                      T.C. Summary Opinion 2007-58



                        UNITED STATES TAX COURT



                    TRACY L. GEACCONE, Petitioner v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 3193-06S.               Filed April 17, 2007.


        Leonard S. Roth, for petitioner.

     Susan K. Greene, for respondent.



     JACOBS, Judge:     This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.     Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other

case.     Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year in issue,
                                - 2 -

and all Rule references are to the Tax Court Rules of Practice and

Procedure.

     Respondent determined a deficiency of $5,921 in petitioner’s

2001 Federal income tax.    The issue for decision is whether

respondent abused his discretion in denying petitioner innocent

spouse relief under section 66(c) for the deficiency and/or

liability for a portion of unpaid tax.

                              Background

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

stipulation of facts and the attached exhibits are incorporated

herein by this reference.   At the time she filed the petition,

petitioner resided in Houston, Texas.

     Petitioner separated from her husband, Dr. Gasper Louis

Geaccone, in August of 2001; they divorced on December 18, 2002.

For the tax year 2001, petitioner timely filed a Federal income

tax return as a married individual filing separately.

     On her 2001 return, petitioner reported:    Wages of

$165,463.20; itemized deductions of $21,254; taxable income of

$144,227; total tax of $42,574; withholding credits of $38,354;

and a tax due of $4,220.

     On Schedule A, Itemized Deductions, of the 2001 return,

petitioner claimed a deduction of $6,138 for real estate taxes and

$15,799 for home mortgage interest.     Both of these itemized
                                - 3 -

deductions were accompanied by a notation that the amounts

represented one-half of the community property total amount.

     Dr. Geaccone is a dentist.    Petitioner, in her 2001 Federal

income tax return, did not include in gross income any amount

attributable to Dr. Geaccone’s earnings or profits from his dental

practice.    Respondent determined that the combined earnings of

petitioner and Dr. Geaccone for the first 8 months of 2001 (the

portion of the tax year 2001 that petitioner and Dr. Geaccone were

not separated) was $320,986.67.    According to respondent,

petitioner should have included (as items of community income)

half of that amount in income, as well as $55,154.33, the portion

of petitioner’s annual salary earned after her separation from Dr.

Geaccone.1   Respondent did not disturb petitioner’s treatment of

the claimed itemized deductions (i.e., her claiming half of the

community property total amount).    However, respondent determined

that of the $38,354 withholding credit petitioner claimed, eight-

twelfths, or $25,569.33 (corresponding to the portion of the year

that petitioner was not separated from Dr. Geaccone) should have

been allocated evenly between petitioner and Dr. Geaccone, and

four-twelfths, or $12,784.67 (corresponding to the portion of the

year that petitioner was separated from Dr. Geaccone) should have

been allocated to petitioner.     Therefore, according to respondent,


       1
       Respondent allocated 50 percent of interest income and
 dividends to petitioner, as the total amounts were small ($13 and
 $19, respectively).
                               - 4 -

the total withholding credit allocable to petitioner was

$25,569.33.

     Dr. Geaccone did not pay any estimated income tax for the tax

year 2001, nor was any tax withheld from his earnings.   According

to respondent, after taking into account petitioner’s prorated

share of Dr. Geaccone’s income, petitioner had taxable income for

2001 of $159,769.83, and the tax on this income was $48,495.

Respondent maintains that because petitioner’s prorated share of

the $38,354 of withheld tax credit was $25,569.33, petitioner owed

$22,925.67 ($48,495 minus $25,569.33), which is $18,705.67 more

than the $4,220 she showed as owed on her return.

     On or about August 24, 2004, petitioner applied for relief

from liability with respect to the items of community income

attributable to her from Dr. Geaccone under section 66(c), which

respondent denied.   Subsequently, respondent issued his notice of

deficiency.

                             Discussion

     Except as otherwise provided in section 66(c), petitioner

bears the burden of proof.   See Rule 142(a); Hardy v.

Commissioner, 181 F.3d 1002 (9th Cir. 1999), affg. T.C. Memo.

1997-97.

     Texas is a community property State.   Tex. Fam. Code Ann.

secs. 3.001-3.005 (Vernon 2001); Lange v. Phinney, 507 F.2d 1000,

1005 (5th Cir. 1975).   Generally, a spouse residing in a community
                                - 5 -

property State has a vested interest in, and is owner of, one-half

of the spouses’ community property.     United States v. Mitchell,

403 U.S. 190, 196 (1971).    Generally, spouses residing in a

community property State are liable for the Federal income tax on

one-half of their community income.     Id.   Income and deductions

attributable to community property are also community property.

See Tex. Fam. Code Ann. secs. 3.001 and 3.002; Adams v.

Commissioner, 82 T.C. 563, 567-568 (1984); Hockaday v.

Commissioner, 22 T.C. 1327, 1329 (1954); Harris v. Harris, 765

S.W.2d 798, 802 (Tex. App. 1989); Marshall v. Marshall, 735 S.W.2d

587, 594 (Tex. App. 1987).

     Spouses who reside in a community property State may file

either a joint Federal income tax return or separate Federal

income tax returns.   If they file separate returns, then

generally each spouse must report, and pay tax on, one-half of the

community income, regardless of whether the spouse actually

received that income.   United States v. Mitchell, supra at 196-

197; Bernal v. Commissioner, 120 T.C. 102, 105-106 (2003).

     Under certain circumstances, section 66 provides that a

taxpayer may be relieved of liability on community income.

Section 66(a) addresses the treatment of community income in the

case of spouses who live apart at all times during the calendar

year.   Section 66(b) allows the Secretary to disallow the benefits

of community property laws if the taxpayer acted as if he or she
                                - 6 -

were solely entitled to the income and failed to notify his or her

spouse of the nature and amount of the income before the due date

for filing the return.    Section 66(c) provides a taxpayer with

relief if certain circumstances are satisfied.

     Petitioner is not eligible for the type of relief provided by

section 66(a) or (b).    Section 66(a) does not apply because

petitioner and Dr. Geaccone lived together for a portion of 2001.

Section 66(b) is not a relief provision and can be used only

by the Commissioner to disallow the benefits of community

property laws to a taxpayer.    It cannot be used by a taxpayer to

claim relief from community property laws.    Consequently, we need

to consider relief only under section 66(c), which provides as

follows:

          SEC. 66(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,
                               - 7 -

     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). * * *

     Section 66(c) pertains to items of community income, and that

is one component of respondent’s calculations that led to his

determination that petitioner is liable for a deficiency in income

tax for 2001.   According to respondent, the amount of income,

including community income, that petitioner should have reported

in her 2001 return was $215,647.66.    Petitioner reported gross

income of $165,463.20, which is $50,184.46 less than respondent

determined, giving rise to a deficiency in tax of $5,921.

Petitioner may be relieved of liability for the tax associated

with this community income if she meets all four of the criteria

of section 66(c).   We find that she does not.

     The parties agree that petitioner meets the first and second

conditions of section 66(c).   Respondent contends that petitioner

does not satisfy the third condition, which relates to

petitioner’s knowledge of the community income.    Petitioner

contends that she did not have access to Dr. Geaccone’s books and

records, which would have shown the amount of his earnings, and

therefore she had no knowledge of his earnings as an item of

community property.   Petitioner testified that her divorce was not

amicable and that by the time she filed her 2001 tax return in

2002, her relationship with Dr. Geaccone had deteriorated to the

point that they were no longer in direct communication.
                               - 8 -

Petitioner testified that she had intended to file a joint return

with Dr. Geaccone in 2001, but that alternative was not feasible,

because of the lack of cooperation between them by the time the

2001 income tax return was prepared.   We found petitioner to be a

credible witness.   Nonetheless, her testimony and the record in

this case do not satisfy the statutory requirement.    Section 1.66-

4(a)(2)(ii), Income Tax Regs., provides:

     If the requesting spouse is aware of the source of community
     income or the income-producing activity, but is unaware of
     the specific amount of the nonrequesting spouse’s community
     income, the requesting spouse is considered to have knowledge
     or reason to know of the item of community income. The
     requesting spouse’s lack of knowledge of the specific amount
     of community income does not provide a basis for relief under
     this section.

     There is no doubt that petitioner knew that Dr. Geaccone was

a dentist and that he earned income from his dental practice, even

though she might not have known the specific amount.   The record

shows that petitioner and Dr. Geaccone filed joint returns for tax

years 1992 through 2000.   Petitioner testified that she knew the

balance that was due on those returns.   We conclude from

petitioner’s testimony that she knew of the item of community

income giving rise to the deficiency for the tax year 2001.

     Even though we find that petitioner does not meet all four

requirements set forth in section 66(c),2 she may nevertheless



      2
       Because we find that petitioner has not satisfied the third
 requirement of sec. 66(c), we need not consider the fourth.
                               - 9 -

obtain relief from liability under the flush language of section

66(c), which provides:

     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.

     To prevail under the flush language of section 66(c),

petitioner must prove that respondent’s denial of equitable relief

from joint liability under section 66(c) was an abuse of

discretion.   Butler v. Commissioner, 114 T.C. 276, 287-292 (2000);

see Beck v. Commissioner, T.C. Memo. 2001-198.   The Court defers

to the Commissioner’s determination unless it is arbitrary,

capricious, or without sound basis in fact.   Jonson v.

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

Cir. 2003).   Whether the Commissioner’s determination was an abuse

of discretion is a question of fact.   The requesting spouse bears

the burden of proving that there was an abuse of discretion.

Cheshire v. Commissioner, 115 T.C. 183, 198 (2000), affd. 282 F.3d

326 (5th Cir. 2002); Abelein v. Commissioner, T.C. Memo. 2004-274.

We find that petitioner has not carried her burden with respect to

the deficiency for 2001 as determined by respondent ($5,921), but

as discussed infra, she has carried her burden with respect to her
                                - 10 -

liability for the unpaid tax resulting from respondent’s

reallocation of her withholding credits.3

     As directed by section 66(c), the Commissioner has prescribed

guidelines in Rev. Proc. 2003-61, 2003-2 C.B. 296, modifying Rev.

Proc. 2000-15, 2000-1 C.B. 447, that are to be used in determining

whether it is inequitable to hold a requesting spouse liable for

all or part of the liability for any unpaid tax or deficiency.4

Sec. 1.66-4(b), Income Tax Regs.   The requesting spouse must

satisfy five conditions (threshold conditions) before the

Commissioner will consider a request for relief under section

66(c).   Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297.

Respondent concedes that petitioner satisfied the threshold

requirements.




         3
        Reallocation of the withholding credits affects the final
  balance due from petitioner more than the treatment of the
  community income. Petitioner claimed a credit of $38,354 for
  withheld taxes, as shown on her Form W-2, Wage and Tax Statement.
  Respondent proposes to allow only $25,569.33 of this amount, a
  difference of $12,784.67. In contrast, the deficiency in tax
  which resulted from the allocation of a portion of Dr. Geaccone’s
  income to petitioner was $5,921.
         4
        Rev. Proc. 2000-15, 2000-1 C.B. 447, was superseded by Rev.
  Proc. 2003-61, 2003-2 C.B. 296, which is effective as to requests
  for relief filed on or after Nov. 1, 2003, and for requests for
  relief pending on Nov. 1, 2003, as to which no preliminary
  determination letter had been issued as of that date.
  Petitioner’s application for relief was filed after Nov. 1, 2003,
  in August of 2004. Respondent issued a notice of deficiency on
  Jan. 20, 2006.
                                 - 11 -

     Where, as here, the requesting spouse meets the five threshold

conditions set forth in Rev. Proc. 2003-61, sec. 4.01, we employ a

balancing test to determine whether, taking into account all the

facts and circumstances, it would be inequitable to hold the

requesting spouse liable for all or part of the unpaid liability.

Id. sec. 4.03, 2003-2 C.B. at 298.     We begin by considering

petitioner’s request for relief in the light of six factors listed

in the revenue procedure.     A description of each factor,

underscored, and our application of that factor to the facts of

this case, follows.5

     (a) Marital status.    The requesting spouse is separated or

divorced from the nonrequesting spouse.     The parties agree that

petitioner is divorced from Dr. Geaccone.     This factor weighs in

petitioner’s favor.

     (b) Economic hardship.    The requesting spouse will suffer

economic hardship if relief from the liability is not granted.

Petitioner did not present any evidence tending to show that she

would suffer economic hardship if relief from liability were not

granted.   We note that petitioner earned substantial income in



       5
        These six factors are found in Rev. Proc. 2003-61, sec.
  4.03(2)(a), 2003-2 C.B. at 298. Additional factors that, if
  present, will weigh in favor of relief but will not weigh against
  equitable relief if not present in a case are found in Rev. Proc.
  2003-62, sec. 4.03(2)(b), 2003-2 C.B. at 299. Neither of those
  factors, pertaining to abuse and mental or physical health, is
  present in this case.
                               - 12 -

2001, and that she is a skilled professional.   Nothing in the

record indicates that she is no longer employed at a salary similar

to her 2001 salary.   On this record, we do not find that petitioner

would suffer economic hardship if relief is not granted.     This

factor weighs against petitioner.

     (c) Knowledge or reason to know.   In the case of an income tax

liability that arose from a deficiency, whether the requesting

spouse did not know and had no reason to know of the item giving

rise to the deficiency.   As discussed supra, we find that

petitioner knew or had reason to know of the community income which

gave rise to the understatement of her income and resulted in the

deficiency respondent determined.   This factor weighs against

petitioner.

     (d) Nonrequesting spouse’s legal obligation.   Whether the

nonrequesting spouse has a legal obligation to pay the outstanding

income tax liability pursuant to a divorce decree or agreement.

Petitioner’s divorce decree assigns her responsibility for all

income taxes “associated with the federal income tax return filed

by petitioner individually for the calendar year 2001.”

Correspondingly, the divorce decree assigns to Dr. Geaccone

responsibility for all Federal income taxes “associated with * * *

[Dr. Geaccone’s] earnings in his dental practice for the calendar

year 2001.”   This factor weighs in favor of petitioner.
                                 - 13 -

     (e) Significant benefit.    Whether the requesting spouse

received significant benefit (beyond normal support) from the

unpaid income tax liability or item giving rise to the deficiency.

Petitioner credibly testified that she received no gifts or other

benefits beyond normal support from the unpaid tax liability.

While, as respondent posits, Dr. Geaccone made some transfers of

funds to a bank account petitioner controlled, we are satisfied

that these transfers were for the purpose of contributing to the

support of the family as a whole and did not constitute a benefit

beyond normal support to petitioner.      This factor weighs in favor

of petitioner.

     (f) Compliance with income tax laws.     Whether the requesting

spouse has made a good faith effort to comply with income tax laws

in the taxable years following the taxable year to which the

request for relief relates.     The record is devoid of any reference

to petitioner’s compliance with the income tax laws in years

subsequent to 2001.   Therefore, this factor is neutral.

     To conclude, we hold that respondent did not abuse his

discretion in denying petitioner innocent spouse relief under

section 66(c) for the determined deficiency.     However, to require

petitioner to remain liable for unpaid tax in excess of $10,141

($48,495, the tax on petitioner’s income including her prorated

share of Dr. Geaccone’s income, less $38,354, the amount of

petitioner’s withholding credits) would be inequitable.     Yet this
                                 - 14 -

is the outcome of respondent’s refusal to allow petitioner credit

for the entire amount of tax withheld by her employer from her

income.   It therefore follows that in denying petitioner credit for

the $38,354 withheld from her wages, and thus denying her innocent

spouse relief under section 66(c) for unpaid tax in excess of

$10,141, respondent abused his discretion.

     To reflect the foregoing,


                                          An appropriate decision

                                     will be entered.
