Wilson v. Commissioner of Internal Revenue

T.C. Memo. 2010-134

UNITED STATES TAX COURT

KAREN MARIE WILSON, Petitioner v. COMMISSIONER OF INTERNAL
REVENUE, Respondent

Docket No. 23882-04. Filed June 17, 2010.

MEMORANDUM FINDINGS OF FACT AND OPINION

HOLMES, Judge:

Lloyd Wilson was up to no good in 1997 and
1998. His previously modest income had skyrocketed in less than
two years’ time. He moved much of the money offshore–including
one deposit of a quarter-million dollars that he sent to
Grenada–and then systematically underreported his income on the
family’s tax returns.
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When the SEC cease-and-desist order arrived, Wilson stopped
working altogether. He asked a different tax preparer to help
him out of the mess; that preparer filled out amended returns
that Lloyd and his wife Karen signed. The amended returns led to
a tax bill of over $540,000; neither Wilson has paid it. The
Wilsons divorced, and Karen resumed working outside the home in
an insecure and low-paying clerical job. She now seeks relief
from the old tax debt.

FINDINGS OF FACT

The Wilsons married in 1983. Karen Wilson was working as a
cashier in a gas station and, apart from a bit of technical
training, did not have an education beyond high school. For the
first 14 years of their marriage, Lloyd was a self-employed
insurance salesman, earning about $30,000 to $36,000 a year.
Karen supplemented the family income by working a variety of
jobs, eventually becoming a loan officer at the local credit
union. The Wilsons had three sons, one of whom is still a minor.
And every year Karen would prepare the family’s simple joint tax
return.

Until 1997. That year the Wilsons’ financial situation
started changing radically for the better. Lloyd began netting
$20,000 a month in his new venture of steering people into a
Ponzi scheme called the Venture Fund Group. We specifically
find, on the basis of her credible testimony, that Karen did not
-3-
1 In the trust world, a grantor is the person who
contributes assets to a trust. A grantor trust is created if the
grantor retains enough control of or interest in the assets that
the trust is ignored for income tax purposes–-in other words, the
IRS continues to treat the assets as belonging to the grantor.

understand the nature of her husband’s business–she believed it
was legitimate and had no knowledge about its operations or
fraudulent nature. But its apparent success allowed Karen to
leave her job at the credit union to help Lloyd with paperwork
and bookkeeping, and to spend more time taking care of the
children. With their new earnings, the Wilsons put down $50,000
on two neighboring houses in Modesto, California and took out a
mortgage on each. They used one as the family home and the
second as Lloyd’s office.

Accounting for Lloyd’s new business was complicated–the
business involved several entities and offshore accounts–and
Lloyd turned to Roosevelt Drummer to prepare the Wilsons’ 1997
and 1998 joint returns. But Drummer failed to report the
substantial income that Lloyd was sending to offshore accounts in
the name of a grantor trust.1 And, in the meantime, the SEC was
investigating. In May 1999, an SEC cease-and-desist order put an
abrupt end to Lloyd’s $20,000-a-month business. Lloyd dumped
Drummer and hired John Northup, a licensed CPA, for advice.
Northup looked at the Wilsons’ 1997 and 1998 returns and told
them to get right with the IRS. They took his advice and at the
end of 1999 filed amended 1997 and 1998 returns that reported the
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income Lloyd had been sending offshore. They also filed their
1999 return. The three returns showed a total tax liability of
$540,000.

Northup knew about the order when he prepared the amended
returns, and he discussed it with Lloyd. Lloyd told Karen about
the cease-and-desist order in 2000. She was credible on this
point, and we find it more likely than not that this is true.
Lloyd responded to this unfortunate turn of events by, as
Karen described it, spending much of 2000 and 2001 staying at
home and doing nothing. Karen got upset with this behavior; the
unpaid bills piled up, and the Wilsons became estranged. Karen
went to work as a clerk at a commercial real-estate company, but
she still did not have enough money to move out of the marital
home. At this point, the Wilsons were renting out the other
house, so Karen moved to a different bedroom, celebrated holidays
separately, and did her best to avoid Lloyd.

While all of this was happening, the tax debt remained
unpaid. In March 2002 Karen submitted IRS Form 8857 seeking
innocent-spouse relief for tax years 1997, 1998, and 1999. Karen
requested equitable relief and described her financial status as
“of survival.” She also submitted Form 886-A, Innocent Spouse
Questionnaire. On that form she wrote that she was married and
still living with Lloyd and that she believed he could pay the
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taxes when she signed the returns because Lloyd was “still in
business during this time.”

The Commissioner’s Centralized Cincinnati Innocent Spouse
Operation (CCISO) denied Karen’s request for relief in a
preliminary determination letter in March 2003. CCISO’s denial
was based on its finding that Karen did not have a reasonable
belief that the tax would be paid because there was an
outstanding balance from 1998 when the 1999 return was filed.
Karen responded to CCISO’s preliminary determination letter by
sending what she labeled a “statement of disagreement” to the IRS
Appeals Office. The IRS Appeals officer handling the case wrote
Karen in February 2004, outlining his initial findings based on
her questionnaire. The Appeals officer summarized his findings–
based on the limited information in the administrative record–
for each of the numerous factors that the IRS considers in such
situations. In March 2004 he also spoke with Karen, who
explained that she was filing for divorce from Lloyd but still
sharing a house with him. The Appeals officer told her that this
would complicate his analysis but that he would contact her again
in about three months. Karen filed for divorce the very next
month. In July 2004, the Appeals officer mailed Karen a letter
asking her to contact him by August 18, 2004 for a telephone
hearing. Karen never did, and in September she received a notice
of determination denying her request for relief.
-6-
2 This excerpt from the transcript of the first trial was
typical: “Call your first witness, then.” “I have no
witnesses.” “Well, how about yourself?” “Okay.” “You count.”
“I count?” “Yes.”
3 Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.

The state court judge overseeing the Wilsons’ divorce
awarded Karen the couple’s second house in December 2004, and in
early 2005 she evicted the tenant and moved in. She petitioned
the Tax Court as a resident of California, and we tried the case
in September 2005. Karen did not have the assistance of legal
counsel and was even unaware that she could testify.2 When
complicated facts and legal issues unfolded, we arranged for pro
bono counsel. The Wilsons’ divorce became final in 2007. We
agreed to reopen the record and held a second trial in 2008 where
Karen provided additional testimony.

OPINION

Section 6013(a)3 lets married couples file their federal tax
returns jointly but, if they do, both spouses are then
responsible for the return’s accuracy and both are generally
liable for the entire tax due. Sec. 6013(d)(3); Olson v.
Commissioner, T.C. Memo. 2009-294. In some cases, however,
section 6015 can relieve a spouse from this joint liability.
Relief comes in three varieties: Relief under section 6015(b) or
(c) requires either an “understatement” or a “deficiency”; relief
under section 6015(f) requires that the requesting spouse be
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“liable for any unpaid tax or any deficiency.” If the liability
is neither an “understatement” nor a “deficiency”, the only
possible relief is under subsection (f). See Hopkins v.
Commissioner, 121 T.C. 73, 87-88 (2003).

The Commissioner never asserted a deficiency against Karen,
so hers is a case where relief is possible only under section
6015(f). This turns out to be important in considering three
preliminary questions:

• jurisdiction;
• standard of review; and
• scope of review.

I. Jurisdiction to Hear Cases under Section 6015(f)

Karen’s case is a “stand alone” nondeficiency case–one where
a spouse asks for relief on her own initiative, and not in
response to a deficiency action or moves by the IRS to collect a
tax debt. After the trial began back in 2005, courts began
questioning whether we had jurisdiction over stand-alone
nondeficiency petitions. See Commissioner v. Ewing, 439 F.3d
1009 (9th Cir. 2006), revg. 118 T.C. 494 (2002) and vacating 122
T.C. 32 (2004). In Billings v. Commissioner, 127 T.C. 7 (2006),
we agreed that we lacked jurisdiction. Instead of dismissing
Karen’s petition, however, we suspended her case in the
expectation that Congress might expand our jurisdiction to
include cases like hers. It did, and late in 2006, amended
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section 6015(e) to give us jurisdiction over stand-alone
nondeficiency cases. Tax Relief and Health Care Act of 2006,
Pub. L. 109-432, div. C, sec. 408, 120 Stat. 3061. We then
confirmed with the parties that Karen’s case was covered by the
terms of the new provision’s effective date, and now agree with
them that we have jurisdiction to review the Commissioner’s
determination.

II. Standard of Review

The Commissioner argues that we should review his
determination to see if he abused his discretion. But our
decision in Porter v. Commissioner, 132 T.C. 203 (2009) (Porter
II), is to the contrary. In Porter II, we held that the 2006
amendment to section 6015(e) not only gave us jurisdiction over
section 6015(f) claims but changed the standard of review: “[I]n
cases brought under section 6015(f) we now apply a de novo
standard of review * * * .” Porter II, 132 T.C. at 210.

III. Scope of Review

An earlier opinion, Porter v. Commissioner, 130 T.C. 115
(2008) (Porter I), reexamined our scope of review–i.e., what
evidence we look at–in stand-alone nondeficiency cases. The
Commissioner continues to argue here that we should limit our
review to the administrative record. The Commissioner also
argues that even if we do look outside the administrative record
in other cases, we should not do so in this one because Karen
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failed to provide information that the IRS Appeals officer
requested, and that we should limit review to evidence from the
first trial. We note that the Commissioner has preserved these
objections, but Porter I and Porter II compelled us to overrule
them and apply both a de novo standard and scope of review.
A trial de novo entails independent factfinding and legal
analysis unmarked by deference to the administrative agency.
See, e.g., Morris v. Rumsfeld, 420 F.3d 287, 292, 294 (3d Cir.
2005) (defining “trial de novo” as “without deferring to any
prior administrative adjudication” and “entirely independent of
the administrative proceedings”); Timmons v. White, 314 F.3d
1229, 1233-34 (10th Cir. 2003) (same); see also Wright & Koch, 33
Federal Practice and Procedure: Judicial Review of Administrative
Action, sec. 8332, at 161-62 (2006).

Because our Court has interpreted section 6015(e) to enable
us to determine the “appropriate relief” quite independently of
what the IRS decides or the administrative record it assembles,
we also do not remand innocent-spouse cases to the IRS as a
district court might in reviewing administrative-agency action
for abuse of discretion when an agency’s factfinding or legal
analysis goes awry. See Fla. Power & Light Co. v. Lorion, 470
U.S. 729, 744 (1985); Virk v. INS, 295 F.3d 1055, 1060-61 (9th
Cir. 2002). When such a remand happens, the agency is able to
compile a new (or at least supplemental) administrative record,
-10-
4 As is always the case in administrative law, general
principles yield to any specific governing statute. See, e.g.,
Nguyen v. Shalala, 43 F.3d 1400, 1403 (10th Cir. 1994) (outlining
specific statutory remedies available to a court reviewing a
denial of Social Security disability claims).

and judicial review on remand can be done using an abuseof-
discretion standard applied against that record.
But, contrary to the Commissioner’s arguments here, remand is
not an option in innocent-spouse cases.4 In Friday v.
Commissioner, 124 T.C. 220, 222 (2005), we held that “whether
relief is appropriate under section 6015 is generally not a
‘review’ of the Commissioner’s determination in a hearing but is
instead an action begun in this Court.” (Fn. ref. omitted.)
Friday is a division opinion. We must follow it. See Sec. State
Bank v. Commissioner, 111 T.C. 210, 213-14 (1998), affd. 214 F.3d
1254 (10th Cir. 2000); Hesselink v. Commissioner, 97 T.C. 94,
99-100 (1991).

To sum up these preliminary matters: We hold that we have
jurisdiction to decide what relief Karen is entitled to under the
Code, and we will make our decision on the basis of the evidence
presented to us at trial, without deferring to the findings of
the Appeals officer who issued the notice of determination
denying relief.

IV. Equitable Relief Under Section 6015(f)
Section 6015(f) grants relief to a requesting spouse if
“taking into account all the facts and circumstances, it is
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5 Karen Wilson filed Form 8857 in March 2002. The procedure
in effect when she filed her request for relief was Revenue
Procedure 2000-15, 2000-1 C.B. 447. It has been superseded by
Revenue Procedure 2003-61, 2003-2 C.B. 296, but the new revenue
procedure applies only to requests for relief filed on or after
November 1, 2003, or those pending on November 1, 2003, for which
no preliminary determination letter had been issued as of that
date. Id. secs. 5, 6, and 7, 2003-2 C.B. at 299. We therefore
apply Revenue Procedure 2000-15 to this case.

inequitable to hold the individual liable.” The Commissioner
uses Revenue Procedure 2000-15, sec. 4, 2000-1 C.B. 447, 448, as
a framework to determine whether to grant equitable relief. We
also have followed that revenue procedure in deciding what relief
is appropriate.5 See, e.g., Washington v. Commissioner, 120 T.C.
137, 147-52 (2003); Jonson v. Commissioner, 118 T.C. 106, 125-26
(2002), affd. 353 F.3d 1181 (10th Cir. 2003).

Revenue Procedure 2000-15, sec. 4.01, 2000-1 C.B. at 448, has
seven requirements that all spouses requesting relief under
section 6015(f) must meet. The Commissioner concedes that Karen
meets all seven.

The procedure also has a safe harbor. This safe harbor
grants relief to a requesting spouse if she meets three
conditions. Id. sec. 4.02, 2000-1 C.B. at 448. The first
requires that:
At the time relief is requested, the requesting spouse is
no longer married to, or is legally separated from, the
nonrequesting spouse, or has not been a member of the same
household as the nonrequesting spouse at any time during
the 12-month period ending on the date relief was
requested;
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Id. sec. 4.02(1)(a), 2000-1 C.B. at 448. Karen concedes that she
was not divorced or legally separated when she requested relief,
but argues that she was no longer part of the same household
because she moved to a different bedroom than her husband and
tried to avoid him as much as possible. However, Karen indicated
on her Innocent Spouse Questionnaire that she was still married
and living together with Lloyd. Based solely upon the
administrative record, Karen would fail the first safe-harbor
condition. Even under de novo review Karen would fail the first
safe-harbor because she was still married and didn’t have a
separate household at the time she applied for relief. In
Nihiser v. Commissioner, T.C. Memo. 2008-135, we found that a
married couple was “living apart” under Revenue Procedure 2000-15
while still living in the same household. Our finding was,
however, based on the test in section 4.03(1)(a), 2000-1 C.B. at
448, that does not require separate households. The safe harbor
in section 4.02(1)(a), does. The first safe-harbor condition is
not met when a legally married couple continue to live in the
same house.

And even keeping separate households wouldn’t be enough in
the case of a married couple, because those separate households
must be maintained for a “12-month period ending on the date
relief was requested.” Id. Karen credibly testified that she
became estranged in 2001 and filed for innocent spouse relief in
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6 Revenue Procedure 2000-15, sec. 4.03, 2000-1 C.B. at 448-
49, does not state that the absence of a significant benefit will
weigh in a petitioner’s favor, but only that receiving a
significant benefit will weigh against her. Nonetheless, we
decided in Ferrarese v. Commissioner, T.C. Memo. 2002-249 (and
other cases cited), that the absence of a significant benefit
should be a positive factor.

March 2002. But when did she become estranged in 2001? If she
moved into the separate bedroom on or before March 1, 2001, 12
months would have passed; if it happened after March 1, 2001, the
requisite period would not be met. She has the burden, and with
no testimony or other proof of the move-to-the-bedroom date in
2001, Karen would also fail based on the 12-month requirement.
And failing any requirement for the safe harbor is enough to deny
relief under its terms. Nihiser, T.C. Memo. 2008-135.

This leaves us with an eight-factor balancing test to apply.
Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at 448-49. The
Commissioner may consider other factors, but this is where he
starts. Id. (“The list is not intended to be exhaustive.”) The
eight factors including the one factor not in dispute, which we
put in italics, are:

Weighs for Relief Neutral
Weighs Against
Relief
Separated or
divorced
Still married N/A
Abuse present No abuse present N/A
No significant
benefit6
Significant benefit
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6 Revenue Procedure 2000-15, sec. 4.03, 2000-1 C.B. at 448-
49, does not state that the absence of a significant benefit will
weigh in a petitioner’s favor, but only that receiving a
significant benefit will weigh against her. Nonetheless, we
decided in Ferrarese v. Commissioner, T.C. Memo. 2002-249 (and
other cases cited), that the absence of a significant benefit
should be a positive factor.

Weighs for Relief Neutral
Weighs Against
Relief
N/A Later compliance
with Federal tax
laws
Lack of later
compliance with
Federal tax laws
No knowledge or
reason to know taxes
would be left unpaid
N/A Knowledge or reason
to know taxes would
be left unpaid
Economic hardship if
relief not granted
N/A No economic hardship
if relief not
granted
Tax liability
attributable to nonrequesting
spouse
N/A Tax liability
attributable to
petitioner
Nonrequesting spouse
responsible for
paying tax under
divorce decree
No divorce decree Petitioner
responsible for
paying tax under
divorce decree

The Commissioner conceded only that the nonrequestingspouse’s-
legal-obligation-to-pay-the-tax factor is neutral. That
leaves the remaining seven factors in dispute.

A. Marital Status

The first contested factor is Karen’s marital status. This
factor favors relief if Karen is “separated (whether legally
separated or living apart) or divorced” from Lloyd. Id. sec.
4.03(1)(a). On the innocent-spouse questionnaire she submitted
to the IRS, Karen stated she was married to and living with
Lloyd, and the IRS Appeals officer initially found that this
factor weighed against relief. We agree that this factor would
be neutral if we looked at just the administrative record. In
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contrast to an applicant’s marital status in applying for relief
under the revenue procedure’s safe harbor, her marital status in
arguing for relief under the balancing test is not limited to her
status when she applied for relief. And because we look at her
eligibility for relief de novo, we look at her situation as of
the time of trial. She credibly testified that her marriage was
formally dissolved in April 2007. We therefore find the marital
status factor weighs in favor of relief.

B. Abuse

Karen does argue that Lloyd was frequently angry with her,
and suggests that that might be a form of abuse. But we agree
with the Commissioner on this point. Karen conceded during the
IRS’s consideration of her claim that she was not abused, and
during the trial presented no specific evidence on the issue.

C. Significant Benefit

The third contested factor is whether Karen received a
significant benefit. This factor weighs against relief if Karen
“significantly benefitted (beyond normal support) from the unpaid
liability or items giving rise to the deficiency.” Id. sec.
4.03(2)(c), 2000-1 C.B. at 449. “A significant benefit is any
benefit in excess of normal support.” Sec. 1.6015-2(d), Income
Tax Regs.

The IRS Appeals officer found in Karen’s favor on this issue,
and the trial revealed nothing that would change that result.
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Since Karen applied for innocent-spouse relief in 2002,
significant benefits have not been rolling in. As we already
found, Lloyd had stopped working by 2001–failing to provide even
“normal support.” As a result, Karen is struggling–living
modestly in an unairconditioned house in Modesto. The two homes
the Wilsons purchased in 1998 still have significant mortgage
balances outstanding; and the $250,000 CD from the First
International Bank of Grenada, which may or may not be solvent,
lists only Lloyd as a beneficiary. Therefore, on both the
administrative record and de novo review, we find that the lack
of a significant benefit weighs in favor of granting relief.

D. Later Compliance with Federal Tax Laws

The fourth contested factor is whether Karen was in
compliance with the Federal tax laws. If Karen “has not made a
good faith effort to comply with federal income tax laws” for
years after those to which her request for innocent-spouse relief
relates, then this factor would weigh against relief. Rev. Proc.
2000-15, sec. 4.03(2)(e), 2000-1 C.B. at 449. The administrative
record showed that this factor should be neutral because Karen
had only small underpayments of tax in 2001 and 2002 that she
later paid in full. Trying the case de novo lets us glimpse at
even later years. Karen testified that she owed approximately
$2,000 for the 2004 tax year, but that she intended to resolve
the matter. The second trial included no testimony about later
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tax compliance, and it remains unclear whether Karen satisfied
her 2004 tax liability and remained current for subsequent tax
years.

Based upon Karen’s pattern of resolving her 2001 and 2002 tax
liabilities, we find it probable that she would resolve her 2004
tax liability as well. We find that these minor shortfalls show
no bad faith. But it was her burden to produce evidence of her
tax compliance, and she did not. We find that this factor,
taking into account her lack of bad faith, slightly weighs
against relief on de novo review.

E. No Knowledge or Reason to Know

The fifth contested factor is Karen’s knowledge of the
underpayment. This factor weighs against relief if she “knew or
had reason to know * * * the reported liability would be unpaid
at the time the return was signed.” Id. sec. 4.03(2)(b), 2000-1
C.B. at 449.

Based solely on the administrative record, the knowledge
factor would weigh against Karen. The IRS Appeals officer wrote
Karen, asking her to explain what she knew when she signed the
returns. She never did, and so failed to show in the
administrative proceedings that she neither knew nor had reason
to know of the underpayment.

On de novo review, we have more information. The original
1997 return showed $33,909 in taxes due, while the 1998 return
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showed $31,384. Considering Lloyd’s earnings, the equity in the
Wilsons’ two houses, the $250,000 CD, and Lloyd’s prior tax
compliance, we find that Karen reasonably believed that Lloyd
would pay the taxes as shown on the original 1997 and 1998
returns. But the 1999 tax return reflected a $98,000 tax
liability because the Wilsons followed Northup’s tax-returnpreparation
advice. The Wilsons had already paid $20,000 in
estimated taxes, meaning they still owed $78,000 in taxes upon
signing. The Wilsons signed the 1999 return on December 30,
1999, when Lloyd was still working but after the SEC had issued
the cease-and-desist order. We have already found, however, that
Karen did not know about the SEC order until 2000 at the
earliest. But even assuming that she knew about the cease-anddesist
order and understood that Lloyd would no longer earn
$20,000 a month, we find that it would be reasonable for her to
believe that the Wilson family’s assets, such as home equity and
the CD, would be sufficient to pay an extra $78,000 in taxes.
In Billings v. Commissioner, T.C. Memo. 2007-234 (Billings
II), an innocent spouse had no knowledge of an underpayment of
tax at the time the original returns were signed, but knew that
the tax would not be paid when he signed the amended returns.

The Commissioner looked to his knowledge when the amended returns
were signed, but we noted that the revenue procedure does not
tell us “when to measure the knowledge of a requesting spouse who
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signed both an original and an amended return.” Id. Citing
section 6015(f)’s requirement to consider “all the facts and
circumstances,” we reasoned that the Commissioner’s failure to
consider knowledge at the time the original return was signed was
an abuse of discretion. Thus, looking just at the time the
original returns were signed, we find that the knowledge factor
weighs in Karen’s favor.

Because, however, Karen’s knowledge or reason to know changed
over time on the de novo record, our holding is a bit mixed. We
do think that we should, on the strength of Billings II, look to
her state of knowledge when she signed the original returns. For
the first two years, this means that we would easily hold that
the knowledge factor weighs in her favor. For the 1999 tax year,
we are less sure, because she signed amended returns for 1997 and
1998 on the same day she signed the original return for 1999.
The two amended returns showed about $444,000 in taxes due, and
when combined with the 1999 taxes, the total came to over
$540,000. We nevertheless conclude from her evident lack of
business sophistication and limited education that she still
lacked reason to know that Lloyd would fail to pay the taxes
owed–after all, in addition to the hundreds of thousands of
dollars in additional taxes owed, the amended returns showed
close to a million dollars in extra income that Lloyd was not
spending at home.
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7 To decide whether a spouse seeking relief will suffer
economic hardship, the revenue procedure directs us to the test
in section 301.6343-1(b)(4), Proced. & Admin. Regs. See Rev.
Proc. 2000-15, sec. 4.02(1)(c), 4.03(1)(b), (2)(d), 2000-1 C.B.
at 448-49.

F. Economic Hardship

The next contested factor is whether Karen will suffer
economic hardship if she must pay the tax debt. This factor
weighs in her favor when satisfaction of the tax liability would
cause her to be unable to pay “her reasonable basic living
expenses.” Sec. 301.6343-1(b)(4), Proced. & Admin. Regs.7 The
Commissioner looks at any information provided by the requesting
spouse to arrive at a reasonable amount for basic living
expenses. Sec. 301.6343-1(b)(4)(ii), Proced. & Admin. Regs.
The Commissioner argues that the administrative record shows
Karen would not suffer economic hardship. The records Karen
provided to the IRS show that her monthly income exceeds her
expenses by only $114. But because Karen failed to substantiate
her expenses as requested by the IRS Appeals officer, the
Commissioner argues that he could not have abused his discretion.
We agree that if we looked only at the administrative record,
we’d have to find that the Commissioner had not abused his
discretion in finding that Karen would not suffer economic
hardship.

On de novo review, the result is different. Karen’s credible
testimony showed that paying a $540,000 tax debt would render her
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unable to meet reasonable basic living expenses. She lives in a
modest Modesto home, but supports a minor son and has run up her
credit card balance to $20,000 for necessary expenses. Taking
into account other expenses not included in the administrative
record, we find that Karen’s expenses do exceed her income. And
even if Karen had an extra $114 a month to spare, this would be
grossly insufficient to pay down the tax debt in any meaningful
way.

The Commissioner points to Stolkin v. Commissioner, T.C.
Memo. 2008-211, to support his argument that a taxpayer who can
afford monthly payments will not suffer economic hardship. In
Stolkin, we held that a taxpayer who “had the means to make
monthly payments to reduce the tax liability” will not suffer
economic hardship. We find Karen does not have the means to make
monthly payments. The taxpayer in Stolkin had secure monthly
disposable income of $600 (after taking into account expenses
such as BMW lease payments). And in Stolkin, the outstanding tax
liability was only $55,000. With $540,000 in outstanding tax
liabilities, an uncertain financial future, and a lifestyle that
is anything but luxurious, the economic-hardship factor weighs in
favor of granting Karen relief.

G. Attribution

The last contested factor is whether the tax liability is
attributable to Lloyd. This factor weighs in favor of relief if
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the “liability for which relief is sought is solely attributable”
to Lloyd. Rev. Proc. 2000-15, sec. 4.03(1)(f), 2000-1 C.B. at
449.

The Commissioner concedes that the portion of unpaid
liabilities attributable to Lloyd weighs in favor of relief; but
argues that since Karen did basic clerical work to assist Lloyd
and was an employee of his company, a portion of those
liabilities is attributable to her. There was little information
in the administrative record that sheds any light on attribution,
so the IRS Appeals officer assumed that 50 percent of the tax
liability was attributable to Karen. If we looked only to the
administrative record, this would weigh against relief. But the
trial record leads us to find that Karen had no understanding of
Lloyd’s business. She merely assisted with clerical duties while
Lloyd made all the business decisions. We therefore find that
the tax liability is entirely attributable to Lloyd.

Conclusion

After our analysis of these contested factors, the table
looks like this:

Weighs for Relief Neutral
Weighs Against
Relief
Divorced
No abuse present
No significant
benefit
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Weighs for Relief Neutral
Weighs Against
Relief
Lack of later
compliance with
Federal tax laws
No knowledge or
reason to know
Economic hardship if
relief not granted
Tax liability not
attributable to
Karen
No divorce decree

Thus, Karen has five factors weighing in favor of relief and only
one weighing against. But the factor weighing against her has
little weight; although Karen’s compliance was never clearly
established, neither was any serious or bad faith lack of
compliance. On the other hand, the knowledge factor weighing in
favor of relief–an “extremely strong factor,” id. sec.
4.03(2)(b) against relief when present–should not be as “heavy”
as usual because of the uncertainty involved in determining the
state of her knowledge as to the 1999 tax year. With so little
weighing against relief, we conclude that relieving her from
joint tax liability for the years in question is the appropriate
relief under section 6015(f).

Decision will be entered
for petitioner.