                        T.C. Memo. 1996-477



                      UNITED STATES TAX COURT



          GERALD JACOBY AND ARLENE JACOBY, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7073-87.                  Filed October 23, 1996.



     Martin Rosen and L. William Fishman, for petitioner Gerald

Jacoby.

     Ira B. Stechel and Thomas J. Fleming, for petitioner Arlene

Jacoby.

     Diane Mirabito and Gary Bornholdt, for respondent.




              MEMORANDUM FINDINGS OF FACT AND OPINION

     CLAPP, Judge:   Respondent determined deficiencies in

petitioners' Federal income taxes as follows:
                                - 2 -

                      Year               Deficiency

                      1978                $93,098
                      1979                 84,284
                      1980                 28,675

Respondent also determined that petitioners are liable for

increased interest pursuant to section 6621(c) (formerly section

6621(d))1 for the taxable years 1978, 1979, and 1980.

     After concessions by the parties, the sole issue for

decision is whether Arlene Jacoby (petitioner) is entitled to

relief as an innocent spouse for the taxable years 1978, 1979,

and 1980.    We hold that she is so entitled.   Petitioner Gerald

Jacoby (Gerald) has reached a settlement with respondent

regarding his liabilities for all taxable years.

     All section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure, unless otherwise

indicated.




1
     Sec. 6621(d) was redesignated as sec. 6621(c) by sec.
1511(c)(1)(A) of the Tax Reform Act of 1986, Pub. L. 99-514, 100
Stat. 2085, 2744, and repealed by sec. 7721(b) of the Omnibus
Budget Reconciliation Act of 1989 (OBRA 89), Pub. L. 101-239, 103
Stat. 2106, 2399, effective for tax returns due after Dec. 31,
1989, OBRA 89 sec. 7721(d), 103 Stat. 2400. The repeal does not
affect the instant case. For convenience, we refer to this
section as sec. 6621(c).   The annual rate of interest under sec.
6621(c) for interest accruing after Dec. 31, 1984, equals 120
percent of the interest payable under sec. 6601 with respect to
any substantial underpayment attributable to tax-motivated
transactions.
                               - 3 -

                         FINDINGS OF FACT

     Some of the facts are stipulated and are so found.     We

incorporate by reference the stipulation of facts and attached

exhibits.

     Petitioner resided in Old Westbury, New York, when the

petition in this case was filed.

     Petitioner married Gerald in 1963.     They separated in April

1984 and obtained a divorce in 1992.

     Petitioner graduated from high school and completed two

semesters of college, where she majored in child psychology.

Following her marriage, petitioner worked as a receptionist, but

she discontinued her job when their first child, Douglas, was

born in 1966.   Their second child, Karen, was born in 1968.     From

the time of Douglas' birth through the years in issue, petitioner

was a housewife and mother.   Petitioner has no training or

experience in business matters.

     When Gerald married petitioner, he worked at his family's

auto parts distribution business.    In the early 1960's, Gerald

organized Ajac Transmission Parts Corp. (Ajac), which

manufactured and repackaged automotive automatic transmission

parts.   Gerald worked hard to make Ajac a success, and by the

mid-1970's, Ajac employed 30 to 50 people and had nationwide

sales of $3 million to $5 million.     Gerald also owned other

businesses during the years in issue.
                                - 4 -

     Petitioner had no role in Gerald's businesses.    Petitioner

never went to Gerald's business offices, except on one occasion

when he was redecorating.    Petitioner never attended Christmas

parties held for Gerald's employees, nor was she invited.      Gerald

never discussed with petitioner the details or the finances of

his businesses.   Gerald had no interest in discussing business

matters with petitioner.    He considered petitioner responsible

for tending the house and caring for the children.    Gerald

considered himself responsible for all matters related to his

businesses and the family's finances.

     Petitioner managed a joint household checking account, to

which Gerald contributed $2,000 to $3,000 monthly, plus an amount

for the monthly mortgage payment.    From this account, petitioner

paid the household expenses, such as food and utility bills.

This was petitioner's sole involvement in the family's finances.

     Petitioner and Gerald (the Jacobys) led an affluent

lifestyle for several years up to and during the years at issue.

In 1973, one of Gerald's businesses acquired a pleasure boat

that petitioner occasionally used with Gerald.    They owned a

residence located on 4 acres, which they purchased for $215,000

in 1976.   They had a housekeeper and took family vacations, and

the children attended summer camp.

     In 1979, Gerald acquired a condominium in Florida that he

used in connection with his business interests.    Petitioner and

the Jacoby children visited the Florida condominium twice in
                                - 5 -

1980, for the Easter and Christmas holidays.    Petitioner also

used the Florida condominium on a couple of vacations while the

children were out of school.

     Petitioner's lifestyle did not change during the years in

issue.   The Jacobys continued to live in the house they acquired

in 1976.   There were minimal increases in the family's savings,

and the amount of petitioner's monthly allowance received from

Gerald did not change.    Neither petitioner nor the children

received any large gifts from Gerald during the years in issue.

     In the early 1980's, the Jacobys began to live apart.      In

1984, Gerald moved out of the marital residence permanently.

Thereafter, Gerald experienced financial difficulties and

business failures.    Gerald sold his business interests to his

employees in 1984 and 1985, and petitioner received no proceeds

from the sale.   Gerald sold the Florida condominium in 1985, and

none of the proceeds of the sale went to petitioner.

     In 1985, Gerald told petitioner that he was having serious

financial problems and had incurred a great deal of debt.    About

that same time, petitioner learned that tax liens had been filed

against their home.    In 1986, Gerald sold the boat, and none of

the proceeds of the sale went to petitioner.

     In May 1987, the Jacobys entered into a separation agreement

under which petitioner received ownership of the marital

residence.   In exchange for ownership of the marital residence,

petitioner waived her rights to alimony, spousal support, and
                                 - 6 -

spousal maintenance.   Pursuant to the separation agreement,

Gerald transferred full ownership of the marital residence to

petitioner, and petitioner incurred a $400,000 home equity loan

(home equity loan), using the residence as collateral.     Gerald

received $40,000 of the proceeds from the home equity loan, and

petitioner used about $250,000 of the proceeds from the home

equity loan to pay the tax liabilities attributable to income tax

deficiencies for the taxable years 1975, 1976, and 1977.     Those

deficiencies are not at issue in this case, but they are

discussed below.

     In the separation agreement, Gerald agreed to pay petitioner

$5,000 per month to amortize the home equity loan until the loan

was repaid.   Gerald reneged on this agreement after making six

monthly payments of $5,000.   Gerald also reneged on his

obligation to pay a portion of the children's college expenses,

insurance, and other expenses.    Petitioner's divorce attorney

advised her not to file suit against Gerald in an attempt to

enforce the separation agreement, because the divorce attorney

felt that Gerald had no resources or income and was judgment

proof.

     In 1988, petitioner sold a portion of the land on which her

home was located.   After the sale, petitioner discovered that

taxes for the taxable year 1984 remained unpaid, so she used

approximately $200,000 of the proceeds to satisfy the tax
                                - 7 -

liability.    She also used the proceeds for living expenses and

Karen's college tuition.

     Petitioner filed in bankruptcy after the lender of the home

equity loan threatened to foreclose on her residence.    The

bankruptcy proceedings were terminated when petitioner found a

buyer for her residence.

Tax Return Preparation

     Stanley J. Gelda (Gelda) prepared the Jacobys' U.S.

Individual Income Tax Returns (Forms 1040) for the years in

issue.    Gelda has been a certified public accountant since 1963,

and he has prepared tax returns for individuals and businesses

since 1954.

     Gelda has had a long affiliation with the Jacoby family.

Gerald's parents retained Gelda's firm to provide tax and

accounting services in the 1960's when they organized their

automobile parts distributorship.    When Gerald formed Ajac, Gelda

handled Ajac's tax and accounting work.    As Gerald formed or

acquired more businesses, Gelda provided accounting services for

them as well.

     Gelda also advised the Jacobys in personal tax matters, and

he prepared the Jacobys' income tax returns from 1963 through

1986.    The Jacobys filed joint income tax returns for the taxable

years 1975-86.    (We have concluded that the returns for 1978 and

1980 were joint returns.)    The record is not clear as to their

filing status in prior years.
                                 - 8 -

        Gelda's method for preparing the Jacobys' income tax

returns did not vary.    Gerald would meet with Gelda, and they

would assemble the information necessary to prepare the Forms

1040.    Petitioner would assemble charitable contribution receipts

and mortgage payment statements and give them to Gerald.    This

was petitioner's only participation in the preparation of the

Forms 1040.    After preparing the returns, Gelda would sign them

as preparer and then forward the return to Gerald to sign and

file.

     Petitioner knew that Gelda had a longstanding professional

relationship with Gerald and his family, and she believed that

Gelda was a cautious return preparer.    Petitioner had known Gelda

personally since she married Gerald, and she trusted Gelda

entirely.    Petitioner considered Gelda an expert in tax matters

and had no reason to question his judgment.

     For the taxable years 1978, 1979, and 1980, the Jacobys

filed Forms 1040, and each Form 1040 indicated a filing status of

"married filing joint return".

     Gelda prepared the 1978 Form 1040, signed it, and forwarded

it to Gerald to sign and file.    Gerald signed petitioner's name

on the 1978 Form 1040, and petitioner never reviewed it.

Petitioner did not know that Gerald had placed her signature on

the 1978 Form 1040, and Gerald never discussed with petitioner

his having signed her name.
                                 - 9 -

     Gelda prepared the 1979 Form 1040, signed it, and forwarded

it to Gerald to sign and file.    Gerald gave the 1979 Form 1040 to

petitioner to sign, and he assured her that it had been prepared

properly.    Petitioner noticed that Gelda had signed the 1979 Form

1040, and she believed that Gelda had prepared it properly.

Before signing the 1979 Form 1040, petitioner reviewed it as best

she could.

     Gelda prepared the 1980 Form 1040, signed it, and forwarded

it to Gerald to sign and file.    Gerald signed petitioner's name

on the 1980 Form 1040, and petitioner never reviewed it.

Petitioner did not know that Gerald had placed her signature on

the 1980 Form 1040, and Gerald never discussed with petitioner

his having signed her name.

Tax Shelter Investments

     Gerald invested in tax shelters as early as 1975.    As a

result of Gerald's tax shelter investments, respondent determined

tax deficiencies against the Jacobys for the taxable years 1975,

1976, and 1977 (the 1975-77 deficiencies) in the amounts of

$26,334.39, $62,354.56, and $76,863.49, respectively.    None of

these deficiencies is at issue in this case.

     The 1975-77 deficiencies were attributable to Gerald's

investments in Hawk Mining Co., Ltd. (Hawk Mining), Mason Coal

Program (Mason Coal), and T.A.B. Production Co. (T.A.B.

Production).   Gerald reinvested the tax savings derived from the

1975, 1976, and 1977 tax shelter investments in his businesses.
                              - 10 -

     Respondent assessed the 1975-77 deficiencies in income tax.

The 1975-77 deficiencies remained unpaid until 1987, when

petitioner paid them with the proceeds of the home equity loan.

Gerald paid no portion of the 1975-77 deficiencies.

     During the years in issue, Gerald invested in five tax

shelters that Steven Gurian (Gurian), Gerald's financial adviser,

had recommended to him.   Ajac also invested in the tax shelters

Gurian recommended.   Gerald reinvested the tax savings derived

from the 1978, 1979, and 1980 tax shelter investments in his

businesses.

     Petitioner had met Gurian once, at a social event, and she

knew that Gurian was a financial adviser.    Petitioner did not

know that Gurian sold tax shelters, and she never discussed

business or financial matters with Gurian.

     Gerald discussed each tax shelter investment with Gelda.

Gelda reviewed the tax shelters and concluded that the shelters

were solely tax motivated with no opportunity for economic gain,

and he advised Gerald not to invest in the tax shelters.    Gelda

came to a definitive conclusion that each of the tax shelters was

solely tax motivated.

     Gelda never discussed the tax shelters or Gerald's

businesses with petitioner.   Gelda believed that petitioner had

no knowledge of the tax shelter investments.
                              - 11 -

     Petitioner did not know that Gerald had invested in the tax

shelters, and she had no ownership interest in them.    She also

did not know that Ajac had invested in the tax shelters.

     Petitioner was not present when the tax shelters were

discussed, and she never saw the tax shelter documents.     Gerald

never discussed the tax shelter investments with her.     When

petitioner noticed the amount of mail they received from the

Internal Revenue Service for prior tax years, she asked Gerald

what was going on.   Gerald told her that Gelda was the

accountant, everything was under control, and she should not

worry about it.

     Gerald invested in the following tax shelters:    Hawk Mining,

Masada Press, Ltd., Mason Coal, Power Control Sales Corp. (Power

Control), and T.A.B. Production.

     For the taxable year 1978, Gerald claimed deductions of

$3,956, $49,472, $5,203, and $24,144 attributable to the

investments in Hawk Mining, Masada Press, Ltd., Mason Coal, and

T.A.B. Production, respectively.   Gerald claimed an investment

tax credit of $42,800 attributable to the investment in Masada

Press, Ltd., for the taxable year 1978.

     For the taxable year 1979, Gerald claimed deductions of

$3,853, $60,000, and $32,396 attributable to the investments in

Hawk Mining, Masada Press, Ltd., and Power Control, respectively.

Gerald claimed an investment tax credit of $28,600 for the

taxable year 1979, but the record does not make clear to which
                               - 12 -

investment this tax credit relates.     When petitioner reviewed the

1979 Form 1040, the deductions related to the tax shelters had no

meaning to her, and she did not understand the financial

consequences of the tax shelter investments.

     For the taxable year 1980, Gerald claimed a deduction of

$52,110 attributable to the investment in Power Control.

     Respondent disallowed the aforementioned deductions and

investment tax credits attributable to the tax shelters, and the

Jacobys filed a petition in this Court.

     In 1992, Gerald and respondent entered into a stipulation of

settlement.   For the taxable year 1978, Gerald conceded that he

was not entitled to any loss attributable to Hawk Mining, Mason

Coal, or T.A.B. Production.    Gerald also conceded that he was not

entitled to the investment tax credit claimed for 1978.

Respondent conceded that Gerald was entitled to a $40,000 loss

resulting from Masada Press, Ltd., that amount being equal to his

cash investment.   For the taxable year 1979, Gerald conceded that

he was not entitled to any loss attributable to Hawk Mining, or

Masada Press, Ltd.    Gerald also conceded that he was not entitled

to the investment tax credit claimed for 1979.    Respondent

conceded that Gerald was entitled to a $35,617 loss resulting

from Power Control.   For the taxable year 1980, Gerald conceded

that he was not entitled to any loss attributable to Power

Control.   Gerald conceded that the deficiencies for the taxable
                               - 13 -

years 1978, 1979, and 1980 were subject to the increased rate of

interest pursuant to section 6621(c).

     Respondent assessed deficiencies against Gerald for his

taxable years 1978, 1979, and 1980 in the amounts of $65,412,

$60,463, and $28,675, respectively, plus interest computed

pursuant to section 6621(c).    Gerald paid nothing on the assessed

amounts and thereafter filed in bankruptcy and was discharged

from liability on the assessments.

     Petitioner had no representation separate from Gerald's in

connection with respondent's audit of the Forms 1040 for the

taxable years 1978, 1979 or 1980, nor did she have separate

representation at the time the petition in this case was filed.

                               OPINION

     Petitioner concedes that she is not entitled to any of the

losses or investment tax credits attributable to the tax shelters

and disallowed by respondent in the notice of deficiency.

Petitioner also concedes that the deficiencies at issue are

subject to the increased rate of interest pursuant to section

6621(c).

     Spouses filing a joint return are jointly and severally

liable for the tax arising therefrom.    Sec. 6013(d)(3).   The

innocent spouse rule permits a spouse to avoid joint and several

liability in certain cases.    Sec. 6013(e).   For petitioner to

qualify as an innocent spouse, it must be established:      (1) That

a joint return was filed for each year in issue; (2) that there
                              - 14 -

were substantial understatements of tax and that the

understatements were attributable to grossly erroneous items of

Gerald; (3) that, in signing the returns, she did not know, or

have reason to know, of the substantial understatements; and (4)

that taking into account all the facts and circumstances, it

would be inequitable to hold her liable for the deficiencies.

Sec. 6013(e)(1)(A) through (D).   Petitioner has the burden of

proving that she had met each requirement of section 6013(e).

Rule 142(a); Russo v. Commissioner, 98 T.C. 28, 31-32 (1992).     A

failure to meet any one of the requirements will preclude

petitioner from relief.   Stevens v. Commissioner, 872 F.2d 1499,

1504 (11th Cir. 1989), affg. T.C. Memo. 1988-63; Bokum v.

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

Cir. 1993).   Section 6013(e)(3) states the numerical prerequisite

to determine whether a substantial understatement exists, and

section 6013(e)(4) concerns whether such understatements exceed a

specified percentage of the putative innocent spouse's income.

Respondent concedes that petitioner satisfies the requirements of

section 6013(e)(3) and (4).   The parties agree that there were

substantial understatements of tax attributable to items of

Gerald for each of the years in issue.

     We first decide whether the Jacobys filed a joint return for

each of the taxable years 1978 and 1980.   Whether petitioner

intended to file a joint return is a question of fact.   O'Connor

v. Commissioner, 412 F.2d 304, 309 (2d Cir. 1969), affg. in part
                               - 15 -

and revg. in part T.C. Memo. 1967-174.    If petitioner did not

file a joint income tax return for the taxable years 1978 and

1980, she is not liable for the deficiencies determined by

respondent, and the question of petitioner's innocent spouse

status becomes moot.   See Davenport v. Commissioner, 48 T.C. 921

(1967).   The parties agree that the Jacobys filed a joint return

for the taxable year 1979.

     Respondent concedes that petitioner did not sign the Forms

1040 for the 1978 and 1980 taxable years.    Thus, respondent must

produce some evidence that petitioner intended to file a joint

return with Gerald for those years.     O'Connor v. Commissioner,

supra at 309.

     Petitioner filed a joint income tax return for each of the

taxable years 1975-77, 1979, and 1981-86.    This pattern is some

evidence that petitioner intended to file a joint return in 1978

and 1980.    See Estate of Campbell v. Commissioner, 56 T.C. 1, 12-

13 (1971).   Petitioner assembled charitable contribution receipts

and mortgage payment statements and gave them to Gerald, who in

turn gave the documents to Gelda.   Petitioner's cooperative

effort in assembling these documents and her delivering them to

Gerald for the sole purpose of the preparation of income tax

returns indicates that petitioner intended to file joint returns

for the taxable years 1978 and 1980.    See Sharwell v.

Commissioner, 419 F.2d 1057, 1059-1060 (6th Cir. 1969), vacating

and remanding on another issue T.C. Memo. 1968-89.    From 1963
                               - 16 -

through the years in issue, Gerald worked with Gelda in preparing

the Jacobys' tax returns.    There existed a general understanding

between petitioner and Gerald that Gerald would handle the family

business and tax matters.    We find the understanding between

petitioner and Gerald is evidence that petitioner intended to

file joint returns for 1978 and 1980.    We conclude that

petitioner intended to file, and did file, joint returns for the

taxable years 1978 and 1980.

       We next decide whether the understatements of tax were

attributable to grossly erroneous items.    A deduction for which

there is no basis in fact or law is grossly erroneous.      Sec.

6013(e)(2).    A deduction has no basis in fact if the expense for

which the deduction is taken was not made, and a deduction has no

basis in law if the expense is not deductible under well-

established legal principles, or if no substantial legal argument

can be made to support its deductibility.    Russo v. Commissioner,

supra at 32; Douglas v. Commissioner, 86 T.C. 758, 762-763

(1986).

       We evaluate whether a claim is grossly erroneous as of the

time of filing of the tax return.    Friedman v. Commissioner, 53

F.3d 523, 529 (2d Cir. 1995), revg. in part and remanding T.C.

Memo. 1993-549.    Petitioner cannot rely on respondent's

disallowance in the statutory notice or her inability to

substantiate the losses to prove the lack of basis in fact or

law.    Douglas v. Commissioner, supra at 763.   Petitioner's
                              - 17 -

concession that respondent's adjustments for the losses are

correct is not sufficient to establish that there was no basis in

fact or law for the claimed losses.     Purcell v. Commissioner, 86

T.C. 228, 239 (1986), affd. 826 F.2d 470 (6th Cir. 1987).

Respondent concedes that the deduction related to T.A.B.

Production is grossly erroneous.

     In the stipulation of settlement entered into between

respondent and Gerald, respondent allowed Gerald a deduction of

$40,000 attributable to Masada Press, Ltd., for the taxable year

1978 and a deduction of $35,617 attributable to Power Control for

the taxable year 1979.   Respondent argues that where a deduction

was allowed in a settlement, it necessarily follows that there is

some basis in fact or law for that deduction.

     Respondent's agreement to a compromise settlement may

suggest that the deductions claimed on a return were less than

grossly erroneous.   See, e.g., Crowley v. Commissioner, T.C.

Memo. 1993-503; Anthony v. Commissioner, T.C. Memo. 1992-133;

Neary v. Commissioner, T.C. Memo. 1985-261.     However, parties

consider a myriad of factors during settlement negotiations, and

we attach little weight to the stipulation of settlement in this

case.   The naked stipulation of settlement gives no insight into

which factors influenced respondent's settlement position.     The

settlement allowed deductions to Gerald for his out-of-pocket

expenses in 1978, and presumably for his out-of-pocket expenses

in 1979, and no deduction in 1980.     The out-of-pocket expense
                               - 18 -

settlement has been entered into by respondent in numerous tax

shelter cases.    The stipulation of settlement does not support

the inference that respondent asks this Court to draw.

       The promotional materials for each tax shelter highlight and

discuss at length the tax benefits derived from the investments.

Each of the tax shelters provided for deferred consideration

using promissory notes that were primarily nonrecourse and

secured by the property upon which the tax shelter was built.

       We also consider significant Gelda's conclusions, reached

during the years at issue, as to each of the tax shelter

investments.    Gelda was an experienced accountant who had been a

certified public accountant since 1963.    He reviewed the tax

shelter documents and attended several of the meetings with

Gerald and Gurian.    Gelda concluded that each of the tax shelters

had no economic substance.    Gelda concluded that the tax shelters

were solely tax motivated and provided no opportunity for

economic gain.    Gelda's conclusion was not equivocal.   Gelda

advised Gerald not to invest in the tax shelters, but Gerald

rejected Gelda's advice.    We find that the understatements of tax

were attributable to grossly erroneous items.

       Petitioner must establish that she did not know and did not

have reason to know that the deductions would give rise to a

substantial understatement.    Friedman v. Commissioner, supra at

530.    Large deductions on a tax return may give rise to a duty to

inquire as to the propriety of such deductions.    Hayman v.
                               - 19 -

Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993), affg. T.C.

Memo. 1992-228.    As noted below, Gerald assured petitioner that

everything was in order, and she relied on Gelda's reputation as

return preparer.

       We look at the following four factors to determine whether a

reasonably prudent taxpayer in petitioner's position should have

known that the return contained a substantial understatement:

(1) Petitioner's level of education; (2) petitioner's knowledge

and experience in the family's business and financial affairs;

(3) whether the family's standard of living during the years in

issue was lavish compared to past levels of income and

expenditures; and (4) the conduct of the culpable spouse in

concealing the true state of the family's finances from

petitioner.    Friedman v. Commissioner, supra at 531-532.

       Petitioner graduated from high school and completed two

semesters of college.    She had no training or experience in

business matters.    Petitioner has worked in the home since 1966.

       Petitioner's knowledge of the family's financial affairs and

Gerald's business affairs was minimal.    Petitioner paid household

expenses from a joint checking account, and that was her only

involvement in the family's financial affairs.    Petitioner had no

voice in the Jacobys' investments, and she was not aware that

Gerald had invested in tax shelters.    She had no role in Gerald's

businesses, and he would not discuss his business activities with

her.
                              - 20 -

     Petitioner enjoyed a comfortable lifestyle during the years

in issue, but that lifestyle was consistent with that of prior

years.   The tax savings from the tax shelter investments were not

used to better petitioner's standard of living; rather, those tax

savings flowed into Gerald's business activities.    Gerald

subsequently sold his business activities, and petitioner

received no benefits from those sales.

     Gerald generally concealed his business activities and tax

shelter investments from petitioner.   Petitioner did not sign the

1978 or the 1980 Form 1040.   Petitioner signed the 1979 Form 1040

after being instructed to do so by Gerald.   Gerald considered all

matters related to his businesses and the family finances to be

his domain.   Gerald did not discuss any investments with

petitioner, including the tax shelter investments, and he had no

interest in discussing those matters with her.    Gerald reinvested

the tax savings derived from the tax shelter investments in his

businesses, and he did not discuss this with petitioner.

Petitioner was not present when Gerald met with Gurian or Gelda.

Gelda advised Gerald not to invest in the tax shelters, but

Gerald never shared Gelda's advice with petitioner.

     Petitioner satisfied any duty she may have had to inquire as

to the propriety of the tax shelter deductions.    Petitioner

reviewed the 1979 Form 1040 as best she could.    She saw that

Gelda already had signed the Form 1040, which led her to believe

that the Form 1040 had been prepared properly.    Petitioner had
                                - 21 -

known Gelda for many years, trusted him, and knew that he had

prepared the Forms 1040.    In addition, Gerald assured petitioner

that Gelda properly prepared the Form 1040 and that it presented

no problem for her.    We conclude that petitioner did not know,

and did not have reason to know, that the deductions would give

rise to a substantial understatement.

     In determining whether it would be inequitable to hold

petitioner jointly liable for the deficiencies, we consider

whether she significantly benefited from the erroneous items of

the other spouse.     Purificato v. Commissioner, 9 F.3d 290, 296

(3d Cir. 1993), affg. T.C. Memo. 1992-580; Estate of Krock v.

Commissioner, 93 T.C. 672, 677 (1989).    Any significant benefit

received by petitioner must be considered in the totality of the

circumstances.   Busse v. United States, 542 F.2d 421, 427 (7th

Cir. 1976).   Normal support is not considered a significant

benefit.   Belk v. Commissioner, 93 T.C. 434, 440 (1989).   We look

at the lifestyle to which the taxpayer is accustomed when

considering what constitutes normal support.     Id.

     Gerald invested in his businesses the tax savings derived

from the tax shelter investments.    The tax savings were not used

to better petitioner's standard of living.    Gerald sold his

business interests in 1984 and 1985, and petitioner received no

proceeds from those sales.

     Petitioner's family vacations and use of the pleasure boat

were consistent with the lifestyle to which the Jacobys had
                              - 22 -

become accustomed.   That lifestyle did not change during the

years in issue.   Petitioner received no large gifts from Gerald

during the years in issue, and the monthly allowance she used to

pay household expenses did not increase during the years in

issue.

     We also consider whether the spouses have been divorced.

Friedman v. Commissioner, 53 F.3d at 532; Flynn v. Commissioner,

93 T.C. 355, 367 (1989).   Petitioner and Gerald separated in

April 1984 and divorced in 1992.    When they separated, petitioner

received the marital residence.    Petitioner obtained a home

equity loan and used most of the proceeds to pay the tax

liabilities attributable to the 1975-77 deficiencies.    Gerald

agreed to pay petitioner $5,000 a month to amortize the home

equity loan, but he reneged on that agreement.   Given Gerald's

financial condition, we consider inconsequential any obligation

he may have had to reimburse petitioner pursuant to the

separation agreement.   Petitioner avoided bankruptcy by selling

the marital residence and using the proceeds to pay the home

equity loan.

     As for the deficiencies related to the years in issue,

Gerald and respondent entered into a settlement.    Respondent

assessed deficiencies against Gerald for the taxable years 1978,

1979, and 1980, but Gerald filed in bankruptcy and was discharged

from liability.
                              - 23 -

     Gerald invested in tax shelters in the taxable years 1975

through 1980, and the tax savings derived from the tax shelter

investments went into his businesses.   Gerald left petitioner

with the deficiencies for the taxable years 1975 through 1977,

which she paid.   Respondent now intends to collect from

petitioner the deficiencies for the taxable years 1978 through

1980.   In short, Gerald made the investments, appropriated the

benefits, and left petitioner with the tab.   We conclude that it

would be inequitable to hold petitioner liable for the

deficiencies.

     We hold that petitioner qualifies as an innocent spouse.

     To reflect the foregoing,

                                         An appropriate

                                    decision will be entered

                                    in accordance with the

                                    stipulation of settlement

                                    as to petitioner Gerald

                                    Jacoby, and decision will

                                    be entered for petitioner

                                    Arlene Jacoby.
