Olive v. Isherwood, Hunter & Diehm
| Decision Date | 31 March 1987 |
| Docket Number | Civ. No. 1987/40. |
| Citation | 656 F. Supp. 1171 |
| Court | U.S. District Court — Virgin Islands |
| Parties | Anthony P. OLIVE, Director of Virgin Islands Bureau of Internal Revenue Plaintiff, v. ISHERWOOD, HUNTER & DIEHM Defendants. |
Joanne E. Bozzuto, Office of the Atty. Gen., Dept. of Law, Charlotte Amalie, St. Thomas, U.S. Virgin Islands, for plaintiff.
Richard H. Hunter, Christiansted, St. Croix, Virgin Islands, for defendants.
This petition asks us to enforce a tax summons for documents involving a lawyer's escrow account. We find that these documents are not privileged and that the law firm has failed to make a substantial showing that the Government ordered production in bad faith. The summons will, therefore, be enforced.
Respondents James H. Isherwood and Richard H. Hunter were the sole members of the partnership during those years.
The firm notified the B.I.R. that the attorney-client privilege prevented its compliance and the B.I.R. responded by filing this petition for enforcement. Oral argument was waived by the parties.
The law firm has conceded that it must surrender escrow checks reflecting income to the partners as well as checks "not involving clients." It argues that the summons must be quashed with respect to the remaining documents because those are both privileged and irrelevant to the audit.
The Internal Revenue Service, and thus the B.I.R.,3 may summon a taxpayer's financial records "for the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax ... or collecting any liability...." 26 U.S.C. § 7602(a)(1). This statute's broad mandate reflects "a congressional policy choice in favor of disclosure of all information relevant to a legitimate I.R.S. inquiry." United States v. Arthur Young & Co., 465 U.S. 805, 816, 104 S.Ct. 1495, 1502, 79 L.Ed.2d 826 (1984). The investigatory power is expansive, id., and summonses are entitled to "an exceptional amount of deference." United States v. Fox, 721 F.2d 32, 40 n. 6 (2d Cir.1983). See generally United States v. Bisceglia, 420 U.S. 141, 145-46, 95 S.Ct. 915, 918, 43 L.Ed.2d 88 (1975).
A challenged tax summons should be enforced where the B.I.R. makes a prima facie showing that the summons issued before criminal prosecution relating to the summons' subject matter was recommended and that the summons power is being used in good faith pursuit of the purposes of § 7602. United States v. LaSalle National Bank, 437 U.S. 298, 318, 98 S.Ct. 2357, 2368, 57 L.Ed.2d 221 (1978). Good faith requires a showing that the investigation was conducted pursuant to a legitimate purpose, that the information sought may be relevant to that purpose, that the information was not already within the taxing authority's possession and that the applicable administrative procedures were followed. United States v. Powell, 379 U.S. 48, 58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964). See also United States v. Cortese, 614 F.2d 914, 919 (3d Cir.1980).
The burden then shifts to the taxpayer to either disprove an element or show that enforcement would constitute an abuse of the court's process. Powell, supra, 379 U.S. at 58, 85 S.Ct. at 255; United States v. Millman, 765 F.2d 27, 29 (2d Cir.1985).4 This burden is a heavy one: the taxpayer is entitled to an evidentiary hearing only after making "`a substantial preliminary showing'" that an abuse has occurred. E.g., id.
The firm challenges this summons under two theories. First, it is contended that the documents sought are protected by the attorney-client privilege. Alternatively, the firm alleges that the summons issued in bad faith because the documents demanded are irrelevant to the audit. We will address the claims seriatim.
The summons power is not absolute and is limited by the traditional privileges, including the attorney-client privilege. Upjohn Company v. United States, 449 U.S. 383, 398, 101 S.Ct. 677, 686, 66 L.Ed.2d 584 (1981); Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct. 508, 513, 11 L.Ed.2d 459 (1964). See United States v. Amerada Hess Corp., 619 F.2d 980 (3d Cir.1980). Whether material is privileged is a matter of federal law and is governed by F.R.E. 501. E.g., United States v. Liebman, 742 F.2d 807, 809 (3d Cir.1984). The essential elements of the privilege are:
(1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to the fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion of law or (ii) legal services or (iii) assistance in some legal proceeding and not (d) for the purpose of committing a crime or tort and (4) the privilege has been (a) claimed and (b) not waived by the client.
United States v. United Shoe Machinery, 89 F.Supp. 357, 358-59 (D.Mass.1950). See also 8 Wigmore on Evidence § 2292 (1961).
The financial aspects of the attorney-client relationship are generally not privileged because fees and awards seldom involve the pursuit of legal counseling. Thus, the privilege excludes a lawyer's record of fees collected from a specific client. United States v. Davis, 636 F.2d 1028, 1044 (5th Cir.1981) (citations omitted) cert. denied, 454 U.S. 862, 102 S.Ct. 320, 70 L.Ed.2d 162 (1981); United States v. Sherman, 627 F.2d 189, 192 (9th Cir.1980); United States v. Hodgson, 492 F.2d 1175, 1177 (10th Cir.1974); United States v. Ponder, 475 F.2d 37, 39 (5th Cir.1973); United States v. Hartigan, 402 F.Supp. 776, 777 (D.Minn.1975); United States v. Long, 328 F.Supp 233, 236 (E.D.Mo.1971).
In response to a tax summons, therefore, a lawyer must reveal both the nature of and remuneration for legal services. Colton v. United States, 306 F.2d 633, 637-38 (2d Cir.1962) cert. denied, 371 U.S. 951, 83 S.Ct. 505, 9 L.Ed.2d 499 (1963); Long, supra at 236. Moreover, the privilege does not immunize the contingency fee contract and statement of distribution from a tax summons. United States v. Cortese, 540 F.2d 640, 642 (3d Cir.1976).
The courts are in accord that the fact that money passes through an attorney's escrow account does not privilege an otherwise unprivileged transaction. Factually, the most similar case is United States v. Tratner, 511 F.2d 248 (7th Cir.1975). Tratner, a lawyer, invoked the attorney-client privilege when asked to identify the payee of a $10,000 check drawn on his escrow account. The Seventh Circuit held that no per se privilege attached to the account and, therefore, Tratner was required to demonstrate that either the account or the transaction was privileged or else comply with the summons. Id. at 252.
In United States v. Dickinson, 308 F.Supp. 900 (D.Ariz.1969) aff'd, 421 F.2d 702 (9th Cir.1970), an attorney whose accounts receivable records were summoned to determine his individual tax liability attempted to invoke the privilege on the theory that production would expose the identities of his clients. The court rejected this argument on the authority of the well-established rule that absent a "compelling reason to protect the identity of the client ..., the identity of the client is not a communication protected by the privilege." Id. at 901.5
Nor can the attorney or client claim the privilege to prevent the bank holding the escrow account from producing its records. Gannet v. First National Bank of New Jersey, 546 F.2d 1072, 1076 (3d Cir.1976) cert. denied, 431 U.S. 954, 97 S.Ct. 2674, 53 L.Ed.2d 270 (1977) (); United States v. Bank of California, 424 F.Supp. 220 (N.D.Cal.1976) ().
Finally, the Third Circuit has unequivocally stated that local laws requiring lawyers to establish escrow accounts add nothing to the federal common law privilege. Cortese, supra; Gannet supra.
The sole grounds advanced in support of the claim of privilege is the firm's bald statement that the documents are entitled to protection merely because they pertain to the escrow account. A finding in favor of the firm would require us to rule that escrow records are privileged per se, a result that is contrary to the established rule. E.g., Tratner, supra at 252; Gannet, supra at 1076. We hold, therefore, that if privilege is to attach to any of the approximately 1,600 escrow transactions, the firm must prove each one individually. E.g., United States v. Lawless, 709 F.2d 485, 487 (7th Cir.1983); Davis, supra at 1044 n. 20.6
Next, the law firm argues that the only escrow records needed for the audit are those reflecting income to the partners or the partnership's expenses. The remaining documents dealing solely with transactions for clients were purportedly summoned as part of "a fishing expedition involving other persons" and are, therefore, irrelevant. Hence, it is contended that that part of the summons issued in bad faith and is unenforceable.
For purposes of a tax summons, relevancy is not judged under the standard of F.R.E. 401 for admitting evidence at...
To continue reading
Request your trial