Judical Process

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7213- Criminal Penalties for Unauthorized Disclosure of Information: Judicial Process

 

 

[1 USTC ¶258]David H. Blair, Commissioner, v. Oesterlein Machine Company

Supreme Court of the United States , No. 210. October Term, 1927, 275 US 220, 48 SCt 87, Decided November 21, 19 27

On Writ of Certiorari to the Court of Appeals of the District of Columbia.The Board of Tax Appeals has full reviewing jurisdiction over findings of the Commissioner in special assessment cases and under Revenue Act of 1924, may compel the Commissioner under subpoena to answer interrogatories and furnish information concerning the returns of other corporate taxpayers. Affirming Court of Appeals of the District of Columbia , 17 F. (2d) 663, which affirmed Supreme Court of the District of Columbia decision.

Mr. Justice STONE delivered the opinion of the Court:

This is a proceeding brought in the Supreme Court of the District of Columbia under §1025(a) of the Revenue Act of 1924 (c. 234, 43 Stat. 253, 348; U. S. C., Title 26, §1258) to compel the Commissioner of Internal Revenue to respond to a subpoena of the Board of Tax Appeals issued under §900(i) requiring him to answer interrogatories, and to furnish information contained in the tax returns of twelve corporations. The Commissioner denied the authority of the Board to require a response to the subpoena. A decree upholding the jurisdiction of the Board and ordering the Commissioner to obey was affirmed by the Court of Appeals of the District, 17 Fed. (2d) 663. The case is here on certiorari. 274 U. S. 730.

Respondent corporation returned and paid excess profits taxes for the years 1918, 1919 and 1920. In the final determination of these taxes the Commissioner considered together the returns for all three years. He reduced the 1918 tax, increased the 1919 tax, and found the net balance as a deficiency. In fixing the amount of the tax for 1918 the Commissioner, as requested by the taxpayer in an amended return for that year, made a special assessment under §§ 327 and 328 of the Revenue Act of 1918 (c. 18, 40 Stat. 1057, 1093) but decided that no grounds existed for a special assessment for the year 1919, and so determined the tax for that year using the ordinary assessment method provided by §§ 301, 311 and 312.

The invested capital of the corporation taxed is one of the necessary factors in the computation of the tax under those sections. In evident anticipation that in some cases the Commissioner might find it difficult or impossible to ascertain the invested capital or that in the disturbed economic conditions left by the war the tax in some cases might be harsh in comparison with others, a special method of assessment for those cases (enumerated in §327) was provided by §328. These sections, printed in the margin, ¹ authorize the computation of the excess profits tax on the basis of a comparison with the data contained in the tax returns of other corporate taxpayers similarly situated.

Respondent, on appeal to the Board of Tax Appeals, assailed the determination of the Commissioner on the ground that although the 1918 tax had been assessed under §328 the standard of comparison applied was erroneous and resulted in an excessive assessment, and on the ground that the tax for 1919 should have been assessed under §328. As to the latter contention it set up that as the Commissioner had been unable satisfactorily to determine respondent's invested capital for 1917 and 1918, he could not have done so for 1919, and that, since the net income for 1919 was abnormal, its profits tax, if assessed by the ordinary method, would be found excessive compared with the tax assessed on other representative corporations.

The subpoena called for information concededly relevant to these contentions and was properly issued if the Board of Tax Appeals had authority to make the inquiry. The Commissioner denies generally that any determinations made by him under §§ 327 and 328 may be appealed, and in any case objects that the appeal as to the year 1918 was not properly taken.

The appeal was authorized it at all by §900(e) of the Revenue Act of 1924 (c. 234, 43 Stat. 253, 337; U. S. C., Title 26, §1216) under §274 of that Act. Section 274 permits an appeal by the taxpayer only if "the Commissioner determines that there is a deficiency in respect of the tax" which has been returned. "Deficiency" is defined by §273 as "(1) The amount by which the tax imposed . . . exceeds the amount shown as the tax by the taxpayer upon his return; . . . (2) If no amount is shown as the tax by the taxpayer on his return, . . . then the amount by which the tax exceeds the amounts previously assessed . . . as a deficiency . . .."

It is argued that although there was a deficiency for 1918 and 1919, as considered together by the Commissioner, the years must be treated separately in determining whether a deficiency existed within the meaning of Sec. 274, for purposes of appeal. So treated there was no deficiency in the year 1918, since the Commissioner had reduced the amount of the tax returned and paid for that year. This argument was rejected in Appeal of E. J. Barry, 1 B. T. A. 156 [1925 C. C. H., Unabridged 8168], and the Commissioner appears formally to have announced his acquiescence in its rejection. Int. Rev. Cum. Bull. IV-2-1.

We think the question suggested is not properly before us. It was not specifically raised on the record before the Board or either court below and, so far as appears, was not considered by any of them. We were asked to grant certiorari only to pass upon the question whether the Commissioner's determinations under Secs. 327 and 328 may be appealed to the Board of Tax Appeals. This Court sits as a court of review. It is only in exceptional cases, and then only in cases from the federal courts, that questions not pressed or passed upon below are considered here. Duignan v. United States , 274 U. S. 195. There are specially cogent reasons why this rule should be adhered to when the question involves a practice of one of the great departments of the government. Hence we do not pass upon this aspect of the case with respect either to the return or the amended return for 1918, and our decision is without prejudice to the disposition of the question wherever appropriately presented.

The Commissioner's objection that as to both years the Board of Tax Appeals is without authority to review his action is based not on any limitations to be found in the sections of the act defining the jurisdiction of the Board, but upon the peculiar provisions of Secs. 327 and 328 themselves. These, it is argued, vest in the Commissioner the exercise of a judgment and discretion in their nature not subject to appellate review. It is pointed out that by Sec. 327 assessments in the manner provided in Sec. 328 are permitted "where the Commissioner is unable to determine" the invested capital of the taxpayer, or where "the Commissioner is unable satisfactorily to determine" the value of a mixed aggregate of tangible and intangible property paid in as capital, or where the Commissioner "finds and so declares of record that the tax if determined without benefit of this section" would, owing to abnormal conditions work a hardship on the taxpayer. And it is urged that this phraseology, evidences an intention to make his decision final. The conclusion is said to be fortified by the confidential nature of the returns of taxpayers with which comparison must be made in order to make the assessment under Sec. 328. Their privileged character is thought to preclude a construction of the appeal statute that would result in giving publicity to tax returns and confidential information so carefully guarded by other provisions of the revenue acts.

But there is no inherent impossibility or, indeed, serious difficulty in reviewing judicially any determination authorized by Secs. 327 and 328. The determination is to be made upon prescribed and ascertainable data and is to conform to standards set up by the statute, all defined with sufficient definiteness and clarity to be susceptible of judicial scrutiny. We cannot assume that it is to be either arbitrary or unrelated to the appropriate data in the Commissioner's office, or that he is more qualified to make it than the Board established to review his decisions. An examination of the sections creating the Board and investing it with power can leave no doubt that they were intended to confer upon it appellate powers which are judicial in character. Not only is it required by Sec. 900(e) to hear and determine appeals taken under Sec. 274, which in terms allows an appeal in every case where a deficiency is found by the Commissioner, but it is empowered to administer oaths and to compel the attendance of witnesses and the production of documents and records. It may investigate anew the issues between the government and the taxpayer and upon the determination of the appeal it may affirm, set aside or modify the findings and decision of the Commissioner. In the light of such provisions there is plainly no sufficient ground for reading into Sec. 274, allowing an appeal wherever a deficiency is found by the Commissioner, an exception based on the supposedly sacrosanct character of his determinations under Secs. 327 and 328.

But little weight can be given to the suggestion that the Board's appellate powers are limited by the section of the Act prohibiting the publication by collectors of information gained in the course of their duties. Sec. 1018, re-enacting Sec. 3167 of the Revised Statutes (U. S. C., Title 18, Sec. 216). The prohibition is limited to disclosures made "in any other manner than may be provided by law." It cannot be deemed to forbid disclosures made in obedience to process lawfully issued in a judicial or quasi-judicial proceeding, as has, indeed, been recognized by the Treasury Department itself in Treasury Decision No. 2962, directing that copies of returns may be furnished for the government's use as evidence in court. Neither the statute nor the practice of the Department suggests the existence of any governmental policy with respect to the use of the returns as evidence in any way inconsistent with the provisions of the statute authorizing the Board of Tax Appeals to hear appeals and conduct proceedings which are judicial in character.

As we do not pass upon the question whether the Board of Tax Appeals had jurisdiction of the appeal, except insofar as it is involved in our decision that the determinations of the Commissioner under Secs. 327 and 328 are subject to review by the Board, the decree will be so modified as to be without prejudice to the petitioner's presenting in any appropriate manner to the Board or the Supreme Court of the District the questions whether the Board of Tax Appeals had in other respects jurisdiction of the appeal as to the tax for 1918 and, if not, to what extent the information called for by the subpoena is relevant and admissible upon the hearing of the appeal as to the tax for 1919.

Affirmed as modified.

¹ Sec. 327. That in the following cases the tax shall be determined as provided in section 328:

(a) Where the Commissioner is unable to determine the invested capital as provided in section 326;

(b) In the case of a foreign corporation;

(c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively;

(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 19 17, and November 11, 19 18, both dates inclusive.

Sec. 328(a) In the cases specified in section 327 the tax shall be the amount which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year, as the average tax of representative corporations engaged in a like or similar trade or business, bears to their average net income (in excess of the specific exemption of $3,000) for such year. In the case of a foreign corporation the tax shall be computed without deducting the specific exemption of $3,000 either for the taxpayer or the representative corporations.

In computing the tax under this section the Commissioner shall compare the taxpayer only with representative corporations whose invested capital can be satisfactorily determined under section 326 and which are, as nearly as may be, similarly circumstanced with respect to gross income, net income, profits per unit of business transacted and capital employed, the amount and rate of war profits or excess profits, and all other relevant facts and circumstances.

(b) For the purposes of subdivision (a) the ratios between the average tax and the average net income of representative corporations shall be determined by the Commissioner in accordance with regulations prescribed by him with the approval of the Secretary.

(c) The Commissioner shall keep a record of all cases in which the tax is determined in the manner prescribed in subdivision (a), containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, and the amount of invested capital as determined under such subdivision. The Commissioner shall furnish a copy of such record and other detailed information with respect to such cases when required by resolution of either House of Congress, without regard to the restrictions contained in section 257.

 

 

 

 

[74-2 USTC ¶9507]In re: Grand Jury Subpoena. Gabriel H. Berkovitz, a Witness; Henry R. Sklar, Movant

U. S. District Court, East. Dist. Pa., Misc. No. 73-159, 12/14/73

[Code Secs. 7213 and 7602]

Examination of witnesses: Suppression of evidence: Grand Jury subpoena: Investigation of SBA, possible tax offenses: Government's failure to follow internal procedures: Disclosure of tax return information.--The court denied a motion to quash a subpoena issued by a Grand Jury to obtain the testimony of a taxpayer's accountant as part of an ongoing investigation into irregularities relating to the Small Business Administration (SBA), including possible tax offenses, and to suppress evidence obtained under a previous subpoena which compelled the accountant to produce all papers, documents and files relating to the financial affairs of the taxpayer for the years 1970-1973. Failure of the government to follow internal procedures required by the rules and regulations of the Internal Revenue Service and the Department of Justice dealing with reluctant witnesses and with the need for approval of a Grand Jury investigation by the Tax Division of the Justice Department did not prohibit the Grand Jury from investigating any possible tax offenses resulting from the activities of the SBA. Further, Code Sec. 7213 does not prohibit the disclosure to the Grand Jury of the taxpayer's tax return information as well as any information resulting from any investigation of his income tax liability since this would improperly prevent the Grand Jury from looking into a legitimate field of inquiry relevant to an ongoing investigation.

Blank, Rome, Klaus & Comisky, 11th Floor, #4 Penn Center, Philadelphia, Pa., for movant. Robert E. J. Curran, United States Attorney, Philadelphia , Pa. , for U. S.

Memorandum

GORBEY, District Judge:

Before the court is a motion by Henry R. Sklar to quash the Grand Jury subpoena issued to obtain the testimony of his accountant, Gabriel H. Berkovitz, and to suppress the evidence obtained by a prior subpoena which compelled Mr. Berkovitz to produce all papers, documents and files relating to the financial affairs of Henry R. Sklar, as to the years 1970 through 1973. The primary ground upon which movant bases his claim for relief is that the United States has not complied with certain internal procedures, allegedly required before this matter could be brought before the Grand Jury.

On October 10, 1973 , this court held a hearing on this motion. The facts of the case, as we find them to be, are as follows: On July 24, 1973 , a special agent for the Internal Revenue Service served a Grand Jury subpoena on petitioner's accountant, calling for the production of all records pertaining to the financial affairs of movant for the years 1970 through 1973. In response to this subpoena, the movant filed on the morning of July 30th, a motion to quash the subpoena. The basis of that motion, as set out in paragraph 3 therein, was that both Internal Revenue and the United States Attorney's Office were prohibited from utilizing the assistance of the Grand Jury, unless certain approvals from Internal Revenue and the Department of Justice, Tax Division, Washington , D. C., had first been obtained.

A two day hearing was held before Judge Clifford Scott Green, sitting as emergency judge. At the end of that hearing, Judge Green, in refusing to quash the subpoena, made findings of fact (n. t., August 2, 1973 , pp. 224-226) and the following conclusions of law (n. t., August 2, 1973 , p. 226):

The court concludes, as a matter of law, that in regard to the investigation described in the Findings of Fact, that the government agencies involved, were not required to follow any procedure concerning prior approvals, as outlined in paragraph A of the motion and, therefore, the procedure followed is proper and lawful.

"Accordingly, the court concludes that, as a matter of law, the movant has not been the victim of the failure to follow any official policies, directives or regulations, which would constitute a discriminatory denial of the regular, impartial administration of the Internal Revenue Code; nor has movant in any manner, been denied due process of law, as guaranteed by the Fifth Amendment of the United States Constitution, as alleged in paragraph 3-D of the motion to quash the subpoena. And the court further finds that movant has not been denied any rights which he may have in regard to this matter.

A second Grand Jury subpoena was issued and served upon Gabriel H. Berkovitz, returnable on October 15, 1973 . The government has agreed to a stay of this subpoena, pending disposition of movant's motion by this court. The grounds which movant puts forth in support of this second motion are almost identical to those put forth before Judge Green. Movant claims that the present situation differs from that before Judge Green because of certain intervening facts, which were put on the record at the hearing conducted by this court on October 10, 1973 .

This new information is as follows:

Beginning in September, 1973, a series of letters were exchanged between counsel for the movant and the Assistant United States Attorney. The essence of these letters was that since Mr. Sklar had not filed a power of attorney with the Internal Revenue Service, Special Agent Alan Feldman ¹ was prohibited by IRS regulations from dealing with anyone but the taxpayer, directly. This resulted in a letter dated September 21, 1973 from John F. Penrose, Assistant U. S. Attorney, to Jerome R. Richter, Esquire, concerning Mr. Sklar. In that letter, Mr. Penrose stated that unless a proper power of attorney is filed, the special agent on the case would continue to contact Mr. Sklar directly. In response to that letter, Jerome R. Richter, Esquire, sent a letter to Special Agent Feldman on October 5, 1973, attaching to that letter the required power of attorney. However, this letter stated that such power of attorney was being filed under protest, simply to prevent Special Agent Feldman from contacting Mr. Sklar directly. The movant urges that the letter of September 21, 1973 "clearly establishes that this investigation is, and has been, at all relevant times, a tax investigation in which the authority in process of the Grand Jury has been unlawfully utilized contrary to the previous stated position of the United States Attorney." (movant's supplemental memorandum of law, p. 2). Movant urges that this new evidence changes the posture of the case from that which was before Judge Green. We cannot agree. The motion put forth to quash this second subpoena is almost identical to the one with which Judge Green dealt. The memorandum in support of that motion makes the same arguments and cites the same law which was put forth to Judge Green. We feel that while this new material may serve to clarify the situation, it does not change it.

Movant's primary attack rests on an allegation that prior to the issuance of this subpoena, the government has not followed certain procedures and received certain approvals, required by the Rules and Regulations (formal and informal) of the Internal Revenue Service and the Department of Justice.

The first procedures that allegedly were not followed are those used in what is commonly described as the "reluctant witness situation." ² While we feel that the validity of these procedures is highly suspect, we agree with the government's position that this is not the situation presently before the court. In this matter, there is an ongoing investigation presently being conducted by the Grand Jury into irregularities relating to the Small Business Administration, including possible tax offenses. Mr. Sklar has become a target of this investigation. Thus, the "reluctant witness situation" is not before us since there is an ongoing investigation being conducted by the Grand Jury concerning Mr. Sklar.

Movant next argues that the requested material is relevant only to tax offenses; and, as such, cannot properly be brought before the Grand Jury without the government first obtaining certain approvals. The government's response to this is that the subpoena is not primarily concerned with potential tax offenses, and that if the investigation does touch upon tax matters, it is only collaterally. In support of this, the government urges that the work papers of the accountant and the accountant's testimony may contain admissions by Mr. Sklar of receipt of bribery or extortion monies, which would be highly relevant to the investigation of the affairs of the Small Business Administration. However, the government does not deny that Mr. Sklar's tax liability is part of this investigation, and that the subpoenaed material may also be relevant to the tax aspects of the investigation.

Movant argues, that before the government can proceed before the Grand Jury to investigate a tax matter, such a Grand Jury investigation must be approved by the Tax Division of the Justice Department. Such approval will only occur at the request of the Internal Revenue Service, after formal notification through regional counsel, that the ordinary investigative techniques of the Internal Revenue Service are inadequate for specified reasons, and that Grand Jury assistance is necessary. Movant further argues that no United States Attorney is permitted to conduct a Grant Jury investigation specifically into the possibility of tax offenses, unless such use of the Grand Jury has been authorized by the Tax Division of the Justice Department. In support of this allegation, the movant cites no specific regulations or procedures, but simply refers to the testimony of L. K. Baily, Chief of the Criminal Section, Tax Division, Department of Justice, Washington, D. C., that the normal procedure would be for the Internal Revenue Service to request such an investigation through the Tax Division of the Justice Department. This request would be forwarded, with approval, to the United States Attorney (n. t. Aug. 2, 1973 , pp. 124-125). Accordingly, we must assume that no more formalized regulations exist. Mr. Baily also admitted that such procedures had not been followed in this case (n. t. Aug. 2, 1973 , p. 125).

The essence of this charge is that since standard procedure requires such approval, the Grand Jury is barred from investigating the possibility of any tax offenses, until such authorization has been obtained.

The investigation in this case is being conducted under what is described as the "Philadelphia Plan", where the coordinated investigation, involving various governmental agencies, is conducted by the local United States Attorney, in cooperation with the interested federal agencies. In this case, the investigation is delving into certain irregularities in the operation of the Small Business Administration and is probing into any possible criminal activity involved, including potential tax offenses. Movant urges that since tax offenses were involved, the requisite approvals for a tax investigation should have been obtained prior to taking any aspect of the tax investigation before the Grand Jury. We feel that when the proposal was sent to the Tax Division of the Justice Department, it should have been reviewed and approved, or rejected, rather than simply forwarded to the Criminal Division of the Justice Department, as occurred in this case. However, the question remains, is that sufficient to bar the Grand Jury from investigating any possible tax offenses resulting from the activities of the Small Business Administration.

A similar situation was dealt with by the Supreme Court in Sullivan v. United States [54-2 USTC ¶9716], 348 U. S. 170, 75 S. Ct. 182 (1954). In the Sullivan case, the Court was faced with a situation where Mr. Sullivan had been convicted on an indictment which was returned by the Grand Jury pursuant to an investigation into Mr. Sullivan's tax affairs. This investigation was begun by the local United States Attorney without obtaining the authorization from the Department of Justice, which was required by an executive order and various circular letters. In refusing to reverse the conviction, the Supreme Court stated at page 173:

Therefore it is not contended that aside from the executive order and a departmental letter, a Grand Jury may not consider evidence of crime known to the Grand Jurors or revealed by their investigation. ³ It is only urged that the executive order and the departmental letter limited the action of the Grand Jury in respect to cases concerning violation of Internal Revenue laws. We hold that the order and the letter had no such restrictive effect, and that the Grand Jury in this case was free to consider the evidence put before it by government counsel without authorization from the Attorney General's office in Washington . The evidence was presented by the District Attorney, who was a representative of the Department of Justice, notwithstanding that he failed to comply with the departmental directive. For this he is answerable to the Department, but his action before the Grand Jury was not subject to attack by one indicted by the Grand Jury on such evidence. [Emphasis Added]

Since the Supreme Court in Sullivan held that violation of such "housekeeping" procedures would not afford relief after the fact of an indictment, we do not see why such violation should allow the court to prohibit the Grand Jury from obtaining the requested information. A Grand Jury that begins an investigation opens up all the ramifications of the particular field of inquiry. United States v. Gilboy, 160 F. Supp. 442 (M. D. Pa. 1958); United States v. Neff, 212 F. 2d 297 at 302 (3d Cir. 1954). Accordingly, even if the subpoenaed material had no relevance to the Small Business investigation and was only relevant to certain collateral tax offenses, ⁴ Mr. Sklar would still have no grounds to prevent such investigation by the Grand Jury.

Movant argues that the Tax Division of the Justice Department has exclusive jurisdiction over any criminal prosecutions brought pursuant to the Internal Revenue laws. For this proposition, he cites Title 28 of the Code of Federal Regulations §0.70(b). In making this argument, movant, in his supplemental memorandum of law, page 6, quotes the regulation as stating: "The Tax Division has exclusive assignment of criminal proceedings arising under the Internal Revenue laws.' [Emphasis Added] This quote is from a statement by movant's counsel, ⁵ and the word "exclusive" is exclusively his, and does not appear in the cited regulation. ⁶ However, even if that were the case, that situation is not presently before us. The government admits that prior to bringing any indictment for a tax offense, or prior to bringing any count of an indictment for a tax offense, it would obtain the approval of the Tax Division of the Justice Department (n. t. Aug. 2, 1973, pp. 132-133). Accordingly, we will not deal with whether or not such approval is required since such a situation has not yet arisen.

Movant also argues that the non-disclosure provisions of Title 26 U. S. C. §7213 and Title 18 U. S. C. §1905 prohibit the disclosure of information relating to the tax returns of movant, as well as any information resulting from any investigation in the movant's income tax liability to the Grand Jury. We must reject this contention. These provisions both read "except as provided by law", and the law is clear that the Grand Jury is free to investigate potential criminal activity. Sullivan v. United States, supra. To prohibit the Grand Jury from inspecting movant's tax returns would be to prohibit the Grand Jury from investigating a legitimate field of inquiry relevant to an ongoing investigation. This we will not do. While we do not think that the procedure, which in effect allows the Internal Revenue Service to bootstrap a tax investigation by clinging to the Small Business investigation, thus avoiding certain procedures within the Internal Revenue Service, is the fairest procedure which could be used; we do not feel that its use amounts to bad faith on the part of the government. Accordingly, the motion to quash the subpoena and to suppress evidence by Henry R. Sklar is denied.

By the Court.

¹ Agent Feldman is on special assignment to the U. S. Attorney's office to assist the Grand Jury in its investigation of the Small Business Administration.

² These procedures deal with a situation, where in an investigation, being conducted by the Internal Revenue Service, a witness is encountered, who will not provide the information requested. Generally, this witness is a person such as a taxpayer's accountant, who will not provide his work papers, which were used in the preparation of the taxpayer's income tax return. After obtaining certain approvals, the Internal Revenue Service, through the local United States Attorney's office, causes a subpoena to be issued to this witness, commanding him to appear before the Grand Jury, for purposes of obtaining the information with which the Internal Revenue Service had been unable to obtain. The important element in this procedure is that the testimony this witness gives before the Grand Jury is totally unrelated to any investigation currently being conducted by the Grand Jury.

³ Likewise, in this case, the movant does not make such a contention. See movant's supplemental memorandum of law, page 3.

⁴ Contrary to the finding of Judge Green, with which we concur.

⁵ N. T. July 31, 1973 , pp. 72-73.

⁶ 28 C. F. R. §0.70 reads as follows:

"Subject to the general supervision and direction of the Attorney General, the following described matters are assigned to and shall be conducted, handled, or supervised by, the Assistant Attorney General in charge of the Tax Division:

"(a) . . .

"(b) Criminal proceedings arising under the Internal Revenue laws, . . ."

 

 

 

[74-1 USTC ¶9268]United States of America and Michael R. McDonald, special Agent, Internal Revenue Service, Petitioners v. Edwin Sapp, Respondent and William F. Pelski and Eva Pelski, Intervenors

U. S. District Court, So. Dist Fla. , No. FL 73-125-Civ-NCR, 371 FSupp 532, 1/30/74

[Code Sec. 7602]

Examination of books, witnesses: Accountant.--Ledgers held by taxpayers' accountant were required to be turned over to the court which enforced the government's summons based on the Supreme Court decision in Couch [73-1 USTC ¶9159].
[Code Sec. 7213]

Disclosures: Unauthorized, penalties: Judicial process: Although enforcing the government's summons of the taxpayers' ledger, the court ordered that the material not be turned over until a complete investigation was made of the government's conduct, which was a shocking and high-handed treatment of the taxpayers.--When the court requested a memorandum of law from the parties, concerning the summons issue, the government gratuitously attached an exhibit to its memorandum, consisting of certified copies of the taxpayers' tax returns for the six years prior to the years at issue. The returns were totally irrelevant to the summons issue.
Findings of Fact and Conclusions of Law

Findings of Fact

ROETTGER, JR., District Judge:

The United States of America sought to obtain a ledger of individual taxpayers for the calendar years 1971 and 1972 by a summons directed to the respondent, Edwin Sapp, a certified public accountant. The taxpayers, Mr. and Mrs. William F. Pelski, demanded of Mr. Sapp that he not turn over the ledger and claimed a privilege under the Fifth Amendment. The taxpayers moved to intervene and were permitted to do so by the court.

The second matter treated in this order involves a motion for sanctions against the government for possible violations of 26 U. S. C. §7213.

[Ledger in Accountant's Possession]

Respondent has been preparing tax returns for the taxpayers since the mid-fifties. Customarily the taxpayers would drop off the ledger in the tax season between January and April, and would pick it up at some later time. The last time they delivered the ledger to the accountant was in 1971 in the tax season. The accountant has had it continuously in his possession since that time. The taxpayers did not continue their usual practice of picking the ledger up after the filing of the annual return because Mr. Pelski took a position as Director of the South Florida insuring office of the Federal Housing Administration in 1970; consequently, they were required to place their assets in a blind trust in order to avoid a conflict of interest situation under the regulations of the Department of Housing and Urban Development. During this period of time the accountant received financial information from the trustee of the blind trust, a Pompano Beach bank.

At the time the taxpayers picked up their tax returns in 1973 they requested the return of the ledger but the accountant asked if he could retain it for a while as he wanted to make some additional entries. Mr. Pelski was no longer in government service, having resigned in late 1972.

The accountant testified that it was due to inadvertence that he had not returned the ledger to the taxpayers prior to being served with the government's summons; in fact, he had the ledger lying on his office couch, intending to deliver it to the taxpayers.

[Tax Returns Exhibited]

All parties agree that the accountant is a mere stakeholder and that the real dispute lies between the government and the taxpayers.

Both the government and the taxpayers rely on the recent Supreme Court decision in Couch v. United States [73-1 USTC ¶9159], 409 U. S. 322, 93 S. Ct. 611 (1973). The court requested a memorandum of law from the government and the taxpayer, and it was in the filing of the government's memorandum that the second and more troublesome matter arose. The court did not request that any evidentiary matter be attached to a memorandum of law; instead, the government followed the somewhat unusual procedure of gratuitously attaching an exhibit to its memorandum of law. The exhibit was no ordinary exhibit: it was certified copies of the taxpayers' joint income tax returns for the last six years. Mr. Pelski has been the subject of considerable news media interest and, curiously enough, when the memorandum was filed representatives of the press were waiting for it in the Clerk's office. The returns were totally irrelevant to any issue raised by the Couch decision.

[Sanctions Requested]

The exhibits stimulated a motion by intervenors for imposition of sanctions and/or abatement of investigation. The court set the intervenors' motion for hearing and directed counsel for all parties to file a brief on the question of whether "any claim of privilege exists to exempt the government attorneys from the operation of 26 U. S. C. §7213." ¹

The government's memorandum in opposition to the motion for imposition of sanctions attempted to justify its cavalier attachment of the tax returns by asserting that the copies of the returns were admissible as a matter of right under the federal shopbook rule, 28 U. S. C. §1732, and as a government record. 28 U. S. C. §1733. Additionally, the government asserted that the exhibits are self-admitting under Rule 44 of the Federal Rules of Civil Procedure. The memorandum then completely misses the mark by asserting that the intervenors' motion has no basis because ". . . income tax returns are, as a matter of law, public records." At this point in time, that presumes an indictment for income tax violations--a prerogative of the grand jury, not the Department of Justice. One must wonder at the government's position if the grand jury refused to indict intervenors--if it is even considering such action.

Although the government has barraged the court with a great many regulations from the Code of Federal Regulations in support of its position that the disclosure of the tax returns was authorized by law and thus outside the purview of 26 U. S. C. §7213, the court finds only one section to be relevant: Regulation 301.6103(a)-1(h) entitled "Use of returns in litigation." The government would have the court believe that once tax returns are turned over to the Department of Justice for use in preparation for grand jury or trial proceedings, the Department of Justice may publicly disclose those returns in connection with any matter even peripherally or tenuously involved with the future prosecution. The court does not believe that §7213 authorizes such a blanket exception. The court believes this conclusion is warranted by the purpose and intent of §7213 and further finds support in part of 301.6103(a)-1(h) itself:

"If a return . . . is furnished pursuant to this paragraph, it shall be limited in use to the purpose for which it is furnished and is under no condition to be made public except to the extent that publicity necessarily results for such use." (emphasis added)

The court entered a further order requiring that the United States Attorney for this district, the chief of the criminal division in the U. S. Attorney's office, all of the assistant U. S. attorneys who had signed any pleadings and the named trial attorneys from the Tax Division of the Department of Justice and "any other attorney in the Department of Justice who authorized or participated in the disclosure of the income tax returns of the intervenors" be present to give testimony at the hearing.

The testimony of the attorneys for the government revealed that the United States Attorney's office was acting merely as a conduit for the filing of the pleadings from the Department of Justice and did not participate in any way in the decision to attach certified copies of the tax returns to the memorandum of law. If fact, the United States Attorney had personally removed himself from this investigation over two years ago and had specifically turned over the responsibility to the Department of Justice.

The responses of the attorneys for the Department of Justice revealed that they are totally confident that their procedure was correct, and that they have the right to make tax returns a matter of public record in any proceeding in which a tax claim of the United States is involved. In fact one attorney candidly admitted that the Department's interpretation of the regulations in the Code of Federal Regulations ² would permit the United States to disclose tax returns of any individual who happens also to be a party to the litigation. The court was hastily assured by this attorney that that, of course, would not be done in routine cases such as the Sovereign's foreclosing a mortgage which had been assigned to the Secretary of the Department of Housing and Urban Development.

The attorneys admitted that the subject of §7213 and its proscription was never discussed at Justice; that in the decision of whether to file the tax returns, the procedure of filing them with the court for an in camera inspection was never considered or discussed. Counsel for the government, however, candidly admitted that the tax returns for the six years were attached to the memorandum of law because of a fear on the part of the Department of Justice that the court would only permit them to have access to the portions of the ledger dealing with calendar years 1971 and 1972; whereas, in fact, the government really wanted to examine the entire ledger and felt the tax returns would justify their position. The government's position is untenable because it never asked for anything other than the 1971 and 1972 portions of the ledger, either in the summons or at the hearing. In addition, never did it serve a summons for the years prior to 1971 and move to amend its petition or serve any notice it was contending for a larger scope under the summons.

This court finds such conduct a shocking and high-handed treatment of taxpayers and a complete evasion of congressional purpose in 26 U. S. C. §7213.

The court was advised that the Department of Justice has reviewed its procedures as a result of the court's order and Justice has concluded that its procedures were correct. Having been a government lawyer in the not very distant past, this court must conclude that the review in Justice amounts to a bureaucratic circling of the wagons.

The government is entitled to the documents sought in its summons: "ledger book of William F. and Eva Pelski for all of their financial transactions and interests staring January 1, 1971 and ending December 31, 1972 ." The case is governed by the decision of Couch v. United States [73-1 USTC ¶9159], 409 U. S. 322, 93 S. Ct. 611 (1973), although the shorter term of possession by the accountant in the instant case gives the intervenors a much stronger position than that of the taxpayer in Couch.

The purpose of §7213 is set forth in United States v. Tucker [70-2 USTC ¶9580], 316 F. Supp. 822 (D. Conn. 1970): `to prevent wholesale revelation of confidential information to persons not determined to have a legitimate interest therein.' Tollefsen v. Phillips, 16 F. R. D. 348, 349 (D. Mass. 1954); Kingsley v. Delaware, Lackawanna & Western R. Co., 20 F. R. D. 156, 159 (S. D. N. Y. 1957). It also serves to encourage the full and accurate reporting of income for tax purposes." Id. at 825.

No justification whatsoever for the attachment of the individuals' tax returns to a memorandum of law appears from a review of the memorandum, or the transcript of the prior proceedings, and the government has failed to show any justification either by the briefs subsequently filed or at the hearing.

It is not appropriate to grant the extreme sanction sought by taxpayers of abatement of the investigation of the government's inquiry into possible tax violations of the intervenors. However, they are entitled to some relief--if only to deter the overly zealous attorney in the Department of Justice from disclosing other taxpayers' returns in such high-handed fashion. Nothing the court can do can restore the privacy Congress intended these taxpayers to enjoy. The publication of data from the returns in local newspapers cannot be undone.

Section 7213 does provide criminal penalties against government employees who make an improper disclosure of tax returns. So the court will impose this limited sanction against the government: The ledger for 1971 and 1972 will be turned over to the government as soon as a grand jury has investigated this matter and either returned an indictment or a "no true bill" against the government officials involved in the disclosure. The court recognizes that responsibility for prosecuting crimes lies within the Executive Branch. U. S. v. Cox, 342 F. 2d 167 (5th Cir. 1965); also see U. S. v. Ammidown, -- F. 2d --, 14 CrL 2189 (D. C. Cir. 1973). Consequently, if the Attorney General declines to present this matter vigorously before a grand jury but adequately explains such action to the court, then the court will permit the government at that time to have the ledger for 1971 and 1972 for use in its investigation.

The court will retain jurisdiction and enters a separate order effecting these findings of fact and conclusions of law.

DONE AND ORDERED this 30th day of January, 1974.

Supplementing the Findings of Fact and Conclusions of Law entered by the Court this date, it is

ORDERED AND ADJUDGED:

1. That the petitioner is entitled to enforce its subpoena against the respondent and the intervenors, subject to the limitations contained in this order. The petitioner's summons was directed to the following documents: "Ledger book of William F. and Eva Pelski for all of their financial transactions and interests starting January 1, 1971 and ending December 31, 1972 ."

2. The intervenors' motion for abatement of investigation of the intervenors is denied.

3. The intervenors' motion for the imposition of sanctions is granted to this extent: the ledger of the taxpayers for the years 1971 and 1972 shall be delivered to the petitioner upon the occurrence of the first of the following conditions:

(a) Investigation by a Federal Grand Jury of the actions of the government officials involved in disclosing the intervenors' tax returns in this case and the return of an indictment against the responsible officials.

(b) Investigation by a Federal Grand Jury of the actions of the government officials involved in disclosing the intervenors' tax returns in this case and the return of a "no true bill" against these officials.

(c) An adequate explanation to the Court by the Attorney General of his reasons for not prosecuting the government officials involved.

4. The attorney for the respondent shall continue his possession of the portion of the ledger covered by the summons of the government pending further order of this Court which shall issue upon the occurrence of any one of the conditions set forth in paragraph 3.

ORDER (5/3/74)

Pursuant to the Findings of Fact and Conclusions of Law entered by the Court on January 30, 1974 , this court agreed that a satisfactory explanation by the Attorney General of the United States would constitute a sufficient satisfaction of the condition precedent set forth in the Court's order implementing those Findings of Fact and Conclusions of Law.

The Court has received such satisfactory explanation and it is therefore

ORDERED AND ADJUDGED:

1. That the petitioner is entitled to the ledger book of William F. and Eva Pelski for all of their financial transactions and interests starting January 1, 1971 and ending December 31, 1972 . The records for the years 1971 and 1972 shall be delivered to the petitioners.

¹ 26 U. S. C. §7213. Unauthorized disclosure of information. (a) Income returns. (1) Federal employees and other persons. It shall be unlawful for any . . . employee of the United States to divulge or make known in any manner whatever not provided by law to any person the amount or source of income, profits, losses, expenditures, or any particular thereof, set forth or disclosed in any income return, or to permit any income return or copy thereof . . . to be seen or examined by any person except as provided by law; . . . and any person committing an offense against the foregoing provision shall be guilty of a misdemeanor . . . and if the offender be an . . . employee of the United States he shall be . . . discharged from employment.

² 26 C. F. R. §301.6103(a)(1) et seq. (1973).

 

 

[76-2 USTC ¶9639]W. D. Kirk, Jr., et al. v. First National Bank of Columbus , et al.

U. S. District Court, No. Dist. Ga. Atlanta Div., Civil Action No. 76-533A, M. D. of Ga. Columbus Div., No 75-8, 8/27/76

[Code Sec. 6103]

Disclosure of tax return information: IRS District Director: Subpoena duces tecum.--A former shareholders' action to compel an IRS District Director to comply with a subpoena duces tecum in seeking information pertaining to certain individual taxpayers and a company in which they were involved in connection with a pending court action involving securities fraud and misappropriation of corporate assets was denied by the District Court.

Timothy R. Askew, Jr., Arnall, Golden & Gregory, Atlanta, Ga., Charles A. Gower, Owens, Littlejohn, Gower & Pugh, Columbus, Ga., for plaintiffs. John W. Stokes, Jr., U. S. Attorney, William D. Mallard, Jr., Ass't U. S. Attorney, Atlanta, Ga., John J. McCarthy, Donald J. Gavin, Robert L. Gordon, Department of Justice, Washington, D. C. 20530, Marcus B. Calhoun, Jr., Martin, Kilpatrick & Davidson, Columbus, Ga., for defendants.

Order

FREEMAN, District Judge:

This is a motion to compel compliance with a deposition subpoena duces tecum served on the District Director of the Internal Revenue Service in Atlanta, Georgia, [hereinafter the "Director"] calling for the production of documents in the possession of the Director relating to tax information of Rachel Ann Wright and Robert H. Wright, and the Wright Contracting Company with respect to sales of construction equipment in Pakistan or Afghanistan in 1961 and 1962 and with respect to the sale of a Lichtenstein Corporation in 1969. Movants seek this information in connection with an underlying action for securities fraud and misappropriation of corporate assets which is presently pending in the Middle District of Georgia.

The Director has refused to produce such documents on the grounds that production is barred by Sections 6103 and 7213 of the Internal Revenue Code of 1954, 26 U. S. C. §§ 6103, 7213 as well as by 18 U. S. C. §1905 of the criminal code. 26 U. S. C. §6103 provides that:

Returns made with respect to taxes . . . upon which the tax has been determined by the Secretary or his delegate shall constitute public records; but, except as hereinafter provided . . . they shall be open to inspection only upon order of the President and under rules and regulations prescribed by the Secretary . . .

26 U. S. C. §7213(a)(1) makes it unlawful:

. . . to divulge or to make known . . . to any person the amount or source of income, profits, losses, expenditures, or any particular thereof set forth in any income return or copy thereof . . .

18 U. S. C. §1905 imposes criminal sanctions on federal employees who violate the non-disclosure provisions of §6103.

The word "returns" within the meaning of §6103 has been defined by the Secretary in regulations promulgated pursuant thereto to mean "information returns, schedules, lists and other statements filed by or on behalf of the taxpayer," Treas. Reg. §301.6103-1(a)(3)(i)(a), as well as "other records, reports, information received orally, . . . memoranda, or evidence taken . . . relating to [the returns.]" Treas. Reg. §301.6103-1(a)(3)(i)(b).

Income tax returns are confidential communications between the government and a taxpayer. Heathman v. United States District Court for the Central District of California , 503 F. 2d 1032 (9th Cir. 1974). §6103(a)(2) when considered in conjunction with 26 U. S. C. §7213(a) reflects a valid public policy against disclosure of tax returns grounded in the interest of the government that this policy of confidentiality encourages the full disclosure of income by taxpayers who are assured that their neighbors or competitors "will not be apprised of the intimate details of [their] financial [lives.]" Association of American Railroads v. United States , 371 F. Supp. 114, (D. D. C. 1974) (three-judge); Tax Analysts & Advocates v. Internval Revenue Service [74-2 USTC ¶9635], 505 F. 2d 350, n. 1 (D. C. Cir. 1974); U. S. v. Liebert [75-2 USTC ¶9576], 519 F. 2d 542 (3d Cir. 1975), cert. denied, -- U. S. --. Heathman v. U. S. District Court, supra, at 1035; Wiesenberger v. W. E. Hutton & Co., 35 F. R. D. 556 (S. D. N. Y. 1964). In this manner, confidentiality ensures full disclosure by the taxpayer and maximizes the revenue to the government. Heathman v. United States District Court, supra, at 1035.

Plaintiffs, while recognizing the general policy against public disclosure as evidenced by these statutory provisions, nevertheless, contend that they are entitled to receive the information requested. Plaintiffs concede that all documents within the scope of the subpoena which were filed by or on behalf of the taxpayers could be construed as "tax return information," and they, therefore, would be willing to exclude such documents from their subpoena. However, they argue that the definition of "returns with respect to taxes" within the contemplation of §6103 does not include:

information which was never filed by either taxpayer, but which was developed by the Internal Revenue Service in the course of its investigations and which was obtained from various and sundry sources other than the taxpayers involved.

The Director, on the other hand, argues that such "technical advice memoranda" come within the scope of the non-disclosure provisions of §6103. See Tax Analysts and Advocates v. Internal Revenue Service, supra; Glickman, Eiger and Co. v. Internal Revenue Service, 75-2 USTC ¶9788, 36 A. F. T. R. 2d 75-6111 (D. Minn. Oct. 14, 1975 ). We agree with the Director's contentions in this respect, since to hold otherwise would frustrate the purpose of maintaining the confidentiality of the taxpayer's returns and the information developed in connection therewith. See also Freuhauf Corp. v. Internal Revenue Service, 522 F. 2d 284, 289 (6th Cir. 1975), cert. granted 44 U. S. L. W. 3397 (only those portions of technical advice memoranda that are or were intended for issuance to taxpayers held appropriate for disclosure.) But see B & C Tire Co. v. Internal Revenue Service [74-1 USTC ¶9272], 376 F. Supp. 708, 711-12 (N. D. Ala. 1974).

Movants have also argued that as former shareholders of the Company, they are entitled to access to the documents sought under 26 U. S. C. §6103(c) and Treas. Reg. 301.6103(c)-1(a). 26 U. S. C. §6103(c) provides that:

all bona fide shareholders of record owning 1 per cent or more of the outstanding stock of any corporation shall, upon making request of the Secretary or his delegate, be called to examine the annual income returns of such corporation and of its subsidiaries.

This statutory exception to the non-disclosure policy is consistent with and reflects the common law right of a stockholder to inspect corporate records, provided that "he is a bona fide stockholder, at the time when inspection is sought." 5 Fletcher Cyc. Corp., 858-59 (1967) (Perm. Ed.); See generally, Nadler, Georgia Corporation Laws, §410 (1950). Movants, as former shareholders clearly have not satisfied the prerequisite of present ownership necessary to invoke disclosure under 26 U. S. C. §6103(c). Similarly, to the extent that plaintiffs attempt to rely upon Treas. Reg. §301.6103(c)-1(a), which provides for examination of corporate returns by any shareholder of a dissolved corporation "who would have been entitled to examine them at the date of dissolution," it is evident that plaintiffs' arguments are not meritorious since there is no contention that the company has been dissolved.

Movants also rely upon Treas. Reg. §301.6103(a)-1(j) which permits inspection of income tax returns to the extent necessary "to permit examination of any accepted offer in compromise" with respect to the liability for any such tax, "under section 7122." The treasury regulation relied upon by movants does not entitle them to production of the documents, since it is evident from the record that the tax liability sub judice was compromised by means of a final "closing agreement" authorized by 26 U. S. C. §7121, rather than by a "compromise" authorized by 26 U. S. C. §7122, as required by the regulation. This court's decision does not, however, absolutely foreclose every avenue whereby plaintiffs may discover this tax information which is undoubtedly relevant to the prosecution of the underlying action. We only conclude that such information is not required to be produced by the District Director of Internal Revenue Service in response to a deposition subpoena duces tecum.

Accordingly, for the reasons hereinabove expressed, plaintiffs' motion to compel compliance with a subpoena duces tecum issued to the District Director of the Internal Revenue Service is hereby DENIED.

IT IS SO ORDERED.

 

 

 

[75-2 USTC ¶9576] United States of America , Appellant v. Peter P. Liebert, III. Vacating and remanding to District Court, 75-1 USTC ¶9263, 383 FSupp 1960

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 74-2294, 519 F2d 542, 6/30/75

[Code Secs. 6103, 7203 and 7213]

Criminal penalties: Failure to file return: Motion to discover list of nonfilers.--Charges for failing to file returns against the taxpayer, which were dismissed by the district court, were reinstated on appeal. The lower court had dismissed the charges upon the government's failure to supply lists of nonfilers to the taxpayer. However, the appellate court concluded that the government's alternative means of securing the information requested by the taxpayer were sufficient to adduce evidence without unnecessarily invading others' privacy.

Scott P. Crampton, Assistant Attorney General, Gilbert E. Andrews, Robert E. Lindsay, Department of Justice, Washington, D. C. 20530, for appellant. Marvin Comisky, Jerome R. Richter, Martin H. Belsky, Blank, Rome, Klaus & Comisky, 1100 Four Penn Center, Philadelphia, Pa., for appellee.

Before SEITZ, Chief Judge, and ROSENN and WEIS, Circuit Judges.

Opinion of the Court

ROSENN, Circuit Judge:

Despite more than a decade of experience with expanded pretrial discovery in criminal cases, the extent to which it should be permitted continued to be "a complex and controversial issue." ¹ Whether pretrial discovery may be used to secure extrinsic evidence to impeach the reliability of computer printouts which are the fundament of the prosecution's case presents an issue of first impression.

Defendant, Peter P. Liebert, III, was charged in a three-count information on December 21, 1973 , with willfully and knowingly having failed to file his income tax returns for the years 1967 through 1969, in violation of section 7203 of the Internal Revenue Code of 1954 (Code). Liebert was arraigned and pleaded not guilty to the charges. His attorneys have claimed he filed a tax return for each of the three years in question.

I. Discovery Motions

In a failure-to-file prosecution, the Government relies heavily upon a report compiled by the personnel of the appropriate service center that their computers have no record of the receipt of a taxpayer's return for the particular year. In preparation for challenging the reliability and accuracy of the computer report, Liebert filed on January 14, 1974 , a motion seeking an order permitting his computer expert access to the Mid-Atlantic Service Center for the purpose of alyzing and testing the Internal Revenue Service's (IRS) data processing systems. After extended proceedings, the district court granted the motion.

On February 28, 1974 , Liebert filed a second discovery motion seeking production of all records indicating the number of notices issued by the IRS for the years 1967 through 1973 to taxpayers advising that no tax return had been received. ² On October 22, 1974 , again after extended proceedings, the district court ordered the Government to furnish Liebert a "mutually agreeable portion of the lists" of the people whom the Government suspected as being probable nonfilers for the years 1970 and 1971. ³ [75-1 USTC ¶9263] 383 F. Supp. 1060 (E. D. Pa. 1974).

When the Government refused to produce the lists, the district court on November 26, 1974 , dismissed the charges against Liebert. The Government appeals, arguing that the lists are not subject to disclosure under the Code. The Government also contends that even if the lists are not privileged under the Code, the information Liebert desires through the use of the lists may be obtained from alternative sources without invading the privacy of the persons listed.