Microcaptive Tax Shelter Promoter Investigation Of Moore Ingram Law Firm Leads To Attorney-Client Privilege Issues With Client Documents
Published - www.Forbes.com
By Jay Adkisson
The IRS began an investigation of the law firm of Moore, Ingram, Johnson & Steele, LLP ("Moore Ingram" or the "law firm") which apparently has its main offices in Marietta, Georgia. The following information comes from a U.S. Magistrate Judge's Final Report And Recommendations filed July 20, 2020 in the case of U.S. v. Moore, Ingram, Johnson & Steele, LLP, and I do not claim to have any independent knowledge of the facts that follow.
The IRS alleged that Moore Ingram acted as a captive insurance manager as it created and oversaw captive insurance companies for its clients. The U.S. Magistrate Judge noted that "Such an arrangement is allowed by law, but some unscrupulous individuals abuse this tax structure." The IRS is investigating Moore Ingram to determine whether the law firm "is liable for, among other things, organizing and promoting abusive tax shelters, aiding and abetting in the understatement of another person’s tax liability, and preparing or assisting in the preparation of tax returns for others that willfully or recklessly understate the taxpayer’s tax liability."
This particular lawsuit began when the IRS filed its petition to enforce its summons for information from Moore Ingram. The IRS alleges that the law firm "is in possession of books, records, paper, and other data that may be relevant to the investigation." The IRS stated that it is seeking to determine whether penalties are warranted against Moore Ingram.
For its part, the law firm alleges that it has produced many, if not all, of the documents requested by the IRS, and that the IRS's summons was overly broad. Moore Ingram alleged that it produced "hundreds of thousands of pages" of documents, and that a full response would require the production of "million of pages" of such documents. The law firm also claimed that because the IRS had also issued summons to "CRI, Pinnacle, and Milliman" that the IRS summons against the law firm was unnecessary, the implication being that those other firms had already produced some or all of the documents that the IRS sought.
The U.S. Magistrate Judge rejected Moore Ingram's claim that because it had produced some documents it was therefore off the hook for the rest of the documents demanded by the IRS:
"As Respondent freely admits, it possesses 'additional documentation' not in the IRS’s possession. But Respondent would have the Court refuse to order the production of those documents based on Respondent’s assertion that the small portion of documents possessed by the IRS should be 'sufficient.' Respondent cites no authority suggesting that it can curb the investigative authority of the IRS by producing only that subset of documents that it, in its magnanimous discretion, deems to be 'sufficient.' As Petitioner pointed out during the hearing, Respondent faces potential liability for its conduct with respect to each separate client for each distinct tax year. Thus, even if the information Respondent produced with respect to the 4.5% of clients already under IRS investigation were 'sufficient,' that would not absolve Respondent of its duty to produce documents with respect to the other 95% of its clients. Each transaction is its own, separate potential basis for liability."
While Moore Ingram would not be required to re-produce documents that it had already produced, it would be required to produce those it had not. It was likewise unreasonable for the law firm to expect the IRS to sort through millions of pages of documents to determine what of Moore Ingram's documents overlapped with those of CRI, Pinnacle, and Milliman.
The Court also rejected Moore Ingram's argument that the IRS summons was abusive because of its wide scope, noting that the law firm:
"cannot just provide information relating to a cherry-picked handful of clients and demand the IRS not investigate Respondent’s activities with respect to the other 95% of its Captives. Each individual relationship is distinct, and the fact Respondent abided by the law when managing a subset of clients is not 'sufficient' to conclude Respondent abided by the law in managing all the Captives."
The U.S. Magistrate Judge similarly rejected the law firm's argument that the IRS was misusing the penalty promoter statutes to intimidate and harass captive managers, noting that although the IRS has not yet levied penalties against any captive manager does not rise to the level of evidence that the IRS is engaged in bad faith. The Court similarly dispensed with the law firm's argument that the IRS was misusing the summons process to circumvent U.S. Tax Court discovery. " If anything," said the Court, "the fact that several of [Moore Ingram]’s clients were under investigation for allegedly using abusive tax shelters proves the IRS had a legitimate basis for investigating [Moore Ingram] for allegedly promoting such abusive tax shelters to its clients."
Having rejected Moore Ingram's grousing that the IRS subpoena was overbroad and abusive, the Court next turned to whether some of the documents requested by the IRS were privileged or confidential because the clients for whom Moore Ingram also provided captive insurance management services were also clients who sought and received legal advice and counsel from the law firm. This is the really juicy part of this opinion. As the U.S. Magistrate Judge put it, "it appears the real crux of the dispute between the parties is whether the millions of documents not produced by respondent are indeed privileged." [Emphasis in original]
The law firm argued that two courts in Kentucky has already held that some of the documents requested were subject to attorney-client privilege and that the privilege had not been waived, and Moore Ingram extrapolated this to claim that all of its communications with its clients were thus attorney-client privileged.
This blanket argument was rejected by the Court, which noted that attorney-client privilege did not arise solely because the communication was between the attorney "acting in its capacity as a professional legal advisor—not a claims adjuster—and so on", and that the legal advice being given must predominate the communication for attorney-client privilege to arise. Indeed, the Court noted, the Kentucky courts which heard the matter did not accept Moore Ingram's claim of a blanket privilege for all documents, but instead engaged in an in camera review (basically, the court reviewed them outside the presence of the IRS's counsel) of those documents to determine whether they were privileged or not.
Moore Ingram next argued that even its non-communicative documents relating to particular clients was privileged, because the IRS would thereby obtain the names of particular taxpayer-clients of the law firm and thus "subject each taxpayer to unnecessary harassment through IRS examination." But that doctrine, known as the last link doctrine, only applies to criminal cases said the Court and thus it was inapplicable here. Further, the Court noted that Moore Ingram could not prove that mere disclose of its clients' identities would result in any harassment by the IRS.
In the end, the U.S. Magistrate Judge recommended that Moore Ingram's petition be granted to the extent that the law firm would not have to re-produce to the IRS any documents that it had previously produced, but Moore Ingram would have to produce the remaining documents. This last point meant that Moore Ingram could produce a privilege log and claim privilege over specific documents that it claimed to be attorney-client privileged, but the law firm would not be allowed to assert a "categorical privilege", i.e., claiming whole groups of documents were privileged for whatever reason. Because this would likely cause the Court to have to individually review many thousands of documents, the U.S. Magistrate Judge additionally recommended that a special master be appointed to review the documents and resolve any further discovery issues relating to these documents.
The U.S. Magistrate Judge's Report and Recommendation now go to the U.S. District Judge for review, and it will be that court's decision which will be final.
ANALYSIS
One interesting factual revelation that we get out of this case is that the IRS has yet to assess any captive manager with promoter penalties, although it is known to have opened cases on at least several. The likely reason for this is that the IRS first has to get its arms around the extent of the particular manager's selling of abusive microcaptives, which means obtaining information on all the taxpayers involved and all the fees that they paid over the years. Yet, this case also illustrates that the IRS is actively working the promoter penalty cases, and probably one day that axe will fall on the necks of these managers.
Something else that we get out of these cases is that it was probably a major mistake for a law firm to be directly involved in captive management (and Moore Ingram was not the only one) for the reasons indicated: It is much more difficult for the law firm to effectively assert attorney-client privilege where it is also conducting non-attorney business for the client. This is one of the history reasons why the various state bar associations around the country have been reticent about allowing law firms to engage in non-law business: It is simply too difficult to keep attorney-client privileged communications separate from non-legal communications such that the privilege is preserved. This could very well give rise to a wave to negligence lawsuits brought against the involved law firms by their clients who had the privilege vitiated as to important communications, and possibly also ethical sanctions if such communications end up being revealed.
We'll see how all this develops ⸺ it is certainly better to be on the observational end of this issue than trying to defend it against the IRS, clients and local bar counsel.
CITE AS
U.S. v. Moore, Ingram, Johnson & Steele, LLP, Case No. 20-CV-2413, N.D.Ga., July 20, 2020 (Magistrate Judge's Final Report and Recommendation), as found at
Angela Yoo
Author