## Chapter 10

## INNOCENT SPOUSE

**§10.01 Introduction- Historical Development of Joint Return Filing**

Originally, the federal income tax treated each individual as a separate
taxpayer and thus, taxing unit. Thus, married individuals were required
to file two separate individual tax returns.[^1] The Supreme Court
upheld this treatment of married couples as two separate taxing units.
[Lucas v. Earl]{.underline}, 281 U.S. 111 (1930). Accordingly, when each
spouse had to file a separate return, there was no question of joint and
several liability and no need for innocent spouse relief.[^2]

However, the treatment of each spouse as a separate taxing unit prompted
high income individuals to devise creative ways of splitting income to
lower their effective tax rates. For example, assume Mr. Jones is a
banker and his gross income in 1918 is \$499,000. Assume that the
marginal rate in 1918 is 70 once taxable income reaches \$260,000.
Further assume that his wife, Mrs. Jones is a stay at home wife and
mother with no individual income. Mr. Jones has income of \$239,000
(\$499,000-\$260,000) that will be taxed at the highest marginal rate.
If, however, Mr. Jones could employ Mrs. Jones and pay her \$249,500,
thereby reducing his taxable income to \$249,500 and increasing Mrs.
Jones's taxable income to \$249,500, then none of the couple's income
would be subject to the highest marginal rate.

This was exactly the result of for spouses who lived in community
property law States. Under community property laws, generally spouses
are considered as receiving one half of the community income regardless
of who earned the income. Thus, in the same year that [Lucas v.
Earl]{.underline} was decided, the Supreme Court considered the
application of the federal income tax laws to income earned by one
spouse under community tax law states, but found a very different
result. In [Poe v. Seaborn]{.underline},[^3] the Supreme Court held that
under the community property laws of the State of Washington, the
husband's salary, interest, dividends and profits from sales of real and
personal property were treated as earned one-half by the husband and
one-half by his wife. Likewise, the expenses were also attributed
one-half to each. Thus, each spouse properly reported one half of the
income and expenses, resulting in a lower tax on the net income. [^4]

As a result of the principle that each member of a marriage were treated
as a separate taxing unit whose income was determined by applying state
property laws, there existed a difference in tax treatment of the total
income of a couple depending on whether the couple lived in a common law
state or community property law state. Following [Poe]{.underline}, some
separate property states were prompted to enact community property laws,
presumably bowing to pressure by wealthy married persons who wanted to
get the income splitting advantage of [Poe]{.underline}. Other states
resisting, prompting their wealth citizens to attempt other ways to
minimize family taxes, such as attempted gifts of property.

Congress began to consider the idea of treating a married couple as an
economic unit in 1928. Congress was aware that in some cases married
taxpayers had offsetting income and losses, the combination of which
would reduce the tax on the income of one spouse. By the Revenue Act of
1928 Congress gave taxpayers the express authority to file a joint
return for the purposes of offsetting income and losses. The tax of the
couple was calculated on the aggregate, netted income of the couple.[^5]
However, the legislation did not address the issue of whether each
spouse was jointly and severally liable for the tax reported on such a
joint return.[^6]

**§10.02 Creation of Joint and Several Liability of Spouses Filing Joint
Returns**

The issue of whether each spouse was jointly and severally liable for
the tax on the other spouse's income that was either reported on the
joint return or omitted, remained an unsettled question until 1938. In
1938, Congress expressly imposed joint and several income tax liability
on each spouse filing a joint income tax return.[^7] The statute
provided:

> In the case of a husband and wife living together the income of each
> (even though one has no gross income) may be included in a single
> return made by them jointly, in which case the tax shall be computed
> on the aggregate income, and the liability with respect to the tax
> shall be joint and several.

Revenue Act of 1938, Pub. L. No. 75-554, 52 Stat. 447, 476 (1938).

Allowing spouses to file joint returns, without providing for a tax
reduction in the case of netted income, did not address the disparity
between couples in common law states and couples in community property
tax states. Thus, finally in 1948, Congress enacted legislation that
allowed couples in common law states to effectively split their income
by filing a joint return. [^8] The official explanation for this change,
as noted in the Senate Finance Committee report was:

> Adoption of these income-splitting provisions will produce substantial
> geographical equalization in the impact of the tax on individual
> incomes. The impetuous enactment of community-property legislation by
> States that have long used the common law will be forestalled. The
> incentive for married couples in common-law States to attempt the
> reduction of their taxes by the division of their income through such
> devices as trusts, joint tenancies, and family partnerships will be
> reduced materially. Administrative difficulties stemming from the use
> of such devices will be diminished, and there will be less need for
> meticulous legislation on the income-tax treatment of trusts and
> family partnerships.[^9]

Commentators have suggested other reasons for adopting the joint return.
These reasons include: (1) Congress recognized that married couples pool
their income; (2) Congress decided it was inevitable that taxpayers
would continue to find creative ways to split income so Congress might
as well get the credit for doing it; and (3) Congress wanted to halt the
movement to community property laws because under such laws women were
obtaining substantial property rights.[^10]

Despite the statutory creation of joint and several liability in 1938
and the increased enticement to file joint returns by the 1948
legislation, Congress did not address the issue of relief from joint
liabilities for innocent spouses until 1971. What prompted Congress to
act was the fallout from the Supreme Court decision in [James v.
Commissioner]{.underline}, [366 U.S. 213, 224
(1961)](http://www.lexis.com/research/buttonTFLink?_m=22970a247b39b767290b5dcfb532b9da&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B39 S. Tex. L. Rev. 845%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=347&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B366 U.S. 213%2Cat 224%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=50&_startdoc=41&wchp=dGLbVtb-zSkAl&_md5=c86acddf5a471d44e83ae60949cf9131).
After the Supreme Court confirmed that taxpayers were in fact taxable on
money earned from illegal activities, such as embezzlement, the IRS
targeted spouses for tax on funds embezzled by their spouses. In such
cases, the unsuspecting spouse, who had no knowledge or no reason to
know of illegal or embezzled funds received by the other spouse, was
nevertheless liable for the tax due on such funds.

**[LOUISE M. SCUDDER]{.underline}**

United States Tax Court

48 T.C. 36(1967)

Judge Hoyt

FINDINGS OF FACT

The stipulated facts are found accordingly and adopted as our findings.

During the years in issue, Frank E. Scudder (hereinafter referred to as
Frank), and Louise M. Scudder (hereinafter referred to as petitioner),
were husband and wife residing in Owensboro, Ky. Forms 1040 were filed
jointly during these years in the names of Frank and Louise Scudder with
the district director  of internal revenue, Louisville, Ky.\
\
Petitioner was a partner with her five sisters in a wholesale liquor
business (hereinafter referred to as the partnership), throughout the
taxable years in question. Her income from this partnership was

\$7,799.65 in 1954, \$10,222.51 in 1955, \$ 8,218.01 in 1956,

\$10,466.68 in 1957, and \$7,419.15 in 1958. During those years Frank
was employed by the partnership as manager. He received wages and a
bonus totaling \$ 8,980.74 in 1954, \$ 10,501.25 in 1955, \$ 8,790.53 in
1956, \$ 10,512.59 in 1957, and \$ 8,214.92 in 1958.\
\
Frank exercised complete control over the affairs of the partnership
until the latter part of 1958. He determined his own rate of
compensation, supervised recordkeeping, determined the amount of cash
distributions to the partners, handled employee problems, and signed the
partnership information tax returns pursuant to a power of attorney from
the partners.

Substantial amounts of partnership funds were taken and used by Frank
for his individual purposes in each of the years 1954 through 1958. The
money was taken without the knowledge or consent of the partners, and
the parties agree that the misappropriations constituted embezzlements.
  Frank concealed his embezzlement activities from petitioner and the
accountants who prepared joint income tax returns for the years 1954
through 1958. Repayments of part of the amounts taken occurred
periodically prior to the discovery of Frank\'s defalcations. The
parties are in agreement that the net amounts taken in each year, except
1954, were as follows:

  ---------------------- ------------------------------------------------
  1954                   \$ 71,025.28

  1955                   83,768.70

  1956                   56,293.97

  1957                   33,514.65

  1958                   37,063.24
  ---------------------- ------------------------------------------------

\* \* \*\
\
The embezzlements were concealed by disguising them as loans on
partnership information which was furnished to the accountants for
preparation of annual financial statements and information returns.
Copies of the financial statements were available to the partners, but
Frank avoided distributing them by telling one of the partners that the
preparation of each copy would cost the partnership \$ 12.50. The
embezzlements were discovered in the fall of 1958 when it was learned
that the partners had not received copies of the financial statements
and an investigation was then made.\
\
Following his admission of the embezzlements, Frank transferred to the
partnership in partial restitution assets valued at \$ 135,470.45. This
transfer of assets was made by a document dated November 17, 1958.\
\
Petitioner was not informed of her husband\'s conduct until May or June
of 1959. It was feared that an immediate disclosure would jeopardize
petitioner\'s health since she had been suffering from illnesses and
emotional disturbances. Petitioner\'s nervous condition had required
hospitalization and extensive medical treatment in 1955.\
\
It was considered to be in the best interest of the partnership to
retain Frank as a figurehead manager for a period following the
discovery of the embezzlements. Frank\'s position with the partnership
was terminated in May or June of 1959 about the time that petitioner was
advised by her relatives of Frank\'s defalcations; it was decided then
that it would be beneficial to her children to move the family to
Hopkinsville, Ky. The move to Hopkinsville was accomplished and
petitioner obtained employment. Petitioner and her husband were
separated in 1962 and a divorce was granted in 1963.

It is not contended by respondent that petitioner personally benefited,
directly or indirectly, from the funds taken by Frank from the
partnership. The partnership sustained a loss due to the embezzlements
in the amount of \$ 140,817.95. Petitioner\'s distributive share of the
loss was \$ 21,082.75, of which \$ 6,596.16 was taken as a deduction on
her 1959 return. The remaining balance of \$ 14,486.59 was allowed as a
net operating loss carryback for the taxable year 1956.

The joint income tax returns filed by Frank and petitioner for the years
1954 through 1958 were prepared from information furnished entirely by
Frank. Petitioner never questioned her husband concerning the
information on the returns and did not discuss financial matters with
him. Petitioner had complete trust and confidence in her husband during
this period, and he was well respected in the community. Their marriage
was normally happy throughout these years. The question of whether joint
income tax returns should be filed was discussed once in 1949. At that
time Frank told petitioner that it would be to their advantage to file
joint returns. Petitioner continued to sign joint returns without
question until she was informed of her husband\'s embezzlement
activities. Subsequent to this time, petitioner filed separate income
tax returns even though she was eligible to file joint returns until
1962.

Although most of the tax deficiencies are based on the unreported
embezzlement income, Frank also received income from several other
sources during the years in question which he failed to report. He
 received a share of the profits from a number of local business
enterprises in which he was secretly interested. He also failed to
report a travel and expense allowance from the partnership which he
received each year but did not use for business travel and expenses.\
\
\* \* \*

**OPINION**

Petitioner\'s liability for the assessed income taxes and fraud
penalties is based upon section 6013(d)(3)[^11] which provides for joint
and several liability for the tax on the aggregate income where a
husband and wife elect to file a joint return. The joint and several
liability also applies to fraud penalties despite the innocence of the
wife or the husband. [W. L. Kann, 18 T.C. 1032
(1952),](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=9&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B18 T.C. 1032%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=9c4b8b8bd5508cc33263b7c34b2fd33b) 
*affd*. [210 F. 2d
247](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=10&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B210 F.2d 247%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=c43b40685d95c0fd64548c944332a348)
(C.A. 3, 1953), *certiorari denied* [347 U.S. 967
(1954);](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=11&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B347 U.S. 967%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=7afb04f76db5a0f8f02ac3b392664ea2)
[Myrna S. Howell, 10 T.C. 859
(1948),](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=12&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B10 T.C. 859%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=f7c1f8a416ca1d811c6b755136b0a81d)
*affd*. [175 F. 2d
240](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=13&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B175 F.2d 240%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=62907abbafe34120750ba88f4ffde5a3)
(C.A. 6, 1949).

Petitioner seeks to avoid liability for the deficiencies on the ground
that legally effective joint returns were not filed with Frank for the
years 1954 through 1958. Petitioner concedes that she voluntarily signed
returns for the years in question with her husband and that valid joint
returns were filed in form. It is argued, however, that joint returns
were not filed in substance due to Frank\'s fraudulent concealment of
his embezzlement and other business activities from petitioner. The
question presented for our decision, therefore, are whether petitioner
was tricked and defrauded by her husband into signing joint returns,
and, if so, whether this vitiates the effectiveness of her signature for
purposes of joint and several liability on the return.\
\
We have found no case in which the foregoing argument has been
exclusively relied upon. There are cases, however, in which wives have
attempted to avoid statutory liability on joint returns on the ground
that their signatures on the returns were the consequence of duress
exerted by their husbands. See [Hazel Stanley, 45 T.C. 555
(1966);](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=14&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B45 T.C. 555%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=a4113a90788ab6a732e1dfa98c072c17)
[Irving S. Federbush, 34 T.C. 740, 754-758
(1960),](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=15&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B34 T.C. 740%2Cat 754%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=2ebbfdca807a6950180cc7bf6a1a16c2)
*affirmed per curiam* [325 F. 2d
1](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=16&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B325 F.2d 1%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=b136a26a3d7974f796e39252d3c1ad5b)
(C.A. 2, 1963); [Estate of Merlin H. Aylesworth, 24 T.C. 134
(1955).](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=17&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B24 T.C. 134%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=a70aa68d57dc056d6fbce62d762a6acb)
These cases have interpreted the term \"joint return\" used in section
6013(d)(3) as not including a return which the wife has been forced to
sign because of duress. The legal premise on which this interpretation
is based is that legal consequences will not attach to an involuntary
act.

It is beyond controversy in the instant case that petitioner signed the
returns voluntarily; thus petitioner deprived herself of any basis on
which to contend that duress was responsible for her signature.\*\*\*

It is doubtful whether Frank viewed his unauthorized loans from the
partnership as creating taxable income and indeed the Supreme Court did
not have such a view of embezzlements throughout the years in question.
*See* [Commissioner v. Wilcox, 327 U.S. 404
(1946).](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=20&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B327 U.S. 404%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=05ea01f022d6548b1b1c7466a6150d4c)
However, it is well settled that the change in the Supreme Court\'s
position expressed in [James v. United States, 366 U.S. 213
(1961),](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=21&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B366 U.S. 213%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=f9af9d7fba5236270c357fcf9ef6f1c6)
is afforded retroactive effectiveness. *See* [Geiger\'s Estate v.
Commissioner, 352 F.2d
221](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=22&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B352 F.2d 221%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=a3b6adf5e22c57622d54f4d014fe5ee0)
(C.A. 8, 1965), *affirming* a Memorandum Opinion of this Court,
*certiorari denied* [382 U.S. 1012
(1966);](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=23&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B382 U.S. 1012%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=a0723cb24461dcbc6d64cca89f922ee5)
[Marvin E. Nerem, 41 T.C. 338
(1963).](http://www.lexis.com/research/buttonTFLink?_m=50c958db7d00757e0b601e738358591d&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B48 T.C. 36%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=24&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B41 T.C. 338%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=1894c925d2a0d8f64b56dc157eab5bd3)
It must be held in this case, therefore, that embezzled funds received
during 1954 through 1958 constitute

taxable income.

With respect to the other income which Frank failed to report, it would
be an exceedingly strained interpretation of the law of fraud for us to
hold that he had a duty to disclose this omission to his wife and that
failure to do so would constitute fraud sufficient to invalidate the
wife\'s signature. The record before us is devoid of evidence of
deliberate deception practiced by Frank to induce petitioner to sign
joint returns with him. There is no showing of detrimental reliance on
the part of the wife now being held jointly and severally liable on the
joint returns.\
\
We think that petitioner has failed to show that her signatures on the
joint returns were the product of her husband\'s fraud. Thus, we are
constrained to hold that petitioner must be subjected to joint and
several liability under section 6013(d)(3) on the ground that she filed
legally effective joint returns during the years in issue. Although we
have much sympathy for petitioner\'s unhappy situation and are appalled
at the harshness of this result in the instant case, the inflexible
statute leaves no room for amelioration. It would seem that only
remedial legislation can soften the impact of the rule of strict
individual liability for income taxes on the many married women who are
unknowingly subjected to its provisions by filing joint returns.\
\
This case is an extreme one to be sure, but it illustrates the degree of
risk assumed by filing joint returns. It seems extremely harsh that
petitioner should be liable for a tax based on money embezzled from the
partnership which she and her sisters owned. However, under the terms of
the statute, petitioner stands in the shoes of her husband and therefore
is individually responsible for any tax deficiency legally applicable to
the husband. No other interpretation of the statute is rationally
permissible if the phrase \"liability with respect to the tax shall be
joint and several\" is to be given its usual and long-accepted meaning
in the law.

In 1971, four years after [Scudder]{.underline} was decided, Congress
acted to provide relief for innocent spouses.[^12] Section 6013(e)
provide some, albeit very limited, relief for innocent spouses. Innocent
spouses could obtain relief from joint and several liability if they
could prove the following:

\(1\) the culpable spouse omitted income,

> \(2\) the amount of omitted income was more than 25% of the gross
> income reported on the return;
>
> \(3\) the requesting spouse proved that he or she did not know of, and
> had no reason to know of, such omission, and taking into account
> whether or not the other spouse significantly benefited directly or
> indirectly from the items omitted from gross income and taking into
> account all other facts and circumstances; and
>
> \(4\) it is inequitable to hold the other spouse liable for the
> deficiency in tax for such taxable year attributable to such omission;

then the other spouse could be relieved of liability for tax (including
interest, penalties, and other amounts) for such taxable year to the
extent that such liability was attributable to the omission of income by
the other spouse.

Such relief, however, was not available if the deficiency was the result
of the culpable spouse overstating deductions or credits because such
tax liability was not due to the "omission" of income. To remedy this,
in 1984, Congress amended section 6013(e) and extended it to instances
where the culpable spouse was the [source]{.underline} of the erroneous
item- i.e., where the culpable spouse overstated deductions or credits
thereby reducing the tax erroneously.[^13]

The state of innocent spouse relief remained the same for 18 years.
Under the law, spouses requesting relief had the burden of proving they
did not have either actual knowledge of the erroneous item or using the
reasonable person test, did not have reason to know (constructive
knowledge) of the erroneous item. Courts interpreting the law, denied
relief when the erroneous item was omitted income where a spouse knew
about the transaction that produced the omitted income, even if she did
not know actual receipt of the income or the amount of the income
received by the culpable spouse.

With respect to erroneous items due to overstated deductions or credits,
however, the courts were split. The Tax Court held that if the
requesting spouse knew about the transaction that was the source of the
overstated deduction or credit, then that fact alone was sufficient to
deny innocent spouse relief.

> **[RICHARD D. BOKUM II AND MARGARET B. BOKUM]{.underline}**
>
> Docket No. 19755-83, UNITED STATES TAX COURT, 94 T.C. 126
>
> February 28, 1990

Judge CHABOT

\* \* \*

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulations and the
stipulated exhibits are incorporated herein by this reference.

When the petitions were filed in the instant case, petitioners Richard
D. Bokum II (hereinafter sometimes referred to as Richard) and Margaret
B. Bokum (hereinafter sometimes referred to as Margaret), husband and
wife, had their legal residence in Miami, Florida. They have been
married to each other since 1941.

Margaret received a high school diploma and attended college for 2
years. She was graduated from Finch College in New York City, but did
not receive any training in business. In particular, she has never taken
any courses in business, finance, accounting, or taxation. Throughout
her married life, Margaret has never worked outside the home, but has
devoted herself to managing the household and raising petitioners\' six
children.

Margaret is a beneficiary of certain trusts, established by her parents,
which generate income for her of about \$ 120,000 to \$ 150,000
annually. She has lent money from time to time to Richard from her
separate funds to finance his business ventures. She has not otherwise
been personally involved in any of Richard\'s business affairs.

Richard is a geologist by training and a graduate of Princeton
University. He is the founder and president of Bokum Resources Corp.
(hereinafter sometimes referred to as Bokum Resources). Bokum Resources
was established to engage in the mining and milling of uranium. Its
shares were offered for sale to the public in December 1976. However,
Bokum Resources was never able to begin operations because of the effect
of safety concerns on the nuclear power industry, and was forced into
involuntary chapter XI bankruptcy in December 1980.

In 1971, Richard formed Quinta Land & Cattle Co. (hereinafter sometimes
referred to as Quinta), a subchapter S corporation with a June 30 fiscal
year. Quinta was formed for the purpose of entering the cattle and ranch
business through the purchase of an 11,000-acre cattle ranch
(hereinafter sometimes referred to as the ranch) in Montana. To this
end, Richard transferred shares in Bokum Resources to Quinta in exchange
for all of its stock. Quinta then transferred the Bokum Resources shares
and cash to Charles Kyd in exchange for all the shares of Kyd Cattle Co.
which had title to the ranch. Margaret knew that Quinta acquired the
ranch from Charles Kyd or from Kyd Cattle Co. Richard continued to own
all of the outstanding shares of Quinta through the years in issue and
was Quinta\'s president in 1977. Margaret never was a shareholder of
Quinta. She was not an officer or director of Quinta in 1977. Margaret
became an officer and director of Quinta in 1981; however, she was
appointed merely to fill a vacancy and did not take any part in
Quinta\'s affairs. Margaret did not do any bookkeeping for Quinta.

After Quinta bought the ranch, Richard made various improvements to the
ranch property. An existing irrigation system was expanded and an office
building and barn were constructed. He also built a home for his family
on the ranch property in 1971, at a cost of about \$ 800,000. Margaret
has spent summers at the ranch since construction of the home.

During the fiscal year ended June 30, 1977, Quinta sold a substantial
portion of the ranch to Madison River Cattle Co. for \$ 3,800,000. This
resulted in a gain of \$ 3,119,045. Margaret knew of this sale, although
she did not participate in the business decision to sell, and did not
know how much Quinta received on the sale. The portion of the ranch on
which the house was built and about 237 acres of surrounding land were
not sold. After subtracting sales commissions, taxes, and payment of \$
1,005,000 owed to the Federal Land Bank on the property, the net sales
proceeds of \$ 2,095,000 were deposited into Richard\'s personal
account. Richard used \$ 1,677,795 of this amount to pay the balance of
a personal loan he had previously incurred from the First National Bank
of Albuquerque. The proceeds of this loan had been transferred by
Richard to Bokum Resources to pay operating expenses and to finance
certain litigation. The remaining \$ 417,205 of net sales proceeds were
used for petitioners\' personal living expenses. Margaret did not know
what Richard did with the sales proceeds.

Petitioners\' living expenses were about \$ 500,000 per year, which
included the cost of maintaining their two residences in the Miami area
and the Montana ranch house, including the employment of three gardeners
and a house servant in Florida and various employees in Montana.
Petitioners also employed a captain and mate and incurred additional
expenses in maintaining a yacht. Richard paid the household bills, and
Margaret helped when he could not afford to pay the bills. Richard wrote
most of the checks, but Margaret wrote some checks when Richard was out
of town.

In its fiscal year ended June 30, 1977, Quinta distributed \$ 3,553,678
(hereinafter sometimes referred to as the distribution) to Richard,
Quinta\'s sole shareholder. On its Form 1120S, Quinta reported \$
2,605,272 of dividend distributions as long-term capital gain, and \$
948,406 as a nondividend distribution. For that fiscal year, Quinta
reported taxable income of \$ 2,605,272, which was the amount of its
current earnings and profits.[^14] With respect to the sale of the
ranch, Quinta reported the gain as shown in table 1.

  ------------------------------------------------------------------------
  Table 1                                              
  ----------------------------------- ---------------- -------------------
  Total gain                                           \$ 3,119,045

  Ordinary income                                      

  Recapture (livestock)               \$ 260,414       

  Recapture (other)                                    

  Inventory (livestock)               \$ 230,425       \$490,839

                                                       

  Long-term capital gain                               \$ 2,628,206
  ------------------------------------------------------------------------

Of the \$ 3,800,000 sale price, \$2,681,856 was allocated to land,
\$436,010 to various categories of depreciable property other than
buildings and livestock (equipment, autos, irrigation systems,
stockwells, and furniture and fixtures), \$148,809 to buildings, and \$
533,325 to livestock.

Petitioners filed a joint Federal income tax return for 1977.[^15] Each
petitioner signed this tax return. Petitioners\' 1977 Schedule D shows
\$ 541,347 as long-term capital gain, computed as follows: (1) Of the \$
3,553,678 distribution, petitioners did not report or otherwise account
for the \$ 948,406 nondividend distribution; (2) petitioners reported \$
2,605,272 as long-term capital gain from dividend distributions from
Quinta;[^16] (3) petitioners reduced that amount by \$ 2,087,057, which
was purportedly Richard\'s basis in his Quinta stock; \[footnote
omitted\] (4) petitioners reported the remaining \$ 516,215 as long-term
capital gain; and (5) petitioners also reported \$ 25,132 as their share
of net long-term gain from a trust, for a total net long-term capital
gain of \$ 541,347. Petitioners reduced this by \$ 270,673 pursuant to
section 1202, and reported capital gain of \$ 270,674 as an element of
adjusted gross income. The \$ 516,215 amount that petitioners reported
on their Schedule D, Part II, as a dividend distribution from Quinta and
the \$ 541,347 amount of their net long-term gain, are larger than any
other amount appearing on petitioners\' joint 1977 tax return (except
for the amount in the schedule set forth in note 8, supra, and a \$
534,319 1975 loss amount utilized in calculating a loss carryover to
1977).

Neither Richard nor Margaret played any role in the preparation of their
1977 joint tax return nor in the formulation of the tax treatment to be
accorded the distribution on the tax return. Although he was active in
business, Richard had little understanding of the tax laws. All of
petitioners\' joint tax returns, including the 1977 tax return, were
prepared by Richard\'s accountants. Beverly Roy, Richard\'s personal
secretary for 18 years, assembled any necessary information on
Richard\'s business and financial dealings. Richard signed the 1977 tax
return prepared by his accountants and then presented it to Margaret for
her signature. Petitioners each signed the tax return without reviewing
its contents. At the time they signed the tax return; neither Richard
nor Margaret knew that the tax return understated their income tax
liability.

Although the 1977 joint tax return was prepared by Richard\'s
accountants, the signature block did not include any information
(signature, identifying number, address) required from paid preparers of
tax returns.

\* \* \*

In the notice of deficiency, respondent determined that petitioners
understated their 1977 taxable income by (1) \$ 606,684 on account of
(a) a reallocation from long-term capital gain to recapture ordinary
income of some of Quinta\'s gain on the sale of the ranch, and (b) a
flow through of that reallocation to Richard, and (2) \$ 1,054,607 on
account of a disallowance of petitioners\' claim of basis (see note 8,
supra).

\* \* \*

On petitioners\' 1977 joint tax return, they reported \$ 1,207 adjusted
gross income, minus \$ 287,615 taxable income, and \$46,112 tax
liability (all of which is minimum tax). For 1977, the parties have
stipulated to adjustments totaling \$ 1,124,664 and to a deficiency of
\$ 513,755.37.

The parties\' settlement reflects the parties\' agreement that
Richard\'s basis in his Quinta stock was \$ 985,583.

On January 6, 1987, petitioners filed a motion to be relieved of the May
14, 1985, stipulation. Petitioners made their motion in order to claim a
greater basis in Richard\'s Quinta stock. Petitioners apparently made
their motion under the mistaken belief that proof of a basis greater
than that inherent in the stipulated deficiency would further reduce the
deficiency. We conclude that no portion of the stipulated deficiency was
related to the nondividend portion of the distribution.

The amount of the dividend portion of the distribution depends on the
amount of Quinta\'s earnings and profits; Richard\'s basis is entirely
irrelevant to that calculation. Richard\'s basis is relevant, however,
to the nondividend portion of the distribution. Because Richard\'s
basis, per the settlement, is greater than the nondividend portion, no
part of the nondividend portion is currently taxed. If Richard\'s basis
were greater than the basis amount specified in the settlement
agreement, then the basis available to \"sop up\" later years\'
nondividend distributions, or to be taken into account on a later
disposition of the Quinta stock, would be greater. However, any tax
consequence from such a greater basis in the Quinta stock would not
affect petitioners\' tax liability for 1977.

Petitioners\' motion was denied on May 1, 1987.

**OPINION**

\* \* \*

II\. Innocent Spouse

Under section 6013(d)(3), if a husband and wife file a joint tax return
for a year, then \"the tax shall be computed on the aggregate income and
the liability for the tax shall be joint and several.\" Under section
6013(e),[^17]^3^ if certain requirements are met for a year, then a
spouse may be relieved of a portion of this joint tax return liability
for the year.

In order to qualify Margaret for innocent spouse status for 1977,
petitioners must show that: (1) Margaret and Richard filed a joint tax
return for 1977; (2) on that joint tax return there is a substantial
understatement of tax; (3) the substantial understatement of tax is
attributable to grossly erroneous items; (4) the grossly erroneous items
are items of Richard; (5) in signing the 1977 joint tax return, Margaret
did not know, and had no reason to know of the substantial
understatement; and (6) it is inequitable to hold Margaret liable for
the deficiency attributable to the substantial understatement. Also, as
elements of item (3), supra, if the items are claims of deduction,
credit, or basis, then (3a) these items must have no basis in fact or
law, and (3b) the tax liability for these items must exceed a certain
percentage of petitioners\' 1982 adjusted gross income, i.e., the
preadjustment year. Sec. 6013(e).

Petitioners bear the burden of proving that Margaret has satisfied each
statutory requirement of section 6013(e). Or, putting it the other way,
petitioners\' failure to prove any one of the controverted statutory
requirements will prevent Margaret from qualifying for relief. [Stevens
v. Commissioner]{.underline}, 872 F.2d 1499, 1504 (11th Cir. 1989),
*affg*. a Memorandum Opinion of this Court; \[T.C. Memo.
1988-63\][Purcell v. Commissioner,]{.underline} 826 F.2d 470, 473 (6th
Cir. 1987), *affg*. 86 T.C. 228 (1986); [Sonnenborn v.
Commissioner]{.underline}, 57 T.C. 373, 381-383 (1971); Rule 142(a).

The parties agree that a joint return was filed (item (1) supra \-- see
section 6013(e)(1)(A)), that the stipulated understatement of tax
liability was substantial within the meaning of section 6013(e)(3) (item
(2) supra \-- see part of section 6013(e)(1)(B)), and that the
understatement exceeded the percentage of income requirements of section
6013(e)(4) as to 1982, the preadjustment year (item (3b) supra \-- see
part of section 6013(e)(1)(B)).

Still in dispute is whether Margaret meets the remaining requirements
for innocent spouse status as to two of the stipulated adjustments to
taxable income. These two adjustments are (1) the mischaracterization of
ordinary income as long-term capital gain (\$ 150,201), and (2) the
reduction of Richard\'s dividend income by Richard\'s claimed basis in
Quinta\'s stock (\$ 969,428).[^18]^5^

With respect to these adjustments, respondent contends that Margaret
does not qualify for innocent spouse status because: (a) The adjustments
in issue are not items \"of\" Richard (as required by section
6013(e)(1)(B)); (b) these adjustments are not \"grossly erroneous
items\" (because they are deduction, etc., items and petitioners failed
to show that the items \"have no basis in fact or law\", as required by
section 6013(e)(2)(B)); (c) Margaret knew or had reason to know of these
adjustments (see section 6013(b)(1)(C)); and (d) it is not inequitable
to hold Margaret liable for the deficiency attributable to these
adjustments (see section 6013(b)(1)(D)).

Petitioners contend that: (a) The adjustments in issue were items \"of\"
Richard; (b) these adjustments are omissions from gross income, which
automatically qualify as \"grossly erroneous\" (see section
6013(e)(2)(A)); (c) Margaret did not know or have reason to know of
these adjustments; and (d) it is inequitable to hold Margaret liable for
the deficiency attributable to these adjustments.

We agree with petitioners that both of the adjustments are items of
Richard. We agree with respondent that both of the adjustments are
deduction, etc., items and not income items. We agree with respondent
that Margaret is not entitled to innocent spouse status as to the
mischaracterization adjustment because petitioners\' tax return
treatment of this item had a basis in fact or law. We agree with
petitioners that the claim-of-basis adjustment had no basis in fact or
law. However, we agree with respondent that Margaret is not entitled to
innocent spouse status as to the claim-of-basis adjustment because
Margaret knew or had reason to know of the substantial understatement.

> \* \* \*

C. Claim of basis

\* \* \*

We next consider the requirement in section 6013(e)(1)(C), that
petitioners establish \"that in signing the return Margaret\] \* \* \*
did not know, and had no reason to know\" of the substantial
understatement in issue.

In Purcell v. Commissioner, 86 T.C. at 238, we pointed out that, under
the law as it was before the retroactive amendments made by the Tax
Reform Act of 1984,[^19]^0^\--

the cases are clear that the spouse claiming to be relieved from
liability for omission from income of an item must be unaware of the
circumstances which give rise to that omission and not merely to the tax
consequences of the facts. [McCoy v. Commissioner,]{.underline} 57 T.C.
732 (1972); [Quinn v. Commission]{.underline}er, 62 T.C. 223 (1974),
affd. 524 F.2d 617 (7th Cir. 1975); [Smith v. Commissioner]{.underline},
70 T.C. 651, 672-673 (1978). \* \* \*

The 1984 Act amendments substantially revised the language of section
6013(e), but much of the language revision (compare note 13 with note
20) appears to have been designed to accommodate the policy change of
permitting relief in the case of a \"claim of a deduction, credit, or
basis \* \* \* in an amount for which there is no basis in fact or law\"
(section 6013(e)(2)(B)), while continuing the prior law\'s policy of
permitting relief in the case of amounts \"omitted from gross income\"
(section 6013(e)(2)(A), prior law section 6013(e)(1)(A)).

In particular, the language changes made by the 1984 Act have not
changed the old rule that the taxpayer claiming innocent spouse status
must establish that he or she is unaware of the circumstances that give
rise to error on the tax return, and not merely be unaware of the tax
consequences. [Purcell v. Commissioner,]{.underline} 86 T.C. at 237-238,
*affd*. 826 F.2d at 473-474.

In [Purcell,]{.underline} the taxpayers reported income from the sale of
stock as long-term capital gain. Part of this should have been reported
as ordinary income from a covenant not to compete, which was included in
the contract for the sale of the stock. The taxpayer wife knew of the
covenant; she had initialled a significant amendment to the covenant;
and she was personally subject to the covenant. She did not, however,
understand the tax consequences of the covenant. Under these facts, we
held that the taxpayer wife\'s knowledge of the covenant not to compete
was enough to disqualify her from innocent spouse status as to that
adjustment. The Court of Appeals for the Sixth Circuit affirmed our
holding that the knowledge contemplated by section 6013(e) is not
knowledge of the tax consequences of the transaction. [Purcell v.
Commissioner]{.underline}, 826 F.2d at 474.

While it is clear that, to qualify as an innocent spouse, Margaret must
not have knowledge (nor reason to know) of the underlying circumstances
which gave rise to the adjustment in issue (i.e., petitioners\' claim of
basis which erroneously offset the dividend from Quinta), it is unclear
what the underlying transaction was in the instant case.

The parties have stipulated that \"The deficiencies in this case arose
from the distribution of funds from \* \* \* Quinta\" and \"The
deficiency claimed by respondent for the year 1977 stems from the
classification of income from the sale of assets of \[Quinta\]\".

We have found that Margaret knew of the sale of the ranch. Petitioners\'
erroneous claim of basis stems from a misapprehension of the tax
consequences and not of the facts of the sale. Accordingly, if the
relevant underlying transaction is that sale, then Margaret knew of the
circumstances that gave rise to the substantial understatement and thus
is disqualified from the innocent spouse status under section
6013(e)(1)(C).

The distribution from Quinta is referred to in two places on
petitioners\' joint 1977 tax return. Schedule D, Part II, shows the
following:

Quinta Land and Cattle

Company \-- SBC

Dividend distributions \-- see Schedule 1 516,215

The \"Schedule 1\" there referred to is the material set forth in note
8, supra. Thus, the fact of the Quinta distribution is set forth
prominently on the 1977 joint tax return that Margaret signed. The \$
2,605,272 distribution amount and the \$ 2,089,057 basis deduction
amount, set forth on Schedule 1, far exceed any amount shown anywhere
else on the tax return. The \$ 516,215 \"Adjusted loan-term \[sic\]
capital gain\" amount (on Schedule 1) that results from the basis
deduction exceeds all but one of the amounts shown elsewhere on the tax
return. (The \$ 516,215 is shown on Schedule D and is a component of the
\$ 541,347 net long-term gain on Schedule D; the latter amount is the
only amount that exceed the \$ 516,215 net resulting from the Quinta
distribution.) Thus, a cursory glance at the tax return would have
brought the distribution and the basis deduction to Margaret\'s
attention. The distribution, and the tax treatment of the distribution,
were not hidden in the recesses of the tax return; one did not have to
be a tax expert to see that a large distribution from Quinta was being
reported on the tax return. Nor did one have to be a tax expert to see
that \$ 2,089,057 was being subtracted from that distribution. More to
the point, a reasonable person with Margaret\'s background \-- if she
had merely quickly turned the pages of the tax return that she was at
the point of signing \-- would have noticed the largest numbers on the
return in the schedule reporting the Quinta dividend (\$ 2,605,272) and
the subtraction of basis (\$ 2,089,057) therefrom (see note 8, supra).

When Margaret signed the tax return, she could not have avoided noticing
that the tax return preparer\'s block, next to the line where she was
signing, was not filled in. If she had looked at the very next page of
the tax return, the Schedule A, she would have noticed the obvious error
of the tax return preparer\'s failure to subtract the \$ 3,200 zero
bracket amount from the itemized deductions.

The size of the basis amount that was subtracted should have prompted
Margaret (and Richard as well) to question the correctness of the
treatment of that item. With so much at stake, a reasonable person with
Margaret\'s (or Richard\'s) background would be on notice to inquire
further. The failure of the accountant to sign the tax return should
have made Margaret (and Richard) wonder about whether the accountant was
really standing up for the advice embodied in the tax return. The
obvious error on the Schedule A should have caused Margaret (and
Richard) some concern about the accuracy of the accountant\'s advice.

Margaret did not examine the tax return that she signed. She cannot
obtain the benefits of section 6013(e) by simply turning a blind eye to
\-- by preferring not to know of \-- facts fully disclosed on a tax
return, of such a numerical magnitude as would reasonably put her on
notice that further inquiry would need to be made. See the cases
collected in [Levin v. Commissioner]{.underline}, T.C. Memo. 1987-67.
Margaret undertook responsibilities when she signed the 1977 joint tax
return. She cannot escape these responsibilities by simply ignoring the
contents of this tax return. [Stevens v. Commissioner,]{.underline} 872
F.2d at 1507.

The standard to be applied in determining whether a putative innocent
spouse has \"reason to know,\" under section 6013(e)(1)(C) is whether
\"a reasonably prudent taxpayer under the circumstances of the 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.\" [Stevens v. Commissioner]{.underline}, 872 F.2d at 1505
(fn. ref. omitted); [Shea v. Commissioner]{.underline}, 780 F.2d 561,
566 (6th Cir. 1986), *affg. on this issue and revg. on another issue* a
Memorandum Opinion of this Court. \[T.C. Memo. 1984-310\] This standard
applies to deduction, etc., matters, as well as income matters. 872 F.2d
at 1505 n. 8.

Accordingly, we conclude that Margaret either knew or should have known
of the circumstances that gave rise to the substantial understatement
and thus is disqualified, under section 6013(e)(1)(C), from innocent
spouse status as to the claim-of-basis item.

In [Stevens v. Commissioner]{.underline}, supra, the Court of Appeals
for the Eleventh Circuit (to which appeal lies in the instant case)
recently set forth its position on the \"reason to know\" component of
the innocent spouse provisions. In Stevens, the taxpayer claimed
innocent spouse relief from disallowances of tax shelter deductions and
of the resulting loss carryovers. For the 4-year period before the Court
in that case, the Stevens\' tax returns showed that they owed a total of
\$ 2,240 in taxes, while claiming tax shelter deductions of more than \$
1,200,000. 872 F.2d at 1501-1502.

In affirming our denial of innocent spouse relief, the Court of Appeals
relied on the following: (1) The taxpayer was present during numerous
conversations concerning her husband\'s business investments; (2) the
taxpayer had information regarding the investments in question through
her position as the secretary and bookkeeper for her husband\'s
corporations; and (3) the taxpayer\'s husband had discussed his personal
investments with the taxpayer to inform her that those investments had
been made. 872 F.2d at 1506-1507.

Also, the Court of Appeals noted the taxpayer\'s assertion that her
husband made a concerted effort to keep her ignorant about the family
finances. In that regard, the Court of Appeals stated as follows (872
F.2d at 1507):

> Significantly, Mrs. Stevens implied that she questioned the fact that
> the returns for 1976, 1977, and 1978 showed that no income taxes were
> due and admitted asking both for an explanation and for copies of all
> the returns. Ultimately, she confessed, she \"blindly\" signed the
> returns. A spouse cannot harbor doubts about the accuracy of a return
> and then turn a blind eye toward it. See Sanders \[v. United States\],
> 509 F.2d \[162\] at 169 \[5th Cir. 1975\]. In signing a return, a
> taxpayer represents that the matters stated therein are true and
> correct to the best of his or her knowledge. That responsibility
> cannot be abdicated or evaded merely by ignoring returns that are
> suspect and which would prompt a reasonable person in the same
> position to investigate before signing them.

The facts in [Steven]{.underline}s differ in some respects from those in
the instant case. Margaret was not personally involved in Richard\'s
business affairs; Margaret did not have access to the corporate books as
bookkeeper or secretary; and Margaret did not ask for any explanation of
the items on the 1977 tax return. As to those elements, respondent\'s
case against the taxpayer in [Stevens]{.underline} was stronger than is
his case against Margaret.

The opinion in [Stevens]{.underline} does not directly set forth how the
Court of Appeals would rule on the facts in the instant case. However,
the opinion does state as follows (872 F.2d at 1505 n. 8):

> We reject Mrs. Stevens\' assertion that she did not have \"reason to
> know\" that the deductions were phony because of her insufficient
> legal acumen. As a practical matter, this argument is tantamount to a
> claim that ignorance of the law is an element of the innocent spouse
> defense, and, as such, is incorrect. See Sanders v. United States, 509
> F.2d 162, 169 n. 14 (5th Cir. 1975). A taxpayer is presumed to have
> knowledge of the tax consequences of a transaction, but is not
> presumed to have knowledge of the transaction itself. See Quinn v.
> Commissioner, 524 F.2d 617, 626 (7th Cir. 1975).

We believe that under the standards set forth in [Stevens]{.underline},
the Court of Appeals for the Eleventh Circuit would consider Margaret\'s
knowledge of the sale of the ranch, together with the plain description
on the tax return and the comparative magnitude of the numbers set forth
on the tax return, and would conclude that Margaret had reason to know
of the erroneous claim of basis. Accordingly, we believe that those
standards would lead to the result that Margaret is not entitled to
innocent spouse status. Because the opinion of the Court of Appeals for
the Eleventh Circuit does not require a result different from the result
we reach in the instant case, there is no occasion to consider the
applicability of the so-called \"Golsen rule\" ([Golsen v.
Commissioner]{.underline}, 54 T.C. 742, 756-757 (1970), *affd.* 445 F.2d
985 (10th Cir. 1971)).

The Court of Appeals for the Ninth Circuit has recently reversed an
unreported Bench Opinion of this Court on our interpretation of section
6013(e)(1)(C). [Price v. Commissione]{.underline}r, 887 F.2d 959 (9th
Cir. 1989). Price involved disallowance of a Schedule C deduction for
\"Exploration and Development Expenses\" arising from a Cal-Colombian
Mines tax shelter investment made by the taxpayer husband. The taxpayer
wife knew the underlying facts of the investment in the Cal-Colombian
tax shelter, but did not understand the tax consequences. In our Bench
Opinion, we held that the taxpayer wife\'s \"knowledge of the facts of
the investment in Cal-Colombian Mines precludes relief under Section
6013(e)\".

The Court of Appeals stated that it would \"decline to follow the
\[Tax\] \[Court\'s\] literal superimposition of the legal standard
developed in omission cases onto deduction cases\" (887 F.2d at 963 n.
9); that the statute \"requires a spouse seeking relief to establish
that she did not know and did not have reason to know that the deduction
would give rise to a substantial understatement\" (887 F.2d at 963;
emphasis added; fn. ref. omitted); that the first step in the analysis
should be to analyze whether \"the record contains \[any\] evidence to
suggest that \[the taxpayer wife\] knew upon signing the return that it
contained a substantial understatement for any reason\" (887 F.2d at
964, emphasis in original); and that the second step should be to
analyze whether the taxpayer wife had reason to know of the substantial
understatement (887 F.2d at 964).

We must decide, in the instant case, whether to adhere to our position
in [Price]{.underline} and the prior opinions on which that position is
based, or modify our position in accordance with the ruling of the Court
of Appeals for the Ninth Circuit. [Groetzinger v.
Commissione]{.underline}r, 82 T.C. 793, 796 (1984), affd. 771 F.2d 269
(7th Cir. 1985), affd. 480 U.S. 23 (1987). With all due respect to the
Court of Appeals for the Ninth Circuit, whose opinion we have considered
thoroughly, we decline to follow their opinion in [Price]{.underline} (
[Lawrence v. Commissioner]{.underline}, 27 T.C. 713 (1957), *revd. on
other grounds* 258 F.2d 562 (9th Cir. 1958)) except in those instances
where appeal lies to that Court of Appeals ([Golsen v.
Commissioner]{.underline}, 54 T.C. at 756-757).

[Sonnenborn v. Commissioner]{.underline}, 57 T.C. 373 (1971), was
decided in the same year (1971) in which the innocent spouse provisions
were enacted. At that time, with the legislative process still fresh, we
sought to establish a proper perspective on the legislation, as follows
(57 T.C. at 380-381):

It is important that these provisions be kept in proper perspective. The
filing of a joint return is a highly valuable privilege to husband and
wife since the resulting tax liability is generally substantially less
than the combined taxes that would be due from both spouses if they had
filed separate returns. This circumstance gives particular emphasis to
the statutory rule that liability with respect to tax is joint and
several, regardless of the source of the income or of the fact that one
spouse may be far less informed about the contents of the return than
the other, for both spouses ordinarily benefit from the reduction in tax
that ensues by reason of the joint return. However, some highly
inequitable results were called to the attention of Congress,
particularly where a wife had been divorced or separated or abandoned
after the tax year, where she was saddled with a disproportionately high
tax liability as a consequence of having filed a joint return, where
such liability grew out of income attributable only to the husband,
unknown to the wife, and where she had not enjoyed any benefit
therefrom. It was in an effort to eliminate the unfairness of the joint
and several liability provisions in such circumstances that section
6013(e) was enacted. To be sure, section 6013(e) is not limited to
precisely such narrow situations. But it must be kept in mind that
Congress still regards joint and several liability as an important
adjunct to the privilege of filing joint returns, and that if there is
to be any relaxation of that rule the taxpayer must comply with the
carefully detailed conditions set forth in section 6013(e). We hold that
petitioner has not brought herself within those provisions here. \[Fn.
ref. omitted.\]

As we see it, the same perspective applies today; the benefits of joint
tax return computations and tax rates are exchanged for the burdens of
joint and several liabilities.[^20]^2^ Petitioners, by filing a joint
tax return, sought the benefits and accepted the burdens.[^21]^3^

With that perspective, we outline the considerations that lead us to
decline to follow the Court of Appeals\' opinion in [Price.]{.underline}

Firstly, we note that the position that the Court of Appeals complains
of is not the position only of the Tax Court. In Purcell v.
Commissioner, 826 F.2d at 474, the Court of Appeals for the Sixth
Circuit states as follows:

> Furthermore, the Tax Court\'s conclusion that her awareness of the tax
> consequences of this transaction was immaterial is correct. As the
> Seventh Circuit stated: \"\[the\] knowledge contemplated by \[section
> 6013(e)\] is not knowledge of the tax consequences of a transaction
> but rather knowledge of the transaction itself.\" *Quinn v.
> Commissioner*, 524 F.2d 617, 626 (7th Cir. 1975) (citation omitted).
> Thus, we believe that the court correctly concluded that appellant was
> not entitled to relief from the deficiency resulting from the income
> derived from the covenant not to compete. \[Fn. ref. omitted.\]

The [Purcell]{.underline} opinion\'s quotation from Quinn appears in the
course of an affirmance of the Tax Court\'s decision in
[Purcell]{.underline}. The [Quinn]{.underline} language that is there
quoted appears in the course of an affirmance of the Tax Court\'s
decision in [Quinn]{.underline} (62 T.C. 223 (1974)). The
[Quinn]{.underline} opinion, immediately following the language quoted
in [Purcell]{.underline}, cites the Tax Court\'s opinion in [McCoy v.
Commissioner]{.underline}, supra.

Also, as we have noted, supra, the Court of Appeals for the Eleventh
Circuit (to which appeal lies in the instant case), in [Stevens v.
Commissioner,]{.underline} 872 F.2d at 1505 n. 8, states virtually the
same thing, in a post-1984 Act innocent spouse deduction case, also
relying on the same statement in [Quinn v. Commissioner]{.underline},
supra.

Thus, at least two Courts of Appeals have seen fit to superimpose the
pre-1984 Act income omission legal standards onto post-1984 Act
deduction cases.

Secondly, we submit that the analysis of the Court of Appeals in
[Price]{.underline} practically writes out of the Code the following
emphasized language in subparagraph (C) of section 6013(e)(1)(C):

\(C\) the other spouse establishes that in signing the return he or she
did not know, and had no reason to know, that there was such substantial
understatement, and \* \* \* \[Emphasis added.\]

The definition of \"understatement\" (see secs. 6013(e)(3) and
6661(b)(2)(A)) \[footnote omitted.\] is essentially the same as the
definition of \"underpayment\" applicable to fraud (see secs. 6653(c)(1)
and 6211(a)). If a taxpayer knows that the tax return understates his or
her tax liability by more than \$ 500, and nevertheless signs that tax
return, then this generally means that that taxpayer is committing
fraud. Thus, under the Court of Appeals\' analysis in Price, the
putative innocent spouse merely has to prove an absence of fraud in
order to win on the \"did not know\" portion of section 6013(e)(1)(C).
Surely the Congress did not intend that the \"did not know\" requirement
could be so easily satisfied as to make it superfluous. We should avoid
such an interpretation of the statute. [Weinberger v. Hynson, Westcott &
Dunning,]{.underline} 412 U.S. 609, 633-634 (1973); [Fort Stewart
Schools v. F.L.R.A.]{.underline}, 860 F.2d 396, 403 (11th Cir. 1988);
[Beisler v. Commissioner]{.underline}, 814 F.2d 1304, 1307 (9th Cir.
1987), affg. a Memorandum Opinion of this Court. \[T.C. Memo. 1985-25\]

Thirdly, the Court of Appeals in [Price]{.underline} contends that its
analysis is mandated by the \"plain meaning\" of the statute. 887 F.2d
at 963-964. The Court of Appeals for the Fifth Circuit confronted this
problem in [Sanders v. United States]{.underline}, 509 F.2d 162, 169
(5th Cir. 1975), as follows:

> That is, the Tax Court apparently reads the statute to say that if a
> spouse knows or has reason to know of a transaction that the IRS later
> determines resulted in income to the couple, that spouse cannot claim
> the benefit of the innocent spouse provision even though he or she had
> no reason whatever to suspect that they had received taxable income.
> n14
>
> n14 This is perhaps a permissible reading of 6013(e)(1)(A)-(B) in
> light of Congress\'s general intent to extend relief only where equity
> demands it, but it is difficult to square with a literal reading of
> the statutory language. Subparagraph (B) mentions \"such omission,\"
> which obviously refers back to (e)(1)(A) where omissions are described
> as \"an amount properly included . . .\" (emphasis added). Since the
> propriety of including a given sum can finally be determined only by
> the IRS or the courts, subparagraph (B) seemingly makes ignorance of
> the fact that known receipts constitute taxable income a valid
> justification for not knowing or having reason to know of omissions
> from gross income. Nevertheless, the practical problems that have
> always prevented acceptance of an ignorance of the law defense in the
> criminal law area, see W. LaFave & A. Scott, Handbook on Criminal Law
> 47, at 363-64 (1972), arguably apply just as forcefully here.
>
> Evidently, the Court of Appeals for the Ninth Circuit also is
> uncomfortable with its plain meaning analysis, for it is willing to
> conclude that \"if a spouse knows virtually all of the facts
> pertaining to the transaction which underlies the substantial
> understatement, \[then the spouse\] \* \* \* is considered as a matter
> of law to have reason to know of the substantial understatement\" (887
> F.2d at 964; emphasis added). We submit that the Court of Appeals for
> the Ninth Circuit has already departed from the plain meaning of the
> statute, and that, if the Court of Appeals\' approach conflicts with
> that of the Tax Court, then it is only as to how much the putative
> innocent spouse must know of the underlying transaction before the
> putative innocent spouse is treated as knowing of the substantial
> understatement.

Fourthly, exemptions from taxation are to be construed narrowly.
[Bingler v. Johnson]{.underline}, 394 U.S. 741, 752 (1969);
[Commissioner v. Jacobson,]{.underline} 336 U.S. 28, 48-49 (1949);
[Matthews v. Commissioner]{.underline}, 92 T.C. 351, 361 (1989), on
appeal (D.C. Cir., July 3, 1989).

Fifthly, we do not believe that our interpretation of section
6013(e)(1)(C) \"would for the most part wipe out innocent spouse
protection\" in deduction cases, as the Court of Appeals charges. [Price
v. Commissioner,]{.underline} 887 F.2d at 963 n. 9. A brief effort at
researching this matter has turned up the following recent Memorandum
Opinions in which this Court held that the putative innocent spouse was
entitled to innocent spouse tax benefits with respect to substantial
understatements attributable to deduction, etc., items. [Bell v.
Commissioner]{.underline}, T.C. Memo. 1989-107; [McRae v.
Commissioner,]{.underline} T.C. Memo. 1988-374; [Bouskos v.
Commissioner]{.underline}, T.C. Memo. 1987-574; [Guth v.
Commissioner]{.underline}, T.C. Memo. 1987-522, on appeal (9th Cir.,
Jan. 11, 1988).

Finally, we note that, even if we were to follow the \"plain meaning\"
of the statute, as stated by the Court of Appeals in
[Price]{.underline}, that would not change the result in the instant
case and, we suspect, in many other cases, because of the impact of the
Price rationale on the interpretation of section 6013(e)(1)(D).

It is clear that Margaret did not understand that Richard\'s basis in
his Quinta stock could not properly be subtracted from Richard\'s Quinta
dividend in determining petitioners\' 1977 joint and several tax
liability. This deduction (or \"claim of \* \* \* basis\", within the
meaning of sec. 6013(e)(2)(B)) had no basis in law, regardless of the
dispute as to the amount of Richard\'s basis. However, it is equally
clear that Richard also did not understand that his Quinta stock basis
could not properly be subtracted from his Quinta dividend. \[footnote
omitted.\]

If innocence of the correct tax consequences of the underlying
transaction is all that is needed in order to satisfy the requirements
of section 6013(e)(1)(C) (that the innocent spouse \"did not know, and
had no reason to know, that there was such substantial
understatement\"), then we would have to consider the requirement of
section 6013(e)(1)(D) that \"taking into account all the facts and
circumstances, it is inequitable to hold \[Margaret\] liable for the
deficiency in tax \* \* \* attributable to such substantial
understatement.\"

In [McCoy v. Commissioner]{.underline}, 57 T.C. 732, 735 (1972), we
stated as follows:

Furthermore, if we look to the requirements of section 6013(e)(1)(C)
\[predecessor of present sec. 6013(e)(1)(D)\], i.e., that taking into
account all other facts and circumstances it is inequitable to hold the
wife liable for the deficiency resulting from the omission of income, we
find there is no inequity in this case. As we see it, the omission here
resulted not from any concealment, overreaching, or any other wrongdoing
on behalf of the husband, though we appreciate that the \"innocent
spouse\" provisions do not specifically require wrongdoing in order to
be brought into play. The omission resulted from a misapprehension of
the income tax laws by the preparers of the tax returns and the
signatory parties. Apparently neither the husband nor the wife knew the
tax consequences of the forgiveness of indebtedness here involved. They
were in this respect both \"innocent spouses\" and we perceive no
inequity in holding them both to joint and separate liability.

We came to the same conclusion in our unanimous post-1984 opinion in
[Lessinger v. Commissioner]{.underline}, 85 T.C. 824, 838 (1985), *revd.
on other grounds* 872 F.2d 519 (2d Cir. 1989).

Thus, a focus on the statutory language\'s literal requirement of
knowledge of the substantial understatement (rather than knowledge of
the underlying facts) would increase the likelihood that we would
conclude that both spouses were innocent, in which event neither spouse
apparently would qualify for innocent spouse status. [McCoy v.
Commissioner,]{.underline} 57 T.C. at 735.

Also, under section 6013(e)(1)(D), we would consider the question of
Margaret\'s benefit. In the income omission cases, we have traditionally
looked to whether the putative innocent spouse benefitted from the
income that had been omitted. In a claim of basis case, such as the
instant case, we might appropriately look to whether the putative spouse
benefitted from the tax saving produced by the erroneous claim of basis.
The tax saved by the erroneous claim of basis (adjustment of \$ 969,428
out of adjustments totaling \$ 1,124,664) clearly exceeded \$ 400,000
(out of a total deficiency of \$ 513,755.37). We have found that \$
417,205 of the net proceeds from the sale \"were deposited into
Richard\'s personal account\" and \"were used for petitioners\' personal
living expenses.\" We have also found that \"Petitioners\' living
expenses were about \$ 500,000 per year\", that \"Richard paid the
household bills, and Margaret helped when he couldn\'t afford to pay the
bills.\" A reasonable inference is that if Richard had paid the taxes
promptly instead of taking the basis deduction, then he would not have
had the \$ 400,000 plus that he used to pay petitioners\' living
expenses, and so Margaret would have had to pay the shortfall. At any
rate, petitioners have failed to carry their burden of proving the
details of each petitioner\'s assets and expenditures from 1977 onward,
as would be necessary in order to show that Margaret derived no
significant benefit from the erroneous claim of basis. See our recent
opinion in [Estate of Krock v. Commissioner]{.underline}, 93 T.C. 672
(1989), for a discussion of the nature of the taxpayer\'s burden in such
a situation.

We hold for respondent on this issue.

\* \* \*

DISSENT:

Korner, J., dissenting: I am in agreement with everything in the
majority opinion except for one small part, involving the interpretation
of section 6013(e)(1)(C), which requires that a putative innocent spouse
establish \"that in signing the return he or she did not know, and had
no reason to know, that there was such substantial understatement \* \*
\*.\" That small part, however, makes a major difference in the result
here.

In holding in favor of respondent on this issue, the majority opinion in
effect holds that a general knowledge of the transaction as a whole by
the so-called innocent spouse will defeat the protection of the statute,
even though it may be shown that the innocent spouse had no knowledge of
nor had any reason to have knowledge that there was some element of the
transaction as reported which gave rise to the substantial
understatement.

In so doing, the majority here follows [Purcell v.
Commissioner,]{.underline} 86 T.C. 228 (1986), affd. 826 F.2d 470 (6th
Cir. 1987) and the more recent opinion of [Stevens v.
Commissione]{.underline}r, 872 F.2d 1499 (11th Cir. 1989), affg. a
Memorandum Opinion of this Court.

This same approach was taken by this Court in the case of [Price v.
Commissioner,]{.underline} an unreported case in 1988, on which we were
reversed by the Court of Appeals for the Ninth Circuit in [Price v.
Commissioner,]{.underline} 887 F.2d 959 (9th Cir. 1989). In that case,
the Ninth Circuit pointed out that section 6013 had been amended by the
Tax Reform Act of 1984 because of the perception of Congress that it was
phrased too narrowly. Thus, the purpose of the 1984 amendment was
described in the House Report as follows:

The committee believes that the present law rules relieving innocent
spouses from liability for tax on a joint return are not sufficiently
broad to encompass many cases where the innocent spouse deserves relief.

\* \* \* \*

The bill liberalizes the innocent spouse joint return relief provision
by expanding the circumstances in which the relief may be granted. \[H.
Rept. 432 (Part 2), 98th Cong., 2d Sess. 1501-1502 (1984).\]

The Court of Appeals in [Price]{.underline} (in note 9) made the
following statements which I consider to be very significant in this
case. The Court of Appeals said:

> The Tax Court, borrowing language from cases involving deficiencies
> caused by omissions of income, read section 6013(e)(1)(C) to require a
> spouse to establish that she did not know of the transaction
> underlying the deduction. \[Citations omitted.\]
>
> We decline to follow the tax court\'s literal super-imposition of the
> legal standard developed in omission cases onto deduction cases in
> part because to do so would for the most part wipe out innocent spouse
> protection in the latter category. Such a standard may be workable in
> omission cases simply because the understatement is caused by
> includable income being left off a return. Therefore, it is
> considerably easier for a spouse to show that she was unaware of the
> transaction giving rise to the omission, and thus to qualify for
> relief. \[Citation omitted.\] But because deductions are necessarily
> recorded, any spouse who at least reads the joint return will be put
> on notice that some transaction allegedly has occurred to give rise to
> the deduction. As a result, if knowledge of the transaction, operating
> of itself, were to bar relief, a spouse would be extremely
> hard-pressed ever to be able to satisfy the lack of actual and
> constructive knowledge element of section 6013(e)(1) in a deduction
> case.
>
> Thus, adoption of such an interpretation would do violence to the
> intent Congress clearly expressed when it expanded coverage of the
> provision to include relief for spouses from deficiencies caused by
> deductions for which there is no basis in fact or law. \[Citations
> omitted.\] It would also hinder Congress\'s broader purpose in
> enacting section 6013(e) \-- that of seeking to remedy an injustice
> \-- by giving the section an unduly narrow and restrictive reading.
> \[Citations omitted.\]
>
> While we do not embrace the Tax Court\'s construction of section
> 6013(e)(1)(C), we do not mean to say that a spouse\'s knowledge of the
> transaction underlying the deduction is irrelevant. Obviously, the
> more a spouse knows about a transaction, ceteris paribus, 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. We merely
> conclude that standing by itself, such knowledge does not preclude
> relief.
>
> In addition, when we look beyond the language courts have used in
> omission cases to the function such a standard has served, we see that
> it represents merely a different way of approaching what is the same
> inquiry as the one we announce today. \[Citation omitted.\] That is,
> in income omission cases, knowledge of the transaction is virtually
> equivalent to knowledge of the understatement because if a spouse
> knows of a transaction which generated income that the return does not
> report, then it is extremely likely that she will know that the return
> does not report all income (unless she merely lacks knowledge of tax
> consequences). Thus, the omission cases that have examined whether a
> spouse had knowledge of the transaction in a sense really have been
> looking to discern whether she knew or had reason to know of the
> substantial understatement.

Here, the majority is saying in effect that simply because Mrs. Bokum
knew about the sale of some of the Quinta Ranch property in a general
fashion, she should be deemed to have knowledge, or be chargeable with
knowledge, of the various computations which went into the way in which
that transaction was reported in the return.

Specifically, the majority is holding that Mrs. Bokum was chargeable
with the knowledge that as the transaction was reported in the 1977
return, an erroneous deduction was taken for the alleged stock basis of
Mr. Bokum. Everyone agrees that such a claimed deduction had no basis in
law and everyone agrees that it was this error which caused the
deficiency in issue here as to which Mrs. Bokum claims relief. It also
appears to be accepted by the majority that Mrs. Bokum was a person with
no business or financial background, experience, or education, and that
she had nothing to do with the operations of Quinta. I submit that to
hold her liable in this situation simply requires that she underwrite
the accuracy of the complicated computation by which the transaction was
reported in the return \-- a transaction she was aware of in only the
most general way and the details of which she knew nothing. I submit
that this is exactly the type of situation which section 6013(e)(1)(C)
was designed to meet, in order to provide protection to a truly innocent
spouse who had nothing to do with the affair at all except for having
signed the joint return.

The issue is a close one, and really depends upon the varying
interpretation which the courts have given to section 6013(e)(1)(C) in
[Purcell v. Commissioner]{.underline}, supra, and [Stevens v.
Commissioner,]{.underline} supra, on the one hand, and in [Price v.
Commissioner]{.underline}, supra, on the other hand. The difference is a
fine one, but the result is not. In this and similar cases, I think this
Court should follow the lead of the Ninth Circuit in [Price]{.underline}
and give the statute the more liberal reading which Congress intended.
Specifically, I think we should hold that Mrs. Bokum was an innocent
spouse within the meaning of section 6013(e), so far as it pertains to
that portion of the deficiency herein which was attributable to the
erroneous deduction of Mr. Bokum\'s claimed basis in the Quinta stock in
arriving at the net amount reportable for tax purposes.

In other respects, I agree with the majority opinion.

Williams, J., dissenting: I agree with Judge Korner\'s dissent and write
only to add what I foresee as the regrettable implications of the
majority\'s analysis.

The majority holds that solely because Mrs. Bokum knew of the
transaction, she cannot be an innocent spouse (though the majority must
itself resolve exactly what the transaction at issue is, see Majority
Op. at 146). Specifically, the majority formulates the applicable legal
standard as follows: \"that the taxpayer claiming innocent spouse status
must establish that he or she is unaware of the circumstances that give
rise to the error on the tax return, and not merely be unaware of the
tax consequences.\" (Majority Op. at 145-146, emphasis added.) In
articulating this standard the majority observes, without reference to
any legislative history, that the \"language changes made by the 1984
Act have not changed the old rule \* \* \*.\" Notably, however, the
House Committee Report (H. Rept. 98-432, (Part 2) (1984), hereafter
report) does refer to this issue in the \"Reasons for Change\" section
explaining the proposed amendments to section 6013(e). The report
provides as follows:

The committee believes that the present law rules relieving innocent
spouses from liability for tax on a joint return are not sufficiently
broad to encompass many cases where the innocent spouse deserves relief.
Relief may be desirable, for example, where one spouse claims phony
business deductions in order to avoid paying tax and the other spouse
has no reason to know that the deductions are phony \* \* \*. \[Report
at 1502. Emphasis supplied.\]

It is noteworthy that the Committee did not phrase the standard as the
majority does (as whether the other spouse had reason to know about the
deductions) but phrased the issue as whether the other spouse had reason
to know that the deductions were phony. The majority agree the claim of
basis on the tax return was \"phony\" (majority op. at 144). The
majority also agree that Mrs. Bokum had no reason to know that the
claimed basis was phony (majority op. at 132). Despite these facts, the
majority fails to accord Mrs. Bokum relief from tax liability on these
phony claims she did not know about because Mrs. Bokum \"knew or should
have known of the circumstances that gave rise to the substantial
understatement \* \* \*.\" (majority op. at 148). It is instructive to
review the facts surrounding these circumstances giving rise to the
phony basis claim: (1) Mrs. Bokum \"did not participate in the business
decision to sell, and did not know how much\" was received in the sale
(majority op. at 129), (2) Mrs. Bokum did not play \"any role in the
preparation of their 1977 joint tax return nor in the formulation of the
tax treatment to be accorded the distribution on the tax return\"
(majority op. at 132), and (3) the tax return was presented to Mrs.
Bokum for signature after it had been prepared by accountants (majority
op. at 132). There is nothing on the return reporting the transaction at
issue that would cause anyone to question the accountants\' calculation
of basis. The necessary implication of holding that Mrs. Bokum \"should
have known\" is to require her to hire an independent tax adviser to
review the return prepared by her husband\'s accountants. As the Supreme
Court has stated in a slightly different context,

Most taxpayers are not competent to discern error in the substantive
advice of an accountant or attorney. To require the taxpayer to
challenge the attorney, to seek a \"second opinion,\" or to try to
monitor counsel on the provisions of the Code himself would nullify the
very purpose of seeking the advice of a presumed expert in the first
place. \* \* \* \[[United States v. Boyle]{.underline}, 469 U.S. 241,
251 (1985).\]

I believe that, as a matter of justice, such a burden is intolerable and
that, as a matter of statutory interpretation, the majority\'s analysis
contradicts the Congress\' explicit attempt to (using the report\'s
choice of words) \"liberalize\" (report at 1502) the relief afforded to
people in Mrs. Bokum\'s circumstances.

The Ninth Circuit Court of Appeals disagreed with the Tax Court. It held
that mere knowledge of the transaction that produced the overstated
deductions or credit was not sufficient to deny innocent spouse relief.
Rather, a court should look to other factors, including (1) did the
couple have an unusual or lavish lifestyle in the tax year; (2) did the
requesting spouse participate in the business or activity that produced
the deductions or credits; and (3) was the culpable spouse deceptive and
did he conceal facts that would have put the requesting spouse on
notice. If enough facts existed to put a reasonable person on notice
that she should inquire about what was on the return, then innocent
spouse relief was properly denied. [Price v. Commissioner,]{.underline}
887 F. 2d. 959 (9^th^ Cir. 1989).[^22]

**§10.03 RRA 98 and the Expansion of Innocent Spouse Relief**

Innocent spouse relief continued to be somewhat anemic after
[Bokum]{.underline}. In 1996 and 1997, as part of the hearings on the
IRS restructure, advocates for innocent spouses determined the time was
ripe to substantially expand the innocent spouse rules. Section 401 of
the Taxpayer Bill of Rights 2, Pub. L. No. 104-168, 110 Stat. 1453 (July
30, 1996), had directed the Treasury Department to study issues relating
to joint return, including:

>   (1) The effects of changing the liability for tax on a joint return
> from being joint and several to being proportional to the tax
> attributable to each spouse.
>
>      (2) The effects of providing that if a divorce decree
> allocates liability for tax on a joint return filed before
> the divorce, the Secretary may collect such liability only
> in accordance with the decree.
>
>      (3) Whether those provisions of the Internal Revenue Code of 1986
> intended to provide relief to innocent spouses provide meaningful
> relief in all cases where such relief is appropriate.
>
>      (4) The effect of providing that community income (as defined
> in I.R.C. section 66(d)) which, in accordance with the rules provided
> in I.R.C. section 879(a), would be treated as the income of one
> spouse, is exempt from a levy for failure to pay any tax imposed by
> subtitle A by the other spouse for a  taxable year ending before their
> marriage.

Treasury Report to the Congress on Joint Liability and Innocent Spouse
Issues, Release Date February 10, 1998, [98 TNT
28-14](http://www.lexis.com/research/buttonTFLink?_m=6a1568f01839e02144c9bb5f1ce6c5f7&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B80 Tax Notes 835%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=78&_butInline=1&_butinfo=98 TNT 28-14&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAl&_md5=0d931a45289905215987cff876254065),
Doc 98- 5641.

The Treasury Department's report coincided with the Senate Finance
Committee's hearings and testimony of witnesses who discussed the
shortcoming of the innocent spouse relief provisions. As a result,
Congress passed as sweeping change to the innocent spouse rules.

The current law, section 6015, embodies four forms of innocent spouse
relief, mechanisms for appeals of adverse IRS determinations to the Tax
Court, and rules to requiring the nonrequesting, alleged culpable
spouse, to be informed of innocent spouse requests.

**§10.04 Overview of the four current forms of Innocent Spouse Relief.**

Currently there are three forms of innocent spouse relief with respect
to an understatement of tax (e.g, the IRS determines that the couple owe
additional tax because income was omitted or deductions or credits were
overstated) and one form of relief for underpayment (i.e., tax shown as
due on the joint return as filed is not paid.)

The three forms of relief for understatement are: (1) Complete or
partial relief, under section 6015(b); (2) Separate Liability, under
section 6015(c), and (3) Equitable relief, under section 6015(f). Each
of these forms of relief are discussed in more detail below. The one
form of relief for underpayment is Equitable Relief under section
6015(f).

***§10.04.1 Terminology***

The taxpayer requesting the relief is referred to as the "requesting
spouse." The other spouse is referred to either as the "culpable spouse"
or "nonrequesting spouse."

If as discussed below the IRS determines not to grant innocent spouse
and the requesting spouse appeals such denial to the Tax Court, then the
nonrequesting spouse can intervene in the appeal and is referred to as
an "Intervenor."

***§10.04.2 Starting a Request for Innocent Spouse Relief***.

To request relief, the requesting spouse must submit a request on IRS
Form 8857, Request for Innocent Spouse Relief [See also]{.underline} IRS
Publication 971. The request cannot be made for relief form an
underpayment until the requesting spouse has received notification from
the IRS indicating the basis of the tax deficiency or liability for
which relief would be sought. Treas. Reg. 1.6015-5(b)(5).

With respect to an understatement of tax, the requesting spouse cannot
file for relief before the IRS sends the requesting spouse a letter
indicating a proposed change due to omitted income or overstated
deductions or credits. With respect to relief for nonpayment of tax
shown as due on a filed joint return, so-called equitable relief, a
spouse cannot file a request for relief until he or she receives
notification from the IRS that the payment has not been received. The
IRS is required to send each of the spouses a separate notice. Section
3201(d), Public Law 105-206 (not codified under section 6105).

In many cases, consistent with a requesting spouse being unaware of the
tax problems of a culpable spouse, a requesting spouse may only learn of
a joint income tax liability after the tax has been assessed and the IRS
starts collection. Realizing that this is common, Congress permitted a
requesting spouse to also make a request as part of a collection
proceeding, including a request for a collection due process hearing or
the submission of an offer in compromise based on doubt as to liability.

Finally, if the couple appeals a proposed deficiency of additional tax
with respect to a joint return by petitioning the Tax Court (see Chapter
12), then one of the spouses may include as an affirmative defense to
the proposed deficiency relief under the innocent spouse provisions.

***§10.04.3 Statute of Limitations for Filing Request for Innocent
Spouse.***

The time period for which a spouse can request innocent spouse relief is
limited. A requesting spouse must file for innocent spouse relief by a
date no later than 2 years after the date the IRS has begun collection
activities with respect to the requesting spouse. IRC Sections
6015(b)(1)(E); 6015(c)(3)(B).[^23]

For purposes of this statute of limitations, "collection activity" is
defined to mean the filing of a notice of intent to levy, an offset of
an overpayment of the requesting spouse to a joint income tax liability,
the filing of a suit by the U.S. to collect a joint income tax
liability, or the filing of a claim by the U.S. in a court proceeding in
which the requesting party is a party or which involves the property of
the requesting spouse (such as a bankruptcy case filed by a requesting
spouse.) Collection activity [does not]{.underline} mean the issuance of
a notice of deficiency, the filing of a tax lien, or a demand for
payment. Treas. Reg. 1.6015-5(b)(2).

With respect to the collection action of the IRS offsetting a subsequent
refund against a past joint income tax liability, often, nonculpable
spouses do not consider this to be collection and may not fully
understand the procedure. The spouse might think it has to do with
miscalculation of the tax due in the overpayment year or may apply to
balances due for other tax years. This is often a trap for the
unrepresented taxpayer. The Tax Court has held that if the collection
offset notice does not inform the spouse of her right to request
innocent spouse relief, it does not start the statute of limitations
running. *See* [McGee v. Commissioner,]{.underline} 123 T.C. 314, 319
(2004); [Campbell v. Commissioner]{.underline}, 121 T.C. 290, 292
(2003).

***§10.04.4 Claims for Refund if Innocent Spouse Relief is Granted.***

A requesting spouse who proves he or she is entitled to relief may
receive a refund of amounts paid on the joint liability for which he or
she gets relief may be entitled to a refund if the relief is granted
under Section 6015(b) (complete or partial relief) or Section 6015(f)
(equitable relief.) A refund is not permitted if the requesting spouse
obtains relief under Section 6015(c) (Separate liability)

The refund amounts, however, have to have been paid after July 22, 1998,
the effective date of the refund. Further, the claim for the refund,
usually made as part of the request for innocent spouse relief, must be
made within the general time periods for claiming refunds. See Code
Section 6511 (refunds must be requested within 2 years of the date they
were paid.)

***§10.04.5 Centralized Processing of Innocent Spouse Relief
Requests.***

The IRS made an early determination to centralize requests for innocent
spouse relief. All requests, except requests made as part of a
Collection Due Process Hearing, were to be filed with a specially
designed unit located in Covington, Kentucky. The process begins when
the requesting spouse files a Form 8857 requesting relief. By statute,
the IRS is then required to notify the nonrequesting spouse of the
receipt of a request. The IRS, however, has recognized that a spouse who
requests relief may be a victim of domestic violence. Accordingly, the
IRS will not disclose the current name, address or employer of the
requesting spouse to the nonrequesting spouse. See Form 8857. The
requesting spouse should also prepare and submit with the Form 8857, a
Form 12510, Questionnaire for Requesting Spouse. The requesting spouse
can attach additional pages to the Form 8857, but it is best to use Form
12507 Innocent Spouse Statement.

After the requesting spouse has submitted the appropriate forms, the
Centralized Unit will notify the nonrequesting spouse that relief is
being requested. Generally, the Centralized Unit will include in such
notification a Form 12508, Questionnaire for Nonrequesting Spouse.

The Centralized Unit will consider all submission, both by the
requesting and nonrequesting spouse, and will issue a letter with its
preliminary determination. Up until this time, however, neither the
taxpayers nor their representatives are allowed to have a conference-
telephonic or in person- with anyone at the Centralized Unit. This makes
it very difficult for a representative to portray his or her client. In
one case where our clinic truly believed that we would not be able to
capture the limited literacy and mental age of our client, we videotaped
a meeting with her to review the Form 12510 and sent along the video
tape!

If the Centralized Unit determines to grant innocent spouse relief to
the requesting spouse, it will issue a letter of Preliminary
Determination, a copy of which will be sent to the nonrequesting spouse.
Until 2003, if the Centralized Unit decided to grant relief to the
requesting spouse, the nonrequesting spouse had no further opportunity
to contest that decision. In 2003, however, the IRS announced new
procedures that give both requesting and nonrequesting spouses rights of
appeals to the Appeals Division.

If the Centralized Unit determines to deny innocent spouse relief, it
will also issue a Preliminary Determination letter giving the requesting
spouse the right to appeal such preliminary determination to the Appeals
Division.

**§10.04.6 The Role of Appeals in Innocent Spouse Relief Cases.**

The Appeals Office generally gets involved with reviewing innocent
spouse cases. The review is precipitated by: (1) an appeal of a
preliminary determination by the Centralized Unit; (2) in connection
with an offer in compromise based on doubt as to liability where the
offering taxpayer raises the question of innocent spouse relief; (3) as
part of Collection Due Process case where the taxpayer raises the
question of innocent spouse relief; and (4) as part of a docketed Tax
Court case. (See Chapter 12 for a more detailed discussion of the
interaction between Appeals and IRS Counsel in docketed Tax Court
cases.)

As discussed above in Section 10.04.4 in 2003 the IRS issued a revenue
procedure that expressly gave nonrequesting spouses the ability to
appeal a preliminary determination in favor of the requesting spouse.
This revenue procedure, effective for all claims filed after April 1,
2003, is reproduced below. It outlines how to request an appeals
conference for both a requesting and nonrequesting spouse.

**Rev. Proc. 2003--19**

**I.R.B. No. 2003-05**

SECTION 1. PURPOSE

This revenue procedure provides guidance on the administrative appeal
rights of a spouse or former spouse when a taxpayer seeks relief from
federal income tax liability under section 6015 of the Internal Revenue
Code.

SECTION 2. BACKGROUND

.01 Section 6013(d)(3) provides that married taxpayers who file a joint
return under section 6013 will be jointly and severally liable for the
tax arising from that return. For purposes of section 6013(d)(3) and
this revenue procedure, the term "tax" includes penalties, additions to
tax, and interest. See sections 6665(a)(2) and 6601(e)(1).

.02 Section 6015 provides relief in certain circumstances from the joint
and several liability imposed by section 6013(d)(3). For purposes of
this revenue procedure, the individual seeking relief from federal
income tax liability under section 6015 is referred to as a "requesting
spouse" and the individual with whom the requesting spouse filed the
joint return is referred to as a nonrequesting spouse."

.03 To request relief under section 6015, a requesting spouse must file
a Form 8857, "Request for Innocent Spouse Relief," or a written
statement with the Internal Revenue Service signed under penalties of
perjury, containing the same information required on Form 8857.

.04 Prior to publication of this revenue procedure, only the requesting
spouse had the right to file a written protest and receive an
administrative conference with the Service's Appeals Office (an "Appeals
conference"). The Service has determined that the nonrequesting spouse
may file a written protest and receive an Appeals conference with
respect to the Service's decision to grant partial or full relief to the
requesting requesting spouse. The nonrequesting spouse may not, however,
appeal a decision by the Service to deny relief to the requesting
spouse.

.05 In section 6015(h)(2), Congress expressed its intent that the
nonrequesting spouse have notice of, and be involved in, proceedings
with respect to a section 6015 election made by the requesting spouse.
The nonrequesting spouse has (with respect to the Service or the Tax
Court, as the case may be) the following opportunities to participate in
the determination of whether the requesting spouse is entitled to relief
under section 6015:

\(1\) As required by section 6015(h)(2) and section 1.6015--6 of the
Income Tax Regulations, the Service notifies the nonrequesting spouse of
the requesting spouse's claim for relief and provides the nonrequesting
spouse with an opportunity to submit information to be considered by the
Service in its administrative determination. The nonrequesting spouse is
not required to provide information. The Service will consider all
relevant information submitted by the requesting spouse and the
nonrequesting spouse in determining whether to grant or deny relief.

\(2\) Once the Service notifies the requesting spouse and the
nonrequesting spouse of the preliminary determination regarding the
requesting spouse's claim for relief, the requesting spouse, the
nonrequesting spouse, or both spouses may file a protest and receive an
Appeals conference as set forth in section 4 of this revenue procedure.

\(3\) Section 6015(e)(1)(A) allows the requesting spouse to petition the
Tax Court from a notice of final determination. There are no provisions
in section 6015 that allow the nonrequesting spouse to petition the Tax
Court from a notice of final determination. See [Maier v.
Commissioner,]{.underline} 119 T.C. 267 (2002). If, however, the
requesting spouse petitions the Tax Court, section 6015(e)(4) and the
Tax Court's Rules allow the nonrequesting spouse to become a party to
the proceeding.

SECTION 3. SCOPE

This revenue procedure applies to a nonrequesting spouse who appeals the
preliminary determination granting full or partial relief from joint and
several liability to a requesting spouse.

SECTION 4. GENERAL PROCEDURES

.01 Initial proceedings following a requesting spouse's claim for relief
under section 6015. In general, the Service will follow the procedures
below after making a preliminary determination regarding a claim for
relief from joint and several liability:

\(1\) The Service will issue a preliminary determination letter to the
requesting spouse based on the merits of the claim. In the event the
preliminary determination grants full or partial relief, the Service
will suspend processing of the claim for 45 calendar days, pending an
appeal by the nonrequesting spouse. The Service will notify the
requesting spouse that the nonrequesting spouse has the right to
separately protest the Service's preliminary determination.

\(2\) The Service will notify the nonrequesting spouse of the
preliminary determination at the same time the Service notifies the
requesting spouse. The nonrequesting spouse has the right to file a
written protest and request an Appeals conference to protest the
preliminary determination to grant partial or full relief. To be
eligible for an Appeals conference, the nonrequesting spouse must
request an Appeals conference, in writing, within 30 calendar days of
the mailing date of the notification letter. If the nonrequesting spouse
appeals, the Service will suspend further processing of the requesting
spouse's claim for relief pending the outcome of the nonrequesting
spouse's appeal.

.02 Procedures for cases forwarded to Appeals. The following procedures
will apply to Appeals conferences for section 6015 claims for relief:

\(1\) If, after the Service issues a preliminary determination letter to
the requesting spouse, only the nonrequesting spouse files a written
protest requesting an Appeals conference, the Service will notify the
requesting spouse of the nonrequesting spouse's request for an Appeals
conference. The Service will hold an Appeals conference with the
nonrequesting spouse. If Appeals proposes to change the preliminary
determination, the requesting spouse will have an opportunity to request
an Appeals conference to present his or her position including any
relevant information before the final determination.

\(2\) If, after the Service issues a preliminary determination letter to
the requesting spouse, only the requesting spouse files a written
protest requesting an Appeals conference, the Service will notify the
nonrequesting spouse of the requesting spouse's request for a
conference. The Service will hold an Appeals conference with the
requesting spouse. If Appeals proposes to increase the relief
recommended in the preliminary determination letter, the nonrequesting
spouse will have an opportunity to request an Appeals conference to
present his or her position including any relevant information before
the final determination.

\(3\) If, after the Service issues a preliminary determination letter to
the requesting spouse, both spouses file written protests requesting
Appeals conferences, the Service will notify each spouse of the other
spouse's request for an Appeals conference. The Service will hold
separate Appeals conferences with each spouse, with both spouses
permitted to submit information. The Service, in its discretion, may
hold a joint Appeals conference instead of separate Appeals conferences.

\(4\) Appeals conferences may be conducted by telephone, correspondence,
face-to- face meetings or by a combination of these methods.

.03 Procedures after Appeals has made a determination. Upon reaching a
final decision, Appeals will:

\(1\) Issue the notice of final determination to the requesting spouse,
unless the requesting spouse executes a waiver pursuant to section
6015(e)(5); and

\(2\) Notify the nonrequesting spouse of the final determination.

**§10.5 Two common requirements for relief from an understatement.**

With respect to all forms of relief for an understatement of tax, it is
necessary for the requesting spouse to prove that a joint return was
filed and that the erroneous item was that of the culpable spouse.

***§10.05.1 Joint return***

Most of us think of a joint return as a Form 1040 on which the spouses
have checked the box indicating that they are choosing the filing status
of married filing jointly and contains the signatures of both spouses.
However, signatures on a joint return may be obtained under duress or be
forged. In either case, the signature will not be recognized and the
return will not be a joint return. Treas. Reg. 1.6105-1(b); Treas. Reg.
1.6013-4(d).

To prove a forged signature a requesting spouse will need to submit
proof that his or her signature is not the same as the signature on the
return. This generally requires expert testimony or an expert report by
a handwriting analyst. What if the requesting spouse knows that her
spouse generally signs his or her name on documents and does not
question whether that is what happened on the joint return? There is a
doctrine of ratification that the Tax Court has applied in this
situation. Thus, even though a spouse may not sign her name to a joint
income tax return, it may nevertheless be treated as a joint return if
the IRS can prove that she acquiesced to someone else (presumably her
husband) signing the return or that she ignored it and did not challenge
the signature in a timely fashion, thereby ratifying the signature as
her own.

  -----------------------------------------------------------------------

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RONALD R. SILVERTON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE,
Respondent RONALD R. SILVERTON and B. SILVERTON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo 1978-433

\* \* \*\
OPINION\
\
This issue is whether B. Silverton is jointly and severally liable for
the deficiency in income tax found to be due from the Silvertons for the
year 1970. This turns on whether she filed or intended to file a joint
return with Ronald. B. contends that she did not sign the return and
thus should not be liable for the deficiency. At the outset we quote
from this Court\'s opinion in [Hennen v. Commissioner, 35 T.C. 747
(1961)](http://www.lexis.com/research/buttonTFLink?_m=19a9b5b3fd74f64d0411719be8a1357c&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5BT.C. Memo 1978-433%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=25&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B35 T.C. 747%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=2&_startdoc=1&wchp=dGLbVlz-zSkAz&_md5=dccb14ee7558e8b04d72747ae9ff7f40),
at 748:\
\
The fact that one spouse fails to sign the return is not always fatal to
the finding of a joint return. [Muriel Heim, 27 T.C. 270
(1956)](http://www.lexis.com/research/buttonTFLink?_m=19a9b5b3fd74f64d0411719be8a1357c&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5BT.C. Memo 1978-433%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=26&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B27 T.C. 270%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=2&_startdoc=1&wchp=dGLbVlz-zSkAz&_md5=5fdf118358dd744a11d33419898820ff),
affd. [251 F. 2d
44](http://www.lexis.com/research/buttonTFLink?_m=19a9b5b3fd74f64d0411719be8a1357c&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5BT.C. Memo 1978-433%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=27&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B251 F.2d 44%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=2&_startdoc=1&wchp=dGLbVlz-zSkAz&_md5=932f5c365f5385891b36fbb99083e2ef)
(C.A. 8, 1958). The determinative factor is whether the spouses intended
to file a joint return, their signatures being but indicative of such
intent. [*Hyman B. Stone,* 22 T.C. 893
(1954)](http://www.lexis.com/research/buttonTFLink?_m=19a9b5b3fd74f64d0411719be8a1357c&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5BT.C. Memo 1978-433%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=28&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B22 T.C. 893%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=2&_startdoc=1&wchp=dGLbVlz-zSkAz&_md5=09e0c57eb5e971bcc60991fc9619d481),
appeal dismissed. This intent may be inferred from the acquiescence of
the nonsigning spouse. \* \* \*\
\
See [Ladden v. Commissioner*,* 38 T.C. 530
(1962)](http://www.lexis.com/research/buttonTFLink?_m=19a9b5b3fd74f64d0411719be8a1357c&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5BT.C. Memo 1978-433%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=29&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B38 T.C. 530%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=2&_startdoc=1&wchp=dGLbVlz-zSkAz&_md5=c1fc17b064664a9fbf7bf909dc0f3cfe),
appeal dismissed.  \[\*17\] \
\
On the record in this case we conclude that B. Silverton intended that
the joint return prepared and filed by Ronald Silverton for 1970 be her
return and that she authorized Ronald to affix her signature thereto.
She is therefore jointly and severally liable for the deficiency in tax
found to be due for the year 1970.

###  However, if a taxpayer can prove that she signed a joint return under duress, then she may be able to nullify the return as a joint return. Duress, however, it is a very fact specific analysis. The spouse who seeks to challenge a joint return as null and void has the burden of proving duress. Generally, the spouse must prove (1) he or she was unable to resist the demands to sign the return, and (2) even if he or she was able to resist the demands, that he or she would not have signed anyway. The following two cases show somewhat similar situations, but very different results on the issue of duress. 

**[HAZEL STANLEY]{.underline}**

> United States Tax Court
>
> 45 T.C. 555 (1966)

Judge FORRESTER

\* \* \*

FINDINGS OF FACT

Some of the facts were stipulated pursuant to our order to show cause
under Rule 31(b)(5), Tax Court Rules of Practice. Such facts are found
accordingly.

Hazel Stanley, the petitioner herein, formerly was known as Hazel Berke.
During the years in issue she resided in Jamaica, N.Y., with her then
husband, Joseph D. Berke (hereinafter referred to as Berke). The returns
for the years 1952-56 were in form the joint returns of petitioner and
Berke and were filed with the district director of internal revenue,
Brooklyn, N.Y. Similar returns were filed for the years 1948-51.

Petitioner and Berke were married in July 1944 after a 2-week courtship.
Berke was a dentist, specializing in orthodontia. He also invented a
number of devices for use in the practice of orthodontia. The couple had
two children, Roger, born in August 1945, and Andrea, born in April
1947.

Petitioner found life with Berke to be less than tranquil. During the
years she was married to him she received several beatings at his hands.
He frequently criticized her, accused her of various inadequacies, and
threatened her.[^24] Berke told petitioner that he intended to subjugate
her completely to his will.

In 1950 Berke and petitioner moved to a fine house in Jamaica, N.Y. In
about 1952 Berke moved his parents into this same house. His mother was
suffering from incurable cancer, and his father was partially blind.
After her in-laws moved into the house, the mental strain on petitioner
greatly increased. She complained of severe migraine headaches[^25] and
other symptoms. Finally, in the latter part of 1952, petitioner sought
help from Kilton Stewart, a qualified psychologist. From petitioner\'s
descriptions of Berke\'s behavior and from Stewart\'s own interviews
with Berke, Stewart concluded that Berke was a psychopathic personality
with violent paranoid tendencies, which at any time could, under stress,
turn into paranoia. [^26]He feared, and he so informed petitioner, that
Berke might at any time, under stress, go berserk and possibly even kill
petitioner and the children. Stewart told petitioner that he would
continue to treat her only if she agreed not to argue with or disobey
Berke, or do anything else that might upset or anger him. Stewart hoped
that petitioner, by following his advice, might be able to avoid causing
Berke\'s complete and violent breakdown and at the same time be able to
recover her own mental health. Petitioner agreed to Stewart\'s
condition. After treating petitioner for about 3 years Stewart finally
concluded that it would be advisable for her to leave Berke. Petitioner
agreed that this would be desirable, but she was afraid that Berke would
pursue and inflict bodily injury upon her and the children. Petitioner
did not at this time \-- around 1955 \-- leave Berke.

Stewart, now confident that petitioner would not suffer a mental
breakdown, nevertheless believed that she required further therapy of a
kind he could not give. Accordingly he recommended that she go to
Alexander Lowen, a licensed psychiatrist. Stewart did not see petitioner
very often after 1955. Petitioner first consulted Lowen in October 1956.
She described her marital difficulties to him. During the course of
treatment she also related her fear of Berke, particularly the fear that
he would pursue and kill her if she ever tried to leave him. Lowen
concluded that petitioner was justified in fearing her husband. Lowen
treated petitioner regularly for about 4 years and occasionally
thereafter.

Despite her marital and emotional difficulties, petitioner got along
adequately. To friends and neighbors, her marriage did not appear to be
particularly abnormal. For the most part she followed Stewart\'s advice
to avoid any clashes with her husband and in this way lived what was in
most respects a normal life. Except for occasional complaints about the
difficulty of having Berke\'s parents live with her, petitioner kept her
problems largely to herself.

Petitioner\'s marital problems came to a climax in 1957. In October of
that year she removed herself and her children from the family home and
moved into her sister\'s house, which was a few blocks away. Shortly
thereafter petitioner instituted an action in the Supreme Court of the
State of New York, Queens County, for a legal separation from Berke. On
April 1, 1958, the court granted petitioner\'s motion for temporary
alimony, attorney\'s fees, and custody of the children. Berke did not
comply with this order. Petitioner divorced Berke in January 1959 and
later that year married Richard Stanley.

Prior to 1952, the first year in issue, Berke had begun accumulating
funds, primarily in savings accounts with banks located in various parts
of the United States and in U.S. Government Series E bonds. He continued
this practice throughout the taxable years and until October 1957. A
portion of the savings bonds and a number of the savings accounts were
held in the names of Berke and petitioner jointly, despite petitioner\'s
failure to contribute any significant amount to these joint holdings. At
Berke\'s direction, petitioner signed the signature cards required to
open the joint savings accounts, of which there were at least 50.
Petitioner endorsed and negotiated a substantial number of checks
representing interest paid on the various joint savings accounts. The
interest earned on such accounts for each of the years 1952-56 totaled,
respectively, \$ 1,917.25, \$ 2,311.39, \$ 2,637.83, \$ 2,908.14, and \$
3,583.69. Throughout the taxable years, Berke gave petitioner \$ 200 per
week for household expenses.

When petitioner first consulted her lawyer about her marital problems in
1956, she was not fully cognizant of the extent to which Berke had been
accumulating funds in savings accounts and U.S. Government bonds. At the
direction of her attorney, she found the books in which Berke recorded
his financial transactions. Petitioner copied the figures in these books
and gave them to the lawyer, who was able to derive sufficient
information therefrom to form the basis of allegations in the separation
action concerning Berke\'s income and assets.

The income tax returns of petitioner and Berke for the taxable years in
issue were prepared by Joseph Jasner, a professional tax adviser, on the
basis of information supplied by Berke. Such information consisted, for
each year, of an amount of gross receipts and lists of deductible
expenditures. The lists of expenditures were compiled by petitioner at
Berke\'s direction. Except for the figure, furnished to petitioner by
Berke, representing the amount of gross receipts, the papers prepared by
petitioner contained no reference to items of income.

\* \* \*

After Jasner prepared the returns, Berke presented them to petitioner
for her signature. Petitioner signed each of the returns. She signed
them without question and without examining them. In short, she complied
with Berke\'s directions to sign the tax returns just as she would
comply with any other directions he gave her. The returns as filed
contained substantial understatements of income. No interest income was
reported. Petitioner suspected that not all income was being reported.
She did not, however, comprehend the full significance of this fact; nor
did she realize the extent of the understatements.

Respondent commenced his investigation of the tax affairs of petitioner
and her husband in January 1958. Petitioner filed her petition herein on
January 26, 1959. On March 4, 1959, two of respondent\'s agents met with
petitioner and her attorney at the latter\'s office. At this conference
petitioner answered various questions about the income, assets, and
expenses of Berke and herself. As to the returns themselves, she stated
that she signed without examining them. Petitioner repeated this
assertion in an affidavit executed on April 20, 1959, and submitted to
one of respondent\'s agents. Neither at the conference nor in her
affidavit did petitioner claim that she was forced to sign the returns
or that she signed them against her will.

Berke left the United States on March 30, 1958, and entered Mexico on a
tourist visa. Later that year his immigration status was changed to
\"resident immigrant,\" upon his own application. He took with him at
least the sum of \$ 111,280.06 in the form of liquid assets.

On November 2, 1961, Berke was indicted by the grand jury, U.S. District
Court for the Eastern District of New York, on charges of willfully
attempting to evade income taxes for the taxable years 1952-56 and of
willfully failing to file an income tax return for the year 1957. On
November 16, 1961, Berke failed to appear for arraignment before the
District Court; pursuant to court order, a bench warrant was issued for
his arrest.

\* \* \*\
OPINION

The only issue is whether petitioner made joint returns with Berke for
the years 1952-56. If joint, the parties are agreed that petitioner is
liable for both the deficiencies and the additions to tax; if not, she
is liable for neither. Furnish v. Commissioner, 262 F. 2d 727 (C.A. 9,
1958), remanding on other grounds 29 T.C. 279 (1957); Irving S.
Federbush, 34 T.C. 740, 754-58 (1960), affirmed per curiam 325 F. 2d 1
(C.A. 2, 1963). As to whether the returns are joint, the burden of proof
is upon petitioner. Cf. Dora S. Hughes, 26 T.C. 23 (1956).

Petitioner correctly states that a wife\'s liability on a joint income
tax return depends upon her voluntary execution of the return. See
Furnish v. Commissioner, supra. She contends that she is not liable
because she was forced by Berke to sign the returns against her will.
She further contends that her liability is to be determined by reference
to the local, i.e., New York law of duress.

Several cases have considered whether a wife who claimed to have been
forced to sign joint returns against her will was liable on the returns.
See, e.g., Furnish v. Commissioner, supra; Irving S. Federbush, supra;
Estate of Merlin H. Aylesworth, 24 T.C. 134 (1955). Although the
question has usually been analyzed in terms of \"duress,\" no decided
case appears to have considered whether the local law of duress was
controlling.[^27] Inasmuch as petitioner has raised this issue, we think
it appropriate that it be resolved.

Neither the statute nor the regulations use the term \"duress.\" See
section 6013, I.R.C. of 1954; n6 section 1.6013, Income Tax Regs.[^28]
Section 6013(d)(3) \[footnote omitted\] imposes joint and several
liability \"if a joint return is made.\" The rule which relieves a wife
of this statutory liability on the ground that she was forced to sign
the return against her will in effect interprets the term \"joint
return\" used in section 6013(d)(3) as not including a return so signed.
This interpretation of the statute is obviously grounded upon the
principle that it is unfair to attach legal consequences to an
involuntary act.

At this point it would be well to examine the common law of duress. The
following excerpts from the opinion of Justice Heher in [Rubenstein v.
Rubenstein]{.underline}, 20 N.J. 359, 120 A. 2d 11 (1956), aptly
summarize the modern view of duress as used in the law of contracts[^29]
n8 (see 120 A. 2d at 13-14):

consent is the very essence of a contract and, if there be compulsion,
there is no actual consent. \* \* \* Duress in its more extended sense
means that degree of constraint or danger, either actually inflicted or
threatened and impending, \* \* \* such as in fact works control of the
will. \* \* \*

\* \* \* \*

It would seem basic to the legal concept of duress, proceeding as it
does from the unreality of the apparent consent, that the controlling
factor be the condition at the \[critical\] time of the mind of the
person subjected to the coercive measures, rather than the means by
which the given state of mind was induced, and thus the test is
essentially subjective.

In the modern view, moral compulsion or psychological pressure may
constitute duress if, thereby, the subject of the pressure is overborne
and he is deprived of the exercise of his free will. The question is
whether consent was coerced; that is, was the person complaining
\"induced by the duress or undue influence to give his consent, and
would not have done so otherwise.\" Williston on Contracts (rev. ed.),
section 1604. See Restatement, Contracts, section 492. \* \* \* the
tendency of the more recent cases, and the rule comporting with reason
and principle, is that any \"unlawful threats\" which do \"in fact
overcome the will of the person threatened, and induce him to do an act
which he would not otherwise have done, and which he was not bound to
do, constitute duress. The age, sex, capacity, relation of the parties
and all the attendant circumstances must be considered. \* \* \*\"
Williston on Contracts, section 1605. \* \* \* \[Emphasis supplied\].
\[footnote omitted.\]

Because of the analytical and factual similarities between the concept
of duress as used in the law of contracts and the rule of nonliability
on involuntarily signed tax returns, it was natural for the problems
encountered in applying the latter to be analyzed in terms of the
former. However, because of the interposition of section 6013(d)(3), we
may not blindly apply local \-- in this case New York \-- rules of
duress, as petitioner suggests we do. The inquiry as to whether or not a
Federal income tax return is a \"joint return,\" i.e., whether or not it
was signed voluntarily, should be conducted under a uniform set of
standards. We do not believe that Congress intended the meaning of the
term \"joint return,\" as used in section 6013, to vary from State to
State according to the peculiarities of local rules about
duress.[^30]^0^ Such local rules tend to involve artificial tests as to
whether certain kinds of pressure are insufficient as a matter of law to
result in duress, or whether the pressure applied need be so great as to
overcome the will of a \"reasonable man\" or \"a person of ordinary
firmness.\" See Furnish v. Commissioner, supra at 733 (reasonable man);
5 Williston, Contracts, sec. 1605 (person of ordinary firmness). Rules
of this nature tend to obfuscate rather than enlighten the essentially
factual inquiry into the voluntariness vel non of the signature on the
return.[^31]^1^ Nevertheless, if this caveat is kept in mind, resort to
the common law of duress can be quite helpful. It is this approach which
the decided cases appear to have adopted. The conclusion in a given case
that \"duress\" was or was not present is thus simply a shorthand way of
stating that the returns were or were not signed involuntarily.[^32]^2^

We turn now to the record in the instant case. Petitioner\'s
presentation was directed chiefly at showing Berke\'s domineering nature
and petitioner\'s inability to resist his demands. Petitioner\'s proof
of these aspects of the case was adequate. We are satisfied that if
petitioner had felt any reluctance about signing the returns in question
when they were presented to her by Berke, she might nevertheless have
signed them out of fear of the consequences of angering her husband. But
petitioner was required to prove such reluctance; she had to prove that
she would not have signed the returns except for the constraint applied
to her will through her fear of Berke. Such a rule is necessary to
prevent a party from avoiding the consequences of an act which he would
have performed even if he had not been subjected to pressure. Proof that
a starving man was ordered at gunpoint to eat a piece of bread would
not, standing alone, be satisfactory proof that it had been eaten
involuntarily. Not surprisingly, the requirement that there be proof of
the involuntary nature of the act has its parallel in the law of duress:

Not only must fear be produced in order to constitute duress \* \* \*
but the fear must be a cause inducing entrance into a transaction, and
though not necessarily the sole cause, it must be one without which the
transaction would not have occurred. \[Restatement, Contracts, sec. 492,
comment f (1932). Emphasis supplied.\] \[footnote omitted.\]

\* \* \*

We are of the opinion that petitioner has failed to prove the necessary
causal relationship between her fear of Berke and her signing of the
returns, and we so hold.

It should first be noted that petitioner signed joint returns for the
years 1948-51, as well as for the years in issue. \[footnote omitted.\]
Since petitioner first consulted Kilton Stewart near the end of 1952, it
is apparent that his advice did not influence her decisions to sign the
returns for 1948-51. Thus, we can infer that petitioner would have
signed the returns for the taxable years even if Stewart had not advised
her to comply with Berke\'s demands.[^33]^5^

It is significant that petitioner did not disclose or even suggest any
reason for being unwilling, or even reluctant, to sign the tax returns.
As a matter of fact, she did not even state directly that she was
unwilling or reluctant to sign them. If petitioner opposed the idea of
signing joint returns, one would expect her to have some reason or
explanation for her opposition and to make such reason known in a
proceeding in which she is making the claim that she signed the returns
under duress.[^34]^6^ This is particularly true when it is recalled that
petitioner signed no fewer than nine such returns.[^35]^7^ We think it
is fair, then, to infer that petitioner had no reason for being
reluctant to sign the joint returns.

The question of petitioner\'s state of mind in signing the returns is
one of proof, and a reason or explanation for some opposition to signing
would add support to her bare claim of unwillingness, just as proof of
specific incidents at the time of the signing would add such support.
Conversely, absence of such proofs detracts from petitioner\'s claim,
because a reason for opposition and incidents at the time of signing
would often (though not always) be companions to any real reluctance to
sign. It is in this regard that the lack of evidence of unpleasant
incidents in connection with petitioner\'s signing the returns becomes
relevant. Cf. Irving S. Federbush, supra at 757 (lack of specific
incidents when the returns were signed relied upon as one factor
indicating no duress). It is not, as respondent seems to argue, that
there can be no finding of involuntariness without proof of such
incidents. Cf. Furnish v. Commissioner, supra. Another factor indicating
that petitioner did not sign the returns involuntarily is her failure to
raise the issue until March 1964, shortly before the trial, rather than
in her original petition (filed in January 1959) or at a conference with
two of respondent\'s agents (in March 1959). This delay was not
satisfactorily explained; we do not think it was due to oversight.

Petitioner points out that she alleged in her December 13, 1957, reply
affidavit filed in her separation action against Berke that the returns
\"were signed by me under his \[Berke\'s\] direct command without any
possibility of discussion relative thereto and, as always, I had no
alternative but to knuckle under to his orders.\"[^36]^8^However,
petitioner did not specifically allege that she signed
unwillingly,[^37]^9^ whereas she did indicate that her state of mind was
no different when signing the returns than when complying with any other
of Berke\'s wishes. We do not believe that petitioner\'s compliance was
always or even usually forced. Consequently, we do not believe that this
evidence materially aids petitioner; it certainly is not sufficient to
carry her burden of proving she signed the returns against her will,
particularly in view of the factors discussed above.

It is also relevant that Sidney Cohn, Beatrice Cohn, and Harry Deutsch,
all of whom were acquainted with petitioner and Berke over an extended
period of time, as well as Jose Ibanez, next door neighbor of petitioner
and Berke during the taxable years, testified that they noticed nothing
unusual in the relationship between petitioner and Berke. Because of the
limited opportunities for these witnesses to observe petitioner and
Berke together, their testimony does not alter our evaluation of Berke
as set forth in our Findings of Fact. It does, however, illustrate that
the relationship between petitioner and Berke was characterized by a
considerable degree of normalcy.

Petitioner points to certain testimony of Kilton Stewart and Alexander
Lowen as support for her position. These men, both of whom treated
petitioner for mental or emotional problems, stated in response to
questions of petitioner\'s counsel that in their opinions petitioner
could not have resisted Berke\'s directions to sign the returns, even if
she had not wanted to sign. The fly in petitioner\'s ointment, however,
is, as we have heretofore indicated, that petitioner has not proven any
unwillingness on her part to sign the returns. Therefore, the opinions
expressed by Stewart and Lowen, based as they were on an unproven
hypothesis, are of no help to petitioner.

Petitioner\'s proof establishes no more than that she signed the returns
under the same state of mind existing when she complied with Berke\'s
other directions. We are not prepared to find, on the record before us,
that every act performed by petitioner at Berke\'s direction during the
greater portion of their married life was performed involuntarily.
Furthermore, we do not believe (and petitioner does not appear to argue)
that petitioner was mentally incompetent during the taxable years.

Petitioner\'s cause is not advanced by her citation of Furnish v.
Commissioner, supra. In that case, the Court of Appeals for the Ninth
Circuit believed that the decision of this Court finding no duress in a
wife\'s signing joint returns was influenced by an erroneous view of the
law of duress. The Court of Appeals held that under modern doctrine a
long continued course of mental intimidation could constitute duress,
and remanded the case for a redetermination of the question of duress
under this modern rule. 262 F. 2d at 731-734.

We are not holding that Berke\'s treatment of petitioner during the time
they were married could not constitute constraint sufficient to cause
petitioner to sign the returns against her will. But constraint alone is
not enough to constitute duress; there must result from the constraint
an act which would not otherwise have been performed. Cf. Restatement,
Contracts, sec. 492, comment f, supra. We have carefully considered
petitioner\'s relationship with and fears of Berke in evaluating the
evidence of record; we conclude that petitioner has not proven the
returns to have been signed by her involuntarily. This failure of proof
is fatal to petitioner\'s case. \[footnote omitted.\]

\* \* \* Even though petitioner in the instant case did not control the
family wealth, she nevertheless benefited by having the additional funds
available to help support her and her children at a fairly comfortable
standard of living. In this respect, at least, petitioner stands on no
different footing than other women who sign joint returns every year at
the directions of their husbands, without really knowing the contents of
the returns or the nature of the obligation they are undertaking. We
have no doubt but that there are millions of such women; it could not
seriously be contended that any significant portion of them sign
involuntarily.

Except for her unfortunate marriage to a domineering and sometimes
violent man, petitioner has not shown herself to be entitled to any
special treatment as regards the joint and several liability imposed by
the statute on those who make joint returns. \[footnote omitted.\]

Proof of duress often turns on the testimony of the requesting spouse
and others, as well as documentary evidence. Consider the following case
of Brown v. Commissioner, and try to identify what facts in this case
allowed the Tax Court to this time conclude duress.

> **[LOLA I. BROWN]{.underline}**
>
> UNITED STATES TAX COURT
>
> 51 T.C. 116 (1968)

Judge DAWSON

\* \* \*

FINDINGS OF FACT

Lola I. Brown (herein referred to as petitioner) was a resident of
Atlanta, Ga., at the time the petition herein was filed. Federal income
tax returns for the years 1956 through 1959 in the names of Lola I.
Brown and E. Thurston Brown (petitioner\'s former husband, who is
referred to herein as Thurston were in the form of joint returns and
were filed with the district director of internal revenue at Atlanta,
Ga.

Petitioner and Thurston were married in 1940. Two children were born to
them, James who was 24 years of age at the time of trial and Lola E. who
was then 20 years of age.

Throughout most of the marriage petitioner was unemployed. She worked
for 18 months during 1940 and 1941 and has been employed from 1960 until
the present time. Petitioner did not receive any taxable income during
the years in issue. In 1954 petitioner began to exhibit horses raised by
Thurston in horse shows which offered cash prizes. Although horses owned
by Thurston often won prizes, expenses always exceeded income creating
losses each year from the enterprise. Petitioner\'s children enjoyed
riding and had their own horses. Although petitioner originally was
\"petrified\" of horses, she agreed to exhibit them as a result of
Thurston\'s threats that if she did not, he would sell the children\'s
horses. In 1957 petitioner sustained from an accident relating to her
showing of horses an injury to her back which caused a paralysis in her
right side. She underwent spinal surgery that year and was bedridden for
a lengthy period of time while she received extensive physical therapy.
During this period petitioner suffered great pain which required large
doses of narcotics to allay.

Thurston controlled with an iron hand all financial matters throughout
his marriage with petitioner. He bought everything, including the
groceries, and paid the cooks. Petitioner was never given a personal
allowance nor was she allowed to write checks on their joint checking
account. Petitioner was not allowed to make decisions on financial
matters.

In all other respects Thurston was a domineering husband who displayed
little regard for petitioner and her welfare and mental and physical
well-being. He had a violent temper and often struck and bruised
petitioner. Thurston is a large man whose size greatly exceeds that of
petitioner, a frail, petite, and nervous person. He intimidated his
children to the point that eventually both ran away from home.

In each year from 1956 through 1959, Thurston received certain
\"commissions\" on transactions arranged by him between agencies of the
State of Georgia and independent contractors. None of these receipts
were reported on the Federal income tax returns filed by Thurston.

During the years in issue the Federal income tax returns in the names of
Thurston and petitioner were prepared by certified public accountants
based solely upon information given them by Thurston. He required
petitioner to prepare schedules reflecting the losses incurred from the
showing of horses owned by him, but she was unaware of other information
given by Thurston to the accountants relating to sources and amounts of
his income. From the outset in 1954 petitioner disapproved of
Thurston\'s involvement in politics and in selling arrangements with
State agencies because of the \"bad publicity\" surrounding such
activities. Through the years in issue here, however, petitioner did not
know that Thurston was receiving \"commissions\" on the State contracts,
but she was aware that he did not always tell her the truth.

After the returns were prepared, Thurston gave them to petitioner solely
for the purpose of signing them. In each instance she requested an
opportunity to look at the returns and inquired how Thurston knew they
were correct. He assured her that \"the C.P.A. fixed them\" and refused
to allow her to read or study them. If petitioner asked any questions
about the return, Thurston became enraged and demanded, \"you sign it or
else.\" He often hit petitioner, and, as a consequence, she and the
children suffered more. Because of Thurston\'s size and his violent
temper, petitioner was on occasion put in fear of her life. Petitioner
reluctantly signed the Federal income tax returns for each of the years
1956 through 1959 at the direction of Thurston whose threats and
physical abuse rendered her incapable of resisting his demands.

Petitioner and her daughter moved away from Thurston in September 1967,
after he was released from a Federal penitentiary, and a divorce was
granted to petitioner on March 13, 1968, on the grounds of Thurston\'s
physical violence and abuse.

**OPINION**

Respondent contends that the evidence presented by petitioner \"has done
little more than show that her husband was domineering and that they
argued on numerous occasions\" and, thus, is wholly insufficient to
sustain a finding that she signed the returns in question while under
duress. He argues that petitioner is jointly and severally liable for
any deficiencies in the returns and all additions to the tax.[^38]

Petitioner asserts that her own testimony, supported by that of her two
children and Thurston, clearly establishes a pattern of domineering and
abusive conduct exercised by Thurston in all family affairs and,
specifically, such violence and intimidation directed by him toward her
on the occasions when she signed the returns sufficient to, and which
did in fact, render her act of signing involuntary. She argues that the
consequence is, in effect, that she filed no return for each of the
years 1956 through 1959, and, since she had no income of her own during
those years, she has no tax liabilities.

Spouses may file a joint return even though one has neither gross income
nor deductions, but as a consequence liability with respect to the tax
is joint and several. Sec. 6013(a) and (d)( 3), I.R.C. 1954. \[footnote
omitted.\] \"Such liability covers not only the basic tax but also any
addition to the tax on account of fraud, notwithstanding that the wife
may have signed the return in blank and that she was innocent of the
fraud.\" [Furnish v. Commissioner]{.underline}, 262 F.2d 727, 731 (C.A.
9, 1958), *remanding in part sub nom.* [Emilie F. Funk,]{.underline} 29
T. C. 279 (1957); [Irving S. Federbush]{.underline}, 34 T. C. 740
(1960), affirmed per curiam 325 F.2d 1 (C.A. 2, 1963). For purposes of
section 6013, however, a joint return form signed by both spouses does
not constitute a \"joint return\" when the signature of either party is
executed under duress. See [Hazel Stanley,]{.underline} 45 T.C. 555
(1966); [Furnish v. Commissioner]{.underline}, supra; [Paul J.
Frederick]{.underline}, T. C. Memo. 1957-225; [Ethel S.
Hickey]{.underline}, T. C. Memo. 1955-149.

A determination of duress must be made under a uniform standard
unaffected by the idiosyncrasies of particular State law. [Hazel
Stanley]{.underline}, supra. The \"modern\" standard is entirely
subjective, i.e., \"whether the pressure applied did in fact so far
affect the individual concerned as to deprive him of contractual
volition.\" 17 C.J.S., Contracts, sec. 175; 8A Mertens, Law of Federal
Income Taxation, sec. 47.09 (1964 rev.); [Furnish v.
Commissioner]{.underline}, supra. The standard, as developed, involves
two critical elements: (1) Whether the taxpayer was unable to resist
demands to sign the return; and (2) whether \"she would not have signed
the returns except for the constraint applied to her will.\" [Hazel
Stanley,]{.underline} supra at 562. In other words, petitioner must show
not only that she had no choice in executing her signature but also that
she was \"reluctant\" to do so.

In formulating a standard of duress applicable in Federal tax
controversies, the Court of Appeals in [Furnish v.
Commissioner]{.underline}, supra at 733, stated:

\"Duress\" may exist not only when a gun is held to one\'s head while a
signature is being subscribed to a document. A long continued course of
mental intimidation can be equally as effective, and perhaps more so, in
constituting duress. n6 \* \* \*

Here Mrs. Funk was defrauded by her then husband, who was at the same
time defrauding the government. She may have signed as an automaton;
there could well have been no exercise of her free will. Under the
peculiar circumstances of this case, we believe it harshly inequitable
for the wife to be forced to pay a penalty for fraud arising out of
nothing she had done, save signing a blank return required of her by a
dominating husband who was attempting to defraud both his wife and his
government."\[Footnote omitted.\]

Petitioner has established without question \"a long continued course of
mental intimidation\" by Thurston. He dominated almost every facet of
their married life, particularly with respect to financial matters. This
is not to say, however, that petitioner obeyed always without any
question or objection. When she asserted her will, Thurston became
enraged and gained her submission through the use of force and violence.
Thurston\'s intimidation was both mental and physical and extended not
only to petitioner but also to their children, who both eventually left
home as a result of his treatment. By his own words Thurston is a
\"domineering, mean, asinine man.\"

This general course of conduct was reflected in Thurston\'s handling of
the Federal income tax returns filed by him for the years 1956 through
1959. We have found as a fact that Thurston gave petitioner no choice
but to sign the returns. The circumstances surrounding each signing
indicate that petitioner did not, however, sign the returns merely as an
automaton. She objected to Thruston\'s involvement in sales transactions
with State agencies because of the \"bad publicity.\" Although she did
not know that he was receiving \"commissions\" which he failed to report
as income, she was aware that he did not always tell her the truth.
Thus, she requested an opportunity to look over the returns before she
signed them. Thurston assured her that \"the C.P.A. fixed them,\" but
when she persisted he became adamant. He demanded, \"you sign it or
else,\" and sometimes hit her. At the time she signed the 1956 return,
petitioner was confined to a bed with a partial paralysis resulting from
a horse accident. She suffered great pain from the injury, yet Thurston
threatened to hit her if she did not sign the return. Petitioner
testified that Thurston \"would put me in fear of my life if I didn\'t
do what he said, and as long as I did what he said, he didn\'t threaten
me.\" Petitioner objected to signing each of the returns in issue unless
she first had an opportunity to look them over, but every time she
capitulated out of a realization that \"when I started questioning this,
things got worse. I suffered more and the children suffered more.\"

The element missing in the taxpayer\'s offer of proof in Hazel Stanley,
supra, i.e., that she was reluctant to sign the returns, is present in
this case. Accordingly, we hold that petitioner\'s signature to each of
the income tax returns for the years 1956 through 1959 was procured by
Thurston through duress and was not the result of her voluntary act.
Consequently, the returns filed by Thurston were not joint returns
within the purview of section 6013, and petitioner is not severally
liable thereon.

In view of our conclusion on this issue, we do not reach several other
issues raised by the parties.

Can you identify different facts in each case that were central to the
Tax Court's holding? What types of proof do these cases suggest are more
persuasive on the issue of duress?

###  If a spouse is successful in determining duress, then he or she may still have a tax liability. If the requesting spouse has not filed a separate return, then he or she will be considered a nonfiler and will need to file a return for that year. 

It is not entirely clear how a client can raise the issue of duress.
Certainly it cannot be raised through the filing a request for innocent
spouse relief. The IRM provides as follows on this point:

### IRM 25.15.1.2.3  (09-01-2006) Return Signed Under Duress

1.  If a spouse claims he or she signed the joint tax return under
    duress or was coerced into signing it, the election to file a joint
    return may be invalid. In that case, the issue of relief from joint
    and several liability is not applicable. If one spouse did not sign
    the joint return, see IRM 25.15.2.2.9. To establish a return was
    signed under duress, the taxpayer must demonstrate:

    A.  the taxpayer was unable to resist demands to sign the return;
        and

    B.  the taxpayer would not have signed the return except for the
        constraint applied by the other party. See, e.g. Stanley v.
        Commissioner, 45 T.C. 555 (1966); Brown v. Commissioner, 51 T.C.
        116 (1968).

2.  A signature made involuntarily or under duress is not a valid
    signature. Therefore, the election to file a joint return is not
    valid.

3.  The individual claiming duress is not jointly or severally liable
    for liabilities arising from such a return if the return was indeed
    signed under duress.

4.  The account should be adjusted to reflect a married filing separate
    return being filed by both spouses.

5.  A married filing separate tax return may need to be secured from the
    spouse claiming to have signed under duress. If a return is required
    for the period or if the taxpayer may have been entitled to a
    refund. Also keep in mind there are certain credits not available
    when spouses file separate returns.

6.  A requesting spouse (RS) who raises the issue of duress and later
    determines he or she would owe more tax if he or she filed
    separately, may choose not to pursue the issue of duress.

7.  The determination of whether or not an income tax return was jointly
    filed presents a question of fact. The resolution of the factual
    issue should focus on the intention of the parties or taxpayers for
    the return in question. Reference can be made to United States v.
    Kramer, 1983 U.S. Dist. LEXIS 15951, 52 A.F.T.R.2d 83 5630, (D.
    Md.1983) and the cases cited therein, for a discussion of the
    factors to consider when making the determination.

***§10.05.2 Erroneous Item of the Culpable Spouse.***

To be relieved of liability for an understatement of tax, the requesting
spouse must prove that the liability is either:

1.  The result of the omission of income that is income of the culpable
    spouse and not income of the requesting spouse; or

2.  The result of a deduction or credit that was overstated and claimed
    by the culpable spouse that relates to an activity or business in
    which the requesting spouse did not have an ownership interest.

See Treas. Reg. 1.6015-3(d)(2)(iii), (iv).

For example, if Mr. Jones and Mrs. Jones file joint returns and Mr.
Jones convinces Mrs. Jones not to report salary income that she earned
and that was reported on a Form W-2 that was issued to her, Mrs. Jones
cannot request innocent spouse relief from a liability that the IRS
determines is due to the omission of the salary income. In this case,
the omission is not an erroneous item of the other spouse.

However, if in our example, Mr. Jones gambled and did not report his net
winnings on the return, then if Mrs. Jones satisfies the other
requirements of one of the forms of innocent spouse relief, she may be
relieved of the liability for the tax on the omitted income. It is an
erroneous item that is income only of Mr. Jones.

**§10.6 Section 6015(b), complete or partial relief from an
understatement.**

The first form of relief, Section 6015(b), is very similar to the old
form of innocent spouse relief under section 6013(e). To qualify for
this relief, the requesting spouse has the burden of proving:

### 1.     S/he filed a joint return. 

### 2.     There is an understatement of tax.

### 3.     The understatement was due to an erroneous item.

> 4.     At the time the electing spouse signed the return, s/he did not
> know or have reason to know that there was an understatement; and

### Taking into account all the facts and circumstances, it would be unfair to hold the electing spouse liable for the understatement.

The first three requirements were discussed [supra]{.underline}. Unlike
relief under section 6015(c), the so-called separate liability relief
discussed in more detail below, a requesting spouse may be either
married, separated or divorced at the time he or she requests relief
under this section. Code section 6015(c)(3)(A)(i). Usually, the most
difficult element to prove is that the requesting spouse [did not know
or have reason to know]{.underline} of the understatement.

Like the old form of innocent spouse relief, under section 6015(b) if a
requesting spouse actually knows of the understatement or has
constructive knowledge (reason to know) about the understatement, then
she will be ineligible for innocent spouse relief. Treas. Reg.
1.6015-2(c). As the majority decision in [Bokum]{.underline} case below
illustrates, the Tax Court has equated the requesting spouse's knowledge
of the transaction to which the underreported or omitted income, as well
as overstated deductions or credits, is the same as constructive
knowledge of the understated or omitted income or overstated deductions
or credits. (The legislative history of section 6015 indicates the
intention of Congress to apply the interpretation of old section 6013(e)
to new section 6015(b),)

Thus, under the example above, if Mrs. Jones knows that Mr. Jones
gambles, then she has constructive knowledge of his income from his
gambling, whether or not she has actual knowledge of the amounts or that
in fact he had net income. Essentially, this requirement requires
spouses to inquire of their "better halves" about the specifics of any
activities or transactions they engage in that might produce funds.

However, a requesting spouse may receive some relief to the extent that
she can prove that she only had actual or constructive knowledge of some
and not all of unreported income.

> **David l. Wiksell and Margaret Ann Carpender**
>
> **UNITED STATES TAX COURT,**
>
> **T.C. Memo 1998-3**

Judge NIMS

OPINION:

\* This opinion supplements our opinion in [Wiksell v.
Commissioner,]{.underline} T.C. Memo. 1994-99, revd. and remanded 90
F.3d 1459 (9th Cir. 1996).

SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION

NIMS, JUDGE: This case is before the Court on remand from the Court of
Appeals for the Ninth Circuit. [Wiksell v. Commissioner]{.underline}, 90
F.3d 1459 (9th Cir. 1996), revg. and remanding T.C. Memo. 1994-99.

Respondent has conceded all additions to tax as to petitioner Margaret
Ann Carpender (petitioner or Margaret). Margaret has conceded that
deficiencies in the amounts of \$221,294 and \$789,919 asserted in
respondent\'s amended answer for taxable years 1984 and 1985,
respectively, are correct.

All section references are to sections of the Internal Revenue Code in
effect for the years in issue, unless otherwise indicated. All Rule
references are to the Tax Court Rules of Practice and Procedure.

In [Wiksell v. Commissioner]{.underline}, T.C. Memo. 1994-99, an order
of dismissal and decision was entered against petitioner David L.
Wiksell (David) by reason of his default. David did not file an appeal.
The caption herein has not been changed to reflect this fact since David
and Margaret jointly filed the petition.

On appeal, petitioner challenged our determination that she was not an
innocent spouse within the meaning of section 6013(e). The Court of
Appeals for the Ninth Circuit held that \"Because there is a significant
void in the evidence which links Appellant to much, if not the majority,
of the understatement and its related tax deficiency\", the case would
be remanded to this Court to \"determine what portion, if any, of the
deficiency is subject to innocent spouse relief.\" [Wiksell v.
Commissioner]{.underline}, supra at 1464.

\* \* \*

The sole issue for decision is whether petitioner qualifies for innocent
spouse relief pursuant to section 6013(e) with respect to any portion of
the deficiencies asserted in respondent\'s amended answer for taxable
years 1984 and 1985.

Petitioner resided in Newhall, California, when the petition was filed.

**FINDINGS OF FACT**

Some of the facts have been stipulated and are so found. The stipulation
of facts and attached exhibits are incorporated herein by this
reference. We adopt in full the findings of fact in our prior memorandum
opinion. For convenience, we shall repeat the facts as necessary to
clarify the ensuing discussion, and we make additional findings of fact.

David and Margaret were married in 1960, legally separated in 1988, and
divorced in December, 1992. They had three children. Throughout much of
their marriage Margaret and David endured a near poverty level
existence.

Sometime in 1982 or 1983 David started his own company, Hitech Recovery
Systems, Inc. (Hitech). David told Margaret that Hitech was to engage in
the extraction of oil from old oil wells.

Sometime before the spring of 1984, David began working as a real estate
investment adviser for Comstock Financial Services, Inc. (Comstock
Financial), an insurance agency owned and operated by Roy L. Comstock
(Roy Comstock). In the spring of 1984, David became a corporate officer
and vice president of Comstock Financial, positions which he held
through the fall of 1985. During the spring of 1984, David told Margaret
that Comstock Financial was investing in Hitech.

During the years in issue, and throughout most of her marriage,
petitioner did not share a joint checking account with David due to his
propensity for bouncing checks. Rather, Margaret maintained her own
separate checking accounts at Security Pacific National Bank (Security
Pacific) and Santa Clarita Bank.

During 1984 and 1985, David maintained a business checking account under
the name of Hitech at Security Pacific. Petitioner was aware that both
her husband and a business associate, Thane Wilson, were signatories on
this account; she, however, was not. David periodically gave petitioner
checks drawn on the Hitech account and made payable to \"Margaret
Wiksell\", which she deposited into her two personal checking accounts.
In 1984, Margaret was given 23 checks from Hitech totaling \$54,500 from
funds that Hitech had obtained from Comstock Financial. In 1985,
Margaret received 15 Hitech checks totaling \$140,500 from funds that
Hitech had obtained from Comstock Financial.

In 1984 and 1985 Margaret wrote checks on her accounts totaling
\$78,781.38 and \$149,444.32, respectively. Among other things, these
checks were for clothes for Margaret and her daughters; loans to one
daughter; charitable and political contributions; entertainment and
gifts; home furnishings; home repair and maintenance; credit card
payments; mortgage payments; and numerous other miscellaneous expenses.

Sometime in 1985 an investigation of David\'s business was initiated by
the Securities and Exchange Commission (SEC). In October, 1985, David
told Margaret that the SEC had recently issued a temporary restraining
order against David and other employees of Comstock Financial to prevent
them from soliciting further investment funds. Petitioner was also aware
that her husband\'s deposition was taken by the SEC in November, 1985,
in connection with activities that had gone on at Comstock Financial.

In January or February, 1987, David was arrested and charged with fraud
in connection with a scam perpetrated by Roy Comstock, Abraham Boldt,
and David, wherein it was alleged that at least \$2 million,
fraudulently obtained from unsuspecting investors in Comstock Financial,
was diverted to Hitech. David was placed in county jail.

In September or October, 1987, David was released from county jail on
bail. On January 13, 1988, David pleaded guilty to various counts of
fraud involving the sale of unregistered securities in connection with
his participation in the fraudulent investment scheme involving Comstock
Financial. He was thereafter confined in a California state prison.

On their returns for 1984 and 1985, petitioners reported an adjusted
gross income of \$10,525 and \$4,298, respectively, of which
approximately \$9,801 in 1984 and \$1,760 in 1985 represented
Margaret\'s wages from part-time nursing as reflected on Forms W-2, Wage
and Tax Statement, issued to her. Petitioners did not report any wages
or income from Comstock Financial on their 1984 return; petitioners
reported \$2,538 in wages that David had received from Comstock
Financial on their 1985 return.

During 1984, David received and retained \$465,400 in illegally diverted
funds from investors of Comstock Financial. During 1985, David received
and retained \$1,572,018 in illegally diverted funds from such
investors. In addition, during 1984 and 1985 David received \$3,898.68
and \$63,128.23, respectively, from the sale of oil by Hitech to various
oil-related companies which he deposited in Hitech\'s Security Pacific
account. In 1985, David also received \$6,944 of interest income from a
Merrill Lynch cash management account. The record does not disclose that
Margaret was aware of the existence of these items at either the time
David received them or when the 1984 and 1985 returns were filed. David
and Margaret reported none of these amounts on their 1984 and 1985
returns.

While David was in county jail, and prior to Margaret\'s signing the
1984 and 1985 returns, he revealed to her the location of separate keys
to unlock the file cabinets and briefcases where he kept his business
records, in order for her to help him obtain release on bail. In the
file cabinets and briefcases, Margaret found \"stacks of papers\"
related to \"everything David had been involved in for years.\" She also
located David\'s business checkbook. Furthermore, each month throughout
the period of her husband\'s incarceration in county jail, Margaret
observed letters addressed to her husband or Hitech containing account
statements from Security Pacific and Merrill Lynch.

At the time she signed the 1984 and 1985 returns, Margaret questioned
David about why the returns contained no income reflecting the money
that he had given her in those years. She stated that he gave her

such a bizarre explanation that I don\'t think I could even repeat it, I
mean what he told me. \* \* \* It was something along the fact that it
had been investment \-- that he had investments in \* \* \* Hitech that
had been lost and this was return, or something along those lines. \* \*
\* it just didn\'t make sense to me.

Petitioner suspected that David was not telling her the truth, but she
would not contradict him or press him further on the matter. David had
in the past frequently evaded giving answers to questions about his
business and finances, and when Margaret or others \"probed\", he would
often \"fly into a rage\" and occasionally throw things.

**OPINION**

The United States Court of Appeals for the Ninth Circuit remanded this
case to allow the Tax Court to apportion relief under the \"innocent
spouse\" provisions of section 6013(e). [Wiksell v.
Commissioner]{.underline}, 90 F.3d 1459, 1464 (9th Cir. 1996). The Court
of Appeals noted that one of the showings that a spouse seeking innocent
spouse relief must make is that in signing the return the spouse did not
know, and had no reason to know, of the substantial understatement. Id.
at 1461. The Court of Appeals agreed that petitioner had reason to know
of the substantial understatement, but observed that it was not clear
that she should have known of the magnitude of the understatement. The
Court of Appeals stated that \"Application of the statute \* \* \*
potentially generates inequitable results\", Id. at 1463, and remanded
the case so that we could reevaluate our previous decision \"with the
knowledge that apportionment is both available and proper IN THIS
CASE.\" Id. at 1464. (Emphasis added).

We have reevaluated our prior decision, as directed, and have also
evaluated the record generated by the further hearing. By doing so we
are led to conclude that petitioner\'s former spouse, David, was so
secretive and devious about his financial affairs, and his business
records were so hopelessly arcane and tangled, that it would have been
impossible for petitioner to obtain even an approximate idea of the
magnitude of David\'s dereliction.

Petitioner was, however, precisely aware of the amounts derived from
Hitech via David that actually passed through her hands. As we have
found, in 1984, petitioner was given 23 checks from Hitech, totaling
\$54,500. In 1985, petitioner received 15 Hitech checks totaling
\$140,500. During these same years petitioner spent substantial amounts
for clothing for herself and her children, loans to a child, charitable
and political contributions, entertainment and gifts, home furnishings,
home repair and maintenance, credit card payments, mortgage payments,
and numerous other miscellaneous expenses.

Taking all of the facts and circumstances into consideration, and
mindful of the Circuit Court\'s assurance that apportionment here is
both available and proper, we hold that petitioner did not know or have
reason to know of the portions of the understatements attributable to
the grossly erroneous items attributable to David in 1984 and 1985 in
excess of the amounts represented by the Hitech checks received by
petitioner from David in those years, and that it would be inequitable
to hold her liable for deficiencies as to those portions. But we also
hold that it would not be inequitable to hold petitioner liable for 1984
and 1985 deficiencies in taxes related to the Hitech checks.

If the requesting spouse did not have knowledge of the transaction that
was the source of the omitted income or overstated deductions or
credits, he or she may still have constructive knowledge of the
erroneous item. To determine if a requesting spouse has constructive
knowledge, the trier of fact will look to circumstantial evidence and
apply a reasonable person test. Specifically, the requesting spouse must
prove that a reasonable prudent person in the same particular
circumstances would not have known about the understatement. [Sanders v.
U.S.]{.underline} , 509 F. 2d 162 (CA5 1975) Generally, the courts look
to three factors to determine if a reasonably prudent person should have
known of an understatement of tax: (1) Whether for the years for which
relief are sought, did the petitioning spouse have unusual or lavish
expenditures; [Mysse v. Commissioner]{.underline}, 57 TC 680 (1972); (2)
Did taxpayer participate in the business affairs of the guilty spouse or
performed bookkeeping chores; [Nicholas v. CIR]{.underline}, 70 TC 1057
(1978); [Heywood v. CIR]{.underline}, TC Memo 1974-283; and (3) Did the
guilty spouse's refuse to be forthright about the couple's income.
[Palmer v. CIR]{.underline}, 35 TCM 908 (1976). For a discussion of
these factors, see [Braden v. Commissioner of Internal
Revenue]{.underline}, T.C. Memo. 2001-69.

**CURTIS EARL MOORE v. COMMISSIONER OF INTERNAL REVENUE**

**UNITED STATES TAX COURT**

**T.C. Summary Opinion 2004-86**

PANUTHOS, Chief Special Trial Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect at the
time the petition was filed. The decision to be entered is not
reviewable by any other court, and this opinion should not be cited as
authority. Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the taxable year in issue, and all
Rule references are to the Tax Court Rules of Practice and Procedure.

Respondent determined a deficiency in petitioner's Federal

income tax for the taxable year 1998 of \$7,128 and a penalty pursuant
to section 6662 of \$1,426. The issues for decision are:

\(1\) Whether petitioner is entitled to relief under section 6015(b) or
(c), and (2) whether respondent abused his discretion in denying
petitioner's request for relief from joint and several liability under
section 6015(f).

[Background]{.underline}

Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference. Petitioner
resided in Chocowinity, North Carolina, at the time he filed the
petition herein.

Petitioner and Dorothy L. Moore (Ms. Moore) were separated

in July 1999, after 17 years of marriage. Sometime prior to 1998, Ms.
Moore began operation of Wee Ones Child Care, a day care business, as a
sole proprietorship. Ms. Moore operated the business during the taxable
year 1998.

Petitioner, who did not complete high school, worked full time as a
maintenance supervisor for Flanders Filters and received wages during
1998. Petitioner did not read well and relied on Ms. Moore during the
marriage for business matters, including tax preparation.

While not directly involved in the operation of Wee Ones Child Care,
petitioner assisted Ms. Moore financially with the startup costs,
purchased supplies, and performed repair work and remodeling for the day
care center. Petitioner considered himself to be a "handyman" for Wee
Ones Child Care. Petitioner gave Ms. Moore receipts for his cash
expenditures. Ms. Moore presumably utilized the receipts in calculating
income and expenses for Wee Ones Child Care.

Ms. Moore prepared joint tax returns for petitioner and herself during
their marriage. For taxable year 1998, as in prior taxable years,
petitioner gave Ms. Moore his Form W-2, Wage and Tax Statement, and
other tax information, and Ms. Moore prepared the return and presented
the completed return to petitioner for his signature. For the year in
issue, petitioner also provided Ms. Moore a list of employee business
expenses approximating \$600. After Ms. Moore prepared the 1998 return,
petitioner did not review it prior to signing it.

The 1998 return reported petitioner's wages of \$27,200. The

return also reflected itemized deductions of \$14,526, which amount
included deductions of \$5,212 for medical and dental expenses and
deductions of \$3,889 for unreimbursed employee business expenses. The
return also attached a Schedule C, Profit or Loss From Business,
relating to Wee Ones Child Care. The Schedule C reflected gross receipts
of \$20,100, expenses of \$30,549, and a net loss of \$10,449.

In a notice of deficiency dated January 8, 2002, respondent

made adjustments to the 1998 return as follows:

Unreported unemployment compensation \$294

Disallowed itemized deductions 7,400

Disallowed Schedule C deductions 27,749

As a result of these adjustments, respondent determined that

there was a self-employment tax of \$2,444.[^39]

The omitted unemployment compensation of \$294 was paid to

petitioner. The disallowed itemized deductions fall into two categories.
The first is net disallowed medical and dental expense of \$3,869, which
appears to be attributable to both petitioner and Ms. Moore.[^40] The
second is net disallowed miscellaneous deductions for employee business
expense, which amounted to \$3,531. All the other adjustments in the
notice of deficiency relate to Wee Ones Child Care. When petitioner and
Ms. Moore were advised of the adjustments, Ms. Moore did not dispute the
proposed adjustments and instead executed a waiver permitting
assessment.

Petitioner made an initial attempt during the examination to

submit information relating to the employee business expense deduction.
Later petitioner submitted a Form 8857, Request for Innocent Spouse
Relief. Since petitioner did not agree to the proposed adjustments, a
notice of deficiency was issued to him,

and a timely petition was filed wherein petitioner claimed relief

under section 6015.

[Discussion]{.underline}

Generally, married taxpayers may elect to file a joint Federal income
tax return. Sec. 6013(a). After making the election, each spouse is
jointly and severally liable for the entire tax due. Sec. 6013(d)(3). A
spouse may seek relief from joint and several liability under section
6015. A spouse may qualify for relief from liability under section
6015(b), or if eligible, may allocate liability under section 6015(c).
In addition, if relief is not available under section 6015(b) or

(c), an individual may seek equitable relief under section 6015(f).
[Fernandez v. Commissioner]{.underline}, 114 T.C. 324, 329-331 (2000);
[Butler v. Commissioner]{.underline}, 114 T.C. 276, 287-292 (2000). Our
review is not limited to respondent's administrative record. [Ewing v.
Commissioner]{.underline}, 122 T.C. 32, 44 (2004).

Except as otherwise provided in section 6015, petitioner

bears the burden of proof. Rule 142(a); [Alt v.
Commissioner]{.underline}, 119

T.C. 306, 311 (2002), affd. \_\_ Fed. Appx. \_\_ (6th Cir., June 3,

2004).

1\. [Section 6015(b)]{.underline}

Section 6015(b) provides relief from joint and several liability for tax
(including interest, penalties, and other amounts) to the extent that
such liability is attributable to an understatement of tax. To be
eligible for relief, the requesting spouse needs to satisfy the
following five elements of section 6015(b)(1):

\(A\) 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 one individual filing the joint
return;

\(C\) the other individual filing the joint return

establishes that in signing the return he or she did not know,

and had no reason to know, that there was such an 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 the taxable year attributable to the

understatement; and

\(E\) the other individual makes a valid election.

Petitioner seeks relief under section 6015(b) with respect to
respondent's adjustments to the 1998 return for unreported unemployment
compensation of \$294, disallowed itemized deductions

of \$7,400, and disallowed Schedule C deductions of \$27,749. However,
petitioner cannot be granted relief for understatements

that are attributable to his own erroneous items. See [Hopkins
v.]{.underline}

[Commissioner]{.underline}, 121 T.C. 73, 77 (2003). The unemployment
compensation was solely attributable to petitioner, and he could

not explain why it was omitted from the joint return. The disallowed
itemized deductions, in the form of medical expense deductions and an
employee business expense deduction, are not necessarily attributable to
petitioner; however, as more fully discussed infra, petitioner had
reason to know of the understatement in this regard. Accordingly, we
agree with respondent that petitioner is not entitled to relief under
section 6015(b) as to the unreported unemployment compensation and the
disallowed itemized deductions.

The disallowed Schedule C deductions are a different matter,

however. Respondent does not appear to dispute that petitioner satisfies
two elements of section 6015(b)(1); namely, those regarding joint return
and timely election under section 6015(b)(1)(A) and (E), respectively.
Thus, we consider whether petitioner satisfies the remaining three
elements of section 6015(b) with respect to the Schedule C deductions
for Wee Ones Child Care.

One of the three remaining elements of section 6015(b)

requires that the understatement of tax resulting from the disallowed
Schedule C deductions is not attributable to petitioner. From a review
of this record, we are satisfied that petitioner was not involved in Wee
Ones Child Care, other than as a handyperson, providing maintenance
assistance to Ms. Moore. His assistance to his former spouse in the
initial funding and his purchase of some supplies does not create a
joint venture, as suggested by respondent. Thus, we conclude that
petitioner satisfies section 6015(b)(1)(B).

The second of the three remaining elements of section

6015(b)(1) requires that petitioner, in signing the return, did not
know, and had no reason to know, that there was an understatement. See
[Grossman v. Commissioner]{.underline}, 182 F.3d 275, 279-280 (4th Cir.
1999), *affg.* T.C. Memo. 1996-452. A requesting spouse has knowledge or
reason to know of an understatement if he or she actually knew of the
understatement, or if a reasonably prudent taxpayer in his or her
position, at the time he or she signed the return, could be expected to
know that the return contained an understatement or that further
investigation was warranted.[^41] [Butler v. Commissioner]{.underline},
supra at 283. In deciding whether a spouse has reason to know of an
understatement, we undertake a subjective inquiry, and we recognize
several factors that are relevant to our analysis, including but not
limited to: (1) The alleged innocent spouse's level of education; (2)
the spouse's involvement in the family's business and financial affairs;
and (3) the culpable spouse's evasiveness and deceit concerning the
couple's finances. Id. at 284.

In the present case, we conclude that petitioner did not have actual
knowledge of the understatement of tax attributable to the Schedule C
deductions of Wee Ones Child Care. Petitioner's knowledge of Wee Ones
Child Care as the source of an erroneous item is not sufficient to
establish actual knowledge. Moreover, we find that a reasonably prudent
person in petitioner's circumstances would not know of the
understatement. Petitioner was employed full time outside the home as a
maintenance supervisor. Petitioner has limited education. Ms. Moore ran
Wee Ones Child Care, maintained the books and records and prepared the
tax returns. Thus, petitioner had no direct involvement in the business,
other than as a handyperson and as a provider of startup costs. We are
thus convinced that petitioner satisfies the requirements of section
6015(b)(1)(C).

**§10.7** **Separate Liability under Section 6015(c)**

Section 6015(b) relief, discussed above, may be requested by a spouse
who at the time of requesting the relief is still married to the
culpable spouse. In contrast, as discussed below, the second type of
relief, separate liability under section 6015(c) may only be requested
if at the time of the request the requesting spouse is either divorced
or separated or has not lived with the culpable spouse for the 12 month
period preceding the date of the request. Code Section 6015(c)(3)(A)(i).

In addition, to obtain separate relief under section 6015(c) must prove:

1\. The requesting spouse must not have had actual knowledge of the item
giving rise to the deficiency or portion thereof and it is the IRS'
burden, not the requesting spouse's burden, of proving actual knowledge.
Code Section 6015(c)(3)(C).

2.  There must not have been transfers to avoid tax- if so, and then the
    separate liability is increased by the value of the "disqualified
    asset." Code Section 6015(c) (4).

3.  There must not have been any fraudulent transfers- IRS has burden of
    proving this and if proven, election is invalid. Code Section
    6015(c)(3)(A)(ii).

4.  The requesting spouse has burden of proving his or her portion of
    the deficiency. Code Sections 6015(c)(1) and(d).

As indicated in section 10.04\_\_\_ under this form of relief, the
requesting spouse may not get a refund.

So how is this form of relief better or different than relief under
section 6015(b)? As the legislative history indicates, this form of
relief was enacted to try to make it easier for spouses who had no
actual knowledge, but may have been determined to have constructive
knowledge, to get relief. Thus, the biggest difference between section
6015(b) and 6015(c) is the requirement that the requesting spouse be
shown to have actual knowledge of the omitted income or overstated
deduction or credit in order to not qualify for relief. Further, the
burden of persuasion lies with the IRS, not the requesting spouse.

A second difference is that this form of relief is not available to
spouses who continue to be married and live together anytime during the
12 month period before the date request for relief is made. However, a
spouse who is separated, but still married, may initially request relief
under section 6015(b) and once the period of separation has reached 12
months, may amend the original request for innocent spouse relief or
resubmit another request for relief under section 6015(c).

Soon after the enactment of section 6015(c) the issue of what is meant
by actual knowledge was tested.

**Cheshire v. Commissioner**

282 F. 3d 326 (5^th^ Cir. 2002), *aff'g* 115 T.C. 183 (2000)

cert denied. 537 U.S. 881, 154 L. Ed. 2d 138, 123 S. Ct. 92.

KING, Chief Judge:\
\
The Commissioner of Internal Revenue assessed a tax deficiency and
associated penalties against Petitioner - Appellant Kathryn Cheshire. In
the United States Tax Court, Cheshire asserted claims for innocent
spouse relief from the tax deficiency and penalties under § 6015(b),
(c), and (f) of the Internal Revenue Code. [26 U.S.C. §
6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=43&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=4164419423ff8c8f08c41d179d433915)
(Supp. 2001). The Tax Court denied Cheshire\'s request for innocent
spouse relief, and Cheshire appeals that denial. For the following
reasons, we AFFIRM the judgment of the Tax Court.\
\
**I. Factual History**\
\
The facts in this case are undisputed. Kathryn Cheshire (\"Appellant\")
married David Cheshire in 1970. More than twenty years later, Mr.
Cheshire retired from Southwestern Bell Telephone Company effective
January 1, 1992, and received the following retirement distributions in
1992:

  ----------------------------------------------------- -----------------
  Lump sum distribution                                 \$ 199,771

  LESOP for salaried employees                          5,919

  Savings plan for salaried                             

       employees                                        23,263

  ESOP                                                  971

  TOTAL                                                 \$ 229,924
  ----------------------------------------------------- -----------------

Of the \$ 229,924 total distribution, \$ 42,183 was rolled over into a
qualified account and is not subject to federal income tax. Mr. Cheshire
deposited \$ 184,377 of the retirement distributions into the
Cheshires\' joint checking account, which earned \$ 1168 in interest for
1992.[^42] n1 Appellant knew of Mr. Cheshire\'s receipt of \$ 229,924 in
retirement distributions and of the \$ 1168 in interest earned on the
distributions.\
\
The Cheshires made several large disbursements from the retirement
distributions in their joint checking account. They withdrew \$ 99,425
from this account to pay off the mortgage on their marital residence,
and they withdrew an additional \$ 20,189 to purchase a new family car,
a 1992 Ford Explorer. Mr. Cheshire also used the retirement proceeds to
provide start-up capital for his new business, to satisfy loans taken
out to acquire a family truck and an automobile for the Cheshires\'
daughter, to pay family expenses, and to establish a college fund for
the Cheshires\' daughter. Appellant knew of all these expenditures.\
\
Appellant and Mr. Cheshire filed a joint federal income tax return,
prepared by Mr. Cheshire, for 1992. On line 17a of this return, they
reported the \$ 199,771.05 in retirement distributions[^43] but claimed
only \$ 56,150.12 of this amount as taxable. Before signing the return,
Appellant questioned Mr. Cheshire about the tax consequences of the
retirement distributions. Mr. Cheshire replied that John Daniel Mican, a
certified public accountant, advised Mr. Cheshire that retirement
proceeds used to pay off a mortgage are nontaxable. Appellant accepted
this answer and made no further inquiries prior to signing the return on
March 14, 1993. In fact, Mr. Cheshire had not consulted Mican, and all
retirement proceeds that are not rolled over into a qualified
account are taxable. Because of Mr. Cheshire\'s persistent problems with
alcohol, the Cheshires permanently separated on July 13, 1993, and they
divorced seventeen months later. The divorce decree awarded Appellant
unencumbered title to the marital residence and to the Ford Explorer.

The Commissioner of Internal Revenue (the \"Commissioner\") audited the
Cheshires\' 1992 return and determined that Mr. Cheshire had received
taxable retirement distributions of \$ 187,741 - the difference between
the total distributions (\$ 229,924) and the rollover (\$ 42,183). Thus,
the Cheshires had understated the amount of their taxable distributions
by \$ 131,591. The Commissioner also determined that the Cheshires had
underreported the interest income earned on the retirement distributions
by \$ 717. Because of these inaccuracies, the Commissioner imposed a
penalty under [§ 6662(a) of the Internal Revenue
Code](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=44&_butInline=1&_butinfo=26 USC 6662&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=402c5083ddfeda931826404d6c304f46) [26
U.S.C. §
6662](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=45&_butInline=1&_butinfo=26 USC 6662&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=9a10b850ad83dcb216399ae6f1b0e7a6)
(a) (Supp. 2001).

 \* \* \*

The Tax Court majority, consisting of twelve judges, denied Appellant
relief under § 6015(b), (c), and (f). [[Cheshire v.
Comm\'r]{.underline}, 115 T.C. 183
(2000).](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=51&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B115 T.C. 183%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=03a8861219094faffe49c8a7dba1bc88)
The Tax Court found that Appellant failed to establish that she \"did
not know, and had no reason to know\" of the tax understatement as
required for relief under § 6015(b)(1)(C). [[Id]{.underline}. at
193.](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=52&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B115 T.C. 183%2Cat 193%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=e3b07cf60b32762a4c5be0455f9011c5)
The Tax Court also found that Appellant was not entitled to relief under
§ 6015(c) because she had \"actual knowledge . . . of any item giving
rise to a deficiency\" within the meaning of § 6015(c)(3)(C).[^44]
[[Id.]{.underline} at
197[.]{.underline}](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=53&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B115 T.C. 183%2Cat 197%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=1b1eb401f28c52b517cf6fcd00b3aed8)
Finally, the Tax Court held that the Commissioner did not abuse his
discretion in denying Appellant equitable relief under § 6015(f) with
respect to the retirement distributions and the interest income, as well
as the § 6662(a) penalty associated with the interest income. \[fn
omitted.\] [Id. at
198.](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=54&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B115 T.C. 183%2Cat 198%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=1aae4a5f68455383f9f92686e1326ccb)
,  [26 U.S.C. §
6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=55&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=3d40a64deae0e431e9b8b85ec39da6f8)
(c)(3)(C) (Supp. 2001). 

 **III. The Statutory Scheme**\
Generally, spouses who choose to file a joint return are subject to
joint and several liability for tax deficiencies under the Internal
Revenue Code. [26 U.S.C. §
6013](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=57&_butInline=1&_butinfo=26 USC 6013&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=787178354290a5326b77b34c073b8581)
[(d)(3) (]{.underline}Supp. 2001). Recognizing that joint and several
liability may be unjust in certain circumstances, Congress authorized
relief from such liability under the \"innocent spouse\" provision, [26
U.S.C. §
6015.](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=58&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=85788d2b4b962d46f34674d53a804e06)
[S]{.underline}ection 6015 provides three distinct types of relief for
taxpayers who file joint returns.[^45] First, § 6015(b) provides  relief
for all joint filers who satisfy the five requirements listed in that
section[^46]^0^. Second, § 6015(c) allows a spouse who filed a joint tax
return to elect to limit her income tax liability for that year to her
separate liability amount.[^47]^1^ n11 Section 6015(c) applies only to
taxpayers who are no longer married, are legally separated,
 **\[\*\*10\]**  or do not reside together over a twelve-month period.
[26 U.S.C. §
6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=59&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=0f6ca0b13acce59b71fb743728c9aa50)
(c)(3)(A)(i). Furthermore, a spouse who had actual knowledge of an item
giving rise to a deficiency at the time that spouse signed the return
may not seek relief under § 6015(c). [26 U.S.C. §
6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=60&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=efecdd4386238af7a4fb4385da273212)
(c)(3)(C). [^48]^2^\
Finally, a taxpayer may seek relief as an \"innocent spouse\" under §
6015(f), which authorizes the Secretary of the Treasury (the
\"Secretary\") or his delegate to grant equitable relief from joint and
several liability when relief is unavailable under § 6015(b) and
(c).[^49]^3^ Except for the knowledge requirement of § 6015(c)(3)(C)
(the provision disallowing election of separate liability to a spouse
with actual knowledge of the item giving rise to the deficiency), the
taxpayer bears the burden of proving that she has met all the
prerequisites for innocent spouse relief. See [Reser v. Comm\'r, 112
F.3d 1258, 1262-63 (5th Cir.
1997).](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=64&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B112 F.3d 1258%2Cat 1262%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=448b3700f7dd01905fe563ed2a5ab683)
Section 6015(c)(3)(C) explicitly places the burden of proof on the
Secretary.\
\* \* \*

**VI. Section 6015(c) Relief**

Section 6015(c)(1) allows any divorced (or separated) individual to
elect to assume responsibility for only that portion of a joint tax
deficiency that is properly allocable to that individual.[^50]^1^ n21
The parties agree that Appellant falls within the class of taxpayers
permitted to make a § 6015(c) election since she and Mr. Cheshire were
divorced when she filed her petition with the Tax Court. Moreover,
neither party in this case disputes that the deficiency attributable to
the retirement **\[\*\*21\]**  distributions is properly allocable to
Mr. Cheshire. Thus, if this election is available to Appellant, she can
avoid liability for the tax deficiency caused by the retirement
distributions. However,
[***^HN15^***](http://www.lexis.com/research/retrieve?_m=56758a9413f52db7e938b37ad3d9776c&csvc=le&cform=&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=961bf5ae0efe3449c6e87992b9b863c3#clscc15%23clscc15)![](media/image1.png){width="0.11388888888888889in"
height="0.12569444444444444in"}the benefit of the § 6015(c) election is
not available to an individual with actual knowledge of \"any item
giving rise to a deficiency.\" [26 U.S.C. §
6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=95&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=f0101ecc7bdf866cbba82c3ecbd1833a)
(c)(3)(C).[^51]^2^ n22 In order to preclude relief under § 6015(c), the
Commissioner must prove by a preponderance of the evidence that
Appellant had actual knowledge of \"any item giving rise to a
deficiency.\" [Culver v. Comm\'r, 116 T.C. 189, 196
(2001).](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=96&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B116 T.C. 189%2Cat 196%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=925648d7895bcc29e8eb8392389d509c)
Whether the Commissioner satisfied this burden is the § 6015(c) issue in
this appeal.

The debate between the parties focuses on the meaning of the term
\"item\" in § 6015(c)(3)(C). Appellant argues that \"item\" means
\"incorrect tax reporting of an item of income, deduction, or credit\"
so that § 6015(c)(3)(C) only bars relief for spouses with actual
knowledge that an entry on the joint tax return is incorrect. The
Commissioner argues that \"item\" means \"an item of income, deduction,
or credit\" so that § 6015(c)(3)(C) bars relief for all spouses with
actual knowledge of the income-producing transaction, even if they
lacked knowledge of the incorrect tax reporting of that transaction.

The term \"item\" appears fifteen times in § 6015. Most of these
appearances are uninformative, but the uses of the term \"item\" in §
6015(b)(1)(B) and (d)(4) support the Commissioner\'s definition. Section
6015(b)(1)(B) refers to \"an understatement of tax attributable to
erroneous items of one individual filing the joint return.\"[^52]^3^ If
\"item\" refers to the \"incorrect tax reporting of an item,\" as
Appellant asserts, then the reference to an \"erroneous item\" is
redundant. Thus, § 6015(b)(1)(B) suggests that \"item\" means \"an item
of income, deduction, or credit,\" as the Commissioner asserts.
Furthermore, § 6015(d)(4) refers to \"an item of deduction or
credit.\"[^53]^4^ This use of  the term \"item\"  suggests that the term
refers to an actual item of income, deduction, or credit, rather than
the incorrect reporting of such an item.  [26 U.S.C. §
6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=100&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=37d0174c46dd361868d5ea27c7a243ca)
(d)(4) (Supp. 2001).\
 \
\
Other sections of the Internal Revenue Code define the term \"item\"
without reference to tax consequences. For example, § 61(a) defines
\"gross income\" to include such \"items\" as compensation for services,
interest, rents, and royalties. [26 U.S.C. §
61](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=101&_butInline=1&_butinfo=26 USC 61&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=2624301d651922f64328f57d82b26dfb)
(a) (1988 & Supp. 2001). Thus, in this context, \"item\" means an item
of income. Section 6231(a)(3) defines the term \"partnership item\" as
\"any item required to be taken into account for the partnership\'s
taxable year under any provision of subtitle A . . . .\" [26 U.S.C. §
6231](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=102&_butInline=1&_butinfo=26 USC 6231&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=ca9b6c7f4c0c2797a7dc53354230b95e)
(a)(3) (1989 & Supp. 2001). These uses of the term \"item,\" as well as
those uses appearing in § 6015, suggest that \"item\" means \"an item of
income, deduction, or credit.\" See [Comm\'r v. Lundy, 516 U.S. 235,
250, 116 S. Ct. 647, 133 L. Ed. 2d 611
(1996)](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=103&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B516 U.S. 235%2Cat 250%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=0047c31c697e29de394d7ee5958559d2)
(stating that \"identical words used in different parts of the same act
are intended to have the same meaning\") (internal citations and
quotations omitted). This interpretation supports the Commissioner\'s
position that § 6015(c)(3)(C) bars relief for all spouses with actual
knowledge of the income-producing transaction, even if they lacked
knowledge of the incorrect tax reporting of that transaction.

Furthermore, Appellant\'s claim that § 6015(c)(3)(C) precludes relief
only if the spouse has knowledge of incorrect tax reporting runs afoul
of the general rule that ignorance of the tax laws is not a defense to a
tax deficiency. See [Park, 25 F.3d at
1293-94](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=104&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B25 F.3d 1289%2Cat 1293%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=98066259a3286ee5eb998c79b01fce4f)
(noting that ignorance of the law cannot establish an innocent spouse
defense to tax liability). In Sanders, a case applying the predecessor
innocent spouse statute, we noted that the statute \"seemingly makes
ignorance of the fact that known receipts constitute taxable income a
valid justification for not knowing or having reason to know of
omissions from gross income.\" [509 F.2d at 169
n.14.](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=105&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B509 F.2d 162%2Cat 169%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=12490a0f7053b631f6f67146b3171cdd)
Rather than establish an ignorance of the law defense, however, in
Sanders we decided to apply a statutory interpretation that \"is
difficult to square with a literal reading of the statutory language\"
because \"the practical problems that have always prevented acceptance
of an ignorance of the law defense in the criminal law area . . .
arguably apply just as forcefully here.\" Id. Unlike the court in
Sanders, we need not overlook the literal meaning of the statute at
issue in this case. As the above discussion illustrates, the plain
meaning of § 6015(c)(3)(C) suggests that a spouse with actual knowledge
of the income-producing transaction cannot receive innocent spouse
relief even if she lacks knowledge of the incorrect tax reporting of
that transaction. This reading of the plain meaning of § 6015(c)(3)(C)
is compelling in light of the general principle that ignorance of the
law is not a defense.

To support the theory that \"item\" means \"incorrect tax reporting of
an item,\" Appellant and amici curiae point to the legislative history
of § 6015(c)(3)(C). We decline to defer to this legislative history for
two reasons. First, when interpreting a statute, this court \"must
presume that a legislature says in a statute what it means and means in
a statute what it says there.\" [Conn. Nat\'l Bank v. Germain, 503 U.S.
249, 253-54, 117 L. Ed. 2d 391, 112 S. Ct. 1146
(1992).](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=106&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B503 U.S. 249%2Cat 253%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=adfec69b207cf62e3c090c3b2a0a53f8)
Unless the text of a statute is ambiguous on its face,  this court
adheres to that statute\'s plain meaning. Id. As the above analysis
demonstrates, the text of § 6015 and other sections of the Internal
Revenue Code strongly suggests that \"item\" refers to \"an item of
income, deduction, or credit.\" Section 6015(c)(3)(C) is not facially
ambiguous.\
\
Second, the legislative history of § 6015(c)(3)(C) is ambiguous. Some
portions of the history appear to support the Commissioner\'s position.
See S. REP. NO. 105-174, at 55-56, 59; H.R. CONF. REP. NO. 105-599, at
253 (1998); 144 CONG. REC. 56, S4473 (1998). Other parts of the history,
however, suggest that the §6015(c)(3)(C) exception is intended to cover
spouses with knowledge of the transaction giving rise to the deficiency
in addition to spouses with knowledge that the tax return is incorrect.
See H.R. CONF. REP. NO. 105-599, at 253; S. REP. NO. 105-174, at 58. We
decline to allow inconclusive legislative history to affect our
interpretation of the plain meaning of § 6015(c)(3)(C). See [Hubbard v.
United States, 514 U.S. 695, 708, 131 L. Ed. 2d 779, 115 S. Ct. 1754
(1995)](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=107&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B514 U.S. 695%2Cat 708%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=08e41d8674d6094b91fc7dd6d84bf95b)
(noting that \"courts should not rely on inconclusive statutory history
as a basis for refusing to give effect to the plain language of an Act
of Congress\"). Thus, we conclude that \"item\" means \"an item of
income, deduction, or credit,\" as asserted by the Commissioner.[^54]^5^

The Tax Court adopted this definition of \"item\" and indicated that the
knowledge standard under § 6015(c)(3)(C) in an omitted income case is
\"actual and clear awareness\" of an item of income.[^55]^6^
[**[Cheshire, 115 T.C. at
195.]{.underline}**](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=110&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B115 T.C. 183%2Cat 195%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=f17697779d9b73a2f2b243bf2463d515)
Since Cheshire, the Tax Court has interpreted the knowledge standard in
the context of an erroneous deduction to be \"actual knowledge of the
factual circumstances which made the item unallowable as a deduction.\"
[King v. Comm\'r, 116 T.C. 198, 204
(2001).](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=111&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B116 T.C. 198%2Cat 204%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=d46d3d5d2e5ac67724aa7a0f9c641597)
As Appellant is liable under either standard, we need not determine
which standard applies in this case. Appellant had \"actual and clear
awareness\" of Mr. Cheshire\'s retirement distributions and earned
interest. Thus, she satisfies the § 6015(c)(3)(C) knowledge requirement
for omitted income cases. Furthermore, Appellant was aware of how the
retirement distributions were spent. None of these expenditures
qualifies for proper deduction, so Appellant had \"actual knowledge of
the factual circumstances which made the item unallowable as a
deduction.\" In such circumstances, Appellant satisfies the §
6015(c)(3)(C) knowledge requirement for erroneous deduction cases. Thus,
§ 6015(c)(3)(C)  bars relief under either the omitted income or the
erroneous deduction knowledge standard, even though Appellant was
unaware of the tax consequences of the deduction. The Tax Court\'s
determination that Appellant is not entitled to innocent spouse relief
under § 6015(c) is not clearly erroneous.\
\
Compare Charlton v. Commissioner, 114 T.C. 333 (2000) (held husband was
entitled to relief under section 6105(c) because although he had access
to records showing certain business income and should have known, he did
not have actual knowledge of omitted income.) With respect to overstated
deductions or credits, the IRS must prove that the requesting spouse had
\"actual knowledge of the factual circumstances which made the item
unallowable as a deduction.\" [King v. Commissioner, 116 T.C. 198, 204
(2001).](http://www.lexis.com/research/buttonTFLink?_m=e94c2e24ce7de103806d69adebae1d5e&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5BT.C. Memo 2001-325%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=83&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B116 T.C. 198%2Cat 204%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVzb-zSkAb&_md5=c5a0a9ea1b63231ef985938727e052c4)

If a requesting spouse has actual knowledge of only some of the omitted
income or overstated deductions, then relief as that portion will be
denied, but relief as to other items of which the requesting spouse did
not have actual knowledge will be allowed.

When a spouse requests relief under section 6015(c), he or she has the
burden of proving the items of income, deductions, credits and
exemptions that are allocable to him or her, and which will create his
or her tax liability. Generally, the items are allocated as if the two
spouses filed separate returns. Section 6015(d).

However, if the IRS determines that either spouse transferred assets as
part of a fraudulent scheme, then the IRS is free to allocate in a
different way. Section 6015(d)(3)(C),

Once the allocation is made, one further adjustment may take place. If
the nonrequesting spouse has transferred property or the right to
property and the IRS proves that the principal purpose of the transfer
was avoidance of tax, then to the requesting spouse will be liable for
the tax attributable to the nonrequesting, culpable spouse up to the
value of the transferred property. There is a rebuttable presumption
that any transfer made within 12 months of the filing of the first
letter of proposed deficiency is such a transfer. Consider the following
examples in Treas. Reg. 1.6105-3.

Example 6. Disqualified asset presumption. (i) H and W are divorced. In
May 1999, W transfers \$ 20,000 to H, and in April 2000, H and W receive
a 30-day letter proposing a \$ 40,000 deficiency on their 1998 joint
Federal income tax return. The liability remains unpaid, and in October
2000, H elects to allocate the deficiency under this section.
Seventy-five percent of the net amount of erroneous items are allocable
to W, and 25% of the net amount of erroneous items are allocable to H.

\(ii\) In accordance with the proportionate allocation method (see
paragraph (d)(4) of this section), H proposes that \$ 30,000 of the
deficiency be allocated to W and \$ 10,000 be allocated to himself. H
submits a signed statement providing that the principal purpose of the
\$ 20,000 transfer was not the avoidance of tax or payment of tax, but
he does not submit any documentation indicating the reason for the
transfer. H has not overcome the presumption that the \$ 20,000 was a
disqualified asset. Therefore, the portion of the deficiency for which H
is liable (\$ 10,000) is increased by the value of the disqualified
asset (\$ 20,000). H is relieved of liability for \$ 10,000 of the \$
30,000 deficiency allocated to W, and remains jointly and severally
liable for the remaining \$ 30,000 of the deficiency (assuming that H
does not qualify for relief under any other provision).

Example 7. Disqualified asset presumption inapplicable. On May 1, 2001,
H and W receive a 30-day letter regarding a proposed deficiency on their
1999 joint Federal income tax return relating to unreported capital gain
from H\'s sale of his investment in Z stock. W had no actual knowledge
of the stock sale. The deficiency is assessed in November 2001, and in
December 2001, H and W divorce. According to a decree of divorce, H must
transfer 1/2 of his interest in mutual fund A to W. The transfer takes
place in February 2002. In August 2002, W elects to allocate the
deficiency to H. Although the transfer of 1/2 of H\'s interest in mutual
fund A took place after the 30-day letter was mailed, the mutual fund
interest is not presumed to be a disqualified asset because the transfer
of H\'s interest in the fund was made pursuant to a decree of divorce.

Example 8. Overcoming the disqualified asset presumption. (i) H and W
are married for 25 years. Every September, on W\'s birthday, H gives W a
gift of \$ 500. On February 28, 2002, H and W receive a 30-day letter
from the Internal Revenue Service relating to their 1998 joint
individual Federal income tax return. The deficiency relates to H\'s
Schedule C business, and W had no knowledge of the items giving rise to
the deficiency. H and W are legally separated in June 2003, and, despite
the separation, H continues to give W \$ 500 each year for her birthday.
H is not required to give such amounts pursuant to a decree of divorce
or separate maintenance.

\(ii\) On January 27, 2004, W files an election to allocate the
deficiency to H. The \$ 1,500 transferred from H to W from February 28,
2001 (a year before the 30-day letter was mailed) to the present is
presumed disqualified. However, W may overcome the presumption that such
amounts were disqualified by establishing that such amounts were
birthday gifts from H and that she has received such gifts during their
entire marriage. Such facts would show that the amounts were not
transferred for the purpose of avoidance of tax or payment of tax.

§10.8 Section 6105(f)- Equitable Relief.

If a spouse does not qualify for relief under either section 6015(b) or
section 6015(c), or if the relief is sought for an failure to pay tax
shown on the return as due, then a spouse may request relief under
section 6015(f).

If the request if for relief from an understatement of tax, the
requesting spouse must first show that she did not qualify for relief
under either Section 6015(b) or Section 6015(c). If the relief is for an
underpayment of tax (described in more detail below), then the only form
of relief that is available is under section 6015(f).

The IRS promulgated a revenue procedure that outlines what a requesting
spouse must show to qualify for section 6015(f) relief if the requesting
spouse does not qualify for relief under section 6015(b) or section
6015(c):

Rev. Proc. 2003-61

Internal Revenue Bulletin:  2003-32

August 11, 2003

###  Table of Contents

-   [SECTION 1. PURPOSE AND
    SCOPE](http://www.irs.gov/irb/2003-32_IRB/ar16.html#d0e1011)

-   [SECTION 2.
    BACKGROUND](http://www.irs.gov/irb/2003-32_IRB/ar16.html#d0e1024)

-   [SECTION 3.
    CHANGES](http://www.irs.gov/irb/2003-32_IRB/ar16.html#d0e1037)

-   [SECTION 4. GENERAL CONDITIONS FOR
    RELIEF](http://www.irs.gov/irb/2003-32_IRB/ar16.html#d0e1048)

-   [SECTION 5.
    PROCEDURE](http://www.irs.gov/irb/2003-32_IRB/ar16.html#d0e1214)

-   [SECTION 6. EFFECT ON OTHER
    DOCUMENTS](http://www.irs.gov/irb/2003-32_IRB/ar16.html#d0e1225)

-   [SECTION 7. EFFECTIVE
    DATE](http://www.irs.gov/irb/2003-32_IRB/ar16.html#d0e1230)

-   [DRAFTING
    INFORMATION](http://www.irs.gov/irb/2003-32_IRB/ar16.html#d0e1235)

### SECTION 1. PURPOSE AND SCOPE 

.01 *Purpose*. This revenue procedure provides guidance for a taxpayer
seeking equitable relief from income tax liability under section 66(c)
or section 6015(f) of the Internal Revenue Code (a "requesting spouse").
Section 4.01 of this revenue procedure provides the threshold
requirements for any request for equitable relief. Section 4.02 of this
revenue procedure sets forth the conditions under which the Internal
Revenue Service ordinarily will grant equitable relief under section
6015(f) from an underpayment of income tax reported on a joint return.
Section 4.03 of this revenue procedure provides a nonexclusive list of
factors for consideration in determining whether relief should be
granted under section 6015(f) because it would be inequitable to hold a
requesting spouse jointly and severally liable for an underpayment of
income tax on a joint return where the conditions of section 4.02 are
not met, or for a deficiency. The factors in section 4.03 also will
apply in det ermining whether to relieve a spouse from income tax
liability resulting from the operation of community property law under
the equitable relief provision of section 66(c).

.02 *Scope*. This revenue procedure applies to spouses who request
either equitable relief from joint and several liability under section
6015(f), or equitable relief under section 66(c) from income tax
liability resulting from the operation of community property law.

### SECTION 2. BACKGROUND 

.01 Section 6013(d)(3) provides that married taxpayers who file a joint
return under section 6013 will be jointly and severally liable for the
income tax arising from that joint return. For purposes of section
6013(d)(3) and this revenue procedure, the term "tax" includes
penalties, additions to tax, and interest. See sections 6601(e)(1) and
6665(a)(2).

.02 Section 3201(a) of the Internal Revenue Service Restructuring and
Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 685, 734 (RRA),
enacted section 6015, which provides relief in certain circumstances
from the joint and several liability imposed by section 6013(d)(3).
Section 6015(b) and (c) specifies two sets of circumstances under which
relief from joint and several liability is available. If relief is not
available under section 6015(b) or (c), section 6015(f) authorizes the
Secretary to grant equitable relief if, taking into account all the
facts and circumstances, the Secretary determines that it is inequitable
to hold a requesting spouse liable for any unpaid tax or any deficiency
(or any portion of either). Section 66(c) provides relief from income
tax liability resulting from the operation of community property law to
taxpayers domiciled in a community property state who do not file a
joint return. Section 3201(b) of RRA amended section 66(c) to add an
equitable relief provision simil ar to section 6015(f).

.03 Section 6015 provides relief only from joint and several liability
arising from a joint return. If an individual signs a joint return under
duress, the election to file jointly is not valid and there is no valid
joint return. The individual is not jointly and severally liable for any
income tax liabilities arising from that return. Therefore, section 6015
does not apply.

.04 Under section 6015(b) and (c), relief is available only from a
proposed or assessed deficiency. Section 6015(b) and (c) does not
authorize relief from an underpayment of income tax reported on a joint
return. Section 66(c) and section 6015(f) permit equitable relief for an
underpayment of income tax. The legislative history of section 6015
provides that Congress intended for the Secretary to exercise discretion
in granting equitable relief if a requesting spouse "does not know, and
had no reason to know, that funds intended for the payment of tax were
instead taken by the other spouse for such other spouse\'s benefit."
H.R. Conf. Rep. No. 105-599, at 254 (1998). Congress also intended for
the Secretary to exercise the equitable relief authority under section
6015(f) in other situations if, "taking into account all the facts and
circumstances, it is inequitable to hold an individual liable for all or
part of any unpaid tax or deficiency arising from a joint return." *Id.*

### SECTION 3. CHANGES 

This revenue procedure supersedes Revenue Procedure 2000-15, changing
the following:

.01 Section 4.01 of this revenue procedure adds a new threshold
requirement under section 4.01(7).

.02 Section 4.03(2)(a)(iii) of this revenue procedure revises the weight
given to the knowledge or reason to know factor.

.03 Section 4.04 of this revenue procedure broadens the availability of
refunds if equitable relief is granted under section 66(c) or section
6015(f).

### SECTION 4. GENERAL CONDITIONS FOR RELIEF 

.01 *Eligibility for equitable relief*. A requesting spouse must satisfy
all of the following threshold conditions to be eligible to submit a
request for equitable relief under section 6015(f). With the exception
of conditions (1) and (2), a requesting spouse must satisfy all of the
following threshold conditions to be eligible to submit a request for
equitable relief under section 66(c). The Service may relieve a
requesting spouse who satisfies all the applicable threshold conditions
set forth below of all or part of the income tax liability under section
66(c) or section 6015(f), if, taking into account all the facts and
circumstances, the Service determines that it would be inequitable to
hold the requesting spouse liable for the income tax liability. 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 two years
after the date of the Service\'s first collection activity after July
22, 1998, with respect to the requesting spouse. *See* Treas. Reg.
§ 1.6015-5(b)(2)(i) for the definition of collection activity.

\(4\) No assets were transferred between the spouses as part of a
fraudulent scheme by the spouses.

\(5\) The nonrequesting spouse did not transfer disqualified assets to
the requesting spouse. If the nonrequesting spouse transferred
disqualified assets to the requesting spouse, relief will be available
only to the extent that the income tax liability exceeds the value of
the disqualified assets. For this purpose, the term "disqualified asset"
has the meaning given the term by section 6015(c)(4)(B).

\(6\) The requesting spouse did not file or fail to file the return with
fraudulent intent.

\(7\) The income tax liability from which the requesting spouse seeks
relief is attributable to an item of the individual with whom the
requesting spouse filed the joint return (the "nonrequesting spouse"),
unless one of the following exceptions applies:

\(a\) *Attribution solely due to the operation of community property
law*. If an item is attributable or partially attributable to the
requesting spouse solely due to the operation of community property law,
then for purposes of this revenue procedure, that item (or portion
thereof) will be considered to be attributable to the nonrequesting
spouse.

\(b\) *Nominal ownership*. If the item is titled in the name of the
requesting spouse, the item is presumptively attributable to the
requesting spouse. This presumption is rebuttable. For example, H opens
an individual retirement account (IRA) in W\'s name and forges W\'s
signature on the IRA in 1998. Thereafter, H makes contributions to the
IRA and in 2002 takes a taxable distribution from the IRA. H and W file
a joint return for the 2002 taxable year, but do not report the taxable
distribution on their joint return. The Service later proposes a
deficiency relating to the taxable IRA distribution and assesses the
deficiency against H and W. W requests relief from joint and several
liability under section 6015. W establishes that W did not contribute to
the IRA, sign paperwork relating to the IRA, or otherwise act as if W
were the owner of the IRA. W thereby rebutted the presumption that the
IRA is attributable to W.

\(c\) *Misappropriation of funds*. If the requesting spouse did not
know, and had no reason to know, that funds intended for the payment of
tax were misappropriated by the nonrequesting spouse for the
nonrequesting spouse\'s benefit, the Service will consider granting
equitable relief although the underpayment may be attributable in part
or in full to an item of the requesting spouse. The Service will
consider relief in this case only to the extent that the funds intended
for the payment of tax were taken by the nonrequesting spouse.

\(d\) *Abuse not amounting to duress*. If the requesting spouse
establishes that he or she was the victim of abuse prior to the time the
return was signed, and that, as a result of the prior abuse, the
requesting spouse did not challenge the treatment of any items on the
return for fear of the nonrequesting spouse\'s retaliation, the Service
will consider granting equitable relief although the deficiency or
underpayment may be attributable in part or in full to an item of the
requesting spouse.

.02 *Circumstances under which the Service ordinarily will grant
equitable relief under section 6015(f) with respect to underpayments on
joint returns*.

\(1\) If an income tax liability reported on a joint return is unpaid,
the Service ordinarily will grant equitable relief under section 6015(f)
(subject to the limitations of paragraph (2) below) in cases in which
all of the following elements are satisfied:

\(a\) On the date of the request for relief, the requesting spouse is no
longer married to, or is legally separated from, the nonrequesting
spouse, or has not been a member of the same household as the
nonrequesting spouse at any time during the 12-month period ending on
the date of the request for relief.

\(b\) On the date the requesting spouse signed the joint return, the
requesting spouse had no knowledge or reason to know that the
nonrequesting spouse would not pay the income tax liability. The
requesting spouse must establish that it was reasonable for the
requesting spouse to believe that the nonrequesting spouse would pay the
reported income tax liability. If a requesting spouse would otherwise
qualify for relief under this section, except for the fact that the
requesting spouse\'s lack of knowledge or reason to know relates only to
a portion of the unpaid income tax liability, then the requesting spouse
may receive relief to the extent that the income tax liability is
attributable to that portion.

\(c\) The requesting spouse will suffer economic hardship if the Service
does not grant relief. For purposes of this revenue procedure, the
Service will base its determination of whether the requesting spouse
will suffer economic hardship on rules similar to those provided in
Treas. Reg. § 301.6343-1(b)(4). After the requesting spouse is deceased,
there can be no economic hardship. *See Jonson v. Commissioner*, 118
T.C. 106, 126 (2002), appeal docketed, No. 02-9009 (10^th^ Cir. May 24,
2002) (taxpayer appeal filed on other grounds).

\(2\) Relief under this section 4.02 is subject to the following
limitation: If the Service adjusts the joint return to reflect an
understatement of income tax, relief will be available only to the
extent of the income tax liability shown on the joint return prior to
the Service\'s adjustment.

.03 *Factors for determining whether to grant equitable relief*.

\(1\) *Applicability*. This section 4.03 applies to requesting spouses
who did not file a joint return in a community property state, who
request relief under section 66(c), and satisfy the applicable threshold
conditions of section 4.01. This section 4.03 also applies to requesting
spouses who filed a joint return, request relief under section 6015, and
satisfy the threshold conditions of section 4.01, but do not qualify for
relief under section 4.02.

\(2\) *Factors*. The following is a nonexclusive list of factors that
the Service will consider in determining whether, taking into account
all the facts and circumstances, it is inequitable to hold the
requesting spouse liable for all or part of the unpaid income tax
liability or deficiency, and full or partial equitable relief under
section 66(c) or section 6015(f) should be granted. No single factor
will be determinative of whether to grant equitable relief in any
particular case. Rather, the Service will consider and weigh all
relevant factors, regardless of whether the factor is listed in this
section 4.03.

\(a\) Factors that may be relevant to whether the Service will grant
equitable relief include, but are not limited to, the following:

\(i\) *Marital status*. Whether the requesting spouse is separated
(whether legally separated or living apart) or divorced from the
nonrequesting spouse. A temporary absence, such as an absence due to
incarceration, illness, business, vacation, military service, or
education, shall not be considered separation for purposes of this
revenue procedure if it can be reasonably expected that the absent
spouse will return to a household maintained in anticipation of his or
her return. *See* Treas. Reg. § 1.6015-3(b)(3)(i) for the definition of
a temporary absence.

\(ii\) *Economic hardship*. Whether the requesting spouse would suffer
economic hardship (within the meaning of section 4.02(1)(c) of this
revenue procedure) if the Service does not grant relief from the income
tax liability.

\(iii\) *Knowledge or reason to know*.

\(A\) *Underpayment cases*. In the case of an income tax liability that
was properly reported but not paid, whether the requesting spouse did
not know and had no reason to know that the nonrequesting spouse would
not pay the income tax liability.

\(B\) *Deficiency cases*. In the case of an income tax liability that
arose from a deficiency, whether the requesting spouse did not know and
had no reason to know of the item giving rise to the deficiency. Reason
to know of the item giving rise to the deficiency will not be weighed
more heavily than other factors. Actual knowledge of the item giving
rise to the deficiency, however, is a strong factor weighing against
relief. This strong factor may be overcome if the factors in favor of
equitable relief are particularly compelling. In those limited
situations, it may be appropriate to grant relief under section 66(c) or
section 6015(f) even though the requesting spouse had actual knowledge
of the item giving rise to the deficiency.

\(C\) *Reason to know*. For purposes of (A) and (B) above, in
determining whether the requesting spouse had reason to know, the
Service will consider the requesting spouse\'s level of education, any
deceit or evasiveness of the nonrequesting spouse, the requesting
spouse\'s degree of involvement in the activity generating the income
tax liability, the requesting spouse\'s involvement in business and
household financial matters, the requesting spouse\'s business or
financial expertise, and any lavish or unusual expenditures compared
with past spending levels.

\(iv\) *Nonrequesting spouse\'s legal obligation*. Whether the
nonrequesting spouse has a legal obligation to pay the outstanding
income tax liability pursuant to a divorce decree or agreement. This
factor will not weigh in favor of relief if the requesting spouse knew
or had reason to know, when entering into the divorce decree or
agreement, that the nonrequesting spouse would not pay the income tax
liability.

\(v\) *Significant benefit*. Whether the requesting spouse received
significant benefit (beyond normal support) from the unpaid income tax
liability or item giving rise to the deficiency. *See* Treas. Reg.
§ 1.6015-2(d).

\(vi\) *Compliance with income tax laws*. Whether the requesting spouse
has made a good faith effort to comply with income tax laws in the
taxable years following the taxable year or years to which the request
for relief relates.

\(b\) Factors that, if present in a case, will weigh in favor of
equitable relief, but will not weigh against equitable relief if not
present in a case, include, but are not limited to, the following:

\(i\) *Abuse*. Whether the nonrequesting spouse abused the requesting
spouse. The presence of abuse is a factor favoring relief. A history of
abuse by the nonrequesting spouse may mitigate a requesting spouse\'s
knowledge or reason to know.

\(ii\) *Mental or physical health*. Whether the requesting spouse was in
poor mental or physical health on the date the requesting spouse signed
the return or at the time the requesting spouse requested relief. The
Service will consider the nature, extent, and duration of illness when
weighing this factor.

.04 *Refunds*.

\(1\) *Deficiency cases*. In a case involving a deficiency, a requesting
spouse is eligible for a refund of certain payments made pursuant to an
installment agreement that the requesting spouse entered into with the
Service, if the requesting spouse has not defaulted on the installment
agreement. Only installment payments made after the date the requesting
spouse filed the request for relief are eligible for refund.
Additionally, the requesting spouse must establish that he or she
provided the funds for which he or she seeks a refund. For purposes of
this revenue procedure, a requesting spouse is not in default if the
Service did not issue a notice of default to the requesting spouse or
take any action to terminate the installment agreement.

\(2\) *Underpayment cases*. In a case involving an underpayment of
income tax, a requesting spouse is eligible for a refund of separate
payments that he or she made after July 22, 1998, if the requesting
spouse establishes that he or she provided the funds used to make the
payment for which he or she seeks a refund. A requesting spouse is not
eligible for refunds of payments made with the joint return, joint
payments, or payments that the nonrequesting spouse made.

\(3\) *Other limitations*. The availability of refunds is subject to the
refund limitations of section 6511.

### SECTION 5. PROCEDURE 

A requesting spouse seeking equitable relief under section 66(c) or
section 6015(f) must file Form 8857, *Request for Innocent Spouse Relief
(and Separation of Liability, and Equitable Relief*), or other similar
statement signed under penalties of perjury, within two years of the
first collection activity against the requesting spouse. *See* Treas.
Reg. § 1.6015-5(b)(2)(i) for the definition of collection activity.

### SECTION 6. EFFECT ON OTHER DOCUMENTS 

Revenue Procedure 2000-15, 2000-1 C.B. 447, is superseded.

### SECTION 7. EFFECTIVE DATE 

This revenue procedure is effective for requests for relief filed on or
after November 1, 2003. In addition, this revenue procedure is effective
for requests for relief pending on November 1, 2003, for which no
preliminary determination letter has been issued as of November 1, 2003.

Courts have applied the revenue procedure when determining whether a
requesting spouse qualifies for relief under section 6015(f), often
taking much time to discuss each and every factor.

**Catherine Rosenthal v. Commissioner.**

TC Memo. 2004-89 (March 26, 2004 )

P and H filed a joint 1996 Federal income tax return on which H failed
to report a taxable distribution from his individual retirement account
(IRA). P was not aware of the existence of the IRA distribution at the
time the 1996 return was filed. The omission was discovered in 1998 and,
on Nov. 22, 1998, after H\'s death on Sept. 1, 1998, P filed an amended
1996 return and paid the additional tax attributable to the omitted
income. P also paid the interest on the additional tax on Feb. 10, 1999.
P claimed relief from joint liability for the additional tax under [sec.
6015(b) LK:NON: IRC-FILE S6015(B)]{.underline} , [(c) LK:NON: IRC-FILE
S6015(C)]{.underline} , and [(f) LK:NON: IRC-FILE S6015(F)]{.underline}
, I.R.C. Her claim was denied by R. P timely filed a petition with this
Court pursuant to [sec. 6015(e) LK:NON: IRC-FILE S6015(E)]{.underline} ,
I.R.C., seeking review of R\'s denial of innocent spouse relief.

> 1\. *Held*, because there is no tax deficiency, P is ineligible for
> relief under [sec. 6015(b) LK:NON: IRC-FILE S6015(B)]{.underline} and
> [(c) LK:NON: IRC-FILE S6015(C)]{.underline} I.R.C.
>
> 2\. *Held*, *further*, under the facts and circumstances, R\'s denial
> of equitable relief under [sec. 6015(f) LK:NON: IRC-FILE
> S6015(F)]{.underline} , I.R.C., constitutes an abuse of discretion.

**MEMORANDUM FINDINGS OF FACT AND OPINION**

HALPERN, Judge : Pursuant to the provisions of [section 6015 LK:NON:
IRC-FILE S6015]{.underline} ,[^56] petitioner applied for relief from
joint and several liability for the 1996 taxable year by submitting a
Form 8857, Request for Innocent Spouse Relief, dated July 25, 1999.
Respondent denied petitioner\'s request for relief pursuant to a notice
of determination dated December 21, 2000 (the notice of determination).
The notice of determination enclosed a Form 886-A, Explanation of Items,
in which respondent stated the basis for his denial of relief as
follows:

> Innocent Spouse Relief cannot be granted due to the fact that you
> failed to meet the centralized factors for relief. Electing spouse
> failed to show she had no knowledge of the unreported income from the
> pension distribution nor that she did not benefit from the income.

On February 26, 2001, petitioner timely filed a petition with this Court
under [section 6015(e) LK:NON: IRC-FILE S6015(E)]{.underline} for review
of respondent\'s determination (the petition).

The sole issue for our decision is whether respondent abused his
discretion in denying petitioner relief from joint and several liability
under [section 6015(b) LK:NON: IRC-FILE S6015(B)]{.underline} , [(c)
LK:NON: IRC-FILE S6015(C)]{.underline} , [(f) LK:NON: IRC-FILE
S6015(F)]{.underline} .

**FINDINGS OF FACT**[^57]

Some facts have been stipulated and are so found. The stipulation of
facts, with accompanying exhibits, is incorporated herein by this
reference.

At the time the petition was filed, petitioner resided in Brooklyn, New
York.

***The Joint Returns***

Petitioner and her husband, Louis Rosenthal (separately, petitioner and
Louis; together, the Rosenthals) timely made a joint Federal income tax
return for calendar year 1996 on or about February 27, 1997. That return
(sometimes, the original 1996 return) reported "total income" on line 22
of \$32,245 consisting, in part, of \$1,308 in taxable "pensions and
annuities". The return reported tax due of \$1,631, total tax payments
of \$5,774, and claimed an overpayment of \$4,143 to be applied to the
Rosenthals\' 1997 estimated tax. The return was prepared by Louis\'s
accountant, Harold Benenstock, a C.P.A. who prepared returns for both
Louis\'s plumbing business and the Rosenthals personally. Petitioner was
not involved in the preparation of the return.

Shortly before April 15, 1998, during the preparation of the
Rosenthals\' 1997 joint return, Mr. Benenstock discovered that, in 1996,
Louis had withdrawn a large amount of money from his account at Republic
National Bank (formerly Crossland Savings Bank), but Mr. Benenstock did
not believe the withdrawal was taxable. Louis suffered a stroke in
August 1998 and died on September 1, 1998. Petitioner never discussed
the withdrawal with Louis, nor was she aware of the amount prior to his
death.

After Louis\'s death, petitioner\'s attorney, recognizing that the
withdrawal constituted a taxable distribution from an Individual
Retirement Account (IRA) (the IRA distribution), contacted Mr.
Benenstock and asked him to prepare an amended 1996 return. On November
22, 1998, petitioner submitted a Form 1040X, Amended U.S. Individual
Income Tax Return, for 1996 on behalf of herself and Louis (the amended
1996 return). The "Explanation of Changes to Income, Deductions, and
Credits" contained the following statement:

> Taxpayer, 90 years old, transferred \$90,000 from individual
> retirement account. He did not receive a 1099R and did not report
> income on his individual return.

The inclusion of the additional \$90,000 in income increased the tax due
less tax payments from the \$4,143 overpayment reported on the original
1996 return to a net tax due of \$24,677, which was reported on the
amended 1996 return. The amended 1996 return was signed by petitioner as
spouse and by Mr. Benenstock as preparer. There was no signature on
behalf of the deceased Louis.

Petitioner paid the total tax due (\$28,820) concurrent with the filing
of the amended 1996 return. She paid that amount from one of her
accounts with Dime Savings Bank. On February 10, 1999, in response to an
IRS request for \$4,334 of interest due on the tax underpayment for
1996, petitioner mailed a check in that amount to the IRS, drawn on her
Dime Savings Bank checking account, which was reflected as paid, on an
IRS transcript, as of February 12, 1999.

***The Rosenthals***

Petitioner and Louis were married in 1976. They had no children
together, but each had children (and, in the case of Louis,
grandchildren)[^58] from a prior marriage.

Louis owned and operated a plumbing business for more than 50 years. He
retired from that business in 1994. Petitioner did not participate in
and had no knowledge of any aspect of that business.

Petitioner was employed as a registered nurse at the time of her
marriage to Louis and continued in the profession throughout her
marriage except for a brief "retirement" which began in April 1996 and
ended in 1997 when she returned to work. At the time of the trial, she
was again retired. Her highest level of education was a degree from
nursing school. She never attended college. Upon her marriage to Louis,
she sold her house, and she, Louis, and her children moved into a house,
which Louis purchased with his own funds in his own name (the house).

***Financial Affairs***

From the inception of his marriage to petitioner, Louis handled all of
the household finances, paid all the bills, including the quarterly real
estate taxes on the house, made the major purchases (e.g., automobiles),
and gave petitioner \$160 per week to purchase groceries and other
household necessities. Petitioner paid for her personal charge accounts
and medical insurance.

***Bank Accounts***

Petitioner and Louis maintained separate bank accounts. Petitioner
maintained accounts at Greenpoint Bank and Dime Savings Bank, and she
deposited her salary in one of her accounts at Dime Savings Bank. Louis
maintained at least six individual accounts and one trust account (for a
grandchild). One of Louis\'s accounts was his IRA at Crossland Savings
Bank, which later became Republic National Bank. In 1996, he withdrew
the unreported \$90,000 from Republic National Bank. There is no direct
evidence of what Louis did with the unreported \$90,000. He did,
however, own a certificate of deposit (CD) issued by Republic National
Bank. That bank advised Louis that, on February 2, 1997, it had renewed
(for 6 months until maturity on August 2, 1997) a CD with a balance of
\$91,213. The Republic National Bank CD bore a different account number
(No. 095-9501672878) than the former Crossland Savings Bank IRA (No.
4888752).

In the innocent spouse questionnaire attached to her request for
innocent spouse relief dated July 25, 1999, petitioner listed both her
and Louis\'s bank accounts. Next to her listing of Louis\'s account at
Republic National Bank she wrote the account number and "(\$90,000)".

***Louis\'s Will***

Louis died testate, and, under the terms of his will, petitioner
received: (1) the house, "all policies of insurance relating thereto,
and all of the contents thereof"; (2) all of Louis\'s "tangible personal
property", and (3) his "Home Savings Bank Account No. 6537415082 and
Crossland Savings Bank Account No. 4888752" identified in the will as
his "pension accounts". The Home Savings Bank account is not listed on
Schedule B of either the original or the amended 1996 return or on
petitioner\'s innocent spouse questionnaire. Presumably, that account
was closed before 1996. The residuary estate went to Louis\'s four
grandchildren.

***Petitioner\'s Financial Circumstances After Louis\'s Death***

Petitioner\'s attorney unsuccessfully attempted to trace the proceeds of
the IRA distribution.

The house, inherited by petitioner from Louis, was valued at \$247,000
at the time of Louis\'s death and was mortgage free. Since Louis\'s
death, petitioner has paid her customary living expenses and generally
maintained the same standard of living that she maintained prior to his
death.

**OPINION**

**I. *Introduction***

As a general rule, spouses filing joint Federal income tax returns are
jointly and severally liable for all taxes shown on the return or found
to be owing. [Sec. 6013(d)(3) LK:NON: IRC-FILE S6013(D)(3)]{.underline}
. In certain situations, however, a joint return filer can avoid such
joint and several liability by qualifying for relief therefrom under
[section 6015 LK:NON: IRC-FILE S6015]{.underline} . There are three
types of relief available under [section 6015 LK:NON: IRC-FILE
S6015]{.underline} : (1) full or apportioned relief under [section
6015(b) LK:NON: IRC-FILE S6015(B)]{.underline} ; (2) proportionate tax
relief for divorced or separated taxpayers under [section 6015(c)
LK:NON: IRC-FILE S6015(C)]{.underline} ; and (3) equitable relief under
[section 6015(f) LK:NON: IRC-FILE S6015(F)]{.underline} when relief is
unavailable under either [section 6015(b) LK:NON: IRC-FILE
S6015(B)]{.underline} or [(c) LK:NON: IRC-FILE S6015(C)]{.underline} .

A taxpayer may seek relief from joint and several liability by raising
the matter as an affirmative defense in a petition for redetermination
invoking this Court\'s deficiency jurisdiction under [section 6213(a)
LK:NON: IRC-FILE S6213(A)]{.underline} or, as in this case, by filing a
so-called stand-alone petition challenging the Commissioner\'s final
determination denying the taxpayer\'s claim for such relief (or his
failure to rule on the taxpayer\'s claim within 6 months of its filing).
See [sec. 6015(e)(1) LK:NON: IRC-FILE S6015(E)(1)]{.underline} ; *Maier
v. Commissioner*, 119 T.C. 267, 270-271 (2002), affd. 93 AFTR2d
2002-1139 (2d Cir. 2004); *Ewing v. Commissioner*, 118 T.C. 494, 496-497
(2002).[^59]

In the petition, petitioner seeks relief under all three of the
available relief provisions: [section 6015(b) LK:NON: IRC-FILE
S6015(B)]{.underline} , [(c) LK:NON: IRC-FILE S6015(C)]{.underline} ,
and [(f) LK:NON: IRC-FILE S6015(F)]{.underline} . The essence of
petitioner\'s claim is that she should be relieved of liability for the
tax and interest occasioned by the reporting of the IRA distribution.
Respondent argues that, because petitioner has paid the additional tax
attributable to the IRA distribution, "there is no understatement,
deficiency or underpayment to which relief under \* \* \* \[section\]
6015 is applicable."

Except as otherwise provided in [section 6015 LK:NON: IRC-FILE
S6015]{.underline} , petitioner bears the burden of proof. See Rule
142(a).

**II. *Relief Under Section 6015(b) and (c)***

[Section 6015(e)(1) LK:NON: IRC-FILE S6015(E)(1)]{.underline} , in
pertinent part, provides this Court with jurisdiction to "determine the
appropriate relief available" under [section 6015 LK:NON: IRC-FILE
S6015]{.underline} to "an individual against whom a deficiency has been
asserted". Consistent with that language and similar language in
[section 6015(b) LK:NON: IRC-FILE S6015(B)]{.underline} and [(c) LK:NON:
IRC-FILE S6015(C)]{.underline} ,[^60] we have observed that the
existence of a tax deficiency is a prerequisite to our granting of
relief under either of those subsections. See Block v. Commissioner, 120
T.C. 62, 66 (2003). Because there is no tax deficiency asserted by
respondent with respect to either the original or amended 1996 returns,
petitioner cannot qualify for innocent spouse relief under [section
6015(b) LK:NON: IRC-FILE S6015(B)]{.underline} or [(c) LK:NON: IRC-FILE
S6015(C)]{.underline} .

**III. *Petitioner\'s Eligibility To Seek Relief Under Section
6015(f)***

**A. *Statutory Requirements***

[Section 6015(f) LK:NON: IRC-FILE S6015(F)]{.underline} provides:

> \(f\) Equitable relief. Under procedures prescribed by the Secretary,
> if ---
>
> \(1\) 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.

For the reasons stated above, petitioner satisfies the requirement of
[section 6015(f)(2) LK:NON: IRC-FILE S6015(F)(2)]{.underline} that
relief not be available under subsection (b) or (c). Moreover, the
absence of a deficiency does not deprive us of jurisdiction over
petitioner\'s claim for equitable relief under [section 6015(f) LK:NON:
IRC-FILE S6015(F)]{.underline} . See *Ewing v. Commissioner*, *supra* at
506-507. Nor, for the reasons discussed in the next section, is
equitable relief under [6015(f) LK:NON: IRC-FILE S6015(F)]{.underline}
precluded by the absence of an unpaid tax liability.

**B. *Eligibility Requirements of Rev. Proc. 2000-15***

Pursuant to his authority, under [section 6015(f) LK:NON: IRC-FILE
S6015(F)]{.underline} , to prescribe "procedures" for granting equitable
relief pursuant to that provision, respondent issued [Notice 98-61
LK:NON: TPC-RUL REVRUL98-61]{.underline} , 1998-2 C.B. 756, which
provided interim guidance for taxpayers seeking equitable relief from
joint and several liability. [Notice 98-61 LK:NON: TPC-RUL
REVRUL98-61]{.underline} was superseded by [Rev. Proc. 2000-15 LK:NON:
TPC-RUL REVPROC2000-15]{.underline} , 2000-1 C.B. 447, effective January
18, 2000, which, in turn, was superseded by [Rev. Proc. 2003-61 LK:NON:
TPC-RUL REVPROC2003-61]{.underline} , 2003-32 I.R.B. 296, effective for
requests for relief filed on or after November 1, 2003, and for requests
for relief pending on November 1, 2003, for which no preliminary
determination letter had been issued as of that date. Petitioner\'s
request for relief and respondent\'s determination are subject to [Rev.
Proc. 2000-15 LK:NON: TPC-RUL REVPROC2000-15]{.underline} because that
revenue procedure was in effect when respondent evaluated petitioner\'s
request and when respondent issued the notice of determination on
December 21, 2000. See *Ewing v. Commissioner*, 122 T.C. 32, 44 n.12
(2004).

Section 4.01 of [Rev. Proc. 2000-15 LK:NON: TPC-RUL
REVPROC2000-15]{.underline} , 2000-1 C.B. at 448, lists the seven
"threshold conditions" for eligibility to be considered for equitable
relief, one of which (set forth in section 4.01(4)) is as follows:

> \(4\) Except as provided in the next sentence, the liability remains
> unpaid. A requesting spouse is eligible to be considered for relief in
> the form of a refund of liabilities for: (a) amounts paid on or after
> July 22, 1998, and on or before April 15, 1999; and (b) installment
> payments, made after July 22, 1998, pursuant to an installment
> agreement entered into with the Service and with respect to which an
> individual is not in default, that are made after the claim for relief
> is requested.

Because petitioner\'s payment of the tax attributable to the IRA
distribution occurred between July 22, 1998, and April 15, 1999 (on
November 22, 1998), petitioner\'s payment of the joint tax liability
does not render her ineligible to seek equitable relief under [section
6015(f) LK:NON: IRC-FILE S6015(F)]{.underline} .[^61]

There is no dispute that petitioner meets the remaining six eligibility
requirements of [Rev. Proc. 2000-15 LK:NON: TPC-RUL
REVPROC2000-15]{.underline} , section 4.01. Therefore, we find that
petitioner is eligible to seek relief under [section 6015(f) LK:NON:
IRC-FILE S6015(F)]{.underline} .

**IV. *Petitioner\'s Entitlement To Equitable Relief Under Section
6015(f)***

**A. *Factors for Determining Whether To Grant Equitable Relief Under
Section 6015(f)***

[Rev. Proc. 2000-15 LK:NON: TPC-RUL REVPROC2000-15]{.underline} ,
section 4.03, 2000-1 C.B. at 448 provides in pertinent part:

> The Secretary may grant equitable relief under [section 6015(f)
> LK:NON: IRC-FILE S6015(F)]{.underline} \* \* \* if, taking into
> account all the facts and circumstances, it is inequitable to hold the
> requesting spouse liable for all or any part of the \* \* \* liability
> \* \* \*.

[Rev. Proc. 2000-15 LK:NON: TPC-RUL REVPROC2000-15]{.underline} ,
section 4.03, further provides "a partial list of positive and negative
factors that will be taken into account" in determining the appropriate
relief under [section 6015(f) LK:NON: IRC-FILE S6015(F)]{.underline} ,
and it states that "\[n\]o single factor will be determinative \* \* \*
in any particular case. Rather, all factors will be considered and
weighed appropriately." [Rev. Proc. 2000-15 LK:NON: TPC-RUL
REVPROC2000-15]{.underline} , section 4.03(1) and (2), 2000-1 C.B. at
448-449, sets forth the "partial list" of factors that the Commissioner
will consider in deciding whether to grant equitable relief under
[section 6015(f) LK:NON: IRC-FILE S6015(F)]{.underline} . Section
4.03(1) of the revenue procedure lists six factors the presence or
absence of which weighs in favor of granting equitable relief (positive
factors), and section 4.03(2) of the revenue procedure lists six factors
the presence or absence of which weighs against granting equitable
relief (negative factors). Four of the six factors on each list have a
reciprocal opposite on the other list, so that the presence or absence
of the circumstance referred to will necessarily be positive or
negative.[^62] The absence of the circumstances referred to by either or
both of the other two factors on each list is considered neutral under
[Rev. Proc. 2000-15 LK:NON: TPC-RUL REVPROC2000-15]{.underline} ,
section 4.03. Because four of the six factors on each list are common to
both lists, there are actually eight separate and distinct factors set
forth in [Rev. Proc. 2000-15 LK:NON: TPC-RUL REVPROC2000-15]{.underline}
, section 4.03.

**B. *Application of the Factors to Petitioner***

**1. *Respondent\'s Notice of Determination***

Respondent based his denial of equitable relief on a finding that
petitioner "failed to show" that she (1) lacked knowledge of the IRA
distribution and (2) did not benefit from that distribution. We
interpret that finding as a finding that petitioner did have knowledge
of the IRA distribution and did significantly benefit from that
distribution. Knowledge or reason to know of "the item giving rise to a
deficiency" and the existence of a significant benefit "(beyond normal
support) from the unpaid tax liability or items giving rise to the
deficiency" are both negative factors weighing against relief pursuant
to [Rev. Proc. 2000-15 LK:NON: TPC-RUL REVPROC2000-15]{.underline} ,
section 4.03(2)(b) and (c). In his notice of determination respondent
characterized the presence of those negative factors as a failure on
petitioner\'s part "to meet the centralized factors for relief."

Petitioner\'s burden is to demonstrate that respondent\'s denial of
equitable relief under [section 6015(f) LK:NON: IRC-FILE
S6015(F)]{.underline} was an abuse of discretion; i.e., that respondent
acted arbitrarily, capriciously, or without sound basis in fact. *Ewing
v. Commissioner*, 122 T.C. at 36-37; *Jonson v. Commissioner*, 118 T.C.
106, 125 (2002), affd. 353 F.3d 1181 (10th Cir. 2003).

**2. *Petitioner Did Not Have Knowledge or Reason To Know of the
Unreported Income***

The first of the two negative factors relied upon by respondent in
denying equitable relief to petitioner (that petitioner "had knowledge
of the unreported income") is described in [Rev. Proc. 2000-15 LK:NON:
TPC-RUL REVPROC2000-15]{.underline} , sec. 4.03(2)(b), 2000-1 C.B. at
449, in pertinent part, as follows:

> \(b\) Knowledge or reason to know. A requesting spouse knew or had
> reason to know of the item giving rise to a deficiency \* \* \* at the
> time the return was signed.

Respondent argues that "petitioner had knowledge or reason to know" of
the IRA distribution when she filed the amended 1996 return on November
22, 1998. But that is not the return that failed to reflect "the item"
(in this case, the IRA distribution) with respect to which petitioner
seeks equitable relief under [section 6015(f) LK:NON: IRC-FILE
S6015(F)]{.underline} . Rather, the return omitting the IRA distribution
(and which may be said to have reflected an understatement in tax) is
the original 1996 return, and petitioner\'s undisputed testimony, also
reflected in a July 25, 1999, letter from her to the Internal Revenue
Service requesting innocent spouse relief, is that she did not learn of
that distribution until it was discovered by her husband\'s accountant
in connection with his preparation of the 1997 joint return in April
1998. That was some 14 months after the original 1996 return was filed.
It is unpersuasive to argue, as does respondent, that petitioner\'s
voluntary filing of an amended 1996 return and her attendant payment of
the delinquent taxes attributable to the omission of income from the
original 1996 return militate against equitable relief simply because
she had to have known of the omission before she filed the amended
return and made the payment. Moreover, there is no evidence that
petitioner had any reason to know of the IRA distribution prior to April
1998. The distribution was from one of Louis\'s separate accounts, and
he never discussed it with her. Therefore, we find no basis for
respondent\'s conclusion in the notice of determination that a negative
factor results because petitioner knew of the IRA distribution.

**3. *Petitioner Did Not Benefit From the IRA Distribution***

The other negative factor relied upon by respondent in the notice of
determination as a basis for denying equitable relief to petitioner is
his finding that petitioner significantly benefited from the unreported
income. See [Rev. Proc. 2000-15 LK:NON: TPC-RUL
REVPROC2000-15]{.underline} , section 4.03(2)(c). There is no evidence
in the record to support that finding. Moreover, there is evidence
(discussed below) to suggest that petitioner did not benefit from the
unreported income.

Respondent argues that petitioner failed to establish that she suffered
"economic hardship" (a negative factor under [Rev. Proc. 2000-15 LK:NON:
TPC-RUL REVPROC2000-15]{.underline} , sec. 4.03(2)(d), 2000-1 C.B. at
449, and that the evidence demonstrating lack of economic hardship
"\[supports\] the determination that petitioner significantly
benefitted." Respondent also states that "\[p\]etitioner has not
provided any evidence to establish that she did not significantly
benefit." We disagree.

First, significant benefit and lack of economic hardship are separate
and distinct negative factors. Pursuant to [Rev. Proc. 2000-15 LK:NON:
TPC-RUL REVPROC2000-15]{.underline} , section 4.03(2)(c), the existence
of the former requires evidence that "\[t\]he requesting spouse
significantly benefitted (beyond normal support) from the unpaid
liability or items giving rise to the deficiency." In contrast, economic
hardship exists if the requesting spouse, in the absence of relief from
the liability, is unable to pay his or her customary "reasonable basic
living expenses." Sec. 301.6343-1(b)(4), Proced. & Admin. Regs.[^63]

As to whether petitioner enjoyed a significant benefit, there is no
evidence that petitioner received *any* benefit from either the unpaid
tax liability or the proceeds of the IRA distribution. She did not learn
of the distribution, which occurred sometime in 1996, until April 1998.
After Louis\'s death, she tried, unsuccessfully, to locate those funds.
Moreover, she discharged the tax liability resulting from the IRA
distribution, plus interest thereon, with borrowed funds that she had
deposited in her own separate bank account. Nor is there any evidence to
suggest that her financial arrangements with Louis, whereby she received
\$160 per week for household expenses, changed as a result of the IRA
distribution.

Louis\'s will bequeathed his Crossland Savings Bank IRA to petitioner.
That was Louis\'s only account at Crossland Savings Bank, and it was the
source of the IRA distribution, which occurred after the bank became
Republic National Bank. The record indicates that, by 1997, that account
had been closed and that Louis had opened another account at Republic
National Bank (the Republic account) with a different account number. As
of February 2, 1997, the Republic account consisted of a \$91,213
renewable CD, and the account was referred to in petitioner\'s innocent
spouse questionnaire as containing \$90,000. The February 2, 1997, CD
was a 6-month CD and was a renewal of a prior CD. The existence of the
Republic account CDs at least suggests that, after Louis withdrew the
money from his IRA (which, as depleted by the withdrawal, he had
bequeathed to petitioner), he deposited it in a new account with the
same bank, which he opened after the execution of his will, and which,
therefore, became part of his residuary estate bequeathed to his
grandchildren.

In short, there is no direct evidence of what Louis did with the funds
comprising the IRA distribution; nevertheless, we surmise that he
deposited them in a bank account that, pursuant to his will, was
bequeathed to persons other than petitioner. We find that petitioner did
not benefit from those funds.[^64]

**4. *Overall Application of the Factors Under Rev. Proc.
2000-15,\[predecessor to Rev. Proc. 2003-61\] Section 4.03***

We conclude from examining respondent\'s "Explanation of Items" attached
to the notice of determination that, in rejecting petitioner\'s request
for innocent spouse relief, respondent failed to apply six of the eight
factors listed in [Rev. Proc. 2000-15 LK:NON: TPC-RUL
REVPROC2000-15]{.underline} , section 4.03. Based upon the evidence
before us (and before respondent at the time he considered petitioner\'s
application for innocent spouse relief), we find that all but one of the
factors listed in [Rev. Proc. 2000-15 LK:NON: TPC-RUL
REVPROC2000-15]{.underline} , section 4.03, are either favorable to
petitioner or neutral.

**a. *Petitioner\'s Marital Status***

At the time petitioner requested relief, Louis was deceased. We view
that circumstance, with respect to petitioner, as tantamount to her
being separated or divorced. Therefore, we conclude that that factor is
favorable. See [Rev. Proc. 2000-15 LK:NON: TPC-RUL
REVPROC2000-15]{.underline} , sec. 4.03(1)(a).[^65]^0^

**b. *Spousal Abuse***

Louis did not abuse petitioner. Because the absence of spousal abuse is
not listed as a negative factor, that factor must be considered neutral.
See [Rev. Proc. 2000-15 LK:NON: TPC-RUL REVPROC2000-15]{.underline} ,
sec. 4.03(1)(c).

**c. *Noncompliance With Federal Income Tax Laws in Subsequent Years***

Respondent concedes that "petitioner has been compliant with Federal tax
laws." Because compliance with the tax law is not listed as a favorable
factor, that factor must be considered neutral. See [Rev. Proc. 2000-15
LK:NON: TPC-RUL REVPROC2000-15]{.underline} , sec. 4.03(2)(e).

**d. *Legal Obligation To Pay the 1996 Tax Liability***

Because neither petitioner nor Louis was legally obligated pursuant to a
divorce decree or agreement to pay the tax liability resulting from the
failure to report the IRA distribution, that factor is also neutral. See
[Rev. Proc. 2000-15 LK:NON: TPC-RUL REVPROC2000-15]{.underline} , sec.
4.03(1)(e) and (2)(f).

**e. *Attribution of the Unpaid Item***

Respondent concedes that "the full amount at issue is attributable to
Louis Rosenthal." That factor is favorable. See [Rev. Proc. 2000-15
LK:NON: TPC-RUL REVPROC2000-15]{.underline} , sec. 4.03(1)(f), (2)(a).

**f. *Economic Hardship***

Because the evidence (which consists entirely of petitioner\'s
testimony) shows that petitioner was able to discharge her customary
basic living expenses even after paying the tax liability arising from
the omission of the IRA distribution from income, there was a lack of
"economic hardship" as that term is defined for purposes of [Rev. Proc.
2000-15 LK:NON: TPC-RUL REVPROC2000-15]{.underline} , section 4.03(1)(b)
and (2)(d). That factor is unfavorable.

**g. *Knowledge or Reason To Know and Significant Benefit***

For the reasons previously discussed herein (section IV. B. 2. and 3.)
we find that petitioner had no knowledge or reason to know of the IRA
distribution, and that she did not benefit from it. Lack of knowledge or
reason to know is a favorable factor ([Rev. Proc. 2000-15 LK:NON:
TPC-RUL REVPROC2000-15]{.underline} , section 4.03(1)(d)) and, because
lack of significant benefit is not listed as a favorable factor, it is
considered neutral under [Rev. Proc. 2000-15 LK:NON: TPC-RUL
REVPROC2000-15]{.underline} . However, on the basis of prior caselaw, we
consider lack of significant benefit to be a favorable factor. See
*Ewing v. Commissioner*, 122 T.C. at 45; *Foor v. Commissioner*, T.C.
Memo. 2004-54; *Ogonoski v. Commissioner*, T.C. Memo. 2004-52;
*Ferrarese v. Commissioner*, T.C. Memo. 2002-249.

**5. *Conclusion***

We find that, of the factors listed in [Rev. Proc. 2000-15 LK:NON:
TPC-RUL REVPROC2000-15]{.underline} , section 4.03, four are favorable,
three are neutral, and only one is unfavorable. Thus, a reasonable
balancing of those factors strongly suggests that petitioner is entitled
to equitable relief under [section 6015(f) LK:NON: IRC-FILE
S6015(F)]{.underline} , and that respondent\'s contrary conclusion
constitutes an abuse of discretion. The following factors provide
additional support for that conclusion:

\(a\) Respondent\'s denial of relief, as recited in the notice of
determination, was based upon his application of two of the eight
separate and distinct factors listed in [Rev. Proc. 2000-15 LK:NON:
TPC-RUL REVPROC2000-15]{.underline} , section 4.03. Therefore, it is not
apparent whether respondent complied with that section\'s requirement
that "all factors \* \* \* be considered and weighed appropriately."

\(b\) Respondent erroneously concluded that the two factors he did
expressly consider (knowledge or reason to know and significant benefit)
were unfavorable when, in fact, both were favorable.

\(c\) Respondent failed to take into account the fact that the
understatement of income on the original 1996 return resulted from
Louis\'s concealment of that income. Both this Court and the Court of
Appeals for the Second Circuit (the court to which an appeal of this
case most likely would lie) have treated as a material factor in
deciding whether to grant equitable relief under [section 6015(b)(1)(D)
LK:NON: IRC-FILE S6015(B)(1)(D)]{.underline} or its predecessor [section
6013(e)(1)(D) LK:NON: IRC-FILE S6013(E)(1)(D)]{.underline}
[^66]^[1]{.underline}^ "\[w\]hether the failure to report correctly tax
liability results from \`concealment, overreaching, or any other
wrongdoing\' on the part of the \`guilty\' spouse". Hayman v.
Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993), affg. T.C. Memo.
1992-228; see also Ewing v. Commissioner, 122 T.C. at 48-49; Jonson v.
Commissioner, 118 T.C. at 119.

For all of the above reasons, we hold that respondent\'s denial of
equitable relief under [section 6015(f) LK:NON: IRC-FILE
S6015(F)]{.underline} was an abuse of discretion and that it would be
inequitable to hold petitioner liable for the underpayment of tax
reflected on the original 1996 return. Therefore, petitioner is entitled
to a refund of the additional tax and associated interest paid in
connection with the filing of the 1996 amended return. See [sec.
6015(g)(1) LK:NON: IRC-FILE S6015(G)(1)]{.underline} .

To reflect the foregoing,

> *Decision will be entered for petitioner*.

. In cases where the requesting spouse is seeking relief from the
underpayment of a tax, the inquiry is different. Obviously the spouse
knew there was an underpayment when the return was filed. If not, the
request would be for an understatement of tax. Relief, therefore, is
dependent upon whether the requesting spouse knew or should have known
that the tax would not be paid. While it is an important factor,
knowledge that the tax will not be paid will not necessarily defeat a
request for innocent spouse relief.

MARY ELIZABETH CUMINGS v.

COMMISSIONER OF INTERNAL REVENUE

T.C. Summary Opinion 2007-77

MARVEL, Judge: This case was heard pursuant to the provisions of section
7463 of the Internal Revenue Code in effect when the petition was
filed.1 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.

This case arises from a request for relief under section 6015(f) with
respect to petitioner's 2002 taxable year. Respondent determined
petitioner was not entitled to any relief from joint and several
liability under section 6015(f). Petitioner timely filed a petition
seeking review of respondent's determination.[^67] The issue for
decision is whether respondent's denial of relief under section 6015(f)
was an abuse of

discretion.

Background

Some of the facts have been stipulated. We incorporate the stipulated
facts into our findings by this reference. Petitioner resided in
Loveland, Colorado, when her petition in this case was filed.

During 2002, petitioner was married to Robert Parker (Mr.

Parker). In October 2002, petitioner and Mr. Parker separated,

and in 2004 they divorced.

Mr. Parker was the sole proprietor of two businesses: Bob's

Drywall and Parker Custom Homes. During 2002 petitioner was a

laborer and a bookkeeper for Mr. Parker's drywall business. During their
marriage, petitioner and Mr. Parker maintained a joint checking account
from which they both paid household bills. Among other things,
petitioner made deposits into the account, wrote checks for household,
business, and personal purposes, reviewed the monthly bank statements,
and reconciled the checkbook. Petitioner also opened the household mail.
After petitioner and Mr. Parker separated in October 2002, petitioner's
access to the joint checking account apparently was restricted.

Petitioner and Mr. Parker timely filed a joint Federal income tax return
for 2002. Their return reflected an unpaid income tax liability of
\$506.[^68] The tax liability resulted from an underpayment of
self-employment tax arising from Mr. Parker's sole proprietorships.

Petitioner and Mr. Parker's 2002 joint return was prepared by a tax
return preparer. Petitioner compiled the necessary paperwork and gave it
to the preparer. Petitioner faxed the completed tax return to Mr. Parker
for his signature and mailing. Petitioner reviewed the return and was
aware that there was a reported unpaid tax liability. Petitioner and Mr.
Parker did not discuss payment of the tax liability at the time they
filed their return.

On November 12, 2003, less than 1 month after petitioner and

Mr. Parker filed their return, petitioner filed Form 8857,Request for
Innocent Spouse Relief, and Form 12510, Questionnaire for Requesting
Spouse. Petitioner requested equitable relief under section 6015(f).

On or about May 25, 2004, Tax Examiner M. Wilce (Ms. Wilce)

evaluated petitioner's request for relief under section 6015(f). Among
other things, Ms. Wilce determined that petitioner had filed a joint
return with Mr. Parker, had filed a timely claim for relief under
section 6015, had not yet paid the outstanding tax liability for the
year in issue, did not prepare a fraudulent return, did not receive a
fraudulent transfer of assets, and did not receive disqualified assets.
However, Ms. Wilce also determined that petitioner had received a
portion of the income from which the liability arose and that petitioner
was ineligible

for relief to the extent of the partial attribution. Ms. Wilce did not
determine at that time what portion of the underpayment was attributable
to petitioner, but she did conclude that petitioner was not entitled to
relief under section 6015(f).

On or about July 19, 2004, petitioner appealed Ms. Wilce's

denial of relief. On or about March 30, 2005, Appeals Officer Leslie
Hackmeister (Ms. Hackmeister) reviewed petitioner's appeal. In the case
memorandum she prepared reflecting her review, Ms. Hackmeister stated,
among other things, that the underpayment is attributable to Mr.
Parker's self-employment income.

On March 30, 2005, respondent issued a Notice of Determination denying
petitioner's request for relief under section 6015(f). On June 24, 2005,
a petition contesting respondent's determination was filed with this
Court.

Discussion

In general, spouses who file a joint Federal income tax return are
jointly and severally liable for the full amount of the tax liability
shown or required to be shown on the return. Sec. 6013(d)(3); Butler v.
Commissioner, 114 T.C. 276, 282 (2000). However, a spouse may seek
relief from joint and several liability under section 6015 if certain
requirements are met.

In this case petitioner seeks equitable relief under section

6015(f). \* \* \*

This Court is a court of limited jurisdiction, and it may exercise its
jurisdiction only to the extent authorized by Congress. Sec. 7442; Moore
v. Commissioner, 114 T.C. 171, 175 (2000); Naftel v. Commissioner, 85
T.C. 527, 529 (1985). On December 20, 2006, Congress amended section
6015(e)(1) to provide that this Court has jurisdiction over stand-alone
section 6015(f) cases.\[fn. omitted.\] Tax Relief and Health Care Act of
2006, Pub. L. 109-432, div. C, sec. 408(a), (c), 120 Stat. 3061,
3062.\[fn. omitted.\] Respondent concedes that we have jurisdiction over
this case under section

6015(e) as amended.

The Commissioner uses guidelines prescribed in Rev. Proc.

2003-61, 2003-2 C.B. 296, to determine whether a taxpayer qualifies for
relief from joint and several liability under section 6015(f).7 We
review the Commissioner's determination using an abuse of discretion
standard. See Washington v. Commissioner, 120 T.C. 137, 146 (2003);
Butler v. Commissioner, supra at 291-292. Under this standard of review,
we defer to the Commissioner's determination unless it is arbitrary,
capricious, or without sound basis in fact. Jonson v. Commissioner, 118
T.C. 106, 125 (2002), affd. 353 F.3d 1181 (10th Cir. 2003). The taxpayer
requesting section 6015(f) relief bears the burden of proof. See Rule
142(a); Jonson v. Commissioner, supra at 113.

A. Rev. Proc. 2003-61, Sec. 4.01

Before the Commissioner will consider a taxpayer's request

for relief under section 6015(f), the taxpayer must satisfy the
following seven threshold conditions listed in Rev. Proc. 2003-61, sec.
4.01, 2003-2 C.B. at 297:

> \(1\) 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 two years
> after the date of the Service's first collection activity \* \* \*
>
> \(4\) No assets were transferred between the spouses as part of a
> fraudulent scheme by the spouses.
>
> \(5\) The nonrequesting spouse did not transfer disqualified assets to
> the requesting spouse. \* \* \*
>
> \(6\) The requesting spouse did not file or fail to file the return
> with fraudulent intent.
>
> \(7\) The income tax liability from which the requesting spouse seeks
> relief is attributable to an item of the individual with whom the
> requesting spouse filed the joint return (the "nonrequesting spouse")

\* \* \*

Review of the administrative record, particularly Ms. Wilce's workpaper
and Ms. Hackmeister's case memorandum, confirms that petitioner
satisfies each of these conditions. Petitioner and Mr. Parker filed a
joint Federal income tax return for 2002. Relief is not available to
petitioner under section 6015(b) or (c) because relief under those
subsections is available only with respect to underreported liabilities;
petitioner and Mr. Parker did not underreport their tax liability on
their 2002 return. Petitioner requested relief promptly after the return
was filed. Ms. Wilce concluded that there was no fraudulent transfer of

assets or transfer of disqualified assets to petitioner, and there is no
evidence in the record supporting a different conclusion. Neither Ms.
Wilce nor Ms. Hackmeister claim that petitioner and Mr. Parker filed
their 2002 return with a fraudulent intent, and there is no evidence in
the record supporting such an intent. Finally, Ms. Hackmeister
determined that the income tax liability in question arose from Mr.
Parker's sole proprietorship income, and the administrative record

overwhelmingly supports her conclusion.

We conclude that petitioner has satisfied the conditions in Rev. Proc.
2003-61, sec. 4.01.

B. Rev. Proc. 2003-61, Sec. 4.02

1\. In general

Rev. Proc. 2003-61, sec. 4.02(1), 2003-2 C.B. at 298, provides that
equitable relief will ordinarily be granted as to unpaid liabilities if,
in addition to the seven threshold conditions, each of the following
elements is satisfied:

> \(a\) On the date of the request for relief, the requesting spouse is
> no longer married to, or is legally separated from, the nonrequesting
> spouse, or has not been a member of the same household as the
> nonrequesting spouse at any time during the 12-month period ending on
> the date of the request for relief.
>
> \(b\) On the date the requesting spouse signed the joint return, the
> requesting spouse had no knowledge or reason to know that the
> nonrequesting spouse would not pay the income tax liability.
>
> \(c\) The requesting spouse will suffer economic

hardship if the Service does not grant relief. \* \* \*

Petitioner and Mr. Parker were separated at the time petitioner filed
her request for relief. The parties dispute only whether petitioner had
knowledge or reason to know that Mr. Parker would not pay the reported
tax liability and whether petitioner would suffer economic hardship if
relief were not granted.

2\. Knowledge or reason to know

This element is satisfied if the requesting spouse did not

know or have reason to know when she signed the return that the

taxes would not be paid. Rev. Proc. 2003-61, sec. 4.02(1)(b).
Accordingly, petitioner must establish that it was reasonable for her to
believe that Mr. Parker would pay the reported liability. Petitioner was
aware of the reported tax liability when she signed the return.
Petitioner also admitted that at the time she signed the return she did
not know whether Mr. Parker would pay the outstanding balance and that
no funds were available at that time to pay the liability. Petitioner
was aware that Mr. Parker intended to file a petition in bankruptcy.

While we are sympathetic to petitioner's situation with her

former husband, we cannot find that respondent abused his discretion in
determining that petitioner had reason to know at the time she signed
the return that the tax liability would not be paid. Petitioner has not
established that it was reasonable for her to believe Mr. Parker would
pay the liability. We conclude, therefore, that respondent did not abuse
his discretion in determining that petitioner did not satisfy the
knowledge or reason to know element of Rev. Proc. 2003-61, sec. 4.02,
and thus does not qualify for equitable relief under that section of the
revenue procedure.

C. [Rev. Proc. 2003-61, Sec. 4.03]{.underline}

Where the requesting spouse fails to qualify for relief under Rev. Proc.
2003-61, sec. 4.02, the Commissioner may nonetheless grant relief under
Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298-299. Rev. Proc.
2003-61, sec. 4.03, provides that, where the seven threshold conditions
have been satisfied and the requesting spouse does not qualify for
relief under Rev. Proc. 2003-61, sec. 4.02, 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. 2003-61, sec. 4.03, contains a list of factors that the
Commissioner will take into account in

determining, on the facts and circumstances, whether to grant full or
partial equitable relief under section 6015(f). As Rev. Proc. 2003-61,
sec. 4.03, makes clear, no single factor is determinative in any
particular case, all factors are to be considered and weighed
appropriately, and the listing of factors is not intended to be
exclusive.

Rev. Proc. 2003-61, sec. 4.03(2)(a), 2003-2 C.B. at 298-299, lists the
following factors that the Commissioner will weigh in determining
whether to grant equitable relief:

\(i\) Marital status. Whether the requesting spouse is separated \* \*
\* or divorced from the nonrequesting spouse. \* \* \*

\(ii\) Economic hardship. Whether the requesting spouse would suffer
economic hardship (within the meaning of section 4.02(1)(c) of this
revenue procedure) if the Service does not grant relief from

the income tax liability.

\(iii\) Knowledge or reason to know.

\(A\) Underpayment cases. \* \* \* whether the requesting spouse did not
know and had no reason to know that the nonrequesting spouse would not
pay the income tax liability.

\* \* \* \* \* \* \*

\(iv\) Nonrequesting spouse's legal obligation. Whether the
nonrequesting spouse has a legal obligation to pay the outstanding
income tax liability pursuant to a divorce decree or agreement. \* \* \*

\(v\) Significant benefit. Whether the requesting spouse received
significant benefit (beyond normal support) from the unpaid income tax
liability \* \* \*

\(vi\) Compliance with income tax laws. Whether the requesting spouse
has made a good faith effort to comply with income tax laws in the
taxable years following the taxable year or years to which the request
for relief relates.

Rev. Proc. 2003-61, sec. 4.03(2)(b), 2003-2 C.B. at 299, lists the
following two positive factors that the Commissioner will weigh in favor
of granting equitable relief:

\(i\) Abuse. Whether the nonrequesting spouse abused the requesting
spouse. \* \* \*

\(ii\) Mental or physical health. Whether the requesting spouse was in
poor mental or physical health on the date the requesting spouse signed
the return or at the time the requesting spouse requested relief.

\* \* \*

We consider the factors below.

1\. Marital status

Petitioner and Mr. Parker separated in October 2002 and divorced in
2004. Both Ms. Wilce and Ms. Hackmeister admitted that this factor
weighs in favor of granting relief.

2\. Economic hardship

Rev. Proc. 2003-61, sec. 4.02(1)(c), requires respondent to apply the
rules in sec. 301.6343-1(b)(4), Proced. & Admin. Regs., in making the
determination of whether a requesting spouse will suffer economic
hardship. Sec. 301.6343-1(b)(4), Proced. & Admin. Regs., provides that
economic hardship is present if satisfaction of the tax liability in
whole or in part will render a taxpayer unable to pay her reasonable
basic living expenses. In November 2003, petitioner submitted a Form
12510 to respondent. Petitioner reported on the Form 12510 monthly
income of \$1,7109 and monthly expenses of \$2,555. Petitioner's stated
monthly expenses included housing, food, and utility expenses of
\$2,107, transportation expenses of \$133, and other expenses of

\$315.

The administrative record establishes that petitioner was the sole owner
of the marital residence and jointly owned a mobile home with Mr.
Parker, that petitioner had significant credit card debt, and that the
mortgage company holding the mortgage on the marital residence had begun
foreclosure proceedings against the marital residence at the time
petitioner filed her request for relief. The administrative record also
establishes that although petitioner was working two jobs in 2003, she
could not pay her reasonable basic living expenses

without going further into debt.

Ms. Wilce determined that petitioner would not suffer economic hardship
because the Internal Revenue Service (IRS) computer records showed that
petitioner had received a Form 1099-MISC, Miscellaneous Income,
reporting \$127,932 of income during

2002\. However, the Social Security number on the Form 1099-MISC

did not match petitioner's Social Security number. Petitioner learned of
Ms. Wilce's determination incorrectly attributing the income from the
Form 1099-MISC to petitioner. On December 2,2004, petitioner faxed to
Ms. Hackmeister an affidavit from Ryan Scallon, the issuer of the Form
1099-MISC, stating that the form was issued to C&C Contracting and not
to petitioner or Mr. Parker. Ms. Hackmeister erroneously concluded that
the Social Security number referenced in the fax matched petitioner's
Social Security number and that the income had not been reported on the
2002 return.

We conclude that petitioner has established that she will suffer
economic hardship if she is not granted equitable relief. This factor
weighs in favor of granting relief.

3\. Knowledge or reason to know

For the reasons stated in our analysis of this factor under Rev. Proc.
2003-61, sec. 4.02, we conclude petitioner has failed to establish that
she did not have reason to know when the return was filed that the tax
liability shown as due would not be paid. This factor weighs against
granting relief.

4\. Nonrequesting spouse's legal obligation

Petitioner and Mr. Parker's divorce decree was not included in the
record, and petitioner did not testify to the contents of it regarding
the unpaid tax liability. Therefore, we cannot determine which spouse
had the legal obligation under the decree to pay the outstanding tax
liability. This factor is neutral.

5\. Significant benefit

Both Ms. Wilce and Ms. Hackmeister admitted that petitioner did not
significantly benefit from the unpaid liability, and the record does not
reflect otherwise. This factor weighs in favor of granting relief.

6\. Compliance with income tax laws

Respondent does not appear to contend that this factor applies, and he
did not otherwise argue at trial that petitioner did not make a good
faith effort to comply with her Federal income tax obligations in the
years subsequent to 2002.

Moreover, both Ms. Wilce and Ms. Hackmeister noted that petitioner met
this requirement. Therefore, this factor weighs in favor of granting
relief.

7\. Abuse/mental or physical health

Neither of these positive factors applies in this case Petitioner was
not abused by Mr. Parker, and there is no evidence in the administrative
record that she suffered poor mental or physical health.

8\. Liability attribution

Under Rev. Proc. 2000-15, sec. 4.03(1)(f) and (2)(a), 2000-1 C.B. 447,
449, the IRS considered whether the outstanding liability was
attributable to the requesting spouse or the nonrequesting spouse when
determining whether equitable relief was appropriate. Although Rev.
Proc. 2003-61, sec. 4.03, does not list liability attribution as one of
the factors for consideration, we note that the list in Rev. Proc.
2003-61, sec. 4.03, is not exclusive.

The entire outstanding liability is attributable to self-employment
taxes arising from Mr. Parker's self-employment income from two sole
proprietorships. None of the self-employment income or self-employment
taxes arising there from is attributable to petitioner. This factor
weighs in favor of granting relief.

D. Conclusion

At trial, petitioner's testimony was consistent with her assertions in
the Form 8857, her responses to information requests from respondent,
and the statements outlined in the revenue agent's workpapers.
Respondent has not challenged petitioner's truthfulness on these
matters. Although we find that petitioner had reason to know that the
tax liability would not likely be paid in light of Mr. Parker's intent
to file a petition in bankruptcy, we nevertheless conclude that
respondent

abused his discretion in determining that petitioner was not entitled to
relief under section 6015(f) because all of the other factors either
weigh in favor of granting relief to petitioner or are neutral.

To reflect the foregoing,

An appropriate order and

decision will be entered for

petitioner.

[^1]: Tariff of 1913, Pub. L. No. 63-16, ch. 16, II(A)(2), 38 Stat. 114,
    166.

[^2]: The Internal Revenue Bureau (the predecessor of the Internal
    Revenue Service), however, permitted couples to file a joint return
    as early as 1918. This was apparently done without specific
    statutory authority and was done for the convenience of the Bureau.
    The filing of a joint return, however, did not change the tax rates
    or tax liabilities of the spouses. The combined tax due was the sum
    of the tax each of the spouses owed on their respective taxable
    incomes. See Christopher B. Wyrick, Till Death Do Us Part Including
    Our Taxes: Inequity Abounds in Spousal Joint and Several Tax
    Liability and the \"Innocent Spouse\" Rule, 6 Kan. J.L. & Pub.
    Pol\'y 163, 164 (Winter 1997).

[^3]: 282 U.S. 101 (1930).

[^4]: *See* Susan Kalinka, *Taxation of Community Income: It is Time for
    Congress to Override Poe v. Seaborn,* 58 La. L. Rev. 73 (Fall 1997)
    for a critical analysis of [Poe.]{.underline}

[^5]: Internal Revenue Act of 1928, Sec 51, Article 381, Regulations.

[^6]: [Cole v. Commissioner]{.underline}, 81 F 2d. 485 (9^th^ Cir. 1935)
    (Court of Appeals for the Ninth Circuit held that despite the filing
    of a joint return, the spouses could not be held jointly and
    severally liable for the tax due.)

[^7]: Revenue Act of 1938, Pub. L. No. 75-554, 52 Stat. 447, 476 (1938).

[^8]: As originally enacted, the joint return schedule of rates were
    pegged at treating each spouse's tax rate as that of what a single
    individual would pay at that income level. Overtime, however, the
    disparity between tax rates of singles and married couples filing
    jointly increased, leading to shifts in tax rates, the creation of
    the so-called marriage penalty, and relief. All during that time,
    however, there was no change in the joint return provisions. See
    Frederick R. Schneider, WHICH TAX UNIT FOR THE FEDERAL INCOME TAX?,
    20 Dayton L. Rev. 93 (Fall 1994).\]

[^9]: S. Rep. No. 1013, 80th Cong., 2d Sess. 25 (1948).

[^10]: *See* Lawerence Zalenak, Marriage and the Income Tax Law, 67 S.
    Cal. L. Rev. 339 (1994); Boris I. Bittker, Federal Income Taxation
    and the Family, 27 Stan. L. Rev. 1389, 1413; (1975); Carolyn C.
    Jones, Split Income and Separate Spheres: Tax Law and Gender Roles
    in the 1940s, 6 Law & Hist. Rev. 259, 268-74 (1988).

[^11]: ^2^ SEC. 6013. JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE.\
    (d) Definitions. \* \* \*\
    \* \* \* \* 

    \(3\) if a joint return is made, the tax shall be computed on the
    aggregate income and the liability with respect to the tax shall be
    joint and several.

[^12]: Act to Amend the Internal Revenue Code of 1954, Pub. L. No.
    91-679, 1, 84 Stat. 2063 (1971).

[^13]: Tax Reform Act of 1984, Pub. L. No. 98-369, 424, 98 Stat. 494,
    801-02 (1984).

[^14]: ^5^ Both sides seem to have ignored whether Quinta had
    accumulated earnings and profits (we cannot tell from the record
    whether Quinta ever had been a nonsubchapter S corporation and had
    earnings and profits from presubchapter S years). We will assume
    that there were no accumulated earnings and profits.

[^15]: ^6^ The parties have stipulated that, \"*During* the years 1977
    and 1979 the petitioners filed joint federal income tax returns.\"
    (Emphasis added.) An examination of the stipulated 1977 tax return
    makes it clear that the 1977 tax return was filed in 1978.
    Accordingly, we disregard the stipulation on this point.

[^16]: ^7^ A subchapter S corporation shareholder is to treat dividend
    distributions as long-term capital gain to the extent of the
    shareholder\'s pro rata share of the corporation\'s net capital gain
    for the year. Sec. 1375(a)(1). The Subchapter S Revision Act of 1982
    (Pub. L. 97-354, 96 Stat. 1669) substantially changed the structure
    of the treatment of distributions to shareholders of subchapter S
    corporations. See current sec. 1368. However, this 1982 Act
    provision does not apply to the instant case.

[^17]: ^13^ Sec. 6013 provides, in pertinent part, as follows:

    SEC. 6013. JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE.

    \(e\) Spouse Relieved of Liability in Certain Cases. \--

    > \(1\) In general. \-- Under regulations prescribed by the
    > Secretary, if \--
    >
    > \(A\) a joint return has been made under this section for a
    > taxable year,
    >
    > \(B\) on such return there is a substantial understatement of tax
    > attributable to grossly erroneous items of one spouse,
    >
    > \(C\) the other spouse establishes that in signing the return he
    > or she did not know, and had no reason to know, that there was
    > such substantial understatement, and
    >
    > \(D\) taking into account all the facts and circumstances, it is
    > inequitable to hold the other spouse liable for the deficiency in
    > tax for such taxable year attributable to such substantial
    > understatement,
    >
    > then the other spouse shall be relieved of liability for tax
    > (including interest, penalties, and other amounts) for such
    > taxable year to the extent such liability is attributable to such
    > substantial understatement.
    >
    > \(2\) Grossly erroneous items. \-- For purposes of this
    > subsection, the term \"grossly erroneous items\" means, with
    > respect to any spouse \--
    >
    > \(A\) any item of gross income attributable to such spouse which
    > is omitted from gross income, and
    >
    > \(B\) any claim of a deduction, credit, or basis by such spouse in
    > an amount for which there is no basis in fact of law.

    \[Although the year before us is 1977, we apply the statute as
    amended in 1984. This is because sec. 424(a) of the Tax Reform Act
    of 1984 (division A of the Deficit Reduction Act of 1984), Pub. L.
    98-369, sec. 424(a), 98 Stat. 494, 801-802, amended sec. 6013(e)
    retroactively to all open years to which the Internal Revenue Code
    of 1954 applies. Sec. 6013(e)(1)(C) is essentially similar to the
    prior law\'s sec. 6013(e)(1)(B).\]

[^18]: ^15^ Petitioners did not raise arguments as to whether Margaret
    was an innocent spouse as to the \$ 1,835 of omitted interest income
    or the \$ 3,200 attributable to excess itemized deductions. Innocent
    spouse status thus is unavailable as to the deficiency attributable
    to these items.

[^19]: ^20^ Before the enactment of the retroactive amendments by the
    Tax Reform Act of 1984. Sec. 6013(e) provided, in pertinent part, as
    follows:

    SEC. 6013. JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE.

    \(e\) Spouse Relieved of Liability in Certain Cases. \--

    \(1\) In General. \-- Under regulations prescribed by the Secretary,
    if \--

    > \(A\) a joint return has been made under this section for a
    > taxable year and on such return there was omitted from gross
    > income an amount properly includable therein which is attributable
    > to one spouse and which is in excess of 25 percent of the amount
    > of gross income stated in the return,
    >
    > \(B\) the other spouse establishes that in signing the return he
    > or she did not know of, and had no reason to know of, such
    > omission, and
    >
    > \(C\) taking into account whether or not the other spouse
    > significantly benefitted directly or indirectly from the items
    > omitted from gross income and taking into account all other facts
    > and circumstances, it is inequitable to hold the other spouse
    > liable for the deficiency in tax for such taxable year
    > attributable to such omission,
    >
    > then the other spouse shall be relieved of liability for tax
    > (including interest, penalties, and other amounts) for such
    > taxable year to the extent that such liability is attributable to
    > such omission from gross income.
    >
    > \(2\) Special rules. \-- For purposes of paragraph (1) \--
    >
    > \(A\) the determination of the spouse to whom items of gross
    > income (other than gross income from property) are attributable
    > shall be made without regard to community property laws, and

    \(B\) the amount omitted from gross income shall be determined in
    the manner provided by section 6501(e)(1)(A).

[^20]: ^22^ For a brief history of the development of joint and several
    liability as \"the price one must pay for the privilege of filing a
    joint return\", see *Pesch v. Commissioner, 78 T.C. 100, 129-130
    (1982).*

[^21]: ^23^ Oddly, when the Congress provided to the innocent spouse
    relief from the burdens of the joint tax return, it did not remove
    from the \"noninnocent spouse\" the benefits of the joint tax
    return. Thus, if spouse A were to provide all the income subject to
    tax, if spouse B had only tax-exempt income (e.g., under sec. 103)
    and paid for substantial itemized deductible items (contributions,
    home mortgage interest, etc.) out of that exempt income and if B
    were relieved of all tax liability under the innocent spouse
    provisions, then A apparently would be allowed to retain the
    benefits of deducting B\'s expenditures against A\'s income as well
    as the benefits of joint tax return tax rates (rather than the rates
    applicable to married people filing separately).

[^22]: Four other circuits have adopted the Price test in the case of
    erroneous items due to overstated deductions or credits. [Hayman v.
    Commissioner]{.underline}, 992 F. 2d 1256 (2d Cir. 1993); [Park v.
    Commissioner]{.underline}, 25 F. 3d 1289 (5^th^ Cir. 1994); [Resser
    v. Commissioner]{.underline}, 74 F. 3d 1528 (7^th^ Cir. 1996);
    [Erdahl v. Commissioner]{.underline}, 930 F. 2d 585 (8^th^ Cir.
    1991)

[^23]: Section 6015(f) which provides for equitable relief does not
    contain any statutory limitation on the period for requesting
    relief. Some have questioned whether equitable relief is therefore
    not subject to a statute of limitations. However, the IRS through
    its regulations and the Tax Court has determined that equitable
    relief under section 6015(f) is subject to the same period of
    limitations.

[^24]: ^1^ Berke threatened, *inter alia*, to kill petitioner, to break
    her legs, and to have her committed to a mental institution

[^25]: ^2^ According to Wilbur Brett, the physician who treated
    petitioner for this condition, migraine is a very severe headache,
    usually involving only one side of the head, and often accompanied
    by nausea, vomiting, visual disturbances, and/or faintness; the
    condition is psychosomatic, i.e., caused or aggravated by emotional
    stress.

[^26]: ^3^ Stewart described paranoia as a mental disorder in which the
    individual\'s picture of the world becomes stronger to him than
    reality; such an individual is dangerous to society because he is
    amoral, and will use any means to force a person or thing to fit his
    idea of what it should be. According to Stewart, a psychopathic
    personality with strong paranoid tendencies is a mentally disturbed
    person who might, under stress, develop complete paranoia and who
    thus is potentially dangerous.

[^27]: ^5^ In *Furnish v. Commissioner, 262 F. 2d 727* (C.A. 9, 1958),
    remanding *29 T.C. 279 (1957),* the court cited an 1868 decision of
    the Supreme Court of the United States and Corpus Juris Secundum, as
    well as a number of California cases, in its attempt to set forth
    the law of duress. The court did not expressly consider what law
    should be applied, nor can the decision be read as implicitly
    holding that California law applied. In fact, the Court of Appeals
    remanded the case for redetermination of the question of duress
    \"under the modern law,\" presumably the rule expressed in the
    court\'s quotation from Corpus Juris Secundum. See *262 F. 2d at
    733-734.*

[^28]: ^^ Regulations under new section 6015 refer to duress. \[cite\]

[^29]: ^8^ The idea that no legal consequences should attach to an
    involuntary act has also produced, *inter alia*, the defense of
    duress in criminal law, see 22 C.J.S., Criminal Law sec. 44, the
    need for a voluntary act to establish tort liability, see Prosser,
    Torts, secs. 7, 8, pp. 30-31 (3d ed. 1964), and the tort law concept
    of duress, see Prosser, *supra* at sec. 18, pp. 107-108.

[^30]: ^10^ Petitioner asserts that the New York law on duress is the
    same as the modern rule referred to in *Furnish*. However, the cases
    cited by petitioner fall far short of establishing this assertion;
    nor were we able to find any such cases. On the other hand, there
    does not appear to be any New York case rejecting this so-called
    modern rule. The difficulty in determining the law of a given
    jurisdiction is another factor indicating the undesirability of
    strictly applying local law, although it is not of itself entitled
    to much, if any, weight.

[^31]: ^11^ In the absence of artificial rules, a determination that the
    pressure applied in a given case was not great enough to overcome
    the signer\'s will to resist would logically lead to the conclusion
    that the signature was in fact voluntary.

[^32]: ^12^ These cases certainly should not be viewed as establishing a
    Federal common law of duress.

[^33]: ^15^ This factor distinguishes the instant case from *Ethel S.
    Hickey, T.C. Memo. 1955-149,* cited by petitioner. In any event, the
    Court in *Hickey* does not appear to have considered whether the
    taxpayer would have signed the return even if her husband\'s doctor
    had not advised her to comply with his wishes.

[^34]: ^16^ In view of petitioner\'s failure to prove *any* reluctance
    to sign the returns, we need not consider whether or not proof of
    pressure which overcomes an *unreasoned* or *irrational* opposition
    to signing could as a matter of law be sufficient proof of
    involuntariness. Compare *Irving S. Federbush, 34 T.C. at 757-758,*
    where the Court found that the wife\'s refusal to sign the 1944
    return was for reasons not related to the filing of the return, then
    went on to hold the return to be joint, even though the husband
    signed the wife\'s name after she had refused to sign; she did not
    intend the return to be different from other joint returns she had
    signed. See also *Estate of Merlin H. Aylesworth, 24 T.C. 134,
    145-146 (1955).*

[^35]: ^17^ While the record discloses a definite worsening of relations
    between petitioner and Berke in 1952, there is no evidence that
    petitioner\'s state of mind when signing the returns was different
    in the period 1952-56 than it was in the period 1948-51.

[^36]: ^18^ Petitioner reaffirmed the truth of this allegation in her
    testimony herein, but she did not elaborate upon it.

[^37]: ^19^ The absence of any explicit assertion, in the reply
    affidavit, of petitioner\'s unwillingness to sign the tax returns is
    to be contrasted with the allegations in petitioner\'s original
    affidavit (in the separation action) to the effect that Berke often
    forced his sexual attentions upon petitioner against her will.

[^38]: ^1^ Both Thurston and Lola Brown signed the income tax returns
    filed for the years 1956 through 1959. A notice of deficiency was
    sent to both of them on Mar. 23, 1965, and a joint petition was
    filed with the Court on June 18, 1965. After answering the petition,
    respondent filed on Feb. 4, 1966, a motion to dismiss the petition
    as to E. Thurston Brown for lack of jurisdiction on the ground that
    he had been adjudicated a bankrupt on Mar. 31, 1965, by the U.S.
    District Court for the Northern District of Georgia, Atlanta
    Division. See sec. 6871(b), I.R.C. 1954. The motion to dismiss was
    granted by the Court on Mar. 2, 1966. The income taxes and additions
    to tax involved herein have been assessed against E. Thurston Brown,
    a notice of lien filed, and a notice of claim filed in the
    bankruptcy proceeding. On June 30, 1965, a discharge of the bankrupt
    was ordered by the referee in bankruptcy. Since Federal tax claims
    are not debts affected by a discharge in bankruptcy, *11 U.S.C. sec
    35,* the tax assessments against E. Thurston Brown are still
    outstanding and collectable from his real or personal property. Thus
    respondent is not left without recourse against E. Thurston Brown.

[^39]: ^1^ Half of this amount or \$1,222 is an allowable deduction

    for self-employment tax.

[^40]: ^2^ The record does not reveal any breakdown of the portion

    of the medical expense deduction attributable to petitioner or

    Ms. Moore.

[^41]: ^3^ Secs. 1.6015-2 and 1.6015-3, Income Tax Regs., do not apply
    to the present case because petitioner's request for relief was
    filed before the regulation's effective date of July 18, 2002. See
    sec. 1.6015-9, Income Tax Regs. Nevertheless, application of those
    regulations to the present case would yield the same result, that
    is, petitioner did not know or have reason to know of the
    understatement of tax attributable to the Schedule C deductions of
    Wee Ones Child Care.

[^42]: ^1^ The amounts rolled over into the qualified account (\$
    42,183) and deposited in the joint checking account (\$ 184,377)
    account for only \$ 226,560 of the retirement distributions. The
    unaccounted-for remainder (\$ 3364), although mysterious, is not
    significant enough to affect our analysis of the case.

[^43]: ^2^ This number corresponds to the amount of the lump sum
    distribution and excludes the LESOP, ESOP, and savings plan
    distributions.

[^44]: ^7^ Section 6015(c)(3)(C) provides:

    If the Secretary demonstrates that an individual making an election
    under this subsection 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 under subsection (d), such election shall not apply to
    such deficiency (or portion).

[^45]: ^9^ Relief under the former innocent spouse statute, § 6013(e),
    was difficult to obtain, so Congress repealed § 6013(e) and enacted
    a new provision, § 6015, in 1998. See S. REP. NO. 105-174, at 55
    (1998); H.R. REP. NO. 105-364(I), at 61 (1998). New § 6015(b)(1)
    provides similar relief to that available under former § 6013(e).
    New § 6015(c) and (f), however, are new forms of relief.

[^46]: ^10^ See supra note 4 for complete text of [26 U.S.C.
    6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=61&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=27e8564edf8d083580d8caedfe481b47)
    (b)(1).

[^47]: ^11^ See supra note 5 for complete text of [26 U.S.C.
    6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=62&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=46e430916edc42abe442819433d79703)
    (c)(1).

[^48]: ^12^ See supra note 7 for complete text of [26 U.S.C.
    6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=63&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=c6d78d2543c57f94837de3fcb05eaa83)
    (c)(3)(C).

[^49]: ^13^ See supra note 6 for complete text of [26 U.S.C.
    6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=65&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=9b556418853468be44796a081a4475f5)
    (f).

[^50]: ^21^ See supra note 5 for complete text of [26 U.S.C.
    6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=97&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=9a2dc92b357ba30d35c26ae13d3eefaa)
    (c)(1).

[^51]: ^22^ See supra note 7 for complete text of [26 U.S.C.
    6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=98&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=903aa24056a5b45adca154e408e24dbd)
    (c)(3)(C).

[^52]: ^23^ See supra note 4 for the complete text of [26 U.S.C. §
    6015](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=99&_butInline=1&_butinfo=26 USC 6015&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=897903dcb2dfb9a3b5aefcd90a1492be)
    (b)(1).

[^53]: ^24^ Section 6015(d)(4) provides:

    If an item of deduction or credit is disallowed in its entirety
    solely because a separate return is filed, such disallowance shall
    be disregarded and the item shall be computed as if a joint return
    had been filed and then allocated between the spouses appropriately.
    A similar rule shall apply for purposes of section 86.

[^54]: ^25^ This determination is in line with an unpublished Ninth
    Circuit opinion holding that the taxpayer\'s \"actual knowledge of
    items of income that were unreported\" precluded relief under §
    6015(c) even though the taxpayer had no knowledge that the tax
    return was incorrect. [Wiksell v. Comm\'r, 2000 U.S. App. LEXIS
    5857,](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=108&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B2000 U.S. App. LEXIS 5857%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=e0c1a2a800caa2034cbe69b3c3493608)
    No. 99-70643, 2000 WL 340130, at \*2 (9th Cir. Mar. 28, 2000)
    (unpublished).

[^55]: ^26^ Contrary to Appellant\'s contention, the Tax Court\'s
    interpretation of § 6015(c) does not ignore its remedial nature by
    improperly substituting the knowledge requirement from §
    6015(b)(1)(C) (and former § 6013(e)(1)(C)) for the stricter
    knowledge requirement of § 6015(c)(3)(C). The knowledge standard of
    § 6015(c)(3)(C) requires \"actual knowledge.\" The Tax Court
    interpreted this to mean \"actual and clear awareness . . . of the
    existence of an item.\" [**[Cheshire, 115 T.C. at
    195.]{.underline}**](http://www.lexis.com/research/buttonTFLink?_m=79caa0694d4ea3f7d4c16014720bb012&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B282 F.3d 326%5D%5D><%2Fcite>&_butType=3&_butStat=2&_butNum=112&_butInline=1&_butinfo=<cite cc%3D"USA"><!%5BCDATA%5B115 T.C. 183%2Cat 195%5D%5D><%2Fcite>&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVlb-zSkAB&_md5=e610679dea9fdeb86c4a613adbb3bd4d)
    Unlike former § 6013(e)(1)(C) and current § 6015(b)(1)(C), a mere
    \"reason to know\" is not enough to preclude tax relief under §
    6015(c).

[^56]: ^1^ Unless otherwise noted, all section references are to the
    Internal Revenue Code as currently in effect, and Rule references
    are to the Tax Court Rules of Practice and Procedure.

[^57]: ^2^ Petitioner did not file a reply brief. As a result,
    petitioner has failed to set forth objections to respondent\'s
    proposed findings of fact. See Rule 151(e)(3). Accordingly, we
    conclude that petitioner concedes that respondent\'s proposed
    findings of fact are correct except to the extent that petitioner\'s
    findings of fact are clearly inconsistent therewith. See *Jonson v.
    Commissioner*, 118 T.C. 106, 108 n.4 (2002), affd. 353 F.3d 1181
    (10th Cir. 2003).

[^58]: ^3^ The record does not indicate whether petitioner has
    grandchildren.

[^59]: ^4^ A taxpayer may also request relief from joint and several
    liability on a joint return in a petition for review of a lien or
    levy action. See [secs. 6320(c) LK:NON: IRC-FILE
    S6320(C)]{.underline} , [6330(c)(2)(A)(i) LK:NON: IRC-FILE
    S6330(C)(2)(A)(I)]{.underline} ; *Maier v. Commissioner*, 119 T.C.
    267, 271 (2002), affd. 93 AFTR2d 2002-1139 (2d Cir 2004).

[^60]: ^5^ Under [sec. 6015(b)(1)(D) LK:NON: IRC-FILE
    S6015(B)(1)(D)]{.underline} , an individual who signed a joint
    return with another individual and who is seeking innocent spouse
    relief must show that "taking into account all the facts and
    circumstances, it is inequitable to hold \* \* \* \[such\]
    individual liable for the deficiency in tax \* \* \* attributable to
    \* \* \* \[the other individual\'s\] understatement". Similarly, an
    individual taxpayer may seek relief pursuant to [sec. 6015(c)(1)
    LK:NON: IRC-FILE S6015(C)(1)]{.underline} for an "individual\'s
    liability for any deficiency which is assessed with respect to the
    return".

[^61]: ^6^ [Rev. Proc. 2003-61 LK:NON: TPC-RUL
    REVPROC2003-61]{.underline} , 2003-32 I.R.B. 296, 299, eliminates
    the window period restriction on refunds of paid amounts and
    generally provides that a requesting spouse is eligible for a refund
    of tax payments made after July 22, 1998, "if the requesting spouse
    establishes that he or she provided the funds used to make the
    payment for which he or she seeks a refund". It also must be shown
    that the payments were not made with the joint return and were not
    joint payments or payments that the nonrequesting spouse made.
    Therefore, it appears that petitioner would be eligible to seek a
    refund of her tax payment under [Rev. Proc. 2003-61 LK:NON: TPC-RUL
    REVPROC2003-61]{.underline} , were it applicable. It further appears
    that, on the basis of our conclusion in *Washington v.
    Commissioner*, 120 T.C. 137, 158-159 (2003), that the term "unpaid
    tax" in [sec. 6015(f)(1) LK:NON: IRC-FILE S6015(F)(1)]{.underline}
    refers to tax reported on a return but not paid with the return
    rather than to amounts remaining unpaid when [sec. 6015(f) LK:NON:
    IRC-FILE S6015(F)]{.underline} relief is requested, respondent has
    abandoned the window period requirement of sec. 4.01 of [Rev. Proc.
    2000-15 LK:NON: TPC-RUL REVPROC2000-15]{.underline} , even for tax
    years covered by that revenue procedure. See *Ziegler v.
    Commissioner*, T.C. Memo. 2003-282.

[^62]: ^7^ In one case, the reciprocal circumstances are that "\[t\]he
    nonrequesting spouse has a legal obligation pursuant to a divorce
    decree or agreement to pay the outstanding liability" (positive) or,
    conversely, that the requesting spouse bears that obligation
    (negative). If neither spouse bears that obligation, the resulting
    absence of the factor is necessarily neutral.

[^63]: ^8^ [Rev. Proc. 2000-15 LK:NON: TPC-RUL
    REVPROC2000-15]{.underline} , sec. 4.02(1)(c), 2000-1 C.B. at 448,
    provides, in pertinent part, that "the determination of whether a
    requesting spouse will suffer economic hardship \* \* \* will be
    based on rules similar to those provided in sec. 301.6343-1(b)(4) of
    the Regulations on Procedure and Administration."

[^64]: ^9^ See *Mysse v. Commissioner*, 57 T.C. 680, 699 (1972), in
    which we stated that, where there is an inability to trace
    unreported funds attributable to one spouse, the benefit to the
    other spouse cannot constitute more than ordinary support, which
    means that the latter did not significantly benefit from the funds.

[^65]: ^10^ See H. Conf. Rept. 105-599, at 252 n.16 (1988), 1998-3 C.B.
    747, 1006, wherein the conferees, in discussing the eligibility
    requirements for the [sec. 6015(c) LK:NON: IRC-FILE
    S6015(C)]{.underline} separate liability election, state that "a
    taxpayer is no longer married if he or she is widowed." See [sec.
    6015(c)(3)(A)(i)(I) LK:NON: IRC-FILE
    S6015(C)(3)(A)(I)(I)]{.underline} (an individual is generally
    eligible to elect relief under [sec. 6015(c)(1) LK:NON: IRC-FILE
    S6015(C)(1)]{.underline} if "such individual is no longer married
    to, or is legally separated from, the individual with whom such
    individual filed the joint return to which the election relates").
    We see no reason why widows should not similarly be treated as
    separated or divorced from the nonrequesting spouse for purposes of
    [Rev. Proc. 2000-15 LK:NON: TPC-RUL REVPROC2000-15]{.underline} ,
    sec. 4.03(1)(a). Cf. *Jonson v. Commissioner*, 118 T.C. 106, 124
    (2002) (decedent spouse\'s marital status for purposes of [sec.
    6015(c)(3)(A)(i) LK:NON: IRC-FILE S6015(C)(3)(A)(I)]{.underline}
    determined at the time of death), affd. 353 F.3d 1181 (10th Cir.
    2003).

[^66]: ^11^ Cases interpreting former [sec. 6013(e) LK:NON: IRC-FILE
    S6013(E)]{.underline} remain instructive to an analysis of [sec.
    6015(b)(1)(D) LK:NON: IRC-FILE S6015(B)(1)(D)]{.underline} , *Jonson
    v. Commissioner*, *supra*, and the equitable factors we consider
    under [sec. 6015(b)(1)(D) LK:NON: IRC-FILE
    S6015(B)(1)(D)]{.underline} are the same equitable factors we
    consider under [sec. 6015(f) LK:NON: IRC-FILE S6015(F)]{.underline}
    , *Alt v. Commissioner*, 119 T.C. 306, 316 (2002).

[^67]: ^2^ 2Respondent filed a motion to dismiss this case for lack of
    jurisdiction in which he contended that the Tax Court did not have
    jurisdiction to review respondent's denial of relief under sec.
    6015(f) in nondeficiency cases. However, in response to an order to
    show cause dated Jan. 5, 2007, respondent concedes that the Tax
    Relief and Health Care Act of 2006, Pub. L. 109-432, div. C, sec.
    408(a), (c), 120 Stat. 3061, 3062, amended sec.

    6015(e)(1) to confer jurisdiction on the Court over stand-alone
    requests for equitable relief under sec. 6015(f), effective for tax
    liabilities arising or remaining unpaid on or after Dec. 20, 2006,
    and requests that his motion to dismiss for lack of jurisdiction be
    denied. An appropriate order denying the motion will be issued in
    accordance with respondent's request.

[^68]: ^3^ The original tax return filed with the Internal Revenue
    Service (IRS) did not contain the signature page. Petitioner and Mr.
    Parker subsequently filed a document confirming that they had signed
    the return.