6
If the substantial understatement of tax is attributable to an
omission of income, the spouse seeking relief has reason to know
of the understatement if he or she has reason to know of the
transaction that gave rise to the understatement. Guth v.
Commissioner, 897 F.2d 441, 444 (9th Cir. 1990), affg. T.C. Memo.
1987-522; Smith v. Commissioner, 70 T.C. 651, 673 (1978). We may
impute to the spouse seeking relief constructive knowledge of the
transaction if he or she turned a blind eye to facts within his
or her reach that would have put a reasonably prudent taxpayer on
notice to inquire further. McCoy v. Commissioner, 57 T.C 732,
734 (1972).
In determining whether the spouse seeking relief had reason
to know of the substantial understatement of tax, courts
generally consider, among other factors, the spouse's level of
education and involvement in the financial and business
activities of the family. There is no information in the record
concerning petitioner's educational background. Petitioner did
not participate in the family's financial affairs other than
paying assorted bills, and there is evidence that petitioner was
not privy to any aspect of the Vriner family restaurant. Nor did
petitioner have any knowledge of her husband's alleged drug
activities prior to 1988 when Federal agents searched their home.
Respondent argues that petitioner had reason to know because
the income reported on the Vriners' 1987 return was inadequate to
meet the family expenses. Petitioner testified that she thought
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