One of the most difficult aspects of state and local tax practice is the lack of publicly available guidance addressing a client’s situation. One potentially rich source of guidance are orders issued by administrative tribunals in taxpayer appeals. These orders are similar in form and function to judicial opinions. Unlike judicial opinions, however, these orders are often available only in redacted form and only if a request is made pursuant to state open records laws. In many states, orders of administrative tax appeals are exempt from public disclosure in their entirety. While exemptions from disclosure requirements are necessary to a degree to protect the privacy of taxpayer information, broad statutory prohibitions and aggressive interpretations of disclosure exemptions have led to the creation of essentially secret bodies of law that are only accessible by the government.
A recent decision by the Kentucky Supreme Court, however, indicates that there are limits to agency authority and provides a potential road map for practitioners in other states seeking to gain access to orders issued by administrative agencies in taxpayer appeals. The decision affirmed the opinion by the Kentucky Court of Appeals in Finance and Administration Cabinet v. Sommer, No. 2015-CA-001128-MR (1/13/2017), which held that the Kentucky Department of Revenue must publish redacted final rulings, including those that were not appealed to the Kentucky Board of Tax Appeals (“KBTA”).
The case originated from a 2012 open records request made by tax attorney Mark Sommer to the Kentucky Department of Revenue (“DOR”). In his request, Mr. Sommer asked for copies of all unappealed “final rulings” of the DOR from 2004 to the present. The DOR denied the request, citing the Kentucky Taxpayer’s Bill of Rights, which provide that certain tax schedules, returns, or reports filed with the DOR may not be disclosed if there is an expectation of taxpayer privacy. The DOR claimed that final rulings not appealed to the KBTA were exempt from disclosure under the Kentucky Open Records Act, KRS 61.870 et seq. The DOR also claimed that reviewing all of the documents to determine what redactions were need would be unduly burdensome. Although the DOR conceded that final rulings appealed to the KBTA are public records, it declined to produce those rulings as well.
Kentucky’s Attorney General affirmed the denial of Mr. Sommer’s request and Mr. Sommer appealed to the Franklin County Circuit Court. At this point, Tax Analysts, a non-profit news organization, was granted leave to intervene after the DOR denied a similarly request submitted by the organization. The circuit court reversed the Attorney General’s ruling and ordered the DOR to produce the requested information with appropriate redactions. The court found that final rulings appealed to the KBTA were public records and the DOR’s denial of access to those rulings was entirely without basis. The court also held final rulings that had not been appealed to the KBTA were subject to disclosure with proper redactions. The court denied the DOR’s motion for reconsideration and awarded costs to Mr. Sommer and Tax Analysts, including attorney’s fees. The DOR then appealed the decision to the Kentucky Court of Appeals.
Although the DOR did not contest the portion of the circuit court’s judgment regarding final rulings appealed to the KBTA, the DOR did contend that the circuit court erred by holding final unappealed rulings are also subject to disclosure under the Open Records Act. The Court of Appeals affirmed the Circuit Court, finding the DOR had taken an overly broad view of the applicable exemption to the Open Records Act. The court held that exceptions to the disclosure of public records are to be strictly construed, and when a public record contains both exempt and non-exempt information, government agencies are required by statute to separate the material and make the non-exempt material available for inspection. The court noted that the substantive portions of the final rulings “contain a wealth of information relative to the implementation of our tax laws.” The court also found the DOR itself had used redacted copies of final rulings to support its position in litigation with other taxpayers, a fact undermining and contradicting its position throughout the proceedings before the court.
The DOR filed motion for discretionary review by the Kentucky Supreme Court, and the motion was granted. On November 1, 2018, the Kentucky Supreme Court affirmed the decision of the Court of Appeals, putting to rest the litigation. See Finance and Administration Cabinet v. Sommer, 2017 WL 127730.
Although Sommer does not apply outside Kentucky, it may be instructive to those in other states seeking to gain access to administrative orders in tax appeals. It is no accident that the plaintiff was a tax lawyer and that Tax Analyst was involved. The litigation was well planned and carefully executed. Importantly, the requests at issue were narrowly tailored to seek only the final rulings, as opposed to protests, statements in support, or other documents submitted by taxpayers. Doing so allowed them to clearly frame the argument and show that the State’s interests in privacy could be accommodated through less restrictive means than withholding the documents, namely redaction. The plaintiffs showed that, in addition to privacy, taxpayers have a strong interest in understanding how tax laws are construed and administered. Once the State’s interest was shown to be adequately protected, its case fell apart. Although breadth and scope of Kentucky’s disclosure exemptions probably differ from those of other states, the underlying purposes are the same from state to state. For this reason, the arguments made in Sommer could resonate in other states.