United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 6, 2009 Decided April 17, 2009
No. 08-5143
MAYER BROWN LLP, FORMERLY DOING BUSINESS AS
MAYER, BROWN, ROWE & MAW LLP,
APPELLANT
v.
INTERNAL REVENUE SERVICE,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 1:04-cv-02187)
Thomas C. Durham argued the cause for appellant. With
him on the briefs was Adam C. Sloane.
Jonathan S. Cohen, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the briefs were
Nathan J. Hochman, Assistant Attorney General, Jeffrey A.
Taylor, U.S. Attorney, and John A. Schumann, Attorney. R.
Craig Lawrence, Assistant U.S. Attorney, entered an
appearance.
Before: HENDERSON, BROWN, and GRIFFITH, Circuit Judges.
Opinion for the Court filed by Circuit Judge BROWN.
2
BROWN, Circuit Judge: In this appeal, the parties dispute
whether disclosure of certain Internal Revenue Service (“IRS”)
settlement information could risk “circumvention of the law” —
a category exempted from disclosure under the Freedom of
Information Act (“FOIA”), 5 U.S.C. § 552. Id. § 552(b)(7)(E).
On cross-motions for summary judgment, the district court held
the settlement information is covered by FOIA exemption 7(E).
Because the disclosure of such information could risk
circumvention of the law, we find the information falls within
the FOIA exemption and therefore affirm the ruling of the
district court.
I. Background
The FOIA request in this case involves lease-in/lease-out
(“LILO”) arrangements between tax-exempt entities and taxable
entities. LILO arrangements occur when a tax-exempt entity
owns and uses property but shifts significant tax deductions by
signing a long-term lease with a taxable entity, reserving the
right to cancel the lease. The tax-exempt owner then “sub-
leases” the property back from the taxable entity. Arguably, the
only purpose of the LILO scheme is to reduce the tax burden of
the taxable entity, who otherwise has no ownership interest in
the property.
In 1999, the IRS disallowed deductions based on LILO
schemes. In 2004, Congress made LILOs illegal, but the statute
had only prospective effect. See 26 U.S.C. § 470. The IRS
continues to audit taxpayers engaged in LILO transactions and
disallows the reported deductions. Many of these cases are
settled.
In 2004, Mayer Brown LLP filed a FOIA request for
various information relating to the IRS’s LILO settlement
practices. Through the course of litigation, the IRS turned over
3
numerous documents, and the parties resolved almost all other
issues by agreement. The only remaining issue concerns one
small class of information, described by the district court as
“settlement strategies and objectives, assessments of litigating
hazards, [and] acceptable ranges of percentages for settlement.”
Mayer Brown v. IRS, No. 04-2187, slip op. at 3 (D.D.C. Nov.
28, 2006) (order granting motion for clarification). On cross-
motions for summary judgment and after reviewing the
information in camera, the district court held that the IRS does
not have to turn over the remaining settlement information
because FOIA exemption 7(E) applies.
II. Discussion
The sole issue in this case is whether the information
requested by Mayer Brown meets FOIA exemption 7(E). That
exemption states, in relevant part:
(b) This section [i.e., mandatory FOIA disclosure]
does not apply to matters that are . . .
(7) records or information compiled for law
enforcement purposes, but only to the extent
that the production of such law enforcement
records or information . . .
(E) . . . would disclose guidelines for law
enforcement i nvestigations or
prosecutions if such disclosure could
reasonably be expected to risk
circumvention of the law.
5 U.S.C. § 552(b) (emphasis added). Of the several
requirements under exemption 7(E), the only one disputed by
the parties is whether disclosure of the information “could
reasonably be expected to risk circumvention of the law.” Id.
4
“Circumvent” is nowhere defined in the statute; Webster’s
defines the word as “[t]o avoid by or as if by passing around.”
WEBSTER’S II NEW COLLEGE DICTIONARY 209 (3d ed., 2005).
The breadth of the phrase “circumvention of the law”
encompasses more than direct violations. While using
information to violate the law is one example of circumvention,
it is also circumvention of the law to evade punishment after
committing a violation. Thus, for instance, circumvention of the
law includes both the person who violates the law and the
fugitive who escapes the consequences of a previous violation.
See United States v. Arias, No. 94-3011, slip op. at 1 (D.C. Cir.
Mar. 25, 1995) (affirming enhancement of sentence because the
defendant was a fugitive for two years after the initial criminal
violation).
Used in a general way, “the law” encompasses both
prohibitions against certain behaviors as well as the legally
prescribed consequences for violations. Indeed, many statutes
both define a violation and describe the applicable punishment.
See, e.g., 26 U.S.C. § 7201 (“Any person who willfully attempts
in any manner to evade or defeat any tax . . . shall, in addition to
other penalties provided by law, be guilty of a felony and, upon
conviction thereof, shall be fined not more than $100,000 . . . or
imprisoned not more than 5 years, or both . . . .”). What
constitutes circumvention varies, depending on the kind of
prohibition and the enforcement mechanisms involved.
A.
Exemption 7(E) shields information if “disclosure could
reasonably be expected to risk circumvention of the law.” 5
U.S.C. § 552(b)(7)(E). If the FOIA request here sought a
checklist used by agents to detect fraudulent tax schemes or the
words most likely to trigger increased surveillance during a
wiretap, the applicability of the exemption would be obvious.
5
But enforcement of the tax laws, a largely self-policed
obligation, depends heavily on the personal probity of taxpayers
and the deterrent effect of severe and certain sanctions. And, as
a slew of high profile cases have recently demonstrated,
compliance will often be delayed until enforcement (or
unfavorable exposure) is imminent.
Presumably, the importance of deterrence explains why the
exemption is written in broad and general terms. It does not
simply apply when information will definitely lead to
circumvention of the law. The IRS does not have to prove that
circumvention is a necessary result; the statute exempts
information that would “risk circumvention of the law.” 5
U.S.C. § 552(b)(7)(E) (emphasis added). Showing a risk, of
course, is a lower standard than showing a certainty. But the
statute does not stop there. Rather than requiring the IRS to
prove a risk of circumvention, the statute exempts information
that would “be expected to risk circumvention of the law.” Id.
(emphasis added). Risk of circumvention is not required —
only an expectation of such a risk. Moreover, this expectation
of a risk of circumvention need not be undeniable or universal;
the risk need only be “reasonably” expected. Id. (emphasis
added). Adding a final strike against a rigidly narrow
interpretation, the exemption does not force the IRS to show this
reasonably expected risk with certainty — only that disclosure
“could reasonably be expected” to create such a risk. Id.
(emphasis added).
In short, the exemption looks not just for circumvention of
the law, but for a risk of circumvention; not just for an actual or
certain risk of circumvention, but for an expected risk; not just
for an undeniably or universally expected risk, but for a
reasonably expected risk; and not just for certitude of a
reasonably expected risk, but for the chance of a reasonably
expected risk. The settlement guidelines requested here
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certainly meet this threshold as information that “could
reasonably be expected to risk circumvention of the law.” Id.
Although the settlement guidelines requested are not “how
to” manuals for law-breakers, the exemption is broader than
that. Exemption 7(E) clearly protects information that would
train potential violators to evade the law or instruct them how
to break the law. But it goes further. It exempts from disclosure
information that could increase the risks that a law will be
violated or that past violators will escape legal consequences.
Though the information here does not necessarily provide a
blueprint for tax shelter schemes, it could encourage decisions
to violate the law or evade punishment.
B.
Tax evasion (like many crimes, to varying degrees) involves
a cost-benefit analysis on the part of the law-breaker.
Information about acceptable settlement ranges quite clearly
affects the cost-benefit analysis of potential evaders because it
informs their economic calculus. Some potential evaders, upon
learning the range of settlement percentages, may decide that the
range is low enough to make evasion an appealing gamble. In
this way, disclosure of the information can create an incentive
for increased evasion. For example, suppose hypothetically the
requested information revealed that the IRS’s acceptable
settlement range goes as low as 35% of the amount due, and a
potential evader expects to gain a greater sum through an illegal
tax scheme. Equipped with this information, the potential
evader might decide the risk of a 35% settlement is low enough
to gamble and violate the tax laws.
Similar reasoning applies to other categories of information
at issue. Litigation hazards may include types of illegal tax
shelters the IRS does not have the resources to pursue, situations
7
which make witnesses unsympathetic or hard to find, or
practical complications for investigating certain types of
schemes. A potential evader who is made aware of the IRS’s
perceived litigation hazards will know how to best structure an
evasion so as to avoid the maximum enforcement efforts of the
IRS. Knowing how to evade in a way the IRS deems more
difficult to detect or prosecute also enters into the cost-benefit
analysis of a potential evader; a person with such knowledge
may feel emboldened because she believes she can execute a
scheme the IRS will be loathe to prosecute.1
Mayer Brown points out that Congress prohibited LILO
transactions in 2004. Because, they argue, the 2004 statute will
effectively eliminate all LILO arrangements, disclosure presents
no danger. Of course, this argument ignores the limitless
ingenuity of lawyers and accountants when it comes to tax
shelters. Returning to the example above, if a potential evader
knows that the IRS’s acceptable settlement range goes as low as
35% for LILO arrangements, she might infer that a similar range
would apply to a slightly different tax model. The LILO
settlement ranges could be used as a baseline or a reference
point for analogous schemes. Indeed, the IRS has estimated the
existence of “almost 400 SILO transactions” (an arrangement
very similar to LILOs) representing “claimed tax deductions in
excess of 35 billion dollars” as evidence of the potential use of
LILO settlement information for other schemes. J.A. at 140.
The information about settlement ranges for LILO transactions
may enter into the cost-benefit analysis for other tax shelters
and, in some cases, could convince potential evaders that a
1
Of course, we recognize “[m]aterial like [discussion and digests
of useful caselaw] is precisely the type of information appropriate for
release under the FOIA.” PHE, Inc. v. DOJ, 983 F.2d 248, 251–52
(D.C. Cir. 1993). Where the information is nothing more than garden-
variety legal analysis, it does not fall under exemption 7(E).
8
questionable scheme is worth the risk.
Mayer Brown urges this Court to adopt an extremely
narrow interpretation of the exemption, arguing the IRS has a
high burden to specifically prove how the law will be
circumvented. We are aware the language of FOIA’s
exemptions “must be narrowly construed.” Dep’t of Air Force
v. Rose, 425 U.S. 352, 361 (1976). But broad language — even
when construed narrowly — is still broad language. Although
some FOIA exemptions set a high standard, see, e.g., 5 U.S.C.
§ 552(b)(6) (requiring the agency to show “a clearly
unwarranted invasion of personal privacy”), the text of
exemption 7(E) is much broader. In matters of statutory
construction, the text is our primary guide. See Sierra Club v.
EPA, 536 F.3d 673, 679 (D.C. Cir. 2008). Rather than requiring
a highly specific burden of showing how the law will be
circumvented, exemption 7(E) only requires that the IRS
“demonstrate[] logically how the release of [the requested]
information might create a risk of circumvention of the law.”
PHE, Inc. v. DOJ, 983 F.2d 248, 251 (D.C. Cir. 1993). The IRS
has logically shown how a risk of circumvention might result;
Mayer Brown’s desire for an even narrower reading is simply
not supported by the text.
In addition to potential future violators who may be
encouraged to evade, those who have already evaded the tax
laws (either through questionable lease transactions or other
conduct) may use the information when deciding whether to
come forward — a different but equally rational cost-benefit
analysis, factoring in the degree of risk, the likelihood of
enforcement, and other factors. If a tax cheat knows the IRS’s
acceptable settlement ranges, and if her liability is substantial,
she might decide the ranges are so high that it is better to remain
in hiding. If the consequences of confession seem especially
harsh, a past evader may feel every effort must be undertaken to
9
cover up the violation. If her efforts actually impede
investigation or prosecution, not only has she circumvented the
law by avoiding the legally prescribed consequences of her
evasion, but she has also violated an additional law by
obstructing justice. See, e.g., 18 U.S.C. § 1503 (prohibiting
attempts “to influence, obstruct, or impede, the due
administration of justice”). The information about settlement
goals, litigation hazards, and settlement ranges is just another
factor in an evader’s cost-benefit calculation about whether to
cooperate.
Mayer Brown insists the term “circumvention of the law”
applies only to future conduct. Thus, a disclosure that merely
inhibits expiation for past conduct — a circumvention which has
already occurred — does not implicate exemption 7(E). But
even if we accept Mayer Brown’s premise that exemption 7(E)
is solely forward-looking, there is a logical flaw in its argument.
Information that encourages a past violator to remain in hiding
affects that violator’s decisions in the future. The fact that a tax
evader has circumvented the law in the past does not mean she
cannot also circumvent the law in the future by avoiding the
legally proscribed consequences of her actions. The decision to
evade the legal consequences of the initial violation is not just
made once; it is a decision that is made anew when there is
additional information. If the disclosed information reveals
severe costs in coming forward, it may influence future conduct,
satisfying even Mayer Brown’s assumption that the exemption
is only forward-looking.
C.
The consequences of a contrary interpretation of exemption
7(E) highlight the problem. In this case, companies using LILO
schemes would love to have information about the IRS’s
objectives of settlement, assessment of litigation hazards, and
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acceptable ranges for settlement. Why? Because this
information would inform their cost-benefit analysis about the
advantages of evading the law. Constructing a phony tax shelter
may only be worthwhile if the IRS’s acceptable settlement range
is below 80% of the tax liability. Once armed with
(hypothetical) information that the IRS’s acceptable settlements
are between 60% and 75%, a questionable tax scheme becomes
viable. Even a failure may be a win. And, once also armed with
information about which cases the IRS does not like to litigate,
the illegal tax shelter can be designed to minimize the chances
of litigation or the likelihood of sanctions.
In other analogous contexts, similar information could be
sought. Everyone seeking to minimize tax liability — not just
LILO users — would love to have all of the IRS’s guidelines for
all other schemes to learn when the agency is likely to seek
enforcement versus when the agency views the specific context
as too difficult to litigate because of concerns about lack of
agency resources for certain types of cases, unsympathetic
witnesses, or complicated investigation requirements. Once
equipped with information about settlement guidelines for all tax
evasion schemes, particularly crafty evaders could plan their
behavior to maximize the litigation hazards for the IRS and
evade tax laws when, based on the settlement ranges, it was
economically beneficial for them to do so.
Outside of the tax context, corporations would request
settlement information from the Antitrust Division at the
Department of Justice, so they could know exactly which kinds
of illegal transactions are likely to draw the enforcement wrath
of DOJ. Knowledge of settlement ranges would foster an
accurate calculation of the risks and benefits of potential illegal
transactions; this knowledge would inspire illegal conduct when,
based on settlement information, such conduct proved to be
economically rational. Criminal defendants, too, would love to
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have access to the settlement guidelines from their local U.S.
Attorney’s office. Information about likely ranges of plea offers
would not only provide leverage to push for a more lenient deal
(for instance, by giving the defendant knowledge about when a
prosecutor may be bluffing), but it would also enter into the ex
ante cost-benefit calculus of soon-to-be criminals when deciding
whether to break the law in the first place.
All of these examples deal with information that could
increase the risk of circumvention of the law. Although other
exemptions may cover such information as well — see, e.g., 5
U.S.C. § 552(b)(5) (exempting from disclosure “inter-agency or
intra-agency memorandums or letters” which meet certain
requirements) — we need not decide whether other exemptions
also apply. As the above examples illustrate, under the most
sensible interpretation of exemption 7(E), disclosure of
settlement guidelines can increase the risk of circumvention of
the law; reading the statutory language otherwise stretches any
reasonable meaning out of the text.
While there may be some legitimate uses of the requested
information, the potential for misuse amply supports the IRS’s
argument for exemption. People prepared to do the right thing
would simply negotiate in good faith. Disclosure in this case
would clearly be of enormous benefit to potential evaders and
past violators hoping to escape punishment. FOIA exemption
7(E) covers these circumstances, exempting disclosure when the
information “could reasonably be expected to risk
circumvention of the law.” Settlement guidelines fall squarely
within this category, and, therefore, the information requested in
this case is not subject to mandatory disclosure.
The ruling of the district court is affirmed.
So ordered.