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Stonehill v. Internal Revenue Service

January 10, 2008


The opinion of the court was delivered by: John D. Bates United States District Judge


The roots of this Freedom of Information Act ("FOIA") case date back over forty years. Following a series of raids on Henry S. Stonehill's*fn1 business offices in the Philippines in 1962, the IRS brought a civil tax case against Stonehill and his associate Robert P. Brooks in 1965. In 1980, after nearly two decades of litigation, the IRS obtained a judgment of $17.6 million against Stonehill and Brooks. Many years later, in 1998, Stonehill filed the FOIA request that forms the basis of this lawsuit. In that request, Stonehill sought documents from the IRS concerning the federal government's role in the 1962 raids on his offices. After receiving only five documents responsive to his 1998 request, Stonehill made another identical request in 2001, which in turn generated a far larger volume of responsive documents. The IRS also produced an extensive privilege log detailing the material withheld by the agency under numerous FOIA exemptions and applicable privileges. Plaintiff now challenges those withholdings on various grounds in this action. Incredibly, the government has filed no fewer than five motions for summary judgment here. Plaintiff, for her part, has cross-moved for summary judgment in her favor. Those motions are now fully briefed and ripe for resolution. After careful consideration, and for the reasons set forth below, the Court will grant in part and deny in part each motion.


The operative facts of this case are not seriously in dispute. Despite the procedural complexities and vast historical litigation record in this case, the crux of the matter is quite simple. In a related proceeding in the Central District of California (and the Ninth Circuit), plaintiff is seeking to vacate the 1980 tax judgment against the estate by way of a Fed. R. Civ. P. 60(b)(6) motion. She believes that the government is in possession of documents that will aid her task of proving fraud on the court, which forms the basis of her Rule 60(b) motion. Consequently, plaintiff has sought to undercover those documents both in the Rule 60(b) discovery proceedings and by way of FOIA. In this case, the IRS has not produced several responsive documents that plaintiff argues have been improperly withheld.

The Rule 60(b) proceedings warrant a brief discussion here because the issues involved there are related to many of the questions raised in the instant case. In 2000, plaintiff filed a motion to vacate the tax judgment citing documents "that revealed that IRS and FBI agents had presented false testimony about the United States' involvement in the raids during the District Court's proceedings on Stonehill's motions to suppress filed in 1967, 1971 and 1974." Pl.'s Opp'n & Cross-Mot. for Summ. J. (hereinafter "Pl.'s Mot.") at 13. While the district court was considering plaintiff's motion, the IRS began to produce to plaintiff purportedly newly discovered documents that were responsive to plaintiff's FOIA request. Id. at 13-14. Before plaintiff had completed her review of that new information, however, the district court denied her Rule 60(b) motion. Id. at 14.

Plaintiff timely appealed that ruling and the Ninth Circuit reversed and remanded the decision "for further proceedings to consider the documents obtained after the District Court's decision." Id. The new documents, the Ninth Circuit reasoned, "'may substantially bolster [plaintiff's] case that the Government committed fraud on the court,'" id. Ex. 11, and hence the district court was ordered to assist plaintiff in obtaining any additional relevant evidence. Id. Consequently, beginning in 2003 the district court undertook the process of ensuring that plaintiff had access to all relevant evidence, including information that plaintiff sought by way of Rule 26 discovery mechanisms outside of the FOIA context. During the course of the IRS's subsequent production, the Service withheld several documents based on various applicable exemptions, including: "attorney-client privilege and work-product doctrine, confidential informant, 26 U.S.C. § 6103, third-party tax payer return information, and 26 U.S.C. § 6105, Treaty Obligation privilege." Id. at 15. Plaintiff objected to many of those withholdings and thus filed a motion to compel those documents with the district court.

On December 20, 2005, the district court issued a ruling granting in part and denying in part plaintiff's motion to compel. See id. Ex. 27. That decision is critical to the outcome of this case because, at least in plaintiff's view, it definitively resolves under the principle of collateral estoppel many of the issues presented in this case. Specifically, the court rejected the government's withholdings made on the basis of "work product doctrine or attorney-client privilege." Id. Ex. 27 at 8. At the same time, the court upheld the government's asserted exemptions relating to third-party tax return information (26 U.S.C. § 6103(h)(4)) and confidential information covered by international tax treaties (26 U.S.C. § 6105). Id. Ex. 27 at 4-6. Similarly, the court permitted the government to withhold information relating to confidential informants. Id. Ex. 27 at 7. Finally, the CIA had made redactions on certain produced documents and the court approved of those redactions on relevance grounds following in-camera review at a subsequent date. Id. Ex. 28.

Against that backdrop, plaintiff filed her First Amended Complaint on August 11, 2006, seeking "all documents related to Saunders"*fn2 and all records responsive to its initial FOIA request. Id. at 19. In response, the government produced a voluminous amount of documents but has also compiled a lengthy privilege log, to which plaintiff now objects. To begin with, the IRS asserts FOIA exemption 5 U.S.C. § 552(b)(3) (hereinafter "Exemption 3"), in conjunction with 26 U.S.C. § 6103(a), to "withhold the returns and return information of individuals and entities other than Stonehill and Brooks." Def.'s Third Supplemental Stmt. of Facts ¶ 31. Exemption 3 applies to documents "specifically exempted from disclosure by statute," see 5 U.S.C. § 552 (b)(3), and the IRS contends that § 6103(a), which prevents the Service from disclosing taxpayer information to third-parties without consent, is one such exempting statute.

Next, the IRS has withheld documents under 5 U.S.C. § 552(b)(5) (hereinafter "Exemption 5"), which allows an agency to avail itself of privileges that would render inter- agency or intra-agency memoranda unavailable "to a party other than an agency in litigation with the agency." In other words, Exemption 5 permits an agency to withhold internal documents that would be privileged or otherwise undiscoverable in civil litigation. Here, the IRS argues that it is "withholding information that was prepared by Chief Counsel and DOJ attorneys" in connection with the Stonehill and Brooks investigation under the work product doctrine. Def.'s Third Supplemental Stmt. of Facts ¶ 35. The Service has also withheld "drafts of documents and other records . . . containing advisory opinions and recommendations" regarding the Stonehill investigation pursuant to Exemption 5 and the deliberative process privilege. Id. ¶ 27.

Turning to the next asserted exemption, the IRS has withheld certain documents "that constitute 'tax convention information' as defined under 26 U.S.C. § 6105(c)(1)," an exempting statute designed to shield foreign tax partners from potentially harmful disclosure of confidential information. Def.'s Fourth Supplemental Stmt. of Facts ¶ 9. The disputed documents, according to the Service, involve foreign taxing authorities, namely from Canada, Japan, and Australia. The IRS argues that the information has been properly withheld under Exemption 3 because, pursuant to his authority under § 6105(c)(1) and § 6103(e)(7),*fn3 the Secretary has determined "that disclosure of such documents would constitute serious impairment of tax administration." Def.'s Fifth Mot. for Partial Summ. J. at 15.

Finally, the Service has redacted from its disclosures the name of a particular IRS agent involved in the original Stonehill investigation, citing 5 U.S.C. §§ 552(b)(6) and (b)(7) as justification (hereinafter "Exemption 6" and "Exemption 7," respectively). Exemption 6 authorizes withholding of personnel information where disclosure would constitute a "clearly unwarranted invasion of personal privacy." See 5 U.S.C. § 552(b)(6). The IRS contends that disclosing the name of the agent involved would amount to an inappropriate invasion of privacy without any corresponding benefit to the public. Def.'s Opp'n at 14-15. Similarly, the Service maintains that it is permitted to withhold the name of the agent under Exemption 7, which authorizes "the withholding of information compiled for law enforcement purposes the release of which could reasonably be expected to constitute an unwarranted invasion of personal privacy." Id. at 15; see also 5 U.S.C. § 522(b)(7)(C). Here, the IRS maintains that the redaction is appropriate because the agent has a legitimate privacy interest and the information was "compiled for a 'law enforcement purpose'": the Stonehill investigation. Def.'s Opp'n at 15.

Plaintiff does not dispute the merits of most of these exemptions.*fn4 Instead, she argues broadly that: (1) the district court in the Rule 60(b) proceedings has already decided the attorney-client and work product privilege issues adversely to the IRS; and (2) to the extent that the Service now asserts other exemptions with respect to various documents, those exemptions are inapposite here because they have been waived due to the fact that they were not previously asserted during the initial Rule 60(b) litigation. As for Exemptions 6 and 7, plaintiff argues that there is no legitimate privacy interest to protect in this case, and in any event, the public's interest in uncovering potential official misconduct outweighs the agent's privacy interest.


Summary judgment is appropriate when the pleadings and the evidence demonstrate that "there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). The party seeking summary judgment bears the initial responsibility of demonstrating the absence of a genuine dispute of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The moving party may successfully support its motion by identifying those portions of "the pleadings, the discovery and disclosure materials on file, and ...

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