Gluck v. U.S., s. 84-5323

• Decision Date: 28 August 1985
• Docket Number: 84-5282,Nos. 84-5323,s. 84-5323
• Citation: 771 F.2d 750
• Parties: -5979, 54 USLW 2160, 85-2 USTC P 9658 Paul GLUCK and Ina Gluck, Appellants, v. UNITED STATES of America, Appellee. Sidney STEIN; Stein & Stein; Stein's Foot Specialties, Inc., Appellee, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 750

771 F.2d 750

56 A.F.T.R.2d 85-5979, 54 USLW 2160, 85-2

USTC P 9658

Paul GLUCK and Ina Gluck, Appellants, v. UNITED STATES of America, Appellee.

Sidney STEIN; Stein & Stein; Stein's Foot Specialties, Inc., Appellee, v. UNITED STATES of America, Appellant.

Nos. 84-5323, 84-5282.

United States Court of Appeals, Third Circuit.

Argued Feb. 12, 1985.

Decided Aug. 28, 1985.

Carl B. Levy (argued), Joseph G. Aronson, Livingston, N.J., for appellants in No. 84-5282.

Bruce Goldman (argued), Edwin Fradkin, John J. O'Toole, Starr, Weinberg & Fradkin, Roseland, N.J., for appellee in No. 84-5323.

W. Hunt Dumont, U.S. Atty., Newark, N.J., Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Charles E. Brookhart, William A. Whitledge (argued), Attys. Tax Div., U.S. Dept. of Justice, Washington, D.C., for appellee in No. 84-5282, and appellant in No. 84-5323.

Before GARTH, BECKER and ROSENN, Circuit Judges.

OPINION OF THE COURT

EDWARD R. BECKER, Circuit Judge.

These consolidated appeals present the question whether certain Internal Revenue Service summonses should be quashed because they resulted from grand jury information obtained by reason of a district court's Fed.R.Crim.P. 6(e) order that would now be invalid under United States v. Baggot, 463 U.S. 476, 103 S.Ct. 3164, 77 L.Ed.2d 785 (1983). We hold that they should not.

I. FACTS AND PROCEDURAL HISTORY

A. United States v. Gluck, No. 84-5282

At some time prior to November 1983, a federal grand jury sitting in the District of New Jersey conducted an investigation into the affairs of Franklin State Bank. During the course of this investigation, the grand jury examined records of bank accounts maintained by appellants Paul and Ina Gluck, among others. At the conclusion of the grand jury inquiry, the United States Attorney for the District of New Jersey, acting pursuant to Fed.R.Crim.P. 6(e)(3)(C)(i), ¹ moved ex parte in the district court for an order authorizing disclosure to the Internal Revenue Service ("IRS" or "Service") of matters occurring before the grand jury for IRS use in calculating civil tax liabilities of the Glucks and others. On November 19, 1982, the court granted this motion. The IRS thereupon used information obtained from the grand jury materials as the basis for summonses to Franklin State Bank and First National State Bank-Edison in April 1983 seeking records necessary to determine the Gluck's tax liability for the tax years 1979-81.

As required by 26 U.S.C. Secs. 7609(a), (c) (1982), the IRS notified the Glucks of the summonses, and they responded by filing, pursuant to 26 U.S.C. Sec. 7609(b), motions to quash the summonses in the United States District Court for the District of New Jersey. The IRS countered with a motion for summary enforcement. The Glucks argued that the Supreme Court's decision in United States v. Baggot, 463 U.S. 476, 103 S.Ct. 3164, 77 L.Ed.2d 785 (1983), filed after entry of the ex parte 6(e) order, retroactively invalidated that order, and that the summonses should therefore be quashed as the fruit of information impermissibly obtained in violation of grand jury secrecy. On December 19, 1983, the district court denied the Gluck's motion to quash the summonses and granted the IRS's motion for summary enforcement. On December 29, the Glucks moved for reconsideration and a stay pending appeal. The district court denied these motions on April 5, 1984, and the Glucks filed the present appeal on April 23. ² Shortly thereafter, the banks complied with the summonses by turning the requested documents over to the IRS.

B. Stein v. United States, No. 84-5323

The Rule 6(e) order entered by the United States District Court for the District of New Jersey on November 19, 1982, also led the IRS to information concerning the tax liabilities of appellants in No. 84-5323, Sidney Stein, Stein and Stein (a corporation), and Stein's Foot Specialities (a partnership) (hereinafter collectively referred to as "the Steins"). Using this information, the IRS issued summonses to Franklin State Bank on April 13, 1983, seeking bank records necessary to calculate the amount of taxes allegedly owned by the Steins for the 1981 tax year. On April 27, the Steins filed, pursuant to 26 U.S.C. Sec. 7609(b), a motion to quash the summonses in the district court, and the IRS responded with a motion for summary enforcement. Like the Glucks, the Steins' primary argument in support of their motion to quash was the alleged retroactive effect of Baggot. The district court denied the Steins' motion to quash and granted the IRS's motion for summary enforcement on November 18, 1983. The Steins moved for reconsideration, and on March 14, 1984, the district court reversed its earlier judgment, holding that Baggot should be applied retroactively to invalidate summonses that are the result of information improperly obtained from grand jury materials. Accordingly, the court ordered that the summonses to the Franklin State Bank be quashed. The IRS appeals.

II. MOOTNESS OF UNITED STATES V. GLUCK, NO. 84-5282

In the Gluck matter, after the district court refused to quash the summonses or to stay the execution of its judgment pending appeal, Franklin State Bank fully complied with the summonses. Relying on Vesco v. Securities and Exchange Commission, 462 F.2d 1350 (3d Cir.1972), the IRS argues that this action ended any controversy between the parties and mooted the Glucks' appeal because the relief sought--prevention of compliance with the summonses--can no longer be granted. The Glucks respond that their appeal is not moot because this court can prevent the IRS from using information obtained as a result of summonses that should have been quashed.

The Glucks cite two cases from this circuit in support of their position. The first is United States v. Waltman, 525 F.2d 371 (3d Cir.1975), which concerned the contents of a diary characterized by the government as a corporate record with no fifth amendment protection, but claimed by the taxpayer to be a personal item privileged from disclosure. The district court ordered the diary produced and denied a stay pending appeal. Although the taxpayer surrendered the diary while the case was on appeal, this court held that the case was not moot, stating:

Because a stay was denied, the diary was produced. However, the case is not moot since if the diary is not a corporate record, the individual respondent is entitled to its return and appropriate suppression of the use of its contents.

Id. at 373 n. 1.

The other case relied on by the Glucks is United States v. Friedman, 532 F.2d 928 (3rd Cir.1976), which also addressed the effect of compliance with an IRS summons during the pendency of an appeal challenging its validity. As in Waltman, this court denied the IRS's motion to dismiss the appeal as moot "because the controversy between the IRS and the taxpayers over these records [was] still very much alive." Id. at 931. We stated:

If the taxpayers were to prevail in their contention that all summonses were illegal because they were issued solely to gather evidence for use in a criminal prosecution, then the records ... would have been obtained unlawfully. Such a ruling could affect the possible use of these records in any subsequent criminal or civil proceeding brought against the taxpayers.

Id.

The IRS concedes that both Waltman and Friedman are squarely on point and strongly supportive of the Glucks' position. The Service contends, however, that these cases are at odds with Vesco and that, as the earlier case, Vesco is controlling. The IRS is correct in its contention that Vesco --if at odds with Waltman and Friedman --would, as the case decided earliest in time, be the controlling authority in this circuit and that the later cases would be ineffective to the extent of the conflict. See O. Hommel Co. v. Ferro Corp., 659 F.2d 340, 354 (3d Cir.1981), cert. denied, 455 U.S. 1017, 102 S.Ct. 1711, 72 L.Ed.2d 134 (1982) ("[A] panel of this court cannot overrule a prior panel precedent.... To the extent that [the later case] is inconsistent with [the earlier case, the later case] must be deemed without effect.") We believe, however, that Vesco is distinguishable from Waltman, Friedman, and the case at bar.

In Vesco, the plaintiffs resisted compliance with an SEC subpoena requiring disclosure of certain documents on the ground that such disclosure would subject them to criminal penalties under Swiss banking law. After losing in the district court, plaintiffs appealed, but surrendered the documents while the appeal was pending. We held that "plaintiffs' full compliance with the subpoena ... obviated the 'case or controversy' originally surrounding the subpoena," 462 F.2d at 1351, and dismissed the appeal as moot.

There is an essential difference between Vesco and the later cases. In Vesco, the very act of surrendering the documents was the critical issue because, it was alleged that act gave rise to criminal liability under Swiss bank secrecy law. Once the plaintiffs had complied with the subpoena, no judgment of this court could absolve Vesco of any such liability or prevent action by the Swiss authorities. Thus, even if we had decided in the plaintiffs' favor, we could have fashioned no remedy to afford them effective relief; any decision, therefore, would have been purely advisory. In contrast, in Waltman, Friedman, and the present case, at issue is not only the act of turning the documents over to the government but also the use of information obtained from these documents. Thus, the surrendering of the documents to the IRS does not end the controversy between the parties because, if we find that the summonses were illegal, we can still fashion a remedy--prohibition of the use of the summoned documents--to afford the Glucks effective relief. We hold, therefore, that the appeal in No. 84-5282 is not moot. ³ Accordingly, we turn to the merits of that appeal as well as of No. 84-5323.

III. DISCUSSION

A. The...