Parkinson v. Diamond Chemical Co., Inc., ___ N.J. Super. ___ (App. Div. 2021). In Ullmann v. Hartford Fire Ins. Co., 87 N.J. Super. 409 (App. Div. 1965), the Appellate Division ruled that a party may obtain an opposing party’s tax returns in discovery only where the tax returns are relevant to the case, there is a “compelling need” for discovery because information contained in the returns is “not otherwise readily obtainable” elsewhere and disclosure of the returns would serve a “substantial purpose.” Ullmann involved discovery of tax filings of an individual. The Parkinson case involved tax filings and other financial information of a corporation, which the Law Division in this wrongful employment discharge case had ordered be produced in discovery.
The key question in the case was thus whether the Ullmann standards are limited to tax filings of individuals. Writing for the panel, Judge Sabatino answered “no,” holding “that the tax filings of corporations and other businesses receive the same presumption of confidentiality as individual tax records, and that the Ullmann test applies to them as well.”
Judge Sabatino began with the fact that both the Internal Revenue Code and New Jersey statutory law makes tax returns confidential, subject to certain exceptions. Caselaw has held that tax filings can be discoverable in proper circumstances. In New Jersey, Ullmann is the “seminal” case on that subject and one that has “withstood the test of time,” having been cited repeatedly.
Plaintiff argued that Ullmann should not apply to tax returns of corporations and other businesses. The Appellate Division did not agree.
Judge Sabatino first observed 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 statutes broadly sweep in all tax filings and return information.” He then observed that “plaintiff has not cited a single reported opinion from any jurisdiction that has treated business tax returns as less confidential than those of individual taxpayers.” In fact, cases from New York, California, and Texas had rejected plaintiff’s position. Finally, no public policy justified “dilut[ing] the strong presumption of confidentiality” for business tax returns. Such returns often contain confidential information that should not be disclosed in discovery.
In ordering production, the Law Division had applied the Ullmann standard. But, applying a “deferential” standard of review applicable to discovery rulings, the Appellate Division held that the Law Division had not sufficiently analyzed the issues. The Law Division’s opinions were “too conclusory in addressing the questions of relevance and compelling need. The rulings did not mention or analyze the important facet of whether the information within the tax filings could be readily obtained from other sources. Nor did the opinions discuss whether a substantial purpose would be achieved by disclosure.” Finally, the Law Division had not reviewed the documents in camera, so the Appellate Division remanded for that to occur.
Turning to that part of the Law Division’s order that directed production of defendant’s financial statements, Judge Sabatino ordered that those documents too be reviewed in camera by the Law Division. Though “ordinary standards for discovery and protective orders” apply to such documents, unlike tax returns, in camera review would be “beneficial and fairer to both parties.” The Law Division’s orders as to both the tax filings and the financial statements were thus “vacated without prejudice, and remanded in anticipation of in camera review and more detailed findings.” Plaintiff thus may still be able to get the discovery when all is said and done, if the Ullmann test, properly applied is satisfied.