- 9 -
excess of $500 and the percentage-of-adjusted-gross-income rules
do not apply. Sec. 6013(e)(3) and (4)(E).
Although the overstatement of cost of goods sold creates a
substantial understatement of tax attributable to a grossly
erroneous item, we must examine the remaining elements of section
6013(e), i.e., sec. 6013(e)(1)(C), (D), to determine whether
petitioner can claim innocent spouse status for the liabilities
arising from this item.
The knowledge test, under section 6013(e)(1)(C), requires a
taxpayer to show that, at the time of signing a joint return, he
or she did not know and had no reason to know of the substantial
understatement of tax on the return. A spouse has “reason to
know” of an understatement if:
a reasonably prudent taxpayer under the circumstances
of the alleged innocent spouse at the time of signing
the return could be expected to know that the tax
liability stated was erroneous or that further
investigation was warranted. * * * [Park v.
Commissioner, 25 F.3d at 1293 (citing Sanders v. United
States, 509 F.2d 162, 166-167 & n.5 (5th Cir. 1975)).]
The primary ingredients of this test are (1) the circumstances
which face the taxpayer; and (2) whether a reasonable person in
the same position would have reason to know that omissions had
been made. Shea v. Commissioner, 780 F.2d 561, 565-566 (6th Cir.
1986), affg. in part and revg. in part T.C. Memo. 1984-310.
Whether an individual had reason to know of a substantial
understatement is generally regarded as a question of fact. Id.;
Estate of Gryder v. Commissioner, 705 F.2d 336 (8th Cir. 1983),
Page: Previous 1 2 3 4 5 6 7 8 9 10 Next
Last modified: May 25, 2011