Kluger v. Comm'r of Internal Revenue, Docket Nos. 26124-83

Decision Date05 December 1988
Docket Number33649-83.,Docket Nos. 26124-83
PartiesDEBRA KLUGER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

P's husband, deceased, was the target of a grand jury investigation. R obtained grand jury materials pursuant to Rule 6(e), Federal Rules of Criminal Procedure, prior to United States v. Baggot, 463 U.S. 476 (1983) and United States v. Sells Engineering, Inc., 463 U.S. 418 (1983). Subsequent to Baggot and Sells, R issued a statutory notice of deficiency based on the grand jury materials. In April 1986 the district court that had supervised the grand jury modified its Rule 6(e) order. The notice of deficiency on its face does not reveal the nature of the grand jury investigation or the extent or scope of its inquiry. The district court was aware of the notice of deficiency prior to the modification of the 6(e) order. HELD, the notice of deficiency is valid. HELD FURTHER, the district court implicitly sanctioned R's use of grand jury materials in preparing the notice of deficiency, and it is, therefore, not arbitrary.

R must establish particularized need before this Court to be able to disclose the grand jury materials. R's counsel was privy to the grand jury materials. HELD, R's counsel's review of grand jury materials is not a new disclosure. HELD FURTHER, R's counsel may not disclose either what occurred before the grand jury or any specific document. HELD FURTHER, so long as no disclosure occurs, R's counsel may use grand jury materials in gathering proof of particularized need. HELD FURTHER, identifying potential sources of information and stating that they are unlikely to be useful does not constitute a showing of particularized need. David M. Kohane and Robert S. Fink, for the petitioner.

Sergio Garcia-Pages, for the respondent.

Stanley P. Kaplan, specially recognized, for the Estate of Henry Kluger.

OPINION

WILLIAMS, JUDGE:

The Commissioner determined deficiencies in Federal income tax against petitioner and the Estate of Henry Kluger and additions to tax for fraud against the Estate of Henry Kluger as follows: 1

+--------------------------------+
                ¦    ¦          ¦Addition to tax ¦
                +----+----------+----------------¦
                ¦Year¦Deficiency¦sec. 6653(b)2   ¦
                +----+----------+----------------¦
                ¦1977¦$18,653.00¦$9,326.50       ¦
                +----+----------+----------------¦
                ¦1978¦155,617.00¦77,808.50       ¦
                +----+----------+----------------¦
                ¦1979¦769,769.34¦384,884.67      ¦
                +----+----------+----------------¦
                ¦1980¦164,585.00¦82,292.50       ¦
                +--------------------------------+
                

While petitioner's liability for the determined deficiencies and t he estate's liability for the deficiency and addition to tax for fraud for 1979 are at issue in this Court, the tax liability of the Estate of Henry Kluger for all of the years besides 1979 is the subject of separate proceedings in the United States District Court for the Southern District of Florida. We must decide two issues: (1) whether the deficiency notice that is the subject of the petition at docket No. 33649-83 is invalid for having been based on grand jury materials contrary to the Supreme Court's holdings in Baggot 3 and Sells; 4 and (2) what use of grand jury materials, copies and fruits of such materials respondent may make in demonstrating particularized need to obtain the right to disclose in trial preparation and at trial such materials. The materials were gathered or developed during a grand jury probe of alleged drug trafficking by Henry Kluger and others.

The facts are not in dispute. Petitioner, Debra Kluger, resided at New York, New York when she filed her petitions in these cases. Petitioner is the surviving widow of Henry Kluger (Kluger), who was murdered in Florida on February 27, 1982.

PROCEDURAL BACKGROUND

In 1981, a Federal grand jury within the jurisdiction of the United States District Court for the Eastern District of New York (the Eastern District of New York) commenced an investigation of an alleged multimillion dollar drug trafficking operation involving several individuals, including Kluger. The grand jury subpoenaed books, records and other documents in the course of its investigation and heard testimony from numerous witnesses. After Kluger's death, the criminal proceedings were terminated as to him.

On March 29, 1983, an assistant United States attorney applied ex parte to the Eastern District of New York under Rule 6(e)(3)(C)(i) 5 of the Federal Rules of Criminal Procedure (Rule 6(e)) for an order authorizing disclosure of the grand jury materials to respondent ‘for the purpose of determining, establishing, assessing and collecting the Federal civil tax liabilities of HENRY KLUGER and his heirs, and for use in any judicial proceeding related thereto.‘ The same day, Judge Henry Bramwell granted the motion by order (the Rule 6(e) Order‘) providing in relevant part as follows:

»T†he United States Attorney for the Eastern District of New York is hereby authorized to make available to agents of the Internal Revenue Service all books, records and documents subpoenaed by or presented to the Grand Jury pertaining to »Henry Kluger† and the transcripts of testimony presented to the Grand Jury in that connection for purposes of determining, establishing, assessing and collecting the Federal civil tax liability of Henry Kluger and his heirs, and for use in any judicial proceeding relating thereto.

Based solely on information obtained from the grand jury, on June 15, 1983, respondent issued a notice of deficiency to petitioner individually and as the surviving wife of Kluger, for the taxable year 1979. Also solely on the basis of information obtained from the grand jury, on October 3, 1983, respondent issued a notice of deficiency to petitioner individually and as the surviving wife of Kluger, for the taxable years 1977, 1978 and 1980. The basis for the deficiencies was alleged unreported income from drug trafficking.

On June 30, 1983, subsequent to the issuance of the Rule 6(e) Order and the deficiency notice for the taxable year 1979 but before the issuance of the deficiency notice for 1977, 1978 and 1980, the Supreme Court decided two cases interpreting the requirements of Rule 6(e). In United States v. Baggot, 463 U.S. 476 (1983), the Court held that a civil tax audit is not ‘preliminar»y† to or in connection with a judicial proceeding‘ within the meaning of Rule 6(e)(3)(C)(i). Consequently, disclosure is not permitted under Rule 6(e) for purposes of a civil tax audit even if the results of that audit lead to litigation because the audit determines a tax liability administratively and is not necessarily preliminary to litigation. In United States v. Sells Engineering, Inc., 463 U.S. 418 (1983), the Court held that Rule 6(e) was not intended to grant access to grand jury materials to attorneys other than those involved in the criminal investigation to which the grand jury materials pertained. The Court held that attorneys in the Civil Division of the Justice Department could not obtain disclosure of grand jury materials without first obtaining a court order under Rule 6(e)(3)(C)(i), which would be granted only upon a showing of particularized need for the information.

While the litigation involving petitioner has been pending before this Court, the Estate of Henry Kluger (the Estate) has been litigating separate cases based on the same deficiency notices in this Court (for the year 1979) and in the United States District Court for the Southern District of Florida (the Southern District of Florida) (for the years 1977, 1978 and 1980). In addition, the Estate has litigated the scope and continued validity of the Rule 6(e) Order in the Eastern District of New York because that Court issued the Order and in the United States Court of Appeals for the Second Circuit.

In March 1986, the Estate filed a motion in the Eastern District of New York to vacate or modify the Rule 6(e) Order on the ground that the disclosures of grand jury material violated Baggot and Sells. Judge McLaughlin issued an opinion on April 14, 1986, ruling that Baggot and Sells should be applied prospectively and modifying the Rule 6(e) Order to forbid any ‘further disclosure of the grand jury material in the pending civil proceeding unless the government shows a particularized need for the materials‘ in the courts in which it seeks to use them. In re Grand Jury Proceedings (Henry Kluger, Deceased), 631 F. Supp. 1542, 1543 (E.D.N.Y. 1986) modified by unpublished opinion (November 14, 1986), affd. as modified 827 F.2d 868 (2d Cir. 1987).

The Government appealed to the Second Circuit, which remanded the case for clarification of the scope of the District Court's Order. On remand, Judge McLaughlin clarified his previous modification of the Rule 6(e) Order as follows in an unpublished opinion dated November 14, 1986:

(1) The Court's prohibition of disclosure applies to the copies and fruits of the grand jury materials. Such a prohibition is necessary to prevent the ‘veil of secrecy‘ that surrounds the grand jury materials from being lifted higher than it already has been. »Citations omitted.†

(2) The Order does not require a showing of particularized need when the Government seeks to authenticate copies of the grand jury materials by showing in camera the original materials to the trial judge before whom the copies are sought to be introduced.

The Government's appeal was reinstated following the clarification. On August 26, 1987, the Second Circuit affirmed Judge McLaughlin's Order as modified. In re Grand Jury Proceedings (Henry Kluger, Deceased), 827 F.2d 868 (2d Cir. 1987). The Government must, therefore, show particularized need to disclose grand jury materials, copies or fruits of the materials in the litigation in this Court and in the Southern District of Florida, except for in camera disclosures to authenticate copies obtained from sources independent of the grand jury. The Second...

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