Opinion
CV 99-1794-PHX-JAT
September 19, 2003
ORDER
Before the Court are the following discovery-related motions:
1. Defendant's "Motion to Compel Production of Documents" (Doc. # 163); and
2. Plaintiffs' "Second Motion to Compel Production of Documents" (Doc. # 176).
The parties have fully briefed the issues contained in both motions.
I. Factual and Procedural Background
Plaintiff Rex Maughan and Maughan Holdings, Inc., an Arizona Corporation, own a substantial interest in Forever Living Products ("FLP"), an umbrella corporation for a group of companies that distribute aloe vera-based products worldwide, including the United States and Japan. Aloe Vera of America ("AVA") distributes aloe vera products in Japan through Forever Living Products Japan ("FLPJ"), which is owned by Maughan and Plaintiffs Gene Yamagata and Yamagata Holdings, Inc. FLPJ sold approximately $317 million worth of aloe vera products in Japan in tax year 1995.
Plaintiffs' Complaint, Doc. # 1 at ¶ 4-8.
Id.
Id. at ¶ 16.
In their Complaint filed October 6, 1999, Plaintiffs claim that at some time in the summer of 1996, the United States Internal Revenue Service ("IRS") proposed a simultaneous examination (audit) of AVA, Maughan, Yamagata and FLPJ to the Japanese National Tax Authority ("NTA"). The ultimate result of the examination was that over $100 million of additional income was shifted from the U.S. to Japan, facilitated by the IRS's transfer of allegedly false information to the NTA. Plaintiffs aver that this false information was leaked by the NTA to the Japanese press, and that Defendant knew or should have known that the NTA routinely leaks such sensitive information concerning foreign-owned corporations.
Id. at ¶ 17.
Id. at ¶ 31; 39-41. This assessment appears to have been reduced in 2002 to "nearly zero" pursuant to negotiations conducted between the U.S. Competent Authority and the NTA. See Doc. # 188, Exh. A (containing the article "Settlement May Indicate Thaw in Japanese View Toward Profit Comparison Models").
Doc. #1 at ¶ 42-53.
In its motion to dismiss Plaintiffs' complaint, Defendant alleged that Plaintiffs were aware of the examination as early as August 15, 1996, therefore making their October 6, 1999 complaint untimely under the two-year statute of limitations applicable to Plaintiffs' action. The Court granted Defendant's motion to dismiss, but provided Plaintiffs leave to file an amended complaint. Plaintiffs filed a First Amended Complaint, stating that although news stories appearing in October 1997 first informed Plaintiffs that information about the simultaneous examination was leaked to the press, they were unaware of the source of the press leaks. Plaintiffs then aver that it was only in August 1998 that the IRS notified Plaintiffs that their return information was disclosed to the NTA as part of the simultaneous examination. Plaintiffs state that IRS'S disclosure in August 1998 was made in response to a March 2, 1998 Freedom of Information Act ("FOIA") complaint in the United States District Court for the District of Arizona "demanding release of documents previously requested under an administrative FOIA request."
Doc. #13.
Doc. #26.
Doc. # 27 at ¶ 55.
Id. at ¶ 56.
Id. at ¶ 59.
Defendant again filed a motion to dismiss the First Amended Complaint challenging, among other things, the timeliness of Plaintiffs' complaint. In the Order denying Defendant's motion, the Court stated that "nothing in the moving papers . . . would allow the Court to conclude with certainty that the Plaintiffs had a different date of discovery than that alleged in the complaint." Plaintiffs later filed a Second Amended Complaint that expounds on the damages Plaintiffs allegedly suffered from the disclosure of false information to the NTA.
Doc. # 40.
Doc. # 65 at 3.
Doc. # 118 at ¶ 73A.
The discovery motions now before the Court involve Defendant's pursuit of documents relating to the statute of limitations issue, and Plaintiffs' quest for information exchanged between the U.S. and Japan during simultaneous examinations of both Plaintiffs and other taxpayers. The Court will address each motion in turn.
II. Defendant's Motion to Compel (Doc. # 163)
Defendant seeks two categories of documents that Plaintiffs have asserted are privileged: (1) those documents that Defendant argues are not protected by the attorney-client privilege because they were exchanged between two non-attorneys (marked by Defendant as "NAC" (not attorney-client)); and (2) documents reflecting either an attorney-client communication or attorney work-product, but that are relevant to the statute of limitations issue. Defendant argues that these documents are essential to its statute of limitations defense and accompanying investigation of when Plaintiffs first discovered that the IRS allegedly disclosed tax return information unlawfully to the NTA.
Defendant informs the Court that although Plaintiffs have subsequently produced certain "non-attorney-client privilege" documents identified in its motion to compel, Plaintiffs have still failed to produce documents listed on pages 29, 68, 79, 109, 110, and 113 of Plaintiffs' privilege log. Defendant submits Plaintiffs' privilege log, requesting that the Court examine in camera certain documents Defendant has marked "not attorney-client privilege" or "statute of limitations."
Doc. # 163 at 8.
A. Documents Marked as "Not Attorney-Client Privilege"
Both parties agree that the test established by In re Fischel, 557 F.2d 209, 211 (9th Cir. 1977) applies to the question of whether the documents at issue are protected by the attorney-client privilege: (1) legal advice of any kind must be sought, (2) from a professional legal adviser acting as such, (3) the communication is related to the pursuit of legal advice, (4) the communication is made in confidence, (5) and is made by the client. Defendant avers that as to those documents Plaintiffs have listed as "draft documents provided to counsel for review and comment," such communications are not privileged or the privilege has been waived. Plaintiffs disagree, providing additional justification as to why each document has been withheld. Accordingly, the Court will conduct an in camera review of these disputed documents pursuant to the aforementioned elements of attorney-client privilege.
Those documents that the Court determines are not subject to the attorney-client privilege, if any, shall be ordered compelled. As to documents the Court concludes are subject to the attorney-client privilege, the Court will apply the test further elaborated on herein in section ILB.
B. Documents Labeled Attorney-Client Privilege or Attorney Work Product
As the parties make no distinction in their briefs between the attorney-client and attorney work product privileges, and because most courts addressing waiver also have not differentiated between the two privileges, the Court's analysis will apply equally to both privileges.
The parties generally agree that the three-prong test outlined by the seminal case of Hearn v. Ray applies to the question of whether Plaintiffs have waived their assertion of privilege by placing certain facts "at issue" in the case, The Court must therefore determine: (1) whether Plaintiffs assert privilege as part of an affirmative act, such as filing suit; (2) whether Plaintiffs, through this affirmative act, have placed the otherwise protected information "at issue" by making it relevant to the case; and (3) whether Plaintiffs' assertion of privilege would deny documents vital to Defendant's statute of limitations defense. 1. The first two elements of the Hearn test are satisfied.
Hearn v. Ray, 68 F.R.D. 574 (E.D. Wash. 1975). See also United States v. Amlani, 169 F.3d 1189, 1195 (9th Cir. 1999) (citing Chevron v. Pennzoil Co., 974 F.2d 1156, 1162 (9th Cir. 1992)).
Amlani, 169 F.3d at 1195.
Plaintiffs have asserted privilege as the result of an affirmative act-by filing a suit in which a statute of limitations defense is available. Therefore, the first prong of the Hearn test is satisfied. As to whether Plaintiffs have placed privileged material relating to the two-year statute of limitations "at issue," if and when Defendant files a motion for summary judgment, the Court will examine whether Plaintiffs have met the statute of limitations. 26 U.S.C. § 7431 (d) states that a plaintiff may "bring an action [for unauthorized disclosure of tax returns or return information] . . . at any time within 2 years after the date of discovery by the plaintiff of the unauthorized inspection or disclosure." Plaintiffs attempt to avoid discovery of privileged documents relating to the "date of discovery" issue by arguing that their Second Amended Complaint makes no affirmative reference to their attorneys' investigations as to the accrual of a cause of action.
26 U.S.C. § 7431 (d) (emphasis added).
Doc. # 172 at 8 (stating that their Second Amended Complaint contains references to their discovery of the disclosures only to "comply with the exact terms of [section 7431(d)]."); Doc. # 118 at ¶ 55-63.
Plaintiffs' artful pleading cannot overcome the record evidence that demonstrates that prior to October 6, 1997, Plaintiffs' through their retained counsel received the examination notice, filed a FOIA request, received a partial response to their FOIA request, and wrote a letter to the IRS stating that IRS conclusions were erroneous and that these conclusions were communicated to the NTA. Plaintiffs also claim in their Second Amended Complaint that their "representatives" were threatened by an NTA official in "late 1996" with a press leak to coerce Plaintiffs into accepting their audit proposal. Plaintiffs' attorneys' involvement as to Plaintiffs' date of discovery of the allegedly unauthorized disclosures, therefore, is certainly "at issue" in this case.
Although Plaintiffs do not state who these "representatives" were, it unlikely that Plaintiffs were without counsel and that counsel were without knowledge of the threatened press leak.
Doc. #118 at ¶ 23.
2. The Test for "Date of Discovery" Contained in Section 7431(d) and the Extent to Which Defendant is Entitled to Otherwise Privileged Information
The third element of the Hearn test addresses the extent to which Defendant is entitled to discover otherwise privileged information dating prior to October 6, 1997. The Court must first determine a test for "date of discovery" under section 7431(d) in order to determine which documents are relevant to the statute of limitations question for purposes of discovery. The Court must then examine whether Plaintiffs' assertion of privilege would deprive Defendant of information vital to its statute of limitations defense. Ultimately, Hearn instructs that the Court should "protect confidential attorney-client relationships only to the extent that the injury the relationship would suffer from disclosure is greater than the benefit to be gained thereby."
Ultimately, however, Judge Teilborg will decide which test applies to Defendant's statute of limitations defense.
Hearn. 68 F.R.D at 582.
a. Plaintiff's Proposed Test
Plaintiffs first advocate in their brief an "actual discovery" test, averring that because Defendant and the NTA were in sole possession of facts regarding the alleged disclosures up until the time documents were disclosed in August 1998 pursuant to Plaintiffs' successful FOIA suit, none of the documents at issue is relevant to Defendant's statute of limitations defense. Plaintiffs then somewhat retreat from this contention, however, arguing in the alternative that if Defendant is entitled to any of Plaintiffs' information, it would only be to satisfy the objective test that "[t]he statute of limitations runs from the time that sufficient facts would have been uncovered by a plaintiff exercising reasonable diligence." Plaintiff objects to Defendant's claim that it is entitled to delve into the subjective reactions of counsel to "various storm warnings."
Doc. # 172 at 9.
Id. at n. 16 (citing Berry. Valence Technology. Inc., 175 F.3d 699, 704 n. 6 (9th Cir. 1999); Young v. Lepone, 305 F.3d 1, 8 (1st Cir. 2002)).
Doc. #172 at 14.
b. Defendant's Position
Citing the Seventh Circuit's opinions in Tregenza v. Great American Comm. Co., and Fujisawa Pharm. Co., Ltd. v. Kapoor. Defendant implies that it is entitled to the subjective opinions of Plaintiffs' counsel, including "whether and how [certain events] constituted `storm warnings' . . . [and] how plaintiffs and their counsel analyzed these messages, particularly given Mr. Woolston's IRS experience." These storm warnings include: (1) an August 1996 examination notice issued to Plaintiffs Maughan, AVA and FLPJ; (2) the NTA's January 1997 levy of additional tax liability on Plaintiffs; and, (3) the April-June 1997 disclosures by Defendant in response to a March 4, 1997 FOIA request by one of Plaintiffs' counsel, Terence Woolston.
Doc. # 163 at 12; Tregenza v. Great American Comm. Co., 12 F.3d 717, 718 (7th Cir. 1993) (Posner, C.J.), cert denied, 511 U.S. 1085 (1994);Fujisawa Pharm. Co., Ltd. v. Kapok, 115 F.3d 1332, 1336 (7th Cir. 1997) (Posner, C.J.).
Doc. # 163 at 10; Doc. # 177 at n. 9.
Doc. # 163 at 4. Defendant refers to "Exhibit 4, ¶ 24." However, no reference to the January 1997 Notice is contained in Exhibit 4.
Id. at 3-4.
Defendant speculates that upon receipt of the August 1996 examination notice and the resulting assessment of additional tax liability in January of 1997, Plaintiffs' counsel Terence Woolston undertook an investigation into whether the IRS unlawfully disclosed information to the NTA. This investigation included Plaintiffs' March 7, 1997 FOIA request that sought, among other things, "information provided by the IRS to the [NTA]." Defendant claims that Woolston has admitted that the March 7, 1997 FOIA request was an "attempt to discover the internal conduct of the Simultaneous Investigation, including possible disclosures by the IRS.'" Defendant states that as a result of this FOIA request, Defendant made partial disclosure of records between April 23, 1997 and June 30, 1997. Defendant refers the Court to a letter written by Woolston to the IRS on August 21, 1997, which states that the determinations by the IRS as to Plaintiffs' tax liability were erroneous and that information was exchanged between the U.S. and Japan. Defendant further argues that because Plaintiffs claim in Count II of their Second Amended Complaint that Defendant knew or should have known that the NTA routinely leaks information, and therefore by implication any disclosure by the IRS to the NTA was an unauthorized disclosure, counsel should have known as early as the 1996 simultaneous exam notice that unauthorized disclosures would be made to the NTA.
Defendant notes that Woolston was formerly an IRS district counsel and has "a great deal of tax and some international experience. . . ."Id. at 3. Defendant submits the affidavit of David Otto, Woolston's former supervisor at the IRS, to support this conclusion. Id. at Exhibit 4. Plaintiffs argue that the filing of this affidavit is inappropriate and that the Court should strike the affidavit. Doc. # 172 at 14.
Doc. # 163 at Exh. 6, ¶ 11.
Id. at Exh. 7, p. 4.
Id. at 9.
Id. at Exh. 6, ¶ 14.
Doc. #177 at 6-7.
c. Analysis
The Ninth Circuit has not addressed whether "date of discovery" under section 7431(d) for purposes of the statute of limitations trigger means per se inquiry notice as a result of "storm warnings," inquiry notice based on the existence of "storm warnings" plus a determination as to whether the plaintiff either objectively or subjectively exercised "reasonable diligence" in investigating whether a cause of action may have accrued, or the date of actual discovery of the cause of action. Both parties rely on cases (Berry, Young, Tregenza, Fujisawa), all cases that addressed the meaning of the Supreme Court's holding in Lampf, Pleva, Lipkind, Prupis Petigrow that plaintiffs in certain securities fraud actions must bring suit "within one year after the discovery of the facts constituting the violation. . . ."
Lampf, Pleva, Lipkind, Prupis Petigrow v. Gilbertson, 501 U.S. 350, 364 (1991).
The Seventh Circuit in Tregenza and Fujisawa approved a standard in which sufficient "storm warnings" alone can trigger the running of the statute of limitations under certain circumstances. However, the Ninth Circuit in Berry, as cited by Plaintiffs, has expressed reservations to the Seventh Circuit's opinion in Tregenza that the existence of storm warnings, without more, triggers the statute of limitations.
See Tregenza, 12 F.3d at 720 (drop in stock price started statute of limitations because "an investor would have become suspicious and investigated "); Fujisawa, 115 F.3d at 1336 (stating that "Fujisawa should have begun to investigate [based on certain "storm warnings"], and had it done so it would not have been caught by surprise [when the FDA brought its investigation] and could have easily have obtained enough information to sue within a year of that time.")
Berry v. Valence Technology, Inc., 175 F.3d at n. 6 (citingTregenza, Fujisawa, supra). The Court further notes that the First Circuit in Young, as cited by Plaintiffs, approvingly cited to Berry, notTregenza or Fujisawa. Young, 305 F.3d at 10. The Court notes that the Defendant's reference to the Fourth Circuit's unpublished opinion in Wood-the only opinion the Court has found specifically addressing what test applies to section 7431(d)-is misplaced. The court in Wood did not base its otherwise cursory inquiry only on the appropriateness of Wood's reaction to "storm warnings." Wood, 1998 WL 414019, at *2 (4th Cir. July 23, 1998) (stating that in some circumstances, the limitations period may be tolled when fads are concealed from a plaintiff, but that Wood had not exercised due diligence once the underlying fraud was discovered).
On the other hand, Plaintiffs "actual notice" test would strip Defendant of any ability to probe Plaintiffs' averments in both its Second Amended Complaint and other pleadings that prior to October 9, 1997, Plaintiffs received the examination notice and "threats" of press leaks, filed a FOIA request, received a partial response to their FOIA request, and wrote a letter to the IRS stating that IRS conclusions were erroneous and that these conclusions were communicated to the NTA. Plaintiff offers no case support for such a test.
The Ninth Circuit in Berry held that if it were to adopt a "date of discovery" test, it would agree with the Tenth Circuit's formulation in Sterlin v. Biomune Systems that the statute of limitations begins to run "once [a plaintiff], in the exercise of reasonable diligence, should have discovered the facts underlying the alleged fraud." In referring to Sterlin's test, the Ninth Circuit specifically stated that a court determines first whether a reasonable plaintiff should have begun an investigation after receiving "storm warnings." If the answer to this question is yes, the Ninth Circuit has indicated that a court then examines at what point a reasonable plaintiff and its attorneys should have discovered a cause of action based on the facts before them Accordingly, Defendant is entitled to discover privileged documents and communications, generated or occurring prior to October 7, 1997, to the extent that they demonstrate the facts before Plaintiffs and their counsel.
The Court ultimately found it unnecessary to decide which standard applied. Berry, 175 F.3d at 704-705.
Id. (citing Sterlin v. Biomune Sys., 154 F.3d 1191, 1201 (10th Cir. 1998)).
Berry, 175 F.3d at 704; Sterlin, 154 F.3d at 1203-4.
Berry, 175 F.3d at 704 (referring to a "reasonable investor" actions and "reasonably diligent investor," not to what actions the specific investor in that case actually took); Sterlin, 154 F.3d at n. 20 (stating that "although a plaintiff has an obligation of diligence, the plaintiff need not show the actual exercise of diligence in order to toll the limitations period" and that a "hypothetical diligence" standard should apply) (citing Ohio v. Peterson, Lowry, Rail Barber Ross, 651 F.2d 687, n. 16 (10th Cir. 1981)).
As to Plaintiffs' counsel's actual work product, the court in Axler v. Scientific Ecology Group, in addressing the extent of discovery of privileged documents relevant to a securities fraud statute of limitations question, held that:
because the test [for a plaintiff's diligence in discovering a cause of action for a securities violation] is objective rather than subjective, the opinions plaintiffs' counsel actually formed are relevant only as possible evidence of what a reasonable person would have concluded . . . defendants are [therefore] entitled to discovery from plaintiffs' counsel concerning what investigation they conducted, what information they received, and when they received it.
Axler v. Scientific Ecology Group, Inc., 196 F.R.D. 210, 212-213 (D. Mass. 2000) (citing In re lmmperial Corp. of America, 179 F.R.D. 706, 708 (S.D. Cal, 1998)).
The Court will therefore compel production of information that may be contained in the disputed documents that evidences what investigation Plaintiffs' counsel conducted, what information counsel received, and when counsel received it. The Court will also compel production of documents containing information relating to when Plaintiffs' counsel may have advised Plaintiffs that a cause of action may have accrued. Production of such information, if it exists, is vital to Defendant's statute of limitations defense and is not obtainable from any other source to the extent that it may have come from persons other than Defendant. At the same time, the Court has sought through the limitations contained herein to protect privileged attorney-client communications and attorney work product.
The Axler court further held that the defendants in that case were entitled to discover "when they [plaintiffs' attorneys] advised their clients that counsel believed plaintiffs had been defrauded." Id. at 213 (citing Conkling v. Turner, 883 F.2d 431, 434-35 (5th Cir. 1989)).
Plaintiffs advance the argument that the only other entity that information was generated from is the NTA, and therefore Defendant is free to issue letters rogatory to the NTA as an alternative to compelling otherwise privileged information from Plaintiffs. Doc. # 172 at 11. It is uncertain at best, however, whether a Japanese court would compel the NTA to provide such information to Defendant.
3. Defendant's Alternative Argument that Plaintiffs Waived Privilege By Asserting Equitable Tolling in the Second Amended Complaint
In the alternative, Defendant contends that Plaintiffs have opened the door to the subjective opinions of counsel by pleading equitable tolling in the Second Amended Complaint. Specifically, Defendant points out that the Second Amended Complaint states that "[a]t no time before August 1998 did the IRS notify Plaintiffs that it had disclosed return or return information as part of the Simultaneous Examination to the NTA," placing equitable tolling at issue. Defendant concludes that "logic belies" Plaintiffs' claim that the reference is only made to establish the reasonableness of Plaintiffs' investigation. Plaintiffs counter that they "have no need to plead equitable tolling" because their Second Amended Complaint "set[s] forth the factual background for the date of discovery, the only pertinent date set forth in [section 7431(d)]."
Doc. # 163 at 6-8 (citing WGLI v. Cablevision Sys. Corp., 879 F. Supp. 229, 234-35(E.D.N.Y. 1994): The Bohack Corp. v. Iowa Beef Processors, Inc., 1981 WL 2018 at *2 (E.D. N.Y. Jan. 13, 1981)).
Doc. # 177 at 5.
Doc. # 172 at 7.
The Court agrees with Defendant, as an initial matter, that Plaintiffs attempt to explain their delay by referring to Defendant's response to their FOIA complaint. Plaintiff's complaint states that:
[r]ead into every statute of limitations . . . is the equitable doctrine that in the case of defendant's . . . deliberate concealment of material facts relating to his wrongdoing, time does not begin to run until plaintiff discovers or by reasonable diligence could have discovered the basis of the lawsuit.
Doc. # 47 at 6.
However, the Court declines to adopt the broad view of privilege waiver set forth in WGLI and Bohack. Federal Rule of Civil Procedure 26(b)(3) entitles Defendant to Plaintiffs' trial preparation materials only upon a showing that the information sought is relevant to the claim or defense of any party. Even then, the Court is instructed under the rule to steadfastly guard "against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney." The crux of Plaintiffs' claim is that because Defendant did not release factual information pursuant to a FOIA request until ordered by a Court to do so, Plaintiffs did not discover that a cause of action had accrued until at the earliest August 1998. Based on the Court's holding explained above that an objective test applies to the question of Plaintiffs' diligence, Plaintiffs' counsel's actual opinions are not relevant to the essential question of what facts relating to the alleged disclosures Plaintiffs' counsel possessed that were not otherwise provided by Defendant, what similar counsel exercising reasonable diligence would have concluded from such facts, and when counsel arrived at a conclusion and may have communicated it to Plaintiffs.
Supra at n. 35.
Id.
II. Plaintiffs' Motion to Compel
Plaintiffs seek information from Defendant to support their argument that Defendant knew or should have known that the NTA routinely disclosed confidential information to third parties, and therefore Defendant's release of Plaintiffs' tax return information to the NTA pursuant to the simultaneous examination was unlawful under 26 U.S.C. § 6103(k)(4) and 7431. In order to succeed on its claim under section 7431, Plaintiffs must show that: (1) disclosure by the IRS was unauthorized; (2) that the disclosure was knowingly or negligently made; and (3) the disclosure was a violation of section 6103. Section 6103(a) and (b) prohibit the disclosure of confidential return or return information, with certain exceptions. One of those exceptions is contained in section 6103(k)(4), which provides that the IRS may disclose such return or return information to the NTA pursuant to the tax treaty existing between the United States and Japan, but only to the extent provided for in the treaty and subject to the terms and conditions of the treaty. In its Order denying Defendant's motion to dismiss, Judge Silver determined that the information exchanged between Defendant and the NTA constituted return or return information, and
Doc. # 26 at 17-18 (citing Weiner v. Internal Revenue Service, 789 F. Supp. 655, 656 (S.D. N.Y. 1992), aff'd, 986 F.2d 12 (2nd Cir. 1993); Christensen v. United States, 733 F. Supp. 844, 849 (D. NJ. 1990), aff'd, 925 F.2d 416 (3rd Cir. 1991); Flippo v. United States, 670 F. Supp. 638 (W.D. N.C. 1987), aff'd, 849 F.2d 604 (4th Cir. 1988)).
26 U.S.C. § 6103(k)(4) provides that "return or return information may be disclosed to a competent authority of a foreign government which has an income tax or gift or estate tax convention, or other convention or bilateral agreement relating to the exchange of tax information, with the United States, and only to the extent provided in, and subject to the terms and conditions of, such convention or bilateral agreement." The treaty at issue in this case is titled the "Convention between the United States of America and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income entered July 9, 1972, TIAS 7365, 1973-1 C.B. 630" ("Convention").
if [Defendant] knew or should have known, based on the alleged prior mutual relations with the NTA, that the latter routinely failed to comply with the terms and conditions of the secrecy mandated by the Convention, [Defendant's] disclosure of any return information-whether true or false-to the NTA was not authorized by the Convention or the statute.
Doc. #26 at 23.
In his order denying Defendant's second motion to dismiss, Judge Teilborg agreed with Judge Silver's conclusions.
Doc. #65 at 5.
The parties have resolved their dispute regarding documents numbered 20000 to 20074, and therefore the Court will not address Plaintiffs motion to compel as to these documents. As for documents numbered 20075 to 20154, Defendant appears not to mount relevancy objections.
Defendant argues that it is prohibited from disclosing the information contained in Documents numbered 20075 through 20154 because the documents contain confidential third-party return information under section 6103(a) and (b) and disclosure cannot be made under any enumerated exception to this rule. Specifically, because the disputed documents contain "return information" and not "returns," Defendant avers that the exception contained in 6104(h)(4)(B) does not apply. Plaintiffs counter that sections 6103(h)(4) and (h)(4)(B) allow disclosure of "return or return information" pursuant to a federal judicial proceeding "if the treatment of an item reflected on such return is directly related to the resolution of an issue in the proceeding."
Doc. # 186 at 10 (citing 26 U.S.C. § 6103 (h)).
Doc. #186 at 7.
Doc. # 188 at 7-9 (citing 26 U.S.C. § 6103 (h)(4)(B)).
The Court agrees with Plaintiffs that Defendant's reading of section 6103(h)(4)(B) ignores the introductory language in 6104(h) that states "return or return information maybe be disclosed" (emphasis added). Recognizing the weakness in this argument, Defendant then falls back on the position that pursuant to the Court of Federal Claims Court's holding in Shell Petroleum, Inc., and the prohibition against disclosure of redacted tax payer information as outlined by the Supreme Court in Church of Scientology, it has prepared a summary document with respect to "raw data" that:
Shell Petroleum Inc. v. U.S., 46 Fed. Cl. 719 (2000). The Shell Court indicated that the best course of action, in response to a plaintiffs request that it conduct an in camera review of tax credit certificates filed by individual tax payers and redact any information pursuant to section 6103(a), would be to separate generic information from the certificate and provide it in list form. Id. at 725. The Court further concluded that "[w]ithout deciding the issue and subject to future argument, the Court notes that a list would seem to fit the requirement under the Haskell Act that the data be "in a form." Id. (citing Church of Scientology of California v. I.R.S., 484 U.S. 9, 15 (1987))
summarizes the number of investigations of potential NTA disclosures of return information, places this number in the context of the number of exchanges with Japan, and summarizes the results of those investigations, all in a form that could not be associated with, or otherwise identify, directly or indirectly, the taxpayers involved.
Doc. # 186 at 9. The "Second Dunahoo Declaration" refers to a document authored by Carol A. Dunahoo, Director of the International Large Mid-Size Business Division at the IRS. As such, Dunahoo acts as the U.S. competent Authority. See Doc. # 188 at Exh. B.
Plaintiffs claims that the Second Dunahoo Declaration is inadequate, as it omits "raw data" and does not "assist in the process of understanding the information exchanges or potential unauthorized disclosures by and between the IRS and the NTA. Plaintiffs then propose that Defendant, in lieu of producing the documents at issue, revise the declaration, to include answers to the following questions:
Doc. # 188 at 5. Dunahoo also has submitted a "Third Declaration" providing further details of Defendant's investigation into NTA disclosures. See Doc. # 186 (end).
Id. at 5.
Plaintiffs perhaps make this offer in lieu of confronting the Supreme Court's holding in Church of Scientology that "removal of identification from return information would not deprive it of protection [from disclosure] under section 6103(b)." The Court notes that conspicuously missing from Plaintiffs' briefing is an explanation ofChurch of Scientology's effect on the information Plaintiffs seek and the extent to which the Court may conduct redaction.
1. Of the 1.1 million information exchanges from 1998 through 2001 between the NTA and the IRS, how many were communication of a withholding amount, foreign source income amount earned by a resident of the other state, or similar transmittal of a single item of discrete information?
2. How many MAP proceedings were conducted between the NTA and the IRS from 1988 to 2001?
3. How many Simultaneous Examinations were conducted between the NTA and the IRS from 1988-2001?
4. What procedures were followed by the IRS in communicating with the NTA and requesting responses to the allegations of unauthorized disclosures?
5. What were the responses of the NTA to the IRS with respect to each investigation performed regarding the allegations of unauthorized disclosures by the NTA?
6. What procedures were followed by the IRS in performing an independent investigation with respect to each allegation of unauthorized disclosure by the NTA?
Defendant did not request permission to file a sur-reply in response to Plaintiffs' proposal. However, it is clear from Defendant's response to the motion to compel that it would, at minimum object to providing answers to question 5 pursuant to 26 U.S.C. § 6105.
Doc. # 186 at 10-12. The Court notes that although the text of Defendant's response indicates the numbered documents that Defendant makes a section 6105 objection to, Defendant's amended privilege log does not specifically designate section 6105 as grounds for objection as to any document. See Doc. # 186.
Because Plaintiffs have offered to accept answers to the aforementioned questions in lieu of production of the documents as issue, and because the Court is of the preliminary opinion that the Haskell Amendment summary as initiated by Defendant may be the only plausible remedy to Plaintiffs' motion pursuant to the Supreme Court's ruling in Church of Scientology, the Court will deny Plaintiffs' motion to compel without prejudice. The Court will order that Plaintiffs serve the above enumerated questions as written interrogatories on Defendant. Defendant may issue objections, if any exist, and move for a protective order under Federal Rule of Civil Procedure 26(c). Once responses have been received, if Plaintiffs determine that information contained in the documents at issue is still necessary to its case, Plaintiffs may move to renew their motion to compel. If Defendant seeks a protective order as to information it believes is protected from disclosure under 26 U.S.C. § 6105(a), both parties shall address specifically the persuasiveness of the holding in Tax Analysts v. Internal Revenue Service. Defendant shall also designate specifically in its privilege log those documents in which it makes a section 6105(a) objection.
The parties continue to be bound by the meet and confer requirement of Rule 26(c).
217 F. Supp.2d 23 (D. D.C. 2002). The Court in Tax Analysts adopted a broad view of what tax convention information is treated as "confidential or secret" under section 6501(c)(1)(E), sustaining the Government's non-disclosure of communications with treaty partners.
III. Orders
IT IS ORDERED that:
1. Defendant's "Motion to Compel Production of Documents" (Doc. # 163) is GRANTED to the extent provided for herein. Plaintiffs shall submit the documents at issue so that the Court may conduct an in camera review within 20 days from the date of the filing of this Order.
2. Plaintiffs' "Second Motion to Compel Production of Documents" (Doc. # 176) is DENIED without prejudice. Plaintiffs shall have 20 days from the date of the filing of this Order to issue the interrogatories referenced by the Court herein. Any future motions related to the information Plaintiffs have sought in their motion to compel shall address the issues raised by the Court herein.