                  T.C. Summary Opinion 2011-77



                      UNITED STATES TAX COURT



                 LAURA E. MERCADO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10578-10S.               Filed June 29, 2011.



     Laura E. Mercado, pro se.

     James C. Hughes, for respondent.



     GERBER, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1    Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and




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

this opinion shall not be treated as precedent for any other

case.

     This proceeding was commenced under section 6015(e) for

review of respondent’s determination that petitioner is not

entitled to relief from joint and several liability with respect

to underpayments of Federal income tax reported on joint Federal

income tax returns filed for 1997 and 2000.2

                             Background

     Petitioner resided in California at the time her petition

was filed.   She married David Schoenbrun (Mr. Schoenbrun) on

August 25, 1991, and they were divorced on May 4, 2004.      For the

years 1991 through 1996 petitioner and Mr. Schoenbrun filed

separate Federal income tax returns.      During 1997, however,

petitioner stopped working, had no income, and was attending

graduate school.   She paid her tuition by means of student loans

and financial assistance but relied on Mr. Schoenbrun for

household living expenses, including food, rent, utilities, etc.

During 1998 petitioner received a master’s degree in social

welfare.

     Mr. Schoenbrun’s income tax returns were prepared by a

professional tax preparer.   Regarding the 1997 income tax return,

the tax preparer advised Mr. Schoenbrun to request that


     2
      Petitioner agrees that she is not entitled to relief for
the 2000 tax year and petitions solely for review of the 1997 tax
year.
                               - 3 -

petitioner file a joint income tax return with Mr. Schoenbrun in

order to decrease his tax liability.   He asked petitioner to file

jointly for 1997, and she was reluctant because she had no source

of income and was a student at the time.   Out of caution,

petitioner had filed separate returns before 1997 even during

years that she had income because of her wish not to be liable

for Mr. Schoenbrun’s obligations.   Mr. Schoenbrun assured

petitioner that he would pay the tax liability on the 1997 income

tax return.

     The 1997 joint Federal income tax return (1997 joint return)

reflected a $7,181 income tax liability and wage withholding of

$3,945.   Petitioner was aware that there was an unpaid balance on

the 1997 joint return.   Petitioner ultimately agreed to execute

the 1997 joint return with Mr. Schoenbrun on the basis of his

representation that he would pay the unpaid tax balance.     At the

time of signing the 1997 joint return petitioner was aware that

Mr. Schoenbrun had a history of financial problems, although she

understood that he was paying the household expenses and his

income tax liabilities, albeit untimely.   Mr. Schoenbrun knew he

could not pay the liability, and unbeknownst to petitioner, he

lied to her at the time she signed the 1997 joint return.

Additionally, and at the time petitioner signed the 1997 joint

return, Mr. Schoenbrun did not disclose to her that he had unpaid
                                   - 4 -

tax liabilities for his individual 1993, 1994, 1995, and 1996

Federal income tax returns.

       Respondent assessed the unpaid 1997 tax liability, but

petitioner did not see any of the notifications of the assessment

or collection because Mr. Schoenbrun kept that information from

her.       For the taxable years 1998, 1999, and 2001 petitioner did

not execute a joint income tax return with Mr. Schoenbrun.       For

the 2000 and 2002 tax years, petitioner did execute joint income

tax returns with Mr. Schoenbrun.       For 1998 and 1999 petitioner

attempted to file Federal income tax returns with single filing

status.       Because she was married to Mr. Schoenbrun during those

years, petitioner was technically not entitled to single filing

status.3

       Petitioner timely filed her 2007 Federal income tax return

seeking a refund, and on April 15, 2008, respondent credited

$9,211.69 and $357.86 of that refund to outstanding 1997 and 2000

joint tax liabilities, respectively.       On April 28, 2008,

respondent notified petitioner of the offsets, and on May 12,

2009 (within 2 years from the notification), petitioner filed a

Form 8857, Request for Innocent Spouse Relief.       The facts

petitioner relied upon in her request for relief are, in all

       3
      The distinction between filing as an “unmarried individual”
rather than “separately” is that for purposes of filing status, a
married person must file either jointly or married filing
separately. Petitioner incorrectly attempted to file as an
unmarried individual.
                                 - 5 -

pertinent respects, the same as those in the record.      After

considering petitioner’s request, respondent notified her that

her claim for relief was denied.    Subsequently, petitioner filed

a petition seeking this Court’s review of respondent’s

determination.

                            Discussion

     Petitioner seeks review of respondent’s denial of relief

from joint liability for 1997.    The matter arose when respondent

offset part of petitioner’s 2007 tax refund against the unpaid

1997 joint tax liability which was solely attributable to

petitioner’s Mr. Schoenbrun’s income.      Respondent agrees that

petitioner meets the threshold test for consideration of section

6015(f) relief.   However, respondent contends that petitioner is

not entitled to relief because she failed to show that she met

two principal criteria for relief.4      Those criteria involve

whether petitioner knew or had reason to know that Mr. Schoenbrun

would not pay the tax liability and whether she meets the

financial hardship test.

     4
      Respondent also argued that petitioner had not been in
compliance with her tax filing obligations because she attempted
to file income tax returns as an unmarried individual during 1998
and 1999 when she was technically not entitled to do so because
she was married at the end of each year. We find respondent’s
argument to be superficial and not worthy of consideration. Even
if we considered that aspect, petitioner’s action would not rise
to the level of being detrimental to her request for relief. It
should also be noted that respondent conceded that all other
criteria used to determine whether petitioner is entitled to
relief are favorable to her.
                                - 6 -

     A married taxpayer who elects to file a joint Federal income

tax return is generally jointly and severally liable for the

entire tax due for that year.   Sec. 6013(a), (d)(3); Butler v.

Commissioner, 114 T.C. 276, 282 (2000).     Under section 6015,

however, a spouse who filed a joint income tax return may seek

relief from joint and several liability.    Relief may be sought

pursuant to different circumstances provided for in section

6015(a), (b), and (c).   If a taxpayer does not qualify for relief

under either section 6015(b) or (c), equitable relief may be

sought under section 6015(f).   The Secretary has discretion to

grant equitable relief to a spouse who filed a joint income tax

return for which a reported liability remains unpaid or to one

who has a deficiency (or any portion of either).    Sec. 6015(f);

sec. 1.6015-4(a), Income Tax Regs.

     Petitioner does not qualify for relief under sec. 6015(b) or

(c) because the tax liability involved was an underpayment.

Petitioner bears the burden of showing that she is entitled to

section 6015 (innocent spouse) relief.    See Rule 142(a); Alt v.

Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34

(6th Cir. 2004).   The scope and standard of this Court’s review

in cases involving requests for equitable relief from joint and

several income tax liability are de novo.     Porter v.

Commissioner, 132 T.C. 203 (2009).
                                 - 7 -

     The procedures under which the Commissioner determines

whether a spouse qualifies for relief are set forth in Rev. Proc.

2003-61, 2003-2 C.B. 296.   Under those procedures a requesting

spouse must meet seven threshold requirements to be considered

for equitable relief.   Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B.

at 297.   Respondent concedes that petitioner meets all seven of

the threshold requirements.

     If a requesting spouse satisfies the threshold requirements,

the Commissioner then looks to Rev. Proc. 2003-61, sec. 4.02,

2003-2 C.B. at 298, for the criteria or guidelines of

circumstances in which relief will ordinarily be granted under

section 6015(f) with respect to an underpayment of a properly

reported liability.   The principal criteria considered are

whether a requesting spouse is no longer married to or legally

separated from the nonrequesting spouse on the date of the

request for relief; had no knowledge or reason to know that the

nonrequesting spouse would not pay the income tax liability; and

will suffer economic hardship.     Id.   Even though a requesting

spouse fails to qualify for relief under Rev. Proc. 2003-61, sec.

4.02, the Commissioner may still grant relief under Rev. Proc.

2003-61, sec. 4.03, 2003-2 C.B. at 298.

     The two principal criteria in dispute are whether petitioner

knew or had reason to know that Mr. Schoenbrun would not pay

their 1997 tax liability and whether she will suffer financial
                                 - 8 -

hardship if relief is not granted.       As to whether petitioner knew

or had reason to know that Mr. Schoenbrun would not pay the

income tax liability, the relevant knowledge is knowing when the

income tax return was signed that the tax would not be paid.

Rev. Proc. 2003-61, sec. 4.02(1)(b).       The following factors are

used in determining whether the requesting spouse had reason to

know:   (1) The requesting spouse’s level of education, (2) any

deceit or evasiveness of the nonrequesting spouse, (3) the

requesting spouse’s degree of involvement in the activity

generating the income tax liability, (4) the requesting spouse’s

involvement in business and household financial matters, (5) the

requesting spouse’s business or financial expertise, and, (6) any

lavish or unusual expenditures compared with past spending

levels.   See Rev. Proc. 2003-61, sec. 4.03(2)(a)(iii)(C).     A

taxpayer who signs a return is generally charged with

constructive knowledge of its contents.       Hayman v. Commissioner,

992 F.2d 1256, 1262 (2d Cir. 1993), affg. T.C. Memo. 1992-228.

     Petitioner was college educated; however, her degree was in

social welfare rather than business or accounting.      She was not

working and had no income during 1997 and was not involved in Mr.

Schoenbrun’s work or finances.    She was aware that he was having

some financial difficulties, but he was paying the household and

living expenses, albeit untimely.    More specifically, Mr.

Schoenbrun intentionally kept information about his tax debts
                               - 9 -

from petitioner and intentionally deceived her into believing

that he would pay the 1997 tax liability if she would sign the

1997 joint return.

     Petitioner did not have any lavish or unusual expenditures

and was a student with student loans and was receiving financial

assistance during the 1997 tax year.   Petitioner was aware that

the 1997 joint return had an unpaid balance due to the Government

but believed that Mr. Schoenbrun would pay that balance in the

same manner as he had been paying the couple’s other living

expenses.

     Under these circumstances, petitioner did not know and had

no reason to know when the income tax return was filed that the

tax liability would not be paid.

      Economic hardship may exist if collection of the tax

liability will cause the taxpayer to be unable to pay reasonable

basic living expenses.   Rev. Proc. 2003-61, sec. 4.02(1)(c).   The

Commissioner uses the factors provided in section

301.6343-1(b)(4), Proced. & Admin. Regs.   The pertinent factors

to be considered here are:   (1) Petitioner’s age, employment

status and history, ability to earn, and number of dependents;

(2) the amount reasonably necessary for food, clothing, housing

(including utilities, homeowner’s insurance, homeowner’s

association dues, and the like), medical expenses (including

health insurance), transportation, and current tax payments
                              - 10 -

(including Federal, State, and local); (3) the cost of living in

the geographic area in which petitioner resides; and, (4) any

other factor that petitioner claims bears an economic hardship.

See sec. 301.6343-1(b)(4)(ii), Proced. & Admin. Regs.

     At the time of trial petitioner had three dependents, two

preschool children and her mother.     Her boyfriend (the father of

her children) also lived in her home and shared some of the

living expenses.   Respondent, following standard guidelines for

basic living expenses, determined that petitioner’s necessary

monthly living expenses should be $4,877.    As one of the criteria

for denying relief, respondent relied on the fact that

petitioner’s mortgage, interest, utilities, and property taxes

exceeded the “necessary” amount and, additionally, that her

boyfriend shared some of the household living costs.

     Petitioner contends that respondent’s reliance on the $4,877

figure is misplaced because respondent used figures for a family

of four, whereas petitioner’s household comprises five.

Respondent’s reliance on monthly living expense calculations for

a family of four does appear to be misplaced in the light of the

fact that respondent acknowledges that petitioner’s boyfriend

contributed to the household costs.     Next, petitioner points out

that her salary from the unified school district has decreased

precipitously since respondent reviewed and denied her request
                             - 11 -

and that announced cutbacks will cause further reductions in her

salary.

     Under these circumstances, we find respondent’s

determination that this factor weighs against relief to be of

little import and that petitioner’s financial circumstances

should not have resulted in denial of relief.

     In summary, all criteria are favorable to her entitlement to

equitable relief from joint liability.   With respect to her

financial circumstances, they do not indicate a standard of

living that is much if in any amount in excess of the minimal

standards by which respondent measures this criterion.     This is

especially so where, as here, respondent used the wrong standard

by not including the fifth person in the analysis.     Although

respondent determined that petitioner knew or had reason to know

that Mr. Schoenbrun could not pay, petitioner provided ample

evidence at trial showing that she did not know and that the

information was intentionally kept from her.    We hold that

petitioner is therefore entitled to equitable relief from the

1997 joint tax liability under section 6015(f).

     To reflect the foregoing,


                                         Decision will be entered

                                   for petitioner.
