                        T.C. Memo. 1995-465



                      UNITED STATES TAX COURT



    BARBARA A. VRINER, A.K.A. BARBARA A. COYNE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8635-94.               Filed September 28, 1995.




     Arthur M. Lerner, for petitioner.

     John W. Duncan, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     CLAPP, Judge:   Respondent determined a deficiency in

petitioner's 1987 Federal income tax in the amount of $36,417.

After concessions by the parties, the sole issue for decision is

whether petitioner is entitled to relief as an innocent spouse

for the taxable year 1987.   We hold that she is so entitled.

     All section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the
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Tax Court Rules of Practice and Procedure, unless otherwise

indicated.

                         FINDINGS OF FACT

     Some of the facts are stipulated and are so found.    We

incorporate by reference the stipulation of facts and attached

exhibits.

     Petitioner resided in Champaign, Illinois, when she filed

the petition in this case.   Petitioner married William S. Vriner

(Mr. Vriner) in 1980, and they obtained a divorce in 1993. From

1984 through 1987, petitioner and Mr. Vriner (the Vriners) filed

joint Federal income tax returns, and they reported no taxable

income during those years.   The Vriners lived in a house acquired

by Mr. Vriner prior to their marriage.    The home was located in

an older neighborhood with moderate- to low-priced homes.       They

received residential services including telephone, cable TV,

garbage pickup, water, and electricity.     During 1987, petitioner

had credit accounts with Amoco Oil Co., J.C. Penney, and

Bergners, and a Visa account with Chemical Bank.

     Mr. Vriner, along with his parents and siblings, worked at a

restaurant owned by his parents (the Vriner restaurant).    When

they first met, Mr. Vriner told petitioner that he worked at the

Vriner restaurant for a living, and he later told her that the

arrangement between him and his family's restaurant was none of

her business.   Petitioner never saw a paycheck of Mr. Vriner's

from the restaurant, but she assumed that he was being paid.      Mr.
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Vriner would bring money home from the Vriner restaurant, and

occasionally he would bring home groceries such as eggs, milk, or

lettuce.   Petitioner was employed as a dental receptionist.

     On their 1987 joint return, the Vriners reported on Schedule

E rental income and expenses from real estate.   Mr. Vriner told

petitioner that he owned the rental property with his brother,

but petitioner knew little else about the property.

     By 1987, the Vriners had closed their joint checking account

because, when Mr. Vriner would take the checkbook to the Vriner

restaurant, members of the Vriner family would write checks on

the account.   After closing the checking account, petitioner paid

their bills either in cash or with a money order.

     Mr. Vriner leased a car and told petitioner that he would

take care of the payments in the amount of $266.84 per month.    In

June 1987, petitioner's father gave petitioner a 1977 Pontiac

Bonneville.    The Vriners had one child, and once or twice during

their marriage they traveled to California to visit petitioner's

parents.   They rarely traveled on weekends or went out to dinner.

Mr. Vriner purchased no expensive items for the home.

     In 1988, Federal agents conducted a search of the Vriners'

home.   During the search, petitioner learned that her husband was

under investigation for narcotics activities.    No narcotics were

found during the search, and petitioner had no knowledge of her

husband's narcotics activities prior to the search.   Although Mr.

Vriner had prior arrests for driving under the influence, those
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arrests all involved alcohol and not narcotics.    Petitioner had

never seen any narcotics in their home.

     Mr. Vriner subsequently was arrested, but he did not discuss

his arrest with petitioner.   After reading the newspaper and

attending her husband's court appearances, petitioner learned

that Mr. Vriner and his brother had been trafficking in

narcotics, and they stored the narcotics in a warehouse located

in Urbana, Illinois.   The deficiency in this case stems from the

proceeds of the Vriner brothers' drug activities.

                              OPINION

     Spouses filing a joint return are jointly and severally

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

innocent spouse rule permits a spouse to avoid joint and several

liability in certain cases. Sec. 6013(e).    For petitioner to

qualify as an innocent spouse, it must be established:     (1) That

a joint return was filed for the year in issue; (2) that there

was a substantial understatement of tax attributable to grossly

erroneous items of Mr. Vriner; (3) that, in signing the return,

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

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

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

the deficiency.   Sec. 6013(e)(1)(A)-(D).   Petitioner has the

burden of proving each requirement of section 6013(e).     Rule

142(a); Russo v. Commissioner, 98 T.C. 28, 31-32 (1992).     A

failure to meet any one of the requirements will preclude the
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spouse from relief.    Stevens v. Commissioner, 872 F.2d 1499, 1504

(11th Cir. 1989), affg. T.C. Memo. 1988-63; Bokum v.

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

Cir. 1993).   It is undisputed that the Vriners filed a joint

return and that the return contained a substantial understatement

of tax attributable to grossly erroneous items of Mr. Vriner.

Respondent argues, however, that petitioner knew or had reason to

know of the substantial understatements, and that it would not be

inequitable to hold her liable for the deficiency.

     Petitioner testified that she signed the 1987 Federal income

tax return after being directed to do so by Mr. Vriner, and we

are convinced that petitioner was not familiar with the contents

of the return.   We find that petitioner had no actual knowledge

of the substantial understatement of tax and, indeed, had no

knowledge of her husband's alleged narcotics activities prior to

the search of their home in 1988.     Thus, we must ascertain

whether she had reason to know of the substantial understatement

of tax.

     A taxpayer has reason to know of a substantial

understatement of tax if a reasonably prudent taxpayer in his or

her position could be expected to know that the stated tax

liability was erroneous or that further investigation was

warranted.    Kistner v. Commissioner, 18 F.3d 1521, 1525 (11th

Cir. 1994), revg. and remanding T.C. Memo. 1991-463; Stevens v.

Commissioner, supra at 1505; Bokum v. Commissioner, supra at 153.
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If the substantial understatement of tax is attributable to an

omission of income, the spouse seeking relief has reason to know

of the understatement if he or she has reason to know of the

transaction that gave rise to the understatement.    Guth v.

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

1987-522; Smith v. Commissioner, 70 T.C. 651, 673 (1978).      We may

impute to the spouse seeking relief constructive knowledge of the

transaction if he or she turned a blind eye to facts within his

or her reach that would have put a reasonably prudent taxpayer on

notice to inquire further.    McCoy v. Commissioner, 57 T.C 732,

734 (1972).

     In determining whether the spouse seeking relief had reason

to know of the substantial understatement of tax, courts

generally consider, among other factors, the spouse's level of

education and involvement in the financial and business

activities of the family.    There is no information in the record

concerning petitioner's educational background.   Petitioner did

not participate in the family's financial affairs other than

paying assorted bills, and there is evidence that petitioner was

not privy to any aspect of the Vriner family restaurant.    Nor did

petitioner have any knowledge of her husband's alleged drug

activities prior to 1988 when Federal agents searched their home.

     Respondent argues that petitioner had reason to know because

the income reported on the Vriners' 1987 return was inadequate to

meet the family expenses.    Petitioner testified that she thought
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the Vriner family was paying some of their expenses such as the

house payment.   Petitioner's belief is reasonable in light of Mr.

Vriner's close ties with his family and the family business,

coupled with the fact that she was privy to no financial

information.   Mr. Vriner reported income from rental property and

also received money from the Vriner restaurant, and petitioner

reasonably could conclude that Mr. Vriner used those funds to

satisfy their monthly expenditures.    There were no unusual or

lavish expenditures.    Thus, we conclude that petitioner did not

know or have reason to know of the substantial understatements.

     In determining whether it would be inequitable to hold

petitioner jointly liable for the deficiency in tax for 1987, we

consider whether she significantly benefited from the

underpayments of tax.    Estate of Krock v. Commissioner, 93 T.C.

672, 677 (1989).   Any benefit received by petitioner must be

considered in the totality of the circumstances.     Busse v. United

States, 542 F.2d 421, 427 (7th Cir. 1976).    Petitioner received

very little, if any, benefit from the funds that gave rise to the

deficiency in this case.    Petitioner lived a modest lifestyle and

made no extravagant expenditures.     Any benefit she received was

in the form of necessities and normal support, with the possible

exception of the two trips to California to visit her parents.

Normal support is not considered a significant benefit.     Belk v.

Commissioner, 93 T.C. 434, 440 (1989).     We conclude that it would
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be inequitable to hold petitioner liable for the deficiencies.

We hold that petitioner qualifies as an innocent spouse.

                                    Decision will be entered

                              for petitioner.
