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H’s deduction is used to offset H’s income; the remaining portion
offsets W’s income. The example limits W’s liability to the
portion of the deficiency attributable to her income offset.
However, with respect to H, the regulations conclude that H’s
election to be relieved of the portion of the deficiency
attributable to W’s income offset “would be invalid because H had
actual knowledge of the erroneous items.”21 If the final
regulations were intended to limit application of section
6015(d)(3)(B) to erroneous deductions of a nonrequesting spouse,
21Sec. 1.6015-3(d)(5), Example (5), Income Tax Regs.,
provides:
Example (5). Requesting spouse receives a benefit
on the joint return from the nonrequesting spouse’s
erroneous item. (i) In 2001, H reports gross income of
$4,000 from his business on Schedule C, and W reports
$50,000 of wage income. On their 2001 joint Federal
income tax return, H deducts $20,000 of business
expenses resulting in a net loss from his business of
$16,000. H and W divorce in September 2002, and on May
22, 2003, a $5,200 deficiency is assessed with respect
to their 2001 joint return. W elects to allocate the
deficiency. The deficiency on the joint return results
from a disallowance of all of H’s $20,000 of
deductions.
(ii) Since H used only $4,000 of the disallowed
deductions to offset gross income from his business, W
benefitted from the other $16,000 of the disallowed
deductions used to offset her wage income. Therefore,
$4,000 of the disallowed deductions are allocable to H
and $16,000 of the disallowed deductions are allocable
to W. W’s liability is limited to $4,160 (4/5 of
$5,200). If H also elected to allocate the deficiency,
H’s election to allocate the $4,160 of the deficiency
to W would be invalid because H had actual knowledge of
the erroneous items. [Emphasis added.]
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