Kelly v. Comm'r

T.C. Memo. 2010-267

UNITED STATES TAX COURT

ELIZABETH B. KELLY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3870-09. Filed December 8, 2010.

Stephen J. Dunn, for petitioner.

A. Gary Begun and Robert D. Heitmeyer, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARIS, Judge: Petitioner brings this case seeking review of

respondent’s decision to deny petitioner relief from joint and

several liability under section 60151 with respect to income

1
Section references are to the Internal Revenue Code of
1986, as amended. Rule references are to the Tax Court Rules of
Practice and Procedure.
 - 2 -

taxes of $97,2882 and $114,877 for tax years 2004 and 2005,

respectively.

FINDINGS OF FACT

Some of the facts have been stipulated and are found

accordingly. The stipulation of facts and the attached exhibits

are incorporated herein by this reference. Petitioner resided in

the State of Michigan at the time the petition was timely filed.

Despite the fact that two notices of filing of the petition and

right to intervene were served on Sean Kelly (Mr. Kelly) at his

last known address on March 6 and August 18, 2009, respectively

and that notice was also sent to his counsel on August 18, 2009,

Mr. Kelly did not intervene and did not participate in the trial.

Petitioner received a bachelor’s degree in social science

from Michigan State University in 1979. During college

petitioner began dating Mr. Kelly, and they “partied a lot”

together. Petitioner and Mr. Kelly married in 1981. Petitioner

testified that she noticed Mr. Kelly’s heavy drinking before and

during the early years of her marriage. She also developed an

alcohol dependence.

After college petitioner worked in various sales assistant

positions. In 1987 petitioner started working with Mr. Kelly at

a brokerage and investment services company, Portfolio Analytics,

2
Petitioner and Sean Kelly’s (Mr. Kelly) 2004 tax return
reflected a mathematical error of $97,955. The correct amount
should be $97,288.
 - 3 -

Inc. (Portfolio). Petitioner was Portfolio’s office

administrator who kept records, managed the office, and provided

client services. Notwithstanding her low-ranked position in

contrast to that of her husband, who was a marketing consultant,

petitioner had an ownership interest in Portfolio, an S

corporation.

In 1997 Mr. Kelly and his parents, Joseph and Suzanne Kelly

incorporated EPC Consulting, Inc. (EPC Consulting), a corporation

that structured early retirement plans of teachers on the West

Coast. Mr. Kelly’s father spun off EPC Consulting from EPC

Management, a company he founded, to give Mr. Kelly control over

a specific geographic area while EPC Management continued to

render services to its clients on the East Coast. Mr. Kelly

managed EPC Consulting’s daily operations.

In 1998 petitioner and Mr. Kelly jointly purchased a home in

Milford, Michigan, valued at approximately $900,000. Petitioner

was a signatory to the mortgage.

After petitioner and Mr. Kelly had been married for over 28

years and had three children, they became estranged. Mr. Kelly

was strong willed and very opinionated. During their marriage

Mr. Kelly drank heavily and developed a substance abuse problem.

By 2001 petitioner realized that Mr. Kelly had a substance abuse

problem and that he had begun to spend more time in Detroit and

Canada frequenting multiple establishments commonly referred to
 - 4 -

as “gentlemen’s” clubs. She felt humiliated by her husband’s

patronage of those clubs. By 2003 or 2004 Mr. Kelly’s excursions

would last for several nights, and his recovery afterwards would

extend for a long period during which he would lie on the couch

immobilized. His substance abuse had adversely affected his work

at EPC Consulting and eventually led him to seek medical

treatment for his addictions in 2006.

Mr. Kelly’s alcoholism also strained the already tenuous

business relationship between his parents and him. His parents

disapproved of Mr. Kelly’s extravagant expenses charged to the

business’ account, including his first-class airline flights,

limousine rentals, lengthy stays at luxury hotels, dining at

high-end restaurants, and use of the corporate credit card for

personal expenses incurred at “gentlemen’s” clubs--many of which

he failed to reimburse. An altercation between Mr. Kelly and his

sister further inflamed his parents. Although he knew that his

sister was pregnant, Mr. Kelly aggressively pushed her around

when she confronted him about the “personal expenses” he charged

to the business account. Immediately after the incident his

sister had a miscarriage. Neither petitioner nor their children

witnessed this physical altercation, and Mr. Kelly never used

this incident to intimidate petitioner.

Because of those problems Mr. Kelly’s parents decided to

“buy him out” of EPC Consulting and structured the buyout as a
 - 5 -

severance plan.3 Mr. Kelly was supposed to receive per the

Severance, Release, and Stock Purchase agreement4 (severance

agreement) $550,646.09, $417,641, $467,746, and $205,7185 for

2003, 2004, 2005, and 2006, respectively. In 2004 Mr. Kelly

actually received a payment of $420,083.44,6 consisting of a

$410,650.09 severance payment and a $9,433.35 reimbursement for

“additional expenses”. In 2005 Mr. Kelly actually received a

severance payment of $393,974 because his anticipated 2005

payment was reduced by a partial advance from his 2006 payment.

Although the payments were made to him individually, Mr. Kelly

indicated on his 2004 and 2005 tax returns that the payments were

3
Petitioner submitted into evidence two agreements which Mr.
Kelly and his parents entered into on the same day, Jan. 1, 2003.
The first agreement states that Mr. Kelly would be hired and paid
as a consultant. The second agreement, Severance, Release and
Stock Purchase agreement (severance agreement), states that
Joseph D. Kelly, Suzanne Kelly, and Timothy Bell would each pay
Mr. Kelly $1 in exchange for his EPC Consulting stock in addition
to making severance payments to him.
4
The severance agreement contained a chart setting forth
when Mr. Kelly would receive his severance. EPC Consulting often
diverged from the payment schedule. For example, Mr. Kelly
received an overpayment of $6,990.91 in tax year 2003, and this
payment was deducted in the subsequent year.
5
Although Mr. Kelly was supposed to receive under the
severance agreement a payment of $205,718 in 2006, Mr. Kelly
requested that Joseph Kelly, Suzanne Kelly and Mr. Bell advance
that payment by borrowing the funds from a bank. Consequently,
the 2003 and 2005 payments were reduced by the borrowed amount,
finance fees, and interest.
6
This severance payment was reduced by $6,990.91 because Mr.
Kelly was overpaid in the previous year 2003.
 - 6 -

income of Sean Kelly, L.L.C. These payments were significantly

more than Mr. Kelly earned at Portfolio and constituted most of

the income petitioner and Mr. Kelly reported on their joint

returns for 2004 and 2005. Petitioner knew of the agreement and

the actual amount of each payment. Although Mr. Kelly deposited

the funds in his own account, he transferred funds to their joint

account whenever petitioner so requested.

Throughout the marriage petitioner was responsible for

paying the household expenses. Petitioner paid the monthly

mortgage payment of $5,000, the monthly utility bill of $1,000,

the monthly car payment of $1,500 for the three cars petitioner

and her children drove and the monthly payment for Mr. Kelly’s

Corvette, the yearly private high school tuition of $8,000-$9,000

for one of their children, and the yearly Michigan State

University tuition of $20,000 for their oldest child. In

addition, petitioner and Mr. Kelly had kept a horse training and

boarding venture that operated as the Double K Ranch, L.L.C., and

reported over $55,500 in losses for tax years 2004 and 2005.

Petitioner kept one of the horses after she separated from Mr.

Kelly.

Despite their substantial income petitioner knew as early as

2003 that she and her husband faced financial woes. Petitioner

and Mr. Kelly often were not able to afford their children’s

tuition. They had bad credit, could not get a credit card, and
 - 7 -

had to rely on the corporate credit card EPC Consulting provided

to pay their personal expenses.

Petitioner was responsible for providing information and

documents to her and Mr. Kelly’s accountant and writing the

checks to pay their Federal income tax throughout the marriage.

For tax years 2001, 2002, and 2003 petitioner and Mr. Kelly filed

joint Federal income tax returns reporting balances due. To pay

those balances petitioner signed and remitted checks written

against her and Mr. Kelly’s joint checking account.

As they had done for previous tax years, petitioner and Mr.

Kelly hired an accountant to prepare their joint Federal income

tax returns for 2004 and 2005. The returns reported all of the

gross income that petitioner and Mr. Kelly each earned from

Portfolio in 2004 and 2005. Petitioner and Mr. Kelly were both

employees of Portfolio in 2004 and 2005. Each spouse received

Forms W-2, Wage and Tax Statement, from Portfolio for 2004 and

2005. Their 2004 and 2005 returns also reported the substantial

severance payments as self-employment income and the deductible

losses petitioner received as flowthrough items from Portfolio.

For the tax year 2004 petitioner and Mr. Kelly filed a

joint Federal income tax return reporting total income of

$445,730, a tax liability of $128,934, and payment of $21,000.

On the basis of those figures petitioner and Mr. Kelly actually
 - 8 -

owed $97,2887 for the tax year 2004. In 2004 Portofolio withheld

only $10,646. Of the total income, $356,7968 was attributable to

Mr. Kelly’s severance payment, $56,250 was petitioner’s wage

income from Portfolio, and $59,500 was Mr. Kelly’s wage income

from Portfolio. Most of the tax petitioner and Mr. Kelly owed

was attributable to the severance payment. Nonetheless,

petitioner and Mr. Kelly did not set aside any of the severance

payment to pay the tax due on the payment. However, to partially

offset the income attributable to the severance payment,

petitioner and Mr. Kelly claimed a loss of $17,219 from

Portfolio.

For tax year 2005 petitioner and Mr. Kelly untimely filed a

joint Federal income tax return reporting total income of

$504,829, a tax liability of $139,619, an estimated tax penalty

of $2,168, and a balance due of $114,877. Of the total income,

$320,9749 was attributable to Mr. Kelly’s severance payment,

$55,625 was petitioner’s wages from Portfolio, and $123,750 was

7
Petitioner and Mr. Kelly erroneously calculated and
reported $97,955 on their 2004 tax return.
8
On their 2004 tax return they deducted $63,287 of Sean
Kelly, L.L.C.’s expenses from the payments Joseph and Suzanne
Kelly and Timothy Bell made.
9
Petitioner and Mr. Kelly indicated on their 2005 return
that the severance payment was the sole income of Sean Kelly,
L.L.C. They then reported a net profit of $345,527 after
deducting expenses of $48,447 from the gross income of Sean
Kelly, L.L.C. They further deducted from the severance payment
$24,553 of losses incurred in their horse venture.
 - 9 -

Mr. Kelly’s wages from Portfolio. In 2005 Portfolio withheld

$26,910 of their total wage income of $179,375. They did not

include a tax payment with their delinquent return. However,

petitioner and Mr. Kelly did partially offset the income

attributable to the severance payment with the loss Portfolio

distributed to petitioner and the loss incurred from their horse

venture. Mr. Kelly received the last severance payment in tax

year 2005.

Petitioner knew the tax balances due for 2004 and 2005

because Mr. Kelly showed petitioner the returns the accountant

had prepared. Petitioner contends that she agreed to sign the

their 2004 Federal income tax return because Mr. Kelly had agreed

to pay the balance due. Petitioner provided the same reason for

her signing of their 2005 Federal income tax return even when

their 2004 Federal tax balance remained outstanding at that time.

However, the balances due were never paid, prompting respondent

to file tax liens against petitioner and Mr. Kelly for the

outstanding balances due on their 2004 and 2005 returns on July

28 and October 20, 2006, respectively. Although two Notices of

Federal Tax Lien Filing and Your Right to a Hearing Under IRC

6320 with respect to the 2004 and 2005 tax liabilities were sent

to petitioner and Mr. Kelly on July 26 and on September 29, 2006,

respectively, neither of them requested a collection due process

hearing.
 - 10 -

In 2006 Mr. Kelly had a relapse and began to drink again.

After observing Mr. Kelly’s relapse, petitioner recognized her

own alcohol addiction and began to attend Alcoholics Anonymous

meetings. Her recovery led her to make a commitment to move out

of the house and improve herself. Nonetheless, petitioner and

Mr. Kelly filed a joint tax return failing to report income of

$18,858 from Portfolio for tax year 2006, causing a notice of

deficiency to be issued. To resolve this deficiency, they filed

an amended return on May 28, 2009, reporting offsetting losses

from Portfolio suspended from prior years.

In 2007 petitioner was laid off from Portfolio. The record

does not indicate whether petitioner sold her Portfolio stock.

Petitioner did not file a joint or separate return for the tax

year 2007 because she did not earn any income for that year. The

record does not indicate whether Mr. Kelly filed a separate

return for 2007.

During January and February 2008 petitioner received

$125,000 from Mr. Kelly to pay their expenses, including their

mortgage payments in arrears. Petitioner did not use any of that

money to pay their joint tax liability for the tax year 2004 or

2005. Petitioner was unemployed until the end of February 2008.

In May 2008, at the direction of his business partners, Mr. Kelly

sought treatment again for his alcoholism.
 - 11 -

On October 15, 2008, respondent received from petitioner a

Form 8857, Request for Innocent Spouse Relief, for tax years 2004

and 2005. On January 15, 2009, respondent issued a determination

denying petitioner relief from joint and several liability under

section 6015(b), (c), and (f) because petitioner failed to meet

the requirements for relief under section 6015. The notice of

determination explained that petitioner did not request relief

before the expiration of 2 years from the date of the first

collection action taken against her for the tax years at issue.

In response, petitioner timely filed her petition, seeking review

of respondent’s denial of equitable relief under section

6015(f).10

When petitioner submitted her Form 8857 in October 2008, she

reported her gross income as $43,200 per year and her expenses as

$69,600 per year for two adults and one child. The two adults

identified on petitioner’s Form 8857 were petitioner and her

adult daughter, a college graduate who was employed as a

substitute teacher. Petitioner acknowledged on Form 8857 that

she and Mr. Kelly had trouble paying bills during 2004 and 2005

because their expenses equaled or exceeded their income.

Petitioner also stated on that form that she was employed on

10
Though respondent’s determination denied her relief under
sec. 6015(b), (c), and (f), petitioner seeks relief only under
subsec. (f).
 - 12 -

February 27, 2008, and Mr. Kelly “[had] not worked for a long

time”.

Petitioner did not physically separate from Mr. Kelly until

February 2009 when she moved out of their home. In April 2009

petitioner timely filed a 2008 return with the status of married

filing separately.

In April 2009 the Appeals office reconsidered petitioner’s

request for relief under section 6015. On April 6, 2009,

petitioner submitted Form 433-A, Collection Information Statement

for Wage Earners and Self-Employed Individuals, reporting income

and expenses that were different from what she had reported on

her Form 8857 in October 2008. The Form 433-A reflected that per

year her gross income was $48,480 and her expenses were $48,480.

Petitioner attached to the Form 433-A bank statements for

3 consecutive months and three pay stubs stating that she

received $1,632.67, $1,599.06, and $1,630.06 on February 24,

March 9, and March 22, 2009, respectively. For each of those

consecutive months petitioner’s total deposits always exceeded

the wages she received. Petitioner’s January 2009 bank statement

indicates that petitioner made a total deposit of $3,687.06,

consisting of a $500 cash deposit on January 23, 2009, and two

check deposits of $1,541.67 and $1,632.67, on January 16 and 30,

2009, respectively. Petitioner’s February 2009 bank statement

indicates that petitioner deposited $600 in cash on February 17,
 - 13 -

2009, and two checks for $1,632.67 and $1,532.67 on February 12

and 26, 2009, respectively. Petitioner’s March 2009 bank

statement indicates that petitioner made a deposit of $3,599.06,

partly in cash and partly by check, on March 16; a check deposit

of $220 on March 17; and a check deposit of $1,530.06 on March

23.

Petitioner’s bank statements reflect monthly expenses

including: $311.17 for “Dish Network”, $235 for Verizon

Wireless, and over $150 of expenses for the horse of which she

retained possession after she left her and Mr. Kelly’s home in

February 2009.

Although petitioner testified that she currently has no

retirement account and her Form 433-A reflects the same, she

reported on her 2008 tax return an IRA account at Charles Schwab

& Co., Inc. Despite petitioner’s testimony that she had been

driving a Saturn 2000 for 10 years, the record indicates that she

drove a Ford 500 in 2005 and does not state that that car had

been repossessed. She stated on Form 8857 that she and her

husband were in arrears with their car payments.

As of September 2009 Mr. Kelly was evicted from the home in

which he and petitioner once lived, and his Corvette, which he

had purchased new in 2004, had been repossessed.
 - 14 -

On November 4, 2009, the Circuit Court for Oakland County,

Michigan, issued a judgment of divorce after Mr. Kelly failed to

participate in the proceedings.

OPINION

The Court must decide whether petitioner is entitled to

relief under section 6015(f).

Under section 6013(d)(3), a husband and wife filing a joint

return are jointly and severally liable for all tax for the

taxable year, including interest. Petitioner claims that she is

entitled to relief under section 6015(f) from the tax liability

reported on the joint tax returns she and Mr. Kelly filed for tax

years 2004 and 2005.

Section 6015 relieves a spouse of joint and several liability

in three situations: (1) If the spouse did not know or have

reason to know of a tax deficiency when the return was signed and

satisfies other conditions; (2) if a divorced or separated spouse

seeks to limit individual liability to the portion of the

deficiency attributable to him or her; and (3) in the case of a

deficiency or of tax shown on a return but not paid, if it is

inequitable to hold the spouse liable for the tax. See sec.

6015(b), (c), and (f), respectively. This last provision, found

in section 6015(f), applies only if relief is unavailable to the

taxpayer under the other two provisions. Because petitioner and

Mr. Kelly’s tax liabilities are attributable to nonpayment of tax
 - 15 -

as shown on the 2004 and 2005 tax returns, petitioner could not

have obtained relief under section 6015(b) or (c). See sec.

6015(b)(1)(B), (c)(1); see also Washington v. Commissioner, 120

T.C. 137, 146-147 (2003). She seeks relief instead under section

6015(f).

Standard of Review

The Commissioner may grant equitable relief from joint and

several liability if he finds that, taking into account all of

the facts and circumstances, it is inequitable to hold the

individual liable for any unpaid tax, and if relief is not

otherwise available under section 6015(b) or (c). The Court’s

determination is made in a trial de novo. See Porter v.

Commissioner, 132 T.C. 203, 210 (2009). In cases brought under

section 6015(f), the Court applies a de novo standard of review

as well as a de novo scope of review. See id. Petitioner bears

the burden of proving that she is entitled to equitable relief

under section 6015(f). See Rule 142(a). The Court has

jurisdiction to determine whether a taxpayer is entitled to

equitable relief under section 6015(f). See sec. 6015(e)(1)(A).

Therefore, the Court may consider evidence introduced at trial

which was not included in the administrative record. Both

parties submitted evidence at trial which was not available to

respondent’s Appeals officer. The Court has considered all

relevant evidence in making its determination.
 - 16 -

Threshold Requirements Under Rev. Proc. 2003-61, Sec. 4.01

Under section 6015(f) the Commissioner decides whether to

grant relief according to procedures the Secretary has

prescribed. These procedures have been described in Rev. Proc.

2003-61, 2003-2 C.B. 296. Under section 6015(e) and (f)(1), the

Court will consider all relevant facts and circumstances in

determining whether petitioner is entitled to relief. As

explained in Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297-

298, in order for the Commissioner to provide relief under

section 6015(f), the requesting spouse must satisfy all of the

following threshold conditions: The requesting spouse must have

filed a joint return for the taxable years for which relief is

sought; the requested relief must not have been available to the

requesting spouse under section 6015(b) or (c); assets must not

have been transferred between the spouses as part of a fraudulent

scheme by the spouses to hide income or avoid tax; the

nonrequesting spouse must not have transferred disqualified

assets to the requesting spouse; the requesting spouse did not

file or fail to file the return with fraudulent intent; and the

income tax liability from which the requesting spouse seeks

relief is attributable to an item of the individual with whom the

requesting spouse filed the joint return. For reasons set forth,

the Court finds that petitioner satisfies these threshold

requirements for equitable relief.
 - 17 -

Respondent denied petitioner relief under section 6015(f) on

the threshold ground that her request was untimely. The Court,

however, has recently held that section 1.6015-5(b)(1), Income

Tax Regs., imposing the 2-year limitation period in which to

request relief, is an invalid interpretation of section 6015.

See Hall v. Commissioner, 135 T.C. ___ (2010).11 This factor is

not dispositive of the outcome of this case.

Safe Harbor Requirements Under Rev. Proc. 2003-61, Sec. 4.02

Under the safe harbor of Rev. Proc. 2003-61, sec. 4.02,

2003-2 C.B. at 298, a spouse who has met the threshold

requirements of Rev. Proc. 2003-61, sec. 4.01, will ordinarily be

granted relief with respect to an underpayment of income tax

reported on a joint return if all of the following three elements

are satisfied: (1) On the date of the request for relief, the

requesting spouse is divorced or separated from the other spouse,

or has not been a member of the same household at any time during

the preceding 12 months; (2) on the date the requesting spouse

signed the joint returns, the requesting spouse had no knowledge

or reason to know that the requesting spouse would not pay the

11
In Hall v. Commissioner, 135 T.C. ___ (2010), this Court
adhered to its decision in Lantz v. Commissioner, 132 T.C. 131,
150 (2009), which had been reversed by the Court of Appeals for
the Seventh Circuit. See Lantz v. Commissioner, 607 F.3d 479
(7th Cir. 2010). Appeal here lies to the Court of Appeals for
the Sixth Circuit. See Golsen v. Commissioner, 54 T.C. 742
(1970), affd. 445 F.2d 985 (10th Cir. 1971).
 - 18 -

income tax liability; and (3) the requesting spouse will suffer

economic hardship if relief is not granted. Petitioner met the

first requirement because she separated from Mr. Kelly at the

time of filing the petition, and they were divorced when trial

ended. Nonetheless, she failed to satisfy the other

requirements.

Petitioner failed to meet the second requirement because she

had knowledge or reason to know that Mr. Kelly would not or could

not pay the tax liability shown on the return. Petitioner had

actual knowledge of all items, specifically the severance

payments, on the 2004 and 2005 returns. Mr. Kelly showed

petitioner the returns reporting tax balances due. According to

petitioner, she agreed to sign the returns because her husband

promised that he would pay the tax balances due. Petitioner

testified that she believed that Mr. Kelly either could be

entrusted to carry out the task or had the means to pay the taxes

owed. Nevertheless, petitioner failed to prove that it was

reasonable for her to believe that Mr. Kelly would carry out the

task of paying the tax for 2004 and 2005. Of petitioner and Mr.

Kelly, petitioner was the one responsible for handling the

finances and writing the checks to pay their tax for tax years

2001, 2002, and 2003. On the evidence petitioner presented, such

as Mr. Kelly’s drug and alcohol addictions and his erratic

behavior, the Court does not find that petitioner had reason to
 - 19 -

believe, when she signed the joint returns for 2004 and 2005,

that Mr. Kelly would pay the reported income tax liabilities.

When petitioner filed her request for innocent spouse relief

she acknowledged that she and Mr. Kelly had experienced financial

problems, that made it difficult to pay their basic household

expenses, let alone their tax liabilities. A requesting spouse’s

knowledge of marital financial difficulties may deprive the

requesting spouse of reason to believe that the nonrequesting

spouse will pay the tax liability. See, e.g., Stolkin v.

Commissioner, T.C. Memo. 2008-211. Moreover, petitioner is an

educated person with over 20 years of experience in the financial

industry advising others how to invest their money. Surely

petitioner had reason to realize that their finances were likely

to prevent Mr. Kelly from paying their tax. In addition,

petitioner had knowledge of the severance payments Mr. Kelly

received in 2004 and 2005 and apparently made no effort to insist

on a tax payment when they had access to those large amounts of

cash.

Last, petitioner failed to satisfy the third element

required under the safe harbor provision. The Court must

consider whether holding petitioner liable for the tax would

create an economic hardship for her. Economic hardship is

defined as the inability to meet “reasonable basic living

expenses.” See sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.
 - 20 -

Petitioner bears the burden of proving that paying these tax

liabilities would cause her an economic hardship. Petitioner

contends that her monthly income barely satisfies her expenses,

much less allows her to pay her tax liabilities. She fails to

carry her burden of proof in that regard. On the basis of the

bank statements petitioner provided, it appears that her monthly

income exceeds the amount she reported on Form 433-A. Contrary

to her testimony, her assets include Portfolio stock and an IRA

at Charles Schwab & Co., Inc. She has not shown which of the

monthly expenses listed on her Form 433-A qualify as reasonable

basic living expenses.

Relief Under Rev. Proc. 2003-61, Sec. 4.03

If relief is not available under Rev. Proc. 2003-61, sec.

4.02, then Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298-299,

sets forth a list of factors that the IRS considers in

determining whether to grant relief. These factors are: (1)

Marital status; (2) economic hardship; (3) knowledge or reason to

know; (4) nonrequesting spouse’s legal obligation; (5)

significant benefit; (6) good-faith effort to comply with tax

laws; (7) spousal abuse; and (8) mental or physical health. No

single factor will be determinative in any particular case and

each is weighed appropriately. As already discussed,

petitioner’s knowledge or reason to know that her spouse would

not pay the liabilities and her lack of economic hardship would
 - 21 -

weigh against granting relief. The Court then considers the

following factors to decide whether petitioner is entitled to

equitable relief.

1. Nonrequesting Spousal’s Legal Obligation

Under Rev. Proc. 2003-61, sec. 4.03(2)(a)(iv), 2003-2 C.B.

at 298, one factor is whether the nonrequesting spouse has a

legal obligation to pay the outstanding income tax liability

pursuant to a divorce decree or agreement. However, if the

requesting spouse knew or had reason to know when the agreement

was entered into that the nonrequesting spouse would not pay the

liability, then this factor will not weigh in favor of relief.

See id.

Although Mr. Kelly was held liable under the divorce decree

for the tax liabilities for the tax years 2004 and 2005,

petitioner failed to demonstrate that when the decree was entered

into, she had reason to believe that he would pay them.

According to petitioner’s testimony, Mr. Kelly was facing

economic hardship and emotional turmoil. Mr. Kelly neglected to

participate in the divorce proceeding, causing the circuit court

to enter a default judgment. Therefore, this factor will not

weigh in favor of relief.

2. Significant Benefit

It is considered a negative factor if the requesting spouse

received a significant benefit (beyond normal support) from the
 - 22 -

unpaid income tax liability. Petitioner used Mr. Kelly’s

severance payments to support her lifestyle. Petitioner’s gross

income for 2004 and 2005 was $56,250 and $55,625, respectively,

but the mortgage payments alone on the home she shared with Mr.

Kelly were $60,000 per year. Add to this the $1,500 per month

spent on car payments and thousands of dollars per year on

private schooling, groceries, cable television, horse expenses,

and other expenses. It is clear that petitioner greatly

benefited from the failure to pay the joint income taxes. The

Court concludes that this factor weighs against granting

petitioner relief under section 6015(f) from the 2004 and 2005

tax liabilities.

3. Compliance With Tax Laws

Another factor is whether petitioner has made a good-faith

effort to comply with the Federal tax laws in the succeeding

years.

The record is incomplete as to whether petitioner made a

good-faith effort to comply with the Federal tax laws in 2006 or

2007. In 2008 she made a good-faith effort when she timely filed

a return. On the record as a whole, the Court concludes that

this factor is neutral.

4. Abuse

The revenue procedure considers spousal abuse as a factor to

determine whether a spouse is entitled to relief under section
 - 23 -

6015(f). A history of abuse by the nonrequesting spouse may

mitigate the negative effect of a requesting spouse’s knowledge

or reason to know.

Petitioner does not argue that Mr. Kelly physically abused

her; instead, she contends that she was subjected to emotional

abuse under Mr. Kelly’s controlling behaviors and his addictions.

This Court has held that mental and emotional abuse could

mitigate the negative effect of a requesting spouse’s knowledge

or reason to know. See Nihiser v. Commissioner, T.C. Memo. 2008-

135. The Court finds that petitioner in her interactions with

her husband was not subjected to such emotional abuse. This

Court has hesitated, as it does here, to find such abuse where

the marital conflict has been understandably distressing but does

not significantly alter a requesting spouse’s behavior. See

Sjodin v. Commissioner, T.C. Memo. 2004-205 (finding that a

nonrequesting spouse’s controlling and secretive nature did not

rise to the level of abuse necessary to weigh as a factor in a

requesting spouse’s favor), vacated and remanded on another issue

174 Fed. Appx. 359 (8th Cir. 2006); Ewell v. Commissioner, T.C.

Memo. 1988-265 (finding no abuse where the nonrequesting spouse

was domineering but inflicted no physical abuse or mental

intimidation). Mr. Kelly may have abused illegal substances, but

there is no evidence that he threatened or intimidated petitioner

or their children, was verbally violent toward them, or behaved
 - 24 -

in an abusive manner towards others in front of petitioner or

their children. This factor is neutral because petitioner has

not shown that Mr. Kelly’s actions negate or mitigate the

negative effect of petitioner’s knowledge or reason to know that

Mr. Kelly would fail to pay the 2004 and 2005 tax liabilities.

5. Other Factors

Petitioner contends that Rev. Proc. 2003-61, supra, fails to

mention “the most significant factor”, which is that petitioner

did not know of her right to file a return with the status of

married filing separately or the consequences of filing a joint

income tax return. In evaluating whether to grant relief under

section 6015(f), the Court can weigh all relevant factors,

regardless of whether the factor is listed in Rev. Proc. 2003-61,

sec. 4.03. After considering the factor which petitioner

proffered, the Court does not find that it weighs in favor of

granting her relief. On the basis of the level of petitioner’s

education, the amount of her control over the filing of the tax

returns, and her extensive communication with the tax preparer,

the Court finds this argument unpersuasive. Even if petitioner

did not have a comprehensive understanding of tax laws, she had

reason to know of her joint and several liability for the taxes

shown on the joint returns. See Beatty v. Commissioner, T.C.

Memo. 2007-167.
 - 25 -

Additionally, the Court infers that petitioner failed to

satisfy any of her and Mr. Kelly’s 2004 and 2005 tax liabilities

when she had control over a large sum of money. There is no

evidence that in 2005 petitioner ever insisted on the payment of

their 2004 income tax liability of $97,288 when petitioner and

Mr. Kelly received the severance payment of $393,974. Nor was

any of the $125,000 she received from Mr. Kelly in 2008 applied

towards their tax liabilities for 2004 and 2005. Petitioner

instead spent the $125,000 for other purposes. The Court infers

from her actions that she was indifferent to her own

responsibility to satisfy the 2004 and 2005 tax liabilities.

Of the eight factors, only one supports granting relief to

petitioner. Nonetheless, this test cannot be mechanically

conducted. After considering all the factors and circumstances,

this Court determines that petitioner is not entitled to relief

under section 6015(f). Petitioner’s knowledge derived from her

intimate involvement in the financial matters of the marriage,

her knowledge of her husband’s extravagant spending habits and

substance abuse, and her knowledge of the protracted decline of

the marriage should have put her on notice that relying on Mr.

Kelly to pay the outstanding taxes owed on their joint Federal

tax returns would be a poor choice.
 - 26 -

Conclusion

For the reasons stated above petitioner is denied equitable

relief from joint and several liability under section 6015(f).

The Court has considered the remaining arguments of both

parties and, to the extent not discussed above, finds those

arguments to be irrelevant, moot, or without merit.

To reflect the foregoing,

Decision will be entered

for respondent.