(a) No levy may be made on the principal residence of any innocent investor or the proceeds from the sale or other transaction involving the principal residence of an innocent investor upon notification to the Franchise Tax Board that the residence is the principal residence of an innocent investor and substantiation of both of the following:
(1) The basis for that levy is an underpayment of any tax imposed under Part 10 (commencing with Section 17001) for any taxable year ending on or before December 31, 2000, that is attributable to an abusive tax shelter.
(2) The principal residence is owned by an innocent investor.
(b) Any state tax lien recorded under Chapter 14 (commencing with Section 7150) of Division 7 of Title 1 of the Government Code, including a state tax lien described under Section 522(c)(2)(B) of Title 11 of the United States Code, relating to state tax liens after bankruptcy, on the principal residence of an innocent investor shall be released without satisfaction of the lien upon notification to the Franchise Tax Board that the residence is the principal residence of an innocent investor and substantiation of both of the following:
(1) The basis for that lien is an underpayment of any tax imposed under Part 10 (commencing with Section 17001) for any taxable year ending on or before December 31, 2000, that is attributable to an abusive tax shelter.
(2) The owner of that principal residence is an innocent investor.
(c) For purposes of this section:
(1) “Abusive tax shelter” shall satisfy both of the following requirements:
(A) Be a potentially abusive tax shelter within the meaning of Section 6112 of the Internal Revenue Code.
(B) With respect to which either of the following has occurred:
(i) The Internal Revenue Service has imposed a penalty under Section 6700 or 6701 of the Internal Revenue Code.
(ii) The Franchise Tax Board has imposed a penalty under Section 19177 or 19178.
(2) “Innocent investor” means any individual (or the spouse or former spouse of that individual) that satisfies each of the following requirements:
(A) Is liable for underpayment of any tax imposed under Part 10 (commencing with Section 17001) for any taxable year ending on or before December 31, 2000, that is attributable to ownership of an interest in an abusive tax shelter.
(B) Had no responsibility for the creation, promotion, operation, management, or control of the abusive tax shelter.
(C) During the tax years to which the underpayment described in subparagraph (A) relates, reasonably believed that the tax treatment of an item attributable to an abusive tax shelter was, more likely than not, the proper tax treatment.
(3) “Principal residence” includes any property that qualifies as a declared homestead as defined in Section 704.910 of the Code of Civil Procedure.
(d) Notification required by this section shall be made in the manner prescribed in forms and instructions of the Franchise Tax Board.
(e) (1) If, after January 1, 2002, the Franchise Tax Board has received proceeds from the sale of a principal residence by either levy or the satisfaction of a lien, the amounts received shall be returned to the owner upon notification to the Franchise Tax Board that the residence was the principal residence of an innocent investor and substantiation as specified in subdivision (a) or (b). The notification shall be made in writing and shall be considered a request for the return of the proceeds from the sale of the principal residence.
(2) If the Franchise Tax Board fails to mail notice of denial of the request for the return of the proceeds from the sale of the principal residence within six months after the date the request was submitted, the owner may, prior to the mailing of the notice of denial of the request, consider the request denied and may, in accordance with subdivision (f), bring an action against the Franchise Tax Board for the return of the proceeds from the sale of the principal residence.
(3) Amounts returned pursuant to paragraph (1) shall include interest at the adjusted annual rate established under Section 19521 from the date the amounts are received by the Franchise Tax Board until the date the amounts are returned.
(4) Any amounts required to be returned pursuant to this subdivision shall first be credited against any amount due from the owner (other than an underpayment of tax described in subparagraph (A) of paragraph (2) of subdivision (c)) and the balance, if any, shall be returned to the owner.
(5) No amount may be credited or returned pursuant to this subdivision unless the notification and substantiation described in paragraph (1) occur before the expiration of the one-year period beginning on the date the proceeds are received by the Franchise Tax Board.
(f) (1) If the Franchise Tax Board denies a request for the return of the proceeds from the sale of a principal residence, the owner of the residence may bring an action against the Franchise Tax Board for the return, in whole or in part, of the proceeds the Franchise Tax Board received by levy or in satisfaction of a lien.
(2) The action described in paragraph (1) must be filed within one year from the date the proceeds are received by the Franchise Tax Board or within 90 days after the Franchise Tax Board notifies the owner of the denial of his or her request for the return of the proceeds from the sale of the principal residence, whichever period expires later.
(3) Except as otherwise provided in this subdivision, an action brought pursuant to this subdivision shall be governed by the provisions of law applicable to an action authorized under Section 19382.
(Amended by Stats. 2002, Ch. 664, Sec. 207. Effective January 1, 2003.)
Last modified: October 25, 2018