Free Reply to Response to Motion - District Court of Federal Claims - federal

Case 1:06-cv-00407-ECH

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3ln tbt 'lníttb ~tattS ((ourt of jf ebetal ~hímf~ I LED
No.03-2164T (Filed August 15, 2005) (Not for Publication)
AUG i 5 i005
FEDER.lL CLAIMS

U.S. CORT OF

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JADE TRADING, LLC, ET AL.,
Plaintiffs,
v.

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THE UNITED STATES,

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Defendant.
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ORDER SUSTAINING DEFENDANT'S INVOCATION OF DELIBERATIVE PROCESS PRIVILEGE

Ths matter comes before the Cour on the paries' joint request that the Court review
documents in ~ and rule on whether they are protected from disclosure in discover under the

deliberative process privilege.) The documents were submitted for in camer review in two increments. The first group of documents contained comments regarding the Interal Revenue
Service's proposed adoption of

Treasur Regulation § i .701 -2 -- including its scope, content and the

pros and cons of adopting the regulation or portions thereof. The second submission contained two documents that mentioned Helmer v. Comm'r, T.C. Memo 1975-160 (1975) and the definition of "liability" under Interal Revenue Code Sections 357,358, and 752. During the Pretal Conference

on August 4, 2005, the Court orally ruled that the documents are properly protected by the
deliberative process privilege. This decision memorializes and explains that ruling.
BackerOUDd
In support of its invocation of

the executive privilege, Defendant submitted five declarations
Chief

of Margo L. Stevens, Assistant Chief Counsel (Disclosure and Privacy Law) in the Offce of
Associate Chief Counsel (procedure & Administration), Offce of

Counsel, Internal Revenue

) Joint Stipulation (May 25, 2005).

Attachment B
A

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Service (IRS), and two declartions of Eric Solomon, the Acting Deputy Assistant Secretar of Treasury.2 There ensued a dispute concerning the adequacy ofthese assertions of executive privi lege 22, 2005, by these individuals because neither is the head ofhis or her respective agency. On April

the Cour issued an order requiring Defendant to assert the executive privilege though the head of
each agency by providing declarations from the Commissioner of the IR and the Secreta of

Treasur, or producing the documents. Jade Trading v. United States, 65 Fed. CI. 487 (2005).

the April 22, 2005, its enforcement pending resolution order, cerification ofthe order for interlocutory appeal, or stay of who must asser the privilege -- which is curently pending before the United States of the issue of Cour of Appeals for the Federal Circuit in Marott Intl Resorts v. United States, Nos. 01-256T an
On May 6, 2005, Defendant fied a motion seeking reconsideration of

o 1-257T. Plaintiffs opposed Defendant's motion. In an effort to resolve this controvery, the paries

filed a stipulation requesting in camera review of documents. In this stipulation, the paries
narowed the scope or documents resnsive to Plaintiffs' first request for production of documents,

including No. 18 relating to Treas. Reg. § 1.701-2, which sought "the 'Backgrund, Information, and

Notes' file (BIN), any other documents maintained by Defendant with respect to the drafing,
proposal, reserations, vagueness, criticisms, invalidity, abandonment, and/or inconsistent

Trea. Reg. § 1.701-2," Pi's' First Request 118, and Plaintiffs' second request for application of production of documents, including Nos. i, 2, 3, 4, and 5, which sought documents addressing Helmer v. Comm'r, T.C. Memo 1975-160 (1975), "the definition of 'liabilty' under (Internal
Revenue 1 Code Sections 357, 358, and 752, and associated topics." Stip. at 1 3. Plaintiffs narowed the body of documents relating to Treas. Reg. 1.70 i -2 by excluding the draft of the regulation. See Stip. at 1 11(a). As to the documents relating to Helmer and the definition of liabilty, Plaintiffs
narowed the request to documents "containing a citation or reference to Helmer." See Id., 1 I 1 (b).

On May 26,2005, Defendant filed approximately 87 documents for in camer review relating

to Treasur Regulation § I. 701-2. In general, these documents appear to have been authored by and
directed to IRS and/or Treasury employees. The documents contain draft language of and comments

on the proposed regulation, proposed recommendations and opinions on drfts of the proposed regulation, opinions on public comments, questions asked by the IRS Chief Counsel and answers the pros and cons regarding the proposed regulation and of IRS staffers, predecisional discussions of its scope and content, opinions about potential examples to be included in the final regulation, and
a parial draft ora notice of

proposed rulemaking.3

On June 2, 2005, Defendant filed two additional documents for in camera review - one of which had been produced in the Marrott litigation and given to Plaintiff, the "Helmer/Cram memo." In Ms. Stevens' Declaration filed in the Marott litigation, she described the withheld document as

2 The Governent submitted declarations of

Margo Stevens on April 9, 2003, March 25,
Eric Solomon On Januar

2004, December 23,2004, January 10,2005, and Januar 28,2005 and of

5,2005, and February 12, 2005. See Stip. at 16.
3 Some ofthese documents reflect legal analysis and legal opinion as welL.
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follows:
Bates Nos. 10997- 10999. Document drafted by Mar Beran, attorney,

Passthoughs and Special Industries, Branch 1, titled "Attachment to Chief Counsel Meeting Request Form," addressing the appropriate treatment of
short sales of securties by parerhips. The portions of this document for which the Serice assers executive privilege consist of: the second setence of

the fit full paragraph on page one (Bates No.1 0997) since ths sentence

contains the recommended holding of a proposed revenue ruling on short
sales of securties, the paragrph beginning on the bottom on page one (Bates

No. 10997) and continuing on the firs four lines of page two (Bates No.

10998) since this information contains the author's reommendatons concerng the definition of liability and the expansion of a project with
respect to liability, and the final pargraph on page th (Bates No. 10999) since thes paragrphs contain opinions concerning the use of secon 705(b)

to rech short sales..
Steven DecL. at 53, Def.'s Opp'n to PI.'s Supp. Motion to Compel (Feb.ll, 2005) at 53.

Discussion
The executive privilege denotes at least three broad categories of

privilege. Fir the state

secrets doctrne or privilege is an evdentiar privilege protecting milita and stte secret, so as not to compel the dissemination of sensitive or classified information. Revolds v. United States, 345
U.S. 1, 7-8 (1953); Marott. 61 Fed. CI.411

, 416 (2004). Second, the presidential privilege protects
v . United

conversations and communications betwee the President and senior advisors. ~ Cheney

States Dis" Ct. for the Dist. ofColumbi!! 542 U.S 367 (2004); United States v. Nixon. 418 U.S. 683 of executive privilege -- the (1974); Marott, 61 Fed. Cl. at416. This case involves a third category

deliberative process privilege, covering intra-governental pre-decisional documents reflecting
advisory opinions, recommendations, and deliberations comprising par of a process by which

governental decisions are formulated. NLRB v. Sear. Roebuck & Co., 421 U.S. i 32, i 50 (i 975).

Court of

the executive privilege was first ariculated and adopted by the Claims in Kaiser Aluminum & Cher. Com. v. United States, 157 F. Supp. 939 (Ct. Cl. 1958).~ The Kaiser Court characterized this privilege as an "evidentiar privilege" and recognized
The deliberative category of

Defendant has not yet provided a redacted version ofthis document to Plaintiffs in this action, it shaIJ do so forthwith.
s See, CACI v. Field Servs.. Inc. v. U.S., 12 CI. Ct. 680, 687 n.7 (1987) ("rA)ccording to
commentators, the creation of Development in the Law of "Discovery of

4 If

the executive deliberation privilege can be trced to ~'') (g

Privileged Communications, 98 HARV. L. REv. 1592, 1620 (1985); Note,

Governent Documents and the Offcial Infonnation Privilege," 76 COLUM. L. REv.
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that "(t)he power must lie in courts to determine executive privilege in litigation." Yd. This privilege

subsequently has been widely recognized in Federal cours. CACl, 12 CI. Ct. at 686 (citing Car)
Zeiss Stiftg v. V.E.B. Carl Zeiss. lena, 40 F.R.D. 318, 324 (D.D.C. 1966), afld, 384 F.2d 979,

cer.~, 389 U.S. 952 (l967)).
For a document to fall within the deliberative category of

both pre-decisional and deliberative. Vons Coso v. United States, 51 Fed. CI. 1,22 (2001). To
policy." Walsky Constr. Co. v. United States. 20 Cl. Ct. 3 I 7,320 (1990)(quoting Jordan v. Den't of Justice, 591 F.2d 753, 774 (D.C. Cir. 1978). Additionally, to be deliberative, a document must
reflect 'the give-and-take of

the executive privilege, it must be

qualfy as pre-decisional, the infonnation must address matter "antecent to the adoption of agency

the consult~tive process,' rather than constituting a 'body of seet law; ,

Vons, 51 Fed. CI. at 22 (quoting Coastal States Gas Coip. v. DeJ't of Energy. 67 F.2d 854, 866-67 (D.C. Cir. 1980)). The executive privilege is a qualified one, and can be overome upon a showing

of evidentiar need weighted agaist the har that may result from disclosure. KI 157 F. Supp.
at 946; ~ at 68, (citing Smith v. FTC, 403 F. Supp. 1000, 1015-16 (D. DeL. 1975)); FTC v.

Braman. 54 F.R.D. 364, 366-367 (W.D. Mo. 1972).

At the outset, the Cour concludes that the description of documents in the seven declarations
is accurte and complete.6 Also, after in camera review, the Court finds that all of

the documents

or portions thereof for which the privilege has bee claied contain pre-decisional opinions,

recommendations or advice offer in the coure of the IRS' decisionraking process and are
therefore propely witheld under the delibertive process privilege.7 Specifically, the first set of

documents reflect predecisional give-and-take among governent employees' including their
opinions, questions, answers and debate on what should be included in the final verion of a

proposed regulation -- quintessential examples of communications protected by the delibertive

process privilege. Similarly, the second document, drfted by an IRS attorney, contains a recommended holding of a proposed revenue ruling on short sales of securities, as well as
recommendations concering the definition of liabilty, the expansion of a project with respect to
Section 705(b) to reach short sales. Such predecisional deliberations about the scope of a statutory definition and a recommended governenta decision
liability and opinions concering the use of

142,156 (1976)).

6 Nothing in this opinion alters the Court's earlier conclusion that the deliberative proess
privilege must be raised by the head of

the agency. See Jade Trading v. United States, 65 Fed. CI.

487 (2005).
7 The Court issued a Notice to the Paries indicating that it had completed its review of

the

in camera documents submitted on May 26, 2005, but had questions relating to four of the
documents reviewed. On June 6, 2005, Defendant provided its response to the Notice to Paries,

answering the Court's questions about the author of certain documents and amplifyng its
explanation regarding why portions of cerain documents were properly subject to the deliberative process privilege.
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are protected under the deliberative process pnvilege. See CACI, 12 CI. Ct. at 686 (stating that the privilege protects "documents reflecting advisory opinions, recommendations and deliberations
comprising par of a process by which govenentaJ decisions and policies are formulated" (quoting

Carl Zeiss. Stiftung v. V.E.B. Carl Zeiss. Jena, 40 F.R.D. 318, 324 (D.D.C. 1966), aftd. 384 F.2d
979, cert. denied, 389 U.S. 952 (1967)).

This does not end the inquiry. Rather the Court must assess whether the nee for disclosure here outweighs the har that would result from opening up the Governent's delibertive and predecisional fies to inspection. See In re Grad Jury Subpoena dated AUl!st 9. 200. 218 F. Supp. 2d 544, 553 (S.D.N. Y. 2002) ('The deliberative process privilege is qualified; it may be overcome by a showing of need, which is determined on a case by case basis."). In support of their nee for these internal documents relating to Treas. Reg. 1.701-2, Plaintiffs' aver:

(t Jhe treaur regulation is Defendant's primar weapon to deny Plaintiffs' tax retu position. It is cited in four of the five substtive contentions in Defendant's (Notice of Final Parerhip
Adminstrtive Adjustment) and it is the primar authority contained
in Defendat's Preliminar Statement of

Contentions. As a result, it

is the primar basis for imposing over $4 millon in penalties agains the Ervns. Only thugh the underlying documents can Plaintiffs
. .. prove their claim . .. that the regulation is unconstitutionally

vague and subject to multiple interpretations.
Pi's' Reply to Def. 's Invalid Asserion of Executive Prvilege at 1. In support of

thir nee for the

internal documents relating to the definition ofJiabilities, Plaintiffs' assert:

Plaintiffs are only trng to discover Defendant's ever-changing position with resect to the definition of contingent liabilties -- a position that seems to change when it benefits the Governent.
Pi's' Reply to Der. 's Opp. to Pi's' Mot. to Compel Pi's' Second Set of

Requests for Pruction of

Documents at 9.
Despite Plaintiffs' stated goals in this litigation, disclosure of the deliberative documents is not waranted here. In weighng a litigant's need for discovery against the goverent's interest in protecting its predecisional internal deliberations, the Court "must consider 'the interests of the litigants, society's interest in the accuracy and integrty of fact finding, and the public's interest in

honest, effective governent. '" In re Grand Jury Subpoena, 2 18 F. Supp. 2d at 553 (internal citations

omitted); In re Sealed Case, 121 F.3d 729, 737-38 (D.c. Cir. 1997) ("This need deterination is to

be made flexibly on a case-by-case, ad hoc basis. 'Each time (the deliberative process privilege) is asserted the district court must underake a fresh balancing of the competing intersts,' taking into account factors such as 'the relevance of the evidence,' 'the availabilty of other evidence,' 'the seriousness of the litigation,' 'the role of the governent,' and the 'possibilty of future timidity by

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governent employees.'" (interal citations omitted)). In the instant case, production of the deliberative documents wil not advance the accuracy and integrty of fact finding. Rather, the
documents address solely internal goverental debate on matters of law -- the scope and content of a regulation and the inteIpretation of a legal term. Both the validity of the regulation and the

interpretation of the term "liabilities" can be adjudicated by the court without resort to the Goverent's predecisional debate and opinion.
Conclusion

For the foregoing reasons, the documents reviewed in camera and withheld by the
Goverent are protected by the deliberative proess privilege. Plaintiffs' motions to compel,fo
the extent stil viable under the paries' stipulation of

May 25,2005, are DENIED.

The documents submitted for in camera review wil be preserved as par of the record for pUIposes of any appeal in this case.

~~~~IJ#
Judge

~LLEN COSTER WILLIAMS -:

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