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.
1
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.
2
Michael recalls
providing Allison with $6,000 to $10,000 per month. Allison recalls getting
only $6,000 per month.
3
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.
4
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.
5
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.
6
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.
ALLISON T. O'NEIL, Petioner, AND MICHAEL J. O'Neil,
Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Case Information:
Code Sec(s):
6015
Docket: Dkt.
No. 28711-09.
Date Issued:
12/4/2012.
Judge: Opinion by
Holmes, J.
Tax Year(s):
Disposition:
HEADNOTE
1.
Reference(s): Code Sec. 6015
Syllabus
Official Tax Court Syllabus
Counsel
William Edward Taggart, Jr., and Barbara N. Doherty, for
petitioner.
Michael J. O'Neil, pro se.
Daniel J. Parent, for respondent.
HOLMES, Judge
MEMORANDUM OPINION
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
Threlatives.
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.
7
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.
8
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.
9
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.
10
$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.
11
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
education?
A: Well, I need the refund to be able to
pay my bills and live my
life.
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
to
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 --
12
The Commissioner,
for his part, also points out errors with Allison's calculations, which she
concedes.
13
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.
Abuse
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
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