In this original proceeding, relators, Jerry A. Bullin, individually, CJB Partners, Ltd., and its general partner CJB Partners Management, LLC, and BRE Group, Ltd., assert that the respondent, Judge Steve Smith of the 361st Judicial District Court, abused his discretion in ordering the production of Bullin's adjusted gross income ("AGI") and taxable income ("TI") by way of Bullin's income tax returns filed with the Internal Revenue Service for the years of 2008, 2012, and 2013. We conditionally grant relators' petition for writ of mandamus.
This proceeding involves real party in interest Texas Private Schools Foundation, Inc. d/b/a Allen Academy's alleged default on four promissory notes payable to Bullin, totaling more than $3.6 million. However, the dispute between the parties originated with the filing of Allen Academy's original petition against relators for breach of fiduciary duty and fraud. Concurrent with the filing of its original petition, Allen Academy served its first requests for production, seeking Bullin's "federal income tax returns, including all schedules and attachments, for the years 2008, 2009, 2010, 2011, 2012, and 2013."
In its original petition, Allen Academy describes itself as follows:
Allen Academy is a private co-educational college preparatory school with a long and rich history of excellence dating back to the late 1800's. Its mission is the education of young people in all respects so that they will ultimately become fulfilled, responsible and contributing citizens. Allen Academy is governed by a Board of Trustees who are responsible for the general oversight of the management of the school. It relies on private donations and tuition payments for its operational expenses.
Bullin objected to Allen Academy's production request regarding his income tax returns, arguing that the request is "overly broad, unduly burdensome and not reasonably calculated to lead to the discovery of relevant and admissible evidence." Bullin agreed to "produce so much of the federal income tax returns as is relevant to the claims in this litigation relating to charitable contributions, loans and income related to Allen Academy." To that end, Bullin produced to Allen Academy redacted copies of each of relator's tax returns, revealing the total charitable contributions, the amount contributed to Allen Academy, and the total deductions taken by each relator. Bullin's counsel redacted from the tax returns each relator's AGI, TI, the amounts contributed to those other than Allen Academy, and the itemized deductions regarding those other than Allen Academy.
Thereafter, Allen Academy filed a motion to compel the production of Bullin's unredacted tax returns. Specifically, Allen Academy argued:
Even though Bullin agreed to produce so much of the tax returns as is relevant to the charitable contributions[,] they have failed to provide this information. Instead, Bullin provided returns with redactions for the charitable contributions from anyone other than Allen Academy, adjusted gross income, his taxable income and his total tax. Bullin also redacted the individual donee for each of the Defendants individual charitable donations. Notwithstanding, each of these numbers are crucial to allow an expert to reconstruct how and when Jerry Bullin was taking deductions on his tax returns for the notes made by Allen Academy to him and his various limited partnerships.
Without the adjusted gross income, taxable income, total tax numbers, and charitable contribution identified by donee (on each return), Allen Academy's expert cannot make the analysis necessary to determine the effect of Bullin's charitable contributions. The limits of the charitable contributions for tax purposes are based on a taxpayer's adjusted gross income. Further, the strategy for taking contribution deductions, or any deduction can be dependent on the taxpayer's tax rate. Allen Academy's expert has required this information in order to make a proper analysis of the Bullin charitable contributions.
After a hearing, the trial court initially denied Allen Academy's motion to compel, concluding that "there is not a sufficient nexus between these claims and the need for the information requested." Subsequently, Allen Academy filed a motion to reconsider the ruling on the motion to compel. After another hearing, the trial court signed an order granting, in part, and denying, in part, Allen Academy's motion to reconsider. In its order, the trial court ordered relators to produce "the redacted adjusted gross income ("AGI") and taxable income ("TI") from Bullin's 2008, 2012, and 2013 tax returns." The trial court denied Allen Academy's request for Bullin's AGI and TI from tax years 2009, 2010, and 2011. This original proceeding followed.
II. STANDARD OF REVIEW
Mandamus is an extraordinary remedy that will issue only to correct a clear abuse of discretion when there is "no adequate remedy by appeal." In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 135-36 (Tex. 2004) (orig. proceeding) (citations omitted). "A trial court has no 'discretion' in determining what the law is or applying the law to the facts." Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992). "Thus, a clear failure by the trial court to analyze or apply the law correctly will constitute an abuse of discretion." Id. (citations omitted). In addition, a trial court clearly abuses its discretion if it reaches a decision so arbitrary and unreasonable as to amount to a clear and prejudicial error of law. Id. at 839. Regarding the resolution of factual issues or matters committed to the trial court's discretion, relators must establish that the trial court could reasonably have reached only one decision. Id. at 839-40. We cannot disturb the trial court's decision unless it is shown to be arbitrary and unreasonable, even if we would have decided the issue differently. Id. at 840.
An appellate remedy may be inadequate when the benefits to mandamus review outweigh the detriments. See In re McAllen Med. Ctr., Inc., 275 S.W.3d 458, 462, 468-69 (Tex. 2008) (orig. proceeding); In re Team Rocket, L.P., 256 S.W.3d 257, 262 (Tex. 2008) (orig. proceeding). "Mandamus will not issue when the law provides another, plain, adequate, and complete remedy." In re Tex. Dep't of Family & Protective Servs., 210 S.W.3d 609, 613 (Tex. 2006). "It is well-established that there is no adequate remedy by appeal for the erroneous compelling of a person to disclose tax records." In re Wharton, 226 S.W.3d 452, 458 (Tex. App.—Waco 2005, orig. proceeding) (citing Walker, 827 S.W.2d at 843; Olinger v. Curry, 926 S.W.2d 832, 836 (Tex. App.—Fort Worth 1996, orig. proceeding)).
With respect to federal income tax returns, the Texas Supreme Court has long cautioned that:
The protection of privacy is of fundamental—indeed, of constitutional—importance. 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 a 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.
It is self-evident that the maximum protection of privacy is unattainable if trial courts do not exercise their discretion to safeguard from discovery those portions of income tax returns which are irrelevant and immaterial, and it is our view that failure to exercise such discretion is arbitrary action. A litigant so subjected to an invasion of his privacy has a clear legal right to an extraordinary remedy since there can be no relief on
appeal; privacy once broken by the inspection and copying of income tax returns by an adversary cannot be retrieved.
Maresca v. Marks, 362 S.W.2d 299, 301 (Tex. 1962) (orig. proceeding); see Hall v. Lawlis, 907 S.W.2d 493, 494 (Tex. 1995) (orig. proceeding) (per curiam) (concluding that income tax returns are discoverable to the extent that they are relevant and material to issues presented in the lawsuit); Sears, Roebuck & Co. v. Ramirez, 824 S.W.2d 558, 559 (Tex. 1991) (orig. proceeding) (per curiam) (concluding that the issuance of mandamus was "guided by our reluctance to allow uncontrolled and unnecessary discovery of federal income tax returns").
Once an objection to the production of federal income tax returns is asserted, unlike the production of other financial records, the party seeking discovery of the tax returns bears the burden of demonstrating relevance and materiality. See In re Beeson, 378 S.W.3d 8, 12 (Tex. App.—Houston [1st Dist.] 2011, orig. proceeding) (citing Hall, 907 S.W.2d at 494-95; Ramirez, 824 S.W.2d at 559); see also El Centro del Barrio, Inc. v. Barlow, 894 S.W.2d 775, 779 (Tex. App.—San Antonio 1994, orig. proceeding) (citing Maresca, 362 S.W.2d at 300). Moreover, federal income tax returns are not material if the same information can be obtained from another source. See Barlow, 894 S.W.2d at 780; see also Chamberlain v. Cherry, 818 S.W.2d 201, 206 (Tex. App.—Amarillo 1991, orig. proceeding). This limitation requires the requesting party to show that the relevant information sought through the returns cannot be obtained from another source. See Barlow, 894 S.W.2d at 780 (citing Kern v. Gleason, 840 S.W.2d 730, 738 (Tex. App.—Amarillo 1992, no writ)); Wal- Mart Stores, Inc. v. Alexander, 868 S.W.2d 322, 331 (Tex. 1993) (Gonzalez, J., concurring) ("[T]rial courts should not allow discovery of private financial records, such as tax returns, when there are other adequate methods to ascertain net worth . . . ."). Thus, to carry its burden, Allen Academy had to show that the tax returns it seeks are relevant and would not duplicate information already provided or available through other, less-intrusive means. See Alexander, 868 S.W.2d at 331; Ramirez, 824 S.W.2d at 559; Chamberlain, 818 S.W.2d at 207.
At the hearing on Allen Academy's motion for reconsideration, the trial court asked the following questions of Allen Academy's counsel:
THE COURT: Well, let me just stop you right there. I'm going to anticipate your argument. But do you have the capability of deposing someone and asking them what was your adjusted gross income in this year and what was your—you have that right?
[Allen Academy's Counsel]: Are you saying just in general?
THE COURT: Yeah.
[Allen Academy's Counsel]: I think under the Supreme Court's case, it says if it's relevant and material, you certainly do.
THE COURT: Well, you're telling me that the only way you can get it is through the production of tax returns. I'm asking is there another way for you to get it?
[Allen Academy's Counsel]: I can only get it off of those returns and through those parties. Are you suggesting that I go to Mr. Bullin and ask him those questions?
THE COURT: I'm just asking, is that one way to get it?
[Allen Academy's Counsel]: Well, I think I'm entitled to see the document to test whether it's true or not.
THE COURT: I didn't ask you that.
[Allen Academy's Counsel]: Let's put it this way: That party is the only source for that information.
THE COURT: Okay. But what I'm trying to get at, are there more than one ways [sic] to get that information from that party without the tax returns?
[Allen Academy's Counsel]: Okay. I would suggest no. I guess I can always subpoena the records from the Service, the Internal Revenue Service. But my anticipation is that we see a motion to quash and we would be arguing the same point again. But to answer your question: They are the source and I think I have to have it.
We disagree with counsel for Allen Academy regarding the inability to procure Bullin's AGI and TI from sources other than Bullin's tax returns. Such information could be obtained by deposing Bullin, propounding interrogatories or requests for admissions, or the use of other discovery means. Furthermore, Allen Academy did not express during the hearing that it had attempted or was unsuccessful in obtaining the desired information through discovery methods other than the production of the tax returns.
In a similar case involving the production of federal income tax returns, the Eastland Court of Appeals noted the following:
The law is clear that income tax returns are not discoverable without a preliminary showing that the information sought from the returns is not available from other sources. The requirement that Duke must show that the desired information is not available from other source is not onerous. If he has been unsuccessful in obtaining the desired information through other discovery methods, he can easily convey this information to the trial court. If Duke has not attempted to obtain the information from other sources, his request for relators' tax returns is premature. Furthermore, the production of the tax returns for an in camera inspection will not apprise the trial court that the information sought from the tax returns is not available from other sources.
We conclude that the trial court abused its discretion by requiring relators to produce their tax returns without a showing by Duke that the information cannot be obtained from other sources. Our ruling is based solely on the record before us. We express no opinion regarding whether, after additional discovery, relators' tax returns could be shown to be material.
In re Miller, No. 11-07-00310-CV, 2008 Tex. App. LEXIS 510, at **6-7 (Tex. App.—Eastland Jan. 24, 2008, orig. proceeding) (mem. op.) (emphasis in original).
We do not believe that merely stating a belief that the information cannot be obtained elsewhere is enough to satisfy Allen Academy's burden of demonstrating that production of Bullin's federal income tax returns is relevant and material. See Alexander, 868 S.W.2d at 331; Ramirez, 824 S.W.2d at 559; Chamberlain, 818 S.W.2d at 207; see also In re Beeson, 378 S.W.3d at 12 ; In re Sullivan, 214 S.W.3d 622, 624-25 (Tex. App.—Austin 2006, orig. proceeding); In re Doctors' Hosp. of Laredo, Ltd. P'ship, 2 S.W.3d 504, 507-08 (Tex. App.—San Antonio 1999, orig. proceeding) (Hardberger, C.J., concurring); Barlow, 894 S.W.2d at 779. Therefore, assuming the relevance of Bullin's tax returns, we conclude that the trial court abused its discretion by requiring relators to produce Bullin's tax returns without an adequate showing that Allen Academy cannot obtain the desired information from other sources. See Hall, 907 S.W.2d at 494; Alexander, 868 S.W.2d at 331; Walker, 827 S.W.2d at 839-40; Ramirez, 824 S.W.2d at 559; Maresca, 362 S.W.2d at 301; Chamberlain, 818 S.W.2d at 207; see also Miller, 2008 Tex. App. LEXIS 510, at **6-7. And like the Miller proceeding, our ruling is based on the record before us; we express no opinion as to whether, after additional discovery, Bullin's tax returns could be shown to be material or relevant. See, e.g., Miller, 2008 Tex. App. LEXIS 510, at *7.
Though it involves a dispute regarding production of federal income tax returns for a net worth determination, the following passages in the Beeson proceeding are particularly noteworthy:
This Court has held that if there are other adequate methods to ascertain net worth, the trial court should not allow discovery of the tax returns. The Trust has not alleged, much less established, that the net worth information it purportedly seeks from Beeson's tax returns has not been produced in other forms and cannot be discovered through other forms of discovery. Moreover, while we have doubts that a desire for pre-judgment discovery to determine whether a defendant has sufficient resources to satisfy a judgment could ever satisfy the relevance threshold for the discovery of tax returns, this argument suffers from the same materiality flaw as the Trust's other arguments because the Trust has not alleged or demonstrated that information cannot be gleaned elsewhere.
In sum, a party's distrust, without more, is not sufficient to support compelling the production of tax returns containing information already provided or available in other forms. Thus, assuming the relevance of Beeson's tax returns, we hold that the returns are not material because the Trust has not carried its burden of demonstrating that the information it seeks has not already been provided in different form or that it is not available through less intrusive means.
In Sullivan, the Austin Court of Appeals mentioned:
Federal income tax returns are not material if the same information can be obtained from another source. 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. 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.
We conditionally grant relators' petition for writ of mandamus and direct the trial court to vacate its order requiring relators to produce Bullin's personal income tax returns. The writ will issue only if the court fails to comply.
Justice Before Chief Justice Gray, Justice Davis, and Justice Scoggins
Opinion delivered and filed March 10, 2016
In re Beeson, 378 S.W.3d 8, 14-15 (Tex. App.—Houston [1st Dist.] 2011, orig. proceeding) (internal citations & quotations omitted).
In re Sullivan, 214 S.W.3d 622, 624-25 (Tex. App.—Austin 2006, orig. proceeding). Similar to Sullivan, Allen Academy has not adequately explained why interrogatories, depositions, or other discovery devices could not obtain the desired financial information. Instead, Allen Academy merely expressed frustration with Bullin's responses to its initial request for production.