                          T.C. Memo. 1997-261



                        UNITED STATES TAX COURT



    ANTHONY J. MARZULLO AND MARY P. MARZULLO, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 15219-94.                          Filed June 11, 1997.



    L. Paige Marvel and Joyce K. Becker, for petitioners.

    Clare J. Brooks, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


    JACOBS,    Judge:       Respondent   determined    the   following

deficiencies in, and additions to, petitioners' Federal income

taxes:
                                                        -2-
                                                    Additions to Tax
                    Sec.        Sec.             Sec.          Sec.         Sec.           Sec.          Sec.
Year   Deficiency 6653(a)(1) 6653(a)(1)(A)   6653(a)(1)(B) 6653(b)(1)   6653(b)(1)(A)   6653(b)(1)(B)    6661
1986   $13,549       ---       $428                1           ---        $ 3,740             2         $3,387
1987    27,024       ---         88                1           ---         18,941             2          6,756
1988    19,611       $73        ---               ---         $13,617        ---             ---         4,903

         1 50 percent of the interest due on the portion of the underpayment attributable to negligence under sec.
6653(a)(1)(B).

         2 50 percent of the interest due on the portion of the underpayment attributable to fraud under sec.
6653(b)(1)(B).




         The       deficiencies              in      this       case        arise         primarily              from

respondent's determination that petitioners omitted income from two

separate and distinct sources: (1) From Mr. Marzullo's salary at

the College of Notre Dame (sometimes referred to as the College),

and (2) from income generated by MPM Productions, an unincorporated

business, and MPM Productions, Inc., a subchapter S corporation

owned jointly by petitioners (both businesses referred to as MPM).1

Respondent determined that both petitioners were aware of the two

sources of omitted income, and that both petitioners intentionally

omitted the two sources of income to defraud the Government. Thus,

respondent determined the fraud penalty against both Mr. and Mrs.

Marzullo for the omission of income from both sources.

         Petitioners concede the deficiency, except for the amount

attributable to self-employment tax relating to the income of MPM

subsequent to August 31, 1987.                            Petitioners further concede that

Mr. Marzullo is liable for the fraud additions to tax for 1987 and

1988 and the negligence additions to tax with respect to the



         1
          In addition to the omitted income, respondent
disallowed a substantial portion of claimed itemized deductions
for each of the years under consideration.
                                        -3-

disallowed itemized deductions.          They contest:      (1) Mr. Marzullo's

liability   for   the    fraud      addition   to   tax   for    1986;    (2)   Mrs.

Marzullo's liability for tax, claiming that Mrs. Marzullo is an

innocent    spouse;     (3)   the    self-employment      tax;    and     (4)   Mrs.

Marzullo's liability for the fraud addition to tax. Thus, the

issues for decision are:         (1) Whether Mrs. Marzullo is entitled to

relief as an innocent spouse pursuant to section 6013(e); (2)

whether Mrs. Marzullo is liable for self-employment tax relating to

income from MPM subsequent to August 31, 1987; and (3) whether Mr.

Marzullo is liable for the fraud addition to tax for 1986, and

whether Mrs. Marzullo is liable for the fraud additions to tax for

1986, 1987, and 1988.

     All section references are to the Internal Revenue Code as in

effect for the years under consideration.             All Rule references are

to the Tax Court Rules of Practice and Procedure.                        Petitioner

Anthony J. Marzullo is herein referred to as Mr. Marzullo and

petitioner Mary P. Marzullo as Mrs. Marzullo.               Together they are

referred to as petitioners.

                              FINDINGS OF FACT

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

stipulation of facts and the attached exhibits are incorporated

herein by this reference.

     Petitioners, husband and wife, resided in Glen Arm, Maryland,

at the time they filed their petition.              Petitioners timely filed

joint Federal income tax returns for 1986, 1987, and 1988, the
                                         -4-

years under consideration.         Mr. Marzullo prepared petitioners' tax

returns.

        Mr. Marzullo obtained a bachelor's degree in accounting from

Loyola    College     in   1962,   and    a    master's   degree    in   business

administration from Loyola College in 1981.               From 1962 to 1980, he

was   employed   as    a   staff   accountant      with    a   C.P.A.    firm,    an

accounting manager, an accounting coordinator at Johns Hopkins

Hospital, and assistant controller at Good Samaritan Hospital.                    In

1980, Mr. Marzullo became the chief financial officer at the

College of Notre Dame, a women's college in Baltimore, Maryland,

and remained in that position during all of the years under

consideration.

        Petitioners    were   married     in   1962.      After    working   as   a

secretary, Mrs. Marzullo stayed at home for several years to care

for petitioners' four sons and then began part-time college studies

in 1971.    She obtained a bachelor's degree in communications from

Towson State University in 1981; after graduation, she obtained

employment with Westinghouse Defense.               That employment lasted 1

year.     She then was employed as a training-media producer by

Reliable Stores.       That employment lasted approximately 4 years.

Later, she started her own business, a video production business

known as MPM Productions, which she operated from petitioners'

residence.
                                   -5-

Bifurcated Salary

      The College of Notre Dame waived tuition for students whose

parents    were   college   employees.     Petitioners   could   not   take

advantage of the tuition waiver benefit because they had sons and

the College admitted women only.

      Mr. Marzullo wanted to receive a benefit that was similar to

the tuition waiver.     He also wanted to structure his compensation

package with the College to mitigate, at least to some degree, the

loss of benefits he had been receiving from his previous employer.

To achieve these results, Mr. Marzullo devised a bifurcated salary

arrangement for himself, in which only a portion of his income was

paid as salary and reported by the College to the Internal Revenue

Service (IRS) on a Form W-2.      The balance of his compensation was

transferred to an accounts payable account that normally was used

for   nontaxable     employee   reimbursement.    That    part    of   his

compensation (which was not reported to the IRS on a Form W-2) was

paid to Mr. Marzullo or to third parties for Mr. Marzullo's

benefit.    Mr. Marzullo used the unreported money to pay for such

things as credit card bills for a family vacation, bills for his

life and disability insurance premiums, and his sons' tuition. The

payments classified to the accounts payable account which were

omitted from petitioners' Federal income tax returns were:

                       Year       Amount

                       1986       $12,322
                       1987        29,296
                       1988        21,542
                                       -6-

         Mr. Marzullo established the bifurcated salary arrangement

sometime after he joined the College in 1980.             It was approved by

the College president, Sister Kathleen Feeley; at that time, she

did not realize that tax consequences were involved.

         In 1989, Mr. Marzullo's staff accountant at the College, Susan

Carapico, confronted him about the need to issue a Form 1099 for

the benefits Mr. Marzullo had received.           He described his attitude

toward this salary arrangement in a conversation he had with her as

follows:

         she came in and she said, "I looked down and I saw this
         other benefits." She said, "I'm going to have to give
         you a 1099 on these other benefits." I said, "Susan, I
         really don't think that's right, you know. I don't know
         why I have to be paying tax on the money, you know, that
         I'm using for tuition and health insurance.      It just
         doesn't make any sense to me." We talked about it for a
         couple of minutes and I said, "How come people that are
         here that are getting free tuition, how come they are not
         being taxed?"

         Mr. Marzullo obtained check requisition forms from Sister

Feeley that she had signed in blank.            Mr. Marzullo used the forms

to obtain payments through the accounts payable account, listing

the purpose of the payments as "car allowance".               Other forms he

signed himself and listed such things as "payment of benefit

reimbursement", "expense allowance", or "tuition reimbursement" as

reasons for issuance of checks.

         In 1987, Mr. Marzullo received an automobile from the College

as   a    bonus.   He   knew   that   it   constituted   taxable   income   but

intentionally omitted the value of the automobile from his tax
                                   -7-

return, contending that he could not afford to pay the tax due

thereon because of financial difficulties.

     The College offered as an employee benefit a matching pension

plan whereby it would match its employee's contribution up to 5

percent of the employee's salary.        Mr. Marzullo participated in

this plan and had the matching contribution calculated on the

entire amount of his salary, not just on the amount paid to him as

salary and reported as such on his Form W-2.              He determined his

total salary by adding the omitted income from the accounts payable

account to the amount paid directly to him as salary.              But he did

not include as part of his salary the cost of medical benefits

received.

     Mr. Marzullo listed the entire amount of his bifurcated salary

when applying for a loan.    On April 29, 1986, Mr. and Mrs. Marzullo

signed   a   loan   application   in   which   it   was   stated    that   Mr.

Marzullo's annual salary was $60,000. On February 8, 1988, Mr. and

Mrs. Marzullo signed a loan application in which             Mr. Marzullo's

gross monthly income was listed as $5,250 (which would total

$63,000 per year) and Mrs. Marzullo's gross monthly income was

listed as $3,666 (rounded) or $43,992 per year.

Form 1099

     Patricia Grega, the College's director of computer services,

discovered that Mr. Marzullo was receiving payments from the

accounts payable account in August 1988, when auditors were doing

a fiscal year audit of the College. The business office was
                                          -8-

responsible for designating whether a Form 1099 should be issued

for various payments by the College.               Ms. Grega noticed that the

payments Mr. Marzullo received had not been designated as requiring

issuance of a Form 1099.         She met with the business office manager

and the person responsible for payroll to discuss the matter.

Shortly after the meeting, Mr. Marzullo telephoned Ms. Grega and

asked    why     she   was   inquiring     about    the   payments.   Ms.   Grega

testified:

     It seemed fairly obvious why I was doing it; I mean,
     those were the procedures that we had to follow.       I
     explained again what I was trying to do and asked him if
     there was anyone at the college who met these criteria
     such that something should be reported for them, and he
     said, no, I should not worry about that, that there were
     no other benefits, no fringe benefits, no other
     compensation to report. * * * He seemed upset with me.

        Mr. Marzullo was Ms. Grega's supervisor.                  She issued the

College's tax information to the IRS for 1988 and certified its

accuracy, as he instructed her to do.              She was concerned, however,

about the omission of the payments to Mr. Marzullo, and in this

regard, spoke with Ms. Carapico, the College's staff accountant, in

March 1989.      Ms. Carapico believed the payments should be reported

to the IRS.       Ms. Grega and Ms. Carapico then took the matter up

with Sister Feeley.

        Sister    Feeley     instructed    Mr.   Marzullo    to   terminate   the

bifurcated salary arrangement in 1986 because no other employee was

being paid in that manner.           Moreover, another chief officer had

just been hired, and Sister Feeley wanted both Mr. Marzullo and the
                                -9-

newly hired chief officer to be treated equally.       When Sister

Feeley learned from Ms. Grega and Ms. Carapico that Mr. Marzullo

was still taking payments from the accounts payable account, she

contacted Mr. Marzullo, who then terminated the arrangement.     A

Form 1099 reporting payments Mr. Marzullo received from the account

was issued for 1989.

     Mr. Marzullo knew that the payments from the accounts payable

account were taxable, and he deliberately did not have the omitted

income included in the payroll account and on his Form W-2.

Criminal charges were filed against Mr. Marzullo in 1992, and he

pleaded guilty to tax evasion for 1987 in the U.S. District Court

for the District of Maryland.

Video Production Business

     Mrs. Marzullo started MPM, a video production business, in

January 1987.    MPM was operated as a sole proprietorship until

August 31, 1987, when it was incorporated.   Mrs. Marzullo received

51 percent of the stock and Mr. Marzullo received 49 percent,

although the business essentially belonged to, and was operated by,

Mrs. Marzullo.

     Mrs. Marzullo had experience in the production of videos

before starting her own business. She made contacts with potential

customers and submitted proposals for video production jobs.   She

determined the price to be charged for each contract. When she

acquired a contract, Mrs. Marzullo wrote the script, produced and

directed the video, and supervised every aspect of its preparation.
                                    -10-

     Mrs. Marzullo prepared all invoices and kept track of whether

checks in payment of the invoices had been received.          If an invoice

was not paid, she would contact the customer concerning payment.

When checks were received, she gave them to Mr. Marzullo, who

deposited the checks, paid the bills, and kept a record of income

and expenses.      His participation in the business was essentially

clerical.   Mrs.    Marzullo     sometimes   made   corrections    to   Mr.

Marzullo's records.     Mr. Marzullo did not deal with customers and

had no knowledge of the video production business.

     Petitioners used their personal checking account for MPM's

business checks and deposits.       MPM was operated from petitioners'

residence, and the business paid no salary or commissions. Mrs.

Marzullo obtained a business phone number, corporate stationery,

and business cards.

     MPM elected S corporation status.          It filed a Form 1120S

return for the period September 1 to December 31, 1987, but in 1988

petitioners filed a Schedule C reporting MPM's activities with

their return.      Petitioners' Form 1040 for 1988 stated that Mrs.

Marzullo was self-employed.

     Petitioners understated the gross receipts of MPM on their

Federal income tax returns as follows:

     Year       Actual Receipts               Reported Receipts

     1987              $71,750                      $14,900
     1988               44,722                       19,682

Respondent increased the expenses attributable to MPM's operations
                                    -11-

by $24,794 for 1987 and decreased them by $4,068 for 1988.

                                 OPINION

Issue 1.     Innocent Spouse

      The    adjustments   giving   rise    to   the    deficiencies   (the

understatement) fall into three categories:            Unreported income of

Mr. Marzullo from his employment at the College; understated income

of MPM; and disallowed itemized deductions. Mrs. Marzullo contends

that she is not liable for the understatement attributable to any

of these items because she qualifies for tax relief as an innocent

spouse pursuant to section 6013(e).

      Spouses who file a joint return generally are jointly and

severally liable for its accuracy and the tax due, including any

additional taxes, interest, or penalties determined on audit of the

return.     Sec. 6013(d)(3).   However, pursuant to section 6013(e), a

spouse (commonly referred to as an innocent spouse) can be relieved

of tax liability if that spouse proves:          (1) A joint return was

filed; (2) the return contained a substantial understatement of tax

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

signing the return, the spouse seeking relief did not know, and had

no reason to know, of the substantial understatement; and (4) it

would be inequitable to hold the relief-seeking spouse liable for

the   deficiency    attributable     to    the   understatement.       Sec.

6013(e)(1).     The spouse seeking relief bears the burden of proving

that each of the four requirements has been satisfied.             In other

words, failure to prove any one of the statutory requirements will
                                         -12-

prevent innocent spouse relief.                Bokum v. Commissioner, 94 T.C.

126, 138-139 (1990), affd. 992 F.2d 1132 (11th Cir. 1993).

     MPM Income

     We first consider Mrs. Marzullo's entitlement to relief with

respect to the understatement resulting from the understated income

of MPM.    Respondent concedes the first statutory requirement--that

a joint return was filed--was satisfied.2

     The     second    requirement        is    that      the    understatement     is

"attributable" to the income of the other spouse (in this case, Mr.

Marzullo).     Respondent asserts that the understatement resulting

from the entire understated income of MPM should be attributable to

Mrs. Marzullo, claiming that MPM should be viewed as a sole

proprietorship, with Mrs. Marzullo the proprietor. As would be

expected,     petitioners          disagree     with      respondent's     position,

asserting instead that the corporate identity of MPM should be

respected     for     tax        purposes.     Further,     petitioners         counter

respondent's argument by claiming that all the unreported income of

MPM should be attributable to Mr. Marzullo because he had an

ownership    interest       in    MPM   and   was   the    one   who   intentionally

understated MPM's gross receipts and net profits.

     While     we     agree      with   respondent's        position     that    MPM's

unreported     income       (the     grossly     erroneous       item)   should     be


     2
          Although petitioners claim that Mrs. Marzullo did not
sign the 1986 and 1987 tax returns, they do not disclaim the fact
that those returns are in fact joint returns.
                                      -13-

attributable      to   Mrs.     Marzullo       for    purposes        of   section

6013(e)(1)(B), we do not do so on the basis that the corporate

identity    of   MPM   should    be   disregarded.         Rather,    we   sustain

respondent's     determination    because      it    was    Mrs.     Marzullo   who

generated MPM's income, with only modest assistance from Mr.

Marzullo. Thus, we conclude that the understatement resulting from

the understated income of MPM should be attributed entirely to Mrs.

Marzullo.

     In reaching our conclusion, we believe it appropriate to

analogize MPM's income to community property income.                  With regard

to community property, unreported income may be "attributable" for

purposes    of   section   6013(e)    to     the   spouse    whose    substantial

services were required to generate the income.                     See Allen v.

Commissioner, 514 F.2d 908, 913 (5th Cir. 1975), affg. in part and

revg. in part 61 T.C. 125 (1973); Grubich v. Commissioner, T.C.

Memo. 1993-194. In the instant matter, although Mr. Marzullo owned

49 percent of MPM's stock, his involvement in producing the income

of the business was limited in comparison to the role played by his

wife.   In addition, we give more weight to control than to stock

ownership in deciding the spouse to which income from a family

business should be attributed for purposes of section 6013(e). See

Meyer v. Commissioner, T.C. Memo. 1996-400.

     Mrs. Marzullo should not receive the benefits of innocent

spouse relief to avoid tax on her own business income. Accordingly,

Mrs. Marzullo is not entitled to innocent spouse relief with
                              -14-

respect to the understated income of MPM.

     College of Notre Dame Income

     We next turn to Mrs. Marzullo's innocent spouse claim with

respect to the understatement resulting from the unreported income

from the College.   In this regard, respondent concedes that Mrs.

Marzullo satisfied the first two elements of the statute. See sec.

6013(e)(1)(A) and (B).

     Mrs. Marzullo claims that she had no actual knowledge or

reason to know of the unreported income from the accounts payable

account.   See sec. 6013(e)(1)(C).   We accept this claim.     Mrs.

Marzullo had been married to Mr. Marzullo since 1962. She credibly

testified that when she married Mr. Marzullo, their marriage

partnership quickly evolved into a division of labor where Mr.

Marzullo was responsible for the family financial affairs and Mrs.

Marzullo cared for their home and children.    Mrs. Marzullo trusted

Mr. Marzullo to properly handle the family's financial affairs. It

was not until Mr. Marzullo's criminal investigation in 1992 that

Mrs. Marzullo realized Mr. Marzullo had failed to report all

taxable income he received from the College.

     Respondent asserts that Mrs. Marzullo must have known about

Mr. Marzullo's unreported income from the College because she knew

of the College's tuition waiver policy for female children of

employees and regretted that her sons could not benefit from the

waiver. The logic of respondent's assertion is flawed. Although

Mrs. Marzullo knew about the tuition waiver policy of the College
                                         -15-

for its employees, it does not follow that she must have known

about the unreported income from the College.                        The unreported

income received from the College was not that of Mrs. Marzullo.

She did not negotiate the arrangement with the College.                      On the

basis of her background, and having observed Mrs. Marzullo while

testifying, we do not believe that she knew or had any reason to

know that Mr. Marzullo received income from the College that he did

not report on their joint tax returns.

        Since the third of the four requirements of section 6013(e)

has been met, we now must decide whether it would be inequitable to

hold Mrs. Marzullo liable for the deficiency attributable to the

understatement with respect to the unreported income from the

College. Sec. 6013(e)(1)(D). In this regard, the focus is on

whether Mrs. Marzullo (the spouse seeking relief) benefited from

the understatement.         See Purcell v. Commissioner, 86 T.C. 228, 242

(1986),       affd.   826     F.2d    470   (6th     Cir.    1987);     Terzian   v.

Commissioner, 72 T.C. 1164, 1170-1171 (1979). "Normal support" is

not a significant benefit.            Sec. 1.6013-5(b), Income Tax Regs. We

conclude she did not benefit from the understatement.

      Petitioners contend that the tax savings benefited their four

sons,    who    had   "very    healthy      appetites,      substantial    clothing

expenses, and private school tuition bills", rather than Mrs.

Marzullo, who "did not own expensive jewelry, antiques, or other

extravagant items".         We find that petitioners' standard of living

did     not    significantly         increase   as    a     result    of   the    tax
                                   -16-

understatement and conclude that it would be inequitable to hold

Mrs. Marzullo liable for the understatement of tax on her husband's

unreported income from the College.           Accordingly, Mrs. Marzullo is

entitled to innocent spouse relief as to Mr. Marzullo's unreported

income from the College.

      Disallowed Itemized Deductions

      Finally, we turn to Mrs. Marzullo's innocent spouse claim with

respect    to   the   understatement    resulting     from    the   disallowed

itemized deductions.       The record with respect to this issue is

scant. No evidence was presented as to the spouse (Mr. and/or Mrs.

Marzullo) to whom the disallowed deductions are attributable or

whether the deductions are "grossly erroneous items" as defined in

section 6013(e)(2).        Thus, petitioners failed to prove all the

elements necessary for Mrs. Marzullo's entitlement to innocent

spouse relief with respect to the understatement resulting from the

disallowed      itemized    deductions.        Accordingly,     we     sustain

respondent's determination in this regard.

Issue 2.    Self-Employment Tax

      Respondent determined that petitioners owe self-employment tax

under section 1401 on MPM's income, contending that the video

production business was operated as a sole proprietorship, and that

the corporate form should be disregarded.           Petitioners claim that

the   business    was   operated   as     a    partnership    prior   to   its

incorporation on August 31, 1987, and that from August 31, 1987,

MPM was a corporation.       Petitioners assert that MPM's corporate
                                    -17-

form should be respected.

       In support of the argument that the corporate form should be

disregarded, respondent points out that petitioners did not open a

separate checking account for the corporation, used stationery that

did not have the corporate name, and filed a Schedule C with their

1988    tax   return   reporting   MPM   income   as   income   from   a   sole

proprietorship.        Petitioners claim that a Schedule C was used in

1988 because they did not have the correct forms. Respondent cites

Noonan v. Commissioner, 52 T.C. 907 (1969), affd. 451 F.2d 992 (9th

Cir. 1971), for the proposition that "if a corporation is simply a

shell and cannot establish that it was formed for any significant

nontax business purpose, its existence will be disregarded for tax

purposes even though it may be validly incorporated under state

law".    Respondent cites other cases involving sham transactions.

       Petitioners incorporated MPM on the advice of counsel in order

to limit their personal liability, a significant business purpose.

MPM was a small, newly formed business operated from petitioners'

residence. Although petitioners might not have followed every

corporate formality, and despite petitioners' use of Schedule C to

report MPM's income, we conclude that MPM was incorporated for a

proper purpose and operated as an entity which should be respected

for tax purposes. See Moline Properties, Inc. v. Commissioner, 319

U.S. 436, 438-439 (1943).       Accordingly, we hold that Mrs. Marzullo

is not liable for self-employment tax on the income of MPM after

August 31, 1987.
                                       -18-

Issue 3.    Fraud

     Respondent determined fraud additions to tax against both Mr.

and Mrs. Marzullo pursuant to section 6653(b) for each of the years

under consideration. Mr. Marzullo has conceded the fraud additions

for 1987 and 1988 but contests the imposition of the fraud addition

for 1986.    Mrs. Marzullo contends that she is not liable for the

fraud additions for any of the years under consideration.

     To prevail, the Commissioner must prove fraud by clear and

convincing evidence.        Sec. 7454(a); Rule 142(b).       The Commissioner

cannot satisfy      the    burden   of   proving   fraud    simply   by   piling

inference upon inference.        Goldberg v. Commissioner, 239 F.2d 316,

320 (5th Cir. 1956), revg. and remanding T.C. Memo. 1954-242.                The

Commissioner must show that the taxpayer intended to evade taxes

known to be owing by conduct intended to conceal, mislead, or

otherwise   prevent       the   collection    of   such    taxes.    Parks    v.

Commissioner, 94 T.C. 654, 661 (1990); Hebrank v. Commissioner, 81

T.C. 640, 642 (1983).

     Fraud is never presumed.          Beaver v. Commissioner, 55 T.C. 85,

92   (1970).        A     taxpayer's     sophistication,      education,     and

intelligence may be considered in determining whether or not he had

fraudulent intent.        See Halle v. Commissioner, 175 F.2d 500 (2d

Cir. 1949), affg. 7 T.C. 245 (1946); Niedringhaus v. Commissioner,

99 T.C. 202, 211 (1992).

     Fraud cannot be imputed from one spouse to another.             Hence, in

the case of a joint return, where fraud is asserted against a
                                           -19-

spouse,    the    Commissioner           must    prove    that    some        part   of   the

underpayment of tax is due to the fraud of that spouse.                          Hicks Co.

v. Commissioner, 56 T.C. 982, 1030 (1971), affd. 470 F.2d 87 (1st

Cir. 1972); Stone v. Commissioner, 56 T.C. 213, 227-228 (1971); see

sec. 6653(b)(3).           We shall first consider whether Mrs. Marzullo is

liable    for    the       fraud   additions      for    any     of    the    years    under

consideration.

      Mrs. Marzullo did not sign the 1986 or 1987 tax return.

Moreover, she testified that she did not review petitioners' tax

returns and did not know about the omitted income. Respondent

contends that         Mrs.    Marzullo     is    liable    for        fraud    because    her

testimony       was    not    credible.         Respondent's          burden    of    proof,

however, cannot be satisfied simply by attacking Mrs. Marzullo's

credibility.      There is no evidence in the record proving that Mrs.

Marzullo actually knew that income from MPM had been underreported.

Further, there is no evidence in the record proving that Mrs.

Marzullo knew of the omission of her husband's income from the

College.    We therefore hold that Mrs. Marzullo is not liable for

the   additions       to     tax   for   fraud    for    any     of    the    years   under

consideration.

      We now consider whether Mr. Marzullo is liable for the fraud

addition for 1986.           Petitioners argue that Mr. Marzullo should not

be liable for the fraud addition for 1986, contending that he did

not abuse the accounts payable account at the College in 1986, in

contrast to his use of the account in 1987 and 1988.                            Respondent
                                     -20-

contends that Mr. Marzullo established the account in order to

receive part of his taxable income tax free.               Further, respondent

contends that the only difference between 1986 and the later years

is that some college checks were used to pay Mr. Marzullo's

personal credit card bills in 1987 and 1988.

     Payments Mr. Marzullo received from the account in all 3 years

were falsely claimed to be for such things as "car allowance".                  Mr.

Marzullo is an experienced accountant. He established the accounts

payable account so that a portion of his salary would not be

reported to the IRS.         On the other hand, he reported his full

salary on    loan   applications     and    used    the    entire    amount    when

calculating matching contributions for his pension.                 He knew these

amounts were taxable but rationalized his actions by focusing on

the unfairness      he   perceived    because      his    sons   could   not    take

advantage    of   the    tuition   waiver   as   could     daughters     of    other

employees.    We conclude that respondent has established by clear

and convincing evidence that Mr. Marzullo committed fraud on

petitioners' 1986 tax return.         Accordingly, he is liable for the

fraud additions to tax for 1986, as well as 1987 and 1988.

     To reflect the foregoing and petitioners' concessions,


                                                   Decision will be entered

                                            under Rule 155.
