The New York Division of Tax Appeals recently held that the judicially developed public interest privilege offers the New York Department of Taxation and Finance (“Department”) privilege protection that is analogous to the deliberative process exemption for requests under the New York Freedom of Information Law (“FOIL”). See In the Matter of the Petition of Moody’s Corp., DTA No. 827396 (11/16/17).

Moody’s petition was related to a 2004-2010 New York audit that involved a receipts sourcing issue, among other issues. The audit was settled in 2012 with a closing agreement (“Closing Agreement”). Moody’s claimed that it entered into the Closing Agreement, at least in part, based on the Department’s claim that similarly-situated taxpayers all sourced New York credit rating receipts the same way. Moody’s later learned that the Department allowed a similarly-situated taxpayer to source its credit rating receipts under a different method, so Moody’s sought a refund for the audit period. The refund was denied, triggering Moody’s petition.

While pursuing its refund, Moody’s made a FOIL request for documents concerning the Department’s sourcing of credit rating receipts. FOIL is New York’s version of the federal Freedom of Information Act, which requires the full or partial disclosure of certain unreleased documents held by the government. In responding to the FOIL request, the Department’s Records Access Office withheld certain responsive documents as exempt from disclosure under the deliberative process exemption, among other exemptions/privileges. Moody’s appealed the Records Access Office’s determination and the Appellate Division, Third Department ultimately required disclosure of all but a few of the documents at issue on the basis that the deliberative process exemption prevented disclosure of those documents.

In short, the deliberative process exemption prevents the release of “inter-agency or intra-agency materials which are not:…final agency policy or determinations,” in response to a FOIL request. See Public Officers Law § 87 (2)(g)(iii). The public policy supporting this exemption is that it ensures agency personnel will be able to express their opinions freely to agency decision makers during the deliberative process.

In New York, the deliberative process exemption does not explicitly apply to subpoenas. Thus, Moody’s sought production of the remaining exempt documents via a subpoena issued by the New York Division of Tax Appeals. Without the deliberative process exemption at its disposal, the Department asserted the judicially developed public interest privilege to prevent the release of the documents. The public interest privilege protects from disclosure confidential communications between public officers, or to public officers, in the performance of their duties where the public interest requires that such confidential communications or their sources should not be divulged. A Division of Tax Appeals administrative law judge (“ALJ”) considered the underlying rationale for the deliberative process exemption (i.e., encouraging candor among agency personnel) in weighing whether the public interest privilege should bar disclosure. The ALJ ultimately held the public interest privilege barred disclosure of the documents at issue because of the “…valid public interest in non-disclosure of internal audit and policy formulation discussions.”

In finding that the documents were subject to the public interest privilege, the ALJ noted that the primary motivation for Moody’s FOIL request—to show disparate treatment of similarly-situated taxpayers— was already part of the public record, thereby negating Moody’s need for any additional documentation supporting this point. But this argument cuts both ways, and the ALJ did not afford equal weight to the fact that Moody’s would likely never have challenged the Closing Agreement if the disparate treatment of similarly-situated taxpayers hadn’t come to light under entirely unrelated circumstances.

The Department’s disparate treatment of similarly-situated taxpayers, as well as Moody’s alleged detrimental reliance on the Department’s representations in entering into the Closing Agreement, cut against the public’s interest in encouraging internal candor from the Department on tax matters and preserving the integrity and finality of negotiated settlement agreements. Moreover, the ALJ’s holding in this case levels the investigative power of FOIL requests and court issued subpoenas for related matters. Such stunting of subpoena power is problematic, particularly in cases of alleged fraud and misrepresentation. Nevertheless, FOIL requests and subpoenas remain important tools for taxpayers in New York given that there is no formal discovery in appeals before the Division of Tax Appeals, and the continued use of these tools should not be slowed by this non-binding, non-precedential ALJ decision, to which the taxpayer has already filed a Notice of Exception.