                        T.C. Memo. 2004-22



                      UNITED STATES TAX COURT



                 LOUISE DEMIRJIAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8836-02.              Filed January 30, 2004.



     Chris Pappas, for petitioner.

     Gerard Mackey, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   This proceeding was commenced under section

6015 for review of respondent’s determination that petitioner is

not entitled to relief from joint and several liability for any

portion of the unpaid interest resulting from an understatement

of tax on a joint return filed with her former husband for 1989.

The issues for decision are:   (1) Whether petitioner is eligible
                               - 2 -

for relief from joint and several liability under either section

6015(b) or section 6015(c) and (2) whether respondent abused his

discretion in denying petitioner’s request for relief from joint

and several liability under section 6015(f).

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue.   All

amounts have been rounded to the nearest dollar.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.    At the

time that the petition in this case was filed, petitioner resided

in New York, New York.

Background

     Petitioner married George Apostle (Apostle) on May 14, 1989.

On or about June 29, 1989, petitioner sold an apartment in New

York City (New York apartment) that she owned jointly as tenants

in common with John Demirjian, petitioner’s first husband.

Petitioner realized a $564,000 gain on this sale.   Both

petitioner and Apostle were under the age of 55 when the New York

apartment was sold.   Petitioner and Apostle were divorced on

September 22, 1994.   Apostle died in 2002.

The Original Joint Return

     On or about September 24, 1990, petitioner and Apostle filed

a joint Form 1040, U.S. Individual Income Tax Return, and
                                - 3 -

attachments for 1989 (original joint return).   The original joint

return was timely filed pursuant to an extension.   Katz & Katz,

Certified Public Accountants, of Brooklyn, New York (Katz &

Katz), prepared the original joint return.   Petitioner and

Apostle signed the original joint return.

     The original joint return included Form 2119, Sale of Your

Home.   Although neither petitioner nor Apostle was eligible to

claim the one-time exclusion of $125,000 from the gain on the

sale of the New York apartment under section 121, this exclusion

was claimed on Form 2119.   Petitioner knew that she was not

eligible to claim the section 121 exclusion at the time that the

original joint return was filed.

     In addition to claiming the section 121 exclusion on

Form 2119, petitioner and Apostle elected to defer recognition of

a portion of the gain realized on the sale of the New York

apartment under section 1034.   The return reported that they

bought a new principal residence for $245,000 during the

replacement period provided under section 1034.   Petitioner and

Apostle did not purchase any property that would have qualified

as replacement property under section 1034 during the replacement

period.

     By claiming the section 121 exclusion and making the section

1034 election on Form 2119, petitioner and Apostle recognized

only $288,000 of the $564,000 gain realized on the sale of the
                                 - 4 -

New York apartment.   Petitioner and Apostle did not report this

$288,000 gain, however, on Schedule D, Capital Gains and Losses,

of their original joint return.    As a result of this omission,

petitioner and Apostle reported total income of only $43,210 on

their original joint return and requested a tax refund in the

amount of $4,774.   Had the original joint return properly treated

the gain realized on the sale of the New York apartment,

petitioner and Apostle would have reported an income tax

liability of $110,470 for 1989 (1989 income tax liability).

The First Amended Joint Return

     On or about June 12, 1992, petitioner and Apostle filed an

amended joint Form 1040X, Amended U.S. Individual Income Tax

Return, and attachments for 1989 (first amended joint return).

Katz & Katz prepared the first amended joint return.

     The first amended joint return also included a Form 2119.

As on the Form 2119 that was attached to their original joint

return, petitioner and Apostle claimed the one-time exclusion

from the gain realized on the sale of the New York apartment

under section 121 and elected to defer recognition of a portion

of that gain under section 1034.    Accordingly, they recognized

only $288,000 of the $564,000 gain realized on the sale of the

New York apartment.

     In contrast to their original joint return, petitioner and

Apostle reported the $288,000 gain on Schedule D of their first
                                - 5 -

amended joint return.    A portion of the $288,000 gain that was

reported on Schedule D was offset by a long-term capital loss

carryover of $166,865 and a short-term capital loss carryover of

$6,870.   Petitioner and Apostle had reported a long-term capital

loss carryover of only $51,865 on Schedule D of their original

joint return.    As a result of including the $288,000 gain on

Schedule D, petitioner and Apostle reported total income of

$165,894.   Based upon this amount of total income, the total tax

shown on the first amended joint return was $39,047.     After

subtracting the amount of Federal income tax withheld during 1989

and adding back the refund requested on the original joint

return, petitioner and Apostle owed income tax on the first

amended joint return in the amount of $36,171.

     Apostle signed and filed the first amended joint return

while petitioner was in California.     Before leaving for

California, however, petitioner signed a blank check for Apostle

to use to pay the income tax liability reported on the first

amended joint return.    This check was made payable to the

Internal Revenue Service (IRS) in the amount of $36,171 on

June 12, 1992.    Petitioner also paid $8,690 of interest on the

past due taxes shown on the first amended joint return on

August 21, 1992.    Even though petitioner made these payments, she

did not request that Apostle show her the first amended joint

return until May 1994.
                               - 6 -

The Second Amended Joint Return

     After petitioner and Apostle were divorced, petitioner filed

a second amended joint Form 1040X and attachments for 1989

(second amended joint return) on November 17, 1994.   Apostle

neither signed nor consented to the filing of the second amended

joint return.

     The second amended joint return also included a Form 2119.

Petitioner neither claimed the one-time exclusion from the gain

realized on the sale of the New York apartment under section 121

nor elected to defer recognition of any portion of the gain

realized on that sale under section 1034.   By not claiming the

section 121 exclusion or making the section 1034 election on

Form 2119, petitioner recognized the entire $564,000 gain

realized on the sale of the New York apartment.

     Petitioner reported the $564,000 gain on Schedule D of the

second amended joint return.   Like the first amended joint

return, a portion of the $564,000 gain reported on Schedule D was

offset by a long-term capital loss carryover of $166,865 and a

short-term capital loss carryover of $6,870.   As a result of

including this $564,000 gain on Schedule D, petitioner reported

total income of $441,894.   Based upon this amount of total

income, the total tax shown on the second amended joint return

was $118,120.   After subtracting the total tax shown on the first

amended joint return (i.e., $39,047), petitioner owed income tax
                               - 7 -

on the second amended joint return of $79,073.    Petitioner paid

the income tax liability reported on the second amended joint

return on or about November 17, 1994.    With this payment,

petitioner paid the 1989 income tax in full.

Accrual of Interest on the 1989 Income Tax Liability

     Because petitioner and Apostle did not report the correct

income tax liability on the original joint return, interest

accrued under section 6601 on the full amount of the 1989 income

tax liability from April 15, 1990, the due date of the original

joint return, until June 12, 1992, the date on which petitioner

paid $36,171 of the 1989 income tax liability (1990-1992 interest

liability).   Thereafter, interest continued to accrue on the

remaining amount of the 1989 income tax liability until

November 17, 1994, the date on which the 1989 income tax

liability was paid in full (1992-1994 interest liability).

Petitioner paid $8,690 of the 1990-1992 interest liability on

August 21, 1992.   Neither petitioner nor Apostle has paid any of

the 1992-1994 interest liability.   Consequently, under section

6601, interest continues to accrue on the remaining amount of the

1990-1992 interest liability and the entire 1992-1994 interest

liability (collectively, these amounts of accrued interest are

referred to as the “unpaid interest”).    Neither petitioner nor

Apostle was required by their divorce decree to pay any of the

unpaid interest.
                               - 8 -

Petitioner’s Request For Relief

     On October 19, 1998, petitioner filed Form 8857, Request for

Innocent Spouse Relief, and requested relief from joint and

several liability for the interest resulting from a “1989 Amended

Tax Return”.   Petitioner asserted on Form 8857 that the erroneous

item on that return was a “One Time Tax Exclusion on the Gain of

a Home Sale” in the amount of $125,000.

     On February 7, 2002, respondent sent a Notice of

Determination Concerning Your Request for Relief from Joint and

Several Liability under Section 6015 (notice of determination) to

petitioner denying her request for relief from joint and several

liability.   Respondent determined that petitioner was not

eligible for relief from joint and several liability for the

unpaid interest because there was no joint liability as a result

of Apostle’s not signing the second amended joint return.

Alternatively, respondent determined that, even if Apostle were

found to be jointly and severally liable, petitioner did not

qualify for relief from joint and several liability under section

6015(b), (c), or (f) for the unpaid interest because (1) the gain

realized on the sale of the New York apartment and the unpaid

interest resulting from that gain’s treatment on the original

joint return were entirely attributable to her; (2) she had

knowledge or reason to know of the underpayment; (3) she would

not suffer economic hardship after paying the unpaid interest, as
                               - 9 -

she would be able to pay for reasonable basic living expenses;

and (4) it was not inequitable to hold her liable for the unpaid

interest under all of the facts and circumstances of her case and

under the guidelines of Rev. Proc. 2000-15, 2000-1 C.B. 447.

                              OPINION

     Generally, married taxpayers may elect to file a joint

Federal income tax return.   Sec. 6013(a).   After making the

election, each spouse is fully responsible for the accuracy of

the return and jointly and severally liable for the entire tax

due for that year.   Sec. 6013(d)(3); Butler v. Commissioner, 114

T.C. 276, 282 (2000).   A spouse (requesting spouse) may, however,

seek relief from joint and several liability by following

procedures established in section 6015.   Sec. 6015(a).

     Under section 6015(a), a requesting spouse may seek relief

from liability under section 6015(b) or, if eligible, may

allocate liability according to the provisions under section

6015(c).   If relief is not available under either section 6015(b)

or (c), an individual may seek equitable relief under section

6015(f).   Section 6015(f) permits relief from joint and several

liability where “it is inequitable to hold the individual liable

for any unpaid tax or any deficiency (or any portion of either)”.

     Petitioner contends that she is eligible for relief from

joint and several liability under either section 6015(b) or (c)

for the 1992-1994 interest liability.   In essence, petitioner
                              - 10 -

argues that she was unaware that there was an understatement of

tax on the first amended joint return that resulted in that

return’s only partially correcting the understatement on the

original joint return.   Accordingly, petitioner contends that she

should be granted relief from joint and several liability for the

interest that accrued as a result of that understatement on the

first amended joint return.   In addition to her argument that she

is eligible for relief under either section 6015(b) or (c),

petitioner argues that respondent abused his discretion by

denying her equitable relief from joint and several liability for

the 1992-1994 interest liability under section 6015(f).

Petitioner does not contend that she should be granted relief

from joint and several liability for the remaining amount of the

1990-1992 interest liability under the provisions of section

6015.

     Respondent argues that petitioner is not eligible for relief

under either section 6015(b) or (c).   Moreover, respondent

contends that there was no abuse of discretion in denying

petitioner’s request for equitable relief from joint and several

liability for any portion of the unpaid interest under section

6015(f).   Respondent has not pursued the argument that petitioner

was ineligible for relief under section 6015 because Apostle did

not sign the second amended joint return.

Relief Under Section 6015(b) and (c)
                               - 11 -

     Section 6015(b) provides relief from joint and several

liability for tax (including interest, penalties, and other

amounts) where:   (1) A joint return has been made for a taxable

year; (2) on such return there is an understatement of tax

attributable to erroneous items of one individual filing the

joint return; (3) 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;

(4) 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 (5) the other individual makes a valid

election.   Sec. 6015(b)(1).   Section 6015(c) allows a taxpayer,

who is eligible and so elects, to limit his or her liability to

the portion of a deficiency that is properly allocable to the

taxpayer as provided in section 6015(d).    Sec. 6015(c)(1).

     Relief from joint and several liability under subsection (b)

or (c) of section 6015 is premised on the existence of a

deficiency for the year for which relief is sought.    Sec.

6015(b)(1)(D), (c)(1); see H. Conf. Rept. 105-599, at 252-254

(1998), 1998-3 C.B. 747, 1006-1008.     Consequently, if there is no

deficiency for the year for which relief is sought, relief from

joint and several liability is not available under either

subsection.   See Washington v. Commissioner, 120 T.C. 137, 146-

147 (2003); see also Hopkins v. Commissioner, 121 T.C. 73, 88
                                - 12 -

(2003) (holding that neither section 6015(b) nor (c) provides

relief from joint and several liability for the underpayment of a

tax liability that was properly reported on a joint return);

Block v. Commissioner, 120 T.C. 62, 65-66 (2003) (explaining that

a prerequisite for relief under both section 6015(b) and (c) is

the existence of a deficiency for which relief from joint and

several liability is sought); Ewing v. Commissioner, 118 T.C.

494, 497, 498 n.4 (2002); cf. sec. 6015(e)(1).

     In the instant case, there was an understatement of tax on

the original joint return that resulted from the improper

treatment of the gain that petitioner realized on the sale of the

New York apartment.   This understatement was partially corrected

by the first amended joint return, and it was completely

corrected when petitioner filed the second amended joint return

in November 1994.   For purposes of computing the amount of a

deficiency for 1989, the total tax reported on the second amended

joint return is treated as the amount of tax shown by petitioner

on the original joint return.    Sec. 6211(a); sec. 301.6211-1(a),

Proced. & Admin. Regs.; e.g., Pesch v. Commissioner, 78 T.C. 100,

111 (1982); cf. Laing v. United States, 423 U.S. 161, 173 (1976)

(a deficiency for a given year, reduced to its simplest terms, is

the correct amount of tax less the amount shown as tax on the tax

return).   Consequently, there is no deficiency for 1989 for which

petitioner can seek relief.   Accordingly, petitioner is not
                               - 13 -

eligible for relief from joint and several liability under either

section 6015(b) or (c).   In any event, she would not satisfy the

requirements for such relief, as shown by our discussion, infra,

of the knowledge and attribution factors.

Equitable Relief Under Section 6015(f)

     Because petitioner is not eligible for relief from joint and

several liability under either section 6015(b) or (c), we review

the determination to deny equitable relief under section 6015(f)

using an abuse of discretion standard.    Butler v. Commissioner,

114 T.C. at 287-292.   Under this standard of review, we defer to

respondent’s determination unless it is arbitrary, capricious, or

without sound basis in fact.    Jonson v. Commissioner, 118 T.C.

106, 125 (2002) (citing Butler v. Commissioner, supra at 292;

Pac. First Fed. Sav. Bank v. Commissioner, 101 T.C. 117, 121

(1993)), affd. __ F.3d __ (10th Cir., Dec. 30, 2003).    The

question of whether respondent’s determination was arbitrary,

capricious, or without sound basis in fact is a question of fact.

Cheshire v. Commissioner, 115 T.C. 183, 198 (2000), affd. 282

F.3d 326 (5th Cir. 2002).   We are not limited to the matters

contained in respondent’s administrative record when deciding

this question.   Ewing v. Commissioner, 122 T.C. __, __ (2004)

(slip op. at 6-21).    Petitioner bears the burden of proving that

respondent abused his discretion in denying relief under section
                                - 14 -

6015(f).    Washington v. Commissioner, supra at 146; Jonson v.

Commissioner, supra at 125.

       As directed by section 6015(f), respondent has prescribed

procedures to use in determining whether a relief-seeking spouse

qualifies for relief under that subsection.     At the time that

respondent issued his notice of determination to petitioner,

those procedures were found in Rev. Proc. 2000-15, 2000-1 C.B.

447.    This Court has upheld the use of these procedures in

reviewing a negative determination.      See, e.g., Washington v.

Commissioner, supra at 147-152; Jonson v. Commissioner, supra at

125-126.

       Rev. Proc. 2000-15, sec. 4.01, 2000-1 C.B. at 448, lists

seven threshold conditions that must be satisfied before

respondent will consider a request for relief under section

6015(f).    Respondent conceded that petitioner has met those seven

threshold conditions.    If the threshold conditions are satisfied,

Rev. Proc. 2000-15, sec. 4.02, 2000-1 C.B. at 448, lists

circumstances where relief will generally be granted in cases

where a liability reported on a joint return is unpaid.     We have

considered the circumstances listed in Rev. Proc. 2000-15, sec.

4.02, 2000-1 C.B. at 448, in cases where the liability reported

on a joint return was unpaid.    See, e.g., August v. Commissioner,

T.C. Memo. 2002-201; Collier v. Commissioner, T.C. Memo. 2002-

144; Castle v. Commissioner, T.C. Memo. 2002-142.     We have
                              - 15 -

declined to consider them where the liability for which equitable

relief was sought was not such a reported but unpaid liability.

See, e.g., Mellen v. Commissioner, T.C. Memo. 2002-280.    In the

instant case, the 1992-1994 interest liability is not a liability

that was reported on a joint return that remains unpaid.    Rather,

the 1992-1994 interest liability resulted from an understatement

of tax on a joint return.   Consequently, Rev. Proc. 2000-15,

sec. 4.02, 2000-1 C.B. at 448, is not applicable here.

     If the requesting spouse satisfies the threshold conditions

of Rev. Proc. 2000-15, sec. 4.01, 2000-1 C.B. at 448, but does

not qualify for relief under Rev. Proc. 2000-15, sec. 4.02,

2000-1 C.B. at 448, respondent looks to Rev. Proc. 2000-15, sec.

4.03, 2000-1 C.B. at 448, to determine whether the taxpayer

should be granted equitable relief.    Rev. Proc. 2000-15, sec.

4.03, 2000-1 C.B. at 448, provides a partial list of positive and

negative factors that respondent is to take into account when

considering whether to grant an individual full or partial

equitable relief under section 6015(f).    As Rev. Proc. 2000-15,

sec. 4.03, 2000-1 C.B. at 448, makes clear, no single factor is

to be determinative in any particular case, all factors are to be

considered and weighed appropriately, and the list of factors is

not intended to be exhaustive.

     Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at 448, lists the

following two factors that, if true, respondent weighs in favor
                              - 16 -

of granting relief and that, if not true, are neutral:    (1) The

taxpayer is separated or divorced from the nonrequesting spouse

and (2) the taxpayer was abused by his or her spouse.     Respondent

concedes that the marital status factor weighs in favor of

petitioner.   The abuse factor is neutral in this case because

petitioner failed to provide any evidence establishing abuse.

     In addition, Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at

448, lists the following two factors that, if true, respondent

weighs against granting relief and that, if not true, are

neutral:   (1) The taxpayer received a significant benefit from

the unpaid liability or the item giving rise to the deficiency

and (2) the taxpayer has not made a good faith effort to comply

with the Federal income tax laws in the tax years following the

tax year to which the request for relief relates.   The

significant benefit factor is neutral in this case because

petitioner ultimately paid the 1989 income tax liability.    The

noncompliance factor is also neutral in this case because both

parties failed to argue or present evidence as to whether

petitioner has made a good faith effort to comply with the

Federal income tax laws since 1989.

     Finally, Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at 448,

lists the following four factors that, if true, respondent weighs

in favor of granting relief and that, if not true, respondent

weighs against granting relief:   (1) The taxpayer would suffer
                              - 17 -

economic hardship if relief is denied; (2) in the case of a

liability that arose from a deficiency, the requesting spouse did

not know and had no reason to know of the items giving rise to

the deficiency; (3) the liability for which relief is sought is

attributable to the nonrequesting spouse; and (4) the

nonrequesting spouse has a legal obligation pursuant to a divorce

decree or agreement to pay the outstanding liability (this factor

weighs against relief only if the requesting spouse has the

obligation).   The economic hardship factor weighs against

petitioner because she failed to provide any evidence

establishing economic hardship in this case (and argues,

unpersuasively, that the economic hardship requirement is

“discriminatory and unconstitutional”).    Petitioner argues that

the knowledge or reason to know factor and the attribution factor

weigh in favor of granting her relief.    We address those

arguments below.   The legal obligation factor is neutral in this

case because neither petitioner nor Apostle was required by their

divorce decree to pay any of the unpaid interest.

     Petitioner contends that, even though it was the improper

treatment of her income (i.e., the gain that she realized on the

sale of the New York apartment) on the first amended joint return

that caused an understatement on that return and the 1992-1994

interest liability to accrue, she had no knowledge or reason to
                               - 18 -

know of that understatement.   On the record before us, however,

petitioner’s contention cannot be sustained.

     Taxpayers seeking to prove that they had no knowledge or

reason to know of an item giving rise to an understatement of tax

must demonstrate, at a minimum, that they have fulfilled a “duty

of inquiry” with respect to determining whether their correct tax

liability was reported on the return for the year for which they

seek relief.   Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th

Cir. 1989), affg. T.C. Memo. 1988-63; Butler v. Commissioner, 114

T.C. at 284.   When taxpayers fail to fulfill their duty of

inquiry, they are ordinarily charged with constructive knowledge

of any understatements on their returns.   See Hayman v.

Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993), affg. T.C.

Memo. 1992-228; Cohen v. Commissioner, T.C. Memo. 1987-537 (the

provisions providing relief from joint and several liability are

“designed to protect the innocent, not the intentionally

ignorant”).

     Petitioner was aware that the first amended joint return was

filed to correct the omission of the entire amount of the gain

that she realized on the sale of the New York apartment on

Schedule D of the original joint return, and she signed a blank

check for Apostle to use to pay the income tax liability reported

on that return.   Petitioner failed, however, to question Apostle

as to the manner in which her income was treated on the first

amended joint return upon her return home from California in June
                               - 19 -

1992, and she did not ask to see that return until May 1994.

Consequently, we conclude that petitioner failed to fulfill her

duty of inquiry.   Because petitioner is charged with constructive

knowledge of the manner in which her income was treated on the

first amended joint return and of the understatement of tax that

resulted from that treatment, we conclude that she had reason to

know of the understatement on that return.

     Petitioner contends that the understatement on the first

amended joint return is attributable to erroneous items of

Apostle (i.e., the exclusion from gain claimed under section 121

and the deferral of gain recognition under section 1034) and

that, as a result, the 1992-1994 interest liability is solely

attributable to him.   Petitioner dedicates most of her argument

to accusing Apostle of fraud and to berating the IRS for not

pursuing action against him.   Petitioner’s arguments are not

persuasive, and her contention cannot be sustained.

     Petitioner relied on Apostle and their accountant to

complete and file the first amended joint return.   The first

amended joint return, and the understatement of income on that

return, however, dealt specifically with the $564,000 gain that

petitioner realized on the sale of the New York apartment.

Petitioner is responsible for the manner in which her income was

treated on that return.   Therefore, the items affecting the

treatment of her income on the first amended joint return are her
                                - 20 -

tax items.   See Hopkins v. Commissioner, 121 T.C. at 77.

Consequently, the understatement of tax on the first amended

joint return and the 1992-1994 interest liability that resulted

from that understatement are attributable to petitioner.

     Based on our examination of the facts and circumstances in

this case, many of the factors in Rev. Proc. 2000-15, sec. 4.03,

2000-1 C.B. at 448, are neutral.    With respect to the factors

that are not neutral, those weighing against granting petitioner

relief outweigh those weighing in favor of granting her relief.

Accordingly, we conclude that respondent did not abuse his

discretion by acting arbitrarily, capriciously, or without sound

basis in fact in denying petitioner’s request for equitable

relief under section 6015(f).

Conclusion

     We hold that respondent did not abuse his discretion in

denying petitioner relief from joint and several liability under

section 6015.   We have considered the arguments of the parties

that were not specifically addressed in this opinion.    Those

arguments are either without merit or irrelevant to our decision.

     To reflect the foregoing,


                                           Decision will be entered

                                     for respondent.
