                            T.C. Summary Opinion 2016-76



                            UNITED STATES TAX COURT



  BOHONG ZHANG, Petitioner, AND THOMAS MCKEE, CONSERVATEE,
         BARBARA STRAIT, CONSERVATOR, Intervenor v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 828-15S.                              Filed November 9, 2016.



      Bohong Zhang, pro se.

      Barbara Strait (conservator), for intervenor.

      Sebastian Voth, for respondent.



                                 SUMMARY OPINION


      GUY, Special Trial Judge: This case was heard pursuant to the provisions

of section 7463 in effect when the petition was filed.1 Pursuant to section 7463(b),


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                            -2-

the decision to be entered is not reviewable by any other court, and this opinion

shall not be treated as precedent for any other case.

      Respondent determined that petitioner is not entitled to relief from joint and

several liability under section 6015 for the taxable years 2007 and 2008.

Petitioner filed with the Court a timely petition for review of respondent’s

determination.2 Petitioner’s former spouse, through a conservator, filed a timely

notice of intervention pursuant to section 6015(e)(4). The issue for decision is

whether petitioner qualifies for spousal relief under section 6015(f) for the taxable

years 2007 and 2008.

                                       Background

      Some of the facts have been stipulated and are so found. The stipulation of

facts and the accompanying exhibits are incorporated herein by this reference.




      1
       (...continued)
Revenue Code, as amended and in effect at all relevant times, and all Rule
references are to the Tax Court Rules of Practice and Procedure. Monetary
amounts are rounded to the nearest dollar.
      2
          At the time the petition was filed, petitioner resided in California.
                                        -3-

I. Petitioner’s Background

      Petitioner was born in Changchun, China, and she completed high school

and earned credits at the university level while living there. In July 1995 she

immigrated to the United States.

      Petitioner has two daughters from an earlier marriage and, during the period

in question, was receiving alimony and child support payments (for one daughter)

from her former spouse. Petitioner owned a home in Mira Loma, California.

II. Intervenor’s Background

      Intervenor had been employed in the retail clothing business over a career

that spanned more than 30 years. He began work as a sales clerk and retired in

2004 as vice president of sales. He owned a condominium unit in Tustin,

California, where he resided, and a rental property in Huntington Beach,

California.

III. Petitioner and Intervenor’s Marriage

      Petitioner met intervenor at a singles party in January 2005. They entered

into a prenuptial agreement on August 11, 2005, which stated that, upon their

marriage, each of them would retain his or her premarital property and be

responsible for personal debts. They were married at the Bellagio Hotel in Las
                                        -4-

Vegas, Nevada, on August 13, 2005. Although petitioner’s family attended the

wedding, intervenor’s family and friends were not invited.

      A. The Tustin Ranch Home

      Petitioner moved into intervenor’s Tustin condominium after they were

married, and they initially made renovations to the unit. Shortly thereafter,

however, intervenor sold both the Tustin condominium and his Huntington Beach

rental property, and petitioner sold her Mira Loma home. The couple then jointly

purchased a new home in Tustin Ranch, California (Tustin Ranch home), for

$930,000. Intervenor and petitioner contributed $400,000 and $200,000 of their

separate funds, respectively, as a downpayment on the residence, and they

obtained a mortgage for the balance of the purchase price. Although there was a

second mortgage on the Tustin Ranch home, there is no documentation in the

record regarding that loan.

      B. Social Security Benefits

      After his marriage to petitioner, intervenor (who was eligible for Social

Security benefits) assisted petitioner and one of her daughters in applying for and

obtaining Social Security benefits.
                                        -5-

      C. Household Expenditures

      The record is unclear as to how petitioner and intervenor managed their

household finances. Although petitioner testified that intervenor controlled the

couple’s finances and that she generally was unaware of the couple’s income and

expenses, she failed to produce bank records that would shed light on this aspect

of their relationship.

      The couple maintained a high standard of living during their marriage.

They frequently dined in expensive restaurants, took shopping trips, and drove

expensive automobiles. During the marriage petitioner took multiple trips to

China and Canada, intervenor paid for petitioner’s mother’s transportation to the

United States from China, and they traveled together on gambling excursions and

took a trip to Hawaii.

      D. Intervenor’s Emerging Health Problems

      Beginning in 2005, intervenor’s longtime friend, Richard Scott, began to

notice a gradual deterioration in intervenor’s memory and a change in his general

demeanor and behavior. Over time, Mr. Scott observed that intervenor had

difficulty remembering the names of his family members and that he became

introverted and less sure of himself.
                                         -6-

      E. Consulting Business and Bankruptcy

      Shortly after his marriage to petitioner, intervenor started a retail clothing

consulting business. In 2007 and 2008 intervenor withdrew $325,000 and

$154,988 from his individual retirement accounts (IRAs), respectively. It appears

that intervenor used some of these funds to support his consulting business. The

business eventually failed, and intervenor filed for bankruptcy in 2009.

      F. Sale of the Tustin Ranch Home

      In early 2009 the couple could no longer pay the mortgage on the Tustin

Ranch home. It appears that petitioner moved out of the home sometime in 2009.

On January 14, 2010, the couple sold the Tustin Ranch home for $775,062. After

paying off two mortgage loans on the property (totaling approximately $640,000)

and accounting for other expenses, petitioner and intervenor received a

disbursement of approximately $80,000 at closing--an amount that petitioner

acknowledged that she kept as her own.

      G. Petitioner’s Real Estate Transactions

      In March 2010 petitioner purchased a residence (in her name only) in Chino

Hills, California, for $365,000. At the same time, intervenor executed a grant

(quitclaim) deed surrendering his community property interest in that property. In

May 2014 petitioner applied for and obtained a $225,000 line of credit secured by
                                        -7-

the Chino Hills residence. The loan application listed the fair market value of the

residence as $550,000. In February 2016 petitioner sold the Chino Hills residence

for $510,000, and soon thereafter she purchased a new residence for $368,000.

      H. The Couple’s Divorce

      In late 2009 petitioner assisted intervenor in renting a room from an

acquaintance of hers in a boarding-house-like arrangement. The record does not

reflect intervenor’s monthly income in 2009 although it was Mr. Scott’s

impression that intervenor had little disposable income and was living on modest

monthly Social Security benefits. At the same time, petitioner moved into the

Chino Hills residence.

      On February 21, 2013, petitioner and intervenor executed a marital

settlement agreement (agreement). The agreement stated that petitioner would

take the Chino Hills residence as her sole and separate property, intervenor would

pay petitioner monthly spousal support equal to 30% of his monthly income until

the earlier of either spouse’s death or petitioner’s remarriage, petitioner would

receive a 2013 Toyota Camry (although intervenor was required to make loan

payments and pay for insurance and maintenance on the vehicle), intervenor was

“fully responsible for all tax bills, and all debts from IRS”, and intervenor would

pay for both parties’ cellular phone charges until February 2015.
                                        -8-

      Petitioner initiated divorce proceedings which were not contested by

intervenor. On August 22, 2013, the Superior Court of California, County of Los

Angeles, entered a final judgment of dissolution of marriage.

      I. Appointment of a Conservator

      On September 23, 2013, intervenor signed a power of attorney appointing

his brother, Robert McKee, and his sister, Barbara Strait, as his attorneys-in-fact.

On July 1, 2014, the Superior Court of California, County of Ventura, granted

Ms. Strait temporary conservatorship over intervenor’s person and property. The

same court granted Ms. Strait permanent conservatorship authority on

September 2, 2014.

IV. Tax Returns for 2007 and 2008

      Petitioner and intervenor filed a joint Federal income tax return for 2007,

reporting wage income of $18,094 (attributable primarily to intervenor’s work as a

consultant), a taxable IRA distribution of $325,000, and a loss of $145,121

attributable to intervenor’s consulting business. Although they reported total tax

of $25,740 and tax due of $23,171, they failed to remit payment with the tax

return.

      Petitioner and intervenor filed a joint Federal income tax return for 2008,

reporting no wages, taxable IRA distributions of $154,988, and a business loss of
                                        -9-

$19,035. Although they reported total tax of $10,929 and tax due of $9,732, they

failed to remit payment with the tax return.

V. Petitioner’s Request for Spousal Relief

      On April 30, 2013, the Internal Revenue Service (IRS) sent a letter to

petitioner requesting that she pay the tax due for 2007 and 2008. On May 7, 2013,

petitioner submitted to the IRS a Form 8857, Request for Innocent Spouse Relief,

for the taxable years 2007, 2008, and 2009. Petitioner acknowledged at trial that

the Form 8857 contained numerous inaccuracies and misstatements. For example,

she incorrectly stated in the Form 8857 that: (1) she had separated from intervenor

and was not living with him in 2007, 2008, or 2009; (2) her highest level of

education was high school; (3) she did not incur any large expenses (such as trips,

home improvements, or automobile purchases) during the period in question; and

(4) her mother coowned the Chino Hills residence with her and that the fair market

value of the property was $125,000.

      Petitioner indicated on the Form 8857 that she had signed the tax returns in

question under duress. She stated that she cannot read English and did not

understand the information reported in the tax returns.

      Petitioner acknowledged on the Form 8857 that she had not been abused by

intervenor and that she did not have a mental or physical health problem at the
                                         - 10 -

time she completed the form or when the tax returns in question were filed. She

reported that she had monthly income of $860 (alimony of $660 and child support

of $200) and monthly expenses of $862.

      Ms. Strait, in her capacity as intervenor’s attorney-in-fact, submitted to the

IRS a Form 12509, Statement of Disagreement, alleging that intervenor had

significant cognitive impairments throughout his marriage to petitioner, that

petitioner took control of the couple’s finances, and that she ultimately chose not

to pay the tax due for the taxable years 2007 and 2008.

      As mentioned above, the IRS issued to petitioner a final determination

denying her request for spousal relief for the taxable years 2007 and 2008.

Because there was no tax due for the taxable year 2009, that year is not addressed

in the notice of determination and is not at issue in this case.

      At the time of trial, petitioner was employed and acknowledged that she was

earning $1,700 monthly. The parties stipulated that “[p]etitioner received alimony

from her former spouses that she did not report on her tax returns filed after her

divorce to intervenor.”
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                                     Discussion

I. Relief From Joint and Several Liability

       Generally, married taxpayers may elect to file a joint Federal income tax

return. Sec. 6013(a). After making the election, each spouse is jointly and

severally liable for the entire tax due. Sec. 6013(d)(3). If certain requirements are

met, however, an individual may be relieved of joint and several liability under

section 6015.

       The Court applies a de novo scope and standard of review in deciding

whether a taxpayer is entitled to relief under section 6015. See Wilson v.

Commissioner, 705 F.3d 980, 993-994 (9th Cir. 2013), aff’g T.C. Memo. 2010-

134; Porter v. Commissioner, 132 T.C. 203, 210 (2009). Except as otherwise

provided in section 6015, the taxpayer (requesting spouse) bears the burden of

proving entitlement to relief. Rule 142(a); Porter v. Commissioner, 132 T.C. at

210.

       Three forms of relief are available under section 6015. In general, section

6015(b) provides full or apportioned relief from joint and several liability for

understatements of tax on a return, section 6015(c) provides apportioned relief in

respect of a deficiency to taxpayers who are divorced or separated, and in certain

circumstances section 6015(f) provides equitable relief from joint and several
                                          - 12 -

liability if relief is not available under subsection (b) or (c). Relief is not available

in this case under subsection (b) or (c) because the amounts due for 2007 and 2008

are attributable to underpayments of tax as opposed to understatements of tax or

tax deficiencies. Consequently, we must decide whether petitioner is entitled to

equitable relief under section 6015(f).

      Section 6015(f) grants the Commissioner discretion to relieve an individual

from joint and several liability if, taking into account all the facts and

circumstances, it is inequitable to hold the individual liable for any unpaid tax or

any deficiency (or any portion of either). The Commissioner has prescribed

guidelines in Rev. Proc. 2013-34, 2013-43 I.R.B. 397, modifying and superseding

Rev. Proc. 2003-61, 2003-2 C.B. 296, that are considered in determining whether

it is inequitable to hold a requesting spouse liable for all or part of the liability for

any unpaid tax or deficiency.3 Although the Court consults these guidelines when

reviewing the Commissioner’s denial of relief, see Washington v. Commissioner,

120 T.C. 137, 147-152 (2003), we are not bound by them inasmuch as our analysis

and determination ultimately turn on an evaluation of all the facts and


      3
        Rev. Proc. 2013-34, sec. 7, 2013-43 I.R.B. 397, 403, makes the guidelines
effective for requests for relief filed on or after September 16, 2013, and requests
for equitable relief pending on September 16, 2013, whether before the IRS, the
Office of Appeals, or a Federal court.
                                        - 13 -

circumstances, see Pullins v. Commissioner, 136 T.C. 432, 438-439 (2011); Porter

v. Commissioner, 132 T.C. at 210; Hudgins v. Commissioner, T.C. Memo. 2012-

260, at *39-*40.

II. Threshold Conditions

      Rev. Proc. 2013-34, sec. 4.01, 2013-43 I.R.B. at 399-400, sets forth seven

threshold conditions that must be satisfied before the Commissioner will consider

a request for equitable relief under section 6015(f). There is no dispute that

petitioner satisfies the seven threshold conditions.

III. Streamlined Determination

      Rev. Proc. 2013-34, sec. 4.02, 2013-43 I.R.B. at 400, sets forth elements

that a requesting spouse must satisfy to qualify for a streamlined determination

under section 6015(f).4 Petitioner does not qualify for streamlined relief because,


      4
        Rev. Proc. 2013-34, sec. 4.02, 2013-43 I.R.B. at 400, as is relevant here,
permits relief if all the following elements are satisfied: (1) on the date the IRS
makes its determination, the requesting spouse is no longer married to, or is
legally separated from, the nonrequesting spouse, is a widow or widower and is
not an heir to the nonrequesting spouse’s estate that would have sufficient assets
to pay the tax liability, or has not been a member of the same household as the
nonrequesting spouse at any time during the 12-month period ending on the date
the IRS makes its determination; (2) the requesting spouse will suffer economic
hardship if relief is not granted; and (3) on the date the joint return was filed, the
requesting spouse did not know or have reason to know the nonrequesting spouse
would not or could not pay the underpayment of the tax reported on the joint
return.
                                        - 14 -

as discussed in detail below, she will not suffer economic hardship if relief is not

granted.

      A requesting spouse will suffer economic hardship if payment of part or all

of the tax liability “will cause the requesting spouse to be unable to pay reasonable

basic living expenses.” Id. sec. 4.03(2)(b), 2013-43 I.R.B. at 401; see sec.

301.6343-1(b)(4)(i), Proced. & Admin. Regs. The determination as to what

constitutes a reasonable amount for basic living expenses may vary with the

circumstances of the individual taxpayer but will not include the maintenance of

an affluent or luxurious lifestyle. Sec. 301.6343-1(b)(4)(i), Proced. & Admin

Regs. The requesting spouse must introduce evidence at trial supporting her claim

that economic hardship will occur. Johnson v. Commissioner, T.C. Memo. 2014-

240 (citing Pullins v. Commissioner, 136 T.C. at 446-447).

      On this record, we conclude that petitioner would not suffer economic

hardship if she were obliged to pay the tax due in this case. At the time of trial

petitioner was employed and earning $1,700 monthly. She also acknowledged that

she had equity of $370,000 in a residence that she purchased shortly before trial.

Although petitioner vaguely suggested that she provides support for one of her

daughters and her mother, she did not provide any financial records or other

documents to support or quantify that claim. Therefore, we conclude that payment
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of the tax liabilities in issue would not leave petitioner unable to pay reasonable

basic living expenses.

IV. Facts and Circumstances Analysis

      Where a requesting spouse meets the threshold conditions for relief but fails

to qualify for streamlined relief, the Commissioner may nevertheless grant relief

after considering the following nonexclusive list of factors set forth in Rev. Proc.

2013-34, sec. 4.03, 2013-43 I.R.B. at 400-403: (1) whether the requesting spouse

is separated or divorced from the nonrequesting spouse; (2) whether the requesting

spouse will suffer economic hardship if relief is not granted; (3) whether on the

date the joint return was filed the requesting spouse did not know and had no

reason to know that the nonrequesting spouse would not or could not pay the tax

liability; (4) whether the requesting or nonrequesting spouse has a legal obligation

to pay the tax liability pursuant to a decree of divorce or other agreement; (5)

whether the requesting spouse received a significant benefit from the unpaid

income tax liability; and (6) whether the requesting spouse has made a good-faith

effort to comply with the Federal income tax laws for the taxable years following

the taxable year(s) to which the request for relief relates. Two additional factors

that the Commissioner may consider in favor of granting relief are whether:

(1) the nonrequesting spouse abused the requesting spouse and (2) the requesting
                                         - 16 -

spouse was in poor mental or physical health at the time the joint return was filed

or when the requesting spouse requested relief. See id. sec. 4.03(2)(c)(iv), (g).5

      1. Marital Status

      If the requesting spouse is no longer married to the nonrequesting spouse as

of the date that the IRS makes its determination, this factor weighs in favor of

relief. Id. sec. 4.03(2)(a). Petitioner and intervenor were divorced before the IRS

made its determination denying petitioner spousal relief. It follows that this factor

weighs in favor of relief.

      2. Economic Hardship

      As discussed above, denying petitioner spousal relief will not cause her to

suffer economic hardship. Consequently, this factor is neutral.

      3. Knowledge or Reason To Know

      In the case of an underpayment of tax due, this factor turns on whether, as of

the date the return was filed or the date the requesting spouse reasonably believed

the return was filed, the requesting spouse knew or had reason to know that the

nonrequesting spouse would not or could not pay the tax at that time or within a

reasonable time after the filing of the return. Id. sec. 4.03(2)(c)(ii).

      5
       The revenue procedure recognizes that the issue of abuse can be relevant to
the analysis of various factors and can negate the presence of certain factors. Rev.
Proc. 2013-34, sec. 3.01, 2013-43 I.R.B. at 398.
                                        - 17 -

      Petitioner testified that she signed the tax returns for 2007 and 2008 without

examining them and that she was unaware that tax was due for those years. We

are not persuaded by petitioner’s self-serving testimony on this point and have

good reason to doubt her veracity considering the multiple misstatements that she

made when she completed Form 8857 and submitted it to the IRS.

      Petitioner was aware at the time the couple’s tax returns for 2007 and 2008

were filed that intervenor was no longer working. In the light of the decline in

intervenor’s memory and cognitive skills during this period, the financial losses

that intervenor had experienced in his consulting business, and the couple’s

inability to make mortgage payments in early 2009, we cannot accept petitioner’s

statement that she simply turned a blind eye to the couple’s tax liabilities. In sum,

we conclude that it was unreasonable for petitioner to believe that intervenor

would or could pay the tax reported to be due on the couple’s joint returns for

2007 and 2008 at the time those tax returns were filed. Therefore, this factor

weighs against relief.

      4. Legal Obligation

      This factor will weigh in favor of relief if the nonrequesting spouse has the

sole legal obligation to pay the outstanding tax liability pursuant to a divorce

decree or other legally binding agreement. Rev. Proc. 2013-34, sec. 4.03(2)(d).
                                         - 18 -

However, where the requesting spouse knows or has reason to know, when

entering into the divorce decree or agreement, that the nonrequesting spouse

cannot pay the outstanding income tax liability, this factor will be neutral. Id.

      Intervenor’s health continued to decline from 2013 into 2014 such that we

now know his sister would soon be appointed as the conservator of his person and

property. At the same time, and despite his recent financial setbacks, intervenor

executed the marital settlement agreement and agreed to make alimony payments

to petitioner, pay off a car loan, pay for petitioner’s cellular phone service for a

period, and assume responsibility for the couple’s tax liabilities. Considering all

the circumstances, we conclude that petitioner had every reason to know that

intervenor could not pay the couple’s outstanding income tax liabilities.

Therefore, this factor is neutral.

      5. Significant Benefit

      This factor calls for an evaluation of whether petitioner received a

significant benefit, beyond normal support, from the underpayments of tax. See

id. sec. 4.03(2)(e); see also sec. 1.6015-2(d), Income Tax Regs. If so, this factor

will weigh against relief. Normal support is measured by the circumstances of the

particular parties. Porter v. Commissioner, 132 T.C. at 212.
                                         - 19 -

      During the period under review petitioner enjoyed trips to China, Hawaii,

and Canada. She drove luxury vehicles and went on gambling excursions with

intervenor to Las Vegas. She collected $80,000 from the sale of the couple’s

Tustin Ranch home in January 2010 and considered those funds her own. On this

record, we conclude that petitioner received significant benefit from the

underpayments of tax for taxable years 2007 and 2008, beyond normal support,

and, therefore, this factor weighs against relief.

      6. Compliance With Tax Laws

      If the requesting spouse is in compliance with the income tax laws for

taxable years following the taxable years to which the request for relief relates,

this factor will weigh in favor of relief. Rev. Proc. 2013-34, sec. 4.03(2)(f). If the

requesting spouse is not in compliance, then this factor will weigh against relief.

Id.

      In taxable years after the years in issue petitioner received alimony

payments from her former spouses that she failed to report as income. In the

absence of any evidence that petitioner made a good-faith effort to comply with

Federal income tax laws, we conclude that this factor weighs against relief.
                                           - 20 -

      7. Mental or Physical Health

      This factor will weigh in favor of relief if the requesting spouse was in poor

mental or physical health at the time the relevant return was filed or at the time she

requested relief. Id. sec. 4.03(2)(g). If the requesting spouse was in neither poor

physical nor poor mental health then this factor is neutral. Id.

      When petitioner submitted her request for spousal relief, she reported that

she was not in poor mental or physical health at that time or when she signed the

tax returns for the years in issue. Therefore, we find that this factor is neutral.

V. Conclusion

      After weighing all of the facts and circumstances of this case, we conclude

that it would not be inequitable to deny petitioner spousal relief for the years in

issue. In sum, petitioner knew or should have known that intervenor would not or

could not pay the tax liabilities when the tax returns were filed or when he

executed the marital settlement agreement. She received substantial benefit from

the unpaid tax liabilities, beyond normal support, and she has not been in

compliance with the income tax laws for taxable years following the taxable years

to which the request for relief relates.
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To reflect the foregoing,


                                     Decision will be entered

                            for respondent.
