Dick DeGuerin: Releasing information could trigger investigations of his clients.
Dick DeGuerin: Releasing information could trigger investigations of his clients.

Payback Time?

Defense attorney Dick DeGuerin and client James "Smokie" Phillips celebrated the apparent end of a long ordeal in September 1997.

Phillips had been fired as a Harris County sheriff's deputy a year after a federal indictment accused him of protecting local traffickers of the Cali drug cartel. Prosecutors alleged that one of the deputy's friends led a smuggling ring that moved an estimated 600 kilos of cocaine through a paint-and-body business and bowling pro shop -- where the coke was concealed inside bowling ball carrying bags.

When jurors returned convictions in the high-profile case, U.S. District Judge Nancy Atlas drew the line at the verdict against the 15-year law enforcement veteran. DeGuerin's vigorous cross-examination of government witnesses -- particularly an IRS agent -- had brought out several key errors in prosecution testimony and shredded the case against Phillips. He'd been wrongly identified as one voice on a key tape recording, and was falsely said to have paid cash in transactions that turned out to have been handled by check. Hundreds of pages of financial documents submitted by the government had omitted the one page that proved another key element in the defense of Phillips.

Atlas threw out the Phillips verdict as no more than a case of guilt by association, and the feds declined to seek another trial.

The defense celebration was short-lived. The IRS didn't go after Phillips again, but a month later it had a new target: DeGuerin himself. An IRS audit ended with a demand for a half-million dollars from his firm.

DeGuerin had duly reported income and paid his taxes, but he was caught up in a continuing legal quandary facing the defense bar. The hefty IRS penalties came for his refusal to follow a tax law requiring lawyers to reveal the names of cash-paying clients, even when those disclosures could hurt the clients by triggering investigations or criminal charges.

In what may be a landmark case for the controversy, DeGuerin has sued the IRS to challenge the reporting law and its penalties.

"If a lawyer's required to give a list to the IRS of everybody who's paid him money and why, that destroys that freedom that a person would have to think, 'I can level with a lawyer and tell him everything and that's not going to come back and bite me on the ass,' " DeGuerin says. "This issue is important to all lawyers and citizens. It strikes at the very foundation of the Bill of Rights and the Constitution…I'm going to fight it all the way."

The IRS audit focused on a 16-year-old supposed weapon in the federal war on drugs: IRS Form 8300. Simply put, businesses have 15 days to file a Form 8300 to provide the government with information on any customer who makes a cash payment of more than $10,000 (or lesser payments totaling that amount over a year).

Unintentional omissions draw a penalty of only $50. But those who willfully withhold the information are subject to punishment of up to five years in prison and fines of $25,000 or forfeiture of the cash received, whichever is greater.

While the law has led to little more than bookkeeping hassles for most merchants, it runs counter to basic ethical safeguards for criminal defense attorneys. Lawyers, who typically require retainers up front, cite situations where clients would be jeopardized by having their identities and fee amounts revealed to the feds within weeks of hiring an attorney. For example, investigators who are faced with several potential suspects in a criminal probe could target the one with cash available to hire an attorney. Or they could see evidence of guilt merely in who seeks legal counsel.

The IRS had sought clients' IDs from DeGuerin in 1989-90, when he returned his forms with a standard explanation provided by the National Association of Criminal Defense Lawyers. That statement explains that citizens "enjoy the constitutional right to seek advice of counsel without the act of doing so having adverse consequences," and that disclosure would violate an attorney's ethical duties and the attorney-client privilege.

Nothing more was heard from the IRS until the audit came on the heels of the Phillips court victory in 1997. The agency concluded that DeGuerin and Lewis Dickson, his partner at the time, had filed 18 "incomplete" Form 8300s in 1995, and demanded about $560,000 from them.

DeGuerin and Dickson paid one $25,000 penalty and filed an appeal that was rejected by IRS group manager Melvin Doolan. His written explanation: "The Service disagrees with the claim of attorney-client privilege."

Courts disagree about the circumstances under which attorneys can legitimately shield cash-paying clients from government scrutiny.

Federal prosecutors tried to have DeGuerin's own brother, lawyer Mike DeGeurin, found in contempt in 1991 when he refused to tell a grand jury details of his fee arrangement for a client accused of drug trafficking. The Fifth Circuit Court of Appeals upheld the ruling by U.S. District Judge David Hittner in favor of DeGeurin, saying the government "would place chilling consequences on the very act of obtaining legal advice" in cases with special circumstances.

However, the Second Circuit Court of Appeals in 1997 ordered New York attorney Gerald Lefcourt to pay $25,000 in IRS penalties in a similar case. Ironically, Lefcourt at the time was president of the National Association of Criminal Defense Lawyers, which was waging a fierce fight against the IRS requirements. The U.S. Supreme Court opted not to hear Lefcourt's appeal, and other circuit courts have been split on the subject.

"There's a real debate here," says Sam Buffone, a noted Washington, D.C.-based appellate specialist who represents Dick DeGuerin. "I think this one is clearly going to be a test case."

The IRS, represented by Justice Department attorney Ralph Shilling of Dallas, takes a basic stance that DeGuerin is liable because he intentionally withheld Form 8300 information. And the IRS states that it has been reasonable, dropping five of the disputed 18 penalties, which reduces the total bill to about $400,000.

Shilling referred questions to a spokeswoman in Washington, who says the Justice Department's policy is to decline comment on litigation. Documents filed for District Judge Sim Lake reflect denials from the government that it retaliated against DeGuerin for the Phillips case.

Buffone disputes that, noting the tarnished image of the IRS in Houston and the fact that of the 38 witnesses for Phillips, nine of them -- including the defendant's mother and eight law enforcement officers -- were hit with IRS audits after the trial.

"The real story here is that the government has such incredible power in terms of its ability to arbitrarily go after people," Buffone says. He questions why the victorious DeGuerin and the head of the defense lawyers group would be singled out. "The government can use those enforcement powers against those who criticize them the most. We think it is really outrageous…"

Tax agents "could walk into any auto dealership or jewelry store in Houston and find out they've got bigger cash receipt problems than Dick DeGuerin does…," Buffone says. "You've got a bunch of people there who are using the Internal Revenue process for purposes it was never intended for."

DeGuerin says he sees deeper implications about handing over client information. "All in the world that will do is cause an investigation of those people -- I'm just not going to do it."


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