HPT CW Properties Trust v. Township of Mount Laurel

                     NOT FOR PUBLICATION WITHOUT APPROVAL OF
                       THE TAX COURT COMMITTEE ON OPINIONS

                                 TAX COURT OF NEW JERSEY


Patrick DeAlmeida                                                            R.J. Hughes Justice Complex
 Presiding Judge                                                                    P.O. Box 975
                                                                           Trenton, New Jersey 08625-0975
                                                                         (609) 292-8108 Fax: (609) 984-0805




                                         October 27, 2011




Peter L. Davidson, Esq.
The Davidson Legal Group, LLC
154 South Livingston Avenue, Suite 207
Livingston, New Jersey 07039

Duncan M. Prime, Esq.
Timothy M. Prime, LLC
307 Fellowship Road, Suite 207
Mount Laurel, New Jersey 08054


                       Re:     HPT CW Properties Trust v. Township of Mount Laurel
                               Docket No. 003351-2010

Dear counsel:

         This letter constitutes the court’s opinion with respect to defendant’s motion pursuant to

R. 4:18-1 for an Order compelling the production of documents. For the reasons explained more

fully below, defendant’s motion is denied.

*
                                        I. Findings of Fact

       This letter opinion sets forth the court’s findings of fact and conclusions of law on

defendant’s motion. R. 1:6-2(f). The following findings of fact are based on the certifications

and exhibits submitted by the parties on the motion. R. 1:6-2(d).

       Plaintiff HPT CW Properties Trust is the owner of income-producing real property

located in defendant Mount Laurel Township. Plaintiff operates a limited service hotel on the

property.

       On March 18, 2010, plaintiff filed a Complaint in this court challenging the assessment

on the property for tax year 2010. During the course of discovery plaintiff produced income and

expense statements relating to the hotel operation for the three years preceding the tax year in

question.

       Subsequent to the production of that information, defendant, on September 2, 2010,

requested pursuant to R. 4:18 that plaintiff produce its 2008 and 2009 “IRS 1040 and the entirety

of Schedules A through D.” The request was repeated in a December 15, 2010 letter to plaintiff.

       On December 16, 2010, plaintiff objected to the production of the tax returns requested

by defendant. Plaintiff argued that it had produced detailed income and expense statements

associated with the subject property and that production of plaintiff’s tax returns was not

warranted absent a demonstration by defendant of a compelling need for those documents.

       On September 6, 2011, defendant reiterated its demand for the tax returns, arguing that

“[i]n reviewing the reported revenues and expenses over the years under appeal at this time, it

appears to us that there is a considerable variation in those items. Our appraiser has requested

that we pursue the tax returns in an effort to pursue highest levels of due diligence on his behalf.”

Plaintiff did not comply with defendant’s demand.




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       On September 12, 2011, defendant moved to compel the production of documents from

plaintiff. Although defendant’s discovery demand was limited to plaintiff’s 2008 and 2009

federal income tax returns, defendant’s motion seeks an Order compelling plaintiff to produce

the “2008 through 2010 federal and state tax returns filed by the owner of the property that is the

subject of the within appeal.”

       Plaintiff opposed the motion, arguing that its interest in the confidentiality of its tax

returns outweighs defendant’s purported interest in the production of those documents. In its

opposition, plaintiff does not note that defendant’s motion seeks the production of documents

beyond those requested in its discovery demands. In light of the fact that the court concludes

that defendant has not made a sufficient showing for an Order compelling the production of

plaintiff’s tax returns, the court does not address the significance of the fact that the scope of

defendant’s motion exceeds the scope of its pre-motion discovery demands.

       The parties waived oral argument.

                                     II. Conclusions of Law

       There shall be a substantial liberality in the granting of discovery in New Jersey courts.

Shanley & Fisher, P.C. v. Sisselman, 
215 N.J. Super. 200, 215-216 (App. Div. 1987). A party

may seek production of all information “relevant to the subject matter involved in the pending

action” or which “appears reasonably calculated to lead to the discovery of admissible evidence,”

R. 4:10-2(a); In re: Liquidation of Integrity Ins. Co., 
165 N.J. 75, 82 (2000). This court has the

discretion to determine the scope and manner of permissible discovery between the parties.

Payton v. New Jersey Turnpike Auth., 
148 N.J. 524, 559 (1997).

       The compelled production of a party’s financial information was addressed by our

Supreme Court in the context of a punitive damage claim in Herman v. Sunshine Chemical




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Specialties, Inc., 
133 N.J. 329 (1993). The Court explained that “[t]empering the normal rule

favoring wide discovery of relevant issues is a regard for the defendant’s interest in maintaining

the confidentiality of information about its financial status.” Id. at 343. The Court continued,

“[i]n reviewing requests for discovery of a defendant’s financial condition, a trial court should

balance the plaintiff’s need for the information with the burden on a defendant of disclosure, and

with an appreciation that a defendant’s finances are private matters which are normally jealously

guarded.” Id. at 344 (citations and quotations omitted). “Sensitive balancing by the trial court is

essential to the accommodation of a plaintiff’s need for discovery and the defendant’s right to

maintain the confidentiality of information about its financial condition.” Id. at 344. The Court

noted that “[c]ertified financial statements of a privately-held corporation may also be

discoverable in an appropriate case. Discovery of income tax returns, however, may go too far.”

Id. at 344-345 (citing Lepis v. Lepis, 
83 N.J. 139, 158 (1980)(stating in matrimonial actions

“[c]ourts have recognized that discovery and inspection of income tax returns should only be

permitted for good cause.”).

       Although these precedents apply where a plaintiff seeks production of tax returns from a

defendant in an action for punitive damages, the salient point – that a party’s interest in

protecting against disclosure of its tax returns – applies equally where the party from whom tax

returns are sought is a plaintiff in a local property tax appeal. 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. This is particularly true where, as is the




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case here, plaintiff has produced to the taxing district detailed income and expense information

associated with the generation of income from the subject property.

       The primary issue before the court is whether the equalized assessed value of the subject

property for tax year 2010 accurately reflects the true market value of that property. The income

capitalization approach is the preferred method of determining the fair market value of income-

producing property, such as the property that is the subject of this appeal. Parkway Village

Apartments Co. v. Township of Cranford, 
108 N.J. 266, 270 (1987); Hull Junction Holding

Corp. v. Borough of Princeton, 
16 N.J. Tax 68, 79 (Tax 1996). The income approach to

valuation requires an analysis of the actual and economic income and expenses associated with

the operation of the property.

       Plaintiff produced income and expense reports associated with the subject property for

the three years preceding the tax year at issue. The reports, which were in the motion record, are

comprehensive. Defendant makes no argument that the documents produced by plaintiff are

incomplete or insufficient. The only proffered basis for its demand that plaintiff’s income tax

returns be produced is that the income and expense statements plaintiff produced show a

“considerable variation” in income and expenses over the years.         According to defendant,

examination of plaintiff’s tax returns by defendant’s expert is necessary for “due diligence,” an

apparent reference to the expert’s desire to verify the income and expense information contained

in the documents plaintiff produced. Plaintiff explains the variation noted by defendant as

reflective of a steady decline in revenue attributable to the depressed economy and its impact on

limited service hotels.

       If defendant’s expert detects what he perceives to be a suspect variation in income and

expenses in the statements produced by plaintiff, defendant is free to seek the production of




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backup materials for the figures in those documents and to take the deposition of a person with

knowledge of the income and expenses associated with the property to test the veracity of the

information produced by plaintiff. Nothing in the record suggests that those approaches were

attempted by defendant or that plaintiff would resist those avenues of further inquiry. Nor has

defendant provided an explanation of why plaintiff’s income tax returns would provide any

greater detail regarding the income and expenses associated with the subject property than does

the income and expense statements plaintiff has already produced.            Plaintiff’s interest in

protecting the confidentiality of its tax returns predominates over defendant’s asserted interest in

compelling the production of those documents.

       An Order denying defendant’s motion is enclosed.

                                              Very truly yours,




                                              Patrick DeAlmeida, P.J.T.C.




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