                           T.C. Memo. 1996-542



                         UNITED STATES TAX COURT


                  FRANCINE ACQUAVIVA, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 14981-94.                 Filed December 17, 1996.



       Richard J. Sapinski, for petitioner.

       Julia Ann Roy, Frank A. Racaniello, and William S. Garofalo,

for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION

       VASQUEZ, Judge:    Respondent determined deficiencies in, and

additions to, the Federal income taxes of petitioner and her

husband (Mr. Acquaviva) as follows:

                                          Additions to Tax
                             Sec.         Sec.         Sec.         Sec.
Year        Deficiency    6651(a)(1)   6653(a)(1)1   6653(a)(2)     6661
                                                         2
1985         $38,708         -0-         $1,935                    $9,677
                                                         2
1986         776,716         -0-         38,836                   194,250
                                   - 2 -
                                                          2
1987          7,826         $391            391                       9,135
       1
        Respondent determined the additions to tax for negligence or
intentional disregard of rules or regulations for 1986 and 1987 under sec.
6653(a)(1)(A).
       2
        50 percent of the interest due on the portion of the deficiency
attributable to negligence as provided by sec. 6653(a)(2) for 1985 and sec.
6653(a)(1)(B) for 1986 and 1987.

       Mr. Acquaviva did not join in the petition filed by

petitioner and thus is not a party in this case.              After

concessions,1 we must decide:       (1) Whether petitioner tacitly

consented to the filing of joint Federal income tax returns for

each of the 3 years in issue; (2) whether payments made by Magnum

Development Corp. (Magnum), Mr. Acquaviva's real estate

development corporation, during the 1986 and 1987 taxable years

were constructive dividends; (3) whether petitioner is relieved

from joint Federal income tax liability as an "innocent spouse"

by operation of section 6013(e);2 (4) whether petitioner is

liable for an addition to tax under section 6651(a)(1) for the

taxable year 1987; (5) whether petitioner is liable for the

additions to tax for negligence under section 6653(a)(1) and (2)

for 1985 and section 6653(a)(1)(A) and (B) for 1986 and 1987; and


       1
        Petitioner conceded before trial that the gain
attributable to a 1986 condemnation award which her husband
received was not properly deferred under sec. 1033. On brief,
petitioner conceded that the proceeds from a 1985 involuntary
conversion were also not properly deferred under sec. 1033.
Petitioner concedes that these amounts are properly taxable to
Mr. Acquaviva.
       2
        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.
                               - 3 -

(6) whether petitioner is liable for the additions to tax for

substantial understatement of tax under section 6661 for 1985,

1986, and 1987.

                         FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

incorporated herein by this reference.   At the time the petition

was filed, petitioner resided in Holmdel, New Jersey.

A.   Background

      Petitioner and her husband have known each other for most of

their lives; they grew up across the street from one another in a

lower middle class neighborhood in Hoboken, New Jersey.

Petitioner married Mr. Acquaviva in 1960 at the age of 17.   Mr.

Acquaviva was the breadwinner; petitioner was a housewife who

stayed at home to take care of their four sons.   Mr. Acquaviva

was a residential real estate developer and, during the 1986 and

1987 taxable years, an officer-shareholder in Magnum.   Petitioner

and Mr. Acquaviva enjoyed a harmonious and close family

relationship with each other and their sons.

      Shortly after they were married, the Acquavivas moved into a

tenement apartment in Hoboken, New Jersey.   The couple's standard

of living improved throughout their marriage as Mr. Acquaviva's

businesses prospered.   By the early 1980's, the family lived in a

large five-bedroom home, which Mr. Acquaviva built, in an upscale

neighborhood located in Holmdel, New Jersey.   The couple had a
                               - 4 -

housekeeper, enjoyed giving gifts of expensive jewelry and furs,

drove expensive automobiles, took family vacations, and

maintained a summer home on the New Jersey shore.   Petitioner

maintained an affluent lifestyle throughout the years in issue.

     Throughout their marriage, petitioner and Mr. Acquaviva have

kept their household responsibilities separate.   Mr. Acquaviva

managed the family finances and made all of the important

financial and investment decisions for the family without input

from petitioner.   Petitioner managed their household, purchased

the family's groceries, clothing, and personal items, and cared

for the children when they were young.   Petitioner paid her

personal expenses and those related to running the household by

personal check drawn on a joint checking account that she

maintained with her husband.   However, petitioner relied on Mr.

Acquaviva to pay the majority of the family's living expenses.

Expenses such as the mortgage, homeowner's insurance, real estate

taxes, life insurance, automobile payments, automobile insurance,

State and Federal taxes, political contributions, and expenses

for live-in help were all paid out of Mr. Acquaviva's personal

account.   Petitioner was not a signatory on her husband's

personal checking account.   Petitioner never asked Mr. Acquaviva

how much money was in his personal checking account.   Mr.

Acquaviva made funds available to petitioner through the couple's

joint checking account by depositing funds drawn from his

personal checking account.   Petitioner never asked how much she
                               - 5 -

could spend; if she needed additional funds, she simply asked her

husband to deposit more money into their joint account.

      Petitioner's education ended with high school.   Petitioner

had no training or background in accounting, business, or

finance, with the exception of running a retail clothing business

called "Unique Boutique", which Mr. Acquaviva set up as an

amusement for her.3   Petitioner's participation in her husband's

business was limited to decorating some of the model houses which

he built.   Petitioner was otherwise unemployed during the

relevant years.

B.   Mr. Acquaviva's Business Activities

      During the years in issue, Mr. Acquaviva did not conceal his

business activities or the family's financial affairs from

petitioner.   However, Mr. Acquaviva generally did not discuss his

investments or the family's financial affairs with petitioner.

Mr. Acquaviva usually did not conduct business at home.

Petitioner did not question her husband's decisions.   Petitioner

trusted her husband and believed he would do what was best for

the family.

      Shortly after his marriage to petitioner in 1960, Mr.

Acquaviva took over his father's refrigerator repair service.    He


      3
        Although petitioner was the owner/operator of this dress
shop, she left all of the business decisions to her husband.
During the 4 years that petitioner's dress shop was in operation
from 1982 through 1985, the business incurred a net loss of
$27,455.
                               - 6 -

eventually developed it into a commercial heating and air

conditioning business.   Sometime during the early 1980's, Mr.

Acquaviva and Frank DiMisa (Mr. DiMisa), a real estate developer

from Staten Island, New York, entered into a venture to develop a

residential subdivision.   Mr. Acquaviva eventually changed his

business from mechanical contracting to residential real estate

development.

     Mr. Acquaviva became a successful real estate developer.      In

the years following his initial project with Mr. DiMisa, Mr.

Acquaviva's real estate activities expanded to encompass over 25

different ventures.   Over the years, Mr. Acquaviva reinvested the

proceeds from his development activities in additional land

purchases and, in turn, future development projects.

     Mr. Acquaviva's primary source of credit for his real estate

activities was City Federal Savings Bank (City Federal).    City

Federal was declared insolvent and taken over by the Office of

Thrift Supervision in December of 1989.   Mr. Acquaviva's primary

source of credit thus disappeared, and he no longer was able to

meet his debt obligations.   An investigation of City Federal by

the U.S. Attorney's Office and the Resolution Trust Corporation

(RTC) revealed that in 1985 Mr. Acquaviva and Mr. DiMisa paid

$75,000 to a senior lending officer at City Federal in order to

obtain approval of a development loan.    Mr. Acquaviva was charged

with, and pleaded guilty to, conspiracy to commit bribery in

1992.   Mr. Acquaviva did not tell petitioner about the
                                 - 7 -

investigation until 2 weeks before he pleaded guilty.    In

settlement of the RTC's claims, Mr. Acquaviva and his sons paid

$7,825,000 in 1993.   This payment was partially funded by

borrowing and was secured by the family's remaining assets which

included the Acquavivas' home.

     1.   1985 Involuntary Conversion

     Mr. Acquaviva purchased a multistory commercial building

located in Hoboken, New Jersey (Hoboken property), in 1973.      The

Hoboken property was destroyed by fire in January 1985.    Mr.

Acquaviva received $1 million from his insurance carrier in late

1985 as a settlement of the damage caused by the fire.    At the

time of the fire, Mr. Acquaviva's adjusted basis in the Hoboken

property was $806,464.   On the Acquavivas' 1985 Federal income

tax return, Mr. Acquaviva did not report any gain from this

conversion, electing instead to defer the gain pursuant to

section 1033.4   No statement was attached to the couple's 1987

     4
        Sec. 1033 provides that, under certain circumstances, a
taxpayer may defer the taxation of gain realized on an
involuntary conversion. Sec. 1033(a)(1). Where condemnation
proceeds are received in the form of money, replacement with
like-kind property must be made within 2 years after the close of
the year in which the landowner first receives the proceeds, in
this case, by the end of the calendar year 1987. The
Commissioner's regulations direct that the details of an
involuntary conversion of property resulting in a gain should be
reported on the return for the year in which the gain is realized
(in this case 1985) but that an election to defer recognition of
gain will be deemed to have been made by a failure to include the
gain in gross income in the year received. Sec. 1.1033(a)-
2(c)(2), Income Tax Regs. The failure of the Acquavivas to
report and pay tax on the gain from the involuntary conversion on
                                                   (continued...)
                               - 8 -

return identifying that the Hoboken property had been replaced,

nor did they file an amended 1985 return reporting the gain.

Petitioner conceded that the Hoboken property was not properly

replaced pursuant to section 1033.

     2.   1986 Condemnation

     Mr. Acquaviva and Mr. DiMisa formed the Holmdel Golf &

Country Club partnership (HGCC) in 1984 to develop land located

in Monmouth County, New Jersey, into an exclusive residential

community of luxury homes with an adjacent golf course and

country club.   Mr. Acquaviva and Mr. DiMisa each owned a 50-

percent interest in HGCC.

     Mr. Acquaviva purchased two tracts of farm land located in

Monmouth County and contributed them to HGCC in 1984.

Petitioner's signature appears on various documents of title,

mortgages, and closing statements related to this transaction.5

HGCC acquired additional land in Monmouth County in January and

October 1985.




     4
      (...continued)
their 1985 income tax return thus constituted an election to
defer the recognition of the gain under sec. 1033. See Cerny v.
Commissioner, T.C. Memo. 1987-599.
     5
        It was necessary for petitioner to attend occasional
real estate closings and personally sign various documents.
Petitioner's signature was required along with her husband's as a
guarantor and/or to release or convey any marital interest she
may have had in the property being conveyed in connection with
her husband's real estate development activity.
                               - 9 -

     During 1985, the Monmouth County Board of Freeholders was

considering the purchase and conversion of 457 acres of farmland

into a public park, 366 acres of which was owned by HGCC.    In

July 1986, Monmouth County filed a declaration of taking against

279 acres of land owned by HGCC and deposited $14,524,600, the

property's estimated fair market value, with the Superior Court

of New Jersey.   The condemnation proceedings, including the

amount of the condemnation award, were reported in local

newspapers; petitioner read some of these articles and attended a

few of the public hearings concerning the condemnation.

     Mr. Acquaviva consulted his accountant, Louis Defalco (Mr.

Defalco), regarding the tax implications of the condemnation

award.   Mr. Acquaviva and Mr. DiMisa were advised by Mr. Defalco

that they had the option of replacing the property and deferring

the recognition of any gain or of recognizing the gain currently.

Mr. DiMisa also suggested that Mr. Acquaviva and he discuss the

matter with Herbert Gannette (Mr. Gannette), a tax attorney.      In

the interim, HGCC reported a gain in the amount of $7,678,378

from the condemnation on its 1986 Form 1065, U.S. Partnership

Return of Income.   HGCC issued checks to each partner for

$3,869,244, which represented each partner's share of the

proceeds from the condemnation award after deduction of expenses.

Mr. Acquaviva deposited his share into his personal checking

account.   However, HGCC subsequently filed an amended Form 1065,

electing to defer this gain pursuant to section 1033.
                              - 10 -

     Mr. Acquaviva intended to reinvest the proceeds from the

condemnation into another venture with Mr. DiMisa.   In the fall

of 1987, Mr. Acquaviva and Mr. DiMisa sought legal advice from

Mr. Gannette regarding the 1986 condemnation gain.   Mr. Gannette

advised the partners that in seeking the benefits of section

1033, HGCC would be regarded as an entity separate from its

partners, and, as such, it was incumbent upon HGCC, not the

partners individually, to acquire and hold replacement property

in its trade or business.   Mr. DiMisa, however, decided not to

enter into another venture with Mr. Acquaviva through HGCC; he

decided to report his share of the taxable income related to the

1986 condemnation.   Thus, the 1986 condemnation proceeds were

never reinvested by HGCC.   Mr. Defalco prepared an amended 1986

individual income tax return which reported Mr. Acquaviva's

proportionate share of HGCC's gain from the 1986 condemnation.

Mr. Defalco delivered the amended return to Mr. Acquaviva for

filing.   Mr. Acquaviva never filed this amended return.   Mr.

Acquaviva explained that he could not afford to pay his share of

the tax liability because he had used the condemnation proceeds

to, among other things, purchase other properties in

contemplation of either contributing or selling them to HGCC.

Mr. Acquaviva never told petitioner of his discussions with Mr.

DiMisa, Mr. Defalco, or his tax attorney concerning the

involuntary conversion, nor did he discuss with her his decision

to ignore the advice of his professional advisers.   Petitioner
                              - 11 -

concedes that the gain realized on the 1986 condemnation award

should have been reported on an amended 1986 return.

     3.   Magnum Development Corp.

       During the 1986 and 1987 taxable years, Magnum was a

closely held real estate development corporation owned by Mr.

Acquaviva and three of his sons.     Magnum functioned as the

general contractor on Mr. Acquaviva's residential real estate

development projects.   Mr. Acquaviva occasionally made cash

advances to Magnum.   No promissory notes were executed and Magnum

did not pay interest on the funds advanced.

      Magnum paid some of Mr. Acquaviva's personal expenses.

During 1986, Magnum paid $23,890 for the installation of a

swimming pool at the Acquavivas' home and $20,000 for home

improvements.   In 1987, Magnum paid $23,552 for landscaping

services benefiting the Acquavivas' home and, in addition, issued

a check in the amount of $4,400 directly to Mr. Acquaviva.

Magnum accounted for these transactions on its books as

reductions in the amount it owed Mr. Acquaviva.     Magnum never

declared a dividend during 1986 or 1987.     Respondent determined

that these amounts paid on behalf of or directly to Mr. Acquaviva

were dividends.

C.   Tax Return Preparation

      Mr. Acquaviva did not discuss tax matters with his wife.

She expected him to take care of such matters.     During the years

in issue, Mr. Acquaviva or his son Christopher ensured that tax
                               - 12 -

returns were filed.   During 1985, 1986, and 1987, Mr. Acquaviva

had joint returns prepared.    He did not present these returns to

petitioner for her review or signature but rather filed the 1985

and 1987 returns without her signature and signed her name to the

1986 return.   Petitioner did not file separate returns for any of

the years in issue.   Petitioner knew that there was a

responsibility to file returns but assumed that "my husband would

have taken care of that."    Petitioner filed joint income tax

returns with her husband during their marriage but could not

recall for which taxable years.

     Mr. Acquaviva used the accounting firm of Defalco & Co. for

tax and accounting services for more than 20 years.     In addition

to advising Mr. Acquaviva on tax matters concerning his

enterprises, Mr. Defalco also advised Mr. Acquaviva on personal

tax matters.   Defalco & Co. prepared the Acquavivas' income tax

returns during the years in issue.      Mr. Acquaviva filed Federal

income tax returns electing the status of "Married filing joint

return" for all of the years in issue.

     Petitioner knew that Mr. Defalco had a longstanding

professional relationship with her husband.     Petitioner was not

involved in the preparation of the couple's income tax returns.

Neither Mr. Acquaviva nor Mr. Defalco discussed the returns with

petitioner.    They did not discuss the advantages or possible

disadvantages of filing a joint return with petitioner.

Petitioner did not give her husband express consent to file the
                                - 13 -

returns on her behalf, although she knew that the returns had

been prepared by the same accountant for many years and was

confident in his abilities.    Petitioner never asked to review the

returns.    Petitioner trusted her husband and relied on his

judgment.    Petitioner executed a Form 2848, Power of Attorney and

Declaration of Representative, designating her husband's

accountant to represent her concerning the IRS audit of the 1986

and 1987 returns.

                                OPINION

A.   Joint Returns

      We must first decide whether petitioner filed a joint return

for each of the taxable years in issue.    If petitioner did not

file a joint return for the taxable years 1985 through 1987, then

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).

Generally, a nonsigning spouse is not liable for taxes shown to

be due on a return or later determined as a deficiency.

Januschke v. Commissioner, 48 T.C. 496, 500 (1967).     We have,

however, recognized that joint liability arising from a return is

not necessarily defeated because one spouse did not sign the

return.     Estate of Campbell v. Commissioner, 56 T.C. 1, 12-13

(1971); Federbush v. Commissioner, 34 T.C. 740, 757 (1960), affd.

per curiam 325 F.2d 1 (2d Cir. 1963).     Rather, the determining

factor is whether the spouses "intended to file and be bound by
                                - 14 -

the particular return in question."      Shea v. Commissioner, 780

F.2d 561, 567 (6th Cir. 1986), affg. in part, revg. in part, and

remanding T.C. Memo. 1984-310; Januschke v. Commissioner, supra

at 500.   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 and revg. in part on another issue

T.C. Memo. 1967-174.    In the instant case, petitioner did not

sign the returns; the burden therefore is on respondent to

produce evidence of petitioner's intent to file a joint return

with Mr. Acquaviva.     Id.

     Petitioner knew that her husband's longtime accountant, Mr.

Defalco, prepared the subject returns, and she was confident in

his abilities.   Petitioner designated Mr. Defalco to represent

her during the audit of the 1986 and 1987 returns.     Thus, she had

the opportunity to raise an objection to the joint filing of the

returns with the examining agent at the audit level but chose not

to do so.   Cf. Estate of Campbell v. Commissioner, supra at 14.

     Income from petitioner's dress shop was reported on Schedule

C of the 1985 return.    Gain from the sale of the real property

used by her dress shop, which she held as a joint owner with her

husband, was included on the 1986 return.     Although not

conclusive, the inclusion of a spouse's income on a return has

been regarded as a factor supporting the conclusion that the

particular return in question was intended as a joint return.

Federbush v. Commissioner, supra at 756.     Petitioner testified
                                - 15 -

that she was aware of her duty to file, having done so in past

years.    Petitioner also testified that she had filed joint

returns with her husband during their marriage, though she did

not recall which joint returns she may have signed.      We also find

it significant that petitioner never filed a separate return, nor

did she ever object to the filing of joint returns either to her

husband or his accountant.

     There was a general understanding between petitioner and her

husband that he would handle the family's financial and business

matters, including the preparation and filing of tax returns.

Petitioner never asked to review the subject returns because she

believed it was not necessary.      Petitioner trusted her husband

and relied on his judgment.    We believe that her reliance on Mr.

Acquaviva's judgment is indicative of petitioner's intent; in

other words, "She intended the returns to be filed as he chose."

Estate of Campbell v. Commissioner, supra at 13.      Based on the

foregoing, we conclude that petitioner intended to file, and did

file, joint returns for each of the 3 taxable years in issue.

     B.    Constructive Dividends

     Petitioner contends that the payments made by Magnum in 1986

and 1987 to, or on behalf of, her husband were repayments of

loans that he made to Magnum.    Respondent determined that Magnum

did not have a bona fide debt to Mr. Acquaviva; any payments,

therefore, were dividends to Mr. Acquaviva.
                                - 16 -

     The characterization of these payments depends upon whether

Mr. Acquaviva and Magnum intended to create a bona fide debtor-

creditor relationship.     Williams v. Commissioner, 627 F.2d 1032

(10th Cir. 1980), affg. T.C. Memo. 1978-306; Commissioner v.

Makransky, 321 F.2d 598, 600 (3d Cir. 1963), affg. 36 T.C. 446

(1961).     If a bona fide debtor-creditor relationship existed,

then the payments by Magnum may be properly characterized as the

repayment of that debt.     See, e.g., Schaefer v. Commissioner,

T.C. Memo. 1994-444.     If however, as respondent contends, there

was no bona fide debtor-creditor relationship, then the payments

may be characterized as dividends to Mr. Acquaviva.     See Fin Hay

Realty Co. v. United States, 398 F.2d 694, 697 (3d Cir. 1968);

Commissioner v. Makransky, supra.     The proper characterization is

a question of fact to be determined on the basis of all of the

facts and circumstances.     Gilbert v. Commissioner, 262 F.2d 512,

513 (2d Cir. 1959), affg. T.C. Memo. 1958-8; Georgia-Pac. Corp.

v. Commissioner, 63 T.C. 790, 795 (1975).     The burden is on

petitioner to show that there existed a bona fide indebtedness

and that the amounts in question were the repayment of that debt.

Rule 142(a).

     Courts have considered various factors in determining

whether shareholder advances are debt or contributions to

capital.6    In making our determination, we recognize that

     6
          The Court of Appeals for the Third Circuit, to which
                                                     (continued...)
                             - 17 -

transactions between shareholders and their closely held

corporations require special scrutiny because of the apparent

lack of a true arm's-length relationship between the two.     Fin

Hay Realty Co. v. United States, supra at 697; J.A. Tobin Constr.

Co. v. Commissioner, 85 T.C. 1005, 1022 (1985).   This scrutiny is

particularly applicable where a shareholder advances funds to a

corporation and characterizes the transaction as creating a

corporate obligation instead of a contribution to capital.     Fin

Hay Realty Co. v. United States, supra at 697.

     Petitioner argues that the requisite intent to create a bona

fide debt existed between Mr. Acquaviva and Magnum.   In support

     6
      (...continued)
appeal in this case lies, uses the following nonexclusive list of
16 factors:

     (1) the intent of the parties; (2) the identity between
     creditors and shareholders; (3) the extent of participation
     in management by the holder of the instrument; (4) the
     ability of the corporation to obtain funds from outside
     sources; (5) the "thinness" of the capital structure in
     relation to debt; (6) the risk involved; (7) the formal
     indicia of the arrangement; (8) the relative position of the
     obligees as to other creditors regarding the payment of
     interest and principal; (9) the voting power of the holder
     of the instrument; (10) the provision of a fixed rate of
     interest; (11) a contingency on the obligation to repay;
     (12) the source of the interest payments; (13) the presence
     or absence of a fixed maturity date; (14) a provision for
     redemption by the corporation; (15) a provision for
     redemption at the option of the holder; and (16) the timing
     of the advance with reference to the organization of the
     corporation. [Fin Hay Realty Co. v. United States, 398 F.2d
     694, 696 (3d Cir. 1968); fn. ref. omitted.]

     These factors are only aids to be used in determining
whether a bona fide debtor-creditor relationship existed between
Mr. Acquaviva and Magnum. See id. at 697.
                                - 18 -

of her position, petitioner offered the testimony of Mr.

Acquaviva, her son Christopher, who during the years in issue

served as Magnum's treasurer, and their accountant, Mr. Defalco.

Petitioner also presented copies of Magnum's automated general

ledger and accounting records as evidence of a bona fide debt.

     Respondent contends that petitioner has not met her burden

of proof.   Statements of intent must be considered in the context

of the surrounding circumstances.     Williams v. Commissioner,

supra at 1034.   What few formal indicia surrounded Mr.

Acquaviva's advances were minimized by the lack of other

objective factors to support the conclusion that they were loans.

Petitioner offered no evidence of indebtedness, e.g., loan

agreements, promissory notes, repayment schedules, or collateral

posted to secure the alleged loans.      There was no interest

reflected in any of the 1986 and 1987 payments, nor was there any

evidence that these payments were made to satisfy a debt between

Magnum and Mr. Acquaviva.   Petitioner did not introduce Magnum's

corporate minutes into evidence.    Furthermore, Mr. Acquaviva, a

25-percent shareholder in Magnum, did not get formal

authorization from the other shareholders for the loans.

Petitioner has failed to prove that Magnum owed a bona fide debt

to Mr. Acquaviva.

     Petitioner has not argued that Magnum lacked earnings and

profits during 1986 and 1987.    See secs. 301, 316.    We sustain

respondent's determination on this issue.
                                 - 19 -

C.   Innocent Spouse

      Section 6013(a) provides that spouses may elect to file a

joint Federal income tax return.     If a husband and wife file a

joint return, the tax is computed on their aggregate income and

the liability with respect to such tax is joint and several.

Sec. 6013(d)(3); Gordon v. United States, 757 F.2d 1157, 1160

(11th Cir. 1985).      Section 6013(e)(1), however, relieves a spouse

of this joint and several liability for tax if he or she can show

that (1) a joint Federal income tax return was filed by the

spouses; (2) there is a substantial understatement of tax

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

in signing the return, the claimed "innocent spouse" did not

know, and had no reason to know, of the substantial

understatement; and (4) taking into account all the facts and

circumstances, it would be inequitable to hold this claimed

"innocent spouse" liable for the deficiency attributable to the

understatement.   Sec. 6013(e)(1).    A spouse seeking relief under

section 6013(e) has the burden of proving that each requirement

has been satisfied.     Because the statute is phrased in the

conjunctive, petitioner's failure to satisfy any one of these

elements will preclude "innocent spouse" relief.      Purificato v.

Commissioner, 9 F.3d 290, 293 (3d Cir. 1993), affg. T.C. Memo.

1992-580.

      We have found that petitioner filed a joint return for each

of the years in issue, and respondent concedes that there was a
                               - 20 -

substantial understatement of tax attributable to Mr. Acquaviva.

Accordingly, we must decide whether:    (1) Petitioner lacked

actual and constructive knowledge of the understatements; and

(2) it would be inequitable to hold her liable for the

deficiencies.

1.   Knowledge or Reason To Know

      Courts have consistently held that the knowledge

contemplated by section 6013(e)(1)(C) is knowledge of the

underlying transaction and not of the tax consequences of that

transaction.    Purcell v. Commissioner, 86 T.C. 228, 237-238

(1986), affd. 826 F.2d 470 (6th Cir. 1987).    Petitioner must show

a lack of actual knowledge as well as that she had no reason to

know of the substantial understatement.    In determining whether

petitioner had reason to know within the meaning of section

6013(e)(1)(C), we must inquire whether a reasonably prudent

person, under petitioner's circumstances, could have been

expected to know at the time of signing each of the returns that

the returns contained a substantial understatement.      Bokum v.

Commissioner, 94 T.C. 126, 148 (1990), affd. 992 F.2d 1132 (11th

Cir. 1993).

      We look to the following factors to determine whether or not

petitioner had reason to know that the returns in question

contained a substantial understatement:    (1) Petitioner's level

of education; (2) petitioner's involvement in the family's

business and financial affairs; (3) whether there was a
                                   - 21 -

substantial unexplained increase in the family's standard of

living; and (4) the conduct of petitioner's husband in concealing

the true state of the family's finances.       Hayman v. Commissioner,

992 F.2d 1256, 1261 (2d Cir. 1993), affg. T.C. Memo. 1992-228.

            a.   Education

     Petitioner possessed only a high school education.

Petitioner lacked meaningful business experience and knowledge

pertaining to finances or tax return preparation.

            b.   Family Business

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

her husband's business affairs was minimal.       Petitioner's

participation in her family's financial affairs was limited to

access to the couple's joint bank account which she used to pay

incidental household and family expenses.7      Mr. Acquaviva

dominated the couple's financial affairs throughout their

marriage.    Mr. Acquaviva completely insulated petitioner from the

family's financial picture as well as his business activities.

We are convinced that petitioner had no voice in the family's

financial and business decisions.       Petitioner was not in a

position to know how much income her husband generated from his


     7
       Cf. Price v. Commissioner, 887 F.2d 959, 965 (9th Cir.
1989) (wife had limited involvement in family finances despite
responsibility of paying mortgage); Hinds v. Commissioner, T.C.
Memo. 1988-426 ("innocent spouse" relief allowed for wife whose
participation in family's financial affairs was limited to
accepting money from husband to pay household expenses and
purchase family's food and clothing).
                                - 22 -

real estate activities, which activities generated that income,

or how he invested that income.

          c.     Family Lifestyle

     Petitioner enjoyed an affluent lifestyle during the years in

issue, but that lifestyle was consistent with that of preceding

years.   The record reflects that the family lived in the same

five-bedroom home located in an upscale neighborhood of Holmdel,

New Jersey, prior to and during the years in issue.    The record

also indicates that items of jewelry, luxury automobiles,

household help, family vacations, and a summer home had all been

a part of the family's lifestyle since at least the mid-1970's.

     Respondent points out that Mr. Acquaviva gave his wife

several items of expensive jewelry in 1985, focusing on the value

of the gifts in relation to the family's adjusted gross income.

We are mindful that "one person's luxury can be another's

necessity, and the lavishness of an expense must be measured from

each family's relative level of ordinary support." Sanders v.

United States, 509 F.2d 162, 168 (5th Cir. 1975).     We note that

these items were given to petitioner in conjunction with the

couple's 25th wedding anniversary and, though expensive, were not

disproportionate to the Acquavivas' standard of living.

           d.    Evasiveness

     Mr. Acquaviva, while not evasive, did not share information

about his financial decisions or his business activities with

petitioner.     Mr. Acquaviva considered all matters related to his
                                - 23 -

business and family finances to be his domain.    We are convinced

that petitioner was unaware of her husband's discussions with Mr.

DiMisa, Mr. Defalco, or his tax attorney concerning the

involuntary conversions.   Further, we do not believe that Mr.

Acquaviva told petitioner, or that she knew, of his decision to

ignore the advice of his advisers with regard to the 1986

condemnation.

     Respondent contends that petitioner had a duty to inquire

and that she failed to do so.    Specifically, respondent argues

that because petitioner knew of the 1985 fire and the 1986

condemnation and the substantial amounts involved, petitioner had

a duty to inquire as to the proper tax treatment of the 1985 and

1986 involuntary conversion proceeds and the constructive

dividends.   We think that, under the circumstances presented

here, it was reasonable that petitioner did not ask her husband

about the tax consequences of the involuntary conversion proceeds

and the corporate distributions.8    Petitioner trusted her husband

to do what was best for her and their family, including ensuring

that the family's tax returns were properly prepared and filed.

Petitioner also knew that her husband had a long-standing


     8
       We also note that, contrary to respondent's belief,
failure to inspect a Federal income tax return does not
automatically preclude innocent spouse relief. See, e.g.,
Terzian v. Commissioner, 72 T.C. 1164, 1171 (1979) ("the fact
that * * * [the taxpayer] signed the return without reading it
does not require the conclusion that she had reason to know of
the omitted income").
                              - 24 -

professional relationship with his accountant, Mr. Defalco, and

that he prepared the couple's tax returns as well as the returns

for the entities that Mr. Acquaviva controlled.     Petitioner had

no reason to question Mr. Defalco's ability.    Moreover, when the

1985 and 1986 returns were filed, there was no substantial

understatement of tax attributable to the involuntary

conversions.   By operation of respondent's regulations, the

Acquavivas were treated as having elected the provisions of

section 1033 with the filing of the 1985 and 1986 returns.     See

sec. 1.1033(a)-(2)(c)(2), Income Tax Regs.

     Based on our review of the record as a whole, we hold that

petitioner did not know, and had no reason to know, of any

substantial understatement of income on the couple's Federal

income tax returns for the taxable years 1985, 1986, 1987.

     2.   Equity of Holding Petitioner Liable

     The final requirement for innocent spouse relief is that,

given all of the facts and circumstances, it would be inequitable

to hold petitioner liable for the deficiency attributable to the

substantial understatement.   Sec. 6013(e)(1)(D).   Although

section 6013(e)(1)(D), as amended, no longer requires us to

determine whether petitioner significantly benefited as a result

of the omitted income, this factor is still considered in

determining whether it is inequitable to hold petitioner liable.

Purificato v. Commissioner, 9 F.3d at 296; sec. 1.6013-5(b),

Income Tax Regs.   Any significant benefit received by petitioner
                              - 25 -

must be considered in the totality of the circumstances.

Purificato v. Commissioner, supra at 293; sec. 1.6013-5(b),

Income Tax Regs.

          a.   1985 Taxable Year

     Petitioner has not demonstrated that she did not realize a

significant benefit from the 1985 insurance proceeds.    Petitioner

failed to produce the couple's joint checking account records for

the 1985 tax year as she did for the 1986 and 1987 tax years.

The failure of a party to produce relevant evidence within its

possession or control gives rise to the presumption that, if

produced, it would be unfavorable.     Wichita Terminal Elevator Co.

v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513

(10th Cir. 1947).

     Petitioner failed to meet her burden of proving that it

would be inequitable, within the meaning of section

6013(e)(1)(D), to hold her liable for that portion of the

deficiency related to 1985.   Therefore, she is not an "innocent

spouse" in 1985.

          b.   1986 Taxable Year

     With respect to the 1986 condemnation award, a check

representing Mr. Acquaviva's share of the condemnation award was

deposited into his personal checking account.    The bulk of the

condemnation award was used in Mr. Acquaviva's real estate

ventures, which failed in subsequent years.    In this regard, we

believe petitioner did not receive any of the benefits of
                              - 26 -

ownership from the condemnation award.   Furthermore, we are

satisfied that petitioner's lifestyle did not change on account

of her husband's receipt of the condemnation award.   Although

petitioner may have received some benefit from the 1986

condemnation award, we believe that such a benefit did not exceed

her normal level of support, which is not a significant benefit.

Flynn v. Commissioner, 93 T.C. 355, 367 (1989).

     We conclude that petitioner did not derive a significant

benefit from Mr. Acquaviva's omission of the 1986 condemnation

award.   Accordingly, under the facts and circumstances of this

case, we find that it would be inequitable to hold petitioner

liable for that portion of the deficiencies in tax arising from

Mr. Acquaviva's understatement of income attributable to the 1986

condemnation award.

     The same cannot be said of the 1986 constructive dividends.

Here the evidence demonstrates that petitioner benefited from the

constructive dividends paid to Mr. Acquaviva.   During 1986,

Magnum paid $23,890 for the installation of a swimming pool at

the Acquavivas' home and $20,000 for home improvements.

Petitioner's lifestyle was enhanced by these home improvements.

We find that the 1986 constructive dividend was used to benefit

petitioner beyond normal support.   We hold that it is not

inequitable to hold petitioner liable for the portion of the

deficiency attributable to the 1986 constructive dividends; thus,
                               - 27 -

she is not entitled to relief as an innocent spouse with respect

to this item.

     c.   1987 Taxable Year

     With respect to the 1987 taxable year, Magnum paid $23,552

for landscaping services to the Acquavivas' home and, in

addition, issued a check in the amount of $4,400 directly to Mr.

Acquaviva.   Again, petitioner's lifestyle was enhanced by these

landscaping services to her home.   We find that the 1987

constructive dividend attributable to landscaping services

benefited petitioner beyond normal support.   With regard to the

$4,400 check to Mr. Acquaviva, petitioner did not present any

evidence on how it was used.   Therefore, as to the $4,400, she

has failed to establish that it would be inequitable to hold her

liable for the deficiency.    We hold that it is not inequitable to

hold petitioner liable for the portion of the deficiency

attributable to the 1987 constructive dividend; thus, she is not

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

with respect to this item.

     For the foregoing reasons, we hold that petitioner is

entitled to "innocent spouse" relief under section 6013(e) for

the portion of the deficiency for 1986 attributable to the

condemnation award, but she is not entitled to "innocent spouse"

relief with respect to the deficiency for 1985 or with respect to

the portions of the deficiencies for 1986 and 1987 attributable

to the constructive dividends.
                               - 28 -

D.   Additions to Tax

      Section 6651(a)(1) imposes an addition to tax for failure to

file a return on the date prescribed (determined with regard to

any extension of time for filing) unless it is shown that such

failure is due to reasonable cause and not due to willful

neglect.    The taxpayer has the burden of showing the addition is

improper.   United States v. Boyle, 469 U.S. 241, 245 (1985).

      If any part of the underpayment is due to negligence or

disregard of rules or regulations, there shall be added to the

tax an amount equal to 5 percent of the underpayment.    Sec.

6653(a)(1) (for 1985); sec. 6653(a)(1)(A) (for 1986 and 1987).

There is a further addition to tax in an amount equal to 50

percent of the interest payable with respect to the portion of

the underpayment that is attributable to negligence.    Sec.

6653(a)(2) (for 1985); sec. 6653(a)(1)(B) (for 1986 and 1987).

      Section 6661 provides for a 25-percent addition to tax on

any substantial understatement.    Pallottini v. Commissioner, 90

T.C. 498 (1988).   A substantial understatement is one that

exceeds the greater of 10 percent of the tax required to be shown

on the return or $5,000.   Sec. 6661(b)(1).   The amount of the

understatement, for purposes of section 6661, is to be reduced by

the portion attributable to any item for which there was

substantial authority or any item that was adequately disclosed.

Sec. 6661(b)(2)(B).
                               - 29 -

     Respondent determined that petitioner is liable for the

additions to tax discussed above.   Petitioner has offered no

evidence with regard to any of the additions to tax.    In fact,

petitioner's briefs fail to address the additions to tax.    The

burden rests with petitioner to prove that respondent's

determinations are in error.   Rule 142(a).   We cannot be sure

that petitioner intended to abandon the issue, but in any case

respondent's determination of the applicable additions to tax

must be sustained with respect to any underpayment of tax or

substantial understatement resulting from the omission of income

in 1985 and from the constructive dividends in 1986 and 1987.

     To reflect the foregoing and the concessions of the parties,

                                         Decision will be entered

                                    under Rule 155.
