25.15.5  Relief from Community Property Laws/Community Property States

Manual Transmittal

July 29, 2014

Purpose

(1) This transmits revised IRM 25.15.5 Relief from Joint and Several Liability, Relief from Community Property Laws/Community Property States.

Material Changes

(1) Editorial changes have been made throughout this IRM.

(2) IPU 13U1380 issued 08-22-2013 IRM 25.15.5.19 added information about IDRS and field letters.

(3) IPU 13U1380 issued 08-22-2013 IRM 25.15.5.19.1 added letters for the field.

(4) IPU 13U1380 issued 08-22-2013 IRM 25.15.5.19.2 added letters for the field.

(5) IPU 13U1380 issued 08-22-2013 IRM 25.15.5.19.3 added letters for the field.

(6) IRM 25.15.5.1 added information about same sex marriage.

(7) IRM 25.15.5.2(2) added information regarding registered domestic partners and moved down (3) and (4).

(8) IRM 25.15.5.3(2) reworded sentence for clarity.

(9) IRM 25.15.5.9(1) added references to the IRM 25.18.2.

(10) IRM 25.15.9.1(1)(a) added note for joint returns.

(11) IRM 25.15.5.9.2 removed references to notice 2012-8 and Rev. Proc. 2003–61. Replaced these references with Rev. Proc. 2013–34.

(12) IRM 25.15.5.9.2(1) updated sentence to remove reference to the 1st and 2nd sentence.

(13) IRM 25.15.5.9.2(4) 4th bullet, updated reference from 25.15.3.8.2.1(4) to 25.15.3.8.2.1(7).

(14) IRM 25.15.5.10(1) reworded for clarity.

(15) IRM 25.15.5.11 editorial changes.

(16) IRM 25.15.5.11.3(2) added citation for Form 4549.

(17) IRM 25.15.5.16(3) added caution.

(18) IRM 25.15.5.19.1(2)(c) note removed.

(19) IRM 25.15.5.19.2(2) note removed.

(20) IRM 25.15.5.6(1) added reference to 25.18.2 Income Reporting Considerations of Community Property.

Effect on Other Documents

IRM 25.15.5, Relief from Community Property Laws/Community Property States, dated March 5, 2013 is superseded. IRM Procedural Update (IPU) 13U1380 issued August 22, 2013 has been incorporated into this IRM.

Audience

Employees receiving requests for relief under IRC 66

Effective Date

(07-29-2014)


Steve C. Klingel
Director, Reporting Compliance
Wage and Investment Division

25.15.5.1  (07-29-2014)
Overview

  1. A spouse domiciled in a community property state is generally liable for income tax on one-half of the community income when they do not file a joint return. This section will discuss community property laws and outline the provisions of IRC 66, Treatment of Community Income.

  2. IRC 66 relief is not available if the spouse:

    • transferred assets to the other spouse as part of a fraudulent scheme,

    • entered into a closing agreement that disposes of the same liability, or

    • entered into an offer in compromise with respect to the liability.

  3. For federal tax purposes, individuals of the same sex are married if they were lawfully married in a state (or foreign country) whose laws authorize the marriage of two individuals of the same sex, even if the state (or foreign country) in which they now live does not recognize same-sex marriage. The term "spouse" includes an individual married to a person of the same sex if the couple is lawfully married under state (or foreign) law. However, individuals who have entered into a registered domestic partnership, civil union, or other similar relationship that is not called a marriage under state (or foreign) law are not married for federal tax purposes.

  4. For further information on community property law not listed in this IRM, see IRM 25.18.1, Basic Principles of Community Property Law.

25.15.5.2  (07-29-2014)
Community Property States

  1. The following are community property states:

    • Arizona

    • California

    • Idaho

    • Louisiana

    • Nevada

    • New Mexico

    • Texas

    • Washington

    • Wisconsin

    Note:

    While not a community property state, Alaska does allow couples to opt-in to a community property arrangement.

  2. Registered domestic partners in Nevada, Washington, or California generally must follow state community property laws and report half the combined community income of the individual and his or her registered domestic partner. Registered domestic partners are not married for federal tax purposes. They can use the single filing status, or if they qualify, the head of household filing status.

  3. Some countries are community property, and the law of each country should be checked as necessary.

  4. The community property territories are:

    • Guam

    • Puerto Rico

25.15.5.3  (07-29-2014)
Treatment of Community Income in General

  1. Community property laws vary greatly from state to state based upon each individual state’s statutes. The community property laws of the state where the spouses are domiciled are controlling and must be reviewed when any tax issue involves the application of community property laws.

  2. Spouses domiciled in community property states may either file jointly or separately. They generally have an undivided one half interest in the community income; so any separate return should reflect one-half of the community income plus 100% of their separate income.

    Note:

    Taxpayers with a prenuptial agreement can opt out of state community property laws and elect to have income treated as if they were domiciled in a non-community property state, in which case IRC 66 would not apply.

25.15.5.4  (07-17-2009)
Domicile

  1. Whether a taxpayer has community property and community income depends on the state of domicile. The words "residence" and "domicile" are not synonymous and are often confused. A taxpayer may have several places of residence, but has only one domicile. A domicile is a permanent home the taxpayer intends to use for an indefinite or unlimited period, and when absent, intends to return.

  2. Objective factors are a good indication of the taxpayer’s intent. Such factors include:

    • Where the taxpayer is employed and registered to vote;

    • Where the taxpayer’s vehicles are registered;

    • Whether the taxpayer is on a temporary work detail;

    • Where the taxpayer’s primary personal residence is located;

    • How often the taxpayer returns home; and

    • Whether the taxpayer’s involvement and ties to the community are asserted where the domicile is located.

  3. If both spouses have different domiciles, you should check the community property laws of each state to determine if they have community property or community income.

25.15.5.5  (07-17-2009)
Community and Separate Property

  1. Community Property - Generally, community property is all property acquired during a marriage while the spouses are domiciled in a community property state. Additional guidelines listed below are the general rules regarding what constitutes community property:

    • Property both spouses agree to convert from separate to community property

    • Property which cannot be identified as separate property

  2. Separate Property - For property to be considered separate after marriage, it must be acquired by separate funds. For property acquired before marriage to remain separate, the upkeep must be done by separate funds and the property must not be commingled.

25.15.5.6  (07-29-2014)
Community Income

  1. Generally, community income is income generated from community property. For additional information see IRM 25.18.2, Income Reporting Considerations of Community Property, for additional information. Listed below are the general rules regarding what constitutes community income:

    • Income derived from community property

    • Salaries, wages, or pay for the services of both spouses during the marriage

    • Income from real estate treated as community property under the laws of the state where the property is located

  2. State law must be reviewed to determine the proper treatment for community income. Also, state law will determine how to treat community income if the spouses have separated during the year. Each state’s laws regarding community income and community property are different. Do not assume the general rules apply in every state.

25.15.5.7  (07-29-2014)
IRC 66(a), Separation of Spouses

  1. IRC 66(a) is not a relief provision but was intended to protect abandoned spouses. Spouses may choose to report their income in this manner assuming they meet all the requirements. IRC 66(a) provides an exception to the general rule that community income is taxed one-half to each spouse domiciled in a community property state. This is a special rule that generally permits spouses to allocate earned income to the spouse who earned the income if certain statutory requirements are met. It applies where:

    • The spouses are married to each other at any time during the calendar year.

    • The spouses live apart at all times during the calendar year and do not file a joint return for the taxable year beginning or ending in the calendar year. For purposes of this requirement, living apart requires that spouses maintain separate residences.

    • One or both of the spouses have earned income for the calendar year, which is community income.

    • No portion of the earned income is transferred between the spouses, directly or indirectly, before the close of the calendar year. Transferred income does not include de minimus amounts of earned income transferred between spouses. Amounts transferred for the benefit of the spouses’ child are not treated as direct or indirect transfers of income.

  2. If all of these criteria are met, spouses in community property states may report their income according to rules of IRC 879(a) which provides:

    1. Earned income (wages, salaries, and other forms of compensation for personal services) is taxed to the spouse rendering the services.

    2. Trade or business income is taxed to the spouse exercising substantially all of the management and control of the business.

    3. A distributive share from a partnership is taxed to the spouse who is the partner.

    4. Income derived from the separate property of the one spouse is taxed to that spouse.

      Caution:

      All other forms of income are taxed in accordance with normal community property laws. This includes dividend, interest, rents, royalties, capital gains, and earnings of unemancipated minor children.

25.15.5.8  (07-17-2009)
IRC 66(b) - Unjust Enrichment

  1. As with IRC 66(a), IRC 66(b) is not a relief provision. IRC 66(b) provides another exception to the general rule that community income is taxed one-half to each spouse. IRC 66(b) authorizes the Treasury Secretary and not the taxpayer to disregard community property laws by denying the benefits of income splitting between the spouses. IRC 66(b) applies under certain prescribed conditions as shown below:

    1. The spouse acted as if he/she was solely entitled to such community income, and

    2. The spouse failed to notify the other spouse of the nature and amount of such income before the due date of the return (including extensions) for the year in which the income was derived.

  2. IRC 66(b) entitles the Treasury Secretary to assess additional tax against the spouse earning the income in accordance with the deficiency procedures in IRC 6212 and IRC 6213. The Service must determine whether IRC 66(b) applies.

  3. Where IRC 66(b) is asserted, it must be clearly reflected on the notice of deficiency.

25.15.5.9  (07-29-2014)
IRC 66(c) - Innocent Spouse Relief

  1. IRC 66(c) provides two additional exceptions to the general rule that community income is taxed one-half to each spouse. IRC 66(c) provides relief from the operation of community property laws under certain circumstances. Unlike IRC 6015, IRC 66(c) provides relief for items of income only, as defined in IRM 25.18.2.1, Income Reporting Considerations of Community Property, not relief from disallowed deductions as defined in IRM 25.18.2.3, Claiming of deductions.

25.15.5.9.1  (07-29-2014)
Traditional Relief

  1. The first sentence of IRC 66(c), known as traditional relief, applies only to deficiency cases. In cases where relief is granted, the taxpayer’s former spouse will be solely liable for the tax liability attributable to the item of community property income. The following must be met for relief to be granted:

    1. The requesting spouse (RS) does not file a joint return for the taxable year for which the RS seeks relief;

      Note:

      If a joint return is filed, IRC 66(c) does not apply. Relief on a jointly filed return may be available under IRC 6015.

    2. The RS does not include in gross income for such taxable year an item of community income;

    3. The community income item would be attributable to the other spouse in accordance with IRC 879(a);

    4. The RS establishes he/she did not know and had no reason to know of such item of community income; and

    5. Considering all the facts and circumstances, it is inequitable to include such community item in the RS’s gross income.

25.15.5.9.2  (07-29-2014)
Equitable Relief

  1. If the RS does not qualify for traditional relief under IRC 66(c), then the Service will consider equitable relief under IRC 66(c).

  2. Relief is available for both deficiency (understatement) cases and underpayment cases.

  3. For information on the factors to consider when determining whether equitable relief should be granted see IRM 25.15.3.8.2Eligibility Threshold Requirements under Rev. Proc. 2013–34. These guidelines should be applied in a consistent and nondiscriminatory manner. Decisions to grant relief should not be based on the subjective personal and social beliefs of the IRS employee or any other inappropriate grounds.

  4. If it is inequitable to hold the RS liable for any unpaid tax or deficiency, the Treasury Secretary may grant relief. The equitable relief provision under IRC 66(c) is available for spouses domiciled in a community property state who did not file a joint return, who do not qualify for the traditional relief under the first sentence of IRC 66(c), and who meet the following threshold requirements:

    • The RS must apply for relief within the time period that the collection statute or refund statute remains open.

    • The non-requesting spouse (NRS) must not have transferred assets to the RS as part of a fraudulent scheme, and, in addition, if disqualified assets were transferred, relief can only be granted to the extent the income tax liability exceeds the value of those assets.

    • The RS did not file or fail to file the return with fraudulent intent.

    • The income tax liability from which the RS seeks relief must be attributable to an item of the NRS, unless an exception applies. See IRM 25.15.3.8.2.1(7), Eligibility Threshold Conditions - Defined, for the exceptions.

  5. If all the above threshold requirements are met, the guidelines in Rev. Proc. 2013-34 should be followed in determining whether to grant relief. If the decision is made to grant relief, the item of community income is included in the gross income of the NRS and not in the gross income of the RS. However, any additional assessments made against the NRS must be made in accordance with the deficiency procedures of IRC 6212 and IRC 6213. Where IRC 66(c) is asserted against the other spouse, it must be clearly reflected in the notice of deficiency.

25.15.5.10  (07-29-2014)
Requesting Relief under IRC 66(c)

  1. A RS seeking relief from the operation of community property law under IRC 66(c) must request such relief on a Form 8857, Request for Innocent Spouse Relief, or other written request, signed under penalties of perjury stating why relief is appropriate.

25.15.5.11  (07-29-2014)
Time Period for Filing a Request for Relief

  1. To request relief from the federal income tax liability resulting from the operation of community property law under IRC 66(c), a RS must file within the time period prescribed in the following subsections.

25.15.5.11.1  (05-01-2005)
Traditional Relief

  1. The earliest time for submitting a request for an amount underreported on, or omitted from, the RS’s separate return, is the date the RS receives notification of an audit or a letter or notice from the IRS stating there may be an outstanding liability with regard to that year.

  2. The latest time for requesting relief, except for requests for equitable relief, is no later than 6 months before the expiration of the period of limitations on assessment, including extensions, against the NRS for the taxable year that is the subject of the request for relief, unless the examination of the RS’s return commences during that 6 month period.

  3. If the examination of the RS’s return commences during that 6 month period, the latest time for requesting relief is 30 days after the commencement of the examination.

25.15.5.11.2  (03-05-2013)
Equitable Relief

  1. The earliest time for submitting a request for equitable relief relating to deficiency is the date the RS receives notification of an audit or a letter or notice from the IRS stating there may be an outstanding liability with regard to that year.

  2. The earliest time for submitting a request for a liability properly reported but unpaid is upon the filing of the individual Federal income tax return.

  3. The latest time for requesting relief is within any time period that the collection statute or refund statute remains open.

25.15.5.11.3  (07-29-2014)
Premature Requests

  1. The Treasury Secretary will not consider a premature request for relief under IRC 66(c).

  2. In the case of a claim for traditional relief, a premature claim is a claim for relief filed for a taxable year prior to a notification of an audit or a letter or notice from the Treasury Secretary indicating there may be an outstanding liability with regard to that year. Such notices or letters do not include notices issued pursuant to IRC 6223 relating to Tax Equity and Fiscal Responsibility Act (TEFRA) partnership proceedings. Such notices or letters include notices of computational adjustment to the partner or partner’s spouse, Form 4549, Notice of Income Tax Examination Changes, which compute the partner’s or partner’s spouse’s share of the partnership liability.

  3. In the case of a claim for equitable relief involving an underpayment, a premature claim is a claim for relief received prior to the date the RS files an individual federal income tax return for the taxable year in question.

  4. In the case of a claim for equitable relief involving a deficiency, a premature claim is a claim received prior to notification of an audit or letter or notice from the IRS stating there may be an outstanding liability with regard to that year.

25.15.5.12  (07-17-2009)
Invalid Joint Return Elections

  1. If a RS in a community property state files a claim for relief from liability because the joint return election was invalid, the examiner should consider whether any of the provisions of IRC 66 apply. If the joint election is determined to be invalid and IRC 66 does not apply, then the appropriate community property split should be completed for the RS and the returns should be secured.

25.15.5.13  (07-17-2009)
Assessment Against NRS if Relief Granted

  1. If it is determined IRC 66 applies, the items of community income attributable to the NRS are included in the gross income of the NRS as long as the statute of limitations on assessment is still open. Thus, it is important to track the statute of limitations on assessment against the NRS when processing a claim under IRC 66.

25.15.5.14  (07-17-2009)
Substitute for Return

  1. In many instances for non-filers, the Service has filed substitute returns for the taxpayer. In community property states, where there are indications the taxpayer was married, the Service will file substitute returns for both spouses using the married filing separate rates. Relief under IRC 66(c) may be available to a RS in this instance, as no joint return was filed by the taxpayers.

25.15.5.15  (07-17-2009)
Effect of Prior Closing Agreement or Offer in Compromise

  1. A RS is not entitled to relief under IRC 66(c) for any taxable year for which the RS has entered into a closing agreement (other than an agreement entered into pursuant to IRC 6224(c) relating to partnership items) with the Commissioner that disposes of the same liability that is the subject of the claim for relief. In addition, a RS is not entitled to relief under IRC 66(c) for any taxable year for which the RS has entered into an offer in compromise with the Commissioner. See IRC 7121 and IRC 7122 for rules relating to the effect of closing agreements and offers in compromise.

25.15.5.16  (07-29-2014)
Notification Requirement

  1. The Treasury Secretary must send a notice to the NRS to inform them the RS filed a claim for relief and provide the NRS an opportunity to submit any information that should be considered in determining whether the RS should be granted relief from the operation of community property law.

  2. This notice will be sent to the NRS’s last known address.

  3. The Treasury Secretary will share with both spouses the information submitted by the other spouse, unless the Treasury Secretary determines the sharing of such information will impair tax administration.

    Caution:

    Do not disclose the other spouse's new last name, location, telephone number or any information about the other spouse's employment, income or assets.

25.15.5.17  (03-05-2013)
Appeal Rights

  1. Any spouse denied relief may file an appeal with the Appeals Division to administratively review the determination made under IRC 66(c).

  2. In order to seek a Tax Court review of a denial of treatment of community income under IRC 66, an independent basis for Tax Court jurisdiction must exist, e.g., a case in which the statutory notice of deficiency was issued. The Tax Court cannot review denial of IRC 66 relief in a stand alone proceeding. See Bernal v. Commissioner, 120 T.C. 102 (2003).

  3. The NRS will be given appeal rights when IRS proposes to grant full or partial relief to the RS.

    Note:

    The NRS does not have the right to appeal if the NRS is no longer liable for the tax liabilities at issue, e.g. they were discharged in the NRS's bankruptcy proceedings and/or offer-in-compromise, or the NRS's CSED has expired.

25.15.5.18  (03-05-2013)
Refunds Under IRC 66

  1. There are no limitations on refunds within IRC 66 other than IRC 6511.

25.15.5.19  (07-29-2014)
Determination Letters

  1. The following is a list of letters to be issued to the taxpayers notifying them of the determination on their request for relief under IRC 66. Integrated Data Retrieval System (IDRS) letters are known as “C” letters and are to be used by the Cincinnati Centralized Innocent Spouse Operation (CCISO). All other letters are to be used by field personnel.

25.15.5.19.1  (07-29-2014)
Preliminary Determination Letters

  1. Letter 3663C/Letter 3663 - Advises the RS of the preliminary determination and gives them the opportunity to appeal the decision.

  2. The following letters for CCISO advise the NRS of the preliminary determination and gives them the opportunity to respond.

    1. Letter 4983Cwhen the preliminary determination is allowed.

    2. Letter 4984C when the preliminary determination is partially allowed.

    3. Letter 4985C when the preliminary determination is disallowed.

    Note:

    These are the same letters sent on IRC 6015 cases.

  3. Letter 3660 - Advises the NRS of the determination and gives the opportunity to appeal the decision.

25.15.5.19.2  (07-29-2014)
Final Determination Letter

  1. Letter 3664C/Letter 3664 - Advises the RS of the final determination.

  2. Letter 3323C/Letter 3323 - Advises the NRS of the final determination.

    Note:

    This is the same letter sent on IRC 6015 cases.

25.15.5.19.3  (07-29-2014)
Other Letters

  1. Letter 3662C/Letter 3662 - Initial contact letter to the RS.

  2. Letter 3665C/Letter 3665 - Initial contact letter to the NRS giving notice to the NRS and opportunity to participate in administrative proceedings.

  3. Letter 3666C/Letter 3666 - Unprocessable Claim letter advising the RS their request for relief has been received; however, it cannot be processed.


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