The opinion of the court was delivered by: GERRY
A federal grand jury, empanelled January 21, 1981 and sitting in Camden, New Jersey, is investigating alleged racketeering in local business and industry. The grand jury issued a subpoena duces tecum to the New Jersey Division of Taxation, (the "Division") requiring it to deliver "copies of all franchise tax returns filed by or for" a named company. The subpoena is supported by a Schofield affidavit of the Special United States Attorney, stating that "the records sought are relevant and necessary to the investigation and are not sought for any purpose other than to further the Grand Jury investigation." In re Grand Jury Proceedings, 486 F.2d 85 (3d Cir. 1973) (Schofield I ); In re Grand Jury Proceedings, 507 F.2d 963 (3d Cir. 1975) (Schofield II ).
The Division now moves to quash the federal grand jury subpoena in reliance on New Jersey's confidentiality statute respecting state tax records, N.J.S.A. 54:50-8. The statute provides that the Division's records and files are "confidential and privileged" and may not be produced or disclosed by the Division except in connection with enforcement of the state tax laws. Criminal sanctions attach to unauthorized disclosures in violation of the Act.
With this Act as a foundation, the Division urges three grounds upon which the subpoena might be quashed: (1) the state statute must be honored by the federal government under the Tenth Amendment; and (2) the statute grants a privilege for the records in question which should be recognized as a codification of common law under F.R.Evid. 501; (3) alternatively, the statutory protections afforded federal tax returns under 26 U.S.C. § 6103(i) should be applied to state tax records as well. The Division's arguments will be addressed in turn.
I. Tenth Amendment. The Division contends that since the state's power to tax is the quintessential aspect of its separate sovereign existence under our federal system, that taxation power must be afforded every protection against incursion by the federal government. It argues that the Tenth Amendment's recognition of the dual sovereignty principle mandates limitation of the federal subpoena power under these circumstances.
The Division identifies three prongs in the comprehensive system adopted by New Jersey to ensure voluntary tax reporting: namely, (1) various penalty provisions, (2) the Division's audit power, and (3) the confidentiality provisions of N.J.S.A. 54:50-8. Since penalties and audits operate only after a return is filed, the statutory guarantee of confidentiality is the sole means of encouraging the taxpayer to voluntarily furnish accurate and complete information in the first instance. A federal grand jury's use of the subpoena power is said to be particularly destructive of the state's objective where, as here, state tax records are sought for investigation of crimes unrelated to tax administration: while the confidentiality statute by its terms permits limited disclosure of return information in connection with state tax proceedings, it effectively guarantees state taxpayers that their filings cannot be used to expose them to non-tax criminal liability. Further, since F.R.Crim.P. (6)(e) does not provide for absolute secrecy of grand jury materials, the information leak necessarily created by compliance with the subpoena would not be effectively plugged by operation of that Rule. The Division therefore contends that enforced compliance with the subpoena would represent federal destruction of the state's own comprehensive implementation of its most central sovereign right, the right to tax its citizens.
This argument need not detain the Court long. A similar line of reasoning was presented to the Seventh Circuit respecting the denial of motions to quash federal grand jury subpoenas requiring production of certain records of a state attorney general. The Seventh Circuit rejected the argument that certain state functions are constitutionally immune from the federal subpoena power. Recognizing that the grand jury is entitled to every person's evidence absent the valid invocation of an established privilege, the court held that "nothing in the United States Constitution immunizes any "exclusive domain of the state' ... from the reach of a federal grand jury ..." In the Matter of the Special April 1977 Grand Jury (Scott), 581 F.2d 589, 592 (7th Cir. 1978), citing Branzburg v. Hayes, 408 U.S. 665, 92 S. Ct. 2646, 33 L. Ed. 2d 626 (1972) and United States v. Nixon, 418 U.S. 683, 94 S. Ct. 3090, 41 L. Ed. 2d 1039 (1974). In particular, the Court found unpersuasive the state's reliance on the Tenth Amendment analysis in National League of Cities v. Usery, 426 U.S. 833, 96 S. Ct. 2465, 49 L. Ed. 2d 245 (1976):
"the impact of a (federal) subpoena on state functions is markedly different from the Usery direct system of regulation that requires a reallocation of state resources." Scott, supra, 581 F.2d at 592.
The Division's citation here of Usery and its progeny likewise fails to take account of the broad investigatory powers of the federal grand jury, even into matters of state government administration. Indeed, another district court has followed the Seventh Circuit's analysis to hold that the confidentiality provisions of a state tax law may not bar compliance with a federal grand jury subpoena without offending the Supremacy Clause. In re Grand Jury Subpoena for New York State Income Tax Records, 468 F. Supp. 575 (N.D.N.Y.1979)
I am satisfied that the Seventh Circuit's reasoning on this point is correct and fully applicable to the instant case. The Tenth Amendment does not of its own force require a federal grand jury to honor a state statute which would shield certain state records from production. However, rejection of this argument does not imply that the Division's concerns regarding the necessary confidentiality of its records may be minimized. Rather,
"the requisite deference to a state's needs are sufficient to create a privilege for certain state records." Scott, supra, 581 F.2d at 592.
Accordingly, I turn now to a consideration of the Division's claims of privilege.
II. Privilege. It is well established that although the grand jury's subpoena authority is broad indeed, it may not compel the evidence of "those persons protected by a constitutional, common-law, or statutory privilege ..." Branzburg v. Hayes, supra, 408 U.S. at 688, 92 S. Ct. at 2660. In the federal courts, issues of privilege are resolved under F.R.Evid. 501, which applies both to civil and to criminal actions, including grand jury proceedings. See In re Grand Jury Proceedings (Cianfrani and Kalman), 563 F.2d 577, 583 (3d Cir. 1977). That Rule provides in pertinent part:
"Except as otherwise required by the Constitution of the United States or provided by Act of Congress or in rules prescribed by the Supreme Court pursuant to statutory authority, the privilege of a witness, person, government, State or political subdivision thereof shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience."
The Division here contends that the material subject to the subpoena in question is entitled to the protection of a ...