United States v. Bank of California

• Decision Date: 14 September 1976
• Docket Number: No. C-76-689 WHO.,C-76-689 WHO.
• Citation: 424 F. Supp. 220
• Parties: UNITED STATES of America and Glenn Miyamoto, Revenue Agent, Petitioners, v. The BANK OF CALIFORNIA, National Association, Respondent.
• Court: U.S. District Court — Northern District of California

424 F. Supp. 220

UNITED STATES of America and Glenn Miyamoto, Revenue Agent, Petitioners, v. The BANK OF CALIFORNIA, National Association, Respondent.

No. C-76-689 WHO.

United States District Court, N. D. California.

September 14, 1976.

COPYRIGHT MATERIAL OMITTED

James L. Browning, Jr., U.S. Atty., John Youngquist, Asst. U.S. Atty., San Francisco, Cal., for petitioners.

James J. Brosnahan, Morrison & Foerster, San Francisco, Cal., for respondent.

Edward M. Stadum, San Francisco, Cal., Applicant for intervention.

OPINION IN ORDER

ORRICK, District Judge.

This is another in a series of recent cases challenging the government's right to obtain a bank's records of its customers' accounts. The case is before the Court on a verified petition for enforcement of Internal Revenue summons, filed by the United States and Agent Glenn Miyamoto of the Internal Revenue Service (Government) on April 7, 1976, and a motion to intervene as a respondent, filed by the taxpayer, Edward M. Stadum, an attorney (Applicant), on May 17, 1976. The summons was served on The Bank of California, National Association (Bank) on October 29, 1975, pursuant to Sections 7602 and 7603 of the Internal Revenue Code of 1954 (26 U.S.C. §§ 7602, 7603).¹ It required the Bank to produce certain of its records respecting Applicant's law office trust account.² This proceeding is brought and this Court has jurisdiction hereof under Sections 7402(b) and 7604(a) of the Internal Revenue Code of 1954 (26 U.S.C. §§ 7402(b) and 7604(a)).³

For the reasons hereinafter set forth, I find that Applicant has failed to establish a "significantly protectable interest" warranting his intervention in these proceedings, and that the summons is enforceable.

I

On November 12, 1973, the Government requested that Applicant provide complete records of all his personal and business banking transactions for 1972 in connection with a routine audit of the 1972 joint income tax return of Applicant and his then wife.⁴ Applicant produced most of the requested materials, but he refused to produce the originals of his trust account records and unaltered copies of checks drawn on his law office trust account, claiming that they were privileged. He did provide copies of cancelled checks with his clients' names deleted.

In July of 1974, the Government caused a Section 7602 summons to be served on Applicant. Applicant again refused to fully comply, claiming that the production of the trust account records and his clients' identities would violate the attorney-client privilege and the Fourth and Fifth Amendments. He further asserted that his clients' identities were irrelevant to his 1972 tax liability. As a result, in August and October of 1975, the Government caused two Section 7602 summonses to be served on the Bank requesting production of its records respecting the trust account. At Applicant's request, the Bank refused to comply with the summonses without a court proceeding.

Thereafter, the Government filed its petition to enforce the October 29 summons (Bank summons), and the Government caused a notice of deficiency in the amount of $28,795 to be sent to Applicant,⁵ and Applicant filed his motion to intervene. The Bank is not opposing the petition, and will produce the requested records upon this Court's order to do so.

Applicant is contending that the Government has abused this Court's process by seeking allegedly irrelevant information and by attempting to circumvent the discovery rules and policies of the United States Tax Court where he intends to contest the deficiency assessment. He further alleges that enforcement of the summons will violate the Fourth and Fifth Amendments and his clients' attorney-client privileges.⁶

The Government resists Applicant's intervention in this proceeding, claiming that he has failed to demonstrate a "significantly protectable interest" warranting his intervention under the standards established by the Supreme Court in Donaldson v. United States, 400 U.S. 517, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971). Moreover, the Government contends that the materials sought are not privileged, and that neither the Fourth nor Fifth Amendments are implicated by a valid Section 7602 summons seeking a bank's records respecting a law office trust account. Finally, it seeks enforcement of the summons on the grounds that it was lawfully issued pursuant to a proper purpose.

II

Taxpayer intervention in Section 7602 summons enforcement proceedings brought against third parties has been permitted under limited circumstances. See, Donaldson v. United States, supra, 400 U.S. at 530-531, 91 S.Ct. 534; Garrett v. United States, 511 F.2d 1037, 1038 (9th Cir. 1975); United States v. Luther, 481 F.2d 429, 433 (9th Cir. 1973). Such intervention is permissive, not mandatory, and is appropriate only where the taxpayer establishes that he has a "significantly protectable interest" in the proceeding, as where there has been an abuse of legal process or where some privilege will be violated by enforcement. Donaldson v. United States, supra, 400 U.S. at 531, 91 S.Ct. 534; Garrett v. United States, supra, 511 F.2d at 1038.

Abuse of process exists where the summons is issued in bad faith, "solely" for criminal investigatory purposes (Donaldson v. United States, supra, 400 U.S. at 533, 91 S.Ct. 534; Wild v. United States, 362 F.2d 206, 208-209 (9th Cir. 1966)), to harass the taxpayer (United States v. Powell, 379 U.S. 48, 58, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964); United States v. Church of Scientology of California, 520 F.2d 818, 822 (9th Cir. 1975)), or after a recommendation for criminal prosecution. Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct. 508, 11 L.Ed.2d 459 (1964); Boren v. Tucker, 239 F.2d 767, 772 (9th Cir. 1956). Applicant does not assert any such abuse. Rather, he maintains, first, that the Bank's records sought are irrelevant to his 1972 tax liability. However, relevancy has "a broader connotation under Section 7602 than in the context of trial". United States v. Ruggeiro, 425 F.2d 1069, 1071 (9th Cir. 1970), cert. denied, 401 U.S. 922, 91 S.Ct. 863, 27 L.Ed.2d 826 (1971). The test as to whether records sought are relevant to a tax inquiry within the meaning of Section 7602(2) is whether the inspection sought might throw light upon the correctness of Applicant's 1972 return. United States v. Ryan, 455 F.2d 728, 733 (9th Cir. 1972); United States v. Shlom, 420 F.2d 263, 265 (2d Cir. 1969), cert. denied, 397 U.S. 1074, 90 S.Ct. 1521, 25 L.Ed.2d 809 (1970). The records sought by the Bank summons clearly satisfy this test. Applicant admittedly derived income from and deposited funds into the trust account during 1972. By the uncontroverted affidavit of Agent Miyamoto, the Government has established that since Applicant will not produce his own trust account records, the only source of ascertaining the correctness of Applicant's 1972 return is the bank records, and the only means of identification and verification of nonincome and income items may be through the trust account clients themselves.

Applicant next maintains that enforcement of the summons at this point in time (after the notice of deficiency and his statement of intention to challenge the deficiency assessment in the United States Tax Court) is analogous to using a Section 7602 summons to obtain information for use in a criminal proceeding, and thus should be condemned under Donaldson v. United States, supra. He argues that Tax Court discovery rules and policy might prevent the discovery and use of the information sought here. The argument lacks merit. It is established federal law that the mailing of a deficiency notice, and even a subsequent petition by the taxpayer to the Tax Court for review of the tax deficiency determination, does not cut off the Government's rights to have produced and to examine records bearing on the determination, where the summons was issued during the course of an audit and before the mailing of the notice. National Plate & Window Glass Co. v. United States, supra, 254 F.2d at 93. Accordingly, I find that this Court's process has not been abused.

III

The heart of Applicant's claimed right to intervene is his contention that production of the Bank's copies of the checks revealing the clients' names will violate the attorney-client privilege.⁷ Applicant argues that the privilege is implicated because as an attorney he is required under Rule 9 of the California Rules of Professional Conduct⁸ to maintain all funds received or held for the benefit of clients in a separate client fund or trust account. He suggests that the disclosure of unaltered checks deposited in or drawn upon this account will necessarily disclose the nature of the legal services he performed for his clients in violation of the state law which requires an attorney to preserve the confidences of his clients.⁹ However, it is the law of this Circuit and elsewhere that checks deposited in or drawn upon a law office trust account are not privileged communications and that, therefore, no attorney-client privilege exists with respect to them or to copies of them in the hands of a third-party bank. Harris v. United States, 413 F.2d 316 (9th Cir. 1969); O'Donnell v. Sullivan, 364 F.2d 43, 44 (1st Cir. 1966), cert. denied, 385 U.S. 969, 87 S.Ct. 501, 17 L.Ed.2d 433 (1966).

In Harris, a bank's records concerning a California attorney's trust account were subpoenaed by the grand jury.¹⁰ In declining to find that such records, in particular copies of checks exchanged between the attorney and client, were protected by the privilege, the court said:

"* * * the client, by writing the check which the attorney will later cash or deposit at the bank, has set the check afloat on a sea of strangers. The client knows when delivering the check, and the attorney knows when cashing or depositing it, that the check will be viewed by various employees at the bank where it is cashed or deposited, at the clearing house through which

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