United States v. Baggot

• Citation: 77 L.Ed.2d 785,463 U.S. 476,103 S.Ct. 3164
• Decision Date: 30 June 1983
• Docket Number: No. 81-1938,81-1938
• Parties: UNITED STATES, Petitioner, v. James E. BAGGOT
• Court: United States Supreme Court

463 U.S. 476

103 S.Ct. 3164

77 L.Ed.2d 785

UNITED STATES, Petitioner,

v James E. BAGGOT.

No. 81-1938.

Argued March 2, 1983.

Decided June 30, 1983.

Syllabus

Federal Rule of Criminal Procedure 6(e)(3)(C)(i) permits disclosure otherwise prohibited by Rule 6 of matters occurring before a grand jury "when so directed by a court preliminarily to or in connection with a judicial proceeding." Respondent was the target of a grand jury investigation of certain commodity futures transactions. He was never indicted but, after plea negotiations, pleaded guilty to misdemeanor violations of the Commodity Exchange Act. Thereafter, the Government filed a motion under Rule 6(e)(3)(C)(i) for disclosure of grand jury transcripts and documents to the Internal Revenue Service (IRS) for use in an audit to determine respondent's civil income tax liability. While holding that disclosure was not authorized by Rule 6(e)(3)(C)(i), the District Court nevertheless allowed disclosure under its "general supervisory powers over the grand jury." The Court of Appeals reversed, agreeing that no disclosure is available under Rule 6(e)(3)(C)(i) but holding that the District Court erred in granting disclosure under "general supervisory powers."

Held: The IRS's 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), and hence no disclosure is available under that Rule. The Rule contemplates only uses related fairly directly to some identifiable litigation, pending or anticipated. It is not enough to show that some litigation may emerge from the matter in which the material is to be used. The focus is on the actual use to be made of the material. It follows that disclosure is not appropriate for use here in the IRS's audit, the purpose of which is not to prepare for or conduct litigation but to assess the amount of tax liability through administrative channels. The fact that if the audit discloses a deficiency, respondent may seek judicial redress in a redetermination proceeding in the Tax Court or in a refund action in the Court of Claims or a district court, without more, does not mean that the Government's action is "preliminar[y] to . . . a judicial proceeding." Pp. 478-483.

662 F.2d 1232 (7th Cir.1981), affirmed.

Lawrence G. Wallace, Washington, D.C., for petitioner.

Samuel J. Betar, Jr., Chicago, Ill., for respondent.

Justice BRENNAN delivered the opinion of the Court.

In United States v. Sells Engineering, Inc., --- U.S. ----, 103 S.Ct. 3133, 75 L.Ed.2d ----, we decide today that in some circumstances the Government may obtain disclosure of grand jury materials for civil uses under Federal Rule of Criminal Procedure 6(e)(3)(C)(i) (hereinafter sometimes referred to as "(C)(i)"). The question in this case is whether an Internal Revenue Service investigation to determine a taxpayer's civil tax liability is "preliminar[y] to or in connection with a judicial proceeding" within the meaning of that Rule. We agree with the Court of Appeals that it is not.

In May 1976, a special grand jury began investigating certain commodity futures transactions on the Chicago Board of Trade. Respondent James E. Baggot became a target of the investigation. He was never indicted; instead, after interviews with IRS agents and plea negotiat ons with the Government, he pleaded guilty to two misdemeanor counts of violating the Commodity Exchange Act.¹ The substance of Baggot's crime was a scheme to use sham commodities transactions to create paper losses, which he deducted on his tax returns. A fraction of the "losses" was then recovered in cash kickbacks which were not reported as income.

About eight months after Baggot's plea, the Government filed a (C)(i) motion for disclosure of grand jury transcripts and documents to the IRS, for its use in an audit to deter- mine Baggot's civil income tax liability. At first the District Court denied the request. After two renewed motions, however, the Court granted disclosure. It held that some of the materials sought are not "matters occurring before the grand jury," and therefore not subject to Rule 6(e)'s requirement of secrecy. With respect to the remainder of the materials, the Court concluded that disclosure is not authorized by (C)(i) because the IRS's proposed civil tax investigation is not "preliminar[y] to or in connection with a judicial proceeding." Nevertheless, the Court allowed disclosure under its "general supervisory powers over the grand jury." App. to Pet. for Cert. 47-48.

The Court of Appeals reversed. In re Special February, 1975 Grand Jury (Baggot), 662 F.2d 1232 (CA7 1981). It held that all the materials sought, with one possible exception, are "matters occurring before the grand jury" and therefore subject to Rule 6(e). It agreed with the District Court that no disclosure is available under (C)(i), but it held that the District Court erred in granting disclosure under "general supervisory powers." It remanded the case for further consideration concerning the material that might not be "matters occurring before the grand jury." The Government sought certiorari, limited to the question of whether the IRS's civil tax audit is "preliminar[y] to or in connection with a judicial proceeding" under (C)(i). We granted certiorari. 457 U.S. ----, 102 S.Ct. 2955, 73 L.Ed.2d 1347 (1982).

The IRS is charged with responsibility to determine the civil tax liability of taxpayers. To this end, it conducts examinations or audits of taxpayers' returns and affairs. If, after the conclusion of the audit and any internal administrative appeals, the IRS concludes that the taxpayer owes a deficiency, it issues a formal notice of deficiency as prescribed by 26 U.S.C. § 6212. Upon receiving a notice of deficiency, the taxpayer has, broadly speaking, four options: (1) he can accept the IRS's ruling and pay the amount of the deficiency; (2) he can petition the Tax Court for a redetermination of the deficiency; (3) he can pay the amount of the deficiency and, after exhausting an administrative claim, bring suit for a refund in the Claims Court or in district court; or (4) he can do nothing and await steps by the IRS or the Government to collect the tax. See generally 4 B. Bittker, Federal Taxation of Income, Estates and Gifts &Par 111.5, 112.1, 115.1, 115.2, 115.7 (1981).

Certain propositions are common ground between the parties. Both sides, sensibly, understand the term "in connection with," in (C)(i), to refer to a judicial proceeding already pending, while "preliminarily to" refers to one not yet initiated. The Government concedes that an IRS audit, including its informal internal appeal component, is not itself a "judicial proceeding" within the meaning of the Rule. Conversely, Baggot agrees that either a Tax Court petition for redetermination or a suit for refund would be a "judicial proceeding." ² The issue, then, is whether disclosure for use in an IRS civil audit is "preliminar[y] to" a redetermination proceeding or a refund suit within the meaning of (C)(i).³ We conclude that it is not.

The provision in (C)(i) that disclosure may be made "preliminarily to or in connection with a judicial proceeding" is, on its face, an affirmative limitation on the availability of court-ordered disclosure of grand jury materials. In our previous cases under Rule 6(e), we have not had occasion to address this requirement in detail, focusing instead on the require- ment that the moving party show particularized need for access to grand jury materials. See Sells, ante, at ---- - ----, 103 S.Ct., at 3147 - 3149, and cases cited. The two requirements, though related in some ways,⁴ are independent prerequisites to (C)(i) disclosure. The particularized need test is a criterion of degree; the "judicial proceeding" language of (C)(i) imposes an additional criterion governing the kind of need that must be shown. It reflects a judgment that not every beneficial purpose, or even every valid governmental purpose, is an appropriate reason for breaching grand jury secrecy. Rather, the Rule contemplates only uses related fairly directly to some identifiable litigation, pending or anticipated. Thus, it is not enough to show that some litigation may emerge from the matter in which the material is to be used, or even that litigation is factually likely to emerge. The focus is on the actual use to be made of the material. If the primary purpose of disclosure is not to assist in preparation or conduct of a judicial proceeding, disclosure under (C)(i) is not permitted. See United States v. Young, 494 F.Supp. 57, 60-61 (ED Tex.1980).

It follows that disclosure is not appropriate for use in an IRS audit of civil tax liability, because the purpose of the audit is not to prepare for or conduct litigation, but to assess the amount of tax liability through administrative channels.⁵ Assuming arguendo that this audit will inevitably disclose a deficiency on Baggot's part, see also n. 6, infra, there is no particular reason why that must lead to litigation, at least from the IRS's point of view. The IRS's decision is largely self-executing, in the sense that it has independent legal force of its own, without requiring prior validation or enforcement by a court. The IRS need never go into court to assess and collect the amount owed; it is empowered to collect the tax by non-judicial means (such as levy on property or salary, 26 U.S.C. §§ 6331, 6332), without having to prove to a court the validity of the underlying tax liability. Of course, the matter may end up in court if Baggot chooses to take it there, but that p ssibility does not negate the fact that the primary use to which the IRS proposes to put the materials it seeks is an extrajudicial one—the assessment of a tax deficiency by the IRS. The Government takes countless actions that affected citizens are permitted to resist or challenge in court. The fact that judicial redress may be sought, without more, does not mean that...