                  T.C. Summary Opinion 2008-165



                      UNITED STATES TAX COURT



               CYNTHIA M. MARTINEZ, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12652-06S.            Filed December 29, 2008.



     Cynthia M. Martinez, pro se.

     Linette B. Angelastro, for respondent.



     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    Pursuant to section

7463(b), 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.   Unless otherwise indicated, subsequent
                               - 2 -

section references are to the Internal Revenue Code, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

     Respondent issued a notice of determination dated May 4,

2006, denying petitioner’s request for innocent spouse relief

from joint and several liability for 1992, 1995, 1998, and 1999,

which as of April 17, 2007, had remaining balances due of $7,038,

$1,914, $4,882, and $5,965, respectively, for a total of $19,799.

The issue for decision is whether petitioner is entitled to

innocent spouse relief for any or all of the years at issue.

                            Background

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

The stipulations of facts and the attached exhibits are

incorporated herein by this reference.    Petitioner resided in

California when she filed her petition.

     Petitioner married Frank Martinez in 1971 when they were

both young, and they remained loving partners until his death 30

years later on April 2, 2001, at age 47.    Mr. Martinez died after

struggling since 1985 with worsening pancreatic problems, which

compounded quickly with diabetes and then diabetes II.    Later,

doctors discovered a hole in his colon.    These deteriorating

conditions required frequent doctor’s care, hospital stays, many

operations, removal of two-thirds of his colon, four shots per

day of insulin, and spending every night at home pumping fluids

out of his body.   Petitioner nursed him at home.   The medical
                                - 3 -

problems remained unanswerable, and despite everyone’s efforts,

Mr. Martinez died, as noted above, on April 2, 2001.1

     Mr. Martinez started out serving in the U.S. Air Force for 8

years.    After an honorable discharge he eventually secured a job

as a telephone service representative for Pacific Bell, a

telephone company.   He worked there from 1981 until July 28,

1995, when he had to stop working because of his declining

health.

     Petitioner has 13 years of education.     She at first stayed

at home as a housewife raising their two children, and then she

worked in different jobs:   Marketing, graphic artist, and later

as a secretary for Ingersoll Dresser Pump Co., which was her

employer during the years at issue.

     The Martinezes’ financial arrangement was that their bank

account was in petitioner’s name, but Mr. Martinez decided which

bills to pay and when to pay them.      The record is not clear as to

whether Mr. Martinez had signatory authority over the account.

Petitioner did not review the monthly bank statements, did not

balance the checkbook, and did not pick up or open the mail.

Regarding their tax returns, Mr. Martinez would show her a




     1
       The death certificate shows that his immediate causes of
death were cardiorespiratory arrest and a ruptured aortic
aneurysm, with contributing factors of diabetes mellitus and
renal insufficiency.
                               - 4 -

preliminary draft, then had her sign a blank original so that he

could complete and mail the return.

     Before the years at issue the Martinezes had a balance due

for their Federal income tax for 1988, 3 years after the medical

problems began.   The Internal Revenue Service (IRS) collected the

unpaid balance by means of a levy in 1994.   At trial petitioner

acknowledged that she was aware of the 1994 levy, but thought

that Mr. Martinez went back to paying the balance due on the

income tax returns that they filed afterwards.

     The couple’s tax problems began in earnest in 1991.   By then

Mr. Martinez’s health had been deteriorating significantly for

about 6 years to the point where he was in and out of work

frequently for short- and long-term disability to take care of

his medical problems.   Below is a table showing for the years at

issue the balances due, attribution, and other pertinent

information:
                                      - 5 -

                                                        IRS          Bal.
            Date IRS      Balance        Balance       Applic.       Due
            Received       Due On       Attrib. To    Of Pet.’s     As Of
  Year       Return      Tax Return     Petitioner    Payments     4/17/07

  1992      11/4/98        $3,054         $1,680       $3,207       $7,038

  1995      11/4/98         6,851             4,316    11,666        1,914
                                          1
  1998      4/15/99         2,822          2,794          775        4,882

  1999    9/22/00           2,650          2,645          -0-        5,965
    Total                  15,377         11,435       15,648       19,799
            1
           Of the couple’s 1999 adjusted gross income of $37,611,
     only $71 of dividend income, or less than 1 percent, was
     attributable to Mr. Martinez. The record is silent on
     attribution for 1998, but because Mr. Martinez had been
     drawing down his investments and retirement funds since he
     stopped working in 1995, we estimate that he had a small
     investment residual in 1998 that continued shrinking into
     1999. As a consequence, we find petitioner was 99 percent
     liable for the 1998 liability and 100 percent for the 1999
     liability.

     In 1992 petitioner and Mr. Martinez earned equivalent wages,

had equivalent withholdings, earned $4,967 in investment income,

and withdrew $485 from petitioner’s retirement fund.            The draw of

retirement funds at her age, late thirties, is an indication of

the Martinezes’ worsening financial condition.          Petitioner was 55

percent responsible for the 1992 underpayment.

     By 1995 the Martinezes were experiencing significant

troubles.       In July of 1995 Mr. Martinez, at only age 41, had to

stop working because of his health problems, and he was never

able to return.      Their two children were still dependents.       To

make ends meet, the Martinezes withdrew $21,809 from their

retirement plans:      $18,840 from Mr. Martinez’s plan and $2,969
                               - 6 -

from petitioner’s plan.   In calculating their tax liability for

1995 their preparer properly included the withdrawals in the

Martinezes’ gross income.   The preparer also reported a 10-

percent additional tax of $2,181 for premature distributions from

retirement plans:   $1,884 attributable to Mr. Martinez, and $297

attributable to petitioner.

     The IRS mistakenly attributed only 8 percent responsibility

to petitioner for the 1995 underpayment because the IRS failed to

give Mr. Martinez credit for the 20 percent withholding on his

retirement plan withdrawal.   After crediting Mr. Martinez with

the proper withholdings, the correct attribution to petitioner is

63 percent.   The reason for petitioner’s higher percentage is

that although she and Mr. Martinez had similar amounts of taxes

withheld from their wages, she earned about twice as much pay

because Mr. Martinez stopped working around mid-1995.

     In 1996 the Martinezes moved from southern to northern

California where they hoped they could live a less stressful

life.   They had read that adrenalin in the fight-or-flight

response to stress worsened diabetes.   Mr. Martinez told

petitioner he was going to transfer to a Pacific Bell office up

north, but he had in fact already stopped working on July 28,

1995.   He hid this fact from petitioner.

     Shortly after the move in 1996 petitioner learned that Mr.

Martinez had not filed their 1992 and 1995 tax returns.     To
                               - 7 -

prepare their delinquent returns the Martinezes engaged a

regional law firm that specialized in taxes.    After 2 years the

law firm completed the returns and dated its preparer signature

October 19, 1998.   The Martinezes dated their signatures October

30, 1998, and they promptly filed the returns such that

respondent recorded receiving the returns on November 4, 1998.

     Regarding the final 2 years at issue, 99 percent of the 1998

underpayment and 100 percent of the 1999 underpayment were

attributable to petitioner, except for some minor interest

income, as her job was the couple’s only source of income.    In

1998 petitioner’s withholdings of $212 were less than 1 percent

of her earnings, and in 1999 her withholdings were less than 3

percent of her earnings.

     For all 4 years at issue, 1992, 1995, 1998, and 1999, the

Martinezes claimed the standard deduction and accordingly did not

itemize their deductible expenses.

     By the end of 1998 or 1999, the couple had no financial

resources other than petitioner’s paycheck.    Mr. Martinez had

stopped working in 1995, and they had exhausted their retirement

accounts and emptied their after-tax investments and savings.      On

petitioner’s salary in the low- to mid-thirty thousands, they

lived in California, a high cost-of-living State, and had to

contend with medical bills while Mr. Martinez was in and out of

doctors’ offices and hospitals.   Petitioner later discovered that
                                 - 8 -

because of pride, or financial concern, or the mental effect of

diabetes, Mr. Martinez was not filling some of his prescriptions,

was ignoring certain medical devices, and was not requesting

medical reimbursements.   Petitioner stated that if Mr. Martinez

had purchased better medicines and better equipment and sought

health care reimbursements, they might have lessened some of

their problems.

     Sometime in 1999 or 2000 petitioner found Mr. Martinez at

home, unconscious, in a coma.    Paramedics rushed him to a

hospital.   He revived but felt numbness in his feet.   He died, as

noted above, on April 2, 2001.

     Shortly before Mr. Martinez’s death, while she was looking

for medical supplies, petitioner discovered shoe boxes full of

unopened letters from the IRS and tax returns that she had signed

but Mr. Martinez had not mailed.    Petitioner reengaged the same

law firm that had prepared the prior delinquent returns to

resolve the matter.   The firm determined that the Martinezes had

outstanding balances for each of the 8 years 1992 to 2000, except

for 1996 where they had a refund due.    The total amount due,

including additions, was $48,684.    On behalf of the Martinezes

the law firm prepared an offer-in-compromise, offering $1,000 to

settle the entire debt.   The firm submitted the offer to the IRS

during the summer of 2001 after Mr. Martinez’s death in April

2001.
                               - 9 -

     By February 2002 for unclear reasons but perhaps because the

IRS indicated that it was going to reject the offer, petitioner

notified the law firm that she had decided to enter into an

installment agreement with the IRS instead of pursuing the offer-

in-compromise.   Petitioner signed a Form 433-D, Installment

Agreement, dated it March 27, 2002, and agreed to pay $775 per

month to resolve the entire accumulated debt of $48,684 for 1992

through 2000.

     Petitioner began making the installment payments in May

2002.   Although the record is not entirely clear, it appears that

she kept making the monthly payments until November 2005 and then

made about four additional monthly payments of $775 in 2006

(February through May 2006).   Petitioner stopped making payments

in 2005 because the IRS stopped sending her monthly payment

coupons.   In total petitioner paid approximately $35,650 in

installment payments ($775 times 46 months).    The IRS applied the

couple’s 1996 refund to the 1993 underpayment.    The record is

silent on the amount of that refund.

     Petitioner’s payments of approximately $35,650 represent 73

percent of the entire $48,684 debt.    The IRS applied the

installment payments in a seemingly haphazard manner,

extinguishing in full the balances owing on 1993, 1994, 1997, and

2000 while leaving balances due on 1992, 1995, 1998, and 1999.
                              - 10 -

     In July 2002 the IRS sent a Final Notice, IRS Intent to

Levy, for 1994 despite, as noted above, having entered into an

installment contract just a few months earlier and where

petitioner was complying with the payment arrangement.

Similarly, in a letter dated April 7, 2004, the IRS requested

that petitioner execute a new installment agreement solely for

the year 2000 even though petitioner was still performing under

the existing installment agreement that included the year 2000.

     To help prepare her 2004 tax return in early 2005 petitioner

retained a national tax preparation firm, which, when reviewing

her records, questioned her regarding the installment payments.

After a discussion the firm suggested that she apply to the IRS

for innocent spouse relief, which she did around August 2005 for

years 1992, 1995, 1998, 1999, and 2000.   Petitioner’s application

included a Form 12510, Questionnaire for Requesting Spouse.    The

form includes a worksheet for monthly income and expenses, upon

which petitioner reported a monthly net income of $2,636 and

expenses of $2,480 (including the $775 monthly installment

payment to the IRS) for a surplus of $156 per month.   In a letter

dated December 13, 2005, the IRS compliance division formally

denied petitioner’s request for innocent spouse relief.

     Petitioner timely appealed the denial to the IRS’s Office of

Appeals.   The Appeals officer determined that petitioner was in

tax compliance and that petitioner satisfied the IRS threshold
                              - 11 -

requirements for relief on the portion of the liability

attributable to her deceased husband.    However, the Appeals

officer rejected petitioner’s request for relief because of the

following factors:   (1) Reason to know: petitioner did not meet

her duty of inquiry because the checking account was in her name,

and as noted above, petitioner should have been on alert after a

1994 levy paid off their 1988 tax debt; (2) attribution: in 1999

and 2000 nearly all or all of the underpayments were attributable

to petitioner’s earnings (the 1998 return was not available, and

therefore the officer did not base the decision for 1998 on

attribution); (3) economic hardship: paying the debt would not

cause petitioner economic hardship because the $156 monthly

surplus that petitioner reported on Form 12510 in August 2005

already included a provision of $775 for the monthly repayment of

back taxes; (4) Mr. Martinez did not abuse petitioner; and (5)

petitioner had no health problems.     The officer did not take into

account or did not find relevant the total amount of money and

the percentage of the overall income tax debt that petitioner had

paid through installment payments.     The Appeals officer also did

not talk with petitioner, although the officer did send a

preliminary notice of determination to which petitioner never

responded.

     The IRS sent a notice of determination dated May 4, 2006, to

petitioner formally denying innocent spouse relief for all
                               - 12 -

remaining open years: 1992, 1995, 1998, and 1999.     The IRS had

been applying most of petitioner’s final installment payments

during 2005 and 2006 to year 2000 such that by the time of the

IRS’s notice, year 2000 had a zero balance.

     Petitioner received no money or property from her deceased

husband’s estate.   Petitioner moved to Southern California, and

doing so was expensive.    Petitioner received a small death

benefit resulting from the death of her first husband; however,

she spent the sum on transporting his body to Southern California

and on funeral expenses.

     The record does not indicate that the parties conducted a

pretrial settlement conference.    At trial a little more than 2

years after her initial submission of Form 12510, petitioner

presented a new Form 12510 that showed a monthly cashflow

shortfall of $322, based on net income of $2,448 and monthly

expenses of $2,770.    The expenses did not include a provision for

the repayment of outstanding taxes.     Petitioner remarried on

November 7, 2006.   Petitioner’s worsened financial condition is

due to the financial arrangement that she has with her new

husband.   He has limited income from which he pays the mortgage

(the home is solely in his name), and he pays for child support

for his child from a prior relationship.     She pays the rest of

their expenses, including food, utilities, telephone, insurance,

and his car payment.   She owns a 1992 Honda; however, she drives
                               - 13 -

his car to work because it is newer and more reliable.

Petitioner’s employer is downsizing, and to retain her job, she

drives a long, expensive commute to a new location.

                             Discussion

I.   Overarching Considerations

      A.   Joint and Several Liability

      When two individuals file a joint Federal income tax return,

they are each responsible for the accuracy of the return and both

are liable together and separately for the entire tax liability.

Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C. 276, 282

(2000); sec. 1.6013-4(b), Income Tax Regs.

      B.   Section 6015(f) Equitable Relief

      Section 6015 provides relief from joint and several

liability in certain circumstances.      As relevant here, if the

taxpayer does not qualify for relief under section 6015(b) or

(c), then the taxpayer may seek an equitable remedy under section

6015(f), which provides relief if, after taking into account all

the facts and circumstances, it would be inequitable to hold the

taxpayer liable for the unpaid tax or any portion thereof.      Sec.

6015(f)(2); Butler v. Commissioner, supra at 287-292.      Petitioner

does not qualify for relief under section 6015(b) or (c) because

the joint tax returns reported the full amount of tax due, and

therefore the liabilities are due to underpayment of tax, and not
                               - 14 -

deficiencies.   Accordingly, petitioner’s sole avenue of relief is

through section 6015(f).

     C.   Jurisdiction

     In 2006 Congress amended section 6015(e) to expressly grant

the Tax Court jurisdiction over the Commissioner’s denial of

relief under section 6015(f) “‘with respect to liability for

taxes arising or remaining unpaid on or after the date of the

enactment of this Act [December 20, 2006]’.”   Christensen v.

Commissioner, 523 F.3d 957, 959 (9th Cir. 2008) (quoting Tax

Relief and Health Care Act of 2006, Pub. L. 109-432, div. C.,

sec. 408(c), 120 Stat. 3062), affg. T.C. Memo. 2005-299.

Petitioner’s liabilities remain unpaid after December 20, 2006,

and accordingly, we have jurisdiction.

     D.   Standard of Review

     Respondent requested in his pretrial memorandum that we

limit our review to the administrative file.   In the past, we

applied abuse of discretion as the standard of review for the

Commissioner’s denial of equitable relief under section 6015(f).

See Washington v. Commissioner, 120 T.C. 137, 146 (2003);

Cheshire v. Commissioner, 115 T.C. 183, 198 (2000), affd. 282

F.3d 326 (5th Cir. 2002).   However, in a recent case we focused

specifically on this issue, and we ruled that when seeking

section 6015(f) relief, it is permissible for a taxpayer to

introduce evidence at trial that was not in the administrative
                               - 15 -

record.    Porter v. Commissioner, 130 T.C. __ (2008).   Further, we

need not decide the standard of review because we would reach the

same result.

      E.   Burden of Proof

      To gain joint and several liability relief under section

6015(f), the taxpayer bears the burden of proof.    Rule 142(a);

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

Appx. 34 (6th Cir. 2004).

II.   Applying the Law to the Facts and Circumstances of
      Petitioner’s Case

      The Commissioner has promulgated a review process that IRS

employees should follow when determining whether a spouse

qualifies for equitable relief under section 6015(f).    Rev. Proc.

2003-61, 2003-2 C.B. 296, modifying and superseding Rev. Proc.

2000-15, 2000-1 C.B. 447.2   This Court employs those factors when

reviewing the Commissioner’s denials.    Washington v.

Commissioner, supra at 147-152.

      A.   Rev. Proc. 2003-61, Sec. 4.01--Threshold Criteria for
           Granting Relief

      The review process begins with seven threshold criteria that

a taxpayer must satisfy before the Commissioner will consider

equitable relief.    Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at


      2
       The later revenue procedure applies to requests for
relief, such as this one, that taxpayers file on or after Nov. 1,
2003, or those pending on Nov. 1, 2003, for which no preliminary
determination letter has been issued as of that date. Rev. Proc.
2003-61, sec. 7, 2003-2 C.B. 296, 299.
                                - 16 -

297.     The Court will not address the criteria for 1992 and 1995

because the Court agrees with respondent’s determination that

petitioner has met the threshold requirements on the portion of

the liability that is attributable to her deceased husband.

        The Court agrees further that on the basis of the

attribution factor of Rev. Proc. 2003-61, sec. 4.01(7),

respondent will not consider relief for 1999 because at the

threshold, nearly all or all of the unpaid balance is

attributable to petitioner.     We reach the same conclusion for

1998.     We note for completeness the importance of the attribution

criterion.     One of the changes that the Commissioner made in

revising the revenue procedure from 2000 to 2003 was to move up

the attribution factor from being one of many considerations to

being a threshold factor.     Compare Rev. Proc. 2003-61, sec. 3.01,

2003-2 C.B. at 297 with Rev. Proc. 2000-15, sec. 4.03, 2000-1

C.B. at 449.     Accordingly, petitioner’s request for relief from

joint and several liability for 1998 and 1999 is not appropriate

because the liability is her own.

       B.   Rev. Proc. 2003-61, Sec. 4.02--Circumstances Under
            Which the IRS Will Ordinarily Grant Relief

        Where a requesting spouse has satisfied the threshold

requirements of Rev. Proc. 2003-61, sec. 4.01, the Commissioner

will ordinarily grant equitable relief under section 6015(f) if

the requesting spouse’s circumstances satisfy all three elements

of Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298: (1) Marital
                                - 17 -

status, (2) knowledge or reason to know, and (3) economic

hardship.

       Petitioner satisfies the first element because Mr.

Martinez’s death in April 2001 was before her application for

relief in August 2005.    Regarding the second and third elements,

knowledge or reason to know and hardship, Rev. Proc. 2003-61,

sec. 4.03, 2003-2 C.B. at 298, incorporates those two elements as

part of its analysis.    Because petitioner does not satisfy at

least one of the tests, to reduce redundancy we reserve our

discussion of the two elements until the section immediately

below.

       C.   Rev. Proc. 2003-61, Sec. 4.03--Factors for Determining
            Whether To Grant Equitable Relief

       For requesting spouses who fail to qualify under Rev. Proc.

2003-61, sec. 4.02, the revenue procedure provides a list of

nonexclusive factors that the Commissioner will consider to

determine whether to grant full or partial equitable relief under

section 6015(f).     Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at

298.     The revenue procedure provides further that no single

factor is determinative, and the reviewer shall weigh all

relevant factors, regardless of whether Rev. Proc. 2003-61, sec.

4.03, lists the factor.
                                   - 18 -

            1.   Marital Status

     Mr. Martinez died in April 2001, before petitioner requested

relief in August 2005.    Thus, this factor favors relief.

            2.   Economic Hardship

     The Commissioner determines economic hardship relying on

rules that the Secretary promulgated in section 301.6343-1(b)(4),

Proced. & Admin. Regs.    Rev. Proc. 2003-61, sec. 4.03(2)(a)(ii)

(referencing Rev. Proc.2003-61, sec. 402(1)(c)).        The regulation

defines economic hardship as the condition where a taxpayer is

“unable to pay his or her reasonable basic living expenses”.

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

a reasonable amount for basic living expenses, the Commissioner

shall consider information such as:         (1) The taxpayer’s age,

employment status, history, and ability to earn; (2) the amount

reasonably necessary for living expenses such as food, clothing,

housing, medical expenses, insurances, tax payments, and child

support; (3) the cost of living in the geographic area in which

the taxpayer resides; and (4) any extraordinary circumstances

such as a medical catastrophe.       Sec. 301.6343-1(b)(4)(ii),

Proced. & Admin Regs.    The requesting spouse bears the burden of

proving economic hardship.        Monsour v. Commissioner, T.C. Memo.

2004-190.

     In determining that petitioner would not suffer economic

hardship from denial of relief, the Appeals officer properly
                              - 19 -

relied on the Form 12510 that petitioner filed with her August

2005 request for relief, where petitioner self-reported monthly

income of $2,636 and expenses of $2,480 which included a

provision of $775 per month to pay the back taxes, for a monthly

surplus of $156 in her basic living expenses.   Petitioner

subsequently corroborated respondent’s determination by:     (1)

Stating that the main reason she stopped making installment

payments in November 2005 was that the IRS stopped sending her

payment coupons, not that she was suffering from financial need,

and (2) recommencing the payments in 2006 and paying the IRS $775

per month from February through May 2006.

     Normally our analysis of the economic hardship factor would

end at this point with an affirmation of the Appeals officer’s

determination.   However, section 6015(f) requires that we take

into account “all the facts and circumstances”.   At trial in

October 2007 more than 2 years after petitioner submitted the

original Form 12510 in August 2005, petitioner provided a new

Form 12510 that showed monthly income of $2,448 and expenses of

$2,770, for a monthly deficit of $322.   The expenses do not

include a provision for payment of back taxes or for housing.

Petitioner did not explain why her net income decreased by $188

per month, and respondent challenged the accuracy of the expense

amounts that petitioner reported.
                              - 20 -

     We are not required to accept a taxpayer’s self-serving and

unsubstantiated statements at trial.     Tokarski v. Commissioner,

87 T.C. 74, 77 (1986).   However, we do find credible that

petitioner, whose lifestyle was already modest, did suffer a

diminution in her financial circumstances.    We note that she

received no assets as a result of the death of Mr. Martinez, she

incurred expenses to relocate to Southern California, she lives

in an expensive State in a home that she does not own, and she

drives and pays for an automobile that is also not her own.      The

car that she does own is 16 years old.    She emptied her after-tax

and retirement savings to provide for her children and to care

for her dying husband.   Her new husband has modest income and

pays court-ordered child support.

     Further, petitioner is now in her mid-fifties, has 13 years

of education, works as a secretary, and earns in the mid-thirty

thousands from a company that is downsizing and requires a long,

expensive commute.   Her combination of age, education, and work

situation suggests limited earnings prospects.    Moreover, if

petitioner had to pay for housing or buy a new car, or if the

couple suffered a significant financial or medical setback, then

they or petitioner would be hard pressed to pay for their basic

living expenses.

     On similar grounds in Washington v. Commissioner, 120 T.C.

at 150, we disagreed with the Commissioner and found that the
                                - 21 -

requesting spouse would suffer economic hardship if we did not

grant her relief.    Although the taxpayer was supporting two

children and earned less than petitioner here, the requesting

spouse’s financial circumstances were similar in that she

received no assets from the marriage, did not own a house, did

not take vacations, and did not own the automobile she drove, and

the IRS liens harmed her credit rating and limited her ability to

borrow.    Id.

     We will not go as far here as we did in Washington to

disagree with respondent because petitioner no longer has

dependent children, her income is higher than that of the

taxpayer in Washington, and petitioner did not substantiate her

expenses.    However, even without precise numbers detailing the

family’s or petitioner’s current financial condition, we find

that petitioner is in a precarious financial circumstance:

Living paycheck to paycheck, maintaining a low standard of

living, and having no significant savings or other financial

cushion.    For the foregoing reasons, we find the economic

hardship factor is neutral.

            3.   Knowledge or Reason To Know

     Respondent contends that petitioner fails this test because

she knew or had reason to know at the time she signed the returns

that Mr. Martinez would not pay the 1992 and 1995 tax

liabilities.     In a case such as this where the couple accurately
                               - 22 -

reported but did not pay the balances due, the relevant standard

is whether the taxpayer requesting relief did not know and had no

reason to know that her spouse would not pay the income tax

liability.    Rev. Proc. 2003-61, sec. 4.03(2)(a)(iii)(A); see

Washington v. Commissioner, supra at 150-151; see also Feldman v.

Commissioner, T.C. Memo. 2003-201, affd. 152 Fed. Appx. 622 (9th

Cir. 2005).    As is pertinent here, in making a determination

whether the requesting spouse had reason to know of the

nonpayment, the IRS will consider the requesting spouse’s level

of education, any deceit or evasiveness of the nonrequesting

spouse, the requesting spouse’s involvement in household

financial matters, and any lavish or unusual expenditures

compared with past spending levels.     Rev. Proc. 2003-61, sec.

4.03(2)(a)(iii)(C); see also Price v. Commissioner, 887 F.2d 959,

965 (9th Cir. 1989) (specifying the factors).

     To establish that she had no reason to know, the alleged

innocent spouse must establish that:     (1) When she signed the

return, she had no knowledge or reason to know that her spouse

would not pay the tax reported on the return; and (2) it was

reasonable for her to believe that the nonrequesting spouse would

pay the tax shown as due.    Collier v. Commissioner, T.C. Memo.

2002-144.

     In making his determination to deny relief to petitioner,

respondent noted that:   (1) The family’s sole checking account
                               - 23 -

was in petitioner’s name; (2) the IRS collected a 1988 tax debt

in 1994 through a levy; and (3) after engaging a law firm to

prepare the returns, petitioner signed the 1992 and 1995 returns

in October 1998 with the returns showing balances due.

Petitioner on the other hand argues that Mr. Martinez handled the

family’s finances and that he was not forthcoming with her.      For

example, he did not tell her he had quit his job, he did not seek

reimbursement for medical expenses, and he hid from her

correspondence from the IRS.    She said that she thought the

checking account had sufficient funds and that he would pay the

balances due.   She added that she believes diabetes contributed

to his mental state.

     Because we find that petitioner is a smart and responsible

person, and given her situation, we find that her lack of

knowledge is improbable.    We believe that sometime after Mr.

Martinez became ill in 1985, she assumed sufficient

responsibility over their delinquent tax filings so as to

encourage seeking help from a law firm, which they did in 1996.

We find that Mr. Martinez lack of a separate or joint bank

account suggests a certain degree of evasiveness on his part, and

his deteriorating medical condition probably required her greater

involvement in the household finances.    In this regard, the

awareness petitioner gained from the 1994 tax levy is

significant.    If simple compliance was the only objective, an
                              - 24 -

ordinary tax preparation firm would have sufficed.   We suspect

that they specifically sought a law firm because petitioner knew

that they had unfiled returns and unpaid balances from 1992 to

1995, and she wanted legal advice on how best to resolve the

situation.

     Even if we were to assume that petitioner was unaware until

October 1998, by the time she or they sat down in the law firm’s

conference room and the attorney presented them with up to five

delinquent returns (1992 to 1997) with four showing a balance due

(1996 showed a refund), we find it is likely that petitioner and

Mr. Martinez had had several conversations discussing how they

would pay the balances due that then aggregated to several

thousands of dollars.   Moreover, even if the above speculation is

wrong and petitioner was still unaware, we find that it strains

credibility to believe that, at the time petitioner signed the

1992 and 1995 returns on October 30, 1998, she did not know that

the returns would not include payment checks.   The checking

account was solely in her name.   Given all the opportunities that

petitioner had to discover the problem, if she was still unaware,

then we would have to apply our consistent holding that Congress

designed the provisions for relief from joint and several

liability “‘to protect the innocent, not the intentionally

ignorant’”.   Morello v. Commissioner, T.C. Memo. 2004-181

(quoting Dickey v. Commissioner, T.C. Memo. 1985-478).
                              - 25 -

     One last comment on petitioner’s knowledge.    The main reason

for the balances due for 1992 to 2000 was that petitioner had her

employer withhold too little tax from her paycheck.     To cause

this result petitioner must have claimed too many withholding

allowances at work.   We speculate that petitioner maintained this

situation year after year because it helped pay her family’s

daily living expenses, especially after Mr. Martinez stopped

working.   Significantly, only petitioner, and not Mr. Martinez,

could have filed the withholding certificate with her employer.

     For all the foregoing reasons, we find that petitioner knew

or had reason to know that she and Mr. Martinez would not pay the

balances due when they filed the 1992 and 1995 tax returns.       In

summary, this test strongly disfavors relief.

     Regarding the significance of this factor, the prior revenue

procedure stated that the knowledge factor was “an extremely

strong factor” in determining whether to grant relief.     Rev.

Proc. 2000-15, sec. 4.03(2)(b), 2000-1 at 449.     However, in

promulgating the new revenue procedure the Commissioner

explicitly downgraded the factor’s significance to one of the

many criteria where “No single factor [is] determinative of

whether to grant equitable relief in any particular case.”       Rev.

Proc. 2003-61, secs. 3.03, 4.03, 2003-2 C.B. 297-298.     Even under

the former, stronger weighting, we have granted relief where we

found that “‘the factors in favor of equitable relief are
                               - 26 -

unusually strong, it may be appropriate to grant relief under

section 6015(f) in limited situations where the requesting spouse

knew or had reason to know that the liability would not be

paid’”.   Washington v. Commissioner, 120 T.C. at 151.

           4.   Legal Obligation

     This factor comes into effect only when “the nonrequesting

spouse has a legal obligation to pay the outstanding income tax

liability pursuant to a divorce decree or agreement.”    Rev. Proc.

2003-61, sec. 4.03(2)(iv).   This factor is inapplicable because

the Martinezes did not divorce.

           5.   Significant Benefit

     In Washington v. Commissioner, supra at 151-152, we held

that the requesting spouse did not significantly benefit from the

unpaid taxes because during and after the marriage she did not

receive expensive jewelry, drive a luxurious car, wear designer

clothes, take expensive vacations, own a home, receive assets

from the marriage, or own the automobile that she drove.

     Petitioner suffered from a similar lack of benefits.    During

and after the marriage she did not receive jewelry, luxury cars,

or designer clothes.   She did not receive and does not own a

home, and does not own the car she drives.   Further, she drained

her savings and retirement assets trying to support her family

and help her dying husband, and she incurred costs in moving to
                               - 27 -

Southern California after his death.     We hold this factor

significantly favors relief.

          6.   Compliance With Federal Tax Laws

     With respect to compliance with Federal tax laws, the

Martinezes filed their 1988 return on time, but respondent stated

they filed their 1999 return “a few months late” (in September

2000 with no information on extensions).     However, since Mr.

Martinez’s death, the Appeals officer noted that petitioner has

been in compliance.    This factor is neutral or in favor of

relief.

          7.   Abuse

     Because we find that petitioner was not abused, this factor

is neutral.

          8.   Mental or Physical Health

     We believe petitioner was under great mental strain dealing

with her long-suffering and dying husband while supporting her

family solely on her modest wages.      This factor strongly favors

relief.

          9.   Other Factors

     Rev. Proc. 2003-61, sec. 4.03(2), states that the

Commissioner will “consider and weigh all relevant factors,

regardless of whether the factor is listed in this section 4.03.”

We find four additional factors merit consideration.
                                - 28 -

     First, with respect to the 1995 tax return, on the basis of

the requirement of section 72(t)(1), petitioner’s attorney

included a 10-percent additional tax of $2,181 because of the

Martinezes’ premature retirement plan distributions totaling

$21,809.   Mr. Martinez’s withdrawal of $18,840 accounted for

$1,884 of the additional tax.    The record does not indicate that

petitioner, her attorney, or respondent considered section

72(t)(2)(A)(iii), which provides an exception to the additional

tax if the distribution was attributable to the employee’s being

disabled within the meaning of section 72(m)(7).    Section

72(m)(7) provides that “an individual shall be considered to be

disabled if he is unable to engage in any substantial gainful

activity by reason of any medically determined physical or mental

impairment which can be expected to result in death or to be of

long-continued and indefinite duration.”    See sec. 1.72-17(f)(1),

Income Tax Regs.; see also Dwyer v. Commissioner, 106 T.C. 337,

340 (1996).   Because Mr. Martinez stopped working permanently in

1995 and because his illness was progressively degenerative and

ultimately resulted in his death, he was a good candidate for

section 72(t)(2)(A)(iii) relief.    Consequently, if one were to

reduce the original 1995 balance due by $1,884 to remove the 10-

percent additional tax attributable to Mr. Martinez and remove

the related accumulation of interest and the other additions to

tax (for late filing and late payment), the result would be that
                              - 29 -

respondent’s application of petitioner’s payments would have paid

the entire remaining liability for 1995.

     Likewise, we consider the possibility that in the years

after Mr. Martinez stopped working in 1995 and until his death in

2001 the couple might have been able to reduce their balances due

by itemizing their deductions instead of claiming the standard

deduction.   We observe that because Mr. Martinez likely had high

medical expenses as a result of his illness, and the couple’s

income was low because petitioner’s earnings were their only

income, they might have qualified for a medical expense

deduction.   We do not know whether they owned a home for which

they paid mortgage interest and property taxes.   Our point in

analyzing the possible itemized deductions and the exception to

the 10-percent additional tax is that we need to consider that

the liabilities may have been higher than necessary; i.e., that

there was doubt as to liability.

     The second supplemental consideration is petitioner’s

installment payments.   Petitioner has paid $35,650 or 73 percent

of the entire liability for 1992 through 2000, which includes a

portion that was attributable to her deceased husband.    We

suspect that in 2001, when petitioner first proposed an offer-in-

compromise for $1,000, respondent would have accepted an offer-

in-compromise or other collection alternative that would yield 73

cents on the dollar, especially considering Mr. Martinez’s then-
                                - 30 -

recent death in April 2001.   Additionally, by paying 73 percent

petitioner has already paid an amount that in one analytical

sense, reimburses the Treasury in full for the unpaid taxes and

the interest.   In other words, from one viewpoint, the Government

has received back its entire principal and the time value of

money for all years 1992-2000.    This factor is not dispositive,

but it indicates petitioner’s good faith effort to resolve the

problem.

     We noted earlier that respondent’s application of payments

seems haphazard.   Because petitioner’s payments under the

installment agreement were voluntary, she had the right to direct

the application as she chose.    See Muntwyler v. United States,

703 F.2d 1030, 1032 (7th Cir. 1983).     However, because petitioner

did not instruct the IRS where to apply her payments, the option

is moot now because “‘In the absence of a designation, it is well

settled that the IRS enjoys the right to apply payments in the

manner it chooses.’”   Isley v. United States, 272 Fed. Appx. 640,

641 (9th Cir. 2008) (quoting United States v. Plummer 174 Bankr.

284, 286 (Bankr. C.D. Cal. 1992)).

     Nonetheless, in reexamining the table supra page 5, we note

that even accepting respondent’s application as given, petitioner

has paid more than her share of the liabilities for 1992 and

1995.   Further, if one were to double petitioner’s share as an

approximation to incorporate additions to tax and accrued
                             - 31 -

interest, the table still would show that petitioner is within

$153 of fully paying the doubled amount for 1992 and has overpaid

for 1995.3

     The third additional factor is that the 1992 and 1995

liabilities are old, particularly the 1992 liability, where the

IRS has strangely applied less of the payments.   We would be

remiss in an equity situation not to point out that the debt has

already aged 16 years and is imposed on a widow and petitioner

has made a good faith effort to repay the obligation.

     Fourth, a review of the conference report accompanying the

enactment of section 6015 shows that the conferees agreed to

include the provision in the House bill “expanding the

circumstances in which innocent spouse relief is available” and

that Congress enacted section 6015 as part of the broader Title

III, “Taxpayer Protection and Rights”.   H. Conf. Rept. 105-599,

at 238, 249 (1998), 1998-3 C.B. 747, 992, 1005.   Thus, to the

extent the legislative history is significant here, we find that

the history favors an expansive interpretation of relief.

     For the foregoing reasons, the other factors strongly favor

relief.




     3
       For 1992 petitioner’s share of the balance due was $1,680.
Multiplying that by 2 as an approximation for additions and
interest yields $3,360, minus her payments applied of $3,207,
results in a shortfall of $153.
                              - 32 -

     D.   Summary of the Factors

     To aid the reader we summarize below the results of the

above analysis:

     1.   Marital status--favors relief.
     2.   Economic hardship--neutral.
     3.   Knowledge or reason to know--strongly disfavors relief.
     4.   Legal obligation--inapplicable or neutral.
     5.   Significant benefit--significantly favors relief.
     6.   Compliance with Federal tax laws--neutral or favors
          relief.
     7.   Abuse--neutral
     8.   Mental health--strongly favors relief
     9.   Other factors--strongly favor relief.

     Accordingly, one factor strongly disfavor relief, three or

four are neutral, and four or five favor or strongly favor

relief.   “No single factor [is] determinative of whether to grant

equitable relief in any particular case.”    Rev. Proc. 2003-61,

sec. 4.03.

     This case is admittedly a close call.    In favor of denying

relief, more than half of the couple’s unpaid balances in 1992

and 1995 were attributable to petitioner’s underwithholdings.

Also, after experiencing the 1994 levy petitioner knew, or had

reason to know there was a problem at the time of engaging a law

firm in 1996, or she knew or had reason to know that Mr. Martinez

was not going to pay the balances due for the 1992 and 1995

returns at the time she signed the returns on October 30, 1998.

The checking account was in her name.   Further, petitioner has

not met her burden of proving that a denial of relief will cause

her to suffer economic hardship.
                                - 33 -

     In favor of granting relief, we are particularly compelled

by the following factors.   Petitioner remained loyal to Mr.

Martinez throughout his illness, and after discovering the tax

problem she promptly engaged a law firm to resolve the matter.

Petitioner has made an enormous effort through her installment

payments to satisfy the debt.    From one point of view, the amount

that respondent has applied to 1992 and 1995 is already

sufficient for petitioner to have paid her share of the debt for

1992 and 1995, or alternatively, petitioner has already paid an

amount in total that is sufficient to pay all of the principal

and interest from 1992 to 2000, including the amounts

attributable to Mr. Martinez.    Moreover, petitioner accomplished

these payments on modest income.    The underlying tax liabilities

may have been overstated because of the medical exception to the

10-percent additional tax on premature retirement distributions,

and perhaps because of the couple’s failure to itemize their

deductions.   Though she did not prove economic hardship,

petitioner’s financial situation is clearly not strong.     She

lives in expensive California, and at least since 1992 she has

lived only a modest lifestyle.    She exhausted her savings and her

retirement assets caring for her children and Mr. Martinez, and

she has left herself in a precarious financial position.     The

1992 debt is 16 years old and is imposed on a widow who in good

faith has done her best to meet her tax obligations.
                                - 34 -

     Balancing the equities, on the basis of the foregoing

analysis we hold that for 1992 and 1995 the factors in favor of

relief outweigh the factors disfavoring relief, with no single

factor being determinative.    We deny relief for years 1998 and

1999 because petitioner’s request for relief failed at the

threshold test of attribution.

                              Conclusion

     We end by noting petitioner and her situation are highly

sympathetic and credible.   Because we grant relief for 1992 and

1995 and deny relief for 1998 and 1999, petitioner will still owe

respondent around $12,000 for debts from long ago.4     If

petitioner is truly suffering from economic hardship, or is

unable to pay the debt, then she may want to approach the IRS

with a request for relief under a different principle, such as an

offer-in-compromise or other collection alternative, where the

parties can further explore petitioner’s ability to pay on the

basis of her new financial situation.

     To reflect our disposition of the issues,


                                           An appropriate decision

                                     will be entered.




     4
       By the time the parties receive this opinion, the $10,847
(= $4,882 + $5,965) aggregate balance for 1998 and 1999 as of
April 17, 2007, will have grown with interest to a figure around
$12,000.
