-11-
Moreover, some of the disallowed items are attributable to
petitioner.
We have observed that respondent's agreement to a compromise
settlement may suggest that the deductions claimed on a return were
less than grossly erroneous. See, e.g., Crowley v. Commissioner,
T.C. Memo. 1993-503; Anthony v. Commissioner, T.C. Memo. 1992-133;
Neary v. Commissioner, supra. Here, respondent agreed in the
settlement stipulation to allow a portion of the Edmondsons' 1988
Schedule C deductions. Further, respondent conceded the
inapplicability of the section 6653(a)(1) addition to tax, and
although the settlement stipulation denies the deferral of gain on
the sale of the Seattle house in its entirety, we do not believe the
mischaracterization of this item constitutes a grossly erroneous
item within the purview of section 6013(e)(2). See Winnett v.
Commissioner, 96 T.C. 802, 810-811 (1991). Thus, we reject
petitioner's argument that the substantial understatement of tax was
attributable solely to Mr. Edmondson's grossly erroneous items.
Petitioner did not satisfy this second requirement.
B. Knowledge of the Substantial Understatement
Assuming however, arguendo, that petitioner satisfied the
second requirement, she still is not entitled to innocent spouse
status because she failed to prove that she did not know, and had
no reason to know, of the substantial understatement of tax.
Whether a spouse knew or had reason to know of a substantial
understatement depends on whether "a reasonably prudent taxpayer
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