Millie B. Heathman v. United States District Court for the Central District of California,respondent

503 F.2d 1032

• Court: Court of Appeals for the Ninth Circuit
• Decided: August 26, 1974
• Docket: 74-1438
• Status: Published

Opinions

OPINION

DUNIWAY, Circuit Judge:

Petitioners, defendants in the trial court, apply for a writ of mandamus or prohibition directing the district court to vacate its order which requires defendants’ accountants to deliver to the real parties in interest, plaintiffs in the trial court, copies of the income tax returns of Prudential Management Corporation and the San Diego Trust, together with accounting materials prepared for use in making the returns. On March 27, 1974, we stayed the district court’s order. The petition raises issues concerning the scope of civil discovery, the resolution of which is necessary to prevent the potential irreparable loss of defendants’ claimed rights. We therefore consider the merits of defendants’ claims. Pacific Car and Foundry Co. v. Pence, 9 Cir., 1968, 403 F.2d 949, 951-953; Harper and Row Publishers, Inc. v. Decker, 7 Cir., 1970, 423 F.2d 487, 492.

The contested discovery order was issued in the following context: Plaintiffs, California Professional Bureau and others, brought suit in the district court under the federal and state securities laws against petitioners and other defendants alleging the sale of securities- and real estate by improper, fraudulent and unlawful means. The complaint alleged that the various defendants were linked in an entangled network of individuals, corporations and other legal entities. In an effort to determine the nature of the interrelationship among the various defendants, plaintiffs deposed a number of the parties to the lawsuit. In the course of this discovery, it was determined that many documents that plaintiffs claimed to be relevant had been lost, destroyed or were otherwise unavailable. Plaintiffs then deposed the accounting firm of Russ and Russ and served a subpoena duces tecum upon its custodian of records. During the course of the deposition, the custodian began to turn over for inspection and copying the various documents enumerated in the subpoena which pertained to the formation and administration of the Prudential Management Corporation and the San Diego Trust. Defendant Heathman is the settlor and trustee of the San Diego Trust. Defendants objected to the disclosure of the federal and state tax returns and accounting materials related to them, of Prudential Management Corporation and of the San Diego Trust claiming that such documents were privileged. The deposition was adjourned and plaintiffs moved in the district court for an order compelling production of these documents. The district court granted that discovery motion and issued the order from which defendants seek relief.

Defendants’ principal claim is based upon their construction of state and federal laws which, they contend, make tax returns privileged documents. Defendants bear the burden of showing that the privilege exists and applies. 8 Wright & Miller, Federal Practice & Procedure: Civil, § 2016 at 126. If they cannot do so, they then bear the more formidable burden of showing that the district court’s order was an abuse of discretion. Baker v. F & F Investment, 2 Cir., 1972, 470 F.2d 778, 781.

APPLICABLE LAW

Defendants argue that under Baird v. Koerner, 9 Cir., 1960, 279 F.2d 623, we are compelled to apply California law which, it is asserted, recognizes that taxpayers’ copies of their tax returns are privileged. They rely upon Webb v. Standard Oil Co., 1957, 49 Cal.2d 509, 319 P.2d 621.

In Baird, which was a federal case, not a diversity case, we held that because the relationship of attorney and client was created and controlled by state law “the nature and extent of the privilege created ... by the attorney-client relationship” is to be determined by state law. Id. 279 F.2d at 632. Because Baird involved a civil inquiry into the identity of a person who might have been liable to pay federal taxes, that is, a federal question, the case has been cited for the broad proposition that in all cases in federal court the existence and scope of all privileges is to be determined by reference to state law. Baird lays down no such rule. By its own reasoning, it is limited to the attorney-client privilege. Baird could not, on its facts, and does not, deal with all privileges. Moreover, we held in Baird that in considering the scope of the attorney-client privilege, “each case must stand on its own facts, with the courts balancing the public policy considerations involved.” Id. at 632.

In the fourteen year's since the announcement of Baird, we have had occasion only once to rely upon it and then in a similar attorney-client situation. See United States v. Cromer, 9 Cir., 1973, 483 F.2d 99, 101-102.¹

As the commentators have documented, in federal question cases the clear weight of authority and logic supports reference to federal law on the issue of the existence and scope of an asserted privilege. 2B Barron & Holtzoff, Federal Practice and Procedure (Wright ed. 1961), § 967 at 243; 4 Moore’s Federal Practice, § 26.60 [7] at 26-255; 8 Wright & Miller, Federal Practice & Procedure, Civil § 2016 at 123; Proposed Federal Rules of Evidence, Rules 501-02. In essence, what Baird did was to import into federal law the. state law of attorney-client privilege. This case differs from Baird. It does not involve a privilege long and universally upheld at common law, as Baird does.

Reference to federal law is especially appropriate where, as here, the documents in question were prepared pursuant to federal law. We hold that the question of the existence and scope of the taxpayer’s privilege, if any, to withhold tax return information is to be determined by federal law for the purposes of this federal question ease.² Cf. Falsone v. United States, 5 Cir., 1953, 205 F.2d 734 (claim of accountant-client privilege). We express no opinion as to other claims of privilege.

FEDERAL LAW

Defendants alternatively contend that their copies of tax returns and documents used in preparing them are privileged under federal law. They argue that 26 U.S.C. § 6103(a)(2), which restricts the publicity of tax returns and the disclosure of information as to persons filing income tax returns, impliedly makes their copies of tax returns privileged.

While it is true that some lower courts have held that § 6103(a)(2), along with 26 U.S.C. § 7213(a), reflects a public policy against disclosure of tax returns, see Federal Sav. & Loan Insur. Corp. v. Krueger, N.D.Ill., 1972, 55 F.R.D. 512, 514, defendants cite no case (and we have found none) which has held that this section makes their copies of tax returns or the underlying data privileged. Indeed, though the circuit court authority on this issue is scant, see Fulenwider v. Wheeler, 5 Cir., 1958, 262 F.2d 97, 99; June v. George C. Peterson Co., 7 Cir., 1946, 155 F.2d 963, 967, the district courts have held in numerous cases that tax returns are subject to discovery in appropriate circumstances. See 4 Moore’s Federal Practice, § 26.-61 [5.-2] at 26-294: 8 Wright & Miller, Federal Practice and Procedure, Civil § 2019 at 162-4. We hold that 26 U.S.C. § 6103(a)(2) only restricts the dissemination of tax returns by the government and that this section does not otherwise make copies of tax returns privileged.

Defendants also argue that the discovery of their copies of their tax returns violates their right of privacy and their right to be free from unreasonable searches and seizures. Neither of these contentions is supported by any authority. There is no merit in these constitutional claims. See Couch v. United States, 1973, 409 U.S. 322, 93 S.Ct. 611, 34 L.Ed.2d 548.

Finally, defendants argue that the tax returns are not relevant to the instant litigation and that they should therefore have been protected from discovery. “Relevance” on discovery has a very broad meaning, Rule 26(b)(1), F. R.Civ.P., and the question is for the district court. Only in the most unusual case’might we consider reviewing a decision on this question by means of an extraordinary writ. This is not such a case.

The stay of the district court’s order is vacated and the petition for a writ of mandamus or prohibition is denied.

1 . All but two of the eight opinions of our sister circuits which have relied upon Baird have also involved the attorney-client privilege. See Hyde Construction Co. v. Koeliring Co., 5 Cir., 1972, 455 F.2d 337, 340 (diversity case); United States v. Woodall, 5 Cir., 1970, 438 F.2d 1317 (federal criminal case); American Can Co. v. Citrus Feed Co., 5 Cir., 1971, 436 F.2d 1125 (diversity case — question was disqualification of attorney, not privilege); Love v. United States, 8 Cir., 1967, 386 F.2d 260, 265 (federal criminal case); Republic Gear Co. v. Borg-Warner Corp., 2 Cir., 1967, 381 F.2d 551, 556 (diversity case); Tillotson v. Boughner, 7 Cir., 1965, 350 F.2d 663, 665-666 (federal tax investigation); NLRB v. Harvey, 4 Cir., 1965, 349 F.2d 900 (federal case); Krizak v. W. C. Brooks & Sons, Inc., 4 Cir., 1963, 320 F.2d 37 (diversity case — confidentiality of accident reports to state).

2 . Defendants have not suggested that state tax returns be treated differently from federal returns nor have they offered any interest that the state may have in treating state tax returns differently from federal tax returns in this case. In fact, in the case cited to us by petitioners, Webb v. Standard Oil Co., supra, Chief Justice Gibson pointed out that under certain circumstances some of the information contained in state and federal tax forms is identical. In light of this overlap of. information and the federal nature of this litigation, we see no reason to differentiate between state and federal tax returns.