Tuesday, February 28, 2017

Court Denies Suppression and Exclusion Despite Odd Facts Regarding Third Party Recordkeeper Summons (2/28/17)

I write today about what seems to me to be a significant failure on the part of an IRS CI agent with respect to a third party recordkeeper summons.  In United States v. Galloway, 2017 U.S. Dist. LEXIS 26362 (ED CA 2017), here, the Court denied motions to suppress or exclude certain evidence obtained by CI agents by summons to Galloway's CPA.

On April 9, 2009, two CI agents  (they usually travel in pairs for the type of activity I describe) showed up unannounced at Galloway's place of business.  Often the first notice a taxpayer has of a pending CI investigation is when the CI agents show up to see if he will submit to an interview.  But Galloway apparently was well-counseled or otherwise savvy enough not to appear when requested and had an employee advise the agents to talk to his lawyer.  The CI agents thus, having lost the element of surprise, felt it was important to secure the files of the taxpayer's former CPA who had represented him in the audit from which the CI investigation apparently arose.  So, they dashed out in handwriting a summons to the CPA and forthwith delivered it to the CPA at his office.  Such summonses -- in this case, third party a recordkeeper summons -- cannot require the summonsed party to deliver the summonsed documents immediately.

Now, for some background.  The IRS is authorized to issue summonses in IRS criminal and civil investigations.  Generally, the notice must be served on the summonsed party and notice given to the taxpayer within 3 days of that service.  Further, the return on the service (production of the documents) must not be required until 23 the issuance of the summons in order to permit the taxpayer to bring a proceeding to quash the summons.  § 7609(a), here.  The notice is not required if the summons is served by a CI agent, except that notice is required if the summons is to a third party recordkeeper.  § 7609(c)(2)(E)(ii).  The summons to a third party recordkeeper is called a third party recordkeeper summons.  Third party recordkeepers include financial institutions, consumer reporting agencies, attorneys, and "accountants."  § 7603(b)(2), here.  The CPA in Galloway clearly fell within the scope of the third party recordkeeper definition and the summons was thus a third party recordkeeper summons.  So, the summons was required to be served on Galloway, in time to permit him to pursue the proceeding to quash the summons.

I noted above that the summons was served on the CPA on April 9, 2009.  The opinion says that the CIA agents interviewed the CPA on June 22, 2010, 439 days after service of the summons.  During that interview, the CPA showed the CI agents some Quickbook records in his file.  The question is whether the CI Agent took delivery of documents earlier than the June 22, 2010 intreview.  In a footnote (Slip Op. p. 13,  fn. 14), the Court says:  "despite the fact that the records in question were obtained by the IRS in 2009," so I think this means that the documents were obtained in the normal course after the summons was served on the CPA.

The brouhaha in the case surrounded the original issuance of the summons.  It is unusual to issue a summons "on the fly" so to speak as was done in that case.  Indeed, the CI agent had only issued one such handwritten summons in his entire career.  Then, when the defense team began inquiring into the summons, the IRS file copy could not be located.  Further, there is no mention in the decision that the taxpayer had been served a copy of the third party recordkeeper summons.  (The decision does not mention the third party recordkeeper summons (except in a parenthetical explaining a case and, perhaps by inference, from § 7609 and § 7603).)  But, the CI agent advised the Government attorney (bold-face supplied by JAT):
Agent Applegate stated he would have sent a copy of the summons to Galloway after serving it on Livsey [the CPA]. (Id. at 5.) He also would have given a copy of the summons to Galloway's attorney after he received a power of attorney signed by Galloway and his attorney. (Id.) Agent Applegate said he would have written a due date on the summons for at least twenty-three days after the date of service to allow Galloway an opportunity to quash the summons. (Id.) Applegate kept all of the summonses issued in the case in a folder in his office. (Id.) However, at the time of the interview, a copy of the summons issued to Livsey could not be found in this paperwork.
Then, in September 2016, the missing summons was found, but the block for listing requested documents was not completed, but someone -- presumably the CI agent -- said the summons delivered to the CPA did list the documents requested.

The CPA testified that his practice on receiving such a summons was to notify the taxpayer.  But, he could not recall if he actually contacted Galloway about the summons.

Finally, on the basis of the foregoing and other facts recounted, the court declined Galloway's requests for relief.  I discuss that resolution below, but note here that the Court did say (Slip Op. p. 7, fn. 11):
fn 11 The court pauses to note that it finds the conducting of this aspect of the IRS investigation, as well as the explanations for the way in which it was carried out, to be somewhat odd. Indeed, Agent Applegate appears to acknowledge that some of the actions taken by him were out of the ordinary. (Doc. No. 69-4 at 5.) However, as noted above, no evidentiary hearing was requested in connection with the pending motion and no credibility determinations are being made in ruling on it.
As recounted by the Court, defendant asserted two bases for the relief sought:  (i) a reasonable expectation of privacy with respect to the documents the CPA delivered to the IRS in response to the summons; and (ii) an equitable exclusion because of the IRS "failed to comply with the requirements of 26 U.S.C. §§ 7603 and 7609 in obtaining them."  It is not clear exactly what failures were in issue in (ii) because the court does detail them.  Certainly, for example, there appears to be nothing in the record that establishes that the required notice to Galloway of the third party recordkeeper summons issued to the CPA, other than the agent's saying that in an interview with the U.S. Attorney that he "would have" sent the notice was his practice.

I will leave it to readers to read through the Court's reasoning for denying the relief in both respects.  I think it is a bit cursory, so I will just add just one thought.

The Court does not discuss the various protections that a taxpayer should be able to reasonably rely in delivering information and documents to a CPA engaged to represent him for return preparation or representation in an audit.  There are state law confidentiality requirements and federal confidentiality / privilege requirements.  For the latter the Federally Authorized Tax Practitioner Privilege in § 7525,. here, could apply, the prohibition of disclosure for return preparers in § 7216, here, may apply,  and, with respect to the documents and quickbook files delivered for the audit, the work product privilege may apply.  The Court only addresses the accountant client privilege which is not recognized in federal cases, but does not mention § 7525 -- and, arguably, § 7216 -- which was intended to cover some of that ground.  The implication the Court gives is that there are no privacy or similar policy implications in what occurred in Galloway.  I would appreciate hearing from readers on this issue.

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