- 27 -
Commissioner, 74 F.3d 1528, 1534 (7th Cir. 1996), revg. and
remanding T.C. Memo. 1994-241. Nonetheless, the innocent spouse
provision was intended to provide relief from "grave injustice"
and is to be applied liberally in favor of the person claiming
its benefits. Id.
Respondent concedes (1) that petitioner and Mr. Morris filed
a joint return for each of the years at issue; (2) that there was
a substantial understatement of tax (substantial understatement)
with respect to each of those joint returns; (3) that the unre-
ported embezzlement income for each of the years at issue consti-
tutes a grossly erroneous item that is attributable to Mr.
Morris; and (4) that petitioner did not know about the funds that
Mr. Morris embezzled during those years until late January or
early February 1991 after she signed the joint return for each of
those years. Respondent argues, however, (1) that neither of the
erroneous deductions in question for 1987 constitutes, as re-
quired by section 6013(e)(1)(B), a grossly erroneous item as
defined in section 6013(e)(2)(B); (2) that petitioner had reason
to know within the meaning of section 6013(e)(1)(C) of the
substantial understatement (a) for 1987 that is attributable to
the unreported embezzlement income and those erroneous deductions
22(...continued)
6013(e)(4), and we assume that the parties agree that that
section is satisfied with respect to any liability attributable
to the erroneous deductions in question.
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