CHURCH OF SCIENTOLOGY OF CALIFORNIA, PETITIONER V. UNITED STATES OF
AMERICA, ET AL.
In The Supreme Court Of The United States
October Term, 1990
On Petition For A Writ Of Certiorari To The United States Court Of
Appeals For The Ninth Circuit
Brief For The United States In Opposition
TABLE OF CONTENTS
The opinion of the court of appeals (Pet. App. 2a-4a), following
remand from this Court in United States v. Zolin, 109 S. Ct. 2619
(1989), is reported at 905 F.2d 1344.
The judgment of the court of appeals was entered on June 20,
and a petition for rehearing was denied on September 19, 1990. Pet.
App. 1a. The jurisdiction of this Court is invoked under 28 U.S.C.
Whether, in accordance with this Court's judgment in United
v. Zolin, 109 S. Ct. 2619, 2632 (1989), remanding this case for
further proceedings consistent with its opinion, the court of appeals
correctly held that the tapes of two meetings of the Mission Corporate
Category Sortout (MCCS) project were within the scope of the
crime-fraud exception to the attorney-client privilege.
1. This case arises out of the efforts of the Criminal
Investigation Division of the Internal Revenue Service (IRS) to
investigate the tax returns of L. Ron Hubbard, the founder of the
Church of Scientology of California, and others for tax years
1979-1983. In the course of the investigation, the IRS sought access
to 49 documents that had been filed with the Clerk of the Los Angeles
County Superior Court in connection with a case entitled Church of
Scientology v. Armstrong, No. C420 153 (Feb. 11, 1985). In October
1984, the IRS served an administrative summons on the Clerk of the
Superior Court seeking a number of documents contained in the record
of the Armstrong case relating to the Church's activities. The
Clerk's office produced some of the documents, but it refused to
produce 13 documents that had been ordered sealed by the Superior
Court. The government then instituted this proceeding in the United
States District Court for the Central District of California to
enforce the summons. Pet. App. 18a. See United States v. Zolin, 109
S. Ct. 2619, 2623-2624 (1989).
Petitioner and Mary Sue Hubbard intervened to oppose production
the sealed documents. They contended, inter alia, that the IRS was
not seeking the summoned documents in good faith and objected on
grounds of lack of relevance and attorney-client privilege. In
particular, petitioner argued that sealed Exhibit 5-C, which contains
tape recordings (known as the MCCS tapes) of two meetings between
various attorneys and representatives of L. Ron Hubbard and the Church
of Scientology, was protected by the attorney-client privilege.
Petitioner also submitted a declaration from Lisa Britowich, one of
its representatives, and a declaration from James M.A. Murphy, a tax
lawyer who had represented Mr. Hubbard's legal interests in his
dealing with petitioner. Pet. 3; Pet. Appp. 18a; Zolin, 109 S. Ct.
The IRS argued, among other things, that the MCCS tapes fell
the crime-fraud exception to the attorney-client privilege. /1/ In
addition, the IRS submitted to the court sealed declarations by IRS
Special Agent Petersell that contained partial transcripts of the MCCS
tapes and stated that the excerpts and his discussions with former
Church employees had given him reason to believe that the meetings
were part of a criminal conspiracy to defraud the United States. Pet.
App. 29a-30a; Zolin, 109 S. Ct. at 2624. /2/
After oral argument and an evidentiary hearing, the district
ordered production of 5 of the 12 sealed documents. Turning to the
MCCS tapes, the district court ruled that petitioner had demonstrated
that they contained confidential attorney-client communications, that
the privilege had not been waived, and that the crime-fraud exception
to the attorney-client privilege did not apply. Pet. App. 33a-34a.
The government sought reconsideration on the ground that the court
should not have rejected the applicability of the crime-fraud
exception without an in-camera inspection of the complete tapes. The
district court denied the motion. Pet. App. 31a-32a.
2. A panel of the court of appeals affirmed the trial court's
ruling that the crime-fraud exception was not applicable to the MCCS
tapes. Citing United States v. Shewfelt, 455 F.2d 836, 840(9th Cir.),
cert. denied, 406 U.S. 944(1972), the panel explained that the
crime-fraud exception could be invoked to justify disclosure of
otherwise privileged communications only where the government
establishes "a prima facie case of fraud independently of the said
communications." Pet. App. 27a, quoting 455 F.2d at 840. Applying
that rule, the panel concluded that the independent evidence in this
case -- consisting of the special agent's declarations describing his
conversations with former Church employees, but not the partial
transcripts of the MCCS tapes themselves -- was not sufficient to make
out the requisite prima facie showing of intended illegality. Pet
App. 29a-30a. /3/
The court of appeals ordered the case to be reheard en banc.
Following supplemental briefing and oral argument, however, the en
banc court entered an order vacating as improvidently granted the
previous order granting rehearing en banc and reinstated the panel
decision with certain modifications. Pet. App. 7a-8a, 16a. Judge
Beezer, joined by two other judges, dissented from the en banc court's
order. He concluded that rehearing en banc had not been improvidently
granted and that the en banc court should overrule the independent
evidence requirement of Shewfelt. Pet. App. 8a-15a.
This Court granted certiorari to review whether the crime-fraud
exception to the attorney-client privilege must be established by the
"independent evidence" rule of Shewfelt (i.e., without reference to
the content of the contested communications themselves), or
alternatively, whether the applicability of that exception can be
resolved by an in camera inspection of the allegedly privileged
material. Zolin, 109 S. Ct. at 2623. /4/ In a unanimous opinion,
this Court rejected the Ninth Circuit's "independent evidence"
approach and held that in camera review may be used to determine
whether allegedly privileged attorney-client communications fall
within the crime-fraud exception. Ibid. In so ruling, this Court
held that before a district court may engage in in-camera review at
the request of the party opposing the privilege, that party "must
present evidence sufficient to support a reasonable belief that in
camera review may yield evidence that establishes the exception's
applicability." Id. at 2632. Finally, this Court held that "the
threshold showing to obtain in camera review may be met by using any
relevant evidence, lawfully obtained, that has not been adjudicated to
be privileged." Ibid. /5/ Because the court of appeals had employed a
"rigid independent-evidence requirement which categorically excluded
the partial transcripts and the tapes themselves from consideration,"
this Court vacated that judgment and remanded for further proceedings
consistent with its opinion. Ibid.
3. On remand, the court of appeals directed the parties to file
supplemental briefs on the crime-fraud issue. In accordance with this
Court's remand instructions in Zolin, 109 S. Ct. at 2632 n.13, the
court of appeals examined the partial transcripts, along with the
independent evidence already reviewed in its first opinion, and
concluded that there was "sufficient evidence of intended illegality
to establish that the tapes are within the crime-fraud exception."
Pet. App. 3a-4a. In so ruling, the court of appeals stated that the
"partial transcripts demonstrate that the purpose of the MCCS project
was to cover up past criminal wrong-doing, * * * (that the) MCCS
project involved the discussion and planning of future frauds against
the IRS in violation of 18 U.S.C. Section 371, * * * (and that the)
figures involved in MCCS admit on the tapes that they are attempting
to confuse and defraud the U.S. Government." Pet. App. 4a. The court
of appeals accordingly concluded that "(o)n remand the district court
should admit the MCCS tapes into evidence, subject to any objections
the parties might make at that time." Ibid. /6/
Petitioner contends that the court of appeals erred in ruling,
after remand from this Court in United States v. Zolin, 109 S. Ct.
2619 (1989), that the MCCS tapes fall within the scope of the
crime-fraud exception to the attorney-client privilege. The court of
appeals' decision, however, reflects a correct application of the
principles of law discussed in this Court's opinion in Zolin to the
particular facts of this case. Indeed, the court of appeals concluded
on remand (Pet. App. 4a) that the individuals involved in the MCCS
project "admit on the tapes that they are attempting to confuse and
defraud the U.S. Government." It is therefore apparent that the MCCS
tapes are well within the scope of the crime-fraud exception.
Moreover, the issue here is presented in the context of a unique
factual sitation (the MCCS project) that is not likely to be repeated.
Nor does the court of appeals' decision conflict with any decision of
this Court or of another court of appeals. Accordingly, further
review is not warranted.
1. Petitioner argues (Pet. 7, 9-10) that the court of appeals
applied an incorrect standard of review in determining that the
crime-fraud exception applies in this case. Thus, petitioner
maintains that the court of appeals improperly reviewed the district
court's crime-fraud findings under a de novo standard, rather than
under the more restrictive "abuse of discretion" or "clear
standards. Petitioner also urges that "this Court should explicitly
reject the de novo standard of review applied below." Id. at 15.
Petitioner's arguments are refuted by the express language of
Court's opinion in Zolin. Contrary to petitioner's contentions, this
Court's opinion in Zolin contemplated that the court of appeals would
determine certain issues on remand. In particular, this Court's
opinion states that the court of appeals should consider whether the
partial transcripts themselves were sufficient to establish the
crime-fraud exception. As the Court explained (109 S. Ct. at 2632
The Court of Appeals also will have the opportunity to review
the partial transcripts, and to determine whether, even without
in camera review of the (actual) tapes, the IRS presented
sufficient evidence to establish that the tapes are within the
Contrary to petitioner's assertions, this is exactly what the
appeals did on remand in "examin(ing) the transcripts and (in)
determin(ing) * * * (that) they, along with the independent evidence
already reviewed, demonstrate sufficient evidence of inteded
illegality to establish that the tapes are within the crime-fraud
exception." Pet. App. 3a-4a. /7/
Petitioner's further argument (Pet. 10-12) as to the proper
standard of appellate review to be applied to district court
determinations in crime-fraud cases is beside the point. This case
does not present such an issue. Rather,, as discussed, this Court's
opinion in Zolin contemplated that the court of appeals on remand
would make certain determinations in the first instance. The court of
appeals' decision below is fully in accord with this Court's opinion.
In these circumstances, this case is not a proper vehicle to resolve
the standard of review questions raised by petitioner. Indeed, the
decision below has little, if anything, to do with such matters. /8/
2. Petitioner next argues (Pet. 18) that the court of appeals
in determining that the crime-fraud exception to the attorney-client
privilege applied here because it allegedly reached its decision
without reviewing the evidence submitted by petitioner in the trial
court. The record as a whole, however, fails to support that
argument. Although this Court's opinion stated that the partial
transcripts alone might be sufficient to establish the crime-fraud
exception (109 S. Ct. at 2632 n.13), there is no basis for thinking
that the court of appeals on remand did not consider petitioner's
evidence for whatever value it might have.
Contrary to petitioner's assertion, the court of appeals directed
the parties on remand to file supplemental briefs on several
questions, including the question it decided here, i.e., whether,
without in-camera review of the tapes themselves, the government
presented sufficient evidence to establish whether the tapes were
within the scope of the crime-fraud exception. Petitioner's brief on
remand (at 10-16) contains an extensive discussion of the evidence
submitted by the government and the rebuttal evidence submitted by
petitioner on the crime-fraud issue. Petitioner does not deny that
the court of appeals had this brief before it in rendering its
decision on remand. Hence, the fact that the court of appeals did not
expressly discuss petitioner's evidence in its opinion falls far short
of demonstrating that the court did not consider petitioner's
arguments. Indeed, the declarations relied on by petitioner here
(Pet. 22-23) are general in nature and make no attempt whatsoever to
explain the specific discussions of crimes contained on the partial
transcripts. /9/ In these circumstances, it is apparent that the
result here would not have been any different had the court of appeals
chosen to discuss petitioner's evidence in its opinion on remand.
3. Finally, petitioner urges (Pet. 8, 21-28) that the
reflected on the MCCS tapes represent nothing more than candid and
frank discussions between attorneys and their clients on how to
restructure past business and corporate relationships to avoid
problems in the future. From this premise, petitioner urges (Pet.
7-8) that review by this Court is necessary so that attorneys and
clients will be free to discuss such matters without the fear that
their communications will be divulged to their adversaries. The
argument is misconceived.
The attorney-client privilege was not designed to protect
communcations made in furtherance of a fraud or crime. It is the
purpose of the crime-fraud exception to assure that the seal of
secrecy does not extend to communcations "'made for the purpose of
getting advice for the commission of a fraud' or crime." Zolin, 109 S.
Ct. at 2626, quoting O'Rourke v. Darbishire, (1920) A.C. 581, 604. In
the present case, the court of appeals carefully reviewed the
communcations reflected on the partial transcripts and concluded (Pet.
App. 4a) that "the purpose of the MCCS project was to cover up past
criminal wrong-doing" and that the "MCCS project involved the
discussion and planning of future frauds against the IRS, in violation
of 18 U.S.C. Section 371." See United States v. Carruth, 699 F.2d
1017, 1021 (9th Cir. 1983), cert. denied, 464 U.S. 1038 (1984). That
conclusion is clearly correct and no further review is warranted.
The petition for a writ of certiorari should be denied.
KENNETH W. STARR
SHIRLEY D. PETERSON
Assistant Attorney General
CHARLES E. BROOKHART
JOHN A. DUDECK, JR.
/1/ The attorney-client privilege does not protect communcations
made in furtherance of a crime or fraud. To invoke that exception,
there must be a prima facie showing that the client was engaged in or
planning criminal or fraudulent conduct and that the attorney's advice
was in furtherance of or closely related to the criminal or fraudulent
activity. See, e.g., Clark v. United States, 289 U.S. 1, 15-16
/2/ The affidavits alleged that the taped meetings, part of the
MCCS (Mission Corporate Category Sortout) project, "focused generally
on the intentional violation of the tax laws," specifically, "i) a
proposed scheme whereby the Church's cash transfers to Hubbard would
be disguised as payments for services rendered (allegedly to insulate
Hubbard from tax liability and to protect the Church of Scientology's
tax-exempt status), and ii) a proposed scheme whereby Hubbard would be
able to control royalty income * * * without that control being
traceable to him." Pet App. 29a-30a. In separate litigation, the Tax
Court has found that the Church of Scientology engaged in a
conspiracy, which lasted from 1969 until at least 1977, to defraud the
IRS and obstruct lawful IRS tax administration functions. See Church
of Scientology v. Commissioner, 83 T.C. 381, 429-443 (1984), aff'd,
823 F.2d 1310 (9th Cir. 1987), cert. denied, 486 U.S. 1015 (1988).
The Tax Court concluded that "criminal manipulation of the IRS to
maintain its tax exemption * * * was a crucial and purposeful element
of the (Church's) financial planning." 83 T.C. at 504.
/3/ On January 24, 1986, during the pendency of the appeal, L.
Hubbard died. The court of appeals, however, rejected petitioner's
suggestion of mootness because the investigation entails civil
elements that have survived Mr. Hubbard's death. See Pet. App. 19a
(adopting the reasoning stated in United States v. Author Service,
Inc., 804 F.2d 1520, 1522 n.1 (9th Cir. 1986)). See also Zolin, 109
S. Ct. at 2623 n.3 ("We are satisfied that a live controversy
/4/ This Court also granted certiorari on a wholly separate
viz, whether a district court may place restrictions on the IRS
regarding the disclosure of summoned information. Zolin, 109 S. Ct.
at 2622-2623. The district court's enforcement order had provided
that the documents produced pursuant to the summons "shall not be
delivered to any other government agency by the IRS unless criminal
tax prosecution is sought or an Order of Court is obtained." Pet App.
35a. The court of appeals upheld that restriction (Pet. App. 24a-25a)
and this Court affirmed its judgment on that issue by an equally
divided Court (Zolin, 109 S. Ct. at 2622-2623). The disclosure issue
is not now before the Court.
/5/ IRS Special Agent Petersell stated that the partial
of the MCCS tapes were obtained by the IRS from a confidential source
prior to the issuance of the summons and that that source was not a
party to the Armstrong litigation in the Calfornia Superior Court.
See Zolin, 109 S. Ct. at 2624 n.5. In view of the district court's
failure to make any finding to the contrary, this Court assumed for
purposes of its decision that the transcripts were legally obtained.
/6/ Petitioner did not seek a stay of the court of appeals'
pending the filing of a petition for a writ of certiorari. Following
the issuance of the mandate, the district court held a hearing and
ordered the MCCS tapes to be released to the government. Copies of
the tapes were then turned over to the IRS. Petitioner, however, has
filed a motion for reconsideration of the trial court's enforcement
order. The district court has scheduled a hearing on this matter for
February 25, 1991; it has also "stayed" its enforcement order pending
that hearing. Because this is an IRS summons enforcement proceeding,
the government has sought only to obtain access to the MCCS tapes for
purposes of its tax investigation, and not to admit them into
evidence. Thus, as the district court properly observed on remand,
"there is no point in receiving the tapes 'into evidence' since the
Court of Appeals has made the only relevant finding of fact -- that
is, that the tapes demonstrate that the tapes come under the
crime-fraud exception to the attorney-client privilege rule, and
should, therefore be subject to the IRS summons." Order of Jan. 17,
1991, at 1-2.
/7/ In a similar vein, petitioner's reliance (Pet. 20 n.12) on
crime-fraud ruling in Church of Scientology v. Armstrong, No. C420 153
(Cal. Super. County Ct. Feb. 11, 1985), is misplaced. That case was
decided under California law and not under the federal crime-fraud
standards set forth in this Court's decision in Zolin.
/8/ At all events, even under a deferential standard of review,
district court plainly erred in concluding that the evidence failed to
establish the crime-fraud exception. Here, the trial judge stated at
the April 30, 1985, hearing that he failed to see how retroactively
reversing a transaction for tax purposes "necessarily show(ed) a fraud
or a crime." Tr. 79. An individual violates 18 U.S.C. 371, however,
by conspring to defraud the United States through disruption of the
IRS's lawful functions in assessing and collecting federal income
taxes. Thus, contrary to the district court's conclusion below, a
conspiracy against the IRS plainly can encompass a transaction where
the conspirators retroactively generate false documents to mislead the
IRS about the true nature of a transaction. See United States v.
Carruth, 699 F.2d 1017, 1021 (9th Cir. 1983), cert. denied, 464 U.S.
1038 (1984) (tax shelter promoters convicted under 18 U.S.C. 371 for
selling tax shelters based on nonexistent cattle breeding
transactions). See also Pet. App. 4a.
/9/ For example, the Declaration of MCCS staff member Lisa
Britowich merely alleges in general terms that the MCCS meetings "were
definitely considered attorney-client conferences which were fully
intended to be confidential and privileged." Supp. E.R. at 3.
Similarly, the Declaration of James M.A. Murphy, an attorney for Mr.
Hubbard, asserts generally that he gave legal advice on "whether
certain things had been handled properly in the past and how they
should be handled in the future" and that there was "never any
question * * * (whether) we were being consulted for criminal or
fraudulent purposes." Id. at 8. However, neither of these
declarations speaks specifically to the IRS special agent's
allegations that the MCCS project focused on the intentional violation
of the tax laws, specifically on a proposed scheme whereby the
Church's cash transfers to Hubbard would be disguised as payments for
services rendered and a proposed scheme whereby Hubbard would be able
to control royalt income without that control being traceable to him.
See Pet. App. 29a-30a and note 2, supra.
/10/ Any remaining possibility that the panel might have
petitioner's evidentiary arguments is eliminated by the fact that
petitioner repeated those arguments in its petition for rehearing with
suggestion for rehearing en banc.
/11/ Petitioner makes a number of factual arguments (Pet. 23-26)
support of its contention that the MCCS tapes show no planning or
furtherance of a future crime or fraud. We note, however, that the
partial transcripts from which petitioner quotes were filed under a
sealing order in the district court. We do not think it appropriate
to discuss such confidential matters here. If, however, the Court
wishes the government to respond to petitioner's assertions, we will
do so under seal. At all events, the excerpts quoted by petitioner
distort the actual statements made by the parties on the sealed
transcripts. Indeed, as mentioned, the court of appeals found that
the individuals involved in the MCCS project "admit on the tapes that
they are attempting to confuse and defraud the U.S. Government." Pet.
App. 4a. Petitioner's self-serving speculation and conjecture on this
matter do not raise any issue for this Court to review.