                              T.C. Memo. 1998-5



                           UNITED STATES TAX COURT



                   LINDA S. DILLON, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 3453-90.                        Filed January 5, 1998.



       James S. Black, Jr., for petitioner.

       Gregory M. Hahn, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


       FAY, Judge:      Respondent determined deficiencies in

petitioner's Federal income taxes as follows:

                                         Additions to Tax

                             Sec.       Sec.          Sec.        Sec.
Year       Deficiency        6651      6653(a)        6659        6661

1981       $42,072.00        $-0-      $2,104        $2,280       $-0-
1982        79,606.42      7,960.64    10,470         5,434     15,373.11
                              - 2 -



     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,1 the issue for decision is whether

petitioner qualifies for innocent spouse relief under section

6013(e) for taxable years 1981 and 1982.2



     1
      The parties have stipulated that petitioner received, but
did not report, $274 in interest income in 1982. Petitioner is
not entitled to innocent spouse protection under sec. 6013(e)
with respect to this income, and petitioner has stipulated that
she is jointly and severally liable for the 1982 deficiency and
additions to tax owing on the $274 of unreported income.
Further, petitioner and Thomas Dillon's joint 1982 Federal income
tax return was due on October 15, 1983, but it was not filed
until November 21, 1983. Therefore, petitioner is liable for an
addition to tax under sec. 6651(a)(1) for failure to timely file
the 1982 tax return.
     2
      The parties have stipulated that petitioner is liable for
the following deficiency and additions to tax for taxable year
1981 if she is not an innocent spouse under sec. 6013(e):
(1) There is a deficiency of $12,143 in Federal income tax;
(2) there is no addition to tax under sec. 6653(a)(1) or (2); and
(3) there is no addition to tax under sec. 6659. The parties
have also stipulated that petitioner is liable for the following
deficiency and additions to tax for taxable year 1982 if she is
not an innocent spouse under sec. 6013(e): (1) There is a
deficiency of $21,715 in Federal income tax; (2) there is a
$2,171 addition to tax under sec. 6651(a)(1); (3) there is a
$7,575 addition to tax under sec. 6653(a)(1)(A); (4) there is an
addition to tax under sec. 6653(a)(1)(B) equal to 50 percent of
the statutory interest due from April 15, 1983, to the date of
assessment of tax or, if earlier, the date of payment; (5) there
is no addition to tax due under sec. 6659; and (6) there is a
$5,429 addition to tax under sec. 6661. The above stipulations
for taxable year 1982 include the deficiency related to the $274
of omitted income and the addition to tax under sec. 6651(a)(1)
for failure to timely file the return discussed in footnote 1.
                                 - 3 -


                         FINDINGS OF FACT

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

The stipulations of facts and attached exhibits are incorporated

herein by this reference.   Petitioner resided in the State of

Washington at the time the petition was filed.

Background

     Petitioner and Thomas J. Dillon were married in 1963.

During the marriage petitioner gave birth to two sons, Mark and

Chris Dillon.   The Dillons separated in 1984 and subsequently

were divorced in 1987.   Petitioner and Thomas Dillon filed joint

Federal income tax returns for both 1981 and 1982.

     Petitioner has a high school degree and completed one year

of college at Brigham Young University.     In addition, she has

attended cosmetology school.   Petitioner worked as a hairdresser

the first year that she and Thomas Dillon were married.     After

the first child was born, however, petitioner stopped working as

a hairdresser and stayed at home as a homemaker for the remainder

of the marriage.

     Mr. Dillon formed Dillon Securities, Inc., in the early

1970s.   Dillon Securities, Inc. (Dillon Securities), is a corpo-

ration engaged in the stock brokerage business, specializing in

small-cap, speculative stocks.    During the years at issue, Thomas

Dillon was a director, officer, and the sole shareholder of

Dillon Securities.   Additionally, Mr. Dillon, working as a trader

for Dillon Securities, was actively involved in the stock trading
                                - 4 -


business.   Petitioner worked part time at Dillon Securities

during 1981 and 1982.   Her responsibilities involved essentially

pedestrian tasks, such as manually entering stock trades in the

ledgers and ordering lunches.

     Dillon Securities prospered during the years at issue, and

this success is reflected in Mr. Dillon's salary.    Specifically,

Thomas Dillon's income from Dillon Securities was more than

$1 million in 1981 and nearly $420,000 in 1982.    This income

allowed the Dillons to enjoy a high standard of living; for

instance, the family lived in a home with a swimming pool.

Further, the Dillons also owned a large number of "toys",

including an airplane, a helicopter, 13 cars, a boat and several

snowmobiles.   Beginning in 1980, petitioner and Thomas Dillon

spent approximately $900,000 to purchase 40 acres of land on

Hangman Valley Road and built a house and barn on the property.

Also, during the years at issue, petitioner went on several

family vacations including two trips to Hawaii, one trip to

Mexico, and at least two ski trips to Sun Valley.

     Petitioner trusted Thomas Dillon.    During the years at

issue, Thomas Dillon generally handled the finances while peti-

tioner took care of their two children.    Thomas Dillon maintained

a money market account (the Murphy Favre, Inc./Composite Cash

Management Company account, hereinafter the Murphy Favre

account), and statements of the activity in the Murphy Favre

account were received by Thomas Dillon at Dillon Securities.     All
                               - 5 -


of the duties with respect to the Dillon family's finances,

including the reconciliation of the Murphy Favre account

statements, were handled by Thomas Dillon or accounting personnel

at Dillon Securities.   Although petitioner maintained a personal

checking account at First Interstate Bank and had several credit

cards, most of the family expenses were paid directly from

accounts that were maintained by Thomas Dillon at Dillon Securi-

ties.   Whenever petitioner needed money for personal expenses,

Thomas Dillon would transfer money into petitioner's checking

account.

     Thomas Dillon divorced petitioner on June 29, 1987.   Peti-

tioner was awarded maintenance of $2,000 per month for 66 months

beginning in June 1987.   There was an equitable distribution of

the marital assets following the divorce.   Pursuant to this dis-

tribution, petitioner received the following assets:   The house,

barn and 40 acres of land on Hangman Valley Road; real property

located at South 5208 Perry Street; a 50 percent interest in

commercial property located at West 525 Second Avenue;

$207,779.66 held in a bank account at First Interstate Bank; one-

half interest in the Dillon Securities profit sharing plan

(valued at approximately $208,000); $70,000 in cash from Thomas

Dillon (payable one year after the entry of the decree of disso-

lution or at the time the R-22 Alpha helicopter was sold, which-

ever occurred first); $52,750 in cash payable from the sale of

certain stock held by Thomas Dillon at Dillon Securities (plus
                                 - 6 -


one-half of any assets remaining in the account after payment of

the $52,750); approximately $23,500 from a reserve account held

in the name of Thomas Dillon at Dillon Securities; three

automobiles (a 1978 SC 911 Targa Porsche, a 1981 Ford 250 4 x 4

truck, and a 1985 Chevrolet S-10 Blazer); a 1977 boat and

trailer; and miscellaneous other assets as identified in the

property settlement agreement.

     At the time of the dissolution proceedings, petitioner was

aware that the IRS was investigating certain items reported on

petitioner and Thomas Dillon's 1981-1985 Federal income tax

returns.   Petitioner negotiated an indemnification clause in the

property settlement agreement to cover any income taxes due for

the years prior to 1987.   Pursuant to this clause, Thomas Dillon

is responsible for any income tax liabilities related to the

years prior to 1987.

     Petitioner's income has dropped considerably since the

divorce.   In her 1994 Federal income tax return, petitioner

reported adjusted gross income of $12,739.

Thomas Dillon's Investments

     In 1981, Thomas Dillon invested approximately $150,000 in a

partnership called Supertaps Associates (Supertaps).   Supertaps

was a partnership involved with the production and syndication of

two movies, "Superman III" and "Taps".   Thomas Dillon sought

investment advice from his accounting firm, Touche Ross & Company

(Touche Ross), prior to investing in Supertaps.   The Dillons'
                               - 7 -


accountant at Touche Ross, after reviewing the financial package

concerning the investment in Supertaps, did not express any

objections relating to the investment.    Petitioner attended the

meeting in 1981 in which Thomas Dillon and the accountant from

Touche Ross discussed the investment in Supertaps.    In their

1981, 1982, and 1983 Federal income tax returns, petitioner and

Thomas Dillon reported losses from this investment of $77,739,

$115,782, and $107,104, respectively.    However, in 1985

petitioner and Thomas Dillon reported partnership income of

$128,924.

     During 1981 and 1982, Thomas Dillon maintained a money

market account with Murphy Favre.   The statements were received

by Thomas Dillon at Dillon Securities, and petitioner was not

listed as a signatory on the account.    The balance in the account

varied between $600,000 and $800,000.    In 1981, petitioner and

Thomas Dillon reported income from this account of $22,517.      In

1982, the Dillons earned $43,158 in income from this account, but

this income was mistakenly omitted from their 1982 Federal income

tax return.

     Petitioner and Thomas Dillon's 1981 Federal income tax

return was prepared by accountants at Touche Ross.    Petitioner

and Thomas Dillon attended a meeting at Touche Ross to review and

sign their return.   The accountants at Touche Ross discussed ways

in which the Dillons could reduce their Federal income tax

liabilities.   Petitioner did not review the return before signing
                               - 8 -


it.   In general, petitioner trusted Thomas Dillon and his

handling of the family finances.

      On November 20, 1989, respondent issued a notice of

deficiency to petitioner and Thomas Dillon.   In the notice of

deficiency, respondent disallowed the loss from Supertaps of

$77,739 which had been deducted by the Dillons in 1981.     Further,

respondent determined that the Dillons had failed to report

$43,158 of income earned on their Murphy Favre account in 1982.

      Petitioner and Thomas Dillon entered into nearly identical

closing agreements with the Internal Revenue Service concerning

the investment in Supertaps.   Thomas Dillon's closing agreement

contains the same financial terms as petitioner's, except that

his agreement does not contain an "innocent spouse" provision.

Under the terms of these agreements, petitioner is entitled to

losses in connection with Supertaps in the amount of $300,625,

which had been previously deducted on the Dillons' 1981, 1982,

and 1983 joint Federal income tax returns.

      Further, under these agreements, there is no Federal income

tax deficiency for the taxable years 1982 through 1985 relating

to the Supertaps investment.   In the event petitioner is not

found to be an innocent spouse, then petitioner is liable for a

$12,143 deficiency for 1981, and petitioner must also report

$114,076 in income from Supertaps on her 1986 Federal income tax

return, or on the next open Federal income tax return.
                               - 9 -


                              OPINION

     Generally, spouses who file joint tax returns are jointly

and severally liable for Federal income tax due on their combined

incomes.   Sec. 6013(d)(3); Guth v. Commissioner, 897 F.2d 441,

442 (9th Cir. 1990), affg. T.C. Memo. 1987-522.   However,

pursuant to section 6013(e)(3), an "innocent spouse" can be

relieved of tax liability.

     For petitioner to qualify as an innocent spouse, she must

establish:   (1) A joint return was filed for each year in issue;

(2) there were substantial understatements of tax attributable to

grossly erroneous items of her spouse in the return; (3) in

signing the returns, she did not know or have reason to know of

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

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

liable for the deficiencies and additions to tax.   Sec.

6013(e)(1)(A) through (D); Guth v. Commissioner, supra at 443.

Petitioner has the burden of proving each element of section

6013(e) by a preponderance of the evidence.   Rule 142(a).   Since

the elements are conjunctive, the failure to prove any one of the

elements will preclude petitioner from receiving relief.     Stevens

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

Memo. 1988-63.

     Respondent concedes that a joint return was filed for each

of the years in issue, and thus the first element is not in
                              - 10 -


dispute.   Further, the parties have stipulated that the $43,158

of income that was omitted from the 1982 Federal income tax

return is a grossly erroneous item.    Therefore, the issues for

decision are:   (1) Whether the understatement of income for the

taxable year 1981 from the Supertaps loss deduction is a "grossly

erroneous item," as defined by section 6013(e)(2)(B), attribut-

able solely to Thomas Dillon, and whether the omission of income

from the 1982 Federal income tax return is attributable solely to

Thomas Dillon; (2) whether petitioner, in signing the 1981 and

1982 Federal income tax returns, did not know or have reason to

know of the substantial understatement of tax in 1981 which

resulted from the Supertaps deduction or the substantial under-

statement of tax in 1982 which resulted from the failure to

report income from the Murphy Favre account; (3) whether it would

be inequitable to hold petitioner liable for the deficiencies in

income tax for 1981 and 1982 attributable to the substantial

understatements.

The 1981 Disallowed Loss Deduction for Supertaps

     Petitioner contends that she is entitled to innocent spouse

relief with respect to the 1981 deficiency arising from the

Supertaps investment.   In order to prevail, petitioner must

prove: (1) That the substantial understatement is a grossly

erroneous item; (2) that the substantial understatement is

attributable solely to Thomas Dillon; (3) that petitioner did not
                               - 11 -


know or have reason to know of the understatement of tax at the

time she signed the return; and (4) that it would be inequitable

to hold petitioner liable for the deficiency resulting from this

understatement.   Respondent asserts that petitioner has failed to

prove each of these items.

     Respondent contends that the loss deduction does not con-

stitute a grossly erroneous item.   The Internal Revenue Code

defines a “grossly erroneous” deduction as one having no basis in

fact or law at the time the income tax return is filed.   Sec.

6013(e)(2).   A deduction has no basis in fact when the expense

for which the deduction 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 a deductible expense under well-settled legal princi-

ples or when no substantial legal argument can be made to support

its deductibility.   Id.   Ordinarily, a deduction having no basis

in fact or in law may be described as frivolous, fraudulent, or

phony.   Bokum v. Commissioner, 992 F.2d 1136, 1142 (11th Cir.

1993), affg. T.C. Memo. 1990-21.

     The taxpayer has the burden of proving that the deduction is

grossly erroneous.   Rule 142(a).   The taxpayer cannot meet this

burden merely by relying on statements contained in the notice of

deficiency, the report of the revenue agent, or the report of the

Appeals officer that the partnership investment is a sham, lacks
                              - 12 -


economic substance, or lacks a profit motive.     Douglas v. Commis-

sioner, 86 T.C. at 762; Michaels v. Commissioner, T.C. Memo.

1995-294.

     We may consider the terms of a stipulated settlement in

determining whether partnership losses are grossly erroneous.

However, we do not draw an inference that the partnership losses

are grossly erroneous where the stipulation is silent as to

whether the partnership transaction was a sham.     Michaels v.

Commissioner, supra.

     Petitioner asserts that Thomas Dillon invested in Supertaps

merely to obtain tax losses and not to obtain a positive return

on the investment.   Therefore, petitioner concludes that the loss

deductions from Supertaps do not qualify as deductible expenses

under well-settled legal principles, and there is no basis in law

for the allowance of the loss deductions.

     Sham transactions are not given effect for Federal income

tax purposes, Frank Lyon Co. v. United States, 435 U.S. 561, 573

(1978), and the resulting deductions are phony and without basis

in fact or law.   In this regard, petitioner has the burden of

producing evidence concerning the sham nature of the underlying

transaction and the lack of profit motive on the part of the

entity and its principals.   Here, petitioner must establish that,

at the partnership level, Supertaps was a sham transaction with-

out a profit motive.   Hulter v. Commissioner, 91 T.C. 371, 393
                               - 13 -


(1988).   The record contains no evidence of the organization,

operations, or business plan of Supertaps.   Petitioner did not

put on any evidence of the activities and motives of the

Supertaps partnership.   Without such evidence, it cannot be

determined whether petitioner and her husband lacked any legal

basis for deducting the Supertaps losses.    See Kaye v. Commis-

sioner, T.C. Memo. 1995-345.   Therefore, despite petitioner's

assertions to the contrary, we conclude that petitioner has not

proven that there was no basis in fact or in law for deducting

the 1981 loss in connection with the investment in Supertaps.

Accordingly, we find that petitioner has not carried her burden

in proving that the deduction is grossly erroneous.

The 1982 Understatement From Unreported Income

     Petitioner also contends that she is entitled to innocent

spouse relief with respect to the 1982 deficiency arising from

$43,158 of unreported income earned on the Murphy Favre account.

Respondent has conceded that this is a grossly erroneous item.

Therefore, in order to prevail, petitioner must prove:   (1) That

the substantial understatement is attributable solely to Thomas

Dillon; (2) that petitioner did not know or have reason to know

of the understatement of tax at the time she signed the return;

and (3) that it would be inequitable to hold petitioner liable

for the deficiency resulting from this understatement.   Respon-

dent asserts that petitioner has failed to prove each of these
                               - 14 -


items.    As more fully explained infra, we conclude that peti-

tioner has successfully demonstrated that she is entitled to

innocent spouse relief with respect to this item.

       First, the facts in the record amply demonstrate that the

omission is attributable solely to Thomas Dillon.    Mr. Dillon

handled the Dillon family finances and maintained all the records

in the offices at Dillon Securities.    It is Mr. Dillon who

possessed the knowledge and information necessary to complete the

return, and the record is clear that Mr. Dillon alone was

responsible for working with the accountants in preparing the

return.    Accordingly, the failure to include income from this

account can be attributed solely to him.

       Second, petitioner did not have actual or constructive

knowledge of the substantial understatement of tax.    In cases

involving the omission of income, actual or constructive

knowledge of the underlying transaction giving rise to omitted

income is sufficient to preclude innocent spouse relief.       Wiksell

v. Commissioner, 90 F.3d 1459 (9th Cir. 1996), revg. and remand-

ing T.C. Memo. 1994-99; Price v. Commissioner, T.C. Memo. 1987-

360.

       Petitioner argues that she did not have actual or construc-

tive knowledge of the Murphy Favre account.    Petitioner points to

the fact that all of the family finances were handled by Thomas

Dillon or employees of Dillon Securities, and all account state-
                               - 15 -


ments and other financial information relating to this account

were received by Thomas Dillon at Dillon Securities.    Petitioner

admits that she did not review the 1982 Federal income tax return

but maintains that, even if she had, because she did not know of

the existence of the Murphy Favre account, she would not have

noticed that income from this account was not reported on the

return.

     Respondent, on the other hand, points out that the account

at Murphy Favre was listed in the 1981 Federal income tax return.

Petitioner testified that Thomas Dillon always had enough money

at Dillon Securities to pay her credit card bills and provide her

with money to spend.   Although petitioner was generally aware

that their tax bill for 1981 was high (the Dillons paid nearly

$250,000 in June 1982) she also believed that Thomas Dillon had

enough money in various accounts at Dillon Securities to pay

their tax liability.   Respondent claims that this is sufficient

evidence of actual knowledge of the account on the part of

petitioner.    Further, respondent notes that Thomas Dillon never

deceived petitioner or refused to discuss the family finances

with her.

     Despite the fact that the Murphy Favre account was listed in

the Dillons' 1981 Federal income tax return, we find that peti-

tioner did not have actual knowledge concerning the existence of

the account.   Petitioner has credibly testified that she did not
                              - 16 -


review the tax returns before signing them.   Further, all of the

account statements were handled by Thomas Dillon at Dillon

Securities.   We find that the record supports petitioner's con-

tention that she lacked actual knowledge of this account.

     Further, we refuse to impute constructive knowledge of this

account to petitioner.   Respondent has cited a number of cases

wherein a taxpayer either had reason to know about a substantial

understatement or had sufficient knowledge such that the taxpayer

was put on notice that an understatement existed.   See Hayman v.

Commissioner, 992 F.2d 1256 (2d Cir. 1993), affg. T.C. Memo.

1992-228; Stevens v. Commissioner, 872 F.2d 1499 (11th Cir.

1989), affg. T.C. Memo. 1988-63; Zimmerman v. Commissioner, T.C.

Memo. 1996-223; Kenney v. Commissioner, T.C. Memo. 1995-431.

These cases are all distinguishable from the case at bar.    The

taxpayers in Hayman and Stevens, supra, were charged with

constructive knowledge of deductions listed in their tax returns.

However, in those cases, even a cursory review of the return

would have revealed the existence of substantial deductions.

Here, the understatement results from the omission of a rela-

tively small amount of investment income.   Petitioner, given her

limited knowledge and lack of education, would not have noticed

anything amiss by simply reviewing the return.

     Kenney v. Commissioner, supra, and Zimmerman v. Commis-

sioner, supra, involved situations where income had been omitted
                               - 17 -


from the taxpayers' returns.   However, even a cursory review of

the returns would have revealed a negligible amount of income

being reported in comparison to the amount of money received by

the taxpayers during the years in question.    See Kenney v.

Commissioner, supra ("Given the fact that the subject returns

reported no taxable income, one need only glance at the bottom

line to see that further inquiry was warranted"); Zimmerman v.

Commissioner, supra ("The total amount of income reported each

year was minuscule compared to the amount of money flowing into

* * * [the taxpayers] household account").    Here, in contrast,

the $43,158 of omitted income was modest in comparison to the

$425,214 of business and interest income that was reported for

1982.   Further, the Dillons reported $38,484 of interest income

in 1982, significantly more than the $26,172 reported in 1981.

As a result, petitioner would not have been put on notice that

something was wrong with the return by simply reviewing it.

Accordingly, we shall not impute constructive knowledge of this

omission to petitioner.   See Terzian v. Commissioner, 72 T.C.

1164, 1171 (1979).   Therefore we find that petitioner did not

have actual or constructive knowledge of the omission.

     Third, it would be inequitable to hold petitioner liable for

the 1982 understatements.   Sec. 6013(e)(1)(D); sec. 1.6013-5(b),

Income Tax Regs.   Section 6013(e) as amended no longer requires

us to determine whether a spouse significantly benefited from the
                              - 18 -


erroneous item; however, this factor is still considered in

determining whether it is inequitable to hold a spouse liable.

Belk v. Commissioner, 93 T.C. 434, 440 (1989); Purcell v.

Commissioner, 86 T.C. 228, 242 (1986), affd. 826 F.2d 470 (6th

Cir. 1987).   Normal support is not a significant benefit for

purposes of determining whether denial of innocent spouse relief

would be inequitable under section 6013(e)(1)(D).     Estate of

Krock v. Commissioner, 93 T.C. 672, 678 (1989); Terzian v.

Commissioner, supra at 1172; sec. 1.6013-5(b), Income Tax Regs.

Normal support is measured by the circumstances of the taxpayers.

See Sanders v. United States, 509 F.2d 162, 168 (5th Cir. 1975).

     Petitioner notes that she and Thomas Dillon enjoyed a high

standard of living that was consistent with Mr. Dillon's level of

earned income, and, therefore, the tax savings did not produce a

benefit beyond their normal level of support.    In fact, the tax

savings of $21,579 in 1982 were negligible in comparison to

Mr. Dillon's reported income of more than $425,000.

     Another factor to consider is the 1987 divorce between

petitioner and Mr. Dillon.   Flynn v. Commissioner, 93 T.C. 355,

367 (1989); sec. 1.6013-5(b), Income Tax Regs.   The Dillons had

acquired numerous assets due to Thomas Dillon's success at Dillon

Securities; these assets were distributed evenly in the divorce.

Given the Dillons' relatively high standard of living during

their marriage, their divorce settlement is well within the
                               - 19 -


bounds of normal support.    See, e.g., Foley v. Commissioner, T.C.

Memo. 1995-16.

       In evaluating the equity holding a spouse liable under

section 6013(e), we also consider the probable future hardship on

the spouse seeking relief if that spouse is required to pay the

tax.    Sanders v. United States, 509 F.2d at 171 n.16; Makalintal

v. Commissioner, T.C. Memo. 1996-9.     The evidence before the

Court indicates that there will be substantial hardships if we

deny relief in this case.    Petitioner's standard of living has

decreased significantly from the time of the divorce.    In 1994,

petitioner reported adjusted gross income of less than $13,000.

Further, petitioner has periodically received financial assis-

tance from her elder son.    Respondent points out that petitioner

received substantial assets in the divorce.    However, the

property located at Hangman Valley Road, by far the most signifi-

cant asset petitioner received in the divorce, was sold in 1989

for barely more than 50 percent of its assigned value in the

property settlement agreement.

       Nonetheless, respondent argues that it would not be

inequitable to hold petitioner liable because, under the property

settlement agreement incident to the divorce, Thomas Dillon

indemnified petitioner against any losses resulting from tax

liabilities arising from returns filed prior to 1987.    The record

indicates, however, that Mr. Dillon does not have the money to
                             - 20 -


pay the tax liabilities in question.   Given this fact, it is

highly unlikely that Mr. Dillon will be able to make good on his

promise to reimburse petitioner if she is required to pay the tax

liability, penalties, and interest related to the 1982

deficiency.

     Accordingly, we find, based on the evidence, that it would

be inequitable to hold petitioner liable for the 1982 deficiency.

We therefore conclude that she is entitled to innocent spouse

relief with respect to the deficiency and additions to tax which

resulted from Thomas Dillon's failure to report, in the Dillons'

1982 Federal income tax return, the investment income earned from

the Murphy Favre account.

     To reflect the foregoing,

                                         An appropriate decision

                                   will be entered.
