                  T.C. Summary Opinion 2006-34



                     UNITED STATES TAX COURT



                 BRENDA J. CLARK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9035-04S.                  Filed February 22, 2006.


     Brenda J. Clark, pro se.

     Inga C. Plucinski, for respondent.




     COUVILLION, Special Trial Judge:     This case was heard

pursuant to section 7463 in effect when the petition was filed.1

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

and this opinion should not be cited as authority.



     1
      Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the years at
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 2 -

     In a notice of deficiency to petitioner and her former

spouse, James B. Clark (Mr. Clark), respondent determined income

tax deficiencies, an addition to tax, and penalties as follows:


                                Addition to Tax     Penalty
     Year      Deficiency       Sec. 6651(a)(1)   Sec. 6662(a)

     1998      $ 7,494              $776.75       $1,498.80
     2000       14,163                 --          2,832.60
     2001        5,754                 --          1,150.80


     The sole issue for decision is whether, under section 6015,

petitioner is entitled to relief from joint liability for the

above deficiencies, addition to tax, and penalties.

     Some of the facts were stipulated.    Those facts, with the

exhibits annexed thereto, are so found and are made part hereof.

Petitioner’s legal residence at the time the petition was filed

was West Valley City, Utah.

     During the years at issue, petitioner was married to Mr.

Clark.   The two filed joint Federal income tax returns for 1998,

2000, and 2001.   Petitioner and Mr. Clark were divorced on

September 26, 2003.   On March 1, 2004, respondent issued a notice

of deficiency jointly to petitioner and Mr. Clark in which the

above deficiencies, addition to tax, and penalties were

determined.   Mr. Clark filed a petition with this Court, in his

own behalf, for a redetermination of the adjustments in the

notice of deficiency.    That case proceeded to trial, and the

Court sustained respondent on all determinations in the notice of
                                 - 3 -

deficiency.   Clark v. Commissioner, T.C. Memo. 2005-292.

Petitioner was not a party in Mr. Clark’s case.    In this case,

petitioner has not challenged the determinations in the notice of

deficiency.   Petitioner’s sole claim is that she is entitled,

under section 6015, to relief from joint liability for the 3

years in question.2   Mr. Clark was served with notice of this

case and his right to intervene.    Mr. Clark did not file a notice

of intervention and did not appear or participate in the trial of

this case.

     Petitioner and her spouse were married in 1975 and had three

children, all of whom were adults at the time of trial.     On the

1998 return, one child was claimed as a dependent.    None were

claimed as dependents on the subsequent returns.

     Petitioner’s educational background included studies at a

vocational technical school, which was a part of Idaho State

University, where she took accounting and business math courses.

For approximately 25 years, petitioner’s employment was primarily

as a secretary, which, at times, involved accounting and

administrative record keeping.    Petitioner’s spouse was an

accountant.   At the time of trial, petitioner described her


     2
      It follows that a decision in this case will be entered
against her for the determinations in the notice of deficiency,
and the Court will further decide on petitioner’s claim for
relief under sec. 6015. Except as otherwise provided in sec.
6015, petitioner bears the burden of proof. Rule 142(a); Alt v.
Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34
(6th Cir. 2004).
                               - 4 -

employment as being in the “accounting area” for her employer

Boise Cascade Corp.

     Prior to 1998, petitioner and Mr. Clark lived in Idaho.

During 1998, they moved from Idaho to Murray, Utah, where they

purchased a home.   In 1999, Mr. Clark quitclaimed his interest in

the home to petitioner.   At some point in time, petitioner sold

the home and purchased a condominium in West Valley City, Utah.

Although petitioner and Mr. Clark were divorced on September 26,

2003, they lived together during the 3 years at issue.

     As previously stated, petitioner and Mr. Clark filed joint

Federal income tax returns for 1998, 2000, and 2001.   On their

1998 return, petitioner and Mr. Clark reported the following

income and deductions:


     Wages and salary                                  $36,718
     Taxable interest                                      305
     Taxable refunds                                       983
     Total pensions and annuities (taxable portion)     14,475
     Unemployment compensation                           4,510
       Total income                                    $56,991
     Moving expenses                                   (35,304)
       Adjusted gross income                           $21,687
     Itemized deductions                                (9,767)
     Dependency exemptions                              (8,100)
       Taxable income                                  $ 3,820


The $35,304 in moving expenses was for the move by petitioner and

Mr. Clark from Idaho to Murray, Utah.3

     3
      In Mr. Clark’s case before this Court, he admitted that the
$35,304 claimed for moving expenses included approximately
                                                   (continued...)
                              - 5 -

     For the year 2000, petitioner and Mr. Clark filed a joint

Federal income tax return on which they reported the following

income and deductions:


     Wages and salary                                    $27,007
     Taxable interest                                          17
     Loss, Schedule C, Profit or Loss From Business      (10,607)
       Total income                                      $16,417
     Itemized deductions                                 (10,741)
     Dependency exemptions                                 (5,600)
       Taxable income                                    $     76


     Of the items listed above, the $10,607 Schedule C loss came

from a trade or business activity of Mr. Clark.   Of the $27,007

in wage and salary income, $24,906.91 represented petitioner’s

earnings and $2,100 represented earnings of Mr. Clark.

     For the year 2001, petitioner and Mr. Clark filed a joint

return in which they reported the following income:


          Wages and salary              $41,660
          Taxable refunds                 1,218
            Total income                $42,878


Of the wage and salary reported, $25,350 represented petitioner’s

wage and salary income and $16,310 represented wages and salary

of Mr. Clark.



     3
      (...continued)
$20,000 to replace the roof of their Idaho residence, which
presumably was an improvement that would facilitate its sale in
connection with petitioner and Mr. Clark’s move from Idaho to
Utah.
                                - 6 -

     Approximately 1 year before the issuance of the notice of

deficiency, and presumably motivated by respondent’s examination

of the tax returns for the years at issue, petitioner filed Form

8857, Request for Innocent Spouse Relief.     In that request,

petitioner claimed as her basis for relief:


     My husband prepares our taxes and I am not informed of any
     information of ways he prepares these taxes. I don’t know
     of expenses or income he claims. I do not review the taxes
     he prepares. He is responsible for any taxes due, past and
     future. I know he is being audited for 1998, 2000, and
     2001, and I have no input into these returns and know
     nothing of these results. Take my liability for any taxes
     owed off me because I am not responsible for his actions,
     filings, information, or money.


     Respondent’s action on petitioner’s application for section

6015 relief is set out in the notice of deficiency.     In addition,

the parties stipulated a copy of the transcript of petitioner’s

hearing before the Appeals officer.     That officer considered

petitioner’s application for relief under section 6015(b), (c),

and (f).   He concluded that petitioner was not entitled to relief

under the cited provisions.

     Generally, married taxpayers may elect to file jointly a

Federal income tax return.    Sec. 6013(a).   Each spouse is jointly

and severally liable for the entire tax due.     Sec. 6013(d)(3).   A

spouse (requesting spouse) may, however, seek relief from joint

and several liability under section 6015(b) or, if eligible, may

seek an allocation of liability under section 6015(c).     Sec.
                               - 7 -

6015(a).   If relief is not available under section 6015(b) or

(c), a requesting spouse may seek equitable relief under section

6015(f).   Sec. 6015(f)(2).

     A prerequisite to granting relief under section 6015(b) or

(c) is the existence of a tax deficiency or, as referred to in

various cases, an “understatement of tax”.    Sec. 6015(b)(1)(B)

and (c)(1); Block v. Commissioner, 120 T.C. 62, 65-66 (2003).      In

this case, there are understatements of tax; consequently,

petitioner is entitled to consideration for relief under section

6015(b) and (c) as well as section 6015(f).

     Under section 6015(b), a taxpayer is entitled to full or

apportioned relief from joint and several liability for an

understatement of tax on a joint return if, among other

requirements, the taxpayer establishes that he or she “did not

know, and had no reason to know” that the other spouse

understated the tax on the return.     Sec. 6015(b)(1)(C).

     In the examination of petitioner’s joint returns for the 3

years at issue, because of inadequate records respondent

determined the taxable income of petitioner and her spouse by use

of the bank deposits method.   The issue in this case,

petitioner’s entitlement to relief from joint liability, to some

extent is predicated on her personal background in education and

work experience in areas of business and accounting.     Petitioner,

therefore, knew or should have known of the necessity of books
                                - 8 -

and records with respect to the determination of taxable income.

Since petitioner and her husband’s records were so deficient that

respondent was required to employ an indirect method in

determining their income for the years at issue, it is a fair

observation that petitioner bears some culpability in the failure

to keep books and records.   That alone, however, does not

foreclose petitioner’s entitlement to claim relief from joint

liability under section 6015.

     Section 6015(b)(1) allows relief from joint and several

liability if five elements are met.     Two of those elements are

pertinent in this case:   (1) On the joint return, there is an

understatement of tax attributable to erroneous items of one

individual filing the return, and (2) 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

an understatement.   Sec. 6015(b)(1)(A), (B), and (C).     With

respect to the year 1998, in the examination of petitioner’s bank

accounts, which included one bank account of petitioner and a

joint account with her husband, respondent determined that

several deposits into these accounts, totaling $9,131,

constituted unreported gross income.     Another item of

significance was the claimed deduction for moving expenses in the

amount of $35,304 on the 1998 return.     In the audit of the

returns, petitioner readily admitted that such an amount for
                                 - 9 -

moving was excessive and that the actual cost was between $300 to

$500.     She and her spouse had not employed a commercial house

mover but had rented a U-Haul trailer and a truck, which they

drove themselves.     That exorbitant cost was also noted in Mr.

Clark’s case before this Court.     Petitioner, therefore, knew or

should have known that these unexplained deposits were coming

from somewhere, i.e., her husband’s trade or business activity,

and also admitted the $35,304 deduction for moving expenses was

incorrect.     Thus, for 1998, petitioner knew, in signing the

return, that there was an understatement of tax with respect to

the items discussed.     Petitioner, therefore, is not entitled to

relief for 1998.

        For the year 2000, the joint return included a Schedule C

for an Internet trade or business activity of Mr. Clark, which

petitioner was well aware of.     On Schedule C for that year, the

reported gross income was $1,682, the expenses deducted were

$12,289, and the reported net loss was $10,607.     Respondent

determined that the gross receipts from the activity were

$33,986.23 and that, during the course of the year, $11,019 was

transferred from the joint account petitioner had with her

husband to petitioner’s personal account.     Thus, the $10,607 loss

from this Schedule C activity served to reduce petitioner and Mr.

Clark’s wage and salary income of $27,007, $24,906.91 of which

represented earnings of petitioner.      Petitioner knew her husband
                              - 10 -

had a business and, therefore, knew that these deposits or

transfers to her account came from that business.    Therefore, in

connection with petitioner’s claim for relief, for purposes of

section 6015(b), there was an understatement of tax attributable

to erroneous items of the other spouse, and petitioner, in

signing the return, knew or had reason to know of an

understatement of tax attributable to this income.   Sec.

6015(b)(1)(B) and (C).   The Court, therefore, sustains

respondent’s determination that petitioner is not entitled to

relief under section 6015(b) for the year 2000.

     For the year 2001, the tax return for that year included an

itemized deduction of $21,355 for unreimbursed employee business

expenses.   In the audit of the return for that year, respondent

contacted Mr. Clark’s employer, and that employer verified that

these claimed expenses had been reimbursed to Mr. Clark.

Respondent also determined that, as in prior years, unexplained

deposits of $7,038 were made to petitioner’s account during 2001,

all of which were attributable to her husband’s activity.    The

Court is satisfied that petitioner knew or had reason to know of

this omitted income in the same fashion as she did for the 2

earlier years.   Respondent also determined, as was determined in

earlier years, that the unexplained deposits to her account also

represented income from her husband’s trade or business activity.

The Court holds, therefore, that, in signing the income tax
                                - 11 -

return for 2001, petitioner knew that there was an underpayment

of tax attributable to these items.      Respondent, therefore, is

sustained in denying petitioner relief for the year 2001 under

section 6015(b).

     The Court next addresses whether petitioner is entitled to

relief under section 6015(c).    Section 6015(c) provides relief

from joint liability for spouses either no longer married,

legally separated, or living separate and apart.      Generally, this

avenue of relief allows a spouse to elect to be treated as if a

separate return had been filed.    Rowe v. Commissioner, T.C. Memo.

2001-325.   Section 6015(c)(2) places the burden of proof with

respect to establishing the portion of the deficiency allocable

to the electing spouse upon that spouse.      An election is not

valid if the Commissioner demonstrates that the electing spouse

had actual knowledge of an item giving rise to the deficiency.

Sec. 6015(c)(3)(B).

     As to these 3 years, respondent considered the same facts

discussed above relating to petitioner’s claim for relief under

section 6015(b).   Based on these facts, the examiner concluded

that petitioner knew or had reason to know of the various

transactions that gave rise to the deficiencies, and that

petitioner benefited from the redetermined items of income and

disallowed expenses.   As noted earlier, some of the deposits to

petitioner’s bank account came from Mr. Clark’s trade or
                               - 12 -

business.   Since petitioner had actual knowledge of these

transfers, that alone precludes her from claiming relief under

section 6015(c).

     If a taxpayer’s request for relief under section 6015(f) is

denied, the taxpayer may petition this Court (pursuant to section

6015(e)(1)) for a review of the determination.    Ewing v.

Commissioner, 118 T.C. 494, 497-507 (2002).    To prevail,

petitioner must prove that respondent’s denial of equitable

relief from joint liability under section 6015(f) was an abuse of

discretion.    Jonson v. Commissioner, 118 T.C. 106, 125

(2002), affd. 353 F.3d 1181 (10th Cir. 2003); Cheshire v.

Commissioner, 115 T.C. 183, 198 (2000), affd. 282 F.3d 326 (5th

Cir. 2002); Butler v. Commissioner, 114 T.C. 276, 291-292 (2000).

     Section 6015(f) provides:


          SEC. 6015(f). 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 (or any
            portion of either); and

                 (2) relief is not available to such individual
            under subsection (b) or (c),

     the Secretary may relieve such individual of such liability.


     As directed by section 6015(f), 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
                                - 13 -

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   The requesting spouse must satisfy

seven conditions (threshold conditions) before the Commissioner

will consider a request for relief under section 6015(f).     Rev.

Proc. 2003-61, supra.   Respondent agrees that petitioner has

satisfied those threshold conditions.

     Where, as here, the requesting spouse satisfies the

threshold conditions, Rev. proc. 2003-61, sec. 4.03,5 lists

factors to be considered in determining whether to grant

equitable relief.   Therefore, the Court considers the factors in

Rev. Proc. 2003-61, sec. 4.03(2)(a) and (b) in determining

whether respondent abused his discretion in denying equitable

relief under section 6015(f).

     In this case, petitioner satisfies only one of the factors

listed in the revenue procedure.    Petitioner divorced Mr. Clark

in 2003; therefore, she satisfies the first factor.   With respect


     4
      Rev. Proc. 2000-15, 2000-1 C.B. 447, was superseded by Rev.
Proc. 2003-61, 2003-2 C.B. 296, and is effective as to requests
for relief filed on or after Nov. 1, 2003, and also is effective
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 on Feb. 18, 2003,
and the report of the Appeals officer is dated Feb. 15, 2005.
Therefore, petitioner’s claim for relief was pending on Nov. 1,
2003.
     5
      The Court need not consider Rev. Proc. 2003-61, sec. 4.02,
2003-2 C.B. at 298, since that section relates to
“underpayments”.
                                - 14 -

to the second factor, the taxpayer must show that he or she would

be unable to pay basic reasonable living expenses if relief were

not granted.    Monsour v. Commissioner, T.C. Memo. 2004-190.

Being unable to pay basic reasonable living expenses would amount

to economic hardship.    Sec. 301.6343-1(b)(4)(i), Proced. & Admin.

Regs.   Petitioner has not established that denial of her request

for relief would result in economic hardship.    She was gainfully

employed, she had no dependents to support, and, in 1999,

petitioner’s spouse had quitclaimed his interest in their Murray,

Utah, home.    In the divorce decree, petitioner was awarded

$27,500, which represented all of the proceeds from the sale of

that home.     Additionally, the divorce decree ordered the former

spouse to pay petitioner alimony of “not less than $300 per

month” until either her death, remarriage, or cohabitation with

an adult male who was not a blood relative.    The Court fails to

see, and petitioner has not established, that she would suffer

economic hardship if her request for relief from joint liability

is denied.

     As to the third factor, the Court has held that petitioner,

particularly in light of her educational background and chosen

vocation, knew or should have known that Mr. Clark’s bookkeeping

was deficient.    Moreover, petitioner received direct deposits,

both in her personal account and her joint account with Mr.

Clark, of unreported gross income during each of the years at
                               - 15 -

issue.    Therefore, petitioner knew when she signed her joint

return for each of the years at issue that there was an

understatement of tax.    Rev. Proc. 2003-61, supra, specifically

states that actual knowledge by the requesting spouse of the item

giving rise to the deficiency is a strong factor weighing against

relief.    This strong factor may only be overcome if the factors

in favor of equitable relief are particularly compelling.

     The fourth and sixth factors are neutral.    There was no

legal obligation on either side to pay for the liability for the

years at issue and there is no evidence that petitioner either

failed to comply with or fully complied with tax obligations.6

     Petitioner also fails to satisfy the fifth factor, because

although the gross income and claimed deductions from which the

liability arises is directly attributable to Mr. Clark,7

petitioner received a significant benefit from the items giving

rise to the deficiency.    This benefit goes beyond that of normal

support.    Part of Mr. Clark’s unreported income was deposited



     6
      In determining whether petitioner complied or failed to
comply with tax obligations, the Court notes that petitioner did
not allege she suffered any abuse, mental or physical, from Mr.
Clark. In addition, petitioner presented no evidence that she
was in poor mental or physical health either when she signed the
return or when she filed her request for relief.
     7
      The liability for the years at issue consisted of
unreported nonemployee compensation to Mr. Clark, a claimed
deduction for unreimbursed employee expenses for Mr. Clark, a
claimed deduction for moving expenses for Mr. Clark, and Schedule
C losses attributed to Mr. Clark’s business.
                              - 16 -

directly into petitioner’s personal account, and the remainder

was deposited into their joint bank account.   In addition, the

exaggeration of Mr. Clark’s moving expenses, unreimbursed

employee expenses, and Schedule C losses reduced petitioner’s tax

liability on the joint returns.   Finally, petitioner’s greatest

benefit was the quitclaim deed Mr. Clark executed in 1999, which

gave all of his interest in their home solely to petitioner.    The

house was purchased in 1998, presumably with the income of both

petitioner and Mr. Clark and with income that Mr. Clark failed to

report.   As previously noted, petitioner sold that home, received

all proceeds from the sale, and later used them to purchase a

condominium.

     The failure of petitioner to satisfy all but one of the

factors in Rev. Proc. 2003-61, supra, is determinative.     After

considering all the facts and circumstances, the Court holds that

there was no abuse of discretion by respondent in denying relief

to petitioner under section 6015(f).   The Court, therefore,

sustains that denial.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                         Decision will be entered

                                    for respondent.
