Grand Marina Invs. v. IRS, No. 23-1676, 2025 WL 2757756 (D.D.C. Sept. 26, 2025) (Lamberth, J.)

Grand Marina Invs. v. IRS, No. 23-1676, 2025 WL 2757756 (D.D.C. Sept. 26, 2025) (Lamberth, J.)

Re: Request for records concerning defendant’s change of settlement offer

Disposition:  Granting defendant’s motion for summary judgment

• Litigation Considerations, Evidentiary Showing, Adequacy of Search:  “The Court agrees with the IRS that [plaintiff’s] challenge to the adequacy of this search was subject to exhaustion and [plaintiff] did not raise the issue before the agency, so it declines to reach [plaintiff’s] contention about the adequacy of the search.” “In this case, there [is] no question that [plaintiff’s] appeal did not raise the adequacy question to the IRS: [plaintiff] concedes that it ‘did not challenge the adequacy of the Service’s search for records’ in its FOIA appeal within the IRS.”
   
• Exemption 3:  The court relates that “[t]he IRS asserts that 26 U.S.C. § 6103(b)(2) requires withholding of the relevant information, which provides that: ‘Nothing . . . in any other provision of law, shall be construed to require the disclosure of standards used or to be used for the selection of returns for examination, or data used or to be used for determining such standards, if the Secretary determines that such disclosure will seriously impair assessment, collection, or enforcement under the internal revenue laws.’”  “The IRS has asserted Exemption 3 over [one document] to support the redaction of Discriminant Index Functions (“DIF”) scores from that document, which is the defendants’ tax transcript.”  “‘DIF scoring is a mathematical technique used to identify tax returns most in need of examination or audit.’”  “‘The IRS closely guards information concerning its DIF scoring methodology because knowledge of the technique would enable an unscrupulous taxpayer to manipulate his return to obtain a lower DIF score and reduce the probability of an audit.’”
   
• Exemption 5, Deliberative Process Privilege:  The court relates that “[i]n this case, the IRS invokes the deliberative process privilege to apply redactions to five pages across two documents:  . . . ‘an IRS Appeals memorandum . . . and one page of a corresponding IRS Appeals summary[].’”  “These documents address ‘litigation risks before the final resolution of Plaintiff’s appeal.’”  “As the underlying declaration explains, the agency’s position is that these documents ‘are deliberative because they discuss litigation risks and/or reflect [the] recommendations with respect to’ the case, and they are ‘pre-decisional because [they] reflect[ ] opinions and recommendations of agency personnel that preceded the final resolution of the plaintiff’s appeal.’”
  
  “[Plaintiff] does not dispute the foregoing facts.”  “Instead, it argues that the privilege should not apply here on two grounds.”  “First, it contends that ‘the deliberative process privilege should be asserted only where there are discussions about what should be the public policy of the agency.’”  “In their view, because ‘the IRS has not shown that the [documents] are the birth of a public policy formation,’ it is not applicable here.” “This argument stumbles right out of the gate, as there is no such limitation inherent in the deliberative process privilege.”  “Second, [plaintiff] contends that ‘the deliberative process privilege [sh]ould not apply here because “the government’s intent is squarely at issue.”’”  “It is true that ‘when a plaintiff’s cause of action turns on the government’s intent,’ the ‘deliberative process privilege is not appropriately asserted.’”  “But this argument misconstrues the legal standard [plaintiff] relies on:  the question is not whether the facts could give rise to improper motive, but whether the nature of the ‘cause of action’ invoked by the plaintiff ‘turns on the government’s intent.’”  “Thus, the government cannot use the privilege to shield an allegedly corrupt or fraudulent purpose, such as in a case alleging abuse of process and malicious prosecution . . . or fraudulent conveyance . . . .”  “The uniform recognition among Courts that the deliberative process privilege falls within the ambit of FOIA Exemption 5 is ipso facto indicia that the private right of action under FOIA is not such a claim.”
   
• Exemption 7(E): The court relates that “Eight documents . . . which are portions of [a memorandum] and summaries thereof . . . contain redactions because they contain ‘detailed calculations explaining how [the IRS Appeals Unit] calculates fair market value of conservation easements, as well as litigation risk assessments that help determine whether the IRS will concede or dispute certain legal issues in settlement negotiations.’” “The IRS contends that these documents are subject to redaction because disclosure would cause the IRS to ‘be unfairly prejudiced in future settlement negotiations with taxpayers, including plaintiff.’”  “[Plaintiff] contends these materials cannot be subject to the law enforcement exemption, asserting instead that the IRS Appeals Unit is oriented toward settlement, not law enforcement, so ‘none of [the] items covered in the memorandum should touch on or disclose law enforcement techniques and guidelines.’” The court finds that “[plaintiff’s] supposition that settlement of disputes is not a law enforcement function rings hollow in a system where, for example, ‘the great majority of criminal cases are resolved by plea bargaining,’ which is nothing more than a settlement of the charges against a party.”  “Nobody would seriously contend that a presentence investigation report is unrelated to law enforcement if . . . the defendant has pleaded guilty pursuant to a settlement.”  “The premise that settlements cannot be part of law enforcement is therefore flawed as a general matter.”  “This is especially so in the context of IRS settlements, and the particular type of IRS appeals memoranda at issue here.”  “Section 8.6.2.2 of the Internal Revenue Manual specifically provides that IRS appeals memoranda should include ‘[i]nformation for Counsel to prepare for trial and to evaluate the settlement proposal.’”  “This is precisely the category of information that the D.C. Circuit has held creates a sufficiently high ‘risk of circumvention of the law’ to qualify for withholding under Exemption 7(E).”
  
  “[One more] document . . . contains redactions because, as noted earlier, it includes information related to the IRS’s DIF scores.”  “Although the Court has already concluded that the DIF score information is subject to withholding pursuant to [Exemption 3], the Court concludes that DIF scores are also subject to withholding pursuant to [Exemption 7(E)].”  “Because disclosure of DIF scoring could . . . enable tax filers to avoid audits by the IRS by manipulating the manner in which they file, courts have generally permitted the IRS to withhold DIF scores pursuant to Exemption 7(E) because such manipulation ‘could reasonably be expected to risk circumvention of the law.’”
   
• Litigation Considerations, Discovery:  The court notes that “[plaintiff] briefly suggests that ‘discovery is warranted related to the IRS’ good or bad faith in its multi-year effort to prevent [plaintiff] from rightfully accessing documents that it is entitled to access under the FOIA and its failure to produce documents related to its abrupt removal of its initial settlement offer.’”  “But [plaintiff] has fallen far short of raising a genuine dispute of material fact.”  “A showing of bad faith must ‘impugn the agency’s affidavits, or declarations,’ or provide some other ‘tangible evidence.’”  “As with [plaintiff’s] earlier discovery motion, . . . which the Court denied, . . . the plaintiffs offer only threadbare allegations of malintent by the IRS, but no argument or evidence why the specific factual presentation in the IRS’s declarations is in question.”  “That does not justify discovery.”