                        T.C. Memo. 2010-270



                      UNITED STATES TAX COURT



             JAMES J. & BONITA KRUSE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9894-08.              Filed December 9, 2010.



     James J. and Bonita Kruse, pro sese.

     Anne M. Craig, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies in

petitioners’ Federal income tax and penalties for 2003 and 2004.

Respondent also determined that petitioner Bonita Kruse

(petitioner) is not entitled to relief from joint and several

liability under section 6015 for 2003 and 2004.   After

concessions, the only issue for decision is whether respondent
                                 - 2 -

erred in denying petitioner relief under section 6015.    All

section references are to the Internal Revenue Code.

                          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 the petition was filed, petitioners resided in Florida.

     Petitioners were married during all relevant times and

claimed two children as dependents for 2003 and 2004.    These

children were born in 1982 and 1988.     Petitioner James Kruse (Mr.

Kruse) operated a lawn care business during the years in

question.   Petitioner did not substantially participate in the

conduct of that business.

     Beginning in 2001 and until 2008, petitioner lived in Oregon

and Tennessee for health reasons, away from petitioners’ home in

Florida.    While she lived out of State, petitioner earned her own

wages but also regularly received money from her husband to

supplement her income and pay living expenses.    Mr. Kruse

generally paid petitioner’s rent, which was originally $410 per

month but increased when she moved to a larger apartment.     Mr.

Kruse maintained and paid the bills associated with their Florida

residence, where he continued to live with the two children they

jointly claimed as dependents.     Petitioner returned to Florida

several times a year, and each year during one of those trips she

would sign their joint Federal income tax return.    When she
                                - 3 -

signed the returns Mr. Kruse’s accountant prepared, she did not

examine the contents closely; at most, she would glance at the

pages and occasionally ask questions that her husband did not

answer.

     In 2003, petitioners reported an adjusted gross income of

$20,598, including petitioner’s wages of $17,859, and $6,045 in

net profit from the lawn care business.    In 2004, petitioners

reported an adjusted gross income of $30,531, including

petitioner’s wages of $18,372, and $16,293 in net profit from the

lawn care business.

     Respondent examined petitioners’ 2003 and 2004 tax returns

and determined deficiencies in Federal income tax and penalties.

In a February 4, 2008, notice of deficiency respondent determined

deficiencies and penalties as follows:

                                             Penalty
                Year      Deficiency       Sec. 6662(a)

                2003      $48,203.00         $9,640.60
                2004       61,629.60         12,325.92

The determined deficiencies arose from two types of improper

items.    First, petitioners claimed a dependency exemption

deduction for one of their children who did not meet the

statutory requirements.    Second, petitioners claimed improper

deductions relating to expenses from the lawn care business.

Furthermore, as a result of the change in income after accounting

for these erroneous items, petitioners were subject to
                                 - 4 -

adjustments to their self-employment tax and corresponding

deduction, child tax credit, retirement savings contribution

credit, earned income tax credit (EIC), and additional child tax

credit (ACTC).     Additional errors in petitioners’ returns

included the incorrect birth date for one of their children.

     Petitioner submitted a Form 8857, Request for Innocent

Spouse Relief, to the Internal Revenue Service (IRS).

Subsequently, Mr. Kruse and the IRS settled the deficiencies and

penalties as follows:

                                              Penalty
                 Year      Deficiency       Sec. 6662(a)

              2003        $20,925.00         $4,185.00
              2004         21,726.60          4,325.32

Petitioner has stipulated that she is jointly and severally

liable for the amounts settled between Mr. Kruse and respondent

to the extent that she is denied relief under section 6015.

     A financial technician for the IRS reviewed petitioner’s

section 6015 case under the process described in Rev. Proc. 2003-

61, 2003-2 C.B. 296, and ultimately denied her relief.     In

reaching this conclusion, the technician attributed the

dependency exemption deduction, EIC, and ACTC to both spouses;

noted that petitioners remained married and lived together; and

determined that petitioner would not suffer economic hardship as

a result of being held liable.    The report further mentioned the

absence of allegations of abuse or poor health.    Among the
                                 - 5 -

factors the technician determined to be in petitioner’s favor,

but ultimately found insufficient to grant relief, were that

petitioner did not receive any significant benefit from the

improper items on the return, she had no actual knowledge of the

erroneous items, and she has made a good faith effort to comply

with the tax laws in later years.

                                OPINION

     Generally, married taxpayers may elect to file a joint

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

election, each spouse generally is jointly and severally liable

for the entire tax due for that taxable year.    Sec. 6013(d)(3).

A spouse (requesting spouse) may, however, seek relief from joint

and several liability by following procedures established in

section 6015.   Sec. 6015(a).   A requesting spouse may request

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

allocate liability under section 6015(c).    Sec. 6015(a).   If

relief is not available under section 6015(b) or (c), an

individual may seek equitable relief under section 6015(f).

Section 6015(b) Analysis

     Section 6015(b) provides, in pertinent part, as follows:

          SEC. 6015(b). Procedures For Relief From
     Liability Applicable to All Joint Filers.--

               (1) In general.–-Under procedures prescribed
          by the Secretary, if–-

                     (A) a joint return has been made for a
                taxable year;
                               - 6 -

                     (B) on such return there is an
                understatement of 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; * * *

                     *    *    *    *    *    *     *

          then the other individual shall be relieved of
          liability for tax (including interest, penalties,
          and other amounts) for such taxable year to the
          extent such liability is attributable to such
          understatement.

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

conjunctive.   Accordingly, a failure to meet any one of them

prevents a requesting spouse from qualifying for the relief

offered therein.   Alt v. Commissioner, 119 T.C. 306, 313 (2002),

affd. 101 Fed. Appx. 34 (6th Cir. 2004).

     Respondent argues that petitioner is not entitled to relief

from joint and several liability for understatements arising from

the improper dependency exemption deduction, ACTC, or EIC because

those deficiencies do not meet the requirements of section

6015(b)(1)(B), that they be “attributable to * * * erroneous

items of one individual filing the joint return.”   Respondent

concedes that this requirement is satisfied as applied to the
                               - 7 -

improper expenses claimed on petitioners’ Schedules C, Profit or

Loss From Business, for the lawn care business.

     Respondent is correct that the understatement related to the

dependency exemption deduction cannot be attributed to a single

spouse, and therefore petitioner cannot be relieved of joint and

several liability for the deficiency related to that item.

However, the adjustments to petitioners’ ACTC, EIC, and any other

credit adjusted on the basis of income are not properly

attributed to both spouses.   But for the other improper items

listed on the return that resulted in an understatement of

income, the adjustments to those credits would not have been

necessary.   Thus the portion of the adjustments to those credits

that is related to the improper dependency exemption deduction is

attributable to both spouses; the portion related to Mr. Kruse’s

business expenses is not.

     Respondent also contends that petitioner has not satisfied

the requirements of section 6015(b)(1)(C) because she knew or

should have known about the improper items on their joint return.

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
                                - 8 -

Cir. 1989), affg. T.C. Memo. 1988-63.    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 (noting that the provisions providing relief from joint

and several liability are “designed to protect the innocent, not

the intentionally ignorant”).

     Petitioner admits that she did not closely inspect the

returns before signing them.    If she had given the returns even a

cursory examination she would have been alerted to some of the

questionable items, including the misstatement of her oldest

child’s date of birth.    Moreover, although she stated that she

believed the minimal income her husband claimed from his business

to be accurate, the financial circumstances of her family would

indicate that this was not a reasonable belief.    Petitioner

received at least $410 from her husband each month to pay the

rent on her apartment and supplement her income while she was

living outside Florida.    In 2003, however, petitioners reported

just $6,045 in income (approximately $500 per month) from the

lawn care business, and no significant additional income or wages

earned by Mr. Kruse.   Absent substantial savings this would leave

less than $100 per month for Mr. Kruse’s living expenses.    The

record does not indicate how much money Mr. Kruse sent to
                               - 9 -

petitioner in 2004; but even if we disregard those payments, the

income claimed in 2003 and the $16,293 claimed as business income

in 2004 were sufficiently small relative to petitioners’

financial situation to have alerted petitioner to the inaccurate

deductions.   Petitioner has not satisfied her burden here, and is

not entitled to relief under section 6015(b).

Section 6015(c) Analysis

     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).   Under section

6015(d)(3)(A), generally, any items that give rise to a

deficiency on a joint return shall be allocated to the individual

filing the return in the same manner as they would have been

allocated if the individual had filed a separate return for the

taxable year.   An election under this subsection, however, is

available only when taxpayers who filed jointly are (1) no longer

married or are legally separated; or (2) are no longer members of

the same household.   Sec. 6015(c)(3)(A)(i).   The regulations

under section 6015(c) provide that

     A husband and wife who reside in two separate dwellings are
     considered members of the same household if the spouses are
     not estranged or one spouse is temporarily absent from the
     other’s household * * *.

Sec. 1.6015-3(b)(3)(ii), Income Tax Regs.
                              - 10 -

     A spouse is considered to be temporarily absent from the

household if:

     [I]t is reasonable to assume that the absent spouse will
     return to the household, and the household * * * is
     maintained in anticipation of such return. Examples of
     temporary absences may include, but are not limited to,
     absence due to * * * illness * * *.

Sec. 1.6015-3(b)(3)(i), Income Tax Regs.

     Throughout the years in question petitioners remained

legally married, and respondent argues that petitioners remained

part of the same household.   Although they lived apart,

petitioner does not contend that she had any intention other than

to remain only temporarily absent from their home in Florida.    In

fact, she lived out of State for health reasons, a circumstance

the regulations specifically contemplate to be a mere temporary

absence.   Although petitioners argue they maintained separate

bank accounts, their finances remained enmeshed and petitioner

received regular monetary assistance from her husband.     She

returned to their Florida home approximately three times per

year, and in 2008, her health improved and she returned to live

there full time.   Because petitioners remained married and part

of the same household throughout the years in question,

petitioner does not meet the requirements to make an election

under section 6015(c) and is therefore not entitled to relief

under that section.
                               - 11 -

Section 6015(f) Analysis

     Section 6015(f) provides an additional opportunity for

relief to those taxpayers who do not otherwise meet the

requirements of subsection (b) or (c) of section 6015.

Specifically, section 6015(f) gives the Commissioner the

discretion to grant equitable relief from joint and several

liability if “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)”.

     We have jurisdiction to review respondent’s denial of

petitioner’s request for equitable relief under section 6015(f).

See sec. 6015(e)(1).    We apply a de novo standard of review as

well as a de novo scope of review.      Porter v. Commissioner, 132

T.C. 203, 210 (2009).    The requesting spouse bears the burden of

proof.   Id.

     As directed by section 6015(f), the Commissioner has

prescribed procedures to use in determining whether a taxpayer

qualifies for relief from joint and several liability.     These

procedures are set forth in Rev. Proc. 2003-61, supra.     Rev.

Proc. 2003-61 sec. 4.01, 2003-2 C.B. at 297, lists seven

conditions (threshold conditions) that must be satisfied before

the Commissioner will consider a request for relief under section

6015(f).   Among these conditions is that the item in question be
                               - 12 -

attributable only to the spouse not seeking relief from joint

liability, unless one of four exceptions applies.

     With regard to the disallowed dependency exemption

deduction, respondent concedes that petitioner meets six of the

seven threshold requirements but contends that she fails to meet

the requirement that the understatement arising from the item be

attributable only to Mr. Kruse.    As discussed above, the

understatement related to the dependency exemption deduction is

attributable to both spouses; likewise, the portion of the

adjustments to the disallowed credits attributable to the

disallowed dependency exemption deduction is attributable to

petitioners jointly.    The exceptions do not apply.

     Respondent further concedes that petitioner meets the seven

threshold requirements as they relate to the disallowed Schedule

C expenses.   Though respondent argues otherwise, as under 6015(b)

the proportional amount of the disallowed ACTC and EIC that

corresponds to those particular deductions is also attributable

to Mr. Kruse alone and therefore satisfies the threshold

requirements.

     When a requesting spouse seeks relief from an understatement

of income, if the threshold requirements are satisfied the

Commissioner will consider the following nonexhaustive list of

six factors weighing in favor of granting relief for the

liability:    (1) Whether the requesting spouse is separated or
                               - 13 -

divorced from the nonrequesting spouse (temporary absences due to

illness are not considered separation if it can reasonably be

expected that the absent spouse will return); (2) whether the

requesting spouse knew or had reason to know of the item giving

rise to the deficiency; (3) whether the requesting spouse would

suffer economic hardship if not granted relief; (4) whether the

nonrequesting spouse has a legal obligation to pay the

outstanding tax liability; (5) whether the requesting spouse

received a significant benefit from nonpayment of the tax

liability; (6) whether the requesting spouse has made a good-

faith effort to comply with the tax laws for the tax years

following the year to which the request for such relief relates.

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

addition, if present, evidence of abuse of the requesting spouse

by the nonrequesting spouse or the poor mental or physical health

of the requesting spouse will weigh in favor of relief from

liability.    Rev. Proc. 2003-61, sec. 4.03(2)(b), 2003-2 C.B. at

299.

       Petitioner has presented little evidence that would justify

relief from liability.    As discussed above, petitioners’ separate

living arrangement was only temporary, and petitioner should have

known about the erroneous deductions.    When asked about the

potential for economic hardship absent relief, petitioner stated

she and her husband were “having a hard time making ends meet
                               - 14 -

right now,” but offered no further evidence that her liability

would cause undue financial strain.     Petitioner has not presented

any evidence necessary to apply the additional factors of spousal

abuse or poor health.    The health problems that led her to live

outside Florida do not justify relieving her of liability because

there is no indication that her health problems prevented

meaningful review of the returns.

     The record does indicate some facts favorable to petitioner;

namely, that she did not receive any significant benefit from the

improper deductions and that she has been in compliance with tax

laws in subsequent years.    However, the totality of the

circumstances in this case does not justify equitable relief

under section 6015(f).

     We have considered the arguments of the parties not

specifically addressed in this opinion.    They are either without

merit or irrelevant to our decision.    We hold that petitioner is

not entitled to relief from joint and several liability under

section 6015.


                                        Decision will be entered

                                  for respondent consistent with

                                  the stipulation.
