                  T.C. Summary Opinion 2007-29



                     UNITED STATES TAX COURT



                  ELSIE R. GARZA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5149-06S.               Filed February 27, 2007.



     Elsie R. Garza, pro se.

     Chong S. Hong and Daniel W. Layton, for respondent.



     COUVILLION, Special Trial Judge:    This case was heard

pursuant to section 7463 in effect when the petition was filed.1

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

and this opinion should not be cited as authority.




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

     Respondent determined deficiencies of $3,525 and $2,842 in

petitioner’s Federal income taxes for taxable years 2002 and

2003, respectively.   Petitioner does not challenge these

deficiencies.   This case involves petitioner’s election to seek

relief from joint and several liability for Federal income taxes

for 2002 and 2003 under section 6015(b), (c), or (f).2

Respondent determined that petitioner is not entitled to relief

under any of the aforementioned subsections of section 6015.   The

sole issue for decision is whether petitioner is entitled to

relief under section 6015(b), (c), or (f) for taxable years 2002

and 2003.

     Some of the facts were stipulated.   Those facts, with the

annexed exhibits, are so found and are made part hereof.

Petitioner’s legal residence at the time the petition was filed

was Fresno, California.




     2
      Prior to filing the petition in this case, petitioner
participated in a case in which the Court decided that she and
her spouse were liable for deficiencies in taxes for 1999-2001.
See Garza v. Commissioner, T.C. Summary Opinion 2005-95.
Petitioner meaningfully participated in that proceeding and did
not seek relief under sec. 6015 at that time. Accordingly, the
Court granted respondent’s motion for partial summary judgment in
this case since the judicial doctrine of res judicata bars
petitioner from requesting sec. 6015 relief for 1999-2001, the
years at issue in the prior proceeding. Sec. 6015(g)(2); Huynh
v. Commissioner, T.C. Memo. 2006-180 (where a requesting spouse
meaningfully participated in a prior proceeding, did not seek
sec. 6015 relief at that time, and that proceeding’s decision has
become final, the requesting spouse is barred from seeking relief
for the years at issue in the prior proceeding).
                                - 3 -

     During the years at issue, petitioner was married to Mario

O. Garza (Mr. Garza).   Petitioner and Mr. Garza have been married

for nearly 25 years.    They physically separated on March 8, 2001,

when they were evicted from their home.    Petitioner has resided

with her mother since the eviction.     Mr. Garza moved in with his

father sometime in October or November 2001.    Although she lived

apart from him, petitioner frequently received mail, including

tax information, addressed to Mr. Garza.    Accordingly, Mr. Garza

went to petitioner’s mother’s house nearly daily to pick up his

mail.    Petitioner visited Mr. Garza at least two to three times a

week at his father’s house.   Thus, petitioner and Mr. Garza

remained married and maintained contact with each other after

their eviction and physical separation.

     Petitioner was employed during the years at issue by Aetna

Insurance Co. processing medical claims.    Though technically

retired since 1998, Mr. Garza continued to receive nonemployee

compensation from renewed life insurance policies (renewal

income) he had sold while he was employed as an independent

insurance agent by American Income Life Insurance Co. (AILIC).3

     3
      As an agent for AILIC, Mr. Garza sold insurance policies
and earned a commission for each sale. AILIC advanced him
anticipated commissions and paid for certain expenses he
incurred. These amounts were added to Mr. Garza’s outstanding
account balances due to AILIC. During the time he worked for
AILIC, these advances and expenses amounted to almost $90,000.
During the years at issue, all commissions coming to and
creditable to Mr. Garza were applied to his outstanding account
                                                   (continued...)
                                - 4 -

     On a joint Federal income tax return for 2002, petitioner

and Mr. Garza claimed an overpayment of tax in the amount of

$449.    The return did not include insurance renewal payments in

the amount of $14,405 received by Mr. Garza and a $1,688 annuity

distribution petitioner received that year.    On August 9, 2004, a

notice of deficiency was issued to petitioner and Mr. Garza in

which respondent determined a deficiency of $3,525 in Federal

income tax for 2002 based on the failure to include these items

of income on their return.    Neither petitioner nor Mr. Garza

petitioned this Court in response to the notice of deficiency.

     On their joint Federal income tax return for 2003,

petitioner and Mr. Garza reported a tax due of $792.    The return

did not include renewal income in the amount of $10,137.19 that

had been received by Mr. Garza.    On October 3, 2005, a notice of

deficiency was issued to petitioner and Mr. Garza in which

respondent determined a deficiency of $2,842 based on the omitted

income.    Neither petitioner nor Mr. Garza petitioned this Court

in response to the notice of deficiency.

     The relationship later soured between petitioner and Mr.

Garza.    After a series of altercations, they legally separated

sometime in July 2004.    Petitioner obtained a temporary

restraining order against Mr. Garza on July 14, 2004, and filed

for divorce on August 23, 2004.    The Superior Court of


     3
      (...continued)
balances owed to AILIC.
                               - 5 -

California, County of Fresno, granted petitioner a protective

order on April 21, 2005.   Petitioner was still involved in

divorce proceedings at the time of trial in this case.

     Petitioner filed a Form 8857, Request for Innocent Spouse

Relief, on August 24, 2005, claiming that the omitted items of

income for 2002 and 2003 were Mr. Garza’s income and that he

refused to include these items of income on the returns.4     On a

Form 12507, Innocent Spouse Statement, Mr. Garza claimed that

petitioner knew of the omitted items of income for the years at

issue.   On February 22, 2006, respondent issued separate Final

Notices for 2002 and 2003 to petitioner determining that she was

not entitled to relief from joint and several liability under

section 6015(b), (c), or (f) because she had actual knowledge and

reason to know of the omitted income that gave rise to the

deficiencies.

     Petitioner alleges in her petition that she is entitled to

relief from joint and several liability under section 6015

because Mr. Garza concealed from her the insurance renewal income

that gave rise to the tax liabilities.   Pursuant to Rule 325 and

King v. Commissioner, 115 T.C. 118 (2000), respondent served Mr.

Garza with notice of this proceeding and his right to intervene.




     4
      In the Stipulation of Settled Issues, petitioner conceded
her liability for the tax due on a $1,688 annuity distribution
she received in taxable year 2002.
                               - 6 -

He did not file a notice of intervention and did not appear or

participate in the trial of this case.

     A taxpayer may petition this Court for review of the

Commissioner’s determination denying relief under section 6015.

Sec. 6015(e)(1)(A).   The petition was filed timely in response to

the Final Notices that denied petitioner’s request for section

6015 relief from her income tax liabilities for the years at

issue.   Thus, the Court has jurisdiction to review the

Commissioner’s denial of section 6015 relief for 2002 and 2003.

     Generally, married taxpayers may elect to file a Federal

income tax return jointly.   Sec. 6013(a).    Each spouse filing a

joint return is jointly and severally liable for the accuracy of

the return and the entire tax due.     Sec. 6013(d)(3).   Under

certain circumstances, however, section 6015 provides relief from

joint liability.   Section 6015 applies to any liability for tax

arising after July 22, 1998, and to any liability for tax arising

on or before July 22, 1998, remaining unpaid as of such date.

Internal Revenue Service Restructuring and Reform Act of 1998,

Pub. L. 105-206, sec. 3201(g), 112 Stat. 740.

     In general terms, there are three avenues of relief under

section 6015:   Section 6015(b) provides relief with respect to

certain erroneous items on the return, section 6015(c) provides

for a separation of liability for separated taxpayers, and

section 6015(f) more broadly confers on the Secretary discretion
                                 - 7 -

to grant equitable relief for taxpayers who otherwise do not

qualify for relief under either subsection (b) or (c).

     A prerequisite for relief under section 6015(b) or (c) is

the existence of an “understatement of tax” or a tax deficiency.

Sec. 6015(b)(1)(B), (c)(1); Block v. Commissioner, 120 T.C. 62,

65-66 (2003).   Except as otherwise provided in section 6015, the

requesting spouse bears the burden of proving that each

requirement of section 6015(b)(1) has been satisfied.    Rule

142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), affd. 101

Fed. Appx. 34 (6th Cir. 2004).

     Under section 6015(b), the Court may grant a taxpayer full

or apportioned relief from joint and several liability for an

understatement of tax on a joint return if, among other

requirements,5 the taxpayer establishes that she “did not know,

and had no reason to know” that the other spouse understated that

spouse’s tax liability on the return.    Sec. 6015(b)(1)(C), (2).

     Where a spouse seeking relief has actual knowledge of the

underlying transaction that produced the omitted income, innocent

spouse relief is denied.   Cheshire v. Commissioner, 115 T.C. 183,

192-193 (2000), affd. 282 F.3d 326 (5th Cir. 2002).   The

requesting spouse has “reason to know” of the understatement of



     5
      Neither respondent nor petitioner disputes that, in this
case, the requirements of subpars. (A), (B), and (E) of sec.
6015(b)(1) have been satisfied. The dispute is solely as to
whether petitioner meets the requirements of subpars. (C) and (D)
of sec. 6015(b)(1).
                                - 8 -

tax if she knew every fact necessary to determine the legal

consequences of the income or if such facts are reasonably within

her reach; ignorance of the attendant tax consequences is not a

defense.   Mitchell v. Commissioner, 292 F.3d 800, 804-804 (D.C.

Cir. 2002), affg. T.C. Memo. 2000-332; Price v. Commissioner, 887

F.2d 959, 964 (9th Cir. 1989); McCoy v. Commissioner, 57 T.C.

732, 734-735 (1972).

     In the instant case, the Court finds that petitioner knew or

had reason to know of the understatements of tax at the time the

returns for 2002 and 2003 were filed.      The Court is satisfied

that petitioner was aware that Mr. Garza received renewal income

during the years at issue.   Petitioner admitted in her testimony

that she was aware that Mr. Garza received renewal income in 1999

because she discussed with him the receipt of such income when

she received in the mail a Form 1099-MISC, Miscellaneous Income,

from AILIC for that year.    Additionally, Mr. Garza’s receipt of

renewal income, as well as the tax consequences arising

therefrom, were the subject of an audit examination conducted by

agents of respondent sometime in 2002 for taxable years 1999-

2001.   At trial, when asked whether she participated in the audit

examination, petitioner testified:      “Yes, that’s when I got my

education on what was going on.”     Moreover, petitioner admitted

on her Form 12510, Questionnaire for Requesting Spouse, that she

questioned Mr. Garza about the renewal income he received during
                               - 9 -

the years at issue and was told not to worry about it.

Petitioner’s basis for requesting relief is that, since she was

told not to worry about the income reported on the Forms 1099-

MISC for 2002 and 2003; i.e., the insurance renewal income, she

was not aware and had no reason to know of the understatements of

tax for the years at issue.

     Even if a spouse requesting relief under section 6015 does

not have actual knowledge of the item giving rise to an

understatement, that spouse may, nonetheless, have reason to know

of the understatement.   A requesting spouse has reason to know of

an understatement if a “reasonably prudent person with knowledge

of the facts possessed by the person claiming * * * [relief]

should have been alerted to the possibility of a substantial

understatement.”   Flynn v. Commissioner, 93 T.C. 355, 365 (1989).

A spouse requesting relief under section 6015 has a duty of

inquiry.   Butler v. Commissioner, 114 T.C. 276, 284 (2000).

     Respondent argues that petitioner had reason to know that

Mr. Garza received renewal income in 2002 and 2003.

Notwithstanding her lack of a business background, the Court is

not convinced that petitioner’s failure to inquire was

reasonable.   Mr. Garza’s unreported renewal income was the only

matter discussed during the 2002 audit examination of taxable

years 1999-2001.   A reasonably prudent taxpayer should have been

alerted to the possibility that, despite retiring from AILIC in
                               - 10 -

1998, Mr. Garza continued to annually receive renewal income when

customers renewed life insurance policies he had sold them.      For

these reasons, petitioner is not entitled to relief under section

6015(b).

     Section 6015(c) affords proportionate relief to the

requesting spouse through allocation of the tax items to the

responsible party.   Generally, this avenue of relief allows a

spouse to elect to be treated as if a separate return had been

filed.   Rowe v. Commissioner, T.C. Memo. 2001-325.    To be

eligible for relief under section 6015(c), the requesting spouse

must no longer be married to, be legally separated from, or have

lived at least 12 months apart from the individual with whom the

tax return was filed.    Sec. 6015(c)(3)(A)(i).   Relief under

section 6015(c) is not available, however, to a taxpayer if it is

shown that the taxpayer had actual knowledge when signing the

return of any “item” giving rise to the deficiency.     Sec.

6015(c)(3)(C).

     As previously discussed, petitioner was in divorce

proceedings and was legally separated from Mr. Garza in July

2004.    However, as noted above, petitioner not only had reason to

know of the understatements at the time the returns were signed,

but she also had actual knowledge of the items giving rise to the

deficiencies.    Because petitioner had actual knowledge of the
                              - 11 -

renewal income, she is precluded from claiming relief under

section 6015(c).

     Petitioner may be considered for relief under section

6015(f) where there is an unpaid tax or deficiency for which she

is not eligible for relief under section 6015(b) or (c).   Sec.

6015(f)(2).   Section 6015(f)(1) provides that a taxpayer may be

relieved from joint and several liability if it is determined,

after considering all the facts and circumstances, that it is

inequitable to hold the taxpayer liable for the unpaid tax or

deficiency.

     The Commissioner has prescribed guidelines that are

considered in determining whether it is inequitable to hold a

requesting spouse liable for all or part of the liability for any

unpaid tax or deficiency.   Rev. Proc. 2003-61, sec. 4.01, 2003-2

C.B. 297, sets forth seven threshold conditions that the

requesting spouse must satisfy before the Commissioner will

consider a request for relief under section 6015(f).6   Respondent

agrees that petitioner has satisfied the threshold conditions.

     Where, as here, the requesting spouse satisfies the

threshold conditions, Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B.



     6
      Rev. Proc. 2000-15, 2000-1 C.B. 447, was superseded by Rev.
Proc. 2003-61, 2003-2 C.B. 296, and is effective as to requests
for relief filed on or after Nov. 1, 2003, and also is effective
for requests for relief pending on Nov. 1, 2003, as to which no
preliminary determination letter had been issued as of that date.
Petitioner’s application for relief was submitted after Nov. 1,
2003, on Aug. 24, 2005. Accordingly, the guidelines found in
Rev. Proc. 2003-61, supra, are applicable in this case.
                              - 12 -

at 298, lists factors to be evaluated for requests for relief

under section 6015 for spouses who filed a joint return and do

not qualify for relief under Rev. Proc. 2003-61, sec. 4.02, 2003-

2 C.B. at 298.7   Rev. Proc. 2003-61, sec. 4.03(2)(a), offers a

nonexclusive list of factors to be considered, including:    (1)

Marital status; (2) economic hardship; (3) no knowledge or reason

to know of the item giving rise to the deficiency; (4) whether

the nonrequesting spouse had a legal obligation to pay the

liability; (5) whether the requesting spouse benefited

significantly from the item giving rise to the deficiency; and

(6) whether the requesting spouse has made a good faith attempt

to comply with the tax laws in subsequent years.   The Court

considers these factors in determining whether equitable relief

under section 6015(f) should be provided to petitioner.

     The Court reviews the Commissioner’s denial of section

6015(f) relief under an abuse of discretion standard.     Butler v.

Commissioner, supra at 287-292.   The Court defers to the

Commissioner’s determination unless it is arbitrary, capricious,

or without sound basis in fact.   Jonson v. Commissioner, 118 T.C.

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




     7
      Petitioner seeks relief from the understatements of tax
attributable to omitted renewal income from 2002 and 2003.
Because Rev. Proc. 2003-61, sec. 4.02, considers circumstances
where equitable relief may be granted for underpayments of tax,
petitioner does not qualify for relief under sec. 4.02.
                               - 13 -

Petitioner bears the burden of proving that there was an abuse of

discretion.   Abelein v. Commissioner, T.C. Memo. 2004-274.

     In the case of an income tax liability that arises from a

deficiency, as exists in this case, a finding that the requesting

spouse had actual knowledge of the item giving rise to the

deficiency is an extremely strong factor weighing against relief.

Rev. Proc. 2003-61, sec. 4.03(2)(a)(iii)(B).   Thus, petitioner

must establish that she did not know about Mr. Garza’s renewal

income during 2002 and 2003.

     As discussed earlier, petitioner had actual knowledge of Mr.

Garza’s renewal income.    In the 2002 audit examination, the sole

issue was Mr. Garza’s receipt of renewal income in taxable years

1999-2001.    Petitioner was present during the audit examination

and testified that the audit examiner made her aware that Mr.

Garza, even though retired, continued to receive renewal income

from AILIC.   Further, petitioner does not dispute that the Forms

1099-MISC for Mr. Garza’s renewal income for the years at issue

were sent directly to her at her mother’s address.   Petitioner

testified that Mr. Garza checked the mail at her mother’s address

while petitioner was working and took the Forms 1099-MISC without

her knowledge.   On her Form 12510, however, petitioner stated

that she inquired many times about the omitted renewal income and

was told not to worry about it.   The Court finds that petitioner

had actual knowledge of the items giving rise to the
                                - 14 -

deficiencies.8    Petitioner’s actual knowledge is a strong factor

weighing against relief, which can be overcome only if the

factors in favor of equitable relief are particularly compelling.

     Petitioner contended at trial that she would experience

economic hardship if she were forced to pay the tax liabilities

for the years at issue.    A taxpayer might experience economic

hardship if he or she is unable to pay basic reasonable living

expenses.   Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.      It

is the taxpayer’s burden to show both that the expenses qualify

and that they are reasonable.     Monsour v. Commissioner, T.C.

Memo. 2004-190.    Despite her assertion that paying the tax

liabilities would cause her to experience economic hardship,

petitioner provided no evidence at trial that she would be unable

to pay basic living expenses if she were held liable for the

deficiencies.    As noted earlier, petitioner was and remains

gainfully employed.    The Court fails to see, and petitioner has

not established, that she would suffer economic hardship if her

request for relief were denied.    This factor weighs against

granting relief to petitioner.

     On the basis of the facts and circumstances in this case,

including the factors set forth in Rev. Proc. 2003-61, supra, the

     8
      Rev. Proc. 2003-61, sec. 4.03(2)(a)(iii)(c), provides
factors to consider in determining whether the requesting spouse
had reason to know of the item giving rise to the deficiency.
Because the Court is convinced that petitioner had actual
knowledge of the omitted items of income, consideration of these
factors is superfluous.
                               - 15 -

Court concludes that there was no abuse of discretion in denying

petitioner’s request for relief under section 6015(b), (c), or

(f) for taxable years 2002 and 2003.    To the extent not addressed

herein, other considerations are without merit or unnecessary to

address.    The Court, therefore, sustains respondent’s

determination that petitioner is not entitled to relief from

joint liability pursuant to section 6015(b), (c), or (f) for

taxable years 2002 or 2003.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                          Decision will be entered

                                     for respondent.
