                        T.C. Memo. 2009-237



                      UNITED STATES TAX COURT



                  OWEN E. SMITH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16708-07.               Filed October 19, 2009.



     Owen E. Smith, pro se.

     Dennis R. Onnen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   This case arises under section 60151 from

petitioner’s request for relief from joint and several liability


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
are rounded to the nearest dollar.
                                  -2-

for unpaid Federal income tax liabilities for 2001, 2002, 2003,

and 2004 (years at issue).     Respondent determined petitioner was

not entitled to relief.     The issue for decision is whether

petitioner is entitled to relief from joint and several liability

pursuant to section 6015(b) or, in the alternative, under section

6015(f).    As explained herein, we find petitioner is not entitled

to relief under either subsection (b) or subsection (f).

                           FINDINGS OF FACT

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

The stipulation of facts, together with the attached exhibits, is

incorporated herein by this reference.    At the time he filed his

petition, petitioner resided in Missouri.

Personal Background

     Petitioner graduated from Central High School in Kansas

City, Missouri, and did not pursue further education.     He served

a 5-year apprenticeship as a plumber and later became a pipe

fitter for General Motors.     In 1977 he took an income tax

preparation course from H & R Block and prepared tax returns for

them for 2 years.     In 1996 petitioner began working for the

Internal Revenue Service (IRS) as a GS-3 tax examiner.     In 1999

petitioner became an IRS customer service representative and

assisted taxpayers who had questions regarding their tax

accounts.    For the past 3 years petitioner served as a full-time

union representative within the IRS.
                                 -3-

     Petitioner married Tressie M. Lyman-Smith (Ms. Lyman) in

1999.    Before and during her marriage to petitioner, Ms. Lyman

owned and operated a restaurant known as Steak’M Take’M, with

which petitioner had no involvement.    However, petitioner

prepared the couple’s joint income tax returns, including the

Schedules C, Profit or Loss From Business, for Ms. Lyman’s

restaurant operations for each of the years at issue using

figures Ms. Lyman gave him.    The losses reported on Schedules C

for 2001, 2002, and 2003 were $35,593, $32,662, $23,570,

respectively, and the couple reported a $7,214 profit on Schedule

C for 2004.

     Before the years at issue, petitioner opened bank accounts

at a local credit union in which he deposited his individual

earnings.    In 2000 or 2001 petitioner gave Ms. Lyman signature

authority for his accounts, and Ms. Lyman placed her separate

restaurant deposits for 2001 and 2002 therein.    On June 3, 2003,

Ms. Lyman opened separate accounts yet continued to place the

bulk of her business deposits into the couple’s joint accounts.2

Notice of Deficiency and Procedural Background

     On April 24, 2007, respondent issued a notice of deficiency

to petitioner and Ms. Lyman.    In the notice of deficiency

respondent reconstructed Schedule C gross receipts using the bank


     2
      During 2003 and 2004 Ms. Lyman deposited 88 percent of her
business deposits into the joint accounts and the other 12
percent in her separate accounts.
                                -4-

deposits and cash expenditures method and determined there were

omissions of gross receipts for 2001, 2002, 2003, and 2004 of

$42,454, $48,305, $70,784, and $19,212, respectively.

     Ms. Lyman filed a separate Tax Court petition at docket No.

16661-07 in response to the notice of deficiency.   As a result of

the documentation provided in that case, the proposed

deficiencies were reduced and the accuracy-related penalty under

section 6662 was substituted for the fraud penalty under section

6663 for each year.   The revised deficiencies for 2001, 2002,

2003, and 2004 are $5,450, $12,228, $7,747, and $4,789,

respectively, and the penalties under section 6662 for 2001,

2002, 2003, and 2004 are $1,090, $2,334, $1,533, and $954.40,

respectively.   The revised deficiency figures are based almost

entirely on unreported Schedule C gross receipts for 2001, 2002,

2003, and 2004 of $42,454, $48,305, $40,122, and $17,000,

respectively.

                              OPINION

     When a husband and wife file a joint Federal income tax

return, they are jointly and severally liable for the amount of

tax shown on the return or found to be owed.   Sec. 6013(d)(3);

Butler v. Commissioner, 114 T.C. 276, 282 (2000).   However, a

spouse may qualify for relief from joint and several liability

under section 6015(b), (c), or (f) if various requirements are

met. Petitioner and Ms. Lyman were married as of the beginning
                                  -5-

of the trial, disqualifying petitioner from potential relief

under 6015(c).     However, petitioner contends he qualifies for

full relief from joint liability under 6015(b) or, in the

alternative, that he is entitled to equitable relief under

section 6015(f).

     Our jurisdiction to review petitioner’s request for relief

is conferred by section 6015(e), which allows a spouse who has

requested relief from joint and several liability to contest the

Commissioner’s denial of relief by filing a timely petition in

this Court.

I.   Relief From Joint and Several Liability Under Section
     6015(b)

     Section 6015(b)(1) authorizes the Commissioner to grant

relief from joint and several liability for tax (including

interest, penalties, and other amounts) if the taxpayer

requesting relief satisfies each of the following five

requirements of subparagraphs (A) through (E):

             (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 understatement;

          (D) taking into account all the facts and
     circumstances, it is inequitable to hold the other
                                  -6-

     individual liable for the deficiency in tax for such
     taxable year attributable to such understatement; and

          (E) the other individual elects (in such form as
     the Secretary may prescribe) the benefits of this
     subsection not later than the date which is 2 years
     after the date the Secretary has begun collection
     activities with respect to the individual making the
     election * * *

     The five requirements of section 6015(b)(1) are stated in

the conjunctive.   Furthermore, except as provided by section

6015, the requesting spouse bears the burden of proving that he

satisfies each of these five requirements. See Rule 142(a);

Jonson v. Commissioner, 118 T.C. 106, 113 (2002), affd. 353 F.3d

1181 (10th Cir. 2003).   If the requesting spouse fails to meet

any one of the five requirements, he fails to qualify for relief.

Alt v. Commissioner, 119 T.C. 306, 313 (2002), affd. 101 Fed.

Appx. 34 (6th Cir. 2004).

     Respondent does not dispute that petitioner satisfies three

elements of section 6015(b)(1); namely, those regarding the

filing of a joint return, the attribution of an understatement of

tax to an erroneous item of the nonrequesting spouse, and timely

election under section 6015(b)(1)(A), (B), and (E), respectively.

Thus, we consider only whether petitioner satisfies the remaining

two elements of section 6015(b)(1).

     A.   Section 6015(b)(1)(C)

     The first element, section 6015(b)(1)(C), requires that in

signing the return, the individual seeking relief did not know
                                -7-

and had no reason to know of the understatement.3   A requesting

spouse has knowledge or reason to know of an understatement if he

actually knew of the understatement or if a reasonable person in

similar circumstances, at the time he signed the return, could be

expected to know that the return contained an understatement.

Sec. 1.6015-2(c), Income Tax Regs.

     Petitioner has shown that he did not know and had no reason

to know of the understatement attributable to Steak’M Take’M

because he had no control over the restaurant’s finances or

knowledge of its operations.   Consequently, we must decide

whether, on the dates he signed the returns, petitioner had

reason to know that the returns understated the tax liabilities

for those years.

     A requesting spouse is considered to have reason to know in

this context 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.”   Butler v.

Commissioner, supra at 283; see also Park v. Commissioner, 25

F.3d 1289, 1293 (5th Cir. 1994), affg. T.C. Memo. 1993-252.

Hence, the spouse seeking relief may have a duty of inquiry with


     3
      “The requirement in section 6015(b)(1)(C) * * * is
virtually identical to the same requirement of former section
6013(e)(1)(C); therefore, cases interpreting former section
6013(e) remain instructive to our analysis.” Doyel v.
Commissioner, T.C. Memo. 2004-35.
                                   -8-

regard to the return.    Butler v. Commissioner, 114 T.C. at 283-

284.

       This duty of inquiry is a subjective test, and its focus is

on the individual seeking innocent spouse relief.     Id. at 284.

It recognizes that the suspicions of a spouse who is a lawyer or

accountant should be triggered more easily than those of someone

without such training.    Compare Ohrman v. Commissioner, T.C.

Memo. 2003-301 (requesting spouse was a lending officer at two

large banks who controlled the family finances), affd. 157 Fed.

Appx. 997 (9th Cir. 2005), with Pietromonaco v. Commissioner, 3

F.3d 1342, 1345-1347 (9th Cir. 1993) (requesting spouse was stay-

at-home mom with a high school education), revg. T.C. Memo. 1991-

472.    In applying the foregoing “reason to know” standard, the

following factors are considered relevant.

            1.   Education Level

       We note that petitioner’s education ended with high school,

and he never pursued college or coursework in accounting,

finance, or mathematics.    However, petitioner has some

understanding of the income tax system, as evidenced by his

enrollment in a tax preparation course and his preparation of

returns for H & R Block for 2 years.     Furthermore, petitioner has

been an employee of the IRS since 1996 and presumably has had

additional exposure to the tax system.
                                  -9-

           2.     Involvement in Financial Affairs

     Petitioner credibly demonstrated that his involvement in the

family’s financial affairs was negligible.    Ms. Lyman was given

the primary responsibility of managing all living expenses, while

petitioner simply direct-deposited his check and made occasional

purchases with his debit card.    However, petitioner was the

primary account holder on the accounts to which Ms. Lyman

deposited the bulk of her business proceeds for the years at

issue.   Accordingly, petitioner had full access to the monthly

financial statements and could review the proceeds of Ms. Lyman’s

business transactions.

           3.     Large or Lavish Expenses

     The record shows that petitioner made mostly minor purchases

during the years at issue.    The exception is petitioner’s

purchase in 2000 of a used Ford SUV.    However, petitioner

credibly testified that this vehicle was purchased primarily with

insurance proceeds that he received from an auto accident claim

settlement.     The record is devoid of any additional information

regarding potential large or lavish expenses petitioner made

during the years in question.

           4.     Nonrequesting Spouse’s Evasion or Deceit

     The last factor is whether Ms. Lyman was evasive or

deceitful regarding the couple’s finances.    As noted, petitioner

was the primary account holder on most of the accounts in which
                                   -10-

Ms. Lyman made business deposits for the years at issue.       The

record shows that 100 percent of her business deposits in 2001

and 2002 and 88 percent of her business deposits in 2003 and 2004

were made to the accounts in petitioner’s name, with only

marginal amounts being deposited into Ms. Lyman’s separate

accounts.    Consequently, petitioner had access to the accounts

and oversight of the couple’s finances.       Further, petitioner

presents no evidence to show that the deficiency was the result

of concealment or deceit on the part of Ms. Lyman.

            5.   Duty of Inquiry

     Taking all factors into consideration, we must decide

whether a reasonably prudent taxpayer in petitioner’s position

would have had reason to know or a duty to inquire whether income

was omitted from his joint returns.       A spouse may have a duty to

inquire if he or she knows enough facts so as to be placed on

notice of the possibility of a substantial understatement of tax.

Guth v. Commissioner, 897 F.2d 441, 444-445 (9th Cir. 1990),

affg. T.C. Memo. 1987-522.   A joint tax return reporting a large

deduction that significantly reduces a couple’s tax liability

generally puts the taxpayer who joins in filing the return on

notice that the return may contain an understatement.      See Levin

v. Commissioner, T.C. Memo. 1987-67.       Consequently, the

requesting spouse is deemed to have constructive knowledge of the

understatement if she fails to inquire.      See Von Kalinowski v.
                                -11-

Commissioner, T.C. Memo. 2001-21 (requesting spouse found to

possess constructive knowledge of understatement where income of

$370,263 was offset by losses of $228,133).

     Petitioner and Ms. Lyman’s tax returns reported large

deductions that significantly reduced their joint tax liabilities

during the years at issue.    Because petitioner prepared and

signed those returns, he would have noticed the net losses and

resulting deductions repeatedly claimed for Ms. Lyman’s business.

Presumably, such large losses, caused by understated gross

receipts, over a period of years would cause him to question how

he and Ms. Lyman were able to maintain their standard of living.

Consequently, petitioner could be expected to know that the

returns contained understatements, thus raising his duty to

inquire.   See Levin v. Commissioner, supra.

     Petitioner prepared the Schedules C of the returns for the

years at issue by entering the numbers provided by Ms. Lyman.

However, a taxpayer who files a joint return with his spouse may

not turn a blind eye to the return and thereby avoid the duty to

inquire.   Id.; see also McCoy v. Commissioner, 57 T.C. 732, 734

(1972).    Moreover, a taxpayer who prepares a return is not

relieved of the duty to prepare an accurate return if the

taxpayer relies on summarized information provided by the

taxpayer’s spouse when information upon which the summary is
                                -12-

based is available to the taxpayer.    Charlton v. Commissioner,

114 T.C. 333, 340 (2000).

      Petitioner’s testimony indicates that he simply relied on

the numbers Ms. Lyman provided and failed to investigate or

inquire as to their origin or accuracy.    As a result of his

failure to fulfill his duty to inquire, petitioner is deemed to

have constructive knowledge of the understatements on the

returns.    A reasonably prudent person with experience filing a

return would have questioned repeated deductions and net losses

of such magnitude in the absence of a diminished standard of

living.    See, e.g., Mora v. Commissioner, 117 T.C. 279, 289

(2001).    Furthermore, had petitioner investigated the bank

statements for the accounts to which his name was affixed, he

would have noticed that his account balances did not correspond

to the sizable losses he claimed on his return for each of the

years at issue.

     We conclude that petitioner, under the facts and

circumstances of this case, had a duty to inquire regarding the

gross receipts omitted from his returns.    Because he failed to

satisfy his duty of inquiry, we find that he had reason to know

of the understatements of tax under section 6015(b)(1)(C).      See

Id.; Charlton v. Commissioner, supra; Hayman v. Commissioner,

T.C. Memo. 1992-228, affd. 992 F.2d 1256, 1262 (2d Cir. 1993).
                                 -13-

        B.   Section 6015(b)(1)(D)

     The second of the two remaining elements takes into account

all the facts and circumstances in deciding whether it is

inequitable to hold the relief-seeking spouse liable for a

deficiency.    Sec. 6015(b)(1)(D).4     The two material factors most

often cited and considered are whether there has been a

significant benefit to the spouse claiming relief and whether the

failure to report the correct tax liability on the joint return

results from concealment, overreaching, or any other wrongdoing

on the part of the other spouse.      Alt v. Commissioner, 119 T.C.

at 314; Jonson v. Commissioner, 118 T.C. at 119.

     There is no allegation of concealment, overreaching, or any

other wrongdoing on the part of Ms. Lyman.       However, there is

evidence that petitioner benefited substantially from the

omissions of income on the returns.       The overstated losses

generated by Ms. Lyman’s activities completely offset

petitioner’s income in 2001 and 2002 and most of his income in

2003.    Consequently, petitioner and Ms. Lyman received

significant tax refunds during those years.

     We conclude, by a preponderance of the evidence, that it

would not be inequitable to hold petitioner liable for the



     4
      Because this requirement is almost identical to the
requirement of former sec. 6013(e)(1)(D), cases interpreting that
section remain instructive to our analysis. Butler v.
Commissioner, 114 T.C. 276, 283 (2000).
                               -14-

deficiencies for the years at issue.   Thus, we sustain

respondent’s determination denying petitioner relief from joint

and several liability under section 6015(b)(1).

II.   Relief From Joint and Several Liability Under Section
      6015(f)

      Relief may be granted from joint and several liability under

6015(f) 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)”.   This Court has jurisdiction to determine

whether a taxpayer is entitled to equitable relief under section

6015(f).   Sec. 6015(e)(1)(A); see also Farmer v. Commissioner,

T.C. Memo. 2007-74.   Our determination is made in a trial de

novo.   Porter v. Commissioner, 130 T.C. 115, 117 (2008).

      The Commissioner prescribed procedures in Rev. Proc. 2003-

61, 2003-2 C.B. 296, that IRS personnel must use to determine

whether a requesting spouse qualifies for relief under section

6015(f).   Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297,

lists threshold conditions which must be satisfied before the

Commissioner will consider a request for relief under section

6015(f).   Respondent concedes that petitioner meets each of the

threshold conditions.

      Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298, provides

that once the threshold conditions have been satisfied, equitable
                                 -15-

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,

lists several factors that the Commissioner, and ultimately this

Court, may consider in determining whether to grant equitable

relief under section 6015(f).    No single factor is determinative,

all factors are to be considered and weighed appropriately, and

the listing of factors is not intended to be exhaustive.       See

Washington v. Commissioner, 120 T.C. 137, 148 (2003); Jonson v.

Commissioner, supra at 125.     Our analysis of the relevant facts

and circumstances is set forth below.

     A.    Marital Status

     Petitioner and Ms. Lyman were married when petitioner sought

relief.   This factor is neutral.5

     B.    Economic Hardship

     This factor favors relief if payment of the owed taxes would

cause the requesting spouse to suffer economic hardship.       Rev.

Proc. 2003-61, sec. 4.03(2)(a)(ii), 2003-2 C.B. at 298.       The

Commissioner considers the taxpayer to suffer economic hardship

if payment of the tax would prevent the taxpayer from meeting

reasonable basic living expenses.       Sec. 301.6343-1(b)(4)(i),


     5
      In analyzing such factors as the taxpayer’s marital status,
whether the taxpayer would suffer hardship, and whether the
taxpayer has complied with income tax laws in subsequent years,
our inquiry is directed to the taxpayer’s status at the time of
trial.
                               -16-

Proced. & Admin. Regs.; Rev. Proc. 2003-61, sec. 4.02(1)(c),

4.03(2)(a)(ii), 2003-2 C.B. at 298.    As the record does not

indicate that petitioner would experience economic hardship from

paying the tax, this factor favors respondent.

     Petitioner argues that, because he is an IRS employee, he

could lose his employment under the Internal Revenue Service

Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105-206,

sec. 1203(b)(9), 112 Stat. 721.    This section authorizes the

Commissioner to terminate the employment of an IRS employee if

there is a final administrative or judicial determination that

the employee has committed, in the performance of his official

duties, an act or omission described in RRA 1998 section 1203(b),

among which is a “willful understatement of Federal tax

liability, unless such understatement is due to reasonable cause

and not to willful neglect”.   Id. sec. 1203(b)(9).   This Court

has no occasion to decide whether petitioner willfully

understated his tax liabilities within the meaning of RRA 1998

section 1203(b)(9), and he has not called to our attention any

final administrative or judicial determination that he has

committed such an act.   Consequently, we consider his reliance on

RRA 1998 section 1203 misplaced.

     C.   Knowledge or Reason To Know

     With regard to an income tax liability resulting from a

deficiency, we are less likely to grant relief under section
                                 -17-


6015(f) if the requesting spouse knew or had reason to know of

the item giving rise to the deficiency.

     We have already attributed to petitioner constructive

knowledge of the understated gross receipts giving rise to the

tax deficiencies.   See supra p. 12.      Thus, this factor favors

respondent.

     D.   Nonrequesting Spouse’s Legal Obligation To Pay

     We conclude that this factor does not apply because

petitioner and Ms. Lyman are not divorced.      See Ferrarese v.

Commissioner, T.C. Memo. 2002-249; see also Washington v.

Commissioner, supra at 148-149.

     E.   Significant Benefit

     Receipt by the requesting spouse, either directly or

indirectly, of a significant benefit in excess of normal support

from the unpaid liability or the item giving rise to the

deficiency weighs against relief.       Lack of a significant benefit

beyond normal support weighs in favor of relief.      Normal support

is measured by the circumstances of the particular parties.

Estate of Krock v. Commissioner, 93 T.C. 672, 678-679 (1989).

     As discussed previously, we conclude that petitioner

significantly benefited, beyond the receipt of normal support,

from the omission of income and that this factor favors

respondent.   See supra p. 13.
                                 -18-

     F.   Compliance With Income Tax Laws

     Respondent concedes that petitioner has complied with income

tax laws in all subsequent years.       Even for the years at issue,

petitioner promptly filed returns.      This factor favors

petitioner.

     G.   Conclusion

     The only factor favoring relief is that petitioner has

complied with all tax laws.   This factor is strongly outweighed

by petitioner’s failure to show economic hardship, his inability

to demonstrate that he had no reason to know of items giving rise

to the deficiencies, and his failure to show he did not receive a

significant economic benefit.

     On the basis of the above, we find that petitioner has

failed to carry his burden of proving that he is entitled to

relief from joint and several liability under section 6015(f).

In reaching our holdings herein, we have considered all arguments

made, and, to the extent not mentioned above, we conclude that

they are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                                  Decision will be

                                             entered for respondent.
