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subject to tax at different rates, with an example demonstrating
the method:
(6) Alternative allocation methods.--(i)
Allocation based on applicable tax rates.--If a
deficiency arises from two or more erroneous items that
are subject to tax at different rates (e.g., ordinary
income and capital gain items), the deficiency will be
allocated after first separating the erroneous items
into categories according to their applicable tax rate.
After all erroneous items are categorized, a separate
allocation is made with respect to each tax rate
category using the proportionate allocation method of
paragraph (d)(4) of this section.
* * * * * * *
(iii) Example.--The following example
illustrates the rules of this paragraph (d)(6):
Example. Allocation based on applicable tax
rates. H and W timely file their 1998 joint Federal
income tax return. H and W divorce in 1999. On July
13, 2001, a $5,100 deficiency is assessed with respect
to H’s and W’s 1998 return. Of this deficiency, $2,000
results from unreported capital gain of $6,000 that is
attributable to W and $4,000 of capital gain that is
attributable to H (both gains being subject to tax at
the 20% marginal rate). The remaining $3,100 of the
deficiency is attributable to $10,000 of unreported
dividend income of H that is subject to tax at a
marginal rate of 31%. H and W both timely elect to
allocate the deficiency, and qualify under this section
to do so. There are erroneous items subject to
different tax rates; thus, the alternative allocation
method of this paragraph (d)(6) applies. The three
erroneous items are first categorized according to
their applicable tax rates, then allocated. Of the
total amount of 20% tax rate items ($10,000), 60% is
allocable to W and 40% is allocable to H. Therefore,
60% of the $2,000 deficiency attributable to these
items (or $1,200) is allocated to W. The remaining 40%
of this portion of the deficiency ($800) is allocated
to H. The only 31% tax rate item is allocable to H.
Accordingly, H is liable for $3,900 of the deficiency
($800+$3,100), and W is liable for the remaining
$1,200.
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