BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 526|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
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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.
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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.
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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
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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.
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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
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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
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