NORTHERN DISTRICT OF CALIFORNIA
DONALD O. GRACE, No. 01-11078
Memorandum re Tax Returns
In this Chapter 7 case, creditor Robert Prior and the trustee seek to examine certain income tax
returns of Megann Grace Sanchez, daughter of debtor Donald Grace. The trustee alleges that Grace
gave Sanchez funds in 1999 which were used to purchase property in Willow Creek. Sanchez' tax
returns could contain evidence either substantiating Grace's version of the facts or indicating that his
payments are avoidable as preferences or fraudulent conveyances. Sanchez argues that her tax returns
are absolutely privileged.
There is no federal privilege protecting tax returns. California is one of a few states in which tax
returns are privileged. Sav-On Drug Stores v. Superior Court
(1975) 15 Cal.3d 1, 6. However, the
privilege is only applicable in federal court to cases based on California law. Lewis v. United States
517 F.2d 236, 237 (9th
Cir. 1975). The privilege is not applicable here because the information sought
is pertinent primarily to federal bankruptcy issues.
Nonetheless, a federal court should still consider a state privilege in fashioning a remedy. 12
Fed.Proc.L.Ed., Evidence § 33:274. The court will accordingly order the production of the requested
tax returns within ten days after entry of an appropriate order, but will allow Sanchez to redact
therefrom any information not directly or indirectly related to payments from Grace or to the Willow
Creek property. Sanchez is warned that overzealous use of the power to redact will result in denial of
the privilege altogether.
Counsel for Prior shall submit an appropriate form of order.
Dated: October 4, 2001 ___________________________