BILL ANALYSIS                                                                                                                                                                                                    



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          SENATE THIRD READING
          SB 1065 (Walters)
          As Introduced  February 17, 2010
          Majority vote 

           SENATE VOTE  :35-0  
           
           REVENUE & TAXATION  9-0         APPROPRIATIONS      17-0
           
           ----------------------------------------------------------------- 
          |Ayes:|Portantino, DeVore,       |Ayes:|Fuentes, Conway,          |
          |     |Beall,                    |     |Bradford,                 |
          |     |Charles Calderon, Coto,   |     |Huffman, Coto, Davis, De  |
          |     |Fuentes, Gatto, Harkey,   |     |Leon, Gatto, Hall,        |
          |     |Nestande                  |     |Harkey, Miller, Nielsen,  |
          |     |                          |     |Norby, Skinner, Solorio,  |
          |     |                          |     |Torlakson, Torrico        |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           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  








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               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 granted.  

          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 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  
            several.  

          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  








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               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 if:

             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 is filed. 

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

           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  :  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 liable."

               The law permits a taxpayer relief of the joint and  
               several liability if they demonstrate they did not  








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               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 spouse relief determinations.  

          Committee Staff Comments:  

           1)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.
           
           2)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.  








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          3)Related legislation:  SB 285 (Speier), Chapter 370,  
            Statutes of 2003, requires FTB to grant innocent spouse  
            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.  


           Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916)  
          319-2098 


                                                             FN: 0005892