The attorney-client privilege is one of the bedrocks of the legal profession. It permits communications between a client and an attorney to remain privileged. The U.S. Supreme Court has stated that by assuring confidentiality, the privilege encourages clients to make "full and frank" disclosures to their attorneys, who are then better able to provide candid advice and effective representation. Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). On the other hand, courts sometimes view the attorney-client privilege as preventing full disclosure. As a result of these conflicting views, the attorney-client privilege "protects only those disclosures necessary to obtain informed legal advice which might not have been made absent the privilege." Fisher v. United States, 425 U.S. 391, 403 (1976).
This Holland & Knight alert discusses Taylor Lohmeyer Law Firm P.L.L.C. v. United States, No. 19-50506 (Dec. 14, 2020) (en banc hearing denied) and the prior U.S. Court of Appeals for the Fifth Circuit decision.
The Beginning
The IRS audited an estate-planning client of the law firm, Taylor Lohmeyer (the Firm). During the audit, the client revealed that the Firm had helped him establish a number of foreign accounts (five) and entities (eight). The Firm also helped the client structure his affairs such that he could assign income to the foreign accounts avoiding U.S. income tax. As a result of the Firm's involvement, the client avoided U.S. income tax on his earnings from 1995 to 2009. According to a closing agreement with the Internal Revenue Service (IRS) that was executed in June 2017, the client and his wife admitted that they had unreported income in excess of $5 million for tax years 1996-2000, resulting in an unpaid income tax liability of more than $2 million. Ultimately, the client paid approximately $4 million in tax, interest and penalties.
Summons Procedures
The IRS utilizes a John Doe summons when it does not know the identity of the taxpayers for whom it is trying to determine their tax liability.1 Section 7609(f) provides that before the IRS can issue a John Doe summons, it is required to establish the following:
- the summons relates to the investigation of a particular person or ascertainable group or class of persons,
- there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and
- the information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.
Based upon information it learned from the audit, the IRS served a John Doe summons on the Firm in October 2018. The summons was designed to determine which of the Firm's clients over a 12-year 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.2
The summons also sought "[t]he names of all persons acting as advisors and the names of all persons ... acting as clients on the subject matter covered by the document."
Upon receipt of the summons, the Firm filed a petition to quash it. The IRS responded to the Firm's petition to quash by filing a motion to dismiss the Firm's petition and a counter petition to enforce the summons.
As a general proposition, a client's identity is not protected by the attorney-client privilege and is therefore subject to subpoena. The Firm acknowledged the general rule, but in its petition focused on the exception that states that when disclosure of the client's identity necessarily discloses the substance of the legal advice provided to the client by the attorney, the privilege may apply. Accordingly, the Firm alleged that all documents requested in the summons were protected by the attorney-client privilege."3
April 2019 Hearing
In April 2019, the IRS and Firm had a status hearing, and it was agreed that the court would hear the IRS' counter petition to enforce the summons. While the Firm had numerous grounds upon which it relied to quash the summons, the most critical was the "intrusion into the attorney-client privilege." The court rejected the Firm's contention that the summons represented an undue intrusion into attorney-client privileged communications, stating that "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[; therefore,] the Firm does not carry its burden".4 On May 15, 2019, the district court granted the IRS' counter petition to enforce the summons. The Firm then appealed to the Fifth Circuit.
Before the Fifth Circuit Panel
The party invoking the attorney-client privilege bears the burden of establishing the following "highly fact-specific" elements: "(1) that he made a confidential communication; (2) to a lawyer or his subordinate; (3) for the primary purpose of securing either a legal opinion or legal services, or assistance in some legal proceeding."5
As the Fifth Circuit panel of three judges noted and the Firm did not contest, the identity of a client is not normally protected by the attorney-client privilege. Taylor Lohmeyer, 957 F.3d at 510. See also, In re Grand Jury Proceedings, 689 F.2d 1351 (11th Cir. 1982); United States v. Ponder, 475 F.2d 37, 39 (5th Cir. 1973). However, the Firm relied upon the narrow exception that states "only where revelation of such information (a client's identity) would disclose other privileged communications such as the confidential motive for retention".6 Or in other words, "[i]f the disclosure of the client's identity will also reveal the confidential purpose for which he consulted an attorney, we protect both the confidential communication and the client's identity as privileged."7
The panel in this case concluded, however, that the summons was not designed to reach confidential communications. Rather, it was intended to reach an unknown class of taxpayers that were reasonably expected to have utilized the Firm's services to avoid U.S. income tax.8
Instead, the John Doe summons at issue seeks, inter alia: documents "reflecting any U.S. clients at whose request or on whose behalf [the Firm] ha[s] acquired or formed any foreign entity, opened or maintained any foreign financial account, or assisted in the conduct of any foreign financial transaction"; "[a]ll books, papers, records, or other data ... concerning the provision of services to U.S. clients relating to setting up offshore financial accounts"; and "[a]ll books, papers, records, or other data ... concerning the provision of services to U.S. clients relating to the acquisition, establishment or maintenance of offshore entities or structures of entities". (Emphasis added.) As the Government asserted, this broad request, seeking relevant information about any U.S. client who engaged in any one of a number of the Firm's services, is not the same as the Government's knowing whether any Does engaged in allegedly fraudulent conduct, or the content of any specific legal advice the Firm gave particular Does, and then requesting their identities.9
In reaching its decision to permit enforcement of the summons, the panel opinion reviewed the Fifth Circuit cases cited by the Firm and rejected them as not applying to this fact situation. Instead, the opinion relied on the case cited by the IRS, U.S. v. BDO Seidman, 337 F.3d 802 (7th Cir. 2003). The panel did so even though it acknowledged that that case "does differ in some respects," because the summons in that case was targeted at an accounting firm (rather than its clients) and because the involvement of an accounting meant that the panel was dealing with the statutory privilege for accountants rather than the federal common law of attorney-client privilege as such.10 BDO Seidman arose from summonses to BDO as part of an IRS investigation of BDO's compliance with Internal Revenue Code registration and list-keeping requirements for organizers and sellers of potentially abusive tax shelters.11 The clients sought to intervene and argued that, because these documents revealed their identities as BDO clients who sought advice regarding tax shelters and who subsequently invested in those shelters, disclosure inevitably would violate the statutory privilege protecting confidential communications between a taxpayer and any federally authorized tax practitioner giving tax advice under 26 U.S.C. § 7525, which was based on certain principles of the attorney-client privilege. The court held that because the accounting firm was statutorily required to disclose its clients' identities to the IRS, there was no expectation that those clients' identities would receive the protection of the attorney-client privilege. Id. at 812. In other words, BDO's clients had no expectation of privacy due to the accounting firm's requirements to report sales of tax shelters to the IRS.
Nonetheless, the panel in this case felt that the summons here, which would reveal which taxpayers were involved in one of the transactions covered by the summons, would not reach "motive, or other confidential communications of [legal] advice. … Consequently, the Firm's clients' identities are not 'connected inextricably with a privileged communication', and, therefore, the 'narrow exception' to the general rule that client identities are not protected by the attorney-client privilege is inapplicable."12
Petition for Fifth Circuit Review En Banc
The Firm filed a petition on June 8, 2020, seeking a rehearing by the Fifth Circuit en banc. In so doing, the Firm argued that previous decisions by the Fifth Circuit made clear that there was no requirement that the government know the particular and specific legal advice given for the attorney-client privilege to apply.
Amici briefs were filed subsequent to the Firm's June petition by the American College of Tax Counsel and the National Association of Criminal Defense Lawyers, both of which supported rehearing en banc.
By a 9-8 vote and without giving any reasons for their decision, the Fifth Circuit voted not to grant the Firm's petition and rehear the case en banc. Moreover, they did so in the face of a very strong eight-judge dissenting opinion (Dissent), which pointed out that failure to provide further clarification to the attorney-client privilege standard applied by the three-judge panel would create the following dilemma:
The IRS has traditionally served such summonses on financial institutions and commercial couriers. Not lawyers. There is good reason to be wary of investigations that exert pressure on lawyers. The relationship between a customer and a financial institution or commercial courier plays little, if any, role in our system's ability to administer justice—but the same cannot be said of the lawyer-client relationship. When the IRS pursues John Doe summonses against law firms, serious tensions with the attorney-client privilege arise. (Citations omitted).
The panel's reliance on BDO was of concern in the Dissent and the two Amici.13 Both the Amicus and the Dissent noted that tax law by its very nature is a complex matter. In seeking advice in such a byzantine area of law, the law firm's clients had a "strong independent motive" to both seek legal advice and reasonably anticipate that their names would be kept confidential. Yet, the panel's opinion reliance on U.S. v. BDO Seidman may cause the imposition of a potentially different but unclarified standard that centers around what should otherwise be privileged communication: the unidentified clients' "motive" or "purpose" for seeking the advice of the Firm.14
Once the clients' purpose is discerned, the government will utilize the Firm's advice to seek an audit and/or prosecute the Firm's clients.15 Such is the impact of the panel's citation to U.S. v. BDO Seidman.
In contrast as noted by the Dissent, the Firm and the Amicus Briefs, the Firm clients were seeking legal advice as to complex tax matters; they were not participating in listed transactions, and the Firm had no obligation to report its clients to the IRS because they were not engaged in IRS listed transactions. Thus there was no reason for the panel to cite to, let alone rely, on U.S. v. BDO Seidman unless a new standard was being created by the three-judge panel.
Conclusion
The refusal to accept an en banc review to explore the Court's reliance on U.S. v. BDO Seidman raises three potential concerns on the three-judge panel's opinion that are left unresolved: 1) did the three-judge panel create a new standard; 2) did the three-judge panel believe that because of the existence of offshore accounts and the potential of unreported accounts subject to Report of Foreign Bank and Financial Accounts (FBAR) penalties and potential unreported income, the Firm's clients had no expectation of privacy; or 3) did the three-judge panel believe that the activities were per se criminal and thus not protected by the attorney-client privilege?16
As a result of the unresolved answers, the IRS may begin to summons firms that have helped clients form entities abroad and/or open foreign bank accounts without regard to whether the firms are responsible for any wrongdoing. If a client has not filed an FBAR, there is a six-year statute of limitation that can keep the delinquent years open.17 If the client committed civil income tax fraud, the civil income tax statute is still open.18 Additionally, if the client committed criminal income tax fraud and there are continuous acts of concealment, criminal statutes may still be open.19 The IRS could use any of these situations as the grounds upon which to issue a summons to a firm, and then harvest the clients' identities for purposes of audits and prosecution.
In conclusion, the notion that the attorney-client privilege continues to be eroded should be of concern to all, including law firms and their clients. As noted in the American College of Tax Counsel's Amicus brief at pgs. 14-15:
[T]he panel's decision could facilitate the issuance of John Doe summons to a law firm seeking documents identifying any companies who retained the firm for legal advice regarding structuring their business so that intellectual property assets were located in low tax jurisdictions, or identifying any individuals who engaged the firm for legal advice regarding structuring a family limited partnership or annuity trust. Departing from longstanding and established precedent in this and other circuits, the panel's decision subjects the John Doe summons power to abuse by allowing the IRS to make broad requests to law firms to circumvent the privilege.
Notes
1 A John Doe summons is "[a]ny summons described in 26 U.S.C.§ 7609(c)(1)." See 26 U.S.C. § 7609(f).
2 Taylor Lohmeyer. v. United States, 957 F.3d 505, 507 (5th Cir. 2020).
3 Id. at 509.
4 Id.
5 United States v. United Shoe Mach. Corp., 89 F. Supp. 357, 358-59 (D. Mass. 1950).
6 In re Grand Jury Subpoena for Attorney Representing Criminal Defendant Reyes-Requena, 913 F.2d 1118, 1125 (5th Cir. 1990).
7 Reyes-Requena, 913 F.2d at 1124.
8 Taylor Lohmeyer, 957 F.3d at 512.
9 Id. at 512.
10 Id. at 513.
11 26 U.S.C. §§ 6111, 6112.
12 Taylor Lohmeyer, 957 F.3d at 513.
13 The American College of Tax Counsel brief (2020 WL 3476367) and the National Association of Criminal Defense Lawyers brief (2020 WL 3411018).
14 As stated by the Dissent at page 2: "We have previously held that client identities are privileged where disclosure would reveal the client's confidential motive for retaining an attorney. If the disclosure of the client's identity will also reveal the confidential purpose for which he consulted an attorney, we protect both the confidential communication and the client's identity as privileged." (Citations omitted).
15 As stated in the American College of Tax Counsel Amicus brief at 12: "[T]he 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. See, e.g., United States v. Hubbell, 530 U.S. 27 (2000). If the Firm's advice was legal advice, then compliance with the summons necessarily invades the attorney-client privilege."
16 U.S. v. Zolin, et. al. 491 US 554 (1989).
17 31 U.S.C. § 5321(b)(1).
18 26 U.S.C.§ 6501(c)(1) and (2).
19 26 U.S.C. § 6531(2); United States v. Carlson, 235 F.3d 466, 470 (9th Cir. 2000).