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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 1 of 14

No. 06-305 T

(Judge Marian Blank Horn)

IN THE UNITED STATES COURT OF FEDERAL CLAIMS



CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC. & SUBSIDIARIES

Plaintiff

Defendant

v.

THE UNITED STATES,



DEFENDANT'S MOTION FOR PROTECTIVE ORDER



EILEEN J. O’CONNOR
Assistant Attorney General

DAVID GUSTAFSON
STEVEN I. FRAHM
DAVID N. GEIER
JOSEPH A. SERGI
JAMES E. WEAVER
ADAM R. SMART

Attorneys
Tax Division
Department of Justice
Washington, D.C. 20044
(202) 616-3448 (telephone)
(202) 307-0054 (facsimile)

Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 2 of 14

TABLE OF CONTENTS

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ii

QUESTION PRESENTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

A.

B.

C.

The United States’ Interests in Not Disclosing
the Requested Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Plaintiff’s Interests in Disclosure of the Requested Information . . . . . . . . 6

Relevance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 3 of 14

TABLE OF AUTHORITIES

FEDERAL CASES

Acord v. United States, 92 F.R.D. 355 (D. Mo. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

International Business Machines Corp. v. United States, 343 F.2d 914 (Ct.
Cl. 1965), cert. denied, 382 U.S. 1028 (1966) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

International Paper Co. v. United States, 36 Fed. Cl. 313 (1996)

. . . . . . . . . . . . . . . 6, 10

Marriott Intern. Resorts, L.P. v. United States, 61 Fed. Cl. 411 (2004) . . . . . . . . . . . 7- 9

Pikes Peak Family Housing, LLC v. United States, 40 Fed. Cl. 673 (1998) . . . . . . . . . . . 3

Simons-Eastern Co. v. United States, 55 F.R.D. 88 (N.D. Ga. 1972) . . . . . . . . . . . . . . . . 3

United States v. Nordberg, 1996 WL. 170119 (D. Mass.), aff'd, 97 F.3d
1445 (1st Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

DOCKETED CASES

Mayer, Brown, Roe & Maw, LLP v. Internal Revenue Service, No. 04-2187
(D.D.C. Nov. 28, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-6, 9

FEDERAL STATUTES

5 U.S.C. § 552(b)(7)(E) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

REGULATORY MATERIALS

61 F.R. 27834-01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

COURT RULES

Court of Federal Claims Rule 26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 10

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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 4 of 14

No. 06-305 T

(Judge Marian Blank Horn)

IN THE UNITED STATES COURT OF FEDERAL CLAIMS



CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC. & SUBSIDIARIES

Plaintiff

Defendant

v.

THE UNITED STATES,



DEFENDANT'S MOTION FOR PROTECTIVE ORDER



Plaintiff is seeking the disclosure of redacted portions of the Internal Revenue Service’s

Coordinated Issue Program Appeals Settlement Guidelines for Lease-in/Lease-out (LILO)

transactions. The disclosure of this highly confidential information would be extremely

prejudicial to the United States’ efforts to enforce the law and challenge the very large tax

deductions claimed in these tax shelters. In addition the information is not relevant to the

determination whether Plaintiff is entitled to the tax benefits it has claimed. Counsel for the

United States discussed the disclosure issues with Plaintiff’s counsel in correspondence and by

telephone in a good faith effort to resolve the matter, but was unsuccessful. The Court’s

assistance is essential, and defendant submits the following in support of its motion:

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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 5 of 14

QUESTION PRESENTED

Whether the United States is entitled to a protective order to prevent the disclosure of

redacted portions of the Internal Revenue Service Coordinated Issue Program Appeals

Settlement Guidelines for Lease-in/Lease-out transactions where disclosure would be highly

prejudicial to the United States’ tax shelter enforcement efforts and the information is not

relevant and beyond the scope of permissible discovery.

SUMMARY OF ARGUMENT

Plaintiff is not entitled to obtain the unredacted final version of the Internal Revenue Service

Coordinated Issue Program Appeals Settlement Guidelines for Lease-in/Lease-outs (LILOs) UIL

9307-07-00 (February 23, 2004) (“Appeals Settlement Guidelines”) it has sought in discovery. The

disclosure of the Appeals Settlement Guidelines would be unduly prejudicial to the United States,

because its release would frustrate the United States’ law enforcement activities. Further, the

information sought by Plaintiff is not within the scope of discovery, because this is a de novo

proceeding and the Appeals Settlement Guidelines are not relevant to whether the statutes and

judicial authority entitle Plaintiff to the tax benefits it has claimed.1

FACTS

On October 4, Plaintiff served the following document request:

REQUEST NO. 4: All unredacted copies of the Coordinated Issue Program Appeals

Settlement Guidelines for Lease-in/Lease-out (LILOS), UIL 9307-07-00 (February 23, 2004).

1Plaintiff’s counsel has indicated that they obtained redacted copies of the final version of
the document as well as certain unredacted versions of drafts of the document outside the course
of this litigation. Although Plaintiff now claims the Settlement Guidelines are relevant, it did not
identify these documents in its Rule 26 disclosures, nor has it produced the documents to the
United States in response to discovery requests.

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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 6 of 14

The government timely objected as follows:

United States Response to Request No. 4:

The United States objects to this request for reasons set forth in its general
objections. In particular, all drafts of the documents covered by this request are
protected from disclosure by the deliberative process privilege. Further, the United
States notes that the protected status of both the drafts and final version of the
requested document has been confirmed in the context of an action brought under the
Freedom of Information act by counsel for the Plaintiff in the United States District
Court for the District of Columbia and captioned Mayer, Brown, Roe & Maw, LLP
v. Internal Revenue Service, No. 04-2187. (See Order dated November 28, 2006,
Docket No. 34, attached hereto). In that case, the Court, after in camera review of
the document sought in the instant request, held that if the document, or a draft
thereof, was disclosed “the government’s enforcement objectives would be impeded”
and would create a risk of “circumvention of the law.” Id. Thus, disclosure of the
requested documents would be highly prejudicial to the United States.

The United States further objects on the basis that the requested documents are
immaterial to the instant action, not likely to lead to admissible evidence, and,
moreover, are administrative in nature and irrelevant to the resolution of this de novo
proceeding. Given the privileged and protected nature of the requested documents,
and their lack of relevance to the instant matter, the United States is not producing
the requested information.

ARGUMENT

Trial courts “have broad powers to regulate or prevent discovery and such powers have

always been freely exercised.” Simons-Eastern Co. v. United States, 55 F.R.D. 88, 89 (N.D. Ga.

1972). “[U]nder RCFC 26 and its counterpart, Federal Rules of Civil Procedure 26, courts

resolve discovery disputes not on the basis of bright-line rules, but rather, by employing a

flexible balancing analysis whereby the need for discovery is balanced against the harm,

prejudice, and burden to the other party.” Pikes Peak Family Housing, LLC v. United States, 40

Fed. Cl. 673, 683 (1998).

The balance of the considerations here strongly favor a protective order to prevent the

disclosure of the redacted portions of the Appeals Settlement Guidelines.

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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 7 of 14

A.

The United States’ Interests in Not Disclosing the Requested Information

Plaintiff’s counsel, Mayer, Brown, Rowe & Maw, LLP, unsuccessfully litigated the

disclosure of the Appeals Settlement Guidelines in another court. The United States District

Court for the District of Columbia recently held that the information is protected and cannot be

disclosed because, as discussed more thoroughly below, disclosure would allow taxpayers to

unfairly use this information to the detriment of legitimate law enforcement objectives. Mayer,

Brown, Rowe & Maw, LLP v. Internal Revenue Service, 04-2187 (D.D.C. Nov. 28, 2006) (A

copy is attached hereto as Exhibit 1). Plaintiff’s counsel’s unsuccessful efforts to secure this

same information in other litigation underscores the broad importance of the information to the

United States’ enforcement efforts and need for a protective order.

The information Plaintiff seeks contains IRS settlement strategies and objectives,

assessments of litigating hazards, and acceptable settlement ranges. Id. In general, Appeals

Settlement Guidelines set parameters by which IRS appeals officers enforce tax laws under the

Internal Revenue Code. (2d Lambert-Dean Decl. ¶ 13, filed in Mayer, Brown, Rowe & Maw,

LLP) (A copy of which is attached hereto as Exhibit 2). Although LILO transactions have been

prohibited since 2004, there are still active settlement discussions ongoing between the IRS and

taxpayers who engaged in LILO transactions. (Id.). The total tax at issue in LILO transactions

is billions of dollars. (Id.). As explained in connection with the Mayer, Brown, Rowe & Maw,

LLP case, at least as of February 15, 2006, more than 50 LILO cases were open and pending in

IRS Appeals offices with an estimated total tax at issue of almost $1.5 billion. (Id.). In addition,

the IRS advised in that litigation that there were more than a dozen LILO cases open in its

Compliance function with an estimated total tax at issue of almost $1.2 billion. (Id.). There are

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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 8 of 14

currently five LILO cases in litigation, and Plaintiff’s counsel is counsel of record in the two that

are pending in this Court (which includes this case). (See Docket No. 14). In the Mayer, Brown,

Rowe & Maw, LLP litigation, the Appeals Division of the IRS estimated that approximately 80%

of the affected LILO taxpayers had not yet resolved their tax liabilities. (2d Lambert-Dean Decl.

¶ 13.).

Disclosing the withheld information contained in the Appeals Settlement Guidelines

would have a very real, immediate, and detrimental impact upon the Government’s ability to

negotiate settlements in open LILO cases. (2d Lambert-Dean Decl. ¶ 13.). The disclosure of

approved settlement ranges and hazards assessments to those who may be attempting to assess

whether the odds are in their favor if they try to stay hidden or whether they should risk

presenting themselves to the IRS, as well as to current and potential future litigants, would

imperil the Treasury. (Id.). Disclosure of the redacted portions of the Appeals Settlement

Guidelines could prejudice the agency’s interests in identifying which of the outstanding cases it

should litigate. (Id.). Finally, as soon as the IRS or Congress takes action to halt one abusive tax

avoidance scheme, taxpayers generally will attempt to morph their transactions in such a way as

to create another. (Id.). Disclosure of the redacted information contained in the Appeals

Settlement Guidelines would unfairly tip the balance in favor of those taxpayers who are

attempting to circumvent the law by continuing to engage in activities which the IRS has clearly

signaled it considers illegal. (Id.).

The United States District Court for the District of Columbia recognized these significant

considerations when it ruled in favor of the IRS and prohibited the disclosure of the Appeals

Settlement Guidelines. Mayer, Brown, Rowe & Maw, LLP v. Internal Revenue Service, 04-2187

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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 9 of 14

(D.D.C. Nov. 28, 2006). The court held that the redacted information in the Appeals Settlement

Guidelines was protected from disclosure under FOIA pursuant to 5 U.S.C. § 552(b)(7)(E), the

Law Enforcement Exception to FOIA.2 Id. In holding the information should not be disclosed,

the Court agreed that disclosure of the redacted information would allow parties to unfairly use

this information to their advantage and to the detriment of the United States’ law enforcement

objectives. Id. Given the United States’ significant interest in enforcing the Internal Revenue

Code in a consistent manner among all taxpayers, this type of disclosure is the hallmark of undue

prejudice. If taxpayers knew how IRS personnel gauged the strength of its positions and the

amounts at which the Service were willing to settle cases, they would have an unfair advantage

in the negotiation process. Moreover, they would have the ability to gauge at what point “crime

pays” – i.e., when it pays to invest in a shelter even knowing that one will have to return some of

the tax savings in a settlement. This information is especially important to the Plaintiff here,

because this is not the only LILO transaction it has entered into.

B.

Plaintiff’s Interests in Disclosure of the Requested Information

Plaintiff argues that it needs the information in the Appeals Settlement Guidelines to

prepare their case for trial. According to Plaintiff, the United States is “in possession of

information that would demonstrate that the transaction at issue is not an abusive tax shelter.”

(Dec. 7, 2006 correspondence, relevant excerpt attached hereto as Exhibit 3). Whether

Plaintiff’s LILO transaction is an abusive tax shelter depends on the facts of the transaction and

2The court in Mayer, Brown, Rowe & Maw, LLP also recognized that similar types of

general criteria used by the IRS in determining when to undertake compliance activity has also
consistently been protected from discovery because its disclosure would enable taxpayers to
unfairly ensure a low risk of enforcement activities.

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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 10 of 14

the applicable law. Plaintiff does not suggest that the Appeals Settlement Guidelines contain any

facts regarding their LILO transaction. The Appeals Settlement Guidelines contain the IRS’s

analysis and opinion of the law, but it is not an independent source of law. Plaintiff has the

burden of proof to establish that they are entitled to the tax treatment they claimed for the LILO

transaction, and the views of the IRS do not establish the law and are not relevant evidence to

meet Plaintiff’s burden. International Paper Co. v. United States, 36 Fed. Cl. 313, 320 (1996).

Plaintiff’s counsel contended during a telephone conference that because the unredacted

portions of the Appeals Settlement Guidelines cite to a revenue ruling (among other statutes and

legal authority), it is entitled to discover the redacted portions of the Appeals Settlement

Guidelines. As support, he appears to rely on a line of cases that allow discovery of materials

underlying a revenue ruling when the Court will have to evaluate different interpretations of law

that have been applied at different points in time. See Marriott Intern. Resorts, L.P. v. United

States, 61 Fed. Cl. 411, 415-16 (2004). As discussed below that line of cases has no application

here.

First, in Marriott, the discovery of information, which the Court acknowledged, was of

limited relevance, was only allowed because the plaintiff there argued that the IRS was taking a

position inconsistent with “well-settled” law, and “longstanding” practice of nearly twenty years

prior to the taxpayer’s decision to enter into the transaction, and then changed its position to the

detriment of the taxpayer in that case. Id. at 414. That is not the factual situation here.

Second, the materials sought here are not the same kind as were at issue in Marriott.

Plaintiff is not seeking information underlying a revenue ruling; it is seeking settlement

information. In addition, the revenue ruling Plaintiff refers to predates the Appeals Settlement

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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 11 of 14

Guidelines by several years.3 Thus, the Appeals Settlement Guidelines are very different than

the materials at issue in Marriott.

Plaintiff next claims that the Appeals Settlement Guidelines are “inconsistent with the

United States’ litigating position in this case” (Exhibit 3), rendering the document discoverable.

Plaintiff makes no assertion that the IRS has taken a position inconsistent with well established

law or longstanding practice relied upon by Plaintiff in its decision to enter into the transaction.

See Marriott, 61 Fed. Cl. at 414. More than a year before Plaintiff entered into the LILO

transaction at issue, the IRS published proposed Rules in June 1996 concerning Section 467

Rental Agreements, see 61 FR 27834-01, which proposed rendering the tax treatment sought by

Plaintiff here invalid in all LILO transactions. Thus, there is no inconsistent position.4

The United States is in possession of documents indicating that Plaintiff received

numerous opinions from tax counsel evaluating the likelihood that the particular LILO

transaction would be declared invalid by the IRS (as an abusive tax shelter) and the extent to

which the IRS could support such a claim under the law as it stood prior to the publication of the

Final Regulations. (See, e.g., US03450-51, US01594-97, and PF006115-18, attached hereto as

3The Appeals Settlement Guidelines, an internal IRS document, was, as acknowledged by

Plaintiff’s own Request for Production, issued in February 2004, over six years after Plaintiff
entered into the instant transaction. It is unclear how internal IRS settlement information,
created over six years after Plaintiff entered into the instant LILO transaction, has any bearing on
Plaintiff’s burden to demonstrate whether the transaction at issue is valid under established case
law, especially where Plaintiff had long been aware that it was the IRS’s position that rent and
interest deductions sought in this refund suit would not be permitted.

4Even if the Department of Justice adopted a position in litigation inconsistent with a

legal conclusion previously expressed by the IRS, the inconsistency cannot entitle Plaintiff to tax
benefits otherwise unavailable under the law. Plaintiff’s inquiry regarding an inconsistency is
irrelevant and cannot entitle them to the redacted portions of the Appeals Settlement Guidelines.

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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 12 of 14

Exhibits 4, 5 & 6 respectively). Those documents indicate that the only risk to Plaintiff in

entering into the transaction was a tax risk – that its desired tax treatment would be disallowed.

(See Exhibit 5). In fact, as indicated by documents in the United States’ possession, Plaintiff

was well aware of the suspect nature of the transaction at issue, and sped up the closing of the

LILO transaction in an endeavor to close the transaction prior to the final rules going into effect.

(See US07047-48, attached hereto as Exhibit 7). Moreover, Plaintiff abandoned consideration of

other LILO transactions following implementation of the final rules. (See US03207 &

CE012018-23, at 12022, attached hereto as Exhibits 8 & 9 respectively). Thus, Plaintiff cannot

credibly argue that the Appeals Settlement Guidelines is necessary to show an inconsistency in

the IRS’s position or that a LILO is not considered an abusive tax shelter.5 Unlike Marriott,

Plaintiff cannot claim it relied on information provided by the IRS that is inconsistent with the

United States’ current position.



The United States’ significant tax enforcement responsibilities and the severe prejudice

that would result if the Appeal Settlement Guidelines were disclosed justify the protective order.

C.

Relevance

In addition to the document’s protected status, the information Plaintiff seeks is not

within the scope of discovery, because it is not relevant and would not lead to the discovery of

admissible evidence. The IRS’ previous analysis of the type of transaction Plaintiff has engaged

5In addition to the fact that the document itself would not be relevant in the instant case,
its production is not likely to lead to admissible evidence, as any further discovery engaged in by
Plaintiff regarding the redacted materials, such as inquiry regarding the reasons for reaching the
conclusions contained in the document, would concern matters protected by the deliberative
process privilege. See Mayer, Brown, Rowe & Maw, LLP v. Internal Revenue Service, 04-2187
(D.D.C. Nov. 28, 2006).

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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 13 of 14

in here, including the specific transaction itself, are simply not relevant to a determination of the

transaction’s tax treatment in the instant matter. International Paper Co., 36 Fed. Cl. at 320.

See also International Business Machines Corp. v. United States, 343 F.2d 914, 919 (Ct. Cl.

1965) (“taxpayers can never avoid liability for a ... tax by showing that others have been treated

generously, leniently, or erroneously by the Internal Revenue Service-each individual must rest

... on the validity of his own position, under the applicable taxing provision independently of the

others.”), cert. denied, 382 U.S. 1028 (1966); United States v. Nordberg, 1996 WL 170119, at *3

(D. Mass.) (noting that if taxpayer’s treatment of a particular item on its return was erroneous,

the taxpayer is liable “regardless of what an IRS agent, at any time, might have thought.”)

(unpublished), aff’d, 97 F.3d 1445 (1st Cir. 1996) (a copy is attached hereto as Exhibit 10).6

Therefore the information is beyond the scope of discovery as defined by RCFC 26(b). Plaintiff

took the position in its December 1, 2006, correspondence that the Settlement Guidelines are

relevant because the Appeals Settlement Guidelines are “inconsistent with the United States’

litigating position in this case.” (Exhibit 4). Plaintiff cannot meet its burden of establishing the

validity of the transaction under established case and statutory law with the opinions of IRS

personnel. See International Paper Co., 36 Fed. Cl. at 320. Plaintiff thus makes no claim at all

that the requested information might lead to the discovery of admissible evidence. We cannot

imagine how it could in any event.

6Further, where, as here, there is no claim of disparate or arbitrary treatment by the IRS,
but simply a refund claim, documents pertaining to internal IRS views of published rulings and
information pertaining to how the IRS deals with other taxpayers are outside the scope of
discovery. Acord v. United States, 92 F.R.D. 355, 357 (D. Mo. 1981).

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Case 1:06-cv-00305-MBH Document 18 Filed 03/16/2007 Page 14 of 14

CONCLUSION

For the reasons stated above, this Court should enter a Protective Order, providing that

Plaintiff is not entitled to the discovery of the unredacted portions of the Appeals Settlement

Guidelines sought in Request for Production Number 4.

Respectfully submitted,

s/ David N. Geier
DAVID N. GEIER

Attorney of Record
U.S. Department of Justice, Tax Division
Post Office Box 26
Ben Franklin Station
Washington, D.C. 20044
Telephone: (202) 616-3448
Facsimile: (202) 307-0054

Chief, Court of Federal Claims Section

Assistant Chief, Court of Federal Claims Section

EILEEN J. O’CONNOR

Assistant Attorney General

DAVID GUSTAFSON

STEVEN I. FRAHM

JOSEPH A. SERGI
JAMES E. WEAVER
ADAM R. SMART

Trial Attorneys

s/ Steven I. Frahm
Of Counsel

March 16, 2007

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