Prosecutor's Disclosure of Tax Records; of Section 6103 and Rule 6(e) (4/23/11)

In Lampton v. Diaz, 639 F.3d 223 (5th Cir. 2011), decided 4/18/11, the Fifth Circuit succinctly stated the issue addressed and holding in its opening paragraph:

In Imbler v. Pachtman, 424 U.S. 409, 430 (1976), the Court held that prosecutors retain common-law immunity from suit for all actions "intimately associated with the judicial phase of the criminal process." This appeal raises the issue of whether that absolute immunity extends to a prosecutor's post-trial transfer of private federal tax records to a state ethics commission. Concluding that it does not, we affirm the denial of a motion to dismiss.

In order to understand the issues I want to discuss in this blog, it is important to have a clear fix on the facts. I will quote the Fifth Circuit's summary of the facts and procedural history, but the facts and procedural history are more nuanced. For more detail, see the district court's opinion, Lampton v. Diaz, 2010 U.S. Dist. LEXIS 44738 (SD Miss. 2010). The Fifth Circuit's statement of facts is:

Between 2003 and 2006, Dunnica Lampton, the U.S. Attorney for the Southern District of Mississippi, prosecuted Oliver Diaz, a Mississippi Supreme Court justice, and Jennifer Diaz, his wife, for fraud, bribery, and tax evasion. Oliver Diaz was acquitted, but Jennifer Diaz pleaded guilty to tax evasion. Lampton then filed a complaint with the Mississippi Commission on Judicial Performance (the "Commission") about Oliver Diaz's conduct. He included copies of the Diazes' federal tax records obtained during the criminal investigation. n1 The Commission dismissed the complaint in December 2008.

n1 The parties have not informed us whether the tax records were introduced in evidence in the criminal proceedings or, if so, whether they were under seal. We therefore assume that those records remained confidential before Lampton forwarded them to the Commission.

The Diazes sued Lampton in federal court, alleging a violation of 42 U.S.C. § 1983 based on deprivation of rights under 18 U.S.C. § 1905 and 26 U.S.C. §§ 6103 and 7213. n2 Jennifer Lampton also later raised a claim under 26 U.S.C. § 7431. Those statutes prohibit government officials from releasing private tax records obtained in the course of their duties. The Diazes' suit also included a number of state law claims. Lampton filed a Federal Rule of Civil Procedure 12(b)(6) motion to dismiss the § 1983 claim, arguing that absolute prosecutorial immunity shields his decision to give the tax records to the Commission. The district court denied the motion, n3 and Lampton appealed. n4

n2 The Diazes filed their claims as a third-party complaint in an action brought by Leslie Lampton, one of the members of the Commission and a distant relative of Dunnica Lampton. Leslie Lampton was seeking a declaratory judgment of immunity from suit by the Diazes. Only the dispute between the Diazes and Dunnica Lampton is at issue in this appeal.
n3 Lampton v. Diaz, 2010 U.S. Dist. LEXIS 44738 (S.D. Miss. 2010).
n4 [OMITTED]

I have highlighted in bold the particular facts that I will focus on in this blog.

The issue decided by the Fifth Circuit was whether Dunnica Lampton, the former USA for SD Mississippi had absolute immunity for his turnover of the records to the state commission. The Court held that absolute immunity extended only to “conduct that is intimately associated with the judicial phase of the criminal process” and that the turnover of the tax records after conclusion of the criminal process was not intimately associated so as to confer immunity.

I will not discuss further the reasoning for the holding. I instead focus on the disclosure of the tax records and what statutes and policies are implicated. The Fifth Circuit opinion describes the documents disclosed as "tax records." The district court decision describes the documents disclosed as "tax and other financial records." Since no further description is given, it is hard to know what precisely was turned over. Context suggests that the disclosure included but was not limited to tax returns.  Even that, though, is not stated specifically.

In a normal federal criminal case involving the investigation and prosecution of a tax crime, the USAO / grand jury case files may include: (a) tax returns obtained usually from the IRS (although a taxpayers retained copy may be obtained from the taxpayer, the preparer or some source other than the IRS); (b) other tax documents and information provided to DOJ Tax by the IRS which were the fruits of its civil or criminal investigations conducted prior to referral to DOJ Tax; (c) documents and information which the grand jury gathered to the extent the grand jury conducted further investigation; and (c) some category that for now I will just call "Other."

Information and documents obtained by the USAO under categories (a) and (b) are subject to the general prohibition against disclosure under Section 6103. The IRS may disclose them to DOJ and hence to the grand jury upon a request under Section 6103(h)(2) in certain strictly limited circumstances (including criminal investigation by a grand jury and prosecution in a federal court) but "solely for their use in [the] proceeding (or investigation which may result in such a proceeding)." And, once they are turned over to DOJ, they are still subject to the prohibition against further disclosures other than as permitted. To put teeth in the prohibition, the Code provides both criminal sanctions for unauthorized disclosures (Section 7213) and a civil remedy for damages for unauthorized disclosures (Section 7431).

Information obtained by the USAO under category (c) -- information obtained in a grand jury investigation -- are not subject to the foregoing Code disclosure prohibition, but are subject to Rule 6(e)'s prohibition on disclosure of grand jury matters. One question might be, for example, whether the information and documents properly disclosed by the IRS to DOJ for use in the grand jury investigation then becomes both grand jury information and Section 6103 information subject to both prohibitions on disclosure. In other words, does it retain its character as solely Section 6103 type information or does it take a dual character because disclosed to DOJ for use in the grand jury investigation. [I suppose one nuance is that the IRS may be able to use the information and documents subject only to Section 6103, whereas for purposes of DOJ or the grand jury's disclosure to third parties, it would have the dual set of prohibitions.]

To the extent that either or both prohibitions apply, they do not apply when the information and documents are properly used and made part of the public record in a criminal case or related proceeding. The information and documents may then be disclosed when the disclosure references the public record source only (and not the information and documents still subject to one or both prohibitions). For example, the IRS may disclose information and documents that would otherwise be subject to Section 6103 if they are introduced into a criminal case; but the IRS should make that disclosure only from the information and documents in the public record and not the same information and documents in its possession subject to the Section 6103 prohibition.

You will note that, in Lampton, the Fifth Circuit noted in fn 1: "The parties have not informed us whether the tax records were introduced in evidence in the criminal proceedings or, if so, whether they were under seal. We therefore assume that those records remained confidential before Lampton forwarded them to the Commission." While the Fifth Circuit may have made that assumption, it does not appear to have been critical to its discussion of the immunity issue. If, indeed, it appears on remand that the disclosures only involved information and documents in the public record, there would appear to be no violation of either prohibition.

Now, I want to move to the "Other" category of information and documents that may be in the prosecutor's files. Remember that the Other category is information and documents that are (i) not information and documents obtained from the IRS subject to Section 6103 and (ii) not grand jury matters subject to Rule 6(e). As the class "Other" is so defined, there was seem to be no prohibition on disclosure. So, this requires a better fix on just what "Other" information the prosecutors would have.

I want to focus on a particular category of information that the Government claims to fall within this "Other" category free of any prohibition on disclosure. That is the information that the prosecutors develop outside the grand jury room while assisting the grand jury in its investigations but without the use of a grand jury subpoena. It is possible that some of the information and documents involved in Lampton involved this category of "Other" -- i.e., information and documents gathered outside the grand jury room without a grand jury subpoena.

I have encountered this claim specifically in my representation of one of the KPMG tax shelter defendants in United States v. Stein, 541 F.3d 130 (2d Cir. 2008). Specifically, the prosecutors first announced by letter that a federal grand jury investigation has been opened in SDNY, that my client was a subject of the investigation, and that they are "open to discussing your situation with your counsel." The prosecutors then requested requesting my client submit to a "voluntary" proffer session -- upon implicit threat of sanctions from my client's employer, KPMG if my client did not do so (the operative lingo for failure to attend proffer sessions was some variation of communication to KPMG that your partner is not cooperating and you, KPMG, need to fix the problem or be indicted). The prosecutors announced that they were free to use the information from the proffer session free of any restrictions on disclosure. Specifically, they claimed the authority to disclose the information to the IRS OPR free of Rule 6(e) and, by implication, if they could do that, they could also disclose it to (i) KPMG (in signaling whether or not the client was cooperating) and (ii), I guess, anyone else for any reason whatever.

I have written before on my concerns about this claim. See here. Moreover, they implicate DOJ Tax's claim that it has authority to investigate tax crimes independent of a grand jury investigation. I have also written before on my concerns about this type of claim. See here.  I think the better rule is that all information the prosecutors gather in their role as attorneys assisting the grand jury is Rule 6(e) matters and the capacity to shake out information under threat (but not actuality of grand jury subpoena or even threat of indictment of the party with the information or documents) should not avoid Rule 6(e).

But, back to Lampton, this type of claim could be litigated on remand if indeed the Government claims that some of the information and documents disclosed fit in this "Other" category that, it claims, is free of any prohibitions on disclosure.