BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 1065
                                                                  Page  1

          Date of Hearing:  June 28, 2010

                            Anthony J. Portantino, Chair

                SB 1065 (Walters) - As Introduced:  February 17, 2010
           Majority vote.  Fiscal committee.  
          SENATE VOTE  :  35-0
          SUBJECT  :  Income tax:  joint returns:  innocent spouse relief

           SUMMARY  :  Modifies the statutory provisions that grant "innocent  
          spouse" relief to more closely conform California law to federal  
          law.  Specifically,  this bill  :

          1)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:

             a)   The individual requests relief;

             b)   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, 

             c)   The individual seeking relief provides the Franchise Tax  
               Board (FTB) with a copy of the federal determination  
               granting relief. 

          2)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  

          3)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  


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            not deny relief with respect to that request until action on  
            the federal request is final.  

          4)Allows a taxpayer to appeal FTB's decision on an "equitable  
            relief" request for innocent spouse relief.  

          5)Applies on and after January 1, 2009.  

           EXISTING LAW  provides that:

          1)Whenever a joint return is filed by a husband and wife, the  
            liability for the tax on the aggregate income is joint and  

          2)An individual who has made a joint return may seek innocent  
            spouse tax relief if the following conditions are met:  

             a)   On that return there is an understatement of tax  
               attributable to erroneous items of one individual filing  
               the joint return;

             b)   The other individual filing the joint return establishes  
               that he/she did not know of, and had no reason to know of,  
               that understatement;

             c)   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,  

             d)   The other individual elects relief within two years of  
               the date FTB begins collection activities.  

          3)Upon election, an individual's liability for any deficiency  
            assessed with respect to a joint return may not exceed the  
            portion of the deficiency properly allocable to the individual  

             a)   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, 

             b)   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  


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               is filed. 

          4)If relief is not available under the provisions set forth  
            above, FTB may relieve an individual of liability on equitable  

           FISCAL EFFECT  :  According to FTB, this bill will result in  
          revenue losses of $90,000 in fiscal year 2009-10, and $200,000  
          annually thereafter.  

           COMMENTS  :   

          1)Both the author and FTB, which is sponsoring this bill, note  
            the following:

               Most married taxpayers file a joint tax return.  In the  
               event a couple divorces, each individual is what the law  
               calls "jointly and severally liable" for the entire tax  
               liability.  In situations where one individual, without the  
               knowledge of the other individual, has manipulated the  
               joint tax liability by concealing income or inflating  
               deductions, both individuals remain "jointly and severally  

               The law permits a taxpayer relief of the joint and several  
               liability if they demonstrate they did not know or had no  
               reason to know about the improperly reported income or  
               deductions.  This person is deemed an "innocent spouse."   
               In these situations, collections efforts cease for the  
               "innocent spouse" and continue against the remaining  
               responsible taxpayer.  

               During the period from January 1, 2004, through December  
               31, 2008, under changes made by SB 285 (Speier, Stats.  
               2003, Ch. 370), the FTB could grant innocent spouse relief  
               where the IRS already made an innocent spouse finding.   
               These changes relieved the burden on a taxpayer to show for  
               a second time that they were entitled to relief and reduced  
               the use of the state's financial and personnel resources,  
               in short, a WIN-WIN situation.  

               In addition to reauthorizing the FTB to rely on federal  
               innocent spouse determinations, SB 1065 would enhance  
               equitable treatment by conforming to recent federal changes  
               that broaden the appeal rights applicable to innocent  


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               spouse relief determinations.  

          2)Committee Staff Comments  

             a)   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.  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.
             b)   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:
               i)     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  
               ii)    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  


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               iii)   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  

               The Tax Relief and Health Care Act of 2006 (2006 Act) gave  
               the Tax Court authority to review an IRS denial of a  
               taxpayer's request for equitable innocent spouse relief.  

              c)   State "Innocent Spouse Law"  :  FTB notes that, 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:

               i)     The liability may be revised by a court in a  
                 proceeding for dissolution of marriage, under specified  
                 circumstances; and, 

               ii)    A taxpayer may seek relief from FTB on any unpaid  
                 self-assessed tax liability on a joint return, including  
                 penalties and interest.

               From January 1, 2004, through December 31, 2008, an  
               individual who had been granted relief from specified joint  
               and several liability provisions under IRC Section 6015  
               would also be granted relief under California law when the  
               facts and circumstances supporting relief were the same.   
               This provision was repealed by a sunset provision.  

               In addition, California has not conformed to the 2006 Act.   
               As a result, "equitable relief" determinations by FTB  
               cannot currently be appealed. 

              d)   What Would This Bill Do?  :  This bill would reenact and  
               make permanent the statutory requirement that FTB grant  
               innocent spouse relief when the IRS has granted federal  
               relief under the same facts and circumstances.  This bill  
               would also allow a taxpayer to appeal FTB's decision on a  
               request for equitable innocent spouse relief.  

              e)   Related Legislation  :  SB 285 (Speier), Chapter 370,  
               Statutes of 2003, required FTB to grant innocent spouse  


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               relief to an individual who had received federal relief  
               based on the same facts and circumstances.  SB 285 was  
               repealed by its own provisions effective January 1, 2009.  


          Franchise Tax Board (sponsor) 
          None on file 

           Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916)