in Re Vaughn Miller and Henry S. Miller Co. ( 2008 )

Opinion filed January 24, 2008

Opinion filed January 24, 2008

                                                                        In The

    Eleventh Court of Appeals

                                                                   __________

                                                          No. 11-07-00310-CV

                                                     __________

                 IN RE VAUGHN MILLER AND HENRY S. MILLER CO.

                                                Original Mandamus Proceeding

                                             M E M O R A N D U M   O P I N I O N

This mandamus proceeding arises from a discovery order compelling production of federal income tax returns for an in camera inspection.  We conditionally grant the writ of mandamus. 

                                                               Background Facts

Real party in interest, Benton Craig Duke, filed suit against relators, Vaughn Miller and Henry S. Miller Co., to recover an alleged debt incurred in connection with the sponsorship of a polo team.  Duke alleged that Vaughn Miller agreed to pay one-half of the team=s expenses in exchange for the players wearing clothing during the tournament indicating that they were sponsored by Henry S. Miller Co.

Duke sent requests for production to relators seeking copies of their 2004, 2005, and 2006 federal tax returns.  Relators lodged the following objection to the discovery requests: AIrrelevant and unlikely to lead to the discovery of admissible evidence.@  Duke subsequently filed a motion to compel production of the tax returns. 

The trial court conducted a brief hearing on the motion to compel on July 19, 2007.  Duke argued that the tax returns were discoverable in light of Vaughn Miller=s statement to Duke that he needed copies of the receipts for the team=s expenses to give them to his accountant. Duke also asserted that the tax returns would be relevant to the extent that they would show the amount, if any, that Henry S. Miller Co. assigned on its tax returns to the expense it incurred with respect to the polo team=s sponsorship.  Relators responded by arguing that the information sought by the request for the tax returns could be obtained from other sources.  Duke did not respond to this argument or otherwise make a showing that the information sought was not available from other sources. 

The trial court initially ruled at the hearing that relators must produce the tax returns directly to Duke.  In response to relators= request, the trial court agreed for the tax returns to be submitted for an in camera review.  The trial court additionally agreed to Duke=s request for an accountant to review the returns to locate the specific information sought by Duke.  Relators subsequently filed this proceeding with a motion for temporary emergency relief. We granted relators= motion for temporary relief, staying production of the tax returns pending our resolution of the petition for mandamus. See Tex. R. App. P. 52.10.

                                                              Standard of Review

Mandamus relief is appropriate only if the trial court abused its discretion or violated a legal duty and if there is no adequate remedy at law, such as an appeal. In re Dana Corp., 138 S.W.3d 298, 301 (Tex. 2004) (orig. proceeding); Walker v. Packer, 827 S.W.2d 833, 839 (Tex. 1992) (orig. proceeding).  A trial court=s ruling that requires production beyond what our procedural rules permit is an abuse of discretion.  In re Dana Corp., 138 S.W.3d at 301.  Mandamus will issue to correct a discovery order when the mandamus record establishes that the order constitutes a clear abuse of discretion and there is no adequate remedy by appeal. In re Colonial Pipeline Co., 968 S.W.2d 938, 941 (Tex. 1998). Mandamus relief may be justified when the appellate court would not be able to cure the trial court=s discovery error, such as when privileged information would be revealed.  Walker, 827 S.W.2d at 843‑44.

                                                  Production of Income Tax Returns

A party=s income tax returns have historically been safeguarded in discovery.  The supreme court outlined these protections in Maresca v. Marks, 362 S.W.2d 299, 301 (Tex. 1962) (orig. proceeding), as follows:  

Subjecting federal income tax returns of our citizens to discovery is sustainable only because the pursuit of justice between litigants outweighs protection of their privacy. But sacrifice of the latter should be kept to the 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.

Income tax returns are subject to discovery to the extent that they are relevant and material to the issues in the lawsuit.  Maresca, 362 S.W.2d at 300; El Centro del Barrio Inc. v. Barow, 894 S.W.2d 775, 779 (Tex. App.CSan Antonio 1994, orig. proceeding).  Ordinarily, a party resisting discovery has the burden of establishing that the requested information is not discoverable.  See El Centro del Barrio, Inc., 894 S.W.2d at 779.  The general rule is not applicable with respect to the production of income tax returns, however, because the party seeking their production bears the burden of showing that the tax returns are relevant and material.  Id.

Texas courts have held that tax returns are not material if the same information can be obtained from other sources.  In re Sullivan, 214 S.W.3d 622, 624-25 (Tex. App.CAustin 2006, orig. proceeding); El Centro del Barrio, Inc., 894 S.W.2d at 779; Chamberlain v. Cherry, 818 S.W.2d 201, 206 (Tex. App.CAmarillo 1991, orig. proceeding).  Accordingly, the party seeking the production of income tax returns must show that the information sought cannot be obtained from some other source, such as interrogatories and depositions.  In re Sullivan, 214 S.W.3d at 625; El Centro del Barrio, Inc., 894 S.W.2d at 780.

                                                                          Issue

Does the trial court abuse its discretion by ordering the production of income tax returns for an in camera inspection without a showing that the information sought from the returns is not available from any other source?

                                                                        Analysis

We initially address Duke=s contention that relators have not presented an issue ripe for mandamus relief. Duke bases this assertion on the fact that relators have only been ordered to produce the tax returns for an in camera inspection.  He contends that relators= privacy interests have not been compromised in this regard because they have not yet been ordered to provide the documents to him.  Duke additionally argues that the trial court might determine that there are no portions of the tax returns that are relevant to the case or that the trial court might schedule another hearing in order to require Duke to establish that the information sought is not available from another source.

We agree with Duke=s premise that an in camera inspection of a privileged document can serve to protect the privileged information contained in the document from disclosure to the opposing party.  Regardless of the protection afforded by a preliminary in camera inspection, relators will incur the burden and expense of having to produce the documents for inspection by the court.  We note in this regard that both parties acknowledged to the trial court that the tax returns for Henry S. Miller Co. are voluminous. 

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 sources 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.

                                                               This Court=s Ruling

Relators Vaughn Miller and Henry S. Miller Co.=s petition for writ of mandamus is conditionally granted. The trial court is directed to rescind its August 27, 2007, order directing relators to produce their 2004, 2005, and 2006 income tax returns for an in camera inspection. In the event this order is not rescinded by February 25, 2008, the writ of mandamus shall issue.

TERRY McCALL

JUSTICE

January 24, 2008

Panel consists of: Wright, C.J., and McCall, J.

Strange, J., not participating.