T.C. Memo. 2010-242

UNITED STATES TAX COURT

TONI LYNETTE KNIGHT, Petitioner,

AND ROBERT KNIGHT, Intervenor v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15590-08. Filed November 2, 2010.

Toni Lynette Knight, pro se.

Peter C. Pappas, for intervenor.

Jeffrey S. Luechtefeld, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, Judge: This case is before us to review the denial

by respondent’s Appeals Office (Appeals) of petitioner’s request

for relief from joint and several liability for 2002 and 2003. 

Petitioner requested relief under subsections (b), (c), and (f)
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of section 6015.1 Respondent now concedes that petitioner is

entitled to relief for those years under section 6015(c).2

Intervenor, petitioner’s husband during the years in issue,

objects that petitioner does not qualify for relief under

subsection (c) because, when she signed the returns, petitioner

had “actual knowledge” of the items giving rise to the

deficiencies. See sec. 6015(c)(3)(C).

FINDINGS OF FACT

Introduction

The stipulation of facts consists of three paragraphs. The

first states that, when she filed the petition, petitioner

resided in Florida. The second states that Exhibit 1 is a copy

of the notice of determination that, in March 2008, Appeals

mailed petitioner denying her relief under section 6015(b), (c),

and (f). The third states that Exhibit 2 is a copy of the

administrative record that the Appeals officer used to make the

determination. The stipulation of facts, with accompanying

exhibits, is incorporated herein by this reference.

1Unless otherwise stated, section references are to the

Internal Revenue Code, and Rule references are to the Tax Court

Rules of Practice and Procedure. We round all dollar amounts to

the nearest dollar.

2Respondent, however, continues to deny that petitioner is

entitled to relief under sec. 6015(b) and (f). Because we find

that petitioner is entitled to complete relief under sec.

6015(c), we need not discuss sec. 6015(b) and (f).
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Only respondent filed a brief in this case; both petitioner

and intervenor expressly decided not to do so. Accordingly, we

must conclude that petitioner and intervenor concede that

respondent’s proposed findings of fact are correct except to the

extent that those findings are clearly inconsistent with the

evidence in the record. See, e.g., Estate of Freeman v.

Commissioner, T.C. Memo. 1996-372.

Business Expenses

Petitioner and intervenor married in 1997, separated in

2004, and divorced in 2006. In 2002 and 2003 intervenor operated

a bar and grill owned by his grandmother (Sports Inn). Both

petitioner and intervenor had full-time jobs; they worked at

Sports Inn at night and on weekends. Intervenor ran the

business; petitioner assisted him by ordering beer and wine from

distributors and waiting on patrons. Only intervenor, however,

had signatory authority over the business bank account. In 2002

and 2003 Sports Inn was losing money. As a result, intervenor

sometimes needed to pay business expenses from the couple’s joint

personal checking account. Petitioner knew that Sports Inn was

losing money and that intervenor sometimes paid its expenses from

their joint personal checking account. 

Intervenor maintained all the records for Sports Inn. 

Before filing the 2002 and 2003 joint returns intervenor

summarized the records (that is, listed the totals of all
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revenues and expenses) in a spreadsheet on a single piece of

paper. Petitioner did not assist intervenor in preparing the

spreadsheet. Once intervenor had completed the spreadsheet and

collected other necessary tax documents (e.g., the couple’s Forms

W-2, Wage and Tax Statement), he placed that information in a

folder. He showed petitioner the folder and gave her a chance to

review it. Intervenor did not discuss the business items with

petitioner in detail; indeed, he did not tell her that he had no

receipts for some of the expenses in the spreadsheet. He then

took the folder to H&R Block to have their joint return prepared. 

Intervenor remained at H&R Block while the return was completed;

later, petitioner went to H&R Block to sign it. 

The 2002 and 2003 Joint Federal Income Tax Returns

In 2002 and 2003 petitioner and intervenor filed joint

Federal income tax returns claiming refunds. Petitioner and

intervenor deposited those refunds into their joint personal

checking account. In a subsequent examination of those returns,

respondent disallowed unsubstantiated business expenses related

to Sports Inn, including rent expenses and entertainment

expenses. For 2002 and 2003 respondent disallowed total expenses

of $42,011 and $37,407, respectively. Respondent made certain

other adjustments, including automatic adjustments. Taking

account of all of the adjustments, respondent determined

deficiencies in tax of $18,418 and $12,988 for 2002 and 2003,
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respectively. In May 2006 petitioner and intervenor signed a

Form 870, Waiver of Restrictions on Assessment and Collection of

Deficiency in Tax and Acceptance of Overassessment, and agreed to

the proposed adjustments and additional assessments of Federal

income tax for 2002 and 2003. 

OPINION

I. Introduction

Spouses who file joint returns are jointly and severally

liable for the tax owed. See sec. 6013(d)(3). Section 6015

provides three ways out of that liability. See sec. 6015(b),

(c), and (f). To qualify for relief under section 6015(c), the

requesting spouse must satisfy various requirements,3 none of

which is in issue. If, however, the Commissioner convinces us

that the requesting spouse had “actual knowledge” at the time she

signed the return of the items giving rise to the deficiencies,

then we will deny relief. See sec. 6015(c)(3)(C). The

3Sec. 6015(d)(3)(A) allocates the items giving rise to the

deficiency as if the spouses had filed separate returns if,

pursuant to sec. 6015(c), the requesting spouse shows that:

(1) the spouses made a joint return;

(2) when the requesting spouse elected to seek relief, the

spouses were legally separated, divorced, or had not been members

of the same household at any time during the previous 12 months;

(3) the requesting spouse elected to seek relief after the

Commissioner asserted a deficiency but no later than 2 years

after the start of collection activities; and

(4) the deficiency remains unpaid.
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nonrequesting spouse may become a party to the action for

redetermination of relief from joint and several liability. See

sec. 6015(e)(4); Rule 325. 

Respondent, however, concedes that petitioner is entitled to

relief under section 6015(c). Intervenor, relying on the “actual

knowledge” exception in section 6015(c)(3)(C), objects. Because

respondent, who otherwise would bear the burden of proving that

exception applies, concedes he cannot do so, there is the

question of whether that burden shifts to intervenor. See

Stergios v. Commissioner, T.C. Memo. 2009-15. As in Stergios,

however, we need not answer that question today because the

parties introduced sufficient evidence so that we can decide the

issue by a preponderance of the evidence.

II. Analysis

The only question is whether, when she signed the 2002 and

2003 joint returns, petitioner knew of any items giving rise to

the deficiencies. Under section 6015(c)(3)(C), we look for “an

actual and clear awareness (as opposed to reason to know) of the

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

Cheshire v. Commissioner, 115 T.C. 183, 195 (2000), affd. 282

F.3d 326 (5th Cir. 2002). Section 1.6015-3(c), Income Tax Regs.,

describes, given a specific class of item, what the Commissioner

must show that the requesting spouse knew. All of the items

giving rise to the deficiencies here were deductions disallowed
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for lack of substantiation. For fictitious or inflated

deductions, the Commissioner must show that the requesting spouse

knew “that the expenditure was not incurred, or not incurred to

that extent.” Sec. 1.6015-3(c)(2)(i)(B)(2), Income Tax Regs.

Because no party alleges that the relevant facts are

different for the 2 years in issue, we shall consider 2002 and

2003 together. We find that petitioner did not know that any

items giving rise to the deficiencies were not incurred or, if

incurred, could not be substantiated. Our reasons are as

follows.

Intervenor kept the records for Sports Inn; he summarized

the information from those records on a spreadsheet, and he

presented petitioner with only his summary of those records. He

did not review his summary with petitioner in any detail, and he

did not tell petitioner that, with respect to certain expenses,

he had no receipts. Petitioner had no role in the management of

Sports Inn. She did not have signatory authority over the

business bank account, and she was not involved in maintaining

the business records. She gave the returns in question only a

cursory review. With respect to rent, intervenor testified that

he paid his grandmother pursuant to a “family agreement”. (Given

that intervenor had no canceled checks to substantiate the rent

expenses, we presume he paid his grandmother in cash.) 

Petitioner testified credibly that she believed that he was
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paying rent. With respect to entertainment expenses, intervenor

testified that he paid the “live musical bands * * * in cash” but

lacked substantiation. We are convinced that, whatever review

petitioner gave to the 2002 and 2003 joint income tax returns,

she had no knowledge of the lack of substantiation for band or

any other expenses.

III. Conclusion

We shall grant petitioner relief from joint and several

liability for 2002 and 2003 under section 6015(c).

Decision will be entered

for petitioner.