                        T.C. Memo. 2002-288



                      UNITED STATES TAX COURT



    FAY DALTON, Petitioner, AND ROBERT DALTON, Intervenor v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8873-00.               Filed November 25, 2002.



     Fay Dalton, pro se.

     Robert Dalton, pro se.

     Ann L. Darnold, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined a deficiency in

petitioner and intervenor’s Federal income tax for 1995 of

$4,123.
                                - 2 -

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue.

     The issue for decision is whether petitioner is entitled to

relief from joint and several liability under section 6015(b),

(c), or (f) with respect to the above 1995 tax deficiency

determined by respondent.    Intervenor does not claim a right to

such relief.   Rather, intervenor testified at trial solely to

contest petitioner’s right thereto.


                           FINDINGS OF FACT

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

     At the time the petition was filed, petitioner resided in

Oklahoma City, Oklahoma.

     In 1995, petitioner and intervenor worked at various jobs,

and intervenor was unemployed for approximately 5 months.

     On January 19, 1996, petitioner and intervenor were

divorced.

     On their 1995 timely filed joint Federal income tax return,

petitioner and intervenor reported taxable income of $29,775.

Petitioner and intervenor’s return was prepared by a tax return

preparer.

     On audit, respondent determined that petitioner and

intervenor received $15,626 in additional income not reported on

their 1995 joint Federal income tax return, as set forth below:
                               - 3 -


                                                 Amount
           Pension income                       $10,686
           Unemployment compensation              4,280
           Barter income                            472
           State income tax refund                  188
             Total                              $15,626


     During 1995, petitioner knew that intervenor received the

above pension income, unemployment compensation, and State income

tax refund, and petitioner was aware that intervenor and Itex,

the company from which intervenor received the barter income, had

some relationship.

     On April 23, 1997, respondent issued to petitioner and

intervenor the notice of deficiency for 1995 reflecting the above

additional items of income and the tax deficiency of $4,123.

Neither petitioner nor intervenor petitioned this Court for a

redetermination of the deficiency.

     On September 22, 1997, respondent assessed the $4,123

deficiency against petitioner and intervenor.   Subsequently,

respondent assessed $407 in interest and penalties against

petitioner and intervenor.

     In collection of the above total $4,530 in tax, interest,

and penalties that had been assessed against petitioner and

intervenor, respondent applied a credit of $2,137 for funds that

had been withheld by respondent from intervenor’s 1995 pension

income.   Also, respondent withheld from intervenor income tax

refunds due intervenor for 1996 and 1997 in the amounts of $411
                               - 4 -

and $211, respectively.   From petitioner, respondent withheld an

income tax refund due petitioner for 1997 in the amount of $940,

and respondent levied against petitioner’s wages and received

$133.1   Petitioner also made payments in accord with an

installment agreement entered into with respondent until the

balance of the total $4,530 assessed liability against petitioner

and intervenor was paid to respondent in full.   The schedule

below sets forth the dates on which petitioner made payments to

respondent, the amount of the payments, and the source of each

payment:


                    Payments Made By Petitioner
        Date               Amount          Source of Payment
   Mar. 9, 1998             $940        1997 income tax refund
   Mar. 19, 1998             133        Garnished wages
   Apr. 22, 1998             200        Installment agreement
   May 6, 1998               200        Installment agreement
   May 28, 1998              135        Installment agreement
   June 26, 1998              50        Installment agreement
   July 23, 1998             150        Installment agreement
     Total                $1,8082




     1
        Petitioner introduced a pay stub from her employer
reflecting total garnished wages of $346. Petitioner, however,
has not provided evidence that the total $346 in garnished wages
shown on petitioner’s pay stub was completely paid to respondent.
We accept respondent’s evidence of the $133 relating to
petitioner’s wages that were levied against and applied as a
credit against petitioner’s 1995 tax liability.
     2
        Respondent refunded to petitioner certain additional
amounts representing overpayments of the $4,530 total due with
respect to petitioner and intervenor’s 1995 joint Federal income
tax liability.
                                - 5 -

     On February 8, 1999, petitioner filed with respondent

Form 8857, Request for Innocent Spouse Relief, in which

petitioner sought to be relieved of liability from and to be

refunded the above entire $1,808 she had paid.

     Respondent considered petitioner’s request for relief under

section 6013(e) (for the payments that petitioner made prior to

July 22, 1998) and under section 6015(b), (c), and (f) (for the

one $150 payment petitioner made on July 23, 1998).

     On January 25, 2000, respondent denied petitioner’s request

for relief from joint liability under section 6013(e).    On

May 17, 2000, respondent issued to petitioner a final notice of

determination in which respondent denied petitioner’s request for

relief from joint liability under section 6015(b), (c), and (f).


                               OPINION

     Generally, taxpayers filing joint Federal income tax returns

are jointly and severally liable for all taxes due.   Sec.

6013(d)(3).   In limited situations, however, taxpayers may be

relieved of joint liability.

     Prior to enactment of section 6015, relief from joint and

several liability was available under section 6013(e) if a

taxpayer met the following requirements:   (1) The joint return

contained a substantial understatement of tax attributable to

grossly erroneous items of the spouse not seeking relief; (2) the

spouse seeking relief established that in signing the return, the
                               - 6 -

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

substantial understatement; and (3) under the circumstances, it

would be inequitable to hold the spouse liable for the tax

liability relating to the substantial understatement.

     Based on Congress’s conclusion that the provisions of

section 6013(e) granting relief from joint liability were

inadequate, S. Rept. 105-174 at 55 (1998), 1998-3 C.B. 537, 591,

and to make relief from joint liability more accessible, H. Conf.

Rept. 105-599, at 249 (1998), 1998-3 C.B. 747, 1003, Congress in

1998 enacted section 6015.   Internal Revenue Service

Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105-206,

sec. 3201(a), 112 Stat. 734.

     Section 6015 applies to tax liabilities arising after

July 22, 1998, and to tax liabilities arising on or before

July 22, 1998, but remaining unpaid as of such date.    RRA 1998

sec. 3201(g), 112 Stat. 740.

     Respondent argues that our review of petitioner’s claim for

relief from joint liability under section 6015 is limited to $150

(the amount remaining unpaid as of July 22, 1998, the effective

date of section 6015).

     Section 6015 has been applied to a taxpayer’s entire tax

liability where the liability arose before the effective date of

section 6015 but where the entire liability remained unpaid on

July 22, 1998.   See Vetrano v. Commissioner, 116 T.C. 272 (2001);
                              - 7 -

King v. Commissioner, 115 T.C. 118 (2000).    No relief may be

granted under section 6015 to a taxpayer who files a stand-alone

petition for such relief and whose liability was paid in full

before the effective date of section 6015.   See Brown v.

Commissioner, T.C. Memo. 2002-187.    Respondent asks us to decide,

however, the extent to which a taxpayer may qualify for relief

under section 6015 where the taxpayer’s liability arose prior to

the effective date of section 6015, but where only a portion of

the liability remained unpaid as of the date of enactment.

     Recently, in Flores v. United States, 51 Fed. Cl. 49 (2001),

the Court of Federal Claims ruled on this issue.   The court

considered and granted, under section 6015(f), relief with

respect to a taxpayer’s entire tax liability including the

portion of the liability that was paid prior to July 22, 1998,

the effective date of section 6015.    The court stated:


     Congress * * * intended the effective date provision to
     be consonant with the remainder of the statute, thereby
     allowing the innocent spouse relief of section 6015(b)
     and (c), and with them the relief afforded by section
     6015(f), to apply to any liability for a particular
     taxable year providing it was not fully paid as of the
     effective date. [Id. at 55.]


     In support of its holding in Flores, the Court of Federal

Claims compared the effective date language of section 6015 to

the language of section 6511(a) that triggers the statute of
                              - 8 -

limitations for filing a timely claim for refund based upon when

a tax is “paid”.


     Courts interpreting * * * [the sec. 6511(a) limitation
     on filing a claim for refund, and not the sec. 6511(b)
     limitation on the amount of the refund] have held that
     the limitation period begins to run as to an entire tax
     liability only when the last dollar of the liability is
     paid, reasoning that “the tax liability is unitary and
     not discharged until paid in full.” [Id. at 55
     (quoting Union Trust Co. v. United States, 70 F.2d 629,
     630 (2d Cir. 1934)).]


     Our resolution of the facts in this case does not require us

to decide the Flores issue.

     Relying on section 6015(b), (c), and (f), petitioner seeks

three grounds for relief from joint and several liability.

     Relief is available under section 6015(b) (similar to former

section 6013(e)) if the following requirements are satisfied:

(1) The joint return contains an understatement of tax

attributable to the spouse not seeking relief; (2) the spouse

seeking relief establishes that in signing the return he or she

did not know, and had no reason to know, that there was an

understatement of tax; (3) taking into account all the facts and

circumstances, it would be inequitable to hold the spouse seeking

relief liable for the deficiency; and (4) the spouse seeking

relief timely elects the benefits of section 6015(b).

     In general, this Court has concluded that a relief-seeking

spouse knows or has reason to know of an understatement of tax if
                                - 9 -

such spouse knows of the transaction that gave rise to the

understatement.   E.g., Jonson v. Commissioner, 118 T.C. 106, 115

(2002).

     Relief is available under section 6015(c) only with respect

to a joint tax deficiency relating to taxpayers who are divorced,

legally separated, or otherwise living apart.   A taxpayer’s

election under section 6015(c) is not valid, however, upon a

showing by respondent that the taxpayer had actual knowledge of

an item giving rise to the tax deficiency.   Also under section

6015(e)(3)(A)3 no credit or refund is available under section

6015(c) with respect to amounts paid.   Therefore, a taxpayer who

qualifies for relief under section 6015(c) can be relieved of

liability only with respect to an unpaid liability.

     Lastly, under section 6015(f) respondent is granted

discretion to award relief where relief is otherwise unavailable

under section 6015(b) or (c) if the facts and circumstances

indicate that it would be inequitable to hold the spouse seeking

relief liable for the deficiency.   Respondent’s denial of

equitable relief under section 6015(f) is reviewable under an

abuse of discretion standard.   See Cheshire v. Commissioner, 115

T.C. 183, 198 (2000), affd. 282 F.3d 326 (5th Cir. 2002); Butler

v. Commissioner, 114 T.C. 276, 292 (2000).


     3
        Sec. 6015(e)(3)(A) was redesignated in 2000 as sec.
6015(g)(3). Consolidated Appropriations Act, 2001, Pub. L.
106-554, App. G, sec. 313, 114 Stat. 2763A-641.
                             - 10 -

     Because the 1995 tax liability was paid in full, no relief

is available to petitioner under section 6015(c).     Petitioner

admits to knowing about the pension income, unemployment

compensation, and State income tax refund and is therefore not

eligible for relief from joint liability under section 6015(b)

with respect to those items of unreported income.

     As to the $472 in barter income, respondent argues that

petitioner does not qualify for relief under section 6015(b)

because petitioner’s knowledge of intervenor’s relationship with

Itex gave petitioner reason to know of the income earned by

intervenor from the bartering activity.   We agree.

     Although some factors arguably support petitioner’s claim to

equitable relief under section 6015(f) as to the total $1,808

petitioner paid, the evidence does not establish that respondent

abused his discretion in denying such relief.   We note

particularly petitioner’s actual knowledge of three of the four

items of unreported income, and we note petitioner’s various tax

protester arguments made herein.

     Petitioner is not entitled to relief from any portion of the

tax, interest, and penalties she paid with respect to her 1995

joint Federal income tax liability.


                                   Decision will be entered for

                              respondent.
