Final Regulation (REG-115054-01)

Federal Register / Vol. 68, No. 132 / Thursday, July 10, 2003 / Rules and Regulations
a.m. and 4 p.m., Monday through
Friday.
The agency has determined under 21
CFR 25.33(a)(2) that this action is of a
type that does not individually or
cumulatively have a significant effect on
the human environment. Therefore,
neither an environmental assessment
nor an environmental impact statement
is required.
This rule does not meet the definition
of ‘‘rule’’ in 5 U.S.C. 804(3)(A) because
it is a rule of ‘‘particular applicability.’’
Therefore, it is not subject to the
congressional review requirements in 5
U.S.C. 801–808.
List of Subjects in 21 CFR Part 558
Animal drugs, Animal feeds.
Therefore, under the Federal Food,
Drug, and Cosmetic Act and under
authority delegated to the Commissioner
of Food and Drugs and redelegated to the
Center for Veterinary Medicine, 21 CFR
part 558 is amended as follows:

■

SUMMARY: This document contains final
regulations relating to the treatment of
community income under Internal
Revenue Code section 66 for certain
married individuals in community
property states who do not file joint
Federal income tax returns. The final
regulations also reflect changes in the
law made by the Internal Revenue
Service Restructuring and Reform Act of
1998.
EFFECTIVE DATE: These final regulations
are effective July 10, 2003.
FOR FURTHER INFORMATION CONTACT:
Robin M. Tuczak, 202–622–4940 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information
contained in the final regulations has
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507)
PART 558—NEW ANIMAL DRUGS FOR under control number 1545–1770.
Responses to this collection of
USE IN ANIMAL FEEDS
information are required in order for
■ 1. The authority citation for 21 CFR
certain individuals to receive relief from
part 558 continues to read as follows:
the operation of community property
law.
Authority: 21 U.S.C. 360b, 371.
An agency may not conduct or
■ 2. Section 558.550 is amended by
sponsor, and a person is not required to
adding paragraph (a)(3); and in
paragraph (d)(1)(xv)(c) by removing ‘‘and respond to, a collection of information
046573’’ and by adding in its place ‘‘and unless the collection of information
displays a valid control number
053389’’ to read as follows:
assigned by the Office of Management
§ 558.550 Salinomycin.
and Budget.
Estimated total annual reporting
(a) * * *
burden for 2001 for Form 8857,
(3) To 053389 for use as in paragraph
‘‘Request for Innocent Spouse Relief ’’:
(d)(1)(xv) of this section.
21,123 hours.
*
*
*
*
*
Estimated average annual burden
Dated: June 26, 2003.
hours per response: 59 minutes.
Andrew J. Beaulieu,
Estimated number of responses for
Acting Director, Center for Veterinary
2001 for Form 8857: 21,336.
Medicine.
Requests for relief under section 66(c)
[FR Doc. 03–17409 Filed 7–9–03; 8:45 am]
constitute less than 1% of the total
BILLING CODE 4160–01–S
requests filed using Form 8857.
Comments on the collection of
information should be sent to the Office
DEPARTMENT OF THE TREASURY
of Management and Budget, Attn: Desk
Officer for the Department of the
Internal Revenue Service
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
26 CFR Parts 1 and 602
20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
[TD 9074]
Clearance Officer, W:CAR:MP:T:T:SP,
RIN 1545–AY83
Washington, DC 20224.
Books or records relating to a
Treatment of Community Income for
collection of information must be
Certain Individuals Not Filing Joint
retained as long as their contents may
Returns
become material in the administration
of any internal revenue law. Generally,
AGENCY: Internal Revenue Service (IRS),
tax returns and return information are
Treasury.
confidential, as required by section 6103
ACTION: Final regulations.
of the Internal Revenue Code (Code).

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Background
This document contains amendments
to 26 CFR part 1 under section 66 of the
Code, relating to the treatment of
community income for certain
individuals not filing joint returns. For
rules regarding relief from joint and
several liability when a joint return is
filed, see section 6015 and the
regulations thereunder.
A notice of proposed rulemaking
(REG–115054–01) was published in the
Federal Register (67 FR 2841) on
January 22, 2002. No public hearing was
requested or held. Written comments
responding to the notice of proposed
rulemaking were received. After
consideration of all the comments, the
proposed regulations are adopted as
amended by this Treasury Decision. The
comments and revisions are discussed
below.
Explanation and Summary of
Comments
1. General
One commentator suggested that the
proposed regulations under section 66
(particularly § 1.66–2) were not helpful,
given the community property laws of
the commentator’s state. This
commentator also suggested that the
proposed regulations appear to assume
that the community property laws of all
community property states are the same.
The intent of these regulations is not to
provide guidance based on the
community property laws of any
particular state. Instead, the regulations
provide guidance on the effect of section
66 on taxpayers’ community income as
determined under state law. After a
determination that an item of income is
community income under state law,
these regulations provide guidance on
the treatment of this income under
section 66 for certain individuals not
filing joint returns.
One commentator noted that there are
fundamental differences between
married taxpayers who filed joint
returns and request relief from joint and
several liability under section 6015 and
married taxpayers who filed separate
returns and request relief from the
Federal income tax liability resulting
from the operation of community
property law under section 66(c).
The final regulations do not address
differences between or make
generalizations concerning married
taxpayers who file joint returns and
those who do not. The final regulations
focus on providing guidance on the
treatment of community income for
certain taxpayers under section 66.
The preamble to the proposed
regulations under section 66 references

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the spousal notification requirements
set forth in regulations under section
6015 and discusses similar notification
requirements under section 66. If the
IRS grants relief under section 66, the
liability of the requesting spouse will
shift to the nonrequesting spouse. Thus,
notification and participation
requirements similar to those applicable
in section 6015 cases are also
appropriate for section 66 cases. In
addition, information provided by a
nonrequesting spouse may help to
determine the appropriate amount of
relief for the requesting spouse, if any.
Similarities between the guidance set
forth in the regulations under section
6015 and the regulations under section
66 are due to the similarities in the
elements required, or factors
considered, in determining relief under
these statutes. The analysis set forth in
proposed § 1.66–4(a)(2) and (3)
regarding knowledge or reason to know
and benefit is similar to that contained
in § 1.6015–2(c) and (d). The final
regulations modify this analysis and
adopt commentators’ suggestions to the
extent that the suggestions are
consistent with the statute, legislative
history, and case law under section
66(c). These changes are more fully
discussed in the comments and
explanation under § 1.66–4 below.
2. Section 1.66–1
One commentator stated that § 1.66–1
of the proposed regulations failed to
expressly require each of the spouses to
report those items of separate income
that are attributable to each spouse
under applicable state community
property laws. Generally, community
income is reportable half by each spouse
pursuant to Poe v. Seaborn, 282 U.S.
101 (1930), and section 61. Whether
income is separate or community is
determined under state law and the
income is included in gross income
under section 61. The final regulations
do not include guidance on how to
report income that is not community
income under state law, as this would
be outside the scope of section 66.
The final regulations clarify in § 1.66–
1(a) that the general rule of community
property applies to married individuals
domiciled in community property
states. A taxpayer should report income
in accordance with the laws of the state
in which he or she is domiciled. United
States v. Mitchell, 403 U.S. 190, 197
(1971); Commissioner v. Wilkerson, 368
F.2d 552, 553 (9th Cir. 1966). For
example, a taxpayer who is domiciled in
State A, a community property state,
should report income in accordance
with the community property laws of
State A, although she may be living in

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State B temporarily, due to a work
detail, military assignment, etc.
One commentator noted that under
§ 1.66–1(b), the limitation of the scope
of the regulations to married taxpayers
was too restrictive. The commentator
noted that income earned during a
marriage, but received after the
dissolution of the marital community,
was community income under the laws
of the commentator’s state. The
commentator suggested that section 66
should apply to this income, as it is
community income under state law. The
final regulations frame the issue in
terms of application of section 66 to
community income, rather than in terms
of marital status.
The final regulations state that section
66 applies only to community income,
as defined by state law. The final
regulations, however, make a distinction
between community income and
income from property that was formerly
community property but, in accordance
with state law, is converted to a form of
property that is not community
property, such as separate property or
property held by joint tenancy or
tenancy in common.
Under the laws of certain community
property states, property that was
community property during the
marriage ceases to be community
property after the dissolution of the
marital community. Conversely, some
state laws treat property that was not
community property as community
property for the limited purpose of
dividing assets upon divorce. See Estate
of Mitchell v. Mitchell, 76 Cal. App. 4th
1378 (Cal. Ct. App. 1999). Income from
such property is not community income
subject to the provisions of section 66.
The determination as to whether income
from such property is community
income may be confusing due to the fact
that sometimes courts will refer to the
property, using ‘‘universally recognized
shorthand,’’ as community property. See
Bouterie v. Commissioner, 36 F.3d 1361
(5th Cir. 1994) (in which the court
found that the wife did not have
community income from community
property and the IRS improperly relied
on a state court’s imprecise use of the
term ‘‘community property’’ in referring
to property that was formerly
community property), rev’g T.C. Memo.
1993–510.
Thus, in determining whether section
66 applies to income, it is first necessary
to determine whether the income is
community income under state law. The
marital status of the parties likely will
be relevant to this initial determination.

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3. Section 1.66–2
One commentator noted that it may be
difficult to determine whether a transfer
of income is a transfer of earned income
under § 1.66–2(a)(5). A transfer of
earned income precludes the reporting
of income in accordance with § 1.66–2,
even if a taxpayer meets the other
requirements of § 1.66–2. The
commentator suggested that there
should be a presumption under § 1.66–
2 that any transfer of income or property
is a transfer of earned income. The final
regulations adopt this recommendation
with respect to transfers of income. It is
a logical presumption that income is
more likely to be earned than unearned,
and that a taxpayer who has unearned
income is likely to have earned income
as well.
Another commentator suggested that
the final regulations clarify the
requirement of § 1.66–2 that spouses
live apart. The final regulations adopt
this recommendation by crossreferencing the definition of members of
the same household in § 1.6015–3(b).
The final regulations clarify that,
when reporting income in accordance
with section 66(a), an individual must
report all income in accordance with
section 66(a). Section 66(a) does not
apply on an item-by-item basis.
4. Section 1.66–3
One commentator recommended that
the final regulations emphasize that the
IRS may disallow the Federal income
tax benefits of any community property
law under section 66(b) on an item-byitem basis. Because the proposed
regulations already reference ‘‘item of
community income’’ in every sentence
of § 1.66–3, however, the final
regulations do not adopt this
recommendation.
One commentator suggested that the
IRS should assert section 66(b)
sparingly, only if ‘‘the * * * spouse had
no knowledge whatever of the income
* * * and did not benefit from the
income in a division of marital assets.’’
Section 66(b) allows the IRS to deny the
Federal income tax benefits of
community property law only when a
taxpayer acted as if solely entitled to the
income and failed to notify the
taxpayer’s spouse of the income. The
final regulations do not impose
additional requirements on the IRS.
Commentators also recommended that
the final regulations provide examples
of what constitutes treating income as
solely one’s own and how specific a
taxpayer must be when notifying his or
her spouse of the nature and amount of
the income. The final regulations adopt
this recommendation.

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5. Section 1.66–4
The proposed regulations describe
relief granted under the first sentence of
section 66(c) as ‘‘specific relief.’’ The
final regulations adopt the term
traditional relief to describe relief
granted under this provision. The final
regulations retain the term ‘‘equitable
relief’’ to describe the relief granted
under the second sentence of section
66(c).
The proposed regulations require that
a spouse requesting relief under § 1.66–
4 file a separate return for the taxable
year relating to the request. One
commentator noted that section 66(c)(1)
requires only that an individual not file
a joint return. The legislative history of
section 66(c) confirms that Congress did
not intend to require an individual to
file a return to be eligible for relief
under this provision. The House Report
uses the phrase ‘‘at the time the return
was filed (if a return is filed).’’ H.R. Rep.
No. 98–432, pt. 2, at 1503 (1984). In
earlier cases regarding relief under
section 66(c), the Tax Court implies that
a requesting spouse must file a separate
return. See, e.g., Roberts v.
Commissioner, T.C. Memo. 1987–391,
aff’d 860 F.2d 1235 (5th Cir. 1988).
More recent cases, however, specifically
state that not filing any return meets the
requirement of not filing a joint return.
See, e.g., Ollestad v. Commissioner, T.C.
Memo. 1996–139; Costa v.
Commissioner, T.C. Memo. 1990–572.
The final regulations adopt the
recommendation to limit the
requirement to not filing a joint return.
One commentator suggested that the
discussion of knowledge and reason to
know of an item of community income
in § 1.66–4 ignores the low probability
that a requesting spouse would have
access to accurate information or
knowledge regarding what the
nonrequesting spouse reported or did
not report for Federal income tax
purposes. Under section 66(c), a
requesting spouse is required to prove,
among other things, that ‘‘he or she did
not know of, and had no reason to know
of, such item of community income’’ to
obtain traditional relief. The final
regulations include a discussion of
knowledge and reason to know, as this
is an element required by section
66(c)(3). The facts and circumstances
considered in making the determination
of knowledge or reason to know are
consistent with the knowledge and
reason to know analysis set forth in case
law determining relief under section
66(c).
Additionally, the final regulations
include new language regarding the
knowledge standard under section 66(c).

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To more closely track the language of
section 66(c), the phrase item of
community income replaces the term
understatement when referring to the
item about which the requesting spouse
has knowledge or reason to know.
Finally, the final regulations clarify that
knowledge of the source of community
income or the income-producing
activity, without knowledge of the
specific amount of income, is sufficient
knowledge to preclude relief under
section 66(c). This is consistent with the
knowledge and reason to know analysis
set forth in case law under section 66(c).
See, e.g., McGee v. Commissioner, 979
F.2d 66, 70 (5th Cir. 1992), aff’g T.C.
Memo. 1991–510.
Two commentators questioned
whether the standard of significant
benefit in excess of normal support,
which is used in determining whether it
is equitable to grant relief under section
6015, is the applicable standard under
section 66. One commentator noted that
under community property laws, each
spouse generally is entitled to half of the
income of the other spouse. Under
section 66, a requesting spouse
essentially is seeking relief for half the
income of both spouses, which may
have been used to provide normal
support to both spouses. Contrast this
situation to that under section 6015,
which permits a requesting spouse to
seek relief from joint and several
liability for the tax on all of the income
of the nonrequesting spouse. This
commentator suggested that the tax
liability should be shifted to the
nonrequesting spouse only if the
nonrequesting spouse has treated the
income in a manner inconsistent with
the community property regime, for
example, has not allowed use of the
income for normal support or has
transferred no part of the income to the
requesting spouse.
A majority of cases decided under
section 66(c) make the determination of
whether it is equitable to grant relief
based on the ‘‘benefit’’ received by the
requesting spouse, as opposed to the
‘‘significant benefit’’ standard applied
by courts in determining relief under
former section 6013(e) and section
6015(b). See Beck v. Commissioner, T.C.
Memo. 2001–198, acq. 2002–49 I.R.B.;
Hardy v. Commissioner, T.C. Memo.
1997–97. The court in Beck and Hardy
cited the legislative history of section
66(c) when discussing benefit under
section 66. The legislative history
provides that, in determining whether it
is equitable to grant relief under section
66(c), the standard is ‘‘whether the
[requesting] spouse benefitted from the
untaxed income.’’ H. Rep. No. 98–432,

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pt. 2, at 1503 (1984). The final
regulations adopt this standard.
One commentator suggested that the
time limitations set forth in § 1.66–4 for
requesting relief under section 66(c) are
not supported by the language of section
66(c). Although the statute itself does
not set forth time limitations on the
filing of a request for relief, the time
limitations in the proposed regulations
are supported by the legislative history
of the traditional relief provision of
section 66(c). Specifically, the House
Report explaining traditional relief
under section 66(c) states that, in
making the determination as to relief,
the IRS should consider (among other
things) ‘‘whether the defense was
promptly raised so as to prevent the
period of limitations from running on
the other spouse.’’ H.R. Rep. No. 98–
432, pt. 2, at 1501 (1984). Thus, the final
regulations retain the time limitations
set forth in the proposed regulations. In
contrast, § 1.66–4(j)(2)(ii) sets forth
timing requirements for requesting
equitable relief that are broader than the
requirements applicable to traditional
relief because the legislative history of
the equitable relief provision does not
contain similar timing requirements.
Therefore, a requesting spouse who does
not meet the time limitations to request
traditional relief may be eligible to
request equitable relief.
Another commentator noted that
perhaps the timeliness of the requesting
spouse’s request should be only one
factor in determining whether to grant
traditional relief under section 66(c), as
opposed to a threshold requirement.
This comment was not adopted because
a requesting spouse who does not meet
the timing requirements for traditional
relief still may receive equitable relief
under section 66(c).
One commentator urged that no
request for relief under section 66
should be considered premature. There
must be some indication that the IRS
may determine a deficiency prior to the
filing of a request for relief from a
deficiency under section 66(c). Thus,
the final regulations retain the timing
limitations set forth in the proposed
regulations regarding premature
requests.
The final regulations incorporate an
item-by-item approach to relief from the
Federal income tax liability resulting
from the operation of community
property law under section 66(c). If a
requesting spouse receives relief under
section 66(c), the proposed regulations
provide for treatment of any community
income of the spouses in accordance
with the rules provided by section
879(a), which is consistent with the
statutory rule under section 66(a). The

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final regulations provide that if a
requesting spouse receives relief for an
item, the rules provided by section
879(a) will govern the treatment of the
item. The item-by-item approach
adopted in the final regulations is
consistent with the statutory language in
section 66(c) that states ‘‘such item of
community income shall be included in
the gross income of the other spouse
(and not in the gross income of the
individual).’’ (Emphasis added.)
Traditionally, section 66(c) provided
relief from liability resulting only from
items of income, unlike former section
6013(e) and section 6015. The final
regulations expand equitable relief
under § 1.66–4(b) to include relief for
underpayments of tax or any deficiency,
including those arising from disallowed
deductions or credits. This is consistent
with the equitable relief provision in
section 66(c).
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 the
regulations do not impose a collection
of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply.
Drafting Information
The principal author of the
regulations is Robin M. Tuczak 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.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to the table to read in
part as follows:

■

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

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

transferees, see sections 6901 through
6904 and the regulations thereunder.

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

§ 1.66–2 Treatment of community income
where spouses live apart.

§ 1.66–1

(a) Community income of spouses
domiciled in a community property
state will be treated in accordance with
the rules provided by section 879(a) if
all of the following requirements are
satisfied—
(1) The spouses are married to each
other at any time during the calendar
year;
(2) The spouses live apart at all times
during the calendar year;
(3) The spouses do not file a joint
return with each other for a taxable year
beginning or ending in the calendar
year;
(4) One or both spouses have earned
income that is community income for
the calendar year; and
(5) No portion of such earned income
is transferred (directly or indirectly)
between such spouses before the close
of the calendar year.
(b) Living apart. For purposes of this
section, living apart requires that
spouses maintain separate residences.
Spouses who maintain separate
residences due to temporary absences
are not considered to be living apart.
Spouses who are not members of the
same household under § 1.6015–3(b) are
considered to be living apart for
purposes of this section.
(c) Transferred income. For purposes
of this section, transferred income does
not include a de minimis amount of
earned income that is transferred
between the spouses. In addition, any
amount of earned income transferred for
the benefit of the spouses’ child will not
be treated as an indirect transfer to one
spouse. Additionally, income
transferred between spouses is
presumed to be a transfer of earned
income. This presumption is rebuttable.
(d) Examples. The following examples
illustrate the rules of this section:

■

Treatment of community income.

(a) In general. Married individuals
domiciled in a community property
state who do not elect to file a joint
individual Federal income tax return
under section 6013 generally must
report half of the total community
income earned by the spouses during
the taxable year except at times when
one of the following exceptions applies:
(1) The spouses live apart and meet
the qualifications of § 1.66–2.
(2) The Secretary denies a spouse the
Federal income tax benefits resulting
from community property law under
§ 1.66–3, because that spouse acted as if
solely entitled to the income and failed
to notify his or her spouse of the nature
and amount of the income prior to the
due date for the filing of his or her
spouse’s return.
(3) A requesting spouse qualifies for
traditional relief from the Federal
income tax liability resulting from the
operation of community property law
under § 1.66–4(a).
(4) A requesting spouse qualifies for
equitable relief from the Federal income
tax liability resulting from the operation
of community property law under
§ 1.66–4(b).
(b) Applicability. (1) The rules of this
section apply only to community
income, as defined by state law. The
rules of this section do not apply to
income that is not community income.
Thus, the rules of this section do not
apply to income from property that was
formerly community property, but in
accordance with state law, has ceased to
be community property, becoming, e.g.,
separate property or property held by
joint tenancy or tenancy in common.
(2) When taxpayers report income
under paragraph (a) of this section, all
community income for the calendar year
is treated in accordance with the rules
provided by section 879(a). Unlike the
other provisions under section 66,
section 66(a) does not permit inclusion
on an item-by-item basis.
(c) Transferee liability. The provisions
of section 66 do not negate liability that
arises under the operation of other laws.
Therefore, a spouse who is not subject
to Federal income tax on community
income may nevertheless remain liable
for the unpaid tax (including additions
to tax, penalties, and interest) to the
extent provided by Federal or state
transferee liability or property laws
(other than community property laws).
For the rules regarding the liability of

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Example 1. Living apart. H and W are
married, domiciled in State A, a community
property state, and have lived apart the entire
year of 2002. W, who is in the Army, was
stationed in Korea for the entire calendar
year. During their separation, W intended to
return home to H, and H intended to live
with W upon W’s return. H and W do not file
a joint return for taxable year 2002. H and W
may not report their income under this
section because a temporary absence due to
military service is not living apart as
contemplated under this section.
Example 2. Transfer of earned income—de
minimis exception. H and W are married,
domiciled in State B, a community property
state, and have lived apart the entire year of
2002. H and W are estranged and intend to
live apart indefinitely. H and W do not file

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Federal Register / Vol. 68, No. 132 / Thursday, July 10, 2003 / Rules and Regulations
a joint return for taxable year 2002. H
occasionally visits W and their two children,
who live with W. When H visits, he often
buys gifts for the children, takes the children
out to dinner, and occasionally buys
groceries or gives W money to buy the
children new clothes for school. Both W and
H have earned income in the year 2002 that
is community income under the laws of State
B. H and W may report their income on
separate returns under this section.
Example 3. Transfer of earned income—
source of transfer. H and W are married,
domiciled in State C, a community property
state, and have lived apart the entire year of
2002. H and W are estranged and intend to
live apart indefinitely. H and W do not file
a joint return for taxable year 2002. W
provides H $1,000 a month from March 2002
through August 2002 while H is working
part-time and seeking full-time employment.
W is not legally obligated to make the $1,000
payments. W earns $75,000 in 2002 in wage
income. W also receives $10,000 in capital
gains income in December 2002. H wants to
report his income in accordance with this
section, alleging that the $6,000 that he
received from W was not from W’s earned
income, but from the capital gains income W
received in 2002. The facts and
circumstances surrounding the periodic
payments to H from W do not indicate that
W made the payments out of her capital
gains. H and W may not report their income
in accordance with this section, as the $6,000
W transferred to H is presumed to be from
W’s earned income, and H has not presented
any facts to rebut the presumption.
§ 1.66–3 Denial of the Federal income tax
benefits resulting from the operation of
community property law where spouse not
notified.

(a) In general. The Secretary may
deny the Federal income tax benefits of
community property law to any spouse
with respect to any item of community
income if that spouse acted as if solely
entitled to the income and failed to
notify his or her spouse of the nature
and amount of the income before the
due date (including extensions) for the
filing of the return of his or her spouse
for the taxable year in which the item
of income was derived. Whether a
spouse has acted as if solely entitled to
the item of income is a facts and
circumstances determination. This
determination focuses on whether the
spouse used, or made available, the item
of income for the benefit of the marital
community.
(b) Effect. The item of community
income will be included, in its entirety,
in the gross income of the spouse to
whom the Secretary denied the Federal
income tax benefits resulting from
community property law. The tax
liability arising from the inclusion of the
item of community income must be
assessed in accordance with section
6212 against this spouse.

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(c) Examples. The following examples
illustrate the rules of this section:
Example 1. Acting as if solely entitled to
income. (i) H and W are married and are
domiciled in State A, a community property
state. W’s Form W–2 for taxable year 2000
showed wage income of $35,000. W also
received a Form 1099–INT, ‘‘Interest
Income,’’ showing $1,000 W received in
taxable year 2000. W’s wage income was
directly deposited into H and W’s joint
account, from which H and W paid bills and
household expenses. W did not inform H of
her interest income or the Form 1099–INT,
but W gave H a copy of the W–2 when she
received it in January 2001. W did not use
her interest income for bills or household
expenses. Instead W gave her interest income
to her brother, who was unemployed. Neither
the separate return filed by H nor the
separate return filed by W included the
interest income. In 2002, the IRS audits both
H and W. The Internal Revenue Service (IRS)
may raise section 66(b) as to W’s interest
income, denying W the Federal income tax
benefit resulting from community property
law as to this item of income.
(ii) H and W are married and are domiciled
in State B, a community property state. For
taxable year 2000, H receives $45,000 in
wage income that H places in a separate
account. H and W maintain separate
residences. H’s wage income is community
income under the laws of State B. That same
year, W loses her job, and H pays W’s
mortgage and household expenses for several
months while W seeks employment. Neither
H nor W files a return for 2000, the taxable
year for which the IRS subsequently audits
them. The IRS may not raise section 66(b)
and deny H the Federal income tax benefits
resulting from the operation of community
property law as to H’s wage income of
$45,000, as H has not treated this income as
if H were solely entitled to it.
Example 2. Notification of nature and
amount of the income. H and W are married
and domiciled in State C, a community
property state. H and W do not file a joint
return for taxable year 2001. H’s and W’s
earned income for 2001 is community
income under the laws of State C. H receives
$50,000 in wage income in 2001. In January
2002, H receives a Form W–2 that
erroneously states that H earned $45,000 in
taxable year 2001. H provides W a copy of
H’s Form W–2 in February 2002. W files for
an extension prior to April 15, 2002. H
receives a corrected Form W–2 reflecting
wages of $50,000 in May 2002. H provides a
copy of the corrected Form W–2 to W in May
2002. W files a separate return in June 2002,
but reports one half of $45,000 ($22,500) of
wage income that H earned. H files a separate
return reporting half of $50,000 ($25,000) in
wage income. The IRS audits both H and W.
Even if H had acted as if solely entitled to
the wage income, the IRS may not raise
section 66(b) as to this income because H
notified W of the nature and amount of the
income prior to the due date of W’s return
(including extensions).

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§ 1.66–4 Request for relief from the
Federal income tax liability resulting from
the operation of community property law.

(a) Traditional relief—(1) In general.
A requesting spouse will receive relief
from the Federal income tax liability
resulting from the operation of
community property law for an item of
community income if—
(i) The requesting spouse did not file
a joint Federal income tax return for the
taxable year for which he or she seeks
relief;
(ii) The requesting spouse did not
include in gross income for the taxable
year an item of community income
properly includible therein, which,
under the rules contained in section
879(a), would be treated as the income
of the nonrequesting spouse;
(iii) The requesting spouse establishes
that he or she did not know of, and had
no reason to know of, the item of
community income; and
(iv) Taking into account all of the
facts and circumstances, it is inequitable
to include the item of community
income in the requesting spouse’s
individual gross income.
(2) Knowledge or reason to know. (i)
A requesting spouse had knowledge or
reason to know of an item of community
income if he or she either actually knew
of the item of community income, or if
a reasonable person in similar
circumstances would have known of the
item of community income. All of the
facts and circumstances are considered
in determining whether a requesting
spouse had reason to know of an item
of community income. The relevant
facts and circumstances include, but are
not limited to, the nature of the item of
community income, the amount of the
item of community income relative to
other income items, the couple’s
financial situation, the requesting
spouse’s educational background and
business experience, and whether the
item of community income was
reflected on prior years’ returns (e.g.,
investment income omitted that was
regularly reported on prior years’
returns).
(ii) If the requesting spouse is aware
of the source of community income or
the income-producing activity, but is
unaware of the specific amount of the
nonrequesting spouse’s community
income, the requesting spouse is
considered to have knowledge or reason
to know of the item of community
income. The requesting spouse’s lack of
knowledge of the specific amount of
community income does not provide a
basis for relief under this section.
(3) Inequitable. All of the facts and
circumstances are considered in
determining whether it is inequitable to

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hold a requesting spouse liable for a
deficiency attributable to an item of
community income. One relevant factor
for this purpose is whether the
requesting spouse benefitted, directly or
indirectly, from the omitted item of
community income. A benefit includes
normal support, but does not include de
minimis amounts. Evidence of direct or
indirect benefit may consist of transfers
of property or rights to property,
including transfers received several
years after the filing of the return. Thus,
for example, if a requesting spouse
receives from the nonrequesting spouse
property (including life insurance
proceeds) that is traceable to items of
community income attributable to the
nonrequesting spouse, the requesting
spouse will have benefitted from those
items of community income. Other
factors may include, if the situation
warrants, desertion, divorce or
separation. Factors relevant to whether
it would be inequitable to hold a
requesting spouse liable, more
specifically described under the
applicable administrative procedure
issued under section 66(c) (Revenue
Procedure 2000–15 (2000–1 C.B. 447)
(See § 601.601(d)(2) of this chapter), or
other applicable guidance published by
the Secretary), are to be considered in
making a determination under this
paragraph.
(b) Equitable relief. Equitable relief
may be available when the four
requirements of paragraph (a)(1) of this
section are not satisfied, but it would be
inequitable to hold the requesting
spouse liable for the unpaid tax or
deficiency. Factors relevant to whether
it would be inequitable to hold a
requesting spouse liable, more
specifically described under the
applicable administrative procedure
issued under section 66(c) (Revenue
Procedure 2000–15 (2000–1 C.B. 447),
or other applicable guidance published
by the Secretary), are to be considered
in making a determination under this
paragraph.
(c) Applicability. Traditional relief
under paragraph (a) of this section
applies only to deficiencies arising out
of items of omitted income. Equitable
relief under paragraph (b) of this section
applies to any deficiency or any unpaid
tax (or any portion of either). Equitable
relief is available only for the portion of
liabilities that were unpaid as of July 22,
1998, and for liabilities that arise after
July 22, 1998.
(d) Effect of relief. When the
requesting spouse qualifies for relief
under paragraph (a) or (b) of this
section, the IRS must assess any
deficiency of the nonrequesting spouse
arising from the granting of relief to the

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requesting spouse in accordance with
section 6212.
(e) Examples. The following examples
illustrate the rules of this section:
Example 1. Item-by-item approach. H and
W are married, living together, and domiciled
in State A (a community property state). H
and W file separate returns for taxable year
2002 on April 15, 2003. H earns $56,000 in
wages, and W earns $46,000 in wages, in
2002. H reports half of his wage income as
shown on his Form W–2, in the amount of
$28,000, and half of W’s wage income as
shown on her Form W–2, in the amount of
$23,000. W reports half of her wage income
as shown on her W–2, in the amount of
$23,000, and half of H’s wage income as
shown on his Form W–2, in the amount of
$28,000. Neither H nor W reports W’s income
from her sole proprietorship of $34,000 or
W’s investment income of $5,000 for taxable
year 2002. The Internal Revenue Service
(IRS) proposes deficiencies with respect to
H’s and W’s taxable year 2002 returns due to
the omission of W’s income from her sole
proprietorship and investments. H timely
requests relief under section 66(c). Because
the IRS determines that H satisfies the four
requirements of the traditional relief
provision of section 66(c) with respect to W’s
omitted investment income, the IRS grants
H’s request for relief as to the omitted
investment income. The IRS determines that
H does not satisfy the four requirements of
the traditional relief provision of section
66(c) as to W’s sole proprietorship income.
The IRS further determines that, under the
equitable relief provision of section 66(c), it
is not inequitable to hold H liable for the sole
proprietorship income. Relief is applicable
on an item-by-item basis. Thus, H is liable for
the tax on half of his wage income in the
amount of $28,000, half of W’s wage income
in the amount of $23,000, half of W’s sole
proprietorship income in the amount of
$17,000, but none of W’s investment income,
for which H obtained relief under section
66(c). W is liable for the tax on half of H’s
wage income in the amount of $28,000, half
of W’s wage income in the amount of
$23,000, half of W’s sole proprietorship
income in the amount of $17,000, and all of
W’s investment income in the amount of
$5,000, because H obtained relief under
section 66(c).
Example 2. Benefit. H and W are married,
living together, and domiciled in State B (a
community property state). Neither H nor W
files a return for taxable year 2000. H earns
$60,000 in 2000, which he deposits in a joint
account. H and W pay the mortgage payment,
household bills, and other family expenses
out of the joint account. W earns $20,000 in
2000. W uses a portion of the $20,000 to
make monthly loan payments on the family
cars, but loses the remainder at the local
racetrack. In 2002, the IRS audits H and W.
H requests relief under section 66(c), stating
that he did not know or have reason to know
of W’s additional income, as H travels
extensively while W handles the family
finances. Regardless of whether H had
knowledge or reason to know of the source
of W’s income, H is not eligible for
traditional relief under section 66(c) because

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H benefitted from W’s income. H’s benefit,
the portion of W’s income used to make
monthly payments on the car loans, was
more than a de minimis amount. While this
benefit was not in excess of normal support,
it is enough to preclude relief under the
traditional relief provision of section 66(c). H
may still qualify for equitable relief under
section 66(c), depending on all of the facts
and circumstances.

(f) Fraudulent scheme. If the Secretary
establishes that a spouse transferred
assets to his or her spouse as part of a
fraudulent scheme, relief is not
available under this section. For
purposes of this section, a fraudulent
scheme includes a scheme to defraud
the Secretary or another third party,
such as a creditor, ex-spouse, or
business partner.
(g) Definitions—(1) Requesting
spouse. A requesting spouse is an
individual who does not file a joint
Federal income tax return with the
nonrequesting spouse for the taxable
year in question, and who requests relief
from the Federal income tax liability
resulting from the operation of
community property law under this
section for the portion of the liability
arising from his or her share of
community income for such taxable
year.
(2) Nonrequesting spouse. A
nonrequesting spouse is the individual
to whom the requesting spouse was
married and whose income or deduction
gave rise to the tax liability from which
the requesting spouse seeks relief in
whole or in part.
(h) Effect of prior closing agreement or
offer in compromise. A requesting
spouse is not entitled to relief from the
Federal income tax liability resulting
from the operation of community
property law under section 66 for any
taxable year for which the requesting
spouse has entered into a closing
agreement (other than an agreement
pursuant to section 6224(c) relating to
partnership items) with the Secretary
that disposes of the same liability that
is the subject of the request for relief. In
addition, a requesting spouse is not
entitled to relief from the Federal
income tax liability resulting from the
operation of community property law
under section 66 for any taxable year for
which the requesting spouse has entered
into an offer in compromise with the
Secretary. For rules relating to the effect
of closing agreements and offers in
compromise, see sections 7121 and
7122, and the regulations thereunder.
(i) [Reserved]
(j) Time and manner for requesting
relief—(1) Requesting relief. To request
relief from the Federal income tax
liability resulting from the operation of

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community property law under this
section, a requesting spouse must file,
within the time period prescribed in
paragraph (j)(2) of this section, Form
8857, ‘‘Request for Innocent Spouse
Relief’’ (or other specified form), or
other written request, signed under
penalties of perjury, stating why relief is
appropriate. The requesting spouse
must include the nonrequesting
spouse’s name and taxpayer
identification number in the written
request. The requesting spouse must
also comply with the Secretary’s
reasonable requests for information that
will assist the Secretary in identifying
and locating the nonrequesting spouse.
(2) Time period for filing a request for
relief—(i) Traditional relief. The earliest
time for submitting a request for relief
from the Federal income tax liability
resulting from the operation of
community property law under
paragraph (a) of this section, for an
amount underreported on, or omitted
from, the requesting spouse’s separate
return, is the date the requesting spouse
receives notification of an audit or a
letter or notice from the IRS stating that
there may be an outstanding liability
with regard to that year (as described in
paragraph (j)(2)(iii) of this section). The
latest time for requesting relief under
paragraph (a) of this section is 6 months
before the expiration of the period of
limitations on assessment, including
extensions, against the nonrequesting
spouse for the taxable year that is the
subject of the request for relief, unless
the examination of the requesting
spouse’s return commences during that
6-month period. If the examination of
the requesting spouse’s return
commences during that 6-month period,
the latest time for requesting relief
under paragraph (a) of this section is 30
days after the commencement of the
examination.
(ii) Equitable relief. The earliest time
for submitting a request for relief from
the Federal income tax liability
resulting from the operation of
community property law under
paragraph (b) of this section is the date
the requesting spouse receives
notification of an audit or a letter or
notice from the IRS stating that there
may be an outstanding liability with
regard to that year (as described in
paragraph (j)(2)(iii) of this section). A
request for equitable relief from the
Federal income tax liability resulting
from the operation of community
property law under paragraph (b) of this
section for a liability that is properly
reported but unpaid is properly
submitted with the requesting spouse’s
individual Federal income tax return, or

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after the requesting spouse’s individual
Federal income tax return is filed.
(iii) Premature requests for relief. The
Secretary will not consider a premature
request for relief under this section. The
notices or letters referenced in this
paragraph (j)(2) do not include notices
issued pursuant to section 6223 relating
to TEFRA partnership proceedings.
These notices or letters include notices
of computational adjustment to a
partner or partner’s spouse (Notice of
Income Tax Examination Changes) that
reflect a computation of the liability
attributable to partnership items of the
partner or the partner’s spouse.
(k) Nonrequesting spouse’s notice and
opportunity to participate in
administrative proceedings—(1) In
general. When the Secretary receives a
request for relief from the Federal
income tax liability resulting from the
operation of community property law
under this section, the Secretary must
send a notice to the nonrequesting
spouse’s last known address that
informs the nonrequesting spouse of the
requesting spouse’s request for relief.
The notice must provide the
nonrequesting spouse with an
opportunity to submit any information
for consideration in determining
whether to grant the requesting spouse
relief from the Federal income tax
liability resulting from the operation of
community property law. The Secretary
will share with each spouse the
information submitted by the other
spouse, unless the Secretary determines
that the sharing of this information will
impair tax administration.
(2) Information submitted. The
Secretary will consider all of the
information (as relevant to the particular
relief provision) that the nonrequesting
spouse submits in determining whether
to grant relief from the Federal income
tax liability resulting from the operation
of community property law under this
section.
§ 1.66–5

Effective date.

Sections 1.66–1 through 1.66–4 are
applicable on July 10, 2003. In addition,
§ 1.66–4 applies to any request for relief
filed prior to July 10, 2003, for which
the Internal Revenue Service has not
issued a preliminary determination as of
July 10, 2003.
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:

■

Authority: 26 U.S.C. 7805.

Par. 4. The following entry is added in
numerical order to the table:

■

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§ 602.101

*

OMB Control numbers.

*
*
(b) * * *

*

*

CFR part or section where
identified and described

*

*

*
*
1.66–4 .......................................
*

*

*

Current
OMB control
No.
*
1545–1770
*

*
David A. Mader,
Assistant Deputy Commissioner of Internal
Revenue.
Approved: July 1, 2003.
Gregory F. Jenner,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 03–17386 Filed 7–9–03; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 9073]
RIN 1545–BB17

Disclosure of Return Information by
Certain Officers and Employees for
Investigative Purposes
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Temporary regulations and
removal of final regulations.
SUMMARY: This document contains
temporary regulations relating to the
disclosure of return information
pursuant to section 6103(k)(6) of the
Internal Revenue Code. The temporary
regulations describe the circumstances
under which officers or employees of
the IRS, the IRS Office of Chief Counsel,
and the Office of Treasury Inspector
General for Tax Administration
(TIGTA), in connection with official
duties relating to any examination,
administrative appeal, collection
activity, administrative, civil, or
criminal investigation, enforcement
activity, ruling, negotiated agreement,
prefiling activity, or other proceeding or
offense under the internal revenue laws
or related statutes, or in preparation for
any proceeding described in section
6103(h)(2) (or investigation which may
result in such a proceeding), may
disclose return information to the extent
necessary to obtain information relating
to such official duties or to accomplish
properly any activity connected with

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