On April 24, 2020, in Taylor Lohmeyer Law Firm PLLC v. United States, the United States Court of Appeals for the Fifth Circuit held that a Texas-based estate and tax-planning law firm (“Taylor Lohmeyer” or the “firm”) could not invoke the attorney-client privilege to quash a summons by the Internal Revenue Service (“IRS”) seeking the identities of firm clients. See No. 19-50506, Dkt. No. 00515394156 (5th Cir. Apr. 24, 2020). In affirming the District Court’s decision, the Court of Appeals ruled that Taylor Lohmeyer could not use the privilege as a “blanket” to circumvent compliance with the summons, but may have viable arguments to shield disclosure of specific documents through the use of a privilege log.
The dispute arose in the context of a “John Doe” summons, a procedure whereby the IRS seeks documents for an unidentified U.S. taxpayer because the name of the taxpayer under investigation is unknown to the IRS. See generally 26 U.S.C. § 7609(c)(1), (f). To initiate the summons, the procedure requires the IRS to first make an ex parte showing that (1) the summons relates to the investigation of a particular person or ascertainable group of persons; (2) there is a reasonable basis for believing that such person, group, or class of persons may fail or may have failed to comply with the federal tax laws; and (3) the information sought is not readily available from other sources. See id. § 7609(f). If the IRS makes this showing, a district judge authorizes the summons, and in a separate proceeding, the recipient has an opportunity to challenge it “on any appropriate ground,” including the attorney-client privilege. See United States v. Powell, 379 U.S. 48 (1964).
In Taylor Lohmeyer, the IRS sought records—including client lists—“that may reveal the identity and international activities” of individuals who used the firm’s services to “create and maintain foreign bank accounts and foreign entities that may not be properly disclosed on tax returns” between 1995 and 2017. See No. 19-50506, Dkt. No. 00515394156, at 3-4. The IRS declared that such information may be relevant to an underlying investigation to identify those who used Taylor Lohmeyer for offshore tax evasion, in light of the fact that the firm was known to structure offshore entities for tax purposes, and the IRS had already prosecuted one client who had earned unreported income of over $5 million through 8 offshore entities and 5 offshore accounts set up by the firm in the British Virgin Islands and the Isle of Man.
Taylor Lohmeyer moved to quash the summons in the Western District of Texas, arguing compliance with the summons would violate the attorney-client privilege. See generally Taylor Lohmeyer Law Firm PLLC v. United States, No. 5:18-cv-011611-XR (W.D. Tex. 2018). Although a client’s identity generally is not privileged, the firm argued that under a narrow exception, such information is protected where “revelation of a client’s identity would also reveal a privileged communication.” See, e.g., DeGuerin v. United States, 214 F. Supp. 2d 726, 735-36 (S.D. Tex. 2002). The firm contended this exception applied because disclosure of the requested client names would effectively reveal the specific services and tax structures those clients received, therefore disclosing confidential communications about those services and tax structures protected by the privilege.
The District Court rejected this argument, citing the oft-quoted rule that the attorney-client privilege cannot be used to excuse disclosure of an entire category of documents, but rather, must be evaluated on a document-by-document basis. 5:18-cv-011611-XR, Dkt. No. 15, at 11 (W.D. Tex. May 15, 2019). Therefore, the Court held, Taylor Lohmeyer could not use the privilege to avoid responding to the summons altogether, but was free to object to the production of specific documents via a privilege log. Id. In affirming, the Court of Appeals also found Taylor Lohmeyer’s proposed exception inapplicable because the IRS summons and supporting affidavit made no reference to particular legal advice that would automatically be revealed by identifying the clients who engaged in the types of transactions the summons described. No. 19-50506, Dkt. No. 00515394156, at 8-11. After all, the privilege only protects confidential communications—not the fact that such transactions occurred.
In requiring the firm to essentially turn over client lists to the IRS, the Taylor Lohmeyer case highlights the IRS’s power to seek potentially-incriminating information regarding unsuspecting taxpayers by submitting an artfully-drafted John Doe summons that avoids seeking “communications” and therefore does not trigger the privilege. It also reveals the importance that counsel be aware of such risks and disclose them to clients in the course of the attorney-client relationship. Whereas firms can—and, from an ethical perspective, must—object to production of particular documents revealing privileged communications with their clients, the attorney-client privilege may not shield all information related to a client’s tax planning from reaching the government, should the government request it.
This ruling is limited to the specific circumstances of an IRS John Doe summons. Nevertheless, there is nothing to stop enterprising prosecutors from other government agencies from using the same logic and broad subpoena language to obtain similar materials from defendant law firms in other contexts.