(a) Request for Relief. An eligible requesting spouse may apply for separation of liability relief, pursuant to M.G.L. c. 62C, § 84(b), by submitting an application in the manner prescribed in 830 CMR 62C.84.1(7), not later than two years after the Commissioner has begun collection activities with respect to the requesting spouse. If a requesting spouse is eligible and is granted separation of liability relief, his or her liability for any deficiency assessed with respect to a joint return shall not exceed the portion of the deficiency that is properly allocable to him or her pursuant to M.G.L. c. 62C, § 84(c)(8)-(12).
(b) Criteria for Eligibility.
1. In general. A requesting spouse is eligible to request the application of 830 CMR 62C.84.1(5) only if, (i) at the time the application is filed, he or she is no longer married to, or is legally separated from, the individual with whom the requesting spouse filed the joint return to which the application relates; or (ii) the requesting spouse was not a member of the same household as the individual with whom the joint return was filed at any time during the 12 month period ending on the date the application is filed.
2. Members of the same household.
a. Temporary absences. A requesting spouse and a non-requesting spouse are considered members of the same household during either spouse’s temporary absence from the household if it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of such return. Examples of temporary absences may include, but are not limited to, absence due to incarceration, illness, business, vacation, military service, or education.
b. Separate dwellings. Spouses who reside in the same dwelling are considered members of the same household. In addition, spouses who reside in two separate dwellings are considered members of the same household if the spouses are not estranged or one spouse is temporarily absent from the other’s household within the meaning of 830 CMR 62C.84.1(5)(b)2.a.
3. Relief may be available to both spouses filing the joint return if each spouse is eligible for and applies for relief under this section.
4. Fraudulent schemes. An application under 830 CMR 62C.84.1(5) by either spouse that filed a joint return shall be invalid if the Commissioner determines that assets were transferred between the spouses as part of a fraudulent scheme. In such cases, each spouse is jointly and severally liable for the entire amount of tax due on the return pursuant to M.G.L. c. 62C, § 6.
(c) Burden of Proof. Each requesting spouse who applies for relief under 830 CMR 62C.84.1(5) shall have the burden of proof with respect to establishing the portion of a deficiency allocable to the requesting spouse.
(d) Request for relief not valid with respect to certain deficiencies.
1. In General. If the Commissioner determines that a requesting spouse applying for relief under 830 CMR 62C.84.1(5) had actual knowledge, at the time he or she signed the return, of an erroneous item that is allocable to the non-requesting spouse, the allocation of the deficiency attributable to that item is invalid, and the requesting spouse remains liable for the portion of the deficiency attributable to that item. For example, assume that W knew that H received a retirement distribution but improperly reported it as nontaxable on their joint return. W remains liable for the portion of the deficiency attributable to the distribution. This subparagraph shall not apply where the requesting spouse establishes that he or she signed the return under duress.
2. Omitted income. In the case of omitted income, knowledge of the item includes knowledge of the receipt of the income. For example, assume W received $5,000 of dividend income from her investment in X Co. but did not report it on the joint return. H knew that W received $5,000 of dividend income from X Co. that year. H had actual knowledge of the erroneous item (i.e., $5,000 of unreported dividend income from X Co.), and no relief is available under this section for the deficiency attributable to the dividend income from X Co. This rule applies equally in situations where the other spouse has unreported income although the spouse does not have an actual receipt of cash.
3. Erroneous deductions or credits. In the case of an erroneous deduction or credit, knowledge of the item means knowledge of the facts that made the item not allowable as a deduction or credit.
4. Fictitious or inflated deductions. If a deduction is fictitious or inflated, the Commissioner must determine that the requesting spouse actually knew that the expenditure was not incurred, or not incurred to that extent.
5. Partial knowledge. If a requesting spouse had actual knowledge of only a portion of an erroneous item, then relief is not available for that portion of the erroneous item. For example, if H knew that W received $1,000 of dividend income and did not know that W received an additional $4,000 of dividend income, relief would not be available for the portion of the deficiency attributable to the $1,000 of dividend income of which H had actual knowledge. A requesting spouse’s actual knowledge (or lack thereof) of the proper tax treatment of an item is not relevant for purposes of a determination that the requesting spouse had actual knowledge of an erroneous item. For example, assume H did not know W’s dividend income from X Co. was taxable, but knew that W received the dividend income. Relief is not available under this section. In addition, a requesting spouse’s knowledge of how an erroneous item was treated on the tax return is not relevant to a determination of whether the requesting spouse had actual knowledge of the item. For example, assume that H knew of W’s dividend income, but H failed to review the completed return and did not know that W omitted the dividend income from the return. Relief is not available under this section.
6. Knowledge of the source not sufficient. Knowledge of the source of an erroneous item is not a sufficient basis for a determination of actual knowledge. For example, assume H knew that W owned X Co. stock, but H did not know that X Co. paid dividends to W that year. H’s knowledge of W’s ownership in X Co. is not a sufficient predicate for the Commissioner to determine that H had actual knowledge of the dividend income from X Co. In addition, a requesting spouse’s actual knowledge may not be inferred when the requesting spouse merely had reason to know of the erroneous item. Even if H’s knowledge of W’s ownership interest in X Co. indicates a reason to know of the dividend income, actual knowledge of such dividend income cannot be inferred from H’s reason to know. Similarly, the Commissioner need not find that a requesting spouse knew of the source of an erroneous item in order to determine that the requesting spouse had actual knowledge of the item itself. For example, assume H knew that W received $1,000, but he did not know the source of the $1,000. W and H omit the $1,000 from their joint return. H has actual knowledge of the item giving rise to the deficiency ($1,000), and relief is not available under this section.
7. Factors supporting actual knowledge. To determine that a requesting spouse had actual knowledge of an erroneous item at the time the return was signed, the Commissioner may rely upon all of the facts and circumstances. One factor that may be relied upon in determining that a requesting spouse had actual knowledge of an erroneous item is whether the requesting spouse made a deliberate effort to avoid learning about the item in order to be shielded from liability. This factor, together with all other facts and circumstances, may demonstrate that the requesting spouse had actual knowledge of the item, and the requesting spouse would not be entitled to relief with respect to that entire item. Another factor that may be relied upon in determining that a requesting spouse had actual knowledge of an erroneous item is whether the requesting spouse and the non-requesting spouse jointly owned the property that resulted in the erroneous item. Joint ownership is a factor supporting a finding that the requesting spouse had actual knowledge of an erroneous item. A requesting spouse will be considered to have had an ownership interest in an item only if the requesting spouse’s name appeared on the ownership documents, or there otherwise is an indication that the requesting spouse asserted dominion and control over the item.
8. Abuse exception. If the requesting spouse establishes that he or she was the victim of domestic abuse prior to the time the return was signed, and that, as a result of the prior abuse, the requesting spouse did not challenge the treatment of any items on the return for fear of the non-requesting spouse’s retaliation, the limitation on actual knowledge in 830 CMR 62C.84.1(5)(d) will not apply. As used herein, “abuse” may include physical, psychological, sexual, or emotional abuse.
(e) Disqualified Asset. Notwithstanding the provisions of 830 CMR 62C.84.1(5)(d), the portion of a deficiency for which the requesting spouse is liable will be increased by the value of a disqualified asset transferred to the requesting spouse. For purposes of this paragraph, the term “disqualified asset” means any property or right to property that is transferred to a spouse filing an application under this subsection by the other spouse filing a joint return, if the principal purpose of the transfer is the avoidance of tax. The Commissioner will presume that the principal purpose of a transfer is the avoidance of tax if the transfer is made less than one year before the Commissioner’s notice of intention to assess the tax. The presumption will not apply to any transfer pursuant to a decree of divorce or separate maintenance, or to any written instrument incident to such a decree.
(f) Allocation of Deficiency.
1. Allocation of items of deficiency.
a. Except as otherwise provided in this section, items giving rise to a deficiency on a joint return shall be allocated to each spouse in the same manner as they would have been allocated if the spouses had filed separate returns for the taxable year.
b. An item otherwise allocable to one spouse under 830 CMR 62C.84.1(5)(f)1.a. shall be allocated to the other spouse to the extent the item gave rise to a tax benefit on the joint return to the other spouse.
c. Erroneous items of income are allocated to the spouse who was the source of the income. Wage income is allocated to the spouse who performed the services producing such wages. Items of business or investment income are allocated to the spouse who owned the business or investment. If both spouses owned an interest in the business or investment, the erroneous item of income is generally allocated between the spouses in proportion to each spouse’s ownership interest in the business or investment, subject to the provisions of 830 CMR 62C.84.1(5)(d). In the absence of clear and convincing evidence supporting a different allocation, an erroneous income item relating to an asset that the spouses owned jointly is generally allocated 50% to each spouse, subject to the provisions of 830 CMR 62C.84.1(5)(d).
d. Erroneous deductions related to a business or investment are allocated to the spouse who owned the business or investment. If both spouses owned an interest in the business or investment, an erroneous deduction item is generally allocated between the spouses in proportion to each spouse’s ownership interest in the business or investment. In the absence of clear and convincing evidence supporting a different allocation, an erroneous deduction item relating to an asset that the spouses owned jointly is generally allocated 50% to each spouse, subject to the provisions of 830 CMR 62C.84.1(5)(d). Deduction items unrelated to a business or investment are also generally allocated 50% to each spouse, unless the evidence shows that a different allocation is appropriate.
e. The requesting spouse must prove that all of the qualifications for relief under this section are satisfied and that none of the limitations apply.
f. The Commissioner may allocate any item between the spouses if the Commissioner determines that the allocation is appropriate due to fraud by one or both spouses.
2. Disallowance of items due to separate return disregarded. If an item of deduction or credit would have been disallowed in its entirety solely because a separate return was filed, the disallowance shall be disregarded and the item shall be computed as if a joint return had been filed and then allocated appropriately between the spouses.
3. Liability of a child on joint return. Any portion of a deficiency relating to the liability of a child of the requesting and non-requesting spouse is allocated jointly to both spouses. For purposes of this paragraph, a child does not include the taxpayer’s stepson or stepdaughter, unless such child was legally adopted by the taxpayer. If the child is the child of only one of the spouses, and the other spouse had not legally adopted such child, any portion of a deficiency relating to the liability of such child is allocated solely to the parent spouse.
4. Ratio of deficiency. A spouse’s portion of a deficiency on a joint return shall bear the same ratio to the total deficiency that the net amount of the items taken into account in computing the deficiency allocable to that spouse under this section bears to the net amount of all items taken into account in computing the total deficiency. For example, suppose W and H timely file a joint income tax return, and the Commissioner assesses a $12,000 deficiency. W and H later divorce, and W timely applies to allocate the deficiency. Four erroneous items give rise to the deficiency: (1) a disallowed $7,000 business deduction allocable to H; (2) $9,000 of unreported income allocable to H; (3) a disallowed $5,000 deduction for educational expenses allocable to W; and (4) a disallowed $3,000 charitable contribution deduction allocable to W. In total, there are $24,000 worth of eroneous items, of which $16,000 are attributable to H and $8,000 are attributable to W. The ratio of erroneous items allocable to W to the total erroneous items is 1/3 ($8,000/$24,000). W’s liability is thus limited to $4,000 of the deficiency (1/3 of $12,000). The Commissioner may collect up to $4,000 from W and $12,000 from H (the total amount collected, however, may not exceed $12,000). If H also applied for relief, there would be no remaining joint and several liability, and the Commissioner would be permitted to collect $4,000 from W and $8,000 from H.
5. Any portion of a deficiency that is (1) attributable to the disallowance of a credit or to a tax other than the tax imposed by chapter 62, (2) required to be included with the joint return, and (3) attributable to an item allocated to one spouse under 830 CMR 62C.84.1(5)(f)(i), shall be allocated to that spouse. Any item giving rise to such deficiency shall not be taken into account for purposes of 830 CMR 62C.84.1(5)(f)4.
(g) No credit or refund shall be allowed as a result of the application of 830 CMR 62C.84.1(5).