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-

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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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