                        T.C. Memo. 2011-202



                      UNITED STATES TAX COURT



 MICHELLE POUNDS, Petitioner, AND DARRYL JOHNSON, Intervenor v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 30363-09.              Filed August 17, 2011.



     Gregg C. Goodwin and Danielle K. Schulte, for petitioner.

     Darryl Johnson, pro se.

     Ann L. Darnold, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     PARIS, Judge:   Intervenor seeks review of respondent’s final

determination that petitioner is entitled to relief from joint
                              - 2 -

and several liability under section 6015(c)1 with respect to a

deficiency in income tax of $25,575 for tax year 2004.

                        FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Both petitioner and

intervenor resided in Kansas at the time the petition and the

notice of intervention were filed.

Background

     Michelle Pounds (petitioner) and Darryl Johnson (intervenor)

were married on April 27, 2003.   The couple’s marriage ended in a

physical separation in May 2004, a legal separation on March 24,

2005, and finally a divorce on October 13, 2005.2   Before and

during the marriage, petitioner worked for intervenor in

intervenor’s automobile repossession business (company).

Intervenor and petitioner started dating when petitioner was a

teenager and dated off and on approximately 10 years before

getting married.


     1
      Section references are to the Internal Revenue Code of 1986
as amended and in effect at all relevant times, and/or in effect
for the year at issue. Rule references are to the Tax Court
Rules of Practice and Procedure.
     2
      Though the couple did not receive a divorce decree until
Oct. 13, 2005, petitioner and intervenor physically separated in
May 2004, when petitioner moved out of the house in which
intervenor lived and ran his automobile repossession business.
Petitioner initially stayed with a friend and later moved into an
apartment in June 2004.
                                - 3 -

Petitioner’s Role at the Company

     During the taxable year at issue petitioner worked as an

office manager and a secretary in intervenor’s company, roles she

filled before and during the marriage.   Intervenor was in the

automobile repossession industry and was a sole proprietor

throughout all of the periods discussed in this opinion.   The

company was operated out of the backyard of the Peck, Kansas,

home.    As the office manager, petitioner’s primary duty was data

entry of receipts for the recovery of the automobiles; however,

she also helped to repossess vehicles when necessary, make

reports on the conditions of the vehicles, and talk to banks

about the recovery of their automobiles.

     Petitioner never held an ownership interest in the company.

In her role as a secretary, petitioner was always treated as an

employee of the company and was paid a salary for her work.    In

addition to her salary, intervenor sometimes paid petitioner lump

sums of money to “stay away” after they had had an argument.     All

of these payments were made by checks intervenor signed using the

company checking account.3   After the separation but before the

divorce, petitioner continued to work for intervenor sporadically


     3
      Intervenor did not observe business formalities during his
management of the company. Intervenor used the company account
for both personal and business expenses. Even though petitioner
frequently wrote checks for the company’s expenses and presented
them to intervenor to sign, petitioner had no signing authority
on the company bank account during the tax year at issue or at
any other time.
                               - 4 -

as she moved in and out of the Peck, Kansas, house depending on

their relationship status at the moment.

     Before and during the marriage, intervenor and petitioner

rarely, if ever, discussed business or financial matters.    Even

though petitioner worked as a secretary, petitioner was never

involved with the overall financial health or reporting of the

company and was unaware of the company’s financial position at

any given time.4   In fact, intervenor’s stepmother, Linda

Johnson, was employed with the company from its inception and,

even though she had no formal accounting experience, was in

charge of the company’s accounting.    Intervenor’s stepmother

testified that while in that role in 2004 as company accountant

she took only 1 week off and handed the accounting books to

petitioner.   Upon her return, intervenor’s stepmother realized

that petitioner had done no accounting work, and intervenor’s

stepmother had to work hard to update the company’s records.

Intervenor and Petitioner’s Relationship

     Intervenor and petitioner had a tumultuous personal

relationship.   The first sign of domestic violence was on October

14, 1997, 6 years before their marriage, when petitioner filed a

police report with the Wichita Police Department alleging battery


     4
      Testimony offered at trial showed that no formal financial
statements were ever prepared for the company, and intervenor
admitted that although he should have been, he was never
concerned with the formalities of running the company, including
accounting and the tax consequences of its operations.
                                 - 5 -

and domestic violence by intervenor.     Despite this incident,

petitioner and intervenor were married on April 27, 2003.     The

relationship, however, remained rocky.    In May 2004 petitioner

moved out of intervenor’s home and in with a friend until she got

her own apartment in June 2004.    On July 29, 2004, a second

incident occurred between petitioner and intervenor after which

petitioner filed an incident report with the Wichita Police

Department alleging intimidation by intervenor.

     A few months later, in October 2004, petitioner signed a

search warrant which allowed local law enforcement officers in

Peck to search the house and yard for stolen vehicles and parts.

Furious with petitioner because she allowed the police to search

their house for stolen car parts pursuant to a search warrant,

intervenor filed a petition for a protective order against

petitioner on October 8, 2004.     On October 21, 2004, the

protective order was served on petitioner, granting intervenor

exclusive possession of the Peck, Kansas, home.

     Intervenor and petitioner continued their relationship

despite the protective order.    On November 17, 2004, intervenor

and petitioner jointly signed an application for a mortgage on

the house in Peck, Kansas.   However, the relationship continued

to be a struggle, and, on December 1, 2004, petitioner signed a

quitclaim deed which relinquished her interest in the home and

gave intervenor sole possession.    On that same day and with
                               - 6 -

intervenor making the downpayment, petitioner purchased her own

home in Wichita, Kansas.   At some point during the day intervenor

and petitioner had an altercation that resulted in intervenor’s

breaking petitioner’s jaw.   As a result, petitioner spent 4 days

in the hospital.   Consequently, on December 3, 2004, petitioner

sought a protective order precluding intervenor from entering or

coming around her new Wichita, Kansas, home.   The District Court

of Sedgwick County had a hearing and issued that protective order

on December 16, 2004.

     Despite their previous issues and the protective orders,

intervenor and petitioner reunited to celebrate the Christmas

holiday in 2004.   However, on March 22, 2005, trouble arose

again, and petitioner filed another police report with the

Wichita Police Department alleging intimidation by intervenor.

     Even though they had been physically separated for 10 months

at the time, the couple legally separated on March 24, 2005.

Pursuant to a separation agreement drafted by intervenor and

executed on that day, petitioner retained possession of a 2003

Dodge pickup truck for which intervenor continued to make

payments, and a joint restraining order was issued.   Just 7 days

later, on March 29, 2005, petitioner filed another police report

alleging intervenor had been shooting paintballs at her house and

intimidating her with harassing phone calls.
                               - 7 -

     On October 13, 2005, petitioner and intervenor were issued a

divorce decree.   The divorce was uncontested, and intervenor was

awarded the home in Peck, Kansas, where he lived and ran his

business.5   The divorce decree provided that petitioner and

intervenor were responsible for filing separate 2005 Federal and

State income tax returns; however, the joint returns filed for

tax year 2004 and prior years would continue to be the joint

responsibility of petitioner and intervenor.   Consequently,

intervenor testified that he and petitioner were expecting an

$8,000 credit from their tax return for tax year 2003 and,

pursuant to the divorce decree which mandated that they split the

tax liability, they were expecting to split that refund upon




     5
      The divorce decree was drafted by the attorney whom
intervenor had used for his personal and the company’s legal
issues. Neither petitioner nor intervenor contested the divorce,
so they decided to use one attorney for efficiency. However,
petitioner did not seek independent counsel or know she had the
right to seek independent counsel to ensure her interests were
being represented and to avoid the apparent conflict of interest.
Petitioner signed the divorce decree pro se, as neither party
felt it was necessary to incur additional legal fees.
                               - 8 -

receipt.6   In addition to obtaining a divorce, both petitioner

and intervenor filed for bankruptcy that month.7

The 2004 Income Tax Return

     On February 8, 2005, the parties signed an engagement letter

to hire a certified public accountant (C.P.A.) to prepare their

joint 2004 income tax return (2004 return) and promised to

present the C.P.A. with the complete and correct information

necessary for him to prepare the 2004 return.   In April 2005

intervenor and petitioner timely requested an extension of time

to file their 2004 return.   The return was untimely filed on

October 17, 2005.

     Because of the strains of their relationship, petitioner was

unaware of the contents of the 2004 return.   Intervenor was the

sole party responsible for gathering and reviewing the documents

to be presented to the C.P.A. who prepared the 2004 return.     In

fact, petitioner had no idea of the contents of the 2004 return

and knew only that intervenor had promised that he would expedite

their divorce if she promptly signed the tax return.   Intervenor



     6
      On the 2004 return an $8,000 credit from an overpayment on
the tax year 2003 return was applied to their 2004 return to
reduce their 2004 tax liability. Petitioner and intervenor
received neither the refund nor the credit because they were
never entitled to the credit. Upon audit, it was conceded that
the tax calculations for tax years 2003, 2004, and 2005 were
erroneous, and petitioner and intervenor never had an
overpayment.
     7
      Intervenor paid the costs of both his and petitioner’s
bankruptcies.
                               - 9 -

and petitioner were divorced just 4 days before petitioner’s

signing the tax return.

2004 Tax Audit

     The 2004 return was selected for an audit, which began in

2007 and concluded on July 7, 2008.    The 2004 return reported no

tax due, with the only items on the return being a $274 State

income tax refund and a loss on Schedule C, Profit or Loss from

Business, of $25,912 from the company totaling an overall loss

for that year of $25,638.   The auditor, however, determined that

tax was due and made adjustments to the 2004 return, including

the disallowance of Schedule C deductions of $32,564 which were

claimed for interest, car and truck expenses, insurance, repairs,

and other miscellaneous expenses.   The auditor also determined

that Schedule C income of $95,961 was unreported as was a capital

gain of $19,682 related to foreclosure of a business property.

In total, the auditor determined that petitioner and intervenor

owed $25,575 in taxes for 2004 and $6,861.05 in interest as of

August 2008.   Petitioner and intervenor both agreed to the

assessment of the deficiency by signing a Form 870, Waiver of

Restrictions on Assessment and Collection of Deficiency in Tax

and Acceptance of Overassessment.

     On July 8, 2008, intervenor and petitioner signed a Form

4549, Income Tax Examination Changes, and consented to the

assessment of the tax deficiency of $25,575 as a result of the
                              - 10 -

audit.   Intervenor provided all of the information to the auditor

for the examination, including all of the information regarding

the business activities.   However, the record reflects that the

auditor contacted petitioner regularly and unsuccessfully for

records or information regarding the company.8   Petitioner was

unable to produce any records as she never was responsible for or

knew of the details of the company’s finances.   Assessment was

made on October 6, 2008.

     Petitioner seeks relief under section 6015 from joint and

several liability for the deficiency determined by audit.   On

August 19, 2008, petitioner submitted timely to respondent a Form

8857, Request for Innocent Spouse Relief, seeking relief from

joint and several liability under section 6015 for tax year 2004.

On October 3, 2008, intervenor signed and submitted a completed

Form 12508, Questionnaire for Non-Requesting Spouse, to

respondent.   On January 21, 2009, respondent made a preliminary

determination that relief would be denied under section 6015(f)

for that year.   Petitioner then sought Appeals review of that

determination, and Appeals determined that the case should have

been reviewed for relief under section 6015(b) or (c) since the


     8
      Petitioner alleged and the audit income adjustments reflect
that intervenor made kickbacks on insurance fraud relating to
cars that received hail damage while in his possession. When
asked about the income he received from hail damage on the 39
vehicles, intervenor said that he and the auto repair shop worked
out a “deal” in which he did not have to pay the $1,000
deductible for each car fixed.
                              - 11 -

tax resulted from an understatement of tax and an assessed

deficiency.   On August 6, 2009, a second determination was made

that relief was not appropriate under section 6015(b) or (c).

Petitioner then submitted a Form 12509, Statement of

Disagreement, which was received by respondent on September 3,

2009, but was not forwarded to the appropriate office.    However,

unbeknownst to petitioner, respondent had issued a final

determination letter on September 11, 2009, without considering

the information submitted with petitioner’s Appeals request.    On

December 15, 2009, after review of the Appeals request, the

innocent spouse unit issued a revised preliminary determination

granting petitioner innocent spouse relief under section 6015(c).

On December 22, 2009, without the knowledge that respondent had

reversed his position and granted petitioner innocent spouse

relief, petitioner filed a petition with this Court.    After

receiving notice, intervenor filed timely a notice of

intervention on April 19, 2010.

                              OPINION

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

tax return for a taxable year are jointly and severally liable

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

for any deficiency subsequently determined, even if all of the

income giving rise to the tax liability is allocable to only one

of them.   Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C. 276,
                                - 12 -

282 (2000).   Section 6015, however, provides exceptions to the

general rule of joint and several liability in limited

circumstances.     Alt v. Commissioner, 119 T.C. 306, 311 (2002),

affd. 101 Fed. Appx. 34 (6th Cir. 2004).

     One of those circumstances is provided for in section

6015(c).   Upon the election of its application by the taxpayer,

that section limits a spouse’s liability for a deficiency to the

portion of the deficiency properly allocable to that spouse under

section 6015(d).    In general, an item that gives rise to a

deficiency on a joint Federal income tax return will be allocated

to each individual who files the joint return in the same manner

as that item would have been allocated had those individuals

filed separate returns.    Sec. 6015(d)(3)(A).   Respondent concedes

petitioner’s entitlement to relief under section 6015(c).      The

concession presumably contemplates a section 6015(d) allocation

satisfactory to both of them.    However, intervenor challenges

petitioner’s entitlement to section 6015(c) relief.

     According to intervenor, petitioner knew about the items

giving rise to the 2004 deficiency, that is, the financial

position of the company, including all income, deductions, and

expenditures, and that knowledge disqualifies her from section

6015(c) relief.    He contends that the evidence that he offered

might support a finding that petitioner had “reason to know”

about the understatement of tax shown on the return.    See, e.g.
                               - 13 -

Price v. Commissioner, 887 F.2d 959 (9th Cir. 1989); King v.

Commissioner, 116 T.C. 198, 204 (2001); Wiener v. Commissioner,

T.C. Memo. 2008-230.    But a requesting spouse’s “reason to know”

of the item is not sufficient to deny relief under section

6015(c).    If, as here, all of the other requirements of that

section have been satisfied, then, as relevant here, the burden

of proof is shifted to the Commissioner and relief is denied to

the requesting spouse only if the Commissioner “demonstrates that

* * * [the requesting spouse] had actual knowledge, at the time

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

deficiency”.    Sec. 6015(c)(3)(C); Charlton v. Commissioner, 114

T.C. 333, 341 (2000); Martin v. Commissioner, T.C. Memo. 2000-

346.

        An issue arises where the burden of proof shifts to the

Commissioner in cases when the Commissioner favors granting

relief and the nonrequesting spouse intervenes to oppose it.      The

Court has resolved this conflict of burden shifting by

determining whether actual knowledge has been established by a

preponderance of the evidence as presented by all three parties.

See Knight v. Commissioner, T.C. Memo. 2010-242; McDaniel v.

Commissioner, T.C. Memo. 2009-137; Stergios v. Commissioner, T.C.

Memo. 2009-15.

       To determine whether the requesting spouse had actual

knowledge, the Court looks to the surrounding facts and
                              - 14 -

circumstances for “an actual and clear awareness (as opposed to

reason to know)” of the items giving rise to the deficiency.    See

Cheshire v. Commissioner, 115 T.C. 183, 195 (2000), affd. 282

F.3d 326 (5th Cir. 2002).

     Other than matters stipulated, respondent offered no

evidence at trial.   Petitioner and intervenor each testified on

his or her own behalf, and numerous documents were introduced

into evidence on intervenor’s behalf.   Petitioner worked for the

company which intervenor ran for the tax year at issue; however,

she never owned any interest in the company and performed only

limited tasks.   Intervenor was solely responsible for maintaining

the checking account from which the finances of the company and

the home were handled.   He was the only signatory to checks drawn

off of that account; had actual knowledge of the time and the

manner in which the hail-damaged cars were “fixed”; was

responsible for hiring and helping the C.P.A. who prepared the

2004 return using the information that intervenor prepared and

gathered from the company and his and petitioner’s personal

records; was responsible for maintaining the financial health of

the company; and was responsible for running the company.

Petitioner had no actual knowledge of the items on which the

deficiency was based.

     In fact, petitioner had moved out of intervenor’s house and

had been separated from him for months when the hail-damaged cars
                             - 15 -

were fixed and for over a year when the tax return was filed.

Petitioner testified that she had absolutely no idea of

intervenor’s business affairs at the time she signed the tax

return and that her signature on the return was the only part she

took in the tax return preparation.

                           Conclusion

     Because petitioner did not have actual knowledge of the

items that resulted in the deficiency during tax year 2004, she

is entitled to relief from joint and several liability for the

deficiency under section 6015(c).

     The Court has considered the remaining arguments of all

parties for results contrary to those expressed herein and, to

the extent not discussed above, finds those arguments to be

irrelevant, moot, or without merit.

     To reflect the foregoing,


                                           Decision will be entered

                                      for petitioner.
