DISCOVERY CASE OUTLINE
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Tax Return

TAX RETURN PRIVILEGE

CONTENTS

CASE OUTLINE

 

See also Privacy Case Outline re financial matters and tax returns

CASES

Aday v. Superior Court, 55 Cal.2d 789
Brown v. Superior Court (1977), 71 Cal. App.3d 141.
In re marriage of Brown(1979), 99 Cal.App.3d 702
Crest Catering Co. v. Superior Court (1965), 62 Cal.2d 274
Coate v. Superior Court (1978), 81 Cal.App.3d 113
Davis v. Union Oil (1982), 135 Cal.App.3d. 642
Deary v. Superior Court (Hendrick) (2001) 87 Cal.App.4th 1072 , 105 Cal.Rptr.2d 132
Fortunato v. Superior Court (Ingrassia) (2003) _CA4th _[12/17/03]2d dist. Div 4.
Heathman v. United States (9th Cir. 1974), 503 F.2d 1032,1035.
King v. Mobile Home Rent Review Bd.(1989), 216 Cal.App.3d 1532
Miller .v. Superior Court (1977), 71 Cal.App.3d 145
In re marriage of Parks(1982), 138 Cal.App.3d346,349
Richards v. Superior Court ( 1968) 258 Cal.App.2d 635
Rifkind v. Superior Court (1981), 123 Cal.App.3d 1045.
Sammut v. Sammut (1980), 103 Cal.App.3d 557.
Sav-On Drugs, Inc. v. Superior Court (1975), l5 Cal.3d l.
Schnabel v. Superior Court (1993), 5 Cal.App.4th 704.
Totter v. Stanford Med. Ctr (1983), Deleted on direction of Supreme Court by order dated October 19,1983
Webb v. Standard Oil (1957), 49 Cal.2d 509
Weingarten v. Superior Court (Pointe S. D. Resid. Com.) (2002)102 Cal.App.4th 268
Wilson v. Superior Court (1976), 63 Cal.App.3d 825

CONTENTS

PURPOSE OF PRIVILEGE
STATUTORY BASIS
APPLICABLE TAXES
SCOPE OF PRIVILEGE
PRIVILEGE IS NOT ABSOLUTE
HOLDER OF PRIVILEGE
WAIVER OR EXCEPTION TO PRIVILEGE


CASE OUTLINE

PURPOSE OF PRIVILEGE: encourage voluntary filing of tax returns and truthful reporting of income, and thus to facilitate tax collection.

Webb v. Standard Oil (1957),49 Cal.2d 509 at p. 513. “The purpose of the amended statutory provisions prohibiting disclosure is to facilitate tax enforcement by encouraging a taxpayer to make full and truthful declarations in his return, without fear that his statements will be revealed or used against him for other purposes. If the information can be secured by forcing the taxpayer to produce a copy of his return, the primary legislative purpose of the secrecy provisions will be defeated. The effect of the statutory prohibition is to render the returns privileged, and the privilege should not be nullified by permitting third parties to obtain the information by adopting the indirect procedure of demanding copies of the tax returns.”

Deary v. Superior Court (Hendrick) (2001) 87 Cal.App.4th 1072, 1077 [Estate & inheritance tax returns protected. “Beginning with Webb v. Standard Oil Co., supra, 49 Cal.2d 509, a series of California Supreme Court and Court of Appeal decisions have considered the scope of various statutory provisions which prohibit the administrators and employees of state agencies responsible for the collection of taxes from disclosing information in tax returns. (See Schnabel v. Superior Court (1993) 5 Cal.4th 704, 718-722 [21 Cal.Rptr.2d 200, 854 P.2d 1117] [corporate income tax and payroll tax returns]; Webb v. Standard Oil Co., supra, at p. 512 [income tax returns]; Sav-On Drugs, Inc. v. Superior Court (1975) 15 Cal.3d 1, 6 [123 Cal.Rptr. 283, 538 P.2d 739] [sales tax returns]; Crest Catering Co. v. Superior Court (1965) 62 Cal.2d 274 [42 Cal.Rptr. 110, 398 P.2d 150] [employment tax returns].) In each of those cases, the respective statute has been held to establish an implied privilege against compelled disclosure in civil proceedings to which the taxpayer is a party. (Schnabel v. Superior Court, supra, at p. 719.) The rationale for this extension of the protection beyond the literal terms of the statutes was first articulated in Webb v. Standard Oil Co., supra, "49 Cal.2d at page 513, where [1078] the court explained: "The effect of the statutory prohibition is to render the returns privileged, and the privilege should not be nullified by permitting third parties to obtain the information by adopting the indirect procedure of demanding copies of the tax returns."  While no reported decisions have extended the privilege to estate tax returns, we see no reason not to do so. Revenue and Taxation Code section 13501 requires the personal representative of every estate to file a return with the California State Controller, along with a copy of any federal estate tax return. Section 14251 of that code provides, in part, that: "All information and records acquired by the Controller or any of his or her employees are confidential in nature, and except insofar as may be necessary for the enforcement of this part or as may be permitted by this article, shall not be disclosed by any of them." The statute goes on to state that any disclosure other than those permitted by law constitutes a felony punishable by a state prison term. This guarantee of confidentiality is quite similar to the statutes prohibiting agency officials from disclosing the contents of income and sales tax returns which were the subject of Webb and the subsequent cases cited above. "These equivalent statutes should be interpreted consistently, and the same privilege should apply." (Schnabel v. Superior Court, supra, 5 Cal.4th at p. 720.)

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STATUTORY BASIS: No express statutory provision creating a privilege; statutes prohibit disclosure by government employees and courts extended the prohibition to create "implied privilege against forced disclosure in civil discovery."

Weingarten v. Superior Court (Pointe San Diego Residential Community) (2002)102 Cal.App.4th 268, 274 [“There is no recognized federal or state constitutional right to maintain the privacy of tax returns. (See Couch v. United States (1973) 409 U.S. 322, 336-337; Deary v. Superior Court (2001) 87 Cal.App.4th 1072, 1075, fn. 2, 1077-1078.) California courts, however, have interpreted state taxation statutes as creating a statutory privilege against disclosing tax returns. (Schnabel v. Superior Court (1993) 5 Cal.4th 704, 718-721; Webb v. Standard Oil Co. (1957) 49 Cal.2d 509, 513.) The purpose of the privilege is to encourage voluntary filing of tax returns and truthful reporting of income, and thus to facilitate tax collection. (Webb v. Standard Oil, supra, 49 Cal.2d at p. 513.)'”]

Schnabel v. Superior Court (1993), 5 Cal.App.4th 704. [ Footnote 4 “This privilege is sometimes described as "judicially created." (E.g., King v. Mobile Home Rent Review Bd., supra, 216 Cal.App.3d at p. 1537; Sammut v. Sammut, supra, 103 Cal.App.3d at p. 560; Miller v. Superior Court (1977) 71 Cal.App.3d 145, 147 [139 Cal.Rptr. 521].) This is not entirely accurate. Given our repeated admonition that because of the exclusivity of the privileges contained in the Evidence Code, courts may not create nonstatutory privileges as a matter of judicial policy, this characterization is also somewhat misleading. (Welfare Rights Organization v. Crisan (1983) 33 Cal.3d 766, 769 [190 Cal.Rptr. 919, 661 P.2d 1073, 31 A.L.R.4th 1214]; Valley Bank, supra, 15 Cal.3d at p. 656; Evid. Code, § 911, subd. (b); see also County of Alameda v. Superior Court (1987) 194 Cal.App.3d 254, 260-261 [239 Cal.Rptr. 400].) Although the privilege is not expressly stated in the statute, it is based on the statutory language and underlying policy. (See Webb, supra, 49 Cal.2d 509; Wilson v. Superior Court (1976) 63 Cal.App.3d 825, 829 [134 Cal.Rptr. 130].) The privilege is thus "impliedly based on statute. ..." (Welfare Rights Organization v. Crisan, supra, 33 Cal.3d at p. 769.)”]

Origin: Webb v. Standard Oil Co., supra, 49 Cal.2d 509, 513 See also Schnabel at page 719; Sav-On Drugs at p. 6. King at p.1537. Deary v. Superior Court (Hendrick) (2001) 87 Cal.App.4th 1072 , at p. 1077

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APPLICABLE TAXES: "These equivalent statutes should be interpreted consistently, and the same privilege should apply." Schnabel v. Superior Court (1993), 5 Cal.App.4th 704.at page 720. Deary v. Superior Court (Hendrick) (2001) 87 Cal.App.4th 1072

See also Ev.Code §1040, Official Information Privilege

Income taxes
Personal: Rev.& Tax Code §19282
Webb v. Standard Oil (1957), 49 Cal.2d 509
In re marriage of Brown(1979), 99 Cal.App.3d 702
Sammut v. Sammut (1980), 103 Cal.App.3d 557.
King v. Mobile Home Rent Review Bd.(1989), 216 Cal.App.3d 1532

Bank & corporate: Rev. & Tax Code §26451
Rifkind v. Superior Court (1981), 123 Cal.App.3d 1045 [tax returns of law corp and 3 partnerships; tr ct rev'd. when it ordered husband to produce]

Sales and use taxes:
Rev. & Tax Code §7056
Sav-On Drugs, Inc. v. Superior Court (1975), l5 Cal.3d l.

Employment tax returns.
Unemployment Ins. Code §§1094[quarterly payroll tax returns], 2111, 2714
Schnabel v. Superior Court (1993), 5 Cal.App.4th 704.
Crest Catering Co. v. Superior Court (1965), 62 Cal.2d 274

Estate / Inheritance tax returns:
Rev.& Tax Code §§ 13501 14251;
Deary v. Superior Court (Hendrick) (2001) 87 Cal.App.4th 1072 , 105 Cal.Rptr.2d 132]

SCOPE OF PRIVILEGE

Tax Returns protected: Federal and State

Webb v. Standard Oil (1957), 49 Cal.2d 509, 514 [“...forcing disclosure of the information in the federal tax return would be equivalent to forcing disclosure of the state returns and would operate to defeat the purposes of the state statute. It follows that the trial court did not err in refusing to require production of copies of either the state or federal tax returns.”]

Aday v. Superior Court, 55 Cal.2d 789, 796-7 [“The warrant was invalid with respect to the copies of the federal and state tax returns because they were privileged and therefore exempt from seizure. (Webb v. Standard Oil Co., 49 Cal.2d 509, 512-514 [319 P.2d 621].) It was held in the Webb case that the provisions of the Revenue and Taxation Code disclose an intent to preserve the secrecy of tax returns except in a few specified situations (Rev. & Tax. Code, §§ 19282-19287) and that, where federal returns may be assumed to contain the same information as is sought from state returns, forcing disclosure as to either will defeat the purposes of the code. While that case involved only the sections of the code relating to personal income taxes, there are substantially identical provisions with respect to corporation taxes. (Rev. & Tax. Code, §§ 26451-26453c.) The sole exception permitting disclosure for purposes of a criminal prosecution [55 Cal.2d 797] appears in sections 19283 and 26453, which are limited to prosecutions for tax violations, thereby indicating that disclosure is not to be made in other criminal cases.]

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Specific entries on tax returns protected

Coate v. Superior Court (Woods) (1978) 81 Cal.App.3d 113 [Privilege covers interrogatories seeking information with respect to partnership income reported by decedent for income tax purposes]

Sav-On Drugs, Inc. v. Superior Court (1975), l5 Cal.3d l, at p.7. [Cannot inquire as to specific entries on tax returns. “While not asking either for the return itself or a copy, the question does seek information concerning specific entries in the return. To require petitioner to respond to such an inquiry would render meaningless the privilege recognized in Webb, Aday and Crest Catering Co. Assuming Revenue and Taxation Code section 7056 protects the returns themselves, it is reasonable to conclude that it must also protect the information contained in the returns. The writ of prohibition must issue as to interrogatory 40.”]

W-2 forms protected

Brown v. Superior Court (1977), 71 Cal. App.3d 141, 143-4 [form of plaintiff in PI action protected; "The W-2 forms, which are required to be attached to a taxpayer's state and federal income tax returns, constitute an integral part of the return and qualify as "information contained in the returns" within the meaning of Sav-On Drugs, Inc., v. Superior Court...]

In re marriage of Parks(1982), 138 Cal.App.3d 346, 349 [waiver by agreement]

Tax Payers

Individual
Webb v. Standard Oil (1957), 49 Cal.2d 509 [Plt returns protected in action for fire damage when sought to determine if fire loss had been claimed as deduction as loss]

King v. Mobile Home Rent Review Bd.(1989), 216 Cal.App.3d 1532

In re marriage of Brown(1979), 99 Cal.App.3d 702 [tax returns of new spouse privileged in custody battle]

Partnership
Rifkind v. Superior Court (1981), 123 Cal.App.3d 1045 [tax returns of law corp and 3 partnerships privileged; tr ct rev'd. when it ordered husband to produce]

Corporate
Crest Catering Co. v. Superior Court (1965), 62 Cal.2d 274
Sav-On Drugs, Inc. v. Superior Court (1975), l5 Cal.3d l

Proceedings: privilege applies to nonadversarial, factfinding, administrative proceeding

King v. Mobile Home Rent Review Bd.(1989), 216 Cal.App.3d 1532, 1537 [“Although Webb and Sav-On Drugs occurred in the context of litigation, there is no rule limiting the application of the privilege to adversarial, court proceedings. Nor should there be. The Supreme Court has declared that attempts to avoid the application of the privilege by indirect means are not to be tolerated. (Sav-On Drugs, Inc. v. Superior Court, supra, 15 Cal.3d at p. 7.) The requirement of providing copies of tax returns in an administrative proceeding is as much an indirect method of obtaining personal tax information as is the attempt to seek copies of returns for discovery purposes. Full disclosure in the preparation of tax returns would not be encouraged by a rule limiting disclosure of returns to certain kinds of judicial, but not administrative, proceedings, and would only undermine the policy behind Revenue and Taxation Code section 19282. We are not persuaded that there are any factors or policies supporting the inapplicability of the privilege in administrative proceedings before local rent review boards.”]

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PRIVILEGE IS NOT ABSOLUTE

Weingarten v. Superior Court (Pointe San Diego Residential Community) (2002)102 Cal.App.4th 268, 274 “But this statutory tax return privilege is not absolute. The privilege will not be upheld when (1) the circumstances indicate an intentional waiver of the privilege; (2) the gravamen of the lawsuit is inconsistent with the privilege; or (3) a public policy greater than that of the confidentiality of tax returns is involved. (Schnabel v. Superior Court, supra, 5 Cal.4th at p. 721.) This latter exception is narrow and applies only "when warranted by a legislatively declared public policy." (Ibid.) A trial court has broad discretion in determining the applicability of a statutory privilege. (See National Football League Properties, Inc. v. Superior Court (1998) 65 Cal.App.4th 100, 106-107.)”

Schnabel v. Superior Court (1993), 5 Cal.App.4th 704, at page 721 [s/h right to access coporate books highly relevant to issues in dissolution plus legislative mandate to openness in dissolution and fiduciary duty of spouse "warrant an exception to the privilege in this case limited to those tax returns that are reasonably related to the purpose for which they are sought." At page 723 the Court observed: " Absent a specific showing of relevance or need, we hold that the general privilege against coerced disclosure of of tax returns applies ...."]

King v. Mobile Home Rent Review Bd.(1989), 216 Cal.App.3d 1532


HOLDER OF PRIVILEGE: who can claim and who can waive privilege

Individual / Corporation

Webb v. Standard Oil (1957), 49 Cal.2d 509 [Plt returns protected in action for fire damage when sought to determine if fire loss had been claimed as deduction as loss]

Crest Catering Co. v. Superior Court (1965), 62 Cal.2d 274

Sav-On Drugs, Inc. v. Superior Court (1975), l5 Cal.3d l

Rifkind v. Superior Court (1981), 123 Cal.App.3d 1045[tax returns of law corp and 3 partnerships; tr ct rev'd. when it ordered husband to produce]

State?

Richards v. Superior Court (1968), 258 Cal.App.2d 635 [Plaintiff's consent to release of med records to defendant in PI case not waiver of official information privilege. Med. Records were obtained by state per Unemployment Ins. Code may be absolutely privileged per Evidence Code §1040]

Evidence.Code §1040]

Joint privilege: both holders must consent to waiver

Coate v. Superior Court (1978), 81 Cal.App.3d 113 [Both parties to a joint return are holders of privilege and both must waive as to joint return.]

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WAIVER OR EXCEPTION TO PRIVILEGE

Contract or agreement

Crest Catering Co. v. Superior Court (1965), 62 Cal.2d 274 [retirement fund cause of action for audit for employer contributions under labor contract; contractual promise to furnish information on demand; Crest agreed to "promptly furnish all necessary information upon demand"; destruction of records made tax returns the only source of information and therefore "necessary" for the audit]

In re marriage of Parks(1982), 138 Cal.App.3d346 [waived by husband's agreement in the 1974 stipulated judgment that, "7. Each of us agrees, on the demand of the other, to execute or deliver any instrument, furnish any information, or perform any other act reasonably necessary to carry out the provisions of this agreement without undue delay or expense ...." ]

Schnabel v. Superior Court (1993), 5 Cal.App.4th 704.

Consent / Voluntary disclosure [“the circumstances indicate an intentional waiver of the privilege”Weingarten]

Coate v. Superior Court (1978), 81 Cal.App.3d 113 [Both parties to a joint return are holders of privilege and both must waive as to joint return.]

Fortunato v. Superior Court (Ingrassia) (2003) _CA4th _[12/17/03]2d dist. Div 4 [disclosure of personal income tax returns to bank to obtain loan not a waiver and not voluntary; Evid. Code §912 does not apply to tax privilege]

King v. Mobile Home Rent Review Bd.(1989), 216 Cal.App.3d 1532 [No implied consent by filing application with local gov't.when tax returns informally requested as part of application process]

Tender of Issue / Implied consent [“the circumstances indicate an intentional waiver of the privilege”Weingarten]

Wilson v. Superior Court (1976), 63 Cal.App.3d 825 [waiver of the tax return privilege by filing complaint against accounting firm alleging neg tax advice raising issues re existence, content and tax consequences of returns]
Schnabel v. Superior Court (1993), 5 Cal.App.4th 704.

King v. Mobile Home Rent Review Bd.(1989), 216 Cal.App.3d 1532 [No implied consent by filing application with local gov't.when tax returns informally requested as part of application process]

Brown v. Superior Court (1977), 71 Cal. App.3d 141, 143-4 [W-2 form of plaintiff in PI action protected; "Nor is this a case, such as Wilson v. Superior Court (1976) 63 Cal.App.3d 825 [134 Cal.Rptr. 130], wherein the taxpayer, by initiating an action over her tax returns, placed their content in issue and thereby waived the privilege."]

Newson v City of Oakland (1974), 37 Cal.App.3d 1050 [Plt in PI case testified to lost earnings but had no records to substantiate; Plt raised 5th amendment objections to questions as to whether tax returns were filed; court gave Plt the option of answering the questions or dropping claim for lost income; tender of issue was waiver of privilege]


Forced election: waive privilege or drop issue / case [“ the gravamen of the lawsuit is inconsistent with the privilege” Weingarten]

Newson v City of Oakland (1974), 37 Cal.App.3d 1050 [Plt in PI case testified to lost earnings but had no records to substantiate; Plt raised 5th amendment objections to questions as to whether tax returns were filed; court gave Plt the option of answering the questions or dropping claim for lost income; tender of issue was waiver of privilege]

A & M Records v. Heilman (1977), 75 Cal.App.3d 554 [5th amendment asserted by defendant at depo in refusing to produce documents or answer questions; tr ct precluded testimony or use of documents unless produced in discovery prior to trial. Aff'd. A party cannot assert a privilege as an objection to discovery and then waive the privilege and testify at trial]

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Public Policy exception [“a public policy greater than that of the confidentiality of tax returns is involved.”Weingarten]

Weingarten v. Superior Court (Pointe San Diego Residential Community) (2002), 102 Cal.App.4th 268 [tax returns discoverable when defendant found to have acted with malice and fraud, has sole control of financial records, and is refusing to produce relevant nonprivileged documents. Protective order limiting disclosure of the tax returns as to time and as to only the attorneys and experts in this case. Court notes that “...exception is narrow and applies only "when warranted by a legislatively declared public policy." citing Schnabel. Mere determination that plaintiff was entitled to punitive damages was insufficient. ]Schnabel v. Superior Court, supra, 5 Cal.4th at p. 721.

Miller v. Superior Court (1977) 71 Cal.App.3d 145 , 149; 139 Cal.Rptr. 521, [Child support arrearages invoke greater public policy; income tax returns discoverable in child support arrearage proceeding based on greater public policy of enforcing child support obligations; battle between spouses re arrearage enforcement.court limited exception to child support cases]

In re Marriage of Brown (1979), 99 Cal.App.3d 702 , 160 Cal.Rptr. 524 [Tr Ct afff'd. in quashing subpoena duces tecum served on new spouse in child support modification proceeding due to factual and public policy (preserve new marriage) distinctions from Miller]

Sammut v. Sammut (1980), 103 Cal.App.3d 557, at p.562 [“...there are no public policy considerations which would permit discovery of income tax returns in litigation between former spouses in spousal support modification proceedings.”]

King v. Mobile Home Rent Review Bd.(1989), 216 Cal.App.3d 1532, 1538. [Expediency of local gov't review. not superior public policy. Rent control board required tax return submission in connection hardship application in order to verify information. No showing information could not be acquired without tax returns.]