Although traveling parallel paths, our FOIA cases seek very different types of information invoking different provisions of the FOIA exemptions.  Brad’s case involves the deliberative process exemption.  The IRS audited his client regarding a tax exempt bond issue.  The agent prepared a Suspected Practitioner Misconduct Report and sent it to OPR on March 17, 2014 alleging that Brad unreasonably delayed the prompt disposition of the case in violation of Circular 230.  The referral contained a memorandum authored by the agent and the agent’s manager.  Brad was notified of the referral and that OPR had decided the report “did not warrant further investigation or action.”  The letter also said that if the allegation in the referral was true it did constitute a technical violation of Circular 230 and that OPR would retain the file for 25 years in case it received further referrals since the cumulative effect of referrals could result in a charge against him.

He sought copies of the memos since he wanted to know what was said.  The IRS released 34 of 54 pages it discovered as relevant to his request and invoked FOIA exemptions 3 and 5 to withhold the balance.  In court the IRS relied on exemption 5 regarding the deliberative process privilege.  After the district court in the first instance discussed in the blog post above ruled for the IRS, he appealed and the DC Circuit remanded for the district court to decide if some of the documents might be reasonably segregable in Waterman v. IRS, (Waterman II), 755 F. App’x 26, 27-28 (D.C. Cir. 2019).  When the district court again ruled for the IRS, he again went to the DC Circuit which ruled in the recent decision that significant portions of the documents contained only factual information which did not involve the deliberative process stating:

In camera review has revealed two passages, appearing on pages 5 and 6 of the memorandum, that reflect Marchetti’s [the agent’s] evaluation of particular conduct he viewed as evincing Waterman’s “intent to not cooperate with the disposition of the matter[]” and his failure to “negotiate[] with [the] IRS in good faith,” J.A. 120-21, which is punctuated with references to the IRS’s internal strategy in its audit of Waterman’s client. As to those portions, Marchetti exercised his judgment to select and organize facts to support a discretionary agency decision by the OPR, much like the agency employees in Montrose and other cases in which this court has affirmed the nondisclosure of factual material under Exemption 5….

But the remainder of the Marchetti Memo, which is a chronological collection of Waterman’s statements over the course of the audit, falls outside the scope of Exemption 5. The IRS’s affidavit provides no indication that Marchetti exercised his judgment to “separate[e] the pertinent from the impertinent,” Montrose, 491 F.2d at 68, nor that he omitted a “known datum” in creating the chronology, Mapother, 3 F.3d at 1540. Exemption 5 does not protect such a “comprehensive collection of the essential facts.” Id. Because it is “reasonably segregable” from Marchetti’s evaluative commentary, 5 U.S.C.

10 § 552(b), the chronological portion of the Marchetti Memo is subject to disclosure.

The Circuit Court found that the entirety of the manager’s memo fell outside the protection of exemption 5.  This is an important decision for individuals referred to OPR who want to know the basis for their referral. 

In contrast with Brad’s case, I joined Nick Xanthopoulos in seeking to learn from the IRS what it does with our personal information, such as our social security numbers, when we call on a client’s case.  Does our personal information become part of the taxpayer’s tax return information?  Can the taxpayer access our personal information?  Might the IRS work with the practitioner community to devise a less intrusive method for verifying who we are?

The post above, written by Nick, talks about the reasons for the FOIA request.  Nick has subsequently dropped out of the litigation because of a job change.  The FOIA request sought information in the Internal Revenue Manual (IRM) that describes the practice, but which is shielded from public view.  The suit resulted in some concessions by the IRS opening up more portions of the IRM.  The concessions let many questions unanswered as much of the IRM remained shielded from the public.  The district court declined to engage in an in camera inspection of the shielded portions and held for the IRS based on FOIA exemption 7.

The Eighth Circuit remanded the case to the district court holding, inter alia, that the court should have an in camera inspection of the IRM and that the affidavit submitted by the IRS was insufficient to show that the agency had met its burden of establishing a reason for non-disclosure.  The affidavit relied heavily on the need for the request for personal information of representatives as a part of the IRS law enforcement activities.  The Eighth Circuit was also concerned about the characterization of the IRS:

Although we find no evidence of bad faith by the IRS, the Barnes Declaration contains a legal error in at least one respect: it states “the I.R.M. generally” is “compiled for law enforcement purposes because the I.R.M. is an internal manual for the IRS, a law enforcement agency.”

The Barnes Declaration erroneously characterizes the IRS as only a law enforcement agency. The IRS is instead a federal agency with mixed law enforcement and administrative functions.

On remand, the district court has recently held that after inspection of the IRS, it sustains its initial determination finding:

Exemption 7(E) requires the IRS to show that the withheld material was “compiled for law enforcement purposes.” 5 U.S.C. § 552(b)(7)(E); see John Doe Agency v. John Doe Corp., 493 U.S. 146, 153 (1989) (“Before it may invoke [Exemption 7], the Government has the burden of proving the existence of . . . a compilation for such a purpose.”). Then, the IRS must show that: (1) releasing the records “would disclose techniques and procedures for law enforcement investigations or prosecutions ;” and that (2) “such disclosure could reasonably be expected to risk circumvention of the law.” 5 U.S.C. § 552(b)(7)(E).2 Upon the Court’s in camera inspection of the withheld material and of Mr. Donaghy’s affidavit, the Court finds that the redactions in IRM § 21.1.3.3 meet each of these requirements.

The district court quoted from the supplemental affidavit submitted by the IRS which stated the redactions were necessary “to combat theft, fraud, and other wrongdoing in the context of telephone calls from third parties who claim to have authorization from a taxpayer for the IRS to disclose that taxpayer’s confidential return information to the caller.”  The court cited to a 2018 report of the Treasury Inspector General finding that the IRS procedures at the time were insufficient to properly authenticate the identity of third parties.  Based on this the court found that the IRS met its threshold burden of showing that the redactions served a law enforcement purpose.

In such a case the IRS must then show that the withheld material would disclose “techniques and procedures for law enforcement investigations or prosecutions.”  The court states:

The Court finds that releasing the redacted portions of IRM § 21.1.3.3 would “disclose techniques and procedures for law enforcement investigations.” 5 U.S.C. § 552(b)(7)(E). As noted above, the redactions address different situations in which the behavior or the information provided by the third party seeking authorization raises a suspicion of fraud. Disclosing the withheld material would reveal techniques that IRS agents use to confirm or disprove their suspicions, including the information that the IRS seeks from individuals in these particular situations.

The IRS must also show that if it discloses the material at issue it could reasonably expect the risk of circumvention of the law.  The court describes this requirement as a low bar the IRS must clear and finds that it cleared that bar.

So, practitioners must continue to provide their personal information without knowing what becomes of it.  Perhaps there will be another journey the circuit court with an outcome as favorable as the one obtained by Brad.  So far, my wonderful attorneys, Tuan Samahon (a colleague when I was at Villanova) and Shawn Rodgers of Goldstein Law Partners have done a great job presenting the case.

The Montgomery family’s partnership transactions attracted the attention of the IRS, leading to a Fifth Circuit opinion finding that most of the partnerships were shams but that one had a legitimate business purpose.  The finding that one partnership was legitimate led the Montgomerys to initiate separate refund suits 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 transactions, with a particular interest in finding out if there was an informant.

In asserting a Glomar defense to the Montgomery request for documents pertaining to whistleblower forms, the IRS refused to either confirm or deny the existence of the records requested.

As I discussed in my original post, the Glomar defense originates from the Cold War and the CIA wanting 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)).

When the government raises a Glomar defense, it still needs to tether the defense to one of the nine statutory FOIA exemptions. In Montgomery, the IRS asserted Exemption 7(D).

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).

As the DC Circuit described, the district court was “persuaded by the IRS’s explanation that it asserted a Glomar Response because a confirmation of the existence or absence of whistleblower documents in a particular case may lead a savvy requester to the very whistleblower himself. “

In sustaining the district court, it rejected a variety of estoppel type arguments that were premised on prior government admissions that no informant existed. That admission was not sufficient to estop the government from asserting a Glomar defense because it was not quite precisely what was at stake in the FOIA litigation:

The issue of the existence of a confidential informant…is not the same as the issue confronting us now; namely, whether the IRS possesses any documents pertaining to a confidential informant… Indeed, the documents requested by the Montgomerys…include such items as award applications and reportable transaction forms.. As the IRS and the district court correctly point out, the IRS does not pay awards for every form submitted to it.

The key point that the DC Circuit made was that “documents pertaining to a potential whistleblower can exist regardless of whether a whistleblower himself exists” any prior admission about the absence of an informant should not serve as a basis to assert collateral or judicial estoppel or otherwise serve to waive its right to assert a Glomar defense.

As to the merits of the underlying Glomar claim, the Montgomerys argued that the 7(D) exemption was not properly at play, claiming that the exemption only runs to the identity of the whistleblower and any information that the whistleblower provided, rather than their mere existence.

The DC Circuit squarely rejected that argument:

We disagree. Exemption 7(D) permits the IRS to withhold information that “could reasonably be expected to disclose the identity of a confidential source.”

Noting that the whistleblower regs require the IRS to use its best efforts to protect a whistleblower’s identity, the IRS’s policy to neither confirm nor deny the existence “makes sense”:

If the IRS only asserts Glomar when whistleblower records exist, and gives a negative answer when no records exist, savvy requesters would both (1) recognize that a Glomar Response indicates the positive existence of whistleblower documents; and (2) may well be able to deduce the identity of a potential whistleblower himself, the very information the IRS is required to protect. This is especially true when the pool of potential whistleblowers is very small, leading a revenge-seeking requester to narrow down the informant with relative ease. Far from violating FOIA’s statutory scheme, the IRS’s Glomar Response to FOIA requests for whistleblower documents aligns with the purpose of Exemption 7(D) and the duties of the IRS to protect whistleblower identities.

Conclusion

For those with a keen interest in FOIA , I recommend reading the opinion, which includes a discussion of when it is appropriate for the government to overcome the presumption of confidentiality for informants, the nature of district court in camera review, and the adequacy of the IRS’ search for other records that the Montgomerys wanted.  To that end and for an even deeper dive, in Saltzman and Book Chapter 2, Taxpayer Access to Information, we have an extensive FOIA discussion, covering materials that are not subject to IRS disclosure as well as myriad FOIA procedural issues.

As I discussed when blogging the 2018 opinion, this case 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.

Shortly after the 2016 election EPIC submitted a FOIA request to the IRS seeking the tax returns of Donald Trump for the years 2010 and forward. It also sought “any other indications of financial relations with the Russian government or Russian businesses.” Not surprisingly, the IRS declined to comply with the request. In declining the IRS provided two reasons: 1) the requested “documents, to the extent that any exists, consist of, or contain the tax returns or return information of a third party,” which “may not be disclosed unless specifically authorized by law” and 2) the IRS rules require consent of the third party when a request is made for their tax return. Because the IRS rules require the consent of the third party when a return is requested, the IRS did not even process the FOIA request.

EPIC submitted a second request trying a slightly different tack by citing to IRC 6103(k)(3). This provision allows the IRS to disclose return information to correct a misstatement of fact if correcting the misstatement is necessary to a tax administration purpose. This provision also requires that the IRS obtain the approval of the Joint Committee on Taxation before making a disclosure. The IRS responded to EPIC’s second request by notifying it that the second request also did not cite a basis for turning over to it the returns of President Trump. The IRS concluded this letter by notifying EPIC that it would not process any further requests from it on this topic.

EPIC brought suit seeking relief under both FOIA and the Administrative Procedure Act. The district court dismissed the suit and the DC Circuit affirmed the dismissal but in doing so provided some clarity regarding the reason for denying the request. The circuit court explained the interplay between FOIA and the IRC. It provided an explanation for how and when tax records stand outside the type of government record that can be obtained through a FOIA request. It noted, however, that the district court denied the request for failure to exhaust administrative remedies. That basis for dismissal was wrong but even though it was wrong other reasons for dismissing the case existed making the decision to deny the requested relief correct.

The court points out that this is not an ordinary exhaustion of remedies case where the litigant rushes to court without giving the agency the chance to consider the argument. Here, EPIC tried to get the IRS’ attention and got pushed away. The IRS argues that because EPIC’s request violated its published rules for considering a FOIA request by not obtaining President Trump’s permission to seek his tax returns EPIC did not exhaust the available administrative remedies. This is an interesting interpretation of the exhaustion doctrine which views the requester’s failure to do the impossible, obtain permission from a party who does not want to consent, as a failure to exhaust remedies.

According to the DC Circuit, the IRS “misunderstands its FOIA disclosure obligations. FOIA unambiguously places on an agency the burden of establishing that records are exempt.” To prevail, the IRS cannot rely on a perceived failure by the requester but must show that the information sought is subject to the IRC 6103(a) bar on disclosure. Although the Court agrees with the IRS that it can create published rules regarding the procedures to follow in making a request, the Court disagrees with the IRS that those rules can substantively shift the burden from the agency to the requester regarding the basis for denying the request. Here, “[n]one of the purposes of exhaustion supports barring judicial review of EPIC’s claims.” Still, the IRS has the ability to show that EPIC should not receive the requested documents by making a showing on the merits of the applicable statutes – which it does.

The scope of IRC 6103 in protecting taxpayer records is broad but is still limited in scope. The court notes that “[n]ot all IRS records constitute tax returns or return information.” It cites as an example of material not covered by those definitions the legal analysis contained in IRS Field Service Advice Memoranda. Here, the first part of EPIC’s request, the request for President Trump’s tax returns, clearly falls within the scope of tax returns and return information and “is plainly covered by section 6103(a)’s bar.”

With respect to the requested information concerning financial relations with Russia, the court finds that the request is framed in such a way that answering it reveals the fact that tax returns were filed, making any response one which would disclose tax returns or return information. Therefore, the court denies this request as well.

Moving on to EPIC’s revised request citing to 6103(k)(3), the court finds that this provision was not designed as a provision for parties to make a request to the IRS but rather for the IRS to make a decision to disclose information to avoid problems with tax administration. The court finds “Congress’s omission of any public right to ‘request’ disclosure under section 6103(k)(3) is intentional.” So, this provision affords the requestor no disclosure right. EPIC’s claim based on this provision fails.

Lastly, the court looks at the APA as a basis to disclose the returns. It finds that the APA claim should be dismissed because FOIA, not the APA, provides the basis for the remedy sought by the requestor. The fact that FOIA does not allow disclosure under this circumstance does not mean that the APA provides a separate remedy.

No doubt we have not heard the last of attempts to obtain President Trump’s returns. The harder people try to obtain the returns without success, the more respect I have for the IRS and the states in their administration of the disclosure laws. Maybe one day we will see the returns and learn great secrets. In the meantime we should appreciate that the disclosure laws which were tightened significantly in response to President Nixon’s attempts to misuse the IRS seem to be working well.