[Federal Register Volume 67, Number 14 (Tuesday, January 22, 2002)]
[Proposed Rules]
[Pages 2841-2846]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1385]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-115054-01]
RIN 1545-AY83


Treatment of Community Income for Certain Individuals Not Filing 
Joint Returns

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
treatment of community income under section 66 for certain married 
individuals in community property states who do not file joint 
individual Federal income tax returns. The regulations also reflect 
changes in the law made by the Internal Revenue Service Restructuring 
and Reform Act of 1998.

DATES: Written or electronically generated comments and requests for a 
public hearing must be received by April 22, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-115054-01), room 5226, 
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:ITA:RU (REG-115054-01), 
room 5226, 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.ustreas.gov/tax_regs/regslist.html.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Robin M. Tuczak, 202-622-4940; concerning submissions of comments and 
requests for a public 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, 
Washington, DC 20224. Comments on the collection of information should 
be received by March 25, 2002.
    Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, 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. 1.66-4. An individual who wishes to be relieved of the operation 
of community property law under Sec. 1.66-4 must request relief from 
joint and several liability by timely filing Form 8857, ``Request for 
Innocent Spouse Relief'' (or other specified form), or a written 
statement, signed under penalties of perjury, indicating why he or she 
should be relieved of the operation of community property law. This 
collection of information is required for an individual to request 
relief from the operation of community property law. This information 
will be used to carry out the internal revenue laws. The likely 
respondents are individuals.
    The burden contained in Sec. 1.66-4 is reflected in the burden of 
Form 8857.
    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

    For married taxpayers living in community property states, income 
that is community property under the laws of the state or jurisdiction 
in which the spouses reside is generally taxed in equal shares to the 
husband and the wife. Thus, if a husband and wife do not elect to file 
a joint individual Federal income tax return (joint return) under 
section 6013, each spouse is generally required to report one-half of 
the community income on his or her married filing separate individual 
Federal income tax return (separate return). Section 66 contains four 
exceptions to the general rule that community income is taxed in equal 
shares to the husband and the wife.
    Section 66(a) provides rules for the treatment of community income 
when the spouses live apart and do not share income for the entire 
taxable year. Section 66(b) authorizes the Secretary to disregard 
community property laws where one spouse is not notified of the nature 
and amount of items of community income. Section 66(c) directs the 
Secretary to prescribe regulations regarding relief from the operation 
of community property law in certain other cases. This provision is 
analogous to the relief provision in section 6015(b) relating to joint 
filers. Section 66(c) also authorizes the

[[Page 2842]]

Secretary to grant equitable relief from the operation of community 
property laws where the other requirements of section 66(c) are not 
met. This provision is analogous to the equitable relief provision in 
section 6015(f) relating to joint filers.
    The four exceptions in section 66 apply to community income that 
spouses receive while they are married. Thus, community income that is 
received during any taxable year in which the spouses are married at 
any time during that taxable year, including the taxable year during 
which the spouses divorce, may be subject, in whole or in part, to the 
provisions of section 66. If spouses file a joint return for a taxable 
year, section 66 does not apply to their community income for that 
taxable year. If a spouse files a joint return with a new spouse in the 
same year that the spouse divorces his or her former spouse, section 66 
may be applicable to any community income of the spouse and former 
spouse earned prior to their divorce. For rules regarding relief from 
joint and several liability when a joint return is filed, see section 
6015 and the regulations thereunder.
    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) that are necessary to carry out the 
provisions of section 66.

Explanation of Provisions

Treatment of Community Income Under Section 66(a) Where Spouses Live 
Apart

    Section 879(a) provides that under certain circumstances, community 
income is taxed to the spouse who earned the income rather than 
according to community property laws. Under section 66(a), a spouse may 
report community income in accordance with the rules provided by 
section 879(a) if the following requirements are satisfied: (1) The 
spouses must have been married to each other at some time during the 
calendar year; (2) the spouses must have lived apart at all times 
during the calendar year; (3) the spouses must not have filed a joint 
return under section 6013 for a taxable year beginning or ending in the 
calendar year; (4) at least one of the spouses must have earned income 
during the taxable year that is community income; and (5) the spouses 
must not have transferred any of the income (directly or indirectly) to 
each other before the close of the calendar year. The proposed 
regulations provide that de minimis amounts are not considered 
transfers for purposes of section 66(a). In addition, the proposed 
regulations provide that amounts that are transferred or paid to, or on 
behalf of, the couple's child are not considered indirect transfers to 
one spouse merely because such transfers satisfy a support obligation 
of that spouse. See H.R. Rep. No. 96-1278, 96th Cong., 2d Sess. 7 
(1980).

Denial of Benefits of Community Property Law Under Section 66(b) Where 
Spouse Not Notified of Community Income

    Section 66(b) provides the Secretary with the authority to deny the 
benefits of community property law to a spouse who does not notify the 
other spouse of the nature and amount of an item of community income 
and who acts as if solely entitled to such income. The proposed 
regulations provide that in such a case, the item of community income 
will be included in the gross income of the spouse for whom the 
benefits of community property law were denied.

Request for Relief From the Operation of Community Property Law Under 
Section 66(c)

    Section 66(c) directs the Secretary to prescribe regulations 
regarding relief from the operation of community property law (specific 
relief) if: (1) The requesting spouse files a separate return for a 
taxable year; (2) the requesting spouse does not include in gross 
income for the taxable year an item of community income properly 
includible therein, which, in accordance with the rules contained in 
section 879(a), would be treated as the income of the nonrequesting 
spouse; (3) the requesting spouse establishes that he or she did not 
know, and had no reason to know, of the item of community income; and 
(4) taking into account all of the facts and circumstances, it is 
inequitable to include the item of community income in the gross income 
of the requesting spouse.
    The proposed regulations provide that if a requesting spouse is 
relieved of the operation of community property law under section 66(c) 
for an item of community income, the item will be included in the gross 
income of the nonrequesting spouse, and not in the gross income of the 
requesting spouse. In addition, the proposed regulations provide that 
when a requesting spouse is granted relief from the operation of 
community property law under section 66(c), community income will be 
treated in accordance with the rules provided by section 879(a). The 
proposed regulations also provide that relief under section 66(c) is 
not available if one spouse transferred assets to the other spouse as 
part of a fraudulent scheme, or if the requesting spouse signed a 
closing agreement or offer in compromise for the taxable year for which 
relief from the operation of community property law is sought.

Request for Equitable Relief Under Section 66(c)

    Section 66(c) also authorizes the Secretary to grant equitable 
relief from the operation of community property law to requesting 
spouses who do not otherwise meet the qualifications for relief set 
forth in section 66(c). This provision, which was added by section 
3201(b) of the Internal Revenue Service Restructuring and Reform Act of 
1998, is only available for liabilities that were unpaid as of July 22, 
1998, or that arise after July 22, 1998.
    Section 66(c) directs the Secretary to prescribe procedures 
regarding when equitable relief may be granted. Such procedures are 
detailed in Revenue Procedure 2000-15 (2000-1 C.B. 447). The proposed 
regulations provide general information on the equitable relief 
provision in section 66(c) and refer individuals seeking more detailed 
guidance to the relevant revenue rulings, revenue procedures, or other 
published guidance issued on this topic.

Time and Manner of Requesting Relief

    Under the proposed regulations, a spouse seeking specific relief 
from the operation of community property law under section 66(c) 
generally may only seek relief after a deficiency for such year has 
been asserted. A deficiency is considered ``asserted'' on the date that 
the requesting spouse either 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 that year.
    The requesting spouse must notify the Secretary of the spouse's 
request for treatment under section 66(c) in a timely manner so that 
the Secretary can assess the tax on the community income against the 
nonrequesting spouse before the statute of limitations on making such 
an assessment under section 6501 expires. Thus, the proposed 
regulations provide that a requesting spouse seeking relief from the 
operation of community property law under section 66(c) must request 
such relief no later than 6 months before the statute of limitations on 
assessment of section 6501 expires with regard to the nonrequesting 
spouse. The proposed regulations further provide that if the 
examination of the requesting spouse's return commences during that 6 
month period, the latest time for requesting relief under this section 
is 30 days after the commencement of the examination.

[[Page 2843]]

    A spouse seeking equitable relief from the operation of community 
property law under section 66(c) for a liability that was properly 
reported but not paid may seek relief on or after the date the return 
for such year is filed.
    In order to request either specific or equitable relief from the 
operation of community property law under section 66(c), the requesting 
spouse must file Form 8857, ``Request for Innocent Spouse Relief'' (or 
other specified form), or a written statement, signed under penalties 
of perjury, with the Secretary indicating why such treatment or relief 
is appropriate. The statement must also include the name of the 
nonrequesting spouse and the taxpayer identification number of the 
nonrequesting spouse, as well as any other information reasonably 
requested by the Secretary that will help the Secretary identify and 
locate the nonrequesting spouse.

Interests of the Nonrequesting Spouse

    The legislative history of section 6015 indicates that the 
Secretary must consider the nonrequesting spouse's views when making a 
determination of relief from joint liability under that section. See 
H.R. Conf. Rep. No. 599, 105th Cong., 2d Sess. 251, 255 (1998). Because 
the liability of the requesting spouse under section 66 will shift from 
the requesting spouse to the nonrequesting spouse, notification and 
participation requirements similar to those in section 6015 are 
appropriate for section 66 cases. In addition, information provided by 
a nonrequesting spouse may help to determine the appropriate amount of 
relief, if any.
    The proposed regulations provide that the Secretary must notify the 
nonrequesting spouse of the requesting spouse's claim for relief and 
provide the nonrequesting spouse with an opportunity to participate in 
the administrative determination of whether relief is appropriate. The 
nonrequesting spouse may submit relevant information to the IRS 
employee making the determination.
    In fashioning rules regarding the notification and participation of 
the nonrequesting spouse, the IRS and Treasury Department attempted to 
balance the rights and interests of both the requesting spouse and the 
nonrequesting spouse. The IRS and Treasury Department recognize that 
some spouses may be reluctant to apply for relief from the operation of 
community property law, or submit information regarding the other 
spouse's request for relief, due to privacy concerns or for fear of 
reprisal by the other spouse. To address this concern, the Internal 
Revenue Manual provides that the Service will omit from shared 
documents any information that could reasonably identify a 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 Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and 8 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and Treasury Department request comments on the clarity of the 
proposed regulations, and on how the proposed regulations can be made 
easier to understand. 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 timing limitations 
that would be imposed on a request for relief under Sec. 1.66-4(g)(2). 
All comments will be available for public inspection and copying. A 
public hearing may be scheduled if requested in writing by any person 
that timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the public hearing will be 
published in the Federal Register.

Drafting Information

    The principal authors of the regulations are Robin M. Tuczak and 
Bridget E. Finkenaur of the Office of Associate Chief Counsel 
(Procedure and Administration), Administrative Provisions and Judicial 
Practice Division.

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 in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.66-4 also issued under 26 U.S.C. 66(c). * * *

    Par. 2. Sections 1.66-1 through 1.66-5 are added to read as 
follows:


Sec. 1.66-1  Treatment of community income.

    (a) In general. Married individuals in community property states 
who do not elect to file a joint individual Federal income tax return 
under section 6013 generally are required to report one-half of the 
total community income earned by the spouses during the taxable year 
unless one of the following exceptions applies:
    (1) When the spouses live apart and meet the qualifications of 
Sec. 1.66-2.
    (2) When a requesting spouse qualifies for relief from the 
operation of community property law under Sec. 1.66-3, because the 
nonrequesting spouse failed to notify the requesting spouse of the 
nature and amount of the income prior to the due date for filing the 
return.
    (3) When a requesting spouse qualifies for relief from the 
operation of community property law under Sec. 1.66-4(a).
    (4) When a requesting spouse qualifies for equitable relief from 
the operation of community property law under Sec. 1.66-4(b).
    (b) Marital status. The rules of this section apply to the 
community income earned during a marriage for any taxable year 
beginning or ending during a calendar year in which the spouses are 
married, including the calendar year in which the spouses divorce. 
Section 66 does not apply to income earned after the spouses divorce.
    (c) Transferee liability. The provisions of section 66 do not 
negate liability that arises under the operation of other laws. 
Therefore, a spouse who is not subject to income tax on community 
income under Sec. 1.66-2 or 1.66-4 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 (other than community property laws). For the rules 
regarding the liability of transferees, see sections 6901 through 6904 
and the regulations thereunder.

[[Page 2844]]

Sec. 1.66-2  Treatment of community income where spouses live apart.

    (a) Income of spouses residing in a community property state will 
be treated in accordance with the rules provided by section 879(a) if 
all of the following requirements are satisfied--
    (1) The spouses are married at any time during the calendar year;
    (2) The spouses live apart at all times during the calendar year;
    (3) The spouses each file a separate Federal income tax return for 
a taxable year beginning or ending in the calendar year on which the 
taxpayer reports his or her income in accordance with section 66(a);
    (4) One or both spouses have earned income for the calendar year 
which is community income and which was earned during the spouses' 
marriage; and
    (5) No portion of such earned income is transferred (directly or 
indirectly) between such spouses before the close of the taxable year.
    (b) Transferred income. For purposes of this section, transferred 
income does not include a de minimis amount of earned income that is 
transferred between the spouses. In addition, any amount of earned 
income transferred or paid to, or for the benefit of, the spouses' 
child will not be treated as an indirect transfer to one spouse solely 
because the payment or transfer satisfies an obligation of support 
imposed on that spouse.


Sec. 1.66-3  Denial of benefits of community property law where spouse 
not notified.

    The Secretary may deny the benefits of community property law to 
any spouse with respect to any item of community income if that spouse 
acted as if he or she was solely entitled to the item of income and 
failed to notify the other spouse of the nature and amount of the 
income before the due date (including extensions) for filing the return 
for the taxable year in which the income was derived. Such item of 
community income will be included, in its entirety, in the gross income 
of the spouse for whom the benefits of community property law were 
denied. The tax liability arising from such item of community income 
must be assessed in accordance with section 6212 against the spouse for 
whom the benefits of community property law were denied.


Sec. 1.66-4  Request for relief from the operation of community 
property law.

    (a) Specific relief--(1) In general. A requesting spouse will be 
relieved of the operation of community property law for an item of 
community income if--
    (i) The requesting spouse filed a separate return for the taxable 
year for which relief is sought;
    (ii) The requesting spouse did not include in gross income for the 
taxable year an item of community income properly includible therein, 
which, in accordance with the rules contained in section 879(a), would 
be treated as the income of the nonrequesting spouse;
    (iii) The requesting spouse establishes that he or she did not know 
of, and had no reason to know of, such item of community income; and
    (iv) Taking into account all of the facts and circumstances, it is 
inequitable to include such item of community income in the requesting 
spouse's individual gross income.
    (2) Knowledge or reason to know. A requesting spouse has knowledge 
or reason to know of an understatement if he or she either actually 
knew of the understatement, or if a reasonable person in similar 
circumstances would have known of the understatement. All of the facts 
and circumstances are considered in determining whether a requesting 
spouse had reason to know of an understatement. The facts and 
circumstances that are considered include, but are not limited to, the 
nature of the erroneous item and the amount of the erroneous 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).
    (3) Inequitable. All of the facts and circumstances are also 
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 omitted 
income. 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 beyond 
normal support and 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, if the 
situation warrants, include the fact that the requesting spouse has 
been deserted by the nonrequesting spouse, the fact that the spouses 
have been divorced or separated, or that the requesting spouse received 
benefit on the return from the understatement. For more information on 
factors relevant to determining whether it is inequitable to hold a 
requesting spouse liable, see Revenue Procedure 2000-15 (2000-1 C.B. 
447), or other guidance subsequently published by the Secretary. Relief 
under this paragraph (a) only applies to deficiencies arising out of 
items of omitted income.
    (b) Equitable relief. Equitable relief may be available when the 
four requirements of paragraph (a) of this section are not satisfied 
but it would be inequitable to include the item of community income in 
the requesting spouse's gross income. For the criteria to be used in 
making a determination under this paragraph, see Revenue Procedure 
2000-15 (2000-1 C.B. 447), and other guidance subsequently published by 
the Secretary. Relief under this paragraph (b) applies only to 
deficiencies arising out of items of omitted income or any unpaid tax 
arising from community income attributable to the nonrequesting spouse 
and is only available for liabilities that were unpaid as of July 22, 
1998, and for liabilities that arise after July 22, 1998.
    (c) Effect of relief. (1) When the requesting spouse qualifies for 
relief under paragraph (a) or (b) of this section, the item of 
community income will be included in the nonrequesting spouse's 
individual gross income and will not be included in the requesting 
spouse's individual gross income. The tax liability arising from such 
item of community income must be assessed against the nonrequesting 
spouse in accordance with section 6212.
    (2) If a requesting spouse is granted relief from the operation of 
community property law with respect to an item of community income 
under paragraph (a) or (b) of this section, any community income of the 
spouses will be treated in accordance with the rules provided by 
section 879(a). Thus, if a requesting spouse is granted relief under 
paragraph (a) or (b) of this section, any item of community income that 
is attributable to the requesting spouse will be

[[Page 2845]]

included, in its entirety, in the requesting spouse's gross income for 
such taxable year, and will not be included in the nonrequesting 
spouse's gross income for such taxable year. If additional tax were to 
result upon granting relief under this section, the requesting spouse 
may withdraw his or her request for relief.
    (3) Example. The following example illustrates the rule of this 
paragraph (c):

    Example. H and W are married and live in State Z (a community 
property state). Both H and W file returns for taxable year 2002 as 
``married filing separately'' on April 15, 2003. H earns $56,000 in 
wages, and W earns $46,000 in wages in 2002. H reports half of his 
wage income as shown on his Form W-2, in the amount of $28,000, and 
half of W's wage income as shown on her Form W-2, in the amount of 
$23,000. W reports half of her wage income as shown on her W-2, in 
the amount of $23,000, and half of H's wage income as shown on his 
Form W-2, in the amount of $28,000. Neither H nor W reports W's 
income from her sole proprietorship of $34,000 or W's investment 
income of $5,000 for taxable year 2002. The Internal Revenue Service 
proposes deficiencies with respect to H's and W's taxable year 2002 
returns due to the omission of W's income from her sole 
proprietorship and investments. H timely files a claim for relief 
under section 66(c). Because the Internal Revenue Service determines 
that H satisfies the four requirements of section 66(c) with respect 
to W's omitted income, the Internal Revenue Service grants H's claim 
for relief. Thus, the income of H and W will be treated in 
accordance with the rules provided by section 879(a). H is liable 
for the tax on his earned income, as shown on his Form W-2, in the 
amount of $56,000. (See section 879(a)(1).) W is liable for the tax 
on her earned income, as shown on her Form W-2, in the amount of 
$46,000, and on the trade or business income from her sole 
proprietorship, in the amount of $34,000. (See section 879(a)(1) and 
(2).) W's investment income will be treated as provided under the 
community property laws of State Z. (See section 879(a)(3) and (4).)

    (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 this section. For purposes of this 
section, a fraudulent scheme includes a scheme to defraud the Secretary 
or another third party, including, but not limited to, creditors, ex-
spouses, and business partners.
    (e) Definitions--(1) Requesting spouse. A requesting spouse is an 
individual who does not file a joint individual Federal income tax 
return with the nonrequesting spouse for the taxable year in question, 
and who requests relief from the operation of community property law 
under this section for the portion of the liability arising from his or 
her share of community income for such taxable year.
    (2) Nonrequesting spouse. A nonrequesting spouse is the individual 
to whom the requesting spouse was married when the community income 
which gave rise to the claim for relief was earned.
    (f) Effect of prior closing agreement or offer in compromise. A 
requesting spouse is not entitled to relief from the operation of 
community property law under section 66 for any taxable year for which 
the requesting spouse has entered into a closing agreement (other than 
an agreement 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 the operation of 
community property law under section 66 for any taxable year for which 
the requesting spouse has entered into an offer in compromise with the 
Commissioner. For rules relating to the effect of closing agreements 
and offers in compromise, see sections 7121 and 7122, and the 
regulations thereunder.
    (g) Time and manner for requesting relief--(1) Requesting relief. 
To request relief from the operation of community property law under 
this section, a requesting spouse must file, within the time period 
prescribed in paragraph (g)(2) of this section, Form 8857, ``Request 
for Innocent Spouse Relief'' (or other specified form), or other 
written request, signed under penalties of perjury, indicating why such 
relief is appropriate. The requesting spouse must include the 
nonrequesting spouse's name and taxpayer identification number in the 
written request. The requesting spouse must also comply with any of the 
Secretary's reasonable requests for information that will assist the 
Secretary in identifying and locating the nonrequesting spouse.
    (2) Time period for filing a request for relief--(i) Specific 
relief. The earliest time for submitting a request for relief from the 
operation of community property law under paragraph (a) of this section 
for an amount that was underreported on, or omitted from, the 
requesting spouse's separate return, is the date that a deficiency for 
the taxable year for which relief is sought is asserted against the 
requesting spouse. The latest time for requesting relief under 
paragraph (a) of this section is 6 months before the expiration of the 
statute of limitations on assessment, including extensions, against the 
nonrequesting spouse for the taxable year that is the subject of the 
claim for relief, unless the examination of the requesting spouse's 
return commences during that 6-month period. If the examination of the 
requesting spouse's return commences during that 6-month period, the 
latest time for requesting relief under this section is 30 days after 
the commencement of the examination.
    (ii) Equitable relief. The earliest time for submitting a request 
for relief from the operation of community property law under paragraph 
(b) of this section for an amount that was underreported on, or omitted 
from, the requesting spouse's separate return, is the date that a 
deficiency for the taxable year for which relief is sought is asserted 
against the requesting spouse. Requests for equitable relief from the 
operation of community property law under paragraph (b) of this section 
for a liability that is properly reported but unpaid may be submitted 
with the requesting spouse's individual Federal income tax return, or 
after the requesting spouse's individual Federal income tax return is 
filed.
    (iii) Premature requests for relief. (A) The Secretary will not 
consider premature claims for relief under this section. In the case of 
a claim for specific relief, a premature claim is a claim for relief 
from an item of community income that is omitted from the requesting 
spouse's individual Federal income tax return that is filed for a 
taxable year prior to the date that a deficiency for such year is 
asserted. A deficiency is considered asserted as of the date the 
requesting spouse 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 that year. Such notices or letters do not 
include notices issued pursuant to section 6223 relating to TEFRA 
partnership proceedings.
    (B) In the case of a claim for equitable relief, a premature claim 
is a claim for relief from an item of community income that is received 
prior to the date that the requesting spouse files an individual 
Federal income tax return for the taxable year in question.
    (h) Nonrequesting spouse's notice and opportunity to participate in 
administrative proceedings--(1) In general. When the Secretary receives 
a request for relief from the operation of community property law under 
this section, the Secretary must send a notice to the nonrequesting 
spouse's last known address that informs the nonrequesting spouse of 
the requesting spouse's 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

[[Page 2846]]

spouse should be granted relief from the operation of community 
property law. The Secretary will share with both spouses the 
information submitted by the other spouse, unless the Secretary 
determines that the sharing of such information will impair tax 
administration.
    (2) Information submitted. The Secretary will consider all of the 
information (as relevant to the particular relief provision) that the 
nonrequesting spouse submits in determining whether relief from the 
operation of community property law under this section is appropriate.


Sec. 1.66-5  Effective date.

    Sections 1.66-1 through 1.66-4 are applicable on the date final 
regulations are published in the Federal Register.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-1385 Filed 1-18-02; 8:45 am]
BILLING CODE 4830-01-P