                          T.C. Memo. 2003-301



                        UNITED STATES TAX COURT



                 RUTHE G. OHRMAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5667-02.                Filed October 29, 2003.



     Steven B. Hval, for petitioner.

     Nhi T. Luu-Sanders, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:     This proceeding was commenced under section

6015 for review of respondent’s determination that petitioner is

not entitled to relief from joint and several liability for 1999

with respect to a joint return filed with Steven F. Ohrman

(Mr. Ohrman).    The issues for decision are:     (1) Whether

petitioner is eligible for relief from joint and several
                                 - 2 -

liability under section 6015(b); (2) whether petitioner is liable

under section 6015(c)(4) to the extent she received disqualified

assets notwithstanding a valid election under section 6015(c);

and (3) whether respondent abused his discretion in denying

petitioner’s request for relief from joint and several liability

under section 6015(f).

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue.    All

dollar amounts have been rounded to the nearest dollar.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.    At the

time the petition in this case was filed, petitioner resided in

Portland, Oregon.

Background

     Petitioner and Mr. Ohrman were married in Seattle,

Washington, on March 26, 1988.    On September 9, 1994, petitioner

and Mr. Ohrman purchased a personal residence on Birdshill Road

in Portland, Oregon (Birdshill residence).   At the time of trial

in March 2003, petitioner was 53 years old and Mr. Ohrman was

56 years old.

     Petitioner attended college for at least 2 years and worked

towards a teaching degree, but she did not graduate.   From 1985

to 1995, petitioner worked as a lending officer at two large
                                 - 3 -

banks.   While working as a lending officer, petitioner dealt with

real estate agents and reviewed mortgage loan applications.

Petitioner became a full-time homemaker when her grandniece Alexa

moved into her home in 1995.

     Mr. Ohrman has worked for Spicers Paper, Inc. (Spicers

Paper), in Gresham, Oregon, as its regional manager for the

Portland, Oregon, and Seattle, Washington, divisions for several

years including 1999.   As of the time of trial, Mr. Ohrman’s

salary was $135,000 per year, and his take-home pay was

approximately $6,800 per month.

Mr. Ohrman’s Gambling Addiction

     Mr. Ohrman has an admitted gambling addiction.    Petitioner

first became aware of Mr. Ohrman’s gambling in 1993.    In 1998,

Mr. Ohrman enrolled in Project STOP (the State of Oregon gambling

treatment center) to seek treatment for his gambling addiction.

Petitioner participated in Project STOP’s “significant other”

program to support Mr. Ohrman.    While participating in Project

STOP, Mr. Ohrman revealed to petitioner that he had accrued

approximately $200,000 in outstanding gambling debts on various

joint credit cards held in Mr. Ohrman’s and petitioner’s names.

Mr. Ohrman graduated from Project STOP on December 19, 1998, and

received a Certificate of Achievement.

     During the Project STOP program, petitioner was advised to

block Mr. Ohrman’s ability to obtain money.    Pursuant to this
                               - 4 -

advice, petitioner took control of the family finances in 1999.

Petitioner wrote checks to pay the bills, reviewed monthly bank

statements, and maintained a file drawer in the Birdshill

residence where she kept the family’s financial records.    In

addition, petitioner removed Mr. Ohrman’s name from their joint

checking account at U.S. Bank (U.S. Bank checking account) as

well as from their joint money market savings account at U.S.

Bank.   Petitioner also obtained quarterly credit reports under

her name to check for inquiries and new credit during 1999.

Petitioner, however, did not remove Mr. Ohrman’s name from either

the $60,000 home equity line of credit held by petitioner and

Mr. Ohrman with Wells Fargo Bank (Wells Fargo home equity line of

credit) or the joint checking account petitioner and Mr. Ohrman

maintained at Key Bank in Seattle.

     After she took control of the family finances, petitioner

had Mr. Ohrman’s wages from Spicers Paper deposited directly into

her U.S. Bank checking account during 1999.    Petitioner was the

only authorized signer on the U.S. Bank checking account, and

Mr. Ohrman had no access to this account.    Mr. Ohrman’s wages

provided the only income source from which petitioner paid her

family’s ongoing living expenses, including Mr. Ohrman’s pre-1998

gambling debts.   Despite petitioner’s efforts, Mr. Ohrman’s

gambling addiction persisted through 1999.
                                 - 5 -

Mr. Ohrman’s Early Withdrawals From His Retirement Account

     During 1999, Mr. Ohrman was the owner of an individual

retirement account (IRA) at Dean Witter Reynolds (Dean Witter

account).   The Dean Witter account was a rollover account set up

by petitioner and Mr. Ohrman in 1997.    Petitioner was present

with Mr. Ohrman when the Dean Witter account was established.

Thereafter, petitioner maintained a file for the Dean Witter

account and placed the monthly account statements into a

notebook.   As of February 28, 1999, the Dean Witter account had a

total asset value of $454,406.

     Petitioner was the designated beneficiary of the Dean Witter

account, but her written consent was not required to make an

early withdrawal.   Petitioner was aware of how much money was in

the Dean Witter account in 1998 and 1999, and she believed there

was approximately $700,000 in the account at one point in 1998.

Because of the size of the Dean Witter account, petitioner

solicited promises from Mr. Ohrman before and during 1999 that he

would not use any of the funds in the Dean Witter account for

gambling.

     Despite his promises to petitioner, Mr. Ohrman withdrew

$79,000 in early distributions from the Dean Witter account in

11 separate transactions from March 19 to December 21, 1999, to

fund his gambling addiction.   Petitioner neither knew about nor

consented to these early distributions, nor did petitioner sign
                                - 6 -

any of the IRA distribution request forms.   Mr. Ohrman was the

only person who endorsed the distribution checks.

     Statements for the months of March, April, May, June, July,

and August 1999 for the Dean Witter account were received at the

Birdshill residence.   These monthly statements showed that

withdrawals totaling $44,000 were taken from the Dean Witter

account in the following amounts:   March, $5,000; April, $5,000;

May, $8,000; June, $5,000; July, $13,000; and August, $8,000.     In

September 1999, Mr. Ohrman changed the address on the Dean Witter

account statements from the Birdshill residence to his work

address at Spicers Paper.   Consequently, the monthly statements

for September, October, November, and December 1999 for the Dean

Witter account were sent to Mr. Ohrman’s work address.

     Mr. Ohrman opened an individual checking account at Wells

Fargo Bank (Wells Fargo checking account) prior to December 8,

1998, and he used this checking account throughout 1999 in

connection with his gambling.   Mr. Ohrman opened the Wells Fargo

checking account without petitioner’s knowledge or consent.

Mr. Ohrman also obtained credit cards in his name alone after

graduating from Project STOP.   These credit cards were used to

fund his gambling addiction and were not known to petitioner

until June 2001.   The early withdrawals taken by Mr. Ohrman from

the Dean Witter account during 1999 were used at least in part to

pay down the gambling debt attributable to these credit cards.
                               - 7 -

     On April 15, 2000, petitioner and Mr. Ohrman filed a joint

1999 Federal income tax return (joint 1999 return), Form 1040,

U.S. Individual Income Tax Return, and attachments.    Petitioner

prepared the joint 1999 return on her home computer using Turbo

Tax, a tax preparation program.    Although two Forms 1099-R,

Distributions From Pensions, Annuities, Retirement or Profit-

Sharing Plans, IRAs, Insurance Contracts, etc., for 1999 were

sent to Mr. Ohrman at the Birdshill residence--one indicating a

gross distribution and taxable amount of $71,000 from the Dean

Witter account and the other indicating a gross distribution and

taxable amount of $8,000 from the Dean Witter account–-the

$79,000 in distributions withdrawn by Mr. Ohrman from his Dean

Witter account was not reported on the joint 1999 return filed by

petitioner and Mr. Ohrman.

     The $79,000 withdrawn by Mr. Ohrman from the Dean Witter

account was taxable income, the omission of which from the joint

1999 return resulted in an understatement of tax attributable to

an erroneous item of Mr. Ohrman.    At the time petitioner signed

the joint 1999 return, she did not have actual knowledge of the

early distributions from the Dean Witter account.

     On May 29, 2001, respondent issued a letter of proposed

changes to petitioner’s and Mr. Ohrman’s reported tax liability

for 1999.   This letter proposed that petitioner and Mr. Ohrman

owed an additional $42,927 (consisting of $32,217 in deficiency,
                               - 8 -

$6,443 in accuracy-related penalty, and $4,267 in interest) for

1999.   The letter of proposed changes was received by petitioner

at the Birdshill residence in early June 2001.   Within a few days

after receiving respondent’s letter of proposed changes,

petitioner confronted Mr. Ohrman and learned of the early

distributions from the Dean Witter account.

Legal Separation Proceedings and Transfer of Assets

     Within 1 week after receipt of respondent’s letter of

proposed changes, petitioner met with Laura Rackner (Rackner), an

attorney in Portland who specializes in divorce and family law,

for advice.   During this meeting, petitioner told Rackner that

she received respondent’s letter of proposed changes for 1999.

In addition, petitioner told Rackner that Mr. Ohrman was a

compulsive gambler and that she wanted to be protected from his

gambling-related debt.

     Rackner informed petitioner that there was a possibility

that she could obtain relief from joint and several liability for

the 1999 tax deficiency.   After hearing Rackner’s advice,

petitioner told Rackner that she wanted a financial separation

from Mr. Ohrman.   Accordingly, petitioner provided assets and

liabilities information to Rackner, including the value of the

Birdshill residence and the value of the funds in Mr. Ohrman’s

Dean Witter account and in his 401(k) retirement account.    On
                                - 9 -

June 21, 2001, petitioner filed for a legal separation from

Mr. Ohrman in Clackamas County (Oregon) Circuit Court.

     On June 25, 2001, petitioner and Mr. Ohrman signed a

Stipulated Judgment for Unlimited Separation (separation

agreement), and Mr. Ohrman conveyed his interest in the Birdshill

residence to petitioner.    Rackner drafted the separation

agreement for petitioner.

     On July 3, 2001, Circuit Court Judge Patrick D. Gilroy

signed the separation agreement in the matter of Ohrman v.

Ohrman, Case No. DR0106592.    Mr. Ohrman was not represented at

any point during the proceedings for legal separation.    Upon

execution of the separation agreement, Mr. Ohrman conveyed to

petitioner his interest in the Birdshill residence.    Petitioner

also received ownership of a 1998 Lexus automobile, the Dean

Witter account, and a 401(k) retirement account that had been

held in Mr. Ohrman’s name.    In addition, Mr. Ohrman was required

to pay to petitioner spousal support as follows:    (1) $6,000 per

month, commencing on July 1, 2001, until the Birdshill residence

was sold and the sales transaction was completed; (2) $5,000 per

month for 12 months thereafter; (3) $4,000 per month for 66

months thereafter; and then (4) $1,500 per month indefinitely.

     Pursuant to the separation agreement, Mr. Ohrman has been

required to maintain medical, dental, and hospital insurance on

petitioner.   He has also been required to maintain life insurance
                               - 10 -

through his employer and through Transamerica with petitioner as

beneficiary.   Additionally, Mr. Ohrman was required to pay,

defend, indemnify, and hold harmless petitioner for 19 specified

credit cards held in his name in addition to all other credit

cards, loans, debts, notes, encumbrances, credit lines, equity

lines, or other financial obligations in his name, with the

exception of an Alaska Airlines Visa account.

     Finally, Mr. Ohrman agreed to:

     pay, defend, indemnify and hold * * * [petitioner]
     harmless from any claim made by any taxing agency
     arising out of tax returns previously filed by the
     parties. * * * [Mr. Ohrman] shall be liable, indemnify
     and hold * * * [petitioner] harmless from the tax
     liabilities resulting for 1999, 2000 and 2001. * * *
     [Mr. Ohrman] shall be responsible for communicating
     with the taxing agencies and do all that is necessary
     to protect * * * [petitioner] from the tax obligation.

     Excluding the right to spousal support, insurance coverages,

and the 1998 Lexus, petitioner received assets with an

approximate fair market value of $782,000 under the separation

agreement.   The fair market value of the Birdshill residence as

of June 2001 was approximately $500,000.   The true and actual

stated consideration in the Bargain and Sale Deed transferring

Mr. Ohrman’s interest in the Birdshill residence to petitioner

was $0.   The 401(k) retirement account had a value of $36,581 on

March 31, 2001.    The Dean Witter account had a value of $246,234

on May 31, 2001.   Under the separation agreement, Mr. Ohrman

retained only his personal belongings, which consisted of
                             - 11 -

clothing, items stored in the garage of the Birdshill residence,

his tools, and a 1997 Honda automobile.

Petitioner’s and Mr. Ohrman’s Relationship After Their “Financial
Separation”

     Although petitioner and Mr. Ohrman were legally separated as

of July 2001, they continued to reside together.    They remained

at the Birdshill residence until June 20, 2002.    On June 10,

2002, petitioner sold the Birdshill residence for $520,000.

Petitioner received $63,087 in proceeds from the sale of the

Birdshill residence.

     After the sale of the Birdshill residence, petitioner and

Mr. Ohrman rented a room together at a hotel in Portland from

June 21, 2002, through July 15, 2002.   On July 15, 2002,

petitioner purchased a new personal residence on Carlton Street

in Portland (Carlton residence) for $363,000.   Petitioner made a

downpayment of $79,438 to purchase the Carlton residence.    In

petitioner’s Uniform Residential Loan Application for the

purchase of the Carlton residence, dated July 17, 2002,

petitioner listed assets with a total value of $940,000 and

reported a net worth of $525,373.   Petitioner and Mr. Ohrman have

resided together at the Carlton residence from July 20, 2002, to

at least March 2003.

     In addition to residing together, petitioner and Mr. Ohrman

have been raising their grandniece Alexa together as parents.

Petitioner and Mr. Ohrman were awarded full custody of Alexa on
                              - 12 -

February 24, 2002.   Petitioner and Mr. Ohrman have also continued

to socialize together as a couple since their legal separation.

     Petitioner has remained in control of the family finances

since the legal separation and has used Mr. Ohrman’s monthly

support payments to pay her family’s ongoing living expenses,

consisting of the monthly mortgage payment on the Carlton

residence, the utilities, the monthly payment due on her Alaska

Airlines Visa credit card, the house and car insurance premiums,

and groceries for Mr. Ohrman, Alexa, and herself.   In addition to

making the monthly support payments to petitioner, Mr. Ohrman

pays at least an additional $1,800 per month for Alexa’s

schooling, his gambling debt, health insurance for petitioner and

Alexa, and life insurance.

Revenue Agent McConnell’s Examination

     On December 10, 2001, respondent sent a statutory notice of

deficiency to petitioner and Mr. Ohrman for 1999.   In the notice

of deficiency, respondent determined that petitioner and

Mr. Ohrman are liable for a deficiency in income tax of $31,515

and a section 6662(a) accuracy-related penalty in the amount of

$6,303.   On March 10, 2002, petitioner timely filed her Petition

for Determination of Relief from Joint and Several Liability on a

Joint Return under section 6015(b), (c), and (f) in response to

the statutory notice of deficiency.
                              - 13 -

     In August 2002, Revenue Agent Joan McConnell (McConnell) was

assigned to examine petitioner’s qualification for relief from

joint and several liability under section 6015.   McConnell

interviewed petitioner on September 11, 2002.   During this

interview, petitioner told McConnell that monthly statements for

the Dean Witter account came to the Birdshill residence during

1999, but she did not open them because they were not addressed

to her.   Additionally, petitioner explained to McConnell that she

obtained the legal separation from Mr. Ohrman in order to protect

herself financially.   Petitioner also provided to McConnell a

written response to respondent’s Innocent Spouse Questionnaire at

this interview and signed it under penalties of perjury.

     McConnell interviewed Mr. Ohrman on October 31, 2002.    When

questioned during this interview about the transfer of assets to

petitioner, Mr. Ohrman told McConnell that the legal separation

and transfer of assets were his ideas and that he did not feel

that petitioner should have to pay for his mistakes.

     McConnell referred to Rev. Proc. 2000-15, 2000-1 C.B. 447,

to determine whether petitioner should be granted equitable

relief under section 6015(f) for the 1999 tax deficiency.     Based

upon her analysis of the facts and circumstances of petitioner’s

case, McConnell determined that petitioner did not qualify for

equitable relief under section 6015(f).   McConnell concluded that

petitioner received a transfer of disqualified assets from
                                 - 14 -

Mr. Ohrman.     In addition, McConnell concluded that petitioner had

reason to know of at least some of the distributions from the

Dean Witter account.

                                 OPINION

     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 for that taxable year.      Sec. 6013(d)(3).   A spouse

(requesting spouse) may, however, seek relief from joint and

several liability by following procedures established in

section 6015.    Sec. 6015(a).   A requesting spouse may request

relief from liability under section 6015(b) or, if eligible, may

allocate liability according to provisions under section 6015(c).

Sec. 6015(a).    If relief is not available under section 6015(b)

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

6015(f).

Section 6015(b) Analysis

     Section 6015(b) provides, in pertinent part, as follows:

          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
                               - 15 -

                 erroneous items of 1 individual filing the
                 joint return;

                      (C) the other individual filing the
                 joint return establishes that in signing the
                 return he or she did not know, and had no
                 reason to know, that there was such
                 understatement;

                      (D) taking into account all the facts
                 and circumstances, it is inequitable to hold
                 the other individual liable for the
                 deficiency in tax for such taxable year
                 attributable to such understatement; and

                      (E) the other individual elects (in such
                 form as the Secretary may prescribe) the
                 benefits of this subsection not later than
                 the date which is 2 years after the date the
                 Secretary has begun collection activities
                 with respect to the individual making the
                 election,

           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.

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

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

prevents a requesting spouse from qualifying for relief offered

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

     There is no dispute that petitioner satisfies subparagraphs

(A) and (B) of section 6015(b)(1).      Moreover, respondent does not

argue that petitioner’s election was untimely under section

6015(b)(1)(E).   Respondent contends, however, that petitioner

failed to meet the requirements of subparagraphs (C) and (D) of

section 6015(b)(1).   Petitioner argues that she has met all of
                              - 16 -

the requirements for equitable relief set forth in section

6015(b)(1) and is entitled to relief from joint and several

liability for the joint 1999 return.

     Section 6015(b)(1)(C) requires that the requesting spouse

establish that in signing the return she did not know, and had no

reason to know, that there was an understatement.   The parties

have stipulated that petitioner did not have actual knowledge of

the understatement at the time she signed the joint 1999 return.

In deciding whether petitioner has carried her burden of proof in

establishing that she had no reason to know of the understatement

in the joint 1999 return, witness credibility is an important

consideration.   See Penfield v. Commissioner, T.C. Memo. 2002-

254; Ishizaki v. Commissioner, T.C. Memo. 2001-318.     In this

case, as discussed below, various inconsistencies in the

assertions of petitioner and Mr. Ohrman undermine the reliability

of their generalized assertions that petitioner had no reason to

know of the withdrawals from the Dean Witter account.    Therefore,

we are not required to accept them.    See Geiger v. Commissioner,

440 F.2d 688 (9th Cir. 1971), affg. T.C. Memo. 1969-159.

     Petitioner believed that there was approximately $700,000 in

the Dean Witter account at one point in 1998.   In an effort to

protect this amount, she solicited promises from Mr. Ohrman

before and during 1999 that he would not use any of the funds in

the Dean Witter account for gambling.   Petitioner was aware of
                               - 17 -

how much money was in the Dean Witter account in 1998 and 1999

because she was present with Mr. Ohrman when the account was

established and had maintained a file for the account’s monthly

statements.

     While Mr. Ohrman may have been deceitful in hiding the

actual withdrawals from the Dean Witter account from petitioner,

the account statements showing these withdrawals were sent to the

Birdshill residence for the months of March, April, May, June,

July, and August 1999.   These statements show that withdrawals

totaling $44,000 were taken from the Dean Witter account during

these months.   Mr. Ohrman changed the address on the Dean Witter

account to his work address in September 1999.

     It is not clear from the testimony or the evidence before us

what happened to the Dean Witter account statements for the

months of March, April, May, June, July, and August 1999.

Petitioner does not account for these six monthly account

statements in her written response to respondent’s Innocent

Spouse Questionnaire.    Specifically, in petitioner’s response to

question No. 22 of the Innocent Spouse Questionnaire, she

provided information only as to Mr. Ohrman’s changing the address

on the Dean Witter account statements for the months of

September, October, November, and December 1999 and his

evasiveness about the account statements for those months.
                              - 18 -

     When McConnell interviewed petitioner on September 11, 2002,

she inquired as to the Dean Witter account statements for the

6 months of March through August 1999.    Petitioner told McConnell

that monthly statements for the Dean Witter account came to the

Birdshill residence during 1999, but she did not open them

because they were not addressed to her.   When questioned at

trial, however, petitioner was not so forthcoming with an

explanation as to what happened to the Dean Witter account

statements for the 6 months of March through August 1999.

Petitioner testified that she could not remember getting any

statements during 1999 for the Dean Witter account at the

Birdshill residence.   Therefore, when examined in their totality,

petitioner’s response on the Innocent Spouse Questionnaire, her

response to McConnell during their interview of September 11,

2002, regarding the delivery of the Dean Witter account

statements to the Birdshill residence during 1999, and her

response at trial about these statements are vague, inconsistent,

and evasive.

     Mr. Ohrman also provided testimony as to what happened to

the Dean Witter account statements for the 6 months of March

through August 1999.   Mr. Ohrman testified that he would leave

work and “chase the mailtruck” in order to prevent the Dean

Witter account statements from reaching the Birdshill residence.

He also testified that, when petitioner asked about the Dean
                              - 19 -

Witter account statements, he would show her statements that he

had “doctored up” in order to hide his withdrawals from the Dean

Witter account.   When asked about the whereabouts of these

“doctored up” statements on cross-examination, however,

Mr. Ohrman acknowledged that neither he nor petitioner had

provided them and that “they were thrown away” by him or

petitioner.

     The Dean Witter account statements were not the only source

of information indicating that Mr. Ohrman had taken the early

withdrawals during 1999.   Two Forms 1099-R for 1999 were also

sent to the Birdshill residence--one indicating a gross

distribution and taxable amount of $71,000 from the Dean Witter

account and the other indicating a gross distribution and taxable

amount of $8,000 from the Dean Witter account.   On the Innocent

Spouse Questionnaire, petitioner stated that the two Forms 1099-R

were sent to Mr. Ohrman’s work address.   This statement is

inconsistent with the address clearly shown on both Forms 1099-R.

     Petitioner is a fairly well-educated individual who had

gained experience with financial matters as a result of her

10 years of employment as a lending officer with two large banks.

Petitioner took complete control of her family’s finances in 1999

as a result of Mr. Ohrman’s gambling addiction, was aware of the

existence and magnitude of the Dean Witter account, and prepared

the joint 1999 return by herself.   A reasonable person in
                                - 20 -

petitioner’s position would have been put on notice by

Mr. Ohrman’s evasion and deception with respect to the Dean

Witter account statements.   Petitioner was well aware of the

extent of Mr. Ohrman’s past gambling and that he needed access to

money in order to continue gambling.     Even though petitioner had

knowledge of these facts, she did not keep close watch over the

Dean Witter account.   Although petitioner also suffered difficult

personal circumstances during 1999, she was able to retain

control of other aspects of the family finances.    Therefore, when

we consider the entire record of this case, we conclude that

petitioner has not established that she had no reason to know of

the understatement when she signed the joint 1999 return.

     We also conclude that petitioner has not satisfied the

requirements of subparagraph (D) of section 6015(b)(1).    Taking

into account all the facts and circumstances of petitioner’s

case, it is not inequitable to hold her liable for the 1999 tax

deficiency because the tax-avoidance purpose of the separation

agreement is apparent from the evidence.    First, a proposed tax

liability of nearly $43,000 prompted petitioner to meet with

Rackner for advice in early June 2001.    Second, petitioner told

Rackner about the proposed tax deficiency during this meeting,

and Rackner informed her that relief from joint and several

liability might be available.    Third, with the knowledge that

relief from joint and several liability might be available to
                              - 21 -

her, petitioner instructed Rackner to draft the separation

agreement whereby she would be financially separated from

Mr. Ohrman.   Fourth, pursuant to this separation agreement,

petitioner received approximately $782,000 in assets that had

previously been held in Mr. Ohrman’s name along with spousal

support amounting to at least $4,000 per month for a minimum

period of 78 months, leaving Mr. Ohrman stripped of nearly all of

his assets and monthly income.   Finally, petitioner and

Mr. Ohrman have continued their marital relationship since their

legal separation was finalized in July 2001 and have continued to

use Mr. Ohrman’s income to pay the family’s ongoing living

expenses.

     In Doyle v. Commissioner, T.C. Memo. 2003-96, we denied a

taxpayer relief from joint and several liability under section

6015(b)(1)(D) because she and her family had engaged in a

systematic plan to put their assets beyond the reach of

respondent’s legitimate collection activities.   Similarly, in

Pierce v. Commissioner, T.C. Memo. 2003-188, we denied a taxpayer

relief under section 6015(b)(1)(D) when the object of a series of

transactions entered into by the taxpayer was to shield assets

from creditors, which ultimately included respondent.   In both

cases, we concluded that granting relief to taxpayers in such

circumstances would wrongfully permit them to shield themselves

from Federal tax liabilities by using section 6015.
                              - 22 -

     In this case, petitioner has presented no credible nontax

reason for the transfer of assets pursuant to the separation

agreement.   Mr. Ohrman’s gambling addiction, long known to her,

did not cause a legal separation.    Petitioner reacted to that

situation by taking practical control of the family finances.

These circumstances lead us to the ultimate conclusion that

petitioner obtained a legal separation in order to shield as many

assets and as much of the family’s income as possible from the

1999 tax deficiency.

     Furthermore, it is not inequitable to hold petitioner liable

for the 1999 tax deficiency because she would not suffer a major

financial hardship as a result.    Petitioner holds assets that she

could use to pay the 1999 tax deficiency.    In addition, her

family’s living expenses are all paid from Mr. Ohrman’s earnings.

Therefore, although her circumstances may be unfortunate, they do

not compel relief from joint and several tax liability under

section 6015(b).

Section 6015(c) Analysis

     Because petitioner cannot avoid liability for the deficiency

arising from the joint 1999 return under section 6015(b), we now

turn our attention to her claim for relief from joint and several

liability under 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
                                - 23 -

allocable to the taxpayer as provided in section 6015(d).      Sec.

6015(c)(1).   Under section 6015(d)(3)(A), generally, any items

that give rise to a deficiency on a joint return, e.g., the

unreported early distributions from the Dean Witter account,

shall be allocated to the individual filing the return in the

same manner as it would have been allocated if the individual had

filed a separate return for the taxable year.

     A taxpayer is eligible to elect the application of section

6015(c) if, at the time the election is filed, the taxpayer is

legally separated from the individual with whom the taxpayer

filed the joint return to which the election relates.      Sec.

6015(c)(3)(A)(i)(I).    Furthermore, the election under section

6015(c) must not be made later than 2 years after the date on

which respondent has begun collection activities with respect to

the taxpayer making the election.    Sec. 6015(c)(3)(B).

Respondent does not contend that petitioner’s election under

section 6015(c) was untimely.    Therefore, petitioner is eligible

to elect the application of section 6015(c) to limit her

liability for the 1999 tax deficiency.

     The issue with which we are faced in this case, however,

deals with the application of section 6015(c)(4) to the transfer

of assets from Mr. Ohrman to petitioner pursuant to the

separation agreement.   Specifically, we must decide whether the

amount of the 1999 tax deficiency for which petitioner can be
                              - 24 -

held liable under section 6015(c)(1) may be increased as a result

of a transfer of disqualified assets under section 6015(c)(4).

     Under section 6015(c)(4)(A), the portion of the deficiency

for which the taxpayer electing the application of section

6015(c) is liable (without regard to section 6015(c)(4)(A)) is

increased by the value of any disqualified asset transferred to

the taxpayer.   The term “disqualified asset” means any property

or right to property transferred to the taxpayer making the

election under section 6015(c) (i.e., petitioner) by the other

individual filing such joint return (i.e., Mr. Ohrman) if the

principal purpose of the transfer was the avoidance of tax or

payment of tax.   Sec. 6015(c)(4)(B)(i).

     Under section 6015(c)(4)(B)(ii), there is a presumption that

any asset transfer that occurs after the date that is 1 year

before the first letter of proposed deficiency is sent by

respondent has as its principal purpose the avoidance of tax or

payment of tax.   (The letter of proposed deficiency allows the

taxpayer an opportunity for administrative review in the Internal

Revenue Service Office of Appeals.     Sec. 6015(c)(4)(B)(ii)(I).)

This presumption, however, does not apply to any transfer made

pursuant to a decree of divorce or separate maintenance or a

written instrument incident to such a decree.    Sec.

6015(c)(4)(B)(ii)(II); see also sec. 71(b)(2)(B) (explaining that

the term “divorce or separation instrument” means a written
                              - 25 -

separation agreement).   Consequently, this presumption is not

applicable in this case because the transfer of assets from

Mr. Ohrman to petitioner took place pursuant to a written

separation agreement.

     Respondent argues that the burden of proof under section

6015(c)(4) is on petitioner because of the language of section

6015(c)(2) and caselaw interpreting section 6015(c).    Conversely,

petitioner contends that respondent has the burden of proof

because of the language of section 1.6015-3(c)(3)(iii), Income

Tax Regs., and the legislative history of section 6015(c).    We

need not resolve this dispute, however, because the preponderance

of the evidence establishes that the principal purpose of the

transfer was the avoidance of tax.

     Respondent contends that the facts of this case show that

petitioner and Mr. Ohrman intentionally and purposely obtained a

legal separation and transferred assets in an attempt to shield

these assets from respondent’s effort to collect the 1999 tax

deficiency.   Petitioner primarily argues that, because the

transfer of assets from Mr. Ohrman to petitioner took place

pursuant to the equitable distribution rules of Oregon family

law, the transfer did not have as its principal purpose the

avoidance of tax or payment of tax.    For the reasons set forth

below, respondent’s argument is persuasive on this matter.
                              - 26 -

     Petitioner’s use of State family law as a vehicle to lend

legitimacy to Mr. Ohrman’s transfer of assets and income to her

is the type of abuse that Congress expressly intended to stop by

adding paragraph (4) to section 6015(c).    While the State of

Oregon’s equitable distribution rules provided the mechanism for

the transfer of Mr. Ohrman’s assets and income to petitioner,

they do not negate the principal purpose for which the transfer

occurred, the avoidance of tax.   As discussed in detail above,

the separation agreement was a way for petitioner to enjoy the

benefits of the family assets and income without satisfying the

1999 tax deficiency.   Accordingly, we hold that petitioner

received a transfer of disqualified assets under section

6015(c)(4).

     The next step in the section 6015(c) analysis is to decide

the amount by which petitioner’s liability for the 1999 tax

deficiency should be increased because of the transfer of

disqualified assets.   Under section 6015(c)(4)(A), the portion of

the deficiency for which petitioner is liable is increased by the

value of the disqualified assets that were transferred to her.

In this case, petitioner’s portion of the 1999 tax deficiency

would have been zero absent the transfer of disqualified assets

because of her eligibility to make an election to limit her

liability under section 6015(c)(3).    The value of the

disqualified assets petitioner received, however, far exceeds
                              - 27 -

petitioner’s liability for the 1999 tax deficiency.

Consequently, her election under section 6015(c) does not allow

her to avoid liability for those taxes.

Section 6015(f) Analysis

     Section 6015(f) provides an additional opportunity for

relief to those taxpayers who do not otherwise meet the

requirements of subsection (b) or (c) of section 6015.

Specifically, section 6015(f) gives respondent the discretion to

grant equitable relief from joint and several liability if

“taking into account all the facts and circumstances, it is

inequitable to hold the individual liable for any unpaid tax”.

     We have jurisdiction to review respondent’s denial of

petitioner’s request for equitable relief under section 6015(f).

Jonson v. Commissioner, 118 T.C. 106, 125 (2002); Butler v.

Commissioner, 114 T.C. 276, 292 (2000).   We review such denial of

relief to decide whether respondent abused his discretion by

acting arbitrarily, capriciously, or without sound basis in fact.

Jonson v. Commissioner, supra at 125; Butler v. Commissioner,

supra at 292.   The review of respondent’s denial of petitioner’s

request for relief under section 6015(f) is a question of fact.

Cheshire v. Commissioner, 115 T.C. 183, 198 (2000), affd. 282

F.3d 326 (5th Cir. 2002).   Petitioner bears the burden of proving

that respondent abused his discretion.    Washington v.

Commissioner, 120 T.C. 137, 146 (2003); see also Alt v.
                               - 28 -

Commissioner, 119 T.C. 306, 311 (2002) (“Except as otherwise

provided in section 6015, petitioner bears the burden of

proof.”); Jonson v. Commissioner, supra at 113 (same).

       As directed by section 6015(f), respondent has prescribed

procedures to use in determining whether a relief-seeking spouse

qualifies for relief under section 6015(f).    At the time that

petitioner filed her Petition for Determination of Relief from

Joint and Several Liability on a Joint Return, March 10, 2002,

those procedures were found in Rev. Proc. 2000-15, 2000-1 C.B.

447.    Section 4.01 of Rev. Proc. 2000-15, 2000-1 C.B. at 448,

lists seven threshold conditions that must be satisfied before

respondent will consider a request for relief under section

6015(f).    The threshold conditions are as follows:

            (1) The requesting spouse filed a joint return for
       the taxable year for which relief is sought;

            (2) Relief is not available to the requesting
       spouse under [section] 6015(b) or 6015(c);

            (3) The requesting spouse applies for relief no
       later than two years after the date of the Service’s
       first collection activity after July 22, 1998, with
       respect to the requesting spouse;

            (4) * * * the liability remains unpaid. * * *

            (5) No assets were transferred between the spouses
       filing the joint return as part of a fraudulent scheme
       by such spouses;

            (6) There were no disqualified assets transferred
       to the requesting spouse by the nonrequesting spouse.
       If there were disqualified assets transferred to the
       requesting spouse by the nonrequesting spouse, relief
       will be available only to the extent that the liability
                              - 29 -

      exceeds the value of such disqualified assets. For
      this purpose, the term “disqualified asset” has such
      meaning given such term by section 6015(c)(4)(B); and

           (7) The requesting spouse did not file the return
      with fraudulent intent.

Id.   A requesting spouse must satisfy all seven threshold

conditions before respondent will consider his or her request for

equitable relief under section 6015(f).     Id.   We have upheld the

use of these procedures in reviewing a negative determination.

See Washington v. Commissioner, supra at 147; Jonson v.

Commissioner, supra at 125.

      Respondent denied petitioner’s request for equitable relief

under section 6015(f) because she did not meet all seven of the

threshold conditions listed above.     Specifically, respondent

concluded that petitioner received a transfer of disqualified

assets from Mr. Ohrman in violation of the sixth condition of

Rev. Proc. 2000-15, sec. 4.01.   Respondent reached this

conclusion by considering the time line of events beginning with

petitioner’s receipt of the May 29, 2001, letter of proposed

changes to petitioner’s and Mr. Ohrman’s reported tax liability

for 1999, the transfer of assets from Mr. Ohrman to petitioner

pursuant to the separation agreement, and statements made by

petitioner and Mr. Ohrman during their separate interviews with

respondent.   Petitioner maintains that she did not receive a

transfer of disqualified assets; thus, petitioner argues that she
                              - 30 -

has satisfied the threshold requirements of Rev. Proc. 2000-15,

sec. 4.01.

     Because we decided that petitioner received a transfer of

disqualified assets from Mr. Ohrman, we conclude that petitioner

does not meet all seven of the threshold conditions of Rev. Proc.

2000-15, sec. 4.01.   Accordingly, we conclude that respondent did

not abuse his discretion by acting arbitrarily, capriciously, or

without sound basis in fact in denying petitioner’s request for

equitable relief under section 6015(f).

Conclusion

     We hold that respondent did not err in denying petitioner

relief from joint and several liability under section 6015 with

respect to the joint return filed with Mr. Ohrman for 1999.   We

have considered the arguments of the parties not specifically

addressed in this opinion.   Those arguments are either without

merit or irrelevant to our decision.

     To reflect the foregoing,


                                          Decision will be entered

                                    for respondent.
