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In re Special February

November 20, 1981


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 79-GJ-534 -- James B. Parsons, Judge.

Before Pell, Circuit Judge, Markey, Chief Judge,*fn* and Wood, Circuit Judge

WOOD, Circuit Judge.

The disclosure of grand jury related materials is the issue. Respondent James E. Baggot became one of the targets of the Special February, 1975 Grand Jury which continued with the Special April, 1977 Grand Jury in an investigation of commodities futures trading on the Chicago Board of Trade.*fn1 No indictment resulted against Baggot, but in accordance with a plea agreement, Baggot pleaded guilty to a two count information charging him with engaging in rigged commodity trades, misdemeanor violations under the Commodities Exchange Act.*fn2 Subsequently, the Internal Revenue Service ("IRS") sought certain evidence generated by the grand jury investigation to assist its determination of Baggot's civil tax liability.*fn3 After two prior unsuccessful attempts to secure the district court's approval of the request, the United States Attorney on February 27, 1979 filed another motion, based on a letter from the Internal Revenue Service*fn4 seeking authority to disclose certain materials to IRS "for use preliminarily to or in connection with judicial proceedings relating to the civil tax liability" of Baggot. The motion seeks to take advantage of an exception added in 1977 to the general rule of secrecy required by Rule 6(e)(2) Fed. R. Crim. P.*fn5 See Pub. L. 95-78, §§ 2, 91 Stat. 319. That exception, Rule 6(e)(3)(C)(i), permits disclosure of matters occurring before the grand jury with court approval "preliminarily to or in connection with a judicial proceeding."


Before examining the specific items sought to be disclosed, some additional background must be explained. In May 1977, two IRS agents called on BAGGOT at his home, questioned him and then served him with a grand jury subpoena requiring his appearance before the special April, 1977 Grand Jury on May 4, 1977. In accordance with the subpoena, Baggot appeared at the office of the United States Attorney. Baggot was advised by an Assistant United States Attorney that if he would tell the truth he would not have to appear before the grand jury, but instead would be interviewed by the Assistant United States Attorney. Baggot consented and made admissions of wrongdoing to the Assistant United States Attorney. When leaving Baggot was advised "to get a lawyer," which he did. After the interview, Assistant United States Attorney Lassar, who was present at the interview, prepared a "Memorandum to File" which is one of the items now sought to be disclosed.

After Baggot secured counsel the plea negotiations began which led to his misdemeanor guildy plea. As part of those negotiations a statement was prepared by the government which Baggot agreed to read to the grand jury on June 8, 1977. The statement would constitute his only testimony before the grand jury. That statement which was read as agreed is also sought to be disclosed.

In addition to those two items, the following specific materials are also sought to be disclosed: a letter to Baggot from Pacific Trading Company showing his net profit for the year 1975; all purchase and sale statements for accounts 21, 22, 4100 and 4101 in the name of James Baggot at Pacific Trading Company for the year 1975; all purchase and sale statements at Central Soya, Inc. for account 509 of James Kerrins, account 608 of Katherine Michalski and account 605 of Guenther Kromminga for the year 1975; transcripts of the grand jury testimony of Robert Meyer, James Kerrins, Katherine Michalski and Guenther Kromminga; and the IRS Special Agent's Report on Baggot.*fn6

Chief Judge Parsons fully considered the matter each time the government sought disclosure under a different theory. He concluded in his final order entered on July 2, 1980, which is the subject of this appeal, that Baggot's statement which he read to the grand jury and the Lassar "Memorandum to File" were not matters occurring before the grand jury and therefore were not subject to Rule 6(e) secrecy limitations. The remaining items sought to be disclosed were found to be classifiable as occurring before the grand jury. Disclosure, however, was denied for those items on the basis that their use was not "preliminarily to or in connection with a judicial proceeding." Disclosure, nevertheless, was permitted under the court's "general supervisory powers." The justification for use of the court's common law supervisory powers was explained to be to prevent the United States Attorney's office from becoming a storehouse for documents used before grand juries long since discharged and to put the material to some good use commensurate with a governmental purpose. The trial court futher noted that the criminal proceedings were closed and that the material was needed to determine the tax liability of Baggot. Under these circumstances the court held Rule 6(e) was not implicated.*fn7

The government in this court argues alternative positions to support Judge Parsons' order. First, it is contended that all of the items, except the testimony of the named witnesses before the grand jury and part of the Special Agent's Report, are not matters occurring beofre the grand jury so as to be subvject to Rule 6(e). Admittedly certain other parts of the Special Agent's Report were derived from grand jury material and therefore would be within Rule 6(e). Secondly, it is urged that the testimony of the witnesses and the grand jury derived portions of the special Agent's Report, together with any of the other items determined to be, but not conceded to be, within Rule 6(e), should be authorized to be disclosed as preliminary to a judicial proceeding under the exception to Rule 6(e). That judicial proceeding is said to be the usual judicial proceeding that might be initiated by Baggot in the Tax Court if he chose not to pay any deficiency assessment, or in the district court if he chose to pay the deficiency assessment and then seek its return. Third, the U.S. Attorney supports the use of general supervisory power by Judge Parsons inauthorizing disclosure. It is argued that since the criminal proceedings are closed there is at best a minimal need for further grand jury secrecy.

Baggot argues that everything sought to be disclosed is a matter occurring before the grand jury, governed by Rule 6(e). He further argues that the "preliminarily to or in connection with a judicial proceeding" exception is not applicable as there is no present judicial proceeding, and whether there may ever be a judicial proceeding in the future depends on whether any deficiency may be assessed, and then whether he decides to pay or contest it. Judge Parsons agreed that the judicial proceeding exception did not apply, labeling the presently intended use by IRS as only administrative.

The Trial Court's Use of Its Supervisory Powers

The court in rare situations may have some discretion to slip entirely around Rule 6(e) and permit disclosure, but that discretion in any event is strictly limited. In In re Biaggi, 478 F.2d 489 (2d Cir. 1973), disclosure determined to be in the "public interest" was affirmed, one judge dissenting, despite a finding that the disclosure could not be justified by any Rule 6(e) exception. The court considered it a unique case because both the U.S. Attorney and the witness Biaggi, a candidate at the time for mayor of New York, sought limited release of Biaggi's testimony because of certain campaign publicity. It was in the public political controversy surrounding Biaggi's campaign that the majority found the "public interest" disclosure justification. Judge Hays, in dissent, preferred a stricter interpretation of Rule 6(e) to a judge-made exception in the "public interest."

The government also directs our attention to In re Report & Recommendation of June 5, 1972 Grand Jury, 370 F. Supp. 1219 (D.D.C. 1974). In that proceeding, Judge Sirica authorized the disclosure to the House of Representatives for use in its impeachment investigation of a "Watergate" grand jury report concerning the President. Rule 6(e) was found to be no barrier since few reasons for secrecy reamined, the President did not object, and the release and disclosure were mandated by the "ends of justice." The determination and collection of any tax deficiency Baggot may owe cannot be considered a compelling need in "a matter of the most critical moment to the nation." 370 F. Supp. at 1229-30.

The government also relies on In re Bullock, 103 F. Supp. 639 (D.D.C. 1952). That court permitted disclosure of the grand jury testimony of a witness policeman to the Police Board of Commissioners for the purpose of determining whether that officer had been guilty of a dereliction of duty. The testimony of other witnesses, however, was not permitted to be disclosed. The court avoided a literal interpretation of Rule 6(e) by finding disclosure to be within the court's discretion if the furtherance of justice so required.

We may not always be bound by a strict and leteral interpretation of Rule 6(e) in the situation where there is some extraordinary and compelling need for disclosure in the interest of justice, and little traditional need for secrecy remains*fn8 but as important as taxes are, their determination, assessment and collection does not satisfy that standard.*fn9 The IRS has other effective statutory means to accomplish its civil purposes which are generally sufficient. It should be remembered that that statutory authority, 26 U.S.C. §§ 7602, which authorizes the Internal Revenue Service to examine any books or records and to cause persons liable for tax and other payments to appear and give testimony, is to be liberally construed in recognition of the vital public purposes served. United States v. Continental Bank & Trust Co., 503 F.2d 45, 50 (10th Cir. 1974); De Masters v. Arend, 313 F.3d 79, 86-87 (9th Cir.), cert. dismissed, 375 U.S. 936 (1963). The government argued to the district court, however, that in this case the Internal Revenue Service was stymied in its efforts to determine Baggot's additional tax obligations, if any. That may be, but the failure of civil process has not been ...

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