The opinion of the court was delivered by: Ellen Segal Huvelle United States District Judge
Plaintiff FPL Group, Inc. ("FPL Group") has brought this action against the Internal Revenue Service ("IRS," "the Service," or "the agency") under the Freedom of Information Act ("FOIA"), 5 U.S.C. § 552, and the Internal Revenue Code ("IRC"), 26 U.S.C. § 6110. FPL Group seeks to compel disclosure of IRS documents related to determinations regarding its ability to take certain deductions on the consolidated tax returns that it filed on behalf of its subsidiary corporations. After searching its records, the IRS identified 15,845 responsive documents, of which it produced 2,153 pages in their entirety, withheld 12,584 pages, and produced 1,108 pages in redacted form. The IRS now moves for summary judgment as to those documents which it has redacted or withheld entirely, and plaintiff cross-moves for summary judgment. The parties agree that certain issues are no longer disputed, and the only questions remaining before the Court are (1) whether the IRS performed an adequate, good faith search in response to plaintiff's requests, and (2) whether the IRS has established that it properly invoked the deliberative process, attorney work product, and attorney-client privileges to withhold or redact certain responsive documents. Upon consideration of the parties' submissions and the entire record, and for the reasons discussed herein, defendant's motion will be granted in part and denied in part, plaintiff's motion will be denied in part, and defendant will be required to supplement its declarations and produce certain documents for in camera review.
Plaintiff is a Florida corporation and parent of an affiliated group of corporations that includes the wholly-owned subsidiary Florida Power & Light Co. ("Florida Power"). (Def.'s Statement of Material Facts ("Def.'s SMF") in Supp. of Mot. for Summ. J. ("Def.'s SJ Mot.") ¶ 2.) This FOIA request arises from plaintiff's long-running dispute with the IRS, culminating in litigation in the Tax Court, over the Service's refusal to let plaintiff characterize certain tax deductions as repair expenses rather than capital expenditures ("the Tax Court case"). See, e.g., FPL Group, Inc. v. Comm'r ("FPL Group I"), 115 T.C. 554, 555 (2000); FPL Group, Inc. v. Comm'r ("FPL Group II"), No. 5271-96, 2005 WL 2159680 (Tax Ct. Sept. 8, 2005); FPL Group, Inc. v. Comm'r ("FPL Group III"), Nos. 5271-96, 6653-00, 10811-00, 2008 WL 2199696 (Tax Ct. May 28, 2008).*fn1
As explained in FPL Group I, during the taxable years 1988 through 1992, "Florida Power incurred substantial costs related to its electric plants. The expenditures for these costs were recorded as either capital expenditures or repair expenses for regulatory accounting and financial reporting purposes. In preparing its tax returns for the years in issue, petitioner used the same characterization of expenditures for tax reporting purposes that Florida Power did for regulatory accounting and financial purposes." 115 T.C. at 558. In 1995, the IRS issued plaintiff a notice of deficiency for those five tax years. Id. at 555. In the Tax Court, plaintiff argued that it had erroneously characterized some repair expenses as capital expenses and sought an adjustment in the deficiency amount. Id. The IRS responded that plaintiff's attempted recharacterization constituted a statutorily impermissible change in plaintiff's "method of accounting," because plaintiff had not previously sought the Service's consent. Id. at 560. In 2000, the Tax Court found that without the agency's consent, plaintiff was "retroactively attempting to recharacterize expenditures that it regularly and consistently capitalized for regulatory, financial, and tax reporting purposes" without the agency's consent, id. at 570, 573, and thus granted the Service partial summary judgment on this issue. Id. at 575-76.
Subsequently, by letter dated April 10, 2001, plaintiff submitted a "protective request" to IRS Associate Area Counsel Donald Williamson for permission to change its method of accounting for the relevant tax years. (Pl.'s Opp'n to Def.'s SJ Mot. & Mem. in Supp. of Cross-Mot. for Summ. J. ("Pl.'s Opp'n"), Second Decl. of James Dawson ("2nd Dawson Decl."), Ex. G (protective request letter) at 2.) Williamson, who supervised the Tax Court case and was based in Atlanta, Georgia, denied the request by letter dated December 17, 2001. (Id., Ex. J ("2001 Williamson Denial").) The denial letter nonetheless encouraged plaintiff to contact the "Examination team" to work towards an agreement "as to which plaintiff items should be expensed and which items should be capitalized." (Id. at 1-2.)
Following Williamson's retirement in 2002, the litigation was assigned to Chicago-based attorney manager William Merkle of the Office of Division Counsel, Large and Mid-Size Business Division ("LMSB"). (Def.'s SMF ¶ 9; Def.'s SJ Mot., Decl. of William Merkle ("Merkle Decl.") ¶ 4.) Around that time, the legal and administrative files for the Tax Court case were transferred from Williamson's Atlanta office to Merkle's Chicago office. (Merkle Decl. ¶ 4.) Lead counsel in the Tax Court case was Lawrence Letkewicz, a trial attorney supervised by Merkle. (Def.'s SMF ¶¶ 9-10.) The Service's audit team included revenue agents Sara Northard, Kathleen Baryza, and Larry Clarke; the audit team's legal counsel was Sergio Garcia-Pages. (Pl.'s Statement of Material Facts in Supp. of Cross-Mot. for Summ. J. ("Pl.'s SMF") ¶¶ 31, 41; Pl.'s Reply to Def.'s Reply & Reply in Supp. of Cross-Mot. for Summ. J. ("Pl.'s Sur-reply") at 10.)
In June 2002, Merkle and plaintiff's counsel Robert Carney began to explore a possible resolution regarding "which of certain expenditures should be capitalized and which should be currently deductible as repairs . . . ." FPL Group III, 2008 WL 2199696, at *1-*2. Although only Merkle had the authority to settle the repairs issue, Merkle's subordinate, Robert Shilliday, was assigned to negotiate on the Service's behalf. Id. at *2.Throughout 2002, Shilliday discussed various alternative methodologies with plaintiff's counsel, and the parties concluded that "the major component methodology" for classifying whether a replaced piece of equipment was a repair expense or capital expense "had the most promise for settlement." Id. However, in April 2003, Merkle advised Carney that the agency would not settle the repairs issue that was the subject of FPL Group I, and subsequently, various agency constituencies indicated to Merkle that they opposed settling the remaining issues as well. See id. at *7-*8. Plaintiff later argued that it had entered an enforceable settlement agreement with the agency, but the Tax Court rejected this argument in May 2008. See id. at *13.
II. THE INDUSTRY ISSUE RESOLUTION PROCESS
IRS revenue procedures provide for an Industry Issue Resolution ("IIR") program, whose objective "is to identify frequently disputed or burdensome tax issues that are common to a significant number of business taxpayers" and which "may be resolved through published or other administrative guidance," Rev. Proc. 2003-36 § 1, 2003 WL 1894524 (May 5, 2003), rather than post-filing examination. (2nd Dawson Decl. ¶ 50.) "Interested parties" can initiate the IIR process by requesting that the Service consider a given issue for development and inclusion on a "Guidance Priority List," Rev. Proc. 2003-36 § 4.01, guided by factors such as "whether the requested guidance promotes sound tax administration." Id. § 4.02. Once an issue has been selected "as a published guidance project," an IIR team, consisting of agency counsel and other employees, is formed to provide analytical assistance. Id. § 6.01. The IIR team may request that private entities voluntarily participate and submit information to assist the team's analysis. Id. § 6.02.
In 2002, following a request by the Edison Electric Institute ("EEI"), which is a utility industry association, the Service initiated the IIR process to provide guidance on the "deduction and capitalization of costs incurred by utilities for assets used for power generation," and whether such incurred costs "are expenditures to maintain assets or capital improvements." IRS News Release 2002-89, 2002 WL 1492975 (July 10, 2002). (See also 2nd Dawson Decl., Ex. V.) According to defendant, this IIR process was "the precursor" to the process of developing a revenue ruling (Def.'s Reply in Supp. of SJ Mot. & Cross-Opp'n to Pl.'s Cross-Mot. for Summ. J. ("Def.'s Reply") at 12), which defendant defines as "an official interpretation by the Service of the Internal Revenue Code, related statutes, and regulations on how the law is applied to a specific set of facts." (Def.'s SJ Mot., Second Decl. of Matthew Cooper ("2nd Cooper Decl.") ¶ 35; accord Def.'s Reply at 9.) IRS attorneys Merrill Feldstein and Kimberly Koch were "primarily responsible" for drafting "the proposed guidance resulting from the IIR process." (2nd Cooper Decl. ¶ 8.) Feldstein and Koch were attorneys in the section of the Office of Chief Counsel ("OCC") "that currently has jurisdiction over tax accounting issues, including whether an item should be treated as capitalized costs or deductible repair." (Id.) The IIR team, consisting of Department of Treasury ("Treasury") and IRS personnel, "conducted fact-finding discussions with representatives of the utility industry" and invited their feedback. (Id. ¶ 34; Def.'s Reply, Third Decl. of Matthew Cooper ("3rd Cooper Decl.") ¶ 16; see also Def.'s Reply at 12; Pl.'s Opp'n at 29-30.) At least one industry representative, EEI, also offered the agency legal analysis in response to its questions. (See 2nd Dawson Decl., Ex. W (responses to questions 3, 4a, 12a, 12b, and 16).)
In 2005, after several years were spent "developing a proposed revenue ruling," executives in Treasury and the IRS Chief Counsel's office decided to end the revenue ruling process and work instead on proposed 2006 regulations for the capitalization of expenditures related to tangible assets. (2nd Cooper Decl. ¶ 32; see also Pl.'s Opp'n at 30-31.) The proposed revenue ruling was never published because defendant "decided to roll the IIR project into the proposed tangible regulations." (Pl.'s SMF ¶ 90; Def.'s Resp. to Pl.'s SMF ¶ 90.) Feldstein and Koch also appear to have been the principal drafters of these "proposed regulations regarding the capitalization of repair expense issue." (2nd Cooper Decl. ¶ 8.)
On April 7, 2008, plaintiff submitted a request for records under FOIA ("the FOIA request") to the IRS National Office, as well as the Service's FOIA disclosure offices in Chicago; Cincinnati, Ohio; and Jacksonville, Florida. (Pl.'s SMF ¶¶ 1, 3; see Compl., Ex. D ("FOIA Request").) The FOIA request sought eight categories of items related to IRS audit determinations regarding the method of accounting for expenditures on repairs to Florida Power's electric generation equipment:
(1) "[d]ocuments related specifically to the reasons for, or factual considerations in connection with," Williamson's determination not to allow Florida Power's April 10, 2001 protective request "for a change in the method of accounting for items of repair expense";
(2) "[a]ny and all directives to Revenue Agents (whether direct or indirect) regarding the disallowance of deductions of repair expenses in excess of the amounts claimed for financial accounting purposes" on Florida Power's consolidated tax returns;
(3) "[a]ny documents related to a final decision or basis for the final decision," "including the background files supporting the decision," not to allow Florida Power's 2001 request for a protective change in the method of accounting for repair item expenses;
(4) affidavits by Williamson and Northard that were described by Williamson in a May 30, 2002 letter, "along with any other files or factual background relating to the affidavits";
(5) "[t]he statement of final decision" (and background files supporting that decision, including studies or analyses by IRS employees or outside contractors on the agency's behalf) regarding the IIR process entitled "Costs of Maintaining and Improving Power Generating Assets" (reference number RR-108668-03), which related to repair expenses and capitalization;
(6) "[a]ny documents submitted by members of the electric utility industry" who participated in the IIR process;
(7) "[a]ll documents and records" related to the 2006 promulgation of proposed regulations regarding the capitalization of repair expenses; and
(8) "[a]l documents" containing the results of certain studies by IRS representatives or outside contractors. (See FOIA Request at 2-3.) The FOIA request specified that the documents sought could "likely be located" in the following offices or with certain individuals who had worked on the FPL tax litigation or other issues related to Florida Power:
the IRS National Office; the office of the LMSB Division's Associate Chief Counsel; Frank Genet, an agency technical advisor, or the agency's utility industry group in Akron, Ohio; Merkle and James Lanning, or the Service's counsel office in Chicago; Garcia-Pages, or the Service's counsel office in Miami, Florida; and Ben DeLuna, or the Service's counsel office in Jacksonville, Florida. (Id. at 1.)
That same day, plaintiff submitted a separate request under IRC § 6110 ("the first IRC request") for "background file documents" relating to "the preparation and issuance of written determinations designated as PLR 199903030 and AM 2006-006," including emails and telephone conferences notes. (Compl., Ex. B at 9 ("1st IRC Request").)
The next day, April 8, 2008, plaintiff submitted a second request under IRC § 6110 ("the second IRC request") for all "Chief Counsel Advice" relating to any IRS National Office directions regarding "the required treatment of items of cost as capitalized costs or deductible repairs for the consolidated returns" of FPL Group, including emails and telephone conference notes. (Compl., Ex. C ("2nd IRC Request") at 1.) This second IRC request was also defined to include materials sought by the FOIA request that might be subject to disclosure under the IRC rather than FOIA. (Id.)
In early June 2008, Brenda Ball and Janice Rudolph of the agency's disclosure offices in Jacksonville, Florida and Lanham, Maryland, respectively, began working on plaintiff's FOIA requests. (See Pl.'s SMF ¶ 9; Def.'s SMF ¶¶ 6, 13.) Ball reviewed agency records that referenced plaintiff's extensive audit and litigation history, and she contacted the individuals identified in the FOIA request, as well as Letkewicz, who had served as lead counsel in the Tax Court case. (Def.'s SMF ¶ 14; see Def.'s SJ Mot., Decl. of Brenda Ball ("Ball Decl.") ¶ 6.) On June 4, plaintiff's counsel James Dawson spoke with Ball and learned that she was working on the FOIA request and coordinating with Rudolph and the National Office.*fn2 (Pl.'s SMF ¶ 9; see Pl.'s Opp'n to Def.'s Mot. for Prot. Order ("Pl.'s Prot. Order Opp'n"), Decl. of James Dawson ("1st Dawson Decl.") ¶ 2; see also Def.'s SMF ¶ 13.) Ball explained to Dawson that she would be handling all items of the FOIA request except Item 7. (Def.'s SMF ¶ 14.) A week later on June 13, Ball informed Dawson that she had contacted the IRS counsel's Chicago office; sent emails to Garcia-Pages, Letkewicz, and Merkle; and contacted Genet, who told her that he was cleaning up his office and that any possibly responsive documents had already been destroyed. (Pl.'s SMF ¶ 10; see 1st Dawson Decl. ¶ 3.)*fn3 Thereafter, Ball received responsive documents from Letkewicz (on behalf of Merkle's office), from "other [IRS] employees," and from her requests pursuant to a search of plaintiff's tax return identification numbers. (Ball Decl. ¶ 7; Merkle Decl. ¶ 8.) Ball reviewed those documents for withholdings and redactions. (Ball Decl. ¶ 7.)
On July 31, 2008, defendant wrote to plaintiff regarding the second IRC request. (See Pl.'s Opp'n, Decl. of James Dawson ("2nd Dawson Decl."), Ex. C.) The letter stated that defendant was busy developing internal record-keeping measures to implement the D.C. Circuit's ruling in Tax Analysts v. IRS ("Tax Analysts III"), 495 F.3d 676 (D.C. Cir. 2007) (holding that informal advice emailed by attorneys in IRS OCC to field personnel constitutes Chief Counsel Advice that must be disclosed under IRC § 6110). (See 2nd Dawson Decl., Ex. C at 2.) Defendant explained that as a result, the agency was presently "unable to divert its attention from this effort, which [was] under the court's supervision, in an effort to isolate any email" that may have been responsive to the second IRC request. (Id.)
On August 6, 2008, Ball informed Dawson that defendant was sending plaintiff some documents, but also that "she was 'not getting responses from her requests.'" (1st Dawson Decl. ¶ 4; Pl.'s SMF ¶ 12.)*fn4 By letter dated August 8, 2008, plaintiff received a total of 318 pages from Ball. (See Ball Decl., Ex. A at 2.) These pages were responsive only to Items 1, 3, and 4 of the FOIA request, because Ball had "found no documents specifically responsive" to Items 2, 5, 6, or 8, and because the National Office would address Item 7. (Id., Ex. B at 1-2; see also Pl.'s SMF ¶ 13.)*fn5
By letter dated September 3, 2008, defendant informed plaintiff that all documents responsive to the first IRC request for written determination PLR 199903030 were destroyed pursuant to record retention procedures. (See Def.'s SJ Mot., First Decl. of Matthew Cooper ("1st Cooper Decl."), Ex. A.) Several months later, by letter dated February 9, 2009, defendant responded to the first IRC request for background documents related to AM 2006-006. (Pl.'s SMF ¶ 16; see 2nd Dawson Decl., Ex. D.) The letter explained that no responsive documents had been found under the IRC, but defendant nonetheless located 375 pages that were responsive under FOIA. (2nd Dawson Decl., Ex. D at 1-2.) Of these, 299 were withheld in full under various FOIA exemptions; 39 pages were disclosed in full, including the AM 2006-006 memorandum and various emails; and 36 pages of emails were disclosed with various ...