United States v. Schmidt, Civ. No. 71-398.

• Court: United States District Courts. 3th Circuit. United States District Court of Middle District of Pennsylvania
• Writing for the Court: John G. Williams, Keith A. Clark, Shumaker, Williams & Clark, Harrisburg, Pa., for respondents
• Citation: 360 F. Supp. 339
• Parties: UNITED STATES of America and James W. Meade, Jr., Special Agent of the Internal Revenue Service, Petitioners, v. J. Donald SCHMIDT, Empire Office Center, Camp Hill, Pennsylvania et al., Respondents.
• Docket Number: Civ. No. 71-398.
• Decision Date: 30 August 1973

360 F. Supp. 339

UNITED STATES of America and James W. Meade, Jr., Special Agent of the Internal Revenue Service, Petitioners,
v.
J. Donald SCHMIDT, Empire Office Center, Camp Hill, Pennsylvania et al., Respondents.

Civ. No. 71-398.

United States District Court, M. D. Pennsylvania.

June 19, 1973.

As Amended August 30, 1973.

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COPYRIGHT MATERIAL OMITTED

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COPYRIGHT MATERIAL OMITTED

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S. John Cottone, U. S. Atty., James W. Walker, Asst. U. S. Atty., Scranton, Pa., Louis J. Lombardo, Dept. of Justice, Washington, D. C., for petitioners

John G. Williams, Keith A. Clark, Shumaker, Williams & Clark, Harrisburg, Pa., for respondents.

MEMORANDUM

SHERIDAN, Chief Judge.

Petitioners, the United States of America and James W. Meade, Jr., Special Agent of the Internal Revenue Service, seek judicial enforcement of an Internal Revenue summons pursuant to 26 U.S.C.A. §§ 7402(b) and 7604(a). The purpose of the summons is to elicit testimony from J. Donald Schmidt, a Certified Public Accountant, with respect to the tax liabilities of Vincent C. McCue for the taxable years 1966 through 1969, and regarding the preparation of the 1969 income tax return of Vincent C. and Elizabeth A. McCue.

A rule was issued requiring Schmidt to show cause why the relief requested should not be granted. Subsequently, a hearing was held at which testimony was taken, briefs were filed, and oral argument was made. Both taxpayers and Shumaker, Williams & Placey, taxpayers' counsel, have been permitted to intervene as respondents.

On or about July 31, 1969, Vincent McCue retained the law firm of Shumaker, Williams & Placey of Harrisburg, Pennsylvania, in order to obtain legal advice regarding certain unspecified business transactions and income tax matters. Thereafter, counsel decided that the services of an accountant were necessary to allow them to properly advise their client. Accordingly, on April 1, 1970, they retained Schmidt, Nenninger & Company, an accounting firm, to assist them in the accumulation of business and financial information required to provide accurate and complete legal advice to Vincent McCue.

The agreement between the law firm and the accounting firm provided, inter alia, that accounting services were to be performed at the written request of counsel; that, except as otherwise directed, the accountants were to bill the law firm monthly for services rendered during the preceding month; and that information obtained by the accountants while performing the services contemplated by the agreement was to be confidential.

In November 1970, Special Agent Meade was assigned to a preliminary investigation of the tax liability of Vincent McCue. Since Schmidt possesses information relevant thereto, Meade issued a summons requiring him to appear and to testify. At the appointed time and place, Schmidt appeared with counsel and testified to a limited extent; he also set forth the legal bases of his refusal to be more expansive. This proceeding followed.

Respondents, in opposing enforcement of the summons, rely upon Schmidt's alleged right to assert both the attorney-client privilege and Vincent McCue's privilege against self-incrimination. In addition, they contend that petitioners are proceeding with malice and in bad faith pursuant to a course of conduct intended to harass Vincent McCue. Accordingly, they request the court to order petitioners to make available to them all information possessed by the Internal Revenue Service of any alleged wrongdoing by McCue to allow them to evaluate petitioners' motives in this action

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and in any future action relating to him

Although judicial enforcement of a summons issued with malice and in bad faith would be an abuse of the court's process,¹ a proper exercise of discretion² requires that respondents' request for discovery be denied because it is too broad³ and because they have not established that discovery is necessary to afford them a meaningful opportunity to challenge the summons. United States v. Benford, 7 Cir. 1969, 406 F.2d 1192, 1194.

Mere allegations of improper purpose are insufficient;⁴ and, at the enforcement hearing at which respondents had an ample opportunity to interrogate Special Agent Meade, no testimony was adduced tending to establish that the summons was issued for the purpose of harassment. Under these circumstances,⁵ discovery properly is denied. United States v. National State Bank, 7 Cir. 1972, 454 F.2d 1249, 1252; United States v. Cote, D.Minn.1971, 326 F.Supp. 444, 451, aff'd, 8 Cir. 1972, 456 F.2d 142; accord, United States v. Bowman, 3 Cir. 1970, 435 F.2d 467, 469

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& n. 3; United States v. Erdner, 3 Cir. 1970, 422 F.2d 835

Furthermore, since I find that the summons issued in good faith as a necessary aid in determining the tax liability of Vincent McCue, respondents have not met their burden to establish that its enforcement would be an abuse of the court's process.⁶ See United States v. Powell, 1964, 379 U.S. 48, 58, 85 S.Ct. 248, 13 L.Ed.2d 112; United States v. Roundtree, 5 Cir. 1969, 420 F. 2d 845, 851.

Respondents' next contention is that Schmidt may refuse to comply with the summons because his testimony might incriminate Vincent McCue.⁷

This presents an interesting question since Schmidt, in his role as accountant, claims to be within the scope of the attorney-client privilege, and the relationship of attorney and client⁸ may involve a constitutionally-protected expectation of privacy. See Couch v. United States, 1973, 409 U.S. 322, 350-351, 93 S.Ct. 611, 34 L.Ed.2d 548 (Marshall, J., dissenting); United States v. White, 5 Cir. 1973, 477 F.2d 757, 764-67 (Ainsworth, J., dissenting).

However, the fifth amendment privilege is a personal privilege, an important element of which is compulsion directed against the one who himself would be incriminated if forced to reveal information. Couch v. United States, 1973, 409 U.S. 322, 328-329, 93 S. Ct. 611, 34 L.Ed.2d 548; United States v. Egenberg, 3 Cir. 1971, 443 F.2d 512, 516. Since Schmidt does not contend that he would incriminate himself by testifying, and since, absent special circumstances,⁹ a summoned party may not refuse to testify for the reason that he might incriminate someone else,¹⁰ it

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would be inconsistent with the policy of the privilege to allow him to assert it

Even assuming he were an attorney who could raise his client's privilege to resist a summons seeking production of McCue's records,¹¹ his own records,¹² or any accounting workpapers in his possession,¹³ he nevertheless could not refuse to testify on the ground that McCue might be incriminated. United States v. Goldfarb, 6 Cir., 328 F.2d 280, 282, cert. denied, 1964, 377 U.S. 976, 84 S.Ct. 1883, 12 L.Ed.2d 746; United States v. Conte, D.Del.1969, 300 F.Supp. 73, 75; cf. Brody v. United States, 1 Cir., 243 F.2d 378, 387 n. 5, cert. denied, 1957, 354 U.S. 923, 77 S.Ct. 1384, 1 L. Ed.2d 1438.

Moreover, any reasonable expectation of privacy between attorney and client is more properly safeguarded by the attorney-client privilege.¹⁴ In contradistinction to the privilege against self-incrimination, it provides a nonconstitutional basis for determining the precise scope of the protection which ought to be granted this unique relationship; in addition, its application avoids distorting the essentially-personal self-incrimination privilege. Petersen, Attorney-Client Privilege In Internal Revenue Service Investigations, 1969, 54 Minn.L.Rev. 67, 84-86; Note, The Attorney And His Client's Privileges, 1965, 74 Yale L.J. 539, 541-45, 552; see United States v. Schoeberlein, D.Md.1971, 335 F.Supp. 1048, 1055; Comment, Internal Revenue Code Summons Enforcement And The Accountant, 1964, 2 Duq. L.Rev. 261, 274-75.

Finally, respondents argue that Schmidt's testimony is protected by the attorney-client privilege.

Since questions of privilege arising in an action for judicial enforcement of an Internal Revenue summons should be resolved pursuant to federal law,¹⁵ neither Pennsylvania's accountant-client

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privilege¹⁶ nor any other privilege recognized in federal court¹⁷ allows Schmidt to refuse to testify in his role as accountant. However, there are circumstances in which an accountant may be within the scope of the attorney-client privilege,¹⁸ the elements of which are set forth as follows:

"(1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) except the protection be waived." 8 Wigmore, Evidence § 2292 (McNaughton rev. 1961).

The burden of establishing the foregoing rests on the claimant against disclosure,¹⁹ and the operative rule of construction is that the privilege ought to be confined within the narrowest limits consistent with its policy to promote freedom of consultation of legal advisers by clients. United States v. Goldfarb, 6 Cir., 328 F.2d 280, 282, cert. denied, 1964, 377 U.S. 976, 84 S.Ct. 1883, 12 L.Ed.2d 746; United States v. Summe, E.D.Ky.1962, 208 F.Supp. 925, 928; 8 Wigmore, Evidence § 2291 (McNaughton rev. 1961).

One corollary of the prerequisite that a professional legal adviser be consulted in his capacity as such²⁰ is that the privilege does not apply when a person who merely happens to be an attorney

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translates his activities into those of an accountant. Olender v. United States, 9 Cir. 1954, 210 F.2d 795, 805-807; United States v. Chin Lim Mow, N.D.Cal.1952, 12 F.R.D. 433; see United States v. Schoeberlein, D.Md. 1971, 335 F.Supp. 1048; United States v. Higgins, S.D.W.Va.1966, 266 F.Supp. 593.

Similarly, what is vital to the assertion of the privilege by an accountant employed by an attorney is that he assist in providing legal advice...