In 1965, the top song was “(I can’t get no) Satisfaction” by the Rolling Stones,1 the cost of a movie ticket was $1,2 and one could buy a four-bedroom home in Mountain Lakes for $45,000.3
When filing an income tax return for the 1965 tax year, the married filing jointly top federal tax bracket for a couple making over $200,000 was 70 per-cent,4 and the Internal Revenue Service (IRS) was launching its first toll-free phone line.5 Filing an income tax return electronically for a taxpayer who owed money was not even on the IRS’s radar until 1986, and it was not possible until 1992.6
Today, life is more like Hanna-Barbera’s 1960s depiction of what the future would look like in the era of George and Jane Jetson than the Flintstones’ Stone Age.7 To say that the internet changed life is a gross understatement, as all information is much more easily shared than it was in 1965. Personal and confidential information can be disclosed with a click of a button when sending an email or when making a purchase by taking advantage of a cyber deal.
The advancement of technology and the ability to share information quickly has also impacted the practice of law. Long gone are the days of using a typewriter to prepare written discovery to be propounded on adversary counsel. Now, discovery is propounded and responded to with a click of a but-ton, and documents are produced in zip files or links, among other media.
In its opinion, the Appellate Division stated that “the average taxpayer is sensitive about his return and wishes to keep it from publication. [A taxpayer] is entitled to that privacy unless there is a strong need to invade it.”1
One thing that has not changed since 1965, however, is the importance of keeping litigants’ income tax returns confidential whenever possible. To that end, New Jersey practitioners frequently look back to 1965 and cite to Ullmann v. Hartford Fire Ins. Co. and its progeny to prevent the disclosure of income tax returns and other financial information during the course of litigation.
In citing to the Ullmann decision, courts and litigants should step back and consider the facts and the court’s reasoning in Ullmann, and the ways the decision still affords protection to litigants in a more technologically advanced era of practice.
Litigants are Entitled to Keep Tax Returns Private, Unless There is a Strong Need to Release Them
In Ullmann, the plaintiffs filed a cause of action and alleged a damage claim upon a windstorm insurance policy. The defendant argued that, in their income tax returns, the plaintiffs would have to make a choice: “1) [to] treat the loss as a windstorm loss and claim no credit against their taxes, or 2) to claim the loss was not by windstorm, or 3) if such fil-ing is possible, to file a return claiming not to know whether or not the loss was by windstorm.”8 The defendant argued it was entitled to receive income tax return information because the plain-tiffs’ treatment of the loss in their income tax returns could be used as an admission against the plaintiffs that the loss being claimed was not by wind-storm. The trial court ordered the plain-tiffs to “provide defendant with whatev-er forms are necessary to enable said defendant to obtain from the Internal Revenue Service any information as to whether the said plaintiffs have filed income tax returns for the years 1962 and 1963 and whether any extensions for the filing of said returns have been granted.”9 The plaintiffs appealed the trial court’s order.
In its opinion, the Appellate Division stated that “the average taxpayer is sensitive about his return and wishes to keep it from publication. [A taxpayer] is entitled to that privacy unless there is a strong need to invade it.”10 The court held that public policy favors the nondisclosure of income tax returns and that “[g]iven appropriate weight to each, the production of tax returns should not be ordered unless it clearly appears they are relevant to the subject matter of the action or to the issues raised thereunder, and further, that there is a compelling need therefor because the information contained therein is not otherwise readily obtainable.”11
The Appellate Division further held that “[i]f disclosure [of an income tax return] will not serve a substantial purpose it should not be ordered at all. If ordered, disclosure should be no greater than justice requires. The disclosure of entire returns should never be ordered if partial disclosure will suffice, and in all but the clearest cases the return should be examined by the judge before any disclosure is ordered. Even then the judge should impose such restrictions and limitations as may be necessary for the protection of the taxpayer.”12
Ullmann’s Impact on Discovery
It is well established that New Jersey discovery rules are to be liberally construed and accorded the broadest possible latitude.13 Indeed, the New Jersey Supreme Court has held that “[l]iberal procedures for discovery in preparation for trial are essential to any modern judicial system in which the search for truth in aid of justice is paramount and in which concealment and surprise are not to be tolerated.”14
Pursuant to New Jersey Court Rule 4:10-2(a), “[p]arties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the parties seeking discovery or to the claim or defense of any other party....”15 It is also well established that copies of income tax records are not privileged.16 Although there is a liberal discovery standard in New Jersey, and income tax returns are not privileged, the Ullmann decision stands for the proposition that discovery disclosures are not limitless and production of income tax returns requires a heightened analysis. When it comes to the production of income tax returns during discovery, New Jersey has permitted discovery and inspection for “good cause.”17 In Ullmann, the court held that “it is impossible to lay down a universal definition of good cause for disclosure and inspection, or an all-inclusive and definitive catalogue of all of the circumstances to be considered by a court in determining whether there is good cause.”18 In the matter of Lepis v. Lepis, the Court held that “[c]ourts have recognized that discovery and inspection of income tax returns should only be permitted for good cause.”19 In Templeton Arms v. Feins, the court held that “[t]he good cause standard [] is flexible, taking its shape from the particular facts to which it is applied. Good cause is distinct from good faith, although good faith is relevant in evaluating good cause.”20
Ullmann Requires Litigants to Step Back Before Clicking the Send Button
The Ullmann decision continues to govern the discovery of income tax returns,21 and requires the court to balance a party’s need for information during the course of a litigation, and a per-son’s or entity’s right to keep income tax returns and certain other financial information private. When confronted with an overzealous litigant seeking the broad production of income tax returns or other confidential financial information, attorneys should slow things down and make their objections known by filing a motion to quash a discovery demand (or third-party subpoena), or by seeking a protective order.
New Jersey Court Rule 4:10-3 allows the court, upon motion and “for good cause shown,” to “make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense....” A motion to quash is governed by the same standards as an application for the entry of a protective order.22
When considering such a motion, the court should factor into its analysis the impact on the litigants, and the scope of information sought in discovery. The production of income tax returns and other confidential information by a business could impact its ability to raise capital or grow if the income tax returns and other confidential information being sought were to be dis-closed to a third party. Regarding individuals, the disclosure of an entire tax return could cause a spouse’s confidential information to be disclosed, even if that spouse is not a party to a pending action.
The production of income tax returns requires a Flintstone-type analysis, which requires the court and parties to step back, go slowly and make sure the income tax return(s) being sought are truly necessary to the claims asserted, and follow Ullmann by considering whether a certain part of the income tax return can be produced instead of the entire return, and whether the information sought can be obtained through other means. Notably, a claimant asserting fraud or misappropriate or the like cannot obtain a tax return under the guise that the monies flowing from the inappropriate conduct should be dis-closed on a tax return. Indeed, tax forms rarely identify the source of income and, in many instances, the tax forms only reveal the aggregate income from all sources.
In an era of instant gratification, where information can be disclosed quickly, litigants confronted with a demand for income tax return information should think before pressing the send button. The author believes courts should stay focused on Ullmann, and the production of tax returns should not be ordered unless it clearly appears they are relevant to the subject matter of the action or to the issues raised.
Technology continues to change legal practice on what seems like a daily basis, but when it comes to the production of income tax returns, the author believes the analysis is better left in the Stone Age.
"Production of Income Tax Returns Requires a Flintstone-Paced Analysis in a Jetson Era of Practice" by Joseph H. Tringali, Esq. Chair/Commercial Litigation, Bendit Weinstock, P.A. (Reprinted with permission from the December 2019 edition of the New Jersey State Bar Association's New Jersey Lawyer)
Endnotes
1. 1965 History, Trivia and Fun Facts, Pop Culture Trivia, https://pop-cul-ture.us/Annual/1965.html.
2. Ibid.
3. 1965, Morris County Library, https://mclib.info/reference/local-history-genealogy/historic-prices/1965-2/ (last visited July 19, 2019).
4. Federal Income Tax Brackets (Tax Year 1965), Tax-Brackets.Org, https://www.tax-brackets.org/feder altaxtable/1966 (last visited July 31, 2019).
5. Historical Highlights of the IRS, Internal Revenue Service (June 28, 2019) https://www.irs.gov/news-room/historical-highlights-of-the-irs.
6. Ibid.
7. 50 Years of the Jetsons: Why the Show Still Matters, Smithsonian (Sept. 19, 2012), https://www. smithsonianmag.com/history/50-years-of-the-jetsons-why-the-show-still-matters-43459669/.
8. Id., at 416.
9. Id., at 412.
10. Ullmann v. Hartford Fire Ins. Co., 87 N.J. Super. 409, 415 (App. Div. 1965).
11. Ibid.
12. Id., at 415-16.
13. Shanley & Fisher, P.C. v. Sisselman, 215 N.J. Super. 200, 211 (App. Div. 1987).
14. Lang v. Morgan’s Home Equipment Corp., 6 N.J. 333, 338 (1951),citing Hickman v. Taylor, 329 U.S. 495, 500-01 (1947).
15. R. 4:10-2(a).
16. Finnegan v. Coll, 59 N.J. Super. 353, 356 (Law Div.), certif. denied, 32 N.J. 357 (1960).
17. DeGraaff v. DeGraaff, 163 N.J. Super. 578 (App. Div. 1978).
18. Ullmann, supra, 87 N.J. Super. at 409, 414.
19. Lepis v. Lepis, 83 N.J. 139, 158 (1980).
20. Templeton Arms v. Feins, 220 N.J. Super. 1, 21 (App. Div. 1987).
21. Pressler and Verniero, Current N.J. Court Rules, cmt. 1.2.2 on R. 4:18-1.
22. See R. 4:10-3 andKerr v. Able Sani-tary and Environmental Services, Inc., 295 N.J. Super. 147 (App. Div. 1996).