Colton v. United States

• Citation: 306 F.2d 633
• Decision Date: 30 July 1962
• Docket Number: No. 316-317,Dockets 26939,27374.,316-317
• Parties: Edward E. COLTON and Lillian Kaltman, Petitioners-Appellants, v. UNITED STATES of America, Respondent-Appellee. UNITED STATES of America, Petitioner-Appellee, v. Edward E. COLTON, Respondent-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

306 F.2d 633 (1962)

Edward E. COLTON and Lillian Kaltman, Petitioners-Appellants, v. UNITED STATES of America, Respondent-Appellee.

UNITED STATES of America, Petitioner-Appellee, v. Edward E. COLTON, Respondent-Appellant.

Nos. 316-317, Dockets 26939, 27374.

United States Court of Appeals Second Circuit.

Argued April 11, 1962.

Decided July 30, 1962.

Jules Ritholz, New York City (Boris Kostelanetz, George G. Gallantz, Edward J. Daus and Corcoran, Kostelanetz, Gladstone & Lowell, New York City, on the brief), for appellants.

Morton L. Ginsberg, Asst. U. S. Atty., Southern District of New York, New York City (Robert M. Morgenthau, U. S. Atty., and Arthur S. Olick and Victor Temkin, Asst. U. S. Attys., on the brief), for appellee.

Before LUMBARD, Chief Judge, and SWAN and KAUFMAN, Circuit Judges.

LUMBARD, Chief Judge.

These appeals raise questions concerning the propriety of a virtually complete refusal by tax counsel, primarily on the ground of the attorney-client privilege, to answer questions and produce files at an examination conducted by special agents of the Internal Revenue Service concerning the tax liability of a client. We hold that it was proper to require counsel to answer questions concerning the years during which they performed legal services and the general nature of the services. We also affirm the order requiring counsel to produce certain documents or files and to answer relevant questions concerning the nature of papers in their possession.

At some time prior to July 29, 1960, the Internal Revenue Service began an investigation into the tax liabilities of Herbert Matter and his wife, Mercedes, apparently with a view to possible criminal prosecution. On July 29, 1960, the Service served identical summonses under § 7602 of the Internal Revenue Code of 1954 upon Edward E. Colton, an attorney, and Lillian Kaltman, an attorney associated with Mr. Colton, directing them to appear in New York City before special agent Anton Kurtzuk on August 9, 1960 to give testimony and to bring with them and produce "retained copies of income tax returns, workpapers, correspondence files, memoranda and all other data relating to the preparation and the filing of Federal Income Tax Returns for or on the behalf of the Matters * * * covering and including the years 1951 through 1958." The appellants state, and the government does not deny, that special agent Kurtzuk informed Miss Kaltman that "he wished to question the attorneys about the reasons which the taxpayers gave their counsel for filing certain tax returns late"; an affidavit submitted by agent Kurtzuk below states the primary purpose of the investigation in similar language. The Service later consented to the adjournment of the return date of the summonses to September 21, 1960.

On September 20, 1960, the appellants obtained from the district court an order requiring the government to show cause why the summonses should not be quashed or modified and staying compliance. The appellants stated that "the subject matter of Mr. Kurtzuk's proposed inquiry would * * * so flagrantly induce a violation of their duty to the taxpayers arising out of the relationship of attorney and client that this petition was deemed necessary by the petitioners." Pending the hearing of the petition, the appellants entered into a stipulation with the government that the above quoted portion of the summonses be amended to add the phrase "except for such portions of said testimony and production that are within the attorney-client privilege." Pursuant to further terms of the stipulation the appellants appeared to testify on November 23, 1960; the stipulation provided that if the appearance was not accepted by the Service as adequate compliance with the summonses, then the petition to quash should proceed for hearing in the district court.

At the November 23 hearing, Mr. Colton and Miss Kaltman testified only that the Matters were clients of their firm, refusing to give any substantial information as to the firm's role, if any, in preparing the tax returns in question. They had with them records of the firm pertaining to the Matters, but refused to turn them over to the agents for examination without the consent of the Matters. Virtually all of the questions asked by the agents were objected to on the basis of the attorney-client privilege.¹ Dissatisfied with the results of the hearing, the government caused the appellants' pending motion to quash to come on for hearing in the district court, on February 28, 1961. Judge Dawson denied the motion and vacated the stay without opinion, and Mr. Colton and Miss Kaltman filed their notice of appeal to this court. This appeal is now before us, designated as No. 26939.

Apparently the Internal Revenue Service requested Colton to return for further questioning and he refused. The Service on March 7, 1961 served on Colton alone a new summons in substance identical to the earlier ones as modified by the stipulation. Colton again appeared on March 24, 1961, in response to this second summons, but gave the Service no more satisfaction than he had at his first appearance, again declining on the basis of the attorney-client privilege to answer certain questions concerning tax work his firm might have done for the Matters. Accordingly, the government on June 7, 1961, applied to the district court for enforcement of this second subpoena against Colton under §§ 7402 (b) and 7604 of the Internal Revenue Code of 1954, 26 U.S.C.A. §§ 7402(b), 7604. Judge Metzner granted the government's application in substance on December 28, 1961 and directed Colton to answer twenty-seven specific questions asked by agent Kurtzuk at the March 24, 1961 hearing. Colton's appeal from this order is before us in No. 27374.

With respect to No. 26939, this Court has already, on June 21, 1961, denied a motion by the government to dismiss the appeal. 291 F.2d 487. The parties are in agreement that this appeal presents no issue of law not more specifically raised by the appeal in No. 27374, except for the question whether Judge Dawson subjected the appellants to harassment forbidden by § 7605(b) of the Internal Revenue Code of 1954, 26 U.S.C.A. § 7605 (b) in permitting further examination by the Service. We hold that Judge Dawson was well within the permissible limits of discretion in not preventing further questioning under the circumstances. Indeed, Colton answered the second summons without apparent objection to being called again. Accordingly, we turn to the questions posed by No. 27374.

Colton now offers to answer by affidavit thirteen of the questions he objected to at the March 24, 1961 hearing, and the government has accepted the offer, making the appeal moot insofar as these questions are concerned. The remaining questions, all of which were objected to as infringing upon the attorney-client privilege, may be grouped under two general headings: those inquiring into the date and nature of the services performed by the Colton firm for the Matters, and those relating to the files of the firm which the Service sought to have Mr. Colton turn over to it.

At the outset, we reiterate our view, stated in In re Albert Lindley Lee Memorial Hospital, 209 F.2d 122 (2 Cir. 1953), cert. denied, 347 U.S. 960, 74 S.Ct. 709, 98 L.Ed. 1104 (1954), that questions of privilege in a federal income tax investigation are matters of federal law. See Falsone v. United States, 205 F.2d 734 (5 Cir.), cert. denied, 346 U.S. 864, 74 S.Ct. 103, 98 L.Ed. 375 (1953). For the reasons stated in our Albert Lindley Lee Memorial Hospital opinion, we do not agree with the Court of Appeals for the Ninth Circuit, Baird v. Koerner, 279 F. 2d 623 (1960), that a hearing held by the Internal Revenue Service under § 7602 of the Internal Revenue Code of 1954 is a "civil action" governed by state evidence law under Rule 43(a) of the Federal Rules of Civil Procedure, 28 U.S.C.A., or that state law should govern for any other reason.

1. Those questions which pertain to the date and general nature of the legal services performed by the Colton firm for the Matters should be answered as they do not call for any confidential communication. The question numbered 16 in the Internal Revenue Service's transcript of the hearing, although ambiguous,² appears to inquire whether in 1951 the firm performed any services for the Matters other than the preparation of income tax returns. (Colton now agrees to answer the preceding question, which asked whether or not the firm had prepared, or caused to be prepared, a 1951 tax return.) Question 18 asked Colton to state the nature of the services he admitted to having rendered the Matters in the years prior to 1951. In directing Colton to answer this question, Judge Metzner limited the required information to "general responses, such as `litigation,' `drafting of documents,' `tax advice' and the like," thus excluding inquiry into specific details; since the government does not here contest this interpretation, the question remains so limited for our purposes. Questions 52 and 54 inquire whether the firm performed any legal services for the Matters during 1954, 1955, 1956 and 1957. Question 55 asks whether the firm received "any remunerations" for legal services during those four years. Finally, Question 80 asks, "Did you or any member of your firm cause to have prepared a 1953 income tax return for or on behalf of Herbert and Mercedes Matter in 1954?"

This court has accepted, and few if any lawyers would quarrel with, Dean Wigmore's statement of the basic principle underlying the attorney-client privilege:

"In order to promote freedom of consultation of legal advisers by clients, the apprehension of compelled disclosure by the legal advisers must be removed; hence the law must prohibit such disclosure except on the client\'s consent." 8 Wigmore, Evidence § 2291 (McNaughton rev. 1961).

See United States v. Pape, 144 F.2d 778 (2 Cir.), cert. denied, 323 U.S. 752, 65 S.Ct. 86...