The opinion of the court was delivered by: Milton I. Shadur, United States District Judge.
This effort by the United States for enforcement of a group of
summonses against accounting firm BDO Seidman, LLP ("BDO") has
generated, during its three months of existence, more than one bulky
submission of paperwork from each side of the controversy. But while the
situation in that respect does not fit the adage variously ascribed to a
number of sources,*fn1 but perhaps best known in Horace's version
— "the lab'ring mountain scarce brings forth a mouse"*fn2 —
the situation is not nearly as complex as BDO attempts to portray it.
What is at issue here is an investigation of BDO as to its potential
liability under the Internal Revenue Code ("Code")*fn3 for promoting
potentially abusive tax shelters, which the government asserts the firm
failed to disclose properly in accordance with statutory requirements.
That investigation implicates a host of statutory provisions, including
Code § §§ 6111, 6112, 6694, 6700, 6701, 6707, 6708, 7407 and 7408
at a minimum. And for more than two decades this Court has looked to
United States v. Kis, 658 F.2d 526 (7th Cir. 1981) (which in turn drew
on the seminal decision in United States v. Powell, 379 U.S. 48 (1964))
for the operative rules that govern judicial enforcement of such
Kis has similarly been reaffirmed and applied regularly by our Court of
Appeals. As succinctly put in 2121 Arlington Heights Corp. v. IRS,
109 F.3d 1221, 1224 (7th Cir. 1997) (citations, including those to Kis
and Powell, omitted):
In those terms this is not a difficult case. All four of those prima
facie elements are indisputably present, even though BDO makes
unpersuasive efforts to challenge each of them.
As for BDO's questioning the "legitimate purpose" factor, that fails
utterly in the face (among other things) of the decision in Tiffany Fine
Arts, Inc. v. United States, 469 U.S. 310 (1985). That unanimous decision
validated the use of "dual purpose" summonses, so long as the requested
information is relevant to a legitimate investigation of a summoned
taxpayer such as BDO — and that certainly applies here.
As for the relevance component (with its corollary requirement of no
overbreadth), United States v. Arthur Young & Co., 465 U.S. 805, 814
(1984) (emphasis in original) supplies definitive support for the
government's position that the test is one requiring only "even
potential relevance to an ongoing investigation, without reference to its
admissibility." And in addition to our Court of Appeals' like holding in
reliance on Arthur Young in 2121 Arlingtgn Heights, 109 F.3d at 1224,
Government Mem. 7 n. 5 lines up a plethora of cases from other Courts of
Appeals applying the same undemanding standard.
Next BDO throws up a really unsupported objection to the "already in
the IRS' possession" factor. On that score the supplemental declaration
of Revenue Agent Michael Friedman provides a compelling showing that the
objection cannot and does not prevail.
Finally, BDO does not directly charge bad faith on the government's
part — instead it casts a number of pejorative aspersions that might
suggest such an evil motive. But this Court has already indicated, and it
reconfirms here, that those aspersions do not begin to meet the
government's persuasive showing of a good faith investigation stemming
from information provided to it.
All of that, then, leaves only BDO's claim of privilege under Code
§ 7525 (the statutory equivalent for accountants of the common law
attorney-client privilege). In that respect the United States is correct
that BDO's original blanket assertion of that privilege must fail (see,
e.g., United States v. Lawless, 709 F.2d 485, 487 (7th Cir. 1983)). But
nothing daunted, BDO has most recently threatened to overwhelm the court
by tendering two massive privilege logs — one of 86 pages listing
826 documents, and the other of 42 pages listing 293 documents —
that identify the documents for all of which it claims privileged
To be sure, that nearly mind-boggling presentation necessarily does
violence to the whole notion that these summons enforcement proceedings
are supposed to be "summary" in nature and capable of swift disposition,
so that an investigation that has cleared all the hurdles can go forward
promptly (see, e.g., Donaldson v. United States, 400 U.S. 517, 529 (1971)
and Kis, 658 F.2d at 536). But unless the United States can suggest
otherwise, it appears that there is no alternative to a one-by-one
examination of the documents themselves (which have not been delivered to
this Court by BDO together with the privilege logs).
This Court is understandably not especially appreciative of the
proffered opportunity to spend its time in that process (something that
appears to be much the equivalent of the task imposed on the new law firm
associate, whose only exposure to what is mislabeled the "litigation
practice" is an assignment to rummage through files in a dusty warehouse,
either in pursuit of or in response to discovery requests). In light of
the demands imposed by its full-scale civil and criminal calendar,
together with its commitment to sit by designation early next month with
the Court of Appeals for the First Circuit, this Court reluctantly (and
with all due apologies) refers the matter to Magistrate Judge Martin
Ashman (to whose calendar this case is also assigned) for that purpose.
BDO is ordered to deliver the privilege-claimed documents to the
Magistrate Judge's chambers forthwith.
One last point has occurred to this Court — something that has
not been addressed by either of the parties. Suppose that some of the
documents for which BDO claims privilege could otherwise fit within the
standards governing the attorney-client privilege (and hence the
equivalent statutory accountant-client privilege), but that they relate
to the types of "abusive tax shelters" that have triggered the
congressional enactment at issue here. In that event, would the
utilization of such an "abusive tax shelter" by a taxpayer to whom BDO
has given advice as to its use create the potential of criminal as well
as civil liability on the taxpayer's part? And if so, would that trigger
the application of the crime-fraud exception to the privilege? This Court
requests prompt input from each party on this subject by written
submissions delivered to this Court's chambers on or before November 18,
2002,*fn4 so that Magistrate Judge Ashman's document review may take
place with that supplemental consideration in mind.