SB 526: Personal income taxes: joint returns: court orders: relief from liability.
- Session Year: 2015-2016
- House: Senate
- Latest Version Date: 2016-08-19
Existing law generally provides that the spouse or partner who controls the disposition of or who receives or spends community income, as well as the spouse who is taxable on the income, is liable for the payment of the taxes imposed by the Personal Income Tax Law on that income, and that whenever a joint income tax return is filed by spouses or registered domestic partners the liability for the tax is joint and several. Existing law allows, under specified conditions, a court in a proceeding for dissolution of marriage to revise the income tax liabilities on a joint return of spouses or registered domestic partners, but prohibits revisions to relieve a spouse or domestic partner of tax liability on income earned by or subject to the exclusive management and control of the spouse or domestic partner. Existing law also provides that the order revising tax liability is not effective if the gross income reportable on the return exceeds $150,000 or the amount of the tax liability the spouse is relieved of exceeds $7,500, except as specified.
This bill would instead provide that an order revising tax liability may relieve a spouse or domestic partner of tax liability on income earned by or subject to the exclusive management and control of that spouse or domestic partner, except if assets or liabilities are transferred between the individuals filing the joint return for the principal purpose of avoidance of the payment of tax or as part of a fraudulent scheme by those individuals or that liability is uncollectible or if, within 3 years of when the court order is effective, specified conditions apply. This bill would also instead provide that the order revising tax liability is not effective if the gross income reportable on the return exceeds $200,000 or the amount of the tax liability the spouse is relieved of exceeds $10,000, except as specified, and would require those amounts to be recomputed annually beginning on January 1, 2018, as specified. The bill would apply to court orders served or acknowledged on or after the effective date of this bill.
Existing law generally provides that the spouse or partner who controls the disposition of or who receives or spends community income income, as well as the spouse who is taxable on the income income, is liable for the payment of the taxes imposed by the Personal Income Tax Law on that income, and that whenever a joint income tax return is filed by spouses or registered domestic partners the liability for the tax is joint and several. Existing law allows, under specified conditions, a court in a proceeding for dissolution of marriage to revise the income tax liabilities on a joint return of spouses or registered domestic partners, but prohibits revisions to relieve a spouse or domestic partner of tax liability on income earned by or subject to the exclusive management and control of the spouse or domestic partner. Existing law also provides that the order revising tax liability is not effective if the gross income reportable on the return exceeds $150,000 or the amount of the tax liability the spouse is relieved of exceeds $7,500, except as specified.
This bill would instead provide that an order revising tax liability may relieve a spouse or domestic partner of tax liability on income earned by or subject to the exclusive management and control of that spouse or domestic partner, except if assets or liabilities are transferred between the individuals filing the joint return for the principal purpose of avoidance of the payment of tax or as part of a fraudulent scheme by those individuals or that liability is uncollectible and, or if, within 3 years of when the court order is effective, specified conditions also apply. This bill would also instead provide that the order revising tax liability is not effective if the gross income reportable on the return exceeds $200,000 or the amount of the tax liability the spouse is relieved of exceeds $10,000, except as specified, and would require those amounts to be recomputed annually beginning on January 1, 2017, 2018, as specified. The bill would apply to court orders served or acknowledged on or after the effective date of this bill.
Existing law generally provides that whenever a joint income tax return is filed by spouses or registered domestic partners the liability for the tax is joint and several, and that the spouse or partner who controls the disposition of or who receives or spends community income as well as the spouse who is taxable on the income is liable for the payment of the taxes imposed by the Personal Income Tax Law on that income, and that whenever a joint income tax return is filed by spouses or registered domestic partners the liability for the tax is joint and several. Existing law allows, under specified conditions, a court in a proceeding for dissolution of marriage or the Franchise Tax Board to revise the income tax liabilities on a joint return of spouses or registered domestic partners, but prohibits revisions to relieve a spouse or domestic partner of tax liability on income earned by or subject to the exclusive management and control of the spouse. spouse or domestic partner. Existing law also provides that the order revising tax liability is not effective if the gross income reportable on the return exceeds $150,000 or the amount of the tax liability the spouse is relieved of exceeds $7,500, except as specified.
This bill would instead provide that an order revising tax liability may relieve a spouse or domestic partner of tax liability on income earned by or subject to the exclusive management and control of that spouse or domestic partner, except if assets or liabilities are transferred between the individuals filing the joint return for the principal purpose of avoidance of the payment of tax or as part of a fraudulent scheme by those individuals or that liability is uncollectible and, within 3 years of when the court order is effective, specified conditions also apply. This bill would also instead provide that the order revising tax liability is not effective if the gross income reportable on the return exceeds $200,000 or the amount of the tax liability the spouse is relieved of exceeds $10,000, except as specified, and would require those amounts to be recomputed annually beginning on January 1, 2017, as specified. The bill would apply to court orders served or acknowledged on or after the effective date of this bill.
Existing income tax law allows, under procedures prescribed by the Franchise Tax Board, an individual who has made a joint return to elect to seek relief from liability for an understatement of tax or to limit the individuals liability of any tax deficiency. Existing income tax laws require an individual making those elections to be relieved of liability from tax if specified conditions are met, and requires that the individuals liability for any deficiency that is assessed with respect to the return may not exceed the portion of the deficiency properly allocable to the individual as specified by law if, among other things, the individual meets the burden of proof as specified. Under existing income tax law, if taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency, and relief is not available to the individual under these procedures, the Franchise Tax Board is authorized to relieve the individual of that liability, as provided.
This bill would allow, for requests for relief received on and after January 1, 2016, when taking into account all the facts and circumstances, the fact that the individuals liability for any unpaid tax or deficiency for any taxable year where a joint return has been filed has been revised under a judgment of dissolution of marriage to be a factor weighing in favor of relief from tax liability on income earned by or subject to the exclusive management and control of the individual, whether or not the individual was a victim of abuse at the time the return was filed or whether or not funds that would have been used to pay the tax or deficiency were misappropriated by the nonrequesting spouse.
Existing law generally provides that whenever a joint income tax return is filed by spouses or registered domestic partners the liability for the tax is joint and several, and that the spouse or partner who controls the disposition of or who receives or spends community income as well as the spouse who is taxable on the income is liable for the payment of the taxes imposed by the Personal Income Tax Law on that income. Existing law allows, under specified conditions, a court in a proceeding for dissolution of marriage or the Franchise Tax Board to revise the income tax liabilities of spouses or registered domestic partners, but prohibits revisions to relieve a spouse of tax liability on income earned by or subject to the exclusive management and control of the spouse.
Existing income tax law allows, under procedures prescribed by the Franchise Tax Board, an individual who has made a joint return to elect to seek relief from liability for an understatement of tax or to limit the individuals liability of any tax deficiency. Existing income tax laws require an individual making those elections to be relieved of liability from tax if specified conditions are met, and requires that the individuals liability for any deficiency that is assessed with respect to the return may not exceed the portion of the deficiency properly allocable to the individual as specified by law if, among other things, the individual meets the burden of proof as specified. Under existing income tax law, if taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency, and relief is not available to the individual under these procedures, the Franchise Tax Board is authorized to relieve the individual of that liability, as provided.
This bill would allow, for requests for relief received on and after January 1, 2016, when taking into account all the facts and circumstances, the fact that the individuals liability for any unpaid tax or deficiency for any taxable year where a joint return has been filed has been revised under a judgment of dissolution of marriage to be a factor weighing in favor of relief from tax liability on income earned by or subject to the exclusive management and control of the individual, whether or not the individual was a victim of abuse at the time the return was filed or whether or not funds that would have been used to pay the tax or deficiency were misappropriated by the nonrequesting spouse.
The Personal Income Tax Law Existing law generally provides that whenever a joint income tax return is filed by spouses or registered domestic partners the liability for the tax is joint and several. Existing law allows a court in a proceeding for dissolution of marriage, under specified conditions, to revise the income tax liabilities of spouses or registered domestic partners. Under existing law, a court may not revise the income tax liabilities of spouses or registered domestic partners if the gross income reported on the joint return exceeds $150,000 or if the liability of the relieved spouse or partner exceeds $7,500. several, and that the spouse or partner who controls the disposition of or who receives or spends community income as well as the spouse who is taxable on the income is liable for the payment of the taxes imposed by the Personal Income Tax Law on that income. Existing law allows, under specified conditions, a court in a proceeding for dissolution of marriage or the Franchise Tax Board to revise the income tax liabilities of spouses or registered domestic partners, but prohibits revisions to relieve a spouse of tax liability on income earned by or subject to the exclusive management and control of the spouse.
This bill would state the intent of the Legislature to enact legislation to increase the gross income threshold and the tax liability thresholds under which a court would be allowed in a proceeding for dissolution of marriage, under specified conditions, to revise the income tax liabilities of spouses or registered domestic partners, and to index these threshold amounts to inflation, and to enumerate in the Family Code the requirements specified in the Revenue and Taxation Code pursuant to which a court may revise income tax liabilities in a proceeding for dissolution of marriage.
Existing income tax law allows, under procedures prescribed by the Franchise Tax Board, an individual who has made a joint return to elect to seek relief from liability for an understatement of tax or to limit the individuals liability of any tax deficiency. Existing income tax laws require an individual making those elections to be relieved of liability from tax if specified conditions are met, and requires that the individuals liability for any deficiency that is assessed with respect to the return may not exceed the portion of the deficiency properly allocable to the individual as specified by law if, among other things, the individual meets the burden of proof as specified. Under existing income tax law, if taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency, and relief is not available to the individual under these procedures, the Franchise Tax Board is authorized to relieve the individual of that liability, as provided.
This bill would allow, for requests for relief received on and after January 1, 2016, when taking into account all the facts and circumstances, the fact that the individuals liability for any unpaid tax or deficiency has been revised under a judgment of dissolution of marriage to be a factor weighing in favor of relief from tax liability on income earned by or subject to the exclusive management and control of the individual, whether or not the individual was a victim of abuse at the time the return was filed or whether or not funds that would have been used to pay the tax or deficiency were misappropriated by the nonrequesting spouse.
The Personal Income Tax Law generally provides that whenever a joint income tax return is filed by spouses or registered domestic partners the liability for the tax is joint and several. Existing law allows a court in a proceeding for dissolution of marriage, under specified conditions, to revise the income tax liabilities of spouses or registered domestic partners. Under existing law, a court may not revise the income tax liabilities of spouses or registered domestic partners if the gross income reported on the joint return exceeds $150,000 or if the liability of the relieved spouse or partner exceeds $7,500.
This bill would state the intent of the Legislature to enact legislation to increase the gross income threshold and the tax liability thresholds under which a court would be allowed in a proceeding for dissolution of marriage, under specified conditions, to revise the income tax liabilities of spouses or registered domestic partners, and to index these threshold amounts to inflation, and to enumerate in the Family Code the requirements specified in the Revenue and Taxation Code pursuant to which a court may revise income tax liabilities in a proceeding for dissolution of marriage.
(a)The spouse who controls the disposition of or who receives or spends community income as well as the spouse who is taxable on the income is liable for the payment of the taxes imposed by Part 10 (commencing with Section 17001) on that income.
(b)(1)Whenever a joint return is filed by a husband and wife, the liability for the tax on the aggregate income is joint and several.
(2)The amount of liability on a joint return may not be reduced, but a court in a proceeding for dissolution of the marriage may determine the individual responsible for all or part of the liability, provided the order revising tax liability on the joint return:
(A)Must separately state the income tax liabilities for the taxable years for which revision of tax liability is granted.
(B)Shall not revise a tax liability that has been fully paid prior to the effective date of the order; however, any unpaid amount may be revised.
(C)Shall become effective when the Franchise Tax Board is served with or acknowledges receipt of the order.
(D)(i)Shall not be effective if the gross income reportable on the return exceeds two hundred thousand dollars ($200,000) or the amount of tax liability the spouse is relieved of exceeds ten thousand dollars ($10,000), unless a tax revision clearance certificate is obtained from the Franchise Tax Board and filed with the court.
(ii)Beginning on January 1, 2018, and annually thereafter, the amounts specified in clause (i) shall be recomputed in accordance with subparagraph (B) of paragraph (3) of subdivision (b) of Section 19442, modified by substituting January 1, 2018 for January 1, 2004.
(E)Shall not be effective to relieve a spouse of the tax liability on income earned by or subject to the exclusive management and control of that spouse if either of the following applies:
(i)Assets or liabilities are transferred between the individuals filing the joint return for the principal purpose of avoidance of the payment of tax or as part of a fraudulent scheme by those individuals.
(ii)That liability is uncollectible and, within three years of the date the court order is effective pursuant to subparagraph (C), either of the following also applies:
(I)The spouse obligated to pay that liability pursuant to the court order files for bankruptcy and that liability is discharged in bankruptcy.
(II)The spouse obligated to pay that liability pursuant to the court order becomes a nonresident.
(c)Notwithstanding subdivision (a) or paragraph (1) of subdivision (b), whenever a joint return is filed by a husband and wife and the tax liability is not fully paid, that liability, including interest and penalties, may be revised by the Franchise Tax Board as to one spouse.
(1)However, the liability shall not be revised:
(A)To relieve a spouse of tax liability on income earned by or subject to the exclusive management and control of the spouse. The liability of the spouse for the tax, penalties, and interest due for the taxable year shall be in the same ratio to total tax, penalties, and interest due for the taxable year as the income earned by or subject to the management and control of the spouse is to total gross income reportable on the return.
(B)To relieve a spouse of liability below the amount actually paid on the liability prior to the granting of relief, including credit from any other taxable year available for application to the liability.
(2)The liability may be revised only if the spouse whose liability is to be revised establishes that he or she did not know of, and had no reason to know of, the nonpayment at the time the return was filed. For purposes of this paragraph, reason to know means whether or not a reasonably prudent person would have had reason to know of the nonpayment.
(3)The determination of the Franchise Tax Board as to whether the liability is to be revised as to one spouse shall be made not less than 30 days after notification of the other spouse and shall be based upon whether, under all of the facts and circumstances surrounding the nonpayment, it would be inequitable to hold the spouse requesting revision liable for the nonpayment. Any action taken under this section shall be treated as though it were action on a protest taken under Section 19044 and shall become final upon the expiration of 30 days from the date that notice of the action is mailed to both spouses, unless, within that 30-day period, one or both spouses appeal the determination to the board as provided in Section 19045.
(4)This subdivision shall apply to all taxable years subject to the provisions of this part, but shall not apply to any taxable year which has been closed by a statute of limitations, res judicata, or otherwise.
(d)For purposes of this section, the determination of the spouse to whom items of gross income are attributable shall be made without regard to community property laws.
(e)The amendments made to this section by the act adding this subdivision shall apply to court orders served or acknowledged on or after the effective date of that act.
(a)The spouse who controls the disposition of or who receives or spends community income as well as the spouse who is taxable on the income is liable for the payment of the taxes imposed by Part 10 (commencing with Section 17001) on that income.
(b)(1)Whenever a joint return is filed by a husband and wife, the liability for the tax on the aggregate income is joint and several.
(2)The amount of liability on a joint return may not be reduced, but the individual responsible for all or part of that liability may be revised by a court in a proceeding for dissolution of the marriage may determine the individual responsible for all or part of the liability, provided the order revising tax liability on the joint return:
(A)Must separately state the income tax liabilities for the taxable years for which revision of tax liability is granted.
(B)Shall not revise a tax liability that has been fully paid prior to the effective date of the order; however, any unpaid amount may be revised.
(C)Shall become effective when the Franchise Tax Board is served with or acknowledges receipt of the order.
(D)(i)Shall not be effective if the gross income reportable on the return exceeds two hundred thousand dollars ($200,000) or the amount of tax liability the spouse is relieved of exceeds ten thousand dollars ($10,000), unless a tax revision clearance certificate is obtained from the Franchise Tax Board and filed with the court.
(ii)Beginning on January 1, 2017, 2018, and annually thereafter, the amounts specified in clause (i) shall be recomputed in accordance with subparagraph (B) of paragraph (3) of subdivision (b) of Section 19442, modified by substituting January 1, 2017 2018 for January 1, 2004.
(E)Shall not be effective to relieve a spouse of the tax liability on income earned by or subject to the exclusive management and control of that spouse if either of the following applies:
(i)Assets or liabilities are transferred between the individuals filing the joint return for the principal purpose of avoidance of the payment of tax or as part of a fraudulent scheme by those individuals.
(ii)That liability is uncollectible and, within three years of the date the court order is effective pursuant to subparagraph (C), either of the following also applies:
(I)The spouse obligated to pay that liability pursuant to the court order files for bankruptcy and that liability is discharged in bankruptcy.
(II)The spouse obligated to pay that liability pursuant to the court order becomes a nonresident.
(c)Notwithstanding subdivision (a) or paragraph (1) of subdivision (b), whenever a joint return is filed by a husband and wife and the tax liability is not fully paid, that liability, including interest and penalties, may be revised by the Franchise Tax Board as to one spouse.
(1)However, the liability shall not be revised:
(A)To relieve a spouse of tax liability on income earned by or subject to the exclusive management and control of the spouse. The liability of the spouse for the tax, penalties, and interest due for the taxable year shall be in the same ratio to total tax, penalties, and interest due for the taxable year as the income earned by or subject to the management and control of the spouse is to total gross income reportable on the return.
(B)To relieve a spouse of liability below the amount actually paid on the liability prior to the granting of relief, including credit from any other taxable year available for application to the liability.
(2)The liability may be revised only if the spouse whose liability is to be revised establishes that he or she did not know of, and had no reason to know of, the nonpayment at the time the return was filed. For purposes of this paragraph, reason to know means whether or not a reasonably prudent person would have had reason to know of the nonpayment.
(3)The determination of the Franchise Tax Board as to whether the liability is to be revised as to one spouse shall be made not less than 30 days after notification of the other spouse and shall be based upon whether, under all of the facts and circumstances surrounding the nonpayment, it would be inequitable to hold the spouse requesting revision liable for the nonpayment. Any action taken under this section shall be treated as though it were action on a protest taken under Section 19044 and shall become final upon the expiration of 30 days from the date that notice of the action is mailed to both spouses, unless, within that 30-day period, one or both spouses appeal the determination to the board as provided in Section 19045.
(4)This subdivision shall apply to all taxable years subject to the provisions of this part, but shall not apply to any taxable year which has been closed by a statute of limitations, res judicata, or otherwise.
(d)For purposes of this section, the determination of the spouse to whom items of gross income are attributable shall be made without regard to community property laws.
(e)The amendments made to this section by the act adding this subdivision shall apply to court orders served or acknowledged on or after the effective date of that act.
(a)The spouse who controls the disposition of or who receives or spends community income as well as the spouse who is taxable on the income is liable for the payment of the taxes imposed by Part 10 (commencing with Section 17001) on that income.
(b)(1)Whenever a joint return is filed by a husband and wife, the liability for the tax on the aggregate income is joint and several. The liability may be revised by a court in a proceeding for dissolution of the marriage of the husband and wife, provided:
(1)The order revising tax liability may not relieve a spouse of tax liability on income earned by or subject to the exclusive management and control of the spouse. The liability of the spouse for the tax, penalties, and interest due for the taxable year shall be in the same ratio to total tax, penalties, and interest due for the taxable year as the income earned by or subject to the management and control of the spouse is to total gross income reportable on the return.
(2)The order revising tax liability:
(2)The amount of liability on a joint return may not be reduced, but the individual responsible for all or part of that liability may be revised by a court in a proceeding for dissolution of the marriage provided the order revising tax liability on the joint return:
(A)Must separately state the income tax liabilities for the taxable years for which revision of tax liability is granted.
(B)Shall not revise a tax liability that has been fully paid prior to the effective date of the order; however, any unpaid amount may be revised.
(C)Shall become effective when the Franchise Tax Board is served with or acknowledges receipt of the order.
(D)(i)Shall not be effective if the gross income reportable on the return exceeds one two hundred fifty thousand dollars ($150,000) ($200,000) or the amount of tax liability the spouse is relieved of exceeds seven ten thousand five hundred dollars ($7,500) ($10,000), unless a tax revision clearance certificate is obtained from the Franchise Tax Board and filed with the court.
(ii)Beginning on January 1, 2017, and annually thereafter, the amounts specified in clause (i) shall be recomputed in accordance with subparagraph (B) of paragraph (3) of subdivision (b) of Section 19442, modified by substituting January 1, 2017 for January 1, 2004.
(E)Shall not be effective to relieve a spouse of the tax liability on income earned by or subject to the exclusive management and control of that spouse if either of the following applies:
(i)Assets or liabilities are transferred between the individuals filing the joint return for the principal purpose of avoidance of the payment of tax or as part of a fraudulent scheme by those individuals.
(ii)That liability is uncollectible and, within three years of the date the court order is effective pursuant to subparagraph (C), either of the following also applies:
(I)The spouse obligated to pay that liability pursuant to the court order files for bankruptcy and that liability is discharged in bankruptcy.
(II)The spouse obligated to pay that liability pursuant to the court order becomes a nonresident.
(c)Notwithstanding subdivisions (a) and (b), subdivision (a) or paragraph (1) of subdivision (b), whenever a joint return is filed by a husband and wife and the tax liability is not fully paid, that liability, including interest and penalties, may be revised by the Franchise Tax Board as to one spouse.
(1)However, the liability shall not be revised:
(A)To relieve a spouse of tax liability on income earned by or subject to the exclusive management and control of the spouse. The liability of the spouse for the tax, penalties, and interest due for the taxable year shall be in the same ratio to total tax, penalties, and interest due for the taxable year as the income earned by or subject to the management and control of the spouse is to total gross income reportable on the return.
(B)To relieve a spouse of liability below the amount actually paid on the liability prior to the granting of relief, including credit from any other taxable year available for application to the liability.
(2)The liability may be revised only if the spouse whose liability is to be revised establishes that he or she did not know of, and had no reason to know of, the nonpayment at the time the return was filed. For purposes of this paragraph, reason to know means whether or not a reasonably prudent person would have had reason to know of the nonpayment.
(3)For purposes of this section, the determination of the spouse to whom items of gross income are attributable shall be made without regard to community property laws.
(4)
(3)The determination of the Franchise Tax Board as to whether the liability is to be revised as to one spouse shall be made not less than 30 days after notification of the other spouse and shall be based upon whether, under all of the facts and circumstances surrounding the nonpayment, it would be inequitable to hold the spouse requesting revision liable for the nonpayment. Any action taken under this section shall be treated as though it were action on a protest taken under Section 19044 and shall become final upon the expiration of 30 days from the date that notice of the action is mailed to both spouses, unless, within that 30-day period, one or both spouses appeal the determination to the board as provided in Section 19045.
(5)
(4)This subdivision shall apply to all taxable years subject to the provisions of this part, but shall not apply to any taxable year which has been closed by a statute of limitations, res judicata, or otherwise.
(d)For purposes of this section, the determination of the spouse to whom items of gross income are attributable shall be made without regard to community property laws.
(e)The amendments made to this section by the act adding this subdivision shall apply to court orders served or acknowledged on or after the effective date of that act.
SECTION 1.Section 18533 of the Revenue and Taxation Code is amended to read:18533.(a)(1)Notwithstanding subdivision (a) and the first sentence of subdivision (b) of Section 19006:
(A)An individual who has made a joint return may elect to seek relief under the procedures prescribed under subdivision (b), and
(B)If the individual is eligible to elect the application of subdivision (c), the individual may, in addition to any election under subparagraph (A), elect to limit the individuals liability for any deficiency with respect to the joint return in the manner prescribed under subdivision (c).
(2)Any determination under this section shall be made without regard to community property laws.
(b)(1)Under procedures prescribed by the Franchise Tax Board, if
(A)A joint return has been made under this chapter for a taxable year,
(B)On that return there is an understatement of tax attributable to erroneous items of one individual filing the joint return,
(C)The other individual filing the joint return establishes that in signing the return he or she did not know of, and had no reason to know of, that understatement,
(D)Taking into account all facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for that taxable year attributable to that understatement, and
(E)The other individual elects (in the form and manner as the Franchise Tax Board may prescribe) the benefits of this subdivision not later than the date that is two years after the date the Franchise Tax Board has begun collection activities with respect to the individual making the election,
then the other individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for that taxable year to the extent that the liability is attributable to that understatement.
(2)If an individual who, but for subparagraph (C) of paragraph (1), would be relieved of liability under paragraph (1), establishes that in signing the return the individual did not know, and had no reason to know, the extent of the understatement, then the individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for that taxable year to the extent that the liability is attributable to the portion of the understatement of which that individual did not know and had no reason to know.
(3)For purposes of this subdivision, the term understatement has the meaning given to that term by Section 6662(d)(2)(A) of the Internal Revenue Code.
(c)(1)Except as provided in this subdivision, if an individual who has made a joint return for any taxable year elects the application of this subdivision, the individuals liability for any deficiency that is assessed with respect to the return may not exceed the portion of the deficiency properly allocable to the individual under subdivision (d).
(2)Except as provided in clause (ii) of subparagraph (A) of paragraph (3) or subparagraph (C) of paragraph (3), each individual who elects the application of this subdivision shall have the burden of proof with respect to establishing the portion of any deficiency allocable to that individual.
(3)(A)(i)An individual shall only be eligible to elect the application of this subdivision if
(I)At the time the election is filed, that individual is no longer married to, or is legally separated from, the individual with whom that individual filed the joint return to which the election relates, or
(II)That individual was not a member of the same household as the individual with whom the joint return was filed at any time during the 12-month period ending on the date the election is filed.
(ii)If the Franchise Tax Board demonstrates that assets were transferred between individuals filing a joint return as part of a fraudulent scheme by those individuals, an election under this subdivision by either individual shall be invalid (and subdivision (a) and the first sentence of subdivision (b) of Section 19006 shall apply to the joint return).
(B)An election under this subdivision for any taxable year shall be made not later than two years after the date on which the Franchise Tax Board has begun collection activities with respect to the individual making the election.
(C)If the Franchise Tax Board demonstrates that an individual making an election under this subdivision had actual knowledge, at the time the individual signed the return, of any item giving rise to a deficiency (or portion thereof) that is not allocable to the individual under subdivision (d), that election does not apply to that deficiency (or portion). This subparagraph does not apply where the individual with actual knowledge establishes that the individual signed the return under duress.
(4)(A)Notwithstanding any other provision of this subdivision, the portion of the deficiency for which the individual electing the application of this subdivision is liable (without regard to this paragraph) shall be increased by the value of any disqualified asset transferred to the individual.
(B)For purposes of this paragraph
(i)The term disqualified asset means any property or right to property transferred to an individual making the election under this subdivision with respect to a joint return by the other individual filing the joint return if the principal purpose of the transfer was the avoidance of tax or payment of tax.
(ii)(I)For purposes of clause (i), except as provided in subclause (II), any transfer that is made after the date that is one year before the date on which the first notice of proposed assessment under Article 3 (commencing with Section 19031) of Chapter 4 is sent shall be presumed to have as its principal purpose the avoidance of tax or payment of tax.
(II)Subclause (I) does not apply to any transfer pursuant to a decree of divorce or separate maintenance or a written instrument incident to that decree or to any transfer that an individual establishes did not have as its principal purpose the avoidance of tax or payment of tax.
(d)For purposes of subdivision (c)
(1)The portion of any deficiency on a joint return allocated to an individual shall be the amount that bears the same ratio to the deficiency as the net amount of items taken into account in computing the deficiency and allocable to the individual under paragraph (3) bears to the net amount of all items taken into account in computing the deficiency.
(2)If a deficiency (or portion thereof) is attributable to
(A)The disallowance of a credit, or
(B)Any tax (other than tax imposed by Section 17041 or 17062) required to be included with the joint return, and the item is allocated to one individual under paragraph (3), that deficiency (or portion) shall be allocated to that individual. Any item so allocated may not be taken into account under paragraph (1).
(3)For purposes of this subdivision
(A)Except as provided in paragraphs (4) and (5), any item giving rise to a deficiency on a joint return shall be allocated to individuals filing the return in the same manner as it would have been allocated if the individuals had filed separate returns for the taxable year.
(B)Under rules prescribed by the Franchise Tax Board, an item otherwise allocable to an individual under subparagraph (A) shall be allocated to the other individual filing the joint return to the extent the item gave rise to a tax benefit on the joint return to the other individual.
(C)The Franchise Tax Board may provide for an allocation of any item in a manner not prescribed by subparagraph (A) if the Franchise Tax Board establishes that the allocation is appropriate due to fraud of one or both individuals.
(4)If an item of deduction or credit is disallowed in its entirety solely because a separate return is filed, the disallowance shall be disregarded and the item shall be computed as if a joint return had been filed and then allocated between the spouses appropriately.
(5)If the liability of a child of a taxpayer is included on a joint return, that liability shall be disregarded in computing the separate liability of either spouse and that liability shall be allocated appropriately between the spouses.
(e)(1)In the case of an individual who elects to have subdivision (b) or (c) apply, or who requests equitable relief under subdivision (f)
(A)(i)The determination of the Franchise Tax Board as to whether the liability is to be revised as to one individual filing the joint return shall be made not less than 30 days after notification of the other individual filing the joint return.
(ii)Any action taken under this section shall be treated as though it were action on a protest taken under Section 19044 and shall become final upon the expiration of 30 days from the date that notice of the action is mailed to both individuals filing the joint return, unless, within that 30-day period, the individual making the election under subdivision (b) or (c) or requesting equitable relief under subdivision (f) appeals the determination to the board as provided in clause (iii) or the other individual filing the joint return appeals the determination to the board as provided in Section 19045.
(iii)The individual making the election under subdivision (b) or (c) or requesting equitable relief under subdivision (f) may appeal the determination of the Franchise Tax Board of the appropriate relief available to the individual under this section if that appeal is filed during the 30-day period prescribed in clause (ii) and the appeal shall be treated as an appeal to the board under Section 19045. Notwithstanding the preceding sentence, the individual making the election under subdivision (b) or (c) or requesting equitable relief under subdivision (f) may appeal to the board at any time after the date that is six months after the date the election is filed with the Franchise Tax Board and before the close of the 30-day period prescribed in clause (ii).
(B)Except as otherwise provided in Section 19081 or 19082, no levy or proceeding in court shall be made, begun, or prosecuted against the individual making an election under subdivision (b) or (c) or requesting equitable relief under subdivision (f), for collection of any assessment to which the election relates until the expiration of the 30-day period described in clause (ii) of subparagraph (A), or, if an appeal to the board has been filed under clause (iii) or Section 19045, until the decision of the board has become final.
(2)The running of the period of limitations in Section 19371 on the collection of the assessment to which the petition under subparagraph (A) of paragraph (1) relates shall be suspended for the period during which the Franchise Tax Board is prohibited by subparagraph (B) of paragraph (1) from collecting by levy or a proceeding in court and for 60 days thereafter.
(3)(A)Except as provided in subparagraph (B), notwithstanding any other law or rule of law (other than Section 19306 and Article 6 (commencing with Section 19441) of Chapter 6), a credit or refund shall be allowed or made to the extent attributable to the application of this section.
(B)In the case of any election under subdivision (b) or (c) or request for equitable relief under subdivision (f), if a decision of the board in any prior proceeding for the same taxable year has become final, that decision shall be conclusive except with respect to the qualification of the individual for relief that was not an issue in that proceeding. The exception contained in the preceding sentence does not apply if the board determines that the individual participated meaningfully in the prior proceeding.
(C)No credit or refund shall be allowed as a result of an election under subdivision (c).
(f)(1)Under procedures prescribed by the Franchise Tax Board, if taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either), and relief is not available to the individual under subdivision (b) or (c), the Franchise Tax Board may relieve the individual of that liability.
(2)Notwithstanding subdivision (b) of Section 19006, when taking into account all the facts and circumstances in paragraph (1), the fact that the individuals liability for any unpaid tax or deficiency for any taxable year where a joint return has been filed has been revised under a judgment of dissolution of marriage may be a factor weighing in favor of relief from tax liability on income earned by or subject to the exclusive management and control of the individual, whether or not the individual was a victim of abuse at the time the return was filed or whether or not funds that would have been used to pay the tax or deficiency were misappropriated by the nonrequesting spouse.
(g)(1)The Franchise Tax Board may prescribe regulations providing methods for allocation of items other than the methods under paragraph (3) of subdivision (d).
(2)It is the intent of the Legislature that, in construing this section and any other sections that are specifically cross-referenced in this section, any regulations that may be promulgated by the Secretary of the Treasury under Section 6015 of the Internal Revenue Code shall apply to the extent that those regulations do not conflict with this section or with any regulations that may be promulgated by the Franchise Tax Board.
(h)The amendments made by Section 5 of Chapter 931 of the Statutes of 1999 shall apply to any liability for tax arising after October 10, 1999, and any liability for tax arising on or before that date but remaining unpaid as of that date.
(i)(1)An individual who has made a joint return and has been granted relief under Section 6015 of the Internal Revenue Code, relating to joint and several liability with respect to a federal joint income tax return, shall be eligible for relief under this section if all of the following conditions are satisfied:
(A)The individual requests relief under this section.
(B)The facts and circumstances that apply to the understatement and liabilities for which the relief is requested are the same facts and circumstances that applied to the understatement and liabilities for which that individual was granted relief under Section 6015 of the Internal Revenue Code.
(C)The individual requesting relief under this subdivision furnishes the Franchise Tax Board with a copy of the federal determination granting that individual relief under Section 6015 of the Internal Revenue Code. If the federal determination does not clearly identify the issues and liabilities for which the individual was granted relief under Section 6015 of the Internal Revenue Code, the Franchise Tax Board may request, from the individual requesting relief, any supporting documentation reasonably necessary to substantiate that the issues and liabilities for which relief is requested under this section are the same as the issues and liabilities for which the individual received relief under Section 6015 of the Internal Revenue Code.
(2)This subdivision does not apply if, prior to the expiration of the 30-day period described in clause (i) of subparagraph (A) of paragraph (1) of subdivision (e), the other individual that filed the joint return for which the relief is requested under this subdivision submits information to the Franchise Tax Board that indicates that relief should not be granted. For purposes of this paragraph, information that indicates that relief should not be granted is limited to the following:
(A)Information that indicates that the facts and circumstances that apply to the understatement and liabilities for which the relief is requested are not the same facts and circumstances that applied to the understatement and liabilities for which that individual was granted relief under Section 6015 of the Internal Revenue Code.
(B)Information that indicates that there has not been a federal determination granting relief under Section 6015 of the Internal Revenue Code or that the federal determination granting relief under Section 6015 of the Internal Revenue Code has been modified, altered, withdrawn, canceled, or rescinded.
(C)Information indicating that the other individual, as described in the first sentence of this paragraph, did not have the opportunity to participate, within the meaning of Section 6015 of the Internal Revenue Code and the regulations thereunder, in the federal administrative or judicial proceeding that resulted in relief under Section 6015 of the Internal Revenue Code.
(j)If, prior to the date the Franchise Tax Board issues its determination with respect to a request for relief under this section, the individual requesting relief demonstrates to the Franchise Tax Board that a request for relief has been filed with the Internal Revenue Service pursuant to Section 6015 of the Internal Revenue Code and demonstrates that the request for relief involves the same facts and circumstances as the request for relief that is pending before the Franchise Tax Board, the Franchise Tax Board may not deny relief with respect to that request, in whole or in part, until federal action on the request for relief under Section 6015 of the Internal Revenue Code is final.
(k)An individual may not be granted relief under this section if a court has revised the tax liability in a proceeding for dissolution of the marriage in accordance with subdivision (b) of Section 19006.
(l)Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code shall not apply to any procedure or rule prescribed by the Franchise Tax Board pursuant to this section.
(m)(1)This section shall become operative on January 1, 2009.
(2)The provisions of subdivisions (i) and (j), as amended by the act adding this paragraph, shall apply on and after January 1, 2009.
(3)The amendments made to subdivisions (e), (g), and (h) by Chapter 318 of the Statutes of 2010 shall apply to requests for relief received on or after January 1, 2010.
(4)The amendments made by the act adding this paragraph shall apply to requests for relief received on or after January 1, 2016.
(a)(1)Notwithstanding subdivision (a) and the first sentence of subdivision (b) of Section 19006:
(A)An individual who has made a joint return may elect to seek relief under the procedures prescribed under subdivision (b), and
(B)If the individual is eligible to elect the application of subdivision (c), the individual may, in addition to any election under subparagraph (A), elect to limit the individuals liability for any deficiency with respect to the joint return in the manner prescribed under subdivision (c).
(2)Any determination under this section shall be made without regard to community property laws.
(b)(1)Under procedures prescribed by the Franchise Tax Board, if
(A)A joint return has been made under this chapter for a taxable year,
(B)On that return there is an understatement of tax attributable to erroneous items of one individual filing the joint return,
(C)The other individual filing the joint return establishes that in signing the return he or she did not know of, and had no reason to know of, that understatement,
(D)Taking into account all facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for that taxable year attributable to that understatement, and
(E)The other individual elects (in the form and manner as the Franchise Tax Board may prescribe) the benefits of this subdivision not later than the date that is two years after the date the Franchise Tax Board has begun collection activities with respect to the individual making the election,
then the other individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for that taxable year to the extent that the liability is attributable to that understatement.
(2)If an individual who, but for subparagraph (C) of paragraph (1), would be relieved of liability under paragraph (1), establishes that in signing the return the individual did not know, and had no reason to know, the extent of the understatement, then the individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for that taxable year to the extent that the liability is attributable to the portion of the understatement of which that individual did not know and had no reason to know.
(3)For purposes of this subdivision, the term understatement has the meaning given to that term by Section 6662(d)(2)(A) of the Internal Revenue Code.
(c)(1)Except as provided in this subdivision, if an individual who has made a joint return for any taxable year elects the application of this subdivision, the individuals liability for any deficiency that is assessed with respect to the return may not exceed the portion of the deficiency properly allocable to the individual under subdivision (d).
(2)Except as provided in clause (ii) of subparagraph (A) of paragraph (3) or subparagraph (C) of paragraph (3), each individual who elects the application of this subdivision shall have the burden of proof with respect to establishing the portion of any deficiency allocable to that individual.
(3)(A)(i)An individual shall only be eligible to elect the application of this subdivision if
(I)At the time the election is filed, that individual is no longer married to, or is legally separated from, the individual with whom that individual filed the joint return to which the election relates, or
(II)That individual was not a member of the same household as the individual with whom the joint return was filed at any time during the 12-month period ending on the date the election is filed.
(ii)If the Franchise Tax Board demonstrates that assets were transferred between individuals filing a joint return as part of a fraudulent scheme by those individuals, an election under this subdivision by either individual shall be invalid (and subdivision (a) and the first sentence of subdivision (b) of Section 19006 shall apply to the joint return).
(B)An election under this subdivision for any taxable year shall be made not later than two years after the date on which the Franchise Tax Board has begun collection activities with respect to the individual making the election.
(C)If the Franchise Tax Board demonstrates that an individual making an election under this subdivision had actual knowledge, at the time the individual signed the return, of any item giving rise to a deficiency (or portion thereof) that is not allocable to the individual under subdivision (d), that election does not apply to that deficiency (or portion). This subparagraph does not apply where the individual with actual knowledge establishes that the individual signed the return under duress.
(4)(A)Notwithstanding any other provision of this subdivision, the portion of the deficiency for which the individual electing the application of this subdivision is liable (without regard to this paragraph) shall be increased by the value of any disqualified asset transferred to the individual.
(B)For purposes of this paragraph
(i)The term disqualified asset means any property or right to property transferred to an individual making the election under this subdivision with respect to a joint return by the other individual filing the joint return if the principal purpose of the transfer was the avoidance of tax or payment of tax.
(ii)(I)For purposes of clause (i), except as provided in subclause (II), any transfer that is made after the date that is one year before the date on which the first notice of proposed assessment under Article 3 (commencing with Section 19031) of Chapter 4 is sent shall be presumed to have as its principal purpose the avoidance of tax or payment of tax.
(II)Subclause (I) does not apply to any transfer pursuant to a decree of divorce or separate maintenance or a written instrument incident to that decree or to any transfer that an individual establishes did not have as its principal purpose the avoidance of tax or payment of tax.
(d)For purposes of subdivision (c)
(1)The portion of any deficiency on a joint return allocated to an individual shall be the amount that bears the same ratio to the deficiency as the net amount of items taken into account in computing the deficiency and allocable to the individual under paragraph (3) bears to the net amount of all items taken into account in computing the deficiency.
(2)If a deficiency (or portion thereof) is attributable to
(A)The disallowance of a credit, or
(B)Any tax (other than tax imposed by Section 17041 or 17062) required to be included with the joint return, and the item is allocated to one individual under paragraph (3), that deficiency (or portion) shall be allocated to that individual. Any item so allocated may not be taken into account under paragraph (1).
(3)For purposes of this subdivision
(A)Except as provided in paragraphs (4) and (5), any item giving rise to a deficiency on a joint return shall be allocated to individuals filing the return in the same manner as it would have been allocated if the individuals had filed separate returns for the taxable year.
(B)Under rules prescribed by the Franchise Tax Board, an item otherwise allocable to an individual under subparagraph (A) shall be allocated to the other individual filing the joint return to the extent the item gave rise to a tax benefit on the joint return to the other individual.
(C)The Franchise Tax Board may provide for an allocation of any item in a manner not prescribed by subparagraph (A) if the Franchise Tax Board establishes that the allocation is appropriate due to fraud of one or both individuals.
(4)If an item of deduction or credit is disallowed in its entirety solely because a separate return is filed, the disallowance shall be disregarded and the item shall be computed as if a joint return had been filed and then allocated between the spouses appropriately.
(5)If the liability of a child of a taxpayer is included on a joint return, that liability shall be disregarded in computing the separate liability of either spouse and that liability shall be allocated appropriately between the spouses.
(e)(1)In the case of an individual who elects to have subdivision (b) or (c) apply, or who requests equitable relief under subdivision (f)
(A)(i)The determination of the Franchise Tax Board as to whether the liability is to be revised as to one individual filing the joint return shall be made not less than 30 days after notification of the other individual filing the joint return.
(ii)Any action taken under this section shall be treated as though it were action on a protest taken under Section 19044 and shall become final upon the expiration of 30 days from the date that notice of the action is mailed to both individuals filing the joint return, unless, within that 30-day period, the individual making the election under subdivision (b) or (c) or requesting equitable relief under subdivision (f) appeals the determination to the board as provided in clause (iii) or the other individual filing the joint return appeals the determination to the board as provided in Section 19045.
(iii)The individual making the election under subdivision (b) or (c) or requesting equitable relief under subdivision (f) may appeal the determination of the Franchise Tax Board of the appropriate relief available to the individual under this section if that appeal is filed during the 30-day period prescribed in clause (ii) and the appeal shall be treated as an appeal to the board under Section 19045. Notwithstanding the preceding sentence, the individual making the election under subdivision (b) or (c) or requesting equitable relief under subdivision (f) may appeal to the board at any time after the date that is six months after the date the election is filed with the Franchise Tax Board and before the close of the 30-day period prescribed in clause (ii).
(B)Except as otherwise provided in Section 19081 or 19082, no levy or proceeding in court shall be made, begun, or prosecuted against the individual making an election under subdivision (b) or (c) or requesting equitable relief under subdivision (f), for collection of any assessment to which the election relates until the expiration of the 30-day period described in clause (ii) of subparagraph (A), or, if an appeal to the board has been filed under clause (iii) or Section 19045, until the decision of the board has become final.
(2)The running of the period of limitations in Section 19371 on the collection of the assessment to which the petition under subparagraph (A) of paragraph (1) relates shall be suspended for the period during which the Franchise Tax Board is prohibited by subparagraph (B) of paragraph (1) from collecting by levy or a proceeding in court and for 60 days thereafter.
(3)(A)Except as provided in subparagraph (B), notwithstanding any other law or rule of law (other than Section 19306 and Article 6 (commencing with Section 19441) of Chapter 6), a credit or refund shall be allowed or made to the extent attributable to the application of this section.
(B)In the case of any election under subdivision (b) or (c) or request for equitable relief under subdivision (f), if a decision of the board in any prior proceeding for the same taxable year has become final, that decision shall be conclusive except with respect to the qualification of the individual for relief that was not an issue in that proceeding. The exception contained in the preceding sentence does not apply if the board determines that the individual participated meaningfully in the prior proceeding.
(C)No credit or refund shall be allowed as a result of an election under subdivision (c).
(f)(1)Under procedures prescribed by the Franchise Tax Board, if taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either), and relief is not available to the individual under subdivision (b) or (c), the Franchise Tax Board may relieve the individual of that liability.
(2)Notwithstanding any other law, subdivision (b) of Section 19006, when taking into account all the facts and circumstances in paragraph (1), the fact that the individuals liability for any unpaid tax or deficiency for any taxable year where a joint return has been filed has been revised under a judgment of dissolution of marriage may be a factor weighing in favor of relief from tax liability on income earned by or subject to the exclusive management and control of the individual, whether or not the individual was a victim of abuse at the time the return was filed or whether or not funds that would have been used to pay the tax or deficiency were misappropriated by the nonrequesting spouse.
(g)(1)The Franchise Tax Board may prescribe regulations providing methods for allocation of items other than the methods under paragraph (3) of subdivision (d).
(2)It is the intent of the Legislature that, in construing this section and any other sections that are specifically cross-referenced in this section, any regulations that may be promulgated by the Secretary of the Treasury under Section 6015 of the Internal Revenue Code shall apply to the extent that those regulations do not conflict with this section or with any regulations that may be promulgated by the Franchise Tax Board.
(h)The amendments made by Section 5 of Chapter 931 of the Statutes of 1999 shall apply to any liability for tax arising after October 10, 1999, and any liability for tax arising on or before that date but remaining unpaid as of that date.
(i)(1)An individual who has made a joint return and has been granted relief under Section 6015 of the Internal Revenue Code, relating to joint and several liability with respect to a federal joint income tax return, shall be eligible for relief under this section if all of the following conditions are satisfied:
(A)The individual requests relief under this section.
(B)The facts and circumstances that apply to the understatement and liabilities for which the relief is requested are the same facts and circumstances that applied to the understatement and liabilities for which that individual was granted relief under Section 6015 of the Internal Revenue Code.
(C)The individual requesting relief under this subdivision furnishes the Franchise Tax Board with a copy of the federal determination granting that individual relief under Section 6015 of the Internal Revenue Code. If the federal determination does not clearly identify the issues and liabilities for which the individual was granted relief under Section 6015 of the Internal Revenue Code, the Franchise Tax Board may request, from the individual requesting relief, any supporting documentation reasonably necessary to substantiate that the issues and liabilities for which relief is requested under this section are the same as the issues and liabilities for which the individual received relief under Section 6015 of the Internal Revenue Code.
(2)This subdivision does not apply if, prior to the expiration of the 30-day period described in clause (i) of subparagraph (A) of paragraph (1) of subdivision (e), the other individual that filed the joint return for which the relief is requested under this subdivision submits information to the Franchise Tax Board that indicates that relief should not be granted. For purposes of this paragraph, information that indicates that relief should not be granted is limited to the following:
(A)Information that indicates that the facts and circumstances that apply to the understatement and liabilities for which the relief is requested are not the same facts and circumstances that applied to the understatement and liabilities for which that individual was granted relief under Section 6015 of the Internal Revenue Code.
(B)Information that indicates that there has not been a federal determination granting relief under Section 6015 of the Internal Revenue Code or that the federal determination granting relief under Section 6015 of the Internal Revenue Code has been modified, altered, withdrawn, canceled, or rescinded.
(C)Information indicating that the other individual, as described in the first sentence of this paragraph, did not have the opportunity to participate, within the meaning of Section 6015 of the Internal Revenue Code and the regulations thereunder, in the federal administrative or judicial proceeding that resulted in relief under Section 6015 of the Internal Revenue Code.
(j)If, prior to the date the Franchise Tax Board issues its determination with respect to a request for relief under this section, the individual requesting relief demonstrates to the Franchise Tax Board that a request for relief has been filed with the Internal Revenue Service pursuant to Section 6015 of the Internal Revenue Code and demonstrates that the request for relief involves the same facts and circumstances as the request for relief that is pending before the Franchise Tax Board, the Franchise Tax Board may not deny relief with respect to that request, in whole or in part, until federal action on the request for relief under Section 6015 of the Internal Revenue Code is final.
(k)An individual may not be granted relief under this section if a court has revised the tax liability in a proceeding for dissolution of the marriage in accordance with subdivision (b) of Section 19006.
(l)Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code shall not apply to any procedure or rule prescribed by the Franchise Tax Board pursuant to this section.
(m)(1)This section shall become operative on January 1, 2009.
(2)The provisions of subdivision subdivisions (i) and (j), as amended by the act adding this paragraph, shall apply on and after January 1, 2009.
(3)The amendments made to subdivisions (e), (g), and (h) by Chapter 318 of the Statutes of 2010 shall apply to requests for relief received on or after January 1, 2010.
(4)The amendments made by the act adding this paragraph shall apply to requests for relief received on or after January 1, 2016.
(a)(1)Notwithstanding subdivision (a) and the first sentence of subdivision (b) of Section 19006:
(A)An individual who has made a joint return may elect to seek relief under the procedures prescribed under subdivision (b), and
(B)If the individual is eligible to elect the application of subdivision (c), the individual may, in addition to any election under subparagraph (A), elect to limit the individuals liability for any deficiency with respect to the joint return in the manner prescribed under subdivision (c).
(2)Any determination under this section shall be made without regard to community property laws.
(b)(1)Under procedures prescribed by the Franchise Tax Board, if
(A)A joint return has been made under this chapter for a taxable year,
(B)On that return there is an understatement of tax attributable to erroneous items of one individual filing the joint return,
(C)The other individual filing the joint return establishes that in signing the return he or she did not know of, and had no reason to know of, that understatement,
(D)Taking into account all facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for that taxable year attributable to that understatement, and
(E)The other individual elects (in the form and manner as the Franchise Tax Board may prescribe) the benefits of this subdivision not later than the date that is two years after the date the Franchise Tax Board has begun collection activities with respect to the individual making the election,
then the other individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for that taxable year to the extent that the liability is attributable to that understatement.
(2)If an individual who, but for subparagraph (C) of paragraph (1), would be relieved of liability under paragraph (1), establishes that in signing the return the individual did not know, and had no reason to know, the extent of the understatement, then the individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for that taxable year to the extent that the liability is attributable to the portion of the understatement of which that individual did not know and had no reason to know.
(3)For purposes of this subdivision, the term understatement has the meaning given to that term by Section 6662(d)(2)(A) of the Internal Revenue Code.
(c)(1)Except as provided in this subdivision, if an individual who has made a joint return for any taxable year elects the application of this subdivision, the individuals liability for any deficiency that is assessed with respect to the return may not exceed the portion of the deficiency properly allocable to the individual under subdivision (d).
(2)Except as provided in clause (ii) of subparagraph (A) of paragraph (3) or subparagraph (C) of paragraph (3), each individual who elects the application of this subdivision shall have the burden of proof with respect to establishing the portion of any deficiency allocable to that individual.
(3)(A)(i)An individual shall only be eligible to elect the application of this subdivision if
(I)At the time the election is filed, that individual is no longer married to, or is legally separated from, the individual with whom that individual filed the joint return to which the election relates, or
(II)That individual was not a member of the same household as the individual with whom the joint return was filed at any time during the 12-month period ending on the date the election is filed.
(ii)If the Franchise Tax Board demonstrates that assets were transferred between individuals filing a joint return as part of a fraudulent scheme by those individuals, an election under this subdivision by either individual shall be invalid (and subdivision (a) and the first sentence of subdivision (b) of Section 19006 shall apply to the joint return).
(B)An election under this subdivision for any taxable year shall be made not later than two years after the date on which the Franchise Tax Board has begun collection activities with respect to the individual making the election.
(C)If the Franchise Tax Board demonstrates that an individual making an election under this subdivision had actual knowledge, at the time the individual signed the return, of any item giving rise to a deficiency (or portion thereof) that is not allocable to the individual under subdivision (d), that election does not apply to that deficiency (or portion). This subparagraph does not apply where the individual with actual knowledge establishes that the individual signed the return under duress.
(4)(A)Notwithstanding any other provision of this subdivision, the portion of the deficiency for which the individual electing the application of this subdivision is liable (without regard to this paragraph) shall be increased by the value of any disqualified asset transferred to the individual.
(B)For purposes of this paragraph
(i)The term disqualified asset means any property or right to property transferred to an individual making the election under this subdivision with respect to a joint return by the other individual filing the joint return if the principal purpose of the transfer was the avoidance of tax or payment of tax.
(ii)(I)For purposes of clause (i), except as provided in subclause (II), any transfer that is made after the date that is one year before the date on which the first notice of proposed assessment under Article 3 (commencing with Section 19031) of Chapter 4 is sent shall be presumed to have as its principal purpose the avoidance of tax or payment of tax.
(II)Subclause (I) does not apply to any transfer pursuant to a decree of divorce or separate maintenance or a written instrument incident to that decree or to any transfer that an individual establishes did not have as its principal purpose the avoidance of tax or payment of tax.
(d)For purposes of subdivision (c)
(1)The portion of any deficiency on a joint return allocated to an individual shall be the amount that bears the same ratio to the deficiency as the net amount of items taken into account in computing the deficiency and allocable to the individual under paragraph (3) bears to the net amount of all items taken into account in computing the deficiency.
(2)If a deficiency (or portion thereof) is attributable to
(A)The disallowance of a credit, or
(B)Any tax (other than tax imposed by Section 17041 or 17062) required to be included with the joint return, and the item is allocated to one individual under paragraph (3), that deficiency (or portion) shall be allocated to that individual. Any item so allocated may not be taken into account under paragraph (1).
(3)For purposes of this subdivision
(A)Except as provided in paragraphs (4) and (5), any item giving rise to a deficiency on a joint return shall be allocated to individuals filing the return in the same manner as it would have been allocated if the individuals had filed separate returns for the taxable year.
(B)Under rules prescribed by the Franchise Tax Board, an item otherwise allocable to an individual under subparagraph (A) shall be allocated to the other individual filing the joint return to the extent the item gave rise to a tax benefit on the joint return to the other individual.
(C)The Franchise Tax Board may provide for an allocation of any item in a manner not prescribed by subparagraph (A) if the Franchise Tax Board establishes that the allocation is appropriate due to fraud of one or both individuals.
(4)If an item of deduction or credit is disallowed in its entirety solely because a separate return is filed, the disallowance shall be disregarded and the item shall be computed as if a joint return had been filed and then allocated between the spouses appropriately.
(5)If the liability of a child of a taxpayer is included on a joint return, that liability shall be disregarded in computing the separate liability of either spouse and that liability shall be allocated appropriately between the spouses.
(e)(1)In the case of an individual who elects to have subdivision (b) or (c) apply, or who requests equitable relief under subdivision (f)
(A)(i)The determination of the Franchise Tax Board as to whether the liability is to be revised as to one individual filing the joint return shall be made not less than 30 days after notification of the other individual filing the joint return.
(ii)Any action taken under this section shall be treated as though it were action on a protest taken under Section 19044 and shall become final upon the expiration of 30 days from the date that notice of the action is mailed to both individuals filing the joint return, unless, within that 30-day period, the individual making the election under subdivision (b) or (c) or requesting equitable relief under subdivision (f) appeals the determination to the board as provided in clause (iii) or the other individual filing the joint return appeals the determination to the board as provided in Section 19045.
(iii)The individual making the election under subdivision (b) or (c) or requesting equitable relief under subdivision (f) may appeal the determination of the Franchise Tax Board of the appropriate relief available to the individual under this section if that appeal is filed during the 30-day period prescribed in clause (ii) and the appeal shall be treated as an appeal to the board under Section 19045. Notwithstanding the preceding sentence, the individual making the election under subdivision (b) or (c) or requesting equitable relief under subdivision (f) may appeal to the board at any time after the date that is six months after the date the election is filed with the Franchise Tax Board and before the close of the 30-day period prescribed in clause (ii).
(B)Except as otherwise provided in Section 19081 or 19082, no levy or proceeding in court shall be made, begun, or prosecuted against the individual making an election under subdivision (b) or (c) or requesting equitable relief under subdivision (f), for collection of any assessment to which the election relates until the expiration of the 30-day period described in clause (ii) of subparagraph (A), or, if an appeal to the board has been filed under clause (iii) or Section 19045, until the decision of the board has become final.
(2)The running of the period of limitations in Section 19371 on the collection of the assessment to which the petition under subparagraph (A) of paragraph (1) relates shall be suspended for the period during which the Franchise Tax Board is prohibited by subparagraph (B) of paragraph (1) from collecting by levy or a proceeding in court and for 60 days thereafter.
(3)(A)Except as provided in subparagraph (B), notwithstanding any other law or rule of law (other than Section 19306 and Article 6 (commencing with Section 19441) of Chapter 6), a credit or refund shall be allowed or made to the extent attributable to the application of this section.
(B)In the case of any election under subdivision (b) or (c) or request for equitable relief under subdivision (f), if a decision of the board in any prior proceeding for the same taxable year has become final, that decision shall be conclusive except with respect to the qualification of the individual for relief that was not an issue in that proceeding. The exception contained in the preceding sentence does not apply if the board determines that the individual participated meaningfully in the prior proceeding.
(C)No credit or refund shall be allowed as a result of an election under subdivision (c).
(f)(1)Under procedures prescribed by the Franchise Tax Board, if taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either), and relief is not available to the individual under subdivision (b) or (c), the Franchise Tax Board may relieve the individual of that liability.
(2)Notwithstanding any other law, when taking into account all the facts and circumstances in paragraph (1), the fact that the individuals liability for any unpaid tax or deficiency has been revised under a judgment of dissolution of marriage may be a factor weighing in favor of relief from tax liability on income earned by or subject to the exclusive management and control of the individual, whether or not the individual was a victim of abuse at the time the return was filed or whether or not funds that would have been used to pay the tax or deficiency were misappropriated by the nonrequesting spouse.
(g)(1)The Franchise Tax Board may prescribe regulations providing methods for allocation of items other than the methods under paragraph (3) of subdivision (d).
(2)It is the intent of the Legislature that, in construing this section and any other sections that are specifically cross-referenced in this section, any regulations that may be promulgated by the Secretary of the Treasury under Section 6015 of the Internal Revenue Code shall apply to the extent that those regulations do not conflict with this section or with any regulations that may be promulgated by the Franchise Tax Board.
(h)The amendments made by Section 5 of Chapter 931 of the Statutes of 1999 shall apply to any liability for tax arising after October 10, 1999, and any liability for tax arising on or before that date but remaining unpaid as of that date.
(i)(1)An individual who has made a joint return and has been granted relief under Section 6015 of the Internal Revenue Code, relating to joint and several liability with respect to a federal joint income tax return, shall be eligible for relief under this section if all of the following conditions are satisfied:
(A)The individual requests relief under this section.
(B)The facts and circumstances that apply to the understatement and liabilities for which the relief is requested are the same facts and circumstances that applied to the understatement and liabilities for which that individual was granted relief under Section 6015 of the Internal Revenue Code.
(C)The individual requesting relief under this subdivision furnishes the Franchise Tax Board with a copy of the federal determination granting that individual relief under Section 6015 of the Internal Revenue Code. If the federal determination does not clearly identify the issues and liabilities for which the individual was granted relief under Section 6015 of the Internal Revenue Code, the Franchise Tax Board may request, from the individual requesting relief, any supporting documentation reasonably necessary to substantiate that the issues and liabilities for which relief is requested under this section are the same as the issues and liabilities for which the individual received relief under Section 6015 of the Internal Revenue Code.
(2)This subdivision does not apply if, prior to the expiration of the 30-day period described in clause (i) of subparagraph (A) of paragraph (1) of subdivision (e), the other individual that filed the joint return for which the relief is requested under this subdivision submits information to the Franchise Tax Board that indicates that relief should not be granted. For purposes of this paragraph, information that indicates that relief should not be granted is limited to the following:
(A)Information that indicates that the facts and circumstances that apply to the understatement and liabilities for which the relief is requested are not the same facts and circumstances that applied to the understatement and liabilities for which that individual was granted relief under Section 6015 of the Internal Revenue Code.
(B)Information that indicates that there has not been a federal determination granting relief under Section 6015 of the Internal Revenue Code or that the federal determination granting relief under Section 6015 of the Internal Revenue Code has been modified, altered, withdrawn, canceled, or rescinded.
(C)Information indicating that the other individual, as described in the first sentence of this paragraph, did not have the opportunity to participate, within the meaning of Section 6015 of the Internal Revenue Code and the regulations thereunder, in the federal administrative or judicial proceeding that resulted in relief under Section 6015 of the Internal Revenue Code.
(j)If, prior to the date the Franchise Tax Board issues its determination with respect to a request for relief under this section, the individual requesting relief demonstrates to the Franchise Tax Board that a request for relief has been filed with the Internal Revenue Service pursuant to Section 6015 of the Internal Revenue Code and demonstrates that the request for relief involves the same facts and circumstances as the request for relief that is pending before the Franchise Tax Board, the Franchise Tax Board may not deny relief with respect to that request, in whole or in part, until federal action on the request for relief under Section 6015 of the Internal Revenue Code is final.
(k)An individual may not be granted relief under this section if a court has revised the tax liability in a proceeding for dissolution of the marriage in accordance with subdivision (b) of Section 19006.
(l)Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code shall not apply to any procedure or rule prescribed by the Franchise Tax Board pursuant to this section.
(m)(1)This section shall become operative on January 1, 2009.
(2)The provisions of subdivision (i) and (j), as amended by the act adding this paragraph, shall apply on and after January 1, 2009.
(3)The amendments made to subdivisions (e), (g), and (h) by Chapter 318 of the Statutes of 2010 shall apply to requests for relief received on or after the effective date of the act adding this paragraph. January 1, 2010.
(4)The amendments made by the act adding this paragraph shall apply to requests for relief received on or after January 1, 2016.
SECTION 1.It is the intent of the Legislature to enact legislation to amend Section 19006 of the Revenue and Taxation Code to increase the gross income threshold and the tax liability thresholds under which a court is allowed in a proceeding for dissolution of marriage, under specified conditions, to revise the income tax liabilities of spouses or registered domestic partners, and to index these threshold amounts to inflation, and to amend Section 2628 of the Family Code to enumerate the requirements that would be specified in Section 19006 of the Revenue and Taxation Code pursuant to which a court may revise income tax liabilities in a proceeding for dissolution of marriage.
It is the intent of the Legislature to enact legislation to amend Section 19006 of the Revenue and Taxation Code to increase the gross income threshold and the tax liability thresholds under which a court is allowed in a proceeding for dissolution of marriage, under specified conditions, to revise the income tax liabilities of spouses or registered domestic partners, and to index these threshold amounts to inflation, and to amend Section 2628 of the Family Code to enumerate the requirements that would be specified in Section 19006 of the Revenue and Taxation Code pursuant to which a court may revise income tax liabilities in a proceeding for dissolution of marriage.
|
Date
|
Status
|
|---|---|
| Aug 4, 2016 | Read second time. Ordered to consent calendar. |
| Jun 2, 2015 | Read third time. Passed. (Ayes 39. Noes 0.) Ordered to the Assembly. |
| Jun 18, 2015 | Referred to Com. on REV. & TAX. |
| Jul 13, 2015 | July 13 set for first hearing. Placed on REV. & TAX. suspense file. |
| Jan 4, 2016 | From committee with author's amendments. Read second time and amended. Re-referred to Com. on REV. & TAX. |
| Jan 11, 2016 | Removed from REV. & TAX. suspense file. |
| Jan 12, 2016 | From committee: Do pass as amended and re-refer to Com. on APPR. (Ayes 8. Noes 0.) (January 11). |
| Jan 13, 2016 | Read second time and amended. Re-referred to Com. on APPR. |
| Aug 3, 2016 | From committee: Do pass. Ordered to consent calendar. (Ayes 20. Noes 0.) (August 3). |
| Jun 2, 2015 | Read third time. Passed. (Ayes 39. Noes 0. Page 1245.) Ordered to the Assembly. |
| Aug 11, 2016 | In Senate. Concurrence in Assembly amendments pending. |
| Aug 11, 2016 | Read third time. Passed. Ordered to the Senate. |
| Aug 11, 2016 | Read third time. Passed. (Ayes 78. Noes 0. Page 5778.) Ordered to the Senate. |
| Aug 16, 2016 | Ordered to special consent calendar. |
| Aug 18, 2016 | Assembly amendments concurred in. (Ayes 36. Noes 0. Page 5140.) Ordered to engrossing and enrolling. |
| Aug 18, 2016 | Assembly amendments concurred in. (Ayes 36. Noes 0.) Ordered to engrossing and enrolling. |
| Aug 24, 2016 | Enrolled and presented to the Governor at 5 p.m. |
| Feb 26, 2015 | Introduced. Read first time. To Com. on RLS. for assignment. To print. |
| Jun 2, 2015 | In Assembly. Read first time. Held at Desk. |
| May 28, 2015 | Read second time. Ordered to third reading. |
| May 28, 2015 | From committee: Do pass. (Ayes 7. Noes 0.) (May 28). |
| May 28, 2015 | From committee: Do pass. (Ayes 7. Noes 0. Page 1155.) (May 28). |
| May 23, 2015 | Set for hearing May 28. |
| May 18, 2015 | From committee with author's amendments. Read second time and amended. Re-referred to Com. on APPR. |
| May 11, 2015 | May 11 hearing: Placed on APPR. suspense file. |
| May 1, 2015 | Set for hearing May 11. |
| Apr 29, 2015 | From committee: Do pass and re-refer to Com. on APPR. (Ayes 6. Noes 0.) (April 29). Re-referred to Com. on APPR. |
| Apr 29, 2015 | From committee: Do pass and re-refer to Com. on APPR. (Ayes 6. Noes 0. Page 816.) (April 29). Re-referred to Com. on APPR. |
| Apr 21, 2015 | Set for hearing April 29. |
| Apr 16, 2015 | Re-referred to Com. on GOV. & F. |
| Apr 14, 2015 | From committee with author's amendments. Read second time and amended. Re-referred to Com. on RLS. |
| Mar 12, 2015 | Referred to Com. on RLS. |
| Feb 27, 2015 | From printer. May be acted upon on or after March 29. |
|
Date
|
Description
|
Location
|
Votes
|
|
|---|---|---|---|---|
| Aug 18, 2016 | Special Consent SB526 Fuller | Senate Floor |
Passed |
|
| Aug 11, 2016 | SB 526 Fuller Consent Calendar Second Day Regular Session | Assembly Floor |
Passed |
|
| Aug 3, 2016 | Do pass. To Consent Calendar. | Assembly Standing Committee on Appropriations |
Passed |
|
| Jan 11, 2016 | Do pass as amended and be re-referred to the Committee on [Appropriations] | Assembly Standing Committee on Revenue and Taxation |
Passed |
|
| Jun 2, 2015 | Senate 3rd Reading SB526 Fuller | Senate Floor |
Passed |
|
| May 28, 2015 | Do pass | Senate Standing Committee on Appropriations |
Passed |
|
| May 11, 2015 | Placed on suspense file | Senate Standing Committee on Appropriations |
Passed |
|
| Apr 29, 2015 | Do pass, but first be re-referred to the Committee on [Appropriations] | Senate Standing Committee on Governance and Finance |
Passed |
This list shows positions taken on this bill by organizations on the date displayed, which is linked to the original source.
Positions by individuals are not included.
|
Organization
|
Position
|
Date
|
|---|---|---|
| Fiona Ma, Board of Equalization Member | ** Support | Jun 2, 2015 |
| George Runner, Board of Equalization Member | ** Support | Jun 2, 2015 |
Office of Senate Floor Analyses (916) 651-1520 Fax: (916) 327-4478 | SB |
VETO
Bill No: SB 526
:
SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 4/29/15
AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Pavley
NO VOTE RECORDED: Moorlach
SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/28/15
AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen
SENATE FLOOR: 39-0, 6/2/15
AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Runner, Stone, Vidak, Wieckowski, Wolk
NO VOTE RECORDED: Jackson
SENATE FLOOR: 36-0, 8/18/16
AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Huff, Jackson, Lara, Leno, Leyva, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Vidak, Wieckowski, Wolk
NO VOTE RECORDED: Hueso, Liu, Stone
ASSEMBLY FLOOR: 78-0, 8/11/16 (Consent) - See last page for vote
SOURCE: Board of Equalization Member George Runner
DIGEST: This bill allows a court as part of a proceeding for the dissolution of a marriage to revise the person responsible for tax on income earned by his or her spouse or under their exclusive management and control under specified circumstances.
Existing law:
- Requires spouses and registered domestic partners filing as “married filing jointly” to be individually responsible for the return’s accuracy and the tax liability, regardless of the amount of income each spouse generates, often called “joint and several” liability.
- Empowers courts to revise liabilities in a proceeding for the dissolution of the marriage under specified circumstances, so long as the court order:
- Separately states the income tax liabilities for the taxable years for which revision of tax liability is granted.
- Does not revise a tax liability that has been fully paid prior to the effective date of the order; however, any unpaid amount may be revised.
- Becomes effective when Franchise Tax Board (FTB) is served with or acknowledges receipt of the order.
- Provides that court orders revising liabilities are only effective if the gross income reportable on the return exceeds $150,000, or the amount of liability exceeds $7,500, unless a tax revision certificate is obtained from FTB and filed with the court.
- Does not allow a court to relieve a spouse of tax liability on income that he or she earns or has exclusive management and control over.
This bill:
- Allows a court to revise the individual responsible for all or part of the liability as part of a proceeding for dissolution of the marriage so long as the overall liability is not reduced.
- Increases the threshold for the order to be effective from $150,000 in gross income to $200,000, or $7,500 in liability to $10,000, and indexes both amounts for changes in inflation as measured by the California Consumer Price Index.
- Provides that any court order revising the individual responsible for tax liability on income earned by or subject to the exclusive management and control of that spouse shall not be effective if:
- The individuals filing the joint return transfer assets or liabilities between themselves for the principal purpose of avoidance of the payment of tax or as part of a fraudulent scheme by those individuals, or
- The liability is uncollectible, and within three years of the date the court order is effective, the spouse obligated to pay that liability under the court order files for bankruptcy and discharges the liability in bankruptcy, or becomes a nonresident.
- Applies to court orders served or acknowledged on or after the bill’s effective date.
FISCAL EFFECT: Appropriation: Fiscal Com.: Local:
According to the Assembly Appropriations Committee, the fiscal effects of this bill are unknown and impossible to calculate. While this bill does not change the amount of tax liability owed to the state, it could reduce collections by concentrating tax liability among one spouse rather than proportionally. For every $1 million granted in tax relief, an estimated $60,000 in GF revenue would be lost.
Board of Equalization Member George Runner (source)
Board of Equalization Member Fiona Ma
OPPOSITION: (Verified 8/12/16)
None received
ARGUMENTS IN SUPPORT: According to the author, “SB 526 will help state tax agencies honor a divorce agreement that assigns tax liability as part of the process of dividing assets and liabilities. Supporters point out that the Board of Equalization (BOE) regularly hears income tax case appeals where a spouse has requested that the BOE enforce the terms of a divorce decree and assign a tax liability to the spouse who has agreed to pay it. In these cases, the FTB assigned a tax liability to both spouses despite an agreement in the divorce proceedings to allocate payment of the tax liability differently.”
GOVERNOR'S VETO MESSAGE:
I am returning Senate Bill 526 without my signature.
This bill allows a court, in a proceeding for the dissolution of marriage, to assign complete income tax liability to one party.
I am concerned this bill goes too far by changing the long-standing policy of joint and several liability, which holds that two married persons are responsible for the full tax in a given year and that each spouse is responsible for the tax liability on whatever income he or she individually earns.
Under existing law, an unknowing spouse can already be granted relief from tax liability if the other spouse failed to report income, reported income improperly, or claimed improper deductions or credit. I think that is sufficient.
ASSEMBLY FLOOR: 78-0, 8/11/16
AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon
NO VOTE RECORDED: Roger Hernández, Low
10/21/16 15:06:42
**** END ****
Office of Senate Floor Analyses (916) 651-1520 Fax: (916) 327-4478 | SB |
UNFINISHED BUSINESS
Bill No: SB 526
:
SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 4/29/15
AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Pavley
NO VOTE RECORDED: Moorlach
SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/28/15
AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen
SENATE FLOOR: 39-0, 6/2/15
AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Runner, Stone, Vidak, Wieckowski, Wolk
NO VOTE RECORDED: Jackson
ASSEMBLY FLOOR: 78-0, 8/11/16 (Consent) - See last page for vote
SOURCE: Board of Equalization Member George Runner
DIGEST: This bill allows a court as part of a proceeding for the dissolution of a marriage to revise the person responsible for tax on income earned by his or her spouse or under their exclusive management and control under specified circumstances.
Assembly Amendments delete the bill’s provisions directing the Franchise Tax Board (FTB) to consider the terms of a divorce settlement when determining whether to grant equitable relief on a taxpayer’s own income, and instead allow a court as part of a proceeding for the dissolution of a marriage to revise the person responsible for tax on income earned by his or her spouse or under their exclusive management and control.
Existing law:
- Requires spouses and registered domestic partners (RDPs) filing as “married filing jointly” to be individually responsible for the return’s accuracy and the tax liability, regardless of the amount of income each spouse generates, often called “joint and several” liability.
- Empowers courts to revise liabilities in a proceeding for the dissolution of the marriage under specified circumstances, so long as the court order:
- Separately states the income tax liabilities for the taxable years for which revision of tax liability is granted.
- Does not revise a tax liability that has been fully paid prior to the effective date of the order; however, any unpaid amount may be revised.
- Becomes effective when FTB is served with or acknowledges receipt of the order.
- Provides that court orders revising liabilities are only effective if the gross income reportable on the return exceeds $150,000, or the amount of liability exceeds $7,500, unless a tax revision certificate is obtained from FTB and filed with the court.
- Does not allow a court to relieve a spouse of tax liability on income that he or she earns or has exclusive management and control over.
This bill:
- Allows a court to revise the individual responsible for all or part of the liability as part of a proceeding for dissolution of the marriage so long as the overall liability is not reduced.
- Increases the threshold for the order to be effective from $150,000 in gross income to $200,000, or $7,500 in liability to $10,000, and indexes both amounts for changes in inflation as measured by the California Consumer Price Index.
- Provides that any court order revising the individual responsible for tax liability on income earned by or subject to the exclusive management and control of that spouse shall not be effective if:
- The individuals filing the joint return transfer assets or liabilities between themselves for the principal purpose of avoidance of the payment of tax or as part of a fraudulent scheme by those individuals, or
- The liability is uncollectible, and within three years of the date the court order is effective, the spouse obligated to pay that liability under the court order files for bankruptcy and discharges the liability in bankruptcy, or becomes a nonresident.
- Applies to court orders served or acknowledged on or after the bill’s effective date.
FISCAL EFFECT: Appropriation: Fiscal Com.: Local:
According to the Assembly Appropriations Committee, the fiscal effects of this bill are unknown and impossible to calculate. While this bill does not change the amount of tax liability owed to the state, it could reduce collections by concentrating tax liability among one spouse rather than proportionally. For every $1 million granted in tax relief, an estimated $60,000 in GF revenue would be lost.
Board of Equalization Member George Runner (source)
Board of Equalization Member Fiona Ma
OPPOSITION: (Verified 8/12/16)
None received
ARGUMENTS IN SUPPORT: According to the author, “SB 526 will help state tax agencies honor a divorce agreement that assigns tax liability as part of the process of dividing assets and liabilities. Supporters point out that the Board of Equalization (BOE) regularly hears income tax case appeals where a spouse has requested that the BOE enforce the terms of a divorce decree and assign a tax liability to the spouse who has agreed to pay it. In these cases, the FTB assigned a tax liability to both spouses despite an agreement in the divorce proceedings to allocate payment of the tax liability differently.”
ASSEMBLY FLOOR: 78-0, 8/11/16
AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon
NO VOTE RECORDED: Roger Hernández, Low
8/12/16 13:23:54
**** END ****
Date of Hearing: August 3, 2016
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Lorena Gonzalez, Chair
SBPCA Bill Id:SB 526
Author:(Fuller) – As Amended Ver:January 13, 2016
Policy Committee: | Revenue and Taxation | Vote: | 8 - 0 |
Urgency: No State Mandated Local Program: No Reimbursable: No
SUMMARY:
This bill modifies the Administration Franchise and Income Tax Law (AFITL) to allow a court, in a proceeding for the dissolution of marriage, to modify the amount an individual is responsible for on a tax liability. Specifically, this bill:
- Authorizes a court to relieve a spouse of joint and several liability for the tax on income earned by, or subject to the exclusive management and control of, the spouse, in certain conditions.
- Increases the amount of gross income and the amount of tax liability to which a court order can apply without a tax revision clearance certificate from the Franchise Tax Board (FTB). Specifically, the amount of gross income is increased from $150,000 to $200,000, and the amount of tax relief is increased from $7,000 to $10,000. These two thresholds will be adjusted for inflation starting on January 1, 2018.
FISCAL EFFECT:
The fiscal effects of this bill are unknown and impossible to calculate. While this bill does not change the amount of tax liability owed to the state, it could reduce collections by concentrating tax liability among one spouse rather than proportionally. For every $1 million granted in tax relief, an estimated $60,000 in GF revenue would be lost.
COMMENTS:
- Background. Under both federal and state law, spouses who file a joint tax return are individually responsible for the return's accuracy and for the full tax liability for that tax year. This concept, referred to as "joint and several liability," can inequitably impact one spouse in particular circumstances. Because spouses can occasionally misrepresent tax information on a joint return without the knowledge of the other spouse, federal law allows an innocent spouse to qualify for relief under specified circumstances, to which California generally conforms.
- Purpose. According to supporters, SB 526 will help state tax agencies honor a divorce agreement that assigns tax liability as part of the process of dividing assets and liabilities. Supporters point out that the Board of Equalization (BOE) regularly hears income tax case appeals where a spouse has requested that the BOE enforce the terms of a divorce decree and assign a tax liability to the spouse who has agreed to pay it. In these cases, the FTB assigned a tax liability to both spouses despite an agreement in the divorce proceedings to allocate payment of the tax liability differently.
Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081
Date of Hearing: January 11, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
SBPCA Bill Id:SB 526
Author:(Fuller) – As Amended Ver:January 4, 2016
SUSPENSE
Majority vote. Fiscal committee.
SENATE VOTE: 39-0
SUBJECT: Personal income taxes: joint returns: court orders: relief from liability
SENATE VOTE: 39-0
SUBJECT: Personal income taxes: joint returns: relief from liability
SUMMARY: Modifies the "innocent spouse" relief provisions by authorizing a court of competent jurisdiction, in a proceeding for dissolution of marriage, to relieve an individual of tax liability on his/her own income, subject to certain limitations. Specifically, this bill:
- Authorizes a court, in a proceeding for dissolution of marriage, to relieve a spouse of joint and several liability for the tax on income earned by, or subject to the exclusive management and control of, the spouse, unless either of the following applies:
- Assets or liabilities are transferred between the spouses filing the joint return for the principal purpose of avoidance of the payment of tax or as part of a fraudulent scheme; or,
- The tax liability is uncollectible and, within three years of the date the court order is effective, the spouse obligated to pay that liability files for bankruptcy, as specified, or becomes a nonresident.
- Increases the applicable threshold for the amount of gross income reportable on the joint tax return from $150,000 to $200,000, and the threshold amount for tax liability relief from $7,000 to $10,000, as provided, and requires the inflation adjustment for these amounts, beginning on January 1, 2017.
- Provides that the determination of the spouse to whom items of gross income are attributable shall be made without regard to community property laws.
- Applies to court orders served or acknowledged on or after January 1, 2017.
EXISTING LAW:
- Provides that, whenever a joint return is filed by a husband and wife, the liability for the tax on the aggregate income is joint and several.
- Allows a court, in a proceeding for dissolution of marriage, to revise a spouse's tax liability reported on a joint tax return, but prohibits the court from relieving the spouse of tax liability on income earned or control by him/her.
- Authorizes the FTB to relieve an individual of liability on equitable grounds, if relief is not otherwise available.
- Allows a taxpayer to appeal FTB's decision on an "equitable relief" request for innocent spouse relief.
FISCAL EFFECT: Unknown
COMMENTS:
- The Author's Statement. The author has provided the following statement in support of this bill:
"According to Members of the Board of Equalization (BOE), the BOE has adjudicated a number of appeals from the Franchise Tax Board (FTB) that have involved taxpayers who believed they had successfully divided assets and debts, including tax liabilities, in a divorce agreement. Current law does not allow the FTB, and by extension the BOE in its quasi-judicial function, to rely on a marital settlement agreement to relieve a spouse of a joint income tax liability unless the agreement meets a number of technical conditions contained in Revenue and Taxation Code section 19006(b).
"SB 526 makes some changes to the technical conditions in Revenue and Taxation Code section 19006(b) that grant the FTB the ability to honor additional divorce agreements, rather than holding both parties jointly liable.
"If the FTB cannot honor the divorce agreement, the spouse requesting relief has to return to court in order to have the marital settlement agreement enforced. After negotiating a fair division of assets and debts, taxpayers are surprised when they learn that their agreement will not be honored by the state government.
"Providing the FTB a greater ability to abide by the agreement that was negotiated between spouses would limit additional needless litigation in both the courts of California as well as appeals to the BOE."
- Background: "Innocent Spouse" Relief: Under both federal and state law, spouses who file a joint tax return are individually responsible for the return's accuracy and for the full tax liability for that tax year. This concept - referred to as "joint and several liability" - can inequitably impact one spouse in particular circumstances. Consequently, both the Federal Government and the state have enacted "innocent spouse" legislation. These provisions allow taxpayers, under specified circumstances, to be relieved of some or all of the responsibility for a joint tax debt.
- Federal "Innocent Spouse" Law: The Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 (1998 Act) made innocent spouse relief easier to obtain. Specifically, the 1998 Act allows an innocent spouse to qualify for relief under any of the following three provisions:
- Understatement/Apportionment: A spouse may request relief for a taxable year to the extent the liability is attributable to an assessment of tax exceeding the amount reported on the return (i.e., an "understatement of tax"). Generally, the requesting party must show that the understatement resulted from an erroneous item, such as an omission of income or an overstatement of deductible expenses. In addition, the taxpayer must show that, at the time the return was signed, he/she did not know and had no reason to know of the erroneous item that caused the understatement. If the taxpayer can show lack of knowledge with respect to a portion of the understatement, the taxpayer may be relieved of liability for the tax attributable to that portion of the understatement.
- Separate Liability Election: A requesting spouse may elect to be taxed as though he/she filed a "married filing separate" tax return. This relief is available to taxpayers who are no longer married, are legally separated, or who have lived apart from their spouse during the 12-month period preceding the request for relief.
- Equitable Relief: An individual who does not qualify for the relief specified above may still obtain relief if, after taking into account all the facts and circumstances, it is determined to be inequitable to hold the individual liable for any unpaid tax or any deficiency. However, even under equitable relief, the income tax liability from which the requesting spouse seeks relief generally must be attributable to an item of the non-requesting spouse or an underpayment resulting from the non-requesting spouse's income. The IRS, nonetheless, will consider granting equitable relief even though the deficiency or underpayment may be attributable in part or in full to an item of the requesting spouse: (a) in the case of abuse prior to the time the return was filed, or (b) where funds that would have been used to pay the tax or deficiency were misappropriated by the non-requesting spouse.
The IRS has issued guidance for taxpayers seeking equitable relief from joint income tax liability. In general, a nonexclusive list of factors is applied in determining whether relief should be granted because it would be inequitable to hold a requesting spouse liable. One of the factors is the existence of a legal obligation arising from a divorce decree or other legally binding agreement and that factor will weigh in favor of relief if the non-requesting spouse has the sole obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement. However, this factor will be only neutral if the requesting spouse knew or had reason to know, when entering into the divorce decree or agreement, that the non-requesting spouse would not pay the income tax liability.[1]
- Understatement/Apportionment: A spouse may request relief for a taxable year to the extent the liability is attributable to an assessment of tax exceeding the amount reported on the return (i.e., an "understatement of tax"). Generally, the requesting party must show that the understatement resulted from an erroneous item, such as an omission of income or an overstatement of deductible expenses. In addition, the taxpayer must show that, at the time the return was signed, he/she did not know and had no reason to know of the erroneous item that caused the understatement. If the taxpayer can show lack of knowledge with respect to a portion of the understatement, the taxpayer may be relieved of liability for the tax attributable to that portion of the understatement.
- State "Innocent Spouse Law": In 1999, California conformed to portions of the 1998 Act by enacting the Taxpayers' Bill of Rights Act of 1999. In addition, California provides two avenues for innocent spouse relief not available under federal law:
- The liability may be revised by a court in a proceeding for dissolution of marriage, under specified circumstances; and,
- A taxpayer may seek relief from FTB on any unpaid self-assessed tax liability on a joint return, including penalties and interest.
- The liability may be revised by a court in a proceeding for dissolution of marriage, under specified circumstances; and,
- Federal "Innocent Spouse" Law: The Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 (1998 Act) made innocent spouse relief easier to obtain. Specifically, the 1998 Act allows an innocent spouse to qualify for relief under any of the following three provisions:
Thus, unlike the federal "innocent spouse" provisions that consider a legal obligation under dissolution of marriage as one of many factors, state law provides that the liability may be revised by a court in a proceeding for dissolution of the marriage and thus creates an independent exception to the general rule of joint and several liability. The FTB will grant relief to the requesting spouse provided the court order does not relieve the requesting spouse of tax liability on income earned by, or subject to the exclusive management and control of, that spouse. When the gross income reported on the tax return exceeds $150,000 or the amount of tax liability relief exceeds $7,500, the requesting spouse must also obtain from the FTB, and file with the divorce court, a tax revision clearance certificate. A taxpayer has the right to appeal FTB's decision on a request for equitable innocent spouse relief.
- What is the Problem? In a recent BOE case[2], a taxpayer appealed FTB's denial of equitable relief for past unpaid taxes. The taxpayer requested the "innocent spouse" relief and submitted a copy of the marital settlement agreement that had assigned all of the couple's California tax debts (including the ones arising from the taxpayer's own income) to the taxpayer's former spouse. The FTB determined that the taxpayer failed to qualify for the equitable relief under Revenue and Tax Code (R&TC) Section 18533(f). Furthermore, the FTB stated that the court order submitted by the taxpayer did not comply with the applicable statutory requirements to provide an independent ground for relief under R&TC Section 19006(b). The taxpayer argued that the divorce settlement between her and her husband allocated the obligation to pay delinquent taxes to him, so she should be absolved of any tax debt. The FTB, however, relied on R&TC Section 19006(b), which specifically prohibits a court, in a proceeding for dissolution of the marriage, from relieving a spouse of tax liability on income earned by the spouse or income subject to the exclusive management and control of the spouse. While R&TC Section 19006(c) expressly authorizes the FTB to revise the unpaid tax liability, it similarly prohibits the FTB from relieving a spouse from tax liability on income earned or exclusively controlled by the spouse, among other conditions.[3]
Currently, there is no legal avenue for the BOE to provide relief to taxpayers under Section 19006(b). Consequently, the BOE sustained the FTB's action regarding the taxpayer's liability attributable to her income because the court order presented by the taxpayer did not comply with the requirements of Section 19006(b). Furthermore, no relief was allowed for the tax liability attributable to income earned by the taxpayer because she failed to satisfy the necessary conditions for equitable relief from that liability under R&TC Section 18533(f). However, the BOE granted the "innocent spouse" relief to the taxpayer as to the portion of the couple's tax liabilities that was attributable to the taxpayer's former spouse. - Proposed Solution. Divorce settlements can result from difficult negotiations between two former spouses, which often involve an allocation of joint assets and liabilities, including tax debts. Existing law allows taxpayers to have their tax liability revised by a court in a dissolution of marriage proceeding. However, existing law is very clear in that it prohibits a court from relieving a spouse of tax liability on income earned or control by him/her.
This bill creates an exception to R&TC Section 19006(b) that currently prohibits courts and the FTB from relieving a spouse of the tax liability on income earned or controlled by that spouse. Specifically, this bill authorizes the court to reduce the amount of the tax attributable to one of the spouses even if the spouse is the one who earned or controlled the income. Thus, the individual may be relieved by the court of the tax liability attributable to his/her own income if the judgment reassigns this liability to the non-requesting spouse. However, the judgment will not be effective if there is a transfer of assets or liabilities between the former spouses for the principal purpose of tax avoidance or as part of a fraudulent scheme. Nor will it be effective if the FTB is unable to collect the tax, within three years from the date of the court order, from the spouse obligated to pay who has either filed for bankruptcy or became a nonresident.
Existing law also provides that taxpayers with gross income or the amount of tax liability relief above a specified amount - $150,000 and $7,500, respectively - must obtain a tax revision clearance certificate from FTB to file with a court issuing the divorce settlement, detailing the amounts of tax, interest, and penalties to ensure this information is incorporated into the settlement. This bill proposes to increase these threshold amounts from $150,000 to $200,000 and from $7,500 to $10,000, respectively.
- Federal Income Tax and Divorce Decree. Under federal law, the IRS will consider the existence of a legal obligation arising from a divorce decree or other legally binding agreement in determining whether equitable relief should be granted to a requesting spouse. This bill takes a somewhat different approach: to the extent that the court follows all of the statutory requirements of R&TC Section 19006(b), the order itself will provide an independent ground for innocent spouse relief, even if the requesting spouse was the one who earned or controlled the income that has given the rise to the tax liability.
REGISTERED SUPPORT / OPPOSITION:
Support
Fiona Ma, Member, State Board of Equalization
Sen. George Runner (Retired), Member, State Board of Equalization
Opposition
None on file
Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098
Internal Revenue Bulletin: 2003-32, Rev. Proc. 2003-61. ↑
In the Matter of the Appeal of: TONJA M. JARRELL, Case No. 571357, BOE, 2014 Cal. Tax LEIXS 178, May 22, 2014. ↑
Section 19006(c) prescribes an additional requirement before the tax liability may be revised by the FTB; namely, that the spouse whose liability is to be revised must establish a lack of knowledge of the nonpayment at the time the return was filed. ↑
SB 526
Page 7
Date of Hearing: July 13, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
SB 526
(Fuller) – As Amended May 18, 2015
Majority vote. Fiscal committee.
SENATE VOTE: 39-0
SUBJECT: Personal income taxes: joint returns: relief from liability.
SUMMARY: Modifies the "innocent spouse" equitable relief provisions by expanding the Franchise Tax Board's (FTB) authority to relieve an individual of tax liability on his/her own income. Specifically, this bill:
Direct the FTB to consider the terms of a judgment of dissolution of marriage in determining whether to grant equitable relief to a spouse on income earned by, or subject to the exclusive management and control of, that spouse.
Specifies that the fact that a spouse's unpaid tax liability or deficiency has been revised under the judgment of marriage dissolution may be a factor weighing in favor of tax relief, even if one of the following applies:
The spouse was not a victim of abuse at the time the return was filed;
The funds that would have been used to pay the tax liability or deficiency were not misappropriated by the other spouse.
Applies to any unpaid tax or deficiency for any taxable year where a joint return has been filed, without regard to Revenue and Taxation Code (R&TC) Section 19006(b).
Is operative for requests for relief received by the FTB on or after January 1, 2016.
EXISTING LAW:
Provides that, whenever a joint return is filed by a husband and wife, the liability for the tax on the aggregate income is joint and several.
Allows an individual who has made a joint return to seek "innocent spouse" tax relief if the following conditions are met:
On that return there is an understatement of tax attributable to erroneous items of one individual filing the joint return;
The other individual filing the joint return establishes that he/she did not know of, and had no reason to know of, that understatement;
Taking into account all facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax attributable to that understatement; and,
The other individual elects relief within two years of the date FTB begins collection activities.
Limits an individual's liability for any deficiency assessed with respect to a joint return to the portion of the deficiency properly allocable to the individual if:
At the time of election, the individual is no longer married to, or is legally separated from, the person with whom that individual filed the joint return; or,
The individual was not a member of the same household as the person with whom the joint return was filed at any time during the 12-month period ending on the date the election is filed.
Authorizes the FTB to relieve an individual of liability on equitable grounds, if relief is not available under the provisions set forth above.
Provides that any individual who has been granted "innocent spouse" relief under Internal Revenue Code (IRC) Section 6015, relating to joint and several liability with respect to a federal joint income tax return, shall be eligible for state relief if all of the following conditions are satisfied:
The individual requests relief;
The facts and circumstances that apply to the understatement and liabilities for which relief is requested are the same facts and circumstances that applied to the understatement and liabilities for which the individual was granted relief under IRC Section 6015; and,
The individual seeking relief provides the Franchise Tax Board (FTB) with a copy of the federal determination granting relief.
Specifies that these relief provisions shall not apply if the other individual who filed the joint return submits specified information to FTB indicating that relief should not be granted.
Provides that, if the individual seeking relief demonstrates to FTB that a federal request for relief has been filed with the Internal Revenue Service (IRS) and demonstrates that the federal request for relief involves the same facts and circumstances as the request pending before FTB, then FTB may not deny relief with respect to that request until action on the federal request is final.
Allows a taxpayer to appeal FTB's decision on an "equitable relief" request for innocent spouse relief.
FISCAL EFFECT: Unknown, but may be substantial.
COMMENTS:
The Author's Statement. The author has provided the following statement in support of this bill:
"According to members of the Board of Equalization (BOE), the BOE has adjudicated a number of appeals from the Franchise Tax board (FTB) that have involved taxpayers who believed they had successfully divided assets and debts, including tax liabilities, in a divorce agreement. Current law does not allow the FTB, and by extension the BOE in its quasi-judicial function, to rely on a marital settlement agreement to relieve a spouse of a joint income tax liability unless the agreement meets a number of technical conditions contained in Revenue and Taxation Code Section 19006(b).
"SB 526 grants the FTB the authority to consider a divorce agreement as a factor weighing in favor of granting relief when a taxpayer requests that the agency assign outstanding tax liabilities to the spouse who agreed to pay them, rather than holding both parties jointly liable.
"The current law forces the spouse requesting relief to return to court in order to have the marital settlement agreement enforced. After negotiating a fair division of assets and debts, taxpayers are surprised when they learn that their agreement will not be honored by the state government. By providing the FTB the ability to abide by the agreement that was negotiated between spouses, this would limit additional needless litigation in both the courts of California as well as appeals to the Board of Equalization."Arguments in Support. The proponents state that this bill would authorize "California tax agencies to abide by divorce judgments assigning liability to one spouse or the other, without the imposition of onerous requirements." The proponents believe that providing relief to the non-assigned spouse would strengthen the enforcement of divorce judgments and would permit an equitable result if the assigned spouse failed to pay. The proponents of this bill argue that authorizing the FTB "to consider divorce agreements when granting equitable relief, even when the agreements do not meet the requirements of Section 19006(b), will reduce the amount of additional litigation – as well as appeals brought before the BOE." Finally, the proponents urge consideration of expanding the class of judgments to include "Legal Separations and Judgments for dissolution of Registered Domestic Partnership."
Background: "Innocent Spouse" Relief: Under both federal and state law, spouses who file a joint tax return are individually responsible for the return's accuracy and for the full tax liability for that tax year. This concept, referred to as "joint and several liability," can inequitably impact one spouse in particular circumstances. Consequently, both the federal government and the state have enacted "innocent spouse" legislation. These provisions allow taxpayers, under specified circumstances, to be relieved of some or all of the responsibility for a joint tax debt.
Federal "Innocent Spouse" Law: The IRS Restructuring and Reform Act of 1998 (1998 Act) made innocent spouse relief easier to obtain. Specifically, the 1998 Act allows an innocent spouse to qualify for relief under any of the following three provisions:
Understatement/Apportionment: A spouse may request relief for a taxable year to the extent the liability is attributable to an assessment of tax exceeding the amount reported on the return (i.e., an 'understatement of tax'). Generally, the requesting party must show that the understatement resulted from an erroneous item, such as an omission of income or an overstatement of deductible expenses. In addition, the taxpayer must show that, at the time the return was signed, he/she did not know and had no reason to know of the erroneous item that caused the understatement. If the taxpayer can show lack of knowledge with respect to a portion of the understatement, the taxpayer may be relieved of liability for the tax attributable to that portion of the understatement.
Separate Liability Election: A requesting spouse may elect to be taxed as though he/she filed a "married filing separate" tax return. This relief is available to taxpayers who are no longer married, are legally separated, or who have lived apart from their spouse during the 12-month period preceding the request for relief.
Equitable Relief: An individual who does not qualify for the relief specified above may still obtain relief if, after taking into account all the facts and circumstances, it is determined to be inequitable to hold the individual liable for any unpaid tax or any deficiency. However, even under equitable relief, the income tax liability from which the requesting spouse seeks relief generally must be attributable to an item of the non-requesting spouse or an underpayment resulting from the non-requesting spouse's income. The IRS, nonetheless, will consider granting equitable relief even though the deficiency or underpayment may be attributable in part or in full to an item of the requesting spouse (a) in the case of abuse prior to the time the return was filed or (b) where funds that would have been used to pay the tax or deficiency were misappropriated by the non-requesting spouse.
The IRS has issued guidance for taxpayers seeking equitable relief from joint income tax liability. In general, a nonexclusive list of factors is applied in determining whether relief should be granted because it would be inequitable to hold a requesting spouse liable. One of the factors is the existence of a legal obligation arising from a divorce decree or other legally binding agreement. It will weigh in favor of relief if the non-requesting spouse has the sole obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement. However, this factor will be only neutral if the requesting spouse knew or had reason to know, when entering into the divorce decree or agreement that the non-requesting spouse would not pay the income tax liability.1
State "Innocent Spouse Law": In 1999, California conformed to portions of the 1998 Act by enacting the Taxpayers' Bill of Rights Act of 1999. In addition, California provides two avenues for innocent spouse relief not available under federal law:
The liability may be revised by a court in a proceeding for dissolution of marriage, under specified circumstances; and,
A taxpayer may seek relief from FTB on any unpaid self-assessed tax liability on a joint return, including penalties and interest.
Thus, unlike the federal "innocent spouse' provisions that
consider a legal obligation under dissolution of marriage as one of
many factors, the state law provides that the liability may be
revised by a court in a proceeding for dissolution of the marriage,
and thus creates an independent exception to the general rule of
joint and several liability. The FTB will grant relief to the
requesting spouse provided the court order does not relieve the
requesting spouse of tax liability on income earned by, or
subject to the exclusive management and control of, that spouse.
In the case the gross income reported on the tax return exceeds
$150,000 or the amount of tax liability relief exceeds $7,500, the
requesting spouse must also obtain from the FTB and file with the
divorce court a tax revision clearance certificate. A taxpayer has
the right to appeal FTB's decision on a request for equitable
innocent spouse relief.
What is the Problem? In a recent BOE case,2 the taxpayer appealed FTB's denial of equitable relief for past unpaid taxes. The taxpayer requested the "innocent spouse" relief and submitted a copy of the marital settlement agreement that had assigned all of the couple's California tax debts (including the ones arising from the taxpayer's own income) to the taxpayer's former spouse. The FTB determined that the taxpayer failed to qualify for the equitable relief under R&TC Section 18533(f). Furthermore, the FTB stated that the court order submitted by the taxpayer did not comply with the applicable statutory requirements to provide an independent ground for relief under R&TC Section 19006(b). The taxpayer argued that the divorce settlement between her and her husband allocated the obligation to pay delinquent taxes to him, so she should be absolved of any tax debt. The FTB, however, relied on R&TC Section 19006(b), which specifically prohibits a court, in a proceeding for dissolution of the marriage, from relieving a spouse of tax liability on income earned by the spouse, or income subject to the exclusive management and control of the spouse. While R&TC Section 19006(c) expressly authorizes the FTB to revise the unpaid tax liability, it similarly prohibits the FTB from relieving a spouse from tax liability on income earned or exclusively controlled by the spouse, among other conditions.3
Currently, there is no legal avenue for the BOE to provide relief to taxpayers under Section 19006(b). Consequently, the BOE sustained the FTB's action regarding the taxpayer's liability attributable to her income because the court order presented by the taxpayer did not comply with the requirements of Section 19006(b). Furthermore, no relief was allowed for the tax liability attributable to income earned by the taxpayer because she failed to satisfy the necessary conditions for equitable relief from that liability under R&TC Section 18533(f). However, the BOE granted the "innocent spouse" relief to the taxpayer as to the portion of the couple's tax liabilities that was attributable to the taxpayer's former spouse.
What Would This Bill Do? This bill creates an exception to R&TC Section 19006(b) that currently prohibits a court as well as the FTB from relieving a spouse of the tax liability on income earned or controlled by that spouse. Specifically, this bill provides that, for purposes of determining whether an individual qualifies for the "innocent spouse" equitable relief under R&TC Section 18533(f), the fact that the individual's liability for unpaid taxes or deficiency has been revised under a court's judgment of dissolution of marriage may be a factor "weighing in favor" of that individual. In other words, the FTB may (or may not) consider a divorce agreement when grating equitable relief even if the agreement does not comply with the requirements of Section 19006(b). Thus, the individual may be relieved by the FTB of the tax liability attributable to his/her own income if the judgment reassigns this liability to the non-requesting spouse.
"Weighting in Favor of Relief:" Non-Conformity? Divorce settlements result from often difficult negotiations between two former spouses to allocate their former joint assets and liabilities, which often involve tax debts. This bill provides that the FTB may consider a court judgment revising the individual's liability for any unpaid tax or deficiency as a factor weighing in favor of relief from tax liability on income earned by the individual.
Under federal law, in determining whether equitable relief should be granted to a requesting spouse, the IRS will consider the existence of a legal obligation arising from a divorce decree or other legally binding agreement. As discussed, this factor will weigh in favor of relief if the non-requesting spouse has the sole obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement. However, this factor will be only neutral if the requesting spouse knew or had reason to know, when entering into the divorce decree or agreement, that the non-requesting spouse would not pay the income tax liability. In contrast, SB 526 does not differentiate between the spouses who knew and those who did not know. Furthermore, IRS's recent guidance indicates that it will grant relief on the requesting spouse's own income in cases of abuse or misappropriation of funds. In contrast, this bill will apply in cases where no abuse or misappropriation of funds occurred. As such, this bill's approach substantially deviates from the federal statutes and regulations, taking California out of conformity with the federal tax laws."Revising" a Judicial Order. Under existing law, a court order, in a proceeding for marriage dissolution, must separately state the income tax liabilities for the taxable years for which revision is granted. Taxpayers with income above a specified amount also must obtain a tax revision clearance certificate from FTB to give to a court issuing the divorce settlement, detailing the amounts of tax, interest, and penalties due to ensure this information is incorporated into the settlement. Under this bill, FTB or BOE are authorized to grant the requesting spouse equitable relief merely by showing that the settlement agreement revised any unpaid tax, thereby shifting the obligation from the requesting spouse to the other one, regardless of the taxable year. Spouses could then seek to reassign tax debts on their own income for specific taxable years to their former spouses, when the divorce settlement only speaks in more general terms about tax debts from income generated by one spouse or the other, or both, without being specific to the taxable year. Additionally, this bill does not compel notification to the other spouse, or grant him or her opportunity to comment, which innocent spouse relief provisions currently require. The Committee may wish to consider whether a tax agency should have such a broad authority to revise the terms of a previously settled divorce agreement.
Following the Law (or Not). As noted, existing law allows taxpayers to have the liability revised by a court proceeding for dissolution of marriage. However, existing law is very clear in that it prohibits a court from relieving a spouse of tax liability on income earned or control by him/her. To the extent that the court follows all of the statutory requirements of R&TC Section 19006(b), the order itself will provide an independent ground for innocent spouse relief. Presumably, in reassigning the spouses' tax liability, a court strives to comply with the existing statute. But if a court does not follow this law, then its order will be unenforceable for purposes of the "innocent spouse" relief provisions.
The supporters of this bill argue that the requirements of Section 19006(b) are onerous. However, instead of deleting these requirements to allow courts expressly to revise the spouses' tax liabilities the way they see fit, this bill appears to condone an occasional deviation by some courts from the prescribed statutory requirements in issuing divorce judgments. In particular, this bill authorizes the FBT to take into account the existence of a court order, regardless of whether or not it complies with Section 19006(b). The Committee may wish to consider whether the approach suggested by this bill is the most efficient way of achieving the intended goal of providing equitable relief to innocent spouses.Slippery Slope? Innocent spouse relief exists for tax agencies to provide relief from joint tax liabilities for taxpayers who signed joint returns with their spouses, but were kept in the dark about the other spouse's income, business interests, or financial activities. IRS and FTB grant innocent spouse relief to these taxpayers because they have no legitimate reason to know that they have a tax obligation arising from items about which they had no knowledge. Only in a few, limited circumstances has the IRS granted relief for unpaid liability on income earned by the requesting spouse, because that spouse should know that tax applies whenever he or she earns income. This bill sets a new precedent to allow the FTB, and BOE as part of an appeal of FTB's determination, to grant relief on the requesting spouse's own income in any case where the requesting spouse has a divorce agreement obligating the non-requesting spouse to pay any outstanding taxes. IRS's recent guidance indicates that it will grant relief on the requesting spouse's own income in cases of abuse or misappropriation of funds, and FTB will follow that guidance regardless of any legislative change, so this bill will only apply in cases where no abuse or misappropriation of funds occurred, setting a new precedent in the area of "innocent spouse" tax relief.
REGISTERED SUPPORT / OPPOSITION:
Support
George Runner, State Board of Equalization, Member
The Executive Committee of the Family Law Section, the State Bar of California
Opposition
None on file
Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098
1 Internal Revenue Bulletin: 2003-32, Rev. Proc. 2003-61.
2 In the Matter of the Appeal of: TONJA M. JARRELL, Case No. 571357, BOE, 2014 Cal. Tax LEIXS 178, May 22, 2014.
3 Section 19006(c) prescribes an additional requirement before the tax liability may be revised by the FTB, namely, that the spouse whose liability is to be revised must establish a lack of knowledge of the nonpayment at the time the return was filed.
SB 526
Page 4
|
Office of Senate Floor Analyses (916) 651-1520 Fax: (916) 327-4478 |
THIRD READING
Bill No: SB 526
Author: Fuller (R) and Runner (R)
Amended: 5/18/15
SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 4/29/15
AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Pavley
NO VOTE RECORDED: Moorlach
SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/28/15
AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen
SUBJECT: Personal income taxes: joint returns: relief from liability
DIGEST: This bill directs Franchise Tax Board (FTB) to consider the terms of a divorce settlement when determining whether to grant equitable relief on a taxpayer’s own income.
Existing law:
Requires spouses and registered domestic partners (RDPs) filing as “married filing jointly” to be individually responsible for the return’s accuracy and the tax liability, regardless of the amount of income each spouse generates, often called “joint and several” liability.
Empowers courts to revise liabilities in a proceeding for the dissolution of the marriage, but does not allow a court to relieve a spouse of tax liability on income that he or she earns or has exclusive management and control over.
Allows, mostly in conformity with federal law, an innocent spouse to qualify for three different forms of tax relief under specified circumstances: innocent spouse relief, relief from separate allocation of tax liability, and equitable relief, which is only available to requesting spouses who don’t qualify for innocent spouse or separate allocation.
Charges FTB with the responsibility to determine that it’s inequitable to hold the innocent spouse liable, taking into account all facts and circumstances when considering whether to grant equitable relief.
Allows taxpayers to appeal innocent spouse relief requests denied by FTB to the Board of Equalization (BOE).
This bill:
Provides that the fact that an individual’s liability for unpaid taxes for any taxable year where a joint return was filed has been revised under a judgment of dissolution of marriage may be a factor weighing in favor of the requesting taxpayer obtaining equitable relief on income earned by the requesting spouse or under his or her exclusive management and control,
Applies its provisions to FTB when considering a request, or BOE when considering an appeal of an FTB denial, for requests received on or after January 1, 2016.
States that its provisions apply notwithstanding any other law.
Comments
Innocent spouse relief exists for tax agencies to provide relief from joint tax liabilities for taxpayers who signed joint returns with their spouses, but were kept in the dark about the other spouse’s income, business interests, or financial activities. Internal Revenue Service (IRS) for federal taxes, and FTB for state taxes, grant relief to these taxpayers because they have no legitimate reason to know that they have a tax obligation arising from items about which they had no knowledge.
While not part of the law, FTB states that it considers the following factors when determining whether to grant equitable relief, and thereby relieve individuals of liability of unpaid taxes or any deficiency:
The taxpayer’s current marital/registered domestic partner status.
Documented proof of abuse from spouse/RDP during marriage or registered domestic partnership.
Proof that when the taxpayer signed the tax return, he or she expected to satisfy the tax liability.
In the case of tax resulting from an audit, the taxpayer wasn’t aware of the tax liability understatement.
The taxpayer’s current financial situation and ability to pay the tax liability.
Whether a divorce decree, termination of a registered domestic partnership, or the legally binding agreement identifies one taxpayer as legally liable to pay the tax liability.
Whether the taxpayer received a significant benefit from the unpaid income tax liability or tax deficiency.
Taxpayer compliance with income tax laws in later tax years.
Additionally, IRS Revenue Procedures set forth the requirements for equitable relief at the federal level, including that the taxpayer requesting relief did not know or have reason to know that there was an understatement or deficiency on the joint return. Because federal and state statutes are very similar, FTB usually applies IRS revenue procedures when deciding whether to grant requests for innocent spouse relief for California tax purposes.
Only in a few, limited circumstances has IRS granted relief for unpaid liability on income earned by the requesting spouse, because that spouse should know that tax generally applies whenever he or she earns income. IRS recently expanded its equitable relief provisions to provide to allow relief on the requesting spouse’s own income when funds intended to pay taxes were misappropriated by the nonrequesting spouse, or in the case of abuse, which resulted in the requesting spouse not challenging anything on the joint return for fear of the nonrequesting spouse’s retaliation. SB 526 allows FTB, or BOE as part of an appeal of FTB’s denial, to grant relief on the requesting spouse’s own income in any case where the requesting spouse has a divorce agreement obligating the non-requesting spouse to pay any outstanding taxes, regardless of whether misappropriation of funds or abuse occurred. As such, this bill sets a significant precedent, and puts the state out of conformity with federal treatment.
FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No
According to the Senate Appropriations Committee, this bill will result in an unknown reduction to General Fund revenues; however, it estimates that for every $1 million dollars of relief granted, General Fund revenues would be reduced by $60,000.
Fiona Ma, Board of Equalization Member
George Runner, Board of Equalization Member
OPPOSITION: (Verified 5/28/15)
None received
ARGUMENTS IN SUPPORT: According to members of the Board of Equalization, the BOE has adjudicated a number of appeals from the FTB that have involved taxpayers who believed they had successfully divided assets and debts, including tax liabilities, in a divorce agreement. Existing law does not allow the FTB, and by extension the BOE in its quasi-judicial function, to rely on a marital settlement agreement to relieve a spouse of a joint income tax liability unless the agreement meets a number of technical conditions contained in Revenue and Taxation Code Section 19006(b). SB 526 grants the FTB the authority to consider a divorce agreement as a factor weighing in favor of granting relief when a taxpayer requests that the agency assign outstanding tax liabilities to the spouse who agreed to pay them, rather than holding both parties jointly liable. The existing law forces the spouse requesting relief to return to court in order to have the marital settlement agreement enforced. After negotiating a fair division of assets and debts, taxpayers are surprised when they learn that their agreement will not be honored by the state government. By providing the FTB the ability to abide by the agreement that was negotiated between spouses, this will limit additional needless litigation in both the courts of California as well as appeals to the BOE.
Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119
5/30/15 16:30:24
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SB 526 (Fuller) Page 3 of 3
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 526 (Fuller) - Personal income taxes: joint returns: relief from liability
|
|
Version: April 14, 2015 |
Policy Vote: GOV. & F. 6 - 0 |
Urgency: No |
Mandate: No |
Hearing Date: May 11, 2015 |
Consultant: Robert Ingenito |
This bill meets the criteria for referral to the Suspense File.
Bill Summary:
SB 526 would direct the Franchise Tax Board (FTB) to consider the terms of a divorce settlement when determining whether to grant equitable relief on a taxpayer’s own income.
Fiscal Impact:
FTB indicates that the bill would result in an unknown reduction to General Fund revenues; however, it estimates that for every $1 million dollars of relief granted, General Fund revenues would be reduced by $60,000. Administrative costs to FTB are also expected to be minimally in the tens of thousands of dollars annually (General Fund).
Background:
Spouses filing as “married filing jointly” are individually responsible for the return’s accuracy and the tax liability, irrespective of the income split between them. This is referred to as “joint and several” liability. While a court may revise the tax liability in a proceeding for the dissolution of the marriage, it cannot relieve a spouse of tax liability on earned income over which he or she has exclusive management and control over.
Because spouses can occasionally misrepresent tax information on a joint return without the knowledge of the other spouse, federal law allows an innocent spouse to qualify for relief under specified circumstances, to which California generally conforms. To qualify for “innocent spouse relief” for state income tax purposes, the following must occur:
The taxpayer must elect to do so within two years of the beginning of involuntary collection activities.
The taxpayer must demonstrate the he or she did not know and had no reason to know of the understatement of tax at the time the return was signed.
FTB must determine that it’s inequitable to hold the innocent spouse liable, taking into account all facts and circumstances.
FTB can also reassign liabilities to the responsible spouse or registered domestic partner (RDPs). The taxpayer must satisfy all of the above requirements, but also must be divorced, separated, or living apart from the other person on the joint return for 12 months before making the election to request relief. Additionally, the Legislature directed FTB to allow similar relief for California income taxes whenever the Internal Revenue Service (IRS) does so, under specified conditions. For those not meeting the conditions, taxpayers can also request “equitable relief” from FTB for self-assessed unpaid taxes reported on a joint return, similar to federal law. While not part of the law, FTB states that it considers the following factors when determining whether to relieve individuals of liability of unpaid taxes or any deficiency:
The taxpayer’s current marital/registered domestic partner status.
Documented proof of abuse from spouse/RDP during marriage or registered domestic partnership.
Proof that when the taxpayer signed the tax return, he or she expected to satisfy the tax liability.
In the case of tax resulting from an audit, the taxpayer wasn’t aware of the tax liability understatement.
The taxpayer’s current financial situation and ability to pay the tax liability.
Whether a divorce decree, termination of a registered domestic partnership, or the legally binding agreement identifies one taxpayer as legally liable to pay the tax liability.
Whether the taxpayer received a significant benefit from the unpaid income tax liability or tax deficiency.
Taxpayer compliance with income tax laws in later tax years.
FTB must notify the other spouse, ex-spouse, RDP, or ex-RDP to allow the non-requesting spouse/RDP an opportunity to provide documentation to grant relief. FTB also notifies them of any action, and provides the non-requesting spouse/RDP with an opportunity to appeal.
IRS Revenue Procedures set forth the requirements for equitable relief at the federal level, including that the taxpayer requesting relief did not know or have reason to know that there was an understatement or deficiency on the joint return. IRS recently expanded its equitable relief provisions to provide that this requirement is satisfied when the requesting spouse has been abused and didn’t challenge anything on the joint return for fear of the nonrequesting spouse’s retaliation. Federal and state statutes are very similar; consequently, FTB usually applies IRS revenue procedures for innocent spouse relief for California cases; however, taxpayers who don’t obtain relief can appeal these decisions to the Board of Equalization (BOE).
In a BOE case, a taxpayer appealed FTB’s denial of equitable relief for past unpaid taxes. FTB stated that the taxpayer failed to establish that she had reason to believe that her tax liability would be paid when the return was filed, she didn’t provide documentation showing she didn’t know about the liabilities, and current law doesn’t allow innocent spouse relief for income exclusively attributable to the innocent spouse. The taxpayer argued that the divorce settlement between her and her husband allocated the obligation to pay delinquent taxes to him, so she should be absolved of any tax debt.
Proposed Law:
This bill would provide that when FTB is considering a request for relief from liability for income earned by the requesting spouse or under his or her exclusive management and control, the fact that an individual’s liability for unpaid taxes or deficiency has been revised under a judgment of dissolution of marriage may be a factor weighing in favor of the requesting taxpayer.
Staff Comments:
FTB would have to predict both the frequency and dollar value of its own future discretionary actions in order to accurately calculate future revenue loss resulting from this bill. Specifically, it would need to estimate instances of when it will provide discretionary relief. Such instances cannot be known in advance; moreover, both the frequency and amounts of such judgments would be unknown. Instead, FTB has developed a calculation that for every $1 million of relief granted under this bill, the General Fund revenue loss would be $60,000.
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SB 526 (Fuller) 4/14/15 Page 4 of 4
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
Bill No: |
SB 526 |
Hearing Date: |
4/29/15 |
Author: |
Fuller |
Tax Levy: |
No |
Version: |
4/14/15 |
Fiscal: |
Yes |
Consultant: |
Grinnell |
||
PERSONAL INCOME TAXES: JOINT RETURNS: RELIEF FROM LIABILITY.
Directs FTB to consider the terms of a divorce settlement when determining whether to grant equitable relief on a taxpayer’s own income.
Background and Existing Law
Spouses filing as “married filing jointly” are individually responsible for the return’s accuracy and the tax liability, regardless of the amount of income each spouse generates, often called “joint and several” liability. However, a court may revise this liability in a proceeding for the dissolution of the marriage, but cannot relieve a spouse of tax liability on income that he or she earns or has exclusive management and control over.
Because spouses can occasionally misrepresent tax information on a joint return without the knowledge of the other spouse, federal law allows an innocent spouse to qualify for relief under specified circumstances, which California conforms to for the most part. To qualify for “innocent spouse relief” for state income tax purposes:
The taxpayer must elect to do so within two years of the beginning of involuntary collection activities,
The taxpayer must demonstrate the he or she did not know and had no reason to know of the understatement of tax at the time the return was signed.
Franchise Tax Board (FTB) must determine that it’s inequitable to hold the innocent spouse liable, taking into account all facts and circumstances.
FTB can also reassign liabilities to the responsible spouse or registered domestic partner (RDPs). The taxpayer must satisfy all of the above requirements, but also must be divorced, separated, or living apart from the other person on the joint return for 12 months before making the election to request relief. Additionally, the Legislature directed Franchise Tax Board (FTB) to allow similar relief for California income taxes whenever the Internal Revenue Service (IRS) does under the following conditions (SB 285, Speier, 2003, and SB 1055, Walters, 2010):
The taxpayer requests the same relief from FTB that they did from the IRS,
The taxpayer furnishes FTB with a copy of the IRS’s determination,
The facts and circumstances that apply to the understatement and the liabilities for which the relief is requested are the same;
The non-requesting spouse has the opportunity to provide information to FTB that is contrary to information submitted by the requesting spouse.
For those not meeting the above requirements, taxpayers can also request “equitable relief” from FTB for self-assessed unpaid taxes reported on a joint return, similar to federal law. While not part of the law, FTB states that it considers the following factors when determining whether to relieve individuals of liability of unpaid taxes or any deficiency:
The taxpayer’s current marital/registered domestic partner status.
Documented proof of abuse from spouse/RDP during marriage or registered domestic partnership.
Proof that when the taxpayer signed the tax return, he or she expected to satisfy the tax liability.
In the case of tax resulting from an audit, the taxpayer wasn’t aware of the tax liability understatement.
The taxpayer’s current financial situation and ability to pay the tax liability.
Whether a divorce decree, termination of a registered domestic partnership, or the legally binding agreement identifies one taxpayer as legally liable to pay the tax liability.
Whether the taxpayer received a significant benefit from the unpaid income tax liability or tax deficiency.
Taxpayer compliance with income tax laws in later tax years,
FTB must notify the other spouse, ex-spouse, RDP, or ex-RDP to allow the non-requesting spouse/RDP an opportunity to provide documentation to grant relief. FTB also notifies them of any action, and provides the non-requesting spouse/RDP with an opportunity to appeal.
IRS Revenue Procedures set forth the requirements for equitable relief at the federal level, including that the taxpayer requesting relief did not know or have reason to know that there was an understatement or deficiency on the joint return. IRS recently expanded its equitable relief provisions to provide that this requirement is satisfied when the requesting spouse has been abused and didn’t challenge anything on the joint return for fear of the nonrequesting spouse’s retaliation. Because federal and state statutes are very similar, so FTB usually applies IRS revenue procedures for innocent spouse relief for California cases; however, taxpayers who don’t obtain relief can appeal these decisions to the Board of Equalization (BOE).
In the recent BOE case, Appeal of Tonya M. Jarrell, the taxpayer appealed FTB’s denial of equitable relief for past unpaid taxes. FTB stated that the taxpayer failed to establish that she had reason to believe that her tax liability would be paid when the return was filed, she didn’t provide documentation showing she didn’t know about the liabilities, and current law doesn’t allow innocent spouse relief for income exclusively attributable to the innocent spouse. The taxpayer argued that the divorce settlement between her and her husband allocated the obligation to pay delinquent taxes to him, so she should be absolved of any tax debt. BOE Member George Runner wants to require FTB to positively consider an instance where the individual’s liability has been revised under a judgment of dissolution of marriage when deciding whether to grant equitable relief from liability on income they earn or is exclusively under their control.
Proposed Law
Senate Bill 526 provides that when FTB is considering a request for relief from liability for income earned by the requesting spouse or under his or her exclusive management and control, the fact that an individual’s liability for unpaid taxes or deficiency has been revised under a judgment of dissolution of marriage may be a factor weighing in favor of the requesting taxpayer, when the
State Revenue Impact
Pending.
Comments
1. Purpose of the bill. According to the author, “According to members of the Board of Equalization (BOE), the BOE has adjudicated a number of appeals from the Franchise Tax Board (FTB) that have involved taxpayers who believed they had successfully divided assets and debts, including tax liabilities, in a divorce agreement. Current law does not allow the FTB, and by extension the BOE in its quasi-judicial function, to rely on a marital settlement agreement to relieve a spouse of a joint income tax liability unless the agreement meets a number of technical conditions contained in Revenue and Taxation Code section 19006(b). SB 526 grants the FTB the authority to consider a divorce agreement as a factor weighing in favor of granting relief when a taxpayer requests that the agency assign outstanding tax liabilities to the spouse who agreed to pay them, rather than holding both parties jointly liable. The current law forces the spouse requesting relief to return to court in order to have the marital settlement agreement enforced. After negotiating a fair division of assets and debts, taxpayers are surprised when they learn that their agreement will not be honored by the state government. By providing the FTB the ability to abide by the agreement that was negotiated between spouses, this would limit additional needless litigation in both the courts of California as well as appeals to the Board of Equalization.”
2. Precedent. Innocent spouse relief exists for tax agencies to provide relief from joint tax liabilities for taxpayers who signed joint returns with their spouses, but were kept in the dark about the other spouse’s income, business interests, or financial activities. IRS and FTB grant innocent spouse relief to these taxpayers because they have no legitimate reason to know that they have a tax obligation arising from items about which they had no knowledge. Only in a few, limited circumstances has the IRS granted relief for unpaid liability on income earned by the requesting spouse, because that spouse should know that tax applies whenever he or she earns income. SB 526 sets a new precedent to allow FTB, or BOE as part of an appeal of FTB’s determination, to grant relief on the requesting spouse’s own income in any case where the requesting spouse has a divorce agreement obligating the non-requesting spouse to pay any outstanding taxes. IRS’s recent guidance indicates that it will grant relief on the requesting spouse’s own income in cases of abuse or misappropriation of funds, and FTB will follow that guidance regardless of any legislative change, so SB 526 will only apply in cases where no abuse or misappropriation of funds occurred, putting the state out of conformity with federal treatment. The Committee may wish to consider the precedent SB 526 sets.
3. Not so innocent? Divorce settlements result from often difficult negotiations between two former spouses to allocate their former joint assets and liabilities, which often involve tax debts. Existing law allows taxpayers to have the liability revised by a court proceeding for dissolution of marriage. The order must separately state the income tax liabilities for the taxable years for which revision is granted. Taxpayers with income above a specified amount also must obtain a tax revision clearance certificate from FTB to give to a court issuing the divorce settlement, detailing the amounts of tax, interest, and penalties due to ensure this information is incorporated into the settlement. Under SB 526, FTB or BOE could grant the requesting spouse equitable relief merely by showing that the settlement agreement revised any unpaid tax, thereby shifting the obligation from the requesting spouse to the other one. Spouses could then seek to reassign tax debts on their own income for specific taxable years to their former spouses, when the divorce settlement only speaks in more general terms about tax debts from income generated by one spouse or the other, or both, without being specific to the taxable year. Additionally, SB 526 doesn’t compel notification to the other spouse, or grant him or her opportunity to comment, which innocent spouse relief provisions currently require. The Committee may wish to consider whether SB 526 provides leverage to revise a previously settled divorce agreement.
Support and Opposition
4/23/15
Support: BOE Member George Runner.
Opposition: Unknown.
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Discussed in Hearing
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Bill Co-Author(s):