                        T.C. Memo. 2003-268



                      UNITED STATES TAX COURT




               ANDREW J. ZOGLMAN, Petitioner, AND
                KATHY E. MORRISON, Intervenor v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2888-02.                Filed September 12, 2003.



     Andrew J. Zoglman, pro se.

     Kathy E. Morrison, pro se.

     Daniel J. Parent, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GERBER, Judge:   Respondent determined a $3,347 deficiency in

petitioner’s 1996 Federal income tax.     Petitioner seeks relief
                               - 2 -

from joint and several income tax liability under section 6015.1

Respondent determined that petitioner is not entitled to relief

from joint and several liability under section 6015, and

petitioner timely filed a petition seeking review of respondent’s

determination.   The issue presented for our consideration is

whether petitioner is eligible for relief from joint and several

liability under subsections (b) or (c) of section 6015.

                         FINDINGS OF FACT2

     Petitioner Andrew J. Zoglman resided in Sacramento,

California, at the time his petition was filed.    Intervenor Kathy

E. Morrison (Ms. Morrison) also resided in Sacramento,

California, at the time she filed a Notice of Intervention.

Petitioner and Ms. Morrison were married on November 19, 1988.

Ms. Morrison filed for a dissolution of marriage on March 7,

1996, and a judgment of dissolution of marriage was entered on

November 20, 1997.

     During 1993, while petitioner and Ms. Morrison were still

married, Ms. Morrison applied for Social Security benefits

(benefits) at the insistence of petitioner.    Initially, Ms.

Morrison’s application was denied.     During the following 2 years


     1
      All section references are to the Internal Revenue Code in
effect for the year at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
     2
      The parties’ stipulation of facts is incorporated by this
reference.
                               - 3 -

petitioner encouraged and assisted Ms. Morrison in reapplying and

submitting numerous documents in support of the reconsideration

of her application for benefits.

     After reconsideration by the Social Security Office of

Hearings and Appeals, Ms. Morrison was notified by a letter dated

October 25, 1995, of her benefit award.   A few months later Ms.

Morrison received another letter, dated December 13, 1995,

notifying her of the monthly benefit amount and her entitlement

to a lump-sum payment for retroactive benefits with respect to

September 1992 through October 1995.

     During 1996, Ms. Morrison received benefits totaling

$39,627.10.   Of that amount, $29,613.10 represented retroactive

benefits for the years 1992 through 1995.   In addition to the

retroactive benefits, she was awarded attorney’s fees and

Medicare premiums.   The remaining $10,014 consisted of regular

monthly benefits for 1996 and the attorney’s fees and Medicare

premiums.

     Petitioner and Ms. Morrison jointly owned their residence.

During March 1996 petitioner became unemployed and stopped making

the monthly mortgage payments on the property.   In addition,

petitioner moved from the house into the garage, where he lived

for the following 6 months.   At this time, Ms. Morrison assumed

responsibility for the mortgage by using her benefits to make the
                               - 4 -

payments, and she continued to do so for the remainder of the

year.   The house was later sold, and the parties split the sale

proceeds.

     During 1996, petitioner was aware that Ms. Morrison received

monthly benefits.   Petitioner also knew that Ms. Morrison had

applied for and received a lump-sum benefit award separate from

her monthly benefits and that a portion of that award was used to

pay her divorce attorney.

     During 1997, petitioner and Ms. Morrison agreed to file a

joint Federal income tax return for the 1996 tax year.   Their tax

return was professionally prepared by Mr. James West.    Petitioner

and Ms. Morrison met with Mr. West to discuss the joint tax

return and to deliver documentation to facilitate the return

preparation.   At this meeting Ms. Morrison presented to Mr. West

her Form SSA 1099--Social Security Benefit Statement (benefit

statement), which detailed the benefits she received during 1996.

 Upon reviewing the benefit statement, Mr. West incorrectly told

the parties that the entire benefit award was not taxable.    Mr.

West returned the benefit statement to Ms. Morrison and did not

use it in the preparation of the joint return.

     Petitioner’s motivation for filing a joint return was to

gain the benefit of Ms. Morrison’s and her family’s exemptions

and itemized deductions in order to offset his taxable income.

The joint return was initially audited by respondent during 1997,
                                  - 5 -

and the joint filing status was allowed, permitting petitioner

the benefit of exemptions, itemized deductions for medical

expenses (reflected on the adjusted joint return totaling

$9,486), and expenses attributable to Ms. Morrison, her mother,

and her daughter.      In addition, petitioner obtained the benefit

of itemized deductions relating to mortgage interest and real

estate taxes on the joint return of $11,734 and $2,632,

respectively.      As a result of the initial audit, petitioner and

Ms. Morrison were issued a refund of $415.      After discovery of

$28,146 of unreported Social Security income, respondent, during

1999, audited the 1996 joint return a second time.      Respondent

determined a $3,347 deficiency based on the unreported Social

Security income.      The corresponding increase to adjusted gross

income resulted in purely mathematical reductions in itemized

deductions, in the amount of $2,674.

                                 OPINION

      The issue we consider is whether petitioner is eligible for

relief from joint and several liability under subsections (b) or

(c) of section 6015.

I.   Relief Under Section 6015(b)(1)

      Section 6015(b)(1) provides for spousal relief from joint

and several liability if the following requirements are met:

              (A) a joint return has been made for a taxable
      year;

              (B) on such return there is an understatement of
                               - 6 -

     tax attributable to erroneous items of 1 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
     individual liable for the deficiency in tax for such
     taxable year attributable to such understatement; and

          (E) the other individual elects * * * 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 * * *

     All of the requirements must be met, and failure to meet

even one of the requirements is a bar to relief.   Sec.

6015(b)(1); Alt v. Commissioner, 119 T.C. 306, 313 (2002).

Respondent concedes that petitioner has satisfied the

requirements of subparagraphs (A), (B), and (E) of section

6015(b)(1).   Therefore, we must decide whether petitioner has met

the requirements of subparagraphs (C) and (D), to wit:    Whether

petitioner, when signing the return knew or had reason to know

that there was a substantial understatement and/or whether,

taking into account all of the facts and circumstances, it would

be inequitable to hold petitioner liable for the understatement.

     A.   Whether Petitioner Knew or Had Reason To Know of the
          Substantial Understatement

     During 1998, section 6013(e) was repealed, and section 6015
                                 - 7 -

replaced it.3    The requirement of section 6015(b)(1)(C) is

similar to the requirement of former section 6013(e)(1)(C), in

that both provisions require a spouse who is seeking relief to

establish that “in signing the return, he or she did not know,

and had no reason to know” of the understatement.     Because of the

similarities, analysis in opinions concerning section

6013(e)(1)(C) is instructive for our analysis of section

6015(b)(1)(C).     See Jonson v. Commissioner, 118 T.C. 106 (2002);

Butler v. Commissioner, 114 T.C. 276, 283 (2000).

         Venue for appeal of our decision by petitioner would

normally be to the Court of Appeals for the Ninth Circuit.      In

omission of income cases under former section 6013(e)(1), this

Court and the Court of Appeals for the Ninth Circuit have held

that a relief seeking spouse knows of an understatement of tax if

he knows of the transaction that gave rise to the understatement.

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

affg. T.C. Memo. 1987-522; Braden v. Commissioner, T.C. Memo.

2001-69.     Accordingly, in such circumstances, innocent spouse

relief is denied.

     The record we consider supports our holding that petitioner



     3
      Sec. 6015 was added by the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3201(a), 112 Stat. 685, 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.
                                - 8 -

possessed actual knowledge of the transaction giving rise to the

understatement.   Petitioner assisted Ms. Morrison in applying and

reapplying for benefits for over 2 years.     Petitioner’s trial

testimony indicates that he knew that Ms. Morrison was receiving

monthly benefits during 1996 and that she used those benefits to

pay the mortgage on their residence.     The record further reflects

that petitioner knew that Ms. Morrison received a lump-sum

benefit separate from her monthly benefits and used $2,500 of the

proceeds to pay her divorce attorney.     Petitioner’s presence when

Ms. Morrison presented her benefit statement to the tax return

preparer also supports the conclusion that he knew Ms. Morrison

received a benefit award.    Because petitioner knew of the

transaction underlying the understatement, we hold that he had

knowledge of the substantial understatement.

     B.   Would It Be Inequitable To Hold Petitioner Liable for
          the Tax Liabilities?

     Whether it is inequitable to hold a spouse liable for a

deficiency is to be determined by taking into account all of the

facts and circumstances.    Sec. 6015(b)(1)(D).   Two material

factors most often considered are:      “(1) whether there has been a

significant benefit to the spouse claiming relief, and (2)

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.”      Jonson v.

Commissioner, 118 T.C. at 119 (citing Hayman v. Commissioner, 992
                                - 9 -

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

Normal support is not considered a significant benefit.      Hayman

v. Commissioner, supra at 1262 (citing Flynn v. Commissioner, 93

T.C. 355, 367 (1989)).

     Petitioner received significant benefits as a result of

filing a joint return on which the Social Security benefits went

unreported.   The joint return filed by the parties reflected

taxable income derived almost exclusively from petitioner.

Filing a joint return with Ms. Morrison allowed petitioner to

significantly reduce his taxable income using exemptions and

itemized deductions attributable to Ms. Morrison, her mother, and

her daughter.   Had he not filed the joint return with Ms.

Morrison, petitioner’s tax liability would have been

substantially higher.    Further, had Ms. Morrison filed a separate

return properly including her benefits, she would have had

little, if any tax liability.   Her tax liability arose when her

benefit income was added to petitioner’s income on the joint

return.

     The parties’ failure to report the correct tax liability was

not the result of concealment, overreaching, or any other

wrongdoing on the part of Ms. Morrison.   Ms. Morrison was

forthright and never made any attempt to conceal from petitioner

the amount of benefits she received.    She presented her benefit

statement to the return preparer while in the presence of
                              - 10 -

petitioner, and he testified that he knew Ms. Morrison received

monthly Social Security payments.

      The parties failed to report the correct liability because

they relied on their return preparer’s assessment that the entire

benefit award was not taxable.   In such situations

      Where the understatement results from “a
      misapprehension of the income tax laws by the preparers
      of the tax returns and the signatory parties,” both
      husband and wife are perceived to be “innocent” and
      there is “no inequity in holding them both to joint and
      separate liability”. * * *

Hayman v. Commissioner, supra at 1262 (quoting McCoy v.

Commissioner, 57 T.C. 732, 735 (1972)).    Taking into account all

the facts and circumstances, holding petitioner and Ms. Morrison

jointly and severally liable would not be inequitable.

II.   Relief Under Section 6015(b)(2)

      If an electing spouse does not know or have reason to know

of the extent of an understatement, under section 6015(b)(2) an

individual may qualify for partial relief from joint and several

liability.   To qualify, the electing spouse must establish that,

in signing the return, he or she did not know or have reason to

know of a portion of the understatement.   In addition, he or she

must satisfy all other requirements of section 6015(b)(1) with

respect to that portion.   See Vetrano v. Commissioner, 116 T.C.

272, 281 (2001)); sec 1.6015-2(e)(1) Income Tax Regs.    Section

6015(b)(2) provides:
                              - 11 -

     If an individual who, but for paragraph (1)(C), would
     be relieved of liability under paragraph (1),
     establishes that in signing the return such individual
     did not know, and had no reason to know, the extent of
     such understatement, then such individual shall be
     relieved of liability for tax * * * to the extent that
     such liability is attributable to the portion of such
     understatement of which such individual did not know
     and had no reason to know.

      Upon review of the record, we conclude that petitioner knew

the full extent of the understatement.    Petitioner testified

that, at the time of signing the 1996 joint return, he knew that

Ms. Morrison was receiving monthly benefits.    Similarly, the

record also reflects that, at the time of signing the joint

return, petitioner knew that Ms. Morrison applied for and

received a lump-sum benefit apart from her monthly benefit.      What

is unclear is whether petitioner had knowledge of the amount of

benefits received by Ms. Morrison.     During trial, petitioner and

Ms. Morrison provided conflicting testimony as to whether

petitioner noted the amount reflected on the benefit statement

when Ms. Morrison presented it to the return preparer.    In

addition, the parties’ testimony conflicts as to whether the

parties discussed the specific amount of the benefit award.

     The preponderance of evidence supports our holding that

petitioner had knowledge of the full amount of the benefit award.

Petitioner encouraged and prodded Ms. Morrison into applying for

benefits and assisted her in the application and reconsideration

process.   The assistance he provided made him aware that Ms.
                              - 12 -

Morrison could receive benefits retroactively from the date of

her application.

     Further, Ms. Morrison’s testimony was more consistent with

the overall record than that of petitioner, making her the more

credible witness.   We are therefore persuaded by her testimony

that petitioner learned of the existence and amount of the

benefits through:   (1) Ms. Morrison’s presentation of her

benefit statement to the joint return preparer; and (2)

conversations between Ms. Morrison and petitioner.

     Petitioner’s knowledge of the understatement is, by itself,

fatal to his claim for partial relief under section 6015(b)(2).

Even if we were to assume that petitioner did not know or have

reason to know of a portion of the understatement, he would not,

in other respects qualify for partial relief under section

6015(b)(2).   Under that section, petitioner must also establish

that he satisfies the requirements of subparagraphs (A), (B), and

(D) of section 6015(b)(1), with respect to a portion of an

understatement for which he lacked knowledge or a reason to know.

See sec 1.6015-2(e)(1) Income Tax Regs.   The record reflects

that, with respect to the entire understatement, petitioner met

the requirements of subparagraphs (A) and (B).   However,

petitioner failed to meet the requirement of subsection (D) that

it would be inequitable to hold petitioner and Ms. Morrison

jointly and severally liable for the deficiency.
                               - 13 -

       Petitioner does not meet two of the requirements of section

6015(b)(2).    Accordingly, we hold that he is not entitled to

partial relief from joint and several liability pursuant to this

section.

III.    Relief Under Section 6015(c)

       In general, section 6015(c) allows proportionate tax relief

from joint and several liability by relieving the requesting

spouse from liability for items making up a deficiency that would

have been allocable to the nonrequesting spouse had they filed

separate returns.    See sec. 6015(c)(1).   Pursuant to section

6015(c)(3)(A)(i), an individual must meet the following

conditions to be eligible to make the election:

            (I) at the time such election is filed, such
       individual is no longer married to, or is legally
       separated from, the individual with whom such
       individual filed the joint return to which the election
       relates; or

            (II) such individual was not a member of the same
       household as the individual with whom such joint return
       was filed at any time during the 12-month period ending
       on the date such election is filed.

       The election must be made no later than 2 years after the

date on which collection activities began.     Sec. 6015(c)(3)(B).

Further, petitioner has the burden of establishing the portion of

the deficiency which is not allocable to him.     See sec.

6015(c)(2); Mora v. Commissioner, 117 T.C. 279, 290 (2001).

       Even if a taxpayer otherwise qualifies for this election, it

will not be valid with respect to certain deficiencies.      If
                              - 14 -

respondent demonstrates that petitioner, at the time of signing

the joint return, had actual knowledge of any item giving rise to

a deficiency (or portion thereof) that amount will not qualify

for relief from joint and several liability.   See sec.

6015(c)(3)(C); Cheshire v. Commissioner, 115 T.C. 183, 193

(2000), affd. 282 F.3d 326 (5th Cir. 2002).    An electing spouse

may have the requisite “knowledge” even though he did not know

that there would be tax consequences arising from the item or

that the item was incorrectly reported.   See Cheshire v.

Commissioner, supra at 194.

     The record reflects that petitioner filed a joint return

with Ms. Morrison, made a timely election, and was not married to

Ms. Morrison at the time of the election.   The dispute at issue

is whether petitioner had actual knowledge, at the time of

signing the joint return, of the omitted Social Security income.

Respondent has the burden of proving, by a preponderance of the

evidence, whether petitioner had actual knowledge of the omitted

income.   See Culver v. Commissioner 116 T.C. 189, 196 (2001).

The knowledge standard for purposes of section 6015(c)(3)(C) is

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

the existence of an item which gives rise to the deficiency (or

portion thereof).”   Cheshire v. Commissioner, supra at 195.     In

omitted income cases, the electing spouse “must have an actual

and clear awareness of the omitted income.”    Id. at 200.
                              - 15 -

     Respondent must also establish that petitioner had knowledge

of the amount of omitted income.    “[W]here an electing spouse has

actual knowledge of an income source, but no knowledge of the

amount of the financial gain, the electing spouse may still

qualify for relief under section 6015(c).”     Rowe v. Commissioner,

T.C. Memo. 2001-325; sec. 1.6015-3(c)(4), Example (4)(ii), Income

Tax Regs.

     After a thorough review of the record we hold that

respondent has established petitioner’s actual knowledge of the

existence and amount of Ms. Morrison’s benefit income.    At the

time of signing the 1996 joint return, petitioner knew Ms.

Morrison had received monthly benefits and a lump-sum benefit

award.   He was made aware of the amount of benefits when Ms.

Morrison presented her benefit statement to the joint return

preparer and through discussions of the benefits with Ms.

Morrison.   Accordingly, we hold that petitioner is ineligible to

elect the application of section 6015(c) and is not entitled to

relief from joint and several liability.

     To reflect the foregoing,

                                      Decision will be entered

                                 for respondent.
