Leslie Book

About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

District Court Finds that Sanmina Waived Privilege Claims For Memos That Tax Counsel Prepared

Earlier this year in Ninth Circuit Defers on Important Privilege Waiver Case I summarized US v Sanmina Corp, a Ninth Circuit opinion that remanded a case to the district court to consider whether by disclosing the existence of purportedly protected documents the taxpayer waived various privilege claims it asserted with respect to memos that its in house tax counsel prepared. Earlier this month a federal district court in California issued an order holding that the taxpayer waived its privilege claims. The issue is important, especially for corporate taxpayers with layers of advisors touching different parts of a transaction or position taken on a tax return.

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As background, and as I repeat from my January post, the case arose out of Sanmina’s 2009 tax return, when it claimed about a half billion dollars in a worthless stock deduction in one of its subsidiaries. The purportedly worthless sub had two related party receivables with an approximate $113 million book value. Notwithstanding the healthy book value, Sanmina claimed that the FMV of the receivables was zilch.

IRS examined Sanmina’s tax return and sent an information document request for documents that supported the deduction. Sanmina gave to IRS a valuation report from DLA Piper, its outside counsel. That report (not surprisingly) supported the taxpayer’s view that the receivables had no fair market value. Included in the report was a footnote that referenced internal memos that Sanmina’s tax counsel had prepared, one in 06 and the other in 09.

IRS asked for those two memos; Sanmina resisted, leading to IRS to summons them and bring an enforcement action when Sanmina did not comply. In 2015, the district court held that both memos were protected by attorney client and work product privilege and that the “mere mention” of the memos in the DLA Piper valuation report did not amount to the party’s waiving the privilege.

The Ninth Circuit reversed and remanded the matter back to the district court, and specifically asked that the district court judge examine the documents in camera so it could provide a “more informed analysis” of the waiver claims.

[As  an interesting aside, the case has been festering for almost four years; the magistrate judge who originally wrote the order that the government appealed, Paul Grewal, has moved on to Facebook where he is Deputy General Counsel.]

After some additional back and forth with the Ninth Circuit about the scope of the remand, the district court has now issued its opinion. In brief fashion, the district court agreed with the taxpayer that the documents were subject to both attorney client privilege and work product protection, but it found that the privileges were waived in light of the DLA Piper valuation report for two main reasons:

  • When Sanmina gave the memos to DLA Piper it did so not with the hope of getting legal advice but for the purpose of getting a valuation for the stock of one of its subs; and
  • In any event when it gave the DLA Piper report to IRS it waived privilege for any of the materials that Piper used to reach its valuation, as the report explicitly stated that it based its conclusions (at least in part) on the two memoranda that were at issue.

Sanmina had attempted to minimize the DLA Paper’s report reliance on the memos, pointing to a Ninth Circuit case Tennenbaum v Deloitte and Touche that suggested that disclosing the existence of the memos was not tantamount to disclosing the contents themselves. The opinion’s framing of DLA Piper as relying on the memos (aided by the in camera review the Ninth Circuit suggested) led the court to reject that argument:

[In Tennebaum], our court of appeals held that a promise to waive privilege is not, in itself, a waiver, rather, it is disclosure that triggers waiver. Id. at 341. The court noted that waiver is rooted in notions of “fundamental fairness” and that its principal purpose is “to protect against the unfairness that would result from a privilege holder selectively disclosing privileged communications to an adversary, revealing those that support the cause while claiming shelter of the privilege to avoid disclosing those that are less favorable.” Id. at 340.

Here, Sanmina wishes to do just that. Sanmina relies on DLA Piper’s determination supporting a $503 million stock deduction, but it avoids disclosing the very foundational analysis that informed its conclusion. DLA Piper acknowledged that it based its conclusions on the memoranda in question. Thus, it would be fundamentally unfair for Sanmina to disclose the valuation report while withholding its foundation.

Conclusion

While the taxpayer may appeal this order, it serves as a cautionary tale for taxpayers who rely on both in house tax counsel and outside advisors. Valuation issues often are at the heart of many disputes with the IRS (and other parties) but when a client leans on outside advice for valuation and those advisors disclose their use of documents prepared in house it creates a road map for a waiver argument for the documents that would otherwise be protected from disclosure.

Altera Oral Argument Live Stream Available Now

We have covered the Altera opinion extensively. The oral argument in the Ninth Circuit is being live streamed here

The argument started today at 5PM EDT. On my stream it can be found at about 7 minutes and 52 seconds in.

UPDATE: The above video link is no longer active; a link to a recording of the video is here and the audio alone is here

Professor Kwoka Sues IRS and Explains the Path of FOIA in Two Recent Important Law Review Articles

Kwoka v IRS is a FOIA case from a federal district court in the District of Columbia. The case involves Professor Margaret Kwoka, one of the leading scholars of government secrecy in general and FOIA in particular. In the lawsuit, Professor Kowka is seeking records that categorize FOIA requests IRS received in 2015, including the names and organizational affiliations of third-party requesters and the organizational affiliation of first-party requesters. The IRS provided some of the information she sought, but not all of it.

In this post I will briefly describe Professor Kwoka’s research project and turn to the particular suit that generated last month’s opinion.

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Professor Kwoka teaches at the University of Denver Strum School of Law. Her recent research focuses on FOIA and how it has strayed from its main purpose of allowing third party requesters (like the press and non profits) holding government accountable.  A 2016 article in the Duke Law Journal, FOIA, Inc.  chronicles the growth at some agencies of commercial FOIA requests, that is requests that are primarily motivated by commercial interests of the requesters. A 2018 article in the Yale Law Journal, First-Person FOIA, highlights the rapid growth in FOIA cases from people or their lawyers or other representatives seeking information about their particular case, often to use in other litigation or administrative actions. It is these FOIA cases that are made by so called first person requesters.

The First-Person FOIA article has particular resonance for people interested in tax administration, as practitioners and taxpayers frequently turn to FOIA to learn more about their case as they challenge an IRS determination. The article looks at agencies like the Department of Veterans Affairs and Social Security Administration and Professor Kwoka demonstrates that a “significant amount of first-person FOIA requesting serves as a means for private individuals to arm themselves when they are subject to governmental enforcement actions or seek to make their best case for a government benefit.”

First-Person FOIA makes the case that while FOIA provides a vehicle for people to get needed information about their cases it has significant shortcomings when used for that purpose. The article does not minimize the need for access to information; she suggests solutions for individual access outside of FOIA, including expanding individuals’ online access to information and limited administrative discovery. Yet Kwoka argues that while “these requests represent legitimate efforts by private individuals to obtain information about themselves, they serve largely private, not public interests.” That, as Kwoka notes, has led some observers to question FOIA’s value and perhaps will have the unintended effect of reducing its role as helping the public keep government accountable, a goal that seems as important today as it did in the post-Watergate era when sunshine laws like FOIA took root as one way to keep government accountable.

That takes us to the lawsuit that Professor Kwoka filed to get more information so she could properly catalogue the FOIA requests IRS received in FY 2015. In her study Kwoka sought information about requesters from 22 different agencies; only six gave her the information she needed; three provided the information in publicly available form on their websites. IRS was one of seven agencies that provided some information but due to withholdings or redactions Professor Kwoka could not use it in her study. That is what led to her suing the IRS to get more specific information about the FOIA requesters and their affiliations. In particular in her FOIA request, she sought “[t]he name of the requester for any third-party request (for first-party requests I accept this will be redacted)” and “[t]he organizational affiliation of the requester, if there is one.”

In the suit IRS relied on Exemptions 3 and 6 to withhold the names of the third party requesters and the organizational affiliations of the first and third party requesters. Exemption 3 essentially requires IRS to withhold information that is exempted from disclosure under another statute—the biggie in tax cases is the general restriction on release of taxpayer information in Section 6103. Exemption 6 allows an agency to withhold “personnel and medical files and similar files the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.”

With respect to its Exemption 3 defense, IRS argued that need not reveal the names or organizational affiliations of FOIA requesters because doing so could “reveal protected tax information including, but not limited to[,] the identity of a taxpayer.”   As part of its defense IRS pointed to the online log of FOIA requests that it maintains (see for example its FY 2015 log).  The IRS argued that if Kwoka obtained the names and organizational affiliation of third-party requesters, she could cross-reference that information with the online log and deduce the identities of the taxpayers.

The opinion pushed back on this, noting firstly that the topics the log lists are vague and more importantly  the “IRS’s conclusion does not follow from its premises.”

Even armed with the information she requests and the publicly accessible FOIA log, in most cases Kwoka could not know with any certainty the identity of particular taxpayers. Neither the log nor the information Kwoka requests generally reveals the target of a FOIA request—i.e., the person whose tax records the requester is seeking. Thus, for third-party requests in which a requester submits a request for someone else’s information, knowing the name and organizational affiliation of the requester (from her own FOIA request) in conjunction with the topic of the request (from the publicly accessible log) would not reveal the identity of the target of the request.

The requests for the organizational affiliations of the first-party requesters was a somewhat more nuanced issue, but there too the court sided with Kowka over the IRS argument that exemption 3 allowed a blanket excuse to withhold on all of the requested information:

In most cases, the same is true for first-party requesters who request their own tax return information. Kwoka concedes that the IRS can redact the names of first-party requesters, see FOIA Request; she asks only for their organizational affiliations. But because most organizations have many affiliated individuals, knowing a requester’s organizational affiliation—even in conjunction with the topic of the request—would not ordinarily reveal the identity of the requester (and thus the identity of the taxpayer). There may be a few exceptions where, for example, a particular organization has only one affiliate, or where a topic listed in the publicly accessible FOIA log is so specific (in contrast to the majority of the entries) that it would, in conjunction with the requester’s organizational affiliation, effectively reveal the first-party requester’s identity. See Def.’s Reply at 8 (arguing that “a FOIA request made by the owner of an individually held or closely held company, in concert with the subject of the request, would be enough to reveal the identity of the individual making the request”). Kwoka also concedes that “[w]here an individual requests tax records about the organization that is identical to the individual’s organizational affiliation as recorded in the IRS’s records, … the organizational affiliation would be subject to redaction.”

The opinion moved on to Exemption 6, which employs a balancing test and allows agencies to withhold certain information when disclosing it would result in a “clearly unwarranted invasion of personal privacy.”  IRS argued that it could rely on Exemption 6 for a blanket witthhoding of the requested information For reasons similar to its rejection of Exemption 3, the court disagreed with the IRS:

For many of the same reasons the IRS is not entitled to a blanket invocation of exemption 3, it is not entitled to one under exemption 6. The IRS argues that “third-party FOIA requesters in this case [would] be subject to harassment, stigma, retaliation, or embarrassment if their identities were revealed” and that “[t]he average citizen has ample reason not to want the world to know that someone else has used the FOIA to obtain information regarding his federal tax liabilities, or his tax examination status.” But, as explained above, in most cases, revealing the organizational affiliations of first-party requesters and the names and organizational affiliations of third-party requesters would not reveal the targetof the request. Moreover, FOIA requesters “freely and voluntarily address[] their inquiries to the IRS, without a hint of expectation that the nature and origin of their correspondence w[ill] be kept confidential.” Stauss v. IRS, 516 F. Supp. 1218, 1223 [48 AFTR 2d 81-5617] (D.D.C. 1981)…

Conclusion

The case continues, as the court concluded that the IRS could not rely on Exemptions 3 and 6 to provide a categorical denial of Professor Kwoka’s request though it may in specific instances rely on those exemptions as a basis for redacting or withholding information.

Kudos to Professor Kwoka for her important research and her efforts to uncover more information about the nature of FOIA requests across the government.

OPR Imposes Monetary Penalties For Enrolled Agent Who Misled Potential Clients

I am catching up on developments over the past few months that slipped through the cracks as Stephen, Keith and I gear up for the next update for the Saltzman & Book IRS Practice & Procedure treatise. One item from this summer involves an Office of Professional Responsibility press release describing a settlement that included monetary penalties on a practitioner for misconduct relating to false claims in connection with tax services.

Circular 230 prohibits tax practitioners from using communication that contains false, fraudulent, coercive, misleading or deceptive statements. It also prohibits practitioners from using false or misleading solicitations to procure business. The release discusses how the practitioner misled potential clients in an effort to attract business.

In this case, the practitioner created false advertising designed to mislead potential clients to believe the firm successfully helped thousands of taxpayers and employed multiple attorneys, enrolled agents, CPAs and former IRS employees. In fact, the practitioner is an enrolled agent and the only Circular 230 practitioner at the firm.

The false advertising was also intended to mislead potential clients to believe that hiring a private firm was virtually their only hope of resolving their tax issues due to alleged widespread misconduct by IRS employees. The advertising also falsely inflated the chances of tax relief for clients by inflating the percentage of clients receiving offers in compromise (OIC) and claiming none of these OICs were above a small percentage of outstanding tax.

The settlement agreement with the practitioner included five years of probation and a 12-month suspension of practice before the IRS if the probation is violated. The release notes that the undisclosed amount of the monetary penalty was based on a percentage of the gross income from the misconduct.

OPR plays an important part in ensuring the integrity of tax practitioners. One of the most interesting  articles that I read in the past year or so was former Director of OPR Karen Hawkins’  2017 Griswold lecture published in Volume 70 of the Tax Lawyer (which Keith now edits in his role as Vice Chair-Publications at the ABA Tax Section) where she forcefully discussed the problems facing the Office Of Professional Responsibility and the many holes in the current version of Circular 230. For those interested in tax administration, I recommend a careful read.

One of the points Ms. Hawkins raised in the Griswold lecture was that starting in about 2014 the OPR no longer was releasing ALJ and Appellate Authority disciplinary opinions. As the article explains this change arose due to the 2014 discovery that earlier legal advice erroneously concluded that OPR could release those opinions without violating Section 6103. The article makes the point that this change has contributed to making the OPR less visible.

The press release describing the settlement in this matter included that the sanctioned practitioner allowed for the release of certain information relating to the violation; in the absence of a settlement it appears that the disciplinary opinions are not accessible to the public, an outcome that is far from ideal.

One other point in the settlement is worth emphasizing. The imposition of monetary penalties in OPR proceedings is relatively uncommon; in the 2017 Griswold lecture Ms. Hawkins notes that was invoked only once since 2004 legislation authorizing it.  I am not sure if the 2018 release is indicative of a change in policy that is contributing to OPR imposing monetary sanctions. The OPR ability to impose monetary penalties is somewhat controversial; Ms. Hawkins makes the case that it has an unwanted effect of further intertwining Circular 230 with the Internal Revenue Code civil penalty regime—one of the many problems she identifies in the lecture.

 

IRS Revenue Agent Entitled to Relief from Joint Liability

A recent summary opinion in Tax Court highlights some of the procedural twists that can turn in cases where an ex seeks to challenge a former spouse’s entitlement to relief from joint and several liability.  The case has some added interest because the spouse seeking and getting relief is an IRS revenue agent.

As guest poster Professor Scott Schumacher discussed a few years ago, some times tax cases turn into a “he said she said” dispute. In the tax context, he said/she usually involve cases with disputes over credits or deductions determined with reference to attachment to children and in innocent spouse cases when former spouses disagree about the other’s entitlement to relief from joint and several liability.

Merlo v Comm’r is a recent Tax Court case that involves the latter scenario.  In this case, the ex-husband (Mr. Merlo) is an IRS revenue agent. He prepared the return, and his former spouse (Ms. Nelson) claimed that he had knowledge of $4,629 of disability income she received and they omitted from their 2011 joint return, which was filed on extension in October 2012, when the soon to be divorced Merlos were separated.

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The joint return omitted the disability income that had been reported on a W-2. IRS picked up the omission, and issued a stat notice. Mr. Merlo petitioned Tax Court, asserting Section 6015(c) relief as an affirmative defense to the deficiency based on his lack of knowledge of Ms. Nelson’s receipt of the disability income. IRS granted him relief from the liability. Ms. Nelson joined the Tax Court case as an intervenor, and she argued that Mr. Merlo should not be entitled to relief because he had knowledge of her omitted disability income and that he intentionally left it off the return to cause her problems with the IRS.

This involves Section 6015(c), which generally allows a separated or divorced spouse to elect to limit the liability for any deficiency assessed with respect to a joint return to the portion of the deficiency that is properly allocable to the electing individual under Section 6015(d).

Section 6015(c)(3)(C) denies relief to the electing spouse if it is shown that he or she “had actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof) which is not allocable to such individual under subsection (d)”

One of the challenges for the IRS in these cases is that the burden on showing actual knowledge rests with the IRS, and the level of proof the Commissioner needs to establish is a preponderance of the evidence. Here, the Commissioner conceded the issue and agreed that Mr. Merlo did not have actual knowledge of the existence of the disability income.

So how does the court address the issue of burden of proof when the IRS agrees that one of the exes is entitled to relief but the other does not?  The opinion notes that the “[c]ourt has resolved this problem by determining whether actual knowledge has been demonstrated by a preponderance of the evidence as presented by all three parties.”

Typically I suspect that Counsel attorneys let the ex spouses duke it out at trial. That is what seemed to happen in this case, with Ms. Nelson testifying that her ex knew about the omitted disability income and Mr. Merlo claiming that the first time he heard about it was when the IRS sent correspondence after they filed the return.

This required the court to dig into the circumstances of the joint filing. As is not unusual with freshly separated and a soon to be divorced couple the communications between the two were not ideal—the opinion notes that Ms. Nelson moved out of the marital residence in May of 2012 and they “seldom spoke, lived in separate households, and communicated primarily through their divorce counsel.”

The 2011 return was on extension and as the October filing deadline neared Mr. Merlo presented evidence that demonstrated to the court that he did not know about the disability income that was left off the return, including a series of emails and a text message and the existence of separate bank accounts. The messages include an exchange where Ms. Nelson proposed to correct the return after a draft return Mr. Merlo prepared included as a gross amount of Ms. Nelson’s income the disability income and about $1,182 in wages from another source, Ethan Allen:

Early on the morning of October 15, 2012, the due date for filing the 2011 return, Mr. Merlo emailed Ms. Nelson the draft Federal return and draft Michigan return for her to review for accuracy. Ms. Nelson responded by text, informing Mr. Merlo that he had misstated her wages from Ethan Allen on the draft returns as equal to $5,811 rather than $1,182, the correct figure. Mr. Merlo, now believing the draft returns to be incorrect, revised them by reducing Ms. Nelson’s wage income from $5,811 to $1,182, a $4,629 difference. Mr. Merlo thereafter emailed Ms. Nelson a revised draft Form 1040 worksheet for her to review at 7:20 a.m. The worksheet listed the Merlos’ wage income as $108,045, consisting of $106,863 in wages from the Department of the Treasury and $1,182 in wages from Ethan Allen.

The opinion noted that a text message from Ms. Nelson specifically identified the wage income she had received from Ethan Allen and made no mention of any disability income, resulting in Mr. Merlo changing the return to reflect only Ms. Nelson’s $1,182 in wages and not the taxable disability income.

Ms. Nelson also testified that her ex had a copy of the W2 that showed the disability income; that would have meant that he had the knowledge necessary to defeat the relief he was seeking.

The opinion then provides more context as to why the court sided with Mr. Merlo’s version of the facts:

Ms. Nelson testified that when she moved out of the marital residence she left copies of all of her Forms W-2, including those from Ethan Allen and Prudential [Prudential is the source of the disability payments], in a tax file maintained there by Mr. Merlo, retaining the originals for herself. Her testimony is uncorroborated, and it is contradicted by Mr. Merlo’s contemporaneous email of October 12, 2012, in which he stated that he did not have a Form W-2 from her. Moreover, we are not persuaded that Mr. Merlo, an IRS revenue agent, would have prepared worksheets that listed Ms. Nelson’s Ethan Allen wages as $5,811 if he in fact had copies of her Forms W-2 showing that her wage income, while in total equal to $5,811, actually consisted of $1,182 from Ethan Allen and $4,629 from Prudential. Finally, we note that Ms. Nelson, having been provided Mr. Merlo’s worksheet accompanying the draft Federal return that made no mention of the Prudential income, had ample opportunity to alert Mr. Merlo to the omission but failed to do so, even though by her own admission she had the originals of the Forms W-2 that had been issued to her. Her silence tended to confirm Mr. Merlo’s belief that he had merely overstated her Ethan Allen wages in the worksheet and had not omitted income from another source.

Conclusion

Spousal relief and intervenor cases in particular are often tough cases. Context matters greatly. In this case, Mr. Merlo’s work as a revenue agent contributed to the court’s conclusion that it found his version of the facts more likely to be true, as the opinion noted that given his “familiarity with IRS procedures, it is not reasonable to believe he deliberately failed to report Form W-2 income for which he had actual knowledge, as he would have been aware that he was creating the same problems with the IRS for himself as Ms. Nelson speculates he intended to cause for her.”

 

 

District Court Allows IRS to Use Glomar Defense In FOIA Suit Seeking Whistleblower Info

This summer I discussed Mongomery v IRS, a FOIA case that was the latest in a long saga of litigation between the Montgomery family and the IRS.  This past month the district court returned to the FOIA dispute and partially resolved the case in favor of the government. In so doing it considered a so-called Glomar defense, when the government seeks to neither confirm nor deny the existence of the records that are the subject of a FOIA request.

As a refresher, the family’s partnership transactions attracted the attention of the IRS, leading to court opinions that upheld the determination that the partnerships were shams and that the IRS properly issued final partnership administrative adjustments, but also a separate refund suit that the IRS ultimately settled, leading to an almost $500,000 refund.  The Montgomerys filed a FOIA claim because they wanted to unearth how the IRS came to scrutinize the transacations, with a particular interest in finding out if there was an informant that spilled some of the partnership beans.

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To that end, they filed FOIA requests for two distinct categories of records: 1) various forms the IRS uses in connection with whistleblower cases and 2) lists, documents and correspondence with third parties concerning the partnership investments or the Montgomerys’ personal tax liability.

This past summer the court denied a summary judgment motion that the IRS filed that claimed that a settlement agreement the IRS and Montgomerys entered into prevented a FOIA suit. That opinion cleared the way for a decision on the merits of the FOIA suit, which takes us up to the district court opinion issued this past month and this post.

The main issue in the case involves the FOIA claims that sought the whistleblower information. IRS took what is known as a Glomar response, which is neither to deny nor confirm the existence of the records. This is a tactic the government has used in other types of cases but to my knowledge not in tax cases. The so-called Glomar response originates from the Cold War and the government’s desire to keep secret its efforts to uncover a sunken Soviet submarine:

In certain circumstances, […] an agency may refuse to confirm or deny that it has relevant records. This “Glomar response” derives from a ship, the Hughes Glomar Explorer, about which the CIA refused to confirm or deny the existence of records. See Phillippi v. CIA, 546 F.2d 1009, 1011 (D.C. Cir. 1976). Such responses are appropriate only when “`confirming or denying the existence of records would’ itself reveal protected information.” Bartko v. DOJ, 62 F. Supp. 3d 134, 141 (D.D.C. 2014) (quoting Nation Magazine v. U.S. Customs Serv., 71 F.3d 885, 893 (D.C. Cir. 1995)).

Despite Glomar having pedigree as a judicial exception to FOIA, the opinion notes that when the government raises a Glomar defense, it still needs to tether the defense to one of the nine statutory FOIA exemptions. In this case, the government asserted Exemption 7D:

Exemption 7(D) excludes from disclosure “records or information compiled for law enforcement purposes, but only to the extent that the production of such law enforcement records or information could reasonably be expected to disclose the identity of a confidential source … [who] furnished information on a confidential basis.” 5 U.S.C § 552(b)(7)(D).

There was no disagreement over whether the records (if they existed) were filed for law enforcement purposes, which is the threshold requirement under 7D. Instead, the opinion turned on whether there was an expectation that the source (again if it or they existed) who spoke to the government expected the information to remain confidential. Yet as my parenthetical notes that question presupposes that an informant exists:

The difficulty here is that if the Government describes its interactions with a specific source, it would thereby undercut the protection that Glomar provides. In other words, because a Glomar response is meant to obscure the very existence of the source (or attempted source), the Government cannot offer any public statement concerning the confidentiality assurances given to that source (or a statement that no source exists). As the Service persuasively argues, even though the identity of an informant may not be at risk in every case, to protect whistleblowers in cases where disclosure of the existence of records could lead to their identification, it must assert Glomar whenever an informant is involved.

The opinion nicely frames how the court must consider not only the content of the documents but the possible harm arising from revealing the very existence of the documents:

For example, in a situation where there is only one suspected whistleblower, the Service’s affirmative or negative response to a request for certain forms would either confirm or refute the suspicion. Either the documents exist, in which case the identity of the informant could be apparent even if the IRS does not release anything, or they do not. Even though the non-existence of records does not implicate a harm cognizable under Exemption 7(D), the IRS can only protect against the damage that confirming such records would engender by asserting Glomar in all situations.

This suggests a robust role for asserting Glomar in the context of FOIA requests seeking information relating to informants. Yet the opinion notes that Glomar is not a blank check for the IRS in these cases, as the government must offer a public explanation why the exemption applies and then provide for in camera review to allow a district court judge to confirm the agency’s conclusions before it will allow Glomar to swat away the FOIA claims.

The government did that in this case, relying on IRS employee affidavits which attested to its policy of asserting Glomar consistently “when a requester seeks records pertaining to a confidential informant in order to protect the identity of whistleblowers” to avoid giving requesters sufficient information “to determine when [it] is protecting records and when there are no records to protect.”

During in camera review, the government was able to establish that either no records existed, or if they did exist, the informant had an express or implied expectation of privacy when dealing with the IRS. As such, the court granted the government’s summary judgment motion as relating to the FOIA request for forms the IRS uses in connection with whistleblower cases.

Conclusion

This is a significant victory for the IRS and paves the way for future Glomar responses in FOIA cases where someone is seeking information to determine if there was an informant that led to an IRS investigation.

It is not, however, the end of the line. Montgomery has also sought information pertaining to correspondence with other third parties concerning the partnership investments or their personal tax liability. That part of the FOIA dispute continues. Stay tuned for at least one more chapter in this case.

Who Owns A Refund? Consolidated Returns and Bankruptcy Add Wrinkles to Refund Dispute

In re United Western Bancorp is an opinion out of the Tenth Circuit Court of Appeals from earlier this year that raises a procedural issue I had not considered: in the consolidated return context who is the true owner of a refund when a refund is wholly attributable to a subsidiary’s net operating losses? Normally, that is not an issue that generates disputes, because affiliated companies have overlapping interests in the refund. In re United Western Bancorp presents facts where this became an issue, because the parent company, UWBI, a bank holding company, filed a petition for Chapter 11 bankruptcy after the Office of Thrift Supervision closed the United Western Bank, the subsidiary/bank of UWBI, and appointed the FDIC as receiver.

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In 2011, after the FDIC came in as receiver, but before the bankruptcy, UWBI filed a refund claim of about $5 million for 2008 due to a carryback of the $35 million that the subsidiary/bank lost in 2010. The IRS had not acted on the refund claim when the parent sought bankruptcy protection.  The FDIC, as receiver for the insolvent subsidiary bank, filed a proof of claim in the UWBI’s bankruptcy case, alleging in main part that the refund stemmed exclusively from the subsidiary bank carrybacks and that it was the true owner of the refund. The IRS granted the refund claim but representatives from UWBI and the bank/subsidiary fought over who should be deemed to own the refund.

The trustee in UWBI’s bankruptcy case initiated an adversary proceeding with the bankruptcy court, which agreed with the trustee and held that the refund was part of UWBI’s bankruptcy estate. The district court reversed and found that the subsidiary bank was the rightful owner of the refund, and the trustee appealed to the Tenth Circuit.

The dispute came down to the issue of whether the refund was part of the parent’s bankruptcy estate under 11 USC § 541(a)(1) which includes “all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case.” 11 USC § 541(d), however carves out from the debtor’s estate property which the debtor only has legal title and not an equitable interest.

The Tenth Circuit in resolving the dispute first looked to the consolidated return rules, an area that I have not had the pleasure of studying since my days in big firm practice in New York. The opinion notes that the consolidated return statute and regs  are silent with respect to legal and equitable ownership of refunds. The opinion notes that federal common law presents a framework for resolving the dispute, looking to the Tenth Circuit in Barnes v Harris, 783 F.3d 1185 (10th Cir. 2015), which itself relied on a 1973 Ninth Circuit opinion In re Bob Richards Plymouth-Chrysler. Barnes v Harris held that “a tax refund due from a joint return generally belongs to the company responsible for the losses that form the basis of the refund.” The Ninth Circuit, in Bob Richards, which also involved a dispute as to the ownership of a refund arising from a bankruptcy within a consolidated group, came up with what the Tenth Circuit refers to as the “Bob Richards Rule”:

Absent any differing agreement we feel that a tax refund resulting solely from offsetting the losses of one member of a consolidated filing group against the income of that same member in a prior or subsequent year should inure to the benefit of that member. Allowing the parent to keep any refunds arising solely from a subsidiary’s losses simply because the parent and subsidiary chose a procedural device to facilitate their income tax reporting unjustly enriches the parent.

Complicating the analysis in In Re United Western Bancorp was that the parent and subsidiary corporation had in fact entered into a tax allocation agreement. The opinion takes a deep dive into the tax allocation agreement that the bank and parent had entered into, and it found that the agreement was ambiguous as to whether it intended to create an agency relationship between the parent holding company and sub/bank, which would in turn vest legal and equitable ownership in refund to the sub/bank, or something akin to a debtor-creditor relationship, which would leave the subsidiary bank only with an unsecured claim against the parent in the amount of the refund that the parent received.

The deep dive that the opinion reveals that the tax allocation agreement is not clear; some parts suggest that it reflects an agency/principal relationship between the parent and sub and other parts point more to a debtor/creditor relationship:

On the one hand, portions of the Agreement quite clearly indicate the intent to create an agency relationship between UWBI [parent] and its regulated, first-tier affiliates. For example, Section A.2 states that “each first-tier subsidiary [is to] be treated as a separate taxpayer with UWBI merely being an intermediary between an Affiliate and the” IRS. Likewise, Section G states that UWBI is being appointed by each affiliate to act as its agent for purposes of filing the consolidated tax return and taking any action in connection therewith. On the other hand, portions of the Agreement arguably suggest the intent for UWBI to retain tax refunds before forwarding them on to regulated, first-tier affiliates. For example, parts of Section A.1 imply that UWBI will retain tax refunds and then later take them into account during the annual settlement process. In addition, the fact that Section A.1 affords UWBI with discretion regarding the amount to refund a regulated, first-tier affiliate (i.e, the exact amount of the refund or a greater amount) seems to suggest something other than an agency relationship. Finally, the ambiguity of the Agreement on this issue is compounded by the fact that it contains no language requiring UWBI to utilize a trust or escrow for tax refunds—which would suggest the existence of an agency or trust relationship—nor does it contain provisions for interest and collateral—which would be indicative of a debtor-creditor relationship.

The agreement does provide however that any ambiguity is to be resolved “with a view to effectuating such intent [i.e., to provide an equitable allocation of the tax liability of the Group among UWBI and the Affiliates], in favor of any insured depository institution.” (emphasis added). In light of that mechanism for resolving the ambiguity  the Tenth Circuit concluded  that it is appropriate to consider the agreement as creating an agency relationship between the parent and sub, with the result that it considered the agreement as not displacing the general rule outlined in Bob Richards and Barnes. By concluding that the tax allocation agreement did not displace the Bob Richards rule the court concluded “that the tax refund at issue belongs to the Bank, and that the FDIC, as receiver for the Bank, was entitled to summary judgment in its favor.”

I note one other interesting part of this opinion. In 2014, the Sixth Circuit, in Fed. Deposit Insurance. Corp. v. AmFin Financial Corp explicitly rejected the Bob Richards Rule because it “is a creature of federal common law” and “federal common law constitutes an unusual exercise of lawmaking which should be indulged only in a few restricted instances.” In note 4 of the United Western Bancorp opinion, the Tenth Circuit declined to step into that issue, noting that the Tenth Circuit’s adoption of the Bob Richards Rule in the earlier Barnes case meant that it was bound to follow the circuit’s precedent.

Temple and Gonzaga Seek Tax Clinicians

Professor Alice Abreu from Temple Beasley School of Law has passed on the news that Temple has an opening for a clinic position. There is no subject matter limitation; the position will be part of the Sheller Center for Social Justice, and the Committee is  interested in considering applications from individuals who propose to establish and run a tax clinic. More information about the Temple position can be found here.

Professor Ann Murphy from Gonzaga also has passed on information about an opening in its existing tax clinic. Gonzaga seeks applicants for a three-quarter-time Lecturer in its Federal Tax Clinic, with flexibility to serve in other areas as needed by the clinical program. More information about the Gonzaga position can be found here.

As the leaves start to fall here in the northeast it is hard to believe that we are now into the third decade of the federally funded low income taxpayer clinic program. For those wanting context Keith wrote a terrific article about the history of tax clinics; a recent blog post from the NTA touts the 20th anniversary of federal matching funding, puts the program in perspective and highlights some recent tax clinic successes.