Facebook, Inc. v. Internal Revenue Serv., Case No. 16-cv-05884-LB

• Decision Date: 19 June 2017
• Docket Number: Case No. 16-cv-05884-LB
• Court: U.S. District Court — Northern District of California
• Parties: FACEBOOK, INC. AND SUBSIDIARIES, Plaintiff, v. INTERNAL REVENUE SERVICE, Defendant.

FACEBOOK, INC. AND SUBSIDIARIES, Plaintiff,
v.
INTERNAL REVENUE SERVICE, Defendant.

Case No. 16-cv-05884-LB

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA San Francisco Division

June 19, 2017

ORDER GRANTING IRS'S SUMMARY-JUDGMENT MOTION; DENYING FACEBOOK'S MOTION TO COMPEL

Re: ECF Nos. 28 & 38

INTRODUCTION

This is a Freedom of Information Act ("FOIA") case regarding the IRS's audit of Facebook's 2008-2010 tax years.¹ Facebook disagrees with the results of the audit, which increased its 2010 income by $84,915,248, and so it challenged the IRS's determination in Tax Court and separately requested audit-related documents through two FOIA requests. After the government requested a FOIA response-deadline extension, Facebook sued the IRS to compel the production of responsive documents. The IRS has since produced thousands of pages of documents.

Facebook now moves to compel production of electronic, native-form documents that contain metadata.² The IRS moves for partial summary judgment on that request, though, because it says

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Facebook did not ask for such documents in its FOIA requests and thus did not exhaust its administrative remedies.³

The court held a hearing on the motions on June 15, 2017. The court grants the IRS's motion because Facebook did not exhaust its administrative remedies with respect to its request for electronic documents and metadata. The court denies Facebook's motion to compel. This order also documents the IRS's agreements about the form of production.

STATEMENT

The IRS audited Facebook's 2008, 2009, and 2010 tax years.⁴ The audit focused "on the 'transfer price' at which Facebook licensed certain technology and other intangibles to [its] Irish affiliate."⁵ And it resulted in a July 2016 notice of deficiency, in which the IRS alleged "that the intangible property transferred . . . had a net present value of $13,883,630,000, thereby increasing Facebook's income in 2010 by $84,915,248."⁶ The IRS determined that Facebook had an income-tax deficiency.⁷

According to Facebook, the IRS "did not provide any economic analysis or otherwise express its position."⁸ So, Facebook sued the IRS in Tax Court "by filing a Petition for a redetermination of its deficiency," and separately sought audit-related documents through FOIA — the subject of this litigation.⁹

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1. Facebook's Initial FOIA Requests

Facebook submitted two FOIA requests in August 2016: one to the IRS's Washington, D.C. Disclosure Office (the "National Office Request"); and one to the IRS's San Jose Disclosure Office (the "Examination Division Request").¹⁰ In the National Office Request, Facebook requested:

1. All documents contained in the administrative file, legal file, or other files of the IRS National Office or Area Counsel relating to any request for field service advice, technical assistance, or other advice in connection with the tax audit of Facebook for its 2008, 2009, and 2010 tax years, whether maintained in electronic or hard copy.
2. All communications, including e-mails, involving members of the IRS National Office, Area Counsel, or any other IRS employees or contractors, regarding, referring, or relating to the audit of Facebook's 2008, 2009, and 2010 tax years, whether maintained in electronic or hardcopy format.¹¹

And in the Examination Division Request, Facebook requested:

1. All documents contained in the Examination Division's administrative files for Facebook for 2008, 2009, and 2010, including but not limited to any of the following items described in the Internal Revenue Manual, whether maintained in electronic or hardcopy format . . . .
2. All communications, including e-mails, involving the members of the IRS Examination Team for Facebook, or any other IRS employees or contractors, regarding, referring, or relating to the audit of Facebook's 2008, 2009, and 2010 tax years, whether maintained in electronic or hardcopy format.
3. All documents constituting any Tax Litigation Division Legal File, Tax Litigation Advice File, Miscellaneous Law File, Chief Counsel Office Files, or Regional Counsel Office Files for Facebook's 2008, 2009, and 2010 tax years, whether maintained in electronic or hardcopy format.
4. All documents contained in the administrative files of the IRS National Office and Area Counsel relating to any request for field service advice, technical assistance, or other advice in connection with the tax audit of Facebook for 2008, 2009, and 2010.¹²

The IRS initially replied in two letters in September 2016.

First, on September 7, the IRS said that it would not be able to respond to the requests within the 20-day statutory time limit.¹³ The IRS extended the deadline by 10 days (as permitted by FOIA), requested from Facebook an additional extension (to December 8, 2016), and informed

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Facebook that it could file suit after September 22, 2016 (i.e. if Facebook did not agree to the December 8 extension).¹⁴

Second, on September 23, the IRS explained that the search for responsive documents was "expected to take at least 3-4 months to be completed and [was] expected to result in a massive number of records, which [would] take an extended period of time to review."¹⁵ The IRS also estimated an initial cost of $19,598 to process Facebook's request, and demanded advance payment.¹⁶ Facebook made the payment.¹⁷

Facebook did not, however, wait for the IRS's requested December 8 deadline. It instead filed this case on October 11, "seek[ing] the production of documents and records" that it asserts the IRS improperly withheld.¹⁸ As of that time, the IRS had not released any responsive documents¹⁹

2. The IRS's Disclosures to Date

Since Facebook filed suit, though, the IRS has produced documents in six batches between November 28, 2016, and March 29, 2017.²⁰ In total, the IRS "has collected approximately 1.9 million documents to respond to [Facebook's] FOIA requests," approximately 320,000 of which are potentially responsive.²¹ And "the IRS has reviewed and released over 68,000 pages of records to [Facebook] since commencement of this action."²²

Those documents included "Facebook's tax returns and documents provided by Facebook to the IRS during the 2008-2010 tax audit."²³ For example, the IRS released a 16,000-page PDF

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Excel spreadsheet that Facebook had previously given to the IRS.²⁴ But, Facebook says, it "is wholly unable to discern what edits, changes, or comments the IRS may have made to the file because it is impossible to reconstruct the file from more than 16,000 pages of gibberish."²⁵

During January-March 2017, Facebook discussed with the IRS "its request for certain native electronic files in the format in which the IRS maintains them along with email that includes a standard load file with typical email metadata."²⁶ But the IRS refused to "provide files in the electronic form in which [it] maintains [them]," or to "provide email in a standard load file with typical metadata."²⁷ The IRS says that "[t]he metadata sought by [Facebook] in this case almost certainly includes information that is statutorily exempt and/or prohibited from disclosure."²⁸ "The IRS cannot release metadata to [Facebook] — whether in a native file format with retained metadata or as part of a separate load file — without first reviewing the metadata to ensure that the material is not exempt from disclosure."²⁹

3. Facebook's Pending Requests for Electronic, Native-Form Documents

Facebook's requests for electronic documents (or, alternatively, "load files") and related metadata are the subject of the current dispute.

Facebook moves to compel the IRS's release of those documents and data.³⁰ Specifically, Facebook seeks an order compelling the IRS to produce (1) "spreadsheet (e.g., Microsoft Excel), word processing document (e.g., Microsoft Word), and presentation (e.g., Microsoft PowerPoint) files that the IRS maintains in electronic format in their native electronic form;" and (2) "emails in

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the electronic format in which the IRS maintains them, or, if the IRS elects, in a standard 'load file' with typical metadata."³¹

The IRS moves for partial summary judgment and argues (among other things) that Facebook's initial FOIA requests did not ask for electronic, native-form documents, and thus this court lacks jurisdiction because Facebook did not exhaust its administrative FOIA remedies.³²

The court held a hearing on the parties' motions on June 15, 2017.

GOVERNING LAW

1. Summary-Judgment Standard

The court must grant a motion for summary judgment if the movant shows that there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). Material facts are those that may affect the outcome of the case. Anderson, 477 U.S. at 248. A dispute about a material fact is genuine if there is sufficient evidence for a reasonable jury to return a verdict for the non-moving party. Id. at 248-49.

The party moving for summary judgment has the initial burden of informing the court of the basis for the motion, and identifying portions of the pleadings, depositions, answers to interrogatories, admissions, or affidavits that demonstrate the absence of a triable issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). To meet its burden, "the moving party must either produce evidence negating an essential element of the nonmoving party's claim or defense or show that the nonmoving party does not have enough evidence of an essential element to carry its ultimate burden of persuasion at trial." Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Cos., Inc., 210 F.3d 1099, 1102 (9th Cir. 2000); see Devereaux v. Abbey, 263 F.3d 1070, 1076 (9th Cir. 2001) ("When the nonmoving party has the burden of proof at trial, the moving party need

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only point out 'that there is an absence of evidence to support the nonmoving party's case.'") (quoting Celotex, 477 U.S. at 325).

If the moving...