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Case 5:04-cv-00278-TJW Case 1:01-cv-00256-CFL

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UNITED STATES DISTRICT COURT EASTERN DISTRICT OF TEXAS TEXARKANA DIVISION KLAMATH STRATEGIC INVESTMENT § FUND, LLC, By and through ST. CROIX§ VENTURES, LLC (Managing Member), § Plaintiff, § v. § § UNITED STATES OF AMERICA, § Defendant. §

CASE NO. 5:04-CV-278-TJW (Consolidated with Kinabalu v. United States, Civil Case No. 5:04-CV- 00279-TJW)

FOURTH (AMENDED) DECLARATION OF MARGO L. STEVENS I, Margo L. Stevens, pursuant to the provisions of 28 U.S.C. § 1746, state: 1. I am the Assistant Chief Counsel (Disclosure & Privacy Law) in the Office Office of Chief Counsel,

of Associate Chief Counsel (Procedure & Administration), Internal Revenue Service (Service).

This declaration supplements the declaration I

executed on July 20, 2006, setting forth the basis for an extension of time in which to lodge formally an assertion of executive privilege, the declaration I executed on July 21, 2006, asserting executive privilege for the documents maintained in the background files to proposed Income Tax Regulation section 1.701-2 and Treasury Decision 8755, and the declaration I executed on July 24, 2006, asserting executive privilege for the documents maintained in the background files to Chief Counsel Notices CC-2003-20 and CC-2003-30. 2. I have been informed that plaintiff's First Request for Production of

Documents, dated November 2, 2005, sought, inter alia, the production of documents pertaining to the development of Treasury Regulations §§ 1.752-6 and -7, and 1.358-7. I have been informed by Stacy Short, an attorney in the office of the Associate Chief Counsel (Passthroughs and Special Industries) ("PSI"), that since Treasury Regulations
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§§ 1.752-6 and -7, and 1.358-7 were developed simultaneously under one project, the primary responsibility for which was with PSI, a single file for the project was created and maintained by PSI. 3. Based upon the thorough review of the documents at issue by attorneys in

the office of the Associate Chief Counsel (PSI), the information provided to me by these attorneys, and my own personal review of these documents, I have determined to assert the claim of executive privilege with respect to certain documents or portions of certain documents more thoroughly described herein below. Should the Court determine the withheld documents or portions thereof to be relevant and that neither I.R.C. § 6103 nor any evidentiary privileges apply, I am claiming executive privilege.

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4.

When the Service asserts a formal claim of executive privilege with documents, the privilege is claimed only to

respect to predecisional/deliberative protect those intra-governmental recommendations,

documents reflecting advisory opinions,

and deliberations which comprise part of the process by

which agency decisions and policies are formulated. The agency does not seek to protect documents containing factual matters unless such factual matters are so intertwined with advisory opinions, recommendations, conclusions, or

reasoning by Government officials that the factual material cannot be excised from the privileged material or unless the factual matter itself, through its selection and distillation by the author, would reveal the author's mental processes or the agency's deliberations. The privilege is not claimed to protect all opinions, conclusions, mental impressions, and thought processes of Government officials, but only those whose disclosure would interfere with vital Government functions or would cause injury to the quality of agency decisions. 5. When the Service asserts a formal claim of executive privilege with documents, the agency first considers

respect to predecisional/deliberative

whether the document falls within the scope of the deliberative process privilege; that is, whether the document was generated before the adoption of an agency policy or position and whether the document reflects the give-and-take of the consultation process leading up to the formulation of an agency policy or position. The agency also considers whether the document is recommendatory in nature or is a draft of what may become a final document; whether the document weighs the pros and cons as to the agency's ultimate adoption of one viewpoint

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or another; and whether the material is so candid or personal in nature that public disclosure is likely in the future to stifle honest and frank communication within the agency. Consequently, the agency considers protecting recommendations, draft documents, proposals, suggestions, and other subjective documents which reflect the personal opinions of the writer rather than the policy or position of the agency. These types of documents could inaccurately reflect or prematurely disclose the views of Government officials, suggesting an agency position which is, as yet, only a personal position. Disclosure of documents containing reasons and rationales that were not ultimately relied upon by the agency in reaching its decision(s) could create public confusion. 6. The following documents, authored between August 13, 2001, and

April 19, 2005, were prepared and/or considered by the Office of Chief Counsel during the development of the aforementioned Treasury Regulations. The

documents are maintained in the files of the Associate Chief Counsel (PSI). The production of the withheld documents, or portions thereof, more fully described below, 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 the Treasury, as well as other Department of the 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

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policy or a final decision and release of the withheld information could, therefore, result in confusion to the public and have a negative impact on the processes in which published guidance (e.g., regulations, revenue rulings, etc.) are considered. Further, disclosure of the withheld information would adversely

affect the Service's ability to administer and enforce the law under 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. 7. The following documents are responsive to Plaintiff's First Request for Production of Documents, dated November 2, 2005, for which the Service asserts executive privilege in whole or in part: Treasury Regulations §§ 1.752-6 and -7, and 1.358-7 · Binder 1

Bates Nos. CC0002-CC0004 - An exchange of nine emails among Deborah Harrington, attorney, Office of Tax Policy ("OTP"), Dianna Miosi, Chief, Branch 1, PSI, William O'Shea, Deputy Associate Chief Counsel, PSI, Horace Howells, attorney, Branch 1, PSI, and Donna Marie Young, Special Counsel to the Associate Chief Counsel, PSI, on July 19 and 22, 2002, discussing potential regulation requirements. The Service claims executive privilege for the entire document because it consists of the respective authors' opinions, analyses, conclusions and recommendations for the treatment of one particular issue in the draft regulations. Bates No. CC0006 - An email from Deborah Harrington to Horace Howells, Dianna Miosi, and Donna Marie Young, dated August 1,2002, listing recommended changes to the latest draft of the regulations. The Service claims executive privilege for the entire document because it consists of the tentative approaches to, and recommended language that Gary Wilcox, Deputy Chief Counsel (Technical), and Eric Solomon, Deputy Assistant Secretary (Regulatory Affairs), recommended be given to, several issues that PSI was to incorporate into the next draft of the regulations.

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Bates Nos. CC0008-CC0009 - An email from Deborah Harrington to Horace Howells, Dianna Miosi, Donna Marie Young, William O'Shea, and Heather Maloy, Associate Chief Counsel, PSI, dated September 27, 2002, containing an explanation of substantive changes that Deborah Harrington suggests be made to the August 9, 2002, version of the draft regulations. The Service claims executive privilege for the entire document because it consists of suggested draft language, and the author's opinions, analyses, conclusions and recommendations for various approaches to be taken in the draft regulations (including references to, and reactions about, suggestions and comments offered by other Treasury and Counsel attorneys on the draft regulations). Bates No. CC0011 - Email from Deborah Harrington to Horace Howells, dated October 30, 2002, transmitting an October 30, 2002, revision of the draft regulations. This Service claims executive privilege for the portion of the document that contains the text of the email message because it discusses the reason for the revisions to a particular section of the draft regulations, in light of certain concerns raised by another Counsel attorney. Bates No. CC0013 -An email from Deborah Harrington to Horace Howells, Dianna Miosi, Donna Marie Young, William O'Shea, and Heather Maloy dated December 16, 2002, transmitting clean and redlined versions, dated December 9 and 16, 2002, of the draft regulations. The Service claims executive privilege for the second sentence of the message because it discusses a particular section of the regulations for which treatment had not yet been made. Bates Nos. CC0014-CC0015An exchange of two emails among Donna Marie Young, Deborah Harrington, Horace Howells, Dianna Miosi, William O'Shea, and Heather Maloy, on December 16 and 17, 2002, transmitting clean and redlined versions of the draft regulations and discussing revisions to language from the December 16, 2002, version of the draft regulations. The Service claims executive privilege for the portion of the document that contains the body of the message from Ms. Young, except for the introductory line, because it contains comments on, and suggested language for, the draft regulations. The Service also claims executive privilege for the second sentence of the message from Deborah Harrington because it discusses a particular section of the regulations for which treatment had not yet been made. Bates No. CC0016 - An email from Deborah Harrington to Horace Howells, Dianna Miosi, and Donna Marie Young and copied to William O'Shea, Heather Maloy, and Audrey Nacamuli, attorney, OTP, dated January 8, 2003, discussing language that she was proposing to address the Chief Counsel's comments regarding the draft regulations. The Service claims executive privilege for the entire document because it discusses a potential concern in the draft regulations and outlines a suggested change to address such concern.

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Bates Nos. CC0018-CC0020 -An exchange of three emails among Deborah Harrington, Donna Marie Young, Horace Howells, William O'Shea, and Dianna Miosi, on March 11 and 13, 2003, addressing the example section of the most recent version of the draft regulations. The Service claims executive privilege for the entire document because it consists of suggested draft language for, and the authors' opinions and recommendations with respect to, the language being suggested for the examples section of the draft regulations. Bates Nos. CC0021-CC0023 -An exchange of four emails among Deborah Harrington, Donna Marie Young, Horace Howells, William O'Shea, and Dianna Miosi, on March 11 and 13, 2003, commenting upon, including revising language from, previous e-mail (Bates Nos. CC0018-CC0020). The emails address examples of the most recent version of the draft regulations. The Service claims executive privilege for the entire document because it consists of suggested draft language for, and the authors' opinions and recommendations with respect to, the language being suggested for the examples section of the draft regulations. Bates No. CC0024 - An exchange of two emails among Deborah Harrington, Horace Howells, Heather Maloy, William O'Shea, Donna Marie Young, Dianna Miosi, and Cary Pugh, Special Counsel to the Chief Counsel, dated April 14, 2003, transmitting copies of the April 9, 2003, versions of the draft Notice of Proposed Rulemaking (NPRM) and temporary regulations, including a description of tentative positions to be taken in the draft regulations. The Service claims executive privilege for the portion of the document that contains Ms. Harrington's message following the first two sentences because this material discusses substantive changes being made in this version of the draft regulations and reflects comments and concerns expressed by other OTP and Counsel attorneys that are addressed in the next version of the draft regulations. Bates No. CC0025 - An exchange of two emails among Deborah Harrington, Horace Howells, Heather Maloy, William O'Shea, Donna Marie Young, Dianna Miosi, Audrey Nacamuli, attorney, OTP, and Eric Solomon, on April 14, 2003, transmitting the April 9, 2003, versions of the draft regulations and including a description of the revisions made in this version of the draft regulations. The Service claims executive privilege for the text of Ms. Harrington's message because it discusses a substantive change made to the language of the draft regulations. Bates No. CC0026 - An exchange of three emails among Cary Pugh, Deborah Harrington, Horace Howells, Heather Maloy, William O'Shea, Donna Marie Young, Dianna Miosi, and Cary Pugh on April 14, 2003, transmitting the April 9, 2003, versions of the draft regulations and discussing the whether the authority for the draft regulations covers a particular area. (Two of the three emails duplicate Bates No. CC0025 and the Service's claim of executive privilege, and the reason therefor, is the same.) The Service claims executive privilege for the message from Ms. Pugh because it discusses a substantive change made to the

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language of the draft regulations and raises a question about, and reflects her own thoughts about, an aspect of the draft regulations that needs resolution. Bates No. CC0027 - An exchange of three emails among Deborah Harrington, Horace Howells, Heather Maloy, William O'Shea, Donna Marie Young, Dianna Miosi, Audrey Nacamuli, and Eric Solomon on April 14, 2003, transmitting the April 9, 2003, version of the draft regulations and including a description of revisions made in this version of the draft regulations. The Service claims executive privilege for the portion of the document that contains Deborah Harrington's message, which is a duplicate of Bates No. CC0025, and the Service's claim of executive privilege, and the reason therefor, is the same. Bates Nos. CC0028-CC0029 - An exchange of four emails among Deborah Harrington, Cary Pugh, Horace Howells, Heather Maloy, William O'Shea, Donna Marie Young, and Dianna Miosi on April 14, 2003, transmitting the April 9, 2003, versions of the draft regulations. The Service claims executive privilege for the portions of the document that contain Ms. Pugh's message and the first paragraph of Ms. Harrington's 1:16pm email, which is a duplicate of Bates No. CC0026, and the Service's claim of executive privilege, and the reason therefor, is the same. Bates Nos. CC0030-CC0031 - An exchange of five emails among Donna Marie Young, Deborah Harrington, Cary Pugh, Heather Maloy, William O'Shea, Dianna Miosi, Horace Howells, and Christine Ellison, Chief, Branch 3, PSI, on April 14 and 15, 2003, transmitting the April 9, 2003, versions of the draft regulations and discussing a question about, and reflects the views of the respective authors, with respect to, an aspect of the draft regulations that needs resolution. The Service claims executive privilege for the portions of the document that contain the first paragraph of Ms. Young's email, because it memorializes her discussions with IRS Examination personnel who had experience with the transactions that were the subject of the draft regulations, and how that experience informed the development of the draft regulations. The Service claims executive privilege for Ms. Pugh's email and Ms. Harrington's 1:16pm email, which are duplicates of Bates No. CC0026, and the Service's claim of executive privilege, and the reason therefor, is the same. Bates Nos. CC0032-CC0034 - An exchange of eight emails among Donna Marie Young, Cary Pugh, Deborah Harrington, Heather Maloy, William O'Shea, Dianna Miosi, Horace Howells, Christine Ellison, and Gary Wilcox, on April 14 and 15, 2003, transmitting the April 9, 2003, versions of the draft regulations and discussing a question about, and reflects the views of the respective authors, with respect to, an aspect of the draft regulations that needs resolution. The Service claims executive privilege for the portions of the document that contain Ms. Young's two emails, Ms. Pugh's two emails, and Ms. Harrington's April 14, 2003, 1:16pm and April 15, 2003 emails. The Service claims executive privilege for the portions that reflect the respective authors' views of, and recommended

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treatment of, a particular transaction under the draft regulations. Some of these portions are duplicates of Bates No. CC0030-CC0031, and the Service's claim of executive privilege, and the reason therefor, is the same. Bates No. CC0035 - An exchange of three emails among Deborah Harrington, William Alexander, Associate Chief Counsel (Corporate), Derek Cain, Deputy Associate Chief Counsel (Corporate), and Horace Howells on April 14 and 15, 2003, forwarding the transmission of the April 9, 2003, versions of the draft regulations for Corporate's review of the draft regulations and pointing out specific changes of interest. The Service claims executive privilege for the portions of the document containing the second sentence of Ms. Harrington's April 15themail and Ms. Harrington's April 14th email because these portions discuss a substantive change being proposed for the draft regulations. Bates Nos. CC0036-CC0039 - An exchange of four emails among Deborah Harrington, Donna Marie Young, Horace Howells, William O'Shea, Heather Maloy, and Dianna Miosi on April 17, 2003, suggesting changes to the language in the draft regulations. The Service claims executive privilege for the portions of the document that contain Ms. Young's 4:35pm email after the first line and Ms. Young's 11:46am email after the first two lines because these portions contain suggested draft language, with typewritten redlining and strike-outs, for the draft regulations. Bates Nos. CC0040-CC0043 - An exchange of nine emails among Cary Pugh, Donna Marie Young, Heather Maloy, William O'Shea, Dianna Miosi, Horace Howells, and Christine Ellison on April 14, 15, and 18, 2003, transmitting the April 9, 2003, versions of the draft regulations and discussing a question about, and reflects the views of the respective authors, with respect to, an aspect of the draft regulations that needs resolution. The Service claims executive privilege for the portions of the document that contain the first three paragraphs of Ms. Pugh's April 18, 2003, email, Ms. Young's April 15, 2003, at 4:05pm email, Ms. Pugh's April 14 and 15, 2003, emails, Ms. Harrington's April 15, 2003, email, Ms. Young's April 15, 2003, at 10:45am email, and the first paragraph of Ms. Harrington's April 14, 2003, email because these portions discuss whether the regulations, as currently drafted, would reach certain transactions. Portions of this document are duplicates of Bates No. CC0032-CC0034; the Service's claim of executive privilege for those portions, and the reason therefor, is the same. Bates No. CC0047 - An email from Deborah Harrington to Horace Howells, Donna Marie Young, Heather Maloy, William O'Shea, Gary Wilcox, and Cary Pugh, dated May 6, 2003, transmitting clean and redlined versions of the May 5, 2003, draft regulations with a discussion of revision of the preambles to the draft NPRM and temporary regulations. The Service claims executive privilege for the entire document because it discusses a substantive change in the draft regulations.

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