                       T.C. Memo. 2002-17



                     UNITED STATES TAX COURT



                 ANGELA C. MORRIS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 10368-00.           Filed January 16, 2002.


     Angela C. Morris, pro se.

     Susan Smith Canavello, for respondent.


                       MEMORANDUM OPINION


     POWELL, Special Trial Judge:     Respondent determined

deficiencies in petitioner’s 1996 and 1997 Federal income taxes

of $1,544 and $1,600, respectively.    This case involves some of

the peculiarities that emanate from the union of community

property concepts and the Internal Revenue Code.    The issues are

(1) whether distributions to petitioner’s husband from an

individual retirement account (IRA) held by petitioner’s husband
                                - 2 -

are included in petitioner’s share of community income and (2)

whether petitioner is entitled, under section 66(c), to equitable

relief from liability for unpaid taxes on half of the community

income for 1996 and 1997.1    Petitioner resided in Baton Rouge,

Louisiana, at the time the petition was filed.

     The facts may be summarized as follows.    During 1996 and

1997, petitioner was married to and lived with Larry Morris (Mr.

Morris) in Louisiana, a community property State.     They did not

have a matrimonial agreement separating their property during the

years at issue.    Petitioner and Mr. Morris are currently

separated and living apart.

     During the years at issue petitioner and Mr. Morris

maintained one checking account over which both had signature

authority.   Mr. Morris kept the checkbook and all bank records in

his possession and gave petitioner checks for household expenses

such as the mortgage, utilities, and food.     Petitioner did not

have ready access to the bank records.    Mr. Morris used this same

checking account for his business activities.

     In 1996, Mr. Morris withdrew $7,645 from an IRA that was

created and owned by him and withdrew an additional $25,660 from

the IRA in 1997.   Petitioner knew that Mr. Morris made a

withdrawal in 1997 because he purchased a new automobile for his


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

use.    She was unaware of the 1996 withdrawal and the precise

amount of the 1997 withdrawal.

       Petitioner was not involved in any way with the operations

or the recordkeeping for Mr. Morris’s business activities.    She

knew, however, that he did not maintain proper records and dealt

in cash.    Petitioner suspected that Mr. Morris did not report all

of his income on his Federal income tax returns.    When petitioner

confronted Mr. Morris regarding his income, records, and the

proper filing of his Federal income tax returns he became

verbally and physically abusive.

       Petitioner filed separate Federal income tax returns for

1996 and 1997 because of her suspicions regarding Mr. Morris’s

honesty in reporting his correct Federal income tax liability.

She believed that filing separately would relieve her of any

liability from his defalcations.

       Respondent determined that during 1996 and 1997, without

regard to the effect of a community property regime, petitioner

and Mr. Morris received income and were entitled to deductions as

follows:
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                                          1996                           1997
     Income                      Petitioner    Mr. Morris   Petitioner      Mr. Morris

     Wages                      $21,407       $2,301        $3,265             $-0-
     State tax refund               195         -0-            463              -0-
     Dividends                         2        -0-           -0-               -0-
     IRA early distributions       -0-         7,645          -0-            25,660
     Schedule C, Profit or Loss
      from Business, net income     -0-       15,305          -0-            (5,373)

     Deductions
     Medical                       2,769        -0-          1,291            3,561
     Mortgage interest             6,989        -0-          6,962             -0-
     Charitable contributions      6,070       4,489           150            4,152
     Taxes                           617        -0-            175             -0-
     Miscellaneous itemized           70        -0-             75             -0-

     Other
     Sec. 72(t) additional tax      -0-           764         -0-             2,566
     Taxes withheld                2,163          125          288             -0-


     Respondent applied community property principles to

determine the parties’ share of income, additional tax, and

deductions, allocating to petitioner her community property share

as follows:

     Income                                1996                        1997

     Wages                             $11,854.00                    $1,632.50
     State tax refund                       97.50                       231.50
     Dividends                               1.00                         -0-
     IRA early distributions             3,822.50                    12,830.00
     Schedule C net income               7,652.50                    (2,686.50)

     Deductions
     Medical                               1,384.50                   2,426.00
     Mortgage interest                     3,494.50                   3,481.00
     Charitable contributions              5,279.50                   2,151.00
     Taxes                                   308.50                      87.50
     Miscellaneous itemized                   35.00                      37.50

     Other
     Sec. 72(t) additional tax               382.00                   1,283.00
     Taxes withheld                        1,144.00                     144.00

     For 1996, respondent’s adjustments resulted in a net

increase of $2,018.50 in petitioner’s income, a net decrease of

$6,013 in petitioner’s deductions, a $1,019 decrease in
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petitioner’s withholding credits, and the imposition of the

section 72(t) additional tax of $382.      For 1997, respondent’s

adjustments resulted in a net increase of $8,277.50 in

petitioner’s income, a net decrease of $470 in petitioner’s

deductions, a $144 decrease in petitioner’s withholding credits,

and the imposition of the section 72(t) additional tax of $1,283.

     Petitioner timely filed a Form 8857, Request for Innocent

Spouse Relief, seeking equitable relief from liability under the

provisions of section 66(c).    Respondent determined that

petitioner was not entitled to equitable relief under section

66(c).

                              Discussion

1. IRA Distributions and Petitioner’s Gross Income

     Spouses domiciled in Louisiana are subject to a community

property regime.   La. Civ. Code Ann. arts. 2327, 2334 (West

1985).   Spouses may opt out of the community property regime by

entering into a matrimonial agreement to that effect.      La. Civ.

Code Ann. art. 2329 (West 1985).    There was no such agreement

between petitioner and Mr. Morris.      The first issue is whether,

under these circumstances, portions of the distributions from Mr.

Morris’s IRA to him are included in petitioner’s income as

community property income.2


     2
        The facts are not in dispute and the issue is primarily
one of law. Sec. 7491, concerning burden of proof, has no
bearing on this issue.
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     Section 408(d) generally sets forth the tax treatment of

distributions from IRA’s as follows:

     SEC. 408(d) Tax Treatment of Distributions.-–

          (1) In general.–-Except as otherwise provided in this
     subsection, any amount paid or distributed out of an
     individual retirement plan shall be included in gross income
     by the payee or distributee, as the case may be, in the
     manner provided under section 72.

      We have held that the distributee or payee of a

distribution from an IRA is “the participant or beneficiary who,

under the plan, is entitled to receive the distribution.”      Bunney

v. Commissioner, 114 T.C. 259, 262 (2000); see also Darby v.

Commissioner, 97 T.C. 51, 58 (1991).   In noncommunity property

jurisdictions, since Mr. Morris was entitled to and did receive

the distributions, those distributions would be taxable to him.

Sec. 408(d)(1).   The question then is whether the Louisiana

community property regime dictates a different result.    Section

408(g) provides that “This section shall be applied without

regard to any community property laws.”   We held in Bunney that

by operation of section 408(g), in a community property

jurisdiction the spouse of a distributee, who did not receive the

distribution from the IRA, is not treated as a distributee

despite whatever his or her community property interest in the

IRA may have been.   Bunney v. Commissioner, supra at 263.
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     Under Bunney, no portion of Mr. Morris’s IRA distributions

are included in petitioner’s gross income.3    Similarly, the

section 72(t) additional tax does not apply to petitioner, and

applies only to Mr. Morris.

2. Relief Under Section 66(c)

     We next turn to petitioner’s claim that respondent abused

his discretion in refusing to grant equitable relief under

section 66(c).    Initially, we note that we are only concerned

with whether petitioner is entitled to equitable relief under

section 66(c) for the year 1996.    With regard to 1997, petitioner

has no deficiency since no part of the IRA distribution for that

year is taxable to her.

     Under a community property regime, each spouse is entitled

to file separate Federal income tax returns.    When separate

Federal tax returns are filed, each spouse must report half of

the community income.     United States v. Mitchell, 403 U.S. 190,

196-197 (1971).    Under certain limited circumstances, one spouse

may be relieved of liability for taxes on that spouse’s share of

community income.    These circumstances are set forth in section

66(c) as follows:



     3
        We note that in Bunney v. Commissioner, 114 T.C. 259, 262
(2000), respondent argued that the taxpayer was taxable on the
full amount of the distribution because he received the
distribution. Under this rationale, it would appear here that
petitioner would not be taxable on the distributions since she
did not receive any of the distributions.
                               - 8 -

          (c) Spouse Relieved of Liability in Certain Other
     Cases.–-Under regulations prescribed by the Secretary, if-–

               (1) an individual does not file a joint return for
          any taxable year,

               (2) such individual does not include in gross
          income for such taxable year an item of community
          income properly includible therein which, in accordance
          with the rules contained in section 879(a), would be
          treated as the income of the other spouse,

               (3) the individual establishes that he or she did
          not know of, and had no reason to know of, such item of
          community income, and

               (4) taking into account all facts and
          circumstances, it is inequitable to include such item
          of community income in such individual’s gross income,

     then, for purposes of this title, such item of community
     income shall be included in the gross income of the other
     spouse (and not in the gross income of the individual).
     Under procedures prescribed by the Secretary, if, 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) attributable to
     any item for which relief is not available under the
     preceding sentence, the Secretary may relieve such
     individual of such liability.

     Petitioner’s request for relief relies on the last sentence

of section 66(c).   This provision generally applies to any

liability for tax arising after July 22, 1998, and any liability

for tax arising on or before such date but remaining unpaid as of

such date.   See H. Conf. Rept. 105-599, at 251 (1998), 1998-3

C.B. 145, 200.   The deficiencies at issue arose prior to July 22,

1998, but remain unpaid.

     We have the authority to review respondent’s denial of

equitable relief under the last sentence of section 66(c).    Beck
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v. Commissioner, T.C. Memo 2001-198.       Here, we review

respondent’s denial of equitable relief under section 66(c) for

abuse of discretion.    Id.; see also Fernandez v. Commissioner,

114 T.C. 324 (2000), Butler v. Commissioner, 114 T.C. 276 (2000).

     Pursuant to the directions in the statute, respondent issued

Rev. Proc. 2000-15, 2000-5 I.R.B. 447, setting forth the criteria

under which respondent will consider equitable relief.       This list

of factors is not intended to be exhaustive and includes

consideration of the economic hardship on the spouse and whether

the spouse had reason to know of the items giving rise to the

deficiency.   Certainly these factors are important.     Petitioner

knew that her husband was engaged in business, and it is

petitioner’s share of that community income that gives rise to

the remaining deficiency for 1996.       See Beck v. Commissioner,

supra.   Moreover, it would appear that petitioner did benefit

from that income.   Finally, according to our rough calculation,

the remaining deficiency is less than $200.      Petitioner has not

established that payment of such an amount would create a

substantial hardship.   Under these circumstances, we believe

respondent’s denial of equitable relief to petitioner under

section 66(c) was not an abuse of discretion as it relates to the

remaining deficiency for 1996.
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To reflect the foregoing,

                                  Decision will be entered

                             under Rule 155.
