                       T.C. Memo. 2009-20


                     UNITED STATES TAX COURT



                 WINNIE L. GREER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24062-06.              Filed January 29, 2009.



     Kenton L. Ball, for petitioner.

     Denise A. Diloreto, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   The issue for decision is whether to uphold

respondent’s determination that petitioner is not entitled to
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relief under section 6015(b)1 or (f) for 1979, 1980, 1981, and

1982.    For the reasons explained herein, we uphold respondent’s

determination.

                          FINDINGS OF FACT

     At the time the petition was filed, petitioner resided in

Kentucky.

     Petitioner graduated from high school in Floyd County,

Kentucky, in 1965.    She then attended the University of Kentucky,

for 2 years and transferred to Louisiana State University from

where she graduated with a bachelor of arts degree in music in

1969.    Petitioner also received a master’s degree in music

education from Marshall University in 1973.    Petitioner did not

pursue studies in economics, finance, or accounting in her formal

education.

     Petitioner married Daniel C. Greer in 1967, and they remain

married.    Petitioner and Mr. Greer have two daughters, born in

1974 and in 1977.    Mr. Greer is a licensed chemical engineer and

was employed by Ashland Oil Co., Inc., from 1969 through July

1993.

     From September 1969 through May 1972 petitioner was employed

as a high school music teacher.    After that she pursued graduate

studies and raised her daughters.    From 1975 to 1985 she acted as



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code.
                                - 3 -

a part-time choir director at the Episcopal church where she and

Mr. Greer became members sometime in 1982 and 1983.

     In 1979 petitioner began a photography business.    She

specialized in wedding and portrait photography.    She opened her

first photography studio in late 1979 in the family home.

Improvements were made to the home in 1982, and the structure

remained petitioner’s photography studio even after petitioner

and her family moved their residence in 1986.

     Throughout the years of her marriage up to and including the

years in issue, petitioner relied upon Mr. Greer to manage their

financial affairs.    Mr. Greer did not conceal any financial

activities from petitioner or mislead her with respect to those

activities.    However, he was the primary decisionmaker, and she

relied upon him to direct their investments and make decisions

regarding their finances and taxes.

     In 1979 Mr. Greer and petitioner’s father founded G&L

Communications, Inc. (G&L), a closely held cable television

business that operated in Boyd and Greenup Counties of Kentucky.

G&L was taxed as an S corporation until the sale of its assets in

November 1982.    Petitioner and Mr. Greer each owned 61 shares of

G&L stock.    Petitioner was not active in G&L’s management, nor

was she an employee of G&L.    In 1982 petitioner and Mr. Greer

each continued to own 61 shares.    They each received a cash

distribution of $146,918.02 attributable to their respective
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portions of the proceeds of the sale.   Thus their combined

distribution from G&L was $293,836.   Following the sale of G&L’s

assets in 1982, two identical Forms 1099-DIV, Statement For

Receipts of Dividends and Distributions, were issued to

petitioner and Mr. Greer, each reflecting a dividend distribution

of $35,976, a capital gain distribution of $82,072, and a

nontaxable distribution of $28,869 for a total distribution to

each of $146,917.

     Motivated by the anticipated income tax consequences of the

G&L dividends and distributions, Mr. Greer invested in Madison

Recycling Associates, Inc. (Madison).   The background of this

transaction and its consequences are fully described in previous

judicial opinions, Greer v. Commissioner, T.C. Memo. 2007-119,

Madison Recycling Associates v. Commissioner, 295 F.3d 280 (2d

Cir. 2002), affg. T.C. Memo. 2001-85, and Madison Recycling

Associates v. Commissioner, T.C. Memo. 1992-605.   We simply note

here that the result of those opinions is that respondent has

assessed joint deficiencies in income tax and additions to tax

against petitioner and Mr. Greer for the years 1979 through 1982.

These deficiencies and additions to tax are the liabilities from

which petitioner seeks section 6015 relief.   The parties

previously agreed that any request by petitioner for relief from

joint and several liability under section 6015 would not be
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determined in the most recent Tax Court litigation reflected in

Greer v. Commissioner, supra.

     The 1982 joint income tax return for petitioner and Mr.

Greer was prepared by John W. Artis, C.P.A.     Mr. Artis advised

Mr. Greer that because the tax benefits associated with Madison

significantly exceeded the dollars invested, the Madison

investment was “fairly aggressive”.     Petitioner was not a party

to those discussions and relied totally on Mr. Greer to make the

decision to claim the tax benefits associated with Madison.     Mr.

Greer chose not to seek an opinion from Mr. Artis regarding the

merits of the Madison transaction.      In Greer v. Commissioner,

supra, we found as fact that Mr. Greer expected that Madison

would provide tax savings of approximately $1.75 for each dollar

invested, and the record in this case is consistent with that

finding.

     On December 16, 1982, Mr. Greer signed a check for $50,000

payable to Madison and drawn on the joint checking account of

petitioner and Mr. Greer to purchase a 5.5-percent limited

partnership interest in Madison.   This was the only checking

account that petitioner and Mr. Greer had at the time.     At the

time of the Madison investment, petitioner knew Mr. Greer was

purchasing an interest in Madison, and they briefly discussed the

Madison transaction before the investment.
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     In March 1983 Madison filed a partnership return for the

taxable year ended December 31, 1982, which reported a loss of

$704,111 and a tax credit basis of $7 million.     Petitioner and

Mr. Greer filed joint individual income tax returns for the years

1979, 1980, 1981, and 1982.     The Madison-related pass-through

losses and investment credits reported on the joint returns for

1979, 1980, 1981, and 1982 were as follows:

           Year          Loss            Investment Credit

           1979           -0-               $177.28
           1980         $9,808             7,153.00
           1981          3,146             4,128.00
           1982         38,726            51,131.00

Of the $51,131 credit reported on the 1982 joint Federal income

tax return, the net credit used in 1982 from Madison totaled

$33,066 because $22,012 was eliminated in the alternative minimum

tax computation, and only an additional $3,947 was allowed as a

credit against alternative minimum tax.     As a result, credits

were available to be carried back to 1979, 1980, and 1981.

     The distributions from G&L were reported on the 1982 joint

return.   Reflecting the listed ownership of 61 shares by each,

the dividends and capital gain distributions reflected on the

Federal income tax return were divided equally between Mr. Greer

and petitioner on two separate Forms 740, Kentucky Individual

Income Tax Return, which were filed using the status married

filing separately.   Petitioner signed both the Federal joint

income tax return and her separate Kentucky form 740 for 1982.
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On February 28, 1983, petitioner and Mr. Greer signed a Form

1045, Application for Tentative Refund, for the years 1979, 1980,

and 1981, seeking a refund totaling $39,534 as a result of

carrying back to those years the credits from the Madison

investment.    Subsequently in August 1983 petitioner also signed a

declaration relating to the Form 1045, which was requested by the

Internal Revenue Service to confirm the execution of the original

Form 1045.    Petitioner discussed the execution of this

declaration with Mr. Greer.    In October 1983 three refund checks

related to the Form 1045 were deposited into the joint account of

petitioner and Mr. Greer.    The total deposit resulting from these

checks was $39,532.    There is no explanation in the record for

the discrepancy of $2 between this amount and the amount claimed

on the Form 1045.    Petitioner did not review the 1982 joint

Federal income tax return, nor did she review the Form 1045.

Petitioner did not ask Mr. Greer for details about the Madison

investment, and she did not ask Mr. Greer or Mr. Artis any

questions about the 1982 joint Federal income tax return or the

Form 1045.    However, petitioner was aware of the Madison

investment.

     Petitioner made an election for relief under section 6015

from liability for the deficiencies, additions to tax, and

interest determined against her for 1979 to 1982 in a Form 8857,

Request for Innocent Spouse Relief, submitted to respondent in
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September 2005.    Petitioner’s grounds for relief were that the

erroneous items at issue are those of Mr. Greer, that he handled

the family finances and was responsible for having the returns

prepared, that she did not review the returns before signing

them, and that she relied upon Mr. Greer to have the returns

prepared correctly.    Petitioner provided no information regarding

her current income or living expenses.    In late 2005 respondent

issued a preliminary determination denying petitioner’s request

for relief on the basis that petitioner was aware of the items on

the joint Federal income tax returns that led to the deficiencies

in question.    Petitioner protested this preliminary

determination.

       Petitioner’s request for relief was then considered by an

Appeals officer, who determined after conducting an investigation

that petitioner was not entitled to relief because the factors

against relief outweighed the factors for relief.    The Appeals

officer found that the factors against relief included that

petitioner knew or had reason to know of the understatement of

tax.    The Appeals officer determined that petitioner should have

made a further inquiry concerning the tax liability, which may

have been generated by the Madison transaction.    The Appeals

officer also determined that petitioner received benefit from the

tax which was not paid because of the Madison transaction,

inferring that the success of petitioner’s photography business
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was tied to the building of the photography studio on a tract of

land she purchased in 1983 and that an increase in net worth of

petitioner and Mr. Greer was caused by not paying the tax

liabilities for the years in question.   Finally, the Appeals

officer determined that there would not be economic hardship to

petitioner and Mr. Greer as a result of the payment of the

underlying tax liabilities if Mr. Greer’s assets were considered

as a source of payment, as well as petitioner’s assets.   The

Appeals officer also determined that petitioner was in compliance

with the tax laws and that this was a favorable factor for

petitioner.

     The Appeals officer estimated that petitioner and Mr. Greer

owned assets which provided a reasonable collection potential to

respondent of $2,262,749.   The Appeals officer estimated the Mr.

Greer’s assets totaled approximately $925,000 and petitioner

owned the remainder.   The parties have stipulated that

petitioner’s personal assets at the end of September 2007 had a

value in excess of $2,134,000.    Petitioner averaged over $42,000

in annual wages from Greer Photography during 2004 through 2006.

     The deficiencies in tax, additions to tax, and interest for

the years 1979 through 1982 associated with the joint income tax

liabilities of petitioner and Mr. Greer exceed $1.2 million at
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this time, largely because of the interest for all 4 years and

the 50-percent additional interest under section 6653(a)(2) for

1981 and 1982.

     After receipt of the notice of determination reflecting the

Appeals officer’s negative conclusions, petitioner filed a timely

petition.

                               OPINION

     In general, taxpayers filing joint Federal income tax

returns are each responsible for the accuracy of their returns

and are jointly and severally liable for the entire tax liability

for the year of the returns.   Sec. 6013(d)(3).   In certain

circumstances, however, a spouse may obtain relief from joint and

several liability by satisfying the requirements of section 6015.

     Section 6015(a)(1) provides that a spouse who made a joint

return may elect to seek relief from joint and several liability

under section 6015(b) (dealing with relief from liability for an

understatement of tax on a joint return).   Section 6015(c) is not

available to petitioner on the facts of this case.    If relief is

not available under section 6015 (b) or (c), an individual may

seek equitable relief under section 6015(f).

I.   Section 6015(b)

     Section 6015(b) provides that a taxpayer will be relieved of

liability for an understatement of tax if (1) a joint return was

filed for the taxable year in question; (2) there is an
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understatement of tax attributable to erroneous items of Mr.

Greer; (3) the taxpayer requesting relief “did not know, and had

no reason to know, that there was such understatement” when he or

she signed the return; (4) taking into account all of the facts

and circumstances, it would be inequitable to hold the taxpayer

liable for the deficiency attributable to such understatement;

and (5) the taxpayer elects to have section 6015(b) apply within

2 years of the initial collection action.   Respondent agrees that

petitioner meets the first and fifth requirements and thus

focuses on the second, third, and fourth factors as the basis for

supporting the determination to deny relief.   The burden is on

petitioner to establish that she is entitled to the relief.

     This case does not involve a deficiency stemming from an

omission of an item of income on a tax return.   Rather, the

deficiency arises from the disallowance of investment credits and

a partnership loss.   In such situations a taxpayer may be aware

that a transaction took place but may not know that an

understatement will result from the transaction. Knowledge of the

transaction has been held to be sufficient knowledge of the

understatement to bar relief under former section 6013(e)(1)(C),

which had a similar requirement to that of section 6015(b)(1)(C).

See, e.g., Bokum v. Commissioner, 94 T.C. 126, 146 (1990), affd.

992 F.2d 1132 (11th Cir. 1993).   The Court of Appeals for the

Ninth Circuit held that a taxpayer meets the standard for relief
                               - 12 -

if the taxpayer did not know or did not have reason to know that

the erroneous deduction or credit would give rise to an

understatement despite the presence of the deduction on the

return.    Price v. Commissioner, 887 F.2d 959, 963 (9th Cir.

1989).    Because of the similarity between the two statutory

standards, we have held that the cases interpreting former

section 6013(e) remain instructive in analyzing the issue

presented by section 6015(b)(1)(C).      Jonson v. Commissioner, 118

T.C. 106, 115 (2002) (citing Butler v. Commissioner, 114 T.C.

276, 283 (2000)), affd. 353 F.3d 1181 (10th Cir. 2003); Doyel v.

Commissioner, T.C. Memo. 2004-35.

     The Court of Appeals for the Sixth Circuit is the likely

venue for any appeal of this case.      In Purcell v. Commissioner,

826 F.2d 470, 473-474 (6th Cir. 1987), affg. 86 T.C. 228 (1986),

that Court of Appeals held that knowledge of the transaction

giving rise to omitted income was sufficient to bar relief under

former section 6013(e).    In Richardson v. Commissioner, 509 F.3d

736 (6th Cir. 2007), affg. T.C. Memo. 2006-69, that Court of

Appeals followed Purcell in a case where the taxpayer sought

relief under section 6015(b) from a tax deficiency arising from

the use of alleged trusts to shield income.     The trusts in

question were held to be a sham.
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      Petitioner notes that the Court of Appeals for the Sixth

Circuit has embraced a test requiring the examination of all

facts and circumstances, citing Shea v. Commissioner, 780 F.2d

561 (6th Cir. 1986), affg. in part and revg. in part T.C. Memo.

1984-310.    Shea involved omissions of income and an analysis of

the facts and circumstances to determine whether a person had

reason to know of the omissions.    We find that under the facts

and circumstances of this case petitioner had reason to know of

the understatement on the joint income tax return for 1982.

II.   Reason To Know

      In Shea, the Court of Appeals for the Sixth Circuit adopted

the description of the “reason to know” test used in Sanders v.

United States, 509 F.2d 162, 166 (5th Cir. 1975).    Shea v.

Commissioner, supra at 565-566, has the following explanation:

           The test adopted by the Sanders court is the same
      test advanced by Restatement (Second) of Agency § 9,
      comment d (1958), which read as follows:

            A person has reason to know of a fact if he had
            information from which a person of ordinary
            intelligence which such person may have, or of the
            superior intelligence which such person may have,
            would infer that the fact in question exists or
            that there is such a substantial chance of its
            existence that, in exercising reasonable care with
            reference to the matter in question, his action
            would be predicated upon the assumption of its
            possible existence.

      509 F.2d at 167. By adopting this reasonable person
      standard, the court rejected a more restrictive
      interpretation which would have required the taxpayer
      to provide that there was no possibility of discovering
      the omissions. Id. at 166. The primary ingredient of
                               - 14 -

     the “reason to know” tests are (1) the circumstances
     which face the petitioner, and (2) whether a reasonable
     person in the same position would infer that omissions
     or erroneous deductions had been made.

     The “reason to know” test is also explained in Price v.

Commissioner, supra at 965:

     A spouse has “reason to know” of the substantial
     understatement if a reasonably prudent taxpayer in her
     position at the time she signed the return could be
     expected to know that the return contained the
     substantial understatement. Factors to consider in
     analyzing whether the alleged innocent spouse had
     “reason to know” of the substantial understatement
     include: (1) the spouse’s level of education; (2) the
     spouse’s involvement in the family’s business and
     financial affairs; (3) the presence of expenditures
     that appear lavish or unusual when compared to the
     family’s past levels of income, standard of living, and
     spending patterns; and (4) the culpable spouse’s
     evasiveness and deceit concerning the couple’s
     finances. [Citations omitted.]

     In reviewing whether petitioner had reason to know of the

understatement, we will begin with the four factors listed in

Price.

     (i)    Education

     Petitioner is highly educated, having received a master’s

degree in music education.    She is not specifically educated in

accounting, economics, or finance, but she is an intelligent,

well-educated person.

     (ii)    Involvement in Financial Affairs

     Petitioner’s ownership of 61 shares of G&L stock led to a

cash distribution to her of approximately $147,000 in 1982.

Petitioner argues that she held the shares only as a nominee for
                                  - 15 -

Mr. Greer.      Regardless, petitioner was aware of the significant

cash distributions that both she and Mr. Greer received as a

result of the sale of G&L’s assets.        Petitioner also signed a

Kentucky income tax return which reflected her separate share of

the proceeds from the sale of G&L’s assets.        In addition, she

signed forms seeking significant tax refunds, which resulted from

the tax reporting of the Madison investment.        Finally, the

investment in the Madison transaction was paid from the joint

checking account of petitioner and Mr. Greer.        Petitioner does not

maintain that she was unaware of the investment, only that she did

not realize the reporting of the Madison transaction would result

in an understatement of tax.     Regarding the large G&L

distributions which were the key to the motivation of Mr. Greer in

making the Madison investment, petitioner was likewise not in the

dark.    She maintains that she always relied on Mr. Greer to handle

financial affairs, but she was at least generally aware of the

results of the G&L sale.      Such knowledge is not irrelevant.       Price

v. Commissioner, supra at 963 n.9; Doyel v. Commissioner, T.C.

Memo. 2004-35.

        (iii)   Changes in Standard of Living

        The parties have argued in great detail about whether

petitioner directly benefited from the reported tax treatment of

the Madison investment.      While a specific dollar benefit to

petitioner personally is not clearly established, there is no
                                 - 16 -

question that petitioner and Mr. Greer maintained a very

comfortable lifestyle during 1982 and for all the years thereafter

and that they provided for the education of their two children.

Cash is fungible, and the reporting of the Madison transaction

generated significant cash savings on the joint tax liability of

petitioner and Mr. Greer for 1979 through 1982.    The record does

not establish any extravagant change in petitioner’s lifestyle,

however.

       (iv)   Mr. Greer’s Evasiveness and Deceit Regarding Finance

       Mr. Greer was not deceitful or evasive with petitioner

regarding the Madison investment or the G&L cash distributions.

Petitioner relied upon Mr. Greer to make the decisions concerning

the family financial transactions and their tax consequences, but

the record does not support the conclusion that she was misled or

denied information.

III.    Did Petitioner Have “Reason To Know”?

        Three of the four Price factors would support the conclusion

that petitioner should have at least made further inquiry about

the extraordinary tax benefits reflected on the joint return for

1982.     She knew there was substantial additional income, yet she

signed forms reflecting tax refunds generated in the years 1979

through 1981 as a result of the reporting of the 1982    Madison

investment.     Almost $40,000 in refunds was deposited into the same

joint checking account on which the check of $50,000 for the
                                - 17 -

Madison investment was drawn.   These refunds were in addition to

tax savings of over $33,000 sought through the aggressive

reporting of the Madison transaction on the joint return for 1982.

Petitioner chose not to know; she was not deceived or misled.

      [B]eing a homemaker and preparing for weddings,
      graduations and reunions certainly cannot relieve a
      taxpayer of joint and several tax liability. The
      petitioner does not make a showing that Mr. Greer’s
      financial affairs were unreasonably complex, nor does
      she provide the court with convincing reasons for not
      reviewing her own bank statements * * *

Shea v. Commissioner, 780 F.2d at 566-567 (citation omitted).       In

conclusion, petitioner has failed to establish that she had no

reason to know that there was an understatement on the 1982 joint

Federal income tax return.   Accordingly, she is not entitled to

relief under section 6015(b).

IV.   Section 6015(f)

      Section 6015(f) provides for relief from joint liability if

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

inequitable to hold the individual liable.   Under the authority

granted by section 6015(f), the Commissioner has issued Rev. Proc.

2003-61, sec. 4.03, 2003-2 C.B. 296, 298, which sets forth the

factors to be applied when making a determination in a case

involving an understatement of tax for requests made when

petitioner’s was submitted to respondent.    We will review those

factors in the light of the facts and circumstances of this case.
                                    - 18 -

     (i)    Marital Status.    Because petitioner remained married to

Mr. Greer, this factor is neutral.

     (ii)    Economic Hardship.     Petitioner has failed to establish

that respondent’s determination regarding a lack of economic

hardship was incorrect.    Therefore, this factor is negative.

     (iii)    Knowledge or Reason To Know.       For the reasons

discussed previously, this factor is negative to petitioner.

     (iv)    Legal Obligation of Nonrequesting Spouse.       There is no

such obligation in this case; this factor is neutral.

     (v)     Significant Benefit.    As discussed previously, in this

record an unusual financial benefit is not clearly established;

this factor is favorable to petitioner.

     (vi)    Compliance with Tax Laws.       This factor favors granting

relief.

     (vii)    Other Factors.   Rev. Proc. 2003-61, supra, provides

factors which if present will weigh in favor of granting relief,

but the absence of which will not support the denial of relief.

These factors are spousal abuse or poor mental or physical health

at the time the return was filed.       Neither of these factors is

applicable in this case.

     In summary, there are two negative and two positive factors;

given its significance, factor (iii) pushes the scale against

granting relief under section 6015(f).
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V.   Prior Cases

     This case is distinguishable from other cases where spouses

of individuals who invested in tax shelters were found eligible

for relief.   See, e.g., Korchak v. Commissioner, T.C. Memo. 2006-

185 (requesting spouse established no reason to know where

requesting spouse did not know nonrequesting spouse was making

investment; requesting spouse had no practical business

experience; and tax return reported multiple investment losses and

credits so that disallowed investment did not stand out); Campbell

v. Commissioner, T.C. Memo. 2006-24 (requesting spouse established

no reason to know where requesting spouse did not know

nonrequesting spouse was making investment; there was concealment

by nonrequesting spouse; and reported items were not noticeable

given complexity of return).   Petitioner knew of the Madison

investment.   There was no deception or concealment by Mr. Greer.

Petitioner was put on notice by the claimed tax benefits on Form

1045 for years prior to 1982 that something out of the ordinary

was generating large tax benefits.   She also knew the significant

distributions they were receiving as a result of the sale of the

G&L assets.   The Madison investment was reflected in the joint

bank account to which petitioner had access.   These facts

distinguish the present case from Korchak and Campbell.
                                 - 20 -

Conclusion

     Petitioner is not entitled to relief from joint liability

under section 6015 (b) or (f).    Accordingly,


                                          Decision will be entered

                                     for respondent.
