Doe v. Kpmg, L.L.P.

• Citation: 325 F.Supp.2d 746
• Decision Date: 12 April 2004
• Docket Number: No. Civ.3:03-CV-2036-H.,Civ.3:03-CV-2036-H.
• Parties: John DOE 1 and John Doe 2, Plaintiffs, v. KPMG, L.L.P., Defendant, UNITED STATES OF AMERICA, Intervenor-Defendant.
• Court: U.S. District Court — Northern District of Texas

325 F.Supp.2d 746

John DOE 1 and John Doe 2, Plaintiffs, v. KPMG, L.L.P., Defendant UNITED STATES OF AMERICA, Intervenor-Defendant.

No. Civ.3:03-CV-2036-H.

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

April 12, 2004.

Robert H. Albaral, Baker & McKenzie, Dallas, TX, Gregory S. Lynam, Thomas V. M. Linguanti, Baker & McKenzie, Chicago, IL, for Plaintiffs.

Kevin M. Dinan, Melissa Bezanson Shultz, King & Spalding, Washington, DC, Timothy W. Mountz, Baker Botts, Dallas, TX, for Defendant.

Stuart D. Gibson, US Dept of Justice, Washington, DC, for Intervenor-Defendant.

MEMORANDUM OPINION AND ORDER

SANDERS, Senior District Judge.

Before the Court are Plaintiffs' Motion for Summary Judgment, filed March 5, 2004; Defendant KPMG, L.L.P.'s Response to Plaintiffs' Motion for Summary Judgment and Cross-Motion for Summary Judgment, filed March 26, 2004; and Plaintiffs' Amended Reply, filed April 5, 2004. Also before the Court are Intervenor-Defendant United States of America's Motion to Dismiss, filed April 2, 2004; Defendant KPMG's Response, filed April 5, 2004; and Plaintiffs' Response, filed April 5, 2004. Because the Court has determined that it needs to consult matters outside the complaint to decide the motion to dismiss, the Court will treat the motion to dismiss as a motion for summary judgment.¹ See Fed.R.Civ.P 12(b). In their Motion for Summary Judgment, Plaintiffs John Doe 1 and John Doe 2 ("Plaintiffs") request the Court to enter a permanent injunction preventing Defendant KPMG, L.L.P. ("KPMG") from disclosing each Plaintiff's identity to the Internal Revenue Service ("IRS") unless and until an adversarial summons enforcement action is instituted by the United States Government to compel such disclosure and a court orders such disclosure. Plaintiffs premise their request on § 7525 of the Internal Revenue Code (I.R.C.) which creates a confidentiality privilege for communications between a taxpayer and a federally authorized tax practitioner. See I.R.C. § 7525(a). Defendant KPMG cross-moves for summary judgment, requesting that the Court deny Plaintiffs' motion. Intervenor-Defendant United States of America also asks that the Court deny Plaintiffs' motion and find that the § 7525 privilege does not apply to protect Plaintiffs' identities. Upon review of the pleadings, briefs, and relevant authorities, the Court is of the Opinion for the reasons stated below that Plaintiffs' Motion for Summary Judgment should be DENIED, and Defendant KPMG's Cross-Motion for Summary Judgment and Intervenor-Defendant United States of America's Motion to Dismiss, which the Court treats as a Motion for Summary Judgment, should be GRANTED.

I. BACKGROUND

Plaintiffs John Doe 1 and John Doe 2 are taxpayers, as defined in I.R.C. § 7701(a)(14), for the years 2000 and 2001. (Joint Stipulation of Facts² at ¶ 7.) Both Plaintiffs engaged Defendant KPMG to "render tax consulting services regarding investments through particular limited liability companies" and to "prepare each Plaintiff's federal income tax returns," both their individual returns and their S corporation returns. (Id. at ¶ 8-9, 11.) Defendant KPMG is a federally authorized tax practitioner as defined in I.R.C. § 7525(a)(3)(A). (Id. at ¶ 8.)

The engagement agreement between Plaintiffs and KPMG provides that "[a] confidentiality privilege under Internal Revenue Code Section 7525 may pertain to certain communications between KPMG personnel and Client regarding federal tax advice provided pursuant to this engagement." (Id. at ¶ 11.) It explains that "[b]y retaining KPMG, Client agrees that KPMG is instructed to claim the privilege on Client's behalf, with respect to any applicable communications, up until such time as Client may waive such privilege in writing." (Id.) Additionally, the engagement letter also states "Client understands that KPMG makes no representation, warranty, or promise, and offers no opinion with respect to the applicability of such confidentiality privilege to any communication and agrees to hold KPMG harmless should the privilege be determined not to apply to particular communications." (Id.)

In April 2002, KPMG received administrative summons from the IRS, "seeking information as to the names of its clients and documents with respect to certain types of transactions, including, but not limited to, a summons relating to transactions that are the same as, or substantially similar to those described in Notice 2000-44, 2000-36 I.R.B. 255 ("Notice 2000-44 Summons" or "summons")." (Id. at ¶ 1.) In late August 2003, KPMG notified Plaintiffs that it believed Plaintiffs' names were responsive to the summons, and that KPMG intended to disclose Plaintiffs' names and relevant documents not subject to I.R.C. § 7525(a), the attorney-client privilege, or the attorney work product privilege. (Id. at ¶ 2.) "Plaintiffs advised KPMG that [they] wished to invoke the tax advisor privilege under [I.R.C.] § 7525(a), and instructed KPMG not to disclose to the IRS Plaintiffs' names in response to the Notice 2000-44 Summons or any other summons, or to take any other action that would waive Plaintiffs' privilege." (Id. at ¶ 3.) KPMG informed Plaintiffs that it could not guarantee that it would not disclose the Plaintiffs' identities and other information that it believed was responsive to the IRS summons and not subject to any privileges. (Id.)

Plaintiffs filed this case on September 9, 2003, seeking injunctive and declaratory relief.³ "On September 11, 2003, the parties filed a Stipulation and Agreed Order whereby KPMG agreed not to disclose to the Government of the United States (including the IRS), the identities of Plaintiffs or any documents or other information relating to Plaintiffs or relating to their transactions that are the subject of this action until the Court enters final judgment on the merits of the privilege issue raised." (Id. at ¶ 5.) Plaintiffs filed their motion for summary judgment on March 5, 2004.

Before KPMG had responded to Plaintiffs' Motion for Summary Judgment, the United States of America (the "Government") moved to intervene as a defendant to protect its interests and the public fisc, claiming that, on average, participants in the tax shelter identified in Notice 2000-44 Summons reported between $2 million and $6 million less per year in federal income taxes than they should have reported. (See Emergency Motion to Intervene, filed March 25, 2004.) The Government asserts that this resulted in tax benefits between $4 million and $12 million to the two Plaintiffs for year 2000. (Id.) Particularly, the Government was concerned that, while this case is pending, the statute of limitations in which the IRS can still determine and assess additional income taxes from Plaintiffs may expire.⁴ (Id.) The Court granted the Government's Motion to Intervene on March 25, 2004, and denied Plaintiffs' Motion for Reconsideration on April 2, 2004.

Defendant KPMG responded to Plaintiffs' Motion for Summary Judgment on March 26, 2004, and filed a Cross-Motion for Summary Judgment that same day. Intervenor-Defendant United States filed a Motion to Dismiss, which the Court construes as a Motion for Summary Judgment, on April 2, 2004. (See Mot. to Dismiss at 1-2.)

II. SUMMARY JUDGMENT STANDARD

Summary judgment is appropriate where the facts and law as represented in the pleadings, affidavits, and other summary judgment evidence show that no reasonable trier of fact could find for the nonmoving party as to any material fact. Fed.R.Civ.P. 56; Lujan v. National Wildlife Federation, 497 U.S. 871, 888, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323-25, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Innovative Database Systems v. Morales, 990 F.2d 217 (5th Cir.1993). "The moving party bears the initial burden of identifying those portions of the pleadings and discovery in the record that it believes demonstrate the absence of a genuine issue of material fact, but is not required to negate elements of the nonmoving party's case." Lynch Properties, Inc. v. Potomac Ins. Co. of Ill., 140 F.3d 622, 625 (5th Cir.1998) (citing Celotex, 477 U.S. at 322-25, 106 S.Ct. 2548). If the movant fails to meet its initial burden, the motion must be denied, regardless of the nonmovant's response. Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.1994).

If the movant does meet its burden, the nonmovant must go beyond the pleadings and designate specific facts showing that a genuine issue of material fact exists for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Edwards v. Your Credit, Inc., 148 F.3d 427, 431 (5th Cir.1998). A party opposing summary judgment may not rest on mere conclusory allegations or denials in its pleadings unsupported by specific facts presented in affidavits opposing the motion for summary judgment. Fed. R. Civ. P. 56(e); Lujan, 497 U.S. at 888, 110 S.Ct. 3177; Hightower v. Texas Hosp. Assn., 65 F.3d 443, 447 (5th Cir.1995).

In determining whether genuine issues of fact exist, "[f]actual controversies are construed in the light most favorable to the nonmovant, but only if both parties have introduced evidence showing that a controversy exists." Lynch, 140 F.3d at 625; see also Eastman Kodak v. Image Technical Services, 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992). However, in the absence of any proof, the Court will not assume that the nonmoving party could or would prove the necessary facts. Lynch, 140 F.3d at 625. A party must do more than simply show some "metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586, 106 S.Ct. 1348. "If the record, taken as a whole, could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial." Friou v. Phillips Petroleum Co., 948 F.2d 972, 974 (5th...