## Facts

- Kathryn Cheshire and David Cheshire were married and filed a joint federal income tax return for 1992, prepared by David.
- In 1992, David received $229,924 in retirement distributions; $42,183 was rolled over, and $184,377 was deposited into the couple’s joint checking account, generating $1,168 in interest.
- The distributions were used to pay off the home mortgage, purchase a vehicle, fund David’s new business, pay family expenses, retire other family debts, and fund the couple’s daughter’s expenses.
- Kathryn knew the distributions were received, knew their approximate amount, and knew how the funds were used.
- The 1992 return reported retirement distributions but treated only part of the amount as taxable; before signing, Kathryn asked about the tax treatment and was told David had consulted a CPA and that certain amounts were not taxable.
- Kathryn and David divorced in 1995; Kathryn received the marital residence in the property division.
- The IRS determined the return understated tax due to improper treatment of the retirement distributions and assessed a deficiency and penalties against Kathryn.
- Kathryn sought “innocent spouse” relief under I.R.C. § 6015(b), (c), and (f); the Tax Court denied relief, and Kathryn appealed.

## Issues

1. Whether Kathryn qualified for relief under I.R.C. § 6015(b) despite her awareness of the retirement distributions and their use.
2. Whether Kathryn’s election for separate liability relief under I.R.C. § 6015(c) was barred because she had “actual knowledge” of an item giving rise to the deficiency when she signed the return.
3. Whether denial of equitable relief under I.R.C. § 6015(f) was an abuse of discretion.

## Decision

- The Fifth Circuit affirmed the Tax Court’s denial of relief under § 6015(b), (c), and (f).
- § 6015(b): Kathryn failed to prove she did not know, and had no reason to know, of the understatement when she signed the return.
- § 6015(c): Separate liability relief was unavailable because Kathryn had “actual knowledge” of the item giving rise to the deficiency—David’s retirement distributions—at the time she signed the return.
- § 6015(f): The Tax Court did not abuse its discretion in denying equitable relief, given Kathryn’s knowledge and her benefit from the distributions, including receipt of the mortgage-free home.

## Legal Principles

- Under I.R.C. § 6015(c)(3)(C), “actual knowledge” refers to actual knowledge of the item giving rise to the deficiency (such as receipt of income), not knowledge that the item was misreported or that the return’s tax treatment was incorrect.
- A spouse’s reliance on the other spouse’s statements about tax advice does not negate “actual knowledge” of the underlying income item for purposes of § 6015(c).
- Relief under I.R.C. § 6015(b) requires showing the spouse did not know and had no reason to know of the understatement when signing; awareness of a large, readily apparent transaction can establish at least reason to know.
- Equitable relief under I.R.C. § 6015(f) is discretionary; knowledge of the item and significant benefit from the understatement may support denial.

## Conclusion

The Fifth Circuit held that a spouse who knew of substantial retirement distributions and their use had “actual knowledge” of the income item that caused the deficiency, barring separate liability relief under § 6015(c), and it affirmed denial of relief under § 6015(b) and discretionary equitable relief under § 6015(f).


Cheshire v. Commissioner, 282 F.3d 326 (5th Cir. 2002)