BILL NUMBER: SB 1065	ENROLLED
	BILL TEXT

	PASSED THE SENATE  JUNE 2, 2010
	PASSED THE ASSEMBLY  AUGUST 17, 2010

INTRODUCED BY   Senator Walters

                        FEBRUARY 17, 2010

   An act to amend Section 18533 of the Revenue and Taxation Code,
relating to taxation.


	LEGISLATIVE COUNSEL'S DIGEST


   SB 1065, Walters. Income tax: joint returns.
   Existing income tax laws provide that an individual who made a
joint return may elect, within 2 years of the date collection
activities are initiated, to be relieved from liability for
additional taxes and penalties if, among other things, that
individual did not know of, and had no reason to know of, an
understatement of tax attributable to erroneous items of the other
individual filing the joint return.
   This bill would, as of January 1, 2009, also provide that an
individual who has made a joint return and has been granted relief
under specified Internal Revenue Code provisions relating to joint
and several liability with respect to a federal joint income tax
return, is eligible for relief from liability for additional taxes
and penalties, except under specified circumstances.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

  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 individual's 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 individual's 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) 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.
   (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) shall
apply to requests for relief received on or after the effective date
of the act adding this paragraph.