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Nature of Suit Code: 895
Nature of Suit: Freedom of Information Act of 1974
Cause of Action: 

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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.

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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 “subleases” 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

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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 crossmotions 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 investigations 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.

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“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.

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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

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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 gardenvariety legal analysis, it does not fall under exemption 7(E).

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

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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

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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.

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