Tax Calculation Of Innocent Spouse’s Share Of Income

California is a community property state which means most property acquired during the marriage (except for gifts or inheritances) is owned jointly by both spouses and is divided upon divorce, annulment or death. Joint ownership is automatically presumed by law in the absence of specific evidence that would point to a contrary conclusion for a particular piece of property.

In a recent Fifth Circuit Court of Appeals decision, the taxpayer claimed that in determining her share of the community property interest in order to calculate how much income to pay tax on, the IRS should have made the “separate tax formula allocation . . . upon the basis of the spouse who earned the income and not upon the basis of a community property split.”

The only disputed issue before the court was how the separate tax liability should be calculated-the taxpayer argued that it should be calculated based on the wages she personally earned, and the IRS argued that it should be calculated based on fifty percent of all community income.

The court simply held that the taxpayer’s argument is not supported by the IRS’s revenue rulings or any other legal authority. The court relied on Revenue Ruling 2004-74 which provides that tax is simply not calculated on the share of community income earned by just one spouse but instead is calculated on the 50% interest attributable to the spouse who live in a community property state (like California).

Do you qualify for innocent spouse relief? Speak with a California tax attorney who understands community property law. Call Mitchell A. Port at 310.559.5259.