Capehart v. Comm'r

T.C. Memo. 2004-268

UNITED STATES TAX COURT

INGRID CAPEHART, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3425-03. Filed November 22, 2004.

Terri Ann Merriam, Jennifer A. Gellner, and Wendy S.

Pearson, for petitioner.

Robert V. Boeshaar and Julie L. Payne, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: This case arises from a request for relief

under section 60151 with respect to petitioner’s 1980 through

1986 taxable years. Respondent determined that petitioner was

1
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
 - 2 -

not entitled to any relief under section 6015. Petitioner timely

filed a petition seeking review of respondent’s determination.

After concessions,2 the issue for decision is whether petitioner

is entitled to relief, in addition to that conceded by

respondent, under section 6015(b), (c), or (f) for the taxable

years 1984, 1985, and 1986.

FINDINGS OF FACT

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

The first, second, third, and fourth stipulations of facts are

incorporated herein by this reference. Petitioner resided in

Sparks, Nevada, when her petition in this case was filed.

2
In the second stipulation of facts, respondent reserved an
objection to the admission of Exhibit 235-P, Appeals Transmittal
and Case Memo, on grounds of relevancy and hearsay. At the end
of the trial, the Court deferred ruling on Exhibit 235-P and
ordered the parties to address the issue of its admissibility in
their posttrial briefs. Respondent conceded on brief that
Exhibit 235-P qualified as a business record under Fed. R. Evid.
803(6) and that, therefore, his hearsay objection is “moot”.
Although respondent did not concede his relevancy objection, he
did not pursue the objection on brief. Consequently, we deem
respondent to have abandoned his relevancy objection, and we
admit Exhibit 235-P.

Respondent also conceded that petitioner is entitled to
partial relief under sec. 6015(c). Accordingly, respondent
initially allocated half of the partnership items giving rise to
the understatements in issue to petitioner and half to Mr.
Capehart but adjusted the allocation to take into account the tax
benefit to Mr. Capehart, as required by sec. 6015(d)(3)(A) and
(B). See Hopkins v. Commissioner, 121 T.C. 73, 82-87 (2003). As
a result, respondent determined that for 1980 through 1983, none
of the deficiencies were allocable to petitioner and that for
1984 through 1986, $2,313.79, $3,070.05, and $3,407 of the
deficiencies, respectively, were allocable to petitioner.
 - 3 -

Background

Petitioner was born and raised in Germany. Petitioner

attended 8 years of elementary school and spent 3 years at a

girls’ school where she learned grammar, reading, writing,

history, religion, first aid, cooking, and sewing.

Petitioner met Mr. Capehart3 in Germany while he was serving

in the U.S. Army. In 1962 they were married, and in 1963 they

moved to the United States. Petitioner and Mr. Capehart were

married for 40 years and were living together when Mr. Capehart

died on January 23, 2002.

Petitioner did not speak any English when she met Mr.

Capehart, but after she came to the United States, petitioner

taught herself to read and write in English. Petitioner is

fluent in English.

Petitioner and Mr. Capehart moved several times within the

United States, and they also lived in Germany. Because of these

moves, petitioner was required to change jobs frequently.

Petitioner worked as a bookkeeper and also did filing and typing.

Although petitioner quit working for a period of time to stay

home with her children, she eventually convinced Mr. Capehart

that she should go back to work. Petitioner took a part-time job

3
Mr. Capehart dropped out of high school to join the U.S.
Army, but he later obtained a general equivalency diploma while
serving in Germany. Mr. Capehart never went to college and had
no formal training in finance, Federal taxation, or cattle
ranching.
 - 4 -

as a sales clerk at a military store and, later, at a 7-Eleven

store, even though she was aware that Mr. Capehart was opposed to

the idea of her working outside of the home. Petitioner

eventually started working as a bank teller, and about 2 years

later, her supervisor trained her as a new accounts clerk. At

the bank, petitioner received advanced training in selling bank

services, soliciting clients’ business, and handling safe deposit

boxes.

Throughout their marriage, Mr. Capehart made decisions

about purchasing the family’s homes, automobiles, and boats.

Although petitioner did not always agree with Mr. Capehart’s

decisions, she usually deferred to his judgment. While

petitioner often tried to please Mr. Capehart to avoid evoking

his temper, Mr. Capehart never acted violently towards

petitioner, even when she sought employment outside of the home

in spite of his opposition to the idea. Mr. Capehart never

physically abused petitioner or threatened her.

Petitioner and Mr. Capehart maintained a joint bank account,

from which petitioner was responsible for paying their bills.

Because Mr. Capehart was not good at math and did not like to

write checks, petitioner wrote and signed most of the checks

drawn on their account, and petitioner balanced the checkbook.
 - 5 -

Hoyt Partnership Investments

Walter J. Hoyt III (Mr. Hoyt) was the son of a prominent

Shorthorn cattle breeder, who, along with other members of his

family, organized, promoted, and operated more than 100 cattle-

breeding partnerships (the Hoyt partnerships) from 1971 through

1998. Each partnership was organized and marketed in the same

manner, and Mr. Hoyt served as the general partner of each

partnership. For an overview of the Hoyt organization, see Bales

v. Commissioner, T.C. Memo. 1989-568; see also River City Ranches

#1, Ltd. v. Commissioner, T.C. Memo. 2003-150; Mekulsia v.

Commissioner, T.C. Memo. 2003–138; Durham Farms #1 v.

Commissioner, T.C. Memo. 2000-159, affd. 59 Fed. Appx. 952 (9th

Cir. 2003); River City Ranches #4, J.V. v. Commissioner, T.C.

Memo. 1999-209, affd. 23 Fed. Appx. 744 (9th Cir. 2001).

In 1983 Mr. Capehart learned about the Hoyt partnerships

from his brother-in-law. Petitioner and Mr. Capehart eventually

met with Mr. Hoyt to discuss the partnerships. During their

initial meeting, Mr. Hoyt explained that he had developed a

special breed of cows, which sold at a very high price, and that

their investment in the cattle would grow as the cows reproduced.

Mr. Hoyt further explained that he would refile petitioner and

Mr. Capehart’s tax returns for the past 3 years and that, in

doing so, they would get a refund from the Internal Revenue

Service (IRS), which they could use to make their initial
 - 6 -

investment in the partnership. Petitioner inquired whether that

was legal, and Mr. Hoyt assured her that it was. Petitioner

asked other questions of Mr. Hoyt during this meeting, but she

felt as though many of her questions remained unanswered.

Mr. Hoyt provided petitioner and Mr. Capehart with a packet

of promotional materials relating to the Hoyt partnerships. The

materials included a document entitled “The 1,000 lb. Tax

Shelter, A ROUND-UP OF DATA AND A QUICK COURSE IN CATTLE BREEDING

TAX SHELTERS”, which stated in pertinent part: (1) “SPECIFIC

RISKS INVOLVED * * * A change in the tax law or an audit and

disallowance by the IRS could take away all or part of the tax

benefits, plus the possibility of having to pay back the tax

savings, with penalties and interest”; (2) “we know we will be

subject to constant audits by the IRS”; and (3) “If you don’t

have a tax man who knows you well enough to give you specific

personal advice as to whether or not you belong in the cattle

business, stay out.” Mr. Capehart reviewed the documents, but

petitioner chose not to.

Petitioner was skeptical about investing in the partnership,

so she had one of her clients from the bank, who was an attorney,

review the partnership and subscription agreement. Petitioner

did not give the attorney any of the promotional materials to

review. The attorney advised petitioner that the agreement
 - 7 -

appeared to be legal, but he was unable to offer any opinion as

to the legitimacy of the business itself.

On July 12, 1984, petitioner and Mr. Capehart invested in

one of the Hoyt partnerships called Shorthorn Genetic Engineering

1983-2 (SGE). Petitioner did not trust Mr. Hoyt, and she tried

to convince Mr. Capehart that they should not invest in SGE.

Both petitioner and Mr. Capehart, however, signed the

subscription agreement, which included a power of attorney and a

partnership agreement, to invest in SGE. On the signed

subscription agreement, under the heading “Type of Ownership”, a

checkmark was placed on the line indicating “Joint Tenancy”.

Petitioner signed the document because Mr. Capehart told her that

he wanted to join SGE.

From 1984 to 1996, petitioner and Mr. Capehart continued to

invest in other Hoyt partnerships.4 Both petitioner and Mr.

Capehart signed documents related to their purchase of additional

partnership interests, and the Hoyt organization issued

certificates in both of their names to reflect their joint

ownership of partnership units.

Petitioner and Mr. Capehart invested in the Hoyt

partnerships using funds from their joint bank account. Mr.

4
The additional partnerships in which petitioner and Mr.
Capehart invested were Hoyt & Sons Trucking Partners J.V.,
Timeshare Breeding Service J.V., Timeshare Breeding Service 1989-
2, and Durham Genetic Engineering 1983-2 J.V.
 - 8 -

Capehart gave petitioner all of the bills they received from the

various Hoyt entities, and petitioner paid them by filling out

and signing personal checks drawn on their joint account. In

addition, petitioner purchased three of the six cashier’s checks

that she and Mr. Capehart sent to the Hoyt organization.

After investing in the partnerships, petitioner and Mr.

Capehart received monthly newsletters, advertisements, and

newspaper articles from the Hoyt organization that informed them

of recent developments in the cattle breeding industry and events

taking place within the Hoyt partnerships. Petitioner never

opened any mail unless it was addressed only to her, so

petitioner did not read all of the information they received from

the Hoyt organization. Mr. Capehart often shared correspondence

from the Hoyt organization with petitioner, but petitioner

suspected that he only showed her favorable documents to prove to

her that they had made a wise investment.

Petitioner and Mr. Capehart also toured several of the Hoyt

ranches over a 2-day period. During the ranch tour, petitioner

received a folder containing partnership information provided by

the Hoyt organization. In addition, petitioner and Mr. Capehart

received “Resource Allocation” forms on which they could rank

certain proposed Hoyt partnership projects in the order that they

believed would make the best use of their capital contributions.

While petitioner did not complete her own form, she filled out
 - 9 -

Mr. Capehart’s for him, and both petitioner and Mr. Capehart

signed the form.5

Both petitioner and Mr. Capehart contacted the Hoyt

organization on several occasions to inquire about their

contributions to the Hoyt partnerships, and Mr. Capehart often

asked petitioner to make phone calls about specific issues

relating to their investment. As they received more letters from

the IRS about the partnerships, petitioner began making more

phone calls to the Hoyt organization.

Tax Returns

Petitioner and Mr. Capehart filed joint Federal income tax

returns for 1980 through 1986. On July 31, 1984, petitioner and

Mr. Capehart filed Form 1045, Application for Tentative Refund,

on which they carried back an investment credit from SGE to 1980,

1981, and 1982. As a result, petitioner and Mr. Capehart

reported no income tax liability for 1980 and 1981, reported an

income tax liability of only $384 for the taxable year 1982, and

claimed cumulative income tax overpayments for 1980, 1981, and

1982 of $12,315.

On their Federal income tax returns for 1983 through 1986,

petitioner and Mr. Capehart reported the following:

5
Ultimately, petitioner forgot to submit Mr. Capehart’s form
to the Hoyt organization.
 - 10 -

Total income Sch. E IRA Investment
Year before Sch. E loss loss contribution credit

1983 $44,139 $10,090 $1,650 $3,225
1984 48,350 30,270 1,600
1985 53,611 34,306 2,400
1986 54,167 36,324 2,400

The Schedule E, Supplemental Income Schedule, losses were the

losses attributable to SGE that were allocated to petitioner and

Mr. Capehart on the Forms K-1, Partner’s Share of Income,

Credits, Deductions, etc., received from the Hoyt organization.

The IRA contributions represented amounts allegedly contributed

to IRAs established for petitioner and Mr. Capehart. The

investment tax credit claimed for 1983 was allocated to

petitioner and Mr. Capehart by the Hoyt organization with respect

to their investment in SGE.

The Hoyt organization prepared petitioner and Mr. Capehart’s

1983 through 1986 returns and the Form 1045.6 Before signing

each return, Mr. Capehart gave it to petitioner, and, together,

they reviewed it for accuracy by comparing the figures reported

on the return to the records they had submitted to the Hoyt

organization. Neither petitioner nor Mr. Capehart understood how

the Hoyt organization had arrived at some of the figures reported

6
Before petitioner and Mr. Capehart invested in the Hoyt
partnerships, a certified public accountant had prepared their
returns. Petitioner began to prepare their Federal income tax
returns, at some point that is not indicated in the record, when
she and Mr. Capehart no longer relied on the Hoyt organization to
do so.
 - 11 -

on their returns, and petitioner questioned the legitimacy of the

large losses that were reported, but both petitioner and Mr.

Capehart signed the returns anyway.

The Hoyt Partnership Litigation and Settlement

The Commissioner initiated audits of the Hoyt partnerships,

including, but not limited to, SGE, and sent appropriate notices

to the partners, including petitioner and Mr. Capehart.7 Mr.

Hoyt, the tax matters partner for the partnerships, represented

the Hoyt partnerships during the audits.

As a result of the audits, the Commissioner proposed

adjustments to the Hoyt partnership tax returns. The Hoyt

partnerships filed petitions in this Court to contest the

partnership adjustments. The partnership-level proceedings were

resolved as a result of our opinions in Shorthorn Genetic Engg.

1982-2, Ltd. v. Commissioner, T.C. Memo. 1996-515, and Bales v.

Commissioner, T.C. Memo. 1989-568 (involving 26 dockets filed by

partners in similar Hoyt partnerships that were tried as test

cases and covered taxable years before 1982), and a memorandum

of understanding between the IRS and Mr. Hoyt dated May 20, 1993

(the settlement agreement), that set forth the basis for settling

all Hoyt cattle partnership cases for 1980 through 1986.

7
For example, on Sept. 22, 1986, the IRS sent petitioner and
Mr. Capehart a letter informing them that the IRS was examining
SGE with respect to its 1983 taxable year.
 - 12 -

In Bales v. Commissioner, supra, we held, inter alia, that

although the Hoyt partnerships at issue were not lacking in

economic substance and would be respected for tax purposes,

adjustments to the Hoyt partnerships’ proportionate shares of

losses generated from the acquisition, management, and sale of

Hoyt cattle were required, and the recalculated losses were

deductible by the limited partners to the extent of the partners’

adjusted bases.

The settlement agreement, which was executed after we issued

Bales in 1989, provided, in pertinent part, as follows:

• deductions for contributions to an Individual
Retirement Arrangement -- also called an
Investment Retirement Account -- are limited to
cash actually paid to custodial banks on or before
the due date of the return for which the deduction
is to be claimed.

* * * * * * *

• The total number of cattle in service and subject
to depreciation by the investor partnerships in
each of the following respective years is

1980 -- 1,736
1981 -- 2,463
1982 -- 2,388
1983 -- 2,932
1984 -- 3,476
1985 -- 4,024
1986 -- 6,409

• For Federal income tax purposes, all the cattle
are adult breeding cattle, each having an original
depreciable basis of $4,000.

• The number of cattle to be depreciated during any year
will be determined by the following method:
 - 13 -

" The depreciable cattle in the herd of each
investor partnership will be adjusted by
multiplying the number listed in the
partnership’s books and records by the ratio
of the aggregate number of cattle in service
in all the partnerships (as indicated
immediately above) over the aggregate number
of cattle listed in the partnerships’ books
and records and subject to depreciation.

For example, in the year 1980, the books
and records of Florin Farms # 1 indicate
that the partnership claimed 149 head of
cattle subject to depreciation. The
aggregate number of cattle listed in the
depreciation schedules of all the
investor partnerships was 4,659. For
purposes of this case, then, Florin
Farms # 1 would be considered to have 56
head of cattle subject to depreciation,
computed as follows:

149 x 1,736 = 56
4,659

• Depreciation for all cattle placed in service in
1980 will be computed using the straight line
method and a 5 year useful life -- without regard
to the ADR system, or any other methods previously
used.

• All cattle which were already in partnerships on
January 1, 1980, will be considered placed in
service in 1977. Such cattle would, therefore, be
eligible for depreciation for only 2 years -- 1980
and 1981. They would then be considered fully
depreciated.

• Depreciation for all cattle placed in service
after 1980 will be computed using the Accelerated
Cost Recovery System, considering the cattle 5-
year property.

• All purchases of cattle after 1981 are in the year
the partnership is formed.

• Investment tax credit will be allowed on the
number of cattle in service during the first year
 - 14 -

of the partnership’s existence (as revised by the
formula discussed above), times $4,000 per head.
Cattle will be considered placed in service in the
year the partnership is formed.

• All cattle purchased are new section 38 property.

* * * * * * *

• Satisfaction of obligations for interest,
principal payments and management fees by
transferring calves and culled cows will
constitute ordinary income to the investor
partnerships. This convention is consistent with
the Tax Court’s decision in Bales v. Commissioner,
which provides that

" calves are not section 1231(a) property; and

" although culled cattle are section 1231(a)
property, the gain on which may be long term
capital gain (depending on the holding
period), depreciation allowed must be
recaptured as ordinary income under the
provisions of section 1245.

* * * * * * *

• For all years after 1980, Management Company is
comprised of Mr. Hoyt, who is entitled to 15% of
the profits; and the 24 investor partnerships in
existence at December 31, 1981.

" The investor partnerships are each entitled
to 1/24 of the remaining 85% of the profits.

" The investor partnerships are each entitled
to 1/24 of 100% of any net losses.

• Each partner’s profit and loss sharing percentage
is determined annually by comparing the partner’s
capital account to the aggregate of the capital
accounts of all partners in the partnership. This
determination is made based on the total capital
owned, not the total capital originally
subscribed.
 - 15 -

• Partners in the investor partnerships are divided
into two categories:

" Partners who continue to honor their note
obligations to Ranches, and who continue to
participate in the Hoyt Cattle partnership.
For purposes of this memorandum, will be
referred to as the “active partners.”

" Partners who have walked away from their note
obligations and/or who no longer participate
in the partnership. For purposes of this
memorandum, will be referred to as the
“inactive partners.”

• The determination of when and whether a partner is
active or inactive and the status of the partner’s
ownership interest will be made using all
appropriate records of Ranches, the investor
partnerships and the individual partners
including, but not limited to, Ranches’ note
records; whether or not Schedules K-1 were issued
to partners; whether the partners continued to
claim items from the partnership on Federal income
tax returns; correspondence; and Forms 1099.

• The amount of liabilities assumed personally by
the partners during the first year of the
partnership will be based on original subscription
agreements, and will be provided by Walter J. Hoyt
III within one week after the partnership
spreadsheet is submitted to him for review and/or
correction.

• For Federal income tax purposes, the maximum
amount of partnership debt which can be assumed by
all partners in an investor partnership is
determined by multiplying the number of cattle in
service during the first year of the partnership’s
existence -- as indicated above -- by the fair
market value of the cattle for Federal income tax
purposes, $4,000.

For example, Poison Creek Ranches # 2 is
considered to have put in service 118 head of
cattle in 1981. The cost basis of the cattle
for purposes of depreciation is $4,000 per
head. Therefore, the maximum amount of the
 - 16 -

note due to Ranches incident to depreciation,
and which is includible in the partner’s
basis is $472,000, calculated as follows:

Cattle In Service 118
Cost Basis (per head) $ 4,000
Total Partnership Note $472,000
Includible in Basis

• All partners who originally assumed personal
liability for a portion of the partnership debt
during the first year of the partnership --
whether they are now determined to be active or
inactive partners -- will be assigned a share of
the lower amount of recognized partnership debt
described above. Each partner’s share will be the
exact same percentage as his/her share of the
partnership debt originally assumed.

* * * * * * *

• Inactive partners are deemed to have liquidated
their respective partnership interest when they
abandon it, according to the following guidelines:

" The amount realized by partners on the
liquidation of their partnership interest
will be the amount of the assumed liability
for which they remained liable when they
abandoned their interest in the partnership.
This amount is the partner’s share of the
lower recognized partnership debt described
above.

" The deemed liquidation of partnership
interest by inactive partners will occur on
December 31 of the year they become inactive,
as described above.

• In computing “At Risk,” active partners are
entitled to include their prorated share of
partnership debt which was previously attributable
to inactive partners for purposes of “At Risk” and
basis. Active partners assume this additional
debt on the date an inactive partner is deemed to
have liquidated his/her partnership interest, as
described in the immediately preceding paragraph.
 - 17 -

• Profits, losses and credits -- after considering
Mr. Hoyt’s share -- are allocated strictly on the
basis of capital account. This means that each
partner’s interest in the credits, profits and/or
loss is calculated annually by comparing the
partner’s capital account to the aggregate of the
capital accounts of all partners in the
partnership.

For purposes of computing a partner’s capital
account, all partners are entitled to include
their share of partnership debt for which they
assumed personal liability, until they liquidate
their interest in the partnership.

• Any partner having a capital account below zero
has a basis in the partnership below zero.

Pursuant to, and in accordance with, the settlement

agreement and our opinion in Shorthorn Genetic Engg. 1982-2, Ltd.

v. Commissioner, T.C. Memo. 1996-515, the capital account of

petitioner and Mr. Capehart was recomputed, and computational

adjustments were made to the distributive shares of Hoyt

partnership losses claimed by petitioner and Mr. Capehart,

resulting in deficiencies for each of the years at issue. The

adjustments were primarily attributable to the Hoyt

organization’s having sold more cattle to the various Hoyt

limited partnerships than it actually owned, see id., having

overvalued some of the cattle sold to the Hoyt limited

partnership, see Mora v. Commissioner, 117 T.C. 279, 292 (2001),

and having failed to properly account for income generated by the

sale of calves in calculating partnership losses, see Bales v.

Commissioner, T.C. Memo. 1989-568.
 - 18 -

Petitioner’s Claim for Section 6015 Relief

On or about August 29, 2000, petitioner filed Form 8857,

Request for Innocent Spouse Relief (And Separation of Liability

and Equitable Relief), on which she requested relief pursuant to

section 6015(b) and (f) for 1980 through 1997.8

On August 24, 2001, respondent sent petitioner a preliminary

determination denying petitioner’s request for relief under

section 6015(b), (c), and (f) for 1980 through 1986. Respondent

denied relief on the basis that: (1) Petitioner had actual

knowledge or reason to know of the item giving rise to the

understatement; (2) petitioner did not show that the erroneous

items were attributable to her spouse; (3) petitioner did not

demonstrate that it would be inequitable to hold her liable for

the deficiency attributable to the understatement; and (4)

petitioner did not meet the marital status requirements of

section 6015(c). On September 17, 2001, petitioner timely

submitted a written appeal of respondent’s determination to the

IRS Appeals Division.

On December 4, 2002, respondent issued a notice of

determination in which he concluded that petitioner did not

qualify for relief from joint and several liability under section

6015(b), (c), or (f). With respect to his determination under

8
On Nov. 14, 2000, respondent sent petitioner a letter that
indicated petitioner’s request for relief with respect to the
1987 through 1997 taxable years was premature.
 - 19 -

section 6015(b), respondent stated that “You failed to meet all

the requirements of IRC section 6015(b); therefore, you do not

qualify for relief under the law.” With respect to his

determination under section 6015(f), respondent stated that “You

are not eligible for relief under the law since the majority of

the factors weigh against equitable relief.”

On March 3, 2003, petitioner filed a timely petition with

this Court pursuant to section 6015(e) seeking review of

respondent’s determination with respect to petitioner’s 1980

through 1986 taxable years.

OPINION

In general, taxpayers filing joint Federal income tax

returns are each responsible for the accuracy of their return and

are jointly and severally liable for the entire tax liability due

for that year. Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C.

276, 282 (2000). In certain circumstances, however, a spouse may

obtain relief from joint and several liability by satisfying the

requirements of section 6015.9

Section 6015(a)(1) provides that a spouse who has made a

joint return may elect to seek relief from joint and several

liability under section 6015(b) (dealing with relief from

9
Sec. 6015 applies to tax liabilities arising after July 22,
1998, and to tax liabilities arising on or before July 22, 1998,
that remain unpaid as of such date. Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3201(g), 112 Stat. 740.
 - 20 -

liability for an understatement of tax on a joint return).

Section 6015(a)(2) provides that a spouse who is eligible to do

so may elect to limit that spouse’s liability for any deficiency

with respect to a joint return under section 6015(c). Relief

from joint and several liability under section 6015(b) or (c) is

available only with respect to a deficiency for the year for

which relief is sought. Sec. 6015(b)(1)(D) and (c)(1); see H.

Conf. Rept. 105-599, at 252-254 (1998), 1998-3 C.B. 747, 1006-

1008. If relief is not available under either section 6015(b) or

(c), an individual may seek equitable relief under section

6015(f), which may be granted by the Commissioner in his

discretion.

In this case, petitioner contends that she is entitled to

full relief from liability under section 6015(b) or (f).

Alternatively, petitioner seeks full relief under section

6015(c), contending that no part of the deficiency is allocable

to her.

Our jurisdiction to review petitioner’s request for relief

is conferred by section 6015(e), which allows a spouse who has

requested relief from joint and several liability to contest the

Commissioner’s denial of relief by filing a timely petition in

this Court. We address petitioner’s request for relief under

subsections (b), (c), and (f) of section 6015 in turn.
 - 21 -

A. Section 6015(b)

Section 6015(b)(1) authorizes respondent to grant relief

from joint and several liability if the taxpayer satisfies each

requirement of subparagraphs (A) through (E). Section 6015(b)(1)

provides:

SEC. 6015(b). Procedures For Relief From Liability
Applicable to All Joint Filers.--

(1) In general.–-Under procedures prescribed
by the Secretary, if--

(A) a joint return has been made for a
taxable year;

(B) on such return there is an
understatement of tax attributable to
erroneous items of 1 individual filing the
joint return;

(C) the other individual filing the
joint return establishes that in signing the
return he or she did not know, and had no
reason to know, that there was such
understatement;

(D) taking into account all of the facts
and circumstances, it is inequitable to hold
the other individual liable for the
deficiency in tax for such taxable year
attributable to such understatement; and

(E) the other individual elects (in such
form as the Secretary may prescribe) the
benefits of this subsection not later than
the date which is 2 years after the date the
Secretary has begun collection activities
with respect to the individual making the
election,

then the other individual shall be relieved of
liability for tax (including interest, penalties,
and other amounts) for such taxable year to the
 - 22 -

extent such liability is attributable to such
understatement.

The requirements of section 6015(b)(1) are stated in the

conjunctive. Therefore, if the requesting spouse fails to meet

any one of them, she does not qualify for relief. Alt v.

Commissioner, 119 T.C. 306, 313 (2002), affd. 101 Fed. Appx. 34

(6th Cir. 2004). Except as provided by section 6015, the

requesting spouse bears the burden of proving that she satisfies

each requirement of section 6015(b)(1).10 See Rule 142(a).

Respondent does not dispute that petitioner meets the

requirements in subparagraphs (A) and (E) of section 6015(b)(1)

but contends that petitioner has not satisfied the requirements

of subparagraphs (B), (C), and (D) of section 6015(b)(1).

Petitioner disagrees.

With respect to subparagraph (B) of section 6015(b)(1),

petitioner argues that the understatement of tax is attributable

entirely to Mr. Capehart because the investment in SGE was not a

joint investment and that Mr. Capehart was solely responsible for

investing in SGE. Respondent argues that the understatement of

tax is not solely attributable to the erroneous items of Mr.

Capehart because both petitioner and Mr. Capehart owned the

partnership interest in SGE, and petitioner participated in the

10
Petitioner does not contend that sec. 7491 applies to this
case and has not produced evidence to show she satisfied the
requirements of sec. 7491(a).
 - 23 -

joint investment. Respondent relies on Ellison v. Commissioner,

T.C. Memo. 2004-57, to support his position.

In Ellison, we held that the taxpayer failed to prove that

the understatement of tax was solely attributable to the

erroneous items of the nonrequesting spouse under section

6015(b)(1)(B) because the requesting spouse was a partner in the

Hoyt partnership and held the partnership units in joint tenancy

with her spouse. The taxpayer in Ellison also signed partnership

documents and checks payable to the Hoyt organization and used

funds from a joint account she held with her spouse to invest in

the partnership.

The material facts of Ellison are indistinguishable from

those in the present case and support the conclusion that the

erroneous items are not solely Mr. Capehart’s items. Petitioner

signed the required partnership documents confirming she was a

partner, and petitioner and Mr. Capehart invested in the Hoyt

partnerships using funds from their joint bank account.

Petitioner purchased cashier’s checks and wrote and signed all of

the personal checks that were payable to the various Hoyt

entities for their partnership interests. The Hoyt organization

issued certificates for partnership units in both of their names

and viewed petitioner and Mr. Capehart as joint investors.

Petitioner contends, however, that joint ownership of the

investment is not determinative of whether the erroneous item
 - 24 -

giving rise to the understatement is attributable to one or both

spouses. Relying on Rowe v. Commissioner, T.C. Memo. 2001-325,

petitioner argues that the erroneous items should be attributed

to the spouse who made the decisions relating to the investment

that produced the erroneous items.

In Rowe, we declined to allocate to the taxpayer any portion

of the erroneous losses generated by the taxpayer’s spouse’s

farming activities even though the taxpayer was listed as one of

the proprietors on the joint tax returns. The taxpayer in Rowe

did not make or participate in the making of any decisions

relating to the activity, was not allowed to see the entire tax

return before it was filed, was not consulted by her spouse

before he engaged in the activity, did not sign any checks for

expenses related to the activity, and was not otherwise involved

in the farming activity.

In contrast to the facts in Rowe, the record in this case

establishes that petitioner was actively involved, along with Mr.

Capehart, in matters relating to their investment in SGE.

Petitioner and Mr. Capehart met with Mr. Hoyt, toured the Hoyt

ranches, received various promotional and informational materials

from the Hoyt partnerships, became partners by signing the

subscription agreement, and signed the income tax returns

prepared by the Hoyt organization. In addition, petitioner

arranged for an attorney to review the subscription and
 - 25 -

partnership agreement before she and Mr. Capehart signed it, and

she made phone calls to the Hoyt organization on several

occasions to obtain answers to both her own and Mr. Capehart’s

questions about their investments. Regardless of whether Mr.

Capehart played a dominant role in the decision to invest in the

Hoyt partnerships or whether petitioner, at times, was simply

following Mr. Capehart’s orders, the fact that petitioner

ultimately agreed to become a partner and participated in

managing the investment is sufficient for us to find that the

erroneous items giving rise to the understatements of tax are

items of both petitioner and Mr. Capehart. Bartak v.

Commissioner, T.C. Memo. 2004-83; Ellison v. Commissioner, supra;

see also Mora v. Commissioner, 117 T.C. at 290; Doyel v.

Commissioner, T.C. Memo. 2004-35.

Petitioner argues that the facts of this case are

distinguishable from Bartak and Doyel because Mr. Capehart

coerced petitioner into participating in the investment,

controlled all aspects of the investment, and acted in a

deceitful and domineering manner towards petitioner with regard

to partnership matters. However, the record is lacking in

credible evidence to support petitioner’s allegations. Although

Mr. Capehart initiated the investment in the Hoyt partnerships,

he never persuaded petitioner to participate in the investment by

coercing, deceiving, or threatening her. To the contrary, Mr.
 - 26 -

Capehart included petitioner in the meeting with Mr. Hoyt, and

petitioner attended the Hoyt ranch tour. Because Mr. Capehart

trusted petitioner to perform mathematical computations, he gave

her all of the bills from the Hoyt organization to pay and

allowed her to review all of the tax returns they filed. In

addition, Mr. Capehart showed petitioner mail they received from

the partnership and often encouraged her to call the Hoyt

organization to inquire about their investment.

We conclude that petitioner has failed to prove that the

understatements of tax are attributable solely to erroneous items

of Mr. Capehart. Because petitioner’s failure to satisfy the

requirement of subparagraph (B) of section 6015(b)(1) is

sufficient for us to deny any additional relief pursuant to that

section, we need not decide whether petitioner satisfied the

requirements of section 6015(b)(1)(C) and (D). For the sake of

completeness, however, we conclude that petitioner did not meet

the requirements of section 6015(b)(1)(C) and (D) for the reasons

set forth in our analysis of section 6015(f), infra.

Accordingly, we sustain respondent’s determination to deny

petitioner relief from joint and several liability under section

6015(b)(1).
 - 27 -

B. Section 6015(c)

Under section 6015(c)(3), if the requesting spouse is no

longer married to,11 or is legally separated from, the spouse

with whom she filed the joint return, the requesting spouse may

elect to limit her liability for the deficiency as provided for

in section 6015(d).12 The election must be made no later than 2

years after the Secretary has begun collection activities with

respect to the electing spouse.13 Sec. 6015(c)(3)(B).

In general, section 6015(d) provides that any item giving

rise to a deficiency on a joint return shall be allocated to each

spouse as though they had filed separate returns, and the

requesting spouse shall be liable only for her proportionate

share of the deficiency that results from such allocation. Sec.

6015(d)(1), (3)(A). To the extent that the item giving rise to

11
A requesting spouse is no longer married if she is
widowed. Rosenthal v. Commissioner, T.C. Memo. 2004-89.
12
A taxpayer is ineligible to elect sec. 6015(c) if the
Secretary demonstrates that (1) assets were transferred between
spouses filing a joint return as part of a fraudulent scheme to
avoid tax or (2) the electing spouse had actual knowledge, when
signing the return, of any item giving rise to a deficiency that
is allocable to the other spouse. Sec. 6015(c)(3)(A)(ii), (C).
Respondent concedes that he is unable to show that either of
those circumstances existed in this case.
13
Petitioner originally did not request relief under sec.
6015(c) because she filed Form 8857, Request for Innocent Spouse
Relief (And Separation of Liability and Equitable Relief), before
Mr. Capehart’s death. However, respondent did not require
petitioner to file another Form 8857 because respondent’s
determination with respect to her initial request was not final
when Mr. Capehart died.
 - 28 -

the deficiency provided a tax benefit on the joint return to the

other spouse, the item shall be allocated to the other spouse in

computing his or her proportionate share of the deficiency. Sec.

6015(d)(3)(B). The electing spouse bears the burden of proof

with respect to establishing the portion of any deficiency that

is allocable to her. Sec. 6015(c)(2).

Because respondent determined that petitioner and Mr.

Capehart were joint investors in SGE, respondent attributed one-

half of the partnership items giving rise to the deficiency to

each of petitioner and Mr. Capehart. See sec. 6015(d)(1),

(3)(A). In order for petitioner to obtain any additional relief

under section 6015(c), she must prove that none of the items

would have been allocated to her if she and Mr. Capehart had

filed separate returns. Sec. 6015(c)(2); Mora v. Commissioner,

supra at 290.

As discussed earlier in this opinion, petitioner has failed

to prove that the erroneous items giving rise to the

understatement of tax are items solely of Mr. Capehart.

Petitioner has also failed to prove that she is entitled to a

more favorable allocation than that conceded by respondent. See

sec. 6015(d)(3)(B). Accordingly, we sustain respondent’s

determination to deny petitioner any additional relief from joint

and several liability under section 6015(c).
 - 29 -

C. Section 6015(f)

We review the Commissioner’s determination to deny equitable

relief under section 6015(f) using an abuse of discretion

standard. Butler v. Commissioner, 114 T.C. at 287-292. Under

this standard of review, we defer to the Commissioner’s

determination unless it is arbitrary, capricious, or without

sound basis in fact. Jonson v. Commissioner, 118 T.C. 106, 125

(2002), affd. 353 F.3d 1181 (10th Cir. 2003). The question of

whether the Commissioner’s determination was an abuse of his

discretion is a question of fact. Cheshire v. Commissioner, 115

T.C. 183, 198 (2000), affd. 282 F.3d 326 (5th Cir. 2002). A

requesting spouse bears the burden of proving that the

Commissioner abused his discretion in denying her relief under

section 6015(f).

The parties agree that it is appropriate to consider whether

petitioner qualifies for relief under section 6015(f) even though

respondent has granted petitioner partial relief under section

6015(c). See Hopkins v. Commissioner, 121 T.C. 73, 87 (2003).

However, the parties disagree as to whether it is inequitable to

hold petitioner liable for any portion of the deficiency under

section 6015(f). Therefore, we must decide whether respondent

abused his discretion in denying petitioner relief from joint and

several liability under section 6015(f). Cheshire v.

Commissioner, supra at 198; Butler v. Commissioner, supra at 292.
 - 30 -

Pursuant to section 6015(f), the Commissioner has prescribed

guidelines in Rev. Proc. 2000-15, 2000-1 C.B. 447, for

determining whether a requesting spouse qualifies for equitable

relief under that section.14 In this case, although the notice

of determination does not state that respondent utilized the

guidelines in Rev. Proc. 2000-15, supra, to make his

determination that petitioner is not entitled to relief under

section 6015(f), the notice of determination refers to

respondent’s analysis of factors, and we assume that respondent’s

reference to factors in the notice of determination is to the

factors enumerated in Rev. Proc. 2000-15, supra. This Court has

upheld the use of the guidelines specified in Rev. Proc. 2000-15,

supra, and has analyzed the factors listed in Rev. Proc. 2000-15,

supra, in reviewing the Commissioner’s negative determination

under section 6015(f). See, e.g., Washington v. Commissioner,

120 T.C. 137, 147-152 (2003); Jonson v. Commissioner, supra at

125-126. Moreover, petitioner has not objected to the use of the

guidelines contained in Rev. Proc. 2000-15, supra, and she has

addressed the factors in her posttrial briefs.

Rev. Proc. 2000-15, sec. 4.01, 2000-1 C.B. at 448, lists

seven threshold conditions that must be satisfied before the

14
On Aug. 11, 2003, the Commissioner issued Rev. Proc. 2003-
61, 2003-32 I.R.B. 296, which supersedes Rev. Proc. 2000-15,
2001-1 C.B. 447. The new revenue procedure is effective for
requests for relief filed on or after Nov. 1, 2003, and,
therefore, is inapplicable here.
 - 31 -

Commissioner will consider a request for relief under section

6015(f). Respondent concedes that petitioner satisfied the seven

threshold conditions.

Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at 448, provides

that, in cases where the threshold conditions set forth in Rev.

Proc. 2000-15, sec. 4.01 have been satisfied but the requesting

spouse does not qualify for relief under Rev. Proc. 2000-15, sec.

4.02,15 2000-1 C.B. at 448, equitable relief may be granted under

section 6015(f) if, taking into account all facts and

circumstances, it is inequitable to hold the requesting spouse

liable. Rev. Proc. 2000-15, sec. 4.03 (1) and (2), 2000-1 C.B.

at 448-449, contains a list of positive and negative factors that

the Commissioner must take into account in determining, on the

facts and circumstances, whether to grant equitable relief under

section 6015(f). As Rev. Proc. 2000-15, sec. 4.03 makes clear,

no single factor is determinative in any particular case, all

factors are to be considered and weighed appropriately, and the

listing of factors is not intended to be exhaustive. See also

Washington v. Commissioner, supra at 148; Jonson v. Commissioner,

supra at 125.

15
Rev. Proc. 2000-15, sec. 4.02, 2000-1 C.B. 447, 448, lists
the circumstances under which equitable relief under sec. 6015(f)
will ordinarily be granted in cases where a liability reported on
a joint return is unpaid. Because this case involves
deficiencies, and not unpaid liabilities reported on joint
returns, Rev. Proc. 2000-15, sec. 4.02, 2000-1 C.B. at 448, does
not apply. See Mellen v. Commissioner, T.C. Memo. 2002-280.
 - 32 -

Rev. Proc. 2000-15, sec. 4.03(1) lists the following six

positive factors that the Commissioner will weigh in favor of

granting equitable relief:

(a) Marital status. The requesting spouse is
separated * * * or divorced from the nonrequesting
spouse.

(b) Economic hardship. The requesting spouse
would suffer economic hardship (within the meaning of
section 4.02(1)(c) of this revenue procedure) if relief
from the liability is not granted.

(c) Abuse. The requesting spouse was abused by
the nonrequesting spouse, but such abuse did not amount
to duress.

(d) No knowledge or reason to know. In the case
of a liability that was properly reported but not paid,
the requesting spouse did not know and had no reason to
know that the liability would not be paid. In the case
of a liability that arose from a deficiency, the
requesting spouse did not know and had no reason to
know of the items giving rise to the deficiency.

(e) Nonrequesting spouse’s legal obligation. The
nonrequesting spouse has a legal obligation pursuant to
a divorce decree or agreement to pay the outstanding
liability. This will not be a factor weighing in favor
of relief if the requesting spouse knew or had reason
to know, at the time the divorce decree or agreement
was entered into, that the nonrequesting spouse would
not pay the liability.

(f) Attributable to nonrequesting spouse. The
liability for which relief is sought is solely
attributable to the nonrequesting spouse.

Rev. Proc. 2000-15, sec. 4.03(2) lists the following six negative

factors that the Commissioner weighs against granting equitable

relief:
 - 33 -

(a) Attributable to the requesting spouse. The
unpaid liability or item giving rise to the deficiency
is attributable to the requesting spouse.

(b) Knowledge, or reason to know. A requesting
spouse knew or had reason to know of the item giving
rise to a deficiency or that the reported liability
would be unpaid at the time the return was signed.
This is an extremely strong factor weighing against
relief. Nonetheless, when the factors in favor of
equitable relief are unusually strong, it may be
appropriate to grant relief under §6015(f) in limited
situations where a requesting spouse knew or had reason
to know that the liability would not be paid, and in
very limited situations where the requesting spouse
knew or had reason to know of an item giving rise to a
deficiency.

(c) Significant benefit. The requesting spouse
has significantly benefitted (beyond normal support)
from the unpaid liability or items giving rise to the
deficiency. See §1.6013-5(b).

(d) Lack of economic hardship. The requesting
spouse will not experience economic hardship (within
the meaning of section 4.02(1)(c) of this revenue
procedure) if relief from the liability is not granted.

(e) Noncompliance with federal income tax laws.
The requesting spouse has not made a good faith effort
to comply with federal income tax laws in the tax years
following the tax year or years to which the request
for relief relates.

(f) Requesting spouse’s legal obligation. The
requesting spouse has a legal obligation pursuant to a
divorce decree or agreement to pay the liability.

The knowledge or reason to know factor, the economic hardship

factor, and the legal obligation factor in Rev. Proc. 2000-15,

sec. 4.03(2)(b), (d), and (f), respectively, are the opposites of

the knowledge or reason to know factor, the economic hardship

factor, and the legal obligation factor in Rev. Proc. 2000-15,
 - 34 -

sec. 4.03(1)(d), (b), and (e), respectively. The attribution

factor in Rev. Proc. 2000-15, sec. 4.03(2)(a) is substantially

the opposite of the attribution factor in Rev. Proc. 2000-15,

sec. 4.03(1)(f), 2000-1 C.B. at 449. Consequently, in our review

of the Commissioner’s determination denying relief under section

6015(f), we have held that a finding with respect to the reason

to know, economic hardship, legal obligation, and attribution

factors ordinarily will weigh either in favor of or against

granting equitable relief under section 6015(f). Ewing v.

Commissioner, 122 T.C. 32, 45 (2004). We have also held that a

finding that a requesting spouse did not receive a significant

benefit from the item giving rise to the deficiency weighs in

favor of granting relief under section 6015(f). Id. Finally, we

treat evidence that the remaining positive and negative factors

are not applicable as evidence weighing neither in favor of nor

against granting equitable relief (i.e., as neutral). Id.

In accordance with the above, we shall consider each of the

positive and negative factors enumerated in Rev. Proc. 2000-15,

sec. 4.03. We shall also consider whether any additional facts

alleged by the parties affect the analysis of whether respondent

abused his discretion in denying petitioner equitable relief

under section 6015(f).
 - 35 -

1. Positive Factors

a. Marital Status

Although petitioner was not separated or divorced from Mr.

Capehart, Mr. Capehart was deceased. In Rosenthal v.

Commissioner, T.C. Memo. 2004-89, we held that, in this context,

being widowed is the same as being separated or divorced.

Because petitioner is a widow, this positive factor applies and

weighs in favor of granting petitioner equitable relief.

b. Economic Hardship

An analysis of economic hardship under Rev. Proc. 2000-15 is

conducted using rules similar to those under section 301.6343-

1(b)(4), Proced. & Admin. Regs., and focuses on the requesting

spouse’s inability to pay reasonable basic living expenses. Rev.

Proc. 2000-15, sec. 4.02(1)(c), 2000-1 C.B. at 448. Section

301.6343-1(b)(4)(ii), Proced. & Admin. Regs., provides that the

Commissioner will evaluate a requesting spouse’s claim of

economic hardship by considering any information offered by the

requesting spouse that is relevant to the determination,

including, but not limited to, the requesting spouse’s income,

assets and liabilities, age, ability to earn, responsibility for

dependents, and the amount reasonably necessary for basic living

expenses.

Petitioner did not offer any evidence of her income,

expenses, assets, or liabilities other than her testimony that
 - 36 -

she and Mr. Capehart had approximately $2,000 in the bank, drove

older automobiles, and maintained an average standard of living.

Petitioner’s failure to offer credible evidence of her current

salary, her basic living expenses, her current debts, and all of

her current assets makes it impossible for us to evaluate her

ability to pay the liabilities allocated to her under section

6015(c). Moreover, petitioner did not prove that requiring her

to pay the reduced liabilities resulting from the allocation of

liability under section 6015(c) would result in economic

hardship. We conclude, therefore, that petitioner has failed to

carry her burden of proving that requiring her to pay the reduced

liabilities would result in an economic hardship within the

meaning of section 301.6343-1(b)(4), Proced. & Admin. Regs.

Because petitioner has failed to establish that she will suffer

an economic hardship, we conclude that this positive factor does

not apply.

c. Abuse by Nonrequesting Spouse

Petitioner alleges that she was motivated to participate in

the investment because she feared Mr. Capehart. For purposes of

this analysis, we shall treat petitioner’s allegation as an

allegation that petitioner was abused by Mr. Capehart, and we

reject it. The record simply does not support a finding that Mr.

Capehart persuaded petitioner to invest in the Hoyt partnerships

by threatening or abusing her. Among other things, we note that
 - 37 -

petitioner’s alleged fear of Mr. Capehart did not prevent her in

the past from trying to convince him that she should obtain

employment outside the home, and he did not abuse her when she

eventually did so. This positive factor does not apply. Ewing

v. Commissioner, supra at 46; Washington v. Commissioner, 120

T.C. at 149.

d. No Knowledge or Reason To Know

The tax liabilities at issue in this case arose from

deficiencies. Petitioner argues that she did not know or have

any reason to know of the items giving rise to those

deficiencies.

Although we have not specifically discussed the meaning of

the phrase “item giving rise to the deficiency” in the context of

section 6015(f), we have considered whether a requesting spouse

had culpable knowledge for purposes of section 6015(f). See,

e.g., Bartak v. Commissioner, T.C. Memo. 2004-83; Ellison v.

Commissioner, T.C. Memo. 2004-57. In addition, we have

specifically interpreted the phrase in deciding whether a

taxpayer qualifies for relief under section 6015(c). In King v.

Commissioner, 116 T.C. 198, 202-203 (2001), a case involving a

deficiency resulting from erroneous deductions, we decided

whether a taxpayer had “actual knowledge of the item giving rise

to the deficiency” under section 6015(c)(3)(C). There, we held

that section 6015(c)(3)(C), which provides an exception to a
 - 38 -

requesting spouse’s right to allocate liability under section

6015(c), requires the Commissioner to prove that the requesting

spouse had actual knowledge of the factual basis for the denial

of the deductions. Id. at 204; see also Mora v. Commissioner,

117 T.C. 279 (2001) (requirement that a requesting spouse have

actual knowledge of an item giving rise to the deficiency

requires proof of more than a taxpayer’s knowledge that an item

appears on the return).

Like section 6015(c)(3)(C), Rev. Proc. 2000-15, supra,

requires, for purposes of section 6015(f), that the requesting

spouse’s knowledge of the items giving rise to the deficiency be

examined. In order to ascertain the level of the requesting

spouse’s knowledge of the items giving rise to the deficiency for

purposes of section 6015(f), we must examine whether the

requesting spouse knew or had reason to know of the factual basis

for the denial of the deductions. See King v. Commissioner,

supra at 204; Mora v. Commissioner, supra at 291-292.

In this case, respondent conceded, for purposes of section

6015(c), that he could not prove that petitioner had actual

knowledge of the items giving rise to the deficiency. With

respect to section 6015(f), our review of the record convinces us

that petitioner did not have actual knowledge of the items giving

rise to the deficiency. However, we still must decide whether

petitioner had reason to know of the items giving rise to the
 - 39 -

deficiency. In order to resolve the issue, we must examine

whether and to what extent petitioner had reason to know of the

factual basis for respondent’s adjustment to the Hoyt partnership

loss deductions and the IRA deductions claimed by petitioner and

Mr. Capehart during the years at issue.

At the time she filed her petition, petitioner resided in

Nevada. In the absence of a stipulation to the contrary, the

U.S. Court of Appeals for the Ninth Circuit is presumably the

proper venue for an appeal of this case. See sec. 7482(b)(2).

In Price v. Commissioner, 887 F.2d 959, 963 (9th Cir. 1989), the

Court of Appeals for the Ninth Circuit interpreted language

contained in section 6013(e), the predecessor to section 6015(b),

in order to decide whether the taxpayer requesting relief under

section 6013(e) (the requesting spouse) had satisfied the

requirement of section 6013(e)(1)(C) that, in signing the return,

the requesting spouse did not know or have reason to know of the

substantial understatement. The Court of Appeals concluded that

the plain meaning of section 6013(e)(1)(C) was clear and that it

required the requesting spouse “to establish that she did not

know and did not have reason to know that the deduction would

give rise to a substantial understatement.” Id. After

concluding that the requesting spouse did not have actual

knowledge, the Court of Appeals examined whether the requesting

spouse had reason to know of the substantial understatement. Id.
 - 40 -

The Court of Appeals held that a requesting spouse has

reason to know of the substantial understatement “if a reasonably

prudent taxpayer in her position at the time she signed the

return could be expected to know that the return contained the

substantial understatement.” Id. at 965. In evaluating how a

reasonably prudent taxpayer might act, the Court of Appeals

considered 4 factors: (1) The spouse’s level of education; (2)

the spouse’s involvement in the family’s business and financial

affairs; (3) the presence of expenditures that appear lavish or

unusual when compared to the family’s past levels of income,

standard of living, and spending patterns; and (4) the culpable

spouse’s evasiveness and deceit concerning the couple’s finances.

After considering the factors, the Court of Appeals concluded

that the requesting spouse had satisfied her burden of

establishing that she did not have reason to know that the

deduction in question would give rise to the substantial

understatement. Nevertheless, because the Court of Appeals also

concluded that the requesting spouse had knowledge of sufficient

facts to put her on notice that an understatement existed, it

held that the requesting spouse had a duty to inquire into the

factual circumstances surrounding the deduction. Because the

requesting spouse had made an appropriate inquiry, the Court of

Appeals held that the requesting spouse had satisfied the
 - 41 -

requirement of section 6013(e)(1)(C) and that she was entitled to

relief under section 6013(e).

Although this case involves a different statute, we believe

that the Court of Appeals would require an analysis of the

“reason to know” requirement like the one it used in Price v.

Commissioner, supra. Consequently, we first examine whether

petitioner had reason to know of the items giving rise to the

deficiency, applying the same factors used by the Court of

Appeals in Price. If we conclude that petitioner did not have

reason to know, we next examine whether petitioner had knowledge

of sufficient facts to impose upon her a duty of inquiry.

Finally, we examine whether petitioner satisfied her duty of

inquiry.

In this case, petitioner, who had in Germany what appears to

be the equivalent of a high school education in this country, was

actively involved in the family’s financial affairs. She wrote

and signed most of the checks drawn on the joint checking

account, and she was aware of, and sometimes participated in,

decisions regarding family purchases. At trial, petitioner

admitted that Mr. Capehart never concealed or deceived her about

the family finances or their Hoyt partnership investments.

With respect to the Hoyt partnership investments, petitioner

admitted that she had had the opportunity to review the

promotional materials that she and Mr. Capehart had received
 - 42 -

before investing in the Hoyt partnerships, but she chose not to

do so. Those promotional materials warned potential investors

that the promised tax savings may be disallowed by the IRS and

that potential investors should consult independent tax advisers

before making an investment in the partnership. Neither

petitioner nor Mr. Capehart conducted any independent

investigation, or hired a competent professional, to verify

critical factual representations made by the Hoyt organization.

Petitioner admitted that the large bills she and Mr. Capehart

received from the Hoyt organization “didn’t look right to * * *

[her]” and she felt that “somehow or another * * * [they were]

being taken advantage of.” Moreover, petitioner was aware of,

and questioned the large losses claimed on the tax returns she

reviewed and signed. Suspecting that the partnership deductions

were not legitimate, petitioner testified that, considering the

income they reported, the figures reported on their tax returns

from the Hoyt partnerships “scared the living daylight out of

* * * [her]”. Nevertheless, petitioner still signed the tax

returns claiming partnership losses and an investment tax credit

from SGE and IRA contribution deductions for contributions

allegedly made on behalf of her and Mr. Capehart. On these

facts, we conclude that petitioner has not shown that she had no

reason to know of the items giving rise to the deficiency.
 - 43 -

Even if we were to conclude that a reasonably prudent person

in petitioner’s position at the time she signed the returns for

the years at issue could not have been expected to know of the

items giving rise to the deficiencies in this case, we would

still conclude that petitioner had failed to satisfy her duty of

inquiry. Petitioner and Mr. Capehart did not make any effort to

verify the most important and most basic facts essential for the

viability of the Hoyt partnership investments and their tax

consequences. For example, they conducted no investigation

whatsoever of whether the Hoyt partnerships in which they were

investing actually owned cattle in sufficient numbers and with

sufficient value to support the projected loss deductions. They

did not ask a knowledgeable tax professional to investigate or

verify that they would have sufficient basis in their Hoyt

partnership investments to claim their distributive shares of

partnership losses. They allowed the promoter of the Hoyt

partnerships to prepare their personal income tax returns, and

they apparently never requested or obtained verification that the

IRA contributions claimed on their joint returns had actually

been made by the contribution deadlines. We conclude, therefore,

that this positive factor does not apply because petitioner had

reason to know of the items giving rise to the deficiency and

failed to satisfy her duty of inquiry with respect to those

items.
 - 44 -

e. Nonrequesting Spouse’s Legal Obligation

Petitioner does not allege that Mr. Capehart had a legal

obligation under a divorce decree or an agreement to pay the

liabilities in question. In fact, petitioner and Mr. Capehart

were married until Mr. Capehart’s death. Consequently, we

conclude that this positive factor does not apply.

f. Liabilities Solely Attributable to Nonrequesting
Spouse

We concluded earlier in this opinion that, because

petitioner and Mr. Capehart were joint investors and petitioner

participated in the Hoyt partnership investments, the erroneous

items giving rise to the deficiency are items of both petitioner

and Mr. Capehart. We also concluded that, for purposes of

section 6015(c) and (d), petitioner has failed to prove that more

of the erroneous items giving rise to the deficiencies would be

allocable to Mr. Capehart if they had filed separate returns for

each year at issue. Because petitioner has failed to prove that

the erroneous items giving rise to the deficiency are

attributable solely to Mr. Capehart, we conclude that this

positive factor does not apply.

2. Negative Factors

a. Attributable to the Requesting Spouse

Respondent determined that one-half of the erroneous items

giving rise to the deficiencies were allocable to petitioner for

purposes of section 6015(c) relief. We agree with that
 - 45 -

determination for the reasons stated earlier in this opinion.

The record adequately establishes that the Hoyt partnership

investments made by petitioner and Mr. Capehart were joint

investments and that petitioner actively participated in the

making of those investments. This factor weighs against granting

petitioner equitable relief under section 6015(f).

b. Knowledge or Reason To Know

For the reasons stated above in our analysis of the

corresponding positive factor, we conclude that petitioner had

reason to know of the items giving rise to the deficiencies in

this case and/or failed to satisfy her duty of inquiry regarding

the items. This factor weighs heavily against granting

petitioner equitable relief under section 6015(f). Rev. Proc.

2000-15, sec. 4.03(2)(b). (This factor is an extremely strong

factor weighing against relief.)

c. Significant Benefit

Petitioner argues that she did not significantly benefit

beyond normal support from the Hoyt partnership losses and

investment tax credit giving rise to the deficiencies.

Respondent contends, however, that the SGE losses enabled

petitioner and Mr. Capehart to increase their available cashflow

for the years at issue by over $34,174 in tax savings, which they

used to make their investments in several Hoyt partnerships,

including SGE. In Doyle v. Commissioner, T.C. Memo. 2003-96,
 - 46 -

affd. 94 Fed. Appx. 949 (3d Cir. 2004), we held that a requesting

spouse significantly benefited from the items giving rise to the

deficiency, which were tax shelter deductions, because she

received significant tax refunds as a result of the items.

Likewise, in this case, petitioner and Mr. Capehart received

substantial income tax refunds as a result of items giving rise

to the deficiencies. That petitioner and Mr. Capehart used the

refunds to invest in the Hoyt partnerships does not protect

petitioner from a conclusion that she and Mr. Capehart received a

significant benefit in the form of increased disposable cashflow.

We conclude that this factor applies and weighs against

petitioner’s claim for equitable relief under section 6015(f).

d. Lack of Economic Hardship

As we noted in our discussion of the positive counterpart of

this factor, petitioner did not introduce credible evidence to

enable us to ascertain her current salary and other income,

assets, debts, and reasonable living expenses, although she was

certainly in a position to do so. A taxpayer’s failure to call

witnesses and produce relevant documentary evidence within her

control supports an inference that such testimony and

documentation would not support the taxpayer’s position. Wichita

Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),

affd. 162 F.2d 513 (10th Cir. 1947). Because of the negative

inference that we draw from petitioner’s failure to produce
 - 47 -

evidence of her current financial condition, we conclude that

requiring petitioner to pay the liabilities allocated to her

under section 6015(c) would not result in economic hardship as

that term is defined under Rev. Proc. 2000-15. Consequently,

this factor applies and weighs against granting petitioner

equitable relief in our analysis.

e. Noncompliance With Federal Income Tax Laws in
Subsequent Years

Respondent did not determine that this factor applies and

weighs against granting petitioner equitable relief. Moreover,

respondent does not argue in his posttrial briefs that petitioner

did not make a good faith effort to comply with her Federal

income tax obligations in years subsequent to the ones at issue

here. Consequently, we conclude that this factor does not apply,

and we treat it as neutral in our analysis.

f. Requesting Spouse’s Legal Obligation

With respect to the positive counterpart of this factor, we

concluded that petitioner and Mr. Capehart were married during

all relevant times, that they were not divorced when Mr. Capehart

died, and that neither petitioner nor Mr. Capehart had assumed

sole responsibility to pay the liabilities at issue in this case.

These conclusions also dictate our treatment of this factor.

Because petitioner was not solely responsible for paying the

liabilities at issue in this case, this factor does not apply,

and we treat it as neutral in our analysis.
 - 48 -

3. Other Relevant Factors

Petitioner argues that in determining whether it is

inequitable to hold petitioner liable for the deficiency, we must

consider the complexity of the transactions and Mr. Hoyt’s

intentional deception of petitioner about the underlying

circumstances that gave rise to the deficiencies. Although we

may consider other factors in addition to those set forth in Rev.

Proc. 2000-15, supra, we have previously rejected taxpayers’

arguments and denied section 6015(f) relief in cases where

neither spouse had actual knowledge of the facts that made the

Hoyt partnership losses unallowable as deductions on their joint

returns. Bartak v. Commissioner, T.C. Memo. 2004-83; Ellison v.

Commissioner, T.C. Memo. 2004-57; Doyel v. Commissioner, T.C.

Memo. 2004-35. The purpose of section 6015 is to protect one

spouse from the overreaching or dishonesty of the other spouse.

Bartak v. Commissioner, supra (citing Purcell v. Commissioner,

826 F.2d 470 (6th Cir. 1987), affg. 86 T.C. 228 (1986)). Where

the deficiency is attributable to the mistaken belief of both the

requesting spouse and the other spouse as to the legitimacy of

tax shelter deductions, we have held that it is not inequitable

to hold both spouses jointly and severally liable. Bokum v.

Commissioner, 94 T.C. 126, 146 (1990), affd. 992 F.2d 1132 (11th

Cir. 1993); McCoy v. Commissioner, 57 T.C. 732, 735 (1972);
 - 49 -

Bartak v. Commissioner, supra; Ellison v. Commissioner, supra;

Doyel v. Commissioner, supra.

4. Conclusion

After examining the entire record before us, we conclude

that petitioner has failed to carry her burden of proving that

respondent abused his discretion in denying petitioner relief

from joint and several liability under section 6015(f) for each

of the years at issue.16

To reflect the foregoing,

An appropriate decision

will be entered.

16
We have carefully considered all remaining arguments made
by the parties for results contrary to those expressed herein
and, to the extent not discussed above, find those arguments to
be irrelevant, moot, or without merit.