Tax Court to Municipality: Enough is Enough!

For the second time in just over one month, a Tax Court Judge has denied a request of a Township to compel production of documents in a tax appeal.  Last month the Tax Court admonished defense counsel for seeking discovery that went well beyond the standard discovery questions permitted by the Court.  More recently, in HPT CW Properties Trust v. Township of Mt. Laurel, Tax Court, Docket No. 003351-2010, (Oct. 27, 2011), the Tax Court denied the request of the Township of Mt. Laurel (“Township”) to compel the appealing taxpayer to produce tax returns for the two years preceding the appeal.

In opposing the Township’s motion, the taxpayer argued that it had already produced income and expense reports relating to the property for the three years preceding the challenged tax year.  Moreover, it argued that its interest in the confidentiality of its tax returns outweighs Township’s purported interest in the production of the returns.  The Township alleged that the tax returns were necessary to explain variations in the income and expense information provided by the taxpayer.

The Court found that the taxpayer had provided “comprehensive” income and expense information and that the Township did not make any argument that this information was incomplete or insufficient.  The Court went on to find that if the Township perceived there to be a suspect variation in the income and expense reports, then it was free to seek the production of backup materials and even take the deposition of a person with knowledge of the reports.  The Township did neither.

The Court held that the taxpayer’s interest in protecting the confidentiality of its tax returns predominates over the Township’s purported interest in compelling the production of those documents.  The Court stated:  “The mere fact that plaintiff initiated this action to challenge the assessment on a parcel of real property that it owns does not mean that plaintiff has effectively waived its interest in protecting from disclosure its tax returns, which contain financial information regarding all of plaintiff’s income, losses and deductions, regardless of whether related to the subject property.”