                              T.C. Memo. 2016-129



                        UNITED STATES TAX COURT



BONNIE MARIA ARMOUR, Petitioner AND MARK V. POULSEN, Intervenor
      v. COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 7079-14.                           Filed July 11, 2016.



      Bonnie Maria Armour, pro se.

      John S. Pontius, Jr., Glen E. Frost, and Jessica F. Marine, for intervenor.

      Timothy B. Heavner, Matthew S. Reddington, and Wendy C. Yan, for

respondent.
                                         -2-

[*2]        MEMORANDUM FINDINGS OF FACT AND OPINION


       JACOBS, Judge: This case is before us with respect to respondent’s denial

of petitioner’s request for relief from joint and several liability under section 60151

for 2007, 2008, and 2009 (years involved). Petitioner and intervenor were married

during the years involved; they separated in 2009 and divorced in 2010 after

nearly 20 years of marriage. Petitioner and intervenor filed their 2007, 2008, and

2009 Forms 1040, U.S. Individual Income Tax Return, as married filing jointly.

Following an audit of petitioner and intervenor’s joint income tax returns, on

March 9, 2013, petitioner signed a Form 870-AD, Offer to Waive Restrictions on

Assessment and Collection of Tax Deficiency and to Accept Overassessment,

agreeing to the assessment and collection of income tax deficiencies and penalties

under section 6662(a) as follows:2



       1
        Unless otherwise indicated, all section references are to the Internal
Revenue Code, as amended, at all relevant times. All dollar amounts are rounded
to the nearest dollar.
       2
        Intervenor has no legal obligation to pay the outstanding tax liability
pursuant to the divorce decree. Intervenor has paid approximately $75,000 of the
outstanding tax liability while petitioner has made no such payment. The record
does not reveal for which tax year(s) intervenor’s payment was applied.
Regardless of whether intervenor’s payment satisfied any year’s tax liability, that
payment does not render petitioner’s request for relief from joint and several
liability moot. See Kaufman v. Commissioner, T.C. Memo. 2010-89.
                                        -3-

[*3]                                                               Penalty
       Year                     Deficiency                       sec. 6662(a)

       2007                       $24,186                            $4,837
       2008                        73,343                            14,018
       2009                         3,753                              -0-

On the same day she signed the Form 870-AD, petitioner signed a Form 8857,

Request for Innocent Spouse Relief, and filed it with the Internal Revenue Service

(IRS). Petitioner’s request for relief was denied on March 17, 2014.

                               FINDINGS OF FACT

       Some of the facts in this matter have been stipulated and are so found. At

the time she filed her petition, petitioner resided in Maryland. Petitioner holds a

high school diploma. She attended the University of Delaware for six months,

taking noncredit courses in data processing.

       While married, petitioner and intervenor owned the marital home, two rental

properties and a farm. Because petitioner and intervenor had a large blended

family, they owned a large van in addition to two pickup trucks and an Oldsmobile

Cutlass, which intervenor described as a “classic car”. They took family vacations

each year, including trips to Bermuda and Mexico. They enjoyed camping, and

throughout the years they purchased several campers, which they used on family

camping trips every few months.
                                       -4-

[*4] Intervenor owned M.V.P. Builders,3 which was the primary source of the

family’s income. Established in the early 1980s, M.V.P. Builders is a home

improvement company focusing on residential remodeling. A carpenter by trade,

intervenor operated the business, but he did not have the bookkeeping background

to maintain the company’s records. He hired petitioner to be the company’s

bookkeeper and office manager. Their relationship blossomed, and they

eventually wed.

      Petitioner was M.V.P. Builders’ bookkeeper/office manager for

approximately 20 years, including the years involved. She developed and

maintained the accounting program used by the business. Her duties included: (1)

managing the company’s financial records, bank accounts, and American Express

credit card account; (2) managing the company’s “end of the month check run”,

which reconciled all charge accounts that M.V.P. Builders had from its vendors,

roofing suppliers, lumber yards, plumbing supply houses, and other

subcontractors; (3) reconciling the company’s bank and credit card statements; (4)

managing the accounts payable and accounts receivable; (5) tracking inventory;

and (6) managing the company’s payroll. To these ends, petitioner had authority


      3
       During the years involved M.V.P. Builders was a sole proprietorship. It
was later incorporated at a time not specified in the record.
                                        -5-

[*5] to write and sign checks on behalf of M.V.P. Builders, deposit money into the

company’s accounts, and prepare checks and receipts for the business. Petitioner

was familiar with M.V.P. Builders’ clients and knew, or at least could have

learned, the amounts they paid the company. Before becoming M.V.P. Builders’

bookkeeper, petitioner had other experience in accounting.

      When petitioner managed M.V.P. Builders’ finances, her duties included the

end-of-year accounting for the company. She reviewed the company’s books and

provided information and documents to the company’s certified public accountant

(C.P.A.), Joe Tigne, who prepared petitioner and intervenor’s joint tax returns.

She also met and interacted with Mr. Tigne during the years involved. She

admitted to “booking things wrong” for M.V.P. Builders and was advised that she

had done so by Mr. Tigne.

      For 2007 petitioner and intervenor’s joint returns underreported income

attributable to M.V.P. Builders; for 2008 the returns underreported income and

overstated expenses attributable to M.V.P. Builders. The IRS made no

adjustments with respect to M.V.P. Builders for 2009.

      In addition to working for M.V.P. Builders, petitioner operated a horse care

and boarding business on the farm that she and intervenor owned. She exclusively

controlled the business, and under her stewardship the business’ income for each
                                        -6-

[*6] of the years involved was underreported. All adjustments made by the IRS

for 2009 were due to underreported income with respect to the horse care and

boarding business.

      Petitioner wrote checks drawn on M.V.P. Builders’ bank account to herself,

and she used the M.V.P. Builders’ American Express credit card to pay horse care

and boarding business and household expenses.

      Petitioner was given the joint income tax returns for 2007, 2008, and 2009

before they were filed, but she did not review them before signing them.

Petitioner was not a victim of spousal abuse or domestic violence during the years

involved.

      Respondent filed his posttrial brief on January 27, 2016. Intervenor notified

the Court on that same day that he would not file a brief. Petitioner’s reply brief

was due by April 13, 2016. No brief was filed by petitioner.

                                     OPINION

I.    Introduction to Relief From Joint and Several Liability

      In general, married taxpayers who file a joint Federal income tax return

under the provisions of section 6013(a) and (d)(3) are jointly and severally liable

for the tax reported or reportable on the tax return. Section 6015(a)(1) provides

that a spouse who has made a joint return may elect to seek relief from joint and
                                          -7-

[*7] several liability under subsection (b). Section 6015(a)(2) provides that if an

individual is eligible to elect the application of subsection (c), that individual may,

in addition to any election under subsection (a)(1), elect to limit his/her liability

for any deficiency with respect to the joint return in a manner prescribed in

subsection (c) of section 6015.

II.   Section 6015(b) Relief

      Section 6015(b)(1) provides that a taxpayer will be relieved of liability for

an understatement of tax if: (A) a joint return was made for the taxable year in

question; (B) there is an understatement of tax attributable to erroneous items of

the nonrequesting spouse; (C) the requesting spouse “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 would

be inequitable to hold the requesting spouse liable for the deficiency attributable

to the understatement; and (E) the requesting spouse elects to invoke subsection

(b) within two years after the date the Secretary has begun collection actions with

respect to the requesting spouse.

      The requirements of section 6015(b)(1) are conjunctive. Failure of a

requesting spouse to satisfy any one of the elements precludes relief. Alt v.

Commissioner, 119 T.C. 306, 313 (2002), aff’d, 101 F. App’x 34 (6th Cir. 2004).
                                          -8-

[*8] The requesting spouse bears the burden of proving entitlement to section

6015(b) relief. Id. at 311.

      Respondent concedes that petitioner satisfies the requirements of section

6015(b)(1)(A) and (E) (petitioner and intervenor filed joint tax returns for 2007,

2008, and 2009, and petitioner sought relief within the two-year limitations

period) but asserts that petitioner does not meet the requirements of subparagraphs

(C) (the spouse requesting relief must establish he/she did not know, and had no

reason to know, of the understatement of tax on the returns4) and (D) (it would be

inequitable to hold the requesting spouse liable for the deficiency).

      We agree with respondent that the requirements of section 6015(b)(1)(C)

have not been met in that petitioner did not establish that she did not know, and

had no reason to know, of the understatements of tax. As a preliminary matter,

petitioner concedes she is responsible for the understatement of tax attributable to

the horse care and boarding business and therefore she does not qualify for relief

with respect to the unpaid tax attributed thereto. Petitioner maintains she is

entitled to relief from liability with respect to the deficiencies attributable to


      4
       “The requirement in section 6015(b)(1)(C) * * * is virtually identical to the
same requirement of former section 6013(e)(1)(C); therefore, cases interpreting
former section 6013(e) remain instructive to our analysis.” Doyel v.
Commissioner, T.C. Memo. 2004-35, 2004 WL 238022, at *8.
                                          -9-

[*9] M.V.P. Builders because she was not the owner of the company and only

made data entries. We disagree. As M.V.P. Builders’ bookkeeper and office

manager for approximately two decades, including the years involved, petitioner

was directly responsible for maintaining all records relating to the company’s

finances. She had access to the business’ checking accounts, credit card account,

payroll, bills, receipts, and deposits; she wrote checks, made the bank deposits,

and reconciled the company’s bank records. She provided the information and

documentation that the C.P.A. used in connection with the preparation of

petitioner and intervenor’s joint income tax returns. And despite having access to

the information underlying the income and expenses reported on the joint income

tax returns, petitioner failed to review the returns, or inquire as to their accuracy,

before they were filed.

      In sum, we find that petitioner knew of the understatements of tax on each

of the returns filed for each of the years involved within the meaning of section

6015(b)(1)(C). Accordingly, petitioner is not entitled to the requested relief from

joint and several liability under section 6015(b).5




      5
      Because we agree with respondent that the requirements of sec.
6015(b)(1)(C) have not been met, we do not address the requirements of subpara.
(D).
                                          - 10 -

[*10] III.   Section 6015(c) Relief

      Section 6015(c) provides that a divorced or legally separated spouse may

elect to limit liability for a deficiency on a joint return to the portion allocable to

him or her under subsection (d); i.e., the tax liability is allocated between the

individuals who filed a joint return in approximately the same way it would have

been had the individuals filed separately.

      To be eligible for section 6015(c) relief, the electing spouse must establish

that: (1) the spouses filed joint returns for the years involved; (2) at the time the

election for relief was made, the spouses were legally separated, divorced, or had

not been members of the same household anytime during the previous 12 months;

and (3) the request for relief was made within two years of the first collection

activity. See sec. 6015(c)(1), (3). Moreover, no assets may be transferred between

the spouses in a fraudulent scheme. See sec. 6015(c)(3)(A)(ii). Respondent does

not dispute that petitioner meets these requirements.

      Relief under section 6015(c) is not available where the Commissioner

demonstrates that the requesting spouse had actual knowledge at the time he/she

signed the return of any item giving rise to a deficiency which is not allocable to

the requesting spouse under section 6015(d). Sec. 6015(c)(3)(C). The knowledge

standard for purposes of section 6015(c)(3)(C) is “an actual and clear awareness
                                      - 11 -

[*11] (as opposed to reason to know) of the existence of an item which gives rise

to the deficiency (or portion thereof).” Cheshire v. Commissioner, 115 T.C. 183,

195 (2000), aff’d, 282 F.3d 326 (5th Cir. 2002); see also Grossman v.

Commissioner, 182 F.3d 275, 279 (4th Cir. 1999), aff’g T.C. Memo. 1996-452.

      If an item of income is omitted, the requesting spouse must have actual

knowledge of the income, which includes knowledge of the receipt of the income.

Harrington v. Commissioner, T.C. Memo. 2012-285; sec. 1.6015-3(c)(2)(i)(A),

Income Tax Regs. We do not infer actual knowledge from a mere reason to know

of the omitted income. Harrington v. Commissioner, T.C. Memo. 2012-285; sec.

1.6015-3(c)(2)(iii), Income Tax Regs. Similarly, a requesting spouse must have

actual knowledge of an improperly deducted item on a return. In and of itself, the

requesting spouse’s knowledge that a deduction appears on the return is

insufficient. King v. Commissioner, 116 T.C. 198, 205 (2001). The requesting

spouse has actual knowledge of an erroneous deduction if he/she has knowledge

of the factual circumstances which made the item unallowable as a deduction. Id.

at 204; sec. 1.6015-3(c)(2)(i)(B)(1), Income Tax Regs.

      With respect to the unpaid tax attributable to the horse care and boarding

business, petitioner concedes she is responsible for these amounts as she was

responsible for operating the horse care and boarding business. These amounts are
                                        - 12 -

[*12] therefore allocable to petitioner, i.e., the requesting spouse. With respect to

the unpaid tax attributable to M.V.P. Builders, we find that petitioner had actual

knowledge of the company’s unreported income and excessive deductions. As

previously stated, petitioner managed the company’s books and finances and was

well aware of the company’s actual income and outlays. Petitioner also collected

and provided the company’s financial information and documentation to the

family’s C.P.A., Mr. Tigne, to allow him to prepare her and intervenor’s joint

income tax returns. She was aware of M.V.P. Builders’ receipt of income. And

she had knowledge of the factual circumstances of the company’s expenses, giving

her knowledge of the factual circumstances which made the claimed expense items

unallowable as deductions.

      We therefore hold that petitioner is not entitled to the requested relief from

joint and several liability under section 6015(c).

IV.   Section 6015(f) Equitable Relief

      Section 6015(f) provides for equitable relief under procedures prescribed by

the Secretary if: (1) taking into account all the facts and circumstances, it is

inequitable to hold the individual liable for any unpaid tax or any deficiency and

(2) relief is not available to the requesting spouse under subsection (b) or (c). The
                                        - 13 -

[*13] requesting spouse has the burden of proving that he/she is entitled to relief.

Alt v. Commissioner, 119 T.C. at 311. We apply a de novo scope and standard of

review in reviewing the requesting spouse’s prayer for relief. Porter v.

Commissioner, 132 T.C. 203, 210 (2009).

      Respondent concedes that petitioner meets the requirement of section

6015(f)(2), in that relief is not available under subsection (b) or (c). With respect

to section 6015(f)(1), the Commissioner published Rev. Proc. 2013-34, 2013-43

I.R.B. 397, outlining the factors the IRS normally considers in deciding whether

section 6015(f) relief should be granted. While this Court is not bound by IRS

revenue procedures, we often look to them for guidance. Hollimon v.

Commissioner, T.C. Memo. 2015-157, at *7-*8; see Pullins v. Commissioner, 136

T.C. 432, 438-439 (2011).

      Rev. Proc. 2013-34, sec. 4, 2013-43 I.R.B. at 399-403, sets forth a three-

step procedure to be followed in evaluating requests for relief: (1) section 4.01

lists seven threshold conditions which must be met; (2) section 4.02 lists

circumstances in which the IRS will make streamlined relief determinations; and

(3) section 4.03 sets forth nonexclusive factors that the IRS will consider in

determining whether equitable relief should be granted because it would be

inequitable to hold a requesting spouse jointly and severally liable.
                                         - 14 -

[*14] The seven eligibility conditions, all of which must be satisfied for the IRS to

consider a claim for equitable relief under section 6015(f), pursuant to Rev. Proc.

2013-34, sec. 4.01, are as follows:

             (1) The requesting spouse filed a joint return for the taxable
      year for which he or she seeks relief.

            (2) Relief is not available to the requesting spouse under
      section 6015(b) or (c).

             (3) The claim for relief is timely filed * * *

            (4) No assets were transferred between the spouses as part of a
      fraudulent scheme by the spouses.

             (5) The nonrequesting spouse did not transfer disqualified
      assets to the requesting spouse * * *

             (6) The requesting spouse did not knowingly participate in the
      filing of a fraudulent joint return.

             (7) The income tax liability from which the requesting spouse
      seeks relief is attributable (either in full or in part) to an item of the
      nonrequesting spouse or an underpayment resulting from the
      nonrequesting spouse’s income. If the liability is partially
      attributable to the requesting spouse, then relief can only be
      considered for the portion of the liability attributable to the
      nonrequesting spouse. Nonetheless, the Service will consider
      granting relief regardless of whether the understatement, deficiency,
      or underpayment is attributable (in full or in part) to the requesting
      spouse if any of the following exceptions applies: (a) Attribution
      solely due to the operation of community property law. * * *(b)
      Nominal ownership. * * * (c) Misappropriation of funds. * * * (d)
      Abuse. * * * (e) Fraud committed by nonrequesting spouse.
                                         - 15 -

[*15] Petitioner acknowledges that the understatement in tax arising from the

horse care and boarding business is attributable to her. Because condition 7 is not

satisfied, petitioner concedes she is ineligible for relief with respect to the

understatement of tax attributable to the horse care and boarding business.

However, with respect to the understatements attributable to M.V.P. Builders,

because petitioner did not hold an ownership interest in the company, and because

respondent concedes that petitioner meets all other threshold conditions set forth

in Rev. Proc. 2013-34, sec. 4.01, we move on to the next step in our analysis.

      Rev. Proc. 2013-34, sec. 4.03,6 provides a list of nonexclusive factors to be

weighed by the IRS in making a decision. They include (a) marital status (i.e., do

the spouses remain together?); (b) economic hardship; (c) knowledge or reason to

know of the requesting spouse; (d) legal obligation arising from a divorce decree

or other binding agreement; (e) significant benefit gained by the requesting

spouse; (f) compliance with income tax laws; and (g) mental or physical health at

the time of filing the request for relief. No single factor is determinative, and all

factors are considered and weighed appropriately. Kellam v. Commissioner, T.C.

Memo. 2013-186, at *26.

      6
        Petitioner has not asserted that she qualifies for the streamlined procedures
for relief provided in Rev. Proc. 2013-34, sec. 4.02, 2013-43 I.R.B. 397, 400. We
therefore do not address them.
                                          - 16 -

[*16] Respondent concedes that (a) marital status and (f) compliance with tax

laws weigh in favor of relief. We therefore limit our inquiry to factors (b)

economic hardship, (c) knowledge or reason to know, (d) legal obligation, (e)

significant benefit, and (g) mental/physical health.

      1.     Economic Hardship

      Rev. Proc. 2013-34, sec. 4.03(2)(b), provides that an economic hardship

“exists if satisfaction of the tax liability in whole or in part will cause the

requesting spouse to be unable to pay reasonable basic living expenses.” Whether

a requesting spouse will suffer economic hardship is based on rules similar to

those in section 301.6343-1(b)(4), Proced. & Admin. Regs. The facts and

circumstances considered include: (1) the requesting spouse’s age, employment

status and history, ability to earn, and number of dependents; (2) the amount

reasonably necessary for food, clothing, housing, medical expenses,

transportation, and current tax payments; and (3) any extraordinary circumstances

such as special educational expenses, a medical catastrophe, or a natural disaster.

Id. In addition, the IRS considers the requesting spouse’s current income

(including how the requesting spouse’s income compares to Federal poverty

guidelines) and assets in comparison with his/her expenses. Rev. Proc. 2013-34,

sec. 4.03(2)(b). Factor (b) (economic hardship) weighs in favor of relief where the
                                        - 17 -

[*17] requesting spouse would suffer economic hardship if relief were denied and

is neutral where the requesting spouse would not suffer such hardship if relief

were denied. Id. At trial petitioner established to the Court’s satisfaction that she

was in some economic difficulty.7 Consequently, we find that this factor weighs

in favor of relief.

       2.     Knowledge or Reason To Know

       Under this factor we examine whether the requesting spouse knew, or had

reason to know, that there was an understatement or deficiency on the joint income

tax return, or did not know, or had reason to know, that the nonrequesting spouse

would not or could not pay a reported but unpaid tax liability. See id. sec.

4.03(2)(c)(ii). The factors enunciated in the revenue procedure are essentially the

same as those relied upon by section 6015(b)(1)(C) and (c). As discussed supra,

petitioner operated the horse care and boarding business and had charge of M.V.P.

Builders’ books and finances. Petitioner had reason to know of the

understatements of tax. Moreover, petitioner has not claimed that she was abused

       7
        We note the Cincinnati Centralized Innocent Spouse Operation’s
determination that the economic factor favored relief as petitioner’s gross income
was at 250% or less of the Federal poverty line and that she did not have sufficient
assets to make payments and still pay basic family living expenses. The IRS
Appeals officer’s own analysis indicated that petitioner’s household income was
below the Federal poverty line and her expenses were slightly less than her
income. Yet the Appeals officer found that this factor was neutral.
                                          - 18 -

[*18] by intervenor or that he restricted her access to financial information. We

find this factor weighs against relief.

      3.     Legal Obligation

      Rev. Proc. 2013-34, sec. 4.03(d) provides that if the nonrequesting spouse

has the sole legal obligation to pay the outstanding income tax liability pursuant to

a divorce decree or other legally binding agreement, this factor will weigh in favor

of relief. There is no evidence that intervenor has any legal obligation to pay any

outstanding income tax liabilities for the years involved. We find this factor to be

neutral.

      4.     Significant Benefit

      Under this factor we consider whether the requesting spouse received a

significant benefit, beyond normal support, from the unpaid income tax liability.

Id. sec. 4.03(2)(e). Normal support is measured by the circumstances of the

particular parties. Porter v. Commissioner, 132 T.C. at 212. This factor will

weigh in favor of relief if the nonrequesting spouse significantly benefited from

the unpaid tax or understatement and the requesting spouse had little or no benefit

or the nonrequesting spouse enjoyed the benefit to the requesting spouse’s

detriment. Id.
                                        - 19 -

[*19] Petitioner wrote checks to herself from M.V.P. Builders’ checking account

for personal use and to support her horse care and boarding business. We find this

factor weighs against relief.

      5.     Mental/Physical Health

      There is no evidence that petitioner was ill when she signed the returns for

the years involved or when she requested relief. Nor did she appear to be in ill

health at trial. We find this factor weighs against relief. See Pullins v.

Commissioner, 136 T.C. at 454.

      6.     Conclusion

      We conclude that petitioner is not entitled to relief from joint and several

liability under section 6015(f) for any of the years involved. The most significant

factor in reaching our conclusion is that petitioner had knowledge of the

understatements of tax or deficiencies with respect to the joint income tax returns.

Petitioner was directly responsible for the underreporting of income with respect

to the horse care and boarding business and, as M.V.P. Builders’

bookkeeper/office manager, she knew of the underreporting of income and

excessive expense deductions attributable to that business.
                                  - 20 -

[*20] To reflect the foregoing,


                                           Decision will be entered

                                  for respondent.
