Ashton v. Cherne Contracting Corp.

ALPERT, Judge. Kenneth A. Ashton appealed the decision of the Workers’ Compensation Commission terminating his vocational rehabilitation benefits and disallowing his claim for additional temporary total disability benefits. Due to Mr. Ashton’s failure to comply with an Order to produce his income tax records, his appeal was dismissed by the Circuit Court for Allegany County. This appeal of that dismissal followed.

As restated by us for clarity, appellant asks: I. Did the Circuit Court abuse its discretion in compelling production of appellant’s income tax records and return information when such records were filed jointly with his wife, who is not a party to the action, and production of such records would violate the rights and privileges of appellant and his wife? ⁹⁰ II. Did the Circuit Court abuse its discretion in dismissing appellant’s case based on his failure to produce copies of his income tax returns? For the reasons hereinafter stated, we shall vacate the judgment of the circuit court and remand for further proceedings. Facts and Proceedings Appellant, Kenneth A. Ashton, filed an appeal in the Circuit Court for Allegany County, contesting an order of the Workers’ Compensation Commission that terminated vocational rehabilitation benefits and disallowed a claim for additional temporary total disability benefits.

During the discovery phase of the appeal, appellee, Cherne Contracting Corporation (“Cherne”), propounded a set of Interrogatories to Mr. Ash-ton, among them number 13, which requested: “State the amount reported as earned income in your income tax returns for each of the past five years and the District in which the returns were filed.” Mr. Ashton replied to the Interrogatory as follows: The claimant respectfully refuses to respond to this Interrogatory. The basis of this refusal is that the income tax returns for each of the past five years were filed by the claimant jointly with his spouse who is not a party to this claim. In an attempt to comply with the spirit and purpose of the discovery rules the claimant is prepared to produce his W-2 forms used in connection with the preparation of the income tax returns he filed with his wife for each of the past five years. Once the W-2 forms are located they will be produced.

On March 29, 1993, appellee wrote Mr. Ashton, requesting production of the income tax returns in compliance with Interrogatory No. 13. In his reply on April 13, 1993, Mr. Ashton again declined to produce the income tax records, but did provide the W-2 forms. On May 25, 1993, appellee filed a motion for an order compelling discovery with respect to Interrogatory No. 13. In ⁹¹ an order dated June 22, 1993, the court granted appellee’s motion and ordered Mr. Ashton to produce “the requested tax records” by July 15, 1993. 1 On July 13, 1993, Mr. Ashton filed a motion and memorandum requesting the court to exercise revisory power over its order to compel discovery.

A conference call was held by the court on July 26, 1993, at which time the court orally ordered Mr. Ashton to produce the income tax records, under seal, to either appellee or to the court for an in camera review. Mr. Ashton refused to comply with the court order and on August 5, 1993, appellee moved for sanctions for failure to comply with the order. The motion for sanctions was granted on August 12,1993, and it was ordered that Mr. Ashton had until September 1, 1993, to produce “income tax records ... to either this court for an in camera inspection or to counsel for the Employer/Insurer.... ” (Emphasis added.) Mr. Ashton failed to produce the records and appellee again moved for sanctions on September 14,1993. This motion was granted on September 15, 1993, and the court dismissed Mr. Ashton’s appeal from the Workers’ Compensation Commission’s order.

This appeal followed. Because the parties to these proceedings and the trial judge construed the subject Interrogatory to require production of Mr. Ashton’s joint income tax returns, in the interest of judicial economy (in part) so shall we but only for the purposes of this appeal and for the guidance of the trial court on remand. Discussion I. Appellant, Mr. Ashton, contends that the Circuit Court abused its discretion when it ordered him to produce his income tax returns because income tax returns are privileged, and as such, are not discoverable. Appellee counters that Mr. ⁹² Ashton’s income tax returns are relevant to his workers’ compensation appeal, enjoy no enumerated privilege, and, therefore, are discoverable.

This case presents a potential issue that ■ the Maryland courts have not addressed before—whether an individual tax-, payer may be forced to disclose copies of his income tax returns, jointly filed with a non-party, during discovery. Md. Rule 2^102 sets forth the scope of discovery, providing: Unless otherwise limited by order of the court in accordance with these rules ... [a] party may obtain discovery regarding any matter, not privileged, ... if the matter sought is relevant to the subject matter involved in the action.... It is not ground for objection that the information sought ... will be inadmissible at the trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence. Under this rule, an individual’s tax returns would appear to be discoverable, provided they are relevant to the subject matter of the action and they are not privileged, irrespective of whether the tax returns would be admissible at trial of the case.

Privileges With Respect to Tax Returns The circuit court was not in error, however, in rejecting appellant’s argument that tax returns are privileged and therefore, not discoverable. Mr. Ashton argues that because his tax returns were filed jointly with his wife, who is not a party to the action, the lower court erred in compelling discovery of these returns in violation of both his and his wife’s privileges and rights. Appellee contends that the tax returns are not privileged and, further, Mr. Ashton does not have standing to assert Mrs. Ashton’s claim, in absence of her intervention in the action. We hold that federal and state tax returns are not privileged, and, provided they are relevant, they are discoverable.

Privileges pertaining to federal income tax returns are addressed by federal statute, and several state statutes speak ⁹³ to the privileges relating to state income tax returns. Mr. Ashton contends that his federal income tax returns are privileged under 26 U.S.C. sections 6103 and 7213(a). Section 6103 provides generally that returns and return information shall be kept confidential by any officer or employee of the United States, with certain exceptions that are inapplicable to this case. Section 7213 makes it unlawful for any United States officer or employee to disclose any return or return information.

Mr. Ashton’s reliance on these statutes to support his claim that his federal tax returns are privileged is misplaced for several reasons. First, at issue in this case is whether Mr. Ashton, the taxpayer, can be forced to disclose his personal tax returns; the statutes he relies upon deal specifically with whether tax information may be disclosed by government employees. Second, in Stokwitz v. United States, 831 F.2d 893 (9th Cir.1987), cert. denied, 485 U.S. 1033 , 108 S.Ct. 1592 , 99 L.Ed.2d 907 (1988), the Court rejected the argument made by the plaintiff therein, who, like appellant, contended that 26 U.S.C. section 6103 should be read to protect a taxpayer from disclosing income tax information. In that case, the lower court had found that section 6103 was not enacted to prevent government employees from obtaining information from the taxpayer directly through such means as civil discovery or a search warrant.... [The court] ‘was convinced that return and return information in the taxpayer’s hands are subject to no greater protection than other private papers in taxpayer’s possession.’ Id. at 894 .

The Ninth Circuit Court of Appeals agreed, reading the statute as a whole and looking to the legislative history behind it. Id. Holding that “section 6103 applies only to information filed with and disclosed by the IRS,” the Court found that the statute was only directed at government employees and officers who had possession of returns and return information as a result of materials being filed by or on behalf of the taxpayer. Id. at 897 .

Further, the Court held that the ⁹⁴ statute was not intended to be a general prohibition against public disclosure of tax information. Id. at 896 . Mr. Ashton also argues that his state tax returns are privileged and exempt from discovery. He asserts that any privilege with regard to the state tax return must be governed by Pennsylvania law, 2 but he also cites the similar Maryland statute 3 , dismissing it as inapplicable. 4 Appellee disagrees with Mr. Ashton’s reliance on both the Maryland and Pennsylvania statutes, because, like the federal statute, they only provide for nondisclosure of tax information by current or former officers, agents, or employees of the government, not by the taxpayer himself.

We agree with appellee. There is no specific privilege in Maryland that protects state income tax returns from disclosure by a taxpayer, nor has any Maryland decision rendered tax returns privileged. Since Maryland law is silent on this point, we must look to cases in other jurisdictions to decide this issue. On the other hand, we find no Maryland statute or case law to the contrary.

Courts in both California and Massachusetts have read state statutes that prohibit tax officials from disclosing tax return information as also making tax returns privileged in the hands of taxpayers. See e.g., Brown v. Sup. Ct. of San Francisco, 71 Cal.App.3d 141 , 139 Cal.Rptr. 327 (1977) (interpreting a statute that prohibits tax officials from disclosing tax return ⁹⁵ information to extend to taxpayers; the privilege is not nullified simply by demanding the information from the taxpayer directly); Goto v. Goto, 187 Cal.App.2d 594 , 10 Cal.Rptr. 14 (1960) (holding that the lower court erred both in requiring production of copies of the defendant’s income tax returns and in receiving the returns into evidence over objection); Webb v. Standard Oil Co., 49 Cal.2d 509 , 319 P.2d 621 (1957) (holding that tax returns are privileged under the statutes that prohibited the tax board and employees from disclosing any information and this privilege should not be nullified by allowing third parties to obtain the information by demanding copies of the returns); Leave v. Boston E.R. Co., 306 Mass. 391 , 28 N.E.2d 483 (1940) (inquiry of a taxpayer as to his state income tax returns was impermissible under a state statute prohibiting disclosure of information in returns by tax officials). The majority of jurisdictions, however, have held the converse; statutes that provide for nondisclosure of tax return information by government employees do not preclude disclosure by the taxpayer himself.

See Thesman v. Dooley, 270 Or. 37 , 526 P.2d 563 (1974); Schriock v. Schriock, 128 N.W.2d 852 (N.D.1964); United States ex rel. Carthan v. Sheriff, City of New York, 330 F.2d 100 (2d Cir.1964), cert. denied, 379 U.S. 929 , 85 S.Ct. 323 , 13 L.Ed.2d 341 ; Constantine v. Constantine, 274 Ala. 374 , 149 So.2d 262 (1963); Application of Second Additional Jury, 234 N.Y.S.2d 64 (1962); State ex rel. Boswell v. Curtis, 334 S.W.2d 757 (Mo.1960). For example, in Thesman, 526 P.2d at 567 , the Oregon Supreme Court stated: “The rule is almost universal that it is discretionary with a court in which a civil action is pending to require one party to produce a copy of a federal or state tax return for inspection by an adverse party in a discovery proceeding.”