A District Court Enforces a John Doe Summons Issued to a Law Firm (Prefaced by a Brief Primer on John Doe Summonses) by ROBERT S. HORWITZ
Administrative summonses are an important investigative tool of the IRS in fulfilling its statutory duty of “proceeding from time to time, through each internal revenue district and inquire after and concerning all persons who may be liable to pay any internal revenue tax.” Internal Revenue Code (“IRC”) §7601(a). Where a person served a summons fails to comply, the IRS can bring a summary proceeding to enforce the summons. To obtain enforcement, the government must show (usually done by the affidavit of the IRS officer who issued the summons) that a) the summons was issued for a legitimate purpose; b) it seeks information that may be relevant to that purpose; c) the information sought is not already in the IRS’s possession; and d) the IRS has followed all administrative steps required by the I.R.C. United States v. Powell, 379 U.S. 48, 57-58 (1964). Once this Powell showing is made, the summoned party can only defeat enforcement if it can show that enforcement would be an abuse of process, 379 U.S. at 58, or another “appropriate ground,” including that the information sought is privileged or is sought for use in a criminal prosecution. Reisman v Caplin, 375 U.S. 440, 449 (1963).
The courts, including the Supreme Court, broadly constructed the IRS’s summons power with respect to third-party record keepers, including so-called “John Doe” summonses. Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 315-316 (1985). Concerned that the use of John Doe and other summonses to third parties could “unreasonably infringe on the civil rights of taxpayers, including the right of privacy,” H.R. Rep. 94-658 at p. 307, Congress enacted IRC §7609. This section instituted procedures requiring notice to taxpayers when a summons was issued to a third-party (with certain limited exceptions) and provides any person entitled to notice with a right to intervene in any proceeding to enforce the summons and a right to bring an action in district court to quash the third-party summons. IRC §7609(a)(2), (b).
In the case of a John Does summons, the IRS does not know the identity of the taxpayer (or class of taxpayers) about whom it is seeking information. Because this makes the service of notice on the taxpayer impossible, Congress required district court approval before a John Doe summons could be served. H.R. Rep. 94-658 at p. 307. Section 7609(f) provides that a summons that does not identify the person with respect to whose liability it was issued may only be served if the IRS establishes to the satisfaction of a court that:
(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.
The IRS and the Department of Justice have set up additional safeguards with respect to a John Doe summons. While non-John Doe summonses can be served after approval by the issuing IRS officer’s manager, see Internal Revenue Manual ¶220.127.116.11.3  (03/03/2017) and Exhibit 18.104.22.168 m, n, a John Doe summons must be approved by IRS Area or Associate Area Counsel, who will then refer the matter to the Department of Justice. Internal Revenue Manual ¶22.214.171.124 , . Before a proceeding is instituted in court for authorization to serve the John Doe summons, the summons must be approved by the Deputy Assistant Attorney General (Civil Trial Matters) of the Tax Division. Department of Justice Tax Division Summons Enforcement Manual at §III.A.2.
This prolix preface gets us to the subject of this blog: Taylor Lohmeyer Law Firm PLLC v United States, 2019 WL 2124676 (WD Tex. 5/15/19), an action by a law firm to quash a John Doe summons issued for the names and other information relating to clients for whom the firm (between 1995 and 2017) “create[d] and maintain[ed] foreign bank accounts and foreign entities” that may have been used to hide taxable income.
Prior to service of this John Doe summons, the government petitioned the district court for an order authorizing it to serve the summons. The petition was supported by a 30 page declaration from an IRS agent who had audited an unidentified client of the firm. The IRS had assessed a deficiency of over $2 million tax on over $5 million of income the client had allegedly hidden through the use of “foreign accounts, foreign trusts, foreign corporations” set up by the law firm. Attached to the declaration were more than 200 pages of exhibits, including memos from the law firm, letters between the law firm and firms in tax haven jurisdictions, transactional documents and excerpts from recorded interviews of both the taxpayer and a partner of the law firm. It appears that the IRS obtained some documents because the taxpayer asserted reliance on advice of the law firm, thus waiving the attorney client privilege. During the lawyer’s interview, he estimated that he had set up foreign entities for twenty to thirty other clients. The lawyer died before the petition for service of the summons was filed.
In authorizing service of the summons, the district court determined that the requirements of §7609(f) had been satisfied. The findings, made in an ex parteproceeding, cannot be challenged in a proceeding to enforce the summons. United States v. Samuels, Kramer & Co., 712 F. 2d 1342, 1346 (9th Cir. 1983). Because the government had met its burden under Powell to enforce the summons, the burden shifted to the law firm to establish that enforcement would be inappropriate. The court held that the law firm failed to meet its burden.
The first claim of the law firm that the court addressed was that the affidavit submitted in support of the petition to serve the summons contained numerous inaccuracies. In the court’s view, this was an attack on its finding in the prior proceeding that it was reasonable to believe that the persons about whom the information was sought failed to comply with the internal revenue laws. Thus, it was not an issue that could be raised in the context of the enforcement proceeding. Even if it could have been raised in the enforcement proceeding, the court held that issuance of the summons was proper.
The firm further argued that not only was the agent’s affidavit replete with misrepresentations, the audited taxpayer owed additional tax because he failed to follow the law firm’s advice. According to the firm, it had reviewed the files of the clients for whom it had structured and maintained foreign grantor trusts and determined that all of them had followed the firm’s advice and thus did not owe additional tax. The court viewed this argument as being two-fold: that enforcement would be an abuse of process and that the Government failed to meet the first two Powell requirements. The court held that these allegations did not rebut the fact that investigating possible offshore tax evasion is a legitimate purpose and that the information sought is relevant to that purpose. Because the law firm disavowed the implication the government acted with a sinister purpose, this undermined its claim of abuse of process.
The main issue raised by the law firm in opposition to enforcement of the summons was that providing the requested information would breach the attorney-client privilege. The law firm did not produce a privilege log identifying any specific document or set of documents that were protected by the attorney client privilege. The court held that the law firm could not use a blanket assertion of privilege but instead had to identify specific documents that it claimed were privileged. The court noted that the identity of a client is not normally privileged except in those rare instances where the identity would be the “last link in an existing chain” of evidence that would likely lead to the client’s indictment.
The law firm argued that identifying the clients and services sought amounted to a violation of the attorney client privilege while the government argued that it was not seeking the advice given clients, just the identities of clients for whom the firm formed or maintained foreign entities or foreign accounts or assisted in foreign financial transactions and that the summons was tailored to avoid the attorney-client privilege. [In fact, the summons sought more than taxpayer identities: an attachment to the summons contained 2 ½ pages of categories of documents sought.]
According to the firm, it had identified 32,000 documents that were responsive to the summons. While given the opportunity to submit additional briefing on the attorney-client issue, the law firm failed to provide a privilege log specifying what documents it alleged were privileged and the reason for the claim of privilege. The firm did produce redacted billing statements that indicated that it performed legal services and thus some documents sought were potentially privileged. The court held that this was insufficient to establish that any specific documents sought were privileged. Thus it ordered the summons enforced.
The court ended its discussion with the following observation:
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 Liebmanargument the Firm advances is better decided individually or by discrete category.
As a result, the enforcement order may not be the end of the matter. It will probably take a while for the firm and its counsel to review all 32,000 documents and provide a privilege log of those documents or categories of documents that are privileged. If the law firm produces a privilege log and establishes that specific documents are privileged, it may still be able to keep the IRS from obtaining the documents.
Contact Robert S. Horwitz at firstname.lastname@example.org or 310.281.3200 Mr. Horwitz is a principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division. He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutionS.