Ethics Opinions from the Bar Association of San Francisco
An attorney cannot ethically disclose records indicating the sources of funds which he has deposited in his client trust account unless the client consents to this disclosure. Such disclosure would breach the attorney-client privilege.
Assuming that the client does not consent to the disclosure of this information, the attorney may not volunteer such information. Nevertheless, an attorney must comply with an IRS summons pursuant to Section 7602 of the Internal Revenue Code requiring production of the attorney's records disclosing such sources, unless he determines that a meritorious objection maybe made to the summons. If the attorney in good faith concludes that disclosure of the information may not be compelled because of the attorney-client privilege, his client's Fifth Amendment rights or some other reason, the attorney must attack the summons in appropriate proceedings and disclose such records only when ordered to do so by the court.
If the attorney in good faith determines that the requested information cannot properly be disclosed for any such reason, he should state his objections to the summons to the IRS hearing officer. If the hearing officer rejects the attorney's argument and the Government seeks to enforce the summons by obtaining a court order pursuant to Section 7402(b), the attorney should seek a judicial determination of the issue in that adversary proceeding. See Reisman v. Caplin, 375 U.S. 440 (1964). The attorney could also affirmatively move to quash the summons. See Application of Colton, 291 F.2d 487 (2d Cir. 1961). In either event, the attorney cannot be prosecuted under Section 7210 or attached for contempt under Section 7604(b) because of his good faith challenge to the summons. See Reisman v. Caplin, 375 U.S. 440 (1964). While such court orders are appealable, the attorney must comply with the court's final order. Id.
Despite the analysis offered by numerous commentators, the scope of the attorney-client privilege in the context of tax investigations has not been clearly defined by the courts. See Orkin, The Attorney-Client Privilege in Tax Matters , 49 A.B.A.J. 794 (1963); Peterson, Attorney-Client Privilege In Internal Revenue Service Investigations, 54 Minn. L. Rev. 67 (1969); Lofts, The Attorney-Client Privilege in Federal Tax Investigations, 19 Tax L. Rev. 405 (1964); 15 ALR Fed. 771 (1973). See also 16 ALR 3d 1047 (1967). There is even a conflict among the Circuit Courts of Appeal whether state or federal law governs the scope of the attorney-client privilege in a Section 7402(b) proceeding. The Ninth Circuit presently follows the minority rule that the state law governs the scope of the privilege, and California attorneys should therefore consult Sections 950-62 of the California Evidence Code. E.g. , Baird v. Koerner , 279 F.2d 623 (9th Cir. 1960). Contra , e.g. , Colton V. United States , 306 F.2d 633 (2d Cir. 1962), cert. denied, 371 U.S. 951 (I963). See 95 ALR 2d 320 (1964). Nevertheless, the federal courts in this Circuit may be influenced by relevant decisions in other jurisdictions, which often tend to assign a more restricted scope to the privilege than analogous California precedents.
Each attorney must resolve for himself the question of whether any meritorious objection may be made to a particular IRS summons, since this committee is unable to render legal opinions and the result could vary depending upon the particular facts of each case. Nevertheless, it is appropriate for the Committee to suggest some of the possible grounds upon which attorneys might object to such a summons and some of the arguments the IRS can be expected to raise in support of disclosure.
The most obvious possible objection to such an IRS summons is that the attorney-client privilege prevents the attorney from disclosing such information. The IRS, however, has frequently persuaded courts that attorneys must testify concerning their actions in depositing and disbursing his client's funds in bank accounts and must produce related receipts, deposit slips and checks. One common rationale for such disclosure is that the attorney-client privilege is not applicable where the attorney acts in the capacity of a banker or a clerical agent, rather than in his professional capacity as an attorney. See McFee v. United States , 206 F.2d 872 (9th Cir. 1953), remanded 348 U.S. 905, reaffirmed , 221 F.2d 807 (9th Cir.) cert. denied , 350 U.S. 825 (1955); Pollock v. United States , 202 F.2d 281 (5th Cir. 1953), cert. denied , 345 U.S. 993 (1953). The courts-have rejected similar claims of privilege where the attorney was engaged in executing financial transactions, managing businesses or collecting rent or other debts on behalf of his client, rather than using the information as a basis for rendering legal advice. See Kelly v. Simon 62-1USTC ¶9334 (S.D. Cal. 1962); Toothaker v. Orloff, 59-2 USTC ¶9604 S.D. Cal. 1959). But see In re Schwartz, 56-2 USTC ¶10,061 (D.D.C. 1956) (privileged recognized as to clients' names and amounts collected from each where doctor consulted attorney in his professional capacity to advise on the desirability of filing suit to collect fees from certain patients). Courts have also ordered attorneys to produce deposit slips, receipts and checks on the ground that such documents are not confidential, but were intended by the client to be disclosed to the bank and other parties besides the attorney. See United
States v. McDonald, 313 F.2d 832 (2d Cir. 1963); United States v. Schoeberlein, 335 F.Supp. 1048 (D. Md. 1971). Similar claims of privilege have also been rejected on the ground that the communications and transmittal of funds were made by the client in furtherance of a crime (i.e., tax evasion). See Pollock v. United States, (1953); Cal. Ev. Code Section 956.
If the IRS is seeking deposit slips, check receipts or other evidence which the client has transmitted to the attorney, under certain circumstances the attorney might be able to prevent enforcement of the summons by invoking his client's Fifth Amendment right against self-incrimination. Although the IRS has persuaded some courts to rule that the client's Fifth Amendment rights do not prevent disclosure of documents held by his attorney, there is authority that the Fifth Amendment can be invoked by the attorney on behalf of his client under circumstances where the client could refuse to produce the documents if they were still in his possession. See United States v. Judson , 322 F.2d 460 (9th Cir. 1963); Application of House, 144 F. Supp. 95 (N.D. Cal. 1956). Contra United States v. Schoeberlein , 335 F. Supp. 1048 (D. Md. 1971); United States v. Boccuto , 175 F. Supp. 886 (D. N.J. 1959).
Resourceful counsel may find additional grounds for objecting to the IRS summons. For example, if the IRS has already obtained the requested information through another source, the attorney might persuade the court not to enforce the summons against him. See United States v. Pritchard , 438 F.2d 969 (6th Cir. 1970) (attorney need not disclose information which the IRS had previously obtained from the client's accountant). The IRS might logically initiate its investigation by obtaining the records of the bank relating to the attorney's trust account, since there is no apparent ground upon which the bank or the attorney can successfully resist such a summons. See Schulze v. Rayunec, 350 F.2d 666 (7th Cir. 1965) (rejecting attorney's claim that the attorney-client privilege prevents disclosure of bank records). To the extent that the IRS has previously obtained from the bank the same information or documents sought from the attorney, the attorney may have a meritorious objection to the IRS summons.
The Committee is therefore of the opinion that when an IRS agent requests such information otherwise than by a Section 7602(b) summons, the attorney should advise the agent that he is obligated to preserve his client's confidences and secrets but that he will ask his client whether he may disclose the information. If the client authorizes disclosure of the information to the agent at any time during the controversy, the attorney should, of course, cooperate with the agent.
If the client does not wish the information disclosed and the IRS agent serves the attorney with a Section 7602 summons, the attorney must investigate all available grounds upon which a meritorious challenge to the summons might be made, including the attorney-client privilege and the Fifth Amendment objections discussed above. If the attorney should determine after reasonable investigation that there is no valid ground upon which the summons may be challenged, the attorney must comply with the summons and disclose the information. If, however, the attorney concludes that there is some ground upon which he can challenge the summons in good faith, the attorney must assert such objections to the IRS hearing officer and in subsequent court proceedings. The attorney, of course, must comply with a final court order resolving the issue.
All opinions of the Committee are subject to the following disclaimer:
In using these opinions you should be aware that subsequent judicial opinions and revised rules of professional conduct may have dealt with the areas covered by these ethics opinions.