                  T.C. Memo. 1996-69



                UNITED STATES TAX COURT



   NANCY SILVERMAN AND ESTATE OF SHELDON SILVERMAN,
 DECEASED, NANCY SILVERMAN, EXECUTRIX, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 20324-89.            Filed February 20, 1996.



     H invested $100,000 in an arrangement, as a result of
which a $1,600,000 Schedule C deduction was claimed on the
1981 tax return. W did not see or sign this tax return, but
the parties agree that it was a joint tax return. As a
result of H's income tax withholding and excess F.I.C.A.
withholding, H's and W's 1981 joint tax return reported
payments of $128,733, all of which was claimed as a refund.
In September 1982 respondent (R) refunded $74,360.39 plus
interest by check, which H deposited in one of his
individual checking accounts, and quickly spent. At the
same time, R transferred the remaining $54,372.61 of 1981
payments to H's and W's 1980 tax liability account, leaving
a zero balance in the 1980 tax liability account. H died in
1986, and his estate was insolvent. Later in 1986, W filed
claims for refund of 1979, 1980, and 1981 taxes, on account
of net operating loss carrybacks from 1982. (A similar
$1,600,000 Schedule C deduction had been taken on H's and
                               - 2 -


     W's 1982 joint tax return.) R abated $55,923 of H's and W's
     1980 tax liability, which (with interest, etc.) resulted in
     W’s receiving a refund check totalling $128,715.36 in 1988.

          1. Held: The 1981 grossly erroneous item (the
     $1,600,000 deduction) is an item of H. Sec. 6013(e)(1)(B),
     I.R.C. 1954.

          2. Held, further, when the tax return was signed, W
     did not know, and had no reason to know, that there was a
     substantial understatement of tax for 1981. Sec.
     6013(e)(1)(C), I.R.C. 1954.

           3. Held, further, in 1988 W received a substantial
     benefit from the 1981 grossly erroneous item (the $54,372.61
     that had been transferred from the 1981 account to the 1980
     account), and so it is not inequitable to hold W liable for
     the substantial understatement of 1981 tax resulting from
     that grossly erroneous item. Sec. 6013(e)(1)(D), I.R.C.
     1954.



     Gary S. Weinick, for petitioners.

     Halvor N. Adams III, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     CHABOT, Judge:   Respondent determined deficiencies in

Federal individual income tax and additions to tax under sections

66591 (valuation overstatements) and section 6661 (substantial

understatement of liability) against petitioners as follows:

                                         Additions to Tax
                                       Sec.                 Sec.
     Year      Deficiency              6659                 6661


1
     Unless indicated otherwise all section references are to
sections of the Internal Revenue Code of 1954 as in effect for
1981.
                                        - 3 -


       1981           $185,361              $55,608                  ---
                                                               1
       1982             27,232                8,170                $6,808
1
    Determined as alternative to sec. 6659 addition to tax.

Respondent also determined that interest on the entire

deficiencies for 1981 and 1982 is to be computed under section

6621(c).

       After concessions,2 the issue for decision is whether

petitioner Nancy Silverman qualifies as an innocent spouse under

section 6013(e) with respect to the 1981 tax deficiency.

                                 FINDINGS OF FACT

       Some of the facts have been stipulated; the stipulations and

the stipulated exhibits are incorporated herein by this

reference.

       When the petition was filed in the instant case, petitioner

Nancy Silverman (hereinafter sometimes referred to as Nancy)

resided in Cincinnati, Ohio.            The will of Sheldon Silverman

(hereinafter sometimes referred to as Sheldon) was admitted to

probate in the Surrogate's Court for Bergen County, New Jersey,

and that Court appointed Nancy as Executrix of Sheldon's estate.

Background




2
     Respondent has conceded all the additions to tax.
Petitioners have conceded the deficiencies, the increased
interest under sec. 6621(c), and petitioner Nancy Silverman's
ineligibility for innocent spouse status for 1982.
                                 - 4 -


     Nancy and Sheldon were married on August 25, 1974, and they

remained married and lived together until Sheldon's death on

August 9, 1986.   They had two children by this marriage--Joseph,

born in 1978, and Melanie, born in 1980.    Both Nancy and Sheldon

had earlier marriages that ended in divorce in 1974.    Sheldon had

a child from his earlier marriage--Lee, born in 1967.    From 1974

through 1986 Sheldon made $250 weekly alimony payments to his

former wife.   Nancy did not receive alimony from her former

husband; she did receive about $30,000 (the balance in her and

her former husband's joint bank account) at or around the time of

her divorce.   At the time of her divorce, Nancy also received

corporate stock worth about $8,000-9,000 from her employer's

profit-sharing plan.    In addition, she had her car and personal

items such as clothing.

     Nancy was born and grew up in Cincinnati, Ohio.    She

received a B.A. degree in English literature from the University

of Cincinnati in 1964.    Nancy got married in 1962, while she was

a junior in college.    Her first husband also was a college

student at that time.    Nancy worked part-time while she was a

student, and after graduation she worked full-time in a

department store.   Nancy and her first husband filed joint tax

returns during their marriage.    These tax returns were fairly

simple, especially those for the years when Nancy and her first

husband were students.    Nancy's first husband prepared their tax
                                 - 5 -


returns, and Nancy signed them after they were prepared.    Nancy

filed for divorce in 1973, and the divorce became final in March

1974.   In 1974, after her divorce, Nancy moved to the New York,

New York, area, intending to work in that city.   She did not get

a job in New York--instead she met and married Sheldon.    At this

time Sheldon was already an established and successful

businessman; he was a part owner of one of the largest junior

dress manufacturers, Dawn Joy.

     After Nancy and Sheldon were married, Nancy moved into

Sheldon's New York apartment, and spent her days decorating the

apartment, learning her way around New York, taking tennis

lessons, dining with friends, and going to the theater.    In 1975

Nancy and Sheldon jointly bought, and in 1976 moved into, a house

in Demarest, New Jersey.   The purchase price was $135,000, for

which they took out a $75,000 purchase money mortgage.    This

house was their home throughout the rest of their married life.

Nancy's and Sheldon's comfortable lifestyle remained

significantly the same throughout their marriage.

     Nancy and Sheldon had a "traditional" marriage.   Sheldon was

the breadwinner-businessman, and Nancy was the home-manager, or

"housewife".   Sheldon took care of the finances and made all of

the investment decisions, as he had done before their marriage.

Sheldon separated business from home; he conducted all business

from his office in Manhattan.    Sheldon did not have an office in
                                 - 6 -


their home; he did not do any "paperwork" at home.    Sheldon took

his mail, which Nancy separated from her mail, and which Nancy

did not open, into his office.    While he was a part owner in Dawn

Joy, Sheldon kept his books and records at Dawn Joy's office

rather than at his home.   Sheldon insisted upon this; this was

Sheldon's longstanding policy as to how he managed his

activities.

     Nancy was in charge of the household; for example, she

bought furniture, food, and other household items, and she paid

for nursery school, utilities, the mortgage on their New Jersey

home, gardening, and clothing.    She paid for these items out of

her and Sheldon's joint checking account in the United Jersey

Bank (hereinafter sometimes referred to as the Joint Account).

See infra table 7. The money that Nancy needed to handle the

household finances came from Sheldon.    The amounts she received

fluctuated, depending on what Nancy told Sheldon she needed in

order to replenish the Joint Account.    Much of the time she

received about $3,000 to $3,500 per month.    Nancy did not work

outside the home during her marriage to Sheldon.

     During 1981 Nancy and Sheldon had two vehicles, a 1978 Jeep

Wagoneer and a 1978 Stutz Blackhawke Coupe.    Both of these

vehicles were left at home for Nancy to use.    Sheldon also had a

leased car.   The Stutz had been leased by Sheldon for 3 years

and, in 1981, he exercised his "buyback" privilege and bought the
                                - 7 -


Stutz for $13,800, for Nancy's use.     Nancy bought the Jeep new in

1977 for $11,495; Sheldon gave her the money to pay for it.

     Sheldon bought furs and jewelry for Nancy.    Sheldon and

Nancy took vacations, including the following:    (1) Five days,

Aruba, Jan. 1978; (2) 7 days, France and Monte Carlo, July 1979;

and (3) 5 days, Antigua, Aug. 1981.

     Nancy and Sheldon jointly owned a house in Cincinnati, Ohio.

Nancy's sister had been unable to qualify for a mortgage loan on

this house, so Nancy and Sheldon took out the mortgage loan.

Nancy's sister sent checks to Nancy, to reimburse Nancy for the

mortgage payments.    When Sheldon died, the Cincinnati house was

worth $40,000 and was encumbered with a $22,000 mortgage.

     Sheldon had open heart surgery in 1977 at age 34; he died on

August 9, 1986.

Business Activities

     Both before and during his marriage to Nancy, Sheldon

conducted his business activities from his office at Dawn Joy.

Nancy was not involved in Sheldon's business activities.

Occasionally Nancy visited Dawn Joy socially.    Nancy usually

stayed in the showroom portion of the facilities.    She did not

know specifically where Sheldon's business records were kept, and

she did not look at these records.

     Sheldon, Sheldon's father, and Martin Stein (hereinafter

sometimes referred to as Stein) began Dawn Joy in 1969.    In June
                               - 8 -


of 1982, after Sheldon's father died, Sheldon and Stein disagreed

about the direction of the business, and so Sheldon sold his

interest in Dawn Joy to Stein for $750,000.     Nancy knew of this

sale before it took place.   Sheldon received wage and salary

income from Dawn Joy in the amounts of $182,000 for 1981 and

$87,483.34 for 1982.   After the sale of his interest in Dawn Joy,

Sheldon remained involved in the garment industry as an employee

and investor.

     In April 1981 Sheldon backed another dress business, Royal

Green Fashions.   Nancy knew at the time it was happening that

Sheldon was backing this business.     There were two "working

partners" of Royal Green Fashions, and Sheldon was the "financial

partner".   On their 1982 tax return, Nancy and Sheldon reported

that Nancy received $5,700 wage and salary income from R & L

Fashions, a company from which Sheldon had received $63,300 in

wage and salary income in 1982.   However, Nancy had not done any

work for R & L Fashions, and was not aware of the Form W-2 and

the fact that she and Sheldon reported the income.

     After Sheldon's death, in late 1986, all of Sheldon's

business records (contained in about 30-40 boxes), which had been

at his various places of business, were delivered to Nancy.      It

was at this time that Nancy first had access to, and first saw

Sheldon's records.
                                - 9 -


     Betty Sverdlik (hereinafter sometimes referred to as

Sverdlik) was the office manager/controller at Dawn Joy from

about 1970 to May 1981.    Charlotte Weiss (hereinafter sometimes

referred to as Weiss) handled accounts payable at Dawn Joy.

Sverdlik helped Sheldon keep his personal books and records.

Sverdlik wrote checks (that Sheldon signed) to pay bills, made

telephone calls, and took care of whatever came up.    Sverdlik

began to work for Sheldon's father in 1963, and performed many of

the same tasks for Sheldon's father before she began to work for

Dawn Joy.    Around the time Sverdlik left Dawn Joy, Sheldon

instructed her to train Weiss so that Weiss could take care of

Sheldon's personal bookkeeping.    After Sverdlik left Dawn Joy,

Weiss assisted Sheldon with his personal bookkeeping.

Investing and Gambling Activities

     Sheldon invested in racehorses (pacers and trotters) before

and throughout his marriage to Nancy.    Nancy was generally aware

of Sheldon's investments in horses, although she was not involved

in the decision-making.    She went to the track with Sheldon to

see the horses race.    Sheldon sometimes mentioned to Nancy the

names of horses he owned, or was buying.    After Sheldon's death

Nancy spent more than $40,000 to wind up Sheldon's horse

business, because the business was not viable without Sheldon to

manage it.    Sheldon gambled on the horses at the racetrack, and
                               - 10 -


gambled at various casinos.    Sheldon owed $84,000 to casinos at

his death.

     In 1981 Sheldon signed a series of documents, dated December

15, 1981, with Crude Associates, purportedly a Florida

partnership.    Each of these documents relates to State Coal

Venture, hereinafter sometimes referred to as State Coal.     One

document, entitled "Second Sublease", purports to obligate

Sheldon to pay $1,600,000 to Crude Associates, by paying $60,000

in cash and $1,540,000 in a promissory note on or before December

30, 1981; the document further purports to require Sheldon to

make a $40,000 principal payment on the note on or before January

31, 1982.    The other documents are the promissory note, a

security agreement, an operating agreement, and a first sublease

between Load Associates and Crude Associates.    Sheldon is named

in, and he signed, each of these documents except for the first

sublease.    Nancy is not named in, and did not sign, any of these

documents.    Nancy did not see any of these documents until late

1986, after Sheldon died.    Sheldon made the 1981 payment by three

checks ($25,000, $15,000, and $20,000) and the 1982 payment by

one check ($40,000), all to an escrow account.    These checks were

drawn on Sheldon's individual checking accounts at Bankers Trust

and Chemical Bank.    See infra table 7.   Sheldon made all the

payments that were made on this investment.    The entire
                                  - 11 -


$1,600,000 of purported obligation was deducted on Sheldon's and

Nancy's 1981 tax return.

     The attorney who marketed State Coal had met Nancy during

social occasions, but never discussed State Coal with her, and

Nancy was never present when the attorney discussed State Coal

with Sheldon.     Sheldon did not tell Nancy of this investment

until late 1985, during a discussion about tax problems.

     Nancy did not have signature authority on either of the

checking accounts that Sheldon used to make his State Coal

payments.     Nancy never wrote any checks to the firm that marketed

State Coal, or any checks to anyone to buy an interest in State

Coal.

     Nancy did not know of the State Coal investment or the

$1,600,000 deduction on the 1981 tax return until a long time

after the 1981 tax return was signed and filed.

Tax Returns and Refunds

        Nancy filed joint Federal income tax returns with Sheldon

from 1974 through 1982.     The 1981 tax return was filed on August

21, 1982.     Table 1 shows the signature dates for the tax returns

from 1979 through 1982.

                                  Table 1

                       Tax Year             Signature Date

                        1979                 June 11, 1980
                        1980                 Oct. 9, 1981
                        1981                 May 21, 1982
                        1982                 Mar. 9, 1984
                                - 12 -


      Nancy filed tax returns as "married filing separately" from

1983 through 1985.     She did this because (1) Sheldon told her

that the Federal Government owed him a large refund, and he was

not going to file tax returns until he received this refund, and

(2) R & L Fashions issued a 1983 Form W-2 reporting wage income

in Nancy's name.3    Nancy filed her 1983 and 1984 tax returns on

or about November 15, 1985, and her 1985 tax return on July 14,

1986.   On her 1983 tax return she reported $15,600 in wages,

etc., income and $1,509 in interest income from the Joint

Account.   On her 1984 and 1985 tax returns she reported $1,601

and $2,046, respectively, in interest income from the Joint

Account.   These are the only income items Nancy reported on her

tax returns for 1983, 1984, and 1985.

      Nancy was not involved in the preparation of her joint

income tax returns during her marriage with Sheldon.     Sheldon had

accountants prepare their joint tax returns, and then he brought

the tax returns home for Nancy to sign.     The 1974 through 1980

joint tax returns were prepared by the firm of Zelon, Septimus &

Co.   Sheldon had been using this firm to prepare his tax returns

at least since 1967.    The 1981 and 1982 tax returns were prepared

by the firm of Spahr, Lacher, Berk & Naimer.     Nancy signed the

3
     When Nancy received the R & L Fashions Form W-2 for 1983,
she questioned Sheldon about it. Sheldon explained that another
partner's wife had been put on the R & L Fashions payroll, and so
Nancy was also put on the payroll to equalize the compensation of
the partners.
                                - 13 -


joint tax returns for 1974 through 1980 and for 1982.    On the

joint tax returns for 1979, 1980, and 1982, Nancy signed as

"Nancy Silverman".

     Sheldon did not bring the 1981 tax return home for Nancy to

sign, and although this tax return was signed with Nancy's name

(shown as "Nancy Jane Silverman"), Nancy did not sign this tax

return.   Nancy did not realize that she had not signed the 1981

tax return, because (1) she had two small children to attend to,

(2) she did not contribute to the tax return preparation, and (3)

Sheldon's and Nancy's tax returns were usually filed with

extensions of time, and were not usually signed at the same time

every year.    See supra table 1.   The tax return preparer's

signature on the 1981 tax return is dated May 20, 1982; the

"Nancy Jane Silverman" signature on this tax return is dated May

21, 1982.     At the time the 1981 tax return was filed, Nancy was

unaware of any tax problems regarding Sheldon, or his businesses,

or their joint tax returns.    Nancy did not review the 1981 tax

return before it was filed; she did not see it until after

Sheldon died.

     Pertinent information that petitioners reported on their

1981 through 1984 tax returns is shown in table 2.
                                     - 14 -


                                     Table 2

                            1979          1980          1981              1982

Wages, etc.              $491,400      $428,700      $340,200       $169,983
Interest income,
  before exclusion          5,508         5,806         6,501         29,752
Dividends,
  before exclusion            571           380             33            74
Sched. C                    ---           ---      (1,600,000)    (1,612,952)
Capital gain or (loss)     (3,000)       (3,000)        -0-          185,065
Sched. E                   (4,926)       56,333         1,933       (106,899)
Other items                26,494        12,813         6,748       (186,901)
                          (20,000)        4,213        (7,800)       (22,250)
                           (7,800)       (7,500)
                                         (7,800)
Adjusted gross income     488,047       489,845    (1,252,785)    (1,544,202)
Total tax liability       186,676       204,868         -0-            -0-
Total payments            196,494       163,828       128,733         34,436
Balance due (Refund
   claimed)                (9,818)       41,040      (128,733)        (34,436)


          The $1,600,000 1981 Schedule C deduction (hereinafter

     sometimes referred to as the State Coal royalty deduction) and

     $1,600,000 of the 1982 Schedule C deduction arose from State

     Coal.   The Schedule C for each of these years shows Sheldon's

     name and Social Security number, and does not show Nancy's name

     or Social Security number.     The Schedule C net loss for each of

     these years ($1,600,000 for 1981, $1,612,952 for 1982) appears on

     the first page of the Form 1040.

          Table 3 shows Sheldon's 1981 wages, Federal income tax

     withholding, and F.I.C.A. tax withholding.
                                   - 15 -


                                   Table 3
                                           Withholding Taxes
    Payor                 Wages          Fed'l Inc.       F.I.C.A.

Dawn Joy                $182,000         $62,715.94       $1,975.05
Lucky Fashions            70,200          28,446.12        1,975.05
Lyon Fashion              52,400          16,975.76        1,975.05
AMS Industries            35,600          14,670.00        1,975.05

                         340,200         122,807.82        7,900.20


Of the F.I.C.A. taxes withheld, $5,925.15 is excess, and is

treated as an income tax payment on the 1981 tax return.

       The 1981 tax return includes a claim for refund of

$128,733--$122,808 withholding and $5,925 F.I.C.A. taxes

withheld.

       On or about September 24, 1982, the U.S. Treasury issued to

Sheldon and Nancy an $81,054.77 tax refund check on account of

1981.4      Of this amount, $6,694.38 was interest and $74,360.39 was

tax.     Petitioners reported $6,798 interest from the U.S. Treasury

on their 1982 tax return.      The remaining $54,372.61 of the

$128,733 claimed refund was transferred to Nancy's and Sheldon's

1980 tax liability account, as further described, infra, in

connection with table 6.      Sheldon deposited the $81,054.77 check

into his individual checking account at Chemical Bank.       See infra

table 7.      Within 2½ weeks, Sheldon had written checks against

this bank account aggregating more than the entire deposited tax

4
     The check is dated Sept. 24, 1982, a Friday, but
respondent's transcript of account for 1981 shows that the
transaction is posted as of Sept. 27, 1982, a Monday.
                               - 16 -


refund check.   Nancy first became aware of this tax refund after

Sheldon's death, probably in early 1987.

     In 1984 the U.S. Treasury issued to Sheldon and Nancy a

$25,540.14 tax refund check on account of 1982.   Sheldon

deposited this check into the same bank account as the earlier

refund check.   Substantial withdrawals were not made from this

bank account until about 2 months after this deposit.

     During the period December 11, 1980, through December 13,

1984, the balance in this Chemical Bank checking account

fluctuated substantially.    Table 4 illustrates these fluctuations

by showing the bank account balances (rounded to the nearest

dollar) on selected dates.

                               Table 4

       Date           Amount             Date       Amount

     12/11/80       $11,108         03/23/83       $17,344
     12/31/80           609         06/10/83        56,248
     03/04/81        41,311         06/28/83       (69,274)
     04/20/81         5,681         12/15/83        61,755
     09/11/81        27,792         01/12/84         5,083
     11/09/81         4,726         02/14/84       123,621
     05/07/82       165,572         02/17/84        14,247
     06/17/82        12,730         03/09/84       103,005
     06/18/82       514,327         04/09/84          (990)
     07/08/82         3,737         05/09/84        33,926
     09/28/82        97,864         07/23/84         3,253
     12/10/82        11,338         07/27/84        46,023
     12/20/82       361,221         12/03/84           989


     On September 8, 1986, Nancy filed amended joint tax returns

for 1979, 1980, and 1981, claiming refunds of previously paid

taxes, as shown in table 5.    On these amended tax returns, Nancy
                                - 17 -


claimed that the refunds arose from a net operating loss

generated in 1982, which is carried back to 1979 and then carried

over to 1980 and 1981.   The calculations on the amended tax

returns begin with the $1,544,202 negative adjusted gross income

shown on the 1982 tax return.    See supra table 2.

                                Table 5

                             1979           1980            1981

Net operating loss
   deduction              $1,217,535      $807,632      $330,099

Refund claimed               186,676       204,868          74,209

     Table 6 shows information as to 1980 liabilities and

payments, as reflected on the 1980 tax return, the 1980 amended

tax return, and respondent's records.
                              - 18 -


                              Table 6

                                    1040/1040X       Respondent's
     Item                         Reported Amount   Records Amount

Total tax liability                   $204,868      $204,868.00

Withholding and excess F.I.C.A.
    payments                            163,828      163,828.00

Balance due                              41,040       41,040.00

Adjustments--Nov. 16, 1981                ---              5.00
                                                       4,104.00
                                                       1,231.20
                                                       2,900.91

Adjustments--Sept. 27, 1982               ---            820.80
                                                       3,039.49
                                                       1,334.43
                                                        (103.22)

Balance without transfer                  ---         54,372.61

Transfer 1981 to 1980                     ---         54,372.61

Balance due                               ---            -0-

Amended tax return refund
    requested                           204,868          ---

Refund paid for 1980                      ---        128,715.36
    Components:
     (1) abatement of 1980 tax            ---         55,923.00
     (2) abatement of penalty             ---          2,052.00
     (3) abatement of previously
         assessed interest                ---          5,940.40
     (4) interest on overpayment          ---         64,799.96


     By April 15, 1982, taking into account additions to tax and

accrued interest, the 1980 tax liability of $41,040 had grown to

$54,372.61.
                               - 19 -


     As of September 27, 1982, respondent transferred $54,372.61

out of Sheldon's and Nancy's 1981 tax liability account and into

their 1980 tax liability account.    This was done in connection

with the September 1982 issuance of the $81,054.77 tax refund

check for 1981, described supra, but the transfer was recorded on

respondent's records as of April 15, 1982.     After this transfer,

the balance in Sheldon's and Nancy's 1980 tax liability account

was zero.

     After Nancy filed the amended tax return for 1980 claiming a

$204,868 refund, respondent abated the 1980 income tax liability,

but only to the extent of $55,923.      This abatement then triggered

a refund of tax for 1980 in the amount of $128,715.36.     This

refund consisted of (1) a tax decrease in the amount of $55,923,

(2) an abatement of penalty in the amount of $2,052, (3) an

abatement of interest previously assessed in the amount of

$5,940.40, and (4) interest on the overpayment in the amount of

$64,799.96.    The refund check for 1980, in the amount of

$128,715.36 was issued on February 5, 1988, and was received by

Nancy.

Bank Accounts, Life Insurance, Etc.

     During 1981 Nancy and Sheldon held various bank accounts and

owned stock, as shown in table 7.    Sheldon's two individual

checking accounts were in existence at the time Nancy and Sheldon

got married.    Nancy did not have signature authority on any of
                                        - 20 -


  Sheldon's individual accounts.           Sheldon's records for these bank

  accounts were kept at his office; Nancy did not have access to

  these records.
                                         Table 7

                            Type of
  Bank or Stock             Account                    Account Holder

  Peoples Trust1            savings      Sheldon/Nancy as trustees for   Lee
  Peoples Trust1            savings      Nancy as trustee for Joseph
  Peoples Trust1            savings      Sheldon/Lee--joint
  Chemical Bank             savings      Sheldon/Nancy as trustees for   Lee
  Chemical Bank             savings      Sheldon/Nancy as trustees for   Melanie
  Chemical Bank             savings      Sheldon/Nancy as trustees for   Joseph
  AT&T stock                custodial    Nancy as custodian for Lee
  AT&T stock                custodial    Nancy as custodian for Joseph
  United Jersey2            checking     Sheldon/Nancy--joint
  Peoples Trust1,3          savings      Sheldon/Nancy--joint
  Chemical Bank             checking     Sheldon
  Bankers Trust             checking     Sheldon
     1
        The parties' stipulations indicate that these accounts are in Peoples Trust.
However the stipulated exhibits indicate that at some point, perhaps before 1981, Peoples
Trust (or at least the branch in which these accounts were maintained) became United
Jersey.
     2
        This is the Joint Account.
     3
        On this record we cannot determine whether the deposits in this account came in
whole or in part from Sheldon. We cannot determine whether Nancy or Sheldon made the
withdrawals. By mid-1977 the account had a balance of $39,764.41. By Jan. 24, 1980,
after deposits of $300 and $320.26, interest had caused the balance in the account to
climb to $46,301.10. On Jan. 24, 1980, $15,000 was withdrawn from the account. On Feb.
1, 1982, $25,000 was withdrawn from the account, leaving a balance of $10,120.97.

        When Sheldon died, Nancy received the proceeds from life

  insurance policies as shown in table 8.              Three of these policies

  were originally owned by Dawn Joy as part of a key-man buyout

  program.     At the time Sheldon left Dawn Joy, Dawn Joy allowed

  Sheldon to take over these policies.
                                       - 21 -


                                       Table 8

Policy #                Date Issued             Amount Received by Nancy

2190403                    06/17/64                    $14,458
1
  25-727                   02/01/72                    100,919
1
  28-813                   06/01/73                    100,740
1071929                    04/01/75                    100,442
1069919                    04/01/75                     50,250
1096151                    03/05/79                     24,507
1096152                    03/17/79                     75,463
1
  8013005                  12/22/80                    489,163
3614323                    11/22/83                    175,773
001337321                    ---                       473,050

                                                     1,604,765
1
    Policies originally owned by Dawn Joy.

       The 1982 premiums on the first eight policies listed in

table 8 aggregated about $16-17,000; these policies provided

almost $1,000,000 of the proceeds that were paid to Nancy.                 The

record does not permit us to determine when policy number

001337321 was issued, nor how much the premiums cost.

The Estate

       Sheldon's probate estate was insolvent.             The estate tax

return showed that there was no estate tax liability.               Respondent

agreed and issued a closing letter to this effect.

       At Sheldon's death, in addition to the life insurance,

discussed supra, Nancy received Sheldon's interest in their

jointly owned Franklin Federal Tax Free Income Fund (valued at

$250,011) by operation of law.               Also, in October of 1985 Nancy

received Sheldon's interest in their jointly owned home in New

Jersey.      The home was valued at $650,000 on Sheldon's estate tax
                                - 22 -


return; the remaining mortgage debt ($57,000) was shown on the

estate tax return as being entirely Sheldon's debt.    Nancy sold

the home for $730,000 in August 1988.    After payment of the

remaining mortgage debt, sales commission, and other expenses,

Nancy received about $625-630,000 on this sale.    Nancy spent

considerable amounts in winding up Sheldon's affairs, as follows:

Legal fees, $40,000; funeral expenses, $10,000; accounting

expenses, $15,000; and horse expenses, $40,000.

Notice of Deficiency

     The entire deficiency determined for 1981, which petitioners

have conceded (supra note 2), is attributable to the State Coal

royalty deduction.

                       _______________________

     If Sheldon and Nancy had filed separate tax returns for

1981, then the State Coal royalty deduction would have been on

Sheldon's tax return and not on Nancy's tax return.    The State

Coal royalty deduction claimed on Nancy's and Sheldon's 1981 tax

return is an item of Sheldon.

     Nancy did not know, and did not have reason to know of the

substantial understatement of tax on the 1981 tax return.

     Nancy significantly benefited from the State Coal royalty

deduction claimed on the 1981 tax return; it is not inequitable

to hold Nancy liable for the deficiency in tax resulting from

this substantial understatement.
                                  - 23 -


                                  OPINION

     Section 6013(a) permits a husband and wife to elect to file

a joint tax return.   Together with section 1(a), this joint tax

return option is a valuable privilege, which ordinarily operates

to lower the tax liability for the income reported on the tax

return.   The price taxpayers must pay for this benefit is joint

and several liability.    Sec. 6013(d)(3); Stevens v. Commissioner,

872 F.2d 1499, 1503 (11th Cir. 1989), affg. T.C. Memo. 1988-63;

Murphy v. Commissioner, 103 T.C. 111, 117 (1994); Bokum v.

Commissioner, 94 T.C. 126, 151-152 (1990), affd. 992 F.2d 1132

(11th Cir. 1993); Pesch v. Commissioner, 78 T.C. 100, 129-130

(1982).

     Under section 6013(e),5 however, a spouse may be relieved of


5
     Sec. 6013(e) provides, in pertinent part, as follows:

     SEC. 6013. JOINT RETURNS OF INCOME TAX BY HUSBAND AND
                 WIFE.

                      *   *   *     *      *   *   *

           (e) Spouse Relieved of Lability in Certain Cases.--

                (1) In general.-- Under regulations prescribed by
           the Secretary, if--

                     (A) a joint return has been made under this
                section for a taxable year,

                     (B) on such return there is a substantial
                understatement of tax attributable to grossly
                erroneous items of one spouse,

                     (C) the other spouse establishes that in
                signing the return he or she did not know, and had
                no reason to know, that there was such substantial
                understatement, and
                                                    (continued...)
                                - 24 -


this joint liability for a year if certain requirements are met

for that year.    The putative innocent spouse must show the

following:   (1) A joint income tax return was filed for the year

(sec. 6013(e)(1)(A)); (2) on this tax return there is a

substantial understatement of tax (sec. 6013(e)(1)(B)); (3) this

substantial understatement of tax is attributable to grossly

erroneous items (sec. 6013(e)(1)(B)); (4) the grossly erroneous

items are items of the other (the putative "guilty") spouse (sec.

5
 (...continued)
                       (D) taking into account all the facts and
                  circumstances, it is inequitable to hold the other
                  spouse liable for the deficiency in tax for such
                  taxable year attributable to such substantial
                  understatement,

          then the other spouse shall be relieved of liability
          for tax (including interest, penalties, and other
          amounts) for such taxable year to the extent such
          liability is attributable to such substantial
          understatement.

               (2) Grossly erroneous items.--For purposes of this
          subsection, the term "grossly erroneous items" means,
          with respect to any spouse--

                       (A) any item of gross income attributable to
                  such spouse which is omitted from gross income,
                  and

                       (B) any claim of a deduction, credit, or
                  basis by such spouse in an amount for which there
                  is no basis in fact or law.

     Although the year before us is 1981, we apply the statute as
amended in 1984, because section 424(a) of the Deficit Reduction
Act of 1984 (DEFRA), Pub. L. 98-369, 98 Stat. 494, 801, amended
sec. 6013(e) retroactively to all open years to which the
Internal Revenue Code of 1954 applies. Sec. 424(c)(1) of DEFRA,
98 Stat. at 803.
                              - 25 -


6013(e)(1)(B)); (5) when the tax return was signed the putative

innocent spouse did not know, and had no reason to know, that

there was this substantial understatement of tax (sec.

6013(e)(1)(C)); and (6) it is inequitable to hold the putative

innocent spouse liable for the tax deficiency that is

attributable to this substantial understatement of tax.    Sec.

6013(e)(1)(D).   Also (as elements of item (3), supra), if any

such item is a claim of deduction, credit, or basis, then the

putative innocent spouse must show that the claim has no basis in

fact or law (sec. 6013(e)(2)(B)); and the tax liability for these

items must exceed a certain percentage of the putative innocent

spouse's income for the preadjustment year, in the instant case,

1988.6   Sec. 6013(e)(4); Hayman v. Commissioner, 992 F.2d 1256,

1260 (2d Cir. 1993), affg. T.C. Memo. 1992-228; Bokum v.

Commissioner, 94 T.C. at 138, 992 F.2d at 1133-1134.




6
     The preadjustment year is "the most recent taxable year
* * * ending before the date the deficiency notice is mailed."
Sec. 6013(e)(4)(C). The notice of deficiency was mailed on May
26, 1989; thus 1988 is the preadjustment year. Nancy's 1988
income was increased by her profit on the sale of the New Jersey
home. This increase in Nancy's 1988 income was enough to
disqualify her from innocent spouse treatment for 1982
(deficiency of $27,232), but not for 1981 (deficiency of
$185,361). Because the parties agree that the preadjustment year
substantiality requirement is enough to disqualify Nancy from
innocent spouse treatment for 1982, we do not consider whether
she failed to meet any of the other requirements as to 1982.
                                - 26 -


       The spouse seeking relief has the burden of proof on each of

these requirements.    Rule 142(a);7 Purcell v. Commissioner, 826

F.2d 470, 473 (6th Cir. 1987), affg. 86 T.C. 228 (1986); Bokum v.

Commissioner, 94 T.C. at 138.    Because the statute is phrased in

the conjunctive, failure to prove any one of the requirements

will prevent the taxpayer from qualifying for relief.    Hayman v.

Commissioner, 992 F.2d at 1260; Purcell v. Commissioner, 826 F.2d

at 475 n. 6; Bokum v. Commissioner, 992 F.2d at 1134, 94 T.C. at

138.

       These factors, taken together with the well-established

principle that exemptions from taxation are to be narrowly

construed, place a significant burden on the taxpayer.    United

States v. Stewart, 311 U.S. 60, 71 (1940); Matthews v.

Commissioner, 907 F.2d 1173, 1174, 1178 (D.C. Cir. 1990), affg.

92 T.C. 351, 361 (1989); Bokum v. Commissioner, 94 T.C. at 155,

and cases there cited.

       The parties agree that the following requirements have been

satisfied:    (1) Nancy and Sheldon filed a joint tax return for

1981;8 (2) the understatement of tax on the tax return is

substantial; (3) the substantial understatement of tax is

7
     Unless indicated otherwise, all rule references are to the
Tax Court Rules of Practice and Procedure.
8
     The parties have stipulated that the 1981 tax return was a
joint tax return, even though Nancy did not sign it, and we have
so found. See Estate of Campbell v. Commissioner, 56 T.C. 1,
12-14 (1971), and cases there cited.
                              - 27 -


attributable to a deduction that had no basis in fact or law; (4)

this deduction is a grossly erroneous item; and (5) in accordance

with the requirements of section 6013(e)(4), the understatement

exceeds the required percentage of Nancy's 1988 income.

     Still in dispute is whether Nancy satisfies the following

requirements:   (1) The State Coal royalty deduction is an item of

Sheldon; (2) at the time the 1981 tax return was signed Nancy did

not know, and had no reason to know, of the substantial

understatement of tax; and (3) it is inequitable to hold Nancy

liable for the deficiency.   We consider these disputed matters

seriatim.

A. Item "of" Sheldon

     Respondent contends that petitioners have failed to prove

that Nancy did not write any checks to buy the interest in State

Coal, and thus that petitioners have failed to prove that the

State Coal royalty deduction is an item of Sheldon.   Petitioners

contend that Nancy played no role in the decision to buy the

interest in State Coal, that Nancy's name does not appear on any

document purporting to grant an interest or impose an obligation

regarding State Coal, and that the total amount required to buy

the interest in State Coal was paid by Sheldon from his

individual accounts.

     We agree with petitioners.
                              - 28 -


     We have found that Sheldon signed a series of documents in

1981 purporting to give Sheldon an interest in State Coal and

purporting to impose obligations on Sheldon.   Nancy is not named

in any of these documents, did not sign any of these documents,

and did not see any of these documents until late 1986, after

Sheldon died.   The second sublease purports to obligate Sheldon

to pay $60,000 in cash and $1,540,000 in a promissory note on or

before December 30, 1981, and to make a $40,000 principal payment

on the promissory note on or before January 31, 1982.   Sheldon

paid the $60,000 and the $40,000 by checks drawn on his separate

accounts, and he signed the promissory note.   On the 1981 tax

return, the $1,600,000 disallowed deduction is claimed on

Schedule C, which shows Sheldon's name and Social Security number

and does not show Nancy's name or Social Security number.   If

Sheldon and Nancy had filed separate tax returns for 1981, then

the disallowed deduction would have been on Sheldon's tax return

and not on Nancy's tax return.   We conclude, and we have found,

that the item from which Nancy seeks innocent spouse relief is an

item “of” Sheldon, within the meaning of section 6013(e)(1)(B).

Bokum v. Commissioner, 94 T.C. 140.



     On brief, respondent asserts that "It is uncertain whether

the four checks were the total payment for the interest in State

Coal because no evidence was offered of the total amount of the
                                - 29 -


investment."     The four checks in question match the obligations

purportedly imposed on Sheldon.     We have no reason to believe

that any additional payments were required to be made or were

made.     Respondent does not suggest that (1) any other witnesses

or books and records might show any other payments, or (2) that

Nancy had a source for making any other payments.     We reject

respondent's attempts to create uncertainty by making unfounded

speculations, and then to capitalize on that uncertainty by

invoking Wichita Terminal Elevator Co. v. Commissioner, 6 T.C.

1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).

        Petitioners have convinced us, and we have found, that

Sheldon made all the payments that were made.     We do not see the

loose ends that respondent speculates about.     We believe that the

instant case does not provide a proper basis for invocation of

the Wichita Terminal doctrine.

        We hold for petitioners on this issue.

B. Knowledge or Reason to Know

        Respondent contends that Nancy's testimony "should not be

relied upon" and that "it is likely that Mr. Silverman informed

her of the investment in State Coal".     Respondent also contends

that, even if Nancy did not in fact know of the State Coal

investment, she should have known, because Nancy should be held

to at least as high a standard of review of the tax return as

would a taxpayer who had actually signed the tax return, and if
                                - 30 -


she had signed the tax return, then "she would have seen the

$1,600,000 loss from State Coal claimed on the face of the return

and noticed that the return reported zero tax liability."

     Petitioners maintain that respondent vastly overstates

Nancy's financial role in the Silverman marriage, and that

Nancy's testimony about her lack of actual knowledge is reliable

and uncontradicted.    Petitioners also maintain that Nancy did not

have any knowledge which should have led her to realize that

there might be a tax problem and that she should ask Sheldon

about it.   Finally, petitioners maintain that respondent's focus

on what Nancy would have seen if she had signed the 1981 tax

return is irrelevant because in fact Nancy did not see and did

not sign the 1981 tax return.

     We agree with petitioners that Nancy did not know, and had

no reason to know, of the understatement in tax.

     In Bokum v. Commissioner, 94 T.C. at 148, we set forth our

position as follows:

          The standard to be applied in determining whether a
     putative innocent spouse has "reason to know," under section
     6013(e)(1)(C) is whether a "reasonably prudent taxpayer
     under the circumstances of the spouse * * * could be
     expected to know that the tax liability stated was erroneous
     or that further investigation was warranted." Stevens v.
     Commissioner, 872 F.2d at 1505 (fn. ref. omitted); Shea v.
     Commissioner, 780 F.2d 561, 566 (6th Cir. 1986), affg. on
     this issue and revg. on another issue * * * [T.C. Memo.
     1984-310]. This standard applies to deduction, etc.,
     matters, as well as income matters. 872 F.2d at 1505 n.8.
                                - 31 -


     The lack of knowledge, as contemplated by section

6013(e)(1)(C), is not a mere lack of understanding of the tax

consequences of a deduction or credit.     Hayman v. Commissioner,

992 F.2d at 1261; Stevens v. Commissioner, 872 F.2d at 1505 n.8;

Purcell v. Commissioner, 826 F.2d at 474, 86 T.C. at 237-238;

McCoy v. Commissioner, 57 T.C. 732, 734 (1972).

     We first consider whether Nancy knew of the State Coal

investment.    Nancy's testimony on this point is clear and

credible.    The surrounding circumstances are consistent with her

testimony.    Sheldon wrote the checks to pay for the State Coal

investment on his individual checking accounts.    It was Sheldon's

practice, both before and during his marriage to Nancy, to keep

his business and investment activities separate from his home

life.   The witness who dealt with Sheldon in the State Coal

matter testified that, although he had met Nancy several times,

he never mentioned State Coal to Nancy, and he never observed

anyone else referring to State Coal in Nancy's presence.      Nancy's

running of the Silverman household with money that Sheldon gave

to her for this purpose is not inconsistent with Nancy's lack of

knowledge about State Coal.    Nancy's service as custodian or

trustee for the children's bank accounts or A.T.& T. stock

account (see supra table 7) is not at all indicative of whether

Nancy knew of State Coal by the time the 1981 tax return was

signed.     Petitioners' burden on this limited point is merely to
                              - 32 -


persuade us that it is more likely than not that Nancy did not

know of the State Coal investment by the time the 1981 tax return

was signed; petitioners have clearly carried this burden of

proof.

     We next consider whether Nancy should have known of the

State Coal investment.   Courts have considered several factors in

deciding whether a taxpayer had reason to know of a substantial

understatement of tax attributable to the grossly erroneous item

(in the instant case, the State Coal deduction), including (1)

the putative innocent spouse's level of education, (2) his or her

involvement in the family's business and financial affairs, (3)

the putative guilty spouse's evasiveness and deceit about the

family's finances, and (4) the presence of lavish or unusual

expenditures or any large unexplained increase in the family's

standard of living.   Flynn v. Commissioner, 93 T.C. 355, 365-366

(1989).

     Nancy received a B.A. degree in English literature from the

University of Cincinnati in 1964.   Nancy was in charge of the

household.   She paid for household items out of a joint checking

account; the funds deposited into the account came from Sheldon.

Nancy was generally aware of Sheldon's business and investment

activities, and was aware of (1) Sheldon's sale of Dawn Joy

interest before it took place, (2) Sheldon's Royal Green Fashion

investment when it took place, and (3) Sheldon's investments in
                              - 33 -


horses.   She did not participate in these activities, except to

occasionally visit Sheldon's garment business showroom or a race

track where one of Sheldon's horses was running.    She did not

participate in the decision-making.    Sheldon had several bank

accounts in his own name, but Nancy did not have access to the

records for these bank accounts.   Until 1985, Sheldon did not

tell Nancy about the grossly erroneous item, or the State Coal

investment that produced that item.    Also, Sheldon did not tell

Nancy of the $81,054.77 tax refund check that he received on

account of the grossly erroneous item, or that he deposited the

check in one of his bank accounts, or that he made withdrawals

that exceeded the deposited amount within about 2½ weeks after

the deposit.   She did not learn of this until after Sheldon died.

Thus, as to most business and major investment matters, Sheldon

neither hid nor volunteered what was happening, but clearly he

hid the State Coal investment and its tax aftermath.    There was

no lavish or unusual expenditure or large unexplained increase in

the Silverman's standard of living at, or after, or in connection

with, the State Coal investment or the tax refunds.    Unlike

Sheldon's garment industry and horse racing activities, State

Coal did not have any showrooms to visit or horse races to watch.

     Apart from the 1981 tax return itself, we are satisfied on

the record in the instant case that nothing occurred that should
                              - 34 -


have put Nancy on notice that there was a tax problem or that she

should inquire as to whether there was a tax problem.

     The 1981 tax return presents two difficulties for Nancy: (1)

She did not sign it, and (2) if she had signed it, then she would

or should have seen the $1,600,000 claimed deduction.   As can be

seen from table 2, supra, the $1,600,000 deduction and Schedule C

loss, and the resultant minus $1,252,785 adjusted gross income,

are far larger than any other amounts on the 1981 tax return, and

several times as large as any amounts on the 1979 and 1980 tax

returns that Nancy signed.   See Bokum v. Commissioner, 94 T.C. at

147-148.

     For whatever reason, Sheldon did not bring the 1981 tax

return home for Nancy to sign, and, although the tax return was

signed with Nancy's name, Nancy did not sign the 1981 tax return.

Ordinarily, we would conclude that Sheldon's failure to present

the 1981 tax return to Nancy for signing should, like "the

incident of the dog in the night-time",9 have alerted Nancy that


9
          You consider that to be important? he asked.
          Exceedingly so.
          Is there any point to which you would wish to draw my
     attention?
          To the curious incident of the dog in the night-time.
          The dog did nothing in the night-time.
          That was the curious incident, remarked Sherlock
     Holmes.

     Doyle, "Silver Blaze", Sherlock Holmes: The Complete Novels
and Stories (vol. 1) 455, 472 (Bantam Books 1986).
                               - 35 -


something was wrong.    However, the evidence in the record of the

instant case causes us to conclude that Nancy's failure to

inquire is excusable under section 6013(e)(1)(C).   Nancy did not

realize that she had not signed the 1981 tax return, because (1)

she had two small children to attend to, (2) she did not

contribute to the tax return preparation; and (3) Sheldon's and

Nancy's tax returns were usually filed with extensions of time,

and were not usually signed at the same time every year.    See

supra table 1.

     We do not suggest that a taxpayer who fails to sign a tax

return is better off, for section 6013(e)(1)(C) purposes, than

one who does sign the tax return.   The taxpayer must explain the

failure, and must dispel any notion that he or she simply chose

to turn a blind eye to--by preferring not to know of--facts fully

disclosed on a tax return, of such a numerical magnitude as would

reasonably put him or her on notice that further inquiry would

need to be made.   Bokum v. Commissioner, 94 T.C. at 148.

     On the totality of the instant case's record, we are

satisfied that Nancy's failure to inquire about the 1981 tax

return is reasonable.    In this circumstance, she did not see the

tax return, and so it is understandable and excusable that the

zero tax liability did not come to her attention and did not set

off any alarms.
                                - 36 -


     In light of these facts and circumstances, we conclude, and

we have found, that Nancy did not know and did not have reason to

know of the substantial understatement of tax for 1981.

     We hold for petitioners on this issue.

C. The Equities

     Respondent contends that it is not inequitable to hold Nancy

liable for the 1981 deficiency, because of the financial benefits

Nancy received from Sheldon.     In particular, respondent directs

our attention to the following:

          (1) Nancy came to the marriage with assets worth less

     than $50,000 and left it after Sheldon's death with assets

     worth more than $2.5 million, with "virtually all" of the

     increase having been "accumulated from Mr. Silverman's

     earnings."

          (2) Less than 3 months after receiving and depositing

     the $81,054.77 tax refund check for 1981, Sheldon paid a

     $12,840 life insurance premium from that account on his life

     insurance policy 8013005.     When Sheldon died, Nancy received

     a death benefit of $489,163 from that policy.     See supra

     table 8.

          (3)     The claimed $1,600,000 loss deduction freed up

     $54,372.61 of Sheldon's 1981 income tax withholding to be

     applied to Sheldon's and Nancy's 1980 income tax liability,
                               - 37 -


     and this resulted in the 1980 tax refund that Nancy received

     in 1988 being greater than it would otherwise have been.

     Petitioners maintain that section 1.6013-5(b), Income Tax

Regs., "disqualify a spouse for relief under Section 6013(e) only

where the alleged benefit is derived from the omitted income and

traceable to the omitted income (or deduction in this case)."

They also maintain that (1) the New Jersey home was bought in

1976 from the funds not traceable to any refund of 1981 tax; (2)

Nancy received only normal support, at a level attained before

the 1981 tax refund; (3) the life insurance proceeds are not

traceable to the 1981 tax refund; (4) the mortgage payments are

properly treated as part of normal support at a level established

before the 1981 tax refund; and (5) the tax refund that Nancy

received in 1988 resulted from an abatement of 1980 tax liability

that "had absolutely no relationship to the 1981 tax year."

     We agree with respondent's conclusion and contention as to

the tax refund Nancy received in 1988.

     Under section 6013(e)(1)(D), Nancy is not entitled to

innocent spouse treatment unless she can show that "taking into

account all the facts and circumstances, it is inequitable to

hold [her] *   *   * liable for the deficiency in tax *   *   *

attributable to such substantial understatement".    This provision

of the statute specifically directs us to take into account
                              - 38 -


equitable considerations in determining whether to grant immunity

from joint and several tax liability.

     One of the equitable considerations is "Whether the failure

to report correctly tax liability results from `concealment,

overreaching, or any other wrongdoing' on the part of the

`guilty’ spouse".    Hayman v. Commissioner, 992 F.2d at 1262

(quoting McCoy v. Commissioner, 57 T.C. at 735).   To the same

effect, see Bokum v. Commissioner, 992 F.2d at 1134-1135.

     In considering whether Sheldon understood what he was doing

in taking the State Coal royalty deduction, we note the

following:   (1) From at least 1967 through 1980, Sheldon used one

firm to prepare his tax returns; the tax returns with the State

Coal royalty deductions were prepared by a different firm.     (2)

From 1974 through 1980, Sheldon showed the tax returns to Nancy

and had her sign them; the first tax return with the State Coal

royalty deduction was not shown to Nancy before it was filed, and

was not signed by Nancy.   (3) As we pointed out supra, under B.

Knowledge or Reason to Know, as to most business and major

investment matters, Sheldon neither hid nor volunteered what was

happening, but clearly he hid the State Coal investment and its

aftermath; thus, as to this item there was a change in Sheldon's

approach to disclosure to Nancy.   The foregoing leads us to

conclude that Sheldon was a "guilty" spouse and there was

concealment of the truth from Nancy.
                                - 39 -


     Another of the facts and circumstances to be taken into

account is whether Nancy significantly benefited from the

substantial understatement of tax.10     Hayman v. Commissioner, 992

F.2d at 1262; Purcell v. Commissioner, 86 T.C. at 241.     In the

instant deduction case we look at whether Nancy significantly

benefited from the tax savings produced by the erroneous

deduction.    Bokum v. Commissioner, 94 T.C. at 157.   Normal

support is not a significant benefit.     Whether a benefit is

significant is to be measured by the circumstances of the

parties.     Hayman v. Commissioner, 992 F.2d at 1262; Purcell v.

Commissioner, 86 T.C. at 242; sec. 1.6013-5(b), Income Tax Regs.

     Nancy and Sheldon saved $185,361 in 1981 Federal income tax

on account of the erroneous State Coal royalty deduction.

Because of withholding prepayments, $74,360.39 plus interest was

returned to Nancy and Sheldon in September 1982 as a refund, and

$54,372.61 was applied as a credit against Nancy's and Sheldon's

1980 tax liability, as of April 15, 1982.     The remaining $56,628



10
     As we pointed out, supra, in the last paragraph of note 4,
sec. 6013(e) was revised retroactively by sec. 424(a) of DEFRA.
The 1984 amendments removed from the statute the language about
significant benefit. It is clear, however, from the legislative
history that the rewording was not intended to remove from
consideration whether the relief-seeking spouse benefited from
the understatement of tax. H. Rept. 98-432 (Part 2), 1501, 1502
(1984). The conference committee agreement follows the House
bill with two modifications, which are not applicable to this
issue. H. Conf. Rept. 98-861, at 1119-1120 (1984), 1984-3 C.B.
(Vol. 2) 1, 373-374.
                                  - 40 -


of the $185,361 correct 1981 tax liability (supra note 2) was not

paid by or withheld from Nancy and Sheldon.

     The tax refund check for 1981 was taken by Sheldon,

deposited into one of Sheldon's individual checking accounts, and

spent by Sheldon, all without Nancy's knowledge.      That checking

account balance fluctuated substantially; money flowed in and out

in large amounts.   See supra table 4.

     How Sheldon spent this money (plus the $56,628 that he

avoided payment of) is unclear, but Nancy's lifestyle did not

change on account of the receipt of this refund and the avoided

payment.    We note that throughout their marriage Sheldon and

Nancy had a comfortable lifestyle easily supported by Sheldon's

earnings.    See supra table 2.    Up to the time of the 1981 tax

return, Sheldon was a successful businessman who made a

considerable amount of money.      Sheldon's and Nancy's lifestyle

included a New Jersey home, two cars, furs, jewelry, dining out,

going to the theatre, and taking vacations.

     Sheldon also gambled and invested.      During 1981 and 1982

Sheldon spent $100,000 to invest in State Coal.      At the time of

his death he owed $84,000 to casinos.      Sheldon owned racehorses,

and he gambled on these horses.      After Sheldon's death Nancy

spent over $40,000 to wind up Sheldon's horse business.

     Sheldon was a "key man" in Dawn Joy, and he had open heart

surgery at age 34; he owned much life insurance.      Substantially
                                - 41 -


all of Sheldon's life insurance policies were bought before the

year in issue.

     Sheldon's probate estate was insolvent, and Nancy spent more

than $100,000 (including the horse business expenditures) in

winding up Sheldon's affairs.    However, at or around the time of

Sheldon's death Nancy received (1) about $1.6 million in life

insurance proceeds (supra table 8), (2) Sheldon's interest,

valued at about $125,000, in their Franklin Federal Tax Free

Income Fund, and (3) Sheldon's interest in the jointly owned New

Jersey home they bought in 1975.

     Based on the foregoing, it is more likely than not, because

of the circumstances of Sheldon's and Nancy's life, and because

Sheldon made a considerable amount of money during his life, that

the above items received by Nancy are normal support and are not

benefits related to the tax savings produced by the State Coal

royalty deduction.

     An additional consideration in weighing the equities is

whether innocent spouse treatment might result in the putative

innocent spouse being relieved of liability for tax on that

spouse's own income.   This might occur if the putative innocent

spouse had income that was offset by a grossly erroneous

deduction item of the putative guilty spouse.   See discussion in

Elting, "Innocent Spouse Relief Availability Is Far From

Certain", 23 Taxn. for Lawyers 205, 210-211 (1995).   In the
                              - 42 -


instant case, Nancy had practically no income for 1981, and so

innocent spouse treatment would not relieve her from a liability

she would have had even if she had filed a separate tax return.

Thus, this consideration should not disqualify Nancy from

innocent spouse status.

     If our analysis were to end at this point, then we would

conclude that it is inequitable to hold Nancy liable for the 1981

deficiency in tax.

     However, Nancy directly received a $54,372.61 benefit from

the tax savings produced by the State Coal royalty deduction.

The tax refund check for 1980, received by Nancy in 1988 in the

amount of $128,715.36, included $54,372.61 of Sheldon's withheld

income tax for 1981 (plus the interest thereon), which amount

would not have been available for transfer to the 1980 tax year

if the State Coal royalty deduction had not created the $185,361

tax saving for 1981.   We consider this to be a significant

benefit.   Thus, Nancy received a significant benefit on account

of the grossly erroneous item.

     In light of the foregoing, we conclude, and we have found,

that it is not inequitable to hold Nancy liable for the

deficiency.

     Petitioners contend that the 1988 refund of 1980 taxes

resulted from an abatement of 1980 tax liability and was not

related to 1981.   However, whatever may have been the source of
                             - 43 -


the abatement determination, there is no blinking the fact that

the $54,372.61 plus interest that was a portion of the

$128,715.36 refund was available to be paid to Nancy in 1988

solely because of the credit for 1981 that had been generated by

the State Coal royalty deduction.

     On answering brief, petitioners contend as follows:

     Respondent's own witness testified that the amount
     "transferred back" to 1980 consisted of withholding credits
     and occurred April 15, 1982, a date which is prior to the
     filing of the Silverman's 1981 tax return, a date which is
     prior to the Internal Revenue Service receiving the tax
     return which contained the grossly erroneous item.
     Therefore, the prior "transfer back" of Sheldon Silverman's
     withholding credits had nothing whatsoever to do with the
     filing of the 1981 tax return and had nothing to do with the
     grossly erroneous State Coal Venture deduction claimed on
     the 1981 tax return. The "transfer back" of Sheldon
     Silverman's withholding credits was not contingent upon, nor
     did it result from the State Coal Venture deduction, as this
     "transfer back" occurred prior to the reporting of this
     grossly erroneous item. [Emphasis in original.]

     The transcripts of account for Nancy's and Sheldon's 1981

and 1980 income tax liabilities show that the $54,372.61 transfer

occurred, or was posted, as of April 15, 1982.    It is clear, and

we have found, that after the transfer the balance in Sheldon's

and Nancy's 1980 account was zero.    Examination of the

adjustments shown on the transcript of account for 1980 and

listed on supra table 6, shows that a $54,372.61 transfer into

the 1980 account would make the balance zero only after giving

effect to the September 27, 1982, adjustments.    Thus, although

the transfer was made as of April 15, 1982, it was made on or
                              - 44 -


about September 27, 1982.   This is after the 1982 tax return

filing date (Aug. 21, 1982), and matches the date of the refund

of $81,054.77.   See supra note 4 and associated text.   We are

satisfied, and we have found, that the $54,372.61 transfer was a

transfer of part of the tax refund claimed on the 1981 tax

return.

     We hold for respondent on this issue.

     As a result, we hold that Nancy fails to qualify for

innocent spouse treatment under section 6013(e).

     To reflect the foregoing and the parties' settlement of

other issues,

                                    Decision will be entered in

                               accordance with the parties'

                               stipulations, as described supra in

                               note 2.
