                        T.C. Memo. 1996-97



                      UNITED STATES TAX COURT



         JOSEPH L. BARNHILL, JR. AND CYNTHIA A. BARNHILL,
Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17955-87.               Filed March 5, 1996.



     Declan J. O’Donnell, for petitioners.

     Jason M. Silver, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     COHEN, Judge:   Respondent determined deficiencies in and

additions to petitioners’ Federal income tax as follows:
                                - 2 -

                                     Additions to Tax
                          Sec.             Sec.              Sec.
Year       Deficiency     6653(a)(1)       6653(a)(2)        6659

1980         $28,057        $1,403            0               --
                                               1
1981          47,048         2,352                          $14,114
                                               1
1982          54,293         2,715                           16,288
                                               1
1983             830            42                             --
       1
        50 percent of the interest due on the deficiency.

The sole issue remaining for decision is whether petitioner

Cynthia A. Barnhill (Mrs. Barnhill) is entitled to relief as an

innocent spouse under section 6013(e).    Unless otherwise

indicated, 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.

                          FINDINGS OF FACT

       Petitioners were residents of Burbank, California, at the

time that they filed their petition.    They were married on

April 15, 1960, and continuously lived together thereafter.

Mrs. Barnhill attended Pacific Lutheran University in Parkland,

Washington, completing 2 years of education in general business

and liberal arts classes.    During the years in issue, however,

Mrs. Barnhill was not employed outside of the home.     Joseph L.

Barnhill, Jr. (Mr. Barnhill), was a business consultant during

the years in issue.

       On their joint Federal income tax returns for the years in

issue, among other things, petitioners reported the following:
                                - 3 -

              Business      Partnership         Adjusted
Year           Income         Losses          Gross Income

1980          $ 80,034       $(197,975)       $(117,849)
1981           115,099        (228,661)        (229,807)
1982           136,596        (228,661)        (318,667)
1983            92,259         (69,870)        (294,885)

(The differences between the total of business income and
partnership losses reflected in the adjusted gross income figures
set forth above are attributable to a large net operating loss
carryover in 1983 and miscellaneous small items for the earlier
years.)

       The partnership losses claimed on petitioners’ returns for

the years in issue were attributable to Mr. Barnhill’s investment

in an entity known as Winchester Oil and Gas Associates.

Mr. Barnhill did not consult with Mrs. Barnhill before he made

that investment, and she had no actual knowledge concerning the

investment.    Winchester Oil and Gas Associates was part of a tax

shelter project commonly referred to as “Electra/Hemisphere”.    In

a Stipulation of Settled Issues filed May 18, 1994, petitioners

conceded that they were not entitled to the net operating losses

claimed on their returns for the years in issue relating to

Winchester Oil and Gas Associates.

       When the joint returns for the years in issue were presented

by Mr. Barnhill to Mrs. Barnhill for signature, she did not read

them or attempt to read them.    Mr. Barnhill told her that she was

required by law to sign the returns, and he assured her that

there was nothing wrong with the returns.    Mrs. Barnhill trusted

Mr. Barnhill to make wise decisions concerning financial and tax

matters.
                                 - 4 -

     During the years in issue, petitioners maintained joint

accounts at Valley National Bank, United California Bank, and

Wells Fargo Bank.   In about 1967, petitioners purchased a

residence in Burbank, California.    Between 1975 and 1985,

petitioners improved their residence with a 450-square-foot

addition, a swimming pool and a spa, at a cost of approximately

$100,000.

     On April 1, 1994, Mr. Barnhill executed a Grant Deed in

which petitioners’ residence was transferred to Mrs. Barnhill.

Also, on April 1, 1994, Mrs. Barnhill executed an Acknowledgment

of Sole and Separate Property, in which she agreed that she had

no claim to a computer business operated by Mr. Barnhill, and she

waived any right of spousal support from Mr. Barnhill.

     From 1986 through the time of trial, Mrs. Barnhill was

employed for wages.   She seeks innocent spouse treatment “in

order to avoid garnishments.”

                                OPINION

     Spouses filing a joint tax return are jointly and severally

liable for the tax arising therefrom.     Sec. 6013(d).   If,

however, a taxpayer spouse satisfies the requirements of section

6013(e), he or she is relieved from such joint and several

liability.

     Section 6013(e) provides:


          (e) Spouse Relieved of Liability in Certain
     Cases.--
                                 - 5 -

               (1) In general.--Under regulations prescribed
          by the Secretary, if--

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

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

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

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

          then the other spouse shall be relieved of
          liability for tax (including interest, penalties,
          and other amounts) for such taxable year to the
          extent such liability is attributable to such
          substantial understatement.


In addition, the understatement must exceed a specified

percentage of Mrs. Barnhill’s adjusted gross income for the

preadjustment year.    Sec. 6013(e)(4).   She bears the burden of

establishing that each of the requirements of section 6013(e) has

been satisfied.    Rule 142(a); Bokum v. Commissioner, 992 F.2d

1132 (11th Cir. 1993), affg. 94 T.C. 126 (1990); Sonnenborn v.

Commissioner, 57 T.C. 373, 381-383 (1971).

     The parties agree that joint returns were filed by

petitioners for each of the years in issue and that the returns

contained a substantial understatement of tax attributable to
                                - 6 -

grossly erroneous items of Mr. Barnhill.   Respondent contends,

however, that Mrs. Barnhill has not satisfied the requirements of

section 6013(e)(1)(C) or (D).

     The undisputed testimony of petitioners is that Mr. Barnhill

made all financial decisions during the marriage and that

Mrs. Barnhill did not have actual knowledge concerning Winchester

Oil and Gas Associates or the contents of petitioners’ tax

returns.   Mrs. Barnhill testified that she was uneasy about

signing “legal documents” but that she trusted Mr. Barnhill with

respect to the tax returns and believed his representation that

she was required by law to sign them.   She testified also that

she never read nor made an attempt to read the tax returns and

that, therefore, she was unaware of the contents.

     A spouse seeking relief under section 6013(e) has reason to

know of substantial understatements on joint returns “if a

reasonably prudent taxpayer in her position at the time she

signed the return could be expected to know that the return

contained the substantial understatement” or that further

investigation was warranted.    Price v. Commissioner, 887 F.2d

959, 965 (9th Cir. 1989), revg. an Oral Opinion of this Court.

The test is a subjective one, looking to such factors as the

alleged innocent spouse’s level of education, involvement in the

family’s financial affairs, the presence of lavish or unusual

expenses or any large unexplained increases in the family’s

standard of living, and the culpable spouse’s evasiveness and
                               - 7 -

deceit concerning the couple’s finances.   Price v. Commissioner,

supra; Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir.

1989), affg. T.C. Memo. 1988-63.

     A spouse cannot obtain the benefits of innocent spouse

protection “<by simply turning a blind eye to--by preferring not

to know of--facts fully disclosed on a return, of such a large

nature as would reasonably put such spouse on notice that further

inquiry needs to be made.’”   Price v. Commissioner, supra at 965-

966 (quoting Levin v. Commissioner, T.C. Memo. 1987-67).     If a

duty of inquiry arises and is not satisfied by the spouse, then

constructive knowledge of the understatement may be imputed to

that spouse.   Price v. Commissioner, supra.

     As set out above, in this case, the tax returns signed by

Mrs. Barnhill, during some of the years in which substantial

improvements were being made to petitioners’ personal residence,

claimed substantial losses and reported large negative amounts of

adjusted gross income.   A reasonably prudent taxpayer in

Mrs. Barnhill’s situation would thus have been put on notice of

and would have had a duty to inquire about the claimed tax

losses.   Because she failed even to look at the returns that she

signed, Mrs. Barnhill failed to satisfy her duty of inquiry.    Cf.

Pietromonaco v. Commissioner, 3 F.3d 1342 (9th Cir. 1993), revg.

T.C. Memo. 1991-361, in which the Court of Appeals for the Ninth

Circuit concluded that, even if the wife had reviewed the return

in question, the difference between the reported expenditures and
                                - 8 -

income was not so extraordinary as to lead a reasonably prudent

person in her position to be alerted to problems.     As we have

said before, innocent spouse relief is designed to protect the

innocent, not the intentionally ignorant.      Cohen v. Commissioner,

T.C. Memo. 1987-537; Dickey v. Commissioner, T.C. Memo. 1985-478.

We are not persuaded that Mrs. Barnhill did not have reason to

know that there were substantial understatements of tax on the

returns in issue.

     Moreover, there is no evidence that it would be inequitable

to hold Mrs. Barnhill liable for the deficiencies in issue here.

This is not a case where the spouse seeking relief has been left

alone to satisfy the deficiencies.      Cf. Pietromonaco v.

Commissioner, supra; Price v. Commissioner, supra.      Petitioners

are still married and continue to share the benefits and burdens

of that relationship just as they shared the benefits of the tax

savings claimed on the joint returns for the years in issue.

They have pointed to no circumstances that make it unfair to hold

her to the liability determined with respect to those joint

returns.   A party to a joint return is not relieved of liability

merely because the transactions reported on the return are all

attributable to the other spouse.    We agree with respondent that

Mrs. Barnhill has failed to satisfy the requirements of either

section 6013(e)(1)(C) or (D).

     To reflect the stipulation of settled issues and our

determination herein,
- 9 -

             Decision will be entered

        under Rule 155.
