Application of Statute

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7213- Criminal Penalties for Unauthorized Disclosure of Information: Application of Statute

 

 

[91-1 USTC ¶50,072] In re Grand Jury Subpoena. United States of America , Plaintiff-Appellee v. Under Seal, Defendant-Appellant

(CA-4), U.S. Court of Appeals, 4th Circuit, 89-5619, 89-5632--89-5634, 12/6/90 , Affirming an unreported District Court decision

[Code Sec. 7213 ]

Unauthorized disclosure of information: Search warrants: Grand jury subpoenas.--An IRS intelligence officer investigating criminal tax fraud did not violate federal rules of criminal procedure when she released certain documents obtained by valid search warrants to IRS civil agents preparing audits of the involved corporations and employees. Although the applicable corporate records were the subject matter of both IRS search warrants and contemporaneous grand jury subpoenas, the records were in fact first obtained pursuant to the search warrants, not the subpoenas. The intelligence officer was careful not to release those corporate records obtained subsequently pursuant to the subpoenas to the IRS civil agents. Although the tax fraud investigation was pursued simultaneously by both the IRS and the grand jury, the IRS-initiated corporate investigation remained essentially independent of the grand jury procedures.

Breckinridge L. Wilcox, United States Attorney, Martin Stanley Himeles, Jr., Assistant United States Attorney, Baltimore, Md. 21201, for plaintiff-appellee. James Allen Rothschild, Anderson, Coe & King, 201 N. Charles St., Baltimore, Md. 21201, James P. Ulwick, Kramon & Graham, P.A., 20 S. Charles St., Baltimore, Md. 21201, for defendant-appellant.

Before SPROUSE and CHAPMAN, Circuit Judges, and WARD, Senior United States District Judge for the Middle District of North Carolina, sitting by designation.

SPROUSE, Circuit Judge:

This appeal concerns information developed by a tax fraud investigation initiated by the Internal Revenue Service (IRS) and pursued by both the IRS and a federal grand jury. The investigation targeted appellants--a parent corporation, its subsidiaries, and several individual employees of the corporations. Records of two of the corporations were seized by IRS agents pursuant to search warrants and records of the other corporations by grand jury subpoenas. The records seized pursuant to search warrants were subsequently shown to agents in the Civil Division of the IRS. The IRS also served a grand jury subpoena requesting the records of the parent corporation, but the latter refused to comply.

Contending that an IRS intelligence agent violated Rule 6(e)(2) of the Federal Rules of Criminal Procedure ¹ by making the documents available to IRS civil agents, the corporations and the individual employees who were targets of the investigation moved for the return of material seized by the two search warrants, and requested an evidentiary hearing on the matter. On appeal, appellants also attack the validity of the search warrants. In addition, the parent corporation moved to quash the subpoena issued for its records. The district court denied all motions. We affirm.

I.

John Doe ² was a tax accountant who prepared returns for the corporate and individual grand jury targets. The corporations owned a number of cemeteries and were principally involved in selling and maintaining cemetery plots. In June 1986, Doe was caught violating certain criminal tax laws in an IRS "sting" operation. Doe turned government informant and provided information that a vice-president of the parent corporation for the cemeteries and officers of the various subsidiaries were purposefully understating income and overstating expenses on their tax returns. In addition, Doe related under-the-table payments from the parent corporation to employees of subsidiaries, a scheme to defraud customers by selling them cemetery plots already owned by others, the creation of fraudulent receipts to support nonexistent expenses, the preparation of false "1099" forms to indicate lower payments of income from the corporation to individuals, the submission of false tax returns and financial statements to lending institutions, the falsification of sales reports in order to justify higher commissions, and the "laundering" of large sums of cash through individual bank accounts and returning the cash by false loans.

After Doe's admissions, the IRS conducted surveillances of the businesses and of the residences of individual employees. In September 1986, a grand jury also was convened to investigate the matter. On September 24, 1986 , IRS agents obtained warrants to search the offices of two of the subsidiary cemetery corporations (hereinafter cemeteries A and B). The affidavit supporting the search warrant application was based on the investigation of Doe and the information he later provided. The search warrants were executed the following day, September 25, 1986 , and the records of cemeteries A and B were simultaneously searched by numerous IRS agents, who, after a day's search, seized numerous boxes of records. On that same day, grand jury subpoenas also were served on cemeteries A and B. ³ The subpoenas requested the same records seized pursuant to the search warrants. Since the seizure of records pursuant to the search warrant was comprehensive, no property was produced in response to the grand jury subpoenas from cemeteries A and B.

Four other cemetery corporations, all subsidiaries of the parent corporation, were also served with grand jury subpoenas on September 25, 1986 . Each of these four corporations timely produced the records identified in the subpoenas. ⁴

All the documents were maintained in the same IRS storage building. Special Agent Mary Bowe of the Criminal Investigation Division of the IRS, who had been assigned to assist the grand jury investigation, assumed custody of all the documents. She testified that she segregated those documents obtained by search warrants from those obtained pursuant to the grand jury subpoenas. In October of 1986, Bowe made available to agents in the Civil Division of the IRS for civil purposes the documents obtained pursuant to the warrants.

The investigation of appellants proceeded slowly. Some two years later, on December 15, 1988 , the government served the parent corporation with a grand jury subpoena requesting production of its records. It declined to honor the subpoena. In January 1989, the parent corporation filed a motion to quash the grand jury subpoena issued to it. On that same day, it filed a motion in the district court to enforce compliance with Rule 6(e) of the Federal Rules of Criminal Procedure, alleging that Bowe had improperly disclosed grand jury materials to civil IRS personnel. After a nonevidentiary hearing, the district court denied both motions. The court later denied subsequent motions for reconsideration of its rulings and motions by cemeteries A and B for the return of their seized property. On June 23, 1989 , the court, on the initiative of the government, held the parent corporation in contempt for not producing its records, but stayed the imposition of sanctions pending this appeal.

II. The Search Warrants

Appellants first attack the validity of the search warrants, contending that they were constitutionally deficient as overly broad and were issued without probable cause. We disagree. The warrants authorized searches for the following items:

Books, records and documents relative to the financial transactions of [cemetaries A and B], their officers and employees, specifically: Forms W-2 and 1099; Forms 940, 941 and 1120 tax returns; workpapers, balance sheets and financial statements; interest and expense ledgers and/or records; accounts receivable and payable ledgers and/or records; general ledgers; invoices, billing statements; cash receipts posting machine and/or journal; payroll checking accounts, workpapers and/or records; plot location files and/or records; checking and saving accounts, statements, checks and deposit tickets; sales contracts; notes and loan receivable and payable ledgers and/or records; and any and all documents reflecting the cost of goods for the businesses operated at [cemetaries A and B], the profits received from the sale of those goods, and all records reflecting the manner in which income is received, federal income tax evaded, monies laundered or income hidden.

Appellants contend that the warrants failed to specify the documents sought with the requisite particularity. Consequently, appellants contend that the warrants authorized "a general exploratory rummaging" in violation of settled law regarding the constitutional requisites of a search warrant. See Coolidge v. New Hampshire , 403 U.S. 443, 467, 91 S.Ct. 2022, 2038, 29 L.Ed.2d 564 (1971); United States v. Owens, 848 F.2d 462, 463 (4th Cir. 1988).

The legality of a search warrant, of course, is not governed by a bright-line test. Rather, the inquiry is fact specific and the permissible nature of the search is, to a degree, dependent on the legitimate scope of the underlying investigation. As we stated in United States v. Torch, 609 F.2d 1088 (4th Cir. 1979), cert. denied, 446 U.S. 957, 100 S.Ct. 2928, 64 L.Ed.2d 815 (1980):

[T]he test for the necessary particularity is a pragmatic one: "The degree of specificity required when describing the goods to be seized may necessarily vary according to the circumstances and type of items involved. . . . [T]here is a practical margin of flexibility permitted by the constitutional requirement for particularity in the description of items to be seized."

Id. at 1090 (quoting United States v. Davis , 542 F.2d 743, 745 (8th Cir.), cert. denied, 429 U.S. 1004, 97 S.Ct. 537, 50 L.Ed.2d 616 (1976)). Moreover, in United States v. Shilling, 826 F.2d 1365 (4th Cir. 1987), cert. denied, 484 U.S. 1043, 108 S.Ct. 777, 98 L.Ed.2d 863 (1988), we again emphasized that the validity of the warrant depends to a degree on the underlying investigation, stating:

Here, the warrant was issued by a Magistrate and contains a two-page list of items for the search. Although the warrant uses generic terms (such as books, records, bank statements, etc.) without detailed descriptions, we consider this to be acceptable, since the Government could hardly have known in detail what precise business records were maintained by the defendant. Likewise, there is no flaw in the fact that the documents covered by the warrant did not have specific time periods attached. The dates of specific documents could not have been known to the Government, and, as for income tax violations, documents from an earlier time may have bearing on the tax violations alleged in a later year.

Id. at 1369. Here, the investigation is aimed at a number of employees of several suspected cemetery corporations as well as the corporations themselves. The allegations, if true, would indicate various criminal practices ranging across and through several corporations--encompassing numerous business activities on the part of the individuals and corporations. Therefore, while the search warrants for both cemeteries A and B listed numerous items, we are persuaded that the descriptions were sufficiently particularized considering the wide-ranging nature of the criminal activities under investigation.

Nor do we find merit to appellants' contention that the warrants were issued without probable cause. Appellants correctly state that a magistrate must have a "substantial basis" for concluding that probable cause exists. However, the existence of probable cause vel non is determined on the "totality of the circumstances" analysis. Illinois v. Gates, 462 U.S. 213, 238, 103 S.Ct. 2317, 2332, 76 L.Ed.2d 527 (1983). In Gates, the Supreme Court established the parameters for making such a probable cause determination, stating:

The task of the issuing magistrate is simply to make a practical, commonsense decision whether, given all the circumstances set forth in the affidavit before him, including the "veracity" and "basis of knowledge" of persons supplying hearsay information, there is a fair probability that contraband or evidence of a crime will be found in a particular place. And the duty of a reviewing court is simply to ensure that the magistrate had a "substantial basis for . . . conclud[ing]" that probable cause existed.

Gates, 462 U.S. at 238-39, 103 S.Ct. at 2332, (quoting Jones v. United States, 362 U.S. 257, 271, 80 S.Ct. 725, 736, 4 L.Ed.2d 697 (1960), overruled on other grounds, United States v. Salvucci, 48 U.S. 83, 100 S.Ct. 2547, 65 L.Ed.2d 619 (1980)). Appellants argue that the affidavit failed to establish probable cause under the Gates criteria. We disagree. A twenty-eight-page affidavit by Agent Bowe supported the application presented to the magistrate. It detailed the information provided by Doe which implicated the corporations, officers, and individual employees. Doe, among other things, had related that he participated in many of the tax crimes at the direction of corporate officers and employees who subsequently became targets of the investigation. Appellants, however, attack Doe's credibility, stressing that his cooperation with the IRS was induced by his admitted guilt and expected immunity from prosecution. Doe's information, however, was corroborated by an affidavit of the undercover agent principally responsible for apprehending him and independent information in IRS files which included documents seized from Doe's residence when he was under investigation as well as information obtained by surveillance. In our view, the affidavit easily satisfied the Gates criteria for establishing probable cause.

III. Rule 6(e)(2)

Appellants next contend that the district court erred in denying its motion to "enforce compliance with . . . Federal Rule of Criminal Procedure 6(e)." In a separate argument, appellants contend that the district court erred by refusing to conduct an evidentiary hearing on this motion. We think the court ruled properly in both instances.

After IRS agents at both cemeteries A and B had identified and seized the materials requested pursuant to the search warrants of September 24, 1986 , the materials were removed to an IRS building. None of the records of A and B were obtained by the IRS pursuant to the grand jury subpoenas because the same records for which the subpoenas were issued had been seized under the aegis of the search warrants. There were, however, records and materials furnished by four sister subsidiary cemetery corporations pursuant to grand jury subpoenas. The records of A and B and the records of the four other subsidiary corporations were eventually maintained in the same IRS storage room. The A and B records, however, were physically segregated from the records of the other four cemeteries. Agent Bowe invited agents from the IRS Civil Division to examine the A and B records but it is undisputed that they had no access to records which had been obtained pursuant to the grand jury subpoenas.

While the procedure utilized by the IRS agent is no doubt routine and permissible in investigations where records are seized solely by search warrant, ⁵ the circumstances present here are unique not only because some of the information stored in the same room was obtained by grand jury subpoenas, but because the search warrants were obtained during the pendency of a grand jury investigation and executed on the same day that the grand jury subpoenas were served.

After a lengthy and careful colloquy between appellants' counsel and the district court, the court found that no evidentiary hearing was required as the Rule 6(e) issue raised no question of fact. The government candidly admitted that the civil agents had access to A and B's records at the invitation of its supervising intelligence agent. The district court found that there was no basis to believe that the civil agents had access to any of the material which had been obtained pursuant to grand jury subpoenas. Thus, we agree that there was no need for an evidentiary hearing on this question, and the court correctly refused to conduct one.

There remains only the legal issue of whether, under the undisputed circumstances of this case, the IRS supervisory intelligence agent violated the secrecy requirements of Rule 6(e)(2) by making available to IRS civil agents the materials obtained from locations A and B by search warrrants. Rule 6(e)(2) prohibits the disclosure of "matters occurring before the grand jury." Therefore, the critical question before us is whether the materials obtained by the two search warrants are "matters occurring before a grand jury" and, accordingly, entitled to the secrecy protection of Rule 6(e)(2). ⁶ We hold that they are not. ⁷

While recognizing that the records and materials of cemeteries A and B were obtained by search warrant, appellants contend that since there was an ongoing grand jury investigation the documents are effectively grand jury material. They correctly point out that Bowe, the IRS intelligence agent directing the criminal investigation, was assisting the United States Attorney in the grand jury investigation and that grand jury subpoenas were effected for the same records and materials that were obtained by the search warrants. Although presenting a close question, we cannot agree that the circumstances surrounding the seizure of the corporate records and materials compel the conclusion that the IRS investigation and the grand jury investigation were integrated.

The substantive content of "matters occurring before the grand jury" can be anything that may reveal what has transpired before the grand jury. In re Grand Jury Matter ( Catania ), 682 F.2d 61, 63 (3d Cir.1982); In re Grand Jury Investigation, 610 F.2d 202, 216-217 (5th Cir.1980). However, Rule 6(e)(2) protects from disclosure "only the essence of what takes place in the grand jury room, in order to preserve the freedom and integrity of the deliberative process." ⁸ Catania, 682 F.2d at 63. At least two of our sister circuits have held that information produced by criminal investigations paralleling grand jury investigations does not constitute matters "occurring before the grand jury" if the parallel investigation was truly independent of the grand jury proceedings. Catania, supra; Anaya v. United States [87-1 USTC ¶9267 ], 815 F.2d 1373 (10th Cir. 1987).

In Catania , the United States Attorney's Office and the Federal Bureau of Investigation conducted an investigation into possible voter fraud. A federal grand jury was convened, but no indictment resulted. Afterwards, the United States Attorney sought authorization, pursuant to a grand jury request, to make available to a state prosecuting attorney information that had been uncovered in the investigation. The information in question had been developed by FBI agents and had not been generated by the grand jury. The district court found that the materials "were the product of an FBI investigation, were not generated by the grand jury . . .," and, therefore, granted the government permission to release the information. Catania , 682 F.2d at 64. The Third Circuit affirmed, stating that

"disclosure of information obtained from a source independent of the grand jury proceeding, such as a prior government investigation, does not violate Rule 6(e)." The information developed by the FBI, although perhaps developed with an eye toward ultimate use in a grand jury proceeding, exists apart from and was developed independently of grand jury processes.

Catania , 682 F.2d at 64 (quoting In re Grand Jury Investigation, 610 F.2d 202, 217 (5th Cir. 1980)) (citation omitted).

In Anaya, the Tenth Circuit reviewed a ruling by the district court that investigative information uncovered by agents of the FBI and made available to agents of the IRS was not grand jury information protected by Rule 6(e). During the course of the FBI investigation, matters relating to the target of the investigation were brought to the attention of the federal grand jury. FBI agents later made some of the information available to IRS agents for assistance in their independent tax investigation. The taxpayers, moving for relief under Rule 6(e), argued that although none of the material given to the IRS by the FBI was presented to the grand jury "[it] was so closely related to what was presented that it must fall within the shadow of 6(e)." Id. at 1379 (emphasis in original). Further, the taxpayers contended that disclosure of any information which would reveal the identities of witnesses, the substance of their testimony, the strategy of the investigations, and the deliberations of the grand jury would violate the rule. The Tenth Circuit disagreed, holding that

revelation of information that has not been submitted to the grand jury does not vitiate those protections for the simple reason that the information was not part of what transpired in the grand jury room.

. . .

The IRS was in pursuit of a legitimate investigation, and revelation of information learned by other governmental agencies in a parallel investigation without disclosure of what had been submitted to the grand jury was not improper.

Id. at 1379-80 (citations omitted); see also In re Subpoena to Testify Before Grand Jury, 864 F.2d 1559, 1564 (11th Cir. 1989).

Appellants here, however, urge that the records from cemeteries A and B were not obtained independently of the grand jury investigation. They asserted below and reiterate on appeal that the search warrant was simply a contrivance by the IRS to obtain the documents to further the grand jury investigation while circumventing Rule 6(e)(2) restrictions so that it could make the documents available for structuring civil tax audits of the grand jury targets. The government, with equal force, denies such villainous motive. The government also insists that, as long as a search warrant is served before a grand jury subpoena, forthcoming records and materials must be considered as derived independently of the grand jury process.

The instant case presents a closer question that those presented in Anaya and Catania . However, reviewing the totality of the circumstances, we are ultimately persuaded that the same result should obtain. We reach this conclusion even though we are not persuaded by the government's argument that service of the search warrants before service of the grand jury subpoenas obviates any further inequity. ⁹ The government's view, which the district court apparently adopted, is that such temporal consideration alone insulates the material obtained by the search warrant from Rule 6(e)(2) requirements because the material ipso facto takes on characteristics of information obtained independently of the grand jury. We think not. Easily visualized are circumstances where a government investigatory agent may, in pursuing an investigation, as here, become an agent of the grand jury. In such scenarios, sequence of service would make little difference if search warrants and grand jury subpoenas were used indiscriminately to obtain the targeted information. Therefore, we would caution investigatory agencies that the procedures such as those utilized in this case might, under slightly varying circumstances, jeopardize an entire investigation.

However, we are persuaded that the initial IRS investigation and the grand jury investigation were not indiscriminately merged but that the initial IRS investigation was conceived and initiated without any connection to a grand jury proceeding. The investigation, ongoing from June until the latter part of September, included the debriefing of informants and surveillance on the targeted residence, and culminated in the application for the search warrant supported by two affidavits detailing the investigation which was either earlier than or apart from the grand jury proceedings.

As we have stated, the protective purposes of Rule 6(e) are many, but they coalesce to protect the integrity of the grand jury process by shielding witnesses and erroneously accused citizens as well as guarding against the compromising of legitimate prosecutorial objectives. The Supreme Court in United States v. Baggot [83-2 USTC ¶9438 ], 463 U.S. 476, 103 S.Ct. 3164, 77 L.Ed.2d 785 (1983), has instructed that revealing grand jury material to civil agents of the IRS for use in auditing violates these purposes. The Court in Baggot held that the information-gathering authority of the grand jury cannot be utilized to obtain evidence or information merely for use in civil proceedings. Here, in our view, however, the records of A and B were obtained as a result of an IRS investigation that was essentially independent of the grand jury proceedings. Moreover, there is no question but that materials obtained by grand jury subpoenas were carefully denied to IRS civil agents. Therefore, while we do not agree with the district court that the sequence of service of a search warrant and of a grand jury subpoena is necessarily determinative of the question of whether the search warrant is a de facto grand jury process, we agree in the discrete circumstances of this case with its conclusion that the search warrant was not a part of the grand jury process. The materials obtained pursuant to it therefore were not subject to Rule 6(e) restrictions.

IV. The 1988 Subpoena

The final issue we consider is that raised by the parent corporation contending that the district court erred in refusing to quash the 1988 grand jury subpoena issued to it and in holding it in contempt for failing to produce its records. The parent corporation advances arguments similar to those advanced in the search warrant context. In addition to reiterating the Rule 6(e)(2) contention, it asserts that the 1988 subpoena failed to meet the prerequisites of Rule 17(c) of the Federal Rules of Criminal Procedure because it was not relevant to the grand jury investigation and did not define targeted documents with particularity, and that the request for documents spanned an unreasonable period of time. The parent corporation complains that the subpoena is misdirected as the underlying investigation is concerned primarily with individuals employed by its subsidiaries, that the subpoena of its records was unreasonable in scope and that to the extent it calls for the records of "all subsidiaries" is overbroad on its face. Again, we disagree.

A presumption of "regularity" accompanies a subpoena duces tecum. See Beverly v. United States , 468 F.2d 732, 743 (5th Cir. 1972). Additionally, we are mindful of the admonition that a court should not intervene in the grand jury process absent a "compelling justification." United States v. (Under Seal), 714 F.2d 347, 350 (4th Cir.), cert. dismissed sub nom. Doe v. United States , 464 U.S. 978, 104 S.Ct. 1019, 78 L.Ed.2d 354 (1983). The grand jury subpoena, dated December 6, 1988 , listed 16 categories of books and records of the parent corporation and all subsidiaries for the period January 1, 1982 , through January 31, 1988 . ¹⁰ Our examination of the items demanded in the subpoena does not reflect the kind of abuse which must be demonstrated in order to overcome the presumption of regularity and for a target of a grand jury subpoena to succeed on a motion to quash. See United States v. Gurule, 437 F.2d 239, 241 (10th Cir. 1970), cert. denied, 403 U.S. 904, 91 S.Ct. 2202, 29 L.Ed.2d 679 (1971). The parent corporation overlooks the critical fact that it is a target of investigation and alleged to be involved with most, if not all, of the suspected individual employees. The same consideration leads us to conclude that the naming of all the subsidiaries in this instance is likewise not abusive.

In view of the above, the judgment of the district court is affirmed.

AFFIRMED.

¹ Rule 6(e), in pertinent part, states:

(e) Recording and Disclosure of Proceedings

(2) General Rule of Secrecy. ... [A]n attorney for the government, or any person to whom disclosure is made under paragraph (3)(A)(ii) of this subdivision shall not disclose matters occurring before the grand jury, except as otherwise provided for in these rules. No obligation of secrecy may be imposed on any person except in accordance with this rule. A knowing violation of Rule 6 may be punished as a contempt of court.

(3) Exceptions.

(A) Disclosure otherwise prohibited by this rule of matters occurring before the grand jury, other than its deliberations and the vote of any grand juror, may be made to--

(i) an attorney for the government for use in the performance of such attorney's duty; and

(ii) such government personnel (including personnel of a state or subdivision of a state) as are deemed necessary to assist an attorney for the government in the performance of such attorney's duty to enforce federal criminal law.

(B) Any person to whom matters are disclosed under subparagraph (A)(ii) of this paragraph shall not utilize that grand jury material for any purpose other than assisting the attorney for the government in the performance of such attorney's duty to enforce federal criminal law.

Fed.R.Crim.P. 6(e)(2)-6(e)(3).

² The grand jury investigation is ongoing and the court records are still sealed.

³ The subpoenas were returnable on October 9, 1986 .

⁴ There were no search warrants issued in connection with those records.

⁵ As appellants concede, it is generally accepted that related IRS criminal and civil proceedings may be pursued simultaneously and that information may be shared between the divisions, absent a showing of bad faith on the part of the IRS. See United States v. Krauth [85-2 USTC ¶9602 ], 769 F.2d 473, 478 (8th Cir.1985); United States v. Amerada Hess Corp. [80-1 USTC ¶9160 ], 619 F.2d 980, 985 (3d Cir.1980); see also United States v. Kordel, 397 U.S. 1, 11, 90 S.Ct. 763, 769, 25 L.Ed.2d 1 (1969).

⁶ For purposes of Rule 6(e)(2), a civil tax audit is not "preliminary to or in connection with a judicial proceeding" and therefore grand jury materials covered by Rule 6(e)(2) may not be disclosed under the Rule 6(e)(3) exceptions for use by IRS "civil" personnel pursuant to court order. United States v. Baggot [83-2 USTC ¶9438 ], 463 U.S. 476, 103 S.Ct. 3164, 77 L.Ed.2d 785 (1983).

⁷ Thus, we do not reach a potentially complicating separate question concerning the quantum of protection afforded to documents that are concededly grand jury documents as opposed to the quantum of protection afforded to other information gathered by the grand jury process. See Nervi, FRCrP 6(e) and the Disclosure of Documents Reviewed by a Grand Jury, 57 U.Chi. L.Rev. 221 (1990).

⁸ The purposes of grand jury secrecy are several: (1) to prevent the escape of a person against whom indictment may be sought; (2) to insure that the grand jury has freedom of deliberation; (3) to prevent subornation of perjury or tamerping with witnesses who may later appear at trial; (4) to encourage full disclosure by witnesses; and (5) to protect the innocent accused from publication of the fact that they have been under investigation. In re Subpoena to Testify, 864 F.2d 1559, 1562 n. 2 (11th Cir.1989).

⁹ The search warrants and subpoenas were served on the same day--the search warrants hours earlier than the subpoenas.

¹⁰ At the corporation's request, the Assistant United States Attorney agreed to condense the period to that of January 1, 1983 , through January 31, 1987 .

 

 

 

[91-1 USTC ¶50,055] United States of America , Plaintiff-Appellee v. Lawrence M. Richey, Defendant-Appellant

(CA-9), U.S. Court of Appeals, 9th Circuit, 88-3276, 1/23/91 , 924 F2d 857, Affirming an unreported District Court decision

[Code Sec. 7213 ]

Criminal penalties: Unauthorized information disclosure: First Amendment.--The prosecution and conviction of a former IRS agent for the willful public disclosure of a federal judge's tax return information did not violate the agent's First Amendment rights. Since First Amendment rights are not without constraint, the government may properly limit speech when compelling government interests outweigh the free expression of the speaker. After retiring from the IRS, the former agent was indicted for conspiring to defraud the government. An attorney who the defendant once audited was the presiding judge. After the trial, the convicted defendant mentioned the audit and the potential bias of the judge, thus violating the duty of confidentiality. Although the former agent had a substantial interest in a fair trial and a right to comment upon matters of public concern, such as judicial bias, this did not outweigh the compelling government interest to provide a confidential and workable tax system.

Carroll D. Gray, Assistant United States Attorney, Spokane , Wash. 99210 , for plaintiff-appellee. Christopher S. Tait, 230 S. 2nd St. , Yakima , Wash. , for defendant-appellant.

Before WRIGHT, REINHARDT and O'SCANNLAIN, Circuit Judges.

OPINION

O'SCANNLAIN, Circuit Judge:

We are asked to decide whether prosecution and conviction of a former Internal Revenue Service employee, for willfully disclosing to the public information about a certain federal income tax return, violates his first amendment right to freedom of expression.

I

Lawrence Richey was an Internal Revenue Service ("IRS") agent for approximately twenty-five years. In 1970, he audited Alan McDonald, who was then an attorney in private practice. After Richey examined McDonald's income tax returns for the years 1967-69, the IRS assessed $1,033.33 in additional taxes. McDonald paid the assessment.

After retiring from the IRS in 1981, Richey joined a private tax preparation service. He soon became involved in a tax shelter scheme and was indicted in 1985 for conspiracy to defraud the government and for aiding and assisting in the preparation of false and fraudulent tax returns.

Richey's case came to trial before a jury in 1987. Presiding as judge was the same Alan McDonald, who had become a United States District Judge for the Eastern District of Washington. Richey did not bring a motion to recuse Judge McDonald nor did Judge McDonald recuse himself. The jury found Richey guilty as charged.

Judge McDonald sentenced Richey to a term of probation. As a condition of probation, Judge McDonald enjoined Richey from making derogatory remarks about the United States government.

Richey's probation condition attracted local press attention. Bill Morlin, a reporter for the Spokesman-Review and Spokane Chronicle newspapers, called Richey and asked him why he thought Judge McDonald had imposed the controversial condition of probation upon him. Morlin would later testify that Richey responded with the following explanation: "Well, I'll tell you why. When I worked for the IRS I once audited Alan McDonald's taxes and further, that [sic] I found discrepancies in his tax returns." Morlin further testified that Richey said: "I kind of get the feeling that [Judge McDonald wanted] retribution." Morlin used Richey's statements in a news article, which was published on the front page of both the Spokesman-Review and the Spokane Chronicle on October 7, 1987 .

On the same day that the newspaper article appeared, Richey spoke to two other people in the local press about his "retribution" theory. Robert Lowery, News Director for KBBO and KSRE radio stations in Yakima , Washington , testified that Richey stated, in an interview on October 7, 1987 , that he had audited Judge McDonald. Rodney Lyle Smith of KNDO television in Yakima also testified that Richey stated that he had audited Judge McDonald some fifteen years earlier and assessed some additional taxes upon him.

On June 15, 1988 , a federal grand jury filed a three-count indictment, charging Richey with willfully disclosing tax return information in violation of I.R.C. §7213 . Prior to trial, Richey filed a motion to dismiss the indictment on the grounds that, among other things, section 7213 violated his first amendment right to freedom of expression. Richey also filed a motion to remove the Assistant United States Attorney assigned to prosecute the case. The district court denied both motions. After a bench trial before Judge Hupp of the Central District of California, sitting by designation in the Eastern District of Washington, Richey was found guilty of violating section 7213 .

Meanwhile, Richey appealed his earlier conviction for conspiracy to defraud the IRS and aiding and assisting in the preparation of false and fraudulent tax returns. Richey claimed, among other things, that the probation condition violated his first amendment right to free speech and that Judge McDonald had abused his discretion by not recusing himself sua sponte. This court concluded that the probation condition issue was moot by the time the case reached us because Richey had been resentenced to a new term of probation that did not include the condition. See United States v. Richey, No. 87-3083 (9th Cir. June 5, 1989 ) (memorandum disposition). We also determined that Judge McDonald did not abuse his discretion by not recusing himself sua sponte from Richey's case. Id.

Richey now appeals from his conviction for violation of section 7213 . We have jurisdiction under 28 U.S.C. §1291 .

II

Richey contends that the district court erred by denying his motion to dismiss the indictment because section 7213 , as applied, violated his first amendment right to freedom of expression.

A

The first amendment's guarantee of freedom of speech encompasses a broad spectrum of form and type of expression. While a "major purpose of [the] Amendment [is] to protect the free discussion of governmental affairs," Mills v. Alabama , 384 U.S. 214, 218 (1966), the amendment also protects an individual's interest in self-expression. See Consolidated Edison Co. v. Public Serv. Comm'n, 447 U.S. 530, 534 n.2 (1980). The fact that the majority of a community may find an idea politically, intellectually, or morally offensive does not shield the idea from first amendment protection. See, e.g., Wooley v. Maynard, 430 U.S. 705, 715 (1977). Accordingly, we protect expression as diverse and unique as burning of the American flag, see Texas v. Johnson, 109 S. Ct. 2533, 2536 (1989), public announcement of boycott violators, see NAACP v. Claiborne Hardware Co., 458 U.S. 886, 909-10 (1982), and live entertainment including nude dancing, see Schad v. Borough of Mount Ephraim, 452 U.S. 61, 66 (1981).

However, first amendment rights are not without some constraints. The government may properly limit speech when compelling government interests outweigh the free expression interests of the speaker. See, e.g., Landmark Communications, Inc. v. Virginia , 435 U.S. 829, 841 (1978). Our task, therefore, is to identify the relevant interests, and then to determine, under established first amendment principles, whether governmental interests outweigh those of the speaker in this case.

B

1

We discern three relevant interests in the present case. First, Richey has an undisputed interest in a fair trial, which includes the right to have an unbiased judge. See Tuney v. Ohio, 273 U.S. 510, 523 (1927) ("it certainly violates the Fourth Amendment, and deprives a defendant in a criminal case of due process of law to subject his liberty or property to the judgment of a court the judge of which has a direct, personal, substantial, pecuniary interest in reaching a conclusion against him in his case"); see also Aetna Life Ins. Co. v. Lavoie, 475 U.S. 813 (1986); Ward v. Village of Monroeville, 409 U.S. 57 (1972). ¹ In Lavoie, a civil case, the Supreme Court concluded that Aetna's due process rights were violated when an Alabama Supreme Court justice participated in an appeal of an Aetna case while the justice had two lawsuits pending against other insurance companies, involving similar issues, at the same time. See Lavoie, 475 U.S. at 824-25. Here, in a criminal trial, Richey's due process interest was clearly substantial. ²

2

Richey also has an interest, as a citizen, in commenting upon matters of public concern. See Pickering v. Board of Educ., 391 U.S. 563, 568 (1968). "[S]peech on public issues occupies the 'highest rung of the hierarchy of First Amendment values' and is entitled to special protection." Connick v. Myers, 461 U.S. 138, 145 (1983) (quoting NAACP v. Claiborne Hardware Co., 458 U.S. 886, 913 (1982)).

The potential bias of a judge is clearly a matter of public concern. See Landmark Communications, Inc. v. Virginia, 435 U.S. 829, 835-37 (1978). There, the Virginian Pilot, a Landmark newspaper, published an article about a pending investigation of a state judge by the Virginia Judicial Inquiry and Review Commission. The article identified the state judge under investigation. Landmark was subsequently indicted, convicted, and fined for the article, as the identification of a judge under investigation was a violation of Virginia state law. The Supreme Court reversed the conviction. "Whatever differences may exist about interpretations of the First Amendment," the Court observed, "there is practically universal agreement that a major purpose of that Amendment was to protect the free discussion of governmental affairs." Id. at 838 (quoting Mills v. Alabama, 384 U.S. 214, 218 (1966)). This includes the operation of the courts and judicial conduct of judges; indeed, such topics are "matters of utmost public concern." Id. at 839. ³ There can be no doubt that, in the case at hand, the public would be concerned about any potential judicial bias, and thus the topic was one in which Richey had a cognizable interest in discussing.

Richey also invokes the public's interest in being informed as a justification for his statements to the press. Indeed, "[b]y protecting those who wish to enter the marketplace of ideas from government attack, the First Amendment protects the public's interest in receiving information." Pacific Gas & Elec. Co. v. Public Utilities Comm'n, 475 U.S. 1, 8 (1986). The public's interest must indeed be considered in any first amendment calculus. This interest carries particular weight when invoked by the media or persons charged with informing the public. See Landmark Communications, 435 U.S. at 839 ("The operation of the Virginia Commission, no less than the operation of the judicial system itself, is a matter of public interest, necessarily engaging the attention of the news media."). Nevertheless, when invoked by persons privy to sensitive material as a result of their position, the public's interest in being informed carries far lesser weight in the balancing process. Cf. id. at 837 (Court expressly disavowed taking a position on the constitutionality of an attempt by Virginia "to punish participants for breach of [the confidentiality] mandate") (emphasis added). ⁴

3

The final interest at issue is that of the government and taxpayers in protecting the confidentiality of private tax information. ⁵ See generally Church of Scientology v. IRS [87-2 USTC ¶9604 ], 484 U.S. 9 (1987); see also Johnson v. Sawyer [86-2 USTC ¶9677 ], 640 F. Supp. 1126, 1131 (S.D. Tex. 1986) (barring disclosure of information pertaining to deficiencies, penalties, and interest due); Cliff v. Internal Revenue Serv. [80-2 USTC ¶9596 ], 496 F. Supp. 568, 571-72 (S.D.N.Y. 1980) (prohibiting disclosure of IRS memoranda that discuss the impact of IRS regulations on specific taxpayer liability). Richey concedes that the government has an interest in protecting the confidentiality of private tax information. However, since we are asked to balance competing interests, the magnitude of the interest must be carefully evaluated.

The government's interest in the confidentiality of tax information has two components. First, confidentiality is necessary to ensure compliance with federal tax laws. The American tax structure is unique in that it is based on a system of self-reporting. United States v. Bisceglia [75-1 USTC ¶9247 ], 420 U.S. 141, 145 (1975). "There is legal compulsion, to be sure, but basically the Government depends upon the good faith and integrity of each potential taxpayer to disclose honestly all information relevant to tax liability." Id. In enacting the statutory provisions guaranteeing confidentiality, including section 7213 , Congress observed that "the question [has been raised] whether the public's reaction to this possible abuse of privacy would seriously impair the effectiveness of our country's very successful voluntary assessment system which is the mainstay of the Federal tax system." Sen. Rep. No. 94-738, Part I, reprinted in 1976 U.S. Cong. Code & Admin. News 3439, 3747.

The government also has an interest, asserted on behalf of its taxpayers, to ensure each individual taxpayer's right to privacy. A tax return and related information contains many intimate details about the taxpayer's personal and financial life. An individual's tax return will contain, in addition to the nature and source of income, information about the taxpayer's family, political affiliation, health data, and union membership. Likewise, a corporate tax return will contain detailed financial information which could potentially be abused by competitors. See, e.g., Association of American Railroads [74-1 USTC ¶9263 ], 371 F. Supp. 114, 116 (D.D.C. 1974) ("The policy of confidentiality for income tax data encourages the full disclosure of income by taxpayers in that the individual or corporate taxpayer is assured that his neighbor or competitor will not be apprised of the intimate details of his financial life."); see generally Benedict & Lupert, Federal Income Tax Returns--The Tension Between Government Access and Confidentiality, 64 Cornell L. Rev. 940, 943-47 (1979) (discussing the importance of maintaining the confidentiality of tax returns). Clearly, individual taxpayers desire to keep this information confidential.

C

Our remaining task is to balance these competing interests. We begin by noting that we have previously found the government's interest in maintaining a workable tax system to be "compelling." See Bradley v. United States [87-1 USTC ¶9336 ], 817 F.2d 1400, 1405 (9th Cir. 1987). There, we considered Martin Bradley's first amendment challenge to I.R.C. §6702 , which forbids the filing of "frivolous" tax returns. Bradley submitted a Form 1040 to the IRS which contained only his name, address, social security number, and a statement, printed in large letters, condemning the United States ' involvement in Central America . Even though Bradley owed no taxes and was thus under no obligation to submit a tax return, the IRS imposed a $500 penalty upon Bradley for filing a frivolous tax return.

We rejected Bradley's first amendment challenge to the application of section 6702 . See id. at 1404-05. After assuming for the sake of argument that Bradley's conduct contained "speech elements entitled to first amendment protection," we nonetheless observed that an "important government interest" could override Bradley's free expression rights. Id. at 1405. The "Government's compelling interest in maintaining a sound and administratively workable tax system" was just such an overriding interest. Id. (emphasis added).

In contrast to the government's "compelling" interest, Richey's personal interest in having an unbiased judge preside at his trial could hardly be advanced by his gratuitous remarks to the media, particularly given they were made after the trial. Although convicted and sentenced in the trial court, Richey still had an avenue for relief in the court of appeals. Conversely, the media offered no practical hope to Richey, as media commentary has no impact or, certainly, should have no impact, on judges as they reach their decisions. See Bridges v. California , 314 U.S. 252, 289 (1941) (Frankfurter, J., dissenting) ("[judges] by tradition will not respond to public commentary"). Thus, while Richey's interest is concededly substantial, the relationship between the interest and the statements at issue is, at best, tenuous. ⁶

Richey's interest as a citizen in commenting upon matters of public concern is also substantial, but it must give way to the government's interest in this case. Even speech dealing with matters of public concern can be, in some instances, subject to governmental regulation. Allen v. Scribner, 812 F.2d 426, 432 (9th Cir. 1987); see also Cox v. Louisiana, 379 U.S. 536, 558 (1965). When the government has a legitimate interest in regulating speech, reasonable time, place, and manner restrictions are permissible. See Allen, 812 F.2d at 432. Here, the government seeks to restrict disclosure of private tax information to the press, where the result sought to be accomplished by such disclosure could be accomplished by less deleterious means. Given the compelling governmental interest in maintaining a workable tax system, it is difficult to say that this regulation is unreasonable. See, e.g., Connick v. Myers, 461 U.S. 138, 154 (1983) (government employee's "limited First Amendment interest" was trumped by action which might "disrupt the office, undermine [supervisor's] authority, and destroy close working relationships"); Snepp v. United States, 444 U.S. 507, 509 n.3 (the government's "compelling interest in protecting both the secrecy of information important to our national security and the appearance of confidentiality so essential to the effective operation of our foreign service" enabled the CIA to "impos[e] reasonable restrictions on employee activities that in other contexts might be protected by the First Amendment"). This is particularly true here where Richey failed even to attempt other less intrusive means of disclosing the sensitive information. ⁷

In sum, there can be no doubt that Richey violated the duty of confidentiality imposed upon him by section 7213 . Richey's self-serving comments to the press--made in full knowledge that they were in violation of section 7213 --are not transmogrified into speech worthy of first amendment protection simply because they touched upon a matter of public concern. The district court did not err in denying the motion to dismiss the indictment on first amendment grounds.

III

Richey contends that the district court erred by not granting his motion for removal of the assistant United States Attorney. Richey's contention appears to be that the assistant United States Attorney might himself have violated section 7213 by disclosing in the indictment Judge McDonald's tax return information. Richey views such disclosure as a basis for removal of the assistant United States Attorney.

This argument is meritless. The record indicates that the disclosure in the indictment in this prosecution was made with Judge McDonald's consent. A taxpayer may disclose his own tax information. See United States ex rel Carthan v. Sheriff of New York , 330 F.2d 100, 101 (2d Cir.), cert. denied, 379 U.S. 929 (1964); see also I.R.C. §6103(a) (taxpayer not prohibited from disclosing his own tax return information). Moreover, tax information may be disclosed to a grand jury. See Lampert [88-2 USTC ¶9463 ], 854 F.2d at 337 (tax information disclosed in an information); In re Grand Jury Investigation, 696 F.2d 449, 450-51 (6th Cir. 1982).

AFFIRMED.

¹ In Richey's prior appeal, we concluded that Judge McDonald was not, in fact, biased. See United States v. Richey, No. 87-3083 (9th Cir. May 5, 1989 ) (memorandum disposition) ("In the conduct of the trial, [Judge McDonald] was eminently fair."). However, since the events at issue in this appeal occurred prior to our resolution of the earlier appeal, we give Richey the benefit of any doubt and assume, for purposes of this appeal, that Richey had at least a colorable claim of potential bias by Judge McDonald.

² Excluding its otherwise strident emotional rhetoric, the dissent asserts that Richey's interest in obtaining an unbiased judge has no place in a first amendment balancing process, but rather, should be considered only in relation to a due process or recusal statute violation. Post at 719 n.6. Paradoxically, the dissent prays for a "narrow exception" to the commands of section 7213 to those who believe they are "victim[s] of judicial bias." Post at 727. Isolating such purported victims necessarily involves identifying members of the class.

The consequences of removing the "due process" component from the first amendment calculus are drastic. Presumably, any person otherwise constrained by section 7213 would be free to disseminate--unchecked except for time, place, and manner restrictions--such information merely if the information creates inferences of judicial bias. Moreover, while judicial bias is indisputably a matter of great public concern, so is malfeasance by any public servant. So applied, the "narrow exception" becomes a gaping hole.

In any event, we have clearly identified the interest as one of "due process." Given that Richey's objectives in speaking to the press may have included an attempt to advance this interest, the government's reasons for limiting this speech must be shown to be all that more compelling in order to defeat such interest.

³ To the extent that Richey's statements simply involved Judge McDonald's audit, the statements cannot be "fairly characterized as constituting speech on a matter of public concern." Connick v. Myers, 461 U.S. 138, 148 (1983). Private tax return information is not "a traditionally public source of information." Seattle Times Co. v. Rhinehart, 467 U.S. 20, 33 (1984). Private tax return information is, moreover, not a matter upon which "free and open debate is vital to informed decision making by the electorate." Pickering, 391 U.S. at 571-72. However, the disclosure of tax information cannot be viewed in isolation; in context, the disclosure was merely the factual predicate for a larger proposition, that of the alleged bias of Judge McDonald.

⁴ "Participants" was defined to include (1) members and staff of the Virginia Judicial Inquiry and Review Commission, and (2) witnesses or putative witnesses. 435 U.S. at 837 n. 10.

⁵ Private tax information, as used in 26 U.S.C. §7213 , specifically includes tax deficiencies, over-assessments, and whether a taxpayer's return has been audited. 26 U.S.C. §6103(b) .

⁶ Ironically, Richey claims that he did not move to recuse Judge McDonald in part because he feared violating section 7213 by making such a motion. Certainly if section 7213 extends to revelations made in the course of a judicial proceeding, the section encompasses statements made outside of the courtroom.

The dissent suggests that we treat Richey's failure to move to recuse Judge McDonald as a bar to his first amendment claim. Of course, this failure to move for recusal cannot be a bar to Richey's claim; rather, it is merely a factor to consider in performing the balancing of interests where the first amendment is implicated. In hindsight we know that Judge McDonald did recognize Richey as the IRS agent who audited him some seventeen years before. Nevertheless, without Richey's having moved for recusal--and thus establishing a factual predicate--his allegations of bias were even more speculative than they might at first appear. As the correlation between the matter of public concern (judicial bias) and the subject matter of the speech at issue (earlier tax audit) becomes more attenuated, the interest of the speaker diminishes in relation to the government's compelling interest.

⁷ If Richey had revealed the audit in court, presumably the press could have discovered and reported the information from this source. That the information was otherwise discoverable is, however, irrelevant. In United States v. Posey, 864 F.2d 1487 (9th Cir. 1989), the defendant, George Posey, was convicted of supplying nonclassified technical information to South Africa, in violation of the Comprehensive Anti-Apartheid Act, 22 U.S.C. §5067 , and the Arms Export Control Act, 22 U.S.C. §2778 ("Acts"). Posey contended that because the information was readily available to virtually anyone in the world, the first amendment prohibited application of the Acts to dissemination of such information. We rejected this argument, holding that the government's national security interests permitted restriction of such information, even if the information were otherwise readily discoverable. See id. at 1496-97. Similarly, in the present case, the government's interest in maintaining a workable tax system permits restrictions on disclosures even if the information might otherwise become known.

Moreover, public confidence in the tax system is less likely to erode if disclosure is made during the course of a judicial proceeding, rather than at the whim of a former IRS agent. Richey's offhand comments to the press suggest to the public that no restrictions of such information exist. Cf Lampert v. United States [88-2 USTC ¶9463 ], 854 F.2d 335, 338 (9th Cir. 1988) ("once return information is lawfully disclosed in a judicial forum, its subsequent disclosure by press release does not violate the Act"), cert. denied. 109 S. Ct. 1931 (1989).

Dissenting Opinion

REINHARDT, Circuit Judge

Lawrence Richey's odyssey through the courts constitutes a sad chapter in this circuit's performance of its judicial duties. Twice now, we have severely stretched the limits of legal reasoning in order to avoid a serious issue regarding judicial conflict of interests. Twice now, significant violations of Richey's first amendment rights have occurred--each time with the active participation of the judiciary. While Richey's original complaints of actual judicial bias may well have been wholly without merit--and I think it reasonable to assume that they were--his allegations raise a serious question whether the district judge failed to recuse himself as required by 28 U.S.C. §455 (1982). Moreover, the subsequent actions of this court have given rise to an even more serious question--whether the judiciary is willing to protect free speech when its own self-interest is involved. I should state at the outset that I do not believe that there is any judicial conspiracy to silence or punish Richey, or even any deliberate exercise of judicial ill-will toward him. There is, however, a remarkable judicial blindness--or perhaps a remarkable judicial insensitivity to the first amendment--that appears to stem from an inability to grasp the import of free speech when criticisms of the judiciary are involved.

I.

The Richey saga undoubtedly originated with a district judge's determination to perform his duties fully and fairly and to carry out the obligations imposed on him by his oath of office. Nevertheless, that judge's decision to preside over Richey's first trial led, perhaps inevitably, to the constitutional controversy that today confronts us. As an I.R.S. agent, Richey audited the tax returns of an attorney named Alan McDonald and assessed additional taxes against him. Several years later, Richey, now in private business as a tax advisor, found himself the defendant in a criminal trial, with the same Alan McDonald, now a United States District Judge, presiding. Following Richey's conviction on charges involving the preparation of fraudulent tax returns, Judge McDonald sentenced him to a substantial term of imprisonment but suspended service of the sentence and placed him on probation for five years subject to a number of conditions. One of those conditions was the remarkable and patently unconstitutional requirement that Richey not make disparaging remarks about the United States government. Because of this unprecedented gag order, Richey faced the threat of criminal sanctions if he exercised his first amendment rights.

Some time after the imposition of the sentence, Bill Morlin, a reporter for the Spokesman-Review and the Spokane Chronicle newspapers, telephoned Richey to ask him about the prohibition against criticizing the government. Morlin identified himself and asked Richey why he believed Judge McDonald had imposed the obviously unconstitutional condition. According to Morlin, Richey responded that when he had worked for the I.R.S., he had audited then-attorney McDonald's tax returns and found discrepancies in travel and entertainment expenses. He stated in response to a question that he did not remember the amounts involved. When asked again why he thought the judge had issued the unconstitutional gag order, Richey responded: "I kind of get the feeling that it was retribution; that he did remember; that he did remember the tax audit. . . . I think the judge thought, 'Now we've got this smart aleck.' He got me, all right."

Morlin published Richey's comments the next day. Based upon this article, Robert Lowery, the news director for the Yakima Broadcasting Company radio station, telephoned Richey and asked him to verify that he had audited Alan McDonald. Richey confirmed that he had conducted the audit but refused to say when or to reveal the outcome. Lowery broadcast this information twice on AM and twice on FM frequencies.

The same day, Rodney Smith, a reporter/editor for KNDO Television, initiated a videotaped interview with Richey concerning the gag order. Smith asked Richey why he thought Judge McDonald had imposed the restraint, and Richey responded: "I thought it was rather malicious. I may have rubbed him the wrong way in my frequent letters to the editors; I don't know. I also remember interviewing him as an agent about fifteen years ago and assessing some additional tax . . . ." Two months later, Smith aired this tape on television.

For having responded to the press inquiries as he did, Richey was charged with three felony counts, and convicted on all three. He was sentenced to three years of supervised probation. He was also charged with having violated the terms of his original probation. His original probation was revoked and he was sentenced to a new probationary term; however the new order did not include a provision similar to the unconstitutional gag order. ¹

II.

Richey first appealed from his conviction on the original tax preparation charges and from the sentence of probation imposed by Judge McDonald. We affirmed. Strangely, we decided that our disposition was not worthy of publication. See United States v. Richey, No. 87-3083 (9th Cir. June 5, 1989) (unpublished memorandum disposition). In our unpublished disposition, we rejected Richey's claim that Judge McDonald should have recused himself sua sponte, saying: "We are reluctant to lay down a rule that every judge in his circumstances is automatically disqualified from presiding." That analysis strikes me as exceedingly odd. One wonders how many judges such a rule would have affected. Is it really common, as our unpublished memorandum hints, for federal judges to preside over criminal trials of individuals who have previously been responsible for the assessment of tax delinquencies against them? I would hardly think so. More important, it seems evident that Judge McDonald did violate, perhaps unwittingly, the rule requiring a federal judge to recuse "himself in any proceeding in which his impartiality might reasonably be questioned." ² While the prior relationship may not have actually affected Judge McDonald's attitude toward Richey, that is not the test under the statute. The test involves the "appearance" and not the actuality of bias. See Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847 (1988). ³ In addition, although we noted in our unpublished disposition that the gag order was an "odd provision" which was "not defensible," we held that Richey's appeal as to this condition was moot.

Today, this court has had a second opportunity to review Richey's treatment at the hands of the judiciary. This time we were asked to review the three felony convictions to which Richey was subjected for his statements explaining why he believed Judge McDonald was biased against him. Unfortunately, once again we have failed to engage in a reasoned discussion regarding either judicial conflicts of interest or the public's right to know. Instead, the majority wholly ignores the first subject and treats the second by a perfunctory balancing of interests followed with a conclusory holding that Richey's three felony convictions must be affirmed. The majority's determination that Richey had no first amendment right to speak as he did is especially ironic in light of the fact that the critical comments for which he was punished related to a federal court order that itself flagrantly violated his right to freedom of speech.

Richey does not dispute that his statements were in violation of the facial provisions of 26 U.S.C. §7213 . Rather, he challenges the constitutionality of that statute as applied to the speech in which he engaged. The majority holds that Richey was properly convicted because the first amendment does not protect the comments in which he criticized the conduct of the court. I dissent.

III.

A public employee or former employee's free speech rights may be limited in ways that other persons' rights may not. Because Richey is a former employee of the I.R.S., we apply the two-part test of Pickering v. Board of Educ., 391 U.S. 563, 568 (1968). ⁴ Under this test, the first question is whether Richey's speech was on a matter of public concern. See Connick v. Myers, 461 U.S. 138, 146 (1983); Pickering, 391 U.S. at 568. The second question is whether Richey's interest in free speech outweighs the government's interest in protecting the privacy of tax return information. See Connick, 461 U.S. at 147. This two-part balancing test involves a fact-specific inquiry. See id. at 150-51. The majority correctly concludes that Richey's speech was on a matter of public concern but erroneously holds that the government's interest in maintaining a workable tax system outweighs Richey's interest in communicating information regarding judicial misconduct. In my opinion, the latter holding constitutes serious constitutional error.

As the majority acknowledges, there can be little question that Richey's speech involved a matter of public concern. In reaching this conclusion, a court must examine the content, form, and context of the speech. See Connick, 461 U.S. at 147-48. The content is undisputed: Richey revealed information pertaining to Judge McDonald's prior tax returns. In itself, this information would not ordinarily be of public concern. Nevertheless, in context, the speech was not about private tax information. Rather, it was about bias in the judiciary. The tax information was merely evidence to support the charge of bias. In short, although private tax information is not in itself a subject of public concern, the same is not true when the tax information is relevant to the question whether a judge should have recused himself. There is a strong public interest in discussing the types of considerations that justify--or require--recusal, as well as in discussing the question whether a judge violated the recusal statute in a particular case. Indeed, "[t]he administration of justice by an impartial judiciary has been basic to our conception of freedom ever since Magna Carta. It is the concern not merely of the immediate litigants. Its assurance is everyone's concern . . . ." Bridges v. California, 314 U.S. 252, 282 (1941) (Frankfurter, J., dissenting). For this reason, "[t]he operations of the courts and the judicial conduct of judges are matters of utmost public concern." Landmark Communications, Inc. v. Virginia, 435 U.S. 829, 839 (1978). The form of Richey's speech also supports a finding of public concern. Richey responded to inquiries from reporters, and the media generally found his comments worthy of dissemination. His statements were broadcast on television and radio and were printed in the newspaper. The interest that attached to Richey's comments supports the conclusion that he spoke on a matter of public importance.

While the answer to the public concern issue is self-evident, the next issue, the balancing of interests, requires more rigorous analysis. Two strong interests conflict. Richey had a compelling interest in speaking out on a matter of public concern. ⁵ On the other hand, it is undisputed that the government has a weighty interest in protecting the privacy of tax return information. See Lampert v. United States [88-2 USTC ¶9463 ], 854 F.2d 335 (9th Cir. 1988), cert. denied, 109 S.Ct. 1931 (1989). In order to foster public confidence in the privacy of individual returns, Congress prohibited government employees and former employees from disclosing information relating to them. See Stokwitz v. United States [87-2 USTC ¶9606 ], 831 F.2d 893, 894 (9th Cir. 1987), cert. denied, 485 U.S. 1033 (1988). The statute specifically sought to end the I.R.S.'s practice of serving as a "lending library" to other government agencies. Id. (quoting 122 Cong. Rec. 24,013 (1976) (remarks of Sen. Weiker)). The Supreme Court has emphasized the statute's "primary purpose of limiting access to tax filings." Church of Scientology v. IRS [87-2 USTC ¶9604 ], 484 U.S. 9, 16 (1987). Thus, in order to resolve whether Richey's comments were protected speech, we must determine which of these competing interests weighs most heavily. ⁶

IV.

The majority initially denigrates the strength of Richey's free speech interest in three ways. First, my colleagues minimize the importance of the public's interest in being informed. Second, they state that Richey failed to exhaust his "avenue for relief in the court of appeals." Finally, they suggest that Richey's failure to move to recuse Judge McDonald significantly undermines his claim. All of these arguments are based on erroneous assumptions. None has any bearing on the proper outcome of this case.

The claim that the public's interest in being informed is of less importance "when invoked by persons privy to sensitive material as a result of their position" finds no support in the law, as evidenced by the majority's exclusive reliance on an opinion that expressly declined to address this issue. See Ante at--(citing Landmark Communications, Inc. v. Virginia, 435 U.S. 829, 837 (1978)). To the contrary, the public has a weighty first amendment interest in hearing whistleblowers speak out when their communication exposes government corruption. See Brockell v. Norton, 732 F.2d 664, 668 (8th Cir. 1984). It should be self-evident that the public's interest in learning of governmental wrongdoing depends only on the nature of the information, not the occupation of the source. In weighing the public interest in the Pickering balance, we have always asked whether the "subject was 'a matter of legitimate public concern.' " Connick, 461 U.S. at 145 (quoting Pickering , 391 U.S. at 571-72) (emphasis added). We consider the speech, not the speaker. Thus, the majority errs by understating the importance of the public's right to know. ⁷

The majority's claim that Richey should have exhausted his judicial remedies is equally without merit. A reversal in the court of appeals would not have accomplished Richey's goal of informing the public about the existence of judicial bias. People have a first amendment right to criticize the judiciary when they believe a wrong has occurred. There is no obligation to delay speaking out in hopes that the judicial system will itself ultimately recognize a wrong and may even take action to correct it--someday. Courts are not above the law--or above criticism. Moreover, even if it is ultimately determined that there has been no judicial misconduct, what matters for purposes of the first amendment is not whether the criticism is correct; what matters is that a person who believes that an injustice has been done has a right to say so publicly. The first amendment right to speak does not evaporate merely because a criticism may be factually or legally in error. The right to appellate review is simply irrelevant to the exercise of the first amendment right to criticize the district court.

The majority's final point is that Richey should have moved to recuse Judge McDonald. That he did not do so, however, is of no legal significance for first amendment purposes. ⁸ Under the statute, it is the duty of the judge to recuse himself whether or not a challenge is made. ⁹ Two legal issues were raised by Richey's criticisms: first, whether, by presiding over his case, Judge McDonald violated the applicable rules and thus acted improperly, and second, whether the judge's conduct, even if it was not covered by a rule, was unfair and prejudicial. Either way, Richey had a compelling interest in bringing his complaint of shortcomings in the judiciary to the public's attention. If the recusal law covered the circumstance of Richey's trial before Judge McDonald, Richey had a strong interest in communicating the fact of Judge McDonald's failure to recuse himself. If, on the other hand, judges are not presently required to recuse themselves in cases in which defendants have previously imposed financial penalties on them, Richey may have had an even more compelling justification for "going public" with a case for reform of the current rules.

The majority's erroneous denigration of the strength of Richey's free speech interest skews the balance in favor of the government. Richey's interest in communicating on a matter of serious public concern cannot be so lightly dismissed. ¹⁰

V.

The balancing of interests in which my colleagues engage can perhaps most generously be characterized as skimpy and confused. The majority refers to time, place, and manner restrictions, thereby suggesting that Richey could have made the statements for which he was convicted in a different time, place, or manner. It of course does not identify the time, place, and manner "regulation" it purports to uphold, nor does it identify when, where, or how Richey could have spoken. The plain fact is, of course, that there is no time, place, or manner regulation--solely a content proscription. Further my colleagues state that Richey's disclosure to the press could have been "accomplished by less deleterious means," but they shed little light on the means of which they might approve. Given their earlier comments that Richey could have moved for recusal or exhausted his judicial remedies in the court of appeals, one might think that they would permit him to make his disclosure in court. Yet, they carefully refrain from asserting that Richey would be protected against a criminal prosecution if he had chosen a judicial forum in which to raise his complaints initially. ¹¹ Most important, even if choosing a judicial forum might facilitate reversal of Judge McDonald's rulings, but see United States v. Richey, No. 87-3083 (9th Cir. June 5, 1989) (unpublished memorandum disposition), doing so would not as directly or as effectively fulfill the function of informing the public. The remedies simply do not serve the same purpose and are not mutually exclusive.

As my colleagues recognize, once Richey made a disclosure in court, the press would be free to disseminate the information, see Lampert v. United States [88-2 USTC ¶9463 ], 854 F.2d 335, 338 (9th Cir. 1988), cert. denied, 109 S.Ct. 1931 (1989)--although, as noted, according to the majority Richey might be subject to criminal prosecution for that disclosure. However, Richey's reason for speaking to the press was to inform the public of his allegations of judicial bias. No logical or legal reason exists that he should be required to file papers in court and await the possibility that some enterprising journalist will discover the conflict and decide independently to publicize it. ¹² Richey's first amendment interest is in his own speech; that the media might discover the conflict following a disclosure in court filings and communicate it to the public does not diminish Richey's right to speak to the press and public directly. Disturbingly, my colleagues seem to suggest that because Richey's comments were newsworthy and the courthouse press might have picked them up, his interest in direct communication was less deserving of protection. This conclusion makes no sense.

VI.

The majority is absolutely correct that the government's interest in maintaining a workable tax system is "compelling." See Bradley v. United States [87-1 USTC ¶9336 ], 817 F.2d 1400, 1405 (9th Cir. 1987). ¹³ Confidentiality of tax return information is a critical component of a tax system based on self-reporting of income. See United States v. Bisceglia [75-1 USTC ¶9247 ], 420 U.S. 141, 145 (1975). But this only serves to establish the validity of the statute in general. It does not tell us when an exception is or is not warranted in order to preserve constitutional principles. Here, we are faced with a specific factual situation and asked to make an extremely narrow exception to the statute. There is no reason to think that the narrow exception Richey seeks would jeopardize the entire tax system or result in wholesale disclosure of citizens' tax returns. While we must remain aware of the importance of the government's general interest in nondisclosure and proceed cautiously, where countervailing first amendment interests exist the Constitution obligates us to look carefully at the particular harm to the individual involved as well as the general harm to first amendment values that would result from suppression of the specific speech at issue.

Richey's limited disclosure of tax return information was the means by which he raised an important question regarding judicial bias--a subject that "lies near the core of the First Amendment." Landmark Communications, 435 U.S. at 838. Moreover, it was the taxpayer whose conduct, albeit well-intentioned, precipitated the disclosure. Judge McDonald presided over a criminal trial of an individual who had previously assessed tax delinquencies against him, and he imposed a wholly unprecedented and unconstitutional gag order upon that individual. Thus, Richey's disclosure was provoked, and not gratuitous. Further, it was appropriately limited in scope. His responses to press inquiries communicated his belief that Judge McDonald had violated the recusal laws by presiding over his trial. By supporting his claim with specific facts, Richey was able to bring to the public's attention the information necessary to an evaluation of his allegation of judicial misconduct. As the courts have recognized in the context of libel, "The protection of the public requires not merely discussion, but information." New York Times Co. v. Sullivan, 376 U.S. 254, 272 (1964) (quoting Sweeney v. Patterson, 128 F.2d 457, 458 (D.C. Cir.), cert. denied, 317 U.S. 678 (1942)). Richey therefore had a strong interest in being able to bring the relevant facts to the public's attention.

In this case, the harm that resulted from disclosure was not great. Judges have life tenure and can readily shrug off unpleasant publicity. Moreover, little or no hard tax information was actually revealed. All that was disclosed was that Judge McDonald had failed to calculate the amount due properly and had been assessed an additional sum. No confidential information regarding business or personal transactions was made public. The information related primarily to governmental enforcement action rather than to the content of the taxpayer's return. ¹⁴ The purpose of Richey's disclosure was not to demonstrate that Judge McDonald had done something wrong with respect to the payment of his taxes but rather to show that the judge had a conflict of interest regarding a case over which he had presided. Further, identical disclosure could lawfully have been, and in fact was, made shortly afterwards in material filed with this court. Subsequently, the facts were discussed in a disposition we issued. Thus, the only harm was that a small amount of tax related information was disclosed prematurely. The government's general interest in prohibiting disclosure of the contents of tax returns was breached to only the slightest degree.

After all the factors are analyzed, three considerations appear preeminent. First, bias on the bench is a matter involving a breach of public trust. Second, an individual who believes he is the victim of judicial bias should not be silenced by the state. Third, the disclosure of confidential tax information was minimal in nature. In light of all of the circumstances of the case before us, I have little difficulty in concluding that under the Pickering balancing test, Richey's free speech rights are paramount.

I would hold that, given the narrow exception we are asked to make, Richey's specific first amendment interest and that of the public clearly outweigh the government's general interest in protecting the operation of its tax reporting system. Accordingly, I would find the statute unconstitutional as applied to Richey and reverse his three felony convictions.

¹ Judge McDonald's involvement with the case ended after the original trial and sentence. Two other judges handled the subsequent proceedings.

² 28 U.S.C. §455 (1982) provides in pertinent part:

(a) Any justice, judge, or magistrate of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.

³ Whether, in light of Judge McDonald's failure to recuse himself, Richey would have been entitled to a reversal of his conviction is another matter. Richey's failure to make a "timely" motion would be a factor to be considered in determining the legal consequences that would result from the court's violation of §455(a) . Id. at 868.

⁴ The majority purports to apply a general test under which "[t]he government may properly limit speech when compelling government interests outweigh the free expression interests of the speaker." However, this general rule is modified in the case of public employees "to accommodate the dual role of the public employer as a provider of public services and as a government entity operating under the constraints of the First Amendment." Rankin v. McPherson, 483 U.S. 378, 384 (1987). Thus, when the government attempts to restrict the speech of public employees, the proper analysis is first, whether the employee's speech was on a matter of public concern, and second, if it was, then whether the employee's interest in making the statement outweighs the government's interest as an employer in promoting the efficiency of its public services. Pickering v. Board of Educ., 391 U.S. 563, 568 (1968).

Although my colleagues fail to discuss specifically the distinction between the general test and the test applied to public employees, I note that they correctly cite Pickering , mention Richey's status as a public employee, and hold that Richey's speech was on a matter of public concern. Only then do they balance Richey's interest in speech against the government's interest in promoting the efficiency of tax collection. Because they end up properly applying the two-part Pickering test, any purported application of the general law is of no consequence in this case.

⁵ To determine the strength of Richey's interest, a court must again look to the content, form, and context of his speech. See Connick, 461 U.S. at 150-52. The Supreme Court has stated that the balancing of interests requires an examination of the "manner, time, and place" of the speech. Rankin v. McPherson, 483 U.S. 378, 388 (1987); Connick, 461 U.S. at 152. Despite the variation in the Court's language, the considerations that must be weighed when balancing the interests are essentially the same as those involved in determining whether the statement relates to a matter of public concern. It would make no sense to ignore the content of the speech or the strength of the public's interest in it when performing the balancing function. Moreover, a time, place, and manner inquiry cannot be separated from a form and context examination.

The time, manner, and place of the communication may serve to support or detract from the free speech side of the argument. In the case before us, had Richey made his statements regarding Judge McDonald's tax returns to an individual engaged in a civil dispute with the judge rather than to the press, and had those statements been made during the course of a cocktail party, the balancing of the interests might well justify the result the majority reaches. However, those are hardly the circumstances with which we are faced.

⁶ The majority suggests that there is a third interest to be weighed--Richey's interest in obtaining an unbiased judge. The majority then quickly concludes that this interest is insufficient given the other circumstances of the case. I fail to understand why the majority raises this issue at all, let alone as a part of its first amendment balancing process. Clearly, the only method of obtaining a new judge is through judicial procedures, and it is quite evident from the record that Richey's statements to the press were made for different reasons. More important, Richey's interest in obtaining a fair trial, as opposed to his interest in publicizing the facts relating to his allegedly unfair treatment, is not a factor to be considered when performing our first amendment balancing function. It is only Richey's interest in speech--and the public's right to know--that may be weighed against the government's interest in silencing him. Richey's interest in obtaining a fair trial is more appropriately considered in relation to a claim that he was deprived of his due process rights or that the recusal statute was violated.

⁷ Of course, the fact that the public's right to know is being asserted by a former I.R.S. employee rather than the news media is not irrelevant to the balance that must be struck here. That fact is relevant to the weight of the governmental interest that we must balance against the public's interest. As already noted, the government may have a legitimate interest in regulating public employee speech under circumstances in which it could not prohibit the media from speaking. However, it is surely incorrect to say, as the majority does, that because Richey is a former government employee rather than a representative of the news media, the public's interest in the content of his speech is in any way diminished. To do so results in double-counting of the government's interest: the majority uses it once to reduce the weight of the public interest and again to increase the countervailing weight of the governmental interest. Neither logic nor precedent supports this improper loading of the scales.

⁸ As pointed out supra note 3, the only relevance of Richey's failure to file a recusal motion is with respect to the remedy to be imposed for a recusal violation, not with respect to whether a violation occurred.

⁹ A judge must recuse himself "in any proceeding in which his impartiality might reasonably be questioned." 28 U.S.C. §455 (1982). It is not necessary that the judge be conscious of the circumstances creating an appearance of partiality for the recusal statute to apply. See Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847 (1988). As long as the public could reasonably believe that the judge is aware of these circumstances, the statute is applicable. Id. Here, the coincidence that Richey had previously audited Judge McDonald would certainly appear to have been enough to allow reasonable persons to question the judge's impartiality. Moreover, although actual knowledge is not required, Judge McDonald's deposition strongly suggests that, when Richey appeared before him as a criminal defendant, he was aware that Richey had conducted an audit of his tax returns. In any event, that we subsequently failed to overturn Judge McDonald's action because of a reluctance to adopt a general rule disqualifying all judges in similar circumstances does not affect the fact that Richey spoke out publicly on a matter of overwhelming public importance.

¹⁰ The majority cites four cases as justification for its balancing of the interests in favor of suppressing Richey's speech. None of the cases remotely supports the majority's conclusion. Cox v. Louisiana , 379 U.S. 536 (1965), involved one statute that was unconstitutionally broad and another that was an unconstitutional time, place, and manner restriction on free speech. Allen v. Scribner, 812 F.2d 426 (9th Cir. 1987), reversed a grant of summary judgment for the defendants, holding that a public employer cannot limit an employee's speech based on a bare assertion that the speech would interfere with efficient governmental operations. Connick v. Myers, 461 U.S. 137 (1983), involved statements made on a questionnaire that a public employee distributed to her co-workers; the Court upheld a limitation on the employee's free speech rights because the statements were of only limited public concern and were reasonably likely to disrupt the office. Finally, Snepp v. United States, 444 U.S. 507 (1980) (per curiam), involved national security concerns. The only relevance of the cited cases is that they support the undisputed proposition that public employee speech may be limited under some circumstances. See supra part III. The cases may provide an introduction to the general issues involved but they are of little assistance in resolving the specific question before us.

¹¹ The majority leaves open the question whether §7213 extends to disclosures made in the course of judicial proceedings. In my view, there is no question that as a part of his appeal from his original conviction Richey was entitled to place on the public record the facts supporting his claim that Judge McDonald erred in failing to recuse himself sua sponte. There exists a great need for public accountability in criminal proceedings, as openness "discourage[s] . . . decisions based on secret bias or partiality." See Richmond Newspapers, Inc. v. Virginia, 448 U.S. 555, 569 (1980). Open judicial proceedings also have "a significant community therapeutic value." Id. at 570. These aspects of open justice are particularly important when courts consider issues of recusal, where allegations of bias have been raised, and especially so when recusal issues arise in the context of a criminal trial. "To work effectively, it is important that society's criminal process 'satisfy the appearance of justice,' and the appearance of justice can best be provided by allowing people to observe it." Id. at 571-72 (quoting Offutt v. United States, 348 U.S. 11, 14 (1954)).

¹² My colleagues state that "public confidence in the tax system is less likely to erode if disclosure is made during the course of a judicial proceeding, rather than at the whim of a former IRS agent." This statement reveals the weighted scales with which they balance the competing interests in this case. The balancing here is not about permitting the destruction of the entire tax reporting system in order to appease the "whims" of a former I.R.S. agent. Rather, it is about whether the unquestionably important governmental interest in promoting a workable tax system would be unduly compromised by a narrow exception permitting disclosure of limited tax information when such information is directly relevant to allegations of judicial bias.

¹³ Although I agree with this principle, the majority attaches far too much significance to Bradley. Bradley involved the failure of a person who had submitted a tax return to provide the required information on that return, in violation of a statute. We held that the statute did not violate the first amendment "because it penalizes a taxpayer's conduct of filing a return based on a frivolous position, not the expression of views." Bradley [87-1 USTC ¶9336 ], 817 F.2d at 1405 (emphasis in original). We then went on in dicta to balance the government's interest in maintaining the tax system against Bradley's purported first amendment interest. We found that the government's interest in the filing of accurate tax returns outweighed Bradley's interest in asserting a frivolous position as a justification for his failure to pay taxes. The balancing that we did in that case was a far different matter than the balancing that we do here. In the case before us, we weigh the public's interest in learning of judicial bias against the injury to the system that could result from disclosure that a judge had once been assessed a delinquency. By relying so heavily on Bradley, the majority significantly overstates the government's interest and improperly trivializes Richey's free speech rights.

¹⁴ The disclosure was, in fact, minimal compared to the disclosure that judges are required to make under the Ethics Reform Act of 1989, 2 U.S.C. §701 et. seq. (requiring judges to file forms disclosing income and assets and providing the public with a right to obtain copies of such disclosure documents).

 

 

 

 

[77-2 USTC ¶9498]Paul C. Maggio, Barbara Maggio and Bernard Horwitz, Plaintiffs v. Charles J. Hynes, Deputy Attorney General of the State of New York, Defendant

U. S. District Court, East. Dist. N. Y., Docket No. 76 C 2119, 12/10/76

[Code Secs. 6103, 7602 and 7213--result unchanged by '76 Tax Reform Act]

Examination of books and records: Income tax returns held by accountant: Summons: Self-incrimination privilege.--Taxpayers' motion to enjoin a state attorney general's office from enforcing a subpoena issued for the purpose of obtaining copies of their 1974 U. S. joint income tax return from their accountant was denied. Disclosure of the return was not prohibited by Code Sec. 6103(a)(2) or 7213(a), because the restrictions contained therein apply only to the dissemination of returns by the government. Taxpayers' argument that their Fifth Amendment rights would be violated also did not prevent such disclosures by their accountant.

Hull , Black & Grundfast, 8 Mawr Road, P. O. Box 623 , Smithtown , N. Y. 11787, for plaintiffs. Charles J. Hynes, Deputy Attorney General, Hauppage, N. Y. 11787, pro se.

Memorandum and Order

PRATT, District Judge:

By motion argued December 3, 1976 plaintiff seeks to enjoin the Deputy Attorney General of the State of New York, Charles J. Hynes, from enforcing a subpoena duces tecum issued pursuant to NY Executive Law §63(8). Plaintiffs' motion for a preliminary injunction is denied.

Defendant, the Special State Prosecutor for Nursing Homes, has attempted to obtain, by means of a subpoena duces tecum issued to the personal accountant of the plaintiffs, the joint tax returns filed by them for the year 1974. Plaintiffs seek a declaration that the subpoena is violative of their rights to privacy and to be free from compulsory self-incrimination, and that it contravenes the federally recognized privilege prohibiting the disclosure of tax returns. Moreover, plaintiffs by this instant motion make application for preliminary relief restraining the Special Prosecutor from seeking to enforce the subject subpoena and from issuing additional subpoenas seeking the production of plaintiffs' joint tax returns.

Relying primarily upon the dissent of Judge Chambers in Heathman v. U. S. District Court, 503 F. 2d 1032 (CA 9 1974), plaintiff urges that the Internal Revenue Code (IRC) §§ 6103 and 7213 proscribes disclosure of plaintiffs' tax returns to the Special Prosecutor. Plaintiff concedes, however, that the Heathman majority found that IRC sections 6103(a)(2) and 7213(a), which restrict the publicity of tax returns and the disclosure of information as to persons filing income tax returns, do not make copies of tax returns totally privileged, since the restriction applies only to the dissemination of tax returns by the government. 503 F. 2d at 1035. Accepting this majority view, the copy of plaintiffs' tax return in the possession of their accountant is not privileged.

In joining with Judge Chamber's dissenting view, plaintiffs point to his discussion of St. Regis Paper Co. v. United States, 368 U. S. 208 (1961), which held that a similar restriction on government dissemination of census data did not apply to copies of census reports retained by the reporting party. Since "Congress quickly overruled the decision by amending §9 to provide that copies of census reports retained by individuals are immune from legal process and inadmissible as evidence without the reporting party's consent," 503 F. 2d at 1036, the dissent argues, the same policy of recognizing the adverse effect discovery may have on the Census Bureau's ability to gather complete and accurate data, should also be applied to the Internal Revenue Service's ability to gather complete and accurate tax returns.

The argument fails, however, since it was Congress and not the courts that determined the census data should be privileged. Similarly here, it is for Congress and not the courts to weigh the competing public considerations and to determine the national policy on discovery of copies of tax returns which are in the possession of private citizens. To date, Congress has not seen fit as it did in St. Regis, to disturb the Heathman holding, nor does this court.

The Heathman decision is helpful as well in determining the constitutional claims of the plaintiffs since there, as here, the parties also argued

that the discovery of their copies of their tax returns violates their right of privacy and their right to be free from unreasonable search and seizures. * * * There is no merit in these constitutional claims. See Couch v. United States [73-1 USTC ¶9159], 1973, 409 U. S. 322, 93 S. Ct. 611, 34 L. Ed. 2d 548. 503 F. 2d at 1035.

Finally, in Couch v. United States , supra, the Supreme Court held that a taxpayer's fifth amendment privilege against self-incrimination does not bar production of records by one's accountant. See also Fisher v. United States [76-1 USTC ¶9353], 96 S. Ct. 1569 (1976). Nor can the accountant himself claim a fifth amendment privilege for a copy of a document whose original he voluntarily prepared and forwarded to the Internal Revenue Service.

Accordingly, plaintiff has shown neither the probable success on the merits nor the serious, difficult questions going to the merits required for threshhold consideration of preliminary relief, see Gresham v. Chambers, 501 F. 2d 687 (CA 2 1974); Sonesta International Hotels Corp. v. Wellington Associates, 483 F. 2d 247 (CA 2 1973). The motion for a preliminary injunction is therefore denied.

 

 

 

[2004-1 USTC ¶50,171] Edward James Schwartz and Sharon Diane Schwartz, Plaintiffs v. Donald A. Kempf, Carol A. Emery, John Doe, Supervisor of Donald A. Kempf, John Doe, Director of IRS, 20 John/Jane Does, Commissioner Charles A. Rossotti, and Internal Revenue Service, Defendants.

U.S. District Court, West. Dist. Mich. , So. Div.; 4:02-cv-198, January 22, 2004 .

[ Code Sec. 7402]

Constitutional provisions: Constitutional arguments: Bivens actions: Jurisdiction of courts: District court: Sufficiency of complaint: Official immunity. --

The government was entitled to dismissal of individuals' suit alleging that IRS agents engaged in wrongful attempts to collect taxes. To the extent the taxpayers sued IRS employees in their individual capacities for damages, Bivens did not provide a waiver of sovereign immunity. Even if the taxpayers had alleged a colorable constitutional violation, federal courts have consistently declined to create Bivens remedies for claims arising from administration of tax laws. The availability of other statutory remedies, including a refund suit for improperly collected taxes, foreclosed the taxpayers' damages action. The district court also denied the taxpayers leave to amend their complaint to add allegations of another Bivens-based First Amendment claim. The taxpayers contended that the IRS had retaliated against them, since the filing of their suit, by serving additional summonses on other parties without notice to the taxpayers, effectively depriving them of the opportunity to move to quash under Code Sec. 7609. Because Bivens does not provide remedies for claims arising from administration of tax laws, however, the proposed amendment would not have provided a basis for subject matter jurisdiction.

[ Code Sec. 7402]

Jurisdiction of courts: District court: Federal Tort Claims Act: Consent by government. --

The government was entitled to dismissal of individuals' suit alleging that IRS agents engaged in wrongful attempts to collect taxes. The Federal Tort Claims Act did not provide a basis for jurisdiction over any claims for money damages because it does not waive sovereign immunity for claims arising out of the assessment of taxes.

[ Code Sec. 7433]

Civil suits: Damages for unauthorized collection actions: Exhaustion of remedies: Jurisdiction. --

The government was entitled to dismissal of individuals' suit alleging that IRS agents engaged in wrongful attempts to collect taxes. Code Sec. 7433(a) applies to collection, not assessment actions. Additionally, the statute provides only a limited waiver of sovereign immunity, and the taxpayers neither alleged nor showed that they had exhausted their administrative remedies. Consequently, the district court lacked jurisdiction over any claims they might have sought to bring under the "Taxpayer Bill of Rights."

[ Code Sec. 7852]

Application of law: Other applicable rules: Privacy Act. --

The government was entitled to dismissal of individuals' suit alleging that IRS agents engaged in wrongful attempts to collect taxes. The Privacy Act, which does not apply to assessing the possibility of a tax liability, did not provide subject matter jurisdiction for the taxpayers' claim that IRS agents improperly contacted persons regarding their tax situation. Moreover, the provisions of the Privacy Act were overcome by Code Sec. 6103.

[ Code Secs. 7602 and 7609]

Examination of books and witnesses: Jurisdiction: Summons to nontaxpayers: Jurisdiction, district court. --

The government was entitled to dismissal of individuals' suit alleging that IRS agents engaged in wrongful attempts to collect taxes. Even assuming that the government failed to notify the taxpayers that it was contacting third parties to investigate the taxpayers' liability, neither Code Sec. 7602 nor Code Sec. 7609 provided a waiver of the government's sovereign immunity to allow the taxpayers to seek declaratory relief or damages.

[ Code Sec. 7213]

Crimes: Unauthorized disclosure of information: Application of statute. --

The government was entitled to dismissal of individuals' suit alleging that IRS agents engaged in wrongful attempts to collect taxes. Their apparent allegation that the IRS violated Code Sec. 7213(a)(1) by disclosing return information did not authorize them to bring a civil cause of action against either the United States or its employees. Thus, it did not provide a basis for subject matter jurisdiction.

[ Code Sec. 6103]

Returns: Confidentiality: Inspection of returns: Disclosure upheld. --

The government was entitled to dismissal of individuals' suit alleging that IRS agents engaged in wrongful attempts to collect taxes. The taxpayers neither alleged nor showed that the limited disclosure of return information that the IRS made was unnecessary. Consequently, Code Sec. 6103(b) did not provide the district court with subject matter jurisdiction over the taxpayers' claims.

[ Code Sec. 7402]

Jurisdiction of courts: District court: Declaratory judgment. --

The government was entitled to dismissal of individuals' suit alleging that IRS agents engaged in wrongful attempts to collect taxes from them. They were not entitled to a declaratory judgment that their rights had been violated, because the Declaratory Judgment Act expressly exempts federal tax disputes from its terms.

ORDER ON PENDING MOTIONS

MILES, Senior District Judge: The pro se plaintiffs filed this action against the Internal Revenue Service ("IRS") and miscellaneous other federal defendants, complaining that the IRS and its agents engaged in certain alleged wrongful attempts to collect taxes. The matter is currently before the court on the following motions: Defendants' Motion to Dismiss (docket no. 32); Plaintiffs' Motion for Leave to File Amended Complaint (docket no. 39); and Plaintiffs' Motion for Summary Judgment (docket no. 42). For the reasons to follow, the court DENIES plaintiffs' motions and GRANTS the defendants' motion.

I

In their complaint, plaintiffs allege that they have been "assessed monies from prior tax years[,]" which include 1996, 1997, and 1998. Complaint, ¶1. Plaintiffs further allege that in an attempt to collect the taxes they allegedly owe, defendant Donald Kempf, an IRS agent, has been "harassing" them and their business customers, using "extortionate means, "intimidation," and "outrageous" tactics, including "issuing summons, subpoenas for records and issuing false statements." Id. , ¶s 2-4. Plaintiffs allege that these actions have harmed them and their business, and damaged their reputations and their relationships with friends, business suppliers and/or customers, and others who have been contacted regarding plaintiffs' tax problems.

Plaintiffs' complaint does not identify the specific alleged collection activities at issue. However, attached to a proposed "Amended Complaint" which plaintiffs have submitted with their "Motion for Leave to Amend Complaint" are IRS summonses not for the tax years 1996, 1997, and 1998 --years for which plaintiffs allege taxes have already been assessed --but for the years 1999, 2000, 2001 --years for which the government contends no assessment has yet been made. Copies of IRS letters which plaintiffs have submitted indeed reflect that the IRS was in the process of investigating the tax years 1999 through 2001. None of the summonses which plaintiffs have submitted reflect attempts to collect taxes assessed for the years 1996 through 1998.

Plaintiffs' complaint alleges that the actions of Kempf and the various other defendants violate plaintiffs' rights under the Fourth Amendment, the Privacy Act, various provisions of the Internal Revenue Code --26 U.S.C. §§7602, 7213, and 6103 --as well as state common law. As relief, plaintiffs seek not only a declaratory judgment that their rights were violated, but also $20 million in damages.

Defendants moved to dismiss the complaint based on Fed.R.Civ.P. 12(b)(1), (2), (3), (5), and (6). Plaintiffs subsequently filed a written response to the motion, in addition to filing their own "Motion for Summary Judgment" and "Motion for Leave to File Amended Complaint."

II

Jurisdiction

One basis for the defendants' motion is Fed.R.Civ.P. 12(b)(1) --lack of subject matter jurisdiction. "Whenever it appears by the suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action." Fed.R.Civ.P. 12(h)(3). Because the court must first be convinced of its jurisdiction before taking any other action in the case, the court will address the issue of subject matter jurisdiction at the outset.

Sovereign immunity bars an action against the United States unless specifically abrogated by an act of Congress. United States v. Testan, 424 U.S. 392, 399, 96 S.Ct. 948, 953-54 (1976). The United States may be sued only insofar as it consents to be sued, and the terms of that consent to be sued in any court define that court's jurisdiction to entertain the suit. United States v. Dalm [ 90-1 USTC ¶50,154; 90-1 USTC ¶60,012], 494 U.S. 596, 608, 110 S.Ct. 1361, 1368 (1990). A suit against the IRS or its officers or employees in their official capacity is essentially a suit against the United States and is barred by sovereign immunity absent statutory consent. Atkinson v. O'Neill, 867 F.2d 589, 590 (10th Cir. 1989); Gilbert v. Da Grossa, 756 F.2d 1455, 1458 (8th Cir. 1985). Therefore, substitution of the United States as the sole defendant is proper.

Plaintiffs have the burden of showing a waiver of sovereign immunity and establishing the court's subject matter jurisdiction over their claim. Whittle v. United States, 7 F.3d 1259, 1262 (6th Cir. 1993); Baker v. United States, 817 F.2d 560, 562 (9th Cir. 1987); see Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377, 114 S.Ct. 1673, 1675 (1994) ("It is to be presumed that a cause lies outside [federal courts'] limited jurisdiction ... and the burden of establishing the contrary rests upon the party asserting jurisdiction"); Rogers v. Stratton Indus., Inc., 798 F.2d 913, 915 (6th Cir. 1986) ("where subject matter jurisdiction is challenged under Rule 12(b)(1) ... the plaintiff has the burden of proving jurisdiction in order to survive the motion"). If the United States has not consented to the suit, subject matter jurisdiction is lacking and the complaint must be dismissed. United States v. Mitchell, 463 U.S. 206, 212, 103 S.Ct. 2961, 2965 (1983). "General jurisdiction statutes such as 28 U.S.C. §1331 and 28 U.S.C. §1340 do not waive sovereign immunity and therefore cannot be the basis for jurisdiction over a civil action against the federal government." Berman v. United States [ 2001-2 USTC ¶50,609], 264 F.3d 16, 20 (1st Cir. 2001) (citations omitted).

A

 

Bivens

Plaintiffs's complaint asserts that the court has jurisdiction over this action under Bivens v. Six Unknown Federal Narcotics Agents, 403 U.S. 388, 91 S.Ct. 1999 (1971). To the extent that plaintiffs sue IRS employees in their individual capacity for damages, 28 U.S.C. §1331 --the source of so-called Bivens jurisdiction --is not a waiver of sovereign immunity. Section 1331 only gives the district court jurisdiction to hear federal claims not otherwise barred. Arvanis v. Noslo Eng'g, 739 F.2d 1287, 1290 (7th Cir. 1984). Even if plaintiffs had alleged a colorable constitutional violation, federal courts have consistently declined to create Bivens remedies in the context of claims arising from the administration of the tax laws. See, e.g., Judicial Watch, Inc. v. Rossotti [ 2003-1 USTC ¶50,202], 317 F.3d 401, 409-413 (4th Cir. 2003); Vennes v. Unknown Number of Unidentified Agents, 26 F.3d 1448, 1453-54 (8th Cir. 1994), cert. denied, 513 U.S. 1076, 115 S.Ct. 721 (1995); McMillen v. United States Dept. of Treasury, 960 F.2d 187, 191 (1st Cir. 1991); Wages v. IRS, 915 F.2d 1230, 1235 (9th Cir. 1990), cert. denied, 498 U.S. 1096, 111 S.Ct. 986 (1991). The remedies provided by Congress, particularly the right to sue the government for a refund of taxes improperly collected, foreclose a damages action under Bivens against the individual defendants. ¹

Plaintiffs also seek leave to amend their complaint, ostensibly to add allegations of another Bivens-based First Amendment claim: that the IRS has "retaliated" against plaintiffs, since the filing of this lawsuit, by serving additional summonses on other parties without notice to plaintiffs, effectively depriving plaintiffs of the opportunity to move to quash under 26 U.S.C. §7609 (more about this below). However, even if plaintiffs's proposed amended pleading could be construed to allege a colorable First Amendment violation, the law has not recognized creation of a Bivens remedy in the context of administration of the tax laws. Under the circumstances, the proposed amendment would be futile insofar as it would not provide a basis for subject matter jurisdiction.

B

Federal Tort Claims Act

The Federal Tort Claims Act ("FTCA") likewise does not provide a basis for jurisdiction over any claims for money damages here. The plaintiffs claims arise out of the assessment of taxes, and the FTCA does not waive immunity for such claims. 28 U.S.C. §2680(c); Fishburn v. Brown [ 97-2 USTC ¶50,742], 125 F.3d 979, 982 (6th Cir. 1997).

C

Taxpayer Bill of Rights

The court has also considered whether 26 U.S.C. §7433 may provide a basis for jurisdiction. This statute, known as the "Taxpayer's Bill of Rights," provides in relevant part as follows:

If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432, such civil action shall be the exclusive remedy for recovering damages resulting from such actions.

26 U.S.C. §7433(a). However, §7433(a), by its express terms, only applies to collection activities, and not to actions undertaken during the assessment process. Wise v. Comm'r of Internal Revenue [ 2001-1 USTC ¶50,294], 168 F.Supp.2d 649, 653 (S.D. Tex. 2001). In addition, §7433 provides only a limited waiver of sovereign immunity in suits by taxpayers for unauthorized collection activities. Even where the statute applies, exhaustion of administrative remedies is a jurisdictional prerequisite to suit thereunder. 26 U.S.C. §7433(d); Fishburn [ 97-2 USTC ¶50,742], 125 F.3d at 982; Devore v. United States [ 2001-2 USTC ¶50,675], 110 F.Supp.2d 1320, 1323-1324 (D. Nev. 2000). ² Because plaintiffs have neither alleged nor shown that they have exhausted their administrative remedies, the court has no jurisdiction over any claims plaintiffs might have sought to bring under §7433.

D

Privacy Act

Plaintiffs generally allege that the IRS violated the Privacy Act by contacting persons regarding plaintiffs' tax situation. The Privacy Act, 5 U.S.C. §§552a et seq., "regulates the collection, maintenance, use, and dissemination of information concerning individuals." Cardamone v. Cohen, 241 F.3d 520, 524 (6th Cir. 2001) (quotations omitted). The Act "attempts to strike a balance between the government's need to collect and maintain information and the privacy interests of the person to whom such information pertains." Id. However, the Internal Revenue Code plainly states that the provisions of the Privacy Act do not apply, either directly or indirectly, to assessing the possibility of a tax liability. 26 U.S.C. §7852(e); United States v. McAnlis [ 84-1 USTC ¶9187], 721 F.2d 334, 336 (11th Cir. 1983) (compliance with Privacy Act not a prerequisite to enforcement of IRS summons), cert. denied, 467 U.S. 1227, 104 S.Ct. 2681 (1984); Pham v. United States [ 99-2 USTC ¶50,801], 84 A.F.T.R.2d 99-5760 (N.D. Ohio 1999). In addition, the provisions of the Privacy Act are in this instance trumped by the more specific provisions of the Internal Revenue Code found in 26 U.S.C. §6103. See, e.g., Gardener v. United States [ 2000-1 USTC ¶50,520], 213 F.3d 735, 740-742 (D.C. Cir. 2000) (Internal Revenue Code preempts Privacy Act for remedies for disclosure of tax information). Under the circumstances of this case, the Privacy Act does not supply a source of subject matter jurisdiction.

E

26 U.S.C. §7602

Plaintiffs also allege that the IRS violated violated [ sic] section 26 U.S.C. §7602 by contacting third parties without giving plaintiffs proper advance notice. IRS contends that section 7602(c) has no application to this case. Section 7602(c) provides in pertinent part as follows:

(c) Notice of Contact of Third Parties. --

(1) General notice. --An officer or employee of the Internal Revenue Service may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of such taxpayer without providing reasonable notice in advance to the taxpayer that contacts with persons other than the taxpayer may be made.

(2) Notice of specific contacts. --The Secretary shall periodically provide to a taxpayer a record of persons contacted during such period by the Secretary with respect to the determination or collection of the tax liability of such taxpayer. Such record shall also be provided upon request of the taxpayer.

Assuming that plaintiffs's allegation that they were not provided with the notice required in §7602, neither that statute, nor §7609 (applying to third-party summonses), provides waives the United States ' sovereign immunity to the extent contemplated by plaintiffs' claims in this action. A close reading of both §§7602 and 7609 reveals that if proper notice if not provided, the taxpayer has the right to intervene in any proceeding involving enforcement of the summons, see §7609(b)(1), and may also begin a proceeding to quash the summons. §7609(b)(2)(A). Nothing in either statute gives a taxpayer the right to seek a declaratory judgment or damages based on the failure to provide notice of the issuance of a summons to investigate the taxpayer's liability. ³ The statutes do not provide a waiver of sovereign immunity allowing parties to seek declaratory relief and damages. Therefore, in this instance neither §7602 nor §7609 provides a basis for subject matter jurisdiction over this action.

F

26 U.S.C. §7213

Plaintiffs's complaint seemingly alleges that the IRS has violated 26 U.S.C. §7213(a)(1), which makes it unlawful for any United States employee "willfully to disclose to any person," except as authorized in Title 26, "any return or return information (as defined in section 6103(b))." However, this is a criminal statute. Nothing in this statute authorizes plaintiffs to bring a civil cause of action against either the United States or its employees. Section 7213(a)(1) does not provide a basis for subject matter jurisdiction.

G

26 U.S.C. §6103

Plaintiffs have also, in their complaint, relied on 26 U.S.C. §6103, seemingly as support for their position that "return information" is not subject to disclosure by the IRS. However, 26 U.S.C. §6103(k)(6) permits the IRS to disclose return information "to the extent that such disclosure is necessary in obtaining information, which is not otherwise reasonably available, with respect to the correct determination of tax, liability for tax, or the amount to be collected[.]" Plaintiffs have neither alleged nor shown that the limited disclosure made by the IRS was unnecessary. Section 6103(b) does not provide the court with subject matter jurisdiction over plaintiffs' action.

H

Declaratory Judgment

Finally, plaintiffs seek a declaratory judgment that their rights have been violated. However, as the defendants have correctly observed, the Declaratory Judgment Act, 28 U.S.C. §2201, expressly exempts federal tax disputes from its terms. See Flora v. United States [ 60-1 USTC ¶9347], 362 U.S. 145, 164-165, 80 S.Ct. 630 (1960). In any event, "[t]he Declaratory Judgment Act does not create an independent basis for federal subject matter jurisdiction." Heydon v. MediaOne of Southeast Michigan, Inc., 327 F.3d 466, 470 (6th Cir. 2003). Therefore, the court does not have jurisdiction under the Declaratory Judgment Act to grant declaratory relief in this case.

Conclusion

For the reasons discussed, the court GRANTS the motion to dismiss. The court also denies plaintiffs' motion to amend and motion for summary judgment. This action is DISMISSED without prejudice for lack of subject matter jurisdiction.

So ordered.

¹ In addition, issuance of the summonses did not violate the Fourth Amendment in any event because plaintiffs could have no reasonable expectation of privacy in documents which are in the possession of a third party. Reimer v. United States [ 99-1 USTC ¶50,454], 43 F.Supp.2d 232, 237 (N.D. N.Y. 1999) (citing cases).

² Title 26 U.S.C. §7433(d)(1) provides as follows:

A judgment for damages shall not be awarded under subsection (b) unless the court determines that the plaintiff has exhausted the administrative remedies available to such plaintiff within the Internal Revenue Service.

³ Insofar as plaintiffs' seek a declaratory judgment --an equitable remedy --this remedy would not be available to plaintiffs in any event; a petition to quash provides an adequate remedy at law.