                        T.C. Memo. 2005-72



                      UNITED STATES TAX COURT



   PATRICIA A. HENDRICKS AND JOHN J. HENDRICKS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11416-03L.            Filed April 5, 2005.


     Randall M. Willard, for petitioners.

     John A. Weeda, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   The petition and amended petition in this

case were filed in response to Notices of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330

(notices of determination) sent separately to Patricia A.

Hendricks (petitioner) and John J. Hendricks (Mr. Hendricks).     In

the notice of determination sent to petitioner, respondent denied
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her request for relief from joint and several liability pursuant

to section 6015.   After concessions, the sole issue for decision

is whether respondent abused his discretion in denying

petitioner’s request for relief from joint and several tax

liability pursuant to section 6015 as to 1983.

     Unless otherwise noted, all section references are to the

Internal Revenue Code in effect at all relevant times, and

amounts are rounded to the nearest dollar.

                         FINDINGS OF FACT

     Some facts have been stipulated and are so found.   The

stipulation of facts, with accompanying exhibits, is incorporated

herein by this reference.

     Petitioner and Mr. Hendricks (collectively, the Hendrickses)

were residents of the State of Colorado at all times relevant to

this case.   The Hendrickses have been married for more than 45

years and have at all times filed joint Federal income tax

returns; i.e., Form 1040, U.S. Individual Income Tax Return.

Both petitioner and Mr. Hendricks are more than 70 years of age

and are retired.   Before the Hendrickses married, they agreed to

separate their responsibilities, deciding that petitioner would

run the household while Mr. Hendricks would be responsible for

their finances.

     Mr. Hendricks worked as a farm manager and a farm and ranch

real estate broker, and he invested in real estate.   Mr.
                                - 3 -

Hendricks did not discuss business matters with petitioner, nor

was petitioner ever an employee of any of Mr. Hendricks’s

businesses.

       Mr. Hendricks maintained several separate business bank

accounts to which petitioner had no access.    The Hendrickses

maintained only one joint checking account from which petitioner

paid personal and household expenses.

       Petitioner completed 2 years of college, where she studied

art.    Petitioner did not take any business courses or classes on

income taxation or preparation of income tax returns.     After

marrying Mr. Hendricks, petitioner stayed at home to raise their

five children and run their household.    Petitioner’s only

involvement in family finances was to pay the monthly household

expenses.    Petitioner relied upon Mr. Hendricks for financial,

business, and tax decisions.

       The Hendrickses have led frugal lifestyles.   There is no

evidence that during the relevant years they made any lavish or

unusual expenditures.

       On November 18, 1980, Mr. Hendricks met with the

Hendrickses’ certified public accountant, Kurt Grosser (Mr.

Grosser), and a broker for a partnership called Boulder Oil and

Gas Associates, 1980 (Boulder Oil and Gas).    Despite its being

the first he had heard of the partnership, during the meeting Mr.

Hendricks agreed to invest $94,002 in Boulder Oil and Gas and
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gave the broker an initial installment check from one of his

business checking accounts.   Mr. Hendricks completed the purchase

by paying two additional installments over the next 2 years by

checks drawn on his business accounts.    The partnership interest

in Boulder Oil and Gas was placed in Mr. Hendricks’s name alone.

     Petitioner had no knowledge that Mr. Hendricks was making an

investment in Boulder Oil and Gas.     Mr. Hendricks did not consult

petitioner about making the investment.    Petitioner did not

receive any mail regarding Boulder Oil and Gas because all mail

from the partnership was sent to Mr. Hendricks’s business

address.

     Just prior to Mr. Hendricks’s investment in Boulder Oil and

Gas, on January 31, 1980, Mr. Hendricks traded various pieces of

farmland that the Hendrickses had previously owned for 10

condominiums in Fort Collins, Colorado.    The condominiums were

not acquired from proceeds made available through Mr. Hendricks’s

investment in Boulder Oil and Gas.     The condominiums were owned

jointly by the Hendrickses.

     During the relevant years, the Hendrickses relied upon Mr.

Grosser, who had promoted Boulder Oil and Gas, to prepare their

tax returns.   Petitioner’s only involvement in preparing the tax

returns for the relevant years at issue was to complete a

questionnaire about personal and household expenses.    Petitioner

relied on Mr. Hendricks to communicate with Mr. Grosser for the
                                - 5 -

preparation of their tax returns.    When Mr. Hendricks brought

home the income tax returns prepared and signed by Mr. Grosser,

petitioner would sign them in reliance on the accountant’s and

her husband’s recommendations to sign.     Except for the years they

reported loss activity from Boulder Oil and Gas, i.e., 1980-83,

the Hendrickses have neither had their Federal tax returns

examined, nor have they had taxes in excess of the amount

reported on their returns assessed.     The Hendrickses claimed

$158,521 in losses arising from Boulder Oil and Gas on their

joint 1983 tax return on Schedule E, Supplemental Income and

Loss.    This amount did not appear on the face of the return, but

was listed on Schedule E, combined with the income and expenses

of at least 11 other properties, including the condominiums and

an office building.

        On September 10, 1985, respondent sent the Hendrickses a

Form 4549, Income Tax Examination Changes, which reflected

proposed changes to the Hendrickses’ joint Federal income tax

returns for 1980-83.    This was the first time petitioner learned

of Mr. Hendricks’s investment in Boulder Oil and Gas.     On October

11, 1985, the Hendrickses received a notice of deficiency for

1980-82.    The Hendrickses failed to petition the Court for

redetermination of the deficiencies set out in the notice of

deficiency and consented to an extension of the assessment date.

On June 10, 1987, respondent assessed the following amounts as
                                      - 6 -

determined in the notice of deficiency with respect to 1980-82:



                          Additions to tax and increased interest
Year      Deficiency       Sec. 6659    Sec. 6661    Sec. 6621(d)

1980       $27,920             --               --     $33,970
1981       $45,294          $13,588             --     $67,177
1982       $70,920          $15,918           $4,465   $53,749

With respect to 1982, respondent subsequently abated the

additions to tax under sections 6659 and 6661.

       The Hendrickses began making payments shortly after the

assessment was made, paying the balance due for 1980 in full by

October 13, 1987.      The liability for 1981 was paid in full by

December 1, 1989, and the liability for 1982 was paid in full by

August 27, 1993.       Over the years 46 payments in varying amounts

were made totaling $387,903, the moneys being derived, in part,

from the sale of several of the condominiums.

       On October 11, 1985, the same day the Hendrickses received

the notice of deficiency for 1980-82, respondent sent a letter to

Mr. Hendricks with respect to 1983, informing him that Boulder

Oil and Gas was being examined under the administrative

procedures enacted by the Tax Equity and Fiscal Responsibility

Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 324.      Mr. Hendricks

received this letter at his place of business and did not take

the letter home.       On April 25, 1988, respondent mailed a letter

to the Hendrickses at their home address, which stated that

respondent was proposing adjustment to their joint 1983 tax
                               - 7 -

return.   The only other correspondence sent to the Hendrickses

was a Notice of Final Partnership Administrative Adjustments

(FPAA) mailed to the Hendrickses on February 6, 1989.

     On April 20, 1989, Boulder Oil and Gas filed a petition with

the Court in response to the FPAA (Boulder Oil and Gas case).

     On October 31, 1997, Mr. Hendricks transferred his jointly

held interest in the remaining condominiums to petitioner.    For 2

years before the transfer of his interest in the remaining

condominiums, Mr. Hendricks had been advised by his attorney and

John Angeli (Mr. Angeli), the Hendrickses’ new certified public

accountant, to transfer his interest in the condominiums to

petitioner in order to protect the condominiums from any

creditors of Mr. Hendricks in the substantial farming enterprise

Mr. Hendricks was engaged in at the time.   Mr. Hendricks’s actual

intent in making the transfers was to protect the investment in

the condominiums because they constituted the Hendrickses’ only

financial resource for their retirement outside of Social

Security.   At the time of the transfer, the Hendrickses

mistakenly believed that they had settled the 1983 tax year and

did not owe any tax liabilities associated with 1983 or any other

years.

     The farming enterprise Mr. Hendricks was engaged in at the

time of the transfer to petitioner involved a 10-year lease-

purchase of 12,270 acres of Colorado farmland between him as
                               - 8 -

lessee and Colmeno of Colorado, Inc., as lessor.    The lease

commenced in January 1994, and was to run until 2003.    The

arrangements required Mr. Hendricks to make annual payments

totaling $350,550 consisting of payments for the land lease, an

equipment lease, a loan of $655,600 from a firm called Menotex, a

prior mortgage, and real property taxes.   The farming enterprise

failed because Mr. Hendricks was unable to meet the income

projections needed to service the payments.    On February 21,

2001, he liquidated the farming enterprise and sold its assets at

an auction.   It took Mr. Hendricks until January 2004 to finally

pay off all creditors from that undertaking.

     On June 18, 1998, we issued an Order to Show Cause why the

Boulder Oil and Gas case should not be decided in accordance with

several test cases.   On November 23, 1998, we issued an Order and

Decision granting respondent’s Motion for Entry of Decision,

making adjustments to the partnership items of Boulder Oil and

Gas for the 1983 tax year.

     On October 14, 1999, respondent sent a letter to the

Hendrickses transmitting a Form 4549A-CG, Income Tax Examination

Changes, explaining how the adjustments made during the TEFRA

proceeding affected their individual income tax return for 1983.

Respondent assessed the Hendrickses’ deficiency for 1983 on

February 16, 2000.
                               - 9 -

     On June 27, 2000, and July 17, 2000, Mr. Angeli faxed

correspondence to respondent alleging that the Hendrickses had

settled the 1983 tax liabilities and questioned the propriety and

timeliness of the 1983 assessment.     Respondent sent a letter to

the Hendrickses dated October 26, 2000, explaining the origin of

the 1983 tax liability in the TEFRA proceeding and attaching

copies of the various notices sent to the Hendrickses over the

years from the time the proceeding began.    Respondent included

transcripts of account showing that while the 1980-82 tax

liabilities had been assessed and paid, the 1983 deficiency had

not been assessed until February 16, 2000, because of the stay on

assessment caused by the TEFRA proceeding.

     Respondent filed a Notice of Federal Tax Lien in Larimer

County, Colorado, for the assessed 1983 tax liability and sent

the Hendrickses a Notice of Federal Tax Lien and Your Right to a

Hearing Under IRC 6320 on November 20, 2000.

     On December 20, 2000, petitioner and Mr. Hendricks submitted

their separate Forms 12153, Request for a Collection Due Process

Hearing, and petitioner submitted a Form 8857, Request for

Innocent Spouse Relief.   A hearing was held by telephone on

February 11, 2003.   Respondent issued separate notices of

determination to petitioner and Mr. Hendricks on June 6, 2003,

sustaining the filing of notices of Federal tax lien and denying

relief to petitioner under section 6015.
                              - 10 -

     The Hendrickses have made payments totaling approximately

$110,150 against the balance due on their 1983 tax liabilities.

The deficiency attributable to Mr. Hendricks’s investment in

Boulder Oil and Gas for 1983 was $63,176.    After accounting for

the payments previously made, the Hendrickses’ current balance

due for 1983 is approximately $300,000.

     The main source of the Hendrickses’ current income consists

of monthly Social Security checks and approximately $1,000 in

rental income per month from the remaining condominiums.    The

Hendrickses’ monthly living expenses exceed their income by about

$1,100.   They are able to meet their living expenses only through

financial assistance from their children.

                              OPINION

     Pursuant to section 6330, petitioner sought relief from

respondent’s notice of determination sustaining the proposed

collection action.   Section 6330 allows a taxpayer to raise

appropriate spousal defenses under section 6015.    Sec.

6330(c)(2)(A)(i); sec. 301.6330-1(e)(2), Proced. & Admin. Regs.

     Generally, married taxpayers may elect to file a joint

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

election, each spouse is jointly and severally liable to pay the

entire tax due.   Sec. 6013(d)(3).   A spouse (requesting spouse)

may, however, seek relief from joint and several liability under

section 6015(b), or if eligible, may allocate liability according
                                - 11 -

to provisions under section 6015(c).     Sec. 6015(a).   If relief is

not available under section 6015(b) or (c), an individual may

seek equitable relief under section 6015(f).

     To qualify for relief from joint and several liability under

section 6015(b)(1), a requesting spouse must establish:

             (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, * * *.

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

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

prevents a requesting spouse from qualifying for the relief

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

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

     Respondent does not dispute that petitioner satisfies the

requirements of subparagraphs (A), (B), and (E) of section
                                - 12 -

6015(b)(1).   Therefore, the controversy arising from the

deduction of the Boulder Oil and Gas losses focuses on:     (1)

Whether petitioner, in signing the joint 1983 tax return, knew or

had reason to know of the understatement; and (2) taking into

account all the facts and circumstances, whether it would be

inequitable to hold petitioner liable for the resulting

deficiency.

     The requirement of section 6015(b)(1)(C) is similar to the

requirement of former section 6013(e)(1)(C) in that both

provisions require the requesting spouse to establish “in signing

the return, he or she did not know, and had no reason to know” of

the understatement.   Because of their similarities, analysis in

opinions concerning former section 6013(e)(1)(C) remains

instructive to our analysis for section 6015(b)(1)(C).      Jonson v.

Commissioner, 118 T.C. 106, 115 (2002), affd. 353 F.3d 1181 (10th

Cir. 2003); Butler v. Commissioner, 114 T.C. 276, 283 (2000).

     An examination of the record reveals that only Mr. Hendricks

executed the investment papers in Boulder Oil and Gas and that

the partnership interest was placed in his name alone.    Mr.

Hendricks paid for the Boulder Oil and Gas investment with checks

drawn from one of his business accounts, to which petitioner had

no access.    All mail from Boulder Oil and Gas was sent to Mr.

Hendricks’s business address.    Petitioner did not see any mail
                                - 13 -

from Boulder Oil and Gas, because Mr. Hendricks did not bring any

of this mail home.

     Petitioner’s lack of knowledge regarding the transaction is

corroborated by the Hendrickses’ testimonies at trial.     Mr.

Hendricks testified that he did not discuss business or financial

matters, including his investment in Boulder Oil and Gas, with

petitioner and that he did not consult petitioner when he decided

to make the investment.

     Having observed the Hendrickses’ appearances and demeanors

at trial, we find their testimonies to be honest, forthright, and

credible.   In view of their testimonies, we find that petitioner

did not have actual knowledge of Mr. Hendricks’s investment in

Boulder Oil and Gas at the time the joint 1983 tax return was

signed.

     Section 6015(b)(1)(C) also requires that petitioner

establish that she did not have reason to know that there was an

understatement.   Whether petitioner had reason to know of an

understatement is a question of fact which must be determined

based upon the entire record.    Guth v. Commissioner, 897 F.2d

441, 442 (9th Cir. 1990), affg. T.C. Memo. 1987-522; Terzian v.

Commissioner, 72 T.C. 1164, 1170-1172 (1979).   Petitioner had

reason to know of an understatement if a reasonably prudent

taxpayer under her circumstances could be expected to know that

the tax liability stated was erroneous or that further
                               - 14 -

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, 94 T.C. 126, 148 (1990), affd. 992 F.2d 1132 (11th

Cir. 1993).

     When deciding whether petitioner had reason to know of an

understatement, we consider several factors including

petitioner’s level of education, her involvement in the financial

transactions which gave rise to the deductions, the presence of

lavish or unusual expenditures compared to her past standard of

living, and her husband’s openness concerning these transactions.

See Stevens v. Commissioner, supra at 1505; Butler v.

Commissioner, supra at 284; Flynn v. Commissioner, 93 T.C. 355,

365-366 (1989).   In making our determination, we must consider

the interplay or balance of the factors, instead of merely

counting the factors in a requesting spouse’s favor.    Guth v.

Commissioner, supra at 444.

     At the time petitioner signed the returns, petitioner had

completed 2 years of college, where she studied art.    She did not

have any education or work experience in tax, financial, or

accounting matters.   We find nothing in the record regarding her

education and experiences that would or should have alerted her

to the pitfalls of this situation.
                                - 15 -

     Mr. Hendricks dominated the financial side of the marriage

with petitioner playing a minor role in the family’s finances.

Petitioner did not participate in any of Mr. Hendricks’s business

activities.   Although Mr. Hendricks was not deceitful regarding

their finances, he did not consult with petitioner about making

the investment in Boulder Oil and Gas and did not disclose that

the investment had been made.    Moreover, petitioner played a

minimal role in the preparation of the tax returns.       The only

information petitioner provided was a list of personal and

household expenses.   She relied upon Mr. Hendricks to provide the

remainder of the information.

     The Hendrickes have led frugal lifestyles.    We find no

evidence in the record that the Hendrickses made any lavish or

unusual expenditures during the relevant years.

     Considering all of the circumstances concerning the joint

1983 tax return, a reasonably prudent taxpayer under petitioner’s

circumstances–-living a modest life, raising a family of five

children, uninvolved in the financial affairs of the family, and

without any financial background–-at the time of signing could

not be expected to know about the understatement attributable to

Mr. Hendricks’s investment in Boulder Oil and Gas.

     Is there, however, a duty of inquiry?    In order for

petitioner’s duty of inquiry to arise, she must first harbor

doubts about the accuracy of the return.     Stevens v.
                                - 16 -

Commissioner, supra at 1507.     Petitioner may be put on notice of

the understatement if a reasonably prudent taxpayer in her

position would be led to question the legitimacy of the

deduction.   Id. at 1505.    The Court of Appeals for the Second

Circuit has concluded:

          Tax returns setting forth large deductions, such
     as tax shelter losses offsetting income from other
     sources and substantially reducing or eliminating the
     couple’s tax liability, generally put a taxpayer on
     notice that there may be an understatement of tax
     liability.

See Hayman v. Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993),

affg. T.C. Memo. 1992-228.

     Mr. Hendricks was a farm and ranch real estate broker and an

investor, which required him to report his various investment

activities on Schedule E on the Hendrickses’ Federal income tax

return.   On their joint 1983 tax return, the Hendrickses claimed

$158,521 in losses arising from Boulder Oil and Gas.    This amount

did not appear on the face of the return, but it was listed on

Schedule E, combined with the income and expenses of at least 11

other properties, including the condominiums and an office

building.

     Considering all of the circumstances, we conclude that

petitioner was not put “on notice” of the understatement.    See

Boyle v. Commissioner, T.C. Memo. 1994-438.     We conclude that a

reasonably prudent taxpayer in petitioner’s position, at the time

of signing the return, could not be expected to know about the
                               - 17 -

understatement of tax or that further investigation was

warranted.    Petitioner has satisfied the section 6015(b)(1)(C)

requirement.

       The final question is whether, taking into account all the

facts and circumstances, it would be inequitable to hold

petitioner liable for the deficiency attributable to the

understatement on the joint 1983 tax return.    Sec. 6015(b)(1)(D).

       Respondent argues that it would not be inequitable for

petitioner to be held liable for the understatement on the joint

1983 tax return because title to the remaining condominiums was

transferred in 1997 to her name alone.    The Hendrickses acquired

the condominiums before Mr. Hendricks invested in Boulder Oil and

Gas.    The condominiums were acquired by exchanging other property

the Hendrickses had previously owned and were not acquired from

proceeds made available through the investment in Boulder Oil and

Gas.    Mr. Hendricks transferred his joint interest in the

remaining condominiums to petitioner nearly 3 years before

respondent assessed the deficiency for 1983 and began collection

action against the Hendrickses for that tax year.    The

Hendrickses had paid the balances due for 1980-82 with moneys,

derived in part, from the sale of several of the condominiums,

and the Hendrickses mistakenly believed that they had settled the

1983 tax year and did not owe any more tax liabilities.
                               - 18 -

       Mr. Hendricks and Mr. Angeli testified at trial that the

risks associated with the substantial farming enterprise with

which Mr. Hendricks was engaged at the time were what motivated

the transfer of the remaining condominiums.      Petitioner was not

involved in the farming enterprise, and the Hendrickses wanted to

protect their investment in the remaining condominiums because

they constituted the Hendrickses’ only financial resource for

their retirement outside of Social Security.      Furthermore,

despite the lack of success with the farming enterprise, Mr.

Hendricks paid all of his debts from the farming enterprise.

       There is nothing in the record to indicate that the

Hendrickses’ standard of living increased in comparison to their

standard of living in prior years.      Their lifestyle was not

lavish, and they made no unusual expenditures.      We find that

petitioner did not significantly benefit from the deduction

attributable to Mr. Hendricks’s investment in Boulder Oil and

Gas.    See Hayman v. Commissioner, supra; Jonson v. Commissioner,

118 T.C. 106 (2002), affd. 353 F.3d 1181 (10th Cir. 2003).

       As retirees, the Hendrickses rely on the Social Security

checks they receive monthly and depend upon the rents from the

remaining condominiums for income.      Their current monthly living

expenses exceed their income by about $1,100.      They are able to

meet their living expenses only through financial assistance from

their children.    We conclude that petitioner would experience
                              - 19 -

considerable economic hardship if relief from the liabilities

were not granted, given the Hendrickses’ current level of income

and assets.   See Ewing v. Commissioner, 122 T.C. 32, 47 (2004).

     We also consider the fact that the Hendrickses have made a

good faith effort to comply with Federal income tax laws in the

tax years following 1983.   Except for the years they reported

loss activity from Boulder Oil and Gas, i.e., 1980-83, the

Hendrickses neither have had their Federal tax returns examined,

nor have they had taxes in excess of the amount reported on their

returns assessed.   Furthermore, the Hendrickses have made an

honest attempt to pay their tax liabilities when they were able

and did so as quickly as possible.     The Hendrickses paid in full

the balances due for 1980-82 by the end of 1993, and have already

paid more than $110,000 toward the balance due for 1983, $63,176

of which represents the underpayment attributable to Mr.

Hendricks’s investment in Boulder Oil and Gas.

     Considering that petitioner did not receive significant

benefit from the understatements, that petitioner would suffer

considerable economic hardship if relief were denied, and that

the Hendrickses have complied with Federal tax laws at least

since 1983, we conclude that on the basis of all the facts and

circumstances it would be inequitable to hold petitioner liable

for the understatement of tax for 1983.    Petitioner has satisfied

the section 6015(b)(1)(D) requirement.
                             - 20 -

     In summary, we find that petitioner has established:   (1) In

signing the joint 1983 tax return, she did not know nor did she

have reason to know of the understatement; and (2) taking into

account all the facts and circumstances, it would be inequitable

to hold petitioner liable for the resulting deficiency.

Petitioner has met all the requirements of section 6015(b), and

she is entitled to relief from joint and several tax liability as

to 1983.

     To reflect the foregoing,


                                        An appropriate decision

                                   will be entered.
