In Re Judge Elmo B. Hunter's Special Grand Jury Empaneled September 28, 1978 ( 1981 )

STEPHENSON, Circuit Judge.

The government appeals from an order of the district court denying its ex parte motion for disclosure of grand jury materials under Fed.R.Crim.P. 6(e)(3)(C)(i), which provides that a court may order disclosure of grand jury materials “preliminarily to or in connection with a judicial proceeding.”

The government’s ex parte motion sought disclosure to the Internal Revenue Service of grand jury evidence (both testimony and exhibits) developed in an investigation which resulted in the prosecution and conviction of two individuals for filing false income tax returns in which they did not report all of their gross income, in violation of 26 U.S.C. § 7206(1). After termination of the criminal proceedings, the government sought the grand jury information for the purpose of conducting a civil tax audit of the two convicted individuals and of the third individual whom the grand jury declined to prosecute.

The district court denied the motion. It concluded that disclosure would not be “preliminary to or in connection with a judicial proceeding” within the meaning of Rule 6(e)(3)(C)(i)¹ because (1) the civil audit may show no tax owed despite the revenue agent’s assertion in a supporting affidavit that there was substantial tax due and owing and (2) if a deficiency is assessed, the taxpayer may elect to pay the assessment, in which event no judicial proceeding would occur.²

The government argues on appeal that, “the legislative history underlying Rule 6(e) and the better reasoned case law indicate that the examination, assessment, and collection of civil tax liability can be considered as preliminary to a judicial proceeding * * * regardless of the possibility of settlement of a tax dispute without trial.”

LEGISLATIVE HISTORY

The provisions of Rule 6(e)(3)(C)(i) were a part of the original rule and have remained unchanged in substance. When Rule 6 was amended in 1977, the Senate Committee on the Judiciary, in Report No. 95-354, stated that:

There is, however, no intent to preclude the use of grand jury-developed evidence for civil law enforcement purposes. On the contrary, there is no reason why such use is improper, assuming that the grand jury was utilized for the legitimate purpose of a criminal investigation. Accordingly, the Committee believes and intends that the basis for a court’s refusal to issue an order under paragraph (C) to enable the government to disclose grand jury information in a non-criminal proceeding should be no more restrictive than is the ease today under prevailing court decisions [citing in a footnote United States v. Proctor & Gamble Co., 356 U.S. 677, 683-84 [78 S.Ct. 983, 986-87, 2 L.Ed.2d 1077] (1958); Robert Hawthorne, Inc. v. Director of Internal Revenue, 406 F.Supp. 1098, 1126 (E.D.Pa.1976)]. It is contemplated that the judicial hearing in connection with an application for a court order by the government under subparagraph (3)(C)(i) should be ex parte so as to preserve, to the maximum extent possible, grand jury secrecy. (Citation omitted).

1977 U.S.Code Cong. & Admin.News 527, 532.

In making this statement, the Senate Committee, as indicated, referred to Robert Hawthorne, Inc. v. Director of Internal Revenue, supra, 406 F.Supp. 1098. The government argues that the court in Hawthorne expressed approval of disclosure of grand jury materials to the IRS for civil use and that the Committee’s citation of Hawthorne :

demonstrates that Congress specifically envisioned disclosure under Rule 6(e)(3)(C)(i) for Internal Revenue Service civil tax investigations, since Hawthorne ’s expression of approval of such disclosure is the only aspect of that decision which reasonably relates to the intention expressed in the report * * * not to preclude the use of grand jury-developed evidence for civil law enforcement purposes.

The court in Hawthorne restated existing law when it stated in general terms that ultimate civil use of grand jury material is proper so long as the government did not acquire it in bad faith. 406 F.Supp. at 1119 n.35. The court also noted that when an agency completes its role in rendering technical assistance to an attorney for the government in a criminal matter, “[t]he future use of the materials to which it had access will follow as though there had been no access.” 406 F.Supp. at 1129. In a footnote to that sentence, the court stated that the materials may result in a petition for disclosure under what is now Rule 6(e)(3)(C)(i).

As the Senate Report makes clear, disclosure under Rule 6(e)(3)(C)(i) is governed by prevailing case law.

CASE LAW

A. IRS Cases

The Fourth Circuit takes the position that judicially supervised disclosure of grand jury materials to the IRS for civil law enforcement purposes is authorized. In In re Grand Jury Subpoenas, April, 1978, 581 F.2d 1103, 1109-10 (4th Cir. 1978), cert. denied, 440 U.S. 971, 99 S.Ct. 1533, 59 L.Ed.2d 787 (1979), the court stated:

This is not to say that the Audit Division, which is charged with civil enforcement of federal tax law, has no legitimate interest in the materials secured by the grand jury. “The Government does not sacrifice its interest in unpaid taxes just because a criminal prosecution begins.” United States v. LaSalle National Bank, 437 U.S. 298, 311-12, 98 S.Ct. 2357, 2364-65, 57 L.Ed.2d 221 (1978). Congress recognized this in amending Rule 6(e) and, accordingly, authorized judicially supervised disclosure of grand jury materials to government agency personnel for civil law enforcement purposes. See S.Rep.No. 95-354, 95th Cong., 1st Sess., reprinted in [1977] U.S.Code Cong. & Admin.News, pp. 527, 531-32.

The court noted that “very recently” one of the district courts in the Fourth Circuit had occasion to supervise such a disclosure and had developed certain criteria which the government must meet in securing a disclosure order under Rule 6(e)(2)(C)(i)³ where the purpose of the disclosure was to aid civil tax enforcement. Id. at 1110.

The case referred to was In re December 1974 Term Grand Jury Investigation, 449 F.Supp. 743 (D.Md.1978). The district court, in permitting disclosure by court order of grand jury materials for use in determining civil tax liabilities, thoroughly reviewed the legislative history of Rule 6(e). The criteria prescribed by the court in securing a disclosure order included: first, there must be a showing under oath by a responsible official of the government that the grand jury proceeding has not been used as a subterfuge for obtaining records for a civil investigation or proceeding. (This should not be difficult in the instant case in view of the indictment and conviction of two of the three taxpayers involved.) ⁴ Further, the government should give a general description of the materials sought to be disclosed in order that the court can intelligently determine that the materials sought to be disclosed have some rational connection with a specific existing or contemplated judicial proceeding as envisaged by Rule 6(e). (In the instant case, Judge Hunter found that the materials sought were relevant to the civil tax audit and production of the materials would result in an enormous savings of taxpayer dollars and time and effort by the government.)

The Fifth Circuit, in In re Grand Jury, 583 F.2d 128, 131 (5th Cir. 1978), approved an order granting access to grand jury materials to attorneys for the Civil Division, Department of Justice, and noted, “[i]t would entail needless duplication of effort both by the government and witnesses to require a new marshalling of the material already produced before the grand jury [citing the Fourth Circuit cases set out above, 581 F.2d 1103 and 449 F.Supp. 743].”

In In re Grand Jury Investigation No. 78-184, 642 F.2d 1184 (9th Cir. 1981), the government moved for disclosure of grand jury materials used in a criminal tax investigation to civil division attorneys and their assistants for possible civil prosecution. The court, in refusing their production under Rule 6(e)(3)(A)(i), stated, “we are not inclined to extend the ‘attorney for the government’ exception to the secrecy rule beyond disclosure for use in assisting grand juries and related aspects of criminal law enforcement”, but held “that Congress intended a court order under subsection C to be the avenue to access to grand jury materials by the government for civil use.” Id. at 1190. In so doing, the court held that the civil enforcement action was a judicial proceeding. Id. at 1191. The court further directed that disclosure should not be made except upon a showing of “particularized and compelling need.” Id. Further, that the hearing on the government’s application may or may not be ex parte. Id. at 1192.⁵

To the contrary, in a recently decided case, In re Special February, 1975 Grand Jury, 652 F.2d 1302 (7th Cir. 1981) (“Baggot”), a panel of the Seventh Circuit, in a 2-1 opinion, dealt with a request for disclosure to the IRS of grand jury evidence pertaining to the civil tax liability of James Baggot, who had been convicted, pursuant to a plea agreement, of fraudulent commodity trading, which involved fraudulent business losses and unreported income having apparently substantial impact on Baggot’s true tax liability. As did the district court in this case, the majority of the Seventh Circuit panel in Baggot ruled that the IRS civil investigation into Baggot’s possible additional tax liabilities was “too embryonic, speculative, and uncertain to firmly say that it [was] ‘preliminarily to’ a judicial proceeding.” Id. at 1308.⁶

1 . Rule 6(e)(3)(C)(i) provides:

(C) Disclosure otherwise prohibited by this rule of matters occurring before the grand jury may also be made—

(i) when so directed by a court preliminarily to or in connection with a judicial proceeding * * *.

2 . The court concluded that disclosure otherwise would be appropriate. It specifically found that the grand jury had been used in good faith, that the material sought was relevant to the audit, and that the government had demonstrated a particularized need for the information.

3 . Now Rule 6(e)(3)(C)(i).

4 . That criminal indictments did not result against one of the taxpayers is no reflection on the integrity of the investigation and does not mean that the evidence obtained cannot be used against him in a civil proceeding. United States v. Proctor & Gamble Co., 356 U.S. 677, 683-84, 78 S.Ct. 983, 986-87, 2 L.Ed.2d 1077 (1958).

5 . See Petition of United States for Disclosure, etc., 518 F.Supp. 163 (E.D.Wis.1981); Legislative History of Rule 6(e)(3)(C)(i), 1977 U.S. Code Cong. & Admin.News 532.

6 . Two district courts have reached the same conclusion. In re 1978-1980 Grand Jury Proceedings, 503 F.Supp. 47, 48 (N.D.Ohio 1980); In re April 1977 Grand Jury Proceedings, 506 F.Supp. 1174, 1181 (E.D.Mich.1981) [appeal pending].