Marianne Hopkins - Page 22

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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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