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Montgomery v. Internal Revenue Service

United States District Court, District of Columbia

February 20, 2018




         Some on the street say snitches get stitches, but in this case they become the subject of Freedom of Information Act requests. As America gears up for another tax season, Plaintiffs Thomas and Beth Montgomery are still concerned about a dispute with Defendant Internal Revenue Service stemming from the early aughts. The controversy began when the IRS adjusted certain pass-through losses Plaintiffs had claimed on their joint tax returns, deeming them the result of sham partnership deductions. The Montgomerys have since embarked on a quest to deduce who, if anyone, tipped off the Service as to the nature of the partnerships.

         This FOIA case is the latest chapter in that pursuit. The Montgomerys seek twelve categories of records, which the IRS asserts either do not exist or are being withheld pursuant to a valid exemption. Before asking the Court to reach those issues, however, Defendant brings this preliminary Motion for Summary Judgment, arguing that the Montgomerys' claims are either barred by a settlement agreement between the parties or by the twin doctrines of collateral estoppel and res judicata. For the reasons explained below, the Court disagrees and will deny the Motion.

         I. Background

         A. Factual History

         The underlying saga between the parties is largely immaterial to the Court's decision, but some recitation is nonetheless necessary to understand the dispositive issues.

         In 2001 and 2002, Thomas Montgomery had a hand in the formation of several partnerships, at least two of which came under IRS scrutiny - Southgate Master Fund and Bemont Investments. The way that these two entities were set up made them “tax-friendly investment vehicle[s].” Southgate Master Fund, LLC v. United States, 659 F.3d 466, 475 (5th Cir. 2011); Bemont Invs., LLC v. United States, 2010 WL 3057437, at *6 (E.D. Tex. 2010), aff'd in part, rev'd in part, Bemont Invs., LLC v. United States, 679 F.3d 339 (5th Cir. 2012). In fact, both partnerships were structured in such a way that they were able to report tax losses without the partnerships (and, by extension, the partners) experiencing any real economic loss. See Southgate Master Fund, LLC v. United States, 651 F.Supp.2d 596, 598 (N.D. Tex. 2009); Bemont, 679 F.3d at 347. Because of the way partnership losses are treated in the Internal Revenue Code, however, each year when the LLCs filed their returns and listed losses, Montgomery (and his wife, as a joint filer) were also able to take a loss against their individual income for the year. Like most things that seem too good to be true, the partnership-loss deductions eventually caught up with the Montgomerys.

         Beginning in 2006, the IRS began issuing a series of “final partnership administrative adjustments” (FPAAs) to the Montgomerys' various partnerships covering tax years 2001 to 2010. See Bemont, 679 F.3d at 343; Southgate, 651 F.Supp.2d at 638-39; Montgomery v. United States, No. 13-2926 (N.D. Tex.), ECF No. 1 (Complaint), ¶¶ 16-20. “An FPAA is the partnership equivalent of a statutory notice of deficiency to an individual or non-partnership entity.” Bemont, 679 F.3d at 341. The IRS determined that the Plaintiffs' partnerships were shams and, accordingly, disallowed the losses the Montgomerys had claimed on their individual tax returns. Id. at 341-42.

         Bemont and Southgate (thorough Thomas Montgomery and other partners) subsequently brought two suits against the United States seeking readjustment of the FPAAs, but with mixed results. In both cases, courts upheld the IRS's determination that the partnerships were a sham and that the FPAAs were thus properly issued. Id. at 347; Southgate, 659 F.3d at 483. In Southgate, however, the Fifth Circuit also held that the underlying business activity was “an economically substantial transaction motivated by a genuine business purpose.” 659 F.3d at 483. Based on this holding, on July 26, 2013, the Montgomerys again sued the United States, seeking a refund of taxes, interest, and penalties assessed by the IRS. See Montgomery, No. 13-2926, Compl., ¶ 1. Along with their Complaint, they filed a Notice of Related Cases, listing twelve suits, eleven of them pending at the time. Id., ECF No. 3. The court consolidated the cases and set a discovery schedule.

         A few months after the close of discovery, the parties entered into a Settlement Agreement on November 6, 2014, which was expressly “intended to fully and finally resolve all ongoing disputes between [redacted], Montgomery, and the IRS related to the Southgate, Southbrook, Classic Paragon, and Pinnacle partnerships in the pending lawsuits.” MSJ, Exh. B at 2, 4-5. The scope of this language is pivotal to resolving the current Motion, as is discussed below. Following the Agreement, the court entered judgment for the Montgomerys, ordering the IRS to refund them $485, 588 plus interest. See Montgomery, No. 13-2926, ECF No. 35.

         B. Procedural History

         Having settled or litigated thirteen cases, the IRS thought it was at last clear of Plaintiffs. Wishful thinking. On May 6, 2016, the Montgomerys sent separate but virtually identical FOIA requests to the Service. See Compl., ¶¶ 16, 21; id., Exhs. A, C. The twelve requests sought two types of documents: items 1 through 5 solicited various IRS forms used when a matter involves a whistleblower or confidential informant, and items 6 through 12 asked generally for any lists, documents, or correspondence referencing the Montgomerys' tax liability or the transactions that were at issue in Southgate and Bemont. Id., ¶¶ 16, 21. On August 18, 2016, the Service sent Plaintiffs its determination, which (1) claimed FOIA exemption 7(D) for items 1 to 5 and (2) stated it had found no responsive documents for items 6 to 12. Id., Exh. E. The Montgomerys timely submitted an administrative appeal, which was denied, citing the same reasons as the August 2016 letter. Id., Exhs. F, H. Plaintiffs now bring this suit, alleging that the IRS violated FOIA and the APA by withholding the requested documents. Id., ¶¶ 60-68. The IRS, in conjunction with filing this Motion for Summary Judgment, sought to stay briefing on the merits of the claims because it believes preliminary issues dispose of the case. See ECF No. 14. The Court granted that stay, see Minute Order of Nov. 6, 2017, and the parties' briefing on these threshold issues is now ripe.

         II. Legal Standard

         Summary judgment may be granted if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A fact is “material” if it is capable of affecting the substantive outcome of the litigation. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute is “genuine” if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. See Scottv. Harris, 550 U.S. 372, 380 (2007); Liberty Lobby, 477 U.S. at 248. “A party asserting that a fact cannot be or is genuinely disputed must support the assertion” by “citing to particular parts of materials in the record” or “showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.” Fed.R.Civ.P. 56(c)(1). The moving party bears the burden of demonstrating the absence of a genuine issue of material fact. See ...

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