UNITED STATES TAX COURT



MICHAEL G. CULVER AND CHRISTINE M. CULVER, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



 Docket No. 11129-98.                     Filed April 2, 2001.



      Held: Under the separate liability election
 provision of sec. 6015(c)(3)(C), I.R.C., the burden of
 proof is on respondent with regard to whether the
 electing spouse had actual knowledge of the item giving
 rise to the deficiency. Respondent must satisfy that
 burden of proof by a preponderance of the evidence.

       Held, further, respondent’s burden of proof under
 sec. 6015(c)(3)(C), I.R.C., is not met by mere proof of
 what a reasonably prudent person would be expected to
 know.

      Held, further, respondent has failed to satisfy
 his burden of proving that petitioner Michael G. Culver
 had actual knowledge of his ex-wife’s embezzlement
 income, and petitioner Michael G. Culver qualifies for
 relief under sec. 6015(c), I.R.C.
                                - 2 -

     Orrin L. Grover, for petitioner Michael G. Culver.

     Christine M. Culver, pro se.

     Nhi T. Luu-Sanders, for respondent.



     SWIFT, Judge:   Respondent determined deficiencies in

petitioners' 1994 and 1995 Federal income taxes and accuracy-

related penalties as follows:


                                           Accuracy-Related
                                                Penalty
             Year       Deficiency           Sec. 6662(a)

             1994        $12,572                $2,514
             1995         18,339                 3,668


     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

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

Procedure.

     After settlement of some issues, the only issue for decision

is whether petitioner Michael G. Culver (Michael) qualifies for

relief from liability under section 6015(b) or (c).


                         FINDINGS OF FACT

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

     At the time the petition was filed, Michael resided in

Woodburn, Oregon, and petitioner Christine M. Culver (Christine)

was incarcerated in an Oregon State penitentiary.
                                - 3 -

     On April 22, 1978, Michael and Christine were married.    From

the marriage, they have two daughters and one son.    Their divorce

became final in February of 2000, 1 week before the trial herein

on February 29, 2000.

     In 1984, because of her embezzlement of funds, Christine was

terminated from her employment with the County of Yamhill,

Oregon.    In 1984, in connection with that embezzlement, Christine

entered a guilty plea to felony theft charges.

     From 1987 through the date of trial on February 29, 2000,

Michael was employed by the police department for the City of

Woodburn, Oregon, as a code enforcement officer with

responsibility for enforcement of land-use regulations and

sanitary codes.

     In 1989, Michael and Christine jointly purchased a residence

in Woodburn, Oregon, in which they during 1994 and 1995 resided

with their three children and in which Michael continues to

reside as of the date of trial.

     In July of 1991, Christine became employed by the City of

Molalla, Oregon, as a city clerk with a salary of $1,400 per

month.    Molalla is a rural farming and logging town in Western

Oregon’s Willamette Valley and is located approximately 30 miles

from Woodburn, Oregon.    Thereafter, Christine received a number

of significant promotions and raises.    By 1994, Christine had

been promoted to financial director for the City of Molalla.
                                - 4 -

     From the time of Michael’s and Christine’s marriage in 1978

through early 1997, Christine handled the finances for the

marriage.    She paid the bills, wrote the checks, and maintained

the bank accounts.    Only occasionally would Michael write and

sign checks.

     Occasionally during the marriage, when Christine had written

checks that bounced due to insufficient funds in the checking

account, Michael would become angry and upset with Christine.

     Christine may accurately be described as a compulsive

shopper.    Christine often went on shopping sprees and bought

clothes for petitioners’ daughters, spending as much as $500 to

$1,000 per trip.    In 1993 or 1994, petitioners purchased a big-

screen television and a surround-sound audio system for their

residence.    Each of petitioners’ three children had a television

of his or her own.

     During 1992 through 1995, petitioners made a number of

improvements to their residence.    Petitioners purchased a new

water softener, added a front porch and a cedar fence, and

installed a hot tub.    Petitioners also purchased a number of

vehicles for themselves and for one of their daughters.    Most of

these purchases were either completely or largely financed.
                              - 5 -

     Michael’s hobbies included hunting, fishing, and archery.

In 1995, Michael went on a fishing trip to Alaska.     Christine did

not participate in Michael’s hobbies.

     During 1993 through 1995, the approximate total of the

deposits into, and the withdrawals and payments out of,

petitioners’ joint checking account were as follows:


               Year      Deposits        Withdrawals

               1993      $88,883              --
               1994       92,138           $92,081
               1995       94,415            97,729


     In September of 1996, during an audit of the financial books

and records of the City of Molalla, it was discovered that during

1991 through 1996 Christine had embezzled a total of

approximately $225,000 from funds she managed as financial

director for the City of Molalla.   Christine was immediately

terminated from her employment with the City of Molalla, and

State criminal charges were brought against her.

     On May 22, 1997, Christine pleaded guilty to charges of

aggravated theft, forgery, and official misconduct in connection

with her embezzlement from the City of Molalla.    Christine was

sentenced to an 18-month prison term, and Christine was ordered

to pay restitution of $225,000.
                              - 6 -

     For 13 months, from June of 1997 until July of 1998,

Christine was incarcerated as a result of the sentence relating

to the above plea.

     Christine carried out the embezzlement from the City of

Molalla by writing improper city checks to herself and by taking

cash from funds available to her as the financial director.

Every week or two, Christine would write a check or take cash

from the city in the amounts of $200 to $800.      The checks and the

cash generally were deposited into the joint checking account

that she and Michael maintained.    The embezzled funds

(represented by the checks and the cash) were commingled by

Christine with the funds available from her wages, and the

embezzled funds were used by Christine to pay for family expenses

and to make payments on the family debts.

     During 1993, 1994, and 1995, the approximate total deposits

into petitioners’ joint checking account were as follows:


                                   1993     1994        1995

       Total Deposits         $88,883     $92,138     $94,415


     Specifically during 1994 and 1995, Michael and Christine

received wages from their employers, and Christine received

embezzlement income as follows:
                                    - 7 -

                            1994                       1995

                Wages       Embezzlement      Wages     Embezzlement
Michael        $27,949           --          $28,234         --
Christine       35,618         $44,152        48,178       $59,128
     Total     $63,567         $44,152       $76,412       $59,128


     On July 7, 1998, Christine was released from prison and

lived for either a month or a month and a half with Michael in

the family residence.    Thereafter, but for a week during the

Christmas season of 1998, Christine did not live in the family

residence, and through the time of trial on February 29, 2000,

Christine lived in Portland, Oregon, with another person whom she

met and with whom she had a relationship while in prison.

     Christine prepared petitioners' 1994 and 1995 joint Federal

income tax returns, and Michael and Christine both signed and

timely filed the returns.    On those returns, Michael’s and

Christine’s wages were accurately reported, but Christine’s

embezzlement income was not reported.

     On audit, respondent determined that Christine’s

embezzlement income represented additional unreported taxable

income and that petitioners were jointly liable with respect to

the tax deficiencies relating thereto.


                                   OPINION

     Generally, taxpayers filing joint Federal income tax returns

are jointly and severally liable for all taxes due.       See sec.

6013(d)(3).
                              - 8 -

     Certain taxpayers, however, may be relieved of joint and

several liability under section 6015.    Michael claims that he is

entitled to relief from joint and several liability under the

traditional rule of section 6015(b) and also under the separate

liability election of section 6015(c).   Michael makes no claim

for equitable relief under section 6015(f).

     With regard to Michael’s claim for separate liability

election relief under section 6015(c), respondent claims only

that Michael fails to meet the lack of actual knowledge

requirement.

     Section 6015(c)(3)(C) provides as follows:


          (C) Election not valid with respect to certain
     deficiencies.--If the Secretary demonstrates that an
     individual making an election under this subsection had
     actual knowledge, at the time such individual signed
     the return, of any item giving rise to a deficiency (or
     portion thereof) which is not allocable to such
     individual under subsection (d), such election shall
     not apply to such deficiency (or portion). This
     subparagraph shall not apply where the individual with
     actual knowledge establishes that such individual
     signed the return under duress. [Emphasis added.]


     In Cheshire v. Commissioner, 

, 195 (2000), we

addressed the meaning of the term “actual knowledge” under the

separate liability election provision of section 6015(c) as

follows:
                              - 9 -

          We believe the knowledge standard for purposes of
     section 6015(c)(3)(C) is an actual and clear awareness
     (as opposed to reason to know) of the existence of an
     item which gives rise to the deficiency (or portion
     thereof). * * *


     The provisions of the Code concerning relief from joint and

several liability were expanded in 1998 in order to make relief

thereunder more accessible and easier to obtain.   See Internal

Revenue Service Restructuring and Reform Act of 1998, Pub. L.

105-206, sec. 3201(a), 112 Stat. 685, 734; H. Conf. Rept. 105-

599, at 249 (1998), 1998-3 C.B. 755, 1003.   Section 6015(c) was

added as an independent ground for relief.   Generally, for a

taxpayer who is no longer married, is legally separated, or has

not resided with his or her spouse for a 12-month period, section

6015(c) provides, if properly elected, relief from joint and

several liability to the extent of the portion of the income tax

deficiency allocable to the other spouse.1

     As the above emphasized statutory language indicates,

however, the election out of joint and several liability under

section 6015(c)(3)(C) will not be available if respondent



1
    Under sec. 6015(c)(3)(B), an election for relief from joint
and several liability is to be made no later than 2 years after
the date on which respondent has begun “collection activities”.
The statutory language does not state the earliest date on which
an election under sec. 6015(c) may be made. Respondent in this
case has not raised any issue as to the timeliness of Michael’s
election under sec. 6015(c).
                             - 10 -

“demonstrates” that the electing spouse, as of the time the joint

income tax return was signed, had actual knowledge of the item

that gave rise to the deficiency.   The statutory language does

not expressly use the words “burden of proof”, and the statutory

language does not quantify the evidentiary standard respondent

must satisfy in order to demonstrate the electing spouse’s actual

knowledge.

     In Cheshire v. Commissioner, supra at 193, and in a number

of other recent opinions, we have repeated the statutory language

(“If the Secretary demonstrates * * * actual knowledge”) without

expressly using the words “burden of proof” and without

discussing the quantity or level of proof that is required for

respondent to demonstrate the electing spouse’s actual knowledge.

See also Charlton v. Commissioner, 

, 341 (2000);

Amankwah v. Commissioner, T.C. Memo. 1999-382.

     In a number of other recent opinions, we have stated

expressly that the above statutory language of section

6015(c)(3)(C) shifts the burden of proof from the electing spouse

to respondent with regard to the actual knowledge element, but

without quantifying the level of that burden of proof.    See

Martin v. Commissioner, T.C. Memo. 2000-346 (“respondent bears

the burden of showing that * * * [the taxpayer] had ‘actual

knowledge’”); Mitchell v. Commissioner, T.C. Memo. 2000-332 (“We

note that in general under sec. 6015(c) the taxpayer has the
                             - 11 -

burden of proof * * * but for purposes of this provision, the

Commissioner has the burden of proof”); Wiksell v. Commissioner,

T.C. Memo. 1999-32 (“section 6015(c)(3)(C) places the burden to

establish actual knowledge on respondent”), affd. without

published opinion 

(9th Cir. 2000).2

     In the legislative history of section 6015(c), it is made

explicitly clear that a shift of the “burden of proof” to

respondent with regard to the actual knowledge element of section

6015(c)(3)(C) is intended, but no mention is made in the

legislative history as to what quantity or level of proof

respondent should be required to satisfy.   See H. Rept. 105-364

(Part I), at 31 (1997), 1998-3 C.B. 373, 403 (“The bill contains

a number of provisions designed to strengthen the rights of

taxpayers in their dealings with the Internal Revenue Service.

Among the more significant of these provisions are modifying the

burden of proof”); H. Conf. Rept. 105-599, supra at 253, 1998-3

C.B. at 1007 (“if the IRS proves that the electing spouse had

actual knowledge that an item on a return is incorrect, the




2
   Further, in a recent opinion by the Court of Appeals for the
Fourth Circuit, language is used that could be read to suggest
that the burden of proof with regard to the actual knowledge
element of sec. 6015(c) remains on the electing spouse. See
Grossman v. Commissioner, 

, 279 (4th Cir. 1999) (“In
order to obtain the benefit of that provision, sec. 6015(c), an
individual must demonstrate inter alia that he had no ‘actual
knowledge’”), affg. T.C. Memo. 1996-452.
                               - 12 -

election will not apply to the extent any deficiency is

attributable to such item”).

     As we have held, the relevant statutory language of section

6015(c)(3)(C) (namely, “If the Secretary demonstrates * * *

actual knowledge”) constitutes an intended shift of the burden of

proof from the electing spouse to respondent with regard to

whether the spouse had actual knowledge of the item in question.

We also hold that the quantity or level of respondent’s burden is

a “preponderance” of the evidence, the traditional quantity or

level of proof required under Rule 142(a) and the case law

thereunder.   This is the same standard to which we and other

courts have, for many years, held taxpayers on questions of

general tax liability, and we believe that this is the standard

that Congress intended be placed on respondent under section

6015(c) with regard to the actual knowledge element.    See Rule

142(a); Welch v. Helvering, 

, 115 (1933); American

Pipe & Steel Corp. v. Commissioner, 

, 126-127 (9th

Cir. 1957) (“* * * [the taxpayer], having invoked the

jurisdiction of the Tax Court, entered the hearing burdened with

the duty of establishing by at least a preponderance of the

evidence that the determination made by the Commissioner was

erroneous”), affg. 

(1955); Estate of Simplot v.

Commissioner, 

, 149-150 (1999).

     Accordingly, in this case, Michael will qualify for relief

from joint and several liability under section 6015(c) with
                              - 13 -

regard to the funds embezzled by Christine from the City of

Molalla unless respondent satisfies his burden of establishing by

a preponderance of the evidence that Michael had actual knowledge

of Christine’s embezzlement income.

     Michael contends (in his testimony and on brief) as follows:

(1) That Christine’s embezzlement activity was so clever that it

was hidden for 5 years not only from Molalla city officials but

also from himself, (2) that the family expenditures (expenditures

mostly financed) were well within the resources of petitioners

based alone on their combined wage income and would not, and did

not, alert him to the embezzlement income, (3) that in fact he

had no clue of the embezzlement income, (4) that he did not abuse

Christine or in any way force her into the embezzlement activity

or knowingly benefit therefrom, (5) that through the embezzled

funds Christine secretly sought to “buy” her family’s love,

(6) that he has been forced into bankruptcy to pay for

Christine’s legal fees, etc., and (7) that he and the children,

rather than benefiting, have suffered greatly, financially, and

mentally, as a result of Christine’s embezzlement.

     Michael’s claims of innocence and of lack of knowledge

regarding Christine’s embezzlement activities and the income

relating thereto are corroborated by Christine’s testimony that

she carried out the embezzlement activity without Michael’s

participation or knowledge.   We find Christine’s testimony
                              - 14 -

credible and persuasive.   Combined with Michael’s testimony and

the other evidence in this case, we conclude that respondent has

not satisfied his burden of proving by a preponderance of the

credible evidence that Michael had actual knowledge of

Christine’s embezzlement income, and we conclude that Michael

qualifies for relief under section 6015(c).

     Respondent argues that the family expenditures, home

improvements, Michael’s fishing and hunting trips, and the

deposits into the joint checking account should have, and would

have, given Michael actual knowledge of the embezzled income.    We

find respondent’s arguments as to what Michael should have known

to be misplaced.   As stated and as we have held, the standard

under section 6015(c) is actual knowledge, and respondent has the

burden to prove Michael’s actual knowledge by a preponderance of

the evidence.   Further, respondent’s burden of proof under

section 6015(c)(3)(C) is not met by mere proof of what a

reasonably prudent person would be expected to know.3

     Arguably, the deposits into petitioners’ joint bank account,

in particular, would indicate that Michael should have been aware

of some source of the deposits greater than his and Christine’s

wages and that Michael should have inquired as to what that

source was (particularly in light of Christine’s prior


3
   We do not intend to suggest that in an appropriate case
respondent’s burden to prove actual knowledge may not be
established by circumstantial evidence.
                                - 15 -

embezzlement activity).   We again emphasize, however, that the

standard under section 6015(c) is not that of a hypothetical,

reasonable person, but only that of Michael’s actual subjective

knowledge.    See Wiksell v. Commissioner, T.C. Memo. 1999-32

(“Petitioner further argues that section 6015(c) has changed the

culpability standard from objective under section 6013(e) to

subjective.   * * * Our finding was based on * * * [taxpayer's]

subjective awareness of the * * * [item]”), affd. without

published opinion 

(9th Cir. 2000);4 H. Conf. Rept.

105-599, supra at 253, 1998-3 C.B. at 1007 (“Such actual

knowledge must be established by the evidence and shall not be

inferred based on indications that the electing spouse had a

reason to know.”).

     Because of our conclusion that Michael qualifies for relief

under section 6015(c), we need not rule on Michael’s claim of

relief under section 6015(b).

     To reflect the foregoing,


                                      Decision will be entered under

                                 Rule 155.




4
   For the prior history of Wiksell v. Commissioner, T.C. Memo.
1999-32, see Wiksell v. Commissioner, T.C. Memo. 1998-3, on
remand from Wiksell v. Commissioner, 

(9th Cir.
1996), revg. and remanding T.C. Memo. 1994-99.