Tornay v. U.S.

• Decision Date: 22 February 1988
• Docket Number: No. 86-4432,86-4432
• Citation: 840 F.2d 1424
• Parties: -701, 88-1 USTC P 9189, 10 Fed.R.Serv.3d 541, 24 Fed. R. Evid. Serv. 1097 Stephen TORNAY, Galene Tornay, Plaintiffs-Appellants, v. UNITED STATES of America; A.R. Demeter, Special Agent, Internal Revenue Service, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1424

840 F.2d 1424

61 A.F.T.R.2d 88-701, 88-1 USTC P 9189,

10 Fed.R.Serv.3d 541,

24 Fed. R. Evid. Serv. 1097

Stephen TORNAY, Galene Tornay, Plaintiffs-Appellants, v. UNITED STATES of America; A.R. Demeter, Special Agent Internal Revenue Service, Defendants-Appellees.

No. 86-4432.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 7, 1988.

Decided Feb. 22, 1988.

Robert J. Wayne, Seattle, Wash., for plaintiffs-appellants.

Michael L. Paup, Tax Div., Dept. of Justice, Washington, D.C., for defendants-appellees.

Appeal from the United States District Court for the Western District of Washington.

Before WRIGHT, Circuit Judge, ALARCON and POOLE, Circuit Judges.

EUGENE A. WRIGHT, Circuit Judge:

We must decide if an IRS summons to an attorney for information regarding fees paid by his clients is protected by the attorney-client privilege, or violates the Sixth Amendment right to counsel or the Fifth Amendment right to due process.

BACKGROUND

Stephen and Galene Tornay were the subject of an investigation by the Internal Revenue Service to determine their federal tax liability for tax years 1978 through 1983. The IRS sought to establish tax liability on a net worth, net expenditure basis. It issued summonses to three Oregon attorneys, whom the Tornays had retained in connection with a 1983 criminal conviction, for information regarding fees paid. When the attorneys complied with the summonses, the Tornays discharged them.

The Tornays also retained Seattle attorney Robert Wayne, their present counsel. In 1984, the IRS issued a summons to Wayne for records of financial transactions with the Tornays for the years 1977 through 1984. The IRS withdrew the summons after the Tornays filed a petition to quash.

Later, the IRS issued a second summons to Wayne requesting only the financial records for 1983. The summons complied with the notice and procedure required by 26 U.S.C. Sec. 7609(a).

Wayne failed to comply with the summons and continues to do so. The Tornays petitioned to quash pursuant to 26 U.S.C. Sec. 7609(b)(2). In response, the IRS sought enforcement to the extent that the summons "sought information concerning the date, amount and form of legal fees paid to and trust funds deposited with Wayne by the Tornays during 1983." The Tornays insist that they will discharge Wayne if he is forced to comply with the summons.

After an evidentiary hearing, Magistrate Sweigert issued recommended findings of fact and conclusions of law. He concluded The Tornays appeal, challenging only the conclusions of law. They allege: (1) the attorney-client privilege protects the records sought by the IRS, and (2) enforcement of the summons violates their Sixth Amendment right to counsel and Fifth Amendment right to due process. We affirm.

that the information was not a confidential communication protected by the attorney-client privilege, and that enforcement of the summons did not violate the Tornays' Sixth Amendment right to counsel. Judge Rothstein adopted the magistrate's findings and conclusions, and denied the petition to quash.

DISCUSSION

I. Attorney-Client Privilege

Denial of a petition to quash an IRS summons is reviewed under the clearly erroneous standard. Ponsford v. United States, 771 F.2d 1305, 1308 (9th Cir.1985). The conclusion that the amount, date, and form of legal fees paid is not a confidential communication protected by the attorney-client privilege is a mixed question of law and fact, and reviewed de novo. See United States v. McConney, 728 F.2d 1195, 1202 (9th Cir.) (en banc), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984).

The party asserting an evidentiary privilege has the burden to demonstrate that the privilege applies to the information in question. U.S. v. Hirsch, 803 F.2d 493, 496 (9th Cir.1986).

Federal Rule of Evidence 501 provides: "[T]he privilege of a witness ... shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in light of reason and experience." Accordingly, federal common law governs whether the information sought by the IRS is protected by the attorney-client privilege. United States v. Hodge and Zweig, 548 F.2d 1347, 1353 (9th Cir.1977).

The purpose of the attorney-client privilege is to encourage full disclosure to attorneys so they are able to render effective legal assistance. 8 J. Wigmore, Evidence Secs. 2291-92 (McNaughton rev. 1961). Because "the privilege has the effect of withholding relevant information from the factfinder, it applies only where necessary to achieve its purpose. Accordingly, it protects only those disclosures--necessary to obtain informed legal advice--which might not have been made absent the privilege." Fisher v. United States, 425 U.S. 391, 403, 96 S.Ct. 1569, 1577, 48 L.Ed.2d 39 (1976).

We have said repeatedly, as the Tornays concede, that fee information generally is not privileged. ¹ See, e.g., In re Grand Jury Supoenas (Hirsch), 803 F.2d 493, 496 (9th Cir.1986); In re Osterhoudt, 722 F.2d 591, 592 (9th Cir.1983). Payment of fees is incidental to the attorney-client relationship, and does not usually involve disclosure of confidential communications arising from the professional relationship. Hirsch, 803 F.2d at 496; Osterhoudt, 722 F.2d at 593.

The Tornays argue that, in light of an exception to this rule, the privilege is applicable to information concerning fees paid to Wayne. The genesis of their argument is Baird v. Koerner, 279 F.2d 623 (9th Cir.1960).

Baird involved several clients who directed their attorney to tender anonymously to the IRS delinquent tax payments and interest. The IRS issued a summons requiring counsel to identify his clients. We concluded that disclosure of the clients' identity was protected by the attorney-client privilege:

"If the identification of the client conveys information which ordinarily would be conceded to be part of the usual privileged communication between attorney and client, then the privilege should extend to such identification in the absence of other factors." ²

Id. at 632. The privilege applied because identifying the clients would be tantamount to conveying a privileged communication in which the clients disclosed their delinquent tax liabilities.

Seventeen years after Baird, our court cited it for this proposition:

"A client's identity and the nature of that client's fee arrangements may be privileged where the person invoking the privilege can show that a strong probability exists that disclosure of such information would implicate that client in the very criminal activity for which legal advice was sought."

United States v. Hodge & Zweig, 548 F.2d 1347, 1353 (9th Cir.1977).

The Tornays argue that the fee information sought by the IRS falls within the Baird exception. They read Hodge & Zweig's statement of Baird to mean that disclosure of fee information which may be used to implicate the client is protected by the privilege. They say the fees were paid to represent them in the IRS investigation, fee information will implicate them in that investigation, and the IRS intends to rely upon the information as an essential element in its case.

The government argues that Baird has been narrowly construed, and is not applicable here. Amici Curiae Washington State Trial Lawyers Association and Washington State Bar Association suggest that Ninth Circuit authority is split as to the extent and breadth of Baird. We agree with the government.

Our court, in several decisions, has cited Baird for the proposition enunciated in Hodge & Zweig. See, e.g., In re Grand Jury Subpoenas Duces Tecum (Lahodny), 695 F.2d 363, 365 (9th Cir.1982); United States v. Sherman, 627 F.2d 189, 191 (9th Cir.1980). We have, however, applied Baird only on one other occasion. See In re Grand Jury Proceedings (Lawson), 600 F.2d 215 (9th Cir.1979). ³

In Lawson, the court applied Baird to protect the identity of an undisclosed client who had arranged to pay the legal fees for two admitted conspirators. With little discussion, the court assumed that the unnamed client sought legal advice regarding possible implication with the conspirators, and concluded that Baird was applicable.

Our court's reliance on the Hodge & Zweig statement of Baird is curious. In Hodge & Zweig, the IRS sought information regarding the nature of fees paid by a client. The client was alleged to be part of a conspiracy which paid the legal fees of co-conspirators who were apprehended. The court stated that Baird would apply because disclosing the nature of the payments could implicate the client as a co-conspirator. Then it concluded, however, that the information was not privileged because the client sought legal representation in furtherance of the conspiracy. We view Hodge & Zweig 's statement of Baird as dictum, and give it no precedential weight.

Nevertheless, Lawson and Hodge & Zweig illustrate the narrow scope of Baird. In both, the government sought more than information about fees paid. It sought the identity of clients who had allegedly paid legal fees for the defense of alleged conspirators. Information regarding the fee arrangement was not deemed a confidential communication merely because it implicated the unidentified client. The crucial factor was the exceptional circumstances by which disclosure of the fee arrangement would be tantamount to revealing the unnamed clients' involvement in the conspiracy clearly a privileged confidential communication. Hodge & Zweig, 548 F.2d at 1354.

Hodge & Zweig has been criticized as misstating the Baird rule. See Hirsch, 803 F.2d at 497; In re Osterhoudt, 722 F.2d at 593; In re Matters Before the Special March 1980 Grand Jury, 729 F.2d 489, 494 (7th Cir.1984). "The principle of Baird was not that the privilege applied because the identity of the client was incriminating, but because in the circumstances of the case disclosure of the identity of the client was in substance a disclosure of...