U.S. v. Gertner

• Citation: 65 F.3d 963
• Decision Date: 04 August 1995
• Docket Number: No. 95-1277,95-1277
• Parties: -6325, 64 USLW 2194, 95-2 USTC P 50,499 UNITED STATES of America, Petitioner, Appellant, v. Nancy GERTNER, Etc., et al., Respondents, Appellees. John Doe, Intervenor, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 963

65 F.3d 963

76 A.F.T.R.2d 95-6325, 64 USLW 2194,

95-2 USTC P 50,499

UNITED STATES of America, Petitioner, Appellant, v. Nancy GERTNER, Etc., et al., Respondents, Appellees John Doe, Intervenor, Appellee.

No. 95-1277.

United States Court of Appeals First Circuit.

Heard Aug. 4, 1995.

Decided Sept. 13, 1995.

John A. Dudeck, Jr., Attorney, Tax Division, U.S. Dep't of Justice, with whom Loretta C. Argrett, Assistant Attorney General, Gary R. Allen and Charles E. Brookhart, Attorneys, Tax Division, were on brief, for appellant.

Gerald B. Lefcourt, with whom Sheryl E. Reich, Lefcourt & Dratel, P.C., Bruce Maffeo, Bernstein & Maffeo, Thomas E. Dwyer Jr., Jody L. Newman, and Dwyer & Collora were on joint brief, for appellees.

Judith H. Mizner, Andrew Good, Benjamin Fierro, III, and Francis S. Moran, Jr. on joint brief for Massachusetts Ass'n of Criminal Defense Lawyers, Massachusetts Bar Ass'n, and Boston Bar Ass'n, amici curiae.

Before SELYA and BOUDIN, Circuit Judges, and LISI, ^* District Judge.

SELYA, Circuit Judge.

This controversy features an old-fashioned tug of war. Pulling in one direction is the Internal Revenue Service (IRS) which, for easily understandable reasons, is intent on learning the identity of persons who pay large legal fees in cash. Pulling in the opposite direction is a consortium consisting of two lawyers and three bar associations (appearing as amici curiae) which, for equally understandable reasons (fearing inter alia that disclosure may spur prosecution), is intent on safeguarding the identity of clients who pay in cash. In this case, the parties' positions hardened and a stalemate developed. The district court resolved matters in the lawyers' favor, refusing to enforce IRS summonses designed to obtain "client identity" information pursuant to section 6050I of the Internal Revenue Code (I.R.C.), 26 U.S.C. Sec. 6050I (1988 & Supp. V 1993). See United States v. Gertner, 873 F.Supp. 729 (D.Mass.1995). The government appeals. We affirm (albeit on more circumscribed grounds than those enumerated by the lower court).

I. BACKGROUND

Federal law, specifically I.R.C. Sec. 6050I and its implementing regulations, requires a person who receives more than $10,000 in cash during a single trade or business transaction to file a form (IRS Form 8300) reporting the name, address, occupation, and social security number of the payor, along with the date and nature of the transaction and the amount involved. See I.R.C. Sec. 6050I; 26 C.F.R. Sec. 1.6050I-1(e) (1995). At various times in 1991 and 1992, respondents Nancy Gertner and Jody Newman, then partners in a Boston law firm, filed forms reflecting four successive payments of hefty cash fees to the firm by a single client. Each of the forms was essentially complete except for the name of the client. The respondents advised the IRS that they were withholding the client's identity on the basis of ethical obligations, attorney-client privilege, and specified constitutional protections.

These filings sparked a lengthy course of correspondence between the law firm and the IRS. In that exchange, members of the firm attempted on at least three occasions to determine whether the IRS wanted the omitted information as part of an investigation focused on the firm or to learn more about the unnamed client. The IRS did not deign to answer these inquiries.

The parties remained deadlocked and the IRS issued summonses purporting to direct the respondents to furnish certain records and testimony anent the client's identity. The respondents declined to comply. The government then brought an enforcement action pursuant to I.R.C. Secs. 7402(a) & 7604(a), claiming that it wanted the information in connection with an investigation of the law firm's tax liability. On April 20, 1994, after perusing the complaint and the declaration of Revenue Agent Sophia Ameno, the district court issued an order directing the respondents to show cause why they should not be compelled to honor the summonses.

The court permitted the client to intervene pseudonymously. Thereafter, the respondents and the intervenor mounted two lines of defense. First, they asseverated that the IRS's alleged investigation of the lawyers was merely a pretext disguising its real objective--learning more about the client--and that the government therefore should be required to follow the statutory procedure for issuing summonses affecting unidentified third parties. ¹ See I.R.C. Sec. 7609(f). Second in concert with the amici they insisted that various privileges and protections allow lawyers to shield their client's identity from the reach of such summonses. The IRS joined issue, asserting that it had employed the appropriate procedure; that the respondents had failed to show either that the supposed investigation of the law firm was a sham or that an improper motive tainted the summonses; and, finally, that no special protection of any kind attached to the desired information.

When the day of decision dawned, the respondents asked the district court to take live testimony. The government opposed the request. The court eschewed the evidentiary hearing that the respondents sought but nevertheless refused to enforce the summonses. It found as a fact that the IRS's purported probe of the law firm's tax-related affairs was a hoax, and that the IRS should have complied with I.R.C. Sec. 7609(f) prior to serving the summonses. See Gertner, 873 F.Supp. at 734. Nor did the court stop there; it proceeded to hold that, under the circumstances here obtaining, the attorney-client privilege thwarted the IRS's demand for information concerning client identity. See id. at 734-37. This appeal ensued.

II. ANALYSIS

We split our analysis into three segments. First, we limn the framework for determining whether the federal judiciary's imprimatur should be impressed upon an IRS summons. Next, we mull the district court's finding on the pretext issue under the deferential standard of review that pertains in this context. Lastly, we explain why the IRS's failure to comply with I.R.C. Sec. 7609(f) effectively ended the case.

A. The Framework.

The IRS has broad authority to issue summonses under I.R.C. Secs. 7602 & 7604. Enforcement proceedings are designed to be summary, see Donaldson v. United States, 400 U.S. 517, 529, 91 S.Ct. 534, 541, 27 L.Ed.2d 580 (1971); United States v. Freedom Church, 613 F.2d 316, 321 (1st Cir.1979), and the court's role is simply to ensure that the IRS is using its broad authority in good faith and in compliance with the law. See Donaldson, 400 U.S. at 536, 91 S.Ct. at 545; United States v. Kis, 658 F.2d 526, 535 (7th Cir.1981), cert. denied, 455 U.S. 1018, 102 S.Ct. 1712, 72 L.Ed.2d 135 (1982). Thus, when a challenge to a summons is lodged, the IRS must only satisfy the court that (1) its investigation is being conducted pursuant to a proper purpose, (2) the information sought in the summons is (or may be) relevant to that purpose, (3) the information is not already within the IRS's possession, and (4) all legally required administrative steps have been followed. See United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-55, 13 L.Ed.2d 112 (1964); Copp v. United States, 968 F.2d 1435, 1437 (1st Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 1257, 122 L.Ed.2d 655 (1993).

In determining whether to enforce IRS summonses under these substantive standards, we do not write on a pristine page. This court has constructed a three-tiered framework for expediting such determinations. See Freedom Church, 613 F.2d at 321; United States v. Salter, 432 F.2d 697, 700 (1st Cir.1970); accord United States v. Church of Scientology, 520 F.2d 818, 824 (9th Cir.1975); United States v. McCarthy, 514 F.2d 368, 372-73 (3d Cir.1975). To mount the first tier, the IRS must make a prima facie showing that it is acting in good faith and for a lawful purpose. This burden is not taxing, so to speak. Courts repeatedly have confirmed that an affidavit of the investigating agent attesting to satisfaction of the four Powell elements is itself adequate to make the requisite prima facie showing. See, e.g., Sylvestre v. United States, 978 F.2d 25, 26 (1st Cir.1992) (per curiam), cert. denied, --- U.S. ----, 113 S.Ct. 1606, 123 L.Ed.2d 168 (1993); United States v. Lawn Builders of New Eng., Inc., 856 F.2d 388, 392 (1st Cir.1988); Liberty Fin. Servs. v. United States, 778 F.2d 1390, 1392 (9th Cir.1985); Kis, 658 F.2d at 536.

Once this minimal showing surfaces, the burden shifts to the taxpayer to rebut the good-faith presumption that arises in consequence of the government's prima facie case. ² The taxpayer is not at this stage required to disprove the government's profession of good faith. See United States v. Samuels, Kramer & Co., 712 F.2d 1342, 1348 (9th Cir.1983); Kis, 658 F.2d at 540. She must, however, shoulder a significant burden of production: in order to advance past the first tier, the taxpayer must articulate specific allegations of bad faith and, if necessary, produce reasonably particularized evidence in support of those allegations. ³ See Kis, 658 F.2d at 540; United States v. Garden State Nat'l Bank, 607 F.2d 61, 71 (3d Cir.1979); Salter, 432 F.2d at 700. This showing does not demand that the taxpayer conclusively give the lie to the prima facie case, but only that she create a "substantial question in the court's mind regarding the validity of the government's purpose." Salter, 432 F.2d at 700; accord Church of Scientology, 520 F.2d at 824; McCarthy, 514 F.2d at 376. To reach this goal, it is not absolutely essential that the taxpayer adduce additional or independent evidence; she may hoist her burden either by citing new facts or by bringing to light mortal weaknesses in the government's proffer.

If the taxpayer satisfies this burden of production, the third tier beckons. At this stage, the district court weighs the facts, draws inferences, and decides the issue. To do so, the court...