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April 30, 2015
California FTB Settles Public Records Lawsuit
by Brian Bardwell

Full Text Published by Tax Analysts®

Tax Analysts has won its second state-level freedom of information case in less than a year, as the California Franchise Tax Board has surrendered a set of records that it sought to keep secret despite a freedom of information request and subsequent lawsuit.

The lawsuit, Tax Analysts v. Franchise Tax Board, was filed after the FTB refused to comply with a request under the state Public Records Act for access to a pair of worksheets that the agency referred to in its multistate audit technique manual, which is published on its website.

The manual said that Form 6861, known as a "Relativity Sheet," was used to estimate the materiality of audit adjustments and to determine the income and factor adjustments needed to generate specific tax changes. The manual said that Form 6685, the "Test Check for Combination," evaluated the tax effect of requiring a combined return.

The FTB denied Tax Analysts' February 2014 request for the records, saying the records were "proprietary." However, the board was unable to identify any law that vests the government with a proprietary interest in its records, and it repeatedly changed its rationale for keeping the records secret when the denial was questioned.

Represented by Cornish Hitchcock of Hitchcock Law Firm PLLC and several attorneys from Reed Smith LLP, Tax Analysts filed suit four months later. The FTB agreed last month to a settlement in which it turned over the records with minor redactions and paid $33,000 in attorney fees.

The agency has since provided both decades-old and more recent revisions of both Form 6685 and Form 6861.

The case was Tax Analysts' second foray into transparency litigation at the state level. Last year, the organization was on the winning side of a lawsuit it joined as an intervenor to compel the release of administrative rulings in Kentucky.

Baby Steps Toward True Transparency

The FTB refused to discuss the case. Tax Analysts President Chris Bergin said that the settlement provides a fair and favorable outcome to this case but that the organization "will keep watching."

"This organization believes in transparency and not putting taxpayers at a disadvantage by being nontransparent. It's not fair, and we will fight for fairness wherever we see unfairness," Bergin said. "I consider this a good start but only a start. I think California has more to go on transparency, and Tax Analysts is considering taking similar actions against other states that have secret information that they use to make assessments against individual and corporate taxpayers."

Marty Dakessian of Reed Smith agreed that being forced to turn over the records and cover a plaintiff's attorney fees is a first step on the road to a culture of openness at the FTB, but he cautioned against expecting a sudden turnaround.

He said California needed to be repeatedly forced to pay "significant" fees in other types of cases before it seemed to factor them into its litigation risk, and he said he expects the same to happen with disclosure cases.

"It's going to take a few more experiences like this for FTB to really begin to understand how important this is to taxpayers, how important this is to the press, and that the consequences are significant," Dakessian said. "Some memo will float down to somebody in the disclosure office, saying 'Hey, this is the third time we've been hit with attorney fees. This is the third time we've lost a case, and so we really ought to be doing a better job on the front end of identifying whether and to what extent we can disclose these documents.'"

For now, though, Dakessian seems to be correct that the agency hasn't yet made a commitment to openness.

As for the documents it agreed to disclose, the FTB has also taken actions that will make it harder for the public to discover that at least one of them even exists.

The page that used to host the audit manual that disclosed the existence of Form 6685 on page 71 has since been taken down, and the FTB now has only a revised manual without that reference.

That could simply mean that the agency is no longer using the form, but the worksheet provided to Tax Analysts indicates that it was revised six months after the FTB purged any mention of it from the manual and its entire website.

Meanwhile, the agency is still claiming a "proprietary" interest not only in its records but also in answers to questions that avoid touching on matters related to any specific taxpayers.

While some agencies begin with an assumption that the public has the right to information about the government's activities unless it is exempted from disclosure, FTB spokesman Chris Smith argues that even generic information about whether or not the government is considering revoking any health plan's nonprofit status is a secret because "there is no authority that permits FTB to disclose that information."

And even a new program that the FTB promoted as a mechanism to increase transparency was treated as secret, with the agency refusing to discuss what kind of questions had been submitted to the "Ask a Legal Expert" program.

As for the records themselves, Hitchcock said that after seeing them, the whole controversy amounted to a "tempest in a teapot," with the FTB fighting to hide records that were neither controversial nor sensitive.

"What's disappointing is that the FTB fought so hard to avoid release of these forms, even in redacted format," Hitchcock said. "We settled to avoid a lengthy battle over the issue, but it's hard to think the state of California would lose much tax revenue if these forms get published."

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