                        T.C. Memo. 1996-96



                      UNITED STATES TAX COURT



               LLOYD E. DAWSON, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 14892-92, 10613-93.1        Filed March 4, 1996.



     Charles Gordon Reed, for petitioner.

     Steven M. Diamond and Wanda Cohen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:   Respondent determined the following

deficiencies in, and additions to, petitioner’s Federal income

taxes:

1

     These cases, hereinafter referred to as the instant case,
have been consolidated for purposes of trial, briefing, and
opinion.
                                          - 2 -

                                          Additions to Tax                      Penalty
  Year       Deficiency Sec. 6651(a)(1)    Sec. 6653(a)(1)   Sec. 6654   Sec. 6661
Sec. 6662(a)

1988   $57,984         -0-                 $40          -0-        $14,051       -0-
1989    14,202        $1,445                -0-         $922         -0-        $2,840

       After concessions, the only issues remaining for decision

are: (1)     Whether petitioner is entitled to "innocent spouse"

relief from liability for the understatement of tax attributable

to funds his former wife Katy Dawson embezzled during 1988; and

(2) whether funds embezzled by Ms. Dawson during 1989 constitute

community income, one half of which is taxable to petitioner.

                               FINDINGS OF FACT

       Some of the facts have been stipulated for trial pursuant to

Rule 91.2    The parties' stipulations are incorporated in this

Memorandum Opinion by reference and are found accordingly.

General Background

       At the time of the filing of the petitions herein,

petitioner resided in Orange, Texas.

       From September 1972 through January 1982, petitioner was

employed by the U.S. Navy and, from January 1982 through February

1994, was employed by Gulf States Utilities as a power plant

operator and control operations foreman.




2

     Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for the
years in issue.
                                 - 3 -

     Petitioner married Ms. Dawson on October 16, 1982, and the

marriage continued through the years in issue.    Petitioner and

Ms. Dawson had two daughters who lived with them during the years

in issue.

Bank Accounts Maintained and Certain Borrowing by Petitioner and
Ms. Dawson

     During the years in issue, petitioner and Ms. Dawson

maintained a joint checking account with Mid County Teachers

Credit Union, Port Neches, Texas (Mid County Teachers), for which

both petitioner and Ms. Dawson had signature authority and on

which petitioner wrote checks.    Petitioner and Ms. Dawson

maintained a joint account with Texaco Port Arthur Works

Employees’ Federal Credit Union, Port Arthur, Texas (Texaco

P.A.W.).    Ms. Dawson was primary account holder and petitioner

was joint owner of the account, which included a joint savings

account and a joint checking account.3   Both petitioner and Ms.

Dawson had signature authority for the joint checking account,

and petitioner wrote checks on the account.    Petitioner and Ms.

Dawson maintained another joint account with Texaco P.A.W.

Petitioner was primary account holder and Ms. Dawson was joint

owner of the account.    Petitioner, Ms. Dawson, and Pauline




3

     Although the parties stipulated that the joint account
included both a checking and a savings account, they did not
further explain that account arrangement.
                               - 4 -

Dupree, Ms. Dawson’s mother, had signature authority for the

joint account.

     The statements for the foregoing accounts were mailed to the

residence of petitioner and Ms. Dawson.    Petitioner opened and

looked at some of the statements.    Petitioner also knew where the

statements were kept at their residence, and he was able to

review them whenever he desired.

     Beginning March 15, 1989, and continuing thereafter through

the remainder of 1989, petitioner and Ms. Dawson maintained a

joint checking account with First National Bank of Mid County.

Both petitioner and Ms. Dawson had signature authority for the

joint checking account.   Petitioner wrote checks on the account

to pay family bills.   The statements for the account were also

sent to petitioner’s residence.    Petitioner reviewed and

reconciled the statements.

     On October 22, 1987, a home improvement loan from Texaco

P.A.W. to petitioner and Ms. Dawson in the amount of $7,520.34

was outstanding.   On that date, petitioner and Ms. Dawson applied

for and received an additional home improvement loan in the

amount of $15,191.69 from Texaco P.A.W. and refinanced the

outstanding balance of the earlier home improvement loan.    The

new balance of the home improvement loan they received on that

date thus became $22,712.03.
                               - 5 -

Facts With Respect to Ms. Dawson’s Employers

     Ms. Dawson was employed by Port Arthur Home Health Services

(PAHHS) and Beaumont Home Health Services (BHHS) from 1977 until

July 17, 1989.   The corporations were wholly owned and/or

operated by Dr. Ruth Constant (Dr. Constant).    During 1988 and

1989, Ms. Dawson was employed by PAHHS and BHHS as an accounting

supervisor and was the second person in charge of the

corporations after Dr. Constant.

     PAHHS and BHHS each operated two different programs, a

Primary Care program and a Medicare program.    Ms. Dawson had

complete authority over the payroll accounting for the programs,

including the input of data into the computer systems for the

payrolls and the review of the payrolls.    Each of the four

programs (viz., PAHHS Primary Care, PAHHS Medicare, BHHS Primary

Care, and BHHS Medicare) had two checking accounts, a general

account and a payroll account, for a total of eight checking

accounts.   While employed by PAHHS and BHHS, Ms. Dawson had

signature authority for, and was authorized to issue checks from,

all eight checking accounts and had complete responsibility and

full authority for the issuance of all payroll checks by PAHHS

and BHHS.

     During the middle of 1987, petitioner worked for Dr.

Constant as a computer consultant.     At such time, petitioner was
                               - 6 -

the sole proprietor of a computer consulting business that

included the delivery of computer equipment and the setting up of

computerized bookkeeping and payroll systems.4   Petitioner

installed computer equipment for PAHHS and BHHS and set up their

computerized bookkeeping and payroll systems.    He also taught the

employees of PAHHS and BHHS how to use the systems.   Such

computerized bookkeeping and payroll systems that were set up by

petitioner included the four payroll checking accounts and the

four general checking accounts maintained by PAHHS and BHHS that

are referred to above.   Petitioner also installed computers in

the offices of other corporations operated by Dr. Constant.

During 1988, petitioner also worked as a “handyman” for BHHS,

setting up offices and moving boxes and furniture.

     During 1988, Ms. Dawson caused checks to be issued to

herself from the payroll checking accounts maintained by PAHHS

and BHHS for her wages from the corporations in the amounts of

$35,903.12 and $33,854.68, respectively.   Also during that year,

in addition to the checks for her wages, she used the

computerized payroll system installed by petitioner to cause

checks to be issued to herself from the payroll checking accounts

in the amount of $153,726.   Ms. Dawson signed each of the checks


4

     Petitioner operated such business from the middle of 1987
through the end of 1989.
                                 - 7 -

on behalf of PAHHS or BHHS.   Ms. Dawson issued to herself between

13 and 22 payroll checks per month, with the amount of each check

ranging from $50 to $1,500.   The checks were endorsed by Ms.

Dawson and were deposited into joint checking accounts maintained

by petitioner and Ms. Dawson during that year.

     During 1989, Ms. Dawson caused checks to be issued to

herself from the payroll checking accounts maintained by PAHHS

and BHHS for her wages from the corporations in the amounts of

$8,900 and $22,900, respectively.    Also during that year, in

addition to the checks for her wages, she used the computerized

payroll system installed by petitioner to cause checks to be

issued to herself from such payroll checking accounts in the

amount of $95,072.   Ms. Dawson signed each of these checks on

behalf of PAHHS or BHHS.   The checks were endorsed by Ms. Dawson

and were deposited into joint checking accounts maintained by

petitioner and Ms. Dawson during that year.    Petitioner deposited

certain of the checks Ms. Dawson received from PAHHS and BHHS

into their joint checking account with First National Bank of Mid

County.

     Ms. Dawson did not hide from petitioner the funds she had

embezzled.

     On July 17, 1989, believing that Ms. Dawson had embezzled

funds, Dr. Constant fired her.
                                - 8 -

Expenditures by Petitioner and Ms. Dawson

     During September 1987, a new Lincoln Continental automobile

was purchased for Ms. Dawson’s use.     The purchase was financed

with a loan of $29,976.   During November 1987, petitioner wrote

two checks to Golden Triangle Remodeling totaling $9,700 for the

cost of a three-car garage added to their home.     On December 29,

1987, petitioner purchased a new Ford Big Bronco automobile.      The

purchase was financed with a loan of $22,079.28 to petitioner on

which payments were made during 1988.

     During 1988, petitioner and Ms. Dawson wrote checks totaling

$146,752.26 on their joint checking account with Mid County

Teachers.    Also during that year, petitioner and Ms. Dawson wrote

checks or made transfers totaling $145,458.62 from their joint

checking account with Texaco P.A.W.     Nearly all of the funds

deposited into the joint checking account maintained by

petitioner and Ms. Dawson with Texaco P.A.W. during 1988 were

spent in that year.

     Between January and April 1988, petitioner and Ms. Dawson

paid $17,602 to Golden Triangle Remodeling for the addition of a

computer room over their garage.   The room was furnished in 1988

with, inter alia, a desk, a computer cabinet, and custom-built

bookcases.   During July and August of 1988, Don Lightfoot Home

Builder, Inc., made improvements to the residence of petitioner
                               - 9 -

and Ms. Dawson that consisted of remodeling its living room and

the bedrooms of their two daughters.   The remodeling included

installation of hardwood floors and new draperies in all three

rooms, removal of part of a wall, and the addition of a skylight

to one bedroom and of a bay window to the other.   On November 3,

1988, Don Lightfoot Home Builder, Inc., was paid $3,227 for the

improvements by a check drawn on the joint checking account with

Texaco P.A.W.   Petitioner also signed a check payable to Beaumont

Cobbs Carpet, Inc., in the amount of $1,065 to pay expenses for

remodeling one of his daughter’s bedrooms.   Petitioner was aware

of the remodeling done at his home.

     During 1988, Ms. Dawson purchased beds for their daughters

at a cost of $5,000, a red cherry dining room set at a cost of

between $5,000 and $6,000, a 25-inch color television and set of

oak entertainment cabinets, a crystal chandelier, a living room

set, a number of sewing machines, two portable televisions with

built-in video cassette recorders, and a camcorder.   Petitioner

was aware of the items Ms. Dawson purchased for their home during

1988.

     Also during 1988, a new Mercury Sable automobile was

purchased that was financed with a loan to petitioner.

Petitioner also purchased a 1987 Nissan pickup truck for $6,500

and paid for it with two checks he wrote on the joint checking
                                  - 10 -

account with Texaco P.A.W.     Petitioner and Ms. Dawson also lent

$4,400 to Ms. Dawson’s sister and her husband for the purchase of

a truck.

     Also during 1988, petitioner purchased a 1967 28-foot wood-

hulled Chris Craft boat (Chris Craft) for $7,500, paid for by

withdrawals from the joint checking account with Texaco P.A.W.

The Chris Craft was licensed and registered to petitioner.       The

interior cabin of the Chris Craft was decorated by Fowler’s

Furniture & Design Gallery (Fowler’s) in December 1988 at a total

cost of $6,187.85.     Petitioner and Ms. Dawson met with an

employee of Fowler’s to discuss the decoration.     Petitioner

incurred labor and parts expenses for work performed on the Chris

Craft by Eastex Marine Maintenance on or about the following

dates in the following amounts:

                Aug.   1, 1988      $1,586.67
                Aug.   10, 1988        557.47
                Oct.   21, 1988        537.15
                Nov.   9, 1988         144.00

                 Total               2,825.29

Additionally, petitioner paid over $1,000 for further work on the

Chris Craft.   Petitioner docked the Chris Craft at the Beaumont

Yacht Club, and the membership in the club was in his name only.

Petitioner paid an annual membership fee and monthly docking fees

to the Beaumont Yacht Club for the Chris Craft that totaled

approximately $1,250 per year.
                              - 11 -

      During 1988, petitioner and Ms. Dawson went on a Caribbean

cruise.   During such year, Ms. Dawson’s parents went on a

Caribbean cruise that petitioner and Ms. Dawson gave them as a

present for their anniversary.    The cost of the trip was $1,316.

Also during that year, petitioner, Ms. Dawson and their daughter

Audrey went on a vacation to Disneyland in California.   The

$1,190 cost of the trip was paid with a check drawn on the joint

checking account with Mid County Teachers.   On Christmas Eve

1988, petitioner and Ms. Dawson gave Ms. Dawson’s sister, her

husband, her sister’s two children, and petitioner’s and Ms.

Dawson’s daughter Audrey a vacation to Disneyland.   The $2,656

cost of the trip was paid with a check drawn on the joint

checking account with Mid County Teachers.

      During 1988, petitioner and Ms. Dawson were members of the

Pompano Club, a private dining club.

      On June 6, 1989, petitioner and Ms. Dawson purchased a 1988

Passport Motor Home (motor home) for $47,804 from Henry Courts

RV.

      Ms. Dawson did not hide from petitioner any of the items she

purchased with embezzled funds.

Petitioner’s and Ms. Dawson’s Income Tax Returns

      Petitioner and Ms. Dawson timely filed a joint Federal

income tax return for each of their 1987 and 1988 taxable years
                                - 12 -

(hereinafter respectively referred to as the 1987 return and 1988

return).   Their 1987 return reported wage income of $90,611,

adjusted gross income of $92,522, and that petitioner’s

compensation from Gulf States Utilities was $41,782.    Their 1988

return reported wage income of $85,862, adjusted gross income of

$87,092, and that petitioner’s compensation from Gulf States

Utilities was $41,604.   Forms W-2 for the 1988 taxable year show

wages paid to Ms. Dawson by PAHHS and BHHS in the amounts of

$27,854 and $29,902.12, respectively.    Such Forms W-2 include

$15,000 in wages from PAHHS and $15,000 in wages BHHS paid to Ms.

Dawson that were omitted from petitioner’s and Ms. Dawson’s

return for that year.    Petitioner assisted Ms. Dawson in

preparing the 1988 return.    The purported signature of petitioner

on the 1988 return is not in fact petitioner’s signature.

     Petitioner filed a separate Federal income tax return for

the taxable year 1989 on May 21, 1990.

Certain Events Occurring Subsequent to the Years in Issue

     Petitioner and Ms. Dawson separated on May 1, 1990, and were

divorced on December 4, 1990.

     On or about July 8, 1991, Ms. Dawson pled guilty in the U.S.

District Court, Eastern District of Texas (District Court) to one

count of embezzlement, in violation of 18 U.S.C. sec. 666, and

one count of income tax evasion for the tax year 1988, in

violation of section 7201.
                              - 13 -

     Ms. Dawson was sentenced to 28 months’ incarceration in

Federal prison.   At the time of trial, Ms. Dawson was on

supervised release from Federal prison.    She was ordered by the

District Court to pay, and, at the time of trial, she was paying,

(1) restitution to Dr. Constant and (2) taxes to the Internal

Revenue Service (IRS) for 1988 in accordance with a payment

schedule developed with the IRS.

                              OPINION

Innocent Spouse Issue

     The first issue that we must consider is whether petitioner

has shown that he is an innocent spouse with respect to the

understatement of tax attributable to the funds embezzled by Ms.

Dawson in 1988.

     Spouses who file joint tax returns generally are jointly and

severally liable for Federal income tax due on their combined

incomes, as well as for interest on, and additions to, the tax.

Sec. 6013(d)(3); Park v. Commissioner, 25 F.3d 1289, 1292 (5th

Cir. 1994), affg. T.C. Memo. 1993-252.    The general rule is

mitigated to some extent by section 6013(e), known as the

“innocent spouse” rule.   Park v. Commissioner, supra.   Congress

regards joint and several liability as an important adjunct to

the privilege of filing joint tax returns, which generally

results in a lower tax on the combined incomes of spouses than

would be due were they to file separate returns, and any
                               - 14 -

relaxation of the rule of liability depends upon compliance with

the conditions of section 6013(e).      Sonnenborn v. Commissioner,

57 T.C. 373, 380-381 (1971).   Because of its remedial purpose,

however, the innocent spouse rule must not be given an unduly

narrow or restrictive reading.    Sanders v. United States, 509

F.2d 162, 167 (5th Cir. 1975).    The question whether a taxpayer

has established that he or she is entitled to relief as an

innocent spouse is one of fact.    Park v. Commissioner, supra at

1291.

     Section 6013(e)(1) provides in pertinent part that if:

               (A) a joint return has been made under this
     section for a taxable year,

               (B) on such return there is a substantial
     understatement of tax attributable to grossly erroneous
     items of one spouse,

               (C) the other spouse establishes that in
     signing the return he or she did not know, and had no
     reason to know, that there was such substantial
     understatement, and

               (D) taking into account all the facts and
     circumstances, it is inequitable to hold the other
     spouse liable for the deficiency in tax for such
     taxable year attributable to such substantial
     understatement,

     then the other spouse shall be relieved of liability for tax
     (including interest, penalties, and other amounts) for such
     taxable year to the extent such liability is attributable to
     such substantial understatement.

     A taxpayer must prove that each requirement of section

6013(e) is met, and failure to prove any one of the requirements
                              - 15 -

prevents a taxpayer from qualifying for relief as an innocent

spouse.   Park v. Commissioner, supra at 1292; Purcell v.

Commissioner, 826 F.2d 470, 473 (6th Cir. 1987), affg. 86 T.C.

228 (1986); Bokum v. Commissioner, 94 T.C. 126, 138 (1990), affd.

992 F.2d 1132 (11th Cir. 1993).   In the instant case, the parties

stipulated that petitioner filed a joint return with Ms. Dawson

for 1988, notwithstanding that the signature on the return

purporting to be petitioner’s is not in fact his.5   Respondent

also concedes that there was a substantial understatement of tax

attributable to grossly erroneous items of Ms. Dawson on the

return.   Respondent contends, however, that petitioner knew or

had reason to know of the substantial understatement and that it

is not inequitable to hold petitioner liable for the deficiency

attributable to the substantial understatement.

     The knowledge test, as stated above, requires a taxpayer to

show that, at the time of signing a joint return, he or she did

not know and had no reason to know of the substantial

understatement of tax on the return.   The relevant knowledge is

of the transaction giving rise to the income omitted from the

return, rather than of the tax consequences of such transaction.

5

     The failure of one spouse to sign a return does not prevent
such return from being considered a joint return if the
nonsigning spouse intended to file a joint return. See Shea v.
Commissioner, 780 F.2d 561, 567 (6th Cir. 1986), affg. in part
and revg. and remanding in part T.C. Memo. 1984-310; Estate of
Campbell v. Commissioner, 56 T.C. 1, 12 (1971).
                               - 16 -

Park v. Commissioner, supra at 1293-1294; Sanders v. United

States, supra at 169; Bokum v. Commissioner, supra at 146.

Consequently, a spouse who knows or has reason to know of such a

transaction does not qualify for relief as an innocent spouse.

Park v. Commissioner, supra; Sanders v. United States, supra.     A

spouse has “reason to know” of an understatement 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 (citing Sanders v. United
     States, supra at 166-167 and n.5.)]

     In deciding the issue, factors we consider include:   (1) The

level of education of the spouse seeking relief; (2) the spouse’s

involvement in the family’s business and financial affairs; (3)

unusual or lavish expenditures made by the family; and (4) the

“culpable” spouse’s refusal to be forthright about the couple’s

income.   Park v. Commissioner, 25 F.3d at 1293; Sanders v. United

States, 509 F.2d at 167-170.   In reaching our decision, we

consider the interplay among the factors, and different factors

will predominate in different cases.    Bliss v. Commissioner, 59

F.3d 374, 378 (2d Cir. 1995), affg. T.C. Memo. 1993-390.

     Turning to the facts of the instant case, we find that, even

if, at the relevant time, petitioner did not actually know that

Ms. Dawson was embezzling funds from her employers, i.e., the
                              - 17 -

source of the income,6 he knew or had reason to know of the

receipt of the income attributable to the embezzlement.     As to

the first factor, level of education, petitioner has presented no

evidence.   We note, however, that, during the years in issue,

petitioner was employed by Gulf States Utilities as a power plant

operator and control operations foreman, employment from which he

earned over $40,000 in 1988, and that he had been so employed

since 1982.   Beginning in mid-1987 and continuing through the

years in issue, petitioner also operated a computer consulting

business that included the delivery and installation of computer

equipment and the setting up of computerized bookkeeping and

payroll systems.   Certainly he had some experience in business

and financial matters.

     As to the second factor, involvement in the family’s

finances, petitioner contends that Ms. Dawson or her mother

handled his family’s financial affairs and that he was uninvolved

6

     We cannot conclude with certainty from the record whether or
not petitioner had actual knowledge that Ms. Dawson had embezzled
funds from her employers when the 1988 return was signed. For
instance, at trial, Ms. Dawson testified that, at the time the
couple purchased a motor home in 1989, petitioner told her to get
more money from the “agency”, i.e., her employers, so that they
could make a larger downpayment. The motor home was purchased on
June 6, 1989, after the filing of the 1988 return in April 1989.
Accordingly, such testimony, even if we were to believe it, would
not necessarily establish that petitioner was aware in April 1989
that Ms. Dawson was embezzling funds from her employers.
Although Ms. Dawson testified that petitioner had made similar
statements at other times, she could not recall specific
instances.
                              - 18 -

in such matters prior to March 1989, when he admits he assumed

responsibility for writing checks to pay his family’s bills.

Perfect knowledge of one’s family’s financial affairs, however,

is not required to satisfy the reason to know standard.    Shea v.

Commissioner, 780 F.2d 561, 567 (6th Cir. 1986), affg. in part

and revg. and remanding in part T.C. Memo. 1984-310; Sanders v.

Commissioner, supra at 168.    We conclude that petitioner had

sufficient involvement in his family’s affairs to put a

reasonable person in his position on notice that the income

reported in the 1988 return was erroneous or that further inquiry

was warranted.   During 1988, Ms. Dawson caused PAHHS and BHHS to

issue to her between 13 and 22 payroll checks per month, with the

amounts of the checks ranging from $50 to $1,500.    All of the

funds embezzled by Ms. Dawson during 1988 were deposited in joint

bank accounts over which petitioner had signature authority and

on which he wrote checks.   The statements for the accounts were

mailed to the residence of petitioner and Ms. Dawson, and he

opened and looked at least some of the statements.    Petitioner

knew where the statements were kept at their residence, and he

could have reviewed them whenever he desired.   Perusal of the

bank statements would have alerted petitioner to the actual level

of the couple’s income.   Furthermore, the number of deposits of

payroll checks made by Ms. Dawson in the accounts and the dollar

amount of the deposits reflected in the statements would have
                                - 19 -

shown petitioner that the amount of income Ms. Dawson was

receiving from her employers was larger than the amount he

claimed to have believed that it was during 1988.     A taxpayer

claiming innocent spouse relief cannot simply turn a blind eye to

facts within his or her reach that would have put a reasonably

prudent taxpayer on notice that further inquiry needed to be

made.     Sanders v. United States, supra at 169; Bokum v.

Commissioner, 94 T.C. at 148; McCoy v. Commissioner, 57 T.C. 732,

734 (1972).

        Moreover, in March 1989, petitioner opened a joint checking

account at First National Bank of Mid County, into which he

deposited certain of Ms. Dawson’s payroll checks, checks that

petitioner concedes represented some of the funds embezzled from

PAHHS and BHHS.     Petitioner reviewed and reconciled the

statements for the account.     As stated above, petitioner admitted

that he assumed responsibility for writing checks to pay his

family’s bills at that time, prior to the time the 1988 return

was filed in April 1989.     Petitioner should have become aware no

later than March or April 1989 of the true level of his family’s

income and expenditures.     Moreover, petitioner assisted Ms.

Dawson in preparing their 1988 joint income tax return.

        In addition to his involvement in his family’s financial

affairs, we consider it significant that petitioner was involved

in the business of Ms. Dawson’s employers, PAHHS and BHHS.
                                - 20 -

During 1987, petitioner delivered, installed, and programmed

computerized bookkeeping and payroll systems for PAHHS and BHHS

in the offices of BHHS.    Petitioner taught the employees of PAHHS

and BHHS to use the systems.    During 1988, Ms. Dawson used the

systems to embezzle funds from her employers.    Petitioner also

installed computers in the offices of other corporations operated

by Dr. Constant.   Petitioner also worked as a “handyman” for

BHHS, setting up offices and moving furniture and boxes.

     The third factor we consider is the presence of unusual or

lavish expenditures by petitioner’s family.    A taxpayer claiming

relief as an innocent spouse cannot close his or her eyes to

unusual or lavish expenditures that might have alerted him or her

to unreported income.     Terzian v. Commissioner, 72 T.C. 1164,

1170 (1979); Mysse v. Commissioner, 57 T.C. 680, 699 (1972).       The

presence of unusual or lavish expenditures may put a taxpayer on

notice that it is probable that income is being omitted from a

joint return.   Estate of Jackson v. Commissioner, 72 T.C. 356,

361 (1979).

     The overall amount of spending by petitioner and Ms. Dawson

during 1988 should have put petitioner on notice that it was

probable that income was omitted from their 1988 return.

Petitioner and Ms. Dawson wrote checks on the joint checking

account with Mid County during 1988 that totaled $146,752.26.

During 1988, petitioner and Ms. Dawson wrote checks on the joint
                              - 21 -

checking account with Texaco P.A.W. in the amount of $145,458.62.

The total amount of the checks written on both the accounts thus

exceeded $290,000.   Such a level of expenditure was made possible

by the deposit in the accounts of the $153,726 that Ms. Dawson

embezzled from her employers during 1988.   Although the record

indicates that petitioner may have written only a relatively

small percentage of the checks drawn on the accounts, and

petitioner claimed to have been uninvolved in his family’s

finances prior to March 1989, we do not think it reasonable to

conclude that he failed to notice that during 1988, he and Ms.

Dawson spent an amount that was two or three times (1) the amount

that he claimed to have believed to have been their income for

each of 1987 and 1988 (viz., between $90,000 to $120,000) and (2)

the amount of adjusted gross income reported on each of their

1987 and 19887 returns.

     The specific expenditures disclosed by the record that were

made during 1988 also should have alerted petitioner to the

probable omission of income from the 1988 return.   While the

record shows that in 1987 a Lincoln Continental automobile and a

Ford Big Bronco automobile were purchased, and a three-car garage

costing $9,700 was added to petitioner’s and Ms. Dawson’s home,

7

     Petitioner has conceded that the 1988 return omitted the
following amounts received by Ms. Dawson: (1) $30,000 of wage
income from PAHHS and BHHS; (2) gross receipts of $740, and (3) a
pension distribution of $1,055.
                              - 22 -

we find that expenditures made by petitioner’s family in 1988

were lavish or unusual.

     Significant sums were spent to remodel and furnish

petitioner’s home during 1988.   Petitioner and Ms. Dawson paid

$17,602 for the addition of a computer room over their garage.

They also paid $3,227 for the remodeling of their living room and

the bedrooms of their two daughters.   Petitioner signed a further

$1,065 check to pay expenses in connection with the remodeling.8

Petitioner was aware of the remodeling.   Petitioner was also

aware in 1988 that Ms. Dawson purchased beds for their daughters

at a cost of $5,000, a red cherry dining room set at a cost of

between $5,000 and $6,000, a 25-inch color television and set of

oak entertainment cabinets, a crystal chandelier, a living room

set, a number of sewing machines, two portable televisions with

built-in video cassette recorders, and a camcorder.

     Expenditures for automobiles and a boat were also made

during 1988.   A Mercury Sable automobile was purchased, and

petitioner purchased a 1987 Nissan pickup truck for $6,500,

paying for it with two checks he wrote on the joint checking

8

     Petitioner claims that the remodeling discussed above was
financed by a loan. Although a loan of approximately $15,000 was
funded in 1987, the total cost of the remodeling of petitioner’s
home in 1987 and 1988 after the funding of the loan exceeded the
amount of the loan. Moreover, it seems reasonable to us that Ms.
Dawson’s embezzlement provided a source of funds from which
payments on the loan could be made, aiding petitioner and Ms.
Dawson in carrying the loan.
                               - 23 -

account with Texaco P.A.W.    Also, petitioner and Ms. Dawson lent

her sister and her husband $4,400 for the purchase of a truck.

Petitioner also purchased a 28-foot Chris Craft boat for $7,500,

paying for it with withdrawals from the joint checking account

with Texaco P.A.W.   Petitioner and Ms. Dawson paid $6,187.85 to

decorate the boat, meeting with the decorator to discuss the

decoration.   Petitioner also incurred maintenance expenses of

over $2,825.29 with respect to the boat in 1988.     Petitioner paid

yacht club membership and dockage fees of $1,250 with respect to

the boat.

     Significant travel financed by petitioner and Ms. Dawson

also occurred during 1988.    Petitioner and Ms. Dawson went on a

Caribbean cruise.    They gave Ms. Dawson’s parents such a cruise

costing $1,316 as an anniversary present.     Petitioner, Ms.

Dawson, and their daughter Audrey went on a vacation costing

$1,190 to Disneyland in California.     Petitioner and Ms. Dawson

gave her sister, her husband, their two daughters, and

petitioner’s and Ms. Dawson’s daughter Audrey a vacation costing

$2,656 to Disneyland.

     The fourth factor we consider is whether Ms. Dawson was

forthright about the omitted income.     Petitioner has not

established that Ms. Dawson was evasive concerning her true level

of income.    We have found that Ms. Dawson did not attempt to hide

the income from her embezzlement or her expenditures from
                               - 24 -

petitioner.    Indeed, all of the embezzled funds were deposited in

and disbursed from joint checking accounts to which petitioner

had access and with respect to which statements were available to

him.

       Under the circumstances of the instant case, a reasonably

prudent person would have seriously questioned the gross income

reported in the joint return petitioner and Ms. Dawson filed for

1988, and petitioner, therefore, had a duty of inquiry with

respect to the correctness of the reported income, a duty that he

failed to discharge.    Park v. Commissioner, 25 F.3d at 1293;

Sanders v. United States, 509 F.2d at 167.     We accordingly find,

based on the entire record, that petitioner knew or had reason to

know of the substantial understatement of tax on the 1988 return

resulting from the omission of the income embezzled by Ms. Dawson

during such year.

       The next matter we consider is whether it would be

inequitable to hold petitioner liable for the deficiency

attributable to the omission of the funds embezzled by Ms. Dawson

from the 1988 return.    Sec. 6013(e)(1)(D).   In deciding the

issue, we take into account all of the facts and circumstances.

Id.; sec. 1.6013-5(b), Income Tax Regs.    A factor to be

considered is whether the person seeking relief significantly

benefited, directly or indirectly, from the omitted income.9

9

       Although sec. 6013(e)(1)(D), since its amendment in 1984, no
                                                     (continued...)
                                - 25 -

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

T.C. Memo. 1992-36; sec. 1.6013-5(b), Income Tax Regs.    Normal

support, which is to be measured by a couple’s circumstances, is

not considered a significant benefit.    Sanders v. United States,

supra at 168; Terzian v. Commissioner, 72 T.C. at 1172; Mysse v.

Commissioner, 57 T.C. at 699.    A significant benefit exists if

expenditures have been made which are unusual for the taxpayer’s

accustomed lifestyle.   Terzian v. Commissioner, supra.   Other

factors include:   (1) Whether the spouse seeking relief has been

deserted by the other spouse or is divorced or separated from

that spouse, sec. 1.6013-5(b), Income Tax Regs.; and (2) probable

future hardships that would be visited upon the purportedly

innocent spouse were he or she not relieved from liability,

Sanders v. United States, supra at 171 n.16.

     We conclude, based on the record in the instant case, that

petitioner received a significant benefit from the funds that Ms.

Dawson embezzled in 1988.   The embezzled funds allowed more funds

to be available for petitioner’s household than were provided by

the wage income that was earned by petitioner and Ms. Dawson and


9
 (...continued)
longer expressly requires that a taxpayer seeking relief as an
innocent spouse show that he or she did not significantly benefit
from items of income omitted from a joint return, the question of
significant benefit is nonetheless a factor properly to be
considered in deciding whether it is inequitable to hold a spouse
liable for the understatement attributable to the omission.
Estate of Krock v. Commissioner, 93 T.C. 672, 678 (1989); Purcell
v. Commissioner, 86 T.C. 228, 241 (1986), affd. 826 F.2d 470 (6th
Cir. 1987).
                              - 26 -

reported on their 1988 return.   Petitioner has not shown that Ms.

Dawson used the funds exclusively for her own benefit, and it

appears to us that the funds were largely expended for the

benefit of petitioner’s family or Ms. Dawson’s relatives.    The

record shows that petitioner enjoyed significant benefits, such

as expensive remodeling of and furnishings for his home, a boat

which was purchased and redecorated at significant cost, and

vacations to the Caribbean and Disneyland.   Petitioner has not

established that such expenditures were characteristic of his

accustomed lifestyle, and we conclude that the benefits they

afforded him were unusual for his lifestyle.   With respect to the

other factors to be considered, we note that, while petitioner

was not deserted by Ms. Dawson, they separated and were divorced

in 1990.   Such circumstance, however, does not outweigh the

significant benefit that petitioner received from Ms. Dawson’s

embezzlement.   Petitioner also has not established that any

hardships would be visited upon him were he not to be relieved

from liability for the deficiency attributable to the omission of

the embezzled funds from the 1988 return.

     We find, therefore, that it would not be inequitable to hold

petitioner liable for the understatement attributable to the

funds embezzled by Ms. Dawson in 1988.

     Based upon the foregoing, we hold that petitioner is jointly

and severally liable for the deficiencies in, and additions to,
                                - 27 -

tax attributable to the funds Ms. Dawson embezzled from her

employers during that year.

Community Income Issue

     The next issue we shall consider is whether any of the funds

embezzled by Ms. Dawson during 1989 are taxable to petitioner.10

Petitioner is taxable on the funds to the extent of his ownership

interest under Texas law.     United States v. Mitchell, 403 U.S.

190, 194-197 (1971), and cases cited therein.     Texas law provides

for a community system of property rights of spouses.     Tex.

Const. art. 16, sec. 15; Tex. Fam. Code Ann. sec. 5.01 (West

1993).   Under that system, each spouse has a vested interest in,

and is the owner of, one-half of all such property.      Johnson v.

Commissioner, 72 T.C. 340, 343 (1979).    Consequently, a spouse is

liable for the Federal income tax on the portion of any income

that is community property.     Id.   A spouse, however, has no

ownership interest in, and is not taxable on, income that is the

separate property of the other spouse.     Id.   Our inquiry

accordingly focuses on whether the $95,072 embezzled by Ms.



10

     Because petitioner filed a separate tax return from Ms.
Dawson for 1989, petitioner concedes that he is not eligible for
relief as an innocent spouse under sec. 6013(e). Petitioner,
however, does not contend, and we do not consider whether, he
qualifies as an innocent spouse pursuant to sec. 66(c), under
which a taxpayer who does not file a joint return may be relieved
of liability for tax on items of community income attributable to
the taxpayer’s spouse. See Roberts v. Commissioner, 860 F.2d
1235, 1238-1239 (5th Cir. 1988), affg. T.C. Memo. 1987-391.
                                  - 28 -

Dawson during 1989 was community property or her separate

property.

     The pertinent Texas statute defines community property as

“the property, other than separate property, acquired by either

spouse during marriage.”     Tex. Fam. Code Ann. sec. 5.01(b) (West

1993).   We have previously held that the well-established rule in

Texas is that the term “acquired” as it is used in the statute

refers to the origin or inception of title.        Johnson v.

Commissioner, supra at 344.       In Johnson v. Commissioner, supra at

344, we reasoned as follows:

     Consequently, a spouse who acquires property during
     marriage must acquire some legal title to the property
     before such property will be characterized as community
     property. Hence, if a spouse acquires possession of
     property without title, the property remains the
     separate property of such spouse.

                     *   *    *    *   *   *   *

          Under Texas law, where property is acquired
     illegally, whether title to such property passes to the
     illegal taker depends on whether the owner intended to
     pass both possession and title to the illegal taker.
     [Citations omitted.]

     We must accordingly consider whether petitioner has carried

his burden of proving that PAHHS and BHHS did not intend to pass

to Ms. Dawson both possession of and title to the funds she

embezzled in 1989.   Ms. Dawson was authorized to issue the

payroll checks in her name that represented the embezzled funds.

She was responsible for and had signature authority over all of

the payroll checking accounts maintained by PAHHS and BHHS and
                             - 29 -

issued all of the payroll checks for those entities.   Ms. Dawson,

therefore, possessed the authority to act on behalf of those

entities to pass both possession of and title to the funds in

those payroll accounts to others.   Based upon our consideration

of the entire record in the instant case, we conclude that

petitioner has not carried his burden of proving that, in issuing

the checks, PAHHS and BHHS did not intend to pass to Ms. Dawson

both possession of and title to the funds embezzled by her during

1989.   Rule 142(a).

     We, therefore, hold that the $95,072 embezzled by Ms. Dawson

during 1989 is community income, one-half of which is taxable to

petitioner.

     To reflect concessions and the foregoing,

                                         Decisions will be entered

                                    under Rule 155.
