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validity of the deductions for the investment, but Mr. Gruys did
talk to Mr. Aude, in passing, about this.
Considering the evidence and finding petitioner to be a
credible witness, we find that petitioner was uninformed about
the nature of the Magnum investment.8 We find that petitioner
did not have actual knowledge that the deductions attributable to
the Magnum investment would result in the substantial
understatements of tax on petitioner's income tax returns for the
years at issue.
Section 6013(e)(1)(C) also requires that the petitioner
establish that she did not have reason to know that there was
such substantial understatement. Whether an alleged innocent
spouse had reason to know of a substantial understatement is a
question of fact that must be determined based upon the entire
record. Guth v. Commissioner, 897 F.2d at 442; Terzian v.
8 Respondent contends that it is obvious that petitioner
"had previously asked questions concerning the Magnum investment,
that she knew a substantial number of facts pertaining to the
investment, and that she possessed both the ability and the
opportunity to have asked more questions of those knowledgeable
about the shelter, namely the Magnum salesman as well as her own
CPA, Mr. Gruys." In making this assertion, respondent relies on
petitioner's following response: "It was after being educated by
Mr. Cutler [petitioner's attorney], that we should have been
advised that this was not a good investment, that I was angry
that I had been such a fool, and not asked more questions."
While respondent asserts that petitioner obviously knew of the
investment, we do not find that this statement shows that
petitioner had the ability or opportunity to ask about the
investment. The response indicates that petitioner did not know
the nature of the investment until years after the tax years at
issue; thus, the statement by petitioner does not obviously lead
to respondent's conclusion.
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