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UNITED STATES v. LIEBMAN

August 29, 1983

UNITED STATES OF AMERICA and CLIFTON BEALE, Revenue Agent, Internal Revenue Service, Petitioners,
v.
EMMANUEL LIEBMAN and LIEBMAN & FLASTER, a Professional Corporation, Respondents



The opinion of the court was delivered by: GERRY

 The Internal Revenue Service is investigating the extent to which certain clients of the law firm of Liebman & Flaster may have improperly claimed tax deductions for fees paid to the firm in connection with the acquisition of real estate partnership interests in the years 1978, 1979 and 1980.

 No one disputes that the law firm did render certain services to a number of clients acquiring real estate partnership interests. But the parties to this summons proceeding disagree -- and have disagreed for some time now -- about the nature of those services and their proper tax treatment. The Government maintains that Liebman & Flaster (L & F) performed investment counseling or brokerage service; the fee for such services would apparently not qualify as tax deductible. L & F, on the other hand, have consistently argued that they rendered legal services to the clients -- the fees for which services do evidently qualify as tax deductible. Apparently L & F so advised its clients.

 The summons seeks records of the law firm that contain the names, addresses and social security numbers of clients who paid a fee to the firm in connection with acquiring a real estate partnership interest in 1978, 1979 or 1980.

 In an ex parte proceeding pursuant to 26 U.S.C. § 7609(f) and 7609(h), the Court granted leave for the summons to issue.

 In response to the summons, the respondent law firm refused to produce the requested records or to reveal information that might have aided the Internal Revenue Service (IRS) in identifying their clients. Consequently, the Government brought the instant motion to enforce the summons.

 Originally, the IRS claimed that there may have been as many as one hundred taxpayers during each of the years under investigation who paid a fee to the firm and who claimed that fee as a tax deduction. In an affidavit submitted to the court, respondents state that 137 clients paid the fee to the firm.

 The respondents move to dismiss the proceeding or to quash the summons on three grounds: (1) the IRS already has all of the requested information, or can obtain the information through its own internal files and procedures; (2) the information is not sought for a proper legal purpose in that the underlying legal issue (the deductibility of said legal fees by persons sought to be identified by the summons) is still an open issue currently docketed for litigation before the United States Tax Court; and (3) the attorney-client privilege precludes the demanded disclosure.

 Threshold Challenges to the Enforceability of the Summons.

 Section 7609 of Title 26, United States Code, places restrictions or pre-conditions upon the enforcement of an IRS "John Doe" summons. For example, a court may not enforce a summons unless the information sought is not readily available from other sources. Concomitant with a showing that the requested information is otherwise unavailable, petitioner IRS must generally show that the data is not already in the Government's possession. See United States v. Powell, 379 U.S. 48, 57-58, 13 L. Ed. 2d 112, 85 S. Ct. 248 (1964).

 The respondents argue that the IRS has the capability to retrieve the summoned information from IRS records.

 Specifically, respondents contend that the IRS has already identified the eleven real estate partnerships in which L & F clients have participated during the years in question. According to L & F, the tax returns for these eleven partnerships indicate the identity of all the limited partners. The IRS could, argue the respondents, examine those limited partners' returns to discern which ones deducted legal fees in connection with the acquisition of their interests. For those taxpayers, the IRS could then demand documentation of the payment of the fee -- documentation that would presumably establish whether the taxpayer paid the attorney's fee to L & F (as opposed to some other attorney).

 The IRS disputes respondents' sanguine view of the Service's capabilities.

 The affidavit of IRS official, William Clemente, explains:

 
After being served with the John Doe summons, the respondents still refused to testify under oath concerning the number of partnerships involved. The respondents now state in the affidavit of Emmanuel Liebman that there were eleven (11) real estate partnerships. Prior to that statement in the affidavit of Emmanuel Liebman, the Internal Revenue Service had no practical means of ascertaining the number of partnerships involved. Even if the Internal Revenue Service knew there were only eleven (11) partnerships, the Internal Revenue Service could not determine from its records whether it knows the names of all the partnerships involved. Some of the partnerships known to the Internal Revenue Service may be different than the eleven (11) partnerships referred to in the affidavit of Emmanuel Liebman. Unless the Service knows the names of all of the partnerships involved, and not just the number of partnerships, it could never be sure that it had ascertained the identities of all of the partnerships or the identities of all of the individual taxpayers.

 Clemente's affidavit further explains the elaborate procedure IRS adopted to discover over one hundred (100) taxpayers who apparently claimed ...


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