Rev. Rul. 78-1

Advice has been requested whether the proration formula provided by section 1.692-1(b) of the Income Tax Regulations must be applied to determine the portion of the joint income tax liability forgiven for a deceased member of the Armed Forces on an original joint income tax return filed by a surviving spouse and the executor or administrator of the estate after the spouse is notified of the member's death, for an earlier taxable year in which the member's spouse postponed, pursuant to section 7508(b) of the Internal Revenue Code of 1954, the filing of such joint income tax return. Under section 692 of the Code, the Federal income taxes of members of the Armed Forces of the United States who died as a result of service in a combat zone shall be "forgiven"; that is, such taxes shall not be assessed, and if assessed the assessment shall be abated, and if collected shall be credited or refunded as an overpayment. This forgiveness of tax applies to the taxable year in which the date of the member's death occurred (or, for individuals in missing status, the taxable year in which the determination date of death falls), and with respect to any prior taxable year ending on or after the first day the member so served in a combat zone after June 24, 1950, but is restricted to those years within the period of limitations provided by section 6511(a), as may be extended by section 7508(a)(1)(E).

Section 1.692-1(b) of the regulations provides, in part, as follows:

(b) If such an individual [the deceased member of the Armed Forces] and his spouse have for any such year [in which the individual was in a combat zone] filed a joint return, the tax abated, credited, or refunded pursuant to the provisions of section 692 for such year shall be an amount equal to that portion of the joint tax liability which is the same percentage of such joint tax liability as a tax computed upon the separate income of such individual is of the sum of the taxes computed upon the separate income of the individual and his spouse, * * *.

Section 692 of the Code provides specifically for the forgiveness of tax liability. Section 692 does not provide for an exclusion of the deceased member's income. See Rev. Rul. 55, 1953-1 C.B. 259, which, in discussing the employment tax aspects of section 154 of the Internal Revenue Code of 1939 (the predecessor of section 692), holds that although the tax liability is cancelled by that section such provision does not eliminate the income on which tax liability is based.

The "forgiveness" provision of section 692 of the Code requires a computation of the total joint income tax liability to be made at the applicable rates, and then the allocable portion of such total income tax liability attributable to the deceased member must be determined and subtracted from such total tax liability.

Accordingly, for purposes of the application of the section 692 "forgiveness" provision, the proration formula of section 1.692-1(b) of the regulations must be applied to determine what portion of the joint income tax liability is forgiven for a deceased member of the Armed Forces on an original joint income tax return filed in accordance with section 6013 of the Code by the surviving spouse and the executor or administrator after the spouse is notified of the member's death, for an earlier taxable year in which the member's spouse postponed, pursuant to section 7508(b), the filing of such joint income tax return. Furthermore, the proration formula also applies in the case of an amended joint income tax return filed by the surviving spouse and the executor or administrator after the spouse is notified of the member's death, with respect to an earlier joint income tax return filed timely by the member's spouse while the member was in a combat zone. Finally, the proration formula applies in the case of a joint income tax return filed in accordance with section 6013 by the surviving spouse and the executor or administrator after the spouse is notified of the member's death, with respect to an earlier taxable year for which a separate income tax return was filed timely by either the member or the member's spouse, or by both, while the member was in a combat zone.