Piercing the Confidentiality of Tax Returns in New Jersey Divorces

Piercing the Confidentiality of Tax Returns in New Jersey Divorces

By: John P. Paone, Jr., Esq. and John P. Paone, III, Esq.*

Almost everyone who has filed tax returns understands the extent of personal and financial information that can be learned by just reviewing a basic income tax return. Tax returns often provide a treasure trove of information about an individual’s finances including but not limited to their income, investments, properties, tax rates, and deductions. While federal and state law generally recognizes that income tax returns are confidential, this does not hold true in divorce actions as compared to other types of legal proceedings. In fact, outside of the realm of divorce litigation, a party must meet a heightened standard in order to obtain an opposing party’s tax filings.

In the recent reported case of Parkinson v. Diamond Chemical Company, Inc., the New Jersey Appellate Division found that a party who filed a wrongful discharge lawsuit against his prior employer was not automatically entitled to the prior employer’s business tax filings in discovery. Since the tax returns of individual and business taxpayers are both afforded the presumption of confidentiality, the former employee was required to demonstrate how the tax returns were relevant to the claims or defenses in his wrongful discharge lawsuit. Although the former employee argued that the tax records were material to his case since they would help to refute the company’s allegations that he contributed to their lost revenue and would further substantiate that he was subject to discrimination, the Appellate Division made clear that a rigorous analysis must be undertaken to determine to what extent information from the tax returns may be produced in discovery, if at all. The former employee who brought the lawsuit was required to meet the following criteria in order to establish that discoverability of the business tax returns was warranted: (1) the tax filings are relevant to the case; (2) there is a compelling need for the documents because the information likely to be contained within them is not otherwise readily obtainable from other sources; and (3) disclosure would serve a substantial purpose.

The obstacles for parties in non-divorce matters to obtain income tax returns as illustrated in the Parkinson case are in stark contrast to New Jersey divorce cases where there is no such cloak of confidentiality as even spouses who are self-employed cannot refuse to disclose tax returns for their businesses. This is because New Jersey courts have adopted a broad and liberal approach in divorce matters where the financial information of one party is deemed essential in order to decide issues such as alimony and child support. In fact, the rules of discovery for New Jersey provide that parties may obtain discovery regarding any matter which is not privileged and which is relevant to a claim or defense of any other party. Business tax returns do not fall under the category of privileged records and oftentimes serve as a starting point in order to determine the marital value of a business entity such as a partnership, limited liability company, or closely held corporation for purposes of equitable distribution.

A difficult issue which can arise with business tax returns in divorces is not whether these records may be disclosed in discovery, but whether certain information may need to be redacted to the extent that a spouse has a partial ownership interest in a business entity which implicates the privacy interests of other owners who are non-parties in the divorce case. However, if there is no other mechanism available to evaluate a spouse’s business interests for support and equitable distribution other than to conduct an examination of the company’s financial records, this will likely weigh heavily in a court’s decision as to whether to allow full disclosure of the tax return or to limit disclosure of such information.

If you are involved in a discovery dispute in a divorce action regarding the disclosure of personal and business tax returns, you should explore the possibility of contacting an experienced family law practitioner who can advise you as to your rights and whether any part of your tax filings may contain sensitive or proprietary information which may entitle you to a Protective Order.

*John P. Paone, Jr., Esq. and John P. Paone, III, Esq. are divorce and family law attorneys with the Law Offices of Paone, Zaleski & Murphy, with offices in Red Bank and Woodbridge.