                        T.C. Memo. 1997-407



                      UNITED STATES TAX COURT



        DEBRA L. STRECK AND DONALD W. STRECK, Petitioners
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25246-95.            Filed September 15, 1997.



     Debra L. Streck and Donald W. Streck, pro sese.

     Joseph P. Grant, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:   Respondent determined deficiencies in

petitioners' Federal income taxes and additions to tax as

follows:
                                    - 2 -

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

1983        $142,520         $71,260        50 percent of       $35,630
                                            the interest due
                                            on $142,520

1984         369,494         184,747        50 percent of        92,374
                                            the interest due
                                            on $191,310

1985         543,404         271,702        50 percent of       135,086
                                            the interest due
                                            on $412,774

                                         Additions to Tax
  Year       Deficiency     Sec. 6653(a)(1)(A)   Sec. 6653(a)(1)(B)

  1986        $111,494          $5,575            50 percent of the
                                                  interest due on
                                                  $111,494


       Respondent's determination was based on the following items:

Unreported gross income;1 disallowance of a net operating loss

carryover;2 allowance of a deduction for two-earner married

couples;3 an increase in capital gains;4 and disallowances of

various deductions for business losses and expenses.5


       1
      Respondent determined that petitioners had unreported gross
income of $384,750, $382,620, and $825,548 in 1983, 1984, and
1985, respectively.
       2
      Respondent disallowed $88,236 of petitioners' 1983 net
operating loss carryover deduction.
       3
      Respondent allowed a deduction for two-earner married
couples of $120 for 1983 pursuant to sec. 221.
       4
      Respondent determined an increase in petitioners' capital
gains of $6,636 for 1983.
       5
        Respondent disallowed deductions claimed by petitioners for
                                                     (continued...)
                                 - 3 -

Petitioners concede the adjustments made by respondent for

unreported gross income, the allowance of the two-earner

deduction, and the increase to capital gains.   Petitioners also

concede that Mr. Streck is liable for the additions to tax under

section 6653(b)(1)6 and (2) for the taxable years 1983, 1984, and

1985, and agree with respondent that the addition to tax under

section 6653(b)(2) is applicable only to the tax attributable to

unreported income.   Respondent concedes that Mrs. Streck is not

liable for the additions to tax under section 6653(b)(1) and (2)

for any of the years at issue.

     The issues remaining for decision are:   (1) Whether

respondent is bound by an alleged settlement agreement for the

years at issue; (2) whether petitioners are entitled to

deductions for losses they claimed were sustained by Double D

Ranch, Inc., an S corporation; (3)whether Mrs. Streck is entitled

to innocent spouse relief pursuant to section 6013(e); (4)

whether petitioners are liable for the addition to tax pursuant

     5
      (...continued)
the following items: Business expenses in the amount of $42,500
for 1984; legal and professional fees in the amount of $16,014
for 1984; losses related to petitioners' ownership of Double D
Ranch, Inc., an S corporation, in the amounts of $200,331,
$255,302, and $229,232 for 1984, 1985, and 1986, respectively;
and real estate taxes in the amount of $22,994 for 1985.
Respondent allowed an increase in expenses related to legal and
professional fees in the amount of $2,848 in 1985.
     6
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                 - 4 -

to section 6653(a)(1)(A) and (B) for negligence or intentional

disregard of rules or regulations for the year 1986; and (5)

whether petitioners are liable for the addition to tax pursuant

to section 6661 for substantial understatement of income tax

liabilities for the years 1983, 1984, and 1985.7


                          FINDINGS OF FACT


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

The stipulation of facts is incorporated herein by this

reference.   At the time the petition was filed, Mr. Streck was

incarcerated at FMC Lexington, Lexington, Kentucky, and Mrs.

Streck resided in Cincinnati, Ohio.      Petitioners were married in

1981 and remained married at the time of trial.     Petitioners

filed joint returns for the years in issue.

     During the early 1980's, Mr. Streck owned and operated

P.G.D., Inc. (P.G.D.), a company which provided trucking

services.    P.G.D. incurred substantial operating losses and, in

early 1983, ceased operations.

     During the years 1983 through 1985, Mr. Streck served as a

consultant to a group of companies known as the Walsh Cos.

(Walsh), which were headquartered in New Jersey.     These companies



     7
      Petitioners appear to have raised other issues at various
times in this case. We need not address these issues since they
are either frivolous or were not addressed at trial or on brief
by petitioners.
                               - 5 -

provided trucking services.   As a consultant for Walsh, Mr.

Streck was paid $500 per day for his services.

     While serving as a consultant, Mr. Streck diverted funds

from Walsh.   Respondent has determined, and petitioners concede,

that Mr. Streck received gross income of $384,750 in 1983,

$382,620 in 1984, and $825,548 in 1985 that petitioners failed to

report on their joint income tax returns for those years.

     On June 23, 1988, Mr. Streck was indicted in the U.S.

District Court of New Jersey for violations of sections 1341,

1343, 1961, 1962, 1963, and 2314 of title 18 of the United States

Code in connection with his diversion of funds from Walsh.     On

February 27, 1991, Mr. Streck pleaded guilty to fraud under count

11 of the indictment.   On November 3, 1988, Mr. Streck was

indicted in the U.S. District Court, Southern District of Ohio,

for tax evasion under section 7201 for the years 1983, 1984, and

1985 and bankruptcy fraud under section 152 of title 18 of the

United States Code.   In November 1989, Mr. Streck was convicted

on all tax evasion counts and acquitted on all counts of

bankruptcy fraud.   As a result of these convictions, Mr. Streck

was incarcerated from December 8, 1989, to April 15, 1991.8

     8
      Subsequent to Mr. Streck's release from prison, and while
he remained on probation, petitioners moved to Knoxville,
Tennessee. In connection with the refinancing of a house they
purchased in Knoxville, Mr. Streck prepared a false document
purporting to be a release of a Federal tax lien. On July 3,
1996, in the Criminal/Circuit Court of Knox County Tennessee, Mr.
Streck pleaded guilty to a theft in excess of $60,000 from his
                                                   (continued...)
                               - 6 -

     As a result of being liable for much of the debt of P.G.D.,

Mr. Streck filed a debtor's petition in the U.S. Bankruptcy Court

under chapter 7 of title 11 of the United States Code on October

14, 1983.   On March 30, 1984, the Bankruptcy Court discharged Mr.

Streck from all dischargeable debts.

     During 1984, petitioners, acting through Double D Ranch,

Inc., constructed a log cabin at an approximate cost of $494,000.

Petitioners used the log cabin as their residence.   During 1984

and 1985, petitioners also purchased two new 1985 Mercedes Benz

automobiles, a $92,000 boat, and four Honda motorcycles.   Also,

in 1985, petitioners purchased two condominiums in Florida, one

on Marco Island for $265,000 and upon its sale, another in Naples

for approximately $675,000.

     During the years in issue, Mrs. Streck was the sole

shareholder of American Carriers, Inc. (ACI), and Mr. Streck was

ACI's president.   Mrs. Streck was a signatory on ACI's bank

account, and she signed checks as an officer on behalf of ACI.

She also participated in voting on resolutions adopted by ACI's

board of directors.   Mrs. Streck was also an officer of P.G.D.

     On August 1, 1993, in connection with an ongoing audit by

respondent, petitioners submitted an Offer in Compromise (Form

656) to respondent's Appeals Officer Frank Sower with respect to

     8
      (...continued)
employer in Knoxville. On July 5, 1996, based on violations of
the terms and conditions of his probation in connection with the
1988 convictions, Mr. Streck was reincarcerated.
                                 - 7 -

their individual Federal income tax liabilities for the years

1983 through 1992 and their liability for withholding taxes

attributable to Jamie Enterprises, Inc. (JEI), a corporation

owned by Mrs. Streck.   This offer was in the amount of $2,000.9

     On February 10, 1994, the original offer in compromise,

dated August 1, 1993, was withdrawn by petitioners, and two

revised offers were executed and submitted on Forms 656.      The

first Form 656 related to petitioners' individual income tax

liabilities for 1983 through 1992.       Petitioners offered to settle

these liabilities for $19,000.    The second Form 656 was submitted

by Mr. Streck on behalf of JEI to compromise its employment taxes

for 1991 and 1992 for $1,000.


                                OPINION


     Petitioners' primary position is that they have previously

entered into a binding settlement agreement with respondent

regarding the years in issue.    They allege that the agreement was

entered into when respondent's Appeals Officer accepted their

offer in compromise prior to the issuance of the notice of

deficiency.   It is not clear which of the two Forms 656 relating

to their individual income taxes petitioners rely on.




     9
      Petitioners had a case before this Court with respect to
their 1987 tax year. On Oct. 19, 1993, pursuant to an agreement
by the parties, this Court entered its decision that there was no
deficiency and no additions to tax with respect to the 1987 tax
year.
                               - 8 -

     The settlement of disputed tax liabilities is governed by

sections 7121 and 7122, which authorize the Secretary or an

authorized delegate to settle any tax disputes and compromise any

civil or criminal case arising under the internal revenue laws.

Klein v. Commissioner, 899 F.2d 1149, 1152 (11th Cir. 1990).

Regulations under section 7122 clarify the procedure required

with respect to an offer in compromise and how an offer may be

accepted.   Section 301.7122-1(d)(1), Proced. & Admin. Regs.,

requires that offers in compromise shall be submitted on forms

prescribed by the Internal Revenue Service.    Section 301.7122-

1(d)(3), Proced. & Admin. Regs., states that "An offer in

compromise shall be considered accepted only when the proponent

thereof is so notified in writing."

     Petitioners submitted a Form 656 to Mr. Sower on August 1,

1993.   In the Form 656, petitioners offered $2,000 to settle

their income tax liabilities for the years in issue plus certain

withholding tax liabilities.   Petitioners withdrew the original

Form 656 on February 10, 1994, and submitted two separate offers

on Forms 656 in place of the first.    Each Form 656 referred to

above contains a statement whereby the taxpayer-proponent agrees

to waive and suspend the statutory period of limitations for

assessment and collection.   The Forms 656 also contain a

signature line for an authorized Internal Revenue Service

official to acknowledge that "I accept the waiver of statutory

period of limitations for the Internal Revenue Service."    Mr.
                                 - 9 -

Sower's signature appears under this preprinted statement on each

form.     By signing the Forms 656, Mr. Sower accepted petitioners'

waiver of the statutory period of limitations.     By signing the

Forms 656 in this manner, Mr. Sower did not accept petitioners'

offers.

     Form 656 makes it clear that Mr. Sower's signature was not

an acceptance of petitioners' offer in compromise.     Clause (8) of

Form 656 states:


     The taxpayer-proponents agree to the waiver and
     suspension of any statutory periods of limitations for
     assessment and collection of the tax liability
     described in paragraph (1) while the offer is pending,
     during the time any amount offered remains unpaid and
     for one (1) year after the satisfaction of the terms of
     the offer. The offer shall be deemed pending from the
     date an authorized official of the Internal Revenue
     Service accepts taxpayer-proponents' waiver of the
     statutory periods of limitation and shall remain
     pending until an authorized official of the Internal
     Revenue Service formally, in writing, accepts, rejects
     or withdraws the offer. * * *


Clause (10) of Form 656 states that "It is understood that this

offer will be considered and acted upon in due course and that it

does not relieve the taxpayers from the liability sought to be

compromised unless and until the offer is accepted in writing by

the Commissioner or a delegated official, and there has been full

compliance with the terms of the offer."     (Emphasis added.)

Petitioners signed the Forms 656 agreeing to these terms.10

     10
          We note that if petitioners believed that Mr. Sower's
                                                       (continued...)
                               - 10 -

     Petitioners next argue their offer was accepted orally by

Mr. Sower.    While it is not clear which offer petitioners refer

to, they have failed to prove that Mr. Sower said or did anything

that would constitute acceptance of any offer they made.

     Both parties offered testimony regarding the alleged oral

agreement.    Mr. Streck testified that Mr. Sower orally

represented that he would accept petitioners' signed offer in

compromise.    Petitioners' accountant, Mr. Mancini, who was

present during meetings between Mr. Streck and Mr. Sower, did not

recall any oral acceptance by Mr. Sower.    Mr. Sower testified

that he never told Mr. Streck that he would accept an offer in

compromise relating to the years in issue.    Mr. Sower testified

that he "did not have the authority to accept or reject offers in

compromises."11   We believe Mr. Sower's testimony.   It is

consistent with the plain language on the Form 656.    The

testimony of petitioners' accountant is consistent with Mr.

Sower's.   Mr. Streck, on the other hand, has a long history of

dishonest, criminal behavior and lacks credibility.    We find that

Mr. Sower never made, or purported to make, an oral acceptance of

     10
      (...continued)
signature on the first Form 656 constituted an acceptance, it
makes no sense that they withdrew the first offer in order to
make an offer to pay more.
     11
      Mr. Sower did not have the authority to accept such an
offer. See Boulez v. Commissioner, 76 T.C. 209, 213 (1981),
affd. 810 F.2d 209 (D.C. Cir. 1987); Deleg. Order No. 11 (Rev.
23), 1994-1 C.B. 324; Deleg. Order No. 11 (Rev. 22), 1992-1 C.B.
488.
                              - 11 -

any offer to compromise petitioners' tax liabilities for the

years in issue and that no settlement agreement with respect to

the tax years 1983 through 1986 ever existed.12

     Petitioners next argue that respondent improperly disallowed

losses that they claimed from Double D Ranch, Inc., an S

corporation.   Petitioners deducted $277,582, $330,385, and

$274,483 as their share of the purported losses of Double D

Ranch, Inc., in 1984, 1985, and 1986, respectively.    Respondent

disallowed $200,331, $255,302, and $229,232 of those loss

deductions in 1984, 1985, and 1986, respectively.   These losses

were disallowed because it had not been established to

respondent's satisfaction that deductions taken by Double D

Ranch, Inc., were ordinary and necessary business expenses or

expenses incurred in an activity engaged in for the production of

income.13

     12
      Petitioners also argue that respondent should be estopped
from rejecting their offer in compromise. The doctrine of
equitable estoppel should be applied against the Government
"'with utmost caution and restraint.'" Kronish v. Commissioner,
90 T.C. 684, 695 & n.10 (1988)(quoting Boulez v. Commissioner,
supra at 214-215). In order for estoppel to apply, the proponent
must show, among other things, the existence of a false
representation and detrimental reliance on the representation.
Id. Petitioners have failed to show any misrepresentations made
by respondent.
     13
      The only deductions that respondent allowed to Double D
Ranch, Inc., were those for real estate taxes and interest. The
Double D Ranch, Inc., loss amounts that respondent allowed to
petitioners were computed as follows:


                                                      (continued...)
                               - 12 -

     Respondent's determinations are presumed correct, and

petitioners bear the burden of proving otherwise.      Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).     Deductions are a

matter of legislative grace, and taxpayers bear the burden of

proving that they are entitled to any deduction claimed.      New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Taxpayers must substantiate the amount of any deductions claimed.

Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), affd. per

curiam 540 F.2d 821 (5th Cir. 1976).     Taxpayers are required to

keep sufficient records to enable the Commissioner to determine

their correct tax liability.   Sec. 6001.

     Section 162 allows the deduction of ordinary and necessary

expenses incurred in carrying on any trade or business.     Section

212 allows the deduction of ordinary and necessary expenses for

the production or collection of income or for the maintenance of

property held for the production of income.     Petitioners failed

to substantiate their entitlement to deductions in an amount in

excess of that already allowed by respondent.    They did not

produce records of Double D Ranch, Inc., such as journals,

     13
          (...continued)
                                        1984      1985      1986

Total income reported by            $1,500        $0      $18,817
  Double D Ranch, Inc.
Less:
  Total interest paid              (71,644)    (69,590)   (58,228)
  Total real estate taxes paid      (7,107)     (5,493)    (5,840)

  Total loss allowed              ($77,251)    ($75,083) ($45,251)
                                - 13 -

ledgers, invoices, or canceled checks.    Petitioners did not prove

that the Double D Ranch, Inc., incurred any expenses which could

be classified as ordinary and necessary.

     A taxpayer claiming a deduction under section 162 or 212 for

an expense, or under section 165 for a loss, must have an "actual

and honest profit objective" in order to avoid the disallowance

of such deductions.   See sec. 183; Dreicer v. Commissioner, 78

T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C.

Cir. 1983).   Mr. Streck testified that petitioners initially

purchased a ranch located in Kentucky as "a getaway because I was

working in New York and traveling all the time and we wanted to

get out in the country."   The ranch was later incorporated under

the name Double D Ranch, Inc.    Although petitioners apparently

engaged in some farming, Mr. Streck testified that the farming

activity was a "total disaster".    Throughout the time petitioners

owned Double D Ranch, Inc., they continued to use the log cabin

constructed on corporate property as a personal residence and use

the boat dock located on corporate property for pleasure.

Petitioners failed to provide evidence of an actual and honest

objective to make a profit.   We sustain respondent's disallowance

of deductions that petitioners claimed with respect to Double D

Ranch, Inc.

     The next issue is whether Mrs. Streck qualifies as an

innocent spouse pursuant to section 6013(e).    Generally, a

husband and wife are jointly and severally liable for the total
                                 - 14 -

tax due on their joint Federal income tax returns.     Sec. 6013(d).

In limited circumstances, however, a spouse may qualify as an

"innocent spouse" and be relieved of joint and several liability.

Sec. 6013(e).     The spouse seeking relief under section 6013(e)

bears the burden of proof.     Rule 142(a); Bokum v. Commissioner,

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

     In order for Mrs. Streck to qualify for innocent spouse

status, she must prove that:     (1) Petitioners filed a joint tax

return; (2) on that joint tax return, there was a substantial

understatement of tax attributable to grossly erroneous items of

the other spouse; (3) in signing the joint tax return, she did

not know, nor have reason to know of the substantial

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

circumstances, it is inequitable to hold her liable for any

deficiency attributable to the substantial understatement.      Sec.

6013(e)(1)(A)-(D).     Failure to meet any one of these requirements

will prevent Mrs. Streck from qualifying as an innocent spouse.

Bokum v. Commissioner, supra at 138.      The parties agree that

petitioners filed joint tax returns for 1983, 1984, 1985, and

1986.     Respondent also concedes that there are substantial

understatements on petitioners' tax returns for those years and

that the unreported income for the years 1983 through 1985

constitutes grossly erroneous items of Mr. Streck.14

     14
          Mrs. Streck claims that for purposes of sec. 6013(e), the
                                                       (continued...)
                              - 15 -

     Under section 6013(e)(1)(C), Mrs. Streck must establish that

in signing the tax returns for the years in issue, she did not

know, and had no reason to know, there was a substantial

understatement.   The standard to be applied in determining

whether a taxpayer "had reason to know" is whether a reasonably

prudent person with knowledge of the facts possessed by the

person claiming innocent spouse status should have been alerted

to the possibility of a substantial understatement.     Shea v.

Commissioner, 780 F.2d 561, 566 (6th Cir. 1986), affg. in part

and revg. in part T.C. Memo. 1984-310; Flynn v. Commissioner, 93

T.C. 355, 365 (1989).   Three factors are significant in

determining whether a spouse had reason to know of an

understatement of tax: (1) Participation in business affairs or

bookkeeping by the alleged innocent spouse, Quinn v.

Commissioner, 62 T.C. 223, 229-230 (1974), affd. 524 F.2d 617

(7th Cir. 1975), (2) the culpable spouse's refusal to be


     14
      (...continued)
deductions disallowed are attributable to grossly erroneous items
of Mr. Streck. Sec. 6013(e)(2)(B) defines "grossly erroneous
items" as "any claim of a deduction, credit, or basis * * * for
which there is no basis in fact or law." Mrs. Streck must prove
that the disallowed deductions have no basis in fact or law.
Flynn v. Commissioner, 93 T.C. 355, 360 (1989). Mrs. Streck
failed to establish that the deductions disallowed by respondent
were frivolous, fraudulent, or phony. Id. at 364. Both Mr. and
Mrs. Streck argued that the deductions related to Double D Ranch,
Inc., are valid business expenses. As previously indicated,
petitioners failed to produce evidence of the amount and nature
of the expenses of Double D Ranch, Inc., that were disallowed.
We find that Mrs. Streck has not proven that any of the
deductions were grossly erroneous items.
                               - 16 -

forthright concerning the couple's income, Adams v. Commissioner,

60 T.C. 300, 303 (1973), and (3) the presence of unusual or

lavish expenditures, Mysse v. Commissioner, 57 T.C. 680, 699

(1972).    Another factor the courts have focused on is whether the

couple's standard of living improved significantly during the

years in issue.    Id. at 698-699.

     Mrs. Streck participated in the business affairs and

bookkeeping of petitioners' businesses.   During the years in

issue, Mrs. Streck was the sole shareholder of ACI.   Mrs. Streck

was a signatory on ACI's bank account, and she signed checks as

an officer on behalf of ACI.   She also participated in voting on

resolutions adopted by the board of directors of ACI.    Mrs.

Streck was an officer of P.G.D., a corporation wholly owned by

Mr. Streck.   Mrs. Streck testified that she wrote and signed

checks for all of petitioners' businesses including ACI.    She

also testified she made deposits to corporate bank accounts and

paid invoices from corporate accounts.    We find that Mrs. Streck

substantially participated in petitioners' combined business

affairs.

     Mrs. Streck provided absolutely no evidence or argument that

Mr. Streck refused to disclose information or was not forthright

with her regarding their financial affairs.

     Family expenditures during the years in issue appear to be

lavish within the meaning of Mysse v. Commissioner, supra at 699.

During 1984, through Double D Ranch, Inc., petitioners
                                - 17 -

constructed a log cabin at an approximate cost of $494,000, which

they used as their residence.    Petitioners purchased other luxury

items during 1984 and 1985, including two 1985 new Mercedes Benz

automobiles, a $92,000 boat, and four Honda motorcycles.   Also,

in 1985, petitioners purchased two condominiums in Florida, one

on Marco Island for $265,000 and upon its sale, another in Naples

for approximately $675,000.   Some of these purchases occurred

during or shortly after the time Mr. Streck had filed for relief
                               - 18 -

in bankruptcy in October 1983.15   Their 1986 financial statement

indicates that petitioners owned valuable furs and jewelry.

     These expenditures appear inconsistent with the amounts

petitioners reported on their tax returns and would have alerted

Mrs. Streck to the fact that there were understatements of income



     15
      In his October debtor's petition filed in the U.S.
Bankruptcy Court, Mr. Streck listed debts of $1,999,678 and
assets of $548,994. A financial statement prepared by
petitioners' accountant, a C.P.A., based on information received
from petitioners, reflects petitioners' assets and liabilities as
of Sept. 30, 1986, as follows:


      Assets

          Cash and cash equivalents             $36,600
          Investments, nonmarketable          1,408,000
            equity securities
          Residence                             770,000
          Automobile                             54,500
          Furs, jewelry, household items,       200,000
            etc.
                                             $2,469,100

      Liabilities and Net Worth

          Income taxes, current year           $500,000
            balance
          Notes payable, financial              817,800
            institutions
          Estimated income taxes, on            215,000
            the difference between the
            estimated current values of
            assets and the estimated
            current amounts of liabilities
            and their tax bases

      Net worth                                 936,300

                                             $2,469,100
                                - 19 -

on petitioners' returns.16    We find that Mrs. Streck knew or

should have known that there were understatements of tax on the

returns in issue.

     Mrs. Streck has also failed to show that it would be

inequitable to hold her jointly and severally liable for the

disputed taxes.   An important factor in determining whether it is

inequitable to hold a spouse liable is whether that spouse

significantly benefited, either directly or indirectly, from the

understatement of taxes.     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 not considered a significant benefit.       Terzian

v. Commissioner, 72 T.C. 1164, 1172 (1979).    Mrs. Streck bears

the burden of proving that she received no significant benefit

from the unreported income other than normal support, and this

burden must be supported with specific evidence of lifestyle

expenditures, as well as asset acquisitions.     Bokum v.

Commissioner, 94 T.C. at 157; Estate of Krock v. Commissioner, 93

T.C. 672, 681 (1989).

     Mrs. Streck failed to provide any specific evidence that her

lifestyle and asset acquisitions were normal support.       There is

no evidence of petitioners' lifestyle prior to 1983.    Petitioners


     16
      On their tax returns, petitioners reported taxable income
of zero in 1983, $66,857 in 1984 (after amendments), $31,561 in
1985, and $103,836 in 1986.
                               - 20 -

purchased numerous luxury items during the years in issue,

including new Mercedes Benz automobiles, an expensive boat, and

various residences.    Petitioners' 1986 financial statement

indicates that their joint net worth increased since Mr. Streck's

bankruptcy.17   The financial statement indicates that petitioners

owned valuable furs and jewelry.    We find that Mrs. Streck failed

to show she did not significantly benefit from the understatement

of taxes.

     The next issue concerns petitioners' liability for additions

to tax under sections 6653(a) and 6661.    Respondent determined

that petitioners are liable for additions to tax for negligence

or intentional disregard of rules or regulations under section

6653(a)(1)(A) and (B) for the taxable year 1986.    As in effect

during 1986, section 6653(a)(1)(A) imposed an addition to tax

equal to 5 percent of the underpayment of tax where any part of

the underpayment was due to negligence or disregard of rules or

regulations.    Section 6653(a)(1)(B) imposed an addition to tax in

an amount equal to 50 percent of the interest payable under

section 6601 with respect to the portion of the underpayment

which was attributable to negligence.

     Respondent also determined that petitioners are liable for

the addition to tax for substantial understatement of income tax


     17
      There is nothing to indicate Mrs. Streck's separate
financial status prior to petitioners' financial statement as of
Sept. 30, 1986.
                              - 21 -

pursuant to section 6661 with respect to their 1983, 1984, and

1985 income tax returns.   As in effect during 1983, 1984, and

1985, section 6661(a) imposed an addition to tax equal to 10

percent of the amount of any underpayment attributable to a

substantial understatement of income tax.   An understatement is

defined in section 6661(b)(2)(A) as the excess of the amount of

tax required to be shown on the return over the amount of tax

imposed which is shown on the return.   There is a substantial

understatement under section 6661(b)(1)(A) if the amount of the

understatement for the taxable year exceeds the greater of 10

percent of the tax required to be shown on the return or $5,000.

All of petitioners' tax returns for the years in issue have

understatements of tax in excess of the threshold.

     Petitioners bear the burden of proving that the additions to

tax do not apply.   Rule 142(a); Luman v. Commissioner, 79 T.C.

846, 861-862 (1982).   Petitioners failed to introduce convincing

evidence that they were not negligent or that respondent's

determination is erroneous.   Accordingly, we sustain respondent's

determination that petitioners are liable for the additions to

tax pursuant to section 6653(a)(1)(A) and (B) in 1986 and section

6661 with respect to their returns in 1983, 1984, and 1985.



                                         Decision will be entered

                                    under Rule 155.
