Discover When a Litigant Is Entitled to an Adversary's Corporate Tax Returns

Corporate tax returns can shed light on a corporation’s finances and provide other key information to support a legal claim...

Corporate tax returns can shed light on a corporation’s finances and provide other key information to support a legal claim. However, because they are considered confidential, litigants are not automatically entitled to them during discovery. As clarified in a recent decision by the Appellate Division of the New Jersey Superior Court, judges should not order the production of business tax filings unless the disclosure satisfies the rigorous standard established in Ullmann v. Hartford Fire Ins. Co..

Seeking Business Tax Filings During Discovery

Tax returns are considered confidential under both federal and New Jersey law. Accordingly, the disclosure of tax returns and associated tax filings is permitted only in limited circumstances in the absence of waiver or consent. However, both state and federal law recognize a trial court’s authority, upon an appropriate showing, to compel taxpayers to provide adversaries with access to their tax filings for their use in civil litigation.

In Ullman, the Appellate Division held that a civil litigant can only obtain an opposing party’s tax filings through discovery by demonstrating to the court the requested documents meet a heightened standard. That standard requires that (1) the filings are relevant to the case; (2) there is a “compelling need” for the documents because the information likely to be contained within them is “not otherwise readily obtainable” from other sources; and (3) disclosure would serve a “substantial purpose.” In addition to these burdens placed on the requestor, Ullmann prescribes that trial judges generally should not order the release of tax filings without first performing in camera review and considering whether partial disclosure of redacted records will suffice.

In Parkinson v. Diamond Chemical Company, Inc., the plaintiff sought in discovery the tax filings of his former employer and the president of the company, and the company’s financial statements, spanning a multiyear period. The plaintiff maintained that the records were likely to contain information that could support his affirmative claims, and also may help him defend against defendants’ counterclaims alleging he caused the company to sustain large financial losses. As part of his argument for compelling disclosure, the plaintiff argued that the tax filings of a business deserve less confidentiality than the filings of an individual taxpayer and the rigorous Ullmann test does not apply to them. 

Appellate Division Holds Ullman Standard Applies to Corporate Tax Returns

The Appellate Division confirmed that the standard set forth in Ullman applies equally to personal and business tax returns. “[W]e hold on this key legal issue that the Ullmann standard of heightened good cause does indeed apply to business tax returns as well as individual tax returns,” Appellate Division Judge Jack Sabatino wrote.

In reaching its decision the Appellate Division concluded that its opinion in Ullman has withstood the test of time, noting there are many published cases from New Jersey courts and the courts of other states that have cited it. “The wisdom of the Ullmann opinion, part of the pantheon of New Jersey law, remains eminently clear,” Judge Sabatino wrote.

The Appellate Division also rejected the argument that corporate tax returns should be subject to a more lenient standard. In support, the court noted that the language of the confidentiality provisions within the Internal Revenue Code and New Jersey’s tax statutes makes no distinction between the tax returns of businesses from those of individual taxpayers. The appeals court went on to highlight that the plaintiff failed to cite a single reported opinion from any jurisdiction that has treated business tax returns as less confidential than those of individual taxpayers. Finally, the Appellate Division “discern[ed] no public policies that should dilute the strong presumption of confidentiality for business tax returns,” noting that “[b]usiness tax returns, particularly the accompanying schedules, conceivably may reveal information about the enterprise that is commercially sensitive.” Because the trial court did not make sufficient findings applying the heightened standard set forth in Ullman, the Appellate Division remanded the matter “for more robust review with such amplified findings.” The Appellate Division also directed the trial court to perform an in-camera review of the disputed records and then consider whether full disclosure is warranted or whether partial disclosure with redactions will suffice.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Bob Levy, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.