Opinion
No. MISC S-09-0052 FCD DAD
08-12-2011
STEPHEN J. DOUGAN, Petitioner, v. UNITED STATES OF AMERICA, Respondent.
FINDINGS AND RECOMMENDATIONS
Petitioner seeks to quash an Internal Revenue Service (IRS) summons pursuant to 26 U.S.C. § 7609(b)(2). The case has been referred to the undersigned pursuant to Local Rule 72-302(c)(10), and the petition to quash has been fully briefed.
BACKGROUND
Petitioner is a licensed attorney who practices personal injury law in California. (Pet. (Doc. 1) ¶ 2.) This action arises from an IRS audit of petitioner's tax returns for 2006 and 2007. (Id.) As part of the audit, IRS Revenue Agent Crystal Langston issued a summons on May 13, 2009, to First Northern Bank, in Dixon, California, requiring the bank to produce banking records for various accounts, including petitioner's client trust account. (Id. ¶ 3, & Ex. A.) Petitioner seeks to quash the summons on three grounds: (1) attorney-client privilege; (2) relevancy; and (3) overbroad as to scope. (Id. ¶¶ 2-4, 16 & 18.)
LEGAL STANDARD
The IRS is permitted to determine a person's tax liability by examining the person's documents, taking the person's testimony, and issuing summonses. 26 U.S.C. § 7602(a) (authorizing the IRS to issue summonses for the purposes of "ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax . . . or collecting any such liability"). The powers granted to the IRS for determining tax liability are to be "liberally construed in recognition of the vital public purposes which they serve," and the restriction contained in 26 U.S.C. § 7605(b) against unnecessary examinations or investigations is "not to be read so broadly as to defeat them." De Masters v. Arend, 313 F.2d 79, 87 (9th Cir. 1963). See United States v. Arthur Young & Co., 465 U.S. 805, 814 (1984) (noting "Congress' express intention to allow the IRS to obtain items of even potential relevance to an ongoing investigation") (emphasis in original); Speck v. United States, 59 F.3d 106, 108 (9th Cir. 1995) (citing the Supreme Court's recognition in Arthur Young & Co. that Congress granted the IRS "expansive information-gathering authority").
A taxpayer identified in an IRS summons served on a third party recordkeeper may bring a proceeding to quash the summons, and the government, in turn, may seek to compel compliance with the summons. 26 U.S.C. § 7609(b)(2)(A).
In the present case, respondent seeks denial of the petition to quash, rather than enforcement of the summons, because petitioner's bank has already produced the responsive documents to the IRS. The documents produced have been set aside and have not been reviewed pending resolution of the pending petition to quash summons. (Resp't's Opp'n to Pet. to Quash IRS Summons (Doc. 5) at 1.)
To defeat a petition to quash, . . . the government must establish that (1) the investigation will be conducted for a legitimate purpose; (2) the material being sought is relevant to that purpose; (3) the information sought is not already in the IRS's possession; and (4) the IRS complied with all the administrative steps required by the Internal Revenue Code. See United States v. Powell, 379 U.S. 48, 57-58 (1964). "The government's burden is a slight one, and may be satisfied by a declaration from the investigating agent that the Powell requirements have been met." United States v. Dynavac, Inc., 6 F.3d 1407, 1414 (9th Cir. 1993). The burden isCrystal v. United States, 172 F.3d 1141, 1143-44 (9th Cir. 1999) (parallel citations and footnote omitted).
minimal "because the statute must be read broadly in order to ensure that the enforcement powers of the IRS are not unduly restricted." Liberty Fin. Servs. v. United States, 778 F.2d 1390, 1392 (9th Cir. 1985) . . . .
Once the government has established the Powell elements, "'those opposing enforcement of a summons . . . bear the burden to disprove the actual existence of a valid civil tax determination or collection purpose by the Service . . . . Without a doubt, this burden is a heavy one.'" United States v. Jose, 131 F.3d 1325, 1328 (9th Cir. 1997) (en banc) (quoting LaSalle, 437 U.S. at 316). As we observed in Derr, "[e]nforcement of a summons is generally a summary proceeding to which a taxpayer has few defenses." United States v. Derr, 968 F.2d 943, 945 (9th Cir. 1992). "'The taxpayer must allege specific facts and evidence to support his allegations' of bad faith or improper purpose." Jose, 131 F.3d at 1328 (quoting Liberty, 778 F.2d at 1392).
RESPONDENT'S PRIMA FACIE CASE
In support of its prima facie case, respondent has provided a declaration by Revenue Agent Crystal Langston. Declarant is employed in the Small Business/Self-Employed Division of the IRS and was assigned to examine the federal income tax returns of Stephen J. Dougan for the 2006 and 2007 tax years. (Resp't's Opp'n (Doc. No. 5), Langston Decl. ¶¶ 1-2.). In furtherance of her examination, declarant issued a summons to First Northern Bank on May 13, 2009, and served the summons on that date. (Id. ¶ 4.) A notice of summons was sent to petitioner. (Id. ¶¶ 6-7.) Declarant has received documents from First Northern Bank in response to the summons but has segregated the documents and has not reviewed them. (Id. ¶ 8.)
Declarant asserts that the examination of petitioner's returns is for the legitimate purpose of determining petitioner's federal income tax liabilities for tax years 2006 and 2007 and that the information and documents sought by the third-party summons will help her determine petitioner's tax liabilities for the years specified. (Id. ¶¶ 9-10.) Declarant asserts further that, except for the unreviewed documents produced by First Northern Bank in response to the summons, the information and documents summonsed are not already in the possession of the IRS. (Id. ¶ 11.) Declarant states that all administrative steps required by the Internal Revenue Code for issuance and service of the summons were followed. (Id. ¶ 12.) Finally, declarant avers that no Justice Department referral, as defined by 26 U.S.C. § 7602(d)(2), is in effect with respect to petitioner for the tax years under investigation. (Id. ¶ 13.)
Revenue Agent Langston's declaration establishes that (1) the summons served on First Northern Bank was issued solely for the legitimate purpose of determining petitioner's federal income tax liabilities for tax years 2006 and 2007, (2) the bank records sought by the summons might shed light upon the correctness of petitioner's tax returns and are therefore relevant to the purpose of respondent's investigation, (3) the information and documents sought by the summons were not already in the IRS's possession when the summons was issued and have not been examined since they were produced by the bank, and (4) the administrative steps required by the Internal Revenue Code were followed.
The court finds that respondent has established a prima facie case in support of the summons issued to First Northern Bank and has therefore met the government's initial burden. The burden shifts to petitioner to demonstrate that the summons should be quashed.
PETITIONER'S ARGUMENTS IN SUPPORT OF QUASHING SUMMONS
Petitioner argues first that the summons at issue seeks information that does not meet the standard for relevancy because it includes the identities of petitioner's clients, who are not the subjects of the audit. Petitioner contends that his clients' identities are not relevant to the accuracy of his tax returns. (Pet. (Doc. No. 1) ¶¶ 2, 4, 9-10, 12-14.)
Petitioner argues second that the bank's production of the documents sought will contravene the attorney-client privilege between petitioner and his clients as well as petitioner's obligation under state law to preserve client confidences. (Id. ¶¶ 3-4, 15-16, 19-34.)
Finally, petitioner argues that the summons is overbroad because it is not limited to documents relevant to the tax years 2006 and 2007 and should be so limited. (Id. ¶ 18.)
ANALYSIS
I. Overbroad Scope
The court turns first to petitioner's argument that the summons is overbroad because it is not limited to documents relevant to the tax years 2006 and 2007. In opposition to this argument, respondent points out that the summons is in fact limited to the two tax years specified. (Resp't's Opp'n (Doc. No. 5) at 4-5 & n.2.) The copy of the summons attached to the petition to quash reveals that the applicable periods are identified as "YEAR ENDED DECEMBER 31, 2006 AND DECEMBER 31, 2007." (Pet. (Doc. No. 1), Ex. A.) The attachment to the summons identifies the same periods and begins "For the periods specified above, please furnish . . . ." (Id.) In reply to respondent's opposition, petitioner inexplicably asserts once more that the summons "is overbroad to the extent it seeks documents beyond the years subject of the examination." (Pet'r's Reply (Doc. No. 6) at 2.) Petitioner's argument in regard to overbroad scope lacks a factual basis and fails to establish a legal ground for quashing the summons. His argument in this regard should therefore be rejected
II. Relevance
The court turns next to petitioner's argument that his clients' identities are not relevant because his clients are not the subjects of the audit. Petitioner's contention that his clients' identities are not relevant to the accuracy of his tax returns fails to apply the correct legal standard for relevance, i.e., relevance to the purpose of the examination. See United States v. Powell, 379 U.S. 48, 57-58 (1964). Congress has authorized the IRS to examine "any books, papers, records, or other data which may be relevant or material" to ascertaining the correctness of any return or determining the liability of any person for any internal revenue tax. 26 U.S.C. § 7602(a)(1). Thus, information sought by summons is deemed relevant if it might throw light upon the correctness of the taxpayer's return. David H. Tedder & Assocs., Inc. v. United States, 77 F.3d 1166, 1169 (9th Cir. 1996). The "may be" language in § 7602(a)(1) "reflects Congress' express intention to allow the IRS to obtain items of even potential relevance to an ongoing investigation," and "the Service can hardly be expected to know whether such data will in fact be relevant until it is procured and scrutinized." Arthur Young & Co., 465 U.S. at 814. Another formulation of the same standard is that the IRS must show that it has a realistic expectation rather than an idle hope that something might be discovered from the information sought by summons. Tedder, 77 F.3d at 1169.
Here, petitioner provided the Revenue Agent with copies of documents from which his clients' names were fully redacted. (See Pet. ¶¶ 12-13; Pet'r's Decl. in Supp. of Reply (Doc. No. 7), Ex. D.) By petitioner's own admission, he was advised by the Revenue Agent that she needed assurance that none of the checks were in fact payments to petitioner himself. (Pet. ¶ 14.) Petitioner also admits that he was advised by the IRS to provide check copies "with the first names of the clients unredacted." (Id.) If the IRS had an improper motive for seeking documents containing the names of petitioner's clients, it is highly unlikely that the agent would have tried to accommodate petitioner's confidentiality concerns by directing him to leave only the first names of his clients unredacted. Petitioner's description of his accounting system demonstrates that without at least partial names on documents, the agent cannot track the moneys deposited into petitioner's trust account as sums are removed from the account to pay for a client's expenses, to reap petitioner's fees pursuant to his agreement with the client, and the remaining settlement amounts ultimately disbursed to clients. Without client-identifying information, the IRS could not determine whether there are discrepancies between petitioner's records and his tax returns. Petitioner's refusal to leave even first names unredacted made it necessary for the government to seek unredacted copies of petitioner's bank records in order to determine whether petitioner accurately reported all of his income for the years under audit.
The information sought by the IRS pursuant to summons in this case is relevant because the information may throw light upon the correctness of petitioner's returns and the IRS has more than an idle hope that something may be discovered from the information produced. The court finds that the banks record containing client's names are relevant to the purpose of respondent's investigation. Petitioner has failed to establish lack of relevance as a legal ground for quashing the summons.
III. Privilege
The court turns finally to petitioner's argument that production of the documents sought will contravene the attorney-client privilege between petitioner and his clients as well as petitioner's obligation under state law to preserve client confidences.
IRS summonses are "subject to the traditional privileges and limitations," including the attorney-client privilege. Upjohn Co. v. United States, 449 U.S. 383, 395-96, 398 (1981). The burden of proving the protection of the attorney-client privilege applies to the documents at issue lies with the party attempting to invoke the privilege to resist enforcement of the summons. Powell, 379 U.S. at 58. The invoking party must prove to a reasonable certainty that the elements of an attorney-client privilege exist. See Clarke v. American Commerce Nat'l Bank, 974 F.2d 127, 129 (9th Cir. 1992). It is federal common law, not state law, that governs whether information sought by the IRS is protected by the attorney-client privilege. United States v. Blackman, 72 F.3d 1418, 1423 (9th Cir. 1995); Clarke, 974 F.2d at 129.
The attorney-client privilege protects only communication made in the course of seeking legal advice from a professional legal adviser in his or her capacity as such. Olender v. United States, 210 F.2d 795, 806 (9th Cir. 1954). "The purpose of the privilege is to encourage clients to make full disclosure to their attorneys." Fisher v. United States, 425 U.S. 391, 403 (1976). "Not all communications between an attorney and client are privileged," and Ninth Circuit courts "have recognized that the identity of the client, the amount of the fee, the identification of payment by case file name, and the general purpose of work performed are usually not protected from disclosure by the attorney-client privilege." Clarke, 974 F.2d at 129 (citing cases). See also Reiserer v. United States, 479 F.3d 1160, 1165 (9th Cir. 2007) ("[T]he attorney-client privilege ordinarily protects neither a client's identity nor information regarding the fee arrangements reached with that client.") (quoting United States v. Horn, 976 F.2d 1314, 1317 (9th Cir. 1992)). "Blanket assertions of the attorney-client privilege are extremely disfavored. Clarke, 974 F.2d at 129. The privilege is ordinarily raised as to each record sought to allow the court to rule with specificity. Id.
Under certain circumstances, the district court may conduct an in camera inspection of alleged confidential communications to determine whether the attorney-client privilege applies to specific documents. Kerr v. United States Dist. Ct. for N. Distr. of Cal., 426 U.S. 394, 405 (1976); Clarke, 974 F.2d at 129. The privilege extends to cover the substance of the client's confidential communications and the attorney's advice in response thereto. In re Fischel, 557 F.2d 209, 211 (9th Cir. 1977). "Because the attorney-client privilege has the effect of withholding relevant information from the factfinder, it is applied only when necessary to achieve its limited purpose of encouraging full and frank disclosure by the client to his or her attorney." Clarke, 974 F.2d at 129. See also Tornay v. United States, 840 F.2d 1424, 1426 (9th Cir. 1988) ("We have said repeatedly . . . that fee information generally is not privileged. Payment of fees is incidental to the attorney-client relationship, and does not usually involve disclosure of confidential communications arising from the professional relationship.").
In the Ninth Circuit, "[i]t is well settled that there is no privilege between a bank and a depositor." Reiserer, 479 F.3d at 1165 (citing Harris v. United States, 413 F.3d 316, 31920 (9th Cir. 1969)). In Harris, a case involving production of checks deposited into or withdrawn from an attorney's trust account, the court explained that "[t]he reasons which led to the attorney-client privilege, such as the aim of encouraging full disclosure in order to enable proper representation, do not exist in the case of a bank and its depositor," and "the check is not a confidential communication, as is the consultation between attorney and client." Harris, 413 F.3d at 319-20. Because the attorney-client privilege applies only where the communication between attorney and client is confidential, and there is no such confidential communication where a third party such as a bank either receives or generates the documents sought by the IRS, there is no privilege protecting such documents. Reiserer, 479 F.3d at 1165.
The bank records sought in this case do not constitute communications made between petitioner's clients and petitioner in his capacity as a professional legal adviser in the course of receiving or giving legal advice. Nor is there any showing that extending the attorney-client privilege to such records would serve the purpose of encouraging clients to make full disclosure to their attorneys. Accordingly, the court finds that petitioner has not proved to a reasonable certainty that the elements of an attorney-client privilege exist as to the bank records sought by the IRS. Petitioner has failed to carry the burden of proving that the protection of the attorney-client privilege applies to the records and has therefore failed to establish privilege as a legal ground for quashing the summons.
CONCLUSION
For the reasons set forth above, IT IS RECOMMENDED that petitioner's petition to quash IRS summons (Doc. No. 1) be denied in its entirety and this action be closed.
These findings and recommendations will be submitted to the United States District Judge assigned to this case, pursuant to the provisions of 28 U.S.C. § 636(b)(l). Within fourteen (14) days after this order is electronically filed and served on all parties, any party may file and serve written objections with the court. A document containing objections should be titled "Objections to Magistrate Judge's Findings and Recommendations." Any reply to objections shall be filed and served within seven (7) days after the objections are served. The parties are cautioned that failure to file objections within the specified time may, under certain circumstances, waive the right to appeal the District Court's order. See Martinez v. Ylst, 951 F.2d 1153 (9th Cir. 1991).
DALE A. DROZD
UNITED STATES MAGISTRATE JUDGE