                  T.C. Summary Opinion 2004-86



                     UNITED STATES TAX COURT



                CURTIS EARL MOORE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4686-02S.             Filed June 28, 2004.


     Curtis Earl Moore, pro se.

     Edwina Jones, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.   The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.   Unless otherwise

indicated, all section references are to the Internal Revenue

Code in effect for the taxable year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
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     Respondent determined a deficiency in petitioner’s Federal

income tax for the taxable year 1998 of $7,128 and a penalty

pursuant to section 6662 of $1,426.     The issues for decision are:

(1) Whether petitioner is entitled to relief under section

6015(b) or (c), and (2) whether respondent abused his discretion

in denying petitioner’s request for relief from joint and several

liability under section 6015(f).

                              Background

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner resided in Chocowinity, North Carolina, at the time he

filed the petition herein.

     Petitioner and Dorothy L. Moore (Ms. Moore) were separated

in July 1999, after 17 years of marriage.    Sometime prior to

1998, Ms. Moore began operation of Wee Ones Child Care, a day

care business, as a sole proprietorship.    Ms. Moore operated the

business during the taxable year 1998.

     Petitioner, who did not complete high school, worked full

time as a maintenance supervisor for Flanders Filters and

received wages during 1998.    Petitioner did not read well and

relied on Ms. Moore during the marriage for business matters,

including tax preparation.

     While not directly involved in the operation of Wee Ones

Child Care, petitioner assisted Ms. Moore financially with the
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startup costs, purchased supplies, and performed repair work and

remodeling for the day care center.      Petitioner considered

himself to be a “handyman” for Wee Ones Child Care.      Petitioner

gave Ms. Moore receipts for his cash expenditures.      Ms. Moore

presumably utilized the receipts in calculating income and

expenses for Wee Ones Child Care.

     Ms. Moore prepared joint tax returns for petitioner and

herself during their marriage.    For taxable year 1998, as in

prior taxable years, petitioner gave Ms. Moore his Form W-2, Wage

and Tax Statement, and other tax information, and Ms. Moore

prepared the return and presented the completed return to

petitioner for his signature.    For the year in issue, petitioner

also provided Ms. Moore a list of employee business expenses

approximating $600.   After Ms. Moore prepared the 1998 return,

petitioner did not review it prior to signing it.

     The 1998 return reported petitioner’s wages of $27,200.        The

return also reflected itemized deductions of $14,526, which

amount included deductions of $5,212 for medical and dental

expenses and deductions of $3,889 for unreimbursed employee

business expenses.    The return also attached a Schedule C, Profit

or Loss From Business, relating to Wee Ones Child Care.      The

Schedule C reflected gross receipts of $20,100, expenses of

$30,549, and a net loss of $10,449.
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     In a notice of deficiency dated January 8, 2002, respondent

made adjustments to the 1998 return as follows:

     Unreported unemployment compensation           $294
     Disallowed itemized deductions                7,400
     Disallowed Schedule C deductions             27,749

As a result of these adjustments, respondent determined that

there was a self-employment tax of $2,444.1

     The omitted unemployment compensation of $294 was paid to

petitioner.    The disallowed itemized deductions fall into two

categories.    The first is net disallowed medical and dental

expense of $3,869, which appears to be attributable to both

petitioner and Ms. Moore.2   The second is net disallowed

miscellaneous deductions for employee business expense, which

amounted to $3,531.    All the other adjustments in the notice of

deficiency relate to Wee Ones Child Care.     When petitioner and

Ms. Moore were advised of the adjustments, Ms. Moore did not

dispute the proposed adjustments and instead executed a waiver

permitting assessment.

     Petitioner made an initial attempt during the examination to

submit information relating to the employee business expense

deduction.    Later petitioner submitted a Form 8857, Request for


     1
        Half of this amount or $1,222 is an allowable deduction
for self-employment tax.
     2
        The record does not reveal any breakdown of the portion
of the medical expense deduction attributable to petitioner or
Ms. Moore.
                               - 5 -

Innocent Spouse Relief.   Since petitioner did not agree to the

proposed adjustments, a notice of deficiency was issued to him,

and a timely petition was filed wherein petitioner claimed relief

under section 6015.

                             Discussion

     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).

Our review is not limited to respondent’s administrative record.

Ewing v. Commissioner, 122 T.C. 32, 44 (2004).

     Except as otherwise provided in section 6015, petitioner

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

T.C. 306, 311 (2002), affd. __ Fed. Appx. __ (6th Cir., June 3,

2004).
                               - 6 -

1.   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 needs to 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 one 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 the taxable year attributable to the

understatement; and

      (E) the other individual makes a valid election.

      Petitioner seeks relief under section 6015(b) with respect

to respondent’s adjustments to the 1998 return for unreported

unemployment compensation of $294, disallowed itemized deductions

of $7,400, and disallowed Schedule C deductions of $27,749.

However, petitioner cannot be granted relief for understatements
                                 - 7 -

that are attributable to his own erroneous items.    See Hopkins v.

Commissioner, 121 T.C. 73, 77 (2003).     The unemployment

compensation was solely attributable to petitioner, and he could

not explain why it was omitted from the joint return.    The

disallowed itemized deductions, in the form of medical expense

deductions and an employee business expense deduction, are not

necessarily attributable to petitioner; however, as more fully

discussed infra, petitioner had reason to know of the

understatement in this regard.     Accordingly, we agree with

respondent that petitioner is not entitled to relief under

section 6015(b) as to the unreported unemployment compensation

and the disallowed itemized deductions.

     The disallowed Schedule C deductions are a different matter,

however.   Respondent does not appear to dispute that petitioner

satisfies two elements of section 6015(b)(1); namely, those

regarding joint return and timely election under section

6015(b)(1)(A) and (E), respectively.     Thus, we consider whether

petitioner satisfies the remaining three elements of section

6015(b) with respect to the Schedule C deductions for Wee Ones

Child Care.

     One of the three remaining elements of section 6015(b)

requires that the understatement of tax resulting from the

disallowed Schedule C deductions is not attributable to

petitioner.   From a review of this record, we are satisfied that
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petitioner was not involved in Wee Ones Child Care, other than as

a handyperson, providing maintenance assistance to Ms. Moore.

His assistance to his former spouse in the initial funding and

his purchase of some supplies does not create a joint venture, as

suggested by respondent.   Thus, we conclude that petitioner

satisfies section 6015(b)(1)(B).

     The second of the three remaining elements of section

6015(b)(1) requires that petitioner, 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 be expected to know that the return

contained an understatement or that further investigation was

warranted.3   Butler v. Commissioner, supra at 283.   In deciding

whether a spouse has reason to know of an understatement, we

undertake a subjective inquiry, and we recognize several factors


     3
        Secs. 1.6015-2 and 1.6015-3, Income Tax Regs., do not
apply to the present case because petitioner’s request for relief
was filed before the regulation’s effective date of July 18,
2002. See sec. 1.6015-9, Income Tax Regs. Nevertheless,
application of those regulations to the present case would yield
the same result, that is, petitioner did not know or have reason
to know of the understatement of tax attributable to the Schedule
C deductions of Wee Ones Child Care.
                                - 9 -

that are relevant to our 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.

     In the present case, we conclude that petitioner did not

have actual knowledge of the understatement of tax attributable

to the Schedule C deductions of Wee Ones Child Care.

Petitioner’s knowledge of Wee Ones Child Care as the source of an

erroneous item is not sufficient to establish actual knowledge.

Moreover, we find that a reasonably prudent person in

petitioner’s circumstances would not know of the understatement.

Petitioner was employed full time outside the home as a

maintenance supervisor.   Petitioner has limited education.   Ms.

Moore ran Wee Ones Child Care, maintained the books and records

and prepared the tax returns.   Thus, petitioner had no direct

involvement in the business, other than as a handyperson and as a

provider of startup costs.   We are thus convinced that petitioner

satisfies the requirements of section 6015(b)(1)(C).

     The last of the three remaining elements of section

6015(b)(1), whether it is inequitable to hold a spouse liable for

a deficiency, is determined by “taking into account all the facts

and circumstances”.   The equitable factors we consider under

section 6015(b)(1)(D) are the same as those we consider under
                                - 10 -

section 6015(f) and are outlined in Rev. Proc. 2000-15, 2000-1

C.B. 447.4    Alt v. Commissioner, 119 T.C. at 316.   The factors

weighing in favor of relief are as follows:    (a) Petitioner was

divorced from Ms. Moore, (b) as more fully discussed with respect

to section 6015(b)(1)(C) above, petitioner did not know or have

reason to know of the understatement, (c) there is nothing in the

record indicating that Ms. Moore had a legal obligation to pay

the outstanding tax liability, and (d) the items giving rise to

the deficiency–-that is, the Schedule C deductions--are

attributable solely to Ms. Moore.    These factors weighing in

favor of relief have either been satisfied by petitioner or have

a neutral effect.    See Rosenthal v. Commissioner, T.C. Memo.

2004-89.     Accordingly, we conclude that it is inequitable under

section 6015(b)(1)(D) to hold petitioner liable for the

deficiency, to the extent that it relates to the Schedule C

deductions and the resulting adjustment of $2,444 to the self-

employment tax.




     4
        The Commissioner prescribed procedures in Rev. Proc.
2000-15, 2000-1 C.B. 447, to be used in determining whether an
individual qualifies for relief under sec. 6015(f). The revenue
procedure takes into account factors such as marital status,
economic hardship, and significant benefit in determining whether
relief will be granted under sec. 6015(f). Rev. Proc. 2000-15,
sec. 4.03, 2000-1 C.B. at 448. We note, however, that this
revenue procedure has been superseded by Rev. Proc. 2003-61,
2003-32 I.R.B. 296, which is effective for requests for relief
made after Nov. 1, 2003.
                               - 11 -

       In summary, we hold that petitioner does not qualify for

relief under section 6015(b) with respect to unreported

unemployment compensation and the disallowed itemized deductions.

However, based on the foregoing, we hold that petitioner does

qualify for relief under section 6015(b) to the extent the

deficiency for the taxable year 1998 relates to adjustments to

Schedule C and to the resulting adjustment to the self-employment

tax.

       For the remaining adjustments not entitled to relief under

section 6015(b), namely, the unreported unemployment compensation

and the disallowed itemized deductions, we next consider whether

petitioner is entitled to relief pursuant to section 6015(c).

2.   Section 6015(c)

       Section 6015(c) allows a taxpayer who is eligible and so

elects to limit his or her liability to the portion of a

deficiency that is properly allocable to the taxpayer as provided

in section 6015(d).    Sec. 6015(c)(1).   In the present case, the

unreported unemployment compensation and the disallowed itemized

deductions are all allocable, at least in part, to petitioner.

Petitioner has the burden of proving the portion of the

deficiency allocable to him, and respondent has the burden of

proving actual knowledge of the item giving rise to the

deficiency.    See sec. 6015(c)(2), (3)(C).   Petitioner did not

establish what portion of the deficiency attributable to the
                               - 12 -

disallowed itemized deductions is allocable to Ms. Moore and what

is allocable to him.    Accordingly, petitioner is not entitled to

relief under section 6015(c) with respect to the portion of

deficiency attributable to these items.

3.   Section 6015(f)

      Since petitioner is not entitled to relief under section

6015(b) or (c), with respect to the unreported unemployment

compensation and the disallowed itemized deductions, we consider

whether petitioner qualifies for relief under section 6015(f),

after a trial de novo and using an abuse of discretion standard.

See Ewing v. Commissioner, 122 T.C. 32 (2004); Fernandez v.

Commissioner, 114 T.C. at 328-329; Butler v. Commissioner, 114

T.C. at 287-292.   Petitioner bears the burden of proving that

respondent’s denial of equitable relief under section 6015(f) was

an abuse of discretion.    See Rule 142(a); Alt v. Commissioner,

supra at 311.   Petitioner must demonstrate that respondent

exercised his discretion arbitrarily, capriciously, or without

sound basis in fact or law.    See Jonson v. Commissioner, 118 T.C.

106, 125 (2002), affd. 353 F.3d 1181 (10th Cir. 2003); Woodral v.

Commissioner, 112 T.C. 19, 23 (1999).

      As previously discussed, the Commissioner has prescribed

procedures for determining whether a spouse qualifies for relief

under subsection (f).    We have upheld the procedures found in

Rev. Proc. 2000-15, 2000-1 C.B. 447, in reviewing a
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determination.     Washington v. Commissioner, 120 T.C. 137, 147-152

(2003).

     Rev. Proc. 2000-15, sec. 4.01, 2000-1 C.B. at 448, provides

seven threshold conditions that must be satisfied before the

Commissioner will consider a request for equitable relief under

section 6015(f).    Respondent does not raise any argument with

respect to these seven threshold conditions, and therefore, we

presume that they have been satisfied and consider other

provisions of the revenue procedure.

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

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.    While we previously

discussed the factors weighing in favor of relief, such

discussion related to items to which we have held that petitioner

is entitled to relief under section 6015(b).    Thus, we limit the

discussion of the factors as they relate to those adjustments

resulting in a deficiency from which we have held petitioner is

not entitled to relief; namely, the unreported unemployment

compensation and the disallowed itemized deductions.    See sec.

6015(f)(2).
                               - 14 -

     The two factors which we consider of most importance weigh

against section 6015(f) relief.    The first factor is the item for

which relief is sought is solely attributable to petitioner.     We

have fully discussed this above and concluded that the omitted

unemployment insurance and the disallowed itemized deductions are

attributable to petitioner.    The second factor is knowledge or

reason to know of the items giving rise to the deficiency.

Petitioner had knowledge or reason to know of the items giving

rise to the deficiency.   We are satisfied that petitioner had

actual knowledge of the omitted unemployment insurance income,

and the itemized deductions.    For example, petitioner gave Ms.

Moore a list representing employee business expenses totaling

approximately $600.   The return, prepared by Ms. Moore, reflected

$3,889 in employee business expense.    Petitioner cannot escape

liability for items of income or deductions which are

attributable to him and of which he had knowledge, by not

reviewing the tax return.

     Considering the above analysis, we conclude that respondent

did not abuse his discretion in denying relief under section

6015(f), as to the portion of deficiency resulting from the

omitted unemployment income and disallowed itemized deductions.
                            - 15 -

    Reviewed and adopted as the report of the Small Tax Case

Division.

    To reflect the foregoing,

                                        Decision will be entered

                                     under Rule 155.
