                     121 T.C. No. 5



                UNITED STATES TAX COURT



            MARIANNE HOPKINS, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 363-01.                    Filed July 29, 2003.


      P and H filed joint returns for 1982, 1983, 1984,
1988, and 1989. Adjustments to partnership deductions
and NOL deductions resulted in tax deficiencies for
1982, 1983, and 1984. The partnership deductions are
attributable to H’s partnership. The NOL deductions
are attributable to P’s property. P and H reported
taxes due on their joint returns for 1988 and 1989;
however, they failed to pay those amounts. After P and
H were separated, P filed a request for relief under
sec. 6015, I.R.C., with respect to her joint and
several tax liabilities for 1982, 1983, 1984, 1988, and
1989.

     Held: P is not entitled to relief under sec.
6015(b), I.R.C., for 1982, 1983, and 1984 because the
NOL deductions are P’s tax items and because she has
not established that in signing the returns she had no
reason to know that there were understatements
attributable to H’s partnership deductions.
                               - 2 -

          Held, further, P is entitled to relief under sec.
     6015(c), I.R.C., to the extent the deficiencies for
     1982, 1983, and 1984 are allocable to H under sec.
     6015(d), I.R.C. For purposes of applying sec. 6015(d),
     I.R.C., items are generally allocated as if P and H had
     filed separate returns. Thus, deficiencies resulting
     from H’s erroneous partnership deductions are generally
     allocated to H, and deficiencies resulting from P’s
     erroneous NOL deductions are generally allocable to P.
     See sec. 6015(d)(3)(A), I.R.C. However, pursuant to
     sec. 6015(d)(3)(B), I.R.C., an item otherwise allocable
     to an individual shall be allocated to the other
     individual filing the joint return to the extent the
     item gave rise to a tax benefit to the other
     individual. As a result, P is relieved of liability
     for deficiencies attributable to H’s erroneous
     partnership deductions except for the portion, if any,
     that offsets her income. Likewise, P is liable for
     deficiencies attributable to her erroneous NOL
     deductions to the extent they offset her income, and
     she is relieved of liability for any remaining portion
     of the deficiencies attributable to the NOL that
     offsets H’s income.

          Held, further, P is not entitled to relief under
     sec. 6015(f), I.R.C., for the remaining portions of the
     deficiencies for 1982, 1983, and 1984.

          Held, further, P is not entitled to relief under
     sec. 6015(b), (c), or (f), I.R.C., for the underpay-
     ments of tax in 1988 and 1989.


     Sandra G. Scott, for petitioner.

     Thomas M. Rohall, for respondent.



     RUWE, Judge:   The issue for decision is whether petitioner

is entitled to relief from joint and several liability under

section 6015(b), (c), or (f)1 for her 1982, 1983, 1984, 1988, and


     1
      Unless otherwise indicated, all section references are to
                                                   (continued...)
                                - 3 -

1989 income tax liabilities.    Those tax liabilities, which

include deficiencies, interest, penalties, and underpayments, are

as follows:

                 Year                         Liability

                 1982                     $216,040.49
                 1983                      154,412.96
                 1984                       21,181.26
                 1988                        2,496.38
                 1989                        3,598.37


                           FINDINGS OF FACT

     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 of filing the

petition, petitioner resided in Kentfield, California.

     Petitioner was born in Germany.    While in Germany,

petitioner completed the equivalent of a ninth-grade education.

She has never taken any business or tax classes.      Her native

language is not English.

     In February 1967, petitioner married Donald K. Hopkins.

Petitioner and Mr. Hopkins were separated on February 1, 1989,

and subsequently divorced.    Mr. Hopkins was an airline pilot

during the relevant periods, and he earned a substantial salary.

Petitioner did not work outside her home during her marriage.



     1
      (...continued)
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
                                - 4 -

     Petitioner has resided in a house located at 111 Diablo

Drive, Kentfield, California, since 1967.    Petitioner was the

sole owner of the house during the tax years at issue.2

     Petitioner filed joint income tax returns with Mr. Hopkins

from 1978 to 1997.3   They reported Mr. Hopkins’s wages of

$141,683, $166,906, and $162,654 as income on their joint returns

for 1982, 1983, and 1984, respectively.    They reported income

from a State tax refund of $5,039 on their joint return for 1982.

The refund matches the amount of State income taxes withheld from

Mr. Hopkins’s wages for 1981.    They reported interest income of

$8,148, $5,192, and $2,107 on their joint returns for 1982, 1983,

and 1984, respectively.   The evidence does not show who owned the

principal that generated the interest.    Petitioner and Mr.

Hopkins reported ordinary income of $68,452 from San Sierra

Investment #11 on their joint return for 1983.    The evidence does

not show who owned the partnership interest.    They reported

ordinary income of $2,751 from ECC Leveraged Drilling on their

joint return for 1984.    The evidence does not show who owned the



     2
      The real property located at 111 Diablo Drive consists of
two parcels. Petitioner and Mr. Hopkins acquired parcel 1 in
1967. On Apr. 2, 1973, Mr. Hopkins quitclaimed his interest in
parcel 1, which included the house, to petitioner. Petitioner is
still the sole owner of parcel 1. Parcel 2 has been held by
petitioner and Mr. Hopkins as joint tenants since it was acquired
in 1973.
     3
      On the joint returns for 1980 through 1984, petitioner’s
occupation is listed as “investor”.
                               - 5 -

interest in this entity.   They reported a $951 section 1231 gain

from Shelter Associates III on their joint return for 1984.4

     Petitioner and Mr. Hopkins’s reported income for 1980

through 1984 was significantly offset by partnership losses,5 a

casualty loss, and net operating loss (NOL) carrybacks and

carryforwards that they claimed as deductions.

     Petitioner and Mr. Hopkins claimed deductions on their joint

returns for 1982 and 1983 which related to Far West Drilling

partnership.6   The Far West Drilling partnership deductions were

attributable to Mr. Hopkins’s investment in that partnership.

The deductions related to the Far West Drilling partnership were

erroneous.   Petitioner and Mr. Hopkins signed a closing agreement

under section 7121 in which they agreed to adjustments to the Far

West Drilling partnership deductions.   In a separate opinion,

Hopkins v. Commissioner, 120 T.C. ___ (2003), we held that



     4
      A Schedule K-1, Partner’s Share of Income, Credits,
Deductions, etc., for 1984 reports petitioner as a partner in
Shelter Associates III.
     5
      Petitioner and Mr. Hopkins deducted substantial losses from
various partnership activities on their 1980, 1982, and 1983
joint income tax returns: The first page of each of the 1980,
1982, and 1983 joint returns showed losses on Schedule E,
Supplemental Income and Loss, of $119,408, $88,383, and $26,844,
respectively. The partnership activities included Circle T
Racing Stable, Shelter Associates III, San Sierra Investment #11,
ECC Leveraged Drilling #3, and Far West Drilling.
     6
      They claimed a loss deduction of $83,402 on their joint
return for 1982. They claimed a loss deduction of $91,086 and a
depletion deduction of $2,126 on their joint return for 1983.
                               - 6 -

petitioner is not precluded by the closing agreement, which was

entered into before the enactment of section 6015, or the

doctrines of res judicata and collateral estoppel from claiming

relief under section 6015 with respect to the tax liabilities

attributable to the disallowance of deductions related to the Far

West Drilling partnership.

     Petitioner and Mr. Hopkins reported a casualty loss of

$280,661 on their joint return for 1981.    The casualty loss was

attributable to a mudslide that destroyed petitioner’s house.

Petitioner and Mr. Hopkins erroneously claimed NOL carryforward

deductions for 1982 and 1984 which were attributable to the

casualty loss.   Petitioner agrees that the erroneous 1982 and

1984 NOL carryforward deductions are her items.

     Respondent assessed deficiencies in petitioner and Mr.

Hopkins’s taxes for 1982, 1983, and 1984.   Those deficiencies

were attributable to the disallowance of the Far West Drilling

partnership deductions and the disallowance of the NOL

carryforward deductions that petitioner and Mr. Hopkins claimed

on their joint returns for 1982, 1983, and 1984.7



     7
      Petitioner and Mr. Hopkins’s tax liability for 1982 is
attributable to adjustments to the NOL carryforward deduction
resulting from the casualty loss and the Far West Drilling
partnership deduction for that year. The tax liability for 1983
is attributable solely to the Far West Drilling adjustments for
that year. The tax liability for 1984 arises solely from the
disallowance of the NOL carryforward deduction for that year.
Those deficiencies are not in issue.
                                - 7 -

      Petitioner and Mr. Hopkins reported, but did not pay, taxes

due of $1,571 and $3,326 on their joint income tax returns for

1988 and 1989, respectively.   Respondent assessed those amounts.

      On May 24, 1999, petitioner filed with respondent a Form

8857, Request for Innocent Spouse Relief, with respect to her

1982, 1983, 1984, 1988, and 1989 joint tax liabilities.    On

January 8, 2001, petitioner filed a petition for relief from

joint and several liability with this Court.    At the time the

petition was filed, respondent had not made a determination with

respect to petitioner’s request.8

                               OPINION

A.   Tax Liabilities for 1982, 1983, and 1984

      Petitioner claims that she is entitled to relief from joint

and several liability under section 6015(b), (c), or (f) for the

tax liabilities attributable to the disallowance of the Far West

Drilling partnership deductions and the disallowance of the NOL

carryforward deductions for 1982, 1983, and 1984.




      8
      Pursuant to sec. 6015(e)(1)(A), a petition may be filed
with this Court after the passage of 6 months from the date the
taxpayer elected sec. 6015 relief if the Commissioner has made no
determination regarding the election.
                                - 8 -

     1.    Section 6015(b)

     To qualify for relief under section 6015(b)(1), the electing

spouse must establish, inter alia, that:    (A) A joint return has

been made for a taxable year; (B) there is an understatement of

tax on the return which is attributable to the erroneous items of

the nonelecting spouse; (C) in signing the return, the electing

spouse did not know, and had no reason to know, that there was

such an understatement; and (D) taking into account all the facts

and circumstances, it is inequitable to hold the electing spouse

liable for the deficiency in tax for the taxable year

attributable to the understatement.     See Alt v. Commissioner, 119

T.C. 306, 313 (2002).

     Petitioner is not entitled to relief under section 6015(b)

with respect to the understatements attributable to the

disallowed NOL carryforward deductions.    Those items are

attributable to the residence at 111 Diablo Drive, which she

owned.    Petitioner agrees that the casualty loss and the NOL

carryforward deductions are her tax items for purposes of section

6015(b).    Petitioner cannot be granted relief under section

6015(b) for understatements that are attributable to her own

erroneous items.    See sec. 6015(b)(1).

     The Far West Drilling partnership deductions are Mr.

Hopkins’s tax items.    With respect to those deductions,

petitioner bears the burden of proving that in signing the joint
                                - 9 -

returns she had no reason to know that there were understatements

attributable to those items.   See sec. 6015(b)(1)(C); Mora v.

Commissioner, 117 T.C. 279, 285 (2001).    An individual has reason

to know of the understatement if a reasonably prudent taxpayer in

her position at the time she signed the return could be expected

to know that the return contained the understatement.     See Price

v. Commissioner, 887 F.2d 959, 965 (9th Cir. 1989); Mora v.

Commissioner, supra at 287.

     Petitioner claims that in signing the returns she had no

reason to know of the understatements on the returns because she

was unaware of Mr. Hopkins’s investments in Far West Drilling and

the other partnerships.    Petitioner’s testimony at trial did not

convince us that she was unaware that those investments were made

or that Mr. Hopkins concealed his investments from her.9

Further, even a cursory review of the joint returns for 1980,

1982, and 1983 would reveal that there were investments in

partnerships for those years and that large partnership

deductions were claimed.   The partnership deductions

substantially reduced petitioner and Mr. Hopkins’s tax

liabilities for those years and, together with other deductions,




     9
      Petitioner’s testimony suggests that none of the
partnership investments reported on the joint returns were her
own. However, a Schedule K-1 for Shelter Associates III lists
petitioner as a partner in that entity in 1984.
                              - 10 -

reduced their reported tax liabilities to zero.10   The losses

from the partnership activities for 1982 and 1983 were largely

attributable to the Far West Drilling deductions.     The joint

return for 1982 showed a Far West Drilling partnership deduction

of $83,402.   The joint return for 1983 showed a Far West Drilling

partnership deduction of $91,086 and a depletion deduction of

$2,126.   Those amounts far exceeded other partnership deductions

which were claimed in the joint returns.

     Petitioner, at the very least, understood the general

concepts of Federal income taxation,11 and she demonstrated to us

no discernible difficulty in understanding English.    Petitioner

was involved in the audit process with respect to the 1982 and

1983 joint returns.   At some point during the Internal Revenue

Service (IRS) audit of those returns, petitioner and Mr. Hopkins

were represented by John E. Lahart.12   Mr. Lahart spoke with

petitioner on more than one occasion, and he testified that she



     10
      However, in prior years, petitioner and Mr. Hopkins
reported relatively large tax liabilities, $24,229 in 1978 and
$22,684 in 1979, but reported insignificant partnership
deductions.
     11
      An individual cannot rely solely on ignorance of the
attendant tax or legal consequences of an item giving rise to a
deficiency to satisfy his or her burden under sec. 6015(b)(1)(C).
See Price v. Commissioner, 887 F.2d 959, 964 (9th Cir. 1989).
     12
      Petitioner and Mr. Hopkins signed a Form 2848, Power of
Attorney and Declaration of Representative, dated Sept. 22, 1988,
in which they appointed Mr. Lahart to represent them before the
Internal Revenue Service (IRS).
                                - 11 -

did not appear confused about the subject matter that was being

discussed and that she did not appear to have a problem with

English.    Petitioner subsequently hired David M. Hellman to

represent her and Mr. Hopkins in prior Tax Court litigation

concerning the disallowance of the NOLs related to the casualty

loss.13    Petitioner, Mr. Hopkins, their tax return preparer, and

Mr. Hellman had a face-to-face meeting to discuss the issues

involved in that case.    In an October 25, 1990, letter to

respondent’s counsel in that case, Mr. Hellman represented that

“The records concerning the 1980 investment in San Sierra

Investment #II apparently were lost in the mud slide.    Mrs.

Hopkins recalls a 1980 payment to them of approximately $40,000.”

Also, in a May 17, 1990, letter to this Court, he represented

that “From what I understand preliminarily upon brief discussions

with Mrs. Hopkins, it appears the position taken on their income

tax returns for the years in question was a correct position.”

Petitioner was actively involved in the prior Tax Court

litigation concerning the disallowance of the NOLs related to the

casualty loss.    She was the only person other than her expert to



     13
      Respondent issued notices of deficiency to petitioner and
Mr. Hopkins for their 1978, 1979, 1981, and 1982 taxable years on
the basis of the disallowance of the NOLs related to the casualty
loss that they had claimed on their joint return for 1981.
Petitioner and Mr. Hopkins filed a petition with the Tax Court,
and the matter went to trial. During the trial, the parties
agreed to settle the case. That case did not involve a claim for
relief from joint and several liability.
                                - 12 -

testify on her behalf in that proceeding.   Also, she was the

person who dealt with the insurance company after it initially

denied coverage for the loss of her house in 1982.

     The record reflects that petitioner dealt with third parties

with respect to her family’s financial, tax, and legal matters.

For example, respondent’s revenue officer who was assigned to the

collection of the income tax liabilities of petitioner and Mr.

Hopkins testified that, except for one occasion, he dealt almost

exclusively with petitioner.    When he would request information

or a response from petitioner and Mr. Hopkins, it was always

petitioner who would respond.

     Petitioner performed numerous financial functions within her

family, exercised considerable discretion, and was ultimately

responsible for the family’s principal asset, the house at 111

Diablo Drive.   She spent considerable sums in remodeling the

house before 1982 and in rebuilding the house after the mudslide

in 1982.14   Petitioner directed the remodeling and rebuilding.

She hired contractors, and she paid those individuals by check or

in cash.

     Given the size of the partnership deductions, the change in

petitioner and Mr. Hopkins’s reported taxes in 1980, 1982, and

1983, and petitioner’s involvement in the family’s financial


     14
      The rebuilt residence included four bedrooms and four
baths and occupied 4,976 square feet with a four-car, 920-square-
foot carport.
                                - 13 -

affairs, we believe that she, as a reasonably prudent taxpayer,

should have at least made inquiries concerning the large

partnership deductions.     “‘Tax returns setting forth large

deductions, such as tax shelter losses offsetting income from

other sources and substantially reducing or eliminating the

couple’s tax liability, generally put a taxpayer on notice that

there may be an understatement of tax liability.’”     Mora v.

Commissioner, 117 T.C. at 289 (quoting Hayman v. Commissioner,

992 F.2d 1256, 1262 (2d Cir. 1993), affg. T.C. Memo. 1992-228).

     We are not convinced that Mr. Hopkins exercised such

dominance over petitioner that she could not question the

reporting of significant deductions.     Petitioner has failed to

establish that she did not have reason to know of the

understatements attributable to the Far West Drilling deductions

for 1982 and 1983.15   Petitioner is not entitled to relief under

section 6015(b) for the tax liabilities attributable to those

items.

     2.   Section 6015(c)

     Under section 6015(c)(1), if an individual who has made a

joint return for any taxable year elects the application of this

subsection, the individual’s liability for any deficiency which

is assessed with respect to the return shall not exceed the


     15
      Petitioner and Mr. Hopkins have maintained close ties to
one another. He still uses a portion of petitioner’s house as an
office, and he also performs maintenance services.
                                 - 14 -

portion of the deficiency properly allocable to the individual

under section 6015(d).16     The purpose of section 6015(c) is to

allocate the tax liability between the individuals who filed a

joint return in approximately the same way it would have been had

the individuals filed separately.

     An individual shall be eligible to elect the application of

section 6015(c) only if:     (1) At the time the election is filed,

the electing individual is no longer married to, or is legally

separated from, the other individual who filed the joint return;

or (2) the electing individual was not a member of the same

household as the other individual at any time during the 12-month

period ending on the date the election is filed.     Sec.

6015(c)(3)(A)(i).     Respondent concedes that petitioner has met

the requirements of section 6015(c)(3)(A)(i).

     Pursuant to section 6015(c)(3)(B), an election under section

6015(c) for any taxable year may be made at any time after a



     16
          Sec. 6015(c)(1) provides:

          SEC. 6015(c). Procedures To Limit Liability for
     Taxpayers No Longer Married or Taxpayers Legally
     Separated or Not Living Together.

                  (1) In general.--Except as provided in this
             subsection, if an individual who has made a joint
             return for any taxable year elects the application
             of this subsection, the individual’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 subsection (d).
                                 - 15 -

deficiency for such year is asserted but not later than 2 years

after the date on which the Secretary has begun collection

activities with respect to the individual making the election.

The applicable 2-year election period shall not expire before the

date that is 2 years after the first collection activity taken by

the IRS after the date of enactment.      Internal Revenue Service

Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.

3201(g)(2), 112 Stat. 740.     Petitioner elected relief on May 24,

1999, within the specified period.

             a.   Allocation of the Items Making Up the Deficiency

     Section 6015(c)(1) provides that the allocation of a

deficiency should be made as provided in section 6015(d).      Under

section 6015(d)(1), the portion of any deficiency on a joint

return allocated to an individual shall be the amount which bears

the same ratio to such deficiency as the net amount of items

taken into account in computing the deficiency and allocable to

the individual under section 6015(d)(3) bears to the net amount

of all items taken into account in computing the deficiency.17


     17
          Sec. 6015(d)(1) provides:

          SEC. 6015(d). Allocation of Deficiency.--For
     purposes of subsection (c)--

                  (1) In general.--The portion of any
             deficiency on a joint return allocated to an
             individual shall be the amount which bears the
             same ratio to such deficiency as the net amount of
             items taken into account in computing the
                                                       (continued...)
                                  - 16 -

Each individual who elects the application of section 6015(c)

shall have the burden of proof with respect to establishing the

portion of any deficiency allocable to such individual.       Sec.

6015(c)(2).

     Respondent argues that a portion of the Far West Drilling

deductions is attributable to petitioner.       He relies upon

petitioner’s testimony in a prior Tax Court case that did not

concern petitioner’s or Mr. Hopkins’s investments in

partnerships.       Petitioner testified under cross-examination in

that case:

     Q    Isn’t it a fact, Mrs. Hopkins, that during 1980
     you invested money into Far West Drilling?

     A       Yes.

     Q       And wasn’t that at least $22,000?

     A       Yes.

In the instant case, petitioner testified that she misunderstood

the question; that she understood the question to refer to both

her and Mr. Hopkins; and that she personally invested nothing in

Far West Drilling.       Petitioner’s testimony is supported by

correspondence from Far West Drilling and a note that Mr. Hopkins

signed in favor of the partnership, which indicates that Mr.

Hopkins invested in Far West Drilling.       The record also contains


     17
          (...continued)
              deficiency and allocable to the individual under
              paragraph (3) bears to the net amount of all items
              taken into account in computing the deficiency.
                                     - 17 -

a Schedule K-1, Partner’s Share of Income, Credits, Deductions,

etc., for 1985, which reports Mr. Hopkins as a partner in Far

West Drilling.     We find that the Far West Drilling deductions are

Mr. Hopkins’s items.

     On brief, respondent argues that “Petitioner is not entitled

to relief under I.R.C. § 6015(c) for the disallowed casualty

losses due to the fact that petitioner owned the residence.

Thus, the deficiencies arising from the disallowed casualty

losses were due to her own item and she remains liable.”

     Section 6015(c) requires an allocation of the items giving

rise to a deficiency to be made under section 6015(d)(3).

Generally, any item giving rise to a deficiency on a joint return

shall be allocated to individuals filing the return in the same

manner as it would have been allocated if the individuals had

filed separate returns for the taxable year.       Sec.

6015(d)(3)(A).18       However, section 6015(d)(3)(B) provides an


     18
          Sec. 6015(d)(3) provides in part:

          SEC. 6015(d). Allocation of Deficiency.--For
     purposes of subsection (c)--

             *     *       *     *       *    *    *

                  (3) Allocation of items giving rise to the
             deficiency.--For purposes of this subsection--

                       (A) In general.--Except as provided in
                  paragraphs (4) and (5), any item giving rise
                  to a deficiency on a joint return shall be
                  allocated to individuals filing the return in
                                                      (continued...)
                                 - 18 -

exception to this general rule where the other individual

receives a tax benefit from the item giving rise to a deficiency.

Section 6015(d)(3)(B) provides:

          (B) Exception where other spouse benefits.--Under
     rules prescribed by the Secretary, an item otherwise
     allocable to an individual under subparagraph (A) shall
     be allocated to the other individual filing the joint
     return to the extent the item gave rise to a tax
     benefit on the joint return to the other individual.

     Section 6015(d)(3)(B) provides an alternative method of

allocating items giving rise to a deficiency between the

individuals filing a joint return, regardless of whether the

items would otherwise be allocable to one individual.       Its

purpose is to allocate liability between the individuals who

filed a joint return on the basis of the extent to which each

individual received the tax benefit of an erroneous deduction.

The language of section 6015(d)(3)(B) does not limit its

application to only one of the individuals who filed a joint

return.     It does not refer to items of a “requesting” or

“electing” individual or to items of a “nonrequesting” or

“nonelecting” individual.     It uses the terms “an individual” and

“the other individual filing the joint return”.     Section

6015(d)(3)(B) requires an allocation between individuals who

filed a joint return no matter who is requesting or electing


     18
          (...continued)
                   the same manner as it would have been
                   allocated if the individuals had filed
                   separate returns for the taxable year.
                              - 19 -

relief.   Indeed, under section 6015(c), either or both of the

individuals who filed a joint return may elect relief.19

     The Senate report discussing the allocation rule in section

6015(d)(3)(B) states:   “Items of loss or deduction are allocated

to a spouse only to the extent that income attributable to the

spouse was offset by the deduction or loss.   Any remainder is

allocated to the other spouse.”   S. Rept. 105-174, at 57 (1998),

1998-3 C.B. 537, 593.   The conference report likewise states:

     If the deficiency arises as a result of the denial of
     an item of deduction * * *, the amount of the
     deficiency allocated to the spouse to whom the item of
     deduction * * * is allocated is limited to the amount
     of income * * * allocated to such spouse that was
     offset by the deduction * * *. The remainder of the
     liability is allocated to the other spouse to reflect
     the fact that income * * * allocated to that spouse was
     originally offset by a portion of the disallowed
     deduction * * * [H. Conf. Rept. 105-599, at 252
     (1998), 1998-3 C.B. 747, 1006.]

See Mora v. Commissioner, 117 T.C. at 293.    The examples in the

Senate and conference reports illustrate the application of

section 6015(d)(3)(B) and divide the liability for a deficiency

in proportion to the amount of income offset for each individual.

S. Rept. 105-174, supra at 58, 1998-3 C.B. at 594; H. Conf. Rept.



     19
      The final regulations issued under sec. 6015 provide that
“Relief may be available to both spouses filing the joint return
if each spouse is eligible for and elects the application” of
sec. 6015(c). Sec. 1.6015-3(a), Income Tax Regs. However, only
a requesting spouse may receive relief under sec. 6015(c); a
spouse who does not also elect relief under sec. 6015(c) remains
liable for the entire amount of the deficiency. Sec. 1.6015-
3(d)(1)(ii), Income Tax Regs.
                             - 20 -

105-599, supra at 252-253, 1998-3 C.B. at 1006-1007.   The

following examples are provided in the conference report:

          For example, a married couple files a joint return
     with wage income of $100,000 allocable to the wife and
     $30,000 of self employment income allocable to the
     husband. On examination, a $20,000 deduction allocated
     to the husband is disallowed, resulting in a deficiency
     of $5,600. Under the provision, the liability is
     allocated in proportion to the items giving rise to the
     deficiency. Since the only item giving rise to the
     deficiency is allocable to the husband, and because he
     reported sufficient income to offset the item of
     deduction, the entire deficiency is allocated to the
     husband and the wife has no liability with regard to
     the deficiency, regardless of the ability of the IRS to
     collect the deficiency from the husband.

          If the joint return had shown only $15,000
     (instead of $30,000) of self employment income for the
     husband, the income offset limitation rule discussed
     above would apply. In this case, the disallowed $20,000
     deduction entirely offsets the $15,000 of income of the
     husband, and $5,000 remains. This remaining $5,000 of
     the disallowed deduction offsets income of the wife.
     The liability for the deficiency is therefore divided
     in proportion to the amount of income offset for each
     spouse. In this example, the husband is liable for 3/4
     of the deficiency ($4,200), and the wife is liable for
     the remaining 1/4 ($1,400). [H. Conf. Rept. 105-599,
     supra at 252-253, 1998-3 C.B. at 1006-1007.]

The allocation in the above example is made without reference to

whether the husband, the wife, or both elect relief under section

6015(c).
                                - 21 -

     On July 18, 2002, the Commissioner published final

regulations under section 6015.20   Section 1.6015-3(d)(2), Income

Tax Regs., of the final regulations provides in part:

          (2) Allocation of erroneous items. For purposes
     of allocating a deficiency under this section,
     erroneous items are generally allocated to the spouses
     as if separate returns were filed, subject to the
     following four exceptions:

               (i) Benefit on the return.--An erroneous
          item that would otherwise be allocated to the
          nonrequesting spouse is allocated to the
          requesting spouse to the extent that the
          requesting spouse received a tax benefit on the
          joint return.

While the above-quoted portion of the regulations does not

specifically address the situation at issue, where an erroneous

item of deduction of the electing individual offsets income of

the nonelecting individual, it does not purport to preclude

application of section 6015(d)(3)(B) to that situation.

     Indeed, the final regulations provide an example which

supports our application of the alternative allocation method in

section 6015(d)(3)(B).   In section 1.6015-3(d)(5), Example (5),

Income Tax Regs., both individuals who filed a joint return elect

relief under section 6015(c).    The erroneous deduction is

initially H’s item; however, in the example, only a portion of



     20
      These regulations are applicable for all elections or
requests for relief filed on or after July 18, 2002. Washington
v. Commissioner, 120 T.C. 137, 154 n.9 (2003); sec. 1.6015-9,
Income Tax Regs. Petitioner’s election was filed on May 24,
1999, before the effective date of the regulations.
                              - 22 -

H’s deduction is used to offset H’s income; the remaining portion

offsets W’s income.   The example limits W’s liability to the

portion of the deficiency attributable to her income offset.

However, with respect to H, the regulations conclude that H’s

election to be relieved of the portion of the deficiency

attributable to W’s income offset “would be invalid because H had

actual knowledge of the erroneous items.”21   If the final

regulations were intended to limit application of section

6015(d)(3)(B) to erroneous deductions of a nonrequesting spouse,



     21
      Sec. 1.6015-3(d)(5), Example (5), Income Tax Regs.,
provides:

          Example (5). Requesting spouse receives a benefit
     on the joint return from the nonrequesting spouse’s
     erroneous item. (i) In 2001, H reports gross income of
     $4,000 from his business on Schedule C, and W reports
     $50,000 of wage income. On their 2001 joint Federal
     income tax return, H deducts $20,000 of business
     expenses resulting in a net loss from his business of
     $16,000. H and W divorce in September 2002, and on May
     22, 2003, a $5,200 deficiency is assessed with respect
     to their 2001 joint return. W elects to allocate the
     deficiency. The deficiency on the joint return results
     from a disallowance of all of H’s $20,000 of
     deductions.

          (ii) Since H used only $4,000 of the disallowed
     deductions to offset gross income from his business, W
     benefitted from the other $16,000 of the disallowed
     deductions used to offset her wage income. Therefore,
     $4,000 of the disallowed deductions are allocable to H
     and $16,000 of the disallowed deductions are allocable
     to W. W’s liability is limited to $4,160 (4/5 of
     $5,200). If H also elected to allocate the deficiency,
     H’s election to allocate the $4,160 of the deficiency
     to W would be invalid because H had actual knowledge of
     the erroneous items. [Emphasis added.]
                                - 23 -

as respondent argues, the regulations could have simply said

that.

     But Example (5) of the final regulations indicates that the

alternative allocation method of section 6015(d)(3)(B) is applied

to both W and H, even though the erroneous deduction is initially

H’s item.    This is illustrated by the fact that H is denied

relief under the actual knowledge exception.    The actual

knowledge exception contained in section 6015(c)(3)(C) denies

relief only if the Commissioner proves that the electing

individual had actual knowledge of an item allocable to the other

individual.22    Thus, before the actual knowledge exception can be

applied, there must be an allocation of the items giving rise to

a deficiency.     In Example (5), actual knowledge would have no

relevance if the erroneous deduction was an item entirely

allocable to H.     The example makes sense only if a portion of H’s

item is reallocated to W pursuant to section 6015(d)(3)(B).

        Unless respondent establishes that petitioner had actual

knowledge of the items giving rise to the deficiencies,

petitioner is entitled to relief to the extent the deficiencies

are attributable to Mr. Hopkins.




     22
      The actual knowledge exception contained in sec.
6015(c)(3)(C) applies only in the case of “any item giving rise
to a deficiency (or portion thereof) which is not allocable to
such individual under subsection (d)”.
                                - 24 -

          b.    Actual Knowledge Exception Does Not Apply to
                Petitioner

     As previously indicated, if the Commissioner demonstrates

that an individual making the election under section 6015(c) had

“actual knowledge”, at the time such individual signed the

return, of any item giving rise to a deficiency (or portion

thereof) which is not allocable to such individual under section

6015(d), the election under section 6015(c) will not apply to

such deficiency (or portion).    Sec. 6015(c)(3)(C).   The

Commissioner must prove actual knowledge by a preponderance of

the evidence.    Culver v. Commissioner, 116 T.C. 189, 196 (2001).

Actual knowledge in the case of disallowed deductions consists of

“actual knowledge of the factual circumstances which made the

item unallowable as a deduction.”    King v. Commissioner, 116 T.C.

198, 204 (2001).   Actual knowledge of the tax laws or legal

consequences of the operative facts are not required.        Id.;

Cheshire v. Commissioner, 115 T.C. 183, 196-197 (2000), affd. 282

F.3d 326 (5th Cir. 2002).

     Respondent concedes that he has not proven actual knowledge

with respect to the Far West Drilling adjustments that are

allocable to Mr. Hopkins.   Respondent makes no argument on brief

with respect to petitioner’s actual knowledge of the NOL

carryforward deductions for 1982 and 1984 attributable to the
                               - 25 -

casualty loss.23   We hold that respondent has not proven that

petitioner had actual knowledge of the factual circumstances

which made the NOL carryforward and the Far West Drilling

deductions unallowable.

          c.   Conclusion

     We hold that petitioner is relieved of liability for

deficiencies attributable to Mr. Hopkins’s erroneous partnership

deductions except for the portion, if any, of the erroneous

partnership deductions that offsets her income.    We also hold

that petitioner is liable for deficiencies attributable to her

erroneous NOL deductions to the extent the NOL deductions may

have offset her income, and she is relieved of liability for any

portion of the deficiencies attributable to the erroneous NOL

deductions which offset Mr. Hopkins’s income.     Most of the income

for the years 1982, 1983, and 1984 was Mr. Hopkins’s income.

However, the record is not clear about some of the items of

income, such as interest.   We expect the parties to resolve this

uncertainty as part of the Rule 155 computation.




     23
      The NOL deductions were disallowed because of
overstatements of the NOL carryback and carryforward deductions
attributable to the casualty loss. A certified public accountant
prepared the joint tax returns for 1981, 1982, and 1984. He
testified that he dealt with Mr. Hopkins and could not recall
whether he discussed the tax returns with petitioner. He did not
testify regarding what petitioner did or did not know in signing
the joint returns.
                                 - 26 -

     3.   Section 6015(f)

     After we grant relief to petitioner under section 6015(c),

she may still have some liability for portions of the

deficiencies for 1982, 1983, and 1984 that are allocable to her

under section 6015(d).      We will therefore consider her

eligibility for relief under section 6015(f).      Under section

6015(f), the Secretary is authorized to grant equitable relief

where:    (1) The taxpayer is not entitled to relief 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 any deficiency (or any portion of either)”.

See Cheshire v. Commissioner, 282 F.3d at 338.      We review for an

abuse of discretion the Commissioner’s decision not to grant

equitable relief.    Butler v. Commissioner, 114 T.C. 276, 292

(2000).

     The Far West Drilling deductions and the overstated NOL

carryforward deductions greatly reduced petitioner and Mr.

Hopkins’s joint tax liabilities in 1982, 1983, and 1984.      In or

about those years, considerable amounts were spent to rebuild

petitioner’s house at 111 Diablo Drive.      Petitioner was, and

still is, the sole owner of that residence, and she was the

person who received the most comfort and benefit from the use of

that residence before and after those years.      The reduced tax

liabilities for 1982, 1983, and 1984 enhanced petitioner’s
                                - 27 -

ability to rebuild the residence.     Petitioner did not present

evidence regarding her inability to pay her reasonable basic

living expenses, see sec. 301.6343-1(b)(4)(i), Proced. & Admin.

Regs., or any other unique circumstances which might lead us to

conclude that she will suffer economic hardship if, after

application of section 6015(c), she remains jointly and severally

liable for any remaining portions of the liabilities for 1982,

1983, and 1984.     We hold that respondent did not abuse his

discretion in deciding that it is not inequitable to hold

petitioner jointly and severally liable for any remaining

portions of the joint income tax liabilities for 1982, 1983, and

1984.     Petitioner is not entitled to relief for those liabilities

under section 6015(f).

B.   Underpayments in 1988 and 1989

        Petitioner claims relief under section 6015(b), (c), or (f)

for her joint and several tax liabilities for 1988 and 1989.

Subsections (b) and (c) of section 6015 apply only in the case of

“an understatement of tax” or “any deficiency” in tax and do not

apply in the case of underpayments of taxes reported on joint tax

returns.     Sec. 6015(b)(1)(B) and (c)(1); see also Block v.

Commissioner, 120 T.C. 62, 66 (2003); Ewing v. Commissioner, 118

T.C. 494, 497, 498 n.4 (2002).     We hold that petitioner is not

entitled to relief under section 6015(b) or (c) for her 1988 and

1989 tax liabilities.
                               - 28 -

     In determining an individual’s entitlement to relief under

section 6015(f) for an underpayment, the Commissioner considers

the requesting spouse’s knowledge, or reason to know, that the

liability would be unpaid at the time the return was signed, as a

factor weighing against relief.    Rev. Proc. 2000-15, sec.

4.03(2)(b), 2000-1 C.B. 447, 449.

     Petitioner has not shown to our satisfaction that she had no

knowledge, or reason to know, that the taxes reported on the

joint returns for 1988 and 1989 would not be paid.    The record

indicates that she was involved in the preparation of the returns

for those years.    Indeed, the 1989 joint tax return contains an

attached Form 2688, Application for Additional Extension of Time

to File U.S. Individual Income Tax Return, dated August 14, 1990,

which states:

     At present we are not able to meet more demands of the
     IRS than we have already on hand. We are physically
     ill and emotionally sick. All of us are suffering from
     POST TRAUMATIC STRESS SYNDROMS.

     In spite of our conditions, we are currently dealing
     with the IRS on a major scale: our casualty loss
     investigation. Our home and all of our belongings were
     destroyed by a huge mudslide. We barely escaped with
     our lives. We are financially devastated. We can not
     do more.

     Please honor our request for an extension of this
     matter until the casualty loss investigation is
     concluded.

     Thank you!    * * * [signed Marianne Hopkins].
                              - 29 -

     Petitioner has not established that she did not know, or had

no reason to know, that the reported tax liabilities on the 1988

and 1989 joint tax returns would be unpaid at the time she signed

those joint tax returns.   See Rev. Proc. 2000-15, sec.

4.03(1)(d), 2000-1 C.B. at 449.   Petitioner has not established

that she will suffer economic hardship if relief is not granted.

On the record before us, petitioner has not demonstrated that

respondent’s failure to grant equitable relief for the unpaid

1988 and 1989 joint tax liabilities was an abuse of discretion.



                                                Decision will be

                                           entered under Rule 155.
