IRS third-party summons quashed.

• Author: Ely, Mark

Editor's note: Mr. Cammarata chairs the AICPA Tax Division Tax Practice Procedures Committee. Dr. O'Neil, Mr. Ely and Ms. Pflieger are members of the committee.

The Ninth Circuit recently quashed an IRS third-party summons issued to a bank, to the extent that the summons requested information identifying the clients of a law firm the Service was auditing (David H. Tedder & Associates, Inc., 77 F3d 1166 (1996)).

In the course of an audit of the 1989 income tax liability of Tedder & Associates, Inc., the IRS requested the production of the firm's financial records, including records of transactions of four bank accounts held by the firm with Wells Fargo Bank. The law firm produced some of the requested records and offered edited versions of documents that identified clients, claiming that disclosure of client names was unwarranted and irrelevant.

The Service subsequently served a third-party summons on the bank, seeking the documents that pertained to the four bank accounts. The law firm balked, arguing that the IRS was conducting the audit in bad faith, that the Service issued the summons to circumvent the requirements for "John Doe" summonses under Sec. 7609(f), that the information requested was privileged, and that the clients' identities were not relevant to the audit of the law firm's 1989 tax return.

After an evidentiary hearing, the district court reviewed the disputed bank records in camera (in the judge's chambers). The court also prepared a table summarizing and describing the sources and recipients of the transactions at issue, which identified clients by numbers to preserve their anonymity. Following the review, the court issued an order enforcing the summons in part, but quashing it with respect to the information identifying the law firm's clients. The district court reasoned that "the names of Tedder's clients are not relevant to the audit of Tedder's 1989 return, given the information already in the IRS's possession and the [sanitized] information provided by the court's in camera examination." The IRS appealed.

Analysis

The first issue the Court of Appeals considered was whether the district court applied the appropriate standard to determine the relevance of the redacted information. The district court had found, under Goldman, 637 F2d 664 (9th Cir. 1980), that the requested documents identifying clients were irrelevant to the firm's audit. The Service argued that the Goldman test was too strict and that the district court...