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The Court of Appeals for the Ninth Circuit's test for knowledge
in erroneous deduction cases is applicable to this case. Golsen
v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th
Cir. 1971). Under this test, mere knowledge of the transaction
will not cause denial of relief; rather, the test is whether
petitioner had knowledge that the deduction would give rise to a
substantial understatement. Price v. Commissioner, supra at 963.
Respondent contends that the evidence clearly shows that
petitioner had actual knowledge of the underlying facts of the
investment. Respondent primarily relies on petitioner's
participation in the late 1979 or early 1980 meeting where the
Magnum investment was discussed.
While the meeting regarding the Magnum investment occurred,
the record provides conflicting evidence concerning who attended
this meeting. Mr. Gruys clearly stated that he and petitioner
attended the meeting along with Mr. Aude and Mr. Saranni.
However, petitioner's recollection is that Mr. Gruys did not
attend the meeting; that she met with Mr. Saranni briefly; and
that she sat in the lobby of the hotel while the meeting between
Mr. Saranni and Mr. Aude occurred in another room. In light of
petitioner's burden, we cannot find that petitioner did not
attend the meeting.
While petitioner had knowledge of the underlying transaction
by attending the meeting, knowledge of the transaction alone will
not cause denial of relief to petitioner, unless petitioner knew
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