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Lack of actual knowledge is not sufficient to qualify for
innocent spouse relief. Petitioner must establish that he had no
reason to know of the understatements. Whether petitioner had
reason to know of the understatements depends on whether a
reasonable person in his circumstances could be expected to know
that income had not been reported and that erroneous deductions
had been claimed at the time the returns were signed. Flynn v.
Commissioner, 93 T.C. 355, 365 (1989). Whether a duty to inquire
into the propriety of the return arises depends on the taxpayer's
education level, involvement in family business and financial
affairs, presence of expenditures that appear lavish or unusual,
and the culpable spouse's evasiveness or deceit concerning the
couple's finances. Kistner v. Commissioner, 18 F.3d 1521, 1525
(11th Cir. 1994), revg. T.C. Memo. 1991-463. Petitioner contends
that he neither knew nor had reason to know about Linda's
defalcations from Datanet.
It is unnecessary to decide whether or not petitioner
actually knew of the unreported income and bogus deductions
because he clearly had reason to know of those items.2 During
these years petitioner and Linda received and spent over $71,000
embezzled from Datanet. At the same time they received gross
income from wages in the amount of approximately $100,000. There
were no savings, and they spent approximately $171,000 during the
2 With regard to the 1993 return, petitioner
obviously knew that that return was not correct. The
return was signed by petitioner on Mar. 9, 1994.
Linda was indicted in January 1994, and pled guilty
and was convicted on Mar. 25, 1994.
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