Saturday, May 25, 2019

District Court Rejects Argument that JDS Seeking Law Firm Client Identities Violates Attorney-Client Privilege (5/25/19)

In Taylor Lohmeyer Law Firm PLLC v. United States, 2019 U.S. Dist. LEXIS 81809 (W.D. Tex 2019), here, the district court (i) dismissed a law firm ("Firm") challenge to an IRS John Doe Summons (JDS) for client identities and (ii) enforced the JDS.

Based on information from an audit which resulted in substantial tax liability, the IRS obtained the JDS, which is an ex parte proceeding, seeking "names of and other information related to the Firm's clients between 1995-2017 to investigate the tax liability of those who used the Firm to 'create and maintain foreign bank accounts and foreign entities that may have been used to conceal taxable income in foreign countries.'" 

The Court held that the JDS easily met the Powell factors (United States v. Powell, 379 U.S. 48, 57-58 (1964)) which it stated as:
the Government must establish that the summons: (1) is issued for a legitimate purpose; (2) seeks information which may be relevant to that purpose; (3) seeks information that is not already within the IRS's possession; and (4) satisfies all administrative steps required by the Internal Revenue Code.
The Court recounted the evidence as follows:
But the bar for "reasonable basis" is not high and the affidavit of Russell-Hendrick from the ex parte proceeding establishes a reasonable basis. She details her conclusion that Taxpayer-1 concealed his connection to offshore structures—for which Taxpayer-1 remained the beneficial owner—created under the advice of the firm. Taxpayer-1 entered an agreement with the IRS in June 2017, admitting that Taxpayer-1 owned all assets owned by the offshore trusts and earned over $5 million in unreported income between 1996 and 2000. Taxpayer-1 accepted liability for civil fraud penalties and penalties for failing to file the required forms for reporting foreign income. 
Russell-Hendrick then states the basis for her opinion that the Firm provided similar advice to other clients. Among other pieces of evidence, she states that in an interview with John Taylor, former partner of the firm, Taylor estimated that he structured offshore entities for tax purposes for 20 to 30 clients between the 1990s and early 2000s. Russell-Hendrick states in part that: 
Taylor Lohmeyer PLLC's services to their U.S. clients, as described by Taxpayer-I and Taylor himself, are the kinds of activities that, in the experience of the IRS, are hallmarks of offshore tax evasion, including: (1) structures of offshore trusts with compliant trustees, and foundations and anonymous corporations managed by nominee officers and directors, (2) the use of "straw men" to contribute nominal funds to foreign trusts to create the false appearance that such trusts have foreign grantors, and (3) the concealment of beneficial ownership of foreign accounts and assets in jurisdictions with strong financial secrecy laws and practices. 
The information obtained by the IRS and discussed in this Declaration suggests that the still-unknown U.S. taxpayers doing business with Taylor Lohmeyer PLLC may not have reported their offshore accounts, entities, or structures. Instead, they have likely relied on the assistance of Taylor, and the fact the structures are hidden offshore to support a decision not to report the existence of those entities and accounts, expecting  that the IRS would not discover the accounts, omitted income, and/or the existence of the entities. 
18-MC-1046, docket no. 1-2 at 37. Thus, assuming for argument that the Firm could challenge the ex parte proceeding at this stage, issuance was proper.
The minimal Powell standards were clearly met.  The real issue was not whether the IRS abused the JDS process (per the Powell factors) but whether the information sought--the identities of clients--implicated the attorney-client privilege.  Normally, client identity is not within the purview of the attorney-client privilege because, except in rare circumstances, the mere identification of the client does not disclose any client confidential communication for obtaining legal services.  The law firm argued that this was a rare circumstance where the facts indicate that identifying the client will identify the client communications regarding the advice, then the attorney-client privilege may apply.  One now rather old tax case so held.  United States v. Liebman, 742 F.2d 807 (3d Cir. 1984).  The court rejected the argument as follows:

"It is well established that '(t)he identity of a client is a matter not normally within the privilege.'" In re Grand Jury Proceedings in Matter of Fine, 641 F.2d 199, 204 (5th Cir. 1981) (quoting Frank v. Tomlinson, 351 F.2d 384, 384 (5th Cir. 1965)). "Despite the general rule," under a "limited and rarely available" exception, "an attorney must conceal even the identity of a client, not merely his communications." In re Grand Jury Proceedings ("Jones"), 517 F.2d 666, 671 (5th Cir. 1975). The exception applies "when the disclosure of the client's identity by his attorney would have supplied the last link in an existing chain of incriminating evidence likely to lead to the client's indictment." In re Grand Jury Proceedings, 680 F.2d 1026, 1027 (5th Cir. 1982). 
In Jones, the court stated that "[t]he cases applying the exception have carved out only a limited and rarely available sanctuary, which by virtue of its very nature must be considered on a case-by-case basis. It could hardly be otherwise, since the purpose of privilege to suppress truth runs counter to the dominant aims of the law." Jones, 517 F.2d at 672; see generally DeGuerin v. United States, 214 F. Supp.2d 726, 735-36 (S.D. Tex. 2002). ("If revelation of a client's identity would also reveal a privileged communication, both the identity and the communication are privileged.").
The Firm argues this exception applies because the summons seeks the identities based on the advice and services sought from the firm, and "when the specific requests are combined with the client identities (not to mention the related client files), the net effect is to identify individuals as well as the specific services and structures they were provided." Docket no. 5 at 14. The Firm relies on an IRS enforcement case from the Third Circuit, United States v. Liebman, 742 F.2d 807 (3d Cir. 1984), in which client identities were privileged. This was because the government was already aware of the advice the law firm had provided its clients (that certain fees were tax deductible), so it "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." Docket no. 5 at 13 (quoting Liebman, 742 F.2d at 809).
The Government distinguishes Liebman because in that case the summons sought the identities of those clients who had been advised that they could deduct, rather than amortize, certain fees. Docket no. 7 at 10. The Government argues this situation is distinct because the client class is defined not by receipt of certain legal advice, but by whether the Firm "acquired or formed any foreign identity, opened or maintained any foreign financial account, or assisted in the conduct of any foreign financial transaction on behalf of the identified class." Id. Thus, "for Taylor Lohmeyer's blanket 'attorney-client privilege' assertion to arguably apply, it would have to show that all members of the identified class received the same privileged communications as Taxpayer-1, and that by disclosing the identities of the identified class, it would be tantamount to disclosing the privileged communications." Id. 
Separately, the U.S. argues the summons does not seek privileged information because it does not seek legal advice and it was tailored to avoid the attorney-client privilege. Id. at 6 (citing, e.g., Seibu Corp. v. KPMG LLP, 2002 U.S. Dist. LEXIS 906, 2002 WL 87461 (N.D. Tex. 2002) ("Where an attorney is functioning in some other capacity—such as an accountant, investigator, or business advisory—there is no privilege.") (applying Texas law) (collecting cases)). In an enforcement proceeding, the party seeking to assert privileges pertaining to documents must allege specifically how the privilege applies to each document. El Paso Co., 682 F.2d at 539 (5th Cir. 1982). The Government contends the Firm must produce a privilege log with specific objections to the summons' requests, but the Firm has not done so. 
Instead, at the status conference in this case, the Firm sought and obtained leave to file an additional memorandum on the attorney-client privilege issue. This memorandum includes a supporting declaration from Fred Lohmeyer that purportedly details "the types of legal services the firm provides, the types of structures employed by the firm's clients, and the nature of the firm's relationships with its clients." Docket no. 8 at 7. The Firm also provided "a sampling of redacted client billing records further showing . . . that the services were legal in nature, and that the legal services received by the clients were similar to the legal services received by Taxpayer-1." Id. Finally, the Firm again argues that the client identities are privileged because "so much is already known about the reasons the clients sought advice from the law firm and the types of services that the law firm provides that the government is already aware of the confidential communications between the clients and the law firm." Id. at 9. 
Here, 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. See, e.g., Hanse v. United States, 2018 U.S. Dist. LEXIS 35571, 2018 WL 1156201, at *6 (N.D. Ill. Mar. 5, 2018) (concluding that a "blanket assertion of privilege," which did not properly assert attorney-client privilege on a document-by-document basis, was "insufficient to challenge the validity of the IRS summons"). These additional filings do not persuade the Court to the contrary. The sample billing records only show, at most, that some services were legal in nature and protected by privilege, but this does not show that the 32,000 responsive documents the Firm claims to have are all privileged. Likewise, the new Lohmeyer declaration provides only generalities that do not show the IRS already knows so much that disclosure of client identities falls in the narrow exception to the general rule that identities are not privileged. 
Ultimately, because blanket assertions of privilege are disfavored, the Firm bears a heavy burden at this stage, and the Firm relies only on a narrowly defined exception to the general rule that identities are not privileged, the Firm does not carry its burden. As the Government suggests, "[u]pon this Court ordering enforcement of the summons, if Taylor Lohmeyer wishes to assert any claims of privilege as to any responsive documents, it may then do so, provided that any such claim of privilege is supported by a privilege log which details the foundation for each claim on a document-by-document basis." Docket no. 7 at 8. Whether certain documents fit the Liebman argument the Firm advances is better decided individually or by discrete category.
Based on this analysis, the court denied the Firm's challenge and enforced the summons, but retained jurisdiction pending any challenges to the Firm's claim of privilege if it chooses to assert privilege by an appropriate privilege log.

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