Section

[Code of Federal Regulations]
[Title 26, Volume 13]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR]

[Page 98-107]

TITLE 26--INTERNAL REVENUE

CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)

Procedure and Administration--Table of Contents

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. For purposes of this section,
the marital status of a deceased requesting spouse will be determined on
the earlier of the date of the election or the date of death in
accordance with section 7703(a)(1). Subject to the restrictions of
paragraph (c) of this section, an eligible requesting spouse who elects
the application of this section in accordance with Sec. Sec. 1.6015-
1(h)(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.

[[Page 99]]

(b) Definitions--(1) Divorced. A determination of whether a
requesting spouse is divorced for purposes of this section will be made
in accordance with section 7703 and the regulations thereunder. Such
determination will be made as of the date the election is filed.
(2) Legally separated. A determination of whether a requesting
spouse is legally separated for purposes of this section will be made in
accordance with section 7703 and the regulations thereunder. Such
determination will be made as of the date the election is filed.
(3) 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, illness, business, vacation, military service, or
education.
(ii) Separate dwellings. A husband and wife who reside in the same
dwelling are considered members of the same household. In addition, a
husband and wife who reside in two separate dwellings are considered
members of the same household if the spouses are not estranged or one
spouse 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) In general. If, under section
6015(c)(3)(C), the Secretary demonstrates that, at the time the return
was signed, the requesting spouse had actual knowledge 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. The Service, having both the burden of
production and the burden of persuasion, must establish, by a
preponderance of the evidence, that the requesting spouse had actual
knowledge of the erroneous item in order to invalidate the election.
(A) Omitted income. In the case of omitted income, knowledge of the
item includes knowledge of the receipt of the income. 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. This rule applies equally
in situations where the other spouse has unreported income although the
spouse does not have an actual receipt of cash (e.g., dividend
reinvestment or a distributive share from a flow-through entity shown on
Schedule K-1, ``Partner's Share of Income, Credits, Deductions, etc.'').
(B) Deduction or credit--(1) Erroneous deductions in general. In the
case of an erroneous deduction or credit, knowledge of the item means
knowledge of the facts that made the item not allowable as a deduction
or credit.
(2) Fictitious or inflated deduction. If a deduction is fictitious
or inflated, the IRS must establish that the requesting spouse actually
knew that the expenditure was not incurred, or not incurred to that
extent.
(ii) Partial knowledge. 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

[[Page 100]]

know W's dividend income from X Co. was taxable, but knew that W
received the dividend income. Relief is not available under this
section. 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
section.
(iii) Knowledge of the source not sufficient. 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. Similarly, the IRS need not establish
that a requesting spouse knew of the source of an erroneous item in
order to establish that the requesting spouse had actual knowledge of
the item itself. For example, assume H knew that W received $1,000, but
he did not know the source of the $1,000. W and H omit the $1,000 from
their joint return. H has actual knowledge of the item giving rise to
the deficiency ($1,000), and relief is not available under this section.
(iv) Factors supporting actual knowledge. To demonstrate that a
requesting spouse had actual knowledge of an erroneous item at the time
the return was signed, the IRS 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, and the requesting
spouse's election would be invalid with respect to that entire 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 asserted dominion and control over 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)(iv) because the account is
not held in her name and there is no other indication that she asserted
dominion and control over the item.
(v) Abuse exception. If the requesting spouse establishes that he or
she was the victim of domestic abuse prior to the time the return was
signed, and that, as a result of the prior abuse, the requesting spouse
did not challenge the treatment of any items on the return for fear of
the nonrequesting spouse's retaliation, the limitation on actual
knowledge in this paragraph (c) will not apply. However, if the
requesting spouse involuntarily executed the return, the requesting
spouse may choose to establish that the return was signed under duress.
In such a case, Sec. 1.6013-4(d) applies.

[[Page 101]]

(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. The presumption does not apply, however, if the requesting
spouse establishes that the asset was transferred pursuant to a decree
of divorce or separate maintenance or a written instrument incident to
such a decree. If the presumption does not apply, but the Internal
Revenue Service can establish that the purpose of the transfer was the
avoidance of tax or payment of tax, the asset will be disqualified, and
its value will be added to the amount of the deficiency for which the
requesting spouse remains liable. If the presumption applies, a
requesting spouse may still 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. H and W divorce in July
2003. 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 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. (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 and failure to review return. (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

[[Page 102]]

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.
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's 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 5
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 5
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 5
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 5
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 6
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 6
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 6
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

[[Page 103]]

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 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 a decree of
divorce, 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
decree of divorce.
Example 8. Overcoming the disqualified asset presumption. (i) H and
W are married for 25 years. Every September, on W's birthday, H gives W
a gift of $500. On February 28, 2002, H and W receive a 30-day letter
from the Internal Revenue Service relating to their 1998 joint
individual Federal income tax return. The deficiency relates to H's
Schedule C business, and W had no knowledge of the items giving rise to
the deficiency. H and W are legally separated in June 2003, and, despite
the separation, H continues to give W $500 each year for her birthday. H
is not required to give such amounts pursuant to a decree of divorce or
separate maintenance.
(ii) On January 27, 2004, W files an election to allocate the
deficiency to H. The $1,500 transferred from H to W from February 28,
2001 (a year before the 30-day letter was mailed) to the present is
presumed disqualified. However, W may overcome the presumption that such
amounts were disqualified by establishing that such amounts were
birthday gifts from H and that she has received such gifts during their
entire marriage. Such facts would show that the amounts were not
transferred for the purpose of avoidance of tax or payment of tax.

(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.
(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. Even 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 Internal Revenue Service may allocate any item
between the spouses if the Internal Revenue Service 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 services 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

[[Page 104]]

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 (c)(2)(iv) of this
section. For rules regarding the effect of community property laws, see
Sec. 1.6015-1(f) and paragraph (c)(2)(iv) 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. Deduction items unrelated to a business or investment 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] TR18JY02.004

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

(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;
(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 (d)(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. If such credit or tax is attributable in
whole or in part to both spouses, then the IRS will determine on a case
by

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case basis how such item will be allocated. 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
allocated jointly to both spouses. 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 minium tax. Any
portion of a deficiency relating to the alternative minimum tax under
section 55 will be allocated appropriately.
(B) Accuracy-related and fraud penalties. Any accuracy-related or
fraud penalties under section 6662 or 6663 are 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's and W's joint bank account;
(B) A disallowed business expense deduction on H's Schedule C; and
(C) A disallowed Lifetime Learning Credit for W's post-secondary
education, paid for by W.
(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.

W's items .. ......... H's items
------------------------------------------------------------- -----------------------------------------------
$40,000 charitable deduction .. $15,000 business deduction
40,000 interest deduction .. 20,000 unreported income
................................................. .. 5,000 education deduction
---------- -----------
$80,000 ................................................. .. $40,000

(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 be permitted to collect $36,000
from W and $18,000 from H.

[[Page 106]]

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.

H's items .. ......... W's items
------------------------------------------------------------- -----------------------------------------------
$2,000 business deduction .. $6,000 wage income

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's 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.

W's share of allocable items .. H's share of allocable items
\3/4\ ($24,000/$32,000) .. \1/4\ ($8,000/$32,000)

(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.

W's share of total deficiency .. ......... H's share of total deficiency
------------------------------------------------------------- -----------------------------------------------
$ 9,000 allocated deficiency .. $3,000 allocated deficiency
14,000 self-employment tax .. 2,000 Lifetime Learning Credit
---------- -----------
$23,000 ................................................. .. $5,000

[[Page 107]]

(vii) Therefore, W's liability is limited to $23,000 and H's
liability is limited to $5,000.
Example 5. Requesting spouse receives a benefit on the joint return
from the nonrequesting spouse's erroneous item. (i) In 2001, H reports
gross income of $4,000 from his business on Schedule C, and W reports
$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 $4,160 (\4/5\ of $5,200). If H also elected to allocate the
deficiency, H's election to allocate the $4,160 of the deficiency to W
would be invalid because H had actual knowledge of the erroneous items.
Example 6. 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 5, 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 will be 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.
Additional alternative methods for allocating erroneous items under
section 6015(c) may be prescribed by the Treasury and IRS 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 deficiency is assessed with respect to
H's 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.

[T.D. 9003, 67 FR 47285, July 18, 2002]