Purpose: This IRM section provides technical guidance on various relief provisions of IRC 66, Treatment of Community Income, and how to determine relief under this code section.

Audience: This IRM section is intended to address the needs of all Service employees working cases involving married taxpayers domiciled in community property states that filed separate returns or are non-filers. They include but are not limited to:

Policy Owner: The Director, Examination - Field and Campus Policy, who is under the Director, Headquarters Examination.

Program Owner: Campus Exam and Field Support, which is under the Director, Examination - Field and Campus Policy.

Program Goals: Determine how provisions of IRC 66 are applicable to taxpayers domiciled in a community property state who file separate returns, or are non-filers. Determine which taxpayers may be eligible for one of the community property income allocation exceptions of IRC 66(a) or (b), or for innocent spouse relief under IRC 66(c). See IRM 25.15.1, Introduction, for more information.

The following are community property states:

Same-sex marriage: On June 26, 2015 in Oberfell v. Hodges, 135 S.Ct. 2584(2015), the Supreme Court held that:

As a result, same-sex married couples receive the same state and federal benefits and burdens as opposite-sex married couples. Therefore, same-sex couples who domicile in a community property state are subject to community property rules in the same manner as opposite-sex married couples.

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. See Cal. Fam. Code § 297.5(a); Nev. Rev. Stat. § 122A200; Wash. Rev. Code § 26.16.030. These laws are summarized in Exhibit 25.18.1-1, Comparison of State Law Differences in Community Property States, at http://irm.web.irs.gov/Part25/Chapter18/Section1/IRM25.18.1.asp#25.18.1-1. Registered domestic partners are not married for federal tax purposes. They may not file married filing jointly or married filing separately federal income tax returns. See IRM 25.18.1.3.3, Registered Domestic Partners, for more information.

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

The community property territories of the United States are:

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 controls and must be reviewed when any tax issue involves the application of community property laws. See Exhibit 25.18.1-1, Comparison of State Law Differences in Community Property States, at Exhibit 25.18.1-1 for more information.

Spouses domiciled in community property states may file tax returns either jointly or separately. The spouses 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.

For federal tax purposes, a taxpayer’s rights and interest in property are determined under the laws of the taxpayer’s state of domicile. The words "residence" and "domicile" are not synonymous and are often confused. A residence is where a taxpayer lives. A domicile is a permanent home the taxpayer intends to use for an indefinite or unlimited period, and when absent, intends to return. A taxpayer may have several places of residence, but only one domicile. See IRM 25.18.1.3.1, Domicile, for more information.

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

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.

Community Property - Generally, community property is all property acquired during a marriage while the spouses are domiciled in a community property state. See IRM 25.18.1.3.10, Definition of Community Property, for more information. Additional guidelines listed below are the general rules regarding what constitutes community property:

Separate Property - Generally, 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 with community property. See IRM 25.18.1.3.11, Definition of Separate Property, for more information.

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:

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. See IRM Exhibit 25.18.1-1, Comparison of State Law Differences in Community Property States, for more information.

The effect of innocent spouse relief is to make a spouse no longer liable for a particular tax. It removes or prevents the assessment of tax against a spouse. It does not affect the ability of the Service to pursue collection remedies against the nonliable spouse’s interest in community property. See United States v. Stolle, 2000-1 U.S.T.C. ¶ 50,329, 86 A.F.T.R.2d ¶ 2000-5043 (C.D. Cal 2000). This is true even if this has an adverse impact on the non-liable spouse who has received the innocent spouse relief.

IRC 6015(g) does not override the Service’s ability to offset payments made from community property under state law. Subject to other limitations in the Code, IRC 6015(g) allows taxpayers who have received innocent spouse relief to receive refunds of certain payments they have made toward the liability. However, the Service may still be able to retain all or part of the payments that would otherwise be refundable under IRC 6015(g) if they were made from community property and the Service has a state law remedy against the community property. See Ordlock v. Commissioner, 126 T.C. 47(2006).

IRC 66 has three subsections that could affect the reporting of community property income.

IRC 66 applies only to community income, as defined by state law. Some of the requirements of the section can be quite complex.

IRC 66 does not negate liability that arises against a spouse under the operation of other (non-community property) laws. For example:

Where IRC 66(c) applies, the items of community property upon which the Requesting Spouse (RS) receives relief are included in the income of the Non-Requesting Spouse (NRS), but only as long as the statute of limitations is open.

Requests for relief under IRC 66(c), except for equitable relief, usually are required to be filed before the statute of limitations on assessment expires for the NRS’s year subject to the request.

The time for filing a claim for equitable relief under IRC 66(c) is not tied into the statute of limitations for assessments against the NRS. See IRM 25.15.5.16, Time Period for Filing a Request for Relief, for more information.

Consideration should be given to protecting the statute of limitations of the NRS if it is still open when the request is received.

If the shifting of the income creates a deficiency for the NRS, then deficiency procedures apply to assess the additional tax.

IRC 66(c) relief is not available if:

Under IRC 66(a), if spouses meet certain requirements, they do not report most community property income under community property rules. 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 allocates earned income to the spouse who earned the income if certain statutory requirements are met. It applies where:

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

IRC 66(b) provides an exception to the general rule that community income is taxed one-half to each spouse. IRC 66(b) authorizes the Service to disregard community property laws by denying the benefits of income splitting between the spouses. IRC 66(b) may be applied under the following conditions:

IRC 66(b) entitles the Service to shift the item of income and assess additional tax against the spouse earning the income in accordance with deficiency procedures. See IRC 66(b) and Treas. Reg. 1.66-3(b).

Only the Service can invoke IRC 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). Where IRC 66(b) is asserted, it must be clearly reflected on the notice of deficiency. The determination must be supported by evidence that IRC 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).

Solely entitled to income: to determine whether a spouse has acted as if he or she was solely entitled to the income, consider the facts and circumstances focusing on whether the spouse used, or made available, the item of income for the benefit of the marital community. See Treas. Reg. 1.66-3(a). For instance:

Notification of nature and amount of income: a spouse who provides a copy of a Form 1099 or Form W-2 to the other spouse satisfies the notification of the nature and amount of income requirement. If notification is done before the due date of the return (including extensions), IRC 66(b) is inapplicable. See Treas. Reg. 1.66-3(c), Example 2, for more information.

IRC 66(c) provides two additional exceptions to the general rule that community income is taxed one-half to each spouse. Unlike IRC 6015, IRC 66(c) provides relief for items of income only, as defined in IRM 25.18.2.2, Income Reporting Considerations of Community Property, not relief from disallowed deductions as defined in IRM 25.18.2.5, Claiming of Deductions.

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. The RS must also comply with the Service's reasonable requests for information that will assist in identifying and locating the NRS. See Treas. Reg. 1.66-4(j) for more information.

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.

If a RS in a community property state files a claim for relief from liability under IRC 6015 but 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 adjusted and/or secured.

If it is determined IRC 66(c) 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(c).

In many instances for non-filers, the Service has filed substitute returns for the taxpayer under IRC 6020(b). 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.

The Service 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.

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

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

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

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, as when a statutory notice of deficiency or Final Determination in a Collection Due Process proceeding 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).

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

There are no limitations on refunds within IRC 66, but all refunds are subject to the limitations of IRC 6511. Also see IRM 25.15.5.7, Effect of Innocent Spouse Relief, for more information.

In general, RS is not eligible for refund of any joint payments or payments made by NRS. See Rev. Proc. 2013-34, Section 4.04, Refunds, for more information.

The following sections provide information regarding letters to be issued to taxpayers regarding requests for relief under IRC 66(c). 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 Area Office personnel.