                         T.C. Memo. 2006-185



                       UNITED STATES TAX COURT



                 HELEN M. KORCHAK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 170-04, 13315-06.   Filed August 30, 2006.



     Robert W. Lynch, for petitioner.

     Gerald A. Thorpe, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Pursuant to Madison Recycling Associates v.

Commissioner, T.C. Memo. 2001-85, affd. 295 F.3d 280 (2d Cir.

2002), respondent assessed against petitioner and petitioner’s

spouse Ernest I. Korchak (Mr. Korchak) a deficiency of $140,388

in their Federal income tax (tax) for their taxable year 1982.

In a so-called affected items notice of deficiency (affected
                                   - 2 -

items notice), respondent determined for the taxable year 1982 of

petitioner and Mr. Korchak additions to tax under sections1

6653(a)(1)(A),2 6653(a)(1)(B),2 and 6659 of $7,019.40, 50 percent

of the interest due on an assessed deficiency of $140,388, and

$34,322.10, respectively.3

     The only issue remaining for decision is whether petitioner

is entitled to relief under section 6015(b) or, in the alterna-

tive, under section 6015(f) with respect to her taxable year

1982.       We hold that petitioner is entitled to relief under

section 6015(b) with respect to that year.



        1
      All section references are to the Internal Revenue Code in
effect for the year at issue.
        2
      In Korchak v. Commissioner, T.C. Memo. 2005-244, see infra
note 3, respondent conceded that the affected items notice
incorrectly referred to sec. 6653(a)(1)(A) and (B), instead of to
sec. 6653(a)(1) and (2).
        3
      On Feb. 28, 2005, respondent and petitioner entered into a
stipulation to be bound (stipulation to be bound) by the final
decision in Korchak v. Commissioner, docket No. 22105-03. That
case, which was based upon the affected items notice issued to
petitioner and Mr. Korchak, was commenced in the Court by Mr.
Korchak. The issue presented there was whether the deficiency in
tax that respondent assessed pursuant to Madison Recycling
Associates v. Commissioner, T.C. Memo. 2001-85, affd. 295 F.3d
280 (2d Cir. 2002), for the taxable year 1982 of petitioner and
Mr. Korchak is subject to additions to tax under secs. 6653(a)
and 6659. In the opinion that the Court issued in the case
involving Mr. Korchak, Korchak v. Commissioner, T.C. Memo. 2005-
244, the Court sustained respondent’s determinations under secs.
6653(a) and 6659. On Oct. 20, 2005, the Court entered its
decision in that case, which became final on Jan. 18, 2006. In
the stipulation to be bound, petitioner retained the right to
assert that she is entitled to relief under sec. 6015(b) or
(f) with respect to her taxable year 1982.
                                 - 3 -

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found

except as stated herein.

     Petitioner resided in Bryn Mawr, Pennsylvania, when she

filed the petitions.

     Petitioner was born in Australia in 1937.     Mr. Korchak was

born in Czechoslovakia in 1934.    In 1939, Mr. Korchak moved with

his family to the Netherlands.    In 1952, Mr. Korchak moved with

his family to Australia, where he met petitioner.     In 1959,

petitioner and Mr. Korchak married (and remained married as of

the time of the trial) and moved to the United States.

     In 1958, petitioner received a B.S. degree in biochemistry

from the University of Melbourne.    In 1962, she received a Ph.D.

in physiology from Tufts University.     As of the time of the

trial, petitioner had never taken any tax, financial, or account-

ing courses.

     In 1957, Mr. Korchak received a B.S. degree in chemical

engineering from the University of Melbourne.     In 1964, he

received a Sc.D. in chemical engineering from the Massachusetts

Institute of Technology (MIT).    Mr. Korchak audited an economics

class and an accounting class when he was studying at MIT.

     During the period 1964 to 1976, petitioner was a full-time

homemaker and mother.   From 1976 until 1986, petitioner worked as

a research scientist for New York University (NYU).     From 1986
                               - 4 -

until at least the time of the trial, petitioner worked as a

research scientist for the University of Pennsylvania.   At the

time of the trial, her annual salary from the University of

Pennsylvania was $115,000.4   As of that time, petitioner intended

to retire in 2007.

     In 1964, Mr. Korchak began working for Halcon International,

Inc. (Halcon).   He worked for that company or one of its subsid-

iaries until 1986 when Halcon and its subsidiaries ceased busi-

ness operations.   During the first few years Mr. Korchak worked

for Halcon, he was involved in research and development.   His

duties included developing chemical processes and determining

whether such processes were economically feasible.   If, after a

relatively short period of time, the processes that were being

developed did not appear to be economically feasible, no further

work was done with respect to such processes.

     During 1981, Mr. Korchak was president of Halcon Research

and Development Corporation, a subsidiary of Halcon that was

involved in research and development.   Sometime during 1981, Mr.

Korchak became president of Scientific Design Corporation,

another subsidiary of Halcon that was involved in engineering,

and held that position during 1982.



     4
      During 2004, the year before the trial took place, peti-
tioner received her salary from the University of Pennsylvania,
the amount of which is not disclosed by the record, and other
unidentified income totaling $270.
                                 - 5 -

     During 1981 and 1982, Mr. Korchak received compensation and

other taxable distributions from Halcon and/or its subsidiaries

(collectively, Halcon distributions) totaling $1,539,269 and

$466,309, respectively.    Petitioner and Mr. Korchak made a

considered judgment not to change their family’s lifestyle in any

way as a result of Mr. Korchak’s having received such distribu-

tions.    They made that judgment because they did not want to

spoil their children by having a lavish lifestyle.    Mr. Korchak

invested a large portion of the Halcon distributions that he

received during 1981 and 1982.    Although petitioner was generally

aware that Mr. Korchak invested a large portion of such distribu-

tions, she was not aware of the specific investments that he

made.

     From the time in 1986 when Halcon and its subsidiaries

ceased business operations and no longer employed Mr. Korchak

until around 1995, Mr. Korchak received very little income.

Starting in 1990 until at least the time of the trial, Mr.

Korchak worked for Performance Coatings Corporation (Perfor-

mance), a new company that he and several others started in that

year.    Mr. Korchak received very little, if any, compensation

from that company during the first several years of its exis-

tence.    At the time of the trial, Mr. Korchak, who was 71 years

old, was president of Performance for which Performance paid him
                                - 6 -

an annual salary of $90,000.5   As of that time, Mr. Korchak had

no intention of retiring.

     Based on their respective personal and business backgrounds

and experiences, petitioner and Mr. Korchak believed throughout

their marriage that managing their family’s finances should be

Mr. Korchak’s responsibility and that Mr. Korchak was better

suited than petitioner to do so.   Petitioner and Mr. Korchak also

believed throughout their marriage that maintaining their home

and rearing their three children6 should be petitioner’s respon-

sibility and that petitioner was better suited than Mr. Korchak

to do so.   Consequently, throughout the marriage of petitioner

and Mr. Korchak, (1) Mr. Korchak assumed the responsibility of

managing their family’s finances, and petitioner relied upon him

to do so; and (2) petitioner assumed the responsibility of

maintaining their home and rearing their three children, and Mr.

Korchak relied on her to do so.

     As part of his responsibility for managing the family’s

finances, Mr. Korchak made all the family’s financial decisions.

He did so without discussing those decisions with petitioner.      If



     5
      During 2004, the year before the trial took place, Mr.
Korchak received a salary of $91,000 from Performance and the
following income: (1) A distribution of $13,586 from an individ-
ual retirement account (IRA), (2) $19,166 of Social Security
payments, and (3) a distribution of $26,981 from a pension.
     6
      The three children of petitioner and Mr. Korchak were born
in 1965, 1967, and 1969, respectively.
                               - 7 -

petitioner had made any inquiries concerning the financial

decisions that Mr. Korchak made for their family, Mr. Korchak

would not have withheld any information from her with respect to

such decisions.

     Throughout their marriage, petitioner was generally unaware

of bank accounts or brokerage or other investment accounts in Mr.

Korchak’s name alone or in the names of Mr. Korchak and peti-

tioner.   During 1982, petitioner was not aware of any brokerage

accounts that Mr. Korchak may have had at that time.   At least

during 1982, petitioner was aware of two joint checking accounts

in the names of Mr. Korchak and herself.   At least during 1982,

petitioner’s salary from NYU of approximately $15,000 (peti-

tioner’s NYU salary) was deposited into one of those two joint

checking accounts (joint checking account into which petitioner’s

NYU salary was deposited), and petitioner used that joint check-

ing account to pay certain personal and household expenses.    The

joint checking account into which petitioner’s NYU salary was

deposited was also used to pay any mortgage loan on the family

residence in which she and Mr. Korchak were living.

     At all relevant times, Mr. Korchak was responsible for

opening and reviewing all the family’s mail, including bills, tax

notices, documents pertaining to investments and other financial

matters, and bank statements, including any joint checking

account statements, and petitioner relied upon him to do so.
                                 - 8 -

     Prior to 1980, Mr. Korchak’s investment portfolio consisted

of stocks and bonds.   During 1980, Mr. Korchak became a client of

Marcus V. Cole (Mr. Cole), who at that time worked for Merrill

Lynch and who was deceased at the time of the trial.    During that

year, petitioner and Mr. Korchak purchased rental property

located on Hilton Head Island.    In 1981, without consulting

petitioner, Mr. Korchak invested in a bus rental activity (Mr.

Korchak’s bus rental investment) and three oil and gas partner-

ships (Mr. Korchak’s three oil and gas partnership investments).7

Although Mr. Korchak did not consult petitioner before he in-

vested in that bus rental activity and those partnerships, he may

have mentioned to her that he had invested in a bus rental

activity.   However, he would not have provided any details about

that activity to petitioner.

     During 1982, Mr. Cole joined the staff of Hamilton Gregg &

Company, Inc. (Hamilton Gregg), a company engaged in the business

of providing financial planning advice to its clients.    On or

about December 6, 1982, Mr. Korchak became a client of Hamilton

Gregg, and Mr. Korchak’s primary contact person at that company

was Mr. Cole.

     On or about November 24, 1982, Mr. Cole delivered a private

offering memorandum (private offering memorandum) to Mr. Korchak



     7
      Mr. Korchak’s three oil and gas partnership investments
were Kelly-Brock Drilling Partners 1981-1, Odyssey Partners 81
Limited Partnership, and Matagorda Limited Partnership II.
                                 - 9 -

with respect to a partnership called Madison Recycling Associates

(Madison Recycling).   According to the private offering memoran-

dum, Madison Recycling was a New York limited partnership formed

on October 1, 1982, that was to lease, as lessee, steam chest

molded expanded polystyrene recycling equipment called Sentinel

EPS Recyclers (EPS Recyclers).    The private offering memorandum

further indicated that Madison Recycling and two other entities

were to engage in a joint venture in which the EPS Recyclers were

to be used in a process designed to recycle scrap polystyrene.

According to the private offering memorandum, the recycled

polystyrene was to be sold on the open market, and Madison

Recycling was to receive a share of the profits from such sales.

     Mr. Korchak considered in some detail whether to invest in

Madison Recycling.   That was because he knew a lot about the

business of recycling technologies.      In considering whether to

invest in Madison Recycling, Mr. Korchak was also aware that

Congress was encouraging investment in recycling in order to

conserve energy.

     After considering in detail whether to invest in Madison

Recycling, on November 30, 1982, without consulting petitioner,

Mr. Korchak purchased an interest in Madison Recycling for

$75,000 (Mr. Korchak’s Madison Recycling investment).      Mr.

Korchak did not use the joint checking account into which peti-

tioner’s NYU salary was deposited in order to purchase Mr.
                              - 10 -

Korchak’s Madison Recycling investment.    Instead, he utilized a

cash management account (cash management account) that he used to

purchase all of the investments that he made.8

     Petitioner became aware of Mr. Korchak’s Madison Recycling

investment on February 2, 1986, when she and Mr. Korchak signed

Form 872, Consent to Extend the Time to Assess Tax (Form 872),

with respect to their taxable year 1982.   That form stated in

pertinent part:

          The amount of any deficiency assessment is to be
     limited to that resulting from any adjustment to:
     (A) the taxpayer’s distributive share of any item of
     income, gain, loss, deduction, or credit of, or distri-
     bution from Madison Recycling, (B) the tax basis of the
     taxpayer’s interest(s) in the aforementioned partner-
     ship(s) or organization(s) treated by the taxpayer(s)
     as a partnership, (C) any gain or loss (or the charac-
     ter or timing thereof) realized upon the sale or ex-
     change, abandonment, or other disposition of taxpayer’s
     interest in such partnership(s) or organization(s)
     treated by the taxpayer as a partnership, (D) items
     affected by continuing tax effects caused by adjust-
     ments to any prior tax return, and (E) any consequen-
     tial changes to other items based on such adjustment.

     In 1986, without consulting petitioner, Mr. Korchak pur-

chased a majority interest in Riverside Polymer Systems, Inc.

(Riverside), and ultimately invested approximately $700,000 in

that company.   In 1989, Riverside filed for bankruptcy.   As a

result of that bankruptcy proceeding, Mr. Korchak lost his entire



     8
      It is not clear from the record whether the cash management
account was held (1) at a bank or another type of financial
institution and (2) in the joint names of petitioner and Mr.
Korchak.
                              - 11 -

investment in that company.   It was only after Riverside filed

for bankruptcy in 1989 that petitioner became aware that Mr.

Korchak had invested approximately $700,000 in that company.

     As was true of petitioner’s reliance on Mr. Korchak with

respect to their family’s finances, petitioner also relied upon

Mr. Korchak to retain a professional to prepare joint tax returns

for them.   Petitioner’s role in the preparation of such returns

was limited to providing Mr. Korchak with any Forms W-2, Wage and

Tax Statement (Form W-2), and Internal Revenue Service (IRS)

information returns that she received as well as any other tax-

related information that she had.

     Since around the mid-1970s until the time of the trial, the

professional that Mr. Korchak retained to prepare Form 1040, U.S.

Individual Income Tax Return, for petitioner and himself (joint

tax return) was Hilton Sokol (Mr. Sokol), a certified public

accountant.   Mr. Sokol was an employee of Miller, Ellin and

Company (Miller Ellin) in New York, which provided accounting

services for, inter alia, Halcon.   Many of Halcon’s executives

retained certified public accountants employed by Miller Ellin to

prepare their respective tax returns.   Both petitioner and Mr.

Korchak trusted and relied on Mr. Sokol’s professional judgment

to prepare accurately their joint tax returns.

     Since around the mid-1970s, the following general practice

remained the same with respect to (1) the preparation of joint
                                - 12 -

tax returns for petitioner and Mr. Korchak, including the joint

tax return for their taxable year 1982, and (2) the review,

signing, and filing of such returns.     Mr. Sokol prepared a joint

tax return for Mr. Korchak and petitioner based on any Forms W-2,

IRS information returns, and other information provided to him by

Mr. Korchak.   Thereafter, Mr. Sokol gave that joint tax return to

Mr. Korchak who reviewed it.    After Mr. Korchak reviewed and

approved the joint tax return that the return preparer prepared,

Mr. Korchak presented that return to petitioner for her signa-

ture.   In presenting such joint tax return to petitioner, Mr.

Korchak had it open to the page on which petitioner and he were

to sign it.    Before petitioner signed the joint tax return that

Mr. Korchak presented to her, Mr. Korchak did not discuss its

contents with her, and petitioner did not review, or make any

inquiries about, such return.    The signature of the return

preparer on the joint tax return that Mr. Korchak presented to

petitioner indicated to her that such return was prepared accu-

rately.

     On April 28, 1983, the return preparer signed the joint tax

return for the taxable year 1982 of petitioner and Mr. Korchak

(1982 joint tax return).    The return preparer then sent that

return to Mr. Korchak.

     The 1982 joint tax return showed, inter alia, the following:
                              - 13 -

                                                 Amount Reported

                                                     1
Wages, salaries, tips, etc.                           $481,648
Interest income                                             55,633
Dividends                                                   13,034
Refunds of State and local income taxes                      6,056
                                                         2
Business income or (loss) from Schedule C                  (24,961)
Capital gain or (loss) from Schedule D                      (3,000)
Supplemental gains or (losses) from Form                    (1,283)
  4797
Rents, royalties, partnerships, estates,                 (220,695)
  trusts, etc. from Schedule E
Other income                                               11,352
Total income                                              317,784
Adjusted gross income                                     310,932
Itemized deductions                                        47,846
Taxable income                                            258,086
Tax                                                       116,492
Total tax                                                 116,492
Investment credit from Form 3468                          116,492
Balance                                                         0
Minimum tax                                                 3,064
Tax from recapture of investment credit                       134
Total Tax                                                   3,198
Total payments                                             96,168
Refund                                                     92,970
     1
       Of the $481,648 of wages, salaries, tips, etc., petitioner
received $15,339.46, and Mr. Korchak received the balance.
     2
       The entire loss of $24,961 from Schedule C, Profit or
(Loss) From Business or Profession, was with respect to Mr.
Korchak’s bus rental investment.

     Of the loss of $220,695 from Schedule E, Supplemental Income

Schedule (Schedule E), claimed in the 1982 joint tax return,

$189,965 was attributable to certain claimed partnership losses

(claimed partnership losses of $189,965) that were not identified

in Schedule E, and the balance was attributable to two claimed
                             - 14 -

rental losses (viz., a claimed rental loss of $7,627 with respect

to property located on Hilton Head Island and a claimed rental

loss of $22,383 with respect to a property identified as “Evian”)

and windfall profit tax withheld in 1982 of $720.

     Schedule E had the following notation with respect to the

claimed partnership losses of $189,965:    “SEE STATEMENT 2".

Statement 2 showed, inter alia, the following partnerships and

the following claimed loss of each such partnership that gave

rise to the total claimed partnership losses of $189,965 shown in

Schedule E:

           Name of Partnership                 Partnership Loss
Kelly-Brock Drilling Partners 1981-11               $64,753
Odessey Partners 81 Limited Partnership1             57,087
Matagorda Limited Partnership II1                    10,036
Madison Recycling                                    58,089
     1
      Petitioner and Mr. Korchak also claimed losses with respect
to Mr. Korchak’s three oil and gas partnerships for their taxable
year 1981.

There was nothing about the claimed $58,089 Madison Recycling

loss that would have made that claimed loss stand out in rela-

tionship to the other partnership losses claimed in the 1982

joint tax return.

     Statement 2 also showed for each of the partnerships identi-

fied below the following amount as “PROPERTY QUALIFIED FOR

INVESTMENT CREDIT NEW RECOVERY PROPERTY - OTHER”:
                                       - 15 -

                                                         Property Qualified for
                                                         Investment Credit New
           Name of Partnership                          Recovery Property - Other
Kelly-Brock Drilling Partners 1981-1                             $11,447
Odessey Partners 81 Limited Partnership                            8,161
Matagorda Limited Partnership II                                   1,246
Madison Recycling                                                577,500

     Neither Schedule E nor Statement 2 referred to Form 3468,

Computation of Investment Credit (Form 3468), that was included

as part of the 1982 joint tax return.

     Form 3468, “PART II. - Qualified Investment”, showed the

following:

                                     (1)          (2)          (3)           (4)
                                                                          Qualified
                                                                          Investment
                                   Class of     Unadjusted   Applicable   (Column 2 x
1 Recovery Property     Line       Property       Basis      percentage     column 3)


             New        (a)        3-year                       60
             Property
Regular                 (b)        Other         598,354        100          598,354
Percentage
             Used       (c)        3-year                       60
             Property
                        (d)        Other                        100

         *        *            *            *           *        *          *

5 Total qualified investment in 10% property - Add lines
  1(a) through 1(h), 2, 3, and 4 (See instructions for
  special limits)[9] . . . . . . . . . . . . . . . . . . . . .               598,354



     Form 3468, “PART III. - Tentative Regular Investment

Credit”, showed the following:




     9
      No entries were made on lines 1(e) through 1(h) and lines 2
through 4 of Form 3468.
                                   - 16 -

 8 10% of line 5 . . . . . . . . . . . . . . . . . . . . . . .      59,835

             *       *        *         *         *         *        *

14 Current year regular investment credit - Add lines 8
   through 13[10]. . . . . . . . . . . . . . . . . . . . . . . .    59,835

             *       *        *         *         *         *        *

17 Tentative regular investment credit - Add lines 14, 15,
   and 16[11] . . . . . . . . . . . . . . . . . . . . . . . . . .   59,835

     Form 3468, “PART IV. - Tax Liability Limitations”, showed

the following:

18 a Individuals - From Form 1040, enter tax from line 38,    )
     page 2, plus any additional taxes from Form 4970 . . . . )
   b Estates and trusts - From Form 1041, enter tax from line )
     26a, plus any section 644 tax on trusts . . . . . . . . .)     116,492
   c Corporations (1120 filers) - From Form 1120, Schedule    )
     J, enter tax from line 3 . . . . . . . . . . . . . . . . )
   d Other organizations - Enter tax before credits from      )
     return . . . . . . . . . . . . . . . . . . . . . . . . . )

19 a Individuals - From Form 1040, enter credits from lines 41)
     and 42 of page 2 . . . . . . . . . . . . . . . . . . . .)
   b Estates and trusts - From Form 1041, enter any foreign   )
     tax credit from line 27a . . . . . . . . . . . . . . . . )
   c Corporations (1120 filers) - From Form 1120, Schedule    )          0
     J, enter any foreign tax credit from line 4(a), plus     )
     any possessions tax credit from line 4(f) . . . . . . . .)
   d Other organizations - Enter any foreign or possessions   )
     tax credit . . . . . . . . . . . . . . . . . . . . . . . )

20 Income tax liability as adjusted (subtract line 19 from line
   18). . . . . . . . . . . . . . . . . . . . . . . . . . . . .     116,492

21 a Enter smaller of line 20 or $25,000. See instruction for
     line 21 . . . . . . . . . . . . . . . . . . . . . . . . .      25,000
   b If line 20 is more than $25,000 - Enter 90% of the
     excess . . . . . . . . . . . . . . . . . . . . . . . . .       82,343

22 Regular investment credit limitation - Add lines 21a
   and 21b . . . . . . . . . . . . . . . . . . . . . . . . . .      107,343

23 Allowed regular investment credit - Enter the smaller of
   line 17 or line 22 . . . . . . . . . . . . . . . . . . . . .     59,835



     10
          No entries were made on lines 9 through 13 of Form 3468.
     11
          No entries were made on lines 15 and 16 of Form 3468.
                                          - 17 -

24 Business energy investment credit limitation - Subtract line
   23 from line 20 . . . . . . . . . . . . . . . . . . . . . .                        56,657

25 Business energy investment credit - From line 14 of Schedule
   B (Form 3468) . . . . . . . . . . . . . . . . . . . . . . .                        57,750

26 Allowed business energy investment credit - Enter smaller of
   line 24 or line 25 . . . . . . . . . . . . . . . . . . . . .                       56,657

27 Total allowed regular and business energy investment credit
   - Add lines 23 and 26. Enter here and on Form 1040, line
   43; Schedule J (Form 1120), line 4(b), page 3; or the proper
   line on other returns . . . . . . . . . . . . . . . . . . .                       116,492

     Form 3468, Schedule B, Business Energy Investment Credit

(Schedule B), referred to on line 25 of “PART IV. - Tax Liability

Limitations” of Form 3468, showed the following:

    (1)                     (2)          (3)            (4)            (5)             (6)
                         Class of                                                  Qualified
                         property                                                  investment
 Type of                 or life                    Unadjusted    Applicable       (Column 4 x
Property          Line    years          Code       basis/Basis   Percentage       column 5)
Recovery          (a)    3-Year                                        60
                  (b)    Other            C           577,500          100            577,500
Nonrecovery       (c)    3 or more
                         but less                                     33 1/3
                         than 5
                  (d)    5 or more
                         but less                                     66 2/3
                         than 7
                  (e)    7 or more                                     100

2 Total 10% energy investment property - Add lines 1(a)
  through 1(e), column (6) . . . . . . . . . . . . . . . . . .                       577,500

              *           *          *          *         *        *           *

7 Enter 10% of line 2 . . . . . . . . . . . . . . . . . . . .                          57,750


              *          *        *            *         *        *            *
                                   - 18 -

11 Current year business energy investment credit - Add lines
   7 through 10[12] . . . . . . . . . . . . . . . . . . . . . .          57,750

             *       *       *        *       *        *        *

14 Tentative business energy investment credit - Add lines
   11 through 13.[13] Enter here and on line 25 of Form
   3468 . . . . . . . . . . . . . . . . . . . . . . . . . . .            57,750

     The following appeared on the bottom of Schedule B of Form

3468:

     TYPE OF PROPERTY        3-YEAR         OTHER          NONRECOVERY
     C - RECYCLING                          577,500.

     It was not obvious from reviewing Form 3468 (1) that $57,750

of the $59,835 investment tax credit shown in Form 3468, “Part

III. - Tentative Regular Investment Credit”, was attributable to

Madison Recycling and (2) that the $56,657 business energy

investment tax credit shown in Schedule B of Form 3468

was attributable to Madison Recycling.            (For convenience, we

shall sometimes refer collectively to the claimed $57,750 invest-

ment tax credit attributable to Madison Recycling and the claimed

$56,657 business energy investment tax credit attributable to

Madison Recycling as the claimed Madison Recycling tax credits of

$114,407.)

     Prior to the preparation of the 1982 joint tax return, Mr.

Korchak never sought or received any tax advice from Mr. Sokol



        12
      No entries were made on lines 8 through 10 of Schedule B
of Form 3468.
        13
      No entries were made on lines 12 and 13 of Schedule B of
Form 3468.
                             - 19 -

with respect to Madison Recycling.    The only information that Mr.

Korchak provided to Mr. Sokol with respect to Madison Recycling

before that return was prepared was Schedule K-1, Partner’s Share

of Income, Credits, Deductions, Etc., that Madison Recycling

issued to Mr. Korchak (Madison Recycling 1982 Schedule K-1 issued

to Mr. Korchak).14

     The information set forth in the Madison Recycling 1982

Schedule K-1 issued to Mr. Korchak was consistent with the

information that Madison Recycling reported in Form 1065, U.S.

Partnership Return of Income, for its taxable year ended December

31, 1982 (Madison Recycling’s 1982 return) that Madison Recycling

filed with the IRS on March 14, 1983.   In Madison Recycling’s

1982 return, Madison Recycling claimed, inter alia, a loss of

$704,111 (Madison Recycling’s claimed $704,111 loss).   In Form

3468, included as part of Madison Recycling’s 1982 return,

Madison Recycling claimed a basis of $7,000,000 for both invest-

ment tax credit purposes and business energy investment tax

credit purposes (Madison Recycling’s claimed $7,000,000 basis for

investment tax credit purposes and business energy investment tax

credit purposes).

     If petitioner had asked Mr. Korchak before she signed the


     14
      The parties stipulated and attached as an exhibit to the
parties’ stipulation of facts a copy of the 1982 joint tax return
that petitioner and Mr. Korchak filed with the IRS. That return
did not include Madison Recycling 1982 Schedule K-1 issued to Mr.
Korchak.
                              - 20 -

1982 joint tax return about the claimed $58,089 Madison Recycling

loss and the claimed Madison Recycling tax credits of $114,407,

which she did not, Mr. Korchak would have assured her that that

claimed loss and those claimed credits were proper.

     On May 1, 1983, petitioner and Mr. Korchak signed the 1982

joint tax return, and on May 6, 1983, they filed it with the IRS.

     On or about December 24, 1987, respondent issued a Notice of

Final Partnership Administrative Adjustment to Madison Recy-

cling’s tax matters partner for, inter alia, Madison Recycling’s

taxable year ended December 31, 1982 (FPAA).   In the FPAA,

respondent, inter alia, disallowed Madison Recycling’s claimed

$704,111 loss and reduced to $0 Madison Recycling’s claimed

$7,000,000 basis for investment tax credit purposes and business

energy investment tax credit purposes (respondent’s reduction to

$0 of Madison Recycling’s claimed basis).

     On February 16, 1988, respondent sent a copy of the FPAA to

Mr. Korchak and petitioner in an envelope addressed to both of

them.   Consistent with his practice of opening the family’s mail,

Mr. Korchak opened that envelope and reviewed the FPAA.   He

showed the FPAA to petitioner because he believed that she should

be aware that the IRS had raised questions about Madison Recy-

cling’s 1982 return, which, in turn, raised questions about the

claimed $58,089 Madison Recycling loss and claimed Madison

Recycling tax credits of $114,407 in their 1982 joint tax return.
                               - 21 -

     On May 17, 1988, a partner other than the tax matters

partner commenced a case in the Court contesting the adjustments

made in the FPAA.   Ultimately, the parties in that case agreed on

the adjustments made in the FPAA, but they disagreed over whether

the IRS timely issued the FPAA.     Madison Recycling Associates v.

Commissioner, T.C. Memo. 2001-85.    On April 9, 2001, the Court

issued its Opinion addressing that dispute and held that the

period for limitations for assessment had not expired and that

the FPAA was timely.   Id.   On August 1, 2001, pursuant to that

Opinion, the Court entered a decision sustaining, inter alia,

respondent’s disallowance of Madison Recycling’s claimed $704,111

loss and respondent’s reduction to $0 of Madison Recycling’s

claimed basis.   That decision was affirmed on appeal.    Madison

Recycling Associates v. Commissioner, 295 F.3d 280 (2d Cir.

2002).

     Pursuant to Madison Recycling Associates v. Commissioner,

T.C. Memo. 2001-85, on October 3, 2003, respondent assessed

against petitioner and Mr. Korchak a deficiency of $140,388 in

tax for their taxable year 1982 and interest thereon of

$1,107,797.85 as provided by law resulting from the disallowance

of the claimed $58,089 Madison Recycling loss and the claimed

Madison Recycling tax credits of $114,407.15    As of the time of


     15
      In computing the liability for interest as of Oct. 3,
2003, respondent used the increased interest rate applicable to
underpayments attributable to tax-motivated transactions estab-
                                                    (continued...)
                                 - 22 -

the trial, no part of that assessed deficiency or that assessed

interest had been paid.

     Respondent issued an affected items notice to petitioner and

Mr. Korchak with respect to their taxable year 1982.      In that

notice, respondent determined that petitioner and Mr. Korchak are

liable for their taxable year 1982 for additions to tax under

sections 6653(a)(1)(A),16 6653(a)(1)(B),16 and 6659 of $7,019.40,

50 percent of the interest due on an assessed deficiency of

$140,388, and $34,322.10, respectively.

     In response to the affected items notice, Mr. Korchak filed

a petition with the Court in the case at docket No. 22105-03.

See supra note 3.

     In response to the affected items notice, petitioner filed a

petition with the Court.      In that petition, petitioner claimed

that she is entitled to relief under section 6015 with respect to

the additions to tax that respondent determined for her taxable

year 1982 as well as interest thereon as provided by law.

     On July 30, 2004, respondent filed a motion to remand herein

(respondent’s motion to remand).      In that motion, respondent

stated, inter alia:

          4. Respondent has not considered petitioner’s
     request for relief under I.R.C. § 6015. Specifically,
     respondent has not made a determination with respect to


     15
      (...continued)
lished by sec. 6621(c).
     16
          See supra note 2.
                             - 23 -

     relief under I.R.C. § 6015(f).

          5. Petitioner’s counsel has indicated that peti-
     tioner is seeking relief under I.R.C. § 6015(b) and
     (f).

          *     *       *         *       *        *         *

          7. Respondent requests this Court grant his mo-
     tion to remand so that he may have an opportunity to
     make a determination with respect to petitioner’s claim
     for relief from joint and several liability under
     I.R.C. § 6015(b) and (f).

     On August 10, 2004, the Court denied respondent’s motion to

remand but continued the trial.    On August 11, 2004,17 respon-

dent’s counsel referred petitioner’s request for relief under

section 6015 to respondent’s Cincinnati Service Center.

     On or about November 11, 2004, petitioner sent to respondent

Form 8857, Request for Innocent Spouse Relief (And Separation of

Liability and Equitable Relief), with respect to her taxable year

1982 (petitioner’s Form 8857).    Petitioner attached to peti-

tioner’s Form 8857 Form 12510, Questionnaire for Requesting

Spouse (Form 12510), a preprinted form.    The preprinted Form

12510 contained several parts identified as Part 1 through 5.

The instructions to Part 1 of Form 12510 stated:       “Complete this



     17
      The parties stipulated that respondent referred peti-
tioner’s request for relief under sec. 6015 to respondent’s
Cincinnati Service Center on Aug. 11, 2003, and not on Aug. 11,
2004. That stipulation is clearly contrary to the facts that we
have found are established by the record, and we shall disregard
it. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195
(1989). The record establishes, and we have found, that respon-
dent referred petitioner’s request for relief under sec. 6015 to
the Cincinnati Service Center on Aug. 11, 2004.
                                 - 24 -

part for all requests for relief”.        The instructions to Part 2 of

Form 12510 stated:      “Complete this part if you are requesting

relief for a balance due shown on your return when filed, but not

paid.”    The instructions to Part 3 of Form 12510 stated:        “Com-

plete this part if you are requesting relief for additional tax

as a result of an IRS examination”.

     In Form 12510 that petitioner attached to petitioner’s Form

8857 (petitioner’s Form 12510), petitioner provided the responses

indicated to the following questions in Part 1 of petitioner’s

Form 12510 with respect to the filing and preparation of the 1982

return:

     2.       What is the current marital status between you and
              the (ex)spouse with whom you filed the joint
              return(s) for the year(s) you are requesting
              relief

              : Married and living together

          *         *       *       *         *       *       *

     3.       Why did you file a joint return instead of your
              own separate return

              I did not make a decision whether to file a joint
              return or a separate return. The tax returns were
              always prepared by my husband and a CPA. The
              filing status was already completed when I was
              told to sign the return.

     4.       What was your involvement in the preparation of
              the return(s)

              I had no involvement at all in the preparation of
              the return. I gave my husband my W-2 for the tax
              year and signed the return when he told me to do
              so.
                             - 25 -

5.        Did you review the tax return(s) before signing.
          9 Yes     : No

          If no, explain why not

          My husband handles all the financial, banking and
          tax matters for us. He is a business man and
          company executive. In 1982, I was married to him
          for 23 years and I always trusted him in these
          matters. I was busy raising three young boys,
          managing our house hold, and working full time.

      *         *       *          *    *          *         *

7a.       During the year(s) in question did you have your
          own separate bank account(s). 9 Yes      : No
          9 Checking   9 Savings    9 Other

          My husband had some separate accounts, I did
          not.

      *         *       *          *    *          *         *

8a.       During the year(s) in question did you and your
          (ex)spouse have any joint bank account(s).
          : Yes     9 No

          If yes, indicate the type of account(s).
          : Checking     9 Savings      9 Other

          A joint account for household matters.       My husband
          had other separate accounts.

8b.       What access did you have to the account(s)

          My salary was automatically, electronically
          deposited into the joint checking account. I did
          not review monthly bank statements, my husband
          did. I used the account to pay for groceries and
          some household expenses.


8c.       What funds were deposited to the account(s)

          My salary was electronically, automatically
          deposited into the account, and I believe my
          husband made some deposits also.
                             - 26 -

      *         *       *        *      *       *       *

8e.       What bills were paid out of the account(s)

          I paid for groceries, clothing for me and the
          children, and household necessities. My husband
          paid other monthly household expenses. He had
          other separate accounts I was not aware of in
          1982.

8f.       Who wrote the checks

          I wrote some checks for groceries, clothes and
          some household expenses. My husband also wrote
          checks and managed the account. He picked up the
          mail. I did not see the monthly bank statements.

8g.       Did you review the monthly bank statements
          9 Yes     : No

8h.       Did you balance the checkbook to the bank
          statements
          9 Yes      : No

9.        Did you pick up and open the household mail
          9 Yes     : No

      *         *       *        *      *       *       *

12.       What was your highest level of education during
          the year(s) you are requesting relief.
          Note any business or tax-related courses you
          completed by that time.

          I am a research scientist with a Ph.D. I also ran
          the household, was the primary care giver, and
          worked full time. My education was in the field
          of physiology. I never had any business courses
          or business experience.

13.       What was your (ex)spouse’s highest level of
          education during the year(s) you are requesting
          relief.
          Note any business or tax-related courses he or she
          completed by that time.

          My husband also has a Doctorate of Science. He is
          an engineer and had business experience as a
                               - 27 -

            company executive. He managed our financial
            affairs and all tax matters. I had no idea he
            invested in Madison Recycling or that it had tax
            implications.

    14.     What business experience did you have during the
            year(s) you are requesting relief

            None.

    15.     Have any assets been transferred from your
            (ex)spouse to you. : Yes      9 No
            If yes, list the assets and the date of transfer.
            Explain why they were transferred to you.

            In 1987, before I learned about any tax problems,
            we had wills prepared. The estate planning
            attorney advised us to each have separate assets.
            Our residence was transferred from joint ownership
            to me. My husband already had other assets in his
            name.

    16.     How was the extra money from the unpaid taxes
            spent

            I did not receive any money from a tax refund. I
            later learned my husband used the refund to form a
            new start up company called Riverside Polymer
            Systems, Inc. The company went bankrupt in 1989
            and the investment was lost.

    17.     Explain any other factors you feel should be
            considered for granting relief

            During 1982, I was completely consumed with
            raising three sons, ages 17, 15, and 13. I was a
            post doctorate research assistant working in the
            field of immunology. I did not have time or
            knowledge about business or tax matters to be
            involved in those areas. My husband always took
            it upon himself to manage financial/tax affairs
            and it was not my place to do so. [Reproduced
            literally.]

    Petitioner did not complete Part 2 of petitioner’s Form

12510.    That was because petitioner is not seeking relief under
                                      - 28 -

section 6015 with respect to an underpayment of tax for her

taxable year 1982.         Petitioner is seeking relief under section

6015 with respect to an understatement of tax for that year.

     In Part 3 of petitioner's Form 12510, petitioner provided

the responses indicated to the following questions with respect

to petitioner’s knowledge of any items that caused the under-

statement:

     1a.       At the time of signing, were you concerned about
               any item(s) omitted from or reported on the
               return(s)

               9 Yes       : No

           *           *          *     *         *       *       *

     1c.       At that time, describe how much you knew about
               each of the incorrect item(s)

               I did not know anything at all about the corrected
               item, Madison Recycling, LLC. As previously
               stated, I knew the return was prepared by our
               accountant, a CPA, and by my husband of then 23
               years. I signed the return when asked because I
               trusted my husband completely. I believed that
               since it had been reviewed and prepared by a CPA
               and my husband, that everything was correct.

     2.        At the time of signing, if you were not concerned
               about any item(s), when and how did your first
               become aware of the incorrect item(s)

               In 1988, the IRS sent a notice to us with a large
               proposed 1982 tax liability because it intended to
               disallow a deduction related to Madison Recycling.
               I never knew about my husband’s investment in
               Madison Recycling and the tax deduction until then
               when he informed me for the first time.

     Part 4 of Form 12510 listed, inter alia, various income

items and various expense items.            For example, the various income
                              - 29 -

items listed in Part 4 of Form 12510 included wages, rent, inter-

est, and dividends.   The various expense items listed in Part 4

of Form 12510 included rents, mortgage loans, food, and utili-

ties.   The instructions to Part 4 of Form 12510 stated:   “If you

completed Part 2, complete this part.    If you completed Part 3,

completing this part is optional.   However, doing so now may

expedite consideration of your claim.”   Pursuant to those in-

structions, petitioner did not complete Part 4 of petitioner’s

Form 12510.   That was because, pursuant to the instructions to

Part 2 of Form 12510, petitioner was not required to, and did

not, complete Part 2 of petitioner’s Form 12510 since petitioner

is not seeking relief under section 6015 with respect to an

underpayment of tax for her taxable year 1982.   Petitioner is

seeking relief under section 6015 with respect to an understate-

ment of tax for that year.

     Petitioner attached Form 12507, Innocent Spouse Statement

(petitioner’s Form 12507), to petitioner’s Form 8857.   An attach-

ment to petitioner’s Form 12507 (petitioner’s attachment to

petitioner’s Form 12507) stated in pertinent part:

          In 1964, Ernest [Mr. Korchak] accepted a position
     with Halcon International, Inc., in Little Ferry, New
     Jersey, and the couple [petitioner and Mr. Korchak]
     moved to Hackensack. Their first child was born that
     year. Helen [petitioner] discontinued her work outside
     the home to be a full-time mother and homemaker. In
     1967, the couple’s second child was born and, in 1969,
     their third and final child was born. During the years
     between 1964 through 1976, Helen was a full-time home-
     maker. In 1969, the Korchak’s moved from Hackensack,
                        - 30 -

NJ, to Westport, Connecticut.

     In 1976, Helen Korchak returned to her post-doc-
toral studies and was hired as a research scientist to
conduct research at New York University under a grant
from the National Institute of Health. During 1979
through 1980, Helen held a post-doctoral fellowship
with the Arthritis Foundation, conducting immunology
research while still being the primary homemaker and
care provider for her family.

     As Ernest rose to more and more responsible posi-
tions with Halcon, he decided to engage the services of
Merrill Lynch as a financial advisor. In 1982, Ernest
received a substantial dividend distribution from
Halcon. He sought advice that year from Merrill Lynch,
which put him in touch with Hamilton Gregg, a financial
advisory group. Hamilton Gregg recommended the pur-
chase of Madison Recycling, a company that had devel-
oped environmentally friendly recycling technology.
Ernest always had a strong interest in protecting the
environment and was attracted by the investment possi-
bilities, coupled with tax incentives. In 1982, Ernest
purchased a limited partnership interest in Madison
Recycling based on the advise of Merrill Lynch. He did
so without consulting Helen or discussing his interest
in various other investment possibilities with her.
Helen Korchak had no idea that Ernest purchased a lim-
ited partnership interest in Madison Recycling, or even
as to the nature of Madison Recycling’s business opera-
tions, until 1988, six years after the 1982 investment.
In 1982, Helen earned $15,339.00. Ernest earned
$466,309.00.

     Halcon went out of business in 1986, at a time
when there were no employment possibilities for people
in Ernest’s field with his experience. He was aware of
a small company, Riverside Polymer Systems, Inc., which
was in financial difficulty. The company specialized
in waterborne coating technology intended to replace
solvent-based coatings. Ernest thought the company
could become profitable and bought a majority interest
in Riverside. He investment approximately $700,000.00
in Riverside, using his savings, including the 1982
federal income tax refund, and money from re-mortgaging
the family home. Unfortunately, the acceptance of
waterborne technology was slower than expected. River-
side struggled for about three years before Ernest had
                        - 31 -

to declare the company bankrupt in 1989.   He lost his
entire investment and the 1982 refund.

     During their entire marriage, Ernest took exclu-
sive charge of all financial matters, giving Helen
money weekly for groceries and household necessities.
While she at times wrote checks for groceries, family
clothing, and household necessities, the monthly bank
account statements were maintained and reviewed solely
by Ernest. Helen was engrossed during these years as a
post-graduate student, a homemaker and mother. Her
time was fully consumed by raising her children, main-
taining the household and performing scientific re-
search work as an immunologist, first at New York Uni-
versity from 1976 through 1986, and then at the Univer-
sity of Pennsylvania from 1986 through the present.
She never studied business or accounting.

     While Helen was aware that income tax returns had
to be prepared and filed each year, her only role was
to provide Ernest with a copy of her W-2 form during
those years in which she worked. On the other hand,
Ernest was an engineer with business skills, who held a
very responsible executive/management position. Fi-
nances were always an area of interest to him. He
regarded the management of family financial affairs as
his sole responsibility. He undertook to engage the
services of a highly reputable accountant in 1966, an
accountant who was providing services to his employer
and to other management personnel at Halcon during
those years.

     Just as she did during all the years of their
marriage, Helen followed the instruction and direction
of her husband to simply sign the 1982 tax return once
it had been prepared by their accountant and presented
to her for signing. During forty-five years of what
could only be described as a wonderful, trusting mar-
riage relationship, Ernest Korchak perceived his role
as having sole responsibility for the financial affairs
of the family.

     During the tax year in question, 1982, Helen
Korchak was completely consumed by her responsibilities
as a mother of three children, then ages 17, 15, and
13, as a homemaker, and by her passionate interest in
her medical research in the field of immunology. As an
engineer and corporate executive/businessman, Ernest
                          - 32 -

had decided that   financial matters were his sole re-
sponsibility and   did not seek to discuss tax matters or
investments with   Helen. When he had questions, he
discussed issues   with his accountant and with his fi-
nancial advisor,   trusting upon their judgment.

     As mentioned above, Helen Korchak first became
aware of Ernest’s investment in Madison Recycling in
1988, when Ernest showed her a February 16, 1988 notice
from the Internal Revenue Service * * *. Prior to that
time, she had no knowledge or awareness that Ernest
claimed a loss from his Madison recycling investment in
1982. She admittedly did not review the Form 1040
individual income tax return when it was presented to
her for signing where marked. It had been prepared by
Ernest and a certified public accountant, and she
trusted her husband’s judgment. It was not until Er-
nest showed Helen the notice from the Internal Revenue
Service in 1988 that she became aware of the tax loss
claimed and the refund generated. She never received
any financial benefit from the refund. Ernest used the
entire refund proceeds as a loan or capital contribu-
tion for a new startup company, Riverside Polymer Sys-
tems, Inc., that filed for bankruptcy in 1989 and was
ultimately liquidated. In total, not known to Helen
until after the fact, Ernest loaned or invested
$700,000.00 by the time it was ultimately lost in bank-
ruptcy.

     Helen Korchak is eligible for retirement. She has
a retirement fund that she has long contributed to.
Unfortunately, she is now faced with the prospect of a
horrific federal tax liability in excess of $2 million,
with interest and penalties. Should she be punished
for being a loving, trusting wife, a homemaker and
mother who also had career aspirations and a keen in-
terest in science? Had she asked any questions about
Madison Recycling, her husband and the accountant would
have reassured her. She never benefited from her hus-
band’s decision to invest in Madison Recycling. The
1982 tax refund was lost as part of her husband’s in-
vestment in a new startup company. Her husband con-
trolled the family’s finances and tax return prepara-
tion. All the facts recited herein concerning the 1982
tax return were not learned by Mrs. Korchak until 1988
through the present. Considering the equities in this
matter, it would be unduly harsh to find Mrs. Korchak
liable for the 1982 tax in question. It would be egre-
                                  - 33 -

     gious to take away her retirement at an age when she
     earned that right. The innocent spouse relief was
     designed for these circumstances. Your favorable con-
     sideration and finding that Mrs. Korchak is indeed an
     innocent spouse is respectfully requested. [Reproduced
     literally.]

     Sometime between October 8, 2004, and January 10, 2005,

respondent received from Mr. Korchak Form 12508, Questionnaire

for Non-Requesting Spouse, with respect to petitioner’s taxable

year 1982 (Mr. Korchak’s Form 12508).       In Mr. Korchak's Form

12508, Mr. Korchak provided the responses indicated to the fol-

lowing questions with respect to taxable year 1982:

     1.        What is the marital status between you and the
               (ex)spouse with whom you filed the joint return(s)
               for the year(s) relief is being requested?

               : Married and living together

           *         *       *       *         *     *        *

     2.        Why did you file a joint return instead of your
               own separate return?

               I always filed married-joint upon the advice of my
               CPA.

     3.        What was your involvement in the preparation of
               the return(s)? For example, did you gather the
               receipts and cancelled checks, just provide your
               W-2's, etc.

               I gathered all the W-2's; K-1's; 1099's, receipts,
               etc and sent them on to my CPA

     4.        Did your (ex)spouse review the tax return(s)
               before signing? 9 Yes    : No

     4a.       If no, explain why not.

               Preparation of the return has always been my
               responsibility - Helen has always trusted me and
                                - 34 -

          my CPA to prepare the tax return properly

4b.       If yes, did your (ex)spouse ask you or the return
          preparer for an explanation of any items or
          amounts on the tax returns?

          N/A

      *         *       *         *       *         *       *

5.        During the year(s) in question, did you have your
          own separate bank account(s)? 9 Yes     : No

      *         *       *         *       *         *       *

6.        During the year(s) in question did you and your
          (ex)spouse have any joint bank account(s)?
          : Yes     9 No

          If yes, indicate the type of account(s).


          : Checking     9 Savings        9 Other

6a.       What access did your (ex)spouse have to the
          account(s)? (For example, permitted to make
          deposits, write checks and withdraw funds)?

          Helen’s paycheck was directly deposited & she
          would write checks for groceries * * * [and
          professional expenses.]

6b.       What funds were deposited to the account(s)?

          Our wages: in 1982 my wages were $466,309 * * *
          while Helen’s were $15,339 * * *

6c.       Who made these deposits?

          I believe we used direct deposit.

6d.       What bills were paid out of the account(s)?

          All household bills

6e.       Who wrote and signed the checks?

          I was the primary bill payer.   I believe Helen
                                 - 35 -

          wrote check for groceries & professional expenses

6f.       Did you review the monthly bank statements?

          : Yes       9 No

6g.       Did you balance the checkbook to the bank
          statements?

          : Yes       9 No

7.        Did you pick up and open the household mail?

          : Yes       9 No

8.        Identify any periods of separation between you and
          your (ex)spouse during the year(s) in question.

          None

9.        What was your highest level of education during
          the year(s) in question?
          Note any business or tax related courses you
          completed by that time.

          Sc.D in chemical engineering from MIT.       No
          business or tax related courses.

10.       What was your (ex)spouse’s highest level of
          education during the year(s) in question?
          Note any business or tax related courses he or she
          completed by that time.

          Ph.D in physiology from Tufts University.         No
          business or tax related courses.

11.       Have any assets been transferred from you to your
          (ex)spouse?    : Yes     9 No

          If yes, list the assets and the date of transfer.
          Explain why the assets were transferred.

          9/14/87. Transfer of principal residence from
          joint ownership solely to my wife. For estate
          planning reasons, in order to utilize our estate
          tax exemptions

      *           *          *     *      *        *             *
                                   - 36 -


     12a. Was your (ex)spouse aware of any financial
          problems you were having such as bankruptcy, high
          credit card debt or difficulty paying monthly
          living expenses? If yes, please explain.

               I did not have any financial problems at the time.

     13.       If the tax years in question were audited, what
               items, if any, changed? Were the changed items
               yours or your (ex)spouse’s? (For example,
               unreported income, disallowed deductions,
               unclaimed credits)

               The audit of my LTD. partnership [Madison
               Recycling] disallowed my deduction and tax
               credits. This was solely my investment.

           *         *        *       *       *       *       *

     15.       If the items changed by the audit were yours, did
               your (ex)spouse benefit from them? Explain.

               No: The losses and tax credits resulted in a
               refund of my withholdings. The refund was
               invested in another business venture of mine which
               failed in 1990. [Reproduced literally.]

     On December 15, 2004, respondent received a memorandum from

petitioner’s attorney of record herein (petitioner’s December 15,

2004 memorandum).        Petitioner’s December 15, 2004 memorandum set

forth (1) factual contentions that are substantially the same as

those set forth in petitioner’s attachment to petitioner’s Form

12507 and (2) legal arguments that are substantially the same as

those set forth in the posttrial briefs that petitioner filed

herein.    Petitioner’s December 15, 2004 memorandum also stated in

pertinent part:

          In 1982, unknown to Helen Korchak [petitioner],
     her husband Ernest [Mr. Korchak] invested in various
                            - 37 -

partnerships and claimed a Schedule E loss in the
amount of $220,695.00 on their Form 1040 joint income
tax return. Mr. and Mrs. Korchak’s Form 1040 for 1982,
together with schedules, consists of 36 pages! There
were also losses and investment credits for Schedule C
activity for rental of buses that generated a loss
deduction of $24,961.00, and net short-term and long-
term loss deductions for U.S. Treasury Bills. The
Schedule E deductions consisted of a $64,753.00 loss
from Kelly-Brock Drilling Partners, a $57,087.00 part-
nership loss from Odyssey Partners, a $10,036.00 part-
nership loss from Matagorda Ltd., a $58,089.00 partner-
ship loss from Madison Recycling Associates, and a
$30,010.00 loss from two rental properties. From all
those various, sophisticated investments, the Internal
Revenue Service disallowed only the loss deduction from
Madison Recycling Associates, which resulted in the
deficiency at issue.

     In 1988, Ernest showed Helen a February 16, 1988
Notice from the Internal Revenue Service disallowing
the Madison Recycling Associates loss claimed on their
1982 income tax return. Until then, Helen had no
awareness or knowledge of Ernest’s various investments.
Helen’s only knowledge about the 1982 income tax return
was to provide Ernest with a copy of her W-2 reporting
wages in the amount of $15,339.00.   As of today, the
disallowed Madison Recycling Associates loss and tax
credits, with interest and penalties, result in an
asserted deficiency exceeding two and one half million
dollars ($2,500,000).   The potential tax liability
exceeds the net value of the Korchak’s assets. At age
67, Helen could be faced with Internal Revenue Service
collection activity that could levy upon her entire
pension benefits and her home - a terrible hardship for
reporting her $15,339.00 wages on a joint income tax
return. * * *

     *         *       *       *       *       *          *

 •       Her husband purchased interests in various part-
         nerships and only the loss deduction from one
         investment, Madison Recycling Associates, was
         disallowed

 •       Funds for the purchase came from her husband’s
         income
                             - 38 -

      •   Her husband maintained separate accounts for his
          investments that Helen did not have access to
          [Reproduced literally.]

     After conducting an examination, respondent’s examiner

prepared workpapers dated January 10, 2005, in which that exam-

iner concluded that petitioner was not entitled to relief under

section 6015 for her taxable year 1982.   The workpapers of re-

spondent’s examiner stated in pertinent part:

                       GENERAL INFORMATION

     Helen M. Korchak [petitioner] has filed a valid Form
     8857 requesting relief of the understatement for tax
     year 1982. TP’s are still married and maintaining a
     home together and are not considering divorce or sepa-
     ration.

                        SPOUSE’S RESPONSE

     NRS [Mr. Korchak] states he handled all financial mat-
     ters and the RS [petitioner] trusted him and they both
     trusted the CPA to prepare the return properly.

                       EVALUATION PROCESS

          Year 1982
                           IRC 6015(b)
     Liability arose before July 22, 1998
     A balance was due as of July 22, 1998
     RS did not make payments before July 22, 1998
     Understatement of tax
     Taxpayers are currently not divorced, widowed or
     legally separated, and did not live apart prior to the
     claim-relief is not available under IRC 6015(c)
     Filed a joint return
     Joint return is valid
     There is enough information to determine the claim
     Balance due remaining
     RS did not sign the amended return or a waiver
     There was a defaulted Statutory Notice of Deficiency in
     the RS’s name-unagreed assessment
     No OIC accepted
     Claimed filed timely
                        - 39 -

Over $1,500 of understatement-full scope
Understatement of tax attributable to both spouses
Erroneous items: Disallowed partnership losses on TP’s
joint Schedule E
RS’s attribution does not meet the attribution
exceptions. This portion will be denied under IRC
6015(f).
Continue IRC 6015(b) for the portion attributable to
the NRS

Knowledge factors:
Background:
 RS-Education: Ph.D. in Physiology. NRS-Education: Doctorate
    Occupation: Research Scientist.     of Science in
                                        Chemical Engineering.
                                        Occupation: Executive.

Involvement:
 RS-RS states there was a joint      NRS-NRS states he was
    checking account for household       the primary bill
    matters and that the NRS had         payer and that he
    other separate accounts. RS          managed the account,
    states she used the joint            balanced the check-
    account to write checks for          book, reviewed the
    groceries, clothing for              monthly bank state-
    herself and the children and         ments and picked up
    household necessities.               and opened the
                                         household mail.

Lifestyle changes:       None indicated.

NRS’s elusiveness:       No evidence of elusiveness or
                         deceit. NRS states he
                         gathered all information and
                         sent it to the CPA. He states
                         the preparation of the return
                         had always been his
                         responsibility. He states the
                         RS did not ask questions that
                         she trusted him and the CPA.

Duty to inquire:         RS states she did not review
                         the return when signing. She
                         states the NRS handles all
                         financial matters and she
                         trusted him and the CPA. She
                         states she was busy raising
                         three boys, managing
                              - 40 -

                               their household and working
                               full time.

Living arrangements:           Lived together entire tax
                               year. TP’s are married and
                               continue to maintain their
                               home together.

RS had constructive knowledge of all erroneous items
when return was signed

Explanation:                   RS has failed to establish
                               that she had no knowledge or
                               reason to know of the
                               overstated deductions. She
                               failed to satisfy her duty to
                               review the return and to
                               inquire as to the content.
                               The return resulted in a
                               refund of $95,488.96.[18]

                  Claim denied under IRC 6015(b)

      *       *         *       *         *        *     *

                            IRC 6015(f)

Eligibility factors:

Evaluating the portion of deficiencies attributable to
the NRS only
Relief is not available under IRC 6015(b) & 6015(c)
Filed a joint return
Liability unpaid, or RS may have refundable payments
Not a fraudulent return
No fraudulent transfer of assets
No disqualified assets transferred

Tier II factors:

Taxpayers are currently not divorced, widowed or
legally separated, and did not live apart prior to the
claim for at least 12 consecutive months

No economic hardship                                   Against

18
     The 1982 joint tax return claimed a refund of $92,970.
                        - 41 -

Explanation:             Economic hardship is not
                         indicated. TP’s are still
                         married and continue to
                         maintain their home together.
                         They continue to file joint
                         returns through the most
                         recently filed tax year and
                         the joint TXI is $227,674.00

No marital abuse

No poor mental or physical health

No legal obligation established

RS had knowledge or reason to know              Against
Explanation:             RS failed to satisfy her duty
                         to review the return or to
                         inquire. The return showed an
                         adjusted gross income of over
                         $300,000.00, a tax liability
                         of only $3198 and a refund of
                         $92,970. RS’ had reason to
                         know there was a substantial
                         loss taken.

No significant benefit gained                       For
Explanation:             No significant benefit
                         evident.

Made a good faith effort to comply with              For
the tax laws
Explanation:             RS is compliant. TP’s have
                         continued to file joint tax
                         returns through the most
                         recently filed tax year.

Unique circumstances:    TP’s state that in 1987 prior
                         to receiving notice of the
                         deficiency on this tax year
                         and as part of their estate
                         planning, the ownership of the
                         primary residence was
                         transferred from joint
                         ownership to the RS’s
                         individual ownership.

Not meeting Tier II factors - deny claim
                                  - 42 -


     Tier II consideration:        Based on the above facts it is
                                   equitable to hold the RS
                                   liable for the balance. RS
                                   failed to establish marital
                                   status or economic hardship,
                                   there are no extenuating
                                   circumstances such as abuse,
                                   poor health or legal
                                   obligation and RS had reason
                                   to know.

                    Tier II factors not met - deny

             Claim denied under IRC 6015(f) - full scope

                                CONCLUSION

     1982 - Denied under 6015(b),(c),(f)            [Reproduced
     literally.]

     At the time of the trial, petitioner and/or Mr. Korchak

owned the following properties:

        Owner                 Type of Property                  Value
   Petitioner          Personal Residence1                    $750,000
   Petitioner          IRA                                     195,220
   Petitioner          Investment Insurance Trust                9,509
   Petitioner          1999 Saturn Automobile                    3,500
   Petitioner          Checking Account                         59,000
   Petitioner          House Contents                           10,000
   Petitioner          CRI2                                      1,000
   Petitioner          Annuity Contract                        466,345
   Petitioner and      Joint Checking Account                   28,000
     Mr. Korchak
   Mr. Korchak         IRAs                                    448,595
   Mr. Korchak         Boat                                      1,000
                                                    Total   $1,972,169

     1
        From Aug. 15, 1986, until Sept. 14, 1987, petitioner and Mr. Korchak
owned as tenants by the entirety the residence in which they were living. On
Sept. 14, 1987, for estate planning reasons, Mr. Korchak transferred to
petitioner for no consideration his interest in the residence in which they
were living.
      2
        The record does not indicate what “CRI” means.
                                 - 43 -


     At the time of the trial, the residence in which petitioner

and Mr. Korchak were living that petitioner owned was subject to

liabilities totaling $139,000.19

     Petitioner filed a second petition with the Court with

respect to her taxable year 1982.      In that petition, petitioner

claimed that she is entitled to relief under section 6015 with

respect to the deficiency in tax assessed against petitioner and

Mr. Korchak for their taxable year 1982 as well as interest

thereon as provided by law.

                                 OPINION

Section 6015(b)

     Introduction

     Petitioner claims that she is entitled to relief under

section 6015(b) for her taxable year 1982.20     Section 6015(b)

provides in pertinent part:

     SEC. 6015.     RELIEF FROM JOINT AND SEVERAL LIABILITY ON
                    JOINT RETURN.

          *        *       *       *       *       *       *

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

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


     19
      The record does not disclose whether petitioner or Mr.
Korchak had any other liabilities at the time of the trial.
     20
      In the alternative, petitioner claims relief under sec.
6015(f) for her taxable year 1982.
                              - 44 -

                    (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,

          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.

     Section 6015(b)(1) is similar to section 6013(e)(1).    We may

look at cases interpreting section 6013(e)(1) for guidance when

analyzing parallel provisions of section 6015.   See Jonson v.

Commissioner, 118 T.C. 106, 119 (2002), affd. 353 F.3d 1181 (10th

Cir. 2003).   The failure by a spouse requesting relief (request-

ing spouse) under section 6015(b) to satisfy any of the require-

ments of that section prevents such spouse from qualifying for
                               - 45 -

such relief.   Alt v. Commissioner, 119 T.C. 306, 313 (2002),

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

     The parties agree that petitioner satisfies section

6015(b)(1)(A), (B), and (E).   Petitioner argues, and respondent

disputes, that she satisfies section 6015(b)(1)(C) and (D).

     Section 6015(b)(1)(C)

     Pursuant to section 6015(b)(1)(C), petitioner must establish

that in signing the 1982 joint tax return she did not know, and

had no reason to know, of the understatement of tax in that

return attributable to the claimed $58,089 Madison Recycling loss

and the claimed Madison Recycling tax credits of $114,407 (under-

statement in the 1982 joint tax return).

     Respondent does not dispute that in signing the 1982 joint

tax return petitioner did not have actual knowledge of the

understatement in the 1982 joint tax return.   The parties dispute

whether in signing the 1982 joint tax return petitioner had

reason to know of the understatement in the 1982 joint tax

return.

     According to respondent, petitioner had constructive knowl-

edge of the items reported in the 1982 joint tax return.   Respon-

dent is correct that a taxpayer who signs a tax return without

reviewing it is charged with constructive knowledge of its

contents.   See Bokum v. Commissioner, 94 T.C. 126, 148 (1990),

affd. 992 F.2d 1132 (11th Cir. 1993).   We must nonetheless

determine whether in signing the 1982 joint tax return petitioner
                                 - 46 -

had reason to know of the understatement in the 1982 joint tax

return.     In making that determination, we bear in mind that a

requesting spouse has reason to know of an understatement if a

reasonably prudent taxpayer under the circumstances of the

requesting spouse at the time of signing a tax return could have

been expected to know that the tax liability stated in such

return was erroneous or that further investigation was warranted.

Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989),

affg. T.C. Memo. 1988-63; Shea v. Commissioner, 780 F.2d 561, 566

(6th Cir. 1986), affg. in part and revg. in part on another

ground T.C. Memo. 1984-310; Bokum v. Commissioner, supra.

     In resolving whether in signing a tax return a requesting

spouse had reason to know of the understatement in such return,

we consider whether the requesting spouse was aware of the

circumstances of the transaction(s) that gave rise to the er-

ror(s) in such return.     See Bokum v. Commissioner, supra at 145-

146.21     In making that determination, we may examine several

factors, including:     (1) The requesting spouse’s level of educa-

tion; (2) the requesting spouse’s involvement in the family’s

financial affairs; (3) the nonrequesting spouse’s evasiveness and

deceit concerning the family’s financial affairs; and (4) the

presence of expenditures that are lavish or unusual when compared

to the requesting spouse’s past standard of living.     See Stevens



     21
          See also Hillman v. Commissioner, T.C. Memo. 1993-151.
                                 - 47 -

v. Commissioner, supra; Butler v. Commissioner, 114 T.C. 276, 284

(2000); Flynn v. Commissioner, 93 T.C. 355, 365-366 (1989).     (We

shall hereinafter refer to the above factors as the education

factor, the involvement in financial affairs factor, the evasive-

ness and deceit factor, and the lavish or unusual expenditures

factor, respectively.)

     We now address whether at the time of signing the 1982 joint

tax return petitioner was aware of the circumstances of the

transactions in which Madison Recycling engaged that resulted in

the understatement in the 1982 joint tax return.     See Bokum v.

Commissioner, supra.22    At the time she signed the 1982 joint tax

return, petitioner was not even aware of Mr. Korchak’s Madison

Recycling investment, let alone the circumstances of the transac-

tions in which Madison Recycling engaged that resulted in Madison

Recycling’s erroneously claimed $704,111 loss and erroneously

claimed $7 million basis for investment tax credit purposes and

business energy investment tax credit purposes.23




     22
          See also Hillman v. Commissioner, supra.
     23
      Madison Recycling’s erroneously claimed $704,111 loss and
erroneously claimed $7 million basis for investment tax credit
purposes and business energy investment tax credit purposes, in
turn, resulted in Mr. Korchak’s erroneously reporting in the 1982
joint tax return the claimed $58,089 Madison Recycling loss, the
claimed $577,500 of basis attributable to Madison Recycling for
investment tax credit purposes and business energy investment tax
credit purposes, and the claimed Madison Recycling tax credits of
$114,407.
                               - 48 -

       We find the instant record to be materially distinguishable

from Bokum v. Commissioner, supra.      In Bokum, we found that the

requesting spouse should have been alerted by the tax return

preparer’s failure to sign the tax return in question.      Id. at

148.    In contrast, we have found herein that the 1982 joint tax

return was signed by a return preparer and that the signature of

the return preparer on that return indicated to petitioner that

such return was prepared accurately.     Moreover, in Bokum, we

found that at the time the requesting spouse signed the return in

question she was aware of the sale of a ranch, the tax treatment

of which was at issue, and that a cursory review of the tax

return would have brought to the requesting spouse’s attention

the distribution resulting from that sale as well as the tax

treatment of that distribution.    Id. at 146-147.   In contrast, we

have found herein that at the time petitioner signed the 1982

joint tax return she was not even aware of Mr. Korchak’s Madison

Recycling investment.    We have also found (1) that there was

nothing about the claimed $58,089 Madison Recycling loss that

would have made it stand out in relationship to the other part-

nership losses claimed in the 1982 joint tax return and (2) that

it was not obvious from reviewing Form 3468 included as part of

the 1982 joint tax return that $57,750 of the claimed $59,835

investment tax credit was attributable to Madison Recycling and

that the claimed $56,657 business energy investment tax credit
                               - 49 -

was attributable to Madison Recycling.

     With respect to the claimed $58,089 Madison Recycling loss,

although that loss was set forth in Statement 2, that statement

also showed the following respective claimed losses of the

following partnerships, which accounted for $131,876 of the total

claimed partnership losses of $189,965 shown in Schedule E:

           Name of Partnership                Partnership Loss
Kelly-Brock Drilling Partners 1981-1               $64,753
Odessey Partners 81 Limited Partnership             57,087
Matagorda Limited Partnership II                    10,036

Thus, Statement 2 showed a claimed loss from the Kelly-Brock

Drilling Partners 1981-1 partnership that was greater than the

claimed $58,089 Madison Recycling loss and a claimed loss from

the Odessey Partners 81 Limited partnership that was approxi-

mately equal to the claimed $58,089 Madison Recycling loss.

     With respect to the claimed Madison Recycling credits of

$114,407, neither Schedule E, which had a notation to Statement

2, nor Statement 2 referred to Form 3468, the form included with

the 1982 joint tax return in which the respective bases for any

claimed investment tax credit and any claimed business energy

investment tax credit and the computation of such respective

credits were to be detailed.   Form 3468 included as part of the

joint 1982 tax return showed (1) a claimed $59,835 investment tax

credit and (2) a claimed $56,657 business energy investment tax

credit.   That form did not, however, indicate the entity or
                             - 50 -

entities to which those respective claimed credits were attribut-

able.

     It is also significant that an examination of the education

factor, the involvement in financial affairs factor, the evasive-

ness and deceit factor, and the lavish or unusual expenditures

factor further supports a finding that a reasonably prudent

taxpayer under petitioner’s circumstances at the time of signing

the 1982 joint tax return could not have been expected to know

that the tax liability stated in that return was erroneous.

     With respect to the education factor, there is no question

that petitioner is highly educated.   However, at the time of the

trial, petitioner did not have any education or work experience

in tax, financial, or accounting matters.   We find nothing in the

record regarding petitioner’s education and experiences that

would, or should, have alerted her to the understatement in the

1982 joint tax return.

     With respect to the involvement in financial affairs factor,

respondent concedes in the face of the instant record “that the

record supports petitioner’s contention that she had little

involvement in her family’s financial affairs.”24


     24
      We have found: (1) Based on their respective personal and
business backgrounds and experiences, petitioner and Mr. Korchak
believed throughout their marriage that managing their family’s
finances should be Mr. Korchak’s responsibility and that Mr.
Korchak was better suited than petitioner to do so; (2) Mr.
Korchak assumed the responsibility of managing their family’s
finances, and petitioner relied upon him to do so; (3) as part of
                                                   (continued...)
                             - 51 -

     With respect to the evasiveness and deceit factor, peti-

tioner contends:

     Ernest [Mr. Korchak] secretly and effectively excluded
     petitioner from information concerning family finances.
     He even concealed in a subsequent year the loss of a
     $700,000.00 investment. His policy of secrecy and not
     disclosing financial matters deceived the petitioner.

Respondent counters, and we agree on the record before us, that

Mr. Korchak was not evasive and did not deceive petitioner with

respect to their financial affairs.   Nonetheless, as discussed

supra note 24, with respect to the involvement in financial

affairs factor, petitioner was not involved in managing her

family’s finances, making financial decisions for her family, or

the reporting of any tax consequences of such financial decisions



     24
      (...continued)
his responsibility for managing the family finances, Mr. Korchak
made all the family financial decisions; (4) Mr. Korchak did not
discuss those decisions with petitioner; (5) throughout their
marriage, petitioner was generally unaware of bank accounts or
brokerage or other investment accounts in Mr. Korchak’s name
alone or in the names of Mr. Korchak and petitioner; (6) at all
relevant times, Mr. Korchak was responsible for opening and
reviewing all the family’s mail, including bills, tax notices,
documents pertaining to investments and other financial matters,
bank statements, including any joint checking account statements,
and petitioner relied upon him to do so; and (7) petitioner did
not become aware of Mr. Korchak’s Madison Recycling investment
until Feb. 2, 1986, when she and Mr. Korchak signed Form 872 with
respect to their taxable year 1982. We have also found that
petitioner was not involved in the reporting of any tax conse-
quences of such financial decisions that were claimed in the
joint tax returns, including the 1982 joint tax return, that she
and Mr. Korchak filed. In this connection, we have found that
petitioner’s role in the preparation of such returns was limited
to providing Mr. Korchak with any Form W-2 and IRS information
returns that she received as well as any other tax-related
information that she had.
                             - 52 -

that were claimed in the joint tax returns, including the 1982

joint tax return, that petitioner and Mr. Korchak filed.

     With respect to the lavish or unusual expenditures factor,

respondent concedes in the face of the instant record “that the

record does not reflect that the * * * taxes saved due to the

Madison loss deduction and investment tax credit led to signifi-

cant changes in petitioner’s and Mr. Korchak’s lifestyle or

spending patterns.”25


     25
      We have found: (1) During 1981 and 1982, Mr. Korchak
received Halcon distributions totaling $1,539,269 and $466,309,
respectively; (2) petitioner and Mr. Korchak made a considered
judgment not to change their family’s lifestyle in any way as a
result of Mr. Korchak’s having received such distributions; and
(3) they made that judgment because they did not want to spoil
their children by having a lavish lifestyle. Nothing in the
record suggests that the desire of petitioner and Mr. Korchak not
to spoil their children by having a lavish lifestyle was limited
to the Halcon distributions that Mr. Korchak received in 1981 and
1982. Moreover, in petitioner’s Form 12510 and petitioner’s
attachment to petitioner’s Form 12507, petitioner indicated, and
respondent does not dispute here, that Mr. Korchak, without
consulting her, invested the $92,970 refund claimed in the 1982
joint tax return in Riverside, which filed for bankruptcy in
1989, and that, as a result of that bankruptcy proceeding, Mr.
Korchak lost his entire $700,000 investment in that company. In
addition, in Mr. Korchak’s Form 12508, Mr. Korchak indicated, and
respondent does not dispute here, that Mr. Korchak invested the
$92,970 refund claimed in the 1982 joint tax return in a business
venture of his (namely, Riverside), which later failed. With
respect to the refund of $92,970 claimed in the 1982 joint tax
return, petitioner testified that she had no specific recollec-
tion regarding that return, that she and Mr. Korchak usually
received tax refunds, and that she had no specific recollection
of the refund of $92,970 claimed in the 1982 joint tax return,
although there may have been such a claimed refund.    We are
unable to find on the record before us that at the time she
signed the 1982 joint tax return petitioner was aware of the
$92,970 refund claimed in that return. Even if petitioner were
aware at that time of that claimed refund, that would not change
                                                    (continued...)
                              - 53 -

     On the record before us, we find that a reasonably prudent

taxpayer under petitioner’s circumstances at the time of signing

the 1982 joint tax return could not have been expected to know

that the tax liability stated in that return was erroneous.

     It is respondent’s position that, even if the Court were to

find, as we have, that a reasonably prudent taxpayer under

petitioner’s circumstances at the time of signing the 1982 joint

tax return could not have been expected to know that the tax

liability stated in that return was erroneous, petitioner none-

theless had a duty to investigate further whether the tax liabil-

ity stated in that return was erroneous (duty to inquire).    In

support of that position, respondent states:

     Had petitioner reviewed the 1982 return, she would have
     discovered that she and Mr. Korchak were claiming a
     substantial loss and tax credit attributable to the
     Madison investment, as that information was clearly set
     forth in a schedule attached to the return. The Madi-
     son loss [of $58,089] and tax credit [totaling
     $114,407] were large enough to put her on notice that
     further inquiry was warranted to determine the legiti-
     macy of those tax benefits. Thus, under the Bokum
     standard, she had reason to know of the understatement.

     With respect to the claimed Madison Recycling credits of

$114,407, we disagree with respondent’s contention that those

claimed credits were “clearly set forth in a schedule attached to

the return.”   As discussed above, we have found that it was not

obvious from reviewing Form 3468 included with the 1982 joint tax



     25
      (...continued)
our findings and conclusions herein.
                             - 54 -

return that $57,750 of the claimed $59,835 investment tax credit

was attributable to Madison Recycling and that the claimed

$56,657 business energy investment tax credit was attributable to

Madison Recycling.

     With respect to the claimed $58,089 Madison Recycling loss,

we disagree with respondent’s contention that that claimed loss

was large enough to put petitioner on notice that further inquiry

was warranted to determine whether it was proper.   As discussed

above, Statement 2 included with the 1982 joint tax return showed

a claimed loss from the Kelly-Brock Drilling Partners 1981-1

partnership that was greater than the claimed $58,089 Madison

Recycling loss and a claimed loss from the Odessey Partners 81

Limited partnership that was approximately equal to the claimed

$58,089 Madison Recycling loss.   We have found that the amount of

the claimed $58,089 Madison Recycling loss would not have made

that claimed loss stand out in relationship to the other partner-

ship losses claimed in Statement 2.

     Even if, as respondent argues, both the claimed $58,089

Madison Recycling loss and the claimed Madison Recycling credits

of $114,407 had been “clearly set forth in a schedule attached to

the return”, as discussed above, at the time petitioner signed

the 1982 joint tax return she must have had sufficient knowledge

of the circumstances of the transactions in which Madison Recy-

cling engaged that resulted in the understatement in that return
                                 - 55 -

so as to permit her to inquire into the appropriate tax treatment

of such transactions.     See Bokum v. Commissioner, 94 T.C. at

148.26     As also discussed above, at the time petitioner signed

the 1982 joint tax return, she was not even aware of Mr.

Korchak’s Madison Recycling investment, let alone the circum-

stances of the transactions in which Madison Recycling engaged

that resulted in Madison Recycling’s erroneously claimed $704,111

loss and erroneously claimed $7 million basis for investment tax

credit purposes and business energy investment tax credit pur-

poses.27

     On the record before us, we find that a reasonably prudent

taxpayer under petitioner’s circumstances at the time of signing

the 1982 joint tax return would not have had a duty to investi-

gate further whether the tax liability stated in that return was

erroneous.28


     26
          See also Hillman v. Commissioner, T.C. Memo. 1993-151.
     27
          See supra note 23.
     28
      The Court has held that a requesting spouse may satisfy a
duty to inquire by questioning his or her spouse about the
accuracy of a joint tax return and receiving a plausible explana-
tion. See, e.g., Foley v. Commissioner, T.C. Memo. 1995-16;
Estate of Killian v. Commissioner, T.C. Memo. 1987-365. Assuming
arguendo that we had found that petitioner had a duty to inquire,
she would have satisfied that duty by asking Mr. Korchak before
she signed the 1982 joint tax return about the claimed $58,089
Madison Recycling loss and the claimed Madison Recycling tax
credits of $114,407 and receiving assurance from him that that
claimed loss and those claimed credits were proper. Mr. Korchak
testified credibly, and we have found, that if petitioner had
questioned him before she signed the 1982 joint tax return, he
                                                   (continued...)
                              - 56 -

     Based upon our examination of the entire record before us,

we find that in signing the 1982 joint tax return petitioner did

not know, and had no reason to know, of the understatement in

that return.   On that record, we further find that petitioner

satisfies section 6015(b)(1)(C) for her taxable year 1982.

     Section 6015(b)(1)(D)

     Pursuant to section 6015(b)(1)(D), petitioner must establish

that, taking into account all the facts and circumstances, it is

inequitable to hold her liable for the deficiency in tax attrib-

utable to the understatement in the 1982 joint tax return.    The

requirement in section 6015(b)(1)(D) is virtually identical to

the requirement of former section 6013(e)(1)(D), and cases

interpreting former section 6013(e) remain instructive to our

analysis.   Alt v. Commissioner, 119 T.C. at 313-314.

     The factors that we consider in determining whether it would

be inequitable for purposes of section 6015(b)(1)(D) are the same

factors that we consider in determining whether it would be

inequitable for purposes of section 6015(f).   See id. at 316.

One factor considered in determining whether it would be inequi-

table for purposes of section 6015(f) and thus for purposes of


     28
      (...continued)
would have assured her that the claimed $58,089 Madison Recycling
loss and the claimed Madison Recycling credits of $114,407 were
proper. We shall not penalize petitioner for failing to perform
the act of asking Mr. Korchak about that claimed loss and those
claimed credits where such an inquiry would have resulted in his
assuring her that that claimed loss and those claimed credits
were appropriate.
                                 - 57 -

section 6015(b)(1)(D), see id., is whether in signing the tax

return the requesting spouse did not know, and had no reason to

know, of an understatement in that return, see Rev. Proc. 2003-

61, sec. 4.03(2)(a)(iii)(B), 2003-2 C.B. 296, 298.     Moreover, in

determining whether a requesting spouse satisfies section

6015(b)(1)(D), we may consider, inter alia, whether such spouse

satisfies section 6015(b)(1)(C).29     We have found that petitioner

satisfies section 6015(b)(1)(C) for her taxable year 1982.     We

further find that in signing the 1982 joint tax return petitioner

did not know, and had no reason to know, of the understatement in

that return for purposes of section 6015(b)(1)(D).

     Other relevant factors that we may consider in determining

whether a requesting spouse satisfies section 6015(b)(1)(D)

include whether (1) the requesting spouse was deserted, divorced,

or separated (marital status factor); (2) the requesting spouse

would suffer economic hardship if relief were not granted (eco-

nomic hardship factor); and (3) the requesting spouse made a good

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

following the taxable year to which the request for relief

relates (tax compliance factor).     See Washington v. Commissioner,

120 T.C. 137, 147 (2003); Alt v. Commissioner, supra at 314-316.




     29
          See Halton v. Commissioner, T.C. Memo. 2005-209.
                             - 58 -

     With respect to the marital status factor, petitioner and

Mr. Korchak were still married and living together at the time of

the trial.

     With respect to the economic hardship factor, pursuant to

Madison Recycling Associates v. Commissioner, T.C. Memo. 2001-85,

respondent assessed against petitioner and Mr. Korchak a defi-

ciency of $140,388 in tax for their taxable year 1982 and inter-

est thereon as of October 3, 2003, of $1,107,797.85 resulting

from the disallowance of the claimed $58,089 Madison Recycling

loss and the claimed Madison Recycling tax credits of $114,407.

If the Court were to deny petitioner’s claim under section 6015,

petitioner and Mr. Korchak would be jointly and severally liable

for that assessed deficiency and that assessed interest, none of

which had been paid as of the time of the trial.   Moreover,

pursuant to Korchak v. Commissioner, T.C. Memo. 2005-244, and the

parties’ stipulation to be bound, see supra note 3, if the Court

were to deny petitioner’s claim under section 6015, petitioner

and Mr. Korchak would be jointly and severally liable for addi-

tions to tax for their taxable year 1982 under sections

6653(a)(1), 6653(a)(2), and 6659 of $7,019.40, 50 percent of the

interest due on the assessed deficiency of $140,388, and

$34,322.10, respectively.

     Petitioner contends that at the time of the trial the total

liability with respect to her taxable year 1982 “greatly exceeds”
                                - 59 -

$2 million.30    Respondent contends that at that time that liabil-

ity was approximately $2 million.     Suffice it to say that the

parties agree that at the time of the trial the total liability

with respect to petitioner’s taxable year 1982 was at least $2

million.     Moreover, interest as provided by law continues to

accrue thereafter with the passage of time.     See sec. 6601.

Thus, the total liability for taxable year 1982 continues to

increase with the passage of time (1982 total liability).

     Respondent maintains, and petitioner does not dispute, that,

because petitioner and Mr. Korchak were still married at the time

of the trial, it is appropriate to consider the income, the

assets, and the liabilities of both of them in determining

whether petitioner would suffer an economic hardship if she were

required to pay the 1982 total liability.     The parties agree that

at the time of the trial the total value of the assets of peti-

tioner and Mr. Korchak was $1,972,169.     The parties also agree

that at that time the residence in which petitioner and Mr.

Korchak were living that petitioner owned was subject to liabili-

ties totaling $139,000.31




     30
      In petitioner’s December 15, 2004 memorandum that she
submitted to respondent during the consideration by respondent’s
examiner of petitioner’s claim under sec. 6015, petitioner
indicated that, as of Dec. 13, 2004, the total liability with
respect to her taxable year 1982 exceeded $2.5 million.
     31
          See supra note 19.
                             - 60 -

     If petitioner and Mr. Korchak were to use all of the assets

owned at the time of the trial, they would be unable to pay even

the $2 million of the liability for their taxable year 1982 that,

at a minimum, the parties agree existed at that time.    And they

would be left with no assets to pay the balance of that liabil-

ity, including the interest as provided by law that continues to

accrue and that causes that liability to continue to increase.

All that petitioner and Mr. Korchak would be left with to pay the

balance of the 1982 total liability, as well as all of their

basic reasonable living expenses,32 would be petitioner’s annual

salary of $115,000 and Mr. Korchak’s annual salary of $90,000

that they were receiving at the time of the trial.33    Of course,

those salaries would be subject to Federal and State income taxes

and Social Security taxes, as required by law.   Moreover, as of

the time of the trial, petitioner intended to retire in 2007 at

age 70.34



     32
      The basic reasonable living expenses of petitioner and Mr.
Korchak include the expenses with respect to the $139,000 of
liabilities to which their residence that petitioner owned at the
time of the trial was subject.
     33
      During 2004, the year before the trial took place, in
addition to the respective salaries of petitioner and Mr.
Korchak, they received other income from various sources totaling
$60,003. The record does not disclose how much, if any, income
from such sources petitioner and Mr. Korchak expect to receive
after 2004.
     34
      Although Mr. Korchak testified that as of the time of the
trial he had no intention of retiring, we note that he was 71
years old at that time.
                              - 61 -

     On the record before us, we find that petitioner would

suffer an economic hardship if she were required to pay the 1982

total liability.

     With respect to the tax compliance factor, petitioner

contends, and respondent does not dispute, that she complied with

the tax laws for her taxable years following her taxable year

1982.

     Based upon our examination of the entire record before us,

we find that, taking into account all the facts and circum-

stances, it is inequitable to hold petitioner liable for the

deficiency in, and additions to, tax (as well as interest thereon

as provided by law) attributable to the understatement in the

1982 joint tax return.   On that record, we further find that

petitioner satisfies section 6015(b)(1)(D) for her taxable year

1982.

     Conclusion

     Based upon our examination of the entire record before us,

we find that petitioner is entitled to relief under section

6015(b) with respect to her taxable year 1982.35

     We have considered all of the parties’ contentions and

arguments that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.


     35
      In light of our finding that petitioner is entitled to
relief under sec. 6015(b) with respect to her taxable year 1982,
we need not address petitioner’s alternative claim for relief
under sec. 6015(f) for that year.
                        - 62 -

To reflect the foregoing,

                                 Appropriate decisions for

                            petitioner will be entered.
