                          T.C. Memo. 2003-91



                      UNITED STATES TAX COURT



                MITCHELL S. WIEST, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 256-00.                 Filed March 27, 2003.


     Mitchell S. Wiest, pro se.

     Martha J. Weber, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:   This case is before the Court on petitioner’s

petition to review respondent’s denial of relief under section

60151 with respect to petitioner’s 1994 taxable year.    We hold




     1
       Unless otherwise noted, all 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 -

that respondent abused his discretion in denying petitioner

relief under section 6015(f).

                         FINDINGS OF FACT

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

incorporate by this reference the stipulation of facts and

attached exhibits.

      At the time of filing of the petition, petitioner resided in

Mt. Juliet, Tennessee.

      Petitioner and his wife during 1994, Michelle Wiest (Ms.

Wiest), filed a joint Federal income tax return for that year

(the 1994 return).   Ms. Wiest engaged a high school acquaintance

employed at a tax return preparer (H & R Block) to prepare the

1994 return and gave the preparer Forms W-2, Wage and Tax

Statement, for herself and petitioner.    Petitioner had given his

Forms W-2 to Ms. Wiest for this purpose.

      The 1994 return reflected a balance due of $4,062.   After

the 1994 return was completed, petitioner and Ms. Wiest signed

it.   On the 1994 return, petitioner and Ms. Wiest reported wages

of $72,138, of which $29,904 was petitioner’s and $42,234 was Ms.

Wiest’s.   Petitioner’s Federal income tax withholding totaled

$2,696, and Ms. Wiest’s totaled $1,918.

      Ms. Wiest assumed responsibility for having the couple’s tax

returns prepared and for filing them with respondent.   With

respect to the 1994 return, after petitioner and Ms. Wiest signed
                               - 3 -

it, Ms. Wiest assumed responsibility for filing it and did so.

However, the $4,062 amount reported as due on the 1994 return was

not paid and remained unpaid at the time of trial.

     Petitioner gave Ms. Wiest his Forms W-2 for taxable years

1995 and 1996, so that she could have the couple’s tax returns

for those years prepared by the same acquaintance at H & R Block.

Although petitioner believed that Ms. Wiest had filed returns for

those years, returns were never filed.

     During their marriage, petitioner paid most household

expenses, including rent, food, and the majority of the

children’s expenses, from his earnings.

     In September of 1997, petitioner and Ms. Wiest divorced.    In

the spring of 1998, in connection with filing his return for

1997, petitioner discovered for the first time that Ms. Wiest had

not filed income tax returns on his behalf for taxable years 1995

and 1996, and that the liability reported as due on the 1994

return had not been paid.   At that time, petitioner filed returns

for 1995 and 1996 and paid his outstanding liabilities for those

years by refinancing the mortgage on his residence.   Petitioner

contacted Ms. Wiest at that time and learned that his Forms W-2

for 1995 and 1996, which he had given her for purposes of filing

returns for those years, were in the trunk of her automobile.

     On March 4, 1999, petitioner filed with respondent Form

8857, Request for Innocent Spouse Relief, with respect to 1994.
                              - 4 -

Petitioner requested relief on two grounds:   (1) That since he

was married and raising five children, the correct amount of tax

was withheld from his salary, and therefore that the liability

reported on the 1994 return arose solely from insufficient

withholding on the part of Ms. Wiest; and (2) that he had relied

on Ms. Wiest to file the 1994 return and pay the amount shown as

due thereon.

     On December 10, 1999, respondent issued petitioner a

determination letter setting forth his determination that

petitioner did not qualify for innocent spouse relief.   The

determination letter concluded that petitioner did not qualify

for relief under section 6015(b) and (c).    As to equitable relief

under section 6015(f), the determination letter provided that

“underpayment was evident at the signing of the joint return.

The taxpayer would have had knowledge/reason to know of the

underpayment at the time of signing the tax return.”   A fuller

discussion, on a Form 886A, Explanation of Items, attached to the

determination letter, provided as follows:

          Marital status--Taxpayers are currently divorced
     ..as of 9-23-97. Taxpayer husband filed Form 8857 on
     March 4, 1999.

          Attribution—Taxpayer states he does not remember
     signing the return. His signature is very identifiable
     and was compared to that on the return. His signature
     on return appears good. Therefore, he knew of the
     underpayment at one time. Agent proportioned balance
     due with underpayment. The breakdown is that the
     responsibility of the underpayment is 37% caused by the
     taxpayer husbands [sic] inadequate withholding and 63%
                                  - 5 -

     of [sic] the taxpayer wife’s inadequate withholding.

             Undue hardship—No known hardship.

                 *     *     *     *       *     *   *

             Marital abuse—None known.

          Spouse’s legal obligation to pay—Divorce decree
     was read over the telephone to Agent. No mention of
     Internal Revenue Service debt made.

          Knowledge/reason to know–Understatement [sic] was
     evident at the signing of the joint return. Taxpayer
     husband would have had knowledge/reason to know of the
     understatement [sic] at the time of signing. Taxpayer
     husband states he does not remember signing the return.
     States he would have paid if he had known of the
     understatement [sic] and cites his paying back taxes
     for 1995 and 1996 promptly as example.

          Significant benefit--No known beyond normal
     support.

Petitioner timely filed his petition on January 3, 2000.

                                 OPINION

     We must decide whether respondent abused his discretion in

denying relief under section 6015(f) with respect to an amount of

tax reported on petitioner’s joint return but not paid.    We

review respondent’s determination for abuse of discretion, Butler

v. Commissioner, 114 T.C. 276 (2000), and we hold that respondent

abused his discretion because respondent’s determination was

arbitrary.

     Section 6015(f) provides as follows:

     Equitable Relief.--Under procedures prescribed by the
     Secretary, if--

                  (1) taking into account all the facts
                                 - 6 -

          and circumstances, it is inequitable to hold
          the individual liable for any unpaid tax or
          any deficiency (or any portion of either);
          and
               (2) relief is not available to such
          individual under subsection (b) or (c),

     the Secretary may relieve such individual of such
     liability.

As directed by section 6015(f), the Commissioner announced

factors, first in Notice 98-61, 1998-2 C.B. 756, and later in

Rev. Proc. 2000-15, 2000-1 C.B. 447, that the Commissioner will

consider in determining whether an individual qualifies for

relief under section 6015(f).2

     Where, as here, the unpaid liability is one that was

reported as due on the joint return, the factors that are deemed

to weigh in favor of granting relief are:   (1) The requesting

spouse is separated or divorced from the nonrequesting spouse;

(2) the requesting spouse will suffer hardship if relief is not

granted; (3) the requesting spouse was abused by the

nonrequesting spouse; (4) the requesting spouse had no knowledge

or reason to know that the liability would not be paid;3 and (5)

the nonrequesting spouse has a legal obligation pursuant to a


     2
       Notice 98-61, 1998-2 C.B. 756, was effective during the
period in which petitioner filed his request for relief and
respondent issued the determination letter. Notice 98-61 was
modified and superseded by Rev. Proc. 2000-15, 2000-1 C.B. 447,
effective Jan. 18, 2000. However, the two releases do not differ
materially with respect to the factors pertinent to this case.
     3
       Although not listed as a factor favoring relief in Notice
98-61, this factor is so listed in Rev. Proc. 2000-15.
                                - 7 -

divorce decree or agreement to pay the liability.    Factors

weighing against relief include:    (1) The unpaid liability is

attributable to the requesting spouse; (2) the requesting spouse

had knowledge or reason to know of the unpaid liability; (3) the

requesting spouse has significantly benefited (beyond normal

support) from the unpaid liability; and (4) the requesting spouse

is obligated under a divorce decree or agreement to satisfy the

liability.    See Notice 98-61, sec. 3.03, supra; see also Rev.

Proc. 2000-15, sec. 4.03, 2001-1 C.B. 448.    In reviewing

respondent’s determination, we do not substitute our judgment for

his.    Rather, we defer to respondent’s determination unless it is

arbitrary, capricious, or without sound basis in fact.       Jonson v.

Commissioner, 118 T.C. 106, 125 (2002); Pacific First Fed. Sav.

Bank v. Commissioner, 101 T.C. 117, 121 (1993).

       In the instant case, petitioner requests relief on two

pertinent grounds:    That he was unaware that the liability

reported on the 1994 return had not been paid, and that the

unpaid liability was solely attributable to Ms. Wiest.    The

determination letter concludes that petitioner knew or had reason

to know of the unpaid liability, and that it was partly

attributable to petitioner.    Based principally on its conclusions

as to petitioner’s knowledge or reason to know of the unpaid

liability and the attribution of the unpaid liability, the
                                - 8 -

determination letter denied relief under section 6015(f).4       We

consider whether respondent’s determination was an abuse of

discretion.

     A.    Knowledge or Reason To Know

     The determination letter found that petitioner had knowledge

or reason to know of the underpayment, based solely on the fact

that he signed the 1994 return.5    While there is no longer any

dispute that petitioner signed the return, as he conceded the

signature was his upon seeing the return again in connection with

these proceedings, the fact that he signed the return does not

establish the actual or constructive knowledge that is relevant

in the case of a liability that is reported on a return but not

paid.6    The relevant knowledge in the case of a reported but

unpaid liability, as respondent’s own published guidance points

out, is whether the taxpayer knew or had reason to know “that the


     4
       The determination letter in addition considered certain
factors supportive of relief (namely, petitioner’s divorced
status and the fact that there was no known significant benefit
from the underpayment beyond normal support), as well as factors
weighing against relief (namely, the absence of hardship or
marital abuse). The determination letter also identified a
neutral factor; namely, the failure of the couple’s divorce
decree to address tax debts.
     5
       The determination letter states: “His signature on the
return appears good. Therefore, he knew of the underpayment at
one time.” (Emphasis added.)
     6
       If signing a joint return that reports a liability is
sufficient to establish actual or constructive knowledge of an
underpayment, then no taxpayer signing such a joint return would
ever lack knowledge or reason to know of the underpayment.
                               - 9 -

tax would not be paid” when the return was signed or filed.7       See

Notice 98-61, sec. 3.03(2)(b); see also Rev. Proc. 2000-15, sec.

4.03(1)(d).   Because the determination letter equated

petitioner’s signing of the return with actual or constructive

knowledge of the underpayment, it failed to consider the relevant

question of whether petitioner knew or had reason to know that

the tax would not be paid.   Consequently, the determination

letter’s conclusion that petitioner knew or had reason to know of

the underpayment was arbitrary and without sound basis in fact.

We proceed to consider, “taking into account all the facts and

circumstances”, section 6015(f)(1), whether petitioner knew or

had reason to know that the tax shown as due on the 1994 return

would not be paid.

     Petitioner gave credible testimony at trial.   He testified

that Ms. Wiest had assumed responsibility for having the 1994

return prepared and filed, and that he turned over his Forms W-2

to her for that purpose.   The testimony of the preparer of the

1994 return corroborates petitioner’s testimony.    The preparer

testified that she was a high school acquaintance of Ms. Wiest,

not petitioner, and that it was Ms. Wiest who provided her with



     7
       Rev. Proc. 2000-15 revises Notice 98-61 with respect to
the time when it is relevant whether the taxpayer knew a tax
would not be paid. Rev. Proc. 2000-15 provides that the relevant
time is when the return is “signed”, whereas Notice 98-61
provides that it is when the return is “filed”. We do not
believe this distinction is material in this case.
                               - 10 -

the materials and information necessary to prepare the 1994

return.   Clearly petitioner relied on Ms. Wiest to file the 1994

return, and it was in fact filed.    Moreover, petitioner’s prompt

action in 1998 to satisfy his 1995 and 1996 liabilities, upon

learning that Ms. Wiest had failed to file the couple’s returns

for those years, together with his testimony, persuades us that

petitioner had no actual knowledge, prior to 1998, of his

outstanding tax delinquencies, including the unpaid liability for

1994.

     The question remains whether he had reason to know; that is,

as respondent’s guidance puts it, whether “it was reasonable for

* * * [petitioner] to believe that the nonrequesting spouse would

pay the reported liability”.    Notice 98-61, sec. 3.02(3); see

also Rev. Proc. 2000-15, sec. 4.02(1)(b).    The determination

letter failed to make this inquiry, and the facts developed at

trial are sketchy.    Although conceding that he signed it,

petitioner does not recall the circumstances of signing the 1994

return.   Ms. Wiest had assumed responsibility for having the

return filed.   Although petitioner did not recall any specific

assurances from Ms. Wiest that she would pay the $4,062 reported

as due on the 1994 return, her wages in that year were

substantially more than his, and her withholdings were

substantially less.    Moreover, we discern a pattern of deception

on Ms. Wiest’s part with respect to the 1995 and 1996 tax years;
                                - 11 -

that is, petitioner also gave her his Forms W-2 for those years

based on her assumption of responsibility for filing, and the

Forms subsequently were found in the trunk of her car after the

delinquencies had been discovered.       Given that Ms. Wiest engaged

in deception with respect to filing returns for 1995 and 1996,

there is reason to believe that she engaged in deception with

respect to 1994 as well.    We conclude, based on all the facts and

circumstances, that it was reasonable for petitioner to believe

that Ms. Wiest would pay the liability reported on the 1994

return.   Accordingly, he did not have knowledge or reason to know

that the tax would not be paid.    To the extent respondent’s

determination to deny relief was based on this factor, it is

unsupported.

     B.   Attribution

     A second factor asserted by petitioner in his request for

relief was that the unpaid liability was entirely attributable to

Ms. Wiest.     In his request for relief, petitioner contended that

he was raising five children in 1994 and that consequently his

withholdings were sufficient to cover his share of the 1994 tax.

With respect to this contention, the determination letter

provided:

     Agent proportioned the balance due with underpayment.
     The breakdown is that the responsibility of the
     underpayment is 37% caused by the taxpayer husbands
     [sic] inadequate withholding and 63% of [sic] the
     taxpayer wife’s inadequate withholding.
                                - 12 -

Thus, respondent’s denial of relief was based in part on his

determination that approximately 37 percent of the underpayment

was attributable to petitioner.    As discussed below, respondent’s

conclusion concerning petitioner’s share of the unpaid liability

was arbitrary and without sound basis in fact.

     The determination letter contains no explanation of the

computation underlying the conclusion that petitioner’s share of

the underpayment was 37 percent.    It is likewise silent regarding

the issue of petitioner’s entitlement to claim exemptions for

dependents.   In his posttrial brief, respondent takes the

position that the determination letter’s calculation of

petitioner’s share of the unpaid tax liability was based upon a

computation of his tax liability as if he had filed for 1994

using a status of married filing separately.   According to

respondent, petitioner’s hypothetical tax liability for 1994 so

computed would have been $4,327, which, after reduction for his

$2,696 withholdings, would have left an unpaid liability of

$1,631--or approximately 40 percent of the actual unpaid

liability ($4,062) for 1994.8

     Respondent’s comparison of petitioner’s hypothetical

liability as a married-filing-separately taxpayer, as reduced by

his actual withholdings, to the actual unpaid liability on his


     8
       Respondent offers no explanation for the discrepancy
between his 40-percent computation on brief and the revenue
agent’s 37-percent computation in the determination letter.
                                - 13 -

joint return for 1994, does not produce a meaningful ratio.    In

making the computation, respondent allowed petitioner a single

personal exemption and no exemption for any dependent.     The 1994

return claimed five dependency exemptions, which claim was

accepted by respondent and is reflected in the actual 1994

liability.   Obviously, the allowance of five dependency

exemptions reduced the actual 1994 liability.   However, in

denying petitioner any benefit from the dependency exemptions in

computing his hypothetical separate liability, respondent has

produced a hypothetical liability that is necessarily inflated in

comparison to the actual 1994 liability.   Although petitioner

raised the issue of the five dependents in his request for

relief, and testified at trial that he provided more than half of

their support in 1994, respondent never addressed the contention

in the determination letter or in his posttrial brief.

Respondent instead has simply treated petitioner as entitled to

no adjustment with respect to dependency exemptions in

calculating petitioner’s share of the unpaid liability.    Since

the unpaid liability reflects an allowance for five dependency

exemptions, respondent’s calculation-–which effectively allocates

the allowance for the five dependency exemptions to Ms. Wiest

-–necessarily inflates petitioner’s share of the unpaid liability

in comparison to Ms. Wiest’s.    Respondent has offered no argument

or evidence to support the allocation of the five dependency
                             - 14 -

exemptions to Ms. Wiest, in the face of petitioner’s claim that

he was providing over half the children’s support.    In this

circumstance, respondent’s calculation is arbitrary and without

sound basis in fact, as is his conclusion that the 1994 unpaid

liability is 37 percent (or 40 percent) attributable to

petitioner.

     Because respondent’s computation of the share of the unpaid

liability attributable to petitioner was arbitrary, we shall

consider attribution based on the record before us.    We believe a

computation of petitioner’s and Ms. Wiest’s respective shares of

the 1994 underpayment is mostly straightforward.    Since they each

reported only wage income and jointly claimed the standard

deduction and their two personal exemptions, each spouse’s share

of reported gross income would, in the absence of other factors,

equal his or her share of the total liability.   Each spouse’s

withholdings could then be compared with his or her share of the

total liability to derive their respective shares of the

underpayment.

     A complicating factor arises with respect to the five

dependency exemptions claimed on the 1994 return.    Respondent’s

acceptance of the 1994 return establishes the entitlement of

petitioner and Ms. Wiest, jointly, to five dependency exemptions.

Although petitioner contends that he was providing more than half

the support of the five children claimed as dependents on the
                              - 15 -

1994 return, we find his bare assertions, without any other

support, an insufficient basis on which to attempt an allocation

of the five dependency exemptions to him, especially in light of

the fact that Ms. Wiest had income of $42,234, as compared to his

income of $29,904, in 1994.   If no allocation is attempted, the

benefit of the five exemptions is effectively split equally

between petitioner and Ms. Wiest, since the total liability for

1994 reflects the benefit of the dependency exemptions claimed on

the return and accepted.   In the circumstances of this case,

splitting the benefit of the five dependency exemptions equally

is appropriate.

     Using the foregoing principles, petitioner’s and Ms. Wiest’s

respective shares of the underpayment could fairly be apportioned

as follows.   The gross income of $72,138 reported on the 1994

return consisted of petitioner’s wages of $29,904 and Ms. Wiest’s

wages of $42,234.   The reported total tax liability was $8,675.

Petitioner’s share of the total tax liability was $3,596

(($29,904 ÷ $72,138) x $8,675), and Ms. Wiest’s was $5,079

(($42,234 ÷ $72,138) x $8,675).   Petitioner’s share of the

underpayment equals his share of the total liability ($3,596)

less his withholdings ($2,696), or $900.   The remaining portion

of the underpayment ($3,162) is attributable to Ms. Wiest.    We

therefore reject petitioner’s contention that the underpayment is

entirely attributable to Ms. Wiest, as well as respondent’s
                                - 16 -

finding that it was 37 or 40 percent attributable to petitioner,

and conclude that petitioner’s share of the underpayment was

$900, or approximately 22 percent.

     C.   Other factors

     The determination letter also considered other factors,

albeit briefly.   With respect to economic hardship, the

determination letter concludes that there is “no known” hardship,

notwithstanding petitioner’s assertions in his claim for relief

that he had to refinance the mortgage on his residence in order

to pay his 1995 and 1996 liabilities.       Nonetheless, the record

before us does not establish that petitioner would suffer

hardship if required to pay the 1994 liability.       Accordingly,

this factor weighs against relief.       Respondent concedes and we

agree that petitioner’s status as divorced from Ms. Wiest weighs

in petitioner’s favor.    The determination letter did not find

that petitioner had significantly benefited (beyond normal

support) from the underpayment and the evidence persuades us that

he did not benefit at all.     Accordingly, this factor does not

weigh against relief.     Finally, there is no evidence of spousal

abuse or that the divorce decree imposed a legal obligation on

either spouse regarding the unpaid liability, rendering these

factors neutral in this case.
                              - 17 -

     D.   Conclusion

     Respondent’s determination to deny petitioner relief under

section 6015(f) was principally based on his findings that

petitioner knew or had reason to know that the liability would

not be paid, and that approximately 40 percent of the unpaid

liability was attributable to petitioner.    Since each of these

findings was arbitrary and without sound basis in fact, we

conclude that respondent’s denial of any relief was an abuse of

discretion.

     Based on our review of all the facts and circumstances, we

conclude that there are several factors favoring relief.

Petitioner did not know, and had no reason to know, that the

liability would not be paid; the underpayment is only

attributable to petitioner to the extent of $900; petitioner and

Ms. Wiest are divorced; and petitioner did not benefit from the

underpayment.   Weighing against relief is the absence of any

showing of hardship if relief is not granted and the fact that a

portion of the underpayment is attributable to petitioner.    On

balance, we find that the factors favoring relief, to the extent

that the underpayment is not attributable to petitioner, outweigh

the factors supporting a denial of relief.    Therefore, we hold

that petitioner is entitled to relief under section 6015(f) with

respect to $3,162 of the underpayment; that is, he is entitled to

relief with respect to all of the underpayment except the $900
                             - 18 -

thereof that we find is attributable to him.   To reflect the

foregoing,

                                        An appropriate decision

                                   will be entered.
