                           T.C. Memo. 2010-255



                      UNITED STATES TAX COURT



               EILEEN L. PUGSLEY, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7841-09.            Filed November 18, 2010.


     Mario J. Fazio, for petitioner.

     Katherine Lee Kosar, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:   This case arises from a request for relief

from joint and several liability under section 6015(f)1 for the

years 1999, 2000, 2001, 2002, 2003 and 2005 (years at issue).

Respondent denied petitioner’s request for relief, and petitioner




     1
      All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure, unless otherwise indicated.
                                   -2-

timely filed a stand-alone petition.2    The issue for decision is

whether petitioner is entitled to relief from joint and several

liability under section 6015(f).    We hold that she is not.

                           FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.    Petitioner resided in Glen

Ellyn, Illinois at the time she filed the petition.

     Petitioner married Daniel Pugsley (Dr. Pugsley) in 1978.

The Pugsleys divorced in February 2010 after 32 years of

marriage.   Petitioner seeks innocent spouse relief from tax

liabilities arising from Dr. Pugsley’s sole proprietorship during

the years at issue.

     Dr. Pugsley owned and operated a dental practice from 1980

through the years at issue.   Petitioner graduated from college

with an English degree in 1976 and worked for nine years before

leaving the workforce to raise the Pugsleys’ four children.

Petitioner later earned a dual graduate degree in education and

psychology from Kent State University in 2004.    Petitioner

thereafter worked as a school psychologist at high schools in

Ohio and Illinois.

     The Pugsleys managed their finances out of two bank accounts

while they were married.   Dr. Pugsley paid some of the family’s

     2
      This Court has jurisdiction to determine whether sec.
6015(f) relief is warranted after a request for relief has been
denied by the Commissioner. See sec. 6015(e)(1).
                                -3-

larger expenses, such as the home mortgage and car payments, from

his dental practice’s bank account.   The Pugsleys paid general

household expenses from a personal joint bank account (joint

account).   Petitioner deposited all of her earnings into the

joint account, and Dr. Pugsley periodically deposited funds into

the joint account.

     The Pugsleys appeared to live a very comfortable life.     They

sold their first home in 2001 for $392,500 and therefter took out

a $480,000 mortgage to purchase a new home for $540,000.   They

spent $300 a month to belong to a tony athletic club.    Three of

their four children attended expensive private colleges.   The

colleges their children attended included Middlebury College,

Dennison University and Rhode Island School of Design.

     The Pugsleys experienced financial difficulties in the early

1990s.   They failed to pay Federal and State taxes, resulting in

tax liens being placed on their home.   Petitioner claims that she

did not know about the liens until the Pugsleys decided to sell

their house in 2001, even though the liens were filed against

both her and Dr. Pugsley.   The Pugsleys used the proceeds from

the sale of their first home to pay off their debts and have the

liens removed.

     In addition, Dr. Pugsley began suffering from depression and

alcoholism following the death of his mother in 1997.    Dr. Pugsley

typically drank at least one bottle of red wine every day during the
                                  -4-

years at issue.   Dr. Pugsley’s alcoholism caused his productivity at

his dental practice to suffer.   Petitioner found creditor notices in

the mail and questioned Dr. Pugsley about their finances.      He

assured her that their finances were in order, and she failed to

question him further.   Though petitioner claims to have had no

knowledge of their financial problems, she did know that they were

receiving great financial support from his and her parents through

gifts and inheritances.   Dr. Pugsley’s father gave the Pugsleys more

than $100,000 to help pay household obligations.   Petitioner

received $100,000 in inheritances from her parents’ estates that she

used to pay a portion of their children’s college tuition.

     In 1999 Dr. Pugsley hired Tim Mikolay (Mr. Mikolay), a

certified public accountant (CPA), to prepare the Pugsleys’ joint

tax returns.   Every year Dr. Pugsley received the return prepared

by Mr. Mikolay and then stuffed the return in his desk drawer at

his dental office.   Neither Dr. Pugsley nor petitioner signed or

filed the returns or made any payment for the 1999 to 2002 tax

years.3   Petitioner did not inquire about the Pugsleys’ tax




     3
      The Pugsleys’ joint tax return for 2001 was dated as signed
on Apr. 2, 2001. Petitioner testified at trial that the stated
date on the return was an error and that the Pugsleys probably
executed the return with the other unfiled returns in 2008 as
discussed below.
                                  -5-

returns during this period.    Mr. Mikolay learned that Dr. Pugsley

had not been filing the joint tax returns.    He stopped preparing

the Pugsleys’ joint tax returns in 2003.

       Dr. Pugsley told petitioner that he had hired a new CPA to

prepare their joint tax return for 2003 when in fact the return

for 2003 had not been prepared or filed.    Dr. Pugsley admitted

his fabrication to petitioner in 2004 after she unsuccessfully

tried to contact the fictitious CPA.    The Pugsleys then hired

Neil Johnson (Mr. Johnson), a CPA, in 2005.    Mr. Johnson prepared

the Pugsleys’ joint tax returns for 2003 and 2004 in August 2005.

The following year, the Pugsleys filed a joint tax return for

2005 but failed to pay the balance shown as due.    The Pugsleys

timely filed a joint return for 2006 and paid in full the tax

due.

       Dr. Pugsley’s dental license expired in 2005 after he failed

to complete his continuing education requirements.    He continued

to practice dentistry until the Ohio State Dental Board shut down

his practice in March 2007.4    Dr. Pugsley continued to get dressed

every morning in his usual medical scrubs and told petitioner that

he was going to the office though he was really going to a

parking lot to consume alcohol.    Petitioner received calls from

many of Dr. Pugsley’s patients asking why he was not showing up


       4
        Dr. Pugsley’s dental license was reinstated in September
2007.
                                  -6-

for appointments.    When petitioner told him about the calls, he

claimed he had already returned the patients’ calls and

rescheduled their appointments.    She failed to pursue this issue.

     Dr. Pugsley’s depression and alcoholism reached a low in June

2007 when he threatened suicide.    He was immediately admitted to a

rehabilitation facility for treatment.    While Dr. Pugsley was in

the rehabilitation facility, petitioner found the unexecuted and

unfiled returns for the 1999 through 2003 tax years (unfiled

returns) in Dr. Pugsley’s desk drawer as well as notices that

their home mortgage was in foreclosure.    Petitioner and Dr.

Pugsley remained together following his release from the

rehabilitation facility.    Dr. Pugsley filed for bankruptcy in June

2007 to be relieved of their financial mistakes, rather than sell

their house.    Dr. Pugsley voluntarily dismissed the bankruptcy in

October 2007.

     Petitioner thereafter contacted Mr. Johnson.    Mr. Johnson

advised her to execute the unfiled returns and send them to the

Internal Revenue Service (IRS).    Before filing the returns,

petitioner filed a claim for section 6015 relief in October 2007.

The IRS denied her claim because the IRS had not received the

unfiled returns.    The Pugsleys did not execute the unfiled

returns until January 2008.    The couple lived together until the

mortgage on their marital residence was foreclosed in May 2008.
                                  -7-

     In August 2008 petitioner moved to Illinois to work as a high

school psychologist.   She earns over $58,000 per year with minimal

expenses.   She provides financial assistance for her youngest

child, who is still in college.    Around September 2008 petitioner

and Dr. Pugsley executed a separation agreement.     Dr. Pugsley

agreed to provide petitioner with $1,500 monthly spousal support

for ten years beginning in September 2008.     Dr. Pugsley also

agreed to pay petitioner $484.17 a month for ten years

representing her half of the marital assets and $240 a month in

health insurance payments for her children.     Dr. Pugsley accepted

liability for the outstanding taxes in the separation agreement.

Dr. Pugsley subsequently agreed to pay the IRS $1,000 a month to

settle the joint liabilities.

     Petitioner filed new claims for section 6015 relief in March

and April 2008 that covered the years at issue.     She subsequently

submitted a Form 433-A, Collection Information Statement, together

with related banking documentation.     Respondent denied

petitioner’s requests based on the information she had provided.

     Petitioner appealed the determination, and respondent’s

Appeals Office again disallowed her claim for relief.       The Appeals

Office determined, among other things, that petitioner would not

suffer economic hardship if obligated to pay the tax

liabilities, petitioner knew or had reason to know that the tax

liability reported on each return would not be paid, and
                                -8-

petitioner was not legally separated from Dr. Pugsley.    The

Appeals Office noted that there was no abuse to consider in its

determination, petitioner did not suffer from any physical or

mental health issues, and petitioner was compliant with the tax

laws as of the time of determination.   Moreover, the Appeals

Office determined that petitioner would have $461 available

monthly to make payments.

     Petitioner filed an individual return for 2009 as an

unmarried head of household with two exemptions.    On the advice of

Mike Mahoney, a CPA, petitioner did not report any of the spousal

support payments she received from Dr. Pugsley as income.

Petitioner also erroneously stated that she contributed $5,000 to

an individual retirement account (IRA) on her return for 2009.

                              OPINION

     We must decide whether respondent erred in denying petitioner

relief from unpaid tax liabilities for the years at issue.

Petitioner argues that she believed her ex-husband would pay their

tax liabilities and that it is inequitable to hold her liable when

the underpayments were attributable to her ex-

husband.

     Only section 6015(f) applies as this case involves

underpayments of taxes shown on joint returns.5    The Commissioner

     5
       Married taxpayers who elect to file a joint return are
jointly and severally liable for the entire tax due. See sec.
6013(d)(3). A spouse or former spouse may petition the
                                                     (continued...)
                                -9-

has the discretion to relieve a spouse or former spouse of joint

liability if, taking into account all the facts and circumstances,

it is inequitable to hold that spouse liable for any deficiency or

unpaid tax.   Sec. 6015(f); sec. 1.6015-4(a), Income Tax Regs.

     We begin with the standard of review and the burden of proof.

Respondent urges us to review the case for abuse of discretion.

To do so, however, would be to reject our previous holding that

the standard of review is de novo.    Porter v. Commissioner, 132

T.C. 203 (2009).   A trial de novo requires independent judicial

determination of the issues in the case.     See, e.g., Morris v.

Rumsfeld, 420 F.3d 287, 292, 294 (3d Cir. 2005); Timmons v. White,

314 F.3d 1229, 1233-1234 (10th Cir. 2003).     The spouse requesting

relief generally bears the burden of proof.    See Rule 142(a); Alt

v. Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34

(6th Cir. 2004).

     The Commissioner has outlined procedures for determining

whether a requesting spouse qualifies for equitable relief under

section 6015(f).   See Rev. Proc. 2003-61, 2003-2 C.B. 296.   The

requesting spouse must meet seven threshold conditions before the

Commissioner will consider a request for relief.     Id. sec. 4.01,


     5
      (...continued)
Commissioner for relief from joint and several liability in
certain circumstances. See sec. 6015(a). In cases involving an
underpayment of tax, as here, sec. 6015(b) and (c) does not apply
but equitable relief may be available under subsec. (f). Sec.
1.6015-4, Income Tax Regs.; Rev. Proc. 2003-61, sec. 2.04, 2003-2
C.B. 296, 297.
                                -10-

2003-2 C.B. at 297.   The parties agree that petitioner has met the

preliminary requirements for relief.

I. Safe Harbor for Section 6015(f) Relief

     We now turn to whether petitioner satisfies the three

conditions of a safe harbor under section 6015(f) that the

Commissioner has established.   See Gonce v. Commissioner, T.C.

Memo. 2007-328; Billings v. Commissioner, T.C. Memo. 2007-234;

Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298.    Equitable

relief will ordinarily be granted if the requesting spouse

fulfills all three conditions of the safe harbor.    The first

condition is that the requesting spouse was no longer married to,

or legally separated from, her former spouse at the time she filed

the request for innocent spouse relief.     Petitioner filed three

separate innocent spouse relief requests.    The request at issue

was filed in April 2008.   At the time, the Pugsleys were still

married.   They did not enter into a separation agreement until

September 2009 and were not divorced until February 2010.

Petitioner does not satisfy this condition.    Accordingly,

petitioner does not qualify under the safe harbor, and we need not

consider the other two conditions.

II. Balancing Test for Determining Whether Section 6015(f)
    Equitable Relief Would Be Appropriate

     When a requesting spouse fails to satisfy the safe harbor

conditions, the Commissioner may determine through a balancing

test whether equitable relief is appropriate.    The Commissioner
                                   -11-

has listed relevant factors to be weighed by the Commissioner in

determining relief.    See Rev. Proc. 2003-61, sec. 4.03, 2003-2

C.B. at 298.    The factors include whether the requesting spouse

(1) is separated or divorced from the nonrequesting spouse, (2)

had knowledge or reason to know that the nonrequesting spouse

would not pay the income tax liability, (3) would suffer economic

hardship if relief were denied, (4) complied with income tax laws

in years after the year at issue, (5) received significant

economic benefit from the unpaid income tax liability, (6) was

abused by the nonrequesting spouse, and (7) was in poor health

when signing the return or requesting relief, and (8) whether the

nonrequesting spouse had a legal obligation to pay the outstanding

liability.     Id. sec. 4.03(2).   The list is nonexhaustive, and no

single factor is determinative.      Id.    We address each of the

factors in turn.

     A. Marital Status

     We first consider petitioner’s marital status.       This factor

weighs in favor of the requesting spouse if he or she is

separated or divorced from the nonrequesting spouse.        Id. sec.

4.03(2)(i).    Petitioner’s marital status changed from the time

relief was requested to the time of trial.       We must therefore look

at petitioner’s marital status at the time of trial in applying

the balancing test under de novo review.       See Wilson v.

Commissioner, T.C. Memo. 2010-134.        Petitioner and Dr. Pugsley

divorced in February 2010 before trial of this case in June.
                                -12-

     B. Knowledge or Reason To Know That Nonrequesting Spouse
        Would Not Pay Liability

     The second factor is whether the requesting spouse knew or

had reason to know that the nonrequesting spouse would not pay the

tax liability.   Petitioner requests relief from liability for

unpaid taxes reported on the returns for 1999, 2000, 2001, 2002

and 2003 signed and filed in 2008 and the return for 2005 signed

and filed in 2006 (returns at issue).

     Respondent argues that it was unreasonable for petitioner to

think that Dr. Pugsley would pay the tax liabilities when she

signed the returns at issue.   We agree.   Petitioner knew that Dr.

Pugsley had a history of failing to pay their joint tax

liabilities.   Petitioner found many unfiled returns showing unpaid

liabilities stuffed inside Dr. Pugsley’s desk drawer and also was

aware that Federal and State tax liens had been placed on their

previous residence because of unpaid taxes.   Moreover,

petitioner knew that her family had serious financial troubles.

Dr. Pugsley filed for bankruptcy in 2007, and the Pugsleys had to

rely on over $200,000 in family gifts and inheritances to pay for

their household necessities and children’s college tuition.

Petitioner testified that she knew the family finances were

utterly devastated and that bills were not being paid.    She

nevertheless signed the returns.

     We have consistently found that a requesting spouse’s

knowledge of the couple’s financial difficulties deprives the
                                -13-

requesting spouse of reason to believe that his or her ex-spouse

will pay the tax liability.   Stolkin v. Commissioner, T.C. Memo.

2008-211; Gonce v. Commissioner, supra; Butner v. Commissioner,

T.C. Memo. 2007-136.   The Pugsleys’ financial difficulties and

previous tax problems should have put petitioner on notice that

Dr. Pugsley would not pay the tax liabilities.

     We also question how petitioner could reasonably believe Dr.

Pugsley would pay the tax liabilities after his long history of

deceit and dishonesty.   In addition to hiding their tax returns

for many years, Dr. Pugsley created an elaborate fabrication about

a fictitious CPA who would file their joint tax return for 2003.

Dr. Pugsley also was not forthcoming with petitioner about losing

his dental license and having his office shut down.   Rather, he

continued to dress every morning in his dental scrubs pretending

he was going to work rather than tell petitioner the truth.

Petitioner is a highly educated person, and she knew that

Dr. Pugsley had lied to her many times in the past, including

about the filing of their returns and payment of their taxes.     We

find it unlikely that she would believe such a habitual liar.

     We cannot accept petitioner’s claim that she had no knowledge

or reason to know that Dr. Pugsley would not pay the liabilities.

We find that petitioner had reason to know at the time she signed

the returns that her ex-husband would not pay the joint tax

liabilities.   This factor weighs against relief.
                                 -14-

     C. Economic Hardship

     A third factor focuses on whether the requesting spouse would

suffer economic hardship if relief were denied.   A denial of

section 6015(f) relief imposes economic hardship if it prevents

the requesting spouse from being able to pay his or her reasonable

basic living expenses.   Butner v. Commissioner, supra; sec.

301.6343-1(b)(4)(i), Proced. & Admin. Regs.   Reasonable basic

living expenses are based on the taxpayer’s circumstances but do

not include amounts needed to maintain a luxurious standard of

living.   Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.

Relevant circumstances include the taxpayer’s age, ability to earn

an income, number of dependents and status as a dependent.     Sec.

301.6343-1(b)(4)(ii)(A), Proced. & Admin. Regs.   The amount of

property available to satisfy the taxpayer’s expenses is also

considered.   Butner v. Commissioner, supra; sec. 301.6343-

1(b)(4)(ii)(D), Proced. & Admin. Regs.

     Petitioner receives $58,000 per year in salary, $1,500 in

monthly spousal support, $484.17 in monthly marital asset payments

and $240 per month for health insurance payments for her children.

Petitioner testified that her monthly expenses are minimal.

Petitioner has no dependents though she provides some financial

support to her youngest child.   Respondent determined that, based

on petitioner’s spousal support and salary, petitioner had monthly
                                 -15-

disposable income of $461 that could be applied to the tax

liabilities.

     We agree that petitioner may not have the means to pay the

entire tax at once.   We note, however, that she can meet her basic

living expenses while making periodic payments against the

liabilities.   See Stolkin v. Commissioner, supra.      We find that

petitioner has the means to make monthly payments to reduce the

tax liabilities and that denying her claim for relief will not

impose an economic hardship on her.     This factor weighs against

relief.

     D. Subsequent Compliance With Income Tax Laws

     A fourth consideration is whether the requesting spouse made

a good faith effort to comply with income tax laws in subsequent

years.    Respondent’s Appeals Office determined that petitioner was

compliant with tax laws as of 2008.     Petitioner failed, however,

to report spousal alimony as taxable income after her separation

agreement was executed in September 2009.    She also

claimed a $5,000 deduction for contributing to an IRA but failed

to make the requisite contribution.     She alleges to have filed an

amended return only after the issue was brought to her attorney’s

attention, though no amended return was submitted into evidence.

This factors weighs against relief.

     E. Economic Benefit From Items Giving Rise to Liability

     A significant benefit for purposes of section 6015(f) is any

benefit in excess of normal support.    Sec. 1.6015-2(d), Income Tax

Regs.    Petitioner spent $300 a month to belong to a tony athletic
                                 -16-

club and purchased a home for over $500,000.      Petitioner also sent

her children to expensive private colleges.      The facts and

circumstances presented strongly suggest that petitioner received

a significant benefit from the failure to pay the tax liabilities.

This factor also weighs against relief.

       F. Abuse by Nonrequesting Spouse

       Petitioner argues that Dr. Pugsley’s financial

irresponsibility constituted a form of financial abuse against

her.    We have indicated, however, that nonphysical abuse will

weigh in favor of relief only where it is severe enough to

incapacitate a requesting spouse in the same manner he or she

would be incapacitated by physical abuse.       Nihiser v.

Commissioner, T.C. Memo. 2008-135.       There is no evidence that Dr.

Pugsley’s lies regarding their financial records incapacitated

petitioner.    This factor is neutral.

       G. Poor Health When Signing Return or Requesting Relief

       Petitioner did not allege that she was in poor health when

she signed the return or when she requested relief.      Respondent

determined that this factor is neutral, and we have no information

to find otherwise.

       H. Nonrequesting Spouse’s Legal Obligation To Pay Liability

       Petitioner argues that she should be relieved of liability

for the tax underpayments because the separation agreement

specifically required Dr. Pugsley to pay the taxes for the years

at issue.    Respondent does not question the validity of the court

order.    Respondent argues and we agree, however, that the legal
                                   -17-

obligation to pay is not a persuasive factor in favor of relief in

this case.    We consider under this factor whether the requesting

spouse had reason to believe upon entering into the agreement that

it would not be upheld by the nonrequesting spouse.      Rev. Proc.

2003-61, sec. 4.03(2)(a)(iv), 2003-2 C.B. at 298.      Dr. Pugsley has

a long history of not paying his tax liabilities.      It is difficult

to put much weight on his agreement in the separation agreement to

pay the taxes.      We find that petitioner had reason to believe that

Dr. Pugsley might not pay the liabilities.      This factor is

neutral.

III.   Conclusion

       In summary, one factor weighs in favor of relief, four

factors weigh against relief and three factors are neutral.

After weighing the testimony and evidence in this fact-intensive

and nuanced case, we conclude that it would not be inequitable to

hold petitioner jointly and severally liable for the joint tax

liabilities for each of the years at issue.

       We have considered all arguments made in reaching our

decision and, to the extent not mentioned, we conclude that they

are moot, irrelevant, or without merit.


                                       Decision will be entered for

                                  respondent.
