Reiserer v. United States ( 2007 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
KENNETH H. REISERER; REISERER & 
AGEE LLP, by Kenneth H.
No. 05-35615
Reiserer, its successor in interest,
Petitioners-Appellants,
 D.C. No.
CV-04-00967-JCC
v.
OPINION
UNITED STATES OF AMERICA,
Respondent-Appellee.

Appeal from the United States District Court
for the Western District of Washington
John C. Coughenour, Chief District Judge, Presiding
Argued and Submitted
December 6, 2006—Seattle, Washington
Filed March 20, 2007
Before: Betty B. Fletcher and M. Margaret McKeown,
Circuit Judges, and William W Schwarzer,* District Judge.
Opinion by Judge Schwarzer
*The Honorable William W Schwarzer, Senior United States District
Judge for the Northern District of California, sitting by designation.
3291
3294 REISERER v. UNITED STATES
COUNSEL
John M. Colvin, Chicoine & Hallett, P.S., Seattle, Washing-
ton, for the appellants.
Gretchen M. Wolfinger, Tax Division, U.S. Department of
Justice, Washington, D.C., for the appellee.
OPINION
SCHWARZER, District Judge:
The Estate of Kenneth Reiserer and the law firm Reiserer
& Agee LLP (collectively, Reiserer) appeal the denial of their
motion to quash an Internal Revenue Service (IRS) summons
issued to the Bank of America. The IRS issued the summons
in connection with its investigation to determine whether pen-
alties should be imposed on Reiserer pursuant to 26 U.S.C.
REISERER v. UNITED STATES 3295
§§ 6700 and 6701 for promoting an abusive tax shelter. The
district court had jurisdiction pursuant to 26 U.S.C.
§§ 7609(b)(2) and 7609(h) and entered a final order denying
the petition. This court has jurisdiction pursuant to 28 U.S.C.
§ 1291.
On appeal, Reiserer contends that the district court erred
when it held that: (1) the penalties under those sections sur-
vived Kenneth Reiserer’s death, and (2) the attorney-client
privilege did not protect the material requested from the Bank
of America. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
Kenneth Reiserer was an attorney whose practice included
tax planning services. The IRS alleged that he was involved
in an abusive tax arrangement known as offshore employee
leasing (OEL). Reiserer was an officer or director of several
domestic leasing corporations involved in an OEL scheme.
According to the IRS, under an OEL scheme a customer will
terminate his current employment and enter into a contract
with a foreign leasing corporation. That corporation then
leases the rights to the customer’s services to a domestic leas-
ing corporation which, in turn, leases the services to the origi-
nal employer. The original employer pays the domestic
corporation, who pays the customer enough to cover living
expenses. The foreign corporation receives the remainder of
the funds, deducts its fee, and deposits the balance in an off-
shore account. On May 5, 2003, the IRS published a notice
stating that OEL schemes were abusive arrangements and per-
sons involved could be subject to IRS investigation and possi-
ble liability. I.R.S. Notice 2003-22, 2003-1 C.B. 851.
In its investigation of Reiserer for potential liability under
§§ 6700 and 6701, the IRS found twenty-one customers who
participated in his OEL scheme. When Reiserer refused to
provide a customer list, the IRS, on April 8, 2004, served a
third-party summons on Bank of America. The summons
3296 REISERER v. UNITED STATES
requested documents from January 1, 1993, to April 7, 2004,
relating to accounts maintained by Reiserer’s law firm,
including his client trust accounts and the accounts of three
domestic employee-leasing companies. Reiserer petitioned to
quash the summons and the IRS moved to enforce it.
Reiserer passed away on July 12, 2004, but the IRS contin-
ued its investigation to determine whether the penalties under
§§ 6700 and 6701 could be assessed against his estate. The
case was referred to a magistrate judge, who found: (1) the
penalties under §§ 6700 and 6701 are not penal in nature and
thus do not abate with death, and (2) disclosure of the account
information would not violate the attorney-client privilege.
The district judge adopted the magistrate judge’s report and
recommendation and this appeal followed.
I.
[1] Under § 6700, a promoter of an abusive tax shelter
“shall pay, with respect to each [proscribed] activity . . . , a
penalty” in the amount of the lesser of $1000 or 100% of the
gross income derived by that promoter. 26 U.S.C. § 6700(a).
Under § 6701, any person who aids, assists or advises in the
preparation of a tax return knowing or having reason to
believe that use of that advice would result in the understate-
ment of another’s tax liability, “shall pay a penalty” of $1000
or, if it relates to the tax liability of a corporation, $10,000.
Id. § 6701(a) & (b).
[2] It is “a well-settled rule that actions upon penal statutes
do not survive the death” of a party. United States v. Oberlin,
718 F.2d 894, 896 (9th Cir. 1983) (citing Ex parte Schreiber,
110 U.S. 76, 80 (1884)). Whether Reiserer’s death abates the
IRS’s action depends on whether the underlying statute is
penal or civil in nature. See United States v. $84,740.00 Cur-
rency, 981 F.2d 1110, 1113 (9th Cir. 1992). Whether §§ 6700
and 6701 are penal or civil is a question of first impression.
REISERER v. UNITED STATES 3297
In Hudson v. United States, 522 U.S. 93 (1997), the
Supreme Court held that monetary penalties and occupational
debarment sanctions imposed by the Office of the Comptrol-
ler of the Currency (OCC) were civil and not criminal (i.e.,
penal) in nature. Accordingly, the Double Jeopardy Clause
did not bar a subsequent criminal prosecution.
[3] “Whether a particular punishment is criminal or civil is,
at least initially, a matter of statutory construction.” Hudson,
522 U.S. at 99. Thus, “[a] court must first ask whether the leg-
islature, ‘in establishing the penalizing mechanism, indicated
either expressly or impliedly a preference for one label or the
other.’ ” Id. (quoting United States v. Ward, 448 U.S. 242,
248 (1980)). “Even in those cases where the legislature has
indicated an intention to establish a civil penalty, we have
inquired further whether the statutory scheme was so punitive
either in purpose or effect, as to transform what was clearly
intended as a civil remedy into a criminal penalty.” Id. (inter-
nal quotation marks, brackets, and citations omitted). To
make that determination, the Court “provide[d] useful guide-
posts” including
(1) whether the sanction involves an affirmative
disability or restraint; (2) whether it has historically
been regarded as a punishment; (3) whether it comes
into play only on a finding of scienter; (4) whether
its operation will promote the traditional aims of
punishment-retribution and deterrence; (5) whether
the behavior to which it applies is already a crime;
(6) whether an alternative purpose to which it may
rationally be connected is assignable for it; and (7)
whether it appears excessive in relation to the alter-
native purpose assigned.
Id. at 99-100 (quoting Kennedy v. Mendoza-Martinez, 372
U.S. 144, 168-69 (1963) (internal quotation marks omitted)).
The Court cautioned “that these factors must be considered in
relation to the statute on its face, and only the clearest proof
3298 REISERER v. UNITED STATES
will suffice to override legislative intent and transform what
has been denominated a civil remedy into a criminal penalty.”
Id. at 100 (quotation marks and citations omitted).
[4] Here it is clear that the legislature intended the penalties
in question to be civil. The statutes are found in Internal Rev-
enue Code Chapter 68, titled “Additions to the Tax, Addi-
tional Amounts, and Assessable Penalties,” rather than
Chapter 75, titled “Crimes, Other Offenses, and Forfeitures.”
Further, Chapter 68 penalties can be imposed through admin-
istrative authority, unlike Chapter 75 sanctions, which require
judicial intervention. See Hudson, 522 U.S. at 103 (“That
[the] authority [to confer monetary penalties] was conferred
upon administrative agencies is prima facie evidence that
Congress intended to provide for a civil sanction.”).
Turning to the Hudson guideposts, we examine the statutes
to determine whether there is the “clearest proof” that the stat-
utes are so punitive in purpose or effect as to render them
criminal despite the evident legislative intent.
[5] The statutes here involve only monetary penalties, and
no “affirmative disability or restraint,” and “certainly nothing
approaching the infamous punishment of imprisonment.” See
id. at 104 (internal quotation marks omitted). Such monetary
penalties have not been historically regarded as punishment.
See Helvering v. Mitchell, 303 U.S. 391, 400 (1938) (“[T]he
payment of fixed or variable sums of money [is a] sanction[ ]
which [has] been recognized as enforceable by civil proceed-
ings since the original revenue law of 1789.”); Estate of Rau
v. Comm’r, 301 F.2d 51, 56-57 (9th Cir. 1962).
[6] The statutes at issue do have a scienter requirement in
the sense that the conduct penalized must necessarily be com-
mitted knowingly. And while the statutes will serve the tradi-
tional aims of retribution and deterrence to some extent, the
Supreme Court has recognized “that all civil penalties have
some deterrent effect” and that “the mere presence of this pur-
REISERER v. UNITED STATES 3299
pose is insufficient to render a sanction criminal.” Hudson,
522 U.S. at 102, 105. The conduct addressed in the statutes
may also be the basis for a criminal prosecution, but “[t]his
fact is insufficient to render the money penalties . . . crimi-
nally punitive.” Id. at 105. Finally, §§ 6700 and 6701 serve
the remedial goal of reimbursing the government for the costs
in investigating tax fraud and for possible lost tax revenue,
and the penalties are not excessive in relation to the statutes’
remedial goal. See Louis v. Comm’r, 170 F.3d 1232, 1235
(9th Cir. 1999).
[7] In sum, there is little to show, let alone the “clearest
proof,” that the penalties are penal.
Our conclusion that the statutes are not penal in nature
finds support in two analogous cases. In Estate of Rau, we
held that a fifty percent addition to tax for fraud did not abate
at the taxpayer’s death. 301 F.2d at 56-57. While Rau pre-
dates Hudson, its reasoning rests in part on the same prece-
dent as that relied on in Hudson. See id. at 55 (citing
Helvering, 303 U.S. 391). And in Louis, we held that under
Hudson, a fifty percent addition to tax for fraud was a civil
remedy and did not violate the Double Jeopardy Clause. 170
F.3d at 1235.
Reiserer asserts that the Hudson decision determining when
a penalty is to be considered criminal for purposes of the
Double Jeopardy Clause has no application to the law govern-
ing survival or abatement of penalties. He does not explicate
reasons for the assertion, and there is no reason in principle
to reject the Hudson analysis. That analysis is not driven by
policies underlying the Double Jeopardy Clause. In Hudson,
as in the case before us, the fundamental question is what
effect to give to a statute as barring a subsequent proceeding.
In that context, abatement is analogous to former jeopardy;
each is a bar to the continuation of proceedings when those
proceedings are grounded on a criminal statute.
3300 REISERER v. UNITED STATES
Moreover, the Hudson analysis is derived from Ward, 448
U.S. 242. See Hudson, 522 U.S. at 95. And in $84,740.00
Currency, we held, on the strength of Ward, that the forfeiture
under 21 U.S.C. § 881, did not abate on the wrongdoer’s
death. 981 F.2d at 1113.
Reiserer’s reliance on Ex parte Schreiber is misplaced.
Schreiber held that a private action to recover statutory penal-
ties for violation of the copyright law abated on the death of
the defendant. 110 U.S. at 80. It reasoned that:
At common law, actions on penal statutes do not sur-
vive, and there is no act of congress which estab-
lishes any other rule in respect to actions on the
penal statutes of the United States.
Id. (internal citation omitted). Thus, Schreiber stands for the
unremarkable proposition that actions on penal statutes abate;
it does not address the issue whether a particular statute is
penal or civil in nature.
Finally, Reiserer urges us to reject the Hudson analysis in
favor of a test adopted by the Sixth Circuit in Murphy v.
Household Finance Corp., 560 F.2d 206 (6th Cir. 1977). Mur-
phy held that a bankrupt borrower’s cause of action for penal-
ties under the Truth in Lending Act was civil in nature. The
court’s three-factor test looked to whether the statute was to
redress individual wrongs, whether recovery runs to the indi-
vidual, and whether recovery is disproportionate to the harm.
Id. at 209. Reiserer’s argument is not persuasive, first,
because it rests on the authority of a court of appeals decision
predating Hudson by twenty years; second, because it ignores
the comprehensive analysis under the guideposts and, in par-
ticular, the focus on legislative intent as the dominant factor;
and third, because the Murphy court’s interpretation of the
penalty provision of the Truth in Lending Act has little bear-
ing on the interpretation of §§ 6700 and 6701 of the Internal
Revenue Code.
REISERER v. UNITED STATES 3301
II.
The IRS issued the summons to Bank of America in con-
nection with its investigation of Reiserer for violations of
§§ 6700 and 6701, which subject Reiserer but not his clients
to potential penalties.1 Reiserer does not object to the produc-
tion of records relating to his leasing companies, but contends
that client identity and fee information should be protected
from disclosure.
[8] It is well settled that there is no privilege between a
bank and a depositor. Harris v. United States, 413 F.2d 316,
319-20 (9th Cir. 1969) (involving production of all checks
deposited into or withdrawn from an attorney’s trustee
account). In refusing to extend the attorney-client privilege,
we stated:
The reasons which led to the attorney-client privi-
lege, such as the aim of encouraging full disclosure
in order to enable proper representation, do not exist
in the case of a bank and its depositor. Moreover, the
client, by writing the check which the attorney will
later cash or deposit at the bank, has set the check
afloat on a sea of strangers. The client knows when
delivering the check, and the attorney knows when
cashing or depositing it, that the check will be
viewed by various employees at the bank where it is
cashed or deposited, at the clearing house through
which it must pass, and at his own bank to which it
will eventually return. Thus, the check is not a confi-
1
The summons required Bank of America to provide “[a]ll documents
and records in (Reiserer’s) possession or under [his] control relating to
[Reiserer] or [seven named corporations and Reiserer & Agee].” It called
for a wide range of documents relating to accounts in which Reiserer or
the named entities had signatory authority, including signature cards,
account applications and related documents, cancelled checks for pay-
ments exceeding $2999.99, account statements, wire transfer instructions,
and documents prepared by the bank.
3302 REISERER v. UNITED STATES
dential communication, as is the consultation
between attorney and client.
Id. at 319-20. As Harris explains, there is no confidentiality
where a third party such as a bank either receives or generates
the documents sought by the IRS. Because the attorney-client
privilege applies only where the communication between
attorney and client is confidential, there is no privilege pro-
tecting the documents the IRS seeks in the present action.
[9] To the extent those documents disclose the identity of
Reiserer’s clients, the attorney-client privilege does not pro-
tect that information. “[T]he attorney-client privilege ordinar-
ily protects neither a client’s identity nor information
regarding the fee arrangements reached with that client.”
United States v. Horn (In re Horn), 976 F.2d 1314, 1317 (9th
Cir. 1992).
[10] Reiserer grounds his privilege claim on Baird v.
Koerner, 279 F.2d 623 (9th Cir. 1960). In Baird, the attorney
had delivered a cashier’s check to the IRS in payment of taxes
that his unidentified clients had unlawfully failed to pay, an
action that in effect acknowledged his clients’ guilt. Id. at
633. Baird stands for the proposition that “the identity of a
client is privileged information if revelation of that identity
would constitute an acknowledgment of guilt of the offense
that led the client to seek legal assistance.” Horn, 976 F.2d at
1317. Here, the IRS issued the summons as part of an investi-
gation of Reiserer and not of his clients. Disclosure of the cli-
ents’ identities may eventually lead them to become IRS
targets, but disclosure in itself is not incriminating. See id.(stating that fee information “may be privileged if it would
provide the ‘last link’ in the chain of evidence incriminating
the client” (internal quotation marks and citation omitted)).
The records requested will not provide this link and thus the
attorney-client privilege does not apply.
[11] Finally, Reiserer contends that by seeking financial
information of Reiserer & Agee, not limited to the offshore
REISERER v. UNITED STATES 3303
leasing corporations, the summons seeks information about
the firm’s entire array of clients. This information, he argues,
is not relevant to the purpose of the IRS’s investigation.
Under 26 U.S.C. § 7602, the IRS has wide latitude to issue a
summons for investigatory purposes. United States v. Jose,
131 F.3d 1325, 1327 (9th Cir. 1997). It needs only to make
a prima facie showing of good faith that the documents it
seeks may be relevant to a legitimate purpose, that it does not
already possess the information sought, and that it has fol-
lowed the required administrative steps. United States v. Pow-
ell, 379 U.S. 48, 57-58 (1964). David H. Tedder & Assocs.,
Inc. v. United States, 77 F.3d 1166 (9th Cir. 1996), is not
apposite. There, the IRS requested full access to the firm’s
bank accounts in the course of an audit of a law firm’s tax
return. Id. at 1168. The district court found that it had failed
to show how clients’ names were relevant to the audit of the
firm because clients could not provide information which
would help determine the correctness of the firm’s tax return.
Id. at 1169. Here, in contrast, the IRS maintains that inter-
viewing Reiserer’s clients may help the IRS determine the
number of illegal schemes marketed by Reiserer, a purpose
relevant to a § 6700 investigation. The IRS has shown that it
does not already possess the information sought and that it has
met the administrative requirements of the Internal Revenue
Code. Reiserer has failed to meet the burden of rebutting the
government’s showing of good faith; the summons is properly
enforced. See Liberty Fin. Servs. v. United States, 778 F.2d
1390, 1392 (9th Cir. 1985) (stating that a taxpayer attempting
to rebut IRS’s showing of good faith has a heavy burden).
AFFIRMED.