- 22 - 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.]Page: Previous 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Next
Last modified: May 25, 2011