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After more than a decade, two Davids will finally get their chance to take on the Goliath known as the Internal Revenue Service. On Aug. 5, in Dick DeGuerin and Lewis Dickson v. United States of America, U.S. District Judge Sim Lake of the Southern District of Texas denied both sides’ motions for summary judgment and set a docket call for Sept. 13. The case raises issues concerning the relationship between attorneys and their clients, such as how far does the attorney-client privilege go when it’s time to report income to the IRS? Is a lawyer required to identify the source of legal fees in all instances or can such information be protected under the attorney-client privilege? And should a lawyer be assessed penalties for failing to disclose a client’s identity when the attorney reasonably believes the client’s identity is protected? The dispute involves penalties assessed by the IRS against prominent Houston criminal defense attorneys DeGuerin and Dickson for not including payer and beneficiary names on forms filed in 1995. The IRS alleges that the attorneys intentionally disregarded their obligations under � 6050I of the Internal Revenue Code by failing to include those names. Section 6050I requires any person engaged in a trade or business who receives more than $10,000 in cash in one transaction (or two or more related transactions) to file Form 8300, which reports the transaction and identifies the name, address and taxpayer identification number of the person from whom the cash was received as well as the amount, date and nature of the transaction. Houston lawyer George W. Connelly Jr., chairman of the tax controversy and litigation section at Chamberlain, Hrdlicka, White, Williams & Martin, spent 15 years as a trial lawyer with the IRS. Connelly says Form 8300 was devised because the nation’s “underground economy” operates mainly in cash and there was no way to track these transactions. Congress thus put the burden on businesses — everyone from car dealers to lawyers who receive fees in excess of $10,000 in cash must report it. “If you’ve ever seen a Form 8300, the amount of information stops just short of how tall the person is and what color their eyes are and what their ethnic derivation is. You’ve got name, rank, serial number, are they acting as a nominee for someone and so forth,” Connelly says. As a lawyer, Connelly says he is concerned about situations where client confidences would be revealed that could have implications in other areas negative to the client. To be obligated to disclose to the IRS that a client dropped, say, $50,000 in cash yesterday for legal fees troubles him, but, he adds, “there is no question that if that happened I’d file a Form 8300.” Connelly says the courts generally have come down strongly in favor of the IRS in these matters. DeGuerin and Dickson argue in court documents that they should not be assessed penalties because, at the time of filing, they reasonably believed the names were protected by the attorney-client privilege. The case is important, says Houston attorney David Gerger, part of the DeGuerin-Dickson litigation team and a partner in Foreman DeGeurin Nugent & Gerger. “What is happening here is that the IRS is trying to punish a lawyer who obviously is trying to legally protect his clients’ confidences,” Gerger says. “This use of the 8300 is dangerous to all lawyers because it is an attempt to drive a wedge between lawyers and their clients.” “One thing needs to be understood from the outset,” says Houston solo Michael Ramsey, who recently agreed to appear on behalf of DeGuerin and Dickson at trial: “Dick and Lewis paid their taxes.” “It’s always been true that they disclosed the income, [that] they did the right thing by the IRS, [but] … for reasons we’ll have to explore in trial, the IRS is coming after them,” says Baker Botts partner B. Daryl Bristow of Houston, who has served as lead plaintiffs’ attorney in the litigation. BRING IT ON In a 41-page memorandum, Lake noted that the attorneys’ dispute with the IRS over disclosure of allegedly privileged information began in 1989, when an IRS agent launched an inquiry regarding certain 8300s they had filed. For the next seven years, the lawyers omitted information on 8300s whenever they believed it was privileged, but filed explanatory statements with each form. They responded to the IRS’ subsequent requests for the omitted information by referring to the explanations originally filed, according to the opinion. The IRS took no other action until the fall of 1997, when an IRS agent informed DeGuerin and Dickson that he would conduct an audit of 8300s for 1995 through 1997. DeGuerin alleges that the IRS’ audit was retaliatory because he had embarrassed an IRS agent on the witness stand at a 1997 trial, Lake noted in his opinion. Although DeGuerin and the IRS tried to resolve the issue, nothing came of it. In March 1998, DeGuerin and Dickson were notified that they would be assessed penalties for allegedly intentionally disregarding their filing obligations. They filed an administrative appeal with the IRS, which was denied on the ground there was no adequate basis for asserting the attorney-client privilege, according to the opinion. The IRS, which had stayed enforcement of the penalties during the appeal but later lifted the stay on all but five of the 1995 Form 8300s, began a collection action. After paying a $25,000 fine assessed on one of the 8300s, DeGuerin and Dickson filed a request for refund, which was denied. They filed suit in the U.S. District Court for the Southern District of Texas on March 28, 2001. The government counterclaimed to recover unpaid penalties including approximately $400,000 relating to 13 incomplete 8300 forms filed for 1995, according to court documents. Lake noted how the IRS imposes a penalty of $50 for each failure to file a Form 8300 in a timely or complete manner, but imposes stiff penalties in cases of “intentional disregard.” No penalty is imposed if the failure to file properly is shown to be due to “reasonable cause” as opposed to “willful neglect.” So even if an attorney intentionally disregards the reporting requirement, he will not be subject to any penalty if he can show reasonable cause for noncompliance. Thus, to Lake, the central issues in the case are whether the attorneys’ failure to provide information on the Form 8300s by claiming attorney-client privilege amounted to intentional disregard of their filing obligations and whether the penalties should be waived because they had reasonable cause for omitting the information. Lake summarized DeGuerin and Dickson’s primary arguments as follows: Penalties are not warranted because the attorneys did not act willfully but, rather, believed they were not required to report privileged information — or, in the alternative, that even if they intentionally disregarded their filing obligations, penalties are not warranted because they acted with reasonable cause and not with willful neglect. They also contend that they acted as any reasonable attorneys would under similar circumstances and that the rules of professional responsibility and attorney-client privilege actually forbid disclosing their clients’ identities. The government’s arguments, Lake said, were that DeGuerin and Dickson did not have a valid reason to believe their clients’ identities could be protected by the attorney-client privilege when the forms were filed in 1995, and, thus, “intentional disregard penalties” were warranted. Also, the government argues that the reasonable cause waiver would not apply because there were no “significant mitigating factors” as required by IRS regulations. Even if a client’s identity might be privileged under certain circumstances, the government says, DeGuerin and Dickson failed to establish that they believed such circumstances existed in 1995 when the 8300s were filed. Calls to Assistant U.S. Attorney Ralph F. Shilling Jr. of Dallas to discuss the opinion were referred to U.S. Department of Justice spokeswoman Dana Perino in Washington, D.C. Perino says the DOJ cannot comment on pending litigation. Ramsey believes Lake’s decision is well-reasoned, well-written and leaves room for both sides to have a good, full-bodied trial. Neil McCabe, a criminal law professor at Houston’s South Texas College of Law, says that DeGuerin and Dickson apparently haven’t yet shown why the names fall under the privilege. “They’re not privileged just because they’re the names of clients,” he says. “Maybe in trial they’ll come up with whatever facts they need, but it doesn’t show from this opinion what those facts would be.” Nor is there anything to show that the names are tied with some attorney-client communication or that the information would be a “last link” in a chain of criminality that the government needs, McCabe says. “Who is going to win this battle? I don’t know,” McCabe says. “It’s a toss up depending on what facts come out at trial.” But when all is said and done, the attorney-client privilege is just a privilege — not a constitutional right — and there are more important things than the attorney-client privilege, McCabe says. “It may be that the government’s interest in getting the names of people who are moving large sums of cash is more important than the attorney-client privilege.”

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