                      T.C. Memo. 1995-488



                  UNITED STATES TAX COURT



    CARL DIMICHELE AND EILEEN DIMICHELE, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 12083-90, 18587-91.   Filed October 10, 1995.



     Robert E. Madden, for petitioner Carl DiMichele.

     Stephen P. Patrizio, for petitioner Eileen DiMichele.

     Douglas A. Fendrick, for respondent.



          MEMORANDUM FINDINGS OF FACT AND OPINION

     WHALEN, Judge:   Respondent determined the following

deficiencies in and additions to petitioners' Federal

income tax:
                                             Additions to Tax
                           Sec.           Sec.          Sec.         Sec.      Sec.
Year    Deficiency    6653(a)(1)(A)   6653(a)(1)(B) 6653(b)(1)    6653(b)(2)   6661
                                                                       1
1985       $265,182        --               --       $132,591                  $66,296
                                            1
1986         22,927      $1,146                         --           --         5,732


       1    Fifty percent of interest due on the deficiency.



Unless stated otherwise, all section references are to the

Internal Revenue Code as in effect during the years in

issue.

           Prior to trial, petitioner Carl DiMichele conceded

liability for the above tax deficiencies and additions to

tax, determined by respondent in two notices of deficiency

issued to petitioners.            At trial, respondent's attorney

conceded that no part of the underpayment for 1985 was due

to the fraud of petitioner Eileen DiMichele.                    Following

those concessions, the only issue for decision is whether

petitioner Eileen DiMichele qualifies as a so-called

innocent spouse under section 6013(e) and should be

relieved of liability for the subject tax deficiencies

and the additions to tax for 1986.               Therefore, all

further references to "petitioner" are references to

Mrs. DiMichele.


                              FINDINGS OF FACT

           The parties have stipulated some of the facts in these

consolidated cases.           The Stipulation of Facts filed by the
parties and the exhibits attached thereto are incorporated

herein by this reference.    At the time the subject

petitions were filed, petitioner resided in Philadelphia,

Pennsylvania, and Mr. DiMichele resided at the Federal

Correctional Institution in Loretto, Pennsylvania.

     Petitioner was born Eileen Secatore on January 3, 1945,

in Philadelphia, Pennsylvania.    She graduated from high

school and, after a marriage that lasted less than 1 year,

she attended "hairdressing school" and briefly worked as a

hairdresser.   Petitioner met Mr. DiMichele in 1964, and they

were married in 1970.    Petitioner and Mr. DiMichele took up

residence in a house located at 2010 South 15th Street in

Philadelphia, Pennsylvania, that had been purchased by

petitioner and her brother on October 22, 1969, for

approximately $12,000.    In addition to her son from her

first marriage, petitioner's two brothers lived with the

DiMicheles.

     In 1978, a daughter, Christina, was born to petitioner

and Mr. DiMichele.   Christina was a hyperactive child, and

in 1983, she was responsible for a fire that burned

petitioner and damaged her home.    Petitioner received two

payments from her insurance company in the amounts of

$32,700 and $28,103.    As mentioned below, petitioner used

these funds to open an account at Home Unity Savings & Loan.

     During each of the years 1978 through 1986 inclusive,
petitioner filed a joint return with Mr. DiMichele.    Each

of those returns states that petitioners' address was "406

Orchard Avenue, Somerdale, New Jersey 08083."    That is the

address of a cousin of petitioner's husband.    Neither

petitioner nor her husband ever lived at that address.

In fact, petitioner and her husband resided in the house

located at 2010 South 15th Street from 1970 through the time

of trial.

     Petitioner's 1984 joint income tax return reports that

the DiMicheles were paid total wages of $26,000 from a

company, Out of the Past, Ltd.   According to Schedule W,

Deduction For A Married Couple When Both Work, attached to

the 1984 return, petitioner was paid $6,500 of the wages in

that year and Mr. DiMichele was paid $19,500.    Petitioner's

1985 income tax return reports that petitioner was paid

wages of $23,400 by Out Of The Past, Ltd.   During 1989 and

1990, petitioner was employed by Quality Sandwich Service,

Inc., and she was paid wages of $11,700 and $9,120,

respectively.   In passing, we note that petitioner's Form

W-2, Wage and Tax Statement, for 1985 lists petitioner's

address as "406 Archard Ave., Somer Dale, NJ 08083."

     The following is a summary of the income reported on

petitioner's joint income tax returns for 1978 through 1986:
                     1978      1979      1980      1981     1982      1983        1984           1985        1986

Schedule C

 General Sign Co.    $3,925   $18,809     --        --       --        --          --             --          --

Wages--

 General Sign Co.    --        1,200    $28,700   $4,000     --        --          --             --          --

Wages--Out of
 the Past, Inc.

  Mr. DiMichele       --        --        --         --    $18,000   $26,000     $19,500         $2,400       --
  Petitioner          --        --        --         --       --        --         6,500         23,400       --

Installment Sale
 of Business

  Capital             --        --        --       8,658      380       363       11,726          --          --
  Ordinary            --        --        --       4,906      215       206        3,472          --          --

Capital gain          --        --        --         --      --        --          --             --        $6,175


Schedule E

 Vacant property      --        --        --       (171)     --        --          --             --          --

 1533 Emily           --        --        --         --      --        --        (1,243)        (1,996)     (1,846)

 N. 5th St.,          --        --        --         --      --        --          --            5,070      9,605
  Commercial Bldg.

 1441 Shunk           --        --        --         --      --        --          --             --         (343)

 1433 Partnership     --        --        --         --      --        --        (5,208)        (2,899)     (1,245)

Interest              --        --         140    10,113    11,921   11,311       14,920         16,925     11,200

Dividends             --        --        --         --       --            18          62             77      137


   Total income      3,925    20,009    28,840    27,506    30,516   37,898       49,729         42,977     23,683




           During the period 1981 through May 7, 1989, Mr. DiMichele

and others, including Mr. Michael Madgin, engaged in the

illegal sale of methamphetamine, a controlled substance, in

violation of 21 U.S.C. section 841.                        As part of that illegal

activity, Mr. Madgin visited petitioners' home from time to

time to purchase methamphetamine from Mr. DiMichele.                                       On

those visits, Mr. Madgin would occasionally deliver cash to

Mr. DiMichele in amounts ranging from $25,000 to $100,000.
On one occasion in 1985 when Mr. DiMichele was not at home,

Mr. Madgin gave petitioner a brown shopping bag containing

$50,000 to $100,000 worth of cash to give to her husband.

Mr. Madgin did not see petitioner open the bag.    On another

occasion in 1985, Mr. DiMichele, Mr. Madgin, and another

individual counted money and discussed drug transactions in

front of petitioner in the kitchen of petitioners' home.

    On May 7, 1987, pursuant to a search warrant, Drug

Enforcement Agency (DEA) agents and City of Philadelphia

police officers conducted a search of petitioners' house.

During the course of their search, the DEA agents and

Philadelphia police officers found cash in the aggregate

amount of $194,972.   They also found jewelry worth $10,166,

gambling chips worth $8,277.50, five firearms, fur coats,

and assorted financial records.

      On the following day, the DEA agents obtained search

warrants to search two safe deposit boxes owned jointly by

petitioner and Mr. DiMichele.    The safe deposit boxes were

located near the DiMicheles' home at First Pennsylvania

Bank, 1444 W. Passyunk Avenue, in Philadelphia.    In one

safe deposit box, No. 402901, the DEA agents found cash in

the amount of $225,000 and 10 gold coins, marked "Canada

999", each weighing 1 ounce.    In the other safe deposit

box, No. 301640, the agents found cash in the amount of

$3,015 and jewelry worth $181,938.
          The value of the jewelry found in petitioners' home

and in safe deposit box No. 301640, in the aggregate amount

of $192,104, was determined by an appraiser retained by the

DEA agents.          We note that the same jewelry was valued by an

appraiser retained by petitioners at $111,167.50.

          At about the time of the Government's investigation

into Mr. DiMichele's affairs, petitioners, either

individually or jointly, maintained the following bank

accounts:

Bank Accounts/CD's      Account No.       Date       Joint     Petitioner     Mr. DiMichele      Total

Delaware Cash Reserve   8-943701-2       6/25/87   $2,181.13        --             --          $2,181.13
Delaware Cash Reserve   8-943617-2       6/25/87      --            --         $3,882.99        3,882.99
Home Unity S & L        21700884-8       6/30/87    4,546.12        --             --           4,546.12
Home Unity S & L        199015785        8/31/87    1,760.49        --             --           1,760.49
Home Unity S & L        1545-0112        9/17/87      --       $11,669.05          --          11,669.05
United Jersey Bank      007006810        1/16/87   32,132.67        --             --          32,132.67
United Jersey Bank      03483922         2/88         --            --          2,261.58        2,261.58
United Jersey Bank      000-0028772      3/88         --            --         14,038.08       14,038.08
United Jersey Bank      9039271          5/86         --            --          8,668.19        8,668.19
PSFS                    5-0531886        6/30/87      --            --         11,000.00       11,000.00
                                                                 1
Prudential S & L        01-25000000916   8/31/87      --           9,926.48        --           9,926.48
                                                                 2
Beneficial S & L        XX-XXXXXXX       6/30/87      --           2,729.58        --           2,729.58
                                                                 2
Beneficial S & L        03-54-49227      6/30/87      --           2,919.63        --           2,919.63

                                                   40,620.41     27,244.74     39,850.84      107,715.99


     1   Titled in petitioner's name as custodian for Mark Laudadio (petitioner's son).
     2   Titled in petitioner's name as custodian for Christina DiMichele (petitioner's daughter).



         In addition to the above accounts, petitioner and her

husband maintained a checking account at First Pennsylvania

Bank, account No. 298-643-8, that they had opened in 1978.

During the years in issue, petitioner wrote monthly checks

from the account to pay the mortgage and certain household

utilities, such as the telephone, electric, cable TV, and

water.       During 1985 and 1986, checks totaling approximately
$4,913 and $4,358, respectively, were drawn from this

account.

     On April 15, 1983, petitioner opened an individual

retirement account at United Jersey Bank in her name and

deposited $500 into the account.   Additional deposits of

$2,000 were made into the account during each of the years

in issue, 1985 and 1986.   The balance of the account on

April 30, 1994, was $8,150.52.

     Similarly, on April 15, 1983, Mr. DiMichele opened an

individual retirement account at United Jersey Bank and

deposited $1,750 into the account.   He made additional

deposits of $2,000 into the account during each of the

years in issue.

     On May 31, 1984, petitioner opened a bank account

under her maiden name, Eileen Secatore, at Home Unity

Savings & Loan.   She initially deposited $56,057.78,

consisting of the insurance proceeds from the fire in

petitioners' home in 1983.   On May 11, 1987, petitioner

and her husband withdrew $25,000 from the Home Unity

account, and on June 16, 1987, they withdrew $33,000 more

from the account.   On June 18, 1987, petitioner opened an

account at United Jersey Bank, in her maiden name, Eileen

Secatore, and made an initial deposit of $33,000.

     At about the time of the Government's investigation

into Mr. DiMichele's affairs, petitioners owned the
following real property:


     Real Estate          Date      Mr. DiMichele   Petitioner      Joint      Total

2010 S. 15th St.        10/22/69        --          $12,000          --     $12,000
1533 Emily St.            1981          --             --         $16,168    16,168
1433 W. Passyunk Ave.     05/83         --             --          60,000    60,000
Trina Dr.               12/11/85        --             --           8,500     8,500
1916-18 N. 5th St.      05/10/85        --             --          32,000    32,000
1441 Shunk St.            03/86         --             --           8,500     8,500
506, 508, 510           10/19/84      $30,000          --            --      30,000
  Fitzwater St.
                                       30,000        12,000       125,168   167,168


All of the above properties are located in Philadelphia,

Pennsylvania.

       Petitioner and her brother, William, had purchased the

property at 2010 S. 15th Street, on October 22, 1969, for

approximately $12,000.             The house located on this property

remained petitioner's primary residence after her marriage

to Mr. DiMichele.          At some time after 1969, petitioner

obtained sole ownership of the property.                      In 1987,

petitioner transferred the property back to her brother,

Mr. William Secatore.

       In 1981, petitioner and Mr. DiMichele purchased

property at 1533 Emily Street for $16,168.                       They paid for

the property with a cashier's check from United Jersey

Bank.     Thereafter, petitioner apparently acquired sole

ownership of this property and, circa 1990, she transferred

the property to her brother, Mr. William Secatore, for $1.

       In May 1983, petitioner and Mr. DiMichele and Mr.

and Mrs. Anthony DiMichele purchased property at 1433 W.
Passyunk Avenue for $120,000.   Part of the purchase price

consisted of a cashier's check for $50,500 drawn from

petitioners' United Jersey Bank account.   Petitioners held

their interest in the property as tenants by the entirety.

In 1990, petitioner's interest in the property was

forfeited to the U.S. Government in connection with

Mr. DiMichele's conviction on drug charges, as discussed

below.

     On October 19, 1984, Mr. DiMichele and Mr. Dennis G.

Maryak purchased properties at 506, 508, and 510 Fitzwater

Street for $30,000.   They sold these properties at the end

of 1986 for $200,000.

     On May 10, 1985, petitioner and Mr. DiMichele

purchased property at 1916-18 N. 5th Street for $32,000.

They paid for the property by check and did not finance any

portion of the purchase.   At some time after they purchased

the property, petitioner obtained sole ownership of it.

Petitioner remained the owner of the property at the time

of trial.

     On December 11, 1985, petitioner and Mr. DiMichele

purchased property located at Trina Drive for $8,500.   They

paid for the property with a check in the amount of $10,000

that petitioner drew from her account at Home Unity Savings

& Loan on December 4, 1985.   Petitioner and Mr. DiMichele

sold the property in 1994 for $65,000.
     In March 1986, petitioner and Mr. DiMichele purchased

a one-third interest in property at 1441 Shunk Street for

$8,500.    The other owners of the property were Tito

Vespasiano and Angel Giancoma, petitioner's cousin.

Petitioners' interest in the property was forfeited to the

U.S. Government in 1990 in connection with Mr. DiMichele's

conviction on drug charges, as discussed below.

     At the time of the Government's investigation into

Mr. DiMichele's affairs, petitioner and her husband owned

two cars.    Petitioner owned a 1981 Lincoln Continental that

she and her husband had purchased in March of 1981 for

$16,200.    In purchasing this car, they had made a down-

payment of $6,200 and had financed the balance of $10,000

through the Fidelity Bank & Trust Co. of New Jersey over 4

years with monthly installments of $280.84.    The Credit

Application and the Purchase Money Motor Vehicle Security

Agreement that were signed by petitioner and her husband

and submitted to Fidelity Bank & Trust Co. of New Jersey

list petitioner's address as "406 Orchard Ave Somerdale, NJ

08083."    Similarly, the Certificate of Ownership of a Motor

Vehicle issued in petitioner's name by the New Jersey

Division of Motor Vehicles lists the same address.

     The second car was a 1984 Cadillac Eldorado that

Mr. DiMichele had purchased in December 1983 for

$25,678.57.    In purchasing that car, Mr. DiMichele had made
a $7,000 downpayment, and he had received an allowance of

$5,000 for trading in a 1979 Dodge Regis.    He financed the

balance, $13,678.57, through a loan with Fidelity Bank &

          Trust Co. payable over 4 years with monthly

installments of $367.31.

     Mr. DiMichele was indicted by a Federal grand jury

on February 17, 1988, for conspiring to distribute metham-

phetamine, in violation of 21 U.S.C. sections 841 and 846,

(count 1), for distribution of methamphetamine, in viola-

tion of 21 U.S.C. section 841(a)(1) (counts 2 and 3), and

for possession of an unregistered firearm in violation of

section 5861(d) (count 4).    Count 5 of the indictment

alleges that the currency, jewelry, bank accounts, and real

property owned by petitioners had been used to facilitate

the commission of the crimes charged in the indictment and

were subject to forfeiture under 21 U.S.C. section 853.

     On March 16, 1988, the grand jury approved a super-

seding indictment that added three criminal tax violations

to the other criminal violations charged in the original

indictment.   The new counts charged Mr. DiMichele with

willfully making and subscribing false income tax returns

for 1983 (count 6), 1984 (count 7), and 1985 (count 8), in

violation of section 7206(1).

     Mr. DiMichele pled guilty to counts 1 and 8 of the

superseding indictment.    As to count 1, Mr. DiMichele was
sentenced to serve 10 years in jail and to pay a fine in

the amount of $25,000.                       As to count 8, he was sentenced to

serve 2 years in jail, to run concurrently with the

sentence imposed on count 1.

         At approximately the same time that Mr. DiMichele was

sentenced, December 22, 1988, the District Court entered

an Order of Forfeiture under which it ordered Mr. DiMichele

to forfeit all of the property listed in the indictment.

Thereafter, on February 17, 1989, petitioner filed

Forfeiture Claim Of Eileen DiMichele in which she claimed

ownership of the Lincoln Continental automobile, bank

accounts, real estate, and jewelry.                              The court entered its

Final Order of Forfeiture on January 24, 1990.                                       Set out

below is a summary of the assets listed by the District

Court in its original order of forfeiture dated

December 19, 1988, the assets claimed by petitioner in her

Forfeiture Claim of Eileen DiMichele filed February 17,

1989, the assets listed in the Final Order Of Forfeiture

filed on January 24, 1990, and the assets that were not

forfeited:

                                                                        Claimed by
Cash and Jewelry                                Date        Assets      Petitioner       Forfeited    Not Forfeited

Cash found at 2010 South 15th St.              05/07/87   $194,972.00                   $194,972.00
Casino chips found at 2010 South 15th St.      05/07/87      8,277.50                      8,277.50
Cash found in safe deposit box 402901          05/08/87    225,000.00                    225,000.00
Ten gold Canadian coins in box 402901          05/08/87
Jewelry found in home and safe deposit box     05/08/87    111,167.50    $92,237.30       71,046.80     $40,120.70
Bank Accounts and CD's

Delaware Cash Reserve 8-943701-2   06/25/87     2,181.13     2,181.13     2,181.13
Delaware Cash Reserve 8-943617-2   06/25/87     3,882.99                  3,882.99
Home Unity S & L 217000884-8       06/30/87     4,546.12     4,546.12                  4,546.12
Home Unity S & L 199015785         08/31/87     1,760.49     1,760.49                  1,760.49
Home Unity S & L 1545-0112         09/17/87    11,669.05    11,669.05                 11,669.05
United Jersey Bank 007006810       01/16/87    32,132.67    32,132.67                 32,132.67
United Jersey Bank 03483922           02/88     2,261.58                  2,261.58
United Jersey Bank 000-0028772        03/88    14,038.08                              14,038.08
United Jersey Bank 9039271            05/86     8,668.19                               8,668.19
PSFS 5-0531886                     06/30/87    11,000.00                 11,000.00
Prudential S & L 01-25000000916    08/31/87     9,926.48     9,926.48                  9,926.48
Beneficial S & L XX-XXXXXXX        06/30/87     2,729.58     2,729.58                  2,729.58
Beneficial S & L 03-54-49227       06/30/87     2,919.63     2,919.63                  2,919.63

Real Estate

2010 South 15th Street             10/22/69    12,000.00    12,000.00                 12,000.00
1533 Emily Street                      1981    16,168.00    16,168.00                 16,168.00
1433 West Passyunk Ave.               05/83    60,000.00    60,000.00    60,000.00
Trina Drive                        12/11/85     8,500.00     8,500.00                  8,500.00
1916-18 North 5th Street           05/10/85    32,000.00    32,000.00                 32,000.00
1441 Shunk Street                     03/86     8,500.00     8,500.00     8,500.00
506, 508, 510 Fitzwater Street     10/19/84    30,000.00                              30,000.00

Automobiles

1981 Lincoln Continental             03/81     16,200.00    16,200.00    16,200.00
1984 Cadillac Eldorado               12/83     25,678.57                              25,678.57

                                              856,179.56   313,470.45   603,322.00   252,857.56
     Before Mr. DiMichele began serving his prison term,

he gave approximately $40,000 to petitioner.    Since

Mr. DiMichele's release from prison, he has lived with

petitioner.   Petitioner filed a Complaint in Divorce on

April 29, 1994, but no further action has been taken,

and petitioner and Mr. DiMichele continue to live

together in the house located at 2010 South 15th Street.

     Respondent issued two notices of deficiency to

petitioners, one for 1985 and one for 1986.    The principal

adjustment made by respondent to the DiMicheles' 1985

income tax return was to increase the gross income reported

on the return by $720,000, the amount respondent determined

that Mr. DiMichele had received from the sale of drugs

during 1985, and to allow a deduction of $180,000 for the

cost of drugs sold during the year.   For the year 1986,

respondent made two adjustments.   Respondent increased the

DiMicheles' gross income by $34,000, the amount of the

long-term capital gain realized from the sale of the

properties located at 506, 508, and 510 Fitzwater Street,

and increased petitioners' gross income by $31,748, the

amount of unreported bank deposits during the year.
                          OPINION

     The sole issue for decision is whether petitioner

qualifies as an "innocent spouse" under section 6013(e),

and is thereby relieved of joint and several liability for

the tax and additions to tax determined by respondent with

respect to joint tax returns that petitioner filed with

Mr. DiMichele for 1985 and 1986.    Section 6013(e)(1)

relieves a spouse of liability with respect to a joint

Federal income tax return if each of the following four

requirements is met:


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

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

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

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


     Petitioner bears the burden of proving that each
of the above requirements is satisfied.   Rule 142(a).   All

Rule references are to the Tax Court Rules of Practice and

Procedure.   Failure to prove any one of the above require-

ments precludes the taxpayer from qualifying as an

"innocent spouse".   Bokum v. Commissioner, 94 T.C. 126,

138 (1990), affd. 992 F.2d 1132 (11th Cir. 1993).

     Respondent concedes that petitioner meets the first

two requirements of the test with respect to both of the

tax returns in issue.   Therefore, petitioner must prove

that she meets the remaining two requirements; i.e.,

that she had no knowledge nor reason to know about the

substantial understatements, sec. 6013(e)(1)(C), and,

taking into account all facts and circumstances, that it

would be inequitable to hold her liable for the deficiency

in tax attributable to the substantial understatement for

the year, sec. 6013(e)(1)(D).

     For the year 1985, the substantial understatement of

tax is attributable entirely to respondent's determination

that petitioners failed to report the income and expenses

from Mr. DiMichele's activity as a drug dealer.   For the

year 1986, the understatement of tax is attributable to
two items, each of which is "substantial".    See sec.

6013(e)(3).   The first item is respondent's determination

that petitioners failed to report gross income of $31,748,

computed using the bank deposits method of computing

income.    The second item is respondent's determination

that Mr. DiMichele "realized a long-term capital gain

of $34,000.00 from the sale of 506 and 510 Fitzwater."

     To satisfy section 6013(e)(1)(C), petitioner must

prove that in signing each of the returns in issue she

did not know, and had no reason to know, that there was

a substantial understatement of tax attributable to the

grossly erroneous items of her husband.    See Purcell v.

Commissioner, 86 T.C. 228, 236 (1986), affd. 826 F.2d 470

(6th Cir. 1987).   This is a question of fact to be deter-

mined after considering all available facts and circum-

stances.   E.g., Flynn v. Commissioner, 93 T.C. 355, 365

(1989).

     Petitioner argues that in signing her joint returns

for 1985 and 1986 she did not know, and had no reason to

know, that there was a substantial understatement of tax

on either of the returns.    She argues that she has limited
education and no formal training in finance or accounting.

She also argues that, during the years in issue, she had

limited involvement in the financial affairs of the family

and that she and her husband made "no unusually lavish

expenditures * * * when compared to their past levels

of income, standard of living and spending pattern."

Petitioner emphasizes that she was not involved in any way

in her husband's illegal activities, and she notes that the

Government's investigation of her husband did not implicate

her in any illegal activity.   Finally, she argues that the

testimony of Mr. Michael Madgin, a Government informant, is

incredible and should be disregarded.

     We find that petitioner did not meet her burden of

proving that she did not know, and had no reason to know,

that there was a substantial understatement of tax on her

joint returns for 1985 and 1986.   There is ample evidence

from which we infer that petitioner knew of Mr. DiMichele's

illegal drug business and, hence, knew or should have

known of the substantial understatements of tax in 1985 and

1986, which were attributable to the unreported income from

that business.   The record shows that Mr. DiMichele
conducted his criminal activities in his home.   He held

business meetings there, he collected and stored hundreds

of thousands of dollars there, and he maintained his

business records there.   It is undisputed that petitioner

greeted Mr. DiMichele's business associates when they came

to the home for meetings with Mr. DiMichele.   There is also

persuasive evidence in the form of testimony by one of

Mr. DiMichele's business associates, Mr. Michael Madgin,

that at least one meeting took place in petitioner's

presence during which Mr. DiMichele, Mr. Madgin, and

another person counted money and discussed illegal drug

activities.   We also credit Mr. Madgin's testimony that he

delivered to petitioner a payment of cash in the amount of

$50,000 to $100,000 for Mr. DiMichele.

     Furthermore, there is ample evidence that petitioner

was aware of the fruits of her husband's illegal drug

activities and, hence, knew or should have known of the

substantial understatements of tax attributable to

unreported income in both 1985 and 1986.   The investigation

conducted by the DEA agents in 1987 and their searches of

petitioners' home and safe deposit boxes revealed that the
couple owned two cars, furs, $419,972 in cash, jewelry,

     valued by petitioners at $111,167.50, and various

parcels of real estate.

     During each of the years in issue, petitioner knew

that she and her husband had purchased the 1981 Lincoln

Continental for $16,200, that they had made a cash down-

payment of $6,200, and that they had borrowed the balance

of $10,000 from Fidelity Bank & and Trust Co. of New

Jersey.   She knew that the car was titled in her name and

she had executed the Credit Application and the Purchased

Money Motor Vehicle Security Agreement submitted to the

lender, Fidelity Bank & Trust Co. of New Jersey.   She also

knew or should have known that the cost of the 1981 Lincoln

was more than 58 percent of the total income reported on

petitioners' 1981 return.

     Similarly, petitioner knew that her husband had

purchased a new Cadillac Eldorado in December 1983.

The record of this case does not include the purchase

documents for the Cadillac which cost $25,400.   Never-

theless, petitioner knew or should have known that the

Cadillac Eldorado was a relatively expensive car to
purchase for a couple whose total wages for the year

were $26,000.

     Petitioner knew of the fur coats that were

photographed but not confiscated by the DEA agents who

conducted the search of the DiMicheles' home.    Petitioner

testified that the fur coats "were really old * * *

antiques, really."   However, she provided nothing to

substantiate that testimony.

     Petitioner knew of the jewelry found in her home by

the DEA agents, and she knew of the jewelry found by the

agents in safe deposit box No. 301640.    According to

petitioners' valuation, all of the jewelry was worth

$111,167.50.    On the other hand, the Government's appraiser

valued the jewelry at $192,104.    Even if we accept

petitioners' valuation, it is difficult to reconcile a

jewelry collection valued at more than $110,000 with the

total income reported on the joint returns filed by

petitioner and her husband.

     Petitioner's brief claims:    "Any jewelry that she

possessed was either purchased during the earlier stages

of the marriage, received as gifts or inherited as
heirlooms."   At trial, petitioner testified about the

jewelry contained in safe deposit box No. 301640 as

follows:


     Q          Now, let's talk for a minute about
           the jewelry.
                The jewelry that was in the safety
           deposit box were pieces of jewelry that
           you did not wear on a regular basis?

     A          That's correct.

     Q          Okay. Describe for His Honor how
           you came into possession of those
           pieces of jewelry. Were they gifts?


     A          Yes, a lot of these things were
           sentimental things; they were heirlooms
           that were passed down from my grand-
           mother, who I had taken care of over
           the years. She had heart pins and her
           necklace and her jewelry that I was
           given to -- given to me. And my mother
           had passed away. I had my mother's
           jewelry also in there.


Based upon that testimony, petitioner asks the Court to

find the following as facts:


     38. Petitioner did use the safe deposit box
     which contained her jewelry.

     39. Petitioner came into these pieces of jewelry
     through gifts and inherited as family heirlooms
     from her mother and grandmother.
     We have several difficulties with petitioner's

testimony.   First, on two occasions, respondent propounded

the following interrogatory to petitioner and her husband:


          78. Indicate all inheritances that the
     petitioners or their children received in their
     lifetime. Also if applicable, indicate the
     following:

                (a)   Who the inheritance was left to;

                (b)   Who the inheritance was left from;

                (c)   Indicate the approximate value of
                      the inheritance and the date that
                      it was received;

                (d)   Indicate if an inheritance tax
                      return was ever filed. If
                      applicable, indicate the date
                      and location of where it was
                      filed;


                (e)   If an inheritance tax return was
                      not filed explain why;

                (f)   Indicate the exact asset that
                      was gifted. i.e. cash,
                      property, jewelry etc.


In response to both interrogatories, petitioner and her

husband responded, "No".

     Second, petitioner's testimony about the jewelry is
contradicted by her husband's testimony during which he

never mentioned any jewelry that was inherited from

petitioner's mother or grandmother.   Rather, in reviewing

petitioner's appraisal of the jewelry, he testified that he

had acquired the jewelry over a period of many years.    He

testified as follows:


     Q         Again, describing the jewelry that
          is contained in this appraisal, these were
          various items that you acquired over the
          years?

     A         That's correct.


     Petitioner knew that her husband had collected

and stored large amounts of cash in their home.   One of

Mr. DiMichele's criminal conspirators, Mr. Madgin,

testified that from time to time he delivered large

amounts of cash, anywhere from $25,000 to $100,000, to

Mr. DiMichele at petitioners' home.   Mr. Madgin also

testified that in 1985, he delivered a brown bag containing

approximately $50,000 to $100,000 in cash to petitioner in

her husband's absence.   Mr. Madgin also testified credibly

that on one occasion, he discussed drug transactions with

Mr. DiMichele and another person and they counted money at
the kitchen table of petitioners' home while petitioner was

present in the kitchen.

     Furthermore, the DEA agents who searched petitioners'

home found cash throughout the house.   They found $136,000

in the rear basement closet, an area of the house that

petitioner claimed she could not enter.   However, they also

found $2,681 in the basement closet where the fur coats

were found, $2,652 in a dining room closet, along with

financial records, $23,850 in a playroom closet, and

$26,917 in the master bedroom.   The agents also found

$3,015 in safe deposit box No. 301640, the box where

petitioner stored her jewelry.

     Based upon the above, we find that petitioner has

failed to prove that she did not know, and had no reason

to know, of the substantial understatement of tax in 1985,

which was attributable to Mr. DiMichele's illegal drug

business.   Concomitantly, we find that petitioner has also

failed to prove that she did not know, and had no reason to

know, of the substantial understatement of tax in 1986

computed by respondent using the bank deposits method.

     The only other issue we must decide is whether
petitioner knew or had reason to know of the substantial

understatement of tax in 1986 attributable to the

unreported gain from the sale of the 506, 508, and 510

Fitzwater Street properties.   During petitioner's testimony

at trial, she made no specific reference to the 506, 508,

and 510 Fitzwater Street properties.   Rather, she testified

that she had no involvement in the purchase of any of the

properties acquired by the couple.   Her testimony is as

follows:


     Q          All right, You heard Carl describe
           the various properties that were purchased
           beginning in 1981, going forward. Tell His
           Honor your involvement in purchasing or any
           aspect of those properties. What was your
           involvement in those?

           THE WITNESS: Well, I really had no
           involvement, Your Honor. As far as things
           went, as purchasing of all the property, I
           left that all up to my husband because he
           was the one that had the talent to do all
           those things and I just didn't understand if
           he bought something or maybe he was selling
           something or he fixed a building or he would
           resell it, and I just never knew what was
           going on at that time.


     Similarly, in her post-trial brief, petitioner does

not specifically deny that she knew of the Fitzwater
Street properties or of the sale of those properties on

December 30, 1986.   The only reference to the properties in

petitioner's post-trial briefs is the following objection

to one of respondent's proposed findings of fact:


          [The] Notice of deficiency issued to
     Petitioners on March 19, 1990 does not take
     into consideration that Petitioner-Wife had
     no ownership interest in the Fitzwater Street
     property and that petitioner-Husband did not
     receive any actual cash on December 30, 1986
     and after deducting the cost for the property,
     husband only received $11,700 which was his
     half of the profit with his partner.


     We cannot accept petitioner's denial of "involvement

in purchasing or any aspect of" the Fitzwater Street

properties to mean that she did not know or have reason

to know of the gain from the sale of those properties on

December 30, 1986.   On that basis alone, we find that

petitioner failed to meet her burden of proof under section

6013(e)(1)(C).   Furthermore, petitioner's testimony that

she relied on her husband concerning the purchase and sale

of real property is not sufficient to satisfy the lack of

knowledge requirement of section 6013(e)(1)(C).   The

innocent spouse exemption was not intended to protect a
spouse who turns a blind eye to whether there is a

substantial understatement of tax on a joint return.

Bokum v. Commissioner, 94 T.C. at 148.

        For the reasons discussed above, we find that

petitioner does not meet the requirements of section

6013(e)(1)(C).     Accordingly, petitioner is not entitled

to the relief provided by section 6013.     It is unnecessary

for us to consider petitioner's arguments under section

6013(e)(1)(D).

Additions to Tax for Fraud

     Respondent determined that Mr. DiMichele is liable

for the additions to tax for fraud pursuant to section

6653(b)(1) and (2) with respect to the underpayment of tax

for 1985.    However, as mentioned above, respondent does not

allege fraud by petitioner.     Accordingly, petitioner is not

liable for the additions to tax for fraud determined by

respondent with respect to petitioner's joint return for

1985.

     For the foregoing reasons,


                                 Decisions will be entered

                            for respondent, except as to
petitioner's liability for the

addition to tax for fraud.
Excess:
This income was unreported and resulted in the conceded
deficiencies in petitioners' Federal income tax as detailed
above. The calculation of petitioners' income was
accomplished using evidence seized in a search of
petitioners' home in Philadelphia. For 1985, respondent
determined that Mr. DiMichele had gross receipts from the
sale of drugs in the amount of $720,000, less cost of goods
sold in the amount of $180,000 and a two-earner deduction
in the amount of $1,876.[S8] For 1986, the increase was
the result of respondent's determination through use of the
bank deposits method of an unreported $34,000 capital gain
and unreported additional income of $31,748.[S9]

     The taxable income stated on the DiMicheles' income
tax returns was as follows:

Year                       Adjusted Gross Income

1985                            $36,696
1986                            $23,683 [Ex.1,2]

     On October 17, 1988, Mr. DiMichele pleaded guilty to
the possession and distribution of methamphetamine in the
U.S. District Court for the Eastern District of
Pennsylvania. He was sentenced to 10 years imprisonment
[E11] and served time in prison from January 1989 to May
1993 when he was released on parole. Mr. DiMichele was
also fined $25,100. The first 1st count which
Mr. DiMichele pled guilty to states that from 1981 through
1987, Mr. DiMichele sold methamphetamine to Michael Madgin,
another drug distributor. [T246-247]

       a. Delaware Cash Reserve
            Account #8-943701-2
            Titled in name of Carl & Eileen DiMichele
            (Balance as of 6/25/87: $2,181.13)

       b. Home Unity Savings & Loan
            Account #21700884-8
            Titled in name of Carl & Eileen DiMichele
            (Balance as of 6/30/87: $4,546.12)
          Account #199015785
          Titled in name of Carl & Eileen DiMichele
          (Balance as of 8/31/87: $1,760.49)

          Account #1545-0112
          Titled in name of Eileen Secatore
          (Balance as of 9/17/87: $11,669.05)

     c. United Jersey Bank
          Account #007006810
          Titled in name of Carl & Eileen DiMichele
          (Balance as of 1/16/87: $32,132.67

     e. Prudential Savings & Loan
          Account #01-25000000916 IRA)
          Titled in name of Eileen DiMichele as
          custodian for Christina DiMichele
          (Balance as of 6/30/87: $2,729.58)

          Account #03-54-49227
          Titled in name of Eileen DiMichele as
          custodian for Christina DiMichele
          (Balance as of 6/30/87: $2,919.63)


     Section 6013(a) provides that a husband and wife may
file a single return jointly. If they elect to do so, the
tax is computed on the aggregate income of both spouses,
and the liability with respect to the tax is joint and
several. Sec. 6013(d)(3). Liability will therefore attach
to a spouse who was "innocent" of deficiencies resulting
from an erroneous omission or deduction solely attributable
to one spouse. In 1971, Congress enacted the "innocent
spouse" provision to remedy this inequity and to protect
one spouse from the overreaching or dishonesty of the
other. Stiteler v. Commissioner, T.C. Memo. 1995-279.

     [The following two paragraphs are written for use if
the opinion is formulated without a discussion of the
(e)(1)(C) knowledge element of the innocent spouse test]
     Where the court finds that it would not be inequitable
to hold a putative innocent spouse liable for income tax on
a joint return, it will often not even address the element
of knowledge under section 6013(e)(1)(C). See Purificato
v. Commissioner, supra at 292; Estate of Krock v.
Commissioner, supra at 677; Stiteler v. Commissioner, T.C.
Memo. 1995-279. Under this analysis, since petitioner must
prove all of the elements under section 6013(e)(1) to
prevail, the failure to prove any one of these elements
will preclude innocent spouse relief. It is reasoned that
if the taxpayer cannot meet the burden of proving that it
would be inequitable to hold her liable, then no other
element of the test need be addressed.

     We adopt this mode of analysis. Petitioner has failed
to meet her burden of showing that, under all of the facts
and circumstances, it would be inequitable to hold her
liable for the tax owing on the joint income tax returns
filed together with her husband. We therefore express no
opinion with respect to petitioner's knowledge of the
circumstances surrounding the subject deficiencies. We
find that petitioner may not be relieved of liability for
the subject deficiencies under the innocent spouse
provision of the Internal Revenue Code.

     [Although respondent does not allege fraud, I have
included an exploration of the issue as follows:]

     In addition to determining petitioner's liability for
the assessed deficiencies, we must determine whether
petitioner is also liable for the asserted additions to tax
for fraud. Under section 6653(b)(4), a spouse is liable
for the fraud addition on the couple's joint return if that
spouse also committed fraud. On this issue, respondent
bears the burden of proof. Stone v. Commissioner, 56 T.C.
213, 227 (1971). Fraud is not imputed from one spouse to
another, and in the case of a joint return, as here,
respondent must prove fraud on the part of each spouse.
Sec. 6653(b). (Now section 6663(c); Hicks Co. v.
Commissioner, 56 T.C. 982, 1030 (1971), affd. 470 F.2d 87
(1st Cir. 1972); Stone v. Commissioner, supra at 227-228.

     For purposes of section 6653(b), fraud means the
intentional commission of an act or acts for the specific
purpose of evading a tax believed to be owing, Webb v.
Commissioner, 393 F.2d 366, 377 (5th Cir. 1968), affg. T.C.
Memo. 1966-81; McGee v. Commissioner, 61 T.C. 249, 256
(1973), affd. 519 F.2d 1121 (5th Cir. 1975). Respondent
must prove that there was an underpayment, Parks v.
Commissioner, 94 T.C. 654, 660 (1990), and that the
taxpayer intended to evade taxes by conduct intended to
conceal, mislead, or otherwise prevent tax collection.
Stoltzfus v. United States, 398 F.2d 1002, 1004-1005 (3d
Cir. 1968); Parks v. Commissioner, supra at 661; Rowlee v.
Commissioner, T.C. 1111, 1123 (1983).

     The first element, the existence of an understatement
of income is met. Both parties acknowledge the understate-
ment of tax liability for the years in issue.

     With respect to proof of fraudulent intent on the part
of petitioner, respondent has not satisfied its burden.
The evidence set forth by respondent aims at exposing
petitioner's knowledge of the circumstances of
Mr. DiMichele's drug activities. However, nothing
submitted by respondent purports to prove petitioner's
fraudulent intent to evade income taxes. Although
petitioner did sign the fraudulent income tax return, we
find no act committed with the specific purpose of evading
income tax. The record shows that petitioner's behavior
was not focused upon committing fraud. By requiring a
showing of intent, the legal standard requires more than
simply a general knowledge of the circumstances. An
examination of the evidence on the record leaves us with
little awareness of petitioner's intentions. Petitioner
was not involved with the couple's record keeping
firsthand. Mr. DiMichele handled the couple's finances,
with the exception of the monthly checks for expenses
written by petitioner. Respondent has pointed to no single
activity which would lead us to believe that petitioner
deliberately misled the taxing authorities.

     In a similar case involving the wife of a drug
trafficker, the Court wrote:

     The mere fact that [the wife] was aware of her
     husband's activities at the time she signed the
     return does not change the result. We will not
     infer intent to evade tax from her passive
     knowledge. [Congelliere v. Commissioner, T.C.
     Memo. 1990-265.]


     In Congelliere, moreover, the wife clearly had actual
knowledge of her husband's activities when the tax return
was signed, since her husband had already been arrested for
drug trafficking. Although she was denied innocent spouse
relief, the Court held that the wife was not liable for
fraud.


The cash was found in various parts of the house, $23,850
in the playroom closet, $2,652 in the dining room, $26,917
in the master bedroom, and $136,000 in the basement closet.
The agents and police


Despite the fact none of the insurance proceeds were used
toward renovating petitioners' home, petitioners managed to
renovate their home using other funds.

A portion of the total the purchase price for the property
was designated for the real estate and part was designated
for a business to be operated at the property. [S54]

[T201-202]
     On December 19, 1988, an order of forfeiture was
issued in Mr. DiMichele's criminal case. The order called
for the seizure of all of Mr. DiMichele's assets.
Following the District Court's Order of Forfeiture,
petitioner filed a Forfeiture Claim on February 17, 1989,
which declared ownership in all jointly and individually
held bank accounts, all real estate listed, other than that
claimed by Mr. DiMichele's counsel, and jewelry worth at
least $91,287 (based on petitioner's appraisal). [Ex.19]
In the District Court's Final Order of Forfeiture on
January 24, 1990, jewelry worth an appraised value of
$40,120 (based on petitioner's appraisal) was returned to
Mrs. DiMichele. Of the bank accounts owned jointly by
petitioners, the Delaware Cash Reserve Account #8-943701-2
was ordered to be forfeited. The property at 1433 W.
Passyunk Avenue was ordered forfeited as well as the
DiMicheles' interest in the 1441 Shunk Street property.
The remaining joint and individually held accounts of
petitioner were retained by petitioner. All cash found at
petitioners' residence and in the safe deposit boxes was
forfeited. The Cadillac apparently remained in
petitioner's possession. [Ex.20] All other jointly and
individually held property not ordered forfeited remained
in petitioner's possession.

     Under section 6013(e)(1)(D), petitioner must prove
that, taking into account all of the facts and
circumstances of the case, it would be inequitable to hold
her liable for the tax deficiency attributable to her
spouse. Sec. 16.6013-5(b), Income Tax Regs. Factors to be
considered are: (i) Whether the spouse claiming relief
significantly benefitted from the grossly erroneous items
attributable to the culpable spouse, Estate of Krock v.
Commissioner, 93 T.C. 672, 677 (1989); and (ii) whether the
spouse claiming relief has been deserted by or divorced or
separated from the culpable spouse. Id. at 678; section
1.6013-5(b), Income Tax Regs.

     In determining whether a putative innocent spouse
significantly benefitted from the grossly erroneous items
attributable to the culpable spouse, we look to whether the
spouse claiming relief significantly benefitted beyond
normal support, either directly or indirectly, from the
erroneous items. Belk v. Commissioner, 93 T.C. 434, 440
(1989); Parcel v. Commissioner, 86 T.C. 228, 242 (1986),
affd. 826 F.2d 470 (6th Cir. 1987); section 1.6013-5(b),
Income Tax Regs.

     The regulations further state that:

     Evidence of direct or indirect benefit may
     consist of transfers of property, including
     transfers which may be received several years
     after the year in which the omitted item of
     income should have been included in gross income.
     Thus, for example, if a person seeking relief
     receives from his spouse an inheritance of
     property or life insurance proceeds which are
     traceable to items omitted from gross income by
     his spouse, that person will be considered to
     have benefitted from those items. Sec. 1.6013-
     5(b) Income Tax Regs.


     The comparative "level" of lifestyle that a taxpayer
leads before and after enjoying the benefits of the tax
understatement is not controlling. Stated another way,
present consumption is not required. Acquisition of
property and contributions to investments and savings may
all be construed as significant benefits which the spouse
enjoys. Purificato v. Commissioner, 9 F.3d 290 (3d. Cir.
1993); see also Estate of Krock v. Commissioner, 93 T.C.
672 (1989).

     Petitioner did not live a lavish lifestyle during the
years at issue. However, we find that petitioner
benefitted significantly from the understatements or the
items underlying them. The evidence shows that petitioner
acquired real property, contributed substantial funds to
bank accounts, and amassed a large jewelry collection.
Petitioner did not rebut this evidence by demonstrating a
source of funds separate from those arising from the tax
understatement. The burden of showing the source of funds
for property received is on the taxpayer. Tertian v.
Commissioner, 72 T.C. 1164 (1979). Petitioner has not
shown us an alternative source of funds for the benefits
she received.

      The purchase of real property is a benefit. Schlosser
v. Commissioner, T.C. Memo. 1992-233, affd. 2 F.2d 404
(11th Cir. 1993). During 1985 and 1986, petitioner
acquired, along with her husband, two real property
interests for $32,000 and $8,500, respectively. Payments
were ostensibly also being made on the 1433 W. Passyunk
Avenue property purchased by the DiMicheles for $120,000 in
1983.
     During the years at issue, petitioner had $4,000
deposited into her IRA account.

     Petitioner withdrew large sums from the Home Unity
bank account. This money came from insurance proceeds
received after petitioners' house was damaged by fire that
had been deposited directly in the Home Unity account.
Renovations must have been accomplished with other money
since the insurance money remained in the bank while
renovations were performed on the house. Petitioner did
not show us any alternative source of funds for these
renovations. We therefore infer that such funds were
traceable to the understatements or the items underlying
the understatements. [R's brief, p. 52]
     Petitioner maintained six other bank accounts either
jointly with Mr. DiMichele or individually. Petitioner has
made no showing as to the source of the funds in these
accounts.

     During the years at issue, payments of $367.31 were
made or the debt was retired in some way on a Cadillac
purchased by the DiMicheles in 1983. The purchase of the
Cadillac and the use of the vehicle constitutes a benefit
to petitioner.

     Petitioner testified that when Mr. DiMichele began his
prison term, he gave petitioner approximately $40,000 to
live on while he was incarcerated. Petitioner claims this
constituted normal support. In Estate of Krock, a wife
claiming innocent spouse relief was deemed to have
benefitted beyond normal support by carrying out a unique
and unusual lifestyle. The wife had joined her husband who
fled to the Bahamas as a fugitive from justice. She
claimed that since life in exile was a source of
unhappiness, any benefit received during this period should
not be considered anything above normal support. In
rejecting this argument, the Court observed that her
ability to maintain life abroad with her husband who was
avoiding arrest and trial could not be described as "normal
support."   Estate of Krock, supra at 684. Similarly,
petitioner's receipt of a large amount of cash to live on
while her husband was in jail constitutes an unusual
benefit, which transcends "normal" support. During her
husband's incarceration, petitioner worked only during the
years 1989 and 1990. No other evidence is provided to show
a source of financial support for the balance of the time.
Petitioner has failed to demonstrate that there was no
nexus between the tax understatements or the items
underlying the understatements and Mr. DiMichele's $40,000
cash gift.

     As to petitioner's argument that her "middle class"
lifestyle did not change and was not lavish, this is not
the focus of the inquiry. As stated previously, present
consumption is not required in determining whether a
taxpayer has significantly benefitted from a tax
understatement. Moreover, petitioner would have had to
present specific documented patterns of spending to show
that there had been no change in order to meet her burden.
See Estate of Krock, supra at 679-680.

     The policy behind this rule is set forth in the recent
case of Purificato, where the court writes:

     Furthermore, we cannot believe that Congress, in
     enacting sec. 6013(e)(1)(D), intended to require
     the kind of investigations and trials that would
     be needed if entitlement to "innocent spouse"
     relief depended on facts and circumstances of
     this type. For example, we do not think that
     Congress wanted to require the IRS to investigate
     whether the Purificato couples ever went out to
     dinner, to the movies, or to a ballgame. Nor do
     we think that Congress wanted to require the tax
     court to conduct a trial and make findings on
     such questions. Purificato, supra at 296.


     A taxpayer derives a benefit from the use of ill-
gotten funds even if they are unaware that the funds are
tainted. Turner v. Commissioner, T.C. Memo. 1988-339.
Thus, the element of knowledge does not enter the inquiry
into whether petitioner significantly benefitted from the
tax under-statements.
     Pursuant to the regulations, we also look to transfers
of property in years following the years at issue. Sec.
1.6013-5(b). In 1994, the Trina Drive property, which was
purchased in 1985, was sold for $64,000. Originally
purchased jointly by the DiMicheles, title had been
transferred to petitioner exclusively after Mr. DiMichele's
incarceration. Thus, petitioner personally received all of
the proceeds from the sale, which constitutes a benefit to
petitioner.

     Petitioner has demonstrated no current source of
income or financial support, so we assume that her living
money is still coming out of her and her husband's
accumulated assets. We therefore infer that she is still
benefitting from the use of money traceable to the tax
understatements resulting from unreported income earned in
the tax years at issue.

     Petitioner, furthermore, retained a substantial
portion of the couple's assets when Mr. DiMichele was sent
to prison. All assets which petitioner claimed and that
were not forfeited to the Federal Government were retained
by petitioner.

     It is noted that subsequent to Mrs. DiMichele's filing
for divorce in April, 1994, no further action has been
taken and Mr. DiMichele continues to live at petitioner's
residence in Philadelphia. This factor therefore will be
accorded no weight in the 6013(e)(1)(D) determination.

     Moreover, in light of the foregoing discussion and of
other evidence, we conclude that petitioner did have
knowledge of the circumstances surrounding the tax
understatements, satisfying section 6013(e)(1)(C). In
thus concluding, we credit the testimony of Mr. Madgin.
Mr. Madgin testified that he had discussed drug
transactions in petitioner's presence on at least one
occasion. He also testified that petitioner had been
involved in a drug transaction when he delivered to her a
bag of cash to give to her husband. We find that
petitioner was intelligent and competent. Petitioner's
knowledge of her husband's drug activities was coupled with
her awareness of all the benefits accruing from these
activities as discussed above. Petitioner therefore must
have had direct knowledge of the drug activities when she
signed the joint income tax returns.

Partial Liability Predicated on Partial Knowledge
     Petitioner asks the Court to hold petitioner liable
for only so much of the deficiency as she was aware of.
This argument is based on the court's holding in Ratana v.
Commissioner, 662 F.2d 220 (4th Cir. 1981). There, the
court found that a wife seeking "innocent spouse" relief
was liable for only that tax attributable to the unreported
income of which she had actual or constructive knowledge
but that she was entitled to "innocent spouse" relief as to
the rest of the unreported income. Id. at 225. See
Purificato, supra at 297. Given the evidence provided in
the record, however, we conclude that we do not have
information specific enough to make such a determination.
We, therefore, find Ratana inapposite. Since it is
factually distinguishable, we do not have occasion to
discuss the application of the methodology used in Ratana.



                    1978      1979      1980      1981     1982      1983      1984      1985      1986

Schedule C
 General Sign Co.   $3,925   $18,809

Wages--                       1,200    $28,700   $4,000
 General Sign Co.

Wages--Out of
 the Past, Inc.

Mr. DiMichele                                             $18,000   $26,000   $19,500   $2,400
Petitioner                                                                      6,500   23,400

Installment sale
 of business

Capital                                           8,658      380       363    11,726
Oridinary                                         4,906      215       206     3,472


Capital Gain                                                                                      $6,175

Schedule E
 Vacant property                                  (171)

1533 Emily                                                                    (1,243)   (1,996)   (1,846)
N. 5th St.,                                                                          5,070    9,605
 Commercial Bldg.

 1441 Shunk                                                                                   (343)

 1433 Partnership                                                        (5,208)   (2,899)   (1,245)

Interest                               140    10,113   11,921   11,311    14,920    16,925   11,200

Dividends                                                          18         62        77      137


  Total income      3,925   20,009   28,840   27,506   30,516   37,898    49,729    42,977   23,683
