Married Filing Separately with only one spouse domiciling in Community Property State

Question

Situation: spouse (wife) domiciling (and residing all year) in Arizona (Community Property State), husband domiciling (and residing all year) in non-CPS. Couple wants to file federal tax return as "Married Filing Separately".

Question: What income does wife/husband have to report on Federal Taxes.

If both domiciled in Arizona, both would have to report half of their total wages. Since husband domiciles in non-CPS, I see four possible scenarios:

(1) both have to report half of their total wages

(2) neither spouse's wages are considered community income, both report the entirety of their individual wages on their returns

(3) only wife's wages are considered community income, wife reports half of her wages, husband reports the entirety of his wages + half of wife's wages

(4) only husband's wages are considered community income, wife reports the entirety of her wages + half of husband's wages, husband reports half of his wages

The IRS website under 25.18.1.3.1 paragraph 5. states:

If, for example, one spouse domiciles in a community property state and the other in a common law state, the wages of the spouse residing in the community property state would be community property, but those of the other spouse would be separate property under the law of the other state

This seems to lend support to scenario (3) above, but I am not sure whether this is the ultimate reference to use here, so I kept searching. In another IRS document online, the definition of Community Income is given:

Salaries, wages, and other pay received for the services performed by you, your spouse (or your registered domestic partner), or both during your marriage (or registered domestic partnership) while domiciled in a community property state.

This is not entirely unambiguous to me either.

Answer 1

See Internal Revenue Manual, Sect. 25.18.1.3.1 which answers the question:

Occasionally, spouses reside in different states. Under traditional community property laws, the marital community, consisting of both spouses, could only have one place of domicile, which was determined by the domicile of the husband. Today, if spouses have different domiciles, the interest of the spouses generally will be determined by the law of the state which has the most significant relationship to the spouses and the property. Lane-Burslem v. Commissioner, 659 F.2d 209 (D.C. Cir. 1981); Siezer v. Sessions, 132 Wash. 2d 642, 940 P.2d 261 (1997). If, for example, one spouse domiciles in a community property state and the other in a common law state, the wages of the spouse residing in the community property state would be community property, but those of the other spouse would be separate property under the law of the other state. See Layman v. Commissioner, T.C. Memo. 1999-218; Commissioner v. Cavanaugh, 125 F.2d 366 (9th Cir. 1942); cf. Lane-Burslem v. Commissioner, 659 F.2d 209 (D.C. Cir. 1981) (refusing to apply Louisiana community property law to the earnings of a spouse not domiciled in Louisiana). Wisconsin does not subject either spouse to community property unless both domicile in that state. Wis. Stat. § 766.01(5). Thus, if a spouse domiciles in Wisconsin and the other spouse domiciles elsewhere, the earnings of the Wisconsin spouse would likely be characterized under Wisconsin law, but would not be community property.