Monday, December 31, 2012

Proposed reliance regs issued on shared responsibility rules for employers

Proposed reliance regs issued on shared responsibility rules for employers

Preamble to Prop Reg12/28/2012Prop Reg § 1.1361-4Prop Reg § 54.4980H-0Prop Reg § 54.4980H-1 , Prop Reg § 54.4980H-2Prop Reg § 54.4980H-3Prop Reg § 54.4980H-4 , Prop Reg § 54.4980H-5Prop Reg § 54.4980H-6

IRS has issued proposed reliance regs, along with Questions and Answers (Q&As), that provide guidance under Code Sec. 4980H on the shared responsibility provisions for employers for employee health coverage. The proposed regs only affect employers that are “applicable large employers,” as described in the proposed regs. Employers may rely on these proposed regs for guidance pending the issuance of final regs or other applicable guidance.
A more detailed article on the proposed reliance regs is forthcoming.
Background. For months beginning after Dec. 31, 2013, an applicable large employer is liable for an annual assessable payment if any full-time employee is certified to receive an applicable premium tax credit or cost-sharing reduction and either the employer:
(1) fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan (Code Sec. 4980H(a) liability); or
(2) offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan that, with respect to a full-time employee who has been certified for the advance payment of an applicable premium tax credit or cost-sharing reduction, either is unaffordable or does not provide minimum value as these terms are defined in Code Sec. 36B(c)(2)(C) (Code Sec. 4980H(b) liability).
The payment under Code Sec. 4980H(a) is based on all (excluding the first 30) full-time employees, while the payment under Code Sec. 4980H(b) is based on the number of full-time employees who are certified to receive an advance payment of an applicable premium tax credit or cost-sharing reduction. A full-time employee for any month is an employee who is employed on average at least 30 hours of service per week.
An applicable large employer for a calendar year is as an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year. For determining whether an employer is an applicable large employer, full-time equivalent employees (FTEs), which are determined based on the hours of service of employees who are not full-time, are taken into account. (Code Sec. 4980H(c)(2))
Code Sec. 4980H ties into Code Sec. 36B, which is designed to use a subsidy/tax credit mechanism to make health insurance affordable for individuals with modest incomes. Under Code Sec. 36B(c)(2)(B), a coverage month for an individual (i.e., a month for which the health care subsidy is available) does not include a month in which he is eligible for MEC, as defined in Code Sec. 5000A(f), other than coverage offered in the individual market. MEC may be government-sponsored coverage, such as Medicare or Medicaid, or certain employer-sponsored plans. An individual is eligible for employer-sponsored MEC only if the employee's share of the premiums is “affordable” and the coverage provides “minimum value.” In general, under Code Sec. 36B(c)(2)(C)(i), an employer-sponsored plan is not affordable if the employee's required contribution with respect to the plan exceeds 9.5% of his household income for the tax year. This percentage may be adjusted after 2014.
Previous guidance on Code Sec. 4980H includes:
  • Notice 2011-36, 2011-21 IRB 792, which floated an optional “look-back/stability period safe harbor” to determine whether ongoing (rather than newly-hired) employees are full-time employees for Code Sec. 4980H purposes. Under this safe harbor, an employer would determine each employee's full-time status by looking back at a defined period of not less than three but not more than 12 consecutive calendar months, as chosen by the employer (the measurement period), to determine whether during the measurement period the employee averaged at least 30 hours of service per week.
  • Notice 2011-73, 2011-40 IRB 474, which described a safe harbor under which employers would not be subject to an assessable payment under Code Sec. 4980H(b), for an employee if the coverage offered to him was affordable based on the employee's Form W-2 wages (as reported in Box 1) instead of household income. Under the safe harbor, an employer would not be subject to the penalty with respect to an employee if the required contribution for that employee was no more than 9.5% of his Form W-2 wages. The proposed affordability safe harbor would apply only for purposes of determining whether an employer is subject to the assessable payment under Code Sec. 4980H(b).
  • Notice 2012-17, 2012-9 IRB 430, which described and requested comments on a potential approach for determining the full-time status of new employees for purposes of Code Sec. 4980H, if, based on the facts and circumstances at the start date, it cannot reasonably be determined whether the new employee is expected to work full-time because his hours are variable or otherwise uncertain. Under the potential approach, employers would be given three months or, in certain cases, six months, without incurring a payment under Code Sec. 4980H, to determine whether a variable hour new employee is a full-time employee.
  • Notice 2012-58, 2012-41 IRB 436, which gave employers the option to use a look-back measurement period of up to 12 months to determine whether new variable hour employees or seasonal employees are full-time employees, without being subject to a Code Sec. 4980H payment for this period with respect to those employees. An employee is a variable hour employee if, based on the facts and circumstances at the date he begins providing services to the employer (the start date), it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week. Through at least 2014, employers were permitted to use a reasonable, good faith interpretation of the term “seasonal employee” for purposes of Notice 2012-58Notice 2012-58 also facilitated a transition for new employees from the determination method the employer chooses to use for them to the determination method the employer chooses to use for ongoing employees.
Proposed regs. The proposed regs generally incorporate the provisions of previous guidance under Code Sec. 4980H inNotice 2012-58, 2012-41 IRB 436, as well as many of the provisions of Notice 2011-36, 2011-21 IRB 792Notice 2011-73, 2011-40 IRB 474, and Notice 2012-17, 2012-9 IRB 430, with some modifications in response to comments. The proposed regs also propose guidance on additional issues.
The proposed regs are organized as follows:
... definitions (Prop Reg § 54.4980H-1),
... rules for determining status as an applicable large employer and applicable large employer member (Prop Reg § 54.4980H-2),
... rules for determining full-time employees (Prop Reg § 54.4980H-3),
... rules for determining assessable payments under Code Sec. 4980H(a) (Prop Reg § 54.4980H-4),
... rules for determining whether an employer is subject to assessable payments under Code Sec. 4980H(b) (Prop Reg § 54.4980H-5), and
... rules relating to the administration and assessment of assessable payments under Code Sec. 4980H. (Prop Reg § 54.4980H-6)
Only applicable large employers may be liable for an assessable payment under Code Sec. 4980H. The proposed regs adopt the position outlined in Notice 2011-36 under which an employee is an individual who is an employee under the common law standard, and an employer is the person that is the employer of an employee under the common law standard. Under the common law standard, an employment relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. Under the common law standard, an employment relationship exists if an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. It is not necessary that the employer actually direct or control the manner in which the services are performed. It is sufficient if the employer has the right to do so.
Preamble to Prop Reg12/28/2012 notes that the identification of full-time employees for purposes of determining status as an applicable large employer under Code Sec. 4980H is, by statute, performed on a look-back basis using data from the prior year, taking into account the hours of service of all employees employed in the prior year (full-time employees and non-full-time employees). Therefore, the look-back measurement method that may be used to identify full-time employees for purposes of determining potential Code Sec. 4980H(a) or Code Sec. 4980H(b) liability does not apply for purposes of determining status as an applicable large employer. Instead, the determination of whether an employer is an applicable large employer for a year is based upon the actual hours of service of employees in the prior year. Transition relief allows use of a shorter look-back period in 2013 for purposes of determining applicable large employer status for 2014.
Employers may rely on the proposed regs pending the issuance of final regs or other guidance. Final regs will be effective as of a date not earlier than the date the final regs are published. If and to the extent future guidance is more restrictive than the guidance in the proposed regs, the future guidance will be applied without retroactive effect and employers will be provided with sufficient time to come into compliance with the final regs. (Preamble to Prop Reg12/28/2012, Section X) (212) 588-1113

Thursday, December 27, 2012

section 469 passive income & employee classification

Carnell Specks, et ux. v. Commissioner, TC Memo 2012-343 , Code Sec(s) 469; 1401; 1402; 6662; 7491.

Case Information:

Code Sec(s):       469; 1401; 1402; 6662; 7491
Docket:                Dkt. No. 1956-11.
Date Issued:       12/11/2012.
Judge:   Opinion by Kroupa, J.
Tax Year(s):       


Reference(s): Code Sec. 469; Code Sec. 1401; Code Sec. 1402; Code Sec. 6662; Code Sec. 7491


Official Tax Court Syllabus


We need to decide whether Mr. Specks, a police officer, who provided services to the third parties during off-duty hours, is an employee or an independent contractor of the third parties. We also must decide whether Mr. Specks is a real estate professional taking into account the amount of time he spent [*5] in the rental activity. Finally, we need to address whether petitioners are liable for the accuracy-related penalty.

I. Worker Classification We first address respondent's determination that amounts Mr. Specks received from the third parties were subject to self-employment tax. Generally, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a);Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933). This principle applies to the Commissioner's determinations of worker classification as an employee or independent contractor. Boles Trucking, Inc. v. United States, 77 F.3d 236, 239-240 [77 AFTR 2d 96-909] (8th Cir.1996); Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 268 (2001). The burden of proof shifts to the Commissioner in certain situations under  section 7491(a). Petitioners do not argue that the burden of proof shifts to respondent and have not shown that the threshold requirements have been met. Therefore the burden of proof remains with petitioners.

Petitioners contend that Mr. Specks was an employee of the third parties and thus the amounts paid to him by the third parties were not subject to self- [*6] employment tax. 4 A tax is imposed on a taxpayer's self-employment income.  Sec. 1401. Self-employment income consists of gross income derived by an individual from any trade or business carried on by the individual.  Sec. 1402(a). The self-employment tax, however, does not apply to compensation paid to an employee. Sec. 1402(c)(2).

Whether an individual is an employee or an independent contractor is a question of fact determined by applying common law principles.  Secs. 1402(d),  3121(d)(2); Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322-324 (1992); Prof'l & Exec. Leasing, Inc. v. Commissioner, 89 T.C. 225, 232 (1987), aff'd, 862 F.2d 751 [63 AFTR 2d 89-427] (9th Cir. 1988); Kaiser v. Commissioner, T.C. Memo. 1996-526 [1996 RIA TC Memo ¶96,526], aff'd without published opinion 132 F.3d 1457 [81 AFTR 2d 98-383] (5th Cir. 1997);  sec. 31.3401(c)-1(d), , Employment Tax Regs. Relevant factors in determining whether a worker is an employee or an independent contractor include (1) the degree of control exercised by the principal over the details of the work, (2) which party invests in the facilities used in the work, (3) the opportunity of the individual for profit and loss, (4) whether the principal has the right to discharge the individual, (5) whether the work is part of the principal's regular business, (6) the permanency of the 4

We note petitioners conceded at trial and in their post-trial brief that the security services Mr. Specks performed for the third parties were not part of his employment as a HPD police officer. [*7] relationship and (7) the relationship the parties believe they are creating. Weber v. Commissioner, 103 T.C. 378, 387 (1994), aff'd,  60 F.3d 1104 [76 AFTR 2d 95-5782] (4th Cir. 1995); Rosato v. Commissioner, T.C. Memo. 2010-39 [TC Memo 2010-39]. 1. Right To Control An employment relationship is indicated when the service recipient has the right to control the details and means by which the worker performs the services.  Sec. 31.3401(c)-1(b), Employment Tax Regs. In contrast, independent contractor status is indicated where the opposite is true. Id. This factor is generally critical in determining the nature of a working relationship. See Clackamas Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440, 448 (2003); Leavell v. Commissioner 104 , T.C. 140, 149-150 (1995); Weber v. Commissioner, 103 T.C. at 387. Petitioners did not demonstrate that the third parties maintained the requisite right to control Mr. Specks in the performance of the security services. Consequently, this factor weighs in favor of independent contractor status. 2. Investment in Facilities Independent contractor status is indicated when a worker provides his or her own tools or supplies used for work. Ewens & Miller, Inc. v. Commissioner 117 , T.C. at 271 (citing Breaux & Daigle, Inc. v. United States, 900 F.2d 49, 53 [65 AFTR 2d 90-1133] (5th Cir. 1990)). Mr. Specks wore his HPD uniform and carried his personal firearm [*8] when performing the security services for the third parties. Additionally, the record does not reflect that the third parties trained, supplied or equipped Mr. Specks. This factor weighs in favor of independent contractor status. 3. Opportunity for Profit or Loss The opportunity for profit or loss indicates independent contractor status. Simpson v. Commissioner , 64 T.C. 974, 988 (1975). Earning an hourly wage or fixed salary indicates an employment relationship. See Weber v. Commissioner, 103 T.C. at 390-391; Kumpel v. Commissioner , T.C. Memo. 2003-265 [TC Memo 2003-265]. Citation and O'Quinn paid Mr. Specks an hourly wage for his services. The record does not reflect whether Finger Furniture paid Mr. Specks an hourly wage or under some other arrangement. Accordingly, there is no evidence that he otherwise had any opportunity for profit or risk of loss in the services he provided. This factor weighs in favor of employee status. 4. Right To Discharge The principal's retaining the right to discharge a worker indicates an employment relationship. See Weber v. Commissioner, 103 T.C. at 391; Colvin v. Commissioner, T.C. Memo. 2007-157 [TC Memo 2007-157], aff'd, 285 Fed. Appx. 157 [102 AFTR 2d 2008-5301] (5th Cir. 2008). The third parties retained the right to discharge Mr. Specks at will. This factor weighs in favor of employee status. [*9] 5. Integral Part of Business An employment relationship is indicated when the worker is an essential part of the taxpayer's normal business. See Simpson v. Commissioner 64 T.C. at 989; , Rosemann v. Commissioner, T.C. Memo. 2009-185 [TC Memo 2009-185]. The record does not reflect that the security services Mr. Specks provided to the third parties were an essential part of their business. This factor weighs in favor of independent contractor status. 6. Permanency of the Relationship A continuing relationship indicates an employment relationship, while a transitory relationship may indicate independent contractor status. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 273. The extended working relationships Mr. Specks had with Citation and O'Quinn weigh in favor of employee status. The record is unclear how much time Mr. Specks spent performing security services for Finger Furniture. The Court infers, however, that it was a short duration because the amount paid to Mr. Specks was small. Accordingly, this factor weighs in favor of independent contractor status with respect to Finger Furniture. [*10] 7. Relationship Contemplated by the Parties Providing benefits such as health insurance, life insurance, paid vacations and retirement plans indicates an employment relationship. Weber v. Commissioner, 103 T.C. at 393-394. The record does not reflect that the third parties provided employee benefits to Mr. Specks during 2008.

Additionally, the record reflects that the third parties did not withhold employment taxes from the amounts paid to Mr. Specks and issued him Forms 1099-MISC for his services. Thus, even if Mr. Specks did not consider himself an independent contractor, the third parties did. The record also does not reflect that Mr. Specks ever attempted to correct the third parties' classification of him as an independent contractor, indicating that Mr. Specks viewed himself as an independent contractor. This factor weighs in favor of independent contractor status. 8. Weighing of the Employee Classification Factors The relationships between Mr. Specks and the third parties have some aspects characteristic of an employer-employee relationship and others characteristic of a principal-independent contractor relationship. After weighing the above factors, giving greater weight to the right of control factor, we conclude that petitioners failed to meet their burden of proof to establish Mr. Specks' status [*11] as an employee with respect to the third parties. Accordingly, we sustain respondent's determination that Mr. Specks is liable for self-employment tax on the amounts the third parties paid to him.

II. Real Estate Professional Classification We now address respondent's contention that the claimed rental loss for 2008 is subject to the passive activity loss limitations under  section 469. 5 The deduction of passive activity losses is generally suspended. Sec. 469(a). A passive activity loss is the excess of the aggregate losses from all passive activities over the aggregate income from all passive activities for the taxable year.  Sec. 469(d)(1). A passive activity includes the conduct of any trade or business in which the taxpayer does not materially participate. Sec. 469(c)(1). A rental activity generally is treated as a per se passive activity. Sec. 469(c)(2),  (4). A taxpayer may, however, avoid having his or her real estate activity classified as a per se passive activity if the taxpayer is a qualifying real estate professional and satisfies the material participation requirements of  section 469(c)(1). A taxpayer will qualify as a real estate professional if (1) more than one-half of the personal services performed in trades or businesses by the taxpayer 5

Respondent first raised the rental loss issue in the answer and therefore bears the burden of proof. See Rule 142(a); Welch v. Helvering, 290 U.S. 111 [12 AFTR 1456] (1933). [*12] during the taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and (2) such taxpayer performs more than 750 hours of service during the taxable year in real property trades or businesses in which the taxpayer materially participates.  Sec. 469(c)(7)(B). A taxpayer's material participation is determined separately with respect to each rental property, unless the taxpayer makes an election to treat all interests in real estate as a single rental real estate activity.  Sec. 469(c)(7)(A); sec. 1.469- 9(e)(1), Income Tax Regs.; see Jafarpour v. Commissioner, T.C. Memo. 2012-165 [TC Memo 2012-165]. Respondent concedes that, for 2008, petitioners may treat their rental properties as a single activity. A taxpayer may establish his or her participation in an activity by any reasonable means. Sec. 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988). This Court has acknowledged that "reasonable means" is interpreted broadly and that the temporary regulations may not provide precise guidance. Goshorn v. Commissioner, T.C. Memo. 1993-578 [1993 RIA TC Memo ¶93,578]. Nevertheless, a postevent "ballpark guesstimate" will not suffice. See Lee v. Commissioner,  T.C. Memo. 2006-193 [TC Memo 2006-193]; Goshorn v. Commissioner, T.C. Memo. 1993-578 [1993 RIA TC Memo ¶93,578].

Where, as here, a joint return has been filed, the foregoing real estate professional requirements are satisfied if either spouse separately satisfies those [*13] requirements. Sec. 469(c)(7)(B). Petitioners concede that Ms. Specks was not involved with the rental activity during 2008. Thus, petitioners' rental activity is not per se passive, and the normal passive activity loss rules of  section 469(c)(1) will apply only if Mr. Specks meets the foregoing requirements. We now consider whether Mr. Specks qualifies as a real estate professional.

Mr. Specks stipulated that he worked less than 750 hours in the rental activity. Mr. Specks also stipulated that he worked 2,171.50 hours as an HPD officer and 618.50 hours for Citation. Accordingly, Mr. Specks cannot satisfy either prong of the test. Consequently, the rental activity was per se passive. 6 We therefore hold that the rental loss is subject to the passive activity loss limitations under section 469. 6

Even if taxpayers fail to qualify as real estate professionals under  sec. 469(c)(7) and must therefore treat losses from their rental properties as passive activity losses, they may still be eligible to deduct a portion of their losses under  sec. 469(i)(1). A taxpayer who actively participates in a rental real estate activity may deduct a maximum loss up to $25,000 per year related to the activity.  Sec. 469(i). The deduction is phased out as adjusted gross income, modified by sec. 469(i)(3)(E), exceeds $100,000, with a full phaseout occurring when modified adjusted gross income equals $150,000. Sec. 469(i)(3)(A). Respondent concedes that, in 2008, Mr. Specks actively participated in the real estate activity and is entitled to deduct a portion of the rental loss to the extent allowed under  sec. 469(i). [*14] III. Accuracy-Related Penalty Finally, we address respondent's determination that petitioners are liable for an accuracy-related penalty under section 6662(a) for 2008. A taxpayer is liable for an accuracy-related penalty on any part of an underpayment attributable to, among other things, a substantial understatement of income tax. See  sec. 6662(a) and  (b)(1) and (2); sec. 1.6662-2(a)(1) and (2), Income Tax Regs. There is a substantial understatement of income tax if the amount of the understatement exceeds the greater of either 10% of the tax required to be shown on the return, or $5,000. Sec. 6662(a), (b)(2), (d)(1)(A);  sec. 1.6662-4(a) and (b), Income Tax Regs.; see Jarman v. Commissioner, T.C. Memo. 2010-285 [TC Memo 2010-285].

The Commissioner has the burden of production with respect to the accuracy-related penalty. Sec. 7491(c); Rule 142(a); see Higbee v. Commissioner,  116 T.C. 438, 446-447 (2001). We find that respondent has met his burden of production if Rule 155 computations show petitioners have a substantial [*15] understatement of income tax for 2008. 7 See Higbee v. Commissioner, 116 T.C. at 446; Jarman v. Commissioner, T.C. Memo. 2010-285 [TC Memo 2010-285]. A taxpayer is not liable for an accuracy-related penalty, however, if the taxpayer acted with reasonable cause and in good faith with respect to any portion of the underpayment. Sec. 6664(c)(1);  sec. 1.6664-4(a), Income Tax Regs. The determination of whether a taxpayer acted with reasonable cause and in good faith depends on the pertinent facts and circumstances, including the taxpayer's efforts to assess his or her proper tax liability; the knowledge, experience and education of the taxpayer, and the reliance on the advice of a professional.  Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most important factor is the extent of the taxpayer's effort to assess the proper tax liability. Id. The taxpayer has the 7

Respondent determined in the alternative that petitioners are liable for the accuracy-related penalty on the portion of the underpayment attributable to negligence or disregard of rules or regulations. "Negligence" includes the failure to make a reasonable attempt to comply with provisions of the Code as well as any failure by the taxpayer to keep adequate books and records or to substantiate deductions and credits claimed on the return. See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. The term "disregard" includes any careless, reckless or intentional disregard. See sec. 6662(c).

Petitioners failed to substantiate Mr. Specks' status as an independent contractor of the third parties and their entitlement to the rental loss. We find therefore that respondent has satisfied his burden of productin for imposing the accuracy-related penalty for negligence or disregard of rules or regulations. [*16] burden of proving the reasonable cause and good-faith exception applies.  Sec. 7491(c); Rule 142(a); see Higbee v. Commissioner, 116 T.C. at 446-447.

Petitioners assert they relied on a return preparer to complete their joint individual income tax return for 2008. We have found that reliance on a tax professional demonstrates reasonable cause when a taxpayer selects a competent tax adviser, supplies the adviser with all relevant information and consistent with ordinary business care and prudence, relies on the adviser's professional judgment as to the taxpayer's tax obligations. Sec. 6664(c)(1); Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff'd, 299 F.3d 221 [90 AFTR 2d 2002-5442] (3d Cir. 2002). All facts and circumstances are considered in determining whether a taxpayer reasonably relied in good faith on professional advice, including the taxpayer's education, sophistication and business experience.  Sec. 1.6664-4(a) and (b), Income Tax Regs.

Petitioners did not establish that the return preparer was a competent professional with significant expertise to justify reliance or that petitioners provided the return preparer all relevant information. We therefore do not find that petitioners have shown that it was reasonable to rely on the return preparer. Furthermore, petitioners failed to otherwise show that their underpayment was due to reasonable cause and was in good faith. [*17] Based on the entire record, we find that petitioners failed to establish that they acted with reasonable cause and in good faith with respect to the underpayment for 2008. Accordingly, petitioners are liable for the accuracy-related penalty on the underpayment for 2008 as reflected in the Rule 155 computation.

We have considered all arguments the parties made in reaching our holding, and, to the extent not mentioned, we find them irrelevant or without merit.

To reflect the foregoing and respondent's concession that petitioners are entitled to deduct a portion of the rental loss to the extent allowed under  section 469(i),

Decision will be entered under Rule 155.

2 (212) 588-1113

Wednesday, December 26, 2012

6672 case - willfulness issue - did not know

KOCZYLAS v. U.S., Cite as 110 AFTR 2d 2012-XXXX, 12/03/2012

SKOCZYLAS, Plaintiff, v. UNITED STATES OF AMERICA, Defendant and Counter-Claimant, v. BREEN, et al. Counter-Defendants.
Case Information:

Code Sec(s):      
Docket No.:        09 Civ. 2035 (ILG) (RML),
Date Decided:   12/03/2012.


II. Legal Standards

A. Section 6672

Section 6672(a) provides, in relevant part, that:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall ... be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
“[U]nder section 6672(a), an individual may be held liable for unpaid withholding taxes if: (1) he or she was a “responsible person” for collection and payment of the employer's taxes; and (2) he or she “willfully” failed to comply” with statutory withholding tax requirements. Winter v. United States, 196 F.3d 339, 344 [84 AFTR 2d 99-6892] (2d Cir. 1999). “The assessment of the tax creates a prima facie case of liability, and the person against whom the penalty is levied bears the burden of establishing by a preponderance of the evidence that at least one of the two elements of section 6672 liability does not exist.” Schwinger v. United States, 652 F. Supp. 464, 466 [59 AFTR 2d 87-546] (E.D.N.Y. 1987).

Although “[n]o single factor is dispositive in evaluating whether an individual” is a “responsible person” within the meaning of § 6672(a), “the determinative question is whether the individual has significant control over the enterprise's finances.” Winter, 196 F.3d at 345 (internal quotation omitted). To answer this question, the Second Circuit has developed a seven-factor test that directs courts to look at whether the individual:

(1) is an officer or member of the board of directors, (2) owns shares or possesses an entrepreneurial stake in the company, (3) is active in the management of day-to-day affairs of the company, (4) has the ability to hire and fire employees, (5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (6) exercises control over daily bank accounts and disbursement records, and (7) has check-signing authority.
Id. (internal quotation omitted).

“Even a responsible person may not be held personally liable under section 6672(a) unless his or her failure to collect, account for, or remit withholding taxes was willful.” Id. “The principal component of willfulness is knowledge: a responsible person acted willfully within the meaning of  § 6672(a) if he [or she] (a) knew of the company's obligation to pay withholding taxes, and (b) knew that company funds were being used for other purposes instead.” United States v. Rem, 38 F.3d 634, 643 [74 AFTR 2d 94-6649] (2d Cir. 1994). “Willful conduct may also include a reckless disregard for obvious and known risks as well as a failure to investigate after having notice that withholding taxes have not been remitted to the Government.” Winter, 196 F.3d at 345 (quotations omitted). However, a responsible person will not be held personally liable under § 6672(a) if he or she reasonably believed that taxes were being paid. Id. at 345–36 (discussing a limited ““reasonable cause” exception to section 6672(a) liability”).

B. Summary Judgment

Summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). “An issue of fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. A fact is material if it might affect the outcome of the suit under the governing law.” Fincher v. Depository Trust & Clearing Corp., 604 F.3d 712, 720 (2d Cir. 2010) (internal quotation omitted).

The moving party bears the burden of establishing the absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). When the burden of proof at trial would fall on the non-moving party, it ordinarily is sufficient for the movant to point to a lack of evidence to go to the trier of fact on an essential element of the non-movant's claim. Id. at 322–23. To defeat a motion for summary judgment, the non-moving party “must do more than simply show that there is some metaphysical doubt as to the material facts,” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586–87 (1986)), and cannot “rely on conclusory allegations or unsubstantiated speculation.” Brown v. Eli Lilly & Co., 654 F.3d 347, 358 (2d Cir. 2011) (internal quotation omitted). However, under § 6672(a), “[t]he person against whom the IRS assesses a  § 6672 tax penalty has the burden of disproving [the tax liability], by a preponderance of the evidence.” Fiataruolo v. United States, 8 F.3d 930, 938 [72 AFTR 2d 93-6550] (2d Cir. 1993).

A court deciding a motion for summary judgment must “construe the facts in the light most favorable to the non-moving party and must resolve all ambiguities and draw all reasonable inferences against the movant.” Brod v. Omya, Inc., 653 F.3d 156, 164 (2d Cir. 2011) (internal quotation omitted). “Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge.” Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000).

“In the context of a section 6672(a) dispute, ... summary judgment is appropriate where there are no genuine questions as to the assessed individual's control of company funds and decision making authority, his or her knowledge of the deflection of company funds to payees other than the IRS, or the existence or reasonableness of his or her belief that the taxes were, in fact, being paid.” Winter, 196 F.3d at 346. “A court may grant summary judgment as to willfulness “only when the facts are undisputed and application of the law to those facts will reasonably support only one ultimate conclusion.”” Reiff v. United States, 461 F. Supp. 2d 142, 154 [98 AFTR 2d 2006-7566] (S.D.N.Y. 2006) (quoting Winter, 196 F.3d at 347). While the individual has the burden of proof, if “the individual's position makes his [or her] claim of ignorance of nonpayment plausible and there are no other indicia of knowledge,” Rem, 38 F.3d at 644, then “a question of fact exists as to willfulness.” Reiff, 461 F. Supp. 2d at 154.

III. Discussion

A. Dvora Skoczylas

Skoczylas argues that she is not a “responsible person” under § 6672 and that even if the Court finds otherwise, it should still grant summary judgment in her favor “because she did not willfully fail to pay over LIHAC's trust fund taxes.” Pl.'s Mem. at 1. The government contends that Skoczylas is a “responsible person” who willfully failed to pay LIHAC's taxes, so the Court should deny Skoczylas' motion and grant summary judgment in the government's favor. Gov't's Opp'n at 1; Gov't's Mem. at 18–19, 23–24. The Court finds the existence of genuine disputes as to material facts and denies both parties' motions.

1. “Responsible Person”

Under the Second Circuit's seven-factor test, two factors weigh in favor of the government, two factors weigh in favor of Skoczylas, and three factors turn on disputed issues of material fact. Therefore, summary judgment for either party under  § 6672 is not appropriate.

i. Officer or Member of the Board of Directors

The parties agree that Skoczylas was a member of the Board of Directors and President of LIHAC. Gov't's 56.1 Opp'n ¶¶ 15, 17. Although they dispute the reach of the title “President” and the importance of how frequently the Board met or that Skoczylas' position was unpaid, Pl.'s Mem. at 6–9; Gov't's Opp'n at 5–6; Pl.'s Reply at 4, the dispute is irrelevant because the issue is whether Skoczylas “is an officer or member of the board of directors.” Winter, 196 F.3d at 345 (emphasis added). Because it is undisputed that Skoczylas was a director of LIHAC, this factor weighs in favor of finding that Skoczylas is a “responsible person” under § 6672(a).

ii. Owns Shares or Possesses an Entrepreneurial Stake in the Company

The parties agree that Skoczylas was the 100% controlling shareholder at all times relevant to this case. Pl.'s 56.1 Opp'n ¶¶ 9–10. Although Skoczylas argues that she “was never a bona fide owner” and merely held the “ceremonial title[] of shareholder,” Pl.'s Mem. at 14, she “concede[s] that she held legal title to the shares of LIHAC during the periods at issue.” Pl.'s Reply at 4. Because it is undisputed that Skoczylas was the sole shareholder of LIHAC, this factor weighs in favor of finding that Skoczylas is a “responsible person” under § 6672(a).

iii. Actively Manages Day-to-Day Operations

The parties agree that “Skoczylas does not appear to have been active in the management of the day-to-day affairs of LIHAC.” Gov't's Opp'n at 6. Although the government notes that Skoczylas was “kept apprised of [the] financial health of the hospital,” this is a far cry from active day-to-day management. Therefore, this factor weighs against finding that Skoczylas is a “responsible person” under § 6672(a).

iv. Has the Ability to Hire and Fire Employees

The parties dispute whether Skoczylas, as a director, had the ability to hire and fire employees. The government argues that Skoczylas had this power because she participated in Board meetings that granted physicians hospital privileges and approved the hiring and firing of various executives. Gov't's Opp'n at 7–8. Skoczylas responds that the Board did not have real power to hire and fire because LIHAC was actually run by the Parties in Interest during the bankruptcy, not the Board. Pl.'s Reply at 5–6. Skoczylas also asserts that “granting privileges to physicians at a hospital is not hiring or firing employees.” Id. at 5. Skoczylas is correct that granting a physician hospital privileges does not constitute an employment contract. Lobel v. Maimonides Med. Ctr., 835 N.Y.S.2d 28, 29 (1st Dep't 2007) (citing Engelstad v. Virginia Mun. Hosp., 718 F.2d 262 (8th Cir. 1983)). 6 The parties also dispute whether the Board or the Parties in Interest ran LIHAC during the bankruptcy, so there are genuine disputes as to material facts regarding this factor.

v. Decides Which, When, and in What Order Debts and Taxes Will Be Paid

The parties agree that Skoczylas lacked the power to decide which, when, and in what order debts and taxes will be paid. However, the government contends that because Skoczylas maintained signature power over LIHAC's corporate checking accounts, she “possessed final veto power” over paying payroll, debts, and taxes. Gov't's Opp'n at 8. That contention is unpersuasive given the Second Circuit's cautionary language that “section 6672(a) is not meant to ensnare those who have mere “technical authority.”” Winter, 196 F.3d at 345. Therefore, this factor weighs against finding that Skoczylas is a “responsible person” under § 6672(a).

vi. Exercises Control over Daily Bank Accounts and Disbursement Records

The parties dispute whether Skoczylas exercised control over daily bank accounts. The government contends, and Skoczylas does not appear to dispute, that “Skoczylas maintained check-signing authority on all of LIHAC's corporate checking accounts,” “her signature was printed on all issued payroll checks,” and she “exercised her signatory authority from time-to-time on LIHAC's operating account.” Gov't's Opp'n at 8. However, Skoczylas argues that she “did not have possession or control of LIHAC's checkbook”; she “simply performed the ministerial act of signing the checks in an emergency.” Pl.'s Reply at 9. The Second Circuit has held that “section 6672(a) was not intended to apply to an individual who lacks actual control over an employer's finances, even though he or she has technical authority by virtue of title or ownership interest.” Winter, 196 F.3d at 346 (citation omitted). Therefore, this factor depends on whether Skoczylas possessed actual control over LIHAC's checkbook and bank accounts, which is a disputed material fact.

vii. Has Check-Signing Authority

This factor turns on the same disputed material facts discussed above.

Skoczylas relies heavily on Simpson v. United States, 664 F. Supp. 43 [62 AFTR 2d 88-5008] (E.D.N.Y. 1987) (Glasser, J.), to argue that she should be granted summary judgment because the seven factors weigh against finding that she is a “responsible person.” In Simpson, this court held that the members of the Board of Trustees of a hospital were not “responsible persons” under § 6672(a), denied the government's motion for summary judgment, and granted the Trustees' motion. Id. at 48–50. Skoczylas analogizes her case to Simpson and emphasizes that, like here, the Trustees in Simpson were unpaid and did not take the leading role in running the hospital. Pl.'s Mem. at 6. While the Court recognizes the “social value in having individuals agree to serve on the boards of hospitals,” it also cautions that “unpaid service on the board of a not-for-profit institution should not confer automatic immunity from the strictures of section 6672.” Simpson, 664 F. Supp. at 49. In Simpson, the Court found that the Trustees “did not sign checks” and “did not hire and fire employees,” whereas here the Court finds genuine disputes as to material facts for both factors. Id. Therefore, Simpson, is distinguishable.

A more apt analogue is Winter v. United States. In Winter, the government introduced evidence that Rita Romer was an officer, director, and shareholder who possessed check-signing authority and was involved in important operations decisions. 196 F.3d at 346. In response, Romer introduced evidence that “she held her ownership interest and her titles merely as a convenience to her husband, who exercised effective control over her interest in the company,” while “she had no decision-making authority.” Id. Faced with this conflicting evidence, the court concluded that “there exists a genuine issue of fact as to whether she exercised “significant control” over [the company's] finances or merely enjoyed a “titular designation” at the company,” so summary judgment was not appropriate. Id. Here, the government has introduced evidence that Skoczylas was a director and sole shareholder of LIHAC who may have possessed hiring, firing, and check-signing authority. Conversely, Skoczylas has introduced evidence that she possessed little, if any, control over management, operations, or finances. As in Winter, this raises genuine issues of material fact that cannot be resolved at the summary judgment stage in favor of either party.

Under the totality of the circumstances, the seven-factor test does not warrant granting summary judgment to either Skoczylas or the government. Accordingly, on the issue of whether Skoczylas is a “responsible person” under § 6672(a), both Skoczylas' and the government's motions are DENIED.

2. Willfulness

“The principal component of willfulness is knowledge,” United States v. Rem, 38 F.3d 634, 643 [74 AFTR 2d 94-6649] (2d Cir. 1994), and, as discussed supra, the parties dispute Skoczylas' knowledge and involvement throughout the relevant period. Although Skoczylas bears the burden of proof, she presents sufficient evidence of being unaware of LIHAC's failure to pay withholding taxes. For example, Hung testified:

Q: So as far as you know, Ms. Skoczylas had no idea of the delinquency?
A: Correct. I didn't say anything to her.
Reiser Decl., Ex. 7 (Hung Dep.), at 197. Conversely, the government presents evidence that Skoczylas had access to, and at times even signed, documents that showed LIHAC's tax delinquencies. Gov't's Mem. at 23–24. In light of these genuine disputes as to material facts, the issue of Skoczylas' willfulness cannot be resolved at the summary judgment stage. Accordingly, both Skoczylas' and the government's motions are DENIED. 7

B. John Breen

Breen concedes that he is a “responsible person” under § 6672(a) for most of the relevant time period, but argues that he is entitled to summary judgment because “there is no evidence that he acted willfully in causing any LIHAC payroll tax deficiency.” Breen's Opp'n at 77. The government contends that it is entitled to summary judgment because “Breen willfully failed to collect, truthfully account for or pay over LIHAC's withheld employment taxes to the IRS.” Gov't's Mem. at 24–26. The Court finds that Breen is a “responsible person” under § 6672(a) for most, but not all, of the relevant time period, but finds that there are genuine disputes as to material facts regarding Breen's willfulness. Accordingly, it grants Breen's motion in part and denies Breen's motion in part, and grant's the government's motion in part and denies the government's motion in part.

1. “Responsible Person”

Breen's status as a “responsible person” turns on the precise timeline of events. As discussed supra, it is undisputed that LIHAC did not fully pay federal payroll taxes for the first three quarters of 2002 and the first two quarters of 2003. It is also undisputed that Breen was COO during the first quarter of 2002, was promoted to CEO during the second quarter of 2002, and was CEO for all subsequent quarters in 2002 and 2003.

The parties appear to agree that Breen was not a “responsible person” in the first quarter of 2002 when he was COO, and was a “responsible person” in the third quarter of 2002 and first two quarters of 2003 when he was CEO. Breen's Opp'n at 34–36; Gov't's Reply to Breen at 2, 5–6. But, they dispute whether Breen was a “responsible person” in the second quarter of 2002. Breen argues that he was not a “responsible person” in the second quarter of 2002 because he was still COO for most of the quarter. Breen's Opp'n at 34–36. The government responds that Breen became CEO with 30 days left in the second quarter of 2002, so “there was sufficient time remaining ... for Breen to determine the status of LIHAC's unpaid federal employment tax liability accruing during the second quarter”; therefore, Breen was a “responsible person” in the second quarter of 2002. Gov't's Reply to Breen at 2, 5–6. Since Breen was promoted to CEO partway through the second quarter of 2002, the Court finds that the extent of Breen's responsibility in the second quarter of 2002 raises genuine disputes as to material facts. Accordingly, on the issue of whether Breen is a “responsible person,” Breen's motion is GRANTED for the first quarter of 2002, and DENIED for all subsequent quarters, and the government's motion is GRANTED for the third quarter of 2002 and all subsequent quarters, and DENIED for all previous quarters.

2. Willfulness

Summary judgment is not appropriate on the issue of willfulness because the issue is a matter of credibility, which is a determination made at trial. As discussed supra, Breen testified that he was unaware of the tax liabilities until September 2003, while Hung testified that he informed Breen in 2002. Similarly, the government argues that Breen was aware of the tax liabilities in September 2002 based on the minutes of a meeting of the Parties in Interest, while Breen contends that he was discussing state employment taxes. Gov't's Reply to Breen at 10–11. Finally, Breen contends that he did not read the tax information appended to the MORs he signed and, even if he had read it, he would not have understood it. The government responds that even if Breen could not understand the tax information appended to the MORs, he showed a reckless disregard for the “known risk that LIHAC's employment tax liabilities would not be paid over to the United States” because “he utterly failed to conduct any investigation to assure himself that employment taxes were being paid over to the IRS.” Id. Such factual disputes cannot be adjudicated at the summary judgment stage, so both Breen's and the government's motions are DENIED. 8


For the foregoing reasons, Skoczylas' motion is DENIED, the government's motion against Skoczylas is DENIED, Breen's motion is GRANTED in part and DENIED in part, and the government's motion against Breen is GRANTED in part and DENIED in part.


Dated: Brooklyn, New York

December 3, 2012

I. Leo Glasser

Senior United States District Judge

  After LIHAC declared bankruptcy, it experienced management changes in 2000 and 2001 and attempted to attain not-for-profit status, which has no relevance to this action. Gov't's 56.1 Opp'n ¶¶ 87, 89, 92–94, 100, 122–23.
  IRS Form 941 is an employer's quarterly federal tax return. Employers are required to withhold payroll taxes from employees and report them quarterly on Form 941. See 26 U.S.C. §§ 3102(a), 7501(a); 26 C.F.R. § 31.6011(a)-4.
  Although Local Civil Rule 56.1 does not require a reply statement of facts by the movant, it also does not forbid it. Therefore, the Court will consider reply statements of facts.
  The Complaint refers to “Trust Fund
 Recovery Penalties” because payroll taxes that employers deduct from employees' wages are held by the employer in a special trust fund for the government's benefit. See 26 U.S.C. § 7501.
  Breen's motion for summary judgment, despite spanning 79 pages, does not contain a statement of material facts in numbered paragraphs as required by Local Civil Rule 56.1(a). “Failure to submit such a statement may constitute grounds for denial of the motion.” Local Civ. R. 56.1(a). Nonetheless, for the sake of efficiency and in light of the voluminous record, the Court will decide Breen's motion in conjunction with the other parties' motions.
  Although Skoczylas does not cite to any authority, LIHAC is governed by New York contract and employment law because it is a New York hospital.
  The government also contends that, in the alternative, Skoczylas should be held strictly liable. Gov't's Mem. at 26–27. The government appears to base its argument on the allegation that LIHAC possessed unencumbered funds and chose not to use them to pay taxes, Gov't's 56.1 ¶ 45, but offers no evidence to support the fact that the funds were unencumbered. Breen's 56.1 Opp'n ¶ 45. The government's theory of strict liability is contradicted by the text of the statute, which only applies to an individual who “willfully fails to collect such tax ... or willfully attempts in any manner to evade or defeat such tax.” 26 U.S.C. § 6672(a) (emphasis added). Moreover, the Supreme Court has explicitly held that “the statute cannot be construed to impose liability without fault” because it “does not impose an absolute duty.” Slodov v. United States, 436 U.S. 238, 254 [42 AFTR 2d 78-5011] (1978). The government's attempts to distinguish Slodov are unavailing, Gov't's Reply to Pl. at 10–12, because the weight of authority holds that “[a]ttaining the status of a “responsible person” does not ... encompass strict liability for a company's tax delinquency.” Michaud v. United States, 40 Fed. Cl. 1, 23 [80 AFTR 2d 97-8007] (Fed. Cl. 1997).
  As with Skoczylas, the government also contends that, in the alternative, Breen should be held strictly liable. Gov't's Mem. at 26–27. The Court rejects the government's argument for the same reasons. (212) 588-1113

Friday, December 21, 2012

Innocent spouse case

TC Memo 2011-284], 2011 WL 6029929, at *6; Bruen v. Commissioner, T.C. Memo. 2009-249 [TC Memo 2009-249], 2009 WL 3617592, at *9, is, seen in this way, entirely appropriate because in the ordinary course of events knowing her husband is mishandling their joint return would allow a wife to begin to pull away from the entanglement of joint liability. We do find that the marital-status, compliance, and health factors weigh somewhat in Allison's favor, but the economic-hardship and significant-benefit factors, and especially the knowledge factor, weigh more heavily against her. When tax troubles engulfed the O'Neils, Allison could see them coming but chose to assume joint liability anyway.

We also cannot say the Commissioner abused his discretion in denying Allison relief. Confining our review to the administrative record would show that [*32] the only factors in her favor were that she was divorced and that she complied with her tax obligations after 2005. That the levy wouldn't cause economic hardship because she had substantial nonexempt assets and that she knew or had reason to know Michael wouldn't pay the tax still tip the scales substantially against her. The Commissioner's conclusion was well within his discretion.

Finally, the record indicates, and the Commissioner confirms, that he received $104,240.67 from the title company upon the sale of the Orinda home. He likewise admits that he received $4,735.99 from Michael's bankruptcy, and that the payoff amount he provided the title company did not account for this sum. Furthermore, he shows that with the bankruptcy sums applied, the amount due immediately before the sale of the Orinda home was $99,496.89 ($104,232.88 - $4,735.99). This leaves a difference of $4,743.78 ($104,240.67 - $99,496.89) that Allison overpaid upon her sale of the Orinda home.

Given the slightly mixed result here,

An appropriate decision will be entered.

  The administrative record notes that the O'Neils have filed their taxes and paid late since at least 1998. It also notes that at the time Allison filed her first request for relief, she had filed her own 2006 income tax return late, despite receiving an extension.
  Michael recalls providing Allison with $6,000 to $10,000 per month. Allison recalls getting only $6,000 per month.
  Michael recalls several all-encompassing discussions. Allison categorically rejects this, and says that she and Michael rarely discussed his business, and that his secrecy contributed to their divorce. We find it more likely than not that the truth lies somewhere between.
  This was, of course, net of the $6,715 in estimated payments. The return shows total tax paid of $6,967, however, and the Commissioner concedes that $6,967 was the correct amount that was applied to 2005 when the return was filed.
  All section references are to the Internal Revenue Code in effect at all relevant times, unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure.
  There is some dispute regarding what levies came out of Allison's separate property. The Commissioner contends that the June 2008 payment of $896.24 and an August 2008 payment of $178.57 came from a llison T. O'Neil, et al. v. Commissioner, TC Memo 2012-339 , Code Sec(s) 6015.

Case Information:

Code Sec(s):       6015
Docket:                Dkt. No. 28711-09.
Date Issued:       12/4/2012.
Judge:   Opinion by Holmes, J.
Tax Year(s):       


Reference(s): Code Sec. 6015


Official Tax Court Syllabus


William Edward Taggart, Jr., and Barbara N. Doherty, for petitioner.
Michael J. O'Neil, pro se.

Daniel J. Parent, for respondent.



Allison T. O'Neil, the ex-wife of Michael J. O'Neil, does not want to pay a penny of their joint 2005 federal tax liability because, she says, it [*2] would be inequitable to make her do so. What makes this case a little bit different is that the tax liability Allison seeks to escape has already been paid. Background The O'Neils met over drinks at the University of California, Santa Cruz, and soon married. Michael, who earned his degree in environmental design and architecture, went into business for himself; Allison, who earned her degree in environmental studies, started out working for a camera store and a law firm, doing secretarial work and light bookkeeping--at least until their kids, now 22 and 20, were born.

Allison started working inside the home and raised the children, kept track of the household finances, and occasionally helped Michael with his books. They filed joint tax returns throughout their marriage, though they occasionally filed or paid late. 1

Michael eventually became a real-estate developer, and got involved in Colorado projects that frequently took him away from home. By 2005, he was spending about eighty percent of his time there. The marriage became strained, [*3] and the O'Neils separated. Though their separation would turn into a divorce, the pair kept their family home in Orinda, an affluent suburb in the San Francisco Bay area, so their children could finish high school without moving. Michael and his partners sold a large Colorado project to Pulte Homes in 2005. He received a net gain of $268,000 from the deal, and used the money to pay his own expenses and provide for Allison and the children. 2 What he didn't do was set aside enough for the IRS--in 2005 and 2006, the O'Neils made only three estimated tax payments toward their 2005 tax liability, and the payments added up to less than $7,000.

When it came time to file their 2005 income tax return, the O'Neils got an extension until October 2006, though they did not include payment of the $13,000 they estimated they would owe. Michael gathered much of the information the couple used to prepare their return, but Allison collected at least some, such as the mortgage interest they paid and charitable contributions that they made and certain investment income that they received. She sent what she got to Michael's accountant in Colorado. Michael sent two draft 2005 income tax returns back [*4] home, and Allison reviewed them. The couple also discussed their taxes and finances, even if not at great length. 3 The O'Neils' Colorado gold soon turned to straw. One of Michael's partners sued him over the allocation of the partnership's profits, and in August 2006 a state court entered a $1.5 million judgment against him. This pressed down on the O'Neils. In early October 2006, Michael gave Allison a draft return that differed substantially from the others--it reported the substantial additional income from the partnership's 2005 sale to Pulte Homes and showed about $70,000 in unpaid tax liability. 4 Allison reviewed the return, and challenged Michael about where this unexpected income came from. Her attorney reviewed the return, and she and her attorney both questioned Michael's accountant, who did his best to explain why the tax was due.

Neither O'Neil could pay that large a tax bill at once, and they had no specific plan for how to pay this liability later on. Michael, for his part, told [*5] Allison that the additional income was an error and that he would get a different Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., that would negate the large tax liability. In October Allison signed the return and mailed it to the IRS. No payment accompanied it, and the IRS assessed the unpaid tax liability that it showed in November 2006.

The next May, while they were still married, the O'Neils refinanced their Orinda home; all $70,000 of the proceeds went for their own use: $50,000 went into an account for Allison to use to pay the Orinda home's mortgage, and $20,000 went to pay off credit-card debt. Even after this refinancing, though, the couple had perhaps $400,000 or more in equity.

Their divorce became final in August 2007, but the O'Neils left the division of their marital property unsettled. About nine days after the divorce, Michael's former partner--now his judgment creditor--recorded his judgment as a lien against the Orinda home. The IRS, impatient to collect the O'Neils' large tax debt, also began circling. It took a small tax refund and then, in 2008, put its own lien on the Orinda home. The IRS then levied on two bank accounts and took Allison's 2007 income-tax refund. Allison filed an application for innocent-spouse relief, while Michael sought refuge in a personal bankruptcy filing, only to have the IRS collect another $4,000 when his half interest in the Orinda home was sold. [*6] Allison wasn't doing too well with her request for innocent-spouse relief either. T
14joint account with Michael, and are unavailable for refund. Allison argues that the accounts belonged only to her following the 2007 entry of her divorce.
  The Commissioner is drafting a new revenue procedure to supersede 2003-61, see Notice 2012-8, 2012-4 I.R.B. 309, but we agree with the parties that Rev. Proc. 2003-61 controls this case.
  This is the total of the $30,000 certificate of deposit she got from the sale of the house and the $25,000 she got in the divorce, all of which she apparently is still saving for her retirement.
  During the May 2007 refinancing of the Orinda home, the O'Neils set up an "escrow account" for Allison to use to pay the balance of the mortgage. She testified at trial, and referred during the Commissioner's review of her section 6015 claim, to taking $2,000 per month out of this account until it was exhausted. She also credibly testified that the monthly withdrawals were used only to supplement her earnings, child support, and alimony in meeting household expenses, specifically the mortgage.
  $6,715 came from estimated tax payments that Michael and Allison made while they still jointly managed their finances, $439 was satisfied when the IRS took Allison's 2006 separate tax refund, $1,837 was satisfied by Allison's 2007 tax refund, and another $600 was satisfied by her stimulus payment. During Michael's personal bankruptcy, the IRS got another $4,736. The IRS also used $99,497 from the sale of Allison's interest in the Orinda home. In fact, only $1,075 came from joint and/or separate bank accounts. See supra note 6.
  One interchange at trial is particularly telling in this respect. After describing to the Commissioner's counsel that her son's 529 plan had run out shortly before he graduated from college, she noted that "I don't have any money to help him." In response to further questions, she remarked that her daughter's 529 would soon run out as well, and short of her expected graduation date. The trial transcript then records the following:
       Q:       So you need the refund in order to fund their college
       A:       Well, I need the refund to be able to pay my bills and live my
Her lack of concern for her immediate financial well-being is likewise apparent later on:
           Q:   And if you don't receive that refund, are you going to be able
                continue to live in the house you're in?
       A:       For a while. But I'll, you know, never get to retire.
       Q:       Are you going to be able to keep your car?
                A: Yes, as --
  The Commissioner, for his part, also points out errors with Allison's calculations, which she concedes.
  She has not dipped into her savings. Yet she claims to have run monthly budget deficits ranging from $90 per month in August 2008 to $573 or more per month in July 2009 to $1,297 per month immediately before trial. The record lacks any explanation of how she could continually run such large deficits while her savings remaiis conclusion doesn't change if we adjust the scope and standard of our review. Apart from alleging that she was "psychologically and emotionally bullied," Allison introduced no evidence of abuse: The doctors' reports she provided noted only that she was prescribed antidepressants, and that Michael was "secretive," leading to great marital stress. She introduced no police reports, and no witness statements. We cannot say that the Commissioner erred when he concluded under the facts available to him at the time he made his final determination that Allison wasn't abused. This factor is neutral for Allison no matter which standard and scope of review we use.

Mental/Physical Health Where a spouse was in poor mental or physical health when she signed a return, the equities balance more favorably towards finding her eligible for innocent-spouse relief. See Rev. Proc. 2003-61, sec. 4.03(2)(b)(ii), 2003-2 C.B. at 299; see also Harris v. Commissioner, T.C. Memo. 2009-26 [TC Memo 2009-26], 2009 WL 275680, at *6. Allison introduced evidence at trial and during the Commissioner's administrative review that she has suffered physical hardship as a result of the stress of her divorce from Michael. She has been treated with antidepressants since [*26] at least 2002, and has seen a therapist for at least as long. The Commissioner contends that this mental condition wasn't a factor when she signed the return or applied for relief. We disagree, and note that Commissioner shows us nothing to controvert Allison's evidence for this factor. We conclude that the factor weighs in favor of providing her relief, tempered somewhat because she hasn't established that her depression is particularly debilitating. See Rev. Proc. 2003-61, sec. 4.03(2)(b)(ii).

The Commissioner had most of the evidence regarding Allison's health available to him at the administrative level, but concluded this factor didn't help her because Allison "[did] not indicate that the depression rendered her incapable of making a decision or from leading a `normal life' [sic] incapable of fulfilling the role of wife, mother, and homemaker." We conclude differently onde novoreview. There is nothing however, in the Commissioner's determination that is "arbitrary," "capricious," or without basis in fact or law: He simply weighs the evidence differently than we do, and concludes that Allison's depression isn't substantial enough to weigh in her favor, but is only neutral. Under the limited standard and scope of review, the Commissioner didn't abuse his discretion by concluding this factor was neutral. [*27] Failure To Pay in 2007

The Commissioner argues that we should also consider, as a special unlisted factor, the fact that the O'Neils could have paid their 2005 tax bill when they refinanced their home, but chose not to. This argument is similar to what we already assayed with regard to economic hardship, and relies on the same set of facts.

The Commissioner does make a good point, but we have already held that the fact that the liability was satisfied out of Allison's nonexempt assets weighs against finding for her. This doesn't leave us much room to find even more in the Commissioner's favor. To some small extent, however, what the Commissioner argues here raises issues regarding intent and timing. We agree with him that the O'Neils' decision not to pay their liability in 2007 when they seemingly could have shows that they either didn't intend to pay it or were trying to delay the day of reckoning. This made the Commissioner spend substantial additional effort to get this tax bill satisfied. He was compensated for his time by additional accrued interest, but the O'Neils' dodgery undercut the Commissioner's interest in an orderly, prompt, and efficient taxing system. [*28] This unlisted factor weighs a little bit against finding relief. Since the Commissioner never raised this argument during his administrative review, we won't analyze it under a limited standard and scope of review.

Windfall to Michael

Allison argues that it is inequitable to deny her relief where the denial will indirectly benefit her ex-husband. While this unlisted factor has nothing to do with economic hardship, it is an "equitable" argument. The problem for us is how to include it in our balance.

As we noted, the Code makes jointly filing spouses jointly liable for the tax. Congress itself balanced the equities of this policy choice when it enacted section 6013(d). The zero-sum problem that Allison highlights here applies to any ex-spouse who is held liable for the debts of the other ex-spouse. This is a restatement of the general problem of how to disentangle the joint tax debt left over from a marriage--the very problem that Congress addressed in section 6015. When Congress has balanced the equites, it's not our place to rebalance. This factor neither helps nor hurts Allison.

Allison never raised this argument during her administrative review, and as with the Commissioner's "failure to pay the liability when they could" argument, we won't evaluate this argument under a limited standard and scope of review. [*29] II. Conclusion We have already concluded that Allison isn't eligible for relief underRevenue Procedure 2003-61's safe harbor because the knowledge factor weighs against her. Under de novo review, the factors weighing in favor of and against relief are as follows: Weighs for Relief Neutral Weighs Against Relief Separated or divorced No economic hardship Knew or had reason to know that Michael wouldn't pay the liability No divorce or other agreement allocating the liability Significant benefit

Allison was individually tax compliant No abuse present Allison in poor mental or physical health O'Neils failed to pay tax liability when they had first opportunity to do so [*30] If we were limited to reviewing the Commissioner's determination for abuse of discretion based entirely on the administrative record, the factors would weigh as follows: Weighs for Relief Neutral Weighs Against Relief Separated or divorced No economic hardship Knew or had reason to know that Michael wouldn't pay the liability No divorce or other agreement allocating the liability Not clear whether benefit was significant or not

Allison was individually tax compliant No abuse present Poor health is not a factor We conclude, on balance, that she is ineligible for relief under Revenue Procedure 2003-61. "As in any multifactor balancing test, we must have something in mind as the appropriate fulcrum when there are factors weighing down both sides of the lever." Nihiser v. Commissioner, 2008 WL 2120983 [TC Memo 2008-135], at *13. And here [*31] we can look to see if the economic unity of the household filing a joint return has been broken down by the actions of the nonrequesting spouse in a way that didn't allow the requesting spouse a reasonable exit. Id. As the Second Circuit once wrote, the innocence we look for "within the meaning of this statute is innocent vis-a-vis a guilty spouse whose income is concealed from the innocent and spent outside the family." Bliss v. Commissioner, 59 F.3d 374, 380 [76 AFTR 2d 95-5621] n.3 (2d Cir. 1995) (discussing former section 6013), aff'g T.C. Memo. 1993-390 [1993 RIA TC Memo ¶93,390]. The knowledge factor's unique importance, see Haggerty v. Commissioner, T.C. Memo. 2011-284 [ned almost entirely untouched. She does acknowledge possibly receiving $500 per month in "gifts" from her ex's relatives, but she doesn't include these in her calculations. She also omitted extraordinary expenses, which, according to her testimony, were the cost of her childrens' schools, and their flights home, computers, etc. We can only infer, lacking any explanation to the contrary, that the bulk of the "support" she claims she provides her children while they attend school is actually reimbursed byur conclusion doesn't change if we review the Commissioner's determination for abuse of discretion. The final determination of this factor [*20] concurred with the preliminary determination, and verified that Allison wouldn't suffer economic hardship if forced to pay the 2005 tax liability. It considered her monthly income much as we just did, but also noted that she was joint owner of a house allegedly worth $1.1 million according to her statement at the Appeals conference. It was no abuse of the Commissioner's discretion to consider this sizeable nonexempt asset when it determined Allison's ability to pay without suffering economic hardship. This factor weighs against her no matter our scope and standard of review.

Significant Benefit The Commissioner now alleges that Allison will benefit beyond ordinary support by receiving a refund of the Orinda home sale proceeds. He argues that she benefits by being able to use this money in the future to retire rather than paying her tax debts now, and implies that retirement funds don't count as "normal support" within the meaning of the revenue procedure. Allison counters that the income giving rise to the tax liability went to pay Michael's own expenses, and that she didn't receive any other financial windfalls from Michael's income.

Allison's characterization twists this factor a bit. It is true that Michael used the proceeds from his partnership's big sale to Pulte to pay his expenses. But he also testified that he used part of the money to support Allison and their children, [*21] and to pay the mortgage on the Orinda home. Michael was without doubt the biggest source of income for the family in 2005, and money is fungible, so we find that Allison did in fact benefit, directly or indirectly, from the underlying income. Whether this benefit was "normal" is another question.

Allison already cashed out in part when she and her husband refinanced the Orinda home to enable her to continue to work only part time, to keep her in the house, and to pay off credit-card debt. And here the Commissioner again notes that Allison intended to use the Orinda home's sale proceeds only to fund her retirement. While a home may not be "beyond normal support," retirement funds can be. See George v. Commissioner, T.C. Memo. 2004-261 [TC Memo 2004-261], 2004 WL 2601319, at *5. Reviewing the notice of determinationde novo, we agree with the Commissioner that this factor weighs against relief.

In the notice of determination, however, the Commissioner concluded that this factor neither favored nor disfavored relief, but was neutral. He didn't make the more detailed argument he makes now, but noted that Allison got $6,000 in monthly support from Michael, and that "[i]t is unclear if the size of the monthly payment is related to the failure to pay income tax for the year." The Commissioner couldn't conclude, using the evidence Allison gave him in the [*22] administrative record, that she wouldn't have received less support from Michael if the couple had paid their taxes.

This conclusion was not an abuse of discretion. Allison said Michael provided her $6,000 per month "[f]rom 2001 forward," but there is no evidence in the administrative record substantiating this statement. Without knowing whether the support Michael provided Allison increased as a result of the couple's not paying their 2005 tax liability, the Commissioner couldn't tell whether the support was ordinary or atypical. He was well within his discretion to conclude this factor was neutral.

In sum, under a de novo review, we conclude this factor disfavors relief; and on the record available to the Commissioner, he didn't err to conclude it was neutral.

Compliance With Tax Laws Though the administrative record suggests otherwise, 15 the Commissioner concedes now that Allison is compliant with her post-2005 tax obligations. But he argues that even if Allison is compliant, the factor doesn't weigh in favor of relief, but is only neutral. He cites Billings v. Commissioner , T.C. Memo. 2007-234 [TC Memo 2007-234], Albin v. Commissioner T.C. Memo. 2004-230 [TC Memo 2004-230], and Keitz v. Commissioner, T.C. , [*23] Memo. 2004-74, in support of his argument, but notes that each involved Rev. Proc. 2000-15, 2001-1 C.B. 447.

Revenue Procedure 2000-15 differs from Revenue Procedure 2003-61. The earlier procedure divided its facts-and-circumstances approach into "factors weighing in favor of relief" and "factors weighing against relief." Rev. Proc. 2000-15, sec. 4.03(1) and (2), 2000-1 C.B. at 448-449. The compliance-with-the-tax-laws factor used to be listed only in the "factors weighing against relief" category.

Under the current revenue procedure, we have routinely noted that a taxpayer's later compliance with her obligation to file returns and pay her taxes weighs in favor of relief. See, e.g., Pullins v. Commissioner 136 T.C. 432, 452-53 , (2011); see also, e.g., Downs v. Commissioner, T.C. Memo. 2010-165 [TC Memo 2010-165], 2010 WL 2990297, at *4. The Commissioner's legal argument does not persuade us, and goes against precedent that we must follow. Given that the Commissioner concedes Allison was compliant, we must conclude this factor weighs in her favor.

Even if we reviewed the Commissioner's determination only for abuse of discretion and confined ourselves to the administrative record, the factor would still favor Allison, because at Appeals the IRS concluded that the "factor [was] favorable for relief" when it issued the notice of determination. It's only now that the Commissioner asks us to reconsider this finding. A more limited review will [*24] not overturn this conclusion, because the Commissioner does not now argue he abused his own discretion by concluding the factor favored Allison. Thus, under either standard of review, the factor favors Allison.


While both parties agree that abuse may weigh in favor of finding relief, they look at the facts here quite differently. Allison suggests that Michael was abusive within the meaning of Rev. Proc. 2003-61 because he lied to her repeatedly, "emotionally and psychologically bullied" her, and threatened her with "trouble" if she didn't sign the return.

The Commissioner disputes this characterization of the O'Neils' relationship. He notes that there is no documented evidence of abuse. He notes that the "threat"

Michael allegedly lobbed at Allison was based upon the couple's legal obligation to file and pay taxes, which Allison already knew. He observes that Michael was already separated from Allison by the time she signed the return--legally, and by substantial distance--and that she signed the return only after consulting with legal counsel, Michael, and his accountant.

We agree with the Commissioner. Allison appears not to have had a happy marriage with Michael. But we have no basis to find "bullying" or intimidation here--much less more substantial abuse of the sort we analyzed inNihiser v. [*25] Commissioner, T.C. Memo. 2008-135 [TC Memearly balked at this suggestion, because she added on her application that Michael "pressured me into signing by pointing out that if I did not agree to sign the return, no return at all could be filed and we would be in trouble." On the basis of these statements, the Commissioner preliminarily determined that Allison knew that the tax wouldn't be paid.

Allison contested this conclusion when she sought review within the IRS. She again admitted she knew that the tax wouldn't be paid when the couple filed, but claimed that Michael was "menacing" and deceitful in that he seems to have told her that he was either going to file an amended return or receive an amended Schedule K-1 that would eliminate the tax due. We also agree with the Commissioner that Allison never established that she was actually deceived into thinking that either approach would work. (In fact, when Michael did present her with an amended return nearly a year later, she wouldn't sign it unless he paid the [*13] stated liability himself, in full--this despite the liability shown on this amended return's being nearly $60,000 less than that shown on the couple's filed return.) Since Allison cannot demonstrate under either standard or scope of review that she reasonably believed Michael would pay the tax liability, she cannot qualify for safe-harbor relief.

This doesn't end our discussion, however. B. Section 4.03: Facts-and-Circumstances Even if a spouse cannot dock in the safe harbor, she can still try to show that she should win relief under a multifactor balancing test. See Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298-299. For this test, we evaluate a "nonexclusive" list of factors, including extra factors the parties note, described below in table form (we've italicized the factors not in dispute): Weighs for Relief Neutral Weighs Against Relief Separated or divorced Still married N/A

Economic hardship N/A No economic hardship Didn't know or have N/A Knew or had reason to reason to know that know that Michael Michael wouldn't pay wouldn't pay the the liability liability No divorce or other Allison was legally [*14] Michael was agreement allocating the obligated by agreement legally obligated by liability to pay the liability agreement to pay the herself liability himself No significant benefit N/A Significant benefit Allison was individually Allison not individually tax compliant N/A tax compliant Abuse present No abuse present N/A Allison in poor mental or Allison not in poor physical health mental or physical N/A health O'Neils paid tax liability O'Neils failed to pay tax when they had first liability when they had opportunity to do so N/A first opportunity to do so

Allison, for her part, also argues that disallowing her relief will give her ex-husband an undeserved financial windfall. The parties don't dispute that Allison is divorced, and no agreement allocates the tax to either Allison or Michael, a neutral factor.

We discuss the additional factors--Allison's knowledge being both a safe-harbor and a balancing-test factor about which the parties disagree.

Economic Hardship Allison argues that her age, earning potential, and low monthly income show that she has "at all times since filing her request for relief" suffered economic [*15] hardship. She argues that the IRS's calculation of her income shortfalls was in error. She also notes that because of the levy, she has insufficient money to retire.

The standard for an economic hardship is more rigorous. There is a regulation, section 301.6343-1(b)(4), Proced. & Admin. Regs., that explains what "economic hardship" is. See Rev. Proc. 2003-61, sec. 4.02(1)(c). It tells the Commissioner to find that a levy would create a hardship "if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses." Sec. 301.6343-1(b)(4), Proced. & Admin. Regs. The Commissioner must look at all of the relevant facts--including assets available to satisfy the liability. See id.; see also, e.g., Wiener v. Commissioner, T.C. Memo. 2008-230 [TC Memo 2008-230], 2008 WL 4568030, at *14.

This regulation constrains our ability to find for Allison: Since the O'Neils' joint tax debts have been completely paid, we must ask whether the levies that satisfied these debts caused Allison to be unable to pay her reasonable living expenses. Given that she still has at least $55,000 in liquid assets, 8 Allison has a substantial burden to meet. [*16] Her position is also undermined by the fact that she began experiencing economic problems long before the levies began--no later than 2007. 9 This means the levies did not create these problems--which arose due to extraneous factors, such as her divorce, expensive medical bills, and the cost of keeping up the Orinda home on a part-time salary. She carefully notes that she "suffers from" economic hardship, but not that the IRS levies would have "cause[d]" her to suffer an economic hardship. A levy can of course exacerbate hardship it might not cause, as Allison contends. She argues that the levies would have caused her economic hardship had they been levied from her monthly income. But of course, they weren't. By the time of trial, the tax liability had been paid in full, and almost none of it came from her monthly income. 10 [*17] And the lion's share of the tax liability was paid by the sale of an asset, her interest in the Orinda home, that Allison was not using to pay her living expenses. (She admits as much now: She wanted to save the proceeds from the Orinda home's sale--and did save the portion she received--for her retirement.) She offers no explanation for how the Commissioner's lien on this asset, and its use to pay her tax liability, caused or aggravated her inability to pay reasonable living expenses. 11 [*18] She also argues that the IRS's satisfaction of the joint tax liability from the Orinda home's sale proceeds will cause her to suffer economic hardship in the future.

But she cites no authority to support her assertion that we ought to consider a levy's impact many years down the line. And we've already held that the Commissioner is explicitly allowed to consider a person's nonexempt assets when he determines whether to grant relief. See, e.g., Wiener, 2008 WL 4568030 [TC Memo 2008-230], at *14.

Allison also contests the income side of the Commissioner's calculation--she says that the IRS miscalculated her monthly income and concluded incorrectly that she was not currently depending on her savings to make ends meet. 12 We found her credible in some of the details in her description of her income and expenses, but she misses the bigger issue: Her available assets at the time her relief was denied. 13  (continued...) [*19] We don't know how much the house was worth at that point. But we do know that she had no less than $159,000 in assets immediately before the sale (her $134,000 portion of the Orinda home's equity plus the $25,000 payment from divorce). 14 We will not ignore these assets to focus on her monthly income alone.

She also implores us not to deny her relief and allow her ex-husband an "undeserved financial windfall." We appreciate she considers it unfair that she is left to pay almost all of her and her ex-husband's tax debt. The law is clear, however: Spouses who jointly file are jointly liable for the debt. The propriety of this rule is not before us, and it's up to Congress to change it, not the courts. It has no bearing on whether the IRS's levies caused Allison economic hardship. On balance, this factor isn't in Allison's favor.

Oo 2008-135], 2008 WL 2120983, at *8-*11. This factor neither helps nor hurts Allison but is neutral.

he IRS preliminarily denied her application, and when she submitted additional information and an updated Form 8857, Request for Innocent Spouse Relief, an IRS Appeals officer sent her a final determination denying her relief because: she knew that the tax wouldn't be paid, she wasn't going to suffer an economic hardship, and she wasn't tax compliant. Allison filed a petition in our Court while she continued to reside in Orinda.

After she filed but before we tried the case, the O'Neils finally sold the Orinda home. Proceeds from the sale paid the overdue 2005 tax bill, with $30,000 left over that Allison put into a certificate of deposit.

The sale enabled the O'Neils to finish the division of their marital property. Allison moved into a townhouse in another Bay Area suburb that her former in-laws had bought and rented to her at a "considerable" discount. After her kids turned eighteen, she stopped receiving child support, though she still receives a bit less than $600 per month in alimony, and earns $1,400 every two weeks as a legal secretary. Her children attend the University of Colorado at Boulder, mostly paid [*7 ] for by a 529 plan set up by Michael's relatives. She continues to claim them as dependents though, and the younger is expected to graduate in the spring of 2013.

She seeks a full refund of the tax paid from her half of the Orinda house proceeds as well as the much smaller amounts that the IRS took from her bank accounts and tax refunds that she otherwise would have received. Discussion

I. Relief Under Section 6015 Married couples may file their tax returns jointly; but if they do, they are jointly responsible for the accuracy of the returns and jointly liable for the tax due. Sec. 6013(d)(3). 5 A spouse who signs a joint return may still try to escape joint liability. Two of the three escape routes in the Code--insection 6015(b) and (c)--are blocked for Allison because they require a "deficiency" or "understatement" and the Commissioner alleges neither here. Allison still may qualify for relief, but she must do so only under section 6015(f). If Allison qualifies for that section's "equitable relief," she may receive a refund for any levy from her separate [*8] property. 6  Sec. 6015(g); Ordlock v. Commissioner, 126 T.C. 47, 57 (2006), aff'd, 533 F.3d 1136 [102 AFTR 2d 2008-5323] (9th Cir. 2008).

Section 6015(f) allows the IRS to grant relief from joint and several tax liability to a spouse if it would be "inequitable" to hold that spouse liable. The Commissioner maintains here the same objections to our Court's review of his determinations in cases like this that he raised inWilson v. Commissioner, T.C. Memo. 2010-134 [TC Memo 2010-134], which is still pending on appeal before the Ninth Circuit,appeal docketed, No. 10-72754 (9th Cir. Sept. 10, 2010). We note his objections; namely, that we should review his determination only to see if he abused his discretion and look only at the administrative record, but we are bound by precedent to analyze the case using the evidence in the trial record and without deference to the Commissioner's determination. See Porter v. Commissioner, 130 T.C. 115, 117 (2008) (scope of review); Porter v. Commissioner, 132 T.C. 203, 210 (2009) (standard of review). Because of the current uncertainty of this area of law in a case appealable to the Ninth Circuit, however, we will also analyze the facts in the administrative record using an abuse-of-discretion standard. [*9] A. The Safe Harbor The IRS uses specific guidelines, Rev. Proc. 2003-61, 2003-2 C.B. 296, 7 to determine whether it would be inequitable to hold a spouse jointly liable for a given tax debt. The revenue procedure lists seven threshold requirements for equitable relief, which both parties agree Allison meets. See id. sec. 4.01, 2003-2 C.B. at 297-98. It then lists three "safe-harbor" factors, and a spouse who can show that she has stowed all three aboard her ship can sail safely home to win relief. See id. sec. 4.02, 2003-2 C.B. at 297-98. For Allison, the safe harbor would require proof that she was divorced or separated from Michael on the date she requested relief; when she signed the 2005 tax return she didn't know (or have reason to know) that Michael wouldn't pay the tax liability; and she will suffer economic hardship if the IRS doesn't grant her relief. Id.

Of the three conditions, the parties dispute only the last two, and we need to look at only one--Allison's knowledge of whether her ex would pay the tax liability. [*10] The revenue procedure tells us to gauge Allison's knowledge on the date she signed the joint return, and tells us to ask whether on that date Allison knew or should have known that Michael wouldn't pay the tax liability. She must in fact establish "that it was reasonable for [her] to believe that [Michael] would pay the reported income tax liability." Rev. Proc. 2003-61, sec. 4.02(1)(b), 2003-2 C.B. at 298. Allison admitted during the Appeals process that she knew Michael wouldn't and couldn't pay, and reiterated these facts at trial. She nevertheless alleges that this factor still favors her. The Commissioner sees things differently.

Allison parses the knowledge factor closely. She admits she knew Michael wasn't going to make a payment when they filed their return, because she knew that they didn't have enough cash on hand for such a big payment. Yet she claims that she shouldn't be charged with this knowledge because Michael assured her that the income reported on his Schedule K-1--the income giving rise to the substantial liability--was incorrect. She claims she believed Michael's representations, and his implicit promise to take care of the potential liability--after all, they had always paid their taxes until this point. Thus, she says, Michael misled and "tricked" her into signing the return.

While there is some evidence that Michael was not always forthright with his ex about his business and personal affairs, there is no doubt that the O'Neils were [*11] routinely tardy in filing their returns and paying their taxes. This made her aware of their need to file immediately when presented with the changed return, lest they get penalized for not filing on time.

More important even than this is that by October 2006, when they filed their 2005 tax return, Allison didn't trust her estranged and soon-to-be-ex husband. She recounted frustration with his growing detachment and evasiveness as early as 2002, frustration so great that she sought medical help. This was not surprising, for by that time Michael was spending less and less time at home, and Allison was tired of dealing with the resulting stress and isolation. When Michael gave her the changed return in October 2006, Allison consulted her attorney and spoke with both Michael and his accountant before signing. She questioned them specifically about the increased income, and she knew that Michael couldn't pay the tax. She knew that she couldn't pay the tax. And she knew that her husband had just lost a very large lawsuit against an estranged former business partner. We therefore do not find credible her claim that she trusted Michael to make the liability "all go away." Such a belief could not possibly have been reasonable under the circumstances.

Even if we were limited to reviewing the Commissioner's determination on this factor for an abuse of discretion, upon the administrative record only, we [*12] would not find in Allison's favor on this factor. The innocent-spouse relief application asks the question "[w]hen the returns were signed, did you know any amount was owed to the IRS for those tax years?", and she checked the "yes" box. She explained that she knew the liability stated on the 2005 return was "large" and also "unpaid", but Michael assured her that they would amend their return and the tax liability would "disappear". She cl (212) 588-1113