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Federal Headlines
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President Obama on August 7 signed legislation to keep the Highway Trust Fund solvent through the end of fiscal year 2009. The bipartisan measure, HR 3357, which would transfer $7 billion from the General Fund to the Highway Account of the Highway Trust Fund, passed the Senate by a vote of 79-to-17 on July 30 and passed the House by a vote of 363 to 68 on July 29 (TAXDAY, 2009/07/30, C.2). The measure will also provide essential loans to the Unemployment Trust Fund (UTF) to meet a projected shortfall by early August. According to a Ways and Means press release issued late on July 29, the loans are repayable with interest, and the Congressional Budget Office has scored the legislation as having no cost to the federal treasury.
The president also signed HR 3435, a bill to provide $2 billion in emergency supplemental appropriations for the Consumer Assistance to Recycle and Save Program, aka the Cash-for-Clunkers program. The program provides dealers with refund vouchers worth up to $4,500 when consumers trade in older vehicles with fuel economy ratings of 18 miles per gallon or less. The Senate approved the measure on August 6 by a vote of 60-to-37 (TAXDAY, 2009/08/07, C.1). The Senate voted down six amendments that would have stalled the bill and caused House and Senate members to negotiate a compromise version after the August recess. The House passed the measure before leaving for its recess on July 31 (TAXDAY, 2009/08/03, C.1).
By Stephen K. Cooper, CCH News Staff
Legislation to Restore Sums to the Highway Trust Fund, Enrolled, as Signed by the President on August 7, 2009, HR 3357
Legislation Making Supplemental Appropriations for Fiscal Year 2009 for the Consumer Assistance to Recycle and Save Program, as Passed by the House on July 31, 2009, HR 3435
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State Headlines
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CCH has recently learned that the California Franchise Tax Board (FTB) is forwarding refunds from a registered domestic partnership's (RDP) California personal income tax joint return to the Internal Revenue Service (IRS) to satisfy the separate federal tax liability of one of the partners, even though the IRS does not recognize RDPs and requires registered domestic partners to file single returns.
Upon inquiry, the FTB has stated that under Cal. Rev. & Tax. Code §17021.7, the FTB is required to treat RDPs the same as married persons. The FTB offset procedures are based on the presumption that refunds from joint returns stem from taxes withheld or other refundable credits that are community property in character and, therefore, are subject to offset to the separate tax liabilities of either spouse incurred before or after marriage. The FTB has stated that the only exception would be if the RDP filed a prenuptial agreement or equivalent. In that case, the FTB would attempt to reimburse the spouse or RDP for the amount of refund allocable to the spouse or RDP.
It is clear that the FTB is following the "letter of the law" in this instance; however, it is questionable whether such action is frustrating the actual intent of the law. The FTB is aware that the IRS is not treating RDPs the same as married taxpayers. The IRS is being inconsistent in its position by refusing to acknowledge RDPs for federal tax purposes, yet taking advantage of the state's community property laws to access state tax refunds from an RDP's joint California return to satisfy a federal tax liability from one of the individual partners. Absent a legislative change, there does not appear to be any clear administrative remedy against the FTB, other than contacting the California Taxpayer Rights Advocate office for possible intervention. The Taxpayer Advocate's office is currently reviewing this matter on a systemic level.
On the federal side, once the IRS receives the refund, the non-debtor spouse/domestic partner may then want to pursue a return of such spouse's/domestic partner's allocable portion of the refund on the basis that the IRS does not regard the individuals as being married and, therefore, the refund should not be treated as community property for federal income tax purposes. While at first blush it might appear that the non-debtor spouse/partner should file Form 8379, Injured Spouse Allocation, the IRS will likely not process such request given that no federal joint return was ever filed, and the IRS does not regard the non-debtor spouse/partner as a spouse at all under federal tax law.
Alternately, the non-debtor spouse/partner might want to file Form 9423, Collection Appeal Request, to request Appeals Office assistance, or Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), and seek the intervention of the Taxpayer Advocate Service. Such efforts may be constrained by the absence of any definitive guidance from Chief Counsel indicating that while property rights are generally determined under state law, and state law may regard the couple as being married and therefore any refund as community property, the IRS will not treat it as community property for federal income tax purposes. The non-debtor spouse/partner might also consider a wrongful levy action if these administrative remedies are unsuccessful.
For preparers who advise same sex couples and domestic partners where one spouse/partner owes back federal taxes, it may be appropriate to consider whether the couple should adjust their state withholding now, thereby avoiding any refund on their 2009 California return.
Subscribers can view the FTB's response to CCH's inquiry.
E-mail, California Franchise Tax Board, August 4, 2009
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