PETERS v. COMMISSIONER

T.C. Summary Opinion 2003-10

UNITED STATES TAX COURT

KATHLEEN PATRICIA PETERS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4854-01S. Filed February 11, 2003.

Jonathan P. Decatorsmith, for petitioner.

Sean R. Gannon, for respondent.

DINAN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority. Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in
 - 2 -

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

Respondent determined deficiencies in petitioner’s Federal

income taxes of $4,092 and $6,972, and accuracy-related penalties

of $818.40 and $1,394.40, for the taxable years 1997 and 1998.

The issue for decision is whether petitioner is entitled to

full or partial relief from joint and several liability under

section 6015 for the deficiencies and penalties determined by

respondent.1

Background

Some of the facts have been stipulated and are so found.

The stipulations of fact and those attached exhibits which were

admitted into evidence are incorporated herein by this reference.

Petitioner resided in Buffalo Grove, Illinois, on the date the

petition was filed in this case.

Petitioner has a high school education. Over the years she

has worked in a variety of areas, including retail sales,

bartending, and secretarial work. During the years in issue, she

was employed on a part-time basis by several employers, including

a bed and breakfast, an eye doctor, and a law office. Petitioner

earned approximately $6,000 in 1997 and approximately $10,000 in

1
Petitioner does not challenge respondent’s determinations
in the notice of deficiency concerning the underlying
deficiencies.
 - 3 -

1998. At that time, petitioner was also receiving child support

from her son’s father.

Petitioner and her former husband, William K. Elesh, were

married in 1991. Shortly after marrying Mr. Elesh, petitioner

moved with him from Illinois to Wisconsin. During their

marriage, petitioner and Mr. Elesh maintained separate bank

accounts and credit cards, and petitioner was not included in any

of the financial matters conducted by Mr. Elesh, such as the

purchase of their family home. During the years in issue, Mr.

Elesh was an engineer and was employed as an executive, earning

approximately $100,000 per year. Petitioner was responsible for

purchasing certain household needs, such as groceries and

landscaping items. Petitioner would use her own earnings and the

child support payments for these expenses, and on occasion she

would also charge the expenses to credit cards which she was

responsible for paying. However, Mr. Elesh occasionally would

reimburse her for some of these expenses and make payments on her

credit cards. He also provided petitioner with a car, and he

routinely paid for certain household expenses such as the

mortgage, utilities, and car insurance. Petitioner did not make

any charitable contributions in either 1997 or 1998, and she was

unaware if Mr. Elesh made any such contributions. During the

years in issue, Mr. Elesh owned a residential rental unit in

Buffalo Grove, Illinois, which he rented to petitioner’s
 - 4 -

daughter. He purchased the unit with proceeds from the sale of

another property he had previously owned. Petitioner and Mr.

Elesh were divorced in late 1999.

For each of the years in issue, petitioner filed a joint

Federal income tax return with Mr. Elesh. The returns were

prepared by Donahue’s Accounting & Tax Service. The return

preparer was hired by Mr. Elesh, and petitioner had little or no

contact with him. Although petitioner did not review the tax

returns for the years in issue, she signed both of them.

Petitioner and Mr. Elesh claimed deductions for charitable

contributions made in cash of $8,574 in 1997 and $8,765 in 1998.

They also deducted losses from the rental property occupied by

petitioner’s daughter of $14,047 in 1997 and $15,632 in 1998. In

the statutory notice of deficiency, respondent disallowed the

claimed cash charitable contribution deductions because they were

not “verified as paid”.2 Respondent disallowed a portion of the

1997 rental loss deduction and the entire 1998 rental loss

deduction based on their status as passive activity losses. In

addition, respondent determined that petitioner and Mr. Elesh

were liable for accuracy-related penalties under section 6662(a)

with respect to the entire amount of the underpayments in 1997

and 1998.

2
Petitioner and Mr. Elesh also claimed noncash charitable
contribution deductions of $485 in 1997 and $490 in 1998. These
deductions were not disallowed by respondent.
 - 5 -

Discussion

Spouses who file a joint Federal income tax return generally

are jointly and severally liable for the payment of the tax shown

on the return or found to be owing. Sec. 6013(d)(3); Cheshire v.

Commissioner, 115 T.C. 183, 188 (2000), affd. 282 F.3d 326 (5th

Cir. 2002) (“Cheshire I”). However, relief from joint and

several liability is available to certain taxpayers under section

6015. There are three avenues for relief under this section--

section 6015(b), section 6015(c), and section 6015(f).

Section 6015(b) Relief

Section 6015(b) provides full or apportioned relief from

joint and several liability for an understatement of tax on a

joint return if, among other requirements, the taxpayer

requesting relief “establishes that in signing the return he or

she did not know, and had no reason to know” of the

understatement of tax on the return. Sec. 6015(b)(1)(C), (b)(2).

Generally, the spouse seeking relief has reason to know of the

understatement if she has reason to know of the transaction that

gave rise to the understatement. Jonson v. Commissioner, 118

T.C. 106, 115 (2002). However, the Court of Appeals for the

Seventh Circuit3 has adopted what has been labeled a more lenient

3
But for the provisions of sec. 7463(b), the decision in
this case would be appealable to the U.S. Court of Appeals for
the Seventh Circuit. See sec. 7482(b)(1)(A). This Court
generally applies the law in a manner consistent with the
(continued...)
 - 6 -

approach in cases involving erroneous deductions (versus cases

involving omission of income). Id. at 115-116. That court has

stated that a spouse is entitled to relief from joint liability

where she establishes “that she did not know and did not have

reason to know that the deduction would give rise to a

substantial understatement.” Resser v. Commissioner, 74 F.3d

1528, 1536 (7th Cir. 1996), revg. and remanding T.C. Memo. 1994-

241 (quoting Price v. Commissioner, 887 F.2d 959, 963 (9th Cir.

1989), revg. an Oral Opinion of this Court).4 The court went on

to state:

When evaluating whether the taxpayer had reason to know, the
circuits agree that a court must follow an objective
“reasonable taxpayer” standard: A spouse has “reason to
know” if a reasonably prudent person, under the
circumstances of the taxpayer claiming innocent spouse
relief, could be expected to know, at the time of signing
the return, that the tax return contained a substantial
understatement or that further investigation was warranted.
* * * “Hence, the court’s analysis must focus on whether the
spouse had sufficient knowledge of the facts underlying the

3
(...continued)
holdings of the Court of Appeals to which an appeal of its
decision lies, see Golsen v. Commissioner, 54 T.C. 742 (1970),
affd. 445 F.2d 985 (10th Cir. 1971), even in cases subject to
sec. 7463(b).
4
The court in Resser was interpreting former sec. 6013(e),
which was repealed and replaced with current sec. 6015 by the
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3201, 112 Stat. 685, 734. Sec. 6015(b)
does not contain the requirement of former sec. 6013(e) that the
understatement be “substantial”. Despite this and other minor
differences between the two provisions, Resser and other cases
interpreting former sec. 6013(e) remain instructive in analyzing
cases under sec. 6015(b). Butler v. Commissioner, 114 T.C. 276,
283 (2000).
 - 7 -

claimed deductions such that a reasonably prudent person in
the taxpayer’s position would question seriously whether the
deductions were phony.”

Id. (quoting Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th

Cir. 1989), affg. T.C. Memo. 1988-63). Factors relevant in this

analysis include the taxpayer’s level of education, the

taxpayer’s involvement in her family’s financial activities, any

substantial unexplained increase in the family’s standard of

living, and evasiveness and deceit by the taxpayer’s spouse

concerning the family’s finances. Id.

Regardless of the standard used in analyzing whether a

taxpayer had reason to know of an understatement, it is well

settled that ignorance of the law is not a defense for a taxpayer

seeking section 6015 relief. Mitchell v. Commissioner, 292 F.3d

800, 803-806 (D.C. Cir. 2002), affg. T.C. Memo. 2000-332;

Cheshire v. Commissioner, 282 F.3d 326, 333-335 (5th Cir. 2002),

affg. 115 T.C. 183 (2000) (“Cheshire II”); Price v. Commissioner,

supra at 964. Where a taxpayer knows “virtually all of the facts

of the transaction underlying the deduction,” she is left with

“no option but to rely solely upon ignorance of law as a

defense”. Price v. Commissioner, supra at 964. Consequently,

regardless of whether the taxpayer “possesses knowledge of the

tax consequences of the item at issue, she is considered as a

matter of law to have reason to know of the substantial
 - 8 -

understatement and thereby is effectively precluded from

establishing to the contrary.” Id.

Petitioner is not entitled to relief from joint and several

liability under section 6015(b). With respect to the disallowed

rental loss deductions, we find that petitioner was fully aware

of all the underlying factual circumstances concerning the rental

of the condominium unit to her own daughter. Petitioner argues

that, while she may have known of the rental income, she did not

have any knowledge concerning the rental expenses which led to

the losses. Contrary to petitioner’s assertion, the disallowed

loss deductions were the result of the application of the section

469 passive activity loss rules, not the claimed expense

deductions--respondent has not challenged the legitimacy of the

expenses themselves. Thus, petitioner’s request for relief

essentially is based upon ignorance of the law; namely, ignorance

of the passive activity loss limitations of section 469.

Ignorance of the law is not a basis for section 6015(b) relief.

Mitchell v. Commissioner, supra; Cheshire II, supra; Price v.

Commissioner, supra.

With respect to the disallowed charitable contribution

deductions, petitioner did not make a significant contribution

herself, she was unaware of a single contribution made by Mr.

Elesh, and her characterization of Mr. Elesh at trial was of

someone very unlikely to make such large cash contributions.
 - 9 -

Thus, petitioner had “sufficient knowledge of the facts

underlying the claimed deductions such that a reasonably prudent

person in the taxpayer’s position would question seriously

whether the deductions were phony.” Resser v. Commissioner,

supra at 1536 (quoting Stevens v. Commissioner, supra at 1505).

Although petitioner had only a high school education and was not

involved in Mr. Elesh’s finances, we find that under the

circumstances of this case her education and involvement with the

finances would not have been a factor in concluding that the

large amount of cash charitable contributions reported on the

return had not been made.

Section 6015(c) Relief

Section 6015(c) provides proportionate relief through

allocation of a deficiency between individuals who filed a joint

return and who are no longer married, who are legally separated,

or who have been living apart for the preceding 12 months. Among

other limitations, relief under section 6015(c) with respect to

an item giving rise to a deficiency is not available to a

taxpayer who had actual knowledge of the relevant item giving

rise to the deficiency or portion thereof. Sec. 6015(c)(3)(C).

In the context of a disallowed deduction, actual knowledge is

present if the taxpayer had actual knowledge of the factual

circumstances which made the item unallowable as a deduction.

King v. Commissioner, 116 T.C. 198, 204 (2001). Knowledge of the
 - 10 -

tax consequences resulting from the factual circumstances is not

required. Id. at 203-204. Respondent bears the burden of

proving that the taxpayer requesting section 6015(c) relief had

the relevant actual knowledge. Sec. 6015(c)(3)(C); King v.

Commissioner, supra at 204.5

With respect to the disallowed rental loss deductions,

petitioner is not entitled to relief from joint and several

liability under section 6015(c). As discussed above, petitioner

was fully aware of all the underlying factual circumstances

concerning the rental of the condominium unit to her own

daughter. See King v. Commissioner, supra. Consequently,

petitioner had actual knowledge of the factual basis for the

denial of the deductions, and she cannot rely on ignorance of the

law for relief from liability. Id.; Mitchell v. Commissioner,

supra; Cheshire II, supra; Cheshire I, supra at 194-195; Price v.

Commissioner, supra.6

5
See also sec. 1.6015-3(c)(2)(i)(B)(2), Income Tax Regs.
(“If a deduction is fictitious or inflated, the IRS must
establish that the requesting spouse actually knew that the
expenditure was not incurred, or not incurred to that extent.”).
This regulation does not apply in the present case because it is
effective only with respect to requests for section 6015 relief
made on or after July 18, 2002. Sec. 1.6015-9, Income Tax Regs.
6
The requirement that a taxpayer not have actual knowledge
of an item is eliminated where the taxpayer signs the return
under duress. Sec. 6015(c)(3)(C). In her trial memorandum,
petitioner hints that she was under duress when signing the
returns. For the reasons discussed more fully below, we find
that petitioner did not sign the returns under duress.
 - 11 -

Petitioner, however, is entitled to section 6015(c) relief

with respect to the disallowed charitable contribution

deductions. We have accepted petitioner’s testimony that she did

not read the returns, that she was unaware of the deductions, and

that she was not involved in Mr. Elesh’s finances. Because

respondent has not shown that petitioner actually knew that the

claimed deductions were false, respondent has not shown that

petitioner had actual knowledge that the disallowed charitable

contribution deductions would give rise to a deficiency. Sec.

6015(c)(3)(C); Rowe v. Commissioner, T.C. Memo. 2001-325

(taxpayer entitled to section 6015(c) relief where she did not

have actual knowledge of fabricated charitable contribution

deductions).

In the context of petitioner’s request for section 6015(b)

relief, respondent argues that the charitable contribution

deductions are “attributable to erroneous items” of both

petitioner and Mr. Elesh. See sec. 6015(b)(1)(B). We infer that

respondent’s position, with respect to section 6015(c) relief, is

that the charitable contribution deductions should be allocated

to both petitioner and Mr. Elesh. See sec. 6015(c)(1),

(d)(3)(A).7 Petitioner bears the burden of proving that the

7
See also sec. 1.6015-3(d)(2)(iv), Income Tax Regs.
(Erroneous deductions “unrelated to a business or investment are
also generally allocated 50% to each spouse, unless the evidence
shows that a different allocation is appropriate.”). See supra
(continued...)
 - 12 -

deduction should be allocated to Mr. Elesh. Sec. 6015(c)(2);

Rowe v. Commissioner, supra. Under the circumstances of this

case, we find that the record is sufficient to show that the

entire amount of the deductions should be allocated to Mr. Elesh:

While respondent argues that petitioner knew that Mr. Elesh made

cash contributions and that petitioner herself made cash

contributions, the record indicates that no such contributions

were made by either individual. Because Mr. Elesh alone was

responsible for the deductions, and because petitioner had no

involvement with the preparation of the return, we find that an

allocation entirely to Mr. Elesh is appropriate in this case.

Section 6015(f) Relief

The final avenue for relief under section 6015 is the

equitable relief which may be afforded by section 6015(f). This

relief is available to taxpayers who are not otherwise entitled

to section 6015 relief if, taking into account all the facts and

circumstances, it is inequitable to hold the taxpayer liable for

any unpaid tax or deficiency (or portion thereof). Sec.

6015(f)(1) and (2). Because equitable relief is discretionary,

we review the Commissioner’s denial of relief for an abuse of

that discretion. Cheshire I, supra at 198. The Commissioner’s

exercise of discretion is entitled to due deference; in order to

7
(...continued)
note 5 regarding the applicability of this regulation.
 - 13 -

prevail, the taxpayer must demonstrate that in not granting

relief, the Commissioner exercised his discretion arbitrarily,

capriciously, or without sound basis in fact or law. Woodral v.

Commissioner, 112 T.C. 19, 23 (1999); Mailman v. Commissioner, 91

T.C. 1079, 1082-1084 (1988).

Because petitioner is entitled to section 6015(c) relief

with respect to the charitable contribution deductions, she is

not eligible for equitable relief with respect to the resulting

deficiencies. Sec. 6015(f)(2). We therefore only address

equitable relief with respect to the rental loss deductions.

As directed by section 6015(f), respondent has prescribed

procedures in Revenue Procedure 2000-15, 2000-1 C.B. 447, that

the Commissioner will consider in determining whether an

individual qualifies for relief under that section. Section 4.03

of the revenue procedure lists several nonexclusive factors to be

considered in determining eligibility for relief. In denying

equitable relief, respondent most heavily relied upon two of

these factors--petitioner’s knowledge of the facts underlying the

rental of the condominium unit to her daughter, and petitioner’s

receipt of a significant benefit from the understatement of tax.

As discussed above, petitioner had full knowledge of the

underlying facts concerning the rental of the condominium unit.

Furthermore, she made no effort to review the tax returns or

otherwise verify their accuracy prior to signing them. She
 - 14 -

argues that “she was expressly prohibited from doing so by her

former husband.” However, petitioner did not establish that this

was the case. She testified at trial:

He [Mr. Elesh] was very controlling. He was very--Bill is
very soft-spoken, but he’s very demanding, as far as
threatening is concerned. He would threaten me a lot with
things that he would shut off, or turn off, or not do. And
I was always very worried what was coming next.

* * * * * * *

He was very paranoid. He was very secretive. He was very
cheap, as far as not wanting to spend a dime on this or
that. Like I said, if I wanted to buy mulch for underneath
the bushes, I had to purchase it. And he would threaten me
and say, if I see a bag of mulch in this house, he said,
that phone’s getting shut off. Or you’re not going to pay
for any of that food. So if I went to the store to buy a
bag of mulch for under the bushes, I had to hide it in my
trunk until after he was in bed, then put it under the bush
during the day.

Concerning the filing of the tax returns, petitioner testified:

Year after year, Mr. Elesh would walk in, around the
same time, and say, sign this. And he would put it in front
of me, he had a file folder. And he would go like this.
And he’d say, hurry up, hurry up. Do it now, do it now.
Sign it. I have to go; I have to go. And he would always
do it when he was on his way to work in the morning.

And I would say, well, why don’t you leave it here
overnight? Why didn’t you leave it here last night when you
came home so I can read what this says? And he would never
let me look at it or read it. He would--just, do it now,
hurry, hurry, hurry, I have to go. Sign it.

* * * * * * *

He told me that [if I refused to sign] he would turn
off the electricity, or turn off the phone, or lots of other
things if I didn’t do it and do it now.
 - 15 -

Although finances and taxes may have been a contentious issue

between petitioner and Mr. Elesh, we find that petitioner

voluntarily chose not to review the returns prior to signing

them. We do not find credible petitioner’s testimony that she

was significantly pressured by the alleged threats by Mr. Elesh

to discontinue telephone or electrical service to his own home.

Petitioner testified that she “didn’t really have any reason to

worry” about the items on the tax returns, and that she “wasn’t

concerned about them, other than the fact that I know you’re

supposed to read something before you sign it.” In the end,

petitioner simply was not sufficiently concerned with the tax

returns to review them or to question any items appearing

thereon.

Because petitioner had full knowledge of the underlying

transaction, and failed to review or otherwise verify the

accuracy of the returns prior to signing them, we do not find an

abuse of discretion in respondent’s denial of equitable relief to

petitioner.

Negligence Penalties

Finally, we turn to the section 6662(a) accuracy-related

penalties. This Court has held that:

it is an abuse of discretion to deny relief under section
6015(f) in an addition to tax or penalty situation when on
an individual basis the putative innocent spouse meets the
statutory standard generally applied to all taxpayers that
shows the addition to tax or penalty is inapplicable.
 - 16 -

Cheshire I, supra at 199; see also Rowe v. Commissioner, supra.

Section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment attributable to any one of various factors,

one of which is negligence or disregard of rules or regulations.

Sec. 6662(b)(1). Respondent determined that petitioner and Mr.

Elesh were jointly and severally liable for the penalty for an

underpayment equal to the total amount of the deficiency in each

year in issue.

“Negligence” includes any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

Code. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

Section 6664(c)(1) provides that the penalty under section

6662(a) shall not apply to any portion of an underpayment if it

is shown that there was reasonable cause for the taxpayer’s

position and that the taxpayer acted in good faith with respect

to that portion. The determination of whether a taxpayer acted

with reasonable cause and in good faith is made on a case-by-case

basis, taking into account all the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most

important factor is the extent of the taxpayer’s effort to assess

her proper tax liability for the year. Id.

As discussed above, the portion of the deficiencies

attributable to the charitable contribution deductions are to be

allocated to Mr. Elesh for purposes of section 6015(c) relief.
 - 17 -

We accordingly find that the portion of the section 6662(a)

penalties determined in connection with these deductions is

likewise to be allocated to Mr. Elesh. Sec. 6015(d)(3)(A).8

With respect to the portions of the penalties relating to

the rental loss deductions, we find that respondent’s failure to

relieve petitioner from joint and several liability was not an

abuse of discretion. Petitioner made no effort to assess her

proper tax liability for the years in issue, and she did not act

with reasonable cause and in good faith because she failed to

review the returns, which she signed. Thus, because we would

find petitioner to have been negligent with respect to the rental

loss deductions outside the context of section 6015 relief, we

find that respondent’s failure to grant relief with respect to

the penalties was not an abuse of discretion.

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

under Rule 155.

8
See also sec. 1.6015-3(d)(4)(iv)(B), Income Tax Regs. (“Any
accuracy-related or fraud penalties under section 6662 or 6663
are allocated to the spouse whose item generated the penalty”).
See supra note 5 regarding the applicability of this regulation.