The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge
The law firm of Mayer, Brown, Rowe & Maw LLP ("Mayer Brown") submitted three requests for records to the Internal Revenue Service ("IRS") under the Freedom of Information Act ("FOIA"), 5 U.S.C. § 552. When the IRS failed to respond, Mayer Brown instituted this suit. Thus prompted, the IRS answered the requests, produced approximately 7,000 documents in whole or in part, and withheld about 23,000 documents. The parties now dispute, through cross motions for summary judgment, whether the scope of the search for responsive records was adequate and whether the IRS has properly relied upon FOIA Exemptions 5 and 7(E). Each motion will be granted in part and denied in part.
Mayer Brown submitted FOIA requests on January 6, 2004; March 1, 2004; and February 16, 2005. These requests were directed at obtaining information concerning two revenue rulings, certain settlement guidelines, and an official IRS Notice. The FOIA requests sought "all materials subject to disclosure, including but not limited to any and all background files, pertaining to" Revenue Ruling 99-14; Revenue Ruling 2002-69; the Appeals Coordinated Issue Program Appeals Settlement Guidelines for Lease-in/Lease-Out (LILOs), UIL 9307-07-00 (February 23, 2004); and IRS Notice 2005-13 (February 11, 2005). When no responses were received, Mayer Brown filed this suit on December 17, 2004. The IRS produced documents responsive to the 2004 FOIA requests in April 2005. Declaration of Deborah Lambert-Dean ("Lambert-Dean Decl.") ¶ 19. It produced documents responsive to the 2005 FOIA request in August 2005. Id. ¶ 24. As noted above, the IRS declined to release the greater bulk of responsive documents in reliance on various exemptions under FOIA.
The documents at issue concern the tax treatment accorded by the IRS to LILOs, or lease-in/lease-out transactions. Under these LILOs, a transit agency would lease transit equipment to a lessor for an extended period under a "Headlease." The transit agency would then lease the property back under a Lease for a period significantly shorter that the term of the Headlease. See Memorandum of Points and Authorities in Opposition to the Internal Revenue Service's Motion for Summary Judgment and in Support of Mayer Brown's Cross-Motion for Summary Judgment ("Pl.'s Mem."), Declaration of Adam Sloane ("Sloane Decl."), Ex. D (Appeals Settlement Guideline All Industries, Losses Claimed and Income to Be Reported from Lease In/Lease Out Transactions, UIL 9307.07-00, at 3-5 (Draft June 6, 2003). According to Mayer Brown, the LILO structure was used as a financing method by transit agencies in a number of cities, including San Diego, Washington, D.C., and Dallas, among others. Pl.'s Mem. at 5. Following an IRS revenue ruling that disallowed deductions for LILO transactions, lessees and lessors increased the use of sale-leaseback structures. In a sale-leaseback (called sale in/lease out, or "SILO" by the IRS), the original owner of transit equipment would sell it and then lease it back.
As noted above, Mayer Brown sought information regarding two revenue rulings, settlement guidelines, and an IRS Notice. Specifically, in Revenue Ruling 99-14, 1999-1 C.B. 835, issued in March 2002, the IRS disallowed deductions claimed with respect to LILO transactions. In October 2002, the IRS issued Revenue Ruling 2002-69, 2002-2 C.B. 760, which modified and superseded Revenue Ruling 99-14 but maintained the same position disallowing deductions. Then in February of 2004, the IRS released Appeals Settlement Guidelines on the LILO issue. Legislation which substantially increased the penalties and sanctions for failing to comply with tax shelter rules was enacted on October 22, 2004. See American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (codified in scattered sections of 26 U.S.C.). On February 11, 2005, the IRS issued Notice 2005-13, which disallowed tax deductions with respect to SILO transactions. See Sloane Decl., Ex. G. The IRS has never published Appeals Settlement Guidelines for SILO issues.
According to Mayer Brown, the IRS has audited or is in the process of conducting audits of substantially all taxpayers that engaged in LILO and SILO transactions. Both parties agree that the total amount at issue will likely be in the billions of dollars. See IRS's Memorandum in Opposition to Plaintiff's Cross-Motion for Summary Judgment and in Reply to Plaintiff's Memorandum in Opposition to IRS's Summary Judgment Motion ("Def.'s Opp.") at 7; Pl.'s Mem. at 11.
In its first FOIA request, dated January 6, 2004, Mayer Brown sought "[a]ll material subject to disclosure, including but not limited to any and all background files, pertaining to the following rulings: Revenue Ruling 99-14, 1999-1 C.B. 835 and Revenue Ruling 2002-69, I.R.B. 2002-44." See Lambert-Dean Decl., Ex. A. The second FOIA request from Mayer Brown was dated March 1, 2004, and asked for "[a]ll materials subject to disclosure, including but not limited to any and all background files, pertaining to the following IRS release: Appeal Coordinated Issue Program Appeals Settlement Guidelines for Lease-in/Lease-out (LILOs), UIL 9307-07-00, February 23, 2004" ("LILO ASG"). Id., Ex. B. These requests were assigned to Deborah Lambert-Dean in the Office of Chief Counsel, Disclosure & Privacy Law, Branch 2, IRS, for search purposes on January 4, 2005, only after Mayer Brown had already filed suit. Id. ¶¶ 1 & 9.
Ms. Lambert-Dean began her search by contacting the Office of Governmental Liaison and Disclosure ("GLD"), which would have primary responsibility for responding to requests of the type received from Mayer Brown. Id. ¶ 11. She discovered that GLD had other, similar, requests pending and had already released 189 pages of redacted records to Miller & Chevalier, another law firm that had filed an earlier FOIA request. Id. ¶¶ 11 & 12. Ms. Lambert-Dean reviewed these records, agreed with the redactions, and released them to Mayer Brown. Id. ¶ 12.
Ms. Lambert-Dean also obtained the "CASE-MIS" number*fn1 for the LILO ASG, allowing her to identify the project in a computer data base and learn which offices had worked on the LILO ASG. Id. ¶ 13. She then sent an email request to search for responsive documents regarding the LILO ASG request to the Office of Chief Counsel and Deputy Chief Counsel; Office of Associate Chief Counsel, Income Tax and Accounting ("Counsel ITA"); the Office of the Division Counsel, Large and Mid-Size Business ("Counsel LMSB"); the Office of the Assistant Chief Counsel, Administrative Provisions and Judicial Practice ("Counsel APJP"); and the Office of Associate Chief Counsel, Financial Institutions and Products ("Counsel FIP"). She asked each of these offices to search for "all background, administrative and legal materials, including but not limited to internal IRS documents, memoranda, analyses, etc., underlying the Appeals Settlement Guidelines on 'LEASE IN/LEASE OUT (LILOs) (UIL 9300.07.00),' dated 2/23/04." Id. ¶ 14. In addition, she asked that the scope of the search include all documents created or considered in the drafting of the LILO ASG and asked the recipients to forward the email to any other offices or persons who may have worked on the LILO ASG and who were not copied on the initial email. Id.
By email on January 6, 2005, Ms. Lambert-Dean contacted the Legal Processing Division within the Office of Associate Chief Counsel, Procedure and Administration ("LPD"), to determine whether it had been involved in processing any requests related to Revenue Rulings 99-14 or 2002-69. Id. ¶ 15. LPD determined that it was in the process of gathering documents associated with both revenue rulings in response to other, similar FOIA requests. Id. ¶ 16. Ms. Lambert-Dean learned from LPD which persons in Counsel LMSB and Counsel ITA were performing the searches and she contacted them to request copies of all responsive documents for the Mayer Brown FOIA request. Id. She also contacted David F. P. O'Connor, a Special Counsel in the Office of Chief Counsel, to conduct a search of that office. Id.
LPD provided documents related to the revenue rulings in mid-February 2005. Id. ¶ 17. By the end of March 2005, Ms. Lambert-Dean had obtained additional documents relating to the revenue rulings from Counsel ITA, Counsel LMSB, and the Office of Chief Counsel. Id.
All told, Ms. Lambert-Dean received 8,653 pages responsive to Mayer Brown's requests concerning the LILO ASG and the LILO revenue rulings. Id. ¶ 18. She reviewed the documents as they were sent to her to determine their disclosure treatment and, on April 15, 2005, provided the Department of Justice (defending this case) with 795 pages to be released in part and 1,115 pages to be released in whole. Id. ¶ 19. Ms. Lambert-Dean withheld the ...