                      T.C. Memo. 1996-9



                      UNITED STATES TAX COURT



              PATRICIA S. MAKALINTAL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 4980-93, 12793-93.    Filed January 18, 1996.



     Richard J. Sideman and Wendy Abkin, for petitioner.

     Debra K. Moe and Lloyd T. Silberzweig, for respondent.




             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   In these consolidated cases, respondent

determined deficiencies in and additions to petitioner's 1986,

1987, and 1988 Federal income taxes as follows:
                                  - 2 -

                                        Additions to Tax
                                 Sec.            Sec.           Sec.
     Year       Deficiency   6653(a)(1)(A)   6653(a)(1)(B)      6661

     1986       $590,852        $29,543            *           $147,713
     1987        254,088         12,704            *             63,522
     1988        280,624         14,031**         --             70,156

            *    50 percent of interest due on portion of
                 underpayment attributable to negligence.

         **     For 1988, the applicable addition to tax was
                determined under sec. 6653(a)(1).


     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions, the issues for decision are whether

Ambrosio G. Makalintal, petitioner’s former husband, and

petitioner underreported their income, and, if so, whether

petitioner qualifies as an innocent spouse under section 6013(e).



                             FINDINGS OF FACT

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

     In 1967, Mr. Makalintal and petitioner were married in the

Philippines, and until 1985 (when they moved to the United

States), Mr. Makalintal and petitioner were residents and

citizens of the Philippines.      Prior to their divorce in 1990,

Mr. Makalintal and petitioner had three children.
                                - 3 -

     In the Philippines, Mr. Makalintal was a wealthy

businessman, and he engaged in numerous business ventures.

Sometime in the late 1970's or early 1980's, Mr. Makalintal

organized Integrated Circuits Philippines, Inc. (ICPI), to

manufacture semiconductors in the Philippines.    Petitioner did

not work for or hold any position with ICPI.

     In 1970, petitioner graduated from the University of the

Philippines with a degree in statistics.    In college, petitioner

took courses in math, science, literature, and history.

Petitioner did not take any accounting or business-related

courses.

     From 1970 through 1977, petitioner worked for her father-in-

law, a judge in the Philippines, and she worked in a small print

shop owned by Mr. Makalintal.    For her father-in-law, petitioner

generally answered the telephone and typed letters.     At the print

shop, petitioner handled typesetting, mailed bills, deposited

payments, and paid two employees of the print shop in amounts

determined by Mr. Makalintal.    An accountant maintained the books

and records for the print shop.

        From 1978 until 1985, when Mr. Makalintal and petitioner

moved to the United States, petitioner did not work outside the

home.

     In the Philippines, Mr. Makalintal and petitioner enjoyed a

high standard of living.    They owned a large home.   They employed

three housemaids, a chauffeur, and two houseboys.      Mr. Makalintal
                                - 4 -

and petitioner’s three children attended private schools.

Mr. Makalintal and petitioner would occasionally take vacations

to a mountain resort in the Philippines.

     While living in the Philippines, petitioner knew the amount

of Mr. Makalintal's salary from ICPI, but petitioner did not know

how much income Mr. Makalintal was earning from his other

businesses and investments.    Mr. Makalintal did not discuss any

significant aspects of his businesses and investments with

petitioner.

     In December of 1984, Mr. Makalintal purchased for $600,000

investment real property in Tiburon, California (Tiburon

Property).    Mr. Makalintal made a cash downpayment of

approximately $300,000 and financed the balance of the purchase

price for the Tiburon Property.

     As indicated, in 1985, Mr. Makalintal, petitioner, and their

three children moved to the United States.    Mr. Makalintal was

issued by the United States a non-immigrant visa that was valid

through February of 1989.    Apparently, Mr. Makalintal now lives

in the Philippines.    The record does not indicate whether

Mr. Makalintal ever became a U.S. citizen.

     Petitioner is now a citizen of the United States and a

resident of Sunnyvale, California.

     In August of 1985, after Mr. Makalintal, petitioner, and

their three children moved to the United States, Mr. Makalintal

purchased for $466,438 a home in Greenbrae, California (the
                                - 5 -

Greenbrae home).   Mr. Makalintal made a cash downpayment of

$200,000 and financed the balance of the purchase price for the

Greenbrae home.    The Greenbrae home had 6 bedrooms and 3-½ baths.

     In 1985, Mr. Makalintal organized the following three

California corporations:    Integrated Systems and Support (ISS),

Magnacad International (Magnacad), and Magna Financial and

Management Corp. (MFMC) (hereinafter sometimes referred to as the

California corporations).

     ISS was organized to market and sell in the United States

semiconductors manufactured in the Philippines by ICPI.     Magnacad

was organized to purchase in the United States raw materials

needed by ICPI for the manufacture of semiconductors.   The

purpose for MFMC is not made clear in the record.

     Mr. Makalintal owned 100 percent of the stock in ISS and

MFMC.   Mr. Makalintal owned 30 percent, and Jose Santos,

petitioner's brother, owned 70 percent of the stock in Magnacad.

Petitioner did not own stock in any of the California

corporations.

     Mr. Makalintal was president, and petitioner nominally was

secretary of each of the above California corporations.

Petitioner, at the direction of Mr. Makalintal, signed the

articles of incorporation of each of the California corporations.

     During the years in issue, Mr. Makalintal managed and

operated each of the California corporations out of the Greenbrae

home.
                               - 6 -

     From 1985 through 1987, the only compensated employees of

ISS, Magnacad, and MFMC were Mr. Makalintal and Mr. Santos.

Petitioner was not, at any time, an employee of, nor was she paid

any compensation by, any of the above California corporations.

     From 1985 through 1988, however, petitioner performed in the

Greenbrae home a limited amount of clerical work for ISS,

Magnacad, and MFMC.   At Mr. Makalintal’s direction and under his

supervision, petitioner, at the Greenbrae home, would

occasionally enter data with respect to the California

corporations into a computer program that generated profit and

loss statements.   Petitioner did not have any training or

experience with accounting, and petitioner did not understand

much of the data entered into the computer.   Petitioner made no

analysis, and petitioner did not attempt to make an analysis, of

the profit and loss statements relating to the California

corporations.

     Petitioner did not know whether the data Mr. Makalintal gave

her to enter into the computer was accurate and complete.

Mr. Makalintal did not discuss with petitioner any significant

aspects of the California corporations, and he did not permit

others to talk to petitioner about the California corporations or

businesses.

     In March of 1986, Mr. Makalintal entered into a written

agreement to sell his 2 million shares of stock in ICPI to

Alfredo de Los Angeles for $3 million.   No downpayment was due,
                              - 7 -

and Mr. de Los Angeles agreed to pay Mr. Makalintal quarterly

installments of $150,000 in cash, with the first installment due

in October of 1987, until the $3 million purchase price for the 2

million shares of stock was fully paid.

     The agreement for the sale of ICPI stock to Mr. de Los Angeles

was negotiated and entered into by Mr. Makalintal and

Mr. de Los Angeles in the Philippines.    Mr. Makalintal did not

discuss this sales agreement with petitioner.    Petitioner did not

participate in the negotiations, and petitioner was not aware of the

terms of the sale.

     In December of 1987, Mr. Makalintal hired Lorna Ombawa as an

assistant to work for his California corporations, and in October

of 1988, Mr. Makalintal hired Grace Cruz to be his assistant.

After being hired, Ms. Ombawa, instead of petitioner, entered

data into the computer for purposes of maintaining profit and

loss statements relating to the California corporations.

     Ms. Cruz supervised Ms. Ombawa, made purchases for ISS, and

paid bills for each of the California corporations.

     At Mr. Makalintal’s insistence, Ms. Cruz and Ms. Ombawa also

lived in the Greenbrae home with Mr. Makalintal and petitioner.

     During the years in issue, Mr. Makalintal maintained

numerous bank accounts for his personal use and for use of each

of the California corporations.

     In 1986, 1987, and 1988, large transfers of funds occurred

from the various bank accounts maintained by Mr. Makalintal and
                               - 8 -

from other sources into account 01150, a personal bank account

maintained by Mr. Makalintal in his and petitioner’s names.

Generally, the funds transferred into account 01150 were then

withdrawn and transferred into account 01206, another personal

account maintained by Mr. Makalintal in his and petitioner’s

names or into various bank accounts of the California

corporations owned and operated by Mr. Makalintal.

     In 1986, 1987, and 1988, petitioner made occasional

withdrawals from account 01206 but only at the specific direction

of Mr. Makalintal.   Petitioner also wrote checks on account 01206

but only to payees and in amounts that were approved by

Mr. Makalintal.   In 1987, on account 01206, petitioner wrote 314

checks totaling $146,282, and in 1988, petitioner wrote 665

checks totaling $367,323.

     At the specific direction of Mr. Makalintal, petitioner

occasionally transferred funds among the various personal bank

accounts that Mr. Makalintal maintained and the separate bank

accounts of the various California corporations.   Mr. Makalintal

did not disclose to petitioner the source of the funds that she

was directed to deposit into the various bank accounts nor the

reason for the withdrawals and deposits that she was directed to

make among the various accounts.

     Other than data entry, the transfer of funds among the bank

accounts, and the writing of checks, as described above, all done

at the specific direction of Mr. Makalintal, petitioner was not
                               - 9 -

involved in the decisions and day-to-day operations relating to

the California corporations.

     In California, during 1986, 1987, and 1988, Mr. Makalintal

and petitioner employed a cook and a chauffeur, and two of their

children attended private schools.     During 1986, Mr. Makalintal

purchased a Ferrari and three Mercedes Benz automobiles.

Mr. Makalintal did not allow petitioner to drive any of the

automobiles.

     In November of 1986, Mr. Makalintal apparently sold or

deeded the Greenbrae home to Mr. Santos.    Mr. Makalintal and

petitioner, however, continued to live in the Greenbrae home.

Although the record is not clear, it appears that sometime before

1990, the Greenbrae home was deeded back to Mr. Makalintal and

petitioner.

     During 1986, 1987, and 1988, Mr. Makalintal and petitioner’s

standard of living remained at a level similar to that which they

had enjoyed in the Philippines.

     Throughout their marriage, petitioner lived in fear of

Mr. Makalintal.   He repeatedly physically abused petitioner.    On

numerous occasions, Mr. Makalintal threatened to kill petitioner

with a gun or a knife.   During 1986, 1987, and 1988,

Mr. Makalintal did not allow petitioner to leave the Greenbrae

home without his permission, and from late 1987 through early

1990, after Ms. Cruz and Ms. Ombawa began working for the

California corporations, Mr. Makalintal required petitioner to
                              - 10 -

spend most of each day in the master bedroom of the Greenbrae

home.   Mr. Makalintal also physically abused his children.

     In the fall of 1989, Mr. Makalintal informed petitioner that

he planned to divorce her.   In March of 1990, Mr. Makalintal

forced petitioner to travel with him to New York City to petition

a New York State court for a divorce.

     In April of 1990, petitioner discovered Mr. Makalintal and

Ms. Ombawa were having an affair in the Greenbrae home.   The next

day, petitioner moved out of the Greenbrae home, taking with her

only some of her personal belongings and a minimal amount of

cash.

     During the summer of 1990, petitioner began taking business-

related courses at a community college in San Mateo, California.

In the summer of 1990, petitioner received from Mr. Makalintal

$135,000 for support of herself and their three children.

     On August 3, 1990, Mr. Makalintal and petitioner’s divorce

was finalized, and a property settlement agreement was approved

by the New York State court under which petitioner was to receive

sole custody of their three children, ownership of the Greenbrae

home, $2,000 per month from Mr. Makalintal for child support and

alimony, and several of Mr. Makalintal's automobiles.

     Except, however, for the above-referenced $135,000 and

$10,553 that petitioner received on the sale of the Greenbrae

home, petitioner has not received any of the above support,

alimony, or property from Mr. Makalintal.   Petitioner now
                              - 11 -

supports herself and the three children with full-time employment

and has a modest standard of living.

     In June of 1991, petitioner graduated from the College of

San Mateo with a degree in business.

     For 1986, 1987, and 1988, petitioner and Mr. Makalintal

filed joint Federal income tax returns.    These returns were

prepared by Katie Yue, an independent certified public

accountant.   The table below summarizes for 1986, 1987, and 1988,

the gross income, itemized deductions, and taxable income that

were reported on these joint Federal income tax returns.


                    Gross        Itemized      Taxable
          Year      Income      Deductions      Income

          1986     $34,006       $89,352         $-0-
          1987      33,945        29,268          -0-
          1988      73,544        72,236          -0-


     On the tax return for 1986, no income was reported with

respect to Mr. Makalintal’s sale in the Philippines of his stock

in ICPI for $3 million.

     When Ms. Yue prepared Mr. Makalintal and petitioner’s 1986

joint Federal income tax return, Ms. Yue expressed concern to her

supervisor at the accounting firm that income reported on the

return was not sufficient to support Mr. Makalintal and

petitioner’s lifestyle.   Ms. Yue's supervisor then questioned

Mr. Makalintal specifically with respect to the income reported,

and Mr. Makalintal explained that additional nontaxable financial
                              - 12 -

resources were available to him from his business interests in

the Philippines.   Ms. Yue and her supervisor accepted

Mr. Makalintal’s explanation and finalized the return for

Mr. Makalintal’s and petitioner’s signatures.

     When Mr. Makalintal gave petitioner the 1986 joint income

tax return for her signature, petitioner reviewed the return, and

petitioner also specifically asked Mr. Makalintal how

Mr. Makalintal and she were able to afford such a high standard

of living in light of the income reported on the return.

Mr. Makalintal informed petitioner that he had access to funds in

the Philippines that had been earned in years prior to 1986 and

that were not reportable as income for 1986.

     Because, among other reasons, Mr. Makalintal frequently

represented that his business interests in the Philippines were

successful and because Mr. Makalintal used an accounting firm to

prepare the income tax return, petitioner accepted

Mr. Makalintal's explanation of the income reported on the 1986

return, and petitioner signed the return.

     In connection with her review and signing of the 1987 and

1988 joint Federal income tax returns, petitioner again asked

Mr. Makalintal about the income reported thereon in light of the

money they were spending.   Mr. Makalintal again reassured

petitioner that he had available nontaxable financial resources

from the Philippines.
                              - 13 -

     For 1986, 1987, and 1988, Ms. Yue also prepared the Federal

corporate income tax returns of the California corporations.

     During respondent’s audit for 1986, 1987, and 1988, and

during the litigation of these cases, petitioner has been unable

to obtain from Mr. Makalintal, who apparently has moved back to

the Philippines, information and records pertaining to the bank

accounts that Mr. Makalintal controlled and the purported sale of

Mr. Makalintal’s 2 million shares of stock in ICPI.   Based

largely on petitioner’s inability to provide adequate

information, respondent determined that Mr. Makalintal should be

treated as having received in 1986 the entire $3 million stated

sales price for the ICPI stock and as having no tax basis in the

stock.   Thus, respondent treated the entire $3 million stated

sales price as additional net long-term capital gain for 1986.

     For 1987 and 1988, apparently based just on bank deposits

analyses of the two bank accounts numbered 01150 and 01206

(limited information with respect to which petitioner was able to

provide to respondent), respondent determined that Mr. Makalintal

and petitioner realized unreported additional income of $690,922

and $969,584, respectively.

     Also for 1988, respondent determined that $31,335 was

improperly claimed as a home mortgage interest expense deduction
                             - 14 -

on Mr. Makalintal and petitioner’s 1988 joint Federal income tax

return.1

     Based on the trial evidence, respondent has adjusted

downward the unreported income that she now claims, under her

bank deposits analyses, should be charged to Mr. Makalintal and

petitioner for 1987 and 1988 from $690,922 and $969,584,

respectively, to $501,134 and $332,601, respectively.

     For 1986, 1987, and 1988, respondent also determined against

Mr. Makalintal and petitioner additions to tax for negligence

under section 6653(a) and for substantial understatements under

section 6661.

     As indicated, Mr. Makalintal apparently now resides in the

Philippines, is divorced from petitioner, and apparently is

ignoring his obligations to petitioner and his children under the

divorce decree and property settlement agreement and his

obligations to respondent under the notices of deficiency mailed

to him for the years in dispute.


                             OPINION

1986 Income from Sale of ICPI Stock and
Respondent’s Bank Deposit Analyses

     Section 453 provides generally that income from an

installment sale shall be taken into account under the


1
     The parties have stipulated that the $31,335 home mortgage
interest expense deduction claimed on Mr. Makalintal and
petitioner’s 1988 joint Federal income tax return was improper.
                              - 15 -

installment method.   Sec. 453(a).   An installment sale

constitutes a sale under which at least one payment is to be

received after the close of the year in which the sale occurs.

Sec. 453(b)(1).   For the years before us, the installment method

of reporting income relating to an installment sale generally

applies, unless the taxpayer elects otherwise.    Sec. 453(d)(1).

     Petitioner acknowledges that evidence regarding the sale of

Mr. Makalintal’s 2 million shares of ICPI stock is incomplete but

she argues, among other things, that no evidence indicates that

Mr. Makalintal’s purported sale of his ICPI stock for $3 million

was actually consummated or that Mr. Makalintal actually received

any portion of the $3 million stated sales price.    Further,

petitioner argues that under the written installment sales

agreement between Mr. Makalintal and Mr. de Los Angeles, any

income to be charged to Mr. Makalintal with regard to the

purported sale of the ICPI stock should qualify for installment-

sale treatment under section 453 and that (because none of the

sales proceeds was scheduled to be received in 1986) none of the

income relating to the sale should be taxable in 1986.

Petitioner also disputes respondent’s bank deposits analyses for

1987 and 1988.

     As explained, respondent takes the position that because of

the inadequacy of the evidence relating to the sale,

Mr. Makalintal’s sale of ICPI stock for a stated $3 million

should be treated as fully taxable to Mr. Makalintal in 1986.
                              - 16 -

     Further, in her post-trial brief and without amending her

answer, respondent raises, in the alternative, a new issue that

if the $3 million stated sales price for the sale of the ICPI

stock is not taxable as long-term capital gain in 1986, then the

scheduled installment payments to be received by Mr. Makalintal

in 1987 and 1988 (namely, $150,000 in 1987 and $600,000 in 19882)

should be charged to Mr. Makalintal for each of those years, in

addition to the additional adjusted income already charged to

Mr. Makalintal and petitioner under respondent’s bank deposits

analyses for those years.

     In response to respondent’s new alternative issue,

petitioner argues that respondent has not timely and properly

raised an issue herein as to the recognition, for 1987 and 1988,

of any income received by Mr. Makalintal on the installment sale

of his ICPI stock.   Further, petitioner argues that any income

that arguably might have been received by Mr. Makalintal in 1987

and 1988 from the installment sale should be treated as already

charged to Mr. Makalintal and to petitioner as part of

respondent’s bank deposits analyses for those years.

     On the limited record before us on this issue and in the

absence of any contrary evidence, we conclude that

Mr. Makalintal’s sale of ICPI stock to Mr. de Los Angeles was

2
     According to the sales agreement, in 1987 one quarterly
installment payment of $150,000 was to be received, and in 1988
four quarterly installment payments of $150,000 each were to be
received for a total of $600,000.
                               - 17 -

consummated consistently with the terms of the written sales

agreement.   Respondent’s bank deposits analyses for 1987 and 1988

indicate large unexplained deposits that may well represent

proceeds received in those years as payments on the sale of

Mr. Makalintal’s ICPI stock.

     We also conclude that Mr. Makalintal's sale of ICPI stock

qualifies as an installment sale under section 453 and that under

that method, because no sales proceeds were scheduled to be

received by Mr. Makalintal in 1986, no income relating to the

installment sale is properly includable in Mr. Makalintal and

petitioner’s joint income for 1986.

     Further, with regard to 1987 and 1988 and to respondent’s

new alternative issue, respondent has not amended her answer or

otherwise properly and timely raised an issue herein as to the

taxability in 1987 and 1988 of the scheduled installment payments

to be received by Mr. Makalintal in those years.   See Rules 40

and 41; Church of Scientology v. Commissioner, 83 T.C. 381, 524

(1984), affd. 823 F.2d 1310 (9th Cir. 1987); Professional Serv.

Corp. v. Commissioner, 79 T.C. 888, 924 (1982).    We shall not

consider this issue.

     With respect to the additional income respondent has charged

to Mr. Makalintal and petitioner for 1987 and 1988 using the bank

deposits analyses (namely, $501,134 for 1987 and $332,601 for

1988), petitioner bears the burden of proving that the deposits
                             - 18 -

are attributable to a nontaxable source.   Calhoun v. United

States, 591 F.2d 1243, 1245 (9th Cir. 1978).

     Petitioner argues generally that the various deposits that

respondent has treated as unexplained for 1987 and 1988 represent

transfers among the various bank accounts and are not properly

treated as income.

     With limited records available, petitioner established at

trial that several of the deposits into accounts 01150 and 01206

represented transfers among those two accounts, and respondent

has adjusted the unreported income determined from her bank

deposits analyses to reflect that evidence.    Petitioner has not

established that the remaining deposits reflected in respondent’s

bank deposits analyses are attributable to nontaxable sources,

and petitioner has not satisfied her burden of proving that the

remainder of the unexplained deposits should not be treated as

includable in Mr. Makalintal’s and her joint income for 1987 and

1988.

     For 1987 and 1988, the unexplained deposits of $501,134 and

$332,601, as determined and adjusted by respondent, are to be

treated as additional income and are to be charged to

Mr. Makalintal and to petitioner.


Innocent Spouse Issue

     In light of our findings and conclusion in favor of

petitioner with regard to 1986 on the substantive tax adjustment,
                              - 19 -

petitioner’s claim of innocent spouse status for 1986 is arguably

moot.   We address this innocent spouse issue for 1986, however,

as an alternative issue on which petitioner is relying.

Petitioner also argues that she qualifies as an innocent spouse

for 1987 and 1988 with regard to any understatements in tax

relating to Mr. Makalintal’s sale of his ICPI stock and to the

deposits into Mr. Makalintal and petitioner’s bank accounts.

     Generally, where a husband and wife file a joint Federal

income tax return, they are jointly and severally liable for any

tax due.   Sec. 6013(d)(3); Ness v. Commissioner, 954 F.2d 1495,

1497 (9th Cir. 1992), revg. 94 T.C. 784 (1990); Guth v.

Commissioner, 897 F.2d 441 (9th Cir. 1990), affg. T.C. Memo.

1987-522; Price v. Commissioner, 887 F.2d 959 n.3 (9th Cir.

1989), revg. an Oral Opinion of this Court.    An exception to this

general provision is found in section 6013(e), the so-called

innocent spouse provision.   A spouse qualifies as an innocent

spouse if the spouse establishes:   (1) A joint return was filed;

(2) the return contained a substantial understatement of tax

attributable to grossly erroneous items of the other spouse; (3)

in signing the return, the spouse seeking relief did not know and

had no reason to know of the substantial understatement; and

(4) it would be inequitable to hold the spouse seeking relief

liable for the understatement in question.    Sec. 6013(e)(1);

Pietromonaco v. Commissioner, 3 F.3d 1342, 1345 (9th Cir. 1993),
                                - 20 -

revg. T.C. Memo. 1991-361; Guth v. Commissioner, supra at 443;

Price v. Commissioner, supra at 961-962.

     Respondent concedes herein that Mr. Makalintal and

petitioner filed joint Federal income tax returns for 1986, 1987,

and 1988 and that any substantial understatements of tax

reflected thereon (relating to Mr. Makalintal’s sale of his ICPI

stock and to the deposits into Mr. Makalintal and petitioner’s

bank accounts) are attributable to grossly erroneous items of

Mr. Makalintal.   Respondent, however, argues that petitioner knew

or had reason to know of substantial understatements of tax

relating to the above items and that it would not be inequitable

to hold petitioner liable therefor.

     Generally, the question of whether a spouse knew or had

reason to know of a substantial understatement is governed by

whether "a reasonably prudent taxpayer under the circumstances of

the spouse at the time of signing the return could be expected to

know that the tax liability stated was erroneous or that further

investigation was warranted."    Stevens v. Commissioner, 872 F.2d

1499, 1505 (11th Cir. 1989), affg. T.C. Memo. 1988-63; see Griner

v. Commissioner, 951 F.2d 360 (9th Cir. 1991), affg. without

published opinion T.C. Memo. 1990-301; Bokum v. Commissioner, 94

T.C. 126, 148 (1990), affd. 992 F.2d 1132 (11th Cir. 1993).    The

standard is based on a reasonably prudent taxpayer in the

particular circumstances of the taxpayer involved in the case.

Pietromonaco v. Commissioner, supra at 1345.
                               - 21 -

     Factors relevant to the consideration of whether a spouse

had reason to know of a substantial understatement include:

(1) The spouse's level of education; (2) the spouse's involvement

in the business and financial affairs of the marriage and of the

transactions that give rise to the understatement; (3) the

presence of expenditures that appear lavish or unusual when

compared to the taxpayers’ accustomed standard of living and

spending patterns; and (4) the culpable spouse's evasiveness and

deceit concerning family finances.      Pietromonaco v. Commissioner,

supra at 1345; Price v. Commissioner, supra at 965; Stevens v.

Commissioner, supra at 1505.

     A spouse's specific and detailed knowledge of the underlying

transaction or business giving rise to the income omitted from

the return may, in certain circumstances, be treated as putting

the spouse on notice of the understatement.      McCoy v.

Commissioner, 57 T.C. 732 (1972); Mayworm v. Commissioner, T.C.

Memo. 1987-536.   Also relevant is the extent to which family

expenses, about which the spouse had knowledge or awareness,

exceeded reported income.   Pietromonaco v. Commissioner, supra at

1345; Hammond v. Commissioner, 938 F.2d 185 (8th Cir. 1991),

affg. without published opinion T.C. Memo. 1990-22.     Involvement

by a spouse in a family's financial affairs may give rise to a

reason to know of an understatement.      Shea v. Commissioner, 780

F.2d 561, 567 (6th Cir. 1986), affg. in part, revg. in part, and

remanding in part T.C. Memo. 1984-310; Sanders v. United States,
                               - 22 -

509 F.2d 162, 168 (5th Cir. 1975); Alberts v. Commissioner, T.C.

Memo. 1986-483.

     Physical or mental abuse may also be a factor in considering

a claim for innocent spouse relief.     Kistner v. Commissioner, 18

F.3d 1521, 1526 (11th Cir. 1994), revg. and remanding T.C. Memo.

1991-463.

     With regard to whether petitioner had reason to know of any

understatements of tax for 1986, 1987, and 1988, relating to

Mr. Makalintal’s sale of his ICPI stock and to the deposits into

Mr. Makalintal and petitioner’s bank accounts, petitioner argues

that she was not significantly involved in the affairs and day-

to-day operations of Mr. Makalintal's businesses and

corporations, that she wrote checks only on one account and only

at Mr. Makalintal's specific direction and approval, that she was

repeatedly physically abused by Mr. Makalintal, and that she did

not know or have reason to know of the substantial

understatements of tax.

     Respondent argues that because petitioner had a college

degree, was somewhat involved in Mr. Makalintal's corporations,

wrote many checks on at least one of the personal bank accounts,

and enjoyed a high standard of living, petitioner should be

treated as having known or as having reason to know of the

substantial understatements.

     We agree with petitioner.   During 1986, 1987, and 1988,

petitioner did not have any significant experience in accounting
                               - 23 -

or business.   Petitioner did not assist Mr. Makalintal in any

meaningful way in any of the income-producing activities of his

businesses or corporations.

     Petitioner was not aware of Mr. Makalintal’s sale of his

ICPI stock.    Mr. Makalintal did not disclose to petitioner the

source of the funds that were deposited into their bank accounts.

     Petitioner reviewed the 1986, 1987, and 1988 Federal income

tax returns, and she specifically inquired of Mr. Makalintal how

the income reported thereon could support their lifestyle.     Based

on her discussions with Mr. Makalintal about the 1986, 1987, and

1988 joint Federal income tax returns, petitioner reasonably

believed that funds that Mr. Makalintal had earned in prior years

from his businesses and investments in the Philippines

constituted the funds that were being used to support the

family’s lifestyle.    Petitioner credibly testified in this

regard.

     Petitioner's acceptance of Mr. Makalintal's explanation was

reasonable in light of the high standard of living they had

experienced in the Philippines and the apparent success of

Mr. Makalintal’s businesses and investments in the Philippines.

Ms. Yue and Ms. Yue’s supervisor accepted the same explanation

from Mr. Makalintal.

     During 1986, 1987, and 1988, Mr. Makalintal and petitioner’s

standard of living remained consistent with prior years.
                               - 24 -

       Further, in light of the frequent physical abuse by

Mr. Makalintal and Mr. Makalintal’s general refusal to discuss

his business and financial affairs with petitioner, we believe

that petitioner's inquiry was reasonable and sufficient to

satisfy her duty of inquiry with regard to the taxable income

reported on Mr. Makalintal's and her 1986, 1987, and 1988 joint

Federal income tax returns.    See Price v. Commissioner, supra at

966.

       The final element in considering whether petitioner

qualifies for innocent spouse relief is whether, in light of all

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

petitioner liable for the alleged understatement for 1986

relating to the sale of the ICPI stock and for the substantial

understatements for 1987 and 1988 that we have sustained relating

to the deposits into Mr. Makalintal and petitioner’s bank

accounts.    Sec. 6013(e)(1)(D); Flynn v. Commissioner, 93 T.C.

355, 367 (1989); sec. 1.6013-5(b), Income Tax Regs.    This issue

turns largely on the question of whether petitioner benefited

directly or indirectly from the understatements of tax.      Flynn v.

Commissioner, supra at 367; Bell v. Commissioner, T.C. Memo.

1989-107; sec. 1.6013-5(b), Income Tax Regs.    Normal support of a

spouse and children is not regarded as a significant benefit and

is to be considered in light of the circumstances of the parties.

Sanders v. United States, 509 F.2d 162, 168 (5th Cir. 1975);

Flynn v. Commissioner, supra at 367; Bell v. Commissioner, supra.
                             - 25 -

Also to be considered is whether the spouse claiming relief has

been deserted, divorced, or separated.     Kistner v. Commissioner,

T.C. Memo. 1995-66; sec. 1.6013-5(b), Income Tax Regs.

     Further, in deciding whether it would be inequitable to hold

a spouse liable for understatements of tax, it is relevant to

consider the probable future hardships that would be imposed on

the spouse seeking relief, if such relief was denied.    Sanders v.

United States, supra at 171 n.16; Dakil v. United States, 496

F.2d 431, 433 (10th Cir. 1974).

     Petitioner argues that it would be inequitable for her to be

held liable for any understatements of tax relating to

Mr. Makalintal’s sale of ICPI stock and to the deposits into

Mr. Makalintal and petitioner’s bank accounts because she did not

significantly benefit from any understatements of income and

because she and the children received the same level of financial

support from Mr. Makalintal during 1986, 1987, and 1988 that she

and the children had received in prior years and because she

received little from him in later years.

     Respondent argues that it would not be inequitable to hold

petitioner liable for any understatements in tax relating to the

above issues because Mr. Makalintal and petitioner lived a lavish

lifestyle in comparison to the income reported on the returns and

because petitioner was to receive substantial funds and property

from Mr. Makalintal under the property settlement agreement.
                               - 26 -

       During 1986, 1987, and 1988, petitioner's standard of living

and level of support from Mr. Makalintal did not significantly

increase in comparison to the standard of living and the level of

support in prior years.

       In 1990, after Mr. Makalintal and petitioner divorced,

petitioner received from Mr. Makalintal approximately $135,000

for living expenses and for support of the children.    Petitioner

was accustomed to a high standard of living, and the $135,000 was

at least consistent with her standard of living and did not

provide petitioner a significant benefit beyond her normal

support.    Aside from the $10,553 that petitioner received from

sale of the Greenbrae home, petitioner did not receive any of the

additional property, alimony, or child support to which she was

entitled under the property settlement agreement.

       Throughout their marriage and during 1986, 1987, and 1988,

Mr. Makalintal physically abused petitioner, and petitioner lived

in constant fear of him.    Mr. Makalintal and petitioner are now

divorced.    Mr. Makalintal apparently is now living in the

Philippines and refused to provide petitioner with certain

records relevant to the issues in these cases.

       Denying petitioner innocent spouse relief in these cases

would likely cause very substantial hardship to petitioner.

Mr. Makalintal has abandoned petitioner and left her to deal with

substantial income tax understatements that are attributable to

him.    Petitioner has had to pursue further education to support
                             - 27 -

herself and her children, living well below her former standard

of living, while receiving virtually no support from

Mr. Makalintal.

     We conclude that it would be inequitable to hold petitioner

liable for any income tax understatements sustained herein with

respect either to Mr. Makalintal’s sale of his ICPI stock or to

the deposits into Mr. Makalintal and petitioner’s bank accounts

and that petitioner qualifies for innocent spouse relief under

section 6013(e)(1) with respect thereto.


Mortgage Interest Expense Deduction

     Petitioner has not specifically argued that she qualifies

for innocent spouse relief with respect to that portion of the

income tax understatement for 1988 relating to the erroneous

$31,335 home mortgage interest expense deduction.   We conclude

that for 1988 petitioner is liable for the portion of the 1988

income tax understatement relating thereto.


Additions to Tax

     Our conclusion herein that petitioner qualifies for innocent

spouse relief as to the portion of any understatements in tax for

1986, 1987, and 1988 (that are attributable to the sale of

Mr. Makalintal’s ICPI stock and to respondent’s bank deposits

analyses) also relieves petitioner from any liability for the

additions to tax relating thereto.    See flush language of section

6013(e)(1).
                             - 28 -

     Because, however, the erroneous mortgage interest expense

deduction is not attributable to Mr. Makalintal, the innocent

spouse provision of section 6013(e)(1) does not immunize

petitioner from liability for the additions to tax for 1988 that

are attributable to that adjustment.   Petitioner has not provided

any evidence as to the basis for this claimed deduction, and

petitioner has not provided any substantial authority or

reasonable cause for claiming this deduction.

     We sustain for 1988 the portion of the negligence addition

to tax under section 6653(a)(1)(A) and (B) and the portion of the

substantial understatement addition to tax under section 6661(a)

that are attributable to the understatement in tax for 1988 that

relates to the claimed mortgage interest expense deduction.


                                         Decisions will be entered

                                   under Rule 155.
