(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, 115 T.C. 183, 195 (2000), we addressed the meaning of the term "actual knowledge" under the separate liability election provision of section 6015(c) as follows:

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 "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 stand

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).

ard 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, 114 T.C. 333, 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 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 215 F.3d 1335 (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,

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, 182 F.3d 275, 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. 1996452.

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 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, 290 U.S. 111, 115 (1933); American Pipe & Steel Corp. v. Commissioner, 243 F.2d 125, 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 neous"), affg. 25 T.C. 351 (1955); Estate of Simplot v. Commissioner, 112 T.C. 130, 149–150 (1999).

Accordingly, in this case, Michael will qualify for relief from joint and several liability under section 6015(c) with 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 him, (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 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 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 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.

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.

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 *** [the taxpayer's] subjective awareness of the *** [item]"), affd. without published opinion 215 F.3d 1335 (9th Cir. 2000);4 H. Conf. Rept. 105-599, supra at 253, 19983 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.

KATHY A. KING, PETITIONER AND CURTIS T. FREEMAN,
INTERVENOR v. COMMISSIONER OF INTERNAL

REVENUE, RESPONDENT

Docket No. 5989-97.

Filed April 10, 2001.

P claimed relief from joint liability under sec. 6013(e), I.R.C., which was repealed and replaced by sec. 6015, I.R.C. Intervenor (I) is P's former spouse, who intervened pursuant to sec. 6015(e)(4), I.R.C., in opposition to P's claim for relief. See King v. Commissioner, 115 T.C. 118 (2000). P and I filed a joint income tax return for 1993 on which they claimed a loss from a cattle-raising activity conducted by I. The loss was disallowed by R on the ground that the activity was not engaged in for profit under sec. 183(a), I.R.C.

1. Held: P meets all the requirements for relief under sec. 6015(c), I.R.C., unless R demonstrates that P had actual knowledge of the item giving rise to the deficiency at the time she signed the return. See sec. 6015(c)(3)(C), I.R.C. When the item giving rise to the deficiency is a disallowed deduction, such knowledge must include knowledge of the factual circumstances giving rise to the disallowance of the deduction.

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, 90 F.3d 1459 (9th Cir. 1996), revg. and remanding T.C. Memo. 1994-99.