Marianne Hopkins - Page 23

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          as respondent argues, the regulations could have simply said                
               But Example (5) of the final regulations indicates that the            
          alternative allocation method of section 6015(d)(3)(B) is applied           
          to both W and H, even though the erroneous deduction is initially           
          H’s item.  This is illustrated by the fact that H is denied                 
          relief under the actual knowledge exception.  The actual                    
          knowledge exception contained in section 6015(c)(3)(C) denies               
          relief only if the Commissioner proves that the electing                    
          individual had actual knowledge of an item allocable to the other           
          individual.22  Thus, before the actual knowledge exception can be           
          applied, there must be an allocation of the items giving rise to            
          a deficiency.  In Example (5), actual knowledge would have no               
          relevance if the erroneous deduction was an item entirely                   
          allocable to H.  The example makes sense only if a portion of H’s           
          item is reallocated to W pursuant to section 6015(d)(3)(B).                 
               Unless respondent establishes that petitioner had actual               
          knowledge of the items giving rise to the deficiencies,                     
          petitioner is entitled to relief to the extent the deficiencies             
          are attributable to Mr. Hopkins.                                            

               22The actual knowledge exception contained in sec.                     
          6015(c)(3)(C) applies only in the case of “any item giving rise             
          to a deficiency (or portion thereof) which is not allocable to              
          such individual under subsection (d)”.                                      

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