Taylor Lohmeyer Law Firm v. United States ( 2020 )

Case: 19-50506 Document: 00515394156 Page: 1 Date Filed: 04/24/2020
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 19-50506 April 24, 2020
Lyle W. Cayce
TAYLOR LOHMEYER LAW FIRM P.L.L.C., Clerk
Plaintiff - Appellant
v.
UNITED STATES OF AMERICA,
Defendant - Appellee
Appeal from the United States District Court
for the Western District of Texas
Before BARKSDALE, HIGGINSON, and DUNCAN, Circuit Judges.
RHESA HAWKINS BARKSDALE, Circuit Judge:
At issue is whether the district court erred by granting the Government’s
counter petition to enforce a summons issued to Taylor Lohmeyer Law Firm
P.L.L.C. (Firm), notwithstanding the Firm’s blanket claim that all documents
responsive to the summons are protected by the attorney-client privilege.
AFFIRMED.
I.
The Firm, located in Kerrville, Texas, provides estate- and tax-planning
advice to its clients. In October 2018, the Internal Revenue Service (IRS)
served a John Doe summons on the Firm, seeking documents for “John Does”,
U.S. taxpayers,
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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.
A John Doe summons is “[a]ny summons described in [26 U.S.C.
§ 7609(c)(1) (covered summonses)] which does not identify the person with
respect to whose liability the summons is issued”. 26 U.S.C. § 7609(f) (Internal
Revenue Code’s special procedures for John Doe summonses). Issuing a John
Doe summons first requires an ex parte court proceeding, in which the
Government establishes: “(1) the summons relates to the investigation of a
particular person or ascertainable group or class of persons”; “(2) 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 “(3) 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”. Id.; see also id. § 7609(h)(2) (requiring the proceeding be ex parte).
The Government successfully made this showing at an October 2018 hearing,
prior to issuing the summons to the Firm.
The Government sought documents from the Firm based on the 2018
declaration of IRS Agent Russell-Hendrick, “an Offshore Special Matters
Expert in the [IRS’] Special Enforcement Program”, which “identifies and
examines [U.S.] taxpayers involved in abusive transactions and other financial
arrangements for the purpose of avoiding U.S. taxes”. Agent Russell-Hendrick
has submitted two supporting declarations for the Government in this case:
the above-described declaration in 2018, prior to the ex parte proceeding; and
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the other in 2019, attached to the Government’s counter petition. The
following is from the Agent’s 2019 declaration.
The Government “is conducting an investigation to determine the
identity and correct federal income tax liability of U.S. taxpayers for whom [the
Firm] acquired or formed any foreign entity, opened or maintained any foreign
financial account, or assisted in the conduct of any foreign financial
transaction”. The investigation arose because, during the IRS’ audit of one
U.S. taxpayer (Taxpayer-1), its investigation “revealed that Taxpayer-1 hired
[the Firm] for tax planning, which [the Firm] accomplished by (1) establishing
foreign accounts and entities, and (2) executing subsequent transactions
relating to said foreign accounts and entities”. Additionally, “[f]rom 1995 to
2009, Taxpayer-1 engaged [the Firm] to form 8 offshore entities in the Isle of
Man and in the British Virgin Islands” and “established at least 5 offshore
accounts so [Taxpayer-1] could assign income to them and, thus, avoid U.S.
income tax on the earnings”. “In June 2017, [however,] Taxpayer-1 and his
wife executed a closing agreement with the IRS in which they admitted that
Taxpayer-1 . . . earned unreported income of over $5 million for the 1996
through 2000 tax years, resulting in an unpaid income tax liability of over $2
[m]illion.”
“Ultimately, Taxpayer-1 paid almost $4 million to the IRS to resolve his
unpaid federal tax, interest, and penalties for those tax years.” Consequently,
the John Doe summons at issue here
seeks records that may reveal the identity and international
activities of certain clients of [the Firm], from January 1, 1995,
through December 31, 2017. This information may be relevant to
the underlying IRS investigation into the identity and correct
federal income tax liability of U.S. persons who employed [the
Firm] to conceal unreported taxable income in foreign countries.
In particular, the IRS is seeking information on U.S. taxpayers for
whom [the Firm] created and maintained foreign bank accounts
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and foreign entities that may not be properly disclosed on tax
returns.
After receiving the Government’s summons, the Firm filed in federal
district court a petition to quash the summons on various grounds, asserting
“the summons is overbroad and represents an unprecedented intrusion into
the attorney-client relationship and is plainly abusive”. Regarding attorney-
client privilege, the Firm claimed that, despite the general rule a lawyer’s
clients’ identities are not covered by the privilege, an exception to that rule
exists whereby “a client’s identity is protected by the attorney-client privilege
if its disclosure would result in the disclosure of a confidential communication”.
Accordingly, the Firm asserted the exception applies here, rendering all
documents requested in the summons protected by the privilege.
The Government responded by filing a motion to dismiss the petition to
quash and a counter petition to enforce the summons. Although the
Government contended the Firm’s petition was “jurisdictionally deficient”,
which supported the petition’s dismissal, it highlighted that the petition itself
“indicate[d] an unwillingness to comply with the summons” and supported
enforcing it. As relevant here, the Firm responded to the Government’s motion
and counter petition, and the Government filed a reply.
At an April 2019 status hearing to discuss the pending filings, the court,
with the parties’ agreement, proceeded directly with the Government’s counter
petition. The counter petition was granted on 15 May 2019, with the court’s
ruling, inter alia: “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”. Moreover, the court noted in
its order that, “if [the Firm] wishes to assert any claims of privilege as to any
responsive documents, it may . . . do so, provided that any such claim of
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privilege is supported by a privilege log which details the foundation for each
claim on a document-by-document basis”. Finally, the court stated it would
“retain jurisdiction in th[e] case pending any challenges by the Government of
the Firm’s privilege log, should the Firm produce one”.
II.
In challenging the court’s ruling, the Firm presents only its contentions
as to attorney-client privilege. The district court, upon the Firm’s motion, has
stayed its proceedings pending this appeal. In doing so, the court stated: “The
Firm produced no privilege log, so there is no longer a need for this Court to
retain jurisdiction. Accordingly, the Clerk’s office is directed to CLOSE this
case”.
“[A] district court order enforcing an IRS summons is an appealable final
order”. Church of Scientology v. United States, 506 U.S. 9, 18 n.11 (1992)
(citation omitted). The party challenging the summons may do so “on any
appropriate ground”, including because the information sought “is protected by
the attorney-client privilege”. Reisman v. Caplin, 375 U.S. 440, 449 (1964)
(citation omitted).
But “[r]eview of a district court’s determination with respect to the
attorney-client privilege, even on direct appeal, . . . is limited”. In re Avantel,
S.A., 343 F.3d 311, 318 (5th Cir. 2003). “The application of the attorney-client
privilege is a question of fact, to be determined in the light of the purpose of
the privilege and guided by judicial precedents.” EEOC v. BDO USA, L.L.P.,
876 F.3d 690, 695 (5th Cir. 2017) (internal quotation marks and citations
omitted). “In evaluating a claim of attorney-client privilege, [our court]
review[s] factual findings for clear error and the application of the controlling
law de novo.” In re Itron, Inc., 883 F.3d 553, 557 (5th Cir. 2018) (italics added)
(internal quotation marks and citation omitted).
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In this instance, of course, federal privilege-law applies. See, e.g.,
Avantel, 343 F.3d at 323 (citation omitted). In that regard, for the attorney-
client privilege to protect from disclosure, either in whole or in part, a
document responsive to the Government’s summons in this case, the Firm
must establish that the document contains a confidential communication,
between it and a client, made with the client’s “primary purpose” having been
“securing either a legal opinion or legal services, or assistance in some legal
proceeding”. BDO USA, 876 F.3d at 695 (citation omitted). “Because the
attorney-client privilege has the effect of withholding relevant information
from the fact-finder, it is interpreted narrowly so as to apply only where
necessary to achieve its purpose.” Id. (alteration, internal quotation marks,
and citation omitted). Construing the privilege narrowly is particularly
important with IRS investigations because of the “congressional policy choice
in favor of disclosure of all information relevant to a legitimate IRS inquiry”.
United States v. Arthur Young & Co., 465 U.S. 805, 816–17 (1984) (emphasis
in original) (citations omitted).
As discussed in part, “[d]etermining the applicability of the privilege is a
highly fact-specific inquiry, and the party asserting the privilege bears the
burden of proof”. BDO USA, 876 F.3d at 695 (internal quotation marks and
citations omitted). In that regard, “[a]mbiguities as to whether the elements
of a privilege claim have been met are construed against the proponent”. Id.
(citation omitted). Additionally, as a general rule, “the attorney-client
privilege may not be tossed as a blanket over an undifferentiated group of
documents”. United States v. El Paso Co., 682 F.2d 530, 539 (5th Cir. 1982)
(citations omitted). Instead, “[t]he privilege must [generally] be specifically
asserted with respect to particular documents”. Id.; see also United States v.
Davis, 636 F.2d 1028, 1038–39 (5th Cir. 1981) (“It is generally agreed that the
recipient of a summons properly should appear before the issuing agent and
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claim privileges on a question-by-question and document-by-document basis.”
(citations omitted)).
Moreover, “[a]s [another] general rule, client identit[ies] and fee
arrangements are not protected as privileged”. In re Grand Jury Subpoena for
Attorney Representing Criminal Defendant Reyes-Requena, 926 F.2d 1423,
1431 (5th Cir. 1991) (Reyes-Requena II) (citation omitted). That said, a
“narrow exception” exists “when revealing the identity of the client and fee
arrangements would itself reveal a confidential communication”. Id. (citation
omitted). This “limited and rarely available sanctuary, which by virtue of its
very nature must be considered on a case-to-case basis”, recognizes that
“[u]nder certain circumstances, an attorney must conceal even the identity of
a client, not merely his communications, from inquiry”. United States v. Jones
(In re Grand Jury Proceedings), 517 F.2d 666, 671 (5th Cir. 1975) (citation
omitted).
The exception, however, does not expand the scope of the privilege; it
does not apply “independent of the privileged communications between an
attorney and his client”. In re Grand Jury Subpoena for Attorney Representing
Criminal Defendant Reyes-Requena, 913 F.2d 1118, 1124 (5th Cir. 1990)
(emphasis added). Rather, a client’s identity is shielded “only where revelation
of such information would disclose other privileged communications such as
the confidential motive for retention”. Id. at 1125 (citation omitted). In that
regard, the privilege “protect[s] the client’s identity and fee arrangements in
such circumstances not because they might be incriminating but because they
are connected inextricably with a privileged communication—the confidential
purpose for which [the client] sought legal advice”. Reyes-Requena II, 926 F.2d
at 1431 (emphasis added).
Because the Firm contends this case falls within this exception to the
general rule that a law firm’s clients’ identities are not protected by the
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attorney-client privilege, it asserts: “[a]s a matter of law, all documents
responsive to the summons are privileged”; and the district court erred in
concluding otherwise. To support its position, the Firm relies on, inter alia,
Reyes-Requena II and United States v. Liebman, 742 F.2d 807 (3d Cir. 1984).
As discussed, our court made clear in Reyes-Requena II that, “[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”. Reyes-Requena II, 926
F.2d at 1431. And, as stated, “[w]e protect the client’s identity and fee
arrangements in such circumstances not because they might be incriminating
but because they are connected inextricably with a privileged
communication—the confidential purpose for which [the client] sought legal
advice”. Id. The Firm asserts such an inextricable connection is present here.
In Liebman, the third circuit, in applying the relevant exception to the
general attorney-client privilege rule for client identities, determined:
The affidavit of the IRS agent supporting the request for [a John
Doe] summons not only identifies the subject matter of the
attorney-client communication, but also describes its substance.
That is, the affidavit does more than identify the communications
as relating to the deductibility of legal fees paid to [the firm] in
connection with the acquisition of a real estate partnership
interest. It goes on to reveal the content of the communication,
namely that “taxpayers . . . were advised by [the firm] that the fee
was deductible for income tax purposes.” Thus, this case 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 . . . .”
Liebman, 742 F.2d at 809 (alterations added) (citations omitted). Along that
line, the Firm contends: Agent Russell-Hendrick’s 2018 declaration, like that
of the IRS agent in Liebman, establishes the Government already knows the
content of the legal advice the Firm provided the Does; and, if the Firm is
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“required to identify [its] clients as requested, that identity, when combined
with the substance of the communication . . . that is already known, would
provide all there is to know about a confidential communication between the
taxpayer-client and the attorney”, breaching the attorney-client privilege. See
id. at 810.
Both cases, however, are distinguishable. In Reyes-Requena II, which
involved whether a defense attorney was required “to reveal the identity of an
anonymous third[-]party benefactor who paid the attorney’s fees for [a] drug
defendant”, both the district court and our court, unlike in this case, inspected
sealed documents relevant to the privilege claim. Reyes-Requena II, 926 F.2d
at 1425, 1428, 1432 (citations omitted). Moreover, the benefactor whose
identity was at issue intervened in the case, and the district court determined,
“[r]elying upon the sealed affidavits presented in camera”, that: “an
attorney/client privilege existed between [the defense attorney] and Intervenor
. . . and . . . the relationship was ongoing”; “Intervenor retained [the defense
attorney] to represent [the criminal defendant] and Intervenor jointly for a
confidential purpose”; and “if [the defense attorney] were to reveal the
Intervenor’s identity, Intervenor’s confidential motive for retaining [the
defense attorney] would be exposed as apparent”. Id. at 1428 (emphasis in
original) (citations omitted). It was under these specific circumstances, not
present here, that the district court found, and our court agreed, the
intervening client’s “confidential motive for consulting [the defense attorney]
was intertwined inextricably with his identity and fee arrangements”. Id. at
1431 (citation omitted).
In Liebman, the IRS agent’s declaration explicitly identified taxpayers’
communications “as relating to the deductibility of legal fees paid to [the firm]
in connection with the acquisition of a real estate partnership interest” and
that, as the defendant firm conceded, “taxpayers . . . were advised by [the firm]
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that the fee was deductible for income tax purposes”. Liebman, 742 F.2d at
809 (alteration in original) (citations omitted). The IRS contended the fee was
not deductible, and the John Doe summons at issue in that case, therefore,
sought identity information explicitly for the discrete subset of clients “who
paid fees in connection with the acquisition of real estate partnership
interests”. Id. at 808 (citation omitted). “Because the IRS request was limited
to the group of persons who paid for specific investment advice, the IRS would
automatically identify those who were told they could make the questionable
deductions”, and this “would [have] provide[d] all there [was] to know about a
confidential communication between the taxpayer-client and the attorney[,] . .
. breach[ing] the attorney-client privilege to which that communication [was]
entitled”. Id. at 809–10 (emphasis added).
Importantly, however, and contrary to the Firm’s contention, Agent
Russell-Hendrick’s 2018 declaration did not state the Government knows the
substance of the legal advice the Firm provided the Does. (Nor, for that matter,
does her 2019 declaration.) Rather, it outlined evidence providing a
“reasonable basis”, as required by 26 U.S.C. § 7609(f), “for concluding that the
clients of [the Firm] are of interest to the [IRS] because of the [Firm’s] services
directed at concealing its clients’ beneficial ownership of offshore assets”. The
2018 declaration also made clear that “the IRS is pursuing an investigation to
develop information about other unknown clients of [the Firm] who may have
failed to comply with the internal revenue laws by availing themselves of
similar services to those that [the Firm] provided to Taxpayer-1”. (Emphasis
added.) Therefore, unlike the declaration in Liebman, neither of the Agent’s
declarations in this case identified specific, substantive legal advice the IRS
considered improper and then supported the Government’s effort to receive the
identities of clients who received that advice. See Liebman, 742 F.2d at 809.
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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.
This is particularly true given statements made by Fred Lohmeyer, one
of the Firm’s name partners, in his declaration attached to the Firm’s
memorandum supporting its petition to quash the summons. He stated the
Firm’s other clients “ha[ve] facts that are distinguishable from” those of
Taxpayer-1 “because[,] to the best of [his] knowledge, [the Firm] never advised
any other client with respect to the treatment of earned income as income
earned by a foreign corporation”. This undermines the Firm’s contention that
the Government knows the substantive content of legal advice the Firm gave
the Does.
In that regard, the circumstances here, as contended by the Government,
are more like those in United States v. BDO Seidman, 337 F.3d 802 (7th Cir.
2003). That case involved unnamed clients of a public accounting and
consulting firm seeking to intervene in an IRS enforcement action against the
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firm “to assert a confidentiality privilege regarding certain documents that [the
firm] intended to produce in response to [IRS] summonses . . . because the[]
documents reveal[ed] their identities as [firm] clients who sought advice
regarding tax shelters and who subsequently invested in those shelters”. Id.at 805–06. According to the clients, disclosing their identities “inevitably
would violate the statutory privilege [26 U.S.C. § 7525] protecting confidential
communications between a taxpayer and any federally authorized tax
practitioner giving tax advice”. Id. at 806 (citation omitted).
BDO Seidman, of course, does differ in some respects from this case.
Namely, the clients sought to intervene in BDO Seidman (in which the IRS
targeted the firm’s, not the clients’, compliance with the Internal Revenue
Code); and a statutory, not the attorney-client, privilege, was at issue. See id.at 805–06. Critically, however, the statutory privilege was modeled after the
attorney-client privilege, including its rule that “ordinarily the identity of a
client does not come within the scope of the privilege” and its “limited
exception” allowing that “the identity of a client may be privileged in the rare
circumstance when so much of an actual confidential communication has been
disclosed already that merely identifying the client will effectively disclose that
communication”. Id. at 810–11 (citations omitted). Ultimately, the seventh
circuit’s rationale in analyzing the privilege claim on the facts of the case before
it, and affirming the district court’s denial of the clients’ motions to intervene,
is instructive: “[d]isclosure of the identities of the Does will disclose to the IRS
that the Does participated in one of the 20 types of tax shelters described in its
summonses”; but, “[i]t is less than clear . . . as to what motive, or other
confidential communication of tax advice, can be inferred from that
information alone”. See id. at 812–13.
The same is true here: disclosure of the Does’ identities would inform
the IRS that the Does participated in at least one of the numerous transactions
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described in the John Doe summons issued to the Firm, but “[i]t is less than
clear . . . as to what motive, or other confidential communication of [legal]
advice, can be inferred from that information alone”. See id. at 812.
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. See Reyes Requena II, 926 F.2d at 1431 (citations
omitted).
III.
For the foregoing reasons, the 15 May 2019 enforcement order is
AFFIRMED.
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