                         T.C. Memo. 2011-97



                       UNITED STATES TAX COURT



 WILLIAM PAUL CROUSE, JR., AND CANDRA J. CROUSE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24660-08.                Filed May 2, 2011.



     William Paul Crouse, Jr., and Candra J. Crouse, pro sese.

     Timothy S. Sinnott, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined a deficiency in, an

addition under section 6651(a)(1)1 to, and an accuracy-related

penalty under section 6662(a) on petitioners’ Federal income tax



     1
      All section references are to the Internal Revenue Code
(Code) in effect at all relevant times. All Rule references are
to the Tax Court Rules of Practice and Procedure.
                                - 2 -

(tax) for their taxable year 2001 of $1,241,658, $308,373, and

$248,332, respectively.

       The issues remaining for decision for petitioners’ taxable

year 2001 are:2

       (1) Do petitioners have certain unreported income?    We hold

that they do.

       (2) Are petitioners entitled to deduct a proportionate share

of the losses of TRG Administration, LLC?    We hold that they are

not.

       (3) Are petitioners liable before the application of section

6015 with respect to petitioner Candra J. Crouse for the addition

to tax under section 6651(a)(1)?    We hold that they are.

       (4) Are petitioners liable before the application of section

6015 with respect to petitioner Candra J. Crouse for the

accuracy-related penalty under section 6662(a)?    We hold that

they are.

       (5) Is petitioner Candra J. Crouse entitled to relief under

section 6015 in addition to the relief under that section that

respondent concedes?    We hold that she is to the extent stated

herein.




       2
      In addition to the issues remaining for decision for peti-
tioners’ taxable year 2001 that are listed below in the text,
there are other questions relating to certain determinations in
the notice of deficiency for that year that are computational.
                               - 3 -

                         FINDINGS OF FACT

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

     At the time petitioners filed the petition in this case,

petitioner William Paul Crouse (Mr. Crouse) resided in Florida,

and petitioner Candra J. Crouse (Ms. Crouse) resided in Indiana.

     Mr. Crouse is a high school graduate.   He also took certain

college classes but did not receive a college degree.   In 1988,

Ms. Crouse graduated from Ball State University with a bachelor

of science degree in telecommunications.

     During 2001, Mr. Crouse and Carmelo Zanfei (Mr. Zanfei)

each owned a 50-percent interest in each of the following three

limited liability companies:   The Redwood Group, LLC (Redwood),

TRG Marketing, LLC (Marketing), and TRG Administration, LLC

(Administration).   At all relevant times, Redwood, Marketing, and

Administration were treated as partnerships for tax purposes

because each of those companies had made an election to be so

treated.

     During 200l, UBA Insurance Services, Inc., paid to Mr.

Crouse total nonemployee compensation of $2,842.20 (Mr. Crouse’s

2001 nonemployee compensation).   It issued to Mr. Crouse two

Forms 1099-MISC, Miscellaneous Income (Form 1099-MISC), for that

year in which it reported nonemployee compensation paid to him

totaling that amount.

     In early 2001, Ms. Crouse worked for approximately two

months in the customer service department of a company identified
                               - 4 -

as TRG.3   In July 2001, Ms. Crouse learned that she was pregnant

and chose to stop working for that company.   At no time did Ms.

Crouse participate in any business decisions of Redwood, Market-

ing, or Administration.   Nor did Ms. Crouse have any responsibil-

ities with respect to the finances of any of those companies.

     During 2001, Marketing paid to Ms. Crouse nonemployee

compensation of $33,127 (Ms. Crouse’s 2001 nonemployee compensa-

tion) and reported that amount in Form 1099-MISC that it issued

to her for that year.   During 2001, Administration paid to Ms.

Crouse wages of $14,226.48 and reported that amount in Form W-2,

Wage and Tax Statement, that it issued to her for that year.4

     From around April 2 through around July 23, 2001, Mr. Crouse

embezzled a total of approximately $1.29 million from Redwood,

Marketing, and/or Administration, including the amounts discussed

below that Mr. Crouse used for his own benefit or the benefit of

his family.




     3
      The record does not establish whether Ms. Crouse worked for
Marketing, Administration, and/or Redwood during 2001. However,
as discussed below, during 2001 both Marketing and Administration
paid certain amounts to Ms. Crouse.
     4
      The record does not establish whether the respective
amounts that Administration and Marketing paid to Ms. Crouse
during 2001 were compensation for any of the work that Ms. Crouse
performed during that year in the customer service department of
the company identified as TRG. See supra note 3.
                                   - 5 -

       Around April 2, 2001, Mr. Crouse signed a $62,307.82 check

payable to Ms. Crouse and drawn on a certain bank account main-

tained at National City Bank in the name of “TRG Companies”

(TRG bank account), over which Mr. Crouse had signatory author-

ity.       That check was deposited into a certain account that

petitioners maintained at Fifth Third Bank (Crouse bank account).

Both Mr. Crouse and Ms. Crouse had signatory authority over, and

withdrew funds from, the Crouse bank account.

       Around April 19, 2001, Mr. Crouse withdrew $546,732 from

a certain bank account that Administration maintained at Fifth

Third Bank (Administration bank account), over which Mr. Crouse

had signatory authority.       Mr. Crouse used those funds to purchase

a so-called official check5 in the amount of $546,732 payable to

Chicago Title.       Mr. Crouse used that official check to purchase

as petitioners’ residence a house in Greenwood, Indiana (Green-

wood residence).       Ms. Crouse did not sign any documents relating

to the purchase of that house and did not make any inquiries of

Mr. Crouse or anyone else with respect to the source of the funds

used for that purchase.       Around May 2001, petitioners moved into

their Greenwood residence.

       Around May 2, 2001, Mr. Crouse withdrew $193,000 from the

TRG bank account.       Mr. Crouse used $53,000 of those funds to


       5
      Although it is not altogether clear, it would appear that
an official check is a cashier’s check, certified check, or other
similar check issued by a bank.
                                - 6 -

purchase an official check in that amount payable to Ms. Crouse.6

That check was deposited into the Crouse bank account.

     Around June 21, 2001, Mr. Crouse withdrew $100,000 from the

Administration bank account.    Mr. Crouse used $50,000 of those

funds to purchase an official check in that amount payable to

Ms. Crouse.7    That check was deposited into the Crouse bank

account.

     Around July 6, 2001, Mr. Crouse withdrew $208,000 from a

certain bank account held at Fifth Third Bank in the name of

Marketing (Marketing bank account), over which Mr. Crouse had

signatory authority.    Mr. Crouse used $104,000 of those funds

to purchase an official check in that amount payable to Ms.

Crouse.8   That check was deposited into the Crouse bank account.

     Around July 23, 2001, Mr. Crouse withdrew $180,000 from the

Marketing bank account.    Mr. Crouse used $80,000 of those funds

to purchase an official check in that amount payable to himself.9

Mr. Crouse endorsed that check and deposited it into the Crouse

bank account.



     6
      The record does not establish what Mr. Crouse did with the
remaining $140,000 that he withdrew from the TRG bank account on
May 2, 2001.
     7
      Mr. Crouse gave to Mr. Zanfei the remaining $50,000.
     8
      Mr. Crouse gave to Mr. Zanfei the remaining $104,000.
     9
      Mr. Crouse used $10,000 of the remaining funds to purchase
an official check in that amount payable to Katheryn Zanfei.
Mr. Crouse gave to Mr. Zanfei the remaining $90,000.
                                - 7 -

     Of the approximately $1.29 million that Mr. Crouse embezzled

from Redwood, Marketing, and/or Administration, $546,732 was used

to purchase the Greenwood residence and $349,307.82 was deposited

into the Crouse bank account.   Those embezzled amounts total

$896,039.82.

     In 2003, Mr. Crouse was charged by the State of Florida with

operating an insurance company without a license.   In 2005, Mr.

Crouse pleaded guilty to that charge and was sentenced to a term

of imprisonment.

     Around December 10, 2004, Redwood filed Form 1065, U.S.

Return of Partnership Income (Form 1065), for its taxable year

2001 (2001 Redwood return).   In that return, Redwood reported

$2,097,280 of ordinary income from trade or business activities

for that year.   Redwood included with the 2001 Redwood return

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

etc. (Schedule K-1), for taxable year 2001 with respect to each

of its two interest-holders, Mr. Crouse and Mr. Zanfei.   In the

Schedule K-1 that Redwood completed with respect to Mr. Crouse

and issued to him (2001 Redwood Schedule K-1), Redwood showed

(1) $1,050,796 as Mr. Crouse’s share of Redwood’s ordinary income

from trade or business activities,10 (2) $854,356 of withdrawals


     10
      The amount that Redwood showed in the 2001 Redwood Sched-
ule K-1 as ordinary income from trade or business activities was
not equal to Mr. Crouse’s proportionate share of such income that
Redwood reported in the 2001 Redwood return. As discussed above,
                                                   (continued...)
                               - 8 -

by, and distributions to, Mr. Crouse, and (3) $248,535 as Mr.

Crouse’s capital account at the end of the 2001 taxable year.

     Around January 10, 2005, Marketing filed Form 1065 for

its taxable year 2001 (2001 Marketing return).    In that return,

Marketing reported $2,086,591 of ordinary income from trade or

business activities for that year.     Marketing included with the

2001 Marketing return Schedule K-1 for taxable year 2001 with

respect to each of its two interest-holders, Mr. Crouse and Mr.

Zanfei.   In the Schedule K-1 that Marketing completed with

respect to Mr. Crouse and issued to him (2001 Marketing Schedule

K-1), Marketing showed (1) $1,043,295 as Mr. Crouse’s share of

Marketing’s ordinary income from trade or business activities,11


     10
      (...continued)
in the 2001 Redwood return Redwood reported $2,097,280 of ordi-
nary income from trade or business activities. Mr. Crouse’s
proportionate share (i.e., 50 percent) of that income is
$1,048,640 and not $1,050,796 as Redwood showed in the 2001
Redwood Schedule K-1. Redwood attached to the 2001 Redwood
return Schedule K, Partners’ Shares of Income, Credits, Deduc-
tions, etc. (Schedule K), in which it showed $2,101,592 of
ordinary income from trade or business activities for its taxable
year 2001. The $1,050,796 that Redwood showed in the 2001
Redwood Schedule K-1 equals Mr. Crouse’s proportionate share
(i.e., 50 percent) of the $2,101,592 that Redwood showed as
ordinary income from trade or business activities in the Schedule
K that it attached to the 2001 Redwood return. The record does
not establish why there is a discrepancy between the amount of
ordinary income from trade or business activities that Redwood
reported in the 2001 Redwood return and the amount of such
ordinary income Redwood showed in the Schedule K that it attached
to that return.
     11
      The amount that Marketing showed in the 2001 Marketing
Schedule K-1 as ordinary income from trade or business activities
                                                   (continued...)
                              - 9 -

(2) no withdrawals by, or distributions to, Mr. Crouse, and

(3) $1,043,158 as Mr. Crouse’s capital account at the end of

the 2001 taxable year.

     Around January 10, 2005, Administration filed Form 1065

for its taxable year 2001 (2001 Administration return).   In that

return, Administration reported $6,876,542 as an ordinary loss

from trade or business activities for that year.   Administration

included with the 2001 Administration return Schedule K-1 for

taxable year 2001 with respect to each of its two interest-

holders, Mr. Crouse and Mr. Zanfei.   In the Schedule K-1 that

Administration completed with respect to Mr. Crouse and issued

to him (2001 Administration Schedule K-1), Administration showed

(1) $3,449,325 as Mr. Crouse’s share of Administration’s ordinary

loss from trade or business activities,12 (2) no withdrawals by,


     11
      (...continued)
was equal to Mr. Crouse’s proportionate share of such income
that Marketing reported in the 2001 Marketing return.
     12
      The amount that Administration showed in the 2001 Adminis-
tration Schedule K-1 as an ordinary loss from trade or business
activities was not equal to Mr. Crouse’s proportionate share of
such loss that Administration reported in the 2001 Administration
return. As discussed above, in the 2001 Administration return
Administration reported $6,876,542 as an ordinary loss from trade
or business activities. Mr. Crouse’s proportionate share (i.e.,
50 percent) of that loss is $3,438,271 and not $3,449,325 as
Administration showed in the 2001 Administration Schedule K-1.
Administration attached to the 2001 Administration return Sched-
ule M-1, Reconciliation of Income (Loss) per Books With Income
(Loss) per Return (Schedule M-1), and Schedule M-2, Analysis of
Partners’ Capital Accounts (Schedule M-2). In both of those
schedules Administration showed $6,898,650 as a “Net * * * (loss)
                                                   (continued...)
                              - 10 -

or distributions to, Mr. Crouse, and (3) $3,449,325 as Mr.

Crouse’s capital account at the end of the 2001 taxable year.

     On October 10, 2005, Mr. Crouse reported to prison in

Florida to serve the prison term to which he had been sentenced

after he pleaded guilty to the charge of operating an insurance

company without a license.

     On October 14, 2005, petitioners jointly filed Form 1040,

U.S. Individual Income Tax Return, for their taxable year 2001

(2001 joint return) that both Mr. Crouse and Ms. Crouse signed.

Ms. Crouse did not review that return or inquire about its

accuracy before she signed it.   At the time she signed the 2001

joint return, Ms. Crouse did not suffer from any physical or

mental illness.

     In the 2001 joint return, petitioners reported, inter alia,

wage income of $93,329.05.   That amount included (1) Mr. Crouse’s

2001 nonemployee compensation and (2) Ms. Crouse’s 2001

nonemployee compensation.

     Petitioners attached to the 2001 joint return the 2001

Redwood Schedule K-1, the 2001 Marketing Schedule K-1, and




     12
      (...continued)
per books” for its taxable year 2001. The $3,449,325 that
Administration showed in the 2001 Administration Schedule K-1
equals Mr. Crouse’s proportionate share (i.e., 50 percent) of the
$6,898,650 that Administration showed as a “Net * * * (loss) per
books” in each of Schedule M-1 and Schedule M-2 that it attached
to the 2001 Administration return.
                                 - 11 -

the 2001 Administration Schedule K-1.     Petitioners also attached

to the 2001 joint return Schedule E, Supplemental Income and Loss

(2001 Schedule E).   In the 2001 Schedule E, petitioners showed

a total loss of $1,266,109 that was derived almost entirely from

(1) $1,043,295 of ordinary income from trade or business activi-

ties that Marketing showed in the 2001 Marketing Schedule K-1,

(2) $1,050,796 of ordinary income from trade or business activi-

ties that Redwood showed in the 2001 Redwood Schedule K-1, and

(3) $3,376,356 of ordinary loss from trade or business activities

(2001 Administration loss) that Administration showed in the 2001

Administration Schedule K-1.13    Petitioners reduced the total

income that they reported in the 2001 joint return by the total

loss of $1,266,109 that they reported in the 2001 Schedule E.

Petitioners reported in the 2001 joint return no taxable income,

no tax, and no self-employment tax.

     Around March 22, 2006, a Federal grand jury in the U.S.

District Court for the Southern District of Indiana (District

Court) indicted Mr. Crouse for embezzlement and money laundering

with respect to the amounts that Mr. Crouse embezzled from

Redwood, Marketing, and/or Administration from around April 2

through around July 23, 2001.     With respect to each of the




     13
      In the 2001 Schedule E, petitioners also reported $16,156
of total rental real estate income from two rental real estate
properties.
                               - 12 -

official checks that Mr. Crouse purchased that were made payable

to Ms. Crouse, the indictment against Mr. Crouse stated that

the “official check [made payable to Ms. Crouse] was endorsed

by Candra J. Crouse”.

     On October 18, 2006, Mr. Crouse entered a plea of guilty

in the District Court to six counts of embezzlement and one count

of money laundering.    On December 4, 2007, the District Court

sentenced Mr. Crouse to, inter alia, 57 months’ imprisonment that

was to run concurrently with the sentence that Mr. Crouse had

received in Florida on the charge of operating an insurance

company without a license.

     On July 16, 2008, respondent issued to petitioners a notice

of deficiency (2001 notice) for their taxable year 2001, in which

respondent determined a deficiency of $1,241,658 in petitioners’

tax for that year.   In that notice, respondent determined, inter

alia, (1) to recharacterize as self-employment income subject to

self-employment tax Mr. Crouse’s 2001 nonemployee compensation

and Ms. Crouse’s 2001 nonemployee compensation,14 (2) to include

in gross income embezzlement income subject to self-employment

tax of $299,308, which equaled the total amount that Mr. Crouse

withdrew from the TRG bank account and the Marketing bank account


     14
      Petitioners concede that Mr. Crouse’s 2001 nonemployee
compensation and Ms. Crouse’s 2001 nonemployee compensation are
self-employment income of petitioners for their taxable year
2001. Petitioners also concede that that income is subject to
self-employment tax for that year.
                                - 13 -

and that was deposited in the Crouse bank account, (3) to include

in gross income embezzlement income not subject to self-employ-

ment tax of $596,732, which equaled the total amount that Mr.

Crouse withdrew from the Administration bank account and that Mr.

Crouse used primarily to purchase the Greenwood residence,15 and

(4) to disallow the claimed deduction for the 2001 Administration

loss.     Respondent also determined in the 2001 notice that peti-

tioners are liable for the addition to tax under section

6651(a)(1) and the accuracy-related penalty under section

6662(a).

     Around March 24, 2009, Ms. Crouse filed Form 8857, Request

for Innocent Spouse Relief (Ms. Crouse’s Form 8857).    In that

form, Ms. Crouse claimed that she had total monthly income of

$4,166 and total monthly expenses of $4,142.    Those claimed

expenses consisted of:




     15
      The $299,308 of embezzlement income subject to self-em-
ployment tax that respondent determined to include in petition-
ers’ gross income and the $596,732 of embezzlement income not
subject to self-employment tax that respondent determined to
include in gross income total $896,040. In the 2001 notice,
respondent did not determine to include in petitioners’ gross
income approximately $394,000, the balance of the approximate
amount (i.e., $1.29 million) that Mr. Crouse embezzled from
Redwood, Marketing, and/or Administration.
                              - 14 -

                 Claimed Monthly Expense            Amount
       Federal, State, and local taxes                $966
       Rent or mortgage                                885
       Utilities                                       300
       Telephone                                        92
       Food                                            800
       Car (including car payments and insurance)      350
       Medical expenses                                175
       Life insurance                                   29
       Clothing                                         50
       Child care                                      200
       Storage unit                                     75
       Cell phone                                      170
       Cable                                            50
          Total                                      4,142

Ms. Crouse did not attach any documentation to Ms. Crouse’s Form

8857 to establish that she had each of the monthly expenses that

she claimed in that form.   Around May 2009, after Ms. Crouse

filed Ms. Crouse’s Form 8857, she discontinued her home telephone

service, which she claimed in that form cost $92 a month.

     After reviewing Ms. Crouse’s request, respondent’s examiner

prepared an examination workpaper dated May 27, 2009 (examination

workpaper).   The examination workpaper stated, inter alia:

                        GENERAL INFORMATION

     Partial - She is liable for part of the understatement.
     They both reported their NEC [nonemployee compensation]
     income as wages. They are liable for the SE [self-
     employment] tax on this income. She had actual knowl-
     edge of his NEC he reported as wages, $269,308 of
     embezzled income paid to her, she deposited to joint
     account. She had constructive knowledge of $626,732
     embezzled income, $80,000 made out the him, deposited
     into joint account & $546,732 made out the Chicago
     Title for the home. She had no knowledge of his Sch E
                         - 15 -

loss that was disallowed & added as income $3,376,356.
She did not help in his business nor was she partner.

                 General Info Continued
                    SPOUSE’S RESPONSE

General info continued - She has not been compliant
with all tax laws. has filing requirement for 2002,
2007 & 2008 & no rtn filed. 2003 filed late with bal
due & no pmts. 2004, 2005 & 2006 are SFR [substitute
for return] rtn filed since she did not file a rtn.
They are still married & living together.

                   EVALUATION PROCESS

     Year 2001

                       IRC 6015(b)
Liability arose on or after July 22, 1998
Understatement of tax
No payments were made by the RS [requesting spouse]
Taxpayers are currently not divorced, widowed or le-
gally separated, and did not live apart prior to the
claim - relief is not available under IRC 6015(c)
Filed a joint return
Joint return is valid
There is enough information to determine the claim
Balance due remaining
RS did not sign the amended return or a waiver
There was not a deficiency notice, or the notice was
not closed in default
There is a potential deficiency pending
Statutory Notice of Deficiency has been issued
No OIC accepted
Claim filed timely
Over $1,500 of understatement - full scope
Understatement of tax attributable to both spouses
Erroneous items:     Per exam audit they both listed
                     their NEC income as wages, Candra
                     $33,127 & William $2,842. William
                     had also embezzled money $896,040.
                     William’s Schedule E income was
                     also increased to $3,376,356.
RS’s attribution does not meet the attribution excep-
tions. This portion will be denied under IRC 6015(f).
Continue IRC 6015(b) for the portion attributable to
the NRS [nonrequesting spouse].
                        - 16 -

Knowledge factors:
Background:
   RS - College Degree            NRS -
        Bachelor of Science

Involvement:
   RS - She stated not involved   NRS - They had a
        in household finances.          joint account
        However per the court           & he also had
        document on his guilty          separate
        plea of embezzled in-           business
        come, they had a joint          accounts.
        account she had full
        access to & used.
        She made deposits.

Lifestyle changes:     No
NRS’s elusiveness:     No
Duty to inquire:       She did not review the return
                       before signing it.
Living arrangements:   Lived together all year.
RS had actual knowledge of some items, constructive
knowledge of some items, and no knowledge of others
when return, CP2000, Form 1040X, etc. was signed
Explanation:           She had actual knowledge of
                       $269,308 embezzled income,
                       checks written to her, she
                       signed & deposited into joint
                       account. Constructive knowledge
                       of $80,000 embezzled income he
                       made out to himself & deposited
                       into joint account & $546,732
                       embezzled income he made out to
                       Chicago Title for the house. Had
                       actual knowledge of his NEC he
                       reported as wages on rtn [re-
                       turn]. No knowledge of Sch E
                       income.
The items with actual knowledge will be considered
under IRC 6015(f) full scope
The items with constructive knowledge will be consid-
ered under IRC 6015(c)
Continue IRC 6015(b) for the items with no knowledge
                        - 17 -

Inequitable factors:
Taxpayers are currently not divorced, widowed or le-
gally separated, and did not live apart prior to the
claim for at least 12 consecutive months
No economic hardship
Explanation:        She overstated expenses & listed
                    expenses not considered basic living
                    such as $50 cable, $170 cell phone,
                    $75 storage, $92 house phone allowed
                    $40 & $800 food. After making
                    changes her income exceeds expenses
                    by $821 a month.
No marital abuse
No poor mental or physical health
No legal obligation established
No significant benefit gained
Explanation:        She did not receive any benefit.
Did not make a good faith effort to comply with the tax
laws.
Explanation:        She has filing requirement      for
                    2002, 2007 & 2008 and no returns
                    filed. 2003 rtn was filed late,
                    with balance due & no payments.
                    2004, 2005 & 2006 are all SFR filed
                    tax returns. No rtn filed by her &
                    balance due on these years with no
                    payments being made.
Unique circumstances: No
Equitability test failed - deny claim
Equitability: Based on the above facts it is equitable
                to hold the RS liable for the balance.
                    She is liable for part of US [under-
                    statement]. She had
                    constructive/actual knowledge of
                    income not reported or reported in-
                    correctly. She has not been compli-
                    ant with tax laws. They are still
                    married & living together.
             Claim denied under IRC 6015(b)
                 Switched to IRC 6015(c)

                      IRC 6015(c)
Taxpayers are currently not divorced, widowed or le-
gally separated
Taxpayers had not been members of separate households
for at least 12 consecutive months - deny claim under
IRC 6015(c)
                               - 18 -

                  Claim denied under IRC 6015(c)
      Also deny under 6015(f) based on inequitable factors

                            CONCLUSION
           Partial
     2001- Denied under 6015(b),(c),(f)

          Comment:
     Partial - She is liable for part of the understatement.
     She had actual/constructive knowledge of the embezzled
     income, actual knowledge of his NEC that was reported
     as wages & no knowledge of the Sch E loss that was
     disallowed. She has not been compliant with all tax
     laws. It will not cause an economic hardship. They
     are still married & living together. [Reproduced
     literally.]

     Respondent concluded that Ms. Crouse is entitled to relief

under section 6015(b) with respect to the respective portions

totaling $989,748 of the deficiency for 2001 that are attribut-

able to respondent’s determinations disallowing petitioners’

claimed deduction for the 2001 Administration loss and

recharacterizing as self-employment income subject to self-

employment tax Mr. Crouse’s 2001 nonemployee compensation

of $2,842.20.16   Respondent concluded that Ms. Crouse is not


     16
      In the examination workpaper, respondent’s examiner con-
cluded that Ms. Crouse was not entitled to relief under sec.
6015(b) with respect to the portion of the deficiency for 2001
that is attributable to respondent’s recharacterizing as self-
employment income subject to self-employment tax Mr. Crouse’s
2001 nonemployee compensation. After respondent’s examiner
prepared that workpaper, respondent prepared a so-called innocent
spouse allocation worksheet for the purpose of calculating the
amount of the portion of the deficiency for 2001 with respect to
which Ms. Crouse is entitled to relief. In that allocation
worksheet, respondent concluded that Ms. Crouse is entitled to
relief under sec. 6015 with respect to $989,748 of the deficiency
for 2001. That amount included that portion of the deficiency
                                                   (continued...)
                              - 19 -

entitled to relief under section 6015(b), (c), or (f) with

respect to the respective portions totaling $251,910 of the

deficiency for 2001 that are attributable to respondent’s deter-

minations in the 2001 notice (1) to recharacterize as self-

employment income subject to self-employment tax Ms. Crouse’s

2001 nonemployee compensation of $33,127 and (2) to include in

gross income (a) embezzlement income of $299,308 that is subject

to self-employment tax and (b) embezzlement income of $596,732

that is not subject to self-employment tax.   Around July 10,

2009, Mr. Crouse sent to respondent’s Appeals Office a letter

dated July 6, 2009.   Mr. Crouse attached to that letter completed

Form 12507, Innocent Spouse - Statement (Mr. Crouse’s Form

12507), and Form 12508, Questionnaire for Non-Requesting Spouse

(Mr. Crouse’s Form 12508).

     In Mr. Crouse’s Form 12507, Mr. Crouse stated:

     My spouse, Candra Jill Crouse, has never been involved
     in the business in which the IRS claims has [sic]
     created a deficiency in taxation. Therefore, she
     should not be part of these proceedings. In addition,
     my spouse never had any information about the finances
     of any of the companies in question.

     In Mr. Crouse’s Form 12508, Mr. Crouse stated that the “2001

Tax Returns were prepared by my business partner Carmelo Zanfei.


     16
      (...continued)
attributable to respondent’s determination recharacterizing as
self-employment income subject to self-employment tax Mr.
Crouse’s 2001 nonemployee compensation. On brief, respondent
concedes that Ms. Crouse is entitled to relief under sec. 6015(b)
with respect to $989,748 of the deficiency for 2001.
                               - 20 -

My spouse and I signed the returns, without reviewing, the

morning I left to catch a plane to Florida to report to prison on

10-10-2005.”   In Mr. Crouse’s Form 12508, Mr. Crouse also stated

that his “Spouse [Ms. Crouse] worked for a couple of months in

our Customer Service Department.   Did not participate in any

other capacity” and that his “Spouse did not participate in the

Company operations and the amounts of tax in Dispute had nothing

to do with her.”

     At all relevant times, including during the year at issue,

at the time Mr. Crouse was released from prison on November 27,

2009, and at the time of the trial in this case, Mr. Crouse and

Ms. Crouse were married.   At no time during their marriage did

Mr. Crouse abuse Ms. Crouse.   Before Mr. Crouse was released from

prison on November 27, 2009, petitioners had not discussed

whether they would divorce, and neither Mr. Crouse nor Ms. Crouse

had filed for divorce as of that date.   Around February or March

2010, several months before the trial in this case, Mr. Crouse

filed for divorce.   At an undisclosed time between the date on

which Mr. Crouse was released from prison and the date of that

trial, petitioners began living separate and apart.

     At the time of the trial in this case, Ms. Crouse had not

filed timely a tax return for any of her taxable years 2003
                               - 21 -

through 2008.17   Nor had Ms. Crouse timely paid as of the time of

the trial in this case the tax for any of her taxable years 2003

through 2006 that respondent determined was due.18

     During 2010, Ms. Crouse received a 4.5-percent raise in her

salary.   At the time of the trial in this case, she no longer

maintained the storage unit costing $75 per month that she

claimed in Ms. Crouse’s Form 8857.      At that time, Ms. Crouse

had total monthly income of $4,353 and total monthly expenses

of $4,010 that consisted of:




     17
      The record does not establish whether Ms. Crouse filed on
or before Apr. 15, 2010, (1) a return for her taxable year 2009,
or (2) a request for an extension of time within which to file
that return.
     18
      The record does not establish whether Ms. Crouse paid
timely the tax for each of her taxable years 2007 through 2009
that respondent determined was due.
                              - 22 -

                  Claimed Monthly Expense           Amount
                                                    1
        Federal, State, and local taxes               $1,001
        Rent or mortgage                                 885
        Utilities                                        300
        Food                                             800
        Car (including car payments and insurance)       350
        Medical expenses                                 175
        Life insurance                                    29
        Clothing                                          50
        Child care                                       200
        Cell phone                                       170
        Cable                                             50
           Total                                       4,010
     1
       We approximated as of the time of the trial in this case
the total amount of the Federal, State and local taxes that Ms.
Crouse paid each month on the 4.5-percent increase in her monthly
salary. As a result, the total monthly expenses that we have
found is an approximate amount. For convenience, we shall not
refer to that total monthly amount as approximate.

                             OPINION

     Petitioners bear the burden of proving that the determina-

tions in the 2001 notice are erroneous.    See Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933).    Ms. Crouse bears the

burden of proof with respect to her claim under section 6015.

Respondent’s Determinations in the 2001 Notice

     We turn first to whether petitioners must include in gross

income for 2001 a total of $896,039.82 of the approximately $1.29

million that Mr. Crouse embezzled during that year from Redwood,

Marketing, and/or Administration.19    Section 61(a) defines the


     19
      Mr. Crouse embezzled approximately $1.29 million from
Redwood, Marketing, and/or Administration during 2001. However,
respondent did not determine in the 2001 notice to include in
                                                   (continued...)
                              - 23 -

term “gross income” broadly to mean all income from whatever

source derived.   Generally, embezzled funds are includible in

gross income for the year in which those funds are embezzled.

James v. United States, 366 U.S. 213, 219 (1961).

     It is Mr. Crouse’s position20 that the “amounts he pled

guilty to in Federal Court, for Embezzlement, were claimed on

taxes.”   According to Mr. Crouse, Redwood showed as disbursements

in the 2001 Redwood Schedule K-1 the amounts that he embezzled

from Redwood, Marketing, and/or Administration.21

     We have found that the embezzled amounts totaling

$896,039.82 that Mr. Crouse embezzled from Redwood, Marketing,

and/or Administration were deposited into the Crouse bank account

and were used to purchase the Greenwood residence.   We have also



     19
      (...continued)
petitioners’ gross income the $393,960 difference between that
total approximate embezzled amount and the $896,040 that respon-
dent determined in that notice to include in petitioners’ gross
income. See supra note 15.
     20
      Pursuant to the direction of the Court, Mr. Crouse and Ms.
Crouse filed separate respective opening briefs and answering
briefs. Mr. Crouse addresses in his briefs all of the issues
remaining in this case. Ms. Crouse addresses in her briefs only
the issue under sec. 6015.
     21
      Mr. Crouse also claims on brief that in 2007 Mr. Zanfei
filed respective amended returns on behalf of Redwood, Marketing,
and Administration for their respective taxable years 2001
because “the disbursed amounts were attributed to the wrong
entity(s).” However, petitioners have not proffered any credible
evidence that Mr. Zanfei filed any such amended returns. Nor
have they proffered any credible evidence regarding the alleged
contents of any such amended returns.
                              - 24 -

found that in the 2001 Redwood Schedule K-1, Redwood showed,

inter alia, $854,356 of withdrawals by, and distributions to, Mr.

Crouse.   However, petitioners have failed to proffer any credible

evidence that the $854,356 that Redwood showed as withdrawals by,

or distributions to, Mr. Crouse included any portion, let alone

all, of the embezzled amounts.

     On the record before us, we find that petitioners have

failed to carry their burden of establishing that they reported

in the 2001 joint return the embezzled amounts totaling

$896,039.82 that Mr. Crouse embezzled from Redwood, Marketing,

and/or Administration.

     We turn next to whether petitioners are entitled to deduct

for 2001 the 2001 Administration loss.     Section 704(d) provides

in pertinent part:

          SEC. 704(d). Limitation on Allowance of Losses.--
     A partner’s distributive share of partnership loss
     (including capital loss) shall be allowed only to the
     extent of the adjusted basis of such partner’s interest
     in the partnership at the end of the partnership year
     in which such loss occurred. * * *.

For purposes of section 704(d), the adjusted basis of a partner’s

interest in a partnership includes the partner’s adjusted basis

in any property, including money, that the partner has contrib-

uted to the partnership.   See sec. 722.   Section 752(a) provides:

          SEC. 752(a). Increase in Partner’s Liabilities.--
     Any increase in a partner’s share of the liabilities of
     a partnership, or any increase in a partner’s individ-
     ual liabilities by reason of the assumption by such
     partner of partnership liabilities, shall be considered
                                - 25 -

     as a contribution of money by such partner to the
     partnership.

A partner is considered to have assumed a partnership liability

only to the extent that (1) the partner is personally obligated

to pay the liability, (2) the person to whom the liability is

owed knows of the assumption and can directly enforce the part-

ner’s obligation for the liability, and (3) no other partner or

person that is a related person to another partner is to bear

the economic risk of loss for the liability immediately after

the assumption.   Sec. 1.752-1(d), Income Tax Regs.

     It is respondent’s position that petitioners are not enti-

tled to deduct the 2001 Administration loss.   That is because,

according to respondent, petitioners have failed to establish

(1) that Mr. Crouse contributed any property or money to Adminis-

tration, (2) that Mr. Crouse’s share of the liabilities of

Administration increased during 2001, or (3) that Mr. Crouse

assumed any liabilities of Administration during 2001.

     It is Mr. Crouse’s position that he is entitled to deduct

the 2001 Administration loss.    In support of that position, Mr.

Crouse argues that he had an adjusted basis in his 50-percent

interest in Administration in excess of the 2001 Administration

loss.   According to Mr. Crouse:

     On December 31, 2001, the accounting books [of Adminis-
     tration] reflected a liability of more than
     $7,000,000.00. This was comprised of Health Plan
     medical Claims by the members of the company sponsored
     health plan. The plan was ended on November 30, 2001,
                              - 26 -

     and the partners [including Mr. Crouse] assumed the
     liabilities of the unpaid claims. Further, over the
     course of trying to work with regulators and claims
     processors, a Civil Judgment was entered against the
     partners in the * * * [District Court] in the amount of
     more than $4,000,000.00 * * *. Further, WPC [Mr.
     Crouse] pled guilty to criminal charges in the State of
     Florida regarding the Company Sponsored Health Plan and
     restitution was ordered in the amount of $2,971,713.84
     to pay the outstanding liabilities discussed in this
     case.

     Petitioners do not claim that Mr. Crouse contributed any

money or property to Administration.   In addition, petitioners

have not proffered any credible evidence that Administration

had any liabilities at the end of its taxable year 2001 or that

Mr. Crouse assumed any portion of any such liabilities that Mr.

Crouse alleges Administration owed.    Nor have petitioners prof-

fered any credible evidence that, as Mr. Crouse alleges, the

District Court entered a judgment against Mr. Crouse or a Florida

State court ordered him to pay restitution, let alone that that

alleged judgment and that alleged order were in the amounts of $4

million and $2,971,713.84, respectively.

     On the record before us, we find that petitioners have

failed to carry their burden of establishing that at the end of

taxable year 2001 Mr. Crouse had any basis in his 50-percent

interest in Administration.   On that record, we further find that

petitioners have failed to carry their burden of establishing

that they are entitled to deduct for 2001 the 2001 Administration

loss.
                                - 27 -

     We turn next to whether petitioners are liable before

the application of section 6015 with respect to Ms. Crouse for

their taxable year 2001 for the addition to tax under section

6651(a)(1) and the accuracy-related penalty under section

6662(a).   Section 6651(a)(1) imposes an addition to tax for

failure to file timely a return.22   The addition to tax under

section 6651(a)(1) does not apply if the failure to file timely

is due to reasonable cause, and not to willful neglect.   Sec.

6651(a)(1).

     Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the underpayment to which section 6662 applies.

Section 6662 applies to the portion of any underpayment which is

attributable to, inter alia, (1) negligence or disregard of rules

or regulations, sec. 6662(b)(1), or (2) a substantial understate-

ment of tax, sec. 6662(b)(2).

     The term “negligence” in section 6662(b)(1) includes any

failure to make a reasonable attempt to comply with the Code.

Sec. 6662(c).   Negligence has also been defined as a failure to

do what a reasonable person would do under the circumstances.

Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),

affg. T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C.


     22
      The addition to tax imposed under sec. 6651(a)(1) is equal
to 5 percent of the amount of tax required to be shown in the
return, with an additional 5 percent to be added for each month
or partial month during which the failure to file timely a return
continues, not to exceed 25 percent in the aggregate.
                              - 28 -

686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990).    The term

“negligence” also includes any failure by the taxpayer to keep

adequate books and records or to substantiate items properly.

Sec. 1.6662-3(b)(1), Income Tax Regs.    The term “disregard”

includes any careless, reckless, or intentional disregard.

Sec. 6662(c).

     For purposes of section 6662(b)(2), an understatement is

equal to the excess of the amount of tax required to be shown in

the tax return over the amount of tax shown in such return.      Sec.

6662(d)(2)(A).   An understatement is substantial in the case of

an individual if the amount of the understatement for the taxable

year exceeds the greater of ten percent of the tax required to be

shown in the tax return for that year or $5,000.    Sec.

6662(d)(1)(A).

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion.    Sec. 6664(c)(1).   The

determination of whether the taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and circum-

stances, including the taxpayer’s efforts to assess such tax-

payer’s proper tax liability, the knowledge and experience of the

taxpayer, and the reliance on the advice of a professional, such

as an accountant.   Sec. 1.6664-4(b)(1), Income Tax Regs.
                               - 29 -

       Respondent has the burden of production with respect to the

addition to tax under section 6651(a)(1) and the accuracy-related

penalty under section 6662(a) that respondent determined in the

2001 notice.    See sec. 7491(c); Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001).    To satisfy respondent’s burden of produc-

tion, respondent must come forward with “sufficient evidence

indicating that it is appropriate to impose” the addition to tax

and the accuracy-related penalty.    Higbee v. Commissioner, supra

at 446.    Although respondent bears the burden of production with

respect to the addition to tax under section 6651(a)(1) and the

accuracy-related penalty under section 6662(a) that respondent

determined, respondent “need not introduce evidence regarding

reasonable cause * * * or similar provisions. * * * the taxpayer

bears the burden of proof with regard to those issues.”    Id. at

446.

       With respect to the addition to tax under section

6651(a)(1), we have found that on October 14, 2005, over three

years after the 2001 return was due without extensions, petition-

ers jointly filed that return.    On the record before us, we find

that respondent has carried respondent’s burden of production

under section 7491(c) with respect to the addition to tax under

section 6651(a)(1).

       Mr. Crouse’s only argument on brief with respect to the

addition to tax under section 6651(a)(1) is that petitioners
                             - 30 -

are not liable for that addition to tax because “there are no

taxes due, but rather a credit”.   We have sustained respondent’s

determinations in the 2001 notice.    As a result, there is a

deficiency for petitioners’ taxable year 2001.

     On the record before us, we find that petitioners have

failed to carry their burden of establishing that they are not

liable before the application of section 6015 with respect to

Ms. Crouse for their taxable year 2001 for the addition to tax

under section 6651(a)(1).

     With respect to the accuracy-related penalty under section

6662(a), respondent argues that petitioners are liable for that

penalty because of a substantial understatement of tax under

section 6662(b)(2) that is attributable to the determinations

that respondent made in the 2001 notice and, in the alternative,

because of negligence or disregard of rules or regulations under

section 6662(b)(1).

     The accuracy-related penalty that respondent determined for

2001 is imposed on an underpayment of tax for that year that is

attributable to a substantial understatement of tax23 resulting

almost entirely from respondent’s determinations (1) to include

in gross income the embezzled amounts totaling $896,039.82 and

(2) to disallow the 2001 Administration loss.    We have sustained


     23
      In the 2001 notice, respondent determined a deficiency of
$1,241,658 for 2001. Petitioners reported in the 2001 joint
return no tax and no self-employment tax.
                               - 31 -

both of those determinations.24   On the record before us, we find

that respondent has satisfied respondent’s burden of production

under section 7491(c) with respect to the accuracy-related

penalty under section 6662(a).

     As was true of his argument regarding section 6651(a)(1),

Mr. Crouse’s only argument with respect to the accuracy-related

penalty under section 6662(a) is that petitioners are not liable

for that penalty because “there are no taxes due, but rather a

credit”.   We have sustained respondent’s determinations in the

2001 notice.    As a result, there is a substantial understatement

of petitioners’ tax under section 6662(b)(2) for their taxable

year 2001.

     On the record before us, we find that petitioners have

failed to carry their burden of establishing that they are not

liable before the application of section 6015 with respect to

Ms. Crouse for their taxable year 2001 for the accuracy-related

penalty under section 6662(a).

Ms. Crouse’s Request for Relief Under Section 6015

     We turn finally to Ms. Crouse’s claim for relief under

section 6015.    It is Ms. Crouse’s position that she is entitled

to total relief under that section for her taxable year 2001.


     24
      In addition, petitioners did not proffer any books or
other records that establish any of their positions with respect
to the determinations in the 2001 notice. On the record before
us, we find that petitioners did not maintain the records re-
quired by sec. 6001 and sec. 1.6001-1(a), Income Tax Regs.
                              - 32 -

Respondent disagrees, although respondent concedes that Ms.

Crouse is entitled to relief under section 6015(b) with respect

to the respective portions totaling $989,748 of the deficiency

for 2001 that are attributable to respondent’s determinations in

the 2001 notice (1) to recharacterize as self-employment income

subject to self-employment tax Mr. Crouse’s 2001 nonemployee

compensation and (2) to disallow the claimed deduction for the

2001 Administration loss.

     Section 6015(b)

     We turn first to whether, as Ms. Crouse argues and as

respondent disputes, she is entitled to relief under section

6015(b) with respect to the respective portions totaling $251,910

of the deficiency that are attributable to respondent’s determi-

nations (1) to recharacterize as self-employment income subject

to self-employment tax Ms. Crouse’s 2001 nonemployee compensation

and (2) to include in gross income the embezzled amounts totaling

$896,039.82.25

     Section 6015(b) provides in pertinent part:

     SEC. 6015.   RELIEF FROM JOINT AND SEVERAL LIABILITY ON
                  JOINT RETURN.

          (b) Procedures For Relief From Liability Applica-
     ble to All Joint Filers.--




     25
      Although Mr. Crouse embezzled approximately $1.29 million
from Redwood, Marketing, and/or Administration, the only amount
at issue in this case is $896,039.82. See supra note 15.
                              - 33 -

               (1) In general.--Under procedures prescribed
          by the Secretary, if--

                    (A) a joint return has been made for a
               taxable year;

                     (B) on such return there is an under-
               statement of tax attributable to erroneous
               items of 1 individual filing the joint re-
               turn;

                    (C) the other individual filing the
               joint return establishes that in signing the
               return he or she did not know, and had no
               reason to know, that there was such under-
               statement;

                    (D) taking into account all the facts
               and circumstances, it is inequitable to hold
               the other individual liable for the defi-
               ciency in tax for such taxable year attribut-
               able to such understatement; and

                    (E) the other individual elects (in such
               form as the Secretary may prescribe) the
               benefits of this subsection not later than
               the date which is 2 years after the date the
               Secretary has begun collection activities
               with respect to the individual making the
               election,

          then the other individual shall be relieved of
          liability for tax (including interest, penalties,
          and other amounts) for such taxable year to the
          extent such liability is attributable to such
          understatement.

The failure to satisfy any one of the requirements under section

6015(b) disqualifies the requesting spouse from obtaining relief

under that section.   See Alt v. Commissioner, 119 T.C. 306, 313

(2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004).
                                - 34 -

     Respondent concedes that Ms. Crouse satisfies the require-

ments of (1) section 6015(b)(1)(A) and (E) with respect to the

entire understatement26 and (2) section 6015(b)(1)(B) with re-

spect to that portion of the understatement that is attributable

to petitioners’ failure to include in gross income the embezzled

amounts totaling $896,039.82.

     It is respondent’s position that Ms. Crouse has failed to

establish that she satisfies the requirements of (1) section

6015(b)(1)(B), (C), and (D) with respect to the portion of the

understatement that is attributable to the self-employment tax on

Ms. Crouse’s 2001 nonemployee compensation and (2) section

6015(b)(1)(C) and (D) with respect to the portion of the under-

statement that is attributable to petitioners’ failure to include

in gross income the embezzled amounts totaling $896,039.82.

     With respect to the portion of the understatement that is

attributable to the self-employment tax on Ms. Crouse’s 2001

nonemployee compensation, we have found that during 2001 Market-

ing paid to Ms. Crouse nonemployee compensation of $33,127.

Petitioners concede the correctness of respondent’s determination

in the 2001 notice to recharacterize Ms. Crouse’s 2001




     26
      Sec. 6015(b) uses the term “understatement”. As discussed
below, sec. 6015(c) and (f) uses the term “deficiency”. In this
case, the understatement for purposes of sec. 6015(b) is equal to
the deficiency that respondent determined for 2001.
                               - 35 -

nonemployee compensation as self-employment income subject to

self-employment tax.

     On the record before us, we find that the portion of the

understatement that is attributable to the self-employment tax

on Ms. Crouse’s 2001 nonemployee compensation is attributable

to Ms. Crouse.   On that record, we further find that Ms. Crouse

does not satisfy the requirements of section 6015(b)(1)(B) with

respect to the portion of the understatement that is attributable

to that self-employment tax.   On the record before us, we find

that Ms. Crouse is not entitled to relief under section 6015(b)

for that portion of the understatement.27

     We turn now to whether Ms. Crouse satisfies the requirements

of section 6015(b)(1)(C) and (D) with respect to the portion of

the understatement that is attributable to petitioners’ failure

to include in gross income the embezzled amounts totaling

$896,039.82.   In order to show that she satisfies section

6015(b)(1)(C), Ms. Crouse must establish that in signing the 2001

joint return she did not know, and had no reason to know, of the

understatement of tax in that return that is attributable to the

failure to include in gross income the embezzled amounts totaling


     27
      In the light of our finding that Ms. Crouse does not
satisfy the requirements of sec. 6015(b)(1)(B) with respect to
the portion of the understatement that is attributable to the
self-employment tax on Ms. Crouse’s 2001 nonemployee compensa-
tion, we need not and shall not address whether Ms. Crouse
satisfies the requirements of sec. 6015(b)(1)(C) and (D) with
respect to that portion of the understatement.
                              - 36 -

$896,039.82.   (We shall sometimes refer to (1) Ms. Crouse’s

knowing of the understatement attributable to petitioners’

failure to include in gross income the embezzled amounts totaling

$896,039.82 as Ms. Crouse’s having actual knowledge of that

understatement and (2) Ms. Crouse’s having reason to know of that

understatement as Ms. Crouse’s having constructive knowledge of

that understatement.)

     Respondent argues that Ms. Crouse had actual knowledge for

purposes of section 6015(b)(1)(C) of $269,307.82 of the embezzled

amounts totaling $896,039.82 because $269,307.82 is the total

amount of the four official checks28 made payable to Ms. Crouse

that Mr. Crouse purchased and that respondent contends Ms. Crouse

endorsed and deposited into the Crouse bank account (four offi-

cial checks in question) during 2001.   In support of respondent’s

argument, respondent relies upon (1) the indictment filed in the

District Court against Mr. Crouse for embezzlement and money

laundering that resulted in a criminal case against Mr. Crouse in

that court, in which Ms. Crouse was not a party, which stated

with respect to each of those four official checks that the

“official check [made payable to Ms. Crouse] was endorsed by




     28
      Respondent does not argue that Ms. Crouse had actual
knowledge of (1) the $80,000 official check that was made payable
to Mr. Crouse and that was deposited in the Crouse bank account
or (2) the $546,732 that Mr. Crouse used to purchase the Green-
wood residence.
                              - 37 -

Candra J. Crouse” and (2) Mr. Crouse’s guilty plea to the charges

in that indictment.

     Respondent seems to be arguing that, in determining under

section 6015(b)(1)(C) whether at the time Ms. Crouse signed the

2001 joint return she had actual knowledge of the understatement

attributable to the four official checks in question totaling

$269,307.82, the only question that we must resolve is whether

at the time Ms. Crouse signed the 2001 joint return she had

actual knowledge of those checks because, according to respon-

dent, she endorsed them and deposited them into the Crouse bank

account.   We disagree that that is the only question that we must

resolve.   In making the determination of actual knowledge under

section 6015(b)(1)(C), we must decide whether at the time Ms.

Crouse signed the 2001 joint return she knew about the under-

statement in that return that is attributable to the failure to

include in gross income in that return the total amount (i.e.,

$269,307.82) of the four official checks in question.

     We not only disagree with respondent that the only question

that we must resolve under section 6015(b)(1)(C) with respect to

the four official checks in question is whether at the time Ms.

Crouse signed the 2001 joint return she had actual knowledge of

those checks; we also disagree with respondent’s contention that

Ms. Crouse had actual knowledge of those checks.   According to
                               - 38 -

respondent, Ms. Crouse had actual knowledge of those checks

because she endorsed them and deposited them into the Crouse bank

account.   Ms. Crouse testified that Mr. Crouse forged her signa-

ture on those four official checks and deposited them into the

Crouse bank account.29   We found Ms. Crouse to be credible and

believe that she did not endorse the four official checks in

question and did not deposit them into that bank account.    On the

record before us, we find that at the time Ms. Crouse signed the

2001 joint return she did not have actual knowledge of the four

official checks in question totaling $269,307.82 that Mr. Crouse

embezzled.   A fortiori, we further find on the record before us

that at the time Ms. Crouse signed the 2001 joint return she did

not have actual knowledge of the understatement in that return

that is attributable to petitioners’ failure to include that

total amount in gross income in that return.

     We now turn to whether, as respondent argues, Ms. Crouse had

constructive knowledge of the understatement in the 2001 joint

return that is attributable to petitioners’ failure to include in

gross income the embezzled amounts totaling $896,039.82.30    In


     29
      The four official checks that were made payable to Ms.
Crouse on which respondent relies are not a part of the record
in this case.
     30
      Respondent argues that Ms. Crouse had constructive knowl-
edge of (1) the $80,000 official check that was made payable to
Mr. Crouse and that was deposited in the Crouse bank account and
(2) the $546,732 that Mr. Crouse used to purchase the Greenwood
                                                   (continued...)
                                - 39 -

support of respondent’s argument, respondent relies on the facts

that $349,307.82 was deposited into the Crouse bank account, over

which Ms. Crouse had signatory authority, and $546,732 was used

to purchase the Greenwood residence.

     Respondent seems to be arguing that, in determining

under section 6015(b)(1)(C) whether at the time Ms. Crouse

signed the 2001 joint return she had constructive knowledge of

the understatement attributable to the embezzled amounts totaling

$896,039.82, the only question that we must resolve is whether at

that time Ms. Crouse had constructive knowledge of those embez-

zled amounts which were deposited into the Crouse bank account

and used to purchase the Greenwood residence.   We disagree.   In

making that determination, we must decide whether at the time Ms.

Crouse signed the 2001 joint return she had reason to know about

the understatement in that return that is attributable to the

failure to include in gross income in that return the embezzled

amounts totaling $896,039.82.

     We have found that Ms. Crouse had signatory authority over,

and withdrew funds from, the Crouse bank account into which Mr.

Crouse deposited during 2001 $349,307.82 of the embezzled amounts

totaling $896,039.82.   We have also found that in May 2001 Ms.


     30
      (...continued)
residence. In addition, respondent argues in the alternative to
respondent’s argument that Ms. Crouse had actual knowledge of the
four official checks in question totaling $269,307.82 that she
had constructive knowledge of those four official checks.
                                - 40 -

Crouse moved into the Greenwood residence which Mr. Crouse pur-

chased with $546,732 of those embezzled amounts and that she did

not make any inquiries of Mr. Crouse or anyone else with respect

to the source of those funds.    On the record before us, we find

that at the time Ms. Crouse signed the 2001 joint return she had

reason to know that petitioners had income for 2001 equal to the

embezzled amounts totaling $896,039.82 that Mr. Crouse deposited

into the Crouse bank account and used to purchase the Greenwood

residence during 2001.

     We must now determine, as discussed above, whether at the

time Ms. Crouse signed the 2001 joint return she had reason to

know that the embezzled amounts totaling $896,039.82 that Mr.

Crouse deposited into the Crouse bank account and used to pur-

chase the Greenwood residence during 2001 were not included in

gross income in that return.    In other words, we must determine

whether at the time Ms. Crouse signed the 2001 joint return she

had reason to know of the understatement in that return that is

attributable to the failure to include in gross income the embez-

zled amounts totaling $896,039.82.       In making that determination,

we bear in mind that a taxpayer, like Ms. Crouse, who signs a tax

return without reviewing it is charged with constructive knowl-

edge of its contents.    See Bokum v. Commissioner, 94 T.C. 126,

148 (1990), affd. 992 F.2d 1132 (11th Cir. 1993).      We also bear

in mind that for purposes of section 6015(b)(1)(C) a requesting
                              - 41 -

spouse has reason to know of an understatement if at the time of

signing a tax return a reasonably prudent taxpayer under the

circumstances of the requesting spouse could have been expected

to know of the omission of income in that return or that further

inquiry or investigation was warranted.   See Stevens v. Commis-

sioner, 872 F.2d 1499, 1505 (11th Cir. 1989), affg. T.C. Memo.

1988-63; Shea v. Commissioner, 780 F.2d 561, 566 (6th Cir. 1986),

affg. in part and revg. in part on another ground T.C. Memo.

1984-310; Bokum v. Commissioner, supra at 148.31

     In determining whether in signing a tax return a requesting

spouse had reason to know of the understatement in the return

that is attributable to an omission of income, we shall consider

(1) the circumstances facing the requesting spouse at the time

that spouse signed the return and (2) whether a reasonable person

faced with those circumstances would have known of the omission.

See Alt v. Commissioner, 101 Fed. Appx. at 41.     In making that

determination, we may examine several factors, including:

(1) The requesting spouse’s level of education; (2) the request-

ing spouse’s involvement in the family’s financial affairs;

(3) the nonrequesting spouse’s evasiveness and deceit concerning

the family’s financial affairs; and (4) the presence of expendi-


     31
      The requirement of sec. 6015(b)(1)(C) is substantially
identical to the requirement of former sec. 6013(e)(1)(C). As a
result, cases interpreting former sec. 6013(e)(1)(C) remain
instructive to our analysis under sec. 6015(b)(1)(C). Butler v.
Commissioner, 114 T.C. 276, 283 (2000).
                               - 42 -

tures that are lavish or unusual when compared to the requesting

spouse’s past standard of living.    See Alt v. Commissioner, 101

Fed. Appx. at 41; Stevens v. Commissioner, supra at 1505; Butler

v. Commissioner, 114 T.C. 276, 284 (2000); Flynn v. Commissioner,

93 T.C. 355, 365-366 (1989).   (We shall refer to the above-listed

factors as the education factor, the involvement in financial

affairs factor, the evasiveness and deceit factor, and the lavish

or unusual expenditures factor, respectively.)

       We have found that Ms. Crouse signed the 2001 joint return.

As discussed above, Ms. Crouse is charged with constructive

knowledge of its contents.   See Bokum v. Commissioner, supra at

148.    As a result, when Ms. Crouse signed the 2001 joint return

she constructively knew that petitioners attached to that return

the 2001 Redwood Schedule K-1, in which Redwood showed, inter

alia, (1) $1,050,796 as Mr. Crouse’s share of Redwood’s ordinary

income from trade or business activities and (2) $854,356 of

withdrawals by, or distributions to, Mr. Crouse.32   She also

constructively knew at that time (1) that petitioners attached

to that return the 2001 Schedule E, (2) that in that schedule

petitioners, inter alia, (a) reported the $1,050,796 of ordinary

income from trade or business activities that Redwood showed on


       32
      As discussed below, Mr. Crouse argues that the embezzled
amounts totaling $896,039.82 were reported in the 2001 joint
return. That is because, according to Mr. Crouse, those amounts
were shown as withdrawals by, or distributions to, Mr. Crouse in
the 2001 Redwood Schedule K-1.
                               - 43 -

the 2001 Redwood Schedule K-1 and (b) reported the 2001 Adminis-

tration loss of $3,376,356, and (3) that that 2001 Administration

loss exceeded that Redwood ordinary income and all other income

reported in that schedule.33

     We are unable to find on the basis of Ms. Crouse’s construc-

tive knowledge of the information in the 2001 joint return that

she had reason to know that petitioners failed to include in

gross income in that return the embezzled amounts totaling

$896,039.82.   We are also unable to find on the basis of our

examination of the education factor, the involvement in financial

affairs factor, the evasiveness and deceit factor, and the lavish

or unusual expenditures factor that at the time Ms. Crouse signed

the 2001 joint return she had reason to know that petitioners

omitted from gross income in that return the embezzled amounts

totaling $896,039.82.

     With respect to the education factor, we have found that Ms.

Crouse has a bachelor of science degree in telecommunications.

However, at the time of the trial in this case, Ms. Crouse did

not have any education or work experience in tax, financial, or

accounting matters.   Although we have found that Ms. Crouse

worked for approximately two months in the customer service


     33
      In the 2001 Schedule E, petitioners also reported
$1,043,295 of ordinary income from trade or business activities
that Marketing showed in the 2001 Marketing Schedule K-1, and
$16,156 of total rental real estate income from two rental real
estate properties. See supra note 13.
                                - 44 -

department of a company identified as TRG, we have also found

that at no time did Ms. Crouse participate in any business deci-

sions of Redwood, Marketing, or Administration.   We find nothing

in the record regarding Ms. Crouse’s education or work experience

that shows that at the time Ms. Crouse signed the 2001 joint

return she had reason to know about the understatement in that

return that is attributable to the embezzled amounts totaling

$896,039.82.

     With respect to the involvement in financial affairs factor,

Ms. Crouse contends that she “was a stay-at-home mother and had

no knowledge of any business or personal financial dealings of

William Paul Crouse.”   As discussed above, although we have

found, as respondent points out, that Ms. Crouse worked for

approximately two months in the customer service department of a

company identified as TRG, we have also found that at no time did

Ms. Crouse participate in any business decisions of Redwood,

Marketing, or Administration.    On the record before us, we find

that Ms. Crouse had no involvement in the financial affairs of

Mr. Crouse or any of those companies in which he owned a 50-

percent interest.

     With respect to the evasiveness and deceit factor, Ms.

Crouse contends that “Paul [Mr. Crouse] deceitfully maintained

all our accounts, taxes, and large purchases.”    The record does

not establish whether Ms. Crouse made any inquiries of Mr. Crouse
                               - 45 -

regarding their financial affairs.      However, we have found that

Mr. Crouse embezzled approximately $1.29 million from Redwood,

Marketing and/or Administration and that Mr. Crouse pleaded

guilty (1) in the District Court to six counts of embezzlement

and one count of money laundering and (2) in a Florida State

court to a charge of operating an insurance company without a

license.   On the record before us, it is reasonable to believe

that Mr. Crouse was not honest, candid, or forthcoming with Ms.

Crouse regarding his embezzlement activities, let alone regarding

whether the amounts that he embezzled were reported in the 2001

joint return.34

     With respect to the lavish or unusual expenditures factor,

we have found that in 2001 Mr. Crouse used $546,732 of the embez-

zled funds to purchase the Greenwood residence.     The record does

not contain any evidence with respect to any other expenditures

that petitioners may have made in 2001, the year at issue, or in

any other year from which we may determine whether petitioners’

expenditures in 2001 were lavish or unusual when compared to

their usual spending habits.


     34
      As discussed above, Mr. Crouse argues that the embezzled
amounts totaling $896,039.82 were reported in the 2001 joint
return. As discussed below, we believe on the record before us
that if at the time Ms. Crouse signed the 2001 joint return she
had been aware that Mr. Crouse had embezzled funds and if at that
time she had made inquiries of Mr. Crouse regarding whether the
amounts that Mr. Crouse embezzled were reported in the 2001 joint
return, Mr. Crouse would have told her, as he argues here, that
those amounts were reported in that return.
                                - 46 -

     On the record before us, we find that under the circum-

stances existing at the time Ms. Crouse signed the 2001 joint

return a reasonably prudent taxpayer could not have been expected

to know of the omission in the 2001 joint return of the embezzled

amounts totaling $896,039.82.    On that record, we further find

that Ms. Crouse had no reason to know of the understatement in

the 2001 joint return that is attributable to petitioners’ fail-

ure to include in gross income those embezzled amounts.

     Respondent argues that, even if under the circumstances

existing at the time Ms. Crouse signed the 2001 joint return she

had no reason to know that petitioners failed to include in gross

income the embezzled amounts totaling $896,039.82, Ms. Crouse

nonetheless had a duty to inquire about the source of the funds

that were deposited into the Crouse bank account and that were

used to purchase the Greenwood residence.

     Respondent seems to be arguing that, in determining under

section 6015(b)(1)(C) whether at the time Ms. Crouse signed the

2001 joint return she had a duty to inquire or to investigate

further, the only question that we must resolve is whether at

that time Ms. Crouse had a duty to inquire as to the source of

the funds that were deposited in the Crouse bank account and

that were used to purchase the Greenwood residence.    We disagree.

In making that determination, we must decide whether at the time

Ms. Crouse signed the 2001 joint return she should have inquired
                             - 47 -

or investigated further as to whether the embezzled amounts

totaling $896,038.82 had been reported in the 2001 joint return.

See Stevens v. Commissioner, 872 F.2d at 1505; Shea v. Commis-

sioner, 780 F.2d at 566; Bokum v. Commissioner, 94 T.C. at 148.

     It is significant in our analysis under section

6015(b)(1)(C) with respect to Ms. Crouse’s duty to inquire or

investigate further that Mr. Crouse argues that respondent’s

determination to include in gross income the embezzled amounts

totaling $896,039.82 is erroneous because petitioners reported

those amounts in the 2001 joint return.   On the record before us,

we believe that even if (1) Ms. Crouse had asked Mr. Crouse about

the source of the $896,039.82 of funds that were deposited into

the Crouse bank account and used to purchase the Greenwood resi-

dence and (2) Mr. Crouse had admitted to Ms. Crouse, which the

record does not establish, that he had embezzled those funds, Mr.

Crouse would have told her, as he argues here, that those funds

were reported in the 2001 joint return.   Although Ms. Crouse did

not make any inquiries about the accuracy of the 2001 joint

return at the time she signed it, we shall not penalize her for

failing to do so where such an inquiry would almost certainly

have resulted in Mr. Crouse’s assuring her that that return was

accurate with respect to, inter alia, the embezzled amounts

totaling $896,039.82.
                              - 48 -

     Based upon our examination of the entire record before us,

we find that at the time Ms. Crouse signed the 2001 joint return

a reasonably prudent taxpayer under her circumstances could not

have been expected to know of the omission from gross income

in that return of the embezzled amounts totaling $896,039.82 or

that further investigation was warranted.   On that record, we

further find that Ms. Crouse did not know, and had no reason to

know, of the understatement in the 2001 joint return that is

attributable to petitioners’ failure to include in gross income

the embezzled amounts totaling $896,039.82.   On the record before

us, we find that petitioner satisfies section 6015(b)(1)(C) with

respect to the portion of the understatement that is attributable

to that failure.

     We now address whether Ms. Crouse satisfies section

6015(b)(1)(D) with respect to the portion of the understatement

for 2001 that is attributable to petitioners’ failure to include

in gross income the embezzled amounts totaling $896,039.82.    In

order to satisfy section 6015(b)(1)(D), Ms. Crouse must establish

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

is inequitable to hold her liable for that portion of that under-

statement.   The requirement of section 6015(b)(1)(D) that Ms.

Crouse must satisfy is virtually identical to the requirement of

former section 6013(e)(1)(D), and cases interpreting former
                                 - 49 -

section 6013(e) remain instructive in our analysis.     See Alt v.

Commissioner, 119 T.C. at 313-314.

     The factors that we consider in determining whether it would

be inequitable for purposes of section 6015(b)(1)(D) are the same

factors that we consider in determining whether it would be

inequitable for purposes of section 6015(f).     See id. at 316.

One factor considered in determining whether it would be inequi-

table for purposes of section 6015(f) and thus for purposes of

section 6015(b)(1)(D), see id., is whether in signing the tax

return the requesting spouse did not know, and had no reason to

know, of an understatement in that return, see Rev. Proc. 2003-

61, sec. 4.03(2)(a)(iii)(B), 2003-2 C.B. 296, 298.     In determin-

ing whether a requesting spouse satisfies section 6015(b)(1)(D),

we may consider, inter alia, whether such spouse satisfies sec-

tion 6015(b)(1)(C).35     We have found that Ms. Crouse satisfies

section 6015(b)(1)(C) with respect to the portion of the under-

statement for 2001 that is attributable to petitioners’ failure

to include in gross income the embezzled amounts of $896,039.82.

We further find for purposes of section 6015(b)(1)(D) that at the

time Ms. Crouse signed the 2001 joint return she did not know,

and had no reason to know, of that portion of that understate-

ment.




     35
          See Haltom v. Commissioner, T.C. Memo. 2005-209.
                               - 50 -

       Other relevant factors that we may consider in determining

whether a requesting spouse satisfies section 6015(b)(1)(D)

include whether (1) the requesting spouse was deserted, divorced,

or separated (marital status factor); (2) the requesting spouse

would suffer economic hardship if relief were not granted (eco-

nomic hardship factor); and (3) the requesting spouse made a good

faith effort to comply with the tax laws for the taxable years

following the taxable year to which the request for relief re-

lated (tax compliance factor).    See Washington v. Commissioner,

120 T.C. 137, 147 (2003); Alt v. Commissioner, 119 T.C. at 314-

316.

       With respect to the marital status factor, we have found

that at all relevant times, including during the year at issue,

at the time Mr. Crouse was released from prison on November 27,

2009, and at the time of the trial in this case, Mr. Crouse and

Ms. Crouse were married.    We have also found that around February

or March 2010, several months before the trial in this case, Mr.

Crouse filed for divorce and that at an undisclosed time between

November 27, 2009, and the date of the trial, petitioners began

living separate and apart.

       With respect to the economic hardship factor, we have found

(1) that around March 24, 2009, Ms. Crouse filed Ms. Crouse’s

Form 8857; (2) that in that form Ms. Crouse claimed that she

had total monthly income of $4,166 and total monthly expenses
                             - 51 -

of $4,142; (3) that around May 2009, after Ms. Crouse filed Ms.

Crouse’s Form 8857, she discontinued her home telephone service,

which she claimed in that form cost $92 a month; (4) that during

2010 Ms. Crouse received a 4.5-percent raise in her salary and

that at the time of trial in this case she no longer maintained

the storage unit costing $75 per month that she claimed in Ms.

Crouse’s Form 8857; and (5) that at the time of the trial in

this case Ms. Crouse had total monthly income of $4,353 and

total monthly expenses of $4,010.

     The 4.5-percent raise that Ms. Crouse received in 2010

increased her monthly salary from the $4,166 that she claimed in

Ms. Crouse’s Form 8857 to $4,353.   The elimination of the ex-

penses for Ms. Crouse’s home telephone service and the storage

unit that she claimed in Ms. Crouse’s Form 8857 reduced her total

monthly expenses from $4,142 to $3,975.   Even taking into account

the Federal, State, and local taxes that she must pay on the

additional salary that she was earning at the time of the trial

in this case, which we estimate to be approximately $35 per

month, on the record before us, we find that Ms. Crouse’s monthly

salary exceeds her monthly expenses by $343.   On the record

before us, we find that Ms. Crouse would not suffer economic

hardship if relief under section 6015(b) were not granted.

     With respect to the tax compliance factor, we have found

that at the time of the trial in this case Ms. Crouse had not
                              - 52 -

filed timely a tax return for any of her taxable years 2003

through 200836 and had not paid timely the tax due for any of

her taxable years 2003 through 2006.

     With respect to other factors that we may consider, we find

it significant that Ms. Crouse did not receive a significant

benefit from the embezzled amounts.    Although respondent’s exam-

iner acknowledged in the examination workpaper that Ms. Crouse

did not receive a significant benefit from the embezzled amounts,

on brief respondent relies on Alt v. Commissioner, 119 T.C. 306

(2002), in support of respondent’s argument that Ms. Crouse

received a significant benefit beyond normal support because “a

residence worth at least $546,000 is clearly in excess of normal

support.”   We find Alt to be materially distinguishable from the

instant case and respondent’s reliance on that case to be mis-

placed.   In Alt, we found that the requesting spouse had received

a significant benefit because the taxpayers (1) purchased a 600-


     36
      At trial, the parties offered as exhibits respective
documents entitled “CERTIFICATE OF OFFICIAL RECORD” (certificate)
with respect to each of Ms. Crouse’s taxable years 2002 through
2009. Each of those documents purported to certify that Ms.
Crouse had not filed a tax return or paid tax for the respective
year to which it pertained. At trial, counsel for respondent
admitted that the document pertaining to Ms. Crouse’s taxable
year 2002 was incorrect and that Ms. Crouse had filed a joint
return with Mr. Crouse for that year and that there was no tax
due for that year. As a result, we expressed concern at trial
about the accuracy of the respective certificates pertaining to
Ms. Crouse’s taxable years 2003 through 2009. However, Ms.
Crouse testified that she attempted to file tax returns for
certain of those years but failed to do so for taxable years 2003
through 2007.
                                - 53 -

acre riverfront property upon which they were building a mansion,

(2) purchased a house for each of their four children, (3) ac-

quired a business for their son, and (4) fully paid for the

undergraduate and graduate educations of their children.    Id. at

314.    Respondent offers no reason other than respondent’s reli-

ance on Alt why the purchase of the Greenwood residence consti-

tutes a significant benefit to Ms. Crouse.    On the record before

us, we find that Ms. Crouse did not receive a significant benefit

from the embezzled amounts totaling $896,039.82.

       Based upon our examination of the entire record before us,

we find that, taking into account all of the facts and circum-

stances, it would be inequitable to hold Ms. Crouse liable for

the portion of the understatement for 2001 that is attributable

to petitioners’ failure to include in gross income the embezzled

amounts totaling $896,039.82.    On that record, we further find

that Ms. Crouse satisfies section 6015(b)(1)(D) with respect to

that portion of that understatement.

       Based upon our examination of the entire record before us,

we find that petitioner is entitled to relief under section

6015(b) for that portion of the understatement for 2001 that is

attributable to petitioners’ failure to include in gross income

the embezzled amounts totaling $896,039.82.37


       37
      In the light of our finding that Ms. Crouse is entitled to
relief under sec. 6015(b) for the portion of the understatement
                                                    (continued...)
                                    - 54 -

     Section 6015(c)

     We turn now to whether Ms. Crouse is entitled to relief

under section 6015(c) for the portion of the deficiency for 2001

that is attributable to the self-employment tax on Ms. Crouse’s

2001 nonemployee compensation.        Section 6015(c) provides in

pertinent part:

     SEC. 6015.         RELIEF FROM JOINT AND SEVERAL LIABILITY ON
                        JOINT RETURN.

          (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).

          *         *         *       *       *       *       *

                   (3) Election.--

                        (A) Individuals eligible to make
                   election.--

                              (i) In general.--An individual shall
                          only be eligible to elect the applica-
                          tion of this subsection if--

                                  (I) at the time such election is
                              filed, such individual is no longer


     37
      (...continued)
for 2001 that is attributable to petitioners’ failure to include
in gross income the embezzled amounts totaling $896,039.82, we
need not and shall not address Ms. Crouse’s claim for relief
under sec. 6015(f) for that portion of that understatement.
                              - 55 -

                        married to, or is legally separated
                        from, the individual with whom such
                        individual filed the joint return to
                        which the election relates; or

                            (II) such individual was not a
                        member of the same household as the
                        individual with whom such joint re-
                        turn was filed at any time during
                        the 12-month period ending on the
                        date such election is filed.

     Section 1.6015-3(b)(3)(i), Income Tax Regs., provides:

          (3) Members of the same household.--(i) Temporary
     absences.--A requesting spouse and a nonrequesting
     spouse are considered members of the same household
     during either spouse’s temporary absences from the
     household if it is reasonable to assume that the absent
     spouse will return to the household, and the household
     or a substantially equivalent household is maintained
     in anticipation of such return. Examples of temporary
     absences may include, but are not limited to, absence
     due to incarceration, illness, business, vacation,
     military service, or education.

     We shall consider only whether Ms. Crouse meets the require-

ments of section 6015(c)(3)(A)(i) and the regulations thereunder.

That is because our resolution of that question resolves the

issue of whether petitioner is entitled to relief under section

6015(c) with respect to the portion of the deficiency for 2001

that is attributable to the self-employment tax on Ms. Crouse’s

2001 nonemployee compensation.

     Respondent argues that Ms. Crouse does not satisfy the

requirements of section 6015(c)(3)(A)(i) and the regulations

thereunder.   According to respondent:

          In this case, petitioner [Ms. Crouse] was neither
     divorced nor legally separated from Mr. Crouse on March
                              - 56 -

     24, 2009, the date upon which she filed her claim for
     relief. * * * Moreover, petitioners did not even dis-
     cuss divorce until after Mr. Crouse’s release [from
     prison] on November 27, 2009. Consequently, Mr.
     Crouse’s incarceration constituted a temporary absence
     under Treas. Reg. § 1.6015-3(b)(3). As a result, Ms.
     Crouse is not entitled to relief under section 6015(c).

     On the record before us, we agree with respondent.     We have

found that (1) at all relevant times, including during the year

at issue, at the time Mr. Crouse was released from prison on

November 27, 2009, and at the time of the trial in this case, Mr.

Crouse and Ms. Crouse were married, (2) before Mr. Crouse was

released from prison on November 27, 2009, petitioners had not

discussed whether they would divorce, and neither Mr. Crouse nor

Ms. Crouse had filed for divorce as of that date, (3) that around

February or March 2010, several months before the trial in this

case, Mr. Crouse filed for divorce, and (4) around March 24,

2009, approximately eight months before Mr. Crouse was released

from prison and approximately one year before petitioners filed

for divorce, Ms. Crouse filed Ms. Crouse’s Form 8857.

     On the record before us, we find that on the date on which

Ms. Crouse made the election under section 6015(c) she was not

divorced or legally separated from Mr. Crouse.   See sec.

6015(c)(3)(A)(i)(I).   On that record, we further find that on the

date on which Ms. Crouse made the election under section 6015(c)

she had been a member of the same household as Mr. Crouse during

the 12-month period ending on the date Ms. Crouse made her elec-
                               - 57 -

tion.38   See sec. 6015(c)(3)(A)(i)(II); sec. 1.6015-3(b)(3)(i),

Income Tax Regs.   On the record before us, we find that Ms.

Crouse is not eligible to make an election under section 6015(c).

     On the record before us, we find that Ms. Crouse is not

entitled for her taxable year 2001 to relief under section

6015(c) for the portion of the deficiency that is attributable

to the self-employment tax on Ms. Crouse’s 2001 nonemployee

compensation.

     Section 6015(f)

     We turn finally to whether Ms. Crouse is entitled to relief

under section 6015(f) for the portion of the deficiency for 2001

that is attributable to the self-employment tax on Ms. Crouse’s

2001 nonemployee compensation.   Section 6015(f) provides:

     SEC. 6015.    RELIEF FROM JOINT AND SEVERAL LIABILITY ON
                   JOINT RETURN.

          (f) Equitable Relief.–-Under procedures prescribed
     by the Secretary, if--

                (1) taking into account all the facts and
           circumstances, it is inequitable to hold the indi-
           vidual liable for any unpaid tax or any deficiency
           (or any portion of either); and




     38
      In the light of our findings that before Mr. Crouse was
released from prison on Nov. 27, 2009, petitioners had not
discussed whether to divorce and that neither Mr. Crouse nor Ms.
Crouse had filed for divorce as of that date, we find it reason-
able to conclude that upon his release from prison Mr. Crouse
would return to his family’s household and that his absence from
that household as a result of his imprisonment was temporary.
See sec. 1.6015-3(b)(3)(i), Income Tax Regs.
                                - 58 -

                 (2) relief is not available to such individ-
            ual under subsection (b) or (c),

     the Secretary may relieve such individual of such lia-
     bility.

     As directed by section 6015(f), the Commissioner of Internal

Revenue (Commissioner) has prescribed procedures in Rev. Proc.

2003-61, supra (Revenue Procedure 2003-61), that are to be used

in determining whether it would be inequitable to find the re-

questing spouse liable for part or all of the deficiency in

question.   Section 4.01 of Revenue Procedure 2003-61 lists the

following threshold conditions (threshold conditions) which must

be satisfied before the Commissioner will consider a request for

relief under section 6015(f):    (1) The requesting spouse filed a

joint tax return for the taxable year for which such spouse seeks

relief; (2) relief is not available to the requesting spouse

under section 6015(b) or (c); (3) the requesting spouse applies

for relief no later than two years after the date of the Ser-

vice’s first collection activity after July 22, 1998, with re-

spect to the requesting spouse; (4) no assets were transferred

between the spouses as part of a fraudulent scheme by the

spouses; (5) the nonrequesting spouse did not transfer disquali-

fied assets to the requesting spouse; (6) the requesting spouse

did not file or fail to file the tax return in question with

fraudulent intent; (7) the income tax liability from which the

requesting spouse seeks relief is attributable to an item of the
                              - 59 -

nonrequesting spouse.   Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B.

at 297.

     Respondent argues that Ms. Crouse has failed to satisfy the

threshold condition in section 4.01(7) of Revenue Procedure 2003-

61 with respect to the portion of the deficiency that is attrib-

utable to the self-employment tax on Ms. Crouse’s 2001

nonemployee compensation because that compensation is attribut-

able to her.   We have found that the portion of the deficiency

attributable to the self-employment tax on Ms. Crouse’s 2001

nonemployee compensation is attributable to Ms. Crouse.   On the

record before us, we find that Ms. Crouse has failed to satisfy

one of the threshold conditions with respect to the portion of

the deficiency that is attributable to the self-employment tax on

Ms. Crouse’s 2001 nonemployee compensation.   See Rev. Proc. 2003-

61, sec. 4.01(7).   On that record, we find that Ms. Crouse has

failed to carry her burden of establishing that it would be

inequitable to hold her liable for that portion of that defi-

ciency.

     On the record before us, we find that Ms. Crouse has failed

to carry her burden of establishing that she is entitled for her

taxable year 2001 to relief under section 6015(f) with respect to

the portion of the deficiency that is attributable to the self-

employment tax on Ms. Crouse’s 2001 nonemployee compensation.
                             - 60 -

     We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.

     To reflect the foregoing and respondent’s concessions as to

Ms. Crouse,


                                      Decision will be entered

                                under Rule 155.
