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Tax Analysts Files Suit to Compel Disclosure of California Tax Audit Worksheets

Posted on June 12, 2014 by David Sawyer

Tax Analysts on June 11 filed an initial complaint in the California Superior Court for Los Angeles County seeking to compel the Franchise Tax Board to comply with the California Public Records Act (CPRA) by disclosing two forms that the FTB uses during audit.

These two forms are referenced in an FTB multistate audit technique manual and may shed light on what the deciding factors are when auditors determine whether a company will be subject to a unitary audit. Together, they may be 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.

The first, Form 6861, is labeled a "Relativity Sheet" and is used to determine the amount of income or factor adjustments necessary to generate a specific tax change. The form may also be used to estimate the materiality of potential audit adjustments.

Form 6685, "Test Check for Combination," is the second requested form. It is used to make a test check of the tax effect of requiring affiliated companies to file a combined corporate income tax return.

On February 12 Tax Analysts requested blank copies of these two audit forms under the CPRA. It asserted in its complaint that because the documents are both records to which no exemption successfully applies, the organization "has a clear, legal and present right to these documents, and the FTB has a legal duty and present ability to provide them."

The FTB on February 27 rejected the open records request, claiming that the forms are exempt from disclosure under Government Code section 6255 because they contain "coding and calculations (proprietary) that are internal to [its] audit process."

Tax Analysts' complaint rejects the FTB's claim of exemption from disclosure under the CPRA and asks the court for both a declaration of its right to receive the documents and the issuance of a writ of mandate to force the FTB to allow the organization to "inspect or receive copies of the public records requested."

Though the organization intervened as an appellant in a Kentucky transparency case, Sommer v. Finance and Administration Cabinet, with the filing of its complaint in Tax Analysts v. Franchise Tax Board of the State of California, Tax Analysts is making its first independent judicial foray into pursuing transparency in state tax administration.

"State and local tax transparency is an emerging and important issue. Tax Analysts has taken the lead -- and successfully so -- in promoting transparency in tax administration at the federal level. We have now taken this challenge to the states," said Chris Bergin, president and publisher of Tax Analysts. "We intend to continue," he added. "We urge others to join us."

Marty Dakessian of Reed Smith LLP, an attorney representing Tax Analysts in the case, said, "Reed Smith is proud to be representing Tax Analysts . . . in this important case. The California FTB is unlawfully withholding documents, which prevents our client from fulfilling its important role as a member of the press."

"Transparency in state taxation has been important to our clients and to our firm," said Kyle Sollie, partner at Reed Smith LLP and an attorney also representing Tax Analysts in the case. "FTB says that they too are committed to transparency. We are putting that to the test with this action."

When asked for comment, FTB officials replied that the board does not comment on pending litigation.