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The authors are fellows of the American College of Trial Lawyers and are partners at Jennner & Block of Chicago. Do you want to get the short hairs on the back of your opponent’s neck to stand up? Serve discovery requests in which you demand copies of tax returns. But what if your client’s tax returns are relevant; how do you keep them from your adversary? As a litigator, it is your job to look for legitimate pressure points that might improve your case or might impel a settlement. So if you can find a legitimate way to request tax returns — without opening the door to the need to produce your own client’s returns, making the exercise a wash — you will do so. Before 1977, tax returns and the information contained in them were considered public information. Congress changed that with the Tax Reform Act of 1976, 26 U.S.C. 6103(a), not because of any particular concern over discovery abuse in private litigation, but rather because of the real fear that the government might be misusing tax information. Congress squirmed and added the provision to protect citizens from their own government. But the act did not address whether citizens needed to be protected from one another. Protected from what, you might ask. We already file tax returns under penalty of perjury, so why is there any question about their accuracy and why should we be concerned about letting someone review them? In the first place, despite the fact that we read in the sports pages how many millions we pay people to play sports, and despite the fact that it is a matter of public record what we pay our judges, our society rightfully thinks that — for most persons — a person’s personal finances are personal. There ought to be some good reason before someone is forced to lay open the details of his or her financial life. But more to the point, no one — no one — understands the Internal Revenue Code. If your finances are so complicated that you don’t use the short form, then, sure as shooting, your long form contains something that is a matter of interpretation. We all are scrupulously honest when we file our returns; but we still turn pale at the mention of those two little words: “au dit.” Be Careful What You Ask For Simple enough, we don’t want our tax returns produced to people sworn to inflict pain upon us. The first question is whether financial information about an individual is relevant. You represent the plaintiff in a theft of trade secrets claim, and you are allowed to elect among a number of different damage theories, including unjust enrichment, disgorgement and lost profits. Do you really want to assert the lost profits claim, knowing that you then put your own client’s income and profitability at issue? Maybe not. And while your right to punitive damages is a bit iffy, do you want to assert the claim anyway? Maybe. The mere claim may make tax returns relevant, since the defendant’s finances need to be assessed in determining a punitive award. How do you fend off a tax attack? Some have tried to wage the battle on a constitutional level. In Commodity Futures Trading Commission v. Collins, 992 F.2d 1230 (7th Cir. 1993), Collins resisted a request for tax returns on Fifth Amendment grounds, arguing that the forced disclosure of his tax returns could be incriminating. The court seemed intellectually bemused by the argument, but it quashed the requests on the far more practical ground that the CFTC had not made a sufficient showing that production of the tax returns might lead to relevant, admissible evidence. But we suspect that if the Seventh U.S. Circuit Court of Appeals had ruled on the constitutional question, it would have booted it off the island. If there is something incriminating about information, the time to assert the privilege is before the information is blurted out, even to the Internal Revenue Service. Once reported, there does not seem to be much of a distinction between something written in a tax schedule or testimony volunteered without the proper assertion of the privilege — it is waived. One could make an argument that the filing of a tax return is involuntary, under compulsion from the government, and that there is no waiver of the Fifth Amendment right. But most people keep copies of their tax returns; and there is no requirement in the Internal Revenue Code that a taxpayer do so. So the mere creation of the document is probably a waiver. General Irrelevancy So there probably is not a constitutional privilege, but all is not lost. Courts are generally reluctant to order the production of tax returns. In Sanderson v. Winner, 507 F.2d 477 (10th Cir. 1974), the court stated that “tax returns and other similar financial data are generally irrelevant and compulsory disclosure is not favored.” And in Cohn v. Taco Bell Corp., 1994 WL 383975 (N.D. Ill. 1994), the court noted that “there is a policy against the disclosure of income tax returns, and thus, income tax returns should be discoverable only where the litigant himself raises the issue of the amount of his income.” The Fifth Circuit advanced a reason for this reluctance in Natural Gas Pipeline Co. of America v. Energy Gathering Inc., 2 F.3d 1397 (5th Cir. 1993), when it stated: “[Not] only are the taxpayer’s privacy concerns at stake, but unanticipated disclosure also threatens the effective administration of our federal tax laws given the self-reporting, self-assessing character of the income tax system.” Huh? Taxpayers are more likely to be candid and forthright with their government if they know they will not have to disclose what they say? Well, no matter. It doesn’t matter whether courts can articulate their reluctance to give up tax returns; what matters is that they are reluctant. So reluctant, in fact, that many courts have endowed tax returns with their own special privilege. Privilege Against Disclosure Obviously, there is no common law privilege against the disclosure of tax returns. When Congress passed the income tax, it did not afford returns any privilege in civil (or any other) litigation. And in all of the tinkering, amendments, regulations and fiddles to the tax code, neither Congress nor the IRS has added a privilege. But the courts have. As they can and should. The protection afforded tax returns in civil discovery “is aptly characterized as a qualified privilege.” See Gattegno v. PricewaterhouseCoopers, 205 F.R.D. 70 (D. Conn. 2001). The Gattegno court also noted that Congress specifically left to the courts “in light of reason and experience” the power to recognize evidentiary privileges in Evidence Rule 501, and adopted, as had many courts before, a two-part test to govern whether the privilege should be applied. First, are the financial matters contained in the returns relevant? And, second, is there a compelling need for the production of the returns — because the information contained in them is not otherwise readily available? The first skirmish in resisting the production of tax returns, then, should be to challenge the relevance of the information. For example, where financial information is relevant simply because of an allegation that punitive damages are appropriate, the first attack should be on whether the punitive claim is legitimate. Some courts require a demonstration beyond mere allegations that punitive damages are a real possibility, or even a prima facie showing, before the discovery floodgates are opened. See Chenoweth v. Schaaf, 98 F.R.D. 587 (W.D. Pa. 1983) (“the complaint must allege a set of circumstances which will demonstrate to the court at least a real possibility that punitive damages will be at issue”). But the majority rule appears to be otherwise and most courts require no special showing. If you cannot get the punitive damages claim dismissed, perhaps you can get it postponed by bifurcating the claims. Some states, such as Kansas, have adopted statutes bifurcating the issues of punitive damages from liability, making it easy to defer discovery of financial information. See American Maplan Corp. v. Heilmayr, 203 F.R.D. 499 (D. Kan. 2001). But courts sitting in states lacking the statutory resolve of Kansas may be hard to convince. So by all means argue relevance, seek bifurcation, but don’t put too much hope on the first prong of the qualified privilege test. The second prong holds far more promise. If the rule really is — and it appears to be — that courts will protect tax returns as long as the same information is made readily available in some other form, then the simple answer ought to be that you should provide the information in some other form. That should be easy. The tax return itself is presumably based on other documents. And even if other documents do not exist, you can create them. A simple affidavit from the taxpayer reciting income, assets or other relevant details, ought to provide an alternate method of informing. But don’t wait too long before offering to supply information short of the actual returns. In Bessier v. Precise Tool & Engineering Co. Inc., 778 F. Supp. 1509 (W.D. Mo. 1991), the plaintiff sought discovery of financial information with a broad, blanket request. When the defendant objected, the plaintiff agreed to substantially limit the request; but the defendant persisted in the objection. The court’s reaction was simple: “[Since] defense counsel elected not to cooperate with plaintiff’s counsel in refining the document production request, a tactic ill-advised in this venue, the court will grant plaintiff’s motion and order defendant to produce all of the items requested.” When you get hit with a request for your client’s tax returns, and if your client would simply prefer not to produce them, you need not push the panic button in response to your opponent’s attempt to push your hot button. Look for a way to provide the information without providing the return, and this simple strategy will pay great returns.

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