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(C) the other spouse establishes that
in signing the return he or she did not know,
and had no reason to know, that there was
such substantial understatement, and
(D) taking into account all the facts
and circumstances, it is inequitable to hold
the other spouse liable for the deficiency in
tax for such taxable year attributable to
such substantial understatement,
then the other spouse shall be relieved of liability
for tax (including interest, penalties, and other
amounts) for such taxable year to the extent such
liability is attributable to such substantial
understatement.
(In 1984, section 424(a) of Pub. L. 98-369, 98 Stat. 801,
803, amended the Code to provide that current section 6013(e) is
applicable to all taxable years to which the Internal Revenue
Code of 1954 applies, which includes 1976, 1977, and 1978.)
Respondent concedes that petitioner satisfies the section
6013(e)(1)(A) and (B) and 6013(e)(4) elements of the innocent
spouse requirements for the relevant years. (Section 6013(e)(4)
relates to understatements exceeding a specified percentage of
the putative innocent spouse's income.) Therefore, the two
elements of the innocent spouse requirements remaining in dispute
are whether petitioner had the kind of knowledge referred to in
subparagraph (C), and whether under the facts of this case there
would be the type of inequity referred to in subparagraph (D).
In reaching our conclusions as to Arlene's liability we are
substantially aided by guidelines provided by the recent
decisions of the U.S. Court of Appeals for the Second Circuit
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