Free Supplemental Brief - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS __________ Nos. 01-256 T and 01-257 T (Judge Lettow) MARRIOTT INTERNATIONAL RESORTS, L.P., MARRIOTT INTERNATIONAL JBS CORPORATION, TAX MATTERS PARTNER, Plaintiff v. THE UNITED STATES, Defendant

______________________ DEFENDANT'S SUPPLEMENTAL BRIEF IN OPPOSITION TO PLAINTIFF'S MOTION TO COMPEL PRODUCTION OF DOCUMENTS WITHHELD OR REDACTED BASED ON DELIBERATIVE PROCESS PRIVILEGE ______________________

Pursuant to the Court's Order of August 18, 2006, defendant, the United States, hereby files this supplemental brief with respect to plaintiff's motion to compel defendant to produce documents withheld or redacted on the grounds of the deliberative process privilege. In Marriott Int'l Resorts, L.P. v. United States, 437 F.3d 1302 (Fed. Cir. 2006), the Court of Appeals for the Federal Circuit ruled that the IRS properly invoked the deliberative process privilege, but this Court must still rule on the question of whether plaintiff has established a compelling need for the documents in order to overcome the Government's assertion of privilege. This supplemental brief highlights relevant developments since briefs were last filed in this Court.

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BACKGROUND1 This case concerns the taxable periods ended October 28, 1994, and December 30, 1994, of a partnership, Marriott International Resorts, L.P. (MIR). The IRS examined the partnership returns filed for those tax periods and issued Notices of Final Partnership Administrative Adjustment (FPAA). In the FPAA for the taxable period ended October 28, 1994, the IRS cited § 752 and Treas. Reg. § 1.701-2 as the statutory and regulatory authority for the adjustments made to the return. In the FPAA for the taxable period ended December 31, 1994, the IRS cited §§ 708 and 752 as the statutory authority for the adjustments made to the return. In the Joint Preliminary Status Report filed in this case, defendant identified the following relevant legal questions involved in these cases: 1. Whether the series of transactions facilitated by Marriott International Resorts, L.P., lacked economic substance. 2. Alternatively, whether the formation of Marriott International Resorts, L.P., and the transactions facilitated by Marriott International Resorts, L.P., violated the intent of subchapter K, and fall within Section 1.701-2 of the Income Tax Regulations (the partnership anti-abuse rules). 3. Alternatively, whether the obligation of Marriott International Resorts, L.P., to close a short sale was a liability within the meaning of Internal Revenue Code of 1986, Section 752 (26 U.S.C. § 752). In discovery, plaintiff requested from defendant all documents relating to the preparation and application of Treas. Reg. § 1.701-2; Temp. Treas. Reg. § 1.752-1T(g)(1988); Treas. Reg. § 1.752-1 (1991); Rev. Rul. 88-77; Rev. Rul. 95-8; Rev. Rul. 95-26; and Rev. Rul. 95-45.

Because the relevant facts have been thoroughly ventilated in previous briefing in this Court and the Court of Appeals for the Federal Circuit, defendant recounts only those facts which are relevant for the purposes of this supplemental brief. -2-

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DISCUSSION A. Defendant has established the potential harm that would result if the documents were disclosed

Plaintiff is incorrect when it argues that defendant's assertion of the deliberative process privilege is deficient because the IRS failed to describe the potential harm to the agency if each document were disclosed. The United States submitted the Declaration of Margo L. Stevens, IRS Assistant Chief Counsel (Disclosure and Privacy), in support of its claim of the deliberative process privilege. In Paragraph 10 of Ms. Stevens' declaration, she stated that disclosure of the withheld documents: . . . would inhibit the frank and honest discussion of legal and policy matters and thus would adversely affect the quality of the Service's decisions and policies. Furthermore, disclosure of the withheld documents, or portions thereof, would reveal opinions of Office of Chief Counsel, Office of the Assistant Secretary (Tax Policy) at the Department of Treasury, as well as other Department of Treasury personnel at many levels at a time when the opinions were not fully developed and the issues were still being debated. None of the withheld documents, or portions thereof, represents a statement of agency policy or a final decision and release of the withheld information, could, therefore, result in confusion to the public. Disclosure of the withheld information would adversely affect the Service's ability to administer and enforce the law under subchapter K of the Internal Revenue Code at all levels, from voluntary compliance and examination to appeals and litigation. By way of example, taxpayers may choose to argue that the Service must defend positions that were not adopted, or that consideration of a position not adopted demonstrates the reasonableness of a taxpayer's position. Because this explanation applies to all documents for which the privilege was asserted, it also applies to each document. Repeating the explanation for each document would be pointlessly repetitive and wasteful.

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B.

Other courts have ruled that similar privileged documents should not be produced to taxpayers

1. Jade Trading, LLC v. United States In Jade Trading, LLC v. United States, CFC No. 03-2164 T (Aug. 15, 2005), the taxpayer requested documents similar to those sought by Marriott here.2 Specifically, Jade requested, inter alia, IRS documents relating to Treas. Reg. § 1.701-2, Helmer v. Commissioner, T.C. Memo 1975-160 (1975), and the definition of "liability" under § 752. (Ex. 1 at 2.)3 The United States asserted the deliberative process privilege with respect to the requested documents, and ultimately the parties requested that the Court review the documents in camera to rule on whether the documents should be produced notwithstanding the Government's assertion of the privilege. (Id. at 1.) After examining the documents, Judge Williams first determined that the IRS declarations describing the documents were accurate and complete and that the documents contained pre-decisional opinions, recommendations, or advice that were properly withheld under the privilege so as to protect the integrity of the government's decision- and policymaking process. (Id. at 4.) Next, the court addressed whether the taxpayer's need for the documents outweighed the harm to the Government that would result from a disclosure. (Id. at 5.) Jade's purported justification for needing the documents was "trying to discover Defendant's ever-changing position with respect to the definition of contingent liabilities...." (Ibid.) In holding that the taxpayer's need for the documents did not outweigh the Government's interest, Judge Williams stated that (id. at 6) :

This non-published decision was a follow-up to the court's ruling in Jade Trading, LLC v. United States, 65 Fed. Cl. 487 (2005). 3 Exhibits 1- 4 are attached to the Declaration of G. Robson Stewart, filed herewith. -4-

2

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production of the deliberative documents will not advance the accuracy and integrity of fact finding. Rather, the documents address solely internal governmental debate on matters of law ­ the scope and content of a regulation and the interpretation 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 Government's predecisional debate and opinion. Judge Williams cogently focused on the critical factor in the consideration of the privileged documents­whether any governmental pre-decisional opinions, recommendations, or advice will aid a court in resolving a legal issue­the definition of a term in a statute. As Judge Williams concluded, a court can adjudicate the relevant legal issues without resort to sifting through the unguarded ruminations of Government attorneys. 2. Klamath Strategic Investment Fund, LLC v. United States In Klamath Strategic Investment Fund, LLC v. United States, No. 5:04-cv-00278-TJW (E.D.Tex. Sept. 19, 2006), the taxpayer requested documents along the same lines as those requested by Marriott here. Specifically, Klamath requested, inter alia, IRS documents relating to Treas. Reg. § 1.701-2, Treas. Reg. § 1.752-6 and -7, and Helmer v. Commissioner, T.C. Memo 1975-160 (1975). (Ex. 2 at 4.) The United States asserted the deliberative process privilege with respect to the documents, and Klamath moved to compel production of the documents notwithstanding the assertion of the privilege. In its motion to compel, Klamath declared that it needed the documents because they reflect the Government's "prior understanding of what constitutes a liability, and under what circumstances it can rely on Treasury Regulation Section 1.701-2 to upset compliance with the Code." (Id. at 12.) Moreover, Klamath contended that the United States "has not articulated any specific or significant harm that would result from disclosure of the particular documents sought here." (Id. at 14.)

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To resolve the dispute, Judge Ward examined the documents in camera.4 (Ex. 3.) Judge Ward noted that the deliberative process privilege protects pre-decisional materials which concern deliberative and policy-making processes. (Ibid.) After reviewing the disputed documents, Judge Ward ruled that the United States had properly invoked the privilege,5 and sustained the Government's claim that the documents were protected from disclosure. (Ibid.) Thus, the court effectively rejected Klamath's argument that the United States had failed to establish that specific or significant harm would result from disclosure of the documents. Moreover, the court's ruling functionally rejected Klamath's claim that its purported need for the documents outweighed any potential harm that might result from disclosure of the documents. Significantly, Judge Ward's September 19, 2006, ruling on the privileged documents was issued two months after his ruling in Klamath Strategic Investment Fund, LLC v. United States, 440 F.Supp.2d 608 (E.D.Tex. 2006)(issued July 20, 2006). In Klamath, the taxpayer moved for summary judgment on two issues: (1) whether a particular loan premium is a "liability" under § 752; and (2) whether Treas. Reg. § 1.752-1(a)(4)(ii) could be applied retroactively.6 Klamath, F.Supp.2d at 610. The court analyzed the question of what constitutes a "liability" for the purposes of § 752 by examining the statute itself, related statutes, and relevant case law. Ultimately, the court ruled that the particular loan premium at issue did not constitute a liability under § 752. The court was able to reach its decision without citing any pre-decisional documents drafted by Government attorneys. Moreover, it appears unlikely that the court

Judge Ward ordered the United States to submit the documents to him on July 17, 2006. (Ex. 4.) 5 Contrast this to Pac. Gas & Elec. Co. v. United States, 71 Fed. Cl. 205 (2006), involving procedural defects in claiming the deliberative process privilege. 6 This regulation is not applicable to the tax periods at issue in this case. -6-

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examined any of the privileged documents prior to rendering its decision on the § 752-liability issue. The § 752-liability decision was issued on July 20, 2006, while the court had ordered the United States to submit the documents for in camera review only three days prior, on July 17, 2006. Even if the court had examined any of the privileged documents prior to issuing the court's decision on the § 752 merits, there is no evidence that they played any part in the court's decision-making process. This conclusion is confirmed by the court's subsequent rejection of Klamath's request to procure the documents. As the decisions in Jade Trading and Klamath demonstrate, taxpayers have no compelling need for the production of pre-decisional documents in these circumstances which can defeat the properly-invoked deliberative process privilege. In this action, plaintiff is seeking the privileged documents because they purportedly relate to the specific legal issues cited in the FPAAs and the statement of issues by the United States in the Joint Preliminary Status Report. The Court, however, can resolve those issues without resort to the privileged documents, just as the court in Klamath reached a decision on the definition of liability under § 752 without any privileged documents. Quite simply, it would be clear error for the Court to rely on any nonpublished, pre-decisional Government documents to resolve any question of law. Moreover, it is hard to imagine that the privileged documents could contain any information pertinent to the Court's fact-finding in this case. Accordingly, the Court should find that plaintiff's purported compelling need does not trump defendant's properly-invoked executive process privilege in this action.

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CONCLUSION Based on the foregoing reasons, defendant respectfully requests that the Court deny plaintiff's motion to compel and issue a protective order with respect to the documents protected by the properly-invoked deliberative process privilege. Respectfully submitted,

s/G. Robson Stewart G. ROBSON STEWART U.S. Department of Justice - Tax Division Court of Federal Claims Section Post Office Box 26 Ben Franklin Station Washington, DC 20044 tel: (202) 307-6493 fax: (202) 514-9440 EILEEN J. O=CONNOR Assistant Attorney General DAVID GUSTAFSON Chief, Court of Federal Claims Section s/David Gustafson Of Counsel Dated: September 29, 2006

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APPENDIX

IN THE UNITED STATES COURT OF FEDERAL CLAIMS

Nos. 01-256 T and 01-257 T

(Judge Lettow)

MARROTT INTERNATIONAL RESORTS, L.P., MARROTT INTERNATIONAL JBS CORPORATION, TAX MATTERS PARTNER,

Plaintiff
v.

THE UNITED STATES,

Defendant

DECLARTION OF G. ROBSON STEWART

I, G. Robson Stewar, being oflegal age and pursuant to 28 U.S.c., Section 1746, declare
as follows:

1. I am the Deparment of Justice tral attorney assigned to defend the abovecaptioned case.
2. Attached hereto are true and accurate copies of

the following documents:

Exhibit 1 - Order dated August 15,2005, filed in Jade Trading, LLC v. United

States, CFC No. 03-2164 T.
Exhibit 2 - Plaintiffs Motion to Compel the Production of

Documents and

Memorandum in Support, filed in Klamath Strategic Investment

-Al-

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Fund, LLCv. United States, No. 5:04-cv-00278-TJW (E.D.Tex.).
Exhibit 3 - Order dated September 19,2006, filed in Klamath Strategic

Investment Fund, LLe v. United States, No. 5:04-cv-00278-TJW (E.D.Tex.).
Exhibit 4 - Order dated Julyll, 2006, filed in Klamath Strategic Investment

Fund, LLe v. United States, No. 5:04-cv-00278-TJW (E.D.Tex.).
I declare under penalty of

perjury, that the foregoing is true and correct. Executed in

Washington, D.C., on September 29,2005.

-A2-

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3ln tle 1lníteb ~tate5 (!ourt of jf eberal (!l tlímf. , LED
No.03-2164T (Filed August 15,2005) (Not for Publication)
AUG 1 5 2005
U.s. Co.URT OF FEDER.AL CLAIMS

*** *** *** * * ******** *** **** **
*

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

* * *
*

*
*

THE UNITED STATES,

*
* *
*

Defendant.

* * * * * * * * * * * * * * * * * * * * * * ** * * * *
_-g ò

ORDER SUSTAINING DEFENDANT'S INVOCATION OF DELIBERATIVE PROCESS PRIVILEGE

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

deliberative process privilege.! The documents were submitted for in camera review in two increments. The first group of documents contained comments regarding the Internal Revenue
Treasury Regulation § l. 70 1-2 -- 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 i 975-160 (1975) and the definition of "liability" under Internal Revenue Code Sections 357,358, and 752. During the Pretrial Conference
Service's proposed adoption of

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 ofthe executive privilege, Defendant submitted five declarations
Counsel (Procedure & Administration), Offce of Chief

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

Counsel, Internal Revenue

i Joint Stipulation (May 25, 2005).

z EXHIBIT ,;
i

ii
l

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Service (IRS), and two declarations of Eric Solomon, the Acting Deputy Assistant Secretary of
by these individuals because neither is the head of

these assertions of executive privilege 22, 2005, the Court issued an order requiring Defendant to assert the executive privilege through the head of each agency by providing declarations from the Commissioner of the IRS and the Secretar of Treasury, or producing the documents. Jade Trading v. United States, 65 Fed. Cl. 487 (2005).
Treasury.2 There ensued a dispute concerning the adequacy of his or her respective agency. On April On May 6,2005, Defendant filed a motion seeking reconsideration of

the April 22, 2005, its enforcement pending resolution of the issue of who must assert the privilege -- which is currently pending before the United States Court of Appeals for the Federal Circuit in Marrott Int'l Resorts v. United States, Nos. 01-256T an 01-257T. Plaintiffs opposed Defendant's motion. In an effort to resolve this controversy, the paries filed a stipulation requesting in camera review of documents. In this stipulation, the paries narowed the scope of documents responsive to Plaintiffs' first request for production of documents, including No.1 8 relating to Treas. Reg. § 1.701-2, which sought "the 'Background, Information, and
order, certification ofthe order for interlocutory appeal, or stay of

Notes' fie (BIN), any other documents maintained by Defendant with respect to the drafting, proposal, reservations, vagueness, criticisms, invalidity, abandonment, and/or inconsistent application ofTreas. Reg. § 1.701-2," PLs' First Request ii 18, and Plaintiffs' second request for production of documents, including Nos. 1, 2, 3, 4, and 5, which sought documents addressing 'liability' under (Internal
Helmer v. Comm'r, T.C. Memo 1975-160 (1975), "the definition of

Revenue) Code Sections 357, 358, and 752, and associated topics." Stip. at ii 3. Plaintiffs narowed the body of documents relating to Treas. Reg. 1.701-2 by excluding the drafts ofthe regulation. See Stip. at ii 1 1 (a). As to the documents relating to Helmer and the definition of liability, Plaintiffs
narowed the request to documents "containing a citation or reference to Helmer." See Id., ii 1 I (b).

On May 26,2005, Defendant filed approximately 87 documents for in camera review relating
to Treasur Regulation § l.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 drafts of the proposed regulation, opinions on public comments, questions asked by the IRS Chief Counsel and answers of IRS staffers, predecisional discussions ofthe pros and cons regarding the proposed regulation and its scope and content, opinions about potential examples to be included in the final regulation, and a parial draft of a notice of proposed rulemaking.3
On June 2,2005, Defendant fied two additional documents for in camera review - one of which had been produced in the Marott 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

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

Margo Stevens on April 9,2003, March 25, Eric Solomon on January

5, 2005, and February l2, 2005. See Stip. at ii 6.
3 Some of

these documents reflect legal analysis and legal opinion as welL.
2

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Bates Nos. 10997-10999. Document drafted by Mar Berman, attorney, Industries, Branch 1, titled "Attachment to Chief Counsel Meeting Request Form," addressing the appropriate treatment of this document for
Passthoughs and Special short sales of securities by parerships. The portions of

which the Service asserts executive privilege consist of: the second sentence ofthe first full paragraph on page one (Bates No. 10997) since this sentence contains the recommended holding of a proposed revenue ruling on short sales of securities, the paragraph beginning on the bottom on page one (Bates

No. 10997) and continuing on the first four lines of page two (Bates No.
10998) since this information contains the author's recommendations

concerning the definition or liability and the expansion or a project with
respect to liability, and the final paragraph on page thee (Bates No. 10999)

since these paragraphs contain opinions concerning the use of section 705(b)
to reach short sales.4

Stevens Decl. at 53, Dero's Opp'n to Plo's Supp. Motion to Compel (Feb.11, 2005) at 53.

Discussion
The executive privilege denotes at least three broad categories of privilege. First, the state privilege protecting militar and state secrets, so as not secrets doctrine or privilege is an evidentiar to compel the dissemination of sensitive or classified information. Remolds v. United States, 345 protects presidential privilege U.S. 1,7-8 (1953); Marott, 61 Fed. Cl. 411, 416 (2004). Second, the
conversations and communications between the President and senior advisors. See Cheneyv. United the Dist. of Columbia, 542 U.S 367 (2004); United States v. Nixon, 418 U.S. 683 States Dist. Ct. for privilege -- the executive
(1974); Marott, 61 Fed. C1. at 416. This case involves a third category of

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. Sears. Roebuck & Co., 421 U.S. 132, 150 (1975).
the executive privilege was first ariculated and adopted by the Claims in Kaiser Aluminum & Chem. Corp. v. United States, IS7 F. Supp. 939 (Ct. C1. Court of 1958).5 The Kaiser Court characterized this privilege as an "evidentiar privilege" and recognized
The deliberative category of

4 If Defendant has not yet provided a redacted version of

this document to Plaintiffs in this

action, it shall do so forthwith.
5 See, CACi v. Field Servs.. Inc. v. U.S., 12 C1. Ct. 680, 687 n.7 (1987) ("(A)ccording to

commentators, the creation ofthe executive deliberation privilege can be traced to Kaiser.") (citing
Development in the Law of "Discovery of

Privileged Communications, 98 HARV. L. REv. l592, 1620 (1985); Note,

Governent Documents and the Offcial Infonnation Privilege," 76 COLUM. 1. REv.
3

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that "( t )he power must lie in courts to determine executive privilege in litigation." Id. This privilege subsequently has been widely recognized in Federal courts. CACI, 12 Cl. Ct. at 686 (citing Carl
Zeiss Stiftng v. V.E.B. Carl Zeiss. Jena, 40 F.R.D. 318,324 (D.D.C. i

966), affd, 384 F.2d 979,

cert. denied, 389 U.S. 952 (1967)).

For a document to fall within the deliberative category ofthe executive privilege, it must be

both pre-decisional and deliberative. Vons Coso v. United States, 51 Fed. Cl. 1,22 (2001). To
qualify as pre-decisional, the infonnation must address matters "antecedent to the adoption of agency policy." Walsky Constr. Co. v. United States, 20 Cl. Ct. 317, 320 (1990) (quoting Jordan v. Dep't

ofJustice, 591 F.2d 753, 774 (D.c. Cir. 1978). Additionally, to be deliberative, a document must
reflect 'the give-and-take ofthe consultative process,' rather than constituting a 'body of secret law; ,

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

of evidentiar need weighted against the har that may result from disclosure. Kaiser, i 57 F. Supp.

at 946; CACI 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 Court concludes that the description of documents in the seven declarations
is accurate and complete.6 Also, after in camera review, the Court finds that all of

the documents

or portions thereof for which the privilege has been claimed contain pre-decisional opinions,

recommendations or advice offered in the course of the IRS' decisioruaking process and are therefore properly withheld under the deliberative process privilege.? 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 version of a
proposed regulation -- quintessential examples of communications protected by the deliberative

process privilege. Similarly, the second document, drafted by an IRS attorney, contains a recommended holding of a proposed revenue ruling on short sales of securities, as well as
recommendations concerning the definition ofliability, the expansion of a project with respect to
liability and opinions concerning the use of

Section 705(b) to reach short sales. Such predecisional

deliberations about the scope of a statutory definition and a recommended governental decision

142, 156 (1976)).

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

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

487 (2005).
? The Court issued a Notice to the Parties 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 Parties,

answering the Court's questions about the author of certain documents and amplifyng its
explanation regarding why portions of certain documents were properly subject to the deliberative process privilege.
4

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are protected under the deliberative process privilege. See CACI, 12 Cl. Ct. at 686 (stating that the privilege protects "documents reflecting advisory opinions, recommendations and deliberations comprising par of a process by which governental 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 need for disclosure here outweighs the han that would result from opening up the Governent's deliberative and predecisional files to inspection. See In re Grand Jury Subpoena dated August 9. 2000. 218 F. Supp. 2d 544, 553 (S.D.N.Y. 2002) ("The deliberative process privilege is qualified; it maybe overcome their need for a showing of by need, which is determined on a case by case basis."). In support of these internal documents relating to Treas. Reg. 1.701-2, Plaintiffs' aver:
(t)he treasury regulation is Defendant's primar weapon to deny
substantive contentions in Defendant's (Notice of

Plaintiffs' tax retu position. It is cited in four of the five

Final Parership

Administrative Adjustment) and it is the primar authority contained Contentions. As a result, it in Defendant's Preliminar Statement of

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

vague and subject to multiple interpretations.
Pl.s' Reply to Def.'s Invalid Assertion of Executive Privilege at 1. In support of

their need for the

internal documents relating to the definition ofliabilities, Plaintiffs' assert:
Plaintiffs are only tryng to discover Defendant's ever-changing position with respect to the definition of contingent liabilities -- a position that seems to change when it benefits the Governent.
Pi's' Reply to Def.'s Opp. to Pl.s' Mot. to Compel Pi's' Second Set of

Requests for Production of

Documents at 9.

Despite Plaintiffs' stated goals in this litigation, disclosure ofthe deliberative documents is
not warranted here. In weighing a litigant's need for discovery against the governent's interest in

protecting its predecisional internal deliberations, the Court "must consider 'the interests of the fact finding, and the public's interest in litigants, society's interest in the accuracy and integrty of honest, effective governent.'" In re Grand Jury Subpoena, 218 F. Supp. 2d at 553 (internal citations omitted); In re Sealed Case, 121 F.3d 729, 737-38 (D.C. Cir. 1997) ("This need determination is to be made flexibly on a case-by-case, ad hoc basis. 'Each time (the deliberative process privilege) is the competing interests,' taking into asserted the district court must undertake a fresh balancing of account factors such as 'the relevance of the evidence,' 'the availability of other evidence,' 'the seriousness of the litigation,' 'the role of the governent,' and the 'possibility of future timidity by
5

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governent employees. '" (internal citations omitted)). In the instant case, production of the deliberative documents will 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 interpretation of a legal term. Both the validity of the regulation and the interpretation of the tenn "liabilities" can be adjudicated by the court without resort to the Governent's predecisional debate and opinion.
Conclusion

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

May 25,2005, are DENIED.
the record for

The documents submitted for in camera review wil be preserved as par of

purposes of any appeal in this case.

~~~wlJ~
Judge

~LLEN COSTER WILLIAMS J

6

Case 5:04-cv-00278-T JW Document 90-1 Filed 07/07/2006 Page 1 of of 28 Case 1:01-cv-00256-CFL Document 76-2 Filed 09/29/2006 Page 9 17

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS

TEXARA DIVISION
Klamath Strategic Investment Fund, LLC by and through St. Croix Ventures, LLC
(Managing Member),
P eti ti oner/Plaintiff,
v.

Civil Action No. 5:04-cv-00278-TJW (lead case)

United States of America,

Respondent/efendant.
KInabalu Strategic Investment Fund, LLC by and through Rogue Ventures, LLC
(Managing Member),

Peti ti oner/Plaintiff,
v.

Civil Action No. 5:04-cv-00279-TJW (member case)

United States of America,

Respondent/Defendant.

PLAINTIFFS' MOTION TO COMPEL THE PRODUCTION OF DOCUMENTS AND MEMORANDUM IN SUPPORT

Defendant, United States of America, in its production in response to Plaintiff s First
Request for Production of Documents, has withheld over 750 documents and redacted over 390

documents under the executive privilege!, withheld or redacted over 85 additional documents
based on other claims of privilege,2 and provided privilege logs which lack the necessary

i Thoughout defendant's privilege logs, defendant refers to "govt.executive/deliberative process privilege,"
"govt.executive/deliberative privilege," and "govt.executive/deliberative process." For purposes of this motion, plaintiffs will collectively refer to such privileges as the "executive privilege."

2 In this Motion, Plaintiffs are not contesting the claim of privilege on these documents, and have limited this
Motion to contesting claims of executive privilege.

z
ì

EXHIBIT
2

i

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information to assess the validity of

the defendant's claims of

privilege. Furthermore, defendant

has withheld many more documents - perhaps thousands - from plaintiffs in responding to this
Court's Amended Discovery Order. Pursuant to Rules 34 and 37(a) of the Federal Rules of

Civil

Procedure ("FRCP"), Klamath Strategic Investment Fund, LLC ("Klamath") by and through St. Croix Ventures, LLC, managing member of Klamath, and Kinabalu Strategic Investment Fund,
LLC ("Kinabalu") by and through Rogue Ventures, LLC, managing member of Kinabalu, move
this Court to take the following two actions:
1. To compel defendant to produce the large number of responsive documents that

defendant has withheld from disclosure under the executive privilege in response

to Plaintiffs' First Request for Production of Documents and this Court's
September 9, 2005 Amended Discovery Order and
2. To compel defendant to produce unedacted versions ofthe responsive documents

provided, but redacted, in part, by defendant under the executive privilege in Documents and this Court's response to Plaintiffs' First Request for Production of September 9, 2005 Amended Discovery Order.

Defendant's response to Plaintiffs' Document Request and this Court's Discovery Order

shows that defendant has abused the discovery process and prefers that the Court not be given a
full record in this case.

Counsel for plaintiffs have conferred with counsel for defendant in a good faith attempt
to resolve this dispute. However, the parties have been unable to reach a resolution.
As grounds for this Motion, plaintiffs show the Court:

I. BACKGROUND.
A. September 9, 2005 Discovery Order.

On October 28, 2005, defendant produced 27 binders of documents pursuant to the
September 9, 2005 Amended Discovery Order (the "Discovery Order"), which required the
paries to exchange all relevant documents by October 31, 2005. In the spirit of cooperation,
plaintiffs agreed to allow the defendant until November 18, 2005 to produce certain additional
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documents responsive to the Discovery Order, which were produced at that time, with one
exception. On November 10, 2005, defendant fied a motion requesting until January 6, 2006 to produce 550 boxes of documentation responsive to the Discovery Order (the so called, "pattern
evidence"). The Court granted the motion. Plaintiffs later agreed to allow defendant until March
31, 2006 to complete a rolling production of the pattern evidence.

On March 31, 2006, defendant fied a motion to further extend the time to produce the
pattern evidence until May 1,2006, which this Court denied. On April 17,2006, per this Court's
order dated April 12, 2006, defendant produced additional documents in response to the

Discovery Order.

It is unclear how many documents defendant withheld as privileged in response to the
Discovery Order, as defendant's privilege log does not provide such detaiL. Instead, defendant's

privilege log claims many blanet assertions of privilege to what it refers to as "various"

documents. A copy of defendant's privilege log for the documents produced on or before
November 18, 2005 is attached as Exhibit A. On July 3, 2006, additional privilege logs were

sent via Federal Express to plaintiffs' counsel regarding pattern evidence. However, these
privilege logs are wholly insufficient to determine whether any or all of the privilege logs relate
to the documents produced on or before November 18,2005. A copy of defendant's July 3, 2006

privilege logs is attached as Exhibit B. Thus, plaintiffs have no way of knowing which or how
many ofthese documents have been withheld under a claim of executive privilege.
B. Plaintifs' First Requests for Production of Documents.

On November 2, 2005, plaintiffs filed Plaintiffs' First Request for Production of
Documents ("Plaintiffs' Document Request"). In Plaintiffs' Document Request, plaintiffs
requested information regarding eight categories of documents related to: (1) transactions that are

the same as or substantially similar to transactions described in IRS Notice 2000-44, (2) Chief
3

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Counsel Notice CC-2003-020 (June 27, 2003), (3) Chief Counsel Notice CC-2003-03 (September
10, 2003), (4) Treasur Regulation Section 1.752-6, (5) Treasury Regulation Section 1.752-7, (6)
Treasur Regulation Section 1.358-7, (7) all Documents citing or discussing Helmer v.

eommissioner, 34 T.C.M. (CCH) 727 (1975) in the context of Section 752 the Internal Revenue

Code of 1986, as amended (the "Code"?, including in paricular any such Documents created by

IRS employee Richard Stark, and (8) Treasur Regulation Section 1.701-2. Plaintiffs' First
Document Request is attached as Exhibit C. On December 5, 2005, defendant responded to

Plaintiffs' Document Request. On December 13, 2005, defendant produced supplemental
documents in response to Plaintiffs' Document Request.

In response to Plaintiffs' Document Request, defendant produced approximately onethird of the documents that it determined were responsive, providing only 395 documents

totaling approximately 3,840 pages in which a large percentage of the material was redacted. A

sample of the redacted documents is attached as Exhibit D. Defendant withheld under the
executive privilege approximately 750 documents consisting of approximately 9,100 pages.
Defendant also withheld or redacted approximately 89 documents on various other privilege

claims.
C. The Privilege Logs.

On Januar 6, 2006, defendant provided 27 privilege logs. The first 26 privilege logs

corresponded to Plaintiffs' Document Request and the final privilege log corresponded to
documents relevant to pleaded claims and defenses in accordance with the Discovery Order. A
copy of defendant's January 6,2006 privilege logs is attached as Exhibit E.

3 Unless otherwise stated, all references to "section" in this brief are to sections of the Internal Revenue Code of
1986.

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II. MEMORANDUM IN SUPPORT OF MOTION.
A. This Court Should Compel Defendant to Produce the Large Number of

Responsive Documents that Defendant Has Withheld from Disclosure or
Provided in Redacted Form Under the Executive Privilege.

The term "executive privilege" refers to a group of judicially created privileges that are available to the Executive Branch to withhold otherwise discoverable information in a judicial
proceeding.4 The deliberative process privilege is a subset of the executive privilege that

protects documents "reflecting advisory opinions, recommendations and deliberations
compromising part of a process by which governental decisions and policies are formulated."
N.L.R.B. v. Sears, Roebuck & eo., 421 U.S. 132, 150 (1975) (citation omitted). The deliberative

process privilege is not conclusive, as it may be overcome upon a showing that the need for the
evidence overrdes the governent's interest in non-disclosure. Exxon Corp. v. Department of
Energy, 91 F.R.D. 26,43 (N.D. Tex. 1981).

The deliberative process privilege requires a three-step review process. First, the court
must determine whether the requirements to properly invoke the executive privilege were met.
Second, if the requirements were met, then the court must determine if the communications are

in fact privileged, with the burden on governent to show privilege. Finally, the court must

balance the paries' interest, with the burden on the pary-seeking discovery to show that its need

for the documents outweighs the governent's interests. See Scott Paper eo. v. United States,
943 F. Supp. 489, 496 (E.D. Pa. 1996).

1. Defendant Has Failed to Satisfy the Fundamental Prerequisites for

Invoking the Executive Privilege.
To protect against abuse of the executive privilege, an agency must follow established

procedural safeguards, including (1) the head of the agency claiming the privilege must
4 Plaintiffs direct the Court's attention to Gerald Wetlaufer, Justifing Secrecy: An Objection to the General

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personally review the material and invoke the executive privilege; (2) the head of the agency

claiming the privilege must specifically designate and describe the documents claimed to be
privileged; and (3) the agency claiming the privilege must provide precise and certain reasons for

preserving the confidentiality of the communications. Scott Paper Co., 943 F. Supp. at 497.
Failure to meet anyone of these requirements will overcome the executive privilege, and

the information for which the privilege was sought must be disclosed. Exxon eorp., 91 F.R.D. at
44.
a. Defendant Did Not Submit an Affdavit or Declaration From

the Commissioner of the Internal Revenue Service Providin2 that He Personally Reviewed the Material and Is Invokin2 the
Executive Privile2e.

The deliberative process privilege can only be invoked by the head of the agency, which
has control over the matter, after personal review of the documents involved and a determination
that disclosure would have a significant negative impact on the agency's fundamental functions.

See Campbell v. Eastland, 307 F.2d 478,486 (5th Cir. 1962) ("There must be a formal claim of

privilege, lodged by the head of the deparment which has control over the matter, after actual

personal consideration by that offcer." (quoting United States v. Reynolds, 345 U.S. 1, 7-8
(1953))); Exxon eorp., 91 F.R.D. at 435 ("Only the agency head may assert the privilege after
that offcer's personal consideration of the matter."). But see Branch v. Philips Petroleum Co.,
638 F.2d 873 (5th Cir. 1981) (holding that in the case of a third party subpoena to a governent
agency, the director of the agency's Houston district offce and custodian of the records

subpoenaed could properly invoke the executive privilege after consulting with the General
Counsel). Further, the affdavit or declaration from the head of the agency must be submitted to

Deliberative Process Privilege, 65 IND. L.1. 845 (1990) for the background and scope of

5 In Exxon Corp., the court did comment that the agency head could rely on subordinates to examine each document

the executive privilege.

before deciding whether the privilege should be invoked. Exxon Corp., 91 F.R.D. at 43 - 44.

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the opposing par at the time the governent responds to the discovery request. Miler v.
Pan

cucci, 141 F.R.D. 292, 300 (C.D. Cal. 1992).

The agency head requirement is essential to ensure that the executive privilege is invoked

only when absolutely necessary, in situations where the governent's need for secrecy
outweighs the public's interest in full disclosure of all relevant facts. eheney v. United States
District eourtfor the District ofeolumbia, 542 U.S. 367, 389 (2004) ("Executive privilege is an

extraordinary assertion of power 'not to be lightly invoked."') (quoting United States v.
Reynolds, 345 U.S. at 7); Exxon eorp., 91 F.R.D. at 43 (the deliberative process is "to be applied

as narrowly as possible, consistent with efficient administrative operations"); eampbell, 307

F.2d at 486 (the executive privilege "may not be invoked lightly").
For three main reasons, the executive privilege should only be used when absolutely

necessary. First, the privilege interferes with the effectiveness of the judicial function, as it

protects an agency's documents at the expense of withholding evidence from the trier of fact.
Second, if the governent is allowed to assert the executive privilege with respect to thousands
of responsive documents, the privilege is no longer being used to protect vital agency interests,
but rather as a litigation tool. This expansive use of the privilege makes the public suspicious of
the governent and detracts from the public interest in the search for the judicial truth. Finally,

the executive privilege places tension between the Executive and the Judicial Branches of the
governent, which must be avoided whenever possible. eheney, 542 U.S. at 389-90. The

Supreme Cour explained this inevitable tension stating that:

Once executive privilege is asserted, coequal branches of the Governent are set on a collision course. The Judiciar is forced into the difficult task of balancing

the need for information in a judicial proceeding and the Executive's Aricle II prerogatives. This inquiry places courts in the awkward position of evaluating the Executive's claims of confidentiality and autonomy, and pushes to the fore diffcult questions of powers and checks and balances. These "occasion( s J for constitutional confrontation between the two branches" should be avoided whenever possible.
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Id. (citation omitted). Thus, the formal invocation of

the privilege by the head of

the agency is a

vital safeguard that assures the court, the public, and the private litigant that the responsible
agency head has correctly balanced the agency's alleged need for confidentiality against the

public interest in full disclosure of relevant facts.
Defendant has provided no affdavit or other statement by the Commissioner of the

Internal Revenue Service (the "Service") demonstrating that the Commissioner has reviewed the
question of executive privilege and believes that disclosure of the materials sought would

genuinely threaten the public interest or efficiency of agency operations. In fact, on June 19,
2005, defendant sent two declarations by Margo L. Stevens in two unelated cases, which relates
to some of

the documents defendant withheld under the executive privilege (the "Declarations").

Defendant has not produced any affdavit for other documents upon which it has claimed
privilege. The Declarations demonstrate that the Commissioner did not review any of the

documents being withheld under the executive privilege. Accordingly, defendant did not meet
this requirement.
b. Defendant Did Not State With Particularity What Information

Is Subject to Privile2e.

Both case law and the Federal Rules of Civil Procedure set forth the requirement that the

documents an agency is seeking to shield under a claim of privilege must be identified and
described with particularty. Scott Paper eo., 943 F. Supp. at 497 (stating that the pary seeking
protection must provide "a specific designation and description of the documents claimed to be

privilege. . . "); FED. R. Civ. P. 26 (b)(5)(stating that "(w)hen a pary withholds information
otherwise discoverable under these rules by claiming that it is privileged. . . the pary shall make

the claim expressly and shall describe the nature of the documents . . . not produced . . . in a
manner that, without revealing information itself privileged or protected, will enable other paries

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to assess the applicability of

the privilege. . . .").

Defendant's privilege logs did not identify specific details of the exact information that
was privileged, as it sometimes described documents simply as a "draft," "briefing notes," or "e-

mail chain discussing revisions to language of the draft regulations." In some instances,
defendant simply referred to a broad category of documents, without describing any of the

documents within that category. Although, defendant did provide the Declarations, the
Declarations do not cover all the documents to which the executive privilege was claimed nor

does it completely correspond to the privilege logs provided by Defendant. Additionally,
defendant does not always provide the date that the document was created. Defendant claims

this is because the date is not available. Usually this would be acceptable; however, in order to
determine if a document meets the requirements

of the executive privilege one must have the

date to determine if the document is predecisional. These descriptions are not suffcient for
plaintiffs to assess the validity of the privilege. Nor is the description ample to allow a court to
determine whether the documents are of a predecisional, advisory nature, and whether the

documents contain analytical as opposed to severable factual information. Accordingly,

defendant did not meet this requirement as it did not designate with paricularity those materials
alleged to be privileged.
c. Defendant Does Not Set Forth the "Precise and Certain

Reasons" For Withholdine the Documents In Question.

The agency claiming the privilege must provide "precise and certain reasons" for
preserving the confidentiality of the communications. Scott Paper eo., 943 F. Supp. at 497.

Defendant's privilege logs do not explain why disclosure of each particular document would be
detrimental to the Service's decision-making process. Nor has defendant ariculated in any

manner the precise reasons why the public interest would be adversely affected by disclosure.
The harm to an agency's decision-making process cannot be simply presumed. Judicial Watch,
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Inc. v. United States Postal Serv., 297 F. Supp. 2d 252, 259 (D.D.C. 2004). A broad claim of
harm is insuffcient to overcome the burden placed on the pary seeking to shield material from
disclosure. Exxon earp., 91 F.R.D. at 43 ("Because the outcome is dependent upon the

individual document considered and the role it plays in the administrative process, any blanket

assertion of privilege must summarly be rejected."); Revelle v. Trigg, 1999 WL 80283, at *2
(E.D. Pa. Feb. 2, 1999) ("A broad assertion of

har is (therefore) clearly not enough. In fact, the
privilege may in itself

Third Circuit has held that an 'indiscriminate claim of

be suffcient reason

to deny it."'(quoting, in part, United States v. O'Neill, 619 F.2d, 222, 227 (3d Cir. 1980))). The

Supreme Court has even rejected the privilege when the President of the United States has
asserted it "solely on the broad, undifferentiated claim of public interest in the confidentiality of.
. . conversations" and has refused to extend deference to a President's "generalized interest in

confidentiality." United States v. Nixon, 418 U.S. 683, 706 (1974). Thus, this requirement was
not met, as no such paricularzed, specific harm was identified by defendant as to any of the

individually withheld documents.
2. Defendant Has Not Established that the Documents Are In Fact

Privileged.
In addition to its failure to properly invoke the executive privilege, defendant also has not

established that such documents should in fact be subject to that privilege. The deliberative
process privilege protects evidence from disclosure if it is both predecisional and deliberative.
Judicial Watch, Inc. v. Dep't of Justice, 365 F.3d 1108, 1113 (D.C. Cir. 2004) (citations omitted)
(stating that the privilege protects predecisional materials "reflecting deliberative or policy-

making processes," but not materials that are "purely factual"). A document is predecisional if
the communication is "antecedent to the adoption of (an) agency policy." Jade Trading, LLe v.

United States, 65 Fed. Cl. 487 (2005). A document is deliberative if it reflects "the give-andtake of the consultative process," rather than constituting a "body of secret law." eoastal States
10

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Gas Corp. v. Dep't of Energy, 617 F.2d 854, 866-867 (D.C. Cir. 1980). "The mere fact that an
agency uses a document during policy discussion does not trigger the privilege." Walsky eonstr.

eo. v. United States, 20 Cl. Ct. 317, 321(1990) (citation omitted). Based on the limited
description of the documents and the fact that defendant did not identity a paricularized, specific
har as to any of the individually withheld documents, plaintiffs cannot determine with certainty

if the documents are privileged.

Furthermore, only discussions between higher-level offcials qualify as policy
deliberations, because agency policies are usually established by or at the direction of senior-

level offcials. Wetlaufer, 65 IND. L.J. at 901-905. Accordingly, discussions between lowerlevel agency personnel do not and canot properly constitute policy deliberations within the
meaning of

the executive privilege. Based on defendant's privilege logs, it is evident that lower-

level agency personnel created a large number of the documents. Based on the foregoing, these
documents cannot be privileged and must be produced.
3. Plaintiffs Have a Compellng Need, Which Outweighs Any Harm that

Might Result From the Disclosure.6
The deliberative process privilege is a qualified privilege, which can be overcome by a
suffcient showing of

need by the party-seeking discovery. Exxon earp., 91 F.R.D. at 43. The

cour must balance the need of the evidence against the harm that may result from the disclosure.
Bank of America v. United States, 1978 WL 4492, at *3 (N.D. CaL. May 24, 1978) ("(T)he need

to protect the decision-making process of the agency may be overrdden by the policy favoring

broad discovery, together with the paricularized need of the plaintiff in this case for the
production of documents relevant and necessary to the search for truth."). In balancing the
plaintiffs' need against any har that may result, the Court should consider five factors: (1) the
6 The Court does not need to determne whether the plaintiffs' needs outweighs any harm that might result from

11

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relevance of the evidence sought to be protected; (2) the availability of other evidence; (3) the

seriousness of the litigation and the issues involved; (4) the role of the governent in the
litigation; and (5) the possibility of future timidity by a governent employee. Scott Paper Co.,

943 F. Supp. at 496.
a. The Documents that Defendant Is Withholdine Under the

Executive Privileee Are Relevant.

The principal issues in this case are whether the adjustments made by the IRS in its
FP AAs were appropriate and, if so, whether the application of an accuracy-related penalty is
warranted. The major issue raised in the FP AAs on the merits is whether the loan premiums that

St. Croix Ventures, LLC and Rogue Ventures, LLC received from a bank in connection with the

funding of their investments in Klamath and Kinabalu, respectively, are to be treated as
"liabilities" for purposes of calculating the parners' bases in the partnerships under Section 752.
The FPAAs assert that, under Section 752 and Treasur Regulation Section 1.752-6, the amount

of the premiums should be treated as liabilities. In the FP AAs, the Commissioner invoked

Treasury Regulation Section 1.701-2 as the principal basis for ignoring the mandate of Section
752 that a contingent obligation is not to be treated as a liability for purposes of the partnership

provisions of the Code. The requested documents are critical to this case for two reasons. First,

plaintiffs have targeted their request at documents which reflect defendant's own prior

understanding of what constitutes a liability, and under what circumstances it can rely on
Treasury Regulation Section 1.701-2 to upset compliance with the Code. Second, defendant has

asserted milions of dollars of penalties in this case on the claim that plaintiffs did not have
substantial authority or reasonable cause and good faith for the tax positions at issue. Plaintiffs
have requested documents that they believe will show that defendant understood plaintiff sIegal
disclosure, as the three procedural requirements above were not met.

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positions to have merit, which in fact caused defendant to promulgate Treasur Regulation
Section 1.752-6 and give it retroactive effect, which was expressly designed to undermine
plaintiffs tax positions. Documents that reflect the governent's understanding of

the rules and

realization of a need to retroactively change them after the transaction at issue took place are
highly probative of

whether any penalty should be applied in this case.
b. The Information Is Not Available From Anv Other Source.

The documents plaintiffs seek are the only way to obtain information critical to
responding to the varous issues raised by defendant. Access to these documents is the only

means available to permit plaintiffs to adequately respond to defendant's assertions in the
FP AAs. Plaintiffs, therefore, should be permitted to obtain the documents for which defendant

asserts the deliberative process privilege. earl Zeiss Stifung v. VE.B. Carl Zeiss, Jena, 40
F.R.D. 318, 328 (D.D.C. 1966) ("Necessity for production is sharply reduced where an available
alternative for obtaining the desired evidence has not been explored.").

c. The Litil!ation Is Serious as It Involves Millons of Dollar In
Taxes. Interest. and Penalties.
The governent should not be able to hide relevant information to plaintiffs' defenses

behind the executive privilege. In re Franklin Nat. Bank Sec. Litig., 478 F. Supp. 577, 586
(D.C.N.Y. 1979) ("(A)n element of unfairness would enter if the governent could further its

defense against these claims by concealing relevant evidence behind the screen of governent

privilege."). Plaintiffs have millions of dollars at stake in this litigation. As a matter of
fundamental fairness, defendant should not be allowed to shield thousands of pages of relevant
information behind a poorly articulated and groundless claim of executive privilege.

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d. The Government's Role In the Dispute Is as a Party to the

Liti2:ation.

When an agency is a litigant, its apparent self-interest in the proceeding should give
courts significant hesitation when the agency invokes executive privilege to withhold relevant
evidence, particularly when that evidence comprises thousands of pages, as it does here.
e. The Future Timidity of the Offcials Is Unclear.

The Cour must weigh the perceived damages of disclosure to the deliberative process
against the impairment of withholding information to the just resolution of the dispute. In re

Franklin Nat. Bank Sec. Litig., 478 F. Supp. at 586 ("Even where the governent's case for

shielding its documents is more persuasive, the interests of the litigants and the public in
disclosure are much more compelling. Accurate judicial factfinding is predominant.").
Defendant has not ariculated any specific or significant har that would result from disclosure

of the paricular documents sought here. Nor is there proof that agency employees wil be
inhibited from expressing their views in fear that the public might some day be privy to such.
Nixon, 418 U.S. at 712 ("(W)e canot conclude that advisers will be moved to temper the candor

of their remarks by the infrequent occasions of disclosure because of the possibility that such
conversations wil be called for in the context of a criminal prosecution").

Thus, all factors weigh in favor of compelling the production of the relevant documents.
Accordingly, defendant should be compelled to produce the documents at issue, as plaintiffs' need outweighs any potential har that might result from disclosure. See First Heights Bank v.

United States, 46 Fed. Cl. 312, 322-25 (2000) (holding that First Height Bank's need for the
documents overcame the governent's assertion of the deliberative process privilege, as (1) the

documents may shed significant light on First Heights Bank's knowledge regarding the
deductibility of covered asset losses, which is important for First Heights Bank's response to the

governent's "assumption of risk" defense, (2) there was no other way for First Heights Bank to
14

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obtain the documents, and (3) the governent did not articulate any particular har that would
result from the particular documents being sought).
III. PRAYER FOR RELIEF.

WHEREFORE, for the reasons stated herein, plaintiffs respectfully request that their
Motion to Compel the Production of

Documents be granted.

Respectfully submitted.

Isl N. Jerold Cohen N. Jerold Cohen (Lead Attorney) GA Bar No. 174700 Kent L. Jones (of counsel) D.C. Bar No. 929075 Sheldon M. Kay (of counsel) GA Bar No. 409341 Thomas A. Cullinan (of counsel) GA Bar No. 738420 Krstin Balding Gutting (of counsel) GA Bar No. 141423

Dated: July 7, 2006

Sutherland Asbil & Brennan LLP 999 Peachtree Street, N.E. Atlanta, Georgia 30309 (404) 853-8000
(404) 853-8806 (fax)

Attorneys for Plaintiffs

15

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CERTIFICATE OF SERVICE
the foregoing Plaintiffs' Motion to Compel

IT is HEREBY CERTIFIED that service of

the Production of Documents and Memorandum in Support has been made on July 7, 2006,
by mailing a copy thereof

to:

Andrew L. Sobotka Deparent of Justice Tax Division 717 N. Harwood, Suite 400 Dallas, Texas 75201

Isl N. Jerold Cohen

N. Jerold Cohen (Lead Attorney) GA Bar No. 174700 Kent L. Jones (of counsel) D.C. Bar No. 929075 Sheldon M. Kay (of counsel) GA Bar No. 409341 Thomas A. Cullinan (of counsel) GA Bar No. 738420 Krstin Balding Gutting (of counsel) GA Bar No. 141423
Sutherland Asbill & Brennan LLP 999 Peachtree Street, N.E. Atlanta, Georgia 30309 (404) 853-8000
(404) 853-8806 (fax)

Attorneys for Plaintiffs

Case 5:04-cv-00278-T JW Document 90-1 Filed 07/07/2006 Page 17 of of 28 Case 1:01-cv-00256-CFL Document 76-2 Filed 09/29/2006 Page 25 17

CERTIFICATE OF CONFERENCE
It is hereby certified that counsel for plaintiffs has conferred with counsel for defendant
in a good faith attempt to resolve the matter at issue in Plaintiffs' Motion to Compel the
Production of Documents and Memorandum in Support without court intervention. Counsel for
plaintiffs tried to resolve this matter with counsel for defendants since May 8, 2006. Counsel for
defendant opposes the motion.
Isl N. Jerold Cohen

N. Jerold Cohen (Lead Attorney) GA Bar No. 174700 Kent L. Jones (of counsel) D.C. Bar No. 929075 Sheldon M. Kay (of counsel) GA Bar No. 409341 Thomas A. Cullnan (of counsel) GA Bar No. 738420 Krstin Balding Gutting (of counsel) GA Bar No. 141423
Sutherland Asbill & Brennan LLP 999 Peachtree Street, N.E. Atlanta, Georgia 30309 (404) 853-8000
(404) 853-8806 (fax)

Attorneys for Plaintiffs

5:04-cv-00278-TJW Document 169 Case 1:01-cv-00256-CFL Document 76-2

Filed 09/19/2006 Page 1 of 2 28 Filed 09/29/2006 Page 26 of

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS

TEXARKNA DIVISION

KLAMATH STRATEGIC INVESTMENT §
FUND, LLC

VS.

§

CIVIL ACTION NO. 5:04-CV-278

UNITED STATES OF AMERICA

§

ORDER
The court grants in part and denies in par the plaintiffs' motion to compel the production of

documents (#90). The motion challenges the governent's assertion of the deliberative process
privilege. The deliberative process privilege protects "predecisional materials 'reflecting deliberative
or policy-making processes,' but not materials that are 'purely factuaL. ", Skelton v. United States

Postal Service, 687 F.2d 35,38 (5th Cir. 1982)(quoting EPA v. Mink, 410 U.S. 73, 87-89 (1