                      117 T.C. No. 23



                UNITED STATES TAX COURT



     PATRICIA M. MORA, F.K.A. PATRICIA RASBERRY,
                    Petitioner, AND
              LYNN RASBERRY, Intervenor v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 6154-00.                     Filed December 17, 2001.


     H invested in a tax shelter limited partnership
that passed through substantial losses that were
claimed on the joint Federal income tax returns H and W
filed for the taxable years 1985 and 1986, and
disallowed by R. After H and W were divorced W sought
relief from joint and several liability. R denied W’s
request for relief from joint and several liability
under sec. 6015(b) and (c), I.R.C., on the ground that
W had knowledge of the items giving rise to the
deficiencies.

     Held, W is not entitled to relief from joint and
several liability under sec. 6015(b), I.R.C.; W had
reason to know of the understatements by reason of the
size of the losses in relation to the income of H and
W. A reasonable person in W’s position would have made
inquiries to determine the legitimacy of the losses,
and W failed to make any such inquiries.
                               - 2 -

          Held, further, W is entitled to relief under sec.
     6015(c), I.R.C. The items giving rise to the
     deficiencies (the disallowed partnership losses) are
     properly attributed to H’s activities and partnership
     interest. W did not have actual knowledge of the items
     giving rise to the deficiencies at the time she signed
     the tax returns. Under the standard enunciated by this
     Court in King v. Commissioner, 116 T.C. 198 (2001), the
     test for actual knowledge under sec. 6015(c)(3)(C),
     I.R.C., is whether the requesting spouse had actual
     knowledge of the facts resulting in the disallowance of
     the losses. Contrary to respondent’s argument, the
     King standard should be applied to both active and
     passive activities. Therefore, petitioner is entitled
     to relief from joint and several liability under sec.
     6015(c), I.R.C.

          Held, further, pursuant to sec. 6015(d)(3)(B),
     I.R.C., W is not relieved of liability under sec.
     6015(c), I.R.C., to the extent that she received a tax
     benefit from the disallowed partnership losses claimed
     on the joint returns.



     Patricia M. Mora, f.k.a. Patricia Rasberry, pro se.

     Lynn Rasberry, pro se.

     Thomas M. Rohall and Kathryn K. Vetter, for respondent.



     BEGHE, Judge:   This case is before us on petitioner’s

“stand-alone” petition under section 6015(e)(1)1 for relief from

joint and several liability, following respondent’s denial of

relief.   Intervenor is petitioner’s former spouse, who intervened

under section 6015(e)(4) and Rule 325.   Intervenor and respondent


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 3 -

both contend that petitioner is not entitled to relief under

either section 6015(b) or (c).

     We sustain respondent’s determination that petitioner is not

entitled to relief under section 6015(b), but hold that

petitioner is entitled to partial relief under section 6015(c).

                         FINDINGS OF FACT

     Most of the facts have been stipulated and are so found.

The stipulation of facts and the related exhibits are

incorporated by this reference.    Petitioner and intervenor both

resided in California at the time their petition and request for

intervention, respectively, were filed with this Court.

     Petitioner was born in 1962 and came to the United States

from Uruguay in June 1984.    Before moving to the United States,

petitioner obtained the equivalent of an associate’s degree in

business administration from a community college in Uruguay.

Petitioner is fluent in English.

     Intervenor was born in 1955 and is not a college graduate.

     Petitioner and intervenor were married on November 30, 1984.

In 1985 and 1986, petitioner and intervenor both worked at the

California State capitol.    Petitioner worked as a clerk for an

assemblywoman, and intervenor worked for the California State

senate.   Petitioner and intervenor filed joint Federal income tax

returns for 1985 and 1986.
                               - 4 -

     Sometime before 1985, intervenor was introduced through a

coworker to an investment syndicator and tax preparation service

known to him as Hoyt Investments.   Walter J. Hoyt III and some

members of his family were in the business of creating tax

shelter limited partnerships for their cattle breeding

operations.   As part of their services, the Hoyt organization

also prepared the investors’ tax returns.   For a description of

the Hoyt organization and its operation, see Bales v.

Commissioner, T.C. Memo. 1989-568; see also River City Ranches

#4, J.V. v. Commissioner, T.C. Memo. 1999-209, affd. without

published opinion ___ F.3d ___ (9th Cir., November 26, 2001).

     Intervenor attended a meeting organized by the Hoyt

organization at which he decided to participate in a tax shelter

limited partnership and have the Hoyt organization prepare his

and petitioner’s joint Federal income tax returns.   Intervenor

signed all the partnership forms, gave the Hoyt organization a

check for $25, and thereby became a limited partner in Shorthorn

Genetic Engineering 1983-2, Ltd. (Shorthorn partnership).

According to the Shorthorn partnership’s records, the partnership

interest was held in the names of both petitioner and intervenor,

even though petitioner had not signed any of the partnership

documents.

     Intervenor did not have material discussions with petitioner

about his decision to invest in the Shorthorn partnership tax
                                 - 5 -

shelter or about his decision to allow the Hoyt organization to

prepare his and petitioner’s joint tax returns.

     Petitioner had little if any involvement with the Hoyt

organization.   She was new to this country, had no experience

with U.S. income tax laws, and trusted intervenor to handle their

tax return preparation.   However, petitioner was aware that

intervenor had made some financial arrangements with the Hoyt

organization.

     Petitioner and intervenor were both wage earners who did not

itemize their deductions.    The tax office of W.J. Hoyt & Sons

Management Co. prepared their 1985 and 1986 tax returns.

Intervenor delivered his and petitioner’s financial information

(consisting of the wage information from their Forms W-2, Wage

and Tax Statement) to the Hoyt office.    From that information,

the Hoyt office prepared and mailed the final returns to

petitioner and intervenor for their signatures.

     The joint Federal income tax return of petitioner and

intervenor for 1985 showed wages of $30,203 and Shorthorn

partnership losses of $20,180.    Their joint return for 1986

showed wages of $36,943 and Shorthorn partnership losses of

$26,234.   On the basis of   the filed returns, petitioner and

intervenor received income tax refunds of $3,185 for 1985 and

$3,947 for 1986.

     Hoyt told intervenor to endorse and forward the refund
                                 - 6 -

checks when received to the Hoyt office so that Hoyt could

calculate and deduct intervenor’s required contribution to the

Shorthorn partnership.     Intervenor delivered the endorsed refund

checks to Hoyt.2

         Intervenor had invested only $25 in the Shorthorn

partnership at the time he and petitioner filed their joint 1985

Federal income tax return, in which they claimed $20,180 in tax

losses from the Shorthorn partnership.     As a result of the

Shorthorn partnership losses, petitioner and intervenor received

a tax refund for 1985 of $3,185.     Intervenor signed the refund

check over to the Shorthorn partnership and received back less

than $500.     The Shorthorn partnership kept the balance of the

income tax refund as intervenor’s Shorthorn partnership capital

contribution.

     At the time petitioner and intervenor filed their 1986

return, intervenor had invested less than $3,0003 in the

Shorthorn partnership, yet claimed an additional $26,234 of

Shorthorn partnership losses (together with the 1985 losses,

petitioner and intervenor recognized a total of $46,414 in



     2
      It is unclear whether, and if so how (a general endorsement
or a restrictive endorsement), petitioner endorsed the refund
checks.
     3
      According to the testimony, intervenor had invested the
original $25 plus the $3,185 tax refund endorsed to the Hoyt
Organization, less approximately $500 of the tax refund that they
received back from the Hoyt organization.
                                - 7 -

partnership losses).   It appears that most of petitioner and

intervenor’s 1986 refund was also paid to the Shorthorn

partnership.

     Respondent examined the Shorthorn partnership’s returns, and

issued notices of final partnership administrative adjustment

(FPAA) to the Shorthorn partnership.    Walter J. Hoyt III, as tax

matters partner for the Shorthorn partnership, filed a petition

with this Court, docket No. 29295-89, which was consolidated with

other Hoyt partnership cases.

     After the partners’ stipulations in Bales v. Commissioner,

supra, the tax matters partner for the Shorthorn partnership

stipulated most of the issues raised by the Commissioner.   The

Tax Court issued an opinion affirming the Commissioner’s

calculations regarding the effect of the stipulation on each of

the partnerships, which is reported at Shorthorn Genetic

Engineering 1982-2, Ltd. v. Commissioner, T.C. Memo. 1996-515.

On the basis of the stipulations and opinion, a substantial

portion of the Shorthorn partnership losses was disallowed.

According to respondent, the losses were disallowed because,

among other things, the Shorthorn partnership overstated both the

number and value of animals owned by the partnership that formed

the basis for the deductions.

     On the basis of the stipulated and decided issues at the

partnership level, respondent denied a portion of the losses that
                                 - 8 -

were passed through to intervenor from the Shorthorn partnership

for 1985 and 1986.    The denial of the losses resulted in

computational adjustments owing by petitioner and intervenor,

which were timely assessed as deficiencies on April 13, 1998.

     On December 30, 1986, petitioner and intervenor filed a

joint petition for summary dissolution of their marriage.    In the

their dissolution petition, petitioner and intervenor stated that

they had no community assets or liabilities.    The divorce became

final in 1987.   The divorce was amicable.

     On July 16, 1998, after respondent mailed a notice of

computational adjustment to petitioner and offset two of her

income tax refunds from later year returns,4 petitioner filed

with respondent a Form 8857 requesting relief from joint and

several liability.    On February 23, 2000, respondent mailed to

petitioner a determination letter denying petitioner’s request

for relief from joint and several liability under both section

6015(b) and (c).     The explanation accompanying the denial states:

     Your claim for innocent spouse has been disallowed
     under IRC 6015(b) & IRC 6015(c). You did not meet one
     of the qualifying factors required under 6015(b) and
     6015(c) lack of knowledge of the understatement.




     4
      According to petitioner’s testimony at trial, respondent
initially offset two of her income tax refunds. One of
petitioner’s tax refunds was returned to her after she filed her
request for relief from joint and several liability. Respondent
has retained one of her tax refunds.
                                - 9 -

     On May 23, 2000, petitioner timely mailed to this Court a

petition for redetermination of relief from joint and several

liability on a joint return.

     On July 11, 2000, respondent mailed a notice to intervenor,

informing him that petitioner had filed a petition with this

Court requesting relief from joint and several liability and that

he had a right to intervene.   On September 19, 2000, intervenor

filed a notice of intervention with this Court, requesting that

petitioner’s petition for relief from joint and several liability

be denied.

                     ULTIMATE FINDINGS OF FACT

     A reasonably prudent taxpayer in the circumstances of

petitioner would have known that the tax liabilities stated on

the returns were erroneous or that further investigation was

warranted.

     Petitioner had no actual knowledge of the facts resulting in

the disallowance of the Shorthorn partnership losses.

                               OPINION

     With certain exceptions, a husband and wife may elect to

file a joint return based on their aggregate taxable income.    See

sec. 6013(a).   After making the election to file a joint return,

each of the spouses is jointly and severally liable for the

entire tax due.   Sec. 6013(d)(3).   “One of the fundamental

characteristics of joint and several liability is that the
                                - 10 -

obligee * * * may proceed against the obligors separately and may

obtain separate judgments against each.”    Dolan v. Commissioner,

44 T.C. 420, 427 (1965).

       “Prior to 1971, a spouse was held strictly liable for tax

deficiencies resulting from omissions and deductions attributable

solely to the other spouse, even if the ‘innocent spouse’ knew

nothing of the erroneous items.”    Guth v. Commissioner, 897 F.2d

441, 442-443 (9th Cir. 1990).    In order to mitigate the effect of

the harsh rule holding both spouses jointly and severally liable

for joint return taxes in all circumstances, Congress in 1971

enacted former section 6013(e) “to bring government tax

collection practices into accord with basic principles of equity

and fairness.”    S. Rept. 91-1537, at 2 (1970), 1971-1 C.B. 606,

607.

       Under the original section 6013(e) enacted in 1971, a

requesting spouse was entitled to relief from joint return

liability only for the nonrequesting spouse’s failure to report

income.    In 1984, former section 6013(e) was amended to cover any

“substantial understatement of tax” whether arising from an

omission of income, or an erroneous deduction, exclusion, or

credit.

       In 1998, Congress repealed former section 6013(e) and

enacted section 6015.    Internal Revenue Service Restructuring and

Reform Act of 1998, Pub. L. 105-206, sec. 3201(a), 112 Stat. 734.
                              - 11 -

Section 6015 was given retroactive effect with respect to any

liability for tax remaining unpaid as of July 22, 1998.    See id.

sec. 3201(g)(1), 112 Stat. 740.    To the extent that the relief

petitioner requested relates to taxes that had not been paid as

of that date,5 section 6015 is applicable.

     Section 6015 contains three alternative grounds for relief

from joint and several liability.    First, section 6015(b)

provides for traditional relief from joint and several liability

following the model of former section 6013(e).    Second, section

6015(c) provides for an allocation of liability as if the spouses

had filed separate returns.   Finally, section 6015(f) provides

for relief on other equitable grounds, but only if section

6015(b) and (c) does not apply.6

Issue 1.   Petitioner’s Right to Section 6015(b) Relief

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

several liability on a joint return if five elements are met:



     5
      Petitioner stated at trial: “I am not trying to seek
relief from my income during those two years. I am seeking
relief for the--an investment that I had no knowledge of, and I
had no idea what that was. I am not--like I said, I am not
seeking relief for the income for those two years.” According to
petitioner’s testimony, respondent has offset one of petitioner’s
subsequent year tax refunds. Petitioner would not be entitled
under sec. 6015(c) to a refund of any amount she had previously
paid. Sec. 6015(g)(3). The amount she had previously paid,
however, should be taken into account in determining her
liability under sec. 6015(c) on a separate return basis.
     6
      Petitioner did not request relief under sec. 6015(f) in her
petition or in any of her other filings with this Court.
                              - 12 -

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

        (E) the other individual elects (in such form as the
     Secretary may prescribe) 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 * * *

     Respondent’s determination states that petitioner’s request

for relief from joint and several liability is denied because

petitioner failed to show her “lack of knowledge of the

understatement.”   While respondent’s determination appears to

have focused on petitioner’s actual knowledge rather than her

“reason to know”, petitioner bears the burden of proving all of

the elements entitling her to relief.   Mueller v. Commissioner,

T.C. Memo. 2001-178; Kalinowski v. Commissioner, T.C. Memo. 2001-

21 (“Petitioner carries the burden of proof as to each of these

elements.”); In re French, 242 Bankr. 369, 377 n.5 (Bankr. N.D.

Ohio 1999) (applying prior law under former section 6013(e) to

determine burden of proof under section 6015).   Petitioner
                              - 13 -

therefore must show both that she lacked actual knowledge of the

understatement and that she had no “reason to know” of the

understatement.

     Because an appeal in this case would lie in the Court of

Appeals for the Ninth Circuit, we are bound by Ninth Circuit law.

See Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d

985 (10th Cir. 1971).

     The principal Ninth Circuit case interpreting the “not know,

and had no reason to know” requirement7 in connection with an

erroneous deduction is Price v. Commissioner, 887 F.2d 959, 962

(9th Cir. 1989).   Charles and Patricia Price filed a joint return

in which they deducted $90,000 in alleged exploration and

development expenses passed through to them from a Colombian gold

mining operation formed by Charles.    The $90,000 deduction was

taken against total income of $103,000.    After making a cursory

review of the tax return, Patricia noticed the large deduction

and questioned Charles about the legitimacy of the deduction.


     7
      Price v. Commissioner, 887 F.2d 959 (9th Cir. 1989), arose
under former sec. 6013(e) rather than under current sec. 6015(b).
The same standard applies under the sec. 6015(b) knowledge test.
Former sec. 6013(e)(1)(C) provided “the other spouse establishes
that in signing the return he or she did not know, and had no
reason to know, that there was such substantial understatement”.
Current sec. 6015(b)(1)(C) provides “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”. The only meaningful change in the language was
to eliminate the requirement that the understatement be
“substantial”. The “did not know, and had no reason to know”
language is the same in both provisions.
                                   - 14 -

Charles assured her that the deduction was proper and had been

approved by the certified public accountant who prepared and

signed the return.

     After the Commissioner disallowed the deduction and Charles

and Patricia were divorced, Patricia claimed relief from joint

and several liability under former section 6013(e).      Following

the law in omitted income cases, the Tax Court denied Patricia’s

claim for relief from joint and several liability because

Patricia was aware of the existence of the transaction underlying

the deduction–-the existence of her husband’s gold mining

investment.

     The Court of Appeals for the Ninth Circuit reversed and

granted Patricia’s request for relief from joint and several

liability.    The Court of Appeals held that in erroneous deduction

cases, unlike omitted income cases, the requesting spouse’s mere

knowledge of the existence of the transaction underlying the

deduction is not enough to deny relief.      In order to be denied

relief, the requesting spouse must know or have reason to know

“that the deduction would give rise to a substantial

understatement.”     Id. at 963.    While ignorance of the legal or

tax consequences of an item which gives rise to a deficiency is

no defense, something more than mere knowledge of the transaction

is required:

     Thus, if a spouse knows virtually all of the facts
     pertaining to the transaction which underlies the
                                - 15 -

     substantial understatement, her defense in essence is
     premised solely on ignorance of law. Id. In such a
     scenario, regardless of whether the spouse possesses
     knowledge of the tax consequences of the item at issue,
     she is considered as a matter of law to have reason to
     know of the substantial understatement and thereby is
     effectively precluded from establishing to the
     contrary. * * * [Id. at 964.]

     Where the requesting spouse lacks such pervasive knowledge

of the facts of the underlying transaction, the Court of Appeals

concluded that the trier of fact must determine whether the

requesting spouse had sufficient knowledge of the facts to make

denial of relief appropriate:

          A spouse has “reason to know” of the substantial
     understatement if a reasonably prudent taxpayer in her
     position at the time she signed the return could be
     expected to know that the return contained the
     substantial understatement. * * * Factors to consider
     in analyzing whether the alleged innocent spouse had
     “reason to know” of the substantial understatement
     include: (1) the spouse’s level of education; (2) the
     spouse’s involvement in the family’s business and
     financial affairs; (3) the presence of expenditures
     that appear lavish or unusual when compared to the
     family’s past levels of income, standard of living, and
     spending patterns; and (4) the culpable spouse’s
     evasiveness and deceit concerning the couple’s
     finances. * * * [Id. at 965; citations omitted.]

     Even though she had limited knowledge of the facts

underlying the transaction giving rise to the deduction, the

Court of Appeals found, on the basis of the size of the deduction

in relation to the taxpayers’ joint income, that Patricia had

sufficient knowledge “such that a reasonably prudent taxpayer in

her position would be led to question the legitimacy of the

deduction.”   Id.   However, because Patricia questioned Charles
                              - 16 -

about the deduction and obtained sufficient assurance that the

deduction was appropriate, she satisfied her duty of inquiry.

Id.    Therefore, the Court of Appeals granted Patricia’s claim

for relief from joint and several liability.     The Court of

Appeals specifically distinguished other cases in which the

requesting spouse failed to question the legitimacy of the

deduction:   “We therefore distinguish this case from one in which

the tax court denied relief to a spouse seeking relief who simply

ignored a large deduction and who refused to make inquiries.”

Id.

      In the case at hand, we are satisfied that petitioner did

not have actual knowledge of the facts giving rise to the

disallowance of the losses.   There was conflicting testimony

concerning whether petitioner had any involvement in the

Shorthorn partnership.   Intervenor testified that petitioner had

knowledge and was involved in the decision to participate in the

Shorthorn partnership.   Conversely, petitioner denied that she

had any involvement in or knowledge of the investment, claiming

that she left the matter entirely in intervenor’s hands.

      Even if we accepted intervenor’s testimony as true, we would

find that neither petitioner nor intervenor knew the facts that

made the flowthrough losses from the partnership unallowable as

deductions on their joint returns.     Indeed, neither petitioner

nor intervenor understood the nature of their investment or the
                              - 17 -

claimed basis for their deductions.    They put their trust

entirely in the Hoyt organization to determine the basis for,

propriety of, and amount of their deductions.

     Moreover, the documentary evidence supports petitioner’s

contention that she had no involvement with the Shorthorn

partnership.   Intervenor signed all of the documents offered in

evidence; petitioner signed none of them.    Intervenor asserted in

his intervention papers that petitioner attended a meeting with

the Hoyt organization, but his actual testimony on this point was

uncertain:

          A:   As far as I know she went with me to
                the one and only meeting I went to.

     Court:    As far as you know, or as far as you recall.

          A:   As far as I recall.

Petitioner denied ever attending a meeting or knowing any of the

people involved in the Hoyt matter.    On balance, we believe

petitioner has met her burden of proving by a preponderance of

the evidence that she had no involvement with the Shorthorn

partnership.   She clearly lacked actual knowledge of the facts

giving rise to the understatement.

     However, petitioner had “reason to know” of the

understatement.   The partnership losses were simply too large in

relation to petitioner and intervenor’s joint income for a

reasonably prudent person with petitioner’s level of education to

ignore.   Petitioner and intervenor’s joint Federal income tax
                              - 18 -

return for 1985 showed wages of $30,203 and Shorthorn partnership

losses of $20,180 and for 1986 showed wages of $36,943 and

Shorthorn partnership losses of $26,234.   A reasonably prudent

taxpayer would have questioned deductions of this size in

relation to their income.   “Tax returns setting forth large

deductions, such as tax shelter losses offsetting income from

other sources and substantially reducing or eliminating the

couple's tax liability, generally put a taxpayer on notice that

there may be an understatement of tax liability.”   Hayman v.

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

Memo. 1992-228.

     Unlike the situation in Price v. Commissioner, 887 F.2d 959

(9th Cir. 1989), where the requesting spouse questioned the

deduction and received assurances regarding the propriety of the

deduction, petitioner failed to make inquiries.   The court in

Price distinguished cases, like the one at hand, where “a spouse

seeking relief * * * simply ignored a large deduction and * * *

refused to make inquiries.”   Id. at 966; see also Reser v.

Commissioner, 112 F.3d 1258, 1267-1268 (5th Cir. 1997) (“Tax

returns setting forth ‘dramatic deductions’ will generally put a

reasonable taxpayer on notice that further investigation    is

warranted.   A spouse who has a duty to inquire but fails to do so

may be charged with constructive knowledge of the substantial

understatement and thus precluded from obtaining innocent spouse
                                - 19 -

relief”), affg. in part and revg. in part T.C. Memo. 1995-512;

Hayman v. Commissioner, supra at 1262    (no relief where

requesting spouse failed to read return); Kalinowski v.

Commissioner, T.C. Memo. 2001-21 (applying Price standard to

section 6015 cases); Levin v. Commissioner, T.C. Memo. 1987-67

(denying relief from joint and several liability where requesting

spouse failed to make inquiry).    Under the circumstances,

petitioner has failed to meet her burden of showing that a

reasonable person in her position would not have reason to know

of the understatement.   Therefore, petitioner is not entitled to

relief from joint and several liability under section 6015(b).

Issue 2.   Petitioner’s Right to Section 6015(c) Relief

     Respondent has also denied petitioner’s claim for relief

under section 6015(c).   Petitioner was eligible to make an

election under section 6015(c) because she was no longer married

to intervenor at the time she filed her request for relief from

joint and several liability.    See sec. 6015(c)(3)(A)(i)(I).

     Upon the satisfaction of certain conditions, section 6015(c)

relieves the requesting spouse of liability for the items making

up the deficiency that would have been allocable solely to the

nonrequesting spouse if the spouses had filed separate tax

returns for the taxable year.    Sec. 6015(d)(1), (3)(A).

Petitioner has the burden of proving which items would not have

been allocated to her if the spouses had filed separate returns.
                              - 20 -

See Culver v. Commissioner, 116 T.C. 189 (2001) (burden of proof

under section 6015 normally on the taxpayer, except under

section 6015(c)(3)(C) actual knowledge test).

     Petitioner has met her burden of establishing that the items

making up the deficiency are attributable to intervenor and not

to her.   Petitioner established by a preponderance of the

evidence that she had no involvement in the decision to invest in

the Shorthorn partnership or to have the Hoyt organization

prepare their joint income tax returns.   She signed none of the

documents for the Shorthorn partnership offered in evidence.

There was no firm credible evidence that petitioner had any

involvement with the Hoyt organization.   Intervenor admitted that

he was the one who was introduced to the Hoyt organization by a

coworker.   He admitted to attending an introductory Hoyt meeting

and to deciding to participate in the Shorthorn partnership.      He

delivered his and petitioner’s tax information to the Hoyt

organization to prepare their tax returns.   The deduction of

excessive losses from the Shorthorn partnership is therefore

attributable entirely to intervenor’s activities and his

partnership interest and would have been allocated entirely to

him if the spouses had filed separate returns.8   Petitioner is


     8
      Determinations made under sec. 6015 are made without regard
to community property laws. Sec. 6015(a) (flush language).
Therefore, petitioner’s potential interest in the Shorthorn
partnership as a result of the community property laws is ignored
                                                   (continued...)
                              - 21 -

therefore entitled to relief under section 6015(c) from joint and

several liability for the deficiency, except to the extent that

one or more of the exceptions apply.

     Section 6015(c) contains three exceptions under which items

initially attributed to the nonrequesting spouse must also be

attributed to the requesting spouse.   These are the “actual

knowledge” exception in section 6015(c)(3)(C), the “benefit”

exception in section 6015(d)(3)(B), and the “fraud” exception in

section 6015(d)(3)(C).   There are no facts to suggest that the

“fraud” exception applies here.

     A.   The Actual Knowledge Exception

     The first exception to the separate return rule is for items

initially allocable solely to the nonrequesting spouse of which

the requesting spouse has actual knowledge.   Sec. 6015(c)(3)(C).

If petitioner had “actual knowledge * * * of any item giving rise

to a deficiency (or portion thereof)” at the time she signed the

return, that item must be allocated to her.   See sec.

6015(c)(3)(C).

     Respondent claims that no relief is available to petitioner

under section 6015(c) because petitioner had “actual knowledge

* * * of the items giving rise to the deficiency.”   Respondent



     8
      (...continued)
for the purpose of determining whether any item giving rise to
the deficiency should be attributed to her under the separate
return standard.
                               - 22 -

has the burden of proving by a preponderance of the evidence that

petitioner, at the time of signing the returns, had actual

knowledge of the items giving rise to the deficiency that

otherwise would have been allocated solely to intervenor under

the separate return rule.   See sec. 6015(c)(3)(C) (“If the

Secretary demonstrates * * * actual knowledge”); Culver v.

Commissioner, supra.

     In King v. Commissioner, 116 T.C. 198, 203 (2001), this

Court considered the standard for “actual knowledge of the item

giving rise to the deficiency” applicable to erroneous deductions

under section 6015(c)(3)(C).   There, the taxpayer filed a joint

return with her husband, Curtis Freeman, and claimed significant

losses from Freeman’s cattle ranching operations.   The taxpayer

knew that the cattle ranch was not profitable but did not know

that Freeman lacked a profit motive for engaging in the activity,

which was the critical fact underlying the Commissioner’s

determination that Freeman was not entitled to deduct the losses

under section 183.   This Court held that the taxpayer was

entitled to relief under section 6015(c), even though the

taxpayer was aware of the activity giving rise to the erroneous

deduction (the cattle ranching activity) because she did not know

the predicate facts causing the losses to be nondeductible (i.e.

her husband’s lack of a profit motive):

          The question in this case, therefore, is not
     whether petitioner knew the tax consequences of a not-
                              - 23 -

     for-profit activity but whether she knew or believed
     that her former spouse was not engaged in the activity
     for the primary purpose of making a profit. Thus, in
     determining whether petitioner had actual knowledge of
     an improperly deducted item on the return, more is
     required than petitioner’s knowledge that the deduction
     appears on the return or that her former spouse
     operated an activity at a loss. Whether petitioner had
     the requisite knowledge is an essential fact respondent
     was required to establish under section 6015(c)(3)(C).
     Respondent failed in this regard. * * * [Id. at 205;
     emphasis added.]

     Applying the factual standard of King to the case at hand,

the losses from the Shorthorn partnership would be allocated to

petitioner only if she knew the factual basis for the denial of

the deductions.   According to respondent:

     the factual basis for the disallowed deduction in the
     Hoyt tax shelter cases generally centers on the lack of
     animals to sustain the deductions taken and an
     overvaluation of the animals that were available. * * *
     Respondent concedes that neither he nor Mr. Rasberry
     has established that petitioner had actual knowledge of
     the factual circumstances giving rise to the
     disallowance of the partnership losses. * * *

     Respondent argues that the principle of King v.

Commissioner, supra, should not be extended to limited

partnership investments because both spouses would often be

eligible for section 6015(c) relief, since neither would have

actual knowledge of the factual basis for the disallowance of the

partnership losses.   That is not how section 6015(c) works.   Only

items that are not attributable to the requesting spouse under

section 6015(d) are subject to the “actual knowledge” exception

in section 6015(c)(3)(C).   Since the erroneous deductions here
                              - 24 -

(the Shorthorn partnership losses) are attributable to

intervenor’s activities and his partnership interest, he cannot

avoid his liability for the deficiency by filing a request for

relief under section 6015(c), even if he lacked knowledge of the

facts giving rise to the deduction.

     It is appropriate to apply the King standard to limited

partnership investments made by the nonrequesting spouse in

allocating liabilities based on the “separate return” standard in

section 6015(c).   The “actual knowledge” test in section

6015(c)(3)(C) is an exception to the general rule under which

items resulting in the deficiency are allocated as if the spouses

had filed separate returns.   The statute makes no distinction

between active and passive investments, and we see no legal basis

and no policy reason for creating a judicial distinction.

Therefore, the Shorthorn partnership losses, which are

attributable solely to intervenor’s activities and partnership

interest, should not also be attributed to petitioner under

section 6015(c)(3)(C) merely because both petitioner and

intervenor, rather than just petitioner, lacked actual knowledge

of the facts giving rise to the disallowance of the losses.

     B.   The Tax Benefit Exception

     Section 6015(d)(3)(B) contains an exception to the general

rule that items are to be attributed to the spouses in the same

manner as they would have been had the spouses filed separate
                              - 25 -

returns.   Under this exception, items giving rise to a deficiency

that are attributable to the nonrequesting spouse must also be

attributed to the requesting spouse if the requesting spouse

received a “tax benefit” from the items on the joint return.   The

legislative history explains the operation of the “tax benefit”

exception:

     If the deficiency arises as a result of the denial of
     an item of deduction or credit, the amount of the
     deficiency allocated to the spouse to whom the item of
     deduction or credit is allocated is limited to the
     amount of income or tax allocated to such spouse that
     was offset by the deduction or credit. The remainder
     of the liability is allocated to the other spouse to
     reflect the fact that income or tax allocated to that
     spouse was originally offset by a portion of the
     disallowed deduction or credit. [H. Conf. Rept.
     105-599, at 252 (1998), 1998-3 C.B. 747, 1006.]

Both the conference committee report and the proposed regulations

contain an example under which an erroneous deduction

attributable to the nonrequesting spouse (in excess of the

nonrequesting spouse’s separate return income) reduces the

requesting spouse’s hypothetical separate return tax liability,

resulting in a tax benefit to the requesting spouse.    See id.;

sec. 1.6015-3(d)(5) Example 6, Proposed Income Tax Regs., 66

Fed. Reg. 3900 (Jan. 17, 2001).

     In the case at hand, petitioner would have been required to

pay tax on her share of the income reported on each joint return

had she filed a separate return.   Because of the erroneous

Shorthorn partnership deductions attributed to intervenor,
                               - 26 -

petitioner did not pay any taxes on her separate return share of

the income.   Therefore, she received a tax benefit from

intervenor’s erroneous deductions that must be taken into account

in determining the extent to which petitioner is entitled to

relief from joint and several liability.

     In order to determine the relief to which petitioner is

entitled, the parties must determine the proportion of the

erroneous Shorthorn partnership deduction that resulted in a tax

benefit to petitioner.    The Shorthorn partnership deduction is

first attributed to intervenor to the extent of intervenor’s

separate return income.    The balance of the deduction benefited

petitioner by reducing petitioner’s separate return income.

Petitioner is liable for the proportion of the deficiency equal

to the proportion of the total Shorthorn partnership deduction

which benefited her.   For example, if petitioner benefited from

25 percent of the Shorthorn partnership deduction, she would be

liable for 25 percent of the deficiency and entitled to relief

from joint and several liability for 75 percent of the

deficiency.   Any amounts previously collected from petitioner and

intervenor should be appropriately credited after determining

petitioner’s liability for the deficiency.
                        - 27 -

To give effect to the foregoing,



                              Decision will be entered in

                         accordance with Rule 155.
