                        T.C. Memo. 2005-209



                      UNITED STATES TAX COURT



                 LINDA K. HALTOM, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17595-03.             Filed September 6, 2005.


     Donald R. Williams, for petitioner.

     Audrey M. Morris, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HOLMES, Judge:   Jerry Haltom embezzled over $765,000 between

1989 and 1994.   He was caught, convicted, and imprisoned for both

mail fraud and evading the tax owed on the embezzled income.

Before he was caught, his wife Linda worked at home raising their

children, running the household, and occasionally earning some

money in a part-time job.   The Haltoms filed joint returns that
                               - 2 -

failed to report the embezzled income, and Linda now seeks

innocent spouse relief under section 6015(b) and (f) from the
                          1
resulting deficiencies.

                          FINDINGS OF FACT

     Linda and Jerry Haltom wed in 1974, and settled in Smyer, a

small town in West Texas where they reared their two children.

Jerry is a college graduate who took courses in accounting and

earned a degree in business administration.    He worked for many

years as a food broker at Oliver Taylor Company West, Inc.    While

Jerry advanced at the Taylor Company, Linda cared for their

children and ran the household.   She had no formal education

beyond high school, and rarely worked outside the home until

1994.

     Food brokerage is part salesmanship and part marketing, and

Jerry’s job was to work with food manufacturers such as Del

Monte, Heinz, and Capri Sun to get their products into

supermarkets and wholesalers throughout West Texas.   He drew a

salary, but would often more than double that income through

commissions, bonuses, and awards.

     By the late 1980s, a culture of fraud had taken hold in

several West Texas food brokerage companies.   Over several years,

18 people from three different firms were convicted for cheating


     1
       All references to sections are to sections of the Internal
Revenue Code, and the one reference to a Rule is to the Tax Court
Rule of Practice and Procedure 155.
                                 - 3 -

their clients in various ways.    Jerry Haltom was one of these

eighteen.   As described by the Fifth Circuit,

          Haltom exploited his position by perpetuating a
     false invoice scheme against his clients, the
     manufacturers. In simple terms, he claimed a greater
     amount in promotional funds than was owed the
     wholesalers and retailers, and he pocketed the
     difference. Unsurprisingly, he failed to report this
     illicit income on his federal income tax returns.
     Haltom stipulated that he misappropriated $766,618
     from the food manufacturers and cheated the government
     of $100,838 in taxes for 1989, 1990, 1991, and 1992.

United States v. Haltom, 113 F.3d 43, 44 (5th Cir. 1997).

     In October 1994, federal investigators raided the Taylor

Company’s offices.    In February 1996, Jerry was charged by

information with one count of mail fraud and four counts of tax

evasion.    In June 1996, he pled guilty and was sentenced in

district court to serve 26 months in prison, followed by three

years of probation.

     The criminal investigation triggered an audit of the

Haltoms' tax returns for 1989-94.    Besides discovering that the

Haltoms had not reported Jerry's embezzlement income, the IRS

also discovered that during those years Linda had earned $4,104

under the name "Dela's Demos"--sporadic employment passing out

samples to customers in local supermarkets.      The Haltoms reported

neither the gross receipts nor calculated the net taxable income

from Dela’s Demos on their returns.      Linda testified that she

believed it was not enough income to report, but this was true

only of 1991.    She should have reported additional net taxable
                               - 4 -

income of $439 in 1990 and $1,552 in 1992.

     At the end of the audit, the IRS agent presented the Haltoms

with a completed Form 4549-CG that described in detail the

calculations performed to arrive at the deficiency amounts.    By

signing the form, the Haltoms agreed that their total deficiency

from 1990 to 1993 was over $145,000.    The Commissioner also added

fraud penalties against Jerry that totaled over $100,000.

Interest (computed only through the end of March 1997) brought

the total liability to over $370,000.

     Throughout their marriage, and including the years for which

she is seeking relief from this very large liability, Linda

shared a joint checking account with her husband into which they

deposited their paychecks.   Both spouses had signature authority

over the account, but Linda managed it, made most of the

additional deposits to it, and wrote most of the checks on it

that went to pay household bills.

     Jerry, however, kept five other accounts at five different

banks, including one in the Caribbean isle of Antigua.   He alone

had signature authority on these accounts.   While Linda knew that

Jerry had an account of his own for business, she was not aware

that there was more than one account or of the balances in any of

them, since Jerry took care to receive the statements at his

office.   He deposited all of his embezzlement income and whatever

prize money and bonuses he received into these five accounts, and
                                - 5 -

tracked them on his office computer.

     Jerry moved some of the money out of those accounts into

places where it was conceivable that Linda might have noticed it.

He invested over $5,000 with A.G. Edwards and another $70,000

with Equitable, and on their 1991 return, the Haltoms did report

dividend income of over $5,700 from the Equitable account.    Both

investments generated regular monthly statements that were sent

to the Haltoms’ post office box.     Linda picked up these

statements along with the rest of the mail, but did not open

them.

     Then there was the money that Jerry spent.     While Linda paid

most of their household expenses out of the joint checking

account, Jerry paid some of the larger expenses out of his own

five accounts–including an addition to their home, new furniture,

a new pool, landscaping, and some other large-ticket items.    He

also made installment payments on his cars, first an Audi and

then a Mercedes (though he lied to Linda and said these were both

Taylor Company cars).    All of Jerry’s payments during 1990, 1991,

and 1992, including those for the cars, totaled $137,427.2


     2
         The parties grouped them into several categories:

            House payments       $   10,666
            Car payments             39,336
            House addition           26,386
            Personal                 15,538
            Furniture                13,354
            Landscaping               9,815
            Insurance                 9,218
            Club expenses             4,060
                                                      (continued...)
                                - 6 -

(While tax year 1993 is also at issue, there is no detailed

evidence of cash flow for that year.)   Jerry also gave checks

totaling $30,290 drawn on two of his accounts to Linda as extra

money when she needed it.

     Each year, Linda would gather the W-2s, 1099s, and canceled

checks to take to their accountant for him to prepare their tax

return.   While Jerry gave Linda the tax information from his job

and some of his investment accounts, he carefully excluded

anything that would have alerted her to his embezzlement.     The

accountant prepared the forms, which the Haltoms then signed and

timely filed.   For the four tax years at issue, their total

reported adjusted gross income was $330,804.   For the three tax

years 1990 through 1992 for which the parties provided spending

information, it was $205,828.   Linda now works as a dental

technician and earns about $25,000 per year.   Jerry is once again

a salesman.   Their total income for tax year 2002 was about

$116,000.

     Linda filed Form 8857, Request for Innocent Spouse Relief,



     2
      (...continued)
          Contributions              2,610
          Children’s expenses        2,408
          Piano                      2,250
          Pool construction          1,786
                     Total       $ 137,427

The “Club Expenses” category includes payments to a local country
club and fitness club totaling $4,054. Only Jerry benefited from
the club expenses and the car payments.
                               - 7 -

for the years 1989-94, which the Commissioner considered and

denied in 2002.   He based his decision on Linda’s having reason

to know of the embezzlement and receiving a significant benefit

from it.   Linda does not appeal his denial of relief for tax

years 1989 and 1994--there was neither an understatement nor an

underpayment of taxes for those years, one of which must be

present for her to qualify for relief under section 6015--but did

petition the Tax Court for review of his denial of relief for

1990-93.   The case was tried in Lubbock.    The Haltoms remain

married and have always been residents of Texas.

                              OPINION

     Spouses who sign joint returns are jointly and severally

liable for their accuracy and the full tax shown.     See sec.

6013(d)(3).   Section 6015, however, provides relief from that

liability to qualifying “innocent spouses,” and Linda asks for

relief under subsections 6015(b) and (f).     These subsections

address the same general problem but differ in important ways.

Relief under subsection (f) is available for a spouse who shows

that "taking into account all the facts and circumstances, it is

inequitable to hold [her] liable for any unpaid tax or any

deficiency (or any portion of either)."     Success in our Court

under this subsection depends on proof that the Commissioner

abused his discretion in denying relief.     Subsection (f) cases

rarely depend on one factor alone--even though the Commissioner
                               - 8 -

has described some of the factors that he will look at and weigh,

his list is not exhaustive.   Rev. Proc. 2000-15, sec. 4.03, 2000-

1 C.B. 447, 448; see also Ewing v. Commissioner, 122 T.C. 32, 48-

49 (2004).

     Relief under subsection (b), in contrast, doesn’t even

require a determination by the Commissioner denying relief before

this Court can grant it.   Butler v. Commissioner, 114 T.C. 276,

288 (2000).   A petitioner under this subsection generally has the

burden of proof, but need only persuade us by a preponderance of

the evidence rather than prove that the Commissioner abused his

discretion.   See McClelland v. Commissioner, T.C. Memo 2005-121.

Section 6015(b)(1) is also similar to former section 6013(e)(1),

which means there is a body of precedent to which we look when

analyzing parallel provisions of section 6015.   Butler, 114 T.C.

at 283; see Jonson v. Commissioner, 118 T.C. 106, 119 (2002),

affd. 353 F.3d 1181 (10th Cir. 2003).

     A requesting spouse may qualify for relief under section

6015(b) if:

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

     (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 an understatement;
                            - 9 -

     (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 * * * 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 * * *.

These requirements are stated in the conjunctive, so a spouse

must satisfy all five to receive relief from joint and several

liability under section 6015(b).

     Both parties agree that Linda has met requirements (A), (B),

and (E): the Haltoms filed joint returns, Jerry was solely

responsible for the embezzlement income, and Linda requested

relief within the statutory period.   They disagree about whether

Linda has met the remaining requirements; namely, that she had no

reason to know of the income omitted from the returns and that

holding her liable for the tax deficiencies would be inequitable.

We consider both.

A.   Knowledge or Reason To Know--Section 6015(b)(1)(C)

     Both Linda and the Commissioner agree that she did not

actually know of the embezzlement and thus did not actually know

of the omitted income at the time she signed the returns.     The

key question is whether she had reason to know.   Sec. 1.6013-

5(a)(3), Income Tax Regs., superseded by sec. 1.6015-2, Income
                               - 10 -

Tax Regs.3   Our precedents taught us that this meant whether “a

reasonably prudent taxpayer in his or her position, at the time

he or she signed the return, could be expected to know that the

return contained an understatement or that further investigation

was warranted.”   Butler, 114 T.C. at 283; see also Park v.

Commissioner, 25 F.3d 1289, 1293 (5th Cir. 1994), affg. T.C.

Memo. 1993-252.   In shorthand form, this means that a spouse

seeking relief has a “duty of inquiry.”   Butler, 114 T.C. at 283.

     This duty is a subjective test--its focus is on the

individual seeking innocent spouse relief.   It recognizes that

the suspicions of a spouse who is a highly skilled lawyer or

accountant should reasonably be triggered more easily than a

stay-at-home mom with a high school education.    Compare Ohrman v.

Commissioner, T.C. Memo 2003-301 (requesting spouse was lending

officer at two large banks who controlled the family finances),

with Pietromonaco v. Commissioner, 3 F.3d 1342, 1345-1347 (9th

Cir. 1993) (requesting spouse was stay-at-home mom with high

school education), revg. T.C. Memo. 1991-472.    We have a large



     3
       Section 6015 took effect on July 22, 1998, but the
regulations interpreting the section didn’t take effect until
July 18, 2002. See sec. 1.6015-2, Income Tax Regs. For requests
(like the one at issue in this case) made during the intervening
four years, we apply the regulations interpreting section 6013,
the predecessor of section 6015, in cases arising under section
6015(b). See Kling v. Commissioner, T.C. Memo. 2001-78; Braden
v. Commissioner, T.C. Memo. 2001-69. See generally Shirley v.
Commissioner, T.C. Memo. 2004-188 (proper to use regulations of
repealed section if new section nearly identical).
                               - 11 -

number of examples from caselaw to help us decide where on the

spectrum the case before us lies.

     That precedent points us to a few key factors:    (a) the

spouse’s education level; (b) her involvement in the family’s

business and financial affairs; (c) the presence of lavish or

unusual expenditures as compared to the family’s past income

levels, income standards, and spending patterns; and (d) the

culpable spouse’s evasiveness and deceit concerning the couple’s

finances.    Butler, 114 T.C. at 284.

     We note first that Linda’s education ended with high school.

Unlike her husband, she has taken neither college nor business

classes.    The Commissioner argues that she continued her

education through life experience by running Dela’s Demos, but

this was a part-time job where she set up tables and passed out

samples at grocery stores.    Nothing from that job could

conceivably have provided her with the financial sophistication

to suspect that her husband may have been embezzling money and

hiding some of it offshore.

     The second factor is Linda’s involvement in the family’s

financial affairs.    Both parties agree that she paid for most of

the everyday expenses out of her checking account and thus

certainly had some general awareness of her family’s financial

situation.    The Commissioner argues that Linda’s habit of picking

up the mail from the post office each day meant that she should
                              - 12 -

be charged with knowing about Jerry’s investment accounts.    The

Commissioner believes that this alone should have been enough to

make her suspicious.   We disagree.    In today’s society, simply

receiving a letter from a financial institution will make a

reasonable person suspect only that her family has somehow made

its way onto a marketer’s mailing list, not that her spouse has

money hidden away.   It certainly would not be enough to compel

her to open the statements to check the account balances.

     The Commissioner also points to Linda’s receiving checks

from Jerry written from two different accounts.    He argues that

this should have caused her to suspect that he had multiple

accounts of his own, concluding again that he must have money

hidden away.   We again disagree.   Having more than one account is

not necessarily a particularly suspicious act, especially for a

prosperous businessman.   Without some other sign of dishonesty,

noticing the different account numbers on the bottom of the

checks would not make a reasonable person in Linda’s position

suspect anything other than Jerry had a business need for more

than one account.

     We next look to see if there were large or lavish expenses.

Courts have been careful to consider whether a family's expenses

were reasonable in relation to the income reported on the return.

Barranco v. Commissioner, T.C. Memo. 2003-18.     This is based on

the commonsense observation that even a trusting wife should
                                - 13 -

notice something's up if her husband suddenly starts bringing in

so much money that their standard of living suddenly becomes much

better than before.

     In many cases that we have decided in the Commissioner's

favor, families were spending three or four or even six times the

income they reported during the years in question.4     But that was

not the case with the Haltoms.    During the years at issue, their

lifestyle did not change that much.      They did pay off a mortgage,

make improvements to their home, buy new furniture, and landscape

their yard.   Jerry also had a membership in a country club.    Yet

while these are large expenses--over $60,000 between 1990 and

1992--this spending was in line with their reported income for

the years at issue.   When we exclude the car payments, which

Linda believed the Taylor Company was paying,5 the expenses that

the Haltoms paid from 1990 through 1992 exceeded their reported

income by less than $30,000.6    Given that Jerry paid many of the


     4
       Barranco v. Commissioner, T.C. Memo. 2003-18; Hammond v.
Commissioner, T.C. Memo. 1990-22 (two or three times as much),
affd. without published opinion 938 F.2d 185 (8th Cir. 1991);
Ayer v. Commissioner, T.C. Memo. 1989-614 (three times).
     5
       See Ferrarese v. Commissioner, T.C. Memo. 1993-404 (Court
excluded cost of entertainment when wife believed tickets were
provided by husband’s employer), affd. without published opinion
43 F.3d 679 (11th Cir. 1994).
     6
       From 1990-92, we calculate that Jerry had about $104,000
of salary directly deposited into the joint checking account.
The IRS calculated that from 1990 to 1992, Jerry spent about
$140,000 on family expenses from the five accounts to which Linda
                                                   (continued...)
                                - 14 -

expenses related to remodeling their house and building the pool,

expenses with which Linda had no familiarity and thus no basis

for comparison,7 the $30,000 difference was not enough for Linda

to suspect that Jerry was keeping income off their returns.     See

Pietromonaco, 3 F.3d at 1347 (requesting spouse had no reason to

know when expenses were less than twice reported income).     Thus,

we find that a reasonable person in Linda's position would not

suspect that something was going on.

     We note that we compared the aggregate expenses and income

from 1990 through 1992.     See supra note 6 (comparing expenses and

income for 1993).     This raises a potential issue unaddressed by

either party--whether for any one year those extra expenses were

so out-of-whack that they should have triggered the duty of

inquiry.     Our own rough calculation is that in 1991, the Haltoms’

adjusted gross income of $51,901 was less than half of their


     6
     (...continued)
did not have access. He also gave Linda an additional $30,000
that she deposited into the joint checking account. These
amounts equal roughly $275,000. We exclude $40,000 of payments
for his cars which Linda did not know about to arrive at
$235,000. The income the Haltoms reported for those 3 years was
$205,828.

     In 1993, the Haltoms reported $124,976 in adjusted gross
income on their tax return, while the total Mr. Haltom embezzled
was $21,652; the amount embezzled was so small compared to their
AGI that it would have passed unnoted amidst all their legitimate
income that year.
         7
       See Ferrarese, T.C. Memo. 1993-404 (neither wife nor many
other recipients of Broadway tickets from husband knew how
expensive they were).
                                - 15 -

expenses of $120,825.     However, we do not find this sufficient in

itself to find that Linda’s lack of suspicion became unreasonable

that year.   First, most of that spending was on home improvements

rather than deposits into their joint account, and as we already

noted Linda had no familiarity with how expensive they might be.

Looking at the numbers for each calendar year might also have

been misleading--especially in a business where legitimate bonus

income might be clustered at the beginning or end of a year, but

the spending that it fuels might occur in a different year.

     The last factor is whether Jerry was in any way evasive or

deceitful regarding the embezzled money.    Jerry credibly

testified that he deliberately took actions to ensure that Linda

would not find out about his embezzlement or his failure to

report it, because he viewed her as an honest woman who would

never sign a false tax return.    And when she collected from him

the W-2s and other documents that their accountant needed to

complete their returns, he was careful to withhold any paperwork

that might cause her to question the numbers.

     Linda realized that Jerry was being less than trustworthy

when she learned in 1994 that investigators had raided his

office.   But ever since, she has regularly checked up on him.

Jerry testified during trial:

          THE COURT:     Who in your family pays the monthly
     utility bills, the routine checks of that kind?

           THE WITNESS:     My wife does.
                             - 16 -


          THE COURT:     Has that always been the case?

          THE WITNESS:   No. Since this incident, she pays
     90 percent of the bills, and she looks at my checking
     account now, too.

We find this testimony eminently credible.   Once Linda’s

suspicions were triggered, instead of “burying her head in the

sand” as the Commissioner has argued, she took steps to stay on

top of everything happening in the family finances.    But we find

that her duty of inquiry was never triggered before the raid, and

so conclude that Linda neither knew nor had reason to know of the

income omitted from their tax returns.

B.   Equitable Considerations--Section 6015(b)(1)(D)

     Section 6015(b)(1)(D) requires that Linda prove that being

held liable would be inequitable.   The old regulation addressed

inequity in only a general and open-ended way:

          Whether it is inequitable to hold a person
          liable for the deficiency in tax * * * is to
          be determined on the basis of all the facts
          and circumstances. In making such a
          determination a factor to be considered is
          whether the person seeking relief
          significantly benefited, directly or
          indirectly, from the items omitted from gross
          income. However, normal support is not a
          significant "benefit" for purposes of this
          determination. * * * Other factors which may
          also be taken into account, if the situation
          warrants, include the fact that the person
          seeking relief has been deserted by his
          spouse or the fact that he has been divorced
          or separated from such spouse.


Sec. 1.6013-5(b), Income Tax Regs., superseded by sec. 1.6015-2,
                              - 17 -

Income Tax Regs.

     The regulation’s identification of “significant benefit” as

a relevant factor derives from the caselaw of old section

6013(e)(1)(C), whose language was carried over nearly intact to

current section 6015(b)(1)(D).   Compare sec. 6013(e)(1)(C),

repealed by Internal Revenue Service Restructuring and Reform Act

of 1998, Pub. L. 105-206, sec. 3201(a), 112 Stat. 734, with sec.

6015(b)(1)(D); see also Butler, 114 T.C. at 283.   And our caselaw

has over time, and under both old and new sections, most heavily

weighted not only whether the requesting spouse has received a

significant benefit from the understatement but also whether the

failure to report the correct tax liability resulted from the

concealment, overreaching, or any other wrongdoing on the part of

the other spouse.   See, e.g., Hayman v. Commissioner, 992 F.2d

1256, 1262 (2nd Cir. 1993), affg. T.C. Memo. 1992-228; Jonson,

118 T.C. at 119.

     In deciding whether taxpayers have received a significant

benefit from omitted income, we have looked to see whether money

was used to pay for children’s education, Jonson, 118 T.C. at

120, special purchases for either themselves or their children,

Alt v. Commissioner, 119 T.C. 306, 314 (2002), affd. 101 Fed.

Appx. 34 (6th Cir. 2004), or frequent travel, Barranco, T.C.

Memo. 2003-18.   Normal support is not a significant benefit.

Jonson, 118 T.C. at 119.
                              - 18 -

     Linda did not put her children through school using the

money, her only real estate was the land underneath her home

(which her mother had given her years before), she did not jet

off to exotic locales, and she made no similar outsized

purchases.   The Haltoms reported a total adjusted gross income

from 1990 to 1992 of $205,000.   Of the $275,000 that Jerry

contributed to the family finances from 1990 to 1992, $230,000

benefited Linda,8 only $25,000 more than the income they reported.

This is less than 15% of their adjusted gross income, and we do

not find that to be significant.

     Jerry also contributed $75,000 to investment accounts that

were in his name.   Since Texas is a community property state,

Linda is entitled by law to half that investment.   Linda has not

yet benefited from this money, and since Jerry owes over $635,000

in restitution from the embezzlement, she most likely never will.

Thus, we find that Linda received no significant benefit from the

omitted income.

     The second factor we look at is whether the failure to

report resulted from wrongdoing on the part of the nonrequesting

spouse.   This factor weighs heavily in Linda's favor.   It was,

after all, Jerry who embezzled the money, not Linda, and we have


     8
       Jerry made payments for his cars, the country club, and a
fitness club. None of these payments benefited Linda. Still
included in the $230,000 are the mortgage payoff, the
improvements on the house, the new pool, and other items that
benefited both Haltoms. See supra, note 6.
                              - 19 -

already found that she had no reason to know of either the

embezzlement or its omission from their return.

     The Commissioner asks us to consider a few other factors,

including the Haltoms’ still being married and whether Linda

would be subject to economic hardship if she were to remain

liable.   See Alt, 119 T.C. at 314-315; sec. 301.6343-1(b)(4),

Proced. & Admin. Regs.   While the endurance of the marriage is

relevant, we do not think it outweighs her not having a reason to

know of the understatement or her not receiving any significant

benefit from her husband’s embezzlement.

     As for economic hardship, the Haltoms’ combined AGI was

$109,000 in 2002.   Linda currently earns around $25,000 per year,

with Jerry earning the remainder.   At trial, however, Jerry

credibly testified that his commission rate was scheduled to

decrease from three percent to one percent in November 2004.

Since most of Jerry’s income is commission-based, this will have

a major effect on the Haltoms’ total income.   As such, we find

Linda would be subject to economic hardship should she be liable,

which supports our overall conclusion that holding her liable

would be inequitable.

     This leaves only the income from Dela's Demos.   Any

understatement caused by the failure to report that comparatively

tiny income is obviously attributable to Linda, not Jerry; thus,

she cannot be relieved under section 6015(b) from the tax
                              - 20 -

liability triggered by that income.    Sec. 6015(b)(1)(B); Hopkins

v. Commissioner, 121 T.C. 73, 77 (2003).9

                            Conclusion

     Linda was responsible for the income from Dela’s Demos, and

does not qualify for relief for that portion of the tax

liability.   She does, however, qualify for relief under section

6015(b) for the much larger part of the tax liability caused by

Jerry’s embezzlement.

                                      A decision will be entered

                               under Rule 155.




     9
       Though, strictly speaking, Linda's failure to prove
entitlement to relief under section 6015(b) for her Dela's Demos
income leaves open the possibility of relief under section
6015(f), she does not argue that the Commissioner abused his
discretion in denying her relief for that small part of the
deficiencies, nor do we see how she could.
