On Appeal from the United States District Court for the District of New Jersey
Before: GARTH and SLOVITER, Circuit Judges, and NEAHER, District Judge*fn*
Emanuel Liebman and the law firm of Liebman & Flaster appeal from a district court order directing them to comply with an Internal Revenue Service summons. The appellants claim that enforcement of the summons, which seeks the names of all clients who paid fees over a three-year period in connection with the acquisition of certain tax shelters, would violate the attorney-client privilege. We agree, and we will reverse.
Facts and Procedural History
The appellants, who specialize in tax law, investigate and evaluate real estate partnerships for clients who want to invest for tax purposes. At least for the period at issue here, the firm charged fees only to those clients who invested. Liebman & Flaster concedes that each of these clients was advised that the fee was deductible as a legal expense. Brief for Appellants at 7. The IRS contends, however, that the fees are not legal fees but brokerage charges, and are therefore not deductible. When the IRS discovered that some investors had deducted fees paid to Liebman & Flaster, the agency sought to ascertain the names of others who might have done the same by various cross-matching methods. This information is not readily available to the IRS from the returns of the other investors because taxpayers who deduct legal fees are not required to identify the recipients. Frustrated in its effort to find the other taxpayers, the IRS sought a John Doe summons to compel the law firm to identify clients who had paid fees in connection with real estate partnerships.
The IRS petitioned the district court under Section 7609(f) of the Internal Revenue Code, which permits service of a John Doe summons upon a showing that it relates to an "ascertainable group or class of persons" when there is a "a reasonable basis for believing" that these persons have failed to comply with a tax code provision and the information sought is "not readily available from other sources." The summons requested "books, records, papers, billing ledgers and any other data which contains, reflects, or evidences the names, addresses and/or social security numbers of clients who paid fees in connection with the acquisition of real estate partnership interests in 1978, 1979 and/or 1980." App. at 12a.
Liebman and his firm objected that enforcement of the summons would violate the attorney-client privilege. The district court rejected the claim and granted the enforcement order, although it permitted the attorneys to produce a list of names rather than their records. See App. at 147a.
This appeal was taken from the district court's order.*fn1
The sole issue before us is whether the attorney-client privilege protects the identities of the Liebman & Flaster clients sought by the IRS. The question is governed by federal common law, see Fed. R. Evid. 501, which of course includes the attorney-client privilege. While the applicability of the privilege must turn on the facts of each case, determining the scope of protection in each case is a ...