[Federal Register Volume 66, Number 11 (Wednesday, January 17, 2001)]
[Proposed Rules]
[Pages 3888-3903]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-8]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-106446-98]
RIN 1545-AW64


Relief From Joint and Several Liability

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to relief 
from joint and several liability under section 6015 of the Internal 
Revenue Code. The regulations reflect changes in the law made by the 
IRS Restructuring and Reform Act of 1998. The regulations provide 
guidance to married individuals filing joint returns who may seek 
relief from joint and several liability. This document also provides 
notice of a public hearing on these proposed regulations.

DATES: Written or electronically generated comments and requests to 
speak (with outlines of oral comments) at the public hearing scheduled 
for May 30, 2001, must be received by April 27, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-106446-98), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG-106446-98), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the Internet by selecting the ``Tax Regs'' option on 
the IRS Home Page, or by submitting comments directly to the IRS 
Internet site at http://www.irs.gov/tax_regs/regslist.html.

[[Page 3889]]


FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Bridget E. Finkenaur, 202-622-4940; concerning submissions of comments, 
the hearing and/or to be placed on the building access list to attend 
the hearing, Guy Traynor, 202-622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507). Comments on the collection of information should be sent 
to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S:O, 
Washington, DC 20224. Comments on the collection of information should 
be received by March 19, 2001. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in this proposed regulation is in 
Sec. 1.6015-5. Individuals may request relief from joint and several 
liability by timely filing Form 8857, ``Request for Innocent Spouse 
Relief (And Separation of Liability and Equitable Relief),'' or a 
written statement that contains the information required on Form 8857, 
that is signed under penalties of perjury. This collection of 
information is required in order for an individual to request relief 
from joint and several liability. This information will be used to 
carry out the internal revenue laws. The likely respondents are 
individuals.
    The reporting burden contained in Sec. 1.6015-5 is reflected in the 
burden of Form 8857. The estimated burden is: learning about the law or 
the form, 17 min.; preparing the form, 17 min.; and copying, 
assembling, and sending the form to the IRS, 20 min. The reporting 
burden contained in Sec. 1.6015-5 for the statement signed under 
penalties of perjury is estimated as: learning about the law, 20 min.; 
preparing the statement signed under penalties of perjury, 30 min.; and 
copying, assembling, and sending the statement to the IRS, 20 min.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    Section 6013(d)(3) provides that spouses who file a joint Federal 
income tax return are jointly and severally liable for liabilities with 
respect to tax arising from that return. The term tax includes 
additions to tax, penalties, and interest. See sections 6665(a)(2) and 
6601(e)(1). Joint and several liability allows the IRS to collect the 
entire liability from either spouse signing the joint return, without 
regard to whom the items of income, deduction, credit, or basis that 
gave rise to the liability are attributable. Before the enactment of 
the Internal Revenue Service Restructuring and Reform Act of 1998, 
Public Law 105-206 (112 Stat. 685) (1998) (RRA), section 6013(e) 
provided the only relief from joint and several liability, and it only 
applied in very limited circumstances.
    Section 3201 of the RRA repealed section 6013(e) and replaced it 
with section 6015. Section 6015 applies to liabilities that arise after 
July 22, 1998, and liabilities that arose prior to July 22, 1998, which 
remained unpaid as of that date. The provisions of section 6015 expand 
the relief available to spouses or former spouses who wish to be 
relieved from all or a portion of the joint and several liability 
arising from a joint individual Federal income tax return. Section 6015 
makes the requirements for relief from joint and several liability, 
formerly in section 6013(e), less restrictive (section 6015(b)), and 
adds two other relief provisions. One provision, section 6015(c), 
permits the allocation of a deficiency between certain estranged 
spouses or former spouses in proportion to their respective erroneous 
items or in accordance with other allocation rules. The other 
provision, section 6015(f), gives the Secretary equitable discretion to 
grant relief from joint and several liability. The three relief 
provisions have different eligibility requirements and provide 
different types of relief.
    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) that are necessary to carry out the 
provisions of section 6015. The proposed regulations provide detailed 
guidance on the three types of relief from joint and several liability 
under section 6015.

Explanation of Provisions

In General

    To qualify for relief from joint and several liability, a 
requesting spouse (as defined in the regulations) must elect the 
application of section 6015(b) or 6015(c), or request equitable relief 
under section 6015(f), within 2 years of the first collection activity 
after July 22, 1998, with respect to the requesting spouse. Relief 
under section 6015 is only available for income taxes required under 
Subtitle A (including self-employment taxes). Relief is not available 
for other taxes reported on a taxpayer's income tax return (e.g., 
domestic services employment taxes under section 3510).
    The proposed regulations define several terms, some of which are 
unique to specific provisions, and others of which are generally 
applicable to section 6015. One generally applicable term is an item. 
An item is generally defined as that which is required to be separately 
reported on an individual income tax return. However, amounts received 
from investments that are required to be separately reported on an 
individual income tax return and that are from the same source are 
aggregated and treated as one item. For example, assume an individual 
receives $700 in dividends and $1,000 in interest from X Co. Although 
dividends and interest are required to be separately reported on the 
individual's income tax return, they are considered one item for 
purposes of section 6015 because the dividends and interest are both 
from X Co. Items include, but are not limited to, gross income, 
deductions, credits, and basis. An erroneous item is defined as any 
item resulting in an understatement or deficiency in tax to the extent 
such item is omitted from, or improperly reported (including improperly 
characterized) on, an individual income tax return.

[[Page 3890]]

Innocent Spouse Relief Under Section 6015(b)

    In enacting section 6015, Congress focused, in part, on the 
limitations of section 6013(e). H.R. Conf. Rep. No. 599, 105th Cong., 
2d Sess. 249 (1998). Thus, certain limitations under section 6013(e) 
have been eliminated in section 6015. For example, section 6013(e) 
required that there be a substantial understatement attributable to a 
grossly erroneous item, whereas section 6015(b) only requires that 
there be an understatement of an erroneous item. Another difference is 
that, unlike section 6013(e), section 6015(b) expressly provides for 
partial relief if a requesting spouse did not know, and had no reason 
to know, of only a portion of the understatement. One procedural 
difference is that a requesting spouse must now elect the application 
of section 6015(b).
    Otherwise, section 6015(b) provides the same type of relief as was 
available under section 6013(e). In addition, as with section 6013(e), 
if a requesting spouse qualifies for relief under section 6015(b), 
refunds are available for amounts that the requesting spouse paid 
toward the liability for which relief was granted. Much of the language 
in section 6015(b) is identical to that of section 6013(e). 
Accordingly, the case law interpreting this language under section 
6013(e) will be applied in interpreting the same language under section 
6015(b).
    The proposed regulations define understatement by reference to 
section 6662(d)(2)(A). Consistent with the interpretation of section 
6013(e), the proposed regulations also clarify that ``knowledge or 
reason to know'' of an understatement exists only when either the 
requesting spouse actually knew of the erroneous item giving rise to 
the understatement, or a reasonable person in similar circumstances 
would have known of the item.

Allocation of Deficiency Under Section 6015(c)

    Section 6015(c) is one of the new relief provisions added by 
section 3201 of the RRA. Section 6015(c) basically provides relief for 
an estranged or former spouse by allowing the requesting spouse to 
elect to limit the requesting spouse's liability for a deficiency to 
the portion of the deficiency allocated to the requesting spouse. As 
with section 6015(b), the relief under section 6015(c) must be elected. 
Unlike section 6015(b), refunds are not available under section 
6015(c).
    Of the three relief provisions in section 6015, section 6015(c) 
comes closest to being a mechanical test. Unlike the other two relief 
provisions, section 6015(c) does not require a determination that it 
would be inequitable to hold the requesting spouse liable in order for 
the requesting spouse to obtain relief. Several objective tests apply 
to determine whether a requesting spouse qualifies for relief. Among 
the requirements for relief under section 6015(c) is the requirement 
that the requesting spouse be divorced, widowed, or legally separated, 
or not have 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. The proposed regulations provide rules 
for determining whether spouses are members of the same household in 
particular situations.
    Relief under section 6015(c) is not available for the portion of a 
deficiency attributable to an erroneous item of the nonrequesting 
spouse if the Secretary demonstrates that the requesting spouse had 
actual knowledge of that item at the time the requesting spouse signed 
the joint return. If the requesting spouse had actual knowledge of only 
a portion of the erroneous item, partial relief may be available for 
the amount of the deficiency attributable to the portion of the item of 
which the requesting spouse did not have actual knowledge. Reason to 
know of an erroneous item or a portion thereof is not sufficient to 
disqualify a requesting spouse from relief under section 6015(c). 
Hence, it may be easier to qualify for relief under this provision than 
under section 6015(b).
    Knowledge of an item means knowledge of the receipt or expenditure. 
It does not mean knowledge of the proper tax treatment of the item or 
how (or whether) it was actually reported on the return. This knowledge 
standard is consistent with the knowledge standard adopted by the 
United States Tax Court and other courts. See Cheshire v. Commissioner, 
115 T.C. No. 15 (August 30, 2000) (knowledge requirement under section 
6015(c) does not require requesting spouse to possess knowledge of the 
tax consequences arising from the erroneous item or that the item 
reported on the return is incorrect; rather the statute requires only a 
showing that the requesting spouse actually knew of the erroneous 
item); Wiksell v. Commissioner, 215 F.3d 1335 (9th Cir. 2000) 
(knowledge inquiry in section 6015(c) focuses on whether the taxpayer 
had knowledge of the erroneous item, not the tax consequences of that 
item). Also, under the proposed regulations, a requesting spouse could 
have actual knowledge of an erroneous item without necessarily knowing 
its source. Thus, if W knew that H received $1,000 of interest income, 
W would have actual knowledge of that item even if W thought that the 
interest was tax-exempt, or even if W did not know from whom the 
interest was received. Similarly, W would have actual knowledge of the 
item even if W had thought (incorrectly) that H had included the 
interest income on the return. A requesting spouse's failure to review 
a completed joint return will not negate a demonstration by the 
Secretary that the requesting spouse had actual knowledge of an item.
    To demonstrate that a requesting spouse had actual knowledge of an 
erroneous item, the Secretary may rely upon all of the facts and 
circumstances. One relevant factor is whether the requesting spouse 
made an effort to be shielded from liability by deliberately avoiding 
learning about an item. Another relevant factor is whether the 
requesting spouse had an ownership interest in the property that gave 
rise to the item. The proposed regulations provide that joint ownership 
is a factor supporting a finding that the requesting spouse had actual 
knowledge of an erroneous item.
    The proposed regulations also provide that the portion of the 
deficiency for which the requesting spouse remains liable is increased 
(up to the entire amount of the deficiency) by the value of any 
disqualified assets transferred to the requesting spouse by the 
nonrequesting spouse. Disqualified assets are defined as those assets 
transferred for the principal purpose of avoidance of tax or payment of 
tax. Any assets transferred during the period beginning 12 months 
before the mailing date of the first letter of proposed deficiency and 
continuing to the present are presumed to be disqualified assets. 
However, the requesting spouse can rebut the presumption by showing 
that the principal purpose of the transfer was not the avoidance of tax 
or payment of tax. In addition, the presumption does not apply to 
transfers of assets pursuant to a divorce or separate maintenance or 
child support agreement. The IRS and Treasury Department are 
particularly interested in receiving comments on whether there should 
be a de minimis exception to the presumption, and if so, the 
appropriate amount for such an exception.
    If a requesting spouse qualifies to elect the application of 
section 6015(c), section 6015(d) generally provides that erroneous 
items are allocated between the spouses as if they had filed separate 
returns. In addition, section 6015(g) directs the Secretary to 
establish

[[Page 3891]]

alternative methods of allocating erroneous items, other than the 
method in section 6015(d). Under the proposed regulations, erroneous 
income items are generally allocated to the spouse who earned the 
income or who owned the investment or business producing the income. If 
both spouses had an ownership interest in an investment or business, an 
erroneous income item from that investment or business is allocated 
between them in proportion to their respective ownership interests. 
Erroneous business or investment deductions are generally allocated to 
the spouse who owned the business or investment. If both spouses had an 
ownership in the business or investment, an erroneous deduction related 
to that business or investment is allocated between them in proportion 
to their respective ownership interests. Personal deductions are 
generally allocated 50% to each spouse, unless the evidence shows that 
a different allocation is appropriate.
    Section 6015(d) also provides rules for allocating a deficiency. 
Under the proposed regulations, a portion of the deficiency is 
allocated under the ``proportionate allocation method,'' that is, in 
proportion to each spouse's share of erroneous items. The proposed 
regulations provide additional rules regarding the allocation of other 
portions of the deficiency. First, any portion of the deficiency 
attributable to certain disallowed credits and taxes (other than income 
tax and alternative minimum tax) is allocated entirely to one spouse or 
the other. Second, any portion of the deficiency attributable to the 
liability of the child of the requesting or nonrequesting spouse is 
allocated under special rules. Third, any portion of the deficiency 
attributable to the alternative minimum tax under section 55 is 
allocated between the spouses in proportion to their individual shares 
of the total alternative minimum taxable income as defined under 
section 55(b)(2). Fourth, any portion of the deficiency attributable to 
accuracy-related penalties under section 6662 and fraud penalties under 
section 6663 is allocated to the spouse to whom the item giving rise to 
the penalty is allocable.
    The proposed regulations provide one alternative allocation method, 
which must be used in place of the general allocation method when there 
are erroneous items taxed at different rates. This method ensures that 
the allocation of the liability is not skewed, for example, when the 
deficiency items consist of ordinary income items and capital gains.

Equitable Relief Under Section 6015(f)

    Section 6015(f) is the other new relief provision that was added by 
section 3201 of the RRA. Section 6015(f) authorizes the Secretary to 
grant equitable relief from joint and several liability to requesting 
spouses who do not qualify for relief under section 6015(b) or 6015(c). 
The proposed regulations provide that the Secretary has the discretion 
to grant equitable relief and that the discretion may be exercised if 
it would be inequitable to hold the requesting spouse jointly and 
severally liable. Equitable relief is only available to requesting 
spouses who fail to qualify for relief under sections 6015(b) and 
6015(c). However, section 6015(f) may not be used to circumvent the 
``no refund'' rule of section 6015(c). Therefore, equitable relief 
under section 6015(f) is not available to refund liabilities already 
paid, for which the requesting spouse would otherwise qualify for 
relief under section 6015(c).
    Section 6015(f) directs the Secretary to prescribe procedures 
regarding when equitable relief may be granted. These proposed 
regulations provide general information on section 6015(f) and refer 
individuals seeking more detailed guidance to the relevant revenue 
rulings, revenue procedures, or other published guidance issued on this 
topic. The detailed guidance on section 6015(f) is currently provided 
in Revenue Procedure 2000-15 (2000-5 I.R.B. 447).

Other Considerations

    In addition to the three types of relief from joint and several 
liability, section 6015 has many provisions that are relevant when a 
requesting spouse elects relief under section 6015(b) or 6015(c), or 
requests relief under section 6015(f). The proposed regulations provide 
detailed guidance on these other provisions:
1. Types of Relief Considered
    There are certain statutory consequences to electing the 
application of section 6015(b) or section 6015(c) (e.g., suspension of 
the statute of limitations on collection). Therefore, the IRS will not 
automatically consider such relief unless the requesting spouse 
affirmatively elects the application of at least one of those sections. 
If a spouse requests relief under section 6015(f) alone, relief will 
only be considered under that section. However, if a requesting spouse 
elects the application of either section 6015(b) or 6015(c), the IRS 
will automatically consider whether the requesting spouse qualifies for 
relief under the other relief provisions of section 6015.
2. Time and Manner of Requesting Relief
    Relief under section 6015 must be elected or requested within two 
years from the first collection activity (as defined in the proposed 
regulations) after July 22, 1998, against the requesting spouse with 
respect to the joint and several liability. In addition, relief may be 
elected or requested before the commencement of collection activity. 
However, the election may not be made, nor may relief be requested, 
before the taxpayer receives a notification of an audit or a letter or 
notice from the Secretary indicating that there may be an outstanding 
liability with regard to the joint return. The proposed regulations 
provide that the Secretary will not consider premature claims.
3. Determinations
    The proposed regulations provide that a requesting spouse generally 
only receives one final determination of relief under section 6015. 
However, a second election under section 6015(c) may be considered, and 
a final determination may be rendered on that election, if, at the time 
of the second election, but not at the time of the first election, the 
requesting spouse is divorced, legally separated, widowed, 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 the election was 
filed.
4. Community Property
    Under section 6015 and the proposed regulations, the operation of 
community property law is not considered in determining to which spouse 
an erroneous item is allocable.
5. Duress
    The proposed regulations amend Sec. 1.6013-4 to clarify that if a 
spouse asserts and establishes that he or she signed a joint return 
under duress, then the return is not a joint return, and he or she is 
not jointly and severally liable for the liability arising from that 
return. Therefore, in such a case, relief from joint and several 
liability under section 6015 is not necessary and inapplicable.

Highlighted Issues

    These proposed regulations contain detailed guidance on the three 
types of relief available under section 6015, as well as the other 
provisions contained in section 6015. Although public comment is sought 
on all of the issues in the proposed regulations, the IRS and Treasury 
Department are particularly interested in receiving comments on the 
issues highlighted below. These issues

[[Page 3892]]

present the most challenge in administering section 6015(c).
    1. Knowledge: The contrasting standards of the relief provisions 
are most evident in the respective knowledge limitations. Under section 
6015(b), relief is not available unless the requesting spouse 
demonstrates that he or she had no knowledge or reason to know of the 
item giving rise to the understatement at the time the joint return was 
signed. In contrast, section 6015(c) provides that, assuming all of the 
qualifications are met, relief is available unless the Secretary 
demonstrates that the requesting spouse had actual knowledge of the 
item giving rise to the deficiency. Actual knowledge cannot be inferred 
from the requesting spouse's reason to know of the erroneous item. The 
Secretary bears the burden of proof with respect to the knowledge 
limitation of section 6015(c). In contrast, the requesting spouse bears 
the burden of proof with respect to the knowledge and reason to know 
limitations of section 6015(b). The IRS and Treasury Department are 
specifically seeking comments on the definition of item, because it is 
knowledge of an item that will disqualify a requesting spouse from 
receiving relief under sections 6015(b) and 6015(c).
    2. Alternative Allocation Methods: Section 6015(g)(1) directs the 
Secretary to prescribe regulations providing alternative allocation 
methods, and the proposed regulations provide one that is discussed 
above. The proposed regulations also provide that additional 
alternative allocation methods may be provided in subsequent guidance. 
The IRS and Treasury Department are specifically interested in 
receiving comments about the alternative allocation method provided in 
the proposed regulations, and any other allocation methods that should 
be considered.
    3. Interests of the Nonrequesting Spouse: It is anticipated that 
relief under section 6015 will be granted more frequently than it was 
under section 6013(e). Accordingly, section 6015 provides safeguards to 
protect nonrequesting spouses from erroneous determinations granting 
relief to their respective requesting spouses. The proposed regulations 
provide that the Secretary must give a nonrequesting spouse notice that 
the requesting spouse filed a claim for relief and an opportunity to 
participate in the determination of whether relief is appropriate.
    In fashioning these safeguards, the IRS and Treasury Department are 
attempting to balance the rights and interests of both the requesting 
spouse and the nonrequesting spouse. A spouse who signs a joint return 
is jointly and severally liable for the entire liability, and the 
Secretary may collect the entire liability from either spouse. 
Therefore, a determination that one spouse is relieved of joint and 
several liability may have no legal effect on the amount of the other 
spouse's liability. However, a nonrequesting spouse does have a 
practical interest in the outcome of an innocent spouse determination 
because if the requesting spouse is relieved of liability, the IRS's 
only recourse is to collect that liability from the nonrequesting 
spouse. The IRS and Treasury Department recognize that Congress 
intended that the IRS take into account the nonrequesting spouse's 
views when it makes a determination of relief. See H.R. Conf. Rep. No. 
599, 105th Cong., 2d Sess. 251, 255 (1998). In addition, information 
provided by a nonrequesting spouse is helpful in many cases to 
determine the appropriate amount of relief, if any.
    Under the proposed regulations, a nonrequesting spouse will have an 
opportunity to participate in any administrative or judicial 
determination of relief. At the administrative level, the nonrequesting 
spouse may submit information relevant to the determination to the IRS 
employee making the determination. In addition, if the requesting 
spouse files a petition with the Tax Court, the nonrequesting spouse 
will be notified, and have an opportunity to become a party to the 
proceeding. See Interim Tax Court Rule 325.
    Nonetheless, the IRS and Treasury Department recognize that some 
spouses may be reluctant to apply for relief from joint and several 
liability, or submit information regarding the other spouse's request 
for relief, due to privacy concerns or for fear of the other spouse's 
reprisal. To address this concern, the proposed regulations provide 
that, at the request of one spouse, the Secretary will omit from shared 
documents any information (e.g., new name, address, employer) that 
would reasonably identify that spouse's location.

Special Analyses

    It has been determined that these regulations are not a significant 
regulatory action as defined in Executive Order 12866. Therefore, a 
regulatory assessment is not required. It has also been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to the regulations, and because the regulations do not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to 
section 7805(f), this notice of proposed rulemaking will be submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on its impact on small businesses.

Comments and Public Hearing

    Before the regulations are adopted as final regulations, 
consideration will be given to any written and electronic comments that 
are submitted timely to the IRS. The IRS and Treasury Department 
specifically request comments on the clarity of the proposed 
regulations, on how the proposed regulations can be made easier to 
understand, and on the highlighted issues. All comments will be 
available for public inspection and copying.
    A public hearing has been scheduled for May 30, 2001, at 10 a.m., 
in the IRS Auditorium (7th Floor), Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the 10th Street entrance, located 
between Constitution and Pennsylvania Avenues, NW. In addition, all 
visitors will not be admitted beyond the immediate entrance area more 
than 15 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons who wish to present oral comments at the hearing must 
submit written comments and an outline of the topics to be discussed at 
the time to be devoted to each topic (signed original and eight (8) 
copies) by April 27, 2001.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of the regulations is Bridget E. Finkenaur of 
the Office of Associate Chief Counsel, Procedure and Administration 
(Administrative Provisions and Judicial Practice Division). However, 
other personnel from the IRS and Treasury Department participated in 
the development of the regulations.

[[Page 3893]]

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
the following entries in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Sec. 1.6015-1 also issued under 26 U.S.C. 6015(g).
    Sec. 1.6015-2 also issued under 26 U.S.C. 6015(g).
    Sec. 1.6015-3 also issued under 26 U.S.C. 6015(g).
    Sec. 1.6015-4 also issued under 26 U.S.C. 6015(g).
    Sec. 1.6015-5 also issued under 26 U.S.C. 6015(g).
    Sec. 1.6015-6 also issued under 26 U.S.C. 6015(g).
    Sec. 1.6015-7 also issued under 26 U.S.C. 6015(g).
    Sec. 1.6015-8 also issued under 26 U.S.C. 6015(g).
    Sec. 1.6015-9 also issued under 26 U.S.C. 6015(g). * * *

    Par. 2. In Sec. 1.6013-4, paragraph (d) is added to read as 
follows:


Sec. 1.6013-4  Applicable rules.

* * * * *
    (d) Return signed under duress. If an individual asserts and 
establishes that he or she signed a return under legal duress, the 
return is not a joint return. The individual who signed such return 
under duress is not jointly and severally liable for the tax shown on 
the return or any deficiency in tax with respect to the return. The 
return is adjusted to reflect only the tax liability of the individual 
who voluntarily signed the return, and the liability is determined at 
the applicable rates in section 1(d). Section 6212 applies to the 
assessment of any deficiency in tax on such return.
    Par. 3. Sections 1.6015-0 through 1.6015-9 are added to read as 
follows:


Sec. 1.6015-0  Table of contents.

    This section lists captions contained in Secs. 1.6015-1 through 
1.6015-9.


Sec. 1.6015-1  Relief from joint and several liability on a joint 
return.

    (a) In general.
    (b) Duress.
    (c) Prior closing agreement or offer in compromise.
    (d) Fraudulent scheme.
    (e) Res judicata and collateral estoppel.
    (f) Community property laws.
    (1) In general.
    (2) Example.
    (g) Definitions.
    (1) Requesting spouse.
    (2) Nonrequesting spouse.
    (3) Item.
    (4) Erroneous item.
    (5) Election or request.
    (h) Transferee liability.
    (1) In general.
    (2) Example.

Sec. 1.6015-2  Relief from liability applicable to all qualifying joint 
filers.

    (a) In general.
    (b) Understatement.
    (c) Knowledge or reason to know.
    (d) Inequity.
    (e) Partial relief.
    (1) In general.
    (2) Example.


Sec. 1.6015-3  Allocation of liability for individuals who are no 
longer married, are legally separated, or are not members of the same 
household.

    (a) Election to allocate liability.
    (b) Definitions.
    (1) Divorced.
    (2) Legally separated.
    (3) Not members of the same household.
    (i) Temporary absences.
    (ii) Separate dwellings.
    (c) Limitations.
    (1) No refunds.
    (2) Actual knowledge.
    (3) Disqualified asset transfers.
    (i) In general.
    (ii) Disqualified asset defined.
    (iii) Presumption.
    (4) Examples.
    (d) Allocation.
    (1) In general.
    (2) Allocation of erroneous items.
    (i) Benefit on the return.
    (ii) Fraud.
    (iii) Erroneous items of income.
    (iv) Erroneous deduction items.
    (3) Burden of proof.
    (4) General allocation method.
    (i) Proportionate allocation.
    (ii) Separate treatment items.
    (iii) Child's liability.
    (iv) Allocation of certain items.
    (A) Alternative minimum tax.
    (B) Accuracy-related and fraud penalties.
    (5) Examples.
    (6) Alternative allocation methods.
    (i) Allocation based on applicable tax rates.
    (ii) Allocation methods provided in subsequent published 
guidance.
    (iii) Example.


Sec. 1.6015-4  Equitable relief.


Sec. 1.6015-5  Time and manner for requesting relief.

    (a) Requesting relief.
    (b) Time period for filing a request for relief.
    (1) In general.
    (2) Definitions.
    (i) Collection activity.
    (ii) Date of levy or seizure.
    (3) Requests for relief made before commencement of collection 
activity.
    (4) Examples.
    (5) Premature requests for relief.
    (c) Effect of a final administrative determination.


Sec. 1.6015-6  Nonrequesting spouse's notice and opportunity to 
participate in administrative proceedings.

    (a) In general.
    (b) Information submitted.
    (c) Effect of opportunity to participate.


Sec. 1.6015-7  Tax Court review.

    (a) In general.
    (b) Time period for petitioning the Tax Court.
    (c) Restrictions on collection and suspension of the running of 
the period of limitations.
    (1) Restrictions on collection under Sec. 1.6015-2 or 1.6015-3.
    (2) Suspension of the running of the period of limitations.
    (i) Relief under Sec. 1.6015-2 or 1.6015-3.
    (ii) Relief under Sec. 1.6015-4.
    (3) Definitions.
    (i) Levy.
    (ii) Proceedings in court.
    (iii) Assessment to which the election relates.


Sec. 1.6015-8  Applicable liabilities.

    (a) In general.
    (b) Liabilities paid on or before July 22, 1998.
    (c) Examples.

Sec. 1.6015-9  Effective date.


Sec. 1.6015-1  Relief from joint and several liability on a joint 
return.

    (a) In general. (1) An individual who qualifies and elects under 
section 6013 to file a joint Federal income tax return with another 
individual is jointly and severally liable for the joint Federal income 
tax liabilities for that year. However, a spouse or former spouse may 
be relieved of joint and several liability for any Federal income tax, 
self-employment tax, penalties, additions to tax, and interest for that 
year under the following three relief provisions:
    (i) Innocent spouse relief under Sec. 1.6015-2.
    (ii) Allocation of deficiency under Sec. 1.6015-3.
    (iii) Equitable relief under Sec. 1.6015-4.
    (2) A requesting spouse may submit a single claim electing relief 
under both or either Secs. 1.6015-2 and 1.6015-3, and requesting relief 
under Sec. 1.6015-4. However, equitable relief under Sec. 1.6015-4 is 
available only to a requesting spouse who fails to qualify for relief 
under Secs. 1.6015-2 and 1.6015-3. If a requesting spouse elects the 
application of either Sec. 1.6015-2 or 1.6015-3, the Secretary may 
consider

[[Page 3894]]

whether relief is appropriate under the other elective provision and, 
to the extent relief is unavailable under either, under Sec. 1.6015-4. 
If a requesting spouse seeks relief only under Sec. 1.6015-4, the 
Secretary may not grant relief under Sec. 1.6015-2 or 1.6015-3. A 
requesting spouse must affirmatively elect the application of 
Sec. 1.6015-2 or 1.6015-3 in order for the Secretary to grant relief 
under one of those sections.
    (3) Relief is not available for liabilities that are required to be 
reported on a joint Federal income tax return but are not income taxes 
imposed under Subtitle A of the Internal Revenue Code (e.g., domestic 
service employment taxes under section 3510).
    (b) Duress. For rules relating to the treatment of returns signed 
under duress, see Sec. 1.6013-4(d).
    (c) Prior closing agreement or offer in compromise. A requesting 
spouse is not entitled to relief from joint and several liability under 
Sec. 1.6015-2, Sec. 1.6015-3, or Sec. 1.6015-4 for any tax year for 
which the requesting spouse has entered into a closing agreement (other 
than an agreement entered into pursuant to section 6224(c) relating to 
partnership items) with the Commissioner that disposes of the same 
liability that is the subject of the claim for relief. In addition, a 
requesting spouse is not entitled to relief from joint and several 
liability under Sec. 1.6015-2, Sec. 1.6015-3, or Sec. 1.6015-4 for any 
tax year for which the requesting spouse has entered into an offer in 
compromise with the Commissioner. For rules relating to the effect of 
closing agreements and offers in compromise, see sections 7121 and 
7122, and the regulations thereunder.
    (d) Fraudulent scheme. If the Secretary establishes that a spouse 
transferred assets to the other spouse as part of a fraudulent scheme, 
relief is not available under section 6015, and section 6013(d)(3) 
applies to the return.
    (e) Res judicata and collateral estoppel. A requesting spouse is 
not entitled to relief from joint and several liability under 
Sec. 1.6015-2 or 1.6015-3 for any tax year for which a court of 
competent jurisdiction has rendered a final determination on the 
requesting spouse's tax liability if the requesting spouse materially 
participated in the proceeding. A requesting spouse has not materially 
participated in a prior proceeding if, due to the effective date of 
section 6015, relief under section 6015 was not available in that 
proceeding. However, any final determinations made by a court of 
competent jurisdiction regarding issues relevant to Sec. 1.6015-2, 
Sec. 1.6015-3, or Sec. 1.6015-4 are conclusive and may not be 
reconsidered, provided the requesting spouse materially participated in 
the prior court proceeding.
    (f) Community property laws--(1) In general. In determining whether 
relief is available under Sec. 1.6015-2, Sec. 1.6015-3, or Sec. 1.6015-
4, items of income, credits, and deductions are generally allocated to 
the spouses without regard to the operation of community property laws. 
An erroneous item is attributed to the individual whose activities gave 
rise to such item. See Sec. 1.6015-3(d)(2).
    (2) Example. The following example illustrates the rule of this 
paragraph (f):

    Example. (i) H and W are married and have lived in State A (a 
community property state) since 1987. On April 15, 2003, H and W 
file a joint Federal income tax return for the 2002 taxable year. In 
August 2005, the Internal Revenue Service proposes a $17,000 
deficiency with respect to the 2002 joint return. A portion of the 
deficiency is attributable to $20,000 of H's unreported interest 
income from his individual bank account, the remainder of the 
deficiency is attributable to $30,000 of W's disallowed business 
expense deductions. Under the laws of State A, H and W each own \1/
2\ of all income earned and property acquired during the marriage.
    (ii) In November 2005, H and W divorce and W timely elects to 
allocate the deficiency. Even though the laws of State A provide 
that \1/2\ of the interest income is W's, for purposes of relief 
under this section, the $20,000 unreported interest income is 
allocable to H, and the $30,000 disallowed deduction is allocable to 
W. The community property laws of State A are not considered in 
allocating items for this purpose.

    (g) Definitions--(1) Requesting spouse. A requesting spouse is an 
individual who filed a joint return and elects relief from Federal 
income tax liability arising from that return under Sec. 1.6015-2 or 
Sec. 1.6015-3, or requests relief from Federal income tax liability 
arising from that return under Sec. 1.6015-4.
    (2) Nonrequesting spouse. A nonrequesting spouse is the individual 
with whom the requesting spouse filed the joint return for the year for 
which relief from liability is sought.
    (3) Item. An item is that which is required to be separately listed 
on an individual income tax return or any required attachments, subject 
to one exception: Amounts received from investments that are required 
to be separately reported on an individual income tax return and that 
are from the same source are aggregated and treated as a single item. 
Items include, but are not limited to, gross income, deductions, 
credits, and basis.
    (4) Erroneous item. An erroneous item is any item resulting in an 
understatement or deficiency in tax to the extent that such item is 
omitted from, or improperly reported (including improperly 
characterized) on an individual income tax return. For example, 
unreported income from an investment asset resulting in an 
understatement or deficiency in tax is an erroneous item. Similarly, 
ordinary income that is improperly reported as capital gain resulting 
in an understatement or deficiency in tax is also an erroneous item. An 
erroneous item is also an improperly reported item that affects the 
liability on other returns (e.g., an improper net operating loss that 
is carried back to a prior year's return).
    (5) Election or request. A qualifying election under Sec. 1.6015-2 
or Sec. 1.6015-3, or request under Sec. 1.6015-4, is the first timely 
claim for relief from joint and several liability for the tax year for 
which relief is sought. A qualifying election also includes a 
requesting spouse's second election to seek relief from joint and 
several liability for the same tax year under Sec. 1.6015-3 when the 
additional qualifications of paragraph (g)(5) (i) and (ii) of this 
section are met--
    (i) The requesting spouse did not qualify for relief under 
Sec. 1.6015-3 when the Internal Revenue Service considered the first 
election because the qualifications of Sec. 1.6015-3(a) were not 
satisfied; and
    (ii) At the time of the second election, the qualifications for 
relief under Sec. 1.6015-3(a) are satisfied.
    (h) Transferee liability--(1) In general. The relief provisions of 
section 6015 do not negate liability that arises under the operation of 
other laws. Therefore, a requesting spouse who is relieved of joint and 
several liability under Sec. 1.6015-2, Sec. 1.6015-3, or Sec. 1.6015-4 
may nevertheless remain liable for the unpaid tax (including additions 
to tax, penalties, and interest) to the extent provided by Federal or 
state transferee liability or property laws. For the rules regarding 
the liability of transferees, see sections 6901 through 6904 and the 
regulations thereunder. In addition, the requesting spouse's property 
may be subject to collection under Federal or state property laws.
    (2) Example. The following example illustrates the rule of this 
paragraph (h):

    Example. H and W timely file their 1998 joint income tax return 
on April 15, 1999. H dies in March 2000, and the executor of H's 
estate transfers all of the estate's assets to W. In July 2001, the 
Internal Revenue Service assesses a deficiency for the 1998 return. 
The items giving rise to the deficiency are attributable to H. W is 
relieved of the liability under Sec. 6015, and H's estate remains 
solely liable. The Internal Revenue Service may seek to collect the 
deficiency from W to the

[[Page 3895]]

extent permitted under Federal or state transferee liability or 
property laws.

Sec. 1.6015-2  Relief from liability applicable to all qualifying joint 
filers.

    (a) In general. A requesting spouse may be relieved of joint and 
several liability for tax (including additions to tax, penalties, and 
interest) from an understatement for a taxable year under this section 
if the requesting spouse elects the application of this section in 
accordance with Secs. 1.6015-1(g)(5) and 1.6015-5, and--
    (1) A joint return was filed for the taxable year;
    (2) On the return there is an understatement attributable to 
erroneous items of the nonrequesting spouse;
    (3) The requesting spouse establishes that in signing the return he 
or she did not know and had no reason to know of the item giving rise 
to the understatement; and
    (4) It is inequitable to hold the requesting spouse liable for the 
deficiency attributable to the understatement.
    (b) Understatement. The term understatement has the meaning given 
to such term by section 6662(d)(2)(A) and the regulations thereunder.
    (c) Knowledge or reason to know. A requesting spouse has knowledge 
or reason to know of an erroneous item if he or she either actually 
knew of the item giving rise to the understatement, or if a reasonable 
person in similar circumstances would have known of the item giving 
rise to the understatement. For rules relating to a requesting spouse's 
actual knowledge, see Sec. 1.6015-3(c)(2). All of the facts and 
circumstances are considered in determining whether a requesting spouse 
had reason to know of an erroneous item. The facts and circumstances 
that are considered include, but are not limited to, the nature of the 
item and the amount of the item relative to other items; the couple's 
financial situation; the requesting spouse's educational background and 
business experience; the extent of the requesting spouse's 
participation in the activity that resulted in the erroneous item; 
whether the requesting spouse failed to inquire, at or before the time 
the return was signed, about items on the return or omitted from the 
return that a reasonable person would question; and whether the 
erroneous item represented a departure from a recurring pattern 
reflected in prior years' returns (e.g., omitted income from an 
investment regularly reported on prior years' returns).
    (d) Inequity. All of the facts and circumstances are considered in 
determining whether it is inequitable to hold a requesting spouse 
jointly and severally liable for an understatement. One relevant factor 
for this purpose is whether the requesting spouse significantly 
benefitted, directly or indirectly, from the understatement. A 
significant benefit is any benefit in excess of normal support. 
Evidence of direct or indirect benefit may consist of transfers of 
property or rights to property, including transfers that may be 
received several years after the year of the understatement. Thus, for 
example, if a requesting spouse receives property (including life 
insurance proceeds) from the nonrequesting spouse that is traceable to 
items omitted from gross income that are attributable to the 
nonrequesting spouse, the requesting spouse will be considered to have 
received significant benefit from those items. Other factors that may 
also be taken into account include the fact that the nonrequesting 
spouse has not fulfilled support obligations to the requesting spouse 
or the fact that the spouses have been divorced, legally separated, or 
not been members of the same household for at least the 12 months 
directly preceding the election. For more information on factors 
relevant to determining whether it is inequitable to hold a requesting 
spouse liable, see Rev. Proc. 2000-15 (2000-5 I.R.B. 447), or guidance 
subsequently published by the Secretary as described in Sec. 1.6015-
4(c).
    (e) Partial relief--(1) In general. If a requesting spouse had no 
knowledge or reason to know of only a portion of an erroneous item, the 
requesting spouse may be relieved of the liability attributable to that 
portion of that item, if all other requirements are met with respect to 
that portion.
    (2) Example. The following example illustrates the rules of this 
paragraph (e):

    Example. H and W are married and file their 2004 joint income 
tax return in March 2005. In April 2006, H is convicted of 
embezzling $2 million from his employer during 2004. H kept all of 
his embezzlement income in an individual bank account, and he used 
most of the funds to support his gambling habit. However, each month 
during 2004, H transferred $10,000 from the individual account to H 
and W's joint bank account. W paid the household expenses using this 
joint account, and regularly received the bank statements relating 
to the account. W had no knowledge or reason to know of H's 
embezzling activities. However, W did have knowledge and reason to 
know of $120,000 of the $2 million of H's embezzlement income at the 
time she signed the joint return because that amount passed through 
the couple's joint bank account. Therefore, W may be relieved of the 
liability arising from $1,880,000 of the unreported embezzlement 
income, but she may not be relieved of the liability for the 
deficiency arising from $120,000 of the unreported embezzlement 
income of which she knew and had reason to know.

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. Subject to the restrictions 
of paragraph (c) of this section, an eligible requesting spouse who 
elects the application of this section in accordance with Secs. 1.6015-
1(g)(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.
    (b) Definitions--(1) Divorced. A requesting spouse is divorced if 
the requesting spouse has a divorce decree that is recognized in the 
jurisdiction in which the requesting spouse resides.
    (2) Legally separated. A requesting spouse is legally separated if 
the separation is recognized under the laws of the jurisdiction in 
which the requesting spouse resides.
    (3) Not 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, hospitalization, business travel, 
vacation travel, military service, or education away from home.
    (ii) Separate dwellings. A husband and wife who reside in the same 
dwelling are considered members of the same household. However, a 
husband and wife who reside in two separate

[[Page 3896]]

dwellings, whether or not part of the same structure, are not 
considered members of the same household unless one 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) If the Secretary demonstrates that the 
requesting spouse had actual knowledge at the time the return was 
signed 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. 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. 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 know W's dividend income 
from X Co. was taxable, but knew that W received the dividend income. 
Relief is not available under this provision. 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 provision.
    (ii) 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.
    (iii) To demonstrate that a requesting spouse had actual knowledge 
of an erroneous item at the time the return was signed, the Secretary 
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. 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 had a direct 
interest in 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)(iii) because the account is not held in her name and there is no 
other indication that she has a direct interest in the item.
    (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. However, the presumption does not apply if the 
requesting spouse establishes that the asset was transferred pursuant 
to a divorce decree or separate maintenance agreement. In addition, a 
requesting spouse may 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. 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, who 
otherwise qualifies under paragraph (a) of this section, 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.

[[Page 3897]]

(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 of return reporting position. (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 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.
    (iii) Assume the same facts as in paragraph (i) of this Example 
3 except that, instead of receiving $100,000 of unreported dividend 
income, H received $50,000 of interest income from ABC Co. during 
the year (properly reported on the return) and $25,000 of dividend 
income from ABC Co. (omitted from the return). W knew that H 
received both dividend and interest income from ABC Co. but did not 
know the total was greater than $50,000. W's election to allocate to 
H the deficiency attributable to the omitted dividend income is 
valid. Although interest and dividend income are required to be 
separately stated on a joint Federal income tax return, they are one 
item in this case because the dividend and interest income are 
investment income received from the same source (ABC Co.). The 
erroneous item is the total dividend and interest income from ABC 
Co. W did not have actual knowledge of the erroneous item (combined 
dividend and interest income from ABC Co. greater than $50,000). 
Therefore, her election to allocate to H the deficiency attributable 
to the erroneous item is valid.
    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 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 4 
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 
4 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 4 
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 4 
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 5 
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 
5 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 5 
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 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

[[Page 3898]]

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 the divorce decree, 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 divorce decree.

    (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. Unless relieved of liability under Sec. 1.6015-2 or 
Sec. 1.6015-4, the requesting spouse remains liable for 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, unless the nonrequesting 
spouse is relieved of liability under Sec. 1.6015-2 or Sec. 1.6015-4. 
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 Secretary may allocate any item appropriately 
between the spouses if the Secretary 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 job 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 
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 (d)(4) of this 
section. For information regarding the effect of community property 
laws, see Sec. 1.6015-1(f) and paragraph (c)(2)(iii) 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. Personal deduction items 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] TP17JA01.053

where X = the portion of the deficiency allocable to the spouse. 
Thus,
[GRAPHIC] [TIFF OMITTED] TP17JA01.054

    (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;

[[Page 3899]]

    (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 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. 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 
generally allocated jointly to both spouses. However, if one of the 
spouses had sole custody of the child for the entire tax year for which 
the election relates, such portion of the deficiency is allocated 
solely to that spouse. 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 minimum tax. Any 
portion of the deficiency attributable to alternative minimum tax under 
section 55 is allocated between the spouses in the same proportion as 
each spouse's share of the total alternative minimum taxable income, as 
defined in section 55(b)(2).
    (B) Accuracy-related and fraud penalties. Any portion of the 
deficiency attributable to accuracy-related or fraud penalties under 
section 6662 or 6663 is 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 and W's joint bank account;
    (B) A disallowed business expense deduction on H's Schedule C;
    (C) A disallowed Lifetime Learning Credit for W's post-secondary 
education; and
    (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.
[GRAPHIC] [TIFF OMITTED] TP17JA01.055

    (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 
collect $36,000 from W and $18,000 from H.
    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.
[GRAPHIC] [TIFF OMITTED] TP17JA01.056


[[Page 3900]]


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 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.
[GRAPHIC] [TIFF OMITTED] TP17JA01.057

    (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.
[GRAPHIC] [TIFF OMITTED] TP17JA01.058

    (vii) Therefore, W's liability is limited to $23,000 and H's 
liability is limited to $5,000.
    Example 5. Allocation of the alternative minimum tax. (i) H and 
W file their 2004 joint Federal income tax return on April 15, 2005. 
During 2004, W's total alternative minimum taxable income was 
$120,000, and H's total alternative minimum taxable income was 
$30,000. All of H's income was from his business and was reported on 
Schedule C. Everything on the 2004 return was properly reported, and 
there was no alternative minimum tax liability. In 2005, H 
experienced a net operating loss of $25,000 for regular tax 
purposes. H did not have a net operating loss for alternative 
minimum tax purposes. In February 2006, H and W file an amended 
return for 2004 claiming the net operating loss that was carried 
back from 2005. The loss is a proper deduction, but it results in an 
alternative minimum tax liability, which H and W do not report on 
the amended return. In December 2007, a $5,500 deficiency is 
assessed on their 2004 joint Federal income tax return resulting 
from the unreported alternative minimum tax liability.
    (ii) W and H divorce in January 2008, and W elects to allocate 
the deficiency.

W's AMT income for 2004: $120,000
H's AMT income for 2004: $ 30,000
Total AMT income for 2004: $150,000
W's share of AMT income for 2004: \4/5\ ($120,000/$150,000)
H's share of AMT income for 2004: \1/5\ ($30,000/$150,000)
    (iii) W's liability is limited $4,400 (\4/5\  x  $5,500). H 
remains liable for the entire deficiency because he did not make an 
election to allocate the deficiency.
    Example 6. Requesting spouse receives a benefit on the joint 
return from the nonrequesting spouse's erroneous item. (i) In 2001, 
H earns gross income of $4,000 from his business, and W earns 
$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 $3,900 (\3/4\ of $5,200). If H also elected 
to allocate the deficiency, H's election to allocate the $3,900 of 
the deficiency to W would be invalid because H had actual knowledge 
of the erroneous items.
    Example 7. 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 7, 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 is 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. 
The Secretary may prescribe alternative methods for allocating 
erroneous items under section 6015(c) 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

[[Page 3901]]

deficiency is assessed with respect to H 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.


Sec. 1.6015-4  Equitable relief.

    (a) A requesting spouse who files a joint return for which a 
liability remains unpaid and who does not qualify for full relief under 
Sec. 1.6015-2 or Sec. 1.6015-3 may request equitable relief under this 
section. The Internal Revenue Service has the discretion to grant 
equitable relief from joint and several liability to a requesting 
spouse when, considering all of the facts and circumstances, it would 
be inequitable to hold the requesting spouse jointly and severally 
liable.
    (b) This section may not be used to circumvent the limitation of 
Sec. 1.6015-3(c)(1) (i.e., no refunds under Sec. 1.6015-3). Therefore, 
relief is not available under this section to refund liabilities 
already paid, for which the requesting spouse would otherwise qualify 
for relief under Sec. 1.6015-3.
    (c) The Secretary will provide the criteria to be used in 
determining whether it is inequitable to hold a requesting spouse 
jointly and severally liable under this section in revenue rulings, 
revenue procedures, or other published guidance.


Sec. 1.6015-5  Time and manner for requesting relief.

    (a) Requesting relief. To elect the application of Sec. 1.6015-2 or 
Sec. 1.6015-3, or to request equitable relief under Sec. 1.6015-4, a 
requesting spouse must file Form 8857, ``Request for Innocent Spouse 
Relief (And Separation of Liability and Equitable Relief)''; submit a 
written statement containing the same information required on Form 
8857, which is signed under penalties of perjury; or submit information 
in the manner as may be prescribed by the Secretary in relevant revenue 
rulings, revenue procedures, or other published guidance.
    (b) Time period for filing a request for relief--(1) In general. To 
elect the application of Sec. 1.6015-2 or Sec. 1.6015-3, or to request 
equitable relief under Sec. 1.6015-4, a requesting spouse must file 
Form 8857 or other similar statement with the Internal Revenue Service 
no later than two years from the date of the first collection activity 
against the requesting spouse after July 22, 1998, with respect to the 
joint tax liability.
    (2) Definitions--(i) Collection activity. For purposes of this 
paragraph (b), collection activity means an administrative levy or 
seizure described by section 6331 to obtain property of the requesting 
spouse; an offset of an overpayment of the requesting spouse against a 
liability under section 6402; the filing of a suit by the United States 
against the requesting spouse for the collection of the joint tax 
liability; or the filing of a claim by the United States in a court 
proceeding in which the requesting spouse is a party or which involves 
property of the requesting spouse. Collection activity does not include 
a notice of intent to levy under sections 6330 and 6331(d); the filing 
of a Notice of Federal Tax Lien; or a demand for payment of tax. The 
term property of the requesting spouse, for purposes of this paragraph, 
means property in which the requesting spouse has an ownership interest 
(other than solely through the operation of community property laws), 
including property owned jointly with the nonrequesting spouse.
    (ii) Date of levy or seizure. For purposes of this paragraph (b), 
if tangible personal property or real property is seized and is to be 
sold, a notice of seizure is required under section 6335(a). The date 
of levy or seizure is the date the notice of seizure is given. For more 
information on the rules regarding notice of seizure, see section 
6502(b) and the regulations thereunder. For purposes of this paragraph 
(b), if a levy is made on cash or intangible personal property that 
will not be sold, the date of levy or seizure is the date the notice of 
levy is made. For more information on the rules regarding levy, see 
section 6331 and the regulations thereunder. For purposes of this 
paragraph (b), if a notice of levy is served by mail, the date of levy 
or seizure is the date of delivery of the notice of levy to the person 
on whom the levy is made. For more information on notices of levy 
served by mail, see Sec. 301.6331-1(c) of this chapter.
    (3) Requests for relief made before commencement of collection 
activity. An election or request for relief may be made before 
collection activity has commenced. For example, an election or request 
for relief may be made in connection with an audit or examination of 
the joint return, or pursuant to the pre-levy collection due process 
(CDP) hearing procedures pursuant to sections 6320 and 6330. For more 
information on the rules regarding pre-levy collection due process, see 
Secs. 301.6320-1T(e)(1) and (2), and 301.6330-1T(e)(1) and (2) of this 
chapter. However, no request for relief may be made before the date 
specified in paragraph (b)(5) of this section.
    (4) Examples. The following examples illustrate the rules of this 
paragraph (b):

    Example 1. On January 11, 2000, a notice of intent to levy is 
mailed to H and W regarding their 1997 joint Federal income tax 
liability. The Internal Revenue Service levies on W's employer on 
June 5, 2000. The Internal Revenue Service levies on H's employer on 
July 10, 2000. W must elect or request relief by June 5, 2002, which 
is two years after the Internal Revenue Service levied on her wages. 
H must elect or request relief by July 10, 2002, which is two years 
after the Internal Revenue Service levied on his wages.
    Example 2. The Internal Revenue Service levies on W's bank, in 
which W maintains a savings account, to collect a joint liability 
for 1995 on January 12, 1998. The bank complies with the levy, which 
only partially satisfies the liability. The Internal Revenue Service 
takes no other collection actions. On July 24, 2000, W elects relief 
with respect to the unpaid portion of the 1995 liability. W's 
election is timely because the Internal Revenue Service has not 
taken any collection activity after July 22, 1998; therefore, the 
two-year period has not commenced.
    Example 3. Assume the same facts as in Example 2, except that 
the Internal Revenue Service delivers a second levy on the bank on 
July 23, 1998. W's election is untimely because it is filed more 
than two years after the first collection activity after July 22, 
1998.
    Example 4. H and W do not remit full payment with their timely 
filed joint Federal income tax return for the 1989 tax year. No 
collection activity is taken after July 22, 1998, until the United 
States files a suit against both H and W to reduce the tax 
assessment to judgment and to foreclose the tax lien on their 
jointly held residence on July 1, 1999. H elects relief on October 
2, 2000. The election is timely because it is made within two years 
of the filing of a collection suit by the United States against H.
    Example 5. W files a Chapter 7 bankruptcy petition on July 10, 
2000. On September 5, 2000, the United States files a proof of claim 
for her joint 1998 income tax liability. W elects relief with 
respect to the 1998 liability on August 20, 2002. The election is 
timely because it is made within two years of the date the United 
States filed the claim in W's bankruptcy case.


[[Page 3902]]


    (5) Premature requests for relief. The Secretary will not consider 
premature claims for relief under Sec. 1.6015-2, Sec. 1.6015-3, or 
Sec. 1.6015-4. A premature claim is a claim for relief that is filed 
for a tax year prior to the receipt of a notification of an audit or a 
letter or notice from the Secretary indicating that there may be an 
outstanding liability with regard to that year. Such notices or letters 
do not include notices issued pursuant to section 6223 relating to 
TEFRA partnership proceedings. A premature claim is not considered an 
election or request under Sec. 1.6015-1(g)(5).
    (c) Effect of a final administrative determination--(1) In general. 
A requesting spouse is entitled to only one final administrative 
determination of relief under Sec. 1.6015-1 for a given assessment, 
unless the requesting spouse properly submits a second request for 
relief that is described in Sec. 1.6015-1(g)(5).
    (2) Example. The following example illustrates the rule of this 
paragraph (c):

    Example. In January 2001, W invests in tax shelter P, and in 
February 2001, she starts her own business selling crafts, from 
which she earns $100,000 of net income for the year. H and W file a 
joint return for tax year 2001, on which they claim $20,000 in 
losses from their investment in P, and they omit W's self-employment 
tax. In March 2003, the Internal Revenue Service opens an audit 
under the provisions of subchapter C of chapter 63 of subtitle F of 
the Internal Revenue Code (TEFRA partnership proceeding) and sends H 
and W a notice under section 6223(a)(1). In September 2003, the 
Internal Revenue Service audits H and W's 2001 joint return 
regarding the omitted self-employment tax. H may file a claim for 
relief from joint and several liability for the self-employment tax 
liability because he has received a notification of an audit 
indicating that there may be an outstanding liability on the joint 
return. However, his claim for relief regarding the TEFRA 
partnership proceeding is premature under paragraph (b)(5) of this 
section. H will have to wait until the Internal Revenue Service 
sends him a notice of computational adjustment or assesses the 
liability from the TEFRA partnership proceeding on H and W's joint 
return before he files a claim for relief with respect to any such 
liability. The assessment relating to the TEFRA partnership 
proceeding is separate from the assessment for the self-employment 
tax; therefore, H's subsequent claim for relief for the liability 
from the TEFRA partnership proceeding is not precluded by his 
previous claim for relief from the self-employment tax liability 
under this paragraph (c).

Sec. 1.6015-6  Nonrequesting spouse's notice and opportunity to 
participate in administrative proceedings.

    (a) In general. (1) When the Secretary receives an election under 
Sec. 1.6015-2 or Sec. 1.6015-3, or a request for relief under 
Sec. 1.6015-4, the Secretary must send a notice to the nonrequesting 
spouse's last known address that informs the nonrequesting spouse of 
the requesting spouse's claim for relief. The notice must provide the 
nonrequesting spouse with an opportunity to submit any information that 
should be considered in determining whether the requesting spouse 
should be granted relief from joint and several liability. A 
nonrequesting spouse is not required to submit information under this 
section. The Secretary has the discretion to share with one spouse any 
of the information submitted by the other spouse. At the request of one 
spouse, the Secretary will omit from shared documents the spouse's new 
name, address, employer, telephone number, and any other information 
that would reasonably indicate the other spouse's location.
    (2) The Secretary must notify the nonrequesting spouse of the 
Secretary's final determination with respect to the requesting spouse's 
claim for relief under section 6015. However, the nonrequesting spouse 
is not permitted to appeal such determination.
    (b) Information submitted. The Secretary will consider all of the 
information (as relevant to each particular relief provision) that the 
nonrequesting spouse submits in determining whether relief from joint 
and several liability is appropriate, including information relating to 
the following--
    (1) The legal status of the requesting and nonrequesting spouses' 
marriage;
    (2) The extent of the requesting spouse's knowledge of the 
erroneous items or underpayment;
    (3) The extent of the requesting spouse's knowledge or 
participation in the family business or financial affairs;
    (4) The requesting spouse's education level;
    (5) The extent to which the requesting spouse benefitted from the 
erroneous items;
    (6) Any asset transfers between the spouses;
    (7) Any indication of fraud on the part of either spouse;
    (8) Whether it would be inequitable, within the meaning of 
Secs. 1.6015-2(d) and 1.6015-4(b), to hold the requesting spouse 
jointly and severally liable for the outstanding liability;
    (9) The allocation or ownership of items giving rise to the 
deficiency; and
    (10) Anything else that may be relevant to the determination of 
whether relief from joint and several liability should be granted.
    (c) Effect of opportunity to participate. The failure to submit 
information pursuant to paragraph (b) of this section does not affect 
the nonrequesting spouse's ability to seek relief from joint and 
several liability for the same tax year. However, information that the 
nonrequesting spouse submits pursuant to paragraph (b) of this section 
is relevant in determining whether relief from joint and several 
liability is appropriate for the nonrequesting spouse should the 
nonrequesting spouse also submit an application for relief.


Sec. 1.6015-7  Tax Court review.

    (a) In general. Requesting spouses may petition the Tax Court to 
review the denial of relief under Sec. 1.6015-1.
    (b) Time period for petitioning the Tax Court. Pursuant to section 
6015(e), the requesting spouse may petition the Tax Court to review a 
denial of relief under Sec. 1.6015-1 within the 90-day period beginning 
on the date the final determination letter is mailed. If the Secretary 
does not mail the requesting spouse a final determination letter within 
6 months of the date the requesting spouse files an election under 
Sec. 1.6015-2 or Sec. 1.6015-3, the requesting spouse may petition the 
Tax Court to review the election at any time after the expiration of 
the 6-month period, and before the expiration of the 90-day period 
beginning on the mailing date of the final determination letter. The 
Tax Court also may review a claim for relief if Tax Court jurisdiction 
has been acquired under section 6213(a) or 6330(d). For rules regarding 
petitioning the Tax Court under section 6213(a) or 6330(d), see 
Secs. 301.6213-1, 301.6330-1T(f), and 301.6330-1T(g) of this chapter.
    (c) Restrictions on collection and suspension of the running of the 
period of limitations--(1) Restrictions on collection under 
Sec. 1.6015-2 or 1.6015-3. Unless the Secretary determines that 
collection will be jeopardized by delay, no levy or proceeding in court 
shall be made, begun, or prosecuted against a requesting spouse 
electing the application of Sec. 1.6015-2 or Sec. 1.6015-3 for the 
collection of any assessment to which the election relates until the 
expiration of the 90-day period described in paragraph (b) of this 
section, or if a petition is filed with the Tax Court, until the 
decision of the Tax Court becomes final under section 7481. 
Notwithstanding the preceding sentence, if the requesting spouse 
appeals the Tax Court's determination, the Internal Revenue Service may 
resume collection of the liability from the requesting spouse on the 
date of the Tax Court's determination unless the requesting spouse 
files an appeal bond pursuant to the rules of section 7485. For more 
information regarding the date

[[Page 3903]]

on which a decision of the Tax Court becomes final, see section 7481 
and the regulations thereunder. Jeopardy under this paragraph (c)(1) 
means conditions exist that would require an assessment under section 
6851 or 6861 and the regulations thereunder.
    (2) Suspension of the running of the period of limitations-- (i) 
Relief under Sec. 1.6015-2 or 1.6015-3. The running of the period of 
limitations in section 6502 on collection against the requesting spouse 
of the assessment to which an election under Sec. 1.6015-2 or 
Sec. 1.6015-3 relates is suspended for the period during which the 
Commissioner is prohibited by paragraph (c)(1) of this section from 
collecting by levy or a proceeding in court and for 60 days thereafter.
    (ii) Relief under Sec. 1.6015-4. If a requesting spouse seeks only 
equitable relief under Sec. 1.6015-4, the restrictions on collection of 
paragraph (c)(1) of this section do not apply. The request for relief 
does not suspend the running of the period of limitations on 
collection.
    (3) Definitions--(i) Levy. For purposes of this paragraph (c), levy 
means an administrative levy or seizure described by section 6331.
    (ii) Proceedings in court. For purposes of this paragraph (c), 
proceedings in court means suits filed by the United States for the 
collection of Federal tax. Proceedings in court does not refer to the 
filing of pleadings and claims and other participation by the 
Commissioner or the United States in suits not filed by the United 
States, including Tax Court cases, refund suits, and bankruptcy cases.
    (iii) Assessment to which the election relates. For purposes of 
this paragraph (c), the assessment to which the election relates is the 
entire assessment of the deficiency to which the election relates, even 
if the election is made with respect to only part of that deficiency.


Sec. 1.6015-8  Applicable liabilities.

    (a) In general. Sections 6015(b), 6015(c), and 6015(f) apply to 
liabilities that arise after July 22, 1998, and to liabilities that 
arose prior to July 22, 1998, that were not paid on or before July 22, 
1998.
    (b) Liabilities paid on or before July 22, 1998. A requesting 
spouse seeking relief from joint and several liability for amounts paid 
on or before July 22, 1998, must request relief under section 6013(e) 
and the regulations thereunder.
    (c) Examples. The following examples illustrate the rules of this 
section:

    Example 1. H and W file a joint income tax return for 1995 on 
April 15, 1996. There is an understatement on the return 
attributable to an omission of H's wage income. On October 15, 1998, 
H and W receive a 30-day letter proposing a deficiency on the 1995 
joint return. W pays the outstanding liability in full on November 
30, 1998. In March 1999, W files Form 8857, requesting relief from 
joint and several liability under section 6015(b). Although W's 
liability arose prior to July 22, 1998, it was unpaid as of that 
date. Therefore, section 6015 is applicable.
    Example 2. H and W file their 1995 joint income tax return on 
April 15, 1996. On October 14, 1997, a deficiency is assessed 
regarding a disallowed business expense deduction attributable to H. 
On June 30, 1998, the Internal Revenue Service levies on W's bank 
account in full satisfaction of the outstanding liability. On August 
31, 1998, W files a request for relief from joint and several 
liability. The liability arose prior to July 22, 1998, and it was 
paid as of July 22, 1998. Therefore, section 6015 is not applicable 
and section 6013(e) is applicable.

Sec. 1.6015-9  Effective date.

    Sections 1.6015-0 through 1.6015-9 are applicable for all elections 
under Sec. 1.6015-2 or Sec. 1.6015-3 or any request for relief under 
Sec. 1.6015-4 filed on or after federal regulations are published in 
the Federal Register.

Charles Rossotti,
Commissioner of Internal Revenue.
[FR Doc. 01-8 Filed 1-16-01; 8:45 am]
BILLING CODE 4830-01-U