Sunday, April 26, 2020

Fifth Circuit Rejects Attorney-Client Identity Privilege for Law Firm Documents (4/26/20)

In Taylor Lohmeyer Law Firm P.L.L.C. v. United States, 957 F.3d 505 (5th Cir. 4/24/20), here, the Court of Appeals affirmed the district court’s enforcement of a John Doe Summons (JDS) to a law firm to obtain documents, and thus identities, of the Firm’s clients 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.”  The Court affirmed the district court's enforcement of the summons, rejecting the firm's argument that the client's identities were confidential client communications. 

I have revised the relevant portion of the working draft of my Federal Tax Procedure Book (for publication in August 2020) and offer below a cut and paste of the revised portion (footnotes omitted).  I also point readers to a good law review article on the general subject:  Richard Lavoie, Making a List and Checking it Twice: Must Tax Attorneys Divulge Who's Naughty and Nice, 38 U.C. Davis L. Rev. 141 (2004), here.  The following discussion from my Federal Tax Procedure Book is under the attorney-client privilege discussion.
(4) Client Identity Privilege. 
Is the identity of the client privileged under the attorney-client privilege?   A frequent context in which this question is presented is the reporting requirements for cash payments via the Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.  (Recall that the Form 8300 is a double agency form–for the IRS and for FinCEN.)  This reporting requirement applies to cash received by attorneys.  Often clients engaged in criminal activity pay their attorneys in cash.  Can the attorney receiving cash omit the client’s name from the report?  The mere receipt of the cash might disclose, at least implicitly, something confidential that is important to the purposes behind the attorney-client privilege; thus a requirement that the attorney disclose the receipt of the cash from the identified client might be inconsistent with the attorney-client privilege.  Another context in which the issue comes up is when the IRS issues a John Doe Summons (“JDS”) to a law firm related to abusive tax shelter transactions to discover the names of clients engaging the firm with respect to the shelter. That those clients engaged the firm with respect to the shelter does imply something about the clients’ communications with the firm, at a minimum the clients’ desire and tax need for some form of tax mitigation.  The conventional holding in this context is that the identity of the client and fee arrangements are not attorney-client communications invoking the the attorney-client confidential communications privilege.  
Some courts of appeals recognize that there may be a “narrow exception * * * when revealing the identity of the client and fee arrangements would itself reveal a confidential communication.” For purposes of convenience I refer to this narrow exception as the “identity privilege” which is a common term for it, but you should remember that it is not a separate privilege but rather a particular subset of one or more other privileges or policies that might be involved (here the attorney-client privilege).  The district court in Gertner relied upon the identity privilege but the Court of Appeals did not address the issue because it denied enforcement of the summons in any event because the Government had not used the proper John Doe summons procedure. 
I attempt here just a summary of the law in the area in tax cases: 
In the overwhelming number of the cases, courts hold that the attorney-client privilege does not protect the client identity in the context of compulsory disclosure (such as on the Form 8300 or by summons (including JDS) or subpoena).   
The frequently-cited example of a case applying the “narrow exception” is United States v. Liebman, 742 F.2d 807 (3d Cir. 1984).  In Liebman, a law firm was engaged in rendering advice regarding tax shelter real estate partnerships.  The law firm advised that the fees the taxpayers paid would be deductible.  The IRS took the position that the fees were nondeductible brokerage fees required to be capitalized with the investment.  The IRS issued a John Doe summons (“JDS”) to the law firm seeking the identity of the clients paying the fees.  The Third Circuit held that, although the identity of a lawyer’s client is normally not a privileged communication, here the nexus between the information the IRS sought and the taxpayer was a specific type of privileged communication (i.e., as to the deductibility of the fees) and therefore the disclosure of the identities would necessarily disclose the privileged communication made to them.   
Liebman is usually distinguished on the facts, so that the identity privilege does not apply.  A good example is a case decided by the Fifth Circuit in 2020 involving a law firm (“Firm”) [Taylor Lohmeyer case] .  In an audit of an individual client of the Firm, the IRS discovered the Firm had created offshore accounts and entities through which the client had substantially underreported tax liability.  Believing that the Firm might have used the strategies for other clients, the IRS served a JDS on the Firm for documents for unknown clients, John Does (U.S. taxpayers), who, in the stated time period, “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.”  The Firm moved to quash the summons, and the Government moved to enforce the summons.  The Firm asserted that the documents summonses would disclose the client’s identities which were confidential client communications, subject to the attorney-client privilege.  The district court enforced the summons.  The Court of Appeals affirmed, rejecting the assertion of the identity privilege. The Court of Appeals distinguished Liebman because, in Liebman, the request was linked to advice given to deduct certain fees.  By contrast, in the 2020 case at hand [Taylor Lohmeyer], the request 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.” 
Two key caveats: First, this is just a summary with certain anecdotal cases illustrating the general rule and the exception, designed primarily to alert students (and practitioners) as to the issues involved.  Second, since FATP privilege in § 7525 incorporates the key concepts of the attorney-client privilege, presumably these concepts apply to nonlawyer practitioners subject to that Section.
 This blog has been cross-posted on the Federal Tax Procedure Blog.

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