Opinion
17038-18L 17535-18L
12-07-2023
THE DIVERSIFIED GROUP INCORPORATED, ET AL., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Emin Toro Judge
On August 9, 2023, petitioners filed a Third Motion to Compel Production of Documents. The Commissioner filed a Response objecting to petitioners' Motion on September 7, 2023, and petitioners' Reply was filed on September 19, 2023. For the reasons described below, we will grant petitioners' Motion in part and deny it in part.
I. Background
Petitioners' Motion requests the Court to issue an order requiring the Commissioner to produce unredacted copies of the following three documents: (1) a memo from William T. McCracken, Revenue Agent, to Daniel A. Rosen, Attorney, and Gail Campbell, Attorney, dated November 15, 2013, regarding a "custom notice and demand letter" (McCracken memo), (2) an undated memo "on tax shelter" from Steven R. Winningham, Attorney, to William P. O'Shea, Deputy Associate Chief Counsel (PSI) (Winningham memo), and (3) a memo from Alia Reyfman-Melamed, Team Manager, to Rosemary Seretti, Industry Director, LB&I Financial Services, bearing the date October 24, 2013, "regarding promoter audit and request for technical advice" (Reyfman memo).
These documents are described in the document titled "Respondent's Privilege Log-April 11, 2023 (selected documents-May 4, 2023)," attached to petitioners' Motion.
The Commissioner argues that he need not produce the McCracken and Reyfman memos because they are protected by the deliberative process privilege.
He further argues that section 6103 precludes him from producing the Winningham memo. As we describe further below, we agree with the Commissioner regarding the Winningham memo, but disagree regarding the McCracken and Reyfman memos.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times.
II. Discussion
A. The Winningham Memo and Section 6103
The Winningham memo analyzes two legal issues under section 6111 and one under section 6707, as applied to a taxpayer unrelated to petitioners. The memo includes summaries of the three issues and the memo's conclusions, background and facts sections, and discussions of the relevant legal authorities and the author's analysis. Only the background and facts sections and a few paragraphs of analysis are redacted.
Petitioners argues that section 6103(h)(4)(B) and (C) authorize the Commissioner to produce the redacted portions of the memo, or, alternatively, that the Commissioner should at a minimum produce more of the memo than he already has. The Commissioner responds that section 6103(h)(4)(B) and (C) do not authorize disclosure because the redacted portions of the memo contain return information of a third party entirely unrelated to petitioners. We agree with the Commissioner.
Section 6103(a) provides that returns and return information generally must be kept confidential unless disclosure is specifically authorized by the Code. See Mescalero Apache Tribe v. Commissioner, 148 T.C. 291, 294 (2017). The authorization at issue here is section 6103(h)(4), which provides, in relevant part:
A return or return information may be disclosed in a Federal or State judicial or administrative proceeding pertaining to tax administration, but only-
(B) if the treatment of an item reflected on such return is directly related to the resolution of an issue in the proceeding; [or]
(C) if such return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding
As the Commissioner correctly points out, section 6103(h)(4)(B) and (C) authorize disclosure only if there is some kind of direct relationship between the return or information sought and the resolution of an issue in the taxpayer's proceeding. See, e.g., In re United States, 669 F.3d 1333, 1337-40 (Fed. Cir. 2012); Mescalero Apache Tribe, 148 T.C. at 298-99. No such relationship (nor indeed any relationship) has been shown to exist here. See Resp't's Resp. at If 25 ("The relationship between petitioners and the third-party taxpayer can, at best, be described as similarly situated."). Thus, section 6103(h)(4)(B) and (C) do not apply and section 6103 prevents the Commissioner from disclosing any third-party return or return information in the Winningham memo to petitioners.
Petitioners' Motion requests that, if we find section 6103(h)(4)(B) and (C) inapplicable, we undertake a review in camera of the Winningham memo to confirm that the Commissioner's redactions are appropriate. We will decline petitioners' invitation. The Commissioner's redactions are in keeping with what we might expect for such a document, and we see no reason to doubt they were appropriately made.
B. The McCracken and Reyfman Memos and Deliberative Process Privilege
The McCracken memo is a communication from a member of the IRS examination team working on petitioners' examination to attorneys with the Office of Chief Counsel. The memo relates to custom notice and demand letters that were ultimately issued to petitioners and that offered petitioners a conference with the IRS Office of Appeals (Appeals). The Reyfman memo is a communication from another member of petitioners' examination team to the IRS Industry Director, LB&I Financial Services, in connection with the Industry Director's review of the decision to deny petitioners' request for a Technical Advice Memorandum.
The Commissioner argues that the deliberative process privilege protects both memos from disclosure. Petitioners disagree. For the reasons described below, we agree with petitioners.
"To protect agencies from being 'forced to operate in a fishbowl,' EPA v. Mink, 410 U.S. 73, 87 (1973) (internal quotation marks omitted), the deliberative process privilege shields from disclosure 'documents reflecting advisory opinions, recommendations and deliberations comprising part of a process by which governmental decisions and policies are formulated,' NLRB v. Sears, Roebuck & Co. [("Sears")], 421 U.S. 132, 150 (1975)." U.S. Fish & Wildlife Serv. v. Sierra Club, Inc., 141 S.Ct. 777, 785 (2021). The rationale behind the privilege "does not apply, of course, to documents that embody a final decision, because once a decision has been made, the deliberations are done." Id.
There are several exceptions to the deliberative process privilege. Most relevant here, and as we have explained in a prior Order in this case, the deliberative process privilege does not apply where the Government's decision- making process is in dispute. See, e.g., New York v. Salazar, 701 F.Supp.2d 224, 237 (N.D.N.Y. 2010) ("[W]hen the decision-making process itself is the subject of the litigation, 'the overwhelming consensus and body of law within the Second Circuit is . . . that the privilege cannot bar discovery,' and it 'evaporates.'" (quoting Children First Found., Inc. v. Martinez, 2007 WL 4344915, at *7 (N.D.N.Y. 2007)), aff'd, 2011 WL 1938232 (N.D.N.Y. 2011)); Dep't of Econ. Dev. v. Arthur Andersen & Co., 139 F.R.D. 295, 299 (S.D.N.Y. 1991) ("Where the deliberations of government are genuinely at issue, privileges designed to shield the deliberative process from public scrutiny 'may not be raised as a bar against disclosure.'" (quoting Burka v. New York City Trans. Auth., 110 F.R.D. 660, 667 (S.D.N.Y. 1986))).
The United States Court of Appeals for the District of Columbia Circuit has held that the deliberative process privilege is unavailable when a "cause of action is directed at [an] agency's subjective motivation." In re Subpoena Duces Tecum Served on the OCC, 156 F.3d 1279, 1280 (D.C. Cir. 1998), reh'g 145 F.3d 1422 (D.C. Cir. 1998); see also Am. Civil Liberties Union v. Nat'l Sec. Agency, 925 F.3d 576, 594 (2d Cir. 2019) (describing the D.C. Circuit as "a specialist" in "differentiating privileged material from working law").
One of petitioners' arguments in this case is that any prior opportunity for review by Appeals of the section 6707 penalty was illusory because the IRS examination function and Appeals had predetermined the outcome of petitioners' challenge. By contrast, in his Motion for Partial Summary Judgment filed on April 14, 2022, the Commissioner asserts that the prior opportunity for review by Appeals was meaningful, and that, "[i]f petitioners had filed protests of the section 6707 penalties, Appeals would have provided an independent determination of petitioners' liability." Resp't's Mot. at If 62.
In our view, this dispute places the IRS's decision-making sufficiently at issue to overcome any deliberative process privilege that may have otherwise attached to the McCracken and Reyfman memos. To determine whether individuals at the IRS acted improperly to deprive petitioners of a meaningful opportunity for review at Appeals, as petitioners contend, petitioners are entitled to review the memos, both of which relate to the procedural handling of petitioners' examination in the months leading up to February 11, 2014, when the IRS issued custom notice and demand letters offering petitioners a conference with Appeals.
In light of our resolution of this issue, we need not address the parties' other arguments, including whether the deliberative process applied to the memos in the first instance.
In view of the foregoing, it is hereby
ORDERED that petitioners' Third Motion to Compel Production of Documents filed August 9, 2023, is granted in part in that respondent shall, on or before December 20, 2023, produce to counsel for petitioners unredacted versions of the McCracken and Reyfman memos as requested in petitioners' Motion. It is further
ORDERED that petitioners' Third Motion to Compel Production of Documents filed August 9, 2023, is denied in all other respects.