Tax Analysts Blog

California Needs a Dose of Sunshine

Posted on Mar 5, 2014

Should a state tax authority be required to disclose forms used by its auditors to determine whether a company will be subject to audit? While the California Franchise Tax Board says no, I would strongly argue -- and recently wrote an article about this for State Tax Notes -- that the state is stretching the limits of the California Public Records Act (CPRA) in declining to disclose those forms.

This issue arose after references to two forms were noticed 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.

Practitioners had only heard rumors about the forms’ existence, and the FTB isn’t forthcoming with information about them. Tax Analysts made a request under the CPRA for both forms (which are blank and so don’t contain any taxpayer-specific information). The FTB denied the request, saying the forms contain proprietary information, the form numbers are obsolete, or that disclosure would invade the board’s deliberative process.

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 they should represent its legal positions and established policies.

By not disclosing forms like this, the FTB is enabling its auditors to take inconsistent positions regarding similarly situated taxpayers. If that’s the case, any guidance the FTB puts out on its application of the unitary business principle is meaningless. Revealing the FTB’s working law is important. It ensures the FTB is consistently enforcing the law and is not letting revenue generation drive its audit process.

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