Copyright (c) 1995 Tax Analysts Tax Notes Today OCTOBER 25, 1995 WEDNESDAY DEPARTMENT: Other Court Documents (CTO) CITE: 95 TNT 208-32 LENGTH: 1820 words HEADLINE: 95 TNT 208-32 FULL TEXT: PLAINTIFF'S REPLY TO DEFENDANT'S OPPOSITION TO MOTION FOR IN CAMERA INSPECTION OF DOCUMENTS. (Tax Analysts v. IRS) (94-CV-00220 (TFH)) (United States District Court for the District of Dist. of Columbia) (Section 6104 -- Exempt Organization Information) (Release Date: September 29, 1995) (Doc 95-9622 (8 pages)) CODE: Section 6104 -- Exempt Organization Information SUMMARY: Plaintiff filed its reply to defendant's opposition to plaintiff's motion for in camera inspection of documents in the case of Tax Analysts v. Internal Revenue Service, a suit seeking release of all exempt organization closing agreements entered into by the IRS after Dec. 31, 1992. AUTHOR: Hogan, Thomas GEOGRAPHIC: United States INDEX: exempt organizations, disclosure REFERENCES: Subject Area: Exempt Organizations TEXT: TAX ANALYSTS, Plaintiff, v. INTERNAL REVENUE SERVICE, Defendant. Release Date: September 29, 1995 PLAINTIFF TAX ANALYSTS' REPLY TO OPPOSITION TO MOTION FOR IN CAMERA INSPECTION I. IN CAMERA INSPECTION IS NOT DISFAVORED UNDER THE CIRCUMSTANCES PRESENT HERE PAGE 13 (c) 1995, Tax Analysts, Tax Notes Today, OCTOBER 25, 1995 In its Response to Plaintiff's Motion For In Camera Inspection of Documents (hereinafter "Opposition"), defendant INTERNAL REVENUE SERVICE asserts that in camera review of documents is "generally disfavored" by the Court. However, in making this assertion, the Service ignores the fact that in camera review is disfavored solely because federal agencies, including the IRS, could use the Court's inspection to avoid preparing a detailed affidavit setting forth the basis for their failure to disclose the requested documents. (See, PHE, Inc. V. Department of Justice, 983 F. 2d 248, 253 (D.C. Cir. 1993).) In those situations, as is the case here, where the agency fails to prepare a detailed affidavit which complies with the requirements of this Circuit, in camera inspection is not only appropriate but necessary. II. THE IRS' AFFIDAVIT IS DEFICIENT SINCE IT FAILS TO ADDRESS THE ISSUE OF "SEGREGABILITY" In its Opposition, IRS argues that the affidavit it submitted to the Court outlining the basis for its refusal to produce the withheld documents to plaintiff is not deficient and complies with this Circuit's standards. Although it acknowledges that the affidavit does not identify why the individual passages of the documents are exempt from disclosure, the IRS argues that the duty to identify segregable material and provide the Court with an affidavit which correlates the basis for its claimed exemption to each passage in the withheld documents, does not apply in this case. This assertion has no merit. As plaintiff set out in its Motion for In Camera Inspection of Documents ("Motion"), it is well settled in this Circuit that in FOIA cases federal agencies which have withheld documents must provide the Court with a detailed affidavit which addresses the "segregability" issue and correlates the claimed exemptions to the individual passages contained in the documents. Krikorian v. Department of State, 984 F. 2d 461, 467 (D.C. Cir. 1993); Schiller v. NLRB, 964 F. 2d 1205, 1209 (D.C. Cir. 1992); Mead Data Central v. Department of Air Force, 566 F. 2d 242, 260 (D.C. Cir. 1977). A Court which does not address the issue of "segregability" errs. Krikorian, supra. In its Opposition, IRS asserts that it was not required to provide the Court with an affidavit addressing the "segregability" issue since this is a FOIA Exemption 3 case. Under this exemption, the IRS may withhold from disclosure information "specifically exempted by statute." 5 U.S.C. 552(b)(3). IRS contends the requested closing agreements are specifically exempted by IRC 6103(b)(2) which provides that "return information" is not subject to public disclosure. Importantly, IRC 6103(b)(2) only exempts "return information" and does not automatically exempt the documents the privileged information may be contained in; this is expecially true where disclosure of return and other information is mandated by a special rule for a process entered into by the taxpayer. (See, IRC 6104(a)(1)(A) (disclosure of documents supporting exemption application).) Contrary to the IRS' assertion, the mere presence of "return information" in a document does not exempt the entire document from disclosure. As the Court stated in Willamette Industries, Inc. v. U.S., 689 F. 2d 865, 867 (9th Cir. 1982), "The focus of FOIA is on information, not documents, and the agency cannot justify withholding an entire document simply by showing that it PAGE 14 (c) 1995, Tax Analysts, Tax Notes Today, OCTOBER 25, 1995 contains some exempt material." (See also, Krikorian, supra; Mead Data Central, supra.) Although the IRS alleged that FOIA's mandate that agencies disclose all segregable material (5 U.S.C. 552(b)) is inapplicable in Exemption 3 cases, it offered no support for this baseless proposition. Since IRC 6103(b)(2) does not exempt the closing agreements in their entirety but, instead, is limited to any "return information" contained therein which relates to a tax the taxpayer is subject to, the Court must determine whether the agreements contain segregable material subject to disclosure. The mere fact that this is an Exemption 3 case involving "return information" does not moot the segregability issue. /1/ The IRS' reliance on Church of Scientology v. United States, 484 U.S. 7 (1987) to support its contention that it did not need to provide the Court with an affidavit addressing the "segregability" issue is woefully misplaced. That case involved the disclosure of tax returns, documents which are exempt in their entirety from disclosure (see, IRC 6103(b)(1)) unless submitted in support of an exemption application. /2/ III. AGENCY "BAD FAITH" MAY EXIST In its Opposition, the IRS asserts that plaintiff is "desperate" to create the appearance of agency bad faith so that the Court will be more inclined to conduct in camera review of the documents at issue herein. This assertion also has no merit. In its Motion, plaintiff pointed out a critical gray area in the IRS' affidavit. Although the affidavit asserts that none of the withheld closing agreements "grants" exempt status to an organization, plaintiff noted that the granting of exempt status is a very formal and technical procedure which is typically only accomplished through the use of a ruling or determination letter. Plaintiff also called the Court's attention to the fact that the Service's affidavit was silent on the issue as to whether the IRS agreed in the closing agreements to "grant" exempt status to the organizations in the future, through the subsequent issuance of a favorable ruling or determination letter, a tactic which the Service conceded during discovery that is has used. (See, Schoenfeld Deposition, p. 115, ll. 4-11.) Plaintiff believed it was important for the Court to understand the limitations of the IRS' affidavit and that notwithstanding the agency's assertion that none of the agreements officially "granted" exempt status to an organization, the IRS may have agreed in the closing agreements to "grant" exempt status in the future. Plaintiff's belief that the closing agreements (or some of them) provide that the IRS will issue a favorable ruling or determination letter granting or recognizing exempt status subsequent to the execution of the withheld agreement(s) is supported by facts discovered by plaintiff with respect to the closing agreement the IRS entered into with the Old Time Gospel Hour ("OTGH"). (OTGH's exempt status had been revoked by the IRS.) OTGH's exemption application, which was filed with the IRS subsequent to its execution of a closing agreement with the Service, states: "The effective date of recognition of exemption under section 501(c)(3) of the Code is effective July 1, 1987 pursuant to a closing agreement entered into with the Internal Revenue Service under section 7121 of the Code." (See, Supplemental Stern Declaration, section PAGE 15 (c) 1995, Tax Analysts, Tax Notes Today, OCTOBER 25, 1995 5.) This statement clearly indicates that prior to the date OTGH filed its exemption application: 1) the Service had agreed to re-recognize OTGH as exempt under IRC 501(c)(3); 2) OTGH's exemption would be retroactive to July 1, 1987; and, 3) the agreement to re-recognize OTGH as exempt from tax retroactive to July 1, 1987 was contained in a closing agreement. (IRS has identified the OTGH closing agreement as being one of the agreements at issue herein.) Although the IRS' affidavit states that none of the agreements "grants" exempt status, the facts relating to OTGH indicate that, at best, this statement is misleading since the IRS apparently agreed in the OTGH closing agreement to grant exempt status to the organization following the agreement's execution. IV. Conclusion Based upon the foregoing, and for the reasons set forth in its Motion, plaintiff TAX ANALYSTS respectfully requests that the Court conduct in camera inspection of the withheld closing agreements. Respectfully submitted, September 29, 1995 William J. Lehrfeld D.C. Bar No. 51292 Bruce L. Stern D.C. Bar No. 436231 WILLIAM J. LEHRFELD, P.C. 1250 H Street, N.W., Suite 740 Washington, D.C. 20005 Telephone: (202) 659-4772 Facsimile: (202) 659-8876 William A. Dobrovir D.C. Bar No. 030148 William A. Dobrovir, P.C. 65 Culpeper Street Warrenton, Virginia 22186 Telephone: (703) 341-2183 Facsimile: (703) 341-4329 Certificate of Service On September 29, 1995, I served the foregoing document on defendant INTERNAL REVENUE SERVICE by mailing a true and correct copy thereof, first class mail, postage pre-paid, to: Margaret Earnest, Trial Attorney, Tax Division, U.S. Department of Justice, Post Office Box 227, Washington, D.C. 20044. September 29, 1995 Bruce L. Stern D.C. Bar No. 150420 FOOTNOTES /1/ The Court will never reach the "segregability" issue if, as requested by plaintiff, it finds that the agreements in their entirety are subject to public disclosure under IRC 6104(a)(1)(A) as documents issued by the IRS with respect to an approved exemption application. PAGE 16 (c) 1995, Tax Analysts, Tax Notes Today, OCTOBER 25, 1995 /2/ Plaintiff concedes that if a statute specifically exempted "closing agreements" from public disclosure, "segregability" would not be an issue in this matter. However, IRC 6103(b)(2) exempts "information", not documents. (In contrast, see, IRC 6103(b)(1), tax returns exempt from disclosure; 31 U.S.C. 5319, certain reports issued by Secretary of Treasury exempt from disclosure.) END OF FOOTNOTES