Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_04-cv-02108/USCOURTS-azd-2_04-cv-02108-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 26:7402 IRS: Petition to Enforce IRS Summons

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

United States of America,

Petitioner,

v.

Marion Holmes,

Respondent,

Chatzky & Associates and Michael G.

Chatzky,

 Intervenors.

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No. CV 04-2108-PHX-EHC

ORDER

Pending before the Court is Intervenors' Motion for Dismissal, Clarification, and/or

for Further Procedures and Alternat ive Responsive Memorandum to Petitioner's Amended

Proposal for Production (Motion). [Dkt. 56]. The Motion is fully briefed.

This case involves an Internal Revenue Service (IRS) Administrative Summons

issued to Respondent for, inter alia, compact disks (CDs) containing a purportedly vast

amount of materials created in the course of Intervenors' law and tax practice, which the

IRS is investigating for tax violations. The IRS has authority to examine the materials on

the CDs because they "may be relevant or material" to the investigation. See 26 U.S.C. §

7602(a)(1) (in tax investigations, IRS may "examine any books, papers, records or other data

which may be relevant or material to such inquiry"). Intervenors claim that t he materials on

the CDs are protected from IRS examination by the attorney-client privilege and other

Case 2:04-cv-02108-EHC Document 61 Filed 05/30/06 Page 1 of 3
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1

 Intervenors argue the Court cannot reach this issue and must dismiss this case

because Respondent has complied with the Summons and the Court has dismissed the

Petition to Enforce the Summons as moot. [See dkt. 48]. This argument ignores the dispute

between Intervenors and Petitioner regarding privileges, which has not been resolved. 

2

 Intervenors cannot maintain that their st at us as Intervenors has kept them from

using those two years to substantiate their privilege claims. The Petition was served on

Intervenors pursuant t o 26 U.S.C. § 7609 (providing procedures for third party

summonses). [See dkt. 3]. The Petition was filed pursuant to a stipulation for dismissal of

a Motion to Quash, which Intervenors filed on August 4, 2003 in a prior case arising from

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privileges. The issue to be determined is how the IRS can examine the vast amount of

materials on the CDs without infringing Intervenor's privileges, if any, in those materials.1

On August 11, 2005, the Court issued a sealed order requiring Petitioner, wit hin 20

days, to file a list of 25 names for Intervenors to use in searching the CDs. Int ervenors were

ordered t o file, within 30 days of receiving Petitioner's list a memorandum setting forth any

claims of privilege with respect to materials found in t he search. Once the memorandum

was filed, the Court would appoint a Special Master to review the CDs and issue a Report

and Recommendation regarding the claims of privilege. [Dkt. 48].

On August 29, 2005, Petitioner filed its list of 25 names. [Dkt. 49]. According to

Int ervenors, the search using those names "results in thousands of unnumbered and

unindexed electronic files." [Dkt. 56, p. 5]. To determine whether any of t hose files are

privileged, Intervenors claim t hey would have "to manually open literally thousands of

unindexed electronic files to be tediously pored over file-by-file, page-by-page, and wordby -word." [Dkt. 56, p. 5]. Intervenors claim, therefore, that preparing the required

memorandum setting forth its claims of privilege "would require a vast and impracticable

expendit ure of nonbillable time and resources for a small San Diego law firm." [Dkt. 56, p.

6]. Intervenors have not suggested alternative means by which the IRS can examine the

materials.

This case has been pending since June 8, 2004, almost two years. During that time,

Int ervenors have failed to offer any evidence substantiating their claims of privilege.2 See

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the privilege dispute between Intervenors and Petitioner. [Dkt. 56, at t ach. (Stipulation filed

in MC 03-0066-PHX-JAT)]. 

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United Stat es v. Abrahams, 905 F.2d 1276 (9th Cir. 1990) (party opposing disclosure to the

IRS has "burden of establishing that the information... satisfied all of the conditions

necessary for the privilege"). Intervenors could have substant iated their claims by, for

example, p roviding a random sample of materials taken from the CDs and demonstrating

that the selected materials were prot ect ed by a privilege. Neither have Intervenors

suggested a method by which the IRS could examine the mat erials on the CDs. Given that

the privilege claims are unsubstantiated and the IRS has authorit y t o examine the CDs, the

Court is considering entering an order allowing the IRS to itself examine the CDs, without

prejudice to Intervenors' asserting a claim of p rivilege as to any specific materials

contained on the CDs.

Accordingly,

IT IS ORDERED that Intervenors' Motion for Dismissal, Clarificat ion, and/or for

Further Procedures and Alternative Responsive Memorandum to Petitioner's Amended

Proposal for Production [dkt. 56] is DENIED.

IT IS FURTHER ORDERED that Petitioner's Motion to Request Status Conference

[dkt. 59] is GRANTED t o t he extent that a show cause hearing is set for Thursday, July 6,

2006 at 9:30 a.m. Intervenors to show cause why Petitioner should not be allowed to

examine the materials on the CDs, without prejudice to Intervenors asserting a claim of

privilege as to any specific materials contained on the CDs.

DATED this 26th day of May, 2006.

Case 2:04-cv-02108-EHC Document 61 Filed 05/30/06 Page 3 of 3