                  T.C. Summary Opinion 2001-128



                     UNITED STATES TAX COURT



         GARY L. AND JOLENE K. PENDLETON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14877-99S.                   Filed August 20, 2001.


     Gary L. Pendleton and Jolene K. Pendleton, pro sese.

     Igor S. Drabkin, for respondent.


     PAJAK, 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,

subsequent section references are to the Internal Revenue Code in

effect for the years in issue.

     Respondent determined deficiencies of $9,550 and $4,294 in
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petitioners’ Federal income taxes for the years 1996 and 1997,

respectively, and a penalty under section 6662(a) of $1,910 for

the year 1996.

     The petitioners have conceded the deficiencies and penalty

by stipulation.    The only issue we must decide is whether either

petitioner is entitled to relief from joint and several liability

under section 6015.

     Some of the facts in this case have been stipulated and are

so found.   Petitioners resided in Burbank, California, at the

time they filed their petition.

     During each of the taxable years at issue, petitioner Gary

L. Pendleton (Gary) maintained a sole proprietorship electrician

business which was operated out of the personal residence of

petitioners.   In addition, Gary worked as an electrician for a

number of employers.    Most of his work was commercial work.   Gary

did his electrical work in the field.

     During each of the taxable years at issue, petitioner Jolene

K. Pendleton (Jolene) worked as a staffing/placement specialist

for Royal Associates.    Jolene earned $52,226 of the $87,773

reported as W-2 wages for 1996 and $52,025 of the $85,270

reported as W-2 wages for 1997.

     Petitioners were married in June 1990.    They were separated

in January 1997.   However, during 1997, Gary “still was living”

with Jolene.   He would go to her home every night and spend the
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night with Jolene and their daughters Amanda and Danielle.

During 1997, petitioners were trying to determine whether they

were going to remain married.    At the time each petitioner

elected relief under section 6015, petitioners were divorced.

     Gary testified that Jolene kept the books and records of his

endeavors.    Gary provided the expense estimates to Jolene.   Both

petitioners had access to their bank accounts and bank

statements.    Both petitioners deposited and withdrew money from

the bank accounts.    Both petitioners were responsible for the

preparation of the 1996 and 1997 Federal income tax returns and

both reviewed the returns.

     Although Jolene disputed some of Gary’s statements, we found

Gary to be a credible witness.    Our evaluation of his testimony

is founded upon “the ultimate task of a trier of the facts-–the

distillation of truth from falsehood which is the daily grist of

judicial life.”    Diaz v. Commissioner, 58 T.C. 560, 564 (1972).

     On their 1996 joint income tax return, petitioners deducted

$22,260 of expenses on Schedule A, Itemized Deductions, which

included $13,471 of job expenses, and $20,886 of expenses on

Schedule C, Profit or Loss From Business.    On their 1997 joint

income tax return, they deducted $13,064 of expenses on Schedule

A and $19,115 of expenses on Schedule C.    For 1996, respondent

disallowed $13,471 of the Schedule A deductions and $20,886 of

the Schedule C deductions.    For 1997, respondent disallowed $379
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of the Schedule A deductions and $19,115 of the Schedule C

deductions.   The deductions were disallowed because petitioners

did not establish that the expenses were paid or incurred during

the taxable year.   Petitioners conceded that respondent’s

determinations were correct.

     On each return, petitioners claimed $15,480 of rent expense

of business property.   Gary explained that the accountant said

they could deduct a percentage of the rent on their home as an

office.   Rent for the home was $950 per month or $11,400 a year.

Petitioners deducted more than 100 percent of the rent and

claimed a deduction of $15,480 for each year in issue.

Petitioners conceded that they did not incur rent expenses of

$15,480 with respect to Gary’s sole proprietorship electrician

business, as claimed for each of the years at issue.   The $15,480

amounts were included in the Schedule C adjustments made by

respondent for each year.   As a result of these rent deductions

and others, petitioners showed a Schedule C loss of $16,708 on

their 1996 return and a Schedule C loss of $16,800 on their 1997

return.

     Each party claims relief from joint and several liability

pursuant to section 6015(b) and (c).   Each party must satisfy

each requirement set forth in section 6015.   Braden v.

Commissioner, T.C. Memo. 2001-69.   The fact that one or the other

of petitioners must be the individual who caused an
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understatement of tax is not a problem under our disposition of

this case.

     If a taxpayer had actual knowledge of the items giving rise

to the deficiency, then the taxpayer will not qualify for relief

under section 6015(b) or section 6015(c).      Sec. 6015(b)(1)(C) and

(c)(3)(C).   On this record, we are convinced that both Gary and

Jolene knew that they were claiming unwarranted rental and other

business expense deductions on their 1996 and 1997 returns and

excessive itemized deductions on their 1996 return, and that

these claimed deductions led to the understatements in question.

Both petitioners were involved in and responsible for the

preparation of their returns.    Jolene was involved in the

bookkeeping of the electrician business.      Both petitioners knew

what the expenses of the business were.      They knew the business

rent deduction exceeded the amount they paid in rent for the

entire house they occupied.   Thus, each petitioner fails to

qualify for relief under either section 6015(b) or section

6015(c).    We find that neither petitioner is entitled to relief

under section 6015.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                             Decision will be entered

                                        for respondent.
