TAX ANALYSTS,
Plaintiff,
v.
INTERNAL REVENUE SERVICE,
Defendant.
IN THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF COLUMBIA
INTERNAL REVENUE SERVICE'S REPLY MEMORANDUM
RE: REDACTIONS ON BASES OF TREATY SECRECY CLAUSES & INTERNATIONAL AGREEMENTS
This is an action under the Freedom of Information Act in which plaintiff seeks to enjoin defendant from continuing to withhold certain documents and records from plaintiff.
STATEMENT
1. Introduction. On April 30, 1998, the Court ordered the Internal Revenue Service to file, within thirty days of the date of the order, a memorandum of law setting forth what if any redactions or deletions should be made from portions of 32
FSAs under 5 U.S.C. § 552(b)(3) on the basis of secrecy clauses in governing treaties and international agreements. Order of Apr. 30, 1998. The Internal Revenue Service did so, filing its papers on June 1, 1998. Plaintiff responded to the memorandum of law with a "preliminary" opposition brief. The opposition was preliminary" because plaintiff wished to conduct certain limited post-remand discovery concerning the substantial issues raised in the Internal Revenue Service's brief.
Subsequently, on the agreement of the parties, the Court permitted a limited period of discovery on remand. The discovery was limited to the treaty issues raised in the Internal Revenue Service's memorandum of law. Plaintiff conducted discovery under the consent order, and on November 19, 1998, served its final opposition brief.
This reply brief is addressed only to those points raised in plaintiffs' opposition which warrant a response. With respect to those points not discussed herein, the Internal Revenue Service relies upon its memorandum re: redactions on bases of treaty secrecy clauses & international agreements.1
2. Background. The expanding global economy and heightened cross-border activities of businesses and individuals located around the world increasingly challenge the United States and its treaty partners to ensure that taxpayers are complying with their domestic tax laws and the provisions of bilateral tax treaties. The overall purposes served by tax treaties are to avoid double taxation and prevent tax avoidance and evasion. The exchange of information articles of United States tax treaties and TIEAs provide critical tools to carry out these purposes. The articles enable the Treasury Department, the Internal Revenue Service and the United States' treaty partners to evaluate and administer current laws, treaties, and compliance programs in order to respond to developing international business practices and new patterns or techniques of tax avoidance or evasion.
The exchange of information articles are the "Law of the Land." They are self-executing and are to be given effect to the same extent as statutes for purposes of FOIA Exemption 3. They contemplate the exchange of information to the widest extent, and the identity of a treaty partner is a vital component of the information exchanged.
The non-disclosure provisions are the linchpins of the articles. Their purpose is to allow the United States and its treaty partners to communicate on tax matters in confidence. Defendant has established, and plaintiff does not dispute, that the plain language of the non-disclosure provisions mandates the United States to treat as secret any information received pursuant to the articles in the same manner as under domestic law; and prohibits the disclosure of such information to persons not concerned with tax enforcement. (Internal Revenue Service's Reply Memorandum Re: Redactions on Bases of Treaty Secrecy Clauses & International Agreements (hereinafter "Dfdts. Memo.") at 20-28.) Plaintiff also concedes that it is not a person concerned with tax enforcement, having not raised this point. (Pltfs. Preliminary Memo. in Opp. to IRS' Claims of Exemption Based on Secrecy Clause of Tax Treaties (hereinafter "Pltfs. Prel. Memo.") passim; Tax Analysts' Memo. in Opp. to IRS' Memo. on Treaty Secrecy (hereinafter "Pltfs. 2d Memo.") passim; Manning Dep. at 78.)
The record in this case includes, inter alia, the uncontroverted testimony of the Assistant Commissioner (International), John Lyons, who is authorized to act as the United States "competent or taxation" authority under United States tax treaties and TIEAs and to interpret and apply such treaties and agreements with the concurrence of the Associate Chief Counsel (International), Michael Danilack, III. Mr. Lyons testified that the information redacted from the twenty-nine FSAs was provided to the United States by its treaty and TIEA partners subject to the non-disclosure provisions and with the expectation that the United States would honor its treaty or TIEA obligations; and that the disclosure of the redacted information, in disregard of the non-disclosure provisions, would constitute violations of the United States' treaty and TIEA obligations. (Lyons Decl. ¶¶ 2, 15.)
Mr. Lyons also testified that the United States' relations with its treaty partners depend greatly on the uniformly-held understanding that the United States will comply with the mandates of the non-disclosure provisions, and that failure to do so would clearly chill or potentially eliminate the ability of the United States to obtain information from its treaty partners. (Lyons Decl. ¶¶ 16, 17.)
Plaintiff now attempts to circumvent this treaty law and obliterate its import by asserting that the exchange of information articles only apply to taxpayer specific information. On the question of what information received from a treaty partner must be kept secret, plaintiff scoffs at defendant's redactions of, for example, "the names of countries." Nevertheless, the uncontroverted record and the law firmly support defendant's redactions. Defendant's position is critical because U.S. tax treaty partners routinely communicate with the United States on non-taxpayer as well as taxpayer specific matters and act with the expectation that the United States will not disclose the communication to the general public. Disclosing these communications could, for example, alert potential tax evaders as to which countries are pursuing specific compliance challenges, or provide road maps for those looking for holes or weaknesses in a country's compliance regime.
Plaintiff attempts to mislead the Court when it suggests that defendant redacted "tout court" the names of countries; citations to, quotations from and analysis of tax treaties; and legal analysis and interpretation. Defendant's redactions demonstrate that it protected from disclosure only information that would reveal the fact that a particular treaty partner communicated with the United States about a particular tax matter. At the same time, defendant adhered to its FOIA obligations by disclosing substantial discussion and legal analysis of U.S. law contained in the twenty-nine FSAs.
Defendant's interpretation of the treaty articles and their non-disclosure provisions has remained consistent for roughly twenty years. Defendant did not, as suggested by plaintiff, "fabricate" its position for purposes of this case. Defendant's long-standing and consistent interpretation of the articles reflect their plain meaning and purpose and must be accorded deference. The passage of section 3509 of the RRA does nothing to affect the applicability of FOIA Exemption 3 for any qualifying statute other than I.R.C. § 6103.
ARGUMENT
I
TAX TREATY AND TIEA EXCHANGE OF INFORMATION ARTICLES ARE THE LAW OF THE LAND AND ARE TOBE GIVEN EFFECT TO THE SAME EXTENT AS STATUTES FOR PURPOSES OF FOIA EXEMPTION 3.
Plaintiff does not dispute that tax treaties are the "supreme Law of the Land" under the United States Constitution, Art. VI, clause 2. (Pltf. 2d Memo. at 11.) Rather, plaintiff first argues that the exchange of information articles should not be considered statutes for purposes of FOIA Exemption 3 because their provisions are not "self-executing." Plaintiff argues that these provisions are not self-executing because they do not bind private parties and are incapable of enforcement as between private parties in the courts. (Pltf. 2d Memo. at 10-16.) Plaintiff's argument is clearly wrong.2
A tax treaty is self-executing if it "operates of itself” requiring no further action by Congress to implement. See Foster v. Neilson, 27 U.S. (2 Pet.) 253, 314 (1839); Bacardi Corp. of America v. Domench, 311 U.S. 150, I61 (i940). Thus, the pertinent inquiry for this Court is whether any legislative action, in addition to ratification under the Treaty Clause, is required to "execute" the provisions of these treaties, not whether private litigants acquire enforceable rights thereunder.
In the case of U.S. tax treaties, it is well-established that their operation is not dependent upon Congressional action beyond ratification. See K. Vogel, Klaus Vogel on Double Taxation Conventions, Intro., para. 39, p. 16 (1991). There is simply no indication in the text of any tax treaty that implementing legislative action is necessary beyond the constitutionally prescribed advice and consent of the Senate. Nor has plaintiff identified a Senate report or subsequent interpretation of any of the treaties, official or otherwise, which calls this into question.
The ten treaties at issue entered into force following approval by the Senate under the Treaty Clause of Article II of the Constitution and now stand as the "Law of the Land" on an equal footing with legislation passed by both houses of Congress and signed by the President.3 Goldwater v. Carter, 617 F.2d 697 (D.C. Cir. 1979); (Dfdt. Memo. at 13). With the enactment of FOIA Exemption 3, Congress appropriately indicated respect for its own determinations and those of equal status. Those determinations include the approval of the non-disclosure provisions in the treaties, and must be respected.4 (Dfdt. Memo. at 14-17.) Whether the exchange of information articles bind private parties or create private rights of action, a question on which plaintiff places much importance, is a distinct issue (Restatement (3d) of Foreign Relations Law § 111, Comment h (1987)) not determinative of the question of whether the articles are operative or self-executing.5
Moreover, to the extent that judicial enforceability is relevant as a test of whether a tax treaty operates without further legislation, numerous judicial decisions enforcing substantial tax benefits for private litigants fully support defendant's position that the information exchange provisions are operative. See, e.g., North West Life Assurance Co. v. Commissioner, 107 T.C. 363 (1996); Taisei Fire and Marine Insurance Co. v. Commissioner, 104 T.C. 535 (1995); Xerox Corp. v. United States, 41 F.3d 647 (Fed. Cir. 1994). These information articles are critical elements to the implementation of the bilateral rights and obligations created by tax treaties. See OECD Commentary quoted at note 10, infra. It would be peculiar in the extreme for the Executive and the Senate to have intended that the various articles relating to substantive tax rules be operative, but that the exchange of information article in the same treaties, on which the proper administration of the substantive tax rules depends, would not be operative without further action by Congress.
In view of the above and the requirement that courts construe treaties and statutes to be consistent whenever possible (South African Airways v. Dole, 817 F.2d 119 (D.C. Cir. 1987); (Dfdt. Memo. at 14-16)), the confidentiality provisions of the treaties must be given effect, first because they are the law of the land and are consistent with the intent of FOIA, and second, because the term "statute" in FOIA Exemption 3 must be understood to encompass treaties.
II
THE TREATY AND TIEA EXCHANGE OF INFORMATION ARTICLES REQUIRE THAT THE UNITED STATES NOT DISCLOSE TO PLAINTIFF INFORMATION RECEIVED FROM TREATY PARTNERS, WHICH INFORMATION WAS THE SUBJECT OF THE REDACTIONS IN THE 29 FSAS
Plaintiff also calls into question defendant's interpretation of the ten income tax treaties and one TIEA at issue.
In order to ensure its fair operation, a treaty must be interpreted in a manner that will give effect to the intent of the parties, as ascertained from the text, context and history of the treaty, including the course of conduct of the contracting states. Air France v. Saks, 470 U.S. 392 (1985); Sullivan v. Kidd, 254 U.S. 433 (1921). The starting point in treaty interpretation is the language of the treaty itself. Eastern Airlines, Inc. v. Floyd, 499 U.S. 530, 534 (1990); Sumitomo Shoji America, Inc. v. Avagliano, 457 U.S. 176, 180 (1982). If the treaty language is clear, it is controlling so long as the words do not effect a result that is inconsistent with the intent or expectations of the signatories. Ibid.; Maximov v. United States, 373 U.S. 49, 54 (1963).
To alter, amend, or add to any treaty, by inserting any clause, whether small or great, important or trivial, would be on our part an usurpation of power, and not an exercise of judicial functions. It would be to make, and not to construe a treaty. Neither can this Court supply a casus omissus in a treaty, any more than in a law.
The Amiable Isabella, 6 Wheat. 1, 71 (1821), quoted in Chan v. Korean Air Lines, Ltd., 490 U.S. 122, 135 (1989). "Treaties are the subject of careful consideration before they are entered into, and are drawn by persons competent to express their meaning, and to choose apt words in which to embody the purposes of the high contracting parties." Rocca v. Thompson, 223 U.S. 317, 332 (1912). Further, in construing a treaty provision, if it "fairly admits of two constructions, one restricting, the other enlarging rights which may be claimed under it, the more liberal interpretation is to be preferred." Bacardi Corp. of America v. Domenech, 311 U.S. at 163; Nielson v. Johnson, 279 U.S. 47, 52 (1929); accord Hauenstien v. Lynham, 100 U.S. 483, 487 (1879); see Eastern Airlines, Inc. v. Floyd, 499 U.S. at 535; Factor v. Laubenheimer, 290 U.S. 276, 298 (1933).
Defendant's construction of the treaties at issue is entitled to "great weight" (Kolovrat v. Oregon, 366 U.S. 187 (1961); Restatement (3rd) of Foreign Relations Law § 326(2) (1987)), especially where, as here, it represents a long-standing practical construction by the contracting states.6 The Court "may not ignore the actual reasonably harmonious practice" adopted by the contracting states. TWA v. Franklin Mint, 466 U.S. 243, 259 (1984).
A. The Articles Require the Exchange of Such Information as Is Relevant for Carrying out, the Provisions of the Treaties or TIEA, or of the Domestic Laws of the Treaty Partners Concerning Covered Taxes. Whether Such Information IS Taxpayer Specific or Non-taxpayer Specific
Without textual, contextual or practical support for its position, plaintiff attempts to circumvent the treaty by asserting that the exchange of information articles apply only to "permit the exchange and protect the confidentiality of taxpayer information." Plaintiff relies upon isolated words in the treaties and TIEA, and their technical explanations and Senate reports, to support the proposition that treaty partners exchange only "tax facts: financial and business information about individuals and entities who may be subject to tax by one or both treaty countries." (Pltf. Memo. at 22-35.) This proposition is clearly off base.7
The articles require the exchange of "such information," not "such taxpayer information," as is relevant for carrying out the provisions of the treaties or TIEA or of the domestic laws of the treaty partners concerning covered taxes. With its concession that it is not a person concerned with tax enforcement, plaintiff resorts to an argument that is belied by the plain language and purpose of the treaties and TIEA, their technical explanations and Senate reports, the OECD Model Treaty and Commentary thereto, and the practice of the United States and its treaty partners.
Although the language of the articles in the relevant treaties and TIEA varies in certain respects, the language defining both the scope of exchanges and the limitations thereon is closely modeled after the article in the OECD Model.8 That article commences with the main rule, which is contained in the first sentence:
1. The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes covered by the Convention insofar as the taxation thereunder is not contrary to the Convention. (Emphasis added),
This broad language requires treaty partners to exchange "such information" as is relevant to carrying out (1) the provisions of the treaty or TIEA, or (2) the domestic laws of the treaty/TIEA partners concerning taxes covered by the treaty/TIEA. (Lyons Decl. ¶ 7.)9 According to the OECD Commentary, the words "such information" must be broadly construed to the "widest possible extent" in order to carry out the purposes set forth in the articles.10 Looking no further than the plain language to define the scope of the articles, Supreme Court precedent mandates the conclusion that the articles are not limited to exchanges of taxpayer specific information. Eastern Airlines, Inc. v. Floyd, 499 U.S. at 534; Sumitomo Shoji America, Inc. v. Avagliano, 457 U.S. at 180; Maximov v. United Stated, 373 U.S. at 54.
Neither the main "such information" rule, nor any other provision, explicitly or implicitly limits information exchanges to taxpayer specific information. Notably, other limitations on the obligations to exchange information are expressed in the same exchange of information article no obligations to vary from laws or administrative practices, or supply trade secrets or information contrary to public policy). But no proviso prescribes that only taxpayer specific information is to be exchanged or limits exchanges to such information.11
Given the broad language of the main rule and the absence of a limiting proviso, plaintiff asks the Court to find that the contracting states intended "to establish an exception of which their words give no hint." See Santovincenzo v. Egan, 284 U.S. 30, 40 (1931) (wherein the Supreme Court refused to infer a specific requirement in the absence of express limitations on the words in the treaty, noting that, "There is no applicable principle which permits us to narrow them.") Similarly, "[h]ad it been the intention" to limit [the articles to taxpayer specific information], "it would have been very easy to have declared that purpose in unmistakable terms" when the treaty partners wrote the limitations. Rocco v. Thompson, 223 U.S. at 332. The clear import of treaty language controls "unless application of the words of the treaty according to their obvious meaning effects a result inconsistent with the intent or expectations of its signatories." United States v. Stuart, 489 U.S. 353, (1989), quoting Sumitomo Shoji America, Inc. v. Avagliano and Maximov v. United States.
A brief contextual analysis readily demonstrates that the clear import of the plain language of the exchange of information article is in accord with the intent of the parties. "Context" refers not only to the specific article but also the language of other provisions in the treaty. O'Connor v. United States, 479 U.S. 27 (1986); Sullivan v. Kidd, 254 U.S. 433 (1921). Each of the ten treaties and the TIEA provides for "mutual agreements" between the states generally modeled on Article 25(3) of the OECD Model Treaty.12 These mutual agreements are the mechanism by which tax treaty partners reach resolution on all matters covered by the treaty. OECD Model Article 25, at paragraph 3, provides that the competent authorities "shall endeavor to resolve * * * any difficulties or doubts arising as to the interpretation or application of the Convention."13 The sheer breadth of this language and the clear intent that treaty partners use the mutual agreement process to resolve all matters, both general and specific, strongly supports a liberal interpretation of the exchange of information article by providing the broad context in which that article must be interpreted.
In addition to the text of the treaties, nontextual sources that may assist a court in "giving effect to the intent of the Treaty parties," Sumitomo, 457 U.S. at 185, such as a treaty's ratification history and the practical construction placed on the treaty by the parties, fail to support plaintiff's claim. (Pltf 2d. Memo. at 26-35.)14 All of the technical explanations and Senate reports track the various paragraphs of each article in a way that is entirely consistent with defendant's interpretation of the treaties. No document relied upon by plaintiff constitutes evidence that the scope of the treaties and TIEA is limited to "tax facts" of specific taxpayers. (See Pltf. 2d Memo. at App. A, A-20 – A-36, A-67; App. V (Sweden))15
Finally, to append a taxpayer specific limitation to the article requires one to believe that the contracting states administer their tax laws by being in lawful possession of taxpayer specific information only. This is an absurd result16 and is belied by the very practices of the OECD member countries. See note 10, supra.17
2. The scope of the articles and the non-disclosure provisions include the identity of treaty partners and other information, including legal analysis, to the extent such information would reveal the identity of the treaty partners
Plaintiff also asserts that the articles and the non-disclosure provisions "cannot be construed to support IRS' claims for exemption of names of countries, references to the treaty or legal analysis." (Pltf. 2d Memo. at 16-22.) Defendant acknowledges that the words "identity of a country", "identity of a treaty" and "legal analysis" are not specifically set forth in the exchange of information articles. (See Pltf. Memo. at 16.) The absence of such words, however, by no means dictates that this type of information falls outside the scope of the articles or that the non-disclosure provisions fail to "specifically" and "explicitly" exempt such information from disclosure. (See Pltf. 2d Memo. at 18-19.)18 Defendant's position that this type of information may be treated as information received under a treaty is set forth in detail in response to plaintiff's Interrogatory Nos. 3-5, but is further addressed here.19
The scope of the articles is broad. They contain specific limitations to the exchange of "such information," but nowhere is it stated in any of the articles that "such information" excludes the "identity of the country," "identity of the treaty," or "legal analysis." Further, the non-disclosure provisions "specifically" and "explicitly" require defendant to withhold such information from plaintiff because they unambiguously state that any information so exchanged shall be treated as secret and shall not be disclosed" to plaintiff. (Emphasis added).20 Had the treaty, TIEA and OECD Model drafters intended to exclude this type of information from "any information," the limiting words suggested by plaintiff would have appeared therein. See Santovicenzo v. Egan, 284 U.S. 30 (1931).
Again, plaintiff's position creates absurd results inconsistent with the plain meaning and purpose of the articles and the practice of the treaty partners in administering these articles. The OECD Commentary contemplates the exchanges to be to the "widest possible extent," and the OECD Survey explains the importance of such exchanges "to prevent tax avoidance and evasion." Implementation of a treaty, and of the domestic taxes covered by a treaty, requires consultation between the competent authorities in contexts outside of particular tax cases. These consultations may be as sensitive as exchanges of information concerning specific taxpayers, but with broader scope. For example, if a treaty partner seeks information from the United States relevant to tax avoidance or evasion schemes, the requesting treaty partner expects the United States to maintain the secrecy of the treaty partner's identity and the content of that communication. See n. 7, supra; (Dfdt. Memo. at 25-28, Lyons Decl. ¶¶ 15, 16).21
III
THE REDACTIONS MADE TO THE 29 FSAs ALLOW THE UNITED STATES TO SATISFY ITS OBLIGATIONS UNDER ITS INCOME TAX TREATIES CONSISTENT WITH THE FOIA
When defendant made its redactions to the twenty-nine FSAs at issue, defendant carefully evaluated each redaction, taking into account both the FOIA and the treaty and TIEA articles. Defendant redacted only: (1) taxpayer specific factual information received from a treaty partner; (2) the identity of the treaty partner (including descriptions and analysis of particular treaty articles); and (3) other information, including information received from the treaty partner, if that information would reveal the identity of the treaty partner. Defendant did not redact, however, other information, including information received from the treaty partner, that would not reveal the identity of the treaty partner. (Danilack Dep. at 157-159; Manning Dep. at 133-136, 158-160, 167.) By focusing its redactions on the identity of the treaty partner, rather than on all references to the content of a communication from a treaty partner, defendant was able to, consistent with FOIA, disclose substantial discussion and legal analysis of United States law.
Examples of how redacting the identity of a treaty partner allowed defendant to satisfy its obligations under the treaty while also disclosing United States legal analysis and conclusions can be seen in the majority of the documents.22 In these documents, defendant disclosed substantial discussion and analysis of the matter raised by the treaty partner's inquiry, but only because defendant redacted information identifying the treaty partner and defendant determined the disclosed subject matter raised by the request to be general enough that it could have been raised by any treaty partners.
If defendant had not protected the identity of the treaty partner, and had instead redacted all references to the content of the communication from that named treaty partner, defendant would have disclosed very little of the twenty-nine FSAs. Each FSA was generated as a result of a communication from a treaty partner and the discussion and analysis contained in each reveals the substance of that communication, per se. Had the treaty partner been identified, defendant would have been required under the applicable treaty or TIEA to redact much, if not all, of that discussion and analysis.
IV
DEFENDANT'S INTERPRETATION OF THE TAX TREATIES AND TIEA SHOULD BE ACCORDED DEFERENCE BY THE COURT
It is not disputed that defendant, and in particular, the Assistant Commissioner (International), acting as the United States "competent or taxation" authority, in concurrence with the Associate Chief Counsel (International), administers and interprets the tax treaties and TIEAs on behalf of the United States. (Lyons Decl. ¶ 2.) Accordingly, judicial deference is appropriate here.
Plaintiff states, "It is the law of this Circuit that an agency's interpretation of a statute (or, here, a treaty) that it invokes to justify withholding under FOIA Exemption 3 is not entitled to Chevron U.S.A. Inc. v. Natural Resource Defense Council, Inc., 467 U.S. 837 (1984) deference." (See Pltf. Memo. at 17.) Defendant disagrees. At an earlier stage in this lawsuit, the Court of Appeals said:
But principles of administrative law tilt in favor of the IRS's position. The principles are the familiar ones, set down in U.S.A. Inc. v. Natural Resources Council, Inc., 467 U.S. 837 (1984), calling upon the courts to defer to an agency's permissible construction of an ambiguous statute the agency administers. * * * If the IRS adopts an interpretation of § 6103, therefore. Chevron is triggered. That the interpretative issue arises in the context of FOIA does not render Chevron inapplicable. It is true that we will not defer to an agency's view of FOIA's meaning. * * * But the meaning of FOIA is not at stake here. This aspect of the case turns on how § 6103(b)(2) is to be construed. And on that score, the IRS stands on the same footing as other agencies administering statutes confined to their particular spheres. (Emphasis added).
Tax Analysts v. IRS, 117 F.3d 607, 613 (D.C. Cir. 1997). Thus, it is the law of the case that, so long as the defendant has adopted an interpretation of its own "statute" — in the instant matter, its tax treaties and TIEA and their non-disclosure provisions — and that interpretation is a permissible construction, the Court must afford that interpretation deference. Cf. Church of Scientology Intl. v. IRS, 845 F. Supp. 714, 720 (C.D. Cal. 1993) (court noting that "deference is especially appropriate" where taxpayer specific documents were withheld pursuant to tax treaty secrecy clauses, in upholding the Office of the Assistant Commissioner (International)'s assertion of 26 U.S.C. § 6103(e)(7) [impairment of Federal tax administration] because of that office's "unique insights into the concerns regarding the cooperation of foreign governments and tax treaty partners").
V
DEFENDANT APPLIED ITS LONG-STANDING INTERPRETATION OF THE NON-DISCLOSURE PROVISIONS OF ITS TAX TREATIES AND TIEA WHEN IT MADE ITS REDACTIONS; DEFENDANT DID NOT FABRICATE, AS PLAINTIFF ACCUSES, THIS INTERPRETATION FOR PURPOSES OF THIS CASE.
On September 28, 1994, five months after plaintiff filed this suit, defendant served plaintiff with a document, which, in response to plaintiff's request for the text of the tax treaty secrecy clauses at issue, stated, inter alia:
The Service takes the view that tax treaty secrecy clauses apply to (a) the disclosure of information exchanged under tax treaties, (b) the fact that information was sought or obtained by a competent authority, and (c) the identity of the foreign treaty partner(s) for which information was sought or exchanged.23
The document served upon plaintiff reflected defendant's longstanding interpretation of the non-disclosure provisions of the treaties and TIEA. That interpretation is embodied in a 1979 position paper provided to plaintiff in response to its discovery request, the import of which plaintiff understood before taking the deposition of Mr. Danilack.24 The paper sets forth defendant's position on the interrelationship between the nondisclosure provisions and domestic disclosure statutes. The paper concludes, inter alia, that the scope of the articles, and therefore information subject to the non-disclosure provisions, includes: (1) taxpayer specific information; (2) non-taxpayer specific information in the form of general material, such as "general policy discussions pertaining to implementation of existing treaties or resolution of the problems of international tax avoidance"; and (3) "the fact that we received communications or information from a specific treaty partner as well as the nature or contents of the communications." The paper also states in pertinent part, "[I]t is our position that, in light of the importance placed by the treaties upon secrecy, it is reasonable to construe the secrecy clause to include fact of communication as well as the content of communications." (App. X, position paper [5-6, 16].)
Despite the unambiguous explanation of defendant's position to plaintiff over four years ago, and the fact that plaintiff had defendant's internal position paper before its counsel examined Mr. Danilack, plaintiff wishes this Court to believe that Mr. Danilack and Mr. Lyons "invented the claims and conceived the theory behind them" in order to redact "the identities of countries and treaties" and "legal analysis" and thwart this Court's November 1997 ruling. (Pltf. Memo. at 5-8.) Viewed in the best light, plaintiff confuses the establishment of a legal position by defendant, which occurred over twenty years ago, and the application of that position to the particular FSAs when ordered by the Court to produce redacted documents, which occurred earlier this year.
The portion of Mr. Danilack's deposition testimony relied upon by plaintiff specifically relates to defendant's general position set forth in Mr. Lyons' declaration in paragraphs 9, 10 and 11 — that the non-disclosure provisions of the various treaties and TIEA at issue should be interpreted in a consistent manner regardless of minor differences in the text of those clauses — a position that plaintiff does not contest.25 The portion cited does not, as plaintiff suggests, relate to defendant's more specific positions on the points that are at issue in this case. (Pltf. Memo. at 5-6.)
Moreover, in his deposition testimony, Mr. Danilack made a clear distinction between asserting the general position set forth in Mr. Lyons' declaration in deciding upon the specific redactions to the FSAs at issue (Danilack Dep. at 88-89), and the fact that defendant had embraced the general position underlying the redactions years before (Danilack Dep. at 90-91). Associate Chief Counsel Danilack specifically described defendant's general position as "the long-standing consistent position of the United States Government." (Danilack Dep. at 92-93.)26
VI
THE AMENDMENT OF SECTION 6110 DOES NOT AFFECT THE ABILITY OF Defendant TO ASSERT FOIA EXEMPTION 3 IN CONJUNCTION WITH THE NON-DISCLOSURE PROVISIONS OF TAX TREATIES
Plaintiff also erroneously argues that Congress, when it enacted new section 6110(i)(1), "overruled" the application of the non-disclosure provisions of tax treaties. (Pltf. Memo. at 35-36.) This is not correct. In amending section 6110 to provide an orderly process to allow the Internal Revenue Service to redact and release FSAs consistent with the opinions of this Court and the Court of Appeals, Congress explicitly provided that the defendant:
may make deletions of material in accordance with subsections (b) and (c) of section 552 of title 5, United States Code, except that in applying subsection (b)(3) of such section, no statutory provision of this title shall be taken into account. (Emphasis added).
26 U.S.C. § 6110(i)(3)(B). Thus, Congress affirmatively provided that its mandate for the defendant to publish FSAs and certain other Chief Counsel Advice did not sweep aside FOIA Exemption 3 for statutes other than those contained in Title 26. In addition, the Conference Committee Report specifically took note of the Court of Appeals decision in this case, which remanded the case for consideration of the treaty secrecy and (b)(7)(E) issues and affirmatively stated:
The only FOIA exemption affected by this provision is 5 U.S.C. 552(b)(3), to the extent that it incorporates section 6103 of the Code, (Emphasis added).
H. Conf. Rep. 105-599 at 298-99, 302.
Plaintiff suggests that defendant's position in this case broadly precludes the disclosure of treaty provision and analysis in all FSAs to be released in the future. (See Pltf. Memo. at 35-36.) Defendant disagrees. The record is replete with other released FSAs with the names of countries, treaty citations and legal analysis fully disclosed because such information was not received from a treaty partner.27
SUMMARY
Defendant has important non-disclosure obligations under the income tax treaties of the United States and the TIEA, and its treaty partners expect that defendant will honor those obligations. The non-disclosure provisions, and the assurance they provide that information exchanged will be used only in connection with administration of the treaty or a covered tax, are essential components of international cooperation in the framework of tax treaties.28 The proper administration of these provisions "is of critical importance to the United States." Disclosure of the information redacted from the twenty-nine FSAs would constitute a violation of the obligations of the United States under the treaties and TIEA and "would seriously impair federal tax administration and jeopardize the United States' relations with all of its tax treaty and TIEA partners." (Lyons Decl. ¶¶ 8, 15, 16.)29
In redacting the twenty-nine FSAs, defendant carried out its treaty obligations in a manner consistent with its responsibility under the FOIA. Defendant's approach should be accorded deference. This court should reject plaintiff's claims that only taxpayers' names, addresses and identifying details should be redacted from the twenty-nine FSAs at issue, and uphold defendant's redactions in full.
CONCLUSION
It is the position of the Internal Revenue Service that the assertion of Exemption 3 with respect to all or parts of twenty-nine FSAs subject to tax treaties and/or TEIAs should be sustained.
DATE: December 16, 1998.
Respectfully submitted,
DAVID A. HUBBERT
MICHAEL J. SALEM
CHRISTOPHER R. ZAETTA
Trial Attorneys, Tax Division
U.S. Department of Justice
Post Office Box 227
Washington, DC 20044
Telephone: (202) 307-6438
OF COUNSEL:
WILMA A. LEWIS
United States Attorney
FOOTNOTES
1This sequence of briefing has been carried out, as explained above, pursuant to the Court's Order of Apr. 30, 1998. None of the briefs filed on this issue is in support of or in opposition to a motion. Consequently, Local Rule 108(e), which prescribes page limitations applicable to motion practice, is inapplicable.
2Plaintiff's requirement that Exemption 3 "statutes" afford citizens a private cause of action has been repudiated by every court, including the D.C. Circuit, that has considered the question whether Fed. R.Crim. P. 6(e) is such a qualifying "statute." Fund for Constitutional Government v. NARS, 656 F.2d 856 (D.C. Cir. 1981) (since Rule 6(e) was affirmatively acted upon by Congress, it was a "statute" within the meaning of Exemption 3.) Moreover, many circuits have held that grand jury targets have no rights of action for alleged violations of Rule 6(e). Finn v. Shiller, 72 F.3d 1182 (4th Cir. 1996); Berry v. United States, 865 F.2d 1317 (D.C. Cir. 1989); Blalock v. United States, 844 F.2d 1456 (11th Cir. 1988); In re Grand Jury Investigation (Lance), 610 F.2d 202 (5th Cir. 1980).
3The discussion of the "entry into force" article in the Technical Explanations and Senate Foreign Relations Committee reports accompanying the treaties makes it clear that the treaties would be fully in force upon ratification. See Appendix III. The TIEA, though not ratified, is on an equal footing with legislative acts. (Dfdt. Memo. at 10-11.) Defendant's Appendices I and II are attached to defendant's opening memorandum.
4The Senate, which has considered numerous tax treaties with provisions on confidentiality of information exchanged with the treaty partner, has repeatedly noted that the treaties compel that the information be held secret without any indication that information exchanged under the treaty is to be released under FOIA. See, e.g., Senate Foreign Relations Committee Report on the Australia Treaty. (Pltf. 2d Memo. App. A-40.)
5A bilateral treaty between the United States and Norway, which established the procedure for determining a Norwegian national's claim against the United States, was held to be self-executing over plaintiff's argument that the treaty was a mere contract. The court held that plaintiff's argument was inapplicable where the treaty addressed plaintiff's claim and required no additional legislation. Hannevig v. United States, 84 F. Supp. 743 (Ct. Cl. 1949).
6See Lyons Decl. The practices of OECD member-countries are also set forth in a 1994 OECD publication, Tax Information Exchange Between OECD Member Countries, A Survey of Current Practices, attached as Appendix IV.
7Plaintiff attempts to append its taxpayer specific limitation to the articles by pointing the Court to single words plucked from the treaties, including words from general scope provisions, the limiting provisos, the tax enforcement clause, and clauses that set forth the type or form of information that may be exchanged. (Pltf. Memo. at 23-25.) Apparently, these isolated words conjure up for plaintiff visions of "tax facts." While review of the entire treaty provision to be construed may entail review of other provisions in the treaty to ascertain the context Sullivan v. Kidd, 254 U.S. 433 (1921)), the analysis by plaintiff by no means constitutes a serious attempt to determine the plain meaning and clear import of the treaties under the standards of the Supreme Court. Rather, the inclusion of express terms and limitations in other provisions make plain the deliberate intent to not so limit the scope of information that could be exchanged. Santovincenzo v. Egan, 284 U.S. 30 (1931).
8The treaties and TIEA set forth the main rule that the United States and its treaty partners "shall exchange such information" as is necessary for carrying out the provisions of this Convention; or for the prevention of fraud or for the administration of statutory provisions concerning taxes to which this Convention applies (Australia, Art. 25, ¶ (1); Austria, Art. XVI, ¶ (1); Japan, Art. 26, ¶ 1; Luxembourg, Art. XVIII, ¶ 1; United Kingdom, Art. 26, ¶ 1) or of the domestic laws of the contracting states concerning taxes covered by the Convention insofar as the taxation thereunder is not contrary to the Convention. (Barbados, Art. 26, ¶ 1; Canada, Art. XXVII, ¶ 1; Cyprus, Art. 28, ¶ 1; Spain, Art. 27, ¶ 1.) The Sweden Treaty, provides for the exchange of "such information in the matter of taxation . . . as may be of use to the . . . other State. . . ." (Sweden, Art. XV. The relevant Sweden Treaty is the one that entered into force in 1940. The relevant articles, and the history thereto, are attached as Appendix V. The TIEA states that the partners "shall exchange information to administer and enforce the domestic laws. . . ." (Mexico TIEA, Art. 4).
9The OECD Model and the Australia, Austria, Barbados, Luxembourg, Spain, United Kingdom Treaties use the term "necessary." The Canada Treaty uses the term "relevant." The Cyprus and Japan treaties use the term "pertinent." The Sweden Treaty uses the phrase "as may be of use to". The U.S. Model Income Tax Convention (September 20, 1996) uses the term "relevant." The Treasury Department Technical Explanation states that the term "necessary," has consistently been interpreted as being equivalent to "relevant. . . ." See Appendix VI, attached hereto.
10Eight of the treaties at issue are with OECD member-countries (Australia, Austria, Canada, Japan, Mexico, Spain, Sweden, United Kingdom). (Dfdt. Memo. at 25-26.) It is appropriate to refer to the OECD Model and official commentary to discern the views of OECD member-countries on the implementation of tax treaties. Taisei Fire & Marine Insurance Co. v. Commissioner, 104 T.C. 535 (1995). The commentary states, "The present Article embodies the rules under which information may be exchanged to the widest possible extent, with a view to laying the proper basis for the implementation of the domestic laws of the Contracting States concerning taxes covered by the Convention and for the application of specific provisions of the Convention." (Dfdt. Memo., App. II.) The commentary further explains these dual purposes as allowing for ascertaining facts in relation to applying the rules of the convention; and, in view of increasing internationalization of economic relations, the growing interest of the contracting states in the reciprocal supply of information on the basis of which domestic taxation laws have to be administered, even if there is no question of the application of any particular article of the convention. (Dfdt. Memo., App. II.) Further, the OECD Survey explains the practices of OECD countries where, under this broad scope, "exchanges help to prevent tax avoidance and evasion, which is increasingly important with the growing proportion of taxpayers who have foreign source income and foreign capital * * *" and ensure that such taxpayers are not advantaged over those "operating only in their domestic markets." (App. IV [9-10].) In its discussion of the legal status of the OECD Commentary, the Survey states, "the Commentary should not be interpreted in a restrictive way * * *." (App. IV [20].)
11The treaties and TIEA at issue contain specific provisos that (1) limit the scope of the information exchanged to information available under the laws or administrative practices of the contracting states (Australia, Art. 25, ¶ 1; Austria, Art. XVI, ¶¶ 1, 2; Barbados, Art. 26, ¶ 3(a) and (b) ; Canada, Art. XXVII, ¶¶ 3(a) and (b) ; Cyprus, Art. 28, ¶¶ 3(a) and (b) ; Japan, Art. 26, ¶¶ 2(a) and (b); Luxembourg, Art. XVIII, ¶ 3; Mexico, Art. 1, ¶ 3(a); Spain, Art. 27, ¶¶ 2(a) and (b); Sweden, Art. XV; United Kingdom, Art. 26, ¶¶ 1 and 3); and (2) limit exchanges to those not contrary to "public policy" (Australia, Art. 25, ¶ 3; Austria, Art. XVI, ¶ 2; Barbados, Art. 26, ¶ 3(c); Canada, Art. XXVII, ¶ 3(c); Cyprus, Art. 28, ¶ 3(c); Japan, Art. 26, ¶ 2(c); Luxembourg, Art. XVIII, ¶ 3; Mexico, Art. 1, ¶ 3(d); Spain, Art. 27, ¶ 2(c); United Kingdom, Art. 26, ¶ 3) or "sovereignty" or "security." (Austria, Art. XVI, ¶ 2; Luxembourg, Art. XVIII, ¶ 3; Mexico, Art. 1, ¶ 3(d); United Kingdom, Art. 26, ¶ 3.) Nine treaties and the TIEA contain specific limitations against exchanges of information in the nature of trade secrets. (Austria, Art. XVI, ¶ 1; Barbados, Art. 26, ¶ 3(c); Canada, Art. XXVII, ¶ 3(c); Cyprus, Art. 28, ¶ 3(c); Japan, Art. 26, ¶ 2(c); Luxembourg, Art. XVIII, ¶ 3; Mexico, Art. 1, ¶ 3(c); Spain, Art. 27, ¶ 2(c); Sweden, Art. XIX; United Kingdom, Art. 26, ¶ 1.)
12The Mutual Agreement Procedures are applicable to "Any difficulties or doubts" in Australia, Art. 24(2); Austria, Art. XVII(2); Barbados, Art. 25(3); Canada, Art. XXVI(3); Cyprus, Art. 27(2); Japan, Art. 25(2); Mexico TIEA, Art. 5(2); Spain, Art. 26(3); United Kingdom, Art. 25(3). Luxembourg, Art. XIX(2) applies to "settlement of difficulties or doubts in the interpretation." Sweden, Art. XIX authorizes competent authorities of the two states to prescribe regulations "necessary to interpret and carry out the provisions of this Convention." See Appendix VII, attached hereto.
13See Appendix VIII, attached hereto.
14Plaintiff's reliance in this regard on the 1994 deposition testimony of Cynthia Mattson, Assistant Chief Counsel (International), is misplaced. Plaintiff's counsel asked Ms. Mattson about a response by defendant to an interrogatory, which asserted that certain FSAs contained information subject to treaty non-disclosure provisions. Without the FSAs in front of her, Ms. Mattson offered one example of such information that would be subject to those provisions, which happened to be taxpayer specific. (Mattson Dep., pp. 122-125) Ms. Mattson's one example cannot seriously be construed as defendant's definitive interpretation of the tax treaties at issue.
15See K. Vogel, Klaus Vogel on Double Taxation Conventions, Art. 26, Par. 30, p. 1213 (1991) ("The term "information" should be given a broad interpretation. It should cover both actual facts and legal relationships * * *. The requested information need not necessarily relate to a specific taxpayer or the latter's circumstances. Next to the indication of facts related to a particular case, Art. 26(1) likewise covers information of a general nature * * *." (emphasis in the text)).
16The United States may exchange such information that it is permitted to obtain under U.S. law or in the normal course of tax administration, at least insofar as it concerns the treaty or the taxes to which the applicable treaty or TIEA applies. "Tax administration," as defined in 26 U.S.C. § 6103(b)(4), is a "sweeping" term. Tavery v. United States, 32 F.3d 1423 (10th Cir. 1994). Tax administration encompasses not only [taxpayer specific] assessment, collection, enforcement, and litigation, but the "development and formulation of Federal tax policy." Clearly, then, the scope and type of information that may be exchanged between the United States and its treaty partners in furtherance of the administration of the treaties and the domestic laws covered by the treaties is necessarily as broad as the information generated and received by the United States as it accomplishes such purposes.
17The OECD Survey contains the following statement of practices:
26. A further case of non-taxpayer related information which may nevertheless be of interest to a Contracting State may be general information such as statistics or information about a particular industry which, although not related to the taxation of a single taxpayer, may be circumscribed by tax secrecy because, for example, it has been supplied in confidence by trade associations (e.g. information on average mark up). Other relevant information might be changes in regular sources of income flowing between countries, administrative interpretations of and court decisions on treaty provisions and administrative practices or developments affecting the application of the treaty. (App. IV [19].)
18Plaintiff asserts that defendant conceded this point in discovery. (Pltf. 2d Memo. at 16.) Defendant made no such concession. Certain of plaintiff's cites to deposition testimony are not relevant to the alleged concession. (Manning Dep. at 36, 66-67, 70.) To the extent relevant, defendant acknowledged that the treaties, technical explanations, and Senate reports refer "indirectly" to the identity of a country or a treaty "because the identity is information" within the scope of treaties, but did not make the concession alleged. (Manning Dep. at 95-95, 101, 117-118.) Further, defendant does not concede that the documents produced to plaintiff contain nothing explicitly commanding secrecy of the identity of a country or a treaty. (See Pltf. Memo. at 16-17.) There are a series of documents that "directly" conclude so in the form of a 1979 position paper of defendant and subsequent versions thereof (Manning Dep. at 38-54), and a host of other documents that support such conclusion, including the treaties themselves. (Manning Dep. at 24-25, 87-88, 93-96, 121-122.)
19See App. IX, attached hereto.
20Australia, Art. 25, ¶ (2); Austria, Art. XVI, ¶ (1) ; Barbados, Art. 26, ¶ (1); Canada, Art. XXVII, ¶ (1); Cyprus, Art 28, ¶ (1)(b); Japan, Art. 26, ¶ (1); Luxembourg, Art. XVIII, ¶ (1); Mexico, Art. 4, ¶ (7); Spain, Art. 27, ¶ (1); United Kingdom, Art. 26, ¶ (1). The one exception to the phrase "any information" is the non-disclosure provision in the Sweden treaty, which is contained in paragraph 11 of the 1939 Protocol, effective on the same day as the treaty, and covers "[d]ocuments and other communications or information contained therein. . . ." (Dfdt. Memo., App. I.)
21The Associate Chief Counsel (International), Mr. Danilack, articulated the basis for redacting treaty partner identities and information that would reveal such identities when explaining the specific redactions to the twenty-nine FSAs:
The basis for our belief, our position, that the information to be protected under the nondisclosure provisions includes the identity of the treaty partner is that the identity of the treaty partner may, in fact, reveal certain particulars of a communication. Many of the terms of our treaties differ; and therefore, when the identity of a particular treaty is revealed, it, in essence, will, or may tend to, disclose the specific subject matter that is being communicated either because, as I mentioned, the treaties do vary or because the factual information that's included is particular to a particular country * * *. [I]n cases where we redacted our legal conclusions, the basis for that was they were specific enough or particularized enough to the country at issue that we believed that revealing that legal analysis or * * * legal conclusion would tend to reveal the identity of the treaty partner and, therefore, information communicated from the treaty partner.
(Danilack Dep. at 60-62, 181.)
22Nineteen FSAs (Nos. 1022, 1045, 1064, 1074, 1086, 1087, 1109, 1117, 1148, 1178, 1184, 1189, 1083, 1127, 1153, 1176, 1222, 1111, and 1214) all contain substantial discussion and legal analysis that is unredacted because the identity of the treaty partner is not revealed therein. In contrast, only 9 FSAs (Nos. 988, 1038, 1065, 1134, 1142, 1200, 1206, 1231 and 1002), contain legal analysis of United States law (other than the treaties) that was redacted because the analysis itself could reveal the identity of the treaty partner. One FSA declined to provide legal advice because the issue was not ripe (No. 1079).
23See Internal Revenue Service's Additional Response to Plaintiff's First Set of Requests for Production of Documents at 2, attached as App. X.
24The positions in the paper were the subject of coordination amongst several divisions within the Internal Revenue Service on the topic of disclosures by the United States of information received pursuant to tax treaties. (Manning Dep. at 38-39, Exhibit 7, attached as App. XI.) Defendant prepared further similar versions of the position paper in 1981. (Manning Dep. at 50-51.)
25Here, defendant's September, 1994 document is also instructive because it reflects defendant's view that all of the tax treaty secrecy clauses protect information in a consistent manner notwithstanding the fact that "the language may vary slightly from treaty to treaty." (App. X [2].)
26When Mr. Danilack's deposition continued a week later, plaintiff's counsel again attempted to coax Mr. Danilack into agreeing to a statement more useful to plaintiff's argument that the defendant's legal interpretation of the treaties was "fabricated" for this case. The testimony does not support plaintiff, instead showing Mr. Danilack's pointed disagreement with plaintiff's counsel's distorted attempt to reword Danilack's testimony:
Q: In other words, once it was clear that the law was that Field Service Advice memos had to be disclosed, you and Mr. Lyons got together and developed the position that is described in paragraphs 9, 10 and 11 of his declaration?
A: No, that is not what I said.
(Danilack Dep. at 252.)
To ensure that there was no ambiguity about the matter, and because it was apparent that plaintiff's counsel and Mr. Danilack were not necessarily ascribing the same meaning to plaintiff's counsel's questions, Mr. Danilack, on cross-examination, again explained that the legal theories underlying the statements in Mr. Lyons' declaration were longstanding. (Danilack Dep. at 256.) This prompted a further exchange with plaintiff's counsel in which Mr. Danilack clarified any lingering ambiguity, stating:
The position on those particular treaty provisions has, to my knowledge, been the longstanding and fairly well-established position of this office as well as our counterparts in other jurisdictions.
(Danilack Dep. at 257.)
27Attached as Appendix XII is a list of twenty-three FSAs defendant released with treaty discussions because the underlying matter was not exchanged pursuant to a treaty, and as such were not part of the twenty-nine FSAs at issue on remand.
28The OECD Model commentaries state, "Reciprocal assistance between tax administrations is feasible only if each administration is assured that the other administration will treat with proper confidence the information which it will receive in the course of their co-operation." (Dfdt. Memo., App. [¶ 11].)
29The positions set forth in this memorandum regarding the status of treaties and treaty interpretation were the subject of consultation and coordination with the Office of Treaty Affairs, Office of Legal Adviser, United States Department of State.
END FOOTNOTES