Smith v. Comm'r

T.C. Summary Opinion 2007-57

UNITED STATES TAX COURT

LESLEY J. SMITH, a.k.a. LESLEY J. SCOTT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22991-04S. Filed April 16, 2007.

Deborah R. McIntosh,1 for petitioner.

Inga C. Plucinski, for respondent.

DAWSON, Judge: This case was heard pursuant to section 7463

of the Internal Revenue Code in effect when the petition was

1
Prof. McIntosh is the supervising attorney of the
University of Idaho College of Law Legal Aid Clinic, which
provides assistance to low-income taxpayers in controversies with
the Internal Revenue Service.
 - 2 -

filed.2 Pursuant to section 7463(b), the decision to be entered

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

be treated as precedent for any other case.

Petitioner seeks relief from joint and several liability for

Federal income taxes for the years 1990 through 1995 with respect

to joint returns she filed with her former husband, David Reeves

Scott (Mr. Scott). Respondent determined that petitioner is not

entitled to relief under section 6015(b) or (c) but is entitled

to relief for one-half ($13,476) of the total liabilities under

section 6015(f). Petitioner filed a petition seeking review of

respondent’s determination. The only issue for decision is

whether petitioner is entitled to full relief under section

6015(f) for all of the tax liabilities.3

2
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the years at
issue, and Rule references are to the Tax Court Rules of Practice
and Procedure.
3
The Tax Relief and Health Care Act of 2006, Pub. L. 109-
432, div. C, sec. 408, 120 Stat. 3061, amended sec. 6015(e)(1) to
give the Tax Court jurisdiction to determine the appropriate
relief available to a taxpayer under sec. 6015, including relief
under sec. 6015(f) in cases where no deficiency has been
determined for the tax year. The amendment applies with respect
to liability for taxes arising or remaining unpaid on or after
Dec. 20, 2006, the date of enactment. Id. sec. 408(c), 120 Stat.
3062. The liabilities at issue in this case remain unpaid, and
we have jurisdiction to determine the relief available to
petitioner under sec. 6015(f) for all years in issue.
 - 3 -

Background

Some of the facts were stipulated. Those facts, with the

attached exhibits, are so found and are made a part hereof.

Petitioner is married to Grant Smith, and she resided in

Portage, Utah, when she filed the petition in this case.

Petitioner was married to Mr. Scott from September 5, 1975,

until they were divorced on January 8, 2001. She and Mr. Scott

(collectively the Scotts) had three children, who are now adults.

Mr. Scott died on December 24, 2003. Mr. Scott was an

accountant who worked for an accounting firm while he and

petitioner were married. He also operated a part-time

bookkeeping service business.

Petitioner has a high school education. She worked part

time while she was married to Mr. Scott. During the years at

issue, she was employed part time as a substitute secretary/clerk

for a school district and as a shipper for a distribution center.

In 1991, she also occasionally provided janitorial services.

The Scotts also operated a business called Karnival Klassics

from their home. Petitioner supplied games and puzzles to

organizations that were putting on carnivals, and she and her

children performed as clowns during the carnivals. Mr. Scott

kept the records for the business. An organization paid half the

fee before the event so that petitioner could purchase supplies.

After the event, the organization sent a check for the balance of
 - 4 -

the fee. Petitioner gave Mr. Scott the receipts and checks. For

most years, Karnival Klassics broke even or made a small profit.

Mr. Scott once told petitioner that Karnival Klassics had a loss

for the year and that they could deduct a loss for only 3 years.

Mr. Scott handled the family finances and dominated the

family. He told petitioner the number of exemptions to claim for

her withholding. The Scotts had a joint checking account they

used to pay household expenses. Mr. Scott controlled and

balanced the account. The Scotts did not live well, and money

was always tight. They had modest furnishings and vehicles, and

they never owned a home.

Mr. Scott prepared their joint Federal income tax returns

for 1975 through 2000, all the tax years of their marriage. Each

year, on or before the April 15 due date, Mr. Scott would place

the Federal and State returns before petitioner and instruct her

exactly where to sign each return. Petitioner did not fill in

the date next to her signature; Mr. Scott did.4 Because Mr.

Scott was an accountant and provided bookkeeping records and

services and prepared tax returns for others, petitioner trusted

him to properly complete their tax returns, and she did not

review them. She did not look to see whether they owed tax or

were due a refund. She did not know that Mr. Scott filed some of

4
The dates on the Federal tax returns are in Mr. Scott’s
handwriting.
 - 5 -

the returns after their due dates. He filed the 1990 return on

November 7, 1992, the 1991 return on August 26, 1996, the 1992

return on October 29, 1994, and the 1993 return on January 26,

1998.

On the 1990 return, the Scotts reported Mr. Scott’s wages of

$29,223, petitioner’s wages of $8,382, a $10,867 net operating

loss from Karnival Klassics, and a $141 overpayment of tax. On

February 23, 1994, respondent sent to the Scotts a notice of

deficiency for 1990 determining a $4,193 deficiency in income

tax, an addition to tax under section 6651, and a penalty under

section 6662(a). The Scotts petitioned this Court for

redetermination of the deficiency, the addition to tax, and the

penalty. On March 14, 1995, the Court entered a stipulated

decision that the Scotts were liable for a $3,176 deficiency in

income tax attributable to the disallowance of the $16,360 of

expenses claimed for the Karnival Klassics activity, an addition

to tax of $795 under section 6651(a), and a penalty of $635 under

section 6662(a).

On the 1991 return, the Scotts reported Mr. Scott’s wages of

$26,232, petitioner’s wages of $8,941, $879 of income from

petitioner’s janitorial services business, $2,796 from Mr.

Scott’s bookkeeping business, and an $8 loss from Karnival

Klassics. The 1991 return showed total tax of $3,917, withheld
 - 6 -

taxes of $1,654, and a balance due of $2,263. Mr. Scott made

computational errors on the 1991 return which resulted in an $80

overstatement of tax. Respondent assessed $2,183.50, which is

the correct amount of tax the Scotts owed for 1991.

Mr. Scott did not file the 1992 return he had petitioner

sign in April 1993. On the 1992 return Mr. Scott filed late, he

reported wages of $37,969,5 income of $2,337 from his bookkeeping

business, and a $32 loss from Karnival Klassics. Mr. Scott

reported total tax of $3,720, income tax withheld of $1,477, and

a balance due of $2,243. The return was signed only by Mr.

Scott, although it was filed as a joint return. Petitioner did

not sign the return, even though respondent accepted it as a

joint return and assessed the tax reported, which was not paid.

On the 1993 return, the Scotts reported Mr. Scott’s wages of

$27,458, income of $5,440 from his bookkeeping business, total

tax of $2,945, income tax withheld of $1,401, and a balance due

of $1,544. He did not send a payment for the balance due with

the return. He made a computational error on the return which

resulted in a $9.51 understatement of tax.

Mr. Scott timely filed the 1994 return on or about April 16,

1995. On the 1994 return, the Scotts reported petitioner’s wages

5
Respondent’s records show that Mr. Scott received wages of
$28,205 from West Kesler Co. and $4,620 from CO & CO Enterprises,
Ltd. It appears that the $5,144 balance ($37,969 - $32,825) was
petitioner’s wages.
 - 7 -

of $15,643, Mr. Scott’s wages of $27,909, income from his

bookkeeping business of $5,750, total tax of $5,353, income tax

withheld of $2,803 ($1,072.51 was withheld from petitioner’s

wages), and a balance due of $2,550. Mr. Scott did not send a

payment for the balance due with the return.

The Scotts lived in California from 1990 through 1994.

Petitioner moved to Idaho in late 1994 or early 1995. Mr. Scott

remained in California. He filed for bankruptcy in 1995, after

petitioner moved to Idaho. During the bankruptcy proceedings,

petitioner learned that she and Mr. Scott owed income taxes for

past years. Mr. Scott told petitioner that they could take care

of the taxes in the bankruptcy proceedings.

The Scotts owed income taxes to the State of California.

Petitioner contacted the State and obtained information about

setting up payments in an attempt to resolve those taxes. Mr.

Scott became angry when petitioner told him she had contacted the

State. He told her it was not her responsibility and that she

had no business getting involved in the matter. The State

eventually allowed the Scotts to make monthly payments of $50.

Petitioner suggested to Mr. Scott that they try to make a similar

arrangement with the IRS to pay their Federal taxes. He told

petitioner to stay out of it because it was his responsibility

and he would handle it.
 - 8 -

Mr. Scott timely filed the Scotts’ 1995 return on or before

April 15, 1996. On the 1995 return, the Scotts reported

petitioner’s wages of $9,719, Mr. Scott’s wages of $10,015,

income from his bookkeeping business of $1,460, and his

unemployment compensation of $4,536. Mr. Scott, however, failed

to include the unemployment compensation when computing the total

income. Consequently, the 1995 return reported total income of

$21,194, total tax of $512, income tax withheld of $412, and a

balance due of $100. Mr. Scott did not send a payment for the

balance due with the return. Respondent computed the correct tax

to be $780 and assessed the $100 tax shown on the return plus an

additional $680. The total amount due has not been paid.

Petitioner and Mr. Scott were divorced in January 2001. A

few months before the divorce, Mr. Scott confessed to petitioner

that he had been paying prostitutes during the last 14 years of

their marriage. At the time of the divorce, the Scotts’ youngest

child was still a minor and resided with petitioner. The Scotts

did not own any real property, stocks, or bonds. Pursuant to the

divorce decree, petitioner received most of the furniture and the

car, and she was obligated to pay approximately $8,531 of credit

card debts. Mr. Scott received some furniture and was obligated

to pay listed debts totaling $4,159.40, which included $1,200 of

taxes for tax year 2000. Mr. Scott was also obligated to pay
 - 9 -

“any other marital debt not specifically included” in the divorce

decree. He was to pay monthly child support of $135; he was not

required to pay petitioner any spousal support.

Mr. Scott remarried after he was divorced from petitioner.

Petitioner married Mr. Smith in 2002. Shortly after they were

married, Mr. Smith’s employer went out of business, and Mr. Smith

began collecting unemployment compensation. Petitioner has been

employed as a receptionist for a publishing company. She is paid

$9.60 per hour for 32 hours a week.

On August 9, 2002, petitioner filed a Form 8857, Request for

Innocent Spouse Relief, seeking relief under section 6015(b),

(c), and (f) from liability for taxes owed for 1990 through 1995.

In accordance with the instructions to Form 8857, petitioner

attached a statement explaining why she believed she was entitled

to section 6015 relief. She stated:

As of January 8, 2001, I was divorced from David
R. Scott. He worked for a CPA Accounting firm in
Oakland, California, and he took care of all of the
financial matters in our family. I had complete trust
in him [sic] doing the books and taking care of these
matters. During this twenty-five year marriage I never
questioned the totals or figures of our Income Taxes or
references to the taxes. In tax matters, my knowledge
was, and is very limited and so when he said he would,
“take care of it”, I had no reason to believe
otherwise.

During part of this marriage we conducted a home
based business. At the opening of the business he
agreed that his part would be to keep record of the
accounting details, while I was busy with all other
aspects of running this business. During this period
of time, with the business in our home, he indicated to
 - 10 -

me that we were taking a loss from the business.
Seldom did I take a draw from the business because
finances were so tight. We basically operated on a
cash basis with very little inventory and credit was
limited. When he figured the taxes each year I did not
question him, and signed the tax forms without
question.

When the IRS audited us and problems were found I
was greatly surprised and totally unaware of any
inconsistencies both with our personal taxes and the
businesses. His explanation, at the time, was that he
knew that we didn’t have the cash flow and knew we
couldn’t afford the taxes. I also have reason to
believe that there were other things that I was not
aware of. It wasn’t too long after this that we went
bankrupt.

In 1994 the children and I moved to Arimo, Idaho.
The bankruptcy was filed in California while I was in
Idaho.

One of respondent’s managers sent petitioner a letter

acknowledging receipt of her request for section 6015 relief and

asking her to complete and return a questionnaire enclosed with

the letter. Petitioner completed the questionnaire and returned

it to respondent in or about September 2002. The additional

information petitioner included on the questionnaire included,

inter alia, her education, Mr. Scott’s education, and a monthly

income and expense sheet showing a two-member household with wage

income of $1,198, unemployment compensation of $1,280, and

expenses totaling $2,007. A tax examiner with respondent’s

Cincinnati Centralized Innocent Spouse Operations (CCISO)

considered petitioner’s request for section 6015 relief.
 - 11 -

On May 23, 2003, CCISO issued petitioner a preliminary

determination denying her section 6015 relief for all years. The

letter explained that CCISO had denied petitioner relief under

section 6015(b) and (c) for the 1993 and 1995 understatements of

tax because she had constructive and actual knowledge of the

computational errors, the errors were on the returns, and

petitioner, having a duty to review the returns, failed to do so.

The letter explained that CCISO denied petitioner relief under

section 6015(f) for the understatements and/or underpayments of

tax for all years because petitioner did not establish that she

believed the tax would be paid at the time the returns were filed

and, having a duty to inquire as to how the taxes would be paid,

failed to do so. Additionally, there were balances owed for

previous years when the returns were filed and a bankruptcy had

been filed. The letter informed petitioner that she could

request that an Appeals Office review the preliminary

determination.

Petitioner, Mr. Smith, and Mr. Scott and his new wife met

with petitioner’s clergyman, a bishop of the Church of Jesus

Christ of Latter-Day Saints (the LDS Church). Mr. Scott told the

bishop that he had filed erroneous Federal income tax returns and

had kept that fact from petitioner and that he put the returns in
 - 12 -

front of petitioner and told her where to sign. At the bishop’s

suggestion, Mr. Scott agreed to write a letter to the IRS

exonerating petitioner. Mr. Scott never sent the letter.

Petitioner requested a review by an Appeals Office, and her

case was transferred from CCISO to respondent’s San Jose Office

of Appeals. By letter dated August 22, 2003, the Appeals Office

informed petitioner that it had received her case for

consideration.

Petitioner and Mr. Smith (collectively the Smiths) filed a

joint income tax return for 2002 that reported an overpayment of

tax. Initially, respondent determined that the return contained

an error, and that the Smiths underpaid their 2002 tax. The

issue was ultimately resolved and, on June 16, 2003, respondent

sent them a refund of $717.74.

Mr. Smith has not been able to find permanent employment and

his unemployment compensation terminated in 2003. He reported

unemployment compensation of $3,888 in 2003. Petitioner provides

the sole support for the household. The Smiths often do not have

enough money to pay their mortgage, buy food, or pay their

utilities. The LDS Church has paid $10,433 for the Smiths’

mortgage and propane gas bills since February 2003. The LDS

Church has also provided them with food.
 - 13 -

Petitioner needs a knee replacement but cannot afford the

cost that exceeds the amount that would be paid by her health

insurance. Moreover, if she had the surgery, she would need to

take a month off from work without pay and would not be able to

pay living expenses for that month.

The Appeals officer assigned to petitioner’s case determined

that (1) petitioner was divorced from Mr. Scott, (2) petitioner

would not suffer economic hardship if relief from liability was

not granted, (3) petitioner did not allege abuse, (4) petitioner

had reason to know that there was not enough cashflow to pay the

taxes, and Mr. Scott had informed her that they could not afford

to pay taxes and had filed for bankruptcy, (5) the Scotts’

divorce decree did not address the payment of taxes for any year

except 2000, (6) one-half of the liability on each return was

attributable to petitioner and one-half was attributable to Mr.

Scott, (7) petitioner did not receive significant benefit other

than normal support, (8) petitioner and Mr. Smith had unpaid

taxes for 2002, and (9) petitioner did not allege any health

problems. The Appeals officer concluded that, despite the lack

of economic hardship, it would be inequitable to hold petitioner

liable for the portion of tax liability attributable to Mr.

Scott. Therefore, on September 1, 2004, the Appeals Office sent

petitioner a notice of determination granting her partial

equitable relief under section 6015(f), as follows:
 - 14 -

Tax Year Liability Relief Allowed Liability Remaining

1990 $4,562.00 $2,281.00 $2,281.00
1991 4,874.00 2,437.00 2,437.00
1992 4,785.44 2,392.72 2,392.72
1993 3,692.44 1,846.22 1,846.22
1994 5,990.50 2,995.25 2,995.25
1995 1,387.00 693.50 693.50

The explanation of adjustments stated that respondent was

granting relief for the unpaid liability attributable to Mr.

Scott under the community property laws of California and Idaho

but could not grant full relief because of the “knowledge

factor”--petitioner had knowledge or reason to know that the

taxes would not be paid.

Discussion

As a general rule, spouses filing a joint Federal income tax

return are jointly and severally liable for all taxes shown on

the return or found to be owing. Sec. 6013(d)(3). Section 6015,

however, provides taxpayers relief from joint and several

liability under certain circumstances. Section 6015 encompasses

three types of relief: (1) Section 6015(b)(1) provides full or

apportioned relief from joint and several liability; (2) section

6015(c) provides proportionate tax relief to divorced or

separated taxpayers; and (3) section 6015(f) provides equitable

relief from joint and several liability in certain circumstances

if neither section 6015(b) nor (c) is available.
 - 15 -

If the Commissioner denies a taxpayer’s request for relief

under section 6015, section 6015(e)(1) permits the taxpayer to

petition the Tax Court, and grants the Tax Court jurisdiction, to

determine the appropriate relief available to the individual

under section 6015. In exercising jurisdiction under section

6015(e)(1)(A) to determine the relief to which a taxpayer is

entitled under section 6015(f), it is appropriate for this Court

to consider the evidence admitted at trial. Ewing v.

Commissioner, 122 T.C. 32, 44 (2004), vacated on other grounds

439 F.3d 1009 (9th Cir. 2006).

Citing Robinette v. Commissioner, 439 F.3d 455 (8th Cir.

2006), revg. 123 T.C. 85 (2004), respondent asserts that this

Court must decide the appropriate relief available to petitioner

under section 6015(f) solely on the basis of the administrative

record. We disagree.

Robinette involved the Court’s jurisdiction under section

6330 to review the Commissioner’s determination to proceed with

collection of taxes. Section 6330(d)(1) permits a taxpayer to

appeal the Appeals officer’s determination to proceed with

collection of taxes. In Robinette, the U.S. Court of Appeals for

the Eighth Circuit held that section 6330(d)(1) provides for

limited judicial review of administrative decisions and that the

Court is limited to the administrative record. Id. at 458-461.
 - 16 -

Our jurisdiction under section 6015(e)(1) is not limited to

an appeal or review of the administrative determination. Rather,

section 6015(e)(1) gives the Tax Court jurisdiction to determine

the appropriate relief available to a taxpayer under section

6015, including equitable relief under section 6015(f). We think

there is no convincing reason to exercise our jurisdiction under

section 6015(e)(1) to determine the appropriate relief available

to a taxpayer under section 6015 differently from our

jurisdiction under section 6213(a) to redetermine a deficiency in

tax. Ewing v. Commissioner, supra at 37. Nor is there any

convincing reason to exercise our jurisdiction under section

6015(e)(1) differently in determining the appropriate relief

available to a taxpayer under section 6015(f) from determining

the relief available under section 6015(b) and (c).

Moreover, the lien and levy procedures under sections 6320

and 6330 are more extensive than the procedures for seeking

relief from liability under section 6015. Taxpayers in a lien or

levy action are entitled to participate in a hearing at the

Appeals Office nearest their residence. Katz v. Commissioner,

115 T.C. 329, 337-338 (2000); sec. 301.6330-1(d)(2), Q&A-D6 and

D7, Proced. & Admin. Regs. The hearing, whether conducted face

to face or by telephone or correspondence, affords the taxpayer

and the Appeals officer the opportunity to discuss the issues and

to fully develop and clarify the facts. The Appeals officer
 - 17 -

often requests specific additional information and supporting

documentation. If the financial information in the

administrative file is more than 12 months old and/or the

information is no longer accurate, the Appeals officer will

request a new or updated financial statement before making the

determination. See, e.g., Etkin v. Commissioner, T.C. Memo.

2005-245. Additionally, taxpayers’ entitlement to audio record

section 6330 hearings, Keene v. Commissioner, 121 T.C. 8, 19

(2003), provides them a means of preserving an accurate record of

the hearing. None of those safeguards is present under the

Commissioner’s procedures for processing a taxpayer’s request for

section 6015 relief.

In September 2004, the Appeals officer determined that

petitioner had not shown that she would suffer economic hardship

if relief from the tax liabilities were not granted. However, in

September 2002 petitioner had sent CCISO a completed

questionnaire reporting unemployment compensation. Although

unemployment compensation is temporary and most assuredly would

have terminated by September 2004 when the Appeals officer made

her determination, the Appeals officer did not request an updated

financial statement from petitioner. Indeed, the Smiths’ joint

return for 2003 reported only $3,888 of unemployment

compensation, which indicates that the $1,280 of monthly

unemployment compensation ended in early 2003.
 - 18 -

Furthermore, in justifying the Appeals officer’s allocation

of the liabilities equally between petitioner and Mr. Scott,

respondent contends that without more information from petitioner

the Appeals officer could not tell whose income was reported on

the returns. Yet the Appeals officer never requested any

additional information from petitioner and, in contravention of

section 6015(a), applied the community property laws of

California and Idaho. See Mora v. Commissioner, 117 T.C. 279,

290 n.8 (2001). Respondent’s own argument demonstrates the

inadequacy of the procedures employed in this case. We conclude

that Robinette is inapplicable to this case.

Our determination with respect to the appropriate relief

available to petitioner under section 6015(f) is made in a trial

de novo, in accordance with Ewing v. Commissioner, supra, and we

may consider matters raised at trial which were not included in

the administrative record.

Petitioner bears the burden of proving that respondent’s

denial of full relief was an abuse of discretion. See Rule

142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), affd. 101

Fed. Appx. 34 (6th Cir. 2004); Jonson v. Commissioner, 118 T.C.

106, 113 (2002), affd. 353 F.3d 1181 (10th Cir. 2003).

Petitioner must demonstrate that respondent exercised his

discretion arbitrarily, capriciously, or without sound basis in
 - 19 -

fact or law. See Jonson v. Commissioner, supra at 125; Woodral

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

Section 6015(f) provides:

SEC. 6015(f). Equitable Relief.--Under procedures prescribed by th

(1) taking into account all the facts and
circumstances, it is inequitable to hold the
individual liable for any unpaid tax or any
deficiency (or any portion of either); and

(2) relief is not available to such
individual under subsection (b) or (c),

the Secretary may relieve such individual of such
liability.

As directed by section 6015(f), the Commissioner has

prescribed procedures to be used in determining whether the

requesting spouse qualifies for relief from joint and several

liability under section 6015(f). As applicable to the present

case, these procedures are set forth in Rev. Proc. 2000-15, 2000-

1 C.B. 447.6 The requesting spouse must satisfy seven conditions

(threshold conditions) before the Commissioner will consider a

6
Rev. Proc. 2003-61, 2003-2 C.B. 296, which supersedes Rev.
Proc. 2000-15, 2000-1 C.B. 447, is effective for requests for
relief under sec. 6015(f) filed on or after Nov. 1, 2003, and for
requests for such relief pending on, and for which no preliminary
determination letter had been issued as of, that date. Rev.
Proc. 2003-61, sec. 7, 2003-2 C.B. at 299. Rev. Proc. 2003-61,
supra, is not applicable in this case because (1) petitioner
filed her request for relief on Aug. 9, 2002, and (2) respondent
issued a preliminary determination on May 23, 2003.
 - 20 -

request for relief under section 6015(f). Rev. Proc. 2000-15,

sec. 4.01, 2000-1 C.B. at 448.

The threshold conditions are as follows: (1) The requesting

spouse filed a joint return for the taxable year for which he or

she seeks relief; (2) relief is not available to the requesting

spouse under section 6015(b) or (c); (3) the requesting spouse

applies for relief no later than 2 years after the date of the

Commissioner’s first collection activity after July 22, 1998,

with respect to the requesting spouse; (4) the liability remains

unpaid; (5) no assets were transferred between the spouses as

part of a fraudulent scheme by the spouses; (6) the nonrequesting

spouse did not transfer disqualified assets to the requesting

spouse; and (7) the requesting spouse did not file or fail to

file the return with fraudulent intent. Respondent agrees that

in this case those threshold conditions are satisfied.

In cases where the threshold conditions have been satisfied,

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, 2000-1 C.B. at 448-449. Rev. Proc. 2000-15, sec. 4.03,

lists several nonexclusive factors that the Commissioner will

consider in determining eligibility for equitable relief under

section 6015(f).
 - 21 -

The list of nonexclusive factors that the Commissioner will

consider as weighing in favor of granting relief includes: (1)

The requesting spouse is separated or divorced from the

nonrequesting spouse; (2) the requesting spouse would suffer

economic hardship if relief were denied; (3) the requesting

spouse was abused by the nonrequesting spouse; (4) the requesting

spouse did not know or have reason to know of the items giving

rise to a deficiency or that the reported liability would be

unpaid; (5) the nonrequesting spouse has a legal obligation

pursuant to a divorce decree or agreement to pay the unpaid

liability;7 and (6) the unpaid liability is attributable solely

to the nonrequesting spouse. Id. sec. 4.03(1).

The list of nonexclusive factors that the Commissioner will

consider as weighing against granting relief includes: (1) The

unpaid liability is attributable to the requesting spouse; (2) at

the time the return was signed the requesting spouse knew or had

reason to know of the items giving rise to a deficiency or that

the reported liability would be unpaid; (3) the requesting spouse

significantly benefited (beyond normal support) from the unpaid

liability; (4) the requesting spouse will not suffer economic

7
According to the revenue procedure, however, “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.” Rev. Proc. 2000-15, sec. 4.03(1)(e),
2000-1 C.B. at 449.
 - 22 -

hardship if relief is denied; (5) 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 to which the request for

relief relates; and (6) the requesting spouse has a legal

obligation pursuant to a divorce decree or agreement to pay the

unpaid liability. Id. sec. 4.03(2).

“No single factor will be determinative of whether equitable

relief will or will not be granted in any particular case.

Rather, all factors will be considered and weighed

appropriately.” Id. sec. 4.03. Furthermore, the list of factors

is not intended to be exhaustive. The Commissioner generally

does not consider the fact that the taxpayer did not

significantly benefit from the underpayment of tax in determining

whether to grant relief under section 6015(f). However, on the

basis of cases deciding whether it was inequitable to relieve a

taxpayer from joint liability under former section 6013(e)(1)(D),

this Court considers the fact that a taxpayer did not

significantly benefit from the unpaid liability as favoring

equitable relief under section 6015(f) for that taxpayer. Van

Arsdalen v. Commissioner, T.C. Memo. 2007-48. In deciding

whether respondent’s determination that petitioner is not

entitled to relief under section 6015(f) was an abuse of

discretion, we consider evidence relating to all the facts and

circumstances.
 - 23 -

1. Marital Status

If the requesting spouse is separated or divorced from the

nonrequesting spouse, this factor would favor granting relief to

the requesting spouse. Rev. Proc. 2000-15, sec. 4.03(1)(a).

Petitioner and Mr. Scott were divorced in January 2001.

Petitioner filed her request for section 6015 relief on August 9,

2002. Consequently, this factor weighs in favor of granting

relief to petitioner.

2. Economic Hardship

If payment of the tax liability would cause the requesting

spouse to suffer economic hardship, this factor would support the

granting of equitable relief to the requesting spouse. Id. sec.

4.03(1)(b). Economic hardship occurs if payment of the

liability, in whole or in part, will cause the taxpayer to be

unable to pay his or her reasonable basic living expenses. Id.

sec. 4.02(1)(c), 2000-1 C.B. at 448; see sec.

301.6343-1(b)(4)(i), Proced. & Admin. Regs. In determining a

reasonable amount for basic living expenses, we consider, among

other things: (1) The taxpayer’s age, employment status and

history, ability to earn, and number of dependents; (2) the

amount reasonably necessary for food, clothing, housing, medical

expenses, transportation, current tax payments, alimony, child

support, or other court-ordered payments and expenses necessary

to the taxpayer’s production of income; (3) the cost of living in
 - 24 -

the geographic area where the taxpayer resides; (4) the amount of

property which is available to pay the taxpayer’s expenses; (5)

any extraordinary circumstances; and (6) any other factor that

the taxpayer claims bears on economic hardship. See sec.

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

Respondent contends that petitioner does not satisfy the

economic hardship test because financial statements on the

questionnaire showed that the Smiths’ total monthly income of

$2,478 exceeded their expenses of $2,007 by $471. The Smiths’

monthly income included $1,280 of unemployment compensation.

After Mr. Smith’s unemployment compensation terminated, there was

a monthly deficit of $809, and they were unable to pay their

mortgage, utilities, and food bills. Beginning in February 2003,

the LDS Church paid the Smiths’ mortgage and propane gas bills

and provided them with food. Petitioner has established that she

is unable to pay her basic living expenses.

Petitioner’s divorce left her with modest furnishings and

vehicles encumbered with debt. Petitioner would suffer severe

economic hardship if relief under section 6015(f) were denied.

3. Abuse

Petitioner was not abused by Mr. Scott. Lack of spousal

abuse is not a factor listed in Rev. Proc. 2000-15, sec. 4.03(2),

that weighs against granting relief. Therefore, this factor is

neutral. See Washington v. Commissioner, 120 T.C. 137, 149

(2003).
 - 25 -

4. Knowledge or Reason To Know

The fact that the requesting spouse did not know or have

reason to know when she signed the returns that there was an

understatement of tax or that the taxes would not be paid favors

granting relief. The fact that the requesting spouse knew or had

reason to know when she signed the returns that there was an

understatement of tax or that the taxes would not be paid weighs

against granting relief. In resolving whether in signing a tax

return a requesting spouse had reason to know of the

understatement of tax in the return, we consider whether the

requesting spouse was aware of the circumstances of the

transaction(s) that gave rise to the error(s) in the return.

Jonson v. Commissioner, 118 T.C. at 115; Bokum v. Commissioner,

94 T.C. 126, 145-146 (1990), affd. 992 F.2d 1132 (11th Cir.

1993).

In determining the taxpayer’s knowledge, we may examine

several factors, including: (1) The requesting spouse’s level of

education; (2) the requesting spouse’s involvement in the

family’s financial affairs; (3) the nonrequesting spouse’s

evasiveness and deceit concerning the family’s financial affairs;

and (4) the presence of expenditures that are lavish or unusual

when compared to the requesting spouse’s past standard of living.

See Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir.
 - 26 -

1989), affg. T.C. Memo. 1988-63; Butler v. Commissioner, 114 T.C.

276, 284 (2000); Flynn v. Commissioner, 93 T.C. 355, 365-366

(1989).

Petitioner was not involved in managing her family’s

finances, making financial decisions for her family, or the

reporting of any tax consequences of financial decisions that

were claimed in the joint tax returns. Mr. Scott prepared the

Scotts’ Federal income tax returns for all years they were

married. Mr. Scott was an accountant who worked for an

accounting firm and who prepared returns for other taxpayers.

Petitioner, by contrast, had a high school education and worked

part time as a substitute clerk or secretary and a shipper. She

never prepared a tax return.

Petitioner never questioned Mr. Scott about the returns and

never questioned that he would pay the taxes reported on the

returns. It appears that, while money had always been tight, Mr.

Scott had paid the taxes shown as owed on the returns for all the

15 years of the Scotts’ marriage before the years at issue.

The liability for 1990 arises from a deficiency attributable

to the disallowance of deductions related to the Scotts’ Karnival

Klassics activity. Mr. Scott kept the records for that activity.

He presented the joint return to petitioner and told her where to

sign. He did not give petitioner the opportunity to examine the

1990 Schedule C, Profit or Loss from Business, for Karnival
 - 27 -

Klassics. She did not know and had no reason to know that the

reported cost of supplies exceeded the gross receipts and that

Mr. Scott had reported advertising expenses that had not been

incurred.

On the record before us, we find that a reasonably prudent

taxpayer under petitioner’s circumstances at the time of signing

the 1990 joint tax return would not have been expected to know

that the tax liability stated in that return was erroneous.

The relevant knowledge in the case of a reported but unpaid

liability is whether, when the return was signed, the taxpayer

knew or had reason to know “that the liability would not be

paid”. Washington v. Commissioner, supra at 150; Rev. Proc.

2000-15, sec. 4.03(1)(d), 2000-1 C.B. at 449. Accordingly, we

must consider whether, “taking into account all the facts and

circumstances”, sec. 6015(f)(1), petitioner knew or had reason to

know that Mr. Scott would not pay the taxes shown as due on the

returns.

Having observed petitioner’s appearance and demeanor at

trial, we find her testimony to be honest, forthright, and

credible. When she signed the returns for 1991 and 1993 on or

about their due dates, she did not know that Mr. Scott would not

file the 1991 return until August 26, 1996, and the 1993 return

until January 26, 1998, or that he would not pay the taxes with

the returns. Petitioner did not sign the 1992 return that was
 - 28 -

filed by Mr. Scott. She had no knowledge that tax was shown as

owed on the return and did not know or have reason to know that

Mr. Scott would not pay the tax. Petitioner did not know that

Mr. Scott had stopped paying the taxes with the returns until he

filed for bankruptcy in 1995. She did not know that Mr. Scott

was frequenting prostitutes.

Petitioner signed the 1994 and 1995 returns after Mr. Scott

filed for bankruptcy. During the bankruptcy proceedings, when

petitioner first learned that Mr. Scott had failed to pay the

taxes, she suggested to him that they try to arrange installment

payments to pay their Federal taxes. Mr. Scott told her that the

payment of the taxes was his responsibility and he would handle

it. When she signed the 1995 and 1996, returns she could not be

sure that he would or would not pay the taxes; she did not know

or have reason to know that he would not pay the taxes shown as

owed on those returns, and she did not know or have reason to

know that he would pay those taxes.

Consequently, the knowledge or reason to know factor favors

granting relief for 1990, 1991, 1992, and 1993 and is neutral for

1994 and 1995.

5. Nonrequesting Spouse’s Legal Obligation

This is a factor in favor of the requesting spouse where the

nonrequesting spouse has a legal obligation pursuant to a divorce

decree or an agreement to pay the outstanding tax liability and
 - 29 -

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

know that the nonrequesting spouse would not pay the income tax

liability. Rev. Proc. 2000-15, sec. 4.03(1)(e), 2000-1 C.B. at

449.

Petitioner and Mr. Scott’s divorce decree placed the legal

obligation to pay the $1,200 unpaid tax liability for 2000

exclusively on Mr. Scott. Mr. Scott was also obligated to pay

“any other marital debt not specifically included” in the divorce

decree. Respondent asserts, however, that petitioner knew or had

reason to know, at the time that the divorce judgment and decree

was entered, that Mr. Scott would not pay the tax liability. We

disagree.

Petitioner first learned that Mr. Scott had failed to pay

taxes when Mr. Scott filed for bankruptcy in 1995. During the

bankruptcy proceedings petitioner suggested to Mr. Scott that

they try to arrange installment payments to pay their Federal

taxes. Mr. Scott told petitioner to stay out of it because it

was his business and he would handle it. There is nothing in the

record to suggest that when the divorce decree was signed in

2001, petitioner knew, or should have known, that Mr. Scott would

not pay the taxes. Therefore, we conclude that this factor

favors petitioner.
 - 30 -

6. Attributable to Nonrequesting Spouse

In recommending that petitioner be granted partial relief

from liability, the Appeals officer erroneously computed

petitioner’s liability under the community property rules.

Determinations under section 6015 are to be made without regard

to community property. Sec. 6015(a); Mora v. Commissioner, 117

T.C. at 290 n.8.

Respondent contends that, on the basis of the information

before the Appeals officer, the officer properly allocated the

liabilities equally between petitioner and Mr. Scott. Respondent

complains that without more information from petitioner

respondent could not tell whose income was reported on the

returns. Respondent urges that, given the fact that for all 6

years at issue both petitioner and Mr. Scott had wages and self-

employment income, the Appeals officer’s determination of a 50-

percent allocation was appropriate under the circumstances. We

disagree.

The Forms W-2, Wage and Tax Statement, attached to the

returns show that Mr. Scott’s income greatly exceeded

petitioner’s for every year at issue. Mr. Scott handled the

family finances and dominated the family. He told petitioner the

number of exemptions to claim for withholding. He was an

accountant, and petitioner believed that the claimed exemptions
 - 31 -

were proper. On the basis of these facts, we conclude that the

underpayments of tax are attributable solely to Mr. Scott.

7. Significant Benefit

During their marriage, including the years at issue, the

Scotts did not live well, and money was tight. They had modest

furnishings and vehicles, and they never owned a home.

Petitioner did not benefit beyond normal support from the unpaid

liabilities for all of the years at issue. Therefore, this

factor favors granting petitioner relief. See Van Arsdalen v.

Commissioner, T.C. Memo. 2007-48.

8. Noncompliance With Federal Income Tax Laws

The fact that the requesting spouse has not made a good

faith effort to comply with Federal income tax laws in years

after the years for which relief is sought is a factor that

weighs against granting relief. Petitioner and Mr. Smith filed a

joint Federal income tax return for 2002 that reported an

overpayment of tax. Initially, respondent determined that the

return contained an error and that the Smiths underpaid their

2002 tax. The issue was ultimately resolved, and on June 16,

2003, respondent sent them a refund of $717.74. Petitioner

complied with Federal income tax laws. This factor is neutral.
 - 32 -

Conclusion

Petitioner has presented a strong case for relief from joint

tax liability on the basis of the factors promulgated by the

Commissioner in Rev. Proc. 2000-15, sec. 4.03. Most of those

factors favor granting petitioner relief. Most significantly,

petitioner would suffer extreme economic hardship if relief were

denied. After considering all of the facts and circumstances, we

find that it would be inequitable to hold petitioner liable for

payment of the outstanding tax liabilities for all years at

issue. Accordingly, we hold that respondent abused his

discretion in denying petitioner equitable relief from joint and

several liability under section 6015(f).

To reflect the foregoing,

Decision will be entered

for petitioner.