                  T.C. Summary Opinion 2004-113



                     UNITED STATES TAX COURT



               WILLIAM G. APPLEGATE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                   LUCY S. WANG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 19676-02S, 19692-02S.     Filed August 24, 2004.


     William G. Applegate, pro se in docket No. 19676-02S.

     Lucy S. Wang, pro se in docket No. 19692-02S.

     Timothy S. Sinnott, for respondent.



      DEAN, Special Trial Judge:   These consolidated cases were

heard pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time that the petitions were filed.

Unless otherwise indicated, subsequent section references are to

the Internal Revenue Code in effect for the year in issue, and
                               - 2 -

all Rule references are to the Tax Court Rules of Practice and

Procedure.   The decisions to be entered are not reviewable by any

other court, and this opinion should not be cited as authority.

     Respondent determined for 1999 a deficiency in William G.

Applegate's and Lucy S. Wang's Federal income tax of $7,176.1

The issues for decision are:   (1) Whether petitioners are

entitled to deductions for employee business expenses; and

(2) whether Ms. Wang is entitled to relief from joint and several

liability on a joint return under section 6015.

     The stipulated facts and the exhibits received into evidence

are incorporated herein by reference.     At the time the petitions

in these cases were filed, both petitioners resided in Attica,

Indiana.   The Court consolidated these cases for purposes of

trial, briefing, and opinion because they involve common

questions of law and fact.

                             Background

     During taxable year 1999, petitioner William G. Applegate

(Mr. Applegate) and petitioner Lucy S. Wang (Ms. Wang) were

married to each other, and they presently remain so.    Petitioners

timely filed a joint Form 1040, U.S. Individual Income Tax

Return, for 1999 which was prepared by Ms. Wang using information




     1
      In the notice of deficiency, respondent allowed petitioners
a previously unclaimed child tax credit of $1,000.
                                 - 3 -

provided to her by Mr. Applegate.    Ms. Wang did not discuss the

return with Mr. Applegate.

     Ms. Wang is a graduate of Purdue University, holding a

degree in engineering.    During taxable year 1999, Ms. Wang was

employed as an environmental engineer with Eli Lilly & Co. (Eli

Lilly), her employer of 22 years.

     Mr. Applegate is also a graduate of Purdue University,

holding a bachelor of science degree in industrial supervision.

During 1999, Mr. Applegate, in his roles as president, secretary,

shareholder, and employee of DriAll, Inc. (DriAll), earned

$41,400.    DriAll, a closely held corporation owned by Mr.

Applegate's family, manufactures agricultural equipment and

incinerators.

     Petitioners maintained joint savings and checking accounts.

Ms. Wang's wages from Eli Lilly, as well as checks from DriAll to

Mr. Applegate, were deposited into their joint checking account.

Ms. Wang had full access to both the joint savings and checking

accounts.    She reviewed the monthly bank statements, wrote

checks, and balanced the checkbook.

     DriAll had a reimbursement policy in place during 1999 which

covered a variety of expenses.    The reimbursable expenses

included:    (1) Business use of personal vehicles; (2) business

travel expenses; (3) meals and entertainment expenses; and (4)

general business expenses.
                               - 4 -

     DriAll's reimbursement policies for business travel, meals

and entertainment, and general business expenses required an

employee to obtain preapproval for the expenses before incurring

them.   Preapproval for business travel and general business

expenses could be obtained from the accounting department and the

head of the department incurring the expense.   Meals expenses in

excess of $35 per day and any entertainment expenses also

required preapproval, but only from the accounting department.

Mr. Applegate was the head of his department and the head of

accounting and preapproved his own expenses.

     During 1999, Mr. Applegate paid the following expenses with

respect to his employment with DriAll:

                  Item                     Amount

           Mileage                       $17,967.84
           Travel                          6,500.27
           Business expenses               5,111.39
           Meals & entertainment           1,770.00
                                         $31,349.50

Mr. Applegate gave Ms. Wang the receipts for his expenses, and on

their 1999 Schedule A, Itemized Deductions, petitioners claimed a

total deduction for unreimbursed employee business expenses of

$31,349.50, less the 2-percent AGI floor of $2,132.24, or

$29,217.26.   Mr. Applegate could have received reimbursement from

DriAll for these expenses instead of deducting them on their tax

return.   Respondent disallowed all of petitioners' claimed

deductions for unreimbursed employee business expenses.
                               - 5 -

      Petitioners also earned $17 in taxable interest from the Eli

Lilly Credit Union which they failed to report on their return.

      Ms. Wang seeks relief from joint and several liability for

the deficiency pursuant to section 6015.

                            Discussion

1.   Unreimbursed Employee Business Expenses

      Under section 7491(a)(1), the burden of proof may shift to

the Commissioner.   Because the unreimbursed employee business

expense issue is a question of law, section 7491 is inapplicable,

and the Court decides the issue without regard to the burden of

proof.

      Pursuant to section 162(a), a taxpayer may deduct

unreimbursed expenses which he actually paid and which were

ordinary and necessary expenses of his trade or business.     Lucas

v. Commissioner, 79 T.C. 1, 6 (1982).     Because the business of a

corporation is not considered the business of its shareholders or

officers, Burnet v. Clark, 287 U.S. 410, 415 (1932), unreimbursed

expenditures undertaken for the benefit of the corporation by one

of its officers generally are not deductible by the officer,

Deputy v. DuPont, 308 U.S. 488, 494 (1940).

     Mr. Applegate testified that he incurred expenses on behalf

of DriAll in his capacity as a corporate officer.    He claims he

sought reimbursement from DriAll for his expenses but DriAll did

not have the funds to reimburse him.     What happened, in practice,
                                - 6 -

is that Mr. Applegate looked at DriAll's account to see if there

was money available for reimbursement and did not seek

reimbursement because he concluded that DriAll did not have

sufficient funds.    Mr. Applegate contends, therefore, that he is

entitled to a deduction for these unreimbursed expenses.

Respondent argues that the disallowed expenses were incurred by

Mr. Applegate on behalf of DriAll and that they are DriAll's

expenses, which may not be deducted by Mr. Applegate as his own

trade or business expenses under section 162.

     Mr. Applegate was entitled to reimbursement from DriAll for

the expenses incurred on its behalf.     Where such an arrangement

exists, the failure to claim such reimbursement from the

corporation will not convert the corporation's expenses into the

corporate employee's own deductible ordinary and necessary

business expenses.    Podems v. Commissioner, 24 T.C. 21 (1955);

Thomas v. Commissioner, T.C. Memo. 1988-505; King v.

Commissioner, T.C. Memo. 1980-373; Ockrant v. Commissioner, T.C.

Memo. 1966-60; Worth v. Commissioner, T.C. Memo. 1961-39.

     Had Mr. Applegate requested reimbursement, the agreement by

the corporation to reimburse an employee or officer, coupled with

a failure to reimburse, might have given rise to a debt due from

DriAll to Mr. Applegate for the unreimbursed amount.     See Worth

v. Commissioner, supra.    The debt would be deductible only in the

year in which it became worthless.      Thomas v. Commissioner,
                               - 7 -

supra; King v. Commissioner, supra; Ockrant v. Commissioner,

supra; Worth v. Commissioner, supra.    Respondent's determination

disallowing petitioners' deduction for unreimbursed employee

business expenses is sustained.

2.   Relief From Joint and Several Liability Under Section 6015

      Generally, married taxpayers may elect to file a joint

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

election, each spouse is jointly and severally liable for the

entire tax due.   Sec. 6013(d)(3).   A spouse may seek relief from

joint and several liability under section 6015.    A spouse may

qualify for relief from liability under section 6015(b), or if

eligible, may allocate liability under section 6015(c).    In

addition, if relief is not available under section 6015(b) or

(c), an individual may seek equitable relief under section

6015(f).   Fernandez v. Commissioner, 114 T.C. 324, 329-331

(2000); Butler v. Commissioner, 114 T.C. 276, 287-292 (2000).

The Court's review is not limited to the Commissioner's

administrative record.   Ewing v. Commissioner, 122 T.C. 32, 44

(2004).

      Except as otherwise provided in section 6015, the taxpayer

bears the burden of proof.   Rule 142(a); Alt v. Commissioner, 119

T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004).

      Ms. Wang seeks relief from liability under section 6015 with

respect to respondent's adjustments to the 1999 return for the
                                 - 8 -

disallowed employee business expenses.     She does not qualify for

relief under section 6015(c) because she is still married to Mr.

Applegate.    See sec. 6015(c)(3).   Thus, the Court begins its

analysis with section 6015(b).

     A.   Section 6015(b)

     Section 6015(b) provides relief from joint and several

liability for tax (including interest, penalties, and other

amounts) to the extent that such liability is attributable to an

understatement of tax.    To be eligible for relief, the requesting

spouse must satisfy the following five elements of section

6015(b)(1):

                (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 an 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 [makes a valid
           election] * * *

     Respondent does not appear to dispute that Ms. Wang

satisfies two elements of section 6015(b); namely, those
                                - 9 -

regarding joint return and timely election under section

6015(b)(1)(A) and (E), respectively.      Additionally, the

parties stipulated that the employee business expenses at issue

are attributable to Mr. Applegate's employment with DriAll.

Thus, Ms. Wang has also satisfied the requirement that the

understatement of tax resulting from the disallowed employee

business expenses must not be attributable to the individual

seeking relief from the liability.      Sec. 6015(b)(1)(B).    The

Court now considers whether Ms. Wang satisfies the remaining two

elements of section 6015(b) with respect to the Schedule A

deductions for unreimbursed employee business expenses.

     The first of the two remaining elements of section

6015(b)(1) requires that Ms. Wang, in signing the return, did not

know, and had no reason to know, that there was an

understatement.   See Grossman v. Commissioner, 182 F.3d 275, 279-

280 (4th Cir. 1999), affg. T.C. Memo. 1996-452.      A requesting

spouse has knowledge or reason to know of an understatement if he

or she actually knew of the understatement, or if a reasonably

prudent taxpayer in his or her position, at the time he or she

signed the return, could have been expected to know that the

return contained an understatement or that further investigation

was warranted.    Butler v. Commissioner, supra at 283.       In

deciding whether a spouse has reason to know of an

understatement, the Court undertakes a subjective inquiry.         There
                                - 10 -

are several factors that are relevant to the Court's analysis,

including but not limited to:    (1) The alleged innocent spouse's

level of education; (2) the spouse's involvement in the family's

business and financial affairs; and (3) the culpable spouse's

evasiveness and deceit concerning the couple's finances.       Id. at

284.

       Ms. Wang has a degree in engineering from Purdue University

and had full responsibility for the family finances.    She had

full access to the family bank accounts, reviewed the bank

account statements monthly, and maintained and balanced the

family checkbook.    Ms. Wang also prepared the tax return for the

year in issue.    Finally, Mr. Applegate made no attempt to deceive

Ms. Wang about expenditures he made regarding his employment.      In

fact, she admits he gave her all his receipts for the

expenditures.    Ms. Wang simply made no effort to question him

about them despite the fact that his expenses of over $31,000

equaled almost 76 percent of his income of $41,400.

       The Court finds that Ms. Wang has failed to satisfy the

requirements of section 6015(b)(1)(C).    Therefore, she does not

qualify for relief under section 6015(b).

       B.   Section 6015(f)

       Ms. Wang may still qualify for relief, however, under

section 6015(f).    Section 6015(f) grants the Commissioner

discretion to relieve from joint and several liability an
                              - 11 -

individual who files a joint return.2   Relief from the 1999

underpayment is not available to Ms. Wang under section 6015(b)

or (c).   Thus Ms. Wang has satisfied section 6015(f)(2).

     As contemplated by section 6015(f), the Commissioner has

prescribed guidelines in Rev. Proc. 2000-15, sec. 4.02, 2000-1

C.B. 447, 448, to be used in determining whether an individual

qualifies for relief under that section.3   Rev. Proc. 2000-15,

sec. 4.01, 2001-1 C.B. at 448, sets forth the threshold

conditions that must be satisfied before the Commissioner will

consider a request for equitable relief under section 6015(f).




     2
      Sec. 6015 provides, in pertinent part, as follows:

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

          (f) 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 (or any
           portion of either); and

                (2) relief is not available to such individual
           under subsection (b) or (c),

     the Secretary may relieve such individual of such liability.
     3
      The guidelines applicable herein are set forth in Rev.
Proc. 2000-15, 2000-1 C.B. 447, which was in effect at the time
Ms. Wang's request for relief was made. Rev. Proc. 2000-15,
supra, has been superseded by Rev. Proc. 2003-61, 2003-32 I.R.B.
296, effective for requests for relief filed on or after Nov. 1,
2003.
                              - 12 -

Respondent does not dispute that Ms. Wang has satisfied those

threshold conditions.

     Where the requesting spouse satisfies the threshold

conditions set forth in Rev. Proc. 2000-15, sec. 4.01, Rev. Proc.

2000-15, sec. 4.02 sets forth the circumstances under which the

Commissioner will ordinarily grant relief to that spouse under

section 6015(f).   Ms. Wang was still married to Mr. Applegate at

the time she filed the claim for relief and thus has failed to

satisfy all of the elements of Rev. Proc. 2000-15, sec. 4.02 and

does not qualify for relief under that section.

     Where, as here, the requesting spouse fails to qualify for

relief under Rev. Proc. 2000-15, sec. 4.02, the Commissioner may

nonetheless grant the requesting spouse relief under Rev. Proc.

2000-15, sec. 4.03.   Rev. Proc. 2000-15, sec. 4.03(1) and (2), at

2000-1 C.B. 448, sets forth six positive and six negative factors

that are to be considered in determining whether to grant relief.

The revenue procedure makes clear that no single factor is to be

determinative in any particular case, that all factors are to be

considered and weighed appropriately, and that the list of

factors is not intended to be exhaustive.

     The sole factor weighing in favor of granting relief for Ms.

Wang is that the items giving rise to the deficiency--the

Schedule A employee business expense deductions--are attributable

solely to Mr. Applegate.   There are, however, several factors
                                - 13 -

weighing against granting relief to Ms. Wang.    First, she clearly

knew about the employee business expense deductions because Mr.

Applegate gave her his receipts and she used them to prepare

their tax return.   Second, Ms. Wang received significant benefit

from Mr. Applegate's employee business expense deductions.   His

expenses of $31,349.50 equaled almost 30 percent of their gross

income and constituted almost 70 percent of their total itemized

deductions.   Finally, Ms. Wang has provided no information at all

to show that she will experience economic hardship if relief from

the liability is not granted.

     Accordingly, the Court concludes that it is not inequitable

under section 6015(f) to hold Ms. Wang liable for the deficiency.

     Reviewed and adopted as the report of the Small Tax Case

Division.


                                     Decisions will be entered for

                                respondent in docket Nos. 19676-02S

                                and 19692-02S.
