United States v. Baggot

463 U.S. 476, 103 S. Ct. 3164, 77 L. Ed. 2d 785, 1983 U.S. LEXIS 98, 51 U.S.L.W. 5075, 52 A.F.T.R.2d (RIA) 5248

• Court: Supreme Court of the United States
• Decided: June 30, 1983
• Docket: 81-1938
• Status: Published

Opinions

Justice Brennan

delivered the opinion of the Court.

In United States v. Sells Engineering, Inc., ante, p. 418, 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 negotiations 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 determine 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 “pre-liminar[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. 47a-48a.

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. 1131 (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 (1976 ed. and Supp. V). 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 ¶¶ 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 requirement that the moving party show particularized need for access to grand jury materials. See Sells, ante, at 442-446, 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 nonjudicial 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 possibility 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 the Government’s action is “preliminar[y] to a judicial proceeding.” Of course, it may often be loosely said that the Government is “preparing for litigation,” in the sense that frequently it will be wise for an agency to anticipate the chance that it may be called upon to defend its actions in court. That, however, is not alone enough to bring an administrative action within (C)(i). Where an agency’s action does not require resort to litigation to accomplish the agency’s present goal, the action is not preliminary to a judicial proceeding for purposes of (C)(i).

We need not decide whether an agency’s action would always be preliminary to litigation if it arose under an administrative scheme that does require resort to courts — one in which, for example, the agency, when it found a probable violation of law, was required to bring a civil suit or criminal prosecution to vindicate the law and obtain compliance.⁶ We also do not hold that the Government (or, for that matter, a private party who anticipates a suit or prosecution against him) may never obtain (C)(i) disclosure of grand jury materials any time the initiative for litigating lies elsewhere.⁷ Nor do we hold that such a party must always await the actual commencement of litigation before obtaining disclosure. In In re Grand Jury Proceedings, Miller Brewing Co., 687 F. 2d 1079 (CA7 1982), rehearing pending, for example, the IRS had closed its audit and issued a notice of deficiency, and the taxpayer had clearly expressed its intention to seek redeter-mination of the deficiency in the Tax Court. The same court that denied disclosure in this case correctly held in Miller Brewing that the IRS may seek (C)(i) disclosure. In such a case, the Government’s primary purpose is plainly to use the materials sought to defend the Tax Court litigation, rather than to conduct the administrative inquiry that preceded it. There may be other situations in which disclosure is proper; we need not canvass the possibilities here. In this case, however, it is clear that the IRS’s proposed use of the materials is to perform the nonlitigative function of assessing taxes rather than to prepare for or to conduct litigation. Hence, no disclosure is available under (C)(i).

The judgment of the Court of Appeals is

Affirmed.

1 7U. S. C. § 6c(a)(A).

2 Hence, we need not address in this case the knotty question of what, if any, sorts of proceedings other than garden-variety civil actions or criminal prosecutions might qualify as judicial proceedings under (C)(i). See generally, e. g., Bradley v. Fairfax, 634 F. 2d 1126, 1129 (CA8 1980); In re J. Ray McDermott & Co., 622 F. 2d 166, 170-171 (CA5 1980); In re Special February 1971 Grand Jury v. Conlisk, 490 F. 2d 894, 897 (CA7 1973); Doe v. Rosenberry, 255 F. 2d 118, 120 (CA2 1958).

3 Our decision is limited to the meaning of (C)(i). Other considerations may govern the construction of similar standards in other contexts (e. g., Fed. Rule Civ. Proc. 26(b)(3) (“in anticipation of litigation or for trial”)).

4 The particularized-need test requires that the materials sought be “needed to avoid a possible injustice in another judicial proceeding” and that the moving party’s request be “structured to cover only material so needed.” Douglas Oil Co. v. Petrol Stops Northwest, 441 U. S. 211, 222 (1979) (footnote omitted). See generally id., at 221-224; United States v. Sells Engineering, Inc., ante, at 442-446. These inquiries cannot even be made without consideration of the particulars of the judicial proceeding with respect to which disclosure is sought. See also the proposed new Rule 6(e)(3)(E), to take effect August 1, 1983.

5 The Government relies on a remark by Wayne LaFave (Reporter for the Advisory Committee on Rules) during congressional hearings leading to the 1977 amendment to Rule 6(e). See generally United States v. Sells Engineering, Inc., ante, at 436-442. In response to a question, LaFave agreed that a “tax hearing” would be considered a judicial proceeding for purposes of Rule 6(e). Hearings on Proposed Amendments to the Federal Rules of Criminal Procedure before the Subcommittee on Criminal Justice of the House Committee on the Judiciary, 95th Cong., 1st Sess., 94 (1977). LaFave’s somewhat ambiguous reference to a “tax hearing,” however, cannot reasonably be taken to refer to an administrative audit. As LaFave explained earlier:

“[T]he cases say that the grand jury material cannot be turned over to an administrative agency for purely administrative proceedings, because that is not a judicial proceeding. But there are occasions when an administrative agency can show sufficient need with respect to pending judicial proceedings.” Id., at 86.

Indeed, if LaFave’s remark meant what the Government now takes it to mean, LaFave’s position would be inconsistent with the Government’s own position, which is that the audit is not itself a judicial proceeding but only preliminary to one.

6 In particular, we find it unnecessary to address the complex contentions of the parties as to the level of likelihood of litigation that must exist before an administrative action is preliminary to litigation. Baggot points out that the purpose of an audit is to determine whether or not he owes any tax deficiency. Thus, he argues, the occurrence of litigation is contingent not only on his decision to contest an assessment, see n. 7, infra, but on the outcome of the audit itself. He concludes that administrative investigations of this kind can never qualify as “preliminar[y] to a judicial proceeding,” since to posit a judicial proceeding is to prejudge the very question supposedly being decided in the investigation. See, e. g., United States v. Bates, 200 U. S. App. D. C. 296, 627 F. 2d 349 (1980); McDermott, 622 F. 2d, at 171; In re Grand Jury Proceedings, 309 F. 2d 440, 443-444 (CA3 1962). The Government counters that when the taxpayer has already pleaded guilty to a tax scam, the prospect of exoneration from civil liability is more theoretical than real. See, e. g., In re Judge Elmo B. Hunter’s Special Grand Jury Empaneled September 28, 1978, 667 F. 2d 724 (CA8 1981); see also Doe v. Rosenberry, 255 F. 2d, at 119-120. As a general matter, many an investigation, begun to determine whether there has been a violation of law, reaches a tentative affirmative conclusion on that question; at that point, the focus of the investigation commonly shifts to ascertaining the scope and details of the violation and building a case in support of any necessary enforcement action. We decline in this case to address how firm the agency’s decision to litigate must be before its investigation can be characterized as “preliminarfy] to a judicial proceeding,” or whether it can ever be so regarded before the conclusion of a formal preliminary administrative investigation.

7 We reject Baggot’s argument that litigation is a remote contingency because, if a deficiency is assessed against him, he may simply choose to pay it, or to negotiate some settlement with the Government. The Government correctly points out that settlement (including settlement by surrender) is almost always a possibility. If some chance of settlement were enough to disqualify a case from eligibility for (C)(i) disclosure, there would be nothing left of the “preliminarily to” language of the Rule. There may conceivably be instances in which the chances of litigation are so low that it cannot be considered a realistic possibility, but this case at least is not such an instance.