                         T.C. Memo. 2001-325



                      UNITED STATES TAX COURT



         JOHN A. ROWE AND DONNA L. ROWE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 20890-93, 21346-94.      Filed December 28, 2001.


     Rodney S. Klein, for petitioner Donna L. Rowe.

     John A. Rowe, pro se.

     Stephen R. Takeuchi, for respondent.



                         MEMORANDUM OPINION


     RUWE, Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes, additions to tax, and

penalties as follows:1


     1
      The fraud additions to tax pursuant to sec. 6653(b) for the
taxable years 1987 and 1988, and the fraud penalty pursuant to
                                                   (continued...)
                                      - 2 -

                          Additions to Tax and Penalties
Year Deficiency Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B)    Sec. 6661
                                             1
1987 $173,817        $130,363                             $43,454

                           Sec. 6653(b)(1)               Sec. 6661
1988         53,937            $40,453                    $13,484

                           Sec. 6651(a)(1)               Sec. 6663
1989         73,279            $13,792                    $54,959

                              Sec. 6654              Sec. 6662(c)
1990        124,891             $8,057                 $24,978
       1
           50 percent of the interest due on $173,817.

After concessions,2 the primary issue for decision is whether

petitioner Donna A. Rowe is entitled to relief from joint

liability pursuant to section 60153 with respect to the following

omitted income and erroneous deduction items giving rise to

deficiencies:         (1) Distribution proceeds from a retirement

account in petitioner’s name; (2) capital gain income from the

sale of jointly titled property; (3) mortgage interest deductions

on jointly titled property; (4) losses related to a farming

activity; and (5) charitable contribution deductions.

Additionally, we must decide whether petitioner Donna A. Rowe is

       1
      (...continued)
sec. 6663 for the taxable year 1989, relate only to petitioner
John A. Rowe.
       2
           See appendix.
       3
      References to sec. 6015 are to that section as added to the
Internal Revenue Code by the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3201,
112 Stat. 734. Unless otherwise indicated, all other section
references are to the Internal Revenue Code in effect for the
years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
                                - 3 -

liable for any additions to tax or penalties.    For purposes of

clarity, after a brief general background and overview of

applicable law, each of the issues submitted for our

consideration is set forth below with separate background and

discussion.

General Background

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

The stipulation of facts, first supplemental stipulation of

facts, stipulations of agreed issues, stipulation of settled

issues, and the attached exhibits are incorporated herein by this

reference.    Petitioners, John A. Rowe (Mr. Rowe) and Donna L.

Rowe (hereinafter petitioner), resided in Florida at the time

they filed their petitions.

     Mr. Rowe graduated from the University of Tennessee in 1969

with a degree in dental science.    Thereafter, he attended the

University of Tennessee Dental School and received a degree in

dental surgery in 1972 and a degree in oral surgery in 1975.

Petitioner graduated from the University of Tennessee in 1971

with a degree qualifying her as a registered dental hygienist.

Petitioners were married in Kingsport, Tennessee, on June 27,

1971, and they had two children during their marriage,

Christopher and Elizabeth.

     From 1971 to 1977, petitioners lived in Memphis, Tennessee,

where Mr. Rowe conducted an oral surgery practice.    From 1977 to
                                - 4 -

1982, petitioners lived in Bristol, Tennessee, where Mr. Rowe

also conducted an oral surgery practice.    In 1981, Mr. Rowe

became licensed to practice oral surgery in the State of Florida.

In 1982, Mr. Rowe was suspended by the Board of Dentistry in

Tennessee and, as a result, Mr. Rowe stopped practicing dentistry

in Tennessee.    In 1983, petitioners moved to Madisonville,

Kentucky, where Mr. Rowe worked in a dental clinic.    In late

1984, petitioners moved from Kentucky to Osceola County, Florida,

where they resided during the years in issue.

     From October 1984 through October 1989, Mr. Rowe was

employed as a dentist and oral surgeon by the Central Florida

Dental Association (CFDA) in Kissimmee, Florida, and St. Cloud,

Florida.    Mr. Rowe’s annual salary while at the CFDA was

approximately $240,000, and he also shared in the profits of the

business.    Dr. Frank Murray (Dr. Murray) was the president of the

CFDA during the years in issue.    In 1989, Dr. Murray suspected

that Mr. Rowe was improperly handling payments from clients and

insurance companies.    Mr. Rowe’s employment with the CFDA was

subsequently terminated.    The local prosecuting attorney was

informed of Dr. Murray’s suspicions regarding the improper

handling of payments, and Mr. Rowe was investigated and

eventually arrested for embezzling funds.    Mr. Rowe was indicted

on charges of grand theft and computer fraud; however, the
                                - 5 -

charges were dropped because of insufficient evidence of criminal

intent.

     After his employment with the CFDA ended, Mr. Rowe started

his own dental practice, and he also provided dental services

through another business.   In April 1995, Mr. Rowe was convicted

of Federal money laundering.   He was sentenced to 33 months in

prison and ordered to make restitution of $359,452.17 to the Bank

of New York.   In November 1997, Mr. Rowe pleaded guilty to 51

counts of unlawful compensation under Florida State Medicaid laws

and one count of organized fraud.   He was sentenced to 8 months

in prison and ordered to make restitution of $5,051.45 to the

Department of Health and Human Services.   The 1997 conviction

stemmed from unlawful acts performed by Mr. Rowe in connection

with providing dental services.

     During her marriage to Mr. Rowe, petitioner was primarily a

housewife.   She engaged in occasional work as a substitute

teacher, did some office filing, and volunteered at church.

Petitioner’s personal income during the years in issue was

minimal.   Petitioner has no background in accounting, tax, or

other financial matters.    During the years in issue, petitioner

did not have expensive jewelry, drive a luxurious car, or wear

designer clothes.   Petitioners’ primary residence during the

years in issue was sparsely furnished with old office furniture
                               - 6 -

from Mr. Rowe’s business, and the walls were decorated with arts

and crafts which were handmade by petitioner.

     While petitioner was primarily responsible for the household

duties, Mr. Rowe controlled all aspects of petitioners’ financial

matters.   Mr. Rowe regularly prepared petitioners’ joint tax

returns, occasionally with the assistance of other individuals.4

     During the years in issue, petitioners maintained a joint

checking account (NCNB account) at NCNB National Bank.    Deposits

totaling approximately $624,286, $383,557, $26,176, and $7,086,5

respectively, were made into the NCNB account in 1987, 1988,

1989, and 1990.   Mr. Rowe deposited money into the NCNB account

at irregular intervals and in amounts necessary to cover

household expenses.   Petitioner and Mr. Rowe both wrote checks on

the NCNB account.   The majority of the amount paid by checks from

the NCNB account in 1987 and 1988 was related to the purchase of

property and the construction of a residence thereon, and the

checks were written by or at the direction of Mr. Rowe.

     Mr. Rowe also maintained separate bank accounts which

petitioner was unaware existed.   Petitioner did not have access




     4
      Richard Danley (Mr. Danley), an accountant, assisted Mr.
Rowe in preparing petitioners’ 1990 Federal income tax return.
     5
      Approximately $4,102 of the deposit total for 1990
represented petitioner’s earnings from her employment as a
substitute teacher.
                               - 7 -

to Mr. Rowe’s separate accounts, and he did not provide her with

information regarding these accounts.   Mr. Rowe opened accounts

in petitioner’s name without her knowledge and also signed

petitioner’s name on several occasions without her knowledge.

     Petitioner and Mr. Rowe’s divorce was finalized in June

1996.   The Final Judgment for Dissolution of Marriage between

petitioner and Mr. Rowe states that petitioner’s “standard of

living and financial circumstances have been devastated by * * *

[Mr. Rowe’s] wrong-doing and incarceration.”   The final judgment

also notes that petitioner “does not have the present financial

resources to support herself and * * * [petitioners’ daughter,

Elizabeth] adequately, but that * * * [Mr. Rowe] does not have

the present ability to pay alimony.”    As a result of Mr. Rowe’s

criminal activities, petitioner had to move out of the family’s

residence in Florida and back to Kingsport, Tennessee, to live

with her parents.   At the time of trial, petitioner was employed

full time as a dental hygienist, and she was paid by commission

only.

     For the taxable years 1987, 1988, 1989, and 1990,

petitioners filed joint Federal income tax returns which were

received by respondent on October 19, 1988, October 17, 1989,

July 31, 1991, and October 18, 1991, respectively.   On June 25,

1993, respondent issued a notice of deficiency to petitioners for

their taxable years 1987, 1988, and 1989.   On August 18, 1994,
                                - 8 -

respondent issued a notice of deficiency to petitioners for their

taxable year 1990.   Petitioners timely filed petitions seeking

redeterminations.    Petitioners subsequently moved to have their

cases consolidated, and we ordered the cases consolidated for

trial, briefing, and opinion.

     Petitioner subsequently made valid elections for relief

under section 6015(b), (c), and (f).     Respondent granted

petitioner relief from joint liability with respect to some of

the items giving rise to deficiencies; however, respondent denied

relief with respect to other items.

Overview of Applicable Law

     If a joint return is filed, the liability with respect to

the tax is normally joint and several.     Sec. 6013(d)(3).   In

1971, Congress enacted section 6013(e) to correct perceived

inequities resulting from the imposition of joint and several

liability in certain circumstances.     S. Rept. 91-1537, at 2

(1970), 1971-1 C.B. 606, 607.   As amended,6 section 6013(e)

provided that a spouse could be relieved of tax liability if the

spouse proved:   (1) A joint return was filed; (2) the return

contained a substantial understatement of tax attributable to



     6
      Sec. 6013(e) initially provided relief only in cases
involving an omission of income. The scope of sec. 6013(e) was
expanded in 1984 to provide relief in cases involving erroneous
deductions. Deficit Reduction Act of 1984, Pub. L. 98-369, sec.
424, 98 Stat. 494, 801-803; H. Conf. Rept. 98-861, at 1119
(1984), 1984-3 C.B. (Vol. 2) 1, 373.
                                - 9 -

grossly erroneous items of the other spouse; (3) in signing the

return, the spouse seeking relief did not know, and had no reason

to know, of the substantial understatement; and (4) under the

circumstances it would be inequitable to hold the spouse seeking

relief liable for the substantial understatement.

       Relief under section 6013(e) was difficult for many

taxpayers to obtain.    In 1998, Congress repealed section 6013(e)

and enacted section 6015 in order to make relief from joint

liability more accessible.    Internal Revenue Service

Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.

3201(a), 112 Stat. 734; H. Conf. Rept. 105-599, at 249 (1998),

1998-3 C.B. 747, 1003.    Section 6015 provides three avenues of

relief from joint and several liability:    (1) Section 6015(b)(1)

(which is similar to former section 6013(e)) allows a spouse to

escape joint and several liability; (2) section 6015(b)(2) and

(c) allows a spouse to be relieved from a portion of the

understatement or deficiency; and (3) section 6015(f) confers

upon the Secretary discretion to grant equitable relief in

situations where relief is unavailable under section 6015(b) or

(c).    Section 6015 generally applies to any liability for tax

arising after July 22, 1998, and any liability for tax arising on

or before July 22, 1998, that remains unpaid as of such date.      H.

Conf. Rept. 105-599, supra at 251, 1998-3 C.B. at 1005.
                             - 10 -

     A spouse seeking relief from joint liability is not limited

to seeking relief under only one subsection; rather, the spouse

may make simultaneous claims for relief under all provisions.   In

the instant case, the parties have treated petitioner’s claim for

relief from joint liability as elections pursuant to section

6015(b), (c), and (f).

     A.   Section 6015(b)

     Section 6015(b) provides, in pertinent part:

          SEC. 6015(b). Procedures for Relief From
     Liability Applicable to All Joint Filers.--

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

                    (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
                                - 11 -

                  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.

                (2) Apportionment of relief.--If an
           individual who, but for paragraph (1)(C), would be
           relieved of liability under paragraph (1)
           establishes that in signing the return such
           individual did not know, and had no reason to
           know, the extent of such understatement, then such
           individual shall be relieved of liability for tax
           (including interest, penalties, and other amounts)
           for such taxable year to the extent that such
           liability is attributable to the portion of such
           understatement of which such individual did not
           know and had no reason to know.

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

may look at cases interpreting former section 6013(e)(1) for

guidance when analyzing section 6015(b)(1).     Butler v.

Commissioner, 114 T.C. 276, 283 (2000); Braden v. Commissioner,

T.C. Memo. 2001-69.

     B.    Section 6015(c)

     Section 6015(c) provides relief from joint liability for

spouses either no longer married, legally separated, or living

apart.    Generally, this avenue of relief allows a spouse to elect

to be treated, for purposes of determining tax liability, as if

separate returns had been filed.    Section 6015(c) provides, in

pertinent part:
                               - 12 -

          SEC. 6015(c). Procedures to Limit Liability for
     Taxpayers No Longer Married or Taxpayers Legally
     Separated or Not Living Together.--

               (1) In general.–-Except as provided in this
          subsection, if an individual who has made a joint
          return for any taxable year elects the application
          of this subsection, the individual’s liability for
          any deficiency which is assessed with respect to
          the return shall not exceed the portion of such
          deficiency properly allocable to the individual
          under subsection (d).

               (2) Burden of proof.–-Except as provided in
          subparagraph (A)(ii) or (C) of paragraph (3), each
          individual who elects the application of this
          subsection shall have the burden of proof with
          respect to establishing the portion of any
          deficiency allocable to such individual.

                 (3) Election.--

                      *    *       *   *   *   *    *

                      (C) Election not valid with respect to
                 certain deficiencies.–-If the Secretary
                 demonstrates that an individual making an
                 election under this subsection had actual
                 knowledge, at the time such individual signed
                 the return, of any item giving rise to a
                 deficiency (or portion thereof) which is not
                 allocable to such individual under subsection
                 (d), such election shall not apply to such
                 deficiency (or portion). * * *

          1.     Allocation of Items

     In enacting section 6015, Congress intended that the

election for relief from joint liability “be available to limit

the liability of spouses for tax attributable to items of which

they had no knowledge.”   S. Rept. 105-174, at 55 (1998), 1998-3

C.B. 537, 591.   Generally, an item giving rise to a deficiency on

a joint return is allocated between the electing spouse and
                               - 13 -

former spouse in the same manner as it would have been allocated

if they had filed separate returns for the taxable year.7    Sec.

6015(d)(3)(A); Grossman v. Commissioner, 182 F.3d 275, 278 (4th

Cir. 1999), affg. T.C. Memo. 1996-452; Charlton v. Commissioner,

114 T.C. 333, 342 (2000); see also S. Rept. 105-174, supra at 56,

1998-3 C.B. at 592; H. Conf. Rept. 105-599, supra at 250, 1998-3

C.B. at 1004.    The electing spouse has the burden of proof with

respect to establishing the portion of any deficiency allocable

to the electing spouse.   Sec. 6015(c)(2).    The allocation is made

without regard to community property laws.    Sec. 6015(a) (flush

language); Charlton v. Commissioner, T.C. Memo. 2001-76.     The

statute provides two exceptions to the general rule of section

6015(d)(3)(A).   Section 6015(d)(3)(B) provides that an item

otherwise allocable to one spouse under section 6015(d)(3)(A)



     7
      Sec. 6015(d) provides, in pertinent part:

          SEC. 6015(d). Allocation of Deficiency.--For
     purposes of * * * [section 6015(c)]--

                 *    *    *    *    *    *     *

               (3) Allocation of Items Giving Rise to the
          Deficiency.-For purposes of * * * [section
          6015(c)]-

                      (A) In general.--Except as provided in
                 paragraphs (4) and (5), any item giving rise
                 to a deficiency on a joint return shall be
                 allocated to individuals filing the return in
                 the same manner as it would have been
                 allocated if the individuals had filed
                 separate returns for the taxable year.
                              - 14 -

shall be allocated to the other spouse filing the joint return to

the extent the item gave rise to a tax benefit on the joint

return to the other spouse.   Section 6015(d)(3)(C) permits the

Secretary to allocate items other than in the manner described in

6015(d)(3)(A) if the Secretary establishes that such allocation

is appropriate due to fraud of one or both spouses.

     Congress has authorized the Secretary to prescribe

regulations providing methods of allocation other than the

methods provided in section 6015(d)(3).   Sec. 6015(g)(1); see

also S. Rept. 105-174, supra at 56-57, 1998-3 C.B. at 592-593; H.

Conf. Rept. 105-599, supra at 251, 1998-3 C.B. at 1005.    Congress

provided the following guidance regarding the types of

alternative methods of allocating items between spouses:

          Under the bill, allocation of items of income and
     deduction follows the present-law rules determining
     which spouse is responsible for reporting an item when
     the spouses use the married, filing separate filing
     status. The Secretary of the Treasury is granted
     authority to prescribe regulations providing simplified
     methods of allocating items.
          In general, apportionment of items of income are
     expected to follow the source of the income. Wage
     income is allocated to the spouse performing the job
     and receiving the Form W-2. Business and investment
     income (including any capital gains) is allocated in
     the same proportion as the ownership of the business or
     investment that produces the income. Where ownership
     of the business or investment is held by both spouses
     as joint tenants, it is expected that any income is
     allocated equally to each spouse, in the absence of
     clear and convincing evidence supporting a different
     allocation.
          The allocation of business deductions is expected
     to follow the ownership of the business. Personal
     deduction items are expected to be allocated equally
                             - 15 -

     between spouses, unless the evidence shows that a
     different allocation is appropriate. For example, a
     charitable contribution normally would be allocated
     equally to both spouses. However, if the wife provides
     evidence that the deduction relates to the contribution
     of an asset that was the sole property of the husband,
     any deficiency assessed because it is later determined
     that the value of the property was overstated would be
     allocated to the husband.
          Items of loss or deduction are allocated to a
     spouse only to the extent that income attributable to
     the spouse was offset by the deduction or loss. Any
     remainder is allocated to the other spouse.
          Income tax withholding is allocated to the spouse
     from whose paycheck the tax was withheld. Estimated
     tax payments are generally expected to be allocated to
     the spouse who made the payments. If the payments were
     made jointly, the payments are expected to be allocated
     equally to each spouse, in the absence of evidence
     supporting a different allocation.
          The allocation of items is to be made without
     regard to the community property laws of any
     jurisdiction.
          If the electing spouse establishes that he or she
     did not know, and had no reason to know, of an item
     and, considering all the facts and circumstances, it is
     inequitable to hold the electing spouse responsible for
     any unpaid tax or deficiency attributable to such item,
     the item may be equitably reallocated to the other
     spouse. In cases where the IRS proves fraud, the IRS
     may distribute, apportion, or allocate any item between
     spouses. [S. Rept. 105-174, supra at 56-57, 1998-3
     C.B. at 592-593.]

     On January 17, 2001, the Secretary issued proposed

regulations under section 6015.8   Sec. 1.6015-1, Proposed Income


     8
      On Mar. 29, 2001, minor corrections were made to the
proposed regulations. Sec. 1.6015-1, Proposed Income Tax Regs.,
66 Fed. Reg. 17130 (Mar. 29, 2001). The proposed regulations
provide that erroneous items are generally allocated between
spouses as if separate returns are filed, subject to four
exceptions. Sec. 1.6015-3(d)(2), Proposed Income Tax Regs., 66
Fed. Reg. 3888, 3898 (Jan. 17, 2001). The exceptions cover
situations where: (1) One spouse receives a tax benefit on the
                                                   (continued...)
                                - 16 -

Tax Regs., 66 Fed. Reg. 3888 (Jan. 17, 2001).    To date, no final

regulations have been issued.

          2.     Actual Knowledge

     If the Commissioner demonstrates that an individual making

the election under section 6015(c) had “actual knowledge”, at the

time such individual signed the return, of any item giving rise

to a deficiency (or portion thereof) which is not allocable to

such individual under section 6015(d), the election under section

6015(c) will not apply to such deficiency (or portion).       Sec.

6015(c)(3)(C).    In the context of omitted income, the

Commissioner must show that the electing spouse had an “actual

and clear awareness of the omitted income.”     Cheshire v.

Commissioner, 115 T.C. 183, 195 (2000).    In the context of a

disallowed deduction, the Commissioner must show that the

electing spouse had “actual knowledge of the factual

circumstances which made the item unallowable as a deduction.”

King v. Commissioner, 116 T.C. 198, 204 (2001).    In either

context, actual knowledge on the part of the electing spouse as


     8
      (...continued)
joint return, (2) one or both spouses commit fraud, (3) erroneous
items of income are present, and (4) erroneous deduction items
are present. Sec. 1.6015-3(d)(2)(i)-(iv), Proposed Income Tax
Regs., supra. With respect to situations involving omitted
income and erroneous deduction items, the proposed regulations
provide language similar to that contained in the legislative
history. Sec. 1.6015-3(d)(2)(iii), (iv), Proposed Income Tax
Regs., supra. The proposed regulations omit Congress’s reference
to the equitable reallocation of an item where the electing
spouse did not know, or have reason to know, of an item.
                                - 17 -

to the tax laws or legal consequences of the operative facts is

not required.     King v. Commissioner, supra, at 204; Cheshire v.

Commissioner, supra, at 195.

     C.    Section 6015(f)

     Section 6015(f) permits the Secretary to relieve a spouse of

liability if, taking into account all the facts and

circumstances, it is inequitable to hold the spouse liable for

any unpaid tax or deficiency (or any portion of either) and

relief is not otherwise available under section 6015(b) or (c).

Sec. 6015(f); Cheshire v. Commissioner, supra at 197.

Respondent’s denial of equitable relief is reviewed under an

abuse of discretion standard.     Cheshire v. Commissioner, supra at

198; Butler v. Commissioner, 114 T.C. at 292.    This is a question

of fact.   Cheshire v. Commissioner, supra.

     On the basis of the circumstances of this case, we initially

consider the merits of petitioner’s claims for relief with

respect to income and deduction items under section 6015(c).    The

parties agree that petitioner made a valid election under section

6015(c), she was no longer married to Mr. Rowe at the time of the

election, and petitioner and Mr. Rowe filed joint returns for the

years in issue.    To the extent petitioner fails to qualify for

relief under subsection (c), we address her claim for relief

under section 6015(b).    To the extent petitioner fails to qualify

for relief under section 6015(b) or (c), we address her claim for
                               - 18 -

equitable relief under section 6015(f).    Finally, we address

whether petitioner is liable for any additions to tax or

penalties for the years in issue.

I.   Retirement Account Distributions

     A.     Background

     In 1990, lump-sum distributions were made from various

pension, profit sharing, and retirement accounts bearing the name

of either petitioner or Mr. Rowe.     The taxable amount distributed

from the accounts in Mr. Rowe’s name totaled $112,979.    The

taxable amount distributed from an individual retirement account

(IRA) in petitioner’s name totaled $3,426.    These amounts were

not reported on petitioners’ 1990 Federal income tax return.

Respondent concedes that petitioner is entitled to be relieved

from joint liabilities attributable to the amount distributed

from Mr. Rowe’s accounts.

     B.     Discussion

            1.   Allocation of Item

     Petitioner argues that the distributions from the IRA in her

name are allocable to Mr. Rowe because he concealed the account

from petitioner and she was not aware of the account or the

distributions until after she signed the return for the year in

issue.    Respondent contends that the distributions from the IRA

are allocable to petitioner because the account was in her name

and she received the distributions.
                                - 19 -

     In analyzing relief from joint liability under section

6015(c), items are generally allocated as if petitioner and Mr.

Rowe had filed separate returns.    Sec. 6015(d)(3)(A).    The first

principle of income taxation is that income must be taxed to him

who earns it.   Commissioner v. Culbertson, 337 U.S. 733, 739-740

(1949); Schuster v. Commissioner, 84 T.C. 764, 773 (1985), affd.

800 F.2d 672 (7th Cir. 1986).    Married individuals filing

separate returns are required to report their own income.

Charlton v. Commissioner, T.C. Memo. 2001-76.

     Petitioner testified that before 1995 she was not aware of

any retirement accounts or plans established in her name.     She

could not recall signing any papers to open a retirement account,

authorizing withdrawals, signing distribution checks, or

receiving any funds from a retirement account.    Mr. Rowe

testified that he personally established the retirement account

and that he could have opened it in petitioner’s name without her

knowledge.   Mr. Rowe also testified that he believed funds were

borrowed from the account, but that he did not consult petitioner

regarding the loan.   Mr. Rowe further testified that he provided

no information to petitioner regarding retirement planning.

     The process of distilling truth from falsehood from the

testimony of witnesses, whose demeanor and credibility we

observe, is the daily grist of judicial life.    Diaz v.

Commissioner, 58 T.C. 560, 564 (1972).    After watching petitioner
                               - 20 -

at trial and observing her demeanor, we found her to be a

credible and earnest witness, and we are satisfied that her

testimony was truthful.    Additionally, Mr. Rowe’s testimony was

consistent with petitioner’s claim that she was not aware of the

IRA or the distributions before 1995.   The evidence in the record

indicates that Mr. Rowe opened the IRA in petitioner’s name and

concealed the account and the distributions from her.

Consequently, petitioner’s only apparent connection to the IRA

was that her name was listed as the owner of the account.

     In the instant case, this item is allocable to Mr. Rowe, and

petitioner will be entitled to relief from joint liability under

section 6015(c), unless respondent shows that she had actual

knowledge of this item.9   We note Congress’s desire regarding

allocation in certain situations:

          If the electing spouse establishes that he or she
     did not know, and had no reason to know, of an item
     and, considering all the facts and circumstances, it is
     inequitable to hold the electing spouse responsible for
     any unpaid tax or deficiency attributable to such item,
     the item may be equitably reallocated to the other
     spouse. * * * [S. Rept. 105-174, supra at 57, 1998-3
     C.B. at 593.]



     9
      On the basis of Mr. Rowe’s control and concealment of the
retirement account and the distributions, it appears that Mr.
Rowe, not petitioner, would have been required to report this
item if he had filed a separate return. See, e.g., James v.
United States, 366 U.S. 213, 219 (1961) (holding that embezzled
funds must be included in the embezzler’s gross income for
Federal income tax purposes in the year in which they were
misappropriated); Yerkie v. Commissioner, 67 T.C. 388, 390 (1976)
(same).
                                - 21 -

In our opinion, the extreme facts and circumstances presented

represent just such a situation envisioned by Congress.

          2.   Actual Knowledge

     Respondent argues that even if this item were allocable to

Mr. Rowe, petitioner still had actual knowledge and reason to

know of the item because she testified that she sorted the mail

and opened letters addressed to her.       Respondent claims that

petitioner must have known about the IRA because periodic

statements from the financial institution managing the account

were addressed to her individually at her home address.

     As we mentioned earlier, petitioner credibly testified that

before 1995 she was not aware of the existence of any retirement

accounts or plans in her name.    Petitioner testified that she

usually collected the mail, but that she never saw any letters

notifying her of the existence of the IRA or the distributions.

Mr. Rowe testified that sometimes he picked up the mail, and

petitioners’ son, Christopher, testified that whoever got home

first would pick up the mail.    Additionally, Mr. Rowe testified

that he provided petitioner with no information regarding

retirement planning.   Whether petitioner had an actual and clear

awareness of the omitted income is an essential fact respondent

is required to establish under section 6015(c)(3)(C).       Respondent

has failed to establish this fact.       Accordingly, we hold that
                                - 22 -

petitioner is entitled to relief from joint liability under

section 6015(c) with respect to this item.

II.   Capital Gain from the Sale of Real Property

      A.   Background

      From late 1984 until May 1987, petitioners lived in Osceola

County, Florida, and resided at certain property known as Lots 22

and 27.    Petitioners eventually purchased Lots 22 and 27 and the

property was titled jointly in their names.

      On May 11, 1987, petitioners sold lots 22 and 27 to Harry

and Shelby Justice for a total sale price of $367,900.

Petitioners’ basis in the property at the time of the sale was

$310,000, and the commission paid on the sale was $25,753.    The

gain on the sale was $32,147.    In connection with the sale, a

check for $89,210.53 representing the proceeds of the sale was

issued payable to “John A. & Donna L. Rowe”.    Petitioner signed

the settlement statement for the property and endorsed the

check.10   The check was deposited into petitioners’ NCNB account

on May 11, 1987.   Petitioners’ 1987 Federal income tax return

listed a capital gain of $30,159.    The capital gain reported on

the return did not include any portion of the $32,147 gain from

the sale of Lots 22 and 27.




      10
      Petitioner’s name is signed “Donna L. Rowe” on the
settlement statement and the check.
                                 - 23 -

     In 1987, certain real property (Anorada property) was

purchased in the names of petitioner and Mr. Rowe.11     On

September 30, 1988, the Anorada property was sold to Mohamed and

Nabila Mohamed for a total sale price of $25,000.     Before the

sale, the property was titled jointly in the names of petitioner

and Mr. Rowe.     The basis in the Anorada property at the time of

the sale to the Mohameds was $20,000, and the commission paid on

the sale was $2,500.     The gain on the sale was $2,500.     In

connection with the sale, a check for $13,552.31 representing the

sale proceeds was issued payable to “John Rowe and Donna Rowe”.

Petitioner’s name is signed on both the settlement statement and

the check.12     The check was deposited into petitioners’ NCNB

account on September 30, 1988.     Petitioners’ 1988 return listed a

capital gain of $20,695.     The capital gain reported on the return

did not include the $2,500 gain from the sale of the Anorada

property.

     B.     Discussion

            1.    Allocation of Items

     Petitioner argues that Mr. Rowe’s secretive nature regarding

his personal and financial activities supports allocating these


     11
      Copies of a deed and a settlement statement list
petitioner and Mr. Rowe as the purchasers of the Anorada
property; however, neither petitioner’s nor Mr. Rowe’s signature
appears on the copies of the documents.
     12
      Petitioner’s name is signed “Donna Rowe” on the settlement
statement and check.
                               - 24 -

items to him because petitioner did not know, or have any reason

to know, that the gains were not reported on the 1987 and 1988

tax returns.   Respondent contends that the capital gain income is

allocable evenly between petitioner and Mr. Rowe because the

properties were jointly titled, and petitioner would have been

required to report half of the proceeds from the sales had she

filed separate returns.

     Petitioner claims that she was often required to sign

documents by Mr. Rowe under conditions where she was not allowed

to question the contents of the documents.   Petitioner maintains

that Mr. Rowe did not tell her that she was listed as an owner of

assets on any of the documents she signed.   Petitioner

acknowledges on brief that she and Mr. Rowe purchased properties;

however, she claims that she was unaware of the disposition of

many of the properties.   Petitioner has not specifically asserted

that she unknowingly signed documents related to the Anorada

property or that she was unaware that her name was listed as a

joint owner of the property.

     Lots 22 and 27 and the Anorada property were titled jointly

in the names of petitioner and Mr. Rowe.   Petitioner testified

that she was aware that she was listed as joint owner of Lots 22

and 27, and she remembered the approximate purchase price of the

property.   Petitioner’s testimony also reflected that she was
                               - 25 -

aware that loans were obtained to finance the purchase of the

property.

     The evidence in the record reflects that petitioner knew

that Lots 22 and 27 and the Anorada property were purchased, and

she knew that she was listed as a joint owner of the property.

Petitioner has failed to establish that the items should be

allocated in a manner other than in proportion to petitioner’s

and Mr. Rowe’s respective ownership interests.    Accordingly,

these items are allocable evenly between petitioner and Mr. Rowe.

Therefore, to the extent petitioner lacked actual knowledge of

these items, she will qualify for relief from joint liability

under section 6015(c) for the portion of the item allocable to

Mr. Rowe.13

            2.   Actual Knowledge

     Respondent maintains that petitioner had actual knowledge of

the capital gain income from the sales of Lots 22 and 27 and the

Anorada property because petitioner was a co-owner of the

properties, she signed the settlement statements, and she

endorsed the settlement checks.     Petitioner claims that she was

unaware of any gain on the sale of Lots 22 and 27 because she did

not have access to financial records, and she relied on Mr.


     13
       Because petitioner cannot qualify for relief under sec.
6015(c) for the portions of items which are allocable to her, we
analyze her ability to qualify for relief for such portions in
our later discussion under sec. 6015(b) and (f). See infra pp.
53-61.
                               - 26 -

Rowe’s determination that there was no gain.     Additionally,

petitioner contends that she was unaware that the Anorada

property was sold in 1988 and that it should have been reported

on the 1988 return.

     In Charlton v. Commissioner, 114 T.C. 333 (2000), we found

that although the electing spouse had actual knowledge of income

from a particular source and knew generally of the source of the

income, he had no knowledge that all income from that source had

not been accounted for as reported.     Thus, we held that the

electing spouse qualified for relief under section 6015(c)

because “respondent has not shown that Charlton had actual

knowledge of the item causing the deficiency”.     Id. at 341.    A

few months later, in Cheshire v. Commissioner, 115 T.C. 183

(2000), we held that where the spouse claiming relief under

section 6015(c) had actual knowledge of the omitted income but

did not have knowledge “whether the entry on the return is or is

not correct”, relief was not available.     Id. at 195.   In Martin

v. Commissioner, T.C. Memo. 2000-346, we discussed generally our

decisions in Charlton v. Commissioner, supra, and Cheshire v.

Commissioner, supra.    We concluded that actual knowledge of a

disputed item of income and the amount thereof prevents a

taxpayer from claiming relief from joint liability under section

6015(c).   Id.   We noted that where an electing spouse has actual

knowledge of an income source, but no knowledge of the amount of
                                 - 27 -

the financial gain, the electing spouse may still qualify for

relief under section 6015(c).      Id.    With those principles in

mind, we now consider whether petitioner had actual knowledge of

the omitted capital gains income.

                 i.     Lots 22 and 27

     With respect to Lots 22 and 27, petitioner testified that

she was aware that the property was sold to Harry and Shelby

Justice in 1987.      Petitioner signed the settlement statement for

the property and endorsed the check representing the proceeds

from the sale.   However, the evidence in the record supports

petitioner’s claim that she did not know the actual amount of

gain on the sale.     Petitioner testified that she simply signed

loan and deed documents and nobody explained them to her.       She

testified she did not see any type of financial statements at the

closing of any real estate, and she did not have access to any

statements or documents identifying the amount of interest paid

on any mortgages.14

     The testimony of petitioner and Mr. Rowe reflects that when

petitioners filed their Federal income tax returns for the years

in issue, petitioner was given the first two pages only of the

tax returns when signing the returns, and she was not afforded

the opportunity to see or review any attachments, schedules, or



     14
      We note that the settlement statement does not identify
petitioners’ basis in the property at the time of sale.
                                 - 28 -

other documents pertaining to the returns.     Petitioner testified

that Mr. Rowe assured her he had records for petitioners’ tax

returns.     Petitioner claims that she was unaware of any gain from

the sale of real estate and that she believed that all income,

capital gains or otherwise, was included on petitioners’ tax

returns.15

     Petitioner has admitted that she knew Lots 22 and 27 were

sold in 1987.    However, respondent has not proven that petitioner

knew the amount of the gain on the sale, or even that any gain

was made on the sale.     Therefore, respondent has failed to

establish that petitioner had actual knowledge of this item

giving rise to a deficiency.     Accordingly, we hold that

petitioner is entitled to relief from joint liability under

section 6015(c) for the portion of this item allocable to Mr.

Rowe.

                  ii.   Anorada Property

     Petitioner maintains that she was unaware that the Anorada

property was sold in 1988.     In connection with the sale of the

Anorada property, a settlement check dated September 30, 1988,

for $13,552.31 was written payable to “John Rowe and Donna Rowe”.

Petitioner claims that she did not endorse the settlement check

because the signature does not look like hers and because she


     15
      We note that the first page of the 1987 return lists a
capital gain of $30,159, which is almost the same amount of gain
realized on the sale of Lots 22 and 27.
                                 - 29 -

signs her name “Donna L. Rowe”, not “Donna Rowe”.     Mr. Rowe

testified that he signed petitioner’s name on different

documents, and he supposed he might have done so on a settlement

statement.    Although Mr. Rowe initially testified that he did not

sign petitioner’s name on the settlement statement or the check

for the Anorada property, he then testified that “there’s no

telling what I might have done.”

     Petitioner’s testimony that she was unaware of the sale of

the Anorada property was credible and persuasive.     Mr. Rowe’s

testimony regarding whether he signed petitioner’s name on the

settlement statement and check was unclear.     Indeed, Mr. Rowe

admitted that he had signed petitioner’s name in the past without

her knowledge and that he generally did not provide her with

information regarding real estate transactions.     Overall, we find

that respondent has not satisfied his burden of proving that

petitioner had actual knowledge of this item giving rise to a

deficiency.    Accordingly, we hold that petitioner is entitled to

relief from joint liability under section 6015(c) for the portion

of this item allocable to Mr. Rowe.

III. Mortgage Interest

     A.      Background

     In May 1987, petitioners sold Lots 22 and 27 and purchased

two adjoining 5-acre lots (Albritton property) across the street

from Lots 22 and 27.      One lot was fenced and on it were a horse
                               - 30 -

barn, a maintenance shed, and a larger building.      A sign on the

road indicated that the lot was the Lake Gentry Horse Farm.         On

the adjoining lot, petitioners constructed a new residence.      From

May 1987 until late 1988, petitioners temporarily resided at

property known as Acorn Court while their new home was being

constructed. In the summer of 1988, petitioners moved into their

new residence.   The total cost for the Albritton property and the

new residence exceeded $1 million.      The residence was jointly

titled in the names of petitioner and Mr. Rowe.

     On the Schedule A, Itemized Deductions, attached to their

1987 return, petitioners claimed a home mortgage interest

deduction of $62,545.    Petitioners substantiated $50,376 of this

amount.   Respondent disallowed the remaining $12,169 of the

claimed deduction on the basis of a lack of substantiation.

     On the Schedule A attached to their 1988 return, petitioners

claimed a home mortgage interest deduction of $97,341.      On the

attached Schedule A, the notation “84,186 + 13,155" appears next

to the figure $97,341.   The Schedule E, Supplemental Income

Schedule, attached to the return lists $13,155 as mortgage

interest paid on rental property identified as “Bayview House”.

Petitioners substantiated $84,186 of the amount claimed for the

home mortgage interest deduction.    The remaining $13,155 of the

home mortgage interest deduction was
                                  - 31 -

disallowed by respondent because it was a duplicate deduction of

interest paid on the Bayview House.16

      On the Schedule A attached to their 1990 return,

petitioners’ claimed a home mortgage interest deduction of

$122,526.    Additionally, an interest expense of $60,564 was

listed on the Schedule F, Farm Income and Expenses, attached to

the return.    In the notice of deficiency for 1990, respondent

allowed a mortgage interest deduction of $66,105 and disallowed

the remaining $56,421 claimed on the Schedule A.          The notice of

deficiency provided the following explanation:

     (h)(I) It is determined that the Schedule A Itemized Deductions
     claimed on the 1990 return for Interest Expense is only allowable
     to the extent of $66,105.00. Since you claimed $122,526.00, your
     taxable income is increased in the amount of $56,421.00 as shown
     below:




     16
      In the notice of deficiency for the years 1987, 1988, and
1989, respondent provided the following explanation:

1.f.II.     It is determined that $13,155 of home
            mortgage interest expense claimed on Schedule
            A in the 1988 tax year is disallowed because
            this amount relates to one of your rental
            properties and has already been deducted on
            Schedule E. Thus, this mortgage interest
            must be disallowed from Schedule A to prevent
            it from being deducted twice.

            Accordingly, your taxable income for the 1988
            tax year is increased by $13,155.
                                       - 32 -
                            Substantiated Interest Expense

           Household Finance                                     $69,770
           Farmers Bank and Trust                                  9,671
           Home Savings of America                                11,417
           Central Fidelity                                        7,922
             Allowable Interest Expense                           98,780
             Factor (33.1% for Schedule F & 66.9%
                     for Schedule A)                               x .669
                                                                  1
               Allowable Schedule A Itemized Deduction             66,105
               Claimed on the 1990 Tax Return                    122,526
                                                                  2
                   Increase in Taxable Income                      56,421
       1
        We note that 98,780 x .669 yields a result of 66,083.82, not 66,105.
      2
        After factoring in respondent’s previously mentioned mathematical
error, the actual increase in taxable income would be $56,442.18. Thus,
respondent’s mathematical error benefits petitioners.

       B.      Discussion

               1.   Allocation of Items

       Petitioners’ 1987, 1988, and 1990 tax returns overstated

itemized deductions for home mortgage interest.                Generally, this

personal deduction item is allocated evenly between individuals.

Sec. 6015(d)(3)(A); S. Rept. 105-174, supra at 57, 1998-3 C.B. at

593.       Petitioner bears the burden of proving that a different

allocation is appropriate.           Sec. 6015(c)(2); S. Rept. 105-174,

supra at 57, 1998-3 C.B. at 593.

       During the years in issue, petitioners resided at Lots 22

and 27, Acorn Court, and the Albritton property.                These

residences and the corresponding mortgages were in the joint

names of petitioner and Mr. Rowe.            Petitioner testified that she

was aware that the residences were jointly titled, and she knew

that loans were acquired on these properties.                Petitioner

acknowledged signing the loan and deed documents for the
                                - 33 -

properties.     Under these circumstances, these items are allocable

evenly between petitioner and Mr. Rowe.     Therefore, to the extent

petitioner lacked actual knowledge of these items, she will

qualify for relief from joint liability under section 6015(c) for

the portion of the item allocable to Mr. Rowe.17

           2.    Actual Knowledge

     Respondent argues that petitioner had actual knowledge of

the erroneous mortgage interest deductions.     In order to prove

actual knowledge in the context of an erroneous deduction,

respondent must show that petitioner had “actual knowledge of the

factual circumstances which made the item unallowable as a

deduction.”     King v. Commissioner, 116 T.C. at 204.

                  i.   1987 Mortgage Interest

     Respondent disallowed $12,169 of the claimed mortgage

interest deduction for 1987 on the basis of a lack of

substantiation.    Thus, respondent must show that petitioner knew

or believed that the mortgage interest for 1987 was overstated by

$12,169.   See id.

     Respondent claims that petitioner had actual knowledge of

the existence and amount of the home mortgage interest payments

in 1987 because she wrote the checks to pay the mortgage


     17
       Because petitioner cannot qualify for relief under sec.
6015(c) for the portions of items which are allocable to her, we
analyze her ability to qualify for relief for such portions in
our later discussion under sec. 6015(b) and (f). See infra pp.
53-61.
                               - 34 -

interest.   Petitioner agrees that she knew of the mortgage;

however, she claims that she was unaware of the amount of

interest paid or that it was incorrectly reported on the tax

return.

     The evidence in the record demonstrates that petitioner

wrote the checks for the mortgage payments in 1987 and 1988.

However, there is no evidence that petitioner knew what portion

of the payments for 1987 constituted interest or the total amount

of interest paid in that year.   The testimony of both petitioner

and Mr. Rowe indicates that petitioner was given only the first

two pages of the tax return when signing the return and she was

not afforded the opportunity to see or review any attachments,

schedules, or other documents pertaining to the return.

Therefore, respondent has failed to show that petitioner knew or

believed that the 1987 mortgage interest was overstated.

Accordingly, we hold that petitioner is entitled to relief from

joint liability under section 6015(c) for the portion of this

item allocable to Mr. Rowe.

                ii.   1988 Mortgage Interest

     Petitioners claimed a home mortgage interest deduction of

$97,341 in 1988.   Petitioners substantiated $84,186 of the amount

claimed for the home mortgage interest deduction.   The notice of

deficiency for 1987, 1988, and 1989, provided the following
                              - 35 -

explanation for disallowing the remaining $13,155 claimed as

deductible home mortgage interest:

     It is determined that $13,155 of home mortgage interest
     expense claimed on Schedule A in the 1988 tax year is
     disallowed because this amount relates to one of your
     rental properties and has already been deducted on
     Schedule E. Thus, this mortgage interest must be
     disallowed from Schedule A to prevent it from being
     deducted twice.

     Accordingly, your taxable income for the 1988 tax year
     is increased by $13,155.

Thus, in order to establish actual knowledge, respondent must

show that petitioner knew or believed that $13,155 of the claimed

mortgage interest was unallowable because it was already listed

on Schedule E.

     Respondent claims that petitioner had actual knowledge of

the existence and the amount of the home mortgage interest

payments in 1988 because she also wrote the checks to pay the

mortgage interest for that year.   Petitioner agrees that she knew

of the mortgage; however, she claims that she was unaware of the

amount of interest paid or that it was incorrectly reported on

the tax return.   Petitioner testified that she received the first

two pages only of the tax return and that she did not see any

attached schedules or other documentation.   Respondent failed to

present evidence showing that petitioner had actual knowledge

that the 1988 mortgage interest was overstated because the

$13,155 had already been listed as a rental expense on Schedule

E.   Therefore, we find that petitioner did not have actual
                              - 36 -

knowledge of the factual circumstances which made $13,155

unallowable as a Schedule A itemized deduction.   Accordingly, we

hold that petitioner is entitled to relief from joint liability

under section 6015(c) for the portion of this item allocable to

Mr. Rowe.

               iii. 1990 Mortgage Interest

     Petitioners claimed a home mortgage interest deduction of

$122,526 in 1990.   Respondent determined that petitioners’

allowable interest expenses was $98,780 but that 33.1 percent of

this amount should have been reported on Schedule F.18    On the

basis of this determination, respondent allowed a mortgage

interest deduction of $66,105 and disallowed $56,421.19    Thus, in

order to establish actual knowledge, respondent must show that


     18
      The notice of deficiency provides no explanation as to how
this allocation was determined or why 33.1 percent of the
allowable interest expense should have been reported on Schedule
F. At trial, Robert Bamber (Mr. Bamber), the revenue agent
assigned to the examination of petitioners’ 1990 tax return,
testified that he examined the interest expense claimed on
Schedule F, $60,564, and the mortgage interest deduction claimed
on Schedule A, $122,526, and calculated the proportion claimed on
each Schedule in relation to the overall interest amount claimed,
$183,090. On the basis of information reported by other sources,
Mr. Bamber determined that petitioners’ allowable interest
related deduction was $98,780, and he allocated this amount
between the Schedule A and the Schedule F in the same proportion
as the amounts claimed on the 1990 return. Consequently,
respondent limited petitioners’ Schedule A mortgage interest
deduction to $66,105.
     19
      As previously mentioned, the notice of deficiency contains
a mathematical error which benefits petitioners by approximately
$21. For purposes of this issue, we shall use the amounts
determined by respondent in the notice of deficiency.
                               - 37 -

petitioner knew or believed that petitioners’ home mortgage

interest was limited to $66,105.

     Respondent’s sole contention is that because petitioner had

actual knowledge of the amount of interest payments in 1987 and

1988, petitioner also had actual knowledge of the amount of

interest paid on the mortgage in 1990.   Petitioner agrees that

she knew of the mortgages; however, she claims that she was

unaware of the amount of interest paid or that it was incorrectly

reported on the tax returns.   Petitioner claims that the interest

payments for 1990 were deducted on Schedule A as home mortgage

interest and on Schedule F as farm interest expense.   Petitioner

contends that she did not know how much interest was paid on the

mortgage, and, because she was allowed to review the first two

pages only of the 1990 return and not the corresponding

schedules, she was unaware that the interest payments were

deducted twice.

     No evidence was presented establishing what funds were used

to make the mortgage interest payments in 1990.   Our review of

the bank statements for 1990 for the NCNB account reveals that

the opening balance was approximately $1,855 and that deposits

totaling only approximately $7,086 were made during that year.

Thus, it appears that little, if any, funds were used from the
                                - 38 -

NCNB account to make the mortgage interest payments in 1990.20

As we mentioned earlier, the record indicates that petitioner saw

the first two pages only of the tax returns, and she was not

afforded the opportunity to see or review any attachments,

schedules, or other documents pertaining to the returns.   Thus,

petitioner would not have known that a portion of the interest

payments was deducted as both a Schedule A itemized deduction and

a Schedule F interest expense.    Respondent has not established

that petitioner had actual knowledge of the factual circumstances

which limited the 1990 Schedule A mortgage interest to $66,105.

Accordingly, we hold petitioner is entitled to relief from joint

liability under section 6015(c) for the portion of this item

allocable to Mr. Rowe.

IV.   Farming Activity Losses

      A.   Background

      During the years in issue, Mr. Rowe owned and showed horses.

Petitioner had little or no involvement in this horse activity.

In 1987, Mr. Rowe employed Joseph and Patricia Shortino (the

Shortinos) as horse trainers, and they showed and stabled Mr.

Rowe’s horses during the years in issue.21   The Shortinos had


      20
      We note that Mr. Rowe testified that at some point during
the years in issue he took over the responsibility of making the
mortgage payments.
      21
      Mr. Rowe first met Joseph and Patricia Shortino (the
Shortinos) in 1985, and they became personal friends of
                                                   (continued...)
                               - 39 -

been in the horse business since 1979, and they operated an S

corporation called Showcase Farm, Inc.     Mr. Rowe purchased a

horse trailer for the Shortinos to use in connection with the

horse activity.    Mr. Rowe and petitioners’ son, Christopher, also

participated in showing horses during the years in issue.     For

the years in issue, the income and expenses of the

horse activity were reported on a Schedule F attached to

petitioners’ tax returns.

     At some point in time during the years in issue, Mr. Rowe

became involved in raising fish.   The income and expenses for the

horse and fish activities (collectively, farming activity) were

combined for tax reporting purposes.     Petitioner was not involved

in the fish activity.

     For the years in issue, the following losses from the

farming activity were reported on the Schedules F:

                  Year               Loss Amount

                  1987                  $143,650
                  1988                   117,278
                  1989                   139,448
                  1990                   184,221

For the taxable years 1987, 1988, and 1989, petitioner and Mr.

Rowe were listed on the Schedules F as the proprietors of the

farming activity.    For the taxable year 1990, Mr. Rowe alone was




     21
      (...continued)
petitioners.
                                 - 40 -

listed on the Schedule F as the proprietor of the farming

activity.

     B.     Discussion

            1.   Allocation of Item

     Petitioner argues that the farming activity is allocable to

Mr. Rowe because petitioner had little or no involvement in

either the horse activity or the fish activity.      However,

respondent contends that the farming activity is still allocable

evenly between petitioner and Mr. Rowe.      Respondent relies on the

fact that petitioner’s name is listed on the tax returns for

1987, 1988, and 1989 as a proprietor of the farming activity to

support his contention.      Additionally, respondent argues that the

horse activity was a family affair that petitioner participated

in by attending different events.

     Petitioner testified that she watched Christopher

participate in horse shows “less than half a dozen times” during

the years in issue.      Contrary to respondent’s argument,

petitioner testified that only Christopher was involved in

showing horses during the years in issue and that Elizabeth did

not become involved until later.      Mr. Shortino corroborated

petitioner on this point, testifying that Elizabeth did not begin

showing horses until sometime around 1992.      Petitioner claims she

did not know the extent of the horse activity, played no role in

the decision to acquire the farm property, and only saw the
                              - 41 -

horses in the possession of the Shortinos.   Christopher testified

that petitioner was not involved in the horse activity and that

she did not make any decisions relating to the activity.

     Mr. Rowe testified that he made the original decision to

start the horse activity and that he did not discuss it with

petitioner.   Mr. Rowe considered the activity principally his,

and he included his children in the activity.   Mr. Rowe testified

that he made all decisions regarding the horse activity and told

petitioner nothing about the horse activity.    Additionally, Mr.

Rowe testified that he did not consult petitioner before starting

the fish activity, and he did not believe she wrote any checks in

connection with the fish farm.   With respect to the fact that

petitioner’s name was listed as a proprietor on the 1987, 1988,

and 1989 tax returns, Mr. Rowe testified that the 1987 and 1988

returns were filled out by another individual and he simply

signed them without reviewing their contents.   As we have

mentioned previously, the record indicates that petitioner was

given the first two pages only of the tax returns when signing

the returns, and she was not afforded the opportunity to see or

review any attachments, schedules, or other documents pertaining

to the returns.

     The Shortinos testified that the checks they received for

their services as horse trainers while employed by Mr. Rowe

always came from him and never from petitioner.   Our review of
                               - 42 -

the checks written on petitioners’ joint account during the years

in issue confirms that petitioner’s signature does not appear on

any of the checks written to Showcase Farms, Inc., the Shortinos’

S corporation.22   The Shortinos also testified that they

consulted only with Mr. Rowe regarding the horses.    Mr. Shortino

testified that he never saw petitioner’s name listed as an owner

of any of the horses and that petitioner was not involved in the

activity.   Mr. Shortino testified that petitioner did not know

Mr. Rowe had purchased the horse trailer, and Mrs. Shortino

testified that Mr. Rowe specifically told her not to tell

petitioner about the horse trailer.

     The evidence in the record reflects that petitioner’s

involvement in the farming activity during the years in issue was

minimal and purely social in nature.    Other than infrequent

attendance at horse shows to support her son, petitioner’s only

apparent link to the activity is that her name is listed as a

proprietor on the 1987, 1988, and 1989 tax returns.    In this

regard, the evidence reflects that petitioner was unaware she was



     22
      No checks from petitioners’ joint account were written to
either Joseph Shortino or Patricia Shortino. Only Mr. Rowe’s
signature is listed on various checks payable to Showcase Farms,
Inc., dated during the years in issue. Additionally, only Mr.
Rowe’s signature is listed on two other checks with memo
notations of “Horse show” and “Stable”. Our review of all the
checks written on petitioners’ joint account reveals that
petitioner’s signature is not listed on any checks which, on the
basis of the payee and the memo notation, indicate payment in
connection with any horse or fish activity.
                               - 43 -

listed as a proprietor, and we decline to allocate any portion of

this item to her simply because her name was listed as such on

the tax returns.    See, e.g., Bokum v. Commissioner, 94 T.C. 126,

140-141 (1990), affd. 992 F.2d 1132 (11th Cir. 1993); Buchine v.

Commissioner, T.C. Memo. 1992-36, affd. 20 F.3d 173 (5th Cir.

1994).    Accordingly, this item is allocable to Mr. Rowe.

Consequently, petitioner will be entitled to complete relief from

joint liability under section 6015(c) unless respondent can show

that petitioner had actual knowledge of this item.

            2.   Actual Knowledge

     In the notice of deficiency for the years 1987, 1988, and

1989, respondent determined that petitioners were not entitled to

the claimed Schedule F losses because the farming activity was

not engaged in for profit.    In the notice of deficiency for 1990,

respondent determined that petitioners were not entitled to the

claimed Schedule F loss because it had not been established that

the farming activity was engaged in as a trade or business within

the meaning of section 162 or as a means of holding property for

the production of income within the meaning of section 212.

Respondent’s primary position under section 6015(c)(3)(C) is that

petitioner had actual knowledge that Mr. Rowe was not engaged in

the farming activity for profit.23   In order to prove actual


     23
      As an alternative ground for disallowing the Schedule F
losses, respondent determined that petitioners failed to
                                                   (continued...)
                                - 44 -

knowledge, respondent must show that petitioner had “actual

knowledge of the factual circumstances which made the item

unallowable as a deduction.”    King v. Commissioner, 116 T.C. at

204.    In the instant case, this requires that respondent prove

that petitioner knew or believed that Mr. Rowe was not engaged in

the farming activity for profit.    See King v. Commissioner, supra

at 205.

       Section 183 provides that expenses incurred in conducting an

activity which is “not engaged in for profit” are not deductible,

except as otherwise provided in section 183(b).    Section 183(c)

defines an activity not engaged in for profit as “any activity

other than one with respect to which deductions are allowable for

the taxable year under section 162 or under paragraph (1) or (2)

of section 212.”    This case is appealable to the Court of Appeals

for the Eleventh Circuit.    In determining whether an activity is

engaged in for profit, the Court of Appeals for the Eleventh

Circuit has stated that the relevant inquiry is whether the

taxpayer’s actual and honest objective in engaging in the

activity is to make a profit.    Osteen v. Commissioner, 62 F.3d


       23
      (...continued)
substantiate the claimed losses. On brief, respondent limits his
sec. 6015(c) argument to the contention that petitioner had
actual knowledge that the horse and fish activities were not
engaged in for profit. While respondent asserts that petitioners
have failed to prove that the losses were actually incurred,
respondent has not proven that the losses were not incurred and
makes no allegation that petitioner had actual knowledge that
such losses were not incurred.
                                - 45 -

356, 358 (11th Cir. 1995), affg. in part and revg. in part T.C.

Memo. 1993-519; Zarins v. Commissioner, T.C. Memo. 2001-68.

While a reasonable expectation of profit is not required, the

objective facts and circumstances must indicate that the

taxpayer’s intent was to make a profit.     Osteen v. Commissioner,

supra at 358.    Whether a taxpayer is engaged in an activity for

profit is a question of fact to be resolved from all relevant

facts and circumstances.     Hulter v. Commissioner, 91 T.C. 371,

393 (1988).     In resolving this factual question, greater weight

is given to objective facts than to the taxpayer’s mere statement

of his intent.     Siegel v. Commissioner, 78 T.C. 659, 699 (1982);

sec. 1.183-2(a), Income Tax Regs.

     The regulations under section 183 contain a nonexclusive

list of nine objective factors to be taken into account when

deciding whether an activity is engaged in for profit.    These

factors are:    (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that assets used in the activity

may appreciate in value; (5) the success of the taxpayer in

carrying on other similar or dissimilar activities; (6) the

taxpayer’s history of income or losses with respect to the

activity; (7) the amount of occasional profits, if any, which are

earned; (8) the financial status of the taxpayer; and (9) the
                               - 46 -

elements of personal pleasure or recreation involved.    Sec.

1.183-2(b), Income Tax Regs.   No single factor is controlling.

Osteen v. Commissioner, supra at 358; Brannen v. Commissioner,

722 F.2d 695, 704 (11th Cir. 1984), affg. 78 T.C. 471 (1982);

sec. 1.183-2(b), Income Tax Regs.   The factors are relevant in

the context of this case to the extent they may indicate whether

petitioner knew or believed that Mr. Rowe was or was not engaged

in the farming activity for profit.     See King v. Commissioner,

supra at 205.

     Respondent argues that petitioner knew that the farming

activity was not engaged in for profit.    Respondent bases his

argument on petitioner’s testimony that the horse activity was a

fun thing for Mr. Rowe to do with his son on the weekends and

that petitioner did not consider the activity an “operation” but

rather her husband just “had a couple of horses in Tampa”.

Respondent contends that petitioner understood that the horse

activity was a fun family recreational activity, and this

understanding establishes that she had actual knowledge that the

horse activity was not engaged in for profit.    Additionally,

respondent claims that petitioner had actual knowledge of both

the horse and fish activities, as well as actual knowledge of the

claimed Schedule F losses.

     As we noted earlier, petitioner had little or no involvement

in the farming activity.   Additionally, she testified that she
                              - 47 -

saw the first two pages only of the tax returns; thus, she was

not afforded the opportunity to review the Schedules F listing

the income and expenses attributable to the farming activity.

Petitioner also testified that she trusted Mr. Rowe when she

signed the tax returns because he told her the returns were

correct, and he assured her he had appropriate records.24

     The evidence in the record indicates that Mr. Rowe

controlled all aspects of the farming activity, and he conducted

the activity without any assistance from petitioner.   He

testified that he did not consult with petitioner before making

decisions concerning the farming activity, and he did not provide

her with any information about the activity.   In fact, Mr. Rowe

testified that he felt that he was operating the horse activity

as a business.   He also testified that he started the fish

activity in order to make the farming activity a more viable

business.   The testimony of Mr. Danley and the Shortinos, as well

as the testimony and affidavit of Mr. Murray, all indicates that

Mr. Rowe acted as if he was engaged in the farming activity for

profit.   There is no evidence that Mr. Rowe acted in such a

manner that would cause petitioner to know or believe that Mr.

Rowe was not engaged in the farming activity for profit.




     24
      Petitioner testified that she did not know whether
parentheses around a number on a tax return indicated a loss or a
profit.
                                - 48 -

     Respondent has failed to establish that petitioner knew or

believed that her former spouse was not engaged in the farming

for profit.   Accordingly, we hold petitioner is entitled to

relief under section 6015(c) from the tax liability arising out

of this activity.

V.   Charitable Contributions

     A.   Background

     On their 1987 return, petitioners claimed a charitable

contribution deduction of $5,556.    Of this amount, $4,059 was

listed as contributed to “1st United Methodist”.    In 1987,

petitioner wrote five checks to the St. Cloud First United

Methodist Church on the NCNB account totaling $5,500.    Respondent

allowed the $5,556 charitable contribution deduction claimed on

the 1987 return.

     On their 1988 return, petitioners claimed a charitable

contribution deduction of $8,165.    On the attached Schedule A,

the claimed contribution was identified as “ERS-106, 1st United

Meth. 8,059".   Respondent disallowed the entire amount claimed as

a charitable contribution deduction for 1988 on the ground that

petitioners had failed to substantiate the charitable

contribution.   In 1988, neither petitioner nor Mr. Rowe wrote any

checks on the NCNB account to the St. Cloud First United

Methodist Church.
                               - 49 -

     On their 1989 return, petitioners claimed a charitable

contribution deduction of $8,111.      The Schedule A attached to the

return did not identify any organization to which a contribution

was made.    Respondent disallowed the entire amount claimed as

charitable contribution deduction for 1989 on the ground that

petitioners had failed to substantiate the charitable

contribution.    No evidence was presented establishing whether any

checks were written on the NCNB account to the St. Cloud First

United Methodist Church in 1989.

     B.     Discussion

            1.   Allocation of Items

     Petitioner claims that this item is allocable to Mr. Rowe

because he controlled the amount contributed to the church and he

represented to her that the contributions had been made.

Respondent argues that this item should be allocated evenly

between petitioner and Mr. Rowe because the contributions were to

a church which they both attended and in which petitioner was

actively involved.

     Congress intended for personal deduction items to generally

be allocated equally between spouses, unless the electing spouse

establishes that a different allocation is appropriate.     Sec.

6015(c)(2); S. Rept. 105-174, supra at 57, 1998-3 C.B. at 593.25


     25
      The legislative history of sec. 6015 provides the
following example of an allocation of charitable contributions:
                                                   (continued...)
                              - 50 -

Petitioner testified that she regularly attended the St. Cloud

First United Methodist Church during the years in issue and that

she was very involved in church activities.   Petitioner testified

that she and Mr. Rowe had tithed regularly during their entire

married life.   In 1987, petitioner wrote five checks totaling

$5,500 to the church on the NCNB account, and respondent allowed

the $5,556 charitable contribution deduction claimed on the 1987

return.   The Schedule A attached to the 1988 return indicates

that most, if not all, of the claimed contribution deduction

related to the church.   The Schedule A attached to the 1989

return does not indicate whether the claimed deduction related to

the church; however, petitioner’s testimony indicates that she

believed that the claimed deduction for 1989 also related to the

church that she regularly attended and was very active in.     In

the instant case, petitioner has failed to show that it is

appropriate to allocate the charitable contribution items for

1988 and 1989 other than equally between her and Mr. Rowe.



     25
      (...continued)
     Personal deduction items are expected to be allocated
     equally between spouses, unless the evidence shows that
     a different allocation is appropriate. For example, a
     charitable contribution normally would be allocated
     equally to both spouses. However, if the wife provides
     evidence that the deduction relates to the contribution
     of an asset that was the sole property of the husband,
     any deficiency assessed because it is later determined
     that the value of the property was overstated would be
     allocated to the husband. [S. Rept. 105-174, at 57
     (1998), 1998-3 C.B. 537, 593.]
                             - 51 -

Therefore, to the extent petitioner lacked actual knowledge of

these items, she will qualify for relief from joint liability

under section 6015(c) for the portion of the item allocable to

Mr. Rowe.26

          2.   Actual Knowledge

     Respondent argues that petitioner had actual knowledge that

the charitable contributions were not made in 1988 and 1989.    In

order to prove actual knowledge, respondent must show that

petitioner had “actual knowledge of the factual circumstances

which made the item unallowable as a deduction.”    King v.

Commissioner, 116 T.C. at 204.    In the instant case, respondent

disallowed the charitable contribution deductions because

petitioners failed to substantiate the claimed deductions.    Thus,

the relevant inquiry is whether petitioner knew or believed that

charitable contributions in the amounts reported on petitioners’

1988 and 1989 tax returns were not made.

     In the instant case, Mr. Rowe was in charge of petitioners’

financial and business affairs.   Petitioner testified that the

amount petitioners’ tithed to the church was Mr. Rowe’s decision.

Petitioner further testified that she was “told when to write

checks to the church”, and she wrote checks only when directed to


     26
       Because petitioner cannot qualify for relief under sec.
6015(c) for the portions of items which are allocable to her, we
analyze her ability to qualify for relief for such portions in
our later discussion under sec. 6015(b) and (f). See infra pp.
53-61.
                                - 52 -

by Mr. Rowe.     Petitioner credibly testified that she was not

surprised by the amounts of charitable contributions deductions

claimed in 1988 and 1989, and she believed that contributions

were made during those years.

     Respondent maintains that if only petitioner wrote checks to

the church from the joint account in 1987, then the fact that no

checks were written to the church from the joint account in 1988

demonstrates that petitioner had actual knowledge that no

contributions were made in either 1988 or 1989.27    However,

petitioner testified that, beginning in 1988, her role in paying

bills and writing checks diminished because Mr. Rowe began to

take over those duties.    Mr. Rowe corroborated this point by

testifying that at some point during the years in issue he took

over the responsibility of paying certain bills, such as mortgage

payments, car payments, and credit card payments.    Mr. Rowe

further testified that he had various other accounts which he

used to transfer money and that petitioner did not have knowledge

of these accounts.

     The fact that no checks were written on petitioners’ joint

account in 1988 does not establish that petitioner had actual

knowledge that no contributions were made to the church in either

1988 and 1989.    Mr. Rowe testified that he did not know whether


     27
      As previously mentioned, no evidence was presented
establishing whether any checks were written on the NCNB account
to the St. Cloud First United Methodist Church in 1989.
                              - 53 -

he provided petitioner with any information regarding charitable

contributions.   In the instant case, petitioner had no reason to

believe that Mr. Rowe had not contributed to the church in 1988

and 1989 in the same manner as petitioners contributed in prior

years.   Under the circumstances presented in this case,

respondent has failed to show that petitioner had actual

knowledge that the charitable contributions were not made in 1988

and 1989.   Accordingly, we hold that petitioner is entitled to

relief from joint liability under section 6015(c) for the portion

of this item allocable to Mr. Rowe.

VI.   Application of Section 6015(b)

      Petitioner claims that she is entitled to complete relief

from liability under section 6015(b) with respect to the items

giving rise to the deficiency.   One requirement of section

6015(b) is that the understatement of tax be attributable to

erroneous items of the nonelecting spouse.    Sec. 6015(b)(1)(B).

We previously granted petitioner complete relief under section

6015(c) for the IRA distributions and farming activity losses.

We also granted petitioner partial relief under section 6015(c)

for the half of the capital gains, mortgage interest, and

charitable contributions items which we found are allocable to

Mr. Rowe.   Thus, the only items remaining are the half of the

capital gains, mortgage interest, and charitable contributions

which are allocable to petitioner.     Consequently, petitioner is
                                - 54 -

not entitled to relief under section 6015(b) for the capital

gains, mortgage interest, and charitable contributions which are

allocable to her because these are not erroneous items “of” Mr.

Rowe.

VII. Application of Section 6015(f)

        Petitioner claims that, to the extent she fails to qualify

for relief under section 6015(b) or (c), she is entitled to

equitable relief under section 6015(f).     We previously found that

the capital gains, mortgage interest, and charitable

contributions items are allocable evenly between petitioner and

Mr. Rowe for purposes of section 6015(c).     We also held that

petitioner did not have actual knowledge of any of these items,

and, thus, she is entitled to relief under section 6015(c) for

the portions of the items allocable to Mr. Rowe.     Thus, the

question is whether petitioner is entitled to equitable relief

under section 6015(f) for the portion of the capital gains,

mortgage interest, and charitable contributions items giving rise

to deficiencies which are allocable to her.

        Petitioner’s claim for relief from joint liability was

initiated in her amended petition to this Court.     Before trial,

respondent conceded that petitioner was entitled to relief with

respect to certain items contained in the notices of deficiency.

We must presume that “before doing so, respondent followed

standard procedures by reviewing his administrative files and
                              - 55 -

considered petitioner’s contentions.”   Cheshire v. Commissioner,

115 T.C. at 198.   Respondent argues that, considering all facts

and circumstances, the determination that petitioner was not

entitled to equitable relief is consistent with Rev. Proc. 2000-

15, 2000-5 I.R.B. 447, the Internal Revenue Service’s published

guidelines on when equitable relief should be granted.

     We have previously found that petitioner did not have actual

knowledge under section 6015(c) of the items giving rise to the

deficiency.   The evidence also reflects that petitioner’s

involvement with the Federal income tax returns and corresponding

audits was minimal.   Mr. Rowe regularly prepared petitioners’

joint tax returns, and he testified that petitioner had no role

in providing information for the returns.   Petitioner testified

that Mr. Rowe provided her with only the first two pages of the

returns, assured her he had records for the returns, and she

trusted him when he said the returns were correct.   Mr. Danley,

the accountant who assisted with the preparation of petitioners’

1990 return, testified that he never discussed the 1990 return

with petitioner, she did not provide him with any information,

and she did not have any involvement in the preparation of that

return.

     Petitioner also testified that she was unaware of the audits

of petitioners’ taxable years 1987 through 1990 until late 1995

and that she never received any correspondence from the Internal
                               - 56 -

Revenue Service.    Mr. Rowe could not remember who received the

notices of deficiency, and he could not remember discussing or

giving petitioner copies of them.    However, Mr. Rowe testified

that he, not petitioner, would have opened up any correspondence

from the Internal Revenue Service.      Mr. Danley testified that

when petitioners where audited, he never spoke to petitioner

about the audit.    At trial, the revenue agent assigned to the

examination of petitioners’ 1987, 1988, and 1989 tax returns,

testified that he did not talk with petitioner during the

examination.    Moreover, he did not recognize petitioner in the

courtroom at trial.28   The revenue agent assigned to the

examination of petitioners’ 1990 tax return testified that he had

never met petitioner.29

     Petitioner testified that she did not sign the tax returns

under duress.   However, petitioner did testify that Mr. Rowe


     28
      The revenue agent originally testified that he had met
petitioner when he issued a summons because he personally went to
petitioners’ home and gave copies of the notice to the woman who
answered the door. However, the revenue agent then testified
that he had assumed petitioner was the woman who answered the
door but that petitioner was presently “not the least bit
familiar to me”.
     29
      There is other evidence in the record to support
petitioner’s claims that Mr. Rowe did not keep her informed about
their financial affairs. For example, petitioner and John
Albers, the police officer who arrested Mr. Rowe in 1989 in
connection with the embezzlement charges related to Mr. Rowe’s
employment at the Central Florida Dental Association, both
testified that petitioner was not aware that Mr. Rowe was
arrested for embezzlement until she read about it in the
newspaper.
                               - 57 -

would get “verbally ugly” if she questioned him about business

documents and that she was only provided with information when

Mr. Rowe wanted her to know.   Christopher testified that there

were several arguments between petitioner and Mr. Rowe, and they

usually centered around the discussion of financial matters.

Christopher further testified that when petitioner asked Mr. Rowe

questions concerning financial matters, Mr. Rowe would either

ignore her and leave or become angry and tell her it was none of

her business.

     The record also reflects that petitioner will suffer

economic hardship if relief is not granted.     In 1995, Mr. Rowe

was convicted of Federal money laundering.     He was sentenced to

33 months in prison and ordered to make restitution to the Bank

of New York in the amount of $359,452.17.30    Petitioner testified

that in 1995 she moved from Florida back to Kingsport, Tennessee,

to live with her parents because she was destitute and had no

funds to provide a home for herself.     Petitioner and Mr. Rowe’s

divorce was finalized in June 1996.     The final judgment for

Dissolution of Marriage between petitioner and Mr. Rowe states

that petitioner’s “standard of living and financial circumstances

have been devastated by * * * [Mr. Rowe’s] wrong-doing and


     30
      Mr. Rowe was subsequently convicted in 1997 of 51 counts
of unlawful compensation under Florida State Medicaid laws and
one count of organized fraud. He was sentenced to 8 months in
prison and ordered to make restitution of $5,051.45 to the
Department of Health and Human Services in the amount.
                               - 58 -

incarceration.”   The Final Judgment also notes that petitioner

“does not have the present financial resources to support herself

and * * * [petitioners’ daughter, Elizabeth] adequately, but that

* * * [Mr. Rowe] does not have the present ability to pay

alimony.”31   On the basis of the factual circumstances present,

Mr. Rowe was ordered to pay petitioner $1 of permanent alimony

per year, although the court reserved jurisdiction to modify the

amount upon Mr. Rowe’s release from incarceration and re-entry

into the job market.

     Petitioner testified that after the divorce there was very

little money left in a college fund to pay for Elizabeth’s

undergraduate education.   Petitioner testified that she and

Elizabeth had to supplement the fund with student loans and

whatever money petitioner could contribute from her own income.

At the time of trial, petitioner was employed full time as a

dental hygienist, and she was paid by commission only.

     Finally, the evidence in the record demonstrates that

petitioner has not significantly benefited, either during or

after her marriage, from the items giving rise to the

deficiencies.   Petitioner did not have expensive jewelry, drive a

luxurious car, or wear designer clothes.   In fact, petitioner

testified that she generally made clothes for herself and her



     31
      The final judgement also found that petitioner did not
have the financial ability to accept collect calls from Mr. Rowe.
                                 - 59 -

daughter.     Mr. Rowe testified that petitioner did not expend

money lavishly.     Petitioner testified that the only trip the

family went on contemporaneous to the years in issue was a 1986

trip to Hawaii, and the testimony indicates that the trip was

inexpensive and not lavish.32

     Although the purchase price of the Albritton property and

construction of a residence at that location exceeded $1 million,

the inside of the residence was sparsely furnished with old

office furniture from Mr. Rowe’s business, and the walls were

decorated with arts and crafts which were handmade by petitioner.

As a result of Mr. Rowe’s criminal activities, petitioner had to

move out of the Albritton residence and back to Kingsport,

Tennessee, to live with her parents because she was destitute and

had no funds to provide a home for herself.33

     Despite the fact that Mr. Rowe was earning substantial

amounts of income during the years in issue, in 1989 and 1990

only $26,176 and $7,086,34 respectively, were deposited into the


     32
      Joseph Shirah, who accompanied petitioners on the Hawaii
trip, testified that the plane tickets for the trip were at a
discount rate and “it was a very inexpensive trip.”
     33
      Respondent determined that petitioners had unreported
income of $283,928, $29,924, $94,648, and $82,053, respectively
for the years 1987 through 1990. This unreported income was
attributable solely to Mr. Rowe, and respondent concedes that
petitioner is not liable for any deficiency associated with this
unreported income for the years in issue.
     34
          Of this deposit total, approximately $4,102, represented
                                                       (continued...)
                               - 60 -

NCNB account, which petitioner testified was the only account she

used during the years in issue.   Mr. Rowe testified that he put

almost all the money he earned back into his dental business and

horse activity.    Presumably, Mr. Rowe was also depositing most of

his earnings into his separate accounts which petitioner was

unaware existed.   In his deposition, Mr. Shirah stated that Mr.

Rowe purchased a house in the name of Mr. Shirah’s business for

another woman.35   Mr. Shirah stated that Mr. Rowe was involved

with the other woman during his marriage to petitioner.      At

trial, Mr. Rowe admitted becoming involved with the other woman

in 1993.   Petitioner testified that the reason she filed for

divorce was because Mr. Rowe was involved with the other woman

while he was still married to petitioner.36

     On the basis of all the facts and circumstances of this

case, we find that compelling reasons existed for respondent to

grant petitioner equitable relief.      Consequently, we hold that

respondent abused his discretion in denying petitioner’s claim

for relief under section 6015(f) for the portion of the capital



     34
      (...continued)
petitioner’s earnings from her employment as a substitute
teacher.
     35
      Mr. Shirah stated that Mr. Rowe signed the realty contract
and the mortgage on the house. However, Mr. Shirah stated that
Mr. Rowe had no connection to Mr. Shirah’s business.
     36
      At trial, Mr. Rowe testified that he married the other
woman after he and petitioner were divorced.
                                - 61 -

gains, mortgage interest, and charitable contributions items

allocable to petitioner.

VIII.        Additions to Tax and Penalties

        Respondent did not determine that the fraud additions to tax

pursuant to section 6653(b) for the taxable years 1987 and 1988,

and the fraud penalty pursuant to section 6663 for the taxable

year 1989, were applicable to petitioner.      On brief, respondent

concedes that to the extent any relief is granted for a portion

of the deficiencies, relief is automatic for the penalties

related to that portion.     Petitioner concedes that the estimated

tax penalty pursuant to section 6654 for 1990 should be allocated

proportionally to the allocation of the underlying deficiency.

Petitioner contends that it is inequitable to hold her liable for

any remaining additions to tax or penalties.

        We have previously held that we have jurisdiction to review

the denial of relief from joint liability under section 6015(f)

for additions to tax and penalties.       Cheshire v. Commissioner,

115 T.C. at 197-199.     We review respondent’s refusal to grant

equitable relief for additions to tax or penalties under an abuse

of discretion standard.     Id. at 198.   In Cheshire v.

Commissioner, supra, we provided the following guidance in

determining whether respondent has abused his discretion in

denying equitable relief in situations involving additions to tax

or penalties:
                                - 62 -

     In our opinion, it is an abuse of discretion to deny
     relief under section 6015(f) in an addition to tax or
     penalty situation when on an individual basis the
     putative innocent spouse meets the statutory standard
     generally applied to all taxpayers that shows the
     addition to tax or penalty is inapplicable. [Id. at
     199.]

     A.      Addition to Tax for Failure To File Timely

     Respondent determined that petitioners were liable for the

addition to tax pursuant to section 6651(a)(1) for 1989.     Section

6651(a)(1) imposes an addition to tax for failure to file a

required return on the date prescribed.     After factoring in the

parties’ concessions and our decisions in petitioner’s favor,

petitioner does not have an unpaid tax liability for 1989.     In

light of respondent’s concession, petitioner is not liable for

the addition to tax for 1989.

     B.      Substantial Understatement Penalty

     For the taxable years 1987 and 1988, respondent determined

that petitioners were liable for the substantial understatement

penalty pursuant to section 6661.     However, after taking into

account respondent’s concessions and the issues decided in

petitioner’s favor, petitioner’s sole remaining liability for

those years involves an $85 theft loss adjustment in 1987 which

the parties agree is allocable one-half to petitioner.37    With

the minimal theft loss adjustment remaining as the only issue for

petitioner for 1987, the predicate for the substantial


     37
          See appendix.
                                - 63 -

understatement penalty no longer exists.     Accordingly, we hold

that petitioner is not liable for this penalty for either taxable

year.

     C.      Accuracy-Related Penalty

        Finally, respondent determined that petitioner was liable

for the accuracy-related penalty pursuant to section 6662(a) for

1990 for negligence.     Section 6662(a) imposes a penalty equal to

20 percent of the portion of an underpayment of tax attributable

to a taxpayer’s negligence, disregard of rules or regulations, or

substantial understatement of income tax.     Sec. 6662(a), (b)(1)

and (2).     “Negligence” has been defined as the failure to do what

a reasonable and ordinarily prudent person would do under the

circumstances.     Neely v. Commissioner, 85 T.C. 934, 947 (1985).

However, section 6662(a) does not apply to “any portion of an

underpayment if it is shown that there was a reasonable cause for

such portion and that the taxpayer acted in good faith with

respect to such portion.”     Sec. 6664(c)(1).   The Commissioner’s

determination that a taxpayer was negligent is presumptively

correct, and the burden is on the taxpayer to show a lack of

negligence.     Hall v. Commissioner, 729 F.2d 632, 635 (9th Cir.

1984), affg. T.C. Memo. 1982-337.

        After factoring in the parties’ concessions and our

decisions in petitioner’s favor, petitioner’s tax liability for

1990 stems from $6,253 of omitted W-2, Wage and Tax Statement,
                              - 64 -

income and $48.50 of omitted interest income.   In Cheshire v.

Commissioner, supra, we faced a similar situation wherein the

spouse claiming relief from joint liability relied upon her

husband for the accurate preparation of their income tax return.

In that case, we stated:

          Petitioner trusted and relied upon Mr. Cheshire
     when it came to the preparation of their tax returns.
     She is an elementary school teacher, having taken no
     courses in accounting or tax return preparation. She
     asked Mr. Cheshire about the potential tax
     ramifications of the retirement distributions, and Mr.
     Cheshire assured petitioner that he had consulted with
     a certified public accountant and had been advised that
     the payment of the outstanding mortgage on the family
     residence and any amount rolled over into a qualified
     account reduced the taxable amount of the retirement
     distributions. Mrs. Cheshire had no reason to doubt
     the truthfulness of Mr. Cheshire’s statement, and in
     fact believed him. Under these circumstances, we do
     not believe petitioner had an obligation to inquire
     further. [Id. at 199.]

     Petitioner has no background in accounting, tax, or other

financial matters, and she was primarily a housewife during her

marriage to Mr. Rowe.   Like the spouse claiming relief in

Cheshire v. Commissioner, supra, petitioner trusted and relied

upon her husband when it came to the preparation of their 1990

tax return, and she believed him when he told her the tax return

was correct.   For 1990, respondent determined that petitioners

failed to report $4,847 of interest income from various sources.

The amount of $97 related to petitioners’ NCNB account.   The

parties stipulated that petitioner is entitled to relief from

joint liability under section 6015(c) for all but $48.50 of the
                              - 65 -

interest income.   For 1990, petitioners reported business income

of $297,756.   Petitioner testified that she believed that her

wage income for 1990 was grouped in with the business income

reported on the return.   Petitioner further testified that she

believed the return was correct because it was prepared and

signed by petitioners’ accountant, Mr. Danley.

     We find that petitioner had reasonable cause for the

understatement caused by the omitted wage income and omitted

interest income.   Furthermore, we believe petitioner acted in

good faith in erroneously concluding that the wage income and

interest income was included in the 1990 return.   Given the

extreme facts and circumstances of this case, we believe that

respondent abused his discretion by failing to grant petitioner

relief from joint liability for the accuracy-related penalty for

1990.   Accordingly, we hold that petitioner is not liable for

this penalty for 1990.

     To reflect the foregoing,


                                         Decisions will be entered

                                    under Rule 155.
                                    - 66 -

                                   Appendix

       In stipulations of agreed issues, petitioner John A. Rowe

conceded the following deficiencies in income taxes, additions to

tax, and penalties:38

                          Additions to Tax and Penalties
Year Deficiency Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B)    Sec. 6661
                                             1
1987 $173,817        $130,363                             $43,454

                             Sec. 6653(b)(1)             Sec. 6661
1988       $ 53,937              $40,453                  $13,484

                             Sec. 6651(a)(1)             Sec. 6663
1989       $ 73,279              $13,792                  $54,959

                                Sec. 6654            Sec. 6662(c)
1990       $124,891               $8,057               $24,978
       1
           50 percent of the interest due on $173,817.

       In a stipulation of settled issues, respondent and

petitioner Donna L. Rowe agreed to the following disposition of

certain issues:

       Ms. Rowe conceded that she is not entitled to relief from

joint liability for an $85 theft loss adjustment in 1987 and a

$6,253 income adjustment in 1990.         Ms. Rowe also conceded that

she is not entitled to relief from joint liability for $48.50 of

interest income, still in dispute, which was part of a $4,847

adjustment in 1990.

       Respondent conceded that Ms. Rowe is entitled to relief from

joint liability under section 6015(c) for a $6,282 rental income


       38
      Petitioner John A. Rowe’s concessions encompass all the
determinations made by respondent in the notices of deficiency.
                             - 67 -

adjustment in 1990 and for $112,979 of the $116,405 lump-sum

distributions adjustment in 1990.

     In the stipulation of facts and first supplemental

stipulation of facts, the following concessions were made:

     Respondent conceded that, pursuant to section 6015(c), Ms.

Rowe is not liable for any deficiency associated with unreported

income of $283,928, $29,924, $94,648, and $82,053, respectively

for the years 1987 through 1990.    Respondent conceded that Ms.

Rowe is entitled to relief from joint liability under section

6015(c) for 1990 with respect to the following adjustments:    (1)

Capital gain income of $11,919; (2) Schedule C income of $82,053;

and (3) all but $48.50 of interest income which was part of a

$4,847 adjustment.
