D.C. Circuit: Tax Settlement Information on LILO Arrangements Exempted from Disclosure under FOIA

Holding:

In this appeal, appellant Mayer Brown LLP and appellee Internal Revenue Service (“IRS”) disputed whether disclosure of certain 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 and § 552(b)(7)(E). On cross-motions for summary judgment, the U.S. District Court for the District of Columbia held the settlement information is covered by FOIA exemption 7(E). On appeal, the U.S. Court of Appeals for the District of Columbia Circuit affirmed, stating that the information falls within the FOIA exemption because the disclosure of such information could risk circumvention of the law. The D.C. Circuit explained that although the settlement guidelines requested are not “how to” manuals for law-breakers, the exemption under 7(E) clearly protects information that would train potential violators to evade the law or instruct them how to break the law. In this regard, the D.C. Circuit held that 7(E) exempts from disclosure information that could increase the risks that a law will be violated or that past violators will escape legal consequences. Accordingly, the D.C. Circuit concluded that although the information here does not necessarily provide a blueprint for tax shelter schemes, it could encourage decisions to violate the law or evade punishment.

Detailed Summary:

The sole issue in this case is whether the information requested by Mayer Brown meets FOIA exemption 7(E).

By way of background, the FOIA request in this case involved 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…

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