U.S. v. Sherman

• Decision Date: 08 September 1980
• Docket Number: No. 79-3595,79-3595
• Citation: 627 F.2d 189
• Parties: 80-2 USTC P 9664, 6 Fed. R. Evid. Serv. 1202 UNITED STATES of America, Petitioner/Appellee, v. Victor SHERMAN, Respondent/Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 189

627 F.2d 189

80-2 USTC P 9664, 6 Fed. R. Evid. Serv. 1202

UNITED STATES of America, Petitioner/Appellee, v. Victor SHERMAN, Respondent/Appellant.

No. 79-3595.

United States Court of Appeals Ninth Circuit.

Argued and Submitted April 2, 1980.

Decided Sept. 8, 1980.

Donald M. Re, Los Angeles, Cal., argued, for respondent/appellant.

Stanley S. Shaw, Jr., Washington, D. C., argued, for petitioner/appellee.

Appeal from the United States District Court for the Central District of California.

Before CHOY, ALARCON, Circuit Judges, and SOLOMON, ^* District Judge.

ALARCON, Circuit Judge:

This is an appeal from an order of the United States District Court for the Central District of California, dated August 20, 1979, which directed the appellant, attorney Victor Sherman, to comply with an Internal Revenue Service summons. Sherman is the attorney for the target of an IRS investigation of net worth for the purpose of determining income tax liability. The summons seeks disclosure of the amount of the legal fees paid by the client to Sherman in 1977.

Sherman resisted the summons in the district court on the basis that (1) enforcement of the summons would violate the attorney-client privilege and (2) that the summons was issued for an improper purpose and should not be enforced.

On appeal, he renews the former argument and, in addition, contends that the district court erred in denying his request for an evidentiary hearing on the issue of whether it was IRS policy to instigate net worth investigations for individuals charged or convicted in large drug trafficking cases. This information, according to appellant, would have been relevant evidence to show that it was likely that appellant and his client would have discussed tax matters at the very outset of their consultations regarding the criminal charges. The establishment of this fact, appellant claims, is essential to his argument that the fee arrangement between himself and Quinn is protected by the attorney-client privilege.

I. BACKGROUND FACTS

On March 14, 1979, Martin D. Lipman, a revenue agent for the IRS, served a summons on Sherman, pursuant to Section 7602 of the Internal Revenue Code of 1954. ¹ The summons directed Sherman to appear before Lipman and to produce information with respect to legal fees paid during 1977 by John F. Quinn. Sherman had originally been retained by Quinn in relation to criminal drug charges. Following Quinn's conviction on the criminal charges, Sherman continued to represent him with respect to tax proceedings brought by the IRS.

When Sherman refused to produce the documents the Government filed a petition in district court seeking enforcement of the summons. The petition was accompanied by Lipman's written declaration, made under penalty of perjury, declaring (1) that the summons was issued pursuant to a valid tax examination, conducted "solely for civil purposes," (2) that the summons had been properly issued and served (3) that the material sought was relevant to a determination of Quinn's tax liabilities by means of the net worth method, and (4) that the information was not already in the possession of the IRS. The declaration also noted that Sherman had appeared in response to the summons but had failed to produce the requested material.

On June 22, 1979 the district court entered an order to show cause directing Sherman to respond to the petition. Sherman filed a response on July 9, 1979, in which he argued that he was not required to comply with the summons because the material sought was protected by the attorney-client privilege.

A hearing was held on the show cause order on August 13, 1979. Sherman made an offer of proof that Lipman, if permitted, would testify that it was the custom and practice of the IRS to conduct civil or criminal investigations into the tax liability of individuals who had been convicted of major narcotics transactions. A further offer of proof was made by Sherman, that he himself would testify that when initially contacted by Quinn in regard to representation in the drug case, the possibility of a future IRS investigation was contemplated and his fee was set accordingly. The court denied Sherman's request to allow testimony to be taken from Lipman and refused Sherman's testimony concerning the nature of his relationship with Quinn. The court took the matter under submission.

On August 20, 1979, the court entered the order appealed from enforcing the summons. Sherman subsequently filed a motion for reconsideration. Following a second hearing, the district court denied the motion for reconsideration and stayed enforcement of the judgment to October 17, 1979 on the condition that Sherman file, under seal, the summoned documents with the district court. On October 25, 1979 this court entered an order granting a stay of compliance pending appeal and establishing an expedited schedule for this appeal.

II. ATTORNEY-CLIENT PRIVILEGE

"As a general rule, where a party demonstrates that there is a legitimate need for a court to require disclosure of such matters, the identity of an attorney's clients and the nature of his fee arrangements with his clients are not confidential communications protected by the attorney-client privilege." (United States v. Hodge and Zweig, 548 F.2d 1347, 1353 (9th Cir. 1977). However this principle of nonconfidentiality is subject to this important exception: "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 and Zweig, supra, 548 F.2d at 1353, citing Baird v. Koerner, 279 F.2d 623, 630 (9th Cir. 1960).) Appellant seeks to fit this case within the exception.

In Baird v. Koerner, supra, this court addressed a unique factual situation. Baird, an attorney, refused to answer a question posed to him by the appellee, Koerner, a Special Agent of the IRS. Specifically, Baird was asked to identify persons on whose behalf he had transmitted a cashier's check to the Director of Internal Revenue in the amount of $12,706.85. This sum represented taxes determined by accountants to be due based upon their conclusion that the undisclosed taxpayers had filed returns which were understated as to the amount of tax owed. No investigation was in progress at that time regarding these taxpayers. The payment was made on their behalf in order to place them in the most favorable position possible should criminal charges be brought by the IRS.

In Baird, the court concluded that under the circumstances then present ". . . a disclosure of the persons employing the attorney-appellant would disclose the persons paying the tax ; the fact of payment indicates clearly what is here specifically admitted, that an additional tax was payable and that the unknown clients owed it . . . (Revealing the clients' names) would disclose the 'ultimate motive of litigation' which Wigmore says the privilege should protect." (Emphasis added.) (279 F.2d at 630.)

In this case, appellant does not argue that disclosure of fees paid to him by Quinn will implicate Quinn in any further drug violations. Rather, he asserts that when Quinn first sought legal advice in regard to the drug charges, the possibility of an IRS...