                    T.C. Summary Opinion 2009-56



                        UNITED STATES TAX COURT



                 LISA A. VIRGILIO, Petitioner,
              AND FRANK A. VIRGILIO, Intervenor v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4323-08S.                Filed April 28, 2009.



     Lisa A. Virgilio, pro se.

     John M. Janusz, for respondent.



     RUWE, Judge:     This case was heard pursuant to the provisions

of section 74631 of the Internal Revenue Code in effect when the

petition was filed.    Pursuant to section 7463(b), the decision to




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

be entered is not reviewable by any other court, and this opinion

shall not be treated as precedent for any other case.

     Respondent determined a $1,136 deficiency in petitioner and

intervenor’s 2005 Federal income tax.    Neither petitioner nor

intervenor disagrees with the liabilities set forth in the notice

of deficiency.   The only issue for decision is whether petitioner

is entitled to full or partial relief from joint and several

liability with respect to the portion of the understatement of

tax attributable to intervenor.

                            Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    At the time the petition

was filed, petitioner resided in New York.    At the time the

notice of intervention was filed, intervenor resided in Florida.

Intervenor has since returned to and currently resides in the

State of New York.

     Petitioner and intervenor were married in the State of New

York in June 1987.   Petitioner and intervenor lived at their

marital residence until sometime in late December 2005.

Petitioner and intervenor filed a joint Federal income tax return

for tax year 2005.   However, as of the end of May 2005 the couple

had separated their finances so that intervenor could accumulate

his earnings to move out and get his own apartment.
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     On January 26, 2007, petitioner and intervenor entered into

a property settlement and separation agreement (agreement).

Article V of the agreement, in pertinent part, states:

          The Husband and Wife warrant that all joint income
     tax returns heretofore filed are true and complete, to
     the best of their knowledge and belief, and that all
     liabilities thereon have been fully paid, and that
     there is no pending audit or examination of any
     returns. In any event, the Husband or the Wife shall
     pay all liability thereafter assessed or imposed with
     respect to his or her portion of income on such income
     returns and will indemnify the other party against and
     hold the other party harmless for all such liabilities
     and expenses, losses and damages as may be incurred by
     such other party in connection with those returns. All
     audits, examinations, suits or other proceedings in
     connection with those returns shall be handled at the
     cost and expense of the party who caused such liability
     and/or audit or by counsel or accounts [sic] selected
     by him or her.

Approximately 5 months later petitioner and intervenor divorced.

The judgment of divorce (decree) dated June 28, 2007,

incorporated, but did not merge, the agreement and stated that

the agreement survived in all respects.

     On December 3, 2007, respondent separately mailed a notice

of deficiency (notice) to petitioner and intervenor for the

taxable period ending December 31, 2005.   Petitioner and

intervenor’s joint 2005 Federal income tax return was incorrect

because it failed to include in income $218 of unemployment

compensation intervenor received (unemployment compensation) and

$3,400 of miscellaneous income intervenor received from R&D
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Construction (construction income).2    The unemployment

compensation and the construction income were reported on Forms

1099, but the forms were not received until after the joint 2005

Federal income tax return had been filed.    At the time the joint

2005 Federal income tax return was filed, petitioner knew that

intervenor had worked for R&D Construction “from approximately

July 27th through the end of October and the beginning of

November in ‘05”, and that a Form 1099 would be received.

Petitioner did not, however, know that intervenor had received

unemployment compensation during 2005.

     Petitioner sent to respondent a Form 8857, Request for

Innocent Spouse Relief, which respondent received on January 16,

2008.    In her request for relief petitioner asserts:     She has

been divorced since June 28, 2007; she holds a college degree of

“Legal Associate’s Degree”; she was not a victim of spousal abuse

or domestic violence during 2005; she signed the 2005 Federal

income tax return; she did not have a mental or physical health

problem then or now; her involvement in the preparation of the

tax return was limited to giving the tax documents to the person

who prepared the return; at the time she signed the return, she


     2
       The joint 2005 Federal income tax return also failed to
reflect a $153 early distribution penalty attributable to a
retirement plan distribution petitioner received. Petitioner
acknowledged that the $153 was attributable to her, and she has
since provided two payments ($80.03 and $100) to the Internal
Revenue Service to address this omission from the joint 2005
Federal income tax return.
                               - 5 -

did not know anything was incorrect or missing; she knew that

intervenor had income during 2005 but did not know any amount was

owed to the Internal Revenue Service; she was having financial

problems in 2005; her involvement with household finances was

limited to the use of a joint bank account to which she made

deposits, paid bills, balanced the checkbook, or reviewed the

monthly bank statements; intervenor had never transferred assets

to her; she was unaware of any unemployment benefits intervenor

received in 2005; intervenor’s Forms 1099 from R&D Construction

and for unemployment compensation were received after she had

already filed the joint 2005 Federal income tax return; and the

agreement stated that intervenor would be responsible for any tax

liability attributable to his income.

     Before respondent determined whether to grant petitioner

relief, petitioner timely filed a petition raising as an

affirmative defense entitlement to innocent spouse relief with

respect to the unemployment compensation and construction income.

Respondent, pursuant to Rule 325 and King v. Commissioner, 115

T.C. 118 (2000), served notice of this proceeding on intervenor.

Intervenor timely filed a notice of intervention on June 3, 2008.

In the notice of intervention, intervenor asserts that petitioner

should be held liable for not only the $153 early withdrawal

penalty but also half of the tax owed on the unreported income he

received.   By exercising his right to intervene, intervenor
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became a party to this case.   Sec. 6015(e)(4); King v.

Commissioner, supra.   Intervenor, however, neither appeared nor

participated in the trial of this case.

                             Discussion

     Petitioner raised her claim for innocent spouse relief in a

petition for redetermination filed pursuant to section 6213(a).

“In the context of a deficiency proceeding, a claim for innocent

spouse relief historically has been an affirmative defense that

must be set forth in the pleadings.”      Butler v. Commissioner, 114

T.C. 276, 287-288 (2000).    Our authority to review petitioner’s

affirmative defense that she is entitled to innocent spouse

treatment is governed by our general jurisdiction to consider any

issue that affects the deficiency before us.     Id. at 288.

     Section 6013(d)(3) provides that taxpayers filing joint

Federal income tax returns are jointly and severally liable for

the taxes due.   Section 6015, however, provides that

notwithstanding section 6013(d)(3), under certain facts and

circumstances limited relief from joint and several liability may

be available under section 6015(b), (c), or (f).     Except as

otherwise provided in section 6015, the taxpayer seeking relief

bears the burden of proof.   Rule 142(a); Alt v. Commissioner, 119

T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004).
                               - 7 -

Section 6015(b)

     To qualify for relief pursuant to section 6015(b)(1), the

requesting spouse must establish that:   (A) A joint return was

filed; (B) there was an understatement of tax attributable to

erroneous items of the nonrequesting spouse; (C) at the time of

signing the return, the spouse seeking relief did not know, and

had no reason to know, of the understatement; (D) taking into

account all the facts and circumstances, it is inequitable to

hold the spouse seeking relief liable for the deficiency in tax

attributable to the understatement; and (E) the requesting spouse

seeks relief within 2 years of the first collection activity.

     There is no dispute that petitioner satisfies subparagraphs

(A), (B), and (E) of section 6015(b)(1).   Petitioner, however,

does not satisfy subparagraph (C) with respect to the portion of

the understatement of tax attributable to the construction

income.   Petitioner testified that she was aware that intervenor

was working during 2005 and that he would receive a Form 1099.

Consequently, we find that petitioner had actual knowledge of the

item giving rise to the portion of the understatement of tax

attributable to the construction income before she signed the

joint 2005 Federal income tax return.

     Notwithstanding the individual’s knowledge or reason to know

of some part of the understatement of tax, section 6015(b)(2)

permits the individual to qualify for relief as to the remainder
                                - 8 -

of the understatement.    Cullen v. Commissioner, T.C. Memo. 2004-

176.    Petitioner stated in both her petition and on Form 8857

that she did not know of the unemployment compensation.      It has

also been established that although petitioner and intervenor

continued to live together in the marital residence until

December 2005, they had segregated their finances as of the end

of May 2005.    Consequently, we find that pursuant to section

6015(b)(1)(C) petitioner has established that she did not know,

and had no reason to know, of the portion of the understatement

of tax attributable to the unemployment compensation.

       We turn to subparagraph (D) to determine whether, taking

into account all the facts and circumstances, it is inequitable

to hold petitioner liable for that portion of the understatement

of tax.    Both petitioner and intervenor have stated that

intervenor never transferred assets to petitioner.    Furthermore,

respondent conceded that petitioner did not receive a significant

benefit from the item giving rise to the deficiency.    Thus,

taking into account all the facts and circumstances, we find it

inequitable to hold petitioner liable for the portion of the

understatement of tax attributable to the unemployment

compensation.    Accordingly, we find that petitioner is entitled

to relief from joint and several liability pursuant to section

6015(b) for the portion of the understatement of tax attributable

to the unemployment compensation.
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     Next, we must decide whether petitioner is entitled to

relief under section 6015(c) or (f) for the portion of the

deficiency attributable to the construction income.

Section 6015(c)

     Section 6015(c) limits the liability of a taxpayer, such as

petitioner, who is no longer married and who makes the

appropriate election.   If a taxpayer elects relief under section

6015(c), such taxpayer’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

section 6015(d).   Sec. 6015(c)(1).     Relief under section 6015(c)

is not available to petitioner if respondent demonstrates that

petitioner had actual knowledge of the item giving rise to the

deficiency.   Sec. 6015(c)(3)(C).   As we have already found,

petitioner had actual knowledge of the item giving rise to the

portion of the understatement of tax attributable to the

construction income.    Accordingly, petitioner is not entitled to

section 6015(c) relief for the portion of the understatement of

tax attributable to the construction income.

Section 6015(f)

     If a taxpayer does not qualify for relief from joint and

several liability under section 6015(b) or (c), the taxpayer may

seek equitable relief under section 6015(f).     Section 6015(f)

confers on the Secretary discretion to grant equitable relief to
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taxpayers where “it is inequitable to hold the individual liable

for any unpaid tax or any deficiency (or any portion of either)”.

     As directed by section 6015(f), the Secretary’s delegate,

the Commissioner, has prescribed guidelines in Rev. Proc. 2003-

61, 2003-2 C.B. 296, for determining whether equitable relief

should be granted.   Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at

297-298, lists seven threshold conditions that must be met for a

request for relief under section 6015(f) to be considered.    The

seven threshold requirements are:   (1) The requesting spouse

filed a joint return for the taxable year for which he or she

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 2 years after the date of the

Service’s first collection activity after July 22, 1998, with

respect 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

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

spouse did not file or fail to file the return with fraudulent

intent; and (7) absent enumerated exceptions, the income tax

liability from which the requesting spouse seeks relief is

attributable to an item of the individual with whom the

requesting spouse filed the joint return.   Petitioner has

satisfied all seven of the threshold conditions.   We must
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therefore determine whether petitioner is entitled to equitable

relief.

     Rev. Proc. 2003-61, sec. 4.03(2), 2003-2 C.B. at 298-299,

lists eight nonexclusive factors that the Commissioner will

consider in determining whether, taking into account all the

facts and circumstances, it is inequitable to hold the requesting

spouse liable for all or part of the deficiency and whether full

or partial equitable relief under section 6015(f) should be

granted.    The eight nonexclusive factors and their application to

petitioner’s facts and circumstances are summarized below.

     1.    Petitioner’s Marital Status

     At the time she requested relief from joint and several

liability, petitioner was divorced from intervenor.      This factor

weighs in favor of granting relief.

     2.    Economic Hardship

     Petitioner has conceded that she would not suffer economic

hardship if relief is not granted.      This factor weighs against

granting relief.

     3.    Knowledge or Reason To Know

     As we have already found, petitioner had actual knowledge of

the item giving rise to the deficiency.      As a result, this factor

weighs against granting relief.
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     4.   Nonrequesting Spouse’s Legal Obligation

     Under this factor we consider whether the nonrequesting

spouse has a legal obligation to pay the outstanding income tax

liability pursuant to a divorce decree or agreement.     The decree,

having incorporated the agreement, makes petitioner and

intervenor liable for the payment of any later imposed or

assessed income tax liability attributable to her or his portion

of income on the income tax return.

     The remaining unreported income from which petitioner seeks

relief (the construction income) is attributable to intervenor’s

work with R&D Construction.     By the terms of petitioner and

intervenor’s decree and agreement, intervenor (the nonrequesting

spouse) is obligated to pay the portion of the understatement of

tax that is attributable to him; i.e., the unemployment

compensation and the construction income.     Accordingly, we find

that this factor weighs in favor of granting relief.

     5.   Significant Benefit

     Respondent has conceded that petitioner did not receive a

significant benefit from the item giving rise to the deficiency.

As a result, this factor weighs in favor of granting relief.

     6.   Good Faith Effort To Comply With Tax Laws

     Respondent has also conceded that petitioner made a good

faith effort to comply with the income tax laws in the taxable
                               - 13 -

years following the taxable year in issue, and this factor favors

granting relief.   See Harris v. Commissioner, T.C. Memo. 2009-26.

     7.    Spousal Abuse

     Petitioner has not alleged that there was abuse in her

former marriage.    Consequently, we find this factor is neutral.

     8.    Mental or Physical Health

     Petitioner concedes that she was not in poor mental or

physical health on the date she signed the return or at the time

that she requested relief.    Accordingly, we find this factor is

neutral.

     Conclusion

     In sum, four factors weigh in favor of granting relief, two

factors are neutral, and two factors weigh against granting

relief.    Accordingly, we conclude that petitioner is entitled to

equitable relief pursuant to section 6015(f) on that portion of

the understatement of tax attributable to the construction

income.

     To reflect the foregoing,

                                            Decision will be entered

                                       under Rule 155.
