in Re Eleanor P. Sullivan ( 2006 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-06-00741-CV
In re Eleanor P. Sullivan
ORIGINAL PROCEEDING FROM BASTROP COUNTY
OPINION
Relator Eleanor P. Sullivan filed a petition for writ of mandamus challenging the trial
court’s order compelling her to produce portions of certain federal income tax returns. We
conditionally grant the writ.
This original proceeding arises from a suit filed by the State seeking condemnation
of approximately two acres owned by Sullivan along U.S. 290 in Bastrop County, where she operates
a business, Highway 290 RV Park. The special commissioners awarded Sullivan $396,000 as just
compensation. The State objected to this amount and, on March 31, 2006, served requests for
production seeking an array of documents relating to the property, including appraisals and other
estimations of value, statements reflecting income and expenses derived from the property and/or
the RV park, and, in request no. 5, “[f]ederal income tax return statements that relate to the RV park
for . . . 2003, 2004, 2005.” The record reflects that Sullivan produced documents in response to the
requests except for no. 5, to which she objected as overly broad, harassing, “seek[ing] information
that is protected by Defendant’s rights of privacy and seek[ing] privileged and proprietary
information,” “duplicative of information sought in other Requests,” and lacking any showing by
the State “that it is unable to obtain the requested information through less intrusive means.” On
June 7, the State moved to compel production of the information requested in no. 5. A hearing was
held on October 16. On October 25, the trial court signed an order granting the State’s motion and
compelling production of the tax returns on November 15 (a date chosen to afford Sullivan the
opportunity to submit additional authority for reconsideration). The court also ordered that the
returns “may be redacted to reveal only those portions . . . that pertain to the income derived and
expenses incurred in Ms. Sullivan’s operation of the Hwy. 290 R.V. Park.” On November 21, the
trial court signed an order denying Sullivan’s motion for reconsideration, upholding its prior order
compelling discovery of the redacted tax returns, and ordering production on November 29. Sullivan
subsequently filed this proceeding with a motion for temporary emergency relief. We granted
Sullivan’s motion for temporary relief, staying production of the tax returns pending our resolution
of the petition for mandamus. See Tex. R. App. P. 52.10.
The Texas Supreme Court has long cautioned us that:
Subjecting federal income tax returns of our citizens to discovery is sustainable only
because the pursuit of justice between the litigants outweighs protection of their
privacy. But sacrifices of the latter should be kept to the minimum, and this requires
scrupulous limitation of discovery to information furthering justice between the
parties which, in turn, can only be information of relevancy and materiality to the
matters in controversy.
Maresca v. Marks, 362 S.W.2d 299, 301 (Tex. 1962) (orig. proceeding);1 see Hall v. Lawlis, 907
S.W.2d 493, 494 (Tex. 1995) (orig. proceeding) (income tax returns are discoverable to extent that
they are relevant and material to issues presented in lawsuit); Sears, Roebuck & Co. v. Ramirez, 824
1
The supreme court emphasized that the protection of this privacy interest “is of
fundamental—indeed of constitutional importance.” Id.
2
S.W.2d 558, 559 (Tex. 1991) (orig. proceeding) (issuance of mandamus was “guided by our
reluctance to allow uncontrolled and unnecessary discovery of federal income tax returns.”).
Once an objection is asserted, the party seeking discovery of the tax returns has the
burden of showing relevance and materiality. El Centro del Barrio, Inc. v. Barlow, 894 S.W.2d 775,
779 (Tex. App.—San Antonio 1994, orig. proceeding). To meet its burden, the State submitted an
affidavit from one of its property appraisers, Randy Williams. Williams testified that to determine
fair market value of the land and improvements (which, he explained, bears upon the ultimate issue
of just compensation), “an appraiser must take into account any income earned and expenses
associated with the land and improvements.” Williams contended that Sullivan had produced
financial statements prior to the special commissioners’ hearing, also made the basis for her
appraiser’s report, that were inconsistent with the financial data she subsequently disclosed in
discovery. Williams urged that “[i]t is impossible based on the currently available information to
determine which documents . . . if any, provide an accurate depiction of the income and expenses
of the Hwy. 290 R.V. Park,” and that “[t]he only way to determine the fair market value of [the
property] is to examine the only audited2 financial statements available—Ms. Sullivan’s federal
income tax statements.”
The State contends here that Sullivan’s federal income tax returns are relevant and
material because “the information in the tax returns presumably represents the definitive account of
the operating income and expenses associated with the property as an R.V. park,” in contrast to the
2
On appeal, the State clarifies that it “is not asserting that Sullivan’s federal income tax
returns have been audited,” only that it “believes that the federal income tax returns are verified.”
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“inconsistent” information Sullivan has already produced. We conclude that, at this juncture, the
trial court abused its discretion in finding that Sullivan’s federal income tax returns are material.3
Federal income tax returns are not material if the same information can be obtained
from another source. El Centro del Barrio, Inc., 894 S.W.2d at 780; Chamberlain v. Cherry, 818
S.W.2d 201, 206 (Tex. App.—Amarillo 1991, orig. proceeding); cf. Ramirez, 824 S.W.2d at 559 (net
worth information in income tax returns was unnecessarily duplicative of previously-produced
annual reports). This limitation, as several of our sister courts have recognized, requires the
requesting party to show that whatever relevant information contained in the federal income tax
returns cannot be obtained through another source, such as interrogatories and depositions. El
Centro del Barrio, Inc., 894 S.W.2d at 780 (citing Borenstein v. Blumenfeld, 260 S.E.2d 377, 378
(Birdsong, J., concurring specially) (“Net worth, income, real estate holdings, stocks and bonds, and
other such income producing holdings can be adequately obtained through interrogatories and
depositions.”)). To show materiality, the State does little more than express frustration with the
financial information Sullivan produced in response to its first request for production and what it
claims are inconsistencies between that information and the reports Sullivan previously submitted
to the special commissioners. The State did not attempt to use (or explain why it could not use)
interrogatories, depositions, or any other discovery device to follow-up its initial discovery request
or further explore the bases for Sullivan’s calculations. On this record, we conclude that the State
is not entitled to production of Sullivan’s tax returns. See In re Doctors’ Hosp. of Laredo, 2 S.W.3d
504, 506 n.1 (Tex. App.—San Antonio 1999, orig. proceeding) (even when financial records are
3
We will assume without deciding that Sullivan’s tax returns contain relevant information.
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relevant to issues in case and requested from party, privacy concerns require trial court to explore
other methods of obtaining the information); Kern v. Gleason, 840 S.W.2d 730, 738 (Tex.
App.—Amarillo 1992, orig. proceeding) (claimants required to attempt to discover relevant evidence
from other records before seeking production of income tax returns).
The record reflects that the trial court was aware of the limits on discovery of federal
income tax returns and judiciously attempted to balance the privacy concerns underlying these limits
with the State’s need to obtain relevant, material information. Where federal income tax returns
contain relevant and material information, redaction, as the trial court ordered, may be advisable or
necessary to limit disclosure solely to that discoverable information. See, e.g., Maresca, 362 S.W.2d
at 301. But where, as here, the record does not support a finding that the requested information is
material so as to be discoverable, we must hold that the trial court abused its discretion in compelling
production of any portion of the tax returns. See In re DuPont de Nemours & Co., 136 S.W.3d 218,
223 (Tex. 2004) (court does not have discretion to analyze or apply law incorrectly).
And compelling production of the tax returns leaves Sullivan without an adequate remedy by
appeal. See Lawlis, 907 S.W.2d at 495.
We emphasize that our ruling is based solely on the record before us and that we
express no opinion regarding whether, after additional discovery, Sullivan’s tax returns could be
shown to be material. See Kern, 840 S.W.2d at 738 (noting that if alternate source of information
proves to be incomplete, renewed request for income tax returns could be made).
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We conditionally grant the petition for writ of mandamus and direct the trial court to
vacate its October 25, 2006 “Order Compelling Production of Documents” and November 21 Order.
The writ will issue only if the court does not comply with this opinion. See Tex. R. App. P. 52.8.
Bob Pemberton, Justice
Before Justices Puryear, Pemberton and Waldrop
Filed: December 18, 2006
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