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. ⁴ We find merit in the Government's latter contention, vacate the judgment of the district court, and remand.

An understanding of the nature of the lists in dispute is essential for the proper resolution of the problem confronting us. ⁵ The lists are prepared in conjunction with the IRS Individual Master File Delinquency Check Program, which identifies individuals who filed in the previous year but apparently have not filed for the current year, and individuals who have not filed for either the current or the previous years.

About six months after the due date of the return in question, an inquiry is initiated by analyzing the individual master file for taxpayers who have filed in the prior year but apparently not for the current year. Also, certain other documents, such as Social Security Administration wage records and W-2 forms, are compared with the master file to identify possible nonfilers. After the potentially delinquent taxpayers have been identified, wage information for the current year, adjusted gross income from the last return filed, and other criteria are used to determine whether the taxpayer probably was required to file.

Within the limitations of available resources, certain of these apparent nonfilers are selected for contact. ⁶ As soon as the first notices are sent to the apparently delinquent taxpayers, the service center prepares a listing identifying each nonfiling taxpayer. These listings are the lists in issue in this case. If the taxpayer does not respond satisfactorily to the notice, a taxpayer delinquency investigation is issued and forwarded to the local IRS office where an attempt is made to communicate with the taxpayer either by phone, letter, or in person to resolve the apparent delinquency.

Thus, although the lists are commonly referred to as the lists of nonfilers, that appellation is misleading in two aspects. First, the lists contain names of persons who, in fact, have filed. For example, the return may have been in process at the time the lists were prepared, the taxpayer may have moved and filed in a different service center, or the taxpayer may have married and filed jointly under a different name. Second, the lists contain names of persons who did not file, but were under no duty to do so. Such people may have not earned enough adjusted gross income to be required to file, or indeed may have died during the year.

II. Government's Statutory Contentions

The Government contends that the production of the lists is barred by section 6103(a) of the Code, which permits the public inspection of returns "only upon order of the President and under rules and regulations prescribed by the Secretary . . .." ⁷

Although recognizing that the nonfiling lists are not tax returns, as are 1040 forms, the Government argues that the lists are compiled from previous years' returns, and from documents normally attached to the current year's returns, such as W-2 forms, and therefore are encompassed within the administrative definition of "return" promulgated under authority of subsection (a). ⁸

Congress, in enacting section 6103(a), sought to protect the confidentiality of the information necessary for the determination of tax liability found in returns filed under compulsion of law. Tax Analysts and Advocates v. IRS, [75-1 USTC ¶9217] 505 F. 2d 350, 354 n. 1 (D. C. Cir. 1974); Association of Am. Railroads v. United States [74-1 USTC ¶9263], 371 F. Supp. 114, 116 (D. D. C. 1974) (three-judge court). 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 Am. Railroads v. United States, supra [74-1 USTC ¶9263], 371 F. Supp. at 116.

Section 6103(a), however, is limited by section 6103(f) of the Code which mandates that the IRS furnish to an inquirer information as to whether a person has, or has not, filed an income tax return. ⁹ Information about an individual's financial status necessarily revealed by disclosing whether or not an individual has filed his return cannot be confidential under subsection (a) because the fact of filing or nonfiling is public information under subsection (f). For example, the amount of an individual's adjusted gross income is confidential under subsection (a), but the information that an individual either has an adjusted gross income requiring a filing or lacks such income but desires a tax refund cannot be confidential because such information necessarily is revealed by the filing of a return.

The nonfiling list reveals two types of information about an individual taxpayer. First, the list reveals that as a result of an investigation, albeit preliminary and incomplete, the IRS has determined that the individual did not file a return notwithstanding his duty to file. This type of information is not covered by subsection (a). Second, the list contains limited information about an individual's financial status. Such information reveals at most that an individual either had filed in the previous year or had an adjusted gross income requiring a filing in the current year. This information is exactly the type of information necessarily revealed by the fact of filing, which is public knowledge under subsection (f).

We therefore conclude that neither section 6103(a) nor any reasonable construction thereof bars the production of the nonfiling lists pursuant to judicial order. Since the production of the lists is not barred by the statute, production may not be barred by the regulations promulgated under authority of the statute. ¹⁰ See Tax Analysts & Advocates v. IRS, supra, 505 F. 2d at 354 n. 1.

The Government also contends that disclosure of the lists is forbidden by section 7213(a)(1) of the Code which provides that it shall be unlawful for any federal employee "to permit any income return or copy thereof or any book containing any abstract or particulars thereof to be seen or examined by any person except as provided by law," ¹¹ and 18 U. S. C. §1905 (1970) which is a more general antidisclosure statute containing a similar prohibition. ¹² Under both statutes, the prohibition against the release of confidential information contains the proviso "except as provided by law." Such phrase permits the disclosure of confidential information pursuant to a lawfully issued judicial order. In Blair v. Osterlein Machine Co., 275 U. S. 220 (1927), the court was confronted with similar language in a predecessor of section 7213(a). The Board of Tax Appeals had issued a subpoena to the Commissioner requesting certain information contained in the tax returns of twelve corporations. The Commissioner maintained that disclosure was forbidden by the statute but the Court disagreed:

The prohibition is limited to disclosures made "in any other manner than may be provided by law." It cannot be deemed to forbid disclosure made in obedience to process lawfully issued in a judicial or quasi-judicial proceeding. . . .

III. Rule 16(b)

Absent any statutory prohibition against the production of nonfiling lists, the authority of the district court to order the production of such lists is governed by Federal Rule of Criminal Procedure 16(b) which provides that "the court may order the attorney for the government to permit the defendant to inspect and copy . . . documents . . . within the possession . . . of the government, upon a showing of materiality to the preparation of his defense and that the request is reasonable." ¹³ The use of the permissive term "may" calls for an exercise of discretion and indicates the absence of a hard and fast rule when discovery should be ordered. United States v. McCarthy, 292 F. Supp. 937, 941-42 (S. D. N. Y. 1968). Thus, a district court's ruling on a discovery motion will be disturbed only for an abuse of discretion. United States v. Fioravanti, 412 F. 2d 407, 410 (3d Cir.), cert. denied, 396 U. S. 837 (1969).

The nonfiling lists undoubtedly are material to the preparation of Liebert's defense. A defendant in a criminal trial enjoys the sixth amendment right of being confronted with the witnesses testifying against him and of having compulsory process for obtaining witnesses to testify in his favor. As the Supreme Court only recently noted in rejecting a presidential claim of privilege:

The ends of criminal justice would be defeated if judgments were to be founded on a partial or speculative presentation of the facts. The very integrity of the judicial system and public confidence in the system depend on full disclosure of all the facts, within the framework of the rules of evidence. To ensure that justice is done, it is imperative to the function of courts that compulsory process be available for the production of evidence needed either by the prosecution or by the defense.

United States v. Nixon, 418 U. S. 683, 709 (1974).

Included within the constitutional right of confrontation is the ability through cross-examination to challenge the credibility and reliability of the witness testifying against a defendant. See Douglas v. Alabama, 380 U. S. 415, 418 (1964); Pointer v. Texas, 380 U. S. 400, 404 (1964). A major "witness" confronting Liebert will be computer printouts indicating that the IRS has no record of having received his returns. See United States v. Greenlee [75-1 USTC ¶9192], 308 F. Supp. 652 (E. D. Pa. 1974), aff'd No. 74-2106, (3rd Cir., May 28, 1975 ). The introduction of a computer printout is admissible in a criminal trial provided that the party offering the computer information lays a foundation sufficient to warrant a finding that such information is trustworthy and the opposing party is given the same opportunity to inquire into the accuracy of the computer and its input procedures as he has to inquire into the accuracy of written business records. United States v. DeGeorgia, 420 F. 2d 889 (9th Cir. 1969).

A party seeking to impeach the reliability of computer evidence should have sufficient opportunity to ascertain by pretrial discovery whether both the machine and those who supply it with data input and information have performed their tasks accurately. See Manual for Complex Litigation in 1 J. Moore, Federal Practice, pt. 2, §2.715 (2d ed. 1974); United States v. Russo, 480 F. 2d 1228, 1241 (6th Cir. 1973); United States v. Dioguardi, 428 F. 2d 1033 (2d Cir.), cert. denied, 400 U. S. 825 (1970). The nonfiling lists plainly are outputs of the computer system identifying individuals not filing returns. If an individual who in fact has filed is listed as a nonfiler due to computer error, such error casts doubt on the accuracy and reliability of the records identifying Liebert as a nonfiler. The lists, therefore, may be useful to Liebert in his efforts to impeach the reliability of the computer procedures indicating that he has not filed his returns.

Rule 16(b), however, does not allow discovery merely upon a showing that the requested documents are material to the defendant's preparation for trial; the reasonableness of the discovery request must also be demonstrated. The determination by the district court of the reasonableness of a request requires balancing the interests favoring and opposing discovery. Whether the scales are tipped for or against discovery depends upon where lies the most compelling need. United States v. Aluminum Co. of America, 232 F. Supp. 664 (E. D. Pa. 1964).

The interest favoring the discovery request in the instant case is, as just discussed, the usefulness of the nonfiling lists to the preparation of Liebert's defense. Opposing the request are weightly interests--the right of privacy of the individuals named on the lists, and the need to avoid the problems in managing the presentation of evidence developed from the lists.

As aptly described by Mr. Justice Brandeis almost a half century ago, and equally true today, "the right to be let alone [is] the most comprehensive of rights and the right most valued by civilized men." Olmstead v. United States, 277 U. S. 438, 478 (1928) (Brandeis, J., dissenting). The district court characterized this right as "elusive," primarily because it believed the information in the lists could be obtained under section 6103(f) by addressing to the IRS numerous inquiries as to whether particular individuals had filed their returns. 383 F. Supp. at 1064. This characterization, however, disregards the existence of three different facets of individual privacy which may be violated by production of the nonfiling lists, only one of which is infringed to the same degree by subsection (f).

First, the failure of an individual to file a return is revealed by production of the lists. Although an individual may desire to keep such information confidential, the fact of nonfiling is public information under subsection (f).

Second, the production of such lists necessarily would lead to communications from Liebert. His specific purpose in seeking the list is to communicate with individuals named in the lists in a zealous effort to find inaccuracies. This he proposes to do in the fact of "[t]he ancient concept that 'a man's home is his castle' into which 'not even the king may enter' has lost none of its vitality. . . ." Rowan v. United States Post Office Dept., 397 U. S. 728, 737 (1970). While courts in some instances have ordered production of lists which might lead to contacts between the parties obtaining, and those named, in the lists, such production has been limited to instances where it advanced an important public interest and where the person contacted probably would not be offended. ¹⁴ Where the contact is likely to prove offensive, the courts vigilantly have safeguarded the privacy of the individuals. ¹⁵

An intrusive communication by a stranger about a failure to file a tax return well may prove disturbing to an individual. Moreover, such contact could prove disturbing apart from tax considerations by reviving dormant unpleasant memories. ¹⁶ See Rose v. Department of the Air Force, 495 F. 2d 261 (2d Cir. 1974), cert. granted, 43 U. S. L. W. 3445 (Feb. 18, 1975).

Of course, inquiries may be made of individuals about their nonfiling as a result of subsection (f), but the probability of such inquiry is significantly less than through the production of the nonfiling lists. Only 450,000 of the estimated 6,000,000 probable nonfilers are contained in the nonfiling lists, thereby increasing the exposure to contact of the individuals named by a factor of twelve. Moreover, as Liebert recognizes, the identification of all nonfilers under subsection (f) is impractical, requiring culling of names from a phone book or street directory, transmitting the list to the appropriate internal revenue office, and tabulating the answers. ¹⁷ As contrasted with this impractical procedure, the easy availability of the names in the nonfiling lists increases the likelihood of contact with such persons.

Third, and most important, the individuals on the nonfiling lists are not just individuals who the IRS believes have not filed, but are individuals who the IRS believes have not filed in violation of their legal obligation. Nothing in subsection (f) authorizes the release of information indicating that the IRS preliminarily suspects an individual of being in violation of the law. Although the great majority of persons on the lists in fact have filed a return or have legitimate reasons for not doing so, being a suspect under investigation by a government agency is a circumstance which every person except the bizarre would prefer to hold in confidence. The courts have respected this preference. See, e.g., Rose v. Department of the Air Force, 495 F. 2d 261 (2d Cir. 1974), cert. granted, 43 U. S. L. W. 3445 (Feb. 18, 1975).

The other interest opposing discovery is the difficulty in managing at trial the information developed from the lists. Liebert hopes to be able to find persons listed as nonfilers but who in fact have filed, and introduce such evidence to the jury either by calling such persons as witnesses or by cross-examination of the IRS computer experts. The Government then may assume the burden of rebutting the accuracy of such evidence by attempting to prove that the persons cited by Liebert did not in fact file their returns or were listed as nonfilers for reasons other than computer error. The trial thus is likely to deteriorate into a series of minitrials centered upon the reasons individuals, not defendants in the case, were listed as nonfilers. The chief issue, Liebert's alleged willful failure to file his returns, may be obscured.

Balancing the need for disclosing all relevant information in a criminal proceeding against the need for protecting the privacy of individuals having no connection with it, and the further need for avoiding the potential misuse of such information is a difficult and delicate task. It may well be, as Liebert contends, that absent alternative sources of information and difficulty in managing such information at trial, "[t]he generalized assertion of privilege [based on confidentiality] must yield to the demonstrated, specific need for evidence in a pending criminal trial." United States v. Nixon, 418 U. S. 683, 713 (1974). See Davis v. Alaska, 415 U. S. 308 (1974) (juvenile records of witness must be made available to defendant for purposes of cross-examination); Smith v. Illinois, 390 U. S. 129 (1968) (witness must reveal his name so as to allow cross-examination); Dennis v. United States, 384 U. S. 855 (1966) (grand jury testimony of witnesses must be disclosed to defendant). We note that the foregoing cases required disclosure from witnesses, not extrinsic evidence from unrelated parties. Moreover, such cases do not control here because they involve discovery from the only available source of information. Further, the information sought was either admissible in the case in chief or in a form manageable during cross-examination.

Even when the evidence sought in pretrial discovery is material for the defense of a criminal prosecution, we believe the mantle of the privacy of a person having no connection with the case should not be lifted, at least in the present context, if there are reasonable alternative means of securing the information. ¹⁸ The principle has particular application when the intrusion on privacy runs a risk of being extraordinarily burdensome to the parties and also may tend to obscure the real issue in the case.

The Government, both voluntarily and as a result of the district court's order directing that Liebert's experts have access to the Mid-Atlantic Service Center for the purpose of testing and analyzing the computer facilities, represented to the district court that it would make available to Liebert: (a) all the relevant IRS handbooks documenting the procedures, machine operations, and other relevant information pertaining to its electronic data processing system; (b) statistical analyses relating to the Service's ability to discover and report accurately failures to file returns; (c) an expert familiar with all aspects of the nonfiling lists; (d) an expert familiar with all aspects of the processing of work through the Mid-Atlantic Service Center; and (e) an expert who has made studies on the reliability of the Service's data processing systems. ¹⁹ The experts may be deposed by Liebert on any subject not concerning confidential data obtained from tax returns filed by taxpayers. Moreover, the Government has offered to allow Liebert's computer experts to run any test on its computer system not unreasonably interrupting the Service Center operations. Finally, the Government has offered to conduct tests demonstrating the retrieval of a number of actual tax returns of taxpayers whose authorizations are obtained.

Such alternatives should provide Liebert with the information necessary to cross-examine the computer testimony confronting him by analyzing the reliability of the computer system in theory and checking the accuracy of the system in fact. Moreover, the alternatives should provide information focusing directly on the credibility of the computer testimony and more likely should develop the facts than the digression sought by Liebert. They should provide evidence adducible at trial in a more manageable manner without the risk of invading the privacy of, or inconveniencing, taxpayers wholly unconnected with the case. The order of the district court directing the production of the nonfiling lists was unreasonable in light of the alternatives offered by the Government.

The judgment of the district court will be vacated and the case remanded with directions to reinstate the information. Upon proper motion by the defendant, the district court should order the Government to produce the materials and experts indicated in this opinion. Each party will bear its own costs.

¹ See Advisory Committee's Note to Proposed Amendments to Rules of Criminal Procedure, 34 F. R. D. 411, 423 (1964).

² Liebert learned of the existence of such records when an Assistant United States Attorney introduced one page of the list into evidence in another failure-to-file case. See United States v. Greenlee, No. 74-2106 (3d Cir. May 28, 1975 ).

³ The lists were not available for 1967 through 1969, the years for which Liebert had been charged with failure to file tax returns. The district court ordered the production of the 1970 and 1971 lists after determining that the system producing these lists had been upgraded since the preparation of the 1967 through 1969 lists. The court reasoned that if errors existed in the later lists, they in all probability would demonstrate the presence of an equal or greater number of errors in the earlier lists. The Government has not challenged this conclusion on appeal.

⁴ Previous to the district court's action, another judge in the district had refused to order the production of the lists. United States v. Spear [75-1 USTC ¶9220], 377 F. Supp. 1162 (E. D. Pa. 1974).

⁵ Our description is taken from a brief filed by the Government in the district court. Liebert has not disputed the Government's characterization of the lists.

⁶ In 1970, out of 6,000,000 potential nonfilers, 465,000 were selected for contact.

⁷ Int. Rev. Code §6103(a) provides:

(a) Public record and inspection.--

(1) Returns made with respect to taxes imposed by chapters, 1, 2, 3, and 6 upon which the tax has been determined by the Secretary or his delegate shall constitute public records; but, except as hereinafter provided in this section, they shall be open to inspection only upon order of the President and under rules and regulations prescribed by the Secretary or his delegate and approved by the President.

⁸ Returns are defined by Treas. Reg. §301.6103(a)-1(a)(3)(i) (1972) which provides:

(3) Terms used--(i) Return. For purposes of section 6103(a), the term "return" includes--

(a) Information returns, schedules, lists, and other written statements filed by or on behalf of the taxpayer with the Internal Revenue Servive which are designed to be supplemental to or become a part of the return, and

(b) Other records, reports, information received orally or in writing, factual data, documents, papers, abstracts, memoranda, or evidence taken, or any portion thereof, relating to the items included under (a) of this subdivision.

⁹ Int. Rev. Code §6103(a) provides:

(f) Disclosure of information as to persons filing income tax returns.--The Secretary or his delegate shall, upon inquiry as to whether any person has filed an income tax return in a designated internal revenue district for a particular taxable year, furnish to the inquirer, in such manner as the Secretary or his delegate may determine, information showing that such person has, or has not, filed an income tax return in such district for such taxable year.

Prior to 1966, subsection (f) required that lists containing the name and address of each person filing a return in a particular internal revenue district should be maintained in each district. The Government argues that the 1966 legislation amending subsection (f) to its present form relegated the disclosure of whether a taxpayer had filed to the provisions of subsection (a).

The 1966 amendment was included in a bill amending the Code to allow for the modernization of the IRS automatic data processing system. Act of Nov. 2, 19 66, Pub. L. No. 89-713, 80 Stat. 1107. As a result of this modernization, the IRS proposed to maintain the lists of filers on microfilm, and Congress believed that making the microfilm and the necessary reading equipment available to the general public would not be practical. S. Rep. No. 1625, 89th Cong., 2d Sess. 8 (1966). Congress also noted that under the proposed automatic data processing system, the list of those individuals filing tax returns would contain the individuals' social security numbers. Congress determined that social security numbers should not be available to the general public because these numbers could not be used to obtain information about an individual's wages. Id. Subsection (f) was amended to its present form to eliminate these problems.

The legislative history does not reveal any effort to restrict the public nature of information showing that an individual has filed his return. Indeed, the Senate Report accompanying the amendment specifically provided that "whether or not a person has filed his tax return should continue to be a matter of public knowledge." Id.

¹⁰ Since we reach this conclusion, we need not determine whether subsection (b) of the Treasury Regulation barring the production of any documents relating to an individual's return to a proper interpretation of the statute. See B & C Tire Co. v. IRS [74-1 USTC ¶9272], 376 F. Supp. 708, 712 (N. D. Ala. 1974).

We also do not reach the question of whether the regulations promulgated under section 6103 do bar in fact the production of the nonfiling lists pursuant to judicial order. See Treas. Reg. §301.6103(a)-1(g) (mandating that returns shall be open for inspection by a United States attorney where necessary in the performance of his official duties); Treas. Reg. §301.6103(a)-1(h) (returns may be furnished to United States attorney for use in, or in preparation for, litigation in any court in which the United States has an interest in the result). But see Treas. Reg. §301.6103(a)-1(a)(3)(i) (items listed in subdivision (b) of regulation open to inspection only in discretion of Secretary or Commissioner).

¹¹ Int. Rev. Code §7213(a)(1) provides in pertinent part:

(a) Income returns--

(1) Federal employees and other persons.--It shall be unlawful for any officer or employee of the United States to divulge or to 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 or any book containing any abstract or particulars thereof to be seen or examined by any person except as provided by law . . .

¹² 18 U. S. C. §1905 (1970) provides in pertinent part:

Whoever being an officer or employee of the United States or of any department or agency thereof . . . permits any income return or copy thereof or any book containing any abstract or particulars thereof to be seen or examined by any person except as provided by law; shall be fined . . . or imprisoned . . .

¹³ Federal Rule of Criminal Procedure 16(b) provides:

(b) Other Books, Papers, Documents, Tangible Objects or Places. Upon motion of a defendant the court may order the attorney for the government to permit the defendant to inspect and copy or photograph books, papers, documents, tangible objects, buildings or places, or copies or portions thereof, which are within the possession, custody or control of the government, upon a showing of materiality to the preparation of his defense and that the request is reasonable. Except as provided in subdivision (a)(2), this rule does not authorize the discovery or inspection of reports, memoranda, or other internal government documents made by government agents in connection with the investigation or prosecution of the case, or of statements made by government witnesses or prospective government witnesses (other than the defendant) to agents of the government except as provided in 18 U. S. C. §3500.

¹⁴ See, e.g., Robles v. EPA, 484 F. 2d 843 (4th Cir. 1973) (names and addresses of persons exposed to radiation emissions, persons seeking information not identified); Getman v. NLRB, 450 F. 2d 670 (D. C. Cir. 1971) (names and addresses of persons eligible to vote in representative elections sought by law professors engaged in academic studies).

¹⁵ See, e.g., Rowan v. United States Post Office Dep't, 397 U. S. 728 (1970) (right of individuals who object to mailings as "sexually provocative" to have names removed from mailing list); Breard v. Alexandria, 341 U. S. 622 (1951) (protection of individual from uninvited visit of door-to-door solicitor of magazines); Wine Hobby USA, Inc. v. United States Internal Revenue Service [74-2 USTC ¶9695], 502 F. 2d 133 (3d Cir. 1974) (refusal to order production of lists which would lead to commercial solicitations). But see Martin v. Struthers, 319 U. S. 141 (1943) (ordinance forbidding door-to-door solicitation unconstitutional as applied to religious solicitors).

¹⁶ For example, Liebert might contact a relative of a person whose name appeared on the list as a probable nonfiler because of the death of that individual.

¹⁷ It is uncertain whether Liebert would have to mail each name in a separate envelope or could transmit the entire list at once.

¹⁸ See ABA Standards Relating To Discovery and Procedure Before Trial §2.5(b) (Approved Draft 1970) which provides:

(b) The court may deny disclosure authorized by this section if it finds that there is a substantial risk to any person of . . . unnecessary annoyance or embarrassment, resulting from such disclosure, which outweighs any usefulness of the disclosure to defense counsel.

Judge Weis believes that considerations of unnecessary annoyance or embarrassment set forth in these ABA standards are more applicable to the issue raised in this case than considerations of privacy.

¹⁹ We assume that the information supplied by the Government will include the number of persons listed as nonfilers due to computer error in 1970 and 1971.

 

 

 

[75-1 USTC ¶9263]United States of America v. Peter P. Liebert, III.

U. S. District Court, East. Dist. Pa., Criminal No. 73-718, 383 FSupp 1060, 10/22/74

[Code Secs. 6103 and 7213]

IRS lists: Return nonfilers: Disclosure of: Criminal defendant: Discovery.--The court granted a motion, made by a man charged with failing to file 1967 through 1969 returns, to discover IRS computer lists of taxpayers who had failed to file 1970 and 1971 returns. His motive--to locate persons who actually filed returns for those years but were erroneously listed as nonfilers--was sufficient to permit discovery under the law. Lists for years later than those for which he was charged (the earlier lists had been destroyed) were relevant, especially since more sophisticated equipment had been used to compile them.

Robert DeLuca, Assistant United States Attorney, for plaintiff. M. Comisky, Blank, Rome, Klaus & Comisky, 4 Penn Center Plaza, Philadelphia, Pa., for defendant.

Opinion

LORD, III, Chief Judge:

Defendant Liebert has been charged with failure to file income tax returns for the years 1967, 1968 and 1969. On February 28, 1974 , he filed a motion pursuant to Rule 16(b), Federal Rules of Criminal Procedure, seeking discovery of certain computer lists used in conjunction with Internal Revenue Service forms 3941 and 4901. The motion was granted on May 16, 1974 . Subsequently, upon learning that the Commissioner of Internal Revenue had decided that the lists were not discoverable, the government moved for reconsideration, citing nondisclosure statutes and alleging lack of materiality and unreasonableness. For the reasons set out below, I shall deny the government's motion.

[Effect of Statutes]

I. The lists sought by defendant purport to identify taxpayers who apparently have not filed tax returns for the years 1970 and 1971. He intends to use these lists to locate persons who actually filed returns for those years, but were nonetheless erroneously listed as non-filers. Defendant claims that the testimony of such persons would "* * * demonstrate * * * that the Internal Revenue Service indices [used to identify non-filers] are totally unreliable." (Defendant's Brief in Opposition to Motion for Reconsideration, p. 9). The government argues that disclosure of the lists is forbidden by provisions of the Internal Revenue Code (26 U. S. C. §§ 7213(a) and 6103(a), Criminal Code (18 U. S. C. §1905), and Treasury Regulations (§301.6103a, 26 C. F. R. §301.6103a).

Title 26 U. S. C. §7213(a) bars disclosure by federal employees of data set forth in tax returns. Title 18 U. S. C. §1905 is a more general statute which forbids disclosure of any confidential information "coming to [a federal employee] in the course of his employment * * *." Both statutes specifically prohibit examination of "any income return * * * or any book containing any abstract * * * thereof." The government contends that the lists of non-filers are "abstracts prepared from information on tax returns" (Government's Brief in Support of Motion for Reconsideration, at p. 3), and thus fall within the statutory ban.

In light of the fact that defendant seeks neither returns nor information contained on returns, the government's characterization is untenable. However, even if the statutory language were interpreted to encompass the lists, the requested discovery would still be well within the judicial power. Neither 26 U. S. C. §7213(a) nor 18 U. S. C. §1905 raises an absolute prohibition on disclosure. Each statute contains the limiting phrase, "except as provided by law." In Blair, Commissioner v. Osterlein Machine Company, 275 U. S. 220 (1927), the Court was faced with similar language in 18 U. S. C. §216, a predecessor of both the above sections. The Commissioner of Internal Revenue had refused to comply with a subpoena, issued by the Board of Tax Appeals, which requested certain information contained in the tax returns of twelve corporations. ¹ The Commissioner asserted that disclosure of such information was forbidden by §216. The Court disagreed:

"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 * * * proceeding * * *." 275 U. S. at 227.

Thus it is clear that the phrase "except as provided by law" contemplates court-ordered disclosure. See also Frazier v. Phinney, 24 F. R. D. 406, 409 (S. D. Texas, 1959). The government has not cited, nor am I able to find, any case which holds otherwise. ²

The Internal Revenue Code §6103 (26 U. S. C. §6103) covers two distinct topics, (1) the publicity of the contents of returns, and (2) the disclosure of whether or not a person has filed a return. The former is dealt with in subsections (a)-(d). Subsection (a), captioned "Public Record and Inspection", is cited by the government as controlling defendant's request. It provides that inspection of tax returns shall be governed by regulations prescribed by the Secretary of the Treasury or his delegate and approved by the President. ³

Without more, the applicability of this subsection and the regulations promulgated under it is at best questionable, since, as stated earlier, defendant does not seek to inspect tax returns, but merely to discover lists of names. Any doubt, however, is resolved by subsection (f), which deals with the second topic covered by §6103. Before 1966, subsection (f) required that lists containing the name and address of each person who had filed a return in a particular district be maintained for public inspection in that district. In 1966 Congress amended this subsection, eliminating the public lists, and providing that,

"The Secretary or his delegate shall, upon inquiry as to whether any person has filed an income tax return in a designated internal revenue district for a particular taxable year, furnish the inquirer, in such manner as the Secretary or his delegate may determine, information showing that such person has, or has not, filed an income tax return in such district for such taxable year."

The government asserts that by substituting the specific inquiry method in place of the lists Congress intended that the lists be kept confidential.

The amendment to subsection (f) was included in a comprehensive Bill (P. L. 89-713) which modernized the I. R. S. automatic data processing system. Senate Report No. 1625, 3 U. S. Code Congressional and Administrative News 3676, 89th Congress, Second Session, 1966, which accompanied the Bill, is revealing. The Report explains that as part of this modernization, the lists of non-filers were no longer to be kept in their original form, but were instead to be put on microfilm. Since making the microfilm and related reading equipment available to the public was felt to be impractical, Congress instituted the specific inquiry procedure. The Report is clear that the Congressional desire for confidentiality was prompted solely by the fact that the lists contained the Social Security numbers of the persons named. ⁴

As to the data sought by defendant, the report is explicit:

"Your committee agrees with the Committee on Ways and Means, however, that whether or not a person has filed his tax return should continue to be a matter of public knowledge." 3 U. S. Code Congressional and Administrative News at 3683, 89th Congress, Second Session, 1966.

Surely Congress did not intend to authorize the Commissioner of Internal Revenue to bar disclosure of information which Congress had placed in the public domain. Had Congress so intended, 26 U. S. C. §6103(f) would have contained a grant of discretion similar to 26 U. S. C. §6103(a). I therefore conclude that neither the statutes nor the regulation relied on by the government preclude discovery of the lists. ⁵

[Discovery]

II. Rule 16(b), F. R. Cr. P., states that:

"Upon motion of a defendant the court may order the attorney for the government to permit the defendant to inspect and copy * * * documents * * * within the possession * * * of the govment, upon a showing of materiality to the preparation of his defense and that the request is reasonable."

The government contends that defendant's discovery motion fails to satisfy the two criteria of materiality and reasonableness imposed by the rule.

The government argues that the lists do not purport to be conclusive lists of persons who have failed to file returns, but serve merely as a starting point in the process of identifying non-filers. Only after further extensive investigation is that process complete. The government argues that by demonstrating the fallibility of the lists, defendant will in no way impugn the accuracy of the entire process. Therefore, the government concludes that discovery of the lists is immaterial to the preparation of Liebert's defense.

This conclusion is short-sighted. Defendant seeks to reveal not merely the inaccuracy of the computer lists, but rather the unreliability of the entire Internal Revenue Service system of weeding out non-filers. The government suggests that there are many reasons why names will appear on the non-filer list that should not be there,--returns in the process of audit, marriage and change of name, death. This is no doubt true. But it may be equally true that some names are on the list simply because the computer makes mistakes. The latter reason could well have a significant bearing on a crucial issue in this case,--the reliability of the entire I. R. S. procedure of identifying non-filers. Nothing short of the discovery sought will reveal the truth. Such necessary discovery satisfies the materiality requirement of Rule 16(b).

The government has also asserted that the lists for 1970 and 1971 are irrelevant to the issue of I. R. S. reliability in this particular case, since defendant is charged with failure to file in 1967, 1968 and 1969. Defendant originally sought the lists for the earlier years, but was told that such records were no longer in existence. Certainly, defendant cannot be held accountable or penalized for the unavailability of the lists for the years of alleged failure to file. And the testimony of the government's own witnesses has established that (1) the overall I. R. S. system of processing returns has remained unchanged since 1967 (N. T. p. 46, April 25, 1974 ), and (2) any changes in computer equipment were improvements over the prior art (N. T. pp. 182-184, Jan. 28, 1974 , and N. T. pp. 100-101, April 25, 1974 ). It comes, then, to this: defendant is reduced to seeking to expose inaccuracies in a present overall system unchanged since his alleged delinquencies, but operating with better equipment. His a fortiori argument is that if those shortcomings exist now, with better equipment, they had to exist in 1969 without the improved equipment. Circumstances, and not mere chronology, are the touchstone of relevance. The government's claim of irrelevance is without merit.

[Right to Privacy]

Finally, the government argues that discovery of the lists would lead to "a gross violation of the privacy of tens of thousands of taxpayers." Urging a special "taxpayers right to privacy," ⁶ the government has labeled defendant's request "totally unreasonable." (Government's Brief, pp. 11, 12).

There can be no doubt that confidentiality plays a fundamental role in our process of collecting taxes. The government correctly states that "in view of the antidisclosure statutes, all taxpayers have a reasonable expectation of this right to privacy." (Government's Brief, p. 11). The question, then, is whether disclosure of the specific information sought by Liebert would breach this expectation and thus impair the working of our system of taxation.

Congress, in amending 26 U. S. C. §6103(f), has clearly answered this question in the negative. As stated earlier, the Secretary of the Treasury or his delegate must furnish such information to anyone on inquiry. ⁷ This is in stark contrast to the treatment of other tax information, which Congress has authorized the Secretary to withhold in his discretion, 26 U. S. C. §6103(a). In light of the fact that the Constitution has placed the federal taxing power solely with Congress, I find this legislative guidance highly persuasive, if not compelling.

I am aware that my brother, Judge Newcomer, has recently decided this same issue in favor of the government. U. S. v. Spear, 377 F. Supp. 1162 (E. D. Pa. 1974). I share his concern for the privacy of the individuals whose names appear on the lists of non-filers. However, I must balance this concern against not only the Congressional policy cited above, but also the interest of defendant in adequately preparing his defense.

In Dennis v. United States, 384 U. S. 855 (1966), the Court, though recognizing `the long established policy that maintains the secrecy of grand jury proceedings in the federal courts'," 384 U. S. at 869, citing U. S. v. Proctor and Gamble Co., 356 U. S. 677 (1958), required the government to disclose to defendants grand jury testimony of four government witnesses. ⁸ The Court recognized "the growing realization that disclosure, rather than suppression of relevant materials ordinarily promotes the proper administration of criminal justice." 384 U. S. at 870.

"In our adversary system for determining guilt or innocence it is rarely justifiable for the prosecution to have exclusive access to a storehouse of relevant fact. Exceptions to this are justifiable only by the clearest and most compelling considerations." Dennis v. United States, supra, 384 U. S. at 873.

I find no such "clear and compelling" countervailing factors in the present case. The right of a citizen to privacy is, of course, an interest that is and should be zealously protected. But so is a citizen's right to his good name. It is the latter interest that defendant here seeks to preserve. When it is considered that the information defendant seeks is public anyway (see discussion, pp. 4-6, supra), the asserted invasion of privacy seems, at best, elusive. Defendant's interest, on the other hand, is very real. As between the two, the balance is heavily in favor of disclosure.

The government's motion is denied and discovery of the information sought by defendant will be permitted with the following limitations:

(1) The Social Security numbers of the persons named shall be deleted from the lists given to defendant.

(2) In order to ensure that discovery does not become an interminable process, the lists need not be produced in their entirety. Counsel are instructed to confer in an effort to agree on a sufficient number of randomly chosen names to satisfy defendant's inquiry. Should counsel fail to agree, they should submit proposals to the court. Such agreement or submission of proposals shall not constitute a waiver of the government's disagreement with our decision as to disclosure.

Order

AND NOW, this 22nd day of October, 1974, it is ORDERED that the government's motion for reconsideration be and it hereby is DENIED. The government shall, within two weeks of the entry of this order, furnish to counsel for the defendant a mutually agreeable portion of the lists prepared by the Internal Revenue Service, Philadelphia Service Center, in conjunction with Internal Revenue Service forms 3941 and 4901. The lists so furnished shall not include the Social Security numbers of the persons named therein.

Should counsel fail to agree on the number of names to be supplied to defendant, they shall, within three weeks of the entry of this order, submit proposals to the court for such further action as the court deems appropriate.

Order

AND NOW, this 23rd day of October 1974, upon consideration of the defendant's Motion for Access to Buildings, Places, Tangible Objects and Documents, and the answer thereto on behalf of the United States; and upon consideration of the United States' Motion for a Protective Order; and upon consideration of the briefs and memoranda relating to the said motions filed by all parties; and following hearings and conferences of record on January 25 and 28, 1974, and March 21, 1974 , and April 25, 1974 , it is ORDERED as follows:

1. The defendant's Motion for Access to Buildings, Places, Tangible Objects and Documents is GRANTED to the extent set forth more particularly herein.

2. The United States' Motion for a Protective Order is DENIED.

3. This Order shall be implemented as follows:

(a) Within 20 days of the entry of this Order there shall be made available to the expert retained by the defendant, Mr. Joseph F. Earley, and no more than two of his assistants, at a location or locations suitable to the United States, the documentation hereinafter listed, to the extent available, relating to the processing of U. S. Individual Income Returns (Form 1040) for the years 1967 through 1973, inclusive, by the Internal Revenue Service, Philadelphia Service Center, including that relating to the Martinsburg, West Virginia Center insofar as that center participates in the processing of information of the Philadelphia Service Center. The said documentation shall include, to the extent available, the following data pertaining to the electronic data processing system: systems documentation, programming documentation, operating documentation and instructions, training aids, job descriptions of systems personnel, organization charts, systems and programming changes, configuration detail, forms, systems personnel selection criteria, audit trial reports, exception reports, all logs relating to data processing (including volume log, error log, reject log, unposted log, changes log), attendance statistics for systems personnel, machine use logs, budget and budget requests, reports of systems operations, any studies relating to all aspects of the processing of income tax returns, all reports and evaluation of the income tax processing system or any portion thereof.

(b) Notwithstanding subparagraph (a) above, the United States shall not be required to disclose any identifiable data taken from the tax returns filed by any individual other than the defendant. If any document ordered to be produced under subparagraph (a) above contains any information identifiable as having come from the tax return of any taxpayer other than the defendant, such information shall be deleted.

(c) Joseph F. Earley and his assistants shall have until 40 days from the entry of this order to review the above designated documentation. Defendant shall promptly notify counsel for the United States of the completion of this review.

(d) Within one week following the completion of the aforementioned review, access to the premises of the Philadelphia Service Center shall be made available to Joseph F. Earley and no more than two of his assistants, for a period of ten days, for the purpose of performing a preliminary examination of the data processing system therein.

(e) Within one week following the completion of the preliminary examination authorized in (d) above, defendant shall submit to counsel for the United States the following information:

(i) the name and location of any equipment which the defendant wishes to inspect and/or operate;

(ii) the precise areas within the Philadelphia Service Center to which the defendant wishes access;

(iii) the name and/or title of any employee of the Philadelphia Service Center with whom the defendant wishes to speak, and the nature of the information sought from such employee.

(f) Within one week following the receipt of the information submitted under (e) above, access to the premises of the Philadelphia Service Center shall be made available to Joseph F. Earley and his aforementioned assistants, for a period of three weeks, during which time a final examination will be completed, relating to the reliability of any reports by the Philadelphia Service Center as to whether the defendant did or did not file personal income tax returns for the years 1967, 1968 and 1969.

(g) The examinations of the Philadelphia Service Center authorized by paragraphs (d) and (f) above, shall be conducted subject to the control of the officials responsible for the operation of the Philadelphia Service Center. In no event shall Joseph F. Earley or his assistants be permitted to view, copy, or make notes from (1) the tax return or copy thereof, or (2) data from the tax return or copy thereof, of any taxpayer, except the defendant herein. In the event that during the course of the said examinations Joseph F. Earley or his assistants should become aware of data from the tax return of any taxpayer except the defendant herein, Joseph F. Earley and his assistants are prohibited from communicating such data, by any means, to any person, except pursuant to further order of this court.

(h) Joseph F. Earley and his assistants are hereby prohibited, in the conduct of the examinations authorized herein, from any activity which would tend to disrupt the ordinary operations of the Philadelphia Service Center.

(i) In the event that there occurs, during the conduct of the examinations authorized herein, any dispute as to whether or not certain conduct or proposed conduct by Joseph F. Earley and/or his assistants is authorized by this Order, the parties will in the first instance be guided by the decision of the officials responsible for the operation of the Philadelphia Service Center. Either party, however, will have the right to bring the existence of the said dispute to the attention of the court within 48 hours, for such further action as the court deems appropriate.

(j) All records, documentation and other data made available by the Government to the defense shall be limited in use to the preparation and presentation of the defense in this action and shall not be disclosed to any person not engaged in or necessary to the preparation or presentation of the defense.

(k) The costs of the examinations of the Philadelphia Service Center granted to defendant by this Order shall be paid by the defendant within 30 days after the completion of the examinations. The costs shall include the salaries of personnel required to assist the defendant's experts and the salaries of personnel prevented from carrying out their normal tasks by virtue of the examinations. In the event that the examinations require the use of the computer, peripheral equipment or other equipment, the defendant shall pay for the use of such equipment at the manufacturer's rental rate then in effect. The Internal Revenue Service shall maintain daily time records of equipment and personnel usage and copies shall be furnished to the defendant. Any disputes shall promptly be brought to the attention of the court, for such further action as the court deems appropriate.

¹ The case involved a rate determination made by the Commissioner.

² The government's reliance on Boske v. Comingore, 177 U. S. 459 (1900), and U. S. ex rel. Touhy v. Ragen, 340 U. S. 462 (1951), is misplaced. Those cases considered only the validity of regulations centralizing the decision-making power (with the Commissioner of Internal Revenue in Boske and with the Attorney General in Touhy) over whether to disclose documents pursuant to a subpoena duces tecum. As Justice Frankfurter's concurring opinion in Touhy makes clear, in neither case did the Court rule on the ultimate reach of that power "to shut off an appropriate judicial demand" for information. 340 U. S. at 472.

³ Treasury Regulations §301.6103a (26 C. F. R. §301.6103a) were adopted and approved pursuant to this authorization.

⁴ Since Social Security numbers could be used to discover wage information, Congress felt that they should not be available to the public. I shall ensure that defendant's discovery satisfies this concern by requiring that Social Security numbers be deleted from any material given to defendant.

⁵ This conclusion does not imply blanket authorization for private citizens to inspect the lists of non-filers. By amending 26 U. S. C. §6103(f) Congress has clearly foreclosed such inspection on demand. We deal here, however, not with a general request under subsection (f), but rather with a motion pursuant to Rule 16(b), F. R. Cr. P.

⁶ It is unclear whether the government claims that this taxpayer's right to privacy falls within the scope of the constitutional right to privacy recognized in Griswold v. Connecticut, 381 U. S. 479 (1965), and its progeny. However, I need not decide this broad question. I hold only that a person's interest in the disclosure of whether or not he has filed a tax return is not a matter of such fundamental importance as "the decision whether to bear or beget a child", Eisenstadt v. Baird, 405 U. S. 438 (1972), or "the security of one's privacy against arbitrary intrusion by the police", Berger v. New York, 388 U. S. 41 (1967). The government's reliance on these two cases is therefore without merit.

⁷ As defendant correctly points out, anyone could compile his own list of apparent non-filers simply by addressing numerous inquiries to the Internal Revenue Service. (Defendant's Brief, p. 6).

⁸ While production of the grand jury testimony was not sought under Rule 16(b), the Court's comments on disclosure are clearly applicable to the case at bar.