                         T.C. Memo. 1995-511



                    UNITED STATES TAX COURT


            WILLIAM C. AND ELAINE GASKINS, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent

        PASQUALE T. QUINN AND SABINA A. QUINN, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 8509-91, 8539-91.     Filed October 26, 1995.

    James J. Riley, for petitioners.

    Keith L. Gorman, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION



      PARKER, Judge: Respondent determined deficiencies in

Federal income tax for petitioners William C. and Elaine Gaskins

and additions to tax for fraud under section 6653(b) for William

C. Gaskins as follows:
                                  - 2 -

         Taxable Year   Deficiency          Addition to Tax
                                              Sec. 6653(b)

            1979        $16,925                  $8,463
            1980         21,628                  10,814
            1981         80,794                  40,397


    Respondent determined deficiencies in Federal income tax for

petitioners Pasquale T. and Sabina A. Quinn and additions to tax

for fraud under section 6653(b) for Pasquale T. Quinn as

follows:

         Taxable Year       Deficiency           Addition to Tax
                                                  Sec. 6653(b)
           1979              $20,766                 $10,383
           1980               25,591                  12,796
           1981               88,322                  44,161


   Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the taxable years before the

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

Practice and Procedure.

   After concessions,1 the issues remaining for decision are (1)

Whether petitioner Elaine Gaskins is entitled to relief as an

innocent spouse under section 6013(e), and (2) whether

petitioner Sabina A. Quinn is entitled to relief as an innocent

spouse under section 6013(e).


     1
      Petitioners William C. Gaskins and Pasquale T. Quinn
conceded they are liable for their respective deficiencies for
taxable years 1979, 1980, and 1981 and for the additions to tax
under sec. 6653(b) for taxable years 1979 and 1980. Respondent
conceded petitioners William C. Gaskins and Pasquale T. Quinn are
not liable for the sec. 6653(b) addition for taxable year 1981.
                               - 3 -

                         FINDINGS OF FACT

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

stipulation of facts, supplemental stipulation of facts, and the

exhibits attached thereto are incorporated herein by this

reference.

     Petitioners William C. and Elaine Gaskins (the Gaskins) and

petitioners Pasquale T. and Sabina A. Quinn (the Quinns) resided

in Minersville, Pennsylvania, at the time they filed their

respective petitions. Their cases have been

consolidated for trial, briefing, and opinion.

    Petitioners' Business Activities

    Prior to 1968, William C. Gaskins (Mr. Gaskins) worked as a

roofer in the Philadelphia and Delaware area. While working in

Philadelphia for the roofers' union, Mr. Gaskins worked for a

John McCullough. From 1968 until 1975 or 1976, Mr. Gaskins owned

and operated his own roofing business known as Minersville

Roofing and Sheet Metal Company (the first roofing company).2

The business address was 142 Sunbury Street, Minersville,

Pennsylvania. Pasquale T. Quinn (Mr. Quinn) worked for the first

roofing company. This company fell behind in its payments of

withheld employment taxes to the Internal Revenue Service (IRS).

Mr. Gaskins was also the subject of a criminal investigation

with respect to these employment taxes but was never charged.


     2
      Paragraph 13 of the parties' stipulation of facts contains an
incorrect name for this first roofing company. The Court relies upon
Mrs. Gaskins' testimony as to the correct name of the first company.
                             - 4 -

The IRS ultimately assessed a responsible officer penalty under

section 6672 (the 100-percent penalty) against Mr. Gaskins for

this delinquency. Tax lines were filed against Mr. Gaskins.

Eugene Clark (Mr. Clark) was the IRS revenue officer responsible

for, collecting this penalty. Mr. Gaskins failed to pay the

taxes, and the first roofing company went out of business.

     In 1975 or 1976, the Gaskins organized, and Mr. Gaskins

ran, Minersville Roofing and Siding Company (the second roofing

company). Due to the unpaid debts of the first roofing company,

the Gaskins incorporated the second roofing company in Mrs.

Gaskins' name. Mr. Gaskins, using the equipment from the first

company, performed the jobs he had already arranged and,

thereby, continued in the roofing business. Mr. Gaskins listed

Mrs. Gaskins as president of the second roofing company. While

he had not asked her permission to list her as an officer, he

informed her he was going to do this. Mrs. Gaskins was at all

times aware that she was at least nominally the president of the

second roofing company.

     The second roofing company employed the same secretary who

had worked for the first roofing company. Mrs. Gaskins

occasionally assisted her with the secretarial work. The

secretary paid the company bills, but Mrs. Gaskins sometimes

made bank deposits. In the late 1970's, the second roofing

company also became delinquent in remitting its withheld

employment taxes. The IRS contacted the second roofing company,
                             - 5 -

and asked for Mrs. Gaskins, since she was listed as that

company's president. The 100-percent penalty was ultimately

assessed against Mrs. Gaskins in 1979 or 1980. Mrs. Gaskins made

monthly payments of about $100 on these taxes, making the

payments either" in person at the IRS office in Pottsville,

Pennsylvania, or by mail, in the period from about 1979 through

late 1981 or early 1982. Finally, equipment of the second

roofing company was-sold to pay off the employment taxes. Mr.

Clark was the revenue officer responsible for collecting this

penalty. The penalty was ultimately paid in full. The second

roofing company operated until late 1981 or early 1982.

     In the latter part of 1975, Mr. Gaskins and Mr. Quinn had

organized West Pine Construction Company (West Pine). Initially,

half of the stock was placed in Mr. Quinn's name and the other

half in Mrs. Gaskins' name. West Pine was involved in

stripmining anthracite coal. West Pine opened a bank account at

the Citizens' National Bank of Ashland on September 26, 1975,

with a deposit of $9,674.96. The signature card contained the

signatures of Benjamin Greenberg, Francis McCullough, Charles

Wertz, and Mr. Quinn. Mr. Quinn served as the secretary of West

Pine. Mr. Quinn's home functioned as West Pine's office,

although he did not even have a desk there. For some period West

Pine used a Post Office Box address.

     In 1979, through the efforts of John McCullough, other

persons invested in West Pine. Oscar Glassman invested about
                             - 6 -

$120,000 and Joseph Crosley about $60,000. Individuals who each

invested approximately $1,800 were Herbert Fisher, Charles

Conwell, Thomas Walsh, John McCullough, and possibly Benjamin

Greenberg. Herbert Fisher was an attorney in Philadelphia.    West

Pine entered into various leases to obtain mining rights.    One

lease, dated July 21, 1979, was signed in the names of Mrs.

Gaskins as president and Mr. Quinn as secretary. Two leases,

dated January 9, 1981, and June 10, 1981, were signed in the

names of Mr. Gaskins as president of West Pine and Mr. Quinn as

secretary. A Judgment Note in the amount of $15,000 and an

accompanying letter, both dated August 25, 1981, were signed in

the names of Mr. Quinn as secretary and Mrs. Gaskins as

assistant secretary.

     Mr. Quinn signed and filed Federal corporate income tax

returns for West Pine for the relevant periods. Mr. Quinn signed

checks for West Pine and kept the checkbook. He would write out

checks at his kitchen table. At some point Mr. Quinn lost his

eyeglasses, and Mrs. Quinn would assist him by writing out the

checks under Mr. Quinn's direction, which Mr. Quinn would then

sign. Sometimes, Mr. Quinn would borrow his wife's glasses so

that he could write out the checks himself.

     For some period, Mrs. Gaskins had signatory authority over

the West Pine bank account. Beginning in December of 1979, Mrs.

Gaskins' name appears along with Mr. Quinn's name as

signers(drawers, not endorsers) of West Pine checks. In most
                             - 7 -

instances, Mr. Quinn signed Mrs. Gaskins' name as the drawer of

these checks. Mr. Gaskins had given Mr. Quinn permission to sign

Mrs. Gaskins' name. Mr. Quinn and Mrs. Gaskins never discussed

this arrangement, but she was aware that he was signing her name

on the checks. Prior to the time in December of 1979 when Mrs.

Gaskins' name first appears on West Pine checks, Mr. Quinn had

signed the name of-William Devers (Mr. Devers) to the West Pine

checks, with Mr. Devers' permission. Mr. Devers had worked with

Mr. Gaskins, earlier when the latter was a roofer in

Philadelphia and Delaware. Mr. Devers also worked at West Pine.

     Mr. Gaskins and Mr. Quinn were generally compensated for

their work on a weekly basis. However, sometimes their paychecks

were delayed or at least were not turned over to their wives in

a timely manner. Mr. Gaskins and Mr. Quinn each received a $100

per-week expense allowance from West Pine; these expense checks

were issued to Mr. Gaskins, Mr. Quinn, or "Cash". On a few

occasions during the years at issue, Mrs. Gaskins received

checks from West Pine in reimbursement for business telephone

calls made from her home.

     Some of the investors, Messrs. Crosley, Walsh, and

McCullough, received paychecks, even though they did not perform

any services for West Pine. Messrs. Crosley and Walsh also

received $100 expense checks. West Pine also leased Lincoln

Continental automobiles for Messrs. Crosley, Walsh, Conwell,

Gaskins, and Quinn. During the years in issue, Messrs. Gaskins
                             - 8 -

and Quinn drove these Lincoln Continental automobiles. Mr. Quinn

paid the automobile leases and insurance from the West Pine

checking account. John McCullough had asked Mr. Quinn to put

Messrs. Crosley and Walsh on the payroll and to pay the other

expenses as a favor to him for having found the investors. Once

or twice, Mr. Quinn wrote a West Pine check to Mr. Conwell to

cover the latter's personal telephone bill. Substantial amounts

of personal or nonbusiness expenses were paid out of the West

Pine checking account.

     West Pine regularly was delinquent in the payment of its

quarterly Federal employment taxes. Beginning in March or April

of 1980 until November of 1981, Mr. Clark was the revenue office

responsible for monitoring West Pine's Federal employment tax

deposits. When West Pine's employment tax returns were late, Mr.

Clark would regularly summons the records necessary to prepare

those returns. Mr. Clark met with Mr. Quinn on numerous

occasions to prepare West Pine's employment tax returns.

     In early 1982, IRS revenue officer John Higgins (Mr.

Higgins) took over the West Pine account. On September 9, 1982,

Mr. Higgins interviewed Mr. Quinn with regard to the 100-percent

penalty for West Pine's employment taxes. During that interview,

Mr. Quinn indicated that the officers of West Pine had been:

Mrs. Gaskins, president, 1975 to 1979; Oscar Glassman,

president, 1979 to June or July 1982; Mr. Quinn, secretary, 1975

to June or July 1982; and Joseph Crosley, vice president, 1979
                                - 9 -

to June or July 1982.

         In February of 1982, West Pine had filed a petition for

bankruptcy protection. The amended disclosure statement filed in

the bankruptcy court on September 20, 1982, listed the

shareholders of West Pine's common stock as: John McCullough

(then deceased) and his widow (13 percent), Thomas Walsh and

Kathleen Walsh (12 percent), Joseph Crosley and Marie Crosley

(12 percent), the Quinns (13 percent), the Gaskins (13 percent),

Oscar and Lillian Glassman (20 percent), Charles T. Conwell (12

percent), and Herbert Fisher (5 percent). All of the shares

except those belonging to the Glassmans and the Crosleys were

pledged as security for loans from Oscar Glassman and Joseph

Crosley of $144,000 and $40,000, respectively. The amended

disclosure statement listed West Pine's officers as: Mr.

Gaskins, acting president; Mr. Quinn, acting secretary; Thomas

Walsh, acting treasurer; Joseph Crosley, acting vice president;

and Charles Conwell, acting assistant vice president; Mrs.

Gaskins was not listed as an officer.

     Following a criminal investigation, Mr. Gaskins and

Mr.Quinn were charged with diverting receipts belonging to West

Pine.3    Mr. Gaskins and Mr. Quinn were convicted of Federal


     3
       Petitioners William C. Gaskins and Pasquale T. Quinn have
conceded in this case that they received receipts nor whether the
diverted receipts included the rental of the Lincoln Continental
automobiles and the payment of personal or nonbusiness expenses
out of the corporate bank account.
                             - 10 -

income tax evasion under section 7201, filing a false return

under section 7206(1), and conspiracy under 18 U.S.C. section

371 for the taxable year 1980. They were acquitted of the same

charges for the years 1979 and 1981.

     Respondent determined that Mr. Gaskins and Mr. Quinn each

had diverted receipts from West Pine in the amounts of $46,891,

$52,819, and $154,630 for 1979, 1980, and 1981, respectively,

and adjusted the Gaskins' and the Quinns' incomes as reported on

their Federal individual income tax returns upwards accordingly.

See supra note 3. Both the Gaskins and the Quinns filed joint

Federal income tax returns for these years and, therefore,

respondent, in the notices of deficiency, determined the

resulting deficiencies against Mr. and Mrs. Gaskins jointly and

against Mr. and Mrs. Quinn jointly. However, the additions to

tax for fraud were determined only against Mr. Gaskins and Mr.

Quinn. Mr. Gaskins and Mr. Quinn have conceded the deficiencies

for all 3 years and the additions to tax for fraud for 1979 and

1980; respondent has conceded the addition to tax for fraud for

1981. Mrs. Gaskins and Mrs. Quinn seek relief in this Court from

these deficiencies as innocent spouses under section 6013(e) for

all 3 years.

     Petitioner Elaine Gaskins

     Background

     Mrs. Gaskins was born on October 20, 1943. She graduated

from high school in 1961; she received no further formal
                             - 11 -

education or training. The Gaskins were married on April 27,

1968, and, as of the date of the trial, remained married. Prior

to her marriage and for 6 months after her marriage, Mrs.

Gaskins worked as a secretary. Thereafter, she worked as a

receptionist for a doctor until March of 1973, when her first

daughter, Rochelle, was born. The Gaskins have two daughters,

Rochelle and Sharon. From 1973 until 1985, Mrs. Gaskins' primary

occupation was that of a homemaker. During the years the second

roofing company was in operation, she assisted Mr. Gaskins to

the limited extent as described earlier.

     In 1985, Mrs. Gaskins took a job as cafeteria worker in

the Minersville area school district, which paid between $3.35

and $3.85 per hour, with no employee benefits. She quit this job

in June of 1990. In May of 1992, she began a secretarial job in

the Domestic Relations Office located at the Schuylkill County

Courthouse in Pottsville, Pennsylvania. This job paid $8.05 per

hour and offered medical benefits for her family. Mrs. Gaskins

has also done some freelance work for a local newspaper,

receiving from $20 to $40 per month for articles she submitted.

     Financial Responsibilities

     Mrs. Gaskins always took care of the family finances,

endorsing and depositing Mr. Gaskins' paychecks into her

checking account or cashing them, and using the funds to pay the

family's bills. Mrs. Gaskins endorsed and deposited many of the
                             - 12 -

expense checks Mr. Gaskins received from West Pine from June of

1979 through September of 1981. When the Gaskins were first

married, they had a joint checking account; a year or two later,

this was changed into Mrs. Gaskins' name only, since she paid

all the bills. To Mrs. Gaskins' knowledge, Mr. Gaskins did not

have a checking account or other bank accounts thereafter. For a

short time in the late 1960's, the Gaskins had had a savings

account containing approximately $800 received as wedding gifts.

As far as Mrs. Gaskins knew, the Gaskins had no other bank

accounts between 1972 and 1981. For the years at issue, Mrs.

Gaskins did not prepare the Gaskins' Federal individual income

tax returns, but she assembled the information for preparation

of the returns and met with the tax return preparer.

     Prior Tax Liabilities

     Mrs. Gaskins first learned of the employment tax problems

with the first roofing company in 1975 or 1976 when the Gaskins

incorporated the second roofing company. Mrs. Gaskins then

learned that Mr. Gaskins had received letters from the IRS,

mailed to the first roofing company's office, requesting payment

of these taxes.

     Mr. Gaskins also had problems with his individual Federal

tax returns for taxable years 1970 through 1974. The IRS

assessed a fraud penalty against Mr. Gaskins with respect to his

individual tax deficiencies. Beginning in late December of 1981

through May of 1982, the IRS sent several notices to Mr. Gaskins
                             - 13 -

regarding his individual income taxes for those earlier years.

Mrs. Gaskins knew that tax lines were placed against Mr.

Gaskins. Mrs. Gaskins, however, believed Mr. Gaskins' tax

liabilities stemmed from his failure to pay over the first

roofing company's employment tax withholdings. She was not aware

that Mr. Gaskins had problems with his individual income taxes

for 1970-1974. However, Mrs. Gaskins was aware of the IRS

criminal investigation into the first roofing company.

     Mrs. Gaskins learned of the second roofing company's

failure to pay employment taxes when the secretary informed Mrs.

Gaskins that the IRS had called the office asking for Mrs.

Gaskins. The IRS ultimately assessed a 100-percent penalty

against Mrs. Gaskins for-this employment tax liability.

     Mrs. Gaskins' Knowledge of West Pine's Operations

     Mrs. Gaskins did not know who incorporated West Pine. She

never attended any shareholder meetings. She only visited a West

Pine work site on one occasion, in the company of Mr. Gaskins

and their children so the children could see where their father

worked. Mrs. Gaskins never performed any duties for West Pine.

Mrs. Gaskins was not aware of West Pine's suppliers or

customers.

      Mr. Gaskins had told Mrs. Gaskins that he wanted her to

be listed as president of West Pine, and that her name would be

used to sign checks since he could not sign anything. Mr.

Gaskins had also told Mrs. Gaskins he had given Mr. Quinn
                             - 14 -

permission to sign her name to the West Pine checks. Mrs.

Gaskins believed that it was Mr. Quinn who was signing her name

to West Pine checks. Mrs. Gaskins permitted this practice,

accepting the explanation that he did not know anything about

the business, Mr. Quinn had the checkbook and was at the work

site, and this arrangement was more convenient. Mrs. Gaskins

knew Mr. Quinn was an officer of West Pine, the treasurer she

thought.

     During the years 1979 through 1981, Mrs. Gaskins suspected

that West Pine had financial problems when Mr. Gaskins did not

give his paycheck to her at regular intervals. Mrs. Gaskins had

no knowledge of any unreported income which Mr. Gaskins received

from West Pine. See supra note 3.

     Every 3 or 4 months, Mrs. Gaskins would make payments on

her 100-percent-penalty for the second roofing company in person

at the Pottsville IRS office. Occasionally, Mrs. Gaskins would

bring in information on Mr. Gaskins' 100-percent penalty for the

first roofing company. During Mrs. Gaskins' visits to the

Pottsville IRS office, she was distressed that she had been

assessed the 100-percent penalty, and Mr. Clark explained the

responsible person penalty to her. In her conversations with Mr.

Clark, Mrs. Gaskins denied she had any position or capacity with

West Pine.

     In the latter half of 1981, Mr. Clark came into possession

of copies of some of West Pine's checks and bank signature
                             - 15 -

cards. He then met with Mrs. Gaskins about these items, told her

of West Pine's delinquent employment taxes, and advised her of

her potential liability. Mr. Clark showed Mrs. Gaskins the West

Pine checks and asked her about her signatures on the front of

those checks. Mrs. Gaskins told him that Mr. Quinn had signed

her name to the West Pine checks. In response to her concern

about the potential for another 100-percent-penalty assessment,

Mr. Clark advised her to get an affidavit from Mr. Quinn

confirming that Mr. Quinn had signed her name and to have her

name removed from the bank signature cards. On a subsequent

visit in late 1981, Mrs. Gaskins told Mr. Clark that she could

not do that since she had signed the checks. In 1982, after the

Gaskins' 1981 individual return had been filed, Mrs. Gaskins

contacted the family's tax return preparer for advice regarding

West Pine's tax problems. The tax return preparer declined to

get involved or offer assistance. Mrs. Gaskins understood from

Mr. Gaskins that West Pine's tax liabilities and other bills

were discussed at meetings held in Philadelphia, meetings that

she did not attend.

     On September 14, 1982, IRS Revenue Officer Higgins

interviewed Mrs. Gaskins relative to the recommendation for a

100-percent-penalty assessment with respect to West Pine's

employment tax liability. During this interview, Mrs. Gaskins

stated that while she was not an officer of West Pine, she may

have been listed as comptroller. At trial, Mrs. Gaskins
                             - 16 -

testified that she was listed as West Pine's president, not at

the time of West Pine's incorporation, but closer to the time

West Pine ceased operating. Mrs. Gaskins explained the apparent

discrepancy in her answers by stating that in 1982, she did not

know whether she actually had been listed as president. Mrs.

Gaskins further explained that she answered Mr. Higgin's

questions based on information given to her by Mr. Gaskins in

anticipation of that interview. Mrs. Gaskins did not distrust

her husband, and she simply repeated what he had told her.

     House, Mortgages, and Related Expenses

     The Gaskins live in a three-bedroom ranch house, where

they have resided since July of 1972. They obtained their first

mortgage on the house from State Capital Savings and Loan in the

principal amount of $21,800. In January of 1978, the Gaskins

obtained a $5,000 loan at an interest rate of 23.04 percent,

secured by their residence, from Pacific Finance Consumer

Discount Company. Of the $5,000 amount, $502.72 was applied

towards credit insurance, $891.07 was disbursed to Household

Finance, $8 was paid to the recorder of deeds, and $3,598.21 was

disbursed to the Gaskins. In February and March of 1981, the

Gaskins borrowed $8,111.09 at an interest rate of 17.10 percent,

and $14,766.14 at an interest rate of 17.64 percent

respectively, from Transamerica Financial Consumer Discount

Company (Transamerica); these loans were secured by their

residence. Transamerica disbursed the proceeds of the February
                             - 17 -

1981 loan as follows: $3,104.84 to pay off the balance on a

previous loan from Transamerica, $1,500 to Household Finance,

$730.92 for insurance and recording fees, and $2,775.33 directly

to the Gaskins. Proceeds of the March 1981 loan (the second

mortgage) paid the balance of $7,541.42 remaining on the

February 1981 Transamerica loan, $1,331.82 to Household Finance,

and title insurance and recording fees of $206, leaving

$5,686.90 for the Gaskins. The Gaskins used a portion of these

funds to replace the broken oil burner in their home with a coal

stoker and to pave the dirt driveway at their home. On July 28,

1982, the Gaskins transferred title to their house from their

joint ownership to Mrs. Gaskins individually.

     As of September 23, 1985, the Gaskins' property taxes

for1983 and 1984 remained unpaid, and the county scheduled the

property to be sold. From February through August of 1985, the

Gaskins failed to make payments on their first mortgage ($161.11

per month) and were threatened with foreclosure. On March 24,

1986, Transamerica filed to foreclose on the second mortgage,

since the Gaskins-had not made any payments ($234 per month)

since November 17, 1985. The Gaskins' default on the second

mortgage note caused the loan to become immediately due in full;

the amount due on principal and interest, plus attorney's fees,

was $15,192. As will be described below, funds were obtained to

pay this mortgage and the foreclosure sale was averted. Mrs.

Gaskins paid the 1984 and 1985 property taxes on October 27,
                               - 18 -

1986.

        As of May 16, 1990, the-1988 property taxes remained

unpaid, and, again, the county threatened to sell the house. On

July 12,    1991, Meridian Mortgage Corporation (then the holder

of the first mortgage) sent notice of its intention to foreclose

if defaulted payments and late fees for the months of April

through June of 1991 were not made within 30 days. On November

11, 1991, Meridian Mortgage wrote again, requesting payments for

August through October of 1991. As of April 13, 1993, the

property taxes for 1991 and 1992 remained unpaid.

        The Gaskins have made no improvements to this house, which

is in a state of disrepair. They have not purchased any new

furniture since at least 1981.

        Personal Bankruptcy

        On October 29, 1982, the Gaskins filed a petition in the

United States Bankruptcy Court for the Eastern District of

Pennsylvania. The Gaskins' petition listed the IRS as a creditor

of Mr. Gaskins in the amount of approximately $115,000.

According to the bankruptcy petition, the Gaskins owed local

taxes of $971.07 and owed Household Finance $1,650 on a loan

borrowed to pay taxes. They also owed Household Finance $992.64

on a second loan, used for the purchase of a major appliance.

When the Gaskins filed the bankruptcy petition, a suit was

pending in the case Credit Alliance Corp. and Leasing Service
                               - 19 -

Corp. v. William and Elaine Gaskins. On March 10, 1983, the

Gaskins filed to withdraw the bankruptcy petition.

     Mr. Gaskins' Medical Condition and Resulting Disability

Income

     Mr. Gaskins suffers from several medical problems. He has

had diabetes since about 1977, polycythemia,4 and

arteriosclerosis. In July of 1981, to improve circulation in his

lower extremities caused by aorticiliac occlusive disease, he

had arterial bypass surgery. Due to the limitations in movement

imposed by this condition, Mr. Gaskins' doctor considered him to

be totally disabled. However, sometime in 1984, Mr. Gaskins went

to work in a coal mine. On August 14, 1984, Mr. Gaskins injured

his lower back while lifting rock for the Sharp Mountain Coal

Company; Mr. Gaskins has not worked since this injury. He still

suffers from back pain. In early 1986, Mr. Gaskins returned to

the hospital for tests, and the physician recommended that the

arterial bypass surgery be repeated. That surgery was not

performed until 1991. In 1993, Mr. Gaskins suffered a stroke. In

December of 1993 and March of 1994, he had procedures performed

on his carotid arteries, which were clogged. Mr. Gaskins

continues to have problems with his legs.

     In 1982, Mr. Gaskins applied for Social Security


4
  Polycythemia is a "condition marked by an abnormal increase in the
number of circulating red blood cells". Webster's Ninth New
Collegiate Dictionary (1983).
                             - 20 -

disability benefits. On May 13, 1983, Mr. Gaskins was granted

benefits fora period of disability from July 3, 1981, through

December 30,1982. After his 1984 accident in the coal mine, Mr.

Gaskins appealed the cessation of his benefits. On August 5,

1986, the Social Security Administration issued its decision

that Mr. Gaskins had continued to be disabled since 1982. In

October of 1986, Mr. Gaskins received a lump-sum payment of

$17,282.88 of retroactive Social Security disability income.

Mrs. Gaskins received two checks in the amounts of $2,032.50 and

$4,065 as retroactive payments herself and for her children,

respectively. Mr. Gaskins used his lump-sum award towards the

mortgages to avert the threatened foreclosures on the family

home. Beginning in October of 1986, the family received monthly

Social Security income of $693, from which $15.50 in medical

insurance premiums was deducted. The family continues to receive

Social Security income in the amount of $1,078 monthly for the

benefit of the Gaskins and their daughter, Sharon.

     Mr. Gaskins also received Workers' Compensation as a

result of his mining accident. On July 11, 1986, Mr. Gaskins

requested that his Workers' Compensation benefits be commuted to

enable him to pay the second mortgage and prevent foreclosure on

the home. In December-of 1986, a lump-sum payment of $74,000 was

approved, from which $7,500-in attorney fees was deducted. Some

of the remaining funds were used to pay off the second mortgage,

taxes, and other past due bills.
                              - 21 -

     Health Insurance

     From 1982 until 1986, the Gaskins family had no medical

insurance. Beginning in October of 1986, when Mr. Gaskins was

approved for his retroactive Social Security payments, he

received Medicare insurance coverage;5 his hospital insurance

coverage was effective retroactive to January of 1984. These

insurance benefits applied to Mr. Gaskins only, not to the other

members of his family. During 1989 to 1991, the Gaskins received

several past due notices related to medical charges. On November

6, 1990, Mrs. Gaskins was approved for public assistance which

entitled her to free medical care. Mrs. Gaskins' secretarial job

at the Schuylkill County Courthouse, which she began in May of

1992, now provides medical insurance for the Gaskins and their

daughter.

     Other Resources and Assistance Received

     During-the early 1980's, Mrs. Gaskins' father gave them

money. Mr. Gaskins' sister gave them several hundred dollars.

The Gaskins did not repay this money.

     In 1982, the Gaskins sold a piece of undeveloped real

property for $7,500. The Gaskins had purchased this 5 1/2-acre

property in 1970 for $200 at a tax sale. Of the proceeds from


     5
      It appears that Mr. Gaskins did not elect to take the
supplemental medical insurance coverage retroactive to Jan. 1984
which was made available for a cost of $500.70. This cost could be
paid in a lump sum, or deducted from the next 21 monthly benefit
checks.
                             - 22 -

the 1982 sale, $2,184.80 went to the IRS to be applied to Mrs.

Gaskins' 100-percent-penalty debt.

     On February 11, 1983, the Department of Public Welfare

authorized fuel energy assistance for the Gaskins; this was used

to buy coal to heat their house. The Gaskins received public

welfare benefits in the amount of $183 every 2 weeks and food

stamps for a period of about 2 years prior to October of 1986.

     During the period 1981 through 1986, the Gaskins'

daughters, Rochelle and Sharon, wore second-hand clothes. Sharon

wore her older sister's clothes. In 1988 or 1989, their

neighbors, the Stabinskys, gave some of their daughters' clothes

to Rochelle and Sharon. Relatives also gave the girls their old

clothes. Their grandparents bought them shoes, school clothes,

and other school items. Their grandparents took them to

amusement parks and bought them swimsuits and ice cream in the

summer and toys for Christmas. Mr. Gaskins' mother gave the

Gaskins family food to prepare Thanksgiving and Christmas

dinners. Mrs. Gaskins' parents and Mr. Gaskins' sister also

bought them food. Their neighbor, Michael Stabinsky (Mr.

Stabinsky), brought them coal during the winter of 1989. Mr.

Gaskins' sister also gave them coal. Mr. Stabinsky hooked up

"rabbit ears" to the Gaskins' television on at least three

occasions when their cable service was disconnected for

nonpayment, so that the children could watch television.

    On November 21, 1989, Mr. Gaskins cashed in two life

insurance policies; he received only $164.74 due to $4,090.81
                             - 23 -

owed on loans made against these policies. These loans had

commenced in 1976, with additional amounts borrowed in 1978,

1979, and 1981.

     Lifestyle

     From 1971 until 1987, Mrs. Gaskins drove a 1971 Plymouth

Fury (the Fury). In 1981 and 1982, the Gaskins also owned a 1979

Dodge truck, which they financed through Chrysler Credit

Corporation. In 1987, the Fury's transmission failed, and the

Gaskins bought a 1984 Chevrolet Celebrity for Mrs. Gaskins. At

that time, the Gaskins also owned a 1977 Cadillac and a

1973Ford. Mrs. Gaskins had the 1984 Chevrolet for only 4 days

when an accident destroyed the car. Mrs. Gaskins' father then

gave her a 1979 Ford Fairlane, which she was still driving at

the time of the trial. In 1994, the Gaskins owned a 1982 Ford, a

1979 Ford, and a 1980 Oldsmobile.

     From 1968 until the early 1980's, Mrs. Gaskins had store

charge cards at the Sears and Pomeroy's department stores. She

stopped using the Pomeroy's card; the Sears account was referred

to a collection agency, and the card was recalled. Mrs. Gaskins

made payments on the delinquent Sears account, restoring her

credit rating so that during the summer of 1993, she was able to

open store charge accounts again. She has never had credit cards

such as Visa or American Express.

     Mrs. Gaskins has never owned any expensive jewelry. The

Gaskins have never gone on a family vacation, nor has Mrs.

Gaskins herself gone on a vacation. The only time the Gaskins
                             - 24 -

have gone out to dinner, excluding fast food restaurants, was

for their daughter's wedding rehearsal dinner. The Gaskins have

never owned any expensive items such as furs, a boat, or race

horses. The Gaskins have never had any stocks, bonds, or other

investments other than that in Mr. Gaskins' companies. The

Gaskins' older daughter was a senior at Kutztown University at

the time of the trial. Her education was financed primarily by

loans, grants, and a scholarship. The Gaskins contributed only

$300 to $400 per year for her college education.

     Petitioner Sabina A. Ouinn

     Background

     Mrs. Quinn was born on November 25, 1925. She graduated

from high school in 1943 and began working shortly thereafter.

She received no further formal education or training. Except for

5 months of unemployment during 1988, Mrs. Quinn was in the work

force almost continuously from 1943 until June of 1994, when she

stopped working due to an accident. For nearly all of this 50-

year period, Mrs. Quinn has worked as a legal secretary. From

1988 until June of 1994, she worked part time, even though she

was in her 60's and receiving Social Security retirement income.

Mrs. Quinn continued working in her later years to earn money

for her car payments of $300 per month, for her medical

insurance costs of $547 every 2 months, and for spending money.

    The Quinns were married in 1947, and, as of the trial in

this case, were still married. In 1955, they moved in with Mrs.
                             - 25 -

Quinn's parents, the Angelos. The Angelos continued living in

the house and were living there until at least 1994. At some

point, title to the property was transferred from the Angelos to

the Quinns. Mrs. Quinn has lived in this house for all but 8

years of her life. The house is one half of a duplex, with three

bedrooms, one bathroom, and a small yard. Mrs. Quinn has paid

for maintenance such as new windows, siding, shutters, and

brickwork; however, there have been no material alterations or

additions to the house. During 1980, the Quinns paid off one

mortgage with payments that year totaling $1,657.71. In the same

year, they obtained a new mortgage in the amount of $3,200. The

Quinns have two daughters, Patricia Miller (Patricia) and Linda

Greis (Linda), who were 45 and 35 years of age, respectively, at

the time of the trial. Patricia attended Bloomsburg University

and Albright College; she also did post graduate work at

Bloomsburg. From 1971 to 1975, and from October of 1977 to June

of 1984, Patricia lived with the Quinns. During the latter

period, Patricia did not pay rent but assisted with the

household expenses. In 1975, when Patricia married for the first

time, and in 1984, when Patricia remarried, the Quinns did not

contribute towards the wedding or reception expenses.

    Linda attended college with the assistance of student loans

and earnings from her part-time jobs; she was graduated from the

University of Delaware in 1981. Patricia helped Linda with rent

and other college expenses. In August of 1982, Linda moved to
                             - 26 -

Germany to be with her husband; she lived there for 3 or 4

years. While in Germany, Linda had a child and thereafter worked

as a teacher at a military installation.

    Financial Responsibilities

    Mrs. Quinn was responsible for paying the family bills with

her own or Mr. Quinn's funds, balancing the checkbook, and

handling the family bank accounts. Mr. Quinn gave Mrs. Quinn his

West Pine paychecks which she deposited into one of their

accounts. She also prepared the Quinns' Federal income tax

returns for the years at issue.

    Knowledge of West Pine's Operations

    Mrs. Quinn had no knowledge of West Pine's operations or

financial obligations other than what she garnered from the West

Pine checks she wrote out under Mr. Quinn's direction. Mrs.

Quinn was unaware of West Pine's customers, suppliers, or

creditors. From writing out those checks, Mrs. Quinn knew West

Pine had employees by the names of Devers and Hobbs, in addition

to Mr. Quinn and Mr. Gaskins. When she did not receive his

paycheck from Mr. Quinn, she thought that he had not been paid.

She thought that Mr. Quinn did not always receive his paycheck

on time, because he paid the other men first and then himself

when sufficient funds were available. Other than his paychecks

Mrs. Quinn knew of no other funds Mr. Quinn received from West

Pine.

    Mrs. Quinn never visited any West Pine work sites. Mrs.
                             - 27 -

Quinn never attended any meetings related to West Pine. She was

not an officer or director of the corporation. She did not know

whether she was listed as a shareholder.6

     Mrs. Quinn knew Mr. Quinn was the secretary of West Pine.

During the years 1979 through 1981, she knew Mr. Quinn visited

the Pottsville IRS office, but she did not know the purpose of

his visits. She was familiar, with that IRS office and with Mr.

Clark from her own work responsibilities with the law firm, and

she knew Mr. Quinn had to file West Pine's quarterly payroll tax

returns there. Mrs. Quinn did not learn of West Pine's tax

problems until she was called to testify at her husband's

criminal trial in Philadelphia in 1987.

     Credit Alliance Action and Aftermath

     On June 14, 1982, Credit Alliance Corporation (Credit

Alliance) entered a default judgment against the Quinns in the

United States District Court for the Eastern District of

Pennsylvania on the basis of the Quinns' personal guarantees of

payment of West Pine equipment lease/purchases. Credit Alliance

also entered this judgment in the Court of Common Pleas of

Schuylkill County, Pennsylvania, on September 7, 1982. Mr. Quinn

had signed Mrs. Quinn's name to the guarantee without her


     6
      In 1984, after the years before the Court, two men from
Philadelphia appeared in her home and insisted that she sign a
blank stock certificate for West Pine. Mrs. Quinn did not wish to
sign without contacting an attorney but did so under pressure
from these men and Mr. Quinn. She did not know the purpose of
this certificate. No evidence of the certificate or its purpose
was presented at trial.
                             - 28 -

permission or knowledge. Mr. Quinn had been served with a

summons regarding the Credit Alliance action, but Mrs. Quinn did

not learn about it until a month later.

    Mrs. Quinn then hired an attorney to defend her in this

Credit Alliance matter and paid him a retainer of $5,000. Mrs.

Quinn was ultimately relieved of liability for the Credit

Alliance debt. Mrs. Quinn was so distressed by this incident

that she contemplated divorcing Mr. Quinn. She was afraid that

Credit Alliance would attempt to take her home and the assets

for which she and Mr. Quinn had worked hard and scrimped and

saved over a lifetime. She felt Mr. Quinn was destroying their

life together by not making her aware of what he had done and by

jeopardizing their life savings. The Quinns did not get a

divorce, but instead they agreed to transfer their joint assets

to Mrs. Quinn or to Mrs. Quinn jointly with one or the other of

their two daughters. Since that time the Quinns' relationship

has been strained. At the trial, Mrs. Quinn was still visibly

upset by this episode in their lives.

    Thus, in December of 1982, the Quinns transferred title to

three undeveloped Schuylkill County lots to Mrs. Quinn's name

alone. The Quinns also transferred title to their house into the

names of Mrs. Quinn and Patricia. Joint bank accounts were

closed or title transferred; none of these accounts contained

any unusually large amounts or any deposits from unknown

sources. At the time of these various transfers, Mrs. Quinn was
                              - 29 -

not aware of any tax problems of West Pine and was not aware of

any tax problems that she and her husband might have in regard

to West Pine. Mr. Quinn retained the insurance policies in his

name through the Prudential Insurance Company of America

(Prudential Insurance) and the Franklin Life Insurance Company.

    As of the time of the trial, the Quinns had a joint

checking account and two safe deposit boxes.

    Mrs. Ouinn's Assets and Other Income

    The Quinns have had bank passbook savings accounts since at

least 1951, and they have contributed to them regularly and

accrued interest on these accounts over the ensuing years.

Accounts were held in the names of Mrs. Quinn, the Quinns

jointly, Mrs. Quinn and Patricia, Mrs. Quinn and Linda, and

Linda and Patricia. Throughout the years, amounts were

transferred from one family account to another; accounts were

closed and new ones opened.

    As of December of 1978, the Quinns had accumulated at least

$30,974.55 in their bank savings accounts. Of this amount,

$7,480.01 was in Mrs. Quinn's account at Home Savings

Association of Pennsylvania (Home Savings). The savings account

the Quinns held jointly at American Bank and Trust (American)

contained $23,494.54.

    Periodically during the 1970's, Mrs. Quinn purchased

Government Savings bonds (Series E or EE bonds) with face values

of $50 and $100 in the names of herself and Patricia. During
                             - 30 -

1981 to 1983, Mrs. Quinn cashed in and rolled over some of those

savings bonds into H or HH bonds. For at least the years 1984

through 1987, 1990, and 1991, interest of $600 per year was

earned on Series H or HH savings bonds held in the names of Mrs.

Quinn and Linda and another $b00 per year on Series H or HH

savings bonds held in the names of Mrs. Quinn and Patricia.

    The Quinns owned Certificates of Deposit (CD's). Mrs: Quinn

purchased CD's, some in her name only and some jointly with her

children. Mrs. Quinn and Patricia had a money market savings

account they opened in 1983. On August 30, 1984, Mrs. Quinn and

Patricia received $13,365 from the sale of the three undeveloped

lots. On January 25, 1985, Mrs. Quinn deposited $1,997.91, the

proceeds from cashing in a life insurance policy, into the

checking account she had with Patricia.

    The Quinns took IRA deductions on their Federal income tax

returns as follows: 1979 ($1,500), 1980 ($1,500), 1981 ($1,500).

No evidence was presented as to where these contributions went,

or to whose credit. During later years, Mrs. Quinn made at least

the following contributions to her IRA's: 1984 ($2,000), 1985

($2,000), 1988 ($1,500). As of September 30, 1985, Mrs. Quinn

had an investment in the T. Rowe Price New Income Fund ,through

her employer's retirement plan worth $1,748.44. On March 15,

1989, a check was written to Mrs. Quinn from her employer's

pension plan in the amount of $20,954.95. On May 12, 1989, Mrs.

Quinn rolled over this distribution into an IRA at Prudential
                             - 31 -

Bank and Trust Company (Prudential Bank),7 which consisted of

one IRA CD for the same amount.

    In 1990, Mrs. Quinn cashed in a Prudential Insurance

annuity, receiving $2,411.71. In December of 1991, Mrs. Quinn

received a partial distribution in the amount of $2,500 from the

ABA Members Retirement Program. Prudential Bank issued a

distribution of $2,250 from Mrs. Quinn's IRA CD on May 26, 1992.

During 1993, Mrs. Quinn received distributions totaling $1,350

from the Prudential Bank IRA, CD. During 1993, she also received

$37,527, in distribution of all of the funds in one of her

employer plans; that fund had earlier been in another such

employer plan.

    On March 30, 1993, the Quinns had a total of $106,014.48 in

bank accounts (mostly savings), Keogh plans, and IRA's and

$30,566.86 in various Government savings bonds. The IRA

accounts, which belonged to Mrs. Quinn, totaled $85,314.81. The

bank account funds, with the exception of $1,433.62 held jointly

by Mrs. Quinn and Mr. Quinn, were held by Mrs. Quinn alone or by

Mrs. Quinn and one or the other of their daughters. The savings

bonds were held jointly by Mrs. Quinn and one of her daughters

or grandchildren, and were purchased, or rolled over from

purchases, in the 1970's. Over 40 years of financial records



     7
      The Prudential Bank and Trust Company later became known as
The Prudential Savings Bank or The Prudential Bank. We will use
the term “Prudential Bank” to refer to this banking institution
throughout this opinion, regardless of its full name at the time
being discussed.
                             - 32 -

showed no unusual increases in the Quinns' assets, just a steady

accumulation of savings.

    Mr. Ouinn's Income

     Mr. Quinn has not been employed since 1982, with the

exception of a short period of time during 1984 when he worked

for Sharp Mountain Coal Company. Mr. Quinn incurred a work-

related injury on August 9, 1984. On December 31, 1985, State

Workmen's Insurance Fund sent him a check in the amount of

$13,046.97, representing compensation for August 9, 1984 through

January 16, 1986, less attorney fees. Thereafter, Mr. Quinn

received a disability check of $323.32 every two weeks. In 1982,

Mr. Quinn was already 62 years old and eligible to collect

Social Security Retirement benefits. As of March 30, 1993, Mr.

Quinn's monthly income from Worker's Compensation was $746 and

from Social Security $423.

     In 1982, Mr. Quinn opened and made two contributions

totaling $9,996.42 to his annuity account with Prudential

Insurance. Mr. Quinn received a partial withdrawal dated April

7, 1983, of $1,117 from his Prudential Insurance annuity account

which, with his permission, was deposited into a joint bank

account belonging to Mrs. Quinn and Linda. In 1985, Mr. Quinn

received $1,564.98 in retirement income from the cash surrender

of a Metropolitan Life Insurance Company policy. As of April 14,

1987, the Prudential Insurance annuity contract was worth

$15,588.08. On April 6, 1988, Mr. Quinn requested that this

contract be distributed as a life annuity, paying 120 monthly
                             - 33 -

payments to him or, after his death, to his beneficiaries; the

amount of each monthly payment is $145.47.

     Lifestyle

     From 1979 to 1985, Mrs. Quinn drove a Volkswagen Rabbit.

Mr. Quinn may have had a pickup around that time.4   At the time

of the trial, Mrs. Quinn drove a 1990 Volkswagen. During the

years at issue, Mrs. Quinn did not purchase expensive clothing,

drive expensive automobiles, or dine at expensive restaurants.

Mrs. Quinn has simple tastes and has always lived a modest

lifestyle. Mrs. Quinn has never owned any expensive jewelry. She

has store charge cards at Boscov's and Pomeroy's department

stores. The Quinns dine out less than once a month; they go to

moderately priced restaurants or make use of discount coupons.

     When their children were young, the Quinns took a few

family vacations, staying at the beach for 4 or 5 days. The

Quinns have not been on a vacation together in 27 years. In

1981, Mrs. Quinn and Linda went to the Bahamas for 5 days to

celebrate Linda's college graduation.

     From 1979 until the present, Mrs. Quinn has given gifts

averaging $50 per month to her three grandchildren, using her

own or Mr. Quinn's funds. She also gave gifts of money to her

daughters. From June of 1983 through June of 1984, Mrs. Quinn

made payments totaling $1,887.56 on Linda's student loans. Mrs.

Quinn gave Linda $3,000 to buy a house in August of 1987; the

property was titled in the names of both Linda and Mrs. Quinn.

During 1989, 1990, and 1991, Mrs. Quinn assisted Linda, who was
                             - 34 -

then a single parent, in paying her bills, including her

mortgage. On December 4, 1989, Mrs. Quinn paid $1,150 for

plastic surgery to remove a scar from Linda's lip. Mrs. Quinn

gave Linda a $500 check for Christmas in 1990. In August of

1991, Mrs. Quinn paid $700 for one of Linda's graduate school

courses. In June of 1993, Mrs. Quinn gave Linda $2,000 to

purchase a different house; the mortgage was issued in both of

their names. Mrs. Quinn also paid $1,200 of the 1993 closing

costs on the new house.

                            OPINION

     The issues for decision in these consolidated cases are:

(1) Whether Mrs. Gaskins is entitled to relief as an innocent

spouse under section 6013(e), and (2) whether Mrs. Quinn is

entitled to relief as an innocent spouse under section 6013(e).

     Normally, spouses who have filed a joint return are

jointly and severally liable for the tax due. Sec. 6013(d)(3).

However, section 6013(e)(1) relieves a spouse of liability for

the tax, including interest, penalties, and other amounts,

attributable to the substantial understatement of tax of the

other spouse, if that spouse meets the following requirements:

(1) A joint, Federal income tax return was filed; (2) there is a

substantial understatement of tax attributable to grossly

erroneous items of the other spouse;-(3) in signing the return,

the alleged innocent spouse did not know, and had no reason to

know, of the substantial understatement; and (4) taking into

account all the facts and circumstances, it would be inequitable
                             - 35 -

to hold the alleged innocent spouse liable for the deficiency

attributable to such substantial understatement. Sec.

6013(e)(1).

     Mrs. Gaskins and Mrs. Quinn each have the burden of

proving that she meets these requirements. Rule 142(a). A

petitioner who fails to meet all of the requirements of section

6013(e)(1) will not qualify for innocent spouse relief.

Purificato v. Commissioner, 9 F.3d 290, 293 (3d Cir. 1993),

affg. T.C. Memo. 1992-580; Purcell v. Commissioner, 826 F.2d

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

Commissioner, 94 T.C. 126, 138 (1990), affd. 992 F.2d 1132 (11th

Cir. 1993). Respondent has conceded that both Mrs. Gaskins and

Mrs. Quinn meet the first two requirements of section

6013(e)(1). We shall consider each petitioner in turn with

respect to the remaining two requirements.

      Mrs. Gaskins

     Knowledge of the Understatement

     Mrs. Gaskins argues that she had no actual knowledge, nor

did she have reason to know, of any diverted receipts from West

Pine or substantial understatements of tax, and therefore, she

should be afforded relief as an innocent spouse. Respondent

contends that Mrs. Gaskins has not established her lack of

knowledge or that she had no reason to know.

     A taxpayer seeking innocent spouse relief must establish

that he or she in signing the return did not know, and had no

reason to know, that there was a substantial understatement of
                             - 36 -

tax. Sec. 6013 (e)(1)(C). The record clearly shows that Mrs.

Gaskins had no actual knowledge of any understatement of Mr.

Gaskins' income and the resulting substantial understatement of

tax. The question is whether she had reason to know about such

understatement. A spouse has "reason to know" if a reasonably

prudent taxpayer under the taxpayer's circumstances at the time

of signing of the return could be expected to know the return

was erroneous or that further investigation was warranted.

Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989),

affg T.C. Memo. 1988-63; Bokum v. Commissioner, 94 T.C. at 148.

     A taxpayer cannot close her eyes to facts or unusual

expenditures that might give her reason to know of unreported

income and a substantial understatement of tax.5 Terzian v.

Commissioner, 72 T.C. 1164, 1170-1171 (1979); Mysse v.

Commissioner, 57 T.C. 680, 699 (1972). If a spouse knows enough

facts to be put on notice of the possibility of a substantial

understatement, she has a duty to inquire further. Guth v.

Commissioner, 897 F.2d 441, 444-445 (9th Cir. 1990), affg. T.C.

Memo. 1987-522; Weiss v. Commissioner, T.C. Memo. 1995-70.

Failure to inquire may cause knowledge of the understatement to

be imputed to the taxpayer. Price v. Commissioner, 887 F.2d 959,

965 (9th Cir. 1989) (citing Levin v. Commissioner, T.C. Memo.

1987-67); McCoy v. Commissioner, 57 T.C. 732, 734 (1972).

     Factors to be considered in determining whether the spouse

had reason to know are the alleged innocent spouse's level of

education; the spouse's involvement in the family's business and
                             - 37 -

financial affairs; the presence of expenditures that appear

lavish or unusual when compared to the family's past levels of

income, standard of living, and spending patterns; and the

culpable spouse's evasiveness and deceit concerning the couple's

finances. Price v. Commissioner, 887 F.2d at 965; Stevens v.

Commissioner, 872 F.2d at 1505; Flynn v. Commissioner, 93 T.C.

355, 365-366 (1989).

     Mrs. Gaskins has a high school education. She has had no

training or work experience in financial matters. Mrs. Gaskins

deposited Mr. Gaskins' paychecks and many of his expense checks

into her checking account which, for most of the years of their

marriage, was the only account that she was aware that the

Gaskins had. She was responsible for paying the family's bills.

For the years at issue, the Gaskins used a tax return preparer

to prepare their Federal income tax returns.

     Involvement with a spouse's business may give rise to a

duty to inquire into the activities of that business. See Shea

v. Commissioner, 780 F.2d 561, 566 (6th Cir. 1986), revg. and

remanding on other grounds T.C. Memo. 1984-310; Dickey v.

Commissioner, T.C. Memo. 1985-478; Shapiro v. Commissioner, T.C.

Memo. 1986-142. Mrs. Gaskins knew little about West Pine's

operations; however, she knew that Mr. Gaskins wanted to list

her as an officer of West Pine and to use her name to sign West

Pine's checks. Mr. Gaskins had used Mrs. Gaskins' name to

incorporate the second roofing company and had named her as its

president, because the outstanding tax debts from the first
                             - 38 -

roofing company precluded Mr. Gaskins from conducting business

in his own name. Likewise, Mr. Gaskins used Mrs. Gaskins' name

in running West Pine. However, knowledge of these facts would

not alert Mrs. Gaskins as to any unreported income Mr. Gaskins

received from West Pine.

     The evidence is contradictory as to whether and when Mrs.

Gaskins was listed as an officer of West Pine.6 Regardless, Mrs.

Gaskins was not assigned any duties and was not involved in the

operation of West Pine. If she was an officer, she was an

officer in name only, and not charged with any special duty to

inquire because of any office to which she may have been named.

See Bell v. Commissioner, T.C. Memo. 1989-107 (wife was

shareholder and on board of directors, but had no authority);

Carter v. Commissioner, T.C. Memo. 1977-322 (wife's only duty as

secretary was to sign stock certificates at her home).

    Mrs. Gaskins had signatory authority over the West Pine

checking account. The mere fact of having signatory authority is

insufficient to charge Mrs. Gaskins with reason to know of the

understatement of Mr. Gaskins' income from West Pine. See Porter

v. Commissioner, T.C. Memo. 1991-561. Mrs. Gaskins' name was

being signed to West Pine checks by Mr. Quinn, beginning in

December of 1979, and Mrs. Gaskins knew this from Mr. Gaskins'

paychecks and expense checks that she endorsed. Yet, we do not

believe that had Mrs. Gaskins signed the checks personally she

would have known any more about West Pine's operations and the

diverted receipts, or that further investigation was warranted.
                             - 39 -

First, since West Pine did not have an office, Mrs. Gaskins

would have signed these checks at her house or that of the

Quinns, not at the mining site where she might have witnessed

any of the business activities. Second, she would have signed

the checks in blind compliance with Mr. Gaskins' or Mr. Quinn's

instructions, just as she allowed them to sign her name. Third,

given Mrs. Gaskins' lack of knowledge of the mining business,

lack of knowledge of West Pine's activities specifically, and

lack of experience with corporate bookkeeping, it is unlikely

that information presented in the checkbook would have aroused

her suspicions. See Guth v. Commissioner, 897 F.2d 441 (9th Cir.

1990) (wife who signed organization's checks under husband's

instruction held to have no reason to know of understatement);

Coleman v. Commissioner, T.C. Memo. 1988-538 (wife who had

access to business books-for limited period and who had no

understanding of bookkeeping system held to have no reason to

know). Mrs. Gaskins' knowledge of West Pine's withholding tax

problem in late 1981 did not put Mrs. Gaskins on notice of the

possibility of diversion of corporate receipts. West Pine's

failure to pay the withheld employment taxes to the IRS and the

fact that Mr. Gaskins periodically failed to give his paycheck

to her would have suggested that West Pine had no money, not

that Mr. Gaskins was diverting corporate receipts.

    Mrs. Gaskins presented evidence about the lack of

expenditures on household repairs, furnishings, clothes, or

vacations. This evidence demonstrated the Gaskins' inability to
                             - 40 -

make timely payments on many of their financial obligations and

their efforts to avert foreclosure by their creditors. Nothing

in the Gaskins' spending habits and lifestyle would have aroused

Mrs. Gaskins' suspicions. She was living at or below the poverty

level.

    Perceived evasiveness of the culpable spouse may trigger a

duty to inquire. Stevens v. Commissioner, 872 F. 2d at 1505;

Park v. Commissioner, T.C. Memo. 1993-252, affd. 25 F.3d 1289

(5th Cir. 1994). Good communication between the spouses may

support a finding that the taxpayer was aware of the

understatement. Hayman v. Commissioner, 992 F.2d 1256, 1262-1263

(2d Cir. 1993), affg. T.C. Memo. 1992-228.This assumes that a

nonevasive spouse is more likely than an evasive spouse to

communicate-relevant knowledge to his or her spouse. Conversely,

a taxpayer who is unaware of being misled by the other spouse

may not have reason to know of the understatement or a duty to

inquire as to the possibility of an understatement. Guth v.

Commissioner, 897 F.2d at 444.

     Mrs. Gaskins believed Mr. Gaskins to be trustworthy. In our

view, Mr. Gaskins, while not evasive, just did not share

information about his business activities with Mrs. Gaskins.

Mrs. Gaskins was unaware of Mr. Gaskins' individual tax debts

from earlier years, learned of the first roofing company's

problems only when Mr. Gaskins used her name to incorporate the

second roofing company, and learned of West Pine's employment
                              - 41 -

tax problems from IRS Revenue Officer Clark. At the time of

signing the individual tax returns for the years 1979, 1980, and

1981, Mrs. Gaskins was not alerted to inquire further into Mr.

Gaskins' business dealings.

     Based on our review of these factors as applied to Mrs.

Gaskins, we hold that Mrs. Gaskins did not know, and had no

reason to know, of the substantial understatements of Mr.

Gaskins' income when signing their Federal income tax returns

for the taxable years 1979, 1980, or 1981.

     Inequity of Holding Mrs. Gaskins Liable

     Mrs. Gaskins argues it is inequitable to hold her liable

because she has not benefited from any unreported income, and

the family has suffered many hardships. Respondent alleges that

Mrs. Gaskins has not proved it would be inequitable to hold her

liable.

     To qualify for innocent spouse relief, the taxpayer must

show that, given all the facts and circumstances, it would be

inequitable to hold the taxpayer liable for the tax deficiency

attributable to the substantial understatement of the other

spouse. Sec. 6013(e)(1)(D). One factor to consider is whether

the taxpayer seeking relief significantly benefited from the

erroneous items of the other spouse, here unreported income.

Estate of Krock v. Commissioner, 93 T.C. 672, 677 (1989). Normal

support is not a significant-benefit. Sec. 1.6013-5(b), Income

Tax Regs.; Estate of Krock v Commissioner, supra at 678-679;
                               - 42 -

Flynn v. Commissioner, 93 T.C. at 367. Normal support is

determined by the circumstances of the parties. Sanders v.

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

Krock v. Commissioner, supra at 678-679; Flynn v. Commissioner,

supra at 367.

     Furthermore, while a meager lifestyle may negate a reason

to know or that a spouse significantly benefited, the Court of

Appeals for the Third Circuit87 has indicated that such a

lifestyle need not lead to the conclusion that it is inequitable

to hold the spouse liable for the tax, particularly where assets

have accumulated for the spouse's later use. Purificato v.

Commissioner, 9 F.3d at 296.

     From a financial standpoint, the Gaskins have lived a bleak

existence. They have had a history of borrowing to pay for

consumer items and being delinquent on their debts. Other than

their house and old automobiles, the Gaskins have no assets.

     Respondent cites Sonnenborn v. Commissioner, 57 T.C. 373

(1971) and Terzian v. Commissioner, 72 T.C. 1164 (1979), for the

proposition that Mrs. Gaskins has not met her burden of showing

she did not benefit, since she has not accounted for the use of

the diverted income. In Sonnenborn v. Commissioner, Mrs.

Sonnenborn, the treasurer of the corporation from which the

omitted income derived, knew of the payments from the


     8
      An appeal in this case would lie to the Court of Appeals
for the Third Circuit.
                             - 43 -

corporation to the taxpayers. She failed to prove that she did

not know, or have reason to know, such payments were income,

rather than the loans the taxpayers alleged them to be. Since

Mrs. Sonnenborn did not provide any information as to the use of

these payments, this Court would not speculate and held that she

did not establish that she did not benefit. In Terzian v.

Commissioner, the taxpayer did not know the source of funds in a

bank account transferred to her. This Court, therefore, assumed

the account contained funds from the omitted income. However,

since the amount was considered to be for the taxpayer's

ordinary support, this Court found she did not significantly

benefit.

     Mrs. Gaskins had no knowledge of any unreported payments to

her husband, nor did she receive any unexplained benefits or

assets. It is impossible for her to explain something she did

not know about. Her burden is to show she did not benefit. It is

clear from the record that Mrs. Gaskins received no benefit from

the omitted income.

     Another factor to consider is whether the spouse seeking

relief had been deserted by, or divorced or separated from the

culpable spouse. Sec. 1.6013-5(b), Income Tax Regs. Yet, this is

only one of the factors to be considered, and section 6013(e)

relief is not limited to spouses whose marriages have ended.

Mysse v. Commissioner, 57 T.C. at 700. Mrs. Gaskins continues to
                             - 44 -

be married to Mr. Gaskins, a fact which neither helps nor

hinders her case.

     A third factor is whether probable future hardships would

be visited upon the innocent spouse if she is not relieved of

liability. Sanders v. United States, 509 F.2d at 171 n. 16. Mrs.

Gaskins has argued that the hardships the family has suffered

due to Mr. Gaskins' disability and the previous lack of medical

coverage make it inequitable to hold her liable for the

deficiency. The Court of Appeals for the Third Circuit has

stated that hardships which do not affect tax liability do not

bear a relationship to the innocent spouse issue. Purificato v.

Commissioner, 9 F.3d at 297. Instead, we must consider the

hardship to the spouse seeking relief if made to share the tax

liability and whether that spouse would have to pay the tax out

of her own assets. Id. at 296-297. If Mrs. Gaskins were made to

share Mr. Gaskins' tax liability, her only asset, their house,

would be used to help satisfy the tax. That house was acquired

long before the years involved in this case. Also the funds to

avert the threatened foreclosure on the mortgages on that house

came from Mr. Gaskins' disability payments under Worker's

Compensation and Social Security, not from any unreported income

from West Pine. Since Mrs. Gaskins has derived no benefit or

assets from Mr. Gaskins' omitted income, it would be inequitable

for Mrs. Gaskins to be required to pay the tax.
                             - 45 -

     Given these facts and circumstances, we conclude that it

would be inequitable to hold Mrs. Gaskins liable for the

deficiencies in tax arising from Mr. Gaskins' understated income

for the taxable years 1979, 1980, and 1981.

     Mrs. Ouinn

     Knowledge of the Understatement

     Mrs. Quinn argues she did not know, and had no reason to

know, of any substantial understatements of income on the

Quinns' returns. Respondent counters by stating that Mrs. Quinn

has not met her burden of proof on this required element for

relief. The record is clear that Mrs. Quinn had no actual

knowledge of the understatement of Mr. Quinn's income. Thus, we

must decide whether she had reason to know of such

understatement.

     Mrs. Quinn has a high school education and work experience

as a legal secretary; she had no special knowledge of financial

matters. She controlled the family finances. Mrs. Quinn

deposited their paychecks, paid the household bills, balanced

the checkbook, and managed their savings. Their savings were in

passbook savings accounts, Government savings bonds, IRA

accounts, employer retirement or pension plans, and certificates

of deposit. She prepared the Quinns' joint tax returns for the

years at issue.

     Mrs. Quinn was not familiar with or involved in the

operations of West Pine. She was not an officer or director.
                             - 46 -

Occasionally, she wrote out West Pine checks under Mr. Quinn's

direction, for his signature. What knowledge she had of West

Pine's activities was limited to information gathered from this

ministerial duty. As underscored by Mrs. Quinn's strong

emotional reaction to recalling the events related to the Credit

Alliance suit, even after the passing of 12 years, she had-no

awareness of any of Mr. Quinn's business activities that would

give rise to personal liability prior to her discovery of that

matter in June of 1982, after the years involved in this case.

Up until that time, Mrs. Quinn had trusted Mr. Quinn and had no

reason to question his actions. See Pietromonaco v.

Commissioner, 3 F.3d 1342 (9th Cir. 1993), revg. T.C. Memo.

1991361 and T.C. Memo. 1991-472 (Supplemental Opinion).

Moreover, even if she had learned of the Credit Alliance matter

before the filing of their 1981 individual tax return, that

would not have alerted her to the possibility that Mr. Quinn had

received unreported income from West Pine. If anything, that

lawsuit, plus Mr. Quinn's apparent failure to receive his

regular paychecks from West Pine, would have suggested that West

Pine had no money, not that Mr. Quinn was diverting corporate

receipts.

    Mrs. Quinn has maintained a moderate lifestyle, with no

lavish expenditures. For most of her married life, she has lived

in the house purchased and occupied by her parents. She and her

husband have worked their entire adult lives, regularly setting
                             - 47 -

aside money into passbook savings accounts, Government savings

bonds, CD's, and retirement plans for themselves and their

children. Mrs. Quinn has assisted her children financially when

needed, the largest sum at any one time being $3,000 to help her

younger daughter purchase a house. Nothing in the record

indicates an increase in spending or a large increase in assets

during or after the years at issue.

    Based on these facts, we hold that Mrs. Quinn did not know

and had no reason to know of any understatements of income on

the Quinns' Federal income tax returns for the taxable years

1979, 1980, or 1981.

    Ineguity of Holding Mrs. Quinn Liable

    Mrs. Quinn contends that it would be inequitable to hold

her liable for the tax deficiency arising from the

understatements because she has not benefited from the omitted

income. Respondent's position is that it would not be

inequitable, since Mrs. Quinn has not proved she did not

benefit.

    Nothing suggests a significant benefit accrued to Mrs.

Quinn as a result of the understatement of Mr. Quinn's income.

Mrs. Quinn continued her usual frugal spending and savings

habits. See Dakil v. United States, 496 F.2d 431 (10th Cir.

1974). The large volume of financial documents submitted by Mrs.

Quinn fails to indicate any large or unusual amounts being

deposited into her accounts, or into those she previously held
                             - 48 -

with Mr. Quinn. The majority of her assets reside in her law

firm retirement plans, and are attributed to her earnings over

the many years of her 50 year participation in the work force.

The assets accumulated in the course of the Quinns' normal

working life do not derive from the omitted income and are not a

significant benefit.

    As with Mrs. Gaskins, respondent argues that Mrs. Quinn

must account for the diverted income. She cannot account for

something she knows nothing about. See our discussion of this

requirement as to Mrs. Gaskins, above. As with Mrs. Gaskins, we

reject respondent's argument. Mrs. Quinn knew of no diverted

funds, had no reason to know, of any diverted funds, and

possessed no assets in excess of those accrued in the course of

ordinary support and a lifetime of steady savings. Mrs. Quinn

has amply demonstrated that she derived no benefit from any

unreported income of her husband.

    The Quinns remain married, although their relationship has

suffered. During 1982, when learning of the Credit Alliance

suit, Mrs. Quinn considered getting a divorce. Her confidence in

Mr. Quinn was shaken; she felt her financial security, for which

she had worked and scrimped and saved her entire life, being

threatened. Rather than pursue divorce proceedings, the Quinns

agreed that their joint assets, including the house given to

them by Mrs. Quinn's parents, be transferred to Mrs. Quinn,

either in her name alone or jointly with one or the other of
                              - 49 -

their two daughters. Remaining in the marriage, however, does

not preclude Mrs. Quinn from relief.

    Should liability be imposed on Mrs. Quinn, the debt would

be paid from her assets, primarily her retirement funds and the

house given to her by her parents. This would be inequitable

since she did not benefit from Mr. Quinn's omitted income. Given

all the facts and circumstances, we conclude that it would be

inequitable to hold Mrs. Quinn liable for the deficiencies in

tax arising from Mr. Quinn's understated income for the taxable

years 1979, 1980, and 1981.

    We hold that both Mrs. Gaskins and Mrs. Quinn are entitled

to innocent spouse relief under section 6013(e).

    Based on the concessions and the above holdings,

                                       Decisions will be entered

                               for petitioners Elaine Gaskins

                               and Sabina A. Ouinn on the

                               innocent spouse issue for 1979,

                               1980, and 1981.

                                       Decisions will be entered

                               for respondent on the

                               deficiencies in tax for 1979,

                               1980, and 1981, and the addition

                               to tax for fraud for 1979 and

                               1980 as to petitioners William C.

                               Gaskins and Pasquale T. Quinn.
