Highlights
- The latest 9-8 ruling starting the U.S. Court of Appeals review for the fifth circuit at law firm Taylor Lohmeyer P.L.L.C. The United States, a case in which a subpoena of "John Doe" was served in a law firm by the Internal Revenue Service (IRS), is viewed by many as an erosion of the protection of the rights of attorneys and clients.
- This Holland & Knight Alert examines the decision and its possible implications, including several unresolved issues that should be of concern to both law firms and clients.
Attorney and client law is one of the foundations of the legal profession. It enables communication between a client and a lawyer in order to remain privileged. The US Supreme Court found that by maintaining confidentiality, the privilege encourages clients to provide "full and open" information to their attorneys, who will be better able to advise openly and represent them effectively. Upjohn Co. v USA, 449, US 383, 389 (1981). Courts, on the other hand, sometimes view legal and client law as preventing full disclosure. As a result of these conflicting views, attorney and client law "only protects the disclosures necessary to obtain sound legal advice that, without the privilege, may not have been given". Fisher v USA, 425, US 391, 403 (1976).
In this Holland & Knight warning, the law firm P.L.L.C. discussed by Taylor Lohmeyer. v. United States, No. 19-50506 (December 14, 2020) (hearing denied) and the former U.S. Court of Appeals for the Fifth Circuit's decision.
The beginning
The IRS examined an estate planning client of law firm Taylor Lohmeyer (the law firm). During the audit, the customer found that the company had helped them set up a number of overseas accounts (five) and businesses (eight). The firm also helped the client structure their affairs so that they could allocate income to the overseas accounts without losing US income tax. As a result of the company's involvement, the customer avoided US income tax on their income from 1995 to 2009. Under a final agreement with the Internal Revenue Service (IRS) that was signed in June 2017, the client and his wife admitted that they had unreported income of more than $ 5 million for the 1996-2000 tax years, which resulted in an unpaid income tax liability of more than $ 2 million. Ultimately, the customer paid around $ 4 million in taxes, interest, and penalties.
Conjuration process
The IRS uses a John Doe subpoena when it does not know the identity of the taxpayers for whom it is trying to determine tax liability.1 Section 7609 (f) provides that it is required before the IRS issues a John Doe subpoena Issue Determine the following:
- The charge relates to the investigation of a specific person or an identifiable group or class of people.
- There is reasonable grounds for believing that that person or group or group of people may be violating or failing to comply with any provision of any internal tax law
- The information to be obtained from examination of the records or certificates (and the identity of the person or persons for whose liability the summons is issued) is not readily available from other sources.
Based on the information it received from the audit, the IRS served a subpoena from John Doe on behalf of the company in October 2018. The subpoena was intended to determine which customers of the company over a period of 12 years:
have used the services of (the Company) … to (1) acquire, set up, maintain, operate or control a foreign financial account or other asset; (2) foreign companies, companies, trusts, foundations or other legal persons; or (3) a foreign or domestic financial account or other asset on behalf of such foreign company
The subpoena also searched for "(t) the names of all persons who act as advisors and the names of all persons … who are clients on the subject in the document".
Upon receipt of the summons, the company filed an application for cancellation. The IRS responded to the company's petition for annulment with a motion to dismiss the company's petition and a counter-petition to enforce the subpoena.
In general, the identity of a client is not protected by attorney and client law and can therefore be summoned. The firm recognized the general rule, but in its petition it focused on the exception that the privilege may apply when disclosure of the client's identity necessarily reveals the content of the legal advice given by the client to the client. Accordingly, the law firm claimed that all documents requested in the summons were protected by attorney and client law. "3
April 2019 hearing
In April 2019, the IRS and the Company had a status hearing and it was agreed that the court would hear the IRS counter-petition to enforce the subpoena. While the firm had numerous reasons to overturn the subpoena, the "encroachment on attorney and client privilege" was the most critical. The court rejected the firm's allegation that the subpoena was inappropriately tampering with privileged communication between attorney and client, stating that "blanket claims of privilege are unfavorable, the firm is currently under a heavy burden, and the firm is only itself based on a narrowly defined exception based on the general rule that identities are not privileged (; therefore), the company does not bear its burden. "4 On May 15, 2019, the district court granted the counter-motion of the IRS to enforce the subpoena. The company then appealed to the Fifth Circuit.
Before the fifth electrical panel
The party invoking legal and client law has the burden of determining the following "very factual" elements: "(1) that it has made a confidential communication; (2) to a lawyer or his subordinate; (3 ) for the primary purpose of securing a legal opinion or legal services or assistance in legal proceedings. "5
As the three-judge Fifth Circuit Panel found and the firm did not contest, a client's identity is usually not protected by attorney 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 company relied on the narrow exception which states "only if disclosure of such information (a customer's identity) would reveal other privileged communications such as the confidential motive of keeping it" .6 Or in other words, "(i) the disclosure If the client's identity also reveals the confidential purpose for which he has consulted an attorney, we protect both confidential communications and the client's identity as privileged. "7
In this case, however, the panel concluded that the subpoena was not intended to reach confidential communications. Rather, it was intended to reach an unknown class of taxpayers who could reasonably be expected to have used the company's services in order to avoid US income tax
Instead, the John Doe subpoena in question seeks, among other things, documents that "reflect any US customer who, at their request or on whose behalf (the company), acquired or established a foreign company, opened or maintained a foreign financial account, or assisted." the execution of foreign financial transactions "; "(a) any books, papers, records or other information … relating to the provision of services to US clients in connection with the establishment of offshore financial accounts"; and "(a) any books, papers, records, or other data … relating to the provision of services to US customers in connection with the acquisition, establishment, or maintenance of any offshore company or corporate structure". (Emphasis added.) As the government claimed, this sweeping request to find relevant information about every U.S. customer who has used any of a company's services is not the same as the government's knowledge of whether someone has suspected fraudulent behavior or the content of a specific legal advice that the law firm has given and which then requests their identity
When deciding to allow the enforcement of the charge, the panel examined the Fifth Circuit cases cited by the company and rejected them as not applicable to this factual situation. Instead, the statement was based on the case cited by the IRS, US v BDO Seidman, 337 F.3d 802 (7th Cir. 2003). The panel did so, although it recognized that this case "is different in some ways" because the subpoena in this case was addressed to an accounting firm (rather than its clients) and because the involvement of an accounting department meant the panel itself BDO Seidman involved in this emerged from subpoenas submitted to BDO as part of an IRS investigation into compliance with the registration and listing requirements of the Internal Revenue Code for organizers and sellers of potentially abusive tax havens.11 The customers tried to intervene and argued that disclosure inevitably constitutes the legal privilege for Protection of confidential communications would violate, as these documents revealed their identity as BDO customers who sought advice on tax havens and then invested in these shelters between a taxpayer and a state-approved tax advisor, the tax consultancy and the 26 USC Section 7525, which was based on certain principles of lawyer-client privilege. The court ruled that since the accounting firm was required by law to disclose the identity of its clients to the IRS, there was no expectation that the identities of those clients would receive the protection of attorney-client privilege. I would. In other words, BDO's clients had no expectation of privacy because of the auditing firm's requirements to report the sale of tax housing to the IRS.
Nonetheless, in this case, the panel was of the opinion that the subpoena here showing which taxpayers were involved in any of the transactions covered by the subpoena would not achieve a "motive" or any other confidential communication of (legal) advice The firm's client identities are not “inextricably linked to privileged communication” and therefore the “narrow exception” to the general rule that client identities are not protected by attorney / client law does not apply. "12
Petition for Review of the Fifth Circuit En Banc
The company filed a petition on June 8, 2020 to request a retry through the Fifth Circuit en banc. In doing so, the firm argued that previous Fifth Circle decisions made it clear that there was no need for the government to be aware of the particular and specific legal advice that was given for exercising attorney and client privilege.
Amici briefs were filed following the firm's June petition by the American College of Tax Counsel and the National Association of Criminal Defense Lawyers, both of which supported the en banc replay.
With a 9-8 vote and no reason for their decision, the Fifth Circle voted not to allow the company's petition and repeat the case en banc. Furthermore, they did so in the face of a very strong dissenting opinion from eight judges (dissent), which indicated that the failure to further clarify the standard for attorney-client privilege applied by the three-judge panel created the following dilemma would create:
The IRS has traditionally directed such subpoenas to financial institutions and commercial couriers. No lawyers. There are good reasons to be wary of investigations that put pressure on lawyers. The relationship between a client and a financial institution or commercial courier plays little or no role in our system's ability to administer justice – but this does not apply to the lawyer-client relationship. When the IRS pursues a John Doe subpoena against law firms, it creates serious legal and client law tension. (Quotes omitted).
The panel's trust in BDO was worrying in both the dissent and the two amici.13 Both the amicus and the dissent noted that tax law is inherently a complex issue. 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 expect their names to be kept confidential. The panel's opinion on US versus BDO Seidman, however, may lead to the introduction of a possibly different, but unclarified standard that focuses on what should otherwise be privileged communication: the "motive" or "purpose" of not identified customers to the advice of Firm.14
Once the purpose of the customer has been identified, the government will use the company's advice to request an audit and / or pursue the company's customers.15 This is the ramifications of citing the panel against US versus BDO Seidman.
In contrast, the law firm's clients sought legal advice on complex tax issues, as stated in the dissent, in the firm and in the Amicus Briefs. They did not participate in publicly traded transactions and the company was under no obligation to report its clients to the IRS as they were not involved in publicly traded IRS transactions. Hence, there was no reason for the panel to plead, let alone rely on, US against BDO Seidman unless the three-judge panel created a new standard.
Conclusion
The refusal to accept an en banc review to investigate the Court's confidence in the US against BDO Seidman raises three potential concerns about the unresolved opinion of the three-judge panel: 1) Did the three-judge panel Body created a new standard? 2) The three-judge panel was of the opinion that the company's customers were not reported due to the existence of offshore accounts and the potential for unreported accounts with penalties for reporting foreign bank and financial accounts (FBAR) and potential unreported Income connected, had no privacy expectations; or 3) did the three-judge panel believe that the activities were per se criminal and therefore not protected by attorney and client law? 16
As a result of the unresolved responses, the IRS may begin conjuring companies who have assisted clients in setting up businesses overseas and / or opening foreign bank accounts, regardless of whether the firms are responsible for wrongdoing. If a customer has not filed an FBAR, there is a six-year statute of limitations that can keep the years in arrears open.17 If the customer has committed an income tax fraud, the Income Tax Act is still open Customer has committed income tax fraud and there is ongoing cover-up. Criminal laws may still be open.19 The IRS could use any of these situations as a basis for submitting a company subpoena and then harvesting the client's identity for auditing and law enforcement purposes.
In summary, the notion that legal and client law will continue to be undermined should affect everyone, including law firms and their clients. As mentioned in the American College of Tax Counsel's Amicus letter on page 22. 14-15:
(D) The panel's decision could facilitate the issuance of John Doe subpoenas to a law firm seeking documents identifying companies that have kept the firm for legal advice on structuring their business to include intellectual property in low tax areas or identify persons who hired the firm to provide legal advice on structuring a family limited partnership or a pension fund. Building on a long-standing and well-established precedent in this and other circles, the panel's decision subdues John Doe's authority to abuse by allowing the IRS to direct broad inquiries to law firms to circumvent the privilege.
Remarks
1 A John Doe subpoena is "(a) any subpoena described in 26 U.S.C. § 7609 (c) (1)." See 26 U.S.C. Section 7609 (f).
2 Taylor Lohmeyer. against USA, 957 F.3d 505, 507 (5th Cir. 2020).
3 Id. At 509.
4 Id.
5 USA versus United Shoe Mach. Corp., 89 F. Supp. 357, 358- 59 (D. Mass. 1950).
6 In the grand jury subpoena for the defendant's attorney 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 letter from the American College of Tax Counsel (2020 WL 3476367) and the letter from the National Association of Criminal Defense Lawyers (2020 WL 3411018).
14 As stated in Dissent on page 2: "We previously determined that client identities are privileged if disclosure would reveal the client's confidential motive to retain an attorney. If disclosure of the client's identity also reveals the confidential purpose for which he has consulted. As a lawyer, we protect both confidential communication and the identity of the client as privileged. "(Quotes omitted).
15 As stated in the American College of Tax Counsel's Amicus Letter, 12: "(T) The subpoena in question requires the company to produce documents linking certain clients to specific advice from the company regarding that advice B. United States v Hubbell, 530 US 27 (2000). If the firm's advice was legal advice, then subpoena compliance necessarily violates attorney-client privilege. "
16 US v. Zolin et al. al. 491, US 554 (1989).
17 31 U.S.C. Section 5321 (b) (1).
18 26 U.S.C. § 6501 (c) (1) and (2).
19 26 U.S.C. Section 6531 (2); United States v Carlson, 235 F.3d 466, 470 (9th Cir. 2000).