                  T.C. Summary Opinion 2006-22



                     UNITED STATES TAX COURT



              RUSSELL WHITING PACKER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8413-03S.               Filed February 8, 2006.


     Russell Whiting Packer, pro se.

     Ric D. Hulshoff, for respondent.



     DEAN, 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.   Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code as in effect for the year at issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.
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     Respondent determined a deficiency in petitioner and his

former spouse’s Federal income tax of $3,280.10 for 1999.      The

issue for decision is whether petitioner is entitled to relief

from joint or several liability pursuant to section 6015(b), (c),

or (f).

                             Background

     The stipulated facts and the exhibits received into evidence

are incorporated herein by reference.     At the time the petition

in this case was filed, petitioner resided in Mesa, Arizona.

     Petitioner and his former spouse, Leanne Valentine Packer

(Ms. Valentine), were married in 1996.    Petitioner and Ms.

Valentine separated in August of 1999.    Petitioner is a college

graduate.    During 1999, he was employed by the U.S. Postal

Service.    Ms. Valentine is a high school graduate.   During the

relevant periods in 1999, she was employed as a receptionist for

an orthodontist.    In 1999, Ms. Valentine received a distribution

from her 401(k) account in the amount of $32,802 (distribution).

     On February 8, 2000, petitioner filed a Petition for

Dissolution of Marriage (Divorce) Without Children in the

Superior Court of Arizona.    On April 15, 2000, petitioner and Ms.

Valentine jointly filed a Form 1040, U.S. Individual Income Tax

Return, for 1999, which was prepared by a certified public

accountant.    The distribution was reported as income on the

return.    On July 27, 2000, the Superior Court of Arizona entered
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a Decree of Dissolution of Marriage (Divorce Without Children)

with respect to petitioner’s marriage to Ms. Valentine.

     On March 5, 2003, respondent issued to petitioner and Ms.

Valentine a statutory notice of deficiency for 1999.    Respondent

determined that petitioner and Ms. Valentine are liable for a 10-

percent additional tax on the distribution under section 72(t),

because Ms. Valentine received the distribution prematurely.

Petitioner filed with respondent a Form 8857, Request for

Innocent Spouse Relief, in which petitioner sought relief from

joint and several liability with respect to the 10-percent

additional tax.   Shortly thereafter, petitioner filed a petition

with the Court.

     Petitioner agrees that he had actual knowledge of the

distribution at the time it was made in 1999 and that he was

aware that it was taxable at the time the joint return for 1999

was filed.   Petitioner, however, does not agree that he knew a

10-percent additional tax under section 72(t) would be imposed on

the distribution for early withdrawal.

                             Discussion

     Generally, married taxpayers may elect to file a joint

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

election, each spouse is jointly and severally liable for the

entire tax due.   Sec. 6013(d)(3).   A spouse, however, may seek
                               - 4 -

relief from joint and several liability under section 6015.     To

obtain relief from liability, a spouse must qualify under section

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

6015(c).   In addition, if relief is not available under section

6015(b) or (c), a spouse may seek equitable relief under section

6015(f).   Fernandez v. Commissioner, 114 T.C. 324, 329-331

(2000); Butler v. Commissioner, 114 T.C. 276, 287-292 (2000).

     Except as otherwise provided in section 6015, the taxpayer

bears the burden of proof.   Rule 142(a); Alt v. Commissioner, 119

T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004).

Relief Under Section 6015(b)

     Section 6015(b) provides relief from joint and several

liability for tax (including interest, penalties, and other

amounts) to the extent that such liability is attributable to an

understatement of tax.   To be eligible for relief, the requesting

spouse must satisfy the following five elements of section

6015(b)(1):

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

                  (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
                               - 5 -

          individual liable for the deficiency in tax for
          such taxable year attributable to such
          understatement; and

                 (E) the other individual [makes a valid
          election] * * *.

     Respondent concedes that petitioner has satisfied the

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

6015(b)(1).   At issue are the requirements under subparagraphs

(C) and (D) of section 6015(b)(1).

     Under section 6015(b)(1)(C), the requesting spouse must

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

had no reason to know of the understatement.    A requesting spouse

has knowledge or reason to know of an understatement if he

actually knew of the understatement, or if a reasonably prudent

taxpayer in his position, at the time he signed the return, could

be expected to know that the return contained an understatement

or that further investigation was warranted.    Mora v.

Commissioner, 117 T.C. 279, 287 (2001); Butler v. Commissioner,

supra at 283; see sec. 1.6015-2(c), Income Tax Regs.

     Petitioner agrees that he knew Ms. Valentine received a

distribution from her 401(k) account in 1999.   Petitioner,

however, contends that he did not know that there was an

understatement of tax on the 1999 return, because he was not

aware that the distribution would be subject to a 10-percent

additional tax under section 72(t).
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     Where a spouse seeking relief has actual knowledge of the

underlying transaction that produced the omitted income, innocent

spouse relief is denied.    Cheshire v. Commissioner, 115 T.C. 183,

192-193 (2000), affd. 282 F.3d 326 (5th Cir. 2002).   The

requesting spouse has “reason to know” of the understatement of

tax if he knew every fact necessary to determine the legal

consequences of the income or if such facts are reasonably within

his reach; ignorance of the attendant tax consequences is not a

defense.   Mitchell v. Commissioner, 292 F.3d 800, 802-804 (D.C.

Cir. 2002), affg. T.C. Memo. 2000-332; Price v. Commissioner, 887

F.2d 959, 964 (9th Cir. 1989); McCoy v. Commissioner, 57 T.C.

732, 734-735 (1972).

     The Court finds that petitioner has failed to satisfy the

requirement of section 6015(b)(1)(C).   Petitioner had actual

knowledge of the distribution at the time that he signed the

return, which gave him reason to know of the understatement of

tax on the 1999 return.    Therefore, petitioner is not entitled to

relief under section 6015(b).

Relief Under Section 6015(c)

     Section 6015(c) allows proportionate tax relief (if a timely

election is made) through allocation of the deficiency between

individuals who filed a joint return and are no longer married,

are legally separated, or have been living apart for a 12-month

period.
                                - 7 -

       Petitioner and Ms. Valentine were divorced on July 27, 2000,

and petitioner’s election for innocent spouse relief was made

shortly after his receipt of the statutory notice of deficiency.

Therefore, petitioner is eligible to elect the application of

section 6015(c).

       Relief under section 6015(c), however, is not available if

respondent demonstrates that the requesting spouse had actual

knowledge, at the time the return was signed, of any item giving

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

to such individual.    Sec. 6015(c)(3)(C); Hopkins v. Commissioner,

121 T.C. 73, 86 (2003); Cheshire v. Commissioner, supra at 193-

194.    The knowledge requirement under section 6015(c)(3)(C) does

not require the requesting spouse to possess actual knowledge of

the tax consequences arising from the item giving rise to the

deficiency.    Hopkins v. Commissioner, supra; Cheshire v.

Commissioner, supra at 194; sec. 1.6015-3(c)(2), Income Tax Regs.

Rather, the statute mandates only a showing that the requesting

spouse actually knew of the item on the return that gave rise to

the deficiency (or portion thereof), without regard as to whether

he knew of the tax consequences.    Mitchell v. Commissioner, supra

at 805; Cheshire v. Commissioner, supra.

       The item giving rise to the deficiency is the distribution.

At the time when the distribution was made, petitioner signed a

spousal consent, which evidenced that he knew and consented to
                                - 8 -

Ms. Valentine’s election to make an early withdrawal of the funds

in her 401(k) account.   Regardless of whether petitioner knew of

the tax consequences for the distribution, petitioner is not

entitled to relief under section 6015(c).

Relief Under Section 6015(f)

     Section 6015(f) grants the Commissioner discretion to

relieve an individual, where relief is not available under

section 6015(b) or (c), from joint liability if, taking into

account all the facts and circumstances, it is inequitable to

hold the individual liable for any unpaid tax or deficiency.

Sec. 6015(f).   A requesting spouse bears the burden of proving

that the Commissioner abused his discretion in denying the

equitable relief from joint liability under section 6015(f).

Jonson v. Commissioner, 118 T.C. 106, 114 (2002), affd. 353 F.3d

1181 (10th Cir. 2003); Cheshire v. Commissioner, supra at 198;

Butler v. Commissioner, 114 T.C. at 292.

     As discussed above, petitioner is not entitled to relief

under section 6015(b) or (c).   The parties dispute whether it is

inequitable to hold petitioner liable for the 1999 deficiency.

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

prescribed guidelines in Rev. Proc. 2003-61 to be used in

determining whether an individual qualifies for relief under that
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section.1   Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. 296, 297,

sets forth seven threshold conditions that must be satisfied

before the Commissioner will consider a request for equitable

relief under section 6015(f).    Respondent concedes that

petitioner has satisfied the threshold conditions.

       A requesting spouse who satisfies all of the applicable

threshold conditions may be relieved of all or part of the

liability under section 6015(f), if, taking into account all the

facts and circumstances, the Internal Revenue Service determines

that it would be inequitable to hold the requesting spouse liable

for the income tax liability.    Rev. Proc. 2003-61, sec. 4.01, at

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

forth a nonexclusive list of factors that the Commissioner will

consider in determining whether, taking into account all the

facts and circumstances, it is inequitable to hold the requesting

spouse liable for all or part of the deficiency.   No single

factor will determine whether equitable relief will be granted in


       1
      Rev. Proc. 2003-61, 2003-2 C.B. 296, supersedes Rev. Proc.
2000-15, 2000-1 C.B. 447. The guidelines set forth in Rev. Proc.
2003-61, supra, are effective for requests for relief filed on or
after Nov. 1, 2003, and for requests for relief pending as of
Nov. 1, 2003, for which no preliminary determination letter has
been issued as of Nov. 1, 2003. Rev. Proc. 2003-61, sec. 7,
2003-2 C.B. at 299. Although petitioner filed his request for
relief prior to Nov. 1, 2003, Rev. Proc. 2003-61, supra, applies
in this case, because respondent had not issued a preliminary
determination letter on or before Nov. 1, 2003.
       2
      Rev. Proc. 2003-61, sec. 4.03 applies to a spouse who meets
the threshold conditions of sec. 4.01, but not sec. 4.02.
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any particular case, and the Commissioner will consider and weigh

all relevant factors regardless of whether or not the factor is

listed in Rev. Proc. 2003-61, sec. 4.03.

     Rev. Proc. 2003-61, sec. 4.03(2)(a), provides the following

factors that may be relevant to whether the Commissioner will

grant equitable relief:    (1) Marital status, (2) economic

hardship, (3) knowledge or reason to know of the item giving rise

to the deficiency, (4) the nonrequesting spouse’s legal

obligation, (5) significant benefit, (6) compliance with income

tax laws, (7) abuse, and (8) mental or physical health.

     1.   Marital Status

     On July 27, 2000, the Superior Court of Arizona entered a

Decree of Dissolution finalizing the divorce between petitioner

and Ms. Valentine.   This factor weighs in favor of granting

relief.

     2.   Economic Hardship

     Economic hardship applies if satisfaction of the tax

liability in whole or in part “will cause an individual taxpayer

to be unable to pay his or her reasonable basic living expenses.

The determination of a reasonable amount for basic living

expenses will be made by the director and will vary according to

the unique circumstances of the individual taxpayer.”     Rev. Proc.

2003-61, sec. 4.03(2)(a)(ii); sec. 301.6343-1(b)(4)(i),
                                - 11 -

Proced. & Admin. Regs.     Unique circumstances do not include the

maintenance of an affluent or luxurious standard of living.

     There is no indication on the record that petitioner lives

an extravagant lifestyle.     Petitioner, however, has offered no

evidence that payment of the deficiency, in part or in full,

would cause him financial hardship.      This is a neutral factor.

     3.      Knowledge or Reason To Know

     Actual knowledge of the item giving rise to the deficiency

is a strong factor weighing against relief.      Rev. Proc. 2003-61,

sec. 4.03(2)(a)(iii)(B).     Petitioner agrees that he had actual

knowledge of the distribution.

     4.      Nonrequesting Spouse’s Legal Obligation

     This factor weighs in favor of the requesting spouse where

the nonrequesting spouse has a legal obligation to pay the

outstanding income tax liability pursuant to a divorce decree or

an agreement.     Id. sec. 4.03(2)(a)(iv).   The Decree of

Dissolution of Marriage entered by the Superior Court of Arizona

is silent as to the treatment of any potential income tax

deficiency from joint returns filed by petitioner and Ms.

Valentine.    Petitioner has offered no evidence to show that Ms.

Valentine has a legal obligation, pursuant to other agreement, to

pay the 1999 tax deficiency.    This is a neutral factor.
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     5.   Significant Benefit

     Where the requesting spouse significantly benefited (beyond

normal support) from the item giving rise to the deficiency, this

is a factor against granting equitable relief.    Id. sec.

4.03(a)(v), 2003-2 C.B. at 299; see sec. 1.6015-2(d), Proced. &

Admin. Regs.

     Petitioner testified that Ms. Valentine used about $1,500 of

the distribution to pay off his truck, and that she also used the

distribution, in an unknown amount, to pay “a couple other

things” for petitioner.   Petitioner further testified that he

subsequently withdrew $3,000 from his thrift savings plan to

repay Ms. Valentine.   Pursuant to the Decree of Dissolution of

Marriage, section 6h, Separate Debt, petitioner is responsible

for a debt in the amount of $14,000, described as “spouse paid

debts by borrowing from her 401K/ Truck Loan, taxes, Orange Tree

Resort Time Share”.

     The facts and circumstances tend to suggest that petitioner

did not receive any significant benefits from the distribution,

because he has either repaid or is obligated to repay the funds

that he received from the distribution.    Nevertheless, it remains

unclear how much petitioner initially received from the

distribution and whether he has repaid or will actually repay all

the funds that he received from the distribution.   The Court

concludes that this is a neutral factor.
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     6.     Compliance With Income Tax Laws; Presence of Abuse;
            and Mental or Physical Health

     There is no evidence that petitioner is not in compliance

with his tax obligations.    Tax compliance is a factor that the

Commissioner will consider only against granting relief.     Ewing

v. Commissioner, 122 T.C. 32, 46-47 (2004).     Therefore, this is a

neutral factor.

     There are also no allegations of abuse, or mental or

physical health problems.    The absence of these factors will not

weigh against equitable relief.    See Rev. Proc. 2003-61, sec.

4.03(2)(b).

     The only factor in favor of petitioner is marital status.

This, by itself, is insufficient to overcome petitioner’s actual

knowledge of the distribution, which is a strong factor weighing

against granting petitioner equitable relief.    See id. sec.

4.03(2)(a)(iii).

     The Court finds, considering all the facts and

circumstances, that there are no particularly compelling reasons

to grant equitable relief under section 6015(f).

     Reviewed and adopted as the report of the Small Tax Case

Division.


                                          Decision will be entered

                                     for respondent.
