Relief from Joint Liability

Bob Parrish C PA. P.C.
A Professional Corporation

Innocent Spouses & Income Tax

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1. Relief From Joint and Several Liability

1 Relief From Joint Liability

SUMMARY: This document contains proposed regulations relating to relief

from joint and several liability under section 6015 of the Internal Revenue Code.

 The regulations reflect changes in the law made by the IRS Restructuring and

Reform Act of 1998. The regulations provide guidance to married individuals

filing joint returns who may seek relief from joint and several liability.

This document also provides notice of a public hearing on these proposed

regulations.

[Proposed Rules]

[Page 3888-3903]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr17ja01-26]

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-106446-98]

RIN 1545-AW64

Relief From Joint and Several Liability

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations relating to relief

from joint and several liability under section 6015 of the Internal

Revenue Code. The regulations reflect changes in the law made by the

IRS Restructuring and Reform Act of 1998. The regulations provide

guidance to married individuals filing joint returns who may seek

relief from joint and several liability. This document also provides

notice of a public hearing on these proposed regulations.

DATES: Written or electronically generated comments and requests to

speak (with outlines of oral comments) at the public hearing scheduled

for May 30, 2001, must be received by April 27, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-106446-98), room 5228,

Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

DC 20044. Submissions may be hand delivered Monday through Friday

between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG-106446-98),

Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue,

NW., Washington, DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting the ``Tax Regs'' option on

the IRS Home Page, or by submitting comments directly to the IRS

Internet site at http://www.irs.gov/tax_regs/regslist.html.

[[Page 3889]]

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,

Bridget E. Finkenaur, 202-622-4940; concerning submissions of comments,

the hearing and/or to be placed on the building access list to attend

the hearing, Guy Traynor, 202-622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed

rulemaking has been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507). Comments on the collection of information should be sent

to the Office of Management and Budget, Attn: Desk Officer for the

Department of the Treasury, Office of Information and Regulatory

Affairs, Washington, DC 20503, with copies to the Internal Revenue

Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S:O,

Washington, DC 20224. Comments on the collection of information should

be received by March 19, 2001. Comments are specifically requested

concerning:

    Whether the proposed collection of information is necessary for the

proper performance of the functions of the Internal Revenue Service,

including whether the information will have practical utility;

    The accuracy of the estimated burden associated with the proposed

collection of information (see below);

    How the quality, utility, and clarity of the information to be

collected may be enhanced;

    How the burden of complying with the proposed collection of

information may be minimized, including through the application of

automated collection techniques or other forms of information

technology; and

    Estimates of capital or start-up costs and costs of operation,

maintenance, and purchase of services to provide information.

    The collection of information in this proposed regulation is in

Sec. 1.6015-5. Individuals may request relief from joint and several

liability by timely filing Form 8857, ``Request for Innocent Spouse

Relief (And Separation of Liability and Equitable Relief),'' or a

written statement that contains the information required on Form 8857,

that is signed under penalties of perjury. This collection of

information is required in order for an individual to request relief

from joint and several liability. This information will be used to

carry out the internal revenue laws. The likely respondents are

individuals.

    The reporting burden contained in Sec. 1.6015-5 is reflected in the

burden of Form 8857. The estimated burden is: learning about the law or

the form, 17 min.; preparing the form, 17 min.; and copying,

assembling, and sending the form to the IRS, 20 min. The reporting

burden contained in Sec. 1.6015-5 for the statement signed under

penalties of perjury is estimated as: learning about the law, 20 min.;

preparing the statement signed under penalties of perjury, 30 min.; and

copying, assembling, and sending the statement to the IRS, 20 min.

    An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless it displays a valid

control number assigned by the Office of Management and Budget.

    Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    Section 6013(d)(3) provides that spouses who file a joint Federal

income tax return are jointly and severally liable for liabilities with

respect to tax arising from that return. The term tax includes

additions to tax, penalties, and interest. See sections 6665(a)(2) and

6601(e)(1). Joint and several liability allows the IRS to collect the

entire liability from either spouse signing the joint return, without

regard to whom the items of income, deduction, credit, or basis that

gave rise to the liability are attributable. Before the enactment of

the Internal Revenue Service Restructuring and Reform Act of 1998,

Public Law 105-206 (112 Stat. 685) (1998) (RRA), section 6013(e)

provided the only relief from joint and several liability, and it only

applied in very limited circumstances.

    Section 3201 of the RRA repealed section 6013(e) and replaced it

with section 6015. Section 6015 applies to liabilities that arise after

July 22, 1998, and liabilities that arose prior to July 22, 1998, which

remained unpaid as of that date. The provisions of section 6015 expand

the relief available to spouses or former spouses who wish to be

relieved from all or a portion of the joint and several liability

arising from a joint individual Federal income tax return. Section 6015

makes the requirements for relief from joint and several liability,

formerly in section 6013(e), less restrictive (section 6015(b)), and

adds two other relief provisions. One provision, section 6015(c),

permits the allocation of a deficiency between certain estranged

spouses or former spouses in proportion to their respective erroneous

items or in accordance with other allocation rules. The other

provision, section 6015(f), gives the Secretary equitable discretion to

grant relief from joint and several liability. The three relief

provisions have different eligibility requirements and provide

different types of relief.

    This document contains proposed amendments to the Income Tax

Regulations (26 CFR part 1) that are necessary to carry out the

provisions of section 6015. The proposed regulations provide detailed

guidance on the three types of relief from joint and several liability

under section 6015.

Explanation of Provisions

In General

    To qualify for relief from joint and several liability, a

requesting spouse (as defined in the regulations) must elect the

application of section 6015(b) or 6015(c), or request equitable relief

under section 6015(f), within 2 years of the first collection activity

after July 22, 1998, with respect to the requesting spouse. Relief

under section 6015 is only available for income taxes required under

Subtitle A (including self-employment taxes). Relief is not available

for other taxes reported on a taxpayer's income tax return (e.g.,

domestic services employment taxes under section 3510).

    The proposed regulations define several terms, some of which are

unique to specific provisions, and others of which are generally

applicable to section 6015. One generally applicable term is an item.

An item is generally defined as that which is required to be separately

reported on an individual income tax return. However, amounts received

from investments that are required to be separately reported on an

individual income tax return and that are from the same source are

aggregated and treated as one item. For example, assume an individual

receives $700 in dividends and $1,000 in interest from X Co. Although

dividends and interest are required to be separately reported on the

individual's income tax return, they are considered one item for

purposes of section 6015 because the dividends and interest are both

from X Co. Items include, but are not limited to, gross income,

deductions, credits, and basis. An erroneous item is defined as any

item resulting in an understatement or deficiency in tax to the extent

such item is omitted from, or improperly reported (including improperly

characterized) on, an individual income tax return.

[[Page 3890]]

Innocent Spouse Relief Under Section 6015(b)

    In enacting section 6015, Congress focused, in part, on the

limitations of section 6013(e). H.R. Conf. Rep. No. 599, 105th Cong.,

2d Sess. 249 (1998). Thus, certain limitations under section 6013(e)

have been eliminated in section 6015. For example, section 6013(e)

required that there be a substantial understatement attributable to a

grossly erroneous item, whereas section 6015(b) only requires that

there be an understatement of an erroneous item. Another difference is

that, unlike section 6013(e), section 6015(b) expressly provides for

partial relief if a requesting spouse did not know, and had no reason

to know, of only a portion of the understatement. One procedural

difference is that a requesting spouse must now elect the application

of section 6015(b).

    Otherwise, section 6015(b) provides the same type of relief as was

available under section 6013(e). In addition, as with section 6013(e),

if a requesting spouse qualifies for relief under section 6015(b),

refunds are available for amounts that the requesting spouse paid

toward the liability for which relief was granted. Much of the language

in section 6015(b) is identical to that of section 6013(e).

Accordingly, the case law interpreting this language under section

6013(e) will be applied in interpreting the same language under section

6015(b).

    The proposed regulations define understatement by reference to

section 6662(d)(2)(A). Consistent with the interpretation of section

6013(e), the proposed regulations also clarify that ``knowledge or

reason to know'' of an understatement exists only when either the

requesting spouse actually knew of the erroneous item giving rise to

the understatement, or a reasonable person in similar circumstances

would have known of the item.

Allocation of Deficiency Under Section 6015(c)

    Section 6015(c) is one of the new relief provisions added by

section 3201 of the RRA. Section 6015(c) basically provides relief for

an estranged or former spouse by allowing the requesting spouse to

elect to limit the requesting spouse's liability for a deficiency to

the portion of the deficiency allocated to the requesting spouse. As

with section 6015(b), the relief under section 6015(c) must be elected.

Unlike section 6015(b), refunds are not available under section

6015(c).

    Of the three relief provisions in section 6015, section 6015(c)

comes closest to being a mechanical test. Unlike the other two relief

provisions, section 6015(c) does not require a determination that it

would be inequitable to hold the requesting spouse liable in order for

the requesting spouse to obtain relief. Several objective tests apply

to determine whether a requesting spouse qualifies for relief. Among

the requirements for relief under section 6015(c) is the requirement

that the requesting spouse be divorced, widowed, or legally separated,

or not have been a member of the same household as the nonrequesting

spouse at any time during the 12-month period ending on the date an

election for relief is filed. The proposed regulations provide rules

for determining whether spouses are members of the same household in

particular situations.

    Relief under section 6015(c) is not available for the portion of a

deficiency attributable to an erroneous item of the nonrequesting

spouse if the Secretary demonstrates that the requesting spouse had

actual knowledge of that item at the time the requesting spouse signed

the joint return. If the requesting spouse had actual knowledge of only

a portion of the erroneous item, partial relief may be available for

the amount of the deficiency attributable to the portion of the item of

which the requesting spouse did not have actual knowledge. Reason to

know of an erroneous item or a portion thereof is not sufficient to

disqualify a requesting spouse from relief under section 6015(c).

Hence, it may be easier to qualify for relief under this provision than

under section 6015(b).

    Knowledge of an item means knowledge of the receipt or expenditure.

It does not mean knowledge of the proper tax treatment of the item or

how (or whether) it was actually reported on the return. This knowledge

standard is consistent with the knowledge standard adopted by the

United States Tax Court and other courts. See Cheshire v. Commissioner,

115 T.C. No. 15 (August 30, 2000) (knowledge requirement under section

6015(c) does not require requesting spouse to possess knowledge of the

tax consequences arising from the erroneous item or that the item

reported on the return is incorrect; rather the statute requires only a

showing that the requesting spouse actually knew of the erroneous

item); Wiksell v. Commissioner, 215 F.3d 1335 (9th Cir. 2000)

(knowledge inquiry in section 6015(c) focuses on whether the taxpayer

had knowledge of the erroneous item, not the tax consequences of that

item). Also, under the proposed regulations, a requesting spouse could

have actual knowledge of an erroneous item without necessarily knowing

its source. Thus, if W knew that H received $1,000 of interest income,

W would have actual knowledge of that item even if W thought that the

interest was tax-exempt, or even if W did not know from whom the

interest was received. Similarly, W would have actual knowledge of the

item even if W had thought (incorrectly) that H had included the

interest income on the return. A requesting spouse's failure to review

a completed joint return will not negate a demonstration by the

Secretary that the requesting spouse had actual knowledge of an item.

    To demonstrate that a requesting spouse had actual knowledge of an

erroneous item, the Secretary may rely upon all of the facts and

circumstances. One relevant factor is whether the requesting spouse

made an effort to be shielded from liability by deliberately avoiding

learning about an item. Another relevant factor is whether the

requesting spouse had an ownership interest in the property that gave

rise to the item. The proposed regulations provide that joint ownership

is a factor supporting a finding that the requesting spouse had actual

knowledge of an erroneous item.

    The proposed regulations also provide that the portion of the

deficiency for which the requesting spouse remains liable is increased

(up to the entire amount of the deficiency) by the value of any

disqualified assets transferred to the requesting spouse by the

nonrequesting spouse. Disqualified assets are defined as those assets

transferred for the principal purpose of avoidance of tax or payment of

tax. Any assets transferred during the period beginning 12 months

before the mailing date of the first letter of proposed deficiency and

continuing to the present are presumed to be disqualified assets.

However, the requesting spouse can rebut the presumption by showing

that the principal purpose of the transfer was not the avoidance of tax

or payment of tax. In addition, the presumption does not apply to

transfers of assets pursuant to a divorce or separate maintenance or

child support agreement. The IRS and Treasury Department are

particularly interested in receiving comments on whether there should

be a de minimis exception to the presumption, and if so, the

appropriate amount for such an exception.

    If a requesting spouse qualifies to elect the application of

section 6015(c), section 6015(d) generally provides that erroneous

items are allocated between the spouses as if they had filed separate

returns. In addition, section 6015(g) directs the Secretary to

establish

[[Page 3891]]

alternative methods of allocating erroneous items, other than the

method in section 6015(d). Under the proposed regulations, erroneous

income items are generally allocated to the spouse who earned the

income or who owned the investment or business producing the income. If

both spouses had an ownership interest in an investment or business, an

erroneous income item from that investment or business is allocated

between them in proportion to their respective ownership interests.

Erroneous business or investment deductions are generally allocated to

the spouse who owned the business or investment. If both spouses had an

ownership in the business or investment, an erroneous deduction related

to that business or investment is allocated between them in proportion

to their respective ownership interests. Personal deductions are

generally allocated 50% to each spouse, unless the evidence shows that

a different allocation is appropriate.

    Section 6015(d) also provides rules for allocating a deficiency.

Under the proposed regulations, a portion of the deficiency is

allocated under the ``proportionate allocation method,'' that is, in

proportion to each spouse's share of erroneous items. The proposed

regulations provide additional rules regarding the allocation of other

portions of the deficiency. First, any portion of the deficiency

attributable to certain disallowed credits and taxes (other than income

tax and alternative minimum tax) is allocated entirely to one spouse or

the other. Second, any portion of the deficiency attributable to the

liability of the child of the requesting or nonrequesting spouse is

allocated under special rules. Third, any portion of the deficiency

attributable to the alternative minimum tax under section 55 is

allocated between the spouses in proportion to their individual shares

of the total alternative minimum taxable income as defined under

section 55(b)(2). Fourth, any portion of the deficiency attributable to

accuracy-related penalties under section 6662 and fraud penalties under

section 6663 is allocated to the spouse to whom the item giving rise to

the penalty is allocable.

    The proposed regulations provide one alternative allocation method,

which must be used in place of the general allocation method when there

are erroneous items taxed at different rates. This method ensures that

the allocation of the liability is not skewed, for example, when the

deficiency items consist of ordinary income items and capital gains.

Equitable Relief Under Section 6015(f)

    Section 6015(f) is the other new relief provision that was added by

section 3201 of the RRA. Section 6015(f) authorizes the Secretary to

grant equitable relief from joint and several liability to requesting

spouses who do not qualify for relief under section 6015(b) or 6015(c).

The proposed regulations provide that the Secretary has the discretion

to grant equitable relief and that the discretion may be exercised if

it would be inequitable to hold the requesting spouse jointly and

severally liable. Equitable relief is only available to requesting

spouses who fail to qualify for relief under sections 6015(b) and

6015(c). However, section 6015(f) may not be used to circumvent the

``no refund'' rule of section 6015(c). Therefore, equitable relief

under section 6015(f) is not available to refund liabilities already

paid, for which the requesting spouse would otherwise qualify for

relief under section 6015(c).

    Section 6015(f) directs the Secretary to prescribe procedures

regarding when equitable relief may be granted. These proposed

regulations provide general information on section 6015(f) and refer

individuals seeking more detailed guidance to the relevant revenue

rulings, revenue procedures, or other published guidance issued on this

topic. The detailed guidance on section 6015(f) is currently provided

in Revenue Procedure 2000-15 (2000-5 I.R.B. 447).

Other Considerations

    In addition to the three types of relief from joint and several

liability, section 6015 has many provisions that are relevant when a

requesting spouse elects relief under section 6015(b) or 6015(c), or

requests relief under section 6015(f). The proposed regulations provide

detailed guidance on these other provisions:

1. Types of Relief Considered

    There are certain statutory consequences to electing the

application of section 6015(b) or section 6015(c) (e.g., suspension of

the statute of limitations on collection). Therefore, the IRS will not

automatically consider such relief unless the requesting spouse

affirmatively elects the application of at least one of those sections.

If a spouse requests relief under section 6015(f) alone, relief will

only be considered under that section. However, if a requesting spouse

elects the application of either section 6015(b) or 6015(c), the IRS

will automatically consider whether the requesting spouse qualifies for

relief under the other relief provisions of section 6015.

2. Time and Manner of Requesting Relief

    Relief under section 6015 must be elected or requested within two

years from the first collection activity (as defined in the proposed

regulations) after July 22, 1998, against the requesting spouse with

respect to the joint and several liability. In addition, relief may be

elected or requested before the commencement of collection activity.

However, the election may not be made, nor may relief be requested,

before the taxpayer receives a notification of an audit or a letter or

notice from the Secretary indicating that there may be an outstanding

liability with regard to the joint return. The proposed regulations

provide that the Secretary will not consider premature claims.

3. Determinations

    The proposed regulations provide that a requesting spouse generally

only receives one final determination of relief under section 6015.

However, a second election under section 6015(c) may be considered, and

a final determination may be rendered on that election, if, at the time

of the second election, but not at the time of the first election, the

requesting spouse is divorced, legally separated, widowed, or has not

been a member of the same household as the nonrequesting spouse at any

time during the 12-month period ending on the date the election was

filed.

4. Community Property

    Under section 6015 and the proposed regulations, the operation of

community property law is not considered in determining to which spouse

an erroneous item is allocable.

5. Duress

    The proposed regulations amend Sec. 1.6013-4 to clarify that if a

spouse asserts and establishes that he or she signed a joint return

under duress, then the return is not a joint return, and he or she is

not jointly and severally liable for the liability arising from that

return. Therefore, in such a case, relief from joint and several

liability under section 6015 is not necessary and inapplicable.

Highlighted Issues

    These proposed regulations contain detailed guidance on the three

types of relief available under section 6015, as well as the other

provisions contained in section 6015. Although public comment is sought

on all of the issues in the proposed regulations, the IRS and Treasury

Department are particularly interested in receiving comments on the

issues highlighted below. These issues

[[Page 3892]]

present the most challenge in administering section 6015(c).

    1. Knowledge: The contrasting standards of the relief provisions

are most evident in the respective knowledge limitations. Under section

6015(b), relief is not available unless the requesting spouse

demonstrates that he or she had no knowledge or reason to know of the

item giving rise to the understatement at the time the joint return was

signed. In contrast, section 6015(c) provides that, assuming all of the

qualifications are met, relief is available unless the Secretary

demonstrates that the requesting spouse had actual knowledge of the

item giving rise to the deficiency. Actual knowledge cannot be inferred

from the requesting spouse's reason to know of the erroneous item. The

Secretary bears the burden of proof with respect to the knowledge

limitation of section 6015(c). In contrast, the requesting spouse bears

the burden of proof with respect to the knowledge and reason to know

limitations of section 6015(b). The IRS and Treasury Department are

specifically seeking comments on the definition of item, because it is

knowledge of an item that will disqualify a requesting spouse from

receiving relief under sections 6015(b) and 6015(c).

    2. Alternative Allocation Methods: Section 6015(g)(1) directs the

Secretary to prescribe regulations providing alternative allocation

methods, and the proposed regulations provide one that is discussed

above. The proposed regulations also provide that additional

alternative allocation methods may be provided in subsequent guidance.

The IRS and Treasury Department are specifically interested in

receiving comments about the alternative allocation method provided in

the proposed regulations, and any other allocation methods that should

be considered.

    3. Interests of the Nonrequesting Spouse: It is anticipated that

relief under section 6015 will be granted more frequently than it was

under section 6013(e). Accordingly, section 6015 provides safeguards to

protect nonrequesting spouses from erroneous determinations granting

relief to their respective requesting spouses. The proposed regulations

provide that the Secretary must give a nonrequesting spouse notice that

the requesting spouse filed a claim for relief and an opportunity to

participate in the determination of whether relief is appropriate.

    In fashioning these safeguards, the IRS and Treasury Department are

attempting to balance the rights and interests of both the requesting

spouse and the nonrequesting spouse. A spouse who signs a joint return

is jointly and severally liable for the entire liability, and the

Secretary may collect the entire liability from either spouse.

Therefore, a determination that one spouse is relieved of joint and

several liability may have no legal effect on the amount of the other

spouse's liability. However, a nonrequesting spouse does have a

practical interest in the outcome of an innocent spouse determination

because if the requesting spouse is relieved of liability, the IRS's

only recourse is to collect that liability from the nonrequesting

spouse. The IRS and Treasury Department recognize that Congress

intended that the IRS take into account the nonrequesting spouse's

views when it makes a determination of relief. See H.R. Conf. Rep. No.

599, 105th Cong., 2d Sess. 251, 255 (1998). In addition, information

provided by a nonrequesting spouse is helpful in many cases to

determine the appropriate amount of relief, if any.

    Under the proposed regulations, a nonrequesting spouse will have an

opportunity to participate in any administrative or judicial

determination of relief. At the administrative level, the nonrequesting

spouse may submit information relevant to the determination to the IRS

employee making the determination. In addition, if the requesting

spouse files a petition with the Tax Court, the nonrequesting spouse

will be notified, and have an opportunity to become a party to the

proceeding. See Interim Tax Court Rule 325.

    Nonetheless, the IRS and Treasury Department recognize that some

spouses may be reluctant to apply for relief from joint and several

liability, or submit information regarding the other spouse's request

for relief, due to privacy concerns or for fear of the other spouse's

reprisal. To address this concern, the proposed regulations provide

that, at the request of one spouse, the Secretary will omit from shared

documents any information (e.g., new name, address, employer) that

would reasonably identify that spouse's location.

Special Analyses

    It has been determined that these regulations are not a significant

regulatory action as defined in Executive Order 12866. Therefore, a

regulatory assessment is not required. It has also been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

does not apply to the regulations, and because the regulations do not

impose a collection of information on small entities, the Regulatory

Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to

section 7805(f), this notice of proposed rulemaking will be submitted

to the Chief Counsel for Advocacy of the Small Business Administration

for comment on its impact on small businesses.

Comments and Public Hearing

    Before the regulations are adopted as final regulations,

consideration will be given to any written and electronic comments that

are submitted timely to the IRS. The IRS and Treasury Department

specifically request comments on the clarity of the proposed

regulations, on how the proposed regulations can be made easier to

understand, and on the highlighted issues. All comments will be

available for public inspection and copying.

    A public hearing has been scheduled for May 30, 2001, at 10 a.m.,

in the IRS Auditorium (7th Floor), Internal Revenue Building, 1111

Constitution Avenue, NW., Washington, DC. Due to building security

procedures, visitors must enter at the 10th Street entrance, located

between Constitution and Pennsylvania Avenues, NW. In addition, all

visitors will not be admitted beyond the immediate entrance area more

than 15 minutes before the hearing starts. For information about having

your name placed on the building access list to attend the hearing, see

the FOR FURTHER INFORMATION CONTACT section of this preamble.

    The rules of 26 CFR 601.601(a)(3) apply to the hearing.

    Persons who wish to present oral comments at the hearing must

submit written comments and an outline of the topics to be discussed at

the time to be devoted to each topic (signed original and eight (8)

copies) by April 27, 2001.

    A period of 10 minutes will be allotted to each person for making

comments.

    An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of the regulations is Bridget E. Finkenaur of

the Office of Associate Chief Counsel, Procedure and Administration

(Administrative Provisions and Judicial Practice Division). However,

other personnel from the IRS and Treasury Department participated in

the development of the regulations.

[[Page 3893]]

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding

the following entries in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Sec. 1.6015-1 also issued under 26 U.S.C. 6015(g).

    Sec. 1.6015-2 also issued under 26 U.S.C. 6015(g).

    Sec. 1.6015-3 also issued under 26 U.S.C. 6015(g).

    Sec. 1.6015-4 also issued under 26 U.S.C. 6015(g).

    Sec. 1.6015-5 also issued under 26 U.S.C. 6015(g).

    Sec. 1.6015-6 also issued under 26 U.S.C. 6015(g).

    Sec. 1.6015-7 also issued under 26 U.S.C. 6015(g).

    Sec. 1.6015-8 also issued under 26 U.S.C. 6015(g).

    Sec. 1.6015-9 also issued under 26 U.S.C. 6015(g). * * *

    Par. 2. In Sec. 1.6013-4, paragraph (d) is added to read as

follows:

Sec. 1.6013-4  Applicable rules.

* * * * *

    (d) Return signed under duress. If an individual asserts and

establishes that he or she signed a return under legal duress, the

return is not a joint return. The individual who signed such return

under duress is not jointly and severally liable for the tax shown on

the return or any deficiency in tax with respect to the return. The

return is adjusted to reflect only the tax liability of the individual

who voluntarily signed the return, and the liability is determined at

the applicable rates in section 1(d). Section 6212 applies to the

assessment of any deficiency in tax on such return.

    Par. 3. Sections 1.6015-0 through 1.6015-9 are added to read as

follows:

Sec. 1.6015-0  Table of contents.

    This section lists captions contained in Secs. 1.6015-1 through

1.6015-9.

Sec. 1.6015-1  Relief from joint and several liability on a joint

return.

    (a) In general.

    (b) Duress.

    (c) Prior closing agreement or offer in compromise.

    (d) Fraudulent scheme.

    (e) Res judicata and collateral estoppel.

    (f) Community property laws.

    (1) In general.

    (2) Example.

    (g) Definitions.

    (1) Requesting spouse.

    (2) Nonrequesting spouse.

    (3) Item.

    (4) Erroneous item.

    (5) Election or request.

    (h) Transferee liability.

    (1) In general.

    (2) Example.

Sec. 1.6015-2  Relief from liability applicable to all qualifying joint

filers.

    (a) In general.

    (b) Understatement.

    (c) Knowledge or reason to know.

    (d) Inequity.

    (e) Partial relief.

    (1) In general.

    (2) Example.

Sec. 1.6015-3  Allocation of liability for individuals who are no

longer married, are legally separated, or are not members of the same

household.

    (a) Election to allocate liability.

    (b) Definitions.

    (1) Divorced.

    (2) Legally separated.

    (3) Not members of the same household.

    (i) Temporary absences.

    (ii) Separate dwellings.

    (c) Limitations.

    (1) No refunds.

    (2) Actual knowledge.

    (3) Disqualified asset transfers.

    (i) In general.

    (ii) Disqualified asset defined.

    (iii) Presumption.

    (4) Examples.

    (d) Allocation.

    (1) In general.

    (2) Allocation of erroneous items.

    (i) Benefit on the return.

    (ii) Fraud.

    (iii) Erroneous items of income.

    (iv) Erroneous deduction items.

    (3) Burden of proof.

    (4) General allocation method.

    (i) Proportionate allocation.

    (ii) Separate treatment items.

    (iii) Child's liability.

    (iv) Allocation of certain items.

    (A) Alternative minimum tax.

    (B) Accuracy-related and fraud penalties.

    (5) Examples.

    (6) Alternative allocation methods.

    (i) Allocation based on applicable tax rates.

    (ii) Allocation methods provided in subsequent published

guidance.

    (iii) Example.

Sec. 1.6015-4  Equitable relief.

Sec. 1.6015-5  Time and manner for requesting relief.

    (a) Requesting relief.

    (b) Time period for filing a request for relief.

    (1) In general.

    (2) Definitions.

    (i) Collection activity.

    (ii) Date of levy or seizure.

    (3) Requests for relief made before commencement of collection

activity.

    (4) Examples.

    (5) Premature requests for relief.

    (c) Effect of a final administrative determination.

Sec. 1.6015-6  Nonrequesting spouse's notice and opportunity to

participate in administrative proceedings.

    (a) In general.

    (b) Information submitted.

    (c) Effect of opportunity to participate.

Sec. 1.6015-7  Tax Court review.

    (a) In general.

    (b) Time period for petitioning the Tax Court.

    (c) Restrictions on collection and suspension of the running of

the period of limitations.

    (1) Restrictions on collection under Sec. 1.6015-2 or 1.6015-3.

    (2) Suspension of the running of the period of limitations.

    (i) Relief under Sec. 1.6015-2 or 1.6015-3.

    (ii) Relief under Sec. 1.6015-4.

    (3) Definitions.

    (i) Levy.

    (ii) Proceedings in court.

    (iii) Assessment to which the election relates.

Sec. 1.6015-8  Applicable liabilities.

    (a) In general.

    (b) Liabilities paid on or before July 22, 1998.

    (c) Examples.

Sec. 1.6015-9  Effective date.

Sec. 1.6015-1  Relief from joint and several liability on a joint

return.

    (a) In general. (1) An individual who qualifies and elects under

section 6013 to file a joint Federal income tax return with another

individual is jointly and severally liable for the joint Federal income

tax liabilities for that year. However, a spouse or former spouse may

be relieved of joint and several liability for any Federal income tax,

self-employment tax, penalties, additions to tax, and interest for that

year under the following three relief provisions:

    (i) Innocent spouse relief under Sec. 1.6015-2.

    (ii) Allocation of deficiency under Sec. 1.6015-3.

    (iii) Equitable relief under Sec. 1.6015-4.

    (2) A requesting spouse may submit a single claim electing relief

under both or either Secs. 1.6015-2 and 1.6015-3, and requesting relief

under Sec. 1.6015-4. However, equitable relief under Sec. 1.6015-4 is

available only to a requesting spouse who fails to qualify for relief

under Secs. 1.6015-2 and 1.6015-3. If a requesting spouse elects the

application of either Sec. 1.6015-2 or 1.6015-3, the Secretary may

consider

[[Page 3894]]

whether relief is appropriate under the other elective provision and,

to the extent relief is unavailable under either, under Sec. 1.6015-4.

If a requesting spouse seeks relief only under Sec. 1.6015-4, the

Secretary may not grant relief under Sec. 1.6015-2 or 1.6015-3. A

requesting spouse must affirmatively elect the application of

Sec. 1.6015-2 or 1.6015-3 in order for the Secretary to grant relief

under one of those sections.

    (3) Relief is not available for liabilities that are required to be

reported on a joint Federal income tax return but are not income taxes

imposed under Subtitle A of the Internal Revenue Code (e.g., domestic

service employment taxes under section 3510).

    (b) Duress. For rules relating to the treatment of returns signed

under duress, see Sec. 1.6013-4(d).

    (c) Prior closing agreement or offer in compromise. A requesting

spouse is not entitled to relief from joint and several liability under

Sec. 1.6015-2, Sec. 1.6015-3, or Sec. 1.6015-4 for any tax year for

which the requesting spouse has entered into a closing agreement (other

than an agreement entered into pursuant to section 6224(c) relating to

partnership items) with the Commissioner that disposes of the same

liability that is the subject of the claim for relief. In addition, a

requesting spouse is not entitled to relief from joint and several

liability under Sec. 1.6015-2, Sec. 1.6015-3, or Sec. 1.6015-4 for any

tax year for which the requesting spouse has entered into an offer in

compromise with the Commissioner. For rules relating to the effect of

closing agreements and offers in compromise, see sections 7121 and

7122, and the regulations thereunder.

    (d) Fraudulent scheme. If the Secretary establishes that a spouse

transferred assets to the other spouse as part of a fraudulent scheme,

relief is not available under section 6015, and section 6013(d)(3)

applies to the return.

    (e) Res judicata and collateral estoppel. A requesting spouse is

not entitled to relief from joint and several liability under

Sec. 1.6015-2 or 1.6015-3 for any tax year for which a court of

competent jurisdiction has rendered a final determination on the

requesting spouse's tax liability if the requesting spouse materially

participated in the proceeding. A requesting spouse has not materially

participated in a prior proceeding if, due to the effective date of

section 6015, relief under section 6015 was not available in that

proceeding. However, any final determinations made by a court of

competent jurisdiction regarding issues relevant to Sec. 1.6015-2,

Sec. 1.6015-3, or Sec. 1.6015-4 are conclusive and may not be

reconsidered, provided the requesting spouse materially participated in

the prior court proceeding.

    (f) Community property laws--(1) In general. In determining whether

relief is available under Sec. 1.6015-2, Sec. 1.6015-3, or Sec. 1.6015-

4, items of income, credits, and deductions are generally allocated to

the spouses without regard to the operation of community property laws.

An erroneous item is attributed to the individual whose activities gave

rise to such item. See Sec. 1.6015-3(d)(2).

    (2) Example. The following example illustrates the rule of this

paragraph (f):

    Example. (i) H and W are married and have lived in State A (a

community property state) since 1987. On April 15, 2003, H and W

file a joint Federal income tax return for the 2002 taxable year. In

August 2005, the Internal Revenue Service proposes a $17,000

deficiency with respect to the 2002 joint return. A portion of the

deficiency is attributable to $20,000 of H's unreported interest

income from his individual bank account, the remainder of the

deficiency is attributable to $30,000 of W's disallowed business

expense deductions. Under the laws of State A, H and W each own \1/

2\ of all income earned and property acquired during the marriage.

    (ii) In November 2005, H and W divorce and W timely elects to

allocate the deficiency. Even though the laws of State A provide

that \1/2\ of the interest income is W's, for purposes of relief

under this section, the $20,000 unreported interest income is

allocable to H, and the $30,000 disallowed deduction is allocable to

W. The community property laws of State A are not considered in

allocating items for this purpose.

    (g) Definitions--(1) Requesting spouse. A requesting spouse is an

individual who filed a joint return and elects relief from Federal

income tax liability arising from that return under Sec. 1.6015-2 or

Sec. 1.6015-3, or requests relief from Federal income tax liability

arising from that return under Sec. 1.6015-4.

    (2) Nonrequesting spouse. A nonrequesting spouse is the individual

with whom the requesting spouse filed the joint return for the year for

which relief from liability is sought.

    (3) Item. An item is that which is required to be separately listed

on an individual income tax return or any required attachments, subject

to one exception: Amounts received from investments that are required

to be separately reported on an individual income tax return and that

are from the same source are aggregated and treated as a single item.

Items include, but are not limited to, gross income, deductions,

credits, and basis.

    (4) Erroneous item. An erroneous item is any item resulting in an

understatement or deficiency in tax to the extent that such item is

omitted from, or improperly reported (including improperly

characterized) on an individual income tax return. For example,

unreported income from an investment asset resulting in an

understatement or deficiency in tax is an erroneous item. Similarly,

ordinary income that is improperly reported as capital gain resulting

in an understatement or deficiency in tax is also an erroneous item. An

erroneous item is also an improperly reported item that affects the

liability on other returns (e.g., an improper net operating loss that

is carried back to a prior year's return).

    (5) Election or request. A qualifying election under Sec. 1.6015-2

or Sec. 1.6015-3, or request under Sec. 1.6015-4, is the first timely

claim for relief from joint and several liability for the tax year for

which relief is sought. A qualifying election also includes a

requesting spouse's second election to seek relief from joint and

several liability for the same tax year under Sec. 1.6015-3 when the

additional qualifications of paragraph (g)(5) (i) and (ii) of this

section are met--

    (i) The requesting spouse did not qualify for relief under

Sec. 1.6015-3 when the Internal Revenue Service considered the first

election because the qualifications of Sec. 1.6015-3(a) were not

satisfied; and

    (ii) At the time of the second election, the qualifications for

relief under Sec. 1.6015-3(a) are satisfied.

    (h) Transferee liability--(1) In general. The relief provisions of

section 6015 do not negate liability that arises under the operation of

other laws. Therefore, a requesting spouse who is relieved of joint and

several liability under Sec. 1.6015-2, Sec. 1.6015-3, or Sec. 1.6015-4

may nevertheless remain liable for the unpaid tax (including additions

to tax, penalties, and interest) to the extent provided by Federal or

state transferee liability or property laws. For the rules regarding

the liability of transferees, see sections 6901 through 6904 and the

regulations thereunder. In addition, the requesting spouse's property

may be subject to collection under Federal or state property laws.

    (2) Example. The following example illustrates the rule of this

paragraph (h):

    Example. H and W timely file their 1998 joint income tax return

on April 15, 1999. H dies in March 2000, and the executor of H's

estate transfers all of the estate's assets to W. In July 2001, the

Internal Revenue Service assesses a deficiency for the 1998 return.

The items giving rise to the deficiency are attributable to H. W is

relieved of the liability under Sec. 6015, and H's estate remains

solely liable. The Internal Revenue Service may seek to collect the

deficiency from W to the

[[Page 3895]]

extent permitted under Federal or state transferee liability or

property laws.

Sec. 1.6015-2  Relief from liability applicable to all qualifying joint

filers.

    (a) In general. A requesting spouse may be relieved of joint and

several liability for tax (including additions to tax, penalties, and

interest) from an understatement for a taxable year under this section

if the requesting spouse elects the application of this section in

accordance with Secs. 1.6015-1(g)(5) and 1.6015-5, and--

    (1) A joint return was filed for the taxable year;

    (2) On the return there is an understatement attributable to

erroneous items of the nonrequesting spouse;

    (3) The requesting spouse establishes that in signing the return he

or she did not know and had no reason to know of the item giving rise

to the understatement; and

    (4) It is inequitable to hold the requesting spouse liable for the

deficiency attributable to the understatement.

    (b) Understatement. The term understatement has the meaning given

to such term by section 6662(d)(2)(A) and the regulations thereunder.

    (c) Knowledge or reason to know. A requesting spouse has knowledge

or reason to know of an erroneous item if he or she either actually

knew of the item giving rise to the understatement, or if a reasonable

person in similar circumstances would have known of the item giving

rise to the understatement. For rules relating to a requesting spouse's

actual knowledge, see Sec. 1.6015-3(c)(2). All of the facts and

circumstances are considered in determining whether a requesting spouse

had reason to know of an erroneous item. The facts and circumstances

that are considered include, but are not limited to, the nature of the

item and the amount of the item relative to other items; the couple's

financial situation; the requesting spouse's educational background and

business experience; the extent of the requesting spouse's

participation in the activity that resulted in the erroneous item;

whether the requesting spouse failed to inquire, at or before the time

the return was signed, about items on the return or omitted from the

return that a reasonable person would question; and whether the

erroneous item represented a departure from a recurring pattern

reflected in prior years' returns (e.g., omitted income from an

investment regularly reported on prior years' returns).

    (d) Inequity. All of the facts and circumstances are considered in

determining whether it is inequitable to hold a requesting spouse

jointly and severally liable for an understatement. One relevant factor

for this purpose is whether the requesting spouse significantly

benefitted, directly or indirectly, from the understatement. A

significant benefit is any benefit in excess of normal support.

Evidence of direct or indirect benefit may consist of transfers of

property or rights to property, including transfers that may be

received several years after the year of the understatement. Thus, for

example, if a requesting spouse receives property (including life

insurance proceeds) from the nonrequesting spouse that is traceable to

items omitted from gross income that are attributable to the

nonrequesting spouse, the requesting spouse will be considered to have

received significant benefit from those items. Other factors that may

also be taken into account include the fact that the nonrequesting

spouse has not fulfilled support obligations to the requesting spouse

or the fact that the spouses have been divorced, legally separated, or

not been members of the same household for at least the 12 months

directly preceding the election. For more information on factors

relevant to determining whether it is inequitable to hold a requesting

spouse liable, see Rev. Proc. 2000-15 (2000-5 I.R.B. 447), or guidance

subsequently published by the Secretary as described in Sec. 1.6015-

4(c).

    (e) Partial relief--(1) In general. If a requesting spouse had no

knowledge or reason to know of only a portion of an erroneous item, the

requesting spouse may be relieved of the liability attributable to that

portion of that item, if all other requirements are met with respect to

that portion.

    (2) Example. The following example illustrates the rules of this

paragraph (e):

    Example. H and W are married and file their 2004 joint income

tax return in March 2005. In April 2006, H is convicted of

embezzling $2 million from his employer during 2004. H kept all of

his embezzlement income in an individual bank account, and he used

most of the funds to support his gambling habit. However, each month

during 2004, H transferred $10,000 from the individual account to H

and W's joint bank account. W paid the household expenses using this

joint account, and regularly received the bank statements relating

to the account. W had no knowledge or reason to know of H's

embezzling activities. However, W did have knowledge and reason to

know of $120,000 of the $2 million of H's embezzlement income at the

time she signed the joint return because that amount passed through

the couple's joint bank account. Therefore, W may be relieved of the

liability arising from $1,880,000 of the unreported embezzlement

income, but she may not be relieved of the liability for the

deficiency arising from $120,000 of the unreported embezzlement

income of which she knew and had reason to know.

Sec. 1.6015-3  Allocation of deficiency for individuals who are no

longer married, are legally separated, or are not members of the same

household.

    (a) Election to allocate deficiency. A requesting spouse may elect

to allocate a deficiency if, as defined in paragraph (b) of this

section, the requesting spouse is divorced, widowed, or legally

separated, or has not been a member of the same household as the

nonrequesting spouse at any time during the 12-month period ending on

the date an election for relief is filed. Subject to the restrictions

of paragraph (c) of this section, an eligible requesting spouse who

elects the application of this section in accordance with Secs. 1.6015-

1(g)(5) and 1.6015-5 generally may be relieved of joint and several

liability for the portion of any deficiency that is allocated to the

nonrequesting spouse pursuant to the allocation methods set forth in

paragraph (d) of this section. Relief may be available to both spouses

filing the joint return if each spouse is eligible for and elects the

application of this section.

    (b) Definitions--(1) Divorced. A requesting spouse is divorced if

the requesting spouse has a divorce decree that is recognized in the

jurisdiction in which the requesting spouse resides.

    (2) Legally separated. A requesting spouse is legally separated if

the separation is recognized under the laws of the jurisdiction in

which the requesting spouse resides.

    (3) Not members of the same household--(i) Temporary absences. A

requesting spouse and a nonrequesting spouse are considered members of

the same household during either spouse's temporary absences from the

household if it is reasonable to assume that the absent spouse will

return to the household, and the household or a substantially

equivalent household is maintained in anticipation of such return.

Examples of temporary absences may include, but are not limited to,

absence due to incarceration, hospitalization, business travel,

vacation travel, military service, or education away from home.

    (ii) Separate dwellings. A husband and wife who reside in the same

dwelling are considered members of the same household. However, a

husband and wife who reside in two separate

[[Page 3896]]

dwellings, whether or not part of the same structure, are not

considered members of the same household unless one is temporarily

absent from the other's household within the meaning of paragraph

(b)(3)(i) of this section.

    (c) Limitations--(1) No refunds. Relief under this section is only

available for unpaid liabilities resulting from understatements of

liability. Refunds are not authorized under this section.

    (2) Actual knowledge. (i) If the Secretary demonstrates that the

requesting spouse had actual knowledge at the time the return was

signed of an erroneous item that is allocable to the nonrequesting

spouse, the election to allocate the deficiency attributable to that

item is invalid, and the requesting spouse remains liable for the

portion of the deficiency attributable to that item. For example,

assume W received $5,000 of dividend income from her investment in X

Co. but did not report it on the joint return. H knew that W received

$5,000 of dividend income from X Co. that year. H had actual knowledge

of the erroneous item (i.e., $5,000 of unreported dividend income from

X Co.), and no relief is available under this section for the

deficiency attributable to the dividend income from X Co. If a

requesting spouse had actual knowledge of only a portion of an

erroneous item, then relief is not available for that portion of the

erroneous item. For example, if H knew that W received $1,000 of

dividend income and did not know that W received an additional $4,000

of dividend income, relief would not be available for the portion of

the deficiency attributable to the $1,000 of dividend income of which H

had actual knowledge. A requesting spouse's actual knowledge of the

proper tax treatment of an item is not relevant for purposes of

demonstrating that the requesting spouse had actual knowledge of an

erroneous item. For example, assume H did not know W's dividend income

from X Co. was taxable, but knew that W received the dividend income.

Relief is not available under this provision. In addition, a requesting

spouse's knowledge of how an erroneous item was treated on the tax

return is not relevant to a determination of whether the requesting

spouse had actual knowledge of the item. For example, assume that H

knew of W's dividend income, but H failed to review the completed

return and did not know that W omitted the dividend income from the

return. Relief is not available under this provision.

    (ii) Knowledge of the source of an erroneous item is not sufficient

to establish actual knowledge. For example, assume H knew that W owned

X Co. stock, but H did not know that X Co. paid dividends to W that

year. H's knowledge of W's ownership in X Co. is not sufficient to

establish that H had actual knowledge of the dividend income from X Co.

In addition, a requesting spouse's actual knowledge may not be inferred

when the requesting spouse merely had reason to know of the erroneous

item. Even if H's knowledge of W's ownership interest in X Co.

indicates a reason to know of the dividend income, actual knowledge of

such dividend income cannot be inferred from H's reason to know.

    (iii) To demonstrate that a requesting spouse had actual knowledge

of an erroneous item at the time the return was signed, the Secretary

may rely upon all of the facts and circumstances. One factor that may

be relied upon in demonstrating that a requesting spouse had actual

knowledge of an erroneous item is whether the requesting spouse made a

deliberate effort to avoid learning about the item in order to be

shielded from liability. This factor, together with all other facts and

circumstances, may demonstrate that the requesting spouse had actual

knowledge of the item. Another factor that may be relied upon in

demonstrating that a requesting spouse had actual knowledge of an

erroneous item is whether the requesting spouse and the nonrequesting

spouse jointly owned the property that resulted in the erroneous item.

Joint ownership is a factor supporting a finding that the requesting

spouse had actual knowledge of an erroneous item. For purposes of this

paragraph, a requesting spouse will not be considered to have had an

ownership interest in an item based solely on the operation of

community property law. Rather, a requesting spouse who resided in a

community property state at the time the return was signed will be

considered to have had an ownership interest in an item only if the

requesting spouse's name appeared on the ownership documents, or there

otherwise is an indication that the requesting spouse had a direct

interest in the item. For example, assume H and W live in State A, a

community property state. After their marriage, H opens a bank account

in his name. Under the operation of the community property laws of

state A, W owns \1/2\ of the bank account. However, W does not have an

ownership interest in the account for purposes of this paragraph

(c)(2)(iii) because the account is not held in her name and there is no

other indication that she has a direct interest in the item.

    (3) Disqualified asset transfers--(i) In general. The portion of

the deficiency for which a requesting spouse is liable is increased (up

to the entire amount of the deficiency) by the value of any

disqualified asset that was transferred to the requesting spouse. For

purposes of this paragraph (c)(3), the value of a disqualified asset is

the fair market value of the asset on the date of the transfer.

    (ii) Disqualified asset defined. A disqualified asset is any

property or right to property that was transferred from the

nonrequesting spouse to the requesting spouse if the principal purpose

of the transfer was the avoidance of tax or payment of tax (including

additions to tax, penalties, and interest).

    (iii) Presumption. Any asset transferred from the nonrequesting

spouse to the requesting spouse during the 12-month period before the

mailing date of the first letter of proposed deficiency (e.g., a 30-day

letter or, if no 30-day letter is mailed, a notice of deficiency) is

presumed to be a disqualified asset. The presumption also applies to

any asset that is transferred from the nonrequesting spouse to the

requesting spouse after the mailing date of the first letter of

proposed deficiency. However, the presumption does not apply if the

requesting spouse establishes that the asset was transferred pursuant

to a divorce decree or separate maintenance agreement. In addition, a

requesting spouse may rebut the presumption by establishing that the

principal purpose of the transfer was not the avoidance of tax or

payment of tax.

    (4) Examples. The following examples illustrate the rules in this

paragraph (c):

    Example 1. Actual knowledge of an erroneous item. (i) H and W

file their 2001 joint Federal income tax return on April 15, 2002.

On the return, H and W report W's self-employment income, but they

do not report W's self-employment tax on that income. In August

2003, H and W receive a 30-day letter from the Internal Revenue

Service proposing a deficiency with respect to W's unreported self-

employment tax on the 2001 return. On November 4, 2003, H, who

otherwise qualifies under paragraph (a) of this section, files an

election to allocate the deficiency to W. The erroneous item is the

self-employment income, and it is allocable to W. H knows that W

earned income in 2001 as a self-employed musician, but he does not

know that self-employment tax must be reported on and paid with a

joint return.

    (ii) H's election to allocate the deficiency to W is invalid

because, at the time H signed the joint return, H had actual

knowledge of W's self-employment income. The fact that H was unaware

of the tax consequences of that income (i.e., that an individual is

required to pay self-employment tax on that income) is not relevant.

    Example 2. Actual knowledge not inferred from a requesting

spouse's reason to know.

[[Page 3897]]

(i) H has long been an avid gambler. H supports his gambling habit

and keeps all of his gambling winnings in an individual bank

account, held solely in his name.

    W knows about H's gambling habit and that he keeps a separate

bank account, but she does not know whether he has any winnings

because H does not tell her, and she does not otherwise know of H's

bank account transactions. H and W file their 2001 joint Federal

income tax return on April 15, 2002. On October 31, 2003, H and W

receive a 30-day letter proposing a $100,000 deficiency relating to

H's unreported gambling income. In February 2003, H and W divorce,

and in March 2004, W files an election under section 6015(c) to

allocate the $100,000 deficiency to H.

    (ii) While W may have had reason to know of the gambling income

because she knew of H's gambling habit and separate account, W did

not have actual knowledge of the erroneous item (i.e., the gambling

winnings). The Internal Revenue Service may not infer actual

knowledge from W's reason to know of the income. Therefore, W's

election to allocate the $100,000 deficiency to H is valid.

    Example 3. Actual knowledge of return reporting position. (i) H

and W are legally separated. In February 1999, W signs a blank joint

Federal income tax return for 1998 and gives it to H to fill out.

The return was timely filed on April 15, 1999. In September 2001, H

and W receive a 30-day letter proposing a deficiency relating to

$100,000 of unreported dividend income received by H with respect to

stock of ABC Co. owned by H. W knew that H received the $100,000

dividend payment in August 1998, but she did not know whether H

reported that payment on the joint return.

    (ii) On January 30, 2002, W files an election to allocate the

deficiency from the 1998 return to H. W claims she did not review

the completed joint return, and therefore, she had no actual

knowledge that there was an understatement of the dividend income.

W's election to allocate the deficiency to H is invalid because she

had actual knowledge of the erroneous item (dividend income from ABC

Co.) at the time she signed the return. The fact that W signed a

blank return is irrelevant. The result would be the same if W had

not reviewed the completed return or if W had reviewed the completed

return and had not noticed that the item was omitted.

    (iii) Assume the same facts as in paragraph (i) of this Example

3 except that, instead of receiving $100,000 of unreported dividend

income, H received $50,000 of interest income from ABC Co. during

the year (properly reported on the return) and $25,000 of dividend

income from ABC Co. (omitted from the return). W knew that H

received both dividend and interest income from ABC Co. but did not

know the total was greater than $50,000. W's election to allocate to

H the deficiency attributable to the omitted dividend income is

valid. Although interest and dividend income are required to be

separately stated on a joint Federal income tax return, they are one

item in this case because the dividend and interest income are

investment income received from the same source (ABC Co.). The

erroneous item is the total dividend and interest income from ABC

Co. W did not have actual knowledge of the erroneous item (combined

dividend and interest income from ABC Co. greater than $50,000).

Therefore, her election to allocate to H the deficiency attributable

to the erroneous item is valid.

    Example 4. Actual knowledge of an erroneous item of income. (i)

H and W are legally separated. In June 2004, a deficiency is

proposed with respect to H and W's 2002 joint Federal income tax

return that is attributable to $30,000 of unreported income from H's

plumbing business that should have been reported on a Schedule C. No

Schedule C was attached to the return. At the time W signed the

return, W knew that H had a plumbing business but did not know

whether H received any income from the business. W's election to

allocate to H the deficiency attributable to the $30,000 of

unreported plumbing income is valid.

    (ii) Assume the same facts as in paragraph (i) of this Example 4

except that, at the time W signed the return, W knew that H received

$20,000 of plumbing income. W's election to allocate to H the

deficiency attributable to the $20,000 of unreported plumbing income

(of which W had actual knowledge) is invalid. W's election to

allocate to H the deficiency attributable to the $10,000 of

unreported plumbing income (of which W did not have actual

knowledge) is valid.

    (iii) Assume the same facts as in paragraph (i) of this Example

4 except that, at the time W signed the return, W did not know the

exact amount of H's plumbing income. W did know, however, that H

received at least $8,000 of plumbing income. W's election to

allocate to H the deficiency attributable to $8,000 of unreported

plumbing income (of which W had actual knowledge) is invalid. W's

election to allocate to H the deficiency attributable to the

remaining $22,000 of unreported plumbing income (of which W did not

have actual knowledge) is valid.

    (iv) Assume the same facts as in paragraph (i) of this Example 4

except that H reported $26,000 of plumbing income on the return and

omitted $4,000 of plumbing income from the return. At the time W

signed the return, W knew that H was a plumber, but she did not know

that H earned more than $26,000 that year. W's election to allocate

to H the deficiency attributable to the $4,000 of unreported

plumbing income is valid because she did not have actual knowledge

that H received plumbing income in excess of $26,000.

    (v) Assume the same facts as in paragraph (i) of this Example 4

except that H reported only $20,000 of plumbing income on the return

and omitted $10,000 of plumbing income from the return. At the time

W signed the return, W knew that H earned at least $26,000 that year

as a plumber. However, W did not know that, in reality, H earned

$30,000 that year as a plumber. W's election to allocate to H the

deficiency attributable to the $6,000 of unreported plumbing income

(of which W had actual knowledge) is invalid. W's election to

allocate to H the deficiency attributable to the $4,000 of

unreported plumbing income (of which W did not have actual

knowledge) is valid.

    Example 5. Actual knowledge of a deduction that is an erroneous

item. (i) H and W are legally separated. In February 2005, a

deficiency is asserted with respect to their 2002 joint Federal

income tax return. The deficiency is attributable to a disallowed

$1,000 deduction for medical expenses H claimed he incurred. At the

time W signed the return, W knew that H had not incurred any medical

expenses. W's election to allocate to H the deficiency attributable

to the disallowed medical expense deduction is invalid because W had

actual knowledge that H had not incurred any medical expenses.

    (ii) Assume the same facts as in paragraph (i) of this Example 5

except that, at the time W signed the return, W did not know whether

H had incurred any medical expenses. W's election to allocate to H

the deficiency attributable to the disallowed medical expense

deduction is valid because she did not have actual knowledge that H

had not incurred any medical expenses.

    (iii) Assume the same facts as in paragraph (i) of this Example

5 except that the Internal Revenue Service disallowed $400 of the

$1,000 medical expense deduction. At the time W signed the return, W

knew that H had incurred some medical expenses but did not know the

exact amount. W's election to allocate to H the deficiency

attributable to the disallowed medical expense deduction is valid

because she did not have actual knowledge that H had not incurred

medical expenses (in excess of the floor amount under section

213(a)) of more than $600.

    (iv) Assume the same facts as in paragraph (i) of this Example 5

except that H claims a medical expense deduction of $10,000 and the

Internal Revenue Service disallows $9,600. At the time W signed the

return, W knew H had incurred some medical expenses but did not know

the exact amount. W also knew that H incurred medical expenses (in

excess of the floor amount under section 213(a)) of no more than

$1,000. W's election to allocate to H the deficiency attributable to

the portion of the overstated deduction of which she had actual

knowledge ($9,000) is invalid. W's election to allocate the

deficiency attributable to the portion of the overstated deduction

of which she had no knowledge ($600) is valid.

    Example 6. Disqualified asset presumption. (i) H and W are

divorced. In May 1999, W transfers $20,000 to H, and in April 2000,

H and W receive a 30-day letter proposing a $40,000 deficiency on

their 1998 joint Federal income tax return. The liability remains

unpaid, and in October 2000, H elects to allocate the deficiency

under this section. Seventy-five percent of the net amount of

erroneous items are allocable to W, and 25% of the net amount of

erroneous items are allocable to H.

    (ii) In accordance with the proportionate allocation method (see

paragraph (d)(4) of this section), H proposes that $30,000 of the

deficiency be allocated to W and $10,000 be allocated to himself. H

submits a signed statement providing that the principal purpose of

the $20,000 transfer was not the avoidance of tax or payment of tax,

but he does not submit any documentation indicating the reason for

the transfer. H has not overcome the presumption that the $20,000

was a disqualified asset. Therefore, the portion of the deficiency

for which H is

[[Page 3898]]

liable ($10,000) is increased by the value of the disqualified asset

($20,000). H is relieved of liability for $10,000 of the $30,000

deficiency allocated to W, and remains jointly and severally liable

for the remaining $30,000 of the deficiency (assuming that H does

not qualify for relief under any other provision).

    Example 7. Disqualified asset presumption inapplicable. On May

1, 2001, H and W receive a 30-day letter regarding a proposed

deficiency on their 1999 joint Federal income tax return relating to

unreported capital gain from H's sale of his investment in Z stock.

W had no actual knowledge of the stock sale. The deficiency is

assessed in November 2001, and in December 2001, H and W divorce.

According to the divorce decree, H must transfer \1/2\ of his

interest in mutual fund A to W. The transfer takes place in February

2002. In August 2002, W elects to allocate the deficiency to H.

Although the transfer of \1/2\ of H's interest in mutual fund A took

place after the 30-day letter was mailed, the mutual fund interest

is not presumed to be a disqualified asset because the transfer of

H's interest in the fund was made pursuant to a divorce decree.

    (d) Allocation--(1) In general. (i) An election to allocate a

deficiency limits the requesting spouse's liability to that portion of

the deficiency allocated to the requesting spouse pursuant to this

section. Unless relieved of liability under Sec. 1.6015-2 or

Sec. 1.6015-4, the requesting spouse remains liable for that portion of

the deficiency allocated to the requesting spouse pursuant to this

section.

    (ii) Only a requesting spouse may receive relief. A nonrequesting

spouse who does not also elect relief under this section remains liable

for the entire amount of the deficiency, unless the nonrequesting

spouse is relieved of liability under Sec. 1.6015-2 or Sec. 1.6015-4.

If both spouses elect to allocate a deficiency under this section,

there may be a portion of the deficiency that is not allocable, for

which both spouses remain jointly and severally liable.

    (2) Allocation of erroneous items. For purposes of allocating a

deficiency under this section, erroneous items are generally allocated

to the spouses as if separate returns were filed, subject to the

following four exceptions:

    (i) Benefit on the return. An erroneous item that would otherwise

be allocated to the nonrequesting spouse is allocated to the requesting

spouse to the extent that the requesting spouse received a tax benefit

on the joint return.

    (ii) Fraud. The Secretary may allocate any item appropriately

between the spouses if the Secretary establishes that the allocation is

appropriate due to fraud by one or both spouses.

    (iii) Erroneous items of income. Erroneous items of income are

allocated to the spouse who was the source of the income. Wage income

is allocated to the spouse who performed the job producing such wages.

Items of business or investment income are allocated to the spouse who

owned the business or investment. If both spouses owned an interest in

the business or investment, the erroneous item of income is generally

allocated between the spouses in proportion to each spouse's ownership

interest in the business or investment, subject to the limitations of

paragraph (c) of this section. In the absence of clear and convincing

evidence supporting a different allocation, an erroneous income item

relating to an asset that the spouses owned jointly is generally

allocated 50% to each spouse, subject to the limitations in paragraph

(c) of this section and the exceptions in paragraph (d)(4) of this

section. For information regarding the effect of community property

laws, see Sec. 1.6015-1(f) and paragraph (c)(2)(iii) of this section.

    (iv) Erroneous deduction items. Erroneous deductions related to a

business or investment are allocated to the spouse who owned the

business or investment. If both spouses owned an interest in the

business or investment, an erroneous deduction item is generally

allocated between the spouses in proportion to each spouse's ownership

interest in the business or investment. In the absence of clear and

convincing evidence supporting a different allocation, an erroneous

deduction item relating to an asset that the spouses owned jointly is

generally allocated 50% to each spouse, subject to the limitations in

paragraph (c) of this section and the exceptions in paragraph (d)(4) of

this section. Personal deduction items are also generally allocated 50%

to each spouse, unless the evidence shows that a different allocation

is appropriate.

    (3) Burden of proof. Except for establishing actual knowledge under

paragraph (c)(2) of this section, the requesting spouse must prove that

all of the qualifications for making an election under this section are

satisfied and that none of the limitations (including the limitation

relating to transfers of disqualified assets) apply. The requesting

spouse must also establish the proper allocation of the erroneous

items.

    (4) General allocation method--(i) Proportionate allocation.

    (A) The portion of a deficiency allocable to a spouse is the amount

that bears the same ratio to the deficiency as the net amount of

erroneous items allocable to the spouse bears to the net amount of all

erroneous items. This calculation may be expressed as follows:

[GRAPHIC] [TIFF OMITTED] TP17JA01.053

where X = the portion of the deficiency allocable to the spouse.

Thus,

[GRAPHIC] [TIFF OMITTED] TP17JA01.054

    (B) The proportionate allocation applies to any portion of the

deficiency other than--

    (1) Any portion of the deficiency attributable to erroneous items

allocable to the nonrequesting spouse of which the requesting spouse

had actual knowledge;

    (2) Any portion of the deficiency attributable to separate

treatment items (as defined in paragraph (d)(4)(ii) of this section);

    (3) Any portion of the deficiency relating to the liability of a

child (as defined in paragraph (d)(4)(iii) of this section) of the

requesting spouse or nonrequesting spouse;

[[Page 3899]]

    (4) Any portion of the deficiency attributable to alternative

minimum tax under section 55;

    (5) Any portion of the deficiency attributable to accuracy-related

or fraud penalties;

    (6) Any portion of the deficiency allocated pursuant to alternative

allocation methods authorized under paragraph 6 of this section.

    (ii) Separate treatment items. Any portion of a deficiency that is

attributable to an item allocable solely to one spouse and that results

from the disallowance of a credit, or a tax or an addition to tax

(other than tax imposed by section 1 or section 55) that is required to

be included with a joint return (a separate treatment item) is

allocated separately to that spouse. Once the proportionate allocation

is made, the liability for the requesting spouse's separate treatment

items is added to the requesting spouse's share of the liability.

    (iii) Child's liability. Any portion of a deficiency relating to

the liability of a child of the requesting and nonrequesting spouse is

generally allocated jointly to both spouses. However, if one of the

spouses had sole custody of the child for the entire tax year for which

the election relates, such portion of the deficiency is allocated

solely to that spouse. For purposes of this paragraph, a child does not

include the taxpayer's stepson or stepdaughter, unless such child was

legally adopted by the taxpayer. If the child is the child of only one

of the spouses, and the other spouse had not legally adopted such

child, any portion of a deficiency relating to the liability of such

child is allocated solely to the parent spouse.

    (iv) Allocation of certain items--(A) Alternative minimum tax. Any

portion of the deficiency attributable to alternative minimum tax under

section 55 is allocated between the spouses in the same proportion as

each spouse's share of the total alternative minimum taxable income, as

defined in section 55(b)(2).

    (B) Accuracy-related and fraud penalties. Any portion of the

deficiency attributable to accuracy-related or fraud penalties under

section 6662 or 6663 is allocated to the spouse whose item generated

the penalty.

    (5) Examples. The following examples illustrate the rules of this

paragraph (d). In each example, assume that the requesting spouse or

spouses qualify to elect to allocate the deficiency, that any election

is timely made, and that the deficiency remains unpaid. In addition,

unless otherwise stated, assume that neither spouse has actual

knowledge of the erroneous items allocable to the other spouse. The

examples are as follows:

    Example 1. Allocation of erroneous items. (i) H and W file a

2003 joint Federal income tax return on April 15, 2004. On April 28,

2006, a deficiency is assessed with respect to their 2003 return.

Three erroneous items give rise to the deficiency--

    (A) Unreported interest income, of which W had actual knowledge,

from H and W's joint bank account;

    (B) A disallowed business expense deduction on H's Schedule C;

    (C) A disallowed Lifetime Learning Credit for W's post-secondary

education; and

    (ii) H and W divorce in May 2006, and in September 2006, W

timely elects to allocate the deficiency. The erroneous items are

allocable as follows:

    (A) The interest income would be allocated \1/2\ to H and \1/2\

to W, except that W has actual knowledge of it. Therefore, W's

election to allocate the portion of the deficiency attributable to

this item is invalid, and W remains jointly and severally liable for

it.

    (B) The business expense deduction is allocable to H.

    (C) The Lifetime Learning Credit is allocable to W.

    Example 2. Proportionate allocation. (i) W and H timely file

their 2001 joint Federal income tax return on April 15, 2002. On

August 16, 2004, a $54,000 deficiency is assessed with respect to

their 2001 joint return. H and W divorce on October 14, 2004, and W

timely elects to allocate the deficiency. Five erroneous items give

rise to the deficiency--

    (A) A disallowed $15,000 business deduction allocable to H;

    (B) $20,000 of unreported income allocable to H;

    (C) A disallowed $5,000 deduction for educational expense

allocable to H;

    (D) A disallowed $40,000 charitable contribution deduction

allocable to W; and

    (E) A disallowed $40,000 interest deduction allocable to W.

    (ii) In total, there are $120,000 worth of erroneous items, of

which $80,000 are attributable to W and $40,000 are attributable to

H.

[GRAPHIC] [TIFF OMITTED] TP17JA01.055

    (iii) The ratio of erroneous items allocable to W to the total

erroneous items is \2/3\ ($80,000/$120,000). W's liability is

limited to $36,000 of the deficiency (\2/3\ of $54,000). The

Internal Revenue Service may collect up to $36,000 from W and up to

$54,000 from H (the total amount collected, however, may not exceed

$54,000). If H also made an election, there would be no remaining

joint and several liability, and the Internal Revenue Service would

collect $36,000 from W and $18,000 from H.

    Example 3. Proportionate allocation with joint erroneous item.

(i) On September 4, 2001, W elects to allocate a $3,000 deficiency

for the 1998 tax year to H. Three erroneous items give rise to the

deficiency--

    (A) Unreported interest in the amount of $4,000 from a joint

bank account;

    (B) A disallowed deduction for business expenses in the amount

of $2,000 attributable to H's business; and

    (C) Unreported wage income in the amount of $6,000 attributable

to W's second job.

    (ii) The erroneous items total $12,000. Generally, income,

deductions, or credits from jointly held property that are erroneous

items are allocable 50% to each spouse. However, in this case, both

spouses had actual knowledge of the unreported interest income.

Therefore, W's election to allocate the portion of the deficiency

attributable to this item is invalid, and W and H remain jointly and

severally liable for this portion. Assume that this portion is

$1,000. W may allocate the remaining $2,000 of the deficiency.

[GRAPHIC] [TIFF OMITTED] TP17JA01.056

[[Page 3900]]

Total allocable items: $8,000

    (iii) The ratio of erroneous items allocable to W to the total

erroneous items is \3/4\ ($6,000/$8,000). W's liability is limited

to $1,500 of the deficiency (\3/4\ of $2,000) allocated to her. The

Internal Revenue Service may collect up to $2,500 from W (\3/4\ of

the total allocated deficiency plus $1,000 of the deficiency

attributable to the joint bank account interest) and up to $3,000

from H (the total amount collected, however, cannot exceed $3,000).

    (iv) Assume H also elects to allocate the 1998 deficiency. H is

relieved of liability for \3/4\ of the deficiency, which is

allocated to W. H's relief totals $1,500 (\3/4\ of $2,000). H

remains liable for $1,500 of the deficiency (\1/4\ of the allocated

deficiency plus $1,000 of the deficiency attributable to the joint

bank account interest).

    Example 4. Separate treatment items (STIs). (i) On September 1,

2006, a $28,000 deficiency is assessed with respect to H and W's

2003 joint return. The deficiency is the result of 4 erroneous

items--

    (A) A disallowed Lifetime Learning Credit of $2,000 attributable

to H;

    (B) A disallowed business expense deduction of $8,000

attributable to H;

    (C) Unreported income of $24,000 attributable to W; and

    (D) Unreported self-employment tax of $14,000 attributable to W.

    (ii) H and W both elect to allocate the deficiency.

    (iii) The $2,000 Lifetime Learning Credit and the $14,000 self-

employment tax are STIs totaling $16,000. The amount of erroneous

items included in computing the proportionate allocation ratio is

$32,000 ($24,000 unreported income and $8,000 disallowed business

expense deduction). The amount of the deficiency subject to

proportionate allocation is reduced by the amount of STIs ($28,000-

$16,000 = $12,000).

    (iv) Of the $32,000 of proportionate allocation items, $24,000

is allocable to W, and $8,000 is allocable to H.

[GRAPHIC] [TIFF OMITTED] TP17JA01.057

    (v) W's liability for the portion of the deficiency subject to

proportionate allocation is limited to $9,000 (\3/4\ of $12,000) and

H's liability for such portion is limited to $3,000 (\1/4\ of

$12,000).

    (vi) After the proportionate allocation is completed, the amount

of the STIs is added to each spouse's allocated share of the

deficiency.

[GRAPHIC] [TIFF OMITTED] TP17JA01.058

    (vii) Therefore, W's liability is limited to $23,000 and H's

liability is limited to $5,000.

    Example 5. Allocation of the alternative minimum tax. (i) H and

W file their 2004 joint Federal income tax return on April 15, 2005.

During 2004, W's total alternative minimum taxable income was

$120,000, and H's total alternative minimum taxable income was

$30,000. All of H's income was from his business and was reported on

Schedule C. Everything on the 2004 return was properly reported, and

there was no alternative minimum tax liability. In 2005, H

experienced a net operating loss of $25,000 for regular tax

purposes. H did not have a net operating loss for alternative

minimum tax purposes. In February 2006, H and W file an amended

return for 2004 claiming the net operating loss that was carried

back from 2005. The loss is a proper deduction, but it results in an

alternative minimum tax liability, which H and W do not report on

the amended return. In December 2007, a $5,500 deficiency is

assessed on their 2004 joint Federal income tax return resulting

from the unreported alternative minimum tax liability.

    (ii) W and H divorce in January 2008, and W elects to allocate

the deficiency.

W's AMT income for 2004: $120,000

H's AMT income for 2004: $ 30,000

Total AMT income for 2004: $150,000

W's share of AMT income for 2004: \4/5\ ($120,000/$150,000)

H's share of AMT income for 2004: \1/5\ ($30,000/$150,000)

    (iii) W's liability is limited $4,400 (\4/5\  x  $5,500). H

remains liable for the entire deficiency because he did not make an

election to allocate the deficiency.

    Example 6. Requesting spouse receives a benefit on the joint

return from the nonrequesting spouse's erroneous item. (i) In 2001,

H earns gross income of $4,000 from his business, and W earns

$50,000 of wage income. On their 2001 joint Federal income tax

return, H deducts $20,000 of business expenses resulting in a net

loss from his business of $16,000. H and W divorce in September

2002, and on May 22, 2003, a $5,200 deficiency is assessed with

respect to their 2001 joint return. W elects to allocate the

deficiency. The deficiency on the joint return results from a

disallowance of all of H's $20,000 of deductions.

    (ii) Since H used only $4,000 of the disallowed deductions to

offset gross income from his business, W benefitted from the other

$16,000 of the disallowed deductions used to offset her wage income.

Therefore, $4,000 of the disallowed deductions are allocable to H

and $16,000 of the disallowed deductions are allocable to W. W's

liability is limited to $3,900 (\3/4\ of $5,200). If H also elected

to allocate the deficiency, H's election to allocate the $3,900 of

the deficiency to W would be invalid because H had actual knowledge

of the erroneous items.

    Example 7. Calculation of requesting spouse's benefit on the

joint return when the nonrequesting spouse's erroneous item is

partially disallowed. Assume the same facts as in example 7, except

that H deducts $18,000 for business expenses on the joint return, of

which $16,000 are disallowed. Since H used only $2,000 of the

$16,000 disallowed deductions to offset gross income from his

business, W received benefit on the return from the other $14,000 of

the disallowed deductions used to offset her wage income. Therefore,

$2,000 of the disallowed deductions are allocable to H and $14,000

of the disallowed deductions are allocable to W. W's liability is

limited to $4,550 (\7/8\ of $5,200).

    (6) Alternative allocation methods--(i) Allocation based on

applicable tax rates. If a deficiency arises from two or more erroneous

items that are subject to tax at different rates (e.g., ordinary income

and capital gain items), the deficiency is allocated after first

separating the erroneous items into categories according to their

applicable tax rate. After all erroneous items are categorized, a

separate allocation is made with respect to each tax rate category

using the proportionate allocation method of paragraph (d)(4) of this

section.

    (ii) Allocation methods provided in subsequent published guidance.

The Secretary may prescribe alternative methods for allocating

erroneous items under section 6015(c) in subsequent revenue rulings,

revenue procedures, or other appropriate guidance.

    (iii) Example. The following example illustrates the rules of this

paragraph (d)(6):

    Example. Allocation based on applicable tax rates. H and W

timely file their 1998 joint Federal income tax return. H and W

divorce in 1999. On July 13, 2001, a $5,100

[[Page 3901]]

deficiency is assessed with respect to H and W's 1998 return. Of

this deficiency, $2,000 results from unreported capital gain of

$6,000 that is attributable to W and $4,000 of capital gain that is

attributable to H (both gains being subject to tax at the 20%

marginal rate). The remaining $3,100 of the deficiency is

attributable to $10,000 of unreported dividend income of H that is

subject to tax at a marginal rate of 31%. H and W both timely elect

to allocate the deficiency, and qualify under this section to do so.

There are erroneous items subject to different tax rates; thus, the

alternative allocation method of this paragraph (d)(6) applies. The

three erroneous items are first categorized according to their

applicable tax rates, then allocated. Of the total amount of 20% tax

rate items ($10,000), 60% is allocable to W and 40% is allocable to

H. Therefore, 60% of the $2,000 deficiency attributable to these

items (or $1,200) is allocated to W. The remaining 40% of this

portion of the deficiency ($800) is allocated to H. The only 31% tax

rate item is allocable to H. Accordingly, H is liable for $3,900 of

the deficiency ($800 + $3,100), and W is liable for the remaining

$1,200.

Sec. 1.6015-4  Equitable relief.

    (a) A requesting spouse who files a joint return for which a

liability remains unpaid and who does not qualify for full relief under

Sec. 1.6015-2 or Sec. 1.6015-3 may request equitable relief under this

section. The Internal Revenue Service has the discretion to grant

equitable relief from joint and several liability to a requesting

spouse when, considering all of the facts and circumstances, it would

be inequitable to hold the requesting spouse jointly and severally

liable.

    (b) This section may not be used to circumvent the limitation of

Sec. 1.6015-3(c)(1) (i.e., no refunds under Sec. 1.6015-3). Therefore,

relief is not available under this section to refund liabilities

already paid, for which the requesting spouse would otherwise qualify

for relief under Sec. 1.6015-3.

    (c) The Secretary will provide the criteria to be used in

determining whether it is inequitable to hold a requesting spouse

jointly and severally liable under this section in revenue rulings,

revenue procedures, or other published guidance.

Sec. 1.6015-5  Time and manner for requesting relief.

    (a) Requesting relief. To elect the application of Sec. 1.6015-2 or

Sec. 1.6015-3, or to request equitable relief under Sec. 1.6015-4, a

requesting spouse must file Form 8857, ``Request for Innocent Spouse

Relief (And Separation of Liability and Equitable Relief)''; submit a

written statement containing the same information required on Form

8857, which is signed under penalties of perjury; or submit information

in the manner as may be prescribed by the Secretary in relevant revenue

rulings, revenue procedures, or other published guidance.

    (b) Time period for filing a request for relief--(1) In general. To

elect the application of Sec. 1.6015-2 or Sec. 1.6015-3, or to request

equitable relief under Sec. 1.6015-4, a requesting spouse must file

Form 8857 or other similar statement with the Internal Revenue Service

no later than two years from the date of the first collection activity

against the requesting spouse after July 22, 1998, with respect to the

joint tax liability.

    (2) Definitions--(i) Collection activity. For purposes of this

paragraph (b), collection activity means an administrative levy or

seizure described by section 6331 to obtain property of the requesting

spouse; an offset of an overpayment of the requesting spouse against a

liability under section 6402; the filing of a suit by the United States

against the requesting spouse for the collection of the joint tax

liability; or the filing of a claim by the United States in a court

proceeding in which the requesting spouse is a party or which involves

property of the requesting spouse. Collection activity does not include

a notice of intent to levy under sections 6330 and 6331(d); the filing

of a Notice of Federal Tax Lien; or a demand for payment of tax. The

term property of the requesting spouse, for purposes of this paragraph,

means property in which the requesting spouse has an ownership interest

(other than solely through the operation of community property laws),

including property owned jointly with the nonrequesting spouse.

    (ii) Date of levy or seizure. For purposes of this paragraph (b),

if tangible personal property or real property is seized and is to be

sold, a notice of seizure is required under section 6335(a). The date

of levy or seizure is the date the notice of seizure is given. For more

information on the rules regarding notice of seizure, see section

6502(b) and the regulations thereunder. For purposes of this paragraph

(b), if a levy is made on cash or intangible personal property that

will not be sold, the date of levy or seizure is the date the notice of

levy is made. For more information on the rules regarding levy, see

section 6331 and the regulations thereunder. For purposes of this

paragraph (b), if a notice of levy is served by mail, the date of levy

or seizure is the date of delivery of the notice of levy to the person

on whom the levy is made. For more information on notices of levy

served by mail, see Sec. 301.6331-1(c) of this chapter.

    (3) Requests for relief made before commencement of collection

activity. An election or request for relief may be made before

collection activity has commenced. For example, an election or request

for relief may be made in connection with an audit or examination of

the joint return, or pursuant to the pre-levy collection due process

(CDP) hearing procedures pursuant to sections 6320 and 6330. For more

information on the rules regarding pre-levy collection due process, see

Secs. 301.6320-1T(e)(1) and (2), and 301.6330-1T(e)(1) and (2) of this

chapter. However, no request for relief may be made before the date

specified in paragraph (b)(5) of this section.

    (4) Examples. The following examples illustrate the rules of this

paragraph (b):

    Example 1. On January 11, 2000, a notice of intent to levy is

mailed to H and W regarding their 1997 joint Federal income tax

liability. The Internal Revenue Service levies on W's employer on

June 5, 2000. The Internal Revenue Service levies on H's employer on

July 10, 2000. W must elect or request relief by June 5, 2002, which

is two years after the Internal Revenue Service levied on her wages.

H must elect or request relief by July 10, 2002, which is two years

after the Internal Revenue Service levied on his wages.

    Example 2. The Internal Revenue Service levies on W's bank, in

which W maintains a savings account, to collect a joint liability

for 1995 on January 12, 1998. The bank complies with the levy, which

only partially satisfies the liability. The Internal Revenue Service

takes no other collection actions. On July 24, 2000, W elects relief

with respect to the unpaid portion of the 1995 liability. W's

election is timely because the Internal Revenue Service has not

taken any collection activity after July 22, 1998; therefore, the

two-year period has not commenced.

    Example 3. Assume the same facts as in Example 2, except that

the Internal Revenue Service delivers a second levy on the bank on

July 23, 1998. W's election is untimely because it is filed more

than two years after the first collection activity after July 22,

1998.

    Example 4. H and W do not remit full payment with their timely

filed joint Federal income tax return for the 1989 tax year. No

collection activity is taken after July 22, 1998, until the United

States files a suit against both H and W to reduce the tax

assessment to judgment and to foreclose the tax lien on their

jointly held residence on July 1, 1999. H elects relief on October

2, 2000. The election is timely because it is made within two years

of the filing of a collection suit by the United States against H.

    Example 5. W files a Chapter 7 bankruptcy petition on July 10,

2000. On September 5, 2000, the United States files a proof of claim

for her joint 1998 income tax liability. W elects relief with

respect to the 1998 liability on August 20, 2002. The election is

timely because it is made within two years of the date the United

States filed the claim in W's bankruptcy case.

[[Page 3902]]

    (5) Premature requests for relief. The Secretary will not consider

premature claims for relief under Sec. 1.6015-2, Sec. 1.6015-3, or

Sec. 1.6015-4. A premature claim is a claim for relief that is filed

for a tax year prior to the receipt of a notification of an audit or a

letter or notice from the Secretary indicating that there may be an

outstanding liability with regard to that year. Such notices or letters

do not include notices issued pursuant to section 6223 relating to

TEFRA partnership proceedings. A premature claim is not considered an

election or request under Sec. 1.6015-1(g)(5).

    (c) Effect of a final administrative determination--(1) In general.

A requesting spouse is entitled to only one final administrative

determination of relief under Sec. 1.6015-1 for a given assessment,

unless the requesting spouse properly submits a second request for

relief that is described in Sec. 1.6015-1(g)(5).

    (2) Example. The following example illustrates the rule of this

paragraph (c):

    Example. In January 2001, W invests in tax shelter P, and in

February 2001, she starts her own business selling crafts, from

which she earns $100,000 of net income for the year. H and W file a

joint return for tax year 2001, on which they claim $20,000 in

losses from their investment in P, and they omit W's self-employment

tax. In March 2003, the Internal Revenue Service opens an audit

under the provisions of subchapter C of chapter 63 of subtitle F of

the Internal Revenue Code (TEFRA partnership proceeding) and sends H

and W a notice under section 6223(a)(1). In September 2003, the

Internal Revenue Service audits H and W's 2001 joint return

regarding the omitted self-employment tax. H may file a claim for

relief from joint and several liability for the self-employment tax

liability because he has received a notification of an audit

indicating that there may be an outstanding liability on the joint

return. However, his claim for relief regarding the TEFRA

partnership proceeding is premature under paragraph (b)(5) of this

section. H will have to wait until the Internal Revenue Service

sends him a notice of computational adjustment or assesses the

liability from the TEFRA partnership proceeding on H and W's joint

return before he files a claim for relief with respect to any such

liability. The assessment relating to the TEFRA partnership

proceeding is separate from the assessment for the self-employment

tax; therefore, H's subsequent claim for relief for the liability

from the TEFRA partnership proceeding is not precluded by his

previous claim for relief from the self-employment tax liability

under this paragraph (c).

Sec. 1.6015-6  Nonrequesting spouse's notice and opportunity to

participate in administrative proceedings.

    (a) In general. (1) When the Secretary receives an election under

Sec. 1.6015-2 or Sec. 1.6015-3, or a request for relief under

Sec. 1.6015-4, the Secretary must send a notice to the nonrequesting

spouse's last known address that informs the nonrequesting spouse of

the requesting spouse's claim for relief. The notice must provide the

nonrequesting spouse with an opportunity to submit any information that

should be considered in determining whether the requesting spouse

should be granted relief from joint and several liability. A

nonrequesting spouse is not required to submit information under this

section. The Secretary has the discretion to share with one spouse any

of the information submitted by the other spouse. At the request of one

spouse, the Secretary will omit from shared documents the spouse's new

name, address, employer, telephone number, and any other information

that would reasonably indicate the other spouse's location.

    (2) The Secretary must notify the nonrequesting spouse of the

Secretary's final determination with respect to the requesting spouse's

claim for relief under section 6015. However, the nonrequesting spouse

is not permitted to appeal such determination.

    (b) Information submitted. The Secretary will consider all of the

information (as relevant to each particular relief provision) that the

nonrequesting spouse submits in determining whether relief from joint

and several liability is appropriate, including information relating to

the following--

    (1) The legal status of the requesting and nonrequesting spouses'

marriage;

    (2) The extent of the requesting spouse's knowledge of the

erroneous items or underpayment;

    (3) The extent of the requesting spouse's knowledge or

participation in the family business or financial affairs;

    (4) The requesting spouse's education level;

    (5) The extent to which the requesting spouse benefitted from the

erroneous items;

    (6) Any asset transfers between the spouses;

    (7) Any indication of fraud on the part of either spouse;

    (8) Whether it would be inequitable, within the meaning of

Secs. 1.6015-2(d) and 1.6015-4(b), to hold the requesting spouse

jointly and severally liable for the outstanding liability;

    (9) The allocation or ownership of items giving rise to the

deficiency; and

    (10) Anything else that may be relevant to the determination of

whether relief from joint and several liability should be granted.

    (c) Effect of opportunity to participate. The failure to submit

information pursuant to paragraph (b) of this section does not affect

the nonrequesting spouse's ability to seek relief from joint and

several liability for the same tax year. However, information that the

nonrequesting spouse submits pursuant to paragraph (b) of this section

is relevant in determining whether relief from joint and several

liability is appropriate for the nonrequesting spouse should the

nonrequesting spouse also submit an application for relief.

Sec. 1.6015-7  Tax Court review.

    (a) In general. Requesting spouses may petition the Tax Court to

review the denial of relief under Sec. 1.6015-1.

    (b) Time period for petitioning the Tax Court. Pursuant to section

6015(e), the requesting spouse may petition the Tax Court to review a

denial of relief under Sec. 1.6015-1 within the 90-day period beginning

on the date the final determination letter is mailed. If the Secretary

does not mail the requesting spouse a final determination letter within

6 months of the date the requesting spouse files an election under

Sec. 1.6015-2 or Sec. 1.6015-3, the requesting spouse may petition the

Tax Court to review the election at any time after the expiration of

the 6-month period, and before the expiration of the 90-day period

beginning on the mailing date of the final determination letter. The

Tax Court also may review a claim for relief if Tax Court jurisdiction

has been acquired under section 6213(a) or 6330(d). For rules regarding

petitioning the Tax Court under section 6213(a) or 6330(d), see

Secs. 301.6213-1, 301.6330-1T(f), and 301.6330-1T(g) of this chapter.

    (c) Restrictions on collection and suspension of the running of the

period of limitations--(1) Restrictions on collection under

Sec. 1.6015-2 or 1.6015-3. Unless the Secretary determines that

collection will be jeopardized by delay, no levy or proceeding in court

shall be made, begun, or prosecuted against a requesting spouse

electing the application of Sec. 1.6015-2 or Sec. 1.6015-3 for the

collection of any assessment to which the election relates until the

expiration of the 90-day period described in paragraph (b) of this

section, or if a petition is filed with the Tax Court, until the

decision of the Tax Court becomes final under section 7481.

Notwithstanding the preceding sentence, if the requesting spouse

appeals the Tax Court's determination, the Internal Revenue Service may

resume collection of the liability from the requesting spouse on the

date of the Tax Court's determination unless the requesting spouse

files an appeal bond pursuant to the rules of section 7485. For more

information regarding the date

[[Page 3903]]

on which a decision of the Tax Court becomes final, see section 7481

and the regulations thereunder. Jeopardy under this paragraph (c)(1)

means conditions exist that would require an assessment under section

6851 or 6861 and the regulations thereunder.

    (2) Suspension of the running of the period of limitations-- (i)

Relief under Sec. 1.6015-2 or 1.6015-3. The running of the period of

limitations in section 6502 on collection against the requesting spouse

of the assessment to which an election under Sec. 1.6015-2 or

Sec. 1.6015-3 relates is suspended for the period during which the

Commissioner is prohibited by paragraph (c)(1) of this section from

collecting by levy or a proceeding in court and for 60 days thereafter.

    (ii) Relief under Sec. 1.6015-4. If a requesting spouse seeks only

equitable relief under Sec. 1.6015-4, the restrictions on collection of

paragraph (c)(1) of this section do not apply. The request for relief

does not suspend the running of the period of limitations on

collection.

    (3) Definitions--(i) Levy. For purposes of this paragraph (c), levy

means an administrative levy or seizure described by section 6331.

    (ii) Proceedings in court. For purposes of this paragraph (c),

proceedings in court means suits filed by the United States for the

collection of Federal tax. Proceedings in court does not refer to the

filing of pleadings and claims and other participation by the

Commissioner or the United States in suits not filed by the United

States, including Tax Court cases, refund suits, and bankruptcy cases.

    (iii) Assessment to which the election relates. For purposes of

this paragraph (c), the assessment to which the election relates is the

entire assessment of the deficiency to which the election relates, even

if the election is made with respect to only part of that deficiency.

Sec. 1.6015-8  Applicable liabilities.

    (a) In general. Sections 6015(b), 6015(c), and 6015(f) apply to

liabilities that arise after July 22, 1998, and to liabilities that

arose prior to July 22, 1998, that were not paid on or before July 22,

1998.

    (b) Liabilities paid on or before July 22, 1998. A requesting

spouse seeking relief from joint and several liability for amounts paid

on or before July 22, 1998, must request relief under section 6013(e)

and the regulations thereunder.

    (c) Examples. The following examples illustrate the rules of this

section:

    Example 1. H and W file a joint income tax return for 1995 on

April 15, 1996. There is an understatement on the return

attributable to an omission of H's wage income. On October 15, 1998,

H and W receive a 30-day letter proposing a deficiency on the 1995

joint return. W pays the outstanding liability in full on November

30, 1998. In March 1999, W files Form 8857, requesting relief from

joint and several liability under section 6015(b). Although W's

liability arose prior to July 22, 1998, it was unpaid as of that

date. Therefore, section 6015 is applicable.

    Example 2. H and W file their 1995 joint income tax return on

April 15, 1996. On October 14, 1997, a deficiency is assessed

regarding a disallowed business expense deduction attributable to H.

On June 30, 1998, the Internal Revenue Service levies on W's bank

account in full satisfaction of the outstanding liability. On August

31, 1998, W files a request for relief from joint and several

liability. The liability arose prior to July 22, 1998, and it was

paid as of July 22, 1998. Therefore, section 6015 is not applicable

and section 6013(e) is applicable.

Sec. 1.6015-9  Effective date.

    Sections 1.6015-0 through 1.6015-9 are applicable for all elections

under Sec. 1.6015-2 or Sec. 1.6015-3 or any request for relief under

Sec. 1.6015-4 filed on or after federal regulations are published in

the Federal Register.

Charles Rossotti,

Commissioner of Internal Revenue.

[FR Doc. 01-8 Filed 1-16-01; 8:45 am]

BILLING CODE 4830-01-U

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