taxpayer's argument that she and "her counsel have the right to be present when the respondents produce the requested records, and to actively participate in such proceedings," noting that "[n]o persuasive authority ha[d] been cited in support of this rather novel suggestion." Similarly, in United States v. Daffin, 653 F.2d 121, 124 (4th Cir. 1981), the Fourth Circuit rejected a taxpayer's argument that he was "entitled to be present and to cross-examine witnesses when questioned by" the IRS agent, noting the Newman and Traynor opinions, as well as what it characterized as the Supreme Court's rejection of similar claims "in the context of other administrative investigatory proceedings" in In re Groban, 352 U.S. 330, 77 S. Ct. 510, 1 L. Ed. 2d 376, 76 Ohio Law Abs. 368 (1957). United States v. Daffin, 653 F.2d 121, 124 (4th Cir. 1981). In United States v. Kershaw, 436 F. Supp. 552 (D. Or. 1977), the District Court for the District of Oregon similarly denied taxpayers' motion to intervene at the interrogation of the accountant who had prepared their tax returns in order to object to questions. Because the accountant's "able counsel announced that he will not permit his client to testify to any matters covering the attorney-client relationship," the court concluded that the taxpayers' privilege was adequately protected at the hearing. Id. at 553.
   n1 Newman was decided in 1971, less than three months after the Supreme Court's Donaldson decision and before the 1976 Congressional reforms spurred by Donaldson.' 

Though not insubstantial in number, all of these decisions are thinly reasoned on the question of taxpayer's rights to intervene before at the IRS hearing. In several of the cases, the taxpayer neither cited any basis for the right to be present nor described the interest to be protected by her presence. None of the cases perform the "balancing of the equities" required by Reisman (as interpreted by Donaldson), or discuss the revisions to Section 7609 that occurred in the wake of Donaldson. Thus, these cases do not fully acknowledge Congress's demonstrated interest in ensuring that taxpayers be provided with "safeguards against improper disclosure of records held by third parties" in summons proceedings. Ip, 205 F.3d at 1172.

But even disregarding this authority would not permit the Court to find that taxpayers have an absolute right to be present at a third-party IRS summons proceeding. Following Donaldson, Congress gave taxpayers certain other safeguards, but remained silent on the question of whether taxpayers had a right to intervene at the summons proceeding. The enactment of Section 7609(a) provided taxpayers with the right to receive notice of third party summons. 7609(b)(1) permitted a taxpayer to intervene in "any proceeding with respect to the enforcement of such summons" before the District Court in cases where the third party summoned "neglect[ed] or refuse[d] to obey such summons." 26 U.S.C. 7604(b). Section 7609(b)(2) gave taxpayers the ability to challenge a third party summons before the District Court in a proceeding to quash, even in cases where the third party has not neglected or refused to obey the summons. But Congress did not revive Reisman's suggestion — disavowed by the Supreme Court in Donaldson — that a taxpayer has an absolute right to be present at the underlying summons proceeding before the IRS. 

In light of its familiarity with Reisman and Donaldson, Congress was aware that it could provide taxpayers with the ability to be present at the IRS hearing where a third party summons pertaining to their tax liabilities was to be executed. The Court therefore concludes that, as Congress provided certain rights to taxpayers to "safeguard[] against improper disclosure of records held by third parties," Ip, 205 F.3d at 1172, but neglected to provide this right, this omission was intentional. See Antonin Scalia & Brian A. Garner, Reading Law: The Interpretation of Legal Texts 93—100 (2012) (cited in Shea v. Kerry, 961 F. Supp. 2d 17, 29 (D.D.C. 2013)) (explaining canon of construction that "[n]othing is to be added to what the text states or reasonably implies (casus omissus pro omisso habendus est ). That is, a matter not covered is to be treated as not covered.")). The application of this canon of construction in this instance is further bolstered by the Supreme Court's repeated admonition that "restrictions upon the IRS's summons power should be avoided absent unambiguous directions from Congress." Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 318, 105 S. Ct. 725, 83 L. Ed. 2d 678 (1985) (internal quotations and citations omitted). 

Therefore, the Court concludes that a taxpayer does not have an absolute right to be present at a third party IRS summons proceeding concerning the taxpayer's liabilities. In order to determine whether a taxpayer should be permitted to be present at such a hearing, a court must engage in the "[t]he usual process of balancing opposing equities" — the standard identified in Donaldson, 400 U.S. at 529, and left undisturbed by Congress's subsequent revisions to provisions concerning taxpayer's rights regarding third party summons. 

Weighing the equities here, the Court finds that they do not tip in favor of permitting the taxpayer to be present at the IRS proceeding in this case. The government has an interest in obtaining information regarding taxpayers' liabilities in an efficient, non-adversarial format through third party summons. The government stated at the hearing that it only intended to question McEligot at the hearing regarding Lui's tax liabilities for the period from January 2005 through December 2012, and would not question McEligot regarding any communications with Lui following the beginning of the audit in 2014. Therefore, the questioning will not implicate attorney-client privilege or work product issues. Furthermore, McEligot has demonstrated that he is willing to preserve Lui's tax practitioner privilege at the IRS hearing by objecting when applicable. This is demonstrated by McEligot's refusal to provide all of the documents requested by the IRS and his objection to answering questions outside the presence of Lui, which necessitated the need for the immediate enforcement petition. As Lui's privilege is already adequately protected, the equities do not weigh in favor of granting him intervention at the IRS proceeding. 

Therefore, the Court will not order the IRS to permit Lui to be present at the summons proceeding. And, as the petition to enforce the summons is not moot, the Court will deny McEligot's motion to dismiss.

JAT Comment:  I think this is consistent with the law, but moves past the thin reasoning in the earlier cases.  I do like the canon of construction invoked by the Court.

Enforcement of Summons

The Court then moved to the U.S. petition to enforce and ordered enforcement of the summons, finding no legally protectable interest that would prevent disclosure.  Specifically, the Court held that (1) the witness must appear and claim privilege only in response to question to which a privilege might apply and (2), after in camera inspection of the redacted documents, the documents did not qualify for the Section 7525 FATP.

The requirement of question by question assertion of privilege is a no brainer, so I move to the court's general discussion of the potential application of the FATP in Section 7525.

"With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney." 26 U.S.C. § 7525(a)(1). The Seventh Circuit has held that, because the tax practitioner privilege is modeled on the attorney-client privilege, in order to qualify for protection, "the communication [must] be made . . . in confidence," and "the confidences [must] constitute information that is not intended to be disclosed by the [tax practitioner]." BDO Seidman, 337 F.3d at 811. "Nothing in [Section 7525] suggests that nonlawyer practitioners are entitled to privilege when they are doing other than lawyers' work." United States v. Frederick, 182 F.3d 496, 502 (7th Cir. 1999). Most significantly, "the privilege does not protect communications between a tax practitioner and a client simply for the preparation of a tax return." United States v. KPMG LLP, 237 F. Supp. 2d 35, 39 (D.D.C. 2002). 

Although the Ninth Circuit has not examined a privilege claim under Section 7525, the Ninth Circuit has examined the attorney-client privilege — on which Congress expressly modeled the Section 7525 privilege — in the tax return preparation context. Ninth Circuit precedent in this realm generally holds that attorney-client communications regarding the preparation of tax returns are not protected. In United States v. Gurtner, 474 F.2d 297, 299 (9th Cir. 1973), the Ninth Circuit held that a defendant could not claim privilege over "consultations with [his accountant] for the purpose of preparing tax returns." Although this case predated the enactment of Section 7525, the Ninth Circuit reasoned that "[s]uch consultations, even with an attorney who is preparing the returns, are not privileged." United States v. Gurtner, 474 F.2d 297, 299 (9th Cir. 1973). 

More recently, in United States v. Richey, 632 F.3d 559 (9th Cir. 2011), the Ninth Circuit held that an appraiser's assessment of a conservation easement was not privileged, where the summonsed appraiser had been hired by counsel for taxpayers in connection with the preparation of a tax return. In detailing the scope of the attorney-client privilege in this context, the Court noted that "[i]f the advice sought is not legal advice, but, for example, accounting advice from an accountant, then the privilege does not exist." Id. at 566. Because "any communication related to the preparation and drafting of the appraisal for submission to the IRS was not made for the purpose of providing legal advice, but, instead, for the purpose of determining the value of the Easement," the Court concluded that communication concerning the appraisal were not protected by the attorney-client privilege. Id. at 567. 

Because Ninth Circuit precedent indicates that attorney-client communications regarding the preparation of tax returns are generally unprotected, the tax practitioner privilege modeled on the attorney-client privilege also likely does not extend to such communications. This view accords with the out-of-circuit authority holding that tax practitioner privilege does not apply to communications made to assist a taxpayer in the preparation of tax returns. See, e.g., KPMG LLP, 237 F. Supp. 2d at 39. The Court thus concludes that the privilege does not apply to the redacted portions of the documents submitted. The Court therefore orders that McEligot comply with the summons and produce unredacted versions of the documents. 

JAT Comment:  One of the things I have found a bit odd about the interpretations of Section 7525 are the plain meaning of quotes such as (from the opinion above):

"Nothing in [Section 7525] suggests that nonlawyer practitioners are entitled to privilege when they are doing other than lawyers' work." United States v. Frederick, 182 F.3d 496, 502 (7th Cir. 1999). 

I think that is probably a straightforward reading of the statute -- Section 7525, here, which is:

With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.

This would seem to suggest that the Section 7525 only covers legal advice given by someone not licensed to practice law.  The accountants pushed for the enactment of Section 7525 so that they could compete in part with lawyers by assuring clients of the same privilege, but in order to get the Section 7525 privilege they have to be doing lawyer's work -- i.e., practicing law.  Of course, in the tax field, much work done by tax accountants is basically the same work as done by tax attorneys, and that has always been a tension as accountants chased after work traditionally done by lawyers.  But to have that tension highlighted in Section 7525 seems somewhat messy.