                        T.C. Memo. 2010-259



                     UNITED STATES TAX COURT



                 ROBERT B. MCGHEE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27465-07.              Filed November 29, 2010.



     Charles Norman Woodward, for petitioner.

     Dessa J. Baker-Inman and Bruce K. Meneely, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:   Pursuant to section 6015 petitioner seeks

relief from joint and several liability for unpaid Federal income

taxes for 2001 and 2002.1



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                               - 2 -

                        FINDINGS OF FACT

     The parties have stipulated some facts, which we incorporate

by this reference.   When he petitioned the Court, petitioner

resided in Oklahoma.

     Petitioner and Cynthia S. McGhee (Mrs. McGhee) have been

married at all relevant times and have not been legally

separated.   They have four children, who were minors during the

years at issue.

     Petitioner has a master’s degree in business administration.

Since 1982 he has been a commercial airplane pilot, an occupation

that keeps him away from home about 20 days each month.    During

the years at issue he was also active in the Air Force Reserve.

     For about 10 years beginning in 1988 or 1989, petitioner and

Mrs. McGhee operated an aviation training business.   In 1998 or

1999 petitioner and Mrs. McGhee, as well as their aviation

business, filed for bankruptcy.   Their debts included significant

Federal income tax and trust fund liabilities.   On August 15,

2001, petitioner and Mrs. McGhee submitted to the Internal

Revenue Service (IRS) an offer-in-compromise based on doubt as to

collectibility offering to pay $42,000 to compromise tax

liabilities totaling $582,520 for the years 1993 through 1998.2

By letter dated September 6, 2001, the IRS accepted this offer-




     2
      Numbers have been rounded to the nearest dollar.
                                 - 3 -

in-compromise.   In 2002 petitioner and Mrs. McGhee paid the

$42,000 from the proceeds of a home equity loan.

     At some time undisclosed in the record, but no later than

2000, Mrs. McGhee accepted employment with the Oklahoma City law

firm of Burch & George, P.C. (Burch & George).       During 2001 and

until June 2002 she was Burch & George’s office manager and

bookkeeper.   Around April 2001 she began embezzling by

periodically writing checks to herself on Burch & George’s

checking account.     In June 2002 she got caught.   It was then that

petitioner first learned that she had been embezzling.

     On June 18, 2002, Burch & George filed a civil suit against

petitioner and Mrs. McGhee, asserting that Mrs. McGhee had

embezzled funds and seeking recovery of the embezzled funds plus

damages and costs.3    On October 23, 2002, criminal charges were

filed against Mrs. McGhee for 23 counts of embezzlement from

Burch & George over the period April 2001 through April 2002.

On January 14, 2004, Mrs. McGhee entered a no contest plea.      On

May 17, 2004, she was sentenced to 20 years in prison and 30

years’ probation.     On December 17, 2004, her sentence was

suspended, and she was ordered to pay $213,144 of restitution to




     3
      On Dec. 16, 2002, after the criminal proceedings had been
instituted, Burch & George withdrew this civil cause of action.
                                - 4 -

Burch & George, with $60,000 due February 1, 2005, and $2,000 due

each month thereafter.4

     Initially, Mrs. McGhee deposited the embezzled funds into a

Bank of Oklahoma checking account that she held jointly with

petitioner.    In January 2002 she opened another Bank of Oklahoma

account in her name alone and began depositing the embezzled

funds into that account.   During the years at issue petitioner

maintained separate checking accounts, in his name alone, at

other banks.   He deposited his paychecks into these accounts,

which he used to pay household expenses, including mortgage

payments, utilities, and insurance.

     For 2001 and 2002 Burch & George sent Mrs. McGhee Forms W-2,

Wage and Tax Statement, reporting only the wages paid to her

($34,145 for 2001 and $12,253 for 2002) and none of the embezzled

funds.   On or about April 8, 2002, petitioner and Mrs. McGhee

filed their joint Federal income tax return for 2001.      On or

about August 15, 2003, they filed their joint Federal income tax

return for 2002.   On these joint returns they reported their

wages but no embezzlement income.5      The taxes reported on these


     4
      Petitioner testified that he paid Burch & George $30,000 on
the day of Mrs. McGhee’s sentencing. The record does not reveal
what other amounts, if any, have been repaid to Burch & George.
     5
      On their original 2001 joint Federal income tax return,
petitioner and Mrs. McGhee reported wages of $114,874, of which
$34,145 was attributable to Mrs. McGhee’s wages from Burch &
George. On their original 2002 joint Federal income tax return,
                                                   (continued...)
                                 - 5 -

returns were paid in full.     Petitioner personally prepared these

joint returns.

         On February 18, 2004, Burch & George mailed Mrs. McGhee

Forms 1099-MISC, Miscellaneous Income, reporting nonemployee

compensation of $126,772 for 2001 and $117,587 for 2002.     These

amounts represented the funds that she had embezzled from Burch &

George.     On November 20, 2004, after the IRS had commenced an

audit of petitioner and Mrs. McGhee’s 2002 joint return,

petitioner and Mrs. McGhee filed amended joint Federal income tax

returns for 2001 and 2002, reporting as income the embezzlement

proceeds reported on the Forms 1099-MISC.     The 2001 amended

return reflects additional tax of $40,366 and a balance due of

$40,366.     The 2002 amended return reflects additional tax of

$33,920 and a balance due of $35,399.     Respondent accepted the

amended joint returns, processed them, and on February 7, 2005,

assessed the tax stated on them.     Neither petitioner nor Mrs.

McGhee paid the balances due on the amended returns.

     On March 22, 2005, petitioner filed Forms 8857, Request for

Innocent Spouse Relief, requesting relief with respect to the

additional taxes reported on the amended joint returns for 2001

and 2002.     On August 27, 2007, respondent sent petitioner a



     5
      (...continued)
petitioner and Mrs. McGhee reported wages of $96,052, of which
$12,253 was attributable to Mrs. McGhee’s wages from Burch &
George.
                                - 6 -

notice of determination denying his requests for relief.

Respondent has issued no statutory notice of deficiency to

petitioner for 2001 or 2002.

                               OPINION

I.     General Principles

       In general, married taxpayers may elect to file a joint

Federal income tax return.    Sec. 6013(a).   After making the

election, each spouse is jointly and severally liable for the

entire Federal income tax liability for that year, whether as

reported on the joint return or subsequently determined to be

due.    Sec. 6013(d)(3); see sec. 1.6013-4(b), Income Tax Regs.

Subject to various conditions, an individual who has made a joint

return with his or her spouse may seek relief from the joint and

several liability arising from that joint return.     There are

three types of relief available under section 6015.     In general,

section 6015(b) provides full or apportioned relief from joint

and several liability with respect to an understatement; section

6015(c) provides divorced or separated taxpayers proportionate

tax relief with respect to a deficiency; and in certain

circumstances section 6015(f) provides equitable relief if relief

is not available under section 6015(b) or (c).     Petitioner seeks

relief under section 6015(b) or alternatively under section

6015(f).
                               - 7 -

II.   Relief Under Section 6015(b)

      The assertion of a tax deficiency is a prerequisite to our

granting relief under section 6015(b).     Block v. Commissioner,

120 T.C. 62, 65-66 (2003); Billings v. Commissioner, T.C. Memo.

2007-234; Rosenthal v. Commissioner, T.C. Memo. 2004-89; see sec.

6015(e)(1) (providing this Court jurisdiction to determine the

appropriate relief available under section 6015(b) or (c) in the

case of an individual “against whom a deficiency has been

asserted”).   Because respondent has asserted no deficiency for

2001 or 2002, petitioner does not qualify for relief under

section 6015(b).6

III. Equitable Relief Under Section 6015(f)

      A taxpayer who does not qualify for relief under section

6015(b) or (c) may nevertheless be relieved from joint and

several liability if, taking into account all the facts and

circumstances, it would be inequitable to hold the taxpayer

liable for any unpaid tax or deficiency.    Sec. 6015(f)(1).    In

determining the appropriate relief available under section

6015(f), we apply a de novo scope and standard of review.       Porter

v. Commissioner, 132 T.C. 203 (2009).    Petitioner bears the




      6
      This circumstance also precludes relief under sec. 6015(c),
which, in any event, petitioner has not sought.
                                 - 8 -

burden of proving that he is entitled to equitable relief under

section 6015(f).   See Rule 142(a).7

     A.   Threshold Conditions

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

that the Commissioner applies in determining whether an

individual qualifies for relief under section 6015(f).8   Rev.

Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297, lists threshold

conditions that must be satisfied before the Commissioner will

consider a request for equitable relief under section 6015(f).9


     7
      Petitioner does not contend that the burden of proof should
shift to respondent pursuant to sec. 7491(a).
     8
      Before our decision in Porter v. Commissioner, 132 T.C. 203
(2009), this Court looked to Rev. Proc. 2003-61, 2003-2 C.B. 296,
or the revenue procedure which it superseded, Rev. Proc. 2000-15,
2000-1 C.B. 447, to decide whether the Commissioner had abused
his discretion in denying relief under sec. 6015(f). See, e.g.,
Wiener v. Commissioner, T.C. Memo. 2008-230 (applying Rev. Proc.
2000-15, supra); Beatty v. Commissioner, T.C. Memo. 2007-167
(applying Rev. Proc. 2003-61, supra). Since Porter, this Court
has continued to look to these revenue procedures as providing
relevant factors for deciding de novo whether an individual is
entitled to relief under sec. 6015(f). See, e.g., Downs v.
Commissioner, T.C. Memo. 2010-165 (applying Rev. Proc. 2003-61,
supra); Wilson v. Commissioner, T.C. Memo. 2010-134 (applying
Rev. Proc. 2000-15, supra).
     9
      The seven threshold conditions are: (1) The requesting
spouse must have filed a joint return for the taxable years for
which relief is sought; (2) the requested relief must not have
been available to the requesting spouse under sec. 6015(b) or
(c); (3) the requesting spouse applied for relief no later than 2
years after the date of the IRS’ first collection activity;
(4) no assets were transferred between the spouses as part of a
fraudulent scheme by the spouses to hide income or avoid tax; (5)
the nonrequesting spouse did not transfer disqualified assets to
the requesting spouse; (6) the requesting spouse did not file or
                                                   (continued...)
                                - 9 -

The parties agree that petitioner meets these threshold

conditions.

     B.   “Safe Harbor” Conditions

     If the threshold conditions are met, the Commissioner

ordinarily will grant equitable relief under section 6015(f) with

respect to an underpayment of income tax reported on a joint

return if the following three “safe harbor” conditions are

satisfied:    (1) On the date of the request for relief, the

requesting spouse is no longer married to, or is legally

separated from, the nonrequesting spouse (or has not been a

member of the nonrequesting spouse’s household at any time during

the 12 months preceding the request for relief); (2) on the date

the requesting spouse signed the joint return, the requesting

spouse did not know or have reason to know that the nonrequesting


     9
      (...continued)
fail to file the return with fraudulent intent; and (7) and the
income tax liability from which the requesting spouse seeks
relief is attributable to an item of the individual with whom the
requesting spouse filed the joint return. Rev. Proc. 2003-61,
sec. 4.01, 2003-2 C.B. at 297. In the revenue procedure that
immediately preceded Rev. Proc. 2003-61, supra, the seventh
condition listed above (income attribution) was treated not as a
threshold condition but rather as a factor that might weigh for
or against relief under the facts and circumstances test. See
Rev. Proc. 2000-15, sec. 4.03(1)(f), 2000-1 C.B. at 449. This
Court has followed that approach in applying Rev. Proc. 2000-15,
supra, both under its pre-Porter abuse of discretion standard,
see, e.g., Rosenthal v. Commissioner, T.C. Memo. 2004-89, and
under its Porter de novo review standard, see, e.g., Wilson v.
Commissioner, supra. Because the parties agree that the income
attribution factor is appropriately treated as a threshold
condition and has been satisfied, we give no further
consideration to this issue.
                                  - 10 -

spouse would not pay the income tax liability; and (3) the

requesting spouse will suffer economic hardship if relief is not

granted.    Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298.    The

parties agree that petitioner does not qualify for this “safe

harbor” relief because, if for no other reason, he fails the

first condition regarding marriage and household membership.

     C.    Facts and Circumstances Test

     A requesting spouse such as petitioner, who satisfies the

threshold conditions under Rev. Proc. 2003-61, sec. 4.01, but

does not qualify for “safe harbor” relief under Rev. Proc. 2003-

61, sec. 4.02, is nevertheless eligible for relief under section

6015(f) if, taking into account all facts and circumstances, it

is inequitable to hold the requesting spouse liable for an

underpayment on a joint return.      Section 4.03, Rev. Proc. 2003-

61, 2003-2 C.B. at 298-299, lists various factors to be

considered in deciding whether to grant equitable relief under

section 6015(f).    No single factor is determinative, all factors

are to be considered and weighed appropriately, and the listing

of factors is not intended to be exhaustive.      Id.   Our analysis

of the relevant facts and circumstances is set forth below.

            1.   Marital Status

     Petitioner and Mrs. McGhee have been married at all relevant

times.     Although petitioner was frequently away from home because

of business and military service, these temporary absences are
                                   - 11 -

not considered separation for this purpose, since it could be

reasonably expected that he would return (as he did) to the

family household.    See id. sec. 4.03(2)(a)(i), 2003-2 C.B. at

298.    This factor is neutral.

            2.   Nonrequesting Spouse’s Legal Obligation To Pay
                 Pursuant to a Divorce Decree or Agreement

       Because petitioner and Mrs. McGhee have not divorced, this

factor is neutral.

            3.   Abuse

       The parties agree that Mrs. McGhee never abused petitioner.

This factor is neutral.

            4.   Health Problems

       The parties agree that petitioner had no serious physical or

mental health problems during 2001 or 2002 or at any other

pertinent time.     This factor is neutral.

            5.   Compliance With Federal Tax Laws

       Respondent concedes that petitioner’s compliance with the

income tax laws in years following the years at issue favors

relief.

            6.   Economic Hardship

       This factor favors relief if paying the tax debt would leave

the requesting spouse unable to pay “reasonable basic living

expenses.”    Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.

Respondent concedes that this factor favors relief.
                              - 12 -

          7.   Significant Benefit

     This factor weighs against relief if the requesting spouse

“received significant benefit (beyond normal support) from the

unpaid income tax liability or item giving rise to the

deficiency.”   Rev. Proc. 2003-61, sec. 4.03(2)(a)(v), 2003-2 C.B.

at 299.   “A significant benefit is any benefit in excess of

normal support.”   Sec. 1.6015-2(d), Income Tax Regs.    “Normal”

support is to be measured by the parties’ circumstances.      Estate

of Krock v. Commissioner, 93 T.C. 672, 678 (1989).      Unusual or

lavish support does not constitute “normal” support.      Id. at 679;

see Hayman v. Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993),

affg. T.C. Memo. 1992-228.

     As petitioner and Mrs. McGhee reported on their amended

joint tax returns, Mrs. McGhee embezzled over $240,000 ($126,772

in 2001 and $117,587 in 2002).   Petitioner has offered no

detailed explanation of what became of these funds.     Mrs. McGhee

testified vaguely that she spent the embezzled funds on food and

clothing for herself and her children and for the children’s

soccer and cheerleading activities.10   On the basis of this vague


     10
      We do not find this testimony entirely credible. It seems
unlikely that in about a year Mrs. McGhee would have spent more
than $240,000 of embezzled funds on food, clothing, and
children’s activities, especially in the light of petitioner’s
testimony that he also gave Mrs. McGhee funds from his separate
bank accounts to pay for food, groceries, and soccer fees. There
appears to be no dispute, however, that Mrs. McGhee spent the
embezzled funds almost as quickly as she got them. In the
                                                   (continued...)
                              - 13 -

testimony, petitioner asserts with little elaboration that he did

not benefit from the embezzled funds apart from “normal support”.

Petitioner has not expressly argued that he did not significantly

benefit from the unpaid income tax liability.

     Petitioner has introduced no evidence by which we might

evaluate what might be considered “normal” support for him and

has produced no specific evidence of lifestyle expenditures and

asset acquisitions before, during, or after the years at issue.11

Without such evidence, we are in no position to determine whether

petitioner benefited from the embezzled funds or the unpaid tax

liabilities in a manner that was beyond what might be considered

his “normal” support.   See Estate of Krock v. Commissioner, supra

at 680-681.   But even if we were to assume, for the sake of

argument, that all the embezzled funds and amounts saved from

taxes were used to cover family living expenses, it would appear

that total living expenses thus covered would have exceeded by

more than 100 percent what petitioner and Mrs. McGhee could have

afforded on the basis of their combined wages.   The subsidizing

of such an enhanced lifestyle would constitute a benefit to


     10
      (...continued)
absence of evidence to the contrary, it seems likely that the
embezzled funds were used to subsidize petitioner and
Mrs. McGhee’s general lifestyle.
     11
      Given that petitioner was the primary breadwinner in his
household (disregarding the embezzlements), it would appear that
he normally would have supported Mrs. McGhee rather than the
other way around.
                                - 14 -

petitioner exceeding normal support.     See Jonson v. Commissioner,

118 T.C. 106, 119-120 (2002) (finding that the taxpayer received

a benefit exceeding normal support where tax savings helped cover

family expenditures, including children’s education), affd. 353

F.3d 1181 (10th Cir. 2003).    Petitioner has not carried his

burden to prove that he enjoyed no significant benefit from the

embezzled funds or the unpaid tax liabilities.    This factor

weighs against relief.

           8.   Knowledge or Reason To Know

     This factor weighs against relief if the requesting spouse

knew or had reason to know that the nonrequesting spouse would

not pay the income tax liability.    Rev. Proc. 2003-61, sec.

4.03(2)(a)(iii)(A), 2003-2 C.B. at 298.    It seems clear that when

petitioner signed the amended joint returns, he knew or should

have known that the additional taxes reported thereon would go

unpaid.    According to respondent, that is all that matters.   He

contends because the underpayments at issue arose from petitioner

and Mrs. McGhee’s amended joint returns, we should evaluate

petitioner’s knowledge as of the time he signed the amended joint

returns rather than as of the time he signed the original joint

returns.    Respondent also acknowledges, however, that this Court

has held to the contrary.     See Billings v. Commissioner, T.C.

Memo. 2007-234; Rosenthal v. Commissioner, T.C. Memo. 2004-89.

In Rosenthal, this Court stated:
                              - 15 -

     It is unpersuasive to argue, as does respondent, that
     petitioner’s voluntary filing of an amended 1996 return
     and her attendant payment of the delinquent taxes
     attributable to the omission of income from the
     original 1996 return militate against equitable relief
     simply because she had to have known of the omission
     before she filed the amended return and made the
     payment. * * *

Furthermore, as this Court reasoned in Billings:

          It would seem a trap for the unwary--and an
     inefficient requirement from the IRS’s perspective--to
     require spouses to go through an audit whose outcome is
     preordained in a situation like that faced by the widow
     Rosenthal or Mr. Billings, rather than fess up by
     filing an amended return.

     Respondent suggests that Rosenthal and Billings were decided

incorrectly.   We decline respondent’s invitation to revisit the

holdings in these cases, however, for we conclude that the

knowledge factor is unfavorable to petitioner even as evaluated

as of the time he signed the original returns.

     More particularly, on August 15, 2003, when petitioner

signed the original 2002 joint return, he had actual knowledge of

Mrs. McGhee’s embezzlements, which had been the subject of both a

civil suit and criminal charges.   On April 8, 2002, when

petitioner signed the original 2001 joint return, he did not yet

have actual knowledge of Mrs. McGhee’s embezzlments, but he had

reason to know, we believe, of items that “may be said to have

reflected an understatement in tax”.   See Rosenthal v.

Commissioner, supra.
                              - 16 -

     In deciding whether a requesting spouse had reason to know

of an understatement, “a key factor is the extent to which family

expenditures, of which the spouse had knowledge, exceeded

reported income.”   Barranco v. Commissioner, T.C. Memo. 2003-18,

(citing Estate of Jackson v. Commissioner, 72 T.C. 356, 361

(1979), and Hammond v. Commissioner, T.C. Memo. 1990-22, affd.

without published opinion 938 F.2d 185 (8th Cir. 1991)).     Other

relevant considerations include:   The requesting spouse’s

education level; any deceit or evasiveness of the nonrequesting

spouse; the requesting spouse’s degree of involvement in the

activity generating the income tax liability; the requesting

spouse’s involvement in business and household financial matters;

the requesting spouse’s business or financial expertise; and any

lavish or unusual expenditures compared with past spending

levels.   Barranco v. Commissioner, supra; Rev. Proc. 2003-61,

sec. 4.03(2)(a)(iii)(C), 2003-2 C.B. at 298.

     The $126,772 that Mrs. McGhee embezzled in 2001 exceeded the

$114,874 of total wages reported on the original 2001 joint

return.   According to Mrs. McGhee’s testimony, she used these

embezzled funds to cover family living expenses.   As previously

discussed, this would mean that family expenses covered in this

manner exceeded petitioner and Mrs. McGhee’s combined wages by

more than 100 percent.   Considering petitioner and Mrs. McGhee’s

financial circumstances during and shortly before 2001, it would
                                   - 17 -

appear reasonable to conclude, in the absence of evidence to the

contrary, that the level of expenditures occasioned by this

influx of embezzled funds was unusual compared with past spending

levels.12       We are not persuaded that petitioner would have been

unaware of this suddenly increased level of expenditures or of

the discrepancy with reported income.        After all, petitioner is

highly educated, with a master’s degree in business

administration.        He personally prepared the original joint tax

returns.        He was very involved in the family’s finances.   He

testified that he “took care of the mortgage and the bills and

insurance and utilities and stuff like that.”

     During 2001 Mrs. McGhee deposited the embezzled funds in a

Bank of Oklahoma checking account that she held jointly with

petitioner.        Petitioner testified that he never saw any of the

bank statements for this account until much later and that he did

not even know it was a joint account or in which bank it was

held.        The evidence shows, however, that petitioner wrote several



        12
      In 1998 or 1999 petitioner and Mrs. McGhee filed for
bankruptcy. In 2001 petitioner and Mrs. McGhee offered to pay
the IRS $42,000 to compromise over one-half million dollars of
tax liability for tax years 1993 through 1998. According to
information included in the administrative record, in accepting
this offer the IRS determined that their combined annual wages
for 2000 were $87,049, that their equity in all their assets (not
counting the income stream from their wages) was about $13,000,
and that their allowable monthly living expenses were $4,840 per
month. The record contains no suggestion that petitioner and
Mrs. McGhee, in seeking an offer-in-compromise, ever claimed
living expenses exceeding their combined wages.
                                 - 18 -

checks on this joint account during the years at issue.

Moreover, we find petitioner’s testimony difficult to square with

the application for an offer-in-compromise that he and Mrs.

McGhee submitted to the IRS in August 2001 and signed under

penalties of perjury.     This application required petitioner and

Mrs. McGhee to submit Form 433-A, Collection Information

Statement for Wage Earners and Self-Employed Individuals, listing

all bank accounts and balances.     Although the record does not

contain the Form 433-A submitted with their offer-in-compromise,

the offer acceptance report of respondent’s Appeals Office, which

is in evidence, indicates that they had reported a Bank of

Oklahoma checking account with a balance of $654.     It seems

apparent, then, that petitioner had knowledge of and access to

the joint Bank of Oklahoma checking account before signing the

original 2001 joint income tax return on April 8, 2002.

     Petitioner claims that Burch & George initially indicated

that it intended to treat the embezzled funds as a loan and that

they expected repayment.     He claims that he was advised that the

embezzlement proceeds would not constitute taxable income.       On

cross-examination, however, he conceded that Mrs. McGhee’s

criminal lawyer had advised him that it was doubtful that the

embezzled funds would be treated as a loan for tax purposes

unless petitioner or Mrs. McGhee made a lump-sum repayment.13

     13
          Petitioner testified that he could not remember whether he
                                                       (continued...)
                                - 19 -

Petitioner also conceded that at the time he was unable to make

any lump-sum repayment.   Furthermore, any confusion about the

manner in which Burch & George might have regarded the

embezzlement proceeds should have been clarified no later than

June 18, 2002, when Burch & George filed a civil suit against

petitioner and Mrs. McGhee seeking recovery of the embezzled

funds plus damages and costs.

     In any event, because we have concluded that petitioner knew

or should have known of the income from the embezzlements, it is

irrelevant whether he knew it was taxable.     See Mitchell v.

Commissioner, 292 F.3d 800, 803-806 (D.C. Cir. 2002), affg. T.C.

Memo. 2000-332; Cheshire v. Commissioner, 282 F.3d 326, 333-335

(5th Cir. 2002), affg. 115 T.C. 183 (2000); Price v.

Commissioner, T.C. Memo. 1987-360.

     D.    Conclusion About Equitable Relief

     As indicated by the foregoing analysis, four factors are

neutral.    Two of the factors--compliance with Federal tax laws

and economic hardship--favor relief.     Two of the factors--

significant benefit and knowledge--weigh against relief.     Thus,

as respondent acknowledges, a “strictly mathematical balancing of

the factors shows them to be in equipoise”.     If we were to

conclude on this score that there is an evidentiary tie, then

     13
      (...continued)
discussed this matter with a tax lawyer. We find it difficult to
believe that petitioner would have relied on a criminal lawyer
for this important tax advice without consulting a tax lawyer.
                              - 20 -

petitioner would lose for failure to carry his burden of proof.

But rather than decide this case on that basis, we conclude on a

preponderance of all the evidence that petitioner is not entitled

to equitable relief.   In reaching this conclusion, we take into

account petitioner’s lack of credibility on several key points as

well as his seeming lack of good faith in waiting until after the

IRS had opened an audit on his 2002 tax year to file amended

joint returns reflecting the embezzlement proceeds that he had,

at that point, long known about but had not previously reported.

IV.   Conclusion

      Petitioner is not entitled to relief under section 6015(b)

or (f).   To reflect the foregoing,


                                           Decision will be entered

                                      for respondent.
