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News

Expert Advice

Apr. 2, 2009

Discovering Foreign Tax Returns

By Craig A. Roeb Federal and state tax returns generally are privileged, but what about foreign tax returns?

Craig A. Roeb

Partner, Chapman, Glucksman, Dean, Roeb & Barger APC

11900 W Olympic Blvd
Los Angeles , CA 90064

Email: croeb@cgdrblaw.com

Loyola Law School; Los Angeles CA


In litigation, the defense may request documentation from the plaintiff to support claimed damages. If the plaintiff has filed tax returns outside the United States - an increasingly common phenomenon in the global economy - the most credible, accurate, and reliable evidence of the plaintiff?s income (or lack thereof) may be aforeign-filed tax return. Are such tax returns discoverable?

There is no federal or state constitutional right to privacy that protects a party against disclosure of such documents. (See Weingarden v. Superior Court, 102 Cal. App. 4th 268, 274 (2002).) The Ninth Circuit has rejected objections based on privacy rights, as well as objections based on the prohibition of unreasonable search and seizure (Heathman v. United States Dist. Court for the Cen. Dist., 503 F.2d 1032, 1035 (9th Cir. 1974)). Likewise, in Schnabel v. Superior Court (5 Cal. 4th 704, 719, fn.3 (1993)), the California Supreme Court recognized the absence of any federal privilege barring disclosure of income tax returns.

Though California courts have recognized a statutory privilege against the disclosure of state and federal income tax returns (Webb v. Standard Oil Co., 49 Cal. 2d 509 (1957)), they have also recognized that the privilege is not absolute (Schnabel, 5 Cal. 4th at 721).

No authority exists to shield disclosure of tax returns filed in a foreign country. Although the policy barring involuntary disclosure of state and federal returns is designed to encourage the voluntary filing of those returns, along with the truthful reporting of income to facilitate tax collection (see Schnabel, 5 Cal. 4th at 719), no such policy extends to foreign-filed tax returns.

The reason for the difference is that the federal and state governments do not have an interest in promoting the policies of foreign governments. This hands-off attitude explains why the California Legislature has not (and arguably cannot) pass laws that affect the affairs of other nations, as such action would encroach on exclusive federal control over foreign affairs. (See League of United Latin Am. Citizens v. Wilson, 908 F. Supp. 755 (C.D. Cal 1995).)

In an instructive California case involving a dispute over a loan and promissory note, the defendant asked the plaintiff to produce his Canadian tax returns. The defense was grounded in the notion that the note had been extinguished, that payment on the note had been arranged through various tax shelters, and that the plaintiff supposedly wrote off the note as uncollectible in his Canadian-filed income tax return (Firestone v. Hoffman, 140 Cal. App. 4th 1408, 1411 (2006)). Prior to trial, the plaintiff filed a motion in limine seeking to exclude evidence relating to his tax returns, especially the Canadian tax return. The defendant opposed the motion, arguing that the Canadian tax return could provide circumstantial evidence that the note had been written off. The trial court granted the plaintiff's motion and excluded any reference to his Canadian tax return.

But the court of appeal reversed, recognizing under Webb that a statutory privilege against disclosure extended only to state and federal tax returns. A Canadian tax return was another story: ?[T]here is no legal authority for application of the privilege to foreign tax returns. As a matter of policy, California has no interest in devising means to ensure effective tax enforcement in Canada - that is exclusively the prerogative of the Canadian government. - (Firestone, 140 Cal. App. 4th at 1420.)

Federal courts also have dealt with this problem. In a dispute between two parties over a joint venture and percentage of ownership, the defendant requested that the plaintiff produce his state, federal, and foreign tax returns. The court was sensitive to the public policy against unnecessary disclosure of tax returns, and it required a showing that the material was not otherwise discoverable before ordering production of any tax documentation. However, the court also stated: ?[T]ax returns are discoverable where they are relevant to the action or the issues raised thereunder and the material is not otherwise readily available.? (Potluri v. Yalamanchili, 2007 WL 2571980 (E.D. Mich. Sept. 4, 2007.) Ultimately, the court ordered the plaintiff to produce his federal, state, and foreign-filed tax returns.

We?ve come a long way since the 1957 Webb decision. The world has gotten smaller, claims have become larger, and in the 21st century, evidence may well be spread over continents instead of counties. Today, whenever a globe-trotting individual asserts claims of lost income, or a multinational company is involved in a business dispute, information that could be dispositive on issues of liability or damages may reside in a foreign-filed tax return. Discovering that information is a strategy for any savvy litigator to consider.

Craig A. Roeb is a partner in the Los Angeles office of Chapman, Glucksman, Dean, Roeb & Barger, where he chairs the business, employment, and product liability practice groups.

 

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Usman Baporia

Daily Journal Staff Writer

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