                           T.C. Memo. 1996-38



                      UNITED STATES TAX COURT



                 ANNA RUTH FRENCH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3265-94.                Filed February 1, 1996.



     Jerold K. Nussbaum, for petitioner.

     Helen F. Rogers, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WRIGHT, Judge:   Respondent determined a deficiency in

petitioner’s Federal income tax for taxable year 1986 in the

amount of $123,862.   Respondent further determined that

petitioner is liable for an addition to tax in the amount of

$12,386 pursuant to section 66611 for a substantial

understatement of income tax.     The issues for decision are:



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect during the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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     (1)   Whether petitioner qualifies for innocent spouse relief

under section 6013(e).   We hold that she does not.

     (2)   Whether petitioner is liable for the addition to tax

for a substantial understatement of income tax under section 6661

for the taxable year at issue.    We hold that she is.

                          FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein.    Petitioner resided in Frederica, Delaware,

at the time the petition was filed in this case.

     For each of the 6 taxable years ending in 1990, petitioner

and her husband (Mr. French) filed joint Federal income tax

returns.    The return for taxable year 1988 was filed in October

1989 and contained a net operating loss (NOL) of $618,987.      The

NOL was derived from several entrepreneurial undertakings by Mr.

French.    On November 10, 1989, petitioner signed a Form 1045,

Application for Tentative Refund, requesting that $226,855 of the

NOL from 1988 be carried back to taxable year 1986.

Concurrently, petitioner and Mr. French filed related Forms 1040X

with respect to taxable years 1986 and 1988.      On or about January

20, 1990, petitioner and Mr. French received a refund check in

the approximate amount of $226,000 for taxable year 1986.

     Following an audit, respondent disallowed part of the 1988

NOL which was carried back to 1986.      Respondent now seeks to

recapture the corresponding portion of the refund.
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A.   Petitioner and Mr. French

     Petitioner graduated from high school in 1958 and was

married to George French (Mr. French) in 1959.    Petitioner

received no further formal education.    Shortly after graduating

from high school, petitioner was employed as a clerk typist.

Petitioner left the labor force in approximately 1960, after

deciding to raise a family.   In 1974, petitioner obtained

employment with B.F.W. Scientific (BFW).   While with BFW,

petitioner performed the duties of an accounts receivable clerk.

In 1976, petitioner accepted employment with International Office

Machines (IOM), where she performed a variety of duties,

including those of an accounts receivable clerk.    Petitioner

remained employed by IOM until sometime in 1983.    After leaving

IOM, petitioner was not employed again until late 1989, when she

accepted a job with Ocean Plaza Mall (OPM).    Throughout the

course of the 2 years that petitioner was employed by OPM, she

performed a variety of managerial functions.

     In early 1989, petitioner and Mr. French separated.     In July

1989, after leaving the marital home located in Annapolis,

Maryland, petitioner moved into the family condominium located in

Ocean City, Maryland.   The Ocean City condominium was jointly

owned by petitioner and Mr. French and had been purchased

sometime prior to 1987.   In 1990, Mr. French left the marital

home in Annapolis, Maryland, and moved to the State of Florida.

Petitioner and Mr. French were divorced in 1993.
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     Petitioner admits that her family maintained a comfortable

lifestyle during 1987 and 1988; she estimates that her personal

and family living expenses for 1988 equaled $104,515.   The

majority of these expenses were paid by checks drawn against Mr.

French’s personal account.   Some expenses, however, were paid by

petitioner.

     On their tax return for 1987, petitioner and Mr. French

reported $804,282 in gross rental receipts and $598,457 in

salaries and wages.   The following year, 1988, petitioner and Mr.

French reported $414,715 in gross rental receipts and $79,500 in

salaries and wages.   The correct amount of gross rental receipts

for 1988 is $737,200.   It has been stipulated that Mr. French was

not aware of the discrepancy between the actual and reported

amounts of gross rental receipts for 1988.   The couple reported

$223 of interest income in 1987 and $18,021 of interest income in

1988.

B.   Mr. French’s Business Activities

     During the 5-year period ending with 1989, Mr. French was

the sole shareholder in a number of S corporations, including

Arundel Housing Components, Inc. (AHC).   In furtherance of its

corporate objectives, AHC leased several parcels of real estate

from Mr. French.   Substantially all of the rental payments made

by AHC were deposited directly into Mr. French’s personal bank

account.   Mr. French’s secretary managed this account, but she
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failed to keep complete and accurate records regarding the rental

deposits.

       Sometime prior to 1989, AHC began experiencing financial

distress.    In June 1988, AHC’s controller quit because of the

company’s deteriorating financial condition.    AHC hired a new

controller, but this replacement quit 3 months later for similar

reasons.    Shortly thereafter, AHC sought the services of an

accounting firm to evaluate its corporate records for taxable

year 1988.    The accounting firm determined that AHC’s corporate

records were in poor condition and many required reconstruction.

       In December 1988, AHC filed a chapter 11 bankruptcy

petition.    The petition was subsequently converted to a chapter 7

petition.    During the pendency of the bankruptcy proceedings, a

creditors committee filed suit against AHC alleging improper

transfers and fraudulent conveyances.    The creditors committee

hired Piper & Marbury, a law firm, to represent it in the

bankruptcy proceedings.    Piper & Marbury hired the accounting

firm of Ernst & Young to evaluate AHC’s financial records.      In

January 1989, before the process of reconstructing AHC’s

financial records for 1988 had been completed, the creditors

committee obtained possession of such records.    Sometime after

October 1989, the creditors committee returned the records to

AHC.    Upon receipt of the records, AHC discovered that some

records were missing.    Consequently, neither petitioner nor Mr.
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French was in possession of AHC’s financial records for taxable

year 1988 at the time their 1988 return was prepared.

C.   Refund Check and Certificates of Deposit

     In January 1990, petitioner and Mr. French received a refund

check in the approximate amount of $226,000 from the Internal

Revenue Service (IRS).   The refund was for taxable year 1986 and

resulted from the NOL carryback which occurred in 1988.

Petitioner and Mr. French also received two refund checks from

the State of Maryland, totaling $47,000, in December 1989.    In

February 1990, petitioner and Mr. French used the proceeds from

the three refund checks to purchase three certificates of

deposit.   Two of the three certificates of deposit were in the

amount of $100,000 and the third was in the amount of $70,000.

Each of these certificates of deposit was issued jointly to

petitioner and Mr. French.   Sometime thereafter, a portion of

these certificates of deposit was cashed, and petitioner used

some of the proceeds for personal and family living expenses.

Mr. French also retained some of the proceeds for use in a

business venture he was undertaking in Florida.    In December

1990, the remaining portion of the three certificates of deposit

purchased in February 1990 was rolled over into two new

certificates of deposit, one in the amount of $100,000 and the

other in the amount of $50,000.   Both of these certificates of

deposit were issued solely in petitioner’s name.
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     In November 1990, petitioner and Mr. French sold their

marital home located in Annapolis, Maryland.       The net proceeds

from this sale amounted to approximately $144,000.       These

proceeds were used to purchase a certificate of deposit in the

approximate amount of $144,000.    This certificate of deposit was

issued solely in petitioner’s name.       In early 1991, petitioner

cashed the certificate of deposit in order to aid Mr. French with

the purchase of a condominium in Pompano Beach, Florida.         The

Pompano Beach condominium was subsequently sold pursuant to the

couple’s divorce decree.     Petitioner received $100,000 from the

sale of the Pompano Beach condominium as a division of her

marital rights.

                                OPINION

Issue 1.   Innocent Spouse

     A husband and wife who file a joint return are jointly and

severally liable for the tax due.    Sec. 6013(d)(3).     An

"innocent" spouse, however, is relieved of liability if he or she

proves the following:   (1) That a joint return has been made for

a taxable year; (2) that on such return there is a substantial

understatement of tax attributable to grossly erroneous items of

the other spouse; (3) that he or she did not know, and had no

reason to know, of such substantial understatement when he or she

signed the return; and (4) that after consideration of all the

facts and circumstances, it would be inequitable to hold him or

her liable for the deficiency in income tax attributable to such
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substantial understatement.   Sec. 6013(e)(1), as amended by the

Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 424(a), 98

Stat. 801-802; Purcell v. Commissioner, 86 T.C. 228, 235 (1986),

affd. 826 F.2d 470 (6th Cir. 1987).     Petitioner bears the burden

of establishing that each of the four requirements of section

6013(e) has been satisfied.    Purcell v. Commissioner, 826 F.2d at

473; Sonnenborn v. Commissioner, 57 T.C. 373, 381-383 (1971).

     The requirements of section 6013(e) are conjunctive rather

than alternative; a failure to meet any of the requirements

prevents a spouse from qualifying for relief under section

6013(e).   Cohen v. Commissioner, T.C. Memo. 1987-537; Estate of

Killian v. Commissioner, T.C. Memo. 1987-365; Levin v.

Commissioner, T.C. Memo. 1987-67.     The parties agree that

petitioner and Mr. French filed a joint return for the taxable

year in issue.    The parties also agree, and we find, that there

is a substantial understatement of tax attributable to a grossly

erroneous item of Mr. French’s for the taxable year in issue.

Whether petitioner fulfilled the remaining requirements of

section 6013(e), however, is disputed.

     Section 6013(e)(1)(D)--Inequitable

     Petitioner must prove that, given the facts and

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

deficiency attributable to Mr. French’s substantial

understatement.   Sec. 6013(e)(1)(D); sec. 1.6013-5(b), Income Tax

Regs.   Section 6013(e), as amended, no longer requires us to
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determine whether a spouse significantly benefited from the

erroneous item; however, this factor is still considered in

determining whether it is inequitable to hold a spouse liable.

Purcell v. Commissioner, 86 T.C. at 242; Johnson v. Commissioner,

T.C. Memo. 1993-227.   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).

Terzian v. Commissioner, 72 T.C. 1164, 1172 (1979); sec.

1.6013-5(b), Income Tax Regs.    Normal support is measured by the

circumstances of the parties.    See Sanders v. United States, 509

F.2d 162, 168 (5th Cir. 1975).    Petitioner bears the burden of

proving that she received no significant benefit from the

understatements other than normal support, and this burden must

be satisfied with specific facts regarding lifestyle

expenditures, asset acquisitions, and dispositions of the

benefits of the understatements.     Estate of Krock v.

Commissioner, 93 T.C. 672 (1989).

     Respondent contends that it would not be inequitable to hold

petitioner liable for the deficiency attributable to the

understatement because petitioner significantly benefited from

the omitted income during 1988.    Respondent further argues that

it would not be inequitable to hold petitioner liable because she

received significant benefits from the refund check received.

     In contrast, petitioner contends that she experienced no

significant benefit with respect to either the omitted income
                                 - 10 -

during 1988 or the refund check received in 1990.     Petitioner

maintains that any benefit that she received from either the

omitted income or the refund check amounted to nothing more than

normal support.   We disagree.    Even assuming that petitioner

received nothing more than normal support from the omitted income

in 1988, we do not accept petitioner’s contention with respect to

the refund check.   As explained above, 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).    Terzian v. Commissioner, supra at 1172; sec.

1.6013-5(b), Income Tax Regs.     We believe, however, that the

refund check provided petitioner with more than normal support in

1990.   Using the funds obtained from the refund check, petitioner

and Mr. French jointly purchased several certificates of deposit

in large denominations.   A portion of the money represented by

these certificates of deposit was used for the direct and

individual benefit of petitioner.     The remainder, less some

amount used personally by Mr. French, was rolled over into two

certificates of deposit owned individually by petitioner.

Although the record is not entirely clear as to what petitioner

did with these two certificates of deposit, which totaled

$150,000, we are not persuaded by petitioner’s argument that such

funds merely amounted to normal support allotted to her by Mr.

French.   In fact, the $150,000 exceeds petitioner’s 1988

estimated family expenses by nearly 50 percent.     Moreover, this
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$150,000 was in addition to all other support petitioner received

during 1990.

     Accordingly, we find that it is not inequitable to hold

petitioner liable for the deficiency attributable to Mr. French’s

substantial understatement.   We therefore hold that petitioner

has not met all the conjunctive requirements of section 6013(e),

and she is not entitled to relief as an innocent spouse.   As a

result of this holding, it is unnecessary for us to consider

whether petitioner knew or had reason to know of Mr. French’s

substantial understatement.

Issue 2.   Addition to Tax, Section 6661

     Respondent determined that petitioner is liable for the

addition to tax pursuant to section 6661 for taxable year 1986

due to a substantial understatement of income tax.   Respondent's

determination carries the presumption of correctness.   Rule

142(a).

     The addition to tax is 25 percent of any underpayment

attributable to a substantial understatement.   Sec. 6661(a);

Pallottini v. Commissioner, 90 T.C. 498 (1988).    A substantial

understatement is one which exceeds the greater of 10 percent of

the tax required to be shown on the return or $5,000.   Sec.

6661(b)(1).    Petitioner has not shown that the understatement for

taxable year 1986 is subject to reduction pursuant to section

6661(b)(2)(B)(i) or (ii).   Accordingly, respondent's

determination as to this issue is sustained.
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To reflect the foregoing,

                                      Decision will be

                                 entered for respondent.
