(Reuters) - If you’ve ever wondered about the outer limits of the Anti-Injunction Act, then I’ve got quite a story for you today, courtesy of a new opinion from the 6th U.S. Circuit Court of Appeals in Gaetano v. U.S. (2019 WL 5778334).
The tale begins with a lawyer, Gregory Goodman, and a client, the 420 Wellness Dispensary and its owners, Richard and Kimberly Gaetano. (Yes, 420 is a marijuana business.) In 2010, according to the 6th Circuit opinion, both Goodman and the Gaetanos were sued by another marijuana company that held shares in 420. That company also filed a disciplinary complaint against Goodman. The ethics inquiry, which centered on Goodman’s alleged double-dealing and then veered into his alleged fabrication of exonerating evidence, “cast an unflattering light on Goodman,” the 6th Circuit said. (I could not locate Goodman for comment.)
The lawyer ended up losing his law license in 2014. The Gaetanos, who did not immediately learn of Goodman’s disbarment, ended their relationship with him in October 2014. Their split, as the 6th Circuit noted, was not amicable.
In 2017, the Internal Revenue Service began investigating the Gaetanos’ tax returns from 2014 and 2015. An IRS investigator sent a letter to Goodman, asking for his help with the investigation.
Goodman, as the 6th Circuit recounted, saw an opportunity. He notified the Gaetanos that the IRS was on their trail and said that if they didn’t pay him for his silence, he would make sure they were “led away in handcuffs.” Goodman followed up with an email informing Kim Gaetano that he had just spent nearly an hour on the phone with an IRS auditor. “You should have just written me a check and settled the judgment,” he wrote, in one of the only sentences of the email that is free of expletives. “You are going down, your mother, your stepson, your babysitter, your husband and anyone else who’s helping you.” (The email spews viciousness; 6th Circuit Judge Jeffrey Sutton, who wrote the opinion for a panel that included Judges Deborah Cook and Amul Thapar, observed that Goodman called Gaetano “names no parent would give a child.”)
Goodman was candid about his grudge against the Gaetanos when he spoke to the IRS. And the agent he spoke to was wary that he might disclose privileged information. Goodman assured her that his information came from public records and from the work of a private investigator, not from his representation of the Gaetanos. She told him, according to the 6th Circuit, that she would check with her boss and with an IRS lawyer to make sure Goodwin had not violated confidentiality.
But the Gaetanos, as you might expect, were quite rattled that their former lawyer was spilling secrets to the IRS. Their new lawyer contacted the IRS. According to them, their lawyer was told that the IRS intended to continue obtaining information from Goodwin. The IRS, according to the Gaetanos, said its investigators were not even obliged to turn down information that they knew was confidential under the attorney-client privilege.
The Gaetanos sued in federal court in Detroit to enjoin the IRS from obtaining privileged information and to require tax investigators to return whatever confidential documents they had already obtained. They later amended the complaint to include claims against two individual IRS investigators, alleging violations of their 5th and 6th Amendment rights.
U.S. District Judge Bernard Friedman of Detroit, who was apparently exasperated by the Gaetanos’ amended complaint because it “contained no headings or counts,” granted (2018 WL 6335053) the IRS agents’ dismissal motion, concluding that attorney-client privilege is not a constitutionally protected right. He also, for good measure, dismissed their claims against the U.S., acting sua sponte. The Gaetanos moved for reconsideration but Judge Friedman refused.
The Gaetanos, represented by Joseph Falcone, appealed to the 6th Circuit. Their brief acknowledged the broad strength of the Anti-Injunction Act, which bars suits intended to restrain the assessment or collection of taxes. But the Gaetanos claimed their case fell into an exception that the U.S. Supreme Court created in 1962’s Enochs v. Williams Packing (370 U.S. 1). In the Williams Packing case, the Supreme Court said taxpayers can overcome the Anti-Injunction Act if they can show both that the government would not prevail against them under any circumstances and that they could not obtain equitable relief by any other means.
The Justice Department said that the Gaetanos met neither of the conditions of the extremely narrow Williams Packing exception to the Anti-Injunction Act. It’s already established, DOJ said, that the IRS can’t be enjoined for alleged violations of attorney-client privilege, so the Gaetanos can’t show the agency would not prevail against them. The IRS denies that it obtained privileged information from the Gaetanos’ ex-lawyer, but even if it did, DOJ said, the Gaetanos would be free to challenge the use of the information in any subsequent IRS court proceeding against them. Therefore, according to DOJ, they can’t satisfy the second prong of the Williams Packing exception.
And that’s pretty much exactly what Judge Sutton said for the 6th Circuit. The appeals court agreed with the Gaetanos that Judge Friedman erred in dismissing their claims against the U.S. on his own initiative. But the court found that the trial judge was right in his assessment of the Gaetanos’ argument. Their constitutional claims are unavailing: The 6th Amendment does not apply in the context of a civil investigation, the appeals court said, and the exceedingly rare cases in which courts have found 5th Circuit due process rights to have been compromised by intrusions on attorney-client privilege have involved “nefarious” government overreach, like infiltrating a lawyer’s office. Judge Sutton noted that the 6th Circuit is particularly skeptical of what he called the “‘outrageous government conduct’ defense.”
And besides, due process claims based on alleged trampling of attorney-client privilege only apply to ongoing relationships – and the relationship between the Gaetanos and Goodman is anything but, Judge Sutton wrote.
The 6th Circuit emphasized that the record in the Gaetanos’ case does not show that the IRS did anything wrong – and that the threshold for misconduct when it comes to the IRS and attorney client privilege is incredibly high. The court cited a 1985 case from the 9th Circuit, U.S. v. Rogers (751 F.2d 1074), in which the court found no misconduct even though an IRS agent induced a criminal defendant’s former tax lawyer to divulge privileged information. “This case,” the court said, “is much farther from the line.”
Just a little something to keep in mind if you’re ever faced with a demand from your lawyer to pay up or else he’ll tell all to the IRS.
The Gaetanos’ lawyer, Falcone, declined to comment. The Justice Department did not respond to a request for comment.
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