In re Cruz, Civ. H 83-188. Misc. Civ. No. H-83-1.

• Decision Date: 12 April 1983
• Docket Number: No. Civ. H 83-188. Misc. Civ. No. H-83-1.,Civ. H 83-188. Misc. Civ. No. H-83-1.
• Citation: 561 F. Supp. 1042
• Parties: In re Grand Jury Proceedings George CRUZ, known as Kar Gard.
• Court: U.S. District Court — District of Connecticut

561 F. Supp. 1042

In re Grand Jury Proceedings George CRUZ, known as Kar Gard.

No. Civ. H 83-188. Misc. Civ. No. H-83-1.

United States District Court, D. Connecticut.

April 12, 1983.

Joseph Lieberman, Atty. Gen., Robert L. Klein, Paul Scimonelli, Asst. Attys. Gen., State of Conn., Hartford, Conn., for plaintiff.

Alan H. Nevas, U.S. Atty., Nancy Lukingbeal, Asst. U.S. Atty., Hartford, Conn., for defendant.

RULING ON PETITIONER'S MOTION TO QUASH SUBPOENA DUCES TECUM

CLARIE, Senior District Judge.

The petitioner, the State Commissioner of Revenue Services for Connecticut, has moved to quash a Federal Grand Jury subpoena duces tecum requesting certain Connecticut state tax records. The Commissioner resists the subpoena on the grounds that the tax records are confidential under state statutes and that these statutes create a privilege that should be recognized in federal court, pursuant to Rule 501, Federal Rules of Evidence. The Court finds that a qualified privilege for these records does exist under Rule 501. The State's motion to quash the subpoena duces tecum is granted, unless within ten (10) days the Grand Jury, through the United States Attorney, has submitted an affidavit pursuant to 26 U.S.C. § 6103, the contents of which are sufficient to overcome the statutory qualified privilege.

Discussion

The Grand Jury is conducting a nontax criminal investigation of a business related arson and has subpoenaed certain state tax records to assist its investigation. Several Connecticut state statutes, Conn.Gen.Stat. §§ 12-15, 12-240, and 12-426(6), make those records confidential and operate to forbid their disclosure.¹ The petitioner contends that those statutes create a privilege that should be recognized in federal court, pursuant to Rule 501. That rule states, in pertinent part:

"The privilege of a witness, person, government, State or political subdivision thereof shall be governed by the principles of common law as they may be interpreted in the courts of the United States in the light of reason and experience."

The Federal Government denies that any privilege should be recognized. It represents that inasmuch as the Federal Grand Jury is a product of the Fifth Amendment to the Federal Constitution, the Supremacy Clause, Article VI, Cl. 2, necessitates that the superior authority of the Federal Constitution control all conflicts between state confidentiality provisions and constitutional investigatory powers, and that all Grand Jury subpoenas should therefore be upheld in the face of contradictory state statutes. It also cites the general proposition that "privileges are strongly disfavored in federal practice." American Civil Liberties Union of Mississippi v. Finch, 638 F.2d 1336, 1344 (5th Cir.1981). Principally, however, the Government relies on United States v. King, 73 F.R.D. 103 (E.D.N.Y.1976), which denied a motion to quash a Federal Grand Jury's subpoena of local tax records.

In King, the Grand Jury subpoenaed certain New York City income tax returns in connection with its investigation into failure to declare federally taxable income from narcotics sales. The city's administrative code, which had the force and effect of state law, prohibited disclosure of these returns, and the city claimed a privilege under Rule 501. The Court began its analysis of the question of privilege by acknowledging the need for appropriate deference to state law:

"A strong policy of comity between state and federal sovereignties impels federal courts to recognize state privileges where this can be accomplished at no substantial cost to federal substantive and procedural policy. In this connection we recognize that the benefit of a state's promise of protection from divulgence is greatly attenuated when those who must choose whether to communicate or not in reliance on the local privilege know that the federal authorities may force public revelation at will." Id. at 105 (Citations omitted).

The Court then determined whether, under Rule 501, the dictates of "reason and experience" required the recognition of the local privilege in the particular circumstances of that case. It took as its point of departure the four tests developed by Wigmore for determining whether a privilege should be recognized, although it substantially reworked these tests:²

"first, the federal government's need for the information being sought in enforcing its substantive and procedural policies; second, the importance of the relationship or policy sought to be furthered by the state rule of privilege and the probability that the privilege will advance that relationship or policy; third, in the particular case, the special need for the information sought to be protected; and fourth, in the particular case, the adverse impact on the local policy that would result from non-recognition of the privilege." Id. at 105.

Applying the facts of that case to these four factors, the Court denied the motion to quash the subpoena, concluding: "The balance of relevant factors in this case clearly falls on the side of compelled disclosure." Id. at 109.

The Government urges this Court to apply the four King factors to the circumstances of this case, certain that such an application will result in the Court's upholding the subpoena.³ Since⁴ the decision in King, however, Congress passed the Tax Reform Act of 1976, Public Law 94-455, § 1202, now codified at 26 U.S.C. § 6103(i)(1), which reads:

"(i) Disclosure to Federal officers or employees for administration of Federal laws not related to tax administration. —

(1) Nontax criminal investigation. —

(A) Information from taxpayer. — A return or taxpayer return information shall, pursuant to, and upon the grant of, an ex parte order by a Federal district court judge as provided by this paragraph, be open, but only to the extent necessary as provided in such order, to officers and employees of a Federal agency personally and directly engaged in and solely for their use in, preparation for any administrative or judicial proceeding (or investigation which may result in such a proceeding) pertaining to the enforcement of a specifically designated Federal criminal statute (not involving tax administration) to which the United States or such agency is or may be a party.

(B) Application for order. — The head of any Federal agency described in subparagraph (A) or, in the case of the Department of Justice, the Attorney General, the Deputy Attorney General, or an Assistant Attorney General, may authorize an application to a Federal district court judge for the order referred to in subparagraph (A). Upon such application, such judge may grant such order if he determines on the basis of the facts submitted by the applicant that—

(i) there is reasonable cause to believe, based upon information believed to be reliable, that a specific criminal act has been committed;

(ii) there is reason to believe that such return or return information is probative evidence of a matter in issue related to the commission of such criminal act; and

(iii) the information sought to be disclosed cannot reasonably be obtained from any other source, unless it is determined that, notwithstanding the reasonable availability of the information from another source, the return or return information sought constitutes the most probative evidence of a matter in issue relating to the commission of such criminal act.

However, the Secretary shall not disclose any return or return information under this paragraph if he determines and certifies to the court that such disclosure would identify a confidential informant or seriously impair a civil or criminal tax investigation."

If the Court in King was free to create its own balancing test to determine whether to recognize a state privilege in a criminal tax investigation, federal courts are no longer writing on an entirely blank slate, in view of § 6103, on the issue of privilege in a nontax criminal investigation, in their efforts to chart a federal evidentiary common law of privileges. While King judicially created a balancing test in the absence of other federal guidelines, Congress, in enacting § 6103, has now legislatively balanced the importance of disclosure in a federal prosecution against the value of confidentiality, and has established, with specific guidelines, a qualified privilege for the procurement of federal tax information.

The question then becomes whether "in the light of reason and experience," the congressionally recognized qualified privilege in § 6103, regarding federal tax information, should also be recognized to protect, with qualifications, confidential state tax information requested in a federal nontax criminal investigation. The two decisions that have addressed this specific issue, In re Hampers, 651 F.2d 19 (1st Cir.1981), and In re Grand Jury Empanelled January 21, 1981, 535 F.Supp. 537 (D.N.J.1982), have both answered in the affirmative.

Hampers involved, as here, an investigation into arson, and a Federal Grand Jury subpoena of confidential Massachusetts state tax information. Under Rule 501, the Court extended the qualified privilege of § 6103 to the state records and remanded the case to the district court to determine whether, in light of the three factors stated in § 6103(i)(1)(B), the qualified privilege could be overcome.

In Grand Jury Empanelled January 21, 1981, a Federal Grand Jury subpoenaed confidential New Jersey tax returns to assist in its nontax criminal investigation into local racketeering. The district court recognized the state's claim of privilege under Rule 501 and adopted the standards set out in § 6103. Moreover, it found insufficient, in terms of the requirements of § 6103(i)(1)(B), an affidavit which merely stated: "The records sought are relevant and necessary to the investigation and are not...