[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: 26CFR1.66-4]

[Page 107-111]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.66-4  Request for relief from the Federal income tax liability 
resulting from the operation of community property law.

    (a) Traditional relief--(1) In general. A requesting spouse will 
receive relief from the Federal income tax liability resulting from the 
operation of community property law for an item of community income if--
    (i) The requesting spouse did not file a joint Federal income tax 
return for the taxable year for which he or she seeks relief;

[[Page 108]]

    (ii) The requesting spouse did not include in gross income for the 
taxable year an item of community income properly includible therein, 
which, under the rules contained in section 879(a), would be treated as 
the income of the nonrequesting spouse;
    (iii) The requesting spouse establishes that he or she did not know 
of, and had no reason to know of, the item of community income; and
    (iv) Taking into account all of the facts and circumstances, it is 
inequitable to include the item of community income in the requesting 
spouse's individual gross income.
    (2) Knowledge or reason to know. (i) A requesting spouse had 
knowledge or reason to know of an item of community income if he or she 
either actually knew of the item of community income, or if a reasonable 
person in similar circumstances would have known of the item of 
community income. All of the facts and circumstances are considered in 
determining whether a requesting spouse had reason to know of an item of 
community income. The relevant facts and circumstances include, but are 
not limited to, the nature of the item of community income, the amount 
of the item of community income relative to other income items, the 
couple's financial situation, the requesting spouse's educational 
background and business experience, and whether the item of community 
income was reflected on prior years' returns (e.g., investment income 
omitted that was regularly reported on prior years' returns).
    (ii) If the requesting spouse is aware of the source of community 
income or the income-producing activity, but is unaware of the specific 
amount of the nonrequesting spouse's community income, the requesting 
spouse is considered to have knowledge or reason to know of the item of 
community income. The requesting spouse's lack of knowledge of the 
specific amount of community income does not provide a basis for relief 
under this section.
    (3) Inequitable. All of the facts and circumstances are considered 
in determining whether it is inequitable to hold a requesting spouse 
liable for a deficiency attributable to an item of community income. One 
relevant factor for this purpose is whether the requesting spouse 
benefitted, directly or indirectly, from the omitted item of community 
income. A benefit includes normal support, but does not include de 
minimis amounts. Evidence of direct or indirect benefit may consist of 
transfers of property or rights to property, including transfers 
received several years after the filing of the return. Thus, for 
example, if a requesting spouse receives from the nonrequesting spouse 
property (including life insurance proceeds) that is traceable to items 
of community income attributable to the nonrequesting spouse, the 
requesting spouse will have benefitted from those items of community 
income. Other factors may include, if the situation warrants, desertion, 
divorce or separation. Factors relevant to whether it would be 
inequitable to hold a requesting spouse liable, more specifically 
described under the applicable administrative procedure issued under 
section 66(c) (Revenue Procedure 2000-15 (2000-1 C.B. 447) (See Sec. 
601.601(d)(2) of this chapter), or other applicable guidance published 
by the Secretary), are to be considered in making a determination under 
this paragraph.
    (b) Equitable relief. Equitable relief may be available when the 
four requirements of paragraph (a)(1) of this section are not satisfied, 
but it would be inequitable to hold the requesting spouse liable for the 
unpaid tax or deficiency. Factors relevant to whether it would be 
inequitable to hold a requesting spouse liable, more specifically 
described under the applicable administrative procedure issued under 
section 66(c) (Revenue Procedure 2000-15 (2000-1 C.B. 447), or other 
applicable guidance published by the Secretary), are to be considered in 
making a determination under this paragraph.
    (c) Applicability. Traditional relief under paragraph (a) of this 
section applies only to deficiencies arising out of items of omitted 
income. Equitable relief under paragraph (b) of this section applies to 
any deficiency or any unpaid tax (or any portion of either). Equitable 
relief is available only for the portion of liabilities that were unpaid 
as of July 22, 1998, and for liabilities that arise after July 22, 1998.

[[Page 109]]

    (d) Effect of relief. When the requesting spouse qualifies for 
relief under paragraph (a) or (b) of this section, the IRS must assess 
any deficiency of the nonrequesting spouse arising from the granting of 
relief to the requesting spouse in accordance with section 6212.
    (e) Examples. The following examples illustrate the rules of this 
section:

    Example 1. Item-by-item approach. H and W are married, living 
together, and domiciled in State A (a community property state). H and W 
file separate returns for taxable year 2002 on April 15, 2003. H earns 
$56,000 in wages, and W earns $46,000 in wages, in 2002. H reports half 
of his wage income as shown on his Form W-2, in the amount of $28,000, 
and half of W's wage income as shown on her Form W-2, in the amount of 
$23,000. W reports half of her wage income as shown on her W-2, in the 
amount of $23,000, and half of H's wage income as shown on his Form W-2, 
in the amount of $28,000. Neither H nor W reports W's income from her 
sole proprietorship of $34,000 or W's investment income of $5,000 for 
taxable year 2002. The Internal Revenue Service (IRS) proposes 
deficiencies with respect to H's and W's taxable year 2002 returns due 
to the omission of W's income from her sole proprietorship and 
investments. H timely requests relief under section 66(c). Because the 
IRS determines that H satisfies the four requirements of the traditional 
relief provision of section 66(c) with respect to W's omitted investment 
income, the IRS grants H's request for relief as to the omitted 
investment income. The IRS determines that H does not satisfy the four 
requirements of the traditional relief provision of section 66(c) as to 
W's sole proprietorship income. The IRS further determines that, under 
the equitable relief provision of section 66(c), it is not inequitable 
to hold H liable for the sole proprietorship income. Relief is 
applicable on an item-by-item basis. Thus, H is liable for the tax on 
half of his wage income in the amount of $28,000, half of W's wage 
income in the amount of $23,000, half of W's sole proprietorship income 
in the amount of $17,000, but none of W's investment income, for which H 
obtained relief under section 66(c). W is liable for the tax on half of 
H's wage income in the amount of $28,000, half of W's wage income in the 
amount of $23,000, half of W's sole proprietorship income in the amount 
of $17,000, and all of W's investment income in the amount of $5,000, 
because H obtained relief under section 66(c).
    Example 2. Benefit. H and W are married, living together, and 
domiciled in State B (a community property state). Neither H nor W files 
a return for taxable year 2000. H earns $60,000 in 2000, which he 
deposits in a joint account. H and W pay the mortgage payment, household 
bills, and other family expenses out of the joint account. W earns 
$20,000 in 2000. W uses a portion of the $20,000 to make monthly loan 
payments on the family cars, but loses the remainder at the local 
racetrack. In 2002, the IRS audits H and W. H requests relief under 
section 66(c), stating that he did not know or have reason to know of 
W's additional income, as H travels extensively while W handles the 
family finances. Regardless of whether H had knowledge or reason to know 
of the source of W's income, H is not eligible for traditional relief 
under section 66(c) because H benefitted from W's income. H's benefit, 
the portion of W's income used to make monthly payments on the car 
loans, was more than a de minimis amount. While this benefit was not in 
excess of normal support, it is enough to preclude relief under the 
traditional relief provision of section 66(c). H may still qualify for 
equitable relief under section 66(c), depending on all of the facts and 
circumstances.

    (f) Fraudulent scheme. If the Secretary establishes that a spouse 
transferred assets to his or her spouse as part of a fraudulent scheme, 
relief is not available under this section. For purposes of this 
section, a fraudulent scheme includes a scheme to defraud the Secretary 
or another third party, such as a creditor, ex-spouse, or business 
partner.
    (g) Definitions--(1) Requesting spouse. A requesting spouse is an 
individual who does not file a joint Federal income tax return with the 
nonrequesting spouse for the taxable year in question, and who requests 
relief from the Federal income tax liability resulting from the 
operation of community property law under this section for the portion 
of the liability arising from his or her share of community income for 
such taxable year.
    (2) Nonrequesting spouse. A nonrequesting spouse is the individual 
to whom the requesting spouse was married and whose income or deduction 
gave rise to the tax liability from which the requesting spouse seeks 
relief in whole or in part.
    (h) Effect of prior closing agreement or offer in compromise. A 
requesting spouse is not entitled to relief from the Federal income tax 
liability resulting from the operation of community property law under 
section 66 for any taxable year for which the requesting spouse has 
entered into a closing agreement (other than an agreement pursuant to

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section 6224(c) relating to partnership items) with the Secretary that 
disposes of the same liability that is the subject of the request for 
relief. In addition, a requesting spouse is not entitled to relief from 
the Federal income tax liability resulting from the operation of 
community property law under section 66 for any taxable year for which 
the requesting spouse has entered into an offer in compromise with the 
Secretary. For rules relating to the effect of closing agreements and 
offers in compromise, see sections 7121 and 7122, and the regulations 
thereunder.
    (i) [Reserved]
    (j) Time and manner for requesting relief--(1) Requesting relief. To 
request relief from the Federal income tax liability resulting from the 
operation of community property law under this section, a requesting 
spouse must file, within the time period prescribed in paragraph (j)(2) 
of this section, Form 8857, ``Request for Innocent Spouse Relief'' (or 
other specified form), or other written request, signed under penalties 
of perjury, stating why relief is appropriate. The requesting spouse 
must include the nonrequesting spouse's name and taxpayer identification 
number in the written request. The requesting spouse must also comply 
with the Secretary's reasonable requests for information that will 
assist the Secretary in identifying and locating the nonrequesting 
spouse.
    (2) Time period for filing a request for relief--(i) Traditional 
relief. The earliest time for submitting a request for relief from the 
Federal income tax liability resulting from the operation of community 
property law under paragraph (a) of this section, for an amount 
underreported on, or omitted from, the requesting spouse's separate 
return, is the date the requesting spouse receives notification of an 
audit or a letter or notice from the IRS stating that there may be an 
outstanding liability with regard to that year (as described in 
paragraph (j)(2)(iii) of this section). The latest time for requesting 
relief under paragraph (a) of this section is 6 months before the 
expiration of the period of limitations on assessment, including 
extensions, against the nonrequesting spouse for the taxable year that 
is the subject of the request for relief, unless the examination of the 
requesting spouse's return commences during that 6-month period. If the 
examination of the requesting spouse's return commences during that 6-
month period, the latest time for requesting relief under paragraph (a) 
of this section is 30 days after the commencement of the examination.
    (ii) Equitable relief. The earliest time for submitting a request 
for relief from the Federal income tax liability resulting from the 
operation of community property law under paragraph (b) of this section 
is the date the requesting spouse receives notification of an audit or a 
letter or notice from the IRS stating that there may be an outstanding 
liability with regard to that year (as described in paragraph 
(j)(2)(iii) of this section). A request for equitable relief from the 
Federal income tax liability resulting from the operation of community 
property law under paragraph (b) of this section for a liability that is 
properly reported but unpaid is properly submitted with the requesting 
spouse's individual Federal income tax return, or after the requesting 
spouse's individual Federal income tax return is filed.
    (iii) Premature requests for relief. The Secretary will not consider 
a premature request for relief under this section. The notices or 
letters referenced in this paragraph (j)(2) do not include notices 
issued pursuant to section 6223 relating to TEFRA partnership 
proceedings. These notices or letters include notices of computational 
adjustment to a partner or partner's spouse (Notice of Income Tax 
Examination Changes) that reflect a computation of the liability 
attributable to partnership items of the partner or the partner's 
spouse.
    (k) Nonrequesting spouse's notice and opportunity to participate in 
administrative proceedings--(1) In general. When the Secretary receives 
a request for relief from the Federal income tax liability resulting 
from the operation of community property law under this section, the 
Secretary must send a notice to the nonrequesting spouse's last known 
address that informs the nonrequesting spouse of the requesting spouse's 
request for relief. The notice must provide the nonrequesting spouse

[[Page 111]]

with an opportunity to submit any information for consideration in 
determining whether to grant the requesting spouse relief from the 
Federal income tax liability resulting from the operation of community 
property law. The Secretary will share with each spouse the information 
submitted by the other spouse, unless the Secretary determines that the 
sharing of this information will impair tax administration.
    (2) Information submitted. The Secretary will consider all of the 
information (as relevant to the particular relief provision) that the 
nonrequesting spouse submits in determining whether to grant relief from 
the Federal income tax liability resulting from the operation of 
community property law under this section.

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