                        T.C. Memo. 2006-17



                      UNITED STATES TAX COURT



 MICHAEL R. MOTSKO, Petitioner, AND CHERYL MANNS, Intervenor v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4624-03.               Filed February 2, 2006.


     Peter B. Brautigam and Michael Jungeris, for petitioner.

     Cheryl Manns, pro se.

     Julie L. Payne, for respondent.



                        MEMORANDUM OPINION


     HOLMES, Judge:   Michael Motsko is a skilled mechanic who

runs a trucking company and repair shop in Fairbanks, Alaska.

His estranged wife used to keep the books, but she was less than

honest in preparing their taxes and ended up serving time for
                                 - 2 -

signing false returns.   Motsko has already won relief from joint

liability for their 1985-92 taxes.       He now seeks relief for 1993

and 1996.

                            Background

      Motsko graduated from high school in Minnesota in 1972 and

began working in construction.    He learned over time to run the

heavy equipment used on major construction projects and in 1975

moved to Alaska, where he helped build the Trans-Alaska pipeline.

He has never taken a business course, and only learned how to

balance a checkbook in 2002.

     He met Cheryl Manns in 1982, and they married the next year.

They have two children: a son who is now grown and a daughter

still in high school who lives with Motsko.      Motsko and Manns

earned their living from two businesses that they cofounded.        The

first changed names as it changed its line of work--starting out

as Independent Excavating, and then becoming Evergreen

Construction before finally settling on its current name of

Evergreen Trucking.   The last shift began when Motsko bought a

truck and lowboy (a wheeled bed on which a driver places cargo to

be hauled by the truck), but the move was ill-timed.      The Alaskan

construction industry went into recession in the 1980s when oil

prices collapsed, and the trucking business followed.

Evergreen’s business fizzled and, unable to afford a driver,

Motsko took over the driving himself.
                                - 3 -

     In 1988, Motsko and his wife formed a second business, the

Hydraulics Center.   It was a natural outlet for Motsko’s growing

skill as a heavy equipment mechanic.    It also gave the family an

income when the construction industry went into its long annual

hibernation.

     From the beginning of their relationship, Manns had taken

care of all of Motsko’s finances.   And this continued when they

started their businesses:   Manns handled all the paperwork, wrote

the checks, and helped their accountants prepare the tax returns,

while Motsko did the excavating, drove the truck, and made the

repairs.   Manns also wrote almost all the checks for the family

bills.   If Motsko needed some money, he would occasionally borrow

the appropriate checkbook to pay for a specific service, such as

a doctor’s appointment, or a part needed by one of the

businesses.    But before he took the checkbook, he would generally

clear it with Manns to make sure that they had enough money in

the right account.

      We specifically find Manns never deliberately lied to him

about anything having to do with their money and that Motsko had

access to all of their financial records.   We also find, however,

that he did not ask her many questions and never reviewed their

financial records:   As far as he knew, she paid all their bills

on time, and we believe him when he testified that it was proof
                               - 4 -

enough for him that no vendor had ever refused to do business

with them because of nonpayment.

     Motsko might, however, have noticed something that was quite

unusual had he dug into those records--Manns, unbeknownst to him,

had drawn up and filed an agreement establishing herself and her

brother as partners of the Hydraulics Center business.   According

to this agreement, Manns had a 51% interest and her brother the

remainder.   And although the Hydraulics Center was a partnership

between Manns and her brother, the business license on file with

the State of Alaska was in her name only.   Motsko, in other

words, seemed to own no part of the business where he worked.    To

add to his troubles, he was also at least partially responsible

for loans he and Manns took out to run the Hydraulics Center,

because Manns drew up the paperwork for these loans and Motsko

signed them without looking too closely.

     Around 1995, the IRS began auditing Motsko and Manns’s

returns.   Manns let Motsko know about this; however, she said

that it was common for businesses to be audited and that it was

nothing to worry about.   This case proved to be an exception.

Manns, it seems, had never filed a 1993 tax return.   She finally

prepared and filed one--which Motsko signed--in October 1995.

This return reported taxes and penalties due of $11,945.   While

Motsko was aware of the audit, he was not overly concerned by it,

and assumed that Manns would pay the taxes just like she would

any other bill.
                               - 5 -

     In 1996, Motsko began having serious back pain, and so

Evergreen’s truck and lowboy sat idle for weeks at a time.    He

decided to sell them because of their carrying cost, and he

negotiated the selling price of $158,684.   The truck and lowboy

were completely depreciated, so nearly the entire sale proceeds

would be taxable income, but Motsko and Manns did not set aside a

reserve.   One reason for their failure is that the sale proceeds

might have been earmarked for settling a lawsuit brought against

Motsko, for reasons unknown, by a man named Jerry Sadler.    Motsko

and Manns settled that suit in 1996 for $100,000, but whether the

money came from a loan or from the cash realized by the lowboy

sale is unclear.   It is also possible that money from the sale

went toward construction on the Hydraulics Center property.

     Then their troubles snowballed.   In February 1997, Manns was

indicted on 13 counts of making and subscribing false income tax

returns for tax years 1985 and 1986, and 1988 through 1992.    In

May, she pleaded guilty to five of these counts, and promised to

pay all back taxes, penalties, and interest.   In September, she

also filed a sentencing statement saying that she accepted full

responsibility for her actions.

     Motsko was never at any time implicated in her crimes, but

the criminal investigation did not cause them to change their

usual distribution of responsibilities.   And with the criminal

case hanging over her, Manns had not taken the time to prepare
                                - 6 -

their 1996 tax return.   When she did finally prepare and file it

in October 1997, the return reported taxes and penalties due of

$45,172.   By then, she had already pleaded guilty and been

sentenced.   And Motsko had by then read her letter accepting

responsibility for her actions.    But even then, he still relied

on her to run the finances.    In answering his lawyer’s question

about whether he was aware of the amount of tax due when he

signed the return, Motsko testified:

           Yes, I remember when I signed the taxes that,
           you know, I remember being it was a big sum,
           and what I do remember is I asked Cheryl
           about it, and Cheryl says, she says, well,
           I’ve got a check in. She said I’m going to
           be incarcerated, she said, so I can’t do
           nothing about it until I get back, and that’s
           where it - it’s it, that’s where it was.

     The 1993 and 1996 returns were never audited, and the

Commissioner accepted them as filed.       The IRS started a

collection action against Motsko and Manns in July 1998, and

filed liens against their assets in October 1999.       In November

1999, Motsko filed for innocent spouse relief for 1993 and 1996.

After the Commissioner denied it, Motsko petitioned this Court to

review the Commissioner’s decision.     The case was tried in

Alaska, where Motsko resided when he filed his petition.       Manns

intervened, believing that Motsko should remain liable with her

for the unpaid 1993 and 1996 taxes.

                              Discussion

     A married couple can choose to file their Federal tax
                                 - 7 -

returns jointly.   Sec. 6013(a).1    If they do, both are

responsible for the return’s accuracy, and both are jointly and

severally liable for the entire tax due.     Sec. 6013(d)(3); Butler

v. Commissioner, 114 T.C. 276, 282 (2000).

     This can lead to harsh results, and so section 6015 lets a

spouse ask for relief from joint and several liability on three

grounds.   Section 6015(b) lets a spouse seek relief if he can

show that he neither knew, nor had reason to know, of an

understatement on the return; section 6015(c) lets divorced or

separated spouses split their tax liability.     Both these

provisions, however, require that the liability in question arise

from a “deficiency,” meaning that a couple has underreported

their taxable income.   In tax years 1986 through 1992, Manns did

understate their joint income.      Motsko knew nothing about it, and

the Commissioner granted him relief for those years under section

6015(b).

     Tax years 1993 and 1996 are a different story.     For those

years, there was no deficiency--the problem Motsko faced was that

part of the tax due went unpaid.     That left him able to seek

relief only under section 6015(f), because that section allows

relief where “it is inequitable to hold the individual liable for

any unpaid tax or any deficiency (or any portion of either).”



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code as in effect for the year at issue.
                               - 8 -

Sec. 6015(f).   The Commissioner has issued revenue procedures to

guide the exercise of his discretion, and Revenue Procedure 2000-

15 was the one in effect when Motsko asked for relief.   Rev.

Proc. 2000-15, 2000-1 C.B. 447.   We routinely refer to that

revenue procedure when we review what the Commissioner did, see,

e.g., Washington v. Commissioner, 120 T.C. 137, 147-152 (2003);

Jonson v. Commissioner, 118 T.C. 106, 125-126 (2002), affd. 353

F.3d 1181 (10th Cir. 2003), though we have also considered other

factors, Ewing v. Commissioner, 122 T.C. 32, 48-49 (2004), appeal

docketed, No. 04-73237 (9th Cir.).

     We begin by noting that Motsko has the burden of proof.     Alt

v. Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx.

34 (6th Cir. 2004).   This means that he must show that the

Commissioner’s denial of relief was arbitrary, capricious, or

without sound basis in fact.   Jonson, 118 T.C. at 125; Butler,

114 T.C. at 292.   We have, however, ruled that the Commissioner’s

determination to deny relief under section 6015(f) is subject to

de novo review.    Ewing v. Commissioner, 122 T.C. at 38-39.    The

Commissioner’s continuing disagreement with Ewing made him argue

in this case that we should limit Motsko to the evidence that was

before the Appeals officer who denied his relief.   Ewing binds

us, though, so we considered evidence that Motsko presented for

the first time at trial.
                                - 9 -

     We begin our analysis with the revenue procedure’s list of

conditions that a person trying to win innocent spouse relief

under section 6015(f) must show.     These include proof that he

filed a joint return, did not qualify for relief under section

6015(b) or (c), and did not fraudulently transfer property to

anyone to avoid paying taxes.   Rev. Proc. 2000-15, sec. 4.01,

2000-1 C.B. 448.   Both Manns and the Commissioner admit that

Motsko meets all these conditions.

     We next see if Motsko qualifies for the safe harbor under

section 4.02 of the Revenue Procedure.    Rev. Proc. 2000-15, sec.

4.02, 2000-1 C.B. 448.   The safe harbor has three conditions, and

if Motsko shows that he met them, he would ordinarily get relief.

One of the three, however, is that he did not know when he signed

the returns that the tax liability would not be paid.    To prove

this, Motsko must show (1) that when he signed the joint return,

he neither knew or had reason to know that tax reported on each

of the returns would not be paid; and (2) that it was reasonable

for him to believe that Manns would pay the reported tax for the

year.   Id.

     We find that Motsko did not actually know in 1995 (when he

signed the 1993 return) that the tax would not be paid, but we do

find he had reason to believe it wouldn’t be.    Motsko is right to

say his wife had paid all of their reported taxes in the past,

but by 1995 he knew that their returns for several years were
                               - 10 -

being audited.    He also knew that he was signing the 1993 return

more than a year late.   This was enough to trigger his “duty of

inquiry,” because a reasonable person in his position would have

gotten suspicious that Manns was no longer behaving as expected.

See Feldman v. Commissioner, T.C. Memo. 2003-201, affd. 152 Fed.

Appx. 622 (9th Cir. 2005) (knowledge of an ex-spouse’s

deteriorating mental condition should have caused the taxpayer to

inquire into whether his ex-spouse had paid their taxes).

Instead of taking a closer look at what was going on, however,

Motsko continued to have nothing to do with the finances.      This

was not reasonable.

     By the time he signed the 1996 return, we find that he

actually knew that the tax would not be paid.      Manns had already

been indicted on 13 counts of tax evasion and pleaded guilty to 5

of them.   He knew that she was on her way to jail, and he

testified that she had told him that there was nothing that she

could do about the taxes due on the 1996 return until after she

was released.    See Kleinman v. Commissioner, T.C. Memo. 1994-19

(wife charged with knowledge after husband indicted).

     This leaves the balancing test--eight factors to consider in

deciding whether relief would be “equitable.”      Rev. Proc. 2000-

15, sec. 4.03, 2000-1 C.B. at 448.      These factors are not the

only ones that the Commissioner and we can look at, but they are

where we start.    Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at
                               - 11 -

448; Ewing, 122 T.C. at 48.   Those about which the parties agree

are in italics:

 Weighs for Relief            Neutral           Weighs against
                                                    Relief
No knowledge                                 Knowledge
Economic hardship                            No economic hardship
No significant                               Significant benefit
benefit2
                     Later compliance with   No later compliance
                     Federal tax laws        with Federal tax
                                             laws.
Liability                                    Liability
attributable to                              attributable to
non-requesting                               petitioner.
spouse.
Nonrequesting        No divorce decree.      Petitioner
spouse responsible                           responsible for tax
for tax under                                under divorce
divorce decree.                              decree.
Separated or         Still married.
divorced.
Abuse present.       No abuse present.


We address each factor that the parties disagree about.

     Knowledge:   As discussed above, Motsko either knew or had

reason to know that the 1993 and 1996 taxes would not be paid.

This factor weighs against relief.


     2
        Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at 448, does
not state that the absence of a significant benefit will weigh in
a petitioner’s favor, but only that a significant benefit will
weigh against relief. Nonetheless, we decided in Ewing, 122 T.C.
at 46 (and other cases cited), that the absence of a significant
benefit should be a positive factor for petitioners.
                               - 12 -

     Economic hardship:    We must figure out whether Motsko will

suffer economic hardship if his request for relief is not

granted.    The revenue procedure refers us to the regulation in

section 301.6343-1(b)(4), Proced. & Admin. Regs., which defines

economic hardship as the inability to pay reasonable basic living

expenses if taxes were paid instead.    In Motsko’s case, those

taxes (and penalties) total over $57,000.      As for his living

expenses, section 301.6343-1(b)(4), Proced. & Admin. Regs.,

directs us to consider such factors as the cost of living in

Alaska, how much of Motsko’s property is exempt from levy, his

earning ability, and any extraordinary circumstances.

     Motsko reported on a “Collection Information Statement for

Wage Earners” (an IRS form submitted in support of his request

for relief) that his monthly wages were $5,154 and that his

monthly expenses (including about $800 a month for his daughter’s

hockey programs) were $7,527,3 leaving him with a monthly deficit

of $2,373.4    The current allowable living expenses for a two-



     3
         Motsko listed his monthly expenses:

            Food, clothing and misc.           $ 1,170
            Housing and utilities                2,963
            Transportation                          92
            Health care                            326
            Taxes (income and FICA)              1,024
            Other expenses                       1,952
              Total living expenses              7,527
     4
       Motsko gave no evidence to the revenue agent to
corroborate his income or expenses, but under Ewing we considered
the evidence he presented at trial anyway.
                              - 13 -

person household in Alaska at Motsko’s stated level of income,

according to the Commissioner’s guidelines,5 is $1,182.

     Motsko also has many assets that he could likely sell

without undue hardship.   He has $10,738 in cash or cash

equivalents,6 plus $285,105 of equity in his house and an

additional $10,000 of equity in an adjacent lot.    He has an

unencumbered Harley Davidson motorcycle and a small all-terrain

vehicle.   What looks to be either an understatement of income or

overstatement of expenses, when combined with these assets, leads

us to find that Motsko would not suffer economic hardship should

we deny his request for relief.   These assets were tied up in the

divorce proceedings between Motsko and Manns when the case was

tried; that does not render them valueless without some showing

by Motsko that he would have no hope of regaining control over

them.

     Significant benefit:   The question here is whether Motsko

significantly benefited--beyond normal support--from the

underpayment of the 1993 and 1996 taxes.   The couple owed 1993

taxes of $11,945 on AGI of $56,968.    The high cost of living in

Alaska and the absence of any suggestion that Motsko’s standard

of living increased leads us to conclude that he did not


     5
       http://www.irs.gov/businesses/small/article/0,,id=
104935,00.html.
     6
       These assets include cash on hand, personal savings and
checking accounts, and other investments.
                                - 14 -

significantly benefit beyond normal support in 1993.

     In 1996, the couple owed taxes of $43,255 on adjusted gross

income of $189,765.7    Most of this income came from the sale of

the lowboy and truck.    Whether the proceeds of that sale went to

settle the Sadler lawsuit or to construction on the Hydraulics

Center is not clear.    If the money went to settle the lawsuit,

Motsko certainly benefited by being relieved of that debt.    If it

went to the Hydraulics Center, he may not have received any

significant benefit if Manns’s paperwork actually deprived him of

any interest in that business.    Yet even with his equity in the

Hydraulics Center in dispute, he admitted that the Center was at

the very least a main source of his income.    Our decision on this

factor for 1996 therefore flows from the burden of proof--Motsko

had it, and he didn't show where the money went, so we find that

he did not prove that he received no significant benefit.

     Attribution:     For 1993, the total AGI reported was $56,968;

the revenue agent attributed 68% of this amount, or $38,992, to

Motsko’s work in Evergreen Trucking, which the agent deemed to be

Motsko’s Schedule C business.    For 1996, the couple reported

total AGI of $189,765; this included $158,684 from Evergreen

Trucking’s sale of the truck and lowboy, and another $546 from

Evergreen Trucking.    This gave Motsko, in the agent’s estimation,


     7
        The couple’s taxable income was $169,069, making their
tax assessed $47,141. However, the Motskos had paid withholding
and excess FICA of $4,141, making their overall tax due for 1996
$43,255.
                                - 15 -

84% of the total income for the year even though Motsko argues

that he never saw a penny from the lowboy sale.

     The agent seems to have concluded that Motsko earned all

revenue coming from Evergreen Trucking and Manns earned

everything that come from the Hydraulics Center.    This is

questionable--the couple seemed to divide the labor in both

businesses fairly equally.    Even though we acknowledge that

Motsko may just be an employee of the Hydraulics Center instead

of a partner, the fact remains that the revenue agent attributed

all the income from the Hydraulics Center to Manns.    Neither of

the parties provided us with evidence to rebut the revenue

agent’s conclusion.   What we do know, however, is that at least

part of the taxes due can be attributed to the income-producing

activities of Motsko.    Thus, this factor weighs against relief.

     Payment responsibility:     Motsko and Manns did not have a

final divorce decree when the case was tried, so this factor is

neutral.

     Other Factors:     Motsko also urges us to consider Manns’s

sole responsibility for the tax crimes stemming from their

returns as a positive factor.    While we encourage all taxpayers

to avoid indictment, we also think doing so should be presumed

rather than rewarded as a positive factor in seeking innocent

spouse relief.8


     8
       In Ewing, we did state that failure to “participate in any
wrongdoing”--at least when that wrongdoing was concealed from the
                                                   (continued...)
                              - 16 -

     When the table is reset to reflect our findings, it looks

like this:

  Weighs for Relief          Neutral            Weighs against
                                                    Relief
                                             Knowledge
                                             No economic hardship
No significant                               Significant benefit
benefit--1993                                --1996
                        Later compliance
                        with Federal tax
                        laws
                                             Liability
                                             attributable to
                                             petitioner.
                        No divorce decree.
Separated or
divorced.
                        No abuse present.


     The final tally--even for the more favorable year, 1993--is

two factors weighing toward relief, three neutral, and four

weighing against.   We agree with the Commissioner that Motsko and

Manns’s separation, and Motsko’s lack of significant benefit in

1993, are outweighed by the three negative factors (knowledge,

economic hardship, and attribution) present--especially since

knowledge or reason to know that a tax would be unpaid is “an

extremely strong factor weighing against relief, Rev. Proc. 2000-


     8
      (...continued)
spouse asking for relief--could be a positive factor. Ewing, 122
T.C. at 48. But the wrongdoing in Ewing was underpaying the
taxes, not filing feloniously false returns, and Manns’s crimes
did not affect the two tax years litigated in this case.
                             - 17 -

15, sec. 4.03, 2000-1 C.B. at 449.    We therefore conclude that

the Commissioner did not abuse his discretion in denying Motsko

relief from joint and several liability for tax years 1993 and

1996.


                                     Decision will be entered for

                              respondent.
