Under I.R.C. § 6015, a spouse may elect to seek relief from joint and several liability on a joint return. Determinations under this section are made without regard to community property. I.R.C. § 6015(a). Therefore, the existence of community property does not impact on section 6015 determinations. Also, if one spouse has received innocent spouse relief under section 6015, that does not affect the Service’s ability to collect from the liable spouse’s interest in community property. United States v. Stolle, 2000-1 U.S.T.C. ¶50,329, (C.D. Cal. 2000); Hegg v. I.R.S., 28 P.3d 1004 (Idaho 2001).

The Supreme Court, in Poe v. Seaborn, 282 U.S. 101 (1930), held that spouses receiving income that is community property and filing separate returns are each required to report half of each item of community property income. This case required a spouse to report half of community property income even if the spouse had not received or benefited from any of the income. Congress enacted I.R.C. § 66 to address this problem. See S. Rep. No. 96-1036, at 8 (1980). Section 66 grants spouses relief from the community property income splitting requirements in certain circumstances.

I.R.C. Section 66 has two subsections that could grant relief from application of community property laws to income of spouses, subsections 66(a) and (c). One other subsection, subsection 66(b), allows the Service to shift the incidents of taxation to the other spouse if certain requirements are met. Section 66 applies only to community income, as defined by state law. Some of the requirements of the section can be quite complex. Pro forma workpapers with checksheets and other information concerning section 66 and its subsections are included in Exhibit 25.18.3-1.

I.R.C. Section 66 does not negate liability that arises against a spouse under the operation of other (non-community property) laws. For example, while it might negate a spouse's direct liability for a tax, it will not negate transferee liability if it applies. Treas. Reg. § 1.66-1(c). It also does not negate any collection remedies based on state law against community property in the hands of the other spouse. For example, if the Service has a remedy against the liable spouse based on collecting from all community property, the fact that the other spouse received relief under section 66 will not eliminate that remedy. Cf. United States v. Stolle, 2000-1 U.S.T.C. ¶50,329, (C.D. Cal. 2000) (with respect to section 6015).

I.R.C. Section 66 relief is not available if the spouse transferred assets to the other spouse as part of a fraudulent scheme. Treas. Reg. § 1.66-4(f). Section 66 relief is not available if the spouse entered into a closing agreement (other than an agreement pursuant to section 6224(c) as to partnership items) that disposes of the same liability that is the subject of the request for relief. Relief is also not available if the requesting spouse has entered into an offer in compromise with the Service with respect to the liability. Treas. Reg. § 1.66-4(h)

Relief under I.R.C. Section 66(a). Under section 66(a), if spouses meet certain requirements, they do not report most community property income under community property rules.

Requirements. I.R.C. Section 66(a) has the following requirements:

Effect of I.R.C. Section 66(a). If section 66(a) applies, spouses report their community income in accordance with I.R.C. § 879(a). Under section 879(a), earned income (other than trade or business income) is taxed to the spouse who earned it. Trade or business (Schedule C) income is treated as the owner spouse's, unless the other spouse exercised substantially all management and control over the business, in which case the income is treated as the other spouse's. I.R.C. §§ 879(a)(2) and 1402(a)(5). Income from a partnership is taxed to the partner spouse. I.R.C. §§ 879(a)(2) and 1402(a)(5). Community income derived from separate property of one spouse is treated as the income of that spouse. I.R.C. § 879(a)(3). All other community income is treated as provided under the applicable state community property law. I.R.C. § 879(a)(4).

Living apart. For purposes of the requirement of section 66(a), living apart requires that spouses maintain separate residences. Treas. Reg. § 1.66-2(b). A temporary absence is not living apart as contemplated by this section. Treas. Reg. § 1.66-2(d), Example 1.

Transferred income. Transferred income does not include de minimis amounts of earned income that is transferred between the spouses. Amounts transferred for the benefit of the spouses' child are not treated as a direct or indirect transfer of income. Income transferred between spouses is presumed to be a transfer of earned income, although the presumption is rebuttable. Treas. Reg. § 1.66-2(c).

I.R.C. Section 66(c) removes the burden of reporting half of specific items of community property income from a spouse, as opposed to the general relief of section 66(a). The section 66 regulations refer to it as "traditional relief." Treas. Reg. § 1.66-4.

Traditional relief under section 66(c) has the following requirements:

Income is shifted. If the requirements are met, then the unreported item of income will be taxed wholly to the non requesting spouse, and not split. I.R.C. § 66(c).

Knowledge or reason to know. For purposes of the knowledge requirement of section 66(c), a requesting spouse has knowledge or reason to know if he or she actually knew of the item of community income or a reasonable person in similar circumstances would have known of the item of community income. Treas. Reg. § 1.66-4(a)(2). All the facts and circumstances are considered.

Relevant factors include, but are not limited to:

The knowledge requirement is interpreted strictly. If a requesting spouse is aware of the source of community income or an income producing activity, the requesting spouse is considered to have knowledge or reason to know of the item of community income even if the requesting spouse does not know the specific amount received. McGee v. Commissioner, 979 F.2d 66 (5th Cir. 1992); Beck v. Commissioner, T.C. Memo. 2001-198; Treas. Reg. § 1.66-4(a)(2)(ii). However, if the requesting spouse knows that the non requesting spouse has some types of income but not other types, he or she may be relieved of tax liability for the latter but not the former. Roberts v. Commissioner, T.C. Memo. 1987-391, aff'd., 860 F.2d 1235 (5th Cir. 1988).

Inequitable. In determining whether it would be inequitable to hold a requesting spouse liable, all the facts and circumstances are considered. An important factor is whether the spouse significantly benefited, directly or indirectly, from the item. This includes transfers of property or rights to property, including transfers several years after the fact. Normal support is not benefit. Other factors include desertion, divorce or separation. Treas. Reg. § 1.66-4(a)(3). See also Rev. Proc. 2003-61, 2003-32 I.R.B. 296.

The Service may relieve a taxpayer of liability for any unpaid tax or any deficiency or any portion thereof attributable to an item of community income for which relief is not available under section 66(c), if taking into account all the facts and circumstances, it is inequitable to hold the taxpayer liable. I.R.C. § 66(c). In making this determination, Rev. Proc. 2003-61, 2003-32 I.R.B. 296, should be consulted.

To qualify for equitable relief, a requesting spouse must meet the following threshold requirements:

Assuming the threshold requirements are met, the Service will then consider other factors in determining whether to grant I.R.C. § 66(c) relief.

Assuming the threshold requirements are met, the following is a partial list of the positive and negative factors listed in Rev. Proc. 2003-61 that will be taken into account in determining whether to grant full or partial equitable relief under I.R.C. § 66(c). No single factor will be determinative of whether equitable relief will or will not be granted in any particular case. Rather, all factors should be considered and weighed appropriately. The list is not intended to be exhaustive.

I.R.C. Section 66(b) may be used by the Service to require one spouse to report 100% of an item of community property income.

Under this section, the Service may disallow the benefits of any community property law (i.e., place the entire incidence of tax for a community property item on a particular spouse) if:

Effect of I.R.C. Section 66(b). If the Service disregards the community property allocation pursuant to section 66(b), the effect is to shift the item of income to that spouse. See I.R.C. § 66(b); Treas. Reg. § 1.66-3(b). The tax must be assessed against that spouse in accordance with I.R.C. § 6212 (deficiency procedures).

Section 66(b) not a relief provision. Only the Service can invoke section 66(b). It is not a relief provision that can be invoked by a taxpayer to escape liability. Hardy v. Commissioner, 181 F.3d 1002 (9th Cir. 1999); Drummer v. Commissioner, T.C. Memo. 1994-214, aff’d without published opinion, 68 F.3d 472 (5th Cir. 1995)

Solely entitled to income. Whether a spouse has acted as if he or she was solely entitled to the income is a facts and circumstances determination focusing on whether the spouse used, or made available, the item of income for the benefit of the marital community. Treas. Reg. § 1.66-3(a). Where the community property at issue is deposited into a joint account or an account over which both spouses have signature authority, the spouse who deposited the funds did not act as though he or she was solely entitled to the funds. Cox v. Commissioner, T.C. Memo. 1993-559; Drummer v. Commissioner, T.C. Memo. 1994-214, aff’d without published opinion, 68 F.3d 472 (5th Cir. 1995). Similarly, where a spouse sends a portion of the funds to the other spouse, that spouse has not acted as though he or she was solely entitled to the funds. Mischel v. Commissioner, T.C. Memo. 1997-350; Treas. Reg. § 1.66-3(c), Example 1(ii). On the other hand, if the community income is retained by one spouse and spent at his or her discretion, that spouse has acted as though he or she was solely entitled to the income. Treas. Reg. § 1.66-3(c), Example 1(i).

Notification of nature and amount of income. Providing a copy of a Form 1099 or Form W-2 satisfies the notification of the nature and amount of income requirement. If this is done before the due date of the return (including extensions), it makes section 66(b) inapplicable. Treas. Reg. § 1.66-3(c), Example 2.

If a notice of deficiency is being issued shifting the incidence of tax from one spouse to the other in reliance on section 66(b), this should be stated in the notice. The determination must be supported by evidence that section 66(b) applies. If the notice fails to do this, the burden of proof may be shifted to the Service. Shea v. Commissioner, 112 T.C. 183 (1999).

A request for relief under I.R.C. § 66 should be made by filing a Form 8857 or equivalent form. The form must be signed under the penalties of perjury, indicate why relief is appropriate, and include the nonrequesting spouse's name and taxpayer identification number. The requesting spouse must also comply with the Service's reasonable requests for information that will assist the Secretary in identifying and locating the nonrequesting spouse. Treas. Reg. §1.66-4(j).

Earliest time for filing a request:

Latest time for filing a request:

When the Secretary receives a request for relief from Federal income tax liability resulting from the operation of community property law under this section, the Service 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 Service will share with each spouse the information submitted by the other spouse, unless the Service determines that the sharing of this information will impair tax administration. Treas. Reg. § 1.66-4(k).

There are no limitations on refunds within I.R.C. § 66. Other limitations in the Code, such as I.R.C. § 6511, may apply.

With respect to equitable relief, the allowability of refunds depends on whether the equitable relief involves an underpayment or a deficiency. Rev. Proc. 2003–61, 2003–32 I.R.B. 296.

Denial of I.R.C. Section 66 relief (including equitable relief) in a deficiency proceeding is subject to judicial review. Beck v. Commissioner, T.C. Memo. 2001-198. The standard is abuse of discretion. Bernal v. Commissioner, 120 T.C. 102 (2003).

I.R.C. Section 66 does not contain a specific grant of Tax Court jurisdiction similar to I.R.C. § 6015(e). The Tax Court cannot review denial of section 66 relief in a "stand alone" proceeding. A stand alone case is one where the issue is raised in connection with the denial of section 66 relief without a determination of a deficiency. An erroneous statement in an IRS notice that the Tax Court can review a determination will not give the Tax Court jurisdiction. Bernal v. Commissioner, 120 T.C. 102 (2003).