United States District Court, N.D. New York
April 5, 2005.
STEPHEN M. GATES and ROBERT W. WILNER, Plaintiffs and Counter-Defendants,
JOHN W. WILKINSON; KEVIN DYEVICH; M.P.L., LTD.; M.P.L., LTD., a Belize Business Entity; WCW. INC.; LoTECH SUPPORT SYSTEMS, LIMITED, a New York Corporation as incorporated by defendant Wilkinson; COMFORT DIRECT, INC., a New Jersey Business Entity; ATLANTIS MEDICAL, INC., a New Jersey Business Entity; ATLANTIS MEDICAL, INC., a Vermont Business Entity; ATLANTIS INDUSTRIES, a Bahamas Business Entity; US SURFACE, INC. OF DELAWARE, a Delaware Business Entity; and ATLANTIS MEDICAL, Defendants and Counterclaimants.
The opinion of the court was delivered by: DAVID HOMER, Magistrate Judge
MEMORANDUM-DECISION AND ORDER
Presently pending are the requests of plaintiffs Stephen M.
Gates ("Gates") and Robert W. Wilner and that of defendants John
W. Wilkinson ("Wilkinson"), M.P.L., LTD., WCW, Inc., LoTech
Support Systems, Limited, Comfort Direct, Inc., US Surface, Inc.
of Delaware, and Atlantis Medical [collectively referred to
herein as the "Wilkinson defendants"] for orders compelling
disclosure of tax returns. Docket Nos. 129, 130. For the reasons
which follow, both requests are denied.
This law suit arises out of longstanding business relationships
among plaintiffs and defendants involving, inter alia, the
design, manufacture, and sale of mattresses. Am. Compl. (Docket
No. 25) at ¶ 1. Generally, plaintiffs allege that by a variety of
schemes commencing in April 1994, defendants "obtained by fraud
and stole valuable property and money, believed to be many
millions of dollars, from plaintiffs. . . ." Id. at ¶ 2. In an
eighty-eight page amended complaint with 350 numbered paragraphs,
plaintiffs allege that defendants deprived them of assets through
various business entities and seek compensatory and punitive
damages as well as declaratory relief under the Racketeer
Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et
seq. (RICO), and related theories. The Wilkinson defendants generally deny wrongdoing and
assert fifteen counterclaims against plaintiffs seeking
compensatory and punitive damages as well as declaratory relief
on breach of contract, fraud, and related theories. Am. Ans.
(Docket No. 74) at ¶¶ 380-512. Thus, the parties' pleadings have
placed in issue the parties' sources and amounts of income as
well as the financial transaction of their various related
On or about September 1, 2004, the Wilkinson defendants served
plaintiffs with document demands which included in Demand Nos. 67
and 68 directions for both plaintiffs to produce "State, Federal
and Foreign Income Tax Returns for 1992 to the present."*fn1
On February 2, 2005, plaintiffs served Wilkinson with a document
demand. Demand No. 29 directed Wilkinson to "[p]rovide copies of
your personal Federal and state income tax returns for the period
of January 1, 1992 to date." Both plaintiffs and Wilkinson
objected to these discovery demands, all refused production, and
the requests at issue herein for orders compelling production
Since 1977, tax returns have been described by statute as
"confidential." 26 U.S.C. § 6103(a); see also Gattegno v.
Pricewaterhousecoopers, LLP, 205 F.R.D. 70, 71 (D. Conn. 2001).
Such confidentiality serves both to protect the privacy interests
of taxpayers, see Gattegno, 70 F.R.D. at 71, and "`the need, if the tax laws are
to function properly, to encourage taxpayers to file complete and
accurate returns.'" Aliotti v. Vessel Senora, 217 F.R.D. 496,
497 (N.D. Cal. 2003) (quoting Premium Serv. Corp. v. Sperry &
Hutchinson Co., 511 F.2d 225, 229 (9th Cir. 1975)). Thus, a
more stringent standard for discovery of tax returns applies than
the general standard of relevance for discovery in Fed.R. Civ.
This more stringent standard is incorporated in a two-prong
test, sometimes described as a qualified privilege, which must be
satisfied for a court to compel disclosure of tax returns. That
test was first enunciated in Cooper v. Hallgarten & Co.,
34 F.R.D. 482, 484 (S.D.N.Y. 1964), requires that (1) the tax
returns are relevant within the broad definition of relevance
contained in Rule 26(b)(1), and (2) there exists a compelling
need for disclosure of the returns because the information
contained in the returns is not otherwise readily available.
See Bujnicki v. American Paving & Excavating, Inc., No.
99-CV-0646S(SR), 2004 WL 1071736, at *14 (W.D.N.Y. Feb. 25,
2004); Gattegno, 205 F.R.D. at 73; Hazeldine v. Beverage
Media, Ltd., No. 94 CIV. 3466(CSH), 1997 WL 362229, at *4
(S.D.N.Y. June 27, 1997). Thus, under the second prong, if the
information contained in a tax return is otherwise available to a
party from other sources, compelled production should be denied.
See Bujnicki, 2004 WL 1071736, at *14 (denying compulsion
where information readily available from other financial
documents); Gattegno, 205 F.R.D. at 73 (same); Hazeldine,
1997 WL 362229, at *4 (denying order compelling production of tax
returns where information was available through deposition and
"other less intrusive" discovery means).
The tax returns sought here by plaintiffs and the Wilkinson
defendants may reasonably be expected to contain information concerning
financial relationships, sources and amounts of income, and
related financial information. That information is clearly
relevant to the respective claims and defenses of the parties
both as to liability and as to damages. Both plaintiffs and the
Wilkinson defendants have, therefore, satisfied the relevance
prong of the test.
As to the compelling need prong, plaintiffs contend first that
Wilkinson has engaged in a pattern of fraudulent activity
involving an offshore corporation or account, money laundering,
forgery, identity theft, and concealing assets. Fanciullo
Letter-Brief (Docket No. 130) at 1-2. Wilkinson has denied such
allegations. These allegations are, of course, issues of fact for
trial and cannot be assumed. However, even assuming the truth of
such allegations, they at most establish the relevance of
Wilkinson's tax returns but not a compelling need. This is
particularly so where, as here, plaintiffs have demanded
production of all other financial documents of the Wilkinson
defendants for the same time period and the production of such
documents has either been promised by the Wilkinson defendants or
ordered by the Court. Moreover, depositions have not yet been
completed by plaintiffs. Wilkinson's tax returns would appear
cumulative of these underlying financial documents and of
depositions. As plaintiffs themselves indirectly concede, the
production of tax returns for purposes of providing prior
statements of Wilkinson to test or challenge his credibility
fails to establish a compelling need. See Fanciullo
Letter-Brief at 4 ("Credibility and cross-examination are
inadequate reasons to order disclosure."). Moreover, the fact
that the information sought by plaintiffs may be more easily
accessible from tax returns than from depositions or other
financial documents does not, without more, constitute a
compelling need. Second, plaintiffs contend that the Wilkinson defendants'
inadequate responses to plaintiffs' discovery demands renders the
financial information contained in Wilkinson's tax returns not
readily available from any other source and create a compelling
need for their production. Fanciullo Letter-Brief at 2-3.
However, partial production of the discovery demanded has been
made by the Wilkinson defendants and the remainder has been
promised or ordered. The discovery demands were served less than
two months ago and seek virtually every financial document for
the past decade and beyond in the possession of the Wilkinson
defendants, presumably including bank statements, financial
statements, records of income and assets, and the like. Moreover,
the depositions of Wilkinson and others associated with him have
not yet been completed. Until such discovery has been completed
and an assessment can be made of the information readily
available to plaintiffs from other sources, it is impossible in
the circumstances of this case for any compelling need for
Wilkinson's tax returns to be found.
Similarly, no compelling need exists for the Wilkinson
defendants to obtain the tax returns of either plaintiff. The
Wilkinson defendants offer as a reason for seeking the returns a
claim that they need to determine the sources of Gates' income
regarding a particular entity. Kinsella Letter-Brief (Docket No.
129) at 3. Given the other discovery which appears to be
available to the Wilkinson defendants from both depositions and
document production, the information sought in plaintiffs' tax
returns by the Wilkinson defendants appears readily available
from those sources at this stage.
Thus, as to the request of both plaintiffs and the Wilkinson
defendants, the information sought appears to be readily
available from depositions and the discovery which has been or
will be produced. No compelling need for the production of tax
returns by these parties can be found at this time. However, if a party
believes that relevant information is not readily and reasonably
available after the completion of depositions and document
production, leave is granted to renew a request for the
production of tax returns at that time.*fn3
WHEREFORE, for the reasons stated above, it is hereby
ORDERED that the requests of plaintiffs (Docket No. 130) and
the Wilkinson Defendants (Docket No. 129) for orders compelling
the production of tax returns are both DENIED without prejudice
to renewal after the completion of depositions and document
IT IS SO ORDERED.