2. Knowledge or Reason to Know of the Substantial
Understatement
Petitioner must show that she did not know or have reason to
know of the substantial understatements attributable to her
husband's tax shelter investment when she signed the 1983 return
and application for refund filed in 1984.
a. Actual Knowledge
We must first decide whether petitioner had actual knowledge
of the understatements when she signed the 1983 return and the
application for refund. Respondent does not contend that
petitioner knew about the understatements at that time. The
record does not contain any evidence indicating that petitioner
had actual knowledge of the understatements. Thus, we find that
petitioner did not have actual knowledge of the understatements
when she signed the 1983 return and application for refund.
b. Reason to Know
We must next decide whether petitioner had reason to know of
the substantial understatements of income tax when she signed the
1983 return and application for refund filed in 1984. Respondent
contends that petitioner had reason to know of the
understatements caused by the Saxon investment tax credit
carrybacks. For the following reasons, we agree with respondent
that petitioner had reason to know of the substantial
understatements of tax at the critical time, and that, therefore,
petitioner does not qualify for relief as an innocent spouse.
The standard to be applied in determining whether a taxpayer
"had reason to know" is whether a reasonably prudent person under
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