61 Pa. Code § 119.30
The following words and terms, when used in this section, have the following meanings, unless the context clearly indicates otherwise:
Collection activity-The application of any overpayment to the liability provided for under section 346 of the TRC (72 P. S. § 7346), the mailing of a notice that the Department plans to intercept taxpayer's Federal Income Tax under section 6402 of the IRC (26 U.S.C.A. § 6402) or the issuance of a writ of execution, whichever first occurs.
Disqualified asset-Any property or right to property that was transferred from the nonelecting spouse to the electing spouse if the principal purpose of the transfer was the avoidance of tax or payment of tax, including additions to tax, penalties and interest.
Electing spouse-A taxpayer who follows the procedure described in subsection (f).
Nonelecting spouse-An electing taxpayer's spouse in the tax year for which the electing taxpayer is seeking tax relief under this section.
Rebate-The amount refunded or credited to a taxpayer because the Department determined that the Pennsylvania tax liability reported on the Personal Income Tax return exceeds the Pennsylvania tax liability due or any other amount refunded or credited to taxpayer that reduces the Pennsylvania tax liability reported on the return.
Taxpayers' Rights Advocate-As defined in section 207 of the Taxpayers' Bill of Rights (72 P. S. § 3310-207).
Understatement-The excess of the tax required to be shown on the Personal Income Tax return for the taxable year, less the tax shown on the Personal Income Tax return reduced by any rebate.
Example: H and W are married and file their 2005 joint Pennsylvania Personal Income Tax return on March 1, 2006. In 2005, casinos report income of $300,000 to H, and H and W do not include this income on their return. H kept his gambling income in an individual bank account; and each month, H transferred a sum of at least $6,000 into H and W's joint bank account. The total deposits from H's separate account to the joint account for the 2005 tax year totaled $90,000. All of H and W's reported income was deposited into this joint account.
W paid the household expenses using the joint account and regularly received the bank statements for it. W did have knowledge and reason to know of at least $90,000 of the $300,000 income reported by the casinos. W may not be relieved of the liability for the tax deficiency arising from $90,000 of the unreported gambling income of which she knew. W may be relieved of the deficiency arising from the additional $210,000 of gambling income reported by the casinos if given the facts and circumstances of H and W's activities, income, and the like, W had no reason to know of the additional $210,000 of income.
Example. W received $5,000 of dividend income from her investment in X Company but did not report it on the joint return. H knew that W received $5,000 of dividend income from X Company that year. H had actual knowledge of the erroneous item (that is, $5,000 of unreported dividend income from X Company); and no relief is available under this section for the deficiency attributable to the dividend income from X Company.
Example 1. If H knew that W received $5,000 of gambling winnings but did not know that W's actual winnings were $25,000, relief would not be available for the portion of the deficiency attributable to the $5,000 of income of which H had actual knowledge.
Example 2. Relief is not available under this subsection when H knew that W received winnings of $5,000 but did not know they were taxable.
Example 3. H knew of W's winnings, but H failed to review the completed return and did not know that W omitted the income from the return. Relief is not available under this subsection.
Example 1. H knew that W owned X Company stock, but H did not know that X Company paid dividends that year. H's knowledge of W's ownership in X Company is not sufficient to establish that H had actual knowledge of the dividend income from X Company. Even if H's knowledge of W's ownership interest in X Company indicates a reason to know of the dividend income, actual knowledge of the dividend income cannot be inferred from H's reason to know.
Example 2. H knew that W received $5,000, but he did not know the source of the $5,000. W and H omit the $5,000 from their joint return. H had actual knowledge of the erroneous item (that is, the omitted $5,000). No relief is available under this subsection.
Example 1. Disqualified asset presumption. H and W are divorced. In May 2005, W transfers $20,000 to H, and in April 2006, H and W receive a billing notice proposing a $40,000 deficiency on their 2004 joint Pennsylvania Personal Income Tax return. The liability remains unpaid, and in October 2006, H elects to allocate the deficiency under this section. Seventy-five percent of the net amount of erroneous items is allocable to W, and 25% of the net amount of erroneous items is allocable to H.
In accordance with the proportionate allocation method (see paragraph (3)), H proposes that $30,000 of the deficiency be allocated to W and $10,000 be allocated to himself. H submits a signed statement providing that the principal purpose of the $20,000 transfer was not the avoidance of tax or payment of tax, but he does not submit any documentation indicating the reason for the transfer. H has not overcome the presumption that the $20,000 was a disqualified asset. Therefore, the portion of the deficiency for which H is liable ($10,000) is increased by the value of the disqualified asset ($20,000). H is relieved of liability for $10,000 of the $30,000 deficiency allocated to W, and remains jointly and severally liable for the remaining $30,000 of the deficiency (assuming that H does not qualify for relief under any other provision).
Example 2. Disqualified asset presumption inapplicable. On May 1, 2001, H and W receive a billing notice regarding a proposed deficiency on their 1999 joint Pennsylvania Personal Income Tax return relating to an unreported capital gain from H's sale of his investment in Z stock. W had no actual knowledge of the stock sale. The deficiency is assessed in November 2001, and in December 2001, H and W divorce. According to a decree of divorce, H must transfer 1/2 of his interest in mutual fund A to W. The transfer takes place in February 2002. In August 2002, W elects to allocate the deficiency to H. Although the transfer of 1/2 of H's interest in mutual fund A took place after the billing notice was mailed, the mutual fund interest is not presumed to be a disqualified asset because the transfer of H's interest in the fund was made pursuant to a decree of divorce.
Example 3. Overcoming the disqualified asset presumption. H and W are married for 25 years. Every September, on W's birthday, H gives W a gift of $500. On February 28, 2007, H and W received a billing notice from the Department relating to their 2003 joint Pennsylvania Personal Income Tax return. The deficiency relates to H's business, and W had no knowledge of the items giving rise to the deficiency. H and W are legally separated in June 2004, and, despite the separation, H continues to give W $500 each year for her birthday. H is not required to give the amounts pursuant to a decree of divorce or separate maintenance. On January 27, 2009, W files an election to allocate the deficiency to H. The $1,500 transferred from H to W from February 28, 2006, (a year before the billing notice was mailed) to the present is presumed disqualified. However, W may overcome the presumption that the amounts were disqualified by establishing that the amounts were birthday gifts from H and that she has received the gifts during their entire marriage. Those facts would show that the amounts were not transferred for the purpose of avoidance of tax or payment of tax.
Example 1. Allocation of erroneous items. W and H timely file their 2005 joint Pennsylvania Personal Income Tax return on April 15, 2006. On October 17, 2006, the Department issued an assessment with respect to their 2005 joint return. The following erroneous items give rise to the deficiency:
A disallowed business expense for H's business.
A disallowed deduction for educational expenses reported by W.
Unreported interest income from a joint account. H and W divorce on January 4, 2007, and W timely elects to allocate the deficiency. The erroneous items are allocated as follows:
The disallowed business expense is allocable to H.
The disallowed educational expense is allocable to W.
The unreported interest income from the joint account normally would be allocated 1/2 to H and 1/2 to W, but because both H and W had knowledge of the income, an election to allocate this portion of the deficiency is invalid.
Example 2. Proportionate allocation. W and H timely file their 2005 joint Pennsylvania Personal Income Tax return on April 15, 2006. On October 17, 2006, the Department issued an assessment for $12,280 with respect to their 2005 joint return. H and W divorce on December 4, 2006, and W timely elects to allocate the deficiency. The following erroneous items give rise to the deficiency:
$300,000 business loss allocable to H.
Deduction under section 179 of the IRC (26 U.S.C.A. § 179) of $60,000 allocable to H.
$15,000 deduction for unreimbursed employee business expenses allocable to W.
$25,000 of unreported interest allocable to W.
| H's items: | W's items: |
| $300,000 Business loss | $25,000 Interest |
| $60,000 Section 179 | $15,000 Unreimbursed employee business expenses |
In total, there are $400,000 of erroneous items, of which $40,000 is attributable to W and $360,000 is attributable to H. The ratio of erroneous items allocable to W to the total erroneous items is 1/10 ($40,000/$400,000).
$1,228 = ($12,280) * $40,000 $400,000
W's liability is limited to $1,228 of the deficiency (1/10 of $12,280). The Department may collect up to $1,228 from W and up to $12,280 from H. The total amount collected, however, may not exceed $12,280. If H also made an election, there would be no remaining joint and several liability, and the Department would be permitted to collect $1,228 from W and $11,052 from H.
Example 3. Proportionate allocation with joint erroneous item. On September 4, 2006, W elects to allocate to H a $921 deficiency for the 2005 tax year. The following erroneous items give rise to the deficiency:
Unreported interest in the amount of $20,000 from a joint bank account.
Disallowed unreimbursed employee business expenses of $2,000 attributable to W.
Disallowed business expenses in the amount of $8,000 attributable to H's business.
The erroneous items total $30,000. Generally, income, deductions, or credits from jointly held property that are erroneous items are allocable 50% to each spouse. However, in this case, both spouses had actual knowledge of the unreported interest income. Therefore, W's election to allocate the deficiency attributable to the interest is invalid. W and H remain jointly and severally liable for the tax due on the interest. The tax due on the interest is $614. W may allocate the remaining $10,000. The tax due on the amount to be allocated is $307.
| H's items: | W's items: |
| $8,000 Business expenses | $2,000 Unreimbursed employee business expenses |
| Total allocable items: $10,000 | |
$61.40 = ($307) * $2,000 $10,000
W's remaining tax liability = $724; [$61 (Allocable to W) + $614 (Nonallocable portion of deficiency)]
H's liability = $921. The Department would be permitted to collect $724 from W and $921 from H. The total amount collected, however, may not exceed $921.
If H were also to make an election, the Department would be permitted to collect $860 from H. [(.8) ($307) = $246 Portion allocable to H]; [$860 = $246 + 614 (Nonallocable portion of deficiency)]
Example: H opens an individual retirement account (IRA) in W's name and forges W's signature on the IRA in 1980. Thereafter, H makes contributions to the IRA. In 2007, when H is age 50, H takes a distribution from the IRA. H and W file a joint return for the 2007 taxable year but do not report the taxable portion of the distribution on their joint return. The Department issues an assessment relating to the IRA distribution and assesses the deficiency against H and W. W requests relief from joint and several liability under this section. W establishes that W had no knowledge of the IRA account, did not contribute to the IRA, sign paperwork relating to the IRA, or otherwise act as if she were the owner of the IRA. W thereby rebutted the presumption the IRA is attributable to W.
Example. If an electing spouse receives property (including life insurance proceeds) from the nonelecting spouse that is beyond normal support and traceable to items omitted from gross income that are attributable to the nonelecting spouse, the electing spouse will be considered to have received significant benefit from those items.
Example 1: H and W filed a joint 2006 Pennsylvania Personal Income Tax return on February 1, 2007, and reported a tax due amount of $307. H and W did not include any payment with the return. H and W had separate checking accounts. W did not participate in H's business. The Department issued an assessment for the $307 on October 1, 2007. H and W did not file a petition for reassessment. On November 1, 2008, H and W's divorce was finalized. On July 15, 2009, W filed the forms required to request innocent spouse relief for the tax assessment issued on October 1, 2007. W timely filed her 2007 and 2008 Pennsylvania Personal Income Tax returns and paid the tax due with the return. W states that she assumed H wrote a check for the 2006 tax due and enclosed the check with the return because in previous years he paid the tax due with the return because her earnings were subject to withholding tax and H had no withholding tax. In addition, the interest they earned each year generally was less than the unreimbursed business expenses W incurred.
H and W's joint return reported the following:
| Gross Compensation | $40,000 |
| (Unreimbursed Business Expense) | ($10,000) |
| Net Compensation | $30,000 |
| Net Profits | $40,000 |
| Interest | $10,000 |
| Total PA Taxable Income | $80,000 |
| (Other Deductions) | ($10,000) |
| Adjusted PA Taxable Income | $70,000 |
| PA Tax Liability | $2,149 |
| Total PA Tax Withheld | $1,228 |
| Resident Credit | $614 |
| Tax Due | $307 |
If H and W were to have filed separate returns, the returns would appear as follows:
| H's Separate Return: | |||
| Gross Compensation | - | ||
| (Unreimbursed Business Expense) | - | ||
| Net Compensation | - | ||
| Net Profits | $40,000 | ||
| Interest | $5,000 | ||
| Total PA Taxable Income | $45,000 | ||
| (Other Deductions) | ($5,000) | ||
| Adjusted PA Taxable Income | $40,000 | ||
| PA Tax Liability | $1,228 | ||
| Resident Credit | $614 | ||
| Tax Due | $614 | ||
| W's Separate Return: | |||
| Gross Compensation | $40,000 | ||
| (Unreimbursed Business Expense) | ($10,000) | ||
| Net Compensation | $30,000 | ||
| Net Profits | - | ||
| Interest | $5,000 | ||
| Total PA Taxable Income | $35,000 | ||
| (Other Deductions) | ($5,000) | ||
| Adjusted PA Taxable Income | $30,000 | ||
| PA Tax Liability | $921 | ||
| Total PA Tax Withheld | $1,228 | ||
| Overpayment | $307 | ||
Factors weighing in favor of granting W relief are W's divorce from H within the year following the tax year for which she is seeking tax relief. H and W did not have a joint checking account, and in past years, H paid the tax due with each return with a check from his account. W's withholding exceeded the tax liability attributable to the income allocable to her. W has no outstanding tax liabilities, and she properly filed her 2007 and 2008 Pennsylvania Personal Income Tax returns. Both years her withholding tax exceeded the tax due with the return. No evidence exists for factors weighing against granting relief from the tax liability attributable to H's income.
The Taxpayers' Rights Advocate may grant W relief on the assessment because the factors weighing in favor of granting relief exceed the factors weighing against granting relief. W does not receive a refund. H is liable for the $307 tax due with H and W's 2007 joint return.
Example 2: H and W have lived apart since December 2008. H and W filed a joint income tax return for tax year 2006. The return included the following:
| Compensation (H-$40,000; W-$40,000) | $80,000 |
| Interest | $8,000 |
| Rent | $12,000 |
| Total PA Taxable Income | $100,000 |
| PA Tax Liability | $3,070 |
| Total PA Tax Withheld | $2,456 |
| Tax Due | $614 |
H and W did not pay the tax due. H and W only had a joint checking account, and the interest they received related to jointly held investment. The rental property was owned by H and W. W regularly picked up and opened the household mail.
W received a notice that her Federal income tax refund would be intercepted to pay the 2006 Pennsylvania Personal Income Tax liability. W filed an election to obtain innocent spouse relief. W did not present any evidence that she would suffer economic hardship if relief was not granted. W's tax returns for subsequent tax years were filed and any tax due was paid.
Since H and W's employers withheld the applicable income tax on the compensation they earned, the unpaid tax due related to the interest and rental income. Since this income is attributable to jointly held property, if H and W had filed separate returns, they each would have reported half of the interest income and rental income. Accordingly, if the Taxpayers' Rights Advocate grants W any relief, the relief which may be granted is limited to 50% of the outstanding liability.
The factors weighing against granting even 50% relief outweigh the factors favoring relief because no factor weighs in favor of relief. W had reason to know that the tax due was not paid with the return and is outstanding. The income on which the tax was not paid was attributable to jointly held property. The Taxpayers' Rights Advocate should not grant W relief.
Example 3: H and W divorced in November 2008. H and W filed a joint income tax return for tax year 2003. The return included the following:
| Compensation (H-$40,000; W-$40,000) | $80,000 |
| Interest | $8,000 |
| Rent | $12,000 |
| Total PA Taxable Income | $100,000 |
| PA Tax Liability | $3,070 |
| Total PA Tax Withheld | $2,456 |
| Tax Due | $614 |
H and W did not pay the tax due. H and W only had a joint checking account, and the interest they received related to jointly held investment. The rental property was owned by H and W. W regularly picked up and opened the household mail.
W received a notice that her Federal income tax refund would be intercepted to pay the 2003 Pennsylvania Personal Income Tax liability. W filed an election to obtain innocent spouse relief. W did not present any evidence that she would suffer economic hardship if relief was not granted. W's tax returns for subsequent tax years were filed and any tax due was paid.
The unpaid tax due is attributable to income obtained from jointly held property. If H and W had filed separate returns, they each would have reported half of the interest income and rental income.
No relief may be granted because W is seeking relief for a tax year more than 12 months before she was divorced or maintained a separate household from her spouse.
Example: Taxpayers filed a joint return late, paid the tax but still owed penalties and interest for filing late. Relief is not available under this section.
61 Pa. Code § 119.30
The provisions of this §119.30 issued under section 212 of the Taxpayers Bill of Rights (72 P. S. § 3310-212).