                   T.C. Memo. 2011-237



                 UNITED STATES TAX COURT



KHATCHATOUR AKOPIAN AND RUZANNA TERFANYAN, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



 Docket No. 31191-08.              Filed October 3, 2011.



      R determined that Ps had unreported income which
 caused deficiencies in Federal income taxes and that Ps
 are liable for accuracy-related penalties pursuant to
 sec. 6662(a), I.R.C., for their 2005 and 2006 tax
 years.

      Held: Ps had unreported income and are liable for the
 deficiencies in Federal income taxes and the penalties.

      Held, further: P-W is not entitled to relief from
 joint and several liability for the deficiencies pursuant to
 sec. 6015, I.R.C.



 Akop Baltayan, for petitioner Khatchatour Akopian.

 Kathryn I. Phillips, for petitioner Ruzanna Terfanyan.

 Kris H. An, for respondent.
                                 - 2 -

                MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:     This case is before the Court on a petition

for redetermination of petitioners’ liabilities for income taxes

and accuracy-related penalties for the 2005 and 2006 tax years.

After concessions by respondent on brief regarding unreported

dividend income, the issues for decision are:

     (1) Whether petitioners received unreported income of

$1,219,969.48 and $464,843.97 for the 2005 and 2006 tax years,

respectively;

     (2) whether petitioners are liable for the section 6662(a)1

accuracy-related penalties for the 2005 and 2006 tax years; and

     (3) whether petitioner Ruzanna Terfanyan is entitled to

relief from joint and several liability for taxes under section

6015(b) or (f) for the 2005 and 2006 tax years.

                           FINDINGS OF FACT

         Some of the facts have been stipulated, and the stipulated

facts and the accompanying exhibits are hereby incorporated by

this reference.     At the time they filed their petition,

petitioners resided in California.

     Petitioners Ruzanna Terfanyan (Ms. Terfanyan) and

Khatchatour Akopian (Mr. Akopian) are currently married and


     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended and in effect for the
tax years at issue. All Rule references are to the Tax Court
Rules of Practice and Procedure.
                                - 3 -

reside together.   They were married in 2000.   When they decided

to marry, they purchased a condominium (condo) to serve as their

home.    Ms. Terfanyan believed that in 2005 Mr. Akopian took out a

line of credit on the condo of $100,000, using $50,000 for

business needs.

     During the years at issue Ms. Terfanyan coowned and operated

Ruz Meg Legal Services.2   The company provided services relating

to tax preparation, public notarization, immigration, and

corporations.   Ms. Terfanyan personally provided the notary

public and individual tax return services.

     Ms. Terfanyan prepared petitioners’ tax returns for the 2005

and 2006 tax years.   She determined her husband’s income by

asking him “at the end of the year” if he was making any money,

to which he responded in the negative.   Ms. Terfanyan never saw

any documentation with regard to Mr. Akopian’s earnings.

     Sometime in 2004 a longtime acquaintance, Vardan Gevorgian

(Mr. Gevorgian), approached Mr. Akopian with information about

investing in an Armenian movie production company in Yerevan,

Armenia.   To make the investment and find other investors, Mr.

Akopian organized Media Fox Enterprises, Inc. (Media Fox), a

Nevada corporation, on December 1, 2004.   Mr. Akopian was

president, secretary, and treasurer of Media Fox.   Mr. Akopian


     2
      At trial Ms. Terfanyan’s counsel referred to Ms.
Terfanyan’s former business as “Lux Med”; however, on brief the
parties refer to Ms. Terfanyan’s former business as Ruz Meg.
                               - 4 -

had the only signature authority over Media Fox’s bank account

during 2005.

     Because Mr. Akopian had never produced a movie or made this

type of investment before, Mr. Gevorgian was supposed to act as

the middle person between Media Fox and the Armenian company.

Mr. Gevorgian provided consulting services and did “all the

paperwork what [sic] has to be done to do the movie production”.

     On October 4, 2005, Media Fox was dissolved into Global Glen

Group, Inc. (Global Glen), which had been organized on August 25,

2005, as a Nevada corporation, to invest in the movies and

advertising business.   Mr. Akopian began Global Glen with his

friend of 20 years, Grigor Bagdasarian (Mr. Bagdasarian).    Mr.

Bagdasarian took the helm as president of Global Glen and Mr.

Akopian handled the finances as treasurer.   Mr. Akopian had the

sole signature authority over the Global Glen bank account during

2005 and 2006.   Mr. Akopian and Mr. Bagdasarian agreed orally to

share the profits of Global Glen equally.    No formal (or written)

agreements were ever made between Mr. Akopian and Mr.

Bagdasarian.   Apparently, Mr. Gevorgian would advise Global Glen

on how much and when money should be sent.

     Mr. Akopian used some of Media Fox’s and Global Glen’s money

to pay personal expenses.   The table below (table 1) shows the

banking activities of Media Fox and Global Glen but excludes

checks written from the accounts.   It shows the total amounts of
                                - 5 -

customer withdrawals, ATM card purchases and withdrawals,

payments made to BMW Financial Services for car loan or lease

payments, and amounts of wired funds.3

                                 ATM          BMW        Wired
 Corporation    Withdrawals    Card Use    Payments     Amounts
Media Fox
  2005            $742,297      $8,271      $4,932      $500,000
Global Glen
  2005              38,000         ---        ---         ---
Global Glen
  2006             125,743       9,213        ---        715,000
    Total          906,040      17,484       4,932     1,215,000


     In addition to the above banking activities of Media Fox and

Global Glen, Mr. Akopian wrote corporate checks to Ms. Terfanyan

and for other personal expenses.    The table below (table 2) shows

the total amounts of the checks written from Media Fox and Global

Glen to:    Mr. Akopian, cash, Ms. Terfanyan, CitiMortgage, Ruz

Meg, Audi Financial Services, Wonder Year Child Care, home owners

association (HOA) fees, and travelers insurance payments.4




     3
      All numbers have been rounded to the nearest whole number.
     4
      In addition to the amounts listed in table 2, in 2006, for
example, Mr. Akopian wrote Global Glen checks to: LA County Tax
totaling $1,051, Wells Fargo totaling $3,025, IKEA totaling $859,
Water & Power Comm Credit Union totaling $2,032, DMV for $211,
and other seemingly personal expenses including passport services
and clothing stores, totaling $827. All of the these amounts are
included when we refer to petitioners’ personal expenses.
                                                - 6 -

                                                                          Wond.            Trav-
                Mr.                    Ms.      Citi      Ruz             Year              el-
              Akopian      Cash     Terfanyan   Mort.     Meg     Audi    Child    HOA      ers

  Media
  Fox
  2005        $124,080   $254,428   $16,850     $4,052   $1,500    $455    $425   $1,120    $162

 Global
  Glen
  2005          18,400      5,000      100         805     ---     ---      ---      237     162

 Global
  Glen
  2006        267,760       ---     37,515       6,443    2,600   3,186   3,850    1,893   1,728

  Total        410,240    259,428   54,465      11,300    4,100   3,641   4,275    3,250   2,052



          In October of 2005 Mr. Bagdasarian went to Yerevan to

confirm that the movie was actually being made.                           Mr. Bagdasarian

was satisfied that the money being sent to the Armenian company

was apparently for the most part used appropriately.

          Things suddenly went bad when Mr. Gevorgian disappeared.

Mr. Bagdasarian made a second trip to Yerevan in search of Mr.

Gevorgian and the president of the Armenian company.                              He was

unable to find either man; and after he inquired about the

president of the movie company, his car was hit and three men

assaulted him, inflicting grievous bodily injury.5

      While respondent’s revenue agent was examining canceled

checks in an unrelated audit, he noticed that some checks were

written to Global Glen and Media Fox.                      The revenue agent then

determined that Global Glen and Media Fox had not filed corporate


          5
      Mr. Bagdasarian made a third trip to Yerevan in February
and March of 2009 when he heard from a singer that Mr. Gevorgian
might be there. He was again unable to find him or the president
of the movie company, Armen Shumanian.
                                - 7 -

tax returns and, through the Web site of the secretary of state

for Nevada, ascertained that Mr. Akopian was the president of

Media Fox and the treasurer of Global Glen.

     Respondent requested all of the books and records for the

corporations.    After petitioners failed to comply with his

request, respondent summoned the corporations’ bank for relevant

documents.   From those documents respondent determined that

petitioners had unreported income, on the basis of money

withdrawn from the accounts by Mr. Akopian, checks written from

the corporation to Mr. Akopian and Ms. Terfanyan personally and

made out to cash, and the use of corporate funds to pay

petitioners’ personal expenses.

     In the notice of deficiency, issued on September 30, 2008,

respondent determined that petitioners had unreported qualified

dividends of $1,944,301.50 and $1,237,006.64 in 2005 and 2006,

respectively.6   He also determined income tax deficiencies of



     6
      The notice of deficiency also disallowed certain itemized
deductions and exemptions. Petitioners did not contest
respondent’s adjustments of $10,075 and $13,037 to itemized
deductions for 2005 and 2006, respectively. They also did not
contest his $12,800 and $13,200 adjustments to exemptions for
2005 and 2006, respectively. Therefore, except as they are the
result of any correlative computational adjustments which require
adjustment as the result of this opinion, we deem those statutory
notice of deficiency adjustments conceded. See Levin v.
Commissioner, 87 T.C. 698, 722-723 (1986) (citing Rule 142(a) for
the proposition that because “petitioners have made no argument
with respect to * * * deductions claimed * * * [, they] are
deemed to have conceded their nondeductibility”), affd. 832 F.2d
403 (7th Cir. 1987).
                                - 8 -

$294,068 and $183,080 for the 2005 and 2006 tax years,

respectively, and section 6662(a) penalties of $58,813.60 and

$36,616 for the 2005 and 2006 tax years, respectively.

Petitioners filed a timely petition with this Court on December

29, 2008, denying that they owed the deficiencies and claiming

innocent spouse status for Ms. Terfanyan.

     Despite repeated requests from respondent, petitioners never

provided ownership or holding period information to entitle them

to the lower tax rates afforded for qualified dividends.

Therefore respondent filed a motion for leave to file an amended

answer out of time.    It was granted by the Court on May 4, 2010.

Respondent recharacterized the unreported income from the

corporation as petitioners’ income and not as qualified

dividends.    He also increased the determined deficiency for 2005

by $122,799 to $416,867 with a corresponding $24,559.80 increase

of the section 6662(a) penalty to $83,373.40.    A trial was held

on June 18, 2010, in Los Angeles, California.

                               OPINION

I.   Burden of Proof

     Section 61(a) specifies that “Except as otherwise provided”

gross income includes “all income from whatever source

derived”.    The Commissioner’s determination of a taxpayer’s

liability for an income tax deficiency is generally presumed

correct, and the taxpayer bears the burden of proving that the
                                - 9 -

determination is improper.    See Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

     The Court of Appeals for the Ninth Circuit, to which an

appeal would lie absent a stipulation to the contrary, has held

that in unreported income cases, the presumption of correctness

applies only after the Commissioner introduces some substantive

evidence that the taxpayer received unreported income.   Edwards

v. Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1982);

Weimerskirch v. Commissioner, 596 F.2d 358, 360-362 (9th Cir.

1979), revg. 67 T.C. 672 (1977).   If the Commissioner introduces

such evidence, the burden shifts to the taxpayer to show by a

preponderance of the evidence that the deficiency was arbitrary

or erroneous.   See Hardy v. Commissioner, 181 F.3d 1002, 1004

(9th Cir. 1999), affg. T.C. Memo. 1997-97.

     By introducing the banking information of Media Fox and

Global Glen, which establishes that only Mr. Akopian could draw

on the corporate accounts, that the accounts were used to provide

cash and to pay personal expenses, and that amounts were given

directly to Mr. Akopian, respondent has introduced sufficient

evidence connecting petitioners with the unreported income.

Consequently, respondent’s determination is entitled to the

presumption of correctness.
                               - 10 -

II.   Recordkeeping Requirements

      Taxpayers must maintain adequate records to substantiate

their income and deductions.   Sec. 6001 (the taxpayer “shall keep

such records”); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992).   As in this case, when the taxpayers fail to maintain

adequate books and records, the Commissioner is authorized to use

whatever method he deems appropriate to determine the existence

and amount of the taxpayers’ income so long as, in the

Commissioner’s reasonable opinion, the method clearly reflects

income.   Sec. 446(b); Mallette Bros. Constr. Co. v. United

States, 695 F.2d 145, 148 (5th Cir. 1983); Gowni v. Commissioner,

T.C. Memo. 2004-154.   The Commissioner has wide discretion in

determining which method to apply, and reconstruction of the

taxpayers’ income “need only be reasonable in light of all

surrounding facts and circumstances.”   Gowni v. Commissioner,

supra.

III. Unreported Income

      By examining the banking activities of Media Fox and Global

Glen, respondent determined on the basis of withdrawals, ATM

purchases, payments made to BMW, and checks written from the

corporations that petitioners had unreported income.   In

respondent’s view, because Mr. Akopian has failed to show

appropriate financial operation of the corporations and had

unrestricted control over all of these distributions, under the
                               - 11 -

claim of right doctrine petitioners must include all of the

amounts in gross income.7   N. Am. Oil Consol. Co. v. Burnet, 286

U.S. 417 (1932).

     A.   Withdrawals, Checks Written to Mr. Akopian, and
          Cash

     According to the bank statements of both Media Fox and

Global Glen in 2005 and 2006 there was a total of $906,040

withdrawn at the bank by Mr. Akopian.   As shown in table 2 above,

in 2005 and 2006 checks totaling $410,240 were written to Mr.

Akopian and checks totaling $259,428 were written to cash from

the Media Fox and Global Glen bank accounts.   As Mr. Akopian was

the sole signatory on the bank accounts, only he could make the

withdrawals and sign the checks.

     According to Mr. Akopian, the Armenian company wanted cash

because it would make producing the movie less expensive and

because Armenian banks could not provide proper banking.    To

provide the cash, Mr. Akopian said that he would draw cash or

cashier’s checks in his name from Media Fox and then have a

transferring service wire the money to Armenia and/or Russia.

Also, according to Mr. Akopian’s and Mr. Bagdasarian’s testimony,

as with Media Fox, Global Glen sent money to the Armenian company




     7
      Under the claim of right doctrine a taxpayer must include
in income any amounts that the taxpayer has unrestricted control
over the use or disposition of and treats as his own. N. Am. Oil
Consol. Co. v. Burnet, 286 U.S. 417 (1932).
                                - 12 -

by drawing either cash or cashier’s checks in Mr. Akopian’s name

from the Global Glen bank account.

     Petitioners claim that the withdrawals and the checks

written to Mr. Akopian and to cash were used to transfer money

from the corporations to the Armenian company.     Petitioners argue

that Mr. Akopian was a mere conduit for the money and thus “need

not treat as income moneys which he did not receive under a claim

of right, which were not his to keep, and which he was required

to transmit to someone else”.     Diamond v. Commissioner, 56 T.C.

530, 541 (1971), affd. 492 F.2d 286 (7th Cir. 1974).

     We cannot find that there is sufficient credible evidence

corroborating Mr. Akopian’s and Mr. Bagdasarian’s testimony that

the amounts should not be includable in petitioners’ income.

Although both Mr. Akopian and Mr. Bagdasarian testified that

Media Fox and then Global Glen would wire the Armenian company

cash, there is not one shred of documentary evidence

corroborating those statements.    Overall their testimony was

inconsistent, fanciful, and not credible.

     Mr. Akopian testified that all of the corporations’

documents disappeared along with Mr. Gevorgian.8    However, had


     8
      We are extremely skeptical that Mr. Gevorgian conveniently
disappeared with all of the documents. According to Mr. Akopian
he was a longtime acquaintance whom Mr. Akopian trusted enough to
form a company for and to invest over a million dollars in his
idea.

                                                      (continued...)
                              - 13 -

petitioners simply presented their own bank documents (which, if

they exist, petitioners might have easily acquired), they could

have shown that the money was not deposited into their accounts

and circumstantially shown that it was not used for personal

expenses.   Petitioners’ failure to introduce evidence “which, if

true, would be favorable to [them], gives rise to the presumption

that if produced it would be unfavorable”.   Wichita Terminal

Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162

F.2d 513 (10th Cir. 1947).

     The bank documents themselves are further evidence that this

money was not transferred to the Armenian movie company.   Media

Fox’s bank statements show that towards the end of both 2005 and

2006, significant amounts of money were wired to foreign

entities.   The fact that the corporation was directly wiring

money to a foreign entity tends to discredit claims that Mr.

Akopian was required to write himself a check or write a check

for cash in order to transfer the money to Armenia.

     Except for the self-serving testimony of Mr. Akopian and Mr.

Bagdasarian, there is absolutely no evidence concerning Media Fox


     8
     (...continued)
     Also, this testimony is inconsistent with the examining
agent’s written record of the initial interview with Mr.
Akopian’s attorney admitted by stipulation in this case. On July
3, 2008, during an initial interview with the examining agent,
when asked why Mr. Akopian did not have copies of the bank
records, Mr. Akopian’s attorney stated that Mr. Akopian “did not
know what he was doing. So he basically threw away everything
when it came in.”
                              - 14 -

or Global Glen, no contracts, invoices, minutes, spreadsheets, or

even an old email discussing the business purpose of the

corporations.   There is also no evidence of the existence of the

Armenian company or even a movie being made.   Nothing.   Therefore

we find that Mr. Akopian received the amounts under a claim of

right and must include those amounts in gross income.     See Ludwig

v. Commissioner, T.C. Memo. 1983-678, affd. without published

opinion 779 F.2d 51 (6th Cir. 1985).

     B.   ATM Card Use, BMW Payments, Checks Written to Ms.
          Terfanyan and Ruz Meg and for Personal Expenses

     Petitioners advance two theories as to why the amounts

received from Media Fox and Global Glen for personal expenses in

2005 and 2006 were not income.   First, petitioners argue that Mr.

Akopian took out a line of credit against petitioners’ condo of

$100,000 and injected $50,000 of it into the business and that

the check written to Ms. Terfanyan were repayments of that line

of credit.   Second, petitioners argue that the corporate funds

used to pay petitioners’ personal expenses were loans.

     Other than petitioners’ own self-serving testimony, there is

simply no evidence that a line of credit was ever taken out

against petitioners’ home.   Although allegedly all of the

corporate documents disappeared along with Mr. Gevorgian, a copy

of the loan documentation could have been obtained from the bank

or other lender issuing the line of credit.    Petitioners’ failure

to introduce this evidence, which would have been in their favor,
                              - 15 -

again gives rise to the presumption that it would have been

unfavorable.   See Wichita Terminal Elevator Co. v. Commissioner,

supra at 1165.   In the absence of loan and payment documents and

records, we do not find that the use of corporate funds for

petitioners’ personal expenses constituted a repayment of a line

of credit.

     We are also unpersuaded by petitioners’ vague self-serving

testimony that the amounts were loans from the corporations which

Mr. Akopian was expected to repay.     See Page v. Commissioner, 58

F.3d 1342, 1346 (8th Cir. 1995), affg. T.C. Memo. 1993-398;

Schneebalg v. Commissioner, T.C. Memo. 1988-563.     Mr. Bagdasarian

explained that Mr. Akopian was allowed to spend the corporations’

money and that it was “regarded as a loan”.    He explained that

there was no formal agreement for the loan because they “always

did things verbally, and * * * trusted each other.”

     Even more egregious than the fact that there is no

documentation of the loan, there is no evidence that Mr. Akopian

was even keeping track of the amounts of the corporations’ money

that he used for personal expenses.    Mr. Akopian treated the

corporations as his personal piggy bank.    He used corporate money

to make mortgage payments, pay his HOA dues, buy clothing, and

even pay for his child’s daycare.    We do not find that the use of

the corporate money for personal expenses was a loan.9

     9
      We further note, ignoring possible timing differences, that
                                                   (continued...)
                               - 16 -

      Therefore petitioners must include in income all of the

amounts at issue discussed above.

IV.   Section 6662(a) Penalties

      Respondent determined that petitioners are liable for

section 6662(a) accuracy-related penalties for their 2005 and

2006 tax years.   Pursuant to section 7491(c), the Commissioner

has the burden of production with respect to a taxpayer’s

liability for a penalty and is, therefore, required to “come

forward with sufficient evidence indicating that it is

appropriate to impose the relevant penalty.”     See Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).      However, “once the

Commissioner meets his burden of production, the taxpayer must

come forward with evidence sufficient to persuade a Court that

the Commissioner’s determination is incorrect.”      Id. at 447.

      Subsection (a) of section 6662 imposes an accuracy-related

penalty of 20 percent of any underpayment attributable to causes

specified in subsection (b).      Respondent asserts two causes

justifying the penalty:   A substantial understatement of income

tax, subsec. (b)(2), and negligence, subsec. (b)(1).


      9
     (...continued)
the discharge of indebtedness is a source of income. Sec.
61(a)(12). Mr. Bagdasarian explained that because the
corporation never succeeded, “there was no money, and there was
no income for Khatchatour to be able to repay the corporation.”
Where, as here, the taxpayer is not required to repay the “loan”,
the proceeds are income to the taxpayer in the year of the
“loan”. See United States v. Kirby Lumber Co., 284 U.S. 1, 2
(1931).
                               - 17 -

     There is a “substantial understatement” of income tax for

any tax year where the amount of the understatement exceeds the

greater of (1) 10 percent of the tax required to be shown on the

return for the tax year or in the case of an individual (2)

$5,000.   Sec. 6662(d)(1)(A). “[N]egligence” is “any failure to

make a reasonable attempt to comply with the provisions of this

title” (i.e., the Internal Revenue Code).   Sec. 6662(c).   Under

caselaw, “‘Negligence is a lack of due care or the failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances.’”   Freytag v. Commissioner, 89 T.C. 849, 887

(1987) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th

Cir. 1967), affg. on this issue 43 T.C. 168 (1964) and T.C. Memo.

1964-299), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.

868 (1991).

     There is an exception to the section 6662(a) penalty when a

taxpayer can demonstrate:   (1) Reasonable cause for the

underpayment and (2) that the taxpayer acted in good faith with

respect to the underpayment.   Sec. 6664(c)(1).   Regulations

promulgated under section 6664(c) provide that the determination

of reasonable cause and good faith “is made on a case-by-case

basis, taking into account all pertinent facts and

circumstances”.   Sec. 1.6664-4(b)(1), Income Tax Regs.

     Respondent met his burden of production under both causes,

and petitioners did not address the section 6662(a) penalties at
                                - 18 -

trial.    Petitioners presented no evidence that they had

reasonable cause for any portion of any underpayment.       See Basile

v. Commissioner, T.C. Memo. 2005-51 (“Because petitioners did not

contest the additions to tax or penalties in the petitions, they

are deemed conceded.” (citing Rule 34(b)(4) and Swain v.

Commissioner, 118 T.C. 358, 364-365 (2002))).        Petitioners, while

contesting the income tax liabilities on which the penalties are

based, have never specifically pleaded that there was reasonable

cause for any negligence or substantial understatement of income

tax.     Petitioners are liable for the penalties.

V.     Section 6015 Relief

       In general, married taxpayers may elect to file a joint

income tax return.    Sec. 6013(a).   After making the election,

each spouse is jointly and severally liable for the entire

Federal income tax liability for that year, whether as reported

on the joint income tax return or subsequently determined to be

due.    Sec. 6013(d)(3); see sec. 1.6013-4(b), Income Tax Regs.     A

spouse or former spouse may petition the Commissioner for relief

from joint and several liability in certain circumstances.       See

sec. 6015(a).    Ms. Terfanyan asserts that she is entitled to

relief under either section 6015(b) or (f).     The Court’s scope

and standard of review are de novo.      Porter v. Commissioner, 132

T.C. 203, 210 (2009).
                              - 19 -

     A.   Relief Under Section 6015(b)

     Section 6015(b) provides:

          SEC. 6015(b). Procedures for Relief From
     Liability Applicable to All Joint Filers.--

               (1) In general.--Under procedures prescribed
          by the Secretary, if--

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

                     (B) on such return there is an
                understatement of tax attributable to
                erroneous items of 1 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 (in such
                form as the Secretary may prescribe) 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.

     “The requirements of section 6015(b)(1) are stated in the

conjunctive.   Accordingly, a failure to meet any one of them
                                - 20 -

prevents a requesting spouse from qualifying for relief”.      Alt v.

Commissioner, 119 T.C. 306, 313 (2002), affd. 101 Fed. Appx. 34

(6th Cir. 2004).    There is no dispute that Ms. Terfanyan

satisfies subparagraphs (A), (B), and (E) of section 6015 (b)(1).

Nor is there any doubt that Ms. Terfanyan does not satisfy

subparagraph (C).    Under this requirement, the individual seeking

relief under section 6015(b) must establish “that in signing the

return he or she did not know, and had no reason to know” that

there was an understatement attributable to the erroneous items

of the other spouse.    Sec. 6015(b)(1)(C); Cheshire v.

Commissioner, 115 T.C. 183, 192-193 (2000), affd. 282 F.3d 326

(5th Cir. 2002).

     Ms. Terfanyan knew that Mr. Akopian had an ownership

interest in Media Fox during 2005 and an ownership interest in

Global Glen in 2005 and 2006.    She also knew that Mr. Akopian was

“taking care of some of the expenses” with corporate money.     In

fact Ms. Terfanyan received checks from the company in her own

right and to her own company, Ruz Meg.     She also prepared the tax

returns at issue relying, if on anything, only on her husband’s

oral claims he had no income, a fact that with her tax experience

she should have known to be untrue.      Consequently, Ms. Terfanyan

is ineligible for relief under section 6015(b)(1).
                               - 21 -

     B.    Relief Under Section 6015(f)(1)

     The Commissioner may relieve a spouse or former spouse from

joint and several liability if, taking into account all the facts

and circumstances, it would be inequitable to hold the taxpayer

liable for any unpaid tax or deficiency.      Sec. 6015(f)(1).   The

Commissioner has outlined procedures for determining whether a

requesting spouse qualifies for equitable relief under section

6015(f).   See Rev. Proc. 2003-61, 2003-2 C.B. 296.     We now

analyze the facts under these procedures to determine whether Ms.

Terfanyan qualifies for equitable relief.

           1.   Threshold Conditions

     Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297-298, sets

forth seven threshold conditions that must be satisfied before

the Commissioner will consider a request for equitable relief

under section 6015(f), as follows:      (i) The requesting spouse

filed a joint income tax return for the taxable year for which he

or she seeks relief; (ii) relief is not available to the

requesting spouse under section 6015(b) or (c); (iii) the

requesting spouse applies for relief no later than 2 years after

the date of the Commissioner’s first collection activity; (iv) no

assets were transferred between the spouses as part of a

fraudulent scheme by the spouses; (v) the nonrequesting spouse

did not transfer disqualified assets to the requesting spouse;

(vi) the requesting spouse did not file or fail to file the
                               - 22 -

return with fraudulent intent; and (vii) the Federal income tax

liability from which the requesting spouse seeks relief is

attributable to an item of the individual with whom the

requesting spouse filed the joint income tax return.   Respondent

concedes that Ms. Terfanyan satisfies the seven threshold

conditions.

           2.   Safe Harbor Conditions

     If the threshold conditions are met, the Commissioner

ordinarily will grant equitable relief under section 6015(f) with

respect to an underpayment of income tax reported on a joint

Federal income tax return, provided the following three safe

harbor conditions are satisfied:    (i) On the date of the request

for relief, the requesting spouse is no longer married to, or is

legally separated from, the nonrequesting spouse; (ii) on the

date the requesting spouse signed the joint income tax return,

the requesting spouse did not know, and had no reason to know,

that the nonrequesting spouse would not pay the tax liability;

and (iii) the requesting spouse will suffer economic hardship if

the Commissioner does not grant relief.    Id. sec. 4.02, 2003-2

C.B. at 298.

      Ms. Terfanyan is still married to and lives with Mr.

Akopian.   Therefore she does not satisfy the first condition.

Accordingly, because Ms. Terfanyan does not meet all the
                                 - 23 -

requirements of the safe harbor, she does not qualify for relief

under Rev. Proc. 2003-61, sec. 4.02.

           3.   Facts and Circumstances Test

     A requesting spouse, such as Ms. Terfanyan, who satisfies

the threshold conditions but fails to satisfy the safe harbor

conditions under Rev. Proc. 2003-61, sec. 4.02, is nevertheless

eligible for relief under section 6015(f) if, taking into account

all the facts and circumstances, it is inequitable to hold the

requesting spouse liable for an underpayment.      Rev. Proc.

2003-61, sec. 4.03, 2003-2 C.B. at 298-299, lists various

nonexclusive factors to be considered in deciding whether to

grant equitable relief under section 6015(f).      No single factor

is determinative, all factors are to considered and weighed

appropriately, and the list of factors is not intended to be

exhaustive.     Id.   Our analysis of the relevant factors and

circumstances is as follows.

                 a.     Marital Status

     Ms. Terfanyan is still married to and lives with Mr.

Akopian.   This factor weighs against relief.

                 b. Economic Hardship If Relief Were Denied

     The second factor under Rev. Proc. 2003-61, sec. 4.03, is

whether the requesting spouse will suffer economic hardship if

relief is not granted.     Economic hardship for these purposes is

defined as the inability to pay reasonable basic living expenses
                              - 24 -

if the requesting spouse is held liable for the tax owed.      See

sec. 301.6343-1(b)(4), Proced. & Admin. Regs.   The ability to pay

reasonable basic living expenses is determined by considering

among other things the following nonexclusive factors:    The

taxpayer’s age; employment status; ability to earn; number of

dependents; and expenses for food, clothing, housing, medical,

and transportation; and any extraordinary circumstances.       Id.

     Ms. Terfanyan computed her monthly household income as

$7,450 and her monthly household expenses as $7,949.     She is

still living with her husband and thus these numbers presumably

include his income and expenses as well.    Ms. Terfanyan is

therefore demonstrating that the tax deficiency will make a

hardship on her household whether or not she is granted relief

from joint liability.   Accordingly, this factor favors Ms.

Terfanyan.

               c.   Knowledge or Reason To Know That the
                    Nonrequesting Spouse Would Not Pay the Income
                    Tax Liability

     Ms. Terfanyan knew that Mr. Akopian was using corporate

money to pay their personal expenses.   She must have known that

petitioners did not have the money to pay all of their expenses.

Even her innocent spouse relief application shows that her

household’s expenses exceed their income.    Therefore, Ms.

Terfanyan knew that Mr. Akopian could not pay the tax

liabilities. This factor weighs against granting relief.
                               - 25 -

                 d.   Nonrequesting Spouse’s Legal Obligation To
                      Pay the Outstanding Liability

       Because Ms. Terfanyan and Mr. Akopian remained married, this

factor is neutral.

                 e.   Significant Economic Benefit

       A fifth factor is whether the requesting party received a

significant economic benefit from the unpaid income tax liability

in excess of normal support.    Mr. Akopian used corporate money to

pay petitioners’ personal expenses.     Petitioners certainly

received an economic benefit from the unreported income.     To the

extent that it would have been less because of tax, petitioners

received a significant economic benefit from the unpaid income

tax.    This factor weighs against granting relief.

                 f.   Subsequent Compliance With Income Tax Laws

        A sixth factor is whether the requesting spouse made a good

faith effort to comply with Federal income tax laws in subsequent

years.    Because of the lack of evidence this factor is neutral.

                 g.   Abuse

       A seventh factor is abuse of the requesting spouse.   The

record does not indicate Ms. Terfanyan suffered abuse; thus this

factor is neutral.

                 h.   Poor Health When Signing the Return or
                      Requesting Relief

       The final factor is whether the requesting spouse was in

poor health when signing the return or requesting relief.       The
                              - 26 -

record does not indicate that Ms. Terfanyan was in poor health

when she signed the 2005 and 2006 joint income tax returns.

Therefore, this factor is neutral.

      C.   Conclusion About Equitable Relief

      After weighing the testimony and other evidence, we

conclude that Ms. Terfanyan is not entitled to equitable relief

for either year.   Ms. Terfanyan is knowledgeable about tax law

and tax return preparation.   She prepared the tax returns at

issue here knowing they did not report all of petitioners’

income and that the true and correct tax owed was very unlikely

to be paid, at least voluntarily.    Accordingly, the Court finds

that Ms. Terfanyan is not entitled to any “equitable” relief

under section 6015(f).

VI.   Conclusion

      Petitioners are liable for the deficiencies in income tax

and the section 6662(c) penalties for 2005 and 2006.   Ms.

Terfanyan is not entitled to relief from joint liability under

section 6015.

      The Court has considered all of petitioner’s contentions,

arguments, requests, and statements.   To the extent not

discussed herein, we conclude that they are meritless, moot, or

irrelevant.
                       - 27 -

To reflect the foregoing,


                                 Decision will be entered

                            under Rule 155.
