U.S. v. Bernhoft, Case No. 08-C-0515.

CourtUnited States District Courts. 7th Circuit. United States District Court of Eastern District of Wisconsin
Writing for the CourtRudolph T. Randa
Citation666 F.Supp.2d 943
Docket NumberCase No. 08-C-0515.
Decision Date28 October 2009
PartiesUNITED STATES of America, Petitioner, v. Robert BERNHOFT, Respondent.
666 F.Supp.2d 943
UNITED STATES of America, Petitioner,
v.
Robert BERNHOFT, Respondent.
Case No. 08-C-0515.
United States District Court, E.D. Wisconsin.
October 28, 2009.
As Corrected November 17, 2009.

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Robert E. Fay, United States Department of Justice, Washington, DC, for Petitioner.

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Robert E. Barnes, The Law Office of Robert G. Bernhoft SC, Milwaukee, WI, for Respondent.

DECISION AND ORDER

RUDOLPH T. RANDA, District Judge.


BACKGROUND

On June 13, 2008, the Petitioner, the United States of America ("the Government"), filed a petition to enforce an Internal Revenue Service ("IRS") administrative summons against the Respondent, Robert Bernhoft ("Bernhoft"). The summons was issued pursuant to 26 U.S.C. § 7602 in connection with an IRS investigation into whether Joseph Banister ("Banister")—an independent contractor of Bernhoft's law firm, Bernhoft Law Firm, S.C. (the "Law Firm")—is engaging in the promotion of abusive tax schemes such as tax shelters that would be subject to civil penalties under 26 U.S.C. § 6700 and whether Banister should be enjoined from promoting abusive tax shelters pursuant to 26 U.S.C. § 7402 and § 7408.

Pursuant to the investigation, the lead IRS agent, Shereen Hawkins ("Hawkins"), discovered that Banister has been receiving substantial amounts of money from Bernhoft each year, but was unable to verify the purpose behind the financial transactions. Therefore, Hawkins issued a summons to Bernhoft for "[a]ny form, document or letter prepared by Joseph Banister for you and/or your entities" and "[a]ny correspondence (including e-mails) between Joseph Banister and you and/or your entities." (Hawkins Decl. Ex. 1 at 3.) IRS agent Thomas Feldon ("Feldon") served the summons upon Bernhoft on September 17, 2007. (Hawkins Decl. ¶ 5.) Bernhoft did not appear at the time and place required by the summons. (Hawkins Decl. ¶ 6.)

On June 13, 2008, the IRS filed the petition to enforce the summons. On February 3, 2009, the Court issued an Order to Show Cause for non-enforcement of the summons to Bernhoft. In that Order to Show Cause, the Court found that the file in this case reflects a prima facie showing that the investigation is being conducted for a legitimate purpose, the inquiries may be relevant to that purpose, the information sought is not already within the IRS Commissioner's possession, and the administrative steps required by the Internal Revenue Code had been followed. See United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964).

On April 9, 2009, Bernhoft filed a response, raising various defenses and abuses of process. Thereafter, the Government filed a reply brief. The matter is ready for resolution and will be addressed herein.

ANALYSIS

With respect to the challenged summons, Powell, 379 U.S. at 57-58, 85 S.Ct. 248, establishes the criteria for a prima facie case evidencing the issuance of an IRS summons in good faith. Powell holds that the IRS must show that (1) the investigation was conducted pursuant to a legitimate purpose; (2) the inquiry is relevant to that purpose; (3) the requested information is not already in the agency's possession; and, (4) the agency followed the administrative steps necessitated by the Internal Revenue Code. Id.

The Powell prima facie good faith test "isn't much of a hurdle" and imposes only a "minimal burden" on the agency. 2121 Arlington Heights Corp. v. I.R.S., 109 F.3d 1221, 1224 (7th Cir.1997); Miller v. United States, 150 F.3d 770, 772 (7th Cir.1998). The government could "typically make [a prima facie] showing through the affidavit of the revenue agent conducting the audit." 2121 Arlington Heights Corp., 109 F.3d at 1224 (citing United States v. Kis, 658 F.2d 526, 536 (7th Cir.1981)).

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In the instant case, the Court has found that the IRS's investigation satisfies the Powell good-faith test. Hawkins's declaration attests that the summons was issued pursuant to a legitimate purpose because it was in "furtherance of the investigation of Banister's activities and in accordance with 26 U.S.C. § 7602"1 (Hawkins Decl. ¶ 4), the information is not already in possession of the IRS, and, the agency has undertaken all the necessary administrative steps for the issuance of the summons. (Hawkins Decl. ¶¶ 7-8.) The relevance of the information sought is established by Hawkins's averment that it is necessary to "obtain Bernhoft's testimony and to examine the documents, letters and other information sought by the summons in order to properly complete her investigation of Banister." (Hawkins Decl. ¶ 9.)

Relevance of Materials Sought by Summons

Despite the Court's prior finding that the IRS has established a prima facie case, Bernhoft asserts that the summons requests the production of tens of thousands of pages concerning forensic work performed for the Law Firm's clients that would not "even be relevant to the summons's purpose." (Resp't's Opp'n Govt's Pet. to Enforce IRS Summons ("Opp'n Pet. to Enforce") 8.) The standard for relevancy in summons enforcement case is "relaxed." 2121 Arlington Heights Corp., 109 F.3d at 1224. The information sought must only be relevant in the sense that it has the potential to shed "some light" on why Bernhoft is making payments to Banister. Id. (citing United States v. Arthur Young & Co., 465 U.S. 805, 814-15, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984)). The Powell court merely required that the records sought "may be relevant." Id.

In 2121 Arlington Heights Corp., 109 F.3d at 1222, the IRS was investigating whether the respondent restaurant had under-reported its income from 1992 to 1993. After failed attempts to reconstruct the income, the IRS issued a summons requesting the restaurant's mudd sheets2 for May 1994 to October 1995. Id. at 1222-23. Although the summons was a circuitous and potentially inaccurate attempt to ascertain the respondent's prior income since a substantial amount, rather than all the respondent's business originated from catering, the appellate court, nonetheless, found the information sought relevant to the investigation. Id. at 1223-25. Dismissing claims that the mudd sheets would capture outgoing personal calls of the respondent's employees, over 100 people who were allowed to use the phone for that purpose, and that most banquets would be arranged by incoming not outgoing calls, the court upheld the

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finding of relevancy based on the determination that the potential existed that the IRS could reconstruct the respondent's income from the mudd sheets because they might disclose the identity of the repeat customers of the respondent's catering services from 1992 through 1993, and those customers might lead the IRS to cash payments received by the respondent during 1992 and 1993. Id. at 1224-25.

In the instant case, the Court concludes that the "documents, letters, or other correspondence sought by the summons may be relevant to the IRS's investigation of Banister," (Pet. to Enforce 3), and that they may "allow the IRS to prove or disprove that [the] Respondent has paid Banister to provide abusive tax schemes to [the] Respondent's clients." (See Reply Brief in Supp. of Pet. to Enforce IRS Summons 4 ("Reply Pet. to Enforce")). Regardless of the actual reason for these transfers of funds, in 26 U.S.C. § 7602 Congress has provided the IRS with broad investigative powers so that the IRS may satisfy itself that Bernhoft is not paying Banister to engage in conduct subject to penalty under the Internal Revenue Code.

The connection at issue here is more substantial than the connection between the summons and the investigation's purpose in 2121 Arlington Heights Corp. Unlike the attempt to reconstruct an income record with customers removed from the pertinent time frame by five months to nearly two and a half years, it is likely that the requested materials at issue in the instant case could directly address the IRS's inquiry of whether any of Bernhoft's payments to Banister were made in return for the provision of abusive tax schemes. Therefore, Bernhoft has not disproved the existence of the Powell factor of relevancy. See 2121 Arlington Heights Corp., 109 F.3d at 1222.

The Court will next examine whether Bernhoft's asserted attorney-client privilege, overbreadth of summons, or improper IRS conduct precludes enforcement of the summons.

Attorney-Client Privilege

Bernhoft asserts, on behalf of Banister, that the communications between him and Banister would be "evidently [attorney-client] privileged information" because he has and continues to represent Banister.3 (Opp'n Pet. to Enforce 6, 11.) Furthermore, Bernhoft maintains that the attorney-client privilege "protection extends to the client[s] of the law firm in which he is a partner and the confidences entrusted in him by clients for whom Banister performed forensic work under the privilege." (Opp'n Pet. to Enforce 15.) Therefore, Bernhoft asserts that "[a]sking which cases Banister worked on is the same as asking which clients informed the firm they faced criminal exposure" and "`the privilege protects an unknown client's identity where its disclosure would reveal a client's motive for seeking legal advice.'" Id. (citing In re Cherney, 898 F.2d 565, 568 (7th Cir.1990)).

Attorney-client privilege under federal law is "the oldest of privileges for confidential information known to the common law." United States v. Zolin, 491 U.S. 554, 562, 109 S.Ct. 2619, 105 L.Ed.2d 469 (1989) (citing Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981)). The privilege is, however, not without its limitations.4 In

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United States v. White, the Seventh Circuit Court of Appeals held that "the privilege is in derogation of the search for the truth," and, therefore, "must be strictly confined." 970 F.2d 328, 334 (7th Cir. 1992). Consequently, the Seventh Circuit generally forbids blanket assertions of privilege. See Holifield v. United States, 909 F.2d 201,...

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1 practice notes
  • Hanse v. United States, Case No. 17-cv-4573
    • United States
    • United States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
    • March 5, 2018
    ...1224 (citing Powell, 379 U.S. at 57-58); see also Khan v. United States, 548 F.3d 549, 554 (7th Cir. 2008); United States v. Bernhoft, 666 F. Supp. 2d 943, 945 (E.D. Wis. 2009); Good Karma, LLC v. United States, 546Page 7 F. Supp. 2d 597, 602 (N.D. Ill. 2008). Respondent's burden remains th......
1 cases
  • Hanse v. United States, Case No. 17-cv-4573
    • United States
    • United States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
    • March 5, 2018
    ...1224 (citing Powell, 379 U.S. at 57-58); see also Khan v. United States, 548 F.3d 549, 554 (7th Cir. 2008); United States v. Bernhoft, 666 F. Supp. 2d 943, 945 (E.D. Wis. 2009); Good Karma, LLC v. United States, 546Page 7 F. Supp. 2d 597, 602 (N.D. Ill. 2008). Respondent's burden remains th......

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