T.D. 9003 T.D. 9003

I.R.B. 2002-32, 294 (August 12, 2002)


[Code Sec. 6013, 6015]

Married individuals: Joint returns: Joint and several liability.

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.
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 §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 §1.6013-5, relating to relief from joint and several liability under former section 6013(e). The final regulation under §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 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 §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 §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 (§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 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 §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 §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 §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, §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 §1.6015-1(g), and redesignate §1.6015-1(g) and (h) of the proposed regulations as §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 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 §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 §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 §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 than 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 §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 §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 §1.6015-2(d) of the proposed regulations to be consistent with the language regarding equity under former §1.6013-5, which provided that facts relevant to the determination of equity include whether the requesting spouse was abandoned by the nonrequesting 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 §§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, 105^th 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, §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, 105^th 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 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 §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, §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 §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 §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.

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 §1.6015-4 is not available to circumvent the "no refund" rule of §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, 105^th 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 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 §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

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

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

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). *****

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

§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.

§1.6013-5 [Removed]

Par. 3. Section 1.6013-5 is removed.

Par. 4. Sections 1.6015-0 through 1.6015-9 are added to read as follows:

§1.6015-0 Table of contents.

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

§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 §§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.

§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.

§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.
(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.

§1.6015-4 Equitable relief.

§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.

§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.

§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 §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 §1.6015-2 or 1.6015-3.
(ii) Relief under §1.6015-4.
(4) Definitions.
(i) Levy.
(ii) Proceedings in court.
(iii) Assessment to which the election relates.

§1.6015-8 Applicable liabilities.
(a) In general.
(b) Liabilities paid on or before July 22, 1998.
(c) Examples.

§1.6015-9 Effective date.

§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 §1.6015-2.

(ii) Allocation of deficiency under §1.6015-3.

(iii) Equitable relief under §1.6015-4.

(2) A requesting spouse may submit a single claim electing relief under both or either §§1.6015-2 and 1.6015-3, and requesting relief under §1.6015-4. However, equitable relief under §1.6015-4 is available only to a requesting spouse who fails to qualify for relief under §§1.6015-2 and 1.6015-3. If a requesting spouse elects the application of either §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 §1.6015-4. If a requesting spouse seeks relief only under §1.6015-4, the Secretary may not grant relief under §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 §1.6015-4, the IRS determines that the requesting spouse may qualify for relief under §1.6015-2 or 1.6015-3 instead of §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 §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 §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 §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 §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 §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.

(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 §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 §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 §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 §§1.6015-2 through 1.6015-9. This section and §§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 §1.6015-2 or 1.6015-3, or requests relief from Federal income tax liability arising from that return under §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 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 §1.6015-3(d)(4)(iv)(B).

(5) Election or request. A qualifying election under §1.6015-2 or 1.6015-3, or request under §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 §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 §1.6015-3 when the Internal Revenue Service considered the first election solely because the qualifications of §1.6015-3(a) were not satisfied; and

(ii) At the time of the second election, the qualifications for relief under §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 §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.

§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 §§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 §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 §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