SENATE, No. 1707

SECTION 1. Section eighty-four of Chapter sixty-two C of the General Laws, as appearing in the nineteen hundred and ninety-six Official Edition, is repealed and replaced with the following:

            SECTION 84.
RELIEF FROM JOINT AND SEVERAL
LIABILITY ON JOINT RETURN.

            (a) In general — Notwithstanding section 6(a) —
            (1) an individual who has made a joint return may elect to seek relief under the procedures prescribed under section (b); and
            (2) if such individual is eligible to elect the application of subsection (c), such individual may, in addition to any election under paragraph (1), elect to limit such individual’s liability for any deficiency with respect to such joint return in the manner prescribed under subsection (c).
            Any determination under this section shall be made without regard to community property laws.

            (b) Procedures for relief from liability applicable to all joint filers.
            (1) In general, under procedures prescribed by the commissioner, if:—
            (A) a joint return has been made for a taxable year;
            (B) on such return there is an understatement of tax attributable to erroneous items of one individual filing the joint return;
            (C) the other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement;
            (D) taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement, and
            (E) the other individual elects (in such form as the commissioner may prescribe) the benefits of this subsection not later than the date which is two years after the date the commissioner has begun to collection activities with respect to the individual making the election, then the other individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such understatement.
            (2) Apportionment of relief. If an individual who, but for paragraph (1)(C), would be relieved of liability under paragraph (1), establishes that in signing the return such individual did not know, and had no reason to know, the extent of such understatement, then such individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent that such liability is attributable to the portion of such understatement of which such individual did not know and had no reason to know.
            (c) Procedures limiting liability for taxpayers no longer married or taxpayers legally separated or not living together.
            (1) In general, except as provided in this subsection, if an individual who has made a joint return for any taxable year elects the application of this subsection, the individual’s liability for any deficiency which is assessed with respect to the return shall not exceed the portion of such deficiency properly allocable to the individual under subsection (d).
            (2) Burden of proof, except as provided in subparagraph (A)(ii) or (C) of paragraph (3), each individual who elects the application of this subsection shall have the burden of proof with respect to establishing the portion of any deficiency allocable to such individual.
            (3) Election.
            (A) Individuals eligible to make election.
            (i) In general, an individual shall only be eligible to elect the application of this subsection if:—
            (I) at the same time such election is filed, such individual is no longer married to, or is legally separated from, the individual with whom such individual filed the joint return to which the election relates; or
            (II) such individual was not a member of the same household as the individual with whom such joint return was filed at any time during the 12-month period ending on the date such election is filed.
            (ii) Certain taxpayers ineligible to elect, if the commissioner demonstrates that assets were transferred between individuals filing a joint return as part of a fraudulent scheme by such individuals, an election under this subsection, by either individual shall be invalid (and section 6(a) shall apply to the joint return).
            (B) Time for election, an election under this subsection for any taxable year shall be made not later than two years after the date on which the commissioner has begun collection activities with respect to the individuals making the election.
            (C) Election not valid with respect to certain deficiencies, if the commissioner demonstrates that an individual making an election under this subsection had actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof) which is not allocable to such individual under subsection (d), such election shall not apply to such deficiency (or portion). This subparagraph shall not apply where the individual with actual knowledge establishes that such individual signed the return under duress.
            (4) Liability increased by reason of transfers of property to avoid tax:
            (A) In general, notwithstanding any other provision of this subsection, the portion of the deficiency for which the individual electing the application of this subsection is liable (without regard to this paragraph) shall be increased by the value of any disqualified asset transferred to the individual.
            (B) Disqualified asset. For purposes of this paragraph:—
            (i) In general, the term “disqualified asset” means any property or right to property transferred to an individual making the election under this subsection with respect to a joint return by the other individual filing such joint return if the principal purpose of the transfer was the avoidance of tax or payment of tax.
            (ii) Presumption.
            (I) In general, for purposes of clause (i), except as provided in subclause (II), any transfer which is made after the date which is one year before the date on which the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Department of Revenue is sent shall be presumed to have its principal purpose the avoidance of tax or payment of tax.
            (II) Exceptions, subclause (I) shall not apply to any transfer pursuant to a decree of divorce or separate maintenance or a written instrument incident to such a decree or to any transfer which an individual establishes did not have as its principal purpose the avoidance of tax or payment of tax.
            (d) Allocation of deficiency.     
            For purposes of subsection (c)
            (1) In general, the portion of any deficiency on a joint return allocated to an individual shall be the amount which bears the same ratio to such deficiency as the net amount of items taken into account computing the deficiency and allocable to the individual under paragraph (3) bears to the net amount of all items taken into account in computing the deficiency.
            (2) Separate treatment of certain items. If a deficiency (or portion thereof) is attributable to:—
            (A) the disallowance of a credit; or
            (B) any tax required to be included with the joint return; and such item is allocated to one individual under paragraph (3), such deficiency (or portion) shall be allocated to such individual.      Any such item shall not be taken into account under paragraph (1)
            (3) Allocation of items giving rise to the deficiency. For purposes of this subsection:—
            (A) In general, except as provided in paragraphs (A) and (5), any item giving rise to a deficiency on a joint return shall be allocated to individuals filing the return in the same manner as it would have been allocated if the individuals had filed separate returns for the taxable year.
            (B) Exception where other spouse benefits. Under rules prescribed by the commissioner, an item otherwise allocable to an individual under subparagraph (A) shall be allocated to the other individual filing the joint return to the extent the item gave rise to a tax benefit on the joint return to the other individual.
            (C) Exception for fraud. The commissioner may provide for an allocation of any item in a manner not prescribed by subparagraph (A) if the commissioner establishes that such allocation is appropriate due to fraud of one or both individuals.
            (4) Limitations on separate returns disregarded. If an item of deduction or credit is disallowed in its entirety solely because a separate return is filed, such disallowance shall be disregarded and the item shall be computed as if a joint return had been filed and then allocated between the spouses appropriately.
            (5) Child’s liability. If the liability of a child of taxpayer is included on a joint return, such liability shall be disregarded in computing the separate liability of either spouse and such liability shall be allocated appropriately between the spouses.
            (e) Petition for review by the Department of Revenue.
            (1) In general, in the case of an individual who elects to have subsection (b) or (c) apply:
            (A) In general, the individual may petition the Department of Revenue to determine the appropriate relief available to the individual under this section if such petition is filed during the 90-day period beginning on the date on which the commissioner mails by certified or registered mail a notice to such individual of the commissioner’s determination of relief available to the individual. Notwithstanding the preceding sentence, an individual may file such petition at any time after the date which is six months after the date such election is filed with the commissioner and before the close of such 90-day period.
            (B) Restrictions applicable to collection of assessment.
            (i) In general, except as otherwise provided, no levy or proceeding in court shall be made, begun, or prosecuted against the individual making an election under subsection (b) or (c) for collection of any assessment to which such election relates until the expiration of the 90-day period described in subparagraph (A), or, if a petition has been filed with the Department of Revenue, until the decision of the Department of Revenue has become final.
            (ii) Authority to enjoin collection actions. Notwithstanding any other provision, the beginning of such levy or proceeding during the time the prohibition under clause (i) is in force may be enjoined by a proceeding in the proper court. The Department of Revenue shall have no jurisdiction under this subparagraph to enjoin any action or proceeding unless a timely petition has been filed under subparagraph (A) and then only in respect of the amount of the assessment to which the election under subsection (b) or (c) relates.
            (2) Suspension of running of period of limitations.         
            The running of the period of limitations on the collection of the assessment to which the petition under paragraph (1)(A) relates shall be suspended for the period during which the commissioner is prohibited by paragraph (1)(B) from collecting by levy or a proceeding in court and for 60 days thereafter.
            (3) Applicable rules.
            (A) Allowance of credit or refund. Except as provided in subparagraph (B), notwithstanding any other law or rule of law, credit or refund shall be allowed or made to the extent attributable to the application of this section.
            (B) Res judicata. In the case of any election under subsection (b) or (c), if a decision of the Department of Revenue in any prior proceeding for the same taxable year has become final, such decision shall be conclusive except with respect to the qualification of the individual for relief which was not an issue in such proceeding. The exception contained in the preceding sentence shall not apply if the Department of Revenue determines that the individual participated meaningfully in such prior proceeding.
            (4) Notice to other spouse. The Department of Revenue shall establish rules which provide the individual filing a joint return but not making the election under subsection (b) or (c) with adequate notice and an opportunity to become a party to a proceeding under either such subsection.
            (f) Equitable relief. Under procedures prescribed by the commissioner, if:—
            (1) taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either); and
            (2) relief is not available to such individual under subsection (b) or (c), the commissioner may relieve such individual of such liability.
            (g) Regulations. The commissioner shall prescribe such regulations as are necessary to carry out the provisions of this section, including:—
            (1) regulations providing methods for allocation of items other than the methods under subsection (d)(3); and
            (2) regulations providing the opportunity for an individual to have notice of, and an opportunity to participate in, any administrative proceeding with respect to an election made under subsection (b) or (c) by the other individual filing the return.