                  T.C. Summary Opinion 2011-78



                     UNITED STATES TAX COURT



               KENNETH P. SHANKS, Petitioner, AND
                 LYDIA L. SHANKS, Intervenor v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24592-09S.            Filed June 29, 2011.



     Kenneth P. Shanks, pro se.

     Lydia L. Shanks, pro se.

     Horace Crump, for respondent.



     THORNTON, 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.   Pursuant to section 7463(b),

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

and this opinion shall not be treated as precedent for any other
                               - 2 -

case.   Unless otherwise indicated, all section references are to

the Internal Revenue Code, as amended.

     The issue for decision is whether for 2007 petitioner is

entitled to relief from joint and several liability under section

6015.

                            Background

     Kenneth P. Shanks (petitioner) and Lydia L. Shanks

(intervenor) (collectively, the Shankses) married in 2000 and

separated in 2008.   They have two children.

     During 2007 petitioner worked as a produce clerk for Kroger

Limited (Kroger), earning $31,077 of wages.     During 2007

intervenor worked for Staffers, Inc. (Staffers), earning $2,778

of wages.   In addition, during 2007 intervenor received $6,776 of

nonemployee compensation from ExamOne World Wide, Inc. (ExamOne),

and $1,386 of unemployment benefits from the Mississippi

Department of Employment Security.     Intervenor deposited her

ExamOne earnings and her unemployment benefits in the Shankses’

joint checking account, but petitioner did not review the bank

records; he relied upon intervenor to keep the bank balances.

Although petitioner knew that intervenor performed services for

ExamOne and received unemployment benefits, he did not know the

amounts of these items that intervenor received in 2007.

     The Shankses filed a joint Federal income tax return for

taxable year 2007.   Jackson Hewitt Tax Service prepared the
                                - 3 -

return using information the Shankses provided.   Petitioner

signed the return without reviewing it.    On their joint return

the Shankses reported their combined wages from Kroger and

Staffers, but they did not report intervenor’s nonemployee

compensation from ExamOne or her unemployment benefits.   On their

joint return the Shankses claimed a $5,926 refund, attributable

in part to an earned income credit and additional child tax

credit.1   The Shankses used the refund to obtain $5,552 in

proceeds from a tax refund anticipation loan.   The Shankses

shared these proceeds.

     Respondent determined a $3,057 deficiency in the Shankses’

2007 Federal income tax.    The deficiency was attributable in part

to $957 of self-employment tax on intervenor’s unreported

nonemployee compensation.   The remaining $2,100 of deficiency

represented reductions to the Shankses’ earned income credit and

additional child tax credit.   These last-mentioned computational

adjustments resulted from respondent’s increasing the Shankses’

income to include intervenor’s unreported nonemployee

compensation and unemployment benefits.2


     1
      More particularly, on their 2007 joint return the Shankses
reported zero total tax, $3,469 of income tax withholding (of
which $3,411 represented petitioner’s withholding on his wage
income and $58 represented intervenor’s withholding on her own
wage income), a $1,244 earned income credit, and a $1,213
additional child tax credit.
     2
      Because of an offsetting increase in the Shankses’ child
                                                   (continued...)
                                 - 4 -

                             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 on their aggregate income.    Sec. 6013(d)(3).   An

individual may seek relief from joint and several liability under

section 6015, which offers three avenues of possible relief under

subsections (b), (c), and (f).    In general, section 6015(b)

provides full or apportioned relief from joint and several

liability with respect to an understatement; section 6015(c)

provides proportionate tax relief to divorced or separated

taxpayers with respect to a deficiency; and in certain

circumstances section 6015(f) provides equitable relief if relief

is unavailable under section 6015(b) or (c).    An individual

against whom a deficiency has been asserted may petition this

Court to determine the appropriate relief under section 6015.

Sec. 6015(e)(1)(A).3   In determining the appropriate relief



     2
      (...continued)
tax credit resulting from the inclusion of the unreported income
in the Shankses’ income, the deficiency reflects no additional
tax liability, apart from the items described above.
     3
      The parties have stipulated that petitioner made an
administrative request for relief under sec. 6015 at the same
time that he filed his petition. Cf. Cheshire v. Commissioner,
115 T.C. 183, 192 n.4 (2000) (in the absence of any objection
from the Commissioner, treating the raising of sec. 6015 relief
in the petition as a timely filed election), affd. 282 F.3d 326
(5th Cir. 2002).
                                 - 5 -

available under section 6015, we apply a de novo scope and

standard of review.     See Porter v. Commissioner, 132 T.C. 203,

210 (2009).

I.    Section 6015(b) Relief

       Under section 6015(b), if certain requirements are met, a

requesting spouse may be relieved of joint and several liability

from a tax understatement that is attributable to the

nonrequesting spouse if, among other requirements, the requesting

spouse establishes that he or she “did not know, and had no

reason to know” that the other spouse understated that spouse’s

tax liability on the return.     Sec. 6015(b)(1)(C), (2).   No relief

is available under this provision if the requesting spouse has

“actual knowledge of the underlying transaction that produced the

omitted income”.     Cheshire v. Commissioner, 115 T.C. 183, 192-193

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

       Because petitioner knew that intervenor performed services

for ExamOne and received unemployment benefits, he is not

entitled to relief under section 6015(b).

II.    Section 6015(c) Relief

       A.   Eligibility--the Knowledge Requirement

       If various requirements are met, an election under section

6015(c) treats the former spouses as if they had filed separate

returns, and each spouse’s liability is limited to the portion of

the deficiency properly allocable to the electing spouse, as
                               - 6 -

determined under the rules contained in section 6015(d).       See

sec. 6015(c)(1), (d)(3).   Such an election is generally not valid

if the Secretary demonstrates that the individual making the

election had “actual knowledge, at the time such individual

signed the return, of any item giving rise to a deficiency (or

portion thereof) which is not allocable to such individual under

subsection (d)”.   Sec. 6015(c)(3)(C).

     In his pretrial memorandum and again at the commencement of

trial respondent’s counsel conceded that petitioner was entitled

to elect relief under section 6015(c) with respect to the $957 of

self-employment tax attributable to intervenor’s nonemployee

compensation.   In his opening remarks at trial respondent’s

counsel explained this concession as being based on a

determination by respondent’s Appeals Office that “it could not

be shown that Mr. Shanks had knowledge of the unemployment

benefits * * * and the income from Exam One.”     But at the

conclusion of trial respondent’s counsel sought to retract this

concession on the ground that petitioner’s testimony established

that he had actual knowledge of these omitted items so as to

invalidate his election under section 6015(c).4




     4
      Respondent does not contend that petitioner fails the
requirements for electing relief under sec. 6015(c) in any
respect other than allegedly having actual knowledge of the
omitted income.
                                  - 7 -

          1.   ExamOne Earnings

     Because petitioner knew that intervenor performed services

for ExamOne, he should have known of this omitted income.     But

that does not mean he had actual knowledge of it.     See Charlton

v. Commissioner, 114 T.C. 333, 340-341 (2000) (finding that the

requesting spouse lacked actual knowledge of the omitted income

from his ex-wife’s business even though he knew of the business

and had access to her business records but never checked them to

determine whether she had accounted for all her income).

Petitioner testified credibly that although intervenor deposited

her ExamOne earnings in their joint checking account, he did not

know the amounts of these deposits because he never reviewed the

bank accounts, entrusting that task to her.     Intervenor did not

directly contradict this testimony; she testified merely that

petitioner had “access” to the joint checking account and “was

aware of what was going on.”      Respondent, who introduced no

evidence on this point, has failed to carry his burden of proving

that petitioner had actual knowledge of intervenor’s omitted

earnings from ExamOne.   Cf. sec. 1.6015-3(c)(4), Example

(4)(iii), Income Tax Regs. (where the requesting spouse knew that

the nonrequesting spouse had income from his business but did not

know the exact amount, her section 6015(c) election was valid

except insofar as she knew the minimum amount of his earnings

from the business).   Consequently, we disagree with respondent
                                - 8 -

that petitioner’s section 6015(c) election is invalid because

petitioner had actual knowledge of intervenor’s ExamOne earnings.

           2.   Unemployment Benefits

     Petitioner testified that he was aware that intervenor was

receiving unemployment benefits in 2007 but did not know the

amount.   Intervenor, by contrast, testified that petitioner

“wasn’t aware of the unemployment”.     Respondent introduced no

evidence on this point.   On the basis of this sparse record, we

conclude that petitioner had at least reason to know of the

unemployment benefits.    But we need not decide whether petitioner

had actual knowledge of the unemployment benefits because, as

discussed below, even if he lacked actual knowledge, petitioner

has not shown that the portion of the deficiency attributable to

the unemployment benefits is not properly allocable to him.5

     B.   Allocation of Deficiency

     Generally, a spouse who is eligible for relief under section

6015(c) is allocated a portion of the joint return deficiency in

proportion to the net amount of items taken into account in

computing the deficiency that is allocable to the electing

spouse.   Sec. 6015(d)(1).   As an exception to this general rule,

two types of items are treated separately in making this


     5
      Furthermore, as discussed infra, for purposes of our
analysis of whether petitioner is entitled to equitable relief
under sec. 6015(f), it is not determinative whether petitioner
had actual knowledge or only reason to know of the unemployment
benefits.
                                 - 9 -

allocation, rather than being aggregated with all other items to

which the deficiency is attributable:    (1) Disallowed credits;

and (2) any tax (other than income tax imposed by section 1 or

alternative minimum tax imposed by section 55) that is required

to be included with the joint return.    Sec. 6015(d)(2).

Consequently, pursuant to this rule, the disallowed credits and

the self-employment tax that make up the Shankses’ deficiency are

treated separately in allocating the deficiency.

     Items giving rise to a deficiency on a joint return are

generally allocated as if the spouses had filed separate returns.

Sec. 6015(d)(3)(A).   Erroneously omitted items of income are

allocated to the spouse who was the source of the income.     Sec.

1.6015-3(d)(2)(iii), Income Tax Regs.    But an erroneous item that

otherwise would be allocated to the nonrequesting spouse is

allocated to the requesting spouse to the extent that the

requesting spouse received a “tax benefit” on the joint return.

Sec. 6015(d)(3)(B); sec. 1.6015-3(d)(2)(i), Income Tax Regs.

          1.    Self-Employment Tax on Intervenor’s ExamOne
                Earnings

     The omitted income from intervenor’s ExamOne earnings is

allocated to her; consequently, the $957 of self-employment tax

on these earnings is also attributable to her and not to

petitioner.    Respondent does not contend that petitioner realized

any tax benefit on the joint return as relates to this unreported

self-employment tax liability.    We conclude and hold, consistent
                                - 10 -

with respondent’s original concession, that the $957 of the

deficiency that is attributable to intervenor’s self-employment

tax liability is properly allocable to her and not to petitioner.

           2.    Disallowed Tax Credits

     The regulations provide that if a disallowed credit is

attributable in whole or part to both spouses, “then the IRS will

determine on a case by case basis how such item will be

allocated.”     Sec. 1.6015-3(d)(4)(ii), Income Tax Regs.

Respondent has effectively determined that the disallowed credits

are to be allocated to both spouses, declining to relieve

petitioner of joint and several liability with respect to the

disallowed credits.

     On the basis of our review of all the facts and

circumstances, we conclude that the disallowed credits are

properly allocable to both petitioner and intervenor.       After all,

it was the combination of petitioner’s income and intervenor’s

income (her reported wage income plus her omitted ExamOne

earnings and unemployment benefits) that caused their total

income to exceed allowable income limits for the earned income

credit and additional child tax credit shown on their joint

return.   Moreover, the Shankses’ tax refund was attributable in

significant part to the earned income credit and additional child

tax credit that respondent has disallowed.     Insofar as the record
                                 - 11 -

shows, the Shankses shared equally the benefit of the tax refund,

in the form of a tax refund anticipation loan.

       Petitioner, as the requesting spouse, bears the burden of

proving the portion of the deficiency that is properly allocable

to him.     See sec. 6015(c)(2); sec. 1.6015-3(d)(3), Income Tax

Regs.     He has not shown that the portion of the deficiency

attributable to the disallowed credits is not properly allocable

to him.

III.    Section 6015(f) Relief

        Because we have held that petitioner is not entitled to

relief under section 6015(b) and is entitled to only partial

relief under section 6015(c), we finally consider whether he may

be eligible for additional relief under section 6015(f).        See

sec. 6015(f)(2).     Section 6015(f)(1) provides that a taxpayer may

be relieved from joint and several liability if it is determined,

after considering all the facts and circumstances, that it is

inequitable to hold the taxpayer liable for the unpaid tax or

deficiency.

        Rev. Proc. 2003-61, sec. 4.01(1)-(7), 2003-2 C.B. 296, 297,

sets out seven threshold conditions that a requesting spouse must

meet before the Commissioner will consider a request for relief

under section 6015(f).     Respondent does not dispute that

petitioner meets these threshold conditions.
                                - 12 -

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

forth a nonexclusive list of factors to be evaluated in requests

for relief under section 6015 for spouses who have met the

threshold conditions.    The factors are:   (1) Marital status, (2)

economic hardship that would result absent relief, (3) knowledge

or reason to know of the item giving rise to the deficiency,6 (4)

any legal obligation of the nonrequesting spouse to pay the tax

liability pursuant to a divorce decree or agreement, (5)

significant benefit received by the requesting spouse, (6) the

requesting spouse’s compliance with income tax laws following the

year for which relief is requested, (7) spousal abuse, and (8)

the requesting spouse’s mental or physical health at the time the

return was filed or relief was requested.

     Petitioner and intervenor are separated.    This factor weighs

in support of equitable relief.    See id. sec. 4.03(2)(a)(i),

2003-2 C.B. at 298.     But, as discussed below, petitioner has

failed to establish that any of the other enumerated factors

weigh in favor of relief.




     6
      Under these guidelines, the requesting spouse’s actual
knowledge of the income giving rise to the deficiency weighs
strongly against granting relief. See Rev. Proc. 2003-61, sec.
4.03(2)(a)(iii)(B), 2003-2 C.B. 296, 298. Such knowledge may be
overcome only if the factors in favor of equitable relief are
“particularly compelling.” Id. By contrast, reason to know of
the item giving rise to the deficiency is weighted no more
heavily than other factors. Id.
                                - 13 -

         At a minimum, petitioner had reason to know of intervenor’s

ExamOne earnings and unemployment benefits.     This factor weighs

against equitable relief.     See id. sec. 4.03(2)(a)(iii)(B), 2003-

2 C.B. at 298.

        The omission of part of intervenor’s income from the

Shankses’ joint return resulted in a higher tax refund, which

petitioner and intervenor shared.     Petitioner has not established

that he received no significant benefit (beyond normal support)

from the understatement.     See sec. 1.6015-2(d), Income Tax Regs.

(stating that the fact that the spouse received a benefit from

the understatement on the return is a factor that may be taken

into account in determining whether the spouse significantly

benefited from an understatement); Rev. Proc. 2003-61, sec.

4.03(2)(v), 2003-2 C.B. at 299.     This factor also weighs against

relief.

        Petitioner claims he will suffer economic hardship if he is

not granted relief because he is caring for his two children.

Generally, economic hardship exists if collection of the tax

liability will render the taxpayer unable to pay reasonable basic

living expenses.     See sec. 301.6343-1(b)(4), Proced. & Admin.

Regs.    Petitioner has made no such showing.   This factor weighs

against relief.     See Rev. Proc. 2003-61, sec. 4.03(2)(a)(ii),

2003-2 C.B. at 298.
                               - 14 -

     Petitioner does not contend and the record does not suggest

that intervenor had a legal obligation to pay the outstanding

income tax liability pursuant to a divorce decree or agreement.

Nor does the record suggest that petitioner was subject to abuse

or was in poor mental or physical health either when he signed

the 2007 joint return or when he requested relief.      See Rev.

Proc. 2003-61, sec. 4.03(2)(a)(iv), (b)(i) and (ii), 2003-2 C.B.

at 298-299.    Finally, the record does not show whether petitioner

has been in compliance with the income tax laws for years after

2007.

        The totality of the factors discussed above convinces us

that it is not inequitable to hold petitioner liable for the part

of the deficiency attributable to items other than intervenor’s

$957 of self-employment tax.    Consequently, we hold that

petitioner is not entitled to equitable relief under section

6015(f).

     To reflect the foregoing,


                                          An appropriate decision

                                     will be entered.
