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ASK THE EDD ATTORNEY- How Does The Supreme Court's Doma Ruling Impact A Same-Sex Married Couple's Exposure To The Edd Part 2

by Robert S. Schriebman

This is Part 2 of a three-part article discussing the exposure of a same-sex married couple to the EDD for assessments and deficiencies. In Part 1we discussed the general rules of marital community property in California. In Part 2 we will discuss both pre-marital and post-marital exposure to an EDD debt. In Part 3 we will discuss pre-marital and post-marital agreements as well as the concept of transmutation of marital community property. I will make a few suggestions on how a same-sex married couple can protect their respective assets against pre-marital and post-marital EDD assessments and deficiencies. Please understand that we are exploring new territory. Things are going to develop and change.

Introduction

Difficult problems can occur in a same-sex marriage when one spouse owes premarital tax debts and the other spouse is tax-debt free. The marriage can suffer an irreconcilable fracture especially when the non-liable spouse has not told that the other spouse is entering the marriage with tax baggage. Is there anything that a couple can do before marriage to protect marital property, especially the property of the “innocent spouse,” from the tax baggage of the other spouse? Can protective steps be taken after the marriage is celebrated?

Case Study: Steve and Sam are in Love and Plan to Marry

Steve owns and operates a small corporation that operates a debt-collection agency. Sam trains the workers and supervises their day-to-day activities. Steve treats all workers as independent contractors. Sam knows about this but is more concerned with training and management. Steve owns 100% of the corporation. The corporation is audited by the EDD and issued a stiff assessment for treating the debt collectors as contractors instead of employees. Steve ignored the Notice of Assessment. It became final, and the EDD has not only issued an assessment against the company but is considering assessing Steve individually as a responsible person. Steve has not told Sam about the EDD.

Steve and Sam decide to marry. They are making all kinds of wonderful wedding plans. However, Steve has totally ignored his EDD problems. About a month after the wedding ceremony the EDD issues an assessment against Steve personally for the corporate-level assessment. Sam knows nothing about it. Steve and Sam open a joint bank account wherein they both put in their marital earnings from the company and from which they pay the usual bills of a household.

We know from this example that Steve has his EDD headaches, but what about Sam? Does he have exposure to the EDD as well? What should Steve and Sam have done before marriage to protect the non liable spouse? Is it too late to do anything to help Sam after the marriage has been celebrated?

Know the Basics

Here we will examine the extent to which both community property and separate property may be seized by the EDD for premarital and marital tax liabilities. The following are general rules you need to know:

  1. Community Property is usually defined in the negative. That is community property is defined as all property coming into a marriage, except property acquired by gift or inheritance. There is also a presumption that property acquired during a marriage is community property unless there are clear indications to the contrary. Things are not always clear. For example, funds held in a marital joint bank account are presumed to be community property. If the EDD levies on a joint bank account it will take the assets of both spouses regardless of which spouse has the tax debt.
  2. Each spouse in community property is liable for community tax debts incurred during the marriage.
  3. A non-liable spouse in community property may be liable for the tax-debtor spouse’s premarital tax debt.
  4. The separate property of a non-liable spouse is not liable for the tax-debtor spouse’s premarital tax debts.

Premarital Strategy

If Steve, in the above example, would have informed Sam that he was entering the marriage with a substantial EDD tax liability the couple could have executed a pre-nuptial agreement setting forth Sam’s separate property and clearly stating that Sam’s earnings during the marriage are to remain his separate property. A family-law specialist attorney should be consulted in these types of situations. Many attorneys advise that the agreement should be notarized and recorded in the county of residence. Steve and Sam can also draft a post-nuptial agreement that would prevent the EDD from seizing Sam’s property providing he does not comingle his earnings and future income in a joint bank account.

In Part 3 we will take a closer look at written agreements between spouses including transmutation agreements as well as to discuss protection of the non-liable spouse’s marital earnings.

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An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.

As a trusted EDD attorney, Robert S. Schriebman has successfully dedicated more than 30 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House and the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure", both published by Commerce Clearing House.