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Section 66.—Treatment of collection of information displays a valid Explanation and Summary of
Community Income control number assigned by the Office of Comments
Management and Budget.
26 CFR 1.66–1: Treatment of community income.
Estimated total annual reporting burden 1. General
for 2001 for Form 8857, “Request for In-
T.D. 9074 nocent Spouse Relief”: 21,123 hours.
One commentator suggested that the
proposed regulations under section 66
Estimated average annual burden hours
DEPARTMENT OF THE per response: 59 minutes.
(particularly §1.66–2) were not helpful,
given the community property laws of the
TREASURY Estimated number of responses for
commentator’s state. This commentator
Internal Revenue Service 2001 for Form 8857: 21,336.
also suggested that the proposed regula-
26 CFR part 1 and 602 Requests for relief under section 66(c)
tions appear to assume that the community
constitute less than 1% of the total requests
property laws of all community property
Treatment of Community Income filed using Form 8857.
states are the same. The intent of these
Comments on the collection of in-
for Certain Individuals Not Filing formation should be sent to the Office
regulations is not to provide guidance
Joint Returns of Management and Budget, Attn:
based on the community property laws
of any particular state. Instead, the regu-
Desk Officer for the Department of the
AGENCY: Internal Revenue Service lations provide guidance on the effect of
Treasury, Office of Information and Reg-
(IRS), Treasury. section 66 on taxpayers’ community in-
ulatory Affairs, Washington, DC 20503,
come as determined under state law. After
with copies to the Internal Revenue
ACTION: Final regulations. a determination that an item of income is
Service, Attn: IRS Reports Clearance
community income under state law, these
SUMMARY: This document contains fi- Officer, W:CAR:MP:T:T:SP, Washington,
regulations provide guidance on the treat-
nal regulations relating to the treatment of DC 20224.
ment of this income under section 66 for
community income under Internal Rev- Books or records relating to a collection
certain individuals not filing joint returns.
enue Code section 66 for certain married of information must be retained as long as
One commentator noted that there are
individuals in community property states their contents may become material in the
fundamental differences between married
who do not file joint federal income tax administration of any internal revenue law.
taxpayers who filed joint returns and re-
returns. The final regulations also reflect Generally, tax returns and return informa-
quest relief from joint and several liabil-
changes in the law made by the Internal tion are confidential, as required by section
ity under section 6015 and married taxpay-
Revenue Service Restructuring and Re- 6103 of the Internal Revenue Code (Code).
ers who filed separate returns and request
form Act of 1998. relief from the federal income tax liability
Background
resulting from the operation of community
EFFECTIVE DATE: These final regula- This document contains amendments to property law under section 66(c).
tions are effective July 10, 2003. 26 CFR part 1 under section 66 of the The final regulations do not address
Code, relating to the treatment of commu- differences between or make generaliza-
FOR FURTHER INFORMATION
nity income for certain individuals not fil- tions concerning married taxpayers who
CONTACT: Robin M. Tuczak,
ing joint returns. For rules regarding relief file joint returns and those who do not.
202–622–4940 (not a toll-free number).
from joint and several liability when a joint The final regulations focus on providing
SUPPLEMENTARY INFORMATION: return is filed, see section 6015 and the reg- guidance on the treatment of community
ulations thereunder. income for certain taxpayers under section
Paperwork Reduction Act A notice of proposed rulemaking 66.
(REG–115054–01, 2002–1 C.B. 530 [67 The preamble to the proposed regu-
The collection of information con- FR 2841]) was published in the Federal lations under section 66 references the
tained in the final regulations has been Register on January 22, 2002. No public spousal notification requirements set forth
reviewed and approved by the Office of hearing was requested or held. Written in regulations under section 6015 and
Management and Budget in accordance comments responding to the notice of discusses similar notification require-
with the Paperwork Reduction Act of 1995 proposed rulemaking were received. After ments under section 66. If the IRS grants
(44 U.S.C. 3507) under control number consideration of all the comments, the pro- relief under section 66, the liability of
1545–1770. Responses to this collection posed regulations are adopted as amended the requesting spouse will shift to the
of information are required in order for by this Treasury Decision. The comments nonrequesting spouse. Thus, notification
certain individuals to receive relief from and revisions are discussed below. and participation requirements similar to
the operation of community property law. those applicable in section 6015 cases are
An agency may not conduct or sponsor, also appropriate for section 66 cases. In
and a person is not required to respond addition, information provided by a non-
to, a collection of information unless the requesting spouse may help to determine
the appropriate amount of relief for the the regulations to married taxpayers was 3. §1.66–2
requesting spouse, if any. too restrictive. The commentator noted
Similarities between the guidance set that income earned during a marriage, but One commentator noted that it may be
forth in the regulations under section 6015 received after the dissolution of the mar- difficult to determine whether a transfer
and the regulations under section 66 are ital community, was community income of income is a transfer of earned income
due to the similarities in the elements re- under the laws of the commentator’s state. under §1.66–2(a)(5). A transfer of earned
quired, or factors considered, in determin- The commentator suggested that section income precludes the reporting of income
ing relief under these statutes. The anal- 66 should apply to this income, as it is in accordance with §1.66–2, even if a
ysis set forth in proposed §1.66–4(a)(2) community income under state law. The taxpayer meets the other requirements
and (3) regarding knowledge or reason to final regulations frame the issue in terms of §1.66–2. The commentator suggested
know and benefit is similar to that con- of application of section 66 to community that there should be a presumption under
tained in §1.6015–2(c) and (d). The final income, rather than in terms of marital §1.66–2 that any transfer of income or
regulations modify this analysis and adopt status. property is a transfer of earned income.
commentators’ suggestions to the extent The final regulations state that section The final regulations adopt this recom-
that the suggestions are consistent with the 66 applies only to community income, as mendation with respect to transfers of
statute, legislative history, and case law un- defined by state law. The final regulations, income. It is a logical presumption that
der section 66(c). These changes are more however, make a distinction between com- income is more likely to be earned than
fully discussed in the comments and expla- munity income and income from property unearned, and that a taxpayer who has
nation under §1.66–4 below. that was formerly community property but, unearned income is likely to have earned
in accordance with state law, is converted income as well.
2. §1.66–1 to a form of property that is not commu- Another commentator suggested that
nity property, such as separate property or the final regulations clarify the require-
One commentator stated that §1.66–1 ment of §1.66–2 that spouses live apart.
property held by joint tenancy or tenancy
of the proposed regulations failed to ex- The final regulations adopt this recommen-
in common.
pressly require each of the spouses to dation by cross-referencing the definition
Under the laws of certain community
report those items of separate income of members of the same household in
property states, property that was commu-
that are attributable to each spouse un- §1.6015–3(b).
nity property during the marriage ceases to
der applicable state community property The final regulations clarify that, when
be community property after the dissolu-
laws. Generally, community income is reporting income in accordance with
tion of the marital community. Conversely,
reportable half by each spouse pursuant to section 66(a), an individual must report
some state laws treat property that was not
Poe v. Seaborn, 282 U.S. 101 (1930), and all income in accordance with section
community property as community prop-
section 61. Whether income is separate 66(a). Section 66(a) does not apply on an
erty for the limited purpose of dividing as-
or community is determined under state item-by-item basis.
sets upon divorce. See Estate of Mitchell v.
law and the income is included in gross
Mitchell, 76 Cal. App. 4th 1378 (Cal. Ct.
income under section 61. The final reg- 4. §1.66–3
App. 1999). Income from such property is
ulations do not include guidance on how
not community income subject to the pro- One commentator recommended that
to report income that is not community
visions of section 66. The determination the final regulations emphasize that the
income under state law, as this would be
as to whether income from such property is IRS may disallow the federal income tax
outside the scope of section 66.
community income may be confusing due benefits of any community property law
The final regulations clarify in
to the fact that sometimes courts will re- under section 66(b) on an item-by-item
§1.66–1(a) that the general rule of com-
fer to the property, using “universally rec- basis. Because the proposed regulations
munity property applies to married indi-
ognized shorthand,” as community prop- already reference “item of community
viduals domiciled in community property
erty. See Bouterie v. Commissioner, 36 income” in every sentence of §1.66–3,
states. A taxpayer should report income
F.3d 1361 (5th Cir. 1994) (in which the however, the final regulations do not adopt
in accordance with the laws of the state
court found that the wife did not have com- this recommendation.
in which he or she is domiciled. United
munity income from community property One commentator suggested that the
States v. Mitchell, 403 U.S. 190, 197
and the IRS improperly relied on a state IRS should assert section 66(b) sparingly,
(1971); Commissioner v. Wilkerson, 368
court’s imprecise use of the term “commu- only if “the . . . spouse had no knowledge
F.2d 552, 553 (9th Cir. 1966). For ex-
nity property” in referring to property that whatever of the income . . . and did
ample, a taxpayer who is domiciled in
was formerly community property), rev’g not benefit from the income in a division
State A, a community property state,
T.C. Memo. 1993–510. of marital assets.” Section 66(b) allows
should report income in accordance with
Thus, in determining whether section the IRS to deny the federal income tax
the community property laws of State A,
66 applies to income, it is first necessary to benefits of community property law only
although she may be living in State B
determine whether the income is commu- when a taxpayer acted as if solely entitled
temporarily, due to a work detail, military
nity income under state law. The marital to the income and failed to notify the
assignment, etc.
status of the parties likely will be relevant taxpayer’s spouse of the income. The
One commentator noted that under
to this initial determination.
§1.66–1(b), the limitation of the scope of
final regulations do not impose additional a requesting spouse is required to prove, transferred no part of the income to the re-
requirements on the IRS. among other things, that “he or she did questing spouse.
Commentators also recommended that not know of, and had no reason to know A majority of cases decided under
the final regulations provide examples of of, such item of community income” to section 66(c) make the determination of
what constitutes treating income as solely obtain traditional relief. The final regula- whether it is equitable to grant relief based
one’s own and how specific a taxpayer tions include a discussion of knowledge on the “benefit” received by the requesting
must be when notifying his or her spouse and reason to know, as this is an element spouse, as opposed to the “significant
of the nature and amount of the income. required by section 66(c)(3). The facts benefit” standard applied by courts in
The final regulations adopt this recommen- and circumstances considered in making determining relief under former section
dation. the determination of knowledge or reason 6013(e) and section 6015(b). See Beck v.
to know are consistent with the knowledge Commissioner, T.C. Memo. 2001–198,
5. §1.66–4 and reason to know analysis set forth in acq. 2002–49 I.R.B.; Hardy v. Commis-
case law determining relief under section sioner, T.C. Memo. 1997–97. The court
The proposed regulations describe re- 66(c). in Beck and Hardy cited the legislative
lief granted under the first sentence of sec- Additionally, the final regulations in- history of section 66(c) when discussing
tion 66(c) as “specific relief.” The final clude new language regarding the knowl- benefit under section 66. The legisla-
regulations adopt the term traditional re- edge standard under section 66(c). To tive history provides that, in determining
lief to describe relief granted under this more closely track the language of sec- whether it is equitable to grant relief under
provision. The final regulations retain the tion 66(c), the phrase item of community section 66(c), the standard is “whether the
term “equitable relief” to describe the re- income replaces the term understatement [requesting] spouse benefitted from the
lief granted under the second sentence of when referring to the item about which the untaxed income.” H. Rep. No. 98–432, pt.
section 66(c). requesting spouse has knowledge or reason 2, at 1503 (1984). The final regulations
The proposed regulations require that a to know. Finally, the final regulations clar- adopt this standard.
spouse requesting relief under §1.66–4 file ify that knowledge of the source of com- One commentator suggested that the
a separate return for the taxable year relat- munity income or the income-producing time limitations set forth in §1.66–4 for
ing to the request. One commentator noted activity, without knowledge of the specific requesting relief under section 66(c) are
that section 66(c)(1) requires only that an amount of income, is sufficient knowledge not supported by the language of section
individual not file a joint return. The leg- to preclude relief under section 66(c). This 66(c). Although the statute itself does not
islative history of section 66(c) confirms is consistent with the knowledge and rea- set forth time limitations on the filing of a
that Congress did not intend to require an son to know analysis set forth in case law request for relief, the time limitations in the
individual to file a return to be eligible for under section 66(c). See, e.g., McGee v. proposed regulations are supported by the
relief under this provision. The House Re- Commissioner, 979 F.2d 66, 70 (5th Cir. legislative history of the traditional relief
port uses the phrase “at the time the re- 1992), aff’g T.C. Memo. 1991–510. provision of section 66(c). Specifically,
turn was filed (if a return is filed).” H.R. Two commentators questioned whether the House Report explaining traditional
Rep. No. 98–432, pt. 2, at 1503 (1984). the standard of significant benefit in excess relief under section 66(c) states that, in
In earlier cases regarding relief under sec- of normal support, which is used in deter- making the determination as to relief, the
tion 66(c), the Tax Court implies that a re- mining whether it is equitable to grant re- IRS should consider (among other things)
questing spouse must file a separate return. lief under section 6015, is the applicable “whether the defense was promptly raised
See, e.g., Roberts v. Commissioner, T.C. standard under section 66. One commen- so as to prevent the period of limitations
Memo. 1987–391, aff’d 860 F.2d 1235 tator noted that under community property from running on the other spouse.” H.R.
(5th Cir. 1988). More recent cases, how- laws, each spouse generally is entitled to Rep. No. 98–432, pt. 2, at 1501 (1984).
ever, specifically state that not filing any half of the income of the other spouse. Thus, the final regulations retain the time
return meets the requirement of not filing Under section 66, a requesting spouse es- limitations set forth in the proposed regu-
a joint return. See, e.g., Ollestad v. Com- sentially is seeking relief for half the in- lations. In contrast, §1.66–4(j)(2)(ii) sets
missioner, T.C. Memo. 1996–139; Costa come of both spouses, which may have forth timing requirements for requesting
v. Commissioner, T.C. Memo. 1990–572. been used to provide normal support to equitable relief that are broader than the
The final regulations adopt the recommen- both spouses. Contrast this situation to that requirements applicable to traditional re-
dation to limit the requirement to not filing under section 6015, which permits a re- lief because the legislative history of the
a joint return. questing spouse to seek relief from joint equitable relief provision does not contain
One commentator suggested that the and several liability for the tax on all of similar timing requirements. Therefore,
discussion of knowledge and reason to the income of the nonrequesting spouse. a requesting spouse who does not meet
know of an item of community income in This commentator suggested that the tax the time limitations to request traditional
§1.66–4 ignores the low probability that liability should be shifted to the nonre- relief may be eligible to request equitable
a requesting spouse would have access questing spouse only if the nonrequesting relief.
to accurate information or knowledge spouse has treated the income in a manner Another commentator noted that per-
regarding what the nonrequesting spouse inconsistent with the community property haps the timeliness of the requesting
reported or did not report for federal in- regime, for example, has not allowed use spouse’s request should be only one factor
come tax purposes. Under section 66(c), of the income for normal support or has in determining whether to grant traditional
relief under section 66(c), as opposed to not apply to the regulations, and because (4) A requesting spouse qualifies for
a threshold requirement. This comment the regulations do not impose a collection equitable relief from the federal income
was not adopted because a requesting of information on small entities, the Regu- tax liability resulting from the opera-
spouse who does not meet the timing latory Flexibility Act (5 U.S.C. chapter 6) tion of community property law under
requirements for traditional relief still does not apply. §1.66–4(b).
may receive equitable relief under section (b) Applicability. (1) The rules of this
66(c). Drafting Information section apply only to community income,
One commentator urged that no request as defined by state law. The rules of this
The principal author of the regulations
for relief under section 66 should be con- section do not apply to income that is not
is Robin M. Tuczak of the Office of As-
sidered premature. There must be some in- community income. Thus, the rules of this
sociate Chief Counsel (Procedure and
dication that the IRS may determine a defi- section do not apply to income from prop-
Administration), Administrative Provi-
ciency prior to the filing of a request for re- erty that was formerly community prop-
sions and Judicial Practice Division.
lief from a deficiency under section 66(c). erty, but in accordance with state law, has
Thus, the final regulations retain the timing ***** ceased to be community property, becom-
limitations set forth in the proposed regu- ing, e.g., separate property or property held
lations regarding premature requests. Adoption of Amendments to the by joint tenancy or tenancy in common.
The final regulations incorporate an Regulations (2) When taxpayers report income un-
item-by-item approach to relief from the der paragraph (a) of this section, all com-
Accordingly, 26 CFR parts 1 and 602
federal income tax liability resulting from munity income for the calendar year is
are amended as follows:
the operation of community property law treated in accordance with the rules pro-
under section 66(c). If a requesting spouse PART 1—INCOME TAXES vided by section 879(a). Unlike the other
receives relief under section 66(c), the pro- provisions under section 66, section 66(a)
posed regulations provide for treatment of Paragraph 1. The authority citation for does not permit inclusion on an item-by-
any community income of the spouses in part 1 is amended by adding an entry in item basis.
accordance with the rules provided by sec- numerical order to the table to read in part (c) Transferee liability. The provisions
tion 879(a), which is consistent with the as follows: of section 66 do not negate liability that
statutory rule under section 66(a). The fi- Authority: 26 U.S.C. 7805 * * * arises under the operation of other laws.
nal regulations provide that if a requesting Section 1.66–4 also issued under 26 Therefore, a spouse who is not subject to
spouse receives relief for an item, the rules U.S.C. 66(c). * * * federal income tax on community income
provided by section 879(a) will govern the Par. 2. Sections 1.66–1 through 1.66–5 may nevertheless remain liable for the un-
treatment of the item. The item-by-item are added to read as follows: paid tax (including additions to tax, penal-
approach adopted in the final regulations ties, and interest) to the extent provided by
is consistent with the statutory language §1.66–1 Treatment of community income. federal or state transferee liability or prop-
in section 66(c) that states “such item of erty laws (other than community property
(a) In general. Married individuals
community income shall be included in laws). For the rules regarding the liability
domiciled in a community property state
the gross income of the other spouse (and of transferees, see sections 6901 through
who do not elect to file a joint individual
not in the gross income of the individual).” 6904 and the regulations thereunder.
federal income tax return under section
(Emphasis added.)
6013 generally must report half of the total §1.66–2 Treatment of community income
Traditionally, section 66(c) provided
community income earned by the spouses where spouses live apart.
relief from liability resulting only from
during the taxable year except at times
items of income, unlike former section
when one of the following exceptions (a) Community income of spouses
6013(e) and section 6015. The final reg-
applies: domiciled in a community property state
ulations expand equitable relief under
(1) The spouses live apart and meet the will be treated in accordance with the rules
§1.66–4(b) to include relief for underpay-
qualifications of §1.66–2. provided by section 879(a) if all of the
ments of tax or any deficiency, including
(2) The Secretary denies a spouse the following requirements are satisfied—
those arising from disallowed deductions
federal income tax benefits resulting from (1) The spouses are married to each
or credits. This is consistent with the
community property law under §1.66–3, other at any time during the calendar year;
equitable relief provision in section 66(c).
because that spouse acted as if solely en- (2) The spouses live apart at all times
Special Analyses titled to the income and failed to notify his during the calendar year;
or her spouse of the nature and amount of (3) The spouses do not file a joint return
It has been determined that these fi- the income prior to the due date for the fil- with each other for a taxable year begin-
nal regulations are not a significant regu- ing of his or her spouse’s return. ning or ending in the calendar year;
latory action as defined in Executive Order (3) A requesting spouse qualifies for (4) One or both spouses have earned
12866. Therefore, a regulatory assessment traditional relief from the federal income income that is community income for the
is not required. It has also been determined tax liability resulting from the opera- calendar year; and
that section 553(b) of the Administrative tion of community property law under (5) No portion of such earned income is
Procedure Act (5 U.S.C. chapter 5) does §1.66–4(a). transferred (directly or indirectly) between
such spouses before the close of the calen- that he received from W was not from W’s earned in- income, denying W the federal income tax benefit re-
dar year. come, but from the capital gains income W received sulting from community property law as to this item
(b) Living apart. For purposes of this in 2002. The facts and circumstances surrounding the of income.
periodic payments to H from W do not indicate that (ii) H and W are married and are domiciled in
section, living apart requires that spouses W made the payments out of her capital gains. H and State B, a community property state. For taxable
maintain separate residences. Spouses W may not report their income in accordance with year 2000, H receives $45,000 in wage income that
who maintain separate residences due to this section, as the $6,000 W transferred to H is pre- H places in a separate account. H and W maintain
temporary absences are not considered sumed to be from W’s earned income, and H has not separate residences. H’s wage income is community
to be living apart. Spouses who are not presented any facts to rebut the presumption. income under the laws of State B. That same year, W
loses her job, and H pays W’s mortgage and house-
members of the same household under
§1.66–3 Denial of the federal income tax hold expenses for several months while W seeks em-
§1.6015–3(b) are considered to be living ployment. Neither H nor W files a return for 2000,
benefits resulting from the operation of
apart for purposes of this section. the taxable year for which the IRS subsequently au-
community property law where spouse not
(c) Transferred income. For purposes dits them. The IRS may not raise section 66(b) and
notified. deny H the federal income tax benefits resulting from
of this section, transferred income does
the operation of community property law as to H’s
not include a de minimis amount of earned (a) In general. The Secretary may deny wage income of $45,000, as H has not treated this in-
income that is transferred between the the federal income tax benefits of commu- come as if H were solely entitled to it.
spouses. In addition, any amount of nity property law to any spouse with re- Example 2. Notification of nature and amount of
earned income transferred for the benefit the income. H and W are married and domiciled in
spect to any item of community income
of the spouses’ child will not be treated State C, a community property state. H and W do
if that spouse acted as if solely entitled to not file a joint return for taxable year 2001. H’s and
as an indirect transfer to one spouse. Ad- the income and failed to notify his or her W’s earned income for 2001 is community income
ditionally, income transferred between spouse of the nature and amount of the in- under the laws of State C. H receives $50,000 in wage
spouses is presumed to be a transfer of come before the due date (including exten- income in 2001. In January 2002, H receives a Form
earned income. This presumption is re- W–2 that erroneously states that H earned $45,000 in
sions) for the filing of the return of his or
buttable. taxable year 2001. H provides W a copy of H’s Form
her spouse for the taxable year in which W–2 in February 2002. W files for an extension prior
(d) Examples. The following examples the item of income was derived. Whether a to April 15, 2002. H receives a corrected Form W–2
illustrate the rules of this section: spouse has acted as if solely entitled to the reflecting wages of $50,000 in May 2002. H provides
Example 1. Living apart. H and W are married, a copy of the corrected Form W–2 to W in May 2002.
item of income is a facts and circumstances
domiciled in State A, a community property state, and W files a separate return in June 2002, but reports
have lived apart the entire year of 2002. W, who is in
determination. This determination focuses
one half of $45,000 ($22,500) of wage income that
the Army, was stationed in Korea for the entire calen- on whether the spouse used, or made avail- H earned. H files a separate return reporting half of
dar year. During their separation, W intended to re- able, the item of income for the benefit of $50,000 ($25,000) in wage income. The IRS audits
turn home to H, and H intended to live with W upon the marital community. both H and W. Even if H had acted as if solely entitled
W’s return. H and W do not file a joint return for to the wage income, the IRS may not raise section
(b) Effect. The item of community in-
taxable year 2002. H and W may not report their in- 66(b) as to this income because H notified W of the
come under this section because a temporary absence
come will be included, in its entirety, in
nature and amount of the income prior to the due date
due to military service is not living apart as contem- the gross income of the spouse to whom of W’s return (including extensions).
plated under this section. the Secretary denied the federal income tax
Example 2. Transfer of earned income—de min- benefits resulting from community prop- §1.66–4 Request for relief from the federal
imis exception. H and W are married, domiciled in
erty law. The tax liability arising from the income tax liability resulting from the
State B, a community property state, and have lived
apart the entire year of 2002. H and W are estranged
inclusion of the item of community income operation of community property law.
and intend to live apart indefinitely. H and W do not must be assessed in accordance with sec-
file a joint return for taxable year 2002. H occasion- tion 6212 against this spouse. (a) Traditional relief—(1) In general. A
ally visits W and their two children, who live with W. (c) Examples. The following examples requesting spouse will receive relief from
When H visits, he often buys gifts for the children, the federal income tax liability resulting
illustrate the rules of this section:
takes the children out to dinner, and occasionally buys from the operation of community property
Example 1. Acting as if solely entitled to income.
groceries or gives W money to buy the children new
(i) H and W are married and are domiciled in State A, law for an item of community income if–-
clothes for school. Both W and H have earned income
a community property state. W’s Form W–2 for tax- (i) The requesting spouse did not file a
in the year 2002 that is community income under the
able year 2000 showed wage income of $35,000. W
laws of State B. H and W may report their income on
also received a Form 1099–INT, “Interest Income,”
joint federal income tax return for the tax-
separate returns under this section. able year for which he or she seeks relief;
showing $1,000 W received in taxable year 2000.
Example 3. Transfer of earned income—source of (ii) The requesting spouse did not in-
W’s wage income was directly deposited into H and
transfer. H and W are married, domiciled in State C,
W’s joint account, from which H and W paid bills clude in gross income for the taxable year
a community property state, and have lived apart the
and household expenses. W did not inform H of her an item of community income properly
entire year of 2002. H and W are estranged and intend
interest income or the Form 1099–INT, but W gave
to live apart indefinitely. H and W do not file a joint
H a copy of the W–2 when she received it in January
includible therein, which, under the rules
return for taxable year 2002. W provides H $1,000 a contained in section 879(a), would be
2001. W did not use her interest income for bills or
month from March 2002 through August 2002 while treated as the income of the nonrequesting
household expenses. Instead W gave her interest in-
H is working part-time and seeking full-time employ-
come to her brother, who was unemployed. Neither spouse;
ment. W is not legally obligated to make the $1,000
the separate return filed by H nor the separate return (iii) The requesting spouse establishes
payments. W earns $75,000 in 2002 in wage income.
filed by W included the interest income. In 2002, the
W also receives $10,000 in capital gains income in
IRS audits both H and W. The Internal Revenue Ser-
that he or she did not know of, and had no
December 2002. H wants to report his income in ac- reason to know of, the item of community
vice (IRS) may raise section 66(b) as to W’s interest
cordance with this section, alleging that the $6,000 income; and
(iv) Taking into account all of the facts attributable to the nonrequesting spouse, wage income as shown on her W–2, in the amount of
and circumstances, it is inequitable to in- the requesting spouse will have benefitted $23,000, and half of H’s wage income as shown on
clude the item of community income in from those items of community income. his Form W–2, in the amount of $28,000. Neither H
nor W reports W’s income from her sole proprietor-
the requesting spouse’s individual gross Other factors may include, if the situation ship of $34,000 or W’s investment income of $5,000
income. warrants, desertion, divorce or separation. for taxable year 2002. The Internal Revenue Service
(2) Knowledge or reason to know. (i) A Factors relevant to whether it would be (IRS) proposes deficiencies with respect to H’s and
requesting spouse had knowledge or rea- inequitable to hold a requesting spouse W’s taxable year 2002 returns due to the omission of
son to know of an item of community in- liable, more specifically described under W’s income from her sole proprietorship and invest-
ments. H timely requests relief under section 66(c).
come if he or she either actually knew of the applicable administrative procedure Because the IRS determines that H satisfies the four
the item of community income, or if a issued under section 66(c) (Revenue Pro- requirements of the traditional relief provision of sec-
reasonable person in similar circumstances cedure 2000–15, 2000–1 C.B. 447) (See tion 66(c) with respect to W’s omitted investment in-
would have known of the item of com- §601.601(d)(2) of this chapter), or other come, the IRS grants H’s request for relief as to the
munity income. All of the facts and cir- applicable guidance published by the Sec- omitted investment income. The IRS determines that
H does not satisfy the four requirements of the tradi-
cumstances are considered in determining retary), are to be considered in making a tional relief provision of section 66(c) as to W’s sole
whether a requesting spouse had reason to determination under this paragraph. proprietorship income. The IRS further determines
know of an item of community income. (b) Equitable relief. Equitable relief that, under the equitable relief provision of section
The relevant facts and circumstances in- may be available when the four require- 66(c), it is not inequitable to hold H liable for the
clude, but are not limited to, the nature of ments of paragraph (a)(1) of this section sole proprietorship income. Relief is applicable on
an item-by-item basis. Thus, H is liable for the tax
the item of community income, the amount are not satisfied, but it would be in- on half of his wage income in the amount of $28,000,
of the item of community income relative equitable to hold the requesting spouse half of W’s wage income in the amount of $23,000,
to other income items, the couple’s finan- liable for the unpaid tax or deficiency. half of W’s sole proprietorship income in the amount
cial situation, the requesting spouse’s ed- Factors relevant to whether it would be of $17,000, but none of W’s investment income, for
ucational background and business experi- inequitable to hold a requesting spouse which H obtained relief under section 66(c). W is li-
able for the tax on half of H’s wage income in the
ence, and whether the item of community liable, more specifically described under amount of $28,000, half of W’s wage income in the
income was reflected on prior years’ re- the applicable administrative procedure amount of $23,000, half of W’s sole proprietorship
turns (e.g., investment income omitted that issued under section 66(c) (Revenue Pro- income in the amount of $17,000, and all of W’s in-
was regularly reported on prior years’ re- cedure 2000–15, 2000–1 C.B. 447), or vestment income in the amount of $5,000, because H
turns). other applicable guidance published by obtained relief under section 66(c).
Example 2. Benefit. H and W are married, liv-
(ii) If the requesting spouse is aware of the Secretary), are to be considered in ing together, and domiciled in State B (a community
the source of community income or the in- making a determination under this para- property state). Neither H nor W files a return for tax-
come-producing activity, but is unaware of graph. able year 2000. H earns $60,000 in 2000, which he
the specific amount of the nonrequesting (c) Applicability. Traditional relief un- deposits in a joint account. H and W pay the mortgage
spouse’s community income, the request- der paragraph (a) of this section applies payment, household bills, and other family expenses
out of the joint account. W earns $20,000 in 2000. W
ing spouse is considered to have knowl- only to deficiencies arising out of items uses a portion of the $20,000 to make monthly loan
edge or reason to know of the item of com- of omitted income. Equitable relief under payments on the family cars, but loses the remain-
munity income. The requesting spouse’s paragraph (b) of this section applies to any der at the local racetrack. In 2002, the IRS audits H
lack of knowledge of the specific amount deficiency or any unpaid tax (or any por- and W. H requests relief under section 66(c), stating
of community income does not provide a tion of either). Equitable relief is available that he did not know or have reason to know of W’s
additional income, as H travels extensively while W
basis for relief under this section. only for the portion of liabilities that were handles the family finances. Regardless of whether
(3) Inequitable. All of the facts and unpaid as of July 22, 1998, and for liabili- H had knowledge or reason to know of the source of
circumstances are considered in deter- ties that arise after July 22, 1998. W’s income, H is not eligible for traditional relief un-
mining whether it is inequitable to hold a (d) Effect of relief. When the requesting der section 66(c) because H benefitted from W’s in-
requesting spouse liable for a deficiency spouse qualifies for relief under paragraph come. H’s benefit, the portion of W’s income used to
make monthly payments on the car loans, was more
attributable to an item of community in- (a) or (b) of this section, the IRS must than a de minimis amount. While this benefit was not
come. One relevant factor for this purpose assess any deficiency of the nonrequesting in excess of normal support, it is enough to preclude
is whether the requesting spouse benefit- spouse arising from the granting of relief to relief under the traditional relief provision of section
ted, directly or indirectly, from the omitted the requesting spouse in accordance with 66(c). H may still qualify for equitable relief under
item of community income. A benefit section 6212. section 66(c), depending on all of the facts and cir-
cumstances.
includes normal support, but does not (e) Examples. The following examples
(f) Fraudulent scheme. If the Secre-
include de minimis amounts. Evidence of illustrate the rules of this section:
Example 1. Item-by-item approach. H and W
tary establishes that a spouse transferred
direct or indirect benefit may consist of
are married, living together, and domiciled in State assets to his or her spouse as part of a
transfers of property or rights to property,
A (a community property state). H and W file sepa- fraudulent scheme, relief is not available
including transfers received several years rate returns for taxable year 2002 on April 15, 2003. under this section. For purposes of this
after the filing of the return. Thus, for H earns $56,000 in wages, and W earns $46,000 in section, a fraudulent scheme includes a
example, if a requesting spouse receives wages, in 2002. H reports half of his wage income as
shown on his Form W–2, in the amount of $28,000,
scheme to defraud the Secretary or another
from the nonrequesting spouse property
and half of W’s wage income as shown on her Form third party, such as a creditor, ex-spouse, or
(including life insurance proceeds) that is
W–2, in the amount of $23,000. W reports half of her business partner.
traceable to items of community income
(g) Definitions—(1) Requesting spouse. Secretary in identifying and locating the These notices or letters include notices
A requesting spouse is an individual who nonrequesting spouse. of computational adjustment to a partner
does not file a joint federal income tax re- (2) Time period for filing a request for or partner’s spouse (Notice of Income
turn with the nonrequesting spouse for the relief—(i) Traditional relief. The earli- Tax Examination Changes) that reflect a
taxable year in question, and who requests est time for submitting a request for relief computation of the liability attributable
relief from the federal income tax liability from the federal income tax liability re- to partnership items of the partner or the
resulting from the operation of community sulting from the operation of community partner’s spouse.
property law under this section for the por- property law under paragraph (a) of this (k) Nonrequesting spouse’s notice and
tion of the liability arising from his or her section, for an amount underreported on, opportunity to participate in administra-
share of community income for such tax- or omitted from, the requesting spouse’s tive proceedings—(1) In general. When
able year. separate return, is the date the requesting the Secretary receives a request for relief
(2) Nonrequesting spouse. A nonre- spouse receives notification of an audit or from the federal income tax liability result-
questing spouse is the individual to whom a letter or notice from the IRS stating that ing from the operation of community prop-
the requesting spouse was married and there may be an outstanding liability with erty law under this section, the Secretary
whose income or deduction gave rise to regard to that year (as described in para- must send a notice to the nonrequesting
the tax liability from which the requesting graph (j)(2)(iii) of this section). The latest spouse’s last known address that informs
spouse seeks relief in whole or in part. time for requesting relief under paragraph the nonrequesting spouse of the request-
(h) Effect of prior closing agreement or (a) of this section is 6 months before the ing spouse’s request for relief. The no-
offer in compromise. A requesting spouse expiration of the period of limitations on tice must provide the nonrequesting spouse
is not entitled to relief from the federal in- assessment, including extensions, against with an opportunity to submit any infor-
come tax liability resulting from the op- the nonrequesting spouse for the taxable mation for consideration in determining
eration of community property law under year that is the subject of the request for whether to grant the requesting spouse re-
section 66 for any taxable year for which relief, unless the examination of the re- lief from the federal income tax liability
the requesting spouse has entered into a questing spouse’s return commences dur- resulting from the operation of commu-
closing agreement (other than an agree- ing that 6-month period. If the examina- nity property law. The Secretary will share
ment pursuant to section 6224(c) relating tion of the requesting spouse’s return com- with each spouse the information submit-
to partnership items) with the Secretary mences during that 6-month period, the lat- ted by the other spouse, unless the Secre-
that disposes of the same liability that is est time for requesting relief under para- tary determines that the sharing of this in-
the subject of the request for relief. In ad- graph (a) of this section is 30 days after the formation will impair tax administration.
dition, a requesting spouse is not entitled commencement of the examination. (2) Information submitted. The Secre-
to relief from the federal income tax lia- (ii) Equitable relief. The earliest time tary will consider all of the information (as
bility resulting from the operation of com- for submitting a request for relief from the relevant to the particular relief provision)
munity property law under section 66 for federal income tax liability resulting from that the nonrequesting spouse submits in
any taxable year for which the requesting the operation of community property law determining whether to grant relief from
spouse has entered into an offer in compro- under paragraph (b) of this section is the the federal income tax liability resulting
mise with the Secretary. For rules relating date the requesting spouse receives noti- from the operation of community property
to the effect of closing agreements and of- fication of an audit or a letter or notice law under this section.
fers in compromise, see sections 7121 and from the IRS stating that there may be
7122, and the regulations thereunder. an outstanding liability with regard to that §1.66–5 Effective date.
(i) [Reserved] year (as described in paragraph (j)(2)(iii)
(j) Time and manner for requesting re- of this section). A request for equitable Sections 1.66–1 through 1.66–4 are ap-
lief—(1) Requesting relief. To request re- relief from the federal income tax liabil- plicable on July 10, 2003. In addition,
lief from the federal income tax liability re- ity resulting from the operation of com- §1.66–4 applies to any request for relief
sulting from the operation of community munity property law under paragraph (b) filed prior to July 10, 2003, for which the
property law under this section, a request- of this section for a liability that is prop- Internal Revenue Service has not issued a
ing spouse must file, within the time pe- erly reported but unpaid is properly sub- preliminary determination as of July 10,
riod prescribed in paragraph (j)(2) of this mitted with the requesting spouse’s indi- 2003.
section, Form 8857, “Request for Innocent vidual federal income tax return, or after
Spouse Relief” (or other specified form), or the requesting spouse’s individual federal PART 602—OMB CONTROL
other written request, signed under penal- income tax return is filed. NUMBERS UNDER THE PAPERWORK
ties of perjury, stating why relief is appro- (iii) Premature requests for relief. REDUCTION ACT
priate. The requesting spouse must include The Secretary will not consider a prema-
the nonrequesting spouse’s name and tax- ture request for relief under this section. Par. 9. The authority citation for part
payer identification number in the written The notices or letters referenced in this 602 continues to read as follows:
request. The requesting spouse must also paragraph (j)(2) do not include notices Authority: 26 U.S.C. 7805.
comply with the Secretary’s reasonable re- issued pursuant to section 6223 relat- Par. 10. The following entry is added
quests for information that will assist the ing to TEFRA partnership proceedings. in numerical order to the table:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where Current OMB
identified and described control No.
*****
1.66–4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1770
*****
David A. Mader,
Commissioner for
Services and Enforcement.
Approved July 1, 2003.
Gregory F. Jenner,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on July 9, 2003,
8:45 a.m., and published in the issue of the Federal Register
for July 10, 2003, 68 F.R. 41067)
