Taxpayers Can't Sue to Stop IRS from Receiving Privileged Info from Former Attorney

(Parker Tax Publishing December 2019)

The Sixth Circuit held that a lawsuit brought by a couple, who is being audited by the IRS and who is seeking to stop the IRS from discussing privileged information with the couple's former attorney, was barred by the Anti-Injunction Act. The Sixth Circuit also held that an exception to the Anti-Injunction Act provided in Enochs v. Williams Packing, 370 U.S. 1 (1962), which allows a claim for equitable relief if (1) the government cannot under any circumstances prevail against the taxpayer's claims for injunctive relief, and (2) equity jurisdiction otherwise exists, did not apply. Gaetano v. U.S., 2019 PTC 440 (6th Cir. 2019).

Background

Richard and Kimberly Gaetano, a married couple, run a cannabis business called 420 Wellness Dispensary. A lawyer, Gregory Goodman, assisted them in this operation. In 2010, the Gaetanos enlisted Goodman's help in attempting to transfer shares in their business to another cannabis company, AgraTek. However, the shares they attempted to transfer had already been purchased by Green-VisionTek, one of AgraTek's rivals.

Green-VisionTek responded by suing the Gaetanos, Goodman, and 420 Wellness. It also filed a disciplinary complaint against Goodman. An ethics inquiry revealed that Goodman had negotiated future employment with AgraTek while representing 420 Wellness in the purchase agreement and from that point on began double-dealing. Goodman lost his law license in June 2014. The Gaetanos learned of this fact the following October and severed their relationship with him.

In 2017, the IRS began an audit of the Gaetanos' 2014 and 2015 tax returns. As part of this investigation, it asked Goodman for his assistance. Goodman saw this as an opportunity to extort the Gaetanos. Goodman threatened that he would see them "taken down" and "led away in handcuffs" unless they gave him a "significant down payment." When the Gaetanos did not oblige, he sent menacing emails to them. The Gaetanos, through a new attorney, asked the IRS to cease contact with Goodman and destroy whatever privileged information he had shared.

Goodman began assisting the IRS. He told an IRS agent that he had an axe to grind with the Gaetanos. The agent, who knew of Goodman's history, told Goodman that she didn't want him to share any privileged information. Goodman replied that he would not, that he understood the difference between privileged and non-privileged communication, and that he had obtained his information primarily through online searches and work performed by a private investigator. The agent told Goodman that she would nevertheless run any information he provided by IRS counsel and her manager to ensure confidentiality had not been violated.

The Gaetanos filed a complaint in a district court seeking to stop the IRS from discussing attorney-client privileged information with Goodman and to require it to destroy any attorney-client confidences it already had. The IRS moved to dismiss, asserting that the court lacked jurisdiction to hear the Gaetanos' request for equitable relief under the Anti-Injunction Act, which is codified in Code Sec. 7421(a). Code Sec. 7421(a) provides that, with certain exceptions, no suit for the purpose of restraining the assessment or collection of any tax may be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed. However, an exception to the rule was recognized by the Supreme Court in Enochs v. Williams Packing, 370 U.S. 1 (1962). This exception applies, and the court has jurisdiction, if the taxpayer can show that (1) under no circumstances could the government ultimately prevail against the claim for injunctive relief, and (2) equity jurisdiction otherwise exists. The district court ultimately, on its own initiative, dismissed the Gaetanos' claim for injunctive relief and the couple appealed to the Sixth Circuit.

The Gaetanos argued that the Williams Packing exception applied. They claimed that the government's intrusion into their attorney-client relationship violated their Sixth Amendment right to counsel. They also asserted that they were deprived of their Fifth Amendment due process rights. The Gaetanos acknowledged that the attorney-client privilege alone generally does not provide the basis for a due process claim because it is a creation of the common law, not the Constitution, but they cited cases holding that deliberate, pre-indictment intrusions into the attorney-client relationship may be so pervasive and prejudicial as to imperil the fairness of subsequent proceedings. In addition, the Gaetanos argued that communications between tax preparers and their clients can be privileged under Code Sec. 7525. Finally, they asserted that courts have common law power to enjoin intrusions into the attorney-client relationship.

Analysis

The Sixth Circuit rejected the Gaetanos' arguments and held that the district court did not have jurisdiction over their claims for injunctive relief. The court found that the Gaetanos' Sixth Amendment rights had not been violated because the Sixth Amendment does not apply until a criminal prosecution is begun, while the government's inquiry in this case was only investigatory. The court also rejected the Gaetanos' Fifth Amendment due process argument. The court explained that there were very few decisions holding that an intrusion into the attorney-client relationship was a due process violation and that such cases generally involved nefarious government conduct, such as infiltrating a defense lawyer's office. The court further found that such a claim requires an ongoing, personal attorney-client relationship, a deliberate intrusion, and actual and substantial prejudice - all factors that the court found absent in this case.

The Sixth Circuit found that Code Sec. 7525 did not remotely justify the remedy requested by the Gaetanos. In the view of the Sixth Circuit, the government did nothing wrong; it told Goodman not to divulge privileged material, verified that he understood the difference between privileged and non-privileged material, and took steps to clear communications with legal counsel. The court further found that the Gaetanos did not identify any privileged information in the summary of the agent's call with Goodman.

Although the Sixth Circuit concluded that the district court lacked jurisdiction over the Gaetanos' claim, it found that the district court improperly dismissed their case of its own accord. But because it found that the Gaetanos were not prejudiced by the dismissal, the Sixth Circuit vacated the district court's order and remanded the case to the district court to dismiss for lack of jurisdiction.

For a discussion of taxpayer appeals to courts, see Parker Tax ¶263,500.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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