Commercial Litigation and Arbitration

Civil Discovery, Fed.R.Crim.P. 6(e) (Grand Jury Secrecy) and 26 U.S.C. §6103 (Internal Revenue Code Tax Privilege)

From Alpert v. Riley, 2009 U.S. Dist. LEXIS 36612 (S.D. Tex. April 30, 2009):

II. Rule 6(e) of the Federal Rule of Criminal Procedure

A. No Secrecy Obligation on a Grand-Jury Witness

The defendants argue that "grand-jury secrecy" under Rule 6(e)(2) prevents them from disclosing any information or documents that were produced to or that otherwise relate to a grand-jury proceeding. ***

Persons who serve as grand-jury witnesses or submit documents to a grand jury are not included in this list. "[D]espite the stringent language of the federal rule imposing secrecy on grand-jury proceedings, witnesses are pointedly omitted from the list of those bound by its provisions. . . . [W]itnesses are free to divulge their testimony as they see fit after testifying." ***

The defendants do not argue that they fall into any of the enumerated categories in Rule 6(e)(2)(B). Contrary to the defendants' argument, Rule 6(e) does not impose a requirement of secrecy on them with respect to information or documents they provided to the grand jury years ago. ***

Although some courts have imposed restrictions on grand-jury witnesses under Rule 6(e), these restrictions have been imposed on the ground that the discovery sought would reveal the grand jury's deliberative process and revelation of that process could jeopardize related proceedings. See, e.g., In re Sulfuric Acid Antitrust Litig., No. 1536, 2004 WL 769376, at *5 (N.D. Ill. Apr. 9, 2004) (denying a motion to compel in a civil case documents produced to an ongoing, related grand-jury investigation because such disclosure could disclose the "direction and focus" of the investigation); In re Caremark Int'l, Inc. Sec. Litig. , No. 94-cv-4751, 1995 WL 557496, at *3 (N.D. Ill. Sept. 14, 1995) (denying a motion to compel production of materials that the witness received from the grand jury, reasoning that these "would disclose the workings of the grand jury" that had returned an indictment against two of the defendants in a related and ongoing criminal case). In In re Eisenberg, 654 F.2d 1107, 1112 (5th Cir. 1981), a case sometimes described as recognizing a witness's "grand-jury privilege," 5 the Fifth Circuit upheld a district court's denial of the plaintiff's motion to conduct a prelitigation deposition of a witness who was testifying in an ongoing grand-jury investigation about the plaintiff…. The Fifth Circuit recognized that "[w]itnesses before the grand jury are not obligated to keep silent" but held that given the ongoing investigation, "the [plaintiff's] need for the deponent's information in the preparation of his civil case must be subordinated to the pending grand jury's interest in secrecy." …. The Fifth Circuit noted that the district court had invited the plaintiff to renew its discovery request "pending the outcome of the criminal investigation." ...

[Footnote 6] The court in SEC v. Oakford Corp., 141 F. Supp. 2d 435, 437 (S.D.N.Y. 2001) stated that although "a witness is free to voluntarily disclose his testimony before a grand jury, he may not be compelled to do so by another person." But the court's holding was in the context of the defendants' motion to compel a nonparty witness to testify about how the witness had testified to a grand jury in a related pending matter that involved the same underlying subject matter as the civil suit. See also FED. R. CRIM. P. 6(e)(5), (6) (imposing on courts the duty to hold closed hearings and keep "records, orders, and subpoenas relating to grand-jury proceedings" under seal "to the extent and as long as necessary to prevent the unauthorized disclosure of a matter occurring before a grand jury").

In the present case, there is no basis to conclude that the discovery the plaintiffs seek would reveal the grand jury's deliberative process or jeopardize any ongoing investigation or proceeding. The grand-jury subpoena was dated January 2001; the government's investigation closed in August 2004. As a witness, Riley has no Rule 6(e) protection from discovery.


III. 26 U.S.C. § 6103 [IRS/Tax Return Privilege]

The defendants also cite an "Internal Revenue Service privilege relative to civil or criminal tax investigations" under 26 U.S.C. § 6103 as a basis for refusing to respond to virtually all of the plaintiffs' discovery requests. Section 6103 is a lengthy statute, and the defendants do not specify which clauses of the statute support the privilege that they assert. The defendants cite no cases that recognize or apply the privilege that they assert.

Section 6103(a) of the Internal Revenue Code provides that "[r]eturns and return information shall be confidential," and that federal, state, and local government officials and employees, and other categories of enumerated persons "shall [not] disclose any return or return information obtained by him in any manner in connection with his service as such an officer or an employee or otherwise." 26 U.S.C. § 6103(a). None of the enumerated persons apply to this case.

The term "return information" includes, in relevant part:

a taxpayer's identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether the taxpayer's return was, is being, or will be examined or subject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or the amount thereof) of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition, or offense.

26 U.S.C. § 6103(b)(2)(A). "Return information includes the taxpayer's identity, the fact that the taxpayer is under investigation or subject to further investigation, and data that the IRS has collected about a return." Huckaby v. United States, 794 F.2d 1041, 1046 (5th Cir. 1986). To be "return information," the information "must first be 'received by, recorded by, prepared by, furnished to, or collected by,' the IRS." Baskin v. United States, 135 F.3d 338, 342 (5th Cir. 1998) (quoting § 6103(b)(2)).

Section 6103 does not impose secrecy obligations on the defendants and does not give them a blanket privilege or protection against discovery. Section 6103 applies only to government officers and employees. Section 6103 cannot be used invoked to "block access, through pretrial discovery or otherwise, to copies of tax returns in the possession of litigants." Commodity Futures Trading Comm'n v. Collins, 997 F.2d 1230, 1233 (7th Cir. 1993); see also Jade Trading, LLC v. United States, 65 Fed. Cl. 188, 194-95 (Fed. Cl. 2005) (concluding that § 6103 provided no basis for a private accounting firm to resist disclosing return information). "[A]lthough tax returns . . . are made confidential within the government bureau, copies in the hands of the taxpayer are subject to discovery." St. Regis Paper Co. v. United States, 368 U.S. 208, 218-19 (1961). "If [a plaintiff] gives his [tax] returns to a friend who passes out copies at work, or to an accountant who relates juicy tidbits at a cocktail party, [the plaintiff] may think himself ill used and may have remedies under state law, but neither the friends nor the accountant violated § 6103." Hrubec v. Nat'l R.R. Passenger Corp., 49 F.3d 1269, 1270 (7th Cir. 1995). Section 6103 "does not evince a Congressional intent to prohibit the production of tax returns in the hands of non-governmental third parties pursuant to a subpoena in civil litigation." Jade Trading, 65 Fed. Cl. at 194 (citing Stokwitz v. United States, 831 F.2d 893, 896 (9th Cir. 1987)).

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