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.

In this case, the fact giving rise to the disallowance was I's
lack of a profit objective. R did not establish that, at the time
P signed the return, P had actual knowledge that I, her
spouse, did not have a primary purpose or objective of making
a profit under sec. 183(a), I.R.C., with respect to the activity
that generated the disallowed loss. Accordingly, P is entitled
to relief from joint liability.

2. Held, further, since the activity in question was attrib-
utable solely to I, and there were no other adjustments in the
notice of deficiency, the relief to P extends to the full amount
of the deficiency.

Kathy A. King, pro se.

Curtis T. Freeman, pro se.

James R. Rich, for respondent.

OPINION

RUWE, Judge: This case was assigned to Special Trial Judge D. Irvin Couvillion pursuant to section 7443A(b)(3) 1 and Rules 180, 181, and 182. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

COUVILLION, Special Trial Judge: Respondent determined a deficiency of $7,781 in petitioner's Federal income tax for 1993.

The sole issue for decision is whether petitioner is entitled to relief from joint liability under section 6015. The underlying deficiency determined by respondent in the notice of deficiency is not at issue. Curtis T. Freeman (intervenor) is the former spouse of petitioner and filed an intervention in this proceeding pursuant to section 6015(e)(4) objecting to the granting of relief to petitioner under section 6015. See Interim Rule 325; King v. Commissioner, 115 T.C. 118 (2000). At the time the petition was filed, and at the time the notice of intervention was filed, the legal residence of petitioner and intervenor was Hartsville, South Carolina.

Petitioner and intervenor were married during 1982. During 1981, intervenor had purchased approximately 100 acres of land at Hartsville, South Carolina, and had begun a cattle

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

raising activity that continued for several years, including the 1993 tax year at issue. This activity commenced with 1 or 2 cows, then grew to a herd of 25-30 cows with intermittent sales and purchases of cows and calves along the way. It was by no means a profitable activity, although intervenor had the expectation that, over time, the activity would become profitable. Intervenor allowed some of his neighbors to pasture their livestock on the property, and the neighbors, in turn, assisted to some degree in caring for intervenor's livestock when intervenor was frequently away from home in connection with his sole income activity, a used car business. Petitioner frequently visited the farm, with the children, and assisted minimally in its operation. However, petitioner maintained or kept records of sales, purchases, and expenses. She did not maintain a formal set of books but made sure that all records were kept together and submitted to their tax return preparer each year for inclusion on the joint Federal income tax returns she and intervenor filed. Petitioner knew that the cattle-raising activity was not profitable, but she had expectations that, at some point, the activity would become profitable. Petitioner and intervenor separated in May 1993, and, thereafter, petitioner no longer maintained records of the cattle-raising activity as she had done in the past; however, she knew that intervenor continued with the activity. The record does not show in what year petitioner and intervenor commenced reporting the income and expenses from the cattle-raising activity on their Federal income tax returns, although the testimony at trial indicates that the activity was reported on their joint income tax returns for the years 1989 and thereafter. For the year 1993, petitioner and intervenor reported gross income of $802, expenses of $28,199, and a net loss of $27,397 from the cattle-raising activity on Schedule C of their return, Profit or Loss From Business.

Petitioner and intervenor were divorced in May 1995. On December 23, 1996, respondent issued separate notices of deficiency to petitioner and intervenor for the year 1993 and determined in each notice a tax deficiency of $7,781. In these notices of deficiency, respondent disallowed the $27,397 cattle activity loss claimed on Schedule C of the 1993 joint Federal income tax return. The basis for the disallowance was that the cattle activity was not an activity engaged in for

profit under section 183. Respondent made no adjustments to the income or expense amounts reported and claimed in connection with the activity. The only other adjustments in the notices of deficiency flowed from the disallowed cattle activity loss.

Petitioner filed a timely petition with this Court. Intervenor did not petition this Court. Respondent, in due course, assessed the deficiency against intervenor, but no portion of that assessment has been paid, nor has intervenor challenged the assessment in any other court.

In this case, petitioner does not challenge the disallowed Schedule C cattle-raising activity loss. Her sole contention is that she is entitled to relief from joint liability under section 6013(e). After the case was tried and taken under advisement, section 6013(e) was repealed and was replaced with section 6015, which retroactively applies to this case. Moreover, the intervention emanates from section 6015(e)(4).2 The case was again calendared for trial and heard pursuant to the provisions of section 6015. Intervenor participated in the trial and objected to petitioner's being relieved of liability under section 6015. In a supplemental trial memorandum, respondent asserted that petitioner was not entitled to relief under section 6015(b) or (c).3

In Cheshire v. Commissioner, 115 T.C. 183, 189 (2000), the Court succinctly set forth the legislative history of section 6015 as follows:

For many taxpayers, relief under section 6013(e) was difficult to obtain. In order to make innocent spouse relief more accessible, Congress repealed section 6013(e) and enacted a new innocent spouse provision (section 6015) in 1998 as part of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105–206, sec. 3201(a), 112 Stat. 734. See H. Conf. Rept. 105-599, at 249 (1998). The newly enacted statute provided three avenues of relief from joint and several liability: (1) Section 6015(b)(1) (which is similar to former section 6013(e)) allows a spouse to escape completely joint and several liability; (2) section 6015(b)(2) and (c) allow a spouse to elect limited liability through relief from a portion of the understatement or deficiency; and (3) section 6015(f) confers upon the Secretary discretion to grant equitable relief in situations where relief is unavailable under section 6015(b) or (c). Section 6015 generally applies to

2 See King v. Commissioner, 115 T.C. 118 (2000), for the procedural history of this case.

3 Pursuant to the Court's holding in King v. Commissioner, supra, the Court's order calendaring this case for further trial stated that the only issue to be considered by the Court would be petitioner's claim for relief under sec. 6015, and the Court would not consider any challenges to the underlying deficiency by either petitioner or intervenor.