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.

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.

Court Rejects Prior Settlement From Barring Release of Documents in FOIA Claim

“Some on the street say snitches get stitches, but in this case they become the subject of Freedom of Information Act requests.” So starts Montgomery v US, one of the more interesting FOIA cases I have come across in this round of updates for the Saltzman Book IRS Practice and Procedure treatise.

I start by noting that “FOIA” and “interesting” do not usually find themselves paired. But in Montgomery, a district court opinion from earlier this year, the two fit nicely. In an opinion written by Judge James Boasberg, the same district court judge who wrote the opinion a few years ago in Loving v IRS, which struck down the testing and continuing education requirements for return preparers, Montgomery addresses a FOIA issue I had not previously seen-namely whether a prior settlement agreement can serve as a nonstatutory basis for the government’s withholding documents in a FOIA case.

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This case had its origins in the IRS’s examination of the taxpayers’ complex partnership transactions many years ago. As the opinion describes, the partnership transactions attracted the attention of the IRS, leading to 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 for the Montgomerys.

The settlement did not end the dispute. The Montgomerys filed a FOIA claim, convinced that the IRS troubles with the partnerships were the result of information that an informant provided to the IRS. The FOIA claim sought general information pertaining to the IRS investigation, but also specific forms the IRS uses when confidential informants trigger an investigation.

The case implicates FOIA Exemption 7D, which we discuss in Chapter 2 of the treatise, and which provides protection for “records or information compiled for law enforcement purposes [which] could reasonably be expected to disclose the identity of a confidential source…”

7D has a lot to unpack, and there has been a substantial amount of case law getting into its nooks and crannies, and we discuss that in Chapter 2.03[6] of the treatise.

This opinion, however, involves a preliminary defense that the Service raised in a motion for summary judgment. In settling the refund suit in 2014, the IRS and Montgomery entered into an agreement that “fully and final resolve[d] all ongoing disputes” among the IRS, the Montgomerys and their partnerships; the language in the agreement also referred to resolving all issues in “pending” lawsuits.

In justifying its refusing to hand over documents that the Montgomerys requested in the FOIA request, the government argued that the refund suit settlement agreement’s final resolution language barred the Montgomerys from bringing their FOIA case.

The problem, however, is that the settlement agreement, which resolved the ongoing disputes and pending litigation, predated the FOIA claim, which was filed a year or so after the agreement. Despite that challenge, the government argued that the Montgomerys in their refund suit had sought similar information in a motion for disclosure, and thus there was an “ongoing dispute” that brought the FOIA claim within the parties’ settlement agreement.

The court disagreed:

Where the IRS goes off track, however, is in conflating the underlying information that Plaintiffs seek with the device through which they are pursuing documents…. The Service cannot try to shoehorn this action into the Settlement Agreement simply because Plaintiffs’ end game is the same.

While the opinion rejected the government’s argument, the opinion notes that the outcome might have differed if in the prior litigation the taxpayers had sought information pursuant to Rule 34 of the Federal Rules of Civil Procedure, which allows for inspection of documents or electronically stored information and which the opinion notes  “might arguably be more akin to a FOIA request.”

Conclusion

For readers with an interest in FOIA, there is a bit more to this case, as the  opinion also rejects strained res judicata and collateral estoppel arguments the government raised in its motion.

Despite the initial win for the Montgomerys, the dispute continues, however, as the parties differ on the reach of the statutory basis for withholding of documents, as well as the applicability of a so-called Glomar denial, which is when the government refuses to confirm or deny information pertaining to a request. A Glomar denial has its origins in a case involving the CIA and the government’s withholding information relating to Project Azorian, a massive project to uncover a sunk Soviet sub. Its reach in FOIA cases involving the IRS and its possible use of informants is now squarely at issue in this case. Stay tuned.

 

 

 

The Freedom of Information Act and the Office of Professional Responsibility

Working for over three decades for Chief Counsel’s office, one of my goals was to avoid disclosure issues both on a personal and professional level. On a personal level, I wanted to know enough to keep out of trouble and on a professional level I wanted to avoid getting labeled as someone who knew disclosure law because that could lead to more assignments regarding disclosure issues which I did not want. At Chief Counsel’s office, FOIA was lumped in with IRC 6103 and the Privacy Act. Practicing at a clinic, I only want to know enough about the Office of Professional Responsibility (OPR) to avoid having contact with it. Just as I did not want to know more about section 6103 than I needed in order to avoid trouble while working at Chief Counsel’s office, I do not want to learn more about OPR. I want to know the ethical rules but not what happens when you break them, because I hope that is knowledge I will never need.

Today’s case takes me into the confluence of two things I try to avoid and yet the case has important lessons worth discussion. In Waterman v. IRS, 121 AFTR2d 2018-__(D.D.C. 1-24-2018), the issue before the court is a request for records from OPR regarding an investigation of an attorney. The attorney, Brad Waterman, practices in D.C. and has for several decades. He graduated from my law school the year before me and we have met on several occasions. He has an excellent practice and the last time we met he was splitting his time between D.C. and Florida, depending on the season. The fact that he is seeking records from OPR concerning an investigation does not mean he engaged in inappropriate behavior. I know nothing about the investigation other than it was quickly closed which, it turns out, is his problem in this case. His case caused OPR to change its procedures despite, or maybe because of, his FOIA difficulties to make it easier for someone in his situation to obtain records from OPR.

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In representing a client in a matter involving a tax exempt bond, Mr. Waterman caused the revenue agent in the IRS Tax Exempt Bond office to feel that Mr. Waterman engaged in misconduct. The revenue agent, through his manager, made a referral to OPR. After investigation, OPR determined that “the allegation against Waterman did not warrant further inquiries or action.” I recently attended the ABA Tax Section meeting, at which I attended the Standards of Practice committee meeting in an effort to keep up on ethical issues. At that meeting, the director of OPR, Steve Whitlock, spoke and he talked about this case. I began writing this post on the plane to San Diego to attend the meeting. So, when the director started talking about this case, I woke up from my normal meeting stupor and started listening carefully. I hope I heard and understood him correctly.

Apparently, OPR decided not to pursue this case without sending out a letter to Mr. Waterman asking him for information. OPR regularly determines that many of the referrals it receives do not warrant further investigation and do not require making the referred individual submit material. When it makes this decision at the internal investigation stage, the case is closed with a letter to the individual informing the individual of the closure of the case without need for input from the individual. This was the normal procedure at the time OPR closed Mr. Waterman’s case. It was also, and still is I believe, the normal procedure for the OPR letter informing the individual of its conclusion to also inform the individual that OPR would retain the file on the matter for 25 years and that it reserved the right to reference the file in any future OPR investigations. Ouch. I suspect that receiving such a letter with the language about retention drove Mr. Waterman to want to know as much about the referral and investigation as possible in the event that it might have future ramifications.

The problem Mr. Waterman faced in trying to obtain information about the referral is that because OPR closed its investigation at the time of the sending of the letter, he could not use the section 6103 procedures, see here and here, that OPR suggests individuals use to obtain information about the referral. Had his case not been closed with an early letter, he would have instead received a far more ominous letter informing him of the investigation and asking him to respond to the allegations. In that situation, OPR would not have a closed investigation but a very open one. During an open investigation, OPR suggests that individuals use the section 6103 process to obtain information about the investigation. Because his investigation was closed by the time Mr. Waterman knew he wanted information, he could not use the section 6103 procedure and instead had to revert to FOIA in order to try to obtain the information.

The OPR director stated at the ABA meeting that because of this case, OPR was changing its procedures. Now, instead of issuing the one letter and closing the case immediately, it is going to issue a preliminary letter giving the target individual 60 days to make a statement to OPR and to obtain information about the investigation through section 6103. See the following paragraph for a link to this letter. Now, a recipient of this “good” OPR letter, if there is such a thing, can use the section 6103 procedures for obtaining information before OPR closes its case 60 days later. If someone receiving this good letter fails to ask for information about the investigation under section 6103 during that 60 day period, then they will face the same FOIA obstacles which Mr. Waterman encountered and which I will discuss below. I hope that neither I nor any reader will need the benefit of this knowledge, but just in case I provide it for any who have the misfortune of a referral.

Attached to the outline created by the director of OPR for his presentation at the ABA meeting were samples of the three letters sent by OPR. The first letter is called the pre-allegation letter. This is the letter alerting the recipient of an OPR investigation that is not being dropped after the initial internal review by OPR. The second letter is called the “soft conduct letter – initial” This is the letter giving the recipient the chance to request information from OPR using IRC 6103 and avoiding the problems faced by Mr. Waterman. This letter would be sent to someone that OPR determines not to investigate further after reviewing the incoming allegations. The third letter is called the “soft conduct letter” which should be sent about 60 days after the initial soft conduct letter and which would inform the recipient that OPR was closing its investigation.

The FOIA case does not discuss the merits of the investigation. From the opinion, it is clear that Mr. Waterman made informal requests for information about the investigation and did not receive everything that he wanted. So, he made a formal FOIA request. In responding to the FOIA request, the IRS withheld certain information asserting primarily FOIA exemption 5, which “allows agencies to withhold information that would not be available by law to a party … in litigation with the agency.”

In the FOIA case, Mr. Waterman agreed that the IRS search for the requested records was adequate. I want to take a brief detour here to mention another recent FOIA case, Ayyad v. IRS, No. 8-16-cv-03032 (D. Md. 2-2-2018). In the Ayyad case, the requester did not agree that the search for the records was adequate and for good reason. An examination of the taxpayer was pending for about a decade when they filed the FOIA request seeking records, which included the administrative file developed by the revenue agent including all written correspondence relating to the examination. With relatively amazing speed for a FOIA case, the IRS identified 2,885 pages of responsive records but did not produce a Vaughn index detailing the redacted and withheld records. After the taxpayers filed their FOIA suit, the IRS informed the Court it found an additional 872 pages. Later, after the taxpayer stated records were still missing, the IRS found another 6,568 pages. Needless to say, the IRS did not cover itself in glory in this case and did not prevail. Its inadequate searches and its failures to submit proper Vaughan indices resulted in an unfavorable FOIA decision. So, it is not unimportant that Mr. Waterman agreed with the IRS search. His case was much less involved and he undoubtedly knew what records were out there, but the Ayyad case provides a note of caution in relying on the first submission of records from the IRS.

In Mr. Waterman’s case, the court found that the Vaughn index properly described the withheld documents and the basis for the exemption (also a major issue in the Ayyad case). The documents at issue were pre-deliberative and involved material created by the revenue agent who made the referral, his manager, preliminary findings of the OPR investigator, and an email between OPR and counsel. The court finds all of the documents meet the test under FOIA exemption 5. If I understood Mr. Whitlock correctly, Mr. Waterman would have received the referring documents under a section 6103 request made during an open OPR investigation. I do not believe he would receive the other two documents under section 6103.

I am very sympathetic with Mr. Waterman’s right to know the basis for the investigation. Because OPR is retaining the records for 25 years, he has genuine concerns. I applaud OPR for changing its procedures to allow other similarly situated individuals to obtain records under the more friendly section 6103 procedures. I hope the information in this post is information you and I will never need to know.

 

Court Orders Release of IRS Documents Despite Deliberative Process Privilege

Government agencies enjoy the cloak of the deliberative process privilege to protect from discovery in court or in FOIA proceedings internal deliberations that are part of their decision making process. Anadarko Petroleum v United States, a recent district court magistrate’s order, illustrates that the protection is not absolute, resulting in possible disclosure of a range of IRS documents that perhaps will shed light on how the agency apparently changed its view on a technical loss deferral regulation under Section 267.

I will summarize the issue and case below.

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Anadarko brought a $25 million refund suit; the substantive issue involved its taking a loss that arose from a liquidation of one of its subsidiaries. The precise question concerned whether a deferral of the loss ended in 2007, when Anadarko liquidated its subsidiary in a taxable liquidation. The government argued that the deferral should have continued, consistent with a regulation Treasury promulgated under Section 267 in 2012 and which Treasury claimed at the time was clarifying existing rules.

In the suit, Anadarko served interrogatories and sought a variety of documents that it felt showed that the 267 regulations did not clarify existing rules because IRS had previously taken differing views on the issue. It asked for documents relating to private letter ruling, a Chief Counsel advisory opinion and even an ABA Tax Section presentation at or around the time of finalizing the regs.

The government argued that the deliberative process privilege insulated the documents from discovery. That privilege essentially keeps from FOIA requests or court discovery agency predecisional documents, including the types that Anadarko sought.

While the privilege is a powerful cloak, it is not absolute. Courts are supposed to weigh the government’s strong interest in protecting full access to how it comes to a decision with the need of the party seeking the requested documents.

In concluding that Anadarko’s need trumped the agency’s interest the magistrate focuses on how agency changes on an issue may be relevant in a court’s legal interpretation. It did not matter, in the magistrate’s view, that the request considered documents that did not in and of themselves directly relate to precedential agency determinations.

In concluding that the government had to comply with the discovery, the court also felt that the request was proportional and reasonable, in light of the amount at issue and the costs to the government in complying. Backstopping its proportionality conclusion was its view that the nonprecedential documents had a bearing on the court’s ultimate task of sorting out the merits of the taxpayer and government’s views of  Section 267 and the regs.

Conclusion

Anadarko is an important taxpayer victory. I am not well versed with the substantive issue in this case. I suspect, however, that the court’s willingness to allow discovery has a lot to do with what the magistrate believes is at a minimum a less than complete explanation accompanying the regs. If IRS takes differing views on a technical issue, and yet when promulgating a final regulation Treasury claims that it is merely clarifying what the law had been all along, a court (and taxpayers) are justifiably curious as to how that explanation jives with what came before the final reg.

District Court Pokes Facebook FOIA Request

Like many social media and tech companies, Facebook has drawn IRS scrutiny over its licensing of technology to low tax offshore affiliates. That dispute is in Tax Court. Seeking to obtain information about the IRS audit, Facebook filed a FOIA request seeking documents related to the dispute. The FOIA request has now generated its own separate litigation.

Not surprisingly, the files IRS has on the Facebook exam are voluminous and it asked Facebook to extend the time to respond to the request. While the IRS served up thousands of pages of records, it did not provide all Facebook wanted. Facebook sought to compel the IRS to issue responsive documents in electronic format. Last month’s district court opinion held that Facebook was not entitled to the records in that format.

While we do not discuss FOIA frequently in PT, we have recently revised our FOIA discussion in the Saltzman and Book treatise. FOIA is an important tool for practitioners seeking information relating to tax disputes. There are some interesting procedural aspects of the Facebook FOIA case.

Facebook emphasizes that if a requester wants documents in electronic format, the request itself must clearly say so. The original Facebook request did not indeed indicate the format that the company wanted the documents. As the opinion notes, [i]t asked for all records ‘whether maintained in electronic or hardcopy format,’ but did not specify the format for production.”

While the Facebook opinion stated that “metadata is an important part of electronic records in today’s world…” the opinion emphasized that without a specific request for a document in a particular form the courts have no basis to order production because there was no valid FOIA request in the first instance:

With respect to its request for electronic-format documents, then, Facebook did not submit a valid FOIA request in compliance with the IRS’s regulations. The request did not trigger the IRS’s FOIA obligations, the IRS did not have an opportunity to exercise its discretion in analyzing the request, and so Facebook has not exhausted its administrative remedies.

A separate and somewhat academic discussion in the opinion considered whether the exhaustion requirement was jurisdictional. There is a split on that issue; some courts have concluded that the exhaustion requirement is a prudential consideration rather than a jurisdictional prerequisite. Facebook argued that even in fact it was a jurisdictional requirement the court could find that ordering Facebook to submit a revised FOIA request was futile (thus allowing the court to compel production in electronic format).

The court declined to resolve the jurisdictional versus prudential dispute, emphasizing that even if the request were not jurisdictional courts waive the exhaustion requirement only if the waiver was consistent with the purpose of the exhaustion requirement:

Whether analyzed prudentially or jurisdictionally (with a futility exception), the ultimate question is the same: does the failure to exhaust undermine the purposes and policies of FOIA exhaustion — i.e. to give the IRS a chance to exercise its discretion and to review its decisionmaking process before judicial intervention? Put another way: would dismissal promote that purpose?

The answer here is yes. Judicial intervention now would deprive the IRS the opportunity to exercise its discretion and analyze Facebook’s (now clarified) request for electronic documents and metadata, and dismissal would give the IRS the chance to do so. The court is not convinced that Facebook’s refiling of a revised FOIA request to specify the format (and content) of the records it seeks would be futile.

Conclusion

The opinion is a careful reminder that what often takes the form of boilerplate requests for information in fact can have practical significance if a FOIA dispute winds up in court. As some disputes can relate to administrative files with millions of documents, and as the world increasingly becomes digital, litigants seeking information from the IRS must be careful and precise when seeking information.

What is a “Record” for FOIA

In today’s post, I am covering a somewhat stale, non-tax holding in American Immigration Lawyers Association v. Executive Office for Immigration Review (“AILA”), a case dealing with a FOIA request “seeking disclosure of records related to complaints about the conduct of immigration judges.”  It will also touch on the DOJ response to the case, which was issued in January.  Perfect for a tax procedure blog that tries to stay somewhat current.  The case, decided by the DC Circuit, is important, however, because the determination of what could be redacted from a record, once it is determined the record was responsive to the FOIA request.  Specifically, whether non-responsive aspects of the record could be redacted (spoiler – Sri Srinivasan says “no”). This has far reaching potential consequences with FOIA requests beyond the narrow scope of the request, including to FOIA requests made in relation to tax cases or requests for information about how the Service administers the laws.

The substance of the case does not matter much for this discussion, although it is interesting that such terrible allegations have repeatedly been made against the immigration judges.  Various complaints included disrespectful and at times racist treatment of defendants, and sometimes fairly reprehensible treatment of counsel.  Unfortunately, this is probably old hat for people who work in this system; makes me somewhat thankful when I do catch a helpful Appeals Officer or Revenue Agent or the quality work usually done by the tax court.  In this case, AILA requested all information relating to complaints about the immigration judges.  Interestingly, I believe some faulty redacting relating to this case may have resulted in the summary of the complaints being released, along with the judges’ names. I just redacted the heck out of about 1500 pages using Adobe, and now I am a little nervous.  I would assume the FOIA folks redact far more frequently than me.

Procedurally, FOIA generally requires the feds to make certain information available to the public, but subject to nine exceptions.  See 5 USC § 552(a).   The pubic is allowed to request the documents, and the agency must provide them, but has the ability to withhold the documents if the entire document is subject to an exemption, or can redact portions that are properly withheld and provide the rest of the document.  The exemptions can be found listed here.  For those of you interested in learning all about the intersection of FOIA and tax practice and procedure, Les recently updated chapter 2 of SaltzBook, which covers this in great detail, including all the exemptions and how to use FOIA requests in your practice.

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In AILA, what is important is that various documents were found that were responsive to the extensive requests made.  Many of those documents contained portions that were responsive to the request, and portions that were responsive but also fit into one of the exemptions.  Aspects of some of the documents were also non-responsive.  Meaning, portions of the documents did not relate to the request that was made.  Agency practice, I believe including the IRS, was to redact all portions of the document that were exempt, and also to redact all the portions of the document that were non-responsive to the request.  When in doubt, keep it out.

This practice had been somewhat sanctioned by various district courts, and was in question in AILA.  The DC Circuit, however, disagreed with the district courts.  In discussing the “ostensibly non-responsive material” (you know this isn’t going to go your way when “ostensibly” is applied to your position), the Court noted that the government’s position was that it was not under any obligation to release information concerning matters unrelated to the FOIA request.  Not a wholly absurd position.  In the Vaughn index, examples were given as to why the portions of the documents were not responsive, such as information relating to the judge needing to clean his/her office, and vacation plans.   That is all interesting, but not germane to the request.

Although the lower court and other district courts had addressed this issue, it was the first time the DC Circuit had taken the matter up.  The Court began by providing some background information, stating FOIA requires “’each agency, upon any request for records which (i) reasonably describes such records and (ii) is made in accordance with published rules stating time, place, fees (if any), and procedures to be followed, shall make the records promptly available to any person.’ 5 USC § 552(a)(3)(A).” Further, in “responsive records” certain portions may be redacted pursuant to the exemptions.  The only provisions, however, related to responsive records, and withholding information, is found within those exemptions.  The court stated, FOIA creates a process for an agency to follow when responding to a FOIA request:

First, identify responsive records; second, identify those responsive records or portions of responsive records that are statutorily exempt from disclosure; and third, if necessary and feasible, redact exempt information from the responsive records. The statute does not provide for…redacting non-exempt information within responsive records.

Relying on a handful of SCOTUS cases that required FOIA exemptions to be narrowly construed, the Court did not see how it could authorize the redacting of aspects of records that were found to be responsive.  As stated above, the manner in which agencies generally redacted was contrary to this holding.

We do not know the exact significance of the holding yet, and the Court somewhat foreshadowed what impact this case may have.  The Court stated:

The practical significance of FOIA’s command to disclose a responsive record as a unit…depends on how one conceives of a “record.”  Here the parties have not addressed the antecedent question of what constitutes a distinct “record” for FOIA purposes…for purposes of this case, we simply take as a given [the government’s] own understanding of what constitutes a responsive “record,” as indicated by its disclosures…

Although FOIA includes a definition section…that sections provides no definition of the term “record.”  Elsewhere, the statute describes the term record as ‘include[ing] any information that would be an agency record…when maintained by an agency in any format, including an electronic format’…but that description provides little help in understanding what is a “record” in the first place.”

In the text of the case, the Court compares the definition of “record” under FOIA to the definition of record under the Privacy Act, which states it is “any item, collection, or grouping of information.” See 44 USC § 2201(2).  Although not completely clear, it is more instructive than no definition at all.

In AILA, the Court’s holding was clearly not going to sit well with the government, but the Court provided the framework for each agency to rethink how it approached FOIA requests in a manner that mitigated what the agencies viewed as a negative holding.  The DOJ somewhat took them up on that offer.  In January of 2017, Office of Information Policy released guidance entitled, “Defining a ‘Record’ Under FOIA” addressing the holding in AILA.  The guidance notes that after AILA, “it is not permissible to redact information within a record as “non-responsive.”  It also highlighted the fact that the Court looked to the “sister statute” of FOIA, The Privacy Act, 5 USC 552a(a)(4) for the potential definition of “record” as “any item, collection, or grouping of information.”

From this, the guidance encouraged the agencies to use the Privacy Act definition and use a “more fine-tuned, content-based approach to the decision,” as to what a record is, and determine if an entire document is the record, or just a page, or just a paragraph.  In AILA, the Court stated it may be impossible to withhold one sentence of a paragraph, and DOJ agreed.  The guidance provided some practical pointers about how an agency must then report the number of records the agency has that is responsive.  It should also clearly identify each record and if it contains multiple subjects so “the requester can readily see why and how the agency divided the document into distinct ‘records’.”

AILA was a substantial departure from how agencies, including Treasury, and the Service, handled FOIA responses.  The case, however, provided a roadmap to mitigate the shift, which the Government apparently will seek to implement.  The practical impact may be less overall pages, but with less redaction.

 

Procedure Grab Bag – Making A Grab for Attorney’s Fees and Civil Damages

Your clients love the idea, and always think the government should pay, but it isn’t that easy.  Below are a summary of a handful of cases highlighting many pitfalls, and a few helpful pointers, in recovering legal fees and civil damages from the government (sorry federal readers) that have come out over the last few months.

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3rd Party Rights

The Ninth Circuit, in US v. Optional Capital, Inc., held that a third party holding a lien on property could not obtain attorney’s fees for an in rem proceeding to determine its rights in real estate that had also been subject to government liens pursuant to the Civil Asset Forfeiture Reform Act, 28 USC 2465(b)(1)(A), or Section 7430.  The Court determined the 3rd party was not the prevailing party “in any civil proceeding to forfeit property,” as required by CAFRA.  The government had lost in a related hearing regarding the lien, but the 3rd party had “not pointed to any work it performed that was ‘useful’ or ‘necessary to secure’ victory against the Government,” so it was not the prevailing party.  It would seem, however, this leaves open the possibility of other 3rd parties prevailing, if meaningful work was done in the underlying case.  This case is a good reminder of another potential option under CAFRA in attempting to claim fees in certain collection matters.

As to Section 7430, the Court found, contrary to the 3rd party’s claims, it had not actually removed the government’s liens from the property, and therefore could not be considered the prevailing party, which is required under Section 7430 to obtain fees.

When You Are Rich Is Important

In Bryan S. Alterman Trust v. Comm’r, the Tax Court held that a trust could not qualify to recover litigation costs under Section 7430 because its net worth was over $2MM.  Section 7430 references 28 USC 2412(d)(2)(B), which states an individual must have under $2MM in net worth in order to recover litigation costs.  That is extended to trusts by Section 7430(c)(4)(D).  The taxpayer argued the eligibility requirement should be as of the time the deficiency notice was issued or the date the petition was filed.  That “reading” of the statute was found incorrect, as Section 7430(c)(4)(D)(i)(II) states the provision applies to a trust, “but shall be determined as of the last day of the taxable year involved in the proceeding.”  At that time, the trust had over $2MM in net worth, saving the IRS from potentially having to shell out capital.  And, that’s why I always keep my trust balances below $2MM…and right around zero dollars.

Key Questions: Are you the Taxpayer?  Did you Exhaust the Administrative Remedies?

The District Court for the Northern District of Illinois dismissed the government’s motion for summary judgment in Garlovsky v. United States on fees under Section 7433, but also gave clear indication that the claim is in danger.  In Garlovsky, the government sought collection on trust fund recovery penalties against an individual for his nursing home employer that allegedly failed to pay employment taxes.  Prior to that collection action, the individual died, and notices were sent to his surviving spouse (who apparently was some type of fiduciary and received his assets).  The taxpayer’s wife paid a portion, and then sued for a refund.  As to damages, the Court found that the taxpayer’s wife failed to make an administrative claim for civil damages before suing in the District Court, which is required under Section 7433.

In addition, although the surviving spouse received the collection notices, none were addressed to her and the Service had not attempted to collect from her.  Section 7433 states, “in connection with any collection of…tax…the [IRS] recklessly or intentionally, or by reason of negligence, disregards any provisions of this title…such taxpayer may bring a civil action…”  The Court found that the spouse was not “such taxpayer”, and likely did not have a claim.  Although I have not researched this matter, I would assume the estate of the decedent could bring this claim (unlike Section 7431, pertaining to claims for wrongful disclosure of tax information, which some courts have held dies with the taxpayer – see Garrity v. United States –a case I think I wrote up, but never actually posted).

Qualifying as a Qualified Offer

The 9th Circuit held that married taxpayers were not entitled to recover attorney’s fees under Section 7430 in Simpson v. Comm’r, where the taxpayer did not substantially prevail on its primary argument, even though they did prevail on an alternative argument.  In Simpson, the wife received a substantial recovery in an employment lawsuit.  The Simpsons only included a small portion as income, arguing it was workers comp proceeds (not much evidence of that).  The Tax Court held 90% was income.  This was upheld.  The 9th Circuit held that the taxpayer was clearly not successful on its primary claim.  They did raise an ancillary claim during litigation, which the IRS initially contested, but then conceded.  The Court held the Service was substantially justified in its position, as the matter was raised later in the process and was agreed to within a reasonable time.  Finally, the Court held that the taxpayer’s settlement offer did not qualify as a “qualified offer”, since the taxpayers indicated they could withdraw it at any time.  Qualified offers must remain open until the earliest of the date it is rejected, the date trial begins, or the 90th day after it is made.  Something to keep in mind when making an offer.

Making the Granite State Stronger – No Fees For FOIA

Granite seems pretty sturdy, but Citizens for a Strong New Hampshire are hoping for something even sturdier.  The District Court for the District of New Hampshire in Citizens for a Strong New Hampshire v. IRS has denied Strong New Hampshire’s request for attorney’s fees under 5 USC 552(a)(4)(E)(i) for fees incurred in bringing its FOIA case.  That USC section authorizes fees and litigation costs “reasonably incurred in any case under [FOIA] in which the complainant has substantially prevailed.”  The statute defines “substantially prevailing” as obtaining relief through “(I) a judicial order, or an enforceable written agreement or consent decree; or (II) a voluntary…change in position by the agency…”

Strong New Hampshire requested documents through a FOIA request regarding various New Hampshire politicians.  It took the IRS a long time to get back to Strong New Hampshire, and it withheld about half the applicable documents as exempt under FOIA.  Strong New Hampshire continued to move forward with the suit, and the Service moved for summary judgement arguing it complied.  Aspects remained outstanding, but the Court held that the Service had not improperly withheld the various documents.  The IRS did a second search, moved for summary judgement, and Strong New Hampshire did not contest.

The Court held that the voluntary subsequent search by the Service did not raise to the level of substantially prevailing by Strong New Hampshire.  As required by the statute, there was not a court order in favor of Strong New Hampshire, and the actions taken by the Service unilaterally in doing the second search was not sufficient to merit fees.