Arden Row Assets, LLC v. IRS, No. 23-2696, 2025 WL 2409748 (D.D.C. Aug. 20, 2025) (Bates, J.)

Arden Row Assets, LLC v. IRS, No. 23-2696, 2025 WL 2409748 (D.D.C. Aug. 20, 2025) (Bates, J.)

Re: Request for records concerning audits of plaintiffs’ 2018 tax returns

Disposition:  Granting defendant’s motion for summary judgment; denying plaintiffs’ motion for summary judgment

• Exemption 5, Deliberative Process Privilege:  The court relates that “[h]ere, plaintiffs do not contest that the deliberative process privilege applies to the withheld documents in the first instance.”  “Instead, they contend that alleged IRS misconduct – the backdating of required approval for the proposed penalties – ‘vitiates the FOIA exemption,’ . . . under the so-called ‘government misconduct exception’ to the deliberative process privilege . . . .”  “The Court is unpersuaded.”  “[The] Court takes no position on whether such an exception exists, but there are good reasons to be skeptical – and the arguments against the exception illustrate why there must be a high bar to invoke it.”  “The D.C. Circuit has never endorsed a government misconduct exception to the deliberative process privilege for FOIA requests . . . [and] [j]udges in this district are divided on the issue.”  “Exemption 5’s protection of privileged materials ‘is not subject to the same exceptions to which the common law privilege is susceptible.’”  “[A] government misconduct exception would cut against the purpose of the deliberative process privilege, which stems from the notion that shielding deliberations encourages candor, thereby reducing the risk of misconduct.”  “But if a government misconduct exception exists, it would be narrow and would apply only in cases of ‘extreme government wrongdoing.’”  “Plaintiffs’ allegations do not clear this high bar.”  “To begin, plaintiffs do not allege that the IRS violated any law.”  “While they accuse the IRS of improperly backdating the required supervisory approval for the penalties assessed against them, . . . they acknowledge that the backdating was legally harmless because the actual date when the IRS agents secured supervisory approval for their penalties was still within the statutory window for approval.”  “Acknowledging that the IRS obtained sufficient approval, plaintiffs argue that the government misconduct exception applies because the IRS agent had a nefarious state of mind.”  “Plaintiffs claim that the IRS ‘believed that they needed’ earlier supervisory approval because since-overturned Tax Court cases held that supervisory approval was required at the time of the IRS’s initial penalty determination.”  “They further suggest that the IRS agent’s request that his supervisor backdate the penalty approvals could only have been animated by duplicitous intent.”  “The IRS, meanwhile, argues that the agents’ behavior is more easily ascribed to ‘incompetence’ than a desire to ‘perpetrate a fraud scheme.’”  “The Court agrees.”  “The agent asked their supervisor to backdate the approval to a date when the supervisor had sent a cursory email saying ‘I approve penalties.’” “Although this email was not actually sufficient to confer approval at the earlier date, it evinces an attempt to comply with the law.”  “Further, the IRS disagreed with the aforementioned Tax Court rulings, appealed them, and prevailed.”  “Finally, longstanding IRS guidance and litigation positions are consistent with the idea that supervisory approval is not required until the final penalty assessment.”  “In sum, the legally harmless act of backdating records here, especially where there are innocuous alternative reasons for doing so, does not rise to the level of egregious misconduct required to satisfy the government misconduct exception (to the extent any such exception exists).”  “Even if the backdating was sufficient to trigger the government misconduct exception, the IRS would still not have to disclose the withheld records.”  “Plaintiffs do not contest that ‘the vast majority of the records withheld under the deliberative process privilege have no connection to the misapplied date whatsoever.’”  “And even for those records related to the backdating, the government misconduct exception only applies to records where the communications themselves display the government’s egregious behavior.”  “Hence, even if the exception applied here, plaintiffs would not be entitled to wide-ranging information about their audit.”
   
• Exemption 5, Attorney-Client Privilege:  The court relates that “plaintiffs do not argue that the IRS improperly applied the attorney-client privilege in the first instance but instead claim that the IRS’s backdating satisfies an exception to the privilege.”  “In this instance, plaintiffs invoke the crime-fraud exception.”  “But [the court finds that] once again, plaintiffs are wrong.”  “The crime-fraud exception prevents agencies from claiming attorney-client privilege over documents that are ‘made in furtherance of a crime, fraud, or other misconduct.’”  “Without a crime or fraud, plaintiffs cannot invoke the crime-fraud exception.”  “As described above, plaintiffs have not alleged that the IRS agent’s backdating was illegal.”  “The IRS supervisor provided timely approval of the agent’s penalty assessments within the statutory window and the plaintiffs have not demonstrated that the IRS intended to ‘perpetrate a fraud scheme.’”  “Accordingly, the IRS properly applied the attorney-client privilege.”
   
• Exemption 5, Deliberative Process Privilege & Attorney-Client Privilege; Waiver and Discretionary Disclosure, Waiver:  The court relates that “plaintiffs argue that the IRS waived both attorney-client privilege and deliberative process privilege as to certain records because it disclosed those records during plaintiffs’ audit and Tax Court cases.” “The IRS has since released previously disclosed records without asserting Exemption 5.”  “As a result, plaintiffs’ waiver argument regarding these particular records is moot.”  “Newly in their reply brief, plaintiffs argue that the IRS committed subject-matter waiver of attorney-client privilege by discussing the audit settlement process in Tax Court.”  “Subject-matter waiver is the doctrine by which a party who discloses privileged attorney-client communications may waive the privilege for those communications and all communications relating to the same subject matter.”  “This doctrine is based on the understanding that a party should not be able to wield privileged information as a sword in one context only to then hide behind privilege as a shield in another.”  “However, disclosures that merely incidentally mention the existence of an attorney-client communication do not vitiate the privilege.”  “In particular, an ‘averment that lawyers have looked into a matter does not imply an intent to reveal the substance of the lawyers’ advice.’”  “That is because when a party ‘neither reveals substantive information, nor prejudices [their opponent’s] case, nor misleads a court by relying on an incomplete disclosure, fairness and consistency do not require the inference of waiver.’”  “Plaintiffs claim that ‘IRS attorneys testified about their internal discussions regarding the backdating,’ thereby waiving attorney-client privilege as to all relevant records.”  “That is incorrect.”  “Plaintiffs merely cite portions of the Tax Court transcript where IRS attorneys mentioned conversations about the audit and/or backdating.”  “But these amount to general assertions ‘lacking substantive content’ that an attorney examined a ‘certain matter,’ which is not sufficient to waive privilege.”  “Consequently, the IRS properly invoked attorney-client privilege and plaintiffs have not demonstrated that subject-matter waiver applies to any of the records at issue.”  “Waiver results in disclosure only when the records at issue are ‘not covered by other protections,’ such as deliberative process privilege.”  “And ‘[t]he concept of subject-matter waiver is almost uniquely a function of the attorney-client relationship’; it does not apply to ‘deliberative process privilege.’”  “The second Vaughn index submitted by the IRS indicates that every document where attorney-client privilege is asserted is also protected by deliberative process privilege.”  “Accordingly, because both attorney-client privilege and deliberative process privilege apply to these records, Exemption 5 protects them from disclosure.”
   
• Exemption 3: The court finds that, “[h]ere, the IRS identified 26 U.S.C. § 6103(e)(7), which provides that the IRS may withhold tax return information if the Secretary of the Treasury ‘determines that disclosure would seriously impair Federal tax administration.’”  “Then, the IRS provided a declaration from an authorized delegate of the Secretary, . . . stating that disclosure of certain records would ‘seriously impair the ability of the government to ensure the assessment and collection of the proper tax and penalties’ from plaintiff . . . .” “In plaintiffs’ view, § 6103(e)(7) does not apply here because, while it permits withholding tax records from third parties, it ‘does not prevent taxpayers and their representatives from accessing the taxpayers’ own tax information.’”  “The general statutory permission for members of partnerships to access the tax information of that partnership, plaintiffs posit, entitles them to their tax return information regardless of Secretarial approval.”  “Not so.” “The general statutory permission to access one’s own tax information in § 6103(e)(1)(C) is eclipsed by the specific prohibition in § 6103(e)(7) providing for withholding tax return information subject to Secretarial disapproval.”  “Plaintiffs do not cite a single case for the proposition that parties are entitled to the disclosure of their own returns, regardless of Secretarial disapproval.”  “That is likely because caselaw shows the opposite.”  “And plaintiffs’ reading is inconsistent with the statutory scheme that establishes the role of Secretarial disapproval as a backstop to otherwise permissible disclosures that would impair the tax system.”  “Indeed, there may be many circumstances where allowing parties to see information about themselves could hamper tax administration.” “Plaintiffs next contend that [defendant’s] declaration is too conclusory to constitute a bona fide Secretarial determination.”  “That is incorrect as well.”  “[Defendant’s] declaration is comprehensive and provides multiple reasons why disclosure of the requested materials could impair tax administration.”  “Because § 6103(e)(7) permits the IRS to withhold the relevant records, the IRS appropriately invoked Exemption 3.”
   
• Exemption 7(A):  “Here, each document withheld under Exemption 7(A) ‘relates to proposed partnership tax adjustments and proposed penalties related to [a subject],’ with whom the IRS is engaged in active Tax Court proceedings.”  “The documents include materials used in [the subject’s] civil examination and email attachments reflecting IRS attorney discussions about the case.”  “Plaintiffs acknowledge as much but argue that the IRS has not provided a sufficient explanation of why the documents would interfere with the ongoing proceedings.”  “But the IRS has explained that divulging those records would ‘give premature insight into the strength of the IRS’s position; elucidate which evidence the IRS’s positions were based on; and reveal the nature, direction, scope and focus of the Service’s case.’”  “The nature of the withheld records and the IRS’s explanation for shielding them are sufficient to suggest that disclosure would threaten pending law enforcement proceedings.”  “Accordingly, the IRS’s invocation of Exemption 7(A) is proper.”