TAX COURT OPINION

Case: Kathy Lorraine Stolkin
Docket Number: 5203-06
Judge: Kroupa
Opinion Type: memo
Filed: 09/04/2008
Pages: 14

RECORDED ~LL RP SERVId T .C . Memo . 2008-21 1 UNITED STATES TAX, COUR T KATHY LORRAINE'STOLKIN, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 5203-06 . Filed September 4, 2008 . Kathy Lorraine Stolkin, pro se . Steven M . Roth , for respondent . MEMORANDUM FINDINGS OF FACT AND OPINIO N KROUPA, Judge : -This .case arises from ..a request for relief from joint and several liability under section 6015(f) for the year 1993 .1 Respondent deniedpetitioner' s request for- relief, and petitioner timely filed a petition . The issue for decision: 1 All section references are to the Internal Revenue Code, unless otherwise indicated . SERVED SEP -42M is whether petitioner is entitled to relief from joint and several liability under section 6015(f) . We hold that she is 2 'not . FINDINGS OF FAC T Some of the facts have been stipulated and are so found . The stipulation of facts and the accompanying exhibits are incorporated by this reference . Petitioner resided in California at the time she filed the petition . Petitioner married Mr . Stolkin in 1981 . They had one son in 1982 and a second son in 1985 . The Stolkins enjoyed a relativel y avish lifestyle, with live-in maids as well as pool and ground s help . Mr . Stolkin earned over $100,000 a year as a pilot for Federal Express, formerly known as the Flying Tigers, and had separate trust fund and oil income . The Stolkins' only bank account was a joint checking account into which Mr . Stolkin would transfer funds . Petitioner paid, al l the household expenses from the joint checking account . I n ddition, she would pay all the invoices for any items Mr . tolkin had purchased . -Petitioner admitted that Mr . Stolkin wa s A compulsive spender and a shopaholic . She worried about his, spending because she knew that they did not have the income t o over all their expenses and his purchases . Mr . Stolkin purchased guns, a gun safe, a customized motor home, and, at one 3 point, purchased anew truck every few months . He made no efforts to conceal his excessive purchases from petitioner- . The Stolkins experiencedfinancial difficulties because their expenses generally exceeded their income . The couple sold their $2 .2 million Beverly Hills home in 1990-and relocated to a $900,000 home in Ojai, California, to . reduce costs' . They . used $500,000 of the proceeds from the-Beverly Hills sale as a dow n .payment (and thus had $500,000 of equity) in the Ojai house . The house was'titledin-the .names of both petitioner and Mr . Stolkin . The Stolkins continued to experience .financ.ial .difficulties-after their move to Ojai.,. Mr . .Stolkin's ..spending habits-exacerbated the Stolkins'. financial problems and strained their marriage- , The couple "received a $220,000 distribution from Mr .. Stolkin's individual retirement account (IRA) in .1993 ; an d petitioner was .aware-of this : She discussed the distribution with Mr . Stolkin before they'received the,money, . ..and'she used the money to pay the expenses that were necessary to maintain the comfortable lifestyle to which the Stolkins had grown accustomed . The Stolkins' marriage seemed'tobe plag-ued with financial ... problems, however,'and eventually they filed 'for bankruptcy in June-1994 . 2 2 Mr .Stolkin continued to fail tomake .mortgage payments and the Stolkins' Ojai home was foreclosed after 1994 . 4 The Stolkins filed a joint Federal income tax return fo r 1993 on October 16, 1994, approximately 4 months after filing bankruptcy .3 The return for 1993 showed'an $81,559 ta x 1~ nderpayment that was attributable, in part, to the $220,000 IRA distribution. Petitioner knew that there was an underpayment for which 'she was liable, but petitioner did not assist,wit h preparation of the return, nor did she discuss the return with Mr . Stolkin . The Stolkins divorced in June 1995 . The California divorc e ourt ordered Mr .'Stolkin to pay petitioner $4,500 in monthl y spousal support and a separate amount for child support . Petitioner was earning $1,000 per month in wages at that time . I In addition, petitioner received half of her husband's Federal Express pension and will be entitled to between $900 and $100 0 per month from the pension when she reaches the age of .59 in 2009 . Mr . Stolkin also agreed to hold petitioner harmless from the Federal income tax liability for 1 :993 as part of the divorce settlement . Petitioner filed a request for section 6015 relief o f $55,473 in 2004, claiming that a denial of relief would be inequitable and would impose undue hardship on her . Petitione r asserted that most of the tax liability was attributable to her i6 The Stolkins were granted two extensions for filing the return for 1993 . ex-husband's separate property and that . at the time the return .was filed, petitioner reasonably believed her ex,-husband would pay the tax . Petitioner further' asserted that it would b e inequitable to hold her liable for the-Munderpayment when he'r, .ex- husband earned far-more . than petitioner's $60,000 salary and when .. .petitioner had mortgage payments to make while her ex-husband lived in property owned,by .his mother . At the time she filed th e request for relief, petitioner :owned a town house valued at- $500,000 with $80,000 in equity and leased a BMW at $600 pe r month . Petitioner was .also attending .law school . Responden t denied petit=ioner ' s request for relief,, and petitioner filed a stand-alone petition to,=this Court. . Petitioner failed to timely . file a return for 1997 . . Petitioner's ex-husband has not filed a .tax return for .=the past 12 years . OPINIO N We are asked to decide whether ., respondent erred in denying petitioner relief from an .unpaid tax liability that was reporte d some 4 short-months after the Stolkins filed for bankruptcy . Petitioner argues that, although she was aware there was an underpayment, she reasonably believed-that Mr .-St,olkinl.would, p y the underpayment as the taxes had :,always been paid in the past . Petitioner further argues that it . is ::inequitablepto hold her 6 liable when the underpayment was attributable to her ex-husband and her ex-husband had the means to pay it . Only section 6015(f) applies as this case involves an underpayment of taxes shown on a joint return for 1993 .9 The Commissioner has the discretion to relieve the spouse or former spouse of joint liability if, taking into account all ,the fact s and circumstances, it is inequitable to hold that spouse liable for any deficiency or unpaid tax . Sec . 6015(f) ; sec . 1 .6015- 4(a), Income Tax Regs . We begin with whether we have jurisdiction . This Court ha s jurisdiction to determine whether section 6015(f) .relief i s warranted after a request for relief has been denied by the !I Commissioner . See sec . 6015(e)(1) . The Court may consider vidence outside. the administrative record when determining whether relief should be granted . Porter v . Commissioner , 13 0 . T .C . _ (2008) . The Commissioner has outlined procedures for determinin g whether a requesting spouse qualifies for equitable relief unde r '~ection 6015(f) . See Rev . Proc . 2003-61, 2003-2 C .B . 296 . Th e Ii 9 Married taxpayers who elect to file a joint return are jointly and severally liable for'the entire tax due . See sec . 60l3(d)(3) . A spouse or former spouse may petition th e Commissioner for relief from joint and several liability in certain circumstances . See sec . 6015(a) . In cases involving an nderpayment of tax, as here, sec . 6015(b) and (c) does not appl y but equitable relief may be available under subsec . (f) . Sec . 1 .6015-4, Income Tax Regs . ; Rev . Proc . 2003-61, sec . 2 .04, 2003-2 C .B . 296, 297 . requesting spouse must .meet seven threshold conditions before the Commissioner will . consider, a .request,for relief .. Rev . Proc . 2003-61, sec . 4 .01, 2003-2C .B at 297 . The panties agree that petitioner has met the preliminary requirements for relief . I . Safe Harbor for-Section 6015(f) Relief ' , .We now turn to whether petitioner .satisfies the three conditions of a safe :. harbor under section-1,6015(f,) that the . Commissioner has established . See Gonce v . Commissioner , T .C . Memo . 20'07-328 ; Billings v . Commissioner, T .C . Memo . 20,07-234 .; Rev . Proc . 2003-61, sec . 4 .02, -2003-2,C ._B . at .298 ._ Equitable relief will ordinariTy be granted if the requesting spouse fulfills all three conditions of the safe-harbor .- The parties agree that petitioner satisfies' the condition that she-is no longer married to Mr . Stolkin . Id sec. 4 .02(cid:127)(1)(a) In'dispute is whether (a) petitioner at . the time .of signing the return had no knowledge or reason-'to know that Mr . Stolkin would not pay .the tax liability, and (b) pe''titioner .would suffer economic hardship if relief is not granted . . "See id . sec . .4 .02(1)(b) and '(c) . . We address these two .condition.s in turn to . determine'whethe r petitioner comes within the safe harbor . A . Petitioner Had Knowledge or Reason To Know -That Mr . Stolkin Would Not Pa y the Liabilit y Respondent argues that it was~.not reasonable for petitioner . to think that Mr . Stolkin'would pay the tax only 4 months after 8 filing for . bankruptcy . We agree . Petitioner had reason t o believe at the time she signed the return that her ex-husband- Iould not pay the joint income tax liability . Moreover, we have consistentl found that a requesting spouse's knowledge of the couple's financial difficulties deprives the requesting spouse of reason to believe that his or her ex-spouse will pay the ta x iability . Gonce v . Commissioner , supra ; Butner v . Commissioner , T .C . Memo . 2007-136 . The Stolkins' financial difficulties throughout their 14- year marriage should have put petitioner on notice that Mr . Stolkin would not pay the tax liability . Mr . (cid:127)Stolkin did no t hide his shopaholic tendencies from petitioner . Moreover, I petitioner was aware that the couple's expenses exceeded their income because she paid the household expenses and all the bills, including bills for Mr . Stolkin's "toys ." We agree wit h respondent that petitioner's testimony that she believed her ex- husband would pay the tax liability is disingenuous give n petitioner's knowledge of the Stolkins' financial difficulties and her ex-husband's financial irresponsibility . We also reject petitioner's argument that it was reasonable for her to assume that Mr . Stolkin would pay the tax . liability with the $500,000 of equity they had in the Ojai house . First , he relevant date for determining the requesting spouse's knowledge is the time at which he or she signs the tax return . See Rev . . Proc . .2003-61 ., sec . .4 .02 (1) (b ) . -Second, any ' refinancing'- would have to have_involved-,petitioner ;because her name was on : the title tothe"Ojai .property . Petitioner did not provide any evidence that she assisted her ex-husband with obtaining a home, equity loan . Moreover ; Mr . Stolkin's history ..of,°spending beyond the couple's means .belies p'etitioner'-s alleged belief . We therefore find that petitioner had reason to- know .at the time she . signed the return that her ex-husband would not pay the-joint tax liability . B . Petitioner. Will Not . Suffer Economic' Hardship If Relief Is Denie d We now address whether petitioner will suffer economic hardship if relief is denied . We find that she will not . A denial of section 6015(f) .relief imposes economic hardship if i t prevents the requesting spouse from being able to pay his or her reasonable basic living expenses . Butner v . Commissioner , supra Sec . 3 .01 .6343-1(b)(4)(i), .-Proced . & Admin . Regs . Reasonabl e basic living expenses are based on the taxpayer's circumstances but do not include amounts needed to maintain a luxuriou s standard of living . Sec . 301 . 6343 -1(b)(4)(i ), Proced . & Admin . Regs . Relevant circumstances include the taxpayer ' s age , ability to earn an income , number of dependents and status as a dependent . Sec . 301 .6343-1(b)(4)(ii)(A), Proced . & Admin . Regs . The amount of property available to satisfy the taxpayer's 10 expenses is also .a relevant factor . Butner v . Commissioner , supra ;, sec . 301 .6343-1(b) (4) (i-i) (D) , Proced . & Admin . Regs . Petitioner was receiving $4,500 in monthly spousal support and $1,000 per month in salary at the time she filed the request for relief in the amount of $55,473 . Petitioner had asset s available to satisfy the tax liability, including a $.500,00 0 townhouse with $80,000 of equity and an interest in her ex- husband's pension . Petitioner's monthly expenses included $600 'monthly lease payments on a BMW . Furthermore, responden t determined that, based on petitioner's spousal support and salary, petitioner had monthly disposable income of $600 which could have been applied to the tax liability . Petitioner argues that she would suffer economic hardship i f she were held liable for the joint tax liability but her husband would not . Petitioner argues that her ex-husband, unlike her , has no monthly housing expense because he lives in a place owned by his mother . In addition, he earns much more than petitioner . We find these factors irrelevant . This Court was not asked t o 11 decide who should bear the burden of the tax liability . Instead, our focus is on whether petitioner is entitled to relief from the liability . We find that petitioner had the means to make monthly is payments to reduce the tax liability and that denying her relie f ill not impose economic hardship on her . 11 . II . Balancing Test for Determining Whether Section"6015(f) Equitable . Relief Would Be Appropriat e When a requesting spouse fails to satisfy the safe harbor conditions, the Commissioner . may determine through a balancing test whether equitable relief is appropriate . The Commissioner has listed relevant positive, neutral, and negative factors to b e weighed by the C(cid:127)ommissioner'in determining relief . See Rev . Proc . 2003-61, sec . .4 .03, 2003-2 C .B . at 298 . The factor s include whether the requesting spouse (1) had knowledge or reason to know that the nonrequesting spouse would not pay the income tax liabil-ity ; (2) would suffer economic hardship if relief wer e denied ; (3) complied with income tax laws in years after the year at issue ; (4) received significant economic benefit from the items giving rise to the liability ; (5) was abused by th e nonrequesting spouse ; and (6) was in poor health when signing the return or requesting relief ; and (7) whether the nonrequesting spouse had a legal obligation to pay the outstanding liability . Id . sec 4 .03(2) . The list is nonexhaustive and no single factor is determinative . Id . We address each of the factors in turn . A . Knowledge That Petitioner's Ex-Spouse Would Not Pay the Liability . We have already expl'ained :our.f.inding that petitioner did . not have-reason-to believe that her ex-husband would pay the tax liability . This factor weighs against' relief . R B . Economic Hardshi p 1 2 We have already explained our finding that a denial of relief would not impose economic hardship on petitioner . This I° ,factor weighs against relief . C . Compliance With Tax Laws After 199 3 Petitioner admits that she failed to timely file a return for 1997 . This factor weighs against relief . Petitioner urges ii is to consider her compliance with tax laws in comparison wit h her ex-husband's failure toicomply with tax laws for the past 12 years . We find petitioner's ex-husband's lack of compliance to be irrelevant . It does not shift the balance in favor of relief . I D . Economic Benefit From Items Giving Rise to Liabilit y A significant benefit for purposes of section 6015(f) is an y benefit in excess of normal support . Sec . 1 .6015-2(d), Income Tax Regs . Respondent concedes that there is no evidence that petitioner benefited significantly from the unpaid tax liability . We agree with respondent and find this factor weighs in favor of relief . E . Abuse by Nonrequesting Spous e Petitioner argues that her ex-husband ' s financial irresponsibility constituted a form . of emotional abuse against p titioner . We have indicated , however , that nonphysical abuse will weigh in favor of relief only where it is severe enough t o incapacitate a requesting spouse in the same manner he or she q. 13 would be incapacitated by physical abuse . Nihiser v . Commissioner , T .C . Memo . 2008-135 . There is no evidence that petitioner's ex-husband's spending incapacitated petitioner to that extent or that his spending was greater in 1993 than when their marriage began . We find this factor to be neutral . F . Poor Healt h Petitioner did not allege that she was in poor . health, when she signed the petition . Respondent determined that this factor is neutral, and we have no information to find otherwise . G . Nonrequesting Spouse's Legal Obligation To Pay Liability Petitioner argues that she should be relieved of liability for the tax underpayment because the divorce agreement specifically required her ex-spouse to pay Ithe underpayment for 1993 . Respondent does not question the validity of the California court order . A legal obligation to pay is not a persuasive factor in favor of relief, however, if the requesting spouse had reason to believe- upon entering the agreement that it would not be upheld by the nonrequesting spouse . Rev . Proc . 2003-61, sec . 4 .03(2)(a)(iv), 2003-2 C .B . at 298 . Petitioner wa s aware of her ex-husband's tendency to spend beyond his means . find that petitioner had reason to believe, at the time th e divorce agreement was issued in 2001, that her ex-husband would not pay the underpayment . Thus, petitioner's ex-husband's legal obligation under the divorce agreement does not weigh in favor of 14 relief . We agree with . respondent that Mr . Stolkin's legal obligation to pay the tax liability is a neutral factor . . H . Additional Factors Cited by Petitione r Petitioner cites two additional factors that we do not find to be persuasive . First, petitioner argues that it i s ;~II 'inequitable to deny her relief because the underpayment is lattributable in part 'to the separate property of her ex-husband . Petitioner was aware of the underpayment and agreed to joint an d everal liability with Mr . Stolkin when she signed the return , however, and she could have filed a married filing separate return . Petitioner argues further that the IRA distribution was the separate property of Mr . Stolkin . We agree with responden t hat the IRA distribution became community property once it wa s II commingled in the Stolkins' joint checking account . See Gee v . commissioner , 127 T .C . 1, 4-5 (2006) . We find these additiona l factors to be neutral . III III . Conclusio n After taking into account all the facts and circumstance s presented, we find that petitioner is not entitled to equitable relief under section 6015(f) . III To reflect the foregoing, Decision will be entered fo r respondent .