John Doe Summons on Law Firm Upheld

By Geoffrey M. Wayne*
The Attorney Client Privilege recently went toe-to-toe with an IRS John Doe Summons in a Texas Federal District Court, and the John Doe Summons prevailed. Taylor Lohmeyer Law Firm PLLC v. United States (Civil Action No. SA-18-CV-1161-XR).
The Taylor Lohmeyer firm (“TL”) was a Dallas, Texas firm engaged in tax planning, including income and estate tax planning utilizing foreign trusts. TL advised a hedge fund manager (“Taxpayer”) in connection with reducing income tax on certain fees he was to receive from offshore sources. While TL would later defend their advice – which included the creation of a foreign grantor trust in the Isle of Man – upon auditing Taxpayer, the IRS assessed, and Taxpayer paid, a civil fraud penalty in connection with the income he failed to report after implementing that advice. The advice was not sound, to say the least. Sometime after beginning the audit of Taxpayer, the IRS came to believe that TL had implemented similar abusive tax planning for other clients. The IRS did not know the identity of those clients and, so, issued a John Doe Summons for the names, information, and documentation of clients from 1995 to 2017 for whom TL had “acquired or formed any foreign entity, opened or maintained any foreign financial account, or assisted in the conduct of any foreign financial transaction”.
A John Doe Summons is authorized under IRC § 7609(f) and does not list the taxpayer’s name since it is unknown. Because of the attenuated nature of the John Doe Summons, it must be approved by a Federal District Court in an ex parte hearing. IRC § 7609(f) imposes additional requirements designed to prevent a “fishing expedition.” Service of the Summons was followed by a Motion to Quash, Memoranda in Support, Responses to Memoranda in Support, and several hearings (click here). The Motion to Quash was based on a number of arguments which the Court ultimately rejected. The Court noted that once it orders service of the Summons, the IRS’ burden is quite limited whereas the taxpayer’s burden is heavy. Apart from arguments based on case law – including United States v. Powell, 379 U.S. 48 (1964), which imposes a good faith requirement and reiterates the statutory requirements – TL raised the defense of attorney client privilege.
This is where this case is instructive and worrisome.
The Court recognized that the privilege is a defense to enforcement of a summons. The Court also recognized that the privilege could be a defense to the disclosure of even a client’s name when disclosure of the client’s name would disclose the essence of a confidential communication. However, the Court noted that “the party seeking to assert the privilege must allege its applicability with specificity as to each document.” The Government argued that TL had to produce a privilege log with specific objections to the Summons. TL argued that there were 32,000 documents responsive to the Summons, and attempted to avoid the filing of a privilege log by filing a Memorandum detailing “the types of legal services the firm provides, the types of structures employed by the firm’s clients, and the nature of the firm’s relationships with its clients.” The Court ruled that TL did “not meet its burden to rebut a Powell showing, in large part because [TL] makes a blanket assertion and does not produce a privilege log or similar device.” The Court further ruled that the Memorandum “provides only generalities that do not show the IRS already knows so much that disclosure of client identities falls in the narrow exception to the general rule that identities are not privileged”.
The instructive part of this case is that even when dealing with a summons on a law firm, a privilege log, and the specificity of information included within, is required to assert the privilege. However, this is also the worrisome part of the case. Which small to medium size firm is prepared to devote the resources necessary to assert the privilege if the IRS serves a summons related to clients over the last 23 years? While the privilege is the client’s to assert and, presumably, the clients would bear the cost of such a gargantuan effort, it would undoubtedly be tremendously disruptive.
*Geoffrey M. Wayne is the founder of Geoffrey M. Wayne, P.A., a boutique law firm located in Coral Gables focusing on individual and corporate issues related to international taxation.