                              T.C. Memo. 1996-223



                            UNITED STATES TAX COURT



                CARLA J. ZIMMERMAN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5586-94.                                      Filed May 15, 1996.



     George Ortiz, for petitioner.

     Judith C. Winkler, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     PARKER, Judge:         Respondent determined the following

deficiencies in tax, additions to tax, and penalty for petitioner

Carla J. Zimmerman and her husband, Charles R. Zimmerman:
                                          Additions to Tax            Penalty
        Year   Deficiency    Sec. 6653(a) Sec. 6661 Sec. 6651(a)(1) Sec. 6662(a)

        1988   $13,977.82      $698.89     $3,494         ---           ---
        1989    14,786.75        ---         ---       $3,615.75     $2,957.35
Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the taxable years before the

Court, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     After concessions,1 the issue for decision is whether

petitioner qualifies for relief under section 6013(e) as an

innocent spouse with respect to the tax liability stemming from

her husband's Schedule C business income and expenses for the

taxable years 1988 and 1989.

                          FINDINGS OF FACT

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

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.

     Petitioner resided in Belleview, Florida, at the time she

filed her petition.   Petitioner and Charles R. Zimmerman (the

Zimmermans) were married in June of 1985, have not separated or

divorced, and continue to be married.    The Zimmermans have a

daughter, Brooke, born April 22, 1988.

     Petitioner has a high school education and has no training

in bookkeeping.   Before her marriage, petitioner worked, received

Forms W-2, knew she had to file tax returns, and filed income tax


     1
        The parties agree and have stipulated that the
adjustments for the taxable years 1988 and 1989 and the resulting
deficiencies, as stated in the notice of deficiency, are
accurate. Petitioner does not claim innocent spouse treatment as
to her own omitted wage, interest, and dividend income for the
years 1988 and 1989. Petitioner does not contest any of the
additions to tax or penalty for the years 1988 and 1989.
                                 - 3 -

returns, using a tax return preparer to complete the returns.      In

1984, petitioner began working for Martin Marietta Electronics

and Missiles Group (Martin Marietta).    During 1988 and for part

of 1989, petitioner worked at Martin Marietta as a machine

operator.    She earned wages of $12,609 and $2,799 for those

years, respectively.

     Mr. Zimmerman operated a sole proprietorship under the name

of Zimmerman's Construction (the business).    The business

constructed driveways, sidewalks, and concrete slabs principally

for residential contractors.    Mr. Zimmerman learned this trade

through on-the-job experience.    The address for the business was

the Zimmermans' home address.

     The Zimmermans had a checking account with Security First

Federal Savings and Loan Association (Security) in the name of

"Charles R. Zimmerman or Carla J.M. Zimmerman, DBA Zimmerman's

Construction" (the business account).    Petitioner and Mr.

Zimmerman were the authorized signatories on the business

account.    Income from the business was deposited into this

account.    Business expenses were paid by check from the business

account or sometimes were paid by cash.    Petitioner or Mr.

Zimmerman also wrote checks to "Cash" from the business account.

     During June and July of 1988, petitioner assisted her

husband by writing the checks for the business.    This was during

the time petitioner was at home caring for their newborn

daughter, and, according to petitioner, when the "business really
                                - 4 -

took off" and Mr. Zimmerman needed her help.      Then, petitioner

and Mr. Zimmerman had a disagreement about his need for certain

lumber supplies he wished to purchase, and Mr. Zimmerman no

longer wanted her involved in the business.      After that, to

preserve marital harmony, petitioner did not attempt to discuss

business matters with her husband.      Mr. Zimmerman began using

Rosie's Accounting Service, Inc., to maintain the books for the

business.    On a few other occasions during the years at issue,

however, petitioner wrote checks from the business account.

     Mr. Zimmerman kept receipts and deposit slips in a box in

his truck; he usually kept invoices and the checkbook in the box

in the truck (excluding the period when petitioner kept the

checkbook at home).    Mr. Zimmerman also had a filing cabinet in

the house.    When writing checks at home, Mr. Zimmerman would

write the checks at the dining table.      At the end of the month,

he would take the records to the accountant.

     The Zimmermans had a second checking account with Security

in the name of "Charles R. or Carla J.M. Zimmerman" which they

used primarily for household expenses (the household account).2

Both spouses were authorized signatories on the household

account, but petitioner had sole responsibility for running the

household and paying the personal and family expenses from the


     2
        The loan on Mr. Zimmerman's truck was paid from the
household account; those payments totaled $2,431.22 in 1988 and
$2,640.24 in 1989.
                                 - 5 -

household account.     Petitioner deposited her Martin Marietta

paychecks into the household account.     Mr. Zimmerman also

deposited amounts drawn from the business account into the

household account.3    Total deposits into the household account

during the period December 19, 1987 through December 19, 1988,

were $16,821.28; total deposits for the period December 20, 1988

through December 19, 1989, were $26,711.36.     Expenses paid from

the household account during those periods totaled $16,627.36 and

$26,664.90, respectively.

     From May through September of 1988, the Zimmermans had a

savings account at Security titled "Charles R. or Carla J.M.

Zimmerman"; only $100 was deposited into this account.     In

December of 1988, the Zimmermans opened a savings account for

their daughter, Brooke, titled "Brooke Adele Zimmerman, Minor by

Carla or Charles Zimmerman".     Deposits into the latter account

during the period December 1988 through December 1989 totaled

$661.81.

     The Zimmermans purchased a house in July of 1988, for

$45,000.   For the preceding year, they had rented this house with

an option to buy.     At closing, the Zimmermans received a rent

credit of $1,800 and a credit for the option deposit of $2,500;

     3
        Mr. Zimmerman testified he deposited about $1,400 to
$1,500 per month into the household account in 1988 and about
$2,000 per month in 1989. However, in 1988 he apparently only
made such deposits for a few months. After petitioner quit her
job at Martin Marietta in early 1989, Mr. Zimmerman made such
deposits into the household account regularly.
                                - 6 -

they took out a mortgage for the remaining $40,700 of the

purchase price.    The cash due from the Zimmermans at closing was

$154.45 for tax, stamps, and recording fees.   The Zimmermans'

monthly mortgage payment was $420.10, for total payments of

$1,680.40 in 1988.   The mortgage payment increased to $450.10 per

month in August of 1989, for total mortgage payments of $5,191.20

in 1989.

     During the years at issue, the Zimmermans purchased no

expensive items, nor did they take any trips other than to attend

family funerals.   They did not belong to any clubs.   Petitioner

purchased many of the household items and baby supplies at K-Mart

and Wal-Mart.

     For the years at issue, petitioner filed joint Federal

income tax returns with her husband, Charles R. Zimmerman.4

Those returns were prepared by Rosemarie Jacques of Rosie's

Accounting Service, Inc., who held herself out as a certified

public accountant.    On the Zimmermans' Form 1040 for the taxable

year 1988, they reported $2,000 in wages, $1,376.20 in net

Schedule C business income, and no other income; an earned income


     4
        The petition in this case was originally captioned in the
names of both spouses, but the attorney filing that petition had
not been authorized to represent Mr. Zimmerman. By order dated
May 27, 1994, the Court afforded Mr. Zimmerman an opportunity to
ratify and affirm the filing of the petition on his behalf. No
response from Mr. Zimmerman having been received, the Court, by
order dated July 6, 1994, dismissed the case for lack of
jurisdiction as to Mr. Zimmerman and changed the caption of the
case.
                                 - 7 -

credit of $474 was claimed.    The Form W-2 attached to the 1988

return reflects $2,000 paid to Mr. Zimmerman by Staff Leasing,

Inc.    On their Form 1040 for 1989, the only income item reported

was $808.37 in net Schedule C business income; an earned income

credit of $114 was claimed.    Petitioner signed the returns but

claims that she did not look at the returns when she signed them.

       After examination of the returns, respondent increased the

Zimmermans' income as follows:


       Item                Taxable Year 1988     Taxable Year 1989

Wages                            $12,609              $2,799
Interest income                      115                 160
Dividend income                       31                ---
Schedule C income                 27,613               8,273
Schedule C expenses               11,125              43,980
       Totals                    $51,493             $55,212

Respondent increased self-employment tax by $5,223 and $6,250,

and disallowed (recaptured) the earned income credit of $474 and

$114, for 1988 and 1989, respectively.

       The omitted wages, interest income, and dividend income are

items attributable to petitioner; the increases in Schedule C

income and the disallowance of portions of the Schedule C

expenses are items attributable to Mr. Zimmerman.    Petitioner

concedes that she failed to report her W-2 wages from Martin

Marietta, her dividends, and her interest income in the amounts

as determined by respondent.    Petitioner seeks to be relieved of

liability as an innocent spouse as to the Schedule C items

attributable to Mr. Zimmerman.
                               - 8 -

                              OPINION

     Normally, spouses who have filed a joint return are jointly

and severally liable for the tax due.   Sec. 6013(d)(3).   However,

section 6013(e)(1) relieves a spouse of liability for the tax,

including interest, penalties, and other amounts, attributable to

the substantial understatement of tax of the other spouse, if the

spouse meets the following requirements:   (1) A joint Federal

income tax return was filed; (2) there is a substantial

understatement of tax attributable to grossly erroneous items of

the other spouse; (3) in signing the return, the alleged innocent

spouse did not know, and had no reason to know, of the

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

facts and circumstances, it would be inequitable to hold the

alleged innocent spouse liable for the deficiency attributable to

such substantial understatement.   Sec. 6013(e)(1).

     The taxpayer has the burden of proving that he or she meets

each of these requirements.   Feldman v. Commissioner, 20 F.3d

1128, 1134-1135 (11th Cir. 1994), affg. T.C. Memo. 1993-17;

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

affg. T.C. Memo. 1988-63.   A failure to prove any one of these

requirements will prevent the taxpayer from qualifying for

relief.   Feldman v. Commissioner, supra at 1135; Stevens v.

Commissioner, supra; Bokum v. Commissioner, 94 T.C. 126, 138

(1990), affd. 992 F.2d 1132 (11th Cir. 1993).   Respondent has
                                 - 9 -

conceded that petitioner meets the first two requirements of

section 6013(e)(1).

       A taxpayer seeking innocent spouse relief must establish

that he or she in signing the return did not know, and had no

reason to know, that there was a substantial understatement of

tax.    Sec. 6013(e)(1)(C).   Petitioner says she did not know

because she did not look at the tax returns when she signed them.

However, a taxpayer cannot simply turn a blind eye to what is

disclosed on the tax returns or to what is omitted from the tax

returns.    The innocent spouse provision is "designed to protect

the innocent, not the intentionally ignorant."     Cohen v.

Commissioner, T.C. Memo. 1987-537.

       A spouse has reason to know of a substantial understatement

if a reasonably prudent taxpayer under the taxpayer's

circumstances at the time of signing the return could be expected

to know the return was erroneous or that further investigation

was warranted.    Stevens v. Commissioner, supra at 1505; Bokum v.

Commissioner, supra at 148.     The test establishes a duty of

inquiry.    Stevens v. Commissioner, supra.   If a spouse knows

enough facts to be put on notice of the possibility of a

substantial understatement, she has a duty to inquire further.

Guth v. Commissioner, 897 F.2d 441, 444-445 (9th Cir. 1990),

affg. T.C. Memo. 1987-522.

       Factors to be considered in determining whether the spouse

had reason to know are the alleged innocent spouse's level of
                              - 10 -

education; the spouse's involvement in the family's business and

financial affairs; the presence of expenditures that appear

lavish or unusual when compared to the family's past levels of

income, standard of living, and spending patterns; and the

culpable spouse's evasiveness and deceit concerning the couple's

finances.   Stevens v. Commissioner, 872 F.2d at 1505; Flynn v.

Commissioner, 93 T.C. 355, 365-366 (1989).

     Petitioner possessed a high school education and no training

in bookkeeping.   She was responsible for running the household,

paying the personal and family expenses, and maintaining the

checkbook for the household account.    The money deposited in the

household account, beyond that from petitioner's paycheck while

she was working, came from the business.   For a short period

during the years at issue, petitioner assisted her husband in the

business by writing checks.   She had access to the checkbook for

the business account at other times.    There is no evidence of any

evasiveness or deceit on the part of her husband with respect to

the finances of either the family or the business.

     The family's expenses were modest and the amounts deposited

into the household account were in keeping with these expenses.

However, the Zimmermans' tax returns reported extremely small

amounts of business income, much smaller than the amounts

deposited into the household account.   In 1988 petitioner wrote

checks on that account of some $16,000 and in 1989 wrote checks
                                - 11 -

of some $26,000.   The Zimmermans' tax returns reported total

income of only $3,376.20 for 1988 and $808.37 for 1989.

     The returns as filed had very few entries and were rather

simple.   Had petitioner made even a cursory review of the

returns, she would have been alerted to the fact that none of her

W-2 income was reported and that at least some income from the

business had been omitted.    Petitioner had a duty to inquire

about these omissions.   The total amount of income reported each

year was minuscule compared to the amount of money flowing into

her household account.   Thus even a glance at the tax returns

would have put a reasonable person on notice that something was

wrong.    Petitioner wrote checks for mortgage payments in 1989

that alone totaled $5,191.20.

     We hold that petitioner knew or had reason to know of the

substantial understatements of tax.      Therefore, she does not

qualify for relief under section 6013(e), and we need not

consider whether it would be inequitable to hold her liable.

     In keeping with the foregoing,

                                            Decision will be entered

                                      for respondent.
