IRS Presents Arguments Against Compelled Discovery in Glaxo Case

Beresford v. United States, 123 F.R.D. 232 (E.D. Mich. 1988)

Bornstein v. United States, 345 F.2d 558 (Ct. Cl. 1965)

Bristol-Myers Barceloneta Co. v. United States No. 97-cv-02567 (D.P.R. filed October 24, 1997)

Church of Scientology of California v. Internal Revenue Service 484 U.S. 9 (1987)

Church of Scientology of Texas v. Internal Revenue Service 816 F. Supp. 1138, (W.D. Tex. 1993)

Coastal States Gas Corp. v. Department of Energy 617 F.2d 854 (D.C. Cir. 1980)

Confidential Informant 92-95-932x v. United States 45 Fed. Cl. 556 (2000)

Davis v. Commissioner, 65 T.C. 1014 (1976)

Environmental Protection Agency v. Mink 410 U.S. 73 (1973)

International Business Machines, Inc. v. Commissioner, 343 F.2d 914 (Ct. Cl. 1965)

Kaiser Aluminum & Chemical Corp. v. United States 157 F. Supp. 939 (Ct. Cl. 1958)

Knetsch v. United States 348 F.2d 932 (Ct. Cl. 1965)

Mindell v. United States, 693 F. Supp. 847 (C.D. Cal. 1988)

National Labor Relations Board v. Sears, Roebuck & Co. 421 U.S. 132 (1975)

Norman E. Duquette, Inc. v. Commissioner, 110 F. Supp. 2d 16 (D.D.C. 2000)

Penn-Field Indust., Inc. v. Commissioner, 74 T.C. 720 (1980)

Renegotiation Bd. v. Grumman Aircraft Eng'g Corp. 421 U.S. 168 (1975)

Rutter v. Commissioner, 81 T.C. 937 (1983)

Shell Petroleum, Inc. v. United States, 46 Fed. Cl. 719 (2000)

Tax Analysts v. Internal Revenue Service 53 F. Supp. 2d 449 (D.D.C. 1999)

Teichgraeber v. Commissioner, 64 T.C. 453 (1975)

United States v. The Northern Trust Co., 210 F. Supp. 2d 955 (N.D. Ill. 2001)

Vons Companies, Inc. v. United States, 51 Fed. Cl. 1 (2001)

Internal Revenue Code

I.R.C. § 482

IRS Chief Counsel Notice, CC-2006-03 (October 25, 2005)

IRS Chief Counsel Notice, CC-2006-06 (November 22, 2005)

Rev. Proc. 2006-9, 2006-2 I.R.B. 278

Legislative Materials

H.R. Conf. Rep. No. 106-1033 (2000)

H.R. Conf. Rep. No. 106-1033, (2000)

H.R. Rep. No. 106-238 (1999)

S. Rep. 94-938(I)

S. Rep. No. 106-120 (1999)

S. Rep. No. 94-938(I) (1976)

S. Rep. No. 94-938(I) (1976), as reprinted in 1976 U.S.C.C.A.N 3438, 3747

Sen. Rep. No. 106-120, (1999)

Tax Court Rules

T.C. Rule 70(b)

Federal Rules

Fed. R. Civ. Pro. 26(b)(1)

Fed. R. Evid. 401

Treaty Materials

Article 27 of the United States-United Kingdom Income Tax Convention

Convention for the Avoidance of Double Taxation, July 24, 2001, U.S.-U.K., art. 27, para. 3, S. Treaty Doc. No. 107-19

Statutes

Housekeeping Statute 1 Stat. 68 (1789)

Tax Reform Act of 1976, Pub. L. No. 94-455, § 1202, 90 Stat. 1520, 1667-1688

Ticket To Work And Work Incentives Improvement Act of 1999, Pub. L. No. 106-170, 113 Stat. 1860, § 521 (1999)

Respondent responded to Petitioner's discovery to the extent the information sought was not privileged or otherwise prohibited from disclosure under the requirements of law. Where appropriate, Respondent objected to Petitioner's discovery requests on the grounds of I.R.C. §§ 6103, 6105, 6110¹ , Ticket To Work And Work Incentives Improvement Act of 1999, Pub. L. No. 106-170, 113 Stat. 1860, § 521 (1999), the deliberative process privilege and relevance.

Table 1, below, identifies the discovery and requests for admissions which are the subject of Petitioner's Motion to Compel, a general description of the requests and Respondent's objections, and a cross reference to the section in this memorandum of law addressing the objection.

TABLE I -- Cross Reference to Respondent's Memorandum of Law

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TABLE II -- Respondent's Discovery Objections Categorized by Request

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TABLE III -- Discovery Requests to Which Respondent Provided Responses (in Addition to Maintaining Appropriate Privileges and Objections)

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First, Petitioner's discovery requests are not reasonably calculated to lead to the discovery of admissible evidence and, therefore, not relevant to this litigation. Absent a prima facie showing of some form of invidious discrimination based on constitutionally impermissible grounds, which Petitioner fails to do, overwhelming case law says that a taxpayer cannot impose an administrative agreement, such as an APA, of an alleged similarly situated taxpayer, as the basis for resolving its own tax case. In this regard, given the bilateral nature of several of the APAs and its treaty implications, the case against APAs having relevance to this case is even stronger. Respondent's Memorandum of Law in Support of Summary Judgment ("Resp. SJ Memo.") at 6-15.

Second, Petitioner's discovery requests would cause Respondent to violate I.R.C. § 6103, which prohibits the disclosure of the APAs and related information sought by Petitioner. Section 6103 has no exceptions applicable to Petitioner's discovery and request for admissions. Petitioner relies on section 6103(h)(4)(B); however, Petitioner cannot satisfy that exception's "item test." This is so because there is absolutely no factual or legally significant relationship between Petitioner and the pharmaceutical company APAs which the "item test" requires. Petitioner's discovery is contrary to the statute and the clear intent of Congress as expressed by the legislative history of sections 6103 and 6110. Furthermore, Petitioner's attempt to obtain information regarding these APAs through interrogatories and admissions without taxpayer identifiers is contrary to the Supreme Court's holding in Church of Scientology which held that return information does not lose its designation as return information merely because taxpayer identifiers have been excised.

There is little doubt Congress has expressly placed the subject matter of Petitioner's discovery off-limits. APAs sought in Petitioner's discovery requests are not written determinations under section 6110, and, therefore, are not subject to public inspection under that provision. Petitioner's discovery is contrary to the express mandate of Congress. Congress' intent to protect APAs and related background files from disclosure is shown by the careful drafting of The Ticket To Work And Work Incentives Improvement Act of 1999, § 521(b) of Pub. L. 106-170 (1999), which provides the public with information concerning the APA program in the form of an Annual Report while protecting APAs and related background information from disclosure. Petitioner's discovery of aggregate APA information is again contrary to the expressed mandate of Congress.

Additionally, the deliberative process privilege prevents Petitioner from accessing information that would disclose the predecisional and deliberative consideration given to the administrative resolution of transfer pricing disputes. Such disclosure would significantly impede or nullify governmental agency action in carrying out a government responsibility or function if disclosed.

Respondent has consistently objected to Petitioner's APA discovery on the ground that it is not reasonably calculated to lead to the discovery of admissible evidence. See T.C. Rule 70(b). Petitioner chose not to address this objection, claiming that the Court previously decided this issue in its March 31, 2005 Order denying Respondent's Motion for Partial Summary Judgment. (Pet. Memo. at 21, n.34)("Respondent also raised a relevancy objection, which Petitioner believes the Court already has rejected")).

In December 2004, Respondent filed a Motion for Partial Summary Judgment on the issue of whether as a matter of law Petitioner was entitled to rely upon IRS agreements in other taxpayers' cases as dispositive of, or relevant to, the merits of this case. By Order dated March 31, 2005, the Court denied the motion, stating "[t]he legal issue on which respondent seeks partial summary judgment, generally involving the right of a taxpayer to consistent treatment with other taxpayers, is not fully developed and is not resolved by existing precedent." (Court Order, Mar. 31, 2005). The Court further stated "resolution of this important issue made in summary fashion would create a risk of multiplicity of proceedings and delay in ultimate resolution of this case, and granting respondent's motion would undermine the purpose of summary judgment, which is to expedite litigation." (Id.) Finally, the Court stated that " [n]o views on the ultimate merits of the respective positions of the parties are implied by this Order, which is based on the conclusion that summary disposition at this time is neither appropriate nor practicable." (Id.)

Respondent's Partial Summary Judgment Motion was based on the pleadings in which Petitioner asserted its discrimination claim. (T.C. Docket No. 5750-04, Pet. ¶ 7). As any APA discovery was informal during the pendency of the partial summary judgment proceeding, the Court was not made aware of the discovery during that proceeding. (See Pet. Motion to Compel, ¶¶ 8-12). While the Court denied Respondent's motion, indicating that the "similarly situated" issue "requires evidentiary development," (Court Order, Mar. 31, 2005), the Court was not in a position, nor requested by the parties, to review any specific discovery requests. Therefore, Petitioner cannot convincingly contend that the Court granted it carte blanche on relevancy grounds with respect to its wide-ranging discovery requests, including items Congress has expressly prohibited, when the Court had not yet reviewed the discovery and did not have a motion before it with respect to the discovery.

Respondent previously raised the issue of relevancy in the context of the partial summary judgment proceeding. The Court has not decided the ultimate resolution of these issues. Respondent argued then, and continues to assert the arguments below, in support of its position that Petitioner's requests cannot lead to the discovery of admissible evidence:

• Absent a prima facie showing of some form of invidious discrimination based on constitutionally impermissible grounds, which Petitioner fails to do, an abundance of case law establishes that a taxpayer cannot impose an administrative agreement, such as an APA, of an alleged similarly situated taxpayer, as the basis for resolving its own tax case. (Respondent's Memorandum of Law in Support of Summary Judgment ("Resp. SJ Memo.") at 6-15}.

• As an administrative agreement, APAs are not entitled to any precedential effect for other taxpayers. (Resp. SJ Memo. at 17-20) .

• Several decisions of the Court of Federal Claims have largely narrowed International Business Machines, Inc. v. Commissioner, 343 F.2d 914 (Ct. Cl. 1965) ("IBM"), upon which Petitioner relies for its discrimination claim, to a small niche which is entirely inapplicable to the facts of this case. (Resp. SJ Memo. at 20-23) .

• APAs are negotiated administrative agreements executed between the Service and taxpayers (and foreign tax authorities in the case of bilateral agreements) and are neither "written determinations" nor "working law." (Resp. SJ Memo. at 23-26).

• APAs bear little resemblance to written determinations or legal interpretations: they are agreements, not unilateral determinations; by their own terms they have no legal effect on transactions or years other than those agreed to; and the agreements do not contain legal or factual analysis. (Resp. SJ Memo. at 26-30).

• The terms of an APA explicitly acknowledge that the agreement cannot be introduced into evidence in any judicial or administrative proceeding, and they constitute compromises within the scope of Rule 408 of the Federal Rules of Evidence. (Resp. SJ Memo. at 30-31) .

Respondent requests that the Court critically evaluate these discovery motions de novo by reviewing the specific discovery requests to ascertain whether each request is relevant to the proceeding and whether each is reasonably calculated to lead to the discovery of admissible evidence. Even if the Court reaches the conclusion that the "similarly situated" issue requires evidentiary development, much of Petitioner's discovery cannot shed any light on these issues. In particular, Respondent requests that the Court carefully consider how the discovery requests seeking aggregate APA information could be relevant, or could lead to discovery of admissible evidence that is relevant to the issues in dispute.

II. THE SUBJECT MATTER OF THE PETITIONER'S DISCOVERY AND REQUESTS FOR ADMISSIONS IS PROTECTED FROM DISCLOSURE PURSUANT TO SECTION 6103 OF THE INTERNAL REVENUE CODE.

Section 6103.(a) protects the confidentiality of returns and return information. Substantial penalties are imposed for violations of the confidentiality rules. Section 7431(a) establishes a civil cause of action and provides for damages for unauthorized disclosures. More significantly, section 7213(a)(1) makes unauthorized disclosure by a federal official a felony, and requires the firing of any federal employee convicted of making an unauthorized disclosure.

Congress amended section 6103 as part of the Tax Reform Act of 1976 in response to concerns that the Privacy Act did not adequately address the unique aspects of tax returns. S. Rep. No. 94-938(I) at 318 (1976), as reprinted in 1976 U.S.C.C.A.N 3438, 3747. Under prior law, a large number of executive and administrative agencies could receive taxpayer information for both tax and non-tax matters. Congress greatly expanded section 6103 as a shield to protect taxpayers from improper disclosure of information they were required to provide to the government by law.

The statute generally prohibits disclosure of "return and return information" except as authorized by the Code. Section 6103(a). A limited exception is found in section 6110 which Congress simultaneously enacted as part of the Tax Reform Act of 1976's overhaul of taxpayer confidentiality provisions. Section 6110 requires that a "written determination" and any background document related thereto must be open for public inspection. Prior to the enactment of the Ticket To Work And Work Incentives Improvement Act of 1999, Pub. L. No. 106-170, 113 Stat. 1860 (1999) (hereinafter "Ticket To Work Act"), a controversy developed about whether APAs and materials relating to APAs constituted "written determinations" within the meaning of section 6110.

APAs and their background files are precisely the documents Petitioner seeks. However, Congress resolved the controversy with the enactment of the Ticket To Work Act, which definitively includes APAs and background documents related to APAs in the definition of "return information" and expressly excludes them and their underlying documents from the definition of "written determination" and "background file document." Sections 6103(b)(2)(C), 6110(b)(1)(B). Return information is defined in relevant part as "any advance pricing agreement entered into by a taxpayer and the Secretary and any background information related to such agreement or any application for an advance pricing agreement." Section 6103(b)(2)(C). Congress has expressly made APAs and their background files off-limits.

Congress crafted limited exceptions to the strict confidentiality rules of section 6103 by drafting section 6103(h), which permits disclosure in certain instances for purposes of tax administration. None of the subsection (h) exceptions applies to this case. Petitioner argues that section 6103(h)(4)(B) permits the disclosure of confidential APA-related materials. Section 6103(h)(4) provides in pertinent part:

Petitioner's federal income tax liability depends on the law and facts applicable to its own financial circumstances. Penn-Field Indus., Inc. v. Commissioner, 74 T.C. 720, 722 (1980); Davis v. Commissioner, 65 T.C. 1014, 1022 (1976); Teichgraeber v. Commissioner, 64 T.C. 453, 456 (1975). Courts have repeatedly rejected the proposition that a taxpayer who otherwise is liable for federal taxes can avoid that liability by pointing to another taxpayer who may have received dissimilar treatment by the IRS. (See Resp't. SJ Memo. 6-13).

The structure and scope of the nondisclosure regime established under section 6103, as amended in 1976, would have compelled the Court of Claims to reach a different result. At the time Congress enacted section 6103(h)(4)(B) in 1976, it had a clear opportunity to allow for unrestricted discovery of the type of claim dealt with in IBM relating to the alleged disparate treatment of taxpayers. However, Congress declined to establish exceptions allowing third party taxpayer return information to be disclosed whenever the issue of disparate treatment of similarly situated but unrelated taxpayers was raised. Instead, Congress established the more restrictive "item test" (section 6103(h)(4)(B)) and "transaction test" (section 6103(h)(4)(C)) for determining when third party taxpayer information may be disclosed in a judicial or administrative tax proceeding. As discussed below, the APA information of other unrelated taxpayers does not satisfy the strict requirements of the "item test."

Petitioner's interpretation of the statutory language would subvert the express mandate of Congress and create an exception that would swallow the rule. Indeed, any tax case involving comparable data would require the Service to disclose all potentially comparable third party taxpayer information requested by a claimant merely because a claim involving disparate treatment appeared in the claimant's pleading. Congress intended no such result, and to the extent it flows from IBM, a better inference is that Congress overruled the IBM result in enacting section 6103.

Congress intentionally used the language "directly related" to reflect a higher standard than mere "relevance." Rule 26(b)(1) of the Federal Rules of Civil Procedure defines information as "relevant" if it is "reasonably calculated to lead to the discovery of admissible evidence." Relevance is the lower standard required for disclosure of a party's own tax information in a proceeding. Section 6103(h)(4)(A) governs the disclosure of a return or return information of a taxpayer who is a party to a proceeding or where the proceeding arises out of, or in connection with, the taxpayer's liability or collection of such liability. In such a situation, Congress did not include the "directly related" standard. It established a lower threshold for disclosure of a party's own tax information in a judicial proceeding under section 6103 (h)(4)(A) than for disclosure of an unrelated third party's tax information in any such proceeding under either sections 6103(h)(4)(B) or 6103(h)(4)(C). Otherwise, Congress could have used the "directly related" language in both sections 6103(h)(4)(A) and (B). By choosing different language, it is apparent that Congress selected a higher standard, greater than mere relevance, for satisfying the "item test" under section 6103(h)(4)(B).

Although the plain language of the statute should be sufficient to confirm that the threshold for the "item test" is greater than mere relevance and requiring rejection of Petitioner's claim, the legislative history for sections 6103(h)(4)(B) and 6103(h)(4)(C) leaves no ambiguity whatsoever:

Where disclosure of third party taxpayer information is made to the Department of Justice in connection with a tax proceeding, Congress provided for disclosure if "the treatment of the item reflected on such return is or may be related to the resolution of an issue . . ." Section 6103(h)(2)(B)(emphasis added). The legislative history amplifies this standard by noting "[t]he return or return information of a third party would be disclosed to the Justice Department in the event that the treatment of an item reflected on his return is or may be relevant to the resolution of an issue of the taxpayer's liability . . ." S. Rep. 94-938(I) at 325 (emphasis added). Clearly, Congress intended something greater than a mere relevance standard in subsection (h)(4)(B) given the language that disclosure of third party return or return information in a tax proceeding will be subject to the same item and transactions tests as that in place for disclosures to the Department of Justice "except that such items and transactions must have a direct relationship . . ." Id. at 326 (emphasis added).

Should the Court determine that the relevance standard is all that is required under subsection (h)(4)(B), the Court should still not grant Petitioner's motion because it fails to satisfy the "directly related" standard. This is because the third party APA information in dispute bears no relevance to the issues in this case. (See Resp. SJ Memo. at 8-13) .

The second example directly addresses sections 482 issues:

This legislative history regarding section 6103 as applied to section 482 cases leaves no doubt that return or return information of an unrelated third party in a section 482 context cannot be disclosed under either the item or transaction tests. Accordingly, Petitioner's effort to come under the item test must fail based upon the unambiguous examples in the legislative history.

The two scenarios from the legislative history, like the facts presented herein, set forth two common situations where an alleged comparability issue exists. Both examples manifest Congress' intent that the standard for disclosing a third party's return or return information is greater than mere relevance. Moreover, the test is not met merely by the effort to find comparables in a section 482 case. Indeed, Congress and the Court would surely reject any effort by Respondent to utilize unrelated taxpayer return information as comparables.

The meaning behind the legislative history under sections 6103(h)(4)(B) and (C) was concisely expressed by the Court of Federal Claims in Vons Companies, Inc. v. United States, 51 Fed. Cl. 1 (2001):

It is apparent that by enacting section 6103(h)(4), Congress weighed the interests of taxpayers to conduct discovery relating to comparability issues with the rights of third parties to protect confidential taxpayer information, and came down on the side of protecting confidential taxpayer information. This is especially apparent in the context of reasonable compensation and section 482 cases, which are specifically and unambiguously identified in the legislative history.

Petitioner cites Shell Petroleum, Inc. v. United States, 46 Fed. Cl. 719 (2000), on reconsideration, 47 Fed. Cl. 812, as holding "that certificates submitted to the IRS by unrelated taxpayers were discoverable under the 'directly related' standard because they were relevant to show whether technology used by Shell was widely available during the relevant period . . ." (Pet. Memo. at 21-22). The foregoing sentence implies that the court required the subject certificates to be directly turned over to the plaintiff, when the court issued no such order.

The opinion does not state that such certificates were "discoverable," but merely requires the IRS to submit the subject certificates to the court for an in camera review. Although Petitioner included a footnote to reference the in camera review (Pet. Memo. at 22, n.35), the footnote failed to explain that such review was the end of the opinion's analysis, leaving the impression that the court ordered the production of the certificates to the moving party. Petitioner then claims that the court found that "the 'directly related' standard of section 6103(h)(4)(B) was akin to the relevance standard found in Rule 401 of the Federal Rules of Evidence." (Pet. Memo. 22). Again, Petitioner twists the language of the opinion to suit its purpose. On reconsideration, the Court of Claims actually stated the following:

Petitioner also cites United States v. The Northern Trust Co., 210 F. Supp. 2d 955 (N.D. Ill. 2001), a case in which the ownership of certain securities was at issue. The discovery requests were limited to the tax returns of parties who either borrowed or purchased the specific mutual funds in question. The court in Northern Trust Co. emphasized this distinction: "Defendants have only requested returns filed by parties who had interests in the shares in question. The returns contain information that may help establish the Trusts' ownership of the Quest shares, which is an element of the claim in question." Id. at 958. In contrast, no such factual relationship exists between Petitioner and the unrelated pharmaceutical companies in this case.

Norman E. Duquette, Inc. v. Commissioner, 110 F. Supp. 2d 16 (D.D.C. 2000), (cited at Pet. Memo. at 22, n.36), is factually distinguishable since it involved disclosure of tax information by an IRS agent from the corporate return of a former husband's wholly owned corporation to his former wife with whom he had jointly filed a Form 1040 for the tax year at issue. The relationships here were between the wholly owned corporation and its sole shareholder, and a husband and wife. In fact, the item of information from the corporate return, which was an improper deduction of a personal expense, directly affected the constructive dividend issue for the jointly filed personal return of the spouses. Mindell v. United States, 693 F. Supp. 847 (C.D. Cal. 1988) also presents a distinguishable transactional relationship between a tax return preparer for a limited partnership who prepared a Form K-l and a third party taxpayer who attached the Form K-l to his Form 1040.

Similarly distinguishable are the facts relating to Beresford v. United States, 123 F.R.D. 232 (E.D. Mich. 1988), which involved the valuation of shares held by a decedent's estate. (Pet. Memo. at 22, n.36). In Beresford, the IRS utilized third party taxpayer information to determine the valuation of the stock in controversy for purposes of issuing its statutory notice, but refused to produce the information based on section 6103 grounds. The IRS placed the third party taxpayer information into controversy by using it as the basis for its valuation of the stock in the notice of deficiency. The court was concerned with the fundamental unfairness of not providing information on which the IRS relied on to the taxpayer. Id. at 233.⁵ In contrast, the APA materials on which Petitioner seeks discovery were not utilized by the Service in preparing the notice of deficiency issued to Petitioner, because the aforementioned Committee Reports plainly prohibit the disclosure of unrelated third party tax information in judicial or administrative proceedings involving section 482 cases.⁶

Petitioner cites an order issued in Bristol-Myers Barceloneta Co. v. United States, No. 97-cv-02567 (D. P.R. filed October 24, 1997) as holding that "[t]he court granted plaintiffs' motion to compel and, based on section 6103(h)(4)(B), ordered the IRS to provide the requested third-party return information." (Pet. Memo. at 24). Simply stated -- the order does not state what Petitioner asserts. (See Pet. Exh. 35). Although the Court's order includes language granting Petitioner's motion to compel, it makes no reference to the grounds supporting that decision, no reference to section 6103(h)(4)(B), nor did the court issue an opinion explaining its reasoning for granting the plaintiff's motion to compel. Accordingly, Petitioner's claim is unsupported by the court's order.

Although Bristol-Myers was resolved prior to the filing of an appeal, to the extent there is any possibility of interpreting section 6103(h)(4)(B) as the basis for the District Court's decision, Respondent respectfully submits that the decision was incorrect and unsupported by the language of section 6103(h)(4)(B) and its legislative history. Moreover and just as importantly, the order in Bristol-Myers was issued prior to the enactment of the Ticket to Work Act amending section 6103 which effectively prohibits the discovery allowed in that case. (See Pet. Motion to Compel, Ex. 34) .

The Supreme Court squarely addressed and rejected such an argument in Church of Scientology of California v. Internal Revenue Service, 484 U.S. 9 (1987). The Supreme Court held that "as with a return itself, removal of identification from return information would not deprive it of protection under § 6103(b)." 484 U.S. at 18; see also Tax Analysts v. Internal Revenue Service, 53 F. Supp. 2d 449, 452 (D.D.C. 1999) Church of Scientology of Texas v. Internal Revenue Service, 816 F. Supp. 1138, 1150 (W.D. Tex. 1993).

The issue in the case was whether the Church of Scientology was entitled, under the Freedom of Information Act ("FOIA"), to documents relating to various Scientology churches contained in IRS files as long as the information identifying these taxpayers was redacted. 484 U.S. at 11. Church of Scientology revolved around an interpretation of the flush language following the definition of "return information" in section 6103(b)(2)(A), also known as the Haskell Amendment. This language provides that "such term [return information] does not include data in a form which cannot be associated with, or otherwise identify, directly or indirectly, a particular taxpayer." Id. at 10.

The Church contended that the Haskell Amendment excepts from the definition of "return information" all material in IRS files which could be redacted to delete any information that would identify a particular taxpayer. The Supreme Court found no support for this argument in the language of the statute or its legislative history. The Court determined that if merely removing the identifying details put the information in a form envisioned by the Haskell amendment "the remainder of the categories included in § 6103(b)(2) would often be irrelevant." Id. at 15. The Court also found that the Church of Scientology's interpretation would "undercut the legislation's primary purpose of limiting access to tax filings." Id. at 16.

Petitioner's alternative approach tries to steer clear of Church of Scientology by issuing interrogatories and requesting admissions instead of directly requesting redacted materials. In a summary description of its own interrogatories, Petitioner states it "requested certain specific information concerning each of the 13 APAs without seeking either the actual documents or the identities of the taxpayers." (Pet. Memo. at 11). Petitioner further describes the requested material as including:

In sum, Petitioner seeks discovery of the contents of the APA and the information in the background files leading up to the APAs.⁷ The discovery is a transparent attempt to circumvent the Supreme Court's holding in Church of Scientology. As the Supreme Court made quite clear, the material requested does not lose its designation as return information merely because taxpayer identifiers have been excised. Moreover, the information requested which derives from the actual APA agreement and background files does not lose its protection as return information merely because Petitioner asks for it in interrogatories or admissions and in a manner that excludes the names of the taxpayers. Such a tortured reading of the statute and Church of Scientology would eliminate the protection Congress mandated under section 6103 to APAs and the background files, and was not contemplated by Congress or the Supreme Court.

Petitioner argues that if it is not entitled to the "Category I" information (individual APAs) under section 6103, then it would still be entitled to the aggregate information regarding APAs, which it classifies as Category II information. (Pet. Memo. at 26-31). Petitioner argues that this information is not return information. (Id. at 26). It also argues that the requested information is information that should have been, but was in fact not included in the statutory APA Annual Reports filed by the IRS. (Id. at 29-30, n.42) ("If the Secretary had actually fulfilled his statutory mandate, Petitioner would have no need for this Category II discovery. Unfortunately, the Secretary has not carried out his duty . . ."). Neither argument has merit.

As discussed previously, in 1999, Congress amended existing sections 6103 and 6110 in response to taxpayer's complaints about the potential public release of APAs and APA background information. Section 6103 was amended to clarify that APAs and background files were encompassed in the definition of confidential return information not subject to public disclosure. Section 6110 was amended to exclude APAs from written determinations subject to public inspection. Congress was concerned that the public release of sensitive taxpayer information, including highly guarded trade secrets, would harm the effectiveness of the APA program by discouraging potential participants.

Congress sought to balance these confidentiality concerns and potential harm to the APA program with the general public's need for practical guidance about the program. It thus required that the Department of Treasury "prepare and publish an annual report regarding APAs, which will provide extensive information regarding the program, while clarifying that existing and future APAs and related background information continue to be confidential return information." H.R. Rep. No. 106-238, at 259 (1999); Sen. Rep. No. 106-120, at 131 (1999). The statute provided a detailed list of specific items required in each Annual Report.

Petitioner's discovery goes well beyond what Congress required the Service to disclose in the Annual Report. Despite Petitioner's complaint that "the Secretary has not carried out his duty" (Pet. Memo. at 29, n.29), the Annual Reports include highly detailed information on each and every item that Congress intended the IRS to disclose. Petitioner's protest is surprising, since Congress has never expressed any dissatisfaction with the quality and sufficiency of any of the reports. If Petitioner is serious about the alleged deficiencies it finds in the reports, it should press its claims on Congress, rather than this Court. Only Congress should have the power to modify the information included in the Annual Report. Even if it were inclined to do so, this Court does not have jurisdiction to determine that the Annual Reports are deficient or to compel Respondent through discovery, to produce the information Petitioner believes is missing from the reports.

Congress wanted the Service to carefully balance the need for confidentiality against the need for public information. It stated that "the report cannot include any information which can be associated with or otherwise identify, directly or indirectly, a particular taxpayer." S. Rep. No. 106-120, at 133 (1999). Petitioner's discovery far exceeds what Congress prescribed for in the Annual Report, and would create the risk that sophisticated persons in the relevant business community could identify specific taxpayers from the detailed information extracted from the APAs and background files. Petitioner is asking the Court to issue an order compelling production of materials in direct contravention of the express mandate of Congress.

Written determinations are narrowly drawn to include only "a ruling, determination letter, technical advice memorandum, or Chief Counsel advice." Section 6110(b)(1)(A). Section 6110(b), amended in 1999, specifically excludes APAs from the definition of "written determinations" subject to public disclosure. Section 6110(b)(1)(B).

In excluding APAs from written determinations, Congress expressed its overriding concern in maintaining and protecting the confidentiality of sensitive information provided to the IRS in the course of APA negotiations. The legislative history provides:

Petitioner's attempt to discover the APAs and APA background files of competitors in unredacted form as well as through a series of probing questions or admissions eliciting information directly from these documents (even with identifiers redacted) is directly contrary to Congressional intent expressed in the statute and legislative history. It would be an anomalous result for this Court to allow greater access to APAs and background files, which Congress has designated as documents inaccessible to the public (other than through the presentation of the APA Annual Report) than to written determinations, which are accessible only under strict redaction rules.⁸

IV. INTERNAL REVENUE CODE SECTION 6105(a) PROTECTS TAX CONVENTION INFORMATION FROM DISCLOSURE.

Tax convention information also includes all background material related to the mutual agreement, including taxpayer's application for the bilateral APA. Section 6105(c)(1)(C). Thus, section 6105(a) generally protects from disclosure all bilateral APAs, the mutual agreement upon which the bilateral APA is based, and related background information, including specifically the bilateral APA request and application.

Any information extrapolated from such background information is also tax convention information. For example, Petitioner is also requesting detailed information relating to Respondent's APA Program and the preparation of the APA program's Annual Reports for the years 2000 through 2004, inclusive ("Category II information"). This compiled information draws from individual APAs and the related background information. Thus, the compilation Petitioner requests which is based on tax convention information, itself constitutes tax convention information in the nature of background information under section 6105(c) (1) (C).

Alternatively, the compilation of information is tax convention information of the kind described in section 6105(c)(1)(E), which covers other information exchanged pursuant to a tax convention which is treated as confidential or secret. The compilations Petitioner requests summarize what was exchanged and discussed with treaty partners during the course of APA negotiations and therefore are tax convention information. The original information on which the compilations would be based is information that is commonly exchanged during the mutual agreement procedure negotiation process. The information does not lose its protection because it is being requested in a different format. See Church of Scientology, supra.

Petitioner argues that the information sought is not tax convention information because the information requested does not include information exchanged with a treaty partner and that the information sought is not tax convention information because "the information sought to be discovered here focuses on the taxpayer's interaction with Respondent, not Respondent's interaction with a treaty partner." (Pet. Memo. at 33). This argument is clearly erroneous given the breadth of the definition of tax convention information, which covers not only the actual mutual agreement entered into with the treaty partner, but the documents implementing the agreement, applications for relief under the convention, background information related to the agreement and applications, the document implementing the agreement, and any other information treated as confidential under the treaty. See sections 6105(c) (1) (A) though (E) The mutual agreement itself in fact is, as a matter of necessity, exchanged directly between the treaty partners. The other items of information, while not routinely or necessarily exchanged between the competent authorities, nonetheless still constitute tax convention information by specific enumeration in subsections (B) through (D).

Petitioner would read into section 6105(c) an inflexible and mechanical "exchange" requirement that simply is not to be found in the plain language of the statute. The statutory categories of tax convention information comprising background information and implementing documents by their nature will not in every case be literally exchanged between treaty partners. Moreover, the legislative history of section 6105 expresses a specific intent that the scope of tax convention information is not to be so narrowly circumscribed, stating: "The conferees intend that tax convention information would include documents and any other information that reflects tax convention information . . . ." H.R. Conf. Rep. No. 106-1033 at 1011 (2000) (emphasis added). The bilateral APAs both implement and reflect the mutual agreements exchanged between the treaty partners.

Accordingly, all of the information at issue constitutes protected tax convention information described by section 6105(c).

Section 6105(b)(1) permits disclosure of tax convention information "to persons or authorities (including courts and administrative bodies) which are entitled to such disclosure pursuant to a tax convention." Petitioner notes that most tax treaties contain general language permitting disclosure of information in judicial proceedings and quotes one typical such clause from Article 27 of the United States -- United Kingdom Income Tax Convention⁹:

Therefore, in order to come within the exception in section 6105(b)(1), the information must be disclosable under the domestic disclosure laws of the U.S., including the rules of section 6103. As demonstrated in section II of this memorandum, section 6103 prohibits disclosure. Accordingly, the exception in section 6105(b)(1) is not applicable.

The second exception, set forth in section 6105(b)(2), applies only to "procedural rules regarding applications for tax relief under a tax convention." This exception applies to generally applicable rules such as the procedures for requesting competent authority assistance and thus does not apply to the information sought by Petitioner. See H.R. Conf. Rep. No. 106-1033, at 1011 (2000). The third exception, set forth in section 6105(b)(3), applies only to information disclosable under 6103(i), which is limited to disclosure to federal officers or employees for administration of federal laws not relating to tax administration.

The last exception in section 6105(b) allows disclosure of tax convention information "not relating to a particular taxpayer if the Secretary determines, after consultation with each other party to the tax convention, that such disclosure would not impair tax administration." Section 6105(b)(4). The information requested by Petitioner relating to the 13 specific APAs is information relating to a particular taxpayer and therefore does not fall into this exception. The Category II information, although being requested in aggregate form, relates back to particular taxpayers and thus also does not fall into this exception. The disclosure of this information is tantamount to disclosure of the APAs themselves and the related background information, even though it is being requested in an aggregate form. In order to compile the information being sought, the APAs and all the related background files would need to be reviewed and information extracted from them. The amount of information and the level of specificity being requested amounts to disclosure of the taxpayer-specific documents that contain the requested information.

Even if it were determined that the Category II information does not relate to a particular taxpayer, section 6105(b)(4) would permit disclosure only in cases where the United States is of the view that such disclosure would not impair tax administration and consults the other treaty partner to confirm such a determination.

Here, disclosure of the aggregation of information being requested in the Category II request would impair tax administration. The legislative history of section 6105 states that "the release of documents that would adversely affect the working relationship of the treaty partners" is an example of an act that would impair tax administration. See H.R. Conf. Rep. No. 106-1033, at 1011-1012 (2000). As noted above, the request for the Category II information is simply asking for disclosure of the documents, although in a different form.

The release of the requested information, even in the aggregate, would seriously undermine the relationships the United States has with its treaty partners. The competent authorities of the United States treaty partners exchange information with the United States based on the underlying agreement that such information is to be kept secret. The release of such information, even in aggregate form, would violate the basic principles of the exchange of information provisions of the treaties and severely undercut taxpayers' utilization of the APA Program. The questions posed by Petitioner would reveal more detailed information than that published in the APA Annual Report and is therefore not analogous to the published Annual Report information. The APA Program cannot exist without the cooperation and trust of United States treaty partners. The release of the information that Petitioner is requesting would jeopardize that cooperation and trust and thus effectively could shut down the APA Program.

Because the Category II information relates to specific taxpayers, and for the further reason that its disclosure would impair tax administration, the exception under section 6105(b)(4) is not applicable. Accordingly, the Category II information is protected from disclosure by section 6105 (a).

The deliberative process privilege protects communications that are (1) predecisional and (2) deliberative. Predecisional communications are those that are prepared prior to the agency's final decision or the adoption of agency policy. Predecisional communications can be contrasted to postdecisional documents which implement an established policy of an agency, or explain actions that an agency has already taken. See, e.g., National Labor Relations Board, 421 U.S. 132 (1975). Deliberative communications reflect the "give and take" of the consultative process and the personal opinions of the agency officials in the course of policy formulation rather than the policy of the agency itself. Coastal States Gas Corp. v. Department of Energy, 617 F.2d 854 (D.C. Cir. 1980).

Respondent has asserted the deliberative process in response to certain questions which Petitioner has grouped into categories. (Pet. Memo. at 34-36). The first category consists of questions contained in the Second Set of Interrogatories, Questions 49, 51, 53, 55, 57, 61, 64 and 66. These questions ask whether the change in certain language from the 2000 APA Annual Report and subsequent reports reflected a "change in policy, practice or viewpoint." If it did, the questions ask for an explanation of the nature of this change and the reasons for it. As part of the response to these questions, Respondent stated that the "APA annual reports do not constitute statements of policy. The purpose and intent of the report is to simply report on the structure and activities of the APA program and is not intended to provide general guidance reflecting the arm's length standard or to reflect the viewpoint of any IRS personnel." (Pet. Motion to Compel, Ex. 23). In other words, this response addresses Petitioner's incorrect surmise that changes to wording in the Annual Report either do or do not reflect a change in policy, practice or viewpoint of the IRS. Because the APA Statutory Annual Report is not intended to be a vehicle to reflect IRS policies, practices or viewpoints, the questions as posed by Petitioner are unanswerable. To the extent that there is information that would pertain to the reasons for the change in the language, that information is subject to the deliberative process privilege since it would be predecisional to the change in the language and would reflect the give and take and personal views of those involved in the decision to change the language. Accordingly, the deliberative process privilege is legitimately claimed with respect to those documents.

The second category consists of Petitioner's Third Set of Interrogatories, Questions 2 and 3, which do not merely ask for data compilations, as Petitioner claims, but rather ask for a description of the facts that form the basis on which the APA was issued and the application of factors to arrive at the APA transfer pricing methodology. Since this factual or objective material is so inextricably intertwined with the privileged portions such material cannot be released without compromising the privileged portions, and therefore the entire communication falls within the privilege. See Environmental Protection Agency v. Mink, 410 U.S. 73, 87 (1973).

The third category also consists of questions that inextricably intertwine factual or objective material and privileged material so that the factual material cannot be released without compromising the privileged. Id. The questions in this category are Requests for Admissions, requests 8, 14 and 15. These questions ask Respondent to admit, for instance, that for a certain unnamed APA a confirming methodology was used either formally or informally under which the operating profit of a certain unnamed U.S. taxpayer was checked to see that it did not exceed 30 percent of the total worldwide profit attributable to products covered by the APA. Respondent cannot in the first place answer that it used or did not use the methodology without producing inadmissible evidence or information protected by section 6103. Secondly, Respondent cannot give a "yes" or "no" answer to the 30% question, since to do so would indirectly answer the question on the use of methodology and provide predecisional and deliberative information.

Petitioner's fourth category consists of one question, Question 1(c) in its Third Set of Interrogatories, the form of which was corrected in and restated in Petitioner's First Request for Production of Documents. The question asks for the production of unredacted background materials related to the pharmaceutical APAs. Much of this material reflects the deliberative "give and take" that regularly occurs within the APA program in the deliberation of the terms that are eventually incorporated in the APA. The communications are predecisional because they are made before and as part of the process of arriving at the terms of the APA. None of these documents would be of a type referred to by APA personnel as guidance in considering a different applicant's APA.

Instead they include documents which may contain "reasons supporting a [decision] which an agency has rejected, or with reasons which might have supplied, but did not supply, the basis for a (decision) which was actually adopted on a different ground." National Labor Relations Board, 421 U.S. at 152. These are documents which analyze and contain opinions of individuals within the APA program and are the kind of advice and recommendations contemplated by the deliberative process privilege which must remain undisclosed in order to permit uninhibited and frank discussions by the APA personnel in reaching sound decisions. See Renegotiation Bd. v. Grumman Aircraft Eng'g Corp., 421 U.S. 168 (1975).

Petitioner's fifth and final category consists of Questions 4(b) and 5(b), which ask for the definition of risks and type of organizations used by the persons assembling the tables for the statutory Annual Reports. This analysis by APA personnel is based on the facts of the case and requires predecisional and deliberative judgments. Since this factual or objective material is so inextricably intertwined with the privileged portions that such material cannot be released without compromising the privileged portions, the entire communication falls within the privilege. E.P.A. v. Mink, 410 U.S. at 87.

The tax system would next feel the impact. It would become common practice (and malpractice to do otherwise) for transfer pricing practitioners to assert IBM-type claims in order to file discovery or submit FOIA requests seeking information on administrative resolutions of any third party case that potentially involves similarly situated taxpayers. Section 482 cases would no longer be resolved on the specific facts or a functional analysis of a particular case, but would become battlegrounds to determine how the Service resolved other potentially similarly situated taxpayer cases. Disputes would ensue, not based on the analysis of the section 482 regulations, but on an analysis of how the Service resolved other taxpayer cases. Endless disputes would ensue about whether a taxpayer was similarly situated or not.

Another impact would be felt in litigation and administrative tax proceedings. While taxpayer forays into the files of unrelated taxpayers to find the most satisfactory example of "fairness" would continue unabated, the IRS would be unable to present a rebuttal case. The statute and legislative history of section 6103 clearly prohibit the use of unrelated third party comparables in section 482 cases. While a taxpayer could cherry-pick any example of comparable situations it believes is favorable to its own position, the IRS, bound by the strict statutory disclosure rules would not be able to present rebuttal evidence. The road to the bottom would be a one way street.

The impact on the APA program would be devastating. The very thing Congress tried to avoid in the 1999 revision of sections 6103 and 6110 would come to pass. Congress understood that taxpayers must share their most sensitive trade secrets with the Service to have a workable APA program. Taxpayers will do this only if their information is protected from disclosure to the public and competitors. Congress knew that the public release of this information, even if in redacted form, would cause taxpayers to refuse to enter into the program and greatly diminish and perhaps destroy the APA program. Congress and the public believed in the APA program as an extremely useful tool in administering the transfer pricing regulations. Further, by elevating an APA to a legal interpretation or legal ruling, Petitioner would have the Court place APAs in a category not intended by Congress and make the use of such agreements much less likely. Congress revised the statute to avoid the exact situation presented to this Court.

Compelling Petitioner's discovery and admissions would produce the very results Congress sought to avoid when it enacted section 6103 in 1976, and amended sections 6103 and 6110 in 1999.

Date : 3/1/06

² Respondent raised the Privacy Act as a bar to fully responding to Petitioner's Branerton No. 6, requests 149 and 150 and incorrectly carried over the objection to Respondent's responses to Petitioner's Third Set of Interrogatories, requests 4(a), 5(a), and 5(b). Respondent agrees that the Privacy Act does not bar the disclosure of information sought in these requests.

³ Due to the fact that Petitioner is seeking the disclosure of confidential taxpayer information of 13 pharmaceutical companies, Respondent provided notice of this proceeding to those entities.

⁴ Petitioner cites Vons for the proposition that "third-party information is especially relevant when an IBM claim is at issue." (Pet. Memo. at 24). In fact, what the Court in dicta stated was "except, perhaps, in a case involving the application of the IBM doctrine, the treatment of an item on the third-party's return . . . has no legal relevance to the proper tax treatment of that same item on the return of the taxpayer requesting disclosure." 51 Fed. Cl. at 17. The court had just concluded based on an analysis of the statute and legislative history that the "item test" is not applicable where the only link is that both the taxpayer and the third party claimed the same treatment for a similar item on the return. Moreover, the court had earlier extensively analyzed the IBM case and held that it applies only in very narrow circumstances and "only ever so slightly expands the realm in which private letter rulings may be cited or used." Id. at 10. Therefore, the court's dicta must be read in this highly limiting context.

⁵ It should be noted the government admitted that it could not rely on the withheld information at trial, even though it relied on the third party information as a basis for its notice of deficiency. Id. at 233.

⁶ Petitioner cites other authorities where it similarly ignores the distinct factual links among the taxpayers seeking discovery of confidential third party information and those third party taxpayers. Confidential Informant 92-95-932x v. United States, 45 Fed. Cl. 556 (2000), cited at Pet. Memo. at 23 n.36; IRS Chief Counsel Notice, CC-2006-06 (November 22, 2005), cited at Pet. Memo. at 23; IRS Chief Counsel Notice, CC-2006-03 (October 25, 2005), cited at Pet. Memo. at 23.

⁷ Although Petitioner states it is not requesting identities, there is nothing in Petitioner's Third Set of Interrogatories that would exclude such information.

⁸ The statute specifically provides that written determinations are not to be used as precedent. Section 6110(k)(3). Vons, 51 Fed. Cl. at 19-22. Although this provision is inapplicable to APAs since they are not written determinations, if the courts were to sanction taxpayer's use of other taxpayer APAs as some type of measuring test or to gauge its own APA, then the Courts would be allowing an APA to be used as precedent, whereas written determinations are not precedential. Congress could not have envisioned such an anomalous result when it specifically carved APAs out of the definition of written determinations.

⁹ Petitioner appears to have referred to an obsolete version of the United States-United Kingdom treaty. The following quotation is from the current version and does not differ materially from the language to which Petitioner referred.

¹⁰ The deliberative process privilege was initially authorized by the Housekeeping Statute, 1 Stat. 68 (1789). That statute was amended by Congress in 1958 so that it could not be relied upon to withhold information from the public or limit the availability of records to the public. In the very next year, the courts created the identical privilege at common law. See Kaiser Aluminum & Chemical Corp. v. United States, 157 F. Supp. 939 (Ct. Cl. 1958).