                     T.C. Summary Opinion 2008-74


                       UNITED STATES TAX COURT



                  JOSEPH B. YAKUBIK, Petitioner,
            AND SUSAN M. (YAKUBIK) WILEY, Intervenor
                                v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21773-06S.              Filed June 26, 2008.



     Joseph B. Yakubik, pro se.

     Susan M. (Yakubik) Wiley, pro se.

     Denise A. DiLoreto, for respondent.



     GOEKE, Judge:    This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

effect at the time the petition was filed.    Pursuant to section


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                - 2 -

7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent

for any other case.   Petitioner seeks review of respondent’s

determination denying him relief from joint and several liability

for the 2003 tax year under section 6015(b), (c), and (f).

     We review respondent’s determination for an abuse of

discretion, and for the reasons explained herein we find

respondent’s determination denying petitioner relief from joint

and several liability under section 6015(f) was in error.

                             Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    At the time the petition

was filed, petitioner resided in West Virginia.

     Petitioner and intervenor were married throughout 2003 and

divorced on June 8, 2005.    During 2003 intervenor was employed by

a local attorney as a paralegal.    Intervenor earned wages, was

paid by check, and received a Form W-2, Wage and Tax Statement,

at the end of 2003.   Intervenor earned about $4,455 in wages

during 2003.

     At some point during 2003, intervenor began to embezzle

funds from her employer.    In addition to this embezzlement

intervenor began to write bad checks from petitioner and

intervenor’s joint bank account and to forge checks belonging to
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petitioner’s stepfather.   It is unclear from the record whether

intervenor stole checks from petitioner’s stepfather and used

them to make purchases or stole checks issued to petitioner’s

stepfather and forged the endorsement in order to cash those

checks.

     Intervenor was arrested for allegedly committing a number of

felonies.   Pursuant to a plea agreement intervenor pleaded guilty

to a number of felonies including forgery and embezzlement.    On

December 1, 2003, intervenor was sentenced in the Circuit Court

of Randolph County, West Virginia, to a term of not less than 1

but no more than 10 years in State prison.   Intervenor was also

ordered to pay restitution of $17,000 to her former employer and

to pay $3,000 to petitioner’s stepfather for the forged checks.

Intervenor was incarcerated from October 20, 2003, to November 9,

2005, and was paroled on November 9, 2005.

     On March 8, 2004, petitioner and intervenor filed a joint

Form 1040, U.S. Individual Income Tax Return, for tax year 2003.

Although intervenor was incarcerated at the time, she executed a

Form 2848, Power of Attorney and Declaration of Representative,

for tax year 2003 giving petitioner the authority to act on her

behalf.   Petitioner used this authority to file their joint

return.   Petitioner and intervenor failed to include on the joint

return the amount intervenor embezzled from her former employer,

the amount of forged checks related to petitioner’s stepfather,
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or the wages intervenor earned as a paralegal.   On the basis of

the Form 1040, respondent issued to petitioner a refund of

$5,017.   Because petitioner did not report the embezzled funds

and wages on the joint return, petitioner and intervenor

qualified for an earned income credit that they would not have

qualified for had those amounts been included in income.

     Petitioner did not file an amended return after receiving

the Form W-2 from intervenor’s employer.    Respondent examined the

joint return and issued a notice of deficiency (the notice) on

May 31, 2005.   The notice determined that the $17,000 intervenor

embezzled and the $4,455 intervenor earned should have been

included in income.   The notice did not include in income the

$3,000 worth of forged checks.    Respondent determined an increase

of $5,188 in petitioner and intervenor’s tax liability and an

accuracy-related penalty of $996 under section 6662.   Neither

petitioner nor intervenor petitioned this Court to challenge

respondent’s determinations in the notice.

     On or about December 28, 2005, petitioner submitted a Form

8857, Request for Innocent Spouse Relief.    On January 26, 2006,

respondent notified intervenor by letter of petitioner’s request

for relief from joint and several liability.

     On April 3, 2006, respondent sent separate letters to

petitioner and intervenor indicating respondent’s preliminary

determination to grant petitioner relief from liability under
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section 6015(c) and deny relief under section 6015(f).     On May 5,

2006, intervenor sent a letter to respondent with attachments

disagreeing with respondent’s determination regarding

petitioner’s claim for relief.    These attachments included a

brief statement of disagreement, a copy of intervenor’s

sentencing order, and a copy of intervenor’s restitution order.

     On July 27, 2006, respondent issued a final notice of

determination denying petitioner’s request for relief from joint

and several liability under section 6015(b), (c), and (f).       On

October 25, 2006, petitioner mailed to the Court a letter that

was filed as an imperfect petition.      The Court ordered petitioner

to submit a proper amended petition to conform with the Rules.

On December 14, 2006, the Court received and filed petitioner’s

amended petition seeking a review of respondent’s determinations.

                             Discussion

     Section 6013(d)(3) provides that taxpayers filing joint

Federal income tax returns are jointly and severally liable for

the taxes due.   Section 6015, however, provides that

notwithstanding section 6013(d)(3), under certain facts and

circumstances limited relief from joint and several liability may

be available under section 6015(b), (c), or (f).     Except as

otherwise provided in section 6015, the taxpayer seeking relief

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).
                                - 6 -

To prevail, the taxpayer must show the Commissioner’s

determination was arbitrary, capricious, or without sound basis

in law or fact.    Butler v. Commissioner, 114 T.C. 276, 291-292

(2000).

     Intervenor, as the nonelecting spouse, had the right to

intervene in this proceeding by filing a notice of intervention.

See sec. 6015(e)(4); Rule 325; Corson v. Commissioner, 114 T.C.

354, 364-365 (2000).    By exercising that right, intervenor became

a party to this case.    See Tipton v. Commissioner, 127 T.C. 214,

217 (2006).

Section 6015(b)

     Petitioner first seeks relief under section 6015(b).    To

qualify for relief pursuant to section 6015(b)(1), the requesting

spouse must establish that:    (1) A joint return was filed; (2)

there was an understatement of tax attributable to erroneous

items of the nonrequesting spouse; (3) at the time of signing the

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

to know, of the understatement; (4) taking into account all the

facts and circumstances, it is inequitable to hold the spouse

seeking relief liable for the deficiency in tax attributable to

the understatement; and (5) the requesting spouse seeks relief

within 2 years of the first collection activity.

     Petitioner’s request for relief fails to satisfy section

6015(b)(1)(C).    Petitioner’s knowledge of how much money
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intervenor embezzled is not clear.      During their marriage they

shared a joint bank account, but their testimony varied as to who

had access to this account.   Petitioner testified that intervenor

maintained control over the account and that he would give his

paychecks to intervenor, who would then deposit them into the

joint account.   Intervenor, however, testified that petitioner

did in fact make deposits to the joint account and also possessed

an ATM card he used to make withdrawals.

     At trial petitioner testified that he did not include those

amounts on the joint return because he did not know how much

intervenor had embezzled and because he had never received a Form

W-2 for intervenor’s employment.   Petitioner later admitted that

he had received a Form W-2 for intervenor after he had filed the

joint return.    Petitioner testified that although he was present

at intervenor’s sentencing and knew that she had embezzled funds,

he was unaware of the amount because he was not allowed to remain

in the courtroom while the prosecutor, the presiding judge, and

intervenor discussed how much restitution was to be paid.

Intervenor, however, testified that she had told petitioner the

amount of restitution she was ordered to pay and that petitioner

knew the amount before filing the joint return.      Although

petitioner testified at trial that he was not in the courtroom

during the portion of intervenor’s sentencing when amounts of

restitution were discussed and that he had not received a Form W-
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2 from intervenor’s employer until after filing the return,

petitioner knew that intervenor had both embezzled funds and

earned wages during 2003 and failed to include those amounts on

the return.

     Petitioner, although unaware of the exact amounts intervenor

had embezzled and earned, had reason to know of the

understatement.

Section 6015(c)

     A taxpayer may elect to seek relief under section 6015(c) if

(1) at the time the election was made, the taxpayer was no longer

married to, or was legally separated from, the person with whom

the joint return was filed, or (2) for the 12-month period

preceding the time of making the election the taxpayer did not

live with such person.   If a taxpayer elects relief under section

6015(c), such taxpayer’s “liability for any deficiency which is

assessed with respect to the return shall not exceed the portion

of such deficiency properly allocable to the individual” under

section 6015(d).   Sec. 6015(c)(1).    Relief is not available under

section 6015(c) with respect to an unpaid liability reported in a

return.

     If the Commissioner proves that the electing spouse had

actual knowledge at the time he signed the return of any item

giving rise to the deficiency and the item was allocable to the

nonrequesting spouse, then the election is invalid with respect
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to the portion of the deficiency that is attributable to the

item.   See sec. 6015(c)(3)(C); sec. 1.6015-3(c)(2), Income Tax

Regs.

     As stated above, petitioner’s request for relief fails to

satisfy section 6015(b) because he had reason to know of the

items giving rise to the understatement.   In order to determine

whether petitioner qualifies for relief under section 6015(c), we

must determine whether petitioner had actual knowledge, rather

than a reason to know, of the items giving rise to the

deficiency.   We believe that petitioner had actual knowledge of

intervenor’s earnings and embezzled income.   Although petitioner

did not know the exact amounts intervenor earned and embezzled,

he knew all of the facts surrounding those items.   Petitioner was

aware that intervenor had worked throughout the year and had been

arrested and sentenced for embezzlement.   Thus, petitioner’s

request for relief fails to satisfy section 6015(c).

Section 6015(f)

     The only remaining opportunity for relief to petitioner is

section 6015(f).   Section 6015(f) provides that the Secretary may

relieve an individual of joint and several liability if (1)

relief is not available to the individual under section 6015(b)

or (c), and (2) taking into account all the facts and

circumstances, it is inequitable to hold the individual liable

for any unpaid tax or deficiency.   The Commissioner has
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prescribed guidelines in Rev. Proc. 2003-61, 2003-2 C.B. 296, for

determining whether relief should be granted under section

6015(f).   To prevail under section 6015(f), petitioner must show

that respondent’s denial of equitable relief under that section

was an abuse of discretion.    We review respondent’s denial of

relief under section 6015(f) for an abuse of discretion.

     Respondent argues that in evaluating petitioner’s request

under section 6015(f), we are limited to the administrative

record as compiled by respondent.    This Court has recently ruled

that our review under section 6015(f) is not limited to the

administrative record.   See Porter v. Commissioner, 130 T.C. ___

(2008).    If we find that respondent abused his discretion in

denying petitioner relief, we will determine the appropriate

relief, rather than remanding the case to the Internal Revenue

Service.    See Friday v. Commissioner, 124 T.C. 220, 222 (2005).

     Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297, 298,

lists seven threshold conditions that the Commissioner considers

in determining whether an individual qualifies for equitable

relief under section 6015(f).    The Commissioner will not grant

relief unless these threshold conditions have been met:    (1) The

taxpayer must have filed joint returns for the taxable years for

which relief is sought; (2) the taxpayer does not qualify for

relief under section 6015(b) or (c); (3) the taxpayer must apply

for relief no later than 2 years after the date of the
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Commissioner’s first collection activity after July 22, 1998,

with respect to the taxpayer; (4) no assets were transferred

between the spouses filing the joint returns as part of a

fraudulent scheme by such spouses; (5) there were no disqualified

assets transferred to the taxpayer by the nonrequesting spouse;

(6) the taxpayer did not file the returns with fraudulent intent;

and (7) absent enumerated exceptions, the liability from which

relief is sought is attributable to an item of the nonrequesting

spouse.

     Respondent concedes, and we agree, that petitioner satisfies

these seven threshold conditions.

     Rev. Proc. 2003-61, sec. 4.03(2), 2003-2 C.B. at 298, lists

eight nonexclusive factors that the Commissioner will consider in

determining whether, taking into account all the facts and

circumstances, it is inequitable to hold the requesting spouse

liable for all or part of the deficiency and full or partial

equitable relief under section 6015(f) should be granted. These

nonexclusive factors include whether:   (1) The requesting spouse

is separated or divorced from the nonrequesting spouse; (2) the

requesting spouse will suffer economic hardship without relief;

(3) the requesting spouse did not know or have reason to know of

the item giving rise to the deficiency; (4) the nonrequesting

spouse had a legal obligation to pay the outstanding liability;

(5) the requesting spouse received a significant benefit from the
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item giving rise to the deficiency; (6) the requesting spouse has

made a good faith effort to comply with income tax laws in

subsequent years; (7) the requesting spouse was abused by the

nonrequesting spouse; and (8) the requesting spouse was in poor

mental or physical health when signing the return or requesting

relief.   Rev. Proc. 2003-61, sec. 4.03(2), further provides that

no single factor will controlling; all relevant factors will be

considered and weighed appropriately.

     1.     Petitioner’s Marital Status

     Petitioner was divorced from intervenor when he sought

relief.   This factor favors petitioner.

     2.     Economic Hardship

     Respondent’s Appeals Office determined that petitioner will

not suffer economic hardship if relief is not granted.    Rev.

Proc. 2003-61, sec. 4.02(1)(c), 2003-2 C.B. at 298, provides that

the Commissioner will base this determination on rules similar to

those provided in section 301.6343-1(b)(4), Proced. & Admin.

Regs., which provides that the requesting spouse will suffer

economic hardship if he is unable to pay his reasonable basic

living expenses.

     Petitioner’s request for relief indicates that at the time

petitioner sought relief, he was earning $1,200 per month and

spending $1,100 per month on his average monthly household

expenses.    Respondent’s Appeals Case Memorandum states that
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“[petitioner] has not demonstrated that he would have an economic

hardship if required to pay the tax.”      Respondent’s final

determination makes no mention of economic hardship and instead

relies on petitioner’s knowledge of the embezzlement in order to

deny relief.

     We disagree with respondent on this factor.     Petitioner has

minimal education and although currently employed, testified

credibly that his hours had recently been cut back.      The record

shows that petitioner would suffer economic hardship if relief

were not granted.    This factor favors petitioner, and the

examiner’s evidence in the record supports a determination of

hardship.

     3.     Knowledge or Reason To Know

     Respondent’s Appeals Office determined that petitioner’s

knowledge or reason to know of the item giving rise to the

deficiency weighed against relief, and we agree.

     4.     Intervenor’s Legal Obligation

     Petitioner’s and intervenor’s divorce agreement is silent as

to who is responsible for paying any outstanding taxes.

Respondent determined that this factor is neutral, and we agree.

     5.     Significant Benefit

     We consider a lack of a significant benefit to the taxpayer

seeking relief from joint and several liability a factor favoring

relief.     Beatty v. Commissioner, T.C. Memo. 2007-167.
                               - 14 -

Respondent’s Appeals officer determined that petitioner had not

received any significant benefit.   At trial counsel for

respondent argued that although petitioner did not receive a

significant benefit, he nonetheless benefited and this factor

should weigh against relief.

     Petitioner testified that a portion of the refund was used

(1) to pay restitution for bad checks written by intervenor, (2)

to pay past-due bills and rent, and (3) to purchase Christmas

gifts for intervenor’s children.    Intervenor, however, testified

that the only restitution payments made on her behalf were made

by her and were based upon her earnings while at a work release

center.   Intervenor testified that she made restitution payments

for three bad checks she had written during 2003 because she was

required to do so before she could have her driver’s license

reinstated.   Intervenor was unable to recall whether the three

bad checks she had paid restitution on in order to reclaim her

driver’s license were the only bad checks she had written during

2003.

     We disagree with respondent on this factor.   Petitioner

testified credibly at trial how he used the refund to make

payments on behalf of intervenor, including restitution on bad

checks, paying past-due bills for rent, electricity, and other

costs, and for Christmas presents for intervenor’s children while

she was incarcerated.   According to petitioner, intervenor was
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responsible for paying household bills before her incarceration

but had stopped paying them.    Intervenor never informed

petitioner that their living expenses were no longer being paid

before her being arrested.    This factor favors granting relief to

petitioner.

     6.     Good Faith Effort To Comply With Tax Laws

     Respondent determined, and we agree, that petitioner has

made a good faith effort to comply with tax laws.    Petitioner has

filed all required tax returns, and this factor is considered

neutral since petitioner was in compliance.

     7.     Spousal Abuse

     Petitioner did not allege that there was abuse in his former

marriage.     Respondent determined that this factor is neutral, and

we agree.

     8.     Mental or Physical Health

     There is no evidence in the record that petitioner suffered

any ailment that would have affected his ability to pay his

Federal income tax obligations for the years in issue.

Respondent determined that this factor is neutral, and we agree.

Conclusion

     In sum, three factors weigh in favor of relief, one factor

weighs against relief, and four factors are neutral.     Rev. Proc.

2003-61, sec. 4.03(2)(a)(iii)(B), provides that in deficiency

cases, reason to know of the item giving rise to the deficiency
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will not be given more weight than other factors, but that actual

knowledge of the item weighs heavily against relief.     Actual

knowledge weighing against relief may be overcome if those

factors weighing in favor of relief are particularly compelling.

Id.

      Petitioner’s lack of significant benefit, his marital

status, and the prospect of economic hardship are sufficiently

compelling and outweigh petitioner’s knowledge of intervenor’s

earnings and embezzled income.    Taking into account all of the

facts and circumstances, we find that it would be inequitable to

deny petitioner relief from joint and several liability.     We

hereby conclude on the facts of this case that respondent has

abused his discretion in denying petitioner relief from joint and

several liability under section 6015(f).

      To reflect the foregoing,


                                           Decision will be entered

                                       for petitioner.
