                         T.C. Memo. 1996-520



                       UNITED STATES TAX COURT



        RONNIE D. WILSON AND LINDA K. LAGADINOS, f.k.a.
                 LINDA K. WILSON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21501-94.                 Filed November 25, 1996.



     Donald D. Harvey, Jr., for petitioner Linda K. Lagadinos.

     James F. Prothro, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:    By notice dated August 24, 1994, respondent

determined a deficiency in petitioners' 1989 Federal income tax

of $30,370 and an accuracy-related penalty, pursuant to section

6662(a), of $6,074.   After concessions, the only remaining issue

for decision is whether Linda Lagadinos, pursuant to section
                                - 2 -

6013(e), is entitled to be relieved of tax liability as an

innocent spouse.   We hold that she is not.

     All section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

                         FINDINGS OF FACT

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

At the time the petition was filed, Ronnie Wilson resided in

Dallas, Texas, and Linda resided in Missouri City, Texas.

     Petitioners were married in 1964.    During their marriage,

they resided in Plano, Texas.   Ronnie is an attorney with a

successful general practice.    Linda has an undergraduate degree

in education and taught elementary school while Ronnie was in law

school.   After Ronnie completed law school in 1965, Linda stopped

teaching to raise their two children, Michael and Leslie.

     In early 1988, petitioners experienced marital problems, and

Ronnie moved out of their house.   In July 1988, Ronnie moved back

into their house, and petitioners attempted to reconcile their

differences.   These attempts were unsuccessful, and in early 1989

Ronnie and Linda permanently separated.

     During the separation period, Ronnie lived in and maintained

an apartment; paid approximately $1,100 a month for the mortgage,

insurance, taxes, and utilities relating to their house; paid

Michael's and Leslie's college expenses; purchased a Jaguar for

himself; and purchased a $23,000 Cadillac for Linda.    In
                                 - 3 -

addition, he paid most of the routine expenses for Linda,

Michael, and Leslie.    In 1988 and 1989, petitioners maintained

separate checking accounts.

     In 1989, Linda, in an attempt to become financially

independent, sought employment.    The city of Plano hired her as

director of the "Keep Plano Beautiful" program.    Linda received

an annual salary of approximately $24,000 and was responsible for

organizing volunteers for litter control and recycling programs.

     In October 1989, Linda filed suit for divorce.    The divorce

was granted on April 30, 1990.    The divorce agreement provided

that (1) Ronnie would indemnify Linda for any underpayment of

taxes attributable to their 1989 joint return and (2) Linda would

receive the marital residence, the Cadillac, certain jewelry,

personal items, and alimony of $2,500 per month.    Ronnie made the

required alimony payments until early 1992.    Since then, however,

he has failed to make approximately $21,000 of alimony payments.

     Ronnie advised Linda that they should file a joint return

for 1989.    Linda agreed, and Ronnie prepared their 1989 return

using worksheets that delineated the income and expenses of his

law practice.    Linda did not see these worksheets.   In October of

1990, Linda met Ronnie at his law office to sign their 1989

return.   Linda did not review the return or ask Ronnie any

questions relating to the accuracy of the return before she

signed it.
                                - 4 -

     On August 24, 1994, respondent issued a notice of deficiency

to petitioners regarding their 1989 return.    In 1989, petitioners

reported $24,782 of earnings attributable to Linda, $54,036.16 of

self-employment income attributable to Ronnie, and $43,323.81 of

taxable income.    Respondent determined that petitioners had

failed to report $22,715 in income from Ronnie's law practice.

Respondent also disallowed, in whole or part, several claimed

deductions (e.g., relating to personal interest, laundry,

entertainment, and other expenses).     These deductions, other than

the personal interest deduction, all related to Ronnie's law

practice.   The deductions were disallowed because Ronnie failed

to substantiate them.    Respondent's adjustments resulted in a

disallowance of $63,198 in deductions.    Based on the above

adjustments, respondent determined that petitioners had taxable

income of $129,237 and were jointly liable for a deficiency of

$30,370.    Respondent also determined that they were liable,

pursuant to section 6662(a), for an accuracy-related penalty for

negligence.

     On October 18, 1995, the parties filed with this Court a

Stipulation of Agreed Issues which provides that there is a

deficiency of $23,392 and that there is no penalty for

negligence.    Accordingly, the only remaining issue for decision

is whether Linda, pursuant to section 6013(e), is entitled to be

relieved of tax liability.
                                - 5 -

                               OPINION

     A husband and wife who file a joint return generally are

jointly and severally liable for the tax due.    Sec. 6013(d)(3).

A taxpayer will be relieved of liability as an innocent spouse,

however, to the extent the taxpayer establishes that:    (1) A

joint Federal income tax return was filed; (2) on the return

there is a substantial understatement of tax attributable to

grossly erroneous items of the other spouse; (3) in signing the

return, the taxpayer did not know, and had no reason to know, of

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

of the facts and circumstances, it would be inequitable to hold

the taxpayer liable for the deficiency attributable to the

substantial understatement.   Sec. 6013(e)(1).   Linda bears the

burden of proving that she satisfies each of the four

requirements.    Rule 142(a); Flynn v. Commissioner, 93 T.C. 355,

359 (1989).   Her failure to satisfy any one of the requirements

will preclude relief from liability.     Park v. Commissioner, 25

F.3d 1289, 1292 (5th Cir. 1994), affg. T.C. Memo. 1993-252; Bokum

v. Commissioner, 94 T.C. 126, 138 (1990), affd. 992 F.2d 1132

(11th Cir. 1993).

     Respondent concedes that a joint return was filed for the

1989 tax year.   She contends, however, that Linda does not meet

the remaining requirements.   We discuss these requirements in

turn.
                                - 6 -

I.   Grossly Erroneous Requirement

      Linda must establish that there was a substantial

understatement of tax attributable to grossly erroneous items of

Ronnie.   Sec. 6013(e)(1)(B).   A substantial understatement is any

understatement that exceeds $500.    Sec. 6013(e)(3).   Any item

omitted from gross income is grossly erroneous.    Sec.

6013(e)(2)(A).    In addition, any claim of a deduction in an

amount for which there is no basis in fact or law is grossly

erroneous.    Sec. 6013(e)(2)(B).   A deduction has no basis in fact

when the expense for which the deduction is taken was not made,

and a deduction has no basis in law if the expense is not

deductible under well-established legal principles or if no

substantial legal argument can be made to support its

deductibility.    Douglas v. Commissioner, 86 T.C. 758, 762-763

(1986).

      Respondent disallowed several of the deductions claimed by

petitioners.    Linda contends that Ronnie's inability to

substantiate the amounts claimed on the return provides a

sufficient basis to conclude that the expenses were, in fact,

never made.    A taxpayer may not rely on the mere disallowance of

a claimed deduction or an inability to substantiate the amount of

an otherwise allowable deduction to establish that the deduction

had no basis in fact or law.    United States v. Shanbaum, 10 F.3d

305, 314 (5th Cir. 1994); Flynn v. Commissioner, supra at 364.
                                - 7 -

Thus, Linda has failed to establish that the deductions are

grossly erroneous.   Accordingly, we conclude that Linda, pursuant

to section 6013(e), is not entitled to be relieved of tax

liability with respect to the disallowed deductions.

      Respondent also determined that petitioners did not report

$22,715 of income from Ronnie's law practice.     Omissions from

gross income are grossly erroneous.     Sec. 6013(e)(2).    The

understatement of tax attributable to the omitted income is

substantial because it exceeds $500.     Sec. 6013(e)(3).    In

addition, respondent has conceded that the omission is

attributable to items of Ronnie.   Accordingly, with respect to

the omitted income, we conclude that Linda has established a

substantial understatement of tax attributable to grossly

erroneous items of Ronnie.    We next determine whether Linda meets

the remaining requirements of section 6013(e).

II.   Knowledge Requirement

      Linda must establish that in signing the return, she did not

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

understatement of tax attributable to the omitted income from

Ronnie's law practice.   Sec. 6013(e)(1)(C).    More specifically,

she must establish that she did not know, or have reason to know,

about the income-producing transaction that Ronnie failed to

report.   Park v. Commissioner, supra at 1294; Bokum v.

Commissioner, supra at 146.    A spouse seeking relief has reason
                                - 8 -

to know if "a reasonably prudent taxpayer under the circumstances

of the alleged innocent spouse at the time of signing the return

could be expected to know that the tax liability stated was

erroneous or that further investigation was warranted."      Park v.

Commissioner, supra at 1293.    Factors relevant to such a

determination include the spouse's level of education, the

spouse's involvement in the family's business and financial

affairs, unusual or lavish expenditures made by the family, and

the "culpable" spouse's refusal to be forthright about the

family's income.    Id.; Sanders v. United States, 509 F.2d 162,

166-167 (5th Cir. 1975).

     Petitioners on their 1989 return failed to report $22,715 in

income from Ronnie's law practice.      In 1989, petitioners reported

$24,782 of earnings attributable to Linda, $54,036.16 of self-

employment income attributable to Ronnie, and $43,323.81 of

taxable income.    Although Linda did not review the return, she is

charged with constructive knowledge of its contents.      Park v.

Commissioner, supra at 1299; Bokum v. Commissioner, supra at 148.

Even with such knowledge, it would have been reasonable for her

to believe that the income reported was sufficient to support

petitioners' lifestyle.    In addition, Linda did not live with

Ronnie during 1989, was not involved in his law practice during

that year, did not see the records Ronnie maintained for the

practice, and had a separate checking account.     Accordingly, we
                                - 9 -

conclude that Linda did not know, and had no reason to know, of

the substantial understatement of tax attributable to the

omission from gross income.

III.    Inequity Requirement

       Linda must prove that, taking into account all the facts and

circumstances, it would be inequitable to hold her liable for the

deficiency.    Sec. 6013(e)(1)(D).   In determining whether it would

be inequitable to hold Linda liable, we consider whether she

"significantly benefitted" from the understatement of tax.

Buchine v. Commissioner, 20 F.3d 173, 181 (5th Cir. 1994), affg.

T.C. Memo. 1992-36; Belk v. Commissioner, 93 T.C. 434, 440

(1989); 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); sec. 1.6013-5(b), Income Tax Regs.      We

consider the lifestyle to which the taxpayer is accustomed when

considering what constitutes normal support.       Sanders v. United

States, supra at 168; Belk v. Commissioner, supra.

       Respondent contends that Linda significantly benefited from

the understatement, because in 1989 Ronnie bought her a $23,000

Cadillac.    At trial, the Court asked Linda's counsel to explain

why the Cadillac did not constitute a substantial benefit to

Linda.    Linda's counsel failed to adequately address this

question.    Moreover, Linda failed to address this issue in both

her opening and reply briefs.    In essence, Linda did not present
                              - 10 -

any evidence to demonstrate that her receipt and ownership of the

Cadillac was consistent with the lifestyle to which she was

accustomed.   Therefore, she has failed to establish that it would

be inequitable to hold her liable for the deficiency.   We note

that pursuant to the divorce agreement Ronnie must indemnify

Linda for any underpayment of tax attributable to their 1989

return.

     Accordingly, we conclude that Linda, pursuant to section

6013(e), is not entitled to be relieved of tax liability with

respect to the omitted income.

     We have considered all other arguments made by petitioner

Linda and respondent and found them to be either irrelevant or

without merit.

     To reflect the foregoing,


                                         Decision will be entered

                                    under Rule 155.
