In a unanimous decision, the Appellate Division affirmed a decision of the Supreme Court, Albany County, which had upheld the New York State Department of Taxation and Finance's partial denial of a taxpayer's Freedom of Information Law ("FOIL") requests. Matter of Moody's Corp. and Subsidiaries v. New York State Dep't of Taxation & Fin., et al., 2016 N.Y. Slip Op. 05612 (3d Dep't, July 21, 2016). The Appellate Division also reversed the lower court's decision to the extent that it had directed the Department to release certain additional documents.

Background. Moody's Corp., a credit rating agency, had filed FOIL requests with the Department seeking the audit file relating to an Article 9-A audit of Moody's, and all records "relating to the sourcing of credit rating receipts for tax years 2004 to present." The Department released certain responsive records, including portions of the Moody's audit file, but ultimately withheld several hundred pages as exempt from disclosure and released redacted versions of certain other documents. These withheld records included emails, draft agreements, a final closing agreement, draft correspondence, and correspondence from and regarding Moody's and non-party taxpayers, as well as other relevant documents.

Moody's challenged the Department's partial denial of its FOIL requests initially by commencing an Article 78 proceeding in the Supreme Court, Albany County. In response, the Department submitted to the Supreme Court judge for review two privilege logs (that do not appear to have previously been furnished to Moody's) and the documents that it had withheld or redacted. After conducting an in camera review, the judge held that an additional 13 unredacted pages and four redacted pages should have been provided to Moody's, but otherwise upheld the Department's FOIL denial. Both Moody's and the Department appealed.

Exemption for Tax Secret Documents. The New York State Freedom of Information law is contained in the Public Officers Law ("POL"). POL 87(2)(a) provides that records that "are specifically exempted from disclosure by state or federal statute" are not subject to disclosure under FOIL. As is relevant here, Tax Law 211(8)(a) provides that

"it shall be unlawful for any tax commissioner [or] any officer or employee of the [Department]; . . . to divulge or make known in any manner the amount of income or any particulars set forth or disclosed in any report under [Tax Law Article 9-A]."

Exemption from Disclosure for Intra-/Inter-Agency Materials. POL 87(2)(g) exempts from disclosure intra- or inter-agency materials that are not "statistical or factual tabulations or data, . . . instructions to staff that affect the public," or "final agency policy or determinations." Under the prevailing case law, this exemption from disclosure generally applies to records that are deliberative, i.e., communications exchanged for discussion purposes not constituting final policy decisions.

Appellate Division Decision. After reviewing in camera documents withheld by the Department pursuant to POL 87(2)(a) because they were protected by tax secrecy, the Appellate Division found that those documents were properly withheld. In so holding, the court determined that the tax secrecy provisions of Tax Law 211(8) are not limited to the tax returns themselves, but extend to "any document that reflects information included in a return." The Appellate Division rejected the argument made by Moody's that otherwise tax secret documents should be released in redacted form to protect confidentiality, and reasoned that to hold otherwise would contravene the purposes of the statute: to protect personal privacy interests and to encourage voluntary compliance with the tax laws by preventing use of return information to harm the reporting taxpayer. The Appellate Division further noted that where, as here, a document is exempt from disclosure pursuant to statute, it may not be subjected to redaction.

The Appellate Division also affirmed the lower court's decision that the Department properly withheld certain documents because they were intra- or inter-agency materials exempt from disclosure pursuant to POL 87(2)(g). In so holding, the Appellate Division

rejected the argument that internal memoranda used to discuss and advance a position pending negotiations with a party, and records of a position taken during an audit, constitute disclosable final agency determinations, and held instead that they constituted "predecisional material, prepared to assist an agency decision maker in arriving at his or her decision," which need not be disclosed (citing Xerox Corp. v. Webster, 65 N.Y. 2d 131, 132 (1985)).

Finally, the Appellate Division reversed the lower court's determination in favor of Moody's that the Department should release an internal memorandum in which a Department employee proposed that an agency regulation be amended and an internal memorandum in which an agency employee sought approval of a tax determination regarding another taxpayer. The Appellate Division held that both memoranda were exempt from disclosure pursuant to POL 87(2)(g) because they were intra- or interagency materials that were prepared to assist with governmental decision-making, and that the latter memorandum was also exempt from disclosure to the extent that it involved information protected by the tax secrecy provisions in Tax Law 211(8).

Additional Insights.

This decision confirms that the tax secrecy provisions of the Tax Law which prevent the Department from disclosing taxpayer information apply not just to a taxpayer's tax returns, but to any document that reflects information included in the returns. The decision also applies a particularly broad interpretation of the exemption from disclosure for intra- or interagency materials that do not represent final agency policy, finding that positions taken by the Department during audit or in negotiations with a taxpayer do not qualify as final agency policy. Based on the Moody's decision, it is unclear what types of intra-agency communications regarding the conduct of an audit are properly disclosable under FOIL.