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March 5, 2014
News Analysis: Can a State Decline to Disclose Tax Forms? California Says Yes
by Cara Griffith

Full Text Published by Tax Analysts®

Two little-known California Franchise Tax Board forms could be among the deciding factors when auditors determine whether a company will be subject to a unitary audit, yet taxpayers and practitioners have heard only rumors about the forms' existence, and the FTB isn't forthcoming with information about them. In fact, it has declined to disclose the forms (which are blank and without any taxpayer-specific information), saying they contain proprietary information, are obsolete, or that disclosure would invade the board's deliberative process.

References to the forms are found in an FTB multistate audit technique manual One of the forms, Form 6861, "Relativity Sheet," is used to determine the amount of income or factor adjustments necessary to generate a specific tax change. The other, Form 6685, "Test Check for Combination," is used to make a test check of the tax effect of requiring affiliated companies to file a combined return. Given their descriptions, the forms probably are worksheets used by auditors to determine whether the revenue benefit of requiring companies to file a combined return is worth the effort of a unitary audit.

If the FTB can withhold those types of forms from disclosure, what's next? Assuming that forms 6861 and 6685 are worksheets used by auditors, it wouldn't be a stretch for the FTB to argue that other worksheets should be withheld from taxpayers. Taken to an extreme, it could be argued that Form 100, "California Corporation Franchise or Income Tax Return," is a worksheet that contains proprietary calculations.

While the FTB won't withhold Form 100 or any form that is voluntarily filled out by taxpayers, the calculations in forms 6861 and 6685 are no more proprietary than the calculations in Form 100. The FTB simply doesn't want taxpayers to know the result of the calculations in the forms, yet those calculations should represent its legal positions and established policies. Disclosure of all forms should be required by law. Doing so will not inhibit the functioning of the FTB -- and might even improve it by providing meaningful guidance to taxpayers.

Deliberative Process

On February 12 Tax Analysts requested blank copies of forms 6861 and 6685 under the California Public Records Act (CPRA). According to FTB Senior Disclosure Specialist Darrine Distefano, the FTB denied the request on the grounds that the forms are exempt under Government Code section 6255 because they contain "coding and calculations (proprietary) that are internal to [its] audit process." Distefano also said that although the forms are listed in the audit manual, the form numbers are obsolete.

The FTB is likely relying on both the balancing test in section 6255 and a deliberative process privilege. The balancing test allows public agencies to withhold records when, based on the facts of the case, "the public interest served by nondisclosure clearly outweighs the public interest served by disclosure of the record." The section is applied case by case, and the burden of proof falls on "the proponent of nondisclosure to demonstrate a clear overbalance on the side of confidentiality."1 While reference is often made to deliberative process when speaking about section 6255, that exemption is not codified in statute. The deliberative process privilege is a common law doctrine that is said to support the balancing test in some circumstances.

The California Supreme Court first addressed the deliberative process privilege in Times Mirror Co. v. Superior Court, 53 Cal. 3d 1325 (1991). The court held that the governor was not required to disclose his daily, weekly, and monthly appointment calendars and schedules because it would be an intrusion into his "deliberative process." Justice Armand Arabian, writing for the majority, said that "disclosing the identity of persons with whom the Governor has met and consulted is the functional equivalent of revealing the substance or direction of the Governor's judgment and mental processes; such information would indicate which interests or individuals he deemed to be of significance with respect to critical issues of the moment."

Deliberative process exemptions are common in public records laws, but they typically extend to the highest levels of an agency and for records reflecting deliberations on how an agency establishes broad policy objectives. California, beginning with Times Mirror, has taken the idea of deliberative process to an extreme. California citizens should know -- and care about -- the interests and individuals the governor deems significant. The president of the United States discloses his calendar. A state governor should expect to be held to the same standard. Justice Joyce Kennard, dissenting in Times Mirror, rightly said the majority expanded "the deliberative process privilege well beyond its proper ambit and disregards the wisdom of the federal courts and legal commentators."

Times Mirror left California with a broad exception to disclosure, and the FTB seems willing to use it. However, there is a limit on what records can and should be protected as deliberative process. While state case law on the CPRA is limited, the CPRA was modeled after the federal Freedom of Information Act; therefore, federal cases addressing the deliberative process under FOIA are instructive.

For purposes of FOIA, federal courts have required that before deliberative process can be invoked, the communication must be pre-decisional and deliberative. While those terms have been debated, federal case law is clear that "statements of an agency's legal position" are not pre-decisional and must be disclosed.2 In a case addressing whether the IRS must disclose field service advice, the U.S. Court of Appeals for the D.C. Circuit said that although field service advice may precede a field office's decision in a particular taxpayer's case, it does not precede the IRS's decision regarding its legal position.

Federal courts have concluded that if records discuss established policies and decisions, they must be disclosed, even if they contain specific fact patterns.3 That includes orders and interpretations an agency might apply to specific cases or records that are "routinely used by agency staff as guidance."4

A California court of appeal seemed to understand that concept, although not specifically as applied to section 6255. In State Board of Equalization v. Superior Court, 10 Cal. App. 4th 1177 (1992) (Associated Sales Tax Consultant), the court held that the BOE was required to disclose documents regarding its interpretation and application of two sales and use tax regulations. The court said any burden placed on the board was outweighed by "the manifest public interest in the avoidance of secret law and a correlative interest in the disclosure of the agency's working law."

Secret Law

California courts' combination of the balancing test and the deliberative process privilege has provided the FTB with the ability to create secret law. The FTB is using the broad application of section 6255 to avoid disclosing documents that could provide insight and guidance regarding when it will subject companies to a unitary audit. Disclosure of the forms would in no way discourage candid discussion within the agency or undermine its ability to perform its functions. It is highly unlikely that there is any candid discussion of policy in the forms; rather, they are likely an application of the FTB's established policy.

As the court in Associated Sales Tax Consultants pointed out, the "revelation of an agency's working law promotes its accountability to the public and the consistent, predictable and nonarbitrary application and enforcement of the law." The FTB's working law as it relates to the application of the unitary business principle is contained not only in statutes and case law, but also in the opinions of counsel and auditors, and in audit staff training materials. There simply is no place for secret law in a voluntary system of taxation.


 Michaelis, Montanari & Johnson v. Superior Court, 38 Cal. 4th 1065, 1071 (Cal. 2006).

2 Tax Analysts v. IRS, 117 F.3d 607 (D.C. Cir. 1997).

3 Coastal States Gas Corp. v. Dep't of Energy, 617 F.2d 854 (D.C. Cir. 1980).

4 Id.Sterling Drug Inc. v. FTC, 450 F.2d 698, 708 (D.C. Cir. 1971).

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