                  T.C. Summary Opinion 2003-27



                     UNITED STATES TAX COURT



                 S.W. DEPASTURE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 615-00S.                Filed March 26, 2003.



     L. Andrew Smith, for petitioner.

     Brandi B. Darwin, for respondent.



     CARLUZZO, 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.    Except for section

60151 and unless otherwise indicated, subsequent section


     1
       Sec. 6015 was added to the Internal Revenue Code by the
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3201(a), 112 Stat. 734, effective for any
liability for tax arising after July 22, 1998, and any liability
for tax arising on or before July 22, 1998, but remaining unpaid
as of July 22, 1998.
                                   - 2 -

references are to the Internal Revenue Code in effect for the

years in issue.   Rule references are to the Tax Court Rules of

Practice and Procedure.    The decision to be entered is not

reviewable by any other court, and this opinion should not be

cited as authority.

     Respondent determined deficiencies in, and penalties with

respect to, petitioner’s Federal income taxes as follows:

     Year             Deficiency           Sec. 6662(a) Penalty

     1994              $20,184                    $4,005
     1995               29,432                     5,886

     The issues for decision for each year are:    (1) Whether

shareholder pro rata income from an S corporation is understated

on the joint Federal income tax return filed by petitioner and

his former spouse; (2) whether petitioner qualifies for relief

from liability under section 6015; and (3) whether the

underpayment of the tax required to be shown on petitioner’s

return is a substantial understatement of income tax.

Background

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

At the time the petition was filed, petitioner resided in

Valdosta, Georgia.

     Petitioner is, and was during all relevant times, a

certified welder.    During each year in issue, petitioner was

employed as a welder by, among other employers, Certified Welding

Services, Inc. (CWS), a Georgia corporation that he organized
                                - 3 -

and incorporated.    In 1984, CWS made an S election, see sec.

1361, that remained in effect for the years in issue.

     Petitioner married Madris Gutierrez (Ms. Gutierrez) in 1975.

They remained married to each other throughout the years in

issue, they separated during 1996, and they were divorced in

1997.

     At one time, petitioner and Ms. Gutierrez owned all of the

stock of CWS.   Some time after the corporation was organized,

however, petitioner and Ms. Gutierrez were advised that the

corporation would enjoy certain competitive business advantages

if all of its stock were held in her name.    Consequently, prior

to 1994, petitioner transferred his stock in CWS to Ms.

Gutierrez.    In the divorce proceeding, CWS was described as

petitioner’s business and, in 1997, in connection with that

proceeding, all of the stock in CWS was transferred to

petitioner.

     Prior to and during his marriage to Ms. Gutierrez, and

before CWS was formed, petitioner was involved in various other

welding businesses.    In connection with each business, he

provided services as a certified welder.    Ms. Gutierrez is not

a welder and except for CWS has no experience in welding

businesses; prior to CWS she was employed as a computer operator

for various companies.    Sometime before 1987, Ms. Gutierrez also

began writing romance novels.    In 1996, she founded New Concepts
                               - 4 -

Publishing (NCP), an electronic publishing company dedicated to

acquiring the rights to romance novels delivered over the

Internet.

     Regardless of who owned its stock at any given time, CWS

functioned, more or less, in the same way from its inception at

least through the years in issue.   Through its employees, which

at all times included petitioner and from time to time other

welders, CWS provided welding services to companies involved in

the construction industry.   CWS competed for and was awarded

contracts at times as a result of petitioner’s reputation in the

industry and at other times based upon estimates or bids prepared

by petitioner.   CWS’s ability to generate income depended upon

petitioner’s efforts to secure contracts and provide the

necessary welding services in accordance with such contracts.

     For the most part, the construction projects involving CWS

and petitioner were located throughout the United States, usually

a substantial distance from where he maintained his residence at

the time.   Consequently, petitioner spent a significant portion

of any given year traveling away from home as an employee of CWS.

This was true in 1994, but because he was in the process of

building a personal residence during 1995, petitioner’s travel as

an employee of CWS was greatly reduced that year.
                                 - 5 -

         Although an employee of CWS, petitioner was not paid a

salary or wages for his services by that company.     The method by

which he was compensated for the welding services he performed is

not entirely clear from the record, but it appears that from time

to time he was paid in accordance with union wage standards by

the contractor (or subcontractor) that had contracted with CWS.

Petitioner’s traveling expenses (transportation, meals, lodging,

etc.) in connection with any particular construction project that

he was working on were paid or reimbursed by CWS.     CWS also

provided petitioner with a truck, welding rigs, and various other

tools.

     CWS maintained at least two checking accounts during the

years in issue.     Presumably, some of the income that CWS received

from various contracts was deposited into these accounts.       In

general, the traveling expenses incurred by petitioner as an

employee of CWS were paid or reimbursed by checks drawn on one of

CWS’s accounts.     These checks were usually made payable to

“cash”.     Various other checks were drawn on these accounts, some

for equipment, some for supplies, some for wages for individuals

other than petitioner, and some for food and other personal items

consumed or used by petitioner and members of his family.2       Some

of the checks made payable to “cash” were not necessarily used to

     2
       Some of these items were paid for directly, others were
purchased by credit card, and the credit card bill was paid by
CWS check.
                                 - 6 -

pay or reimburse petitioner for traveling expenses.    Most of the

checks drawn on the accounts were prepared and signed by Ms.

Gutierrez, but it appears that certain checks, although signed by

Ms. Gutierrez, were actually prepared by someone else.    Some

checks, including checks made payable to cash, were signed by

petitioner.

     In 1993, CWS purchased 94 acres (approximate area, including

dry land and a lake) in Madison, Florida, for $65,5503 (the

Mystic Lake property or the property).    When purchased, the

Mystic Lake property contained four dilapidated structures that

previously had been used as a motel.4    Petitioner and Ms.

Gutierrez, who were then living in Georgia, intended to construct

a personal residence in the likeness of a medieval castle on the

property.     They renovated three of the four existing structures

to a condition that allowed each to be used as a residence by

petitioner, Ms. Gutierrez, and other members of their family

while the “castle” residence was being built.    Renovations on the

fourth structure were completed by early 1995.    As of March 1995,



     3
       There is some question as to whether the purchase price
was $65,000, as indicated by each party’s expert, or $65,550, as
stipulated by the parties. Because the parties have stipulated
to the adjusted basis of the property, the discrepancy is of no
significance.
     4
       Apparently these structures were in such poor condition
that the local real estate assessment authority had removed them
from the real estate tax rolls.
                               - 7 -

a substantial sum5 had been expended in connection with these

renovations.

     On March 2, 1995, CWS distributed the Mystic Lake property

to the petitioner and Ms. Gutierrez (the distribution).    Soon

thereafter, petitioner and Ms. Gutierrez obtained a $300,000

construction loan from Barnett Bank to fund the construction of

the castle residence that they intended to build on the property.

As of the close of 1995, the castle residence was substantially

completed.

     Petitioner and Ms. Gutierrez filed a timely joint Federal

income tax return for each year in issue.   Each return was

prepared by John D. Gaskins,6 a certified public accountant whose

license was later revoked because he was convicted of Federal

income tax evasion.   Income of $64,400 is reported on

petitioner’s 1994 return, which income consists of $34,635 of

shareholder pro rata income from CWS, $29,546 of wages; and $219

of interest.   Income of $33,461 is reported on petitioner’s 1995

return, which income consists of $18,259 of shareholder pro rata



     5
       The parties stipulated that the basis of the Mystic Lake
property had increased by $63,949 as of March 1995. As best as
can be determined from the record, the addition to the property’s
basis is attributable to the improvements made to the four
existing structures. Some of the expenditures now included in
the property’s basis apparently gave rise to deductions claimed
by CWS and disallowed by respondent.
     6
       Mr. Gaskins was also involved as a principal with
petitioner in various welding businesses.
                                - 8 -

income from CWS, $14,095 of wages, $178 of interest, and $929 of

capital gains.    The distribution is not disclosed on their 1995

joint return.

     CWS filed a timely Form 1120S, U.S. Income Tax Return for an

S Corporation, for 1994 and 1995.    Each return was prepared by

Mr. Gaskins and signed by Ms. Gutierrez as CWS’s president.     Some

of the expenditures made in connection with renovations made to

existing buildings on the Mystic Lake property were claimed as

business expense deductions on CWS’s returns for 1994 and 1995.

Some of the expenditures made in connection with the construction

of the castle residence were also claimed as business expense

deductions on CWS’s 1995 return.    The income reported on CWS’s

1995 return did not include income attributable to the

distribution, nor was the distribution otherwise disclosed on

that return.

     Respondent examined the 1994 and 1995 returns of CWS and, as

a result, disallowed various business expense deductions claimed

on each return.    For 1995, respondent also determined that CWS

realized a capital gain of $102,939 from the distribution.7




     7
         Computed as follows in the notice of deficiency:

     Fair market value of Mystic Lake property
      as of Mar. 2, 1995:                           $168,489
     Minus adjusted basis:                           (65,550)
     Capital gain:                                   102,939
                               - 9 -

These adjustments form the basis of the adjustments to the

shareholder pro rata income of CWS here in dispute.     For each

year in issue, respondent also determined that the underpayment

of tax required to be shown on petitioner’s return is due to

negligence and/or a substantial understatement of income tax.

Discussion

1.   Shareholder Pro Rata Income From CWS

      Petitioner now agrees that the shareholder pro rata income

from CWS reported on his return for each year is understated and

that the understatement is measured by the disallowed business

expense deductions claimed by CWS.     Furthermore, although he

disputes respondent’s computation of the amount, petitioner

now agrees that CWS realized capital gain income from the

distribution of the Mystic Lake property, see secs. 311(b),

1371(a); Martin Ice Cream Co. v. Commissioner, 110 T.C. 189,

219-220 (1998); Eustice & Kuntz, Federal Income Taxation of

S Corporations, par. 1.03(2)(d)(ii), at 1-61, par. 8.02(1)(a),

at 8-24, par. 8.04(9), at 8-79 (4th ed. 2001), and that a like

amount of capital gain should have been included in the

shareholder pro rata income reported on petitioner’s 1995

Federal income tax return.   According to petitioner, however,

respondent’s computation of the capital gain is overstated

because respondent overstated the fair market value of the

property and understated the adjusted basis of the property.
                              - 10 -

     The parties now agree that the adjusted basis in the Mystic

Lake property as of the date of the distribution was $129,499.

Consequently, we turn our attention to the fair market value of

that property as of the date it was distributed.

     Each party employed a valuation expert to determine the fair

market value of the Mystic Lake property as of March 2, 1995.

Both experts appraised the land separately from the improvements,

and each expert relied, at least in part, on comparable sales in

formulating his opinion of the property’s fair market value.

     According to petitioner’s expert, James Searcy, the fair

market value of the Mystic Lake property as of the date of the

distribution ranged from $104,444 (income approach) to $135,780

(cost minus depreciation approach, allocating $77,000 to land and

$58,780 to improvements).   Mr. Searcy determined that the “final

reconciliation of value” was $125,000, which also represented his

estimate of the property’s fair market value using the market

approach to valuation.   In arriving at his cost estimate of

value, Mr. Searcy used the cost minus depreciation approach.    He

estimated the replacement cost of the three small structures to

be $137,700, but reduced this amount by 60 percent to $55,080 to

account for depreciation.   Mr. Searcy considered the largest of

the four structures located on the property to be functionally

obsolete on the date of the distribution and assigned no value to

that structure.   Applying the allocation between land and
                              - 11 -

improvements as set forth in Mr. Searcy’s “cost approach to

value” to his “final reconciliation of value” of $125,000 results

in an allocation between land and improvements in the respective

amounts of $70,887 and $54,113.

     According to respondent’s expert, Harry Smith, the fair

market value of the Mystic Lake property as of the date of

the distribution was $168,489, allocated between land and

improvements in the respective amounts of $48,102 and $120,387.

Mr. Smith estimated the fair market value of the largest of the

four structures to be $38,670.

     Respondent’s estimate of the fair market value of the Mystic

Lake property as of the date of the distribution exceeds

petitioner’s estimate by $43,489.8     This difference is the result

of several factors; however, it closely approximates the value of

the largest of the four structures as valued by Mr. Smith.     Mr.

Searcy assigned no value to this structure because he determined

that it was functionally obsolete on the relevant date.

     As we view the matter, petitioner’s expert erred by failing

to assign any value to the largest of the four structures located

on the property.   Other evidence in the record, including

petitioner’s testimony, demonstrates that this building had been

renovated and was in use at the time the property was


     8
       Curiously enough, petitioner’s estimate of the fair market
value of the land is actually higher than respondent’s estimate
of the value of the land.
                               - 12 -

distributed.   We could accept petitioner’s estimate of the value

of the land and respondent’s estimate of the value of the

improvements, except by doing so the overall value would then

exceed the estimate of each party.

      Under the circumstances, we accept respondent’s estimate of

the fair market value of the Mystic Lake property.   In so doing

we find the resulting capital gain realized by CWS to be $38,990

($168,489 fair market value as determined here, minus $129,499

adjusted basis of the property, as stipulated).   Therefore, in

accordance with the foregoing, we sustain respondent’s

determination that shareholder pro rata capital gain income from

CWS is understated on petitioner’s 1995 return.   In addition, we

sustain respondent’s determination that shareholder pro rata

ordinary income from CWS is understated on petitioner’s return

for each year in issue.

2.   Claim for Relief Under Section 6015

      In general, “spouses filing a joint tax return are each

fully responsible for the accuracy of their return and for the

full tax liability.”   Butler v. Commissioner, 114 T.C. 276, 282

(2000); see sec. 6013(d)(3).   “Section 6015, however, provides

various means by which a spouse can be relieved of this joint and

several obligation.”   Alt v. Commissioner, 119 T.C. 306, 311

(2002).   Petitioner makes a claim for such relief in this case

under section 6015(c) and (f) in the petition filed in this case.
                              - 13 -

Except as otherwise provided in section 6015(c), petitioner bears

the burden of proof that he is entitled to section 6015 relief.

See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Request for Relief Under Section 6015(c)

     Section 6015(c) limits an individual’s liability for any

deficiency to the portion of the deficiency properly allocable to

that individual under section 6015(d).   In general, an item that

gives rise to a deficiency on a joint return will be allocated to

the individuals who file the return in the same manner as that

item would have been allocated had those individuals filed

separate returns.   See sec. 6015(d)(3)(A).   Relief under section

6015(c) is subject to various conditions, all of which have been

satisfied in this case.   See sec. 6015(c)(1), (3)(A)(i).

     In support of his claim for relief under section 6015(c),

petitioner argues that pursuant to section 6015(d), all of the

shareholder pro rata income attributable to CWS is allocable to

Ms. Gutierrez during the years in issue because during those

years she was the sole shareholder of CWS.    See sec. 6015(c)(2).

Assuming, without finding, that petitioner is correct in this

regard,9 we consider whether petitioner’s claim for relief is

precluded by the provisions of section 6015(c)(3)(C), which,

except under circumstances not relevant here, provides that

relief under section 6015(c) is not available if the Commissioner


     9
       Respondent does not contend that Ms. Gutierrez was
petitioner’s nominee with respect to her stock in CWS.
                                - 14 -

demonstrates that the individual who seeks such relief has actual

knowledge at the time the individual signed the return of any

item giving rise to a deficiency.

     According to petitioner, he was unaware that Ms. Gutierrez’s

shareholder pro rata share of CWS’s income was not properly

reported on their joint Federal income tax return for either year

in issue.   Petitioner further maintains that Ms. Gutierrez, as

the corporation’s sole shareholder and president, rather than

himself, ran CWS and had exclusive control over the corporation

and corporate funds.   However, petitioner’s professional

background, his involvement in the construction industry over the

years, and his connection with CWS greatly undermine petitioner’s

claim on this point, which, for the following reasons, we reject.

     Petitioner organized CWS in 1984.   He is a certified welder

by profession, and CWS is a welding services company that

functioned through petitioner.    Prior to the organization of CWS,

petitioner was involved in other welding operations.    Ms.

Gutierrez is not a welder and, except for her involvement with

CWS through her relationship with petitioner, has no practical

experience in the welding services industry.    Ms. Gutierrez’s

primary vocational interest before, during, and after the years

in issue was writing and publishing romance novels.    She came to

be sole shareholder and president of CWS only because of her

relationship with petitioner.    Furthermore, she was CWS’s sole
                               - 15 -

shareholder so that the corporation might compete successfully

for certain contracts.

     Notwithstanding the transfer of legal ownership of CWS to

Ms. Gutierrez, petitioner continued to prepare CWS bids for

welding projects and secure welding contracts based on his

reputation in the welding industry.     It was his knowledge that

enabled CWS to compete for and obtain contracts.     No doubt, Ms.

Gutierrez was, to some extent, active in the corporation.     She

arranged for the filing of the corporate income tax returns and

paid corporate bills.    But it appears that she did what she did

as a convenience to petitioner who was frequently away from home

working on contracts he secured for CWS.     Petitioner negotiated

the income-generating contracts that CWS was awarded; he worked

on the jobs pursuant to those contracts; and he must have been

aware of the profitability of each job and the overall financial

situation of CWS.   Furthermore, having drawn no compensation from

CWS during the years in issue, he also must have been aware that

the corporation was paying for a variety of his and his family’s

personal expenses, including the renovations of the existing

structures and the construction of the castle residence on the

Mystic Lake property.

     Petitioner’s actual connection with CWS, as opposed to any

formal status as a stockholder during the years in issue, is

further evidenced by the fact that all of the stock in the
                              - 16 -

corporation was transferred from Ms. Gutierrez to him pursuant to

their marital settlement agreement.

     As noted, petitioner was obviously aware that many of his

and his family’s personal expenses were being paid by CWS during

each year in issue.   He wrote checks drawn on corporate accounts,

and very well might have prepared other checks for the signature

of Ms. Gutierrez.   He was equally aware that during 1995 CWS

transferred the Mystic Lake property to Ms. Gutierrez and

himself.   We find that respondent has demonstrated that

petitioner had actual knowledge that the shareholder pro

rata share of CWS’s income was not properly reported on his

joint Federal income tax return for either year in issue.

Consequently, petitioner is not entitled to relief under section

6015(c) for either year, regardless of how items giving rise to

the deficiencies would be allocated under section 6015(d).

Request for Relief Under Section 6015(f)

     To the extent that petitioner is not entitled to relief

under section 6015(c), he requests relief under section 6015(f).

     Section 6015(f) allows for relief from joint and several

liability stemming from a joint Federal income tax return if,

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

inequitable to hold the requesting individual liable for any

unpaid tax or any deficiency or any portion thereof.   Sec.

6015(f)(1).
                              - 17 -

     As relevant here, a nonexclusive list of factors the

Commissioner will consider in allowing relief under section

6015(f) is set forth in section 4.03 of Rev. Proc. 2000-15, 2000-

1 C.B. 448.   No single factor is determinative; rather, all

factors are considered and weighed appropriately.   See Mellen v.

Commissioner, T.C. Memo. 2002-280; Penfield v. Commissioner, T.C.

Memo. 2002-254.

     Knowledge of an item giving rise to the deficiency “is an

extremely strong factor weighing against relief.”   Rev. Proc.

2000-15, sec. 4.03(2)(b), 2000-1 C.B. 449.   As we have previously

discussed, petitioner was aware of the items that give rise to

the deficiencies in this case.

     Furthermore, relief might not be appropriate under section

6015(f) if the individual who requests such relief benefited from

the unpaid liability or items giving rise to the deficiency.     See

Rev. Proc. 2000-15, sec. 4.03(2)(c), 2000-1 C.B. 449.    In this

case, petitioner significantly benefited from the items that

resulted in the deficiencies here under consideration.   Some of

his personal and family living expenses were paid by CWS during

each year in issue, and, in 1995, he received from CWS an

ownership interest in a valuable piece of real estate.
                                - 18 -

      Taking into account all of the facts and circumstances, it

would not be inequitable to hold petitioner liable for the

deficiencies here in dispute.    Consequently, respondent’s

implicit denial of petitioner’s request for equitable relief

under section 6015(f) is not an abuse of discretion.

3.   Section 6662(a) Penalty

      For each year in issue, respondent determined that

petitioner is liable for a penalty under section 6662(a).      That

section imposes an accuracy-related penalty if, among other

things, an underpayment of tax required to be shown on a return

is a substantial understatement of income tax.      Sec. 6662(a) and

(b)(2).

      In this case, the understatement of income tax for each

year in issue is computed in the same manner as and is equal to

the deficiency.   See sec. 6662(d).      We find that, for each year

in issue, the understatement of income tax is substantial within

the meaning of section 6662(d) because it exceeds the greater of

$5,000 or 10 percent of the tax required to be shown on the

return for the taxable year.    Sec. 6662(d)(1)(A).    Consequently,

the penalty imposed by section 6662(a) is applicable, and

respondent’s determination in this regard is sustained for both

years.

      Reviewed and adopted as the report of the Small Tax Case

Division.
                        - 19 -

To reflect the foregoing,

                                 Decision will be entered

                            under Rule 155.
