                                T.C. Memo. 2012-339


                          UNITED STATES TAX COURT



   ALLISON T. O’NEIL, Petitioner, AND MICHAEL J. O’NEIL, Intervenor v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 28711-09.                            Filed December 4, 2012.



      William Edward Taggart, Jr., and Barbara N. Doherty, for petitioner.

      Michael J. O’Neil, pro se.

      Daniel J. Parent, for respondent.



                            MEMORANDUM OPINION


      HOLMES, Judge: 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-

[*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,

         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.
                                         -3-

[*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




      2
        Michael recalls providing Allison with $6,000 to $10,000 per month.
Allison recalls getting only $6,000 per month.
                                           -4-

[*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


      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-

[*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-

[*6] Allison wasn’t doing too well with her request for innocent-spouse relief

either. The 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-

[*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--in section 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




      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.
                                          -8-

[*8] property.6 Sec. 6015(g); Ordlock v. Commissioner, 126 T.C. 47, 57 (2006),

aff’d, 533 F.3d 1136 (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 in Wilson v. Commissioner, T.C.

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.


      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 joint account with Michael, and
are unavailable for refund. Allison argues that the accounts belonged only to her
following the 2007 entry of her divorce.
                                         -9-

[*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.




      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.
                                          - 10 -

[*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 -

[*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 -

[*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 clearly 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 -

[*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
                                         - 14 -

 [*14] Michael was               No divorce or other        Allison was legally
   legally obligated by        agreement allocating the      obligated by agreement
   agreement to pay the               liability              to pay the liability
   liability himself                                         herself
 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 -

[*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, 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.



      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.
                                          - 16 -

[*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

      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
                                                                          (continued...)
                                         - 17 -

[*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

      10
        (...continued)
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?

                                                                          (continued...)
                                         - 18 -

[*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, 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


      11
       (...continued)
      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 remained almost entirely untouched. She does acknowledge possibly
receiving $500 per month in “gifts” from her ex’s relatives, but she doesn’t


                                                                          (continued...)
                                          - 19 -

[*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.

       Our conclusion doesn’t change if we review the Commissioner’s

determination for abuse of discretion. The final determination of this factor


       13
         (...continued)
 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 by relatives.
       14
        Her assets at their postassessment peak could have totaled more than
$194,000 because of her half share of the additional $70,000 in equity she and
Michael pulled out of the Orinda home.
                                         - 20 -

[*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 -

[*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, 2004 WL 2601319, at *5.

Reviewing the notice of determination de 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 -

[*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,

Albin v. Commissioner, T.C. Memo. 2004-230, and Keitz v. Commissioner, T.C.



      15
           See supra note 1.
                                         - 23 -

[*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, 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 -

[*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 in Nihiser v.
                                          - 25 -

[*25] Commissioner, T.C. Memo. 2008-135, 2008 WL 2120983, at *8-*11. This

factor neither helps nor hurts Allison but is neutral.

      This 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, 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 -

[*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 on de novo review.

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 -

[*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 -

[*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 -

[*29] II.    Conclusion

       We have already concluded that Allison isn’t eligible for relief under Revenue

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 -

[*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, at *13. And here
                                         - 31 -

[*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 n.3 (2d Cir. 1995) (discussing

former section 6013), aff’g T.C. Memo. 1993-390. The knowledge factor’s unique

importance, see Haggerty v. Commissioner, T.C. Memo. 2011-284, 2011 WL

6029929, at *6; Bruen v. Commissioner, T.C. 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 -

[*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.
