Tax Exceptions

By Michael Tarrant

In re HS-122, 2011 VT 138 (mem.).

What do you get when you add one cup of state property tax adjustment records to a quart of public records laws, and then blend with one heaping spoonful of a request to see those records?  

Why, a mess of course.  

But fortunately, we received this nice SCOV opinion as a parting gift for 2011 to help clean it all up.

This case involves the often tenuous relationship between public access to government records and individuals’ privacy interests in the information contained in those records.  Here, Appellee wanted to see the Town of Manchester’s state property tax adjustment report, or as the cool kids in the know call it, the Town of Manchester’s “HS-122.”  

The state calculates and delivers to each town an HS-122 listing the property tax adjustments for each taxpayer, based mostly on said taxpayers’ income.  The adjustment calculation is rather convoluted, and basically combines various smaller adjustments before arriving at the final total adjustment.  The towns then use the HS-122s in assessing the amount of property tax each taxpayer is required to pay.  The total adjustment figure listed on the HS-122 is essentially the amount of each taxpayer’s total property tax burden that they are not required to pay, but from that number it is possible, at least some argue, to back out the taxpayer’s income.

Appellee started this journey to the SCOV innocently (or not-so innocently) enough by requesting a copy of Manchester’s HS-122 report from the town treasurer.  The treasurer denied Appellee’s request, claiming that HS-122s are exempt from disclosure under various portions of 1 V.S.A. § 317(c).  

Section 317(c) is the exemptions section of Vermont’s public records access law, containing a plethora of different exemptions.

Evidently, Manchester does offer the total property tax bill of each taxpayer in town, but it redacts certain information related to adjustment calculations.  Apparently Appellee was not satisfied with this redacted disclosure, and appealed the denial to the superior court.  After a hearing on the merits, the superior court determined that HS-122s are public information and ordered Manchester to produce the report.

Manchester argued below that HS-122s are exempt from disclosure under two different exemptions to the public records act.  First, it argued that the records were exempt under 1 V.S.A. § 317(c)(1) (documents deemed confidential by statute) because 32 V.S.A. § 3102 deems all income tax records to be confidential.  Second, the Town argued that the records were exempt under 1 V.S.A. § 317(c)(6), which exempts tax returns and “related documents, correspondence and certain types of substantiating forms which include the same type of information as in the tax return itself filed with or maintained by the Vermont department of taxes” from public disclosure. 

Under the impression that the main thrust of Manchester’s argument rested on § 317(c)(6), the trial court ignored the Town;’s first argument based on 317 (c)(1) and ruled that the information contained in HS-122s was not covered by the (c)(6) exemption because it constituted “derivative information” as the SCOV laid out in Finberg v. Murnane.

In Finberg, the SCOV concluded that “derivative documents were covered by the exemption only to the extent necessary ‘to avoid disclosure of information taken from the return and related documents.’”  Thus, the trial court concluded that confidentiality of the HS-122s was not necessary as the information contained within the report related to adjustment figures and those could not necessarily be used in all cases to determine otherwise confidential information.

In reversing the trial court, the SCOV elects to not answer the question answered below, and instead determines that HS-122s are confidential under 32 V.S.A. § 3102, a/k/a, Vermont’s statute governing the confidentiality of tax documents.  In doing so, the SCOV reaffirms its statements in Finberg that Vermont’s public record act is the minimum guarantee of protection for “tax records applicable to all taxing authorities and types of taxes,” whereas Title 32 may in fact be significantly broader, but is “applicable only to the state tax information the Legislature has specified.”  Thus, where Title 32 makes information confidential, it is also confidential under section 317(c)(1) as “records which by law are designated confidential or by a similar term.”

Here, the SCOV concludes that the HS-122 reports are amply covered by Title 32.  Section 3102(a) states that no agent of the department of taxes “shall disclose any return information to any person who is not an officer, employee or agent of the department of taxes,” and § 3102(b)(3) defines “return information” as “any other data, from any source, furnished to or prepared or collected by the department of taxes with respect to any person.”  Concluding that the total property tax figures contained in the HS-122s are “indisputably” data prepared by the tax department with respect to any person, the reports are subject to § 3102(a)’s confidentiality requirement.  

Furthermore, the SCOV notes that Manchester itself is equally bound to protect the confidentiality of such records under § 3102(h), which states that “[i]f any provision of Vermont law authorizes or requires the commissioner to divulge or make known in any manner any return or return information, the person or persons receiving such return or return information . . . shall be subject to the provisions of subsection (a) of this section as if such person were the agent of the commissioner.”

As a parting note, the SCOV reminds us that it will construe exemptions to public record access strictly against the records’ governmental custodians, but here, even under such strict construction, the language of the statute is plain and the SCOV cannot but conclude that the information is not publicly accessible. This kind of policy choice, the SCOV reminds us, is for the Legislature.

While heavy on the type of statutory and tax record interpretation that scientists use to battle insomnia, today’s decision is likely to have significant ramifications for towns, real estate attorneys, and anyone trying to buy or sell a home.  For one thing, towns and the state are going to have to revise they way they draft tax bills to separate out the public information (the amount of property taxes assessed and paid) from this newly recognized privileged information.  As one practitioner has already seen, good faith compliance means the town has to produce a document that looks like swiss cheese.

Next stop for Appellee I would guess is the Legislature.  By the way, I hear they’re back in session.