- 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
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