where X = the portion of the deficiency allocable to the spouse.
W's items | H's items | |||
$40,000 | charitable deduction | $15,000 | business deduction | |
40,000 | interest deduction | 20,000 | unreported income | |
5,000 | education deduction | |||
$80,000 | $40,000 |
H's items | W's items | |||
$2,000 | business deduction | $6,000 | wage income |
Total allocable items: $8,000
W's share of allocable items | H's share of allocable items | |
3/4 ($24,000/$32,000) | 1/4 ($8,000/$32,000) |
W's share of total deficiency | H's share of total deficiency | |||
$ 9,000 | allocated deficiency | $3,000 | allocated deficiency | |
14,000 | self-employment tax | 2,000 | Lifetime Learning Credit | |
$23,000 | $5,000 |
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.
26 C.F.R. §1.6015-3