                            T.C. Memo. 1996-139



                          UNITED STATES TAX COURT



                     PATTI ANN OLLESTAD, Petitioner v.
               COMMISSIONER OF INTERNAL REVENUE, Respondent


        Docket No. 22197-91.                     Filed March 20, 1996.


        Patti Ann Ollestad, pro se.


        Dan Orzechowski, for respondent.


                            MEMORANDUM OPINION


        NAMEROFF, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1       Respondent determined the following deficiencies and

additions to tax in petitioner's 1982, 1983, 1984, and 1985


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


Federal income taxes:                                                                   Additions to
Tax
                                          Sec.                      Sec.                 Sec.
Year         Deficiency                6651(a)(1)                6653(a)(1)1            6654(a)

1982              $1,441                 $360                      $72                   $140
1983                 884                  221                       44                     54
1984                 902                  226                       45                     57
1985               2,122                  531                      106                    121
1
    In addition, respondent determined that petitioner was liable for an addition to
tax under sec. 6653(a)(2) in the amount of 50 percent of the interest payable with
respect to the portion of the underpayment attributable to negligence for each of
the years in issue.

       In the notice of deficiency, respondent determined that

petitioner and her former spouse, Dan Thompson (Mr. Thompson),

did not file Federal income tax returns for taxable years 1982,

1983, 1984, and 1985.                In addition, respondent determined that

petitioner was married and domiciled in a community property

State and computed her income tax liability in accordance with

community property laws.                Respondent determined that petitioner's

community share of gross receipts from National Cartage Co. was

$28,505 in 1982; $24,147 in 1983; $24,971 in 1984; and $36,750 in

1985.    Further, respondent determined that petitioner earned

interest income of $5 in 1982 and $5 in 1983.                               Respondent allowed

the following business expenses:
        Gross          Expense                                              Total      Community
Year   Receipts    X   Percent   =     Expense   +      Deprec.1    =    Deduction   Share (1/2)

1982   $57,009             41          $23,374          $8,000             $31,374     $15,687
1983    48,294             41           19,801           8,000              27,801      13,901
1984    49,941             41           20,476           8,000              28,476      14,238
1985    73,500             41           30,135           8,000              38,135      19,068
1
    The depreciation is based on a tractor placed in service in 1980 with a cost of
$80,000, zero salvage value, 10-year useful life, and the straight-line method.

In addition, respondent allowed excess itemized deductions as

follows:
                                           - 3 -

        Gross         Deduction   Total        Zero                Excess        Community
Year   Receipts   X   Percent =   Deduction - Bracket       =   Deduction    Share (1/2)

1982   $57,009          9         $5,131           $3,400           $1,731          $866
1983    48,294          9          4,346            3,400              946           473
1984    49,941          9          4,495            3,400            1,095           548
1985    73,500          9          6,615            3,540            3,075         1,538

Respondent also allowed petitioner two exemptions for each of the

years at issue.

       After concessions,2 the issue remaining for decision is

whether petitioner is entitled to relief from the deficiencies as

an innocent spouse for the years in issue.

       At the time of the filing of this petition, petitioner

resided in Moreno Valley, California.                   The stipulation of facts,

supplemental stipulation of facts, and attached exhibits are

incorporated herein by this reference.

       Petitioner did not complete the ninth grade.                         Petitioner

married Mr. Thompson in 1976, 1 month before she turned 16 years

old.       Prior to and during her marriage, petitioner was not

employed.        Petitioner and Mr. Thompson had two children:                      Danny,

who was born in 1976, and Tricia, who was born in 1980.

Petitioner's responsibilities were to care for the children and

do the grocery shopping.


       2
          Respondent conceded all additions to tax under secs.
6651(a)(1), 6653(a)(1) and (2), and 6654(a). In addition,
respondent allowed additional business deductions for 1982 in the
amount of $4,266.15; for 1983 in the amount of $3,001.90; for
1984 in the amount of $3,241.35; and for 1985 in the amount of
$6,657. The result of these concessions by respondent is that
the deficiencies decreased to $573 for 1982; $398 for 1983; $399
for 1984; and $762 for 1985.
                                 - 4 -


     During the years at issue, Mr. Thompson worked for Dan

Thompson Trucking (Trucking),3 a partnership he had formed with

his father Harry Thompson.    Trucking employed several truck

drivers; however, Trucking did not employ a bookkeeper or a

secretary.    Mr. Thompson maintained the books and records for

Trucking.    Trucking's business office was not located in the

marital home, and Mr. Thompson did not conduct business in the

marital home.    Petitioner did not work or perform services for

Trucking and did not help generate income for the business.

     Petitioner and Mr. Thompson had one checking account.      This

account was used for business and personal purposes.    Petitioner

was allowed to write checks or make deposits only with Mr.

Thompson's permission.    Petitioner wrote checks for groceries or

clothes for the children.    Petitioner never purchased, and was

not given, jewelry or furs.    On occasion, Mr. Thompson asked

petitioner to write checks between the amounts of $100 and $400

for "cash".   Petitioner gave the money from these checks to Mr.

Thompson, who used the money to pay truck drivers for fuel and

for various personal expenses.    Sometimes, Mr. Thompson requested

that petitioner make deposits to the checking account.

Petitioner did not know the source of the funds she deposited.

     3
          In view of the manner in which both parties presented
this case, we must assume that National Cartage Co. is either a
former name of Trucking or perhaps a "d.b.a.". Thus, we will
regard respondent's determination in the notice of deficiency as
relating to Trucking.
                               - 5 -


Mr. Thompson also wrote checks on and made deposits to this

account.   Petitioner did not see the monthly checking account

statement and did not balance the checkbook.

     At the beginning of their marriage, petitioner drove an 8-

year-old Cadillac which petitioner and Mr. Thompson had purchased

from their neighbors.   Mr. Thompson later gave the Cadillac to

his son from a previous marriage.   Sometime between 1982 and

1985, Mr. Thompson purchased a Cadillac El Dorado, which was

titled in both petitioner's and Mr. Thompson's names.    It is

unclear whether the El Dorado was new or used.   Petitioner used

the car for transportation for herself and the children.    Mr.

Thompson sometimes drove a truck and parked it at the marital

home; however, he also drove the El Dorado.

     Petitioner and Mr. Thompson separated in July of 1985.

Pursuant to a court order, Mr. Thompson and petitioner were

ordered to share the residence.   At first, they lived during

alternate weeks in the house; however, they were subsequently

ordered by the court to live in separate areas of the house at

the same time.   Sometime in October or November 1985, petitioner

permanently left the marital home to live with her mother.

Tricia continued to reside in the marital home with Mr. Thompson.

It is unclear whether Danny resided with Mr. Thompson.

     Petitioner's divorce from Mr. Thompson became final on

September 7, 1986.   Pursuant to the Division of Property Order
                                - 6 -


dated July 15, 1986, the Superior Court of the State of

California for the County of Los Angeles (the divorce court)

ordered the marital home to be sold for $104,500.    A portion of

the proceeds was used to pay various community obligations.

Petitioner received $5,500 as an equalizing payment to offset the

receipt of a truck by Mr. Thompson, and she received an

additional $4,383.35 from the sale proceeds of the marital home.

The divorce court also ordered the sale of various trucking

equipment and division of the sale proceeds among Mr. Thompson,

petitioner, and Mr. Thompson's parents.4   The divorce court noted

that certain property was the separate property of Mr. Thompson,

other property was the separate property of petitioner, and

certain property was sold.    The court retained jurisdiction over

a trailer located in Grass Valley, California.    The record

contains no information regarding the value or disposition of

this trailer.    Petitioner and Mr. Thompson were to divide the

furniture and camping equipment.    However, Mr. Thompson resided

in the marital home, so petitioner never received any of the

furniture.    Petitioner did receive photo albums of the children.

Petitioner and Mr. Thompson were awarded joint custody of the

children.




     4
            Petitioner testified that this equipment was never
sold.
                               - 7 -


     For the years at issue, neither petitioner nor Mr. Thompson

filed an income tax return.

Discussion

     Petitioner seeks relief as an innocent spouse from the

revised deficiencies determined by respondent.   Because

petitioner and Mr. Thompson were nonfilers during the years at

issue, petitioner is not entitled to relief as an innocent spouse

under the provisions of section 6013(e).5

     Rather, we must examine the provisions of section 66(c) to

determine whether petitioner qualifies for relief as an innocent

spouse.   The purpose of section 66(c) is to provide relief from

unreported community income which, pursuant to the provisions of

section 879(a), is more appropriately attributable to the other

spouse.   Lucia v. Commissioner, T.C. Memo. 1991-77, affd. without

published opinion 962 F.2d 14 (9th Cir. 1992).




     5
          If a husband and wife file a joint return, sec.
6013(d)(3) provides that each spouse becomes jointly and
severally liable for the tax due. A spouse, however, may be
relieved of such liability if he or she proves entitlement to
innocent spouse protection under sec. 6013(e). Sec. 6013(e)
provides relief if (1) a joint tax return has been filed for the
year at issue, (2) there is a substantial understatement of tax
attributable to grossly erroneous items of the other spouse on
the return, (3) the innocent spouse establishes that, in signing
the return, he or she did not know or have reason to know of the
substantial understatement, and (5) under all the facts and
circumstances, it would be inequitable to hold the innocent
spouse liable for the deficiency in tax resulting from the
substantial understatement.
                               - 8 -


     To qualify for relief under section 66(c), petitioner must

satisfy the following provisions:   (1) She must not have filed a

joint return with Mr. Thompson for any of the years at issue; (2)

she must not have included in her gross income for any of the

years in issue an item of community income properly includable

therein which, in accordance with the rules contained in section

879(a), would be treated as the income of Mr. Thompson; (3) she

must establish that she did not know, and had no reason to know,

of the item of community income; and (4) taking into account all

facts and circumstances, it is inequitable to include such item

of community income in her gross income.    Under section 66(c),

all four of the above requirements must be met before relief can

be granted.   Roberts v. Commissioner, 860 F.2d 1235, 1238 (5th

Cir. 1988), affg. T.C. Memo. 1987-391.

     The first requirement is satisfied since petitioner did not

file a return during the years at issue.    In addition, the first

portion of the second requirement is satisfied since petitioner

did not include items of community property in her gross income

which were properly includable therein.

     With respect to the second portion of section 66(c)(2),

section 879(a) attributes (1) earned income to the spouse who

performed the services and (2) trade or business income in

accordance with section 1402(a)(5).    The income earned from

Trucking constitutes income derived from a trade or business.
                               - 9 -


Therefore, we look to section 1402(a)(5), which provides as

follows:

     (5) if-

           *      *       *      *        *     *    *

           (B) any portion of a partner's distributive
           share of the ordinary income or loss from a
           trade or business carried on by a partnership
           is community income or loss under community
           property laws applicable to such share, all
           of such distributive share shall be included
           in computing the net earnings from self-
           employment of such partner, and no part of
           such share shall be taken into account in
           computing the net earnings from self-
           employment of the spouse of such partner;

We find that the income from Trucking is properly attributable to

Mr. Thompson.   Petitioner had nothing to do with the management

or control of Trucking.   Other than making a few deposits or

cashing some checks under the specific direction of Mr. Thompson,

petitioner was not involved in the operations of Trucking.

Accordingly, the second part of section 66(c)(2) is satisfied

with respect to the income derived from Trucking.

     The issue of whether petitioner knew or should have known of

the unreported income is essentially factual.   We are convinced

that petitioner had no actual knowledge of the unreported income.

However, petitioner must also prove that a reasonably prudent

person with her knowledge of surrounding circumstances would not

and should not have known of the understatement, keeping in mind

her level of intelligence, education, and experience.      Sanders v.
                               - 10 -


United States, 509 F.2d 162, 166-167 (5th Cir. 1975); Terzian v.

Commissioner, 72 T.C. 1164, 1170 (1979).    We conclude that a

reasonably prudent person in petitioner's position would not

have had reason to know of the unreported community income from

Trucking during the years at issue.

     In arriving at this conclusion, we emphasize that petitioner

did not complete the ninth grade and was not sophisticated with

respect to financial or tax matters.    Prior to and during her

marriage, petitioner did not hold a job.    Apparently, she had no

experience with paychecks or income taxes and never filed an

income tax return.    Moreover, there is no indication of lavish or

extravagant expenditures that might have given petitioner reason

to know of the unreported income.    Rather, petitioner lived a

modest lifestyle.

     Trucking was a partnership between Mr. Thompson and his

father.   Petitioner was unfamiliar with the financial condition

and business operations of Trucking.    Taxation of income from a

partnership is far more complicated than the taxation of an

employee's wages.    A partner's income is based upon his or her

"distributive share" of a partnership's tax items.    Sec. 702(a).

Without going into an elaborate explanation of partnership

accounting, we merely note that a partner might have take-home

money, without having taxable income from the partnership; e.g.,

a draw.   Consequently, petitioner did not have reason to know of
                              - 11 -


any unreported community income.   This is not the case where

petitioner knew that Mr. Thompson had earnings from Trucking but

did not know the exact amount of those earnings.   Cf. Horner v.

Commissioner, T.C. Memo. 1994-447 (spouse knew her husband worked

full time and earned substantial income); McGee v. Commissioner,

T.C. Memo. 1991-510, affd. 979 F.2d 66 (5th Cir. 1992) (spouse

knew her husband earned income from his dental practice which was

primary means of support and that his records were not kept in

order); Thatcher v. Commissioner, T.C. Memo. 1988-537 (spouse

knew her husband's dental practice earned money and that the

dental equipment was community property which generated income);

Baldwin v. Commissioner, T.C. Memo. 1986-342 (spouse previously

filed joint returns with her husband which disclosed income; she

knew her husband earned a salary from teaching at a university;

and she knew that his salary remained the same throughout the

years in issue).   Accordingly, the third requirement is

satisfied.

     Finally, taking into account all of the facts and

circumstances, we conclude that it would be inequitable to

include the unreported community income from Trucking in

petitioner's gross income.   There is no evidence that she

benefited significantly from this income.   Petitioner did not

live extravagantly and was given money by Mr. Thompson only for

groceries and clothing for the children.    She took nothing away
                             - 12 -


from the marriage beyond photo albums, a car and water skis, and

$9,883.35 from the sale of the marital home.

     Based on the foregoing, we conclude that petitioner is

relieved of tax liability under section 66(c).


                                               Decision will be

                                        entered for petitioner.
