any liability for tax arising after July 22, 1998, and any liability for tax arising on or before July 22, 1998, that remains unpaid as of such date. See H. Conf. Rept. 105-599, supra at 251.

We consider the merits of this case under section 6015(c), which, in pertinent part, provides:

SEC. 6015(c). PROCEDURES TO LIMIT LIABILITY FOR TAXPAYERS NO LONGER MARRIED OR TAXPAYERS LEGALLY SEPARATED OR NOT LIVING TOGETHER.

(1) IN GENERAL.-Except as provided in this subsection, if an individual who has made a joint return for any taxable year elects the application of this subsection, the individual's liability for any deficiency which is assessed with respect to the return shall not exceed the portion of such deficiency properly allocable to the individual under subsection (d). (2) BURDEN OF PROOF.-Except as provided in subparagraph (A)(ii) or (C) of paragraph (3), each individual who elects the application of this subsection shall have the burden of proof with respect to establishing the portion of any deficiency allocable to such individual.

(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). * * * In Martin v. Commissioner, T.C. Memo. 2000-346, the Court stated:

section 6015(c) relieves certain joint-filing taxpayers by making them liable only for those items of which they had actual knowledge, rather than being liable for all items reportable on the joint return. In effect, this approach is intended, to the extent permitted, to treat certain spouses as though they had filed a separate return. This is a departure from predecessor section 6013(e) and companion section 6015(b) where the intended goal was to permit relief only if the relief-seeking spouse did not know or had no reason to know of an item.

Accordingly, taxpayers who are either no longer married, separated (for 12 months or more), or not living together *** may elect treatment as though they had separately filed. Section 6015(c)(3)(C), however, does not permit the election of separate treatment for any item where "the Secretary demonstrates that an individual * * * had actual knowledge, [of the item] at the time such individual signed the return”. * * *

In this case, the activity giving rise to the deficiency, i.e., the cattle-raising activity, was attributable solely to intervenor. As noted above, relief under section 6015(c)(3)(C) is not

available to petitioner if respondent demonstrates that petitioner had actual knowledge of the item giving rise to the deficiency.

In Cheshire v. Commissioner, supra, this Court held that, where the spouse claiming relief under section 6015(b) or (c) had actual knowledge of items of omitted income but did not have knowledge "whether the entry on the return is or is not correct", relief was not available. Id. at 195. In furtherance of the point, the Court stated:

In our opinion, the knowledge requirement of section 6015(c)(3)(C) does not require the electing spouse to possess knowledge of the tax consequences arising from the item giving rise to the deficiency or that the item reported on the return is incorrect. Rather, the statute mandates only a showing that the electing spouse actually knew of the item on the return that gave rise to the deficiency (or portion thereof). * * * [Id. at 194.]

See also Martin v. Commissioner, supra, where this Court stated: "Thus, in Cheshire v. Commissioner, supra, we concluded that ignorance of the applicable tax law is no excuse and that respondent had met his burden of proving knowledge of the omitted income."4

The Cheshire case involved taxable retirement income distributions received by the taxpayer's spouse that were not reported on the taxpayers' joint income tax return. The Court held that 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)." Cheshire v. Commissioner, supra at 195. The Court further stated: "In the case of omitted income (such as the situation involved herein), the electing spouse must have an actual and clear awareness of the omitted income." Id. The Court appended to that statement a footnote stating: "We leave to another day the manner in which the actual knowledge standard will be applied in erroneous deduction cases." Id. n.6. Since the taxpayer's claim for relief in Cheshire was based solely on lack of knowledge of the tax consequences of the unreported income, relief was denied under section 6015(c). This case involves an erroneous deduction.

4 The quoted statement relates to sec. 6015(c)(3)(C), where the Commissioner has the burden of proof with respect to knowledge of the item giving rise to the deficiency.

Respondent disallowed the deduction involved in this case because petitioner's former spouse lacked the necessary profit objective. Even under prior section 6013(e), where the spouse claiming relief was required to prove lack of knowledge of the item, we said that "the taxpayer claiming innocent spouse *** [relief] must establish that he or she is unaware of the circumstances that give rise to error on the tax return, and not merely be unaware of the tax consequences." Bokum v. Commissioner, 94 T.C. 126, 145-146 (1990) (emphasis added), affd. 992 F.2d 1132 (11th Cir. 1993). As previously indicated, Congress was attempting to expand relief from joint liability when it enacted section 6015. When a spouse elects relief under section 6015(c), the burden of proving the spouse's actual knowledge of the item in order to deny relief is on the Commissioner.5 We therefore hold that the proper application of the actual knowledge standard in section 6015(c)(3)(C), in the context of a disallowed deduction, requires respondent to prove that petitioner had actual knowledge of the factual circumstances which made the item unallowable as a deduction. Consistent with Cheshire, such actual knowledge does not include knowledge of the tax laws or knowledge of the legal consequences of the operative facts.6

The factual basis for respondent's determination in this case was the lack of required profit objective on the part of petitioner's former spouse. Section 183(a) disallows any deductions attributable to activities not engaged in for profit except as provided under section 183(b). Section 183(c) defines an activity not engaged in for profit as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212." This case is appealable to the Court of Appeals for the Fourth Circuit. The standard for determining whether expenses of an activity are deductible under either section 162 or section 212(1) or (2) in the Court of Appeals for the Fourth Circuit is whether the taxpayer engaged in the activity primarily for the purpose of making

5 See Culver v. Commissioner, 116 T.C. 189 (2001) (the Commissioner's burden of proof under sec. 6015(c)(3)(C) is met by a preponderance of the evidence).

6 We note that in Cheshire v. Commissioner, 115 T.C. 183 (2000), the spouse claiming relief was found to have actual knowledge of factual circumstances that caused the items of omitted income to be taxable and that her omission was based on her misunderstanding of the law.

a profit. See Hendricks v. Commissioner, 32 F.3d 94, 97 n.6 (4th Cir. 1994), affg. T.C. Memo. 1993-396. While a reasonable expectation of profit is not required, a taxpayer's profit objective must be bona fide. See Hulter v. Commissioner, 91 T.C. 371 (1988). Whether a taxpayer is primarily engaged in the activity for profit is a question of fact to be resolved from all relevant facts and circumstances. See id. at 393; Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd. without published opinion 647 F.2d 170 (9th Cir. 1981). In resolving this factual question, greater weight is given to objective facts than to the taxpayer's after-the-fact statements of intent. See Siegel v. Commissioner, 78 T.C. 659, 699 (1982); sec. 1.183– 2(a), Income Tax Regs.

Thus, several factors are taken into consideration in determining whether an activity is engaged in primarily for profit under section 183. Generally, these factors, set out in section 1.183-2(b), Income Tax Regs., include: (1) The manner in which the activity is conducted, (2) the taxpayer's expertise, (3) the time and effort expended in the activity, (4) an expectation that the assets used in the activity may appreciate in value, (5) the success of the taxpayer in other similar or dissimilar activities, (6) the history of income or losses of the activity, (7) the taxpayer's financial status, and (8) elements indicating personal pleasure or recreation associated with the activity. These factors are relevant in the context of this case to the extent they may indicate whether petitioner knew or believed that her former spouse was or was not engaged in the cattle-raising activity primarily for profit.

The question in this case, therefore, is not whether petitioner knew the tax consequences of a not-for-profit activity but whether she knew or believed that her former spouse was not engaged in the activity for the primary purpose of making a profit. Thus, in determining whether petitioner had actual knowledge of an improperly deducted item on the return, more is required than petitioner's knowledge that the deduction appears on the return or that her former spouse operated an activity at a loss. Whether petitioner had the requisite knowledge is an essential fact respondent was required to establish under section 6015(c)(3)(C). Respondent failed in this regard. The Court is satisfied that petitioner's knowledge of the activity in question was that it was an activity that she knew was not profitable but that she hoped

and expected would become profitable at at some point. Respondent presented insufficient evidence to show that petitioner knew that her former spouse did not have a primary objective of making a profit with his cattle-raising activity. Petitioner, therefore, is entitled to relief from the tax liability arising out of this activity under section 6015(c). Since the activity was an activity attributable solely to her former spouse, the relief to petitioner extends to the full amount of the deficiency.

Decision will be entered for petitioner.

SAM H. PATTON, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT

Docket No. 16428-99.

Filed April 13, 2001.

For 1995, P elected, under sec. 179, I.R.C., to expense a
depreciable asset. R examined P's 1995 Federal income tax
return and reclassified as depreciable three assets that P had
originally classified as "materials and supplies". Following R's
reclassification, P sought R's consent to expense the three
reclassified assets under sec. 179, I.R.C. P was unable to
revoke (modify or change) his election without R's consent. R
refused to give P consent to revoke (modify) his original elec-
tion. Held, R's refusal to consent, considering the facts in this
case, was not an abuse of discretion.

Hugh T. Echols, Sr., for petitioner.
Gordon P. Sanz, for respondent.

OPINION 1

GERBER, Judge: Respondent determined a deficiency in petitioner's 1995 Federal income tax of $26,526, a penalty pursuant to section 6662(a) 2 of $5,305, and a late-filing addition to tax pursuant to section 6651(a)(1) of $5,305. After concessions,3 the issue remaining for our consideration is

1 This case was submitted fully stipulated under Rule 122 of this Court's Rules of Practice and Procedure.

2 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable periods under consideration, and all Rule references are to the Tax Court Rules of Practice and Procedure.

3 Petitioner concedes that he is liable for the accuracy-related penalty pursuant to sec. 6662(a) for the 1995 taxable year. Respondent concedes that petitioner is not liable for an addition to tax pursuant to sec. 6651(a)(1) for the 1995 taxable year. Several other agreements and conces