                        T.C. Memo. 2010-110



                      UNITED STATES TAX COURT



             DORIANNE L. HO DEMATTOS, Petitioner AND
               EDWARD JAMES DEMATTOS, Intervenor v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27879-07.               Filed May 18, 2010.



     Dorianne L. Ho DeMattos, pro se.

     Edward James DeMattos, pro se.

     D. Anthony Abernathy, for respondent.



                        MEMORANDUM OPINION


     GOEKE, Judge:   Petitioner Dorianne L. Ho DeMattos seeks

review of respondent’s determination to deny relief from joint
                                - 2 -

and several liability under section 6015(b),1 (c), or (f) for tax

years 1993, 1994, 1995, 1997, 1999, 2000, 2001, and 2002 (the

years at issue).    As discussed below, we sustain respondent’s

determinations.

                              Background

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

The stipulated facts are incorporated herein by this reference.

Both petitioner (Ms. Ho DeMattos) and intervenor (Mr. DeMattos)

resided in Hawaii at the time the petition and the notice of

intervention were filed.

     Ms. Ho DeMattos and Mr. DeMattos were married throughout the

years at issue.    The couple’s marriage ended in April 2006.   The

DeMattoses had three children born of their marriage.    Mr.

DeMattos had two children from a prior marriage.

     Mr. DeMattos operated a construction business during the

years 1993, 1994, and 1995.    In later years Mr. DeMattos worked

as a general contractor.    In 1993 Ms. Ho DeMattos was primarily a




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                 - 3 -

homemaker for her family and a caregiver to her mother, who was

critically ill.   At various times during their marriage Ms. Ho

DeMattos, who had some knowledge of accounting, worked as a

bookkeeper.

     The DeMattoses filed joint returns for the years at issue.

They relied upon a tax return preparer to prepare their 1993

joint return, but it was not timely filed.   All the remaining

joint returns at issue with the exception of those for 1997 and

1999 were prepared by Ms. Ho DeMattos.   The most complex part in

the preparation of the joint income tax return was the Schedule

C, Profit or Loss From Business, with respect to Mr. DeMattos’

construction business.   Sometime in the earlier years at issue,

the computerized records of the construction business were

adversely affected by a major computer problem.   In 1995 an

unrelated setback in the finances of the business made a tax

return preparer unaffordable.    As a result, Ms. Ho DeMattos took

responsibility for the preparation of the joint Federal income

tax returns for 1994 and 1995.    Ms. Ho DeMattos stated that she

executed all of the joint income tax returns and prepared the

joint income tax returns for all the years at issue except the

returns for 1993, 1997, and 1999.

     The joint income tax returns for 1993, 1994, and 1995 were

all filed late.   In January 1997 before the returns were filed,

the DeMattoses were contacted by an Internal Revenue Service
                                - 4 -

(IRS) revenue agent requesting their 1993, 1994, and 1995

returns.    During a conversation with the revenue agent Mr.

DeMattos stated that only the 1994 tax return had been filed and

that he would subsequently send the 1993 and 1995 returns.

However, the 1993 return sent to the IRS was unsigned.    In

addition, the revenue agent discovered that the 1994 return had

in fact not been filed.    As a result, on March 10, 1997, the

revenue agent visited the DeMattoses to secure their signatures

on the 1993 return and to obtain the 1994 return.    At that

meeting Ms. Ho DeMattos demonstrated knowledge of the location of

copies of the joint returns maintained by her and Mr. DeMattos.

Ms. Ho DeMattos retrieved and provided executed returns for 1993

and 1994.

     In May 1997 the revenue agent notified the DeMattoses by

letter that their 1993, 1994, and 1995 joint income tax returns

were under audit and requested documentation to substantiate the

claimed Schedule C expenses for the construction business.     No

substantiation was provided.    Ms. Ho DeMattos participated in the

decision to refuse to provide documentation to the IRS and to not

cooperate with the audit.

      In January 1998 respondent issued to the DeMattoses notices

of deficiency for their 1993, 1994, and 1995 income tax and

additions to tax totaling nearly $2 million based on the

disallowance of all the Schedule C deductions for the
                                - 5 -

construction business.    The DeMattoses did not petition this

Court, and the deficiencies and additions to tax were assessed in

June and July 1998.   In addition to those assessments, there are

also unpaid assessments of the income taxes reported on all the

joint returns at issue.    The total unpaid taxes reflected on the

joint returns exceeded $36,000.    Ms. Ho DeMattos seeks relief

from both the deficiencies for 1993, 1994, and 1995, and the

unpaid assessments of tax reported on all the returns at issue.

At trial she testified that she knew the taxes would not be paid

with the returns and that she knew Mr. DeMattos was in financial

difficulty when the returns were filed.

     The divorce decree entered into between Ms. Ho DeMattos and

Mr. DeMattos provided that with respect to previously filed

income tax returns, any liabilities on all joint State and

Federal income tax returns filed for all years through 2002 would

be paid equally by the DeMattoses.      In addition, the divorce

decree provided:

          In the event of an income tax examination of any
     parties’ jointly filed tax returns, the parties shall
     share equally in the receipt of any resulting tax
     refund, or in the payment of any taxes, penalties or
     interest imposed, as the case may be.

For years after the years at issue, Ms. Ho DeMattos failed to pay

her outstanding tax liabilities.

      Respondent issued notices of intent to levy as follows:

For the 1993 taxable year on August 11, 1997, and July 23, 2001;
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for the 1994 taxable year on June 9, 1997, and July 23, 2001; and

for the 1995 taxable year on August 11, 1997, December 29, 1997,

and July 23, 2001.   Ms. Ho DeMattos acknowledged that respondent

made collection efforts solely with respect to her, including the

issuance of notices of intent to levy.

     The DeMattoses submitted an offer-in-compromise for their

1993, 1994, 1995, 1997, and 1999 tax years on June 29, 2000, and

for the 2000 tax year on May 24, 2001.   On July 5, 2001,

respondent rejected the offers-in-compromise.

     On November 3, 2006, Ms. Ho DeMattos filed Form 8857,

Request for Innocent Spouse Relief, to request equitable relief

with respect to her joint Federal income tax liabilities for the

1987 through 2002 tax years.   Respondent did not argue that any

of Ms. Ho DeMattos’ requests was untimely.   In a final notice of

determination dated September 5, 2007, respondent determined that

Ms. Ho DeMattos was not entitled to the relief requested.

     Ms. Ho DeMattos timely filed her petition with this Court on

December 4, 2007.

                            Discussion

     In general, spouses who elect to file a joint Federal income

tax return for the taxable year are jointly and severally liable

for the entire amount of tax reported on the return, as well as

for the liability for any deficiency subsequently determined,

even if all of the income giving rise to the tax liability is
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allocable to only one of them.      Sec. 6013(d)(3); Butler v.

Commissioner, 114 T.C. 276, 282 (2000).      The spouse requesting

relief generally 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).      Section 6015 offers three avenues of possible

relief under subsections (b), (c), and (f).      In general, section

6015(b) provides full or apportioned relief from joint and

several liability; section 6015(c) provides proportionate tax

relief to divorced or separated taxpayers; and in certain

circumstances section 6015(f) provides equitable relief if relief

is not available under section 6015(b) or (c).

     Respondent argues that Ms. Ho DeMattos does not qualify for

relief from joint and several liability under section 6015(b),

(c), or (f).

I.   Section 6015(b)

     Under section 6015(b), a requesting spouse may be relieved

of joint and several liability from an understatement of tax to

the extent that the understatement was attributable to the

nonrequesting spouse.      Thus, section 6015(b) is available, if at

all, only with respect to the liabilities arising from the

deficiencies in tax for years 1993, 1994, and 1995.      In order to

qualify for relief, section 6015(b)(1) provides that the taxpayer

must establish that

             (A)   a joint return has been made for a taxable
     year;
                                 - 8 -

          (B) on such return there is an understatement of
     tax attributable to erroneous items of one individual
     filing the joint return;

          (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 understatement;

          (D) taking into account all the facts and
     circumstances, it is inequitable to hold the other
     individual liable for the deficiency in tax for such
     taxable year attributable 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.

The requirements of section 6015(b)(1) are conjunctive, and the

failure of a taxpayer to satisfy any one of the elements

precludes relief.     Haltom v. Commissioner, T.C. Memo. 2005-209.

Respondent concedes that Ms. Ho DeMattos satisfies the

requirements of section 6015(b)(1)(A), (B), and (E); however,

respondent maintains she failed to establish that she satisfies

the requirements of section 6015(b)(1)(C) and (D).

      In determining whether Ms. Ho DeMattos had “reason to know”

of an understatement, this Court must determine whether a

reasonable person in similar circumstances would have known of

the understatement.    Factors to consider in analyzing whether Ms.

Ho DeMattos had “reason to know” of the substantial

understatement include:    (1)   Her level of education; (2) her

involvement in the family business; (3) the presence of
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expenditures that appear lavish when compared to the family’s

past standard of living; and (4) Mr. DeMattos’ evasiveness and

deceit concerning the couple’s finances.      See Price v.

Commissioner, 887 F.2d 959, 965 (9th Cir. 1989).      We apply these

factors to Ms. Ho DeMattos regarding the understatements for

1993, 1994, and 1995.

     First, Ms. Ho Demattos received some college-level education

in business and accounting.    Second, although Mr. DeMattos was

responsible for the day-to-day operation of the construction

business, Ms. Ho DeMattos was responsible for the preparation of

the tax returns for 1994 and 1995.      Third, there is nothing in

the record with respect to lavish expenditures.      Fourth, Mr.

DeMattos was not evasive or deceitful concerning their finances.

     Under these circumstances, Ms. Ho DeMattos had reason to

know of the understatements arising from the disallowance of the

claimed Schedule C expenses relating to Mr. DeMattos’

construction business.   Ms. Ho DeMattos’ extensive involvement in

preparing the joint returns for 1994 and 1995 demonstrates that

she had actual knowledge of the records available to support the

claimed Schedule C expenses.    As the tax return preparer, she had

access to whatever records were used to determine the expenses

claimed, and she knew and agreed with the decision to

intentionally not produce records to the IRS in the audit.      This

is true for 1993 as well because the 1993 return was not filed
                                 - 10 -

until after the 1994 and 1995 returns were prepared by Ms. Ho

Demattos, and the record system for all 3 years was the same,

according to Ms. Ho DeMattos’ own testimony.

II.   Section 6015(c)

      Under section 6015(c), if the requesting spouse is no longer

married to or is legally separated from the spouse with whom she

filed the joint return, the requesting spouse may elect to limit

her liability for a deficiency as provided in section 6015(d).

Sec. 6015(c)(1), (3)(A)(i)(I).     In this case, section 6015(c) is

available, if at all, only for the liabilities attributable to

the deficiencies in tax for the 1993, 1994, and 1995 tax years.

Respondent concedes that Ms. Ho DeMattos has satisfied certain of

the prerequisites for relief.     However, respondent argues that

Ms. Ho DeMattos is precluded from obtaining relief because under

section 6015(c)(3)(C) apportionment of liability does not apply

if the Commissioner “demonstrates that an individual making an

election under this subsection had actual knowledge, at the time

such individual signed the return, of any item giving rise to a

deficiency (or portion thereof) which is not allocable to such

individual”.   This Court has defined actual knowledge as “an

actual and clear awareness (as opposed to reason to know) of the

existence of an item which gives rise to the deficiency (or

portion thereof).”      Cheshire v. Commissioner, 115 T.C. 183, 195

(2000), affd. 282 F.3d 326 (5th Cir. 2002).     When one spouse
                               - 11 -

requests relief under section 6015(c), the burden of proving the

spouse’s actual knowledge of an item is on the Commissioner.      In

the case of a disallowed deduction, the burden requires the

Commissioner to prove that the spouse had “actual knowledge of

the factual circumstances which made the item unallowable as a

deduction.”    King v. Commissioner, 116 T.C. 198, 204 (2001).

       Ms. Ho DeMattos had actual knowledge of the factual

circumstances concerning the disallowed deductions.    Although Mr.

DeMattos was responsible for the day-to-day operations of the

construction business, Ms. Ho DeMattos prepared the 1994 and 1995

tax returns.    Because of the timing of the preparation of the

returns, she had actual knowledge of the substantiation which was

available for all 3 years when she prepared the 1994 and 1995

returns.    Therefore, Ms. Ho DeMattos is not entitled to allocate

the deficiency arising from the disallowance of these deductions,

and no relief is available under section 6015(c).

III.    Section 6015(f)

       Section 6015(f) provides an alternative means of relief for

a requesting spouse who does not otherwise qualify for relief

under subsection (b) or (c) of section 6015.    Sec. 6015(f)(2).

Section 6015(f) permits relief from joint and several liability

where “it is inequitable to hold the individual liable for any

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

6015(f)(1).    Under section 6015(f), the Secretary may grant
                              - 12 -

equitable relief to a requesting spouse on the basis of the facts

and circumstances of the requesting spouse’s case.

     Except as otherwise provided in section 6015, the taxpayer

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

119 T.C. at 311.

     Pursuant to section 6015(f), the Commissioner has prescribed

revenue procedure guidelines to help IRS employees determine

whether a requesting spouse is entitled to relief from joint and

several liability.   See Rev. Proc. 2003-61, 2003-2 C.B. 296,

modifying and superseding Rev. Proc. 2000-15, 2000-1 C.B. 447.

Rev. Proc. 2003-61, supra, lists the factors that IRS employees

should consider, and the Court consults those same factors when

reviewing the IRS’ denial of relief.   See Washington v.

Commissioner, 120 T.C. 137, 147-152 (2003).

     Ms. Ho DeMattos’ Form 8857 was filed on November 3, 2006,

after the November 1, 2003, effective date of Rev. Proc. 2003-61,

supra.   According to Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B.

at 297-298, Ms. Ho DeMattos, as a requesting spouse, must satisfy

all of the following threshold conditions in order to be eligible

to submit a request for equitable relief under section 6015(f):

(i) She filed a joint return for the taxable year for which she

seeks relief; (ii) relief is not available to her under section

6015(b) or (c); (iii) no assets were transferred between the

spouses as part of a fraudulent scheme by the spouses; (iv) Mr.
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DeMattos did not transfer disqualified assets to her; (v) she did

not file or fail to file the returns with fraudulent intent; and

(vi) absent enumerated exceptions, the income tax liability from

which she seeks relief is attributable to an item of Mr.

DeMattos.

     Respondent concedes that Ms. Ho DeMattos satisfies all seven

threshold requirements for equitable relief.

     As an initial matter, Rev. Proc. 2003-61, sec. 4.02, 2003-2

C.B. at 298, contains a safe harbor.   If the threshold

requirements are met, equitable relief under section 6015(f) will

ordinarily be granted with respect to an underpayment of income

tax reported on a joint return if all of the following three

elements are satisfied:   (1) On the date of the request for

relief, the requesting spouse is no longer married to, or is

legally separated from, the nonrequesting spouse; (2) on the date

the requesting spouse signed the joint return, the requesting

spouse had no knowledge or reason to know that the nonrequesting

spouse would not pay the income tax liability; and (3) the

requesting spouse will suffer economic hardship if relief is not

granted.

     Ms. Ho DeMattos was divorced from Mr. DeMattos on April 5,

2006, and requested relief on November 3, 2006; thus, she

satisfies the marital status requirement.   However, Ms. Ho

DeMattos does not satisfy the second requirement because, as we
                               - 14 -

held above, she had actual knowledge of the understatement of

tax.

       Ms. Ho DeMattos stated that she signed the returns at issue

and was aware that amounts were owed with respect to each return.

Ms. Ho DeMattos has failed to establish that it was reasonable

for her to believe that Mr. DeMattos would pay the reported

income tax liability.    Thus, she has not satisfied the knowledge

or reason to know requirement as it relates to the underpayments

on the joint returns.

       Accordingly, since Ms. Ho DeMattos does not satisfy the

second element, she is not entitled to relief under Rev. Proc.

2003-61, sec. 4.02.

IV.    Rev. Proc. 2003-61, Sec. 4.03 Factors

       If relief is not available under Rev. Proc. 2003-61, sec.

4.02, then Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298-299,

sets forth additional factors that the IRS considers in

determining whether relief is granted.    These factors are:     (1)

Marital status; (2) knowledge or reason to know; (3) economic

hardship; (4) nonrequesting spouse’s legal obligation; (5)

significant benefit; (6) good-faith effort to comply with tax

laws; (7) spousal abuse; and (8) mental or physical health.       We

will address each in turn.
                              - 15 -

     1.   Marital Status

     Respondent concedes that Ms. Ho DeMattos and Mr. DeMattos

are divorced; the marital status factor favors granting relief.

     2.   Knowledge or Reason To Know

     Respondent argues that Ms. Ho DeMattos knew or had reason to

know that her then husband, Mr. DeMattos, would not pay the

income tax liabilities due when she executed the joint income tax

returns for the years at issue.   Ms. Ho DeMattos contends that

these deficiencies and additions to tax for the 1993, 1994, and

1995 tax years arise from disallowed Schedule C expense

deductions attributable to Mr. DeMattos and therefore would be

allocable to him.   However, Ms. Ho DeMattos acknowledges that she

prepared and reviewed their income tax returns starting in 1994

and was aware that an amount was owed with respect to each

return.   Further, in her Form 8857 she indicated that she and Mr.

DeMattos were having financial difficulties, yet she failed to

explain how she thought they were going to be able to pay the

taxes owed.   Lastly, Mr. DeMattos testified that Ms. Ho DeMattos

was aware that taxes were owed with respect to the 1997, 1999,

2000, 2001, and 2002 tax years and would not be paid.   As a

result, Ms. Ho DeMattos has failed to establish that it was

reasonable for her to believe that Mr. DeMattos would pay the

reported income tax liability for any of the years at issue.

The deficiencies all relate to unsubstantiated Schedule C
                                - 16 -

expenses.   Ms. Ho DeMattos is responsible for the failure to

substantiate expenses she herself reported on the returns for

1994 and 1995 and knew about for 1993.    Thus, Ms. Ho DeMattos has

failed to satisfy the knowledge or reason to know requirement

regarding the unpaid liabilities and the deficiency amounts.

     Because Ms. Ho DeMattos had actual knowledge of the

unsubstantiated deductions giving rise to the deficiencies in tax

and had actual knowledge or reason to know that the reported

liabilities would go unpaid, this factor weighs against relief.

     3.    Economic Hardship

     Respondent argues that Ms. Ho DeMattos would not suffer

economic hardship if she were denied equitable relief.     Ms. Ho

DeMattos argues that she would experience economic hardship.      Ms.

Ho DeMattos’ monthly expenses exceeded her monthly income.     She

earns $4,200 per month in self-employment business income.     Her

mortgage is $2,750 per month.    She pays $1,000 per month for

food, $500 per month in medical expenses, $540 per month in gas

and insurance for her car, and $185 per month for telephone.      At

the time of trial, Ms. Ho DeMattos was unemployed and still had a

17-year-old son living with her.    Considering these facts, we

find she would suffer economic hardship if relief were not

granted.    This factor weighs in favor of relief.
                                - 17 -

     4.   Nonrequesting Spouse’s Legal Obligation

     Respondent contends that this factor is neutral because the

DeMattoses’ divorce decree includes a provision under which Ms.

Ho DeMattos and Mr. DeMattos have an equal obligation to pay the

income tax liabilities.    Accordingly, this factor is neutral.

     5.   Significant Benefit

     Respondent contends that this factor is neutral.    Respondent

asserts that there is no evidence in the record of whether Ms. Ho

DeMattos benefited beyond normal support from the unpaid tax

liabilities (both the underpayments and understatements).

However, this Court has stated that “we consider the lack of

significant benefit by the taxpayer seeking relief from joint and

several liability as a factor that favors granting relief under

section 6015(f).”    Butner v. Commissioner, T.C. Memo. 2007-136.

We do not find from the record that there was a significant

benefit to Ms. Ho DeMattos and find that this factor weighs in

favor of relief.

     6.   Good-Faith Effort To Comply With Federal Income Tax Laws

     Respondent argues that Ms. Ho DeMattos did not make a good-

faith effort to comply with the Federal income tax laws after the

years at issue.    Respondent therefore argues that this factor

weighs against relief.    Ms. Ho DeMattos failed to pay outstanding

tax liabilities for the 2003, 2005, and 2006 tax years, filed her

2006 tax return late, and failed to make estimated tax payments
                                 - 18 -

for years after 2006.      Since the time the revenue agent

considered Ms. Ho DeMattos’ case, she has filed her tax return

for 2006 and returns for the other years after the years at

issue.    Nevertheless, untimely filing demonstrates that she has

not been in compliance with the tax laws.      This factor weighs

against relief.

     7.    Spousal Abuse

     Ms. Ho DeMattos did not allege that there was abuse in her

former marriage.    Respondent determined this factor to be

neutral, and we agree.

     8.    Mental or Physical Health

     There is no evidence in the record that Ms. Ho DeMattos

suffered any ailment such that she was in poor physical or mental

health at the time she signed the returns for the years at issue

or at the time she requested section 6015 relief.      Respondent

determined that this factor is neutral, and we agree.

                               Conclusion

     Of the factors listed in Rev. Proc. 2003-61, sec. 4.03,

three factors support relief (marital status, economic hardship,

and lack of significant benefit), two factors weigh against

relief (knowledge or reason to know, and lack of good-faith

effort to comply with tax laws in subsequent years), and three

factors are neutral (nonrequesting spouse’s legal obligation,

spousal abuse, and mental or physical health).      Rev. Proc. 2003-
                             - 19 -

61, sec. 4.03(2)(a)(iii)(B), provides that in deficiency cases,

reason to know of the item giving rise to the deficiency will not

be given more weight than other factors, but that actual

knowledge of the item weighs heavily against relief.

     We find that the factors for relief are strongly outweighed

by Ms. Ho DeMattos’ awareness that the taxes would not be paid,

her preparation of tax returns, her related knowledge of the

unsubstantiated Schedule C expenses, and her subsequent

noncompliance with Federal tax laws.   In sum, Ms. Ho DeMattos had

actual knowledge which is supported by her own testimony

regarding the return preparation.

     On the basis of the above, we find that Ms. Ho DeMattos has

failed to carry her burden of showing that she is entitled to

relief from joint and several liability under section 6015(f) for

the years at issue.

     To reflect the foregoing,


                                         Decision will be

                                    entered for respondent.
