DIVORCED TAXPAYER IS ENTITLED TO TAX REFUND FOR INTEREST IN JOINT OVERPAYMENT CREATED BY NET OPERATING LOSS ON FORMER SPOUSE'S SEPARATELY FILED RETURN

Rev. Rul. 86-57

ISSUE

(1) Is a divorced taxpayer entitled to a refund of tax for the taxpayer's interest in a joint overpayment attributable to the recomputation of a joint tax liability as a result of the carryback of a separate net operating loss of a former spouse to a year in which a joint return was filed?

(2) If so, what is the applicable period of limitations for filing a claim for refund?

FACTS

A and B, a married couple residing in a noncummunity property state, filed a joint federal income tax return for calendar year 1981 reporting a tax liability of $3,191. A reported $15,000 in taxable income and withholding tax credits of $2,500. B reported $5,000 in taxable income and withholding tax credits of $1,000. They received a refund of $309. In 1984 A and B were divorced. A timely filed a separate return for that year claiming a net operating loss of $5,000. No extension was obtained by A for filing that return. A carried the loss back to 1981 and filed a claim for refund or credit. B also filed a claim for refund or credit of a portion of the joint overpayment as a result of the recomputation of the joint tax liability. The recomputed liability was $2,034.

LAW AND ANALYSIS

Section 6013 of the Internal Revenue Code provides for the filing of a joint return by a husband and a wife and imposes joint and several liability upon them for the tax computed on their aggregate income.

Section 6402(a) of the Code provides that in the case of an overpayment, the Secretary, within the applicable period of limitations, may credit the amount of the overpayment, including any allowable interest, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and, subject to certain exceptions, must refund the balance to the person.

Section 6511(a) of the Code provides that a claim for credit or refund of an overpayment of any tax for which the taxpayer is required to file a return must generally be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever period expires later, or if no return was filed by the taxpayer, 2 years from the time the tax was paid.

Section 6511(d)(2) of the Code provides a special period of limitations if the claim for credit or refund relates to an overpayment attributable to a net operating loss carryback. In lieu of the 3-year period prescribed in section 6511(a), the period after which a claim may not be filed for the taxable year to which the loss is carried back (the carryback year) is the period ending 3 years after the time prescribed by law for filing the return (including extentions) for the taxable year of the operating loss that results in the carryback (the loss year).

Rev. Rul. 74-611, 1974-2 C.B. 399, holds that when a husband and wife file a joint return each spouse has a separate interest in the jointly reported income and a separate interest in any overpayment.

Rev. Rul. 75-368, 1975-2 C.B. 480, holds that when a net operating loss of an unmarried taxpayer is carried back or carried over to a year in which the taxpayer is married and files a join return, the net operating loss deduction is carried back or carried over only to reduce the taxpayer's portion of the income shown on the joint return.

Rev. Rul. 80-6, 1980-1 C.B. 296, modifies Rev. Rul. 75-368 by providing that the rules set out in Rev. Rul. 80-7, described below, will be used in calculating the amount of the refund to be paid to the spouse who incurred the net operating loss.

Rev. Rul. 80-7, 1980-1 C.B. 296, provides a formula (the separate tax formula) for determining one spouse's share of a joint tax liability. Under the separate tax formula, a spouse's share is an amount that bears the same ratio to the joint liability as the amount of tax for which the spouse would have been liable if the spouse had filed a separate return bears to the sum of the taxes for which both spouses would have been liable had they filed separately. The ruling also holds that a spouse's share of a joint overpayment is determined by subtracting the spouse's share of the joint liability for the spouse's contribution toward the payment of the joint liability.

In addition, Rev. Rul. 80-7 provides rules for determining each spouse's contribution toward the payment of the joint liability in the absence of agreement or clear evidence as to each spouse's actual contribution. An analogue to the separate tax formula is used to allocate both estimated tax payments and payments with the return. The amount of the overpayment credited or paid to either spouse cannot exceed the amount of the joint overpayment.

Rev. Rul. 80-8, 1980-1 C.B. 298, holds that the Internal Revenue Service will accept a claim for credit or refund filed by a divorced taxpayer with respect to a joint return if the claim form is signed by only one taxpayer and that the Service will issue a refund check in that taxpayer's name alone. The amount of the refund or credit will be computed according to the rules for determining each spouse's share of the joint overpayment set out in Rev. Rul. 80-7.

Rev. Rul. 75-368, as modified by Rev. Rul. 80-6, does not address the question of whether the spouse not suffering the net operating loss is entitled to a refund for a share of the joint overpayment that results when a net operating loss deduction is carried back to a joint return year and the joint tax liability is recomputed. However, Rev. Rul. 80-8 recognizes that each spouse has an interest in any overpayment, and that ruling provides that the allocation rules set out in Rev. Rul. 80-7 must be used to determine the individual refund of each spouse. Thus, the net operating loss is applied only against A's income, as required by Rev. Rul. 75-368 but since application of the rules provided in Rev. Rul. 80-7 and used in Rev. Rul. 80-8 results in allocation of a share of the overpayment to B, that amount should be refunded to B in the manner described in Rev. Rul. 80-8.

In order to compute A's and B's contributions toward payment, the original refund of $309 must also be allocated under the rules provided in Rev. Rul. 80-7. In allocating this original refund, the separate tax formula is applied using A's and B's income as originally reported on the joint return before the application of the net operating loss. When the separate tax formula is applied to the original 1981 figures, A's share of the joint liability is $2,724; B's share is $467. Because A's share of the joint liability is greater than A's withholding credits of $2,500, the entire refund of $309 is allocated to B.

A's and B's respective portions of the overpayment would, thus, be computed as follows:

A's and B's joint liability as originally reported was $3,191. After application of the net operating loss to A's income the joint recomputed liability was $2,034. The total joint refund was $1,157 ($3,191 - $2,034).

A's recomputed separate tax liability is $1598;

HOLDING

Issue (1): Under the facts as presented, a divorced taxpayer is entitled to a refund of tax for the taxpayer's interest in a joint overpayment. B is entitled to a refund of $185.13.

Issue (2): the applicable period of limitations is that provided by section 6511(d)(2) of the Code. B has until April 15, 1988, to file a claim for refund or credit.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 75-368 and Rev. Rul. 80-8 are amplified.