[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.879-1]

[Page 366-369]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.879-1  Treatment of community income.

    (a) Treatment of community income--(1) In general. For taxable years 
beginning after December 31, 1976, community income of a citizen or 
resident of the United States who is married to a nonresident alien 
individual, and the deductions properly allocable to that income, shall 
be divided between the U.S. citizen or resident spouse in accordance 
with the rules in section 879 and paragraph (a)(2) through (a)(6) of 
this section. This section does not apply for any taxable year with 
respect to which an election under section 6013 (g) or (h) is in effect. 
Community income for this purpose includes all gross income, whether 
derived from sources within or without the United States, which is 
treated as community income of the spouses under the community property 
laws of the State, foreign country, or

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possession of the United States in which the recipient of the income is 
domiciled. Income from real property also may be community income if so 
treated under the laws of the jurisdiction in which the real property is 
located.
    (2) Earned income. Wages, salaries, or professional fees, and other 
amounts received as compensation for personal services actually 
performed, which are community income for the taxable year, shall be 
treated as the income of the spouse who actually performed the personal 
services. This paragraph (a)(2) does not apply, however, to the 
following items of community income:
    (i) Community income derived from any trade or business carried on 
by the husband or the wife.
    (ii) Community income attributable to a spouse's distributive share 
of the income of a partnership to which paragraph (a)(4) of this section 
applies.
    (iii) Community income consisting of compensation for personal 
services rendered to a corporation which represents a distribution of 
the earnings and profits of the corporation rather than a reasonable 
allowance as compensation for the personal services actually performed, 
but not including any income that would be treated as earned income 
under the second sentence of section 911(b).
    (iv) Community income derived from property which is acquired as 
consideration for personal services performed.

These items of community income are divided in accordance with the rules 
in paragraph (a)(3) through (a)(6) of this section.
    (3) Trade or business income. If any income derived from a trade or 
business carried on by the husband or wife is community income for the 
taxable year, all of the gross income, and the deductions attributable 
to that income, shall be treated as the gross income and deductions of 
the husband. However, if the wife exercises substantially all of the 
management and control of the trade or business, all of the gross income 
and deductions shall be treated as the gross income and deductions of 
the wife. This paragraph (a)(3) does not apply to any income derived 
from a trade or business carried on by a partnership of which both or 
one of the spouses is a member (see paragraph (a)(4) of this section). 
For purposes of this paragraph (a)(3), income derived from a trade or 
business includes any income derived from a trade or business in which 
both personal services and capital are material income producing 
factors. The term ``management and control'' means management and 
control in fact, not the management and control imputed to the husband 
under the community property laws of a State, foreign country or 
possession of the United States. For example, a wife who operates a 
pharmacy without any appreciable collaboration on the part of a husband 
is considered as having substantially all of the management and control 
of the business despite the provisions of any community property laws of 
a State, foreign country, or possession of the United States, vesting in 
the husband the right of management and control of community property. 
The income and deductions attributable to the operation of the pharmacy 
are considered the income and deductions of the wife.
    (4) Partnership income. If any portion of a spouse's distributive 
share of the income of a partnership, of which the spouse is a member, 
is community income for the taxable year, all of that distributive share 
shall be treated as the income of that spouse and shall not be taken 
into account in determining the income of the other spouse. If both 
spouses are members of the same partnership, the distributive share of 
the income of each spouse which is community income shall be treated as 
the income of that spouse. A spouse's distributive share of the income 
of a partnership that is community income shall be determined as 
provided in section 704 and the regulations thereunder.
    (5) Income from separate property. Any community income for the 
taxable year, other than income described in section 879(a) (1) or (2) 
and paragraph (a) (2), (3), or (4) of this section, which is derived 
from the separate property of one of the spouses shall be treated as the 
income of that spouse. The determination of what property is separate 
property for this purpose shall be made in accordance with the laws of 
the State, foreign country, or possession of

[[Page 368]]

the United States in which, in accordance with paragraph (a)(1) of this 
section, the recipient of the income is domiciled or, in the case of 
income from real property, in which the real property is located.
    (6) Other community income. Any community income for the taxable 
year, other than income described in section 879(a) (1), (2), or (3), 
and paragraph (a) (2), (3), (4), or (5) of this section, shall be 
treated as income of that spouse who has a proprietary vested interest 
in that income under the laws of the state, foreign country, or 
possession of the United States in which, in accordance with paragraph 
(a)(1) of this section, the recipient of the income is domiciled or, in 
the case of income from real property, in which the real property is 
located. Thus, for example, this paragraph (a)(6) applies to community 
income not described in paragraph (a) (2), (3), (4), or (5) of this 
section which consists of dividends, interest, rents, royalties, or 
gains, from community property or of the earnings of unemancipated minor 
children.
    (7) Illustrations. The application of this paragraph may be 
illustrated by the following examples:

    Example 1. H, a U.S. citizen, and W, a nonresident alien individual, 
each of whose taxable years is the calendar year, were married 
throughout 1977. H and W were residents of, and domiciled in, foreign 
country Z during the entire taxable year. No election under section 6013 
(g) or (h) is in effect for 1977. During 1977, H earned $10,000 from the 
performance of personal services as an employee. H also received $500 in 
dividend income from stock which under the community property laws of 
country Z is considered to be the separate property of H. W had no 
separate income for 1977. Under the community property laws of country Z 
all income earned by either spouse is considered to be community income, 
and one-half of this income is considered to belong to the other spouse. 
In addition, the laws of country Z provide that all income derived from 
property held separately by either spouse is to be treated as community 
income and treated as belonging one-half to each spouse. Thus, under the 
community property laws of country Z, H and W are both considered to 
have realized income of $5,250 during 1977, even though Z's laws 
recognize the stock as the separate property of H. Under the rules of 
paragraph (a) (2) and (5) of this section all of the income of $10,500 
derived during 1977 is treated, for U.S. income tax purposes, as the 
income of H.
    Example 2. (a) The facts are the same as in example 1, except that H 
is the sole proprietor of a retail merchandising company, which has a 
$10,000 profit during 1977. W exercises no management and control over 
the business. In addition, H is a partner in a wholesale distributing 
company, and his distributive share of the partnership profit is $5,000. 
Both of these amounts of income are treated as community income under 
the community property laws of country Z, and under these laws both H 
and W are treated as realizing $7,500 of the income. Under the rule of 
paragraph (a) (3) and (4) of this section all $15,000 of the income is 
treated as the income of H for U.S. income tax purposes.
    (b) If W exercises substantially all of the management and control 
over the retail merchandising company, then for U.S. income tax purposes 
the $10,000 profit is treated as the income of W.
    Example 3. The facts are the same as in example 1, except that H 
also received $1,000 in dividends on stock held separately in his name. 
Under the community property laws of country Z the stock is considered 
to be community property, the dividends to be community income, and one-
half of the income to be the income of each spouse. Under the rule of 
paragraph (a)(6) of this section, $500 of the dividend income is 
treated, for U.S. income tax purposes, as the income of each spouse.

    (b) Definitions and other special rules--(1) Spouses with different 
taxable years. A special rule applies if the nonresident alien and the 
United States citizen or resident spouse of the alien do not have the 
same taxable years, as defined in section 441(b) and the regulations 
thereunder. The special rule is as follows. With respect to the U.S. 
citizen or resident spouse, section 879 and this section shall apply to 
each taxable year of the U.S. citizen or resident spouse for which no 
election under section 6013 (g) or (h) is in effect. With respect to the 
nonresident alien spouse, section 879 and this section apply to each 
period falling within the consecutive taxable years of the nonresident 
alien spouse which coincides with a taxable year of the U.S. citizen or 
resident spouse to which section 879 and this section apply.
    (2) Determination of marital status. For purposes of this section, 
marital status shall be determined under section 143(a).

[T.D. 7670, 45 FR 6928, Jan. 31, 1980]

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                          foreign corporations