[Code of Federal Regulations]
[Title 26, Volume 10]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.981-2]

[Page 536-538]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.981-2  Foreign law community income for taxable years beginning 
before January 1, 1967.

    (a) Election for special treatment--(1) In general. For all open 
taxable years beginning before January 1, 1967, for which an individual 
citizen of the United States meets the requirements of subparagraphs (A) 
and (C) of section 981(a)(1) and subparagraph (2) of this paragraph, 
such citizen and his nonresident alien spouse may make a joint election 
to have section 981(c)(2) and paragraph (b) of this section apply to 
their income which is treated as community income under the applicable 
community property laws of a foreign country or countries. However, if 
the conditions prescribed by section 981(d)(3) and subparagraph (3) of 
this paragraph are met, the nonresident alien spouse is not required to 
join in the election and such citizen may make a separate election to 
have section 981(c)(2) and paragraph (b) of this section apply to such 
income for such taxable years. An election under section 981(c)(1) and 
this section shall apply to every open taxable year of such citizen and 
his nonresident alien spouse beginning before January 1, 1967, for which 
all the requirements of subparagraphs (A) and (C) of section 981(a)(1) 
and subparagraph (2) of this paragraph are met. It is immaterial whether 
such open taxable year is a taxable year subject to the provisions of 
the 1954 Code, the 1939 Code, or any other internal revenue law in 
effect before the 1939 Code. An election under section 981(c)(1) and 
this section has no effect for any taxable year beginning after December 
31, 1966. For the definition of ``open taxable year'' see section 
981(e)(2) and paragraph (a) of Sec. 1.981-3. If the citizen and his 
nonresident alien spouse have different taxable years, see paragraph (c) 
of Sec. 1.981-3. If one of the spouses is deceased, see paragraph (d) 
of Sec. 1.981-3. An election under section 981(c)(1) and this section 
is binding and may not be revoked.
    (2) Requirements to be met. In order for the citizen of the United 
States to make an election under this section, whether required to be 
made jointly with his nonresident alien spouse or permitted to be made 
separately, it is required under section 981(c)(1) that, for each 
taxable year to which the election applies, the citizen making the 
election be (i) a citizen of the United States and (ii) married at the 
close of the taxable year to an individual who is (a) a nonresident 
alien during the entire taxable year and (b), in the case of any such 
taxable years subsequent to the first, the same nonresident alien 
individual to whom the citizen was married at the close of such first 
taxable year. The provisions of paragraph (a)(2) of Sec. 1.981-1 apply 
to determine whether a U.S. citizen making an election under section 
981(c)(1) and this section is married at the close of a taxable year to 
an individual who is a nonresident alien during the entire taxable year.
    (3) Cases where joint election is not required. A nonresident alien 
spouse is not required to join in an election under section 981(c)(1) 
and this section if the Director of International Operations determines 
in accordance with paragraph (c)(4) of this section--
    (i) That an election under section 981(c)(1) and this section would 
not affect the liability for Federal income tax of the nonresident alien 
spouse for any taxable year, whether beginning on, before, or after 
January 1, 1967, or
    (ii) That the effect of the election on the liability of the 
nonresident alien spouse for Federal income tax for any such taxable 
year cannot be ascertained and that to deny the election to the U.S. 
citizen spouse would be

[[Page 537]]

inequitable and cause undue hardship to the U.S. citizen.

If in accordance with this subparagraph the nonresident alien spouse is 
not required to join in the election by the U.S. citizen, the provisions 
of section 981(d)(2) and paragraph (e) of Sec. 1.981-3 shall not apply 
so as to extend the period for assessing deficiencies or filing a claim 
for credit or refund for any taxable year of the nonresident alien 
spouse.
    (4) Manner of electing. The election under section 981(c)(1) and 
this section shall be made in accordance with the applicable rules set 
forth in paragraph (c) of this section.
    (b) Treatment of community income--(1) In general. Community income, 
as defined in paragraph (b)(1) of Sec. 1.981-1, for any taxable year 
beginning before January 1, 1967, to which an election under section 
981(c)(1) and this section applies, and the deductions properly 
allocable to such income, shall be divided between the U.S. citizen and 
his nonresident alien spouse in accordance with the rules set forth in 
section 981(c)(2) and subparagraphs (2) and (3) of this paragraph. The 
income shall be divided in such manner even though the nonresident alien 
spouse is not required, in accordance with paragraph (a)(3) of this 
section, to join in the election by the U.S. citizen.
    (2) Earned income, business income, partnership income, and income 
from separate property. All community income for any taxable year to 
which this paragraph applies which is treated as the income of one of 
the spouses in accordance with section 981(b)(1), (2), or (3) and 
paragraph (b)(2), (3), (4), or (5) of Sec. 1.981-1 shall be treated as 
the income of that spouse for purposes of this paragraph.
    (3) Other community income. All community income for any taxable 
year to which this paragraph applies, other than income described in 
subparagraph (2) of this paragraph, shall be treated as the income of 
the spouse who, for such taxable year, has a greater amount of gross 
income than the other spouse, determined by adding to the amount of 
gross income which is treated as the gross income of that spouse in 
accordance with subparagraph (2) of this paragraph the amount of the 
gross income for the taxable year which is treated as the separate 
income of that spouse under the community property laws of the foreign 
country having jurisdiction to determine the legal ownership of the 
income. If either spouse dies during a taxable year, the taxable year of 
the surviving spouse shall be treated as ending on the date of such 
death for the purpose of determining which spouse has the greater amount 
of gross income for such taxable year. Moreover, if the U.S. citizen and 
his nonresident alien spouse do not have the same taxable year, as 
defined in section 441(b) and the regulations thereunder, the periods 
for which the amounts of gross income are to be compared under this 
subparagraph are (i) the taxable year of the citizen and (ii) that 
period falling within the consecutive taxable years of the nonresident 
alien spouse which coincides with the period covered by such taxable 
year of the citizen. See paragraph (c) of Sec. 1.981-3.
    (c) Time and manner of making election--(1) In general. A citizen of 
the United States and his nonresident alien spouse or, if subparagraph 
(4) of this paragraph applies, such citizen alone may make an election 
under section 981(c)(1) and this section at any time on or after 
November 13, 1966, for each and every taxable year beginning before 
January 1, 1967, which on the date of the election, as defined in 
paragraph (b) of Sec. 1.981-3, is open within the meaning of section 
981(e)(2) and paragraph (a) of Sec. 1.981-3. The election shall be made 
by filing a return, an amended return, or a claim for refund, whichever 
is proper, for each taxable year to which the election applies and 
attaching thereto a statement that the election is being made and that 
the requirements of paragraph (a)(2) of this section are met for each 
such taxable year. The statement must also show the information required 
by subparagraph (2) of this paragraph and must, where applicable, be 
signed by both persons making the election.
    (2) Information required. The statement described in subparagraph 
(1) of this paragraph must show--
    (i) The name, address, and account number, if any, of each spouse,

[[Page 538]]

    (ii) The name and address of the executor, administrator, or other 
person making the election for a deceased spouse,
    (iii) The taxable years to which the election applies,
    (iv) The office of the district director, or the service center, 
where the return or returns, if any, for such taxable year or years were 
filed,
    (v) The dates on which such return or returns, if any, were filed 
and on which the tax for such taxable year or years was paid, if the tax 
has been paid, and
    (vi) The name of the foreign country or countries having 
jurisdiction to determine the ownership of any income being treated in 
accordance with section 981(c)(2) and paragraph (b) of this section.
    (3) Place for filing. Any return, amended return, or claim for 
refund filed under subparagraph (1) of this paragraph in respect of any 
taxable year shall be filed with the Director of International 
Operations, Internal Revenue Service, Washington, DC 20225. (See Sec. 
1.6091-3.)
    (4) Determination that joint election is not required. A U.S. 
citizen spouse entitled to make an election under section 981(c)(1) and 
this section for open taxable years beginning before January 1, 1967, 
may apply to the Director of International Operations for a 
determination under section 981(d)(3) that the nonresident alien spouse 
is not required to join in the election by such citizen. This 
application shall be made by filing with the Director of International 
Operations, Internal Revenue Service, Washington, DC 20225, a statement 
setting forth the same information required by subparagraph (2) of this 
paragraph and such other information as is required by the Director of 
International Operations to justify a claim that the requirements of 
section 981(d)(3) and paragraph (a)(3) of this section are met. The 
Director of International Operations shall notify the U.S. citizen by 
letter of his determination with respect to the application. If the 
determination is that the nonresident alien spouse is not required to 
join in the election, a copy of the letter of determination shall be 
attached to each return, amended return, or claim for refund, to be 
filed pursuant to subparagraph (1) of this paragraph.

[T.D. 7330, 39 FR 38373, Oct. 31, 1974]