[Federal Register Volume 67, Number 138 (Thursday, July 18, 2002)]
[Rules and Regulations]
[Pages 47278-47296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-17866]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9003]
RIN 1545-AW64


Relief From Joint and Several Liability

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final 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 
Internal Revenue Service Restructuring and Reform Act of 1998 and by 
the Community Renewal Tax Relief Act of 2000. The regulations provide 
guidance to married individuals filing joint returns who seek relief 
from joint and several liability.

EFFECTIVE DATE: These regulations are effective July 18, 2002.

FOR FURTHER INFORMATION CONTACT: Charles A. Hall, 202-622-4940 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under 
control number 1545-1719. Responses to this collection of information 
are required in order for certain individuals to receive relief from 
the joint and several liability imposed by section 6013(d)(3).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by the Office of 
Management and Budget.
    The burden contained in Sec. 1.6015-5 is reflected in the burden of 
Form 8857.
    Comments concerning the accuracy of the burden estimate and 
suggestions for reducing the burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S 
Washington, DC 20224, and 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.
    Books or records relating to this 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

    This document contains amendments to the Regulations on Procedure 
and Administration (26 CFR part 301) under section 6013 of the Internal 
Revenue Code (Code), relating to the election to file a joint Federal 
income tax return, and section 6015, relating to relief from the joint 
and several liability. Section 6015 was added to the Code by section 
3201 of the Internal Revenue Service Restructuring and Reform Act of 
1998, Public Law 105-206 (112 Stat. 685) (1998) (RRA), effective for 
any joint liability that was unpaid as of July 22, 1998, and for any 
liability that arises after July 22, 1998. Section 6015 was amended by 
section 313 of the Community Renewal Tax Relief Act of 2000, which was 
enacted as part of the Consolidated Appropriations Act, 2001, Public 
Law 106-554 (114 Stat. 2763)(2000)(CRA).
    This document also removes final regulation Sec. 1.6013-5, relating 
to relief from joint and several liability under former section 
6013(e). The final regulation under Sec. 1.6013-5 is obsolete due to 
amendments to section 6013 of the Code by the Internal Revenue Service 
Restructuring and Reform Act of 1998. The removal of this regulation 
will not affect taxpayers.
    A notice of proposed rulemaking (REG-106446-98) was published in 
the Federal Register (66 FR 3888) on January 17, 2001, with correction 
dated March 29, 2001 (66 FR 17130). Several comment letters were 
received, and three of the commentators spoke at the public hearing on 
May 30, 2001. After consideration of the comments, the proposed 
regulations are adopted as modified by this Treasury decision. The 
comments are discussed below.

Summary of Comments and Explanation of Revisions

1. Section 1.6015-1

    Section 1.6015-1 of the proposed regulations contains general 
provisions that apply to all three types of relief from joint and 
several liability.
A. Types of Relief Considered
    Section 1.6015-1 of the proposed regulations provides that if a 
requesting spouse only requests equitable relief under section 6015(f) 
and does not elect relief under section 6015(b) or (c), the IRS may not 
grant relief under either section 6015(b) or (c). Several commentators 
suggested that, regardless of the type of relief requested, the 
regulations should require that the IRS consider all three types of 
relief.
    Relief under section 6015(b) and (c) must be elected by the 
requesting spouse. When an election is made, the statute of limitations 
on collection of the requesting spouse's liability relating to such 
election is suspended. In addition, the IRS is statutorily prohibited 
from pursuing certain collection activities until the claim for relief 
under section 6015(b) or (c) is resolved. When, however, a requesting 
spouse only requests equitable relief under section 6015(f), the 
statute of limitations on collection is not suspended, and the IRS is 
not prohibited from collecting the liability from the requesting 
spouse. The IRS cannot assume, absent an election under section 6015(b) 
or (c), that a requesting spouse, in only requesting

[[Page 47279]]

relief under section 6015(f), would have elected relief under section 
6015(b) or (c). Such an assumption would improperly suspend the 
requesting spouse's statute of limitations on collection when the 
requesting spouse did not elect relief under section 6015(b) or (c). 
Thus, the final regulations do not adopt this recommendation.
    If, in the course of reviewing a request for relief only under 
section 6015(f), the IRS determines that the requesting spouse may 
qualify for relief under section 6015(b) or (c) instead of section 
6015(f), the IRS will contact the requesting spouse to see if he or she 
wishes to amend the claim for relief by affirmatively electing relief 
under section 6015(b) or (c). If the requesting spouse so chooses, he 
or she may submit a statement that amends the claim for relief and 
elects relief under section 6015(b) or (c). The final regulations 
provide that the amended claim for relief will relate back to the 
original claim for purposes of determining the timeliness of the claim.
B. Duress
    Section 1.6013-4(d) of the proposed regulations provides that if an 
individual asserts and establishes that he or she signed a return under 
legal duress, the return is not a joint return, and the individual is 
not jointly and severally liable for the tax shown on the return, or 
any deficiency in tax with respect to the return.
    Two commentators suggested that Sec. 1.6013-4(d) of the proposed 
regulations improperly denies the benefits of section 6015 to those 
individuals who establish that they signed returns under duress. The 
rule in Sec. 1.6013-4(d) reflects well established case law regarding 
the consequences of filing a joint return under duress. Compare Stanley 
v. Commissioner, 45 T.C. 555 (1966), with Brown v. Commissioner, 51 
T.C. 116 (1968). Under section 6013, married taxpayers may elect to 
file a joint return. If such an election is made, section 6013(d)(3) 
provides that both spouses are jointly and severally liable for the 
combined liability of both spouses. The election under section 6013 
must be voluntarily made by both spouses. If either spouse 
involuntarily makes the election under duress, then the election is 
invalid with respect to both spouses.
    One commentator suggested that the invalidation of the joint 
election when one spouse signs a return under duress inappropriately 
denies such spouse the benefits of certain credits (e.g., the earned 
income credit) and the joint filing rates. An allegation that a spouse 
was forced to sign a joint return against his or her will indicates 
that, in the absence of the threat, the spouse would have filed a 
separate return. In order to qualify for the earned income credit or 
the joint return rates, the Code mandates that the spouse file a joint 
return. If the spouse filed a joint return in order to benefit from the 
earned income credit, the joint return rates, or other benefits flowing 
from a joint return, and not due to duress, then the election to file 
the joint return was voluntary and valid. If the requesting spouse 
raises the issue of duress and it is determined that the requesting 
spouse would owe more tax if he or she filed a married filing 
separately return, then the requesting spouse may choose not to pursue 
the issue of duress.
    Both commentators suggested that the rule regarding the treatment 
of returns signed under duress was inconsistent with the language of 
section 6015(c)(3)(C). Section 6015(c)(3)(C) provides that the 
limitation on relief under section 6015(c), when the requesting spouse 
has actual knowledge of the item giving rise to the deficiency, does 
not apply if the requesting spouse establishes that he or she signed 
the return under duress. Neither the limitation of section 
6015(c)(3)(C), nor any portion of section 6013 or 6015 applies to a 
return signed under duress, i.e., a return for which no valid joint 
return election was made. To interpret the rule to allow the benefits 
of a joint return in the absence of a valid joint return election, as 
the commentators suggest, would require that the IRS treat joint return 
elections as valid for purposes of section 6015(c), but invalid for 
purposes of sections 6015(b) and (f), when the requesting spouse 
establishes that the return was signed under duress. Placing the duress 
rule in the regulations under section 6013 results in consistent 
treatment of a claim of duress that would apply to the three relief 
provisions under section 6015.
    One commentator suggested that, the Treasury and IRS refer to 
duress as opposed to legal duress because the term legal duress 
suggests that something more specific than duress is intended. In 
particular, the commentator noted that in some cases courts have 
declined to define legal duress to include domestic abuse. Although the 
final regulations use the term, duress rather than legal duress, 
Treasury and the IRS believe the terms are synonymous, and duress 
continues to provide a basis for invalidating the joint return 
election.
    Nonetheless, Treasury and the IRS have taken these comments into 
consideration in interpreting the specific duress provision in section 
6015(c)(3)(C). See the discussion of the abuse exception to actual 
knowledge (Sec. 1.6015-3(c)(2)(v)) in section 3.B. of this preamble.
C. Prior Closing Agreement or Offer in Compromise
    Section 1.6015-1(c) of the proposed regulations provides that 
relief is not available if the requesting spouse signed a closing 
agreement or entered into an offer in compromise with the IRS for the 
same tax year for which he or she seeks relief under section 6015. One 
commentator suggested that there was no support for this position in 
the statute. Section 6015(g)(1) provides that ``[e]xcept as provided in 
paragraphs (2) and (3), notwithstanding any other law or rule of law 
(other than section 6511, 6512(b), 7121, 7122), credit or refund shall 
be allowed or made to the extent attributable to the application of 
this section.'' (Emphasis added). Sections 7121 and 7122 deal with 
closing agreements and offers in compromise, respectively. Section 
301.7121-1(c) of the Regulations on Procedure and Administration 
provides that a closing agreement is final and will not be set aside in 
the absence of fraud, malfeasance, or misrepresentation. Section 
301.7122-1T(d)(5) of the Temporary Regulations on Procedure and 
Administration provides a similar rule for the finality of offers in 
compromise. Thus, the statute and the regulations directly support the 
position in the proposed regulations that relief under section 6015 is 
not available if the requesting spouse signed a closing agreement or 
offer in compromise disposing of the same liability that is the subject 
of the claim for relief.
    Another commentator suggested that the requesting spouse should be 
given an opportunity to establish that he or she was not a party to the 
closing agreement or offer in compromise and that such signed documents 
should not preclude relief. In Hopkins v. Commissioner, 146 F.3d 729 
(9th Cir. 1998), the United States Court of Appeals for the Ninth 
Circuit held that a claim for relief from joint and several liability 
under section 6013(e) was precluded if a closing agreement was signed 
by the requesting spouse for the tax year in question. Nothing in 
section 6015 nor the legislative history indicates that Congress 
intended to change the rules regarding the finality of such documents 
when relief is requested under section 6015. If the requesting spouse 
did not sign the closing agreement or offer in compromise, then the 
requesting spouse is not bound by that document, and relief under 
section

[[Page 47280]]

6015 would be available. Thus, there is no need to amend the final 
regulations to incorporate this comment.
D. Fraudulent Scheme and Fraud
    Section 1.6015-1(d) of the proposed regulations provides that if 
the Secretary establishes that one spouse transferred assets to the 
other spouse as part of a fraudulent scheme, relief is not available 
under section 6015. Section 1.6015-3(d)(2)(ii) of the proposed 
regulations provides that the Service may allocate any item between the 
spouses if the Service establishes that the allocation is appropriate 
due to fraud by one or both spouses. Two commentators requested that 
the Treasury and IRS provide examples to distinguish between a 
fraudulent scheme and fraud.
    Fraudulent scheme in Sec. 1.6015-1(d) refers to a fraudulent 
transfer of assets. The final regulations clarify that a fraudulent 
scheme is a scheme to defraud the IRS or another third party, 
including, but not limited to, creditors, ex-spouses, and business 
partners. In contrast, fraud in Sec. 1.6015-3(d)(2)(ii) encompasses any 
fraud of either spouse including, but not limited to, the fraudulent 
alteration of documents, the fraudulent filing of a return or claim for 
relief, or any other fraud that may be relevant to the claim for 
relief. The fraudulent scheme and fraud exceptions are very broad and 
might overlap in some circumstances. It would be misleading to provide 
discrete examples that attempt to distinguish between a fraudulent 
scheme and fraud. Thus, the final regulations do not adopt this 
recommendation.
E. Definition of Item
    Section 1.6015-1(g)(3) of the proposed regulations defines item as 
that which is required to be separately listed on an individual income 
tax return or any required attachments, subject to one exception. The 
exception provides that interest and dividend income from the same 
source would be treated as one item. Several commentators suggested 
that this rule be eliminated because the source of the income should 
not be relevant. The requesting spouse's ability to receive partial 
relief from the deficiency relating to an erroneous item when the 
requesting spouse knew of part but not all of the item addresses the 
concern for which this rule was originally drafted. Thus, the final 
regulations adopt this recommendation.
F. Definition of ``Erroneous Item''
    Section 1.6015-1(g)(4) of the proposed regulations defines 
erroneous item as 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. One commentator suggested that it was improper to include 
items that were improperly characterized on the return as erroneous 
items. The commentator suggested that such a rule would require a 
requesting spouse to know the proper characterization of an item in 
order for the spouse to receive relief. The proposed regulations, 
however, do not require a requesting spouse to know the proper 
characterization of an item for the item to be ``erroneous.'' To the 
contrary, if the requesting spouse knew of the item that gave rise to 
an understatement or deficiency, regardless of whether the requesting 
spouse also knew the item was improperly characterized, the item is 
``erroneous'' under Sec. 1.6015-1(g)(4). To remove improper 
characterization from the definition of erroneous item might create an 
inference that requesting spouses are not entitled to relief for an 
item that was improperly characterized on a return. Such a rule would 
be inconsistent with the statutory language. Therefore, the final 
regulations do not adopt this recommendation.
    This provision was also amended to clarify that penalties and 
interest are not erroneous items. Rather, relief from penalties and 
interest will generally be determined based on the proportion of the 
total erroneous items from which the requesting spouse is relieved. If 
a penalty relates to a particular erroneous item, then relief from such 
penalty will be determined based on whether the requesting spouse was 
relieved of liability from the erroneous item.
G. Collection
    Section 1.6015-1(h) of the proposed regulations provides that the 
relief provisions of section 6015 do not negate liability that arises 
under the operation of other laws. One commentator suggested that the 
regulations adopt a rule that the IRS would not look to community 
property as a collection source when a requesting spouse with an 
interest in such community property is granted relief under section 
6015. A federal tax lien arising under section 6321 attaches to all 
property and rights to property of the taxpayer. Whether a taxpayer has 
an interest in property to which the lien can attach is determined by 
state law. Aquilino v. United States, 363 U.S. 509 (1960). Once that 
property interest is defined, federal law alone determines the 
consequences resulting from the attachment of the federal lien on the 
property. United States v. Drye, 528 U.S. 49 (1999). If under the law 
of the community property state in which the spouses reside, the IRS 
can look to community property to collect a liability of one of the 
spouses, the determination that the other spouse is entitled to relief 
under section 6015 does not affect the Service's ability to collect the 
nonrequesting spouse's liability from the community property. See, 
e.g., United States v. Stolle, 2000-1 U.S.T.C. ] 50,329 (C.D. Cal. 
2000); Hegg v. IRS, 28 P.3d 1004 (Idaho 2001). The final regulations do 
not adopt this recommendation because it goes beyond the scope of the 
statute.
H. Res Judicata
    Section 6015(g)(2) provides that, in the case of any election under 
section 6015(b) or (c), if a decision of a court in any prior 
proceeding for the same taxable year has become final, such decision 
shall be conclusive except with respect to the qualification of the 
requesting spouse for relief which was not at issue in that proceeding. 
This exception does not apply if the court determines that the 
requesting spouse participated meaningfully in the prior proceeding. In 
other words, a requesting spouse who participated meaningfully in a 
prior court proceeding concerning the underlying liability for which 
relief is sought is precluded by section 6015(g)(2) from electing 
relief under section 6015(b) or (c) after the decision becomes final, 
whether or not the requesting spouse's eligibility for relief under 
section 6015(b) or (c) was at issue in the prior proceeding. In 
addition, under section 6015(g)(2) if the requesting spouse's 
entitlement to relief from liability under section 6015 for the same 
tax year was at issue in a prior proceeding, then, regardless of the 
extent of the requesting spouse's participation in such proceeding, the 
requesting spouse would be precluded from electing relief under section 
6015(b) or (c) after the decision in such proceeding has become final. 
Thus, Sec. 1.6015-1(e) of the final regulations was amended to 
emphasize that res judicata will apply if relief under section 6015 was 
at issue in the prior proceeding, or if the requesting spouse 
meaningfully participated in the prior proceeding.
I. Scope of Section 6015
    The final regulations add Sec. 1.6015-1(g), and redesignate 
Sec. 1.6015-1(g) and (h) of the proposed regulations as Sec. 1.6015-
1(h) and (j), respectively. Section 1.6015-1(g) of the final 
regulations clarifies that relief under section 6015 will not be 
available for

[[Page 47281]]

any portion of a liability for any taxable year for which a claim for 
credit or refund is barred by operation of any law or rule of law.

2. Section 1.6015-2

    Section 1.6015-2 of the proposed regulations provides the rules 
regarding relief from joint and several liability under section 6015(b) 
that are applicable to all qualifying joint filers.
A. Knowledge or Reason to Know
    Section 1.6015-2(a)(3) of the proposed regulations provides that 
one of the requirements of relief under section 6015(b) is that the 
requesting spouse establish that he or she had no knowledge or reason 
to know of the item giving rise to the understatement. Two commentators 
pointed out that the underlined language is not consistent with section 
6015(b)(1)(C), which articulates the requirement as knowledge or reason 
to know of the understatement. Both commentators suggested that the 
rules regarding knowledge under section 6015(b) should be consistent 
with the knowledge standard developed under former section 6013(e).
    The language in Sec. 1.6015-2(a)(3) of the proposed regulations was 
not intended to reflect a new standard of knowledge in section 6015(b) 
cases. Indeed, the standards for knowledge or reason to know that were 
developed under former section 6013(e) should be used in determining a 
requesting spouse's knowledge or reason to know under section 6015(b). 
The Treasury and IRS did not intend to suggest a harsher standard of 
knowledge under section 6015(b) than that which existed under section 
6013(e). Therefore, the final regulations adopt this recommendation by 
amending the language of Sec. 1.6015-2(a)(3) of the proposed 
regulations to be consistent with the language of section 
6015(b)(1)(C).
B. Inequity
    Section 1.6015-2(d) of the proposed regulations provides that all 
of the facts and circumstances are considered in determining whether it 
was inequitable to hold a requesting spouse liable for the 
understatement attributable to the nonrequesting spouse. Among the 
factors considered is whether the requesting spouse significantly 
benefitted, in excess of normal support, either directly or indirectly 
from the understatement. Such significant benefit may include transfers 
of property or rights to property, including transfers that may be 
received several years after the year of the understatement (e.g., life 
insurance proceeds) that are traceable to items omitted from gross 
income.
    Two commentators suggested that the Treasury and IRS define normal 
support for purposes of this section. Normal support depends on the 
taxpayer's particular circumstances, including the cost of living, 
which varies across the country. Thus, a general definition in the 
final regulations would not be useful. Rules regarding normal support 
have been developed in case law under section 6013(e) and are 
applicable to section 6015(b) as well. The final regulations do not 
adopt this recommendation.
    Another commentator questioned the conclusion in the example within 
Sec. 1.6015-2(d) of the proposed regulations that life insurance 
proceeds that are traceable to items of omitted income of the 
nonrequesting spouse are considered a significant benefit. The 
commentator pointed to the legislative history as suggesting that 
Congress intended widows to benefit from the relief provided by the 
statute, and it is likely that widows would receive such a benefit. The 
reference to widows in the legislative history to section 6015 is 
contained in a footnote to the legislative history for section 6015(c). 
The footnote provides that no longer married for purposes of that 
section includes widowed. The reference to widows is not in the 
legislative history for section 6015(b) with respect to the rules 
regarding equity under section 6015(b).
    The courts have recognized that the rules regarding knowledge or 
reason to know and equity under section 6015(b) are consistent with the 
rules regarding knowledge or reason to know that were developed under 
section 6013(e). See, e.g., Von Kalinowski v. Commissioner, T.C. Memo. 
2001-21. The rule regarding significant benefit from life insurance 
proceeds was contained in the regulations under Sec. 1.6013-5. As life 
insurance proceeds traceable to items of omitted income were considered 
a significant benefit for purposes of section 6013(e), they are also 
considered a significant benefit for purposes of section 6015(b). 
While, the final regulations do not adopt this recommendation, they do 
clarify that the receipt of property, such as insurance proceeds or the 
value of life insurance, traceable to items omitted by the 
nonrequesting spouse must be beyond normal support before they are 
considered a significant benefit.
    One commentator suggested that the final regulations provide that 
the IRS should consider the entire property settlement, if any, in 
order to determine whether the requesting spouse significantly 
benefitted from the understatement. The commentator suggested that if 
the requesting spouse did not receive an equitable distribution of 
assets during the divorce proceedings, the Service should not consider 
any items received by the requesting spouse that are traceable to items 
of omitted income as a significant benefit. Such a rule, however, would 
require the IRS to make a determination of whether the distribution of 
assets was fair in a divorce proceeding, which may have taken place 
years before and to which the IRS was not a party. Many factors, 
including equity, are typically considered under state and local laws 
in determining the distribution of assets in a divorce proceeding. It 
would be inappropriate for the IRS to pass judgment on the equity of 
such determinations. The final regulations do not adopt this 
recommendation.
    One commentator suggested that the final regulations adopt a de 
minimis exception to significant benefit. However, if the benefit was 
de minimis, it would not be significant. Thus, the final regulations do 
not adopt this recommendation.
    Section 1.6015-2(d) of the proposed regulations also provides a 
list of factors that may be considered in determining whether it would 
be inequitable to hold the requesting spouse liable for an 
understatement. Such factors include the fact that the nonrequesting 
spouse has not fulfilled support obligations, or that the spouses are 
divorced, legally separated, or have not been members of the same 
household for the 12 months directly preceding the election. One 
commentator suggested that whether the spouses are divorced or legally 
separated, and the duration of the spouses' separation, should not be 
relevant to a determination of equity. The language in the proposed 
regulations was used in an attempt to be consistent with the marital 
status determination in section 6015(c). After further consideration, 
the Treasury and IRS have determined that, as the rules regarding 
equity under section 6015(b) are the same as those developed under 
section 6013(e), the final regulations should adopt the language that 
was used in former Sec. 1.6013-5 regarding the couple's marital status. 
Thus, although the final regulations do not adopt the commentator's 
recommendation, the final regulations amend the language of 
Sec. 1.6015-2(d) of the proposed regulations to be consistent with the 
language regarding equity under former Sec. 1.6013-5, which provided 
that facts relevant to the determination of equity include whether the 
requesting spouse was abandoned by the nonrequesting

[[Page 47282]]

spouse and whether the spouses are divorced or separated.
    Section 1.6015-2(d) of the proposed regulations cross-references 
Rev. Proc. 2000-15 (2000-1 C.B. 447), for additional guidance on the 
definition of inequitable. Two commentators suggested that this cross-
reference was inappropriate because the public did not have an 
opportunity to comment on the procedures in Rev. Proc. 2000-15. The 
procedures in Rev. Proc. 2000-15 were originally published in Notice 
98-61 (1998-2 C.B. 756). Notice 98-61 was published on December 21, 
1998, and the Treasury and IRS specifically requested comments on the 
procedures prescribed therein. The comment period was extended from 
April 30, 1999, to June 30, 1999, by Notice 99-29 (1999-1 C.B. 1101). 
Those procedures were finalized, with minor changes, in Rev. Proc. 
2000-15, in January 2000. In addition, as the proposed regulations 
cross-referenced Rev. Proc. 2000-15, the procedures prescribed therein 
were again subject to comment during the comment period for the 
proposed regulations. No such comments were received.
    Both Secs. 1.6015-2 and 1.6015-4 require a determination of whether 
it was inequitable to hold a requesting spouse liable, and such a 
determination should be consistent under both relief provisions. Thus, 
it is appropriate for the final regulations to cross-reference the 
procedures for determining whether it is inequitable to hold a 
requesting spouse liable as outlined in Rev. Proc. 2000-15. The final 
regulations do not adopt this recommendation.

3. Section 1.6015-3

    Section 1.6015-3 of the proposed regulations provides the rules 
regarding the allocation of a deficiency under section 6015(c) for 
spouses who are no longer married, legally separated, or not members of 
the same household.
A. Marital Status
    Section 1.6015-3(a) of the proposed regulations provides that 
spouses who are no longer married, legally separated, or who have not 
been members of the same household for the 12 months preceding the 
election may allocate a deficiency between the spouses in proportion to 
each spouse's share of the deficiency. Section 1.6015-3(b)(1) of the 
proposed regulations defines divorced as a requesting spouse having a 
decree of divorce that is recognized in the jurisdiction in which the 
requesting spouse resides. Section 1.6015-3(b)(2) defines legally 
separated as a separation that is recognized under the laws of the 
jurisdiction in which the requesting spouse resides. Several 
commentators suggested that the final regulations cross-reference the 
rules of section 7703, and the regulations thereunder, for a 
determination of whether a requesting spouse is divorced or legally 
separated. The final regulations adopt this recommendation.
    Section 1.6015-3(b)(3)(i) of the proposed regulations defines 
members of the same household and provides that spouses are considered 
members of the same household if one of the spouses is temporarily 
absent from the household, and the household is maintained in 
anticipation of that spouse's return. Such temporary absences include, 
but are not limited to, incarceration, hospitalization, business 
travel, vacation travel, military service, or education away from home. 
One commentator suggested that the inclusion of incarceration and 
hospitalization as temporary absences was inappropriate under the 
circumstances of a typical case where a spouse is requesting relief 
from joint and several liability. Section 6015(c), however, provides 
relief to spouses who are divorced, widowed, legally separated, or who 
were not members of the same household for the 12 months preceding the 
election. H.R. Conf. Rept. No. 599, 105th Cong., 2d Sess. 252 (1998); 
S. Rep. No. 105-174 (1998). The Treasury and IRS have interpreted ``not 
members of the same household'' as meaning that the spouses live apart 
and are estranged. Thus, if the spouses live apart due to a temporary 
absence, but the household is being maintained in anticipation of the 
absent spouse's return, then the spouses are still considered members 
of the same household. The exceptions regarding temporary absences are 
also consistent with the regulations under section 152, regarding 
temporary absences for purposes of a dependency exemption. The election 
to allocate liability is not available to spouses who are not divorced, 
widowed, legally separated, or living apart and estranged. Although the 
language in the final regulations was modified to more closely track 
the language of the regulations under section 152, the final 
regulations do not adopt this recommendation.
    One commentator suggested that, because the election to allocate 
liability was meant to address the situation where spouses were 
divorced, widowed, or estranged, the final regulations should adopt a 
rule that spouses who indefinitely maintain separate households (the 
spouses have jobs in different cities, for example) but who are not 
estranged are considered members of the same household for purposes of 
this provision. This clarification is adopted in the final regulations.
    In addition, Sec. 1.6015-3(a) of the final regulations clarifies 
that, for purposes of section 6015(c), the marital status of a deceased 
requesting spouse is determined on the earlier of the date of the 
election or the date of the requesting spouse's death in accordance 
with section 7703(a)(1).
B. Actual Knowledge
    Section 1.6015-3(c)(2) of the proposed regulations provides that 
relief under section 6015(c) is not available if the IRS demonstrates 
that the requesting spouse had actual knowledge of the item giving rise 
to the deficiency at the time he or she signed the return. The proposed 
regulations adopt the holding in Cheshire v. Commissioner, 115 T.C. 183 
(2000), aff'd, 282 F.3d 326 (5th Cir. 2002), that, in an omission of 
income case, the relevant inquiry is whether the requesting spouse had 
actual knowledge of the item, rather than whether the requesting spouse 
had actual knowledge of the tax consequences of the item. Several 
commentators suggested that the regulations provide that actual 
knowledge of the item means actual knowledge of the proper tax 
treatment of the item. The legislative history to section 6015(c) 
provides an example of a requesting spouse who had actual knowledge of 
a portion of the nonrequesting spouse's self-employment income that was 
omitted from the return. See H.R. Conf. Rep. No. 599, 105th Cong., 2d 
Sess. 253 (1998). The example provides that the requesting spouse 
remains liable for the portion of the income tax and self-employment 
tax deficiency attributable to the portion of the self-employment 
income of which the requesting spouse had actual knowledge. Id. Nothing 
in the example indicates that the IRS would have to establish that such 
spouse had actual knowledge that self-employment income was subject to 
income tax and self-employment tax in order to invalidate the 
requesting spouse's section 6015(c) election under section 
6015(c)(3)(C). In addition, in many cases, neither spouse may know the 
proper tax treatment of an item, and both spouses may have equal 
knowledge regarding the item. The fact that the spouse to whom the item 
is not attributable does not understand the intricacies of tax law 
should not be relevant to a determination of whether the spouse had 
actual knowledge of the item. Therefore, the final regulations do not 
adopt the recommendation to have the regulations provide that actual 
knowledge of the item means actual

[[Page 47283]]

knowledge of the proper tax treatment of the item.
    The Tax Court also held that, in an erroneous deduction case, the 
relevant inquiry is whether the requesting spouse had actual knowledge 
of the factual circumstances which made the item unallowable as a 
deduction, rather than whether the requesting spouse knew the proper 
tax consequences of the item. King v. Commissioner, 116 T.C. 198 
(2001). The final regulations adopt the standard for erroneous 
deductions set forth in King in Sec. 1.6015-3(c)(2)(i)(B)(1).
    Section 1.6015-3(c)(2)(i)(B)(2) of the final regulations also 
clarifies that if a deduction or credit is fictitious or inflated, the 
relevant inquiry is whether the requesting spouse had actual knowledge 
that the expense was not incurred, or not incurred to that extent.
    Section 1.6015-3(c)(2)(iii) of the proposed regulations provides 
that one factor that may be relied upon in demonstrating that a 
requesting spouse had actual knowledge of an item giving rise to a 
deficiency is whether the requesting spouse deliberately avoided 
learning about the item. Several commentators suggested that this 
factor was inappropriate in that it would harm those individuals who do 
not pay attention to the family finances, or who are afraid to confront 
the nonrequesting spouse about financial matters. This rule, however, 
addresses situations where the requesting spouse makes a deliberate 
effort to avoid learning about an item in an attempt to be shielded 
from liability. For an example of deliberate avoidance, see United 
States v. Campbell, 977 F.2d 854 (4th Cir. 1992) (Criminal money 
laundering case where the Fourth Circuit found that a finding of 
knowledge may be made by inferences drawn when a party deliberately 
closes his or her eyes to what would otherwise be obvious, i.e., 
willful blindness to the existence of a fact).
    As discussed above in section 1.B. of this preamble, section 
6015(c)(3)(C) provides that the limitation on a requesting spouse's 
ability to allocate an erroneous item to the nonrequesting spouse when 
the requesting spouse had actual knowledge of that item does not apply 
if the requesting spouse establishes that he or she signed the return 
under duress. When a requesting spouse signs a return under duress, it 
is not that spouse's return, and accordingly, the spouse is not jointly 
and severally liable for the tax on that return. Thus, such spouse does 
not need the relief from joint and several liability provided by 
section 6015. The final regulations interpret the ``duress'' provision 
in section 6015(c)(3)(C) to mean that a requesting spouse in an abusive 
situation who does not establish that he or she signed the joint return 
under duress and elects relief from joint and several liability can 
receive such relief regardless of the requesting spouse's knowledge of 
the erroneous item at the time the return was signed. Although the 
requesting spouse may have voluntarily signed the joint return without 
a direct threat of abuse from the nonrequesting spouse, he or she may 
have not challenged the content of the joint return due to a long 
history of abuse from the nonrequesting spouse, resulting in a general 
fear of the nonrequesting spouse's reprisal. Thus, Sec. 1.6015-
3(c)(2)(v) of the final regulations provides that if a requesting 
spouse establishes that he or she was the victim of domestic abuse 
prior to the time the return was signed, and that, as a result of the 
prior abuse, the requesting spouse did not challenge the treatment of 
any items on the return for fear of the nonrequesting spouse's 
reprisal, the actual knowledge limitation in Sec. 1.6015-3(c)(2) will 
not apply.
C. Disqualified Assets
    Section 1.6015-3 of the proposed regulations provides that the 
portion of a deficiency for which a requesting spouse remains liable 
will be increased (up to the entire amount of the deficiency) by the 
value of any disqualified asset that is transferred to the requesting 
spouse. A disqualified asset is defined as that which is transferred 
for the purpose of avoidance of tax or payment of tax. Any asset 
transferred from the date that is 1 year prior to the date the first 
letter of proposed deficiency (30-day letter) is mailed, is presumed 
disqualified. The presumption will not apply if the asset is 
transferred pursuant to a divorce decree or separate maintenance 
agreement. Two commentators suggested that the use of the terms divorce 
decree and separate maintenance agreement is inconsistent with the 
language of the statute. The final regulations adopt this 
recommendation by amending the language of the regulation to read 
``decree of divorce or separate maintenance or written instrument 
incident to such decree.''
    One commentator suggested that there should be a de minimis 
exception to the disqualified asset limitation of $5,000. The Treasury 
and IRS have determined that a de minimis exception to the disqualified 
asset rule is inappropriate. The disqualified asset rule limits relief 
under section 6015(c) when an asset is transferred to the requesting 
spouse for the purpose of avoidance of tax or payment of tax. The 
requesting spouse's participation in the attempt to avoid tax or the 
payment of tax should prevent the spouse from obtaining relief no 
matter how small the value of the asset. Thus, the final regulations do 
not adopt this recommendation for a de minimis exception.
    One commentator suggested that an example of when a requesting 
spouse overcomes the disqualified asset presumption in Sec. 1.6015-
3(c)(3)(iii) be included in the final regulations. The final 
regulations adopt this recommendation.
    One commentator suggested that some assets should be disqualified, 
even if they are transferred pursuant to a decree of divorce or 
separate maintenance or a written instrument incident to such a decree, 
if it can be shown that the assets are transferred for the purpose of 
avoidance of tax or payment of tax. The final regulations adopt this 
recommendation by clarifying the rule. A disqualified asset is defined 
as that which is transferred for the purpose of avoidance of tax or 
payment of tax. Regardless of the situation, if the asset is 
transferred for that purpose, it is a disqualified asset. The rule 
regarding a transfer pursuant to a decree of divorce or separate 
maintenance provides that the ``presumption'' that an asset is 
disqualified will not apply if the asset is transferred pursuant to a 
decree unless the IRS can establish that the asset was transferred for 
the purpose of avoidance of tax or the payment of tax. If, however, in 
the absence of a decree, the requesting spouse cannot establish that 
the purpose of the transfer was not the avoidance of tax or payment of 
tax, the asset will be disqualified, and its value will be added to the 
amount of the deficiency for which the requesting spouse remains 
liable.
D. Burden of Proof for Allocation
    Section 1.6015-3(d)(3) of the proposed regulations provides that a 
requesting spouse seeking to allocate liability under section 6015(c) 
has the burden of proof to establish the proper allocation of items. 
One commentator suggested that the final regulations provide an 
exception to this rule for cases where the requesting spouse is unable 
to locate the appropriate documents to establish the proper allocation. 
Section 6015(c)(2) places the burden on the requesting spouse. The 
final regulations do not adopt this recommendation.

[[Page 47284]]

E. Other Comments on Allocation of Items
    Section 1.6015-3(d)(4)(ii) of the proposed regulations provides 
that 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 addition to tax (other than a tax imposed by 
section 1 or 55) is allocated separately to that spouse. One 
commentator suggested that such items should be allocated 
proportionately between the spouses instead of solely to one spouse or 
the other. Section 6015(d)(2) provides that if a deficiency is 
attributable to the disallowance of a credit, or any tax (other than 
tax imposed by section 1 or 55) required to be included with the joint 
return, and the item is allocated to one individual, the deficiency 
shall be allocated to that individual. The item will not be subject to 
the proportionate allocation in section 6015(d)(1). The statutory 
language of section 6015(d)(2) suggests that separate treatment of 
items is only appropriate when the item is allocable solely to one 
spouse or the other. Thus, the final regulations adopt this 
recommendation by providing that the allocation of taxes and credits 
attributable to both spouses will be determined by the IRS on a case-
by-case basis.
F. Child's Liability
    Section 1.6015-3(d)(4)(iii) of the proposed regulations provides 
that any portion of a deficiency relating to the liability of a child 
of the requesting and nonrequesting spouse will be allocated jointly to 
both spouses. If one of the spouses has sole custody of the child, the 
proposed regulations provided that the liability will be allocated 
solely to that spouse. One commentator suggested that the liability 
should be allocated based on the child's residence; another commentator 
suggested that the liability be allocated based on which parent is in 
control of the child's finances; and a third commentator suggested that 
it is not clear to which spouse a child's liability should be 
allocated. The final regulations address these recommendations, in 
part, by removing the exception to allocating the child's liability 
jointly to both parents when only one parent has custody of the child.

4. Section 1.6015-4

    Section 1.6015-4 of the proposed regulations provides the rules 
regarding equitable relief from joint and several liability under 
section 6015(f). Section 1.6015-4(b) of the proposed regulations 
provides that relief under Sec. 1.6015-4 is not available to circumvent 
the ``no refund'' rule of Sec. 1.6015-3(c)(1). Several commentators 
suggested that this rule be removed. Under Rev. Proc. 2000-15, refunds 
under section 6015(f) are generally limited to amounts paid pursuant to 
an installment agreement, on which the requesting spouse is not in 
default, from the date the claim for relief is filed until a final 
determination is made. The rule regarding installment payments is 
intended to encourage individuals to remain current on their 
installment agreements. Therefore, the Treasury and IRS determined that 
limited refunds would be appropriate to encourage such compliance. 
Section 6015(g)(3), however, precludes the allowance of a credit or 
refund under section 6015(c). It would be inappropriate to circumvent 
the rule of section 6015(g)(3) by giving equitable relief in the form 
of a refund when the requesting spouse qualifies for relief under 
section 6015(c). Thus, the final regulations do not adopt this 
recommendation.

5. Section 1.6015-5

    Section 1.6015-5(b)(2) of the proposed regulations defines 
collection activity as, among other things, an administrative levy or 
seizure described by section 6331. Section 1.6015-5(b)(2) of the final 
regulations provides that the term collection activity includes a 
collection due process (CDP) notice under section 6330. That notice, 
which occurs in all cases before levy or seizure except in the case of 
levies on state tax refunds and in jeopardy situations, provides 
taxpayer notice of the Service's intent to levy and the taxpayer's 
right to a pre-levy CDP hearing. This change is consistent with the 
legislative history of section 6015(e). See H.R. Conf. Rep. No. 599, 
105th Cong. 2d Sess. 250-251 (1998).

6. Section 1.6015-6

    Section 1.6015-6 of the proposed regulations provides rules 
regarding the nonrequesting spouse's right to notice and to participate 
in the administrative determination of whether the requesting spouse is 
entitled to relief under any of the provisions of section 6015. Some 
commentators suggested that the proposed regulations are overly broad 
in providing rights to the nonrequesting spouse, while other 
commentators suggested that the proposed regulations unnecessarily 
limit the rights of the nonrequesting spouse. One commentator suggested 
that the IRS have minimal contact with the nonrequesting spouse and 
that the nonrequesting spouse not be automatically notified at the 
administrative level. This commentator also suggested that all of the 
information submitted by the nonrequesting spouse be shared with the 
requesting spouse, but not vice versa. The commentator suggested that 
the nonrequesting spouse should only be given information submitted by 
the requesting spouse if the nonrequesting spouse files his or her own 
request for relief. Section 6015 specifically provides the 
nonrequesting spouse with two opportunities to participate in the 
determination of whether the requesting spouse is entitled to relief 
(once at the administrative level under section 6015(h)(2), and once 
when the petition has been filed in the Tax Court under section 
6015(e)(4)). The nonrequesting spouse's participation is necessary to 
ensure that relief is only granted in meritorious cases. The final 
regulations do not adopt these recommendations.
    Section 1.6015-6(a)(1) of the proposed regulations provides that, 
at the request of one spouse, the IRS will omit from shared documents 
the spouse's new name, address, employer, telephone number, and any 
other information that would reasonably identify the spouse's location. 
One commentator suggested that this information always be omitted from 
shared documents regardless of whether a spouse requests such 
treatment. The final regulations do not adopt this recommendation. 
Instead, this statement is removed from the final regulations. To 
address this concern, however, the Internal Revenue Manual provides 
that the IRS will omit from shared documents any information that could 
reasonably identify a spouse's location.
    A commentator made several suggestions to help ensure that the 
nonrequesting spouse will have a meaningful opportunity to participate 
in the administrative determination. One suggestion is that the 
nonrequesting spouse have access to all information submitted by the 
requesting spouse, including the basis for relief. Under the proposed 
regulations, the IRS has the discretion to share information submitted 
by one spouse with the other spouse. It is the Service's practice to 
share information at the request of one of the spouses. The final 
regulations adopt this recommendation by clarifying that information 
will be shared on request as long as the information would not impair 
tax administration.
    Another suggestion was that the nonrequesting spouse be afforded 
administrative appeal rights if the nonrequesting spouse disagrees with 
the Service's determination that the

[[Page 47285]]

requesting spouse is entitled to relief. The nonrequesting spouse's 
participation is essential to a proper determination of relief. The 
nonrequesting spouse may participate during the preliminary 
determination of relief, and if the requesting spouse files an 
administrative appeal or a petition in court, the nonrequesting spouse 
may participate in those proceedings as well. In addition, if a 
requesting spouse files a petition in Tax Court, the IRS is precluded 
from settling with the requesting spouse unless the nonrequesting 
spouse agrees to the settlement. See Corson v. Commissioner, 114 T.C. 
354 (2000). The nonrequesting spouse is afforded a meaningful 
opportunity to participate in the administrative determination of 
relief, as well. Thus, the final regulations do not prohibit the 
nonrequesting spouse from administratively appealing the IRS's 
determination that the requesting spouse is entitled to relief from 
joint and several liability.

7. Section 1.6015-7

    Section 1.6015-7 of the final regulations reflects changes to 
section 6015 that were made by section 313 of the CRA with respect to 
waivers and the 90-day period for filing a Tax Court petition.
    Section 1.6015-7(c)(1) of the final regulations reflects the fact 
that when the requesting spouse elects relief under Sec. 1.6015-2 or 
1.6015-3, the IRS is restricted from taking collection actions until a 
decision of the Tax Court becomes final. Section 1.6015-7(c)(1) also 
reflects the fact that section 6015(e)(1)(B)(i) provides that rules 
similar to the rules of section 7485 will apply with respect to 
collection actions. Section 7485 provides that the IRS may begin 
collection activity upon the filing of a notice of appeal from a Tax 
Court decision unless the taxpayer files an appeal bond. Because 
refunds may be limited under section 6015, a requesting spouse may be 
denied a refund of amounts collected during the pendency of an appeal 
proceeding, even if he or she is granted relief on appeal. Therefore, 
the IRS has determined that at this time it will not begin any 
collection activities against the requesting spouse upon the filing of 
a notice of appeal unless the expiration of the statute of limitations 
on collection is imminent, or that collection will be jeopardized by 
delay.

Special Analyses

    It has been determined that these final 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 these 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply.

Drafting Information

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

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    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 * * *
    Section 1.6015-1 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-2 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-3 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-4 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-5 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-6 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-7 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-8 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-9 also issued under 26 U.S.C. 6015(h). * * *


    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 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) for married individuals filing 
separate returns. Section 6212 applies to the assessment of any 
deficiency in tax on such return.


Sec. 1.6013-5  [Removed]

    3. Section 1.6013-5 is removed.

    4. 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.
    (1) In general.
    (2) Exception for agreements relating to TEFRA partnership 
proceedings.
    (3) Examples.
    (d) Fraudulent scheme.
    (e) Res judicata and collateral estoppel.
    (f) Community property laws.
    (1) In general.
    (2) Example.
    (g) Scope of this section and Secs. 1.6015-2 through 1.6015-9.
    (h) Definitions.
    (1) Requesting spouse.
    (2) Nonrequesting spouse.
    (3) Item.
    (4) Erroneous item.
    (5) Election or request.
    (i) [Reserved]
    (j) 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) Members of the same household.
    (i) Temporary absences.
    (ii) Separate dwellings.
    (c) Limitations.
    (1) No refunds.
    (2) Actual knowledge.
    (i) In general.
    (A) Omitted income.
    (B) Deduction or credit.

[[Page 47286]]

    (1) Erroneous deductions in general.
    (2) Fictitious or inflated deduction.
    (ii) Partial knowledge.
    (iii) Knowledge of the source not sufficient.
    (iv) Factors supporting actual knowledge.
    (v) Abuse exception.
    (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) Section 6330 notice.
    (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.
    (2) Waiver of the restrictions on collection.


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) Waiver of the restrictions on collection.
    (3) 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.
    (4) 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. A spouse or former spouse may be 
relieved of joint and several liability for Federal income tax 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 Internal Revenue 
Service will consider 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 in the absence of an affirmative election 
made by the requesting spouse under either of those sections. If in the 
course of reviewing a request for relief only under Sec. 1.6015-4, the 
IRS determines that the requesting spouse may qualify for relief under 
Sec. 1.6015-2 or 1.6015-3 instead of Sec. 1.6015-4, the Internal 
Revenue Service will correspond with the requesting spouse to see if 
the requesting spouse would like to amend his or her request to elect 
the application of Sec. 1.6015-2 or 1.6015-3. If the requesting spouse 
chooses to amend the claim for relief, the requesting spouse must 
submit an affirmative election under Sec. 1.6015-2 or 1.6015-3. The 
amended claim for relief will relate back to the original claim for 
purposes of determining the timeliness of the claim.
    (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--(1) In general. 
A requesting spouse is not entitled to relief from joint and several 
liability under Sec. 1.6015-2, 1.6015-3, or 1.6015-4 for any tax year 
for which the requesting spouse has entered into a closing agreement 
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, 1.6015-3, or 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.
    (2) Exception for agreements relating to TEFRA partnership 
proceedings. The rule in paragraph (c)(1) of this section regarding the 
unavailability of relief from joint and several liability when the 
liability to which the claim for relief relates was the subject of a 
prior closing agreement entered into by the requesting spouse, shall 
not apply to an agreement described in section 6224(c) with respect to 
partnership items (or any penalty, addition to tax, or additional 
amount that relates to adjustments to partnership items) that is 
entered into while the requesting spouse is a party to a pending 
partnership-level proceeding conducted under the provisions of 
subchapter C of chapter 63 of subtitle F of the Internal Revenue Code 
(TEFRA partnership proceeding). If, however, a requesting spouse enters 
into a closing agreement pertaining to any penalty, addition to tax, or 
additional amount that relates to adjustments to partnership items, at 
a time when the requesting spouse is not a party to a pending TEFRA 
partnership proceeding (e.g., in connection with an affected items 
proceeding), then the provisions of paragraph (c)(1) shall apply. 
Similarly, if a requesting spouse enters into a closing agreement with 
respect to both partnership items (including affected items) and 
nonpartnership items, while the requesting spouse is a party to a 
pending TEFRA partnership proceeding, the provisions of paragraph 
(c)(1) shall apply to the portion of the closing agreement that relates 
to nonpartnership items and the provisions of this paragraph (c)(2) 
shall apply to the remainder of the closing agreement.

[[Page 47287]]

    (3) Examples. The following examples illustrate the rules of this 
paragraph (c):

    Example 1. H and W file joint returns for taxable years 2002-
2004, on which they claim losses attributable to H's limited 
partnership interest in Partnership A. In January 2006, the Internal 
Revenue Service commences an audit under the provisions of 
subchapter C of chapter 63 of subtitle F of the Internal Revenue 
Code (TEFRA partnership proceeding) regarding Partnership A's 2002-
2004 taxable years, and sends H and W a notice under section 
6223(a)(1). In September 2007, H files a bankruptcy petition under 
chapter 7 of the Bankruptcy Code and receives a discharge in April 
2008. In August 2008, H and W enter into a closing agreement with 
the Internal Revenue Service, in which H and W agree to the 
disallowance of some of the claimed losses from Partnership A for 
taxable years 2002 through 2007. W may not later claim relief from 
joint and several liability under section 6015 as to the disallowed 
losses attributable to Partnership A for taxable years 2002 to 2007. 
This is because at the time W entered into the closing agreement, 
H's partnership items attributable to Partnership A had converted to 
nonpartnership items as a result of H's filing of the bankruptcy 
petition. The conversion of H's items also terminated W's status as 
a partner in the TEFRA partnership proceeding regarding Partnership 
A. Consequently, the closing agreement did not pertain to 
partnership items and W was not a party to a pending partnership-
level proceeding regarding Partnership A when she entered into the 
closing agreement. Accordingly, the exception in paragraph (c)(2) of 
this section for agreements relating to TEFRA partnership 
proceedings does not apply.
    Example 2. H and W file a joint return for taxable year 2002, on 
which they claim $25,000 in losses attributable to H's general 
partnership interest in Partnership B. In November 2003, the Service 
proposes a deficiency in tax relating to H's and W's 2002 joint 
return arising from omitted taxable interest income in the amount of 
$2,000 that is attributable to H. In July 2005, the Internal Revenue 
Service commences a TEFRA partnership proceeding regarding 
Partnership B's 2002 and 2003 taxable years, and sends H and W a 
notice under section 6223(a)(1). In March 2006, H and W enter into a 
closing agreement with the Service. The closing agreement provides 
for the disallowance of the claimed losses from Partnership B in 
excess of H's and W's out-of-pocket expenditures relating to 
Partnership B for taxable year 2002 and any subsequent year(s) in 
which H and W claimed losses from Partnership B. In addition, H and 
W agree to the imposition of the accuracy-related penalty under 
section 6662 with respect to the disallowed losses attributable to 
partnership B. In the closing agreement, H and W also agree to the 
deficiency resulting from the omitted interest income for taxable 
year 2002. W may not later claim relief from joint and several 
liability under section 6015 as to the deficiency in tax 
attributable to the omitted income of $2,000 for taxable year 2002, 
because this portion of the closing agreement pertains to 
nonpartnership items. In contrast, W may claim relief from joint and 
several liability as to the disallowed losses and accuracy-related 
penalty attributable to Partnership B for taxable year 2002 or any 
subsequent year(s). This is because this portion of the closing 
agreement pertains to partnership and affected items and was entered 
into at a time when W was a party to the pending partnership-level 
proceeding regarding Partnership B. Consequently, W never had the 
opportunity to raise the innocent spouse defense in the course of 
that TEFRA partnership proceeding. (See Sec. 1.6015-5(b)(5) relating 
to premature claims).
    (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. For purposes of this section, a fraudulent 
scheme includes a scheme to defraud the Service or another third party, 
including, but not limited to, creditors, ex-spouses, and business 
partners.
    (e) Res judicata and collateral estoppel. A requesting spouse is 
barred from relief from joint and several liability under section 6015 
by res judicata for any tax year for which a court of competent 
jurisdiction has rendered a final decision on the requesting spouse's 
tax liability if relief under section 6015 was at issue in the prior 
proceeding, or if the requesting spouse meaningfully participated in 
that proceeding and could have raised relief under section 6015. A 
requesting spouse has not meaningfully participated in a prior 
proceeding if, due to the effective date of section 6015, relief under 
section 6015 was not available in that proceeding. Also, any final 
decisions rendered by a court of competent jurisdiction regarding 
issues relevant to section 6015 are conclusive and the requesting 
spouse may be collaterally estopped from relitigating those issues.
    (f) Community property laws--(1) In general. In determining whether 
relief is available under Sec. 1.6015-2, 1.6015-3, or 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) Scope of this section and Secs. 1.6015-2 through 1.6015-9. This 
section and Secs. 1.6015-2 through 1.6015-9 do not apply to any portion 
of a liability for any taxable year for which a claim for credit or 
refund is barred by operation of law or rule of law.
    (h) 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 
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. 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. In 
addition, a deduction for an expense that is personal in nature that 
results in an understatement or deficiency in tax is an erroneous item 
of deduction. 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). 
Penalties and interest are not erroneous items. Rather, relief from 
penalties and interest will

[[Page 47288]]

generally be determined based on the proportion of the total erroneous 
items from which the requesting spouse is relieved. If a penalty 
relates to a particular erroneous item, see Sec. 1.6015-3(d)(4)(iv)(B).
    (5) Election or request. A qualifying election under Sec. 1.6015-2 
or 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 paragraphs (h)(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 solely 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.
    (i) [Reserved]
    (j) 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, 1.6015-3, or 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 (j):

    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 
will 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 section 6015, and H's estate remains 
solely liable. The Internal Revenue Service may seek to collect the 
deficiency from W to the 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(h)(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 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 understatement if he or she actually knew of 
the understatement, or if a reasonable person in similar circumstances 
would have known of 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 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).
    (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 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 guidance concerning the criteria to be 
used in determining whether it is inequitable to hold a requesting 
spouse jointly and severally liable under this section, see Rev. Proc. 
2000-15 (2000-1 C.B. 447), or other guidance published by the Treasury 
and IRS (see Sec. 601.601(d)(2) of this chapter).
    (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. H and W had a joint 
bank account into which H and W deposited all of their reported 
income. Each month during 2004, H transferred an additional $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.

[[Page 47289]]

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. For purposes of this section, 
the marital status of a deceased requesting spouse will be determined 
on the earlier of the date of the election or the date of death in 
accordance with section 7703(a)(1). 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(h)(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 determination of whether a 
requesting spouse is divorced for purposes of this section will be made 
in accordance with section 7703 and the regulations thereunder. Such 
determination will be made as of the date the election is filed.
    (2) Legally separated. A determination of whether a requesting 
spouse is legally separated for purposes of this section will be made 
in accordance with section 7703 and the regulations thereunder. Such 
determination will be made as of the date the election is filed.
    (3) 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, illness, business, vacation, military 
service, or education.
    (ii) Separate dwellings. A husband and wife who reside in the same 
dwelling are considered members of the same household. In addition, a 
husband and wife who reside in two separate dwellings are considered 
members of the same household if the spouses are not estranged or one 
spouse 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) In general. If, under section 
6015(c)(3)(C), the Secretary demonstrates that, at the time the return 
was signed, the requesting spouse had actual knowledge 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. The Service, having both the burden of 
production and the burden of persuasion, must establish, by a 
preponderance of the evidence, that the requesting spouse had actual 
knowledge of the erroneous item in order to invalidate the election.
    (A) Omitted income. In the case of omitted income, knowledge of the 
item includes knowledge of the receipt of the income. 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. This rule 
applies equally in situations where the other spouse has unreported 
income although the spouse does not have an actual receipt of cash 
(e.g., dividend reinvestment or a distributive share from a flow-
through entity shown on Schedule K-1, ``Partner's Share of Income, 
Credits, Deductions, etc.'').
    (B) Deduction or credit--(1) Erroneous deductions in general. In 
the case of an erroneous deduction or credit, knowledge of the item 
means knowledge of the facts that made the item not allowable as a 
deduction or credit.
    (2) Fictitious or inflated deduction. If a deduction is fictitious 
or inflated, the IRS must establish that the requesting spouse actually 
knew that the expenditure was not incurred, or not incurred to that 
extent.
    (ii) Partial knowledge. 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 section. 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 section.
    (iii) Knowledge of the source not sufficient. 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. Similarly, the IRS need not 
establish that a requesting spouse knew of the source of an erroneous 
item in order to establish that the requesting spouse had actual 
knowledge of the item itself. For example, assume H knew that W 
received $1,000, but he did not know the source of the $1,000. W and H 
omit the $1,000 from their joint return. H has actual knowledge of the 
item giving rise to the deficiency ($1,000), and relief is not 
available under this section.
    (iv) Factors supporting actual knowledge. To demonstrate that a 
requesting spouse had actual knowledge of an erroneous item at the time 
the return was signed, the IRS may rely upon all of the facts and 
circumstances. One factor that may be relied upon in

[[Page 47290]]

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, and the requesting spouse's election would be 
invalid with respect to that entire 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 asserted 
dominion and control over 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)(iv) because the account is not held in her name and 
there is no other indication that she asserted dominion and control 
over the item.
    (v) Abuse exception. If the requesting spouse establishes that he 
or she was the victim of domestic abuse prior to the time the return 
was signed, and that, as a result of the prior abuse, the requesting 
spouse did not challenge the treatment of any items on the return for 
fear of the nonrequesting spouse's retaliation, the limitation on 
actual knowledge in this paragraph (c) will not apply. However, if the 
requesting spouse involuntarily executed the return, the requesting 
spouse may choose to establish that the return was signed under duress. 
In such a case, Sec. 1.6013-4(d) applies.
    (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. The presumption does not apply, however, if the 
requesting spouse establishes that the asset was transferred pursuant 
to a decree of divorce or separate maintenance or a written instrument 
incident to such a decree. If the presumption does not apply, but the 
Internal Revenue Service can establish that the purpose of the transfer 
was the avoidance of tax or payment of tax, the asset will be 
disqualified, and its value will be added to the amount of the 
deficiency for which the requesting spouse remains liable. If the 
presumption applies, a requesting spouse may still 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. H and W 
divorce in July 2003. 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 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. (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 and failure to review return. (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.
    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's 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

[[Page 47291]]

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 5 
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 
5 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 5 
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 5 
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 6 
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 
6 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 6 
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 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 a decree of divorce, 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 decree of divorce.
    Example 8. Overcoming the disqualified asset presumption. (i) H 
and W are married for 25 years. Every September, on W's birthday, H 
gives W a gift of $500. On February 28, 2002, H and W receive a 30-
day letter from the Internal Revenue Service relating to their 1998 
joint individual Federal income tax return. The deficiency relates 
to H's Schedule C business, and W had no knowledge of the items 
giving rise to the deficiency. H and W are legally separated in June 
2003, and, despite the separation, H continues to give W $500 each 
year for her birthday. H is not required to give such amounts 
pursuant to a decree of divorce or separate maintenance.
    (ii) On January 27, 2004, W files an election to allocate the 
deficiency to H. The $1,500 transferred from H to W from February 
28, 2001 (a year before the 30-day letter was mailed) to the present 
is presumed disqualified. However, W may overcome the presumption 
that such amounts were disqualified by establishing that such 
amounts were birthday gifts from H and that she has received such 
gifts during their entire marriage. Such facts would show that the 
amounts were not transferred for the purpose of avoidance of tax or 
payment of tax.

    (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.
    (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. Even 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 Internal Revenue Service may allocate any item 
between the spouses if the Internal Revenue Service establishes that 
the allocation is

[[Page 47292]]

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 services 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 
(c)(2)(iv) of this section. For rules regarding the effect of community 
property laws, see Sec. 1.6015-1(f) and paragraph (c)(2)(iv) 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. Deduction items unrelated to a business or investment 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] TR18JY02.004


where X = the portion of the deficiency allocable to the spouse.
    (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;
    (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 (d)(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. If such credit or tax is 
attributable in whole or in part to both spouses, then the IRS will 
determine on a case by case basis how such item will be allocated. 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 
allocated jointly to both spouses. 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 minium tax. Any 
portion of a deficiency relating to the alternative minimum tax under 
section 55 will be allocated appropriately.
    (B) Accuracy-related and fraud penalties. Any accuracy-related or 
fraud penalties under section 6662 or 6663 are 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's and W's joint bank account;
    (B) A disallowed business expense deduction on H's Schedule C; 
and
    (C) A disallowed Lifetime Learning Credit for W's post-secondary 
education, paid for by W.
    (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

[[Page 47293]]

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.

           W's items                                                         H's items
-------------------------------------------------------------    -----------------------------------------------
  $40,000  charitable deduction                                     $15,000  business deduction
   40,000  interest deduction                                        20,000  unreported income
                                                                      5,000  education deduction
----------                                                       -----------
  $80,000                                                           $40,000
 

    (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 
be permitted to 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.

           H's items                                                         W's items
-------------------------------------------------------------    -----------------------------------------------
   $2,000  business deduction                                        $6,000  wage income
 

    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's 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.

W's share of allocable items           H's share of allocable items
\3/4\ ($24,000/$32,000)                \1/4\ ($8,000/$32,000)
 

    (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.

           W's share of total deficiency                                     H's share of total deficiency
-------------------------------------------------------------    -----------------------------------------------
  $ 9,000  allocated deficiency                                      $3,000  allocated deficiency
   14,000  self-employment tax                                        2,000  Lifetime Learning Credit
----------                                                       -----------
  $23,000                                                            $5,000
 

    (vii) Therefore, W's liability is limited to $23,000 and H's 
liability is limited to $5,000.
    Example 5. Requesting spouse receives a benefit on the joint 
return from the nonrequesting spouse's erroneous item. (i) In 2001, 
H reports gross income of $4,000 from his business on Schedule C, 
and W reports $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

[[Page 47294]]

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 $4,160 (\4/5\ of $5,200). If H also elected 
to allocate the deficiency, H's election to allocate the $4,160 of 
the deficiency to W would be invalid because H had actual knowledge 
of the erroneous items.
    Example 6. 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 5, 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 will be 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. 
Additional alternative methods for allocating erroneous items under 
section 6015(c) may be prescribed by the Treasury and IRS 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 deficiency is assessed 
with respect to H's 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 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 obtain a refund of 
liabilities already paid, for which the requesting spouse would 
otherwise qualify for relief under Sec. 1.6015-3.
    (c) For guidance concerning the criteria to be used in determining 
whether it is inequitable to hold a requesting spouse jointly and 
severally liable under this section, see Rev. Proc. 2000-15 (2000-1 
C.B. 447), or other guidance published by the Treasury and IRS (see 
Sec. 601.601(d)(2) of this chapter).


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

    (a) Requesting relief. To elect the application of Sec. 1.6015-2 or 
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'' (or other specified form); 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 
prescribed by the Treasury and IRS in forms, relevant revenue rulings, 
revenue procedures, or other published guidance (see Sec. 601.601(d)(2) 
of this chapter).
    (b) Time period for filing a request for relief--(1) In general. To 
elect the application of Sec. 1.6015-2 or 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 a section 6330 notice; 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 
deficiency; 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 (b), 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) Section 6330 notice. A section 6330 notice refers to the 
notice sent, pursuant to section 6330, providing taxpayers notice of 
the Service's intent to levy and of their right to a collection due 
process (CDP) hearing.
    (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 a demand for payment, or pursuant to the CDP 
hearing procedures under sections 6320 in connection with the filing of 
a Notice of Federal Tax Lien. For more information on the rules 
regarding collection due process for liens, see the Treasury 
regulations under section 6320. 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 section 6330 notice 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

[[Page 47295]]

July 10, 2000. An election or request for relief must be made by 
January 11, 2002, which is two years after the Internal Revenue 
Service sent the section 6330 notice.
    Example 2. The Internal Revenue Service offsets an overpayment 
against a joint liability for 1995 on January 12, 1998. The offset 
only partially satisfies the liability. The Internal Revenue Service 
takes no other collection actions. On July 24, 2001, 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 sends a section 6330 notice on January 
22, 1999. 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 business property 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 proof of claim in W's bankruptcy case.

    (5) Premature requests for relief. The Internal Revenue Service 
will not consider premature claims for relief under Sec. 1.6015-2, 
1.6015-3, or 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 IRS 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(h)(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(h)(5).
    (2) Example. The following example illustrates the rule of this 
paragraph (c):

    Example: In January 2001, W becomes a limited partner in 
partnership P, and in February 2001, she starts her own business 
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 
commences 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's 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 resulting from the TEFRA partnership proceeding 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 Internal Revenue Service receives an 
election under Sec. 1.6015-2 or 1.6015-3, or a request for relief under 
Sec. 1.6015-4, the Internal Revenue Service 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. For 
further guidance regarding the definition of last known address, see 
Sec. 301.6212-2 of this chapter. 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. Upon the request of either spouse, the Internal Revenue 
Service will share with one spouse the information submitted by the 
other spouse, unless such information would impair tax administration.
    (2) The Internal Revenue Service must notify the nonrequesting 
spouse of the Service's preliminary and final determinations with 
respect to the requesting spouse's claim for relief under section 6015.
    (b) Information submitted. The Internal Revenue Service 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, 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 90 days after the date 
notice of the Service's final determination is mailed by certified or 
registered mail (90-day period). If the IRS 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 
1.6015-3, the requesting spouse

[[Page 47296]]

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. The Tax Court also may review a claim for relief if Tax 
Court jurisdiction has been acquired under another section of the 
Internal Revenue Code such as section 6213(a) or 6330(d).
    (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 Internal Revenue Service 
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 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. For more 
information regarding the date on which a decision of the Tax Court 
becomes final, see section 7481 and the regulations thereunder. 
Notwithstanding the above, if the requesting spouse appeals the Tax 
Court's decision, the Internal Revenue Service may resume collection of 
the liability from the requesting spouse on the date the requesting 
spouse files the notice of appeal, unless the requesting spouse files 
an appeal bond pursuant to the rules of section 7485. Jeopardy under 
this paragraph (c)(1) means conditions exist that would require an 
assessment under section 6851 or 6861 and the regulations thereunder.
    (2) Waiver of the restrictions on collection. A requesting spouse 
may, at any time (regardless of whether a notice of the Service's final 
determination of relief is mailed), waive the restrictions on 
collection in paragraph (c)(1) of this section.
    (3) 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 1.6015-3 
relates is suspended for the period during which the Internal Revenue 
Service is prohibited by paragraph (c)(1) of this section from 
collecting by levy or a proceeding in court and for 60 days thereafter. 
However, if the requesting spouse signs a waiver of the restrictions on 
collection in accordance with paragraph (c)(2) of this section, the 
suspension of the period of limitations in section 6502 on collection 
against the requesting spouse will terminate on the date that is 60 
days after the date the waiver is filed with the Internal Revenue 
Service.
    (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. Accordingly, the request 
for relief does not suspend the running of the period of limitations on 
collection.
    (4) 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 Internal 
Revenue Service 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. Section 6015 applies 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 Federal 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 Federal income tax 
return on April 15, 1996. On October 14, 1997, a deficiency of 
$5,000 is assessed regarding a disallowed business expense deduction 
attributable to H. On June 30, 1998, the Internal Revenue Service 
levies on the $3,000 in W's bank account in partial 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. Section 6015 is applicable to the $2,000 that 
remained unpaid as of July 22, 1998, and section 6013(e) is 
applicable to the $3,000 that was paid prior to July 22, 1998.


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 1.6015-3 or any requests for relief under 
Sec. 1.6015-4 filed on or after July 18, 2002.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    5. In Sec. 602.101, paragraph (b) is amended by adding an entry in 
numerical order to read as follow:


Sec. 602.101  OMB Control Numbers.

* * * * *
    (b)  * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
1.6015-5................................................       1545-1719
 
                  *        *        *        *        *
------------------------------------------------------------------------


Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: July 3, 2002.
Pamela F. Olson,
Acting Assistant Secretary of the Treasury.
[FR Doc. 02-17866 Filed 7-17-02; 8:45 am]
BILLING CODE 4830-01-P