                          T.C. Memo. 1996-55



                     UNITED STATES TAX COURT


                 LINDSEY C. NELSON, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 733-95.                   Filed February 14, 1996.


     Lindsey C. Nelson, pro se.

     Amy Dyar Seals, for respondent.


                          MEMORANDUM OPINION


     POWELL, Special Trial Judge:    Respondent determined

deficiencies in petitioner's Federal income taxes and accuracy-

related penalties pursuant to section 6662(a)1 in the following

amounts:




     1
         Section references are to the Internal
Revenue Code in effect for the years in issue, and
Rule references are to the Tax Court Rules of Practice
and Procedure.
                                 - 2 -

          Year             Deficiency          Penalty

          1991                $4,599              $920
          1992                 5,879             1,176
          1993                 5,641             1,128

     At the time the petition was filed, petitioner resided in

Greensboro, North Carolina.    The deficiencies result from the

inclusion in income of funds embezzled by petitioner's wife,

Linda, in the respective amounts of $17,450 in 1991, $25,997 in

1992, and $28,379 in 1993, and the disallowance of losses in the

respective amounts of $3,345 in 1991, $3,213 in 1992, and $2,055

in 1993 claimed on the returns from a bookkeeping business

operated by Linda.

     The sole issue is whether petitioner is entitled to relief

as a so-called innocent spouse pursuant to section 6013(e)(1).

     The facts may be summarized as follows.    Petitioner and

Linda married in 1988.    They had a child in 1992.   Petitioner had

worked as a "general superintendent" for several construction

companies.   Petitioner dropped out of college in 1979 but went

back in the fall of 1991 as a full time student majoring in civil

engineering with a stipend that included tuition and books.

Linda worked full-time as a bookkeeper/accountant for Datanet

Services, Inc. (Datanet), and essentially supported the family.

Linda was approximately 28 years old during 1991.     Petitioner was

apparently a few years older.

     From the beginning, petitioner and Linda had financial

difficulties.    In 1988, they sought protection under chapter 13

of the Bankruptcy Code.    The bankruptcy plan required them to pay
                                 - 3 -

$465 per month.    During 1991, 1992, and 1993, Linda received

wages in the amounts of $37,882, $30,085, and $27,191,

respectively.   Petitioner's employment was "sporadic".   He had

income in the amounts of $4,013 for 1992 and $2,203 for 1993.

     During 1991, when petitioner reentered college, Linda began

embezzling funds from Datanet.    She embezzled $17,450, $25,997,

and $28,379 during 1991, 1992, and 1993, respectively.    These

funds were spent on food, clothing, rent, furniture, and other

living expenses, including expenses for petitioner's education.

Petitioner and Linda took vacations to the beach each year and

also a trip to Colorado.    Linda was arrested in September 1993,

and convicted on March 25, 1994.

     Petitioner and Linda filed joint Federal income tax returns

for each of the years in issue reporting wages discussed above.

Petitioner and Linda did not report the amounts embezzled from

Datanet.    Petitioner and Linda deducted losses from the alleged

accounting service operated by Linda.    These losses were

fictitious.   Respondent determined that the embezzled funds

constituted gross income and disallowed the losses.    Respondent

also determined that accuracy-related penalties for negligence

were due.   Petitioner does not contest any of the adjustments,

but rather contends that he is entitled to relief of liability

under the so-called innocent spouse provisions contained in

section 6013(e).

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

income tax return.    When a joint return is filed, both spouses
                               - 4 -

become jointly and severally liable for the entire tax.     Sec.

6013(d)(3).   A spouse may be relieved of liability, however, if

the following requirements of section 6013(e) are satisfied:       (1)

The taxpayer and his or her spouse file a joint return for the

taxable year; (2) there is a substantial understatement of tax

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

the taxpayer establishes that in signing the return he or she

neither knew, nor had reason to know, of the substantial

understatement; (4) taking account of all the facts and

circumstances, it is inequitable to hold the taxpayer liable for

the deficiency in tax resulting from the substantial

understatement; and (5) the understatement exceeds 10 percent of

the taxpayer's adjusted gross income for the preadjustment year

(if such adjusted gross income is $20,000 or less).    An

understatement is substantial if it exceeds $500.    Sec.

6013(e)(3).   Petitioner bears the burden of proving all five

conditions of section 6013(e) have been satisfied.    Rule 142(a);

Ratana v. Commissioner, 662 F.2d 220 (4th Cir. 1981), affg. in

part and revg. in part T.C. Memo. 1980-353.

     It is undisputed that petitioner filed a joint return for

each of the years in issue and that there were substantial

understatements on those returns attributable to Linda's

activities.   The dispute then focuses on whether petitioner knew

or had reason to know of the understatements and whether it is

inequitable to hold petitioner liable for the deficiencies.
                               - 5 -

     Lack of actual knowledge is not sufficient to qualify for

innocent spouse relief.   Petitioner must establish that he had no

reason to know of the understatements.   Whether petitioner had

reason to know of the understatements depends on whether a

reasonable person in his circumstances could be expected to know

that income had not been reported and that erroneous deductions

had been claimed at the time the returns were signed.    Flynn v.

Commissioner, 93 T.C. 355, 365 (1989).   Whether a duty to inquire

into the propriety of the return arises depends on the taxpayer's

education level, involvement in family business and financial

affairs, presence of expenditures that appear lavish or unusual,

and the culpable spouse's evasiveness or deceit concerning the

couple's finances.   Kistner v. Commissioner, 18 F.3d 1521, 1525

(11th Cir. 1994), revg. T.C. Memo. 1991-463.   Petitioner contends

that he neither knew nor had reason to know about Linda's

defalcations from Datanet.

     It is unnecessary to decide whether or not petitioner

actually knew of the unreported income and bogus deductions

because he clearly had reason to know of those items.2   During

these years petitioner and Linda received and spent over $71,000

embezzled from Datanet.   At the same time they received gross

income from wages in the amount of approximately $100,000.    There

were no savings, and they spent approximately $171,000 during the

     2
         With regard to the 1993 return, petitioner
obviously knew that that return was not correct. The
return was signed by petitioner on Mar. 9, 1994.
Linda was indicted in January 1994, and pled guilty
and was convicted on Mar. 25, 1994.
                                - 6 -

3 years in issue.   The amounts embezzled constituted 42 percent

of that amount.   It is simply ludicrous for a person who was a

mature full-time college student to say that he had no reason to

know that something was not awry with this situation.   It may be

that he did not know exactly where the money came from, but

surely he was aware when the returns were filed that they spent

more than they were reporting on their returns.

     The same is true concerning the deductions claimed for the

alleged accounting business.    Petitioner knew that Linda worked

full-time.   During 1992 and 1993 she either was pregnant or had a

baby.   There is no evidence that remotely suggests that Linda's

alleged accounting business was a reality.

     Finally, while it is perhaps unnecessary to discuss whether

it would be inequitable to hold petitioner liable for the

deficiencies, see sec. 6013(e)(1)(D), we note that petitioner is

in a poor position to make such a claim.   In making this

observation we consider, inter alia, whether petitioner

significantly benefited from the understatement, beyond normal

support, and whether petitioner has been divorced.    Belk v.

Commissioner, 93 T.C. 434, 440 (1989); sec. 1.6013-5(b), Income

Tax Regs.

     Petitioner may be in the process of being divorced, and

while married to Linda he may not have enjoyed a lavish

lifestyle.   But he clearly did not live the life of a full-time

student, and the lifestyle that he did enjoy was due in no small

part to Linda's defalcations.   Furthermore, after Linda was
                               - 7 -

convicted, the only person who survived with any benefit was

petitioner.   His college education had been paid for during this

period.   He may not have walked away with many tangible benefits,

but he did receive that great intangible benefit.     We believe,

therefore, that it is not inequitable to hold petitioner liable

for the tax liabilities.

                                       Decision will be entered

                               for respondent.
