[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.66-3]

[Page 107]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.66-3  Denial of the Federal income tax benefits resulting from 
the operation of community property law where spouse not notified.

    (a) In general. The Secretary may deny the Federal income tax 
benefits of community property law to any spouse with respect to any 
item of community income if that spouse acted as if solely entitled to 
the income and failed to notify his or her spouse of the nature and 
amount of the income before the due date (including extensions) for the 
filing of the return of his or her spouse for the taxable year in which 
the item of income was derived. Whether a spouse has acted as if solely 
entitled to the item of income is a facts and circumstances 
determination. This determination focuses on whether the spouse used, or 
made available, the item of income for the benefit of the marital 
community.
    (b) Effect. The item of community income will be included, in its 
entirety, in the gross income of the spouse to whom the Secretary denied 
the Federal income tax benefits resulting from community property law. 
The tax liability arising from the inclusion of the item of community 
income must be assessed in accordance with section 6212 against this 
spouse.
    (c) Examples. The following examples illustrate the rules of this 
section:

    Example 1. Acting as if solely entitled to income. (i) H and W are 
married and are domiciled in State A, a community property state. W's 
Form W-2 for taxable year 2000 showed wage income of $35,000. W also 
received a Form 1099-INT, ``Interest Income,'' showing $1,000 W received 
in taxable year 2000. W's wage income was directly deposited into H and 
W's joint account, from which H and W paid bills and household expenses. 
W did not inform H of her interest income or the Form 1099-INT, but W 
gave H a copy of the W-2 when she received it in January 2001. W did not 
use her interest income for bills or household expenses. Instead W gave 
her interest income to her brother, who was unemployed. Neither the 
separate return filed by H nor the separate return filed by W included 
the interest income. In 2002, the IRS audits both H and W. The Internal 
Revenue Service (IRS) may raise section 66(b) as to W's interest income, 
denying W the Federal income tax benefit resulting from community 
property law as to this item of income.
    (ii) H and W are married and are domiciled in State B, a community 
property state. For taxable year 2000, H receives $45,000 in wage income 
that H places in a separate account. H and W maintain separate 
residences. H's wage income is community income under the laws of State 
B. That same year, W loses her job, and H pays W's mortgage and 
household expenses for several months while W seeks employment. Neither 
H nor W files a return for 2000, the taxable year for which the IRS 
subsequently audits them. The IRS may not raise section 66(b) and deny H 
the Federal income tax benefits resulting from the operation of 
community property law as to H's wage income of $45,000, as H has not 
treated this income as if H were solely entitled to it.
    Example 2. Notification of nature and amount of the income. H and W 
are married and domiciled in State C, a community property state. H and 
W do not file a joint return for taxable year 2001. H's and W's earned 
income for 2001 is community income under the laws of State C. H 
receives $50,000 in wage income in 2001. In January 2002, H receives a 
Form W-2 that erroneously states that H earned $45,000 in taxable year 
2001. H provides W a copy of H's Form W-2 in February 2002. W files for 
an extension prior to April 15, 2002. H receives a corrected Form W-2 
reflecting wages of $50,000 in May 2002. H provides a copy of the 
corrected Form W-2 to W in May 2002. W files a separate return in June 
2002, but reports one half of $45,000 ($22,500) of wage income that H 
earned. H files a separate return reporting half of $50,000 ($25,000) in 
wage income. The IRS audits both H and W. Even if H had acted as if 
solely entitled to the wage income, the IRS may not raise section 66(b) 
as to this income because H notified W of the nature and amount of the 
income prior to the due date of W's return (including extensions).

[T.D. 9074, 68 FR 41070, July 10, 2003]