                        T.C. Memo. 1998-11



                      UNITED STATES TAX COURT



   LINDA EVANS AND ESTATE OF ROBERT C. EVANS, JR., DECEASED,
             LINDA EVANS, EXECUTRIX, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2492-97.                     Filed January 12, 1998.



     John E. Wright, for petitioners.

     Steven B. Bass, for respondent.



                        MEMORANDUM OPINION


     LARO, Judge:   Petitioners petitioned the Court to

redetermine respondent's determinations with respect to their

1989 through 1991 Federal income taxes.   Respondent determined

the following income tax deficiencies, additions thereto, and

penalties:
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                                 Addition to Tax         Penalty
                                       Sec.                Sec.
     Year         Deficiency        6651(a)(1)           6662(a)

     1989          $63,105           $15,776             $9,203
     1990           52,402            13,101              5,650
     1991           26,264             6,566              5,156

     After concessions by petitioners,1 we must decide the

following issues:

     1.     Whether petitioners may deduct certain amounts reported

as deductions on their 1989 through 1991 Federal income tax

returns.     We hold they may not.

     2.     Whether petitioners failed to report $60,247 of income

from the sale of cattle in 1989.     We hold they did.

     3.     Whether Ms. Evans is an "innocent spouse" under section

6013 for any of the years.     We hold she is not.

     Section references are to the Internal Revenue Code in

effect for the subject years.     References to Mr. Evans and

Ms. Evans are to Robert C. Evans Jr., and Linda Evans,

respectively.     Unless otherwise indicated, Rule references are to

the Tax Court Rules of Practice and Procedure.

     1
       Petitioners have conceded the correctness of all of
respondent's determinations, but for the deductions and
unreported income discussed herein. Although petitioners'
concession does not mention explicitly the additions to tax and
penalties determined by respondent, we conclude that their
concession extends to these items. Petitioners' counsel did not
list these items as an issue when he set forth the triable issues
in his opening statement at trial, and petitioners did not
present any evidence at trial aimed directly at disproving the
applicability of these items. Nor did petitioners address these
items on brief.
                                - 3 -


                           FINDINGS OF FACT

     Some of the facts have been stipulated.      These stipulations

and the exhibits submitted therewith are incorporated herein by

this reference.   During the subject years, Mr. Evans and

Ms. Evans (collectively, the Evanses) were husband and wife.

Mr. Evans died in 1993, and Ms. Evans was named executrix of his

estate.   When Ms. Evans (in her individual capacity and in her

capacity as executrix of Mr. Evans' estate) petitioned the Court,

she resided in Carrizo Springs, Texas.

     Ms. Evans graduated from high school in 1966, and she

completed 6 weeks of college.    After leaving college, she worked

as a bank teller.   She also worked in a dress shop that she

started with her sister.    Ms. Evans was a housewife during the

subject years.

     On August 24, 1992, the Evanses filed a 1989 through 1991

Form 1040, U.S. Individual Income Tax Return, using the filing

status of "Married filing joint return".      The returns reported

that the Evanses received income from oil and gas royalties of

$74,693, $98,726, and $94,733 during the respective years.      The

Evanses deposited all of these royalties into their joint

checking account (the joint account); Ms. Evans held the

checkbook for the joint account, and she used this account to pay

the household expenditures.    The Evanses' 1989 through 1991 Forms

1040 also reported that the Evanses were entitled to deduct
                                - 4 -


$67,321, $85,604, and $81,096 from the respective years' income

because the deducted amounts were reported as income on the

returns of an estate in bankruptcy (the estate).

     On October 28, 1983, Mr. Evans had filed for protection

under Chapter 11 of the Bankruptcy Code.   On September 29, 1988,

his case was converted to Chapter 7 of the Bankruptcy Code, and

his Chapter 7 proceeding continued throughout the subject years.

Throughout the proceedings in the bankruptcy court, Mr. Evans was

represented by experienced counsel, and Mr. Evans' position was

that the royalty income (as well as all of his assets) belonged

to him and not to the estate.   Randolph N. Osherow (Mr. Osherow),

an experienced bankruptcy attorney, was appointed trustee of the

estate in or before 1989, and he remained as trustee throughout

the subject years.   Mr. Osherow disagreed with Mr. Evans'

position on the ownership of the royalties, as well as the

ownership of Mr. Evans' other assets.   Sometime in 1989,

Mr. Evans and Mr. Osherow settled their disagreement with the

former retaining most of his assets.    Following the settlement,

Mr. Osherow never attempted to recover any of the royalties that

had been paid to Mr. Evans; Mr. Osherow understood the settlement

agreement to provide that the royalties belonged to Mr. Evans.

The estate never received any of the royalties, and Mr. Osherow

never reported the royalties as income on the Federal income tax

returns that he filed for the estate.
                                 - 5 -


     Mr. Evans had a ranching business that he operated as a

sole-proprietorship, and Ms. Evans knew about Mr. Evans'

involvement in this business.    In 1989, Mr. Evans sold some of

the business' cattle, and he deposited the proceeds into the

business' bank account (the ranch account).     Mr. Evans recorded

this sale in the business' sales journal, and he filed the sales

receipt with the business' records.      Neither he nor Mr. Osherow

reported this sale for Federal income tax purposes.

     Ms. Evans signed the tax returns at issue without reviewing

them.   All of these returns were prepared by an accountant, and

Ms. Evans could have reviewed the returns before signing them.

Ms. Evans was with Mr. Evans when she signed the returns, and she

could have discussed the contents of the returns with him at or

before the time that she signed them.     Ms. Evans never questioned

the contents of the returns, and Mr. Evans did not coerce her

into signing them.   Mr. Evans did not exercise undue influence

over Ms. Evans with respect to their financial affairs.

     The Evanses maintained records on their personal finances;

the records included journals, ledgers, bank statements,

receipts, and canceled checks.    Ms. Evans received the bank

statements in the mail, and, when she did, she would place the

statements in a cabinet in the Evanses' dining room.     All of the

Evanses' other records, including records on Mr. Evans' business,

were kept in an unlocked office on the second floor of their
                                  - 6 -


home.     Ms. Evans knew where the records were kept, and she had

access to these records.     Ms. Evans could have examined any of

the Evanses' financial records if and when she desired.     She

chose not to review any of the Evanses' financial records.

                                 OPINION

     Petitioners must prove respondent's determinations wrong.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Petitioners also must prove their entitlement to any deduction.

Deductions are a matter of legislative grace, and petitioners

must keep sufficient records to substantiate any deduction that

would otherwise be allowed by the Code.     Sec. 6001; New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

     1.    Reported Deductions

     Respondent determined that petitioners' deductions of

$67,321, $85,604, and $81,096 for 1989 through 1991,

respectively, were improper because petitioners had failed to

prove:     (1) The Evanses had not received the royalties, (2) the

Evanses were not the owners of the royalties, and (3) the

royalties were reported by the estate as claimed.     Petitioners

argue that the royalties belonged to the estate.     Petitioners

assert that Mr. Osherow loaned the royalty proceeds to Mr. Evans,

and that Mr. Evans later repaid these loans.     Petitioners assert

that Mr. Osherow did not recognize that Mr. Evans considered the

royalties to belong to the estate.
                               - 7 -


     We are unpersuaded by petitioners' arguments and assertions

on this issue.   Mr. Osherow testified credibly that he never

loaned any money to the Evanses, and that Mr. Evans considered

the royalties to be his income.   Based on this testimony, we find

that Mr. Osherow never reported the royalties as income on the

estate's tax returns.   We hold for respondent on this issue.2

     2.   Unreported Income

     Respondent determined that petitioners did not recognize

income that they realized in 1989 when Mr. Evans sold the cattle.

Petitioners assert that the cattle were sold by Mr. Evans'

secured creditors, and, hence, that the income was not

petitioners'.

     We are unpersuaded by petitioners' argument and assertion on

this issue.   The record reveals that Mr. Evans sold the cattle

and deposited the proceeds into his personal bank account.

Petitioners attempt to explain away this evidence by asking the

Court to find as a fact that Mr. Evans sold the cattle as an


     2
       Petitioners misconstrue that 1983 through 1987 fiduciary
income tax returns that were prepared for the "Bankruptcy estate
of Robert & Linda Evans", in asserting that Mr. Osherow should
have known before the settlement that the royalties belonged to
the estate. The settlement was reached in 1989, and all these
returns were prepared on or after July 26, 1991. The record does
not indicate that these returns were ever filed with the
Commissioner. When we view these returns in the light of
petitioners' amended returns for the same years, we conclude that
the fiduciary and amended returns were merely an attempt by
petitioners to have the royalty income taxed to the estate at a
rate of tax that was lower than that imposed on their own income.
                                - 8 -


agent or trustee for a lender who held a lien on the cattle.    We

decline to do so.    Petitioners' proposed finding is unsupported

by the record.3   We hold for respondent on this issue.

     3.    Innocent Spouse

     Ms. Evans argues that she is an innocent spouse under

section 6013, and, hence, that she is not liable for the subject

deficiencies, additions thereto, or penalties.    Ms. Evans asserts

that she never reviewed the subject returns, relying solely on

the fact that the returns were prepared by an accountant.    Ms.

Evans asserts that, even if she had reviewed the returns, she

would not have understood them without the assistance of a

professional adviser.

     We do not agree with Ms. Evans that section 6013 allows her

to be relieved of liability for the deficiencies, additions

thereto, or penalties which we determine herein.    In order to be

"innocent" in any of the subject years, Ms. Evans must prove

that:    (1) She filed a joint Federal income tax return with

Mr. Evans, (2) there was a substantial understatement of tax

attributable to grossly erroneous items of Mr. Evans, (3) in

signing the return, she did not know, and had no reason to know,

of the substantial understatement, and (4) taking into account


     3
       Contrary to petitioners' claim on brief, the credit memos
in evidence do not show that the sale proceeds were used
immediately upon deposit to reduce a payable owed by Mr. Evans to
one of his creditors.
                                   - 9 -


the facts and circumstances of this case, it would be inequitable

to hold her liable for the deficiency attributable to the

understatement.       Sec. 6013(e)(1); Reser v. Commissioner, 112 F.3d

1258, 1267 (5th Cir. 1997), affg. in part and revg. in part T.C.

Memo. 1995-572; United States v. Shanbaum, 10 F.3d 305, 314

(5th Cir. 1994); Estate of Krock v. Commissioner, 93 T.C. 672,

676 (1989).       Ms. Evans' failure to satisfy any one of these

elements precludes "innocent spouse" relief.       Reser v.

Commissioner, supra at 1263; United States v. Shanbaum, supra at

315; Estate of Krock v. Commissioner, supra at 677.

       With respect to each of the subject years, we agree with

Ms. Evans that she meets the first requirement for innocent

spouse relief; i.e., the filing of a joint return.       We part

company with her, however, when we turn to the other

requirements.       With respect to the deduction issue in each of the

subject years,4 we are unable to find a substantial

understatement of tax.       A substantial understatement would be

present if the tax in dispute exceeded an amount based on

Ms. Evans' adjusted gross income for 1995.       Sec. 6013(e)(3) and

(4).       We do not know Ms. Evans' gross income for 1995.   Although

she asks the Court in her reply brief to reopen the record to

       4
       Ms. Evans asks the Court in her brief to consider this
issue to be an unreported income issue. We decline to do so.
Petitioners did not fail to report the income from oil and gas
royalties. They included it on their Forms 1040, and they
claimed a deduction with respect thereto.
                             - 10 -


allow her accountant to testify on his calculation of her

adjusted gross income for 1995, we decline to do so.5   Ms. Evans

has been represented by counsel throughout this proceeding, and

she could have called her accountant as a witness at trial.     For

some reason, which she has not articulated and which we decline

to surmise, she did not call her accountant as a witness.     Her

failure to establish her 1995 adjusted gross income prevents her

from qualifying as an innocent spouse on the deduction issue.

Sec. 6013(e)(4); see Reser v. Commissioner, supra at 1262.

     Turning to the omitted income issue, which applies to 1989

only, we disagree with Ms. Evans that she has met the third

requirement; i.e., an absence of actual and constructive notice

of the substantial understatement upon signing the return.

Although she may not have had actual knowledge that the income

was omitted, because she did not review the 1989 return before it

was filed, she should have known of the omitted income.   A

taxpayer should know about a substantial understatement


     5
       Petitioners have also moved to reopen the record to admit
an affidavit of Ms. Evans' accountant for the purpose of
establishing Ms. Evans' adjusted gross income for 1995; we filed
petitioners' motion 10 days after we filed their reply brief.
Respondent objected to petitioners' motion, stating that
petitioners were aware of this issue before trial and could have
addressed it at trial. Respondent also objected to the admission
of the affidavit as hearsay. We shall deny petitioners' motion
to include the affidavit in the record. Even if we were to
exercise our discretion to reopen the record, which we do not do,
we would not admit the affidavit into evidence. The affidavit is
hearsay. Fed. R. Evid. 801.
                               - 11 -


attributable to omitted income if, upon signing his or her tax

return, the taxpayer had reason to know about the income-

producing transaction that produced the omitted income.     Reser v.

Commissioner, supra at 1265; see also Sanders v. United States,

509 F.2d 162 (5th Cir. 1975); Terzian v. Commissioner, 72 T.C.

1164, 1170 (1979).

     Here, the record establishes that a reasonably prudent

taxpayer would have known about the omitted income.    Although

Ms. Evans was involved in the family finances and knew about

Mr. Evans' ranching activity, she took no steps to assure herself

that petitioners' tax returns were filed properly.    She did not

ask (or even care) to see the returns or the underlying records.

She was not concerned with, and turned a blind eye to, her tax

obligations.    A reasonable person in her position would have at

least asked about the accuracy of the income reported on the 1989

return.    This is especially true in the instant setting where

Ms. Evans could easily have discussed the contents of the returns

with Mr. Evans at or before the time that she signed them.    She

was not coerced into signing the returns, and Mr. Evans did not

exercise undue influence over her with respect to their financial

affairs.    See Adams v. Commissioner, 60 T.C. 300, 303 (1973).

     We hold that Ms. Evans is not an innocent spouse in any of

the years in issue.    In reaching all of our holdings herein, we

have considered all arguments made by petitioners for contrary
                               - 12 -


holdings and, to the extent not discussed above, find them to be

irrelevant or without merit.

     To reflect the foregoing,


                                         An appropriate order will

                                    be issued and decision will be

                                    entered for respondent.
