ASK THE EDD ATTORNEY- How Does The Supreme Court’s Doma Ruling Impact A Same-Sex Married Couple’s Exposure To The EDD Part 3
by Robert S. Schriebman
This is Part 3 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 discussed 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 and Disclaimer
I am a certified tax-law specialist. I am not a certified family-law specialist. This article is written from a point of view of a tax attorney. I defend clients against the IRS, FTB, and EDD. What follows is my world view. Any decisions that you make concerning the preparation of any type of documentation relating to the change in the status of marital community property should be done through the expertise of a certified family-law practitioner. All legal documents have their complications and subtleties. These documents should not be drafted on your own without the advice of specialized counsel. You will find your attorney’s fees well spent.
Sara and Sue were married in early 2013. At the time of the marriage Sara owed the EDD for a tax deficiency that occurred in 1995. She had totally forgotten about this debt and assumed that the EDD was barred by the statute of limitations for collection. Unfortunately, Sara did not know that the EDD has no statute of limitations for collections. Both Sara and Sue are gainfully employed, and they deposit their respective paychecks in a joint bank account. The EDD has notified Sara that they intend to collect the 1995 debt, together with accruing interest. Sara ignored the letter, and the EDD has just levied on the proceeds in the joint account taking Sue’s earnings along with Sara’s. The bank has notified Sara that they are holding the funds for a short time before they remit them to the EDD. Sue does not owe the EDD anything. She files her income tax returns on time and pays her taxes to both the IRS and FTB.
The avenue available to Sue and Sara, at this point in time, are limited.
- Contact the EDD to arrange an immediate full payment and have the EDD notify the bank that the levy has been released.
- Contact the EDD to arrange an installment payment agreement and allow the EDD to take the first payment out of the levied funds. The bank should release the rest of the funds.
- Contact the EDD to begin negotiations for an Offer in Compromise. It is doubtful, however, that the EDD will immediately release the funds because of the substantial amount of time involved in this process.
- Prepare to lose the funds in the account to the EDD but consider the rules of California community property discussed below; and what Sue can do to protect her future earnings from any future EDD levies.
A Review of Community Property Liability Basics
1) Each spouse in community property is liable for community tax debts incurred during the marriage.
2) A non-liable spouse in community property may be liable for the tax-debtor spouse’s premarital tax debt.
3) The separate property of a non-liable spouse is not liable for the tax-debtor spouse’s premarital tax debts.
The threshold question in any type of tax-collection matter involving community property is whether, at the time the EDD asserts its state-tax lien, the marital property has any property interest to which a tax lien applies. Whenever the EDD attempts to levy on the bank account of a married couple the first considerations are the title in which the account is held and who is the liable spouse. If only one spouse is the tax debtor, but the levied account is a joint bank account, the non liable spouse does not have any practical grounds to convince the EDD to release the funds that are attributable to the non liable spouse. The EDD simple grabs the money in the account and does not return any of it.
Important Cases on Premarital EDD Liabilities and Transmutation Agreements
Back in 1974, the 9th Circuit Court of Appeals decided the case of Babb v Schmidt. The Babb case involved an IRS debt, but the decision can be applied to the EDD as well. In Babb, the court held tax liabilities that arose and assessed against the husband before marriage created tax liens that did, in fact, attach to the wife’s community property interest during marriage. The court held that under California law the wife’s community property interest is not immune from liability of her husband’s pre-marital debts. The Babb decision was affirmed in a 1985 Texas case of Hollingshead v U.S.
The Noonis Case
In 1983, a case in Texas pointed the way to resolve both pre-marital and post-marital tax assessments against one spouse and not the other. The case of Noonis v U.S. was decided by the Texas District Court. Mr. and Mrs. Noonis originally lived in California. They entered into a written agreement in California that stated each spouse owned only his or her separate property and that there was no marital community property. After the agreement was written the couple moved to Texas where the IRS issued an assessment against one of the spouses but tried to collect the tax debt from both spouses on a community property theory. The Texas court held that California community property laws controlled the terms of the agreement, and the IRS could not reach the earnings or assets of the non liable spouse.
The lesson from the Noonis case is clear. A couple is free to enter into a pre-marital or post-marital written agreement changing, or transmuting, their community property interests to separate property. The EDD must honor this agreement and avoid trying to collect the tax-debtor’s liabilities from the non liable spouse.
Protecting Sue’s Future Marital Earnings
The earnings of a non liable spouse may be protected from EDD collection activities against the tax -debtor spouse for pre-marital EDD deficiencies. As I stated earlier, marital community property is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property. The earnings, however, of a non-liable spouse during the marriage are not liable for a debt incurred by the tax-debtor spouse before marriage. After the earnings of the non-liable spouse are paid by the employer they remain exempt, so long as they are held in a deposit account from which the tax-debtor spouse has no right of withdrawal. These funds must not be commingled with other community property. Earnings means compensation for person services performed, whether as an employee or otherwise.
The lesson is clear – the earnings of the non liable spouse should be kept in her own separate bank account. The tax-debtor spouse’s name should be nowhere in sight.
Sue and Sara, in the above example, should also consider transmuting their marital community property to their respective separate property through a written post-nuptial agreement drafted by a certified family-law specialist.
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.