                        T.C. Memo. 1997-18



                      UNITED STATES TAX COURT



               GLENYCE R. PETERSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17376-94.                    Filed January 8, 1997.



     Terry L. Moore, for petitioner.

     Mark J. Miller, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WRIGHT, Judge:   Respondent determined deficiencies in

petitioner’s Federal income tax for taxable years 1990 and 1991

in the amounts of $20,958 and $27,090, respectively.   Respondent

further determined that petitioner is liable for additions to tax
                                - 2 -

under section 6651(a)(1)1, in the amount of $2,625 for taxable

year 1990, and in the amount of $5,280 for taxable year 1991, for

failing to timely file tax returns for those taxable years.

Respondent also determined that petitioner is liable for the

accuracy-related penalty pursuant to section 6662(a), in the

amount of $4,192 for taxable year 1990, and in the amount of

$5,418 for taxable year 1991.   The sole issue for decision is

whether petitioner qualifies for "innocent spouse" relief under

section 6013(e) for either taxable year 1990 or 1991.    We hold

that she does not.

                         FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein.   At the time the petition was filed in this

case, petitioner resided in Menomonie, Wisconsin.

     Petitioner and her former husband, Carl L. Peterson (Mr.

Peterson), were married in 1973.   They were divorced in 1993.

The couple filed a joint Federal income tax return for taxable

year 1990 on October 9, 1991.   They filed their joint Federal

income tax return for taxable year 1991 on August 18, 1992.

     Petitioner received a bachelor's degree in home economics

from the University of Wisconsin in 1958.   She received a

     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect during the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 3 -

master's degree in home economics from the same institution in

1963.    After receiving her degrees, petitioner became a school

teacher, teaching at both the junior high and senior high school

levels.    She continued teaching at the high school level until

1968 when she became a professor of home economics at the

University of Wisconsin, located in Stout, Wisconsin.    Since

1968, petitioner has been a college professor.    Petitioner's

expertise lies in the area of textile design and quality

analysis.

        Petitioner's former husband, Mr. Peterson, was an attorney

who practiced law in Menomonie, Wisconsin, during the years at

issue.    He was granted a power of attorney over the financial

affairs of Martha Burgess (Burgess) in 1985, following the death

of her husband.    Mr. Peterson served in this capacity until

Burgess' death in 1990.    After Burgess' death, her brother, Ralph

Grundman (Grundman), was appointed administrator of her estate

(the estate).    Grundman retained Mr. Peterson to serve as the

estate's attorney.    In February 1991, Grundman died and his

widow, Edna (Edna), replaced him as administratrix of the estate.

Mr. Peterson suffered a stroke in June 1991.

     Sometime after February 1991, Edna, in her capacity as

administratrix of the estate, began receiving notices regarding

the estate's delinquent tax status.     This concerned Edna, and she

initiated an inquiry into the estate's condition.    An accounting

of the estate's assets provided by Mr. Peterson was incomplete,
                                 - 4 -

and his affiliation with the estate was terminated in February

1992.   Soon thereafter, Edna hired Roger Schilling (Schilling), a

certified public accountant, to perform an extensive examination

of the estate.    Schilling's examination revealed that Mr.

Peterson had misappropriated $136,901.92 from the estate during

1990, and $186,000 from the estate during 1991.

     In March 1994, Mr. Peterson was indicted on three counts of

theft, under Wis. Stat. sec. 943.20(1)(b)(West 1996).    Mr.

Peterson pleaded guilty to two counts and was sentenced to 15

years in prison.

     In addition to Mr. Peterson's occupation as an attorney and

petitioner's occupation as a college professor, the couple also

owned and operated a beef farm during the years at issue.      The

name of this farm was "Mill Road Limousins."

     During the years at issue, petitioner and Mr. Peterson

maintained at least 2 joint bank accounts at local financial

institutions.    One of these accounts was with Valley Bank (the

Valley account) and the other was with Menomonie Farmer's Credit

Union (the Menomonie account).    The couple conducted their

personal and business affairs from both accounts.    Between

February 3, 1990 and January 3, 1991, petitioner and Mr. Peterson

wrote checks against the Valley account totaling $111,100.72.        Of

this amount, petitioner wrote checks totaling $88,532.95, and Mr.

Peterson wrote checks totaling $22,567.77.    The records for the

Valley account indicate that the account had a balance of
                                 - 5 -

$6,336.96 on February 1, 1990 and $4,934.95 on January 3, 1991.

Between June 13, 1990 and January 2, 1991, petitioner and Mr.

Peterson wrote $31,476.39 worth of checks against the Menomonie

account.    Of this amount, petitioner wrote checks totaling

$8,519.84, and Mr. Peterson wrote checks totaling $4,728.07.     An

employee named Jeff White, who worked for the Petersons, wrote

checks against the account totaling $11,699.19.2   The records

from the Menomonie account indicate that the account had a

balance of $20.90 on March 6, 1990 and $3,892.79 on December 31,

1990.    Petitioner managed the account records for both of these

accounts.

     Mr. Peterson prepared the couple's 1990 Federal income tax

return.    That return reflects the following amounts of gross

income:

     Wages                 $64,258
     Interest                1,091
     Other gains             5,280
     Gross rents            15,982
     Gross farm income       3,570
           total           $90,181

The couple's 1990 return also reflects the following tax

withholdings and expenditures:

     Federal income tax withholdings           $ 10,458.00
     Social Security tax withholdings             4,962.43
     State tax withholdings                       4,082.18
     Rental expenses                             11,465.00
     Farm expenses                               65,219.00
     Depreciable assets purchased                95,319.86
          total                                $191,506.47

     2
      It is unclear from the record who wrote the remaining
$6,529.29 worth of checks.
                                - 6 -



Accordingly, as reflected on the couple's 1990 tax return, a

difference of $101,325.47 exists between the amount of gross

income and total withholdings and expenditures.

     None of the funds that Mr. Peterson misappropriated in 1990

was reported on the couple's joint return for that year, and,

because their beef farm operation generated large business losses

that offset the couple's reported income, the couple reported no

Federal income tax liability for taxable year 1990.   Prior to

signing the couple's 1990 joint return, petitioner examined its

content and expressed concern with a farm loss but nonetheless

signed the return.

     In February 1992,   Mr. Peterson's daughter, Lucy, an

attorney practicing in Mr. Peterson's firm, informed petitioner

that Mr. Peterson had embezzled an undetermined sum from the

estate.   Prior to this time, petitioner had no actual knowledge

of the embezzlements.    When petitioner was examining the couple's

joint return for 1991, she asked Mr. Peterson whether the

embezzled funds were being reported on the return.    Mr. Peterson

replied in the affirmative and informed petitioner that $45,000

was being reported on a Schedule C attached to the return in

order to account for the funds that he embezzled during 1991.

Having limited this amount to $45,000, $141,000 of the amount Mr.

Peterson misappropriated in 1991 was not reported on the couple's

1991 joint return.
                                 - 7 -

     Respondent determined that the amounts of unreported

embezzlement income in 1990 and 1991 were $115,500 and $168,500,

respectively.   The parties now agree, however, that the actual

amounts of unreported income were $136,901 and $141,000 for 1990

and 1991, respectively.

                               OPINION

     As a general rule, a husband and wife who file joint tax

returns are jointly and severally liable for Federal income tax

due on their combined incomes.    Sec. 6013(d)(3); Resser v.

Commissioner, 74 F.3d 1528, 1534 (7th Cir. 1996), revg. T.C.

Memo. 1994-241; Park v. Commissioner, 25 F.3d 1289, 1292 (5th

Cir. 1994), affg. T.C. Memo. 1993-252.   Section 6013(e), however,

mitigates this general rule to some extent.    Park v.

Commissioner, supra.   Nonetheless, Congress regards joint and

several liability as an important counterpart to the privilege of

filing joint tax returns, which generally results in a lower tax

on the combined incomes of spouses than would be due were they to

file separate returns, and any relaxation of the rule of joint

and several liability depends upon compliance with the conditions

of section 6013(e).    Sonnenborn v. Commissioner, 57 T.C. 373,

380-381 (1971).   However, because of its remedial purpose, the

"innocent spouse" rule, as section 6013(e) is commonly referred,

must not be given an unduly narrow or restrictive reading.

Friedman v. Commissioner, 53 F.3d 523, 528-29 (2nd Cir. 1995),

affg. in part and revg. in part T.C. Memo. 1993-549; Sanders v.
                               - 8 -

United States, 509 F.2d 162, 167 (5th Cir. 1975).   The question

of whether a taxpayer has established that he or she is entitled

to relief as an "innocent spouse" is one of fact.   Park v.

Commissioner, supra at 1291.

     Pursuant to section 6013(e)(1), an "innocent spouse" is

relieved of liability if he or she proves that: (1) A joint

return has been made for a taxable year; (2) on such return there

is a substantial understatement of tax attributable to grossly

erroneous items of the other spouse; (3) he or she did not know,

and had no reason to know, of such understatement when he or she

signed the return; and (4) after consideration of all the facts

and circumstances, it would be inequitable to hold him or her

liable for the deficiency in income tax attributable to such

understatement.   See Purcell v. Commissioner, 86 T.C. 228, 235

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

burden of establishing that each of the four requirements of

section 6013(e) has been satisfied.    Purcell v. Commissioner, 826

F.2d at 473; Sonnenborn v. Commissioner, supra at 381-383.

Moreover, the requirements of section 6013(e) are conjunctive; a

failure to meet any one requirement prevents a spouse from

qualifying for relief.   Park v. Commissioner, supra at 1292;

Purcell v. Commissioner, supra; Bokum v. Commissioner, 94 T.C.

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

     The parties agree that petitioner and Mr. Peterson filed a

joint return for each of the taxable years at issue.   The parties
                                 - 9 -

also agree that there is a substantial understatement of tax

attributable to grossly erroneous items of Mr. Peterson for each

of the taxable years at issue.    Respondent contends, however,

that petitioner knew or had reason to know of such substantial

understatements and that it would not be inequitable to hold her

liable for the deficiencies attributable to those

understatements.   Petitioner disagrees.

Section 6013(e)(1)(C)

     In resolving whether petitioner had reason to know that the

returns she signed for the years at issue contained substantial

understatements within the meaning of section 6013(e)(1)(C), the

Court must inquire whether a reasonably prudent person, under the

circumstances of petitioner, could have been expected to know at

the time of signing each return that each such return contained a

substantial understatement or that further investigation was

warranted.   Bliss v. Commissioner, 59 F.3d 374, 378 (2d Cir.

1995), affg. T.C. Memo. 1993-390; Park v. Commissioner, supra at

1293 (citing Sanders v. United States, supra at 166-167 and n.5);

Bokum v. Commissioner, supra at 148.     The relevant knowledge is

of the transaction giving rise to the income omitted from the

return, rather than of the tax consequences of such transaction.

Quinn v. Commissioner, 524 F.2d 617, 626 (7th Cir. 1975).

Consequently, a spouse who has reason to know of such a

transaction does not qualify for relief as an "innocent spouse."

Park v. Commissioner, supra; Sanders v. United States, supra.
                               - 10 -

Additionally, a spouse may have a duty to inquire further if he

or she knows enough facts so as to be placed on notice of the

possibility of a substantial understatement.    Guth v.

Commissioner, 897 F.2d 441, 444-445 (9th Cir. 1990), affg. T.C.

Memo. 1987-522.    Factors to be considered in determining whether

a taxpayer had reason to know within the meaning of section

6013(e)(1)(C) include:    (1) The level of education of the spouse

seeking relief; (2) the alleged innocent spouse's involvement in

his or her family's financial and business activities; (3) any

substantial unexplained increase in the family's standard of

living; and (4) the culpable spouse's evasiveness and deceit

about the family's finances.    Resser v. Commissioner, supra at

1536.    In reaching our decision, we consider the interaction

among these factors, and different factors may predominate in

different cases.    Bliss v. Commissioner, supra at 378.

     With respect to each taxable year at issue, we find that

petitioner has failed to establish that she had no reason to know

that the return contained a substantial understatement.

     We first consider petitioner's level of education.    It is

clear from the record, as well as from our observations at trial,

that petitioner is a highly educated, intelligent woman.    She

holds undergraduate and graduate degrees from a respected

academic institution.    Not only has she taught at the high school

level, but she has been a university professor for nearly 20

years.    Despite such accomplishments and experience, however,
                               - 11 -

petitioner argues that, because her area of expertise is limited

to the study of fabrics and clothing, rather than business and

accounting, we should attribute little if any weight to her

academic degrees and status as a professor.   We reject

petitioner's efforts to attenuate her academic accomplishments by

pointing to the nature of her expertise.    Based on the record in

the instant case, we are satisfied that a reasonably prudent

taxpayer with petitioner's education would have had the ability

to understand that there was a substantial understatement on each

of the joint returns.   While it is not uncommon for courts to

conclude that highly educated intelligent taxpayers are entitled

to innocent spouse relief, cf. Resser v. Commissioner, 74 F.2d

1528 (7th Cir. 1996); Friedman v. Commissioner, 53 F.3d 523 (2d

Cir. 1995) ; Foley v. Commissioner, T.C. Memo. 1995-16; Robertson

v. Commissioner, T.C. Memo. 1992-32, the facts of the instant

case do not support a similar conclusion.   We do not believe that

it was necessary for petitioner to have possessed specialized

knowledge and education in order for her to have had reason to

know income was being omitted from her joint returns.     This case

does not involve transactions the nature of which would require

special understanding or knowledge to appreciate.   Rather, it

involves the omission of embezzlement income.   Cf. Resser v.

Commissioner, supra.    That Mr. Peterson's law practice may have

been complex in nature, and despite petitioner's professed lack

of knowledge with respect to the operation of that practice, is
                              - 12 -

inconsequential.   Accordingly, we find that petitioner's level of

education supports respondent's claim that petitioner knew or had

reason to know of the substantial understatements contained in

the joint returns for both taxable years at issue.

     The second factor we consider when assessing whether a

taxpayer had reason to know of the existence of a substantial

understatement at the time such taxpayer signed his or her return

focuses on the taxpayer's involvement in his or her family's

business and financial affairs.   We separately analyze this

factor with respect to each taxable year at issue.

                         Taxable Year 1990

     Petitioner managed her family's checkbooks during taxable

year 1990.   She also was her household's principal bill payer.

During taxable year 1990, petitioner drew checks totaling

approximately $97,052 against the family's bank accounts.

Similarly, petitioner's former husband drew checks totaling

approximately $27,296 against the accounts.   Additionally,

another $18,228 was drawn against the accounts.   Consequently, at

least $142,576 passed through these accounts during taxable year

1990.   This was approximately $52,000 more than the gross income

of $90,181 reported on the Petersons' return for 1990.   As

manager of the bank accounts, petitioner was obviously aware of

this activity.

     Petitioner attempts to clarify this disparity by explaining

that her former husband borrowed substantial amounts of money and
                              - 13 -

cashed in various life insurance policies during 1990.     The

proceeds from such loans and insurance policies, petitioner

contends, more than account for the imbalance between the

couple's earnings and expenditures for taxable year 1990.     At

trial, however, when questioned whether she could substantiate

such allegations, petitioner explained that, although she

possessed documentary proof of the above-referenced loans, she

had not brought such documentation to court.    Moreover, other

than her own testimony, petitioner did not offer any

corroboration for her assertion regarding the life insurance

policies allegedly cashed in by her former husband.    Although

petitioner's testimony regarding the loans and life insurance

policies was not contradicted at trial, we are not required to

accept petitioner's self-serving testimony if we determine it to

be improbable or questionable.   Lovell & Hart, Inc. v.

Commissioner, 456 F.2d 145, 148 (6th Cir. 1972), affg.     T.C.

Memo. 1970-335; MacGuire v. Commissioner, 450 F.2d     1239, 1244

(5th Cir. 1971), affg.   T.C. Memo. 1970-89; Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986); see also Lerch v.

Commissioner, 877 F.2d 624 (7th Cir. 1989); Shapiro v. Rubens,

166 F.2d 659, 666 (7th Cir. 1948).     Furthermore, it has long been

settled that a party's failure to introduce evidence within his

or her possession, and which, if true, would be favorable to him

or her, gives rise to the presumption that if produced such

evidence would be unfavorable.   Wichita Terminal Elevator Co. v.
                                - 14 -

Commissioner, 6 T.C. 1158 (1946), affd. 162 F.2d 513 (10th Cir.

1947); see also Glimco v. Commissioner, 397 F.2d 537, 541 (7th

Cir. 1968, affg. T.C. Memo. 1967-119); Frierdich v. Commissioner,

925 F.2d 180 (7th Cir. 1991).

     Petitioner also attempts to restrict the amount of weight we

attribute to her involvement in her family's financial and

business affairs by arguing that Mr. Peterson's embezzlement

activities occurred at his law office and not at the couple's

residence, explaining that the embezzled funds were funneled

through the law practice and that she possessed minimal knowledge

about such practice.   This argument is without merit as it

attempts to shift our focus of inquiry from her family's

financial activities to Mr. Peterson's law practice.   Granted,

petitioner may not have known much about her former husband's law

practice, but she knew how much money the family was spending and

how much it was reporting as income.

     A taxpayer claiming "innocent spouse" relief cannot simply

turn a blind eye to facts within his or her reach that would have

put a reasonably prudent taxpayer on notice that further inquiry

was necessary.   Sanders v. United States, 509 F.2d at 169; Bokum

v. Commissioner, 94 T.C. at 148; McCoy v. Commissioner, 57 T.C.

732, 734 (1972).   Even a cursory examination of petitioner's 1990

return should have placed her on notice that something was amiss.

The return listed expenditures and tax withholdings totaling

approximately $191,506.   Of this amount, roughly $95,319 is
                             - 15 -

attributable to assets acquired for the beef farm and $65,219 is

attributable to out-of-pocket Schedule F expenses.    Despite

whether petitioner was aware of the tax withholdings, or even the

depreciation deductions claimed on the return, she was fully

aware of the out-of-pocket expenditures.    Not only did she write

checks in order to pay many of the farm expenses, petitioner's

former husband did not conceal the assets acquired for the

couple's farm; i.e. the vehicles, farm equipment, livestock, etc.

In fact, the nature of such assets make them noticeable, so

petitioner was undoubtedly aware of there existence.    In any

event, a summary review of the return indicates that, even

without regard to living expenses, the expenditures and tax

withholdings totaled at least $101,325 more than the $90,181

reported as gross income for taxable year 1990.

     We conclude that petitioner had sufficient involvement in

her family's financial affairs to put a reasonable person in her

position on notice that the income reported in her 1990 return

was erroneous or that further inquiry was warranted.

                        Taxable Year 1991

     Just as she did for taxable year 1990, petitioner managed

her family's checkbooks for taxable year 1991.    On their 1991

return, petitioner and her former husband reported $45,000 of the

$186,000 that Mr. Peterson had embezzled during the taxable year.

Petitioner maintains that at the time she signed the return on

August 15, 1992, she believed that all funds embezzled by Mr.
                             - 16 -

Peterson during taxable year 1991 were reported on the return and

that that amount totaled $45,000.   She claims that she

specifically asked Mr. Peterson whether all embezzled funds were

reported on the return and that Mr. Peterson assured her that the

above-referenced $45,000 figure accounted for all such funds.

Further, petitioner asserts that she inquired at Mr. Peterson's

law office as to whether anyone there knew the actual amount that

Mr. Peterson had embezzled during 1991.   Office personnel, she

testified, told her that the estate had received special

treatment and that, as a result of such treatment, and because no

paper trail had been created, the actual amount of Mr. Peterson's

embezzlement could not be determined.   Petitioner also claims to

have been told that the estate's file had been forwarded to an

attorney unaffiliated with Mr. Peterson's firm, and that, as a

result, she was unable to pursue the matter further.

     Respondent attempts to refute each of these allegations.

Specifically, she argues that, because Mr. Peterson was a known

embezzler and had suffered from a memory-impairing stroke the

prior year, it was unreasonable for petitioner to accept his word

that he had only embezzled $45,000 in 1991 and that all such

embezzled funds were reported on the couple's 1991 return.

Instead, respondent claims, petitioner should have contacted the

attorney who had replaced Mr. Peterson as the estate's attorney

in order to determine the validity of Mr. Peterson's

representation that all embezzled funds were accounted for in the
                                - 17 -

return.    Because petitioner did not conduct such an inquiry,

respondent contends that she failed to discharge her duty to

inquire.    Consequently, respondent maintains that, at the time

she signed her 1991 return, petitioner knew or had reason to know

that such return contained a substantial understatement.

     We find respondent's argument in this regard unpersuasive.

We reject her assertion that petitioner was obligated wholly to

discard the trust and confidence she had in Mr. Peterson simply

because he had engaged in prior illegal activity.     However,

petitioner bears the burden of proof on this issue, and she has

fallen short in carrying that burden.     Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933); see Purcell v. Commissioner, 826

F.2d at 473; Sonnenborn v. Commissioner, 57 T.C. at 381-383

(1971).     Petitioner's argument with respect to taxable year 1991

is bootstrapped to her argument with respect to taxable year

1990.     She maintains that she lacked reason to know of the

understatement for 1991 because her husband's embezzlement

activities took place at his law office and not at the couple's

residence.     For reasons explained earlier in this opinion, we

find this argument unpersuasive.     Petitioner has provided little

convincing evidence in this case, and her arguments are cursory

and attenuated.      Moreover, although petitioner testified that

she questioned the staff at Mr. Peterson's office about the

embezzlement, she failed to corroborate that testimony.     Because

petitioner's testimony in this regard is self-serving and
                              - 18 -

questionable, we find it to be unreliable and lacking

credibility.3   Accordingly, we conclude that petitioner has

failed to establish that she lacked involvement in her family's

financial and business affairs to an extent sufficient to

conclude that she had no reason to know that the income reported

in the couple's return for taxable year 1991 was erroneous.

     The third factor we consider is the presence of unusual or

lavish expenditures by petitioner's family.   The presence of

unusual or lavish expenditures may put a taxpayer on notice that

it is probable that income is being omitted from a joint return.

Estate of Jackson v. Commissioner, 72 T.C. 356, 361 (1979).     A

taxpayer claiming relief as an "innocent spouse" cannot close his

or her eyes to unusual or lavish expenditures that might have

alerted him or her to unreported income.   Terzian v.

Commissioner, 72 T.C. 1164, 1170 (1979); Mysse v. Commissioner,

57 T.C. 680, 699 (1972).

     Petitioner's argument with respect to this factor is

considerably thin.   It essentially amounts to a general denial

that either she or her former husband experienced any change in

their individual lifestyles and that the couple did not make any

unusual or lavish expenditures during either taxable year at


     3
      As previously noted, uncontradicted questionable testimony
need not be accepted by this Court. See Lovell & Hart, Inc. v.
Commissioner, 456 F.2d 145, 148 (6th Cir. 1972), affg. T.C. Memo
1970-335; MacGuire v. Commissioner, 450 F.2d 1239, 1244 (5th
Cir. 1971) affg. T.C. Memo. 1970-89; Tokarski v. Commissioner, 87
T.C. 74, 77 (1986).
                               - 19 -

issue.   We concluded that petitioner has failed to satisfy her

burden of proof as to this factor with respect to both taxable

years at issue.    In taxable year 1990, the couple acquired more

than $95,000 of depreciable assets for their farming operation.

Among the assets purchased were at least 19 head of livestock, a

Ford truck, two trailers, and two tractors.    Whether such

purchases are to be considered lavish and unusual for

petitioner's household is obviously a question of fact, as "one

person's luxury can be another person'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 at 168.    But we are unable to make a proper assessment

of the asset acquisitions involved in this case because the

record lacks evidence against which an appropriate comparison can

be made.   Perhaps petitioner and her former husband routinely

acquired large quantities of livestock, as well as multiple

vehicles and farm equipment, but nothing in the record suggests

this to be the case.    In fact, petitioner does not even argue as

much.

     Similarly, with respect to taxable year 1991, other than

petitioner's general denial, as noted above, the record lacks

evidence of whether petitioner and her former husband made

unusual or lavish expenditures, or experienced significant

changes in lifestyle.    Persuasive evidence would have been

relatively easy for petitioner to provide, yet she elected not to
                              - 20 -

provide it, relying instead on her general denial.   Due to the

lack of persuasive evidence in the record, and in light of our

concerns with petitioner's credibility, we are simply reluctant

to conclude that petitioner's self-serving denial satisfies her

burden of proof as to this factor.

     The fourth factor we consider when assessing whether a

taxpayer had reason to know of the existence of a substantial

understatement at the time he or she signed the return focuses on

whether the taxpayer's spouse was forthright about the omitted

income.   Because petitioner did not receive actual knowledge of

the embezzlement income at issue in this case until February

1992, it is clear that Mr. Peterson was evasive with respect to

his embezzlement activities during both taxable years at issue.

However, while the record contains evidence that Mr. Peterson

might have maintained a "secret" checking account, such evidence

is not sufficient to convince us that the funds Mr. Peterson

embezzled were accumulated in that account.   To the contrary, it

is clear from the record that during 1990 a large amount of

otherwise unexplained cash flowed through the couple's two joint

accounts managed by petitioner.   Accordingly, though petitioner

did not acquire actual knowledge of her former husband's

embezzlement activity until after she signed the joint return for

taxable year 1990, we find that Mr. Peterson did not attempt to

conceal from petitioner the asset acquisitions or other

expenditures made with embezzled funds during that year.
                                - 21 -

     With respect to taxable year 1991, we find that petitioner

has established that her former husband attempted to conceal the

"extent" of his embezzlement activities by misleading petitioner

when she inquired whether the $45,000 entry on their return

accounted for all of the couple's 1991 embezzlement income.

     Having thoroughly examined the circumstances of the instant

case, we conclude that a reasonably prudent person would have

seriously questioned the gross income reported in the joint

return petitioner and her former husband filed for taxable year

1990.     None of the four factors discussed above favors petitioner

with respect to taxable year 1990.       We therefore conclude that

petitioner had a duty of inquiry with respect to the correctness

of the reported income and that she failed to discharge that

duty.     See Park v. Commissioner, 25 F.3d at 1293; Sanders v.

United States, supra at 167.     Accordingly, we find, based on the

entire record, that petitioner had reason to know of the

substantial understatement of tax on her 1990 return resulting

from the omission of the income embezzled by Mr. Peterson during

taxable year 1990.

        With respect to taxable year 1991, our examination of the

circumstances of the instant case indicates, and we find

accordingly, that petitioner has failed to establish that she had

no reason to know of the substantial understatement of tax on her

1991 return resulting from the omission of the income embezzled

by Mr. Peterson during taxable year 1991.       Of the four factors
                                - 22 -

discussed above, only Mr. Peterson's evasiveness benefits

petitioner.   The weight we attribute to such factor, however,

does not exceed the amount of weight we attribute to any of the

remaining three factors, each of which favors respondent.     In

light of the facts of the instant case, we do not think that Mr.

Peterson's evasiveness was of such an extent that petitioner

could not have had reason to know of the understatement of income

in the return.

Section 6013(e)(1)(D)

     The next matter we consider is whether it would be

inequitable to hold petitioner liable for the deficiencies in tax

attributable to her former husband's embezzlement activities.

See sec. 6013(e)(1)(D).    In answering this question, we take into

account all of the facts and circumstances.     Id.; sec.

1.6013-5(b), Income Tax Regs.    A factor to be considered is

whether the spouse seeking relief significantly benefited, either

directly or indirectly, from the omitted income.     Buchine v.

Commissioner, 20 F.3d 173, 181 (5th Cir. 1994), affg. T.C. Memo.

1992-36; sec. 1.6013-5(b), Income Tax Regs.    Normal support,

which is to be measured by a couple's circumstances, is not

considered a significant benefit.     Sanders v. United States,

supra at 168; Terzian v. Commissioner, 72 T.C. at 1172; Mysse v.

Commissioner, 57 T.C. at 699.    A significant benefit exists if

expenditures have been made which are unusual for the taxpayer's

accustomed lifestyle.     Terzian v. Commissioner, supra.   Other
                              - 23 -

factors include: (1) Whether the spouse seeking relief has been

deserted by the other spouse or is divorced or separated from

that spouse, sec. 1.6013-5(b), Income Tax Regs.; and (2) probable

future hardships that would be visited upon the purportedly

"innocent spouse" were he or she not relieved from liability.

Sanders v. United States, supra at 171 n.16.

     Based upon the record in the instant case, we conclude that

petitioner has failed to establish that she did not receive

significant benefits from the funds that Mr. Peterson embezzled

during taxable years 1990 and 1991.    For 1990, the record

indicates that the couple enjoyed more disposable income as a

result of the embezzled funds than would have been otherwise

available from the couple's reported earnings.    Petitioner has

failed to establish that Mr. Peterson used the embezzled funds in

a manner that did not benefit her significantly.    To the

contrary, and particularly with respect to taxable year 1990, the

record indicates that the funds were used for the significant

benefit of the family and its beef farm operation.    Petitioner

has not established that such benefits were consistent with her

then existing lifestyle, nor has she established that they

constituted normal support.

     When assessing whether it would be inequitable to hold

petitioner liable for the deficiencies attributable to Mr.

Peterson's embezzlement activity, we also consider whether

petitioner was deserted or divorced subsequent to that activity.
                             - 24 -

The couple did receive a divorce subsequent to 1991.   We find,

however, that such circumstance does not outweigh the significant

benefits petitioner received from the embezzled funds.

Furthermore, petitioner has not established that any hardship she

would encounter as a result of incurring liability for the

deficiencies attributable to the omission of the embezzled funds

from the 1990 or 1991 returns would make it inequitable to hold

her jointly liable for those deficiencies.

     We find, therefore, that it would not be inequitable to hold

petitioner liable for the understatements attributable to the

funds embezzled by Mr. Peterson in taxable years 1990 and 1991.

     Because petitioner has failed to satisfy all of the

conjunctive factors set forth in section 6013(e)(1), we hold that

she does not qualify for "innocent spouse" relief and is

therefore jointly and severally liable for the deficiencies in

tax, additions to tax, and penalties for 1990 and 1991.

     To reflect the foregoing,

                                        Decision will be

                                   entered under Rule 155.
