                        Revised March 25, 2002

               IN THE UNITED STATES COURT OF APPEALS

                        FOR THE FIFTH CIRCUIT

                        _____________________

                            No. 00-60855
                        _____________________



     KATHRYN CHESHIRE


                                     Petitioner - Appellant

          v.


     COMMISSIONER OF INTERNAL REVENUE


                                     Respondent - Appellee

_________________________________________________________________

     Appeal from the Decision of the United States Tax Court
_________________________________________________________________

                           February 8, 2002

Before KING, Chief Judge, DAVIS, Circuit Judge, and VANCE,
District Judge.*

KING, Chief Judge:

     The Commissioner of Internal Revenue assessed a tax

deficiency and associated penalties against Petitioner -

Appellant Kathryn Cheshire.    In the United States Tax Court,

Cheshire asserted claims for innocent spouse relief from the tax

deficiency and penalties under § 6015(b), (c), and (f) of the

     *
        District Judge of the Eastern District of Louisiana,
sitting by designation.
Internal Revenue Code.   26 U.S.C. § 6015 (Supp. 2001).    The Tax

Court denied Cheshire’s request for innocent spouse relief, and

Cheshire appeals that denial.    For the following reasons, we

AFFIRM the judgment of the Tax Court.



                         I.   Factual History

     The facts in this case are undisputed.     Kathryn Cheshire

(“Appellant”) married David Cheshire in 1970.     More than twenty

years later, Mr. Cheshire retired from Southwestern Bell

Telephone Company effective January 1, 1992, and received the

following retirement distributions in 1992:

          Lump sum distribution            $199,771
          LESOP for salaried employees        5,919
          Savings plan for salaried
                employees                    23,263
          ESOP                                  971
          TOTAL                            $229,924

Of the $229,924 total distribution, $42,183 was rolled over into

a qualified account and is not subject to federal income tax.

Mr. Cheshire deposited $184,377 of the retirement distributions

into the Cheshires’ joint checking account, which earned $1168 in

interest for 1992.1   Appellant knew of Mr. Cheshire’s receipt of

$229,924 in retirement distributions and of the $1168 in interest

earned on the distributions.

     1
        The amounts rolled over into the qualified account
($42,183) and deposited in the joint checking account ($184,377)
account for only $226,560 of the retirement distributions. The
unaccounted-for remainder ($3364), although mysterious, is not
significant enough to affect our analysis of the case.

                                   2
     The Cheshires made several large disbursements from the

retirement distributions in their joint checking account.   They

withdrew $99,425 from this account to pay off the mortgage on

their marital residence, and they withdrew an additional $20,189

to purchase a new family car, a 1992 Ford Explorer.   Mr. Cheshire

also used the retirement proceeds to provide start-up capital for

his new business, to satisfy loans taken out to acquire a family

truck and an automobile for the Cheshires’ daughter, to pay

family expenses, and to establish a college fund for the

Cheshires’ daughter.   Appellant knew of all these expenditures.

     Appellant and Mr. Cheshire filed a joint federal income tax

return, prepared by Mr. Cheshire, for 1992.   On line 17a of this

return, they reported the $199,771.05 in retirement

distributions2 but claimed only $56,150.12 of this amount as

taxable.   Before signing the return, Appellant questioned Mr.

Cheshire about the tax consequences of the retirement

distributions.   Mr. Cheshire replied that John Daniel Mican, a

certified public accountant, advised Mr. Cheshire that retirement

proceeds used to pay off a mortgage are nontaxable.   Appellant

accepted this answer and made no further inquiries prior to

signing the return on March 14, 1993.   In fact, Mr. Cheshire had

not consulted Mican, and all retirement proceeds that are not


     2
        This number corresponds to the amount of the lump sum
distribution and excludes the LESOP, ESOP, and savings plan
distributions.

                                 3
rolled over into a qualified account are taxable.     Because of Mr.

Cheshire’s persistent problems with alcohol, the Cheshires

permanently separated on July 13, 1993, and they divorced

seventeen months later.     The divorce decree awarded Appellant

unencumbered title to the marital residence and to the Ford

Explorer.

     The Commissioner of Internal Revenue (the “Commissioner”)

audited the Cheshires’ 1992 return and determined that Mr.

Cheshire had received taxable retirement distributions of

$187,741 – the difference between the total distributions

($229,924) and the rollover ($42,183).     Thus, the Cheshires had

understated the amount of their taxable distributions by

$131,591.   The Commissioner also determined that the Cheshires

had underreported the interest income earned on the retirement

distributions by $717.    Because of these inaccuracies, the

Commissioner imposed a penalty under § 6662(a) of the Internal

Revenue Code.3



                      II.    Procedural History



     3
        Section 6662(a) provides:
          If this section applies to any portion of an
          underpayment of tax required to be shown on a
          return, there shall be added to the tax an
          amount equal to 20 percent of the portion of
          the underpayment to which this section
          applies.
26 U.S.C. § 6662(a) (Supp. 2001).

                                   4
     Appellant commenced this action in the Tax Court.     She

conceded that $131,591 of the retirement distributions and the

corresponding earned interest were improperly excluded from

taxable income.   She claimed, however, that she was entitled to

relief as an innocent spouse under § 6015(b),4 § 6015(c),5 or

     4
        Section 6015(b)(1) provides:
          [I]f–
                (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 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 . . .
                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,
          then the other individual shall be relieved
          of liability for tax (including interest,
          penalties, and other amounts) for such
          taxable year to the extent such liability is
          attributable to such understatement.
26 U.S.C. § 6015(b)(1) (Supp. 2001).
     5
         Section 6015(c)(1) provides:
          [I]f an individual who has made a joint
          return for any taxable year elects the
          application of this subsection, the
          individual’s liability for any deficiency
          which is assessed with respect to the return
          shall not exceed the portion of such

                                 5
§ 6015(f)6 of the Internal Revenue Code.   26 U.S.C. § 6015.

Prior to trial, the Commissioner conceded that Appellant

qualified for innocent spouse relief with respect to the LESOP

distribution ($5919), the savings plan distribution ($23,262),

and the ESOP distribution ($971).    Consequently, the taxable

income from the retirement distributions and the corresponding

earned interest remaining in dispute totaled $101,438 and $691,

respectively.   These amounts roughly correspond to the improperly

deducted amounts that the Cheshires used to pay off their

mortgage.




          deficiency properly allocable to the
          individual under subsection (d).
26 U.S.C. § 6015(c)(1) (Supp. 2001). The general rule under
subsection (d) is that:
          [A]ny item giving rise to a deficiency on a
          joint return shall be allocated to
          individuals filing the return in the same
          manner as it would have been allocated if the
          individuals had filed separate returns for
          the taxable year.
26 U.S.C. § 6015(d)(3)(A) (Supp. 2001).
     6
         Section 6015(f) provides:
          [I]f–
                (1) taking into account all the facts
                and circumstances, it is inequitable to
                hold the individual liable for any
                unpaid tax or any deficiency (or any
                portion of either); and
                (2) relief is not available to such
                individual under subsection (b) or (c),
          the Secretary may relieve such individual of
          such liability.
26 U.S.C. § 6015(f) (Supp. 2001).


                                 6
     The Tax Court majority, consisting of twelve judges, denied

Appellant relief under § 6015(b), (c), and (f).     Cheshire v.

Comm’r, 115 T.C. 183 (2000).     The Tax Court found that Appellant

failed to establish that she “did not know, and had no reason to

know” of the tax understatement as required for relief under

§ 6015(b)(1)(C).   Id. at 193.    The Tax Court also found that

Appellant was not entitled to relief under § 6015(c) because she

had “actual knowledge . . . of any item giving rise to a

deficiency” within the meaning of § 6015(c)(3)(C).7    Id. at 197.

Finally, the Tax Court held that the Commissioner did not abuse

his discretion in denying Appellant equitable relief under

§ 6015(f) with respect to the retirement distributions and the

interest income, as well as the § 6662(a) penalty associated with

the interest income.8   Id. at 198.




     7
         Section 6015(c)(3)(C) provides:
          If the Secretary 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 under subsection (d), such
          election shall not apply to such deficiency
          (or portion).
26 U.S.C. § 6015(c)(3)(C) (Supp. 2001).
     8
        The Tax Court granted Appellant equitable relief with
respect to the portion of the § 6662(a) penalty associated with
the retirement distributions, however. Id. at 198-99.

                                   7
                    III.    The Statutory Scheme

     Generally, spouses who choose to file a joint return are

subject to joint and several liability for tax deficiencies under

the Internal Revenue Code.    26 U.S.C. § 6013(d)(3) (Supp. 2001).

Recognizing that joint and several liability may be unjust in

certain circumstances, Congress authorized relief from such

liability under the “innocent spouse” provision, 26 U.S.C.

§ 6015.   Section 6015 provides three distinct types of relief for

taxpayers who file joint returns.9    First, § 6015(b) provides

relief for all joint filers who satisfy the five requirements

listed in that section.10    Second, § 6015(c) allows a spouse who

filed a joint tax return to elect to limit her income tax

liability for that year to her separate liability amount.11

Section 6015(c) applies only to taxpayers who are no longer

married, are legally separated, or do not reside together over a

twelve-month period.   26 U.S.C. § 6015(c)(3)(A)(i).   Furthermore,

a spouse who had actual knowledge of an item giving rise to a


     9
          Relief under the former innocent spouse statute,
§ 6013(e), was difficult to obtain, so Congress repealed
§ 6013(e) and enacted a new provision, § 6015, in 1998. See S.
REP. NO. 105-174, at 55 (1998); H.R. REP. NO. 105-364(I), at 61
(1998). New § 6015(b)(1) provides similar relief to that
available under former § 6013(e). New § 6015(c) and (f),
however, are new forms of relief.
     10
         See supra note 4 for complete text of 26 U.S.C.
6015(b)(1).
     11
         See supra note 5 for complete text of 26 U.S.C.
6015(c)(1).

                                  8
deficiency at the time that spouse signed the return may not seek

relief under § 6015(c).       26 U.S.C. § 6015(c)(3)(C).12

     Finally, a taxpayer may seek relief as an “innocent spouse”

under § 6015(f), which authorizes the Secretary of the Treasury

(the “Secretary”) or his delegate to grant equitable relief from

joint and several liability when relief is unavailable under

§ 6015(b) and (c).13    Except for the knowledge requirement of

§ 6015(c)(3)(C) (the provision disallowing election of separate

liability to a spouse with actual knowledge of the item giving

rise to the deficiency), the taxpayer bears the burden of proving

that she has met all the prerequisites for innocent spouse

relief.     See Reser v. Comm’r, 112 F.3d 1258, 1262-63 (5th Cir.

1997).     Section 6015(c)(3)(C) explicitly places the burden of

proof on the Secretary.



                        IV.    Standard of Review

     This court reviews decisions of the Tax Court “in the same

manner and to the same extent as decisions of the district courts

in civil actions tried without a jury.”       26 U.S.C. § 7482(a)(1)

(1989 & Supp. 2001).     Thus, we review issues of law de novo and

findings of fact for clear error.        Park v. Comm’r, 25 F.3d 1289,


     12
         See supra note 7 for complete text of 26 U.S.C.
6015(c)(3)(C).
     13
            See supra note 6 for complete text of 26 U.S.C.
6015(f).

                                     9
1291 (5th Cir. 1994).     The Tax Court’s determination that a

spouse is not entitled to innocent spouse relief is a finding of

fact that this court reviews for clear error.      Reser, 112 F.3d at

1262.



                     V.   Section 6015(b) Relief

     Section 6015(b)(1) provides innocent spouse relief if the

taxpayer satisfies all of the five requirements listed in that

section.14   In this case, the parties concede that Appellant

satisfied the requirements of subsections (A), (B), and (E) of

§ 6015(b)(1).    Thus, the § 6015(b) issue presented by this case

is whether Appellant satisfied the requirements of subsections

(C) and (D).    We conclude that Appellant has not satisfied the

requirement of subsection (C) and thus is not entitled to relief

under § 6015(b).

     Subsection (C) allows for innocent spouse relief only if the

spouse “establishes that in signing the return he or she did not

know, and had no reason to know, that there was such

understatement.”15   26 U.S.C. § 6015(b)(1)(C).    Originally, the

innocent spouse provision (formerly codified at § 6013(e)(1))

     14
        See supra note 4 for complete text of 26 U.S.C.
6015(b)(1).
     15
        Because current subsection (C) of § 6015(b)(1) is
virtually identical to former subsection (C) of § 6013(e)(1), we
may look to cases construing § 6013(e)(1)(C) for help in
construing § 6015(b)(1)(C). See Butler v. Comm’r, 114 T.C. 276,
283 (2000).

                                  10
granted relief only in cases involving omitted income, i.e.,

cases in which the tax return failed to report taxable income.

Since the enactment of the original provision, courts have agreed

that in omitted income cases, the spouse’s actual knowledge of

the underlying transaction that produced the income is sufficient

to preclude innocent spouse relief (the “knowledge-of-the-

transaction test”).   Reser, 112 F.3d at 1265.16   In 1984, the

innocent spouse provision was expanded to include relief in

erroneous deduction cases, i.e., cases in which an incorrect

deduction results in an understatement of taxable income.     Park,

25 F.3d at 1292.   The Tax Court applies the knowledge-of-the-

transaction test to both types of cases, see Bokum v. Comm’r, 94

T.C. 126, 151 (1990), though some circuits have adopted an

alternate test for erroneous deduction cases.17    See, e.g., Price

v. Comm’r, 887 F.2d 959, 965 (9th Cir. 1989); Reser, 112 F.3d at

1267 (Fifth Circuit case).

     16
         The knowledge-of-the-transaction test conflicts with
the plain meaning of § 6015(b)(1)(C), which limits relief to
spouses with no knowledge of the understatement. Along with
other courts, this court has concluded that this deviation from
plain meaning is justified because it avoids “acceptance of an
ignorance of the law defense.” Sanders v. United States, 509
F.2d 162, 169 n.14 (5th Cir. 1975); see also Price v. Comm’r, 887
F.2d 959, 963 n.9 (9th Cir. 1989).
     17
         The Tax Court has suggested that if the case is
appealable to a circuit that has adopted a different knowledge
test for erroneous deduction cases, it will apply that circuit’s
knowledge test rather than the knowledge-of-the-transaction test.
See Bokum, 94 T.C. at 151 (declining to follow the Ninth
Circuit’s knowledge standard in erroneous deduction cases “except
in those instances where appeal lies to that Court of Appeals”).

                                11
     The Ninth Circuit was the first circuit to adopt an

alternative knowledge test for erroneous deduction cases.     In

Price, the Ninth Circuit established that a spouse fails to

satisfy the § 6015(b)(1)(C) knowledge requirement in erroneous

deduction cases if “a reasonably prudent taxpayer in her position

at the time she signed the return could be expected to know that

the return contained the substantial understatement.”      887 F.2d

at 965.   The Ninth Circuit reasoned that since erroneous

deductions are necessarily reported on a tax return, any spouse

who signs the joint return is thereby put on notice that an

income-producing transaction occurred.   Id. at 963 n.9.    Thus, in

erroneous deduction cases, it would be illogical to bar recovery

for spouses with mere knowledge of the transaction as this would

preclude any spouse from obtaining relief under § 6015(b).     Id.

The Ninth Circuit noted that “adoption of such an interpretation

would do violence to the intent Congress clearly expressed when

it expanded coverage of the provision to include relief for

spouses from deficiencies caused by deductions for which there is

no basis in fact or law.”   Id.

     Thus, under the Price approach, actual knowledge of the

underlying transaction, standing alone, is not enough to preclude

innocent spouse relief under § 6015(b)(1)(C) in erroneous

deduction cases.   However, Price notes that if the spouse knows

“virtually all of the facts pertaining to the transaction which

underlies the substantial understatement,” then her defense “is

                                  12
premised solely on ignorance of law,” and “she is considered as a

matter of law to have reason to know of the substantial

understatement.”   Id. at 964 (emphasis added).

     This court adopted the Price approach and reasoning in

Reser.18   See 112 F.3d at 1267.    Accordingly, in erroneous

deduction cases, this court questions whether the spouse “knew or

had reason to know that the deduction in question would give rise

to a substantial understatement of tax on the joint return.”      Id.

(emphasis in original).   However, if the spouse knows enough

about the underlying transaction that her innocent spouse defense

rests entirely upon a mistake of law, she has “reason to know” of

the tax understatement as a matter of law.      See Park, 25 F.3d at

1293-94 (noting that ignorance of the law cannot establish an

innocent spouse defense to tax liability); Sanders v. United

States, 509 F.2d 162, 169 & n.14 (5th Cir. 1975).     If “reason to

know” cannot be determined as a matter of law, the proper factual

inquiry is “whether a reasonably prudent taxpayer in the spouse’s

position at the time she signed the return could be expected to

know that the stated liability was erroneous or that further

investigation was warranted.”      Reser, 112 F.3d at 1267.



     18
         The Second, Seventh, Eighth, and Eleventh Circuits have
also followed the Ninth Circuit’s decision in Price. See Resser
v. Comm’r, 74 F.3d 1528, 1535-36 (7th Cir. 1996); Bliss v.
Comm’r, 59 F.3d 374, 378 n.1 (2d Cir. 1995); Kistner v. Comm’r,
18 F.3d 1521, 1527 (11th Cir. 1994); Erdahl v. Comm’r, 930 F.2d
585, 589 (8th Cir. 1991).

                                   13
     In this case, the Cheshires reported the receipt of

$199,771.05 in retirement distributions on line 17a of their

joint tax return.   On line 17b, they reported $56,150.12 as the

taxable amount of those retirement distributions.    Mr. Cheshire

led Appellant to believe that he calculated this amount of

taxable income by properly deducting the money placed in a

qualified account ($42,183) and the money used to pay off the

mortgage on their home ($99,425).     In fact, only the money placed

in a qualified account was properly excludable from the

Cheshires’ taxable income.   Appellant argues that these facts

present a case of erroneous deduction and that the knowledge-of-

the-incorrect-deduction standard is therefore applicable.    The

Commissioner argues that this is a case of omitted income and

that the knowledge-of-the-transaction test is therefore

applicable.

     This court has not previously determined if such facts

present a case of omitted income or of erroneous deduction, and

we need not do so here because the outcome under either standard

is the same: Appellant knew or had reason to know of the tax

understatement.19   Under the knowledge-of-the-transaction test

applied in omitted income cases, Appellant fails to satisfy


     19
         This court took the same approach in Park. See Park,
25 F.3d at 1298-99. Because the result in Park was the same
under the knowledge-of-the-transaction test and the new erroneous
deduction test set forth in the Ninth Circuit’s opinion in Price,
this court declined to determine which test applied. Id.

                                 14
§ 6015(b)(1)(C) because she had actual knowledge of the

retirement distributions and of the corresponding earned interest

at the time she signed the return.20   In erroneous deduction

cases, this court asks whether Appellant “knew or had reason to

know” that the deduction in question would give rise to a tax

understatement at the time she signed the return.    The parties

agree that Appellant did not have actual knowledge that the

deduction was improper.   However, because Appellant knew all the

facts surrounding the transaction that gave rise to the

understatement, including the amount of the retirement proceeds,

the account where the proceeds were deposited and drawn upon, the

amount of interest earned on the proceeds, and the manner in

which the proceeds were spent, Appellant had “reason to know” of

the improper deduction as a matter of law.    Appellant’s defense

consists only of her mistaken belief that money spent to pay off

a mortgage is properly deductible from retirement distributions.

Ignorance of the law cannot establish an innocent spouse defense

to tax liability.   Park, 25 F.3d at 1293-94; Sanders, 509 F.2d at

169 & n.14.

     Because Appellant “knew or had reason to know” of the

understatement under both the omitted income standard and the

erroneous deduction standard, she fails to establish the

requirement of § 6015(b)(1)(C).    This conclusion bars relief

     20
         This is the result reached by the Tax Court.     Cheshire,
115 T.C. at 193.

                                  15
under § 6015(b)(1), obviating the need for this court to decide

whether Appellant satisfied the requirement of § 6015(b)(1)(D).

The Tax Court’s determination that Appellant is not entitled to

innocent spouse relief under § 6015(b)(1) is not clearly

erroneous.



                     VI.   Section 6015(c) Relief

     Section 6015(c)(1) allows any divorced (or separated)

individual to elect to assume responsibility for only that

portion of a joint tax deficiency that is properly allocable to

that individual.21   The parties agree that Appellant falls within

the class of taxpayers permitted to make a § 6015(c) election

since she and Mr. Cheshire were divorced when she filed her

petition with the Tax Court.    Moreover, neither party in this

case disputes that the deficiency attributable to the retirement

distributions is properly allocable to Mr. Cheshire.    Thus, if

this election is available to Appellant, she can avoid liability

for the tax deficiency caused by the retirement distributions.

However, the benefit of the § 6015(c) election is not available

to an individual with actual knowledge of “any item giving rise

to a deficiency.”    26 U.S.C. § 6015(c)(3)(C).22   In order to


     21
         See supra note 5 for complete text of 26 U.S.C.
6015(c)(1).
     22
         See supra note 7 for complete text of 26 U.S.C.
6015(c)(3)(C).

                                  16
preclude relief under § 6015(c), the Commissioner must prove by a

preponderance of the evidence that Appellant had actual knowledge

of “any item giving rise to a deficiency.”    Culver v. Comm’r, 116

T.C. 189, 196 (2001).    Whether the Commissioner satisfied this

burden is the § 6015(c) issue in this appeal.

     The debate between the parties focuses on the meaning of the

term “item” in § 6015(c)(3)(C).    Appellant argues that “item”

means “incorrect tax reporting of an item of income, deduction,

or credit” so that § 6015(c)(3)(C) only bars relief for spouses

with actual knowledge that an entry on the joint tax return is

incorrect.    The Commissioner argues that “item” means “an item of

income, deduction, or credit” so that § 6015(c)(3)(C) bars relief

for all spouses with actual knowledge of the income-producing

transaction, even if they lacked knowledge of the incorrect tax

reporting of that transaction.

     The term “item” appears fifteen times in § 6015.    Most of

these appearances are uninformative, but the uses of the term

“item” in § 6015(b)(1)(B) and (d)(4) support the Commissioner’s

definition.   Section 6015(b)(1)(B) refers to “an understatement

of tax attributable to erroneous items of one individual filing

the joint return.”23    If “item” refers to the “incorrect tax

reporting of an item,” as Appellant asserts, then the reference

to an “erroneous item” is redundant.    Thus, § 6015(b)(1)(B)

     23
         See supra note 4 for the complete text of 26 U.S.C.
§ 6015(b)(1).

                                  17
suggests that “item” means “an item of income, deduction, or

credit,” as the Commissioner asserts.    Furthermore, § 6015(d)(4)

refers to “an item of deduction or credit.”24   This use of the

term “item” suggests that the term refers to an actual item of

income, deduction, or credit, rather than the incorrect reporting

of such an item.

     Other sections of the Internal Revenue Code define the term

“item” without reference to tax consequences.    For example,

§ 61(a) defines “gross income” to include such “items” as

compensation for services, interest, rents, and royalties.      26

U.S.C. § 61(a) (1988 & Supp. 2001).    Thus, in this context,

“item” means an item of income.    Section 6231(a)(3) defines the

term “partnership item” as “any item required to be taken into

account for the partnership’s taxable year under any provision of

subtitle A . . . .”   26 U.S.C. § 6231(a)(3) (1989 & Supp. 2001).

These uses of the term “item,” as well as those uses appearing in

§ 6015, suggest that “item” means “an item of income, deduction,

or credit.”   See Comm’r v. Lundy, 516 U.S. 235, 250 (1996)

(stating that “identical words used in different parts of the

     24
         Section 6015(d)(4) provides:
          If an item of deduction or credit is
          disallowed in its entirety solely because a
          separate return is filed, such disallowance
          shall be disregarded and the item shall be
          computed as if a joint return had been filed
          and then allocated between the spouses
          appropriately. A similar rule shall apply
          for purposes of section 86.
26 U.S.C. § 6015(d)(4) (Supp. 2001).

                                  18
same act are intended to have the same meaning”) (internal

citations and quotations omitted).    This interpretation supports

the Commissioner’s position that § 6015(c)(3)(C) bars relief for

all spouses with actual knowledge of the income-producing

transaction, even if they lacked knowledge of the incorrect tax

reporting of that transaction.

     Furthermore, Appellant’s claim that § 6015(c)(3)(C)

precludes relief only if the spouse has knowledge of incorrect

tax reporting runs afoul of the general rule that ignorance of

the tax laws is not a defense to a tax deficiency.       See Park, 25

F.3d at 1293-94 (noting that ignorance of the law cannot

establish an innocent spouse defense to tax liability).      In

Sanders, a case applying the predecessor innocent spouse statute,

we noted that the statute “seemingly makes ignorance of the fact

that known receipts constitute taxable income a valid

justification for not knowing or having reason to know of

omissions from gross income.”    509 F.2d at 169 n.14.    Rather than

establish an ignorance of the law defense, however, in Sanders we

decided to apply a statutory interpretation that “is difficult to

square with a literal reading of the statutory language” because

“the practical problems that have always prevented acceptance of

an ignorance of the law defense in the criminal law area . . .

arguably apply just as forcefully here.”    Id.   Unlike the court

in Sanders, we need not overlook the literal meaning of the

statute at issue in this case.   As the above discussion

                                 19
illustrates, the plain meaning of § 6015(c)(3)(C) suggests that a

spouse with actual knowledge of the income-producing transaction

cannot receive innocent spouse relief even if she lacks knowledge

of the incorrect tax reporting of that transaction.     This reading

of the plain meaning of § 6015(c)(3)(C) is compelling in light of

the general principle that ignorance of the law is not a defense.

     To support the theory that “item” means “incorrect tax

reporting of an item,” Appellant and amici curiae point to the

legislative history of § 6015(c)(3)(C).     We decline to defer to

this legislative history for two reasons.     First, when

interpreting a statute, this court “must presume that a

legislature says in a statute what it means and means in a

statute what it says there.”     Conn. Nat’l Bank v. Germain, 503

U.S. 249, 253-54 (1992).    Unless the text of a statute is

ambiguous on its face, this court adheres to that statute’s plain

meaning.    Id.   As the above analysis demonstrates, the text of

§ 6015 and other sections of the Internal Revenue Code strongly

suggests that “item” refers to “an item of income, deduction, or

credit.”    Section 6015(c)(3)(C) is not facially ambiguous.

     Second, the legislative history of § 6015(c)(3)(C) is

ambiguous.    Some portions of the history appear to support the

Commissioner’s position.     See S. REP. NO. 105-174, at 55-56, 59;

H.R. CONF. REP. NO. 105-599, at 253 (1998); 144 CONG. REC. 56, S4473

(1998).    Other parts of the history, however, suggest that the

§ 6015(c)(3)(C) exception is intended to cover spouses with

                                  20
knowledge of the transaction giving rise to the deficiency in

addition to spouses with knowledge that the tax return is

incorrect.    See H.R. CONF. REP. NO. 105-599, at 253; S. REP. NO.

105-174, at 58.    We decline to allow inconclusive legislative

history to affect our interpretation of the plain meaning of

§ 6015(c)(3)(C).    See Hubbard v. United States, 514 U.S. 695, 708

(1995) (noting that “[c]ourts should not rely on inconclusive

statutory history as a basis for refusing to give effect to the

plain language of an Act of Congress”).     Thus, we conclude that

“item” means “an item of income, deduction, or credit,” as

asserted by the Commissioner.25

     The Tax Court adopted this definition of “item” and

indicated that the knowledge standard under § 6015(c)(3)(C) in an

omitted income case is “actual and clear awareness” of an item of

income.26    Cheshire, 115 T.C. at 195.   Since Cheshire, the Tax


     25
         This determination is in line with an unpublished Ninth
Circuit opinion holding that the taxpayer’s “actual knowledge of
items of income that were unreported” precluded relief under
§ 6015(c) even though the taxpayer had no knowledge that the tax
return was incorrect. Wiksell v. Comm’r, No. 99-70643, 2000 WL
340130, at *2 (9th Cir. Mar. 28, 2000) (unpublished).
     26
        Contrary to Appellant’s contention, the Tax Court’s
interpretation of § 6015(c) does not ignore its remedial nature
by improperly substituting the knowledge requirement from
§ 6015(b)(1)(C) (and former § 6013(e)(1)(C)) for the stricter
knowledge requirement of § 6015(c)(3)(C). The knowledge standard
of § 6015(c)(3)(C) requires “actual knowledge.” The Tax Court
interpreted this to mean “actual and clear awareness . . . of the
existence of an item.” Cheshire, 115 T.C. at 195. Unlike former
§ 6013(e)(1)(C) and current § 6015(b)(1)(C), a mere “reason to
know” is not enough to preclude tax relief under § 6015(c).

                                  21
Court has interpreted the knowledge standard in the context of an

erroneous deduction to be “actual knowledge of the factual

circumstances which made the item unallowable as a deduction.”

King v. Comm’r, 116 T.C. 198, 204 (2001).     As Appellant is liable

under either standard, we need not determine which standard

applies in this case.    Appellant had “actual and clear awareness”

of Mr. Cheshire’s retirement distributions and earned interest.

Thus, she satisfies the § 6015(c)(3)(C) knowledge requirement for

omitted income cases.    Furthermore, Appellant was aware of how

the retirement distributions were spent.     None of these

expenditures qualifies for proper deduction, so Appellant had

“actual knowledge of the factual circumstances which made the

item unallowable as a deduction.”     In such circumstances,

Appellant satisfies the § 6015(c)(3)(C) knowledge requirement for

erroneous deduction cases.    Thus, § 6015(c)(3)(C) bars relief

under either the omitted income or the erroneous deduction

knowledge standard, even though Appellant was unaware of the tax

consequences of the deduction.    The Tax Court’s determination

that Appellant is not entitled to innocent spouse relief under

§ 6015(c) is not clearly erroneous.



                  VII.    Section 6015(f) Relief

     Section 6015(f) confers power upon the Secretary and his

delegate, the Commissioner, to grant equitable relief where a



                                 22
taxpayer is not entitled to relief under § 6015(b) or (c), but

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

inequitable to hold the individual liable for any unpaid tax or

any deficiency (or any portion of either).”27   In this case,

Appellant argues that the Commissioner improperly denied her

equitable relief with respect to the retirement distributions and

the interest income.28   This court reviews the Commissioner’s

decision to deny equitable relief for abuse of discretion.      See

Butler, 114 T.C. at 291-92.29

     This court has stated that “[t]he most important factor in

determining inequity is whether the spouse seeking relief

‘significantly benefitted’ from the understatement of tax.”

Reser, 112 F.3d at 1270 (quoting Buchine v. Comm’r, 20 F.3d 173,



     27
           See supra note 6 for complete text of 26 U.S.C.
6015(f).
     28
        The Commissioner also denied Appellant equitable relief
with respect to the entire § 6662(a) accuracy-related penalty.
The Tax Court affirmed the denial of equitable relief with
respect to the § 6662(a) penalty associated with the interest
income. Cheshire, 115 T.C. at 198-99. However, the Tax Court
granted equitable relief to Appellant for the portion of the
§ 6662(a) penalty that relates to the retirement distributions.
Id. Neither party appeals these findings.
     29
        Because the wording of § 6015(f)(1) is virtually
identical to that of former § 6013(e)(1)(D), case law construing
former § 6013(e)(1)(D) is helpful in determining whether the
Commissioner abused his discretion in denying equitable relief to
Appellant under current § 6015(f)(1). See Butler, 114 T.C. at
291 (applying the § 6013(e)(1)(D) standard to a § 6015(f) inquiry
because “the language of section 6015(f)(1) does not differ
significantly from the language of former section
6013(e)(1)(D)”).

                                 23
181 (5th Cir. 1994)).   This benefit can be indirect, such as “a

spouse’s receipt of more than she otherwise would as part of a

divorce settlement.”    Reser, 112 F.3d at 1270.     In the instant

case, Appellant received as part of the divorce settlement the

Cheshires’ marital residence, the value of which was enhanced by

the use of $99,425 in untaxed retirement distributions to pay off

the mortgage.   Appellant also received the family car, which was

purchased with retirement distributions.       The Commissioner could

have reasonably concluded upon these facts that Appellant

received significant benefit from the tax understatement.      Thus,

the Commissioner’s decision to deny equitable relief to Appellant

is sufficiently supported and not an abuse of discretion.

Accordingly, the Tax Court correctly determined that the

Commissioner did not abuse his discretion when he denied

equitable relief to Appellant under § 6015(f) with respect to the

retirement distributions and the interest income.



                          VIII.   CONCLUSION

     For all the foregoing reasons, we AFFIRM the judgment of the

Tax Court.




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