Using the California Public Records Act to obtain tax audit files.

Introduction

One of the most important weapons in a tax representative's arsenal is the right to inspect and receive a copy of a client's file that has been compiled by the California Franchise Tax Board (in respect of the income and franchise tax) or the California State Board of Equalization (in respect of the business tax) during an audit of the taxpayer. These files provide valuable insight into how the audit was conducted, and reveal information not normally communicated to the taxpayer during the usual course of the audit.

This article reviews California law regarding the disclosure of documents and explores how taxpayers and their representatives may use these laws to obtain access to a taxpayer's files.(l) Although the laws concerning public access to records apply equally to all California state tax agencies, this article focuses upon obtaining taxpayer records from the FTB under the California Public Records Act (Gov't Code [section] 6250, et seq.). The Information Practices Act (Civ. Code [sections] 1798, et seq.) is also briefly mentioned. Finally, the article explores possible responses by the FTB to document requests, as well as a taxpayer's recourse where requested documents are improperly withheld.

Information Practices Act

The Information Practices Act (IPA) is one vehicle by which a taxpayer may obtain documents. The IPA permits a person to inspect or obtain copies of any personal information, with certain exceptions, maintained by a state agency.(2) The IPA defines "personal information" as "any information that is maintained by an agency that identifies or describes an individual,"(3) which is elsewhere defined to mean "a natural person."(4) Thus, the IPA is applicable only in those tax cases involving individual taxpayers rather than corporate taxpayers.

California Public Records Act

The principal means by which a corporate taxpayer may receive access to its files is through the California Public Records Act (CPRA). The California Legislature enacted the CPRA to balance the competing interests of an individual's right to privacy with every person's fundamental right to access information "concerning the conduct of the people's business."(5) The enactment of the CPRA reflected a "legislative impatience with secrecy in government."(6) As the California Supreme Court declared:

Implicit in the democratic process is the notion that

government should be accountable for its actions. In order

to verify accountability, individuals

must have access to

government files. Such

access permits checks

against the arbitrary

exercise of official power

and secrecy in the political

process.(7)

Like its federal counterpart, the Freedom of Information Act (FOIA)(8) upon which it is modeled, the CPRA "expresses a policy generally favoring disclosure of public records."(9) Because of the similarities between the provisions of FOIA and the CPRA, California courts may look to decisions interpreting FOIA in interpreting the CPRA.(l0)

Provisions of the CPRA

The CPRA states that "[p]ublic records are open to inspection at all times during the office hours of the state or local agency and every person has a right to inspect any public record," with certain exceptions.(11) "Public records" are defined to include any writing prepared or maintained by a state or local agency that relates "to the conduct of the public's business."(12) In addition to the right to inspect public records, the CPRA requires state agencies to make available copies of public records upon request.(13)

The CPRA provides little guidance regarding the form a request must take, and requires only that the request "reasonably describe an identifiable record."(14) Clearly, a record request does not have to contain "a complete description [of a record] down to the last detail of [its] title and file number."(15) Rather, a request must sufficiently describe a record in a manner to allow for the agency to locate the record with "reasonable effort." (16)

Upon receiving a request for copies of public records, the state agency has ten days in which to determine whether it will comply with the request and must immediately notify the person making the request of its decision.(17) If the agency decides to comply with the taxpayer's request, the requested copies must be made "promptly available" to the taxpayer.(18)

Exception to Disclosure

The FTB frequently refuses to disclose to a taxpayer a record or file that is requested under the CPRA. In such instances, it must justify its denial by "demonstrating that the record in question is exempt under express provisions of [the CPRA] or that on the facts of the particular case the public interest served by not making the record public clearly outweighs the public interest served by disclosure of the record."(19) The CPRA also allows a state agency to "edit" (or redact) requested records before disclosing them. Since an agency is allowed to edit a requested record when necessary, the fact that a public record may contain some confidential information does not justify withholding the entire document.(20) The CPRA expressly provides that "[a]ny reasonably segregable portion of a record shall be provided to any person requesting such record after the deletion of the portions which are exempt by law."(21)

The FTB has promulgated its own disclosure policies based upon a compilation of the statutory exceptions to disclosure which are discussed below, and a taxpayer's request for a copy of its audit file will be "screened" by FTB pursuant to these policies. Under this policy, the FTB will disclose returns, reports, etc., that have been furnished to the FTB by the taxpayer making the request; factual data contained in audit narratives; and the schedules supporting the audit adjustments.(22) The FTB, however, under its disclosure policy, will not disclose the following:

* Those sections of an audit report which contain the auditor's workpapers, opinions, recommendations, judgment, analysis of the strengths and weaknesses of the proposed adjustments, and other pertinent information, developed during the course of the audit (for example, the attitude of the taxpayer or the representatives);

* Proprietary information including audit guidelines, audit criteria, operational memos, information which a taxpayer could use to manipulate the system (related to the department's internal decision making process);

* Information from or about third parties unrelated to the taxpayer; and

* Protest hearing reports.(23)

Like any standing policy, however, judgment and discretion -- and occasionally human error -- all enter into the decision of what specific documents are not disclosed by FTC in response to a specific request. Experience teaches that an item not produced by the FTB in response to a particular request might very well be produced by the FTB in response to a different request.

The CPRA provides little guidance on how the tax agency may deny a record request, with the only explicit requirement being that the name of the person responsible for the denial, as well as his or her title, must be included in the notification to the taxpayer.(24) Responses from the FTB can range from very specific denials to very general denials. Some denials include references to the specific statutory provisions the FTB relied upon in denying the record request. In other cases, the FTB will comply by delivering copies of the requested records, but stating without elaboration that the records had been "edited in accordance with the Franchise Tax Board's disclosure policies."

While there are a multitude of statutory exceptions to the CPRA's disclosure requirement, only a few are pertinent in tax matters. A brief discussion of each such exception follows.

1. Preliminary Memoranda. Section 6254(a) permits a state agency to withhold the following records from disclosure: "[p]reliminary drafts, notes, or interagency or intra-agency memoranda that are not retained by the public agency in the ordinary course of business, provided that the public interest in withholding those records clearly outweighs the public interest in disclosure."

This exception has been interpreted to require that "(1) [t]he record sought must be a preliminary draft, note, or memorandum; (2) which is not retained by the public agency in the ordinary course of business; and (3) the public interest in withholding must clearly outweigh the public interest in disclosure."(25) Perhaps the biggest hurdle here for the FTB is to establish that the record is one that is not retained by the agency in its ordinary course of business. In Citizens for a Better Environment, the plaintiffs sought the disclosure of Department of Food and Agriculture monitoring reports concerning county enforcement of state pesticide-use laws.(29) Contending that it was not required to disclose these materials under section 6254(a), the Department offered the testimony of an employee who stated that the reports were generally used as the basis for later reports and were not "normally retained" after the later reports were completed.(27) In addition, the employee testified that the Department did not have any standards with regard to which documents would normally be retained, but voiced the opinion that "most of the specific [reports] in issue would be discarded."(28) The court concluded that although the employee's testimony showed that it was the Department's custom to discard reports such as those requested, the Department had failed to meet its burden that these particular reports would not be retained in its ordinary course of business to justify the Department's refusal to disclose them.(29)

Therefore, if a taxpayer's request for a document is denied by the FTB on the basis of section 6254(a), the taxpayer needs to inquire into whether the requested document is one that is not retained by the agency in its ordinary course of business. Unless the agency can establish that its policy is not to ordinarily retain writings such as the one requested, the record should be disclosed.

2. Pending Litigation. The CPRA also allows state agencies to refuse disclosure under a Upending litigation" exception. This exception encompasses [r]ecords pertaining to pending litigation to which the public agency is a party, ...until the pending litigation or claim has been finally adjudicated or otherwise settled."(30) Courts have narrowly construed this exception to permit an agency to withhold a requested record from disclosure "only if it was specifically prepared for use in litigation."(31) This construction recognizes that although a public agency should not be hampered in its efforts to prepare for litigation, the time of litigation is "exactly the time when members of the public become aware of possible misdeeds or undesirable practices on the part of the agency, and have the strongest incentive to examine records which shed light on the operations of their government."(32)

In City of Hemet, a newspaper requested copies of a police department's internal investigation into possible misconduct on the part of a city police officer. Although litigation eventually arose concerning the officer's conduct, the investigation had concluded over two weeks before any claim was filed. The court held that the report was not exempt since it was not prepared with the intention of assisting with litigation, but rather, was prepared as a "self-critical analysis" of departmental affairs.(33)

This exception also requires the litigation to which the record relates must be pending. In City of Los Angeles v. Superior Court (Axelrad),(34) a request was made for copies of deposition transcripts from already concluded litigation in which the city was involved. The court refused to exempt the materials from disclosure under this exception. First, the court reasoned that the depositions fell within the provisions of the CPRA since, as records generated out of litigation involving the city, they were related "to the conduct of public business."(35) Second, the court concluded this exception only protected records "for a limited Period of time while there is ongoing litigation,"(36) and the exception was not available to the City because the litigation spawning the depositions had already concluded.

3. Privileged Material. A request under the CPRA may also be denied on the basis that the record sought is privileged. This exception exempts disclosure of "[r]ecords the disclosure of which is exempted or prohibited pursuant to federal or state law including, but not limited to, provisions of the Evidence Code relating to privilege."(37) Among the records exempt from disclosure under this section are records covered by the attorney client privilege or by the attorney work-product doctrine. For instance, a written legal opinion by FTB legal counsel could be protected by the attorney-client privilege and would therefore be exempt from disclosure.(38)

4. The "Catch-All" Exception. Finally, even where a requested record does not fit into one of the specific exceptions, the agency may still withhold the document from disclosure under the CPRA's "catch-all" exception. This exception provides that "[t]he agency shall justify withholding any record by demonstrating that the record in question is exempt under express provisions of this chapter or that on the facts of the particular case the public interest served by not making the record public clearly outweighs the public interest served by the disclosure of the record."(39)

This is an incredibly broad exception and, for instance, the FTB may claim this exemption when a requested document provides insight into the agency's decision-making process. But in order to succeed on such a claim, it must be established that "the disclosure of the records would expose an agency's decision making process in such a way as to discourage candid discussion within the agency and thereby undermine the agency's ability to perform its functions."(40)

The FTB may also attempt to claim this exemption from disclosure on the ground that the request is too burdensome. The CPRA contemplates that, while there will be some burden placed upon the public agency in having to comply with a record request, the question is whether a particular request is "so onerous as to clearly outweigh the public interest in disclosure."(41) The California Supreme Court has recognized that considerations of the "public interest" have to include the burden placed upon the agency or else the CPRA would "make it possible for any person requesting information, for any reason or for no particular reason to impose upon a governmental agency a limitless obligation. Such a result would not be in the public interest."(42) In seeking to deny a record request on the basis that it is burdensome, the FTB bears "the burden of showing [the] request is too onerous."(43)

A prime example of this application of this exemption is found in Associated Sales Tax Consultants, where the California State Board of Equalization denied a request for copies of records which revealed how it interpreted and applied two sales and use tax regulations. The Board claimed the exemption on the basis that production of the records would be too burdensome since confidential taxpayer information would have to be excised. In rejecting the Board's arguments, the court found that the agency had overstated the burden of excising the confidential information from the requested documents, and that any burden which the agency might incur in excising the information was clearly 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."(44)

Availability of Judicial Relief

When a taxpayer feels a response to its CPRA request is improper, there is a judicial remedy. The CPRA allows a taxpayer to seek injunctive or declarative relief or a writ of mandate to compel disclosure of withheld records in the superior court of the county where the records are situated.(45) The agency (e.g., FTB) bears the burden of demonstrating that it is justified in withholding the requested records from the taxpayer.(46) In deciding whether the tax agency is justified in withholding requested records from a taxpayer, the court may conduct an in camera review of the records; consider any papers filed by the parties; and/or entertain any oral argument or other evidence as it may allow.(47) If the court decides after review of the records that the agency is justified in withholding the requested records from disclosure, the court must return the records to the agency without disclosing their contents to anyone.(48) If the court decides the agency is unjustified in withholding records from disclosure, the court may order the agency to disclose the records to the taxpayer who has made the request.(49) The losing party has the option to immediately seek review in an appellate court by petitioning for the issuance of an extraordinary writ within 20 days of receiving notice of the lower court's decision.(50)

The taxpayer should also consider the availability of attorney fees and costs in deciding whether to seek a court order for the disclosure of records being improperly withheld by a tax agency. If the taxpayer prevails in establishing the agency was unjustified in its refusal to disclose requested records, the court will "award court costs and reasonable attorney fees to the plaintiff."(51) The award of attorney fees and costs to a prevailing taxpayer under this statutory provision is mandatory.(52) On the other hand, if the tax agency prevails in establishing that its refusal to disclose requested records to a taxpayer is justified, the State is only entitled to an award of attorney fees and costs if it can show that the taxpayer's position was clearly frivolous.(53) This heightened standard clearly favors the taxpayer in bringing an action to compel the disclosure of public records.

Conclusion

The CPRA provides taxpayers and their representatives with a powerful tool. The information which can be gleaned from the tax agency's files can be very valuable to the taxpayer in deciding how to approach a tax controversy matter. Moreover, sometimes the agency's files will be more complete than the records in the taxpayer's possession, particularly when the audit has lasted many years and the taxpayer has undergone a change of ownership or a change in key tax personnel during the audit. The agency's file on the taxpayer may also contain insight into how the agency is pursuing the matter against the taxpayer. Corporate taxpayers and their representatives should not overlook the many uses of the California Public Records Act.

(*) Footnotes appear on page 389. (1) While this article focuses upon obtaining copies of a taxpayer's file, the disclosure laws can also be used to obtain copies of a tax agencies' files which reveal how the agency interprets and applies its regulations in tax matters. See State Board of Equalization v. Superior Court (Associated Sales Tax Consultants, Inc.), 10 Cal. App. 4th 1177, 13 Cal. Rptr. 2d 342 (3d App. Dist. 1992) (holding that the SBE could not deny a record request for copies of its files revealing how the agency would interpret and apply Sales and Use Tax Regulations 1660 and 1667). (2) Cal. Civ. Code [sections] 1798.34(a). (3) Cal. Civ. Code [sections] 1798.3(a). (4) Cal. Civ. Code [sections] 1798.3(d). (5) Cal. Gov't Code [sections] 6250. (6) San Gabriel Tribune v. Superior Court, 143 Cal. App.3d 762, 771772, 192 Cal. Rptr. 415, quoting 53 Ops. Cal. Atty. Gen. 136, 143 (1970). (7) CBS, Inc. v. Block, 42 Cal. 3d 646, 651, 725 P.2d 470, 473, 230 Cal. Rptr. 362, 365 (1986). (8) 5 U.S.C.[sections] 552. (9) Associated Sales Tax Consultants, 10 Cal. App. 4th at 1186 n.10, 13 Cal. Rptr. 2d at 347 n.10; Citizens For A Better Environment v. Department of Food & Agriculture, 171 Cal. App. 3d 704, 711, 217 Cal. Rptr. 504, 508 (3d App. Dist. 1985). (10) American Civil Liberties Union v. DeukmeJian, 32 Cal. 3d 440, 449, 651 R2d 822, 827, 186 Cal. Rptr. 235, 240 (1982); Williams v. Superior Court (Freedom Newspapers, Inc.), 5 Cal. 4th 337, 852 R2d 377, 19 Cal. Rptr. 2d 882 (1993). (11) Cal. Gov't Code [sections] 6253(a). (12) Cal. Gov't Code [sections] 6252(d); see Cal. Gov't Code [sections] 6252(e) (defining "writing" to mean "handwriting, typewriting, printing, photostating, photographing, and every other means of recording upon any form of communication or representation, including letters, words, pictures, sounds, or symbols, or combination thereof, and all papers, maps, magnetic or paper tapes, photographic films and prints, magnetic or punched cards, discs, drums, and other documents"). (13) Cal. Gov't Code [sections] 6256. In addition to inspecting and receiving copies of records, a court also has the discretion to order the agency to provide a list or index of the documents which are sought by the person making a record request, even though the CPRA does not explicitly require this. Associated Sales Tax Consultants, 10 Cal. App. 4th at 1193, 13 Cal. Rptr. 2d at 351. (14) Cal. Gov't Code [sections] 6257. (15) Associated Sales Tax Consultants, 10 Cal. App. 4th at 1186 n.9, 13 Cal. Rptr. 2d at 347 n.9. (16) Id. at 1186, 13 Cal. Rptr. 2d at 347. (17) Cal. Gov't Code [sections] 6256; see Cal. Gov't Code [sections] 6256.1 (providing that the ten-day period may be extended by written notification where the request is voluminous or regards documents which are maintained in a facility separate from the one processing the request). (18) Cal. Gov't Code [sections] 6257. In addition, section 6257 provides that copies may only be delivered to the person making a request upon payment of a fee for the costs of duplication. One can expect to pay about 10 cents per page requested although sometimes the agency may waive the duplication charge. (19) City of Hemet, 37 Cal. App. 4th at 1416, 44 Cal. Rptr. 2d at 536. There are 24 specific exceptions listed in Government Code [sections] 6254; more than 10 exceptions listed in sections 6254.1 to 6254.15; and a general "catch-all" exception contained in section 6255. (20) Associated Sales Tax Consultants, 10 Cal. App. 4th at 1187, 13 Cal. Rptr. 2d at 347. (21) Cal. Gov't Code [sections] 6257. (22) Memo from Paul Usedom, Director, Corporation Audit Bureau, Franchise Tax Board, to Corporation Audit Managers and Supervisors (Mar. 30, 1993). (23) Id. (24) Cal. Gov't Code [sections] 6256.2. (25) Citizens for a Better Environment, 171 Cal. App. 3d at 711-12, 217 Cal. Rptr. at 508. (26) Id. at 707, 217 Cal. Rptr. at 505. (27) Id. at 709, 217 Cal. Rptr. at 506-07. (28) Id. at 709, 217 Cal. Rptr. at 507. 29 (29) Id. at 714, 217 Cal. Rptr. at 510. 30 Cal. (30) Gov't Code [sections] 6254(b). (31) City of Hemet, 37 Cal. App. 4th at 1420, 44 Cal. Rptr. 2d at 538. (32) Id. (33) Id. at 1419, 44 Cal. Rptr. 2d at 537. (34) 41 Cal. App. 4th 1083, 49 Cal. Rptr. 2d 35 (2d App. Dist. 1996). (35) 41 Cal. App. 4th at 1088, 49 Cal. Rptr. 2d at 37. (36) Id. at 1087, 49 Cal. Rptr. 2d at 37. (37) Cal. Gov't Code [sections] 6254(k). (38) See, e.g, Roberts v. City of Palmdale, 5 Cal. 4th 363, 853 R2d 496,20 Cal. Rptr.2d 330 (1993) (holding that a letter written by the city attorney expressing his legal opinion as to a matter before the council was exempt from disclosure under section 6254(k) since it was a communication protected by the attorney-client privilege). (39) Cal. Gov't Code [sections] 6255. (40) Times Mirror Co. v. Superior Ct. (State of California), 53 Cal. 3d 1325, 1342, 813 R2d 240, 250, 283 Cal. Rptr. 893, 903 (1991). (41) Associated Sales Tax Consultants, 10 Cal. App. 4th at 1190 n. 14, 13 Cal. Rptr. 2d at 349 n. 14. (42) ACLU, 32 Cal. 3d at 453, 651 R2d at 829-30, 186 Cal. Rptr. at 243. (43) Associated Sales Tax Consultants, 10 Cal. App. 4th at 1188, 13 Cal. Rptr. 2d at 348. (44) Id. at 1190, 13 Cal. Rptr. 2d at 349. (45) Cal. Gov't Code [sub sections] 6258,6259. In contrast to the general rule, the CPRA does not require a taxpayer to exhaust available administrative remedies before pursuing judicial review. Rather, the CPRA allows for immediate judicial review which is consistent with its intended policy of favoring immediate disclosure of public records where proper. (46) Citizens for a Better Environment, 171 Cal. App. 3d at 712, 217 Cal. Rptr. at 508. (47) Cal. Gov't Code [sections] 6259(a). (48) Id. (49) Id. (50) Id. (51) Cal. Gov't Code [sections] 6259(d). (52) Belth v. Garamendi, 232 Cal. App. 3d 896, 900, 283 Cal. Rptr. 829, 831 (1st App. Dist. 1991). (53) Cal. Gov't Code [sections] 6259(d).

ERIC J. COFFILL is a partner in the Sacramento office of Morrison dr Foerster LLP, where he practices with the State and Local Tax Group. He is also an Adjunct Professor in the graduate tax program at McGeorge School of Law and is a faculty member at the University of California's Center for State and Local Taxation Summer Institute. His article on California's sales and use tax manufacturing equipment exemption appeared in the September-October 1995 issue of The Tax Executive.