                  T.C. Memo. 2001-178



                UNITED STATES TAX COURT



         CHRISTA KARIN MUELLER, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 3336-95.                       Filed July 19, 2001.


     P and H filed a joint return for 1986. R
determined a deficiency in tax on account of omission
of embezzlement income and gain from liquidation of
corporation, both items attributable to H. R also
determined a sec. 6661, I.R.C., addition to tax for
substantial understatement of income. P challenges
deficiency and asks relief from liability under
sec. 6015, I.R.C., as a so-called innocent spouse.
     1. Held: P and H omitted from income
embezzlement income and gain (in a reduced amount) of
H.
     2. Held, further, P has failed to show error in
the determination of sec. 6661, I.R.C., addition to tax
for substantial understatement of income.
     3. Held, further, P has failed to show
entitlement to relief from liability under sec. 6015,
I.R.C.
                                   - 2 -

       Christa Karin Mueller, pro se.

       Julius Gonzalez, for respondent.


               MEMORANDUM FINDINGS OF FACT AND OPINION


       HALPERN, Judge: By notice of deficiency dated December 5,

1994 (the notice), respondent determined deficiencies in, and

additions to, petitioner and petitioner’s husband’s 1986 Federal

income tax liability as follows:

With Respect to Husband:

                                    Additions to Tax
Year    Deficiency Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B) Sec. 6661
                                                1
1986    $1,367,888     $1,023,699                         $341,233
1
 50 percent of the interest payable under sec. 6601.

With Respect to Petitioner:

                                           Addition to Tax
            Year      Deficiency              Sec. 6661
            1986      $1,367,888              $341,233

       Petitioner and her husband, Reinhard Mueller (sometimes,

husband), made a joint return of income for 1986 (the 1986

return).    The principal adjustments giving rise to respondent’s

determination of a deficiency in tax are respondent’s positive

adjustment to gross income on account of three items determined

by respondent to have been omitted from gross income:

(1) embezzlement income of husband in the amount of $485,177,

(2) stock-related gain of husband in the amount of $2,299,920,

and (3) stock-related gain of husband in the amount of $5,068.
                                - 3 -

Respondent has since conceded the third item.   We accept that

concession, and do not further discuss that item.

     By the petition, petitioner assigns error to respondent’s

determinations but only avers facts supporting the defense that

she should be relieved of liability as a so-called innocent

spouse under section 6013(e).   At trial, the parties agreed that

petitioner could amend the petition to raise a claim under

section 6015 rather than section 6013(e).1   We gave leave for

such amendment.   Since respondent also consented to petitioner’s

introducing evidence with respect to the two remaining items of

gross income, we also deem the petition amended to raise those

issues and the addition to tax under section 6661.   See Rule

41(b).

     Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the year in issue.     Rule

references are to the Tax Court Rules of Practice and Procedure.

Petitioner bears the burden of proof.   See Rule 142(a).




     1
        On July 22, 1998, sec. 6015 was enacted, replacing
former sec. 6013(e), which was repealed generally as of the same
date. See Internal Revenue Service Restructuring and Reform Act
of 1998, Pub. L. 105-206, sec. 3201(a), (e)(1), 112 Stat. 734.
                                - 4 -

                          FINDINGS OF FACT

     Some facts have been stipulated and are so found.    The

stipulations of facts filed by the parties, with accompanying

exhibits, are incorporated herein by this reference.

Residence

     Petitioner resided in Fort Lauderdale, Florida, at the time

the petition was filed.

Petitioner

     Petitioner was born in Germany.    She married Reinhard

Mueller in 1956, and the couple have three sons.    She is a

housewife and has had no training in law, finance, or taxes.

She has not been employed outside her home or self-employed for

30 years.    She and husband have lived in Fort Lauderdale,

Florida, since approximately 1962.

Omni Equities, Inc.

     Omni Equities, Inc. (Omni), formerly A.T. Bliss & Co., Inc.,

was a Massachusetts corporation.    After May 2, 1986, husband was

president, a director, and the majority shareholder of Omni,

owning 6,571,201 of its shares, which was approximately 66

percent of its shares.    The second major shareholder in Omni was

Depository Trust Co. (DTC), which owned approximately 12 percent

of Omni’s shares.    The remaining 22 percent of Omni’s shares were

owned by various smaller shareholders.    In 1986, Omni’s principal
                                 - 5 -

asset was a block of shares in a corporation, MagnaCard, Inc.

(MagnaCard).

Walter Lyall Jacob, Walter L. Jacob & Co., Ltd., Jacob Growth
Capital, Ltd.

     Walter Lyall Jacob (Jacob) was a securities broker and

Scottish lawyer who engaged in business transactions with

husband.

     Walter L. Jacob & Co., Ltd. (WLJ & Co.) was a brokerage

house in London, England, owned by Jacob.

     Jacob Growth Capital, Ltd. (JGC), also known as Overseas

Growth Capital (OGC), was a Channel Island corporation owned, at

least in part, by Jacob.

Form 8-K

     A U.S. Securities and Exchange Commission Form 8-K, Current

Report Under Section 13 or 15(d) of the Securities Exchange Act

of 1934, dated July 24, 1985 (the Form 8-K), reports various

purchases by husband of shares in A.T. Bliss & Co., Inc. (Omni),

during July 1985, totaling 2,344,099 shares, for a total price of

$421,614.85.   The Form 8-K states:      “Including the above

purchases, Mr. Mueller now owns a total of 3,106,599 shares of

Registrant’s common stock, or 31% of the 9,877,266 total common

shares outstanding.”

Husband’s Indebtedness to Omni

     Husband was indebted to Omni in the principal amount of

$844,635 for the purchase in November 1985 of at least a portion
                                - 6 -

of his shares in Omni, as evidenced by a promissory note to Omni,

due January 30, 1986.   Husband satisfied the promissory note with

funds borrowed from WLJ & Co.

March 7 Agreement

     By agreement executed March 7, 1986 (the March 7 agreement),

Omni and WLJ & Co. agreed that, since Omni was desirous of

selling its shares in MagnaCard, and WLJ & Co. was a licensed

dealer in securities in England, Omni would appoint WLJ & Co. as

its agent to find a purchaser for such shares.     The March 7

agreement also provided that WLJ & Co. would receive a commission

of 10 percent of the price paid for Omni’s MagnaCard shares.

R. Mueller & Sons, Ltd.

     R. Mueller & Sons, Ltd. (RM & Sons) was a British

corporation, originally named Stockease, Ltd., which husband

acquired as an empty shell.   Following husband’s acquisition of

RM & Sons, he served as president of the corporation.     On

April 8, 1986, husband sold his 6,571,201 shares in Omni to RM &

Sons for $1,232,100.

Sale of MagnaCard; Disbursement of Proceeds

     On April 10, 1986, the board of directors of Omni authorized

the liquidation of Omni.

     On April 26, 1986, Omni sold 38,860,956 shares of MagnaCard

common stock to JGC for $3,600,000.     WLJ & Co. served as the

brokerage firm in the transaction.
                              - 7 -

     Out of the $3,600,000 proceeds, WLJ & Co. received $360,000

as brokerage commissions, leaving net proceeds of $3,240,000 for

distribution to Omni’s shareholders.

     On April 29, 1986, husband instructed WLJ & Co. to disburse

the net proceeds of $3,240,000 as follows:   (1) $2,299,920 to the

account of RM & Sons and (2) $940,080 by wire transfer to the

trust account of Omni’s attorneys (the trust account).   The

aforesaid $940,080 was transferred by wire to the trust account.

On May 5, 1986, $940,080 from the trust account was transferred

to an account at Meritor Savings (Meritor) in the name of

Reinhard Mueller, Trustee for Omni shareholders.   On August 19,

1986, $485,177.37 was wired from the Meritor account to WLJ &

Co.’s account at Barclays Bank, in London, England.

     With respect to the $2,299,920 to be disbursed to the

account of RM & Sons, WLJ & Co.’s customer account records show a

credit to account number 10051 (account No. 10051), in the name

of RM & Sons, on May 3, 1986, in the amount of $2,299,920.

Transactions in Account No. 10051

     WLJ & Co.’s records for account No. 10051 show the following

pertinent information with respect to transactions during April

and May 1986:
                                 - 8 -

 Date     Description            Debit       Credit        Balance
April 8   (Transfer from          –-           –-            --
          RM) 6,571,201
          shares Omni

April 8   2 Notes: RM for     $1,000,243      –-        (1$1,000,243)
          US $985,000 plus
          accrued interest

May 3     Tfr Omni               –-        $2,299,920      1,299,676
          Securities

May 3     Bought – US          1,250,000       –-             49,676
          $1,250,000
          5x US $250k – 6%
          Demand Debentures

May 3     Additional               5,919       –-             43,751
          Interest 8 Apr –
          3 May

May 3     Bought – US             43,751       –-             --
          $ 43,751.47
          1x US $43,751.47
          6% Demand Deb
     1
        We assume this to be a negative balance, although it is
not shown as such in the records for account No. 10051.

     Two documents from WLJ & Co. entitled “Contract Notes” (the

contract notes) evidence purchases for RM & Sons, account number

10051, of “Demand Debentures”.    The first such contract note

states that RM & Sons bought “US $1,250,000" “5 x US $250,000 5%

Demand Debentures” “Trade Date [May 3, 1986]”.      The second such

contract note states that RM & Sons bought “US $43,751.47" “5%

Demand Debentures” “Trade Date [May 3, 1986]”.
                                 - 9 -

DTC Suit

     DTC was due a liquidating distribution from Omni in the

amount of $496,437.50 (the DTC liquidating distribution), which

it never received.

     On or about October 28, 1986, DTC filed suit in Polk County,

Florida (the DTC suit), for payment of the DTC liquidating

distribution, naming, as defendants (1) Omni, and (2) husband in

his individual capacity, as director of Omni, and as trustee for

the shareholders of Omni.   A complaint (the complaint) was served

on husband by substitute service on petitioner at the family

residence on October 30, 1986.    The complaint alleges, among

other things, that husband had:

     surreptitiously removed from the Meritor Account and
     placed them in personal accounts or accounts over which
     he has control, and has thereby converted to his own
     personal use and benefit funds of DTC which were
     entrusted to him for safekeeping and distribution.
     Mueller has further caused assets of Omni which should
     have been used for payment of liquidating dividends to
     shareholders to be diverted to himself, his business
     associates, or companies which he controls.

     On June 1, 1989, the court in the DTC suit entered summary

final judgment in DTC’s favor against Omni and husband in the

amount of $496,437.50.   Eventually, DTC recovered $10,259.50 of

the dividend by garnishing an Omni account, leaving a balance due

of $486,178.
                                - 10 -

The 1986 Return

     On the 1986 return, petitioner and husband reported the

April 8, 1986, sale by husband of his 6,571,201 shares in Omni to

RM & Sons.   They reported a sales price of $1,232,100 and a cost

basis of $1,388,125, for a loss of $156,025.       They did not claim

the loss, however, stating:   “loss of $156,025 not deducted as

the sale was to a related entity.”       On September 20, 1988,

petitioner and husband made an amended return for 1986 (the

amended return).   On neither the 1986 return nor the amended

return did they report any amount with respect to the DTC

liquidating distribution.

Husband’s Criminal Conviction

     On or about October 6, 1994, husband was convicted (the 1994

conviction) of violating sections 7201 (“Attempt to evade or

defeat tax.”) and 7206 (“Fraud and false statements.”).       Among

the counts on which he was convicted were counts charging him

with (1) tax evasion on account of his failure to report and pay

tax for 1986 on income resulting to him from his conversion of

the DTC liquidating distribution, and (2) willfully making false

returns of income for 1986 by, among other things, failing to

report a liquidating dividend from Omni of approximately $2.2

million.

     On December 21, 1994, with respect to the 1994 conviction,

husband was sentenced to 51 months in prison, plus 3 years
                               - 11 -

probation.   The sentencing judge provided that husband could

reduce the length of his sentence by making restitution.    The

sentencing judge rejected husband’s claim of indigence:    “[T]he

court feels confident that you have either secreted funds or you

have placed funds in trust to other family members so that funds

are available.”

Christa Karin Mueller Trust

     The Christa Karin Mueller Trust (the trust) was established

by agreement dated April 30, 1989, between petitioner, as

grantor, and husband’s brothers, as trustees.    Petitioner is the

sole vested beneficiary under the trust.    The trust is governed

by the laws of Germany.

     The trust was funded with stocks and bonds with a cost basis

of $1,057,852.09 and an approximate fair market value at the time

of transfer of $1,150,509.    The stocks and bonds were transferred

from accounts with Prudential-Bache and Shearson Lehman Hutton

Inc., held in petitioner’s name alone.    The trust funds are

managed by Dresdner Bank located in Luxembourg.

     Petitioner received at least one distribution from the trust

in the amount of $13,700 in 1990, and approximately $100,000 in

distributions in 1991 through 1993.     On or about July 12, 1994,

petitioner obtained $450,000 by wire from the trust, which funds

were used to post cash bail (the cash bail) for husband in the

case leading to the 1994 conviction.
                                 - 12 -

Gordon Case

      Katherine and Richard Gordon (the Gordons) were shareholders

in Omni and made other investments in entities closely associated

with husband.      In 1985, the Gordons brought suit in State court

to recover losses incurred through the fraudulent activities of

husband, Omni, and other entities controlled by him.      Judgments

from these suits (the State court judgments) exceeded $1 million.

      In 1994, the Gordons filed suit in the U.S. District Court

for the Middle District of Florida (the District Court suit and

the District Court, respectively) to execute on the $450,000 cash

bail.      Petitioner was a defendant in the District Court suit.

Among the findings made by the District Court were the following:

      “The * * * [1994 conviction] involved the same facts
      and circumstances for which the Plaintiffs obtained
      their judgment[s] [the state court judgments], i.e.,
      failing to pay taxes on the money Mr. Mueller stole
      from investors such as the Plaintiffs.   * * * The
      Trust [trust] is funded by money fraudulently conveyed
      to it by Reinhard and Christa-Karin Mueller.”

      The District Court held, among other things, that the cash

bail was subject to execution by the Gordons.



                                 OPINION

I.   Deficiency in Tax

      A.     Introduction

      We must first determine whether respondent erred by

including in petitioner and husband’s gross income embezzlement
                                - 13 -

income of $485,177 and stock-related gain of $2,299,920, both

items attributable to husband.    We conclude that respondent erred

only in that the stock-related gain was $911,795 rather than

$2,299,920.   Petitioner and husband made a joint return of income

for 1986 and, thus, barring relief under section 6015, petitioner

is jointly and severally liable for any deficiency in tax

resulting from respondent’s adjustments.       See sec. 6013(d)(3).

     B.   Embezzlement Income

     Husband was convicted of tax evasion on account of his

failure to report and pay tax for 1986 on income resulting to him

from his conversion of the DTC liquidating distribution.       DTC had

obtained summary judgment against husband in the amount of

$496,437.50, which, after garnishment in the amount of

$10,259.50, left a balance due of $486,178.       There is sufficient

evidence for us to find that husband had unreported income in the

amount of $485,177 on account of his conversion of the DTC

liquidating distribution in 1986.2       See James v. United States,

366 U.S. 213, 220 (1961) (embezzled funds constitute gross income

to embezzler in year funds were misappropriated).




     2
        Respondent’s adjustment for embezzlement income is based
on the Aug. 19, 1986, withdrawal of $485,177.37 from the Meritor
account.
                                 - 14 -

     C.   Liquidating Dividend

            1.   Positions of the Parties

     Respondent has determined that husband failed to report gain

of $2,299,920 realized by him in 1986 on account of the

distribution by Omni to him of a portion of the proceeds from the

sale by Omni of its shares of MagnaCard (the MagnaCard sale).

Petitioner does not dispute that, in 1986, husband was owed a

$2,299,920 liquidating dividend from Omni on account of the

MagnaCard sale.    Petitioner argues as follows:     In 1986, husband

owed to WLJ & Co. (the broker on the MagnaCard sale) $985,000,

plus interest (for a total of $1,006,163), which total WLJ & Co.

offset against its obligation to disburse to him his portion of

the proceeds of the MagnaCard sale.       WLJ & Co. discharged the

remainder of its obligation to husband by issuing to him its

debentures in the amounts of $1,250,000 and $43,751 (the WLJ &

Co. debentures).    No payments were made on the WLJ & Co.

debentures in 1986.    WLJ & Co. eventually defaulted on the

debentures, and husband received only payments and property worth

$250,000.    The cost to husband of his Omni stock was $1,388,125.3



     3
        On brief, petitioner describes RM & Sons as husband’s
“alter ego” and treats husband and RM & Sons “as one and the
same”. We accept that RM & Sons’ separate identity is to be
disregarded, and, therefore, we shall disregard husband’s
April 8, 1986 sale of 6,571,201 shares of Omni to RM & Sons for
$1,232,100. We shall treat husband as owning directly such
shares of Omni. Further references to RM & Sons are to be
understood as references to husband.
                               - 15 -

Petitioner concludes that husband realized no gain in 1986 with

respect to his Omni stock.

           2.   Sections 331 and 1001

     Section 331(a) provides that amounts received by a

shareholder in a distribution in complete liquidation of a

corporation shall be treated as in full payment in exchange for

the stock.   In pertinent part, section 1001(a) provides that gain

from the sale or other disposition of property is the excess of

the amount realized therefrom over the taxpayer’s adjusted basis

in the property, and loss is the excess of adjusted basis over

amount realized.   In pertinent part, section 1001(b) provides:

“The amount realized from the sale or other disposition of

property shall be the sum of any money received plus the fair

market value of the property (other than money) received.”

Section 1001(c) provides that, except as otherwise provided, the

entire amount of the gain on the sale or exchange of property

shall be recognized.

     As we understand petitioner’s argument, it is not that there

was no sale by Omni of its MagnaCard shares in 1986 or that there

was no liquidating distribution to husband in 1986; it is that,

in 1986, husband received only $1,006,163, in the form of debt

relief from WLJ & Co.4   On that basis, we must determine


     4
         On brief, petitioner states:

                                                    (continued...)
                                  - 16 -

husband’s adjusted basis in his Omni shares, his amount realized,

and the amount and timing of any gain or loss.

           3.    Adjusted Basis

     Respondent has allowed petitioner no adjusted basis in

husband’s Omni shares.    We have found that husband was indebted

to Omni in the principal amount of $844,635 for the purchase of

at least a portion of his shares in Omni.      We make that finding

based on a note, dated November 20, 1985, from husband to Omni,

which is an exhibit to the stipulation of facts agreed to by the

parties.   We have also found that, by the Form 8-K, A.T. Bliss &

Co., Inc. (Omni), reported husband’s purchase of 2,344,099 shares

during July 1985 for $421,614.85.      Those two purchases account

for most, but not all, of husband’s shares in Omni.      We find that


     4
      (...continued)
          In summary of the foregoing transactions,
     Petitioner’s husband Reinhard Mueller received the
     following proceeds as his liquidating dividend on the
     OMNI shares:

       DATE                         ACTION              AMOUNT
     May 1986:         Margin loan plus interest
                       offset by the broker WLJ Co.   $1,006,163

     June 1987:        Settlement received from
                       Mr. Jacob personally for
                       defaulted debentures.            $100,000

     November 1987: Remaining claim under the
                    debentures exchanged for a
                    15% interest in a new
                    company, which was then sold
                    in 1988 for                         $150,000

     TOTAL proceeds from the OMNI dividend:           $1,256,163
                                  - 17 -

husband’s total adjusted basis in his Omni shares was $1,388,125,

based on these two findings and on the amount shown by petitioner

and husband on the 1986 return as husband’s basis in his Omni

shares.

          4.    Amount Realized

     On April 29, 1986, husband instructed WLJ & Co. to disburse

$2,299,920 of the net proceeds from Omni’s sale of MagnaCard to

the account of RM & Sons.   On May 3, 1986, WLJ & Co. credited

RM & Sons’ account with that amount.       On April 8, 1986, WLJ & Co.

debited RM & Sons’ account $1,000,243 to repay an indebtedness of

RM & Sons to WLJ & Co., and, on May 3, 1986, WLJ & Co. credited

RM & Sons account $5,919 to pay interest, and a total of

$1,293,752 to purchase demand debentures (the demand

debentures).5   Petitioner concedes that the sum of the first two

amounts, $1,006,162, constitutes an amount realized by husband.

She denies that the third amount does.      Petitioner argues that

husband had agreed to accept the demand debentures as a condition

of the sale of the Omni shares:

     because WLJCo. was unwilling to deplete its working
     capital for the sake of OMNI. * * * Reinhard Mueller
     had also agreed that the issuance of the debentures
     would satisfy WLJCo’s obligation to OMNI for the
     purchase of the MagnaCard shares and that thereafter


     5
        We assume that the 6-percent demand debentures referred
to in WLJ & Co.’s customer account record for account number
10051 and the 5-percent demand debentures referred to in the
contract notes are the same debentures. We cannot, however,
explain the discrepancy in description.
                               - 18 -

     Mueller would look only to WLJCo. and Mr. Jacob
     personally for payment of the balance due him under the
     liquidating dividend.

With respect to husband’s receipt of the demand debentures,

petitioner argues:    “As a matter of law, the debentures did not

constitute taxable income to a cash basis taxpayer until paid.

(I.R.C. Section 453(h)(1)(A)).”

     The parties have stipulated:    “On April 26, 1986, Omni sold

38,860,956 shares of MagnaCard common stock to JGC in England for

$3,600,000.00.   WLJ & Co. served as the brokerage firm in the

transaction.”    It is unclear whether petitioner is arguing that

WLJ & Co., rather than JGC, should be considered the purchaser of

the 38,860,956 MagnaCard shares from Omni.     In neither event,

however, did husband’s receipt of the demand debentures bring

into play installment reporting under section 453.     Section

453(a) provides that, generally, income from an installment sale

shall be taken into account under the installment method of

accounting.   In pertinent part, section 453(b)(1) defines an

installment sale as “a disposition of property where at least 1

payment is to be received after the close of the taxable year in

which the disposition occurs.”    In pertinent part, section

453(f)(4) provides:   “Receipt of a bond or other evidence of

indebtedness which--(A) is payable on demand * * * shall be

treated as receipt of payment.”     Section 15a.453-1(e)(1)(i),

Temporary Income Tax Regs., 46 Fed. Reg. 10718 (Feb. 4, 1981),
                               - 19 -

provides:   “A bond or other evidence of indebtedness * * * issued

by any person and payable on demand shall be treated as a payment

in the year received, not as installment obligations payable in

future years.”    (Emphasis added.)   Section 15a.453-(1)(e)(3),

Temporary Income Tax Regs., 46 Fed. Reg. 10719 (Feb. 4, 1981),

provides that an obligation is treated as payable on demand only

if the obligation is treated as payable on demand under

applicable State or local law.    See also Champy v. Commissioner,

T.C. Memo. 1994-355.    Petitioner has not overcome the inference

to be drawn from WLJ & Co.’s customer account records for account

number 10051 and the contract notes that the demand debentures

(evidences of indebtedness) were, indeed, payable on demand.       She

has failed to specify the applicable law or to prove that the

debentures would not be considered demand debentures under

applicable law.    As a result, we find that the demand debentures

were evidences of indebtedness payable on demand.     There were,

therefore, no payments after the year of sale with respect to

Omni’s sale of the MagnaCard stock, and the installment method of

accounting is unavailable.

     On May 3, 1986, $2,299,920 was credited to RM & Sons’

account at WLJ & Co. with respect to the sale by Omni of the

MagnaCard stock.    Of that sum, $1,006,163 was used to repay

indebtedness and the remainder purchased the demand debentures.
                                 - 20 -

Petitioner has failed to show that the amount realized by husband

was less than $2,299,920, and we find that it was $2,299,920.

           5.   Gain

      Husband realized a gain of $911,795 ($911,795 = $2,299,920 -

1,388,125) on receipt of the liquidating dividend from Omni.

That gain was recognized to husband in 1986.      See sec. 1001(c).

II.   Section 6661

      Respondent determined that petitioner and husband

substantially understated their income tax liability for 1986 and

petitioner is liable for the addition to tax provided for

in section 6661.     The addition to tax for a substantial

understatement of income tax for a taxable year equals 25 percent

of the amount of any underpayment attributable to such

substantial understatement.      See sec. 6661(a); Pallottini v.

Commissioner, 90 T.C. 498, 500-503 (1988).       There is a

substantial understatement of income tax for a taxable year if

the amount of the understatement for the taxable year exceeds

the greater of 10 percent of the tax required to be shown on the

return or $5,000.      See sec. 6661(b)(1)(A).   Although petitioner

bears the burden of proof, she has submitted no evidence nor has

she made any argument as to why section 6661 should not apply.

Accordingly, we sustain respondent’s determination of an addition

to tax for a substantial understatement to the extent that the
                               - 21 -

redetermined deficiency continues to qualify as a substantial

understatement under section 6661(b)(1)(A).

III.   Relief From Joint and Several Liability

       Petitioner seeks relief from the joint and several liability

imposed by section 6013(d)(3).    Section 6015(a) permits an

individual who has filed a joint return to elect to seek relief

from joint and several liability provided the taxpayer

meets the requirements of section 6015(b).    The pertinent

requirements of section 6015(b) that must be met are as follows:

         (A) a joint return has been made for a taxable year;

         (B) on such return there is an understatement of tax
       attributable to erroneous items of one individual
       filing the joint return;

         (C) the other individual filing the joint return
       establishes that in signing the return he or she did
       not know, and had no reason to know, that there was
       such understatement; [and]

         (D) taking into account all the facts and
       circumstances, it is inequitable to hold the other
       individual liable for the deficiency in tax for such
       taxable year attributable to such understatement; * * *

An individual meeting the requirements of section 6015(b) is

relieved of liability for tax (including interest, penalties, and

other amounts) for the taxable year in question to the extent the

liability is attributable to the understatement described in

section 6015(b).

       Respondent concedes that petitioner satisfies the first two

requirements but argues that she does not satisfy the last two:
                               - 22 -

“The petitioner cannot be relieved from liability under I.R.C. §

6015 because she had reason to know of the understatements on the

1986 joint income tax return; and because she significantly

benefitted from the unreported income, it would not be

inequitable to hold her jointly and severally liable.”

Petitioner argues that she satisfies all four section 6015(b)

requirements.

     We need not decide whether petitioner satisfies the third

(section 6015(b)(1)(C)), lack-of-knowledge requirement, since,

taking into account all of the facts and circumstances, as

required by section 6015(b)(1)(D), we find that it would not be

inequitable to hold her liable for the deficiency in tax we here

redetermine.    The establishment and funding of the trust plays a

large role in our reaching that conclusion.   The trust was

established by agreement dated April 30, 1989, and petitioner is

the sole beneficiary.   Stocks and bonds with an approximate fair

market value of $1,150,509 were transferred to the trust.     In

1994, husband was convicted of tax evasion for failing to report

his conversion of the DTC liquidating dividend and willfully

making false returns for 1986 by failing to report a liquidating

dividend from Omni of approximately $2.2 million.   The sentencing

judge stated:   “[T]he court feels confident that you have either

secreted funds or you have placed funds in trust to other family

members so that funds are available.”   In the District Court
                               - 23 -

suit, involving the Gordons, the judge found, among other things:

“The * * * [1994 conviction] involved the same facts and

circumstances for which the Plaintiffs obtained their

judgment[s], i.e., failing to pay taxes on the money Mr. Mueller

stole from investors such as the plaintiffs.    * * *   The Trust

[trust] is funded by money fraudulently conveyed to it by

Reinhard and Christa-Karin Mueller.”    We think those statements

are probative of the fact that the trust was funded with

husband’s unreported items of income for 1986.

     Petitioner testified as follows:    The stocks and bonds

transferred to the trust were her “savings”.    Her savings were

the result of her frugality as a housewife.    Her savings were

money she has set aside for retirement.    At the time the trust

was established, she had “a few” stocks and bonds.      She does not

know the difference between a share of stock and a bond, and she

could not remember the quantity or name of any of the stocks and

bonds that funded the trust.   Her husband had put the money into

the trust, and she did not know how much money went into the

trust.   She did not keep track of the value of the trust, and, at

the time of trial, did not know the trust’s value.      She did not

receive accountings from the trustees.

     Petitioner did not comply with a subpoena for documents

relating to the trust.   Moreover, we found petitioner’s testimony

regarding the establishment and operation of the trust to be
                               - 24 -

contradictory and evasive.    We also note that, in the District

Court suit, involving the Gordons, the judge found petitioner to

be uncooperative and responsible for delaying the course of the

lawsuit.

     Petitioner’s lack of knowledge and apparent lack of concern

with respect to the operation of the trust, which contained what

she claimed to be her life savings of over $1 million, gives us

no confidence in her claim that the trust was funded with her and

not husband’s funds.    Petitioner has failed to rebut the

inference from the statements and findings of the State Court and

District Court that the trust was funded with the embezzlement

income and liquidating dividend that husband failed to report for

1986, and we so find.    Indeed, the District Court explicitly

found that petitioner was complicit in the fraudulent conveyance

of funds to the trust, and we find likewise.    Whether all of the

1986 unreported income went to the trust or not is not critical.

Certainly, because of the conveyance of stocks and bonds with an

approximate fair market value of $1,150,509 to the trust,

petitioner significantly benefited from husband’s unreported

income of approximately $1.4 million, and that is enough for us

to determine that it is not inequitable to hold her liable for

the deficiency in tax.   See sec. 1.6013-5(b), Income Tax Regs.

(interpreting the predecessor of section 6015(b)(1)(D)).
                             - 25 -

     Petitioner has provided no grounds for relief under either

section 6015(c) or (f).


                                        Decision will be entered

                                   under Rule 155.
