                          T.C. Memo. 2007-234



                        UNITED STATES TAX COURT



               DAVID BRUCE BILLINGS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6148-03.                Filed August 16, 2007.


     Patrick Wiesner, for petitioner.

     Vicki L. Miller, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     HOLMES, Judge:     David Billings, the petitioner, began this

case to be relieved from liability for the tax owed on money that

his wife embezzled from her employer without his knowledge.      When

this case was first before us, we dismissed it for lack of

jurisdiction.     Billings v. Commissioner, 127 T.C. 7 (2006)

(Billings I).    Billings appealed our decision and, while his
                               - 2 -

appeal was pending, Congress amended the Code to give us

jurisdiction over cases like his.   His case was remanded to us

for reconsideration in light of the new law.    We examine first

whether the new law gives us jurisdiction.   Concluding that it

does, we then move on to consider the merits of his case.

                         FINDINGS OF FACT

     The parties submitted this case for decision on stipulated

facts, which means that the “Background” section of our previous

opinion can now be more properly labeled “Findings of Fact.”     The

facts are set out in greater detail in Billings I, 127 T.C. at 8-

11, but to recapitulate briefly:    David Billings married Rosalee

in 1996.   He was working at General Motors, and she was a payroll

clerk at the local electric company.   The Billingses kept two

checking accounts, and while both were jointly held, David and

Rosalee each kept almost exclusive control over one of them.     In

1999, Rosalee transferred money from her employer’s payroll

account into the checking account that she controlled and into

which she had her own pay directly deposited.

     Her embezzlement continued into 2000, but Rosalee kept it

secret from her husband until the company caught her.    She then

told her husband what she had done and hired a lawyer.    By the

time that she was caught, Rosalee and her husband had already

filed their joint 1999 tax return, and she had left off the

nearly $40,000 that she had stolen that year.    Her lawyer advised
                               - 3 -

her to report the embezzlement income on an amended return

because, he said, a judge would probably be more lenient in

sentencing her if she took responsibility for her actions.    But

section 1.6013-1(a)(1) of the income tax regulations created a

problem.1   It prohibits spouses who have already filed a joint

return for a particular year from filing amended returns changing

their status to married-filing-separately once the deadline to

file returns has passed.   The due date for the Billingses’ 1999

tax year--April 15, 2000--was long past, and so David signed the

amended return.

     That return showed an increase in taxable income, and an

increase in tax of over $16,000.   When David signed the amended

return, he knew that neither he nor his wife expected to be able

to pay this increased tax.   In 2002, the Billingses filed for

bankruptcy and received a discharge, which affected neither

Rosalee’s obligation to repay the money she’d embezzled nor her

own liability for the unpaid 1999 taxes.   11 U.S.C. secs.

523(a)(1), 507(a)(8) (2000).   David retired and began collecting

a pension--although, as of the date the case was originally

submitted, he continued to work two other jobs.   He and his wife

have filed timely tax returns for later years as they came due.



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code and regulations in effect for the year
in issue.
                                - 4 -

     David asked the IRS for relief from joint liability for the

unpaid 1999 tax but, in November 2002, the IRS denied his request

based on “all the facts and circumstances,” particularly because:

          you failed to establish that it was
          reasonable for you to believe the tax
          liability was paid or was going to be paid
          at the time you signed the amended return.

David appealed, and the IRS issued its final determination, again

denying him relief because he did not believe when he signed the

amended return that the tax would be paid.

     David then petitioned our Court to overturn the

Commissioner’s determination.   Such a petition is called a

nondeficiency stand-alone petition--“nondeficiency” because the

IRS accepted his amended return as filed and asserted no

deficiency against him, and “stand-alone” because his claim for

innocent-spouse relief was made under section 6015 and not as

part of a deficiency action or in response to an IRS decision to

begin collecting his tax debt through liens or levies.    When this

case was first before us, our jurisdiction over such petitions

was controversial.   We had first held that we did have

jurisdiction, Ewing v. Commissioner, 118 T.C. 494 (2002), but

then the Ninth Circuit reversed us in Commissioner v. Ewing, 439

F.3d 1009 (9th Cir. 2006), and the Eighth Circuit followed in

Bartman v. Commissioner, 446 F.3d 785, 787-788 (8th Cir. 2006),

affg. in part, vacating in part T.C. Memo. 2004-93.    After these

two cases, we revisited the question and in Billings I followed
                                 - 5 -

those circuit courts and dismissed David’s case for a lack of

jurisdiction.

     David appealed our decision to the Tenth Circuit (he was a

resident of Kansas when he filed his petition).    Congress amended

section 6015 to give us jurisdiction over nondeficiency stand-

alone cases, and the Tenth Circuit remanded the case to us for

reconsideration.   We then ordered the parties to report whether

the Billingses’ tax liability remained unpaid, and they recently

filed a stipulation agreeing that it did.

                                OPINION

     As we summarized this part of tax law in our earlier

opinion, Billings I, 127 T.C. at 11-12, a married couple who file

their Federal tax return jointly are both responsible for the

return’s accuracy and are both jointly and severally liable for

the entire tax due.   Sec. 6013(d)(3); Butler v. Commissioner, 114

T.C. 276, 282 (2000).   Section 6015, however, directs the

Commissioner to relieve qualifying innocent spouses from that

liability under certain circumstances.    Sec. 6015(a).   An

innocent spouse may seek relief from liability under section

6015(b) if he can show that he was justifiably ignorant of

unreported income or inflated deductions.    He may have his tax

liability allocated between himself and an estranged or former

spouse under section 6015(c).    Or, like David, he may look to

section 6015(f) for relief.   Subsection (f) relief is available
                               - 6 -

only to a spouse who is ineligible for relief under subsections

(b) and (c) and who shows that "taking into account all the facts

and circumstances, it is inequitable to hold [him] liable for any

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

      David and the Commissioner stipulated that he did not

qualify for relief under either section 6015(b) or (c) because no

deficiency was ever asserted against him and his wife.    They were

right to do so, because both those subsections require a

deficiency as a condition of relief.    See, e.g., Block v.

Commissioner, 120 T.C. 62, 66 (2003).    That left David able to

look only for equitable relief under subsection (f), and when the

Commissioner denied it to him, left him with the problem of where

to seek judicial review.   When he first came to us, section

6015's jurisdictional provision read:

     SEC. 6015(e).   Petition for Review by Tax Court.

               (1) In general.--In the case of an
          individual against whom a deficiency has been
          asserted and who elects to have subsection
          (b) or (c) apply--[Emphasis added.]

                    (A) In general.--In addition to
               any other remedy provided by law, the
               individual may petition the Tax Court
               (and the Tax Court shall have
               jurisdiction) to determine the
               appropriate relief available to the
               individual under this section if such
               petition is filed--

     This was the language we construed in Billings I to require

petitioners like David--i.e., those filing stand-alone section
                                - 7 -

6015(f) petitions--to have had a deficiency asserted against

them.   But Congress amended section 6015(e) after we released

Billings I to insert “or in the case of an individual who

requests equitable relief under section 6015(f)” into section

6015(e).    The Tax Relief and Health Care Act of 2006 (TRHCA),

Pub. L. 109-432, div. C, sec. 408(a), 120 Stat. 2922, 3061.     The

opening line of section 6015(e) now reads:

     SEC. 6015(e).   Petition for Review by Tax Court.

                 (1) In general.--In the case of an
            individual against whom a deficiency has been
            asserted and who elects to have subsection
            (b) or (c) apply, or in the case of an
            individual who requests equitable relief
            under subsection (f)--

     The amendment is effective for liabilities remaining unpaid

on December 20, 2006.    TRHCA sec. 408(c), 120 Stat. 3062.   No

suspense here:    The parties’ stipulation that David’s 1999 tax

liability remains unpaid assures us that we do have jurisdiction

to review the Commissioner’s decision to deny him relief.

     We are mindful that our review of that decision is for abuse

of discretion.    See Butler v. Commissioner, 114 T.C. 276, 287-92

(2000).    This standard does not ask us to decide whether in our

own opinion we should grant relief, but whether the Commissioner,

in refusing to do so, exercised his discretion “arbitrarily,

capriciously, or without sound basis in fact.”    Jonson v.

Commissioner, 118 T.C. 106, 125 (2002), affd. 353 F.3d 1181 (10th

Cir. 2003).    When deciding whether to grant 6015(f) relief, the
                                - 8 -

Commissioner should take “into account all the facts and

circumstances,” which means that his determination rarely depends

on any one factor.   See sec. 6015(f); Rev. Proc. 2000-15, sec.

4.03, 2000-1 C.B. at 448.    To guide IRS employees in exercising

their discretion, the Commissioner has issued revenue procedures

that list the factors they should consider.2     We also use the

revenue procedure when we determine whether the Commissioner

abused his discretion.   See, e.g., Washington v. Commissioner,

120 T.C. 137, 147-52 (2003); Jonson v. Commissioner, 118 T.C. at

125-26.

     The revenue procedure begins with a list of seven conditions

for equitable relief that a taxpayer must meet.     Rev. Proc. 2000-

15, sec. 4.01, 2000-1 C.B. at 448.      Both parties agree that David

met all of these threshold conditions.     The procedure also has a

safe harbor--three conditions that, if met, will ordinarily

trigger a grant of relief.   Rev. Proc. 2000-15, sec. 4.02, 2000-1

C.B. at 448.   David does not qualify for this safe harbor,

though, because one of the three conditions is that a requesting

spouse be divorced or separated from the nonrequesting spouse,



     2
       The procedure in effect when David filed his request for
relief was Revenue Procedure 2000-15, 2000-1 C.B. at 447. It has
since been replaced by Revenue Procedure 2003-61, 2003-2 C.B. at
296, but the new procedure applies only to requests for relief
filed on or after November 1, 2003 or those pending on November
1, 2003, for which no preliminary determination letter has been
issued as of November 1, 2003. Rev. Proc. 2003-61, sec. 7, 2003-
2 C.B. at 299.
                                - 9 -

Rev. Proc. 2000-15, sec. 4.02(1)(a), 2000-1 C.B. at 448, and

David and Rosalee have remained married throughout her ordeal.

     This leaves an eight-factor balancing test to decide whether

relief would be "equitable."    Id., sec. 4.03.   Those factors, and

the circumstances under which they are to weigh for or against

relief or be treated as neutral, are easily summarized in a

chart.   Here we list those factors about which the parties agree

in italics.

                                                  Weighs against
 Weighs for Relief             Neutral
                                                      Relief
No knowledge of                              Knowledge
the underpayment
or item giving
rise to the
deficiency
Economic hardship                            No economic hardship
No significant                               Significant benefit
benefit3
                     Later compliance with   No later compliance
                     Federal tax laws        with Federal tax
                                             laws
Liability                                    Liability
attributable to                              attributable to
nonrequesting                                petitioner
spouse




     3
        Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at 448, does
not state that the absence of a significant benefit will weigh in
a petitioner’s favor, but only that a significant benefit will
weigh against relief. Nonetheless, we decided in Ewing v.
Commissioner, 122 T.C. 32, 45 (2004), vacated 439 F.2d 1009 (9th
Cir. 2006) (and other cases cited), that the absence of a
significant benefit should be a positive factor for petitioners.
                                - 10 -

                                                    Weighs against
 Weighs for Relief             Neutral
                                                        Relief
Nonrequesting          No divorce decree      Petitioner
spouse responsible                            responsible for tax
for tax under                                 under divorce decree
divorce decree
Separated or           Still married
divorced
Abuse present          No abuse present

These are not the only factors that either the Commissioner or we

can look at, but they are where we start.     Id.   In this case, the

parties contest only two factors: knowledge and significant

benefit.

A.   Knowledge

     The basic problem in analyzing the Commissioner’s decision

that David flunks the knowledge factor is that the revenue

procedure is quite unclear about when a person’s knowledge should

be measured.     The procedure tells us that the knowledge factor

weighs in favor of relief when:

           In the case of a liability that was properly
           reported but not paid, the requesting spouse
           did not know and had no reason to know that
           the liability would not be paid. In the case
           of a liability that arose from a deficiency,
           the requesting spouse did not know and had no
           reason to know of the items giving rise to
           the deficiency.

Rev. Proc. 2000-15, sec. 4.03(1)(d), 2000-1 C.B. at 449.      The

first sentence in the quoted section would seem to be the one

that applies--since there’s no deficiency here--and it tells us
                               - 11 -

to look at whether “the requesting spouse did not know and had no

reason to know that the liability would not be paid.”

     But what did David not know and when did he not know it?

The parties agree that David was ignorant of his wife’s

embezzlement when he signed the original return.   They also agree

that when he signed the amended return he knew about the

embezzled income and that the taxes on it would not be paid.

     Looking at the procedure’s description of when the knowledge

factor weighs against relief doesn’t help much either.     That part

of the procedure tells us to ask whether a “requesting spouse

knew or had reason to know of the item giving rise to a

deficiency or that the reported liability would be unpaid at the

time the return was signed.”   Rev. Proc. 2000-15, sec.

4.03(2)(b), 2000-1 C.B. at 449.   Neither section tells us when to

measure the knowledge of a requesting spouse who signed both an

original and an amended return.

     When the Commissioner made his determination, he assumed

that the right time to measure the state of David’s knowledge was

when David signed the amended return, but he didn’t explain his

assumption.   The problem for us on review is that it would have

been just as reasonable for the Commissioner to measure David’s

knowledge when he signed the original return.   If he had done so,

David’s conceded ignorance of the embezzled income when he signed

the original return would have caused the Commissioner to find
                               - 12 -

that the knowledge factor weighed in David’s favor.     We thus need

to look elsewhere to decide at which time the Commissioner should

have measured David’s knowledge.

     The first place we look is at a case where a wife who

requested relief didn’t know about an IRA distribution that her

husband failed to report when she signed the original return.

She learned about the distribution only after her husband’s

death, and then filed an amended return that corrected the

omission.    In that case, the Commissioner also measured her

knowledge at the time she signed the amended return.     We found

his determination to be an abuse of discretion because:

            It is unpersuasive to argue, as does
            respondent, that petitioner’s voluntary
            filing of an amended 1996 return and her
            attendant payment of the delinquent taxes
            attributable to the omission of income
            from the original 1996 return militate
            against equitable relief simply because
            she had to have known of the omission
            before she filed the amended return and
            made the payment.

Rosenthal v. Commissioner, T.C. Memo. 2004-89.

     We acknowledge that in Rosenthal the requesting spouse paid

the taxes she owed on the omitted income when she filed her

amended return, but we find that this fact does not distinguish

David’s case--in both cases the innocent spouses were ignorant of

the key facts at the time they signed the original return.

     A second place we can look to for help is in section

6015(b).    That section gives relief when a spouse is reasonably
                              - 13 -

ignorant of an understatement of tax that gives rise to a

deficiency.   Indeed, the Commissioner argues here that:

           Instead of filing an amended return,
           [Rosalee] could have contacted respondent and
           informed him of the unreported embezzlement
           income. Once informed, respondent could have
           proceeded with examination procedures and
           [Rosalee] could have agreed to respondent’s
           determination of additional tax.

Resp. Br. at 30.   This would have led to the determination of a

deficiency and presumably allowed David to file a successful

request for relief under section 6015(b).   See, e.g., Haltom v.

Commissioner, T.C. Memo. 2005-209 (ignorance of embezzlement

income).

     It would seem a trap for the unwary--and an inefficient

requirement from the IRS’s perspective--to require spouses to go

through an audit whose outcome is preordained in a situation like

that faced by the widow Rosenthal or Mr. Billings, rather than

fess up by filing an amended return.

     Tax law is of course filled with such traps and has never

been viewed as a garden of efficiency, but Congress itself has

directed the Commissioner--at least in this area--to take a

somewhat more open-ended view of the law.   Section 6015(f)

directs him to consider “all the facts and circumstances.”    The

revenue procedure likewise counsels the Commissioner’s employees

that, in weighing an application for relief, “No single factor

will be determinative of whether equitable relief will or will
                              - 14 -

not be granted in any particular case.     Rather, all factors will

be considered and weighed appropriately.     The list is not

intended to be exhaustive.”   Rev. Proc. 2000-15, sec. 4.03,

2000-1 C.B. at 448.

     We conclude from this that, in choosing an interpretation of

the knowledge factor that was unexplained, “unpersuasive” (as we

called it in Rosenthal), and seemingly contrary to the

Commissioner’s own interest in having taxpayers amend their

returns when they discover their spouses’ misreporting, the

Commissioner was acting arbitrarily and so abused his discretion.

We therefore find that the knowledge factor in this case weighs

in favor of relief, not against it.

B.   Significant Benefit

     The second contested factor is whether David ”significantly

benefited (beyond normal support) from the unpaid liability or

items giving rise to the deficiency.”     Rev. Proc. 2000-15, sec.

4.03(2)(c), 2000-1 C.B. at 448-49.     A spouse’s benefit exceeds

"normal support" when the money in question was used to pay for a

child’s education, Jonson, 118 T.C. at 119-20, or special

purchases for the couple or their children, Alt v. Commissioner,

119 T.C. 306, 314 (2002), affd. 101 Fed. Appx. 34 (6th Cir.

2004), or for unusually frequent travel, Barranco v.

Commissioner, T.C. Memo. 2003-18 (lifestyle as a whole, which

included several European vacations, was a significant benefit).
                                  - 15 -

We must examine whether David benefited from either the

embezzlement income itself or from not paying the taxes on that

income.    If he did significantly benefit, the factor weighs

against relief; otherwise (under our precedents), it weighs in

his favor.    See supra note 3.

     The Commissioner argues that David significantly benefited

from his wife’s embezzlement because it allowed them to continue

their free-spending lifestyle, and still have the means to buy a

larger house in 2000, the year the embezzlement ended.      He also

points out that the spending did not stop after Rosalee’s

employer discovered the embezzlement, and that the Billingses

even bought three new vehicles after she was discovered.      David

counters that it wasn’t Rosalee’s embezzlement that supported

their lifestyle--it was the two paychecks he earned and the

liberal use of his credit cards.

     To determine whether the Commissioner erred on this point we

can trace the embezzlement income to see where it was spent and

by whom.     Looking first to see where the money went, in 1999,

Rosalee deposited $71,100 into her account and withdrew about

$67,500.     Of her withdrawals, $7,200 went into a savings account

she shared with David, $4,100 went toward her car, and $7,500

went toward her credit cards.      While some of the remaining

$48,700 paid for their basic living expenses, David received

little marginal benefit from his wife’s extra cash.      She spent
                                - 16 -

most of it on small-money items that benefited only her.     She

also gave some of the money to her children and her ex-husband.

Of the $7,200 she put into their joint savings account in 1999,

David withdrew about $1,670.     But in their life--a life where

they chose to spend nearly all their legitimate 1999 income of

$100,000--this extra income was not “significant”.

     We also ask whether David significantly benefited from not

paying the tax.    See Rev. Proc. 2000-15, sec. 4.03(2)(c), 2000-1

C.B. at 448; Mellen v. Commissioner, T.C. Memo. 2002-280.     Here,

we think it is important that the Billingses filed for bankruptcy

under chapter 7 in May 2002.    Chapter 7 required them to

liquidate all of their nonexempt assets, and turn that money over

to a trustee.     Rosalee’s tax debt was not dischargeable, however,

and so she will continue to owe the IRS until that debt (which

the parties stipulated was close to $30,000 by the end of 2006)

is paid in full.    We therefore do not consider David to have this

unpaid tax money available for his personal use, and we find that

the Commissioner clearly erred when he found that David

significantly benefited from the partial nonpayment of the

Billingses’ 1999 taxes.
                              - 17 -

     Based on our findings, the chart looks like this:

 Weighs for Relief           Neutral             Weighs against
                                                     Relief
No knowledge of
the embezzled
funds at the time
the original
return was filed
                                             No economic hardship
No significant
benefit
                     Later compliance with
                     Federal tax laws
Liability
attributable to
nonrequesting
spouse.
                     No divorce decree
                     Still married
                     No abuse present


     Thus, of the eight factors described in the revenue

procedure, three weigh toward relief, five are neutral, and only

one weighs against relief.   David’s mere lack of economic

hardship being too thin a justification for denying him relief,

we conclude that the Commissioner abused his discretion in

denying David relief, and


                                     Decision will be entered

                               for petitioner.
