                               T.C. Memo. 2016-66



                         UNITED STATES TAX COURT



      LARRY O. AROBO AND SLETTA HUGHES AROBO, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 29981-12.                         Filed April 14, 2016.



      Glen E. Frost, Michael Y. Goldberg, and Jessica F. Marine, for petitioner

Larry O. Arobo.

      John B. Snyder, III, for petitioner Sletta Hughes Arobo.

      Nancy M. Gilmore and David A. Indek, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      JACOBS, Judge: Respondent (Internal Revenue Service or IRS)

determined deficiencies, additions to tax and penalties against petitioners, husband

and wife, for 2004, 2005, 2006, and 2007 (years involved), as follows:
                                          -2-

[*2]                                           Additions to tax/penalties
                                                 Sec.               Sec.
       Year                Deficiency         6651(a)(1)          6662(a)

       2004                $168,039             $40,625             $33,608
       2005                 224,193              53,064              44,839
       2006                 186,864              42,565              37,373
       2007                  67,510              11,880              13,502

Petitioners filed a petition for redetermination in this Court. The parties reached a

settlement before trial and filed a stipulation of settled issues, resolving all issues

except whether Sletta Hughes Arobo is entitled to relief from joint and several

liability under section 6015(b) and (f) for each year involved. Unless otherwise

indicated, all section references are to the Internal Revenue Code as amended and

in effect for the years involved. All Rule references are to the Tax Court Rules of

Practice and Procedure. All dollar amounts are rounded to the nearest dollar.

                                FINDINGS OF FACT

       Some of the facts involving the remaining issue presented in this case are

stipulated and are so found.

       Petitioners resided in Maryland at the time they filed their petition. Their

marriage has seen its “ups and downs”. Petitioners briefly separated; at an

undisclosed date in 2004 they reconciled and resumed living together. At all

relevant times, Larry O. Arobo was the family’s primary financial provider.
                                        -3-

[*3]   Mrs. Arobo holds an associate’s degree in merchandising but has no

business experience. She was employed by Public School Employees’ Child

Development Program in 2004 and 2005; Helping Hands Enrichment in 2004; and

Howard County Public Schools (HCPS) in 2005, 2006, and 2007. For HCPS, she

worked as a professional instructional assistant in an alternative educational

program for at-risk children who struggled with poor attendance, low grades, and

similar issues. She earned $26,665 in 2004, $15,916 in 2005, $16,490 in 2006,

and $21,549 in 2007. Mrs. Arobo has never taken an accounting course, nor does

she have any accounting experience. Her employment has always been in the

education field. Mrs. Arobo’s only other taxable income was interest income of

$19, $13, and $21 for 2004, 2005, and 2007, respectively.

       Mr. Arobo was the sole owner of Capital Markets, LLC, a mortgage

origination company during the years involved. The company had numerous bank

accounts. It ceased doing business in 2008. Mrs. Arobo was not involved in the

operation of the company.

       During the years involved Mrs. Arobo had her own checking and savings

accounts; Mr. Arobo had his own checking account. In addition, petitioners had

two joint bank accounts. Mr. Arobo regularly borrowed money from Mrs. Arobo

to pay those of his company’s vendors who would do business only in cash. Mrs.
                                        -4-

[*4] Arobo obtained the cash from her separate bank accounts. Mr. Arobo repaid

his wife by check drawn either on one of his company’s accounts or on his

individual account.

      Petitioners jointly own the marital home, which Mrs. Arobo inherited from

her parents. The house was subject to a mortgage at the time of the inheritance.

Petitioners refinanced the house in 2004 and took out a second mortgage in 2007.

The monthly mortgage payment on the house from 2004 to the present ranged

from $1,400 to $1,800. The mortgage on the house presently is in foreclosure.

Mr. Arobo drives a 1999 Mercedes vehicle, and Mrs. Arobo drives a 2000 BMW.

      Petitioners have two daughters. During the years involved the elder

daughter attended college. Aside from spending money while attending college,

petitioners did not provide that daughter with financial support. Petitioners’

youngest daughter attended public school.

      Mrs. Arobo paid the household bills. Mr. Arobo regularly gave Mrs. Arobo

checks drawn on his individual account or on one of the company’s accounts to

pay household expenses and/or the mortgage.

      Petitioners’ Federal income tax return for each year involved was filed late.

Petitioners’ income tax return for 2004 was filed on January 19, 2010. The IRS

commenced an audit of that return in October 2010. Petitioners filed their 2005
                                       -5-

[*5] income tax return on February 25, 2011, and their 2006 and 2007 income tax

returns on March 2, 2011, while the 2004 return was under audit, through the IRS

examining agent. Mr. Arobo was responsible for the preparation and filing of

petitioners’ income tax returns. Mrs. Arobo did not review the returns; rather, she

“entrusted her husband and just signed them”. She testified that she learned that

Mr. Arobo had failed to file their 2004, 2005, 2006, and 2007 tax returns only

when they were contacted by the IRS.

      The 2004 and 2005 income tax returns each reported on the first page, on

line 12, a business loss and negative adjusted gross income. The 2006 and 2007

income tax returns reported adjusted gross income of $52,163 and $32,049,

respectively; no business income or loss was reported on, and no Schedule C,

Profit or Loss From Business, was attached to, either the 2006 return or the 2007

tax return.1 Each year’s tax return reflected a tax overpayment.

      The IRS examining agent expanded his audit of petitioners’ 2004 tax return

to include petitioners’ 2005, 2006, and 2007 tax returns. The agent reviewed the




      1
       Petitioners attached Schedules C-EZ, Net Profit From Business, to their
2006 and 2007 tax returns regarding Primrose Title/Settlement Services, a notary
services company that Mr. Arobo owned. These Schedules C-EZ reported no
gross receipts or expenses.
                                        -6-

[*6] Schedules C attached to petitioners’ 2004 and 2005 income tax returns. The

2004 and 2005 Schedules C reported the following:

Year          Gross receipts           Total expenses            Net loss

2004           $492,708                  $552,732                $58,301
2005            508,431                   621,238                125,751

       The IRS agent doubted the correctness of the amounts of income reported

on the returns. Believing the amounts of income reported to be understated, the

agent reconstructed Capital Markets’ gross receipts using the bank deposits

method. The agent determined that petitioners underreported Capital Markets’

gross receipts, as well as petitioners’ dividend income, as follows:

       Year         Unreported gross receipts       Unreported dividend income

       2004                $411,624                               -0-
       2005                 443,216                               -0-
       2006                 471,460                             $46,030
       2007                 172,850                              38,400

Petitioners failed to substantiate their reported business expenses. Therefore, the

IRS disallowed deductions for all these expenses.

       On September 14, 2012, the IRS issued petitioners a notice of deficiency for

the years involved. On December 12, 2012, petitioners filed a petition in this

Court seeking redetermination of the deficiencies determined by the IRS. On
                                        -7-

[*7] September 30, 2015, the parties filed a stipulation of settled issues agreeing

that Capital Markets’ gross receipts were underreported as follows:

      Year                             Agreed underreported gross receipts

      2004                                          $297,473
      2005                                           161,102
      2006                                           306,422
      2007                                            60,319

Further the IRS agreed that Capital Markets was entitled to Schedule C deductions

of $57,314 for 2004 and $175,815 for 2005, respectively, and that petitioners were

entitled to deductions on Schedule A, Itemized Deductions, of $17,348 for 2004,

$16,571 for 2005, $19,982 for 2006, and $16,647 for 2007, respectively.

      Upon the recommendation of Mr. Arobo’s attorney, Mrs. Arobo prepared a

Form 8857, Request for Innocent Spouse Relief, which she signed on January 19,

2015. She submitted the form to the IRS on an unspecified day that month. Mrs.

Arobo testified that when she submitted Form 8857 she did not know the progress

of petitioners’ case in this Court. Mr. Arobo testified that recently he had found

employment with a financial company, which he anticipates will provide him with

funds to pay petitioners’ outstanding income tax liabilities.
                                          -8-

[*8]                                  OPINION

I.     Section 6015(b) Relief

       1.    Introduction

       In general, married taxpayers who file a joint Federal income tax return

under the provisions of section 6013(a) and (d)(3) are jointly and severally liable

for the tax reported or reportable on the tax return. Section 6015(a)(1) provides

that a spouse who has made a joint return may elect to seek relief from joint and

several liability under subsection (b).

       Section 6015(b)(1) provides that a taxpayer will be relieved of liability for

an understatement of tax if: (A) a joint return was made for the taxable year in

question; (B) there is an understatement of tax attributable to erroneous items of

the nonrequesting spouse; (C) the requesting spouse “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 would

be inequitable to hold the requesting spouse liable for the deficiency attributable

to the understatement; and (E) the requesting spouse elects to invoke subsection

(b) within two years after the date the Secretary has begun collection actions with

respect to the requesting spouse.
                                        -9-

[*9] The requirements of section 6015(b)(1) are conjunctive. Failure of a

requesting spouse to satisfy any one of the elements precludes relief. Alt v.

Commissioner, 119 T.C. 306, 313 (2002), aff’d, 101 F. App’x 34 (6th Cir. 2004).

The requesting spouse bears the burden of proving entitlement to section 6015(b)

relief sought. Id. at 311.

      Respondent concedes that Mrs. Arobo satisfies the requirements of section

6015(b)(1)(A), (B), and (E), but asserts she does not meet the requirements of

subparagraphs (C) (whether the requesting spouse established that she/he did not

know, and had no reason to know, there was an understatement in income tax) and

(D) (whether it would be inequitable to hold the requesting spouse liable for the

deficiency). Because we agree with respondent that the requirements of section

6015(b)(1)(C) have not been met, we do not address the requirements of

subparagraph (D).

      2.     Sec. 6015(b)(1)(C) Reason To Know

      A taxpayer who signs a return is generally charged with constructive

knowledge of its contents. Porter v. Commissioner, 132 T.C. 203, 211-212

(2009). Section 6015(b)(1)(C) requires that the spouse requesting relief must
                                         - 10 -

[*10] establish that he/she did not know, and had no reason to know, of the

understatement of tax on the returns.2

      “An individual has reason to know of the understatement if a reasonably

prudent taxpayer in her position at the time she signed the return could be

expected to know that the return contained the understatement.” Hopkins v.

Commissioner, 121 T.C. 73, 77 (2003); see sec. 1.6015-2(c), Income Tax Regs.

Consequently, the requesting spouse has a “duty of inquiry” with respect to the

income tax return filed. Butler v. Commissioner, 114 T.C. 276, 283-284 (2000).

The duty of inquiry is subjective, focusing on the individual seeking relief. Smith

v. Commissioner, T.C. Memo. 2009-237. Factors to be considered in making this

determination are: (1) the requesting spouse’s level of education; (2) the

requesting spouse’s involvement in the family’s business and financial affairs;

(3) the presence of expenditures that appear lavish or unusual when compared to

the family’s past levels of income, standard of living, and spending patterns;

and (4) the culpable spouse’s evasiveness and deceit concerning the couple’s

finances. See Hayman v. Commissioner, 992 F.2d 1256, 1261 (2d Cir. 1993),


      2
       “The requirement in section 6015(b)(1)(C) * * * is virtually identical to the
same requirement of former section 6013(e)(1)(C); therefore cases interpreting
former section 6013(e) remain instructive to our analysis.” Doyle v.
Commissioner, T.C. Memo. 2004-35, 2004 WL 238022, at *8.
                                        - 11 -

[*11] aff’g T.C. Memo. 1992-228. We believe Mrs. Arobo had reason to know of

the understatement of tax on petitioners’ returns for each year involved.

Petitioners filed each of the 2004, 2005, 2006, and 2007 tax returns many years

late. When petitioners’ 2004 tax return was ultimately filed, and a $58,301 loss

was reported, Mrs. Arobo should have suspected that something might be amiss.

      The returns for 2005, 2006, and 2007 were filed only after the 2004 return

was under IRS examination. Under the facts and circumstances present in this

case, we would expect a reasonably prudent person in the position of Mrs. Arobo

to be diligent, vigilant, and circumspect and that he/she would carefully review the

2005, 2006, and 2007 tax returns for accuracy.

      Mrs. Arobo was a college-educated individual. She knew, or should have

known, of her responsibility to file an accurate tax return, especially in view of the

fact that she taught at-risk students to be responsible. She knew that the returns

had been filed because petitioners had been contacted by the IRS. That knowledge

should have put her on notice that petitioners’ 2005, 2006, and 2007 tax returns

would likely be subject to scrutiny. Even a cursory review of each year’s tax

return would have revealed that Mr. Arobo’s mortgage origination business had

reported (on line 12 of the first page of each return) substantial losses for 2004 and

2005 and that no business income or loss was reported for 2006 and 2007.
                                         - 12 -

[*12] Mrs. Arobo, as a reasonably prudent person, had a duty to question Mr.

Arobo as to the accuracy of the 2004, 2005, 2006, and 2007 tax returns, but she

did not. Rather, she signed each tax return without inspection. And a taxpayer

who files a joint return with her spouse has a duty to inquire and may not avoid

that duty by turning a blind eye to the contents of the joint return. Price v.

Commissioner, 887 F.2d 959, 965 (9th Cir. 1989) (citing Levin v. Commissioner,

T.C. Memo. 1987-67); Work v. Commissioner, T.C. Memo. 2014-190, at *7.

      Mrs. Arobo was responsible for paying the family’s bills. Had she reviewed

the tax returns she would have seen that the returns reported no net business

income for four years and yet the family’s standard of living was not diminished.

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

returns setting forth ‘dramatic deductions’ will generally put a reasonable taxpayer

on notice that further investigation is warranted.”), aff’g in part, rev’g in part T.C.

Memo. 1995-572; Levin v. Commissioner, T.C. Memo. 1987-67 (spouse

requesting relief had a duty to inquire about large deductions reported on the face

of the joint tax return and could not escape her responsibilities by ignoring the

contents of the return when signing). As there was no indication that Mr. Arobo

was deceitful or evasive with respect to the family’s finances, Mrs. Arobo cannot

escape her responsibility to be informed of the contents of the joint tax return.
                                        - 13 -

[*13] In sum, we find that Mrs. Arobo had reason to know of the understatements

on each of the returns within the meaning of section 6015(b)(1)(C). We thus hold

that Mrs. Arobo is not entitled to the requested relief from joint and several

liability under section 6015(b).

II.   Section 6015(f) Equitable Relief

      Section 6015(f) provides for equitable relief under procedures prescribed by

the Secretary if: (1) taking into account all the facts and circumstances, it is

inequitable to hold the individual liable for any unpaid tax or any deficiency and

(2) relief is not available to the requesting spouse under subsection (b) or (c). The

requesting spouse has the burden of proving that he/she is entitled to relief. Alt v.

Commissioner, 119 T.C. at 311. We apply a de novo scope and standard of review

in reviewing the requesting spouse’s prayer for relief. Porter v. Commissioner,

132 T.C. at 210.

      The IRS concedes that Mrs. Arobo meets the requirement of section

6015(f)(2), in that relief is not available under subsection (b) or (c). With respect

to section 6015(f)(1), the Commissioner published Rev. Proc. 2013-34, 2013-43

I.R.B. 397, outlining the factors the IRS normally considers in deciding whether

section 6015(f) relief should be granted. While this Court is not bound by IRS

revenue procedures, we often look to them for guidance. Hollimon v.
                                         - 14 -

[*14] Commissioner, T.C. Memo. 2015-157, at *7-*8; see Pullins v.

Commissioner, 136 T.C. 432, 438-439 (2011).

      Rev. Proc. 2013-34, 2013-43 I.R.B. at 399-403, sets forth a three-step

procedure to be followed in evaluating requests for relief: (1) section 4.01 lists

seven threshold conditions which must be met; (2) section 4.02 lists circumstances

in which the IRS will make streamlined relief determinations; and (3) section 4.03

sets forth nonexclusive factors that the IRS will consider in determining whether

equitable relief should be granted because it would be inequitable to hold a

requesting spouse jointly and severally liable. The IRS concedes that Mrs. Arobo

meets the threshold requirements of section 4.01, and Mrs. Arobo concedes she

does not qualify for the streamlined procedures of section 4.02. Hence, we focus

on the nonexclusive factors of section 4.03.

      Rev. Proc. 2013-34, sec. 4.03, provides a list of nonexclusive factors to be

weighed by the Commissioner in making a decision. They include (a) marital

status (i.e., do the spouses remain together?); (b) economic hardship; (c)

knowledge or reason to know of the requesting spouse; (d) legal obligation arising

from a divorce decree or other binding agreement; (e) significant benefit gained by

the requesting spouse; (f) compliance with income tax laws; and (g) mental or

physical health at the time of filing the request for relief. No single factor is
                                          - 15 -

[*15] determinative, and all factors are considered and weighed appropriately.

Kellam v. Commissioner, T.C. Memo. 2013-186, at *26.

      The parties agree that factors (a) marital status, (f) tax compliance, and (g)

mental/physical health are neutral and that the legal obligation factor is

inapplicable. Accordingly, we limit our inquiry to factors (b) economic hardship;

(c) knowledge or reason to know; and (e) significant benefit.

      1.     Economic Hardship

      Rev. Proc. 2013-34, sec. 4.03(2)(b), provides that an economic hardship

“exists if satisfaction of the tax liability in whole or in part will cause the

requesting spouse to be unable to pay reasonable basic living expenses.” Whether

a requesting spouse will suffer economic hardship is based on rules similar to

those in section 301.6343-1(b)(4), Proced. & Admin. Regs. The facts and

circumstances considered include: (1) the requesting spouse’s age, employment

status and history, ability to earn, and number of dependents; (2) the amount

reasonably necessary for food, clothing, housing, medical expenses,

transportation, and current tax payments; and (3) any extraordinary circumstances

such as special educational expenses, a medical catastrophe, or a natural disaster.

Id. In addition, the IRS considers the requesting spouse’s current income

(including how the requesting spouse’s income compares to Federal poverty
                                        - 16 -

[*16] guidelines) and assets in comparison with his/her expenses. Rev. Proc.

2013-34, sec. 4.03(2)(b). Factor (b) (economic hardship) weighs in favor of relief

where the requesting spouse would suffer economic hardship if relief were denied

and is neutral where the requesting spouse would not suffer such hardship if relief

were denied. Id.

      Mrs. Arobo stated on Form 8857 that her monthly income in 2015 was

$3,420 and that her monthly expenses were $3,360; thus, her monthly expenses do

not exceed her monthly income. Moreover, Mr. Arobo testifies that he expects to

be able to pay petitioners’ liability. Consequently, Mrs. Arobo has not proven she

will suffer economic hardship if we deny relief. We find factor (b) is neutral.

      2.     Knowledge or Reason To Know

      Under this factor we examine whether the requesting spouse knew, or had

reason to know, that there was an understatement or deficiency on the joint income

tax return, or knew, or had reason to know, that the nonrequesting spouse would

not or could not pay a reported but unpaid tax liability.3 See id. sec. 4.03(2)(c)(ii).

The factors enunciated in the revenue procedure are essentially the same as those

relied upon by section 6015(b)(1)(C). As discussed in section I(2), supra, Mrs.


      3
       There were no underpayment of tax reported on the joint returns for any of
the years involved.
                                        - 17 -

[*17] Arobo had reason to know of the understatements of tax. Moreover, Mrs.

Arobo has not claimed that she was abused by Mr. Arobo or that he restricted her

access to financial information. We find factor (c) weighs against relief.

      3.     Significant Benefit

      Under this factor we consider whether the requesting spouse received a

significant benefit, beyond normal support, from the unpaid income tax liability.

Rev. Proc. 2013-34, sec. 4.03(2)(e). Normal support is measured by the

circumstances of the particular parties. Porter v. Commissioner, 132 T.C. at 212.

This factor will weigh in favor of relief if the nonrequesting spouse significantly

benefited from the unpaid tax or understatement and the requesting spouse had

little or no benefit or the nonrequesting spouse enjoyed the benefit to the

requesting spouse’s detriment. Id.

      Petitioners testified that they used their income to maintain their lifestyle. If

Mr. Arobo’s mortgage origination business had suffered the losses reported or had

no income, petitioners’ standard of living would have been significantly

decreased. Thus, Mrs. Arobo, as well as Mr. Arobo, received the benefit of paying

no tax on hundreds of thousands of dollars. Petitioners provided no

documentation regarding the disposition of that benefit. Because Mrs. Arobo
                                           - 18 -

[*18] bears the burden of proving that she did not receive a significant benefit

from the unreported income, but did not, this factor weighs against granting her

relief.

          4.    Conclusion

          Mrs. Arobo is not entitled to relief from joint and several liability under

section 6015(f) for any of the years involved. No factor supports the requested

relief, and the totality of the circumstances surrounding Mrs. Arobo’s reason to

have known of the understatements on petitioners’ tax returns makes clear that it

would not be inequitable to deny her the relief sought.

          To reflect concessions made in the stipulation of settled issues,


                                                    Decision will be entered under

                                          Rule 155.
