Hayes v. Comm'r

T.C. Summary Opinion 2010-121

UNITED STATES TAX COURT

WILBERT LEE HAYES, Petitioner, AND
MARLENE HAYES, Intervenor v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11294-08S. Filed August 23, 2010.

Wilbert Lee Hayes, pro se.

Marlene Hayes, pro se.

Jennifer K. Martwick, for respondent.

GOLDBERG, Special Trial Judge: This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. 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
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for any other case. Unless otherwise indicated, subsequent

section references are to the Internal Revenue Code, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

The sole issue for decision is whether petitioner is

entitled to relief from joint and several liability for 2004 and

2005. In a notice of deficiency that the Internal Revenue

Service (IRS) mailed to petitioner and intervenor, the IRS

determined Federal income tax deficiencies of $1,870.90 and

$3,852.75, for 2004 and 2005, respectively, and an addition to

tax for 2004 of $100 for late filing under section 6651(a)(1) and

denied petitioner’s request for relief under section 6015(b),

(c), or (f) for 2004 and 2005. The deficiency in each year

resulted from: (1) The failure by petitioner and intervenor to

report interest income from their separate bank accounts; (2) the

disallowance of most of the business expense deductions on the

couple’s joint Schedule C, Profit or Loss From Business; and (3)

computational reductions to the earned income credit (EIC) and

the additional child tax credit (ACTC) as a result of the first

two adjustments.

Petitioner timely petitioned the Court, seeking full relief

from joint and several liability for 2004 and 2005 while

conceding all of respondent’s adjustments for both years. After

the filing of the petition, an IRS administrative review proposed

partial relief to petitioner. Petitioner rejected the offer,
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preferring instead to continue to seek full relief through the

Court. Intervenor, by not filing a petition, likewise accepted

respondent’s determination. Intervenor, in accordance with Rule

325(b), intervened opposing any relief to petitioner. Both

petitioner and intervenor appeared at trial and testified.

Background

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

The stipulation of facts and the exhibits received into evidence

are incorporated herein by reference. Petitioner resided in

Georgia when he filed the petition.

Petitioner was born and raised in DeKalb County, North

Carolina. In 2001 he purchased a house there because it was near

his extended family. After about a 1-year courtship, petitioner

and intervenor married in May 2003. Petitioner had at least two

daughters from a prior relationship who were by then adults.

Intervenor had two teenage sons from a prior relationship.

In 2004 and 2005 petitioner, intervenor, and intervenor’s

two sons lived together in quarters provided by the U.S. Army

near Heidelberg, Germany, not far from a military facility where

intervenor was stationed. Petitioner had retired from the U.S.

Navy at the rank of first class petty officer. He received a

taxable pension from the Navy of $14,616 in 2004 and $15,000 in

2005. His Federal income tax withholdings on the pension
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distributions were $351.24 or 2.4 percent for 2004 and $379.56 or

2.5 percent for 2005.

During 2004 and 2005 intervenor was an active-duty member of

the U.S. Army, serving as a supply logistics sergeant. She

earned taxable compensation from the Army of $33,717 in 2004 and

$37,035 in 2005. Her Federal income tax withholdings on her Army

earnings were $1,227 or 3.6 percent for 2004 and $2,185.05 or 5.9

percent for 2005.

The couple maintained separate bank accounts. For example,

petitioner deposited his Navy pension into his separate account,

and likewise intervenor deposited her Army salary into her

separate account.

Petitioner and intervenor started having marital problems

almost immediately after they married. Petitioner enjoyed living

frugally and wanted the couple to save money while intervenor was

more apt to spend what she earned, for instance taking her family

to Italy and London when her mother visited. Intervenor was also

responsible for raising her two sons. While living in Germany,

petitioner made frequent return visits to North Carolina to be

near his remaining family.

One weekend in early 2004, a friend of petitioner who was

working in Germany as a disc jockey (DJ) approached the couple

asking whether petitioner would serve as his paid assistant and

replacement from time to time. Intervenor encouraged petitioner
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to accept. Thus, starting in April 2004, petitioner began

serving as a DJ on weekends at nightclubs in Heidelberg on and

off the Army base.

When petitioner was using his friend’s DJ equipment,

petitioner would net only about $35 per night after the equipment

rental and other charges. Because of this, petitioner purchased

his own sound equipment and obtained the necessary insurance

license in Germany. Petitioner typically worked one show on most

of the weekends when he was in Germany, grossing around $250 to

$300 per show. Intervenor helped petitioner with the DJ

activities. She attended the shows, collected money at the door,

and helped “load/unload and pull requested songs.” They

continued the DJ business until November 2005.

In November 2005, because of their worsening marital

problems and other personal issues, petitioner left Germany and

moved back to North Carolina. In December 2005, acting upon

intervenor’s relocation request, the Army reassigned intervenor

to a military base near El Paso, Texas. During this time

intervenor informed petitioner that she was having financial

difficulties. Petitioner flew to El Paso to assist intervenor

and her sons, including using his good credit rating to help her

secure a home to rent. Petitioner and intervenor attempted to
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reconcile. At the end of 2005 and for a few months into 2006,

petitioner lived in the El Paso home with intervenor and her

sons.

Sometime in early 2006, petitioner went to Atlanta to

collect a car, furniture, and other belongings that they had

shipped from Germany. On April 3, 2006, petitioner emailed to

intervenor electronic copies of his 2004 and 2005 Forms 1099-R,

Distributions From Pensions, Annuities, Retirement or

Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for his

Navy pension income so that intervenor could have their Federal

income tax returns prepared. While intervenor was at a cookout,

a military friend gave her a business card for an income tax

preparer, James Washington of Washington Tax Services in El

Paso.1 The slogan on Mr. Washington’s business card said: “Get

most, if not all, of it Back”.

Petitioner was still out of town when intervenor met with

Mr. Washington at his office. Mr. Washington asked intervenor

basic opening questions including the filing status of the couple

1
The Court takes judicial notice that James Washington was
indicted in the U.S. District Court for the Western District of
Texas on Nov. 7, 2007, and pleaded guilty to one count of making
a materially false statement that he was a certified public
accountant (C.P.A) who was authorized to represent taxpayers
before the Internal Revenue Service (IRS), in violation of 18
U.S.C. sec. 1001(a)(3) (2006). See Fed. R. Evid. 201. At the
time of trial Mr. Washington was serving a State jail sentence
for controlled substances possession. No accuracy-related
penalties are at issue in the instant case.
 - 7 -

and whether petitioner had any employment in 2004 and 2005.

Intervenor told Mr. Washington that petitioner had “DJed” but

that she did not have any receipts. Mr. Washington assured

intervenor that receipts were not necessary because she and

petitioner had lived in Germany when they conducted the DJ

activities.

Intervenor called petitioner from Mr. Washington’s office.

She conveyed the filing status and no need for substantiation

information that Mr. Washington had told her. Nonetheless,

petitioner still did not want to report any income or expenses

from the DJ activity, telling intervenor to report him solely as

“Military Retired and not self-employ”. Intervenor asked

petitioner to talk with Mr. Washington, and they had a brief

conversation.

Intervenor concluded that she would “do the right thing” by

reporting the income and expenses they incurred in the DJ

business. Consequently, “line by line” intervenor and Mr.

Washington completed a Schedule C for each year using

“guesstimates”. They listed petitioner and intervenor as the

“proprietors” of the business and they listed the name of the

business as “DJ Play Music”. For 2004 they reported a loss on

the Schedule C of $18,141 consisting of DJ income of $4,800 and

DJ expenses of $22,941. For 2005 they reported a Schedule C loss
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of $24,910, comprising DJ income of $5,690 and DJ expenses of

$30,600.

The Schedule C losses, when combined with the couple’s

Federal income tax withholding credits, dependency exemption

deductions for intervenor’s two sons, standard deductions for

married filing jointly, EIC, and ACTC, resulted in Federal income

tax refund requests of $3,672 for 2004 and $5,846 for 2005. On

or about April 15, 2006, intervenor filed both returns without

petitioner’s review or signature.

Petitioner returned to Texas toward the end of April 2006.

In anticipation of the refunds, on or about May 3, 2006,

intervenor and petitioner went to intervenor’s bank where she

added petitioner’s name to her account. The IRS sent the 2004

refund check to the couple’s El Paso address, and on May 30,

2006, the couple deposited the 2004 refund check into the joint

bank account.

Unlike the return for 2004, the 2005 joint Federal income

tax return that intervenor had filed was not processed by the

IRS. Instead, the IRS returned the 2005 Form 1040, U.S.

Individual Income Tax Return, to the couple’s El Paso address,

requesting that petitioner sign the return. Intervenor gave the

return to petitioner to review and sign. He eventually signed

the 2005 Form 1040, and intervenor mailed it back to the IRS.

The IRS received the jointly signed return on June 5, 2006.
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The couple’s disagreement over whether to save or spend the

refunds were “the last straw” for petitioner. In mid-June 2006

petitioner withdrew $1,000 from the joint bank account and moved

back to North Carolina, separating permanently from intervenor.

Within a month, petitioner reimbursed intervenor for the

withdrawal.

After petitioner left, intervenor received the IRS refund

check for 2005 at the couple’s El Paso address. She deposited

the check into their joint bank account on July 20, 2006.

Petitioner withdrew $991 on August 3, 2006. Petitioner watched

the account over the Internet as intervenor withdrew the

remainder of the funds. One year later, in August 2007, the

couple divorced.

However, the divorce did not end the couple’s money disputes

because the IRS selected their 2004 and 2005 joint Federal income

tax returns for examination. The examination led to the

following proposed adjustments.

With respect to 2004, the examiner determined that

petitioner and intervenor failed to report $146 and $68,

respectively, in taxable interest income from their separate bank

accounts. Much more significantly, the examiner disallowed

$10,036 of the Schedule C expense deductions for 2004, adjusting

the DJ business bottom line from a loss of $18,141 to a loss of

$8,105. These adjustments resulted in computational reductions
 - 10 -

to the EIC and the ACTC, leading to a deficiency for 2004 of

$1,870.90, together with a $100 addition to tax for late filing

under section 6651(a)(1).

Similarly for 2005, the examiner determined that petitioner

and intervenor failed to report $206 and $12, respectively, in

taxable interest income. In addition, the determination

disallowed $23,967 of the business expense deductions for 2005,

causing an adjustment in the Schedule C reporting from a net loss

of $24,910 to a net loss of $943. These adjustments resulted in

computational adjustments to the EIC and the ACTC, culminating in

a deficiency for 2005 of $3,852.75.

At this point, intervenor suggested to petitioner that she

would take responsibility for the aggregate deficiencies for both

years if he would repay her the funds he had withdrawn from their

joint bank account in the summer of 2006. Intervenor prepared a

Form 9465, Installment Agreement Request, listing petitioner’s

name and her name, and proposing a payment plan of $400 per

month.

Petitioner declined to sign the installment agreement.

Instead, petitioner provided the examining agent a completed Form

8857, Request for Innocent Spouse Relief, dated April 26, 2007,

requesting that the IRS grant him full relief from all the

Federal income tax liabilities for 2004 and 2005. On the

accompanying Form 12510, Questionnaire for Requesting Spouse,
 - 11 -

petitioner wrote that “I had no involvement in preparation of

tax” and “My wife control and spend most of the money and I was

not living in Texas when this happen.” Petitioner checked a box

on the form stating that he did not “review the tax return(s)

before signing.”

Intervenor provided the examining agent with a multipage

response to petitioner’s request for relief. In main part,

intervenor asserted:

Mr. Washington (tax-preparer) spoke with my
husband on the phone at the time I was getting the
papers prepared. My husband was very aware that we
wanted to file self employment. Initially, my husband
told me to file Military Retirement but I told him that
Mr. Washington informed me that receipts were not
required since we were filing from overseas.

Intervenor also pointed out that:

The entire [2005 Federal income tax return] packet was
returned, my husband had every opportunity to review
and sign the packet. I did not rush him so I’m not
convinced that he did not review it before he signed
it. He didn’t ask any questions about how we filed
because he was aware of it.

The examiner determined that petitioner was not entitled to

innocent spouse relief but did not issue a formal determination

letter.

A preliminary version of the divorce decree listed

intervenor and petitioner as responsible equally for their

outstanding Federal income tax liabilities; but because of

petitioner’s strong views regarding not having knowledge of the

DJ expense deductions and not receiving a benefit from the
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refunds, the final divorce decree dated August 2007 did not

address unpaid taxes.

As previously stated, the IRS issued a notice of deficiency

dated February 6, 2008, to petitioner and intervenor. The notice

adopted without change the examiner’s proposed adjustments, the

resulting deficiencies, and the denial of innocent spouse relief

to petitioner.

Petitioner filed the current petition, and in response,

respondent sent petitioner’s request for innocent spouse relief

to the IRS Cincinnati Centralized Innocent Spouse Operations Unit

(CCISCO). CCISCO contacted intervenor, who provided

documentation and her version of the events. CCISCO recommended

partial relief for petitioner under section 6015(c) for 2004 and

2005.

In respondent’s pretrial memorandum, respondent’s counsel

agreed with the CCISCO recommendation. In particular, respondent

concluded that petitioner did not have actual knowledge of, and

is therefore entitled to relief under section 6015(c) from,

intervenor’s unreported interest income for 2004 and 2005 and

from one-half of the disallowed business expense deductions for

2004 and 2005, which corresponds to intervenor’s share of the

disallowed DJ business expense deductions. Respondent also

concluded that petitioner is entitled to relief from one-half of
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the computational adjustments to the EIC and the ACTC resulting

from the two adjustments.

Discussion

I. Burden of Proof

Except as otherwise provided in section 6015, the requesting

spouse generally bears the burden of proof with respect to relief

from joint and several liability. See Rule 142(a); Alt v.

Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34

(6th Cir. 2004); Stergios v. Commissioner, T.C. Memo. 2009-15;

McClelland v. Commissioner, T.C. Memo. 2005-121 (and cases cited

therein). However, in an instance as here where the Commissioner

has proposed to give partial relief but the intervenor has

intervened to oppose the relief, the Court may decide the matter

according to the preponderance of the evidence. See Stergios v.

Commissioner, supra.

II. Joint and Several Liability

When taxpayers file a joint return, they compute the tax on

their aggregate income and liability for the resulting tax is

joint and several. Sec. 6013(d)(3); Butler v. Commissioner, 114

T.C. 276, 282 (2000); sec. 1.6013-4(b), Income Tax Regs.

However, the Code provides three possible avenues of relief

through section 6015(b), (c), and (f) from joint and several

liability. Stergios v. Commissioner, supra. All three are

subject to certain separate threshold requirements. In main
 - 14 -

part, section 6015(b) may provide relief if at the time of

signing the return the requesting spouse “did not know, and had

no reason to know, that there was such understatement”. Sec.

6015(b)(1)(C). Section 6015(c) may provide relief if at the time

of signing the return, the requesting spouse did not have “actual

knowledge” of the items that gave rise to the deficiency. Sec.

6015(c)(3)(C). Section 6015(f) may provide equitable relief

after “taking into account all the facts and circumstances” if

relief is not available under section 6015(b) or (c). Sec.

6015(f)(1) and (2). We now apply these three relief provisions

to the present facts.

III. Section 6015(b)

Section 6015(b)(1) has five conjunctive requirements for

relief to a requesting spouse. Thus, if the requesting spouse

fails to meet any one of the five requirements, he/she does not

qualify for relief. Alt v. Commissioner, supra at 313.

Petitioner immediately satisfies two of them: The couple filed

joint returns for 2004 and 2005,2 and petitioner requested relief

before the IRS began collection activity.

For context, we note that at all stages of the

administrative review respondent denied relief to petitioner

2
Petitioner did not sign the 2004 joint tax return, but he
does not claim this omission as a defense. We will assume that
intervenor filed the 2004 joint return with petitioner’s consent.
See Hennen v. Commissioner, 35 T.C. 747, 748 (1961); Moran v.
Commissioner, T.C. Memo. 2005-66.
 - 15 -

under section 6015(b) because one or more of the three other

requirements was not met. Next we describe the three

requirements.

A. Attribution--Section 6015(b)(1)(B)

The understatement of tax must be “attributable to erroneous

items of 1 individual filing the joint return”. Sec.

6015(b)(1)(B). That one individual must be the nonrequesting

spouse. Juell v. Commissioner, T.C. Memo. 2007-219.

B. Reason To Know--Section 6015(b)(1)(C)

The requesting spouse must have had no knowledge and “no

reason to know” of the items giving rise to the understatement.

Sec. 6015(b)(1)(C). A requesting spouse has constructive

knowledge or a reason to know of an understatement if “a

reasonably prudent taxpayer under the circumstances of the

[requesting] spouse at the time of signing the return could be

expected to know that the tax liability stated was erroneous or

that further investigation was warranted.” Kistner v.

Commissioner, 18 F.3d 1521, 1525 (11th Cir. 1994),3 revg. T.C.

Memo. 1991-463; Juell v. Commissioner, supra; see also sec.

1.6015-2(c), Income Tax Regs.

Even if the requesting spouse is not aware of sufficient

facts to give him reason to know of the understatement, he may

3
If the decision in this case were appealable, which it is
not because of sec. 7463(b), the appeal would lie in the U.S.
Court of Appeals for the Eleventh Circuit.
 - 16 -

know enough facts to put him on notice that an understatement

exists. Juell v. Commissioner, supra. In other words, a

taxpayer who files a joint return with his spouse may not turn a

blind eye to the return and thereby avoid the duty to inquire.

McCoy v. Commissioner, 57 T.C. 732, 734 (1972). Under this duty,

the decisive question is whether “‘a reasonably prudent taxpayer

in [his, the requesting spouse’s] position [would] be led to

question the legitimacy of the deduction.’” Juell v.

Commissioner, supra (quoting Guth v. Commissioner, 897 F.2d 441,

445 (9th Cir. 1990), affg. T.C. Memo. 1987-522).

C. Inequity--Section 6015(b)(1)(D)

The inequity requirement tests whether “taking into account

all the facts and circumstances” it would be “inequitable” to

hold the requesting spouse liable for the understatement. Sec.

6015(b)(1)(D). The analysis is similar to the equity analysis of

section 6015(f). Juell v. Commissioner, supra. The two most

common factors are whether the requesting spouse received a

significant benefit and whether the nonrequesting spouse caused

the understatement through concealment, overreaching, or other

wrongdoing. Smith v. Commissioner, T.C. Memo. 2009-237. We now

apply the law of section 6015(b) to the present facts and

circumstances.
 - 17 -

D. Omitted Interest Income

Because of the attribution requirement of section

6015(b)(1)(B), petitioner is eligible for relief only from

intervenor’s omitted interest income, not from his own. The

amount of intervenor’s unreported interest income was $68 for

2004 and $12 for 2005.

Intervenor and petitioner maintained separate bank accounts

during these 2 years. Intervenor filed the 2004 Federal income

tax return without petitioner’s review. Even though petitioner

signed the 2005 Federal income tax return before filing, a $12

omission is not highly noticeable. Moreover, although petitioner

was aware that intervenor had at least one separate bank account,

intervenor does not claim and the record does not indicate that

petitioner knew or had reason to know that intervenor earned

interest. In fact, petitioner perceived intervenor as a

spendthrift, and may have thought that she maintained solely a

non-interest-bearing checking account.

With respect to section 6015(b)(1)(D), we conclude that it

would not be inequitable to grant relief to petitioner with

respect to the omitted interest income for 2004 and 2005.

Petitioner’s share of the tax refunds that the omitted interest

of $68 and $12 generated for 2004 and 2005, respectively, are far

too small to find that petitioner received a significant benefit

from their exclusion.
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For the above reasons, we conclude that petitioner did not

know or have reason to know of intervenor’s omitted interest

income for 2004 and 2005 and that he is entitled to relief under

section 6015(b) for intervenor’s omitted interest income for 2004

and 2005 and for the related computational impacts on EIC and

ACTC.

E. Disallowed DJ Business Expense Deductions

Petitioner’s active participation in the DJ activity gave

him firsthand knowledge that the business generated income and

expenses. Further, the reporting of the DJ business was foremost

in his mind because he explicitly told intervenor during the tax

preparation telephone conversation that he did not want her to

report the DJ income or expenses. These factors clearly put

petitioner on notice and gave him a duty to inquire. We conclude

that a reasonably prudent person in petitioner’s circumstances

would have followed up with his wife or with the tax preparer,

asking whether they reported the DJ activity, and if so, the

amount of income and expenses that the couple claimed and whether

they owed a balance or had a refund due. The conclusion for 2005

is even clearer because petitioner had the 2005 Federal income

tax return in his possession with plenty of time for review

before he signed it. We find that by not making these inquiries

petitioner cast “a blind eye” toward the disallowed DJ business

expense deductions for 2004 and 2005.
 - 19 -

Additionally, both petitioner and intervenor were active in

the DJ business. Petitioner served as the DJ while intervenor

attended the shows, helped collect cash at the door, and pulled

music selections. On her own initiative, intervenor reported

that she and petitioner were coproprietors of the business.

Thus, because the DJ business was not attributable solely to

intervenor, the attribution requirement of section 6015(b)(1)(B)

independently precludes relief to petitioner under section

6015(b).

For the above reasons, we sustain respondent’s determination

denying any relief to petitioner under section 6015(b) with

respect to the disallowed DJ business expense deductions.

IV. Section 6015(c)

A. Preliminary Requirements Under Section 6015(c)

Under section 6015(c) the requesting spouse who filed a

joint return for the year(s) in issue elects to be treated as if

he had filed a separate return, thereby limiting his tax

liability to that portion of the deficiency properly allocable to

him. Rowe v. Commissioner, T.C. Memo. 2001-325. To be eligible

for relief under section 6015(c) the electing spouse must satisfy

two pertinent preliminary conditions as of the time of the

election. First, he must no longer be married to, must be

legally separated from, or must have lived for the entirety of

the preceding 12-month period in a different household from the
 - 20 -

individual with whom he filed the joint return. Sec.

6015(c)(3)(A). Secondly, he must have made the election after

the deficiency was asserted but no later than 2 years after the

date on which the collection activity began. Sec. 6015(c)(3)(B).

Petitioner satisfies these two initial conditions. Although

petitioner submitted the Form 8857 to the IRS before the State

court finalized his divorce in August 2007, in the present

circumstance the Court does not look to the date of the Form

8857. We are redetermining whether petitioner is entitled to

relief from joint liability with respect to the determined

deficiencies and thus look to the date of petitioner’s petition.

See Stergios v. Commissioner, T.C. Memo. 2009-15; see also

Vetrano v. Commissioner, 116 T.C. 272, 283 (2001). Thus, as of

May 12, 2008, the date on which petitioner filed the petition, he

was no longer married to intervenor. Likewise, the IRS had not

commenced collection activity before the petition was filed.

Consequently, petitioner’s election was timely. Accordingly, he

has satisfied the two pertinent threshold requirements of section

6015(c).

B. Allocation of Deficiency

For purposes of section 6015(c), section 6015(d) allocates

the items that gave rise to a deficiency on a joint return to

each spouse as though they had filed separate returns, and the

requesting spouse is liable only for his proportionate share of
 - 21 -

the deficiency that results from such allocation. Sec.

6015(d)(1), (3)(A). Thus, section 6015(c) permits an individual

to elect to limit the liability to the portion of the deficiency

that is properly allocable to the electing individual under

section 6015(d). Estate of Capehart v. Commissioner, 125 T.C.

211, 214 (2005); Barnes v. Commissioner, T.C. Memo. 2004-266;

sec. 1.6015-3(a), Income Tax Regs. In other words, petitioner

may be entitled to relief from intervenor’s share of the

deficiencies, but not from his own share.

Applying these principles to the present situation,

respondent determined that under section 6015(c), one-half of the

disallowed DJ business expense deductions for 2004 and 2005 is

attributable to intervenor. We agree. As noted, intervenor was

active in the business and she independently reported that

petitioner and she were coproprietors. Thus, we will analyze

petitioner’s request for full relief under section 6015(c) solely

as applicable to intervenor’s one-half share of the disallowed DJ

business expense deductions, but not for petitioner’s one-half

share.

C. Knowledge Standard Under Section 6015(c)

Congress sought to make relief easier to achieve through

section 6015(c) than section 6015(b) by requiring a higher level

of knowledge under section 6015(c) before denying relief. King

v. Commissioner, 116 T.C. 198, 204 (2001). Specifically, the
 - 22 -

requesting spouse must not have had “actual knowledge, at the

time such individual signed the return, of any item giving rise

to a deficiency (or portion thereof) which is not allocable to

such individual”. Sec. 6015(c)(3)(C). The Court and the

regulations interpret this statutory language as requiring that

the requesting spouse not have “actual knowledge of the factual

circumstances which made the item unallowable as a deduction.”

King v. Commissioner, supra at 204; sec. 1.6015-3(c)(2)(i)(B)(1),

Income Tax Regs. The Court has further defined actual knowledge

as “an actual and clear awareness (as opposed to reason to know)

of the existence of an item which gives rise to the deficiency

(or portion thereof).” Cheshire v. Commissioner, 115 T.C. 183,

195 (2000), affd. 282 F.3d 326 (5th Cir. 2002).

D. Disallowed 2004 DJ Business Expense Deductions

We begin by noting that the CCISCO administrative review

recommended relief under section 6015(c) from intervenor’s one-

half share of the 2004 disallowed DJ business expenses and

respondent’s pretrial memorandum concurred with that

recommendation.

The decisive factor here is that intervenor filed the 2004

Federal income tax return without petitioner’s review or

signature. Despite intervenor’s nearly 2 years of opposition,

documentation, and testimony regarding petitioner’s claim for

relief under section 6015, she never indicated that she discussed
 - 23 -

with petitioner the final “guesstimates” for the 2004 DJ business

expenses deductions or the 2004 refund request before she filed

their 2004 joint Federal income tax return. Therefore, we find

that petitioner did not have an actual and clear awareness of the

overstated DJ business expense deductions for 2004. Accordingly,

we agree with respondent that petitioner is entitled to relief

from joint and several liability under section 6015(c) from the

portion of the deficiency related to intervenor’s half of the

2004 disallowed DJ business expense deductions and from the

associated computational adjustments to EIC and ACTC.

E. Disallowed 2005 DJ Business Expense Deductions

CCISCO and respondent likewise concluded petitioner is

entitled to relief under section 6015(c) from intervenor’s one-

half share of the disallowed DJ business expense deductions for

2005.

The IRS returned the unprocessed 2005 Federal income tax

return to the couple’s El Paso address, requesting petitioner’s

signature. Intervenor gave the unprocessed 2005 Federal income

tax return to petitioner to sign, and he had plenty of time to

review the return before he signed it.

Petitioner signed the 2005 Form 1040 on page 2, in the

signature block “Under penalties of perjury”, only a short

distance from the line that showed a large refund of $5,846,

slightly more than 15 times his own personal withholding credit
 - 24 -

for 2005 of $379.56. Further, the 2005 Form 1040 on page 1

reported only two other items of income: Intervenor’s Army

income of $37,035 and petitioner’s Navy pension $15,000.

Sandwiched between these two figures, in the middle of the

numbers column, was the reported loss of $24,910 from the DJ

business, surrounded by handwritten brackets clearing indicating

a negative number. Similarly, the Schedule C, which reported the

details of the DJ business loss, immediately followed the page

where petitioner signed the return. Consequently, petitioner’s

claim that he did not have actual knowledge of the factual

circumstances giving rise to the 2005 business loss is untenable,

especially since he had previously told intervenor not to report

the DJ activity.

Moreover, petitioner was also keenly aware of the pending

2005 refund. The couple had already set up a joint bank account

to receive the refund, they had already deposited the 2004 refund

check, and they had each drawn separately from the 2004 refund

proceeds before petitioner had signed the 2005 return.

For all of these reasons, we find that at the time

petitioner signed the 2005 return, he had an actual and clear

awareness of the large loss from the DJ business that gave rise

to almost all of the understatement for 2005. Accordingly, we

hold that petitioner is not entitled to any relief from joint and
 - 25 -

several liability under section 6015(c) from the 2005 disallowed

business expense deductions.

V. Section 6015(f) Equitable Relief

In overview, because petitioner is not entitled to full

relief under section 6015(b) or (c), he may be eligible for

relief under section 6015(f). In broadest terms, section 6015(f)

provides equitable relief if, after taking into account all the

facts and circumstances, it would be inequitable to hold the

requesting spouse liable for the unpaid tax or any portion

thereof. Butler v. Commissioner, 114 T.C. at 292. We begin by

noting that the IRS examiner, the notice of deficiency, and

respondent in his pretrial memorandum determined that petitioner

is not entitled to equitable relief under section 6015(f).

A. Analysis of Section 6015(f)

The Commissioner has prescribed guidelines in Rev. Proc.

2003-61, 2003-2 C.B. 296, for determining equitable relief.

Except for certain exceptions inapplicable here, Rev. Proc. 2003-

61, sec. 4.01(7), 2003-2 C.B. at 297, limits equitable relief to

only those items which are attributable to the nonrequesting

spouse. Therefore, petitioner is not eligible for equitable

relief from his own share of the omitted interest income or from

his share of the disallowed DJ business expense deductions.

Consequently, because we allowed partial relief for petitioner

under section 6015(c), we review section 6015(f) solely with
 - 26 -

respect to whether petitioner is entitled to equitable relief

from intervenor’s share of the disallowed 2005 DJ business

expense deductions.

The Commissioner’s guidelines set forth three tiers of

requirements. Summarizing the first two tiers, we note that

where, as here, the requesting spouse has satisfied the first set

of requirements found in Rev. Proc. 2003-61, sec. 4.01, 2003-2

C.B. at 297-298, but fails to meet the conditions set forth in

Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298 (here,

petitioner failed to establish economic hardship as discussed in

more detail below), the requesting spouse may nevertheless obtain

relief under a nonexclusive list of factors that Rev. Proc. 2003-

61, sec. 4.03, 2003-2 C.B. at 298-299, provides. No single

factor is determinative, and the Court will consider all relevant

factors whether or not enumerated in that section. We now apply

the equity factors to the facts in this case.

1. Marital Status

The marital status factor is satisfied because petitioner

and intervenor were divorced before petitioner filed his petition

requesting relief.

2. Economic Hardship

Rev. Proc. 2003-61, sec. 4.03(2)(a)(ii), states that the

definition of economic hardship relies on rules that the

Secretary set forth in section 301.6343-1(b)(4), Proced. & Admin.
 - 27 -

Regs. The regulation defines economic hardship as the condition

where a taxpayer is “unable to pay his or her reasonable basic

living expenses.” Sec. 301.6343-1(b)(4)(i), Proced. & Admin.

Regs. In determining a reasonable amount of basic living

expense, the Commissioner considers information such as: (1) The

taxpayer’s age, employment status, history, and ability to earn;

(2) the amount reasonably necessary for living expenses such as

food, clothing, housing, medical expenses, insurances, current

tax payments, and child support; (3) the cost of living in the

geographic area in which the taxpayer resides; and (4) any

extraordinary circumstances such as a medical catastrophe. Sec.

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

On the Form 12510 which petitioner submitted as part of his

administrative application for innocent spouse relief, petitioner

reported that his monthly income of $1,200 exceeded his monthly

expenses of $1,068. Further, petitioner did not claim that he

will be unable to pay his reasonable basic living expenses if

relief is not granted. Accordingly, petitioner has not

established financial hardship. This factor weighs against

relief.

3. Knowledge or Reason To Know

We have already concluded that petitioner failed to

establish that when he signed the 2005 Federal income tax return,

he did not know or have reason to know of the disallowed 2005 DJ
 - 28 -

business expense deductions for 2005. This factor weighs against

relief.

4. Nonrequesting Spouse’s Legal Obligation

The legal obligation factor is pertinent only when the

nonrequesting spouse has a legal duty to pay the outstanding

income tax liability pursuant to a divorce decree or agreement.

Rev. Proc. 2003-61, sec. 4.03(2)(a)(iv). This factor is

inapplicable here because the final divorce decree did not assign

responsibility for paying the outstanding taxes.

5. Significant Benefit

This factor concerns whether the requesting spouse received

significant benefit beyond normal support as a result of the

unpaid tax liability or refund. Id. sec. 4.03(2)(a)(v), 2003-2

C.B. at 299. Petitioner received nearly $2,000 from the refunds,

though he reimbursed intervenor for $1,000. This factor is

neutral or weighs against relief.

6. Compliance With Federal Tax Laws

Another factor is whether the requesting spouse made a good-

faith effort to comply with the Federal income tax laws in the

succeeding years. Id. sec. 4.03(2)(a)(vi), 2003-2 C.B. at 299.

The record is devoid of information in this regard.
 - 29 -

7. Other Factors

With respect to the other factors that Rev. Proc. 2003-61,

sec. 4.03, provides, abuse and poor mental or physical health of

the requesting spouse, neither of those factors is present here.

B. Conclusion With Respect to Section 6015(f)

Weighing the above factors, we sustain respondent’s

determination that equity does not call for relief for

petitioner. Other than being divorced, no factor weighs in favor

of relief, and all the other factors are inapplicable, neutral,

or weigh against relief. Therefore, we hold that petitioner is

not entitled to equitable relief under section 6015(f) for any

portion of the disallowed 2005 DJ business expense deductions and

the related computational adjustments to EIC and ACTC.

Conclusion

The Court has considered all of the arguments that

petitioner and intervenor have made, and, to the extent not

mentioned, the Court concludes that the arguments are moot,

irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.