                        T.C. Memo. 2000-346



                      UNITED STATES TAX COURT



                 EVELYN M. MARTIN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 26555-96.                 Filed November 8, 2000.



     Stephen G. Salley and Anthony J. Scaletta, for petitioner.

     Willie Fortenberry, Jr., for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   Respondent determined deficiencies in and

additions to petitioner’s Federal income tax for the 1986 and

1987 taxable years as follows:
                                   - 2 -



                                       Additions to Tax
                             Sec.            Sec.          Sec.
Year        Deficiency    6651(a)(1)    6653 (a)(1)(A) 6653(a)(1)(B)
                                                             1
1986        $2,707,872     $269,713        $135,394
                                                             1
1987         1,725,692      426,884          86,285
       1
           50 percent of the interest due on the deficiency.

           All section references are to the Internal Revenue Code in

effect for the years under consideration, and all Rule references

are to the Tax Court’s Rules of Practice and Procedure, unless

otherwise indicated.

       The sole issue for consideration is whether petitioner

should be relieved of liability for any portion of the income tax

and additions to tax under the provisions of section 6015.

Entitlement to relief is, in part, dependent upon a taxpayer’s

knowledge about the questioned item(s) at the time of signing a

joint return.

                             FINDINGS OF FACT

       Petitioner and her husband, Glen H. Martin, filed delinquent

joint Federal income tax returns on December 31, 1987, and April

4, 1989, for their 1986 and 1987 tax years, respectively.         At the

time of the filing of her petition, petitioner’s legal residence

was Dallas, Texas.       Petitioner’s husband has been incarcerated in

a Federal penitentiary since 1995.

       Petitioner was born in 1935 in Canada and was one of six

children.       She discontinued her education at age 14 and entered

into a training program with the Royal Bank of Canada.         She
                               - 3 -

worked at the bank for approximately 7 years, advancing from a

mail clerk position to that of a teller and thereafter became an

administrative office manager of a general insurance agency.    In

1961, the insurance agency transferred her to Miami, Florida,

where she met her first husband, married, and had a daughter in

1964.   Shortly thereafter, petitioner divorced her first husband

and returned to the Royal Bank of Canada for a short time.

Following that, she returned to Florida and began to work for

Amicable Life Insurance Co. (Amicable).   Petitioner met Mr.

Martin, a part-time insurance salesman at Amicable, and they were

married in 1968, and petitioner became a full-time housewife with

two additional children born during 1969 and 1973.

     Mr. Martin established a very successful insurance agency,

named “Insurance Agency of America” (IAA), which wrote policies

exclusively for Amicable.   Generally, petitioner’s involvement

with IAA was in the role of supporting Mr. Martin’s career as his

spouse, entertaining business associates, and accompanying Mr.

Martin on agent recruiting trips.

     In September 1981, Mr. Martin formed a Florida corporation

named “Glenn H. Martin and Associates, Inc. d/b/a IAA” and named

himself board chairman, president, and treasurer.    Petitioner was

named vice president and secretary of the corporation.

Petitioner was not involved in the business of IAA, and her

designation as an officer of the corporation was in the nature of
                                 - 4 -

a nominee.   IAA was, in effect, a holding company, with 80.2

percent of the shares in another corporation, Financial Security

Corp. of America, Inc. (FSCA).    Through the end of 1986, Mr.

Martin held 80 percent of the shares of IAA, and the remaining

three shareholders were some of the same people who owned the

19.8 percent of the shares of FSCA that were not held by IAA.          In

turn, FSCA was the parent of eight subsidiary corporations,

including one named Primera Development Corp., Inc. (Primera).

     Mr. Martin had been a high school teacher and coach, earning

extra income by means of part-time insurance sales.       By employing

teacher/coaches, he was very successful in his insurance agency

business and, as of 1984, had 2,500 agents under contract.        In

1984, Amicable was purchased by another insurance company, which

detrimentally affected Mr. Martin and IAA, and, due to

contractual disputes with their agents, a suit was filed against

the purchaser of Amicable.   Mr. Martin began looking for another

insurance company to underwrite his business, and, in 1984, he

acquired Twentieth Century Life Insurance Co. (Life) and made it

a subsidiary of a holding company named Twentieth Century

Financial Corp., Inc. (Financial).       Financial was owned 51

percent by Mr. Martin, and he and petitioner were board members.

Petitioner was a minority shareholder of Financial.       Petitioner

was not involved in the business of Financial, but she did get

involved in public relations, such as charitable projects in
                                - 5 -

connection with the corporation’s public image.    Petitioner was

able to pick up a limited amount of business information from her

participation on the boards of some of the related corporations,

but she was generally not involved in or knowledgeable about the

day-to-day operations or the details of the business of

Financial.

     Mr. Martin’s success in the insurance business permitted the

Martins, during 1975, to build a palatial home in the Sweetwater

Estates subdivision.    From 1975 through 1986, the success and the

quality of the Martins’ lifestyle continued unabated, including

the purchase of Rolls Royce and Lamborghini automobiles, a 60-

foot yacht, several other luxury automobiles, 2 airplanes, 5-

carat and 12-carat diamond rings given to petitioner as gifts by

Mr. Martin, and 4 Rolex watches.   Although the Martins reported

some net Federal income tax losses during the period 1981 through

1986, it was not uncommon for Mr. Martin to receive Forms W-2 for

amounts in excess of $1 million.   The Martins employed several

household staff members and a full-time gardener.    Petitioner was

involved in high profile charitable and political fund raisers

and threw lavish parties at the Martins’ home.    Although

petitioner was a member of several of the corporate boards and

was involved in the publication of Central Florida Magazine,

during the period 1973 through 1987, she was primarily a

housewife and mother.
                                 - 6 -

     Initially, petitioner maintained the Martin family’s

household finances, but after the business growth, Mr. Martin’s

personal business secretary began maintaining the Martin

household and family finances.    For example, petitioner

maintained a checking account to pay routine bills for doctors,

groceries, etc., but Mr. Martin’s personal secretary paid, out of

Mr. Martin’s corporate shareholder accounts, a majority of

household bills, such as those concerning the mortgage, credit

cards, installment loan payments, etc.

     In 1984, Mr. Martin hired Louis J. Hevey, a certified public

accountant, and he became the chief financial officer for all of

Mr. Martin’s businesses.   Mr. Hevey ensured that there was

sufficient cash in the shareholder advance accounts to pay the

Martins’ expenses.   Petitioner did not exercise any control or

direction over Mr. Hevey, and she did not review his records or

discuss finances with him.   The amount of money used by Mr. Hevey

to cover the Martins’ lifestyle remained relatively constant

during 1984-1991, the period Mr. Hevey worked for Mr. Martin.

     During the period under consideration, Life advanced

substantial funds to FSCA.   In 1986, the North Carolina Insurance

Department (NCID) regulators became concerned about the financial

stability of Life and the large volume of loans to FSCA, which

the regulators did not consider to be assets for statutory

accounting purposes.   Without considering the promissory notes
                                - 7 -

for funds due from FSCA, Life would have been “statutorily

insolvent” and/or “impaired” under North Carolina law and thereby

prohibited from underwriting life insurance.

     FSCA was not capable of repayment, and so Mr. Martin and

several advisers, including Mr. Hevey, designed a multistep

transaction to bolster Life’s assets.    Although petitioner was

generally aware    of Mr. Martin’s involvement in a transaction

involving Primera and that the Primera land was involved, she did

not discuss it with Mr. Martin and was not involved or consulted

concerning the structuring or execution of the transaction.    No

cash or property inured to the benefit of or was received by the

Martins due to execution of this transaction.

     Mr. Forness, a certified public accountant who served Mr.

Martin’s business and prepared corporate and individual income

tax returns, assisted in attempting to structure the transaction

to make it appear that Federal tax consequences would be deferred

under section 351.    On December 15, 1986, Mr. Martin, Life, FSCA

and its parent entered into a three-step transaction where the

Primera stock would be contributed to Glen H. Martin and

Associates, Inc. (GHMA), in exchange for 2,400 shares of GHMA

stock.   GHMA would then contribute the Primera stock to FSCA as

paid-in capital.    FSCA, in turn, would sell the Primera shares to

Life in exchange for loan forgiveness and other consideration.

Primera was valued at $22,540,000 as of November 26, 1986, and
                                 - 8 -

its value was, in great part, attributable to real property.

Petitioner did not participate in Mr. Martin’s decision to enter

into this complex transaction.    At a January 30, 1987,

shareholders’ meeting for Financial and attended by petitioner,

Mr. Martin in connection with the above-described transaction

stated   that, on December 31, 1986, the Primera property,

consisting of approximately 196 acres of real estate, had been

sold to Life for $115,000 per acre, or $22,500,000.

     Mr. Forness prepared the 1986 and 1987 Federal income tax

returns reflecting the above-described Primera transaction for

all parties that were involved.    A Form 4797, Sales of Business

Property, attached to the Martins’ 1986 joint Federal income tax

return, reflected that the Primera transaction was subject to

section 351, and therefore no gain was recognized.    Petitioner

now concedes that the Primera transaction should have resulted in

gain and section 351 did not apply to cause nonrecognition.     If

petitioner and Mr. Martin had filed separate returns for 1986,

petitioner would not have been required to report any portion of

the gain from the Primera transaction.

     In addition to the improper section 351 transaction,

respondent made several other adjustments to arrive at

petitioner’s 1986 and 1987 income tax deficiencies, none of which

would have been attributable to petitioner but for her filing a

joint return with Mr. Martin.    Extensions were obtained for
                               - 9 -

filing the 1986 and 1987 joint Federal income tax returns for

petitioner and Mr. Martin, and the returns, ultimately, were not

timely filed.   Mr. Forness did not discuss any position taken on

the Martins’ income tax returns with petitioner, and she was not

in a position to secure records from the various business

entities to prepare the 1986 and 1987 joint returns.   Petitioner

did not receive any Forms W-2, Wage and Tax Statement, for the

period under consideration.   Mr. Forness always presented the

joint Federal income tax returns to Mr. Martin, who in turn

presented them to petitioner for her execution.

     After the Primera transaction, NCID and the insurance

regulatory authorities of two other States, focused on Life’s

financial situation and imposed restrictions.   NCID, during 1987,

ordered that Life sell Primera.   During 1988, Life sold Primera

to a development company for a $33 million promissory note linked

to the real property.   Mr. Martin did not discuss these

difficulties with petitioner, and from 1984 through 1989, there

was no change in her lifestyle, and petitioner believed that she

was a wealthy person.   Although petitioner was generally aware of

the Primera transaction, it was not until a few years after the

years in issue (sometime in 1990) that petitioner became aware of

the tax and insurance-related details and financial problems with

which her husband and family were confronted.
                              - 10 -

     On March 1, 1991, NCID seized Life and declared it

insolvent, relieving Mr. Martin of his position as president of

Life.   Thereafter, the Martins began selling off or losing their

assets to foreclosure in order to pay day-to-day living expenses.

By September 1991, most of the Martins’ assets had either been

repossessed or sold to pay their daily living expenses.     In July

of 1992, the Martins filed a voluntary liquidating bankruptcy.

During 1994, a 33-count criminal indictment was issued against

Mr. Martin and his sister for diverting insurance premiums to

hide them from the NCID regulators.     Mr. Martin was found guilty

on November 27, 1995, following a 3-month trial.     Petitioner

attended the trial each day but was not named as a defendant and

had no knowledge of the diversion.

     As of the time of the trial of this case, petitioner resided

in her children’s homes, had no assets, and was unable to work

due to poor health.   At that time, Mr. Martin remained

incarcerated, with his prison term to conclude in 2006, and the

Martins remain married.

                              OPINION

     Petitioner seeks relief, under section 6015, from income tax

deficiency determinations that she now concedes are not in error.

Respondent concedes that petitioner is entitled to “separation of

liability relief” under section 6015(c) with respect to three

Schedule C adjustments as follows:     $17,232 for 1986 airplane
                              - 11 -

rental; $99,838 and $36,422 for insurance sales commission

expenses for 1986 and 1987, respectively.

     Section 6015 provides, in certain circumstances, for relief

from joint liability for tax, interest, penalties, and other

amounts arising from a joint Federal income tax return.    See sec.

6015(a), (b), and (c).1   Section 6015(a) permits taxpayers to

seek relief under section 6015(b) if they filed a joint return

and, if eligible, under section 6015(c).    Section 6015(c), in

pertinent part, provides for relief for certain joint filers, as

follows:

           (c) Procedures to limit liability for taxpayers no
             longer married or taxpayers legally separated
             or not living together.

             (1) In general. Except as provided in this
           subsection, if an individual who has made a joint
           return for any taxable year elects the application of
           this subsection, the individual’s liability for any
           deficiency which is assessed with respect to the
           return shall not exceed the portion of such deficiency
           properly allocable to the individual under subsection
           (d).

             (2) Burden of Proof. Except as provided in
           subparagraph (A)(ii) or (C) of paragraph (3), each
           individual who elects the application of this
           subsection shall have the burden of proof with respect
           to establishing the portion of any deficiency allocable
           to such individual.



     1
       Sec. 6015 was added by sec. 3201(a) of the Internal
Revenue Service Restructuring and Reform Act of 1998 (RRA), Pub.
L. 105-206, 112 Stat. 734. Sec. 6015 is effective with respect
to any tax liability arising after July 22, 1998, and any tax
liability arising on or before July 22, 1998, that is unpaid on
that date.
                                - 12 -

            (3) Election.

                            *   *     *    *      *

              (C) Election not valid with respect to certain
           deficiencies. 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) * * *

     Therefore, section 6015(c) relieves certain joint-filing

taxpayers by making them liable only for those items of which

they had actual knowledge, rather than being liable for all items

reportable on the joint return.     In effect, this approach is

intended, to the extent permitted, to treat certain spouses as

though they had filed a separate return.       This is a departure

from predecessor section 6013(e) and companion section 6015(b)

where the intended goal was to permit relief only if the relief-

seeking spouse did not know or had no reason to know of an item.

     Accordingly, taxpayers who are either no longer married,

separated (for 12 months or more), or not living together

(petitioner’s circumstance) may elect treatment as though they

had separately filed.   Section 6015(c)(3)(C), however, does not

permit the election of separate treatment for any item where “the

Secretary demonstrates that an individual * * * had actual

knowledge, [of the item] at the time such individual signed the

return”.   Petitioner has elected separate treatment under section

6015(c), and, accordingly, respondent bears the burden of showing
                             - 13 -

that petitioner had “actual knowledge * * * of any item giving

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

to [petitioner]”.2

     The concept of actual knowledge under section 6015(c) has

been addressed by this Court in Charlton v. Commissioner, 114

T.C. 333, 341-342 (2000), where relief was granted, and Cheshire

v. Commisioner, 115 T.C. __, __ (2000) (slip op. at 17-23), where

relief was denied.

     In Charlton v. Commissioner, supra, a recent application of

the innocent spouse rule, we explained that a section 6015(c)

election “is not valid if respondent shows that the individual

making the election had actual knowledge when signing the return

of any ‘item’ giving rise to a deficiency (or portion thereof)

which is not allocable to the electing individual.”   Id. at 341.

In Charlton, the taxpayer seeking relief was aware that the

source of income was his wife’s business, but he did not compare

records provided him by his wife with other business records to

determine whether his wife had accounted for all of the income.

Although Mr. Charlton had actual knowledge of income from a

particular source and knew generally of his spouse’s source of

income, he had no knowledge that all income from that source had


     2
       Respondent, has agreed that petitioner is entitled to sec.
6015(c) relief with respect to three items other than the Primera
transaction. The only question we consider here is whether
petitioner had “actual knowledge” within the meaning of sec.
6015(c).
                                - 14 -

not been accounted for as reported.      We thus held in Charlton

that “respondent has not shown that Charlton had actual knowledge

of the item causing the deficiency, and that Charlton qualifies

for relief under section 6015(c).”       Id.

     A few months later, this Court again had the opportunity to

consider the section 6015(c) relief provisions.     In Cheshire v.

Commissioner, supra, also an omitted income case, petitioner had

actual knowledge of the fact of the omitted income, as well as

the amount of income, but submitted that she was entitled to

relief because she was unaware of the applicable tax laws.

Specifically, petitioner “was aware of the amount, the source,

and the date of receipt of the retirement distribution and

interest” but did not know the tax consequences of the income.

Id. (slip op. at 19).   In that case we held that “knowledge” for

purposes of section 6015(c) relief disqualification does not

require actual knowledge on the part of the electing spouse as to

whether the entry on the return is or is not correct.     See id.

Instead, the electing spouse must have “actual knowledge of the

disputed item of income * * * as well as the amount thereof, that

gave rise to the deficiency”.    Id. (slip op. at 23).   Thus, in

Cheshire v. Commissioner, supra, we concluded that ignorance of

the applicable tax law is no excuse and that respondent had met

his burden of proving knowledge of the omitted income.
                              - 15 -

      Cheshire v. Commissioner, supra, established that actual

knowledge of the disputed item of income and the amount thereof

prevents a taxpayer from claiming innocent spouse relief under

section 6015(c).   With those principles and Charlton as our

backdrop, we must determine whether petitioner is entitled to

innocent spouse relief under section 6015(c)(3)(C).

     Petitioner contends that respondent’s showing of her minimal

or superficial knowledge about Mr. Martin’s transfer of shares in

Primera and of the sale of Primera land is insufficient to meet

the statutory threshold necessary to deny her section 6015(c)

relief.   Respondent argues that petitioner’s attendance at the

shareholders’ meeting 1 year prior to the filing of the return in

question and learning that the Primera property was sold to

Twentieth Century Life for $22,500,000 constitutes actual

knowledge of the item giving rise to the deficiency.

     In Charlton v. Commissioner and Cheshire v. Commissioner,

supra, the nonelecting spouse received an amount of income from a

business or as a lump sum from a distribution of retirement

benefits of which the electing spouse was aware.   Here,

petitioner and her spouse did not receive any cash or property.

The “Primera” transaction involved a complex series of steps that

resulted in the transfer of stock and the sale of property which

was structured to qualify as a nontaxable transaction under

section 351 for Federal tax purposes.   Without petitioner’s
                              - 16 -

involvement or knowledge, Mr. Martin and certain professionals

devised this complex and somewhat devious transaction consisting

of a series of steps and involving several entities.    The

transaction was primarily intended to deceive State insurance

regulators into believing that the asset position or picture of

Mr. Martin’s insurance company was improved.    The transaction was

further complicated because it was structured for tax purposes to

appear that the transfer of property to the corporation(s) was a

nontaxable event under section 351.    Ultimately, the desired

results were not achieved, Mr. Martin was incarcerated due to his

fraudulent deceptions, and petitioner was left penniless and

bankrupt.

     Petitioner knew that Mr. Martin intended to contribute

shares in Primera to another corporation, but she had no actual

knowledge of the myriad and complex steps or entities involved in

the transaction.   Petitioner’s uncontroverted testimony revealed

that she was, at most, superficially aware of only a small

portion of the details in these complex transactions.    Because

petitioner had only a superficial awareness of the transaction,

petitioner did not have actual knowledge of the amount of the

financial gain that was misreported, nor of the underlying facts

that gave rise to the gain.   Based on the facts pertaining to the

transactions available to petitioner, she would not have known

that the stock transfer was not a section 351 transaction or that
                              - 17 -

the corporate sale of land could have resulted in financial gain

or income to her husband.3   Like the taxpayer in Charlton v.

Commissioner, supra, petitioner possessed only a part of the

information, and the information that she did possess was

insufficient to supply her with actual knowledge regarding the

amount of the financial gain from the transaction, if any.      In

sum and in substance, petitioner knew only that Mr. Martin had

transferred his stock in Primera and land was sold.   Without

knowledge of additional and complex facts, petitioner would not

be in a position to actually know the amount of the financial

gain from the transaction, if any.

     We have difficulty discerning any meaningful differences

between the taxpayer in Charlton v. Commissioner, supra, who knew

of the income source and did not verify the total amount

reportable, and petitioner, who knew that her husband transferred

stock and sold land, but had no knowledge of the amount of the

financial gain, if any, or of most of the facts that gave rise to

that gain.   Unlike the taxpayer in Cheshire v. Commissioner,

supra, respondent has not shown that, at the time she signed the

return, petitioner had actual knowledge of items underlying the

possibility of any financial gain.



     3
       Neither party disputes that any gain arising from the
stock transfer and land sale would have been reported solely by
petitioner’s husband had petitioner and her husband filed
separate tax returns.
                              - 18 -

     We have considered and compared Charlton v. Commissioner,

supra, and Cheshire v. Commissioner, supra, to decide whether

petitioner is entitled to innocent spouse relief.   We hold that

respondent has not shown that petitioner had actual knowledge of

the amount of the item giving rise to a deficiency.4

     Respondent also determined additions to tax for negligence

under section 6653(a)(1)(A) and (B) and for delinquency under

section 6651(a)(1).   Because of our holding with respect to

section 6015(c) relief, petitioner’s income tax deficiency, if

any, for either tax year would be de minimis.5   In particular,

respondent agreed to section 6015(c) relief for all of the

adjustment items other than the one we have decided in

petitioner’s favor.   In that regard, respondent relied on

petitioner’s husband’s transactions/adjustments to assert that

petitioner was liable as a joint return filer for the negligence

addition to tax.   With all of those adjustments either conceded

by respondent or decided in petitioner’s favor, the predicate for

the negligence addition no longer exists.   Accordingly, we hold



     4
       It is unnecessary to consider petitioner’s arguments for
relief under other provisions of sec. 6015 because we have
decided she is not liable for the portion of any deficiency
attributable to the “Primera” transaction. In that regard, in
this proceeding, petitioner sought relief solely from that
transaction.
     5
       It appears that the remaining adjustments are more
mathematical in nature and dependant upon the adjustments that
have been conceded or determined.
                               - 19 -

that petitioner is not liable for the addition to tax for

negligence for either taxable year.

       With respect to the delinquency addition, petitioner has

failed to offer evidence that would relieve her of that

obligation, and, to the extent that the Rule 155 computation

results in any income tax deficiency due from petitioner, she

will be liable for the section 6651(a)(1) delinquency addition to

tax.

       To account for concessions of the parties and to reflect the

foregoing,

                                      Decision will be entered

                                under Rule 155.
