IRS Collection Issues
It can be difficult representing clients who owe the IRS large sums of money, but those difficulties are compounded in community property states because spouses who generally think of themselves as “innocent spouses” can still bear the economic brunt of bad decisions made by their husband or wife. It is of course a foregone conclusion that parties who file a tax return, and elect to do so jointly in order to take advantage of the lower joint rates sign up for joint and several liability should something go wrong.
Code Sec. 6015 provides a variety of remedies which are available to insulate “innocent spouses” from joint and several liability, if they can run the gauntlet of that section. The rules of Code Sec. 6015 are, however, outside the scope of this article. This article deals with the very real consequences that arise in spite of Code Sec. 6015 as a direct consequence of California community property law.Community Property:
Will You Know it When You See it?The character of property as “separate” or “community” is determined by the marital status of a couple when the property was acquired. All property that a person acquires while married in California is presumed to be community prop-erty.1 Note, however, that Social Security income is not community property.2The parties’ respective interests in community property are “present, existing, and equal.”3 This means that the spouses hold equal (or 50/50) interests in the JOURNAL OF TAX PRACTICE & PROCEDUREDECEMBER 2016–JANUARY 201740THE CONSEQUENCES OF CALIFORNIA COMMUNITY PROPERTY whole of the community property rather than 50-percent ownership interests in the community estate to the exclu-sion of each other.4On the other hand, the earnings and accumulations of spouses who live “separate and apart” are the separate property of the spouse who earns or accumulates property.5In California, all property owned by marriage partners is either (1) community property, (2) separate property of the husband (HSP) or (3) separate property of the wife (WSP).
Sometimes the phrase “community debt” or “commu-nity liability” is used to describe who is responsible for a debt. However, this is an imprecise formulation. There are no community property debts per se. There are simply debts, and the question is what property a creditor can reach to satisfy those debts.California is considered to a creditor friendly state. Ac-cording to the California Supreme Court ... “[T]he policy of protecting the ... creditors [of a spouse] outweighs the policy of protecting family income ... ”6 This creditor friendliness spills over to the IRS since as a general rule the IRS looks to state property law to determine to what extent a tax delinquent has property or property rights to which its federal tax liens, or levies attach to.7Thus, the separate tax liabilities of the husband may be satisfied by HSP and the separate tax liability of the wife may be satisfied by WSP.8 The separate property of a nondelinquent spouse may not be reached to satisfy the separate liability of the delinquent spouse.9 However, all community property may be reached administratively or judicially to satisfy the separate tax liabilities of either spouse which arose “before or during marriage.”10In M. Babb v. Schmidt, the Ninth Circuit faced the question of whether a California wife’s one-half interest in community bank accounts was subject to the federal tax lien for the husband’s premarital tax liability. In holding that the lien could reach her one-half interest, the Court reasoned that since California law made the nondebtor wife’s share of the community property available to credi-tors of the debtor husband, “California law has by the same rule implicitly given the husband rights in that property sufficient to meet the requirements of 26 U.S.C. § 6321.”11On the other hand, California Family Code §910(b) carves out an exception to the liability of community property for debts incurred by spouses while they live “separate and apart.” Section 910(b) provides that, for purposes of Section 910, the phrase “during marriage” does not include “the period during which the spouses are living separate and apart before a judgment of dissolution of marriage or legal separation of the parties.” Thus, the community property of a spouse is not liable for the debts incurred by the other spouse during the period that the spouses live “separate and apart.