Kathryn Cheshire v. Commissioner of Internal Revenue

Summary

The Tax Court denied Kathryn Cheshire innocent spouse relief under sections 6015(b) and (c) for omitted retirement distribution proceeds and interest income because she had actual knowledge of the items giving rise to the deficiency, holding that actual knowledge of an 'item giving rise to a deficiency' under section 6015(c)(3)(C) means an actual and clear awareness of the omitted income itself, not knowledge of its tax consequences or that the return entry was incorrect. The court upheld respondent's denial of section 6015(f) equitable relief as to the deficiency items and the accuracy-related penalty on the omitted interest, but held that denying section 6015(f) relief from the section 6662(a) penalty on the omitted retirement distribution proceeds was an abuse of discretion because petitioner established reasonable cause and good faith in relying on her husband's false report of a CPA consultation. Decision will be entered under Rule 155 giving effect to respondent's concessions and the penalty relief. Judge Colvin, joined by Judges Parr, Gale, and Marvel, dissented from the section 6015(c) knowledge standard as contrary to the legislative history, and Judge Thornton, joined by five judges, concurred to endorse the 'actual and clear awareness' formulation.