57 T.C. 373">*373 The Commissioner determined deficiencies in petitioners' income tax in the years and amounts as follows:

Petitioner 1971 U.S. Tax Ct. LEXIS 13">*14 Jerome J. Sonnenborn has conceded that he is liable for the deficiencies as determined by the Commissioner. Petitioner Ethel G. 57 T.C. 373">*374 Sonnenborn similarly does not contest the correctness of the deficiencies but presents merely the issue as to whether she is relieved of liability in respect thereof by section 6013(e), I.R.C. 1954.

FINDINGS OF FACT

Jerome J. and Ethel G. Sonnenborn are husband and wife. They filed joint Federal income tax returns for the calendar years 1965, 1966, and 1967 with the district director of internal revenue at Manhattan, New York, and resided in New York at the time the petition in this case was filed.

Ethel G. Sonnenborn (petitioner) attended New York University. She later did graduate work at the College of Podiatry of New York University, and in 1944 received a doctorate degree in podiatry. She and Jerome J. Sonnenborn were married in 1939; they have remained married and have continuously lived together until the date of the trial herein. Although petitioner did some volunteer "clinic" work in podiatry in the early years following her education, she does not appear to have been gainfully engaged in her profession until 1970 when she "purchased" a private 1971 U.S. Tax Ct. LEXIS 13">*15 practice in order to supplement family income which had meanwhile declined as a result of financial reverses.

From 1961 until the present time the Sonnenborns have lived in a large apartment in a fashionable area in New York City. The rent for this apartment was originally $ 1,000 a month; during the tax years, 1965-67, the rent was at least $ 1,200 a month; and the rent now is about $ 1,400 a month. The Sonnenborns have three sons, Monroe, Donald, and Gene, who in 1965 were 23, 21, and 12 years old, respectively.

During 1965, 1966, and 1967, the years in issue, petitioner and her husband each owned 50 percent of the stock of Monodon Corp. ("Monodon" or the "corporation"). Its principal business was the sale and export of paper.

Mr. Sonnenborn was president and petitioner was treasurer of the corporation. In its fiscal years ended January 31, 1966, 1967, and 1968, Monodon paid salaries of $ 26,100, $ 26,180, and $ 42,460, respectively, to Mr. Sonnenborn and $ 3,120, $ 3,172, and $ 8,352, respectively, to petitioner. Monodon's income tax returns for each of those years stated that "All" of the time of each of its officers was devoted to business. That representation was not truthful 1971 U.S. Tax Ct. LEXIS 13">*16 in petitioner's case, although she did devote some time to its affairs. In the years 1965, 1966, and 1967, Mr. Sonnenborn was not only active in the management of Monodon but was also concerned with the operation of another company, Northland Paper Mill (Northland), of Norfolk, N.Y. That company had been acquired some time during or prior to the tax years, and the record indicates that it was under Mr. Sonnenborn's control; its activities 57 T.C. 373">*375 appear to have been related to those of Monodon. The record does not satisfactorily disclose whether it was a subsidiary of Monodon, whether it was wholly owned by the Sonnenborns individually, or whether petitioner had any interest therein. During the tax years, 1965-67, Mr. Sonnenborn traveled to Norfolk often in connection with Northland's affairs. On these and other occasions when he was absent from the corporate offices of Monodon, petitioner, who was authorized to sign checks on the corporation's behalf, went to Monodon's offices and signed such checks presented to her by other corporate officers. She was otherwise only generally acquainted with the operation of the corporation from discussions she had with her husband and other corporate 1971 U.S. Tax Ct. LEXIS 13">*17 officers.

For the years 1965, 1966, and 1967, the Sonnenborns reported the following "total income" on their joint returns:

As to the "Wages, salaries * * *" component, the record does not reveal whether the foregoing figures include compensation from any source or sources other than Monodon; and if that component relates exclusively to compensation from Monodon, the record does not explain the possible discrepancy that may exist between those figures and the following salaries (as found above p. 374) received by petitioner and her husband from Monodon during its fiscal years ending January 31, 1966, 1967, and 1968:

As to the "Other income" component, no amount thereof for any of the years includes any income from Monodon, by the way of dividends or otherwise. Such "Other income" was attributable in major part to securities (predominantly stock in American Telephone & Telegraph Co.) owned by petitioner which she had acquired either 1971 U.S. Tax Ct. LEXIS 13">*18 from her father or prior to the tax years involved herein. The remaining "Other income" related to interest on a small bank account of petitioner's, dividends on securities owned by her husband, and sales or exchanges of property.

57 T.C. 373">*376 The joint returns of petitioner and her husband for the 3 years 1965-67 indicate that the following aggregate amounts of income tax were withheld from their salaries by their employer:

Every week during the tax years petitioner's husband gave her a $ 900 check issued by Monodon. She deposited each such check in her personal checking account and returned $ 100 thereof to her husband for his personal expenses. She used the remaining $ 800 for household and living expenses. In this manner petitioner received $ 46,800 in checks from Monodon in each of the years in issue, of which $ 41,600 was applied by her to household and living expenses. Mr. Sonnenborn did not make any deposits to petitioner's account.

Among the household expenses paid by petitioner during the tax years out of her personal checking account were the following: Apartment rent ($ 1,200 per month); maid's salary ($ 50 per week); clothing 1971 U.S. Tax Ct. LEXIS 13">*19 for family (approximately $ 3,000 per year); food (approximately $ 100 per week); tuition and expenses for Monroe at Yale Law School, for Donald at Haverford College and Columbia Law School, and for Gene at the Walden School plus summer camp (in the aggregate of about $ 9,000 or $ 10,000 a year). In addition to these living expenses petitioner and her husband made the following payments during the tax years:

Also, petitioner and her husband paid Federal income taxes during the years 1965, 1966, and 1967 in the amounts of $ 12,227.20, $ 12,229.90, and $ 14,216.20, respectively, inclusive of the amounts withheld from salary, as found above.

In April 1968, Monodon made an assignment for the benefit of its creditors and went out of business. Thereafter, Mr. Sonnenborn devoted his time to another company, Overseas Pulp & Paper, in which he and petitioner each owned 50 percent of the stock. Some time after 1967 petitioner sold the American Telephone & Telegraph Co. 57 T.C. 373">*377 stock given to her by her father. She 1971 U.S. Tax Ct. LEXIS 13">*20 invested the proceeds therefrom in the amount of approximately $ 150,000 in Overseas Pulp & Paper. She received "salary" checks in the amount of about $ 500 per week from Overseas Pulp & Paper.

The joint returns involved herein were prepared by an accountant from information supplied primarily by petitioner's husband. The information supplied by petitioner was limited to dividends and interest received by her, which are not here in issue. After the returns were prepared, they were sent by the accountant to petitioner, who briefly examined them, signed them, made out a check in the appropriate amount for the tax due, and then mailed the returns together with the check.

For its fiscal years ended January 31, 1966, January 31, 1967, and January 31, 1968, Monodon deducted the following expenses, portions of which have been disallowed and charged as dividend income to the petitioner:

In his deficiency notice addressed to petitioner and her husband, the Commissioner 1971 U.S. Tax Ct. LEXIS 13">*21 determined that Monodon made certain payments to the Sonnenborns or for their benefit and permitted them to use corporate property without compensation which constituted dividend income to both of them, as follows:

The record does not contain any explanation in respect of the "Payments charged to the loan account" item in 1965, 1966, and 1967, which the Commissioner determined to constitute dividends to petitioner and her husband.

57 T.C. 373">*378 The entertainment expenses consist of the following:

The selling and travel expenses consist of the following:

57 T.C. 373">*379 The individual items comprising the entertainment and selling and travel categories listed above were payments made by Monodon to certain individuals, department, jewelry, and fur stores, the Metropolitan Opera, American Express, and certain airlines and hotels. Although the record establishes that Monodon made various expenditures in the nature of gifts to or entertainment for certain of its customers that correlate with certain of the payees above (e.g., Saks Fifth Avenue, Tiffany's Jewelers, American Express), the record fails to correlate most of the specific items listed above with such expenditures. The Metropolitan Opera item represents the purchase of a pair of season 1971 U.S. Tax Ct. LEXIS 13">*23 tickets which were sometimes used by petitioner together with her husband, which were sometimes offered to customers of Monodon, or which were used on occasion by petitioner together with a customer of Monodon. Some of the other items were unexplained. Petitioner did not personally receive any benefit either directly or indirectly from most of the foregoing payments relating to entertainment or selling and travel expense.

The "Auto expense" item in the determination of deficiency relates to a Cadillac automobile that was owned by Monodon but which was garaged at the apartment house in which the Sonnenborns resided. The automobile was used not only for business purposes, but it was also used from time to time for personal family purposes. The Commissioner's determination disallowed only a portion of the automobile expenses claimed by Monodon and treated that portion as dividend income to petitioner and her husband.

The "contributions" item represents payments to the Walden School, which was attended by the Sonnenborns' youngest son.

The "commissions" item consists of two unexplained checks to cash in the amounts of $ 2,000 and $ 2,850.

Mr. Sonnenborn has conceded that he is liable for 1971 U.S. Tax Ct. LEXIS 13">*24 the full amount of the deficiencies which are the consequence of including these constructive dividends in the income of both spouses. He was in New York City at the time of the trial herein but did not appear or testify in this case.

OPINION

Petitioners are husband and wife, who filed joint returns for the years 1965, 1966, and 1967. Together they owned, in 57 T.C. 373">*380 equal shares, all of the stock of Monodon corporation. During the taxable years, Monodon made various payments, which the Commissioner treated as dividends or constructive dividends to petitioners. He accordingly determined deficiencies ² in tax against both petitioners, whose liability is joint and several as a consequence of the filing of joint returns ( sec. 6013(d)(3), I.R.C. 1954). The husband has already conceded that he is liable for these deficiencies. Moreover, the wife, now the only remaining litigant contesting the Commissioner's action (and referred to herein for convenience as the petitioner), does not challenge the correctness of the Commissioner's determination. She seeks to be relieved of liability only on the narrow ground that she comes within the so-called innocent spouse provisions of the recently enacted 1971 U.S. Tax Ct. LEXIS 13">*25 addition to section 6013 of the Internal Revenue Code of 1954, ³ which reads as follows:

SEC. 6013. JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE.

(e) Spouse Relieved of Liability in Certain Cases. --

(1) In general. -- Under regulations prescribed by the Secretary or his delegate, if --

then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent that such liability is attributable to such omission from gross income.

(2) Special rules. -- For purposes of paragraph (1) --