By Miriam S. Edelstein, Esq.

In a recent published decision in Parkinson v. Diamond Chem. Co., Inc., the Appellate Division reaffirmed the longstanding precedent in Ullmann v. Hartford Fire Ins. Co. and its progeny governing the heightened privacy interest and specific analyses courts should use to determine the validity of discovery requests for tax returns and other private, financial records. 

The Parkinson court added a new dimension to these standards by extending their application, including the heightened privacy interest, to requests for the tax returns and financial records of a business, rather than an individual. 

The balancing test prescribed by Ullmann five decades ago requires that the requesting party show (1) the records are likely to contain relevant information; (2) a “compelling need” for the records because such information is not readily obtainable through less invasive means; and (3) that disclosure will serve a “substantial purpose” in the litigation. Upon such a showing, the trial judge should then conduct an in camera review to consider “whether partial disclosure of redacted records may suffice.”

During discovery, the plaintiff in Parkinson sought the defendant-employer’s tax returns and financial statements. In opposing the defendant’s application for a protective order, the plaintiff argued, and the trial court appeared to agree, that a business tax return is less confidential than an individual’s tax return, and thus is not afforded the heightened privacy interest and balancing test set forth in Ullmann. However, the trial court also ruled that even if Ullmann did apply, the plaintiff had satisfied the heightened test to warrant production of the defendant’s tax returns, as well as other financial records being sought.

The Appellate Division rejected the plaintiff’s argument that tax returns filed by businesses are less confidential than those filed by individuals, and further held that businesses are entitled to the same, heightened presumption of privacy in their tax returns as individuals. 

The heightened standard is based, in large part, on the confidential designation of these records articulated in the Internal Revenue Code and New Jersey tax laws protecting them from disclosure, except for  the specific exceptions expressly provided in those laws. The Appellate Division held that none of these regulations and statutes contain or imply any lower level of confidentiality for business tax returns as opposed to those filed by individuals. 

The Appellate Division further found that the trial court had not sufficiently analyzed the defendant’s application for a protective order under the Ullmann rubric. The appellate panel specifically noted with disapproval that the trial court had not conducted an in camera review.  Accordingly, the Appellate Division vacated the trial court’s order and remanded with instruction that the trial court fully analyze the issue using the roadmap set forth in Ullmann, including by conducting an in camera review of both the tax returns and the financial statements.

While the Parkinson decision does provide further and recent support for plaintiffs in challenging the nearly universal requests defendants make for their private tax returns and financial records, the decision is troublesome in that it equates the privacy interest of businesses with that of individuals, despite the purely commercial nature of businesses and the typically personal nature of individuals.

A 2017 Florida State University Law Review article makes the argument that people file tax returns that contain information reflecting on themselves, personally, such as significant medical expenses, charitable donations, legal expenses, all of which may be completely unrelated to the employment litigation.  

In comparison, commercial interests based on proprietary information, while certainly protectible, can easily be redacted and/or protected in litigation by a confidentiality stipulation. But as a bright-line rule, equating the privacy concerns held by businesses with those of individuals artificially inflates the risk of harm that businesses face from such disclosures, and diminishes the gravity of harm in divulging personal information contained in an individual’s return.  

The Parkinson decision thus adds to the wealth of jurisprudence developed in the wake of Citizens United, which, as pointed out in a 2016 University of Illinois-Chicago Law Review article, has given rise to the trend of enhanced “corporate personhood” in pivotal decisions at every level of the judiciary since.

Miriam S. Edelstein, Esq., is Counsel at Costello & Mains, LLC, in Mount Laurel, NJ, focusing on plaintiff-side civil rights and employment litigation, after more than 12 years working for an AmLaw 100 firm, premier insurance carrier and Lambda Legal.  She is a member of NJAJ where she has presented on issues in employment law as well as on topics in diversity, equity and inclusion.