                          T.C. Memo. 1996-165



                        UNITED STATES TAX COURT




                  ANNE C. SOMERVILL, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 14222-93.                       Filed April 1, 1996.


       A. Kelly Williams, for petitioner.

       Wanda M. Cohen, for respondent.


               MEMORANDUM FINDINGS OF FACT AND OPINION

       FAY, Judge:   Respondent determined deficiencies in Federal

individual income tax against petitioner as follows:

                                 Additions to Tax and Increased Interest
                                           Sec.                Sec.
Year              Deficiency             6621(c)               6659
                                            1
1976                 $1,682                                     --
                                            1
1977                 37,851                                     --
                                            1
1978                 36,933                                     --
                                            1
1979                 31,606                                     --
                                            1
1980                 21,615                                     --
                                            1
1981                 25,967                                   $7,790
                                   - 2 -
                                                 1
1982                 34,128                                       10,255
       1
        To be determined.

       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, unless

otherwise indicated.

       After concessions, the issue for decision is whether

petitioner qualifies as an innocent spouse with respect to any

portion of the income tax deficiencies.

                              FINDINGS OF FACT

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

The stipulation and the attached exhibits are incorporated herein

by this reference.

       Petitioner resided in Harlingen, Texas, at the time the

petition was filed.    Petitioner and her then husband, Robert C.

Somervill,1 filed joint Federal income tax returns for all of the

years in issue.    Respondent issued a notice of deficiency on

April 2, 1993, for the tax years 1976 through 1982.           Respondent's

notice of deficiency disallowed in full the ordinary losses from

an investment in Oxnard Properties, a partnership, claimed by

petitioner and Robert Somervill on their joint Federal income tax

returns for certain of the years in issue.           Additionally, the

notice disallowed an investment tax credit carryback from 1979 to


       1
      Petitioner and Robert C. Somervill divorced in 1985 but
were married throughout the years in issue.
                                - 3 -

1976 in the amount of $1,682.   Furthermore, the notice disallowed

the ordinary losses claimed from an investment in Progressive

Properties, a partnership, in the years 1980, 1981, and 1982.

     Petitioner was raised in a small town of 1,500 people.      She

completed high school and continued on to junior college for 2

years.   Petitioner then attended Northwestern University in

Evanston, Illinois, and was awarded a bachelor of arts degree in

psychology.   Immediately after completing college, petitioner

worked at Northwestern University's medical school answering

phones in the registrar's office.

     Petitioner met and married Robert Somervill, a medical

student at Northwestern University, in 1957.     Their first child

was born 13 months thereafter, in 1959, their second in 1962,

their third in 1964, and twins in 1965.     Petitioner and her

family moved to San Benito, Texas, in 1967 and remained there for

all of the years in issue.

     In 1977, petitioner received her real estate license and

began working in a real estate office as an agent.     Petitioner

testified that she was not a successful agent, and that her first

sale took place in 1983.   However, a joint Federal income tax

return filed for the 1977 tax year reflects a net profit from

petitioner's real estate activity.      In 1983, petitioner became a

real estate broker, the requirements for which are more

burdensome than those for a real estate agent.
                                 - 4 -

     Petitioner's husband worked as a physician during the years

in issue.   Petitioner had very little involvement in her

husband's medical practice.    She testified that her involvement

was limited to picking up a bank bag from her husband's office

and delivering it to the bank.

     Petitioner maintained her own checking account during the

years in issue.   Petitioner would pay for food, the family's

clothing, and gas for her car from her checking account.    She

would also pay the family's utility bills out of her checking

account.    When petitioner needed money to deposit in her checking

account, she would ask Pamela Mitchell, her husband's secretary,

to write her a check.

     Petitioner did not live a lavish lifestyle during the years

in issue.   She and her family lived in an old farmhouse that was

simply furnished.   Petitioner maintained a social membership at

the Harlingen Country Club, but the record is unclear as to what

year the membership began.    Petitioner was active in a garden

club during the years in issue.    She even held the position of

secretary and president for 1 year.

     Petitioner and her husband acquired several properties in

San Benito during the years in issue.    During 1978 they acquired

the "East Jackson" property, the 1602 Sunshine Strip property,

the 1801 Sunshine property, and the 1045 South Commerce property.

In 1979, petitioner and her husband acquired property on West
                               - 5 -

Jackson.   In 1981, they acquired property at 1616 South Carolina

and, in 1982, property at 2501 North 25th Street.

     During the years in issue, Tim Radder, a certified public

accountant (C.P.A.), prepared petitioner and her husband's

returns.   Petitioner's husband's secretary would compile the

information needed by the C.P.A. to complete the tax returns.

Petitioner would compile the information relating to the expenses

associated with her own real estate activities and any charitable

contributions that she made.   Petitioner would sign the return

when her husband's secretary called to tell her the completed

return was available.   Petitioner testified that no one ever

explained to her the different deductions or schedules on her tax

return, nor did she ask anyone to explain the return or the

deductions on it.   Petitioner further testified, however, that no

one prevented her from examining the returns in issue; instead,

she simply chose not to examine them.

     Petitioner testified at trial that she had no knowledge of

her husband's investments in either the Oxnard Properties or

Progressive Properties partnerships.    However, Sol Finkelman or a

member of his accounting firm, petitioner, and Robert Somervill

met for lunch or dinner, during which there was some discussion

of the Oxnard Properties and Progressive Properties.    Petitioner

testified that she did not understand what was being discussed as

to Oxnard Properties and Progressive Properties.    Nonetheless,
                                - 6 -

petitioner testified that, while she had the opportunity to ask

questions during these meetings, she did not do so.

      On July 12, 1988, a Form 906, Closing Agreement On Final

Determination Covering Specific Matters, relating to Progressive

Properties was executed.    Pursuant to that agreement petitioner

agreed to be bound by the final decision in Finkelman v. Commis-

sioner, T.C. Memo 1989-72, affd. without published opinion 937

F.2d 612 (9th Cir. 1991).   Also on July 12, 1988, another Form

906 was executed, this one relating to Oxnard Properties.

Pursuant to this Form 906, petitioner agreed to be bound by the

final decision in Finkelman v. Commissioner, supra.      Amongst

other issues, Finkelman had at issue the deductibility of losses

from investment in Oxnard Properties and Progressive Properties.

Once again, petitioner testified that she signed the Form 906

simply because she was instructed by her husband's secretary to

do so.   On February 16, 1989, this Court filed an opinion holding

that the losses generated by certain partnerships, including

Oxnard Properties and Progressive Properties, were disallowed.

Id.

                               OPINION

      When a husband and wife file a joint Federal income tax

return, liability for the tax due is joint and several.      Sec.

6013(d)(3).   However, an "innocent spouse" can find relief under

the provisions of section 6013(e).      In order to invoke the

provisions of section 6013(e), the spouse seeking relief must
                                - 7 -

satisfy the following requirements:     (1) That a joint return was

filed; (2) that, on the return, there is a substantial under-

statement of tax; (3) that the understatement is attributable to

grossly erroneous items of the other spouse; (4) that the spouse

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

substantial understatements of tax; and (5) considering all the

facts and circumstances, it would be inequitable to hold the

spouse liable for the deficiencies in income tax.    Sec. 6013(e).

Failure to meet any one of the statutory requirements will

prevent petitioner from qualifying for relief under section

6013(e).    Bokum v. Commissioner, 992 F.2d 1132 (11th Cir. 1993),

affg. 94 T.C. 126, 138 (1990); Purcell v. Commissioner, 826 F.2d

470, 473 (6th Cir. 1987), affg. 86 T.C. 228 (1986).

     Petitioner bears the burden of proving that she is entitled

to relief as an innocent spouse under section 6013(e).    Rule

142(a).    The parties agree that petitioner and her then husband

filed joint Federal income tax returns for the years in issue and

that there was on each return a substantial understatement of tax

attributable to items of his.   Respondent contends, however, that

petitioner is not entitled to innocent spouse relief for the

taxable years in issue because the understatements of tax on the

subject returns are not attributable to grossly erroneous items,

petitioner knew or had reason to know of the understatements, and

it is not inequitable to hold petitioner liable for the deficien-

cies in tax.
                               - 8 -

     For purposes of section 6013(e), grossly erroneous items are

defined as "any item of gross income attributable to such spouse

which is omitted from gross income," and "any claim of a deduc-

tion, credit, or basis by such spouse in an amount for which

there is no basis in fact or law."     Sec. 6013(e)(2)(A) and (B);

Purcell v. Commissioner, supra at 474.     Ordinarily, a deduction

has no basis in law or fact if it is "'fraudulent,' 'frivolous,'

'phony,' or 'groundless.'"   Bokum v. Commissioner, supra at 1142

(quoting Stevens v. Commissioner, 872 F.2d 1499, 1504 n.6 (11th

Cir. 1989), affg. T.C. Memo. 1988-63); see Ness v. Commissioner,

954 F.2d 1495 (9th Cir. 1992), revg. 94 T.C. 784 (1990).     A

deduction has no basis in fact when the expense for which it is

claimed was never, in fact, made.      Douglas v. Commissioner, 86

T.C. 758, 762 (1986).   A deduction has no basis in law when the

expense, even if made, does not qualify as deductible expense

under well-settled legal principles or when no substantial legal

argument can be made in support of its deductibility.      Id.   The

fact that the deduction has been disallowed does not, however,

dictate a finding that the deduction is "grossly erroneous".

Ness v. Commissioner, supra at 1498.

     The deductions in question arose from petitioner's husband's

investment in Progressive Properties and Oxnard Properties, part-

nerships formed and managed by Sol Finkelman.     The losses claimed

by Progressive and Oxnard for the years in issue, and the dis-

tributive shares of those losses claimed by one of the partners,
                               - 9 -

were among the deductions whose deductibility was decided in a

test case.   Finkelman v. Commissioner, T.C. Memo. 1989-72.

     The major issue considered in Finkelman involved the tax

consequences of leveraged real estate transactions.   The focus of

the Court's inquiry was whether the transactions should be

disregarded for Federal income tax purposes because they lacked

economic substance and/or were primarily tax motivated.    The

Court determined that the transactions were lacking in economic

substance and profit objective and, accordingly, were not to be

respected for tax purposes.   Although the deductions were not

allowed, the Court declined to sustain the section 6653(a)

negligence additions to tax against the promoter.   In so holding,

the Court explained that the taxpayer's favorable financing

argument was not an "untenable" theory, that it had "some support

in the case law", and that "the claimed losses were supported by

a credible and unprecedented (albeit erroneous) theory".

     Petitioner claims that the holding in Finkelman that the

transactions lacked economic substance and that there was no

profit objective mandates the conclusion that the deductions can

have no basis in law.   We cannot agree with petitioner.

     The Court in Finkelman acknowledged that, although the

transactions were not reasonable, "That does not, however, render

petitioner's theory untenable."   Finkelman v. Commissioner,

supra.   Despite the Court's rejection of the taxpayer's arguments

in that case, they were "not without some support in the case
                                - 10 -

law."     Id.   Moreover, the Court stated that "the claimed losses

were supported by a credible and unprecedented (albeit erroneous)

theory".     Our opinion in Finkelman makes clear that the deduc-

tions, while disallowed, were not frivolous, fraudulent, or

phony.

        We find that, under the circumstances presented herein, the

deductions are not attributable to grossly erroneous items within

the meaning of section 6013(e)(2)(B).    Petitioner is, therefore,

not relieved of joint liability with respect to any part of the

income tax deficiencies.

                                      Decision will be entered for

                                 respondent.
