Barnes v. Comm'r

T.C. Memo. 2004-266

UNITED STATES TAX COURT

DONALD J. BARNES AND BEVERLY A. EDWARDS,
f.k.a. BEVERLY A. BARNES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6182-96. Filed November 22, 2004.

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

for petitioner Beverly A. Edwards.

Thomas M. Rohall, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge: This case was assigned to Special Trial

Judge Stanley J. Goldberg pursuant to the provisions of section

7443A(b)(4), in effect at the time the petition was filed in this
 - 2 -

case, and Rules 180, 181, and 183.1 The Court agrees with and

adopts the opinion of the Special Trial Judge, as set forth

below.

OPINION OF THE SPECIAL TRIAL JUDGE

GOLDBERG, Special Trial Judge: Respondent determined the

following deficiencies in petitioners’ Federal income taxes and

additions to tax for the respective taxable years:

Additions to Tax
Sec. Sec. Sec. Sec.
Year Deficiency 6653(a)1 6653(a)(1)2 6653(a)(2)2 6659

1978 $3,834 $192 n/a n/a $1,150
1979 4,420 221 n/a n/a 1,326
1980 6,024 301 n/a n/a 1,807
3
1981 8,143 n/a $407 2,443
1
As in effect for petitioners’ taxable years 1978, 1979, and
1980.
2
As in effect for petitioners’ taxable year 1981.
3
50 percent of the interest due on the deficiency of $8,143.

Respondent further determined that the entire amount of the

deficiency for each year is subject to the increased rate of

interest charged on “substantial underpayments attributable to

tax motivated transactions” under section 6621(c)2.

1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect during the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
2
References to sec. 6621(c) are to sec. 6621(c) as in effect
with respect to interest accruing after Dec. 31, 1986. See Tax
Reform Act of 1986 (TRA 1986), Pub. L. 99-514, sec. 1511(d), 100
Stat. 2746. For interest accruing before that date, but after
Dec. 31, 1984, a nearly identical provision was codified at sec.
(continued...)
 - 3 -

In their petition, petitioners dispute all of the

determinations made by respondent in the notice of deficiency,

and petitioners further argue that the statute of limitations

bars the assessment and collection of the taxes for each of the

years. Petitioner Donald J. Barnes (Mr. Barnes) and respondent

have settled all of the issues in this case as they pertain to

Mr. Barnes and have filed a stipulation of settled issues.

Petitioner Beverly A. Edwards (petitioner) has conceded that (1)

the adjustments in the notice of deficiency underlying the

amounts of the deficiencies are correct; (2) the statute of

limitations does not bar the assessment and collection of the

taxes in this case; and (3) petitioner is not entitled to a

deduction for a theft loss as asserted in the Second Amendment to

Petition. In the first Amendment to Petition, petitioner alleges

that she is entitled to relief from joint liability pursuant to

section 6015(b), (c), or (f), relief which respondent denied on

or about February 27, 2003.3 Thus, the remaining issues for

2
(...continued)
6621(d). See TRA 1986 sec. 1511(c)(1)(A), 100 Stat. 2744;
Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 144(a), (c),
98 Stat. 682, 684. Sec. 6621(c) was repealed in 1989 with
respect to returns due after Dec. 31, 1989. Omnibus Budget
Reconciliation Act of 1989 (OBRA 1989), Pub. L. 101-239, sec.
7721(b), (d), 103 Stat. 2399, 2400.
3
Respondent treated petitioner’s first Amendment to Petition
as petitioner’s request for relief under sec. 6015, and
respondent’s Appeals Office subsequently denied petitioner
relief.
 - 4 -

decision in this case are, with respect to petitioner alone: (1)

Whether petitioner is liable for the section 6653 addition to tax

for negligence in each year in issue; (2) whether petitioner is

liable for the section 6659 addition to tax for valuation

overstatements in each year; (3) whether petitioner is liable for

the increased rate of interest under section 6621(c) that is

applied with respect to tax motivated transactions; and (4)

whether petitioner is entitled to relief from joint and several

liability pursuant to section 6015.

FINDINGS OF FACT

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

The first, second, third, and fourth stipulation of facts and the

attached exhibits are incorporated herein by this reference.

Petitioner resided in Placerville, California, on the date the

petition was filed in this case.

I. Walter J. Hoyt, III and River City Ranches #1

The parties stipulated certain facts for purposes of this

case that provide a background for the partnership items on

petitioner’s return, facts that concern Walter J. Hoyt, III (Mr.

Hoyt) and the partnership River City Ranches, also known as River

City Ranches #1 (RCR #1). The following is a summary of a

portion of the stipulated facts that are supported by the record:

Mr. Hoyt’s father was a prominent breeder of Shorthorn

cattle, one of the three major breeds of cattle in the United
 - 5 -

States. In order to expand his business and attract investors,

Mr. Hoyt’s father had started organizing and promoting cattle

breeding partnerships by the late 1960s. Before and after his

father’s death in early 1972, Mr. Hoyt and other members of the

Hoyt family were extensively involved in organizing and operating

numerous cattle breeding partnerships. From about 1971 through

1998, Mr. Hoyt organized, promoted to thousands of investors, and

operated as a general partner more than 100 cattle breeding

partnerships. Mr. Hoyt also organized and operated sheep

breeding partnerships in essentially the same fashion as the

cattle breeding partnerships (collectively the “investor

partnerships”). Each of the investor partnerships was marketed

and promoted in the same manner.

Beginning in 1983, and until removed by this Court due to a

criminal conviction, Mr. Hoyt was the tax matters partner of each

of the investor partnerships that are subject to the provisions

of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),

Pub. L. 97-248, 96 Stat. 324. As the general partner managing

each partnership, Mr. Hoyt was responsible for and directed the

preparation of the tax returns of each partnership, and he

typically signed and filed each return. Mr. Hoyt also operated

tax return preparation companies, variously called “Tax Office of

W.J. Hoyt Sons”, “Agri-Tax”, and “Laguna Tax Service”, that

prepared most of the investors’ individual tax returns during the
 - 6 -

years of their investments. Petitioner’s 1981 return, on which

the deduction and credits appeared that underlie the deficiency

in each year in issue in this case, was prepared and signed by

Mr. Hoyt. From approximately 1980 through 1997, Mr. Hoyt was a

licensed enrolled agent, and as such he represented many of the

investor-partners before the Internal Revenue Service (IRS)

before he was disbarred as enrolled agent in 1998.

Beginning in February 1993, respondent generally froze and

stopped issuing income tax refunds to partners in the investor

partnerships. The IRS issued prefiling notices to the investor-

partners advising them that, starting with the 1992 taxable year,

the IRS would disallow the tax benefits that the partners claimed

on their individual returns from the investor partnerships, and

the IRS would not issue any tax refunds these partners might

claim attributable to such partnership tax benefits.

Also beginning in February 1993, an increasing number of

investor-partners were becoming disgruntled with Mr. Hoyt and the

Hoyt organization. Many partners stopped making their

partnership payments and withdrew from their partnerships, due in

part to respondent’s tax enforcement. Mr. Hoyt urged the

partners to support and remain loyal to the organization in

challenging the IRS’s actions. The Hoyt organization warned that

partners who stopped making their partnership payments and

withdrew from their partnerships would be reported to the IRS as
 - 7 -

having substantial debt relief income, and that they would have

to deal with the IRS on their own.

On June 5, 1997, a bankruptcy court entered an order for

relief, in effect finding that W.J. Hoyt Sons Management Company

and W.J. Hoyt Sons MLP were both bankrupt. In these bankruptcy

cases, the United States Trustee moved in 1997 to have the

bankruptcy court substantively consolidate all assets and

liabilities of almost all Hoyt organization entities and the many

Hoyt investor partnerships. This consolidation included all the

investor partnerships. On November 13, 1998, the bankruptcy

court entered its Judgment for Substantive Consolidation,

consolidating all the above-mentioned entities for bankruptcy

purposes. The trustee then sold off what livestock the Hoyt

organization owned or managed on behalf of the investor

partnerships.

Mr. Hoyt and others were indicted for certain Federal

crimes, and a trial was conducted in the U.S. District Court for

the District of Oregon. The District Court described Mr. Hoyt’s

actions as “the most egregious white collar crime committed in

the history of the State of Oregon.” Mr. Hoyt was found guilty

on all counts, and as part of his sentence in the criminal case

he was required to pay restitution in the amount of $102 million.

This amount represented the total amount that the United States

determined, using Hoyt organization records, was paid to the Hoyt
 - 8 -

organization from 1982 through 1998 by investor-partners in

various investor partnerships, including the partnership RCR #1.

RCR #1, which had been organized and promoted by Mr. Hoyt as

a sheep breeding partnership, had begun operating in 1981. Mr.

Hoyt was responsible for and directed the preparation of RCR #1's

partnership income tax return for 1981, although he may not have

prepared the return personally.

Barnes Ranches was a sheep breeding business owned and

operated by David Barnes and April Barnes. David Barnes had

experience in breeding several breeds of purebred sheep,

including Hampshires, Rambouillets, and Suffolks. Randy Barnes,

who had acquired a degree in agricultural business management in

1985, began working for Barnes Ranches in that year to handle the

sheep breeding and feeding programs. By the late 1980's, David

Barnes, along with Randy Barnes, had acquired very good

reputations in purebred sheep breeding circles and were generally

considered to be among the country’s top breeders of Rambouillet

and Suffolks. During the 1980s, Barnes Ranches typically would

enter annually from 20 to 25 of their best yearling sheep in

various national purebred sheep shows around the country, and

their sheep often won awards at these shows.

Mr. Hoyt and David Barnes created documents that purported

to represent transactions in which RCR #1 purchased sheep from

Barnes Ranches. These documents included a “livestock bill of
 - 9 -

sale”, a “full recourse promissory note”, a “certificate of

assumption of primary liability”, a “sharecrop operating

agreement”, and a “security agreement--registered sheep”

(collectively the “sheep sale agreements”). The sheep sale

agreements purported to document the purchase of registered

purebred Rambouillet and Suffolk breeding ewes from Barnes

Ranches. While Mr. Hoyt and David Barnes were the principal

individuals involved with the sheep sale agreements, Mr. Hoyt and

the Barnes family were not independent parties acting at arm’s

length insofar as RCR #1's sheep breeding activities were

concerned. Mr. Hoyt signed “assumption agreements” on behalf of

individual partners with respect to RCR #1's promissory notes.

There are no bills of sale, certificates of assumption,

partnership agreements, or promissory notes that were signed by

partners other than Mr. Hoyt.

Under the sharecrop agreements, Barnes Ranches purportedly

obligated itself to undertake all management with respect to the

sheep partnerships’ breeding of sheep, payment of expenses, and

provision of stud ram services. In exchange, Barnes Ranches was

to receive all lambs produced and culls. The terms of the

sharecrop agreements required Barnes Ranches to maintain adequate

records allowing it to identify at all times RCR #1's breeding

sheep; to manage RCR #1's breeding sheep (which Barnes Ranches

purportedly did in a commingled flock with the Barnes’ own
 - 10 -

sheep); to increase the number of RCR #1’s breeding sheep by a

net 5 percent each year; and to replace any ewe that could no

longer serve as a breeding ewe with another ewe of a specified

quality. RCR #1 received a livestock bill of sale from Barnes

Ranches identifying the breeding sheep allegedly purchased by the

partnership. According to the documents, RCR #1 agreed to pay

$455,100 for a total of 401 sheep.

II. Petitioner, Mr. Barnes, and Their Investment

Petitioner began taking college courses in 1963, after

graduating from high school, and continued doing so until she

received her undergraduate degree in psychology in 1984. Her

education was primarily in the sciences and humanities, but it

included accounting courses that she attended around 1964, as

well as other business and legal courses. From approximately

1966 through 1970, petitioner worked as a secretary for the

California Department of Rehabilitation. In 1970 and 1971,

petitioner was employed in the Pentagon. After several years

outside the workforce, petitioner worked as a secretary for the

California State University, Sacramento, from approximately 1975

through 1986. In 1986, petitioner began working as a secretary

for the California State Department of Corrections. In 1990, she

was promoted to the position of budget analyst, where she

remained until she retired from the State of California in 2000.
 - 11 -

In 1966, petitioner married Mr. Barnes, who is the younger

brother of David Barnes, when both petitioner and Mr. Barnes were

approximately 21 years old. Mr. Barnes then received an

undergraduate degree in personnel management from Sacramento

State College in 1969. In 1981, Mr. Barnes was employed by the

State of California as a personnel analyst. During the years of

their marriage, petitioner and Mr. Barnes always discussed major

decisions, such as purchasing a house, car, and other large

expenditures. Prior to their separation in 1982, Mr. Barnes and

petitioner maintained a joint checking account. They both

deposited their paychecks into this account, and petitioner

generally was responsible for paying the household bills from it.

Petitioner and Mr. Barnes filed joint Federal income tax returns

from 1966 through at least 1984. In the years 1978, 1979, 1980,

and 1981, they reported total combined income of $30,610,

$34,126, $42,032, and $45,078, respectively.4 Petitioner’s

separate wage income during each of these years was $11,387,

$12,713, $15,906, and $16,708, respectively. The 1978, 1979, and

1980 joint returns were prepared by independent accountants or

tax return preparation services unaffiliated with Mr. Hoyt.

Starting with the 1981 return and continuing through at least

4
The total income of $45,078 for 1981 is the income reported
by petitioner and Mr. Barnes prior to subtracting the partnership
loss of $29,520.
 - 12 -

1995, the joint returns and the separate returns filed by

petitioner were prepared by Mr. Hoyt or one of his tax services.

In 1981, petitioner and Mr. Barnes met with Mr. Hoyt

concerning a possible investment in a Hoyt investor partnership.

Mr. Barnes had known Mr. Hoyt for many years prior to the time

that petitioner and Mr. Barnes made their investment in 1981, and

Mr. Barnes knew that Mr. Hoyt had been involved in cattle

ranching. Prior to her meeting with Mr. Hoyt, petitioner

believed that David Barnes was interested in raising sheep and

that he was interested in expanding what essentially was his

hobby into a commercial sheep ranching operation. Petitioner

believed that David Barnes was working with Mr. Hoyt in

developing a business related to sheep ranching, and petitioner

knew that David Barnes wanted petitioner and Mr. Barnes to speak

with Mr. Hoyt about this business. As a result of the 1981

meeting, petitioner and Mr. Barnes made the decision to invest in

one of the sheep partnerships organized and promoted by Mr. Hoyt,

namely RCR #1. Petitioner and Mr. Barnes did not invest any cash

at the time they initially decided to make the investment.

Instead, the invested funds were obtained using the tax refunds

that Mr. Hoyt helped secure by preparing tax forms for petitioner

and Mr. Barnes. Petitioner and Mr. Barnes agreed that Mr. Hoyt

would retain 75 percent of the tax refunds that they were to

receive, and that petitioner and Mr. Barnes would receive the
 - 13 -

remaining 25 percent. Prior to making her investment, petitioner

did not independently investigate RCR #1--she did not review or

physically visit its business operations, and she did not seek

outside advice concerning it. The only sheep connected with

David Barnes that she saw prior to her investment were

approximately 10 sheep that were located on David Barnes’s

property, sheep that petitioner believed were being raised by

David Barnes and his daughter as a “4-H” or “Future Farmers”

project.

For taxable year 1981, RCR #1 issued a Schedule K-1,

Partner’s Share of Income, Credits, Deductions, Etc., in

connection with petitioner’s and Mr. Barnes’s investment in that

partnership. The schedule, which was addressed solely to Mr.

Barnes, reflected capital contributions during the year of

$30,020; partner’s share of nonrecourse liabilities of $119,943;

a flowthrough ordinary loss of $29,520; and basis of $151,600 in

property eligible for the investment tax credit (ITC).

At the time of the meeting with Mr. Hoyt in 1981, petitioner

and Mr. Barnes were having marital difficulties. In 1982,

petitioner and Mr. Barnes separated and began living apart, and

in 1986 they were divorced. At the time of the separation, Mr.

Barnes remained in the marital home with the couple’s daughter,

and petitioner moved into an apartment.
 - 14 -

Around the time of petitioner’s divorce in 1986, she was

informed that her partnership interest had been transferred from

RCR #1 to a similar but separate partnership, River City Ranches

#4 (RCR #4). Around this same time, petitioner personally began

making substantial periodic cash payments to RCR #4; these

payments were in addition to the indirect payments that

petitioner was making to RCR #4 in the form of the tax refund

checks that were being negotiated on her behalf. Petitioner

continued investing in RCR #4 through at least 1995, and she

continued claiming losses with respect to that investment on her

income tax returns through that year.

By letter dated June 9, 1995, petitioner was notified by the

Portland, Oregon, office of the Federal Bureau of Investigation

(FBI) that the FBI and United States Postal Inspection Service

were:

conducting an investigation into allegations that W.J.
Hoyt & Sons and its affiliated entities, and certain
associated individuals, engaged in conduct and/or
practices that may be violations of federal criminal
fraud statutes.

Attached to this letter was a questionnaire pertaining to

petitioner’s involvement in “one or more of the W.J. Hoyt & Sons

investment programs.” Petitioner completed portions of this

questionnaire. In answer to the question “How did you first hear

of Hoyt & Sons or any of its related entities”, petitioner

responded “Relatives were involved in livestock business and were
 - 15 -

personal friends of Hoyt family.” Petitioner stated that her

first contact with Hoyt & Sons was through a sales presentation

that was attended by herself, Mr. Barnes, and Mr. Hoyt.

Petitioner stated that she and Mr. Barnes were told at this

meeting that “We would be investing in sheep/livestock; buying,

raising, selling; and investing in ranch properties and

equipment, feed and grain.” Petitioner stated that she and Mr.

Barnes invested $20,000 in the partnership RCR #4 in 1980, and

that the money was provided in the form of a cashier’s check from

personal savings and/or from “income tax recapture”.5 Petitioner

further stated that she made the investment because:

It sounded like a reasonable investment opportunity;
one that we could follow and participate in locally.
Initially as limited partners, it was considered a
passive partnership.

Petitioner stated that she “started out as a limited partner and

remained so for 7 or 8 years”, and as of 1995 she was “still an

active partner”. Finally, petitioner stated in the

questionnaire:

It really disgusts me that a number of “partnership
dropouts” are engaging in such subversive activities to
destroy the Hoyt partnerships. These people apparently
did not understand the partnerships or perhaps had
expectations that exceeded what is real. The tax
matters have been a horror, mostly because [the] IRS
keeps changing the tax laws and thus attempts to

5
The record establishes that the meeting was in 1981 rather
than 1980; that petitioner and Mr. Barnes initially invested in
RCR #1; and that they did not invest any cash in the partnership
at the time of the initial investment.
 - 16 -

undermine people simply trying to conduct a legitimate
and productive business.

In July 2001, petitioner testified in a proceeding in this

Court concerning her involvement in the Hoyt partnerships.6 In

this prior testimony, petitioner stated that when she and Mr.

Barnes made the investment, she was “drawn into” it because of

the involvement of the Barnes family, but that she felt that she

would be supporting the family operation and that it was her

“understanding that it was an investment in ranching * * * for

the long term”, one that would involve “some tax advantages”.

Petitioner further stated that she and Mr. Barnes “signed the

papers to enter the investment”. Finally, petitioner testified

that she believed at the time of the initial investment with Mr.

Barnes that she was investing in “an overall ranching business”.

Petitioner is employed by a winery named Madrona Vineyards,

where she is receiving monthly wages of $757. In addition,

petitioner is receiving pension income of approximately $2,186

per month. Petitioner lives with Lawrence Edwards (Mr. Edwards),

whom she married in 1997, in a residence that they purchased in

1991 for $225,000. Petitioner’s only long-term debt obligations

are the monthly mortgage payment on the residence, her portion of

which is $360, and a monthly payment on a 2001 Jeep Cherokee of

6
The opinion of the Court in that proceeding, which involved
numerous consolidated cases, is River City Ranches #1 Ltd. v.
Commissioner, T.C. Memo. 2003-150.
 - 17 -

$295. Petitioner and Mr. Edwards do not financially support any

dependents. The combined wage and salary income of petitioner

and Mr. Edwards, who is employed as an environmental consultant

and community college teacher, was approximately $70,000 in both

2001 and 2002. Petitioner has individual retirement accounts

with balances of $3,895, $15,745, and $1,595; a savings account

with a balance of $3,335; and a checking account with a balance

of $1,635. Finally, petitioner owes approximately $8,900 on

credit card accounts, and she estimates her total monthly living

expenses to be $2,748.

III. Petitioner’s 1981 Tax Return and the ITC Carrybacks

Petitioner filed a joint Federal income tax return with Mr.

Barnes for the taxable year 1981. On the return, petitioner

claimed a deduction for an ordinary loss from RCR #1 of $29,520.

This deduction offset the combined wage income of $45,078,

resulting in an adjusted gross income of $15,558. In addition to

the deduction, petitioner reported a qualified investment of

$151,600 on a Form 3468, Computation of Investment Credit,

resulting in a tentative ITC of $15,160. Petitioner applied $287

of this credit against the 1981 tax liability, reducing the tax

liability to zero. The 1981 return reflected an overpayment

resulting in a refund of $8,257.

In addition to the 1981 return, petitioner filed a Form

1045, Application for Tentative Refund, on which she requested
 - 18 -

refunds for 1978, 1979, and 1980 based upon a carryback of the

unused 1981 ITC. In each respective year, a credit in the amount

of $4,053, $4,610, and $6,209 was applied, resulting in a tax

liability of zero, $223, and $949, and refunds of $3,834, $4,420,

and $6,025.

The combined wage income reported on the joint returns filed

by petitioner for taxable years 1978, 1979, 1980, and 1981

totaled $151,564. After filing the 1981 return and the Form

1045, petitioner’s claimed total tax liability for these four

years was $1,172. The refunds reflected on the return and the

Form 1045 totaled $22,536.

Petitioner signed both the 1981 joint return and the Form

1045. Petitioner reviewed the 1981 return before signing it.

Petitioner, however, did not ask Mr. Barnes or Mr. Hoyt, or any

independent tax adviser, how the $29,520 loss was calculated.

Nor did petitioner make any inquiries concerning how such a loss

could be generated when she and Mr. Barnes had not invested any

cash in the partnership as of that date.

After auditing RCR #1, respondent disallowed the partnership

loss claimed by RCR #1 in 1981. In the notice of deficiency

underlying this case, respondent determined the deficiencies and

additions to tax listed in detail above, based upon the

disallowance of RCR #1's 1981 partnership loss and the related

ITC carryback from 1981 to 1978, 1979, and 1980.
 - 19 -

OPINION

I. Evidentiary Issues

As a preliminary matter, we address evidentiary issues

raised by the parties in the stipulations of facts. First, both

parties reserved objections in the stipulations on the grounds of

relevancy: Petitioner reserved an objection to Exhibit 17-R, and

respondent reserved objections to Exhibits 400-P through 476-P,

Exhibits 478-P through 490-P, and paragraphs 10, 11, and 12 of

the Fourth Stipulation of Facts. Federal Rule of Evidence 4027

provides the general rule that all relevant evidence is

admissible, while evidence which is not relevant is not

admissible. Federal Rule of Evidence 401 provides that

“‘Relevant evidence’ means evidence having any tendency to make

the existence of any fact that is of consequence to the

determination of the action more probable or less probable than

it would be without the evidence.” While certain of the exhibits

and stipulated facts are given little to no weight in our finding

of ultimate facts in this case, we hold that the exhibits and

stipulated facts meet the threshold definition of “relevant

evidence” under Federal Rule of Evidence 401, and that the

exhibits and stipulated facts therefore are admissible under

Federal Rule of Evidence 402.

7
The Federal Rules of Evidence are applicable in this Court
pursuant to section 7453 and Rule 143(a).
 - 20 -

Next, respondent reserved hearsay objections to Exhibits

400-P, 401-P, 405-P, and 478-P. We need not address these

objections, however, because they were withdrawn by respondent in

his opening brief.

Finally, respondent reserved an objection to Exhibit 402-P

on the grounds that the exhibit is incomplete. Again, while the

incomplete nature of the document affects the weight that it is

accorded in our findings, we overrule respondent’s objection and

hold that the exhibit is admissible. See, e.g., Goichman v.

Commissioner, T.C. Memo. 1987-489 n.12.

II. Negligence

With respect to each of the years in issue, section 6653

imposes one or more additions to tax on certain underpayments

attributable to negligence or intentional disregard of rules and

regulations. With respect to petitioner’s taxable years 1978,

1979, and 1980, the addition to tax under section 6653(a) is

equal to 5 percent of the entire amount of an underpayment if any

part of the underpayment is due to negligence or intentional

disregard of rules or regulations. With respect to petitioner’s

taxable year 1981, the addition to tax under section 6653(a)(1)

is the same as that imposed under the former section 6653(a).

However, with respect to that year, section 6653(a)(2) provides

for a further addition to tax equal to 50 percent of the interest

due on only that portion of the underpayment that is attributable
 - 21 -

to negligence or intentional disregard of rules or regulations.

With respect to each of the years in issue, an “underpayment” is

defined, as applicable in this case, to be equal to the amount of

any deficiency. Sec. 6653(c)(1).

Negligence is defined as the “lack of due care or failure to

do what a reasonable and ordinarily prudent person would do under

the circumstances.” Neely v. Commissioner, 85 T.C. 934, 947

(1985) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th

Cir. 1967), affg. in part and remanding in part on another ground

43 T.C. 168 (1964)); see Allen v. Commissioner, 925 F.2d 348, 353

(9th Cir. 1991), affg. 92 T.C. 1 (1989). Negligence is

determined by testing a taxpayer’s conduct against that of a

reasonable, prudent person. Zmuda v. Commissioner, 731 F.2d

1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982). Courts

generally look both to the underlying investment and to the

taxpayer’s position taken on the return in evaluating whether a

taxpayer was negligent. Sacks v. Commissioner, 82 F.3d 918, 920

(9th Cir. 1996), affg. T.C. Memo. 1994-217.

The Commissioner’s decision to impose the negligence

addition to tax is presumptively correct. Collins v.

Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988), affg. Dister

v. Commissioner, T.C. Memo. 1987-217; Hansen v. Commissioner, 820

F.2d 1464, 1469 (9th Cir. 1987). A taxpayer has the burden of

proving that respondent’s determination is erroneous and that she
 - 22 -

did what a reasonably prudent person would have done under the

circumstances. See Rule 142(a); Hansen v. Commissioner, supra;

Hall v. Commissioner, 729 F.2d 632, 635 (9th Cir. 1984), affg.

T.C. Memo. 1982-337; Bixby v. Commissioner, 58 T.C. 757, 791

(1972).8

A central theme in petitioner’s arguments concerning several

issues in this case, including whether she was negligent, is her

assertion that she was not an investor in RCR #1. We therefore

address this factual issue before addressing petitioner’s

liability for the additions to tax for negligence.

There is little documentary evidence in the record

concerning the initial investment in RCR #1 by Mr. Barnes and

petitioner. Most notably, none of the original partnership

agreements were received into evidence. Thus, there is no

documentary evidence corroborating petitioner’s assertion that

she did not sign the original documents. The record does include

a Schedule K-1 that was issued by RCR #1 to Mr. Barnes in 1981.

Petitioner argues that this document shows that she was not an

investor in the partnership. Based on the record as a whole,

however, we decline to give the Schedule K-1 such significant

8
Sec. 7491, as currently in effect, shifts the burden of
production and/or proof to the Commissioner in certain
situations. However, this section is not applicable in this case
because the underlying examination did not commence after July
22, 1998. Internal Revenue Service Restructuring and Reform Act
of 1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727.
 - 23 -

weight: The omission of petitioner’s name could have been due to

any of a number of reasons, such as an oversight by the person

who prepared the Schedule K-1. In short, this document standing

alone does not corroborate petitioner’s assertion that she was

not an investor in RCR #1.

Aside from the Schedule K-1, the primary evidence in the

record that petitioner was not an investor in RCR #1 is

petitioner’s own testimony. In her testimony, petitioner

admitted that she was at the investment sales meeting with Mr.

Barnes and Mr. Hoyt. Petitioner, however, stated that she was

“sort of there in body but not really in spirit or mind”, because

she was preoccupied with the state of her marriage and because

she was worried about her daughter. Petitioner nevertheless

testified in great detail concerning certain aspects of this

meeting. For example, petitioner testified that she recalled the

posture of herself and Mr. Barnes in their chairs, and she stated

that Mr. Hoyt “wasn’t even making eye contact with me that much”.

She also stated that she recalled Mr. Hoyt’s mentioning that he

was an enrolled agent, at which point petitioner, according to

her testimony, asked him what an enrolled agent was. Petitioner

further stated that she did not realize, at the time the meeting

took place, that Mr. Hoyt was attempting to convince petitioner

and Mr. Barnes to make an investment in the partnership. On the

other hand, petitioner testified that she does recall Mr. Hoyt’s
 - 24 -

mentioning that there were tax benefits of making such an

investment. Petitioner testified that she inquired into the

legality of these tax benefits.

We do not accept petitioner’s testimony as reliable evidence

concerning the meeting with Mr. Hoyt, a meeting that occurred

approximately 22 years prior to trial. The testimony is self-

serving and uncorroborated, and we therefore are not required to

accept it as credible evidence. See Niedringhaus v.

Commissioner, 99 T.C. 202, 212, 219-220 (1992); Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986). Furthermore, we find

certain details provided by petitioner to be contradictory. For

example, while petitioner testified that she did not want to be

at the meeting and that she was completely uninterested in the

subject matter being discussed, she testified that she recalls

that she asked specific questions concerning Mr. Hoyt’s

credentials and the legality of the investment. We also do not

accept that petitioner, with her level of education and

background, would have been present at the sales meeting without

realizing it was in fact an attempt to sell petitioner and Mr.

Barnes an investment.

Petitioner further testified that she was unaware that Mr.

Barnes signed any investment papers prior to the time they filed

their 1981 joint return: It was only when she signed the return

that she learned Mr. Barnes had decided to invest in the
 - 25 -

partnership. Petitioner stated that she did not consider herself

an investor in the partnership until the time of her divorce.

Around that time, petitioner had approached April Barnes to

inquire into the status of the investment. Petitioner asserts

that April Barnes informed her that she “could not” leave the

partnership, and that petitioner was subsequently forced into

accepting her status as an investor because of certain documents

which she was told she had signed, but with respect to which she

had no memory. Petitioner testified that she “had to” continue

claiming Hoyt-related losses from 1981 through 1995.

We do not accept these assertions by petitioner. Firstly,

petitioner’s version of events presented in her testimony and on

brief are belied by the version of events that she provided to

the FBI in 1995. In responding to the FBI questionnaire,

petitioner very clearly held herself out to be a willing partner

in the Hoyt partnership. She stated that she had been a partner

since 1980, and she defended the validity of her investment and

the Hoyt organization. Petitioner never stated that her status

as a partner started only after her divorce. Petitioner also

derided certain investors who had previously decided to abandon

their interests in the partnerships as engaging in “subversive

activities”.
 - 26 -

Secondly, the version of events presented by petitioner in

her prior testimony, discussed in detail above,9 also clearly

indicates that petitioner considered herself an investor in 1981.

While she stated that her decision to invest was influenced by

family ties, she also stated that she understood that she was

making a long-term investment and that she signed documents

relating to that investment.

Finally, certain of petitioner’s assertions at trial and on

brief are also contradicted by the facts alleged in the first

Amendment to Petition in which petitioner set forth her claim for

section 6015 relief. In this pleading, while petitioner did

allege that she “did not have any real choice in the investment,

but was drawn into the investment by Don Barnes to support the

family business”, she also alleged that “At the time of the

investment, [she] understood that the investment was a long term

retirement investment in the family ranching enterprise, as well

as some tax advantages associated with the investment”. This

latter allegation contradicts petitioner’s assertion at trial and

on brief that she did not realize that an investment had been

made until the tax return was filed. Even more contradictory is

petitioner’s allegation in the pleading that, when she and Mr.

Barnes “originally signed the partnership documents, they were

advised by Jay Hoyt that they were signing on as ‘Limited

9
See discussion infra note 10.
 - 27 -

Partners’”. Petitioner now denies signing any partnership

documents.10

Based on the record as a whole, we conclude that petitioner

was an investor in the partnership RCR #1, and that she invested

in the partnership in 1981.

Petitioner argues that she is not liable for the negligence

additions to tax because she had “reasonable cause for tax claims

on the subject returns” and that she made “reasonable inquiries

into ascertaining the nature of the claim and received assurances

of its accuracy.” In support of this argument, petitioner

asserts that she reasonably relied on Mr. Hoyt to accurately

prepare her returns.

Good faith reliance on professional advice concerning tax

laws may be a defense to the negligence penalties. United States

v. Boyle, 469 U.S. 241, 250-251 (1985). However, “Reliance on

professional advice, standing alone, is not an absolute defense

to negligence, but rather a factor to be considered”. Freytag v.

Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th

Cir. 1990), affd. 501 U.S. 868 (1991). In order to be considered

as such, the reliance must be reasonable. Id. To be objectively

10
Similar contradictory statements were made in the initial
petition signed by both petitioner and Mr. Barnes. In the
petition, petitioner alleges that she was a general partner in
RCR #1 (as well as another partnership, River City Ranches #2)
during 1981, and that she was personally liable on a note in the
amount of $116,780 related to her partnership investment.
 - 28 -

reasonable, the advice generally must be from competent and

independent parties unburdened with an inherent conflict of

interest, not from the promoters of the investment. Goldman v.

Commissioner, 39 F.3d 402, 408 (2d Cir. 1994), affg. T.C. Memo.

1993-480; LaVerne v. Commissioner, 94 T.C. 637, 652 (1990), affd.

without published opinion sub nom. Cowles v. Commissioner, 949

F.2d 401 (10th Cir. 1991), affd. without published opinion 956

F.2d 274 (9th Cir. 1992); Rybak v. Commissioner, 91 T.C. 524, 565

(1988); Edwards v. Commissioner, T.C. Memo. 2002-169.

It is clear in this case that the advice petitioner

received, if any, concerning the items resulting in the

deficiencies was not objectively reasonable. First, we note that

petitioner has not established that she received any advice at

all concerning the deduction and credits. Although petitioner

relied on Mr. Hoyt to prepare the return and the tentative refund

form, petitioner’s testimony and the other evidence in the record

does not suggest that she directly questioned Mr. Hoyt about the

nature of the tax claims. Petitioner testified only that she

asked Mr. Hoyt about the general legality of the investment and

tax benefits at the time of the sales meeting. When petitioner

signed the return and form, she did not question or seek advice

concerning the large deduction and credits appearing on them.

Nevertheless, assuming arguendo that petitioner did receive

advice from Mr. Hoyt, any such advice that she received is in no
 - 29 -

manner objectively reasonable. Mr. Hoyt was the primary creator

and promoter of the RCR #1 partnership, and Mr. Hoyt was

receiving petitioner’s tax refund checks from the Government,

cashing them, and retaining the bulk of the proceeds. For

petitioner to trust Mr. Hoyt for tax advice and/or to prepare her

returns under these circumstances was inherently unreasonable.

Finally, petitioner argues that she was defrauded by Mr.

Hoyt, and that any amount of investigation on her part would have

failed to undercover his criminal activities with respect to the

investor partnerships. This argument is mere speculation by

petitioner, however, because petitioner never investigated the

partnerships. While Mr. Hoyt may have misled petitioner

concerning the investment, petitioner nevertheless was negligent

in not investigating the promoter’s claims or otherwise inquiring

into the nature of the tax benefits that she claimed on her

return, benefits which on their face reduced petitioner’s tax

liability to nearly zero over a span of four years--all without

any prior cash investment by petitioner or Mr. Barnes.

Petitioner asserts that a prior case decided by this Court,

Bales v. Commissioner, T.C. Memo. 1989-568, is relevant in the

inquiry into whether petitioner was negligent. Bales involved

deficiencies asserted against various investors in several

different cattle partnerships marketed by Mr. Hoyt. This Court

found in favor of the investors on several issues, stating that
 - 30 -

“the transaction in issue should be respected for Federal income

tax purposes.” Petitioner’s reliance on Bales is misplaced. The

case was decided in 1989, years after petitioner invested in RCR

#1. Thus, petitioner cannot claim that she relied on the case in

evaluating the propriety of the deduction and credits that she

claimed on her return. Petitioner, however, also argues that,

because the Court was unable to uncover fraud or deception by Mr.

Hoyt in Bales, petitioner as an individual taxpayer was in no

position to evaluate the legitimacy of RCR #1 or the tax benefits

claimed with respect thereto. This argument employs the Bales

case as a red herring: The Bales case involved different

investors, different partnerships, different taxable years, and

different issues. Furthermore, adopting petitioner’s position

would imply that taxpayers should have been given carte blanche

to invest in partnerships promoted by Mr. Hoyt, merely because

Mr. Hoyt had previously engaged in activities which withstood one

type of challenge by the Commissioner, no matter how illegitimate

the partnerships had become or how unreasonable the taxpayers

were in making investments therein and claiming the tax benefits

that Mr. Hoyt promised would ensue.

In summary, petitioner invested in RCR #1, and petitioner

subsequently signed the tax return and tentative refund request

form that, in combination, claimed to reduce petitioner’s tax

liability over a 4-year period to $1,172, resulting in a combined
 - 31 -

refund of $22,536. Petitioner was not an uneducated person, yet

she took these actions without consulting an independent adviser

concerning the viability of the partnership as an investment

vehicle, or concerning the validity of the tax claims being made

with respect thereto. Instead, on both fronts petitioner relied

completely on Mr. Hoyt--the promoter of the partnership and the

same person who was retaining the bulk of petitioner’s tax

refunds, refunds obtained by Mr. Hoyt through the preparation of

petitioner’s tax returns. Petitioner never inquired into how the

large deduction and credits were calculated, and she never

questioned their legitimacy. We find that petitioner’s actions--

with respect to the investment and with respect to the items on

her tax return and tentative refund claim--reflect a lack of due

care and a failure to do what a reasonable or ordinarily prudent

person would do under the circumstances. We therefore hold that

petitioner was negligent within the meaning of section 6653 with

respect to the entire amount of the deficiency in each year in

issue.
 - 32 -

III. Valuation Overstatements

In general, section 6659(a)11 imposes an addition to tax on

any portion of an underpayment of income tax by an individual

which is “attributable to a valuation overstatement”. A

“valuation overstatement” exists “if the value of any property,

or the adjusted basis of any property, claimed on any return is

150 percent or more of the amount determined to be the correct

amount”. Sec. 6659(c)(1). The amount of the addition to tax

varies depending upon the size of the discrepancy in the

valuation. Sec. 6659(b). Respondent determined that the entire

amount of the deficiency in each year in issue is attributable to

a valuation that was more than 250 percent of the correct

valuation, resulting in an addition to tax of 30 percent in each

year. See id.

Petitioner’s only arguments concerning this issue were made

in the context of her objections to the application of the

section 6621 tax motivated interest, an issue that is discussed

below. First, petitioner argues that “Respondent concluded in

11
References to sec. 6659 are to sec. 6659 as in effect with
respect to returns that were filed after Dec. 31, 1981, and that
were due before Jan. 1, 1990. See Economic Recovery Tax Act of
1981, Pub. L. 97-34, sec. 722(a), 95 Stat. 341; OBRA 1989 sec.
7721, 103 Stat. 2395. We note that, where a valuation
overstatement on a return filed after Dec. 31, 1981, gives rise
to an underpayment for a year prior to 1981 by operation of a
carryback, then that underpayment is attributable to the
overstatement on the return filed in the later year, and sec.
6659 is applicable with respect to the resulting underpayment in
the earlier year. Nielsen v. Commissioner, 87 T.C. 779 (1986).
 - 33 -

the audit of RCR #1 for the tax years at issue that there was no

basis for asserting an overvaluation penalty.” As support for

this argument, petitioner cites a document taken from

respondent’s administrative file relating to petitioner’s request

for section 6015 relief. This document states that “Per

information from Joe Pierce, TEFRA Review Coordinator for the

Hoyt Project, the overvaluation penalty should not be proposed.”

The role of this document in the context of the ultimate issuance

of the notice of deficiency is unclear. However, petitioner’s

contention in her brief that this document shows that

respondent’s assertion of the addition to tax is “disingenuous”

is not persuasive. There is nothing in the record showing that

respondent’s assertion of the addition to tax in the notice of

deficiency was arbitrary or that it involved unconstitutional

conduct, and in the absence of such a showing this Court does not

go behind a notice of deficiency to ascertain respondent’s

motives in asserting a deficiency or addition to tax. Rountree

Cotton Co. v. Commissioner, 113 T.C. 422, 426 (1999), affd. 12

Fed. Appx. 641 (10th Cir. 2001); Greenberg’s Express, Inc. v.

Commissioner, 62 T.C. 324, 327-328 (1974).

Petitioner further argues that a tax underpayment is not

“attributable to” a taxpayer’s overvaluation of property where

“an alternative ground for the deficiency is sustained”, such as

where the relevant property was never placed in service. See,
 - 34 -

e.g., Gainer v. Commissioner, 893 F.2d 225 (9th Cir. 1990), affg.

T.C. Memo. 1988-416. Petitioner, however, has provided no

evidence that this is the situation here. With respect to

petitioner’s implication that the relevant property in this case

was never placed in service, we note that there is evidence in

the record indicating that Mr. Hoyt and others involved in the

partnerships in fact did sell “phantom” livestock to investors in

certain instances. However, there is also evidence in the

record--including evidence stipulated by the parties--that the

livestock purchased by some investors actually did exist, but

that it was greatly overvalued. Petitioner has presented no

evidence regarding any specific property at issue in this case,

let alone tending to show that such property was never placed in

service. Nor has petitioner shown that any portion of any of the

deficiencies in this case was otherwise not attributable to a

valuation overstatement. Because petitioner bears the burden of

proof in showing respondent’s determinations in the notice of

deficiency to be in error, see Rule 142(a),12 we sustain

respondent’s determination that the deficiencies were

attributable to valuation overstatements.

12
See supra note 8.
 - 35 -

IV. Tax Motivated Interest

Section 6621(c) provides an increased rate of interest for

“any substantial underpayment attributable to tax motivated

transactions”. A “substantial underpayment attributable to tax

motivated transactions” is defined under section 6621(c)(2) as

“any underpayment of taxes imposed by subtitle A for any taxable

year which is attributable to 1 or more tax motivated

transactions if the amount of the underpayment for such year so

attributable exceeds $1,000.” A “tax motivated transaction” is

defined under section 6621(c)(3)(A) to include “any valuation

overstatement (within the meaning of section 6659(c))” and “any

credit disallowed under section 46(c)(8)”. Sec. 6621(c)(3)(A)(i)

and (ii). In general, section 46(c)(8) limits a taxpayer’s basis

in certain depreciable property to the amount the taxpayer is “at

risk” with respect to such property, thereby limiting the amount

of investment tax credit available to the taxpayer. Sec. 46(a),

(c)(1), (c)(8)(A).

While respondent’s arguments concerning the applicability of

section 6621(c) center on whether respondent disallowed the

credits under section 46(c)(8), we need not reach those

arguments. Section 6621(c) also applies the increased rate of

interest to underpayments of tax that are attributable to

valuation overstatements, as that term is defined under section

6659(c). Sec. 6621(c)(3)(A)(i). Because we have sustained
 - 36 -

respondent’s determination that the entire amount of the

deficiency in each year is attributable to a valuation

overstatement under section 6659, we likewise sustain

respondent’s determination that the section 6621(c) increased

rate of interest is applicable with respect thereto.

V. Relief Under Section 6015

In general, spouses filing joint Federal income tax returns

are jointly and severally liable for all taxes due with respect

to such returns. Sec. 6013(d)(3). Under certain circumstances,

however, section 6015 provides relief from joint and several

liability. There are three separate avenues of relief under

section 6015--section 6015(b), section 6015(c), and section

6015(f). Petitioner alternatively argues that she is entitled to

relief under each of these provisions.

A. Section 6015(b)

Section 6015(b) provides relief from liability for taxes,

including interest, penalties, and other amounts, that is

attributable to certain understatements appearing on joint

returns. To qualify for relief under section 6015(b)(1), a

taxpayer must establish:

(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
 - 37 -

know, and had no reason to know, that there was such understatement;

(D) taking into account all 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 * * * .

These requirements are stated in the conjunctive: A taxpayer is

not entitled to relief if any one of the requirements is not

satisfied.

We first address the requirement found in section

6015(b)(1)(B); namely, the requirement that the understatement

with respect to which a taxpayer seeks relief must be

attributable to an erroneous item of the other individual filing

the joint return. If the understatement is attributable to an

erroneous item of both the taxpayer and the other individual

filing the return, the taxpayer is not entitled to relief under

section 6015(b). See, e.g., Bartak v. Commissioner, T.C. Memo.

2004-83; Ellison v. Commissioner, T.C. Memo. 2004-57; Doyel v.

Commissioner, T.C. Memo. 2004-35. For the reasons discussed

above in connection with the additions to tax for negligence, we

have concluded that both petitioner and Mr. Barnes were investors

in RCR #1. Consequently, the understatement in each year in

issue is attributable to erroneous items of both petitioner and
 - 38 -

Mr. Barnes, and petitioner therefore is not entitled to relief

under section 6015(b). Sec. 6015(b)(1)(B). Nevertheless, we

briefly consider whether petitioner meets the requirements of

section 6015(b)(1)(C) and (D).

For purposes of section 6015(b)(1)(C), the relief-seeking

spouse knows of an understatement of tax if he or she knows of

the transaction that gave rise to the understatement. Jonson v.

Commissioner, 118 T.C. 106, 115 (2002), affd. 353 F.3d 1181 (10th

Cir. 2003). In general, the relief-seeking spouse has reason to

know of an understatement if he or she has reason to know of the

transaction that gave rise to the understatement. Id. While

courts consistently apply this “reason to know” standard to

omission of income cases, certain Courts of Appeals, including

the Court of Appeals for the Ninth Circuit, to which appeal lies

in this case, have adopted what has been labeled a more lenient

approach to deduction cases. Price v. Commissioner, 887 F.2d

959, 963 (9th Cir. 1989), revg. an Oral Opinion of this Court;

Jonson v. Commissioner, supra at 115.

In Price v. Commissioner, supra at 965, the Court of Appeals

for the Ninth Circuit stated:

A 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. Factors to consider in
analyzing whether the alleged innocent spouse had
“reason to know” of the substantial understatement
include: (1) the spouse’s level of education; (2) the
 - 39 -

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 patters; and (4) the culpable spouse’s
evasiveness and deceit concerning the couple’s
finances. [Citations omitted.]

Under the Price approach, a spouse’s knowledge of the transaction

underlying the deduction is not irrelevant; the more a spouse

knows about a transaction, “the more likely it is that she will

know or have reason to know that the deduction arising from that

transaction may not be valid.” Price v. Commissioner, supra at

963 n.9.

In the present case, petitioner was acquiring a college

education during the years in issue. She was involved in her

family’s financial affairs, and she participated in the decision-

making process with respect to large expenditures. There is no

evidence of evasiveness or deceit by Mr. Barnes. In fact, in

this case petitioner was involved in the Hoyt investment, she

knew the investment was designed to generate substantial tax

savings, she knew that those savings were derived from positions

taken on the joint returns for the years in issue, and the

investment materials clearly and repeatedly indicated that the

tax benefits would almost assuredly be disputed by the IRS.

“Tax returns setting forth large deductions, such as tax

shelter losses offsetting income from other sources and

substantially reducing or eliminating the couple’s tax liability,
 - 40 -

generally put a taxpayer on notice that there may be an

understatement of tax liability.” Hayman v. Commissioner, 992

F.2d 1256, 1262 (2d Cir. 1993), affg. T.C. Memo. 1992-228. The

court in Price v. Commissioner, supra at 966, likewise noted that

“the size of the deduction * * * viz-a-viz the total income

reported on the return * * *, when considered in light of the

fact that” the taxpayer knew of the investment and its nature, is

enough to put the taxpayer on notice that an understatement

exists and to result in a duty of inquiry. If the duty of

inquiry arises but is not satisfied by the taxpayer, constructive

knowledge of the understatement may be imputed to the taxpayer.

Id. at 965. Because petitioner did not ask any questions about

the Hoyt investment deduction and credits, which were large in

relation to the income reported by petitioner and Mr. Barnes and

nearly eliminated their Federal tax liability, petitioner did not

satisfy her duty to inquire. Accordingly, we conclude that a

reasonable person, faced with petitioner’s circumstances and in

petitioner’s position, would have had reason to know of the

understatements.

Finally, we note that, for the same reasons discussed below

in connection with respondent’s denial of section 6015(f) relief,

we conclude that the requirement of section 6015(b)(1)(D) has not

been met because it would not be inequitable, taking into account
 - 41 -

all the facts and circumstances, to hold petitioner liable for

the deficiencies and additions to tax in this case.

B. Section 6015(c)

Section 6015(c) allows a taxpayer to elect that her

liability for any deficiency with respect to the joint return be

limited to the portion of such deficiency which is “properly

allocable” to her under section 6015(d). A taxpayer is not

entitled to relief under section 6015(c) with respect to any

portion of any deficiency if the Commissioner shows that the

taxpayer “had actual knowledge, at the time such individual

signed the return, of any item giving rise” to that portion of

the deficiency. 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; knowledge of the tax

consequences resulting from the factual circumstances is not

required. King v. Commissioner, 116 T.C. 198, 204 (2001).

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. In

this case, respondent denied petitioner relief pursuant to

section 6015(c) solely on the grounds that petitioner had actual

knowledge within the meaning of section 6015(c)(3)(C).

Respondent, however, conceded on brief that he has not shown
 - 42 -

petitioner had actual knowledge of the items giving rise to the

deficiencies in this case. Consequently, respondent concedes

that petitioner is entitled to section 6015(c) relief.

Section 6015(d) allocates a deficiency between a taxpayer

entitled to section 6015(c) relief and the other individual

filing the joint return. The general rule for the allocation of

the deficiency provides that:

The portion of any deficiency on a joint return
allocated to an individual shall be the amount which
bears the same ratio to such deficiency as the net
amount of items taken into account in computing the
deficiency and allocable to the individual under
paragraph (3) bears to the net amount of all items
taken into account in computing the deficiency.

Sec. 6015(d)(1). An item giving rise to a deficiency generally

is “allocated to individuals filing the return in the same manner

as it would have been allocated if the individuals had filed

separate returns for the taxable year.” Sec. 6015(d)(3)(A).

However, items giving rise to a deficiency that are otherwise

allocable to one individual must be allocated to the other

individual if she received a “tax benefit” from the items on the

joint return. Sec. 6015(d)(3)(B).

Respondent argues that the items giving rise to the

deficiencies in this case are allocable equally to petitioner and

Mr. Barnes. Petitioner argues that the items are allocable

solely to Mr. Barnes. Because we have found that petitioner and

Mr. Barnes were both investors in the partnership, as discussed
 - 43 -

above in connection with the negligence additions to tax, we

agree with respondent that the items are allocable equally to

petitioner and Mr. Barnes. The amounts of the deficiencies

allocable to petitioner and Mr. Barnes under section 6015(d)

shall be determined in the Rule 155 computations by the parties,

taking into account our findings and the “tax benefit” rule of

section 6015(c)(3)(B).

C. Section 6015(f)

Section 6015(f) allows the Secretary to relieve a taxpayer

from liability where, 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). Relief is

available to a taxpayer under section 6015(f) only to the extent

that it is not available under either section 6015(b) or (c).

Sec. 6015(f)(2). Because petitioner qualifies for relief under

section 6015(c) with respect to the portions of the deficiencies

allocable to Mr. Barnes under section 6015(d), we address

petitioner’s eligibility for section 6015(f) relief only with

respect to the portions of the deficiencies allocable to her.

We review the Commissioner’s denial of relief under section

6015(f) for an abuse of discretion. Butler v. Commissioner, 114

T.C. 276, 291-292 (2000). An abuse of discretion occurs where

the Commissioner acts arbitrarily, capriciously, or without sound

basis in fact. Jonson v. Commissioner, 118 T.C. 106, 125 (2002),
 - 44 -

affd. 353 F.3d 1181 (10th Cir. 2003). A taxpayer bears the

burden of proving that the Commissioner abused his discretion.

Washington v. Commissioner, 120 T.C. 137, 146 (2003).

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

procedures to determine whether a taxpayer qualifies for relief

under that section. Those procedures are set forth in Rev. Proc.

2000-15, 2000-1 C.B. 447. This Court has upheld the use of those

procedures in reviewing a negative determination for relief from

joint and several liability. Jonson v. Commissioner, supra.

Section 4.01 of Rev. Proc. 2000-15, 2000-1 C.B. at 448,

lists seven threshold conditions that must be satisfied before

the Commissioner will consider a request for relief under section

6015(f). If the threshold conditions are satisfied, relief may

be granted under section 4.02 of Rev. Proc. 2000-15, which

applies to relief from liability that is reported on a joint

return but that remains unpaid. If that section does not apply,

the Commissioner looks to section 4.03 of Rev. Proc. 2000-15 to

determine whether the taxpayer should be granted relief. In this

case, respondent does not assert that petitioner has failed to

meet any of the threshold requirements of section 4.01 of Rev.

Proc. 2000-15. Because the liability in question was not

reported on the joint return, section 4.02 of Rev. Proc. 2000-15

is not applicable in this case. We therefore turn to section
 - 45 -

4.03 of Rev. Proc. 2000-15 to review respondent’s denial of

relief for an abuse of discretion.

Section 4.03 of Rev. Proc. 2000-15 provides a nonexhaustive

list of factors that the Commissioner is to take into account in

determining whether to grant full or partial relief under section

6015(f). The revenue procedure provides that no single factor is

to be determinative; rather, all factors are to be considered and

weighted appropriately. Section 4.03(1) of Rev. Proc. 2000-15

lists six factors that, if present, the Commissioner will

consider as weighing in favor of granting relief for an unpaid

liability (positive factors), and section 4.03(2), 2000-1 C.B. at

449, lists six factors that, if present, the Commissioner will

consider as weighing against granting relief for an unpaid

liability (negative factors). The following are the positive

factors set forth in the revenue procedure, as they apply to this

case:

(a) Marital status. The requesting spouse is * * *
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 arose from a deficiency, the requesting
spouse did not know and had no reason to know of the items
giving rise to the deficiency.
 - 46 -

(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.

The following are the negative factors set forth in the revenue

procedure, Rev. Proc. 2000-15, sec. 4.03(2), as they apply to

this case:

(a) Attributable to the requesting spouse. The * * *
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 * * * . 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 sec. 6015(f) * * * 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 sec. 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.
 - 47 -

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

As previously discussed in detail in this opinion, we have

found that both petitioner and Mr. Barnes were investors in the

partnership, and we have accordingly found that the deficiencies

are attributable equally to petitioner and Mr. Barnes. In

reviewing respondent’s denial of section 6015(f) relief with

respect to the portions of the deficiencies attributable to

petitioner, we find petitioner’s personal involvement as an

investor to be a significant factor. Another significant factor

weighing against relief is that petitioner had reason to know of

the understatements, as discussed above in connection with the

application of section 6015(b).

There is no evidence that petitioner was abused by Mr.

Barnes, or that petitioner was to any degree coerced into

becoming an investor--even if petitioner went along with the

investment in order to avoid conflict with Mr. Barnes or his

family, she nevertheless became an investor voluntarily.

Petitioner’s arguments to the contrary are not supported by the

record and are even contradicted by petitioner’s own testimony.

Finally, because petitioner has not shown that she would be

unable to pay her reasonable basic living expenses, especially in

light of the substantial continuing income that she and Mr.

Edwards receive, petitioner has not shown that she would suffer
 - 48 -

economic hardship if relief were not granted. See sec. 301.6343-

1(b)(4), Proced. & Admin. Regs.; Rev. Proc. 2000-15, sec.

4.02(1)(c).

On the basis of the record as a whole in this case, we

cannot say that respondent abused his discretion by acting

arbitrarily, capriciously, or without sound basis in fact in

denying petitioner’s request for relief under section 6015(f).

To reflect the foregoing,

Decision will be entered

under Rule 155.