TAX COURT OPINION

Case: Wayne C. Evans
Docket Number: 24498-07
Judge: Cohen
Opinion Type: memo
Filed: 09/13/2010
Pages: 21

T .C . Memo . 2010-19 9 UNITED STATES TAX COUR T WAYNE C . EVANS, Petitioner v . OMMISSIONER OF INTERNAL REVENUE, Responden t MADELYN F .'EVANS, Petitioner v .' OMMISSIONER OF'INTERNAL REVENUE, Responden t DocketlNos . 24498 - 07, 24510-07 . Filed September 13, 2010. Kirk A~ McCarville and Philip C . Wilson , for petitioners . Heidi 1 . Hansen , for respondent . MEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge : In a notice sent July 27, 2007, respondent' determined deficiencies in petitioners' Federal income taxes for 1995 and'1'9 6'of $70,311 and $196,814, respectively . Respondent also determ ned penalties for fraud under section 6663 o f SERVED SEP 13 2012 $52,733 .25"and $147,610 .50 against Wayne C . Evans (Evans) fo r 1995 and 1996, respectively . The issues for decision are whether petitioners had unreported income resulting in an underpayment o f ,tax for each year ; whether the underpayment of tax for each yea r was due to fraud on-the part of Evans, justifying the penalty and , negating the bar : of .-the statute of limitations ; whethe r petitioners are-entitled to any deductions not allowed by respondent ; and whether Madelyn F . Evans ( Ms . Evans ) is entitled to relief under section 6015 . Unless otherwise indicated, al l section references are to the Internal .Revenue Code (Code) in effect for the years in=issue, and all Rule references are to the Tax Court Rules of Practice and Procedure . FINDINGS OF FACT Some of the facts have been stipulated between Evans an d respondent, and the stipulated facts are incorporated in our findings by this reference . Ms . Evans declined to stipulate, .' asserting that she had no knowledge of the relevant facts . She did not contradict any of the facts in the stipulation between Evans and respondent, and the " stipulated . facts were establishe d with respect to her, pursuant to a motion, order to show cause , and order following the procedures specified in-Rule 91 . ~ Petitioners resided in Arizona at the time .that, . they filed their- .. petitions . At all material times, . they were married to each other and resided together . 86 through the years in issue, petitioners resided o n West Calle Concordia in Tucson, .Arizona (the Concordia p operty) . The Concordia property was purchased by Stephen and Rosalie Olsen (the ..Olsens) in 1986 and was refinance d in 1989 wit a loan of . .$17.2, .194 .71 from Household Finance . Petitioners did not pay rent to-the Olsens for their use of the Concordia p operty, but during 1995 they made-payments, on the Household . F nance,mortgage and otherwise to,prevent foreclosure on the Conc rdia property . The sources and,amountsof the payments a r further . described below . The Farmi n Authority and Huntington .Constructio n On Aug st 22, 1995 , Evans entered into an agreement with the Tohono O'od am Farming Authority ( the Farming Authority ) pertaining o Evans employment . as the full -time general manage r of the' Farm ng Authority . Evans, had oversight responsibility fo r the approva and disbursement of Farming Authority funds . Th e agreement p T causi n in acc the Au record at all by aut Counci be mad for an year b Board . e General Manager shall be responsible for , the accounts of the Authority to be maintained rdance with an accounting system established by hority's accountant or accounting firm . The and accounts of the-Authority will be available reasonable times for. inspection and examination orized officers of the, Authority, and the . The Board may require special examinations to at any time . The General Manager shall arrange . audit to be made at the close of each busines s a certified .accounting firm approved by the Evans' employment agreement specifically prohibited him fro m transacting -business on-the Farming Authority' s behalf, with any s company in which . he held a direct or indirect interest . B y transacting business with such a company, Evans' would have a , conflict of interest . Evans' failure to disclose'to his employer . that he was conducting Farming Authority business-with :a company fiduciary duty he owed . to his employer ." Any'° such ,conduct, b y Evans would be grounds-for termination . Huntington Construction, Inc (Huntington Construction), wa s an Arizona corporation effectively operated and ..controlled by .Evans during 1995 and 1996 .- Evans concealed from the Farming Authority his'ownership, operation, and-control of Huntington' Construction . Evans caused 22 checks totaling'$449,005 -in 199 5 and 28 checks totaling $1,148,208 in 1996 to be paid t Huntington Construction from the Farming"Authority.- Willie Gilbert (Gilbert) was paid by Evans to . sign check s drawn on the 'Huntington Construction' account to conceal Evans ' ownership and control of Huntington Construction . Checks wer e drawn on Huntington Construction's bank account to pay for Willie Gilbert's travel expenses, including'one or more trips 'to Indian a where Gilbert had family . Records were not maintained t o substantiate the business purpose .of Gilbert's'travel . Payment s to Gilbert and other persons for services to Huntington Construction were not reported to the Internal Revenue Service b y Huntington Construction . On-,September' 8, . 1997, the Tohono O'odham Nation filed'a complaint-against Evans, Ms . Evans, Willie .TGilbert ;-Jane Doe Gilber.t, SIephenOlsen, . . Rosalie Olsen,-Dawson Riley, Jane Doe Riley, Huntington Construction, Western Pacific Construction,- Inc ., and Voice of God Recordings, :Inc .. ; in . the U .S . District Court for he District of Arizona (the District .Court) (the civi l case) In June 2000, the civil case was settled with an agreement providing in part that Voice-'of God Recordings, would pay $820,00 0 to the Toh no .O'odham Nation . (Evans had caused the sum of $820,000 t be paid by Huntington Construction to Voice of Go d Recordingson behalf of petitioners,-as further described below .) Ms . Evans as a party to the settlement agreement . On September 22, 1999, .Evans was indicted in the Distric t Court on-1 8~ counts of . embezzlement :and theft from an India n tribal, organization ; theft or-bribery concerning programs receiving Federal funds ;-wire fraud ; and .frauds .and swindles . The first count of the indictment alleged, in part, tha t begin ing on or about December ; 1994, and continuing through on or ;about September, 1997,, in the District of A.rizo a, ,Wayne C . Evans,-* * * did ' embezzle, steal, knowingly=convert to . his use~or the use of-another,, and . ,did willfully misapply and permit to be .misapplied, approximately $1 .597 million of the moneys,-funds, credits, goods, assets and other property belonging to or intrusted to the custody or care of the Tohono .O'odham Indian Nation, by causing those funds . to be paid to himself through use of Huntington Construction, an entity which he secretly and covertly controlled .- On October 12, 2001, an Information : was filed in the . District Court charging . Evans with fi-iing, a false .tax return, f '1996'1 :in violation of . section 7206(1) On_October, 12, 2001 , Evans, represented by counsel, entered-into-a plea agreement-in, .' which he pleaded guilty to the first count'"of the"-indictment and to the information specifically admitting facts establishing hi s guilt beyond a reasonable doubt . The facts admitted included the following : Huntington Construction, . Inc . was an Arizona corporation . Beginning at least as early as 1985, Wayne,C . Evans effectively operated and„controlled th e affairs of Huntington Construction, Inc . Huntington Construction performed work'for the Farming Authority while Wayne C . Evans was .the, ..Farming Authority's general manager and during the . time Evans controlled ., its affairs . Between March,-1995 and August, 1996, the Farming Authority paid Huntington Construction approximately,$1 .597 .million for work allegedly performed on Farming Authority projects . Wayne C . .,Evans was responsible for authorizing-the payment of those funds . Wayne C . Evans failed to, disclose and concealed from the Farming Authority tha t he effectively owned, operated and controlled Huntington Construction and the funds in its bank accounts . while causing Farming Authority funds to be paid to Huntington Construction . Once Wayne .C . Evans-had effected the transfer of funds to Huntington, Wayne C ., Evans controlled the use of those funds and used them for personal purposes . Once the funds were deposited to Huntington's bank accounts ; Evans concealed his control of those funds,by directing third-party nominees to sign-checks and make payments from the Huntington accounts . f11 n or about Januar 2" 2001- in Tucson rizo n - y , Wayne C . Evans filed and subscribed to a-joint U .S . Individual Income Tax Return for the-calendar year 1-996 . Wayne C . Evans signed the return under penaltie s of perjury . The return understated Wayne ' C . Evans,-- total income for the 1996 tax year, in that Wayne C' . Evans knowingly failed to include the above-mentione d monies from tribal funds during the . 1996 calendar year . A jud4ment-of conviction pursuant to Evans' guilty plea wa s entered S e tember 12, 2002 . Evans was sentenced to .15 months i n prison fol owed by 3years_ of supervised release and was ordere d to pay re s itution of $138,935 to the Tohono O'odham Nation . Th e restituti o amount was arrived at by taking the total . amount of money Eva n illegally received reduced by the $820,000 Voice o f God Recor d ngs paid in settlement of the civil suit . On th ee occasions, in 2004, 2008, and 2009, Evans attempte d to have t h restitution provision in his sentence vacated, bu t the Distr i t . Court and the Court,of'Appeals for the Ninth Circui t held that e was barred by his plea agreement from contesting th e sentence . . No in ome tax return was filed for Huntington Constructio n for 199 5 1996 . In January 2001, petitioners filed join t individual income tax returns for 1995 and 1996 on which the y reported $ :2,204 and $7,210 o f income from Huntingto n Construction for 1995 and 1996, respectively . Petitioners did not provide bank records reflecting income or expenses or receipts substantiating their expense deductions to their return preparer when the returns were prepared . The returns did no t 8 - . report all of the income petitioners,received as a result o f payments from the . Farming Authority to Huntington Construction . .and disbursements from Huntington,Construction to or'fo r petitioners . After examining records of payments made by the Farmin g Authority to Huntington Construction and checks written on the bank accounts of'Huntington Construction, respondent determine d that petitioners had unreported income, that certain busines s expenses and . personal itemized deduction. s .were .allowable, an d that other checks represented payments for the personal benefi t of petitioners and constitute d taxable' .income to them . The personal itemized deduction s allowed included charitabl e contributions to Voice of God Recordings . Checks drawn on Huntington Construction's account payable t o its bank for cashier's checks or for cash totaled $39,760 .29 in 1995 and $1,174,555 .79 in 1996 . Specific Items of Unreported Income On May 23, 1995, funds were withdrawn from Huntingto n Construction's bank account and used to .purchase cashier's check s Voice of God Recordings for $100,000 and to Coots Funeral Hom e for $5,980 . At the same time, $700 in cash was withdrawn fro m .the account . Coots Funeral Home provided funeral services for . Evans' brother . On May 23, i995 , u funds, were withdrawn from ' the Huntingto n Constructi n account to purchase a $2,000 cashier's check payable to Western Pacific Construction, Inc . (Western Pacific)' . . .,Western Pacific (s metimes referred to in the stipulation of facts as Pacific We tern) was, an Arizona- corporation-ownedand controlle d by petiti o On July 26, 1995, funds were withdrawn from .the Huntingto n Construction account to .purchase a $16,025 cashier's chec k payable to the Olsens . On Oc ober 4, 1995, $11,084 was withdrawn from th e Huntington Construction account to purchase a vehicle for one o f petitioner'' children . On December 14,°1995, funds were withdrawn from the Huntington Construction account to-purchasea $1,500 cashier' s check payable to the widow of 'Evans ' brother-. On January 30, 1996, funds were withdrawn from'th e Huntington Construction account to purchase a $159,422 :7 9 cashier's heck 'payable<to Household Finance to be applied to th e mortgage on the',Concordia property . In-conjunction with th e payment, t e Concordia property was transferred from the Olsens- to the Campo Bello Irrevocable Trust . Petitioners are the grantors of the Campo Bello Irrevocable Trust and, along wit h their chit ren, .are'the .beneficiaries of the trust . On August 15,. 1996 ., funds were withdrawn from'the'.Huntington Construction account to purchase two,$1,000 cashier's, checks . use d to pay personal debts of,petitioners . ., In September 1996, '.funds, were withdrawn , from the Huntingto n Construction account to,purchase $820,000 .and $70, ..000 cashier' s checks payable to Voice of God Recordings on behalf petitioners During 1995 and 1996, Western Pacific received income , totaling $ 83,009 .92 and $7,603 .12 . Certain of the income wa s received from the Farming Authority, and much ,of it, was,receive d from Huntington' Construction . No income .'tax returns were file d for Western Pacific-, and petitioners did not, include any incom e from Western Pacific on their return for .1995-or 1996 . On : February 1, 1995, fundstotaling $26_,756 .54 were,, withdrawn from Western Pacific's bankaccount .to,make payments .by or on behalf of petitioners to prevent a foreclosure on_th e Concordia :property . During the years in issue, 43 checks writte n on Western Pacific's bank account were payable, to petitioners or members of their family or to-cash . Ms . Evans signed most of th e checks written on the Western Pacific account . Ms . Evans' Liability . Petitioners Federal tax returns for 1995 and 1996 wer e filed in January 2001 . Ms . Evans , was aware of Evans' indictmen t and arrest at the time that she signed the joint returns , and she - 11 - knew ;ora-should have known . of the underreporting of income and- understate entof taxes on those" returns . . She signed checks on , the Western=Pacific°ac :count by which that corporation's income was distributed to petitioners or to members of their family ;"she knew or should have known that such'income had not been reporte d by Western Pacific or by .petitioners on their returns .. She received't e . benefits of the unreported income and the,resulting underpayme t of'taxes to the same extent as Evans . OPINION Respondent relies on section 6501 (c) (1) as' a defense . to petitioners, assertion of .the bar of'thestatute of limitations and, therefore-, must prove :that petitioners"- 1 :995(cid:127)and 1996 tax returns were false or fraudulent with the intent to evade tax Because th question of fraud is determinative as to the statutory eriod of-limitations as well as the penalty unde r section 6663-against Evans, we first discuss the evidence and our conclusions with .-respect to-fraud . Respondent has not alleged' fraud by Ms . Evans . However, proof of fraud'against eithe r .spouse'pre ents .the .running of the period of limitations as to, both spouses with respect to the income tax deficiencies on joint returns . Hicks Co . v . Commissioner, 56 T .C . 982, 1030 (1971)',- affd . ..470 1 .2d 87 (1st Cir . 1972) . The penalty,in(cid:127)the case of fraud is a civil sanction , provided primarily as'a safeguard for the protection of'the' - 12 - revenue and to :"reimburse the Government for the .heavy .expen'se of investigation and the loss-resulting from the taxpayer's fraud . . Helvering v .,Mitchell , 303 U .S . 391, 401--'(1938,) ; Sadler v ; Commissioner , 113 T .C . 99,,102 (1999) : The Commissioner has the burden of proving,(cid:127)by clear, and convincing evidence, an underpayment for each year, in issue and that some part of th e underpayment-tor-each of those years is due to"f .raud .p .Se c 7454(a) ; Rule 142(b) . If the .Commissioner establishes that any portion of .the underpayment isfattributable to fraud, the entir e underpayment is treated as attributable to :fraud and subjected t o a,75 .-percent, penalty, unless the taxpayer establishes that som e part of .the'underpaymen.t is not attributable°to,fraud Sec . 6663 (a) and (b) . . The Commissioner must show that' the 'taxpaye r intended to conceal, mislead,--or .,,otherwise prevent the collectio n of .taxes . Katz v . Commissioner , 90 T.C . 1130,,1143-(1988) . The existence of . fraud is' a-_question of,fact to be resolve d upon ,consideration °of the, entire record .-, King's Court Mobil e Home Park, Inc . V . . Commissioner ,-98 T .C . 511, 516° .(1992) .= Fraud will never be presumed . Id .- ; Beaver v . Commissioner 55 T .C . 85, 92 (1970) . ,, Fraud may, however, be proved by, circumstantial evidence and inferences drawn,fromthe-facts because direct proof of a . taxpayer's intent is rarely .available. ; Niedringhaus v . Commissioner , 99 T .C . 202, 210 (1992), . . The-taxpayer's entire course .,of conduct may establish the requisite fraudulent' intent . -'13 Stone v . C mmissioner, - 56 T .C . 213', 223-'224 (1971) . . ;Fraudulen t intent may be inferredfrom .various kinds of circumstantia l evidence, or "badges of fraud", including the consistent understatement of income,-inadequate records, implausible or ,inconsiste t . explanationsof behavior, concealing assets, and failure to cooperate with tax authorities . Bradford v . ,' Commissioner, 796 F .2d 303, 307 (9th Cir ."1986) affg . T .C . Memo . 1984-601 Dealing in : cash is also considered a "badge of fraud " by the cou is because it :is indicative of aItaxpayer's attempt to avoid scrutiny of his finances . See- id, at 308 . Additional "badges of,fraud" include handling one's affairs to avoid making the record usually-made in transactions of the kind . Spies v . United Stales, *31 .7rU .S .' 492-, 499 (1943)i . Evidence of-fraud also includes-a :taxpayer'-s use of .a business entity to cloak th e personal n ture of,expenses° . See- Romer v . Commissioner , T .C . Memo . --2001-168 .. Although Evans' conviction for'subscribing a false Federal tax return does not collaterally estop him from denying that he fraudulently understated . petitioners''income tax liability, his conviction is evidence'of fraudulent intent . 'See Wright v'. Commissioner, 84 T .C . 636, :643-64 .4 (1985) . Evans contends tha t he entere d into the plea agr eement -solely to protect' Ms . Evans-i n the face of a-threat that shemight'be arrested . The detail s alleged in counts of which he was convicted and admitted n 14 - .the plea . agreement are specific and convincing evidence . of :.fraud, and he has not raised . any doubt .that the . facts . admitted are - :. ,, accurate . . . His motivation in entering into' theplea agreement i s irrelevant . and . in' no way undermines . the reliability . of . the overwhelming .evidence,of unreported income accompanied by ; other . badges of fraud . Petitioners also contend that the amounts paid to-Huntingto n Construction from-'the .Farming Authority were for work before th e time that Evans became general- manager and that, therefore, thos e amounts were not embezzled from the-Farming Authority in breach . of his duties . Whether petitioners,',business_performednservices for the Farming .Authority before the time that Evans became the general manager is irrelevant in this case . . The-paymen.t s received by Huntington Construction and,,used for petitioners' personal purposes ., during the,years in issue were income to them during those years . The failure to report that income resulted ; in underpayments of taxes and-is clear .: and, convincing, evidence o f fraud . Respondent has thus shown by clear and . convincing evidence that petitioners received .unreported income during each of the . years in,issue,. .at least-in the amounts withdrawn from Huntingto n Construction and Western . Pacific as set forth in our findings . ,.Once the,,receipt of income is shown it is petit ibners',burde n come forward with, explanations of why,receipts~are not ., taxable or of of fsett ng deductions . See, e . .g . , Brooks V .=Commissioner ;- 8 2 T .C . 413, 32-433 (1,984) affd . without . published opinion F:.2d 910 ( . th,Cir . 1985) . Respondent doesnot have the' .burde n disproving petitioners' entitlement to- deductions ,,,, even in a criminal c se'where the,Government :bears-'a .heavier .burden .o f proof . See, e .g ., Elwert v . . United States ; .231 F .2dh928, 933-93 6 (9th Cir . .(cid:127)- 956) . Petitioners did not ; produce any records to substantiat e their :busi ess~expenses Under the-circumstances, we ar e infer.. that they did not maintain required records o r that any_r cords that were maintained, would be unfavorable .,to their ;clai s .-_See Wichita Terminal Elevator Co' . =v .Commissioner , 6 T .C .! 115 1165 (1946), affil . 162 F 2d 513 (10th Cir . 1947) . Petitioner "suggest that respondent ;had a burden to show tha t "Evans possessed a requisite-amount of . education and 'busines s experience or sophistication'to .,keepsuch records ." Although a taxpayer's education and experience maybe considered i n determining intent, we are,satisfied that the complicated scheme by Evans is clear and convincing evidence that he ha d that helknew . that records are'required to substantiate ' -Under the management agreement with the-Farming Evans wasy :to . maintain records and accounts , among- others duties . Thus °his failure to keep or . be regarded as conc .ea'lment . 16 - Evans admitted, in the plea :agreement that-he concealed his,, , ownership-of Huntington ! Construction . from the Farming Authority . Petitioners argue that disguising assets or . embezzlement , standing alone, does not establish 'intent''to evade taxes . Thes e facts taken together with other badges of fraud, however, ar e clear and . convincing evidenceof,fraudulent intent . Respondent refers, to-the untimely -filing- of petitioners"-ta x returns as evidence of fraud . Petitioners . argue that-late----- filing, as contrasted with failure to file, .is not indicative o f fraud . The returns in this' case,(cid:127) .however, were filed afte r disclosure of Evans' . } criminal conduct in misappropriating funds . Returns were not filed for. the entities through which th e misappropriated funds were channeled to petitioners . Under thes e circumstances, we agree with respondent . The evidence, is . clear and convincing that petitioners dealt in :large amounts of cash,during the years in issue . Petitioners' response is to point to . the . paper trail on which-responden t relies ; petitioners assert . that the paper trail negates fraudulent intent . Again the evidence must be considered in'the context .of .the total factual record, . That petitioners'<schemes .. were discovered, because they . did not successfully .hide al l potential evidence is not an exonerating factor . Even if some, portion of the cash Was used for business expenses ., the "handling one's affairs to avoid making-the records usual i s transactio s-of .the,_kind" ;has long been recognized'as a badge o f fraud . S es v . United States, 3,17 U .S . at_499-500 ;,see Bradfor d v . Commiss'oner, 796 F .2d .at'308 . Anoth r badge-'-.of fraud in this case is -the , record- o f implausibl and inconsistent explanations of behavior ., Evans attempts,Tt explain away .his guilty plea_and plea agreement a s .intended t protect his wife from arrest . _ £ He %has not shown that the ,facts admittedin the plea- agreement are inaccurate -He attempts tc minimize his wrongful- conduct Rtoward-'the' Farming Authority . .y asserting that funds were owed to-Huntington Constructs n,prior to his employment as general manager,-but the receipt of $1 .597 million._in 1995 :and 1996tcalls for more than a generalize assertion, that it . was due before mid-1995 By, the nature of the claim, corroborating documentary-or, witness evidence should have been available, . Because such evidencewas not produced, a negative inference again may be drawn . See' Wichita Terminal Elevator Co . v .° Commissioner, supra "at 1165 . In any event, the failure to report the income, regardless of the legalityo illegality of its source, is the key element in this case . Disallowed Deduction s As a general,,rule with . respect to the amounts of the deficiencies in issue, the taxpayer, bears the burden of"proof . Rule 142(a) ; INDOPCO, Inc . v ."Commissioner , 503 U .S 79, 8 4 _(1992) Rockwell v . Commissioner , 512:F .2d' 882,--886 (9th Cir' . 1975) , affg ., T . C . . Memo .. 1972-133 . ._,That 'burden may shift to th e Commissioner . if -the taxpayer introduces credible--evidence wit h respect .to any factual=issue relevant to ascertaining . the taxpayer's tax liability .. 'Sec . 7491(a)(1) . However, .,section- ' 7491(a)(1)-, :.applies with respect to an :issue only,if thetaxpaye r has complied with .the-requirements under-the,Code :to substantiate any item,--has maintained all records required by .the,Code ; and has cooperated with-reasonable-requests by the Commissioner for. witnesses, information ; documents, meetings, ' and, interviews . Sec . .7491 (a) (2) (A) =and (B) . For the :. reasons -discussed above, . petitioners'°evidence .is unreliable,,and their claims are unsubstantiated . . They have not satisfied the conditions fo r shifting the burden of proof~ .to respondent . The deductions .-in dispute are identified by a list of check s that Evans generally claimed, were business expenses of Huntingto n Construction, including travel expenses,, vehicle expenses,' and,- . : meals expenses that were not substantiated in accordance . with section 274(d) . Some disputed payments were made to petitioners' sons . Evans,,, estimony;was not corroborated . by records or, .other . performed during 1995,=or : 19,96 . Evan s professed a lack of recollection' with respect to many of the payments . is testimony .asserting that certain(cid:127)payments,related : to.. loan, tra sactions : was not -supported ;by any documentation of . loans receied or,repaid .. Testimony concerning attorney's . fee s was .not sup orted,by evidence establishing that, the . fees wer e business ex0enses rather than personal nondeductible expenses,,, , such as fee relating tothe criminal case . Business -related , the, testimony apparently occurred- 5 or more yea snbefore .the years,in „Many .0 the items that„Evans asserted, were business related were inhere tly,personal, and the record ,. of .diversion of business income .:to,p y persona l expenses, undermines :, the credib ility of the generalized assertions ofrbusiness purpose .-The-,failure to. keep . adequate re ords, the . .use of, cash, the,absence of tax returns . fo r Huntington . constructions and Western - Pacific, the .. failures to turn over record to petitioners' returnpreparer, and the, implausible claims_ :toge her. render the . uncorroborated testimony., .unrel:iable . Petitioners have not shown , any-error in the deficiency determinati ns for 1995-,. and .n 199 6 { Responc ent, : .has, proven, that the fraud penalty applies-, ..and- . , - 20 - underpayments was not attributable' to fraud . = See sec . 6663(b) . Respondeht 'is°(cid:127)not barred'from'assessing°petitioners' 1995, and 1996 tax deficiencies . The penalty under- section '6663 will' b e upheld ., Section . 6015. Relie f Ms . Evans asserted in her petition a'claim for relief fromy , joint and several liability for 1995 and 1996 under section 6015 . She does not, qualify for relief under section 6015 ' ( c)': becaus e petitioners were married and living together at all - materia l times : Relief under section'-'6015(b) requires that she establis h that in signing the . return she did not know, and h aad'no reason t o know, that there was an understatement'of tax attributable't o items of Evans . . ; See 'sec . 6015 (b) '(1) (C) Under either sectio n 6015,(b) (1) (D) or' '(f)', she must show that taking into account all . of the facts ° and circumstances ;- -it"" is inequitable 'to hold he r liable for the deficiencies . -At trial' ;-' Ms . Evans testified that she did not know anythin g about her husband's activities givingrise'to an-understatement which funds were-diverted to pay petitioners' personal expenses .°' We are not persuaded that,she did not'-know or have' reason" to- kno w of the understatements . At the time she signed the tax' returns , she,-knew' that Evans was being prosecuted LLfor,misappropriation o f funds . As far as the record reflects , the unreported income was itioners equally, and she .has suggested no particula r would support aconclusion of inequity in holding her , is not inequitable to hold her liable for th e on the joint returns We need not, therefore , entitlement to relief under section 6015 . considered the other arguments of the parties' The y are irrel e -discussion . Decisions will be entered