BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 526| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: SB 526 Author: Fuller (R) and Runner (R) AmendedAmended:5/18/15 Vote: 21 SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 4/29/15 AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Pavley NO VOTE RECORDED: Moorlach SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/28/15 AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen SUBJECT: Personal income taxes: joint returns: relief from liability SOURCE: Author DIGEST: This bill directs Franchise Tax Board (FTB) to consider the terms of a divorce settlement when determining whether to grant equitable relief on a taxpayer's own income. ANALYSIS: Existing law: 1)Requires spouses and registered domestic partners (RDPs) filing as "married filing jointly" to be individually responsible for the return's accuracy and the tax liability, regardless of the amount of income each spouse generates, often called "joint and several" liability. SB 526 Page 2 2)Empowers courts to revise liabilities in a proceeding for the dissolution of the marriage, but does not allow a court to relieve a spouse of tax liability on income that he or she earns or has exclusive management and control over. 3)Allows, mostly in conformity with federal law, an innocent spouse to qualify for three different forms of tax relief under specified circumstances: innocent spouse relief, relief from separate allocation of tax liability, and equitable relief, which is only available to requesting spouses who don't qualify for innocent spouse or separate allocation. 4)Charges FTB with the responsibility to determine that it's inequitable to hold the innocent spouse liable, taking into account all facts and circumstances when considering whether to grant equitable relief. 5)Allows taxpayers to appeal innocent spouse relief requests denied by FTB to the Board of Equalization (BOE). This bill: 1)Provides that the fact that an individual's liability for unpaid taxes for any taxable year where a joint return was filed has been revised under a judgment of dissolution of marriage may be a factor weighing in favor of the requesting taxpayer obtaining equitable relief on income earned by the requesting spouse or under his or her exclusive management and control, 2)Applies its provisions to FTB when considering a request, or BOE when considering an appeal of an FTB denial, for requests received on or after January 1, 2016. SB 526 Page 3 3)States that its provisions apply notwithstanding any other law. Comments Innocent spouse relief exists for tax agencies to provide relief from joint tax liabilities for taxpayers who signed joint returns with their spouses, but were kept in the dark about the other spouse's income, business interests, or financial activities. Internal Revenue Service (IRS) for federal taxes, and FTB for state taxes, grant relief to these taxpayers because they have no legitimate reason to know that they have a tax obligation arising from items about which they had no knowledge. While not part of the law, FTB states that it considers the following factors when determining whether to grant equitable relief, and thereby relieve individuals of liability of unpaid taxes or any deficiency: The taxpayer's current marital/registered domestic partner status. Documented proof of abuse from spouse/RDP during marriage or registered domestic partnership. Proof that when the taxpayer signed the tax return, he or she expected to satisfy the tax liability. In the case of tax resulting from an audit, the taxpayer wasn't aware of the tax liability understatement. The taxpayer's current financial situation and ability to pay SB 526 Page 4 the tax liability. Whether a divorce decree, termination of a registered domestic partnership, or the legally binding agreement identifies one taxpayer as legally liable to pay the tax liability. Whether the taxpayer received a significant benefit from the unpaid income tax liability or tax deficiency. Taxpayer compliance with income tax laws in later tax years. Additionally, IRS Revenue Procedures set forth the requirements for equitable relief at the federal level, including that the taxpayer requesting relief did not know or have reason to know that there was an understatement or deficiency on the joint return. Because federal and state statutes are very similar, FTB usually applies IRS revenue procedures when deciding whether to grant requests for innocent spouse relief for California tax purposes. Only in a few, limited circumstances has IRS granted relief for unpaid liability on income earned by the requesting spouse, because that spouse should know that tax generally applies whenever he or she earns income. IRS recently expanded its equitable relief provisions to provide to allow relief on the requesting spouse's own income when funds intended to pay taxes were misappropriated by the nonrequesting spouse, or in the case of abuse, which resulted in the requesting spouse not challenging anything on the joint return for fear of the nonrequesting spouse's retaliation. SB 526 allows FTB, or BOE as part of an appeal of FTB's denial, to grant relief on the requesting spouse's own income in any case where the requesting spouse has a divorce agreement obligating the non-requesting spouse to pay any outstanding taxes, regardless of whether misappropriation of funds or abuse occurred. As such, this bill sets a significant precedent, and puts the state out of conformity with federal treatment. SB 526 Page 5 FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: No According to the Senate Appropriations Committee, this bill will result in an unknown reduction to General Fund revenues; however, it estimates that for every $1 million dollars of relief granted, General Fund revenues would be reduced by $60,000. SUPPORT: (Verified5/28/15) Fiona Ma, Board of Equalization Member George Runner, Board of Equalization Member OPPOSITION: (Verified5/28/15) None received ARGUMENTS IN SUPPORT: According to members of the Board of Equalization, the BOE has adjudicated a number of appeals from the FTB that have involved taxpayers who believed they had successfully divided assets and debts, including tax liabilities, in a divorce agreement. Existing law does not allow the FTB, and by extension the BOE in its quasi-judicial function, to rely on a marital settlement agreement to relieve a spouse of a joint income tax liability unless the agreement meets a number of technical conditions contained in Revenue and Taxation Code Section 19006(b). SB 526 grants the FTB the authority to consider a divorce agreement as a factor weighing in favor of granting relief when a taxpayer requests that the agency assign outstanding tax liabilities to the spouse who agreed to pay them, rather than holding both parties jointly liable. The existing law forces the spouse requesting relief to return to court in order to have the marital settlement agreement enforced. After negotiating a fair division of assets SB 526 Page 6 and debts, taxpayers are surprised when they learn that their agreement will not be honored by the state government. By providing the FTB the ability to abide by the agreement that was negotiated between spouses, this will limit additional needless litigation in both the courts of California as well as appeals to the BOE. Prepared by:Colin Grinnell / GOV. & F. / (916) 651-4119 5/30/15 16:30:24 **** END ****