Relief of spouse from New York State personal income tax liability on joint New York State personal income tax returns.

(1) If a joint New York State personal income tax return has been filed pursuant to the provisions of subdivision (b) or (c) of this section for a taxable year, and on such return there is a substantial understatement of New York State personal income tax attributable to grossly erroneous items of one spouse, the other spouse will be relieved of liability for New York State personal income tax (including interest, penalties and other amounts) for such taxable year to the extent that such liability is attributable to such substantial understatement of New York State personal income tax attributable to grossly erroneous items if:

(i) the other spouse establishes that, in signing such return, he or she did not know, and had no reason to know, that there was such substantial understatement; and

(ii) taking into account all the facts and circumstances, including whether or not the other spouse benefited directly or indirectly from the grossly erroneous items, it is inequitable to hold the other spouse liable for the deficiency in New York State personal income tax for such taxable year attributable to such substantial understatement.

(2) A spouse may make application for the relief provided for in this subdivision by filing with the Tax Commission a sworn statement stating all the facts and circumstances set forth in subparagraphs (1)(i)-(ii) of this subdivision in support of such application. The Tax Commission may request additional sworn statements, testimony under oath or any other proof that it requires to determine whether the applicant should be relieved of liability for New York State personal income tax as provided for in this subdivision.

(3) For the purposes of this subdivision:

(i) the term grossly erroneous items means, with respect to any spouse, any item of New York adjusted gross income attributable to such spouse which is omitted from New York adjusted gross income and any claim of a New York deduction, exemption, credit or basis by such spouse in an amount for which there is no basis in fact or law;

(ii) the term substantial understatement means the excess of the amount of the New York State personal income tax required to be shown on the New York State personal income tax return for the taxable year, over the amount of New York State personal income tax imposed which is shown on the New York State personal income tax return, reduced by any rebate (within the meaning of section 681[g] of the Tax Law), which exceeds $100; and

(iii) the determination of the spouse to whom items of New York adjusted gross income (other than New York adjusted gross income from property) are attributable will be made without regard to community property laws.

(4) New York State personal income tax liability attributable to substantial understatement must exceed specified percentage of innocent spouse New York adjusted gross income.

(i) Except as provided in subparagraph (iii) of this paragraph, the provisions of this subdivision shall apply:

(a) if the innocent spouse's New York adjusted gross income for the most recent taxable year ending before the date the deficiency notice is mailed is $20,000 or less, only if the liability for New York State personal income tax described in paragraph (1) of this subdivision (including interest, penalties and other amounts) attributable to the substantial understatement is greater than 10 percent of such New York adjusted gross income;

(b) if the innocent spouse's New York adjusted gross income for the most recent taxable year ending before the date the deficiency notice is mailed is more than $20,000, only if the liability for New York State personal income tax described in paragraph (1) of this subdivision (including interest, penalties and other amounts) attributable to the substantial understatement is greater than 25 percent of such New York adjusted gross income.

(ii) For purposes of this paragraph, if the innocent spouse is married to another spouse at the close of such year, the spouse's New York adjusted gross income must include the New York adjusted gross income of the new spouse, whether or not they file a joint New York State personal income tax return.

(iii) Exception. The requirement contained in this paragraph that New York State personal income tax liability (including interest, penalties and other amounts) attributable to substantial understatement must exceed either 10 percent of the innocent spouse's New York State adjusted gross income if such spouse's adjusted gross income for the most recent taxable year ending before the deficiency notice is mailed is $20,000 or less; or 25 percent of the innocent spouse's New York State adjusted gross income if such spouse's adjusted gross income for the most recent taxable year ending before the deficiency notice is mailed is more than $20,000, shall not apply to a substantial understatement attributable to an omission from New York adjusted gross income. Therefore, these relief of spouse provisions will be available without the need to meet the applicable percentage limitation specified in this paragraph where there is a substantial understatement attributable to an omission from New York adjusted gross income.

(5) If a joint New York State personal income tax return has been made by a husband and wife for a taxable year and on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse, and if, pursuant to the provisions of this subdivision, the other spouse is relieved of liability for New York State personal income tax (including interest, penalties and other amounts) for such taxable year to the extent that such liability is attributable to such substantial understatement, and if a joint New York City personal income tax return or a joint City of Yonkers income tax surcharge return is made by the spouse for the same taxable year, then such other spouse shall be relieved of liability for the New York City personal income tax or the City of Yonkers income tax surcharge, whichever is applicable, for the taxable year to the extent that such liability is attributable to such substantial understatement.