Harvey I. Epstein and Arlene B. Epstein - Page 8

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                         (C)  the other spouse establishes that                       
                    in signing the return he or she did not know,                     
                    and had no reason to know, that there was                         
                    such substantial understatement, and                              
                         (D)  taking into account all the facts                       
                    and circumstances, it is inequitable to hold                      
                    the other spouse liable for the deficiency in                     
                    tax for such taxable year attributable to                         
                    such substantial understatement,                                  
               then the other spouse shall be relieved of liability                   
               for tax (including interest, penalties, and other                      
               amounts) for such taxable year to the extent such                      
               liability is attributable to such substantial                          
               understatement.                                                        
               (In 1984, section 424(a) of Pub. L. 98-369, 98 Stat. 801,              
          803, amended the Code to provide that current section 6013(e) is            
          applicable to all taxable years to which the Internal Revenue               
          Code of 1954 applies, which includes 1976, 1977, and 1978.)                 
               Respondent concedes that petitioner satisfies the section              
          6013(e)(1)(A) and (B) and 6013(e)(4) elements of the innocent               
          spouse requirements for the relevant years.  (Section 6013(e)(4)            
          relates to understatements exceeding a specified percentage of              
          the putative innocent spouse's income.)  Therefore, the two                 
          elements of the innocent spouse requirements remaining in dispute           
          are whether petitioner had the kind of knowledge referred to in             
          subparagraph (C), and whether under the facts of this case there            
          would be the type of inequity referred to in subparagraph (D).              
          In reaching our conclusions as to Arlene's liability we are                 
          substantially aided by guidelines provided by the recent                    
          decisions of the U.S. Court of Appeals for the Second Circuit               




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