United States v. Cote, 4-70-Civ. 510.

• Decision Date: 30 March 1971
• Docket Number: No. 4-70-Civ. 510.,4-70-Civ. 510.
• Parties: UNITED STATES of America and Howard W. George, Special Agent, Internal Revenue Service, Plaintiffs, v. Donald E. COTE and Thomas J. Murphy, Defendants.
• Court: U.S. District Court — District of Minnesota

326 F. Supp. 444

UNITED STATES of America and Howard W. George, Special Agent, Internal Revenue Service, Plaintiffs, v. Donald E. COTE and Thomas J. Murphy, Defendants.

No. 4-70-Civ. 510.

United States District Court, D. Minnesota, Fourth Division.

March 30, 1971.

COPYRIGHT MATERIAL OMITTED

Stephen G. Palmer, Asst. U. S. Atty., Minneapolis, Minn., Jeffrey D. Snow, Trial Atty., Tax Division, Dept. of Justice, Washington, D. C., for plaintiffs.

John C. Johanneson, Maun, Hazel, Green, Hays, Simon & Aretz, St. Paul, Minn., for defendants.

MEMORANDUM

LARSON, District Judge.

This action was brought to enforce two summonses issued by Howard W. George, a special agent of the Internal Revenue Service, in connection with his investigation of the income tax liabilities of the taxpayers John and Evelyn Erickson. The summonses were issued under 26 U. S.C. Section 7602 to Donald Cote, a certified public accountant, and Thomas Murphy, a lawyer. This Court has jurisdiction to enforce both summonses under 26 U.S.C. Sections 7402(b) and 7604 (a).

John Erickson is an electrical contractor who operates the Erickson Electric Company in St. Cloud, Minnesota. In early 1969, the Ericksons' tax liabilities came under the scrutiny of Harold Leddy, a revenue agent in the Audit Division of the Internal Revenue Service. Leddy requested to examine the taxpayers' 1967 income tax return and suggested June 18, 1969, as an interview date. Mr. Erickson cancelled this appointment on June 16, 1969, and rescheduled it for June 24, 1969.

On June 17 the taxpayers retained the defendant Thomas Murphy as their counsel; and later that day Murphy retained the defendant Donald Cote to assist him. Both Murphy and Cote practice their professions in St. Cloud. Cote had prepared the taxpayers' returns for the years 1960 through 1968, but this was his first contact with Murphy concerning the taxpayers. Murphy hired Cote because he was already familiar with the taxpayers' history and because of his expertise in accounting. Under their arrangement, a room was set aside in Murphy's law offices where Cote worked on the case. He billed Murphy for his services.

A week later, on the date of the scheduled interview, Murphy informed Leddy that the 1967 tax records could not be examined until an accountant had checked them. On September 11, 1969, Leddy tried again and was informed by Murphy that he was still advising his clients to withhold these records.

On September 22, 1969, an associate of Murphy delivered amended income tax returns for the years 1966, 1967 and 1968, together with a check for $14,057, to Leddy on behalf of the taxpayers. These returns listed additional income of $4,000 for 1966, $19,200 for 1967, and $19,100 for 1968, but contained no explanation of the increases.

On October 24, Howard George, an agent in the Intelligence Division of the Service, was assigned to the case and the investigation was broadened to include the years 1965, 1966, and 1968. The Intelligence Division enters an investigation when a possibility of criminal fraud exists.

Having wind of George's involvement, Cote delivered his complete files pertaining to the taxpayers to Murphy on November 3, 1969. These records cover the years 1960 through 1968, and had been maintained by Cote at his office. Two days later Murphy informed George that his clients would not be available for questioning and would not furnish any records. On November 12 the agents asked Cote to produce the work papers which he had used in preparing the original returns for the four years now under investigation, but having already relinquished control over them, he could not comply.

On June 18, 1970, George issued a summons to Cote requiring him to testify and produce retained copies of the original 1965-1968 returns, memoranda and work papers used in preparing the original returns for the years 1965-1968, and work papers used in preparing the amended returns for the years 1966-1968. Cote appeared in response to this summons on June 29. He testified about preparing the original returns; he claimed that all his work papers were the property of his clients.

On August 27, 1970, George issued a summons to Murphy requesting essentially the same material listed in the earlier summonses. In response Murphy produced a copy of the taxpayers' original 1967 return. He declined to produce anything else.

This is the undisputed chronology of events preliminary to the filing of this action on November 23, 1970, by the United States and George. An affidavit supporting the petition was submitted by George. He stated that the testimony and records demanded by the summons are "necessary for the determination of the tax liabilities of John C. and Evelyn Erickson for the years 1965 through 1968, inclusive." In view of the fact that Cote no longer possesses any of the papers described in the summons addressed to him, plaintiffs request that enforcement of that summons be limited to his testimony concerning the memoranda, work papers and returns. And because the Service has both the original and amended returns for the years 1965-1968, the plaintiffs request that enforcement of the summons directed to Murphy be limited to his production of the work papers and memoranda pertaining to both types of returns.

The defendants have requested that the summonses be quashed in their entirety on grounds that will be discussed in the pages to come. Alternatively, they request that the summonses be quashed to the extent that they would force Cote and Murphy to disclose information protected either by the attorney-client confidential relationship or the taxpayers' constitutional privilege against self-incrimination.

The taxpayers sought leave to intervene in these proceedings under Rule 24 (a) of the Federal Rules of Civil Procedure. They asserted a proprietary interest in the documents, raised a Fifth Amendment defense, and argued that the plaintiffs are improperly using this civil enforcement proceeding to obtain evidence for use in a criminal action against them. They sought discovery of various manuals of the Service and the periodic reports of the two agents. George has been served with a subpoena calling for these documents. He has moved to quash the subpoena.

These motions were the subject of a hearing on January 18, 1971. The taxpayers' motion to intervene was granted at that time. This occurred before this Court had the benefit of Donaldson v. United States, 400 U.S. 517, 91 S.Ct. 53, 27 L.Ed.2d 580 (1971), in which the Supreme Court restricted the ability of taxpayers to intervene in summons proceedings. Intervention is no longer an issue in this case. We now turn to the merits of the case, discussing, first, the testimony and work papers relating to the original returns and, later, the testimony and work papers relating to the amended returns.

WORK PAPERS RELATING TO ORIGINAL RETURNS

Defendants argue that the work papers and memoranda which Cote utilized in preparing the original returns are protected because they are the property of the taxpayers and to force their production would violate the taxpayers' Fifth Amendment right against self-incrimination. Cote's statement that he viewed his work papers as the property of the taxpayers does not settle the issue. The defendants agree that this Court is not bound by the assertions of the taxpayers, their accountants or their lawyers.

The facts of this case do not support the conclusion that the taxpayers had a proprietary interest in their accountant's handiwork. Before the initiation of the investigation they had not claimed title to the papers, nor had they ever asserted authority over them. This is not surprising because people generally do not lay claim to technical memoranda and work papers which they will find inscrutible. Cote had prepared and accumulated his files pertaining to the taxpayers for nine years. He had uninterrupted possession of them until five months after the investigation began. Uninterrupted possession is a factor which has weighed heavily with courts in similar cases where ownership of accountants' work papers was an issue. Sale v. United States, 228 F.2d 682, 686 (8th Cir. 1956); Bouschor v. United States, 316 F.2d 451, 456 (8th Cir. 1963); United States v. Zakutansky, 278 F.Supp. 682, 685 (D.Ind.1968).

Cote's hurried transfer of his files to the taxpayers' recently retained attorney did not result in a change of ownership. It did not vest rightful possession in either the taxpayers or their counsel. It was an attempt to straight-arm the Government investigators, which cannot be condoned by this Court. Bouschor v. United States, supra, at 459. We find that the work papers and memoranda which Cote used in preparing the taxpayers' original returns for the years 1965 to 1968 are his personal property.

WORK PAPERS RELATING TO AMENDED RETURNS

To protect the memoranda and work papers which were used in preparing the three amended returns the defendants and taxpayers invoke the attorney-client relationship, the work product privilege, the taxpayers' Fifth Amendment guarantee against self-incrimination, and the claim that the summonses were issued for an improper purpose.

The defendants concede that no privileged accountant-client relationship exists with regard to the work papers and memoranda which Cote utilized in preparing the original returns. But they contend that Cote's relationship to the taxpayers changed "dramatically" on June 17, 1969, when he was entered on Murphy's payroll. Thereafter, they argue, Cote worked as Murphy's agent and his work papers pertaining to the amended returns are entitled to the same protection as that afforded any other confidential communication between client and attorney.

In rebuttal the plaintiffs cite United States v. Merrell, 303 F.Supp. 490, 493 (D.N.Y.1969), and Colton v. United States, 306 F.2d 633, 638 (2nd Cir. 1962), for the general rule that income tax work papers are not confidential because,...