DALLAS (Legal Newsline) - A Texas law firm lost its fight to block an Internal Revenue Service summons seeking the names of clients who sought tax advice after one of them was caught hiding money offshore.
In a curt order that was opposed by nearly half of the court’s 17 judges, the Fifth Circuit Court of Appeals rejected the Taylor Lohmeyer Law Firm’s request for an en banc hearing before the full court. The Dec. 14 order drew a strong dissent by Judge Jennifer Walker Elrod, who said the court should have taken up the case to “clarify the boundaries of attorney-client privilege in this precarious area.”
“The IRS has traditionally served such summonses on financial institutions and commercial couriers. Not lawyers,” Judge Elrod wrote in a dissent joined by Chief Judge Priscilla Owen. “There is good reason to be wary of investigations that exert pressure on lawyers.”
The IRS served Taylor Lohmeyer with a “John Doe” summons in October 2018, seeking the identity of any U.S. taxpayers who used the firm to establish or buy foreign accounts, corporations or assets. The government targeted the law firm for investigation after it audited another client and found he had hidden $5 million in income in a variety of offshore accounts and businesses and paid almost $4 million in taxes and penalties.
Taylor Lohmeyer filed a petition in federal court to quash the summons but the court rejected it in April 2019, ruling that the law firm faced a “heavy burden” trying to avoid turning over any documents to the government. A three-judge panel on the Fifth Circuit agreed in April, saying that in most cases client identities and fee arrangements are not protected by the attorney-client privilege.
A “narrow exception” to the rule exists when revealing the client’s name “would itself reveal a confidential communication,” such as the reason the client hired the lawyer in the first place. In one case the privilege applied because a law firm had advised its clients their legal fees from a transaction were deductible; revealing the names of other clients would effectively also disclose the privileged advice they were given.
But the Fifth Circuit rejected this comparison for Taylor Lohmeyer, saying the IRS didn’t identify any specific tax strategies it was searching for when it demanded the law firm’s books and records for any clients who established offshore accounts. Disclosure of their names “would inform the IRS that the Does participated in at least one of the numerous transactions” the agency was interested in, but “it is less than clear . . . as to what motive, or other confidential communication of [legal] advice, can be inferred from that informati'on alone.”
Taylor Lohmeyer petitioned for en banc consideration, supported by the National Association of Criminal Defense Lawyers and the American College of Tax Counsel. In a friend-of-the-court brief the ACTC decried the IRS’s “increasingly aggressive” use of John Doe summonses and said they could discourage taxpayers from seeking legal advice.
“There is no statute or regulation imposing upon Taylor Lohmeyer a duty to disclose the identity of clients for whom it provided legal services relating to offshore planning,” the ACTC said. "If taxpayers knew the IRS could learn their identities in response to a summons issued to their attorney, they might forgo seeking legal advice from a tax attorney or might be less than candid in doing so.”
In her dissent, Judge Elrod said she hoped the panel’s earlier decision didn’t change the law regarding when a law firm can shield the identities of its clients. Although the privilege may at times prevent the government from obtaining useful information, she wrote, “this is the price we pay for a system that encourages individuals to seek legal advice and to make full disclosure to the attorney so that the attorney can render informed advice.”
The case will go back to district court, where Judge Elrod said she was confident the law firm could still protect the identities of its other clients if revealing them would “also reveal the confidential purpose for which he consulted an attorney.”