United States District Court, Northern District of Illinois, E.D
April 21, 1972
UNITED STATES OF AMERICA AND RICHARD THALMAN, SPECIAL AGENT, INTERNAL REVENUE SERVICE, PETITIONERS,
HAROLD H. TSUKUNO, RESPONDENT, AND KEN ETO, INTERVENOR.
The opinion of the court was delivered by: McLAREN, District Judge.
OPINION AND ORDER
This action was initiated by the United States by a petition
requesting an order to respondent Tsukuno directing him to show
cause why he should not comply with an Internal Revenue Service
(hereinafter "IRS") summons issued by petitioner Thalman, a
Special Agent of IRS, pursuant to 26 U.S.C. § 7402(b) and
7604(a). The order was entered February 22, 1972 with directions
to the parties to brief the legal issues.
The summons directed Tsukuno, an accountant, to produce certain
records and documents in his possession in connection with an
investigation of the tax liabilities of intervenor Ken Eto. The
items described in the summons may be generally divided into two
categories: (1) workpapers developed and used by Tsukuno in the
preparation of Eto's tax returns, and (2) the personal books and
records of Eto used by, and still in the possession of, Tsukuno.
Tsukuno and Eto urge two reasons why this Court should not
order Tsukuno to comply with the summons — the Illinois statutory
accountant-client privilege and the Fifth Amendment privilege
The Accountant-Client Privilege
Ill.Rev.Stat. ch. 110½, § 51, provides that:
"A public accountant shall not be required by any
court to divulge information or evidence which has
been obtained by him in his confidential capacity as
a public accountant."
In United States v. Balistrieri, 403 F.2d 472
, 481 (7th Cir.),
vacated on other grounds, 395 U.S. 710
, 89 S.Ct. 2032
, 23 L.Ed.2d
654 (1969), the Court of Appeals for the Seventh Circuit held
that in a federal criminal tax prosecution federal law applies,
and because there is no accountant-client privilege in the
federal system, the Illinois statute is inapplicable. Although
the present case merely involves the enforcement of a
summons, Balistrieri appears to state the applicable rule.
Although state laws creating privileges are substantive and have
been followed in diversity cases, Palmer v. Fisher, 228 F.2d 603
608 (7th Cir. 1955), it is well-settled that questions of
privilege in a federal income tax investigation are controlled by
federal law. Colton v. United States, 306 F.2d 633
, 636 (2d Cir.
1962), cert. denied, 371 U.S. 951
, 83 S.Ct. 505
, 9 L.Ed.2d 499
(1963); Falsone v. United States, 205 F.2d 734
, 742 (5th Cir.),
cert. denied, 346 U.S. 864
, 74 S.Ct. 703, 98 L.Ed. 375 (1953);
United States v. Schoeberlein, 335 F. Supp. 1048, 1057 n. 13
(D.Md. 1971); Dorfman v. Rombs, 218 F. Supp. 905
, 907 (N.D.Ill.
1963). Compliance with the Revenue Service summons cannot
therefore be withheld on the basis of the Illinois
The Fifth Amendment Privilege Against Self-Incrimination
Although it did not involve the same issue and facts as the
instant case, Donaldson v. United States, 400 U.S. 517, 91 S.Ct.
534, 27 L.Ed.2d 580 (1971) is illuminating. In that case, an IRS
agent issued summonses to the taxpayer's former employer and its
accountant for the production of their records of his
compensation. The intervening taxpayer's argument that an IRS
summons proceeding may not be utilized in aid of an investigation
that has the potentiality of resulting in a recommendation of
criminal prosecution was rejected, the Court stating:
"To draw a line where a special agent appears would
require the Service, in a situation of suspected but
undetermined fraud, to forgo either the use of the
summons or the potentiality of an ultimate
recommendation for prosecution. We refuse to draw
that line and thus to stultify enforcement of federal
law. [citation omitted]
"We hold that under § 7602 an internal revenue
summons may be issued in aid of an investigation if
it is issued in good faith and prior to a
recommendation for criminal prosecution."
400 U.S. at 535-36, 91 S.Ct. at 545. The Court emphasized in
Donaldson that there was no constitutional issue presented by
the facts and that each summons was —
". . . we repeat, . . . directed to a third person
with respect to whom no established legal privilege .
. . exists, and had to do with records in which the
taxpayer has no proprietary interest of any kind,
which are owned by the third person, which are in his
hands, and which relate to the third person's
business transactions with the taxpayer."
400 U.S. 523, 91 S.Ct. 534, 538 [emphasis added]. The Court
endorsed the Court of Appeals' statement in Donaldson:
". . . nor is it a case in which the subpoena seeks
to obtain records of the taxpayer in the hands of
his attorney or accountant, which the courts have
deemed the same as if they were in the possession of
the taxpayer himself. See Reisman v. Caplin,
375 U.S. 440, 84 S.Ct. 508, 11 L.Ed.2d 459, and this court's
recent decision in Stuart v. United States, et al., 5
Cir., 416 F.2d 459; . . . ."
418 F.2d 1213, 1214 (5th Cir. 1969) [emphasis in original]. The
clear implication of the statements above which distinguish
Donaldson from cases such as the instant one where the records
sought belong to the taxpayer, or in which he had some
"proprietary interest," is that the taxpayer may assert his Fifth
Amendment privilege to prevent their production by his lawyer or
Petitioners argue that the privilege was lost when the
accountant received the intervenor's records, relying in part on
Johnson v. United States, 228 U.S. 457, 458, 33 S.Ct. 572, 57
L.Ed. 919 (1913). It is inapposite, however, because there the
defendant's books had passed by operation of law to his trustee
in bankruptcy and he therefore no longer
had any proprietary interest in them. The government's reliance
on Bouschor v. United States, 316 F.2d 451, 458-59 (8th Cir.
1963) is also misplaced. At best, that case says that the
respondent accountant could not assert the taxpayer's
constitutional right against production; here, the intervening
taxpayer himself has personally asserted that right.
The petitioner relies chiefly on United States v. Couch,
449 F.2d 141 (4th Cir. 1971), cert. granted, 405 U.S. 1038, 92 S. Ct.
1311, 31 L.Ed.2d 579 (April 3, 1972) and United States v.
Schoeberlein, 335 F. Supp. 1048 (D.Md. 1971). Couch held that
requiring an accountant to produce taxpayer's records did not
violate the taxpayer's privilege against self-incrimination
because she had voluntarily relinquished control of the records.
449 F.2d at 143. Relying on Couch, the Schoeberlein court
". . . a person whose personal records are in the
possession of another may not ordinarily, by invoking
the Fifth Amendment, bar production by the other of
the incriminating evidence."
335 F. Supp. at 1055.
Another line of cases reaches a contrary conclusion. For
example, in Stuart v. United States, 416 F.2d 459, 463 (5th Cir.
1969), it was held that the government could not force the
production of records which the taxpayer had placed in his
accountant's possession solely for the convenience of a revenue
agent. The basic reasoning underlying Stuart and a number of
other cases dealing with similar facts (United States v. Merrell,
303 F. Supp. 490, 493 (N.D.N.Y. 1969); United States v. Pizzo,
260 F. Supp. 216, 221 (S.D.N.Y. 1966); Dorfman v. Rombs, 218 F. Supp. 905,
906 (N.D.Ill. 1963)), as well as the language quoted from
the Fifth Circuit and Supreme Court opinions in Donaldson,
appears to be simply this: inasmuch as a taxpayer's privilege
against self-incrimination extends to refusing to produce records
in his own possession, it makes little sense to say that he has
waived it by placing the records in the possession of an agent.
It seems clear that when intervenor-taxpayer Eto delivered his
personal books and records into the possession of his accountant
in connection with services to be performed for him by the
accountant, he did not lose his ownership or proprietary interest
in them. It also seems clear that a person's Fifth Amendment
rights are not so lacking in substance that they disappear if a
government agency can locate and subject to process records
temporarily out of his immediate possession. This Court therefore
refuses to enforce the summons directed to the
respondent-accountant Tsukuno as to Eto's personal records and,
pursuant to Eto's request, directs that they be returned to him.
As to the accountant's working papers, which the summons also
seeks to reach, the issue to be decided is whether they were the
property of the accountant or of the taxpayer at the time of the
service of summons. Absent a contrary showing, it is presumed
that they are the property of the accountant and thus must be
produced in compliance with the summons. United States v.
Zakutansky, 401 F.2d 68, 70-73 (7th Cir. 1968), cert. denied,
393 U.S. 1021, 89 S.Ct. 628, 21 L.Ed.2d 565 (1969). Here, unless some
strong rebutting evidence is shown, such as a prior agreement
that the workpapers were to belong to the taxpayer (United States
v. Re, 313 F. Supp. 442, 447 (S.D.N.Y. 1970); Application of
House, 144 F. Supp. 95, 102 (N.D.Cal. 1956)), this Court will
conclude that the accountant's previously uninterrupted
possession of the working papers shows his ownership of them.
United States v. Zakutansky, 401 F.2d at 72. The taxpayer will
have ten days within which to present any such rebutting
evidence, failing which, the respondent will turn the
above-described workpapers over to IRS pursuant to the summons.
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