BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 1065
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          Date of Hearing:   August 4, 2010

                                Felipe Fuentes, Chair

                SB 1065 (Walters) - As Introduced:  February 17, 2010 

          Policy Committee:                             Revenue and  
          Taxation     Vote:                            9-0

          Urgency:     No                   State Mandated Local Program:  
          No     Reimbursable:              


          This bill brings California law more closely into line with  
          federal "innocent spouse relief" provisions, by providing that a  
          taxpayer granted relief under federal law will also be eligible  
          under state law. Specifically, the bill:

          1)Reenacts state provisions that expired at end of 2008, which  
            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.

          2)Conforms California to federal provisions enacted in 2006  
            allowing those denied "equitable relief" by the FTB staff to  
            appeal the ruling to its board. 

           FISCAL EFFECT  

          FTB estimates that the bill will result in revenue losses of  
          $90,000 in 2009-10 and $200,000 annually thereafter. Most of the  
          losses are related to the provision allowing taxpayers to appeal  
          equitable relief determinations. 


          1)Purpose  . This is a FTB-sponsored bill that is intended to  
            reduce taxpayer burden and confusion by bringing California's  
            innocent spouse relief provisions into conformity with federal  

           2)Background - federal law  . Existing federal law generally  
            requires that spouses filing joint tax returns are each liable  


                                                                  SB 1065
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            for the accuracy of the return and the full tax liability,  
            regardless of the income earned by each spouse (joint and  
            severable liability).  However, under provisions enacted in  
            1998, the Internal Revenue Code (IRC) allows a spouse to be  
            relieved of some or all of the responsibility of a joint debt  
            under certain circumstances.  For example, the IRC allows  
            taxpayers that are no longer married or have been separated  
            from their spouse for more than a year to file separate  
            returns and only be subject to penalties and interest on  
            understatements attributable to their income and deductions.  
            It also provides for "equitable relief" in circumstances where  
            the IRS finds that it would not be equitable for the spouse to  
            be held responsible for the unpaid deficiency.  Federal law  
            changes enacted in 2006 allow taxpayers that have been denied  
            equitable relief by the IRS to appeal the ruling in tax court.
           3)Background - California law  . California currently conforms to  
            federal provisions enacted in 1998. It also provides other  
            avenues for taxpayers to seek relief, such as through a  
            divorce court order, or where a spouse can avoid certain  
            penalties and interest by demonstrating that he or she was  
            unaware of a nonpayment of a tax obligation. California  has  
            not  conformed to the federal provisions passed in 2006  
            allowing for appeal of equitable relief determinations.


            Also, SB 285 (Speier), Chapter 370/2003 required FTB to grant  
            state tax relief to a taxpayer that had previously received an  
            innocent spouse relief determination at the federal level,  
            when 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. These provisions were in effect  
            from 2004 through 2008. 
            This bill reinstates the provisions of SB 285 and applies them  
            retroactively to January 1, 2009.  It also conforms to the  
            federal provisions enacted in 2006 to allow appeals of FTB  
            equitable relief determinations, and deletes obsolete language  
            that refers to a four year period for submitting a request for  
            innocent spouse relief. Since state and federal law are  
            currently consistent with regard to spousal relief, the  


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            practical effect of this bill is to relieve taxpayers from  
            having to seek a separate spousal relief determination from  
            the FTB when the circumstances surrounding the underpayment  
            are the same for the state and federal tax returns.

          .  Analysis Prepared by  :    Brad Williams / APPR. / (916)