                        T.C. Memo. 1995-529


                      UNITED STATES TAX COURT


         JOSEPH T. WALKER AND NANCY WALKER, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent

         WEST JERSEY MANUFACTURING CO., INC., Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent1


     Docket Nos.     4923-90, 18842-90,   Filed November 8, 1995.
                     28294-91.

     Joseph T. Walker, pro se, in docket No. 4923-90.


     Mark E. Cedrone, for petitioner Nancy Walker, in docket No.

4923-90.

     Joseph T. Walker (an officer), for petitioner West Jersey

     Manufacturing Co., in docket Nos. 18842-90, 28294-91.

     Richard E. Buchbinder and Craig Connell, for respondent.




     1
      This Court granted petitioners' motion to consolidate on
Dec. 4, 1992.
                                      - 2 -

                     MEMORANDUM FINDINGS OF FACT AND OPINION

            PARR, Judge: Respondent determined deficiencies in

     petitioners' Federal income tax and additions to tax as follows:



                     Joseph T. and Nancy Walker
                     Docket No. 4923-90
                                              Additions to Tax
                          Year Deficiency     Sec. 6653(b)1
                          1978 $96,900.21     $48,450.11
                          1979 104,619.49     52,309.75
                          1980 183,321.39     91,666.07
                          1981 124,031.84     62,015.92

                 1     The fraud addition was determined as to Joseph T.
    Walker only.


            West Jersey Manufacturing Co., Inc.
            Docket Nos. 18842-90 and 28294-91

                                                   Additions to Tax
                                      Sec.              Sec.      Sec.
                      Sec.
     Year        Deficiency      6653(a)(1) 6653(a)(2)       6653(b)      6661

     3/31/78        $963.00      --           --             $481.50       -
     3/31/79     123,397.51      --           --             60,998.96     -
     3/31/80      81,435.75      --           --             40,717.87     -
     3/31/81     174,068.45      --           --             85,263.85     -
     3/31/82     101,585.07      --           --             101,585.07    -
                                              1
     3/31/83           0.00      $7,286.48                        --      $36,432.38
                                              2
     3/31/85      88,180.05      4,409.00                         --       22,045.01

            1
             50 percent of the interest due on $145,729.51.
            2
             50 percent of the interest due on the deficiency.
            After concessions, the remaining issues we must decide are:

(1) Whether respondent's determination with respect to unreported

taxable income of petitioner Joseph T. Walker (Mr. Walker), for 1978,

1979, 1980, and 1981, should be reduced to take into account certain

alleged additional cash payments Mr. Walker made to two individuals
                                - 3 -

that were involved in overbilling and kickback arrangements with Mr.

Walker and petitioner West Jersey Manufacturing Co., Inc.(West

Jersey); (2) whether Mr. Walker and petitioner Nancy Walker (Mrs.

Walker) filed joint individual income tax returns for 1978, 1979,

1980, and 1981; and (3) whether Mrs. Walker is entitled to relief for

any tax liabilities determined with respect to her for 1978, 1979,

1980, and 1981, as an innocent spouse under section 6013(e).2

                             FINDINGS OF FACT

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

stipulations of facts and attached exhibits are incorporated by this

reference.

          At the time their petition was filed, Mr. Walker and Mrs.

Walker resided in Stone Harbor, New Jersey. They were married in June

1963. From June 1963 through the time of the trial in the instant

cases, Mr. Walker and Mrs. Walker have been married to one another and

have resided together. Mr. Walker filed with the Internal Revenue

Service (IRS), for each of the years 1978, 1979, 1980, and 1981, a

Form 1040, Individual Income Tax Return, which was stated to be the

joint individual income tax return of himself and Mrs. Walker.

Although Mr. Walker signed his own name to each of the returns, he did

not have Mrs. Walker execute the returns. Mr. Walker or another

individual, acting at Mr. Walker's direction, subscribed Mrs. Walker's


          2
           All section references are to the Internal Revenue Code as
     in effect for the years in issue. All Rule references are to the
     Tax Court Rules of Practice and Procedure, unless otherwise
     indicated.
                                   - 4 -

purported signature to each of the returns.

            Prior to the time its petitions were filed, West Jersey, a

        New Jersey corporation, maintained its office and principal

place

        of business in New Jersey. West Jersey was incorporated in about

        1970 by Mr. Walker, William Reilly (Reilly), and a third

        individual. Mr. Walker and Reilly became the only shareholders

        of West Jersey sometime well prior to 1978.

            From 1978 through about 1984, Mr. Walker was the president

and a 50-percent shareholder of West Jersey. Reilly owned the other 50

percent of West Jersey's outstanding shares of stock and also served

as an officer of West Jersey.

            West Jersey engaged in the business of manufacturing and

selling steel pipe flanges. Substantially all of its sales were made

to various contractors working on nuclear power plant construction

projects throughout the country. West Jersey had been certified to

manufacture pipe flanges used in nuclear power plants and was one of

the few manufacturers of pipe flanges in the country which had such a

nuclear certificate.

        Overbilling and Kickback Arrangements

            During 1978 through 1981, West Jersey participated in

overbilling and kickback arrangements with two contractor purchasing

agents, Robert Short (Short) and William Simmel (Simmel), with respect

to certain purchases Short's and Simmel's respective employers made

from West Jersey. Short was employed as a purchasing manager with B.F.
                                   - 5 -

Shaw, Inc. (B.F. Shaw). Simmel was employed as a purchasing manager

with Pullman, Inc. (Pullman).

          The overbilling and kickback arrangement with Short covered

only certain specially fabricated items that Short ordered on behalf

of B.F. Shaw from West Jersey. The kickback arrangement did not apply

with respect to stock fabricated items that West Jersey sold B.F.

Shaw, because the prices West Jersey charged B.F. Shaw with respect to

the stock items generally were fixed under a previously established

price list for such stock items.

          Typically, overbilling would occur after Short or Simmel, as

purchasing agent for his employer, contacted Mr. Walker or another

West Jersey employee, requested a price quote on certain items, and

then placed an order for the items. With Short's or Simmel's knowledge

and connivance, the price West Jersey later billed and charged B.F.

Shaw or Pullman for the ordered items would 'be inflated above the

price originally quoted to Short or Simmel. Mr. Walker would record

the amounts West Jersey overbilled B.F. Shaw and Pullman (i.e., the

difference between the inflated price West Jersey charged and the

originally quoted price) in various notebooks he maintained for each

company. Pursuant to the overbilling and kickback arrangement with

Short, part of the overbilled amounts that West Jersey collected from

B.F. Shaw was required to be paid over to Short. Essentially, Short

was to receive a 50-percent share of the overbilled amounts that West

Jersey collected from B.F. Shaw. Similarly, under the overbilling and

kickback arrangement with Simmel, part of the overbilled amounts that
                                      - 6 -

West Jersey collected from Pullman was required to be paid over to

Simmel.

            During 1978 through 1981, some of West Jersey's funds were

diverted from West Jersey by Mr. Walker and Reilly, West Jersey's two

shareholders. They diverted and obtained these funds by having West

Jersey's bookkeeper write checks on West Jersey's corporate checking

account payable to various employees and vendors of West Jersey,

endorse the checks with the payee's name, cash the checks, and give

over the funds obtained to Mr. Walker or Reilly. These fictitious

payments to employees and vendors were then deducted on West Jersey's

income tax returns as part of its promotional expenses, freight, and

other miscellaneous expenses.

            During West Jersey's fiscal years ended March 31, 1979

through March 31, 1982, Reilly diverted and received funds from

     West Jersey as follows:

                      FYE            Amount

                      3/31/79        $61,828.38
                      3/31/80         65,986.10
                      3/31/81         69,945.58
                      3/31/82         28,184.91

     During 1978 through 1981, Mr. Walker diverted and received funds

from West Jersey as follows:

     Year                   Amount

     1978                   $150,997.52
     1979                    165,408.05
     1980                    277,621.19
     1981                    195,516.87
                                - 7 -

     However, some of these diverted funds Mr. Walker obtained were

then paid over by him to Short and Simmel pursuant to the

     respective overbilling and kickback arrangements with Short and

Simmel.

          During 1978, 1979, 1980, and 1981, Mr. Walker each year

used, respectively, $58,150, $50,705.16, $59,175, and $11,000.00, of

the funds he had diverted to purchase cashier checks payable to and

given to Simmel. Similarly, during 1980, Mr. Walker used $44,141.87 of

the diverted funds to purchase a boat for Short.

          Additionally, during 1980 and 1981, Short received a total

between $2,000 and $3,000 in cash from Mr. Walker. Mr. Walker further

paid for certain outings and trips of Short's, and also purchased

jewelry for Short. The cash, jewelry, outings, trips, and the boat

were treated by Mr. Walker and Short as payments to Short of amounts

due him under their overbilling and kickback arrangement.

          On its income tax returns for fiscal years ended March 31,

     1979, through March 31, 1982, West Jersey reported gross sales

as

     follows:

     Fiscal Year
     Ended     Gross Sales

     3/31/78    $2,745,276.60
     3/31/79    3,632,049.69
     3/31/80    3,584,660.75
     3/31/81    4,373,085.98
     3/31/82    3,780,177.24
                                    - 8 -


     During 1978 through 1981, West Jersey's respective annual gross

sales to B.F. Shaw (Short's company) and Pullman (Simmel's company)

were as follows:

                 Gross Sales To       Gross Sales To
     Year             B.F. Shaw            Pullman
     1978                  --              $455,939.02
     1979                  --               753,429.99
     1980             $445,040.51           937,052:08
     1981              410,675.97           513,501.72

            In 1984, a grand jury investigation was commenced with

respect to Mr. Walker's and West Jersey's activities during 1978

through 1981, in connection with their overbilling and kickback

arrangements with Short and Simmel.

            On April 1, 1985, the U.S. Attorney for the District of New

Jersey filed an information with the U.S. District Court for the

District of New Jersey, charging Mr. Walker with eight counts of

criminal tax violations and mail fraud, stemming from Mr. Walker's

actions, during 1978 through 1981, with respect to the overbilling and

kickback arrangements. On May 21, 1985, Mr. Walker pleaded guilty to

five of the eight counts of the information. On May 23, 1985, the U.S.

District Court entered its judgment of conviction against Mr. Walker

on the five counts, fined Mr. Walker $15,000, and sentenced him to be

placed on probation for a 5-year period.

     Mrs. Walker

     Mrs. Walker completed high school in 1959 and then attended a 1-

year program at a vocational school to become a medical technical
                                - 9 -

secretary. While attending the vocational school, during 1961, she

held a part-time job as a secretary to the administrator of a hospital

located in Philadelphia, Pennsylvania.

     Following her graduation from the vocational school, she

obtained full-time employment as a secretary and physical therapist at

another Philadelphia hospital. She worked at the hospital for

approximately 2 years until about October 1963.

     Mrs. Walker left her full-time job with the hospital in October

1963, due to medical difficulties she experienced during her pregnancy

with the Walkers' first child. The first-child was born on May 18,

1964. From 1964 through 1984, Mrs. Walker devoted herself to taking

care of her home and five children.

     While in high school, Mrs. Walker had taken courses in

bookkeeping and accounting. She later helped keep the books and

records of a skating club some of her children belonged to. Much

later, after she had resumed working in 1985, Mrs. Walker kept West

Jersey's books for a relatively short period of time.

     During 1978 through 1981, Mrs. Walker was involved to some

degree in keeping her and Mr. Walker's family records. She took care

of her and Mr. Walker's joint checking account by organizing canceled

checks by month in numerical order, and placing the canceled checks in

an accordion folder with the related monthly statement for the

account. Mrs. Walker wrote checks on the account to pay for most of

their household expenses. However, Mr. Walker and West Jersey's

bookkeeper made the deposits to the account.
                                - 10 -

     During 1978 through 1981, the only checking account that either

Mr. Walker or Mrs. Walker maintained was their joint checking account.

During 1978 through 1981, the total amount of checks they wrote, and

total amount of deposits they made, with respect to the account for

each year were as follows:

               Total Checks          Total Deposits
     Year      Written               Made
     1978      $209,693.94           $247,604.68
     1979      259,427.54            240,911.51
     1980      333,693.04            386,649.63
     1981      224,928.48            214,627.62


     On November 18, 1980, Mr. Walker paid $76,504.95 to Merrill

Lynch by writing a check on his and Mrs. Walker's joint checking

account. On April 16, 1981, Mr. Walker paid $15,680 to a Cadillac

dealership by writing a check on the account.

     During 1978 through 1981, the sources for the funds Mr.Walker

deposited each year into the joint checking account were as follows:

                          1978     1979             1980      1981
     Mr. Walker’s West $89,335.34 $89,l002.39     $99,676.26 $98,726.12
          Jersey Salary Net
          of Withholding
     Tax Refund           --       10,185.67       11,709.73     8,733.15
     West Jersey Loan    46,043.40 71,000.00       24,283.60        --
          Repayment Checks
     West Jersey "Reim- 66,091.19 12,803.51       135,000.00 61,889.60
          bursement" Checks
     West Jersey Check    --       --                 7,500.00     --
     for Unspecified
      Purpose
     Unknown Sources     46,134.75   57,919.94    108,480.04     45,278.75
                                - 11 -

     Mr. and Mrs. Walker's Lifestyle

     From the early 1970's through 1981, Mr. and Mrs. Walker and their

family lived very well. Following West Jersey's incorporation in 1970,

Mr. Walker began to earn substantially more income than he had earned

in prior years.

     During the early 1970's, Mr. Walker received an annual salary of

$200,000 from West Jersey. Prior to 1970, Mr. Walker had been employed

as a salesman at two steel companies. From 1963 through about 1968,

Mr. Walker worked at Bethlehem Steel. After 1968, he then worked for

about a year and a half as a salesman at Philadelphia Steel & Iron.

     However, beginning in about 1974, Mr. Walker's annual salary from

West Jersey was reduced significantly, from $200,000 to $130,000, as

the result of an IRS examination that concluded that the prior annual

salary of $200,000 was not reasonable compensation. With respect to

the $200,000 annual salary received during one or more of the years

prior to 1974, the IRS required Mr. Walker to treat salary in excess

of $130,000 as constructive dividend income. During 1978 through 1981,

Mr. Walker received annual compensation from West Jersey as follows:

     Year      Compensation
     1978      $130,000.00
     1979      130,000.00
     1980      145,937.50
     1981      144,950.00

     In 1969, Mr. and Mrs. Walker purchased for $72,000 a fivebedroom

home located in an affluent neighborhood in Cherry Hill,
                                - 12 -

New Jersey. The home has a swimming pool. Mr. and Mrs. Walker

own the home jointly. They paid the $72,000 purchase price for

the Cherry Hill home using proceeds from the sale of the prior

home which they owned and through obtaining a $40,000 20-year

mortgage loan.

     Mr. and Mrs. Walker used the Cherry Hill home as their principal

residence from 1969 through about 1989, and have continued to own it

through the time of the trial. In 1980, Mr. and Mrs. Walker paid about

$50,000 to renovate and remodel the kitchen of their Cherry Hill home.

     In 1974, Mr. and Mrs. Walker jointly acquired a vacation home at

the Jersey shore in Stone Harbor, New Jersey, which abuts the

shoreline of a bay. The home was built for them during 1973 and 1974.

They did not obtain a mortgage loan to acquire the Stone Harbor

property, but paid the full $125,000 purchase price for the property

in installments over the course of the home's construction. Until

about 1989, the home was used exclusively by them and their family as

a vacation home, and was not rented out to others. From 1990 through

the time of trial, the Stone Harbor home has been used as Mr. and Mrs.

Walker's principal residence.

     During 1978 through 1981, both the Cherry Hill and Stone Harbor

homes were nicely furnished. Mr. and Mrs. Walker purchased some

furnishings for the homes during 1978 through 1981, including

furnishings purchased when the kitchen of their Cherry Hill home was

remodeled in 1980.
                                - 13 -

     During 1978 through 1981, Mr. and Mrs. Walker employed a

housekeeper at their Cherry Hill home.

     At various times during 1978 through 1981,, Mr. and Mrs. Walker

drove a 1979 BMW, a 1981 BMW, a Cadillac, a 1976 Mercedes, and a

Subaru. These cars were held in Mrs. Walker's name. They acquired the

1979 BMW by paying some cash and trading in the 1976 Mercedes. They

later acquired the 1981 BMW by paying some cash and trading in the

1979 BMW. Subsequent to 1981, the 1981 BMW was traded in to acquire a

1990 Honda Accord held in Mrs. Walker's name that cost $15,200.

     During 1978 through 1981, Mr. and Mrs. Walker each owned at least

$20,000 in jewelry. A substantial portion of this jewelry was acquired

during 1978 through 1981. Among the items of jewelry that Mr. Walker

purchased and gave to Mrs. Walker, during 1978 through 1981, was a

diamond tennis bracelet and a Rolex watch.

     During 1978 through 1981, Mr. and Mrs. Walker spent between

$16,000 to $20,000 a year for skating lessons for some of their

children and in attending the children's skating competitions along

the East Coast, including competitions in Atlanta, Georgia; Lake

Placid, New York; and Virginia. During 1978 through 1981, they and

their children took family vacations in Aspen, Colorado; Lake Placid,

New York; and Florida. Mr. Walker also took vacations in the Bahamas

once or twice a year. His wife and family may have accompanied him on

some of his trips to the Bahamas during 1978 through 1981.

     From 1977 through about 1985, unbeknownst to Mrs. Walker, Mr.
                                 - 14 -

Walker carried on an affair with another woman. During 1978 through

1981, he helped support this woman by giving her about $15,000 a year

in cash and other gifts. In addition, he purchased a $10,000 BMW for

her in 1978.

     During 1978 through 1981, Mr. Walker and Reilly (West Jersey's

other shareholder) jointly owned several other corporations besides

West Jersey. One of their corporations owned and operated a 53-foot

Hatteras yacht and a 46-foot Hatteras sport fishing boat. Another

corporation owned and operated an airplane. In addition, during 1978

through 1981, West Jersey owned a Rolls Royce, and it or one of Mr.

Walker's and Reilly's other jointly owned corporations owned a

condominium.

     In about 1984, Reilly withdrew from the operation of West Jersey.

He then sued Mr. Walker to obtain payment for his interest in the

assets of all the corporations he and Mr. Walker jointly owned. As a

result, the airplane, boats, car, and condominium owned by West Jersey

and their other corporations were sold, and the proceeds divided

between Reilly and Mr. Walker.

     After Reilly's withdrawal from West Jersey's operation in 1984,

Mr. Walker continued to operate West Jersey and conduct its pipe

flange manufacturing business. Shortly before or after Reilly's

withdrawal, Mr. Walker loaned $300,000 to West Jersey. Mrs. Walker

resumed working and performed clerical tasks at West
                                - 15 -

Jersey's office in 1985. Later, after West Jersey's bookkeeper left,

Mrs. Walker kept West's Jersey's books for a short time.

     However, Mr. Walker's efforts to continue conducting West

Jersey's pipe flange manufacturing business were not successful,

because of adverse publicity about West Jersey's and Mr. Walker's

prior involvement in the overbilling and kickback arrangements. West

Jersey experienced a drastic decline in its sales and suffered

financial losses. After he concluded that West Jersey's business could

not be operated profitably, Mr. Walker liquidated its assets and

business in 1985.

     In about 1986, at least $40,000 that Mr. Walker obtained from the

liquidation of West Jersey's assets and business was used to

capitalize and establish another corporation, Piping Supplies, Inc.

(PSI). PSI's shares of stock were issued to Mrs. Walker and a son of

theirs who is an engineer or a machinist.

     PSI is engaged in a pipe flange manufacturing business similar to

the business that West Jersey previously conducted. As of the time of

trial, PSI had gross annual sales of between $1.3 million to $1.4

million.

     Mrs. Walker has served as PSI's president. Although Mr. Walker,

at various times from 1986 through the time of trial, has worked on a

daily basis at PSI, he has not drawn a salary from PSI. He and Mrs.

Walker have lived on the salary Mrs. Walker received from PSI.
                                 - 16 -

     Various Individual Tax Returns, Petition Filed By Mr. And Mrs.
Walker, And Their Pretrial Activities


     Prior to her marriage to Mr. Walker, Mrs. Walker prepared and

filed her own income tax returns. She knew of her obligation to file

tax returns.

     After Mr. Walker and Mrs. Walker were married in June 1963, Mr.

Walker, in 1964, prepared and filed a 1963 joint individual income tax

return for them, which included the income Mrs. Walker received during

1963 from her prior job at the Philadelphia hospital. From 1964

through at least about 1989, Mr. Walker continued to file yearly joint

individual income tax returns for himself and Mrs. Walker.

     Mrs. Walker was aware that Mr. Walker was filing these joint

returns for them. $he left the responsibility of filing their tax

returns to him. Mrs. Walker never sought to file a separate income tax

return for herself during their marriage, nor did she ever object to

Mr. Walker's filing a joint individual income tax return for them.

Throughout the course of their marriage, Mrs. Walker knew that Mr.

Walker retained the services of various accountants to help prepare

and file their joint income tax returns. During 1975 through 1989, she

and Mr. Walker occasionally met with one or more of their accountants

socially.

     Robert W. Gargone (Gargone) served as Mr. Walker's and Mrs.

Walker's personal accountant from about 1975 through 1989, and

prepared yearly joint individual income tax returns for them during

this time.   During the late 1970's and early 1980's, Gargone
                                   - 17 -

represented them during one or more examinations conducted by the IRS

of their previously filed income tax returns. During the course of

Gargone's service as their accountant, return preparer, or authorized

representative, neither Mr. Walker or Mrs. Walker ever told Gargone

that Mrs. Walker did not intend to file a joint tax return for any

year.

        The returns Mr. and Mrs Walker filed for each of the years from

1963 through 1977 were valid joint individual income tax returns of

Mr. and Mrs. Walker.

        Mr. and Mrs. Walker received tax refunds for 1978, 1979, 1980,

and 1981, as a result of the respective joint returns they filed for

those years.

        During the course of examinations the IRS conducted of their

1978,' 1979, 1980, and 1981 returns, Mrs. Walker never expressed any

indication of not having acquiesced to Mr. Walker's filing of the

returns as joint returns. During the period from about late December

1985 through 1988, she received in the mail various letters from the

IRS regarding their 1979, 1980, and 1981 tax liabilities, and was

aware that this correspondence was addressed both to her and Mr.

Walker. Each of the letters from the IRS enclosed a Form 872, Consent

to Extend the Time to Assess Tax. She discussed these letters with Mr.

Walker, and was told by him that they had to sign the enclosed Forms

872, which she did.

        A timely petition was filed on behalf of Mr. and Mrs. Walker on

March 19, 1990. They were represented by the same counsel until about

September 1993. Mrs. Walker's present counsel in the instant cases
                                - 18 -

represented both Mr. and Mrs. Walker from March 19, 1990 through April

14, 1993, ceased his representation of them pursuant to leave of this

Court, and then resumed being counsel solely to Mrs. Walker on

February 3, 1994.

     On August 30, 1990, Mr. and Mrs. Walker filed a motion to

suppress all evidence obtained from grand jury materials. This Court

denied their motion on February 5, 1992. See Walker v. Commissioner,

T.C. Memo. 1992-54.

     Sometime in October 1993, during the course of pretrial discovery

conducted by respondent, Mr. and Mrs. Walker for the first time

asserted that Mrs. Walker had not signed the 1978, 1979, 1980, and

1981 returns. In their responses to certain other interrogatories

served upon them by respondent, they also denied that, during or after

the years in issue, Mr. Walker (1)

transferred any assets of over $500 (other than for certain

automobiles) to Mrs. Walker; and (2) made any gifts to her.

                                OPINION

Mr. Walker's Unreported Taxable Income

     The parties agree that, during 1978 through 1981, Mr. Walker

diverted and received from West Jersey the funds determined in our

findings. They also agree that these diverted funds, less amounts Mr.

Walker used in purchasing cashier checks for Simmel and the boat for

Short, represent unreported taxable income of Mr. Walker for 1978,

1979, 1980, and 1981, except to the extent of additional cash payments

that Mr. Walker can establish were made by him "to (or for the direct

benefit of)" Short and Simmel
                                - 19 -

pursuant to the respective overbilling and kickback arrangements

with them.

       Mr. Walker contends he made additional cash payments to

Short and Simmel. He maintains that he directly gave them cash,

purchased for them items of expensive clothes and jewelry, and

paid for their various trips or outings. He estimates that he

made at least $407,900 in additional cash payments to them during

1978 through 1981.

       Respondent, on the other hand, contends that Mr. Walker has

failed to establish that anywhere near $407,900 of actual

additional cash payments were made to Short and Simmel.

Respondent asserts that no further reduction in respondent's

determination with respect to Mr. Walker's unreported taxable

income, for 1978, 1979, 1980, and 1981, is warranted.

       We do not accept Mr. Walker's contention that he made

$407,900 of additional payments. While the record reflects that

some additional payments were made to Short, the $407,900 amount

Mr. Walker asserts is excessive. As respondent points out, the

payments Short and Simmel received during 1978 through 1981

represented their respective shares of the overbilled amounts

West Jersey collected from their employers.

       Mr. Walker arrived at the $407,900 amount by estimating

that, during 1978 through 1981, he made additional cash payments

equal to at least 10 percent of West Jersey's annual gross sales

to B.F. Shaw and Pullman. He testified that under the

overbilling and kickback arrangements, the overbilled amounts
                                - 20 -

West Jersey charged and collected were between 10 to 40 percent

of the originally quoted price for the overbilled items.

However, Short testified that their overbilling and kickback

arrangement applied only with respect to specially fabricated items

that Short ordered on behalf of B.F. Shaw, and not to stock items.

Neither Mr. Walker or Short could provide a precise breakdown with

respect to how much of Short's purchases on behalf of B.F. Shaw

consisted of specially fabricated items, as opposed to stock items.

Short related only that B.F. Shaw purchased more specially fabricated

items than stock items. No specific evidence was offered on whether

the overbilling and kickback arrangement with Simmel covered all items

or only certain items sold to Pullman. Yet, we think that the

arrangement applied only

to certain items, since Pullman, like B.F. Shaw, would have obtained a

price list from West Jersey with respect to stock items Pullman

purchased. During 1978 through 1981, Pullman purchased more from West

Jersey than B.F. Shaw did.

       We thus believe Mr. Walker's $407,900 estimate to be grossly

excessive, considering that the overbilling and kickback arrangements

did not cover all items that Short and Simmel ordered on behalf of

their respective employers, B.F. Shaw and Pullman. A substantial

portion of West Jersey's sales to these two contractors involved items

not subject to the overbilling and kickback arrangements with Short

and Simmel. Further, only the overbilled amounts West Jersey

collected, not the entire gross sales price of the overbilled items,

was shared with Short and Simmel.
                                  - 21 -

       Even if we hypothetically assumed that Short's and Simmel's

total shares (consisting of the agreed and alleged additional

payments) under the overbilling and kickback arrangements were so high

as to equal 10 percent of West Jersey's annual gross sales

to their respective employers, the possible additional payments

indicated is far less than the $407,900 Mr. Walker asserts.3 Moreover,

the record in the instant cases does not disclose whether other B.F.

Shaw and Pullman employees, besides Short and Simmel, placed purchase

orders with West Jersey during 1978 through 1981. The overbilling and

kickback arrangements may not have operated with respect to these

possible sales transactions involving other B.F. Shaw and Pullman

employees.



            3
             Our calculation is as follows:

     Short
                 10 Percent of                         Possible
                 West Jersey's                         Additional
                 Gross Sales to      Agreed Payment    Payments
     Year           B.F. Shaw         Made of Boat       Owed

     1980        $44,593.90          $44,141.87          $452.03
     1981         41,067.60               --           41,067.60


     Simmel

                 10 Percent of                          Possible
                 West Jersey's                         Additional
                 Gross Sales to      Agreed Cashier     Payments
     Year           Pullman          Check Payments       Owed

     1978        $45,593.90          $58,150.00        ($12,556.10)
     1979         75,343.00           50,705.16          24,637.84
     1980         93,705.21           59,175.00          34,530.21
     1981         51,350.17           11,000.00          40,350.17
                                  - 22 -

          Unfortunately, the records Short and Mr. Walker maintained

with respect to the payments due Short under their overbilling

and kickback arrangement, were not introduced in evidence.

Neither did Mr. Walker offer in evidence the records he

maintained with respect to his overbilling and kickback

arrangement with Simmel.

          We are also skeptical of Mr. Walker's claim that, during his

trips to California where Simmel lived and worked, Mr. Walker

delivered large amounts of cash to Simmel, in addition to the

cashier checks. Mr. Walker was unable to roughly estimate the

alleged amounts of cash given to Simmel. Simmel, in his

testimony, denied receiving any additional cash payments from Mr.

Walker.

          As indicated above, the record does reflect that some

additional payments were made to Short during 1980 and 1981.

Short testified he received a total of $2,000 or $3,000 in

additional cash payments from Mr. Walker. He further testified

that Mr. Walker took Short and his wife to the 1980 Super Bowl,

had given Short and his wife items of jewelry, and paid for sport

fishing boat charters on fishing trips that Short took. Short

treated these trips, outings, and jewelry items that Mr. Walker

provided as payments due Short under their overbilling and

kickback arrangement.

          Doing the best we can on the record presented, and bearing

heavily against Mr. Walker because this inexactitude is of his own
                                - 23 -

making, we hold that Mr. Walker made a total of $15,000 in additional

cash payments to Short and Simmel during 1978 through

1981.   See Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). We

further allocate this $15,000 of payments $6,000 to 1980 and

$9,000 to 1981.4

Joint Individual Income Tax Returns

        Section 6013(a) provides, with certain exceptions not

relevant here, that a husband and wife may file a joint income

tax return notwithstanding that one of the spouses has no gross

income or deductions. Generally, a joint income tax return must

be signed by both spouses. Sec. 1.6013-1(a)(2), Income Tax Regs.

        However, it is settled that where an income tax return is

intended by both spouses to be a joint return, the absence of the

signature of one spouse will not prevent their intention from being

realized. Estate of Campbell v. Commissioner, 56 T.C. 1, 12 (1971);

Federbush v. Commissioner, 34 T.C. 740, 757 (1960), affd. per curiam

325 F.2d 1 (2d Cir. 1963); Kann v. Commissioner, 18 T.C. 1032, 1045

(1952), affd. 210 F.2d 247, 251 (3d Cir. 1953). The question of the

spouses' intention is one of fact. Estate of Campbell v. Commissioner,

supra at 12.



          4
           On brief, Mr. Walker argues that he should be allowed
     "credit" for certain alleged gifts he made to West Jersey's
     employees. However, in the Stipulation Of Settled Issues the
     parties agreed that the only remaining issue with respect to Mr.
     Walker's 1978, 1979, 1980, and 1981 unreported taxable income was
     his alleged additional cash payments to Short and Simmel. The
     "credit" issue is thus not properly before us.
                                   - 24 -

       The intent to file jointly may be inferred from the

acquiescence of the nonsigning spouse. Id. at 12-14. A spouse's

failure to file a separate return has been considered an indication

that the spouse "tacitly consented" to the filing of a joint return.

Abrams v. Commissioner, 53 T.C. 230, 234 (1969); Heim v. Commissioner,

27 T.C. 270, 273-274 (1956), affd. 251 F.2d 44 (8th Cir. 1958);

Carroro v. Commissioner, 29 B.T.A. 646, 650 (1933).

       Mrs. Walker contends that she cannot be found to have intended

and to have filed joint returns with Mr. Walker for 1978, 1979, 1980,

and 1981. She argues that the so-called tacit consent rule is

inapplicable because she had no separate taxable income of her own to

report during 1978 through 1981.

       Respondent contends that Mrs. Walker intended the returns Mr.

Walker filed for them to be joint returns. We agree with respondent.

       From the time of their marriage in June 1963 through at least

1989, Mr. and Mrs. Walker have had a long history of

customarily filing joint returns.5 Mrs. Walker relied entirely


          5
           In our findings, we have determined that Mr. and Mrs.
     Walker filed valid joint individual income tax returns for
     themselves for the years 1963 through 1977.Although Mrs.
     Walker initially testified that she never signed any of the joint
     returns Mr. Walker filed for them until about 1985, we do not
     believe such to have been the case. When specifically questioned
     about this on cross-examination by respondent's counsel, Mrs.
     Walker replied that she "really couldn't say" and could not
     remember. While Mrs. Walker may have dispensed with actually
     signing the returns Mr. Walker filed for them at some point prior
     to the years in issue, the record reflects, and we are convinced,
                                 - 25 -

upon Mr. Walker to prepare and file their returns. The record

reflects that Mrs. Walker left the responsibility for preparing

and filing the returns to Mr. Walker, and that she intended the

returns to be filed as he chose. From June 1963 through the time

of trial, Mr. and Mrs. Walker have continued to live together and

enjoy the benefits of their economic community.   These facts are

evidence establishing that Mrs. Walker intended that the 1978,

1979, 1980, and 1981 returns Mr. Walker filed for them be joint

returns.   Estate of Campbell v. Commissioner, supra at 2, 12-14;

see also Estate of Krock v. Commissioner, T.C. Memo. 1983-551.

Further, Mrs. Walker accepted the benefits from her and Mr.

Walker's filing of joint returns for 1978, 1979, 1980, and 1981.

The record reflects they received tax refunds as a result of

their filing of these returns. See Heim v. Commissioner, 27 T.C.

at 274.

     Indeed, from the time the returns were filed through about

October 1993, Mrs. Walker never undertook any affirmative act

indicating that she intended the 1978, 1979, 1980, and 1981 returns be

anything other than her and Mr. Walker's joint returns. At trial, Mrs.

Walker acknowledged receiving in the mail, during the period from

about late December 1985 through 1988, a series of four letters from



     that she viewed her actual execution of the returns to be a mere
     formal ritual, and that she, nevertheless, consented to the
     returns being their joint returns. Estate of Campbell v.
     Commissioner, 56 T.C. 1, 12-13 (1971).
                                - 26 -

the IRS enclosing the Form 872 extensions. Mrs. Walker stated that she

had noted and was aware that the letters were addressed to both her

and Mr. Walker. She discussed the letters with Mr. Walker and was told

by him that they had to sign the Forms 872, which she did.

     Mrs. Walker should have been aware her tax liabilities were under

investigation. Yet, she never intimated to the various taxpayer

representatives who represented her and Mr. Walker during the course

of the examinations the Internal Revenue Service conducted of Mr. and

Mrs. Walker's returns, or to the attorneys who prepared her and Mr.

Walker's petition in the instant cases, that she had not signed or

intended to file joint returns with Mr. Walker.

     It was only in October 1993, over 42 months after Mr. and Mrs.

Walker's petition had been filed, that Mrs. Walker first raised any

claim that the 1978, 1979, 1980, and 1981 returns were not joint

returns. This assertion was made over 11 years after the 1981 return

was filed and was merely an afterthought. This Court has previously

rejected such delayed attempts to disavow a joint return. O'Connor v.

Commissioner, 412 F.2d 304, 309-310 (2d Cir. 969) (finding of joint

returns upheld where 15-year delay occurred before taxpayers

challenged Commissioner's view of the returns), affg. in part and

revg. in part and remanding T.C. Memo. 1967-174; Estate of Campbell v.

Commissioner, 56 T.C. 1, 14 (1971) (late attempt to discredit joint

return "appears to us to be merely an afterthought"); Federbush v.

Commissioner, supra; see also Alioto v. Commissioner, T.C. Memo. 1994-
                                   - 27 -

51 (assertion raised 13 years after the fact was a tactical

afterthought without substance).

     We hold that the 1978, 1979, 1980, and 1981 returns were valid

joint returns of Mr. and Mrs. Walker.

     Innocent Spouse Relief

     Spouses filing a joint return are jointly and severally liable

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

rule of section 6013(e) permits a spouse to avoid joint and several

liability in certain cases. To qualify as an innocent spouse, it must

be established: (1) A joint return was filed for the year in issue;

(2) there was a substantial understatement of tax attributable to

grossly erroneous items of the other spouse; (3) the spouse seeking

relief did not know or have reason to know of the substantial

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

circumstances, it would be inequitable to hold that spouse liable for

the deficiency. Sec. 6013(e)(1)(A)-(D). A failure to meet any one of

these requirements will preclude the spouse from relief. Purificato v.

Commissioner, 9 F.3d 290, 293 (3d Cir. 1993), affg. T.C. Memo. 1992-

580; Bokum v. Commissioner, 94 T.C. 126, 138 (1990), affd. 992 F.2d

1132 (11th Cir. 1993).

     Respondent acknowledges that Mrs. Walker meets the first two

above requirements, but disputes that she is entitled to relief as-an

innocent spouse under section 6013(e). Respondent contends (1) that

Mrs. Walker knew or had reason to know of the understatements with
                                - 28 -

respect to the 1978, 1979, 1980, and 1981 returns; and (2) that it is

not inequitable to hold her liable. We need not decide whether Mrs.

Walker knew or had reason to know of the understatements because we

conclude that it is not inequitable to hold her liable for the

deficiencies.

     In deciding whether it is inequitable to hold a spouse liable for

a deficiency, we consider whether the purported innocent spouse

significantly benefited beyond normal support, either directly or

indirectly, from the items omitted from gross income. Purificato v.

Commissioner, 9 F.3d at 296; Hayman v. Commissioner, 992 F.2d 1256,

1262 (2d Cir. 1993), affg. T.C. Memo. 1992-228; Belk v. Commissioner,

93 T.C. 434, 440 (1989); Purcell v. Commissioner, 86 T.C. 228, 242

(1986), affd. 826 F.2d 470 (6th Cir. 1987); sec. 1.6013-5(b), Income

Tax Regs. Normal support is determined in the context of the

circumstances of the particular couple involved. Sanders v. United

States, 509 F.2d 162, 168 (5th Cir. 1975); Flynn v. Commissioner, 93

T.C. 355, 367 (1989).

     Mrs. Walker argues that she did not significantly benefit from

the unreported income, because, if she benefited at all, the benefit

was not beyond normal support. She points out that she and her family

already lived very well during preceding years, and claims that their

lifestyle during the years in issue did not materially improve and

remained essentially the same. However, even with no change in the

standard of living, the spouse may fail to meet the requirement of

section 6013(e)(1)(D).
                                - 29 -

     Unusual support or transfers of property to the spouse are

considered even if the benefit is received after the years in issue.

Hayman v. Commissioner, 992 F.2d at 1262; Estate of Krock v.

Commissioner, 93 T.C. 672, 679 (1989); S. Rept. 91-1537 (1970), 1971-1

C.B. 606, 607-608. In about 1986, Mr. Walker used at least $40,000 of

the proceeds from his liquidation of West Jersey's assets and business

to establish another corporation, PSI, whose shares were issued to and

held in the name of Mrs. Walker and their son. Additionally, during

1980, Mr. Walker, by way of a check drawn on his and Mrs. Walker's

joint checking account, paid over $76,000 to Merrill Lynch for an

unexplained purpose.

     In their responses to certain interrogatories served upon them by

respondent during pretrial discovery, Mr. and Mrs. Walker denied that

Mr. Walker, during or after the years in issue, made any transfers of

over $-500 to Mrs. Walker or that he had made any gifts of over $500

to her. At trial, these responses of theirs were shown to be untrue.

We are not satisfied that Mr. and Mrs. Walker have disclosed all of

the assets they owned during and after the years in issue. Neither are

we convinced that they have provided full and complete information

with respect to all transfers Mr. Walker may have made to Mrs. Walker

during and after the years in issue. Mrs. Walker has thus failed to

establish that she did not significantly benefit from Mr. Walker's

unreported income. Rule 142(a); Purificato v. Commissioner, 9 F.3d at

294-295.
                                - 30 -

     Another factor to be taken into account, in appropriate

situations, is whether the spouse has been deserted or is divorced or

separated. Purificato v. Commissioner, 9 F.3d at 293-294; S. Rept. 91-

1537, supra, 1971-1 C.B. at 608. Mr. and Mrs. Walker are not divorced

or separated. They have continued to live together and have supported

one another. Mr. Walker has not disappeared and left her to "face the

music alone." See Hayman v: Commissioner, 992 F.2d at 1263.

     We conclude that it is not inequitable to hold Mrs. Walker liable

for the deficiencies. Thus, we hold that she is not entitled to relief

as an innocent spouse under section 6013(e).

                              Decision will be entered under Rule 155

                         in docket No. 4923-90.

                              Decisions will be entered for

                         respondent in docket Nos. 18842-90 and

                         28294-91.
