United States v. Lipshy, CA 3-78-1002-F.

• Decision Date: 25 September 1979
• Docket Number: No. CA 3-78-1002-F.,CA 3-78-1002-F.
• Citation: 492 F. Supp. 35
• Parties: UNITED STATES of America and Jack E. Smith v. Bruce A. LIPSHY.
• Court: U.S. District Court — Northern District of Texas

492 F. Supp. 35

UNITED STATES of America and Jack E. Smith v. Bruce A. LIPSHY.

No. CA 3-78-1002-F.

United States District Court, N. D. Texas, Dallas Division.

September 25, 1979.

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COPYRIGHT MATERIAL OMITTED

Kenneth J. Mighell, U. S. Atty., Dallas, Tex., for plaintiff.

Ralph Muoio, Richard E. Timbie and Bernard Bailor of Caplin & Drysdale, Washington, D. C., Ethan B. Stroud, Dan McElroy and Cameron D. Sewell of Stroud & Smith, Dallas, Tex., for defendant.

MEMORANDUM OPINION

ROBERT W. PORTER, District Judge.

This is an action to enforce an IRS summons. The summons was issued on February 27, 1978 by an IRS Special Agent and was directed to Bruce A. Lipshy as Senior Vice President for Zale Corporation. It sought information relating to an interim report originally submitted to Zale's Board of Directors by an ad hoc investigatory committee. The report had issued pursuant to an investigation by the committee into alleged misconduct by Zale Corporation and certain of its officers. Although Mr. Lipshy had voluntarily furnished the IRS with a copy of the report, he declined to submit to its later request for underlying evidence. The IRS thereafter persisted by administrative summons pursuant to section 7602 of title 26 of the United States Code. After Mr. Lipshy failed to comply with the summons, the IRS sought judicial enforcement in this Court. In his answer, Mr. Lipshy asserts various grounds for dismissal of and as affirmative defenses to the petition. For the reasons stated in this opinion, I deny enforcement of the summons.

I. GOVERNMENT WAIVER

The IRS waived its right to proceed in this Court to force Mr. Lipshy's compliance with the summons. The summons requested that he appear before IRS Special Agent Jack Smith on March 10, 1978. On March 3, 1978, Richard E. Timbie, an attorney for Mr. Lipshy and for Zale Corporation, contacted Special Agent Smith to advise him that Mr. Lipshy, upon Mr. Timbie's instruction, would neither testify nor produce the documents at the time specified in the summons. Mr. Timbie explained that he had directed this course, whereupon Special Agent Smith and Mr. Timbie agreed that Mr. Lipshy would not be required to be present at the time and place indicated in the summons. They further agreed that Mr. Timbie would assert the various objections to the summons in a letter to be directed to Special Agent Smith.

Mr. Timbie did write Special Agent Smith on March 9, 1978, restating the bases of Zale's objection in the summons. Mr. Lipshy now contends that the above agreement by Special Agent Smith waived any rights of the IRS to compel Mr. Lipshy's testimony or production of records as requested in the summons.

Mr. Lipshy relies upon United States v. Malnik, 489 F.2d 682 (5th Cir.), cert. denied, 419 U.S. 826, 95 S.Ct. 44, 42 L.Ed.2d 50 (1974), as authority for dismissal of the petition due to waiver by the government. In Malnik, counsel for the taxpayer had conferred with the IRS Assistant Regional Counsel, whereupon both agreed that Malnik would not appear personally at all. The IRS agreed to accept, instead of appearance and production, a written statement signed by Malnik and his attorney to the effect that, had Malnik personally appeared, he would have asserted "appropriate constitutional privileges." Id. at 684. The appellate court for this circuit affirmed dismissal of the petition solely on the ground that the IRS' agreement that Malnik need not comply with the demand of the summons effectively waived its right to subsequent judicial enforcement of the summons.¹

The IRS distinguishes Malnik as presenting facts significantly more limited than those in this case. In Malnik, the taxpayer announced that he would assert a blanket objection under the fifth amendment to any questions. The court found improper the "indiscriminate" agreement between the IRS agent and Malnik that he need not appear as directed in the summons; rather Malnik should have been required to attend and raise his constitutional claim as to specific questions because it was impossible to anticipate every question and conclude that each would present an issue of self-incrimination. Because he was not required to appear under the summons, enforcement was denied. Id. at 688.

The IRS characterizes the conversation between Mr. Timbie and Special Agent Smith as being merely an agreement not to require Mr. Timbie to make a lengthy trip to Dallas solely to announce his client's grounds for opposing production of the records.

The IRS ignores the proper procedure for raising defenses when summoned under the provisions of section 7602. The party should appear before the hearing examiner and refuse to testify about such matters as he believes to be privileged. Reisman v. Caplin, 375 U.S. 440, 84 S.Ct. 508, 11 L.Ed.2d 459 (1964). Although the defense raised in Malnik differed from those presented here, the underlying considerations remain valid. In Malnik, the presence of the taxpayer was necessary to crystallize requests and objections of the parties. A similar circumstance is present regarding the issue of attorney-client privilege here. Counsel should present himself and the records requested before the hearing examiner and specifically assert the claim of privilege as each question is asked. United States v. Finley, 434 F.2d 596 (5th Cir. 1970); United States v. Roundtree, 420 F.2d 845 (5th Cir. 1969). See generally, 15 A.L.R.Fed. 771 § 2(b) (Supp.1978). As to the work product claim, it is arguable that no similar circumstance appears to demand presence under the summons relating to defense of work product. Mr. Lipshy was required to bring certain records, the scope of which was clearly denoted in the summons itself. Consequently, his objection to their production on the ground of work product rule was one that could be made in advance of appearance. Special Agent Smith testified regarding the fact and substance of his March 3 conversation with Timbie. Smith confirmed that the Zale attorney had contacted him to inform him that Mr. Lipshy would not appear, whereupon the two discussed judicial enforcement of the summons. Special Agent Smith related his statement concluding the conversation: "We will seek enforcement."

It is inviting to distinguish the Malnik case from this on the basis that the former lacked true adversarial character on the part of the IRS where the facts displayed an agreement not to enforce the summons at the time and place indicated, coupled with an inconsistent stand taken some seven months after when the IRS demanded judicial enforcement of the summons. Although the facts before me do not suggest any subjective abandonment on the part of the IRS to demand compliance with the subject matter of the summons, it nonetheless demonstrates that the IRS agreed to dispense with an essential step in the examination and inspection process. In essence, the IRS would have the court condone a procedure whereby a summons was issued for a time and place certain, but by agreement the parties dispensed with the meeting. The IRS agent's belief that judicial compliance would be attempted does not cure the absence of administrative steps contemplated within the statutory framework. Moreover, by the nature of the attorney-client defense, it is imperative that a hearing be at least offered, so that the scope of enforcement is properly before the district court. In the absence of this, the Court will not in most cases have sufficient information upon which to make proper orders.²

II. PRIVILEGE

Even had waiver not occurred, an alternate ground is present to bar enforcement of this summons. Rule 26(b)(1) of the Federal Rules of Civil Procedure limits discovery to matter that is not privileged. Mr. Lipshy objects to the substance of the summoned information on the ground that its disclosure would violate the attorney-client privilege and work product doctrine. To consider these issues, it is necessary to examine the function of Mr. Lipshy in Zale Corporation and his activities there during the relevant periods.

At the time of the summons' issuance, Mr. Lipshy served Zale Corporation in dual capacities. As an executive, he acted as Senior Vice President; in addition, Mr. Lipshy served Zale as Acting General Counsel, a duty he had assumed in November 1975 when Zale's previous house counsel had resigned. Mr. Lipshy continued as Zale's general counsel for approximately thirteen months, in which capacity he undertook responsibility for all legal affairs of the company.

In early 1976 Shearn Rovinsky terminated his employment as Zale's treasurer, and he later made various charges of misconduct against Zale Corporation and its officers and employees. One of the allegations involved political contributions that may have been made in earlier years. Zale's chairman requested Mr. Lipshy to investigate the charges. On April 23, 1976, a Special Ad Hoc Committee was formed to complete the investigation, and Mr. Lipshy served as counsel to that committee.

On August 11, 1976, the Committee adopted a report of findings and conclusions and submitted the report to its Board of Directors. One of the findings made disclosed disbursement of some $25,000 from a Zale diamond trading account in Antwerp, Belgium, which sums were not accounted for. The report further found that approximately $20,000 of these funds were used to reimburse officers of Zale Corporation for political contributions made on Zale's behalf. The report was based on the investigation made by Mr. Lipshy, in which he had interviewed employees, officials and directors of Zale Corporation. Mr. Lipshy contends that the communications and data collected during the course of this investigation are protected from disclosure through the summons.

A. Attorney Client Privilege.

The summons before me required Mr. Lipshy to appear before the hearing examiner to give testimony relating to the tax liability of Zale Corporation. Mr. Lipshy's refusal to...