United States v. Manchel, Lundy and Lessin

• Decision Date: 24 July 1979
• Docket Number: Civ. A. No. 79-174.
• Parties: UNITED STATES of America and James W. Cinelli, Jr., Plaintiffs, v. MANCHEL, LUNDY AND LESSIN, Defendant, Louis Kurland, Applicant for Intervention.
• Court: U.S. District Court — Eastern District of Pennsylvania

477 F. Supp. 326

UNITED STATES of America and James W. Cinelli, Jr., Plaintiffs, v. MANCHEL, LUNDY AND LESSIN, Defendant Louis Kurland, Applicant for Intervention.

Civ. A. No. 79-174.

United States District Court, E. D. Pennsylvania.

June 21, 1979.

On Motion for Stay July 24, 1979.

COPYRIGHT MATERIAL OMITTED

Will E. McLeod, Trial Atty., Tax Div., U. S. Dept. of Justice, Washington, D. C., Joseph M. Gontram, Asst. U. S. Atty., Philadelphia, Pa., for plaintiffs.

Ronald F. Kidd and Sharon Butcher Watson, of Duane, Morris & Heckscher, Philadelphia, Pa., for intervenor Louis Kurland.

MEMORANDUM AND ORDER

DITTER, District Judge.

The question in this case is whether a taxpayer may intervene in a proceeding brought by the government to obtain financial records kept by a law firm which formerly employed him.

The United States and Special Agent James W. Cinelli, Jr., (government) have issued an Internal Revenue Service (IRS) summons pursuant to 26 U.S.C. § 7602 directing Manchel, Lundy and Lessin, a law partnership which employed Louis Kurland, Esquire, from 1973 to 1975, to produce its business records as they pertain to his employment. Mr. Kurland instructed Manchel, Lundy and Lessin not to comply with the IRS summons since he planned to intervene and present objections to the court. The government then brought summons enforcement proceedings under the authority of 26 U.S.C. §§ 7402(b) and 7604(a). In support of his motion to intervene, Mr. Kurland contends that Manchel, Lundy and Lessin were third-party recordkeepers as defined in 26 U.S.C. § 7609, that he has an interest in the proceedings under Fed.R. Civ.P. 24(a) and (b), and that intervention should be permitted because there has been an abuse of process. After consideration of briefs and arguments of counsel, this motion must be denied for the reasons explained herein.

THIRD-PARTY RECORDKEEPER CONTENTION UNDER THE INTERNAL REVENUE CODE

Under section 7609 of the Internal Revenue Code, effective February 28, 1977, when a summons is served on a "third-party recordkeeper", the person named in the summons as to whom records are sought must be given notice of the summons § 7609(a) and of a right to intervene § 7609(b)(1). A third-party recordkeeper is defined as:

(A) any bank

(B) any consumer reporting agency (as defined under Section 603(d) of the Fair Credit Reporting Act (15 U.S.C. § 1681a(f)));

(C) any person extending credit through the use of credit cards or similar devices;

(D) any broker (as defined in section 3(a)(4) of the Securities Exchange Act of 1934 (15 U.S.C. § 78c(a)(4)));

(E) any attorney; and

(F) any accountant.

26 U.S.C. § 7609(a)(3) (emphasis added).

Since Manchel, Lundy and Lessin is a firm of attorneys, the taxpayer attempts to characterize his relationship with it as being within the third-party recordkeeper definition.

Although a law partnership may seemingly be covered by one of the labels in section 7609(a)(3), a third-party recordkeeper must also "be a person engaged in making or keeping the records involving transactions of other persons. For example, an administrative summons served on a partnership, with respect to the records of the partnership's own transactions, would not be subject to these rules § 7609." S.Rep. No. 94-938, 94th Cong. 2d Session 369. See H.R.Rep. 94-658, 94th Cong. 2d Session reprinted in 1976 U.S.Code & Admin.News, pp. 2897, 3203, 3798. In light of this legislative history, courts differentiate between those records which are maintained by a business for its own purposes, even though they relate incidentally to a taxpayer, and those records which are maintained by the business for the taxpayer's purposes. When the records are kept for the taxpayer, the business is a third-party recordkeeper and the taxpayer is entitled to notice and intervention in the proceedings. On the other hand, when the records only relate incidentally to the taxpayer and are really kept for the purposes of the business, no third-party recordkeeper relationship exists and a taxpayer has no rights that would arise from such a relationship. United States v. Exxon Co., USA, 450 F.Supp. 472 (D.Md.1978); United States v. Gartland, Inc., 79 F.R.D. 148 (D.Md.1978). In the instant case the records involve Manchel, Lundy and Lessin's own business transactions in the employment of the taxpayer and thus the law firm is not a third-party recordkeeper for purposes of section 7609.

INTERVENTION AND A PROTECTABLE INTEREST UNDER THE RULES OF CIVIL PROCEDURE.

Alternatively the taxpayer asserts intervention should be allowed as a matter of right pursuant to Fed.R.Civ.P. 24(a) which states:

(a) Upon timely application anyone shall be permitted to intervene in an action: (1) when a statute of the United States confers an unconditional right to intervene; or (2) when the applicant claims an interest relating to the property or transaction which is the subject of the action and he is so situated that the disposition of the action may as a practical matter impair or impede his ability to protect that interest, unless the applicant's interest is adequately represented by existing parties.

Since I have already explained that section 7609 would not confer an unconditional right to intervene on the taxpayer in this case, Rule 24(a)(1) does not apply.

The taxpayer contends that under Rule 24(a)(2) he has a significantly protectable interest in the subject of the action and its disposition may as a practical matter impair or impede his ability to protect that interest. In Donaldson v. United States, 400 U. S. 517, 91 S.Ct. 534, 27 L.Ed.2d 580 (1970), the Supreme Court denied a taxpayer under investigation the right to intervene pursuant to Rule 24(a) in an IRS summons enforcement proceeding against his former employer and the employer's accountant to obtain the taxpayer's employment records. The Court reasoned that

the material sought . . . consists only of Acme's employer's routine business records in which the taxpayer has no proprietary interest of any kind, which are not the work product of his attorney or accountant, and which enjoy no established attorney-client or other privilege. Donaldson's only interest—and of course it looms large in his eyes—lies in the fact that those records presumably contain details of Acme-to-Donaldson payments possessing significance for federal income tax purposes.

This asserted interest, however, is nothing more than a desire by Donaldson to counter and overcome Mercurio's and Acme's willingness, under summons, to comply and to produce records.

* * * * * *

. . . This interest cannot be the kind contemplated by Rule 24(a)(2) when it speaks in general terms of `an interest relating to the property or transaction which is the subject of the action.' What is obviously meant there is a significantly protectable interest. And the taxpayer, to the extent that he has such a protectable interest, as, for example, by way of privilege, or to the extent he may claim abuse of process, may always assert that interest or that claim in due course at its proper place in any subsequent trial. Cf. United States v. Blue, 384 U.S. 251, 86 S.Ct. 1416, 16 L.Ed.2d 510 (1966).

We therefore hold that the taxpayer's interest is not enough and is not of sufficient magnitude for us to conclude that he is to be allowed to intervene. 400 U.S. at 530-31, 91 S.Ct. at 542.

The holding in Donaldson is precisely on point. No significantly protectable interest exists under Rule 24(a) which would allow Mr. Kurland to challenge enforcement of the IRS summons to Manchel, Lundy and Lessin for records dealing with his employment.

In Donaldson, however, the Court implied that a taxpayer may be allowed to intervene where he has a privilege or claims abuse of process. In the present case, Mr. Kurland argues that the employer's records are of his financial relationships (presumably between his employer and him or between his clients and him) rather than mere employer-employee transactions, and that the disclosure of cancelled checks may reveal fees paid by clients in violation of an attorney-client privilege.

The first distinction raised by taxpayer that the records sought relate to financial relationships rather than employer-employee transactions, whatever this may mean, is insufficient to bar enforcement of the summons. On the face of the summons, the former employment relationship seems the primary focus of the investigation.¹ Additionally I do not read Donaldson to prevent enforcement of a summons if the information merely reveals financial relationships concerning a taxpayer.

Mr. Kurland's assertion of the attorney-client privilege is similarly without merit. Although an attorney may raise an objection based on confidentiality for his client, the privilege is for protection of the client not the attorney and no one has described what harm will result to any client from the disclosure to the IRS of Mr. Kurland's paychecks. If any serious objection as to breach of confidentiality is raised on behalf of any client, I will consider examining the checks in camera or ordering the clients' names, if they appear, expunged before providing these records to the IRS.

ABUSE OF PROCESS ALLEGATION

Finally, the taxpayer asserts that he should be allowed to intervene in order to prevent abuse of process, but by way of explanation, has merely alleged that bad faith existed on the part of the government because an IRS informer was investigating the Philadelphia negligence bar. Again the Supreme Court in Donaldson provides guidance on the question as to whether the mere allegation of abuse of process or bad faith amounts to such a proprietary interest as will require a taxpayer's intervention in a summons enforcement proceeding under Rule 24. In Donaldson, taxpayer sought to intervene in a proceeding to enforce a summons against the taxpayer's former employer and his employer's accountant alleging inter alia that the two special IRS agents were investigating the...