                        T.C. Memo. 1997-534



                      UNITED STATES TAX COURT



                  BETSY O. MUHN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17391-96.                    Filed December 1, 1997.



     Ron Lewis, for petitioner.

     Susan E. Seabrook, for respondent.



                        MEMORANDUM OPINION


     JACOBS, Judge:   Respondent determined a $14,733 deficiency in

petitioner's Federal income tax for 1991, an addition to tax for

failure to timely file a 1991 Federal income tax return pursuant to

section 6651(a)(1), and an addition to tax for failure to pay

estimated taxes pursuant to section 6654.
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       The sole issue for decision is whether petitioner is entitled

to innocent spouse relief pursuant to section 6013(e).          Petitioner

concedes     that   respondent's   determinations    in   the   notice   of

deficiency are otherwise correct.

       Unless otherwise indicated, all section references are to the

Internal Revenue Code as in effect for the year in issue.         All Rule

references are to the Tax Court Rules of Practice and Procedure.

All dollar figures are rounded.

                            General Findings

       This case was submitted with fully stipulated facts under Rule

122.     The stipulation of facts and the attached exhibits are

incorporated herein by this reference.

       At the time the petition was filed, petitioner resided in

Ruidoso, New Mexico.     She has been married to her husband, John N.

Muhn, for approximately 42 years.

Background

       Petitioner attended the University of Texas at El Paso and

Southern Methodist University for 2 years.          She did not take any

accounting or business classes while attending college.

       Mr. Muhn had been an accountant for Atlantic Richfield Corp.

before retiring on November 1, 1984.       He took care of all of the

family's financial matters.

       During 1991, petitioner was employed by Home Health Services

and briefly by American Greetings; Mr. Muhn was employed as a
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bookkeeper for the Ruidoso Valley Chamber of Commerce. Payment for

Mr. Muhn's services during 1991 was not made directly to him but

rather at   Mr.   Muhn's   direction   by   Ruidoso   Valley   Chamber   of

Commerce checks made payable to PFA Enterprises. These checks were

deposited into petitioner's account No. 20014362 at the First

Federal Savings Bank of New Mexico branch in Roswell, New Mexico.

PFA Enterprises

     On March 1, 1989, PFA Enterprises (PFA or the trust), an

unincorporated    Massachusetts   business    trust,1   was    created   by

Herbert Bates.    Mr. Bates was paid $3,000 for his services.

     Mr. Bates appointed Peer Financial Group as PFA's first

trustee to administer the trust. (David Smith was the agent for

Peer Financial Group; he has had no connection with PFA Enterprises

since its inception and has executed no documents on its behalf.)

Mr. Bates also appointed an interim beneficiary, First Surety Bank,

Ltd. (First Surety Bank) of the Marshall Islands, to hold PFA's

certificates for the trust's beneficiaries (namely, Mr. Muhn,

petitioner, their son John Scott Muhn (Scott Muhn), and Karen Kopp,

Scott Muhn's then fiancée). Mr. Bates has had no connection with

     1
           A Massachusetts business trust is one in which property
is conveyed to trustees and held and managed for the benefit of
certificate holders. 12A C.J.S., Business Trusts, sec. 2 (1980).
Under Federal tax law, these entities may be treated as
corporations rather than trusts. Sec. 301.7701-4(b), Proced. &
Admin. Regs.
           The parties have stipulated that PFA Enterprises should
be disregarded for tax purposes because it lacked economic
substance.
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PFA since its inception. No trust certificates have ever been

received by any of PFA's named beneficiaries.

     Petitioner has never met Mr. Bates or Mr. Smith, nor does she

have any knowledge of Peer Financial Group or First Surety Bank.

Petitioner was not involved in the operation of PFA, although she

executed a number of documents relating to the trust at the

direction of her husband.

     In June 1989, petitioner and her husband conveyed title to

both their residence and a cabin (each of which was subject to a

preexisting mortgage) to PFA.       PFA did not assume the obligation

under either of the mortgages.      After the transfer, petitioner and

her husband continued to reside in the house transferred to PFA;

their son lived in the cabin. Neither petitioner, her husband, nor

their son paid rent to PFA.

     On June 21, 1989, PFA (by or through Mr. Muhn and Scott Muhn

acting as PFA trustees) purchased Quick Print Express, a printing

business, for approximately $80,000.      Mr. Muhn and Scott Muhn paid

the sellers approximately $30,000 as a downpayment; the $50,000

balance was payable in 120 monthly installments of $660.75 each.

Mr. Muhn and Scott Muhn obtained financing for this acquisition by

listing as their assets the real property transferred to PFA by

petitioner   and   her   husband.    (Petitioner   believed   she   was

transferring her interest in her home and cabin to the trust in

order to assist her son in obtaining financing for the printing
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business.)    The $50,000 balance was secured by the business'

assets.

     In June 1990, PFA purchased Ruidoso Printing Co. and executed

a $95,050 note to First National Bank of Ruidoso (which was

cosigned by Mr. Muhn and Scott Muhn and renewed in August 1991) for

the acquisition.   The note was secured by the business' assets.

PFA executed a lease, cosigned by Mr. Muhn and Scott Muhn, of the

business premises in which Ruidoso Printing Co. operated.   In July

1990 and May 1991, Mr. Muhn and/or Scott Muhn executed leases for

a desktop publishing system and photocopier for the operation of

the printing businesses.

     During all relevant times, Scott Muhn managed the printing

businesses.   Petitioner was never employed by PFA.    Nor did she

ever have signing authority with respect to its checking accounts.

Personal Financial Affairs

     Petitioner and Mr. Muhn maintained two joint bank accounts

with First Federal Savings Bank.      With respect to one account

(account No. 20014362 at the First Federal Savings Bank of New

Mexico), preauthorized withdrawals were made in 1991 totaling

$12,246 for the mortgage on the residential home, $2,990 for

petitioner's personal loan on a 1984 Ford truck, and $1,403 for

petitioner's personal loan on a fifth wheel travel trailer.   With

respect to the second account (account No. 20020412 at the First

Federal Savings Bank of New Mexico), 355 checks totaling $30,596
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were written during 1991; petitioner signed only five of those

checks totaling $135.

Federal Tax Return

     On June 3, 1993, petitioner and Mr. Muhn filed a 1991 joint

Federal income tax return, reporting an adjusted gross income of

$25,880.   Petitioner did not review the delinquent return even

though at the time the return was filed, Mr. Muhn was under

examination with regard to his 1991 tax liability and petitioner

was aware of the tax examination.

Notice of Deficiency

     In the notice of deficiency, respondent determined a tax

deficiency of $14,733.    For the most part, the deficiency was

attributable to $41,665 of unreported income (1) from Mr. Muhn's

work for the Ruidoso Valley Chamber of Commerce ($14,019), and (2)

the net income of PFA ($27,646).

                            Discussion

     The sole issue for decision is whether petitioner qualifies

for innocent spouse relief for the 1991 deficiency and additions.

     Spouses who file a joint income tax return generally are

jointly and severally liable for its accuracy and the tax due,

including any additional taxes, interest, or penalties determined

on audit of the return.   Sec. 6013(d)(3).    However, pursuant to

section 6013(e), a spouse (commonly referred to as an innocent

spouse) can be relieved of tax liability if that spouse proves: (1)
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A joint income tax return was filed; (2) the return contained a

substantial understatement of tax attributable to grossly erroneous

items of the other spouse; (3) in signing the return, the spouse

seeking relief did not know, and had no reason to know, of the

substantial understatement; and (4) under the circumstances it

would be inequitable to hold the spouse seeking relief liable for

the understatement. Sec. 6013(e). The spouse seeking relief bears

the burden of proving that each of the four statutory requirements

has been satisfied, and the failure to satisfy any one of the

requirements        will    prevent      innocent     spouse    relief.        Bokum    v.

Commissioner, 94 T.C. 126, 138-139 (1990), affd. 992 F.2d 1132

(11th Cir. 1993).

      Respondent concedes that the first two statutory requirements

for   innocent      spouse       relief   have      been   satisfied.       Respondent

contends, however, that petitioner knew or should have known of the

unreported income from petitioner's employment with the Ruidoso

Valley Chamber of Commerce and the net income from PFA, and that it

would    not   be    inequitable         to   hold   petitioner       liable   for     the

deficiency and additions.

1.    Knowledge of Understatement

      To   establish        lack    of    knowledge        of   the    understatement,

petitioner must show that she was unaware of the circumstances

giving     rise     to     the    omission     of    income.          See   Purcell     v.

Commissioner, 86 T.C. 228, 238 (1986), affd. 826 F.2d 470 (6th Cir.
                                 - 8 -


1987).    She must further show that she lacked both actual and

constructive knowledge of the omission such that a reasonable

person could not be expected to know that the tax liability stated

was erroneous or that further inquiry was necessary.       See Stevens

v. Commissioner, 872 F.2d 1499, 1504-1505 (11th Cir. 1989), affg.

T.C. Memo. 1988-63.

     Whether the spouse seeking relief had reason to know of the

substantial understatement is a question of fact to be determined

after reviewing the entire record.       Guth v. Commissioner, 897 F.2d

441 (9th Cir. 1990), affg. T.C. Memo. 1987-522.

     a.     Mr. Muhn's Chamber of Commerce Income

     Petitioner asserts that she was unaware that Mr. Muhn's income

as a bookkeeper with the Ruidoso Valley Chamber of Commerce was not

reported on their joint Federal income tax return. She claims that

she did not review the return and that the paychecks made payable

to PFA went into a checking account used only for preauthorized

withdrawals. As such, petitioner contends, she "could not be

expected to unravel the financial web strung by her accountant

husband".

     Although petitioner may not have been aware of the amount of

compensation received by Mr. Muhn from the Ruidoso Valley Chamber

of Commerce or where those amounts were going, she certainly was

aware that Mr. Muhn was employed there and earned income.       Even a

cursory examination of the 1991 tax return would have alerted
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petitioner that Mr. Muhn's compensation was not reported. See

Chandler    v.    Commissioner,   T.C.   Memo.     1993-540,   affd.   without

published opinion 46 F.3d 1131 (6th Cir. 1995).                The failure to

review a tax return generally does not absolve a taxpayer of

liability.       Hayman v. Commissioner, 992 F.2d 1256, 1262 (2d Cir.

1993), affg. T.C. Memo. 1992-228.              A taxpayer may not generally

close her eyes and plead ignorance.              Edmondson v. Commissioner,

T.C. Memo. 1996-393. Petitioner was obligated to inquire into the

failure to report that income, and there is no evidence of such an

investigation.       See Park v. Commissioner, T.C. Memo. 1993-252,

affd. 25 F.3d 1289 (5th Cir. 1994).            Thus, we hold that petitioner

is not entitled to innocent spouse relief with respect to Mr.

Muhn's    unreported    income    from   the    Ruidoso   Valley   Chamber   of

Commerce.

     b.    Net Income From PFA

     Petitioner argues that she was not involved in the operation

of PFA and signed documents relating to the trust only at her

husband's direction.       Consequently, petitioner contends that she

had no knowledge of her husband's role in the trust and did not

know that any such role would result in taxable income.

     On brief, petitioner asserts:

                 The organization [PFA] has a complex
            structure. The structure of the organization
            utilized a "creator", "trustee" and off-shore
            bank as "interim beneficiary". Petitioner did
            not understand the complex structure of the
            organization to which she was directed by her
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          husband to transfer her residence and other
          real property. Clearly, Petitioner could not
          have understood the possible consequences of
          her transfers of real property to the
          organization because it was unconscionable
          that she would transfer control of the
          residence she occupies to persons unknown to
          her.

               Petitioner was directed to sign documents
          by her husband under the belief that she was
          helping   her   son  acquire   businesses   by
          providing equity to be used as net worth to
          qualify for purchase money financing. Signing
          documents as "exchangor" and transferring real
          property was the only connection of the
          Petitioner to the organization.     Petitioner
          was neither employed by nor rendered services
          to the organization, and was not otherwise
          connected with or involved in the organization
          whatsoever.   Petitioner had no knowledge of
          and had no reason to know the affairs of the
          organization.

     Although petitioner had no role in PFA, she knew that her

husband was involved in obtaining financing with her son and that

she was asked to transfer her real estate interests to PFA.   There

is no evidence that petitioner ever inquired as to the significance

of these events, whether at the time of:    (1) PFA's creation; (2)

Mr. Muhn's audit; or (3) the tax return's filing.   In any case, it

is knowledge of the transactions, not the tax consequences of those

transactions, that is material.     Quinn v. Commissioner, 524 F.2d

617, 626 (7th Cir. 1975), affg. 62 T.C. 223 (1974); McCoy v.

Commissioner, 57 T.C. 732 (1972).

     Further, although there is no evidence as to petitioner's

lifestyle during 1991, a cursory review of the reported adjusted
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gross income and petitioner's bank statements would have revealed

that expenses exceeded reported adjusted gross income by almost 2

to   1.      See     Chandler     v.   Commissioner,        supra;     Tafolla     v.

Commissioner, T.C. Memo. 1991-576.              The record does not indicate

that petitioner was prohibited from reviewing those documents or

investigating the family finances, or that Mr. Muhn was deceitful

about the family finances. See Cousins v. Commissioner, T.C. Memo.

1995-129. Such an inquiry would have seemed appropriate given that

the 1991 return was filed during Mr. Muhn's audit.                   Thus, we hold

that petitioner is not entitled to innocent spouse relief with

respect to the net income from PFA.

2.   Inequities of Holding Petitioner Liable

     Assuming arguendo that petitioner did not know or did not have

reason to know of the omitted income on the 1991 Federal income tax

return, petitioner failed to meet her burden of proof with respect

to the inequities of holding her liable for the deficiencies and

additions to tax.       Rule 142(a).

      In examining the inequity of holding petitioner liable, we

focus on whether she received significant benefit from the omission

of income, Estate of Krock v. Commissioner, 93 T.C. 672, 677-678

(1989), and whether she was deserted, divorced, or separated, sec.

1.6013-5(b),       Income   Tax   Regs.    We    may   also       consider   whether

petitioner     will    suffer     undue   hardship     as     a    result    of   the
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deficiencies.   See Dakil v. United States, 496 F.2d 431, 433 (10th

Cir. 1974).

     On brief, petitioner argues that she should not be held liable

for helping her son start his business.     This, however, is not a

basis for innocent spouse relief.

     It is unclear from the record whether petitioner benefited

from the omitted income; however, it is clear that the omitted

income items constituted more than 100 percent of the reported

income.   There is no evidence that the omitted income was used in

a manner that did not benefit petitioner.   In fact, the income from

the Ruidoso Valley Chamber of Commerce was deposited into an

account petitioner owned and was used to make payments on her

house, truck, and travel trailer during 1991.

     In examining the inequity of holding petitioner liable, we

also consider the status of the Muhns' marriage because it may

affect petitioner's ability to satisfy the tax liability.   In this

regard, we are mindful that the parties stipulated that petitioner

and her husband (1) were not contemplating separation or divorce,

(2) have not entered into any marital property agreements, and (3)

did not own separate property.

     Giving consideration to all the facts herein, we do not

believe it would be inequitable to hold petitioner liable for the

deficiencies and additions to tax.
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     To conclude, we hold that petitioner is not entitled to

innocent spouse relief.



                                      Decision will be entered

                                for respondent.
