BILL ANALYSIS                                                                                                                                                                                                    




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                           1065 (Walters)
          
          Hearing Date:  05/03/2010           Amended: As Introduced
          Consultant: Mark McKenzie       Policy Vote: Rev&Tax 5-0
          _________________________________________________________________ 
          ____
          BILL SUMMARY:   SB 1065 would reenact certain "innocent spouse  
          relief" provisions and apply them retroactively to January 1,  
          2009.  Specifically, this bill would require the Franchise Tax  
          Board (FTB) to grant "innocent spouse" relief from taxes and  
          penalties if the taxpayer has been granted innocent spouse  
          relief for federal tax purposes, with certain restrictions.  
          _________________________________________________________________ 
          ____
                            Fiscal Impact (in thousands)

           Major Provisions         2010-11      2011-12       2012-13     Fund
           Tax revenue loss       $200       $200        $200      General
                                 (additional revenue loss of $90 in  
          2009-10)
          _________________________________________________________________ 
          ____

          STAFF COMMENTS: This bill meets the criteria for referral to the  
          Suspense File.  

          Existing state and federal law provides that spouses who file a  
          joint tax return are individually liable for the accuracy of the  
          return and the full tax liability, regardless of the income  
          earned by each spouse (joint and severable liability).  Because  
          one spouse may not be aware of another spouse's  
          misrepresentation of tax information on the return, the federal  
          Internal Revenue Code allows a spouse to be relieved of some or  
          all of the responsibility of a joint debt under certain  
          circumstances (innocent spouse relief).  State law generally  
          conforms to the federal provisions that were enacted in 1998.   
          However, state innocent spouse relief provisions differ from  
          federal provisions in several ways: 
           State law does not conform to federal provisions enacted in  
            2006 that broaden the appeal rights by authorizing the tax  
            court to review the IRS denial of innocent spouse relief and  
            suspending the period of limitations while on appeal.
           State law allows a taxpayer to seek a divorce court order  










            relieving that taxpayer of liability for state income tax on a  
            joint return.
           State law allows a taxpayer to seek relief from FTB on any  
            unpaid self-assessed tax liability on a joint return.
          In some circumstances, a taxpayer may be granted innocent spouse  
          relief under federal law, but not state law.

          During the period from January 1, 2004 through December 31,  
          2008, under changes to innocent spouse relief provisions enacted  
          by SB 285 (Speier), Chapter 370 of 2003, FTB was required to  
          grant relief to a taxpayer that previously had received an  
          innocent spouse relief determination at the federal level and  
          the facts and circumstances that supported the determination  
          were the same.  SB 285 also authorized the spouse who did not  
          request relief to provide FTB with information contrary to what  
          was provided by the requesting spouse and information that may  
          support a determination that relief should not be granted.
          Page 2
          SB 1065 (Walters)

          SB 1065 would reinstate the provisions of SB 285 and apply them  
          retroactively to January 1, 2009.  This bill would also conform  
          to federal provisions enacted in 2006 to broaden the appeal  
          rights applicable to innocent spouse relief determinations, and  
          delete obsolete language that refers to a four year period for  
          submitting a request for innocent spouse relief.

          FTB estimates that this bill would result in a revenue loss of  
          approximately $90,000 in 2009-10 and $200,000 annually  
          thereafter.  This estimate is based on the relatively small  
          number of innocent spouse claims filed annually and the few  
          cases in which an FTB determination may differ from an IRS  
          ruling.